HOW TO TACKLE EVALUATION & ANALYSIS IN THE RAP – Part I
Failure in the Evaluation, Analysis & Conclusions section continues to be one of the most common causes of failure (along with Information Gathering and Referencing). However whereas Referencing is a discipline with distinct rules that can be read, learnt and applied, evaluation is about recognising the right way of addressing analysis and presents more of problem to overcome unless you are given proper direction. So whether you are still working on your first submission or have received the bad news that you have failed this section, learning how to do successful evaluation and analysis is a vital element if you are to achieve a pass.
This article therefore aims to look at what the OBU RAP entails in terms of evaluation and will try to guide you into adopting the correct approach to this. I will look first at the most common topic, Topic 8 but will then turn in Part II to the other topics and suggest ways that you can try to ensure that you comply with the assessment criteria and deliver what is expected.
First though I want to draw attention to this brief paragraph from the OBU Information Pack (p.25) that is critical to this subject and is probably overlooked by most students, but it sums up everything that is required:
In order to produce a successful RAP you have to evaluate and / or analyse information from a range of sources. This means creating some meaning of what you have found, or making a judgment or coming to a conclusion. If you only report the information that you have found or generated, you will not pass the RAP. The ability to evaluate and / or analyse information is a very important graduate attribute and the grade that you are awarded for your RAP will be significantly influenced by ‘how well’ you demonstrate your evaluative and/or analytical skills in your RAP.
There are a few key words and phrases here that I shall return to in a moment: ‘create some meaning’; ‘making a judgment or coming to a conclusion’ but first I want to home in on the central theme here – ‘If you only report the information that you have found or generated, you will NOT pass the RAP.’
Let’s start at the beginning of Part 3 Finding and Analysis. I advise most students to do their models first. The reason for this is that the models should not be seen in isolation. Assessment Criterion 1 is ‘Understanding of Accountancy and Business Models’ and Assessment Criterion 2 is ‘Application of Accountancy and Business Models’ which means that you need to state a relevant model(s) and then apply it (them) to your chosen organisation. Most students do not have a problem with this but then having ‘ticked the boxes’ for this they then move on to the Financial Analysis (Topic 8). The problem is in the majority of cases they see this as a separate requirement – what they fail to understand is that the business and financial analyses are related – not just in theory but in actual practice in the real world.
Evaluation in connection with Topic 8
(The overall approach I am about to outline below is also applicable to Topic 5 as well and also to a certain extent to Topic 15)
The directors of companies are keen to cash in on their strengths and opportunities and want to overcome weaknesses and threats and furthermore want to make the best of favourable environmental factors and use them to their advantage or take steps to minimise the effect of the disadvantageous factors. Only foolhardy managers of companies are arrogant enough to assume that if they are market leaders they will continue to enjoy such an omnipotent advantageous position. Look at Nokia – in a matter of about 5 years they slipped from being the top company for mobile handsets to being taken over by Microsoft, and Tesco the leading UK supermarket now finding that their position is being challenged not just by long standing rival Sainsbury’s but relatively newcomers to the UK market, the German duo Lidl and Aldi. Maybe if Nokia had recognised technological factors and the impending importance of smart-phones they would have survived. If Tesco had really embraced the importance of economic factors on disposable incomes maybe they may have been able to take steps to reduce their margins to retain hard pressed customers before they left in droves to go to Lidl and Aldi. Instead now they are seeing their profits plummeting as a consequence, and they are having to fight back from the position of the weaker party rather than be the leader. Hindsight is a wonderful thing but both of these cases illustrate that all companies exist in a very dynamic environment and this is something that students need to appreciate.
So what does this signify in terms of evaluation? It means that you need to apply your SWOT /PESTLE factors to your company when you are assessing their financial results. You also need to read the CEO /Directors reports as they will be keen to impress on shareholders that they are alert and aware of environmental factors and furthermore the decisions they have made and strategies employed are based on these and management’s own assessment of the company’s SWOT.
Just read any reputable business pages (e.g. BBC, FT, the Daily Telegraph or Times in the UK) and you will see how companies change their strategies or react to environmental factors. On just one day recently I read that Coca-Cola having previously rejected a UK government initiative on nutritional labelling had changed its position after “having gauged British consumers’ views on the scheme” and how Laura Ashley is tending to move away from fashion and focus more on home accessories (i.e. overcoming a weakness and building on a strength). Admittedly Coca-Cola’s changed attitude is unlikely to greatly influence their sales much in the UK (but it may have done if they had done nothing) however it does illustrate that no company can afford to stand still and ignore public opinion.
Now going back to Laura Ashley – just for interest after reading the BBC Business news brief article I then downloaded their latest Annual Report for year ended 25th Jan 2014. It seems that retail space in the last 12 months had actually reduced by 2% and they had closed 3 UK stores and I also learned that online sales accounted for 16% of the UK sales and the annual report gave me some segmental analysis. When I read the CEO report he commented that both Fashion and Furniture had shown a downward trend in 2013/2014 (but he outlined plans to halt this slide) however home accessories and decorating products “continue to be well received by our customers”. (And I discovered all of this in about only 10 or 15 minutes!). So back to the BBC article: Laura Ashley has just reported its half-year profits for 2014/2015 and stated that compared with the same period last year that profits were up 15%. I am now ‘armed’ with some quality information so if I were doing a 2015 RAP on this company and starting to discuss profit I would now be able to attempt a sensible analysis grounded in facts and reality. I would be able to write something meaningful that showed I had researched and used the information appropriately. Assuming this trend continued – and it seems that in the 5 weeks into the 3rd quarter the “like-for-like sales are up 8%” (BBC, 2014). I would most likely be able to comment as follows:
‘In spite of the continuing fall in sales in two of its main segments, Furniture and Fashion, the management are now consolidating their range in key areas within these segments: beds for the former and quality, style and price in the latter, and focusing on their two other segments, home accessories and decorating lines (CEO statement, 2014). This strategy of concentrating on homeware has proved extremely successful: profits have risen by 15% in 2014/2015 (BBC, 2014) in spite of a significant 2% reduction of retail space the previous year (Laura Ashley, 2014).”
When it came to discussing operating margins I would also be able to bring in the store closures as one of the factors helping reduce operating costs and therefore strengthening margins, and another quick search of the Telegraph business pages told me that in 2013 Laura Ashley had been squeezing suppliers to reduce their margins. Furthermore in the investor section I would be able to draw all of this together and say that earnings per share have increased significantly because of the strategies management had undertaken and the market price of the shares have risen by 9% (BBC, 2014)
[Remember this is at the moment hypothetical as I am making assumptions that the current trends will be maintained but is meant as an example of how to approach producing a sensible, reasoned analysis and evaluation. There is also a lot more I could write with a bit more research as I have a few avenues I would explore further e.g. I could look at how the online sales over the 3 year period had increased as there probably is some info in the annual report about this, I could calculate some appropriate ratios ‘sales and/or profit per sq.m of retail space’ – but remember I did my little bit of ‘analysis’ above based on just 15 mins of research!]
Now look at this – it is a typical extract from a student’s piece of work.” [I am giving you much just enough for you to get the ‘flavour’ as the whole piece was written in a similar manner]:
“The operating profit of ABC stood at GBP 26,608 million (2012: GBP 24,721 million, 2011: 23,111 million); having increased by GBP 1,887million (2012: 1,610; 2011: 1,306 million) representing an increase of 7.63% (2012: 6.97%; 2011: 5.99%)…. The increase in the profit is continued improvement in operating efficiency margin”
Returning to OBU’s requirements: you need to ‘create some meaning’; ‘making a judgment or come to a conclusion’. I think I hardly have to ask at this point – but which fulfilled these criteria and which only ‘REPORTED the information found or generated’? Which made more sense? Which actually told you something meaningful about the company? Which communicated information to you effectively? Which paragraph was easier to read and understand? Which do you think is likely to impress a marker? And of course, most importantly which do you think (if it continued in the same vein) is likely to get a pass grade and which a fail?
So when you come to doing your analysis for Topic 8 (or 5) and Topic 15 too, you must bear in mind that you need to EXPLAIN not just describe differences – anyone can use a calculator or an Excel spreadsheet and come up with figures! And so now you can probably see that the student report failed because they had not created anything meaningful, they had not made a judgment or come to any conclusion. Quite simply all the student had done was just reported what they had found.
Most of your information will come from the Annual Reports too but as I have demonstrated you need to look at other sources and think about what the numbers and information you find actually MEAN. In terms of time, I probably didn’t spend much more time doing my little extract than the student did inputting all of those dreadful numbers into a spreadsheet /calculator!
A couple of other things I need to point out: first when you learn about ratios in text books you must appreciate that you are being presented with just the bare rudiments – it is like trying to learn to drive from a book – the basics may be correct but the approach needs to be adapted to the situation. At best a driving manual can only be a guide – it cannot deal with every situation you will find yourself in when you are actually behind the wheel – so too with ratio analysis – it has to be applied flexibly to the particular context. Ratios MUST be appropriate to the industry otherwise they are pointless – like calculating the Quick Ratio for a service industry like an airline. Think about it: what are airlines selling? Is it a tangible product? No! So inventory is never going to be a significant factor for a service industry (but it will be very important for a manufacturing organisation). Again in the retail sector students trot out liquidity ratios and make pronouncements about how the organisation is carrying too much stock – without thinking about what is the business of this company? Answer: Selling the stock on its shelves at a profit! So if it cut back on this they would go out of business! What is far more useful is to know how well the retail space is being utilised (remember I mentioned above about calculating sales or profit per sq.m?). How much more appropriate it would be if students when they look at the annual report were to consider the more relevant key performance ratios that are actually used in these businesses. They would then greatly improve the quality of their analysis by demonstrating that they had thought about the particular company and the appropriate ways of measuring its performance (rather than calculating every ratio in the book whether it is relevant or not!)
And one final point “you have to evaluate and / or analyse information from a range of sources”: this means that you should NOT rely exclusively on the annual report for your information. Management are always going to trumpet their successes and try to ‘bury’ the bad news. Just using the annual reports does not really demonstrate a full range of research skills and you will not be producing work that shows evidence of a critical thought or objectivity and according to the Assessment Criteria 3 “Little of no critical evaluation” is one of the grounds that leads to a fail (and “very few information sources used” will often mean a fail for Information Gathering too)
When it comes to, evaluation and analysis in the RAP, correct approach is everything – as the Information Pack citation above says:
“…the grade that you are awarded for your RAP will be significantly influenced by ‘how well’ you demonstrate your evaluative and/or analytical skills in your RAP.”
Once YOU recognise the reality of this when you come to evaluate and analyse the company and its comparator’s performance you should be able to appreciate that evaluation means making sensible appropriate comments based on a range of available information.
Furthermore you will probably find that researching and piecing bits of information together and making something ‘meaningful’ can be very satisfying and enjoyable and probably will go down well with your marker – words that can never be used to describe the act of number crunching and drowning the reader in a ‘sea’ of meaningless numbers and throwing lots of ratios in (whether they are appropriate or not), just for ‘good’ measure!