Strategic Change and Firm Performance - Case Study Example

Table of Contents Introduction 2 Analysis of Income Statement Items 2 Analysis of Balance Sheet Items 3 Analysis of Cash Flow Statement 4 Analysis of Financial Ratios 5 Items to be included in the financial statement 6 References 7 Appendix 8 Introduction This report will examine the strategic changes which were made by Microsoft in 2008 after the business made broad changes in relation to technology so that the business partners could be benefitted and the fortunes of the organization also change. To find out the manner in which the strategic changes benefitted Microsoft the report will analyze different items pertaining to balance sheet and income statement to find out the changes which were seen. This will be matched by analysis of statement of cash flow so that the impact it has on the business financials can be understood. The report will also look to carry out a few financial ratios and highlight the manner in which business encountered different changes in the manner business was carried out. Lastly the report will dwell on items which were not included and if included would help to improve the overall efficiency of the financials and would multiply the gains which were received due to strategic changes. Analysis of Income Statement Items The analysis of the items before and after the strategic changes for different items on the income statement is as follows Revenues: It is analyzed that even after making the strategic changes in 2008 the revenues for Microsoft didn’t increase as expected. In the year 2006 the revenues stood at $44,282 million which continues to increase and was $60,420 in the year strategic changes took place but after 2008 the revenues decreased and reduced to $58,437. This highlights that the business was ineffective in making the strategic change and the benefit which was expected out of the change didn’t actually occur. Operating Expenses: It is analyzed that even after making the strategic changes in 2008 the operating expenses for Microsoft didn’t increase but instead it remained constant showing it as a good sign but when compared to the revenues it generated the expenses should have reduced but it didn’t thereby raising concerns regarding the manner in which strategic change was done. In the year 2006 the revenues stood at $27,810 million which continues to increase and was $37,928 in the year strategic changes took place but after 2008 the expenses increased slightly and went to $38,074. This highlights that the business was ineffective in making the strategic change and the benefit which was expected out of the change didn’t actually occur as the revenues had decreased but the overall expenses for the business didn’t decrease but instead remained constant. Sales & Marketing Expenses: It is analyzed that even after making the strategic changes in 2008 the sales and marketing expensed for Microsoft reduced showing a good sign. In the year 2006 the sales and marketing expenses stood at $9,818 million which continues to increase and was $13,039 in the year strategic changes took place but after 2008 the sales and marketing expenses decreased and reduced to $12,879. This highlights that the business was effective in making the strategic change and the business was able to reduce the overall sales and marketing cost but to a limited degree. Despite it the benefit were limited as the business witnessed a reduction in sales but the actual reduction in expenses didn’t met it signifying that the changes were not properly implemented. Analysis of Balance Sheet Items The analysis of the items before and after the strategic changes for different items on the income statement is as follows Current Assets: It is analyzed that even after making the strategic changes in 2008 the current asset base for Microsoft didn’t increase as expected. In the year 2007 the current asset stood at $40,168 million which continues to increase and was $43,242 in the year strategic changes took place but after 2008 the current asset increased drastically and went to $49,280. This highlights that the business able to gain some advantage from the strategic change but was largely limited. Current Liabilities: It is analyzed that even after making the strategic changes in 2008 the current liabilities for Microsoft didn’t increase but instead it decreased showing it as a good sign but the change was small and will require more efforts to be able to bring a complete change in the business workings. In the year 2007 the current liabilities stood at $23,754 million which continues to increase and was $29.886 in the year strategic changes took place but after 2008 the current liabilities decreased slightly and went to $27,034. This highlights that the business was effective in making the strategic change and the benefit which was expected out of the change did actually occur as but was very small and will require better changes to ensure better results. Long Term Debt: It is analyzed that even after making the strategic changes in 2008 the long term debt for Microsoft started to rise which shows that the business was able to raise finance through external sources. In the year 2006 the long term debt stood at $0 million which continues to remain zero in the year strategic changes took place but after 2008 the long term debt started to rise and increased to $3,746. This highlights that the business was effective in making the strategic change and the business will be able to raise finance from external sources and will thereby increase their leverage and ensure better opportunities of growth. Despite it the benefit were limited as the manner in which the loan helps the business will be decided in the following years Analysis of Cash Flow Statement Cash flow from Investment Activities: It is analyzed that even after making the strategic changes in 2008 the cash flow from investment activities for Microsoft started to decrease which shows that the business able to find other source of finance. In the year 2006 the cash flow from investment activities stood at $20,562 million which continues to rise till strategic change is made but decreased in the year of strategic change to $12,934 but after 2008 the cash flow from investment activities started to reduced and went to $7,463. This highlights that the business was effective in making the strategic change and the business will be able to raise finance from external sources and will thereby increase their leverage and ensure better opportunities of growth. Cash Flow from Financing Activities: It is analyzed that even after making the strategic changes in 2008 the cash flow from financing activities for Microsoft started to decrease which shows that the business was not able to use its finance properly. In the year 2006 the cash flow from investment activities stood at $8,003 million which continues to rise till strategic change is made but decreased in the year of strategic change to $4,586 but after 2008 the cash flow from financing activities started to reduce and went to $15,770. This highlights that the business was effective in making the strategic change and the entire process was aimed towards generating additional revenues for the business. Analysis of Financial Ratios: The analysis of the financial ratios is as Liquidity Ratio: The current ratio reveals that the business is liquid and has sufficient which will enable them to pay the short term debt on time. The business has a ratio of more than 1.5 in all the year except 2008 where it stood at 1.45 showing sufficient liquidity and the ability to pay off their shot term debts (Deloof, 2003) Profitability Ratio: This ratio shows that after the strategic change the profits have decreased and is a concern as it shows that the strategic change have not benefitted the business. This has reduced the profits to 34.85% in 2009 from 37.23% the previous year and is an aspect which needs to be analyzed and worked so that future performance can improve (Eljelly, 2004) Equity To Assets: This ratio shows that after the strategic change the equity have increased and is a good sign showing that the dependency of business on outside sources have been reduced. This has increased the equity to assets to 50.79% in 2009 from 49.84% the previous year and is an aspect which shows continuous improvement and better opportunities in the future (Antony, 2004) Items to be included in the financial statement The different items to be included in the financial statement are as Cost involved due to strategic change: The business should provide a full description of the different cost which has been incurred due to the process of strategic change. This will help the user of the financial statement to understand the manner in which the benefits should be expected and will be able understand the different cost associated with the business Gains due to the process of strategic change: The financial report should clearly highlight the different gains which have been made to due to the strategic changes so that the user can make a comparison between the cost and benefit and based on it take their decision to invest in the organization. This will provide valuable inputs and guide the people towards making effective decisions. References Annual Report. 2014. Annual Report Microsoft: 2006 to 2009. Retrieved on April 28, 2014 from http://www.microsoft.com/investor/reports/ar09/10k_fr_inc.html Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Appendix Calculation of Ratios     2006 2007 2008 2009 Current Ratio Current Assets / Current Liabilities 38134 / 21347 = 1.79 40168 / 23754 = 1.69 43242 / 29886 = 1.45 49280 / 27034 = 1.82 Profitability Ratio Net Profit / Sales * 100 16472 / 44282 * 100 = 37.20 18524 / 51122 * 100 = 36.23 22492 / 60420 * 100 = 37.23 20363 / 58437 * 100 = 34.85 Equity to Asset Equity / Assets 29148 / 59036 = 46.14 31097 / 63171 = 49.23 36286 / 72793 = 49.84 39558 / 77888 = 50.79 Read More