RAP – Part 3 Findings, Analysis + Business Models

Hi
I also forgot to ask do I need to analyse why comparator is showing better results?

@Fatema First Part 3 is the most important part of your RAP and will ultimately dictate your grade (or indeed whether you will pass or fail) as it shows what you are able to bring to the ‘party’. Here is a paragraph in the Info Pack that is critical:

“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.”

First have you done your SWOT & PESTLE? The reason I ask this is that the business and financial analyses are inter-connected – how the company has performed in the period is directly related to the market and environmental conditions that prevailed.

Second have you read the CEO/ Directors’ reports for your two companies? The reason for this is that usually management will comment briefly on some of the environmental (PESTLE) factors that they have had to contend with. They will also mention what strategies they have used – they will talk about how they built on their strengths and seized opportunities – probably not in these exact words but if you go through it you will start to realise that this is what most of their report is usually about. This then gives you a good foundation upon which to build your financial analysis. Go over these for the 3 year period of your study as some of these factors may (a) affect more than one year and (b) some strategies have a time lag, so the results may not kick in until the following year.

So you first of all you could look at the revenue/turnover of your two companies – usually it is better to look at the companies ‘side by side’ – which it sounds as if you are doing – so well done for that 🙂 . When you look at these figures and re-read the above reports, does anything strike you? Had the company moved into a new market/ expanded production / brought in a new product etc? Has this been reflected in the figures? This then gives you something to discuss. At this point you should try to look at articles from the business press / trade journals or whatever as the business pages often report or comment on the company performance.

For example just today I have found this on the BBC website in connection with Tesco:

“Tesco said it would cut costs. Spending on the business for the current financial year will be no more than £2.1bn, which is £400m less than planned and £600m less than last year. IT will be affected and plans to refurbish its stores will be slowed. The Board’s priority is to improve the performance of the Group. ‘We have taken prudent and decisive action solely to that end. The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly. They are considered steps which enable us to retain a strong financial position.’ (Tesco CEO 29.08.14)”

So for anyone doing Tesco next year this will account for many of the changes that will occur and will probably be reflected in a number of areas: revenue growth will probably show sluggish growth in 2014/15, cost of sales may be slightly reduced as they squeeze suppliers. a significant impact should be seen in the factors affecting net profit margin – IT cost and other admin are likely to show reductions or be static. By the end of the financial year (about Feb 2015) Tesco will be hoping that the NPM will not be down too much. Then there is the impact on dividends (and possibly share price – today it is significantly down but if the margins have improved by the year end it will start to bounce back). Tesco was the leading UK supermarket but sinceTerry ‘Leahy CEO left about 2 years ago the company has been struggling and its performance over the last 3 years (a) presents an interesting study and (b) shows the ‘dynamism’ any company faces. A company can be a market leader but if they take their eye off the ball, their position could very quickly slip.

So in your evaluation you HAVE TO take a broad view and bring lots of threads together to make your analysis valid and reliable.

You have made a good start @Fatema – you comment on inflation costs and so that is very relevant and it is this sort of ‘tie-in’ back to the SWOT that the markers will be looking for. What they want is a sensible and reasoned analysis that is based on facts and demonstrates that the student has thought about the topic and researched (used articles not just relied exclusively on the annual reports – even though these will be important) – it is how you link all the information that shows whether you are analysing properly. You do not have to go into quite so much detail with your comparator but the trend I am picking up from marker feedback is that they need more than just comments that company A has performed better than company B or that Company B’s GP was 5% more than Company A’s – they want something that explains WHY this should be so….

(The worst thing students do is just do heavy number crunching and throw in lots of figures at the marker with no real explanations, or make statements that sound like they are straight from a text book or from the notes to the accounts – this is NOT and never will be satisfactory to meet the assessment criteria for a pass).

Have a quick look at my posts made in April / May mentioned above as well – I will be doing an article shortly and I will attempt to put all of these points in one place but hope this gives you some idea of how to proceed 😀

Hi all,
I’m stuck in part three. when doing business analysis, should I analyse both the company of study and the chosen comparator? or the comparator will only come in when doing a financial analysis?
Thanks for your help.

@jofayo The business analysis is normally confined to the main company (but remember that the PESTLE is likely to be more or less the same for both companies). When looking at the business analysis you will need to explain the differences in their performances (not just describe by how much one exceeds the other). This is the main thing students do wrong – they fail to explain and think all they ever need to do is talk in numbers. The business& financial analyses are connected and the financial analysis is not just about numbers.

Graphs! Graphs! And more graphs! Words should be used to furnish proper explanations. Good clear graphs show the trends so throwing more numbers in is not going to add anything as it does not advance or enhance the analysis unless there is something really worthwhile in doing so.

@Fatema If they are using different bases then this is one case when you would have to adopt one commonly accepted formula for ROCE and apply to both. In the end it is what you make of the figures that counts – on its own ROCE is of limited use – it is the trend in it that is more significant and the component parts e.g. whether there has been a material change in the capital base.

So rather than tie yourself in knots on this look at gearing, changes in share issues (or repurchase of shares) and focus on the funding side and the strategies the companies are using. The two areas you really need to focus on are Profitability and the Investor ratios. There is a very limited amount you can say about ROCE on its own.

Linking the info is the hard part which is why well linked RAPs are the ones that get the better grades. However try to see how the companies are building on their strengths and employ both equity and debt to manage their strategies (investing in New markets/ products or expanding) and how they deal with the challenges from the environment (PESTLE factors) rather than taking a ‘text book’ approach.

I am not saying this is easy but this is what you need to try to do. Sadly I’ll bet my boots in 3 weeks time we will have students on here puzzled as to why they failed on analysis. The short answer will be that they took the wrong approach – crunched lots of numbers, just described movements (increases & decreases) did not explain anything except in terms of yet more numbers and mistakenly thought this was ‘Evaluation & Analysis’!

Thanks for your help, Trephena, I really appreciate.

hi Trephena

Thanks for replying.
Would it be ok for me to email you part 3 to just have a look at after I have finished it?
Just to get an opinion.

Kind Regards

Hi
No problem I thought that was the case, but as I have not found a mentor yeti just thought I would ask.
Regards

@Fatema you may be able to look at trends in dividends and dividend policy (there may be some comments on this in the CEO Report). Also look at changes in long term debt and gearing. Are profits falling because the interest charges have risen? Is this all part of a longer term strategy e.g. to take on more debt (or issue more shares) to fund future plans (product development or expansion for example)?

You have to try to stand back and see the big picture and how everything is usually inter-connected

Hi Trephena

Thank you for the article which I will be reading.
I just wanted to ask another question. I am currently on part 3 and it is challenging.
I have already asked you about the ROCE figures for my companies which are calculated on a different bases. I know you advised better ratios to analyse but I really would like to explain the change in Roce for both companies.
Instead of calculating my own ROCE figures can I mention that both companies have used different formulae to calculate ROCE in my limitations in part 2, and mention that I am analysing the trend rather than the actual figures? Or is this not a good idea? Or shall I just calculate my own ratios

Hi Trephena
Question for part three: In the conclusions I have given a brief summary of the company’s overall performance and mentioned their current performance based on interim results, is that ok?
In the recommendations I am stumped. I have already recommended actions the company can take in the opportunities section of the SWOT. Shall I just repeat these? Also the company was already in the process of making these changes in the current financial year. What do you think?

Regards

@Fatema – Recommendations section is not mandatory – it is probably more relevant for some of the other topics so do not worry as long as you have done a good evaluation. And if any recommendations are elsewhere as part of your SWOT then that is fine. The Conclusions section should be a summary of your main findings and if possible try to link back to your objectives so that you briefly show how you have covered them. No don’t repeat too much information unnecessarily as it does not add any value to your work and just wastes words. If you are referring to the company having implemented the changes after your period of study then you do not have to mention it as it is not actually within your brief as it outside your reference years.

@lamech311 – A title page and contents for the SLS are not mandatory but if produced will be captured by the word count. If you have sufficient words left you can do them if you want. Otherwise if words are tight why not do your name and Reg No as a header as I don’t think headers (or footers for that matter) are included by Microsoft Word in the word count?

Hello

I’d appreciate getting your suggestions regarding application of Porter’s five forces model.

My understanding is that this is to be done on a single SBU (strategic business unit) like a particular line of products of a particular industry. So let’s say the company I chose provides majorly telecomm services and a minor transport business too. Does that mean the 5 Forces are to be based on the telecomm part of the business (since major revenue is from there)? What’s the best approach to go about this?

Lastly, in a single RAP, it is possible to do PEST, SWOT and Porter’s 5 forces?
I mean realistically speaking I know I’ll be constraint on word count…last thing I want is for any of the model application to be inadequate just because I was trying to squeeze in all three. My PEST and SWOT are going well so far. But during the process I thought 5F could have potentially added more value. I’m just concerned about the industry-focus bit since the company has diversified products in different industries (while core activities are in one industry and that counts for the lion share of the revenue). I’m not that clear on how to apply the 5F in this case. Any tried and tested suggestions?

Thanks a lot!