Purpose:
Business analysis is the process to enable the alterations in the business context through explaining the recommendation and needs solution which delivers the true value to the stakeholders. Business analysis process evaluates the financial and non financial values of an organization and measures that whether the firm would offer higher return to the company or not. This process is used by the companies or the investors to articulate and manage the activities and the operations of the firm. The main value of the business analysis is to realize the benefits, identification of new opportunity, avoidance of cost and understanding about the modelling and capabilities of the business.
Case context of analysis:
In the report, business analysis process has been done on ABB and its competitive company on General Electrics and Siemens. The financial evaluation has been done on the company to measure the overall financial performance of the company as well as various strategies of the business have also been measured and compared with the financial performance of competitive company to reach over a conclusion point about the business position and the performance (Home, 2018). The limitations of the business model have also been discussed to measure the financial position of the company in better way.
Company Background:
ABB is ESEA Brown Boveri Company which is basically a Swedish-Swiss multinational company. Head office of the company is in Switzerland. The company is mainly operating its business in power, robotics, electrical equipment, automation technology etc. It has been founded in 1988 and the stock of the company is traded on Swiss exchange, New York stock exchange and Nasdaq Stockholm (Home, 2018).
Rationale for the chosen company:
On the other hand, the General Electrics and Siemens are the close competitors of the company. General electric company is an American company which is incorporated in the New York. The main operations of the company are Aviation, healthcare, digital additive manufacturing, power etc.
At the same time, Siemens is a German company. Headquarter of the company is in Munich and Berlin. The principle division of Siemens are energy, healthcare, industry etc. the main services of the company are financing, business services, construction and project engineering.
Key issues:
In case of ABB Limited, it has been found that the few issues have been faced by the company in last few years. These issues have impacted negatively on the company and due to it; the valuation of the company has been affected. The main issues of the business include:
Customer, Vendor and business partners
Alcohol or substance abuse
Threats and physical violence
Conflict of interest
Legal or contractual issues
Out of policy payment etc (Reporting of issues, 2018)
These issues and factors have affected the overall performance of ABB limited in the market.
Macro environment analysis:
PESTLE analysis is one of the most used analysis method to measure the macro economical environment of the business. It measures the political, economical, social, technological, environment and legal factors of the business. It offers different angle to the analyst to measure the performance of the company (Hitt et al, 2012). The PESTLE factors of ABB limited is as follows:
|
Political factors: Level of corruption Legal framework for contract enforcement Taxation – tax rates and incentives Product labelling |
Economical factors: Labour cost and economy productivity Inflation rate Interest rate Unemployment rate |
|
Social factors: Culture Leisure interest Entrepreneurship Class structure Education level (Hill et al, 2014) |
Technological factors: Rate of technological diffusion Impact of value chain process and structure Technology impact on the product and service |
|
Legal factors: Discrimination laws Data protection Healthy and safety law Consumer protection and e-commerce |
Environmental factors: Weather Climate change Recycling Attitude towards renewable energy Endangered species |
Political:
Political factors play a crucial role in evaluating the macro environment factors of the business. On the basis of the study, it has been measured that the political factors of the country has been changed which has directly impacted the operations and the activities of ABB limited. The company mainly focuses on the political stability, employment laws, tax guidelines, public health responsibilities etc, the main political factors of the business are Level of corruption, Legal framework for contract enforcement, Taxation – tax rates and incentives, Product labelling, Favoured trading partners etc which must be focused by the business and pan some strategies to resolve the issue (Hammond and Waldron, 2008).
Economical:
Economical factors also play a crucial role in evaluating the macro environment factors of the business. On the basis of the study, it has been measured that the economical factors of the country has been changed and impacted the operations and the activities of ABB limited (Guedes et al, 2018). The main economical factors of the business are Labour cost and economy productivity, Inflation rate, Interest rate, Unemployment rate, Economy growth rate etc which must be focused by the business and plan some strategies to resolve the issue.
Social:
There are social factors as well which must also be focused by the business to measure the performance of the business. These factors also play great role in evaluating the macro environment factors of the business. On the basis of the study, it has been measured that the social factors of the country has been changed and impacted the operations and the activities of ABB limited. The main social factors of the business are Culture, Leisure interest, Entrepreneurship, Class structure, Education level etc which must be focused by the business and plan some strategies to resolve the issue (Williams et al, 2005).
Technology:
There are technological factors as well which must also be focused by the business to measure the performance of the business. On the basis of the study, it has been measured that the technological factors of the country has been changed and impacted the operations and the activities of ABB limited. The main technological factors of the business are Rate of technological diffusion, Impact of value chain process and structure, Technology impact on the product and service etc which must be focused by the business and plan some strategies to resolve the issue.
Environment:
Environmental factors of ABB limited has also been studied and it has been measured that there are numerous factors such as Weather, Climate change, Recycling, Attitude towards renewable energy, Endangered species etc. the ABB limited has managed various strategies to administer the issues and improve the performance of the company (Madhura, 2011).
Legal:
Lastly, the legal factors of ABB limited has also been studied and it has been measured that there are numerous factors such as Discrimination laws, Data protection, Healthy and safety law, Consumer protection and e-commerce etc. The ABB limited has managed various strategies to administer the issues and improve the performance of the company (Weygandt, Kimmel and Kieso, 2009).
Porter’s 5 forces model:
Porter’s 5 forces model is an analysis method to measure the competitive position of the company. This model has been used to measure the competitive forces of ABB limited. The analysis of porter’s 5 forces model is as follows:
Threat of new entrants:
The threat level from new entrants has been evaluated firstly and it has been measured that the threat level of the industry is quite lower because it would take huge investment for the companies to enter into the industry. However, ABB limited is required to manage all the threat related issues through building the effective barrier and competitive edge (Nobes and Parker, 2008).
Threat of substitute:
The threat level from substitute product and services has been evaluated and it has been measured that the threat level of the industry is quite higher because the available products and the services in the market are quite similar. However, ABB limited is required to manage all the threat related issues through building the effective barrier and competitive edge.
Bargaining power of suppliers:
The bargaining power of suppliers has been evaluated further and it has been measured that the bargaining power of suppliers is quite higher because of the less availability of the suppliers in the market. However, ABB limited is required to manage all the threat related issues through building the effective barrier and competitive edge (Damodaran, 2011).
Bargaining power of buyers:
The bargaining power of buyers has been evaluated further and it has been measured that the bargaining power of buyers is quite lower because of the less availability of the companies in the market. It would help the business to maintain the better performance and the competitive performance.
Industry rivalry:
Lastly, the industry rivalry of the company has been measured and it has found that the ABB limited operates its activities and the operations in a very competitive diversified machinery industry. This kind of competition hampers the overall profitability level of the business (Davies and Crawford, 2011).
On the basis of the study, it has been measured that the overall performance of the business is quite better. The company has built various effective barriers to safeguard the performance, profitability and the competitive performance of the company.
Financial analysis is the process to enable the alterations in the business context through explaining the recommendation and needs solution which delivers the true value to the stakeholders about the financial position of the company. Financial analysis process evaluates the financial values of an organization and measures that whether the firm would offer higher return to the investors and the shareholders of the company or not. This process is used by the companies or the investors to articulate and manage the financial performance of the company. The main value of the financial analysis is to realize the financial benefits, identification of new opportunity, avoidance of risk and understanding about the financial modelling and capabilities of the business.
Financial performance:
In the report, financial analysis of ABB, General Electrics and Siemens has been calculated. The study of ratio analysis has been performed on all the three companies to evaluate the financial performance of the company (Bromwich and Bhimani, 2005). Ratio analysis is one of the key analysis methods to evaluate and compare the financial performance of an organization.
Return on capital employed:
Return on capital employed is a profitability ratio which is calculated to measure the profitability level of an organization. Return on capital employed focuses on the operating profit and the capital employed to measure the total profit in context with the capital of the company.
Figure 1: Return on capital employed
The above graph explains about the return on capital employed of ABB limited is quite higher from the competitors of the company. The curve of ROCE of ABB limited has been slightly downward in 2017. However, the ROCE performance of the company is quite better. GE limited and Siemens limited explains a reduced level of ROCE (Arnold, 2013). On the basis of the graph, it has been measured that the ROCE of Siemens limited was higher in 2015 but the average performance of ABB limited is higher than other companies in the industry.
The ratio explains that the return on capital employed of ABB limited is quite better in the industry as well as it explains that the profitability level of the company is better.
Gross Profit Margin:
Gross profit margin is a profitability ratio which is calculated to measure the profitability level of an organization. Gross profit margin ratio focuses on the gross profit and the sales revenue to measure the total profit margin in context with the turnover of the company.
Figure 2: Gross profit margin
(Morningstar, 2018)
The above graph explains about the gross profit margin of ABB limited is average in context with the competitors of the company. The curve of gross profit margin of ABB limited has been slightly improved in 2017. However, the gross profit performance of the company is quite average. GE limited explains an improved level of gross profit margin. On the basis of the graph, it has been measured that the gross profit margin of Siemens limited was quite similar then the ABB limited. It explains that the gross profit margin is average in the industry.
The ratio explains that the gross profit margin of ABB limited is quite better in the industry as well as it explains that the profitability level of the company is average in the industry (Baker and Nofsinger, 2010).
Operating profit margin:
Operating profit margin is a profitability ratio which is calculated to measure the profitability level of an organization. Operating profit margin ratio focuses on the Operating profit and the sales revenue to measure the total profit margin in context with the turnover of the company (Besley and Brigham, 2008).
Figure 3: Operating Profit Margin
The above graph explains about the operating profit margin of ABB limited is average in context with the competitors of the company. The curve of operating profit margin of companies explains that the performance of GE limited is better in the industry. However, the operating profit performance of the company is quite average. GE limited explains an improved level of operating profit margin. On the basis of the graph, it has been measured that the operating profit margin of Siemens limited was quite lower than the ABB limited. It explains that the operating profit margin is average in the industry.
The ratio explains that the operating profit margin of ABB limited is quite better in the industry as well as it explains that the profitability level of the company is average in the industry (Brigham and Ehrhardt, 2013).
Current Ratio:
Current ratio is a liquidity ratio which is calculated to measure the short term debt liability level of an organization. Current ratio focuses on the current assets and the current liabilities to measure the liquidity position in context with the short term debt obligation company.
Figure 4: Current Ratio
(Morningstar, 2018)
Current ratio of ABB limited and its competitors have been measured on the basis of the above graph. It explains that the current ratio of ABB limited is average in context with the competitors of the company. The curve of current ratio of companies explains that the performance of ABB limited is better in the industry as the company has managed the current ratio on the basis of the risk as well as working capital requirement of the company. GE limited explains an improved level of current ratio which impacts higher cost to the company. On the basis of the graph, it has been measured that the current ratio of Siemens limited was quite lower than the ABB limited (Brewer, Garrison and Noreen, 2005).
The ratio explains that the current ratio of ABB limited is quite better in the industry as well as it explains that the risk level and the working capital level has been managed by the company in better way.
Gearing ratio:
Gearing ratio is a capital ratio which is calculated to measure the optimal level of capital of an organization. Gearing ratio focuses on the long term liabilities and the capital employed of organization to measure the capital structure in context with the risk and return level of the company.
Figure 5: Gearing Ratio
(Morningstar, 2018)
The above graph explains about the gearing ratio of ABB limited is average in context with the competitors of the company. The curve of gearing ratio of companies explains that the performance of GE limited is better in the industry. However, the gearing performance of the company is quite average. On the basis of the graph, it has been measured that the gearing position of Siemens limited was quite lower than the ABB limited (Brealey, Myers and Marcus, 2007).
The ratio explains that the gearing position of ABB limited is average in the industry and it is required for the company to make few changes into the strategies to improve the gearing position.
Earnings per share:
“Earnings per share” is a market value ratio which is calculated to measure the market position of an organization. “Earnings per share” ratio focuses on the net income and the total available outstanding shares to measure the total earnings of the stockholders in context with the net income of the company.
Figure 6: Earnings per share
Earnings per share of all the three companies have been analyzed. The curve of earnings per share of companies explains that the performance of Siemens limited is better in the industry. The market performance of the ABB limited and GE limited is quite average (Bierman, 2010).
The ratio explains that the earnings per share of ABB limited is quite better in the industry as well as it explains that the market position of the company is average in the industry which must be improved through making few changes into the policy.
Limitations of analysis:
Limitations of strategic analysis:
The external environment of the company has been evaluated on the basis of the PESTLE analysis. PESTLE analysis focuses on the external environment of a business only. It does not take the concern on the resources and the capability of the company which are the main element of the competitiveness and the sustainability of the business. The focused element of PESTLE analysis changed rapidly and thus better decisions could not be made on the basis of those elements. The porter’s 5 forces model is not even used in various industries and few changes have been demanded in the model.
The main reason behind the lower interest of the industries in PESTLE analysis is its narrow scope. The business goals are quite wider in range and five forces model could not maintain that level. As such, it becomes important for the industry like petroleum to assess the technology disruption.
Limitations of financial analysis:
As well as the financial analysis also has some issues this restricts the better analysis and evaluation about the company’s activity and operations. The financial analysis does not take the concern on the government action, economical performance, market sentiment etc. These factors play crucial role while evaluating the business performance but financial analysis model ignores all the relevant factors of the business and thus it could be stated that an analyst must not depended on the financial analysis only while measuring the business performance of an organization (Ackert and Deaves, 2009).
Conclusion:
On the basis of the analysis, it has been found that the financial performance of the company is quite better. The company is financially stable. On the other hand, it has been measured that the profit margin and the turnover of the business is also improving. The analysis explains that the diversification strategy would help the business more to improve the performance of the company. The porter’s five forces model has also explained that the overall performance of the company is quite strong. The business is required to implement little new strategy to become the leader in the market and manage the overall performance of the business.
To recommend, ABB limited should implement few new strategies to reduce the threat and the risk level from the company. The financial stability must also be improved by the business through making few changes into the dividend policy and the operating expenses of the company. Further, it is also recommended to the business to improve the suitability, feasibility and acceptability in the business.
References:
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Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of equals. World Scientific.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.
Brewer, P.C., Garrison, R.H. and Noreen, E.W., 2005. Introduction to managerial accounting. McGraw-Hill Irwin.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
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