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THE
RELATION BETWEEN
MARKET
SHARE
AND
PROFITABILITY
Birger
Wernerfelt
Gaining
market
share can be
a means
of
obtaining
profits.
While
one cannot
develop
precise
prescriptions
for gaining
market
share
in complex
and dynamic
environments,
a
stylized
model
can
provide
a reference
point
for evaluating
what
to
do
in more complex
situations.
In the last
ten
years,
it has
become
something
of a dogma in the
theory and
practice
of strategic
management,
or at
least in popular
simplifications
of
it, that
maximizing
one's market share is a
way
to maximize
one's
profits.
A positive
association between market share
and
profitability has been demonstrated empiri-
cally
in several
cross-sectional
studies,
most not-
ably in the PIMS study by Buzzell, Gale, and
Sultan
t3l. The supporting
theory most often
cited
is that of the experience
curve effect, formu-
lated
by the Boston
Consulting
Group
(BCG)
t1l.
As an indirect measure of the impact of these
ideas,
Haspeslagh
[6]
estimates
that
a majority
of
the Fortune 500 use another
of BCG's ideas,
namely
some sort
of portfolio planning
technique.
Finally,
diversified
firms often state
it as a
policy
to participate
only in those markets where they
can
occupy the number
one or number two spot
t101.
Some voices,
however, have been raised
in
opposition
to the
seemingly
widespread
desire
to
increase
market share at any cost. Several
years
ago,
Fruhan
[4] cited
numerous
examples
where
attempts
to gain market share
proved costly to
the
involved
firms,
a finding
which suggests
that
Birger
Wernerfelt
is Associate
Professor, Policy and Environ-
ment,
J.L. Kellogg
Graduate School of Management,
North-
western
University.
He would like to thank Aneel Karnani
for
comments
on this
article.
ample financial resources are a necessary
pre-
requisite
for engaging
in a fight
for market
share.
Later, Hamermesh,
Woo, and
Cooper
[5, 14, 15]
showed
that low market
share firms can
be very
profitable.
Rumelt and Wensley
[7] have argued
that the
price of getting
market share, in analogy
to the prices in perfect markets
for investment
goods,
must be expected
to adjust, so that one
could
not make a long-term
profit
on investments
in market share.
That is, the high returns from
having a high market share are counterbalanced
by a correspondingly
high
price paid
earlier to
get
that market
share. Rumelt
and Wensley
test
the
theory in a time series setting and cannot
reject
the hypothesis
that the relationship between
mar-
ket share and
profitability
is due
only to stochas-
tic effects.
By taking
a theoretical
perspective,
this article
offers new insights concerning
the question:
Under what circumstances, and by how much,
should a firm trv to increase market share?
The Nature
of the Problem
The
argument
by Rumelt and
Wensley-that it is
necessary
to look at long-term
profits and sub-
tract the
cost
of getting
market share
from current
returns from
it-is crucial
to the
issues here.
One
should
expect
the
"price" of market share
(in
the
form of pricecutting,
quality
variation,
R&D, ad-
67
-t
68 THE
JOURNAL
OF
BUSINESS
STRATEGY
EXHIBIT
1
Market
Share
Auction With
Decreasing
Returns
to Market Share
Costs of buying
market
share
Point
beyond
which
the marginal
cost of
market
share is
higher
than the
Returns
of having
market
share
marginal
return
Net
profit
(returns
net
of costs
of buying market
share)
Market
Share
vertising,
etc.)
to adjust in such
a way that no
profits can be made
on investments
in it. Much
casual use
of
previous
work seems
to proceed
on
the assumption
that other firms are stupid and
underinvest
in market share to get
it cheap.
This
seems unrealistic and the
author
here will adopt
a theoretical
perspective
that assumes com-
petitors are smart. This perspective
will be
applied
to situations with increasing returns to
scale. Here are some highly idealized thought
experiments.
Experiment
I
Assume that the static returns revenues minus
costs
at constant market
share
from having
mar-
ket share
in a given
industry
are
decreasing,
so
that the industry does not exhibit the positive
cross-sectional
association between
profits and
market share found in the aggregate PIMS re-
sults. Now hypothesize an auction in which a
number of identical firms
(called
^A/)
can buy small
units
of market
share. In this
auction, each buyer
will want to buy until the marginal
(net
present
value of long-term) returns from higher market
share are
lower than the price (marginal
cost)
of
that market share. Since all buyers are
identical,
this
point
will be
the same
for all
of them
and the
ultimate
price
will be such
that each
gets liN of
the market. If the
price
is lower. total
demand
will
exceed one
and if it is higher, it will be
less
than
one. In a more
complete
analysir,twill adjust
in
such
a way
that
each
firm's net
profit,
after
costs
of buying
share,
will be
just enough
to keep
i1
in the industry. So in this situation,
the
analy,sis
of
Rumelt and Wensley
applies directly.
(See
p1_
hibir I
.
)
Experiment
ll
Now look at the more difficult case.
involving
increasing
static returns from market
share
Foi
simplicity of reasoning,
skip the intermediate
case with
first increasing
and
then
decreasing
cost
curves. In a similar auction, buyers here
maximize
net profit by having either
the whole
market
or nothing
at all. What
one runs
into
is
a
variation
of a major
problem
in modern
economic
theory,
namely, the nonexistence
of competitive
prices
(or natural
monopoly)
in markets
with
in-
creasing
returns
to scale.
So
the market
for
mar-
ket
shares does not clear
at any
single
price:
there
is either
too much
or too little demand
(see
Ex-
hibit
2).
Since
this
obviously does
not
happen
in
real life, there is something
wrong with the
model.
In particular,
the
single
price
assumption
cannot
hold. In a market
with increasing
static
returns
from market
share,
some
units of market
share
will be cheaper
to get
than
others.
So
the
static
auction
model
is
insufficient.
and
one
needs
to think explicitly
about
the dynamic
process of
market
share
acquisition.
This
is done in
the
sec-
tion
called
''Analysis.
"
The
implication
of the above is that in the
case
with increasing returns from market share,
a
price,
in the usual
sense of the word, does
not
exist. This is not to say that getting
more
market
share
does not
have
a
cost;
it clearly
does,
but
the
cost depends on a number
of
factors,
such
as
how
much market share one has
already,
how much
one's
competitors
have, the
cost
positions
of
both
sides,
and the
stage
of the
product
life cycle.
In
a
market with relatively few competitors,
which
is
what
one always will have with increasing
returns
to scale, the
price
furthermore
depends
on
what
a
company und
itr competitors
think one
party
will
do in reiponse to all
possible
actions
on the
part
of the other party. If everyone
thinks that
more
aggressive
fighting for market share will be
matched,
relitively low prices
will result.
Con-
versely, if one thinks that any effect above
a
certain high level
will be beaten,
then
the
price
of
market
share
will be driven t;h"t ievel. So
it is
hard to characterize
equilibrium in very rnuch
detail.
Equilibrium
should, hori""i, ttuu
i tt'" fo.l-
lowing pioperty: All players
attempting
to galn
market share would find thaitft" U.nJfits
of a
change
are fewer than the negative conse-
quences.
(This
is strictly
speaking,
unless
the ef-
fort
is
plus
or minus infinity.)
Now look at some
properties
of such
equilibria
in simple
dynamic
rnodels
with
increasing
static
returns
from
market
share.
Analysis
One
builds
models
to study
the effects
of a few
phenomena
on a system of interest in a noise-free
laboratory
setting.l One
does not build
models if
the
effects under
investigation are so
simple
that
one
can
understand
their logical impact
in one's
head.
Similarly,
one
cannot build
models
of situa-
tions
that are
too rich, since
one's
model solving
capability
is limited. Such
situations
have to be
understood
in more intuitive
ways, but that in-
tuition
could be helped by examining
medium-
sized
models,
experience
with similar
situations,
etc. The purpose
of modeling
is to capture
as
many
of the important elements
of a real situation
as
possible
and then analyze
these
rigorously.
One
can
never
get
a precise
and complete
analy-
sis
of
the full richness
of real economic
situations,
but
in one's attempt
to understand
them,
it may
help
to have the precise
analysis
of simpler but
similar
situations.
If one
wants to use
a model
to
find the optimal action for a firm with com-
petitors,
a special
problem
is what to assume
about
the actions of those competitors.
The
tradi-
tional
economic answer
is that
one assumes
all of
one's competitors
act optimally.
Then
decide on
what to do oneself. Although
this of course is
unrealistic, it seems
hard
to decide
on
a
particular
type
of "error" to ascribe to the competitors. So
when
one
investigates
the optimality
of BCG-type
penetration
pricing, one assumes
that all other
firms do the same.
This is a much
more
interest-
ing
situation
than that
where
all other firms make
mistakes.
It may
well
be
possible
to
find
a real life
example
of successful firms that do not follow
the
prescriptions
from models. This
can be due
to
factors
not in the models
(technical
change,
het-
erogeneous
buyers,
etc.), errors on the part of
competition,
or it may be that firms did well but
still not as well as if they had followed the pre-
scriptions.
One
can
never
model reality exactly,
but
a precise
understanding
of similar
situations
may
be
a good
building block
for one's
intuition.
For
reasons
of expositional
ease, consider first
a
highly
idealized
industry
with
only two firms, A
' This
section draws
heavily
the results are derived in the on
B. Wernerfelt
(see
[1]-13]),
where
setting of differential
game
theory.
THE JOURNAL
OF
BUSINESS
STRATEGY 69
and
B, competing
on price
only. Hypothetically,
say that the two identical firms with unlimited
financial resources
can lower their price/perfor-
mance
ratio and
go for market share
"early" or
"late" in the product life cycle of an unseg-
mented
market. The word "orice" will be used
for the priceiperformance
ratio, allowing
compe-
tition along
lines
of quality,
services,
price,
etc.
Going
for it in all
periods
is assumed
suicidal and
never trying will not be optimal under the as-
sumptions
made below.
The payoff matrix for this game
should look
more
or less like that in Exhibit
3. In the upper
left and lower
right squares,
both firms are
lower-
ing price
in the same
period,
resulting
in heavy
competition
in those periods
and a friendlier
coexistence
in the other half of the product life
cycle. If one
firm attacks
"early" and the other
"late," various
mechanisms
will make the
forrner
firm a much stronger
defender
than the latter.
EXHIBIT
2
Market
Share
Auction With Increasing Returns
to Market
Share
Monopoly
net
loss
(expensive
market
Share)
Monopoly net
profit
(cheap
market
share)
Market
share
Cost
of buying
expensive
-----\
market share
Returns
of
having
market
EXHIBIT
3
Payoff
to Firm
A/8
Early B Late
Early
Late
Medium
Medium
Low
High
High
Low
Medium
Medium
70 THE
JOURNAL
OF
BUSINESS
STRATEGY
With increasing
returns
from market
share
(due,
for example,
to economies
of scale
or brand
loy-
alty effects), the early firm will have built up
entry-barrier-type
advantages,
as a result of
which the late firm faces
an uphill battle. The
early firm will therefore
take the lion's share
of
the payoffs
and
be able
to take home returns
on
its
"investment"
over
a
longer
period.
If firms
are
not identical, the same
argument holds, although
the payoff
matrix loses
its symmetry.
From
this, unless
a player
expects
very unrea-
sonable reaction
patterns
from the other,
any
rea-
sonable
equilibrium concept would point to the
upper left corner,
where
both firms lower price
early. It is
possible
that
this will lead
to very
low
payoffs, especially
if the firms have approxi-
mately the same financial strength; but if one
wants to participate
in the industry, this is the
appropriate
strategy. In a more realistic setting,
new technologies, designs,
segments, or tastes
might annul
the original
entry barriers
and
create
enough turbulence to make
it profitable
to attack
again
later in the product
life cycle. But even
if
one also takes those
opportunities, one would
always
be better off by also attacking
early, since
the first-mover advantage
from the original situa-
tion
gives
one
a better
position
to exploit
the
new
possibilities
especially if others are doing so.
(Late
entrant
success
stories like BIC and
L'eggs
would,
following this logic,
have been
even better
off by entering earlier.) If the others are tou
strong,
a firm may choose tc drop out; but a
smaller
firm should
not sit and wait while larger
firms
create entry
barriers.
It should be intuitively
plausible
that the core
of this reasoning remains
valid
in a
more
realistic
setting with firms,
techni-
cal change, etc.
The following
are some
guiding
principles
on which to model a plan
for gaining
market
share.
Attacking
Early
to Stay
in the
Industry
If a firm wants
to stay in the industry, it should
at
least
attack
early. The next logical
question
con-
cerns
the fierceness and duration of the attack. It
is ciearly not optimal to charge infinitely low
prices;
instead, the
price should
be
determined by
the earlier rule, that the expected net present
value of benefits and costs of changing to other
prices at least balance
each other out. Applying
the logic from the above
hypothetical situation
to
a specific
setting would, however, enable
one to
argue that attacks should decrease
in fierceness
over the product life cycle.
Attacking
With
Decreasing
Fierceness
Staying
with the example of identical
firms,
these
firms will have the same increasing
markup pat-
tern and will share the
profit equally. Pushing
this
to its logical limit, in a more complete analysis.
the number of firms should adjust so that each
only reaps
enough
profit to keep it in the
industrv.
Again, the above analysis assumes
optimal b!-
havior on the part of one's competitors. If thev
only wake up to the competitive reality late
in
thl
life cycle, the optimal response
ffi?y, of course.
be different.
In practice firms are, however, not identical,
and not all firms have unlimited financial re-
sources.
In reality some firms will enter earlier
than others, and some will not be financially
able
to participate in the early race for market share.
These asymmetries, combined with returns to
scale, brand loyalty, or other entry barrier type
effects, award first-mover advantages
to the early
and/or strong firms. (That some firms fail to
capitalize on these advantages is another case.)
While the ideal for all firms is to attack most
fiercely early in the life cycle, late entrants
may
find themselves
at too big a disadvantage
to be
able to make it pay. Similarly, the financial
lim-
itations of the less well-endowed firms are
likely
to be more constraining the earlier in the product
life cycle it is, and these financial limitations
may
prevent them from capitalizing on their early en-
try. These firms will presumably get more and
more cash flow as time goes
by. If cash
flow has
some
positive
relationship to profit, a higher
mar-
ket share should produce disproportionately
more cash flow in an industry with increasing
returns from market share. This cash will then
permit the lowering of price. So, while the ideal
b"g.ee of attack diclines over the product life
cycle, the financial constraints under u'hich
some firms operate
make a more and mors vigor-
ous attack feasible.
This gives very earll', legs-
well-endowed
firms the opportunity
to malitmtze
growth subject to financiif constraint. The early
entrants and/o. financially strong firms fare best
in the war. So in this gamb
the fai will getfaffer'
Taking
the Profits Home
Thinking
further ahead
in the product life cycle'
it
is clear that at some time, ihe firms will stop
maximizing
growth and start taking profits
horne'
The question
is when.
THE
JOURNAL
OF
To provide a partial answer
to this, still in an
unsegmented
market, it is easiest
to start
out by
6onsidering
the firm which by virtue of early
entry
and,'or
financial strength has become the
brgest This firm will be gaining
market share as
long
as it maximizes
growth. This will be more
and
more
expensive. however,
and less
and
less
effective.
since
price
has to be
lowered on bigger
and
bigger
market
shares,
while fewer and fewer
customers
are lett to chase.
On the other hand,
the
competitors
could be at an increasing
cost
disadvantage
because of the increasing size dif-
ferences.
On the whole,
however, it is likely that the
biggest
firms will stop maximizing
growth
well
before
monopolization.
If one does
not
take
into
consideration
regulatory influence and assumes
that
the big firm does
come clc'se to monopoly, it
might be tempting to persist long enough to
squeeze
the last
competitor
out so
that one could
practice
monopoly
pricing.
This is an unlikely
scenario,
however: First, one cannot abstract
from
regulatory
agencies; second, a truly domi-
nant firm will often be able to ensure near-
monopoly
markups
anyway; and third,
in reality
smaller
firms
will often
succeed in segmenting the
market, making monopolization
even harder.
Thus, the largest firm will rarely want to
monopolize the industry.
A Declining Market
Share
for
the
Largest Firm
Accepting that the biggest firm is unlikely to
monopolize
the
industry, the next
question
is how
it will choose to let its market share
develop.
The
same mechanisms that make monopolization
expensive also make it tempting to "sell off"
some market share. This is because
increasing
prices
on a big market share
will give high short-
term payoffs and the entry barrier effect of the
high market share
will have become
less
impor-
tant in the late stages
of the product life cycle,
where the fierceness
of attack is smaller.
There-
fore,
at some
''late point in time," the largest
firm
will often reduce its market share slightly.2
From the viewpoint of smaller firms, the
pressures
early in the product life cycle tend to
work two ways. On the one hand, the declining
market share of the smaller firms will make
price
2
See also F.M. Scherer,
nomic P erformanc e (1970), Industrial Market Structure and Eco-
pp.217-218.
BUSINESS
STRATEGY
cutting
cheaper;
on the other hand,
the declining
size of their
market
share
will, through
economies
of scale,
tend to squeeze
profit margins and
avail-
able financial resources. The crucial instant is
when the largest firm stops maximizing growth
and starts
to raise
prices (or lets
prices
drop less
sharply).
If a small
firm can
turn out a
profit at
the
new, higher
prices,
it will probably
be
able
to stay
in the industry, although
it is unlikely to be very
profitable. If it has lost too much in scale
advan-
tages, it will probably already
have left the
indus-
try. Some of the short-run
results
are
graphically
summarized in Exhibits 4 and 5.
The largest
firm
will
rarely
want
to
monopolize
the industry.
In terms of the long-run steady state
of the
industry, bigger
and smaller firms face different
cost
and markup conditions as
illustrated
in Ex-
hibit 6. The
biggest
firms
will have
low marginal
costs (because
of economies
of scale) but be
tempted
to charge high markups
(because
of their
relatively big
customer
base).
The smaller
firms,
conversely,
will have higher
marginal costs
and
be less
tempted to charge high markups. Both
types of firms should price at the long-run
profit-maximizing
level,
which for stable
markets
will be equal
to marginal costs
plus a markup.
And this
depends on
the size and
price-sensitivity
of the customer
base
Assume
that as
the
firm
grows
very
big,
chang-
ing market shares
affect the marginal
costs less
than the demand-derived
markup. So
economies
of scale
are not too
dramatic for very big firms. In
this case, the steady state
price
will increase as
the firm grows
very big, since
marginal
costs
go
down less than the
markup
goes
up.
Conversely,
for the smaller firm, the steady state
price may
decrease
as it grows smaller,
if the markup
will
decrease more than enough to compensate
for the
loss in cost
efficiency.
The industry
could
there-
fore stabilize in an equilibrium where both
smaller and larger firms charge
the same
price,
based
on different costs and
profit
margins
[2].
Note that this equilibrium is stable, since
a
sudden
change
in market share
will lead to a
correcting price action. If the big firm gains
(loses)
market
share, it will increase
(decrease)
price,
since the
effect
due to
changed
elasticity of
71
-
72 THE
JOURNAL OF
BUSINESS STRATEGY
EXHIBIT
4
Price
Paths
for Bigger
and
Smaller Firms
Time
xxxxx Actual
price
for
bigger
firm
ooooo Actual
price
for
smaller
firm
Price
Profit maximizing
price
for bigger firm
if it had
no
financial limitations
Profit
maximizing
price
for smaller
firm if it had
no
financial
limitations
Equilibrium
price
path
Minimum
feasible
price
,for smaller
firm
i given
financial
limitations
Minimum
feasibie
( price
for
bigger
fii'm
given
financial
limitations
EXHIBIT
6
Steady
State
Prices
as Functions
of Market
Shares
Small
firm
-\
Optimal
markup
Marginal
costs
r'
Market
share
Price
demand will outweigh the cost change. Corre-
spondingly, if a small firm gains (loses)
market
share,
the same effects
would pertain. So, under
certain technical conditions the industry could
end in a stable asymmetric long-run equilibrium
where all firms charge
the same
price. An in-
teresting and
related
result,
which
holds under a
set of similar technical conditions, is that a
"symmetric" industry structure,
where
firms
are
of the same size,
is often
unstable.
Industry
Stability
What happens
is that a firm that gains (loses)
a
small advantage will affect price in such a way
that the discrepancy
is augmented.
This is based
on the assumption
that the effect
from economies
of scale is larger than the demand-based
effect
from a changing market share in the case
where
firms are of about equal size.3 If the unstable
equilibrium is disturbed,
one firm will gain
market
share
until the market structure is driven to the
stable "asymmetric" size distribution, at which
point the arguments
against
monopolization
carry
more weight.
Note that this explanation for a share-profit
correlation
in mature industries
depicts
the profit
as
a result of the share,
which uguin
is the result
of some underlying information or resource
asymmetry. This
It Oiffetent
from the concePtr.on
of profit und ,hu.e as
result oi the sarne
underly-
ing phenomena
[7, 9]. One should note the in-
teiesting managerial
implications
of this phenom-
3
See B. Wernerfelt, ..Consumers With Differing Reactton
Speeds, Scale Advantages, and Industry Structu
ra," Eurttpeutt
Econonic Review, Yol. 24, 1984,
pp. 257-2'70.
EXHIBIT 5
Market
Share
Paths
Firms for Bigger and Smaller
Market
share
| ilYl6
enon.
If the optimal
price
curve
looks
like
Exhibit
6,
it becomes
very critical
to get
the biggest
reia-
tive
market
share
early
on, since
even
a small
size
2dvantage
will tend to blow up if all firms act
optimally.
Conversely,
if one
is at a small
market
share
disadvantage
and the leader seems
deter-
rnined
to keep its position,
one may be better
off
accepting
one's fate and dropping
to a lower mar-
ket
share,
as
illustrated
in Exhibit 7.
The
iong-run
results
are that the industry could end in one of
the
situations
following:
. There is a stable asymmetric long-run cquilib-
rium and all firms charge the same
price.
. There
is a "symmetric" industry
structure
that
is unstable
and firms are of the same size.
These
are illustrated
in Exhibit 7, which depicts
a
two-firm example.
In Exhibit 7, (MS,, I - MSr) is the stable
asymmetric equilibrium, whereas ll2 is the un-
stable
symmetric situation.
The firms clearly
gain
in profitability by staying close to the stable
equilibrium values and avoiding the unstable
symmetric equilibrium. The only reason that
firms will accept the low payoff from the price
war
of the symmetric equilibrium
is that
they both
have
a chance
of moving ahead,
thus
ending
up in
the high payoff situation at 1 MSt. Note also
that it is irrational for the small firm to challenge
the larger firm with a price war. So if one is
established
as a leader
in an asymmetric equilib-
rium such
as (MSr, 1 - MSr), one is in a very
secure
position, at least
in conventional
warfare.
Now look at the normative implications of these
results.
lmplications
Note,
first, that if a firm finds
itself in a stable,
asymmetric
equilibrium,
a higher market share
will correspond
to a higher
profit from that time
on.
Over-
or under-shooting
the equilibrium
and
trying
to hold too big
or too small
a market share
will,
however, not lead
to maximum
profits.
Try-
ing
to hold
too big
a market share,
for example,
will often involve charging
prices that are too
low.
So
each firm has an optimal
market share
to
shoot
for, and the higher
this target,
the higher
the
firm's
profit.
The target itself
is
dependent on
the structural characteristics
of the industry,
namely
the relative
cost
positions
and
the
relative
price
sensitivities
of firm-specific
demands
which
entered
into the construction
of Exhibit 6. Pre-
THE
JOURNAL
OF
BUSINESS
STRATEGY 73
tending that the target
is higher
than
it actually is
and going for higher market share
will be self-
defeating.
What
is valuable
is not market share
but the
firm's
relative cost
position
and the
price
sensitivity of its demand,
of which market
share,
if equal to its equilibrium
value, is an indicator.
Trying to increase the value
of the
firm
simply by
increasing market share is like trying
to put out a
fire by blowing the smoke away. Again, even
though higher sales can influence the
firm's
rela-
tive cost
position
and
demand
elasticity,
it is not
profit-maximizing
to try to influence those once
the industry is in a stable equilibrium. Hence
the
stability of the equilibrium.
Should
a
firm find
itself in an
unstable symmet-
ric equilibrium
with an associated
"deadlocked"
price
war, it is safe
to assume
that
the industry
will eventually move to a stable symmetric
equilibrium and that the current
casualties
are
part of the fight
for the high-share/high-profit
po-
sition. In these situations,
the firm has to decide
whether
or not to fight
on the
basis
of an
assess-
ment of its chances of winning
and
the associated
costs.
Because the firm's relative
cost
position
and
demand
elasticity
gradually
freeze
as the industry
matures, the
early
phases
of the
product
life
cycle
always offer opportunities to
jockey
for
position.
To stay
in the industry, the firm should
always
EXHIBIT
7
Equilibrium
Profit for Different
Market
Shares,
Duopoly
Stable.
asvmmetric eouilibri um
/\
' Unstable \
symmetric \
equilibrium
Monopoly
I
1-MS, Market
share
74 THE
JOURNAL
OF
BUSINESS
STRATEGY
fight hard early in the product life cycle. If the
firm is financially
weak and only entered
after
most
of its competitors,
this fighting
is unlikely
to
prevent market share
from declining and may
only
reduce
the
speed
of that
decline;
but
it is
still
the
profit
maximizing
course
of action.
It is
possi-
ble, of course,
that
the firm's
strengths
relative
to
present
and
future
competitors
are so
limited that
its total
product
life cycle
payoff
will be
negative,
in which case
it should
not participate
at all.
Sometimes
opportunities
to switch
the relative
cost
and
demand elasticity
positions
occur at se-
lected
points
in time later in the product
life cy-
cle. This might happen,
for example,
with the
advent of new
technology,
if one can develop a
new
product
design or find
a new
strategy.
As
an
example,
Miller shifted
market shares in the
ma-
ture beer industry by using marketing
techniques
that were radically new for that industry. The
Japanese
have
shifted
shares late in many
indus-
tries by offering a different price/performance
package.
A blind attack late in the product
life
cycle which is not tied to a major change
in the
cost or demand
properties
of the
product
is likelv
to be a failure, however.
In summary,
firms
should
select
the
industries
they
want to be in, attack
in periods
of turbu.lence
(such
as
the early
stages
of the
product
life
cycle),
and try not to overplay
their cards
in the stabie
periods
of the
product
life cycle.
i,
2.
REFERENCES
Boston
Consulting
Group, Perspectives on Experience
(1972).
R.D. Buzzell, "Are There Natural Market Structures?"
Mimeographed,
Harvard University, Graduate School
of
Business
Administration.
1980.
3. R.D. Buzzell, B.T. Gale, and R.G.M. Sultan,
"Market Share-A Key to hofitability," HaNa Business Review,
Yol.
53.
No. l. 1975.
4, W.E. Fruhan, Jr., "Pyrrhic Victories in Fights for Market Share," Harvard Business
Review, Yol- 50, No. 5, 1972.
5. R.G. Hamermesh, et al., "Strategies
for Low Market Businesses," Harvard Business
Review, Vol. 56, No. 3, 1978.
6. P. Haspeslagb, "Ponfolio Planning: Uses and Limits," Han)ard Business Review, Yol.60, No. I, 1982.
7. R,P. Rumelt and R. Wensley,
"In Search of the
Market Share Effect," in Proceedings ofthe 41st Meeting of the
Academy
of Management
(1981).
8. F,M, Sherer, lzdlr strial Market Structure
and Economic
Performance
(Rand
McNally, 1970).
9. H.A. Simon and C.P. Bonini, "The Size Distribution of Business Firms," Iie American Economic Review, 1958,
10. The Dexter Corporation,
ICCH 9-3'19-112, 19'19-
11. B. Wemerfelt, "Consume6 With DilTering
Reaction Speeds, Scale Advantages,
ard Industry Structure," European
Economic
Review. Yol. 24. 1984,
12. B. Wemerfelt, "A Special
Case
of Dynamic Pricing Policy," Mimeographed, Northwest€rn University, J.L. Kelloeg
Graduate
School
of Management, 1985.
13. B. Wernerfelt,
"The Dynamics of Prices
aud
Market Shares Over the Product
Life Cycle," Management
Science,
Yol'
31, 1985.
14. C,Y.Y. Woo
and A.C. Cooper,
"strategies
of Effective Low Share
Businesses,"
Srrategic
Management
Journal,Yol.E,
1981.
15. C.Y.Y. Woo and A.C. Cooper,
"The Surprising Case for Low Market Share,"
-ala rvsrd Business Review,
Vol. 60,
No 6,
1982.
