Daily Archives: March 4, 2007

Wharton Nuggets (on Market Share, Entrepreneurship, and Grocery Purchasing Patterns)

Over the last couple of months, Knowledge @ Wharton has published three articles that caught my eye. (Well, more than three, but I felt that these three were worth blogging about.)

The first article that I am going to draw attention to is The ‘Myth of Market Share’: Can Focusing Too Much on the Competition Harm Profitability?. The article starts off by noting that it is a common practice of many companies to focus their attention on grabbing market share from their competitors, but such efforts can actually be detrimental to the firm’s profitability.

The reality is that even fifty years ago research indicated that competitive choices are often low-profit. Back in 1996, a study by Armstrong and Collopy analyzed data amassed by scholars to measure the level of competitor orientation of 20 major corporations for five nine year periods beginning in 1938 and ending in 1982 and found that competitive-oriented objectives were negatively correlated with ROI for the data. In other words, the more managers tried to be the biggest in their market, the more they harmed their own profitability. In contrast, companies whose only goal was profit maximization posted stronger returns on investment than the other firms.

The article ends by quoting Wharton Marketing Professor J. Scott Armstrong who says We’re not saying companies shouldn’t pay attention to their competitors; they might be doing reasonable things that you may also want to do … What we’re saying is that the objective should not be to try to beat your competitor. The objective should be profitability. In view of all the damage that occurs by focusing on market share, companies would be better off not measuring it. ‘Nuff said.

The next article that caught my eye was Dos and Don’ts for Entrepreneurs, from Those Who Have Actually Done It. As someone who spent the early part of their career working in a lot of start-ups, I know from extensive experience that most entrepreneur’s don’t have a clue what they’re doing. When you fail when you (a) have the best technology, (b) have more than enough money to do what you promised, or (c) have great talent across the board, or (d) have all three … something’s wrong … and it’s not with the employees.

Therefore, whenever someone who has a clue offers to share their advice, I thoroughly believe you should heed it. Tidbits you will take away from the article is that not every business idea needs venture capital, successful businesses solve a real problem (not a hypothetical one), disruptive technologies enable a start up to jump into a large, lucrative market where established leaders have become complacent, good entrepreneurs manage risk, and the KISS rule is always in full-force: get the prototype out as soon as possible, get feedback, and improve only where needed. Remember, a camera, mp3 player, personal organizer, web browser, etc. may be great, but sometimes you just need a phone.

The final article is The ‘Traveling Salesman’ Goes Shopping: The Efficiency of Purchasing Patterns in the Grocery Store about the application of the “Traveling Salesman Problem” to the study of the behavior of grocery shoppers.

Wharton marketing professor Peter S. Fader insists that the Traveling Salesman Problem (TSP), which seeks the shortest route available to a traveling salesman who has to visit a number of cities and then return home, closely resembles the problem faced by a typical grocery shopper who plans to purchase a certain list of items in the grocery store. To achieve the same efficiency as the salesman who meticulously plots his route, a shopper would need to know where products are located, and have a game plan on how to go about gathering the items on his list while covering as little distance as possible. However, the average shopper is quite inefficient.

What’s the goal of the research? To understand in-store behavior and how stores should place items to ( a) increase customer efficiency and ( b) increase sales. Does it affect your supply chain? Not really – unless you are in grocery retail, because more efficiency and better sales increase demand, which increases revenue, which should increase profit. But it’s still a very interesting article.