Strategic Analysis of Clockwork Airlines Company - Case Study Example

Strategic Analysis Introduction Business growth and development is the dream of all people that engage in business activities. Businesses must have a starting point in their growth and then they build on it progressively towards ensuring that they become successful. It is important to understand that the process of business growth and development is not easy. The business has to ensure that it relies on strategies that can enable it understand some of the important factors that determine its effectiveness in the market. This means that business owners and managers have to consistently monitor the different factors in the internal and external environment, which have a bearing on the growth and development of the business. The business owners have to ensure that the consistently check on the strategies they develop to ensure that they are reliable and effective. In doing their strategic analysis, business have to focus on their financial statements and other outcomes to establish their path of growth. This paper examines the strategic analysis of Clockwork Airlines Company, explaining some of the factors that have influenced its growth and performance as well as the strategies that can be developed in ensuring that the company achieves its competitive advantages and market position effectively. 2. Causes of Firm Performance 2.1 Financial Results - The income statement The income statement, also known as the profit and loss statement or statement of income is one of the most essential statements in the success of the business. This is because; the income statement indicates the business’ profitability according to the time interval, which is specified on its particular heading (Kimmel and Weygandt 21). According to the income statement provided by Clockwork Airlines, the company has not been operating effectively in the last quarter within which it produced its income statement. For instance, let us consider the statistics that are provided in the firm’s income statement given in appendix 1. Clockwork Airline has a net income of $2,947,512 with its operating expenses standing at $2,927,594. The difference in these figures gives the operating income, which is standing at $19,918. From this, we can calculate the firms operating margin, as shown Operating margin = $19,918__ $2,947,512 = 0.007 Compared to operations in the whole industry, this figure represents about 0.04 % of the entire industry. In this case, it can be seen that the company needs to improve on its operations in order to increase its market share. It is therefore important to note that according to this kind of performance, clockwork airline needs to ensure that it develops some of the activities like market research and development in order to understand the things that are hindering its success compared to some of its competitors in the airline industry (Bazargan 84). Generally, the operating income of any company is useful in making comparison of its performance against other companies in the market. When the company has higher profit margins, it means that it is performing well. The company often has a better control on its costs as compared to those of its competitors. In this case, Clockwork airline does not have a bigger operating income that can place it at an effective position to compete effectively with other established companies in the airline industry. This analysis is gotten from the statistics provided by other companies in the statistic given for the operations in the same quarter. Fig 1. Net Income for the selected companies in the airline Industry 3. The balance Sheet The balance sheet is a very important financial statement to the business. The balance sheet, also referred to as the point statement provides a detailed summary for the business’ financial balances that have taken place in the business, thus indicating the current financial position of the business (Elliott and Elliott 43). The standard balance sheet for a business has three main sections, which include the liabilities, assets and owners equity as shown in the appendix 2. From a standard balance sheet, the business can effectively derive some important rations that can be used in understanding its success and performance. From the balance sheet indicated in the appendix, we can calculate some of the financial rations for clockwork airline and understand its growth path. It is also important to note that the balance sheet is an important document that is often used by the business when negotiating for additional financial from the banks and other financial institutions, who often want to be sure that the business can pay the loan effectively with the kind of assets that it has. 3.1 The current ratio The current ration, often calculated from the balance sheet is simply the value of current assets expressed over current liabilities. It often indicates the ability of the business to effectively manage its debts using the amount of resources it has at present over a period of one year. The ration is expressed as follows; Clockwork has its total current liabilities standing at $4,108,414, with its sum of total current liabilities standing at $1,026,778. In this case, its current assets expressed over the current liabilities give a current ratio of 4.001 as shown Current ratio = $4,108,414 $1,026,778 = 4.001 In comparison to other companies in the airline industry, this current ratio takes about 3.109 of the entire market share in the industry. It is important to note that current ration indicates the market liquidity for the business as well as the capacity to meet effectively the demands by the company’s creditors. For healthy businesses, the required current ratio often ranges between 1.5 and 3; however, the recommended statistics varies from one industry to another. From the above analysis, it is evident that Clockwork Airline has a better financial strength, especially in the short-term. If the current ratio for the business had been one, it would have meant that the company has problems in meeting its short-term financial expectations. In this case, analysis can that the company has challenges in the way it manages its working capital. 3.2 Return on Assets The ROA indicates the profitability of the company in relation to its cumulative assets. It provides an idea of how efficient the management is in using its total assets in generating earnings. The ROA in the business is arrived at by dividing its annual earnings by the cumulated assets the company has as shown; Return on Assets = = $19,918 $4,168,414 = 0.006 Compared to other companies in the airline industry, the Return on Assets for Clockwork Airline commands about 0.005 of the entire airline industry. This indicates that the company got few earnings from its invested capital in the industry, something that call for strategies that can be used in order to improve the performance of the airline. Generally, the ROA for companies varies substantially, depending on the particular attributes in the industry. For this reason, it is important that the ratio be given in comparison to what other companies have gained from their activities. 4. Analysis of Financial Performance From the financial information provided above, we can make an analysis of the stock performance for Clockwork Airline against other companies in the industry. This is essential in understanding the strategies that can be used to improve the performance of the company towards become a leader in offering various kinds of services in this industry. First, let us compare the stock prices of the various companies in the industry. Fig 2. Stock price analysis for selected companies in the airline Industry From the statistical information given above, Clockwork is existing in a highly competitive market, having companies that command a huge share of the market like LuxAir and Royal Air. It financial performance as shown in its ratios is not consistent, for instance while its current ratio, at 4.001 shows that it can effectively handle most of its short-term financial obligations, its operating margin is very small, standing at 0.007, which is about 0.004 of the entire industry. In terms of the stock prices, the company has a lot to change in its operations in order to attract better returns from its investments. In this case, it has to make a credible market research, which can be helpful in identifying some of the important requirements that can be adopted in order to enhance its success and performance in the market. Fig 3. Performance measures for selected companies in the airline industry Compared to the company with the highest stock price at $33.13, clockwork airline has been given a range of $7.82, something that shows the company is not in the best position to experience increased returns. At the end of the simulation, it is evident that the company has only managed a total net income of only $307,494, compared to the high performing company, Amenity airlines, which has an annual net income of 626,873. 5. Causes of poor performance in the industry 5.1 High operating Expenses One of the causes of the company’s poor performance is an increase in its operating costs. Generally, higher operating costs in a business, which are not followed by increased returns often leads to reduced financial returns by the company. From the information given in the company’s financial analysis statement, it had expenses reaching 70% standing at $2,049,316. Expenses, in this case, are significant challenges to the company’s operations because other companies that have surpassed its income may probably have achieved this by having low operating costs and high returns. For this reason, it is important that the company redefines its strategies and approaches to management in order to ensure that its expenses are commensurate to its income, something that will position it effectively to compete with the highest performing companies. 5.2 High number of accounts payables Another significant problem that has affected the profitability of the company is a high number of its accounts payables. However, in as much as the company has a good current ratio, which indicates its ability to pay off its current liabilities, it has a responsibility of ensuring that it keeps its liabilities to the lowest levels. Currently, the total accounts payables as indicated at the end of the simulation are $876,778. Most high performing companies are those the look for ways of reducing their operating expenses as low as possible. By keeping them low, Clockwork Airline can manage to create itself competitive advantages that can enable it to increase its returns and the expected market position. 6. Solutions 6.1 Reducing its promotional costs The airline industry is one of the most competitive in most countries. Companies joining this industry have to be equally prepared to compete effectively, by employing strategies that can ensure it keeps its costs as low as possible while maximizing on its returns. In keeping its expenses as low as possible, Clockwork Airlines needs to ensure that relies on cost effective ways of conducting its practices. One of the ways includes developing cheaper methods of product and service promotion. Clockwork Airline needs to use some strategies like social media and other online mechanisms in order to conduct its promotional activities, which are essential for the success of any airline company. This is because, passengers moving to various destinations always depend on the information they gather about various companies in order to make their flights decisions. The internet as a reliable promotional media is cheap and can be reached by many people. In this case, by using this approach, the company can reduce and cut down on its expenses, thus increasing and maximizing its returns. 6.2 Pros and cons of using the internet as a promotional tool One of the advantages of using the internet as a promotional tool is that it has the ability to be accessed by many people across the world. in accessing information on the internet, one only needs to be in a place that has a consistent supply of reliable internet connectivity. Secondly, the internet, through social media, offers an opportunity where the business can engage its prospective clients in live sessions, where it can use this opportunity to convince the consumers about its practices and other important activities. The internet also offers other important opportunities that can reduce the overall costs of the business. For instance, the internet can enable clients to make their financial transactions effectively, thus avoiding unnecessary inconveniences. By using this approach, Clockwork Airlines can create opportunities for the businesses to create portals that clients can use for making their bookings and paying for them. The only disadvantage with these approach is that it may require a cost of initial installation, but later, the business can leverage on the strategy in order to increase and maximize its returns. Clockwork Airline should invest in this one off strategy and train its employees on how to use this strategy in order to create itself effective competitive advantages (Lee 67). This is essential in enabling the company to compete effectively with other companies that use these and other strategies 7. Investing in credible research and development activities Research and development is an essential strategy that can be used in creating effective competitive advantages. Research and development is important in understanding some of the market needs that clients have. In this case, the airline can offer those services in the most effective way (Butler 72). Research and development is an important non-price strategy that the business can use in making itself competitive advantages. Research development ensures that the business can understand the needs of its customers in the market and the strategies used by competitors in their operations. In this case, it can effectively devise its approaches that it can rely on while ensuring that it performs best in the market. 7.1 Pros and Cons of this strategy One of the reasons why companies undertake research and development is for them to understand the trends happening in consumers’ tastes and preferences. In this case, they use this information to develop strategies that can deliver the particular needs of the customers according to the way they have been identified in the particular research (Walsh 54). However, one of the drawbacks in the development and use of this approach is that it does not often guarantee the business that it will automatically have increased sales. This is because; other factors often influence consumers’ purchasing power, which may not be captured in the research. This includes sudden changes in government’s policies like change in travel because of emerging issues like climatic changes and terrorism. 8. Recommendation The airline industry is one of the most competitive, with factors that have a strong influence on the performance of companies that join this industry. For this reason, Clockwork Airline needs to ensure that it has made an effective analysis of the business environment before devising strategies that it can use when creating competitive advantages (Wu 43). The company needs to ensure that is it masters the strategies used by its competitors. This is important in the sense that the company can use this knowledge to create its strategies that can give it success in the industry. The company needs to ensure that it invests in research and development activities, besides others that can give it the success it endeavors and market position. Works Cited Bazargan, Massoud. Airline Operations and Scheduling. 2nd ed. Farnham, Surrey, England: Ashgate, 2010. Print. Butler, Gail. Handbook of Airline Operations. New York, NY?: Aviation Week :, 2000. Print. Elliott, Barry, and Elliott, Jamie. Financial Accounting and Reporting. 12th ed. Harlow: Financial Times Prentice Hall, 2008. Print. Kimmel, Paul, and Weygandt, Jerry. Financial Accounting: Tools for Business Decision Making. 4th ed. Hoboken, NJ: John Wiley, 2007. Print. Lee, Darin. The Economics of Airline Institutions, Operations and Marketing. Amsterdam: Elsevier, 2007. Print. Walsh, Connor. Airline Industry Strategies, Operations and Safety. New York: Nova Science, 2011. Print. Wu, Cheng. Airline Operations and Delay Management Insights from Airline Economics, Networks, and Strategic Schedule Planning. Farnham, Surrey: Ashgate, 2010. Print. Appendices 1. Income Statement for Clockwork Airlines 2. Balance sheet – Clockwork Airlines Read More