Wharton Prof Debunks Market Share Myth

Regular readers know that I've always been a skeptic regarding business strategies that use loss leaders and other techniques to maximize market share instead of profits. Well, astute reader Marc points out that Wharton Business School professor J. Scott Armstrong now has data that demonstrates that market share maximization strategies provide poorer long-term business results than profit maximization strategies, both in the lab and in the field. One of the things I like about the article is that they cite the video game business as one of the worse offenders in chasing the wrong metrics:

The harm that competitor-oriented objectives can cause the companies that pursue them was the subject of a December 4, 2006, article in The New Yorker by James Surowiecki, the magazine's business writer. Surowiecki describes how Sony (SNE), with its PlayStation 3, and Microsoft (MSFT), 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 (NTDOY.PK), with its new game console called Wii (pronounced "wee"), has quietly become the most profitable game console company in Japan.

Nintendo "has not just survived out of the spotlight; it has thrived," Surowiecki writes. "It has $5 billion in the bank from years of solid profits, and this past year, though it has spent heavily on the launch of the Wii, it made close to a billion dollars in profit and saw its stock price rise by 65%. Sony's game division, by contrast, barely eked out a profit and Microsoft's reportedly lost money. Who knew bringing up the rear could be so lucrative?"

So now if anyone asks why Apple's (AAPL) business value and stock price keeps going up despite its small market share, we now have an answer: it's because they focus on customers and profits, in that order, rather than market share. For over a decade now, they've been the most profitable computer maker in the US. And while Apple has since diversified into other markets, that one metric says more about their success than any other.

Disclosure: Author is long AAPL.

Comments

[paddy:]

You obviously did no research yourself on this subject. If you were to take 30 minutes and search for articles about video game consoles before and after this last generation's launch, you would retract the entire top paragraph.

First lets get something straight, Sony and Microsoft are catering to the same audience, thats why they are battling so hard for market share. Nintendo overlaps sightly but caters more to a casual audience of gamers. Nintendo thrived this go around by focusing on innovation and identifying a new market. This has absolutely nothing to do with focus on profits vs lead-loss.

Second, focus on profits and not market share almost sunk the PS3. Its high price margin made it unattractive to customers. Without taking a hit on manufacturing costs Sony and Microsoft couldn't sell their consoles. The video game industry is actually a poster boy for market share maximization. Companies like valve and others allow the gamers to create and distribute content for free, and the company gets nothing in licensing fees.

I think we already see enough profit maximization in this country. Lets celebrate the few industries that do provide something for free every once in a while.

2007 Dec 27 04:53 PM

[Victor Cook:]

Carl and Paddy,

There's a simple solution to this old problem: target that market share that optimizes enterprise marketing expenses. The result is maximum earnings. See any of my posts on SA or just click on this link to my blog customersandcapital.co...

2007 Dec 27 05:54 PM