Business Market Share and Growth

A company’s growth and its business market share (the percentage of total profits of its industry that it controls) have varying degrees of positive correlation. Depending on the nature of the industry a firm operates in, a small amount of growth can lead to large market share increases, or a large amount of growth can lead to small increases. In perfect competition, where a large number of price-taking suppliers all compete against each other with identical products, a given rate of growth may have a lesser impact on a company’s market share than it would in an industry where a small number of firms dominate the market and there is price control and product differentiation.

Sustainable vs. Unsustainable Growth

Early in a successful company’s life, it might undergo a period of rapid growth that is not sustainable in the long run. Consider an analogy: if one has never worked out before and starts lifting weights every day, he will get stronger quickly. However, after a few months, his level of strength plateaus, and it takes more effort to get just a little stronger. This is one way to look at a company's growth and market share. As a new firm fund its growth and grows in size, its market share will also grow substantially. However, once a firm reaches a certain size, it becomes much more difficult to continue its rapid growth, and it will have to work harder to realize repeating lower growth. In other words, scale becomes harder to manage. Think of how difficult it would be for Microsoft to double in size from what it is now.

The Nature of Growth Stocks and Growth Companies

Growth stocks are potentially more lucrative investments than stocks of more mature, larger companies. These stocks also have more risk, though. Growth companies also typically do not pay dividends because all of the profits earned are reinvested into the growth of the company. When a company funds a large portion of its growth through retained earnings and less through more costly methods like raising capital through debt and equity, it can be a sign of stable future growth and effective capital management.

Incentives for Product Enhancement

A company operating in an industry where product differentiation exists can experience growth by investing in research and development. This can result in competitive advantages and is another way for firms in product-differentiated markets to grow. In industries where all products are identical, firms have to rely solely on size and effective capital management for growth. Product differentiation exists when an industry produces similar products with unique differences, where consumer tastes and personal preferences may make one product sell better than another similar product. A good example would be different toothpastes in the toothpaste industry.

In Sum

A company's growth rate will affect its market share in varying ways depending on its size and the type of market it operates in. When evaluating company market share, it is essential to learn about the industry in which it operates and to compare its financial statements to those of competitors and firms of equal size in the industry.

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