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Leslie Budd on... the trade off

Updated Thursday, 30th September 2010

Leslie Budd examines the tenuous relationship between profitability and market share; too much of either can have serious consequences

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Firms like to be competitive but avoid competition as this can sometimes end in a zero-sum game. Related to this is the trade-off between profitability and market share. At the startup phase of a business, profitability is crucial for survival, but as the business develops then market share becomes important to ward off the interest and threat of competitors. If we look at the recent increase in consolidation in the commodities industries, we find this relationship in action. If you create too much profitability, you might excite the interest of predators on a hostile takeover.

If you build too much market share, then you attract the interest of competition authorities and regulators who might limit the scale of your business. Investment firms frequently go short and long on a range of financial assets. Whether a firm goes short and long on profitability and market share will depend on the financial environment, where they are in the business cycle and the sector they operate in. The bottom line is that the relationship between profitability and market share is a dynamically strategic one. You can’t have one without the other.

That’s my view. You can join the debate with The Open University.

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