Financial Analysis of Marks and Spencer - Case Study Example

A report on Financial Analysis of Marks and Spencer (M & S) By Location Contents Executive summary………………………………………………………………………………3 Introduction………………………………………………………………………………………4 Company identification…………………………………………………………………………..4 Balanced Scorecard……………………………………………………………………………….5 Strategy map……………………………………………………………………………………..11 Firm recommendations…………………………………………………………………………..13 Evaluation of Balanced Scorecard……………………………………………………………….15 Reference………………………………………………………………………………………...18 Appendix…………………………………………………………………………………………20 Executive Summary Marks and Spencer (M & S) is a leading retail shop in the UK. The company has thousands of shareholders who have devoted themselves and invested in the business. Similarly, shareholders play key roles in the growth of a business. On the other hand, this report entails the financial analysis and key performance indicators that are useful to the management. However, Balanced Scorecard is outlined to analyzed and measure the performance. The balanced scorecard contains the financial, customer, internal business processes and learning and growth perspective. Therefore, the financial perspective has details on the financial success of the company which include the profit or the target revenue. Customer perspective deals with improving the customer-market segment by building good relationship. Also, there is internal business process that entails processes that the business use to succeed and they are; innovation, operation process and post-service process. Lastly, learning and growth involves equipping employees with skills through training. M & S has the mission of transforming the company into an international multi-channel retailer. However, this has worked through the introduction of the online shopping. The digital strategy is trying to open up the market segment by reaching out to more customers. This report also, entails the strategy map that describes the causal relationships among the balanced scorecard objectives and measures. M & S has realized that, if they want to improve the management of their assets, then they have to integrate them into their management system. Introduction This report depicts the financial and non-financial performance indicators for Marks and Spencer for the two years (2013 and 2014).The current non-financial measures are viewed as useful predictors of long-term financial performance. Moreover, the company needs to use a mixture of both financial and non-financial performance indicators as part of its performance management (Parmenter, 2015). In case of financial goals, the company is driven towards getting higher profits. On the other hand, non-financial indicators help to improve the business as whole. The non-financial indicators like employee satisfaction, the quality of the products and the kind of services offered to the customers are vital to creating a stronger company (Varley, 2014). Therefore, the company can compete and perform better towards increasing their profit. A company or any organization needs a strategy map so that it can evaluate the various techniques to be employed. The strategy map helps in giving a clear direction on how the strategies are linked to each other. For example it will show how one or more strategies are influenced by the others. Also, this report contains a Balanced Scorecard and this will help in aligning the diverse key performance with the vision and strategies of Marks and Spencer (M&S) company. Company Identification Mark and Spencer have more than 21 million customers who frequently visit their stores. It is one of the leading retail outlets in the UK (Campbell & Rahman 2010). However, as a company they had to set their vision so that they could operate within their scope. Mark and Spencer’s vision is to become the world’s most known and sustainable retail outlets. Additionally, they will only do that by being efficient, innovative and hence they will benefit the society and environment as a whole. To support this vision, the company has designed a business-level strategy. This strategy involves differentiating the products so that they can be seen as unique by the customers. For years M & S have been revolving around trying to catch-up and pursue their stated goal. For this reason, M & S has a mission of transforming the company from a traditional British retailer store to an international, multi-channel retailer. This will enable the brand to be known by more customers worldwide. About the multi-channel aspect, the company has tried its best to invest heavily in terms of finance and time. Also, M & S is yet to deliver what it promised to the society. To compete in the retail market, firms always use relevant strategies to fight their competitors (Gamble & Thompson, 2014). The M & S stores have opted for digital strategy whereby it has introduced an on-line shopping and left the old ways of doing business. The strategy has worked because most consumers nowadays have preferred to research for the products online before making a purchase. Therefore, this has helped M & S on-line stores to prosper. Balanced Scorecard The structures below show Balanced Scorecard (BSC) for performance measurement. Financial metrics as depicted by BSC is regarded as the ultimate measure of any success in a company. However, these metrics are supplemented by three additional perspectives that include internal business process, innovation and learning and customer (Dilla & Steinbart, 2005). These perspectives have been proposed as the key drivers when creating long-term profitability margin (Hoque, 2014). For this organization (M & S), investing in employee training is the most important and will lead to quality improvement. Similarly, when the services are of high quality then the customers will be much satisfied hence becoming loyal to the business. Additionally, because of the loyalty of the customers their purchasing power will be high and this will increase the revenue generated. Therefore, increase in sales revenue increases the profit margin. The framework for Balanced Scorecard is given in appendix 1. How does M & S look to its shareholders? M & S plc financial perspective Goal KPI Target Initiative or ACTION Cash Flow To double the cash flow Cash flow operating cycle To enhance free cash flow and improve by 2.0 by the end of this year. Initiate a reduction on capital expenditure and improve on working capital management. Shareholders To provide better return on the shareholder’s funds by increasing it by 1.09% to 18.69% in 2014 (CW 1). Shareholders measures To stick with the dividends policy and increase the dividend payment to 20p by the end of the year. Shareholders in M & S to use cash dividends to purchase additional shares. Profitability Increase profit by 13.7% to £ 61.2 million (CW 1). Profitability ratio Improvement in net profit by a double digit figure (13.7%) by end of month 6. Increase revenue and reduce cost. Efficiency Increase efficiency compared to last year. Working capital management measures To control the company’s cost efficiently and increase it by 17% in six months. Increase staff and M & S operating efficiency How do customers see M & S? M & S plc customer perspective Goal KPI Target Initiative or ACTION Customer retention Retain high valued customers Customer surveyed To double the number of customer in the next two years. Increase social media fans form 1.8 million to 2.4 million by the end of the year. Offer quality services. Brand image Brand the image of the company Market survey To become a multinational company. The online retail market is expected to grow by 17% by next year. Customer satisfaction Increase customer satisfaction Number of customers profiled Improve on the services offered and reduce customer complaints by 15% in the next six months. Customers are subjected to friendly and quality services. Cost New customer acquisition Cost per customer Reduce cost per customer by around 5% every year. M & S has launched M & S.com website and 90,000 sq ft distribution center. What must M & S excel at? M & S plc internal business perspective Goal KPI Target Initiative or ACTION Innovation processes To introduce new products and services. Average sale To increase sales revenue by 10% at the end of the year. M & S is on the lookout regarding the latest trend of new products. Operation process To manage transport better. Cost per unit To reduce the cost of transport by 20% a year. Managing transport better to improved the efficiency of M & S system Post-service To exercise buyer power Sales delivery To improve the company’s sales by reducing the selling price by 0.7% before the year ends. The company has ensured it exercises buyer power. Can M & S continue to improve and create its value? M & S innovation and planning objectives Goal KPI Target Initiative or ACTION Capabilities for research and development Improve existing products. Productivity measures To improve and introduce new products six every two months. M & S has launched online shopping. Environmental scanning and customer knowledge Customer awareness Strategic awareness Increase the numbers of marketing channels by 10% at the end of the year. M & S products are advertised globally. Quality and assessment capability Greater value to customers Market feedback Ensure high-quality products and services are offered. Increase products quality by 13% every month. Employees are trained and also skillful manpower is used. In-house training Train the employees. Training and skill measures To equip more knowledge and skills to the employees. Introduce a six months training sessions. Introduce Make Your Mark Scheme as a career step. Strategy Map Innovation and learning perspective Internal business process perspective Customer perspective Financial perspective A strategy map is a diagram that shows the cause-and-effect relationship among the Balanced Scorecard’s objectives and measures (Cheng & Humphreys, 2012). Similarly, it provides the visual framework that integrates the objectives of the organization in the four perspectives outlined in the Balanced Scorecard. When using the strategy map, it has become easy to give a description of the causal relationship between the strategic objectives. The management of M & S has the mission of increasing the profitability, the cash flow, efficiency and the value of their shareholders, and how revenue growth is achieved. The strategy map gives a clear causal chain of strategic objectives as explained below. Employees who are trained in a better and quality management tools lead to a reduction in the time of the process cycle. Also, the process defects or costs are reduced. Additionally, due to improved processes, customers experience shorter lead times, delivery of the products on time are also improved. Through improved processes, the customers also receive fewer cases of defects in the products and services. Therefore, all these are because of quality improvement and it results in higher percentage of customer satisfaction, purchasing power and also retention. This will drive all the way to the company getting higher revenue and profit margin. The key objective in this strategy map for M & S Company is to attain a long-term profit margin. Mark and Spencer is a business organization that has the focus of generating more profit by increasing the number of sales made through the on-line shopping. It has identified the internet as the platform that most customers frequently visit. Therefore, M & S has taken the advantage of e-commerce due to the fast growing internet access. Digital strategy has a lot of benefit to the firm unlike the traditional way of doing business. The digital strategy is less costly and therefore, it replaces the cost that would have been used in advertising channels such as radio, yellow pages and televisions. The other benefit is that the digital strategy increases online awareness of the company. Online shopping is open 24/7 and many people nowadays use internet frequently and therefore, this will boost their access to the company’s profile. When using digital marketing strategy, it is simple to measure what is or not working on the part of your business (Humphreys & Trotman, 2011). For example, M & S can use Google analytic to measure the traffic on their site and this will give the number of people who have visited M & S.com. Similarly, the strategy provides a real-time result and the management does not need to wait for days or weeks for reply. Also, when marketing online, the company can refine its strategies at any point in time. This will help in trying to assess what part need to be changed or need some further improvement. The most important benefit is that digital strategy gives a far greater exposure to the company. Customers globally would have a chance to see the kind of products and services offered by the company from just one marketing campaign. Firm Recommendations This report has documented the financial and non-financial performance indicators in a designed Balanced Scorecard and strategy map. In circumstances when you are questioned what happens next, then a person find it difficult to respond. The following are the recommendations to the board in relation to the financial analysis of M & S. Leadership is an important variable when it comes to explaining success or failure. Without leadership Balanced Scorecard would be considered as a mere arranged reporting system. Also, it would be difficult to realize the gains from fixing the Balanced Scorecard in a system so that we can execute an effective strategy. Leadership is vital and it the most required in the strategy map when translating strategy into the linked strategic objectives. The map and the scorecard are interactively used together. If managers decide not to use leadership then it would be difficult for the four strategy focused principle to be mobilized and sustained. Therefore, leadership needs to be at the top for it to work. Secondly, the board needs to look at the financial perspective keenly to assess the cash flow, profitability of the firm, the efficiency of the organization and the shareholder. Since the dividend policy for the company is still unchanged, the firm recommends that the shareholder to use their cash dividends when purchasing additional share from the company. This is done through M & S’s dividend Reinvestment Plan. M & S should also be more aggressive in terms of profitability. Profitability is achieved when there is increased sales revenue and the customers’ purchasing power is high. Getting more customers is something that is not easy since the company needs to acquire customer loyalty and that is only possible when the products and services offered are of high quality. Also, under the financial aspect is the issue of efficiency. The firm recommends the board of M & S to improve on the staff and operation cost efficiency. However, about the customer perspective the board of M & S needs to look at the general aspect of the customers since without them then the business is dead. Customer retention is the key to each and every business success. Similarly, acquiring new customer also play a vital role in business growth. Therefore, these two aspects will be achieved only if the customers are satisfied with the products or services being offered. Also, the management should critically look at the gains or profitability of its loyal customers. When reviewing the pricing model, considerations must be put on the market forces of demand and supply. Also consumers need to be considered when prices are set since they are the most important members of the business fraternity. On the internal business perspective, the firm recommends for M & S to improve the innovation process by coming up with new products or ideas. The products or idea should be much different with what the competitors offer. Also, the company should reduce its operational costs by managing the transport sector well. This will be achieved by introducing one standard way across the main warehouse and more truck that will supply the products. Lastly, linking well with the supplier is good for the post-service cases. For the company to continue pleasing its customers, it should include the learning and growth perspective. However, this consists of training of the employees and also learning. Employee should be provided with in house training to sharpen their skill and expand on their knowledge. Also, the capabilities of research and development should be considered since they are vital at researching on new products and the customer needs. The customer’s knowledge about the products and services are also important. Therefore, advertisement is a good way to increase customer awareness. The firm also recommend for the assessment of the quality of the products and services customers are to be offered. When a firm has skillful employees with a vast knowledge and experience on interacting with the customers then the chances are high for the firm to prosper. Critically Discuss and Evaluate the use of Balance Scorecard Balanced scorecard is widely used by many organizations to measure performance from four diverse perspectives. These perspectives help companies to focus on their major issues and also translate their strategies into action (Ioannou & Serafeim, 2014). Similarly, Balanced Scorecard helps an organization to align key performance measures with strategy. Financial Perspective The financial objectives of an organization are covered by the financial perspective. This will help the management to keep an eye on the financial success of their company. According to (Tayler, 2010), the financial perspective is good at measuring the strategy, implementation and execution of the company and if they contribute to bottom line improvement. Also, it focuses on traditional return- based efficiency (Jindal, 2014). For example, M & S wanted to meet its profit target by the year 2104, therefore, it decided to train employees, provide quality services, reduce the cost, and hence this increased sales revenue Customer Perspective In this perspective, customers and market segments are identified by the managers. The customer and market segments provide a platform where the business unit will compete. When customer perspective is implemented well, then it would result in successful outcomes. Therefore, these outcomes include customer profitability, retention, satisfaction, acquisition of new customers. Similarly, it will include the market share in targeted segment. Mark and Spencer have attracted more than 21 million customers all over the world and it is trying to cater for all their needs hence gaining customer satisfaction. However, for M & S.com it is easier for them to retain their customers than finding new ones. Customers have become loyal and stick with M & S because of the online shopping strategy. The company has done what it takes to reach out to customers and it launched M & S.com website and 90,000 sq ft warehouse distribution center at Castle Donington. This is more convenient to the customers and the shoppers can shop from the comfort of their homes. Also, after the purchase, the goods are delivered to their door steps. Moreover, M & S have set new level of retailing by developing a more complex and extended shopping to have been experienced. The online retail market is expected to grow by 17% this year. Internal Business Process Perspective In this perspective, managers will try and identify the internal business process that makes the business to succeed. Therefore, it would be easier to implement the business strategy. Also the metrics in this perspective allows the management to determine the successfulness of their organization and if the kind of goods offered are in line with what the customers want. There are three principle processes that are used to identify the internal business process. According to Valmohammadi and Servati (2011) these processes include innovation process, operation process and the post-service processes. In the innovation process, M & S is designing and developing new products through sourcing suppliers and market research. Moreover, the company has migrated from Amazon platform which was a third party to their own bespoke platform and they are now able to manage how M & S.com website functions. On the other hand, the operation process requires the management to manage their transport system in such a way that M & S uses less cost. Lastly, in the supplier process firms try to exercise control or buyer power. M & S will do this so that it increases its figure by the end of the financial year. Learning and growth perspective This perspective entails learning and training of the employees within the organization. Therefore, in the near future customers will continue to be pleased. The employees in M & S are from diverse backgrounds and the company gives them an opportunity to develop their talents. However, most companies fail in an attempt to measure the outcome of learning and growth but M & S look different since they always measure the performance of their staff. For example employees in M & S always apply for training in order to improve their skills and also knowledge although it is not a primary focus for this company. Similarly, M & S provide employment to the youth through Make Your Mark Scheme. Therefore, young people are given confidence and skills to step towards their career ladder References Campbell, D., & Rahman, M. R. A. (2010). A longitudinal examination of intellectual capital reporting in Marks & Spencer annual reports, 1978–2008. The British Accounting Review, 42(1), 56-70. Cheng, M. M., & Humphreys, K. A. (2012). The differential improvement effects of the strategy map and scorecard perspectives on managers strategic judgments. The Accounting Review, 87(3), 899-924. Course Work 1 Dilla, W. N., & Steinbart, P. J. (2005). Relative weighting of common and unique balanced scorecard measures by knowledgeable decision makers. Behavioral Research in Accounting, 17(1), 43-53. Gamble, J. E., & Thompson Jr, A. A. (2014). Essentials of strategic management. Irwin Mcgraw-Hill. Humphreys, K. A., & Trotman, K. T. (2011). The balanced scorecard: The effect of strategy information on performance evaluation judgments. Journal of Management Accounting Research, 23(1), 81-98. Hoque, Z. (2014). 20 years of studies on the balanced scorecard: Trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), 33-59. Ioannou, I., & Serafeim, G. (2014). The consequences of mandatory corporate sustainability reporting: evidence from four countries. Harvard Business School Research Working Paper, (11-100). Jindal, A. (2014). An Overview of Retailing. Available at SSRN 2391046. Parmenter, D. (2015). Key performance indicators: developing, implementing, and using winning KPIs. John Wiley & Sons. Tayler, W. B. (2010). The balanced scorecard as a strategy-evaluation tool: The effects of implementation involvement and a causal-chain focus. The Accounting Review, 85(3), 1095-1117. Valmohammadi, C., & Servati, A. (2011). Performance measurement system implementation using Balanced Scorecard and statistical methods. International Journal of Productivity and Performance Management, 60(5), 493-511. Varley, R. (2014). Retail product management: buying and merchandising. Routledge. Appendix 1 Balanced Scorecard framework Read More