“The Myth of Market Share”
Tuesday, January 22nd, 2008I read a great book the other day. It was titled “The Myth of Market Share” by Richard Miniter. What Minter discusses is that there are too many companies that are obsessed with the concept of being #1, “the biggest & the best”, the largest in its industry. For some reason business leaders believe that there is a direct relationship between the size of a company (their market share) and having bigger profits. Bottom line is that the perceived #1 company in any given industry might not just be the most profitable, or the healthiest. Minter goes on to say that, in fact, the most profitable company in their respective business segment was not the company with the largest slice of the market and that more than 70% of they also did not have the highest rate of return. Miniter then goes on to say that in 23% of the industries, the fourth largest company had the best profits Bottom line size does not lead to profits.
- The Company with the largest share can raise prices - In most cases raising rates tend to send customers to competitors with lower prices.
- Size naturally creates higher returns- 7 times out of 10 the most profitable firm was not the largest.
- Economies of scale lower cost- The idea that the more you make, the cheaper they are per unit isn’t always valid. As companies grow they typically add layers of personnel which quickly cannibalize the profits.
- The experience curve improves efficiency- This theory states that unit costs should decline as a company’s output grows, however, when a company is growing it is typically focused upon enlarging production, instead of wringing cost savings out of the process.
- Higher Market Share Attracts Exceptional Managers- There is no proven documentation anywhere that shows that larger companies have better personnel. I know many small companies that had exceptional people working for them.