Wednesday, April 22, 2009

RIM and the Base of the Pyramid, or low-margin high-volume market

This post is a follow-on from my last.

Over the past year RIM's stock was discounted by many because they expanded from their home turf in the high-margin business market and out to the lower-margin but larger consumer market. Many investors saw this as a poor strategy because it would effect their gross margins (the profit they make on each dollar of revenue).

The gross margin of a company is one of the few "ratios" (stats) used by investors to evaluate a company's performance relative to its peers. Conventional thinking impels a company to "preserve margins" by getting out of low-margin business, usually by selling that off and doing whatever possible to keep from having those margins impacted. RIM broke from the current and made a play with a low-margin higher-volume strategy. Perhaps it is because many Rimmers (employees of RIM) went to such a fine school (my alma mater) that they realize that ten apples is more than 5. Or perhaps they felt that the business market was near saturation, or that they needed to attack their competition from their safer turf. Whatever the reason, RIM surprised many investors this past quarter when it released new earnings. Indeed, 10 apples is more than 5, RIM's profits were up, even though their margins had slipped by 2 points. So, perhaps it is true the low-margin high-volume, aka. BOP (base of pyramid) strategy can work?

The jury is still out, however, because this week there is yet more

No comments:

Post a Comment