In praise of the third place

James Surowiecki's great piece of wisdom about what is important - No.1 player in the domain and hurting your profitability or No.3 player yet make decent enough profits. James incidentally is the author of "The Wisdom of Crowds". Link via Bokardo

A recent survey of the evidence on market share by J. Scott Armstrong and Kesten C. Green found that companies that adopt what they call “competitor-oriented objectives” actually end up hurting their own profitability. In other words, the more a company focusses on beating its competitors, rather than on the bottom line, the worse it is likely to do. And a study of the performance of twenty major American companies over four decades found that the ones putting more emphasis on market share than on profit ended up with lower returns on investment; of the six companies that defined their goal exclusively as market share, four eventually went out of business.

The point is that business is not a sporting event. Victory for one company doesn’t mean defeat for everyone else. Markets today are so big—the global video-game market is now close to thirty billion dollars—that companies can profit even when they’re not on top, as long as they aren’t desperately trying to get there. The key is to play to your strengths while recognizing your limitations. Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely. Some pundits are now speculating,ironically, that the simplicity of the Wii may make it a huge hit.Nintendo wouldn’t complain if that happened. But, in the meantime,third prize is looking a lot better than steak knives.

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