Case Study On Project for Financial and Strategic Analysis

Question: Discuss about the case study Business Analysis Project for Financial and Strategic Analysis. Answer: Introduction The following Business Analysis Project report represents the financial and strategic analysis through the selected company Activision Blizzard vs. Electronic Arts and Ubisoft as competitors. The report focuses on key financial and performance ratios while the business strategy has been analyzed through Porters five forces and PESTEL analysis (Khan, Alam and Alam 2015). Purpose: The purpose of the report is to analyze and evaluate the performance of the company and its competitors through various key performance indicators. The analysis is conducted to examine the financial data to estimate the future risk and potential of the organization to achieve their objectives. Company Background: Activision Blizzard is a largest communal gaming and amusement organization across the world (Activisionblizzard.com. 2016). While the competitor organization Electronic Arts is a gaming company involves in developing, publishing, marketing and distribution of video games. Ubisoft, another competitor is a developer and publisher of video games having its headquarters based in France. Key issues: The financial and strategic analysis has been conduct to evaluate the key issues of chosen company, Activision Blizzard. The significant issues are decline in the sale of a unit product, Call of Duty, decline in the number of subscribers and average reviews on the unit game product World of Warcraft and Destiny respectively (Activisionblizzard.com. 2016). Rationale of the selected companies: Activision Blizzard is a largest gaming company and facing critical issues that could hamper its cash flows. Other two competitive companies Electronic Arts and Ubisoft are equally popular for the product video games. Hence, analysis and evaluation of financial information and business strategy would be transparent and fair with respect to gaming industry. Financial Analysis Financial Analysis is a process of evaluating the feasibility, profitability and stability of the of the business performance. The analysis is performed through financial statements of the organization related to the accounting year (Carter et al. 2015). Revenue analysis and forecast Analysis of sales revenue is conducted to take decisions on business strategies and its performance for the related period. Revenue of Activision Blizzard shows increasing and decreasing trend since the financial year 2011 to 2015. The net revenue in the year 2011 stood at $4,755 while it increased in the year 2012 amounting to $4,856. However, the net sales declined in the year 2013 and 2014 while the company managed to increase the revenue in 2015 amounted to $4,664 (Activisionblizzard.com. 2016). Moreover, the net revenue of the competitor companies Electronic Arts stood at $4,515 in the year 2015 and $3,575 in the year 2014 (Electronic Arts Home Page. 2016) while that of Ubisoft $142,536 in the year 2015 which was negative in the year 2014 (Ubisoft.com. 2016). Activision Blizzard $ Electronic Arts $ Ubisoft $ Profitability Net Margin= Net Profit/ Revenue 892/4664*100 948/4515*100 142536/1219150*100 Net Margin % 19.13 21.00 11.69 Return on Assets= Net Income/ Total Assets 892/15251*100 948/6147*100 142536/1941630*100 Return on Assets % 5.85 15.42 7.34 Figure 1: Graph showing net margin (Source: Created by author) On considering the revenue data of all the three companies, it can be observed that the performance of Activision Blizzard was better as compared to that of its two competitors. Although, the revenue of Electronic Arts increased in the year 2015 but the same was declined in the year 2014. Market share growth Market share is a percentage of total sales of market industry and the total sales of a particular company over the financial period. Market share growth identifies the companys share in the economic industry with respect to the profitability and growth (Dewachter et al. 2015). The approximate total sales of gaming industry in the year 2015 are $91.5 billion whereas the net sales of the company Activision Blizzard were $4,664 and Electronic Arts was $4,515. Hence, the companies procure a decent share in the gaming industry as well as have increased sales turnover in recent years. Profit margins Profit margin or return on sales is a profitability ratio that is used to measure the value of net income earned by the organization against its total sales. This ratio determines the percentage of revenue comprises the net income of the company. Additionally, it measures the ability to the companys expenses to generate business income (Noori et al. 2016). Activision Blizzard $ Electronic Arts $ Ubisoft $ Net Income 892.00 948.00 142,536.00 Net Sales 4,664.00 4,515.00 1,219,150.00 Profit Margin Ratio 0.19 0.21 0.12 Table 1: Profit Margin Ratio (Source: Created by Author) As the profit margin of the company, Activision Blizzard is 0.19, which is lower than that of Electronic Arts that is 0.21 in the year 2015. However, profit margin ratio of another competitor Ubisoft is low at 0.12 than that of Activision Blizzard and Electronic Arts. Price earnings ratios Price earnings ratio is a ratio that is used to measure the companys current price of shares and securities with respect to its earnings on each share (Jindal et al. 2016). Activision Blizzard Electronic Arts Ubisoft Price 38.71 68.72 40.54 EPS (basic) 1.21 2.81 0.89 P/E ratio 31.99 24.46 45.17 Table 2: Analysis of P/E Ratio (Source: Created by Author) The price-earnings ratio analysis for the company Activision Blizzard and its competitors shows that it is higher in case of Ubisoft while that of Electronic Arts is lowest. It measures that the investors of the organizations expects to invest to earn from the company as proportion to their shareholding (Feinberg and Park 2015). Debt level (gearing ratio) Debt ratio comprises of short-term and long- term debts that are borrowed by the companies to finance their assets. Additionally, gearing ratio is examined to measure the organizations debts to the equity. It indicates the risk of finance that the companies might face because high gearing ratio (Camarero, Carrion i Silvestre and Tamarit 2015). Activision Blizzard$ Electronic Arts$ Ubisoft $ Debt 4,079 966 788,314 Equity 8,068 3,036 682,054 Gearing ratio 0.51 0.32 1.16 Table 3: Gearing Ratio Analysis (Source: Created by Author) The analysis of debt equity gearing ratio shows that Ubisoft has the highest gearing ratio in the financial year 2015 while Electronic Arts has the lowest. In case of high gearing ratio, there is high proportion of debts and equity that indicates high financial leverage of the company. In the present situation, Activision Blizzard has the moderate proportion of debt and equity mix among the competitive organizations. Cash and other ratio Cash ratio is examined to measure the companys ability to disburse off its current liabilities. High cash ratio indicates that the company is more liquid and has the ability to pay its debt from the liquid cash funds (Kriz, Wang and Issarachaiyos 2015). Activision Blizzard $ Electronic Arts$ Ubisoft $ Cash and Cash Equivalent 1,823 2068 284,009 Total Current Liabilities 2,611 633 482,403 Cash Ratio 0.70 3.27 0.59 Table 4: Cash Ratio Analysis (Source: Created by Author) The analysis of cash ratio reflects the position of companies in paying off their debts with cash and cash equivalent. Cash ratio of Activision Blizzard and Ubisoft is less than one; therefore the companies need to use other current assets to pay off current liabilities. On the other hand, cash ratio of the competitor company Electronic Arts is greater than one hence; it has sufficient cash balance to pay off their debts (Ogiela 2015). Current ratio is used to examine the efficiency of companies to pay off the current liabilities with current assets. Activision Blizzard $ Electronic Arts$ Ubisoft $ Current Assets 3,387 3,720 919,799.60 Current Liabilities 2,611 633 482,403.00 Current Ratio 1.30 5.88 1.91 Table 5: Current Ratio Analysis (Source: Created by Author) Since all the companies current ratio is greater than one, their liquidity position to pay off the debts is good and favorable. However, the current ratio of Electronic Arts is highest therefore the company has more resources to pay its debts (Feiz et al. 2015). Key Performance Indicator KPI Activision Blizzard $ Electronic Arts$ Ubisoft $ Growth Revenue growth, YoY % 5.80% 26.29% 31.72% Profitability Return on Invested Capital % 5.94 23.69 9.69 Efficiency Operating Margin % 25.56 21.00 125.93 Solvency Operating Cash Flow/ Debt- Equity Ratio 2,357.70 2,979.43 1,198,861.67 Innovation RD expenses in % of sales - - 52.76 Table 6: Analysis of Key performance Indicator (Source: Created by Author) Growth percentage have been evaluated by considering sales of the year 2015 and 2014 which shows the increase in generation of revenue of all the companies (Podgrski 2015). Profitability percentage is highest in Electronic Arts while efficiency and solvency is moderate. This shows that all the three organizations are competitive and reflects the efficient performance in the year 2015 in all respects. Moreover, there is no research and development cost in Activision Blizzard and Electronic Arts whereas, Ubisoft had incurred in RD expenses at 52.76% of sales. Strategic Analysis Strategic Analysis is a use of several tools to present the strategies of business by assessing the opportunities and threats of the organizations. Additionally, it involves a review of organizational strengths and weakness as well as environmental factors that influence the performance of the business (Amaldoss, Desai and Shin 2015). Market and competitors analysis: It is the assessment of industry and organizational market considering the competitor organizations in the similar industry (Zhao et al. 2016). In order to evaluate the market and competitors analysis, Michael Porters five forces model and PESTEL tools have been considered. Porters five forces is model that is used to examine the level of competition within the market industry and development of business strategy. Figure 2: Porters five forces analysis (Source: created by author) Bargaining power of buyers exist when there are more number of substitutes available in the market (Chuchrova, Vilamova and Kozel 2016). In case of electronic games, the concerned company has competitors like Electronic Arts and Ubisoft, which are quite large distributors in the industry (Mathooko and Ogutu 2015). Therefore, the buyers bargaining power in the gaming sector is high. On the other hand, suppliers bargaining power is also high because there are limited number of substitutes are available in the market. Besides, threat of new entrants in the gaming industry are low because currently there are large companies exist in the market (Fitzpatrick, Nguyen and Cayan 2015). However, it creates substitution effect and industry rivalry high because of the strong competitive organizations (Strumickas and Valanciene 2015). As the gaming industry requires to be updated with respect to digitalization and innovation it is important to have upgraded software for the game products for their mobility. In the competitive world, companies have high mobility with updated software and innovative gaming programs. PESTLE analysis is a comprehensive tool that examines the external factors to the organizations and its competitors in the gaming industry. Political (P) Intervention of government in case of all the gaming companies has favorable impact. The companies are required to clear all the duties and taxes on income with necessary provisions according to Generally Accepted Accounting principles. Hence, the political factors for the gaming industries are not distinctive (Kolios, Read and Ioannou 2016). Economic (E) From the analysis of data, it can be said that Activision Blizzard and its competitors shown increase in turnover and operating income with respect to economic growth, rates of interest and inflation factors. Hence, the competition between the companies in the gaming industry is a neck-to-neck match (Babatunde and Adebisi 2012). Social (S) All the companies deal into electronic gaming products, which considers young and teenage generation because they are more interested in playing such indoor games (Kolios, Read and Ioannou 2016). Technological (T) Electronic games are meant to be upgraded from time to time. Hence, the companies in the gaming industry must have updated, digitized and well programmed software (Babatunde and Adebisi 2012). With this view, Activision Blizzard expanded its business by starting up new range of electronic games in recent years over its two competitors. Legal (L) In order to promote and marketing the new products, companies undertake the compliance of advertising standards, consumer rights, safety of products and specific legal matters related to operation of business (Kolios, Read and Ioannou 2016). Environmental (E) Environmental factor is one of the significant factors in the PESTLE analysis with respect to the safety of environment and society (Kolios, Read and Ioannou 2016). Since, the companies are engaged into the business of electronic gaming, the management has considered all the safety measures of environment. Table 7: PESTLE Analysis (Source: Babatunde and Adebisi 2012) Limitations of Financial models and conventional analysis Limitation of financial models in analyzing performance Financial models have certain disadvantages to analyze the organizations performance for the accounting year. One of the major limitations of the model is time- consuming. It requires ample of time to prepare each of the segments and variables of the model. Another essential limitation is accuracy because the model is presented by using various critical financial and accounting variables. Hence, there are chances to miss out some factors or make an error while presenting the data (Khan, Alam and Alam 2015). The company faces some of the limitations in the gaming sector that are lack of class multiplicity. Even though the company launched new range of games, yet it did not match with the expectation of consumers. Another limitation of the company is technological advancement that is major factor of less revenue generation in the sale from the new game. Limitations of Conventional Analysis Along with the limitation in financial model, conventional analysis also has certain disadvantages. Since the analysis is conducted by Porters five forces and PESTLE it is difficult to examine each of the external factor to make the comparison with the internal factors. This may take place due to lack of availability of proper data, lack of preparation time as well as high cost of preparing the model (Strumickas and Valanciene 2015). The companys major disadvantage is lack of using updated and advanced technology that affects the digitization of the games in terms of screen display, speed and software support. Conclusion The report has been presented by incorporating different variables of financial information and business strategies relating to the external and internal elements of the organization. The financial analysis reflects the growth in sales and profit generation for Activision Blizzard along with its competitors. Apart from that, companys key performance indicators are also positive therefore, it has a scope to enhance its business and maximize the profitability in gaming industry. The company is required to focus on the programs and software for the products with respect to latest technologies so that it can overcome the substitution threats. If the company does not release new technologies, it might face the huge competition from rivals and loose sales revenue. Moreover, increase in sales revenue in the year 2015, company reflects future sustainable growth. Recommendations As per the data provided in the excel sheet for best case and worst-case scenario, current ratio and return on invested capital of Activision are lower. But, the same falls under 5%+ Trend in best case scenario. However in case of Electronic Arts, the return on capital and current ratio falls under present years best case. Hence, the company Activision Blizzard is advised to maintain its performance by increasing the current ratio and sales ratio. Attaining this step, the company will be able to maximize its profits and strengthen customer relationship. At present in case the company does not take step to improve its current and sales ratios, it will be difficult to survive in the gaming industry because of high market competition. SAFe Model Principles Recommendation Economic view In the current economic scenario, advancement of technology has become a priority. Many countries are taking steps to improve the technological system to increase the GDP per capita $12,476 by the year 2020. Therefore, the government is strengthening bond to emerge hi- tech operation system. Best 5% Over Past Trend Moderate Maintain Trend Worst 5% Below Trend Application of system thinking Activision Blizzard requires new software data, cross- sector partnerships to implement in gaming products. The company needs to implement software data and federal policy to improve the quality of products. The company can only implement the cross- sector partnership and changes in federal policy to develop the sales of products. Learning cycles The company requires conducting training sessions to provide knowledge on the use of latest gaming software and technologies. The company can hire personnel having hi- tech expertise for the implementation in gaming products. The company can outsource the technological and software implications for a particular range of gaming products. Unlock the essential motivation of expert workers It is important for the management of the company to provide motivational factors to the workers like payment of incentives, bonus or any other reward. The company may take steps to hire the expertise on permanent basis based on their knowledge to develop its overall operation system. The company would not take steps to reward the workers as the company takes outsourcing activity, which may improve the sales but would not improve the operation system. Decision - making Activision Blizzard is recommended to apply this strategy, as it would improve the sales revenue by around as well as the 10.05% in the next financial year and operation system. If the company applies this strategy, it will help to increase the sales revenue by 7.66% but at the same time, it will increase the cost structure, which results in lowering the profit percentage by 3.08%. This business strategy is not recommended as the outsourcing will lead to increase the cost of operation by around 11.14% as well as the company will not be able to improve its working technology experts for the benefit of the company in future years. Recommendations using Modeling Data Modeling data and forecast graphic shows the level of net margin percentage as well as return on assets considering best, moderate and worst case scenario for the years 2009 to 2016. On the basis of financial analysis net margin percentage and return on assets is the best in case of Electronic Arts as it has the highest percentage in comparison to other two organizations. Additionally, the net margin percentage and return on assets of Activision Blizzard are in increasing phase but at lower rates. As a result, the company has to face the rival company, Electronic Arts because profit margin, income ratio, gearing ratio and return on assets of Ubisoft are lower compared to other companies. Therefore, Activision Blizzard has to incorporate its assets and increase the sales of products to capture the market with a better profit margin. 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