Financial Analysis of the Performance of Burberry - Essay Example

Work 2- Analysis of Burberry Group Plc. Executive Summary It is evident from the operations of Burberry that the company employs the use of the diversified business model. The company has gained popularity as having invested heavily into having a signature trend, making it not only an exciting aspect, but also proving to be a very dynamic aspect of the company’s management strategy (Burberry Plc ‘Annual Report 2012/2013). This perhaps explains the reason the company has been able to maintain the strategy right from the inception of the company to its modern products also. The group strategy of the company is characterized by a combination of a leading market position and a strong franchise that is well established in various countries. Additionally, the company is buoyed by the platforms in the emerging countries to drive their earnings both in growth and volume. We will base our strategic analysis of the company on four distinct factors. These are; the existing strengths, the existing weaknesses, the existing opportunities and the existing threat. From a review of the previous performance of the company, the focus that is currently being given to the distribution on licensing in countries like Japan, Spain and the United States has left the company with a low gearing ratio (Proctor, 2012). However, through the current strategy of expansion of sales of Burberry brand and the seizure of opportunities aimed at capturing a greater share of the brand value chain presents numerous opportunities enhancing future value creation. To this end, it would be worth noting that the business model employed by the company possess characteristics of both retail and luxury goods companies. Table of Contents Cover Executive Summary Introduction Section 1 – Identifying the vision and strategy of the organization Section 2 – Balanced Score Card (BSC) Diagrammatic Representation of Balanced Score Card Section 3 – Strategy Map Section 4 – Recommendation Section 5 – Critical discussion and evaluation of the Use of Balanced Scorecard References Appendices 1 2 4 5 5 7 8 9 8 9 13 14 Introduction Created in 1956, Burberry Group plc continues to be a global luxury fashion brand and boasts of a history of 158 years. The company specializes in manufacturing a wide variety of products which include accessories, beauty for men, luxury apparel, with men and children being a major business item of the company. The market for the company’s products is spread out to regions including Americas, Asia pacific and Europe with its stock being listed on the London Stock Exchange with the principle business being investment. This report will be applying the appropriate accounting techniques to critically analyzing financial data in the context of a variety of business decision making instances while at the same time making informal judgments from such accounting analyses. Section 1 – Identifying the Vision and Strategy of the Organization The vision of Burberry from its financial statements is; “To be the leading company that is fully digital across the globe” (Burberry Plc ‘Annual Report 2012/2013). The group strategy of Burberry is marked by a combination of both leading market position and a strong franchise in the established countries in addition to employing the use the platforms from the emerging countries in order to drive earnings both in the form of growth and volumes. Among other things that the company will be giving special focus include meeting the ever changing consumer demands through continuous innovation and product portfolio expansion through the direct operation of the stores network, the selective wholesale distribution channel while at the same time trying to enhance its capabilities in terms of operations. This has been the driving force behind the recent growth in the company. Section 2 – Balanced Score Card (BSC) A scorecard is a combination of the four common measures (quadrants) that are directly associated with a company’s objective strategies (Pearson & Robinson, 2009). Balance scorecard is a strategic planning and management tool that is used extensively in business and industry, government and non-profit making organizations in order to align business activities to the vision and strategy of the organization. It also helps to monitor the overall performance of the organization against the strategic objectives. It was a brain child of Dr. Kaplan and David Norton as a performance measurement basis that complements strategic non-financial performance metrics with the traditional financial measures to give managers a more balanced view of the organizational performance. A balance scorecard focuses on four perspectives namely: i. Learning and growth perspective- in order to achieve our vision and strategy, how will we sustain our ability to change and improve? ii. Business process perspective- for the organization to satisfy its customers what business processes must they excel at? iii. Customers perspective- this perspective addresses the question of how should the organization appear to their customers so as to achieve their vision and strategy? iv. Financial perspective -seeks to address how should we appear to our shareholders in order to succeed financially? For the performance perspectives to be implemented appropriately, they managers must seek to address; a. Objective- what is the strategy to achieve in that perspective b. Metrics-it describes how the progress of an activity will be quantified. c. Target-this refers to the targeted value that an organization seeks out to obtain for each perspective. d. Initiatives-this refers to the steps that will be taken to facilitate accomplishment of the target. A scorecard is a combination of the four common measures (quadrants) that are directly associated with a company’s objective strategies (Pearson & Robinson, 2009). Financial perspective i. Increase in the total market share- Burberry Company ought to increase its production levels and also incorporate higher marketing strategies so as to lead in the fashion industry. ii. Maximize profitability- for the company to gain more revenues from the sales of the good they produce, their products should be of higher quality as compared to those of their competitors. iii. Increase market dominance- Burberry company should ensure they create attractive and make them have an advantage over other similar products in the market and also place stiff competition. Customer Value Perspective- it is aimed at ensuring customer’s satisfaction in the company. i. Customer retention- the company should treat every customer based on their previous transaction history. Customers with a long-term sales relationship with the company deserve some transaction privileges to ensure continues relationship with the company. This will ensure that the company does not lose its royal customers. ii. Customer satisfaction- the company should produce quality goods and excellent services which are aimed at customer satisfaction and ialso maintain a good relationship with their customers. This in return will ensure the income for the copany will be increasing due to high and regular sales. iii. Rewarding customer’s loyalty-Burberry company have to improve their customer’s value by always ensuring that their books of records are up-to date regarding the customer’s sales information such as price paid, discounts and costs. This will help the company to identify and reward their customers accordingly. Internal business prospective- this is an objective aimed to ensuring effective performance of the company’s processes. i. Lower operational costs- Burberry company should adopt more advanced technological processes which are important in achieving their goals and targets. This implies that the company’s profit should be high despite lower operational costs. ii. Fast and effective performance- based on new technologies the company should ensure the performance ifs fast and accurate. This is key to a successful business. iii. Quality management-Burberry Company should ensure the produce natural raw materials in their production process. This makes the company to be unique in the market by the quality of goods they produce. Learning and growth perspective- this objective aims at ensuring a good relationship between the employees and the managers of the company. i. Employee satisfaction- the company should give its employees fair remuneration as this motivates them to work and increase productivity. Also they should create conducive working environment for their employees to be able to work and relate with each other. ii. Creating open communication- Burberry Company should create an environment where their employee’s feedback and complaints on their feelings can be heard by the management and the necessary action taken with immediate effect to find a lasting solution and this makes the employees to feel cared for at work place. iii. Employee retention- For Burberry Company to retain its employees they should reward them for excellent performances and also give them commissions. This serves as a motivating factor to them and ensures continued loyalty to the company and also they carry out their work effectively and efficiently. iv. Market research and employee training- training of the employees brings about improvement their knowledge, skills and attitude. When the company incorporates new technology in its operations, there is a need to train the employees on how to cope with the new changes in the production techniques. This ensures that the employee do not feel that their job is being taken away from them. The Balanced Scorecard 1. Financial perspective Objectives-increase fixed asset utilization Measures-asset turnover ratio Targets-increase by 3.5 Initiatives- implement the use of modern and new technology in production of clothes. 2. Customer perspective Objectives-on-time delivery of goods Measures-number of orders placed by the customer Targets-make 5 deliveries per week Initiatives-be prompt in product and service delivery. 3. Learning and growth perspective Objectives-introduce new products Measures-number of new products launched in the market Targets-create 4 new clothing design per year Initiatives- market research and development programs. 4. Internal business perspective Objectives-reduce cycle time Measures- number of days it takes to process an order. Targets-to make 3 orders per week Initiatives-cycle-time optimization program Section 3-Strategy map A strategy map refers to a diagram that is used to show the links between the objectives of different performance perspectives. It succinctly summarizes the strategic goals that are being followed by an organization (Kumar, Galar, Parida, and Stenstrom 2011). Financial perspective Customer perspective Business process perspective Learning and growth perspective In assisting to achieve the set targets of Burberry Company the financial aspect of the scorecard provides timely and accurate data that helps to determine the financial position of the organization at any particular time and therefore the managers will use this data to know the areas that need improvement for the accomplishment of the goals. Similarly, the customer aspect defines the value preposition that the company should apply to satisfy their customers so as to generate sales revenue. This is a crucial aspect in achieving the vision and strategy of the organization in the sense that increased relation and customer satisfaction will contribute positively to the goals. Additionally, the learning and growth aspect is one of the key contributors to the attainment of the set targets. This is because technology levels are dynamic and therefore the employees should be willing to embrace change so as to increase productivity levels and also quality products. Lastly, the internal business process aspect is also important in that it allows the managers to know how well their business is learning and whether its product and services conform to the customer’s requirements. It also focuses on all the activities required in order for the company to outshine in providing the value expected by the customers both profitably and efficiently. This involves incorporating innovative processes and development in order to stimulate improvement and achievement of the set organizational goals and targets. Section 4-Recommendations After analyzing the organizations vision and strategy, it is evident that Burberry Company is driven by customer interaction whereby the customers are able to access Burberry anywhere and also satisfaction by the improved designs and quality of goods they produce. In order for the company to achieve these objectives a lot need to be done. Firstly, they have to ensure that the goods they offer to their customers are of better quality and also they are correctly priced. This will attract more customers and hence increased sales revenues will be generated. Improved advertising will create awareness to the customers on the products available. Similarly, Burberry Company will be required to reduce its operation costs so as to increase the profit margin this has an effect of portraying a good image to the shareholders of the company and they will be satisfied that the business is headed on the right track of achieving its goals. Additionally, through the implementation of the balanced scorecard in the organization the managers will be required to incorporate better measures if they want to achieve the set targets. This will include focusing on customer satisfaction through creating new quality products and designs. The organization should also seek to retain and grow the number of customers they have as this will make them the most preferred suppliers in the market. Inspiring customer loyalty will go a long way in increasing the sles volumes. The managers of Burberry Company should seek to maximize shareholders wealth and this is achievable through increasing the fixed asset utilization and improving financial management for improved efficiency aimed at achieving the set targets. Similarly, the managers and executives should encourage their employees by motivating and empowering them through training on new ideas in the economy. They should also recruit quality staff and improve market research so as to incorporate new methods of carrying out business activities to enhance operational efficiency. In addition, the managers should enhance better communication so as to provide a platform for the employees to air out their grievances and also ensuring there is proper understanding of the strategic goals as this helps in working towards attainment of those targets because everyone in the organization knows what is expected of him. The overall equipment used to carry out the business operations should be properly scrutinized to ensure that they are effective; this will reduce chances of breakdowns and delays in the production process. Lastly, the managers should be able to implement the balanced scorecard and the strategy maps to be able to increase productivity and also create new designs of their product so as to attract more customers and have a large percentage of the market share. Section 5-Critical Discussion and Evaluation of the Use of Balanced Scorecards Uses of a balanced scorecard 1. Increase forecast on strategy and results A balanced scorecard enables an organization in determining whether they are achieving their strategic goals or not. For Burberry Company, the managers will be able to assess their operations from the results obtained from the balanced scorecard analysis. 2. Improve organizations performance A balanced scorecard ensures that an organization is undertaking the correct business activities and this is useful in improving their performance. This ensures that all the operations are geared towards the achievement of the goals set by the manager and assist In the full allocation and utilization of the resources available. 3. Align organization strategy. Balanced scorecard aligns the company’s strategy with the work that is carried out by the employees on day to day basis and this aid in the realization of the strategic objectives 4. Focus on the drivers of future performance The implementation of a balanced scorecard in the organization is very important in the sense that the managers will be able to identify the key activities that need to be incorporated in the future for improved results. These factors need to be understood in the organization so that the employees will be willing and ready to accept change so as to improve efficiency in the production process. 5. Improve communication of the organizations vision and strategy. Communication is key as it enables the managers to communicate to the employees on the goals that should be achieved and also the employees will have an efficient channel to get help on a problem also the production levels will decrease and this will slow down the achievement of the set targets and goals. 6. Prioritize initiatives The managers are able to plan the activities giving priority to those that are more important in terms of efficiency, reasonableness and effectiveness which are crucial in improving the organization’s performance. Limitations of a balanced scorecard 1. It requires a lot of planning on what objectives the organization would like to achieve. It is not an easy task as the managers have to meet and discuss on the strategies to lay down for the organization. 2. A balanced scorecard contains limited financial information for successful implementation. 3. In some cases the information being pursued might not be applicable to the organization’s needs. Companies need to assess the suitable scorecard that fits their vision and strategy to avoid implementing a meaningless and inappropriate scorecard. Reference Burberry Plc ‘Annual Report 2012/2013’ [online]. Available from Pearce, J. A., & Robinson, R. B. (2009). Strategic management: Formulation, implementation, and control (11th Ed.). New York, NY: McGraw-Hill. Bplans. Com (2011). Clothing Manufacturer Business plan. Retrieved on 15 February, 2014 from http://www.bplans.com/clothing_manufacturer_business_plan/company_summary_fc.php Kumar, U., Galar, D., Parida, A. and Stenstrom, C. (2011), ‘Maintenance audits using balanced scorecard and maturity model’Maintworld, 3 34-40. Kumar, U. Galar, D. Parida, A. Stenstrom, C. Berges, L. (2013) ‘Maintenance performance metrics: a state-of-the-art review’, Journal of Quality in Maintenance Engineering, 19 (3) 233-277 Proctor, R. (2012) Managerial Accounting: Decision Making and Performance Management. England: Pearson Education Limited Appendices SWOT Analysis Strength 1. Wide geographical presence with 500 stores around the world 2. Strong Branding 3. Diversified network Weaknesses 1. Poor efficiency 2. Low resonance in other countries Opportunities 1. Gain in popularity of e-marketing 2. Growth in emerging markets Threats 1. Rapid change in consumer preferences 2. Slowdown in economic growth Read More