Submit a Summary for illustration: 1.4

Managerial Strategy:

Maximize Profit or Maximize Market Share?

Do not save management science techniques that agency may fail to be the most profitable airline or are oriented to maximizing market share, such as auto rental agency. As mentioned in our discussion portfolio planning matrices and experience curve of common management errors, the presence of net- analysis work effects can make the pursuit of market share a Design information systems to focus attention on profitable strategy, as we will explain more fully in the firm's performance, as measured by profits. Chapter 12. In his recent book on market share, Beware that improvement in the ability to mea Richard Miniter offers this warning on the exceptional sure market share-specifically through can case of network effects ner data collected at checkouts may lead to a Every rule has an exception network effects and stronger focus on market share and less focus on everyone wants to believe that they are it. Their brust profitability ness is special and unique and therefore profits are not primary for them, but market share i Too many In a book about the business strategies of Southwest managers believe that the myth of market share is not Airlines, the authors examine the decisions made by the myth--for them. In a handful of care they're right: airline's CEO, Herb Kelleher. In a section titled "Say Market share is what matters. In the majority of Nuts to Market Share." Kelleher explains the role that cales prontalone should it on the three market share play at Southwest Airlines. Kelleher says: We will show you in Chapter 12 how to identify Market share has nothing to do with profitability those special few industries when market share mat Market share ways we just want to be big we don't care ifters. As this Illustration stresses, most managers should we make morwy doing H... That is really incongruous it ignore market share. Between advances in shareholders profitability is your purpose willingness and ability to fire CEOs and the active mars The book goes on to say that Kelleher believes "conket for corporate control (mergers, acquisitions, and fusing the two concepts (increasing profit and increase takeovers), a manager who fails to pursue primarily the ing market share) has derailed many firms that were maximization of profit may have a short career otherwise on track in fulfilling their fundamental pur sourcest), Scott Armstrong and Fred Collopy. "Compet pove (maximizing profit and firm value)." Perhaps it for Orientation Effects of Objectives and Information on was only a coincidence, but we should mention that Managerial Decision and Irofitability. Journal of Market the value of Southwest Airlines tripled during the one arch. May 1996. pp 188-49. The Profitability of carly to mid-19%). Winning Chiruruti June 1. 191. p.0, Kevin Freiberg As we emphasize in this chapter, shareholders wish and Jacke Prelver, Natal Shut ArlinesCrazy Recap Busines and Personal Sur (New York Broadway Books to see the value of their firms maximized. A manager 1995), p 4, Richard Miniter. The Myth of Market Share (New bent on being the biggest airline or biggest auto rental Yorke Crown business, 20021.p. 139 ILLUSTRATION 1.4 Managerial Strategy Maximize Profit or Maximize Market Share? Net Present Value of Expected Pratit over Five Year Although sports and war metaphors are common in bus ness conversation and management seminars, managers Low price strategy High price strategy may be reducing the value of their firms by placing too Base trustment much emphasis on beating their competitors out of muar 50 milion kust share rather than focusing on making the most profit Beat treatment for their shareholders. In a provocative study of marge 30 million rial strategy. Profesores J. Scott Armstrong at the University of Pennsylvania's Wharton School and Fred Collopy at Case Western Reserve University advise CS to focus on profits instead of market share. Armstrong performance. They discovered that exposing manag- and Collopy discovered that, instead of maximizing profit , ers to techniques that focus on gaining market share many managers make decisions with an eye toward per increased the proportion of subjects who abandoned forming well relative to their competiton-a decision profit maximization. When executives take strategic making point of view they refer to as competitor oriented management courses, they become more likely to In their nine-year study of more than 1,000 experi make protit-reducing decisions. These results are enced managers, Armstrong and Collopy found that impressive because they have been repeated in more managers are more likely to abandon the goal of protit than 40 experiments with more than 1,000 subjects maximization when they have greater amounts of in- To see if firms that seek to maximize market share formation about the performance of their rivals. In the competitor-oriented firms) tend to be less profitable study, managers were asked to choose between two on the long run than firms that pursue profit with pricing plans for a new product-a low price and a high out concem for market share, Armstrong and Collopy price strategy and were told the five-year present value tracked the performance of two groups of firms over a of expected profits associated with each strategy. The 54-year period. The group of firms that made pricing table in the next column presents two of the treatments" decisions based on competitor-oriented goals, such as that were administered to different groups of subjects increasing market share, were consistently less profit- The "base" treatment gives the manager no infor able over the 54-year period than the group that made mation about how a rival firm will fare under the two pricing decisions to increase profit without regard to plans, while the beat" treatment allows the manager market share. Furthermore, companies pursuing market to know how a decision will affect a rival. In the base share were found to be less likely to survive "Four of treatment, almost all managers, as expected, chose the the six companies that focused strictly on market share most profitable strategy (high price) When given in (Gulf, American Can, Swift, and National Steel) did not formation about the rival firm protit, subjects could survive. All four profit-oriented companies (DuPont. see the impact of their decision on their rival, and General Electric, Union Carbide, and Alcoa) did." many managers abandoned profit maximization. In Armstrong and Collopy conclude that the use of the beat treatment, 60 percent chose not to maximize competitor-oriented objectives is detrimental to profit- profit (low price). To address the possibility that the ability. To encourage managers to keep their focus on subjects were considering longer-term profits, Arm-profit and not on market share, they offer the following strong and Collopy changed the payoffs to 20-year specific advice present values. The results were the same. . Do not use market share as an objective. Armstrong and Collopy believe the abandonment of profit as the firm's objective is a consequence of - Avoid using sports and military analogies managers having information about a competitor's because they foster a competitor orientation