Business Environment Assessment of Tessa Harewood - Case Study Example

Timpson & Harewood Business Environment Assessment Timpson & Harewood Mr/Ms.xxxxxxxxxxxxxxxx MBA, Section xxxxxx xxxxxxx December 24, 2008 Timpson Changing Structure of ownership Pros and Cons of remaining as a Private Limited Company The two advantages for Timpson in opting to stay private are: There is no need to disclose the company’s financial information to any outside agencies Mr.Timpson has absolute control in decision making and can impart personal touch to the management of the company. He can brook no interference of any kind from anybody. The two disadvantages for Timpson are: Though Timpson can have limited liability partnership, most banks will insist on personal guarantee being signed before lending. A Public Limited company has greater borrowing power. (Thisismoney.co.UK, 1999) From the Customer’s point of view, dealing with a company, where the owners have limited liability is less secure. In the event of losses which may lead to closure, such a company is unlikely to honor commitment. The customer, if the product or service is not yet delivered may lose the down payment. All the guarantees offered at the time of sale would not be complied with. If a large company folds up, their innumerable customers may raise an uproar leading to the intervention of trade associations and the government. But if it is a small company with limited liability of the shareholders and few customers, the customer has no wherewithal to protest. The customer is victimized. (Davidmann, Manfred, 2008) In case of suppliers, the risk in dealing with companies with limited liability of the shareholders is greater. Often suppliers supply with a credit. Since in most manufacturing enterprises, cost of materials form substantial part of the total cost, the supplier is at great risk, In the event of the company’s closure, suppliers are not likely to be paid and are likely to suffer a huge loss. At the time of insolvency in such companies, the employees lose the salary, benefits, and severance pay due to them. Most importantly, they lose their jobs, a source of their livelihood. The employees should assess the company with limited liability of the shareholders, before they choose the career with them. The shareholder’s risk is minimal. In the case of insolvency, the shares held by the share holders would be nearly worthless. If the company’s share has some residual value in the market, the share holder can redeem it just before insolvency is declared. Therefore, effective corporate governance could substantially reduce the risk of the aforesaid stakeholders. The good corporate governance mechanism would recognize impending sickness. This mechanism would promote management discipline, owners’ accountability to the other stake holders and transparency in transactions. Even the World Bank found it essential for the financial intermediaries to implement effective Corporate Governance in the firms they invest in (Sundararajan, V, 2002). Good corporate governance can effectively bridge the gap between ownership and control. The government of US addressed this issue and passed Sarbanes - Oxley Act making it necessary for the corporations to pursue tenets of corporate governance. Tessa Harewood Business Environment Assessment Tessa Harewood took over T.J.Lang Ltd to become the chief executive of UK’s fifth largest sports goods supplier. While T.J.Lang specialized in equipment manufacturing, it also manufactured racquets. In the first year of takeover of the company, UK had just come out of the 9 month recession that had started just before the takeover. In the second year, business cycle moved from recession to recovery. By the end of the year, the company was achieving record profits and was finding difficulty in meeting the demand. But in the third year, the authorities hiked the interest rate and simultaneously Pound strengthened. Tessa Harewood witnessed a fall in performance. However, in the later part of the year, interest rates were reduced and the economy recovered. Effect of inflation on Harewood products Inflation is caused by too much money chasing too few goods. High and variable rates of inflation cause substantial concern. This affects the premise for the projects factored in at the time of project formulation. The risks will be enhanced hurting the viability. It will retard the operation level. The information on prices will be distorted. It will make people spend less time producing and more time trying to protect their wealth and income from uncertainty (Thomson Business and Economics). A mixture of major construction projects in the public sector and high consumer spending in the private sector led to a sudden rise in inflation. But inflation would not have uniform effect on all the Harewood products. In fitness equipment, Harewood specialized in the higher quality and technologically sophisticated end of the market. Such high end products tend to be price inelastic to a large extent. The high end products have substantial esteem value, which are not affected by price elasticity. Similar would be the case of the more expensive racquets. From the case it is seen that people did not seem to be too concerned about price when buying these products. Tessa’s confidence in inflation not having impact across the board on Harewood products is justified. Asymmetry in unemployment rates When structural unemployment rises, there is an increasing mismatch between the job that is offered and the skills, experience, education, and geographical location of potential employees (The Encyclopedia of Earth). The Structural Unemployment is asymmetric across the different sectors. For instance, there might be a pool of bio technologists in mid west. But they can not of much use if a Biotech company wants to establish a unit in north east. Of course this is with a premise, that this pool is not ready to shift. The Cyclical unemployment is caused by fluctuations in the macro economic indicators. Public and Private spending and investment fuel the aggregate demand, which in turn enhance employment. During recession, when the economic activity is downbeat due to reduced spending and investment, lower demand will force the industry and service sectors to scale down the operations resulting in unemployment. When the aggregate demand for products increase, the cyclical unemployment falls. In UK by the end of the year 1, the sales of fitness equipment were still at their lowest for three years. The recession in metal products may be pervasive leading to closure of firms in the industry. This would have caused an increase in structural unemployment. But when UK came out of 9 months recession with improved sales of all products, the cyclical unemployment fell. But structural unemployment remained. This worked in Tessa Harewood’s favor when she opened the new factory in Wolverhampton at the beginning of the year 3. It was relatively easy for Harewood Ltd to find both a suitable site and the necessary skilled labor to produce fitness equipment. Implications of fluctuations of business cycle The economists are of the view that there is no regularity in the time of occurrence of business cycles. The business cycles are caused by the forces that destabilize the economy and cause employment levels either to fall below full employment or above it. Increase in Private and Public spending fuel inflationary boom (Romer, Christina. D). Harewood had a wide spectrum of products and its value chain was spread across several countries. It produced racquets in China, Portugal and UK and sold products in Italy and France. The business cycles for sportswear, racquets and fitness equipment were different. When UK came out of the 9 months recession, sportswear recovered most strongly UK, but by the end of the year fitness equipment sales were still at their lowest. The product mix of Harewood leveled the business cycle substantially for the company as a whole. Impact of increase in interest rates. Fixation of interest rates is a part of monetary policy of the Government. When money supply exceeds certain limits, it will fuel inflation heating up the economy. The government will increase the interest rates to reduce public and private spending and investment. This in turn will reduce the aggregate demand. In times of recession, when there is a flagging aggregate demand, the government will reduce the interest rates to propel public and private investment and spending. This will impart buoyancy to the market. The announcement of a 1.5% increase in interest rates in April took Tessa by surprise. Harewood Ltd had borrowed all of the money needed to open the new factory, hoping to benefit from the low interest rate at the time. The economy was getting overheated with increase in money supply and consumer and institutional spending. The response in terms of monetary policy for any government in such a case would be a hike in interest rates to promote savings. This monetary policy seems to have had the desired effect. For Tessa, the outcome was unpleasant. The orders from shops for sportswear were down by 2%, racquets sales had fallen by 5% and fitness equipment –orders had decreased by a whopping 20%. By July, the economy had lurched from a strong recovery back into a downturn. In August, the authorities announced a reduction of 1% in interest rates. By the end of the year, another cut of 0.5% was made and the threat of recession seemed to have disappeared. Tessa could heave a sigh of relief with the outcome. Impact of changes in exchange rates The exchange rate is driven by the theory of demand and supply. When the demand for a particular currency increases, its price increases. When a country has surplus in balance of trade, its currency strengthens. This in turn will reduce the price competitiveness of the products and services of the country, which may reduce its balance of trade surplus. If the balance of trade of the country turns deficit, the currency weakens making the country’s product more competitive. That is how the balance is maintained. These fluctuations of exchange rate would impinge on the companies which have not globalised their operations. Harewood had global presence. It manufactured Sportswear in India, racquets in China, Portugal and UK and fitness equipment in UK. The increase in the value of pound against the other currencies would not hit Harewood. Indeed the increase in the value of pound would help reduce the cost of manufacture in China, India and Portugal. They would be paying lesser in more valued pound as compared with the earlier period. But the exports to Italy and France would be hurt by the higher price of British products due to the strengthening of pound. References Davidmann, Manfred. Community Economics, Ownership and Limited Liability http://www.solhaam.org/articles/clm504.htm The Encyclopedia of Earth, Types of Unemployment http://www.eoearth.org/article/Types_of_unemployment Romer, Christina. D. Concise Encyclopedia of Economics, Business Cycles http://www.econlib.org/library/Enc/BusinessCycles.html Sundararajan, V, 2002.Financial Sector Governance and Banking Insolvency (IMF/WB/Brooking report), Policy Challenges for the Financial Sector in the context of Globalisation, http://www1.worldbank.org/finance/assets/images/Sundararajan--finsec_gov_bnkg_insolv-ppt.pdf Thisismoney.co.UK (1999).Incorporating: Pros and Cons, http://www.thisismoney.co.uk/help-and-advice/advice-banks/article.html?in_advicepage_id=129&in_article_id=395476&in_page_id=9 Thomson Business and Economics, Economic Fluctuations, Unemployment and Inflation facstaff.elon.edu/jplatania/Gwartney-11ed-PowerPoint/Chapter%208.ppt Read More