Market share, profitability and implications for strategy formulation

Abstract

The research explores the. causal relationship between market share and profitability arid is specifically aimed at understanding the factors that affect the "strength of this relationship, and the mechanisms that cause the relationship. % The research initially utilised a data base of over 100 South African SBUs with information in the "PIMS Limited 5 Information, Model" format. The relationship between market share and profitability was explored using ordinary least squares regression analysis and the slope of the line was found to be significantly lower than that of the quoted PIMS studies. Cluster analysis was used on the environmental variables to produce clusters of similar environments and regression analysis again done on market share and profitability to test whether the correlation between profitability and market share was stronger or weaker i n ; the different environmental \ settings. _ Significant differences wOre found in, the correlations and one particular environment was found to exhibit a : relationship between market share rind profitability that was significantly stronger than all other environmental settings. A fine grained methodology was developed to determine the cause of the correlation for this environment. This initial study led to the causal relationship between market share and profitability being explained for the SBUs concerned. The results of the initial study were then extended using intuition, logic and some accepted concepts from the literature into a new generalised theory, and some working hypotheses were formulated. A methodology for testing the hypotheses using the remaining SBUs in the data base was developed. The results supported the ~ hypotheses and hence the theory. \ \