Wednesday, December 26, 2007

The Myth of Market Share

According to the above article, corporations that focus on market share (that is, trying to dominate the competition) end up much less profitable than those corporations that focus on profit without regard to market share. Companies that pursue market share as their ultimate goal often end up with pyrrhic victories, if they win at all. Companies that ignore the competition and focus on profit can be very successful and provide the greatest return on investment to shareholders, even from the number two (or three or fifteen) position.

This has always seemed obvious to me, but it is apparently a new concept in US corporations (compared with Japan, where this is the standard practice.)

As one respondent said, American Airlines is the biggest. Southwest is the most profitable. Which would you rather own shares of?

4 comments:

JamesQMurphy said...

Absolutely! Although businesses should keep an eye on what their competitors are doing, if their focus is solely on capturing market share, then they stifle innovation and simply make slightly better crud than their competitor (at best). By focusing on making great products and streamlining operations, you stand a better chance of motivating your employees and developing some sweet solutions.

SCD said...

Not to be contrary, but sometimes marketshare is the name of the game.

I used to work for a company that made diabetes glucose monitors, and we were all about market share.

This is a product where customers stay loyal and buy a lifetime of test strips. Sometimes out of their pockets, sometimes the insurance company's pocket, but either way, brand loyalty was huge and so market share was king.

I realize that is not the case for some other markets, but just goes to show, there is a place for every strategy.

Shamino said...

SCD: I would argue that if you focus on making the best quality monitors, for the best price, that will create the customer loyalty.

In other words, market share is the result of, not the cause of success.

But even if not, what would they prefer? To be the #5 player, but be rolling in profits? Or to be the #1 player, that's barely able to pay what's owed to the banks?

IMO, a company that would prefer the latter is doing themselves and their shareholders a grave disservice. It's a strategy that can only pay off if you manage to completely destroy your competition, creating a monopoly you can then exploit. Although there are some examples where this has worked (like Microsoft), there are plenty more when it's not bloody likely.

SCD said...

I think you misunderstand me. In this business at least, quality and price did not win the day. Various things led to brand loyalty (perception, doctor's advice, word of mouth, marketing) and once a customer strated with a brand they stuck with it. Not as easy to change glucose monitors as to change brands of soda (and look how little some people will do that).

Their studies showed that the #1 brand could charge whatever it wanted, and thus rake in the profits, while the #5 guy (and to some extent 2, 3, and 4) could ONLY compete on price and thus, have little profit.

I'm not saying that this is typical but I think it more common than you might think. Brand loyalty can be powerful, and once a company gets it, they can charge extra. That is pure profit.

Insurance companies do this, start you with low rates and jack it up because you are unlikely to switch often. I mentioned soft drinks, the big two charge a big premium for a product that isn't much different from some of their smaller competators. I'm sure there are other examples as well.