BM6023: The financial characteristics of companies vary for many reasons The two most prominent drivers are industry economics and firm strategy: Managerial Accounting & Finance Case Study, HWU, Malaysia


Heriot-Watt University (HWU)

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BM6023: Managerial Accounting & Finance

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The financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate.

An airline, for example, would naturally be expected to have a high proportion of fixed assets, while a consulting firm would not. A steel manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subject to strong price competition, while highly differentiated products like patented drugs enjoy much more pricing freedom.

Because of the unique economic features of each industry, average financial statements will vary from one industry to the next. Similarly, companies within industries have different financial characteristics, in part, because of the diverse strategies that can be employed.

Executives choose strategies that will position their company favourably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made, how it is marketed, and how the company is financed. Strategies among companies in the same industry can differ dramatically.

Different strategies can produce striking differences in financial results for firms in the same industry. The following paragraphs describe pairs of participants in several different industries. Their strategies and market niches provide clues as to the financial condition and performance that one would expect of them.

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