I discuss three scenarios below where market leadership is not necessarily a competitive advantage.
First, the market structure is important. For example, a market leader with 30% market share does not have as much clout in a fragmented industry with five other competitors having 10% market share each. On the other hand, a 10% market share can be significant, if no other competitor in the market has more than 1% market share. The market share of a company should be evaluated relative to the market share of its closest competitors and the structure of the market.
Second, the definition of the market space matters. It is common for self-promoting management to "carve out" a niche market space where the company is the market leader. By defining a sufficiently small market space, any company can be a market leader. Investors should pay attention to the words used in the description of the market that the company operates and also the size of the market. The market defined should be large enough, so that any increase in market share creates real value for the company.
Last, in the same way that growth destroys value when the return on capital is below the cost of capital, being a captain of a sinking ship adds no value. In an industry with deteriorating prospects, it is natural to see weaker companies being forced out of the market or taken over by stronger competitors. This will lead to stronger companies consolidating and emerging as market leaders with improved ROEs. However, the positive impact is typically short-lived as the law of zero economic profits kicks in pretty quickly in a commoditized industry.