What strategies are recommended for a firm that is a weak competitor in a slow growing market?

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  • Indications of Performance
  • Elements of Strategy
  • Segment, segment, segment
  • Use R&D efficiently
  • Think small
  • Ubiquitous chief executive
  • Alternative to Growth
  • What strategies recommended for a firm that is weak competitor in slow growing market?
  • Which grand strategy is recommended for a firm with rapid market growth and a strong competitive position?
  • What are the strategies for competing?
  • What are the 4 grand strategies?

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What do the Burroughs Corporation, Crown Cork & Seal Co., Inc., and the Union Camp Corporation have in common? Although none of them enjoys a dominant market share, all three earn quite respectable returns on their equity, have healthy profit margins, and continue to maintain strong sales growth year after year. In this article, the authors identify and analyze four characteristics that help explain their success: they compete only in areas where their particular strengths are most highly valued, make efficient use of limited research and development budgets, eschew growth for growth’s sake, and have leaders who are willing to question conventional wisdom.

During the past several years, a great deal of research on profitability and market share has uncovered a positive correlation between the two. One study shows that “on the average, a difference of ten percentage points in market share is accompanied by a difference of about five points in pretax ROI.”1 Although in general market share and return on investment do go hand in hand, many of the inferences that both managers and consultants have been drawing from this finding are erroneous and misleading.

One of the most dangerous inferences drawn from this generality is that a low market share business faces only two strategic options: fight to increase its share or withdraw from the industry. These prescriptions completely overlook the fact that, in many industries, companies having a low market share consistently outperform their larger rivals and show very little inclination to either expand their share or withdraw from the fight. Perhaps the best example of this situation is the steel industry, where producers such as Arco Steel, Inland Steel, and Kaiser Steel have consistently earned a higher return on equity than their much larger competitors, United States Steel and Bethlehem Steel.

Often, planning systems that are based on this generality also have serious flaws. Most of these systems place a business in one of four categories, according to its market share and the industry’s growth rate.2 Depending on the category a business falls in, a strategy is automatically prescribed. Low market share businesses in low-growth industries should be divested; high market share businesses in low-growth industries should be “milked” or “harvested” for cash; high market share businesses in high-growth industries should maintain their growth; and low market share businesses in high-growth industries should increase their market share.

Although each classification system has its own nuances, all such systems share the same shortcoming: they define strategy at such a high level of abstraction that it becomes meaningless. A successful business strategy must be specific, precise, and far-ranging. It should state the markets in which a business will compete, the products that will be sold, their performance and price characteristics, the way in which they will be produced and distributed, and the method of financing. By taking the attention of corporation executives away from these essential details and instead focusing their attention on abstractions, many planning systems do a great disservice.

Finally, such sweeping generalities offer little consolation to those businesses that, for one reason or another, find themselves in a poor market position. Since only one competitor enjoys the highest share of any given market, most businesses must face the disadvantage of not having the highest market share. They must devise a specific strategy that will lead to the best possible performance, regardless of their position.

During the past several months, we have been studying businesses that have outperformed other much larger companies in their industries. We have identified four important characteristics that most of these successful businesses share. In this article, we shall discuss these characteristics.

Indications of Performance

Although there are numerous ways to define successful performance and low market share, we have chosen two straightforward definitions. Low market share is less than half the industry leader’s share, and successful companies are those whose five-year average return on equity surpasses the industry median. Applying these criteria to the over 900 businesses in 30 major industries listed in Forbes Annual Report on American Industry revealed numerous successful low share businesses. From a list of these companies, we chose three—Burroughs Corporation, Crown Cork & Seal Co., Inc., and Union Camp Corporation—for close study. These three companies have surpassed not only their industries’ average return on equity but have actually led their industries in several important performance categories.

Consider Burroughs. During the mid-1960s, many analysts predicted that the corporation, with its narrow line of computers, aging accounting machines, and market share of less than 3%, would soon withdraw from the mainframe computer market. Today, Burroughs competes more effectively with IBM than does any other computer company. Its market share is still dwarfed by that of IBM, but during the past five years, its sales and earnings per share have grown faster than IBM’s. And although Burroughs’s net profit margin and return on equity trail IBM’s, they exceed those of NCR, Sperry Rand, Honeywell, and Control Data by a substantial margin.

It is significant that results by line of business, which are reported in 10—K statements and which distinguish businesses such as Control Data’s finance and insurance lines and Honeywell’s controls line, also indicate that on a return-on-sales basis, Burroughs’s computer line greatly outdistances that of all its rivals except IBM. (See Exhibit I for detailed comparisons of the financial positions of mainframe computer manufacturers.)

Crown Cork & Seal is another successful low share company. In fact, as Exhibit II shows, its financial performance over the past decade has consistently been the highest of the major metal can manufacturers. Yet Crown Cork & Seal has not always enjoyed such success. In early 1957, the company was near bankruptcy, and with sales of $115 million in 1956, it had to compete with American Can (1956 sales of $772 million) and Continental Can (1956 sales of $1 billion).

Today, Crown Cork & Seal is still much smaller than its two giant rivals, but with profits of $46 million (15.8% return on equity), the prospect of bankruptcy has long since passed. Although Crown Cork & Seal’s competitors have all diversified, an analysis of 10—K statements for 1976 shows that the pretax returns on sales of their metal packaging businesses were all below 6%; Crown Cork & Seal’s pretax return on sales was nearly 10%.3

Our third company, Union Camp, competes in the extremely competitive, highly fragmented forest products industry. Over 3,000 companies have major product lines in this industry, and it has been highly volatile and plagued with overcapacity, depressed prices, pollution control problems, and high construction costs.

Despite these problems, Union Camp’s earnings per share have increased by almost 27% annually over the past five years, and average return on equity has been over 20%. As the ninth largest company in its industry, Union Camp competes with such giants as International Paper and Weyerhaeuser, which are three and a half and two and a half times larger than Union Camp. As shown in Exhibit III, Union Camp’s weak market position has not prevented the company from outperforming its larger competitors. Comparisons of the pretax return on 1976 sales of the paper and paperboard portions of these companies shows that Union Camp leads the pack with a 28% return. The next highest rate was posted by Boise Cascade’s paper operations.

Elements of Strategy

Except for their low market share positions and exceptional performances, Burroughs, Crown Cork & Seal, and Union Camp seem to have little in common. Certainly their competitive environments are extremely different. Computer mainframes constitute a highly technological, rapidly growing industry that is dominated by one company. The metal container industry is extremely mature and, with only four major competitors, is a classic oligopoly. The forest products industry is also mature, but it is very fragmented.

Given these rather substantial differences in industry settings, are there any common strategies that these three successful low share companies have implemented to yield profits? Our research suggests four characteristics that these companies share: they carefully segment their markets, they use research and development funds efficiently, they think small, and their chief executives’ influence is pervasive.

Segment, segment, segment

First, to be successful, most businesses must compete in a limited number of segments within their industry, and they must choose these segments carefully. Thinking in broader terms than only the range of products offered and the types of customers served, most successful companies define market segments in unique and creative ways. For example, besides products and customers, a market can also be segmented by level of customer service, stage of production, price performance characteristics, credit arrangements with customers, location of plants, characteristics of manufacturing equipment, channels of distribution, and financial policies.

The point is an important one. To be successful, a low share company must compete in the segments where its own strengths will be most highly valued and where its large competitors will be most unlikely to compete. Whether that strength is in the type and range of products offered, the method by which the product is produced, the cost and speed of distribution, or the credit and service arrangements is irrelevant. The important thing is that management spend its time identifying and exploiting unique segments rather than making broad assaults on entire industries.

Aerosol & beverage cans.

Although the metal container industry sells to numerous industries and faces competition from glass, aluminum, fiberfoil, and plastic containers, Crown Cork & Seal has elected to concentrate on two product segments: (1) metal cans for hard-to-hold products such as beer and soft drinks and (2) aerosol cans. In an industry where transportation costs represent a large proportion of total costs, Crown Cork & Seal has built small single-product plants close to its customers instead of large and possibly more efficient multiproduct plants located at some distance from its customers.

The two market segments Crown Cork & Seal serves have both grown more rapidly than the total industry, but they also require expert skills in container design and manufacturing. The company has a particular advantage over competitors in the soft drink and brewing industries because it is the largest supplier of filling equipment to these companies. Thus Crown Cork & Seal has segmented its market by products, customers, customer service, and plant location. It is significant that the company sells to growth segments in which it has special expertise.

Four large paper mills.

In the forest products industry, Union Camp has had to overcome the disadvantages of having a relatively small timberland holding—only 1.6 million acres—in contrast to International Paper’s 23.7 million acres and Weyerhaeuser’s 16.7 million acres. Although this difference makes Union Camp’s raw material prices higher, the company has achieved consistently lower operating costs than its large rivals. Since the location of plants is important, Union Camp, like Crown Cork & Seal, operates only four very large mills, strategically situated in deep-water ports close to both Union Camp’s southern timberlands and its eastern customers.

For example, at its Franklin, Virginia, plant, Union Camp operates the largest fine-paper machine in the world. As a low-cost producer of paper products, this corporation produces large volumes of only a limited number of paper products, and in bleached paper, Union Camp is not fully integrated. Instead, it sells most of its output to end-product converting companies. By selling to a rather small number of paper converters, the corporation has established a superior service record.

Thus Union Camp has segmented its market by stage of production, manufacturing policies, prices, products, customers, and services.

Three distinct computer lines.

Unlike Union Camp and Crown Cork & Seal, which do not offer complete lines in their industries, Burroughs offers a full line of computers. But in developing its full product line, the corporation has taken advantage of historical ties to the financial community, where it has been a major supplier of accounting machines for decades. Today, Burroughs possesses an 18% share of the banking segment, almost three times its overall market share.

In designing its large computers, the B5000 series, Burroughs has emphasized ease and flexibility of programming at the expense of efficient use of main memory. This form of segmentation has been justified by the ten-fold decrease in memory costs since 1964, while talented programmers have become both scarce and expensive.

In medium-size computers, Burroughs has chosen to imitate IBM’s design and to compete on price. The company has reportedly underbid IBM by considerable amounts on some large government contracts. In the small computer market, Burroughs has continued to upgrade its electronic accounting machines and has given them the capability to serve as either terminals to a larger computer or as freestanding accounting machines.

Thus, although Burroughs offers a full line of mainframe computers, within each line it has segmented the market to capitalize on its particular skills and resources.

That Crown Cork & Seal, Union Camp, and Burroughs have had to compete in unique market segments in order to attain their success should not be surprising. But what these three companies reveal is that the opportunities to segment an industry are enormous and extend to every facet of a business. When a business segments its markets in unique and creative ways, it can far surpass the performance of its larger competitors. The marketing vice president of one high market share business once commented:

“For years, we have been unable to understand why our profits have been mediocre despite our strong market position. The expert planners at corporate staff have been of little help. About a year ago, we decided to do a detailed study of our industry. We found that, although we had the highest market share, in all of the important and more profitable market segments, we were taking a beating. We were leading the pack, however, in the unappealing segments of the markets.”

Use R&D efficiently

Although low market share companies can improve their performance by pursuing narrow market segments, their larger rivals still seem to have a tremendous advantage, because of their size, in research and development. Our research suggests that smaller companies seldom win R&D battles but that they can channel their R&D spending into areas that are the most likely ones to produce the greatest benefits for them.

Lower process costs.

At both Crown Cork & Seal and Union Camp, for example, R&D is focused on process improvements aimed at lowering costs. A Crown Cork & Seal executive has noted:

“We are not truly pioneers. Our philosophy is not to spend a great deal of money for basic research. However, we do have tremendous skills in die forming and metal fabrication, and we can move to adapt to the customer’s needs faster than anyone else in the industry.”4

Alexander Calder, Jr., Union Camp’s chairman, has adopted a similar R&D strategy:

“We are known to be very strong in process and in the manufacturing of industrial products. We do little basic research like Du Pont. But we are good at improving processes, developing improved and some new products, and helping to build new manufacturing capabilities.”5

Another R&D strategy Union Camp and Crown Cork & Seal have developed is to work closely or jointly with their largest customers on major developments. For example, Crown Cork worked closely with large breweries in the development of the drawn-and-ironed cans for the beverage industry. As a result, the company beat all three of its major competitors in equipment conversion for the introduction of this new product.

Concentrate on innovations.

For Burroughs, the problem of developing an R&D strategy is much more difficult and crucial than for the other two companies because of the rapid changes and high technology in the computer industry. Although Burroughs spends 6% of its sales on R&D compared with IBM’s 7.5%, in dollar terms the difference is staggering—$112 million versus $1.2 billion. To compensate, Burroughs runs an extremely efficient R&D operation and concentrates on truly innovative products. And because of its low share position, these products are able to attract enough new customers to more than offset the trading up by Burroughs’s existing customers.

IBM, on the other hand, has paced its innovations because, whenever it introduces a new system, a significant amount of its leased equipment is exchanged for the new system. As a result, Burroughs is recognized as one of the technological leaders in the computer industry.

Burroughs also runs an extremely efficient R&D operation. Its chairman, Ray Macdonald, spends a great deal of time at his R&D center and exerts tremendous pressure on his engineers.

Think small

Another characteristic of successful low market share companies is that they are content to remain small.6 Most of them emphasize profits rather than sales growth or market share, and specialization rather than diversification.

Limit growth.

Macdonald limits Burroughs’s growth in the rapidly growing computer industry to 15% per year because he maintains that fast growth does not allow for the proper training of people and the development of a management structure. And in an industry where giants such as General Electric and RCA have faltered because they have found the pursuit of market share to be too costly, Burroughs has been consistently profitable despite only slow and modest gains in market share. Macdonald notes:

“There are two theories of growth in this industry. One is ours, where you plan to grow at a sustainable and affordable rate and put market share low on the list of objectives. Then there are others who thought that this rate was inadequate and took risky measures to increase their growth and market share. They were moths around a candle on that one.”7

Union Camp and Crown Cork & Seal have also emphasized profits rather than size. At Crown Cork & Seal, management decided not to continue to compete in the oil can market even though the company had a 50% share of this segment. Despite the loss of sales, management decided that it had other more profitable opportunities and that new materials such as fiberfoil provided too great a threat in the motor oil can business.

During the 1973–1975 recession, Union Camp’s management resisted customer pressure to produce a broad line of white papers. To Union Camp, the extra sales could not be justified by the added production costs.

Diversify cautiously.

Unlike many of their larger competitors, most successful low market share companies are not diversified. For example, both Continental Can and American Can have diversified widely, while Crown Cork & Seal has continued to concentrate on making metal cans. When successful low market share companies do diversify, they tend to enter closely related areas. For example, Union Camp has diversified into wood-based chemicals and retail distribution of building materials. Union Camp’s vice chairman, Samuel Kinney, Jr., explained another element of Union Camp’s diversification strategy.

“You must have someone in the parent organization who really understands the [new] business before its gets heavy. Other paper companies have had troubles along these lines. They had these MBAs who, I am sure, were intelligent. But once they failed, there wasn’t a damn thing anyone could do back at headquarters. They didn’t know the business, and they were completely out on a limb.”8

Ubiquitous chief executive

The final characteristic of these companies we found striking is the pervasive influence of the chief executive. John Connelly of Crown Cork & Seal, Alexander Calder of Union Camp, and Ray Macdonald of Burroughs have all been described as extremely strong-willed individuals who are involved in almost all aspects of company operations.

To a large extent, it is understandable that leaders of low market share companies are dynamic, tough people who see obstacles as challenges and enjoy competing in unorthodox ways. It may simply take a strong-willed leader to convince and inspire an organization to “beat the odds.”

This is not to imply that the chief executives of large share companies are not also strong-willed, dynamic, and tough. But most often these executives work with teams of other senior managers and limit their responsibilities to a few key areas. In successful low share companies, the influence of the chief executive often extends beyond formulating and communicating an ingenious strategy to actually having a deep involvement in the daily activities of the business.

At Union Camp, for example, Calder still retains responsibility for sales and marketing. Macdonald of Burroughs is deeply involved in both the development and the marketing of new products.

Of course, the pervasive influence of the chief executive in low market share business makes the problem of management succession an extremely difficult one. Connelly, now 72, has yet to retire or to pick a successor. While Macdonald retired in December 1977, he has retained the position of executive committee chairman, and analysts are already questioning Burroughs’s prospects without him. Though reports differ about what the actual situations are, only Union Camp’s Calder seems to have been able to delegate significant responsibilities and to practice a more participatory style of leadership than the others have.

Alternative to Growth

Although this article has an optimistic tone, we must acknowledge that there are some serious obstacles a low market share business must overcome. These usually include small research budgets, few economies of scale in manufacturing, little opportunity to distribute products directly, little public and customer recognition, and difficulties in attracting capital and ambitious employees. Moreover, previous research indicates that, on the average, the return on investment of low share businesses is significantly less than that of businesses with high market shares.

While low market share divisions of large diversified companies face many of the problems we have encountered in our research, it is important to note that their status creates additional problems as well as some opportunities.

An obvious advantage is that many of the more established diversified companies maintain large, centralized research and development centers. One successful division we studied had few funds itself for new product development. But when a competitor developed a product that was based on a new technology, those at corporate headquarters had their R&D center imitate the development in accordance with a one-time request from the division.

On the negative side, most large companies place great emphasis on growth and reward those division managers whose units grow the fastest. This philosophy runs counter to the needs of many divisions to segment and think small. Many large companies also use formal planning techniques that categorize their divisions. The division managers then must convince their top managers that, despite the dismal projections and warnings of statistically oriented planners, their divisions do face a bright future.

An example illustrates these problems and the ways in which they can be overcome. Consolidated Businesses is a typical diversified company operating in 65 businesses ranging from air conditioners to automobile parts.* Dedicated to continuous increases in sales and earnings, its semiconductor division produced a full line of sophisticated devices and had grown quite rapidly prior to a sudden sharp decline in its sales and profits. After a number of management changes, a new division team and executives from the group vice president’s staff undertook a complete review of the division and its industry. They determined that the division could only succeed by concentrating on serving a distinct group of industrial customers.

By doing this, the semiconductor division has recorded the highest ROI in its history; in fact, it enjoys one of the highest ROIs within Consolidated Businesses (see the accompanying Table.) Even though the division’s sales are lower than they were ten years ago and its profits are at about the same level, Consolidated Businesses’ top executives understand that the high return it is earning on shareholders’ investment more than compensates for these facts. They have also promoted many of the semiconductor division’s managers for their performance.

Table The semiconductor division’s success

* This disguised example was also reported on in Richard Hamermesh’s article “Responding to Divisional Profit Crises,” HBR March–April 1977, p. 124.

We have made no attempt to refute these research findings or to deny the obstacles facing low share businesses. But we have sought to demonstrate that many of the inferences being drawn from these findings are simplistic and misleading. Simply put, not all low share businesses are “dogs.”

Rather, we have found that a small market share is not necessarily a handicap; it can be a significant advantage that enables a company to compete in ways that are unavailable to its larger rivals. We believe that these findings are significant.

For the independent low share company, these findings represent an alternative to bankruptcy and the high costs and risks associated with efforts to increase market share.

To the large diversified company, the findings suggest that formal planning systems must go beyond simply placing each division in one of several categories. Categorization schemes can provide a useful conceptual handle for top executives, but the best planning systems are those which encourage and enable a division to seek the best fit between the opportunities in the competitive environment and the particular skills, strengths, and resources each division possesses.

In sum, our findings indicate that, in a division or in an independent company, management’s first objective should be to earn the maximum return on invested capital rather than to achieve the highest possible market share.

1. Robert D. Buzzell, Bradley T. Gale, and Ralph G.M. Sultan, “Market Share—A Key to Profitability,” HBR January–February 1975, p. 97.

2. See Perspectives on Experience (Boston: Boston Consulting Group, Inc., 1968 and 1970) for a description of a typical classification system.

3. For a more comprehensive description of Crown Cork & Seal, see E. Raymond Corey, “Key Options in Market Selection and Product Planning,” HBR September–October 1975, p. 119.

4. “Crown Cork & Seal and the Metal Container Industry,” Harvard Business School case study, ICCH No. 6-373-077 (Boston: Intercollegiate Case Clearinghouse, 1973), p. 30.

5. “Union Camp Corporation,” Harvard Business School case study, ICCH No. 9-372-198 (Boston: Intercollegiate Case Clearing-house, 1972), p. 6.

6. For an excellent discussion of the risks of attempting to build market share, see William E. Fruhan, Jr., “Pyrrhic Victories in Fights for Market Share,” HBR September–October 1972, p. 100.

7. “How Ray Macdonald’s Growth Theory Created IBM’s Toughest Competition,” Fortune, January 1977, p. 98.

8. “New Growth at Union Camp,” Dun’s Review, March 1975, p. 43.

A version of this article appeared in the May 1978 issue of Harvard Business Review.

What strategies recommended for a firm that is weak competitor in slow growing market?

Which grand strategy is recommended for a firm with rapid market growth and a strong competitive position?

What are the strategies for competing?

What are the 4 grand strategies?