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Market Share and Deep Pockets

Adding shareholder value through increasing a company’s market share is very tricky strategy. We also tell you in the first week of a finance course that the objective of the manager is to maximize shareholder value, not to increase market share.

In a move aimed at bolstering its market share, Compaq Computer Corp. lowered prices by as much as 28% on its line of personal computers that use Intel Corp.’s Pentium Pro chip, according to the WSJ May 7, 1996.

Why does this strategy make sense?

The strategy is aimed at squeezing out small rivals, adds the Journal. Compare this strategy with price-cuttings in, say, the airline industry. Can you think of a difference?

What makes Compaq’s strategy viable is that a large segment of its competitors are small in that these companies do not have deep pockets that they can draw on for a prolonged time. Thus, they are unable to sustain losses for a very long time. Hence, lower prices by Compaq would drive smaller companies out of business, giving Compaq the opportunity to capture these sales.

The airline industry, for example, is structured differently. Lower fares by one airline can be matched by other competitors who also have deep pockets. Thus, in such industries, you end up with "price wars" when the competitors are of comparable strength. Nevertheless, even in this industry, lower prices and more vigorous competition will drive the "small" companies out of business. Peoples Express is just one example.