Market Share As a Strategic Goal

Posted by 21 September, 2008
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Agreat many marketing missions and objectives rest on the assumption that a domi­nant share of your market is a sure-fire recipe for success. Think again about the Starbucks mission-“to dominate every place coffee is sold.” This is in fact a market share objective, and it makes sense only if there is some payoff for holding a dominant share of markets.
Because of the importance of assumptions about market share, a group of pro­fessors with the Strategic Planning Institute (SPI) has assembled a highly detailed database of information on the performance of thousands of individual businesses and business units over four years or more. It tracks the standard financial measures, plus many of the marketing and strategy variables thought to drive financial perfor­mance. In this Profit Impact of Marketing Strategy (PIMS) database, two striking trends appear. First, on average, market share and return on investment (ROI) vary together. A smaller share is typically associated with lower ROI, and vice versa. In fact, the relationship is virtually a straight line, varying from an average ROI of 11 percent for businesses with market shares of 10 percent or less, up to an ROI of 40 percent for businesses with shares of 50 percent or more. Professors Buzzell and Gale write that:

The primary reason for the market share-profitability linkage, apart from the connec­tion with relative quality, is that larger share businesses henefit from scale economies. They simply have lower per-unit costs than their smaller competitors. These cost ad­vantages are typically much smaller than those once claimed hy overenthusiastic pro­ponents of “experience curve pricing strategies,” but they are nevertheless substantial and are directly reflected in higher profit margins.
Second, as their brief aside about quality hinted, the data also show a clear relation­ship between quality relative to competitors, as perceived by customers, and both market share and ROI. The data support the arguments of quality advocates that there does not need to be a trade-off between quality and cost. Higher quality seems to be associated with higher share and lower costs (thus higher margins and ROI) in actual operating data from thousands of companies.
So what happened to Xerox? If firms gain 3.5 points of ROI for every 10 points of market share on average, as the PIMS database indicates, Xerox’s 86 percent share in 1974 should have given it a greater than 25 percent lead in ROI over its closest com­petitors. How could anyone possibly afford to challenge Xerox? This is exactly what its management assumed, and what many leaders in other industries assumed as well. (The U.S. auto industry is a classic example.) But this assumption ignores the impact of quality. Higher profits do not guarantee dominance-it depends on how you spend them! Xerox did not use its cost advantage to maintain its leadership in quality and product superiority, and customers do not share planners’ regard for market position.
Market share represents customers’ past purchases, not their future purchases- something planners tend to overlook-and if a better product comes along, future pur­chases will not remain consistent with past purchases. Market share is a good objective for management, but it is not an impenetrable shield against competitors, as Xerox learned.

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