Multi-National Operation and Risk Management of Debenhams plc - Essay Example

?Multi-national operation and risk management of Debenhams plc Introduction Once a company decides to operate as a multinational corporation, there are several forms of competition and risks that face it. In the interest of succeeding in the competition and surviving the risks, the companies respond by use of various international competitive strategies that aim to improve their financial performance (Gauthier, 2007). To withstand the risks that face the companies also, there is often the use of various risk management strategies that often target the risks at their formative stages so that they do not cause havoc to the companies (Ammar et al ,2001). Studies have actually indicated that the more competitive and strategic a company is, the more likely it is that it would gain competitive advantage to become a preferred choice for the available customers who may all be seeking to undertake the same form of transactions from among a group of alternative companies (Baldassare, 2008). It is in light of this that Debenhams has been brought under the spotlight for a through market analysis on how the company presents itself on the international market and seeks to better its financial performance through the engagement of various forms of globalisation strategies. Whiles initiating globalisation strategies, it is also admitted that there are risks that can easily prevent the company from growing to the level it desires. Risks management strategies within the company are therefore scrutinised to balance the discussion. Company Description Not only is Debenhams listed on the London Stock Exchange but it is also a member of the FTSE 250 index (Davidson, 2010). Currently, the company emphasises on UK, Ireland and Denmark as its major market destinations. This notwithstanding, there are number of international franchise that operate under the name of the company. As of 2012, the total number of UK, Denmark and Ireland based locations for the company were 172 and those operating as international franchise were 68 stores across 25 countries (Alter, McLaughlin & Melniker, 2008). The company is currently engaged in retail chain departmental stores, which means that it is not a manufacturer of the products that it sells out to customers. In effect, the company does not source raw materials but depend on suppliers who deal directly with the manufacturers of the various products that the company displays on its shelves. The operational industry of the company mainly focuses on the sale of electrical and electronic products, clothes, accessories, cosmetics, gifts, toys, shoes and home furniture. The operating income with which the company went into the 2012 annual market was ?158.3 million, out which ?2,229.8 million was produced as revenue and ?125.3 million as net income (Kingdon, 2013). The operations of the company in all its local and international stores are run by a powerful 29,000 employee base that undertake all forms of duties ranging from managerial positions to cleaning (Kloha, Weissert & Kleine, 2005). Financial Performance and Globalisation Strategies Gross transaction value Since 2008, Debenhams has focused its strength on competitive global marketing on two larger market segments, which are UK and International market segments. Together, these two form the group market for the company. To measure its profitability ratio, there is a lot of emphasis on the gross transaction value that the company creates, as this value represents the unadulterated quantum of revenue accrued by the company over given period of time (Groves, Godsey & Shulman, 2012). From the table below, it would be noted that there has been a steady rise in the physical quantum of gross transaction value for both UK and international markets. However, these increases have not come at an even interval of growth as the figure shows that there are years that the percentage rise goes down even though they do not represent negative growth trends. What is more, the margin of percentage growth has always only been minimal, indicating that the company has not been very proactive in heightening its growth agenda. Table 1: Gross Transaction Value for UK and International Markets from 2008 to 2012 Gross Transaction Value 2008 2009 2010 2011 2012 UK ?2,350.7m ?2,407.2m ?2,449.5m ?2,481.4m ?2,510.2m International ?533.2m ?543.7m ?556.8m ?574.0m ?580.9m Source: Debenhams (2013) For each of the yearly interval of gross transaction value recorded for UK and international markets respectively, the following percentage changes prevail. Figure 1: Percentage changes in gross transaction value from 2008 to 2012 Source: Debenhams (2013) Operating profit Having looked at the gross transaction value that the company earns on a yearly basis, it is important to know the operating profits that it puts into its operations to bring about the yields that have been identified above. Often, the allocation of operating profits is influenced by several factors, most of which is the outcome of a forecasting model used by the company. It would be realised that on a periodic basis, the company engages in a forecasting process that helps it to forecast the trend of business that the company will experience for a given year (Clark & Ferguson, 2013). Depending on the outcome of the forecasting that is done, the budget of the company captures and assigns an appropriate operating profit. Other factors that determine the allocation of operating profit includes the revenue results of preceding years. Generally though, economists would consider the operating profit of the company as major performance indicator because how much the company is able to invest as expenditure depends directly on how much the company has in its coffers (Benton, 2013). The table below gives an overview of the year to year operating profit that the company has assigned for its financial operations for the past five years starting 2008. Table 2: Fig 2: Operating profits assigned for UK and International Markets from 2008 to 2012 Operating Profit 2008 2009 2010 2011 2012 UK ?211.3m ?201.7m ?212.5m ?225m ?209.6m International ?43.2m ?45.7m ?42.8m ?44.8m ?45.4m From the data presented above, it would be deduced that the trend of allocation of operating profit for Debenhams plc is not static or constant but keeps changing with time. Fig 2: Operating profits assigned for UK and International Markets from 2008 to 2012 in ?m Return on investment In most common instances the return on investment of companies is measured using share prices and the dividends that shareholders derive from the shares that they purchase. To this end, it is expected that companies listed on the stock exchange would have competitive share prices that guarantees return for the investments that are made into the company. Unfortunately for Debenhams, their basic earnings per share are one of the lowest among its competitors (Kettl & Fesler, 2013). The low figures notwithstanding, in table 3, it is noticed that the company experiences a highly stable trend of growth rate in its basic earnings per share. What this means is that in the trading of shares of the company, shareholders, rather than the company as a corporate entity has better chances of benefiting and recording higher returns on investment (Groves, Valente & Schulman, 2003). This is because with lower share prices, the company does not enjoy higher returns on a single share transaction that is made from individual shareholders. However, individual shareholders making these investments are sure of experiencing fairly stable and guaranteed basic earnings per share. ? 2008 2009 2010 2011 2012 Interim dividend per share 1.0p 1.0p 1.0p 1.0p 1.0p Basic earnings per share (Sep 30 close) 66p 69p 71p 74p 76p Net debt Even though companies may be doing very well with their operating profits and close of year revenues, other expenditure such as the net debt that the company incurs may prevent the company from recording profits that are needed (Levine, Justice & Scorsone, 2012). As noticed with the relationship between interim dividend per share (share price) and basic earnings per share in the presentation above, it would be noted that there are factors that are causing a mismatch in the revenues of the company with its profitability as reflected in the share price. This is a factor that McConnell, Brue & Flynn (2009) attribute to excessive spending, that brings about higher net debt for the company. Risk Management Exchange rate risk In order for the company to consolidate its revenue flow, Debenhams does not only depend on its sales UK and abroad for its income. Rather, the company engages in securities such as the buying of bonds. Because the company operates in a number of countries, the purchasing of these bonds as securities is performed on a number of markets that are outside of the UK. Specifically, there are three currency destinations for the company as far as these bond securities are concerned. According to the Annual Report of Debenhams, there are Sterling bonds, Euro bonds and Dollar bonds. Meanwhile, it has been noted that in cases where investors make purchase of bonds in market designations that is different from its trading currency from home countries, there is the exposure to exchange risk resulting from exchange rate differentiations (Hendrick, 2004). With regards to both the Euro and Dollar also, the both continue to record rate exchanges that are non-synchronising with the Sterling. In a latest report, the Euro’s annual rate was pegged at 8.7% with the Dollar having an annual rate of 6% (Financial Times, 2013), which is a very disturbing situation for Debenhams plc for gaining full potential on its bond returns. In light of the prevailing situation where exchange rate differences makes the company earn less than expected on its bond investments, there are a number of interventions and risk management procedures that are put in place in correcting the situation. One of the commonest mitigation strategies used by the company is by ensuring that instead of going to the currency market to exchange earnings back to the Sterling before doing business with it, it designates the revenues earned on bonds on the very currency markets where they were invested (Wooton & Horne, 2010). For example all bond revenues raised in European markets are used for European market spending instead of transferring the money to UK. The same is true for Dollar markets. But in some cases, there have been excesses, creating the need for there to be transfer to UK and for that matter exchange rate trading. In such a situation, what the company does by way of exchange rate management is to hedge its revenue funds against such shocks by directly engaging in foreign currency options with its interest in the foreign bonds (Harrison & Horngren, 2005). Country and Political Risk Debenhams plc rightly identifies the harm that various forms of country and political risks can pose to its fortunes of becoming a global market leader. Particularly is the kind of country and political factors that exists in the new market destinations that the company has identified for new growth expansion projects. Some of the country and political risks have been identified to include political instability, availability of substitute products, change of government, bargaining power of consumers and availability of competition (Coe, 2008). Some of the very specific locations that the company identifies for market expansion where the worse forms of country and political risks may exist are Scotland, Brazil, Egypt and China. As far as Scotland is concerned, the country is currently contemplating on the national referendum that is to take place in that country in 2014 to make it an independent country. This would lead to several political risks such as change in political ideologies, which may affect economic positioning of the citizenry (County of Yolo, 2011). In Brazil, the 2014 World Cup has become a major country risk that the company is seeking to battle. Currently, the country is making plans on how to direct the interest of the citizens to the focus of the products that the company offers rather than those centred on the game of football. In Egypt, there is an existing political uprising, which puts the country at a political risk of unpredictable aftermath of the political uprising. Commonly, such political tensions leading to change in government in the Arab League has been associated with entire changes in political ideologies, which affect the economic policies of governments (Berne & Schramm, 2012). The major fear of the company now is how to deal with unfavourable socio-political economic policies that will take focus of government assisted funding from private companies to state companies. In China also, the greatest country and political threat or risk that the company faces is that of existence of substitute products and risk of imitation of products that is in place as a result of insecure legislative system that does not protect the interest of investors and entrepreneurs. As a way of managing these country and political risks, the company has put in place a set of management measures that do not depend directly on country government macroeconomic and microeconomic politics for funding. Rather, the focus of market capitalisation of the company is directed at the use of divestiture and dependence on the UK government, which has been found to be safer. There is also engagement in securities such as the purchasing of bonds. The company also relies heavy on international mediation for issues of intellectual property legal violations. Recommendations Reading through the financial performance, globalisation strategies and risk management procedures of Debenhams plc, there are two major recommendations that come to mind. In the first place, it is recommended for that company to put in place more cost sharing policies that will ensure that within its annual budget allocation, there is sufficient sharing of cost among various departments of the supply chain of the company (Kavahagh, 2007). This recommendation is made against the background that the currently has several spending allocations within its operations that makes the deficit cost records of the company rather higher as against the profit that the company makes. Because of the absence of control on cost, even though the company continues to record growth in return on investment and other income related parameters its profits have not reached the levels that is desired. Again, it will be recommended for the company to have a more pragmatic risk management procedure that is used in managing the various forms of risks that the company faces year in and year out (quite). Currently, there seem not to be a substantive risk management approach in use by the company, making it rely on haphazard measures for controlling risk whenever such risks that are identified above show up. A systematic risk management process that is made up of setting of objectives, identification exposure to loss, measurement of exposure, identification of alternatives, implementation of options, and monitoring of results is recommended for the company (Ruppel, 2010). Conclusion Debenhams has not realised most of its potentials to become a market leader in its area of market trading that it currently finds itself. This conclusion is made as a result of the outcomes that are produced from the international competitive analysis that has been performed for the company. In the first place, the company seems to realise the need for it to remain highly competitive, given that the need for competition is highly inevitable. But whiles doing this, the company seem not to follow its own set of principles and management paradigms other than competing as a direct response to what prevails among its key competitors. There is an exemplification of this conclusion in the way and manner in which the company continues to embark on competitive programs such as expansion and growth but refuses to realise a reflected increasing profitability over the past five years. Once the company realises the need to be competitive, it must not lose sight of its personal brand differentiations that gives it a basis to be engaged in competition. Until now, Debenhams plc refuses to be proactive in defending its core corporate brand. It can also be concluded that the company has not seen the best out of its risk management because it continues to treat risk management as an event rather than a process. It is important that risk management becomes a constant part of the company’s practice (Sanders & Ritzman, 2012). References Alter, T. R., McLaughlin, D. K., & Melniker, N. E. (2008). Analyzing Local Government Fiscal Capacity. University Park: Pennsylvania State University Cooperative Extension Service. Ammar, S., Duncombe, W., Hou, Y, Jump, B., & Wright, R. (2001). Using Fuzzy Rule-Based Systems to Evaluate Overall Financial Performance of Governments: An Enhancement to the Bond Rating Process, Public Budgeting and Finance, 21(4), 1-110. Baldassare, M. (2008). 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