Why Being #1 Should NOT Be Your Goal

This morning Kathy Chu wrote a Wall Street Journal article titled, "China's Lenovo to Reboot  After Losing PC Crown to HP."   Chu writes:

China’s Lenovo Group is shaking up its operations as it seeks to reclaim the title of global leader in personal computers and shore up its smartphone business.   For the first time in four years, Lenovo—a company that gained acclaim a decade ago for turning around storied U.S. personal-computer maker International Business Machines Corp.—slipped from the top spot this year to No. 2 in the personal-computer market, behind rival HP Inc.  Lenovo has also fallen to No. 8 in the number of smartphones shipped globally, from No. 3 when it acquired another U.S. brand, Motorola, in late 2014.

When I read this article, I asked myself:  Why do firms obsess with being #1 in their market?  Or, perhaps more specifically, why do they obsess with being #1 in market share in their industry?  Yes, Lenovo held the top spot in the personal computer industry for the past four years.  What precisely did that mean for them?  Well, I checked their Annual Report.  Last year, the company reported a net loss.  During the previous year, they generated a slim profit (1.79% profit margin).    Before that, the margins ranged from 1.6% to 2.1% from 2012-2014.  In short, Lenovo has made very little money over the past five years.  Perhaps, you might argue, they generated a decent return on assets despite the low margins.  With strong asset turnover as a low cost producer, they might produce a good return on assets.  Not so much... in 2015, their ROA equaled 3%.   We should not be surprised by these results.  It's not necessarily an indictment of management.  The personal computer industry is one of the lowest profit industries on earth.  If you perform a five forces analysis, you conclude rather quickly that all the elements of the industry structure point to low returns.  It's a very unattractive industry.  

The lesson: Don't obsess over market share.  Don't worry so much about being #1 in volume.  Think instead about the structure of your industry.  If you are in an unattractive industry, you might not want to be #1 in market share. Instead, you may want to find profitable niches and segments within that industry.  By focusing there, you might not lead the industry by volume, but you may produce stronger returns for investors.