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To monopolise or to not? Study says owning more market may mean slightly more profits, but not much anymore

To monopolise or to not? Study says owning more market may mean slightly more profits, but not much anymore
Business2 min read
If you’re in the sandcastle business, it helps to own a beach!

It doesn’t take a seasoned financial analyst to know that owning a larger share of the market generally means that you have more opportunity to rack in the big monies — although several studies have confirmed this trend with empirical evidence. However, in an era defined by digital transformation, the traditional metrics of profitability and market share are undergoing a seismic shift.

Analysing over 6,000 cases from 800 US companies spanning the last 25 years, a new groundbreaking study unveils that digitalisation is having a surprisingly massive influence on corporate success. The process acts like a Robin Hood of sorts, directing traffic away from the imposing sway of corporations — especially in highly digitised companies — and towards smaller businesses that can now easily sell their products and services online.
Eroding value of the market share
The erosion of market share's influence stems from the disruptive forces unleashed by automation, a hallmark of digitalisation. “The digital transformation with its opportunities for automation is replacing learning effects that were previously generated by sheer size — i.e., market share," explains study author Alexander Himme.

In addition, while a higher market share used to be a signal of quality, digitisation has since helped diminish this image. As the cost of online distribution fell, it helped ease the entry of new players into the market, which was highly advantageous for firms with relatively smaller market shares.

Further, customers can now gauge prices easily to ascertain what benefits them on e-commerce platforms, diminishing the apparent monopoly of larger companies with significant market share.
Impact on profitability
Further, the study also found that the impact of declining market share on profitability varied across companies based on how and which aspect of their operations they choose to digitise.

When companies go through digital changes, they can focus on improving internal operations inside the company or on upgrading their interactions with customers. These two types of changes can affect how much market share a company has and how much money it ends up making.

For example, if a company focuses on improving interactions with customers using digital tools, it can become more efficient, especially in the case of big firms with access to a ton of data. But if an organisation focuses on enhancing its operations better with automation and AI, it can become more efficient too, which could be especially profitable for smaller companies with less market share.

"Small companies with a smaller market share often have more to gain," affirms study author Felix Sklenarz, highlighting the democratising influence of digitalization. For managers navigating this digital frontier, recalibrating key performance indicators (KPIs) emerges as imperative. The traditional yardsticks of success must evolve to reflect the intricacies of digital markets.

The findings of this research have been published in the International Journal of Research in Marketing and can be accessed here.

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