Glaxo Smith Kline - Assignment Example

Assignment Answer Glaxo Smith Kline is a UK based drug manufacturer involved in producing live saving medicines thereby enabling contributing in healthcare and treatment of patients that suffer from chronic illnesses. The company has expanded its business operations to all across the world including advance and emerging economies as part of global diversification and growth strategies. This section will provide a critical review of the following aspects of the business of GSK in the past three years; its overall financial performance and dividend policy for its valued shareholders. (GSK Annual Report, 2009) First of all, strategic planners at GSK had expressed their intention in 2008 towards accomplishing goals of rapid business expansion, growth and sustainability through offering and ‘delivering more products of value’ to their clients and increasing their focus on Research and Development to gain a competitive edge over their rival multinational pharmaceutical competitors such as Pfizer, Novartis and others etc. Therefore, the managers identified ‘new growth areas such as biopharmaceuticals, vaccines and other consumer healthcare products’ as part of their Diversification strategy. Secondly, GSK divised a strategy to restructure / reorganise / reengineer its organisational operations so that it could reduce the costs of doing business thereby increasing its operating margins and return on investments in the short and long run. In addition, the company managers has also considered the role of Brand Management and Effective Marketing Strategies in today’s highly globalised, unstructured, unclear, unexpected and unpredictable business environment. Hence, they have made ‘Brand innovations and adjustments in their maketing / advertising stratgies’ to enhance their reputation and goodwill in the marketplace while accomplishing their goal of reaping financial benefits and excessive profits simaltaneously. The strategies formulated and expressed in 2008 were openly communicated to employees, shareholders and stakeholders while implemented in subsequent fiscal years. (GSK Press Release, 2008) and (Pharmalive, 2010) As quoted in Pharmalive Report (2010), “Brand innovations launched in the last 3 years representing approximately 14% of sales.” It is worthwhile to mention that overall demand for pharmaceuticals is relatively inelastic while it is highly inelastic for live–saving drugs. Hence, economic recession is not among the major factors that reduce demand of drugs for a company. Rather, there are strictly internal factors such as higher costs of business, management inefficiencies, poor quality (side effects) etc or external factors such as ban by governments, expiry of patents, lawsuits, legal licensing and registration barriers, threat of substitutes from competitors and potential new entrants that lead to stiff competition among different producers. GSK also faced challenges in 2008 after ‘expiry of its US patents coupled with decline in Avandia and pandemic sales’. Its total sales in 2008 touched £24.4 billion, which ‘decreased by 3% in constant exchange rate (CER) terms’ year-on-year basis. The Earning Per Share (EPS) remained to be £1.04, down by over 8% compared to 2007. Since, it is a business with inelastic demand, the cash flows remained relatively better to over £7 billion. The company also indulged in purchasing treasury stock totaled nearly £3.5 billion. The diversification and brand strategies finally benefited the pharmaceutical giant that recorded a 20% jump in sales of vaccines. In addition, the increased focus on emerging economies also resulted in sales growth of over 10%. The company’s Research and Development department enabled the managers to come up with a comprehensive launch of 10 new products, sales of which are gaining momentum with the passage of time. The overall profits in 2008 were amounted to nearly $5.7 billions. The sales in 2009 jumped to £28.4 billion from £24 billion in 2008 which shows an increase of over 15% and the profit increased to approximately $7 billion that shows an increase of over 20% year on year basis. The increase in profit is mainly attributed to outstanding last quarter performance in 2009 which resulted in a profit of $2.6 billion compared to $1 billion in the same period last year. Vaccines sales increased dramatically by 30% due to swine flue threats. The company managers expect that these sales may hit same levels in 2010 as well. (Moran, 2010) and (GSK Financial Summary, 2009) In addition, it must be pinpointed that the implementation of diversification strategy and launch of new products have triggered the purchase responses of customers and improved the marketability of Glaxo Smith Kline. Secondly, the implementation of reorganizing strategy also remained lucrative as it resulted in significant cost savings amounting nearly £1 billion annually. The improvement in sales also improved the cash inflows that touched nearly £7.8 billion that shows an increase of £0.7 billions in comparison to 2008. The earning per share jumped to 1.21 GBP 2% against 1.04 of 2008. (GSK Annual Report, 2009) In simple words, the overall financial performance of GSK over last three years remained sustainable as GSK has implemented diversification, innvoation, product development and market development stratagies. The company has now entered emerging economies thereby gaining financial benefits from purchases by a large segment of potential customers who do not top quality health services at their disposal. This has reduced GSK’s dependency over advance European and US economies. Furthermore, GSK has also adopted a balanced Dividend Policy which can be supported by the fact that company disbursed more dividends in 2009 compared to preceding two years, mainly attributable to sales and profit growth. The dividend announced in 2008 was 57p compared to dividend of 53p in 2007 that shows an increase of over 7%. Dividend in 2009 was 61p that shows an increase of over 6% year-on-year basis. Sharing profits with valuable shareholders is a key to make them satisfied and gain their loyalty in return for any future investments in home and host countries. (GSK Annual Report, 2008) Answer 2: The Board of Directors consists of 13-15 members who are mainly responsible for developing policies for the Chief Executive Officer and Chairman. These directors are independent in making their decisions about devising group’s policies and are responsible for formulation of GSK’s corporate governance policy for the fiscal year. These directors are solely responsible for implementation of policies, risk management tools; review of financial performance (growth, sustainability and decline) and for approval of remuneration and incentives for employees. They also define the organisational values and provide direction for ensuring discrimination free organisational culture. These directors are supported by Non-Executive Directors who analyse and evaluate GSK micro and macro environment and then forward their analysis to Board. The Board specifically considers the organisational mission and vision in defining goals and objectives to be accomplished. The board reviews the political, economic, technological, legal, socio-cultural and environmental factors. In addition, the strength, weaknesses, opportunities and threats are reviewed so that relevant decisions could be taken. (GSK Annual Report, 2008) and (GSK Annual Report, 2009) GSK has specifically focused on Internal Audit and Risk Management besides other areas such as Internal Control, Remuneration, External Consultation and Organisational Employees. The Internal Audit group has given the responsibilities to evaluate the relevance of GSK’s strategies to manage risks in home and host nations. The group reviews the functioning and performance of all worldwide and cross border business units so that weakness and threats can be identified and overcome. This ensures the internal efficiency and higher productivity besides setting stringent criteria for all workers associated with GSK’s business units. In simple words, the group has intensified the role of Internal Audit after development and implementation of Diversification, Product and Market Development strategies. Today, GSK’s Internal Audit comprises of four sub-functions namely “Group Internal Audit, Manufacturing Internal Audit, R&D Internal Audit, and Environment, Health, Safety and Sustainability Internal Audit”. (GSK Annual Report, 2009) This move is aimed to ensure sound internal control in worldwide GSK business operations. This is not only helpful in reducing the costs and lapses but also in building better relationships with all the stakeholders and shareholders. The second most important programme is Management of Risks / Uncertainty by reviewing advancements in government regulations, environmental laws and health policies. The risks are identified and communicated with Board of Directors and CET to develop global and grand business strategies. Individual strategies are developed for each geographic region after considering the ground realities and domestic laws. The third important area is disclosure of Remuneration and Employee related policies. GSK has developed a sound policy regarding incentives and extrinsic rewards for top performers and talented workers who contribute in making profits for the group. The group announces yearly promotions, bonuses and rewards to encourage its physical assets and reduce the employee turnover rates through need fulfillment. This helps GSK in reducing its recruitment, selection and training costs. Special attention is paid to ensure participation of workers in decision-making process. Tasks are delegated to trustworthy employees by their bosses thereby improving their normative commitment to GSK. Finally, the employees are empowered so that they could showcase their best performance. (GSK Annual Report, 2008) and (GSK Annual Report, 2009) In simple words, the above mentioned corporate governance strategies and policies as disclosed in financial reports are relevant in nature as they are formulated after thoroughly analysing and evaluating GSK’s business environment (internal and external factors). Moreover, the organisational culture seems to be democratic rather authoritarian as concluded from Secondary Research. Hence, it is justified to conclude that GSK’s has a balanced corporate governance model that contributes in accomplishment of the drug manufacturer’s defined goals and objectives. Answer 3: An annual report of a multinational company like Gloxo Smith Kline, General Motors, British Airways, Unilever and other etc. usually include details about their introduction, financial highlights, performance and review, Board of Directors, Corporate Governance policies, consolidated financial statements and notes related to their assumptions in preparing those statements. Since, these companies have worldwide operations; there annual report normally comprises of more than 150 to 300 pages on average that becomes tedious for shareholders to go through all the details and information about their company. In addition, this problem is further intensified due to the recent changes in Financial Reporting and generally accepted Accounting methods. Usually, these changes are observed in accounts related to property leasing and mortgage, automobile leasing, bonds, taxation, inventory management and valuation, depreciation methods, calculation of exchange rates etc. The financial statements are prepared on the basis of assumptions by auditors (CPAs, CAs, ACCA and ICMAs) who undertake the adjustments in International Financial Accounting Standards. Hence, the financial statements such as Income Statement, Balance Sheet, Cash Flows and Statement of Retained Earnings often do not include complete information, thereby considered inappropriate to communicate effectively with all the stakeholders and shareholders. These assumptions are usually identified in the notes section that include a number of details and explanation used in preparation of financial information for stakeholders. In addition, it is worthwhile to mention that accountants are allowed to any inventory valuation and depreciation methods for calculation in financial statements. Therefore, they tend to use FIFO (First in First Out) when preparing Profit and Loss Accounts so that they could showcase better performance by a firm for their valued shareholders. Similarly, they tend to use LIFO (Last in Last Out) for inventory valuation when signing ‘taxation’ forms. The reason behind it is the fact that FIFO enables them to portray better earnings as units purchased first for resale are cheaper than units purchased after some time (due to our concept of inflation). Similarly, using LIFO for tax purposes enables them to show higher Costs of Goods Sold thereby reducing Earnings before Interest and Taxes and ending up with paying low taxes. However, it is justified to say that this tactic although benefits the company and shareholders but it does not communicate financial information appropriately. Another example could be the calculation of depreciation for which ‘reducing balance method’ is adopted while preparing corporate tax statement to governments or tax authorities. The reason behind it is the fact the depreciation (non cash) expense is higher from this method. Whereas, ‘straight line’ or any method is adopted when preparing the income statements and balance sheets so that they appear more attractive to stakeholders and shareholders in terms of financial income, assets and equities. In addition, these changes also affect the Cash Flow Statement in different instances. References / Bibliography: No author (2009) “GSK Annual Report 2009” GSK.com Available at http://www.gsk.com/investors/annual-reports.htm No author (2009) “Summary of 2009 financial information” GSK.com Available at http://www.gsk.com/investors/annual-reports.htm No author (2009) “GSK Annual Report 2008” GSK.com Available at http://www.gsk.com/investors/reps08/GSK-Report-2008-full.pdf GSK Press Release (2007) “Results Announcement for the second quarter 2007” GSK.com Available at http://www.gsk.com/investors/reports/gsk_q22007/q22007.pdf No author (2010) “GSK announces Q1 results for 2010” Pharmalive.com Available at http://pharmalive.com/News/index.cfm?articleid=700565 Jack, Andrew (2010) “GSK relies more on emerging markets” Financial Times Available at http://www.ft.com/cms/s/0/e32d436a-5326-11df-813e-00144feab49a.html Andrew. Moran (2010) “GlaxoSmithKline Q4 profits up 66% from H1N1 vaccines” Digital Journal Available at http://www.digitaljournal.com/article/287031 GSK Press Release (2008) “GSK sets out new strategic priorities” GSK.com Available at http://us.gsk.com/html/media-news/pressreleases/2008/2008_pressrelease_10088.htm Read More