The mad scramble for market share can trip up growth-hungry businesses

Growth is the holy grail for all businesses.

But the link between capturing market share and boosting profitability -- widely assumed to be a direct correlation -- is coming under fresh scrutiny within the field of business consulting. And the reassessment has critical implications for growth strategies.

In a book scheduled to be published this fall, Stuart Jackson , vice president of the British-based L.E.K. Consulting, argues that the scramble for market share often can hurt a company -- and the more broadly it defines market share, the more damage it can suffer.

Jackson, who heads the L.E.K. office in Chicago, draws on the global consulting firm's research on what determines shareholder value in leading companies. Rather than simply chasing market share, he concludes, they build a ``strategic market position" by identifying and investing in segments where they can be most productive.

Companies generally earn the most money in the niches where they are strongest in relation to competitors, he contends, so diversification into markets where they are weaker -- a favorite maneuver of multi-industry conglomerates -- often proves counterproductive.

``If you make yourself stronger in a place where you're weaker, you make yourself weaker overall," Jackson said.

His forthcoming book, titled ``Where Value Hides: A New Way to Uncover Profitable Growth for Your Business," contrasts the tactics of empire-building enterprises with those of businesses that pick strategic market segments. America West Airlines, for example, went bankrupt after expanding into too many domestic markets and even launching some overseas routes. Its rival, Southwest Airlines, instead built a profitable franchise by adding more routes in a smaller number of markets where it could better capitalize on economies of scale.

German automakers BMW and Daimler-Benz, meanwhile, started as competitors in the luxury performance car market. Daimler grew dramatically by swallowing Chrysler Corp., gaining multiple product lines from compact cars to pickup trucks to sports utility vehicles, but its profits as a percentage of sales lagged. BMW, by contrast, expanded its profitability by offering new models within its core market segment.

Daimler's gamble illustrates a common pitfall for growth-hungry companies, Jackson argues. ``They probably read a paper by some consultant saying the industry is consolidating and you either get with the program and be one of the big boys or you fall by the wayside and become road kill," he said in jest. ``So they catapulted themselves to a larger market share, but that was irrelevant."

A similar example can be seen with high-tech manufacturer Hewlett-Packard Development Co., which diluted its profit margins when it acquired rival Compaq Corp. While the deal gave HP greater market share in personal computers, its far more profitable printer business represented a smaller share of its total revenue after the merger.

Such case studies hold lessons for business leaders concerned about managing their brands, suggested Teresa Nelson , strategy professor at the Simmons School of Management in Boston. ``There's a fundamental trade-off between your ability to gain market share and your ability to specialize and serve customers," she said.

In a larger sense, Nelson said, ``If you look at the various performance measures for businesses -- there's growth, innovation, return on equity, stock price, and market share -- sometimes focusing on one area causes you to lose in another. If you're going to invest in innovation, that's going to cost you money. If you're going to invest in diversification through acquisitions, that's going to cost you money."

Jackson, for his part, said he's all for building up market share. But market share must be defined more carefully through the lens of ``strategic segmentation," he maintained. ``You need to understand what definition of market share drives profitability in your business," Jackson said. ``Once you understand that, go for more of it."

But he cautioned that the strategic market position of companies will vary widely from one industry sector to another. In computer software or electronic games, for instance, there is no advantage to geographic segmentation. But in the health club business, like the airline business, forming bigger clusters of outlets in a smaller number of markets can be more profitable than spreading out a larger number of operations more thinly across multiple regions.

For example, Town Sports International Holdings, which runs Boston Sports Clubs, has outperformed the larger Bally Total Fitness chain by concentrating in only a handful of markets, chiefly Boston, New York, and Washington, D.C., rather than blunting its impact by pursuing a national strategy.

Not surprisingly, Jackson frowns on most conglomerates and looks askance at acquisitions that take businesses outside their core competencies. But he doesn't see the urge to merge ending any time soon, largely because corporate chiefs like to build empires.

``Every compensation consultant will say if you're running a $10 billion company you get paid more than if you're running a $5 billion company," he noted. ``Plus you have more toys to play with."

Robert Weisman can be reached at weisman@globe.com.