Market Share and Competition.

[Old Geezer]

This question is part technical and part philisophical;

I was recently engaged in debate with someone who claimed that "companies compete for market share" and that the primary end of the marketing department is to "crush the competition" It seems to me that when competition is present, companies which focus solely on "crushing the competition" fail to promote the virtue of their own products/services.

1. I know that many of you run your own business or are involved in the management thereof. Would you consider "crushing the competition" and obtaining "market share" primary or secondary roles of your marketing team?

2. Isn't a fixed market a fallacy? does someone have a good link on this?

[Yaniv]

The role of every business is to make profits,

The best method for doing so depends on the market structure.

Let`s assume that the competing firms are equal in technology - they have the same production costs and quality, otherwise it`s natural and beneficial that one firm takes over due to it`s superiority (see microsoft).

A market with only a few competitors is subject to "crushing the competition" if one of the competitors has loads of spare money.

"crushing" means temporarily reducing prices and operating at a loss, this forces all other competing firms to operate at a loss or go out of business.

Since the "crushing" firm has larger reserves it will eventually become a monopoly, as all other firms are gone.

As a monopoly, the firm can raise it`s price above competitive level and maximize it`s profits.

Notes:

1. A "crush the competition" monopoly cannot last, as the high market price invites new competitors. the market will eventually stabilize.

2. "crush the competition" is not always profitable - in order to monopolize, the firm has to operate at a loss for some time.

Rather than crushing the competition, a firm can establish a monopoly by offering a superior product for a lower price. such a monopoly can last as long as superiority is maintained. (see microsoft)

[DavidV]

Aside from Yaniv’s points, a more fundamental argument against basing competitive strategy on the competition is that success or failure is ultimately determined by one’s relationship to reality, not to others. It is possible to gain a temporary advantage by cutting prices, matching the competitor’s features, etc, but the ultimate judge is the actual value you can provide to your customer. Strategic advantage is gained by being focused on the nature of the goods or services you provide and the core competencies of your business, not on the actions of your competitors. I think that is more important than the particular strategy you choose, whether it is providing better value vs. better products, or expanding vs. consolidating a market.

[Capitalism Forever]

It seems to me that when competition is present,  companies which focus solely on "crushing the competition" fail to promote the virtue of their own products/services.

...and when competition is absent, you're an evil monopolist. Translation: If you're in business, you're bad.

[AisA]

The owners of a business are the ones entitled to set its purpose. Having said that, it is a safe bet that the overwhelming majority of business owners wish to maximize profits -- to make as much money as possible in the present and do everything possible to make even more money in the future.

This should be the "primary end of every department", marketing, production, customer service -- the whole works. Setting a goal such as "crush the competition" is as mistaken as seeking to "maximize customer satisfaction" or "maximize market share". All such goals serve to take the eye off the only ball that counts: maximizing profits.

Dropping prices to increase market share -- unless it is accompanied by a reduction in costs -- has a murderous effect on profits. For example, say you sell an item for $100, your total costs are $90, leaving a $10 profit margin (this is a pretty healthy profit margin in many industries.) If the marketing department seeks to "increase market share" by dropping the price by 10%, this means the price goes to $90, costs stay at $90 and profit goes to zero! A 10% price cut resulted in a 100% reduction in profits.

The point is that decisions should always be made in the context of profits, not secondary things like market share. Unfortunately, I have seen the above happen many times. I've seen market managers report glowingly on increased sales volumes -- while profits are declining because of price cuts.

Everyone should have the same goal -- make money and as much of it as possible!

[khaight]

...it is a safe bet that the overwhelming majority of business owners wish to maximize profits -- to make as much money as possible in the present and do everything possible to make even more money in the future.

This should be the "primary end of every department", marketing, production, customer service -- the whole works.

A primary focus on maximizing profits can also lead a business into pitfalls, if that focus leads to a loss of long-range perspective. A company can often enhance its profits in the short term by taking actions (such as reducing quality) whose repurcussions are not felt until later.

In my experience, good businesses conceptualize their primary goal as "maximizing long-range profits by doing X", where X is the specific value the company provides to its customers.

As always, context and a focus on reality are essential. If the market changes in a way that renders X less valuable, the company needs to notice and switch its focus to maximizing long-range profits by doing Y instead.

[Concerto of Atlantis]

Yes, that is correct - profit should be the primary objective of a company. However, I wouldn't make the mistake of assuming that things like 'market-share' and 'customer satisfaction' somehow detract from this aim. They CAN, but the point is that often say, customer satisfaction can lead to improved profits. I mean, it makes perfect sense - keep customers happy and they will come back for more and spend more, tell their friends, etc.

So while these things should not be an ends in themselves, they are often very effective means to and end.

[Bearster]

I had an argument today with someone who (among other things) insisted that when she was CEO of a company, she would sell what she knew first-hand would be best, and not what the customer thinks he wants.

My response was that one *can't* sell what the customer doesn't want. One has some ability to persuade the customer to want something new (though this is harder than it sounds). But one can't simply "sell" Wi-Fi Voice over IP phone phones to a customer who wants a cell phone from Verizon.

I think there is an objective balance between being customer-driven and vision-driven (where the former is strategy by focus groups and the latter is a megalomaniac CEO who thinks he can dictate what the market will want.)

Ultimately, a business comprises many individual processes, including product development, quality improvement, production, sales, customer satisfaction, marketing, etc. At any given moment, one of them is the gating factor. That is the one which the rational CEO will focus on, because by its very nature, a change here will impact the bottom line.

Ford identified in the 1980's that the quality of its products was poor. So they created their "Quality is Job 1" program, I think first and foremost to work on increasing quality, and secondarily to tell the world it had done so. Cynical readers can ask if they expect a new Ford to run 100,000 miles without major problems. I was there in 1980; it weren't so back then.

Chrysler around 1990 identified that its most important goal was to develop fun new cars. Intrepid. Neon. Viper. 300. Prowler. ...

Microsoft in 1995 identified marketing, specifically persuading game developers to support Windows 95, as the most important factor. They did a blitz which had the result that a number of important game titles were released for Windows in Christmas 1995, and nearly all important titles for Christmas 1996 were Windows. DOS was history, and all the holdouts bought Windows.

Notice that none of these companies were limited by production. Microsoft particularly was not limited by quality or new product development. Each company has to look at its own market, products, customers, channel, competitors, complementors, etc. to determine what to work on next.

[Bearster]

Since the "crushing" firm has larger reserves it will eventually become a monopoly

Whatever that means.

the firm can raise it`s price above competitive level

Or whatever this means.

If one looks at the companies which people have called "monopolies" over the years, they can be broken into two groups. Those which had government power backing them, and those which were good.

Neither group behaved as this theory alleges.

Yaniv: are you clear regarding what terms such as "monopoly", or "comeptitive price level" mean?

Dropping prices to increase market share -- unless it is accompanied by a reduction in costs -- has a murderous effect on profits. For example, say you sell an item for $100, your total costs are $90, leaving a $10 profit margin (this is a pretty healthy profit margin in many industries.) If the marketing department seeks to "increase market share" by dropping the price by 10%, this means the price goes to $90, costs stay at $90 and profit goes to zero! A 10% price cut resulted in a 100% reduction in profits.

AisA makes an excellent point. This is true regardless of the "bigness" of the firm, and in fact the economic scales at least as rapidly as the company itself. Think of Say's law; it's not the craftsman who labors a year to make a custom piece of furniture who becomes large and wealthy. It's Ethan Allen, and today I suspect Ethan Allen is small compared to Ikea. I bet Ikea's gross margin is less than Ethen Allen's, which is much less than the custom craftsman. Can Ikea afford to drop prices by 10%? I doubt it. Wal-Mart can't!

[Yaniv]

If one looks at the companies which people have called "monopolies" over the years, they can be broken into two groups. Those which had government power backing them, and those which were good.

Neither group behaved as this theory alleges.

The theory shows how short-term monopolies are created, such monopolies don`t use coercive force nor offer a superior product and thus remain monopolies for a short time.

'short time' is the time period required to create a new firm and start production. ("enter the market"). 'short time' may be several years, it depends on the scale of investment,construction,training etc.

I`ll elaborate using this example:

Dropping prices to increase market share -- unless it is accompanied by a reduction in costs -- has a murderous effect on profits. For example, say you sell an item for $100, your total costs are $90, leaving a $10 profit margin (this is a pretty healthy profit margin in many industries.) If the marketing department seeks to "increase market share" by dropping the price by 10%, this means the price goes to $90, costs stay at $90 and profit goes to zero! A 10% price cut resulted in a 100% reduction in profits.

All agreed, but there`s more to it:

Suppose a market with 10 identical firms producing and selling X.

All X`s are identical, to the extent that the customer would not pay more for a specific X but rather buy the cheapest X available.

No firm may sell X for a price higher than 100$ since it`s competitors sell X for 100$. hence, 100$ is the competitive price level.

Now suppose my firm has 1 billion spare dollars and the other firms don`t. I`m going to sell X for 80$, thus "forcing" all other firms to do the same. we would all operate at a loss, firms would slowly shut down until my firm remains the only X producing firm, an X monopoly. That process is called "crushing the competition".

What I`m gonna do next is raise the price to 150$, since no competition is available.

As long as there`s no competition (and it`s not for long) I can make great profits.

By the end of the day I MAY have gained from the entire process. It depends on how long I can operate as a monopoly, how long it takes to "crush the competition" and how much the customers are willing to pay for X.

[Betsy]

Suppose a market with 10 identical firms producing and selling X.

Instead of supposing a market with 10 imaginary companies making unspecified X's, let's focus on reality.

One real, actual, historical example will suffice.

[AisA]

You won't find many real-world examples of this kind of monopolizing because of the issue of capacity. If there are 5 companies with equal market share and one of them wishes to drive out the others, consider what the monopolist must do.

Most companies operate at 70% - 90% utilization levels, that is, without much excess capacity. This means the would-be monopolist must increase his capacity by 500% to be able to supply the entire market. This means hiring 500% more employees, buying 500% more production machines, finding the land and putting up the buildings to house all this equipment, finding 500% more raw material suppliers, finding 500% more shippers, etc.

And all of this has to be done before the price war begins, else one will not be able to supply the new customers. So, the company will have to make an enormous investment to get to a point where it will lose money on 5 times the volume it was previously running.

And there is no guarantee that you can then sell the product at 150% of the pre-monopoly price. There are always indirect competitors -- for example, you might monopolize the supply of aluminum, but there are many other metals to use if the price of aluminum gets too high.

[Betsy]

You won't find many real-world examples of this kind of monopolizing because of the issue of capacity.

You won't find any real-world examples of this kind of monopolizing because the only way a bad monopoly can exist is because of improper government intervention into the economy.

I dare any advocate of antitrust laws to show me one real example to the contrary.

[AisA]

Betsy is right, you won't find any coercive monopolies except the ones that government establishes. Which is why antitrust actions are never against actual monopolies, only against firms/individuals that have an arbitrarily defined "excessive market share", i.e. against companies that are exceptionally good at what they do.

The purpose of my previous post is to make clear that trying to establish a non-coercive monopoly is far more difficult than it looks -- and I've never seen an attempt at it, more less a successful attempt.

[felicity]

Since humans do not have "automatic knowledge", they must learnabout reality. The perfect mousetrap that I invented does little in my workshop. To profit from it, it has to be marketed: people must learn about its value to them.

The primary purpose of a marketing department is to communicate the value of the firm's products to potential customers.

[Elle]

1. I know that many of you run your own business or are involved in the management thereof.  Would you consider "crushing the competition" and obtaining "market share" primary or secondary roles of your marketing team?

Crushing the competition is secondary, and has to be for any company to be successful. Obviously the profit is prime, and that entails producing a product with a value for the consumer. Competition is a secondary outcome, and therefore a secondary concern.

The example I would use for my company is that we can't be concerned about crushing the competition (mainly by havin the most clients) if we only consist of two people in a small office. Obviously the profit is #1, and with that comes the creation of a product of value.

Anti-trust folk tend to put the cart before the horse.

2. Isn't a fixed market a fallacy? does someone have a good link on this?

I don't have a link, but I think that the basis of that fallacy is simply that a fixed market could never exist in the real world.

[Moral_Free]

I think that the basis of that fallacy is simply that a fixed market could never exist in the real world.

In Russia there was once something very close to a “fixed market”, they called it communism, and if memory serves it didn’t work out so well for them.