Strategic Management Accounting by Wing Sun Li

Author:Wing Sun Li
Language: eng
Format: epub
Publisher: Springer Singapore, Singapore

Source: Company annunal reports

*Sales from Consumer business (mobile phones) during Year 02-04 were 22%, 23.8%, and 26.1% of the total amount respectively

A concept of relative strength was included in this benchmark study to elucidate the competitive strength. Relative strength shows how strong a firm is compared to its rivals in a specific area of benchmarking. The concept of relative strength was raised by Simmonds’ famous article in 1986 1 which demonstrated how accounting was used for assessment of competitive position. The benchmark study requires a focal firm. In this study, Ericsson was taking the role of focal firm. Table 7.1, compared the performance of Ericsson with its three rivals. The year-to-year % (YoY%) denotes a growth rate of the firm, whereas the 3-year average in YoY% indicates the percent change over a 3-year period. Sales, sales growth, gross margin, and operating profits were extracted from their respective annual reports. These are good proxy measures for competitive position, as already been explained in the prior section. Let’s examine the financial numbers of each firm during this 3-year period from 2012 to 2014. From the market size perspective (i.e., sales), Ericsson had the highest sales in fixed and mobile network (including service and support sales) among all four firms in 2012. Nokia_Siemens and Alcatel_Lucent were half the size of Ericsson sales, and Huawei was about 80% of the relevant segment sale (Huawei had 22% of sales from consumer segment – mobile phones). In fact, Ericsson was the traditional market leader in the telecom network business. In terms of gross margin%, they were close with each other except that Huawei’s gross margin% was much higher than its counterparts. The high % gross margin reflects Huawei’s good cost control in production compared to rivals. Profit level is a good indication of market power. Huawei once again had the best business performance, seconded by Ericsson and Nokia_Siemens. Alcatel_Lucent was the worst performer due to some operation problems. In sum, the relative strengths of Ericsson to its rivals reflect this business reality. Ericsson was better than its European rivals (the rivals’ relative strength less than 1) but worse than its Chinese rival (Huawei’s relative strength higher than 1). All relative numbers reflect a progressive change in competitive position in those firms. The 3-year average shows that Huawei had outperformed Ericsson and others evidenced by a solid sale growth, good cost control in production, and a marvelous profit performance. The relative strengths of Ericsson and Huawei reflect their rivalry intensity. Huawei took the lead to be the sale champion in 2015 in network infrastructure (including service and solutions). In fact, detailed analysis on business unit performance (i.e., in network, services, and solutions) of these firms can also be performed based on the same approach. Companies listed in matured financial markets (e.g., the USA) have mandatory disclosure for business segment performance.

Though the above competitive position analysis shows comparative strength of rivals in their market performance, it lacks the root-cause analysis. For example, what particular internal factors attributed to the performance.

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