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When Is It Wise to Sacrifice Profitability for Market Share?

mobile-phone-market-share.jpgMotorola's chief executive, Ed Zander, will hand over the reigns on January 1st, 2008. Zander's adamant it was his decision: "[It was] my date, my doing, my time frame." He even added that he'd told his wife he intended to be CEO for four years only. If you've followed Motorola's performance this year, you may be muttering a faint, "Yeah right." You're not alone.

The Associated Press notes that Motorola had two successful years post-Razr, but once sales of the handset slowed down, Motorola's house of SIM cards fell apart. In fact, Motorola admitted it had been trading profit margins for global market share by "aggressively undercutting pricing."
This type of competitor-oriented objective is never good news for shareholders. Harvard Business School Press' "Manage for Profit, Not for Market Share" examines the danger in this practice. The authors suggest that when companies let market share guide pricing strategy, they sacrifice 1-3 percent of their annual revenue -- meaning a manager of a $5 billion business sacrifices between $50 and $150 million.

If Zander knew he was out the door at the end of year four, perhaps that explains why he chose to boost his own ego by increasing market share instead of aiming to maximize shareholder value. Greg Brown, Zander's replacement, may want to take a few lessons from Nokia. The company purchased NAVTEQ earlier this year so it could add software and services -- like music and navigation -- to its business. Zander's reaction: "We didn't even think about it...That's not our strategy. We're not in the applications business." We all know how that strategy's working out.

Related Reading:

The Myth of Market Share: Can Focusing Too Much on the Competition Harm Profitability?
(Market Share image courtesy of Tim in Sydney, cc 2.0)

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