Strategic Capabilities and Competitive Advantage of Next UK - Essay Example

Company Report: The Case of Next UK by Student’s name Code+ course name Professor’s name University name City, State Date Introduction Next UK is arguably one of the largest companies listed on the UK stock exchange. The corporation, which specializes in the retailing of household items such as attire and footwear, has branches and outlets in many countries across Europe (Next 2007). The company, whose products are exported to many countries, has been described as one of the most money-spinning organizations listed in the UK stock exchange. Having come into focus during the 2007/2008 accounting year when its net worth went negative, the company has undergone a number of transformations with much of the restructuring focusing on the capital aspect of it. Talking of capital, the company has taken a big step in moving from equity funding to debt financing. This way, they thought, the earnings per share could change significantly. This paper seeks to report on the current position of the company in light of financial performance, capital structure, competitive advantage as well as the weaknesses and strengths. The strategic capabilities and competitive advantage of Next UK Strategic capabilities are those strengths that allow a company, an organization or an individual to perform better than other individuals or organizations operating under the same circumstances in the same industry (Kevin 2006). On the other hand competitive advantage is the capability of an organization to perform better than competitors in the same industry, given the same amount of resources and operating under the same legal and economic framework. In essence therefore strategic capabilities are long term strengths that may enable an organization to perform better than competitors in the same field over time. It is important to understand that strategic capabilities are internally generated strengths that propel the performance of a company making it appear better than competitors. For our purpose, Next UK shall be evaluated with the main objective of trying to establish the internal procedures and practices that have earned it the competitive advantage it is enjoying over other organizations. Arguably, one of the most important ways through which trading concern can gain competitive advantage is through thorough marketing (Rivoli & Waddock 2011). The efforts of the marketing department of any going concern determine the organization’s direction and relative position in the industry. Talking of marketing, Next UK is one of the most active organizations in the industry of clothing and home ware. The company has invested a lot into its marketing activities. It is for this reason that the managers have elected to use all the available channels of marketing. The prominence that the company has given to online marketing has been credited for the successful marketing strategy. The company carries out its e-marketing through many websites and search engines, its home website being the most prominent medium. Through the use of such important innovations as the search engine optimization feature, the company has gone an extra mile in capturing the attention of online shoppers in Europe. This company is arguably the strongest and most aggressive UK-based Corporation. The links they have established in many online networks are strong and well maintained. Today, an online shopper anywhere across the world can access the information on the products being sold by Next UK since the database of the company is connected to various blog spots and social networks (Next 2008). The company has fan pages and profiles on the key social networks, Facebook and twitter being the most prominent. Through such social sites as Linked In the organization sources for human resources besides carrying out intensive marketing. Such intensive marketing gives Next UK a competitive advantage. Another strategy that has given the organization a considerable competitive advantage is the fact that it has prominently embraced corporate social responsibility. This is a concept through which the organization gives back to society. By giving back to society, the essence is that the organization offers some services to the organization without any direct gain in return (Sabadoz 2011). In other words, the organization acts charitably towards the community. One of the ways through which Next UK carries out the concept is through organizing social functions through which members of the public interact, socialize and have a good time. The events, mainly designed for children can be attended over the holidays when parents have the time to unwind. Additionally, the organization sponsors may events such as beauty contests through which it awards the talented models. The organization has made the concept of social responsibility part and parcel of its marketing strategy. Next UK, as part of its corporate social responsibility package pays taxes to the government in good time and without failure (Reng &Huang 2011). The organization has been named one of the top ten most reputable firms in the United Kingdom. This gives it a competitive advantage over the other firms in the sense that customers take pride in being associated with a reputable organization. The reputable nature of the organization makes the potential clients associate the organization’s products with quality. This in addition to the total quality management function of the organization makes it have an edge above the rest of the firms in the industry. The competitive advantage that accrues to having a good reputation is sufficient in attracting new potential shoppers (Bishop 2008). In its social responsibility program, Next UK acknowledges that it owes a lot to the presence and cooperation of its customers, suppliers and the general public (Next 2009). As such, the organization acts responsibly when dealing with all of these stakeholders. For instance, the organization pays its suppliers in good time and maintains reliable correspondence with them. Such correspondence and timely settling of bills and debts ensures a steady supply of raw materials and this in turn makes the organization’s activities go on uninterrupted (Mackey et al 2007). The uninterrupted supply as well ensures constant supply to the consumers. In his report of the year 2012, the Managing Director of the company mentioned that the consumer was the most important stakeholder and that having such a stakeholder satisfied is the beginning of success. The multinational nature of the organization is another advantage that Next UK enjoys over most UK based clothing and home ware companies. The company has branches and outlets in other countries. Most of the consumers that are loyal to the company are non-UK residents. This explains why the company has invested so much in mail order business. This is a system of doing business, which entails the customer placing an order for their goods through a mail (Clarke 2005). The payment is either wired or sent through a similar manner and the products are shipped to the customer. This form of doing business has taken Next UK an extra mile in dominating the foreign market. This, coupled with intensive online marketing has boosted the performance of the organization in foreign markets thereby giving it a competitive advantage. The capital structure of Next UK The capital makeup of a corporation is the mix of the sources of long-term financing. Characteristically, the capital structure of a business is evaluated in terms of the proportion of equity to debt. Equity refers to the contributions of the owners also known as the shareholders of the company into the company’s long term financing (Smithson 2003). This is usually raised through the sale of shares in the shareholders are the last parties to be considered in the event that the company has closed the financial year and is in the process of distributing its profits. The equity holders are not guaranteed a profit share since they do not have a fixed claim in the company. Similarly, in the event that the company is undergoing dissolution, the equity holders are the last ones to be considered since the debt holders are claimants against the wealth of the company (Puxty et al 1988). On the other hand, debt is a fixed return type of capital. This way, the interest on debt must be paid, whether or not the company makes a profit. This is the major merit of being a fixed return claimant in a company. As per the 20112 annual report, the company held 300 million sterling pounds in bonds and 350 million sterling pounds in bank commitments. During the year, the debt to equity proportion was at 6:01. This is to say that the capital base of the company is almost entirely made up of debt. The 2012 final accounts reflect a capital structure made up of 652.1 million sterling pounds and equity of 222.7 sterling pounds. This trend indicates that the capital structure of the company is highly levered. Leverage refers to the extent to which the company employs the use of debt. A highly levered firm is associated with many merits as well as a considerable number of demerits. Among the key merits is the fact that the earnings per share will always be higher than that of another firm with similar financial performance and less leverage. Additionally, debt capital is cheaper compared to equity. The floatation and allotment costs associated with shares make equity a costly alternative. One of the key advantages enjoyed by Next UK is the fact that the interest payable to the debt holders is a tax allowable expense. Such tax deductible expenses are a saving to the company. The amount saved in the long run can be re-invested paid out to equity holders hence boosting the earnings per share. Next UK saves such money into reserves as they can come in handy at times of financial adversity. This is part of Next UK’s contingent plan. Worth noting is the fact that the high leverage affects Next UK in many negative ways. For instance, the company’s investment decisions are affected by the debt covenants signed between the managers of the company and the providers of long term debt. Additionally, the assets bound to the debts cannot be sold or handled in any manner without the consent of the debt holders. The fact that Next UK is highly levered is as well a merit in the sense that it compels performance. The debt holders, being fixed return holders, are entitled to their interest whether or not Next UK makes profits. This compels the managers to push for results. Comments of the company in context of the industry Next UK is performing exemplary well in the clothing and home ware industry. It has emerged as a market leader in the UK industry of clothing and home ware. Being one of the most profitable companies, Next UK attributes its success to ecommerce and online exchange of goods and services. Unlike most competitors in the industry, the company has embraced retail mail order business (Newswire 2012a). The company is expanding in all dimensions basing the argument on the financial performance as well as the increase in sales. According to the 2012 report, the sales have gone up by an approximate 4% in a 12 month financial year. The expansion in the company’s sales has increased the profits by an approximate 15% as the group average. Most of the company’s trading takes place online through its website that has well over 3 million active customers. Active customers are those that engage in regular trade, majorly buying for resale. Next UK, being a large scale retail dealer, sells goods to other small retailers who sell the products in various markets across the world. Additionally, the company runs more than 500 stores across Europe with more than 200 outside Europe being run through franchise (Newswire 2012b). Such franchises have enabled Next UK cut down on the costs of distribution. The level of technology embraced by the firm is beyond reproach according to company standards. The rationale behind the use of such high technology is the fact that the firm is so much reliant on the internet for such functions as correspondence, marketing, human resource management, trading and transacting, as well as, customer support and services. The fact that the organization uses such technology has enabled it to reach more potential buyers. In 2012, Next UK recorded an increase in the number of customers by 9.6%. This is an indicator of a firm that is tending to market leadership. Research in the industry has indicated that the numbers of organizations using ecommerce are many, but none matches the extent to which Next UK does (Next 2012). This again gives the firm an upper hand when it comes to commanding the global market. It is for this reason that the chairman of the firm expressly states that the organization is in the right track towards achieving its goal of undisputed customer satisfaction and actualizing the company vision. At its current position the organizations results has been defined as being satisfactory and well above industry averages. Cross sectional ratio analysis has proven that the company’s performance is above industry averages. This means that it is performing better than most rivals considering the fact that cross sectional analysis entails comparison with all companies at the same level and in the same industry. Share performance for the last four years Ahlstrom, D. 2012. Innovation And Growth: How Business Contributes To Society. Academy Of Management Perspectives, 24(3), P11-24 The share of Next UK has performed well over the past four years. In the year 2007, the firm recorded a negative net worth. This was the worst performance in the history of the firm. Close investigation and discussion indicated that the solution was to acquire more debt finance than the equity capital (Next 2010). As such Next UK set out on a buyback binge. The aim of the buyback spree was to increase the earnings per share and reduce the overall cost of capital. The cost of capital of a company is its required rate of return. As such, the shareholders realized that there was need for a reduction in the cost of capital. The argument behind the buyback spree was that if the earnings of the company could remain constant and the number of shares reduced, then the amount of profit payout accrued to one share would be high. Again the buyback was the most suitable alternative given that there was lack of foreseeable opportunity. The fact that the 2007/2008 financial year reflected a net worth whereas the firm has a positive net value indicates that the buyback decision was and still is a successful way increasing the earnings per share and consequently correcting a deficit net worth (Jones 2008). As observable from the diagram above, the performance of the share of Next UK is at its best in the current financial year. The 2007/2008 depression indicates the low period when performance was quite poor. Additionally, dividend per share and the earnings per share are directly related, such that an increase in either ratio results in a corresponding increase of the other. Worth noting is the fact that currently the share price stands at 36.03 sterling pounds. Academic underpinnings Next UK has been among the organizations selected for case studies by scholars and researchers especially after the fall of the 2007/2008 accounting period. The academic reviews and underpinnings that have been done in relation to Next UK have revealed substantial truth yet have both strengths and weaknesses. The most popular academic reviews concerning the company are done in relation to the capital structure, social responsibility as well as the extent of ecommerce and use of technology. Scholarly reviews have indicated that the use of more debt in the capital structure reduces the cost of capital and increases dividend per share as well as the earnings per share. Thus they have argued that this is an effective decision taken by the management of the firm. One of the strengths of this academic view is that it portrays a good image of the company hence attracting the interest of potential investors. The major weakness of this approach is that there is a high possibility of modification and falsification of financial results (Ahlstrom 2012). It may fail to reveal the actual implications of investing in the economy. The second area where the scholarly efforts have been emphasized is on the function of social responsibility in achieving better performance and improving profitability. The scholars argue that the concept of corporate social responsibility on profitability is twofold and depends to a great extent on the kind of activities that the organization incorporates into its social responsibility plan (Hill & Jones 2008). For instance it is clear and quite understandable that from the argument above one of the main activities that next incorporates into its social responsibility program is the sponsoring of beauty contests. Such an activity amounts to killing two birds using one stone because the idea is both a marketing strategy and a way of promoting the society. The weaknesses of the concept of social responsibility are rooted in the idea that it is a dead weight expense as it has no direct reward. Conclusion In conclusion, it is quite clear that from the foregoing, Next UK is a well recognized retail that has survived the test of time. The organization has effective contingent plans bearing in mind the speed with which it recovered from the negative net worth. It is worth observing that the organization is one enterprise that is focusing beyond the borders of the United Kingdom and seeking to gain a substantial market share globally. The EPS of the company is on the rise and so is the share value. The company is achieving better results by the day following such effective financial planning as the replacement of equity with debt finance through buyback sprees. as per the statement of the chairman, the sales have gone up by an approximate 4%. The overall business performance has improved by 5% and the share buybacks plus the sale of subsidiaries have yielded 290 million sterling pounds. Reference list Ahlstrom, D. 2012. Innovation And Growth: How Business Contributes To Society. Academy Of Management Perspectives, 24(3), P11-24 Bishop, J. 2008. 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