The Economic Times

Power of leadership economics

In these times of economic uncertainty, positions of leadership are particularly powerful.

By Ashish Singh and Chris Zook

Published on May 20, 2008
min read


Golf ranks as one of the demanding markets in the sports business. So, despite its fabled swoosh, Nike was regarded as an amateur when it decided in 1995 to branch out from shoes to golf apparel, balls, and equipment. Within six years, however, Nike had scored priceless marketing victories—not once, but three times running. Nike scored its victories in the golf market by using the power of leadership economics—exploiting its strong global customer position and capability to quickly build a leading market presence in a new sport using a repeatable formula, including co-branding with champions. Leadership economics does not require companies to eventually become the market leader by size in their industries. That is seldom a worthwhile pursuit. Rather, leadership economics means finding an area of unique strength to build on—a set of customer situations, channels, locations, or products where you have some competitive advantage. In these times of economic uncertainty when credit is tight and stock markets volatile, positions of leadership are even more valuable. Consider the following findings from our analysis of the economics of leadership in a well-defined competitive arena. The typical industry has more than six competitors. In any sector, the two leading players usually capture over 75% of the profit pool, and the company with the greatest market power usually snares about 70% of total profits. In contrast, followers with a marginal share of the profit pool act as the shock absorbers of the economic system, exhibiting much larger fluctuations and enduring a bumpier ride during downturns. When we analysed 22 pairs of global leaders and their followers—Nike versus Reebok (now owned by Adidas) or Southwest Airlines versus Delta, for example—we found that the average variance in profit margin was three times as great for followers as for leaders. This discrepancy should give strong leaders an inherent advantage in making gains during downturns—including the current turbulence in the US with its global ramifications—because the relative economics of leaders are magnified profoundly compared with those of struggling followers. Capital markets also value leaders at a premium relative to followers in the same industry. Moreover, in our examination of 22 paired global leaders and followers, we also found that leaders had nearly twice the market-to-book ratio of followers. This gives them an advantage in raising money, in controlling their costs of debt service, and in making acquisitions. That's not all: leaders tend to perform better when they expand their main business into areas close to their core—like Nike's move into golf—with a success rate of more than 40%. Followers, though, even with relatively close-in growth moves, have a success rate of only about 17%. A case in point is Nike and Reebok. Nike has consistently succeeded in expanding into adjacencies through a repeatable formula—from one sport to another, and from equipment to shoes to apparel. Reebok had difficulty moving into adjacent products and its financial performance suffered. To fully exploit the advantages of leadership economics, leaders first need to recognise the power of their position, especially as accounting systems tend to obscure the full value of leadership economics. When leaders fail to identify the leverage and market power provided by their positions, they can pay a heavy price, as contact lens maker Bausch & Lomb did. In the early 1990s, when competitors attacked Bausch & Lomb's market share with new technologies, the company failed to understand the true boundaries and profit economics of its business and prematurely abandoned its core. It diversified into businesses such as skin care, dental health, and hearing aids that had no obvious links to lens-making. The result: Bausch & Lomb's market share plunged, its stock plummeted, and it dropped two places from its top-ranked position in the lens-making business. As for followers, it turns out that they can sometimes have pockets of leadership that they don't recognise at first. They can reverse their position, for example, by harnessing a unique strength in a narrow market segment. Another way followers can move up to become leaders is to develop an innovative product that the leader has not matched. A third way is for followers to gain a large share of an industry's profit pool with a low-cost model that gives them true market power and influence despite their smaller size. Whether you are a follower or a leader, when it comes to wanting a larger stage for your talents, it pays to determine where you are already the best, and capitalise fully on that position. That's how Nike's continues to notch up victory after victory in new geographies and adjacencies. In India, it has used its leadership position and repeatable adjacency formula to successfully move into cricket shoes, gear, and apparel, and become the official kit sponsor of the hugely popular national team. Ashish Singh is the MD of Bain & Company India and Chris Zook leads Bain & Company's Global Strategy Practice.

Golf ranks as one of the demanding markets in the sports business. So, despite its fabled swoosh, Nike was regarded as an amateur when it decided in 1995 to branch out from shoes to golf apparel, balls, and equipment. Within six years, however, Nike had scored priceless marketing victories—not once, but three times running.

Nike scored its victories in the golf market by using the power of leadership economics—exploiting its strong global customer position and capability to quickly build a leading market presence in a new sport using a repeatable formula, including co-branding with champions. Leadership economics does not require companies to eventually become the market leader by size in their industries. That is seldom a worthwhile pursuit. Rather, leadership economics means finding an area of unique strength to build on—a set of customer situations, channels, locations, or products where you have some competitive advantage.

In these times of economic uncertainty when credit is tight and stock markets volatile, positions of leadership are even more valuable. Consider the following findings from our analysis of the economics of leadership in a well-defined competitive arena. The typical industry has more than six competitors. In any sector, the two leading players usually capture over 75% of the profit pool, and the company with the greatest market power usually snares about 70% of total profits.

In contrast, followers with a marginal share of the profit pool act as the shock absorbers of the economic system, exhibiting much larger fluctuations and enduring a bumpier ride during downturns. When we analysed 22 pairs of global leaders and their followers—Nike versus Reebok (now owned by Adidas) or Southwest Airlines versus Delta, for example—we found that the average variance in profit margin was three times as great for followers as for leaders.

This discrepancy should give strong leaders an inherent advantage in making gains during downturns—including the current turbulence in the US with its global ramifications—because the relative economics of leaders are magnified profoundly compared with those of struggling followers. Capital markets also value leaders at a premium relative to followers in the same industry. Moreover, in our examination of 22 paired global leaders and followers, we also found that leaders had nearly twice the market-to-book ratio of followers. This gives them an advantage in raising money, in controlling their costs of debt service, and in making acquisitions.

That's not all: leaders tend to perform better when they expand their main business into areas close to their core—like Nike's move into golf—with a success rate of more than 40%. Followers, though, even with relatively close-in growth moves, have a success rate of only about 17%. A case in point is Nike and Reebok. Nike has consistently succeeded in expanding into adjacencies through a repeatable formula—from one sport to another, and from equipment to shoes to apparel. Reebok had difficulty moving into adjacent products and its financial performance suffered.

To fully exploit the advantages of leadership economics, leaders first need to recognise the power of their position, especially as accounting systems tend to obscure the full value of leadership economics. When leaders fail to identify the leverage and market power provided by their positions, they can pay a heavy price, as contact lens maker Bausch & Lomb did. In the early 1990s, when competitors attacked Bausch & Lomb's market share with new technologies, the company failed to understand the true boundaries and profit economics of its business and prematurely abandoned its core.

It diversified into businesses such as skin care, dental health, and hearing aids that had no obvious links to lens-making. The result: Bausch & Lomb's market share plunged, its stock plummeted, and it dropped two places from its top-ranked position in the lens-making business.

As for followers, it turns out that they can sometimes have pockets of leadership that they don't recognise at first. They can reverse their position, for example, by harnessing a unique strength in a narrow market segment. Another way followers can move up to become leaders is to develop an innovative product that the leader has not matched.

A third way is for followers to gain a large share of an industry's profit pool with a low-cost model that gives them true market power and influence despite their smaller size. Whether you are a follower or a leader, when it comes to wanting a larger stage for your talents, it pays to determine where you are already the best, and capitalise fully on that position. That's how Nike's continues to notch up victory after victory in new geographies and adjacencies. In India, it has used its leadership position and repeatable adjacency formula to successfully move into cricket shoes, gear, and apparel, and become the official kit sponsor of the hugely popular national team.

Ashish Singh is the MD of Bain & Company India and Chris Zook leads Bain & Company's Global Strategy Practice.