Value-Added Strategy of the Bellway PLC Between 2011 to 2005 - Case Study Example

RUNNING HEAD: Value Added Strategy of Bellway PLC Value Added Strategy of Bellway PLC Between to 2005 of of Professor Date 1. Introduction Bellway PLC (or “Bellway”) is a holding company based in the United Kingdom (UK). It is through its subsidiaries that the company is principally engaged in house building in the UK. The company provides a range of house types such as terraced homes; two and three-bedroom apartments; three story homes; three, four and five bedroom detached homes; and semi-detached homes. Townhouses and bungalows are also built. It has also its special offers. During fiscal year of 2010, ending in July, it completed the sale of about 5,000 homes, sold more than 900 of these to registered social landlords, and made available not less than 700 homes to Lifetime Home standards (Reuters, 2011a) This paper seeks to explain the value added strategy used by Bellway plc between 2011 and 2005 by using the economic value added (EVA) model between 2011 and 2005. 2.1 What is the economic valued added per year to Bellway from 2006 to 2010? To determine any valued added made by Bellway for purposes of determining the strategy used, there is need to look at the company’s economic value added situation per year. The computation of the EVA requires the computation of the cost of capital under the CAPM model (Brigham & Houston, 2002) which uses risk free rate of 0.50% based on Bank of England base rate (Housepricecrash, 2011) and market rate based on industry price-earnings reciprocal (Reuters, 2011a) for purposes of multiplying the same with the total stockholders’ equity. See Appendix A for the schedule showing the EVA per year together with Appendix B for the related bar graph. The production or generation of value is therefore a function of net income, cost of capital and stockholder’s equity. Based on Appendices A and B, it was only therefore in 2006 and 2007 that value was created for the company. If fact what the company earned in 2008 and 2010 was lower than the cost of capital employed. In 2009, the amount of loss should mean that there is no value added. The stock market prices graph in Appendix C underpins the behaviour of the EVA for five years. The value added strategy should include however not only those that caused the company to produce the value added but all the strategies that helped the company to meet its objectives. For example, from 2008 through 2010, there was no value added but it does not mean that there is no value added strategy employed. It could be argued had the company not applied said strategy during 2008 through 2010, the results could have been worse due to the effect of the financial crisis starting the end of 2007. 2.2 What was the strategy Bellway in 2006 and 2007 for the positive EVA? The company simply employed growth strategies in 2006. Its annual report for 2006 cited increasing revenue compared to previous year or 2005. The Chief Executive reported of increase volume of output or houses built by the company and in sales outlets. The company was fortunate externally because of the low inflationary environment at that time. The company cited also the expansion of its divisional network and the further enhancement of its land bank by its employment of “future urban regeneration schemes” (Bellway, 2011e). In addition to growth strategy, the company employed cost reduction as a result of its cost base benefiting from standardization of some of its outputs (Bellway, 2011e). 2.3. What strategies were employed from 2008 through 2010? Towards the end of 2007, however, US recession started which produced effects in the United Kingdom but the result of such effects came only in 2008 when the company reported very low income which was not enough to compensate for the cost of capital employed. Thus the economic value added was negative during 2008. It does not mean however that the company had not employed any strategy to cushion the impact of the economic crises that was already felt not only in the US and in the UK but many parts of world in 2008. Thus, as early as 2008, the company has started cash conservation and reduction of its cost base to prepare for normal times. The company however has applied the same without affecting the material part of operation and is aimed shareholder value protection (Bellway, 2011c). To complement cash conservation strategy in 2008, the company had employed debt reduction programme as a strategy in 2009. The Chairman reported reduced net borrowings from banks from more than £200 million in 2008 to less than £40 million or about five times below the prior year’s level. At the same time while price for land appeared encouraging to acquire, Bellway placed additional 5.8 million shares. From this the company generated net proceeds of more £4O million. This was aimed to ensure an excellent position in the land market when the opportunity comes (Bellway, 2011b). In 2010, the company employed Corporate Social Responsibility (CSR) strategy by improving efficiency of houses built. This was done despite the tough economic situation. This was part of its overall solution to reduce carbon at it helped the government in the latter’s objective to reduce CO2 in UK at a given level by 2050. It was also in 2010 when the company used risk minimization strategies. The company wanted to limit adverse operational and financial effects on its overall performance at it aimed to ensure the effects from the reduced market size and the ability of customer to access credit facilities while the economy was not normal. Thus, local management from a division level of the company was allowed to determine product range and pricing strategy. It also allowed the use of sales incentive to boost sales during the difficult time. Its efforts indeed resulted to positive profit after suffering a loss in 2009 but the EVA was still negative (Bellway, 2001a). See Appendices A and B. 3. Conclusion Bellway had employed growth strategies from 2006 to 2007 but it was not able to prevent a negative value added for the three later years 2008 to 2010. The reason of course is obvious, the economy is bigger than the company and it can only at some point depend of what the former allows. The strategies however that were applied during the last three basically include a combination of cash conservation, cost base reduction, debt reduction and risk minimization to wait for the economy to normalize. The company had already reported profits in 2010 as a sign of recovery of the company and economy although it was not yet enough to produce a positive economic value added. The company’s efforts to conserve cash during the turbulent years paid off and it did have money to finance future expansions. Conserving cash as strategy was very much applicable then during those hard-hitting times rather to the same o stockholders via dividends. Bellway has therefore employed strategies that consider the external environment and the results were a survival and eventual recovery of the company. Appendices Appendix B Bar Chart of the economic value added; Sources (Bellway, 2011a, 2011b, 2011c, 2011d, 20113; Reuters, 2011a) Appendix C Stock price graph; Source: (Reuters, 2011b) References: Bellway (2011a). Annual Report and Accounts for 2010. Retrieved 20 March 2011 from Bellway (2011b). Annual Report and Accounts for 2009. Retrieved 20 March 2011 from Bellway (2011c). Annual Report and Accounts for 2008. Retrieved 20 March 2011 from Bellway (2011d). Annual Report and Accounts for 2007. Retrieved 20 March 2011 from Bellway (2011e). Annual Report and Accounts for 2006. Retrieved 20 March 2011 from Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Housepricecrash (2011) Bank of England Base rate. Retrieved 20 March 2011 from Reuters (2011a). Company Overview. Retrieved 20 March 2011 from Reuters (2011b). Stock Price Graph. Retrieved 20 March 2011 from Read More