Review Question on Impact Analysis of changes in market share and size on the firm ’ s sales

1. Review Question on Impact Analysis of changes in market share and size on the firm’s sales Ted Mitchell

2. Basic definition of Market Share • Market Share =(your sales revenue)/(total industry sales) • S = R/Ri • WhereS = Market ShareR = Sales RevenueRi = Total Industry Sales Revenue

3. Calculation of Market Share • The total industry sales in the market isRi = $100 million. Your sales revenue is R = $20 million dollars. What is your market share S = _______? • S = R/Ri = $20/$100 = 20%

4. New Question onyour market share, S • Your share of the total sales in the market is S=25%. The total sales revenue is Ri=$100 million dollars. How many dollars did you make in sales revenue, R= ___? • Your Sales Revenue = (Market Share x Total Sales Revenue) • R = S x RiR = 25% x $100 = $25 million

5. Scenario Question • Your firm’s market share was 20% last year and increased to 25% this year. Your sales revenue is greater this year than last year. • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely

6. Scenario Question • Your firm’s market share was 20% last year and increased to 25% this year. Your sales revenue is greater this year than last year. • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely A significant majority of students think this is a plausible or likely scenario.

7. Assumption • Smaller market shares imply smaller sales revenues. Bigger market shares imply bigger sales revenues. • Your market share increased from 20% to 25%. • Should you assume that you made more in sales revenue?

8. Scenario Question • Your firm’s market share was 20% last year and increased to 25% this year. However, your sales revenue is less this year than last year. • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely

9. Scenario Question • Your firm’s market share was 20% last year and increased to 25% this year. However, your sales revenue is less this year than last year. • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely A significant majority of students think this scenario is implausible or unlikely

10. Review Question • Smaller market shares imply smaller sales revenues. Is it possible for the firm’s share of the industry’s total sales revenue to decrease from one period to the next while over the same time period the firm’s sales revenues are increasing? For example, the firm’s market share increased from 20% last period to 25% this period. Is it possible for the firm’s actual sales revenue to decrease from $100,000 to $80,000 over the same period? • a) Definitely Yes • b) Probably Yes • c) Probably No • d) Definitely No

11. Review Question • Smaller market shares imply smaller sales revenues. Is it possible for the firm’s share of the industry’s total sales revenue to decrease from one period to the next while over the same time period the firm’s sales revenues are increasing? For example, the firm’s market share increased from 20% last period to 25% this period. Is it possible for the firm’s actual sales revenue to decrease from $100,000 to $80,000 over the same period? • a) Definitely Yes • b) Probably Yes • c) Probably No • d) Definitely No

12. Review Question • Smaller market shares imply smaller sales revenues. Is it possible for the firm’s share of the industry’s total sales revenue to decrease from one period to the next while over the same time period the firm’s sales revenues are increasing? For example, the firm’s market share increased from 20% last period to 25% this period. Is it possible for the firm’s actual sales revenue to decrease from $100,000 to $80,000 over the same period? • a) Definitely Yes • b) Probably Yes • c) Probably No • d) Definitely No The majority of students answered probably or definitely No

13. A positive change in rate does not imply that the result should get larger

14. A change in rate does not imply that the result should get largerIt can get smaller!!!

15. A change in rate does not imply that the base or denominator has remained constantThe Denominator can change!

16. Scenario Question • Your firm’s share of the market was 20% last year and increased to 25% this year. The total market size shrunk from $500 million to $320 million. Your average market share for the two years was 22.5% • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely

17. What is your average share over the two periods?

18. Scenario Question • Your firm’s share of the market was 20% last year and increased to 25% this year. The total market size shrunk from $500 million to $320 million. Your average market share for the two years was 22.5% • a) Very plausible or likely • b) Somewhat plausible or likely • c) Somewhat implausible or unlikely • d) Very implausible or unlikely The majority of students answered very plausible or likely

19. Your average share over the two periods is NOT 22.5%

20. Your average share over the two periods is take the totals of the two periods into account!

21. Your average share over the two periods is 21.95%

22. The points so far • 1) Don’t assume a constant contextDon’t assume the denominator in the rate is constant when judging if a change in a rate is good or bad for business! • 2) Don’t simply take the average of two rates and assume you have the average rate!

23. How to Measure the Amount of The Change in Our Sales Revenue Due to the Individual Changes in Market Share and Market Size Ted Mitchell

24. Basic Relationship • Our Sales = (Market Share) x (Market Sizein Units Sold) • 20,000 units = 20% (100,000 units) or in Revenues • $100,000 = 20%($500,000)

25. Analysis of Changes • Change in Sales from period to period must equal the change in sales due to the change in Market Share plus the change in sales due to the change in Market Size • (Revenue in period 4 - Revenue in period 3)=Impact due to ∆ in Share +Impact due to ∆ in Size of Market • R4-R3 = Impact due to ∆ in Share + Impact due to ∆ in market size • ∆R = I∆S + I∆Ri

26. Observing Change from period to period • The revenue you made in period 4 has decreased from period 3. • Is the decrease is due to • 1) a change in your market share or • 2) due to a change in the market size or • 3) both?

27. Observed Changes

28. No bonus because there is no increase in profit • Your market share went up by 5% • It is not your fault that the total market shrank by $180 million dollars • It is not your fault that the amount of your revenue shrank by $20 million dollars • You should get a bonus for increasing the market share • The market share increase made things better than they would have been if share had not increased

29. How much is the 5% increase in market share worth in dollars of revenue?

30. Observed Changes

31. Observed Changes

33. Your bonus should be based on the $16 million dollars in extra revenue that the extra 5% in market earned you!

34. Graphical Example Ted Mitchell

35. Market Share $100 million in Period 3 20% Market Size $500 In millions of dollars

36. Market Share $80 million in Period 4 25% $2.70 Impact Market Size $320 In millions of dollars

37. Net Change of -$20 million Market Share $80 million in Period 4 $100 million in Period 3 25% Impact of +$16 $2.70 Impact 20% Impact of -$36 Market Size $320 $500 In millions of dollars

38. Revenue Change Has Three Impacts • R4–R3 = Sx(Ri4 –Ri3)+ Rix (S4 –S3)+ r where • R4–R3 = ∆R = Change in Revenues • Sx(R4 –R3) = Impact due to deviation in Market Size • Rx (S4 –S3) = Impact due to deviation in Market Share • r = Joint Impact not explained by individual deviations in market size and and market share Subscripts 4 = period 4, 3 = period 3, x = minimum value of period 3 orperiod 4

39. Net Change of -$20 million Market Share $80 million in Period 4 $100 million in Period 3 25% Rix(S4-S3) = $16 $2.70 Impact 20% Sx(Ri4-Ri3) = -$36 Market Size, Ri $320 $500 In millions of dollars

40. Revenue Change is due to Three Impacts • Ri4–Ri3 = Sx(Ri4 –Ri3)+ Rix (S4 –S3)+ r where $80 – $100 = 20%($320 - $500) + $320(25%-20%) + 0 • R4–R3 = ∆R = Change in Our revenue • Sx(Ri4 –Ri3) = Impact due to deviation in Market Size • Rix (S4 –S3) = Impact due to deviation in Market Share • r = Joint Impact not explained by individual deviations in market size and and market share Subscripts 4 = period 4, 3 = period 3, x = minimum value of period 3 orperiod 4

41. If Both Change in the Same Direction You get a Joint or Residual Impact

42. Net Change of =$16 + $36 + $9=+$61 million Market Share $125 million in Period 4 25% Joint impact +$9 Impact of +$16 $2.70 Impact 20% $64 million in Period 3 Impact of +$36 Market Size $320 $500 In millions of dollars

43. Residual • For identifying relative importance of a specific change the joint impact is not important • For rewarding changes in performance allocate the joint variance to the two primary impacts in the same proportion as the primary impacts.

44. Any Questions?