Sunday, 18 November 2012

How Efficient is Reseach in Motion?

Watching Research in Motion's (RIMM) stock price fall over the past few years has been difficult. While RIMM gets singled out for its poor stock price performance and Apple becomes the most valuable company in the world by stock market capitalization, it is important to point out that some of RIMM's competitors have not been doing so well. Over the past year, Apple has been the clear winner, but Ericson, Nokia and Research in Motion have each underperformed.

One thing to remember about companies based on cutting edge technologies is that no company can be the leader forever. The product landscape changes. What is new today becomes common place in the future. Think about the cutting edge technology companies of 15 years ago (Microsoft, Cisco, Dell). These companies are still in business but now they are no longer considered young dynamic upstarts but rather established mature companies. In my view, handset makers are entering a more mature phase in which the explosive growth in hand sets is going  to slow considerably. A new United Nations report reveals that there are now 6 billion cellphone users in the world. That means that 86 out of every 100 people now have a cellphone.

A different way to compare RIMM with its competitors is to calculate how efficient it is. To calculate technical efficiency I use data envelope analysis (DEA).  DEA is a non-parametric approach to the estimation of production functions. I use three inputs (employees, total assets, total operating costs) and one output (total revenues). Data are for the year 2011. Samsung is omitted from the comparison because it is a huge multi-product conglomerate. For those interested in the technical details, I use the 2 stage input approach with variable returns to scale (VRS).

The DEA results are presented in the above table. Total technical efficiency (CRS_TE) can be broken down into pure technical efficiency (VRS_TE) and a  scale effect. The total technical efficiency measures indicate that Apple, Google and Research in Motion are efficient since their CRS_TE measures are equal to one. Ericsson, Motorola are Nokia are inefficient. Nokia. for example, can reduce its inputs by 29% and still produce the same output. In the case of Motorola, the pure technical efficiency measure of 1 indicates that management is efficient and the inefficiencies are coming from the scale effect which measures the size of the company. So, while Research in Motion's stock price has suffered over the past year, it is, at least by these calculations, an efficient company.

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