The Myth Of Market Share

Some more dope on the discussion of competitive collaboration. I recently read a very interesting research paper by Wharton marketing professor J. Scott Armstrong. According to him it is a common practice of many companies to focus their attention on grabbing market share from their competitors (focus on the slice rather than the pie).

Now here’s the best part… he says such efforts can actually be detrimental to the firm’s profitability. For years, Armstrong has been conducting research showing that competitor-oriented objectives, such as setting market-share targets, are counterproductive. Their study is titled, “Competitor-oriented Objectives: The Myth of Market Share.” I have a PDF of the same so if you want to read it, just say so.

As he says, to see how well they were doing in revenue maximization (the key word here is revenue and not profit), companies compared themselves to competitors in their industries. But in the mid-20th century some academic scholars began to question the widespread focus on market share. For instance, several researchers in the 1950s and 1960s had groups of subjects play repeated games in which cooperation was necessary to maximize profits. The researchers found that when they provided feedback to subjects on other subjects’ performance, nearly 90% of the choices that the subjects made were competitive and hence low-profit. In another example, Armstrong and Collopy asked 170 MBA students over a period of years whether the “primary purpose of the firm is (a) to do better than its competitors, or (b) to do the best it can.” One-third of the students chose (a), suggesting that a large number of the students believed that beating the competition is more important than other goals, including profitability. In other words, the more managers tried to be the biggest in their market, the more they harmed their own profitability.

Armstrong says the focus on beating the competition remains entrenched in the world’s biggest companies. Jack Welch, the former CEO of General Electric, famously stated that GE would not be in any business in which it could not be first or second in market share. Welch’s belief in the myth still holds sway in boardrooms, but Armstrong says it is never too late for CEOs to change. “We’re not saying companies shouldn’t pay attention to their competitors; they might be doing reasonable things that you may also want to do,” Armstrong says. “What we’re saying is that the objective should not be to try to beat your competitor. The objective should be profitability. In view of all the damage that occurs by focusing on market share, companies would be better off not measuring it.”

Watch this space!

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