Impact of Change in Strategy upon Financial & Non-Financial Performance - Essay Example

?FDP – Impact of Change in Strategy upon Financial & Non-Financial Performance Introduction This report mainly analyses the different financial as well as non-financial indicators of the proposed strategy of FDP. The new strategy would bring certain structural changes as well as the financial changes in the company. In order to assess the financial impact of the proposed strategy upon FDP’s financial performance and position, financial ratio analysis has been used as a tool for that purpose. On the other hand, non-financial indicators have also been analyzed with the help of Balanced Scorecard technique which is a very effective as well as precise tool to judge the performance of the company. This report is fundamentally structured in two parts such that first part of the report highlights financial analysis of FDP with the help of ratio analysis. Last part of the report evaluates the non-financial indicators through Balanced Scorecard. Conclusion is provided at the end of this report which summarizes the performance of FDP. Background Information Cut throat competition, shrinkage in profits and increasing redundancies turned out to be the prime factors that lead FDP to change its business strategy. The company’s streamline business used to have both non-urgent and urgent delivery system of the parcel from both mail order companies as well as from internet retailers. The normal non-urgent parcel delivery system used to take around 5 to 7 working days but due to excessively increasing and tightening situation of competition especially with the entrance of international players, it has become extremely difficult for FDP now to survive in such closed competitive environment of the non-urgent parcel delivery system. The board of directors of the company has realized all the situations and considered different options in order to boost the revenues of FDP. The final strategy that has been selected by the board is the discontinuance of the non-urgent parcel delivery system by replacing a fast urgent delivery system which would ensure that every parcel is delivered to its recipient within 2 hours of the order booking. Such adoption of the strategy requires significant amount of investment in the existing operations of the business as the company requires more infrastructure and advancements in its communication and information technology based machines. It is intended to provide the parcel delivery personnel a notebook computer along with a parcel scanner such that they are linked with the central database system of FDP. Through all this communication devices, the tracking, collection and delivery of parcels would be delivered with much more convenience as well as ensuring their delivery less than 2 hours. The board has also decided to charge the premium price in respect of the urgent delivery system from the customers. Impact of Implementation of New Strategy upon the Financial Performance of FDP This strategy would be implemented from 1 December, 2011. Therefore, the impact of the change in strategy would definitely change company’s financial performance for the upcoming year. The performance of the company in respect of its profitability, leverage, efficiency, liquidity and financing has been discussed as under: Profitability Profitability is the most highly concerned area of financial performance as it is the basis upon which every business decision is taken whether it is small as per company’s perspective or large. Whatever the decision the company takes, everyone is interested to know as what would be the impact of that decision upon the profitability position of the company. Generally there are few profitability ratios that actually highlight the profitability in terms of various different perspectives. Some of those ratios are discussed as under: Net Profit Margin The company was struggling to maintain a steady growth rate in terms of its Net profit Margin in the past two years but with the implementation of the new strategy, the company can stabilize the growth rate of net profit margin substantially. In 2010, the company’s net profit margin was around 7.9% but fell sharply in 2011 such that it came to around 4.5%. Due to this new move of the company, it is estimated that the company’s net profit margin would be around 4.27%. Had the company not followed this new strategy, the net profit margin of the company would have slipped more brisk pace. Gross Profit Margin So far as the gross profit margin of the FDP is concerned, it can be observed that in the past 2 years, there can be experienced a decrease of 4% such that in 2010 the company’s gross profit margins were around 22% which have tumbled to around 18% in the very next year. The budgeted gross profit margin of the company is expected to remain around 23% which is the highest as compared to the previous years. ROTCE So far as Return on Total Common Equity is concerned, FDP has experienced a huge slump in its ROTCE such that it was around 32% in 2010 but dramatically reduced to merely 16.8% which is very alarming for the company. So, if the new strategy is adopted and it also works out for the company in its intended form, it would surly increase the company’s ROTCE for the year 2012 such that it would increase to around 27% which is a good perspective from FDP’s operations. Return on Assets As per the available data of the company, FDP had a ROA of around 8.4% in the year 2011. However, the budgeted ROA for the company is likely to be improved such that it can be estimated to around 13.4% in 2012 which is a significant increase. Return on Fixed Assets Return on fixed assets also determines the profit generating power of the total fixed assets. FDP had a ROFA of around 13.6% in the year 2011. The company now aims to increase it to around 22.5% in the year 2012 after the implementation of new strategy. It can be observed that the new fixed assets would have the power of increasing ROFA by around 9%. Revenue Growth This is also an interesting as well as an important ratio as it describes as how much the increase a company is currently experiencing in terms of its growth in revenues. The company had a growth rate of about 1.2% in the year 2010 as the company managed to deliver around 2.4 million parcels. However, in 2011, the company’s performance in this regard remained very unsatisfactory as the company resulted in the loss of around 0.05 million parcels. The company barely managed to deliver some 2.35 million which also pushed its revenues backwards and the company had to face a negative growth of about -5.3%. For the year 2012, the company anticipates an increase of around 17% in the total revenues but seeks that increase in the form of premium price to be charged from the customers. The company still aims to deliver 2.35 million parcels in year 2012. Leverage Analysis Leverage ratios depict upon the riskiness of the company in terms of its capital structures. There are various different formulas that are used for this purpose but only two of them have been considered under this analysis, which are described as under: Gearing Ratio Gearing ratio describes as the portion of debt included in the total capital employed by the company. If FDP’s past trend of gearing ratio is considered, it can be noticed that there has been a slight decline in the gearing ratio which is a bright sign for the company as it has become less risky. In 2010, the gearing ratio of the company was around 43.6% but decreased slightly to around to 41.8% in 2011. In 212, the company expects to have a gearing ratio of 43.44% due to increase in the debt of the company which would be used a financing source for the company in making investment to the new technology. Interest Cover Interest Cover or Times interest earned basically describes as how much the excess profit a company has, to cover its interest expense. In 2010, FDP has an interest cover of around 8 times but it dropped half in the very next year which means that FDP is having lower profits to cover its interest expenses. Under the new strategy, the company expects to have an interest cover of about 5.65 times which is very satisfactory. Efficiency Analysis For efficiency analysis, generally the individual components of current assets and liabilities are analyzed. However, with the currently available information, only debtors’ collection period is analyzed. If it is observed, it can be observed that average number of day to collect the receivables have increased from 35 days to 39 days in the past 2 years. If the budgeted estimates of FDP are taken into consideration, it can be seen that that the company’s receivables days tends to increase to about 43 days which increases the likelihood of more receivables becoming uncollectible. Liquidity Analysis As far as the liquidity position of FDP is concerned, the current ratio of the company describes best the liquidity position. The current ratio depicts that in order to pay a dollar of current liability, how many dollars a company has, in order to pay that 1 dollar liability. The current ratio of the company was quite low in 2010 amounting to around 1.23 but it has grown significantly such that it reached to around 2.33 in the very next year. If the budget estimate for current ratio for the year 2012 is taken into consideration, FDP has chance of maintaining the current ratio of 2.77 which is the highest in all the three years. Financing Requirements From the budgeted financial statements for the year 2012, it can be observed that the company needs to borrow $0.5 million. However, it is recommended to the board of directors to retain all of the earnings and do not pay any dividends as this can become a substitute for debt financing. Debt financing will increase the interest expense of FDP. However, the decision regarding the distribution of dividends rests with the board of directors and it is not the liability of the company to pay dividends. For that matter, it the company retains the profits for one or two years, the company can revive once again. Balance Scorecard for measuring Performance of FDP in 2012 Balance scorecard is that management accounting tool which is wide used by the companies. Despite of quantifiable measures of performance, a lot of qualitative measures of performance are also utilized by company which includes delivery service measure, quality measures, customer satisfaction measures etc. balance scorecard is also a form of non-financial measure which provides the top management about clear, fast and comprehensive view of the operations. Balance scorecard measures the performance of the company in the following four dimensions: Business process perspective- includes quantitative measures such as quality, cost, order completion, production, material procurement etc. Learning and growth-includes employee retention, customer satisfaction, employee satisfactions etc. Customer perspective-includes customer retention, market share, customer satisfaction etc. Financial perspective- includes economic value addition, capital employed, cost reduction, operating profit etc. For FDP, Balance Scorecard can measure the performance for 2012. In this regard, critical success factor and key performance indicators are mentioned in the given table. Quadrant of Balance Scorecard Key Measure Business Process Perspective Procuring more vehicles for prompt delivery Responding to customer needs in an efficient manner Learning and Growth Providing more valuable service to customers Creating more satisfaction for employees Customer Perspective Increasing market share by expanding business Quick service to be provided to customers Financial Perspective Increasing profits by 10% Reducing cost by 20% Nowadays, Balance Scorecard is utilized by every large and small organization. Many companies go off track, for instance United Parcel Service, commonly known as UPS also got off track and neglected to focus its customers. But balance scorecard changes the entire strategies of the firm and makes it more strategically aligned with its goals. Balance scorecard provides the snapshot of the entire organization. It is very easy to understand by every employee and it incorporates all the important constituents of business. This is the reasons that it has gathered such huge consideration from small and large businessmen. Balance scorecard helps in boosting each of the four quadrants. These four quadrants reflect each dimension of the business. These dimensions, when come together form an enterprise. Therefore, measuring each quadrant is also essential. Measurement and further description of these quadrants are mentioned in the subsequent paragraphs. Customer Perspective Under this quadrant, company goes heavily in making more customers. The basic measures which are included in this quadrant are customer acquisition, customer satisfaction, product profitability and customer retention. If FDP is following balance scorecard approach, then it definitely needs to focus on these four important elements. They will solve every problem pertaining to customers and thus the company would have the ability to cope with customers in a more efficient manner. In the above table, two key measures which given are: Increasing market share by expanding business Quick service to be provided to customers If FDP excels in acquiring, retaining and satisfying customers then definitely this will lead to an increased market share. Quick service provided to the customers will consequently lead to acquiring, retaining and satisfying customers. Business Process Perspective Business process perspective pertains to the activities which are required for the performance of business. The two key measures mentioned above are: Procuring more vehicles for prompt delivery Responding to customer needs in an efficient manner Balance scorecard also helps in making strategies for business process. The two key measures will help the company in making its business operations more efficient. Procurement of new vehicles will speed up the quick delivery which will ultimately lead to the customer satisfaction, retention and acquisition (First Quadrant). If FDP makes strategies for responding to customer needs then it will also enhance the market share because the customers will be more satisfied. Learning and Growth This quadrant is imperative for sustainable success because it works on the basis of learning experience curve. In this way, firm learns more from its previous performance and therefore avoids making the similar mistakes. Avoiding mistake saves costs and time to a greater extent. For this purpose the two key measures which are mentioned above includes: Providing more valuable service to customers Creating more satisfaction for employees These two measures can work for both the employees and customers as well. Every company focuses on customer retention but it is also important to focus on employee retention because continuously changing employee or high employee turnover can also cause reluctant in customers. In this regard, just like customer retention and employee retention is also vital for FDP. Financial Perspective The basic purpose, for which every large and small company exists, is to make profits. Not generating desired results often ends up in collapse of the company. The two measures mentioned above are provided for FDP and therefore, FDP should continually try to enhance profits and reduce cost as much as it can. It is not possible that after applying learning experience curve, the cost will ultimately reach zero and profits will be maximum but at least an optimum combination can be maintained where the cost is minimum and profits are higher. Companies continue to change their strategies as per their structures and situations from time to time. FDP currently needs to focus on the following two measures from financial perspective: Increasing profits by 10% Reducing cost by 20% These measures will help FDP in aligning all the four quadrants towards its desired goal and objectives. Financial perspective must be given considerable attention, and the board must decide, as per the situation of the company that which two important financial measures need more attention. Conclusion The above measures can help FDP in enhancing its market share and market position in the parcel delivering industry. This industry is receiving huge response from its customers due to phenomenal increase in number of internet retailers. After applying the approach of balance scorecard, FDP can be in a position to maintain and expand its business all over the world. Balance scorecard will help FDP in taking care of every perspective and moving forward by taking care of all the four essential components of business. References Brigham, Eugene F. and Ehrhardt, Michael C., (2008). Financial management: theory and practice. 12th ed. New York: Cengage Learning. Eckbo, Bjorn Espen., (2008). Handbook of corporate finance: empirical corporate finance. Oxford: Elsevier. Khan, M. Y., (2004). Financial Management: Text, Problems And Cases. 2nd ed. New Delhi: Tata McGraw-Hill Education. Jaffe, Jeffrey. and Ross, Randolph Westerfield., (2004). Corporate Finance. New Delhi: Tata McGraw-Hill Education. Read More