How Corporate Restructuring Transformed Market, Productive, and Financial Performance - Case Study Example

USE MARKS & SPENCER TO DISCUSS HOW ‘CORPORATE RESTRUCTURING’ TRANSFORMED MARKET, PRODUCTIVE AND FINANCIAL PERFORMANCE Introduction Corporate restructuring is one of the most important strategies used by firms to transform their productivity, financial performance and markets. Restructuring is achieved through services that are focused on addressing a firm’s operational challenges. Restructuring helps companies that face financial stress. Restructuring is applicable in situations where a firm is experiencing losses and cash flow challenges (Alkhafaji, 2001, p. 38). Restructuring activities turn around operations through management assessment, and evaluation, debt raising, working capital management, risk management, refinancing and debt restructuring, cultural transformation, operational structuring, strategy development, cost management, sales and marketing management and supplies management (Alexander & Quinn, 2002, p. 16). Marks and Spencer will be used to show how corporate restructuring can help in the transformation of markets, financial performance and productivity. Corporate restructuring can only yield transformation through planning. The planning processes are evolutional, which means that adjustments are made in order to achieve the organization’s mission of restructuring. Marks and Spencer is one of the companies in the world that has benefited from the restructuring its operations. Marks and Spencer is a British retailer that has outlets globally. The firm has its headquarters in London and it specializes in the sale of luxury food products and clothing. In 1998, Marks and Spencer became the first British multinational to achieve pre-tax profits of over 1 billion pounds (Alexander, 2010, p. 75). Thereafter, the firm went into a sudden financial and operational slump. Shareholders, the firm’s management, small investors, business journalists, retail analysts and customers did not expect the slump because the firm had just achieved a performance milestone, which has never been achieved by another British firm. Marks and Spencer’s Group Structure and Financial Performance Marks and Spencer has 718 retail outlets that are located in 34 countries. The international retailer sells footwear, clothing, gifts, food and home furnishing. The firm sells its products under its St. Michael trademark. Half of the firm’s overseas operations are franchised. Marks and Spencer owns the Brooks Brothers and Kings Super Market chain. The firm uses direct mail to meet its objectives of providing its customers with a variety of products. Retailing accounts for 96 percent of the firms fiscal revenues (Alexander, 2007, p. 57). The firm’s growth can be attributed to its management, which was willing to restructure the firm’s operations. Restructuring was necessary in order to address Marks and Spencer financial performance. In 2000, the firm’s financial performance was disappointing. Earnings per share and returns on equity ratios were zero. During this period, the firm made a profit of 1.3 million British pounds. The dividend cover for this period was zero. The previous year, dividend cover was 1.0 British Pound (Beaver, 2001, p. 326). The firm had to cut its dividend from 14.4 pounds to 9.0 pounds. In 2000, the firm did not make any profits, but it promised is shareholders a similar dividend payout to the previous year. Sales and Operating Profit per Area (Year Ended 31 March) Sales Operating profit­­­­­­ ­­ 2001 2000 2001 2000 £m £m £m £m Group Total 8075.7 8195.5 467.0 543.0 UK Retail 6293.9 6482.7 334.8 420.1 International Retail Europe Continental Europe 285.0 294.3 (34.0) (33.5) Ireland & European franchise businesses 263.3 261.3 22.6 18.7 North America Brooks Brothers 448.1 395.5 20.2 7.9 Kings Super Markets 313.1 273.7 11.9 11.1 Far East 110.1 101.2 7.4 (4.8) Financial Services 363.1 364.6 96.3 115.9 (Brenady, 2005, p. 24) Shareholders Disappointment In 2000, shareholders expressed their disappointment over the firm’s financial performance and operational activities. During this period, the firm announced for the first time that it would cut its dividends following a sharp decline in profits. Shareholders disappointment and the failure of the management to turnaround its performance led to the announcement of a new management team, which developed a restructuring program (Briggs, 2012, p. 125). Restructuring Activities The new management was tasked with the establishment of strategies that would help in improving Marks and Spencer’s financial performance. In order to overcome market, financial and productivity difficulties, Marks and Spencer began implementing a number of restructuring strategies (Burt, 2006, p. 60). Additionally, the firm embarked on a companywide strategy that helped in breaking down the trends of its traditional buyers. Most importantly, Marks and Spencer introduced retailing skills in a number of its operational areas. New Strategies and Their Outcomes on Market Position, Financial Performance and Productivity Total Focus on U.K Retail From 2001, the firm decided to focus on selling its brands and products exclusively to Marks and Spencer’s U.K customers. The firm ensured that it could guarantee quality and value while delivering services. This recovery plan relied on significant improvements in the availability and value of its products, and product appeal (Groft, 1999 p. 1). This was aimed at ensuring that the firm could rebuild its relationships with its customers. Focusing on the U.K market gave the firm an opportunity to rebuild its relationships with its core customers. The firm intended to regain customer confidence in quality, value and service delivery. Focusing on the U.K market ensured that the firm developed strategies for its core market. This means that the firm had to rebalance its pricing architecture while extending its product range. Marks and Spencer increased the number of products with entry level pricing in order to attract more customers. It’s pricing and market strategies were widely communicated to customers (Grundy, 2005, p. 197). In addition to expanding on its clothing product range, Marks and Spencer expanded its foods and beverages category. The expansion was intended to improve the performance of this division. Marks and Spencer also recognized that the food and beverage division was important for future growths. These activities were supported by the acceleration of store renewal programs. Marks and Spencer accelerated the establishment of new concepts in its store formats. The refurbishments were accomplished at a low cost and they were intended to benefit its customer by offering more space (Kay, 2005, p. 745). Selling space was reallocated to the firm’s high growth and sales product areas. Additional customer oriented activities included extending opening time and modernizing the stores. Value Realization These activities cost the firm approximately 100 million pounds. In return, the firm increased its profits in the U.K market by approximately 10 percent. This means that the firm’s profits increased by 40 million pounds per annum (Keller, 2009, p. 103). This shows that increased company investments and realignment of its operations has the potentials to increase profits. Cost Cutting Measures and Closure of Non-Performing Businesses The management at Marks and Spencer had to take stringent measures in order to save the business. Recovery efforts were focused on cutting costs and closing non-performing businesses. Closure of these outlets would lead to the loss of approximately 3,500 jobs. Most of the non-performing businesses were located in Continental Europe, in countries such as Netherlands, Belgium, Germany and Spain. Marks and Spencer had to close down these operations because they were not profitable. Over a period of three years, its businesses in continental Europe had made losses of close to 100 million pounds. In 12 months, they made losses of approximately 34 million pounds (Nardine, 2004, p. 29). Improved Capital Structure The cost cutting measures reduced investments in Marks and Spencer’s inventory by approximately 10 percent. This means that the firm reduced investments in non-performing ventures by close to 90 million pounds. In order to establish an efficient capital structure that would help in increasing the rates of growth in earning, Marks and Spencer had to refund its shareholders close to 2 billion pounds. This release value was funded by the sale of its international subsidiaries (Olins, 2007, p. 1). This decision was meant to give Marks and Spencer financial flexibility and strength to fund future growths. These restructuring decisions had immediate financial impacts. The benefit to trading profits following the closure of its European subsidiaries was approximately 50 million pounds in a year. In 2002, the firm’s management announced that its revenues had increased from 250 million pounds to 350 million pounds (Palmer, 2005, p. 23). Impact of Restructuring on Productivity Restructuring productivity requires a firm to have a comprehensive view of its operations process and existing business. Marks and Spencer’s restructuring of its productivity was based on an understanding of the firm’s productivity levels, and what needed to be done in order to improve productivity. This encouraged the firm to think about acceptable business processes while questioning the available alternatives for improving productivity. Marks and Spencer restructured its processes and operations in order to provide a platform for growth in productivity. Marks and Spencer undertook a number of cost measures that were aimed at streamlining operations (Piercy, 1999, p. 44). For instance, the firm sold close to half of its European operations. In addition, the firm sold its profitable supermarket chain in the U.S. These activities reduced the number of employees and investments into its operations. Restructuring a workforce requires a firm to use knowledge based systems. Restructuring will lead to a reduction in the number of employees. Organizations need to increase the levels of motivation and facility output despite the reduction in the number of employees. Knowledge based systems are applied in different human resources activities in order to motivate employees and facilitate the maximum and effective use of its workforce. The objective of the knowledge based system is to achieve the right type and number of employees required for the achievement of market and productions objectives. Knowledge based systems of improving productivity are based on the firm’s ability to forecast its future demands for skills and competencies, in addition to analyzing its supply of resources. The firm should also have an ability to reconcile critical discrepancies in supply and demand (Tordyman, 2004, p. 7). It is evident that the restructuring of Marks and Spencer’s operations led to massive job losses. Conversely, it led to an increase in labor productivity. Productivity in this case is indicated by the growth achieved by Marks and Spencer after the restructuring programs. Restructuring led to the expansion of value addition per employee. It also increased productivity through the reduction of the number of redundant employees. In the face of competition, the motivation and skills of employees plays a crucial role in the achievement of a firm’s objectives. Strategic responsiveness during these times requires a firm to identify the competencies of its employees, in addition to the personality characteristics of employees that align to the firm’s operations (Tse, 2002, p. 19). Restructuring enabled Marks and Spencer to be agile to its environment, and have the abilities to identify weak signals that indicate the need for change in operational processes. Restructuring transformed productivity because it increased Marks and Spencer’s competencies. This means that the firm had the ability to perform tasks in a superior manner to its competitors. Changes that are caused by restructuring forces a firm to change its business focus. A firm is forced to redesign its business models in order to recover its lost market share (Whitehead, 2004, p. 16). A chronology of events shows that Marks and Spencer returned to productivity following the restructuring program. In 2004, Arcadia Group and BHS attempted a takeover of Marks and Spencer. Marks and Spencer’s recovery plan prevented the takeover. The recovery plan convinced Marks and Spencer’s shareholders that the firm could return to profitability. In 2007, the firms announced its plans to expand by opening its largest outlet in Dubai. In 2008, the firm added a new outlet in China’s Shanghai city. After years of reduced sales, the firm was able to recapture its U.K market share in 2013. Impact of Restructuring on Financial Performance Strategic restructuring activities have the potential to improve a firm’s financial performance. Restructuring ensures that a business can allocate resources to its most critical areas of performance. Strategic restructuring of an organization can lead to an increase in productivity by 50 percent. Additionally, it leads to an increase in customer loyalty by 56 percent and increase in profits by 33 percent. The financial statements of Marks and Spencer show that the firm was able to return to profitability after the implementation of the restructuring program. In 2000, the firm made profits of 258.7 million pounds, which dropped to 2.8 million pounds in 2001. Marks and Spencer introduced the restructuring plan in 2001 after the decline in profitability. In 2002, the firm’s profits increased to 153 million pounds against a turnover of 8.1 billion pounds. Since then, the firm has been able to maintain its profitability (Greenberg & Maymin, 2013, p. 1). Table showing the Financial Performance of Marks and Spencer over the years (Greenberg & Maymin, 2013, p. 1) Conclusion Corporate restructuring is one of the strategies used by firms experiencing sales, profitability and cash flow difficulties to transform their performances. Marks and Spencer is a British retailer that used corporate restructuring to transform its business processes, financial performance and productivity. It is vital to note that one of the outcomes of corporate restructuring is job losses and cost cuttings, which enable businesses to minimize their operational costs. Restructuring gives businesses an opportunity to allocate resources to the most critical areas of performance. Strategic restructuring has the potential to increase productivity by 50 percent, customer loyalty by 56 percent and profits by 33 percent. The financial statements of Marks and Spencer show that the firm was able to return to profitability after the implementation of the restructuring program. Corporate restructuring is transformation because it changes a firm’s outlook of its market. It forces business to adopt new strategies and tools for addressing their challenges. Corporate restructuring can change a market by reducing the prices of products and services. This has the potential of changing the demand and supply dynamics of the market. 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