Competitor Orientation: Effects of Objectives and Information on Managerial Decisions and Profitability

Traditional economic theory calls for firms to maximize shareholder wealth. However, managers often do not explicitly pursue the maximization of profits (Mueller 1992). Instead, they frequently make decisions so as to perform well relative to their competitors, which we refer to as having competitor-oriented objectives. Managers might choose not to focus on maximizing future profits, because profits are difficult to forecast or because a focus on profits may lead to a short-term orientation at the expense of long-term considerations. Because it is difficult to determine how close a firm is to “maximum profits,” managers may worry that using such a measure could make them or their organizations content with mediocre performance. Some experts argue that if profits do not motivate managers effectively, relative measures, such as market share, should be used. Kotler (1988, p. 333) states that the strategic objective of many firms “is to increase their market shares, thinking that this will lead to greater profitability.” Compared with profit maximizing, such competitor-oriented objectives may be more visible because the performance of another firm serves as a benchmark. In the face of an uncertain future, market share can serve as an intermediate goal that positions the firm for long-term profitability. Competitor-oriented objectives are advocated in textbooks, magazines, and journals. For example, Hendon (1986, p. 1) stresses beating competitors at the expense of all other objectives, including profit maximization. He states that “Business is war! . . . It is a zero sum game. . . . Military people want to destroy a target; business executives want to eliminate a competitor.” Parks, Pharr, and Lockeman (1994, p. 68) say, “Just as in war, the reality of market-share battles is that the success of the victor depends upon the failure of the loser.” Over the past half-century, improvements in information systems have made competitor-oriented information–such as market share–more timely, accurate, detailed, and cost-effective, thus making it easier to pursue competitor-oriented objectives. One recent development is the use of scanner data. Some experts, for example, consider that the goal of using scanner data is to “take market share away from the other guy.”2 We examine how competitor-oriented objectives and the availability of competitor-oriented information can affect managerial decisions and the profitability of firms. Using a variety of evidence collected over nine years, we compare the long-term profitability of competitor-oriented and self-oriented objectives.