Measuring Performance and Nature of the Business - Essay Example

?Measuring Performance Table of Contents Introduction 3 a) Explanation of the Nature of the Business 4 a) i. PESTLE Analysis 4 a) ii. Porter’s Five Forces 6 a) iii. SWOT Analysis 8 a) iv. Identification of the Six Main Factors 9 b) Benefits of Budgeting for Jengo Ltd 11 c) Balanced Scorecard Approach 13 Conclusion 17 References 18 Introduction Budgeting not only signifies the strategic objective of an organisation but also focuses on the process through which the ultimate objective shall be attained and the total expenditure likely to arise due to the execution of the planning. Similarly, forecasting tends to identify the profitability of the business plan and thus assists the organisation in decision-making (Prieskorn, 1975). Considering the importance of budgeting and forecasting in the development of an effective business plan, the paper will concentrate on the structuring of an effective business plan for Jengo Ltd. The objective of the paper is to identify the profitability of Jengo Ltd. that shall be beneficial for Palisade Plc. and thus shall provide with a reliable cause to purchase 50% of the organisation’s stake. In this regard, the paper will emphasise on identifying the nature of the business along with an in-depth understanding of the industry structure rewarding significant opportunities and noteworthy threats to the company’s success. The implication of balanced scorecard will also be considered in the paper to measure the performance of Jengo Ltd. Therefore, the paper will aim at supporting or opposing the decision of Palisade Plc. to purchase 50% of Jengo Ltd, based on the result of the analysis. a) Explanation of the Nature of the Business The nature of a firm depends largely on the business related environmental aspects such as economic fluctuations, social considerations, political involvement, technological development and other influencing factors. It is worth mentioning that Jengo Ltd is a five year old ladies’ fashion retailer in the UK (London and Birmingham). Thus, it relates to the national fashion retail industry of the UK. The business environment of Jengo Ltd is thereby discussed below through the implication of PESTLE analysis. Furthermore, the Porter’s Five Forces model shall be implemented in order to identify the opportunities along with threats likely to be faced by the company. A SWOT analysis shall also be conducted to recognise the strategic stance of the company with due consideration to its strengths as well as weaknesses. a) i. PESTLE Analysis Political Factors The political environment of the UK is witnessed to be fluctuating and in an unstable stage of recovery that in turn causes various challenges for the industrial sector of the economy. For instance, the spending cuts are stated to be the most crucial measures influencing the growth of the industrial environment in the UK (Stewart & Boffey, 2011). Economical Factors Along with the political environment, the economic trends in the UK are also stated to be in its recovery stage after the global turmoil of the recent economic recession. The current economic trend is recorded to grow by 0.5%, but is unstable in providing basic opportunities to the consumers. It is due to the fact that inflationary rates in the economy are growing with significant rapidity especially in the luxury product sector (Office of National Statistics, 2011). Social Factors The social factors in the economy are projected to grow at 0.7%. A majority of the population in the economy constitutes of people aged above 65. However, the life expectancy rate of females is recorded to be more than the males in the economy. The literacy rate is also favourable in the economy with almost 92% of the population being constituted with white ethnic group (Office of National Statistics, 2011). Technological Factors Fuelled up by the education and technology based living standards in the economy, business firms in the UK has also initiated to involve technological development in their organisational operations. On the similar context, the living standards of the majority of the population also depend upon technology to a large extent (Office of National Statistics, 2011). Legal Factors The fashion industry in the UK faces the strongest legal barriers in terms of copyright laws and intellectual property laws. In the recent years, the legal barriers have been strengthened to secure the interests of designers and customers (Lawdit, 2011). Environmental Factors Environmental factors do not have a direct impact on the fashion retail industry in the UK. However, the clothing industry along with other fashion related industries face significant barriers in terms of environment protection laws that in turn influence the performance of fashion retail industry (BBC, 2009). a) ii. Porter’s Five Forces The fashion retail industry in the UK is currently witnessing various challenges in terms of legal, environmental as well as economic barriers. However, the fashion industry possesses a significant position in the market contributes almost ?21 billion directly to the economy. Considering the industry to be quite significant, the government has also initiated to increase the grants for small size fashion retailers that are likely to increase the threat of new entrants in the market (UKTI, 2011). Fig. 1.2 Porter’s Five Forces Model (Lima, 2006). Availability of substitute products is a major threat for the UK fashion retail industry. The growing number of fashion designers and the trend of innovative designing have significantly fuelled up the threat of substitute products and services in the industry (British Fashion Council, 2010). On the similar context, the UK fashion retail market is significantly influenced by the global suppliers. In the current day context, the number of global suppliers in the UK fashion retail industry is also witnessed to increase which substantially enhances the bargaining power of the local suppliers (Guardian, 2010). The bargaining power of the buyers also tend to be high in the current situation of the industry due to the increasing income inequality and falling per capita growth that in turn is reducing the number of local customers in the industry (Office of National Statistics, 2011). Therefore, it can be stated that the fashion industry in the UK is quite competitive in the current situation. a) iii. SWOT Analysis Strengths Weaknesses Widely expanded in the local market of the UK Well-developed organisational structure Customer brand loyalty through customer satisfaction in the local market Concentrated only on ladies fashion retail industry Poor administrative planning Excessive expansion can result in ambiguity Opportunities Threats Favourable political conditions in terms of governmental grants Low bargaining power of local suppliers Intense involvement of technology in the industry Increased threat of new entrants High bargaining power of local customers Fluctuating political and economic conditions a) iv. Identification of the Six Main Factors The six main factors that can be evidently identified with reference to the above discussion relates to the threats faced or likely to be faced by the company in its near future and the weaknesses possessed by the company. To be specific, the company possesses few weaknesses in terms of poor administrative planning that can be quantified as the over-expansion of the company in the local market, i.e. five shops in the major cities of the UK along with two shops in London and Birmingham. The company also intends to establish three shops every year from 2012 which will require effective business planning and efficient execution of the administrative process. In lack of these services, the organisation shall face significant limitations in terms of perplexity and thus result in poor performance. Threats in terms of competition should also be considered which would require diversification in the product line of the company. To be precise, the six factors to be considered by the company in the process of preparing forecasts of the business are as follows. Competition in the national as well as international market: In the current market performance of Jengo Ltd. a strong influence of market share can be witnessed which is intended to be generated from expansion. However, to develop the overall competency of the company it should provide due consideration to the increasing market competition both in the local and the international boundaries. Need for diversification: The Jengo Ltd. is currently concentrated on the women’s fashion wear. On the contrary, the economic and social factors tend to influence the demand of such products and thus develop the market to be highly volatile to be concentrated on a particular product line. It is due to this reason that the company should diversify its operations to other sectors and sub-sectors along with market expansion. Need for well-structured business administration policies and planning: Similar to most of the small enterprises in the local market of the UK, Jengo Ltd. also lacks in proper infrastructural policies and operational method. In order to enhance its overall productivity in terms of competitive performance the company should focus on developing well-structured corporate governance. Major inclusion of technology: The future operations of Jengo Ltd. intend to intensify the inclusion of technology through online advertising and marketing of its products. This can be of significant benefit to the company as the trend of online consumption is enhancing considerably in the UK local market. However, it is subject to proper planning and budgeting. Customer retention through brand awareness: Jengo serves as a small local retail brand in the UK market and possesses a strong customer loyalty towards its services. Due to the fact that customer loyalty is signified to be quite important in enhancing the competency of a company, Jengo should also focus on improving its performance and enhancing its brand awareness for customer retention. Demand for the products in the targeted market: Technology, customer loyalty, diversification and other organisational and marketing strategies apparently depend on the demand for products as well as services in the targeted market. Therefore, Jengo Ltd. should provide significant consideration to the aspect with the purpose of identifying the demand for its products and services before implementing any of its aforementioned strategies. b) Benefits of Budgeting for Jengo Ltd Various studies conducted in relation to the aspect of benefits derived from formal budgeting in the case of small business firms have concluded that budgeting is quite vital in providing assistance to the overall performance of the organisations (Reid, 1999; Qi, 2010). According to Pinney & Woelful (1991), “A budget is a forecast of all cash sources and cash expenditures”. In the current day phenomenon, budgeting is considered to be a strong and vital support for the managers to forecast their success. In this context Kemp & Dunbar (2003) quoted that, “Planning and budgeting can help us lead our team to success”. Jengo Ltd. is recognised to be a competitive small business enterprise that though possesses an effective customer loyalty but lacks in proper planning to forecast its future performance in the fiercely growing competition of the UK fashion retail industry. In this regard, it can be stated that implementing the concepts of planning and budgeting can assist the organisational leaders to forecast its future success with pragmatic explanations. For instance, proper budgeting and planning shall be beneficial in recognising the errors in the business operations of the company and in the process of achieving the ultimate objective (Kemp & Dunbar, 2003). To be precise, budgeting assists the managers in having better control on its inventory issues with regular evaluation of its transactions and other financial operations. This in turn supports the organisation to manage its cost structure with efficiency by programming effective cash management activities. A better organised operational structure shall in turn assist the company in gaining efficiency in its operations such as recruitment, procurement of resources and others related activities (Reid, 1999). From an in-depth perspective, through budgeting Jengo Ltd shall be able to recognise the future growth prospects in the market along with obtaining an insight to the financial requirement of the operational process. For instance, the company is currently planning to boost its expansion in the UK fashion market by introducing three outlets each year on an average. With the given virtues of budgeting, Jengo Ltd will be able to identify the capital to be introduced in executing its business planning and thus re-consider its aim. Furthermore, budgeting and forecasting shall also provide an insight to the requirement of labour force and therefore assist in planning the recruitment procedure. In a nutshell, budgeting and forecasting shall assist the company to identify the pros and cons of its determined objectives and business plans. This in turn shall lead to the re-structuring of its entire business planning with the purpose of enhancing the efficiency and productivity of organisational performance with due consideration to the objective determined. In other words, the implementation of budgeting and forecasting shall assist Jengo Ltd in developing a coherent, well-organised and rational planning of the process aimed at achieving the organisational goal. c) Balanced Scorecard Approach Measuring the performance of a business firm, especially in the case of a small business organisation such as Jengo Ltd is stated to be quite significant. In this context, C. C. Johnson stated that “If one “gets” performance measurement right, the data generated will tell the user where the business is, how it is doing, and where it is going”. The author further stated that “A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-defined strategy” (Johnson, n.d.). It is in this context that measurement of the organisational performance is considered to be a broad concept and thus requires a well-structured framework in order to be executed effectively. The balanced scorecard approach in this case can be evidently supportive in providing a structured framework to the company with the purpose of measuring the overall organisational performance. A comprehensive definition of the approach depicts that “the balanced scorecard is a conceptual framework for translating an organization’s strategic objectives into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth” (Department of Energy, n.d.). In the implication of Balanced Scorecard approach, four different quadrants are considered to be significant in providing overall efficiency to the organisational performance, i.e. the financial aspect of the organisation, its customer orientation, organisational operations and development of its internal culture. These quadrants can be apparently identified from the diagram below (Kaplan & Norton, 1993). Fig. 1.3 Balanced Scorecard Approach (Johnson, n.d.). In relation to the performance measurement of Jengo Ltd, balanced scorecard approach can be stated as highly beneficial. It is due to the reason that the approach considers almost every vital aspects of the modern day business environment from financial issues to the issues related to employee and customer management. Thus, the approach shall be highly supportive in evaluating the appropriateness of the strategies implemented by the organisation and enhance the productivity of the company. Thereby, with the purpose of implementing this approach in the organisational system of Jengo Ltd, two indicators can be identified as most important from each of the four quadrants of the framework. They are as follows. Financial Perspective: Return on Capital Employed (to analyse the past and current performance of the company) Project Profitability (to forecast the future performance of the company) Customer Perspective: Customer Satisfaction Index (to recognise the effectivity of organisational performance in retaining customers) Market Share (to measure the competency of the company in terms of its customer services) Internal Business Perspective: Rework (to manipulate the efficiency of the organisational services) Project Performance Index (to quantify the future enhancement expected to earn in terms of efficiency in the organisational operations) Innovation and Learning Perspective: Revenue from new services (to measure the profitability of the business plan) Revenue per employee (to measure the productivity of each employee in contributing to the organisational success) Conclusion A well-structured plan is stated to be the firm base for decision-making of an organisation. The success of a particular business depends on its future business planning which in turn enhances the significance of an effective business plan. It is in this context that the efficiency of the business plan is supported by budgeting and forecasting of the business process (Lebel & Krasner, 2008). It is in this context that Jengo Ltd should consider the development of a business plan with rational explanation regarding the current status of the business performance and its future profitability. The measures that the company can apply in this regard is budgeting and forecasting along with the implication of balanced scorecard approach. Notably, the implication of balanced scorecard approach shall provide the company with an extra advantage to monitor its performance continuously and direct its strategies accordingly. References BBC, 2009. Bid to Buck 'Fast Fashion' Trend. News. [Online] Available at: http://news.bbc.co.uk/2/hi/uk_news/7899327.stm [Accessed June 30, 2011]. 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