This is just a little story from real life. Only a few minutes to read and you know one more trap you would not expect in your planning process.
Everyone knows how to calculate the market share. In general, market share is your own sales volume divided by the total market volume. Of course, there are some variations. For instance, the relative market share is your own sales volume divided by that of your largest competitor. However, as long as you know your sales (what you actually should know) and have a halfway accurate estimate of the market volume, it is fairly easy to come up with your market share.
Thatâ€™s what you might think. That is what I thought until some years ago.
At that time, I was asked to set up a standard strategic planning process for all business units of my former employer. This was a large manufacturer of high-precision metal components with global operations. All product groups were to be analyzed by region.
If you want to determine your competitive position, it is a sensible thing to look at the market share, amongst others. Hence, I developed a questionnaire in which I asked product managers to enter their own sales and the estimated market volume for all relevant regions. The tool would than calculate and display the market shares and give them a rating betw.
In year one, this exercise delivered reasonable results. All market shares were roughly at the expected level.
Of course, some of the sales figures did not quite match the figures provided from our controlling department. Nevertheless, this was a known problem. Local managers and product managers tended to keep their own â€œshadow accountingâ€, focused on their own view of their business, rather than the central controlling view.
At that time, our companyâ€™s central group controlling department had a very powerful position. They realized that managers had used other figures than their â€œofficialâ€ ones. They urgently requested us to make sure that only official figures were used in strategic planning.
At this point I made a mistake.
I am a great fan of consistent figures. So I agreed with controlling that they would deliver all relevant sales figures to us in advance. We would fill them into the questionnaires as default values. Sounds reasonable, doesnâ€™t it?
It wasnâ€™t. I should have wondered where the inconsistencies came from. Why did we come up with plausible market shares when we used wrong input values for sales?
I became aware of that mistake only in the next annual strategic planning cycle. We sent out the questionnaires with the fixed sales values from controlling. Shortly afterwards, I received some phone calls from angry product managers. The conversation always was as follows:
Manager: â€œYour sales figures donâ€™t make any sense!â€
Me: â€œBut these are the official figures from group controlling. They must be correct.â€
Manager: â€œWe always have problems with controlling. They donâ€™t care how our market really looks like.â€
Me: â€œSorry, but controlling insists that their figures are used only. The CFO supports their position. I canâ€™t do anything about that.â€
Manager: â€œDo what you have to do. But I am telling you that does not make any sense. Have a look for yourself!â€
I had a look as soon as I got one of their questionnaires back. The particular product was an engine component, solely sold to the automotive industry. Results were indeed surprising, not to say strange:
We knew we had a moderate market share in Germany. However, the questionnaire showed a market share of about 105%! This was absolute market share, not relative share. In contrast, we knew that we almost had a monopoly with nearly 100% share in South America. The tool came up with almost zero!
It took me some more phone calls and questions to find out what had happened:
As mentioned, the product in question was an automotive component. The automotive industry in South America consisted almost only of VW do Brazil (at that time) and we were the almost only supplier to them. There was no doubt about that. It was a logical conclusion that we would have an extremely high market share in that region.
However, VW had the policy that all invoices for deliveries to their global operations all over the world were sent to their headquarters at Wolfsburg, Germany. Here we had an unfortunate combination of circumstances: Our group controlling attributed all sales to that region were the invoice went. The invoices for our sales in South America went to Germany and thus were considered as sales in Germany in our controlling system!
What did I learn from that? Two things:
- Even small inconsistencies can have a severe cause and should be analyzed in more detail.
- In all sorts of market analyses, make sure that everyone involved uses one and the same definition for that market.