Aesoph Group

By Christopher Aesoph, MA

     Would you rather win or make money? Most people would say “both,” but many studies are saying you can only do one at a time. Companies that get caught up in beating the competition—in winning—make less money. Companies that keep their eye on the ball—the ball being their own profits—make more money. In other words, if you tell your sales manager to increase profits, you’re on the right track. If you tell your sales manager to increase market share—to beat the competition—you are headed for the ditch. It’s that simple.

In one of the most interesting of all the studies done in this area, a group of business students are asked if they would prefer a profit of $40 million or $80 million for their future company. That seems easy enough to decide. But wait—what if you could beat your competitor while you still made $40 million? In a stunning reversal of priorities, 60% of the respondents would settle for the $40 million—they would cut their profits in half—in order to beat the competition.¹ To my mind, that is competitiveness run amok.

And in an unexpected twist, beating the competition hurts innovation.² Within 194 manufacturing companies, high competitor-orientation scores within companies predicted weak innovation. Those who are more concerned about beating competitors were less likely to produce line extensions and new products, and are more likely to produce me-too products.

In another example, a group of 57 subjects were asked to make advertising spending decisions for medium-sized manufacturers in mature markets. The decision involved high (competitive) or low (cooperative) budgets. Although profits were significantly higher for the cooperative budgets, 78% of the subjects chose the competitive budget.³

In a business setting, 20 large firms including General Electric, DuPont, Union Carbide, and General Motors were tracked over a 44-year period. Those that concentrated on profit rather than market share did consistently better in terms of profitability, compared with utter failure for four of the six companies whose only goal was market share.⁴

While authors of these studies—the latest available is 2005—offer the above facts, none postulates about why. I believe I know why those who concentrate on profits fare better than those who become caught up in beating their competitors:

1. Profit-first companies concentrate on the customer voice, not the voices of their competitors. Hearing, understanding, and anticipating customer needs and wants becomes an obsession. What the competition does or doesn’t do rates as an irritant perhaps, not a commanding presence.
2. Profit-first companies concentrate on doing the absolute best they can within their chosen area. They are not pulled sideways by a need to spar with competitors. They are too busy finding themselves to spend time overanalyzing what competitors are doing or plan to do.

Market share should grow because you are doing the best job, because you deserve it to grow, because you’ve earned it, not just because you will do anything to see it grow. If your market share grows for any other reason—better advertising, more flash on your product, slashing prices—you  are selling out and headed for trouble, if not this year, then next year.

Finding yourself as a company isn’t easy. Earning customer trust isn’t easy. Doing both at the same time is excruciating, but it’s still better than staring at your competition. The good news is, chances are you'll make more money too.

“We expect economic losses to continue at least until textbooks, business school courses, decision aids, and investors’ decisions reflect the evidence that pursuing profit, rather than defeating competitors, is the proper objective of businesses.”    J. Scott Armstrong, The Wharton School, University of Pennsylvania, and Kesten C. Green, Department of Econometrics and Business Statistics, Monash University, Australia

Summary studies:

-Armstrong, J. Scott, and Kestin C. Green (2006) “Competitor-oriented objectives: the myth of market share,” University of Pennsylvania Marketing Papers

-Abramson, C., L.S. Cirrim and R.Sarin (2005), “An Experimental Investigation of the Impact of Information on Competitive Decision Making,” Management Science, 51 (2), 195-207.

1 Arnett and Hunt (2002)

2 Lukas and Ferrell (2000)

3 Corfman and Lehmann (1994)

4 Armstrong and Collopy (1938-1992)