Shareholder value and market share have at least one thing in common: The typical corporation probably would like to increase both of them. Shareholder value is a measure of how successfully the company is performing for its owners, while market share is a measure of how successfully the company is attracting customers.
"Shareholder value" is a broad term, but at its most basic, it refers to what the shareholders of a corporation are getting for their investment. On one level, it means making a profit, because ultimately profits belong to the shareholders -- who, after all, are the owners of the company. But it also means ensuring the long-term viability of the company, so that it can continue to deliver a return to those shareholders. As representatives of the shareholders, the members of the company's board of directors are expected to protect and enhance shareholder value -- and to employ company officers who will do the same.
Increasing shareholder value doesn't necessarily mean putting money directly into shareholders' pockets. Companies can certainly do that by distributing profits as dividends. But shareholder value also increases when the price of the company stock rises, since it makes the company the shareholders own worth more. Healthy earnings and strong growth prospects usually push a company's stock price up. The challenge for company managers is in delivering profit in the short term without hurting long-term growth. For example, cutting spending on product development could boost this year's profits, but might leave the company with obsolete products a couple years down the road. Former General Electric CEO Jack Welch, credited by many with popularizing the concept of shareholder value, has said, "Shareholder value is an outcome -- not a strategy." In other words: Make good decisions for the company, and shareholder value will increase.
Market share refers to the total percentage of sales made by a particular company within a market. If, for example, Americans bought 10 million widgets last year, and 2 million of those were sold by Company X, then Company X's share of the U.S. widget market is 20 percent. Companies looking to expand market share commonly use advertising, promotions and discounts to try to drum up demand. A firm can also increase market share on the supply side by introducing new product lines and acquiring smaller companies that operate in the same market.
Market share can be defined in terms of the products companies are selling, or in terms of the customers they're selling to. An auto manufacturer, for example, could aim for market share in all car sales, or just sedan sales, or just sales of luxury sedans. It might have just a 5 percent share of the auto market, but 10 percent in sedans and 20 percent in luxury sedans. Similarly, it could target all car buyers, or predominantly families, or single men, or high-income individuals, or countless other subgroups defined by age, sex, geography, ethnicity, what have you, and measure its market share in them all.
- Financial Accounting for MBAs, Fourth Edition; Peter Easton, et al
- Bloomberg Businessweek: Jack Welch Elaborates - Shareholder Value
- A Framework for Marketing Management, Fifth Edition; Philip Kotler and Kevin Keller
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.