JZ Benny Plc Strategic & Financial Analysis - Essay Example

JZ Benny PLC Overview: J Z Benny is a medium sized clothing retail chain with 30% market share and second biggest in the UK market having 30 stores chain in the South of England. JZ Benny had adopted employee friendly policies and offered them lifetime job security, which results in retaining employees and managers for long time. JZ had adopted Matrix organizational structure. But widespread change in socio-economic and political situation world over and effective changes in customers fashion trends and entry of different organization having different organizational culture posses a major threat to the business of JZ. New entrants in the market, suppliers outsourcing, and operational competitiveness through adopting new technologies like e-supply chain & efficient inventory management resulted into decrease in market share for JZ Benny. Due to these changes, JZ appointed new CEO from rival company with a view to follow and adopt those policies, which competitors are adopting to succeed in the market. New CEO adopted the policy of reduction of management and other staff & even curtailment in employee’s facilities has not resulted into revival of the company. These steps rather resulted apprehensions about job security among employees’. Though CEO had reorganized the JZ and adopted flatter structure and also invested heavily in RFID (Radio Frequency identification), altered outsourcing agencies and; locations but failed to bailout JZ Benny. This situation created an opportunity for market leader Mr. McQueen for possible acquisition of JZ Benny but competition commission laws prohibited it. In the mean time JZ Benny appointed a new CEO John Hammond to revive the JZ Benny. He noticed that negligible cash reserves; more overdraft and low share prices are the major constraints for the revival of the organization. Strategic & Financial analysis: Strategy development is about ‘fit’; that is identifying opportunities in the environment and building strategy by matching resources capabilities to those opportunities. Other argues that the resources and competences of organizations are what are most important because they explain differences between organizations, potential uniqueness and therefore superior performance. They take a stretch view arguing that strategies should be built on the unique competences and resources of organizations, by seeking out market in which such competences have special value or by trying to create new markets on the basis of such competences. There are other considerations too. Organizations have different stakeholders (Shareholders, customers, employees, perhaps government) and have different expectations from the organization and may exercise considerable influence and power over the strategy to be followed. Environment (Internal & External) is changing very fast and becoming more and more uncertain. The speed of change especially technological and global communication means more and faster then ever before (Mintzbeg, 1994), The rise and fall of strategic planning, Prentice- Hall). The most general layer of the environment is often referred to as the Macro environment and it influences almost all the organizations. The PESTEL framework (Johnson & Scholes, 2002) consists of political, economical, social, technological, environmental and legal aspects (See Appendix-1). It is particularly important that PESTEL framework is used to look at the future impact of environmental factors which may be different from their past impact. It will be a combined effect of some or all of these separate factors. In the case of JZ Bunny, there are several factors like economic, social, legal, technological and political have combined effect on the organization. The political factors like opening up of country boundaries, European union have directly affected the JZ. Emergence of overseas entrants, taking suppliers from china & SE Asia are the few things affected by political factors. Later economical factors such as sourcing the cloths from East Europe, china & S.E. Asia to minimize the costs to adopt JIT inventory practices, reduction in workforce more disposable income etc. clearly shows that how economics impact on the organization. Social factors like lifestyle, changing trends, more fashion consciousness, loyalty changes of customers and not stick to a particular shop or brand, purchasing from low cost shops, designer shops and middle of the road shop are the few factors that directly influenced by the social conditions of UK. Legal factor like competitive commission laws about monopolies serve as the great legal factor that shaped the policy and strategic directions for the JZ. Finally the technological developments like e-supply chain, RFID are the few technological factors, which influenced strategically to the organizations. Further the convergence of markets cost advantages are the strategic factors which externally affected the JZ. It has been quite evident that JZ is experiencing convergence of market i.e. companies from other countries are operating in UK as well as e-supply chain and e-marketing spelt trouble on JZ. Fast fashion, designer outlets and supermarkets low cost also affected JZ performances adversely. It has also been clearly identified that JZ is not the cost leader in the market. Low cost shops, middle of the road shops, supermarket having low priced fashion segment creates hurdle to establish JZ as cost leader in the market. When the business environment has high levels of uncertainty arising from either complexity or rapid change or both different approaches will be needed to understand the future impact of environment. As arms-length market relationships are increasingly relegated to trade in low-value products, institutional factors and linkages have become key determinants of trade relationships. In this regard, value chain analysis (see appendix-4) can assist in understanding the competitive advantage of particular countries, locations and firms (Kaplinsky, 2000). Scenarios (Heijden, 1996; Price, 1998; Shell, 1998) are a detailed and plausible view of low the business environment of an organization might develop in the future based on grouping of key environmental influences and drivers of change about which, there is a high level of uncertainty. Sharing and debating various scenarios improves organizational learning by making managers more perceptive about the forces in the business environment. Inherent within the notion of strategy is the issue of competitiveness. In business, that is about gaining advantage over competitors. There are many factors in the environment, which influences the competitiveness. The five forces framework (Porter, 1980) helps to identify the sources of competition in an industry or sector. The five forces are not independent of each other. Pressure from one direction can trigger off changes in another in a dynamic process of shifting sources of competition. The five forces model is a useful starting point in understanding competitive forces. The five forces framework consists of (i) The threat of entry, (ii) Threat of substitutes (iii) Power of buyers (iv) Power of suppliers & (v) competitive rivalry (See Appendix-2). Now if we analyze JZ Benny on the basis of five forces model we will be able to find out the causes of failure at a certain level. Threat from the two new entrants from overseas like Eldorado and Helgar posses a real threat to JZ Benny. Threat to substitution could easily be observable when low cost shops, designer shops and supermarkets provided fashion clothes to customers in the low prices. This trend has reduced the growth of market share of the JZ Benny. In the era of fast technological changes and effective communication technologies as well as globalization, the power of buyers i.e. customers has increased many fold. They have better choices and can bargain hard on quality, which ultimately reduced the profitability of JZ Benny. All over the world suppliers are also bargaining hard and JZ Benny also experienced it. China & SE Asian suppliers provided JZ Benny the cost advantage but on the bulk purchase and at the end, unsold articles rationalize the cost advantage. Finally the competitive rivalry between number one UK retailer Mirabel Fashions and JZ Benny is also affecting the later adversely. It has been indicated that market growth rate is approximately 25% but JZ has not been able to capitalized it and lagging behind. The financial position of the JZ Benny also cannot support the price war, low-margin operations. These five forces framework can be used to gain insight into the forces at work in the industry environment, which is mainly confirmed to macro/external environment. Finally to analyze any organization or industry strategically from both the business environment and concerning strategic capabilities, SWOT analysis (See Appendix-3) is one of the best models. A SWOT (Tilles, 1968; Jacobs et al., 1998) analysis summarizes the key issues from the business environment (External) and the strategic capabilities of an organization (Internal) that are most likely to impact on strategy development. This can be useful as a basis against which to judge future course of action. The aim is to identify the extent to which the current strength and weakness (internal factors) are relevant to and capable of dealing with the threats or capitalizing on the opportunities (External factors) in the business environment. It cab also be used to assess whether there are opportunities to exploit further the unique resources or core competencies of the organizations. Now to analyze strategic organization externally or internally SWOT analysis could provide us a complete view. JZ Benny will be analyzed below on its Strength, Weaknesses, Threats and Opportunities. Strengths of JZ Benny: First of all the strength of the company is that it is one of the oldest and known brand in the market. It has a long background of profit making and growth. The next strength, company enjoys that its employees and managerial staff are loyal to it because it provides them job security and other benefits to them. Turnover rate of staff is at minimum and brightest and best talent is with the company. The company finally has a new CEO John Hammond, a transactional leader with excellent track record in retail business. This type of leadership, which can generate faith and loyalty among employees and be able to restrict the belief about generated apprehensions about job security among employees. This type of leadership again motivate employees and managers alike to have belief generated by his predecessor has to be removed at any cost by Hammond otherwise most of the bright and talented staff either leave the jobs or do not participate with complete enthusiasm. Hammond predecessor D’Saster who in order to cut down the cost, withdrawn the facilities of employees and reduced headcount by 20% to make organization lean and efficient has generated adverse impact and many people left the organization. So new leader with transactional qualities may improve the loyalty and remove apprehensions about change. Till now the JZ Benny market position is only second to Mirable fashions with 30% market share and have cost advantage due to sourcing strategy. Now going through the financial statement of JZ Benny, it has net assets of around 3000 million pounds. So company is financially strong though in the last 2 year it is making small losses. Weaknesses: The most important weakness for the company is that it became complacent during the last 15 years. It has not changed in the last 15 years whereas the clothing fashion industry has changed a lot. Preferences, social trends and needs of customers have changed completely. Customers’ trend has changed and they are not loyal to a particular shop any longer and they started shopping in low cost shops, designer shops, and supermarkets. Department stores have begun to develop their own store brands and move into higher value markets. Gereffi (1999) has suggested that different types of retail firm, serving distinct market segments, have particular strategies, sourcing patterns and buying practices. So with the fast changed in customers’ preferences, JZ Benny could not be able to match the change speed and lags behind and finally making losses in last two years. The next weakness is that JZ Benny had not adopted latest technology. Technological changes, often driven by the industry it self have brought about lean retailing though the introduction of bar-coding, electronic data interchange and modern distribution centers. These changes have enabled companies to reduce inventory costs and be more responsive to market demand (Abernathy et al. 1999). JZ Benny has not been able to face overseas entrants. They have low cost business models and e-supply chain software. They have adopted a JIT philosophy and adjusted inventory. Fast fashion and designers outlets consumed the market share of JZ Benny. JZ Benny’s weakness was that it could not be able to improve its technologies. Competition is increasing from overseas using communication technologies and Internet (Gereffi, 1994). So the main weakness of the JZ Benny was that it cannot be able to with old the competitive pressure from overseas companies because new entrants have more sophisticated systems using latest technologies low cost techniques, trying to cover all age group and all strata of customers. Manufacturers are increasingly turning to outsourcing as part of their production process in order to lower costs. Branded retailers and merchandisers are devolving even more functions to other actors – such as packaging, quality control - in order to concentrate on marketing and brand development (Palpacuer, 2000; Gereffi, 1999). The next weakness for the company is that due to some wrong policies of Bob D’Saster, some key employees left the organization and workforce have apprehensions about job guarantee. JZ Benny’s sales have been decreasing i. e. from to 2080 M pound in 2005 to 1990 M pound in 2006. Benny has negligible cash reserves and 30 M pound overdraft and a record low share price, which is also restricting its financial capabilities. Threats: The major threat to JZ Benny is coming from the customers. Changes in social trends, change in the organizations culture that they are adopting team working principles, change in fashion trends, customers choices and loyalty as well as increase in customers disposable income asking for more choices finally resulted in the overall change in the market and product. JZ Benny has not changed with the trend and that posse’s great threat to it. The next main threat is from the rapid change in technologies. Companies from overseas have adopted e-supply chain to streamline inventory through JIT to cut costs. But JZ Benny has not adopted these technologies though out sourcing the manufacturing to china and SE Asia provided initial cost advantage but due to higher inventory of less moving products which has to be sold at discounted price rationalizes the cost advantage. So not been able to keep the cost of the product at low level also posing a threat. From the financial statement we can observe that sales has not been increasing as much as the cost of sales in 2004 and 2005. This indicates that cost of the products has been increased abruptly; Similarly operating expenses has increased almost double from 2003 to 2006 where as quantum of sales has not increased in the same ratio. These figures clearly show that operating expenses are higher and cost of the products is also at higher level. Sales have not been increasing at the same growth rate by which the whole industry is increasing. So high costing / pricing of products posses great threat to JZ Benny. During the tenure of Bob D’Saster, reduction in head count by 20% and that structure without the key people and apprehensions about change could also be considered as one of the threat to the JZ Benny. Opportunities: Even the loss in the last two years posses’ great threat to JZ Benny, but company has always an opportunity to revive itself by grabbing it. Competitive commission provides a greater opportunity to JZ Benny to survive and remains as an independent high street name. Due to policies adopted by Bob D’saster, now JZ Benny have a lean and flat structure with 20% reduced headcount with still long serving workforce loyal to JZ Benny provided greater opportunities to restructure itself. Next JZ Benny has the opportunities to find out most suitable outsource supplier from Romania which is part of EU to minimize the cost of the products JZ Benny has invested heavily in adopting advanced technology like RFID tags which ultimately facilitate barcode inventory processes and lowered the cost. Competitive commission binding provided an opportunity to New CEO John Hammond, a transactional leader with excellent track record in retail, to revive the JZ Benny with his dynamic leadership. The time provided by this opportunity to JZ Benny could be utilize to revive and stand firmly in the market and ensure its independent identity. Lastly the loss to sales is only around 4% which provides JZ Benny the clearest opportunity to revive immediately by cutting operating expenses, which almost increase 22% in 2005 with respect to, 2004 and almost double in 2006 in comparison to 2003. So this period provided JZ Benny an opportunity to re-look all its strategic aspects so that it could be turnaround. *************************************************************** References: 1. Abernathy, F.; Dunlop, J. T.; Hammand, J. H.; Weil, D. (1999), A Stitch in Time: Lean Retailing and the Transformation of Manufacturing - Lessons from the Textiles and Apparel Industries, Oxford University Press, New York. 2. Gereffi, G. (1999) ‘International Trade and Industrial Upgrading in the Apparel Commodity Chain’, Journal of International Economics, Volume 48, pp. 37-70. 3. Gereffi, G. (1994) ‘The Organization of Buyer Driven Global Commodity Chains: How US Retailers Shape Overseas Production Networks’ in Gereffi, G. and Korzeniewicz, M. (eds.), 1994. 4. Gerry Johnson & Kevan Scholes, (2002), Exploring Corporate Strategy, 6th Edition; Pearson education limited. 5. Heijden, K. Van Der (1996) Scenarios: The art of strategic conversations, Wiley. 6. Jacobs, T. Shepherd, J. and Johnson, G. (1998) ‘SWOT analysis’ in V. Ambrosini with G. Johnson and K. Scholes (eds.), Exploring techniques of analysis and evaluation in strategic management, Printice Hall. 7. Kaplinsky, R. (2000) ‘Spreading the Gains from Globalisation: What can be Learned from Value Chain Analysis,’ IDS Working Papers No. 110, IDS, University of Sussex, Brighton. 8. Mintzbeg, Henry (1994), The rise and fall of strategic planning, Prentice- Hall. 9. Palpacuer, F. (2000) ‘Promoting Industrial Upgrading and Decent Jobs in an Economy of Globalisation’ (draft). 10. Porter, M.E. (1980) Competitive strategy: Techniques for analyzing industries and competitors, Free press, p.5. 11. Price, G. (1998) ‘The why and how of scenario planning’ in V. Ambrosini with G. Johnson and K. Scholes (eds.), Exploring techniques of analysis and evaluation in strategic management, Printice Hall. 12. Shell (1998) ‘ The uses of scenarios’ described in G. Ringland, Scenario planning, Wiely. 13. Tilles, S. (1968) ‘Making strategy explicit’ in I. Ansoff (ed.) Business strategy, Penguin. Appendices Appendix-1. PESTLE Analysis (PEST analysis) The PESTLE acronym. Political Economic Social Technological Legal Environmental PESTLE Analysis is a simple technique, which can be used in a fairly sophisticated way, particularly when it is combined with Risk Analysis, SWOT Analysis, an Urgency/Importancy Grid and expert knowledge about the organisation and its external factors. PESTLE Analysis is normally used to help organisations identify and understand the external environment in which they operate and how it will operate in the future. I believe that a version of PESTLE Analysis can be used by the individual for personal development planning. Some people will argue that this is a use for which it was never designed and for which it may be inappropriate. My answer to that is to “try it, it does work for PDP”. The shorter version is a PEST Analysis – missing out Legal and Environmental factors. At the end of this document is an explanation of the use of PESTLE for organisational change. How PESTLE may be used for PDP For PDP purposes view yourself as being ‘the organisation’ – an organisation subject to external factors, and internal factors. 1 For each of the 6 PESTLE factors brainstorm and identify 5-10 things which, based on existing knowledge, may change or are likely to change over the short term, medium term and long term. 2 Then assess/evaluate their likely impact/affect/relevance/importance on/to/for you. Then narrow these down and rank them for importance/priority – so that each factor has 3 most important or most likely changes. Then select/choose the most important or most likely 3 changes from across all factors. You may need expert knowledge for this or need to use risk analysis and/or urgency vs importancy grid. 3 Then identify if a factor and/or its impact will be external or internal. Ie can you control it (internal) or does it control you (external). Or can you influence the external factor? 4 Then identify an action plan. Then take action ! The above can be carried out for a short, medium or long-term timescales. A number of PESTLE Analysis may be carried out for short term, medium term, internal and external and combined with Risk Analysis used to build up a useful picture of what the future might look like and what action we may need to take, or what the most important action which we need to take is and when we need to take it. The traditional use of PESTLE for organisational change is as follows: 1 List external PESTLE factors for the organisation - may need to brainstorm and have expert knowledge of the organisation and/or the world outside the organisation for this. 2 Identify the implications of each PESTLE factor for the organisation. 3 Decide the importance of the implications of the external factors – ranks or rate them. Normally this involves assessing their: impact over time, impact by type (positive or negative affects) and impact by dynamics (ie is the significance/importance of the implication increasing, decreasing or remaining unchanged). 4. Rate the importance of the implication to the organisation (eg using: critical, very important, important, significant, unsignificant). This may be further refined by ranking the likelihood of it happening (eg using: will happen, extremely likely, very likely, likely, unlikely, remote chance of happening, will not happen). 5. Scenario building. Or ‘what if..’ Used to develop scenarios of different alternative futures for ht organisation. APPENDIX-2 Strategy - Analysing competitive industry structure Defining an industry. An industry is a group of firms that market products, which are close substitutes for each other (e.g. the car industry, the travel industry). Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry. The most influential analytical model for assessing the nature of competition in an industry is Michael Porters Five Forces Model, which is described below:   Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are - The threat of entry of new competitors (new entrants) - The threat of substitutes - The bargaining power of buyers - The bargaining power of suppliers - The degree of rivalry between existing competitors Threat of New Entrants New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include - Economies of scale - Capital / investment requirements - Customer switching costs - Access to industry distribution channels - The likelihood of retaliation from existing industry players. Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: - Buyers willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a companys profitability. If suppliers have high bargaining power over a company, then in theory the companys industry is less attractive. The bargaining power of suppliers will be high when: - There are many buyers and few dominant suppliers - There are undifferentiated, highly valued products - Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) - Buyers do not threaten to integrate backwards into supply - The industry is not a key customer group to the suppliers Bargaining Power of Buyers Buyers are the people / organisations who create demand in an industry The bargaining power of buyers is greater when There are few dominant buyers and many sellers in the industry - Products are standardised - Buyers threaten to integrate backward into the industry - Suppliers do not threaten to integrate forward into the buyers industry - The industry is not a key supplying group for buyers Intensity of Rivalry The intensity of rivalry between competitors in an industry will depend on: - The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader - The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price-cutting - Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry - Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier - Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry. APPENDIX-3 STRATEGIC GROUPS AND COGNITIVE MAP AND GSS (Group support system). APPENDIX-4 The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.   The activities of the Value Chain Primary activities (line functions) Inbound Logistics. Includes receiving, storing, inventory control, transportation planning. Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product. Outbound Logistics. The activities required to get the finished product at the customers: warehousing, order fulfillment, transportation, distribution management. Marketing and Sales. The activities associated with getting buyers to purchase the product, including: channel selection, advertising, promotion, selling, pricing, retail management, etc. Service. The activities that maintain and enhance the products value, including: customer support, repair services, installation, training, spare parts management, upgrading, etc. Support activities (Staff functions, overhead) Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc. Technology Development. Includes technology development to support the value chain activities. Such as: Research and Development, Process automation, design, redesign. Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers. Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc. Creating a cost advantage based on the value chain A firm may create a cost advantage: by reducing the cost of individual value chain activities, or by reconfiguring the value chain. Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.   Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value chain activities. Porter identified 10 cost drivers related to value chain activities: 1. Economies of scale. 2. Learning. 3. Capacity utilization. 4. Linkages among activities. 5. Interrelationships among business units. 6. Degree of vertical integration. 7. Timing of market entry. 8. Firms policy of cost or differentiation. 9. Geographic location. 10. Institutional factors (regulation, union activity, taxes, etc.). A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by "Reconfiguring" the value chain. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.   Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire Value Chain. This idea is called: Supply Chain Management. Some people argue that network is actually a better word to describe the physical form of Value Chains: Value Networks.  Book: Michael E. Porter - Competitive Advantage Read More