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Focusing on Market Share

IN PRAISE OF THIRD PLACE — “[A] study of the performance of twenty major American companies over four decades found that the ones putting more emphasis on market share than on profit ended up with lower returns on investment; of the six companies that defined their goal exclusively as market share, four eventually went out of business.”

6 replies on “Focusing on Market Share”

This is just another case that reinforces the general rule: be careful what you wish for. If you target market share, you’ll get it. If you target number of stores, that’s what you’ll get. If want to be a healthy (read: profitable) organization, you need to focus on that.

The problem is that MBAs looked at the success of companies like McDonald’s or Microsoft (my former employer) and saw huge market share AND huge profits. They saw GE where Jack Welch always wanted to be number 1 or 2 in any given market. They thought the key was market share. What they missed was that all these companies were at least as fanatical about margins as they were about share.

Successful companies use share as a numerator, with margin as the denominator. Companies that focus solely on share risk being ones who, as the old joke goes, “lose a little on each sale but make it up in volume”.

This is part of a common mistake of the dot-com boom. People focused on being “first movers” to gain dominant share, and even pooh-poohed profits — “we’ll worry about that later.” Later never came.

As I note consistently on my site (http://clwill.com) you need to set clear organization goals — a vision — then echo it frequently, use it daily, and make crucial decisions based on it. Measure success against that vision, reward (e.g. through compensation) behavior that is consistent with the vision, and frequently check to be sure the vision makes sense in the market.

A vision focused solely on share is not complete, and not sustainable. After all, no one wants to be the biggest bankrupt company in their market.

Companies fail to put quality over quantity when it comes to increasing profits. With all the options consumers have today, focusing on offering a strong product or service with high quality will ensure higher market share.

[…] I found a really interesting article in The New Yorker magazine via Matt’s blog. The article is a must-read but here’s the article in a nutshell: Focus on profitability and not market share as market share doesn’t always lead to profitability. The article looks at Sony, Microsoft and Nintendo and how Sony rules the video game marketplace with the Play Station and Microsoft is closing in with the XBox. Nintendo is languishing in third place but its stock is up 65% this year and because Nintendo is not trying to rule the entire industry, it’s been able to focus on its core competence and actually make money. Microsoft’s game division is losing money while Sony is barely making any money. Here is an edited quote from the article: […]

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