Dear Bob ...
I have to disagree with you on your example from Keep the Joint Running this week ("Higher hierarchies," 6/22/2009), where you recommend marketshare over margin as one desirable characteristic of entrepreneurs.
[ Get sage IT career advice from Bob Lewis' Advice Line newsletter. ]
In my experience, it is not one over the other; both are critical to long-term success. Perhaps the lessons are still open to be learned, but incredible market share with little margin is ... Facebook? Or as my German friends say, "In America it is not 'I believe,' it is 'make believe'." For the one Microsoft, Google, and Amazon, there are thousands of tombstones for the dead companies that bet everything on market share with no care for profit margin.
- Skeptical
I get that a lot. And looking at what I said in the article, I didn't clarify whether I was talking about overall corporate profit margin or average product profit margin. The two are vastly different subjects. For the record, I was referring to product profit margin, and for that I stand by my statement.
Product margin doesn't equal profit or even profitability. Some companies are well-known for having paper-thin margins and huge profits. ExxonMobil comes to mind (at least in their corporate propaganda -- I'm not sure if I believe 'em and I can't find an authoritative source of information).
The way it works is simple: The more volume you sell, the less margin you need, so long as you achieve the volume by turning over inventory instead of accumulating it. The key to more volume is market share, which has the additional benefits of taking market share away from competitors. In many cases it's also an indicator of increased customer loyalty, which makes it a predictor of success, where margin merely reports past success.
There are times when taking the risk of reduced corporate profits in exchange for increased market share makes sense as well. You mentioned Amazon.com, and it's an excellent example of a company that realized critical mass was, for its business model, everything, and succeeded in achieving it.
[ Want in on more controversial topics like this one? Subscribe to Bob's weekly e-letter Keep the Joint Running. It's the source of ideas for running IT that working CIOs rely on. And it's free. Just go to www.issurvivor.com and click on Subscribe. ]
Even without a business model that depends on critical mass, the combination of declining market share and increasing profit margin is a warning sign of trouble to come. General Motors is an example: Its management focused on profitability instead of focusing on building cars people want to buy.
An entrepreneur would never make a mistake like that.
- Bob
This whitepaper explains the terminology and concepts behind Data Replication technologies and establishes some sizing rules through worked examples. Learn the new paradigm in disaster tolerance—protect data anywhere.
Download now »
Server virtualization is a popular option for dealing with mounting datacenter costs. Another equally promising approach is the use of an Application Delivery Controller. Citrix NetScaler provides a low-cost way for organizations to reduce their server count and accrue cost savings from a reduction in space, cooling, power and personnel.
Download now »
The emergence of WLANs has created a new breed of security threats to enterprise networks.
Included in HP ProCurve WLAN solutions is security technology that alleviates threats from WLANs through:
* Monitoring wireless activity inside and out of the enterprise
* Classifying WLAN transmissions into harmful and harmless
* Preventing transmissions that pose a security threat to the enterprise network
* Locating participating devices for physical remediation
Effectively address data protection challenges, implementing solutions that help store and protect business–critical data while cutting costs and improving efficiency and reliability.
Download now »If you are going to run at a loss for a period of time in order to build market share, you must make sure that you have a realistic cash flow plan and a definite set of conditions that will determine when you can no longer run at a loss.
If you are going to run only a portion of you business at a loss (loss leader), then you need a realistic method to determine if this product is really increasing sales in the profitable portion of you business, or if your customers are taking the bait, but spitting out the hook.
Sign up to receive InfoWorld Resource Alerts
438 Recommendations
