Buzzard Limited Market Performance - Essay Example

Buzzard LTD: A Case Study YOUR FULL YOUR INSTITUION OR SCHOOL Buzzard LTD: A Case Study Buzzard LTD is first-tier car parts supplier to vehicle manufacturers. The company provides "systems that fit directly into motor vehicles" that have been built from "components acquired" from lower tier suppliers (Davies and Boczko, 2005: 185). We have been tasked to prepare a SWOT analysis for the company based on the limited information provided, assess the risks faced by the organization, offer a report to shareholders regarding corporate performance, and provide a statement of our own satisfaction regarding Buzzard LTD's achievements. Given the limited nature of the information provided, we will use what we do know of the company's operations and the provided financial statements to guide the process. Our review will be less than typical; there is an inherent limitation in the scope of the marketing portion of this analysis, given the lack of data on competitors, specific brand strength, plant operations and distribution channels, as well as other standard evaluative measures. Accordingly, the SWOT will not be a comprehensive treatment of strategic position, but will speak to a few of the known specifics. We can use the financial information provided to offer some accurate shareholder analysis. It has been noted that the purpose of preparing "financial reports on a regular basis..." is to "influence the decisions of users of the information produced" (Atrill and McLaney, 1997: 2); and through the use of standard ratio analysis, we will be able to evaluate the provided statements to come to a reasonable understanding of the company's financial strength. That analysis will permit us to report the current financial condition to shareholders and evaluate Buzzard LTD's operational efficiencies in light of its quality and customer satisfaction achievements. SWOT Analysis Any company that wishes to remain successfully in business must engage in strategic thinking. This concept is particularly true in the modern marketplace, where information technologies and other manufacturing efficiencies have increased the need for competitive intelligence. Fleisher and Bensoussan make a compelling case for this when they state: Strategic thinking is necessary today because our organizations compete in an increasingly global, postindustrial, knowledge- and information-based competitive environment as opposed to the slower paced, domestic, industrial competitive environment of only a few decades ago. The hierarchical, linear models that dominated management thinking, and in some cases still do, have given way to newer, more flexible, perpetually self-reorganizing, network-based arrangements. No senior executive can reasonably be expected to know the entire competitive terrain well enough to correctly strategize in the same was as the great industrial and military leaders of the past. This pressing need for strategic thinking is why organizations need to improve and enhance their competitive intelligence. (2002: 5) The primary component used for informing the competitive intelligence process is predicated upon analyzing the strengths, weaknesses, opportunities, and threats (SWOT) facing the organization. The limited information provided does not permit a comprehensive analysis of these elements, but we will be able to focus on key parts of each segment and derive some competitive intelligence regarding the market position of the company. SWOT TABLE FOR BUZZARD LTD. Strengths Weaknesses Opportunities Threats Reputation for Innovation R & D Efforts New Facilities High Cost Structure Firefly Reputation New Market Expansion New Technology New Plant Competitor Emergence Regulatory Changes Buzzard LTD has some important strengths. Their reputation for innovation is the most important of these as they have achieved high levels of pleased customers and are regarded as "one of the world's leaders in design, manufacture and supply of innovative automotive systems" (Davies and Boczko, 2005: 185). It is a fundamental truth that customer perception and satisfaction can make or break an organization, and Buzzard's past performance has positioned it at the top of the market. Buzzard's second key strength is its commitment to R & D. First-tier auto parts suppliers in the UK find themselves in a very competitive environment and it takes technology to maintain the competitive edge. Finally, the new plant in Bramblecote is a strength of Buzzard. The company's commitment to achieving higher levels of performance will position it to meet its current market demand and expand into new markets as well. Unfortunately, the organization is not without weakness. From review of the financials and relevant analysis discussed further in this paper, we know that the company is seeing a reduction in profit margins, indicating the possibility of a higher cost structure. Management is addressing this issue with its focus on performance, but they will have to return the margins to higher levels to maintain viability. A second weakness, also being addressed by management, is the reputation of its acquisition, Firefly. Overcoming a negative reputation with customers and suppliers is time intensive, and Buzzard is moving away from that association-yet it is still a weakness that needs to be completely replaced by Buzzard's quality and innovation. The good news is that Buzzard LTD has some key opportunities facing it. First, the development of new markets should be aggressively pursued. We know that the company has expanded its geographical segment by increasing non-UK sales in Europe, and entering the Japanese market (Davies and Boczko, 2005: n.p.). This represents a significant opportunity for management to increase market share and revenues, and that opportunity requires timely action. A second opportunity is for Buzzard to use its commitment to R & D and develop new technologies. With a reputation for innovation, the company will enhance its standing in the market by continuing to provide new ideas and better, more efficient technologies. The final opportunity listed is Buzzard's new manufacturing facility. Taking its operational strategy to a new level as it increases is production and distribution capabilities will position Buzzard to continue as an industry leader. Finally, Buzzard LTD does face two threats. There is the ever-present issue of increased competition, as new independent companies enter the market in general and the UK market specifically. Given the original equipment manufacturers' willingness to allow price competition, the company needs to watch the market closely and use its innovation and technology development to stay ahead of the competition. More significantly, perhaps, management needs to monitor the regulatory environment. Recently, there have been a "number of attempts...to eliminate or severely restrict competition...," and it is not unreasonable to expect that "...if competition auto parts are legislatively forced out of the market" the company's future is imperiled (Wells, 2006: 1). While it might seem unlikely, a negative regulatory development would be disastrous, and Buzzard LTD should monitor the situation closely. Risks: Internal and External One internal risk faced by Buzzard LTD is that of inventory control and production costs. As manufacturers in the UK and elsewhere increase their competitive efficiencies, the costs of carrying excess inventory have the ability to negatively impact more than just the bottom line. One possible solution for Buzzard, with its new factory, would be to consider some new technology for inventory control. Radio Frequency Identification (RFID) is emerging as an effective tool, and is "now being looked at by the automotive aftermarket in hopes that it will help the industry with issues like excess inventory..." (Gardner, 2004: 3). Management needs to address this, as most "aftermarket manufacturers are increasing efforts to...learn all that is possible [about RFID], monitor other industries and begin implementation..." (2004: 18). An efficient inventory control system would position the company to take advantage of expanded production and profitability. One external risk facing Buzzard LTD is design protection. Management has made a significant commitment to research and development (R&D) and is perceived as a leader in technology. The European Policy Evaluation Consortium authorized a report regarding the aftermarket for spare parts. In its findings, the report's authors note that previously, "there was a lack of agreement on the role of design protection in respect of 'must match' spare parts for complex products" (EPEC 2003: i). Given Buzzard's leadership in technology development, they would be well-served to assess the impact of developments among the Member States as there is a disparity in regulatory protection, as well as increasing competition from non-EU companies, particularly South-East Asia and Latin America (2003: iii). Shareholder Report For shareholders, the company's reputation and ability to deliver innovative products is important. Those things must translate into profitability, however, as shareholders are investors who need to see a competitive return on their money. In reviewing the financial data given for Buzzard LTD, and applying standard performance analysis based on the financial statements, shareholders can evaluate the company's condition. This process, though insightful, is not without its own limitations. As noted by Fridson and Alvarez: Users of financial statements can, at best, hope for informed guesses, and there is considerable room for honest people (not to mention rogues with vested interests) to disagree. Therefore, users of financial statements should not assume that balance sheet figures invariably correspond to the current economic worth of the assets they represent. (2002: 32-33) That said, however, shareholders can apply four standard comparisons to see how Buzzard LTD is doing: profitability, efficiency, liquidity, and investment. In terms of profitability, the appropriate method is to employ a Margin Analysis; - Gross Profit Turnover *100 As mentioned previously, the profit margin for Buzzard LTD is slipping off. For the fiscal year ended 2004, the organization had a 115M turnover with a gross profit of just over 15M. This 13% gross profit is less than the previous year's 15%. While most likely the result of their operational changes, if this becomes a trend, shareholders will be concerned. Management should be focusing on their operational margins, and taking proactive measures to increase the amount of money they are making. For efficiency, we will compare the two years under review by using the Return on Total Assets calculation; Profit before Int. & Taxes Total Assets which evaluates total organizational efficiency by juxtaposing operating profit (before interest and taxes but after distribution and administrative expenses) with the value of all the company's assets. For Buzzard LTD, 2003's profit was almost 4M versus 2M for the current year. Total assets (less current liabilities) increased from 36M in 2003 to 43M in the current year. The ratios for comparison between 2003 and 2004 are 11.1% and 4.6% respectively; obviously not a good trend. In the company's defense, however, it should be noted that the asset base was dramatically enhanced by the new plant. As a shareholder, this value demonstrates how hard the assets of the company are working, and how well they are succeeding in light of capital investment. Here, the increase in asset value, coupled with the decrease in profit, has dramatically lowered the return and should be a consideration for shareholders. To understand liquidity, which is the ability of the company to deal with short-term cash needs, we use a simple comparison of what Buzzard LTD has to what it owes; Current Assets: Current Liabilities. This is a useful way to obtain a snapshot of day-to-day financial condition and can be used to infer the company's relative strength. Unfortunately for Buzzard LTD, this comparison is not favorable at this time. The difference between current assets and current liabilities for 2003 is a healthy 6.4M. For 2004, it precipitously decreases to less than 1M. Although the short-term cash impact on a company that is implementing a major relocation can be severe, these numbers tell us that Buzzard LTD may have a solvency issue. It would only take one major crisis to put the company into a cash crunch. Finally, we can evaluate the overall shareholder investment by calculating the earnings per share; Net Profit Available Number of Issued Shares In 2003, a shareholder could expect the company to earn almost 3M of net profit to be distributed among almost 23M shares. In 2004, those earnings dropped to 1.1M for the same number of shares. The previous year's earnings of .13 per share have dropped to .05 per share. This calculation is the most personal one for shareholders as they need their money to work for them. In this case, 1 earned over 60% less this year than last. In terms of investment value, this report should cause shareholders to evaluate whether Buzzard LTD remains a good place for their money. If they believe in the future of the company and are willing to ride out the short-term appearances of problems, shareholders should stay involved. Buzzard LTD, however, must recognize that better-performing investment opportunities are in the market and ensure that the new factory smoothes out and the company succeeds in expanding market share. Shareholder Satisfaction This shareholder is concerned. The company has a good reputation, expanding markets, and a new manufacturing facility. In past shareholder meetings, the information given has confirmed the wisdom of putting money into Buzzard LTD. My expectations for this year were that the company would continue and strengthen that position, even as it brought a new facility on line. As a businessperson, I understand that companies have both good and bad years. As an investor, however, what I want to avoid is a trend that puts my money's earning power in jeopardy. If I am a shareholder in Buzzard LTD in 2004, I am faced with just that situation. I cannot choose to leave my investment with the company unless I have great confidence in management's ability to return to higher profitability. If the senior staff of Buzzard LTD makes the right decisions, the organization has the potential to be as good an investment in the future as it has been in the past. If, however, they do not act timely-or if they blunder-I could see the value of my investment plummet. I will give them that chance to do that this next year, but it will be incumbent upon management to convince me that they can maximize the company's operational efficiencies and increase their profitability. References Atrill, P., and McLaney, E., (1997) Accounting and Finance for Non-Specialists, Second Edition. Indianapolis: Prentice Hall PTR Davies, T., and Boczko, T., (2005) Business Accounting and Finance, Second Edition. Maidenhead: McGraw Hill Education European Policy Evaluation Consortium, (2003) Impact Assessment of Possible Options to Liberalise the Aftermarket in Spare Parts, Final Report to DG Internal Market, 1-66 Fleisher, C.S., and Bensoussan, B.E., (2002) Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition, Indianapolis: Prentice Hall Fridson, M., and Alvarez, F., (2002) Financial Statement Analysis: A Practitioner's Guide, Third Edition. New York: Wiley and Sons Publishing Wells, M., (2006) 'Calif. Associations Want Auto Aftermarket Competition to Continue,' Insurance Journal, 1 Read More