RFM Corporation

Business Report

Submitted to:
Mr. Aaron C. Escartin, CPA, MBA

In partial fulfillment of the requirements

for the ACT620M course
Master of Science in Accountancy
De La Salle University

By: Esmeña, Jessica

Date: April 20, 2018

 EXECUTIVE SUMMARY
This paper presents a business review of RFM Corporation. RFM is one of Philippines’
biggest food and beverage companies today. This business review includes various
analysis of the company. This includes discussion and analysis of the company’s
background, cost behaviour, budget process, firm performance, capital investment, and
competitive performance. The paper also includes a chapter about a proposed
balanced scorecard for the company. Generally, RFM Corporation is performing well
in terms of financial performance. As RFM is still establishing some of its brands, there
are still difficulties faced by the company in capturing market share and enjoy
competitive advantage over its competitors.
 TABLE OF CONTENTS

Executive Summary

Table of Contents

List of Tables

List of Figures

Chapter 1 COMPANY BACKGROUND

Chapter 2 COST BEHAVIOR ANALYSIS

Chapter 3 BUDGET PROCESS ANALYSIS

Chapter 4 FIRM PERFORMANCE ANALYSIS

Chapter 5 CAPITAL INVESTMENT ANALYSIS

Chapter 6 COMPETITIVE ANALYSIS

Chapter 7 BALANCE SCORECARD AND STRATEGY MAP

Summary and Conclusion

Appendices

References

ii
 LIST OF TABLES

Table 1 Cost Structure using Conventional Classification of Costs

Table 2 Degree of Operating Leverage (2012-2016)

Table 3 Breakeven Analysis Data

Table 4 Profitability Ratios

Table 5 Liquidity Ratios

Table 6 Efficiency Ratios

Table 7 Growth Ratios

Table 8 Capital Spending

Table 9 Comparative Profitability Ratios of RFM, SMPFC, and URC

Table 10 Comparative Profitability Ratios of RFM, SMPFC, and URC (using EBIT)
 LIST OF FIGURES

Figure 1 Growth of Sales Revenue, Cost of Sales, Selling and Marketing Expense, and
General and Administrative Expenses

Figure 2 Growth of Fixed Cost, Variable Cost and Sales Revenue

Figure 3 Comparison between Gross Margin, Operating Margin, EBT Margin, and Net
Margin

Figure 4 Comparison of Profitability Ratios

Figure 5 Liquidity Ratios

Figure 6 Growth Ratios

Figure 7 Capital Spending

Figure 8 Size of the Firm

Figure 9 Comparative Profitability Ratio of RFM, URC, and SMPFC, Inc.

Figure 10 Comparative Liquidity and Solvency Ratios of RFM, SMPFC, and URC

Figure 11 Balance Scorecard by Robert Kaplan and David Norton

 COMPAY BACKGORUND
RFM Corporation was founded by Salvador Araneta on August 16, 1957 as Republic
Flour Mill, Inc. in which the manufacture of flour is the primary operation of the business.
Mr. Araneta’s goal then was to create jobs for the Filipinos and save the foreign exchange.
It has been a challenge for Mr. Araneta and his co-founders as the main ingredient of the
flour that they intend to produce is wheat, which is not grown in the Philippines. Despite
the hurdles and impossibility of Mr. Araneta’s dream, RFM became one of the pioneers
in the flour-milling industry in Asia. From its original business operation of flour milling,
RFM Corp. has diversified into other industry such as poultry and livestock production
and areas of food manufacturing that includes flour-based products, margarine, milk &
juices, canned and processed meat, ice cream, and bottled mineral water (RFM, 2018).
The company, however, divested from some of its diversified operation, such as the
poultry and livestock production, and canned and processed meat. Today, RFM is one of
the biggest food and beverage companies in the Philippines offering branded products
that are highly visible in the consumer market. Among the branded products offered by
RFM are White King, Royal and Fiesta, Sunkist, and Selecta Ice Cream, which is under
joint venture with Unilever. The company remains operating its flour-milling business and
serves the requirements of several bakeshops, and makers of biscuits, cookies, noodles,
snacks and other flour-based products, as well as internal flour requirements for its
products (RFM, 2018).
RFM Corporation is not only a major player in food and beverages industry in the country
but it is also involved in non-food businesses. The food businesses of the Firm have two
major business segments: the institutional segment and the consumer segment.
Institutional segment is involved primarily with the manufacture of flour and bakery
products that the company sell to its institutional customers. Consumer segment pertains
to the company’s production and sale of food and beverages, such as ice cream, milk
and juices, pasta products, and flour- and rice-based mixes. On the other hand, non-food
businesses of the company include barging services and leasing of commercial and office
spaces. RFM remains to be the biggest manufacturer of pasta in the country, as
evidenced by its market share.
RFM Corporation continuously strive to be the best in the foods and beverage industry by
adhering to its vision, mission, and commitments. RFM envision itself to able to provide
the Filipino customers, anywhere in the country, with better branded food and beverage
products. This vision strengthens the attainment of the company’s mission, that is to
become the market leader in the Philippines’ food and beverage industry through offering
affordable and quality products. Also, RFM commits to the quality in all its products and
to continuously innovate their products to make children healthier and happier. The
company’s vision coupled with its mission and commitments to produce value for their
customer’s money helps creating RFM a world-class Filipino food conglomerate. In
addition, RFM’s recognized success are driven by its commitment to product excellence,
the aggressive marketing, keen management and good governance.
Ownership
As of December 31, 2016, there are a total of 3,198 shareholders of RFM common stock.
Filipinos owned 76.24% of the total common shares (or 2,665,547,660 common shares).
Meanwhile, foreigners owned 830,693,206 common shares or 23.76%.
Below are the top 20 stockholders of common shares, the number of shares they held,
and their % of ownership, as of December 31, 2016:

Beneficial Ownership
As attested on the Annual Corporate Governance Report of RFM Corporation on
December 2016, there is no one who beneficially owns more than 5% of the Company’s
common stock.
Corporate Governance
The Board of RFM Corporation is composed of 11 members and is chaired by Jose S.
Conception, Jr., while the CEO/President of the company is Jose Ma. A. Conception III.
The corporate governance policy of RFM is contained in its 2009 Revised Manual of
Corporate Governance. As disclosed in its 2016 Annual Corporate Governance Report,
the Board review their vision and mission to assess its attainability.
 COST BEHAVIOUR ANALYSIS
Proper cost management is integral to the success of any business organization.
Management needs to understand how the cost behaves to manage and control them
effectively. One of the main objective of this analysis is to reduce costs and achieve better
financial performance. Garrison (2006) defined cost behavior as the reaction of each
costs to every changes in activity. Activity are normally expressed in financial terms.
Costs may be classified as fixed costs, variable costs, or mixed costs. The cost
classification will depend on movement of the cost drivers. Fixed costs are the costs that
does not fluctuate regardless of the movement in the activity level. Meanwhile, variable
costs are those that fluctuates proportionately with changes in the activity level. Lastly,
mixed costs are costs that has both the characteristics of fixed costs and variable costs.
Understanding the behavior of cost is important for management to plan and control the
organization’s cost. It is also essential in budgeting process and other management-
based analysis.
RFM Corporation has been performing well. This was evidenced by the increasing net
income in the 5-year comparative statement of comprehensive income covering the years
2012 to 2016. However, to determine whether the company is indeed managing its cost
well, we need to review the characteristics of the costs it has incurred. This section would
include the analysis of the cost structure, operating leverage, and break-even analysis of
the company. It would also include an assessment on the impact of the company’s cost
structure to the vulnerability of income due to changes in the level of sales.
Limitations and Assumptions
The following are the limitation assumed in the analysis of the cost behaviour of RFM’s
costs:
a. The basis of the analysis are the data lifted from the annual reports of RFM
Corporation. Because annual financial reports do not provide information as to the
number of units sold, the break-even analysis does not include sales mix and is
only calculated in peso.

b. There was no information disclosed in the annual financial statements regarding

the nature of each costs, thus the cost classification was based on conventional
way. Because of this, the costs were classified only to fixed costs and variable
costs.
Cost behaviour of RFM Corporation
The summary of the classification of RFM Corporation into fixed and variables costs of
using the conventional method is presented below:
 Table 1. Cost Structure using Conventional Classification of Costs
The average variable cost of the company is 79% of the total costs, which is normal to
manufacturing companies like RFM Corporation. Most of the costs under cost of sales of
the company are classified as variable costs, except for the depreciation expense, rental,
and personnel cost which are classified fixed costs. Meanwhile, most of the selling,
marketing, general, and administrative expenses are classified as fixed cost with the
exemption of some expenses under them. The classification was based on the movement
of the expense account against the movement in sales.
Analysis of Relevant Data
Cost Structure and Analysis
Shown in Table 1 is the breakdown of the total expenses of the company both in amounts
and in percentages. Fixed costs, meanwhile, only accounts for at an average of 21% of
the total costs. It could be inferred from the table that most of the company’s expenditures
for its normal operation goes to variable expenses. This scenario normally happens to
manufacturing companies, as they spend more on direct materials and direct labor.
However, this may pose a problem for company. As there were high percentage of
variable costs, the contribution margin becomes low. This would mean that if the company
wants to generate higher net profit, it must produce and sell more goods. In addition, if
there will be a decline in sales volume, the net profit of the company would be affected
greatly as most of the expenses are geared on the variable costs.
Degree of Operating Leverage (DOL)
The operating leverage is a measure of the behavior of the income in relation to the
changes in sales due to increase in selling price or sales volume (Gowthorpe, 2008). The
degree of operating leverage is computed as follows:
The degree of operating leverage of RFM Corporation for the years 2012 – 2016 are
presented below:

Table 2. Degree of Operating Leverage (2012-2016)

The degree of operating leverage (DOL) explains the movement of the net income in
relation to the movement is sales. We can infer from Table 2 that in 2016, there earnings
before interest and taxes of RFM Corporation increases by 3.23 time for every change in
sales. A more informative analysis can be done with DOL if it was compared with the
industry average. That way, we would be able to determine how the company is faring
with regards to cost management in comparison with other companies in the same
industry. The data (industry average) however have not been gathered for this report.
Cost Ratios
Figure 1 shows the growth of the total sales earned and various expenses incurred by the
company for the comparative years 2012 to 2016. In the graph, we can see the fluctuation
in the growth of the revenue and expenses for the five-year period. The highest increase
in cost is in the selling and marketing expenses followed by the general and administrative
expenses.

Figure 1. Growth of Sales Revenue, Cost of Sales, Selling and Marketing Expense, and
General and Administrative Expenses
The increase in the selling and marketing, and general and administrative expenses are
caused by the increase in the fixed cost, advertising expense and provision for doubtful
accounts in particular, of the company as presented below:

Figure 2. Growth of Fixed Cost, Variable Cost and Sales Revenue

In addition, selling and marketing expense of the represents 25%, 21%, 19%, 19%, 18%
of the company’s total expenses for the years 2016, 2015, 2014, 2013, and 2012,
respectively. Of which, 75% are classified as variable costs. This is caused by the
extensive campaign of the company to advertise its products to the market.
Breakeven Analysis
The breakeven computation shown in Table 3 depicts the total sales that the company
should generate to cover all their fixed costs. There was a notable increase in the
breakeven point in peso from 2015 to 2016, from 5.6 billion to 6. 7 billon pesos. This was
because on 2015, the company has incurred the lowest fixed cost. In addition, the
breakeven point in peso indicates that for RFM Corporation to earn profit, it must produce
a total sale of 6.7 billion pesos.

Table 3. Breakeven Analysis Data

Recommendations
The following are the recommendations for the cost management of RFM Corporation:
a. The management of the company should create measures to reduce the
company’s variable selling and meeting expenses without harming its reputation
and image to the market. Although such costs may help in the competitive
advantage of the company, it still important to manage and control the costs
incurred so as to present a better financial performance to the investors.

b. The company could also consider entering into outsourcing agreement with other
company to reduce the fixed cost.

BUDGET PROCESS REVIEW ANALYSIS

A budget is a comprehensive financial plan used by management to achieve the
operational and financial goals of the company. It is a map of the strategic plans of the
company. They are necessary to highlight the he financial implications of plans, to outline
the required resources in achieving these plans and to provide a means of measuring,
viewing and controlling the obtained results, in comparison with the plans (Bufan, I.D.,
2013). Once the budget is in place, it becomes a powerful benchmark where the
management evaluates themselves whether they have attained their objectives.
There are various benefits that can be obtained by applying budgeting process in the
company. First, budget creates a formal coordination process between departments in
doing an activity. This is helps align tasks and activities to the company’s strategic plan.
Second, budgeting allows delegation of decision-making responsibilities to the lower
management, which then enhances their level of responsibility. Having a defined budget
plan in place creates unity to decision makers to work collectively towards the attainment
of the same objective. Lastly, budget enhances the process of evaluating performances
by providing the managers and executives a common basis for discussion on how well
the manager met his goals and providing a talking point concerning why actual results
veered from the original budget (Straton, 2015). Having a budget heps create a greater
company-wide efficiency through encouraging all areas within the business to become
more efficient.
Louis Staton (2015) cited a few methods in creating an effective budget:
a. Identify the decision makers in the organization and involve them in the budget
creation process.
b. Use technology to coordinate and consolidate the budgeting efforts with the team.
c. Create a budget that reflects the organization’s strategic plan for the company.
d. Engage the team in reviewing and comparing the budget to actuals to highlight
strengths and weaknesses.
e. Identify issues quickly and create a plan for immediate resolution.
f. When going through the budget process remember that the budget is a tool. It is
the tool that translates the organization’s goals and strategies into dollars. It is a
 plan and when developed well it can provide opportunities to work closer with the
team to keep the organization on track.
On the other hand, Hanif (2013) mentioned that the existence of a budget manual is
important in ensuring that the mechanisms are properly employed. Hanif (2003) identified
the significant influence of the manual:
a. States the specific procedures to be followed in the development of the budget.
b. Statement of the objective of the business; statement of duties and responsibilities
of different personnel involved in the preparation of the budget.
c. Time schedule of budget preparation
d. Forms of different schedules
e. Procedures for budgetary control
f. Procedures for obtaining approval
This section shall contain an evaluation of the budget setting process employed by RFM,
the assessment of presence and relevance of a budget committee of RFM, and others.
Budgeting Policies Generally Employed by RFM Corporation
Budgeting process is an integral part of the operation of the business. The budget plan,
once stablished, serves as a tangible manifestation of the company’s strategic plans.
Since the budget is prepared internally inside the company and disclosures about it are
generally discretionary, no data on the actual budget plan of RFM Corporation were
gathered. This is despite the efforts exhausted to gather information about the budgeting
process and actual budget plan of the company. There are, however, hints in the
mandatory disclosures filed by RFM Company to the SEC and PSE that may provide us
with the general idea how the company prepares its budgets, from the planning phase to
the performance evaluation.
Like many other companies, the management of RFM Corporation is the preparers of the
budgets from each segments of operation. The Chief Executive Officer (CEO), as
disclosed in their 2016 Annual Corporate Governance Report, oversees the budget
preparation process of the company. These budgets are collated and brought upon the
Board of Directors for review and approval. There are three types of directors in RFM:
executive director, non-executive director, and independent director. The executive
director is the one that is tasked to supervise the preparation of the annual and long-term
plans and budgets of the company (ACGR, 2016).
The Board is composed of four major committees: executive committee, audit committee,
nomination committee, and renumeration committee. In general, the Board is the one that
oversees and approves business strategies and objectives of the company. The various
committees aid the Board in the performance of its tasks. In relation to budgeting process
of the company, the executive committee (which is composed of 1 executive director, 2
non-executive director, and 1 independent director) is the one that “reviews major
direction and strategies” of the business, as well as the “reviews the quarterly financial
reports, approve capital expenditures, and decide on hedging of raw materials beyond
one (1) year” (ACGR, 2016). Meanwhile, the audit committee performs the oversight
function of the Board. That is, it monitors the company’s compliance with applicable rules
and regulations as well as review the annual internal and external plans and reports of
the company, and check whether it adheres to the company strategies. The company
also employs risk management system to ensure the attainment of the company’s vision
and mission.
Recommendation
a. Though it is not required by any governing bodies (i.e. SEC, PSE), RFM
Corporation should consider issuing a detailed, or even a summary, report of its
budgeting process. Though it might not be costly to the company, stakeholders
might be interested in knowing how the Management conducts it operation. In
addition, as the budget represents the strategic goals of the company, access to it
would help company stakeholders assess whether the company is performing well.

FIRM PERFORMANCE ANALYSIS

This section analyses the performance of the company by using financial ratios such as
profitability ratios, liquidity ratios, efficiency ratios, and growth ratios. Financial ratio
analysis involves evaluation of the financial performance and health of the company using
the historical and current data from the company’s financial statements. The formulas
used the following analyses are appended in Appendix A of this report.
Firm Performance of RFM Corporation
Profitability
Profitability ratios depicts the company’s effectiveness on generating profit from its
operation (Investopedia, 2018). Gross margin, return on assets, and return equity are
some of the examples of the profitability ratios commonly used. The following are the
profitability ratios for RFM Corporation:

Table 4. Profitability Ratios

The gross margin, operating margin, earnings before tax (EBT) margin and net margin
are computed in a similar way, that is dividing the income related to the ratio by total
sales. These ratios, though very similar with each other, are important individually as they
show the focus on different components of the company’s financial performance.
Summarized below is the graph that shows the trend of these four ratios over the last five
years.

Figure 3. Comparison between Gross Margin, Operating Margin, EBT Margin, and Net
Margin
As we cab observe in the figure above, there is a huge gap between the gross margin
and operating margin. The main difference between the two profitability ratios are the
selling, general and administrative expense (SG&A) ratios. The SG&A of the company
eats up 25% to 30% of the total sales revenue, thus the operating profit margin were down
to only 9% to 13% from the gross profit margin of 33% to 42%. This means that even
though the company generates a huge gross profit from its operation, a large amount of
that profit would still be proportioned to the operating expenses of the business, like
salaries of employees, advertisements, and others. On the other hand, we can see that
EBT margin and net margin mirrored the movement of each other. This is because the
only difference between the two is the provision for income tax.
Though the sales revenue increased by 6% in 2016, the cost of sales for 2016 decreased
by 1%. Due to this, the gross profit margin also increases. One of the possible reason for
this scenario is the sale of the beginning inventory of the company. That shows the
effective inventory management of the company, as supported by the lack of inventory
obsolescence in the company’s financial statement. On the other hand, SG&A expenses
increases in 2016 due to the increase in the advertisement expenses, freight and handling
costs, recognition of provision for doubtful accounts, and professional fees. However,
despite this, operations margin is still higher in 2016 than in 2015. This was because of
the higher sales revenue and lower cost of sales. In the figure above, we can see that the
operating margin and EBT margin has almost the same percentage of sales from 2013
to 2016. This is because there are no unusual or non-routinary transactions that
happened to the company between this period. Also, the provision for income tax has
increase from 205 to 2016. The increase was mainly due to higher net income for 2016.
Overall, the sales and related cost of RFM Corporation are stable.
The next portion of the profitability analysis involves the analysis of return on assets, asset
turnover, financial leverage, return on equity and return on invested capital. Shown below
in the graph is the behaviour of such ratios over time.

Figure 4. Comparison of Profitability Ratios

Based on the trend of the ratios shown in figure 4, return on equity (ROE) has the highest
value. However, we can see that there was an actual decline of ROE in 2014. This was
because in 2013, there were non-recurring transactions that had occurred to the company
like revaluation increment of property, planta and equipment, and its tax effect.
The asset turnover measures the company’s efficiency in using its assets to generate
sales income. The asset turnover of the company is at par with the industry average. In
addition, the company’s fixed asset turnover, receivable turnover, and inventory turnover
are 2.3, 10.5, and 4.9 times respectively. These figures quite behind, though not far, from
the industry average for the year 2016. The company’s return on asset is commendable
as it exceeds the industry average. This would mean that the asset management of the
company effective in generating revenues.
Overall, the company, in terms of profitability, is doing well as it operates at least at par
with the industry averages.
Liquidity and Solvency
Liquidity refers to the ability of the company to use its current or quick assets to pay
current liabilities as they fall due (Investopedia, 2018). Liquidity is normally represented
by quick ratio and current ratio. Solvency, on the other hand, pertains to the company’s
ability to pay its long-term obligations. Solvency ratios are sometimes called financial
leverage. Below is the summary of liquidity ratios for RFM Corporation.

Table 5. Liquidity Ratios

RFM Corporation has commendable liquidity ratio, as shown in the graph, with the highest
current ratio and quick ratio on 2013. The high liquidity ratio can be attributed to the
payment of RFM of its current liabilities in that year. There was however a decrease on
the both liquidity ratios on 2014. This was due to the increase in bank loans of the
company. Although, it gradually increases, as shown in the figure below. This means that
the company has the current resources to pay off its current obligations as they fall due.

Figure 5. Liquidity Ratios

The company’s shareholders cannot finance the its whole operation infinitely. There will
be a time when a company needs to get their financing through borrowing. And that is
being measured by financial leverage. Financial leverage, as defined by Investopedia
(2018a) is the “degree to which a company uses fixed-income securities such as debt
and preferred equity”. The higher the debt financing a company has, the higher its
financial leverage (Investopedia, 2018a). A high degree of financial leverage results to
high interest payments, which has a negative effect the company's earnings per share.
RFM Corporation’s financial leverage is decreasing over 5 years, as shown in table 5.
This indicates that the company’s strategy to reduce the financing of its operation through
borrowings. This was achieved through the payment of principal obligations of the
company. This would mean lower interest expense and improve the net income of the
company.
Efficiency

Table 6. Efficiency Ratios

Efficiency ratios are ratios that assesses the effectivity of the company to use its assets
and liabilities in generating sales and maximizing profits. Some of the key efficiency ratios
are the asset turnover ratio, inventory turnover, fixed asset turnover and receivable
turnover.
Asset turnover indicates the size of the asset that is required to be committed to support
a particular level of sales (Helfert , 1997). Table 6 showed asset turnover that is less than
1. However, since RFM is a manufacturing company, which means uses of PPE in its
majority of its operation, fixed assets turnover is the better determinant of the required
assets for each sale.
The fixed asset turnover ratio illustration how much of fixed assets is required to generate
a unit of revenue. The ratios are relatively stable except for a little fluctuation on the
working capital turnover. There is minimal increase in the fixed asset turnover from over
5 years. The inventory turnover explains how long the inventory can be converted into
sales while receivable turnover pertains to how long a receivable can be converted into
cash. Overall, the results for efficiency ratios are great for RFM Corporation.
Growth Ratio

Table 7. Growth Ratio

 Figure 6. Growth Ratios
The growth rate of the financial performance of the company, as measured by various
performance measures, are fluctuating over the years. The company must look for ways
to ensure that the increases in sales revenues are forwarded to the net income.

CAPITAL INVESTMENT ANALYSIS

Capital investment analysis, or capital budgeting, is a budgeting procedure that
organizations uses to assess the potential profitability of a long-term investment
(Investopedia, 2018b). The objective of this analysis is to determine the best possible
option which will yield to the highest return on invested capital. There are various
techniques that can be used in the conduct of capital budgeting. Among which are the
Net Present Value (NPV) analysis, Discounted Cash Flow (DCF) analysis, risk-return
analysis, and risk-neutral analysis (Investopedia, 2018b).
Decisions relating to capital investments normally include large expenditures on assets
(i.e. purchase of fixed assets and property, plant, and equipment). Because the of scarce
resources due to limited funds, it is important that decisions about capital expenditures
are thoroughly thought out before it is approved. That is why, companies would generally
stablish set of standards that should be met first before the approval of any capital
investment proposal.
Capital Investment Analysis of RFM Corporation
Below is the summary of the RFM’s capital expenditures lifted from the company’s
cashflow statements for the years 2012 to 2016. Based on the annual reports of RFM
Corp. for five years, it can be noted that the company has an annual addition in their
property, plant and equipment account. However, it was not disclosed in their financial
statements any plans succeeding years’ capital expenditure plans.
 Table 8. Capital Spending

Figure 7. Capital Spending

RFM’s capital expenditures for cash expenditures pertains to the new investment of the
company to boost plant capacity and improve manufacturing efficiencies (Annual Report,
2014). There was also on-going construction in progress in the company’s balance sheet
for the years 2013 to 2016 which pertains to the construction of warehouse of Pasta Line
3 which will be used in the production of pasta long goods (Annual Report, 2015).
In addition, the major increases in property, plant and equipment account is mainly
attributed to the recognition of land and land appraisals at the end of each years.
Recommendations
a. The capital acquisitions of the company cover a lot from the cash flows. RFM
should strengthen then policies to make sure that the acquisitions are in line with
the company’s vision and mission.

b. An additional disclosure may be included in the financial statements or annual

report about the company’s plans for capital acquisition may be beneficial to the
users of financial statements.
 COMPETITIVE ANALYSIS
Competition is inevitable in any endeavor. Because of a competitive environment,
business organization faces various risks that could make or break them. Decisions about
product positioning, value creation, cost leadership, marketing strategies, and product
pricing, among many others, becomes more critical as the business strive to be
outperformed their competitors.
The effects of competition seemed to be negative to the company as the higher the
competition is, the tougher it would be for the business organization to successfully
penetrate the market and achieve financial goals and objectives. However, that is not
usually the case. Competition, in business, also brought out benefits for those who are
competing and to various stakeholders. For one, competition encourages innovation.
Without competition, business organization would find it hard to improve the goods and
services they offered. On the other hand, competition allows market players (business
organizations) to continuously improve their products to capture a larger market share
(Forbes, 2018). This is reason why most business invest a huge amount of their capital
in research and developments to distinguish their products from the products of their
competitors. Another benefit of competition is that it encourages business to top up their
customer services (Forbes, 2018). For businesses offering similar goods and services,
customer service is vital in capturing market share. And satisfied customer is most likely
a loyal customer. And lastly, business organizations would learn a lot from analyzing the
overall structure and performance of their competitors and the industry they compete in
(Forbes, 2018). Knowing their competitors how their competitors fared in the industry
would add insight to the company as to what strategies would be beneficial, and what
would not. This is also where competitive analysis comes in.
The competitive analysis analyses how strategies of business relate to its competition in
the industry. The objective of the competitive analysis is to “determine the strengths and
weaknesses of the competitors within your market, strategies that will provide you with a
distinct advantage, the barriers that can be developed to prevent competition from
entering your market, and any weaknesses that can be exploited within the product
development cycle” (Entrepreneur, 2006).
This section’s objective is to determine RFM Company’s advantages and disadvantages
as compared with its competitors. The tool that is used in this section is analysis of Key
Performance Indicators (KPI) of RFM and two of its identified competitors.
Basis for Competition
The competitors chosen for this analysis were Universal Robina Corporation (URC) and
San Miguel Pure Foods Company, Inc. (SMPFC).
RFM Corporation is a manufacturing company which operates in a food and beverages
industry. Majority of its revenue was generated through the sale of its products, which
includes flour, bakery products, cake mixes, pasta products, milk and juices, and ice
cream. Universal Robina Corporation (URC) also operates on the commercial food
industry. URC’s revenues are also greatly affected by the sales of its branded products.
On the other hand, San Miguel Pure Foods Company, Inc. (SMPFC) main operation is
focused on flour milling, coffee, biscuits, etc. And like RFM and URC, it also has
packaging business. As URC is comparable to RFM in the food sector, SMPFC can be
compared with the other segments of RFM. In addition, RFM, URC, and SMPFC used
similar ratios for the analysis of key performance indicators.
Comparison of Key Performance Indicators
The following discussions will be the analysis of the key performance indicators of RFM,
URC, and SMPFC. The table of financial ratios for the three companies are presented in
Appendix B.
Size of the Company
The data used in the analysis of the size of the company are total assets, total liabilities,
and market capitalization. The figures for total assets and total liabilities were lifted from
the 2016 annual report of each companies, while the market capitalization was computed
by multiplying the outstanding shares of each company by the share price of each shares
at December 31, 2016.

Figure 8. Size of the Firm

Apparently, URC is the largest among the three companies in terms of size. Its total
assets, total liabilities, and market capitalization are way higher than those of RFM
Corporation and SMPFC, Inc. SMPCF, Inc.’s market capitalization, on the other hand, is
63% higher than those of RFM. Although there is a huge gap between RFM and URC,
URC will still be used as one of the bases of competitive performance of RFM because
of the similarity of the two company’s operation.
Even though URC and SMPFC, Inc. is deemed bigger in firm size, RFM Corporation has
approximately 3,496 million outstanding shares. This is higher 59% and 1947% higher
than those issued by URC and SMPCF, Inc., respectively. The lower market capitalization
of RFM was because even though they have large number of issued share, the shares
price is relatively lower than the other two companies.
Profitability
Based on the graph below, there is significant difference between the profitability ratios
between the three companies. This may imply the difference in operational efficiency and
capital utilization despite being in the same industry.
Among the three companies, RFM generated the highest gross margin of 41.55% as
compared with SMPFC’s 23% and URC’s 25.94%. This means that RFM was able to
incur lower cost of production than URC and SMPFC.

Figure 9. Comparative Profitability Ratio of RFM, URC, and SMPFC, Inc.

However, despite having a higher gross margin, RFM’s net profit margin of 7.89% is lower
than those of URC’s net profit margin 10.90%. This tells a lot about the incurrence of
RFM’s selling and administrative expense relative to the amount of sales. This means
that though RFM is somehow managing well the cost of production, huge expenses were
still incurred in the operating expenses and finance costs. As mention in the prior section
of this report, majority of RFM’s selling expenses are from advertising, freight and
handling, depreciation, outside services, professional fees.
RFM has also the lowest return on assets and return on invested capital as compared
with URC and SMPFC.

Table 9. Comparative Profitability Ratios of RFM, SMPFC, and URC

The figures above, however, does not really reflect the true ability of the companies to
generate profit from its normal operations out of its assets and invested capital. This is
because the numerator in the computation of both ratios is already the net income, which
is already inclusive of the nonrecurring transactions. Thus, to look into the better
profitability ratio, presented below is the revised computation of return on asset and return
on invested capital, using earnings before interest and taxes as the numerator.

Table 10. Comparative Profitability Ratios of RFM, SMPFC, and URC (using EBIT)
The revised ROA and ROIC computation showed that SMPCF is better in utilizing its
assets and invested capital to generate profit. Though URC is the largest among the three
companies in terms of firm size, it seems that large assets does not necessarily translate
to income. Because of this, these companies should assess whether the assets that they
currently have contributes to income generation or it only incur maintenance expenses
for the company.
Liquidity and Solvency

Figure 10. Comparative Liquidity and Solvency Ratios of RFM, SMPFC, and URC
RFM Corporation has quite a commendable liquidity ratio. Its current ratio is lower than
those of SMPFC and URC, but only on a small difference. Its quick ratio is higher than
the other two companies. This means that RFM has the ability to meet currently maturing
obligation using its current and quick assets.
RFM’s solvency ratios or also called gearing ratios – debt to asset and debt to equity –
are fare well, and almost at par with the gearing ratios of URC and SMPFC. These gearing
ratios must be maintained low so as not to affect the company’s net profit margin. This is
because high debt ratio means high number obligation which demands high interest
payments. Overall, RFM is faring well in terms of liquidity and solvency.
Recommendations
a. Even though the company has high gross margin, its net margin is quite low in
comparison. The company must check its operating expenses and find away to
minimize these expenses to ensure a higher net profit margin.

b. The company’s return on asset is very low in comparison with its competitors. Due
to this, the company must look into its operating process to check whether the
assets owned by the company are properly utilized in generating profit or if it only
adds to the growing expenses of the company.

BALANCED SCORECARD
This section aims to use Balance Score Card (BSC) to measure the overall performance
of RFM Corporation. The section is structured as (1) overview of balance scorecard, (2)
presentation of models used in the proposed BSC for RFM Corporation, and (3) proposed
BSC for RFM Corporation.
Overview of Balance Score Card
Balance scorecard is a strategic performance measurement model developed by Robert
Kaplan and David Norton which aims to translate the organization’s vision and mission
into actual actions (Van Vliet, 2010). Below is an illustration of a balance scorecard
developed by Kaplan and Norton.

Figure 11. Balance Scorecard by Robert Kaplan and David Norton

Balance scorecard is created by Kaplan and Norton with the idea that there is no single
measure that can provide a broad picture of the health of the organization. That is why
they (Kaplan and Norton) devised a four-perspective framework which starts with the
vision, mission and strategy of the company. From there, it there are four key
perspectives: financial, customer, internal business process, and learning and growth, in
which the organization must select critical measures to address.
Financial Perspective
The financial perspective is mostly quantitative and answer the question “How attractive
must we appear to our shareholders?”. Since this is more focused on the shareholders’
value, the focus of the financial perspective is to assess the financial performance of the
company.
Financial perspective provides an insight into the operational management and the
sustainability of the company’s strategy. This is the where the other three perspectives
are being quantified as “the added value that was delivered from the other three
perspectives will be translated into a financial success” (Van Vliet, 2010). This is due to
the assumption that higher added value generated from the scorecard would translate to
higher profits.
The measures of this perspective are normally the key performance indicators such as
operating margin, ROI, and EVA.
Customers Perspective
The focus of the customers perspective is the customer satisfaction. Customers are the
target market of the business organization. If the customer is satisfied with the business’
products and services, it would translate to higher sales, which would mean a positive
impact on the financial performance of the business. Therefore, companies always try to
meet the changing expectations of the customers.
The customer’s perspective answers the question “How attractive should we appear to
our customers?” (Van Vliet, 2010). This is normally measured by the level of product
returns and the service ratings by the customers.
Internal Business Process
Internal business process perspective answers the question “What must we excel at to
satisfy our customers and shareholders?” (Van Vliet, 2010). This perspective is geared
towards the improvement of the company’s operational efficiency. This is normally
measured by the revised product lead time and unit costs.
Learning and Growth
“How can we sustain our ability to achieve our chosen strategy?” (Van Vliet, 2010) is the
question answered by the learning and growth perspective. This perspective focuses on
the ability of the organization innovate and continuously improve in a dynamic
environment. With the onset of technological advancement, this perspective checks
whether the company can cope, adopt and rise over the various changes. This is
measured by employee retention and flow of NPD ideas.
Causal Relationship Among Perspectives
In a balanced scorecard model, balance or equilibrium should be exhibited. “There must
always be a balance between the short-term and the long-term objectives, financial and
non-financial criteria, leading and lagging indicators and external and internal
perspectives” (Van Vliet, 2010). Also, causal relationship between perspective is
important as it provides guidance in the preparation of strategy map.
Models used in the Proposed BSC for RFM Corporation
Each company may create or identify their own metrics in measuring the four perspectives
of BSC. These measures will depend on the company’s vision, mission, and strategies
as well as the nature of the company and the industry it belongs.
In creating the BSC for RFM Corporation, the framework developed by Perramon,
Rocafort , Femenias, & Llach (2016) in their study was used.
The learning perspective will be measured by the following indicators: (a) employee
production; (b) information system, and (c) asset utilization. For internal process
perspective, the metrics that would be used are: (a) innovation, (b) operations, and (c)
post-sale programs. On the other hand, customer perspective is measured by customer
survey ratings and low customer complaints. Finally, the financial perspective shall be
measured using (a) revenue growth, (b) cost reduction, and (c) asset utilization.
Proposed Balanced Scorecard
The proposed balance scorecard is in Appendix C.
 SUMMARY AND RECOMMENDATION
RFM Corporation has been operating well in the past years. However, it will still take a
while before the company will be able to attain its vision, which is to become a market
leader in affordable-quality food and beverages products. This difficulty was due to the
tight competition in the industry that RFM is operating in. Thus, the following are my
general conclusion and recommendations:
a. RFM Corporation is being led by competent board of directors and management.
They are qualified individuals who has commendable business knowledge, which
is beneficial to the company. A suggestion however for the committees under
board of directors. Through enterprise risk management is mentioned in the annual
corporate governance report, it was not indicated which committee is the one
responsible for monitoring it. ERM is vital to the success of the business, thus a
separate committee may be established to monitor and respond to challenges that
comes with it.

b. As recommended in the previous section, there must be a disclosure relating to

the cause of increase in the additions of property, plant, and equipment. As it was
not indicated in the financial statements, two assumptions can be made. First is
that the additions were major repairs and overhaul of the existing PPE. The second
assumption is that there were acquisitions of new PPE. If the first assumption is
true, then the company must review if the assets being repaired annually actually
contributes to revenue generation, because if it does not, then the major overhaul
will be for naught. On the other hand, if the second assumption is true, the
acquisition must be reviewed if it is in line with the vision, mission, and objective of
the company.

c. The ability of the company to generate high gross margin is commendable. It

surpasses its competitors greatly in this aspect. However, the company’s net profit
margin plummeted. The difference between gross margin and net margin are
operating and finance cost, setting aside the non-recurring costs and revenue. The
company must look deeper into its operating costs, selling and administrative
expenses, as it eats up almost 30% of sales, leaving the net profit margin at only
around 9%.

d. To capture greater market share, it is understandable that the company invest a

lot on its advertising expense. This however hurts the financial performance of the
firm. Thus, the company must look into other methods in establishing their products
and capture larger market share without bloating their advertising expenses.

In conclusion, RFM Corporation is a well-performing company. Aside from the

mentioned recommendations, the greatest challenge that it face is how to establish
their products to be more well-known, capture a larger market share, and stay alive in
the industry.
 APPENDICES
Appendix A PERFORMANCE RATIO FORMULA
Appendix B Financial Performance Ratio Comparison of RFM, URC, & SMPFC,
Inc.

Appendix C. Balance Scorecard for RFM Corporation

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