Market Share Theory

I really enjoyed Richard Miniter’s The Myth of Market Share. His first book it criticizes market share goals.

Interestingly he focuses mostly on market share as a proxy for size. This is usually logical, firms that get bigger, all else equal, increase market share. I’d suggest that he could make more of the fact that sometimes it isn’t a reasonable assumption. Cutting prices to gain volume share often makes the market shrink in dollar terms. Furthermore, growing even dollar share in a declining market often means decreased revenue. Pursuing size for the sake of size is foolish, but pursuing market share is even worse as it may not even deliver size.

Like most popular management books Miniter explains using examples. This is a useful technique but can be a bit dangerous. Market share goals are probably not the entire story of a company’s failure. That said reading Miniter’s book should prompt managers to think again the next time someone puts an elaborate plan together than involves size now and profit at some ill-defined point in the future.

When facing market share advocates remember to ask: “Why do you think this is the key to success in our market?” Demand a theory connecting share to future profits. It may exist, e.g. network goods, but often a reasonable theory is missing. People often have seen correlations between size and profitability and assume causation. Remember that it is perfectly reasonable to think that the firm is big and the firm is profitable because it is producing a good product. It isn’t size driving profits but a third variable, product quality driving both size and profits.

Where I disagree with Miniter is that he disparages theory. He says academics are pushing the theory that share drives success. “The gap between theory and practice also needs to kept in mind” (Miniter 2002, page 47). I don’t see this happening. I’m not saying business school professors don’t laud market share goals but the problem isn’t that academic theory recommends pursuing market share. There is often very little theoretical justification for the pursuit of market share. Miniter, ironically, gives market share proponents too much credit. They aren’t applying a clever, but impractical, ivory tower theory. They often haven’t got any justification at all for their beliefs. Academics do support market share goals but rarely give a meaningful theoretical justification.

I liked Miniter’s book, and agree that the pursuit of market share is usually folly. I’ll go further and suggest that we shouldn’t assume that market share proponents have a theoretically justified plan. Sometimes they are just being a little silly.

Read: Richard Miniter (2002) Myth of Market Share: Why Market Share Is the Fool’s Gold of Business, Random House.