Wharton Prof Debunks Market Share Myth

by: Yankee Group

By Carl Howe

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 (NYSE:SNE), with its PlayStation 3, and Microsoft (NASDAQ: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 (OTCPK:NTDOY), 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 (NASDAQ: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.