Strategic Capabilities of Burberry UK - Case Study Example

Strategic capabilities of Burberry UK Total number of pages (including references): 17 Total number of words (excluding references): 3010 Introduction Burberry is an iconic brand that started in 1856 when Thomas Burberry established a small clothes outlet in Basingstoke, England. The company built its standing as an apparel maker when Burberry invented a tough new fabric known as gabardine, which was liked by the British military and the royal family (Haig 2011, p. 122). Today, Burberry has grown into a giant company and its success is attributed the quality of the innovative fabric that provided high-quality long-lasting outerwear; endorsements by the British royal family, the military and explorers, and today models and other celebrities have been associated with the brand, thus helping to revive its appeal; and finally Burberry is associated with British identity, an aspect that has made it a successful and focused brand (Haig 2011, p. 122). Against this background information, this report presents Burberry’s strategic capabilities and analyses whether the company has a competitive advantage based on its past performance and reflecting on the Burberry Group’s annual report of 2011/12. Along with this, the report analyses the capital structure of the company in regard to how the structure might affect the company’s future prospects. A brief comment is also given about the company with reference to apparel the industry. This includes an analysis of the company’s share price performance over the last four years and the likely trend over the next 12 months. In all the analyses, the report discusses key issues while highlighting the strengths and weaknesses of the issues that are analysed. Strategic capabilities of Burberry Strategic capability of an organisation refers to the organisation’s readiness for the present situation and an ability to adapt in future (Burke & Cooper 2005, p. 36). It is obtained through relationships whereby the creation, exchange and acquiring of knowledge develops the individual and organisational resources and capabilities that enable an organisation to offer superior value for customers (Burke & Cooper 2005, p. 36). Burke and Cooper (2005, p. 36) further note that on their own, most resources offer limited competitive value. It is when the resources from various categories (that is finance, human, technological and intangible) are combined and coordinated to form a bundle that is rare, valuable, difficult to copy, and non-substitutable, that resources make the greatest contribution to an organisation’s success. Turning to Burberry, the company has undergone tremendous change of its image over the years, having been termed as an obsolete business whose prestige had faded by top financial forecasters in 1998 (Emerald Publishing Limited 2005, p. 22). The recent success of Burberry can be attributed to Rose Marie Bravo, who joined the company at the same time that Burberry was being referred to as outdated (Hill & Jones 2009, p. 83). Bravo engineered a remarkable turnaround of the company in that when she left in 2006, Burberry was described as a prestigious fashion brand that offered customers a variety of choices (Hill & Jones 2009, p. 83). In less than ten years, Burberry transformed to become one of the most valuable luxury fashion brands in the world. When asked how she accomplished the transformation, Bravo elucidated that there was a hidden brand value that was unleashed by incessant creativity and innovation. Bravo had hired world-class designers to redesign Burberry’s “outdated” fashion. The marketing department also worked intimately with advertisers to create hip advertisements that would attract the younger, well-off audience (Hill & Jones 2009, p. 83). Bravo also pointed out that inventiveness does not just come from clothes designers, but rather, ideas emanate from the sales floor, the promotion department, and even the accounting department (Hill & Jones 2009, p. 83). Notably, Bravo stated that personnel at whichever level they are working have an opinion and have something to articulate which is worth paying attention to (Hill & Jones 2009, p. 83). In more recent times, Burberry has also strived to interact with customers more intimately through social media. By leveraging the scale and engagement of Twitter, Facebook and YouTube, Burberry has in effect reinvented its fashion exhibition as content rich social experiences that millions of fans and interested customers are able to view, rather than just a few insiders (Vollmer & Premo 2012, p. 2). The use of social media has also shaped how Burberry tells stories directly to consumers especially when the company launches new products. For instance when Burberry launched the Body fragrance in the fall of 2011, it invited its Facebook fans to a “fans-first” sampling session which generated 225,000 requests in the initial week alone (Vollmer & Premo 2012, p. 3). It is therefore evident that Burberry’s strategic capability has arisen from the ability of the organisation to organise its financial, human, technological and intangible resources to achieve a long term vision – a point that was addressed above. The financial position of Burberry attests the success it has attained by employing the various strategies described above. In its latest annual report of 2011/2012, Burberry Group’s total revenue increased by 24 per cent to £1,857 million (Burberry 2011/12, p. 8). The Group’s operating profit increased by 25 percent to £377 million. In addition, after tax return on capital stayed firm at 37 per cent. These figures were presented on an adjusted basis. The period also saw a £388 million net balance for the Group, and the board made a recommendation for a 25 per cent increment in the full year divided to 25p, meaning that shareholders will earn better dividends compared to the preceding year. The competiveness of an organisation’s strategy is achieved by connecting the organisation’s strategic capabilities with the present and future needs of both current and future customers (Nielsen 2004, p. 134). According to Oz (2008, p. 43), competitive advantage is often achieved when an organisation tries a strategy that no other organisation has tried before. Some of these strategies include reducing costs, creating new products or services, enhancing products or services, and differentiating product or services (Oz 2008, p. 43). Burberry has achieved this through strategies aimed at strengthening its brand’s digital position, ensuring steadiness of experience, and adding value to the depth and ease of access of that experience while meeting changing customer expectations (Burberry 2011/12, p. 12). The Group has in recent times launched new products such as Thomas Burberry, Burberry Prorsum, Burry London and Burberry Accessories for the UK market (Emerald Publishing Limited 2005, p. 23). There are also Burberry Black and Burberry Blue which are sold exclusively in Japan (Emerald Publishing Limited 2005, p. 23). The Group is also continuing efforts to integrate Japan with the modern British brand (Burberry 2011/12, p. 12). The launch of Burberry Body also gives Burberry at competitive advantage since fragrance is the most widely encountered product in the Burberry portfolio (Burberry 2011/12, p. 13). Burberry also launched Burberry Bespoke in 2011/12. This interactive online tool enables customers to explore the full possibilities of the Group’s iconic trench coat and design a fully personalised edition made at Burberry’s local facility in England for delivery in approximately 8 weeks. According to the Group’s 2011/12 report, Bespoke is the highest expression of the Burberry brand. The Group has also integrated the physical and digital by having store and digital platforms that offer consumer advantages. For instance, stores provide the immediacy of the physical product while the Group’s digital; headquarters – Burberry World – can conjure a product’s image from the runway or put it within a customer’s buying history (Burberry 2011/12, p. 13). Burberry strategy towards having a competitive advantage has many advantages including the fact that it eliminates geographical barriers and it enables the company to send messages to targeted audiences (Barker & Angelopulo 2006, p. 309). But its disadvantages are that the scheme leaves out some potential buyers since not everyone is connected to the Internet or is Internet-savvy, and that relying on the Internet so much exposes the company to negative publicity since not everyone may be satisfied with the Burberry products. Burberry’s capital structure Capital structure is defined as the portion of the total funds available to a company except current liabilities (Panda 2006, p. 237). It also refers to the long-run sources of finance employed in a business venture (Kumar & Sharma 1998, p. 401). Capital structure comprises equity shares, preference shares, reserves, debentures, and surpluses (Panda 2006, p. 237; Pratheepkanth 2011, p. 172). The principal source of funding for Burberry’s operations has been cash flow from operations. The Group finances its business and capital expenditures including shareholder dividends, strategic infrastructure investments and share purchases with existing cash balances, created from operating activities and the deployment of credit facilities (Burberry Group Plc 2006, p. 10). Burberry also has share capital in which there is a uniform class of shares which bears no right to fixed revenue (Burberry 2011/12, p. 70). Each share bears rights to a single vote at the company’s general meetings. The ordinary shares of Burberry are listed on the Group’s official list and are bought and sold on the London Stock Exchange (LSE). The company had 438,768,108 ordinary shares in issue as at 31 March 2012, of which 30,027 were held as treasury shares (Burberry 2011/12, p. 70). There are several characteristics of a good capital structure. These include simplicity, minimum cost, maximum returns, minimum risk and flexibility (Kumar & Sharma 1998, p. 402-403). Burberry’s capital structure bears such characteristics as simplicity and flexibility and this is advantageous because by being simple, it is possible to attract many investors and thus raise future additional capital (Kumar & Sharma 1998, p. 402). Also by being flexible, the capital structure allows the firm to make essential changes in it in relation to the changing business conditions to make it feasible to obtain more capital whenever there is need or save the extra capital (Kumar & Sharma 1998, p. 403). Comment on Burberry position in the apparel industry The fact that Burberry’s half-year pre-tax profit for 2012 went up by 6 per cent implies that the company is doing well financially (Fashion United 07 November 2012; BBC News 07 November 2012). This level of profit was unexpected as it was six million pounds higher than the expected profit margin. Notably, the apparel industry has become more competitive (Bruce & Daly 2010, p. 227) and it can only be expected that players in the industry would realise reduced profits. In fact, Burberry chief executive officer Angela Ahrendts acknowledged the fact customer visits had slowed. But on the contrary, Burberry’s profit margin has been increasing since 2009 as indicated in fig 1. Fig 1: Burberry’s adjusted operating profit between 2008 and 2012. The values indicated on the right are in million sterling pounds Source: Burberry (2011/12, p. 4) Burberry’s strong financial position could be attributed to the fact that the Group has diversified into the fragrances sector. As noted earlier in the report, the Burberry Body fragrance was a major hit when it was launched. If this is the case, the company will remain strong in the coming years (especially the next 12 months or so) because as noted by Fashion United (2012), the cosmetics division is expected to boost the Group’s earnings from 2014. According to Sawyer (1985, p. 139), high profitability implies that more internal finance is obtainable for expansion purposes, and is likely to raise the level of available external finance by, for example, making the issuance of new shares easier. Similarly, Rachna Sagar (1998, p. 264) notes that profitability is the determinant of the efficiency and success of a business enterprise. This is because potential investors analyse the financial statements of a firm to know how vibrant the organisation is so as to decide whether to invest in it or not (Rachna Sagar 1998, p. 264). According to the Group’s annual report 2011/12, net cash as at 31 March 2012 was £338 million, having increased from £298 million at 31 March 2011 (p. 51). The high level of profitability also shows that Burberry is managing its working capital efficiently, as suggested by Hayajneh and Yassine (2011, p. 75). Burberry is therefore in a position to attract more investors. The weakness of relying on profitability as a measure of performance is that the strategy ignores the performance of individual market segments in which the Burberry is operating. Share price performance over the last four years The price of Burberry’s shares has been fluctuating between 2009 and 2012. For instance, in July 2010, the price rose nearly 3 per cent after the company recorded a big increase in sales (Reuters 2010). According to Reuters (2010), Burberry shares increased by 170 percent in 2009 and were up almost 30 per cent in 2010. But the situation was different in September 2012 when Burberry shocked the market with a profit warning that sales had declined, which made the share price to drop nearly 21 percent to £10.87 (Kollewe, 2012). See fig 2 for a graphical illustration of the share price between 2008 and 2012. Fig 2: Burberry share price between March 2008 and October 2012 Source: London South East (2012) From the graph above, it can be seen that the shares price was somewhat unsteady in 2008 but started increasing steadily with minor fluctuations in November 2008. This trend continued until July 2011 when some major fluctuations in the share price started occurring. The decline in price around this time was attributed to the uncertainty surrounding Burberry’s operations in the China (Cooper 2011). According to Cooper (2011), Burberry shares fell by a further 5 per cent in September 2011 as investors panicked over the perspective of growth in the Chinese market. In 2012, the share price has been fluctuating steadily but a deep slump was recorded in September 2012 due to the profit warning as noted earlier. This decline has also been attributed to the downturn being experienced in its market in China (BBC News, 11 October 2012). Given that Burberry’s profit has as indicated in the latest report was on a positive note, it is evident that a company’s past/present performance is not the only determinant of share price as argued by Rutherford (2001, p. 19). Notably, changes in the economic climate generally may affect the share prices and different firms may be affected by a change in economic climate in different ways (Rutherford 2001, p. 19). Evidently, Burberry has not adjusted well to the market in China and thus any profit warning in this market always has a negative impact on its share price. The trend in the discussion above can be viewed clearly when the last four months or so are taken into consideration. Fig 3 shows the Burberry share price trend between August 2012 and November 2012. It can be seen that after the slump in September, the share price started rising in October and this trend has been experienced up to the day of writing this report (23 November 2012). Fig 3: Burberry share price between August 2012 and November 2012. Source: London South East (2012) Turning to earning per share and dividend paid to shareholders, Burberry’s 2011/12 annual report shows that these values have been increasing (see fig 4 and fig 5). This is a positive note given that an investor buying Burberry’s can rest assured that he or she will earn on the investment in the end. Fig 4: Burberry adjusted diluted earnings per share between 2008 and 2012 (year to 31 March). The values indicated on the right are in pence. Source: Burberry (2011/12, p. 5) Fig 5: Burberry dividend per share between 2008 and 2012. The values indicated on the right are in pence. Source: Burberry (2011/12, p. 5) Although the share price has improved slightly since September 2012, it has not reached what it was around July 2011. Therefore bearing in mind the shares price history, the best action to take at the moment is to buy the shares because there a high probability that the share prices will improve over time. According to Spooner and Clarke (2005, p. 17), the best time to buy shares is when the market seems to be at the bleakest point. One should buy stock when a company is losing a lot of money, and sell the shares when the company is making more money than ever before (Spooner & Clarke 2005, p. 17). Watson (2005, p. 247) also agrees that the best time to buy is in the depths of a recession, rather than when there is a general agreement that the outlook is encouraging. This is not to say that Burberry’s position is at the bleakest point at the moment; but buying is the best alternative given that there is a high likelihood that the share price will improve in future. The reasons for this are the profit level recorded in the 2011/12 annual report and the fact that the company is steadily increasing its floor space, which is likely to bolster sales and hence confidence in its shares. According to BBC News (11 October 2012), Burberry plans to increase its floor space by 14 per cent and in recent months it has opened new 13 new mainline stores in Rome, Milan, Hong Kong and Regent Street in London. Conclusion Burberry’s strategic capabilities are reflected through the fact that the Group has a strong financial position and has been profitable despite the increasing competition in the apparel industry. Notably, Burberry’s profit improved by 24 percent in the year 2011/12, implying that the Group has more money for future investments and that it has been managing its working capital efficiently. The level of profitability means that there are more earnings per share and the Group has also been able to raise earnings on dividends. This puts the Group in a better position to attract more investors. Given that the Group sounded a profit warning due to instability in the market in China, it is advisable for an investor to buy Burberry shares since the shares have shown good performance based on analysis of the same since 2008. Burberry’s expansion into more markets and product diversification implies that its shares will definitely regain value in the next 12 months or thereabout. References Barker, R & Angelopulo, G C 2006, Integrated organisational communication, Juta and Company Ltd, New Delhi. 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