Does Bigger Still Mean Better? How Digital Transformation Affects the Market Share-Profitability Relationship

Abstract

Extensive research has examined the effect of market share on profitability and, in general, has found a significantly positive relationship between the two metrics. However, this article demonstrates that the digital transformation of companies has substantially altered this relationship and its underlying mechanisms. The authors first theoretically develop the different influences of digital transformation on the traditional market share–profitability framework. Subsequently, they estimate a firm–profitability model based on a sample of 6,389 observations from 824 U.S. firms over 25 years that accounts for companies’ degree of digital transformation by text mining their financial statements using a self-developed and validated dictionary. The authors find a significantly negative interaction between the degree of digital transformation of a company and the impact of market share on profitability. However, they also show that this effect is moderated by i) a firm’s digital transformation emphasis (i.e., digital transformation of internal vs. external processes; digital transformation through platformization), ii) a firm’s general strategic emphasis (value appropriation relative to value creation), and iii) a firm’s general market environment (B2C versus B2B). The findings suggest that managers and investors of digital companies should exercise caution when relying on market share as a metric for performance.