Compass Group Ltd - Statistics Project Example

Financial Strategy - Compass Group Ltd Words: 2508 Compass Group Ltd Corporation Overview Compass Group is a company operating in the foodservice sector. The firm has been considered as the world's leading company in the specific commercial sector. It should also be noticed that the company is currently activating in more than 90 countries around the world generating an annual income of ' 12 billion [1]. Furthermore, the number of its employees is really impressive reaching the 400,000 who enjoy conditions of diversity both geographically but also culturally. It has to be highlighted that the company managed through the 60 + years of existence (it was established in 1941) to extend its activities globally through a continuous and radical growth both as a consequence of its performance as well as through the acquisitions of its competitors. Last year was a very challenging period for the company as its total operating profit fell from ' 500 million (in 2004) to ' 302 million in 2005 [1]. Compass Group Ltd Mission Statement The company has set as its mission [1] the delivery 'of great service and results through its people and the achievement of leadership in chosen foodservice markets'. The basis for the achievement of the above target is the commitment towards the employees, the shareholders and the customers (Parnell, 2003). Moreover, the firm recognizes the need for high levels of customer satisfaction which it aims to achieve through the extension of its activities and the development of its relationship with the client. Towards, this direction the use of innovative strategic plans is been considered as a useful tool towards the increase of the company's performance on a long-term basis (Hodgetts et al., 2003). Future Strategic Direction Historically [4] 'strategic decision analysis focused on the effects on individual firms; decisions were based solely on firm optimization criteria, such as return on investment and net present value. Increasingly, firms are recognizing that their internal strategic choices affect their suppliers and customers; however, traditional firm profit-maximizing criteria (e.g., return on investment and net present value) often reject new and emerging technologies' (Shank and Govindarajan, 1993) The firm's strategy for the future has to be based on the effort to retain its place in its industry while trying to secure its level of development throughout the years (Winston, 2002). On the other hand, the chosen plan has to be in accordance not only with the market's current trends but also with the company's financial strength and its ability to respond effectively in every issue appeared in the daily commercial transactions of the specific industry sector. The influence of particular elements has to be taken into account during the design of the corporate strategy for the future (Pritsker, 1997). In order to estimate the effects of the firm's strategy in the future we could use the strategic cost management framework as stated by Shank and Govindarajan which [2] 'demonstrate the strategic power of value chain analysis, i.e., linking external value creating activities all the way from basic raw materials, to component suppliers, and through to the ultimate end-use product delivered to the consumers'. Moreover, the specific framework helps to examine 'how cost management and cost control must be differentiated depending on the strategic positioning chose by the firm, be it cost leadership or product differentiation' [2]. Relative Market position Compass Group is - as always stated - a leading company in its area of operations. Moreover, the company is listed on the London Stock Exchange and is a member of FTSE100 [1]. In addition, as always stated above, the firm currently operates in over 90 countries around the world, an achievement that supports its recognition as the leading company in the specific industry. On the other hand, the company has achieved to extend its activities through the establishment of a series of brands which currently dominate the foodservice sector. In this context, a reference to the firm's brands could be valuable for the explanation of current corporate strategy as well as for the planning of the company's strategy in the future. More specifically, the following 'foodservice - companies' are the firm's brands: Burger King, Upper Crust and Caffe Ritazza. The above brands, which are very well known to the public through their operations in a series of countries around the world, have to be restructured in order to meet the current conditions and demands both of the national and the international markets. The firm's strategy under these conditions has to be formulated in accordance with its position in its market as well as its ability to face the difficulties involved in the strategic planning with a long term scope of application. Value Chain analysis According to [3] the 'current accepted European definition of Supply Chain Management is 'The strategic management process, unifying the systematic planning and control of all technologies, materials and services, from identification of need by the ultimate customer. It emcompasses planning, designing, purchasing, production, logistics and quality. The objectives are to optimise performance in meeting agreed customer service requirements, minimising cost, whilst optimising the use of all resources throughout the entire suppy chain'; this definition highlights the importance of the needs of the customer and the strategic nature of supply chains'. As for the definition of value-chain as stated by Shank and Govindarajan (1993), this can be summarized to 'the linked set of activities required to transform raw materials to products for end-users'. Regarding the above, the value chain analysis has to be focused to the examination and the identification of the activities that lead to the formulation of the final product as well as of the service provided to the public taking into account that the relevant forms are very likely to be differentiated in accordance with the local cultures and the specific financial environment of a given market (Nattermann, 2000). Strategic cost drivers In order to decide the elements that will characterize the firm's strategy in the future, a reference should be made to the level of influence of the strategic cost drivers. A possible solution to the evaluation of this indicator could be the plan proposed by Wiseman (Wiseman's Strategic Option Generator, 1985). According to this plan the target set by a company's strategic management team has to follow certain rules which are depended from the firm's needs under its particular condition of commercial activity. Using the Strategic Option Generator plan (as designed by Wiseman) the most important factors for the firm's strategy will be its suppliers, its customers and its competitors. In this context, the strategic plan will have to be formulated in accordance with the demands and the requirements set by the above parties while interacting with the specific company. Moreover, the use of Balanced Scorecard could help to estimate the level of cost related with these activities as well as the impact of the results produced to the company's performance. Figure 1 - Wiseman's Strategic Option Generator (Wiseman, C., 1985, 'Strategy and Computers', Dow Jones - Ivwin) What is the strategic target' Supplier Customer Competitor What is the strategic thrust' Differentiation Cost Innovation Growth Alliance What is the mode' Offensive Defensive What is the direction' Use Provide According to Shank and Govindarajan (1993) the strategic cost drivers of the company's future strategic plan have to be formulated [4] 'in terms of structural choices and executional skills that determine a firm's competitive position whereas structural choices include plant and operational scale, degree of vertical integration or scope, experience, process technologies employed, and product line complexity; executional skills are determined by work force involvement, total quality management, capacity utilization, plant layout efficiency, product configuration, and exploiting supplier or customer linkages' Profit impact of market strategy According to the results of last year the company faces an intensive pressure regarding its financial performance. The reasons for this situation can be found to the existence of extremely difficult financial conditions both locally but also globally. More specifically the financial transactions around the world face a decline in their value and as a result all industry sectors suffer from losses at a significant level. Under these conditions, the strategy of the company has to be formulated in accordance with the needs and the demands of the relevant industry. Moreover, in order for this strategy to achieve its targets, it should be formulated using as indicators the level of profits achieved in the past (both in a long term and in a short term basis) as well as the specific types of interaction and dependence of these profits from the general market structure and performance. In this context, the decline in the company's profits as monitored in last year (' 1 million) comparing to the year before, i.e. 2004 (' 180 million, Annual Report, p. 38) has to be taken into consideration for the design of the company's strategy for the future. Relationship between strategy and management control Shank and Govindarajan (1993) proposed [4] 'an alternative approach for evaluating strategy; Their approach recognizes the weaknesses of current managerial accounting principles; However,it also recognizes that decisions should not be made solely on the basis of strategic implicationswithout considering cost.;Their approach, termed Strategic Cost Management (SCM), includes analyses of the value chain, cost drivers, and competitive advantages. The important contribution of Shank and Govindarajan (1993) is the integration and combination of supply or value-chain ideas with strategy concepts, such as Porter's competitive advantage, and cost concepts from the managerial accounting literature. This integration builds upon ideas from the industrial organization literature'. In the above context, strategy has to be considered as closely connected with every decision taken in the managerial sector of a corporate environment (David, 2003). Moreover, the control made by the management team should be viewed as the only effective tool for monitoring and evaluating any strategy proposed or applied in an organizational environment. Porter's industry analysis According to the theory stated by Porter (1985), while operating in a commercial environment a company has to face five different forces (as shown in Figure 2 below) which tend to act simultaneously. Figure 2 - Porter's Five Forces of Industry Competition (Porter, M.E., Millar, V.E., 1985, 'How Information gives you competitive advantage', Harvard Business Review, July-August) Threat of New Entrants Bargaining Power of Suppliers The Industry: Jockeying for position among Rivals Bargaining Power of Customers Threat of Substitute Products or Services The presentation of the above 'powers' on the company's performance - as stated by Porter - is differentiated when examining the issue from the view of Shank and Govindarajan (1992). More specifically, it is stated [3] that the inclusion of the entire supply chain network as a task to be managed demands that management accountants become familiar with the value chain concept (Porter 1985) in contrast with the internal focus that is typically adopted in management accounting (Shank and Govindarajan, 1992) as these authors argue that management accounting usually takes a value-added perspective and this fails to recognise the potential for exploiting linkages with the firm's suppliers and customers'. Action plan of strategic direction The above principles as set by Porter (1980) can be effectively used in order to formulate a flexible strategic plan for the specific company. Moreover, the above principles have to be combined with the views of Shank and Govindarajan (1993) who based on Porter's study to formulate a general accepted corporate strategy that could be used in any business environment. In accordance with the views of the above researchers, the priority in the specific strategy should be the costs involved both in its design and its application as it can be expressed through [4] 'economies of scale of production, learning curve effects, cost control capabilities, and cost minimization in research and development, service, or marketing (Porter 1980, Shank and Govindarajan, 1993)'. Moreover, the expansion of the company to more markets globally (through the creation of new brands) will help the increase of the firm's performance in a long-term basis. In this context, 'brand loyalty, customer service, distribution networks, product design and features, and product technology can be used to achieve differentiation' (Porter, 1980). It should be noticed that the company's strategy should be formulated taking into account the differences that the firm's performance appear on a worldwide basis. More specifically, the company tends to present a strong growth in profit and ROCE (although differentiated between 2004 and 2005, 6.4% in 2004 and 5.7% in 2005) in North America and Continental Europe as well as in Rest of the World whereas in UK its growth is in progress [1]. Valuation of the company's share A general overview of the company's performance lead to the assumption that its share has suffered a significant loss - not directly but indirectly through the absence of profit the last year. More specifically, the reported earnings per share for 2005 were 0.0p whereas in 2004 they were 8.3p which is a very important differentiation. In order to evaluate the company's share under these conditions (Damodaran, 2001), we should refer to the following figures: the total equity shareholders' funds in 2005 were 2,284 (m) whereas in 2004 they were 2,482 (m), a differentiation which is rather limited compared with the figures revealed when using other indicators of the firm's performance. Moreover, the dividends paid in 2005 were 211 (m) instead of 200 (m) in 2004 which is another small difference. The above figures prove that the company's performance the last year was disappointed but the firm managed to keep the balance regarding the profits attributable to its shareholders, trying perhaps to avoid a radical decrease of the firm's power in the global market (Hardgrove et al., 2003). For the future, the differentiation in the strategic direction will lead the firm to a phase of a stable development which cannot be guaranteed to be radical. However, the combination of the increase in the benefits given to the shareholders as well as to the supply chain's participants can ensure the firm's survival in the market as well as its continuous growth the next years. Financial ratios The ratios that refer to the company's financial performance can be divided into particular categories in accordance with the figures used in their calculation (as extracted from the company's accounts and other financial reports in an annual basis). Note: the figures used for the calculations below represent a ' 000 number each. A. Efficiency Ratios 1. Cash Turnover Ratio Formula: Cost of sales {excluding depreciation}) / cash a. Year 2004 11,276 / 266= 42.390 b. Year 2005 12,404/318= 39.006 2. REVENUE PER EMPLOYEE Formula: Net sales / number of employees a. Year 2004 729 /316,553 = 0.002 b. Year 2005 439/ 322,270 = 0.001 B. Liquidity Ratios 1. CURRENT RATIO (or Working Capital ratio) Formula: Current Assets / Current Liabilities a. Year 2004 2,400/ 472 = 5.084 b. Year 2005 2,549/ 451= 5.651 2. Quick Ratio or Acid Test Radio Formula: (Current Assets - Stocks) / Current Liabilities a. Year 2004 (2,400-279/ 472 = 4.493 b. Year 2005 (2,549-263) / 451 = 5.068 3. CASH RATIO Formula: Cash / Current liabilities a. Year 2004 266/ 472= 0.563 b. Year 2005 318/451 = 0.705 C. Profitability and Performance Ratios 1. RETURN ON CAPITAL EMPLOYED (ROCE) Formula: (Net Profit before tax / (Total assets - Current liabilities)) x 100 a. Year 2004 (370/5,586) x 100 = 6.62 % b. Year 2005 (171/ 5,346) x 100 = 3.19% 2. RETURN ON EQUITY Formula: (Profit attributable to ordinary shareholders / Shareholders' funds) x 100 a. Year 2004 (216 / 2,482) x 100 = 0.0870 x 100 = 8.70 % b. Year 2005 (216 / 2,284) x 100 = 0.0945 x 100 = 9.45 % 3. RETURN ON SALES Formula: (Net Profit before tax / total income) x 100 a. Year 2004 (370 / 11,772) x 100 = 0.0314 x 100 = 3.14 % b. Year 2005 (171 / 12,704) x 100 = 0.0134 x 100 = 1.34 % 4. COST: INCOME RATIO Formula: (Total Operating Expenses / Total income) x 100 a. Year 2004 (11,276/ 11,772) x 100 = 0.957 x 100 = 9.57% c. Year 2005 (12,404 / 12,704) x 100 = 0.976 x 100 = 9.76% 5. VALUE ADDED Formula: Total Income - Administrative expenses a. Year 2004 11,772 - 11,276= 496 b. Year 2005 12,704 - 12,404 = 300 6. NET PROFIT MARGIN Formula: (Net profit / Turnover) x 100 a. Year 2004 (370 / 11,772) x 100 = 0.0314 x 100 = 3.14% b. Year 2005 (171 / 12,704) x 100 = 0.0134 x 100 = 1.34% 7. GROSS PROFIT MARGIN Formula: (Gross profit / Turnover) x 100 a. Year 2004 (496 / 11,772) x 100 = 0.0421 x 100 = 4.21% b. Year 2005 (299 / 12,704) x 100 = 0.0235 x 100 = 2.35% 8. RETURN ON INVESTMENT Formula: net profits before tax / shareholders equity a. Year 2004 370/ 2,482 = 0.149 b. Year 2005 171/ 2,284 = 0.0748 C. Stock Market Ratios 1. PRICE PER SHARE Formula: shareholders value after dividend payment / number of shares a. Year 2004 2,482/2,155,345,032 = 1.151 b. Year 2005 2,284/2,155,661,135 = 1.0595 2. Price / Earnings (P/E) Formula: Current market share price / earnings per share a. Year 2004 9.3 /21.1 = 0.440 b. Year 2005 9.8/19.1 = 0.513 3. Earnings per share Formula: profit available to equity shareholders / average number of issued equity shares a. Year 2004 216/ 2,155,345,032 = 1.0021 b. Year 2005 216/2,155,661,135 = 1.00201 4. Dividend payout ratio Formula: Dividends / Earnings a. Year 2004 200/ 21.1 = 9.478% b. Year 2005 211/ 19.1= 11.047 % 5. Dividend yield ratio Formula: Annual Dividends per share / Price per share a. Year 2004 200/9.3 = 21.505 % b. Year 2005 211/9.8 = 21.530 % References Damodaran, Aswath. 2001. Corporate Finance: Theory and Practice. New York: John Wiley & Sons, Inc. David, F.R. 2003. Strategic Management Case Writing: Suggesting after 20 years of experience. SAM Advanced Management Journal, 68(3): 36-45 Hardgrove, M.W., Voloshko, A. 2003. Maximize Your Global IP: Strategic Planning Helps Multinational Companies Enhance Profits and Avoid Pitfalls. Journal of Accountancy, 195(4): 43-49 Hodgetts, R., Luthans, K. 1998. Pragmatic Tools to Assist Leaders: The Use of Metrics and Spider Diagrams. Journal of Leadership Studies, 5(1): 18-24 Jonassen, D. 2003. Using Cognitive Tools to Represent Problems. Journal of Research on Technology in Education, 35(3): 362-376 Nattermann, P.M. 2000. Best Practice [Neq] Best Strategy. The McKinsey Quarterly, 22-27 Parnell, J.A. 2003. Five Critical Challenges in Strategy Making. SAM Advanced Management Journal, 68(2): 15-25 Pritsker, K.D. 1997. Strategic Reengineering: An Internal Industry Analysis Framework. SAM Advanced Management Journal, 62(4): 32-43 Shank J.K. and Govindarajan, V. 1993. Strategic Cost Management and the Value Chain. Journal of Cost Management, 5(4): 5-21. ' Winston, M. 2002. NGO Strategies for Promoting Corporate Social Responsibility.' Ethics & International Affairs, 16(1): 71-85 http://www.compass-group.com/ [1] http://mba.tuck.dartmouth.edu/pages/faculty/vg.govindarajan/research/book_scm.html [2] http://www.shu.ac.uk/schools/fsl/fisjnl/vol1996/pprs1997/jmarson.htm [3] http://www.mountain-plains.org/pubs/pdf/MPC96-61.pdf#search='Shank%2C%20J.%20%26%20Govindarajan%2C%20V.%201992%2C%20%E2%80%98Strategic%20Cost%20Management%20and%20the%20Value%20Chain%E2%80%99' [4] Read More