A note on the market share-profitability relationship

This study extends earlier empirical work to determine whether there is a breakpoint or critical level in the frequently observed relationship between firm market share and profit rate. The analysis focuses on the banking industry and uses a sample of 10,690 firms located in 2165 different local geographic markets. Though the results apply directly only to banking, the similarity of findings on various other industrial organization topics in banking and the industrial sector suggests that the results of this study will be broadly relevant to the industrial sector.The main findings of the study are that (1) in general, firm market share is directly related to profitability; (2) the firm market share variable remains positive and significant when controlling for market concentration either with concentration as a separate independent variable or by conducting tests with subsamples of firms that are in markets with similar concentration ratios; and (3) while there is no sharp breakpoint in the market share-profitability relationship, the results indicate that profit rates of firms increase at a decreasing rate up to a share of about 55 percent. Since numerous studies have found that economies of scale are not particularly important in banking, it appears that the observed relationship is not due to greater efficiency with larger shares.     

Surviving the gales of creative destruction: the determinants of product turnover

Innovative industries are often characterized by rapid product turnover. Product longevity may be driven by both a product's position within a market as well as its position within a firm's larger product portfolio. However, we have little understanding of the relative importance of these factors in determining product turnover and how they interact as an industry evolves. Although researchers have invested substantial effort in analyzing firm survival and turnover, there are far fewer studies of the determinants of product survival and turnover. We use hazard rate models and count regression models to describe the behavior of firms and their products with a new and detailed database on the laser printer industry. We show, first, that competition and market structure variables have a large impact on both speeding product exit and delaying product entry. Second, there is some evidence that firms that have maintained a high market share for a number of years keep their products on the market longer than those with lower market share. Finally, firms with high innovative capacity tend to enter markets frequently, but withdraw their products at average rates. Firms with strong brands tend to introduce few products and withdraw their products slowly. With these findings, the paper links product entry and exit decisions to the broader literature on firm strategic and product management. Copyright © 2006 John Wiley & Sons, Ltd.     

The perils of high-growth markets

The conventional wisdom that businesses should invest in growth markets is based upon the assumptions that, in the early phase of a growth market, share gains are easier and worth more, the experience curve will lead to advantage, price pressure will be low, needed access to the technology will result and future entries will be deterred. These assumptions are examined and six major types of growth market risks are discussed. Finally, conditions which should be present if an early entry into a growth market is attempted are identified.     

Buyer animosity in business to business markets: Evidence from the French nuclear tests

Academic studies of buyer reaction to unpopular political events in the country of origin of products have focused on consumer markets. This paper aims to extend Klein, Ettenson and Morris' [Klein, J., Ettenson, R., & Morris, M. (1998). The animosity model of foreign product purchase: An empirical test in the People's Republic of China. Journal of Marketing, 62(1), 89-101] concept of consumer animosity to industrial markets by comparing industrial and consumer buyer reaction to the nuclear tests conducted by France in the Pacific in the mid-1990s. It investigates whether firms in the B2B sector were affected more than those in B2C markets, whether entry mode was significant, and examines the way in which firms in the two market sectors responded. The results show that buyer animosity was less pronounced in industrial than in consumer markets. They also show that entry mode can influence the experience of animosity.     

Competitive drivers and international plant configuration strategies: a product‐level test

We analyze the determinants of the decision to invest abroad and the choice of spatial configurations of overseas plants for 120 Japanese firms active in 36 well‐defined electronic product markets. We find that key competitive drivers at the firm and industry levels have a critical impact on the choice between alternative international plant configurations. Regional configurations focused on Asia are chosen by firms with weaker competitiveness for products with established manufacturing technologies. Plant configurations focused on the United States and the European Union are chosen by technology‐intensive firms facing competitive threats in foreign markets. Global configurations are chosen by firms with a strong competitive position in the Japanese and world market for their core product businesses and are more common in the case of strong oligopolistic rivalry between Japanese firms. Copyright © 2005 John Wiley & Sons, Ltd.     

An analysis of B2B ingredient co-branding relationships

The proliferation of co-branding in consumer markets has been given considerable attention in the literature, yet attention to the practice in business-to-business markets has been limited, despite the growing attention to the role of relationships in the B2B arena. In an examination of co-branding in the industrial sector, this paper discusses the use of ingredient co-branding and uses an econometric modeling approach to offer a rationale for why it occurs. The analysis provides insight into why downstream manufacturers participate in a relationship that strengthens the supplier's position in the market. We find that under the threat to the supplier of entry from a competitor whose costs are unobservable, co-branding relationships will be entered into resulting in a reduced probability of entry. This co-branding arrangement benefits both the incumbent supplier and the downstream manufacturer. The incumbent supplier benefits from the reduced probability of competitor entry, and the downstream manufacturer is rewarded with a lower price. Further, we find that the cost of the co-branded product is lower, due to a mitigation of double marginalization in a vertically-integrated solution. We examine co-branding relationships with and without advertising support and find that co-branding relationships with advertising support tend to be superior.     

The role of international design orientation and market intelligence in the export performance of US machine tool companies

This paper looks at the role of product design in the export performance of US manufacturing firms in the machine tool (MT) industry. Evidence from a survey of 173 MT companies points to stronger export results among firms that initiate the design process with respect to the needs of foreign buyers. In contrast, firms that enter foreign markets with products that were originally designed for domestic clients typically exhibit weaker export sales. Firms in the latter category spend less on market intelligence than their more internationally-oriented counterparts. For both groups of firms, however, a common finding is that recent interest in export expansion has been driven by rising import penetration (loss of domestic market share). The paper concludes with a brief discussion of the implications of the empirical results for future research on export marketing.     

Profitability and market share: A reflection on the functional relationship

The paper analyzes the functional relationship between profitability and market share for type of businesses in the PIMS data base. Although a linear relationship has been imposed in other studies, our result shows that empirically it seems a poor representation of the data. In addition, three observations seem to be most evident. First, small-share businesses were not per se less successful than larger business units. In the service market and the market for raw or semi-finished materials small-share businesses were just as profitable or even more profitable than larger business units. Second, some businesses were ‘stuck in the middle’, which was most evident in the service market but also in the retail and wholesale markets. Third, very large-share businesses were often less profitable. A critical market share was identified as between 65 and 70 percent. Beyond that level the ROI decreased.     

On commodity taxation in vertically differentiated markets

We examine the impact of commodity taxation on vertically differentiated product markets when entry is allowed. We show that an ad valorem tax may have a dramatic effect on market structure by inducing the entry of a large number of firms in what was previously a natural monopoly. The producers of high quality products reduce market share after an increase in their unit production cost, leaving more room for lower quality products. While within a given market structure aggregate quality decreases monotonically with the tax rate, quality jumps upwards at tax rates that cause a change in market structure.     

The Impact of the Entry of Biosimilars: Evidence from Europe

Biologics represent a substantial and growing share of the U.S. drug market. Traditional “small molecule” generics quickly erode the price and share of the branded product upon entry, however only a few biosimilars have been approved in the US since 2015, thereby largely preserving biologics from competition. We analyze European markets, which have had biosimilar competition since 2006. Using our own survey, we analyze how market features and public policies predict biosimilar entry, price, and penetration, finding significant heterogeneity across countries and products. Effective buyer institutions are associated with increased biosimilar penetration. Our estimates can inform ongoing policy discussions.     

Market,organizational and managerial correlates of economic performance in the U.K. Electrical Engineering Industry

Hypotheses relating to market, organizational and managerial determinants of profitability and growth are developed and tested using data collected by structured interviews in 45 randomly selected companies in the electrical engineering industry. Multiple regression analysis suggests that market share and barriers to entry are the principal determinants of profit margins, but that tightness of control of working capital and aggressive management style also have an important influence. Centralization of decision-taking among smaller companies, too, was associated with greater profitability, whilst more extensive budgetary control and planning of acquisitions or diversification were both negatively correlated with the latter. Profitability was the single most important predictor of the rate of company growth of sales but constraints from organized labor, from sources of finance, and conservative management styles, the rate of product change, R&D intensity, and decentralization all entered significantly.     

Reducing Structural Dominance and Entry Barriers in Russian Industry

While many industrial firms in Russiahave undergone ownership change, relatively few havecompetitively restructured. This paper, using survey and other data, suggests much of Russian industry is immune from robust competition due to seller/buyer concentration in select markets, a high degree of vertical integration, and geographic segmentation. Regulatory constraints protect incumbent firms from entrants, both domestic and foreign. The absence of new businesses is striking. Restructuringanti-competitive structures and reducing barriers to entry should be key items in Russia'spost-privatization program, and the paper sketches out a reform agenda. The nascent rules-based framework for competition policy should be strengthened to reduce discretion, increase transparency and enhance accountability.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

Determinants of Entry and Profits in Local Banking Markets

This paper estimates a two equation model of market entry and profits, utilizing data on entry into over 2,000 banking markets over the period 1977--88. The entry equations measure whether entry depends on incumbent firms' profits and other market attributes that reflect the long-term attractiveness of markets for entry. Market profits, assumed to follow a partial-adjustment process, are affected by entry directly and indirectly through market structure. The model also corrects for an unavoidable source of error in market-level profits for the banking industry. The estimates suggest that a competitive process is at work in banking markets that limits the ability of supra-normal profits to persist. Entry is more likely in markets that have high profits, consistent with previous empirical results that market structure adjusts more quickly when profits are supra-normal. Population and population growth are also strong determinants of entry. Entry, in turn, reduces profits in rural markets.     

Institutional environment and complementary assets: Business strategy in China’s 3G development

This paper develops a framework to assess the influences of institutions and markets on the business strategy of firms in transition economies. We argue that regulatory systems and markets in transition economies are interdependent. Their changing conditions will interact and influence the types of partnerships in new market entry. Using a case study approach based on historical data and interviews, we show how China’s telecommunications industry evolved between 1987 and 2007, and led to the development of a 3G (third generation mobile telecommunications) standard and networks. Our analysis based on the framework explains how regulative elements and market conditions shape the strategic choices of partnerships between domestic and foreign firms when entering China’s 3G market.     

Can first-mover and early-mover advantages be sustained in an industry with low barriers to entry/imitation?

This study examines whether first-mover and early-mover advantages can be sustained in an industry where the barriers to entry are generally low and new product innovations can be easily imitated—namely, the money market mutual fund industry. Using a simultaneous-equation supply-and-demand model of panel data from a variety of money market fund product categories, the study finds that first-movers and early-movers enjoy both a highly sustainable pricing advantage and a moderately sustainable market share advantage. These counterintuitive results are interpreted in terms of the structural characteristics of demand in the industry. Implications of these results for the ongoing debate between the ‘sustainability’ and ‘hypercompetition’ perspectives are discussed. © 1998 John Wiley & Sons, Ltd.     

中国大飞机产业化的市场约束与进入条件

中国大飞机项目成功的关键在于实现产业化,而能否产业化又取决于市场基础。由于民用大飞机产业属于买方约束条件十分严格的市场,中国大飞机项目产业化的基本立足点应该是储备进入市场的条件。目前中国国内民用航空市场的结构状况不利于国产大飞机进入市场,应当对航空公司作进一步重组的市场制度安排。为了能使中国的大飞机在实现规模化生产之前就能获得“买家”的订单,有必要在航空运输市场重组现有的航空公司,减少航空公司的数量,鼓励更有实力的航空公司的涌现。     

Big losses in ecosystem niches: how core firm decisions drive complementary product shakeouts

This study examines shakeouts in the context of business ecosystems. Market turbulence generated by core firm decisions in competing differentiated ecosystems can generate financial losses and exit for complementary niche market firms. I develop hypotheses predicting which niche markets will suffer larger losses and be more susceptible to shakeouts, and how core firm decisions will drive complementor performance and survival. I then apply these hypotheses to brand‐based differentiated ecosystems in the automotive industry, where networks of suppliers, customers, and complementors surround car manufacturers. More specifically, I study the complementary niche market of automotive leasing, where manufacturers sway leasing markets through product change, entry, and subsidization. To test the hypotheses, I use a proprietary dataset of 200,000 individual car leases between 1997–2002 to identify how manufacturer product design and niche market entry drive complementor losses and exit. These data allow a unique opportunity to understand how the strategic choices of core firms can have substantial and often devastating effects on niche markets in their ecosystem. Further, the results suggest how the dynamic capabilities to adapt to core firm behavior might improve performance for certain niche market complementors. Copyright © 2008 John Wiley & Sons, Ltd.     

The Form of Relationship between Firm‐Level Product Innovativeness and New Product Performance in Developed and Emerging Markets

This study compares the new product performance outcomes of firm‐level product innovativeness across a developed and emerging market context. In so doing, a model is constructed in which the relationship between firm‐level product innovativeness and new product performance is anticipated to be curvilinear, and in which the nature of this relationship is argued to be dependent on organizational and environmental factors. The model is tested using primary data obtained from chief executive officers and finance managers in 319 firms operating in the United Kingdom, an advanced Western market, and 221 firms from Ghana, an emerging Sub‐Saharan African market. The model is assessed using a structural equation model multigroup analysis approach with LISREL 8.5. In the United Kingdom and Ghana, the basic form of the relationship between firm‐level product innovativeness and business success is inverted U‐shaped, but the strength and/or form of this relationship changes under differing levels of market orientation, access to financial resources, and environmental dynamism. While commonalities are identified across the two countries (market orientation helps firms leverage their product innovativeness), differences are also observed across the samples. In Ghana, access to financial resources enhances the relationship between product innovativeness and new product performance, unlike in the United Kingdom where no moderation is observed. Furthermore, while U.K. firms leverage product innovativeness to their advantage in more dynamic environments, Ghanaian firms do not benefit in this way: here, high levels of innovation activity are less useful when markets are more dynamic. If the study's findings generalize, there are a number of implications for managers of both emerging and developed market businesses. First, managers in both developed and developing market firms should focus on determining and managing an optimal balance of novel and intensive product innovativeness within the context of their unique institutional environments. Second, for emerging market firms, a market orientation capability helps businesses leverage local market intelligence, enabling them to compete with multinational giants flocking to emerging markets, but typical developed market learning approaches may be insufficient for multinational firms when seeking to compete in emerging markets. Third, for emerging market firms, access to finances helps deliver product innovation success (although this is not the case for developed market firms, possibly due to strong financial institutions). Finally, unlike developed market firms, burdened by institutional voids at home, emerging market firms appear to be less capable of competing on an innovation front in more dynamic market conditions. Accordingly, policymakers in emerging markets should consider identifying ways to help businesses raise market orientation levels, and seek to create conditions that enhance access to financial capital (e.g., direct financing, matching grants, tax rebates, or rewarding firms that innovate creatively and intensely). Likewise, since environmental dynamism is likely to be a growing issue for emerging markets, efforts to help firms become more adept at keeping up with more agile developed market counterparts are needed.