Tema 19

An Analysis of the Market Share-Profitability Relationship
Author(s): David M. Szymanski, Sundar G. Bharadwaj and P. Rajan Varadarajan

Source: Journal of Marketing, Vol. 57, No. 3 (Jul., 1993), pp. 1-18
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/1251851 .
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All use subject to JSTOR Terms and Conditions
David M. Szymanski, Sundar G. Bharadwaj and P. Rajan Varadarajan
An
of
the
Market
ShareProfitability
Relationship
Analysis
A number of researchers in the marketing, management, and economics disciplines have expressed reservations regarding the validity and generalizability of the reported relationships between market share
and profitability. Against this backdrop, the authors performed a meta-analysis on 276 market shareprofitability findings from forty-eight studies to address whether market share and profitability are positively related and to examine the factors that moderate the magnitude of that relationship. The authors
found that, on average, market share has a positive effect on business profitability. However, the magnitude of the market share-profitability relationship is moderated by model specification errors, sample
characteristics, and measurement characteristics. The relationship is moderated the most (and, on average, the relationship could be artifactual) when firm-specific intangible factors are specified in the profit
model or the estimate of the market share-profitability relationship is based on an analysis of non-PIMS
businesses. The authors discuss the implications of these results for the evaluation and utilization of
market share information by managers in reference to strategies that focus on building market share as
a means for increasing profits.
SEVERAL
studies published in the Journal of
Marketing (e.g., Cook 1985; Jacobson 1988; Jacobson and Aaker 1985) and other academic journals
have questioned the validity and generalizability of the
market share-profitability relationship. The debate regarding the underlying relationship has been fueled by
inconsistencies in the magnitude of the market shareprofitability relationship, the statistical significance of
this relationship, and the direction of the relationship
reported across studies and across models within the
same study. Furthermore, the explanations offered for
these diverse results also vary. Some researchers argue that the different estimates of the market share
effect are the result of differences in how market share
DavidM. Szymanski
is an AssociateProfessor
in the Department
of
Administration
andGraduate
Schoolof
Marketing,
Collegeof Business
TexasA &MUniversity.
Sundar
G.Bharadwaj
is anAssistant
Business,
intheDepartment
Professor
of Marketing,
Atlanta.
P.
Emory
University,
is Foley'sProfessor
of Retailing
andMarketing
inthe
Rajan
Varadarajan
of Marketing,
Administration
andGradDepartment
Collegeof Business
uateSchoolof Business,
TexasA &MUniversity,
CollegeStationTX.
Theauthorsextendtheirsincereappreciation
to ThomasC. Kinnear,
RolandRust,andthe anonymous
JMreviewers
fortheirhelpfulcommentson previous
versionsof the article.
Journal of Marketing
Vol. 57 (July 1993), 1-18
and profitability are measured (e.g., measured at either

the firm level or business-unit level in the literature).
While Farris, Parry, and Webster (1989) suggest
that measuring profit as return on sales (ROS), rather
than return on investment (ROI), understates profits
and the magnitude of the market share-profitability relationship, others are of the opinion that the differences in effects are the result of sampling error. For
example, Anderson and Paine (1978) and Ramanujam
and Venkatraman (1984) contend that findings based
on the PIMS (Profit Impact of Market Strategy) sample of businesses are biased in ways that could affect
the magnitude of derived relationships. Still others
contend that the differences are the result of model
specification errors, e.g., not specifying firm-specific
intangibles, such as management skill and luck, in the
profit model (Jacobson 1988, 1990).
The inconsistent research findings and differing
explanations offered for these findings suggest that
managers and researchers alike could benefit from the
improved understanding that could be gained from a
meta-analysis of the market share-profitability findings. For instance, a meta-analysis performed on the
reported findings can provide managers with an esti-
An Analysisof the MarketShare-Profitability

/1
Relationship

mate of the centraltendencyof the marketshareeffect

that is easily accessible and can enhance understanding of the directionand magnitudeof the profit impact
of marketshare. Such understandingcould ensure that
scarce resourcesare being put to their most productive
use. Furthermore,a meta-analysis performedon the
marketshare-profitabilityfindings could providemanagers and researcherswith insights into how modeling
decisions, sample characteristics, and measurement
characteristicsmodify the size of the market shareprofitabilityrelationship. These insights could be of
value in reducingspecificationerrorsand samplingerrors in future studies and facilitating the evaluation
and use of marketshare informationby managers.
Therefore, the purpose of this study is to synthesize and scrutinize the findings on the market shareprofitabilityrelationship. Specifically, it will be conducted in the spirit of an earlier, broader-basedmetaanalysis by Capon, Farley, and Hoenig (1990) that
focused on the factors that moderatethe relationship
between financial performanceand industry concentration, advertisingto sales ratio, R&D to sales ratio,
growth rate, and capital investment to size ratio, respectively. Our more focused and more current review of the marketshare-profitabilityfindings permits
us to investigate 63% more factors from many more
market share-profitabilitymodels (276 versus 220
models) than were examined and available at the time
Capon, Farley, and Hoenig (1990) concludedtheir review in 1987. For example, the moderatingroles of
firm-specific intangible assets, price, and product/
service quality on the estimate of the market share
elasticity with respect to profit were not examined by
Capon, Farley, and Hoenig (1990). Yet, looking at
the moderatingeffects of these factorson the estimate
of the market share-profitabilityrelationship could
produce additionaland importantinsights.
We begin by discussing the samplingframefor the
study, which is followed by a discussion of the potential moderatorsof the magnitudeof the estimated
market share-profitabilityrelationship. We then present the empiricalfindings and close by discussing the
implicationsof the findings, study limitations, and directions for future research.
economics journals covering the period from January

1970 to December 1991 were searched manually for
studies on the marketshare-profitabilityrelationship;'
studies
(3) referencesfromthe marketshare-profitability
were uncoveredthroughsteps 1 and 2 above, as well
as the references provided by Capon, Farley, and
Hoenig (1990) were reviewed for additionalleads on
studiesrelevantto this review;and (4) authorsof known
working papers that examined the marketshare-profitabilityrelationshipwere contacted,and copies of their
paperswere obtained. The searchfor studies was concluded when it becameclearthatincreasedeffortswere
not yielding additionalrelevant studies.
Studies whose findings were ultimately included
in this review were furtherrestrictedto those thatused
regression to estimate the effect of market share on
profitability. In the case of the market share-profitabilityliterature,the regressioncoefficientwas the most
common estimate of association reported in the literaturethat also providedthe most useful information.
Specifically, the regressioncoefficient providesan estimate of the magnitudeof the effect after accounting
for the effect of other includedvariables,and the market share coefficient can be interpretedas an elasticity, since both marketshareand profitabilityare most
frequently expressed as percentages. The reported
market share elasticity serves as the dependentvariable in the meta-analysis(see also Capon, Farley, and
Hoenig 1990).
In all, 76 empirical studies on the market shareprofitabilityrelationshipwere uncovered, and 48 of
these studies reporteda total of 276 marketshareelasticity estimates. These studies consisted of nine studies from marketingjournals, ten studies from management journals, fifteen studies from economics
journals, four studies from cross-disciplinaryjournals,
two conference proceedings, one study reportedin a
book, five workingpapers, and two dissertations.The
elasticity estimates and information on the model,
sample, and measurementcharacteristicsassociated
with each of the estimates were coded into the data
base, and coding quality was checked by having two
independentinvestigatorscode 15% of the observations. No errorswere identifiedin the coding. A complete list of the studies can be found in Table 1.
Sampling Frame
Only studies thatexaminedthe effects of marketshare
on profitabilitywere includedin the meta-analysis.The
following steps were taken to identify these studies:
(1) four bibliographicdata bases (ABI Inform, DissertationAbstracts,NOTIS, and WILS) were searched
using different key words that referredto profit and
market share (e.g., performance, competitive position, market share, profit(s), and profitability); (2)
nineteen marketing,management/businesspolicy, and
'The following journals were searched manually for relevant studies

on the market share-profitability relationship: (1) marketing-European Journal of Marketing, Journal of the Academy of Marketing Science, Journal of Marketing, Journal of Marketing Research, and
Journal of Retailing; (2) management/business policy-Academy of
Management Journal, Administrative Science Quarterly, Journal of
International Business Studies, Management Science, and Strategic
Management Journal; and (3) economics-American Economic Review, Bell Journal of Economics, Economica, Journal of Industrial
Economics, Journal of Law and Economics, Journal of Political
Economy, Quarterly Journal of Economics, Review of Economics and
Statistics, and Southern Economic Journal.
2 / Journalof Marketing,
July1993

TABLE 1
Descriptive Information on the Market Share Elasticities by Study'
Number of
Mean
Statistically
Number of
Mean of t:he
Sample
Significant
Size for the
Elasticities
Elasticities
Reportecd
ElasticitiE
es
Author(si)/Year
Study
Reported
Reported
Aaker and Jacobsor i (1987)
4
3
.075
2,727
Allen and Haig (198 9)
Anderson and Zeith aml (1984)
Anterasian and Philllips (1988)
Bass (1974)
Bass, Cattin, and W ittink (1978)
Bloch (1974)
Bothwell, Cooley, arid Hall (1989)
Buzzell and Gale (1S)86)
Buzzell and Gale (1S)87)
Clark (1984)
Craig, Douglas, and Reddy (1987)
Cronin (1985)
Cronin and Page (1'388)
Davis, Robinson, an d Pearce (1991)
Douglas and Craig (1983)
Farris, Parry, and Wfebster (1989)
Farris and Reibstein (1979)
Gale (1972)
Gale and Branch (1'382)
Gale and Buzzell (1l)87)
Grinyer, McKiernan, and YasaiArdekani (1988)
Hambrick (1983)
Hambrick and Schecter (1983)
Hambrick, MacMillan, and Day (1982)
Hansen and Wernerfelt (1989)
Hergert (1984)
Hula (1989)
Hurdle (1974)
175
411
6
3
4
2
.367
.130
343
42.5
8
16
3
8
.159
.119
63
.010
14
2
1
19
4
2
4
1
3
3
2
8
2
1
19
4
1
4
1
3
2
2
.085
.135
.462
.310
.730
.260
.313
.170
.203
.320
.465
65
156
1,217
2,314
4,623
382
80
101
70
255
2,124
227
.292
1,697
.285
1,483
.495
954
.343
45
1,452
16
14
.040
.260
.200
2
3
2
2
4
12
4
4
4
4
16
6
1
4
15
5
1
4
15
1,100
60
5,400
157
b
Imel and Helmberger (1971)
Jacobson (1988a)
Jacobson (1988b)
Jacobson and Aaker (1985)
Jacobson and Aaker (1987)
Lecraw (1983)
Lecraw (1984)
Markell,Strickland, and Neeley (1988)
Marshall and Buzzell (1990)
Moutinho (1989)
99
10,053
9,483
3,658
1,798
153
200
303
2,494
28
5
6
7
3
3
3
2
-.010
.090
.253
.151
.180
.030
.090
.255
.266
.100
.170
.065
.055
.270
.200
.217
.170
.053
.270
.250
.152
.343
.310
.152
I
Range of the
Reported
Elasticities
.06 to .10
.27 to .55
.11 to .17
.09 to .24
.01 to .67
n.a.
.07 to
.10 to
n.a.
.15 to
.41 to
.02 to
.21 to
n.a.
.09 to
.13 to
.46 to
.28 to
.27 to
.49 to
.04 to
.37
.43
.47
.30
.30
.50
.72
.01 to
.24 to
-.03 to
-.05 to
.08 to
.11 to
-.12 to
.10
.28
.48
.03
.10
.44
.40
.10
.17
.53
.84
.35
.54
-.07 to .54
.03 to .03
n.a.
.03 to .48
.03 to .74
-.02 to .14
n.a.
.06 to
-.04 to
.27 to
.17 to
-.16 to
.07
.12
.30
.23
.48
180
6
6
Parry (1988)
Porter (1979)
38
1
0
n.a.
Ravenscraft (1983)
6
3,186
6
-.11 to .18
Rumelt and Wensley (1981)
976
1
1
n.a.
363
Schul, Davis, and Babakus (1991)
1
1
n.a.
Scott and Pascoe (1986)
9
2,450
9
.11 to .17
172
15
Shepard (1972)
15
-.04 to .52
Srinivasan (1986)
4
2,609
1
.30 to .32
Venkatraman and Prescott (1990)
305
16
16
.01 to .53
aAn additional twenty-eight empirical studies that examined the market share-profitability relationship were uncovered but not
included in the review, because they failed to report elasticities and/or the findings could not be converted to elasticities. The
twenty-eight studies reported (1) descriptive statistics (Buzzell, Gale, and Sultan 1975; Schoeffler, Buzzell, and Heany 1979; Gale
and Branch 1981; Cvar 1982; Woo and Cooper 1982; Heany and Weiss 1983; DeSouza 1985; Gale and Kravens 1985); (2) correlation
matrices or factor analysis, discriminant or other (nonregression) multivariate findings (Buzzell and Farris 1977; Farrisand Buzzell
1979; Buzzell and Weirsema 1981; Woo 1981; Yip 1982; Galbraithand Stiles 1983; Phillips, Chang, and Buzzell 1983; Thietart and
Vivas 1984; Zeithaml and Fry 1984; Montgomery 1985; Ramanujam,Venkatraman,and Camillus 1986; Horwitchand Thietart 1987;
Cowley 1988; Venkatramanand Prescott 1988); (3) path estimates (Prescott, Kohli, and Venkatraman 1984, 1986; Woo 1987; Venkatraman and Prescott 1990b); or (4) market measures such as Tobin's q to operationalize performance (Smirlock, Marshall, and
Gilligan 1984). The complete references for the studies reviewed for the meta-analysis can be obtained by writing to the first author.
bSample size was not reported in the respective study.

Relationship/ 3

Framework for the Investigation

A taxonomy was developed to organize the large
numberof factorsthat describedthe 276 profitmodels.
Consistent with the literature,the potential moderating factors were grouped into three categories: (1)
omissionof relevant-explanatory
variables(i.e., modelspecification errors), (2) sample characteristics, and
(3) measurementcharacteristics.The potential moderating effects of these factors on the estimate of the
marketshare-profitability
relationshipis framedin terms
of the effects of market structure,competitive strategy, and firm-specific resource variables on business
performance(see Figure 1).
The model in Figure 1 depicts marketshare as an
antecedentof profitability,and marketshareand profitability as impacted simultaneouslyby marketstructure, competitive strategy, and firm-specific resource
variables. Market share as an antecedent of profit-
ability is consistent with the profitabilitymodels proposed in numerousempiricalstudies(e.g., Buzzell and

Gale 1986; Domowitz, Hubbard,and Petersen 1986;
Farris and Reibstein 1979; Gale and Branch 1982;
Martin 1988), and this relationshipis groundedin (1)
efficiency theory-i.e., the cost efficiencies for firms
with high marketsharesleadingto greaterprofitability
(Demsetz 1973); (2) marketpower theory-i.e., firms
with high market shares exercising market power to
(a) set prices (versus being a price taker), (b) obtain
inputsat lower costs, and (c) extractconcessions from
channel members (Schroeter 1988; Staten, Umbeck,
and Dunkelberg 1988); and (3) product quality assessment theory-i.e., buyers use market share as a
signal for brandquality and a brand'swidespreadacceptance as an indicator of superior quality (Smallwood and Conlisk 1979).
There also exist empirical precedence and theoreticalrationalefor the predictorvariablerelationships
FIGURE 1
A Conceptual Framework for the Meta-Analysis
Omission of RelevantExplanatory Variables

--
I------____________
--
I
/s
iv
IP.
I :td_ :1,,r
i i -I v rs
ruul?r?rr?r
i lIf
* Industryconcentration
*sMarket
cgrowth
rateo
rate
growth
->Market
`I
*
Profitabilitymeasure
* Marketshare measure
? Timeframeof measure
I?
I
I
.....
* Productline breadth
? Productcustomization
? Product/servicequality
? Productprice
? Advertisingexpenditures
? Sales force expenditures
? Verticalintegration
Research&development
expenditures
I
I
I
I
, BI
A
I
I
I
I
I
__^3lI P **T[,,
I
_^^i^ffSj^
fm
I -- IIILIaglUIe
I
actors
* Industrial
or consumer
businesses
* PIMSor non-PIMS
businesses
4 / Journalof Marketing,July 1993

with marketshare and profitabilityrepresentedin Figure 1. For example, (1) the industrystructure-performance relationshiphas been examined extensively in
the industrialorganizationeconomics literature(Bain
1951, 1956; Scherer 1980; Weiss 1971); (2) the competitive strategy-performance
relationshiphas been the
focus of extensive research in the marketing (e.g.,
Buzzell and Wiersema 1981b) and business policy literatures(e.g., Woo 1987); (3) both industrystructure
and competitive strategyvariablesare presentedas explanators of business performancein numerous empirical studies based on the PIMS database(see Buzzell and Gale 1987) as well as those spawned by
Porter's (1980) work on the structuralanalysis of industries and their implications for competitive strategy, and (4) the linkage between firm-specific resources and marketshareand profitabilitycapturesthe
view that a firm's intangible resources are a determinant of its competitive position and business performance (e.g., Boulding and Staelin 1990; Jacobson
and Aaker 1985; Rumelt and Wensley 1981). Additional rationales for the variable relationships specified in Figure 1 are discussed next in the context of
omitted variable bias and the moderating effects of
sample and measurementcharacteristicson the market
share elasticity.
Potential Moderating Effects of

the Omission of RelevantExplanatoryVariables
The omission of variablesthat are relatedtheoretically
and statistically to both market share and profit can
contributeto the variance in market share elasticities
found across profit models. Specifically, when market
structure,competitive strategy, and firm-specific resource variables that are related both to marketshare
and profitability are omitted from the profit model,
the estimated marketshare elasticity would be biased
(i.e., differ from the estimate based on a correctly
specified model) by a factor equal to the product of
the regression coefficient for the omitted variable on
profitability and the correlation coefficient for the
omitted variable with market share (Kmenta 1986).
The direction of the estimation bias is determinedby
multiplyingthe sign of the impact of the omitted variable on profitabilityby the sign of the correlationbetween the omitted variable and market share.
Postulating that omission of a relevant-explanatory variablefrom the profit model could significantly
bias the estimate of the market share coefficient requires that a further rationale be provided for suggesting that the omitted variable is related to both
market share and profitability. In the discussion that
follows, therefore,the authors'goals center on (1) establishinga theoreticallink between the respective ex-
planatoryvariable and market share and profits2and

(2) developing directionalhypotheses whenever possible (in some instances, however, the sign of the relationshipis equivocal). A summaryof the hypotheses
can be found in Table 2. In addition, the variables
examined in the review are confined to factors that
could be coded in at least 20 models to ensure that
the meta-analyticfindings would be relatively stable.
Relationship Between Market Structure
Variables and Market Share/Profit
Industry concentration. By definition, the combined
marketshare of all competing firms (=100%) will be

dispersedover fewer firms in a more concentratedindustrythan in a less concentratedindustry.Therefore,
a positiverelationshipwouldexist betweenmarketshare
and industryconcentration.Meanwhile, the relationship between marketstructureand profit performance
can be addressedin referenceto the structure-conductperformance(SCP) paradigm(Bain 1951, 1956), which
posits that industrystructurevariables (e.g., concentration) influence the firm's strategy (conduct) to
eventually affect its performance. Embedded in the
SCP perspective is the view that the firm attemptsto
control the outputin the marketby (1) colluding with
other firms to drive up prices and profit or (2) exercising monopoly power. Therefore, more concentrated industries are expected to be more profitable
(cf., Domowitz, Hubbard,and Petersen 1986; Martin
1983; Weiss 1971).
Market growth rate. High-growth markets are
generallyviewed as relativelymore attractiveby businesses because of the high margins and growing demand that characterizethem. Consequently, it would
be expected that most firms would show a propensity
to exit low- or moderate-growth
marketsandenterhighmarkets.
growth
Therefore,everythingelse beingequal,
the combined market share of all competing firms
(=100%) in relatively high-growth markets will be
dispersedover a largernumberof firms in such a way
that market growth rate and market share would be
inversely related.
In addition, markets experiencing high rates of
growth can be characterizedby high marketingcosts,
rising productivity,increasedinvestmentto keep pace
with growth, low or negative cash flow, and high levels of buyer spending. The net effect of these cost
reductionsand increasesand rising profit marginsand
sales seems to be increasedprofits (Buzzell and Gale
1987); in turn, profitability and market growth rate
should be positively related.
2The reader is referred to Buzzell and Gale (1987, pp. 257-72) for
detailed definitions of how studies based on the PIMS sample of businesses operationalized the respective relevant-explanatory variables.
AnAnalysisof the MarketShare-Profitability

Relationship
/ 5

Hypotheses
TABLE 2
and Summary of the Proposed Relationships for the Omitted Relevant-Explanatory
Variables and (1) Market Share and (2) Profitability
Omitted
Predictor Variable
Market Structure Variables:
Industry Concentration
Market Growth Rate
Competitive Strategy Variables:
Product Line Breadth
Product Customization
Product/Service Quality
Product Price
Advertising Expenditures
Sales Force Expenditures
Vertical Integration
R&DExpenditures
Firm-Specific Resources:
Intangible Factors
Hypothesized Biasing
Effect on the
Market Share Elasticity
Proposed Relationship
With Market Share
Proposed Relationship
With Profitability
+
-
+
+
+
+/+/+/+
+
+
+
+/+/+/+/+/+/+
+
+/+/+/+/+/+/
+
+
Relationship Between Competitive Strategy

Variables and Market Share/Profit
Product line breadth. It seems reasonable to expect
that the net effect of offering a broadline of products
on market share would be positive. A broad product
line can lower the risk of marketshare erosion when
consumers engage in variety-seeking behavior (i.e.,
variety-seeking could occur within the firm's offerings) and/or when consumersare deal-prone(i.e., by
ensuring that one of the firm's offerings is on deal).
A broad productline can also minimize marketshare
erosion by acting as an entry barrier,i.e., closing alternative product forms, sizes, etc., as entry points
and preemptingcompetitionby occupying more shelfspace (Rao and Rutenberg 1979). Finally, a broad
productline may be preferredby buyers whose needs
change with time. For example, purchase risks and
transactioncosts can be lower for buyers who are familiar with procurementprocedures and the general
characteristicsof the firm and its offerings.
Meanwhile, the impact of productline breadthon
the level of business profits appearsto be equivocal.
The effect can be positive when the differentiation
benefits of a broad line enable a business to charge
higher prices to obtain higher margins, and the modularizationbenefits of producinga broadline of goods
could allow the use of common parts across products
in the line to reduce costs (Hayes, Wheelwright, and
Clark 1988). However, the effect of a broaderline of
goods on profits can be negative because of the increased costs that could result from more complex operations (Johnson and Kaplan 1987; Lubben 1988),
increased material handling and inventories (Kekre
1987; Lubben1988; McClainand Thomas 1980), more
diverseprocess flows (Banker,Datar,and Kekre 1988;
Karmarkar 1987), more monitoring of operations

(Miller and Vollman 1985), and more resources required for scheduling the shorter production runs associated with producing a broader line of goods (e.g.,
Abegglen and Stalk 1985; Johnson and Kaplan 1987).
Product customization. A priori, it is difficult to
predict whether producing customized goods (versus
standardized goods) will lead to more or fewer sales
for the business. On one hand, customized products
could satisfy the heterogeneous needs of buyers better
than standardized goods, thereby leading to more sales.
On the other hand, customized products can be more
expensive to produce because they eschew economies
in production, and these higher costs may lead to higher
prices, fewer sales, and lower market share.
The effect of producing customized products on
profits is also equivocal. For example, product differentiation taken to the extreme achieves the objective of moving away from price competition and aids
in commanding a price premium (see Porter 1985).
However, customizing products can mean higher production costs, as noted above. Therefore, it is difficult
to predict beforehand whether the premium prices that
firms often charge for customized products more than
offset, just offset, or fail to offset the higher costs of
manufacturing customized goods.3
3The temporal stability of the hypothesized relationship between
product customization and market share and product customization
and profitability, however, is another issue. It has been suggested that
mass-customization is no longer an oxymoron and that in the foreseeable future mass-customization that offers to customers the cost
benefits of mass production and the differentiation benefits of customization could become a competitive imperative (Davis 1987). Furthermore, with advances in flexible manufacturing systems, a firm's
quest to offer more customized products does not have to come at the
cost of eschewing economies in manufacturing.Case histories of firms
achieving a competitive advantage in the marketplace through mass-
6 / Journalof Marketing,July 1993

Product/service quality. Although several studies
have uncovered a positive relationshipbetween product quality and marketshare (e.g., Buzzell and Wiersema 198la, 198lb), differences in defining quality
as conformanceversus superiorperformancecould influence the relationship between quality and market
share (Garvin 1988). For example, superior quality
defined as greater conformance to product specifications need not be accompaniedby higher prices and
the reducedsales often associatedwith charginghigher
prices. On the other hand, superiorquality defined as
superiorperformanceand moreexpensivefeaturescould
increase costs that lead to higher prices and the reduced sales that often accompanyhigher prices. Also,
a high-qualityimage that requiresa perceptionof exclusivity would be incompatiblewith high marketshare
(Porter 1980).
The net effect of quality on profit is also difficult
to predict. On one hand, superior quality could require the use of more expensive components, less
standardizedprocedures,greateremphasis on product
innovationto sustaina high-qualityposition, and higher
promotionalexpendituresto convey a position of superiorqualityto customers(Farrisand Reibstein 1979;
Phillips, Chang, and Buzzell 1983). When these increased costs cannot be passed on to customers, profit
margins would be squeezed, and quality and profit
would be inversely related. Conversely, a strategy of
superior quality could lower customer sensitivity to
price so that higher prices could be charged without
a proportionatedecline in sales (Buzzell and Gale
1987). Superiorproductqualitycould also lower manufacturingcosts, e.g., reducerework,and servicecosts,
e.g., warrantycosts (see Garvin 1988), to increase
margins, as well as protect the business from forces
that reduce margins, e.g., bargainingpower of buyers.
Productprice. Economic theory suggests that for
rational and informed consumers, price and quantity
sold (which can proxy for marketshare) would be inversely related. For example, penetrationpricing and
experiencecurve pricing strategiesare groundedin the
presumed inverse relationship between price and
quantity demanded. Yet, positive price-quantityrelationshipscan exist (giffen goods) when higherprices
are proxies for higher quality or confer greaterprestige onto ownersof the good (MichaelandBecker 1973;
Monroe and Krishnan1984). In addition, high market
share businesses could charge higher prices without
losing sales when high market share endows a business with greatermarketpower (Montgomery 1985).
These equivocal relationshipsbetween price and market share are reflected in the mixed empiricalfindings
customization lend further credence to this viewpoint (e.g., Glazer
1991).
on this relationship.A numberof PIMS-basedstudies

have arrivedat either an insignificantor a significant
and positiveassociationbetweenpriceand marketshare
(e.g., Buzzell and Wiersema 1981a; Jacobson and
Aaker 1985; Phillips, Chang, and Buzzell 1983; Robinson and Forell 1985), whereas Gale and Branch
(1982) found lower costs ratherthan higherprices account for most of the greaterprofitabilityof high market share businesses. This latter finding casts doubt
over the validity of the argumentsin supportof the
marketpower theory and furtherclouds the issue as
to whetherprice and marketshare can be expected to
be positively or negatively related.
Whetherthe effect of price on profit is positive or
negative is also difficult to predicta priori. It depends
on the form of the demandcurve and where along the
curve businesses are operating. For example, price
would not be accompaniedby reducedsales when the
demand curve is vertical (true necessities); marginal
revenues are negative when businesses are operating
in the inelastic portion of their demandcurves (Henderson and Quandt 1980); and marginalrevenues are
positive and the increases in total revenues can more
than offset the sales lost from charginghigher prices
when businesses are operatingin the elastic portionof
their demand curves.
Advertising
and
sales
force
expenditures.
Expenditures on advertising (Assmus, Farley, and

Lehmann 1984; Tellis 1988) and sales staffs (Gatignon and Hanssens 1987) are shown to affect sales and
market share positively, especially when the quality
of marketingeffortis held constant.Economiesof scale
associatedwith largeramountsof marketingeffort and
economies of scope resultingfrom sharingmarketing
resourceswith other businesses in the firm's portfolio
may also have a favorable effect on the positive relationship between marketing communication effort
and market share.
However, the effect of marketingexpenditureson
profit could be positive or negative. All else being
equal, loweringmarketingexpendituresperunitof good
sold (1) lowers the per-unit costs of selling and (2)
increasesprofitmarginsto ultimatelyincreaseROI and
ROS. But marketingexpendituresand profits would
not exhibita relationshipwhen the increasedsales from
spending more on marketingeffortsjust offset the reduction in profit margins that occur when marketing
efforts are increased. A thirdpossibility is that the increased sales from increased marketingexpenditures
less thanoffset the reductionin profitmarginsbecause
of increased spending, in which case marketingexpendituresand profit would be inversely related.
Vertical integration. Research suggests that mar-
ket share and vertical integration are positively related. All else being equal, the economic viability of

Relationship/ 7

increased vertical integrationis greaterfor high market share businesses because of the greaternumberof
upstreamand downstreamactivitiesfor which the scale
of activity will be at or above the minimum efficient
level. Furthermore,vertically integrating operations
can lead to supplyassurances(Amihudand Lev 1981),
more consistentproductquality(Scherer1980), shorter
turnaroundin getting the productproducedand available to consumers (Chandler1977), and higher entry
barriers(Buzzell 1983). Ultimately, the benefits from
integrationcould translateinto more sales and greater
marketshare.
Vertical integrationcould also have a positive impact on profits. Vertically integratedfirms can internalize profits that would otherwise go to other members of the distribution chain (Aaker and Jacobson
1987), and the economic benefits of integration,e.g.,
reducedtransactioncosts (Ravenscraft1983), can more
than offset the increased costs, e.g., greater coordination costs (Buzzell 1983; Williamson 1975), associated with being more integrated.Therefore, profits
could increase as businesses become more vertically
integrated.
Research and development expenditures. One ad-
vantageof R&D activitiesis thatbusinessesoften place

themselvesin a positionto develop innovativeand new
productsto gain customersfromtheircompetitors.Both
the novelty of having new goods and the likelihood
thatnew goods can satisfycustomers'needs betterthan
existing goods suggest that R&D can be positively related to market share. This effect is even more pronounced when R&D acts as an entry barrier.
R&D can also positively affect profitability because of factorssuch as productR&D andprocessR&D
having a positive impact on innovation and product
quality (Hill and Snell 1989; Collier, Monz, and Conlin 1984). Customersmay be willing to buy more of
the goods and pay a premium price for these more
innovative and better quality products. The resulting
increase in sales and greater revenues per sale may
more than offset the increased expenditureson R&D
to ultimatelyincreasebusinessprofits.In addition,R&D
has a high fixed component(Buzzell and Gale 1987),
meaning R&D expendituresper unit of goods sold decrease as total sales increase.
Relationship Between Firm-Specific Variables
and Market Share/Profit
Intangiblefactors. Researchon business performance
has focused more on modeling the effects of tangible
factors than intangible factors on business profit.
However, Rumelt and Wensely (1980), Jacobsonand
Aaker (1985), Jacobson (1988), and Boulding and
Staelin(1990) find thatthe marketshareeffect on profits
is overstatedwhen intangible factors, operationalized
as ROI lagged one period, are excludedfrom the profit

model. Although the constructvalidity of ROI lagged
one period might be questioned as a measure of the
intangibleassets of a firm (Buzzell 1990; Buzzell and
Gale 1986), the notion that intangiblefactors such as
strategic decision-makingskills will be positively related to both marketshare and profits has face validity. Therefore, it would be expected that intangible
factors are relatedpositively to both marketshare and
profit.

Sample Characteristics
Differences in sample characteristicscould also contributeto the variancein marketshareelasticitiesfound
across profit models (see Hambrickand Lei 1985).
The two sets of sample characteristicsexamined here
for their moderatingeffects on the marketshare elasticity are (1) industrial, consumer, or mixed businesses and (2) PIMS or non-PIMSbusinesses.
Industrial and Consumer Businesses
The marketshare-profitabilityrelationshipis likely to
be strongestfor consumerbusinesses, weakest for industrialbusinesses, and moderatelystrongfor a mixed
group of businesses, i.e., some consumer and some
industrial.Buzzell and Gale (1987) found that the associationbetweenmarketshareand profitwas stronger
for consumer businesses comparedto industrialbusinesses and thatthis differencecould be capturingvariations in such factors as the natureof the selling process and the types of goods sold that can distinguish
consumer from industrialbusinesses. Assuming that
the Buzzell and Gale (1987) findings generalize and
thateverythingelse is equal, it would be expected that
the market share elasticity would be highest among
consumer businesses and lowest among industrial
businesses and of moderateintensity among a mixed
sample of businesses because of the temperingeffect
that the industrialbusinessesin the samplewould have
on the estimate of the marketshare elasticity.
PIMS Versus Non-PIMS Businesses
One issue of recurringspeculationin the strategyliteratureis whetherfindings based on an analysis of the
PIMS participantsgeneralize to the largerpopulation
of businesses. Although Marshalland Buzzell (1990)
found similarresultswhen estimatingtheirprofitmodel
using the PIMS data base and the FTC (FederalTrade
Commission) line of business data, the PIMS data is
thoughtto be biased (Andersonand Paine 1978). For
example, the PIMS data is gathered at the business
unit level ratherthan the firm level; and the business
unit is defined subjectively by PIMS participants,
leaving the possibility thatthe participantsmay define
July1993

their marketnarrowlyand overstatetheir marketshare

(Marshall 1987); and the PIMS data are dominatedby
Fortune 1000 firms which, on average, have larger
marketshares and higher profits relative to non-PIMS
businesses (Buzzell 1981; McCabe 1984). Therefore,
relative to non-PIMS businesses, PIMS participants
could exhibit a strongermarketshare-profitabilityrelationship.

Measurement Characteristics
In addition to specification errors and sample characteristics, the estimate of the marketshare elasticity
could be moderatedby measurementfactors, including measuringprofitabilityas ROI, ROS, or ROE (return on equity); measuring market share as absolute
or relative marketshare;and measuringmarketshare
and profitability as 4-year averages or 1-year estimates.
ProfitabilityMeasure
Profitabilityis specified as ROI, ROA (returnon assets), ROC (returnon capital), ROS, or ROE in the
studies reviewed. Whereas ROI, ROA, and ROC are
mainlysemanticdifferences,so thatthey can be viewed
collectively as ROI, ROS and ROE can differ from
ROI and lead to different market share-profitability
findings. To illustrate:
ROI = profits/investment
= (profits/sales) x (sales/investment)
= ROS x asset turnoverratio
= ROS x (1 [investment/sales])
= ROS x (1/investment intensity)
(1)
Basically, ROS is one component of ROI. The

measuresare equal only when the investmentto sales
ratio equals one, which is rarely the case, e.g., this
ratio equals one for just 5% of the PIMS businesses
(Buzzell and Gale 1987, p. 139). Furthermore,studies indicatingthat, on average, the cost of goods sold
as a percent of sales are lower for high market share
businesses than for low marketshare businesses suggest thatan increasein marketsharewill increaseROS.
However, the increase in ROI will be greaterthan the
increase in ROS because of the multiplicativeeffect
of the increase in ROS and the asset turnoverratio.
Therefore, market share changes could have a more
pronouncedeffect on ROI than ROS (see Buzzell and
Gale 1987, p. 107; Kerin, Mahajan,and Varadarajan
1990, pp. 148-9; Farris, Parry, and Webster 1989).
ROE and ROI could also produce different estimates of profitability,becauseROE and ROI are equal
only when the financial leverage ratio equals one as

illustratedbelow:
ROE =
=
x
=
x
profits/shareholder equity
(profits/[debt + equity])
([debt + equity]/equity)
(profits/total assets)
(total assets/equity)
= ROI x financialleverage
(2)
Since the financialleverageratiowill be greaterthan
1 when the debt component of total assets is greater
than zero, as is generally the case, the profit measure
will be lower by a factor equal to the financial leverage ratio when ROI is used instead of ROE. Whether
marketshare and profit, in turn, are more highly correlatedwhen ROE or ROI is being used would depend
on the variabilityof the financialleverage ratio across
firms. However, the findings by Capon, Farley, and
Hoenig (1990) suggest the market share effect on
profitabilityis larger when ROE, as opposed to ROI
(i.e., ROA), is being captured, and a similar effect
might be found.
Market Share Measure

Absolute market share (the ratio of a business' sales
to total sales in the served market)and relativemarket
share (the ratio of a business' market share to the
combined market share of its three largest or largest
competitor)are two differentmeasuresof marketshare
that could contributeto the variance in market share
elasticities found across studies.4 Absolute measures
of marketshare, for example, are preferredwhen specific industriesare studied, because the sum constraint
(the marketshares of individualfirms should sum to
4Furtherdistinction could be made between absolute market share
measures, based on unit sales and dollar sales. These two measures
could produce similar or dissimilar estimates of market share, depending on the industry and types of products being studied (e.g., the
degree of price dispersion that exists in a product category; candy bars
versus cars). Investigating whether basing absolute market share on
unit or dollar sales moderates the magnitude of the market share-profitability relationship is worthy of consideration but could not be executed because few studies reported this information. Similarly, while
there was no ambiguity as to how PIMS-based studies operationalized
relative market share, there was a dearth of information on how relative market share was operationalized in non-PIMS studies.
In addition to the unit of measurement (unit versus dollar sales),
Wind and Mahajan(1981) and Kerin, Mahajan, and Varadarajan(1990)
have pointed to a number of other factors that impact on the estimated
value of market share. Chief among these factors are (1) product definition [brand, product line, strategic business unit (SBU)], (2) market
definition (broadly versus narrowly defined; e.g., market for cars versus luxury cars), (3) time frame (short-term versus long-term), and
(4) scope of the denominator (all brands versus selected brands). For
instance, all else being equal, a broad definition of the served market
will yield a lower market share measure than a narrow definition of
the served market. Given that the frames of reference can impact on
the estimated relationship between market share and profitability, it
is imperative that the frame of reference employed to measure market
share and profit be clearly explicated. This was seldom the case in
the studies included in the meta-analysis.
AnAnalysis
of theMarket
/9
Relationship
Share-Profitability

100%) and bound constraint (market shares of individual firms should be between zero and 100%) can
be satisfied. Relative marketshare, on the otherhand,
is preferredwhen cross-sectionaldata is pooled across
industries, because (1) the sum constraintand bound
constraintcannot be satisfied (Varadarajanand Dillon
1982), and (2) the business' scale and bargainingeffects in its served market are thought to be captured
better with relative market share measures (Buzzell
and Gale 1987). Furthermore,while absolute market
shareis measuredin percentages,relativemarketshare
being a ratio of marketshares, the percentagesin the
numeratorand denominatorof the measurecancel out.
These differences in scale propertiescould yield different estimates of the marketshare elasticity.
Time Frame of Measurement
Decisions at the corporatelevel and strategicbusiness
unit level tend to be characterizedby a relativelylonger
time horizon comparedto decisions at the functional
level. Because of the longer time horizon, measuring
marketshare and profitabilityas a multi-year(i.e., 4year) average versus a 1-year estimate may be a preferred indicator of the effectiveness of strategic decisions. Multi-yearaveragesmay also provide a better
picture of the central tendency of business performance when performance fluctuates as a result of
fluctuationsin environmentalfactors, e.g., the economy. The effects of these external factors can be
smoothedout throughthe use of a multi-yearaveraged
measure. In addition, when performance fluctuates
because of third factors, the probabilitythat a multiyear average and a single-year estimate of performance are equal diminishes, and so, on average, different estimates of the market share elasticity would
be expected when 1-year versus 4-year averageddata
are used.
Results
Descriptiveand multivariateanalysis are presentedfor
the unweighted and sample-size weighted (SSW) estimate of the marketshareelasticity (see Table 3). Table 3 contains descriptive informationon the sample
size and mean elasticity by the respective predictor
variablesthat constitutethe independentvariablesexamined in the meta-analysis.The descriptivefindings
make apparentthe centraltendencyof the marketshare
effect on profits as well as the dispersion of the 276
effects about the mean. The multivariate(ANCOVA)
findings (Table 4) capturethe interrelationships
among
the variables and the profiles of the profit models to
provide a test for the moderatorhypotheses. Finally,
the SSW estimates are emphasizedas being the better
quality estimate of the market share-profitabilityrelationship. This is true because the SSW approachas-
signs more emphasis to estimates from largersamples

(central limit theorem). Since (1) the data base does
not contain severe outliers in terms of sample size,
i.e., an absence of a 3:1 differencebetween one sample size and the next smallest/greatestsamplesize (see
Hunterand Schmidt 1990); (2) rangevariationin market share and profitabilityis not likely to be significant, that is, profit is expressed consistently as percentages, and differences in how market share is
expressed (e.g., relative versus absolute) are controlled for in the multivariateanalysis;and (3) assuming little or no measurementerror, the SSW estimate
shouldoffer the bettermeasureof relationshipstrength,
(see Churchillet al. (1985), HunterandSchmidt(1990),
and Sultan, Farley, and Lehmann (1990) for additional discussions of the SSW method).5
Descriptive Findings
Overall,the 276 reportedmarketshareelasticitiesrange
from -.16 to .84 (Table 3). Although fifteen (5.4%)
of the elasticities are negative, and twelve of the fifteen negative elasticities are reported as statistically
significant, analysis based on the sign test (a = .05)
indicatesthat the numberof positive elasticities is significantly greaterthan the numberof negative elasticities found in the literature.In addition, both the unweightedand the SSW weightedelasticitiesare positive
on average and significantly differentfrom zero. The
mean unweighted elasticity is .200 (95% confidence
interval: .104 to .296) versus the mean of .260 reportedby Capon, Farley, and Hoenig (1990); and the
mean SSW elasticity is .259 (95% confidence interval: .171 to .347).
Publicationbias or the "file drawerproblem"addresses the issue of studies reporting nonsignificant
findings being more likely to be censored from the
journals (Rosenthal 1991). Our analysis of sampling
bias however reveals that the sample of elasticities
analyzed was not seriously contaminatedby any possible publicationbiases that may exist. In total, 40,760
statistically nonsignificant elasticity estimates would
have to reside in the file drawers of researchersfor
the combined probability level to change from p <
.01 (t = 20.06) to p > .05 (see Tellis 1988, footnote
3). Analysis of publicationbias based on the approach
developed by Rust, Lehmann, and Farley (1990) further reveals that the literatureon the market shareprofitabilityrelationshipis just slightly biased at best
(based on an underlying Erlang 2 distribution).Just
5Although additional weighting schemes could be suggested; e.g.,
weighting the estimates by the inverse of their sampling error variance
(Hedges and Olkin 1985; Sultan, Farley, and Lehmann 1990), Hunter
and Schmidt (1990, p. 147) emphasize that weighting effects by their
sampling variance depends on knowing the population value for the
effect size, which usually is not known, and that substituting the observed effect for the population effect does not lead to the most accurate alternative to the SSW approach.
July1993

TABLE3
Mean Market Share Elasticities by Relevant-Explanatory Variables, Sample Characteristics, and
Measurement Characteristics
Sample Size
Weighted (SSW)
Mean
Hypothesized
Effect
n
Unweighted Mean
I. Relevant-ExplanatoryVariables
A. MarketStructure Variables:
Omitted
184
.218** (.191 to .245)d
.284** (.257 to .311)
Included
92
.165 (.130 to .200)
.157 (.100 to .214)
MarketGrowth Rate
Omitted
170
.244** (.215 to .273)
.299** (.270 to .328)
Included
106
.129** (.100 to .158)
.160 (.113 to .207)
B. Competitive Strategy Variables:
Omitted
240
.198 (.174 to .222)
.212 (.094 to .330)
+/Included
36
.218 (.176 to .260)
.261 (.234 to .288)
Omitted
243
.196** (.174 to .218)
.258 (.231 to .285)f
+/Included
33
.278 (.216 to .340)
.286 (.168 to .404)
Product/Service Quality
Omitted
197
.230* (.203 to .257)
.271 (.240 to .302)9
+/Included
79
.188 (.157 to .219)
.234 (.189 to .279)
Product Price
Omitted
211
.201 (.175 to .228)
.279** (.250 to .308)
+/Included
65
.199 (.163 to .235)
.203 (.152 to .254)
Advertising Expenditures
Omitted
177
.229** (.201 to .257)
.304** (.277 to .331)
+/Included
99
.149 (.117 to .181)
.106 (.055 to .157)
Omitted
255
.206* (.184 to .228)
.278** (.253 to .303)h
+/Included
21
.125 (.062 to .188)
.084 (.004 to .164)
Omitted
+
202
.198 (.171 to .225)
.178** (.129 to .227)
Included
74
.208 (.175 to .241)
.288 (.259 to .317)
R & D Expenditures
Omitted
-+
207
.196 (.169 to .223)
.214* (.157 to .271)
Included
69
.214 (.181 to .247)
.270 (.241 to .299)
C. Firm-Specific Resources:
Intangible Factors
Omitted
+
256
.205** (.182 to .228)
.313** (.286 to .340)
Included
20
.137 (.095 to .179)
.114 (.069 to .159)
II. Sample Characteristics
Business Type:
Consumer Businesses
69
.171 (.125 to .217)
.257 (.230 to .284)
IndustrialBusinesses
75
.164 (.139 to .189)
.273 (.246 to .300)
Mixed Businesses
+
132
.214** (.169 to .259)
.191** (.128 to .254)
PIMS/Non-PIMSSample:
Non-PIMS
142
.149** (.122 to .176)
.174** (.123 to .225)
PIMS
+
134
.254 (.221 to .289)
.286 (.257 to .315)
Ill. Measurement Characteristics
ProfitabilityMeasure:
ROS
50
.198** (.158 to .238)
.247** (.055 to .439)
ROE
+
43
.209** (.153 to .265)
.257** (.234 to .284)
ROI
183
.095 (.054 to .135)
.143 (.056 to .227)
MarketShare Measure:
Relative MarketShare
88
.138** (.100 to .176)
+/.248** (.175 to .321)
Absolute MarketShare
188
.229 (.204 to .254)
.339 (.312 to .366)
Time Frame of Measurement:"
1-Year MarketShare
106
.247** (.213 to .281)
+/.280 (.241 to .319)
4-Year Market Share
166
.171 (.144 to .198)
.242 (.207 to .277)
1-Year Profit
124
.227** (.196 to .258)
+/.263 (.244 to .302)
4-Year Profit
149
.178 (.148 to .208)
.256 (.223 to .289)
"Itwas hypothesized that the mean coefficient for market share would be higher when industry concentration is omitted from the
profitabilitymodel.
It was hypothesized that the mean coefficient for market share would be higher when consumer businesses as well as mixed
businesses are studied, compared to when industrial businesses are studied.
'It was hypothesized that the mean coefficient for market share would be lower when ROS is used to measure profit and that it
would be higher when ROEis used to measure profit, compared to when ROIis used to measure profit.
d95%confidence intervals are reported in parentheses.
'Three models used 7- or 14-year averages for measuring profitability,and four models used 7- or 14-year averages for measuring
market share. These measurements were not contrasted to the 4-year and 1-year measurements because of their small n's.
'SSW means for Product Customization were based on n = 237 "omitted" and n = 30 "included" elasticities.
gSSW means for Product/Service Quality were based on n = 192 "omitted" and n = 75 "included" elasticities.
hSSW means for Vertical Integration were based on n = 197 "omitted" and n = 70 "included" elasticities.
**Significant difference in means at p - .05.
*Significant difference in means at p < .10.
AnAnalysisof the MarketShare-Profitability

Relationship
/ 11

two market share-profitabilitystudies may have been

censored from the literature, and this potential bias
has been more than adjustedfor by the seven unpublished studies included in our review.
Moderator Findings
In addition to finding that the mean elasticity is positive and statistically significant and that the sample
is not seriously biased, decomposition of the total
variancein the reportedeffect sizes indicatesthat most
of the varianceis "real,"that is, the ratio of observed
variance (.045) to sampling errorvariance (.0009) is
equal to 96%, and when most of the varianceis real,
searchingfor moderatorvariablesis suggestedas being
appropriate(Hunterand Schmidt 1990).
The search for variables that moderate the magnitudeof the estimate of the marketshare-profitability
relationshipwas executed using an ANCOVA model,
i.e., dummy variableregression (cf. Assmus, Farley,
and Lehmann1984; Capon, Farley, and Hoenig 1990;
Szymanski and Busch 1987; Tellis 1988). An ANCOVA model was consistent with the properties of
the data, in that the predictorvariables were categorical (variableomitted versus present in the model; industrial, consumer, or mixed sample of businesses;
PIMS versus non-PIMS data; ROI, ROS, or ROE
measureof profit;relative versus absolute measureof
marketshare; 1-yearversus 4-year measureof market
share and profit), and the criterionfactor was continuous (marketshare elasticity). Furthermore,preliminary analysis of the ANCOVA model indicated that
multicollinearitywas not a significant problem, as it
can sometimes be in ANCOVA models in meta-analysis (Farley and Lehmann 1986). The maximumvariance inflation (VIF) value associated with any predictorvariablewas below the criticalvalueof ten, which
normally signals that collinearity is unduly influencing the least squaresestimates(Neter, Wasserman,and
Kutner 1990).6 Attention now turns to the ANCOVA
findings reportedin Table 4.
Omission of explanatory variables in the profit
model. The ANCOVA findings reveal that omitting

firm-specific intangibles, sales force expenditures,
product/service quality, market growth rate, and
product line breadthvariables from the profit model
significantlymoderatesthe estimateof the marketshareprofitabilityrelationship.Specifically, the omission of
intangiblesfrom the profit model has the largest bias6A dummy variable that captured the level of data aggregation (i.e.,
business unit level versus firm level) was added to the authors' original ANCOVA model in response to a comment made by one of the
reviewers. Adding "level of aggregation" led to severe collinearity
problems in the model, the result in part due to "level of aggregation"
being highly correlated with the PIMS/non-PIMS variable (r = .83).
The "level of aggregation" variable was subsequently dropped from
the model.
ing effect on the marketshare estimate of any of the

factors examined in the meta-analysisi.e., the market
shareelasticityis .352% higheron averagewhen firmspecific intangiblesare not specifiedin the profitmodel.
This finding supportsat a more general level the position of Jacobson (1988, 1990) and others who argue
that the market share effect on profits is greatly diminished,thatis, it tendstowardzero on average,when
firm-specificintangiblesare incorporatedinto the profit
model.
The omission of sales force expendituresfrom the
profit model has the next greatestbiasing effect on the
estimated market share elasticity (.217%), followed
by product/service quality (.116%), product line
breadth(.100%), and marketgrowthrate (.071%), respectively. The signs associated with the regression
coefficients for firm-specific intangibles, sales force
expenditures,product/servicequality, and productline
breadthare also within the realm of possibilities suggested by our hypotheses. Only the positive coefficient for market growth rate was not hypothesized,
but post hoc, the positive biasing effect could be explained by the perils of high-growth markets adversely affecting business profits (see Aaker and Day
1986). Collectively, these findings suggest that incorrect modeling decisions can have an important
biasing effect on the estimateof the marketshareelasticity.
Sample characteristics. The ANCOVA findings
further reveal that, on average, the estimate of the

market share elasticity is moderatedby whether it is
estimated over a mixed sample of businesses (consumer and industrialbusinesses) or a "pure"sample
of industrialbusinesses. The estimated market share
elasticityis higher(+.104%) on averagewhen a mixed
sample of businesses is used ratherthan an industrial
sample of businesses (as anticipated),but the estimate
is not affected by whetheronly consumeror industrial
businesses are analyzed (an effect that was not anticipated). Overall, these findings suggest that although
the estimate of the market share elasticity can be robust between consumer and industrialbusinesses, an
uncritical pooling of consumer and industrial businesses can accent the compounding errors often associated with pooling data across heterogeneousbusinesses (Prescott, Kohli, and Venkatraman1986).
The ANCOVA findingsfurtherrevealthatit makes
a difference whetherthe marketshare elasticity is estimated for a sample of PIMS or non-PIMS businesses. As hypothesized, the estimated marketshare
elasticity is higher (+.287%) on average when based
on analysis of PIMS rather than non-PIMS businesses. Although several explanationsfor this biasing
have been posited (e.g., differences in the level of
data aggregationand/or the proportionof successful
July1993

TABLE 4
Results of the ANCOVA Analysis
Hypothesized
Effect
Unweighted
Model
Sample Size
Weighted
(SSW) Model
Omitted Explanatory Variables

Market Structure Variables:
+
.037 (.049)
-.055 (.043)c
.071** (.032)
-.104**
Market Growth Rate
(.025)
Competitive Strategy Variables:
.100* (.065)
.025 (.053)
+/.035 (.085)
-.048 (.089)
+/.116** (.058)
.023 (.060)
+/Product/Service Quality
.070 (.063)
Product Price
.040 (.069)
+/.031 (.049)
.049 (.046)
+/Advertising Expenditures
-.217** (.088)
-.010 (.078)
+/+
.008 (.046)
.003 (.046)
+
-.002 (.044)
.052 (.046)
R&DExpenditures
Firm-Specific Resources:
+
.352** (.032)
.164** (.043)
Intangible Factors
Sample Characteristicsa
+
-.033 (.040)
-.007 (.031)
Consumer Businesses
+
.104** (.028)
Mixed Businesses
.046 (.030)
+
.287** (.042)
.117** (.040)
PIMS Businesses
Measurement Characteristicsb
ProfitabilityMeasure:
ROS
-.141** (.044)
--.124**
(.031)
+
ROE
.077 (.076)
.030 (.034)
Relative Market Share
-.036 (.039)
-.055 (.032)
+/Time Frame of Measure:
1-Year Market Share
-.089** (.036)
-.079** (.039)
+/1-Year Profit
.113** (.035)
.025 (.037)
+/-.162 (.120)
.029 (.105)
Intercept
R2 (R2dj)
.347 (.298)
.553 (.519)
FValue (p Level)
15.970 (<0.01)
7.155 (<0.01)
d.f.
258
249
Max. VIF
9.11
9.87
"Thecontrastcategoriesforthe "SampleCharacteristics"
are as follows:Bothmixedand consumerbusinessesare beingcontrasted
to the industrialsample of businesses, and the PIMSbusinesses are being contrastedto the non-PIMSbusinesses.
bThecontrast categories for "Measurement Characteristics"are as follows: Both ROS and ROEare being contrasted to ROI;relative
market share is being contrasted to absolute market share; 1-year market share is being contrasted to the 4-year averaged market
share; and 1-year profit is being contrasted to the 4-year averaged profit.
cStandard errors are in parentheses.
**p < .05, directional two-sided test.
*p < .10, directional two-sided test.
firms in the respective samples), in general, the finding supports the position that the PIMS sample of
businesses is biased relative to the overall population
of businesses in ways that bring into question the generalizability of PIMS-based findings to non-PIMS
participants.
Measurement characteristics. The findings further suggest that the estimate of the market share elasticity is moderated by how market share and profit are
measured and the time frame over which they are
measured. Measuring profit as ROS (rather than ROI)
or measuring market share as a 1-year estimate (versus a 4-year average), on average, results in a more
modest estimate of the market share elasticity (-.141%
and -.089, respectively). In contrast, capturing profit
as a 1-year estimate (versus a 4-year average) produces a loftier (+.113%) estimate of the market share
elasticity. In effect, it makes a difference how market
share and profitability are measured when developing
estimates of the magnitude of their association.
Stepwise investigation. As a final analysis, the three
classes of variables (i.e., omission of relevant-explanatory variables, sample characteristics, and measurement characteristics) were examined in a stepwise
manner to determine which group of factors adds the
most to the prediction of the estimate of the market
share elasticity. The entering of the three classes of
variables as blocks by hierarchical regression revealed
that after considering the omission of explanatory
variables (Radj2 = .358), sample (ARadj2 = .118) and

Relationship/ 13

measurementcharacteristics(ARadj2= .043) account

for only a small and unique portionof the variancein
the elasticities.
Discussion
do not moderatethe impactof marketshareon profits.

However, the findings do provide supportfor product
quality assessment and noncausaltheories. Consistent
with product quality assessment theory, omitting
productquality from the model is shown to bias the
market share elasticity upwards, and consistent with
noncausal theory, the estimate of the market share
elasticity all but disappearson averagewhen firm-specific intangiblesare specified in the profit model.
The studies addressingthe relationshipbetween market share and profitability span a broad spectrum.
Several studies view building market share as conducive to superior financial performance(e.g., Buzzell and Gale 1986); other studies view models that
do not specify intangiblefactorsas deficient and question whethermarketsharehas any effect on profit(e.g.,
Jacobson 1988). Still other studies contend that the
magnitudeof the marketshare elasticity is moderated
by other specification errors and sample and measurement characteristics.Although the meta-analysis
findings cannot completely reconcile these differing
viewpoints, on one hand, the findings indicate that,
on average, marketsharehas a significant(SSW mean
= .259) and positive effect on business profits. On
the other hand, the multivariatefindings reveal that
the estimate of the market share elasticity is moderated by modeling, sample, and measurementfactors.
These findings supportthe perspective that third factors moderate the estimate of the market share elasticity. A more detailed discussion of the theoretical
and managerialimplicationsof the findings follows.
Managerial Implications
Utilizationof externallygeneratedmarketinformation
is viewed as increasinglyimportantfor making effective strategicdecisions. Along these lines, studiesshow
that assessing and using market informationis moderatedby environmentalstability, task variability,organization centralizationand formalization, information quality and accessibility, managers' cognitive
skills, etc. (e.g., Deshpandeand Zaltman1982, 1984,
1987;JohnandMartin1984;Lee, Acito, andDay 1987;
Menon and Varadarajan
1992; Root and Kinnear1991;
Zinkhan, Joachimsthaler, and Kinnear 1987). The
findings from the meta-analysis,in turn, can facilitate
the use of informationon the marketshare-profitability relationshipby (1) increasingits accessibility, (2)
facilitatingits assessment,and (3) offering insightsfor
developing parsimoniousmodels.
Theoretical Implications
The alternative explanations offered for the market
share-profitabilityrelationshipare not necessarilymutually exclusive, and the findings from the meta-analysis offer an opportunityto determine the extent to
which efficiency, market power, product quality assessment, and "non-causal"theories on the market
share-profitabilityrelationshipare supported.
In general, the findings fail to support the efficiency theory perspective. Advertising and R&D expendituresdo not significantly moderate the magnitude of the marketshare-profitabilityrelationship,as
would be suggested by efficiency theory, and sales
force expendituresnegatively, rather than positively
(the latter being consistent with efficiency theory),
moderate the magnitude of the relationship. It is,
however, conceivable that failure to support efficiency theoryis the resultof the analysis of large businesses in the majority of the studies. Research has
shown that economies of scale/scope dissipate, on
average,at a small percentof the market(Scherer1974;
Rumelt1991), andeven businesseswith relativelysmall
market shares can be operatingat levels greaterthan
minimum efficient scale (Schmalensee 1987).
The findings from the meta-analysis also fail to
supportmarketpower theory. Price and industryconcentration (which can be proxies for market power)
uation and use of marketinformationis the outcome

of a complex decision process with many competing
forces, O'Reilly (1982) notes that the ambiguity inherent in most of the informationavailable to managers and the pressureson decision makersto produce
resultsplaces the accessibility of relevantinformation
at the forefrontof the determinantsof informationuse.
Specifically, more accessible informationis likely to
be used more frequently, and concerns regardingthe
usability of academic researchby managersnotwithstanding,journalsfacilitateeasy access to externalinformation.
By providing managers with informationon the
profit impact of market share through an easily accessible source, this meta-analysisfacilitatesthe interpretation of numerous and diverse findings on the
marketshare elasticity and economizes on managers'
search costs of collecting informationon 276 profit
models from forty-eight studies reportedin the marketing, management/business policy, and economic
literatures.
Greater accessibility of the informationat lower
costs could in turn lead to greater use of the information by managersas input into strategicdecisions,
especially for those managers who can be characterized as highly involved, risk-aversive,and cognitively
skilled (Zinkhan,Joachimsthaler,and Kinnear1987).
Accessing information. Recognizing that the eval-
July1993

These managersmay use the information(1) conceptually, e.g., to enhance knowledge and understanding
of the market share-profitabilityrelationship;(2) affectively, e.g., to impact on confidence or dissonance
levels as they pertainto marketshare strategiesto increaseprofits(see Menon and Varadarajan1992); and/
or (3) instrumentally,e.g., to directly impacton business strategieswhen the informationconfirms a priori
beliefs (Deshpande and Zaltman 1982, 1984, 1987;
Lee, Acito, and Day 1987).
Assessing the quality of information. The findings
from the meta-analysis also provide a backdrop for

evaluating the quality of externally generated information on the market share-profitabilityrelationship.
For example, studies show that the technical quality
of market information(sampling procedures, statistical analyses, etc.) plays an importantrole in the use
of this informationby managers(e.g., Deshpandeand
Zaltman 1982, 1984). The findings from the metaanalysis also can provide managerswith insights into
several central cues for evaluatingthe technical quality of market share-profitabilityinformation. Specifically, the quality of the marketshare-profitabilityinformationcan be assessedin partby examiningwhether
the profitmodelspecifiesfirm-specificintangibles,sales
force expenditures, product/service quality, product
line breadth, and marketgrowth rate.
The meta-analysisreveals that omitting these factors from the model producesa biased estimate of the
marketshare elasticity. The authors'findings also indicate that managersshould carefullyreview the composition of the sample on which the estimate of the
marketshare elasticity is based. As evidenced in this
study, analysis of mixed samples and PIMS samples
of businesses, on average, producesinflatedestimates
of the marketshareelasticity.Finally, managersshould
examine how marketshare and profitabilityare measured to assess whetherthe marketshare-profitability
informationbefore them is of high or low quality. Our
findings reveal that operationalizingprofit as ROS,
ratherthan ROI, and profit and marketshareas 1-year
ratherthan 4-year averagessignificantlymoderatesthe
estimate of the marketshare elasticity.
Generating information. Finally, the findings from
the meta-analysisoffer insights for modeling the mar-
ket share-profitabilityrelationshipin a parsimonious

manner.In lieu of the costly and time-consuming"all
possible factors approach"to modeling profitability,
our findings indicate thatjust five of the eleven "relevant-explanatoryvariables" examined (intangibles,
sales force expenditures, product/service quality,
productline breadth,and growth rate) moderatedthe
estimateof the marketshareelasticity. Therefore,ideally, these five factorsshouldbe incorporatedinto any
profit model.
Limitations and Directions for Future Research
The limitations of this study should also be borne in
mind when interpretingthe findings. They include the
fact that the analysis was restrictedto variables frequently reportedin the literature,to the exclusion of
other potential moderatingfactors, e.g., product innovation and productlife cycle. The review was also
restrictedto econometric models, whereby added insights might be gained from a review of noneconometric findings. Finally, the SSW method does not
exhaust the weighting schemes but reflects deficiencies in the reportingof descriptiveinformationin the
literature.
The meta-analysisalso was not designed to be definitive. Rather, its purpose was to develop a concise
quantitativeunderstandingof the market share-profitability relationshipand to offer a point of departure
for future researchon the antecedentsof profitability
and the role of marketshare in the business' financial
performance.Therefore, additionalresearchis called
for to (1) establish the validity of lagged ROI as a
proxy measurefor firm-specific intangibles, e.g., develop psychometricmeasures, prior to dismissing the
market share-profitabilityrelationship as artifactual;
(2) examine the moderatingeffects of additionalstrategic variables, e.g., order of entry and strategic alliances, and environmentalfactors, e.g., social values, on the estimateof the marketshareelasticity;and
(3) examine the degree to which the estimate of the
magnitude of the market share-profitabilityrelationship generalizes across foreign markets. If examined
programmatically,these and other issues would increase understandingof the value of a market share
building strategy for improving the financial performance of a business.
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/ 17
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ALEXANDERHAMILTONLECTURESHIPS
IN BUSINESSADMINISTRATIONOR ECONOMICS:
CENTRALAND EASTERNEUROPE
Approximately 20 to 25 awards are available to lecture and develop programs at academic
institutions in central and eastern Europe in 1994-95.
Fundedby the Supportfor East EuropeanDemocracy(SEED) Act, opportunitiesexist for

lecturingin:
Albania
Bulgaria
Croatia
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Estonia
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Slovenia
Awardsare for 5 or 10 months,beginning9/94 or 2/95. Regularapplicationdeadlineis August1,

but late applicationswill be accepteduntil October1.
A detaileddescriptionof the lectureships,awardbenefits, and applicationprocessis includedin

the 1994-95FulbrightScholarProgramapplicationbooklet.Tbobtaina copy,write or call:
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An Analysis of the Market Share-Profitability Relationship

Author(s): David M. Szymanski, Sundar G. Bharadwaj and P. Rajan Varadarajan

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David M. Szymanski, Sundar G. Bharadwaj and P. Rajan Varadarajan

Vol. 57 (July 1993), 1-18

and profitability are measured (e.g., measured at either

An Analysisof the MarketShare-Profitability

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mate of the centraltendencyof the marketshareeffect

economics journals covering the period from January

'The following journals were searched manually for relevant studies

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Imel and Helmberger (1971)

An Analysisof the MarketShare-Profitability

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Framework for the Investigation

ability is consistent with the profitabilitymodels proposed in numerousempiricalstudies(e.g., Buzzell and

Omission of RelevantExplanatory Variables

4 / Journalof Marketing,July 1993

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Potential Moderating Effects of

planatoryvariable and market share and profits2and

marketshare of all competing firms (=100%) will be

AnAnalysisof the MarketShare-Profitability

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Relationship Between Competitive Strategy

Karmarkar 1987), more monitoring of operations

6 / Journalof Marketing,July 1993

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Product/service quality. Although several studies

on this relationship.A numberof PIMS-basedstudies

Expenditures on advertising (Assmus, Farley, and

An Analysisof the MarketShare-Profitability

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vantageof R&D activitiesis thatbusinessesoften place

as ROI lagged one period, are excludedfrom the profit

Potential Moderating Effects of

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their marketnarrowlyand overstatetheir marketshare

Potential Moderating Effects of

Basically, ROS is one component of ROI. The

only when the financial leverage ratio equals one as

Market Share Measure

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signs more emphasis to estimates from largersamples

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AnAnalysisof the MarketShare-Profitability

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two market share-profitabilitystudies may have been

model. The ANCOVA findings reveal that omitting

ing effect on the marketshare estimate of any of the

further reveal that, on average, the estimate of the

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Omitted Explanatory Variables

An Analysisof the MarketShare-Profitability

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measurementcharacteristics(ARadj2= .043) account

do not moderatethe impactof marketshareon profits.

uation and use of marketinformationis the outcome

Accessing information. Recognizing that the eval-

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from the meta-analysis also provide a backdrop for

the meta-analysisoffer insights for modeling the mar-

ket share-profitabilityrelationshipin a parsimonious