Discuss about the Strategic Audit for Financial Position or Performance .
This assignment of “strategic audit” aims to analyze the strategic audit system at Microsoft Corporation. During this particular assignment, the analysis has been done in order to identify the Brexit effect on the financial performance of Microsoft Corporation. The assignment has mainly two parts. In the first part, the analysis and evaluation have been made on the measurement and the control system at Microsoft and the second part analyzes and evaluates the change initiatives taken by the same organization. At the end of the assignment, there is a conclusion that states the gist of the overall findings in the study.
Microsoft Corporation is one of the largest companies in the global electronic industry. Bill Gates and Paul Allen founded this giant company in the year of 1975 (Microsoft – Official Home Page. 2016). Currently the company is operating its business at an international level. However, the recent incident of British exit from European Union, which is known as Brexit has affected financial performance of Microsoft Corporation (Microsoft Warns U.K. About Potential Risks for Brexit. 2016).
The effect of Brexit on Microsoft’s financial performance can be clearly identified by analyzing the financial measurement and control system of the organization. This analysis has been stated below:
Current financial position of Microsoft:
In order to identify the Brexit effect on the measurement and control system of Microsoft Corporation, it is very important to analyze the current financial position of the organization. As per the 2015’s annual report of Microsoft Corporation, the total revenue of the company has been increased by 7.77% from 2014. The net margin of the company was 13.03%, which has been decreased from 2014. In 2014, the net margin of the company was 25.42%. The income statement of company in 2015 has also stated that the Earnings per Share or EPS of the company was $1.49 per share, which was $2.66 per share in 2014 (FY16 Q2 – Metrics – Investor Relations – Microsoft. 2016).
As per the 10-K form in the annual report of Microsoft Corporation, the annualized run rate of the company at the end of 2015 was $8 billion. At the same time, the 10-K form also disclosed that the company has increased the revenue percentage in server services and server products by 9% and the company has continued to add 50000 medium and small size business organizations in each year (FY16 Q2 – Metrics – Investor Relations – Microsoft. 2016).
However, currently, the higher management of Microsoft Corporation has expressed their concern regarding the Brexit effect on the financial position of the company. Microsoft has the plan to employee more 5000 employees in Britain in order to provide the data access facility to the remote areas in European Union region. This decision of Britain to exit European Union has put Microsoft Corporation in a risky situation. The company believes that if it does further investment in this project, then that may be unsuccessful. Due to this, the investors of Microsoft Corporation have stopped to invest on the new project of the company to expand its business at the remote areas in European Union region. This has ultimately negatively affected the future plans and budget of the company and at the same time it has increased the risk of the company. Therefore, on overall basis it can be said that in 2015 the financial performance of the company has decreased though it was much stable. However, due to the current Brexit, the financial position is at risk to some extent.
Comparison between the financial performance of Microsoft with competitors and standards:
The financial performance of the company that is Microsoft Corporation can be better analyzed if the performance is measured with the financial performance of the competitors and with the financial standards. At current scenario, Yahoo is one of the major competitors for Microsoft Corporation. However, if the financial performance of these two organizations is compared then it can be identified that the current market capitalization of Microsoft is 402.22 billion dollar, whereas the current market capitalization of Yahoo is 36.36 billion dollar. On the other side, the EPS of Microsoft is $1.49 per share and EPS of Yahoo is -$4.75 (FY16 Q2 – Metrics – Investor Relations – Microsoft. 2016).
These data indicate that in comparison between the financial performance of Microsoft and Yahoo, the performance of Microsoft is better than Yahoo. However, there is another major competitor of Microsoft Corporation and that is Apple. As per the current data, the market capitalization of the company is 523.64 billion dollar and the EPS is $8.98 per share. This means, the current performance of Apple is better than Microsoft. However, if the beta of these two companies is compared then it can be identified that the risk at Apple is more than Microsoft Corporation (FY16 Q2 – Metrics – Investor Relations – Microsoft. 2016).
On the other side, as per the auditor’s report in 2015’s annual report, Microsoft has presented the financial statements fairly. At the same time, the auditor’s report has also mentioned that all the financial statements of the company has been prepared as per the accounting principles and standards stated by US GAAP and Public Company Accounting Oversight Board (United States). However, the company is yet to follow the new standards stated by Financial Accounting Standards Board or FASB, International Financial Reporting Standards or IFRS and US GAAP regarding revenue recognition. The company will make these standards effective from 1st July 2017.
Analyzing the financial position by using the financial analysis tools
The financial position of Microsoft Corporation can be analyzed in a better manner by using the ratios as the tool of analysis. The financial ratios of the company for last two years are shown below:
|
Financial Ratios |
2014 |
2015 |
|||
|
Net margin |
25.42121 |
13.02949 |
|||
|
Current ratio |
2.504022 |
2.501344 |
|||
|
Quick ratio |
2.445721 |
2.443139 |
|||
|
Debt to Equity ratio |
0.919986 |
1.200504 |
|||
|
Return on equity |
0.245857 |
0.152255 |
Table 1: Financial Ratios of Microsoft Corporation on 2014 and 2015
(Source: FY16 Q2 – Metrics – Investor Relations – Microsoft, 2016)
The above-stated financial ratios of Microsoft Corporation are clearly disclosing that the liquidity position of the company has not been changed that much in 2015 than that of 2014. However, the debt-to-equity ratios are stating that the amount of debt capital has been increased in 2015. The main concern of the company can be noticed in the returns. The net margin as well as return on equity of the Microsoft has decreased in 2015 than that of 2014. Therefore, from the ratio analysis, it can be said that the control system of Microsoft Corporation must be improved in order to improve the financial performance. Moreover, after the Brexit, the risk of the company has already increased as the new plan of Microsoft has been hampered. Hence, new and improved strategies are required to change the financial performance to the positive trend. (Refers to appendix)
Key Performance Indicators KPIs of Microsoft Corporation
The KPIs of Microsoft Corporation are – Return of cash to the shareholders, Revenue, Operating income or loss, Diluted earnings per share and Revenue Vs. Operating income. If the KPIs of the company for 2015 and first two quarters of 2016 are analyzed, then it can be identified three elements are there under the return of cash to the shareholders and those are – Dividend per share, total dividend and share buyback. Among these three, the first one has increased from last quarter of 2015 to the first quarter of 2016 and it was static in first and second quarters, 2016. However, the amount of total dividend has decreased. This indicates that though the per share cash to shareholders increased, the total earnings of the shareholders has decreased in 2016 (Microsoft – Official Home Page. 2016).
On the other hand, the revenue earning capacity of the company was bit fluctuating since second quarter of 2015. However, in the 2nd quarter 2016, the revenue of the company increased $3 billion from 1st quarter of 2016. In case of the operating income, the performance of the company was very poor in the 4th quarter of 2015, which has been recovered in the first two quarters of 2016. The same thing happened in case of the diluted earnings per share. However, the revenue vs. operating income ratio Therefore, the analysis of the KPIs of Microsoft Corporation is clearly indicating that before the Brexit incident, the company started to recover its low financial performance in the first two quarter of 2016. However, the sudden fall in the revenue vs. operating income ratio indicates that the risk aroused due to Brexit has affected the income of the company. This means the financial control system of the company needs to be improved in order to reduce the negative Brexit effect on the financial performance of Brexit.
Previous and current success of improvement initiatives
At current business world, Microsoft Corporation is a giant company that has business coverage in most of the parts of this glob. However, in last five years time span, the performance of Microsoft Corporation was bit fluctuating. Due to this, the higher management of the company has taken some initiatives in order to improve the present situation of the company. The management of the company focuses on the technological improvements in the business operations. The company is currently trying to bring some environment friendly technologies, which are also very effective for the effective use of resources (Learn to Develop with Microsoft Developer Network | MSDN. 2016).
The company is trying to bring the technological change or improvements by applying the Lean manufacturing and Total Quality Management or TQM techniques. The company has already declared that they are carefully addressing the carbon footprint, so that no environmental damage takes place from their side. Lean manufacturing techniques helped the company to control their energy usage. At the same time, the company is also focusing more on using wind, hydropower and solar in order to generate the electricity. As per the Chief Legal Officer of Microsoft, the company is currently using 44% renewable energy, which has improved from 35% in the beginning of 2015 and it has an aim to make it 50% in 2018 (Microsoft Environmental Sustainability | Protect Natural Resources. 2016).
The Lean manufacturing techniques has helped the company in reducing the cost level of the company. The company has already implemented the lean pull with the help of Kanban requirements. The lean manufacturing techniques can be noticed in Microsoft Dynamics AX 2012. It has helped the company in remodeling the logistic process so that a consistent production flow can be maintained (Presentation Software | Online Presentation Tools | Prezi. 2016).
Alignment of improvement initiatives and integration into the strategic management
Microsoft Corporation has aligned the improvement initiative with the strategic management by introducing the modification in Human Resource department. The introduction of lean manufacturing technology and use of renewable energy have been done by the company through the training process implemented by Microsoft for its employees. At the same time, introduction of new technologies also required knowledgeable and skilled human resource, which again required the performance management. The company has taken such performance management strategies those can be linked with the corporate strategy (Learn to Develop with Microsoft Developer Network | MSDN. 2016).
On the other side, the implementation of TQM has been done by taking the progressive leadership approach that is focused on strategic planning and modernization of the company’s portfolio. Along with these, the cloud-first and the mobile-first corporate strategies have helped the company to meet the ever-changing needs of the customers. As changing the organizational culture is the most difficult change at Microsoft, the company has made that by taking improved strategy for performance management.
Due to these types of change, the company has gained high productivity with low cost, skilled human resource team, gained competitive advantage and gained employee as well as customer satisfaction.
Comparison of improvement initiatives of Microsoft with the other organizations
In the comparison between the improvement initiatives of Microsoft Corporation and the other competitors or organizations, it can be said there is not that much differences. The major competitors of Microsoft Corporation are Yahoo, Apple and Google. If the improvement initiatives of Yahoo and Apple are noticed, then it can be easily identified that both the company emphasized on the environment matter like Microsoft. Apple has already started the TQM in its production system. The improved technology of Apple has helped the company to reduce its resource usage. On the other side, Yahoo has brought the improvement by changing the organizational culture. Before 2012, the company was facing some problems in its internet services due to which it was loosing its market position. However, in order to improve the performance, the company improved its human resource by taking strategic human resource management initiatives. Microsoft does not take these types of initiative. At the same time, Google has focused on the improvements of its services (Presentation Software | Online Presentation Tools | Prezi. 2016).
Therefore, in the comparison, it can be identified that the improvement initiatives taken by Microsoft Corporation and the other competitors or organizations have a little difference. These differences are there because of the different problem areas within the organization. However, in overall basis, it can be understood that the improvements have been made within these organizations in order to improve the financial performances.
Conclusion
This above discussion in the assignment has identified that currently, the financial position or performance of Microsoft Corporation is at risk due to the Brexit effect. In the last year, the financial performance of the company was bit down than that of 2014. However, the liquidity position of the company was static. However, the Key Performance Indicators or KPIs of the company have disclosed that the company that is Microsoft Corporation has improved its financial performance a little bit in the first two quarters of 2016. The dividend per share of the company has increased in these two quarters. However, at the same time, the total dividend paid by the company to the shareholders has decreased. This indicates that the number of share of the company has been decreased in the first and second quarter in 2016.
The financial performance of the company has also been analyzed with the help of financial ratios. The financial ratios of Microsoft Corporation have indicated that the return or the income that the company has generated in the financial year 2015 was lower than that of 2014. However, on the overall basis, the analysis has identified that the current financial position of the company needs more control and advanced strategies.
On the other side, the improvements that the company has made in past were mainly focused on the technological improvements. However, currently, the company is also focusing on the environmental issues. Due to this, the company is using the renewable energy like, solar or wind energy. At the same time, the company is also concerned about controlling the carbon footprint. The improvement initiatives are bit different from the initiatives taken by the other organizations.
Reference List
FY16 Q2 – Metrics – Investor Relations – Microsoft. (2016). Microsoft.com. Retrieved 1 July 2016, from https://www.microsoft.com/en-us/Investor/earnings/FY-2016-Q2/kpi
Learn to Develop with Microsoft Developer Network | MSDN. (2016). Msdn.microsoft.com. Retrieved 1 July 2016, from https://msdn.microsoft.com
Microsoft – Official Home Page. (2016). Microsoft.com. Retrieved 1 July 2016, from https://www.microsoft.com
Microsoft Environmental Sustainability | Protect Natural Resources. (2016). Microsoft.com. Retrieved 1 July 2016, from https://www.microsoft.com/about/csr/environmental-sustainability/
Microsoft Warns U.K. About Potential Risks for Brexit. (2016). Fortune. Retrieved 1 July 2016, from https://fortune.com/2016/05/17/microsoft-brexit/
Presentation Software | Online Presentation Tools | Prezi. (2016). prezi.com. Retrieved 1 July 2016, from https://prezi.com
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