Market share refers to the percentage of the overall volume of business in a given market that is controlled by one company in relation to its competitors. For example, if the total sales of a certain product in a market is $100, 000, and the company in question sold $20, 000 worth of that product, then the company had 20 percent market share. Market share is most meaningful in a relative sense; that is, when a company compares the market share it commands to the percentage held by its largest competitors. "The important factor in computing relative market share is not the exact number associated with the sales volume, " Kenneth J. Cook wrote in his book The AMA Complete Guide to Strategic Planning for Small Business. "Your position relative to the competition is more important. You want to know basically if they dominate you, if you are relatively equal in size, or if you dominate them."
To calculate market share, a small business owner first needs to determine the total sales of a product in a target market over a specific time period, usually one year. Then the small business owner needs to calculate the total sales achieved by his or her company in that market over the same time period. It may also be useful to find out the sales level achieved by the company's largest competitors and then use that information to compute relative market share. Information on the overall size of markets is usually available through industry associations, which commonly track both sales and growth rates. If competing firms happen to be publicly owned, their sales figures can usually be gleaned from their annual reports. Otherwise, the small business owner may be need to make an educated guess based on his or her knowledge of each competitor and on information provided by the company's customers and sales staff.
APPLICATIONS OF MARKET SHARE INFORMATION
Many companies use market share as a managerial objective—i.e., a company might try to gain a specified share of the market by a certain time. Market share can be a useful objective in that it forces small business owners to pay attention to the overall market and to the actions of competitors. It is also easier to measure than some other common objectives, such as maximizing profits. But there are some potential pitfalls associated with setting a company objective of increasing market share. For example, a company may be tempted to set too low a price to achieve this goal, even though a larger sales volume does not always lead to higher profits.
Another application of market share information is in evaluating a company's competitive position in an industry in order to formulate an effective strategy. Information on a firm's relative market share—which indicates its competitive position—can be combined with information on the growth rate and attractiveness of the industry to determine the best future positioning of the firm. The attractiveness of an industry can be determined through an industry analysis, which points out the threats and opportunities facing competitors. The growth rate of an industry can be determined by measuring trends in customer spending levels. As Michael E. Porter outlined in his classic book Competitive Strategy: Techniques for Analyzing Industries and Competitors, the results of these measurements can be plotted on a quadrant diagram. The horizontal side of the matrix represents the firm's competitive position and the vertical side represents the growth rate and attractiveness of the industry, both ranging from weak to strong.
If both the company's competitive position and the industry's attractiveness and growth rate are strong, then the company occupies a fortunate position and is known as a "star." The most appropriate strategy for star companies is to exploit their competitive advantage and protect themselves against new competitors entering the industry. If both the company's competitive position and the industry's attractiveness and growth rate are weak, then the company is in an unfortunate position and is known as a "dog." The potential for market growth is limited, and the company's future prospects in the industry do not appear promising. The most appropriate strategy for a dog company is to limit spending, generate as much cash as possible in the short term, and consider exiting the industry.
If a company holds a strong position in a weak industry, it is known as a "cash cow." The best strategy for companies in this situation is to milk the market for cash while not expending too many resources. Finally, if a company occupies a weak competitive position in a strong industry, it is known as a "question mark." The business owners have important strategic decisions to make. Although there is strong future potential in the industry, the company's weak position means that it will have to make a significant investment to take advantage of the opportunity presented. In this case, it is particularly important for the business owner to understand his or her customers and competitors to determine whether it will be possible for the company to develop a competitive advantage.