Market share and ROI: Observing the effect of unobserved variables

Unobserved variables correlated with market share are largely responsible for the high profitability of market share leaders; yet, very little is known about these unobserved variables. The objective of this paper is to empirically determine the cost/sales ratios through which unobserved variables affect profitability, and to use this information to identify specific unobserved variables. We find that firm-specific unobserved variables, generally called 'management skill' in the literature, decrease the purchase costs/sales ratio much more than they do any other costs/sales ratio. This finding allows us to identify three specific 'skills' utilized by market share leaders-(i) exploiting product/process efficiencies; (ii) negotiating better supplier discounts; and (iii) vertically integrating or developing strategic partnerships with key suppliers. (C) 1999 Elsevier Science B.V. All rights reserved.