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