Associated British Foods: Corporate structure, Parenting and Portfolio Management - Essay Example

Associated British Foods: Corporate structure, parenting and portfolio management Executive summary Associated Business Foods Plc (ABF) is a diversified conglomerate that deals in ingredients, agriculture, foods, and retail businesses doing business in over 100 countries across the world. The company has a broad product category and sizeable operations that make it an interesting study to evaluate organic growth, complementary business acquisitions and management of a diversified portfolio. The paper tries to analyse the diversification of Associated Business Foods from various theoretical models like the BCG matrix and the Ansoff matrix and evaluates the nature of the corporate parent of a well diversified conglomerate through a study of its strategy, structure and organic growth. Through such analysis, the paper tries to establish a justification for inclusion of Primark, a clothing business within ABF which is largely engaged in the foods sector. Such an explanation is provided by way of a historical analysis of the company’s growth process. Introduction Associated British Foods PLC is a London based food, ingredients and retail company that enjoys a strong leadership position in the market. The primary production activity for the company is related to production of cereals, breakfast items, baking and confectionary, flour, tea, dairy products and vegetables. Other divisions also produce textiles, glass, processed meat and refined sugar. The company enjoys a strong presence in Europe, Asia, US, Australia and New Zealand. The company is also listed on the London stock exchange and the FTSE 100 as one of the largest companies on the exchange. This paper is an appraisal and a research of the investment analysis of Associated British Foods Plc. The analysis contains evaluation of the company performance, future scope and financial position through the use of various theoretical tools and techniques. 1. Using appropriate frameworks assess the diversification of Associated British Foods and discuss the logic of the portfolio. The Ansoff Matrix helps to determine company growth and market penetration strategy and suggests how a business attempts to penetrate market and grow through new or existing product mix in newer or existing markets (McDonald and Wilson, 2011). Figure 1: Ansoff Matrix (Source: Riley, 2012) The core competency for ABF Plc is operation spread out over 46 countries which giver cost advantage and diversity in production. The selling strategy is low cost market penetration. Such is attained through low management and operational costs and low advertising expenses. In this view, the company operates with an expansion of the existing products line and penetration by way of lowering prices in existing markets. As per the Ansoff matrix, the company follows what is called the market penetration strategy. The company needs to develop newer products and try to enter newer market in different business segments so as to have a stronger global presence. There is growing consolidation within the industry. This can pose serious threat to businesses that do not innovate continuously and therefore it is suggested that the management looks at diversification strategy by way of innovation and expansions. The company is making good progress in most of its divisions. The group delivered a growth of 10% in operating profit while each one of its subsidiaries showed impressive results. The core strength of the company lies in its geographic diversification and wide range of business activities. However, such strength is mitigated by the lack of liquidity to expand the scope of business activities and non standardisation of production norms due to cultural difference in the different manufacturing locations. The company’s diversification strategy was based on the central idea that it catered to consumers needs by providing products that were central to their day to day needs. It established itself as a provider of quality products and establishing a wide scope of business operations. The company enjoys a high position in some of the major foodstuff categories (Mailonline, 2001).. The expansion process for the company through the history was not a gradual, smooth and continuous process. ABF employs a family of business through a process of strategic acquisitions and sustainable development of businesses.ABF subsidiaries have come along through mergers and acquisitions or have been developed from within but yet, they retain their individuality and brand name. The connections with the parent company are not weak for any of the brands within ABF. The central management exercises the core business functions. The expansion process was slowed down during the world war and the great depression and financial crisis, however, it continued at a good pace during the times of financial boom. Figure 2: Boston Consultancy Group Matrix (Source: Wooley, 2012) The above matrix tries to segregate business or product classes based on their growth and market share opportunities. The company identifies Retail and Sugar to be start performers for ABF. Retail does generate revenues for ABF to qualify as a cash cow but the requirement of further investment into the business makes it a star performer. The segment provides 28% of revenues alone for ABF. Primark is the only brand within the clothing division. The business model of Primark is largely based on company ownership of stores which brings down the profits significantly. Primark plans to expand by way of establishing more stores and need huge investment. Hence the brand falls within the start performer quartile in the BCG matrix. Sugar qualifies as a market leader. Other divisions like groceries, agriculture and ingredients face challenges pertaining to investment and divestment decisions. They are looking at draining finances despite huge profitability because of market conditions. The logic behind such structure of ABF Plc is that the company supports a wide range of business activities. According to Levitt, most of the consumers across the world seek or desire the same thing and among these things, they want higher quality, better products at lower prices. Companies need to continuously look for better and newer products that satisfy the constant needs and at a lower price. This is necessary in order to remain competitive and hence in business. 2. Assess the nature of the corporate parent; what is the role of the ABF parent and how does the interaction between parent and operating companies contribute to the success of the group? The group parent company, ABF Plc has diversified and grown by way of strategic business acquisitions and diversification of business activity in varied fields. The company works under the logic of parental developers where the core competency in the field of food & nutrition was used to enhance the portfolio of businesses into agriculture and allied services, clothing and enzymes. The portfolios of offering within the ABF control are well suited to the expertise of the parent company. The businesses are all related to farm and dairy produce like sugar, fertilisers, chemicals, enzymes, dairy products, yarn and clothing and grocery and ingredients and thus suit the strategic requirements for successful parental controlled business activity. Control exercised over the subsidiaries is limited to the activities that are central to business operations like financing and budgetary control. The group business requires adhering to group financial control standards. Each subsidiary company submits its budget and seeks approval from the parent company. The internal auditor is held responsible for all audit work for the purpose of strong compliance with the parent financial control standards. Such attempts minimize risks and ensure capital control. Financial control is necessary to ensure business growth and sound practices (ABF, 2014C). Rest of the business activities are left for business level decision making. Such control is highly effective in determining the success of businesses. Freedom for business level decision making is essential to let a business grow to its full potential and capacity. ABF has a policy of settling all bills promptly in its dealings with the suppliers and there are no trade creditors maintained as per the Basic Payments Practice Code. Almost 55% of the turnover for the company comes from sales of food products and through this; it improves quality of life of people using its products. Maintain strict quality controls and high standards of quality maintenance in the production activity, the company have tried to bond the company image together for each of its brands. This reflects the autonomy at service levels and control in terms of parental policy while dealing with suppliers. Figure 3: Ashridge portfolio display (Source: Goold and Luchs, 1993) As per the Ashridge portfolio matrix, the parenting advantage framework for ABF Plc can be developed as below: Heartland: Primark stores and the retail sector at large offer to be the heartland of ABF business. These offer rich growth and revenue opportunities and need huge investments that the company plans to pump in within the near future to generate surplus revenues. Ballast business: Such businesses include the sugar industry which does not see high competition and is doing well at present. This industry is well established within the industry and is in no need of high cash for expansion activities. Value trap: The agriculture business is growing slowly and does not offer much scope for gaining higher profits. Hence it can qualify as a value trap. Alien businesses: The ingredients businesses do not show much scope in the future. Also the benefits derived within this sector are limited because the client segment is limited to the industrial users alone. Organic growth in the field of business activity is existent through continuous innovation, efficiency in manufacturing capacity and continuous improvement in operational capacity. Acquisitions are made only to assist and enhance and complement existing business activities or for the purpose of exploiting a business opportunity (ABF, 2014B). 3. Considering the long term history of ABF and key management figures, can you suggest, in addition to a portfolio rationale you have already discussed, a justification for the inclusion of Primark in the ABF portfolio? The global clothing retail chains were first established in the year 1969 under the banner of Associated British Foods. Associated British Foods initially did business in agriculture and because most of its manufacturing locations were located in rural and distant locations, the business developed strategies to serve to the needs of the poor and the rural people. Primark came in 1969 as a provider of cheap clothing and was located in distant rural locations for serving the rural needs. This provides the justification for using Primark within the ABF portfolio. The business has had the motto of ‘pile them high and sell them cheap’. This is the motto behind most of the produce for ABF. The company was serving the rural people who seek cheap clothes. In today’s world, people want high fashion needs and such fashion changes quickly. This has created a market for cheap clothes and demand for such fashion is very high. Primark is among the highest contributors to ABF revenues as per 2012 data shown in the figure below. Figure 4: Revenue by Business Segment (Source: World money Analyst Team, 2012) Primark has shown major growth within the industry and sells value priced high fashion merchandise through 192 stores across the world. Such unique offering has brought in huge success and the business model supports swift growth. The latest expansion in Germany has increased company presence in the country and also contributed quite positively to the company revenues. In the present economic scenario, the company is expected to do much better because the economic lull does not permit to spend highly on fashion needs. Affordable fashion can become quite popular in countries like France and its neighbours. Primark has expanded its presence from being concentrated to UK to the rest of Europe. As a part of the long term strategy, the company wants to move on to the mid-market segment and serve high fashion branded retail in clothing industry and expand its product portfolio. 4. How does the development of Associated British Foods reflect the historical perspective of corporate diversification as discussed by Goold and Luchs (1993)? ABF Plc has grown by way of developing a unique identity for each one of its brands and thereby letting them create and thrive in a market of their own. Each diversified product category has been designed and grown organically by way of strategic financial plans and realistic goals. The overall business perspective was to satisfy consumer needs by providing affordable products and quality items. Quality was of utmost importance because it was working within the foods industry. The company emerged from Allied foods industry in 1935 and soon grew up to be Associated British Foods in 1960. During the period between 1961 and 1980, the company made two acquisitions, Cranfield Brothers millers and AB Hemmings bakeries (ABF, 2014A). These were strategic business acquisitions to strengthen the input resources of the running business activity. No significant diversification of business activities was seen here. The general idea in that era was the company which jumps from one area of business to another is up to no good and specially so, when it becomes big and powerful through such expansion activities (Goold and Luchs, 1993). During the period form 1991-1994, the company expanded and grew into the sugar and the animal feed business including poultry (ABF, 2014). Such a business expansion was adding on the value chain by both forward and backward integration. Gradually, the company moved on to clothing, enzymes, ingredients, tea and cereals. The company has grown as a result of strategic acquisitions and the perspective of such acquisitions for rapid growth has grown to be seen as being a reason to be competitive. Companies which do not diversify and grow are deemed to be non competitive and up to no good. Such businesses shall be thrown out of business by mighty competitors in no time at all. The dominant logic for ABF’s diversification is providing lower priced products of higher quality to penetrate the markets. Conclusion The growing competition is offering high demand from developing countries as well. The overall strategy for ABF should be directed towards tapping these market segments that have tremendous potential. Despite financial restrictions, the company is aligned in most businesses and should continue with its market penetration strategy with a gradual move towards a diversification strategy. However, it is suggested that divisions like agriculture and ingredients needs serious though over divestment due to tremendous diversification. Reference List ABF., 2014A., Our History. [online] Available at: [Accessed 14 February 2014]. ABF., 2014B., Internal Control. [online] Available at: < http://www.abf.co.uk/investorrelations/corporate_governance/internal_control> [Accessed 14 February 2014]. ABF., 2014C., Group business model and Strategy. [online] Available at: < http://www.abf.co.uk/investorrelations/annual_report_2013/group-business-model-and-strategy> [Accessed 14 February 2014]. Goold, M. and Luchs, K., 1993. Why diversify? Four decades of management thinking. Academy of Management Executive, 7(3), pp.7-25. Mailonline., 2001. Primark makes its mark. [online] Available at: [Accessed 14 February 2014]. McDonald, M. and Wilson, H., 2011. Marketing Plans: How to Prepare Them, How to Use Them.West Sussex: John Wiley & Sons. Riley, J., 2012. Ansoff Matrix. [online] Available at: [Accessed 14 February 2014]. Wooley, M., 2012. Marketing Planning. [online] Available at: [Accessed 14 February 2014]. World money Analyst Team., 2012. 3 World-Class Stocks for Armor-Plated Yields over the Long Haul. [pdf] Mauldin Economics. Available at: [Accessed 14 February 2014]. Read More