Week 11- Case Study: Financial Indicators and Analysis NOTE: Students will use the analysis described below instead of the textbook Item 4 on page 529. They are, however, encouraged to use the text's explanation and analysis framework under "Calculating Financial Ratios" on pg 529 and continuing onto pg 530. For This Assignment: • For this portion of the Case Study, you will use the company and industry information available from the Ready Ratios website (Links to an external site.) and analyze at least 3 selected years of financial data from your company. The years and the financial indicators you choose should be based on the significant findings from your earlier report on the company and its competitor. Further assignment details are below in the Overview. Overview Imagine you're a candidate for the CEO position of a Fortune 1000 company. The position's starting base salary is expected to be in the $800K to $1.3M range and you've passed the initial screening, so congratulations! As part of upcoming interviews with the prior CEO (now Chairman of the Board), the CFO and the Board of Directors, you need to be ready to answer questions as to what you see in the company financials, why those items are significant and then articulate your plans to improve the company's standing. You are expected to have both financial literacy and effective analytical skills. This is what this portion of the project will help you develop. For your project, the years you choose for your own company should be guided by your prior research which indicated their particular challenges. So, if the company went through some difficult times during the 2007 recession, you might look at a financial snapshot from 2004 and another from 2008 or 2009 to see the impact of the down cycle in the business environment and maybe another from 2018 to see how and if they recoevered. You should also compare this performance to a competitor during the same periods (and if you want to impress the instructor, compare how your company did against the industry average). As another example, if one of the challenges you found was your company has lagging sales performance relative to its industry rivals, a smart action on your part would be to look up the data for at least one sample year of the rival, choosing also the data for the same year for your company to give an "apples-to-apples" comparison. A follow-up analysis would be to see how your company recovered a few years afterwards to strengthen its competitive position (i.e. how with effective was their strategic response?). How well management can get the company to bounce back after a tough time speaks to their competency. What makes the above comparisons meaningful is you will see how different companies, in the same industry and subjected to the same broad PESTEL factors performed against one another, just like professional sports teams do in the same season. The value of this assignment for you as a senior student is you will have better analytic ability that you can use to prepare for a real-life job interview. Using the same process, you can sit across your interviewer and talk about their past performance, their issues and have some ideas about their industry and where they might be headed. Assignment Deliverables: • • Students will also include a 2-4 page summary of the key findings from the report above as well as 2-4 graphs/charts that clearly communicate their points. This part should also include the competitive and/or industry comparisons. The data for this portion will be drawn from the raw report below and any other sources the student can find. Remember to properly cite and document all sources in your report. Students will upload the raw data MS Word format report for their company (generated pretty quickly at the Ready Ratios website (Links to an external site.), ends up with 18-20 pages). Since this report is generated with little effort, students should not anticipate much points for this section, though it is required. The majority of points will be for the section above. Week 11 - Quick Access Supplement: Financial Ratios and Terms to Know Overview: This page provides background on some of the ratios and terms used in Ready Ratios (Links to an external site.) website. Also, in the End Matter of your e-textbook is a summary of these and other ratios used in business. You may also wish to review Investopedia's Financial Dictionary website (Links to an external site.). This is an ungraded assignment and no submission is required. Terms: • Asset Turnover: Sales, generated in a particular year, divided by the value of total assets for the same period. • Book Value per Share: Equity divided by Shares Outstanding. Equity is Common Stock plus Retained Earnings. Shares Outstanding are the number shares that have been issued. For example, if Equity is $50 million and there are 2 million shares outstanding, Book Value is $25 per share. • Bond Rating: If your firm has no debt at all, your current debt interest rates are the prime rate and you are awarded an AAA bond rating. As your debt-to-assets ratio increases, your current debt interest rates increase. Your bond rating slips one level for each additional 0.5% in short term interest. For example, if the prime rate is 10%, and your short term interest rate is 10.5%, then you would be given an AA bond rating instead of an AAA. • Close (Outstanding Bonds): Closing price of the bond last year. Bonds are bought and sold in the marketplace, but since their interest payment is fixed, the price of the bond fluctuates. A risk assessment is made for each firm, ranging from “AAA” to “D.” For each lower grade, investors expect an additional 0.5% yield. The simulation adjusts the closing price of the bond so that the yield reflects current interest rates and an appropriate risk. • Contribution Margin: Contribution Margin = Sales - (Direct Labor + Direct Materials + Inventory Carry) Contribution Margin % = Sales - (Direct Labor + Direct Materials + Inventory Carry) / Sales • Cumulative Profit: Cumulative total of all profits (losses) generated since the game's inception (includes Round 0 profits). • DuPont Chain: This equation is commonly known as the DuPont Chain: Return On Sales x Asset Turnover x Leverage = Return on Equity While two companies might have the same Return on Equity (ROE), they could achieve those returns in very different ways. A company that sells differentiated products with high margins and low unit volume would have a DuPont Chain with a high Return on Sales and a low Asset Turnover. The DuPont Chain component ratios on page 1 of the Capstone Courier are shown below: • Return On Sales (or Profitability) = Profit / Sales Asset Turnover (or Turnover) = Sales / Assets Leverage = o Assets / Equity Return on Equity = Profit / Equity • Earnings Before Interest and Taxes (EBIT): Profits before loan interest payments, broker fees, write-offs, and bonus income are taken into account. Earnings Per Share (EPS): Earnings Per Share = Net Profit for the year divided by the number of Shares Outstanding. • Emergency Loan: A cash injection during the year, automatically triggered when the company runs out of cash. Typical causes: sales projections not met, new plant & equipment ordered without proper funding, excessive inventories. Emergency Loans have an interest rate 7.5% above current rates. • Face Value: For each outstanding bond, Face ($000): Principal of the issue. If the face is $11,040,000 then $11.04M in bonds were issued (unless a portion of the bond was paid off before maturity). Using the 15.4S2006 bond with a face value of $11.04M as an example, coupons (interest) of of 15.4% or a total of $1,700,160 will be paid each year until the bond becomes due in 2006. In 2006, the last coupon and the principal are due. The principal is converted automatically to Current (short term) Debt on December 31 of the year it is due. • Free Cash Flow: Free Cash Flow = Cash Flow From Operations - Capital Expenditures Free Cash Flow is the money left after investment that a company can either put in the bank or give to shareholders in the form of a dividend. Even if Profit is small, Depreciation can deliver a Cash Flow From Operations. However, you never actually write a check for Depreciation. The money is sitting in the Cash account like a check that has not been cashed. It follows that Free Cash Flow must subtract Capital Expenditures, the investments in plant and equipment. If it turns out that you are plowing money back into plant at the same rate you are depreciating it, the whole business reduces back to profits. If the result is a positive number, then the company is creating wealth. The Free Cash Flow can be used to pay dividends, repurchase stock, or reinvest in the company, any of which delights Owners. If negative, then the company needs to consume somebody's wealth, and there are only three places to get it — working capital (our own wealth), a new stock issue (Owner's wealth), or more debt (Lender's wealth). • Leverage: Total assets at the end of the period under review divided by owners' equity for the same period. A value of 2 indicates that half the assets have been bought with equity, and the other half with current and/or long term debt. o Example: ▪ ▪ ▪ Assets = $2,000,000 Owners' equity = $1,000,000 $2,000,000 / $1,000,000 = 2 • Market Capitalization: Total Shares outstanding multiplied by the price of each share. Example, if a company issues 2,000,000 and shares trade at $50.00 per share, the Market Capitalization would be $100,000,000. • Price Earnings Ratio (P/E Ratio): Price Earnings Ratio = Stock Price divided by Earnings Per Share (EPS). • Retained Earnings: Profits the company chose to keep rather than pay to shareholders as dividends. Technically, Retained Earnings belong to the shareholders, as such Retained Earnings are a Liability, not an Asset. • Return on Assets (ROA): Net profit, generated each year, divided by the value of total assets for the same period. • Return on Equity (ROE): Net profit, generated each year, divided by the value of owners' equity for that year. • Return on Sales (ROS): Net profit, generated each year, divided by total sales for the same period. • Bond Series #: Label given to a bond when it was issued. The first numbers are the interest rate. “S” means series, and the last two digits refer to the year the bond is due. 15.4S2011 means that the bond pays a coupon 15.4% each year and that the principal is due in 2011. • SG+A: Sales, General and Administrative expenses: In the simulation, SG&A includes all R&D, Marketing, and TQM costs. • Variable Costs: Costs that vary in direct proportion to the number of units sold. In the simulation, variable costs include material cost, labor cost and inventory carrying cost. • Working Capital = Current Assets – Current Liabilities o Current Assets = Cash + Inventory + Accounts Receivable o Current Liabilities = Accounts Payable + Current Debt. o Days of Working Capital = Working Capital / (Sales/365) • Yield: A measure of what the bond is worth at current interest rates. To calculate, the stated interest rate is divided by the closing bond price. For example, if the stated interest is 15.4% and the closing price is $115.80 then $15.40 divided by $115.80 gives a yield of 13.3%. The graphic below helps explain these concepts in greater detail: Running head: UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES Uber Case Study: Strategic Issues and Challenges Name Course Title Instructor Date 1 UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 2 Uber Case Study: Strategic Issues and Challenges Part 1 Introduction Uber started to operate in 2009 as a private luxury car service to cater to top executives of Silicon Valley in San Francisco. Limousine and taxi services were a niche market for Uber. A particular code accessed these services via the Uber app. Aggressive growth strategy enabled the company to penetrate global markets, operating in 85 cities in over 30 countries. Thus, the smartphone app is Uber's product that helps bring together both passengers and drivers. The passenger can know the drivers in the vicinity because Google maps are integrated into the app. Also, Uber's co-founders have brought the company this far. The positive feedback loops for the company include shorter pickup times, extensive geographical coverage, and affordable prices. Therefore, Uber should continue because of its customers' knowledge regarding its customers and market opportunity, innovative products, credible team, and flexibility. Additionally, Uber depended on social media for most of its promotional and branding activities on Facebook, Youtube, Twitter, and its website. Mission Statement "We ignite opportunity by setting the world in motion" ("Uber Mission Statement & Vision Statement: An Analysis," 2021). Vision statement "Transportation as reliable as running water, everywhere for everyone" ("Uber Mission Statement & Vision Statement: An Analysis," 2021) Basic Facts UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 3 Uber was founded in 2009 by Garret Camp and Travis Kalanick. Its headquarters are based in San Fransisco, California, United States of America. Some of the services provided by Uber include hiring vehicles, delivering foodstuffs, packages, couriers, and transporting freight. The company operates in more than 900 metropolitan areas globally. Besides, it has approximately 91 million users, 3.9 million drivers, and more than 22,000 employees. As per 2020 statistics, uber`s annual revenue was $11.1 billion ("Uber Mission, Vision & Values", 2021). Competitor Uber faces massive competition in the market from companies such as Lyft. Lyft was established in 2012 and is a rideshare company (Trigub, 2017). It operates a transportation platform that is useful in connecting passengers with drivers. The company engages itself in designing, marketing, and operating mobile applications that help to link drivers and individuals who need a ride. Its headquarters are based in San Francisco, CA, US. Company Background Uber is a transportation network company with a business model which relies primarily on online; customers with smartphones can submit a trip request through the Uber mobile application. The application is routed to Uber drivers who use their cars to transport customers to their preferred locations, which require a fleet of vehicles. ICT plays a massive role in Uber's business operations. Also, Uber is using a mix of cost leadership and differentiation strategies. Compared to old-style taxi services, uber is taking minimal charging, usually between 5 to 20%. It does not hire permanent drivers but building solid relationships with a diverse number of drivers. Any person who has personal care can become a temporary driver of Uber. In this way, it will cut costs on infrastructure and maintenance. Indeed, this kind of benefit can be shifted to UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 4 drivers and riders, causing lower operating costs for Uber. Also, drivers are getting additional money, and riders are paying less and receiving advanced convenience. It is a cost leadership advantage to Uber. With the help of this, it has gained a significant level of popularity in metropolitan areas. The heavy investment in the development and repetition of mobile app demonstrates continuous growth and competitive performance. The drivers connect with the riders without informing uber to represent the physical location of each city where they operate. This is a highly mountable strategy that has limited barriers to future growth. However, it allows uber to tap other segments, such as food delivery with the same operating model. Ease of use in the app's user interface has gained customer loyalty and minimized competition. Thus, it is creating less switching cost. The feedback loop of Uber functions in a certain way. For instance, a more significant number of drivers is associated with shorter pickup times. Therefore, shorter pickup times result from more drivers because the probability of matching the customer's request to a ride in any given vicinity is relatively high. Additionally, higher coverage has more valuable results. It is important to note that the network of Uber is at the city level and usually starts at the city's heart. The demand begins rising in the fringes and getting onto the platform to provide service overtime after picking up the feedback loop. Thus, higher usage of brigs saturation in the city as the city contains a finite limit. Due to congestion within the town, the pickup times start to drop, triggering more demand, resulting in more positive feedback. Furthermore, as liquidity increases, prices start to become better and better. The higher the demand and supply, the lower the driver's waiting time and hence the more significant the drivers` availability, and such a platform UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 5 provides better prices to passengers. For this reason, more passengers are using the system, and the feedback loop becomes positive by and by. Uber depended on social media for most of its promotional and branding activities. The social media platforms include Facebook, YouTube, Twitter, and the website. Furthermore, Uber utilized companies to reach customers and improve its brand as well. For instance, the motto of the company, "Everyone's Private Driver," became prominently displayed on its Facebook page and included in its promotional videos on YouTube (Rogers, 2015). The company should ensure that all the regulatory issues associated with promotional activities through social media are addressed. Uber has deployed the online transportation network management, Uber mobile application design, and Uber drivers and provided a safe cashless credit card payment system that is convenient to its customers producing an effective value chain process that leads to a competitive advantage. The owner's intellectuality that led to Uber's idea and deciding to start online transportation portrays how capabilities and its practical implementation process could result in a competitive advantage. In this case, the owner could be the game-changer in the taxi transportation industry. Uber's resources coordination has created a competitive advantage and set it aside from its competitors and rivals. Part 2 Qualitative Analysis Some of the strengths of Uber include a well-reputed and well-established brand, it provides luxurious service, tested drivers and cars, and has an unrestrained fleet of vehicles. Also, it has not permanent drivers, has a low working cost, and Uber technology is convenient for drivers. It is vital to note that the company has lower prices than traditional cab operators and UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 6 has a high valuation. Some of the primary weaknesses that the company faces include the fact that the ridesharing concept can be imitated easily, the operating costs of drivers are very high, and it has a volatile business model. Also, it has confidentiality apprehensions. Several opportunities are available for Uber. For example, customers are very disturbed, worried, and dissatisfied with traditional taxi services because of higher charges and longawaited time. It can also exploit and expand into new markets like India, where taxi services are problematic and exclusive (Rogers, 2015). Additionally, cheaper electric cars can be used because it reduces the costs and increases the returns of drivers. Some of the external factors pose as potential threats for Uber. For instance, some new legal protocols could ban uber from working, and local authorities can charge fines if having problems, and frauds and humiliations could surge when Uber is entering new markets. Also, self-driving cars can eliminate the need for Uber-like Google cars. Some of the pestle factors are political, economic, social, and technological. From a political perspective, the government may decide to impose commercial licenses and create tax problems. Economically, this sector is a growing business segment and has high disposable income. The social aspect is the increasing nature of inhabitants, people preferring a paced lifestyle, and the ever-increasing demand for conveyance. Last but not least, the technological concept can be seen from the rivalry with supplementary carpooling businesses and betterquality map reading. Furthermore, most of Uber's resources align with the VRIO standards. For instance, Uber resources are valuable because they provide services at low prices compared to traditional taxis and ensure quality standards. Its resources are also rare because the company can differentiate itself from the competition. Lastly, the organization concept is evidenced by the fact that it has a UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES 7 credible leadership that efficiently deploys resources. Uber has expanded to more than 66 countries and modernizes the taxi industry, creating a customer value and competitive advantage. Company Problem Uber faces the problem of the employer-employee relationship. The dismissal of Uber as a technology company would imply that the government may claim that the entire ride payment is revenue for Uber and subject to city and state taxes. Uber already encounters complaints from several governments that it neglects its tax liabilities onto its drivers, and the drivers fail to pay their taxes (Page, 2019). More tax legislation may force the company to increase its charges and adversely affect its operations. UBER CASE STUDY: STRATEGIC ISSUES AND CHALLENGES References Page, V. (2019). 4 challenges Uber will face in the next years. Retrieved 9 June 2021, from https://www.investopedia.com/articles/investing/072215/4-challenges-uber-will-facenext-years.asp Rogers, B. (2015). The social costs of Uber." University of Chicago Law Review Dialogue Trigub, D. (2017). Lyft: using technology to connect aging persons with transportation ondemand. Innovation In Aging, 1(suppl_1), 70-70. https://doi.org/10.1093/geroni/igx004.289 Uber Mission Statement & Vision Statement: An Analysis. Visionary BusinessPerson. (2021). Retrieved 9 June 2021, from https://visionarybusinessperson.com/uber-missionstatement/. Uber Mission, Vision & Values. Comparably. (2021). Retrieved 9 June 2021, from https://www.comparably.com/companies/uber/mission. 8
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