The Role of International Companies - Case Study Example

Introduction Mark & Spencer (M&S) is the second largest retail chain store in the UK and has a market share of 11 in clothing and 4.3% in food. Ithas 760 stores in UK and 30 countries around the world. (see Annual Report) M&S profits peaked in 1998 when it crossed the £ 1 billion mark that year. It was the highest achieved by a UK retail chain. From then until 2003 it was downhill. In 2004 a new CEO Rose took over the reins and M&S slowly but surely got back to making higher profits every year since, although they are still far from the billion pounds they made in 1998. (see Appendix 1) The cause of the steep fall post 1998 was its poor strategy and it was a change in strategy again that has seen reversal of the lean period. Several major factors affected profits of M&S. Profits are the barometer of public support and financial performance. Rivals had switched to source their products from abroad at cheaper prices while M&S continued with the costly UK suppliers. As a result margins came under pressure, sales became stagnant and profits plummeted. From a high of a billion pounds in 1998, the profits fell to a low of 145 million in 2001. M&S were forced to curtail their dependence on UK suppliers and resort to other means for sustenance. (see Appendix 1). The suppliers as stakeholders had great power. The second factor was the company policy not to accept credit cards. This had become a universal phenomenon and denial was luring younger and more mobile customers away to other rival outlets that offered this facility. The customer as stakeholder was dissatisfied. The third factor was that M&S had abandoned its high street image and had gone for low end products like rivals were doing and it suffered an image loss. The top management erred in it strategy. It was earlier known for quality of its products and it was no longer a leader in that segment. The shareholder as stakeholder was affected by poor performance. This forced a serious rethinking in the boardroom and led to a total revamp of both control and strategy of the company. A new post of Chairman as well as a new one for a CEO, as against a combined post, were created and have since seen the company’s fortune turn around. M&S, chastened by the serious erosion in customer loyalty and profits decided to revert to its roots. The stakeholders had to be cared for. It introduced a new range of classical clothing for women and it was reported by Jess Cartner-Morley, the Guardian fashion editor, in 2001, that M&S has resorted to regain the title of Britain’s best loved store: Women’s Institute Chic, and has abandoned attempts to compete with Top Shop (Arcadia), Hennes, Zara and Mango who dealt in cheap catwalk copies. They decided to go back to their core customer, the highly fashion and style conscious woman. In 2004 it changed the top management and Stuart Rose was inducted as CEO. He has since then transformed the company as can be seen from the financial results. The profits went zooming from £145 millions in 2001 to £745 million in 2006. The dividend soared to 18.3 p in 2007 Balance Sheet (see Chairman’s Foreward) and the EPS rose to 34.4 p in April 2006 from zero in March 2003. (Appendix1) By 2007 UK general merchandize sales recorded a 2,9% year on year increase suggesting that M&S sales have been better than rivals, despite the vagaries of weather that have affected every retailer in the country, including M&S. Analysts are of opinion that M&S have probably done better than the rest as the latest figures of the rest have yet to come in. Competition & Current Strategies Since M&S is into retailing it has competition from similar retailers like Tesco and Sainsbury as well as clothiers and fashion shops like Topshop. Competition is intense as the home market is maturing. The ideal way to handle this competition is to seek competitive advantage by doing the same things but doing them differently (Porter M.E. 1966). The clothing division of M&S had already taken a beating in the market in the late nineties when the company shifted its focus to cheaper varieties in order to face competition from other retailers. However this strategy backfired as firstly they lost their image as a high fashion brand and the fashion conscious women and girls shifted loyalties. Secondly they could not match the prices of the competition that were sourcing their wares from third world countries operating on sweat-shop practices. For positioning themselves they decided to shift their focus to food and hence the emphasis now came to be on wider variety in new eco-friendly packaging that was now offered to the customer. This meant they had to change the layouts of their stores to offer more legroom to the customers and better displays. M&S undertook to standardize their store layouts all over the world. While this provides better ambience and larger spaces for customers, it is also an attempt to form a recognizable pattern to give it some distinction and recognition. This aspect has a dual role. It is a Positioning exercise with an aim to providing an eco-friendly environment at its stores. This pattern registers well with the customers who then sub-consciously accept it as a standard by which they judge and evaluate other outlets. This is a very subtle way of adding value to their stated objectives. M&S also found that the centre of power that lay with the Chairman who also doubled up as CEO was not in tune with changing demographics and customer preferences. In late 1998 and 1999 the younger customers had different outlook and the earlier values and vision of the last fifty years required a change to suit the mood of the customer as well as the financial market. The company was advised to change its drab outlook and to bring in fresh blood. In 2001 Roger Holmes was made CEO, and in 2002 Luc Vedervelde was appointed Chairman & and he commenced restructuring the company. By 2004 the exercise was frustrating as by closure of some European branches, sale of some properties and a continuance of earlier policies did not quite work out and the plunging share prices indicated the shareholders displeasure. Desperation turned to despair, business strategy was unfocussed; and in true fashion both the Chairman and the CEO were replaced in May that year. Paul Myners took over as Chairman and Stuart Rose took over as CEO. Restructuring was replaced by Positioning as strategy and it worked. In 2007, Lord Burns, the latest Chairman reported that the company was well on its way to attaining the eminent position that it had in 1997-98 riding on the new positioning strategy. Strategic Options Strategies have always been used as a process to for setting long term goals and objectives of the organization. These are necessarily followed by implementation processes that are then evaluated to find the results of these strategic maneuvers. But the shaping of strategies is much more complex than it appears to be. It is significant to mention here that although the 5Ps of strategy expounded by Mintzberg (1991) is a simplistic method for analyzing strategies of corporates, there are other views that have been developed offering more accurate reasons and analysis. For instance Hamel and Prahalad (1996) have argued that core competencies are the route to future developments and that they define the inventive and transformational aspect of business today that looks for future positioning. Without development of these competencies, that have to be extensively deliberated upon prior to planning, the idea of positioning will be superfluous. M&S did exactly this and took a long time to look hard at facts that will have a lasting influence on their customers. The strategic decision was that as the world is veering around to the acceptance of global warming, and both leaders and the masses are eager to participate in saving the environment, their own efforts, no doubt at great expense, will offer physical evidence that will register with everyone as positive action. The preparation that they are undertaking, without apparent concern of its contribution to the bottom-line, actually brings out the sympathies of the customers who flock to their stores to show their solidarity with the company. That this will bring in good returns by way of higher sales was the primary motive of M&S and was achieved with distinction. Then there is a “fitness to landscape” theory from Kaufmann stating that states that all companies work hard to achieve glorious heights that can be viewed like a mountainous landscape with high and low peaks. In this case the height of a feature is a measure of its fitness. It is further explained that these are not static highs and lows but are dynamic and corporates change positions to gain maximum advantage. (Kaufmann ). In actuality when a company embarks on a positioning strategy, it is beset with several roadblocks en-route. It is able to surmount them but within these attempts it sometimes prolongs the effort and at times is able to quickly realize its goals. The sum total of efforts is quite dynamic and results in highs and lows. Its endeavour is to achieve the maximum in the quickest possible time to prove to its customers that its success rate is high. This is how Micheal Porter explains these efforts as “jockeying for position”. (Micheal Porter 1996). In this scenario too outwardly the company struggles to come to terms with the various changes that it has undertaken to go through to achieve its noble objectives, but the underlying cold calculation is again aimed towards catching customer attention and to gain more footfalls resulting in higher sales and returns. The customer is attracted more by the efforts and contributes by aligning himself with a company that is visibly trying to overcome difficulties to improve the customer’s future life. The more the company tries to fit the landscape the more customer appreciation they earn; it is incidental that they earn a higher profit in the process. M&S positioning strategy fits very neatly into this theory and they have perfected the art of convincing their customers that they are doing this for the benefit of humanity at large. The reward they reap is in the shape of soaring share prices showing shareholders acknowledgement of the company’s ability to entice customers with their winning positioning strategy. Recommendations Two recommendations are being made for sustaining the growth and continuance of competitive advantage regained recently by M&S. Having achieved a turnaround, the time is opportune for M&S to consolidate its gains. It must continue to serve all its stakeholders and sustain through vigorous Implementation of Plan A. It cannot and must not shy away from the social and societal causes it has undertaken and must report all attempts, endeavors and results transparently to all its stakeholders. It has a long way to go, but is on a firm footing now as all its stakeholders, specially the shareholders are rallying around it and it must capitalize on it. Mintzberg and Quinn (1991) state that strategy implementation is conducted under four headings; structure, system, culture and power. Structure is the organizations hierarchy, systems refers to administrative processes, culture can be described as the way things are done in the organization and power means the power of individuals and groups and the delegation of authority for carrying out functions. It is recommended that M&S pay special attention to implementation procedures by regular monitoring of achievements and modifying needs as it goes along the road to further success. The second recommendation is that M&S must now look towards becoming a global company. It has already achieved prominence in the home country and can now take its knowledge, experience and management expertise and leverage it in International markets. Motives for FDI may be summarized in a categorization formulated by Behrman (1972) and supported by Dunning (1993) who introduced a model of internationalization including four different categories of motives. These categories are market seeking, resource seeking, efficiency seeking and strategic resource seeking motives. Market and Resource seeking motives have been the two most recognized categories of motives (Dunning 2000) and here lies the motivation for M&S. Dunning’s (1977, 1980, 2000) eclectic paradigm is useful in analysing the complex decisions made by Firms to go international. Three factors help to explain why production is based in a foreign land in place of home country. They are the Ownership, Locational and Internalization advantages (OLI) of the company. It explains the value additions available to a company in host countries on account of OLI. Each of these factors offers some advantage that enhances the competitiveness and performance of the firm. Basically the home advantage of Ownership is transferred to the host countries for competitiveness. These are then transferred to specific host country where the best the Locational factors exist through FDI. Finally the Internalization or the internal expertise, partly due to O factors accounts for the competitive advantage that was originally the objective of the exercise. M&S should proceed to Internationalize to take advantage of OLI factors and to enhance its competitive edge. Bibliography Annual Report (M&S) pdf available at: http://www.marksandspencer.com/gp/node/n/43436031/202-7927409-1015818?ie=UTF8&mnSBrand=core Behrman, J. N,. (1972) The Role of International Companies in Latin America: Autos and Petrochemicals. Lexington, MA: Lexington Books. Chairman’s Foreward 2007 avaialable at: http://www.marksandspencer.com/gp/node/n/43436031/202-7927409-1015818?ie=UTF8&mnSBrand=core Dunning, J. H., (1977). ‘Trade, location of economic activity and the MNE: A search for an eclectic approach’. In: Ohlin, B. et al. (Eds.), The International Allocation of Economic Activity pp. 395–418, London: Macmillan Press. . Dunning, J.H., (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of International Business Studies, 11 (Spring/Summer): 9-31. Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. New York: Addison-Wesley. Dunning, John H. (2000), “The Eclectic Paradigm as an Envelope for Economic and Business. Hamel, Gary. and Prahalad, C.K., (1996) Competing for the Future, Harvard Business Review, May-June. Kauffman, Stuart., (1995)At Home in the Universe, Oxford University Press. Mintzberg, Henry., (1987)THE STRATEGY CONCEPT I: FIVE Ps FOR STRATEGY, California Management Review; Fall; 30, 1; ABI/INFORM Global Minzberg, H. and Quinn J., (1991)The Strategy Process – Concepts, Context and Cases. Prentice Hall international. Porter, Michael., (1996) What is Strategy., Harvard Business Review, November-December. Appendix 1 Until 1999 M&S financial year ended on 31 March. Since then, the company has changed to reporting for 52 or 53 week periods, ending on variable dates. Year ended Turnover (£ M) Profit before tax (£ M) Net profit (£ M) Basic eps (p) 1 April 2006 7,797.7 745.7 520.6 31.4 2 April 2005 7,490.5 505.1 355.0 29.1 3 April 2004 8,301.5 781.6 552.3 24.2 29 March 2003 8,019.1 677.5 480.5 20.7 30 March 2002 8,135.4 335.9 153 5.4 31 March 2001 8,075.7 145.5 2.8 0.0 1 April 2000 8,195.5 417.5 258.7 9.0 31 March 1999 8,224.0 546.1 372.1 13.0 31 March 1998 8,243.3 1,155.0 815.9 28.6 31 March 1997 7,841.9 1,102.1 746.6 26.7 31 March 1996 7,233.7 965.8 652.6 455.8 Appendix 2 PLAN A Plan A is our five-year, 100-point plan to tackle some of the biggest challenges facing our business and our world. Climate Change We aim to make our UK and Republic of Ireland operations carbon neutral in five years. We will minimise energy use, maximise the use of renewables and offset only as a last resort. Waste We’ll reduce packaging by 25%, find new ways to recycle and stop sending waste to landfill from our stores, offices and warehouses. Sustainable Raw Materials From fish to forests, our goal is to make sure our key raw materials come from the most sustainable sources available. Fair Partner By being a fair partner, we’ll help improve the lives of hundreds of thousands of people in our worldwide supply chain and local communities. Health We’ll help customers and employees choose healthier lifestyles through healthy food ranges and clear labelling. To find out more visit www.marksandspencer.com/PlanA 1 Appendix 1 Until 1999 M&S financial year ended on 31 March. Since then, the company has changed to reporting for 52 or 53 week periods, ending on variable dates. Year ended Turnover (£ M) Profit before tax (£ M) Net profit (£ M) Basic eps (p) 1 April 2006 7,797.7 745.7 520.6 31.4 2 April 2005 7,490.5 505.1 355.0 29.1 3 April 2004 8,301.5 781.6 552.3 24.2 29 March 2003 8,019.1 677.5 480.5 20.7 30 March 2002 8,135.4 335.9 153 5.4 31 March 2001 8,075.7 145.5 2.8 0.0 1 April 2000 8,195.5 417.5 258.7 9.0 31 March 1999 8,224.0 546.1 372.1 13.0 31 March 1998 8,243.3 1,155.0 815.9 28.6 31 March 1997 7,841.9 1,102.1 746.6 26.7 31 March 1996 7,233.7 965.8 652.6 455.8 2 Plan A PLAN A Plan A is our five-year, 100-point plan to tackle some of the biggest challenges facing our business and our world. Climate Change We aim to make our UK and Republic of Ireland operations carbon neutral in five years. We will minimise energy use, maximise the use of renewables and offset only as a last resort. Waste We’ll reduce packaging by 25%, find new ways to recycle and stop sending waste to landfill from our stores, offices and warehouses. Sustainable Raw Materials From fish to forests, our goal is to make sure our key raw materials come from the most sustainable sources available. Fair Partner By being a fair partner, we’ll help improve the lives of hundreds of thousands of people in our worldwide supply chain and local communities. Health We’ll help customers and employees choose healthier lifestyles through healthy food ranges and clear labelling. To find out more visit www.marksandspencer.com/PlanA Read More