In a short article for Sloan Management Review, Neil T. Bendle and Charan K. Bagga argue that managers should be cautious about using market share as a key metric for their businesses. I concur wholeheartedly with their concerns about using market share as a primary objective. I believe that efforts to grow market share often cause managers to pursue misguided strategies that ultimately undermine competitive advantage and damage long-run profitability. Bundle and Bagga argue:
In some markets, bigger can be better; the most obvious examples are markets with economies of scale. Companies in such markets can reduce their cost per unit by selling more — thus increasing overall profits. If you think you are in such a market, you should confirm that the economies of scale you think exist actually do. Economies of scale do not automatically apply to all markets. For example, consulting does not get substantially cheaper per hour to provide at higher volumes... In some settings, market share can be a proxy for power. Depending on the setting, relative size can matter, and having a bigger market share can encourage others to treat your company more favorably. For example, when it comes to dealing with retailers, a category leader such as Coca-Cola may be able to negotiate better deals than a weaker brand can; retailers need Coke on their shelves more than they may need a smaller brand. A similar logic applies to network goods, which are products for which the benefit to consumers increases when more people use them. For example, Facebook’s value to its members increases when more of its members’ friends use it. Overall, though, the research on the relationship between profits and market share is ambiguous. There is no general rule; the importance of market share varies from market to market.