Why market share is the wrong target

Citation

Pennington, M. (2003), "Why market share is the wrong target", Strategy & Leadership, Vol. 31 No. 4. https://doi.org/10.1108/sl.2003.26131dae.002

Why market share is the wrong target

Malcolm Penningtonis both a member of the Executive Committee and a director of Kikkoman Foods, Inc. He heads The Marketing and Planning Group consultancy and is a contributing editor of Strategy & Leadership (mwpenn@nyc.rr.com).

The Myth of Market Share: Why Market Share is the Fool's Gold of Business

Richard MiniterPublished by Crown Business, 2002, 172 pp.

Many companies are focused on increasing market share. Richard Miniter, a former Wall Street Journal editor asks two core questions. Does market share growth lead to growth in profits? Does market share leadership lead to profit leadership?

Most of us would give these questions a little thought and answer, "As a general rule, yes and yes''. The author, however, refutes a number of widely held beliefs that lead us to assume that profits will follow market share growth:

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  The company with a dominant market share can set prices and make big profits. Unfortunately, in the real world this does not work. The high margins attract smaller competitors. A classic example is American Sugar, which in the 1890s purchased every producer in the Northeast and ended with a 98 percent share. Nonetheless the company could not make decent profits because the high margins attracted imports. As a modern-day example, AT&T started with a dominant share of long distance, but in its struggles with MCI and Sprint, prices and profits have fallen for all three rivals.

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  Size naturally leads to higher returns. This theory got some early support from academic research. However, a recent careful study of the four market leaders in each of 240 industries tends to refute this. The leader in market share was the leader in profitability in 29 percent of the industries. That is only four percentage points above the pure chance result.

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  Economies of scale invariably boost profitability. It is assumed that production costs will move down the experience curve, overhead costs can be distributed over more units, larger orders reduce purchasing costs, and profits will increase. Life should work this way. But what often happens instead is that large-share companies are already down on the flat part of the learning curve, there are added costs for new layers of management and new production facilities, suppliers negotiate with determination to maintain their own margins, and management looking for share gets distracted from pursuing profits.

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  High market share attracts exceptional managers. The assumption is that market leaders can offer higher compensation, stock options, and other benefits. Perhaps, but some top executives do not care for large bureaucracies or they see more opportunity and flexibility in smaller organizations. Mergers that increase market share can cause a management exodus. Daimler was profitable before increasing market share by taking over Chrysler, then the most profitable of the US automakers. After the merger almost the entire Chrysler management team departed. Now Mercedes is the only DaimlerChrysler brand that makes money.

The Boeing case

Boeing offers a great example of market-share mania in action. Boeing was accustomed to having a 70 percent share of the commercial transport market, but Airbus had a good year in 1994 and Boeing was down to 50 percent. Would Boeing become a second rank producer? Would it have to layoff workers and have idle capacity? Faced with these prospects, Boeing panicked!

Overreacting, the company geared up to produce 550 aircraft a year – an amazing performance in itself – but bottlenecks occurred as procedures were streamlined. Soon delays proliferated, and unhappy customers clamored for attention. Furthermore, many of the aircraft were sold at low prices, with further costs for customizations, special financing packages, and the like. Boeing had a backlog of orders for 1,000 planes and managed to lose money in 1997, for the first time in 50 years.

A new management took over that was determined to make money on each aircraft sold. Their plan: let Airbus use its government subsidies to sell aircraft below cost, but Boeing will make a profit.

Soon Airbus announced its super jumbo plane with a large sale to Singapore Airlines. Airbus admitted it needed a sales price of $225 million per plane just to break even. However, according industry intelligence, Singapore Airlines would pay Airbus only $160 million for each aircraft. Unwilling to get into a competition in which the winner loses so much money, Boeing decided that it would not make a super jumbo. Instead, it is working on a super-fast aircraft as an alternative.

The perils of focusing on market share

The author describes a set of unfortunate consequences that result from concentrating on market share:

Cutting margins to boost volume. If you cut margins, your competitors will likely do the same and soon everybody's margins will deteriorate. In fact, this happens regularly in auto sales, airline tickets, telephone services, soft drinks, gasoline, and other industries that seem unable or unwilling to learn from experience.

Mobil employed an alternative strategy for its gas stations. Mobil reasoned that, because gasoline is more less a commodity, it did not want to compete strictly on price. Instead Mobil put the "service'' back in its service stations and offered fast friendly service (touch cards at the pumps), bright lighting, and clean restrooms. It charged a little bit more, but in 1997 Mobil had a 3 percent increase in sales while the industry dropped 2 percent. Mobil sales held steady in 1998 while the industry dropped another 3 percent. Then they merged with Exxon, went back to price competition, and ceased to be the industry profit leader.

Killing brands to gain share. Bargain prices give buyers the idea that your product (or service) is not really valuable. For example, one of the attractions for Cadillac buyers was the inclusion of the $1,500 OnStar security system as part of the package. Now it is offered as a free incentive on many GM cars. Why buy a Cadillac?

Making bad acquisitions. Buying your competitor to get his customers and market share sounds like a great idea. KMPG did a study of this kind of merger in 1999 that concluded that 83 percent of them did not add to shareholder value. Differing cultures are often hard to integrate and expected economies of scale are difficult to achieve. For example, when GM purchased 50 percent of SAAB in 1990 some scale economies were achieved. But SAAB's primary competitor, Volvo, did an even better job of quickly trimming costs, and as a result, it took seven years for SAAB to become profitable. Meanwhile Volvo, with sales of only 400,000 cars per year, was the most profitable auto company in the world. That is why Ford paid Volvo $6 billion for its car business. Volvo will concentrate on its even more profitable truck business.

Boneheaded brand extensions. Miller Brewing did a great job of building Miller High Life to the number two position with a 21 percent share. Then they introduced Miller Lite, which rocketed to a 19 percent share. But it took that entire share from the High Life brand. Introducing two new brands, Miller Reserve Light and Miller Clear, added to consumer confusion without adding to sales.

Crazy cost control. In the 1980s, Texas Instrument decided to dominate the digital watch market by offering maximum performance at minimum price. They came out with watches at an unheard of price/value point, just $9.95. They expected to quickly win a major share of the low cost watch market. Unfortunately, to reach that low price they had to use a cheap looking plastic band. Few people wanted to be seen wearing such unfashionable bands and the watches sold poorly. Soon TI exited the watch business.

Forgetting customer service. Miniter notes that, ''Increasing market share means wooing more customers or enticing existing customers to buy even more. So why do so many firms ditch customer service to boost market share?''. He cites the case of the cable modem industry, which sold super fast Internet connections to eager buyers impatient with their much slower telephone modem hookups. Initially consumers were delighted with the connection service, but they soon found that the more users on a cable ''node'' the slower the service. The cable operators were so busy signing up new customers that they failed to add new nodes quickly enough. So as most services slowed to the old telephone speed, their customers at first became frustrated that they could not ''surf the net'' quickly and then indignant that they were paying for a premium service.

When DSL companies joined the competition for market share, its operators made the same errors as the cable modem industry. DSL installations were late, problems went unresolved, and soon more than half their customers were unhappy with their service.

The author's central point is that you should strive to be the profit leader. If this makes you the market leader too, that's well and good. But having a small share and high profits is fine. Ryanair and Southwest Airlines are small players, but they are the only profitable airlines.

The book is full of excellent cases and examples, plus some worthwhile advice on becoming the profit leader. It is well worth your time.