Competitor-oriented Objectives: The Myth of Market Share
The Wharton School, University of Pennsylvania, Philadelphia, PA 19104 firstname.lastname@example.org b Business and Economic Forecasting Unit, Monash University, VIC 3800, Australia; and Decision Research Ltd., PO Box 10800, Wellington 6143, New Zealandkesten@kestencgreen.com ABSTRACT Competitor-oriented objectives, such as market-share targets, are promoted by academics and are commonly used by firms. A 1996 review of the evidence, summarized in this paper, found that competitor-oriented objectives reduced profitability. We describe new evidence from 12 studies, one of which is introduced in this paper. The new evidence supports the conclusion thatcompetitor-oriented objectives are harmful, especially when managers receive information about competitors’ market shares. The evidence appears to have had little effect on managers’ decisions and on what is taught in business schools. JEL Classification: L2; M21; M31 Keywords: Competition; Market Share; Objective; Profitability
J. Scott Armstronga and Kesten C. Greenb
Armstrong and Green
Many managers have a natural inclination to want to beat their competitors. Our concern in this paper is with the relationship between competitor orientation and performance. We show that competitor-oriented objectives are detrimental to firms’ profitability and that the use of information and decision aids to support such an orientation exacerbates the harm. The pursuit ofcompetitor-oriented objectives is consistent with the long-held belief that business is like warfare. In the late 19th century, it was popular for executives to strive for revenue maximization. To see how well they were doing, they compared themselves to their competitors in the industry. Judging from Lanzillotti (1958), competitor-oriented objectives, typically expressed in terms of market share,were commonly utilized by large firms well before the 1950s. Oxenfeldt (1959) lamented the common use of market-share objectives and discussed the logical and practical flaws of pursuing such objectives. Economists frown on competitor-oriented objectives (Mueller 1992). They consider the proper objective of business to be profits, not market share. Business school academics, however, have rushed tosupport market share objectives, noting that higher market shares are correlated with higher profitability. Influential support came from two Harvard Business Review papers: Buzzell, Gale, and Sultan (1975) and Porter (1979). Other articles and books, such as Porter (1980), agreed with these claims. These writings gave credence to the already popular view that business is like war and that the goalis to win by defeating competitors. Porter (1979) went further by referring to customers and suppliers as competitors. Henderson, founder of Boston Consulting Group, claimed, in a 1989 Harvard Business Review article, that it is all about survival: “ … Darwin is probably a better guide to business competition than economists are.” Market share is positively correlated to profits. A meta-analysisof the relationship between market share and profitability by Szymanski et al. (1993) identified 48 studies that reported 276 elasticities from econometric models. The elasticities ranged from -0.16 to 0.84 with the unweighted mean elasticity equal to 0.20. However, it does not follow logically that seeking higher market share will improve profits. Rather the correlation between market share andprofitability is more logically interpreted as showing that firms with better offerings tend to achieve higher market shares. Advocates of competitor-oriented objectives do not provide evidence relevant to their claims. However, much evidence has been published that shows such objectives are common, II. EVIDENCE UP THROUGH 1996
Much of the evidence on the prevalence and effect of competitor...