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