Business Strategy: Accounting & Finance - Case Study Example

Business Strategy: Accounting & Finance Introduction The world is changing at a fast rate so to retain the competitive position in the market companies have to devise strategies to combat cut throat competition. Each and every decision taken by the company directly affects its operation and market image. Therefore management has to develop strategies after undertaking external as well as internal variables into account. As and when there is any change in the market conditions, the business strategy needs to be updated to retain its effectiveness. In the given project a company will be selected and its prevailing condition will be analysed with the help of external and internal audit. While conducting this research basically secondary data will be used. Data will be collected from the annual report published by the company and other information available on the corporate website of the company. Apart from these sources, data will be collected from authenticated on-line sources and different news sites. Many a time organisations publish journals that provide useful information regarding different industries and the companies operating in it. For collecting data these journals will also be used. Once the data is collected it will be analysed to find out required information for conducting external as well as internal audit. Later on different strategic positioning techniques will be used to find out the most feasible strategy for the selected company. A strategic plan will be developed to implement the selected strategy. Once the plan is developed, requirement of the resources will be evaluated; targets will be set along with finalisation of time frame. This will not only assist in smooth implementation of the project, but will also help in evaluating that whether the process of implementation is progressing as per the plan. Marks & Spencer (M&S) The given project will deal with Marks & Spencer (M&S), a London based company operating in retail sector. It was founded in 1884 by Michael Marks and Thomas Spencer; they opened their first shop at 20, Cheetham Hill Road, Manchester (BBC News, 2008). With passage of time the company expanded at a fast rate; at present in UK Marks & Spencer operates more than 600 stores and around 300 stores in 40 different international territories (Marks & Spencer-a, 2010). The company maintains highly diversified product portfolio that comprises of clothes for men, women and children, food, cosmetics, homeware, technology and lot more. Marks & Spencer’s vision is “To be the standard against which all others are measured” and the mission statement says “To make aspirational quality accessible to all” (Marks & Spencer-b, n.d.). The company values certain specific element like “quality, service, innovation and trust”. Therefore M&S pays equal attention toward product quality and customer satisfaction. Before onset of the economic recession of 2008-09 the company was performing quite satisfactorily but the recession phase adversely affected the company’s profitability as well as operational efficiency. This is a high time for the management to set the future strategy for M&S so that the company can retain its competitiveness in both domestic and international market. Business strategy James Brain Quinn (1980) explained strategy as “the pattern or the plan that integrates an organisation’s major goals, policies and actions sequences into a cohesive whole (John & Gillies, 1996, p.176). He also explained that a well formulated strategy assists in proper allocation of the resources to meet short term changes in the external environment. A business strategy answers certain vital questions like: What the business is trying to achieve in long-run? In which market does the business should compete and the nature of activities involved in that particular? How the organisation can enhance its competitive position? Which resources the company needs to acquire to achieve competitive position in the market? How the external environmental conditions effect the business? What is the expectation of stakeholders of the organisation? In an organisation strategy is formulated and applied at different levels in the business; these are as follows: Corporate Strategy: At this level the strategies are formulated to meet the stakeholders’ expectation, hence these are called “mission statement”. Business Unit Strategy: These strategies are formulated to direct operations of the business and to gain competitive position in the market. Operational strategy: These strategies are designed for each functional unit in the business and help in achieving corporate as well as business unit strategies. In the organisation strategy management process takes into account three interrelated steps: strategic choice, strategic analysis and strategy implementation. Thus strategy management is a dynamic process. Stakeholder’s analysis and its significance “A stakeholder in an organisation is (by definition) any group or individual who can affect or is affected by the achievement of the organisation’s objectives” (Rae & Wong, 2004, p.136). Therefore the stakeholders have a stake in the company’s decisions, so the management needs to conduct stakeholder analysis. Figure 1: The Stakeholders of an organisation (Source: Weiss, 2008, p.47) Stakeholder analysis is a tool that assist in identification and description of all those who have stake in the company. Such analysis is conducted on the basis of the stakeholder’s attributes and their interrelationship with different issues prevailing in the organisation. Grimble et al. defined stakeholder analysis as an approach for identification of the stakeholders and their respective interest in different system of the organisation (Buckles, et al., 1999, p. 102). There are specific steps that need to be followed while conducting stakeholder analysis; these steps are summarised and presented below: Identification of the purpose for conducting analysis Understanding the decision making process of the organisation Identification of the principle stakeholders Investigation of interest and character of the stakeholders Analysing the patter in which stakeholders interact with each other Defining the option to be followed in the organisation It is quite clear that stakeholder analysis provides vital information regarding the stakeholders hence the management takes the information into consideration while developing business strategy. The management of an organisation develops stakeholder matrix while developing business strategies. This matrix segregates stakeholders into four distinct categories and also explains how each of the group should be satisfied. Figure 2: Stakeholder Matrix (Source: Iba, 2009, p.30) Therefore stakeholder analysis assist in segregating the stakeholders in different categories on basis of their priority and thus it helps management in developing a plan that explains what role these stakeholders will play in strategy development process of the organisation. Hence stakeholder analysis plays a significant role in developing and implementing business strategy in the organisation. Environmental & Organisational audit of Marks & Spencer While conducting the environment analysis of Marks & Spencer, PEST analysis was conducted. It is provided as below: Political Environment: UK always had a more stable and well balanced political environment (Cabinet officer, n.d.), but at present there is certain degree of uncertainty. The government is facing a major challenge to balancing the risk associated with economic slowdown and budget deficit (Cannell, 2010). The political condition in other nations is also not very stable. Economic Environment: Effect of economic recession of 2008-09 was quite harsh in all the developed nations and UK was no exception. Many well developed, larger financial institutes were on the verge of getting bankrupt. The government assisted many companies by providing stimulus packages and injecting liquidity in the economy. However at present the government is facing the risk of sovereign debt crisis and the nation may face double dip recession (Economy Watch, 2010). On the other hand the BRIC nations are enjoying a healthy economic growth (BBC News-a, 2010). Social Environment: In UK the rate of population is quite slow, hence after few years majority of the population will be in their mid age (30-40 years). This indicates the demand for trendy and fashionable clothes and accessories will decline in these nations (CIA, n.d.). This is true for almost all the developed nation whereas condition will be different in developing countries like China, India and Brazil. In future these nations will have a large part of the population in the age group of 18-30 (Population Reference Bureau, n.d.). Thus in developing nations there will be high demand for the trendy clothes and accessories offered by M&S. Technological Environment: The last century can be called the era of technology advancement as because technology underwent fast change and this is clearly visible at each and every market segment. Technology does add competitive advancement in the retail companies where the concept of web based marketing and e-commerce are gaining ground day by day. Organisational audit: To determine the health of the organisation and to understand how the company is performing, an organisational audit was conducted. Through organisational audit the financial performance and market position of the company was determined. Some vital financial ratios are given below: The given graph indicates that in last few years (2005-2010) the inventory turnover rate is increasing. This indicates that the company is unable to circulate its stock at proper rate. As the stock is remaining in the stores for quite long, so it increases the requirement of working capital. Receivable turnover ratio indicates that how well the management manages its debtors. A long receivable turnover ratio indicates poor cash management technique. In 2008 the receivable turnover rate declined and hence it effected requirement of capital. As a result cost of capital enhanced. However the management succeeded in improving receivable turnover rate. Current ratio of a company reflects the liquidity state. Due to recession phase liquidity of the company declined in 2007 but as the world’s economic condition is reviving, liquidity state of M&S is also improving. Quick ratio indicates cash and cash equivalent possessed by the company, so it gives better information of short term liquidity of the company. Quick ratio of M&S is showing a steady improvement from 2007 onward. Profitability state of the company was analysed through operating profit ratio. Although the revenue of M&S is increasing year after year but the company’s profitability is constantly declining. This indicates that M&S’s operating efficiency is declining and thus it is a matter of concern. Debt / Equity ratio of a company is a good way to find out the risk associated with long term solvency of the company. In 2008 M&S took debt from the market to finance its operations. As the market conditions are improving, management of M&S is trying to pay back the debt. M&S is also increasing equity to fulfil cash requirement; hence the Debt/Equity ratio is reducing steadily. After undertaking the financial analysis it appears that the company’s financial position is improving at a moderate rate, but declining profitability and slow movement of inventory is a matter of concern. Strategic positioning of Marks & Spencer Before developing a strategic plan, it is important to analyse the competitive position of the company in retail market. As M&S is an international company having operation in different part of the world, so M&S was compared with some of the big players in retail sector. Profitability In terms of profitability, M&S is much ahead to its rivals, Tesco and Sainsbury. However the other retail companies can better maintain their operating expenses, hence M&S need to reduce its operating cost to enhance its competitive position. When return on equity ratio was compared among all the three companies, it was found Tesco is much ahead of M&S. Hence the investors of M&S may not be much satisfied with its performance. Liquidity As compared to the other retail companies, liquidity state of M&S is still a little low. This may sometime lead to short term solvency. Long-term Solvency Debt – Equity ratio of M&S is better as compared to its other rivals. In the financial year 2009-10 M&S repaid some debt and issued fresh equity to further reduce the solvency risk. Market Value Higher price – earning ratio indicates the popularity of the stock among its investors. The given chart explains that P/E ratio of M&S is quite low as compared to its rivals. Thus the company needs to improve its market image. Strategic Plan After considering the results of above given analysis it appears that the retail industry is a highly competitive sector. The retail market of UK is more or less saturated whereas on the other side there exists opportunities in international retail markets, especially in the developing nations like China and India. So a strategic plan will be developed for M&S to improve the competitiveness. “Strategic planning involves gaining insights about where you are now, gathering the information that identifies where you should be in the future and generating the decisions that will bridge the gap” (Lake, 2002, p.viii). The company will first develop corporate strategy that will be further broken down in business as well as functional strategy. The recommended strategies that can be adopted by M&S are discussed below: 1. Reducing operational cost to enhance profitability. 2. Gaining cost leadership in existing markets to increase market share. 3. Expand the business in developing nations where the company already has its existence. 4. Undergoing M&A to reduce competition in domestic market. 5. Enter in new potential markets. 6. Developing new products and services. 7. Gaining synergy through vertical as well as horizontal integration. Evaluation of strategies Before finalising the business strategy for M&S, the above given strategies will be evaluated with the help of grand strategy matrix. Grand strategy matrix is based on two components: the competitive position of the company and the rate of market growth. Figure 3: Grand Strategy Martix (Source: Kilpatrick & Johnson, 1999, p.624) M&S enjoys a moderate competitive position in UK as well as in other developing markets, whereas the retail industry of UK is more or less stagnant. Hence the company belongs to IV quadrant. On the other hand international retail sector is growing at a fast rate mainly in developing countries hence in international market M&S belongs to I quadrant. Therefore M&S will develop separate strategies for domestic as well as international market. Hence in domestic market company will follow “limited growth strategy” and for the international market M&S will imply “substantive growth strategy”. In UK market M&S will reduce operating cost and it will undergo integration. For international market the company will expand its presence in existing markets and will try to enter new unexplored markets. Comparison of the role and responsibilities while strategy implementation Virgin train offers service in UK and it is a part of Virgin group. In the below given table a comparison has been made to reflect the difference between role and responsibilities while implementing strategy. Marks & Spencer Virgin Train Management As the degree of competition is high, hence management has to develop strategy that enhances the competitive position. While implementing the strategy role of the management is to analyse changes taking place in the market as well as in the strategy followed by the rival. So the strategy needs to be revived at regular interval of time. As the degree of competition is not that very high, hence while developing strategy aim is to fulfil stakeholders’ demand. The management will pay special attention toward changing needs of the stakeholders and thus their responsibility is to take active part in implementation of the strategy. Employees Employees need to take active part as they are the one who have sound knowledge of the changing customer behaviour. The employees need not to participate that actively as customer behaviour can be analysed with help of data stored in data warehouse. Stakeholders The stakeholders will play important role in strategy development and implementation. The stakeholders are taken into consideration while developing the strategy but while implementation they need not get highly involved. Resource requirement, target and timeframe At present M&S enjoys a moderately sound financial state but raising new capital may be problematic due to economic uncertainty in European nations and slow rate of economic recovery in US. Hence the company should try to fund the projects with retained earnings. If required M&S should divest loss making stores to finance the expansion plan in developing nation. Backward integration is also a good way to reduce cost of raw material. The main target of the company is to open new stores in developing countries and to enhance profitability of all those stores operating in UK. The whole plan needs to be evaluated at quarterly basis to verify that things are propagating as per the plan. The given strategy is for a period of 5 years but it needs to be revived at annual basis, if needed. Recommendation & Conclusion The above given analysis clearly explains that retail sector in UK is a highly competitive one, thus M&S should enhance its competitive position by reducing the cost of operation and by enhancing brand image. Company should divest loss making stores where as profit making stores should be renovated to attract more number of customers. Apart from low profitability low inventory movement is also a matter of concern for the management of M&S. Hence company should improve its supply chain so that lowering the inventory should not increase the risk. Backward integration with the suppliers is also a good way to get access to high quality material at comparatively low rate. As M&S will follow a substantive growth strategy in developing markets, hence it should open new stores. However finance may be constrain for expansion, so it is better to go for joint ventures. The local retailers can also proved vital information regarding customer behaviour and local market situation. Therefore it can be concluded that by using specific strategies for specific market, M&S can soon occupy the position of market leader in both domestic as well as in international market. Reference BBC News. December 19, 2008. The History of Marks and Spencer. [Online]. Available at: http://www.bbc.co.uk/dna/h2g2/A43825629 [Accessed on July 1, 2010]. Buckles, D., International Development Research Centre (Canada) & World Bank Institute. IDRC. 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