Fundamentals of Business

Empirical research on the profit impact of marketing strategy

Empirical research on the profit impact of marketing strategy indicated that firms with a high market share were often quite profitable, but so were many firms with low market share. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem.

Porter's explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable because they did not have a viable generic strategy.

Cost Leadership Strategy

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience (learning) curve effects effects. The product is often a basic no no-frills product that is produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible.

Promotional strategy often involves trying to make a virtue out of low cost product features.To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labour labour, or some other important inpu inputs. Without one or more of these advantages, the strategy can easily be mimicked by competitors. Successful implementation also benefits from:

. Process engineering skills
. Products designed for ease of manufacture
. Sustained access to inexpensive capital
. Close supervision of labour
. Tight cost control
. Incentives based on quantitative targets
Examples
low ost airlines such as EasyJet, Ryanair, and supermarkets such as Aldi, Lidl.