Internal Audit of Fuller Smith & Turner Plc - Essay Example

Internal Audit of Fuller Smith & Turner plc Contents Contents 2 Internal Audit of Fuller Smith & Turner plc What is an Internal Audit SWOT/PESTEL Analysis 2 Porter's Models 2 Backgrounder on the Firm 3 Marketing Audit Findings 4 SWOT Analysis 5 PESTEL Analysis 7 Recommendations on Fuller's Marketing Strategies 10 Bibliography 12 Internal Audit of Fuller Smith & Turner plc We perform an internal audit of Fullers Smith & Turner plc (Fuller's) and identify areas of their marketing they should improve. The audit will use two well-known strategic analysis techniques called the SWOT and PESTEL analysis that we explain briefly prior to a short discussion of the firm's background. What is an Internal Audit In general, an audit examines a firm's financial accounts. A business audit is broader and involves a review and evaluation of the effectiveness of core organisation-wide business processes from the perspective of top-level management. It is otherwise known as an internal audit if initiated by top management and involves several or all of the board members and plays the important role of checking the firm's strategic management cycle that will provide feedback to help management re-focus the firm for the next annual cycle (Neely, 1998). The aim of the audit is to see the need for corrective action by top-level management on its policies. The idea is to stimulate mutual discussion between outside auditors and insiders (management and employees) who implement goals and find ways of improving the present situation. Its objective is therefore not only to correct the present way things are done, but probably more important is the good that the process can do to everyone involved, like the conduct of surveys of the present situation and the roundtable discussions that would be based on facts instead of opinions (Kondo, 1988, p. 15-16). An internal audit serves an educational purpose and offers management a chance to review those facts of the firm's strategies and operations that may reflect on management, employees, and other stakeholders. One positive effect of an audit is contributing to the way employees improve relationships with each other and understanding the work they do. There are different ways of doing an internal audit. The simplest is to gather data from periodic strategic and operational reviews, but the firm can also commission the use of other tools such as employee and customer satisfaction surveys, performance excellence models, and benchmarking (Witcher, 2003). Three highly popular techniques we can use audit the firm and the business environment where it operates are the SWOT analysis (Andrews, 1987; Ansoff, 1965; Chandler, 1962), the PESTEL analysis (Steiner, 1979; Andrews, 1987), and Porter's Five Forces model and Generic Strategy (Porter, 1980 and 1985). SWOT/PESTEL Analysis For this first part, we combine the SWOT/PESTEL approach. The SWOT analysis is so-called because of the acronym of the four factors required for assessing the organization's internal (Strengths and Weaknesses) and external (Opportunities and Threats) environments. The PESTEL analysis considers six environmental factors that affect the enterprise and its business: Political, Economic, Social, Technological, Environmental, and Legal. We will combine the PESTEL factors with the SWOT analysis factors to audit Fuller's. Porter's Models Porter (1980, 1985) proposed the Five Forces model that helps a firm analyse its environment and design its competitive strategy by choosing one of three generic strategies. The five forces are bargaining power of suppliers, bargaining power of buyers, threat of substitutes, the intensity of rivalry, and the threat of new entrants. The three generic strategies are over-all cost leadership that allow the firm to compete on the basis of price by achieving efficiencies by minimising costs and attaining economies of scale; differentiation by way of brand image, technology, features, uniqueness, or the quality of service support, any of which enables the firm to charge a premium price for a product perceived to be different from what its rivals can offer; and focus, where the firm concentrates on a particular market or niche. According to Porter, a firm has to choose one of these three so it can compete and achieve sustainable profitability. The firm's competitive strategy, also known as its competitive positioning, describes a set of objectives that enable it to achieve competitive advantage through the way they position activities in the business environment where it operates. We conduct our SWOT-PESTEL analysis within the framework of Porter's five forces: suppliers, buyers, substitutes, rivalry, and new entrants. We then include his generic strategies in our recommendations. Backgrounder on the Firm Fuller Smith & Turner plc, or Fuller's, started brewing ale at Chiswick over 350 years ago. Business problems led in 1845 to the formation of a new firm by J.B. Fuller, H. Smith, and J. Turner. The present vision of the firm, since then Fuller Smith & Turner, is to "be the benchmark in retailing and brewing, delivering Quality Service and Pride in everything" it does. It manages a diverse range of businesses in brewing fifteen brands of beer and retailing them in pubs, marketing outlets, and properties some of which it owns, rents, or manages. Its stocks are listed in London with symbol FSTA (Langley, 1995). For several years, Fuller's has been in the midst of the brewing industry's consolidation in the face of intense global competition. Several mid-sized breweries have vanished, and a number of U.K. firms have sold their breweries (Fuller's, 2001, p. 6). Fuller's two principal trading divisions are Fuller's Beer Company and Fuller's Inns. Fuller's Beer Company handle production, sales, marketing, and logistics of beer. Fuller's Inns consist of Managed and Tenanted Pubs, Bars, and Hotels and handle the management of its estate including sales of food and wine. It exports a small but growing portion of beers to international markets. In 2005, Fuller's purchased the Hampshire-based brewer and operator of 69 tenanted and 42 managed pubs, George Gale and Company Ltd. (Gales), for 92 million. The estimated synergy savings from the deal will amount to 3 million annually. Fuller's acquisition is consistent with its strategy of seeking excellent geographic fit and high quality by way of largely freehold estates that provide cost savings through economies of scale and generate value for shareholders (Fuller's, 2005, p. 6). In the year ended April 2005, Fuller's had total revenues of 170 million and net profits of 24 million (beer accounted for 69 million and 8.2m whilst Inns contributed 101m and 16m of turnover and profits, respectively). A fast growing revenue source is its Wine Division that imports from Chile, Australia, New Zealand, and Spain. With this brief background, we proceed with an internal marketing audit of Fuller's. Marketing Audit Findings The marketing audit will use the SWOT-PESTEL analysis to examine Fuller's relation to its current and potential markets. Our analysis will cover aspects of the marketing climate, looks at both macro-environment factors like demography, the economy, ecology, technology, politics, and culture, and micro- or task-orientated factors like customers, markets, competitors, distributors, dealers, and suppliers (Powell, 1995). The audit considers the firm's marketing strategy, organisation, systems, and productivity. Our systematic analysis will suggest specific conclusions based on these analyses. Audit objectivity is assured, as this writer is independent of the firm or marketing programmes to be assessed. Although a marketing audit is normally performed when the value of a firm's current marketing plan is in question, this is being done to identify problems before they arise and to propose solutions (Grayson et al., 2006). SWOT Analysis Strengths. Fuller's long history as brewer-retailer gives it an edge on competitors. Its professional management, led by a Fuller family descendant, maintains an image useful for marketing (if the brand has lasted this long, it must be good) and helps the firm achieve economies of scale to drive down costs and compete on premium price (Rao and Bergen, 1992). Its motto - "Whatever you do, take Pride" - is powerful in serving its marketing objectives as regards customers, shareholders, and potential investors. Fuller's commitment to quality helps it competed with several beer and alcoholic drink brands. It has a deep brand portfolio (fifteen beer brands) and three major types of retail outlets (pubs, inns, and hotels), highly focused customer-orientated retail sites offering food, drink (beers and wines), and entertainment, with distinct branding schemes that it can exploit to grow turnover and profits by targeting a wide range of markets based on age and income levels - specialist bars for the youth market, Fine Line and Boardwalk bars for mature clients, and English Inn hotels and restaurants for families and special groups of all ages. Fuller's clear focus allows it to strengthen its leading position in the brewing and retail markets. Its beer product portfolio, led by its flagship London Pride, boasts several award-winning brands that prove that its beers are very good. Fuller's key strength are its people - service staff in the pubs, inns, and hotels, sales and marketing people who push its products and the administrative staff who support them - and its brands. The unionised firm has a communications policy to share vital operating information, even its finances, with employees and shareholders. This improves its image and marketing (Tanner, 1994). Weaknesses. One weakness is its size compared to industry giant S&N with annual turnover of 3.9 billion in 2005. Its competitors in a U.K. market characterised as highly fragmented with slow sales growth can exploit Fuller's size. Fuller's small export sales is a weakness, although its volumes are growing each year, reaching less than 1 percent of total turnover in 2005. In contrast, S&N's total exports are 55 percent of turnover, though other drinks account for much of this figure (S&N, 2006). One reason for Fuller's low export volumes is a brewing capacity just over domestic demand and relative inexperience in opening up new markets. It is focusing on U.S. sales growth in the face of flat U.K. sales (Euromonitor, 2006). Opportunities. As a brewer of premium quality cask ales, Fuller's can sell more in the growing export markets. It can continue increasing its retail outlets to take advantage of the current growth in the trend for off-trade sales and the big night-in despite slightly lower margins (Euromonitor, 2006). Having experienced success in increased sales with promotions, it must use groups like CAMRA (Campaign for Real Ale) to improve brand recall of premium brands like London Pride and ESB and newer brands like Discovery Blonde Ale, Jack Frost, and Red Fox that are experiencing strong growth. As the industry goes into stagnation, near saturation, and flat growth, Fuller's will have growth opportunities through takeovers and consolidation because of its strong financial position and prudent top management. It can exploit its image to re-align new brands for sale in its growing stable of managed estates (Ramaswamy et al., 1994). Fuller's have an opportunity to serve new customer groups, enter new markets or segments, and exploit the complacency of rival firms, most especially the bigger firms in the industry that are closing down breweries and disposing portions of its estate to pay off debts. In cases where these closures and downsizing is due to poor management, Fuller's can turn the situation to its advantage through acquisitions and bringing in management expertise and well-trained human resources. It can also re-tool many of these brewing facilities to meet its planned demand growth that it can decide to accelerate. Threats. Fuller's have been facing threats from several fronts for over a hundred years and has overcome them all. In recent decades, the most threatening conditions were brought about by the shifting trend in consumption from ale to lager and from beer to spirits, especially amongst the youth market, the intense competition from cheaper imports, the growing trend for off-trade consumption, and the impending ban in the U.K. on smoking in pubs. These threats will certainly bring down on-trade sales and patronage of pubs and hotel restaurants (Euromonitor, 2006). PESTEL Analysis Much of the PESTEL analyses have been covered in our SWOT analysis, but we can reclassify some of them according to the framework that follows. Political. CAMRA is doing Fuller's some good, but as a consumer group it establishes new standards that companies like Fuller's need to take into account, especially as regards their brewing standards for cask ale. Fuller's must take advantage of CAMRA's market influence to support its growth and profitability targets and marketing strategies. The total smoking ban in public places is a political move, using health as an excuse for some MPs to gain political mileage. Since this trend is worldwide, nothing much can be done about its implementation, but Fuller's can make adjustments in marketing strategies to mitigate the potential negative effects on sales. Another political factor that affects the firm's operations is globalisation that prevents the government from protecting with tariffs the import of foreign beer. Economic. The U.K.'s economy is growing slowly, and inflation is under control, but unemployment is still high (BOE, 2006). Prices of beverages cannot be increased and, in fact, in the face of competition may even have to be brought down slightly, cutting into profits. Economic uncertainty may dent customer purchasing power, but the social tension is a good marketing opportunity to attract the stressed out populace to its pubs and hotels. There is nothing like a glass of good ale to quiet the spirit and relax the mind, is there Social. Pub drinking and hooliganism are social phenomena played up in the media, resulting in serious discussions about the role that pubs play in violent behaviour. This has been going on for decades and certainly factors into Fuller's marketing strategies. Beer drinking and health are two other social issues linked for decades, and although most people acknowledge that drinking beer is good for health, second hand smoke in pubs seems to have been linked to lung cancer. Another health issue is obesity, which has led companies like Fuller's to develop healthier brands like mild ales and organic drinks. Age limits for on-trade sales have an effect on turnover. Wine drinking is on an up-trend especially in the U.K., cutting into beer sales (USDA, 2002, p. 53-55). Technological. Whilst Fuller's is pressed to increase brewing productivity, it is constrained by market demand for traditional brewing techniques that require slower production times and lower volumes. It can, however, make use of the Internet for its domestic and international marketing. Technology can help improve Fuller's supply chain management and ensure that supplies efficiently match demand. This will allow it to operate around tight production schedules whilst ensuring fresh supplies where needed without delivery shortages. If it wants to increase exports, it needs to internationalise distribution channels, for which the use of technology will certainly help (Luftman and McLean, 2004). Fuller's can take advantage of mobile telephone marketing channels to inform its customers of new products, promotional activities, and other data about pubs and hotels. This drives traffic to managed and tenanted estates with positive effects on sales. So-called open-source beer brands from microbreweries are a potential competitor but because of their small relative size, this may not pose a real threat to Fuller's at the moment. Nevertheless, the firm needs to assess the threat and analyse effects (Blakely, 2005). Environmental. The use of aluminium cans for beer products bring up waste disposal and recycling concerns. Breweries in the U.K. are monitored for their environmental compliance and meet stringent standards and regulations, adding to production costs. This is better and more acceptable to the market, however, compared to brewing offshore or importing foreign-brewed beers because the beverage is best consumed fresh. The weather affects beer consumption, not only on the volumes consumed but also on the types or brands brought to market. Fuller's attributed previous low sales of the seasonal blond Summer Ale due to a cold and wet summer (MindBranch, 2001, p. 14). Legal. The Chancellor's recent 1p tax on beer in anticipation of projected additional consumption from the soccer World Cup in June 2006 was condemned by CAMRA as "a slap in the face of beer drinkers, given that beer" is the traditional drink in Britain (Elliott, 2006). The possible effect of this tax will eat into higher profits that brewers were hoping to generate from the sporting event that happens only every four years. The total smoking ban and the legal sanctions on violators can change social habits of British beer consumers. Fuller's must adapt and formulate strategies to avoid a dip in sales while following the law. Recommendations on Fuller's Marketing Strategies Given the above findings, we recommend some improvements that will help Fuller's deliver on its goal of providing a premium retail experience to its customers. First, it must try to deliver above-market sales growth above the current 2 percent to the 4-6 percent range by strengthening its brands, product innovation, premiumisation, and its leading position in the cask ale and managed estates markets. Its brands are Fuller's key growth drivers, so it must continue strengthening its brand portfolio by investing consistently in this effort. Like its investments in refurbishment of pubs, inns, and hotels, Fuller's must deliver an acceptable rate of return on brand investments. Second, Fuller's must focus its resources on brand-market combinations that will deliver the best returns. The firm operates in several markets, each one offering different growth opportunities. It must allocate its marketing and advertising resources against brand-market combinations offering the best potential returns in terms of margin growth. Profits will enable it to execute robust growth strategies. Third, having identified which combination of its brands and markets offer the best margin growth potential, Fuller's must execute the growth strategies by focussing on expanding the consumer base, expanding its distribution capability, or building up the premium image of the brands identified (premiumisation) as it does for London Pride. Fourth, Fuller's must accelerate innovation. New products can help its brands broaden their appeal to new groups of consumers or address new consumption patterns. Its recent success with the launch of Discovery Blond Ale and the relaunching of ESB should help carry through its efforts to revitalise other brands. Possible ideas are matching each brand with specific types of food or activities, highlighting the health benefits of its brews, or innovating promotional activities that will traffic and push each of their products. Fifth, it must maintain its marketing excellence by developing the best marketing people and processes in the industry. It has to develop marketing training programs for its people, product innovation centres, and international standard marketing policies that would lead to growth in export sales where its competitors are winning the battle. Lastly, Fuller's positive image as a socially-responsible, independent family brewer of premium quality ales must be supplemented by the unique personal experience in its pubs, inns, and hotels where customers congregate as part of the British social tradition. It needs to build this image and convince clients that more than the brew and the place, what keeps them coming back is the special experience they have everytime they and their friends are together. It makes them feel special, proud, and happy to be at Fuller's. Bibliography Andrews, K. (1987) The concept of corporate strategy (3rd ed.). Homewood: Irwin. Ansoff, H. I. (1965). Corporate strategy: an analytic approach to business policy for growth and expansion. London: Pelican. Bank of England (2006). 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