Why Market Share Strategies Fail

A recent Stratmor survey revealed that the primary growth strategy of lenders, especially independent mortgage bankers, is stealing market share from other lenders through branch acquisitions. No question that mortgage bankers have committed to this approach. Firms such as Stearns, Caliber, Guaranteed Rate and others have certainly climbed the leaderboard in market share. The critical question to ask: Is there a positive correlation between market share and profitability? The assumption is that maximizing market share will maximize profits but is it really true?

The market share strategy gained fame from empirical research performed by Professors Robert Buzzell, Bradley Gale and Ralph Sultan who published a landmark article in Harvard Business Review 41 years ago (1975) entitled Market Share —a Key to Profitability.

In more recent years, counter-arguments have been made showing that to increase market share at any cost is not a profitable strategy. Studies by Rumelt and Wensley indicate that low market share firms can be very profitable. While the financial press is critical of firms that have lost market share, recent research shows that companies whose primary goal is to pursue market share often don’t fare well.

Why? Dale Furtwengler, author of  Pricing for Profit says that “when a company’s focus is on their goals, and not their customers’ interests” disaster can happen. Furtwengler cites Toyota as a clear example. Once known for quality in the mid-price range automotive market, Toyota suffered a setback. Shortly, after announcing that they intended to be the #1 automaker, they had a recall that cost them, conservatively, $1 billion dollars. Furtwengler states other reasons why a market-share strategy fails:

• The companies don’t define the market, they assume that all buyers are potential customers.

• The companies often discount heavily to get customers who don’t value what they offer and lose margin on all customers that do.

• The companies significantly grow their infrastructure to accommodate the additional, albeit unsustainable demand.

According to Furtwengler, focusing on increasing market share is often another name for a low price strategy which can lead to economic failure quickly. He contends that “a better strategy for companies is a customer focus that enriches the lives of their customers. Price for that and enjoy your well-deserved success.” I couldn’t agree more that for a majority of mortgage firms their best strategy is a value-added approach and not increasing market share.