New research on companies that sprint to rapidly gain market share is revealing the danger of pursuing sudden massive growth, according to the Management Insights feature in the April issue of Management Science.
"Getting Big Too Fast: Strategic Dynamics with Increasing Returns and Bounded Rationality" is by John D. Sterman and Rebecca Henderson of MIT's Sloan School of Management; Eric D. Beinhocker, McKinsey Global Institute; and Lee I. Newman, Department of Psychology, University of Michigan.
Positive feedbacks such as network effects, scale economies, and learning curves are increasingly important in hi-tech, information-age industries. Strategy literature generally recommends that firms in such industries pursue "get big fast" (GBF) strategies, expanding capacity and production rapidly, and cutting prices--often below current costs--to gain market share and grow faster than their rivals, thus building the resources and competitive advantages needed to dominate the market.
The authors find, however, that such aggressive strategies often lead to overcapacity when the market saturates. The resulting losses can overwhelm the advantages of market share leadership, which happened during the collapse of the technology bubble in 2001.
The authors developed a simulation model that shows the conditions under which forecasting errors leading to capacity overshoot and large losses are likely. Rather than expanding aggressively when the risk of capacity overshoot is high, they recommend that firms consider conservative strategies, allowing less sensible rivals to play the aggressive strategy, then buying these rivals at distress prices when they fail during the transition from boom to bust.