Strategic and Financial Analyses for Loftmeister Plc - Essay Example

Running Header: A STRATEGIC AND FINANCIAL ANALYSIS FOR LOFMEISTER PLC A Strategic and Financial Analyses for Loftmeister Plc in Harvard Style by Student'sName Course Name University Introduction Strategic management has become a very important aspect in running a business organization as it aims to direct it the company to its expected end. In order to evaluate the internal strengths and weakness of the organization and identify the external factors that can affect its performance in the long run, analysts often make use of strategic management techniques. Strategic management tools are essential instruments for managers and decision makers. The use of these tools does not only provide a diagnosis for the business organization but prescribe solutions and strategic responses as well. Similarly, the strategic position and performance of Loftmeister Plc can be ascertained by utilizing developed strategic management tools. However, it should also be noted that each of these techniques has its own weaknesses and limitations. Thus, in evaluating the Loftmeister's strategic performance through the use strategic management tools, this report will also state its weaknesses and limitations. The report is organized as follows. The first section will look at the internal environment of the Loftmeister through the use of ratio analysis in order to assess its profitability. Next, the external factors in the company's environment will be looked into through the use of PESTLE analysis. The last section will present a SWOT analysis which will integrate the previous analyses. Ratio Analysis Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. Specifically, it enables a financial analyst to spot trends in a business and to compare it with the performance of similar business enterprises within the same industry. Financial ratios are grouped into four categories, each showing a different aspect of a company's financial operations. These are profitability ratios, financial leverage ratios and liquidity/solvency, and activity ratios. Due to the limited availability of data, this report will only look at Loftmeister's profitability ratios from 2001-2004. Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred. The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. The computed operating profit margin, which is the ratio of operating income to sales measures as a percentage of sales, the excess revenue from sales over cost of normal operation excluding financing. (Analyzing Company Reports 2005). Logically, higher profitability ratios indicate a healthier financial condition. The table above shows the computed profitability ratios of the Loftmeiser Plc from 2001-2004. It should be noted that both gross profit and operating profit margins are declining through the years. The company's gross profit margin declined by 9% during the five year period attributing to the rise in the demand for lower margin off-trade products coupled with the decline of higher margins on-trade offerings. On the other hand, operating profit margin also slid by 10% indicating Loftmeiser's inefficient cost management. Financial ratios are commonly used to assess the financial performance of a business organization. However, this type of analysis is limited only in evaluating the financial aspect of a company and not the whole industry. Financial analysis should always be accompanied by benchmarking in order to fully determine how each industry player fared during the financial year. It should be noted that numbers don't tell all and attention should also be focused on other relevant qualitative issues in the market. PESTLE Analysis PESTLE analysis stands for Political, Economic, Social, Technological, Legal, and Environmental. This strategic management tool is noted for its ability to capture almost all the variables in the environment where the business operates. The following section applies the PESTLE analysis of the UK brewing industry. Political. The political issues which is currently affecting and is expected to drive the UK brewing industry in the long run is the governments' move to integrate their economies through the creation of economic and free trade zones. These policies encourage the influx of foreign direct investments and increase the number of foreign participants in the local brewing industry, intensifying the competition in the market. Economic. The economic factors in the UK brewing market are significantly shaped by the political issues. As stated above, integration among the economies brought about more intense competition in the economy. This pushes business organizations to operate more efficiently. Social. Social factors are the main driving force in the UK brewing industry. There has been a decreasing trend in alcohol consumption within UK households. It also noted that the traditional beer consumption in public houses is now overshadowed by the increasing consumer preference to consume brewed products at home as this is perceived to be more socially acceptable. Also, the drinking population is becoming younger and more varied as drinking is seen to be more of leisure. Technological. The UK brewing industry is not significantly influenced by the development in technology. Legal. Legislations and government regulations affect competition and operation of industry players. It should be noted that there has been "recent changes to licensing law relating to 24 hour drinking and legislation relating to non smoking in establishments that serve food." Environmental. Being a more or less environment friendly industry, it is expected that the UK brewing sector will not be affected by sustainability issues. The PESTLE analysis, as shown by the discussion above, reveals trends in the external environment of almost all the sectors affecting the UK brewing industry. This enables a Loftmeister to adopt its strategies with regard to the issues in the environment. The PESTEL analysis becomes a good preemptive tool enabling the business organization to prepare and gear itself to the challenge and opportunities ahead. Though the PESTLE analysis can give a complete and detailed outlook of Loftmeister's environment, it should be noted that this strategic management tool is not prescriptive. The real essence of the PESTLE analysis is how a company relates the trends in the environment with its operation. The PESTLE analysis, however, just enables a business organization to conduct environmental scanning but falls short of prescribing a potent strategy to combat threats and take advantage of opportunities. Porter's Model The Porter's Five Forces Model is originally developed to derive the five forces that determine market attractiveness. This strategic management tool is commonly used by decision makers in order to examine the market environment through the different actors present. Intensity of Rivalry. The competition in the UK brewing industry is very intense as players continue to battle with each other for larger market share. One indication of this is the intensive and aggressive marketing and product development strategies each pursues. Barriers of Entry/Exit. Notwithstanding the fierce competition in the industry, barriers to entry are relatively moderate. The potential entrant needs to face the challenge of snatching market share from the incumbents. However, with the emerging segments in the market, potential entrants can employ niche targeting. Threats of Substitutes. Alcoholic drinks are not seen as perfect substitutes. This is even intensified by the company's effort of stressing their market positioning strategies. Supplier Power. Supplier power is relatively low with the intense rivalry in the supplier market. Buyer Power. The purchasing leverage of the buyers in the UK brewing industry is heightened by the competition in the industry. Nowadays, manufacturers and distributors are aggressively marketing their products to customers. The further increase in off-trade demand is expected to put more power in the buyers hand as they are not constrained by the offerings available in public houses. Even though it is commonly used for the evaluation of the business organization's market environment, the Porter's Five Forces Model is criticized by academics and strategists because of the dubious assumptions of the model. The following lists these assumptions: "that buyers, competitors, and suppliers are unrelated and do not interact and collude; that the source of value is structural advantage (creating barriers to entry); and that uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior" (Porter's Five Forces Model 2007). SWOT Analysis SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is one of the most widely utilized strategic management tools in assessing the position of a business entity. This analysis is an integration of the results of other tools like the PESTEL analysis, industry analysis, and internal analysis. The company's strengths and weaknesses are derived from internal analysis while the PESTEL and industry analyses provide the required information to ascertain the opportunities and threats specific to the company. Strengths. Even though Loftmeister has been overtaken by two foreign firms in the United Kingdom market, the company remains a strong brand, having a market share of 13%. Being one of the oldest players in the brewing industry, the company has already established one of the most efficient production systems in the sector. Weaknesses. As shown in the above financial analysis, Loftmeister currently suffers from a declining profitability. This is attributed to the inefficiencies in the value chain and poor cost management. The organizational structure of Loftmeister is also a source of its weakness. It can be observed that the company is "very bureaucratic comprising several tiers of management and rigid demarcation." This structure hinders the business organization to efficiently utilize its human resources and fast decision making. Even though Loftmeister has a very efficient production system, inefficiencies lie in the supporting departments like distribution, marketing, purchasing, sales, and public relations department. Another weakness is the company is its lack of "definitive positioning in the within the UK marketplace." This lack of strategic market positioning contributes to the poor performance and decline of Loftmeister in the UK brewing industry. Opportunities. The changes in the social factors in the market place present various opportunities for growth. Loftmeister tailor its product offerings to the emerging segments in the UK brewing industry by creating brands for exclusively for women and younger population. On the other hand, the opening of foreign economies to foreign direct investment gives Loftmeister the opportunity to diversify its products abroad. Threats. Loftmeister is currently facing the threat of intense competition with its competitors. Even though the company ranks third in the entire UK market, it is desperately struggling to maintain this position. The business organization is also threatened with the possible merger of its two smaller competitors. The real value of the SWOT analysis lays on the company's ability to match its strengths with the available opportunities in the market. This however, is not clearly presented in the SWOT analysis. The technique only enables to give the management an insight of the company's strengths and the opportunities in the market but does not indicate what strengths should be employed in order to take advantage of each of the opportunities (Adams, 2005). SWOT analysis lists all the strengths of a business organization in a way, which do not show their importance in the company's success (De Wit & Meyer, 1998). The random arrangement of these strengths does not allow the management to determine the relative importance of these strengths in the company's operation. This in turn, will not enable management to know which strengths to further boost and enhance. This becomes critical especially when the company is faced with a tight budget. Since SWOT analysis is only a matter of listing the strengths, weaknesses, opportunities, and threats of a company, it is not prescriptive in the sense that it does not give the decision makers the specifics on how to correct the company's problems (Hill and Westbrook, 1997). Another limitation of the technique is its focus on the current performance of a business organization. As economies are increasingly becoming more past faced and developed, changes and trends occur which consequently shape the performance of a business entity. This implies that the SWOT analysis of a company is only valuable in a certain period of time. As changes occur, other SWOT analyses should be conducted to gain a reliable assessment of the company's resources and the factors affecting it. This constant updating of SWOT analysis can be time and budget exhausting considering that to come up with an in-depth analysis, managers should first conduct PESTEL, industry, and internal analyses (Strategic Management n. d.). Another limitation of the SWOT analysis is its inability to identify whether an opportunity is specific to a company or an industry as a whole. As discussed above, distinction should be made between company and industry opportunity. In a company opportunity, profitability is more viable as there is no rivalry among competing players. Industry opportunities, meanwhile requires tougher decision making from the management as it should take into account the strategies which can be possibly employed by competitors who will also plunge in the new opportunity. References Adams, J. 2005, Analyze Your Company Using SWOTs, Supply House Times, Vol. 48 Issue 7, pp. 26-28. Analyzing Company Reports 2005, Retrieved 19 January 2007, from http://www.ameritrade.com/educationv2/fhtml/learning/profratios.fhtml De Witt, B. and Meyer, R. 1998, Strategy: Process, Content, Context, 2nd ed., Oxford: International Thompson Business Press. Hill, T. and Westbrook, R. 1997, SWOT Analysis: It's Time for a Product Recall, Long Range Planning, Vol. 30 Issue 1, pp.13-16. Porter's Five Forces Model 2007, Retrieved 19 January 2007, from http://en.wikipedia.org/wiki/Porter_5_forces_analysis Strategic Management, Strategic Management Journal, Vol. 11 pp.171-195 Thompson, J. 2002, Strategic Management, 4th Edition, London: Thomson Read More