A new generation of managers is realizing that the old idea of building profits by building market share is about as relevant today as the rotary-dial telephone. The truth is that profitable companies build market share — not the other way around.

A new strategic outlook, called "profit leadership," has been used successfully by companies like Dell Computer and Roche Diagnostic Systems, and it is rapidly replacing the traditional "market leadership" outlook.

Let's examine the facts behind this trend and its implications.

Consider a 1997 study by Donald V. Potter, formerly of Accenture and now president of Windermere Associates. Potter and his team studied more than 3,000 public companies in 240 industries. He discovered that more than 70 percent of the time, the company with the biggest share of the market does not have the industry's highest rate of return.

In fact, in 23 percent of the industries, the fourth-largest firm actually earned higher returns than any of its three larger rivals. If market share was essential to profitability, these smaller competitors should not have even been contenders; yet they were almost as likely to be the most profitable competitor as the No. 1 company in the industry. The bottom line is inescapable: Market share does not automatically lead to profits.

Why then do managers insist on maximizing market share? In his book, The Myth of Market Share, Richard Miniter explodes five classic myths that executives use to justify their pursuit of market share at the expense of short-term profit:

First, they believe the company with the largest market share can raise prices. It's true that some dominant firms have raised prices and made them stick. But take a closer look, and market share had little to do with it. Instead, the company offered a unique benefit or feature that the competition couldn't match. For example, Gillette introduced its Mach III razors and charged higher prices. The reason it worked is because the Mach III is a better disposable razor than anything else on the market. The premium was due to the product's unique value proposition, not Gillette's market share.

Second, they believe size naturally creates higher returns. This argument for market share is simple, widely believed, and totally wrong. ...