Financial Business Activities Assignment (GC01341)

Table of Contents

1.0      Introduction.

2.0      Critically evaluate the key features of Rosetta Stone’s business model and explain its core business strategy

Competitive rivalry.

Customer bargaining power

Supplier bargaining power

Threats of new entrants.

Threats of a substitute.

3.0      Critically examine the advantages and disadvantages of the IPO process undertaken by Rosetta Stone

Advantages.

Disadvantages.

4.0 Market-Multiples approach as a basis for Rosetta Stone determining an exit value.

5.0 How to use the market-multiples approach for purposes of arriving at a suitable share price for Rosetta Stone’s IPO.

6.0 Based on the case information, discuss what might be a reasonable rate of return on investment in Rosetta Stone.

7.0 Apply a Free Cash Flow model to Rosetta Stone to arrive at a valuation. Explain and show all your calculations and workings.

8.0 What offer price would you set for the IPO?.

9.0 Concussion.

References.

1.0  Introduction

Analyzing financial business activities are essential for any organizations to make effective decision and strategies. This paper analyzes several financial business activities of a particular firm, call Rosetta Stone. First, this paper evaluates the key features and core business strategy of Rosetta Stone. Then, advantages and disadvantages of IPO process is discussed in term of Rosetta Stone business. Next, the market-multiple approach is discussed along with its advantages and disadvantages and applied to arrive at a suitable share price for Rosetta Stone. Then, the Weighted Average Cost of Capital (WACC) calculated to define a reasonable rate of return on Rosetta Stone’s investment and the Free Cash Flow (FCF) model is applied to arrive at a valuation for Rosetta Stone. Finally, this paper offers a share price for the IPO process of Rosetta Stone.

2.0  Critically evaluate the key features of Rosetta Stone’s business model and explain its core business strategy

Identifying and analyzing key features of a business model is essential for an organization to penetrates and maintain market position. The business model of Rosetta Stone includes different features that define how it is penetrating markets, practicing leadership, and maintaining market positions (Rosetta Stone, 2017) One of the key features of Rosetta Stone’s business model is offering unique products with quality and integrity. Rosetta Stone first started its business by introducing retail language training software in 1999. The users of this product of Rosetta Stone were satisfied with their experiences and regularly recommended to others that motivated Rosetta Stone to pursue the retail market in 2001. From 2004 Rosetta Stone started to enter new markets and scale up the current business that created job opportunities for over 1200 people. Rosetta Stone has been a world-recognized language learning software brand by 2009 and has been able to attract millions of language learners in 31 languages and over 150 countries. Among the customers of Rosetta Stone, 80% are retail consumers and 20% are institutional customers.

Another feature of Rosetta Stone’s business model is its effective pricing strategy. This feature is the most important and effective for Rosetta Stone that has gradually increased its customer base, revenue and profits even in the global economic downturn in 2008/2009.  The revenue increased from $25.373 million in 2004 to $209.380 million in 2008. The gross profit and net profit increased from $21.405 million and $1.923 million in 2004 to $180.704 million and $13.892 million in 2008 respectively. The total assets and equity also increased from $110.376 million and $58.125 million in 2007 to $138.818 million and $79.071 million in 2008 respectively. This huge success has encouraged Rosetta Stone to increase language learning experienced by introducing Rosetta World and Rosetta Studio. Rosetta World gives a virtual community where the learners can practice their skills, whereas Rosetta studio allows learners to chat with other learners.

Another key feature of Rosetta Stone’s business model is its effective marketing and advertising activities.  Due to effective advertising and promotional activities, Rosetta Stone has successfully developed a strong brand image, brand awareness and brand perception among the target and potential customers. However, Rosetta Stone needs to spend a lot on marketing and research and development. In 2004, its total expenditure was $19.620 million that increased to $153.179 million by 208. In addition, strong management and leadership practices as business features have supported Rosetta Stone to move from one stage to another stage of business and make effective decisions and strategies for its business success (Véronis, 2015). Building and maintaining strong relationships with stakeholders (such as underwriters, audit firms, lenders) as a business feature has helped Rosetta Stone to develop effective business strategies and gain its organizational goals and objectives (Dudley and James, 2013). Finally, in 2009 Rosetta Stone decided to undertake the IPO process as the strategy that is considered as an essential feature to increase its brand image, sales and profits. Rosetta Stone has been able to gain a sustainable competitive advantage because the competitive situation is in favor of its business.

The competitive situation of Rosetta Stone is outlined using Porter’s Five Forces model as follows:

Competitive rivalry

Rosetta Stone is facing high competitive rivalry. This is because the language learning industry is being dominated by specialized language schools including Berlitz International and Auralog. These schools teach languages using several conventional classroom methods. For example, Berlitz International uses the Berlitz Method of Language Instruction. Both Berlitz and Auralog are the primary competitors of Rosetta Stone because they offered quality language training software. Rosetta Stone also faces challenges from secondary competitors including Palabea, Babalah, and LiveMocha that have adopted social media approach to teaching language to learners. However, quality and integrity in products and wider services (mainly Rosetta World and Rosetta Studio) have given competitive advantages to Rosetta Stone in the market…………

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