Decoding the Digital Shift: A New Perspective on Market Share and Profitability

A woman standing in front of a whiteboard and presenting a strategy plan in a meeting

In a world dominated by the digital revolution, where companies strive to scale at breakneck speeds, I challenge the age-old belief that 'bigger is better.' As I delved into this research endeavor, little did I anticipate the unexpected twists and turns that awaited me in uncovering the intricacies of the market share–profitability relationship in the digital era. As we are in the middle of diverse paradigm shifts due to the digital transformation, the question lingers: Is market share still the compass we can rely on in the complex terrain of the digital age?

Unveiling Digital Transformation's Impact:

The Digital Rush: The digital realm has ushered in a new era where the pursuit of market share isn't the golden ticket to profitability it once seemed. With my co-authors we systematically dissect how digital transformation influences the market share–profitability nexus. Read the full study here: https://www.sciencedirect.com/science/article/pii/S0167811624000041

Key Findings

Digital Advantage: Contrary to conventional wisdom, our research reveals a notably weaker link between market share and profitability for digitally transformed companies. The digital landscape provides opportunities for smaller players, diminishing the relevance of market share as a driver of efficiency gains, market power, and quality assessments.

The Platform Paradox: Two-sided digital platforms defy the notion that size guarantees success. Differentiation and multihoming emerge as crucial factors, challenging the anticipated winner-takes-all outcomes driven by network effects.

Industry Insights: Industry context matters, with business-to-consumer (B2C) sectors exhibiting a weakened negative effect of digital transformation on market share–profitability. Consumer influence through online information introduces dynamics distinct from organizational customers.

Practical Implications

Market share as a key performance indicator? Question the centrality of market share for your decision-making! Consider that pure scaling up is not the guaranteed path to success in a digital world. Observe that small and midsize companies with a focus on internal digital processes, emphasizing business analytics expertise are very profitable. Note that differentiation, not size, emerges as a crucial profitability driver for digital companies. For example, Oracle, a multinational computer technology company, picks profits over market share via a focused differentiation strategy. As a result, Oracle is able to charge a premium price for its products leading to profit margins exceeding 25%.

A wake-up call for investors and analysts. Look beyond size as a major criterion for tech stocks! Consider alternative performance criteria, especially for more digital firms where market share has a weaker impact on profitability.

Theoretical Contributions

Digital Winds of Change: Challenging existing notions, we update the theoretical framework of the market share–profitability relationship for the digital age. We delve into efficiency theory, market power theory, and quality assessment theory, providing a nuanced view of the impact of digital transformation on these theories.

Make Digital Transformation measurable: Introducing a novel digital transformation dictionary, our tool allows the measurement of digital transformation and its facets. Our text-mining approach opens avenues for analysis across various channels of firm communications.

The conclusion

Our exploration of the digital shift's impact on market dynamics prompts a fundamental questioning of the use of market share as a key performance indicator for decision-making. The digital era invites businesses to reconsider the metrics that guide their strategic decisions, urging them to explore alternative indicators and adopt a more adaptive and nuanced approach to navigate the uncertainties of this evolving digital frontier.

Published on 21 March 2024 by Prof. Dr. Alexander Himme