The danger of chasing market share and trying to harm competitors

It might seem odd for the author of “How Brands Grow” to warn against aiming to grow market share, but here I’m offering a reminder that growth should be an outcome of a strategy to grow profits – profits should not be sacrificed for growth, and especially not for the goal of harming competitors.

We all know that market share growth can deliver increased profits.  But we also know that it can also decimate profits.

It’s fine to aim for share gains, so long as the strategy is carefully developed so that the share gains really do deliver profits.  Because research shows that companies that focus on profits are more profitable, while companies that aim for winning market share from competitors are LESS profitable, and more likely to go broke.

Here is a short essay by Wharton and Ehrenberg-Bass Institute Professor Scott Armstrong which does a pretty good job of summarising his extensive research on this topic.

The Dangers of a Competitor Orientation

Question: Do profits improve when firms attempt to gain market share?

If you believe in the common wisdom of students, managers, and professors of marketing, the answer would be “yes.” However, the evidence tells a different story.

Fred Collopy and I summarized prior research consisting of nearly 30 previously published empirical studies. Twenty-three different laboratory experiments were conducted with 43 groups spaced over many years and countries. In addition, we analyzed 54 years of field data for 20 companies to compare companies that used market share as an objective versus those that focused only on profits. Our research extended over a decade. The results from all approaches showed that market-share objectives harmed profits and put the survival of firms at risk (Armstrong and Collopy 1996).

The paper was difficult to publish. Reviewers disagreed with our findings and seemed intent on blocking publication. They kept finding what they thought to be serious problems with the research. When we would respond to their criticisms with additional experiments, they became incensed. In all, it took about five years to get through the review process. In the end, an editor over-ruled the reviewers.

In a follow-up paper, Kesten Green and I described new evidence from 12 studies that were conducted since the 1996 publication. The new evidence provided further support for the conclusion that competitor-oriented objectives are harmful. In fact, there has been no empirical evidence to date to challenge this conclusion.

While our research has received much attention (e.g., 167 citations for the 1996 paper), it seems to have had little effect on what is learned in business schools.

In teaching the introductory marketing class to Wharton MBAs, I would present the results of this research. This proved to be upsetting to many students as it conflicted with their beliefs and with what they said they were learning in other courses. After one session in which I described this research, an MBA class representative came to me with the “friendly advice” that the students did not appreciate hearing about my research; they would prefer to know what is going on in the real world.

To illustrate the dangers of a competitor-orientation, I also used an experiential exercise known as the “dollar auction” (Shubik 1971). In this exercise, the top two bidders pay, but only the top bidder wins the dollar. Typically the bidding would start at a penny, then move up at an increasing rate. I always made money on the dollar auction. But in 1982, I had my most successful session when I received over $20 for my dollar. I have kept in touch with the 2nd highest bidder, Ravi Kumar, over the years. On a recent trip to India, Ravi reminded me of the name of the winning bidder – Raj Rajaratnam, a hedge-fund manger who was found guilty of insider trading in May 2011, and who is suspected of funding suicide bombers in Sri Lanka (New York Times May 12 stories starting on the front page). Apparently I failed to convince Mr. Rajaratnam that a competitor orientation is harmful to oneself as well as to others.

Professor J Scott Armstrong

References

Armstrong, J.S and K. C. Green, “Competitor-oriented Objectives: The Myth of Market Share,” International Journal of Business, 12 (2007), 117-136.

Armstrong, J.S. and F. Collopy (1996), “Competitor Orientation: Effects of Objectives and Information on Managerial Decisions and Profitability,” Journal of Marketing Research, 33 (1996), 188-199.

Shubik, M. (1971), “The Dollar Auction game: A paradox in noncooperative behavior and escalation,” Journal of Conflict Resolution, 15, 109-111.

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