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“Zynga: Is the Game Over” Case Solution & Answer

Zynga: Is the Game Over Case Solution

Financial Analysis

Ratio Analysis

In order to analyze the financials of the firm, ratio analysis is conducted. According to the ratio analysis, given in Exhibit 1, the liquidity position of the firm is very strong with a current ratio of 4:1 in 2016. This implies that the firm can use its liquid assets to revive its operations and bring a turnaround in the company. However, the profitability position of the firm doesn’t seem in a better position with negative net profit and operating profit margins. Along with it, a negative ROE also shows the disappointment of the stockholders with the firm and threaten the firm for a high decline in future stock price. Other ratios include the total expenses as a percentage of sales which shows that the firm expense out higher money than its revenues. It can also be seen that the R&D is about 37% of total expenses in 2016. Despite of a high amount of R&D spending, the firm is far behind from its competitors in terms of innovation and considers itself as inefficient as compared to its competitors. Therefore, it can be said that the overall financial position of the firm is not effective enough to compete in the market and the management must take certain actions to revive the financial position.

Enterprise Value

Another financial analysis tool which can be used to analyze the financial position is to calculate enterprise value using the given financial statements and Free Cash Flows. The enterprise value is calculated as $1759440 which is given in the Exhibit 2. It can be seen that despite of negative profits, the firm’s equity value has enough value to protect shareholders’ wealth. However, these numbers depends upon several assumptions including the depreciation and amortization which is assumed to be as 20% of total expenses, the discount rate and the growth rate. The assumptions are taken on general basis.

Recommended Course of Action

Focus on R&D

In order to cope up with this situation, Zynga should focus on strengthening its R&D with bringing innovative culture in the organization and motivating developers with benefits on bringing new ideas. The pros and cons of R&D are given below:

Pros

  • Research and development in the video gaming industry continuously find innovative solutions to problems that arise from the ever-increasing complexity of games. The competition between companies is increasing as each one implements various innovations and techniques to keep up with the fast pace of the changing market. One can say that research and development in the video gaming industry contributes significantly to the success of a game.
  • Research and development in the video gaming industry mainly focus on technological, economic and social changes that have taken place in the field of software and hardware. With the progress in information technology, computer graphics and game related technologies have dramatically changed. The change in hardware has been contributed by the introduction of the digital computer. The emergence of the multi – level marketing (MLM) business model has also contributed to the development of online games.
  • In addition, you will be able to create better graphics and complex animation for your games. This is a huge advantage because most players nowadays prefer flashier and engaging games. They would rather play something that is more visually attractive and interactive. Therefore, being able to produce better visuals and animations will help your video gaming business.

Cons

  • Due to the competitive nature of the games, market penetration is becoming more difficult. Companies have to be extremely creative and come out with new games every other day to survive in the cutthroat market. Innovation and creativity are the key factor that has to be implemented for a thriving market. Innovation and creativity in the form of new concepts like action games, sports games, role playing games and racing games are always in demand.
  • On the flip side, it will also cost you a lot of money to hire people for your R&D analysis. Although this might seem like an expense, it can actually pave the way for you to obtain valuable insights about the pros and cons of different video games

Focus on Customer Service

As described in the case, one of the major reason for the declining profits is the dissatisfaction of customers with Zynga and their shift to its competitors. This is due to the poor customer services offered by the company. The pros and cons of focusing on customer services are as follows:

Pros

  • For one, the pros include the ability to receive feedback from the players about the games. Since you are a part of the development process, you will know if you are making a good game or not. Feedback from the players will help you assess the pros and cons of different games and find what works and what doesn’t.
  • However, this is actually a good thing for the video gaming industry, as this means more people will enjoy the games. It also means that gamers will find themselves in chat rooms to play against opponents from around the world. The competition will push game companies to make their games better, meaning that the customer will come back for more. After all, most customers are happy to pay for a quality game, as they often come back for more once they have played enough of them.
  • One of the pros is that the companies providing it will always have plenty of money to advertise to make sure that the games get plenty of exposure. In fact, some believe that this is why there are so many websites dedicated to reviewing these games.
  • Another pro is that customers can now voice their complaints directly to the company, making them feel that they have an important role to play in the game design process. In fact, some game companies allow customers to become beta testers, helping to test out new versions of the games before they are launched……………………….

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