Generically, market share is driven by the breadth of the company’s product line and management’s willingness to sacrifice profits. An expanded product line implies a larger asset base. Profits fall because of price cuts, expanded inventory carrying costs (to avoid stock-outs) , and increased SG&A expenditures.

When it stands alone, market share drives managers towards destructive behaviors. Of course, demand increases, and if the company can at least break even, at some point in the future the company will be significantly larger than its competitors. Management will increase margins, sacrificing some of its demand for profits.

Given our starting balance sheet, how would market share alone affect management behavior?

• 1) Let’s assume management wants to at least break even. Profits are close to zero. No increase in retained earnings. Management will want to expand the product line and add to existing capacity.
• 2) Plant and equipment expands, funded by stock and long term debt. However, because there are no profits, the stock price will fall, limiting the amount of equity that can be raised. The burden shifts to long term debt. 3) Management will expand accounts receivable (increases demand) and Inventory (avoids stock-outs) , with corresponding increases in accounts payable and current debt. 4) Plant and equipment purchases will be somewhat smaller because the emphasis will be on capacity, not automation. It will be constrained by a need to expand current assets.