Financial Analysis of Mark and Spencer Company - Example

FINANCIAL ANALYSIS OF M &S COMPANY al Affiliation) Key words: Satisfaction, Strategies, Online Contents Executive Summary 3 Introduction 3 Vision 4 Strategies 4 The Balanced Scorecard 5 Perspective: finance 5 Perspective: learning and innovation 6 Perspective: internal business process 6 Perspective: customer 7 Strategy Map 8 Recommendation 9 Discussion and evaluation of the balanced scorecard 10 Practical Use of Balanced Scorecard 10 Benefits 11 Limitations 11 Evaluation 12 References 14 Executive Summary Mark and Spencer is a multinational retail company based in the UK. The company specializes in selling high-value garments, luxurious food items, and general merchandise. Mark and Spencer is a public trading retail company whose shareholders comprise of thousands small investors. In 1998, it became the first retail company to hit the 1 billion pounds mark in pre-tax profit (Stern, Shiely, and Ross, 2001). The paper will strive categorically to afford a financial analysis of the company. The analysis is based on the financial statements of year 2013 and 2014. The report will be useful to the company’s board of directors in evaluating the company performance. The paper will examine the strategies available to the company’s management to augment the financial performance. A balanced scorecard will be developed to help assess if the business activities are in line with company’s vision and strategy. Through the scorecard, the board of directors will have an objective view of Mark and Spence operations. Moreover, the report will incorporate a quintessential strategy map providing a less detailed description of the aspects analyzed in the balanced scorecard. A recommendation is provided to the board of directors on the appropriate strategies to secure the company position in the retail market. Introduction Mark and Spencer is a leading player in the UK retail industry whose stores are located in strategic locations such as near the train stations or Oxford Circus. On a general note, the company revenue amounted to 10.3 billion pounds with a net profit of 506 million pounds from each of the 700 stores spread across UK. The company operations are divided into two major segments: the food segment and the general merchandize segment. The food section is the company top earner contributing 5.1 billion pounds of the company revenue. The general merchandize segment also provides huge earnings to the company and contributes 4.1 billion pound. The global competitiveness in the retail business has afforded several challenges to M&S Company. The company differentiates itself from its competitors by providing high quality products. The paper will provide a report that analyzes Mark and Spencer performance using the company’s financial ratios and making comparison with its competitors. Vision M&S vision is to transform the company from a British retailer to a leading multinational retailer and expand the global reach of its brand. Mark and Spencer focus on infrastructure transformation will allow the company to consolidate its market position as a multinational retailer. Emerging trends and online shopping are among the major drivers affecting the company since it has less control over them. Mark and Spencer core values include affordability, quality improvement and customer service delivery. Currently the company commands a huge market share though its profits are declining. The company vision is to provide quality and affordable food items and clothing. It is committed to understanding and meeting the customer’s needs in a consistent basis in the current dynamic and competitive retail market. Strategies M&S Company uses the high prices strategy to appeal to value-oriented customers. The company differentiates itself from other retailers in food industry by providing its own brand of food label and meals for special occasion. M&S strives to furnish its customers with an additional value for their money by providing standard and fresh foodstuff. M & S Holding has expanded its operations overseas by opening up additional stores in top travel destination around the world. As a result, the company has experienced a revenue boost and higher profit margin in the past few years. The company strategy in the food sector majorly lies on four basic values: innovation, quality, and healthy eating. Using its core competencies both in the UK and in the global market, it will focus on augmenting its growth in the food industry. The company is responsive to economic, social and technological factors given the dynamic nature of its market (Greiner, and Schein, 2008). The company is forced to keep up to the ever-changing trends in the clothing business and the expanding number of competitors in the market. The food sector contributes close to 50% to the company’s overall revenue in the UK market. The values have helped in promoting the M&S brand across international market (Nicholls & Watson, 2005). The Balanced Scorecard Perspective: finance Key success factors (objectives) Measures (KPI) performance level (Target) Summary action plan (initiatives) Profitability Profit margin Increase the profit margin from 7% to 15% Organization restructuring aimed at cutting down operating cost. Increase the sale revenue by penetrating new market Increase sale revenue Revenue Increase the revenue by 10% by year end Increase the customer base by penetrating new market cash flow Current ratio Increase the current ratio by 10% Reduce the number of credit purchases Review the current credit control system asset utilization Return on net assets Increase the current return on net asset of 0.26 pounds by 15% Introduce a target for each employee and allowance for employees who meet the target. Introduce an overtime from Monday to Saturday Perspective: learning and innovation Objectives Key Performance Indicator (Measures) Target Action employee motivation turnover rate Reduce employees turnover rate by 5% every year Engage the employees in the decision making process Expansion of product quality Market survey Become a global food brand Carry out a market survey on the areas that need improvement Establish a design team Expand the existing marketing channels The number of marketing channels worldwide Two every year Engage in franchising to promote the company brand label Identify new technology advantage processes Number of new products launched Become a digital company Design a team that focus on process re-engineering Perspective: internal business process Objectives Key Performance Indicator (Measures) Target Action Efficiency Employee response time to customer needs Minimize the response time by 20% Provide incentives to the employees Effectiveness Sales revenue per store Increase the revenue by 10% by year end Provide incentives based on the performance of each store Product quality Customer feedback Expand the brand label globally Engage a design team to make adjustment to the products based on the emerging trend Timely delivery Customer feedback Reduce the delivery time by half Put more emphasis on time Expand the business to other locations to reduce the delivery time Perspective: customer Objectives Key Performance Indicator (Measures) Target Action Selling price Market price To expand to other income levels by providing competitive prices Carry out a market to determine the optimal pricing mechanism Reliability Sales return Reduce the annual sales return by 10% every year Put more emphasis on quality improvement Develop products that meet the specific need of the customers Company image Market research Become a renown global brand Focus on quality improvement Provide guarantees to boost customers confidence Customer support Customer feedback Be the best organization that provides customer support service Organizational restructuring that promotes customer oriented initiatives Raise awareness to the staff on the importance of a customer Strategy Map Innovation and learning perspective Internal business process perspective Customer perspective Financial perspective Recommendation M&S holding strategies have facilitated the achievement of most it objective. In 2014, performance declined slightly compared to the previous year. However, with regard to the financial information provided, the company performed well compared to other companies within the industry. As at the year 2009, M&S Holding controlled a market share of 3.9%,four major retail companies in the UK control a huge portion. The competitiveness of the global environment presents a huge challenge to the company growth objective. For M&S Holding to overcome its external challenges, it should first ensure continual growth in its revenues (Jones, 2011). First, an occasional review of the company’s pricing model is necessary. The reviews should be in accordance with the market price signal. For instance, the company may lower it prices to a certain level to attract more customers without losing its sales revenue (Knox, & Denison, 2000). On the other hand, price increases should be done in accordance with the existing demand in the market. Moreover, the company should also review its discount offers with an aim of determining if the expected objectives are met. In addition, the company ought to invest in its online business that has been lagging behind compared to other companies in the retail business. With the emergence of new technologies, most customers prefer to shop at the comfort of their homes. The virtual world presents a huge market that is still not exploited by retail companies. Finally, the company should institute measures to reduce wastage in the entire business. For instance, through efficient use of power, renting vacant offices, and recycling waste materials (Han, 2003). The wastages reduction results in cost reduction and thus improving the company’s revenue. Discussion and evaluation of the balanced scorecard Practical Use of Balanced Scorecard The balanced scorecard is widely used in several organizations as a management tool to align the performance of a company with its vision and goals. It improves company’s communication and feedback process between the management and employees. The scorecard operates under four perspectives: the financial perspective, customer satisfaction, learning and growth, and the internal business process (Kaplan, & Norton, 2004). Each perspective is used to assess different aspects of the company business with an aim of ensuring an optimal capacity. The balanced scorecard provided by this report makes use of the non-financial and financial indicators of performance. Moreover, a strategy map is provided to show the cause and the effect of each aspect analyzed in the balanced scorecard. Non-financial measures are analyzed under the customer perspective, learning and innovation and the internal business process perspective. Both measures have a common goal of providing strategies of managing the financial performance of the company. Benefits The benefits of a balanced scorecard solely depend on its use. It must be used to measure the performance of the organization. Different organization apply different format of the balanced scorecard. The scorecard has two different applications that include strategic control and management control. Although they are superficially similar, they require different development, design process, and afford distinct benefits to the management of the company. Limitations Kaplan and Norton in their scholarly work claim that the balanced scorecard is a suitable strategic tool. However, in an attempt to achieve its goal, there are unexpected barriers. A number of limitations of the balanced scorecard are provided below. First Limitation Scholars argue that the balanced scorecard is only a theoretical model and therefore relies on the user’s previous experience. Under customer perspective, the goal is to increase the customer satisfaction (Leiblein, 2011). To boost the customer service delivery, previous experience is needed on the weaknesses of the existing customer service system. In short, this means that the use of balanced scorecard solely depends on experiences and it is likely to be ineffective in companies with no experience in certain areas. Second Limitation The balanced scorecard places less emphasis on key performance indicators. There is hardly any connection between the key success contributors of the company and the less performing areas. Often, this is due to a variety of factors such as input requirement and inter-dependencies. Therefore, the planning process is centered on the underperforming units and focuses less on key performing business units for the value growth in the future. Third Limitation The balanced scorecard fails to provide the company with the opportunity to develop synergies specifically between the underperforming areas and the value driven factors. However, it analyzes the weaknesses of the organization business model and affords measures to compute the intangible assets but fails to provide a platform to develop synergies. Fourth Limitation Fourthly, intricate communication processes provide a huge challenge to the organization. The communication of visions and strategies of the organization may be difficult due to the diverse employee’s approaches and the dissimilar ability to comprehend the strategies. In addition, the individual interest and ambition level may hinder the communication of the strategic direction. Evaluation The adoption of the balanced scorecard solely depends on the acceptance of the employees. The scorecard approach revolves around the macro aspects of an organization rather than the development of the employees. Team building and other employee development activities are not facilitated based on individual needs thus creating obstacles of resistance. Such barrier impairs the management ability to implement the balanced scorecard. Lastly, according to Hans in his article, the execution of the balanced scorecard solely depends on the response of the market change in which the company operates in (Han, 2003, p.676). Therefore, the balanced scorecard cannot be applied in all companies. A company is forced to make a strategic change in case of a significant change in the market. The company is, therefore, forced to make changes on the balanced scorecard as well as the strategy map in order to adjust the current goals. Additionally, the occasional adjustment of the balanced scorecard means the acquisition of data for the measurement. In the retail industry specifically for, a number of market changes are expected to happen due to inflation and recession or political factors. In implementing the balanced scorecard, M&S Holding need to communicate its vision and objectives to the staff in order to be successful in applying their strategies. The balanced scorecard plays a crucial role in strategic management. The financial perspective provides the main goals of the organization backed by other perspectives. The perspectives are designed to provide the most suitable strategy for M&S Holding specifically in the food market. The balanced scorecard is founded on the visions of the company and provides the strategies that could help achieve their objectives. The strategy map provides the cause and effects of each strategy in the balanced scorecard. For instance, under the customer perspective, by increasing the customer satisfaction with the strategy afforded by the balanced scorecard, it is expected to expand the sales returns. References Top of Form Bottom of Form Bourne, M. and Bourne, P. (2007). Balanced scorecard. London: Hodder Arnold. Greiner, L. and Schein, V. (2008). Power and organization development. Reading, Mass.: Addison-Wesley. Han, I. 2003. Knowledge management and organizations process, system and strategy. Bradford, England: Emerald Group Pub. Jones, P. 2011 Strategy mapping for learning organizations building agility into your balanced scorecard. Farnham, Surrey: Gower Pub. Kaplan, R. and Norton, D. (2001). The strategy-focused organization. Boston, Mass.: Harvard Business School Press. Kaplan, R. and Norton, D. (2004). Strategy maps. Boston: Harvard Business School Press. Leiblein, M. 2011. Technology strategy and innovation management. Cheltenham, UK: Edward Elgar Pub. Nair, M. (2004). Essentials of balanced scorecard. Hoboken, N.J.: John Wiley & Sons. Nicholls, A., & Watson, A. (2005). Implementing e-value strategies in UK retailing. International Journal of Retail & Distribution Management, 33(6), 426-443 Raynus, J. 2011. Improving business process performance gain agility, create value, and achieve success. Boca Raton: CRC Press Stern, J., Shiely, J. and Ross, I. (2001). The EVA challenge. New York: Wiley. Williamson, D. 2004. Strategic management and business analysis. Amsterdam: Elsevier, Butterworth-Heineman. Read More