Company Assessment - Research Paper Example

?Company Assessment Table of Contents Company Assessment Overview 3 Internal Analysis of strengths and weaknesses 3 External analysis 7 Industry analysis using Porter’s Five Forces 7 Evaluation of the strategic alternatives 12 Reference 14 Overview WPP is the group offering the largest communication services across the world with an employee base of 141000 working in 2400 office across 107 countries (WPP-b, “Who we are”). The companies in the group belong to various disciplines like media management, advertising, consumer insight, branding and identity, public affairs and public relations, healthcare communications, various forms of marketing like promotional, direct and relationship based marketing, specialist communications and WPP Digital (WPP-c, “What we do”). So the parent company through its various subsidiaries provides various marketing and communication services across the world. Mission- WPP nurtures and manages new talent and applies the same for the client benefits across the world. The company facilitates the accessibility of the clients with the companies with required communication skills & marketing and companies with distinctive and strong cultures. WPP complements the functions of these companies in various ways. WPP saves the companies from administrative related work. There is a central co-ordination in financial matters like budgeting, planning, reporting, treasury, control, tax, acquisitions, mergers and investor relations. This enables WPP companies to pursue professional excellence. Besides WPP encourages the joint functioning of its companies belonging to various disciplines (WPP-a, “Our mission”). Internal Analysis of strengths and weaknesses WPP is the global leader in “marketing communications services”. The leading company composition of the group includes media investment, advertising, consumer insight, public relations, branding, promotion etc. For the financial year 2010 the group reported revenues worth ?9.3 billion with reported billings of ?42.6 billion. The market capitalisation of the company is ?7.7 billion (WPP-d, “WPP at a glance”). The main strength of WPP is its ability to recognize the trends and exploiting the same for the benefit of the clients. This is evident from the company’s tenacity to withstand the effects of the recent credit crisis. The big clients look out for parent companies with a group of subsidiaries companies that can provide integrated solutions to fulfil their marketing needs. WPP has a list of subsidiaries with each specialising in a discipline. By virtue of this the companies of varying disciplines work together to satisfy the marketing needs of the clients. This works to the advantage of WPP. Awards & recognitions- WPP is a member of FTSE100, FTSE4Good Index, Forbes Global 2000 and Euro FT300. In the year 2009 the company won “Building Public Trust Awards” for excellence in the area of corporate reporting. In the same year the website of the company received “Best of Industry for Outstanding Achievement in Web Development”. In International ARC awards 2009 the company won ‘Gold’ for “Best Online Annual Report in Class And Honours for Best Annual Report across All countries”. The global newspaper of the group “The WRE” ranked number one out of 400, for straight two years in “2008 LACP Inspire Awards”. The corporate responsibility section of the company consists of information on the ratings of WPP bys socially responsible investors (WPP-d, “WPP at a glance”). The Group comprises 150 companies with each company having a distinctive brand. Each company has a distinct identity, commands loyalty, highly committed and has a specialist expertise. This highlights the individual strength of each of these companies. The companies under the group are associated with 354 Fortune Global 500 companies; 28 companies out of Dow Jones 30; more than half of NASDAQ 100 companies and nearly three-fourth of the Fortune-e 50 companies. The clients get additional advantages from the combined working of the WPP companies. This is because the clients can avail the customised integrated communication and marketing services. Nearly 700 of the group’s clients are served by three separate disciplines. Another 440 clients are taken care of by four varying disciplines and this class of clients account for 56% of the overall revenues. In the last year the group was able to strengthen its relations with Kraft as evident from the chain of new appointments in US and the launch of a relationship in Greater China. In the financial year 2010 WPP received ten additional brand responsibilities. In the highly rated “Graphis competition” the group fetched eight gold and two platinum awards. The year 2009 was both difficult and different for the group. With the change in the economic scenario the focus of the clients shifted to costs. Despite the recovery in the markets the group has to face important challenges. In many cases the recession has deprived the group of the ‘added value’ associated with service dimensions (WPP-e, “Annual Report & Accounts 2009”). The international operations of the Group are vulnerable to fluctuations in foreign exchange rate, Besides the operating country may impose restriction on earnings repatriation. Any form of political or economic instability can also adversely impact the operations of the company. The revenue base of the group has increased by 16.1% from 2008 to 2009. The EBITDA of the company however, reduced by 3.7% during the period. This reflects the rising costs due to which the group failed to retain the profitability of the last year. With fall in profitability the EPS of the group also declined from 55.5p in 2008 to 44.4p in 2009. Despite the fall in earnings the group maintained the previous year’s dividend payout ratio as evident from the unchanged DPS of 15.47p (WPP-f, “Financial summary”). The net debt component of the group fell by 14% in the year 2009. The leverage of the group has remained less than one for the last ten years. In 2008 it was 0.98 and in a span of two years this ratio dropped to 0.60 in 2010. The return on equity of WPP was reported at 9.1% for 2010. This figure was significantly high at 11.7% for 2007. The net profit margin of the company was 10.2% in 2010. This has increased over the last two years. In 2008 the figure was 9.6% therefore it shows that the company management has worked towards managing the administrative expenses. The operating margin of the company has remained mostly above the mark of 10% for the last five years. This is a good sign as it shows that the management of the company has succeeded in exercising a good control over the administrative expenses. This has enabled the company to generate high rates of returns for its investors as reflected from the high return on capital employed (ROCE) by the company. For the last two financial years the company reported an ROCE of more than 100% (London Stock Exchange plc, 2011). This signifies that the shareholders funds are being managed quite efficiently. In the last five years the sales of the company has increased by 11.67% as compared to the industry average of 10.51%. The net profit amount of the company has increased by 10% as compared to the industry average of 4%. This shows that the financial performance of the company is far better as compared to the industry average (MSN Money, “Key Ratios”). External analysis The newly established super-agencies have a great opportunity. The priorities of the clients are creative thinking & great ideas and improved co-ordination. Besides they want all the facilities at the lowest price. WPP is faced with the challenge of providing great ideas integrated or co-ordinated in the best possible way at the minimum possible cost. The norm of a gross commission of 15% is no more prevalent. The level of commission has lowered to approximately 12%. There have been huge reductions or near elimination of production commission. Slowly the fee is gaining popularity with the clients as it represents minimum 75% of the overall business. For all the sectors except Media Investment Management and Advertising are expected to resume a moderate growth rate from 2010. Advertising faces challenges on account of the increased demand from the clients for increased efficiency especially in the mature markets. The financial year 2009 was a huge challenge for the company. The automotive and finance clients of the company scaled down their budgets. The impact of this was felt on WPP as well as the clients asked the company to do the same work but with lesser money (WPP-e, “Annual Report & Accounts 2009”). Industry analysis using Porter’s Five Forces The Porter’s Five Forces model helps in analysing the external conditions of the industry. This was developed by Michael Porter in the year 1979. It assesses the industry on various parameters like bargaining power of suppliers and buyers; presence of substitutes, threats to new entry and the internal competition prevailing in the industry. This model assesses the forces that determine the industry profits (Ahlstrom & Bruton, p.131). Source: (Schermerhorn, p.146). Bargaining power of buyers- In the area of marketing communications the ‘buyers’ refer to the clients of the companies. In an industry the buyer can lower the profitability by demanding more services (Parnell, p.27). The advertising and communication companies provide marketing and promotion based services to various companies. These clients spend a hefty amount on promotions and advertisements with the purpose of creating more awareness about their products and services. They demand for exquisite services and unique ideas. The marketing services company must therefore engage the best brains to cater to the exclusive needs of their clients. Besides creative ideas the clients emphasise on lower costs. The marketing companies have to continuously work towards transforming the communication services for meeting the ever-changing needs and demands of the clients. All this shows that the clients have a fair amount of bargaining power in their hands. In recent times when the worldwide economy was grappling with financial crisis the clients asked the marketing companies to do the same volume of work at a scaled down costs. The companies complied with this. No doubt the revenue base of the marketing companies was impacted on account of this cut-down. This shows that the clients of the companies have a significant amount of authority over the marketing companies. This is the reason the marketing and communications services companies continually work towards upgrading their services to meet the demand of the changing needs of the clients. Any loss of clients can impact the market share of the company and reduce the profits. Bargaining power of suppliers- For the marketing and communication services industry the ‘employees’ of the company are the ‘suppliers’. The marketing work requires a lot of creativity. The performance of the companies can get severely impacted if they are not able to attract and absorb high quality workforce. This means that the companies depend heavily on the creative ability, talent and technical skills of the personnel. The retention of talented employees is a key issue of the companies belonging to this industry. To retain the workforce the companies offer competitive compensation packages and spend heavily towards the training and development of the employees. A big threat for the marketing and communication services companies is retaining its talent force. This is the reason the incentive plans are regularly revised to make it the most attractive in the market. Other than monetary incentives the employees are also given shares based incentives. Together with the need to retain its existing multi-talented workforce the companies also have to face pressures from the shortage of skilled human capital. Therefore, the dearth of quality manpower and the market competition means that the employees of the company have a good tool in their hand to bargain for higher compensation packages. This means that the workers can strike a good bargain from the employers, implying that the suppliers in the industry have high bargaining powers. Rivalry- The marketing and communications services companies operate in a highly competitive business environment. The loss of a single client can transform into significant loss of market share and fall in the profit margins. The industry comprises a number of large multinational marketing and advertisement communication companies as well as some national and regional marketing services companies. The companies generally derive their revenues from a group of large clients. There is stiff market competition in the industry as evident from the continuous efforts of the advertising companies to restructure their employee compensation packages or meeting the needs of the clients even if that means a cut-down in the revenues. The major marketing and advertising companies include WPP Plc, Aegis Group Plc, Rightmove Plc, Huntsworth Plc, Publicis Groupe and Moneysupermarket.com Plc. This shows that the market is dominated by a number of key players. The market capitalisation of these companies is also high. WPP Plc holds the top position in terms of market capitalisation at US$199.31 billion followed by Aegis Group Plc at US$161.1 billion and Rightmove Plc at US$101.48 billion. In terms of ROE Rightmove Plc is the market leader reporting a return of 248.16%. The growth rate in EPS has been highest in the case of Huntsworth PLC at 2805% (Yahoo Finance, “Industry”). From the above analysis it is clear that the industry is characterised by strong competition. Threat of new entrants- The marketing and communications services require extensive investment in human capital. The companies spend extensively on providing high quality training to the employees as they are the ones who can put the company on the forefront. Therefore the main entry barrier is with regard to hiring top quality workers. Dearth of good quality manpower is a serious impediment in the entry of new firms in the industry. Other than this the advertising companies have a contract with the large companies. These contracts are acquired on the basis of good business relations and business liaisons. It takes time for the advertising and media companies to build this network with the large corporate houses. The new firms take time to build up relations with the corporate houses. As most of the work is procured through good business relations the new businesses face a lot of difficulty in getting work. Moreover, as the companies spend a significant amount of money towards business promotion they would like to give it to the top players in the industry leaving the small or new businesses even out of the ambit. Other than this the design of any ‘brand logo’ requires sophisticated software. The use of this software requires trained professionals. It may not be possible for the newly formed business to hire a highly skilled manpower as they are mostly working under big banners drawing high compensation packages. So it can be inferred that the newly established businesses face a number of hurdles. Threat of substitutes – There is no substitute to advertising and promotional activity. In an intensely competitive business market characterised by oversupply in nearly all the consumer markets the companies continuously try to make their products and services more appealing in the eyes of the consumers. For this reason they allocate a considerable portion of business funds towards advertising and promotion. As such the industry does not face any threats of use of substitutes with an only exception that the large companies may set up their own media house to take care of their promotional needs. Evaluation of the strategic alternatives The activities of WPP act as an interface between the consumer and business. Therefore the strategies of the company must be aligned in a way that it yields maximum rewards at minimum possible costs. To tackle the climate change WPP adopts the strategy of cutting down the costs relating to energy use and business travel. Investing in facilities like videoconferencing facilitates more number of meetings without having to incur costs on flight travels. The company also has a strategy in place to check for wastage and recycling of the contracts. Like to reduce electronic waste the company plans to establish recycling contracts for electronic equipments. In the year 2009 the company launched a strategy for water conservation targeting its locations in regions with water scarcity. By way of this the company plans to derive the highest environmental benefit. To deal with any uncertainties in the market conditions the company has a strategy in place as per which the variable costs of the staff constitute the major part of the total costs that the company has to spend on staff. This means that the staff costs of the company mainly comprise of consultants, freelancers and incentive payments. This gives the company the necessary financial flexibility to adjust its costs in times of volatility in business revenues or in times of recessionary phases (WPP-e, “Annual Report & Accounts 2009”). On the whole the strategy designed by the company varies from sustainability to cost-cutting. To attract the employees it has a share based incentive strategy. This means that it has taken care of most of the business aspects. Reference Ahlstrom, D. Bruton, D.G. International Management: Strategy and Culture in the Emerging World. Cengage Learning. 2009. London Stock Exchange plc. Fundamentals.2011. WPP. March 6, 2011. . MSN Money. Key Ratios. 2011. Fundamentals. March 6, 2011. . Parnell, A.J. Strategic Management: Theory & Practice. Dreamtech Press. 2003. Schermerhorn, R.J. Exploring Management. John Wiley and Sons. 2009. WPP-a. Our mission. 2011. Who we are. March 6, 2011. . WPP-b. Who we are. 2011. March 6, 2011. . WPP-c. What we do. 2011. March 6, 2011. < http://www.wpp.com/wpp/about/whatwedo/>. WPP-d. WPP at a glance. 2011. March 6, 2011. . WPP-e. Annual Report & Accounts 2009. 2009. March 6, 2011. . WPP-f. Financial summary. 2009. March 6, 2011. . Yahoo Finance. Industry. 2011. WPP Plc (WPP.L). March 6, 2011. . Read More