Wednesday, June 8, 2011

View of the Economy Slowing Down


First of all, I want to stress this is a simplistic overview of a left-brained person who is overly analytical.

The question this morning raised by all the pundits on TV is if the gradual slowdown of the economy is devastating for the stock market. Seeking to illustrate this question,  I'll create a chart, using generalization of what happens when a random company encounters our current market. No consideration of age, value, sentiment, growth, etc. was factored in. No consideration of what the company does with its "top line" revenues is considered. I'm using the K.I.S.S. principle

I have three states for the companies in this chart. Revenue growth is used, but as a doorstop to prove a point. I have three states for the gross domestic product (GDP)

A company can have revenues that are { Growing, Stable or in Equilibrium, Slowing }
The economy can have %GDP that is  { (>)Growing,(0) in Equilibrium, (<)Slowing }
The resultant status is the third column.

Company GDP Resulting Consequence
Growing Growing ?
Equilibrium Equilibrium ?
Slowing Slowing ?

Maybe GDP is not a good measure whether a company will succeed or not. The conclusion is, that the GDP really has no direct relationship to the growth of a company, maybe the market share does....

Let's use Market Share.
Market share is
the percentage or proportion of the total available market or market segment that is being serviced by a company. It can be expressed as a company's sales revenue (from that market) divided by the total sales revenue available in that market.


The total market segment can be expanding or the individual company's market share can be expanding; Likewise, the market segment could be contracting or the equities market share could be contracting.



Company Market Share Resulting Consequence
Growing Growing Growing*
Growing Equilibrium Growing
Growing Slowing Growing
Equilibrium Growing Slowing
Equilibrium Equilibrium Equilibrium
Equilibrium Slowing Growing
Slowing Growing Slowing
Slowing Equilibrium Slowing
Slowing Slowing Slowing*
* depending on rate

It points out the obvious, that a growth company will do well in most situations. It will do well if the economy is in a bear or a bull market.

The interesting discovery is that if a market share for an industry or sector is expanding, the expected results might be counterintuitive.
If the market share is decreasing then the growth of a company can be growing and in equilibrium with good results.
If the market share is stable then the growth of a company can be growing with good results.
If the market share is growing then the company has to be growing faster than the market share for good results.


Conclusion
It's not whether the macroeconomic GDP is declining or expanding; it's the market share of your product declining/expanding. If your revenues are not growing as fast as the total market share, your basically shrinking compared to your competitors.


How do you measure market share?
Calculating Market Share
How to define Market Share

No comments:

Post a Comment