The myth of market share

Does your business focus its attention on grabbing market share from your industry rivals? Do you constantly compare your sales figures to those of your main competitors? Be careful: your desire for a bigger slice of the cake may actually be reducing your firm's profitability.

by Knowledge@Wharton
Last Updated: 23 Jul 2013

In 1996 Wharton marketing professor J. Scott Armstrong co-authored a controversial paper with Fred Collopy of Case Western Reserve University which concluded that competitor-oriented objectives, such as setting market-share objectives, are counterproductive. Armstrong has now co-authored a new study with Kesten C. Green of Monash University in Australia which summarises 12 new studies that add weight to this conclusion.

They say that the traditional view of business as an activity akin to war has led companies to focus excessively on ‘beating' their rivals. In the 19th century, for example, it was common for many American executives to strive for revenue maximisation and constantly compare themselves to their competitors. But by the mid-20th century some scholars began to question the value of competitor-oriented approaches, according to Armstrong and Green. In 1959 one researcher lamented "the common use of market-share objectives and discussed the logical and practical flaws of pursuing such objectives," they say.

In their 1996 study, Armstrong and Collopy observed that several researchers in the 1950s and 1960s had groups of subjects play repeated games in which cooperation was necessary to maximise profits. The researchers found that when they provided feedback to subjects on the performance of others in the study, nearly 90% of the choices the subjects made were competitive -- and low-profit.

Armstrong and Collopy also measured the level of competitor orientation among 20 major corporations, according to the firms themselves, and calculated how it related to the firm's after-tax return on investment for five nine-year periods between 1938 and 1982. "Competitive-oriented objectives were negatively correlated with ROI for these data," Armstrong and Collopy concluded. The study found that those companies whose only goal was profit maximisation posted stronger ROI than those whose only goal was market share. In other words, the more managers tried to be the biggest in their market, the more they harmed their profitability.

However, the study was largely ignored by corporate executives and attracted criticism from other academics.

In their new study, Armstrong and Green write that they have yet to find a "single paper that challenges the finding that competitor-oriented objectives harm profitability". But while advocates of market-share objectives have provided no evidence to support their contention, their writings "seem to have a big impact" on strategic management research and executives' belief that increasing market share is a worthwhile goal.

"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."

Competitor-oriented Objectives: the Myth of Market Share
J Scott Armstrong and Kesten C Green

Review by: Nick Loney

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