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.

Doubling Assets

If we double the asset base, the net effect might look like this:

Assets Doubled To Emphasise Market Share

ASSETS		LIABILITIES & OWNER'S EQUITY
Cash	$8,000	Accounts Payable	$14,000	7.0%
Accounts Receivable	$27,000	Current Debt	$24,000	12.0%
Inventory	$40,000	Long Term Debt	$88,000	44.0%
Total Current Assets	$75,000	Total Liabilities	$126,000	63.0%
Plant and equipment	$169,000	Common Stock	$45,000	22.5%
Accum. Depreciation	($44,000)	Retained Earnings	$29,000	14.5%
Total Fixed Assets	$125,000	Total Equity	$74,000	37.0%
Total Assets	$200,000	Total Liab. & O. E.	$200,000	100.0%

Note the trade-offs with other performance measures. We are increasing assets, using a modest increase in equity and heavy leverage. Profits are zero. Dividends are zero. Stock is diluted.

The implications for other performance measures include:

• ROE: Falls because of low profits. May climb if some share is sacrificed near the end of the simulation.
• ROA: Same as ROE.
• Asset turnover: Likely stays neutral or falls slightly.
• Stock price: Falls. No increased book value. EPS is zero. Dividends zero. Shares diluted.
• Market cap: Falls. More shares at a lower price.
• ROS: Falls to zero.
• Cumulative profit: Falls to zero.

Of course, the company hopes to suddenly restore profits near the end of the simulation. If they can, all of the performance measures will turn sharply upwards in the end game. Further, in destroying their own profitability, they have also destroyed their competitors. If they can get “big” while competitors stay small (possible, since competitors would seek a profit) , they can sacrifice a small amount of share in the end game for a sizeable, albeit late, profit.

The board of directors will almost always impose other performance measures. Applying market share alone is a recipe for self-destruction. Used in concert with cumulative profit, management will feel schizophrenic, but will see a common theme of fast growth.