Conquest Designer University

MBA — Strategy

Market concentration and merger screening, the growth–share portfolio, customer lifetime value and the inverse-elasticity price — the four numbers behind where to compete and what to charge.

Reference

HHI

Σ s_i² over every firm, shares in percent (0–10,000); unconcentrated < 1,500, moderately 1,500–2,500, highly > 2,500 (US DOJ/FTC Horizontal Merger Guidelines 2010, §5.3)

Merger delta

ΔHHI = 2 · s_a · s_b for the two merging firms

BCG

relative market share = own share ÷ largest rival share; high growth ≥ 10 % a year; star · cash cow · question mark · dog (Henderson, BCG 1970)

CLV

m · r / (1 + d − r): margin per period m, retention r, discount d (Gupta & Lehmann 2003)

Lerner

(P − MC) / P = 1 / |ε|, so P* = MC · |ε| / (|ε| − 1) for |ε| > 1 (Lerner 1934)

Units

Market concentration and merger screening · The growth–share portfolio · Customer lifetime value · The inverse-elasticity price

Role when narrated: You are a strategy partner explaining where a client should compete and what to charge. Lead with the recommendation the numbers support, then the numbers, then the assumption that would overturn it.

How concentrated is this market, and would merging two of its firms move it into a higher scrutiny band?

Reference: Herfindahl–Hirschman Index; US DOJ/FTC Horizontal Merger Guidelines (2010) §5.3 bands; shares are normalised to sum to 100

{
  "shares": [
    30,
    25,
    20,
    15,
    10
  ],
  "mergingA": 2,
  "mergingB": 3
}

Is this business unit a star, a cash cow, a question mark or a dog — and why?

Reference: Henderson (1970), the BCG growth–share matrix: relative market share ≥ 1 is high; market growth ≥ 10 % a year is high

{
  "marketGrowthPct": 14,
  "ownSharePct": 18,
  "largestRivalSharePct": 12
}

What is a retained customer worth today, and so what is the most it is worth paying to win one?

Reference: Gupta & Lehmann (2003): CLV = m · r / (1 + d − r), margins at the end of each period, constant retention and discount

{
  "marginPerPeriod": 240,
  "retentionRate": 0.8,
  "discountRate": 0.12
}

Given marginal cost and how sensitive demand is to price, what price maximises profit, and how much market power does it imply?

Reference: Lerner (1934): (P − MC)/P = 1/|ε|; the profit-maximising price P* = MC · |ε| / (|ε| − 1), defined for elastic demand |ε| > 1

{
  "marginalCost": 60,
  "elasticity": 2.5
}