Market share An ongoing study of 57 companies reveals a link a key to between roi and market share the bigger the better profitability Robert D Buzzell, Bradley T. Gale, and Ralph G.M. Sultan The March-April 1974 issue for businesses selling It is now widely recognized that one of the main of HBR carried an article products that are pur. determinants of business profitability is market that reported on Phases I chased infrequently by a share. Under most circumstances, enterprises that and II of a project spon- fragmented customer have achieved a high share of the markets they sored by the Marketing group. The authors also serve are considerably more profitable than their Science Institute and the analyze the strategic The basic purpose of (h smaller-share rivals. This connection between mar- arvar implications of the market-share/ROI rela ket share and profitability has been recognized by tionship. They conclude by demonstrated in the results of a project undertaken the profit impact of mar- advising companies to ket strategies (PIMS) analyze their own positions by the Marketing Science Institute on the Profit Im The earlier article estab- in order to achieve the pact of Market Strategies(PIMS). The PIMS project, lished a link between stra- best balance of costs and on which we have been working since late I97I, tegic planning and profi is aimed at identifying and measuring the major performance; here, w strategies determinants of return on investment(ROI) in in additional data, the authors dividual businesses. Phase II of the PIMS project, come up with a positive Mr. Buzzell, who is re completed in late 1973, reveals 37 key profit influ- correlation between market search director of the share and ROI. The authors PIMS project, is professor ences, of which one of the most important is market discuss why market share of business administration share profitable, listing econo- and chairman of the mies of scale, market marketing area at the There is no doubt that market share and return on power, and quality of Harvard Business School investment are strongly related. Exhibit I shows management as possible Mr. Gale, associate pro- average pretax ROI figures for groups of businesses explanations, then, using fessor of economics at the in the PIMS project that have successively increasing the PIMs data base, University of Massachu- shares of their markets. (For an explanation of how they show how market setts-Amherst, is currently businesses, markets, and ROI results are defined and share is related to ROI on sabbatical to direct the measured in the PIMS project, see the ruled insert Specifically, as market economic analysis of the share increases, a business PIMS project. Mr Sulta on page Ios. On the average, a difference of Io per is likely to have a higher chief economist of the? centage points in market share is accompanied by a profit margin, a declining Royal Bank of Ca difference of about s points in pretax ROL. anada purchases-to-sales rati Montreal, was a member a decline in marketing costs of the Harvard Business rs'note: We wish to acknowledge the ntage of sales, School faculty. He MS project to the results reported in t as a percen higher quality, and higher directed the PIMS project ut numerous analyses very and cheerfully. The priced products. Data from its inception in are, of course, solely responsible for any errors or misinterpretations also indicate that the late 197I until early 1973 dvantages of large earlier article on Phases I and II of the project by Sidney Schoeffle ). Buzzell, and Donald F, Heany, " Impact of Strategic-Planning arket share are greatest Performance, HBR March-April 1974
Harvard Business Review January-February 1975 Exhibit I Relationship between market share and pretax ROI Economies of scale: The most obvious rationale for the high rate of return enjoyed by large-share busi nesses is that they have achieved economies of scale in procurement, manufacturing, marketing, and other cost components. a business with a 4o% share of a given market is simply twice as big as one with 2o% of the same market, and it will attain, to much greater degree, more efficient methods of operation within a particular type of technology Closely related to this explanation is the so-called experience curve phenomenon widely publicized Under%10-20%20-30% 130-40% lover 40% by the Boston Consulting Group. According to BCG, larke Share total unit costs of producing and distributing a prod uct tend to decline by a more or less constant per centage with each doubling of a companys cumula While the PiMs data base is the most extensive and tive output. Since, in a given time period, businesses detailed source of information on the profit/market- with large market shares generally also have larger share relationship, there is additional confirming cumulative sales than their smaller competitors, they evidence of its existence. For instance, companies would be expected to have lower costs and corre- enjoying strong competitive positions in their pri- spondingly higher profits mary product markets tend to be highly profitable. Consider, for example, such major companies as D IBM, Gillette, Eastman Kodak, and Xerox, as well Market power: Many economists, especially among as smaller, more specialized corporations like Dr. those involved in antitrust work, believe that econ Scholl (foot care products) and Hartz Mountain (pet omies of scale are of relatively little importance in foods and accessories most industries. These economists argue that if large-scale businesses earn higher profits than their Granted that high rates of return usually accompany smaller competitors, it is a result of their greater high market share, it is useful to explore the rela- market power: their size permits them to bargain tionship further. Why is market share profitable? more effectively, "administer" prices, and, in the What are the observed differences between low- and end, realize significantly higher prices for a particu high-share businesses? Does the notion vary from lar product.a industry to industry? And, what does the profitabil- ity/market-share relationship imply for strategic O lanning? In this article we shall attempt to provide Quality of management: The simplest of all explana- partial answers to these questions by presenting tions for the market-share/profitability relationship evidence on the nature, importance, and implica- is that both share and RoI reflect a common under tions of the links between market share and profit lying factor: the quality of management. Good man performance. agers including, perhaps, lucky ones!) are successful in achieving high shares of their respective markets they are also skillful in controlling costs, getting maximum productivity from employees, and so on Moreover, once a business achieves a leadership Why market share is profitable position-possibly by developing a new field-it is much easier for it to retain its lead than for others to catch up data shown in Exhibit I demonstrate the dif- nces in ROI between high- and low-market-share These explanations of why the market-share/profit- businesses. This convincing evidence of the relation- ability relationship exists are not mutually exclusive ship itself, however, does not tell us why there is a To some degree, a large-share business may benefit link between market share and profitability. There from all three kinds of relative advantages. It is im- are at least three possible explanations portant, however, to understand from the available
Market share Relationships of market share to key financial and operating ratios for overall PIMS sample of businesses Financial and 20%-30% Over 40% ent/sales 67.74 14.08 13.96 Inventory/sales 9.30 3一 Pretax profit/sales 0.16 4.84 1316 Purchases/sales Manufacturing/sale 3176 Marketing/sales R&D/sales 260 一 Capacity/utilization 74.70 77.10 78.10 78.00 Product 20.40 43.00 Relative price 2.65 Number of businesses Average value on 5-point scale o or more lower than leading competitors average; 1= 10% or more higher than competition information how much of the increased profitability ing shares over 4o%, we are not observing differences that accompanies high market share comes from in costs and profits within a single industry. Each each of these or other sources subgroup contains a diversity of industries, types of products, kinds of customers, and so on Differences between high-and How market share relates to roi low-share businesses The data in Exhibit II reveal four important differ- ences between high-share businesses and those with Analysis of the PIMS data base sheds some light on smaller shares. The samples used are sufficiently the reasons for the observed relationship between large and balanced to ensure that the differences market share and ROI. Businesses with different between them are associated primarily with varia market-share levels are compared as to financial and tions in market share, and not with other factors operating ratios and measures of relative prices and These differences are product quality in Exhibit Il. In examining these figures, remember that the PIMS sample of busi- 1 nesses includes a wide variety of products and in. As market share rises, turnover on investment rises dustries. Consequently, when we compare businesses only somewhat, but profit margin on sales increases with market shares under Io%, say, with those hav- sharply. ROI is, of course, dependent on both the rate of net profit on sales and the amount of in- vestment required to support a given volume of 2. Boston Consulting Group, Inc, Perspectives on Experience (Boston, 1968 sales. Exhibit II reveals that the ratio of investment and 197o to sales declines only slightly, and irregularly, with 3. This general argument has been made in numerous books, articlc speeches dealing with antitrust economics, see, for example increased market share. The data show too that ca Indnstrial Organization, and edition (New York, John Wiley & Sons pacity utilization is not systematically related to market share
Harvard Business Review January-February 197 Exhibit Ill Effect of vertical integration on investment/sales ratio Vertical Market share Under 10% 30%-40% Over 40% High 男m ExhibitⅣv Purchase-to-sales ratio corrected for vertical integration Market share Over 40% 28 46 On the surface then, higher investment turnover on sales exhibits a strong, smooth, upward trend as does not appear to be a major factor contributing to market share increases higher rates of return. However, this observation is subject to some qualification. Our analysis of the Why do profit margins on sales increase so sharply pims data base shows that investment intensity (in- with market share? To answer this, it is necessary vestment relative to sales tends to vary directly with to look in more detail at differences in prices and a business's degree of vertical integration. operating expenses (The degree of vertical integration is measured as 2 the ratio of the total value added by the business to The biggest single difference in costs, as related to its sales. Both the numerator and denominator of market she n the purchases-to-sales ratio. As the ratio are adjusted by subtracting the pretax in- shown in IL, for large-share businesses-those come and adding the PIMS average ROI, multiplied with shares over 40%-purchases represent only 33% by the investment. J of sales, compared with 45% for businesses with shares under Io% Vertical integration thus has a strong negative rela tion to the ratio of purchases to sales. Since high How can we explain the decline in the ratio of pur- market-share businesses are on the average some- chases to sales as share goes up? One possibility, as what more vertically integrated than those with mentioned earlier, is that high-share businesses tend smaller shares, it is likely that investment turnover to be more vertically integrated-they"make/rather increases somewhat more with market share thanthan"buy, and often they own their own distribu- the figures in Exhibit II suggest. In other words, as tion facilities. The decline in the purchases-to-sales shown in Exhibit Ill, for a given degree of vertical ratio is quite a bit less see Exhibit IV) if we control integration, the investment-to-sales ratio declines for the level of vertical integration. A low purchases significantly, even though overall averages do not. to-sales ratio goes hand in hand with a high level of vertical integration Nevertheless, Exhibit ll shows that the major reason for the ROI/market-share relationship is the dra- Other things being equal, a greater extent of vertical matic difference in pretax profit margins on sales. integration ought to result in a rising level of manu- Businesses with market shares under Io% had aver- facturing costs. For the nonmanufacturing business- age pretax losses of oI6%. The average ROI for busi- es in the PIMS sample, "manufacturing" was defined nesses with under Io% market share was about 9%. as the primary value-creating activity of the busi Obviously, no individual business can have a nega. ness. For example, processing transactions is the tive profit-to-sales ratio and still earn a positive ROI. equivalent of manufacturing in a bank. But the The apparent inconsistency between the averages data in Exhibit II show little or no connection be- reflects the fact that some businesses in the sample tween manufacturing expense, as a percentage of incurred losses that were very high in relation to sales, and market share. This could be because, de sales but that were much smaller in relation to pite the increase in vertical integration, costs are investment In the PIMS sample, the average return offset by increased efficiency
Market share This explanation is probably valid for some of the important cost advantage from their ability to utilize businesses in the sample, but we believe that, in the the most efficient mass-advertising media majority of cases, the decline in costs of purchased materials also reflects a combination of economies In addition, leading brands of consumer products of scale in buying and, perhaps, bargaining power in appear to benefit to some extent from a"bandwagon dealing with suppliers. Economies of scale in pro- effect"that results from the brand's greater visibil- curement arise from lower costs of manufacturing, ity in retail stores or greater support from retail marketing, and distributing when suppliers sell in store sales personnel. For example, Anheuser-Busch large quantities For very large-scale buyers, custom- has for some time enjoyed lower advertising costs designed components and special formulations of per case of beer than its smaller rivals-just as the materials that are purchased on long-term contracts advertising expense per car of General Motors is may offer"order of magnitude"economies significantly lower than that of other competing auto manufacturers Still another possible explanation of the declining purchases-to-sales ratio for large-share businesses 4 might be that they charge higher prices, thus in- Market leaders develop unique competitive strategies creasing the base on which the percentage is figured. and have higher prices for their higher-quality prod This does not, however, appear to be the case ucts than do smaller-share businesses. The figures in Exhibit ll do not show smooth, continuous relation In Exhibit II we give measures of price relative to ships between market share and the various com- competition for each group of businesses that in- ponents of price, cost, and investment.Indeed, it dicate otherwise. Because of the great difficulty of appears that one pattern operates as share increases computing meaningful relative price-index numbers up to 40%, but a somewhat different pattern above the measure we used here is rather crude. We asked that figure the PIMS participants to indicate on a five-point scale whether their prices were"about the same"as major Particularly, there are substantial differences in rela competitors,"somewhat"higher or lower, or"sub- tive price and product quality between market lead stantially higher or lower for each business. The ers and the rest of the sample Market leaders obtain average values of this scale measure are virtually higher prices than do businesses with smaller market identical for each market-share group, except for shares. A principal reason for this may be that mar- those with shares over 4o% ket leaders also tend to produce and sell significantly higher-quality products and services than those of Despite the similarity of relative prices for the first their lower-share competitors four share groups, the purchases-to-sales ratios de- cline in a regular, substantial fashion as share in- We measured quality as follows: We asked the par creases In light of this, we do not believe that the ticipating companies to judge for each business the decline in purchase costs is a reflection of higher proportions of total sales comprised of products and price levels imposed by "market power. services that were "superior, ""equivalent, "and"in- ferior"to those of leading competitors. The figures 3 shown in Exhibit II are averages of the differences As market share increases, there is some tendency between the superior quality and the inferior quality for marketing costs, as a percentage of sales, to de. percentages cline. The difference in marketing costs between the smallest and largest market-share groups amounts The measures we used for relative price and relative on the average to about 2% of sales. We believe that quality are not, of course, directly comparable. Thus this reflects true scale economies, including the it is impossible to determine which is greater-the spreading of fixed marketing costs and the ability price premiums earned by market leaders, or the dif of large-share businesses to utilize more efficient ferential in the quality of their products. But it is media and marketing methods. In the case of indus- clear that the combination of significantly higher trial products, large scale permits a manufacturer prices and quality represents a unique competitive to use his own sales force rather than commissioned position for market leaders. agents and, at some point, to utilize specialized sales forces for specific product lines or markets For con- Market leaders, in contrast to their smaller com sumer goods, large-scale businesses may derive ar petitors, spend significantly higher amounts on re search and development, relative to sales. As shown
Harvard Business Review January-February 1975 in Exhibit II, the average ratio of r&d to sales for 2 the highest-share group of businesses was 3.55%0- Market share is more important to businesses when nearly 4o% greater than the ratio for the under-Io% buyers are"fragmented"rather than concentrated share group. This, combined with the quality ad- As Exhibit V shows, when buyers are fragmented vantage enjoyed by market leaders, suggests that i.e., no small group of consumers accounts for a they tynsw pursue a strategy of product leader- significant proportion of total sales), the ROI dif- ship. Certainly this is consistent with what is known ferential is 27 percentage points for the average mar- about innovative leaders such as Eastman Kodak, ket leader. However, when buyers are concentrated, IBM, and Procter Gamble the leaders'average advantage in ROI is reduced to only I9 percentage points greater than that of the average small-share business Given that market leaders have a high market share and thus the profitability that goes with it, it is nat- A likely explanation for this is that when buyers ural to question whether the share and profitability are fragmented, they cannot bargain for the unit cost ratio shifts from industry to industry. In other words, advantage that concentrated buyers receive, thus do businesses in some kinds of industries nee higher share than others to be profitable ed a allowing higher profits for the large are br Obviously, then, the ROI differential is smaller when buyers are somewhat concentrated. In this case Variations among industries powerful buyers tend to bargain away some of the seller's cost differential by holding out for low prices While our analyses of the PIMS data base clearly demonstrate a strong general relationship between Clearly, the strategic implications of the market- ROI and market share they also indicate that the share/profitability relationship vary according to the importance of share varies considerably from one circumstances of the individual business. But there type of industry or market situation to another. Two is no doubt that the relationship can be translated of the more striking variations are summarized in Exhibit IV. These figures show that set market goals. gies for all companies trying to Market share is more important for infrequently purchased products than for frequently purchased ones. For infrequently purchased products, the roI What the roI/market share link of the average market leader is about 28 percentage means for strategy points greater than the ROI of the average small share business. For frequently purchased products those typically bought at least once a month), the Because market share is so strongly related to profit correspondingly ROI differential is approximately ability, a basic strategic issue for top management Io poInts is to establish market-share objectives. These objec tives have much to do with the rate of return that Why? Infrequently purchased products tend to be can reasonably be budgeted in the short and long durable, higher unit-cost items such as capital goods, runs, as well as the capital requirements and cash equipment, and consumer durables, which are often flow of a business complex and difficult for buyers to evaluate. Since there is a bigger risk inherent in a wrong choice. the purchaser is often willing to pay a premium for Setting market-share goals assured quality What market-share goals are feasible, or even de- Frequently purchased products are generally low sirable, obviously depends on many things, includ- unit-value items such as foods or industrial supplies. ing the strength of competitors, the resources avail- The risk in buying from a lesser-known, small-share able to support a strategy, and the willingness of supplier is lower in most cases, so a purchaser can management to forgo present earnings for future feel free to shop around results. At the risk of oversimplification, we can classify market-share strategies into three rather broad groups
Market share Exhibit V Industry variations in the share/ROI relationship A Frequently purchased vs, infrequently purchased products Concentrated vs fragmented custom 30 Under10%10-20% 2030% 3040% Over 40% Under10%10-20%2030%3040%over40% Market share Market share ● frequent nted ● Concentrated and they pulled out. Similarly, Motorola, with an Building strategies are based on active efforts to in- estimated 6% to 7% share of U.S. TV-set sales, and crease market share by means of new product intro- a rumored loss of $20 million in the period from ductions, added marketing programs, and so on. I970 to 1973, announced its intention early in I974 to sell the business to matsushita Holding strategies are aimed at maintaining the existing level of market share On the other hand, when share is not so low as to dictate withdrawal, but is still not high enough to Harvesting strategies are designed to achieve high yield satisfactory returns, managers can consider short-term earnings and cash flow by permitting aggressive share-building strategies. They should market share to decline recognize, however, that a) big increases in share are seldom achieved quickly; and(b) expa nding share is almost always expensive in the short run When does each of these market-share strategies seem most appropriate? How should each be im- Among the 6oo businesses in the PIMS sample, only plemented? The experiences documented in the about 20% enjoyed market share gains of 2 points PIMS data base provide some clues or more from I970 to 1972. As might be expected successful building strategies were most common among relatively new businesses. Of those that have Building strategies begun operations since I965, over 40%achieved The data presented in Exhibit I imply that, in many share increases of 2 points or more-compared with cases, even a marginally acceptable rate of return only I7% of the businesses established before I9so can be earned only by attaining some mi InImum level of market share. If the market share of a busi- Generally speaking, businesses that are building ness falls below this minimum, its strategic choices share pay a short-run penalty for doing so. Exhibit Isually boil down to two: increase share or with- VI compares ROI results for businesses with differ draw. Of course there are exceptions to this rule. ent beginning market shares and for businesses with decreasing, steady, and increasing shares over the But we are convinced that in most markets there is period I970 to 1972. Generally the businesses that a minimum share that is required for viability. RCa were"building"(i.e. had share increases of at least and General Electric apparently concluded that they 2 points) had ROI results of I to 2 points lower than were below this minimum in the computer business, those that maintained more or less steady(hold ing)positions. The short-term cost of building was
Harvard Business review January- February 1975 Exhibit VI In a recent article, William Fruhan demonstrated How ROI is affected by market-share changes hat there was a positive relation between market share and rate of return for automobile manufac turers and for retail food chains. 4 Yet he also cited Market share examples of disasters stemming from overambition in the market-share dimension from the computer industry, the retail food business, and the airline Average Rol, 1970-1972 companles Under 10% 0.4% 0% The main thrust of Fruhan's article was to encourage business strategists to consider certain questions be- fore launching an aggressive market-share expansion 30%-40% strategy:(1) Does the company have the necessary financial resources? (2) Will the company find itself 40% or over 31.9 32.6 in a viable position if its drive for expanded market share is thwarted before it reaches its market share targets? (3)Will regulatory authorities permit the company to achieve its objective with the strategy rest for small-share businesses, but even for mar- it has chosen to follow? Negative responses to these leaders, ROI was significantly lower when share questions would obviously indicate that a company was rising than it was when share was stable. should forgo market-share expansion until the right conditions are created Schick's campaign to build sales of the"Flexamatic" electric shaver during 1972 and 1973 dramatically It is fairly safe for us to say, therefore, that whenever illustrates the cost of increasing market share. In the market position of a business is reasonably satis- late 1972 Schick introduced the Flexamatic by means factory, or when further building of share seems of a controversial national advertising campaign in excessively costly managers ought to follow holding which direct performance comparisons were made strategies with its leading competitors. Trade sources have estimated that Schick spent $4.5 million in 1972 and Holding strategies S5. 2 million in I973 on advertising, whereas the By definition, a holding strategy is designed to pre- company s advertising expenditures in I97o and 197I serve the status quo. For established businesses in had been under SI million annually relatively mature markets-which is to say, for the majority of businesses in advanced economies-hold- In one sense the effort was successful: by late 1972 ing is undoubtedly the most common strategic goal Schick's market share had doubled from 8% to I6%. with respect to market share But the impact on company profits was drastic. Schick's operating losses for the fiscal year ending A key question for businesses that are pursuing hold February 28, 1974 amounted to $I4.5 million on ing strategies is, "What is the most profitable way to sales of $o3.8 million, and it appears that although maintain market position? ""The answer to this ques- it was not the only cause, the high promotional cost tion depends on many things, including the possibil of the Flexamatic campaign was a major contribut ties and costs of significant technological change ing factor. Only time can tell whether Schick's short- and the strength and alertness of competitors. Be term losses will prove to be justified by increased cause competitive conditions vary so much, few future cash flows reliable generalizations can be made about profit maximizing methods of maintaining market share The Schick example is, no doubt, an extreme one. Nevertheless, a realistic assessment of any share- Nevertheless, our analyses of the PiMs data base do building strategy should take into account the strong suggest some broad relationships between ROI and likelihood that a significant price will have to be competitive behavior. For example, our data in paid-at least in the short run. Depending on how dicate that large-share businesses usually earn higher great the gains are and how long it takes to achieve rates of return when they charge premium prices them, this cost may or may not be offset by the (Recall that this pricing policy is usually accom- onger-term gains 4."Pyrrhic Victories in Fights for Market Share, HBR September-October
Market share The PIMs data base The data on which this arti Data compiled for indi As explained in the earlier dual businesses by means HBR article, the focus of the unique pool of operating of special allocations of PIMS project has been pri- isting company data and marily on ROI because this PIMS project, now in its third for some items, judgmental is the performance measure ear of operations at the estimates supplied by oper- most often used in strategic Marketing Science Institute ating managers of the ning. W uring 1973, 57 major North panies. however, that RoI results are American corporations often not entirely compar- For each business, th able between businesses. information on 620 individual panies also provided esti- When the plant and equip businesses for the three- mates of the total sales it ment used in a business have year period 1970-1972. he market served by the business Markets were measured by relating pretax been almost tull y dep\ Each business is a division defined, for purposes of the operating profits to the sum be inflated. Also, Rol results product line, or other profit PIMS study, in much nar. debt are affected by patents, trade center within its parent com- rower terms than the "indus- Operating income in a busi- secrets, and other proprietary pany, selling a distinct set of tries"for which sales and ness is after deduction of aspects of the products or products or services to an other figures are published allocated corporate overhead methods of operation identifiable group or groups by the Bureau of the Census, costs, but prior to any capita employed in a business. of customers, in competition Thus the data used to meas charges assigned by corpo- hese and other differences with a well-defined set of ure market size and growth rate offices, As in the ca among businesses should competitors. Examples of rates cover only the specific of market share data. the rol naturally be kept in mind in businesses include manufac- products or services, cus- figures shown in Exhibits I evaluating the reasons for turers of TV sets: man-made types, and geograph V, and vi are averages for variations in ROI performance fibers: and nondestructive areas in which each business 1970-1972 dustrial testing apparatus actually operates panied by premium quality )Also, ROI is usually successfully. Market leaders enjoyed rates of re- greater for large-share businesses when they spend turn about three quarters of a point higher when more than their major competitors, in relation to they allowed market share to decline than when they sales, on sales force effort, advertising and promo. maintained it over the period 1970-1972. For the tion, and research and development. other groups of businesses shown in Exhibit VI, dif ferences in ROI between"holdingand"harvesting For small-share businesses, however, the most prof- are irregular. Of course, these comparisons also re- itable holding strategy is just the opposite: on the flect the influence of factors other than strategic average, ROI is highest for these businesses when choice. Market share was lost by many businesses their prices are somewhat below the average of lead- because of intensified competition, rising costs, or ing competitors and when their rates of spending other changes which hurt both their profitability on marketing and R&D are relatively low and their competitive positions. For this reason, it is impossible to derive a true measure of the profit ability of harvesting. Nevertheless, the PIMS data Opposed to a share-building strategy is one of"har- support our contention that, under proper condi vesting -deliberately permitting share to fall so that tions, current profits can be increased by allowing higher short-run earnings and cash flow may be se- share to slide cured. Harvesting is more often a matter of neces sity than of strategic choice. Cash may be urgently When does harvesting make sense, assuming it is a needed to support another activity-dividends, for matter of choice? A reduction in share typically example, or management's earnings record. What- affects profits in a way directly opposite to that of ever the motivation, corporate management some- building: ROI is increased in the short run but re- imes does elect to"sell off part of a market-share duced in the longer term. Here again, a trade-off must be made. The net balance will depend on man agement's assessment of the direction and timing of The experience of the businesses in the PIMs data future developments such as technological changes, pool, summarized in Exhibit VI, indicates that only as well as on its preference for immediate rather large-share businesses are generally able to harvest than deferred profits
106 Harvard Business Review January-February 1975 Balancing costs and benefits Evidence from the PIMS study strongly supports the proposition that market share is positively related to the rate of return on investment earned by a busi- ness. Recognition of this relationship will affect how managers decide whether to make or buy to decrease purchasing costs, whether to advertise in certain media, or whether to alter the price or quality of a product. Also, recognizing that emphasis on market share varies considerably among industries and types of market situations, decisions concerning product and customer are likely to be influenced. For in- stance, a small competitor selling frequently pur hased, differentiated consumer products can achieve satisfactory results with a small share of the market Under other conditions, it would be virtually im possible to earn satisfactory profits with a small share (e.g., infrequently purchased products sold to large, powerful buyers Finally, choices among the three basic market share strategies also involve a careful analysis of the im- portance of market share in a given situation. Be- yond this, strategic choice requires a balancing of short-term and long-term costs and benefits. Neither the PIMs study nor any other empirical research can lead to a formula"for these strategic choices But we hope that the findings presented here will at least provide some useful insights into the probable consequences of managers'choices ize by itself has major sources for a much longer impact on strategy. And time, for instance, to strategy, in turn, has long-term research major impact on size. The projects which are beyond small organization can do the staying power of the things the large ones small business. The ques- cannot do. Its simpli tion"What strategies befit city and its small size different sizes? is thus of should give it fast re crucial importance to ponse, agility, and the op management. ability to focus its sources. But the large From the book organIzation, in turn, also can do things the small organization cannot do. It can commit re- ublish