Strategy

‘Share of Future Innovations’ is a good lead measures for ‘Market Share’ & ‘Profit share’

posted by Ravi Arora January 13, 2016

‘Market Share’ is a very commonly used term to compare performance of a company amongst its competitors. It is nothing but the ‘Revenue Market Share’ (I call it ‘Share of Revenue’ in this article). In simple terms, it means revenue of the company as a percentage of overall revenue generated by everyone in the same industry.

Similarly ‘Share of profit’ is the profit made by the company in percentage of overall profit made by all the companies in the industry (competitors). This is not a commonly used metric by the company or analysts. The company and market analysts (unfortunately) use profitability (% of revenue) and use it to compare the performance with the competitors.

I would like to suggest that one of the main drivers that decide the quantum of change in the ‘Share of Profits’ and ‘Share of revenue’ in a particular year as compared to previous years is the quantum of Process innovations and Product/Service innovations accomplished by the company as compared to those accomplished by the competition.

Process Innovations: Most Process innovations result in reducing wastes or improving the cycle time and defects. They could also result in increasing throughput or could avoid an expenditure. They could also reduce direct and indirect costs. All of these would end-up in reducing overall costs leading to better profits. Companies who already enjoy one a very high share of profits, process innovations would support in maintaining those profits.

Interestingly, process innovations in the area of Selling, Marketing and Branding resulting in higher sales could drive better sales thereby improving share of revenues. Needless to say that that higher revenues would result in higher profits and could result in higher share of profits as well.

Product and Service innovations: Most Product and Service innovations result in higher revenues. Better revenues through Product/service innovations could be achieved by (a) the increase in number of customers (b) higher margins/premium on the products/services with or without losing the number of customers. In both the cases revenues and profits would increase in absolute terms. In the first case, the profitability is not likely to change whereas in the second case the profitability will surely improve. There could be an instance, where a product innovation might reduce overall revenues but could improve the profits and/or profit margins. Can you think of an example?

Therefore if a company puts in efforts to map and track the ‘Share of future innovations’, it can get a very good sense of the likely Market share and Profit share for the next year and also for the next few years. This ‘Share of future innovations’, if not found to be satisfactory, could assert a lot of pressure on the leaders to take actions to improve it. The levers to improve the ‘Share of future innovations’ are not a rocket science: (i) Improve the quality/quantity of opportunities and if need be re-evaluate the boundaries/constraints imposed on the business (ii) Improve resource planning for innovation projects (iii) Re-evaluate the business model of current and future innovations.

Do you agree? Why not?

If you agree, how can one measure ‘Share of future innovations’?

Summary:

‘Share of future process innovations’ could be a good lead measure for ‘Future share of Profits’

AND the above combined with ‘Share of future product/service innovations’ might be dominant lead measure for ‘Future Market Share’