Maximize Market Share

In the 1980s, Japanese firms inundated global markets with their products and focused their attention on increasing market share. Their apparent success at converting this market share to profits led other firms, including some in the United States, to also target market share as an objective. In concrete terms, this meant that investments that increased market share more were viewed more favorably than investments that increased them less. Proponents of this objective note that market share is observable and

German and Japanese corporate governance systems. He finds that the U.S. system provides better incentives for firms performing well and that it is easier for companies in the U.S. to return cash to the stockholders.

29 Macey, J.R., 1998, Measuring the Effectiveness of Different Corporate Governance Systems: Towards a more Scientific Approach, Journal of Applied Corporate Finance, v10(4), 16-25.

measurable like market price, and does not require any of the assumptions about efficient financial markets that are needed to justify the stock price maximization objective.

Underlying the market share maximization objective is the belief (often unstated) that higher market share will mean more pricing power and higher profits in the long term. If this is, in fact, true, maximizing market share is entirely consistent with our objective of maximizing firm value. If however, higher market share does not yield higher pricing power, and the increase in market share is accompanied by lower or even negative earnings, firms that concentrate on increasing market share can be worse off as a consequence. In fact, many of the same Japanese firms that were used by corporate strategists as their examples for why the focus on market share was a good one discovered the harsh downside of this focus in the 1990s.

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