Wednesday, January 24, 2007

The Myth of Market Share?

J Scott Armstrong from the Wharton School of Business and co-author Kesten C Green have published a new study that discusses how too much focus on competition and gaining market share can harm profitability.

Sound management thinking has often stated that if a company must chase market share if they are to achieve greater profitability. Beating the competition is a common mindset in corporations. 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, and who would refute the success of Jack Welch?

Scott's work goes back as early as a study published in 96 which showed that for competitive-oriented objectives were negatively correlated with ROI. In other words he more managers tried to be the biggest in their market, the more they harmed their own profitability. Although the results of this study were criticized and ignored, they are now back with more research to back up the original claim. Plus there are now some very real world examples that have been very public which seem to back this claim...

Toyota is a profitable company and expects to build more vehicles than any other automaker in 2007, but grabbing market share is apparently not one of its goals. An Associated Press story on Toyota's imminent rise to the top described Kazuo Okamoto, executive vice president, as being "nonchalant" about Toyota's achievement. "We aren't that concerned about vehicle numbers," Okamoto told the AP. "But we are determined to go at it to develop cars that make a lot of people happy."

In a December 4, 2006, article in The New Yorker by James Surowiecki, the magazine's business writer. Surowiecki describes how Sony, with its PlayStation 3, and Microsoft, maker of the Xbox 360, are beating each other's brains out trying to capture the biggest share of the video-game market. Meanwhile, third-place Nintendo, with its new game console called Wii (pronounced "wee"), has quietly become the most profitable game console company in Japan.

To me this has a lot to do with Blue Ocean Strategy and thinking. Focusing on the competition whether it be about the products you make or the services you offer is a red ocean strategy, and not optimal for success. This study appears to back this concept nicely. Focusing on competition and therefore existing market share puts you into a red ocean. Blue ocean strategy allows you to create new market share, so you don't have to think about the competition beyond determining the right new direction to follow. What do you think about the 'Myth of Market Share'?

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