The profitability of winning

Introduction: Sports and war metaphors abound in business today. For example, one management book, Thunder in the Sky, by Thomas Cleary, opens with a Chinese saying that translates: “The marketplace is a battlefield. The Asian people view success in the business world as tantamount to victory in battle.” The book advises American executives to do the same. However, such metaphors are misleading. The objective in both sports and war is to beat the competitor. Business, on the other hand, aims to create wealth. Ignoring this reality, many people believe the metaphors and choose competitor-oriented strategies that pursue market share rather than profits, according to research at Wharton, Weatherhead, and other institutions. In one study, one-third of 105 managers said their firms had competitor-oriented objectives. Another revealed that managers opted to sacrifice profits to beat the competition on price. A third showed that firms stating pricing goals in competitive terms had lower returns-on-investment over a 45-year span. Our conclusion: Firms should focus on profits, not competition. Our premise is neither mysterious nor modern. It originates in classical micro-economics. Competitive objectives are especially harmful, because they likely will provoke unfavorable reactions from business rivals, which may, in turn, lead to price wars. Comments Postprint version. Published in Chief Executive, Number 95, June 1994, pages 61-63. The author has asserted his/her right to include this material in ScholarlyCommons@Penn. This journal article is available at ScholarlyCommons: http://repository.upenn.edu/marketing_papers/32 Published in Chief Executive, June, 1994, 61-63. The Profitability of Winning J. Scott Armstrong The Wharton School, University of Pennsylvania Fred Collopy Case Western Reserve University Sports and war metaphors abound in business today. For example, one management book, Thunder in the Sky, by Thomas Cleary, opens with a Chinese saying that translates: “The marketplace is a battlefield. The Asian people view success in the business world as tantamount to victory in battle.” The book advises American executives to do the same. However, such metaphors are misleading. The objective in both sports and war is to beat the competitor. Business, on the other hand, aims to create wealth. Ignoring this reality, many people believe the metaphors and choose competitor-oriented strategies that pursue market share rather than profits, according to research at Wharton, Weatherhead, and other institutions. In one study, one-third of 105 managers said their firms had competitor-oriented objectives. Another revealed that managers opted to sacrifice profits to beat the competition on price. A third showed that firms stating pricing goals in competitive terms had lower returns-on-investment over a 45-year span. Our conclusion: Firms should focus on profits, not competition. Our premise is neither mysterious nor modern. It originates in classical micro-economics. Competitive objectives are especially harmful, because they likely will provoke unfavorable reactions from business rivals, which may, in turn, lead to price wars.