Turnerwood Plc Strategic Management - Case Study Example

Case Study - Turnerwood Plc. Strategic Management To critically analyse the information and knowledge needs of the organisation. 2. To critically analyse accounting based information with the aim of supporting the financially measured developmental needs of the organisation. 3. To analyse the management decision and future business plan of the organisation. Case Study - This case study deals with financial strategic management issues of Turnerwood Plc which revealed a turonver of 33.7m and a pre-tax profit of 3.4m by the end of 2005. The company manufactures garden equipment and its sites and offices are located in Derby, Uttoxeter and Burton -on- Trent. The company uses three brand names which are generally recognised as providing value for money. Products and parts for the company are usually imported from China, Taiwan and Bangladesh. The first part of the discussion deals with analysis of the information and knowledge needs of the company. This would involve issues related to operations, inventory management and customer service. However company balance sheet and profit and loss accounts should be taken into consideration to analyse whether Turnerwood Plc is in a sound financial position. We discuss this possibility with derivation of the measures of performance and also provide quantified statements to support the analysis. Considering information and knowledge needs of the organisation, the company has largely focused on understanding consumer needs and has manufactured stock for anticipated sale along with longer production runs. However if demand is not as expected, sale would be slow and in this case forecasting technqiues of what customers actually want in terms of value would be important in production, marketing and management (Walters, 1997). The sales invoice processes, the company balance sheet and profit and loss accounts provide some indication of the company means adopted for measuring performance and product analysis. These would be some of the important factors for information and knowledge management of the organisation. The company runs a computerised ordering system and accumulates sales and maintains an inventory for knowledge management and runs an upgraded information management system for its 1500 line items. The computerised information systems are operated for tasks such as purchasing, stock control, accounting ledgers, sales, payroll management and general expenditure management. The stock inventory, sales invoicing and accounting services are done with upgraded computerised systems. The most recent balance sheet available to the members of the strategy teams is given here. Table A: Published Balance Sheets as at 31 October All figures in 000 2003 000 000 2004 000 000 2005 000 000 Fixed Assets *1 4915 4928 4608 Current Assets Stock *2 2765 3063 3915 Debtors 3832 4802 5352 Cash 2313 2237 604 8910 10102 9871 Creditors payable in less than a year Trade Creditors 1263 1432 1783 Taxation 1679 1823 1270 Dividends 2494 2709 1888 5436 5964 4941 Net Current Assets 3474 4138 4930 Net Assets 8389 9066 9538 Financed by Bank Loans 11% 1300 1300 1300 Share Capital Ordinary shares of 1 1000 1000 1000 Reserves 6089 6766 7238 Share Holders Funds 7089 7766 8238 Capital Employed 8389 9066 9538 The balance sheet of the company shows that the fixed assets of the company by the end of 2005 is at 4608,000 and current assets are at 9871,000. Payable creditors of the company amount to 4941,000 with net assets at 9538,000. Bank loans are at 1300,000 with shareholder funds at 8238,000. The capital employed in the company is at 9538,000 which is equivalent to the net assets and considering reserves and shareholder funds at 8238,000 and 3.4 million pre tax profits, the reality of whether the company is in sound financial position will have to be analysed further using employed capital, operating and retained profits. The latest and audited profit and loss statement has been made available, and can be seen in Table Six. Table B: Published Operating Statement. All values in 000's. Profit and Loss Account for the years ending 31 October 2004 and 2005 000 000 000 000 Sales 36725 33671 Cost of goods sold 21224 21440 Gross profit 15501 12231 Selling and distribution 4828 5304 Administration 3140 7968 3373 8677 Operating Profit 7533 3554 Net interest 110 130 Profit before taxation 7423 3424 Taxation 2246 952 Profit for the year 5177 2472 Dividends 4500 2000 Retained profits 677 472 Notes to the profit and loss. Sales analysis 000 000 Home 33,484 30,716 Export 3,241 2,955 Included in the derivation of the Operating Profit Depreciation charged 375,000 342,000 Audit fees 75,000 85,000 Staff costs 4,626,000 4,979,000 Director's remuneration 425,000 475,000 From the profit loss and balance sheet accounts, staff costs and director's remuneration seem to have increased considerably. Yet operating profits and gross profits are at 3554,000 and 12231,000 respectively which is lower than 7533,000 and 15501,000 that was reported in 2004. Comparing the profits in 2004 and 2005, and the costs in 2004 and 2005, the company was in a financially better position in 2004 than in 2005. According to 2005 reports, operating costs and staff costs have increased considerably and the operating profits noted are lower than that reported in 2004. The retained profits are also considerably lower at 472,000 whereas in 2004 it was at 677,000. The decreased profits reported by the company suggests that the financial position of company based on knowledge and information management is not too sound although there have been several improvements in the knowledge management and information framework to keep up with the newer demands of consumers and the company. The difference between operating costs and the gross profits clearly indicates performance measures of the company and performance was better for 2004 than 2005. Thus an analysis of the statement as to whether Turnerwood Plc is financially sound would be subject to several issues such as profits on a comparative basis with the previous years and the increase or decrease of operating costs in the company. So, although the statement is reassuring, it may not be completely valid. The effective analysis of the company sales performance would provide a financially based information on the company including performance measures, financial needs of the company and the general developmental focus attained. Thus identifying financial and developmental needs of the company would depend on operationally based measures of performance and show how success could be achieved through a better level of alignment. Strategy is especially important in case of uncertainty when product development and marketing may not give expected results or the market conditions are not predictable (Snowden, 2005). The proposal of higher levels of particpation by managers will also be examined in this context. Is it a feasible strategy to consider higher levels of participation of managers as effective in improving company performance. Kelly and Gennard (2007) draw on interviews with HR, finance and marketing directors to examine strategic decision making in organisations and the characteristics and competencies of strategic decision makers. Directors in certain cases can exert their influence through several informal channels of an organisation and influence strategy formation and decision making. The decision makers within an organisation are managers focused on improvement of the business rather than focused on general management of the organisation (Kelly and Gennard, 2007). The strategic decision making process has important implications for any organisation and management structure. Thus the emphasis on direct participation of managers may not even be required as managers already have a significant influence on the decision making process. In this context the company sales performance can be analysed effectively. The sales figures of 2004 has been for 36725,000 when compared with the 2005 values in sales which is 33671,000 so a considerable reduction in sales has been noted in the last year. Cost of goods sold have however remained nearly the same through the past year. Sales analysis shows a decrease in both export value from 3241,000 to 2955,000 and decrease in sale of home based articles in the range from a value of 33,484,000 in 2004 to 30,716,000 in 2005. The five year sales profie of the company is given as follows Table C: Five year sales profile, 12 months to October 31: Channel 2001 m 2002 m 2003 m 2004 m 2005 m Distributors 17.8 19.0 21.0 21.2 20.0 Direct 12.3 13.5 14.9 13.2 11.8 Overseas 0.3 2.0 1.9 2.3 1.9 Total 30.4 34.5 37.8 36.7 33.7 The sales profile of the company shows that direct sales have decreased over last year, and sales through distributors increased in 2003-2004 but again decreased slightly in 2005. Overseas sales have also gone down and the sales figures are now changed from a total of 36.7m to 33.7m from 2004 through 2005. 2003 and 2004 showed the highest sales figures and profit growth for Turnerwood plc. Thus effective analysis of the sales performance of the company could be based on financial information and evaluation and this is related to not just sales figures and profits, operating costs and general costs of products and manufacture but would also include the decision making structure that would delineate the broader performance measures of the company (Correnti et al, 1998; Coles et al, 2001). Certain financial measures that could be considered here such as countering the problems of inventory management. As anticipatory or expected sale is not in accordance with actual sales, the estimated customer expectations seem to have fallen out of balance with the inventory drawn out by the company and a balance needs to be achieved between customer demands and expectations and the products planned or manufactured by the company. For this objective to be attained, it is important that proper marketing surveys are done to determine customer preferences, then according to marketing needs, a marketing strategy will have to thought out so that there is a greater demand for the products with emphasis on brand values. After this further market needs and demands should be determined considering competitive factors and considering oeprating costs and estimated profit margins of the company, production and manufacture should be determined in accordance with the financial capabilities of the company. The numerically based and operationally based measures of performance in this case would be the profits attained by the company for 2005, the sales figures and changes in the sales figures and the differences between operating costs or total manufacturing, production and marketing costs and the gross profits and sales of the company. The last part of the analysis of Turnerwood plc would be based on identifying the management decision and future business plan of the organisation considering issues of new product development and management changes. In this case the focus is on how managers should understand the management problems that are associated with new product development and this could be analysed using management and decision making theories to bring out a solution for the case. In this case, the Turnerwood plc management will have to determine whether the Hedge Clipper HC007 should be developed as a new product and what would be the costing methodology adopted. Turnerwood plc initially marketed HC003 hedge clipper which has now been updated to a new product Hedge Clipper HC007 model. HC003 sells for 16 and the costs of production is at 11 per unit, so a 5 profit margin was fixed for this product and the sales of HC003 was at 3500 units. The company expects that 4000 units of the updated product model HC007 will be sold this year. The costing for this new model is given as follows: Table D: Preliminary costs summary for Hedge Clipper HC007 Direct Materials 3.00 Direct Labour 2.00 Variable Overheads 1.00 Fixed Overheads 6.00 Total Cost 12.00 Proposed Selling Price 18.00 Target Gross Margin 6.00 Fixed Overheads are to be absorbed at the rate of 300% on the value of Direct Labour although there may be several cost issues in the addition of new product despite the fact that the total costs of manufacture and production of the new product would be 12.00 and the proposed selling price would be 18.00 with a target profit gross margin at 6.00. For marketing of this new product, special promotions at a lower price could also be implemented and the management would arrive at management decisions that would consider marketing initiatives for the new product. In this context of budget and financial planning, Abratt et al (1994) emphasised that marketing planning and annual budget are the two procedures that organisations seem to do systematically to improve company performance. The interrelationship of marketing planning and annual budgeting are seen in several consumer goods companies as described by Abratt et al (1994) and a high degree of interaction is usually expected and observed between marketing and finance departments. This also explains the fact that most companies do marketing plans and financial budgeting at the same time as sales targets are also actually set to meet financial targets. Cost, quality and timing are the three essential features of new product development and most companies give equal emphases to these three aspects of product development and almost simultaneously (Hoque and Monden, 2003). Everaert and Bruggeman (2002) highlighhts the imporatnce of cost targets in new product development where the costing or pricing methodology should include several issues of design quality, total product costs and development time. There may be two approaches to the costing methodology, one in which there are no specific cost targets and the focus is on design and the other in which manufacturers and engineers are expected to reduce or minimise the cost levels of future products so that the product design could be implemented at the lowest price. These approaches are followed by companies along with high and low time pressures and Everaert and Bruggeman showed that the process of meeting cost targets can lead to lower cost new products without damaging quality or design of the products or substantially increase the time taken for new product development. However the findings show that 'under high time pressure cost targets lead design engineers to work longer on a partciular design without there being a corresponding cost decrease' (Everaert and Bruggeman, 2002). Considering the costing methodology that breaks down the cost of the new product in this case Hedge Clipper into direct materials, direct labour, fixed and variable overheads give the total costs of all these components and the cost of the Hedge clipper is noted at 12 pounds. A profit of 6 is thus expected when the sale price is fixed at 18 per unit. An expected 4000-4500 units should be sold as marketing targets are specified considering that the older version HC003 sold 3500 units, although it was priced at 16 per unit. A 2 increase in sale price could be easily acceptable for customers if an upgraded and new product is distributed in the market. Maintaining a cost target is imporatnt and in case of production of the hedge clipper, engineers will have to work in accordance with the costs specified by the management. Although time pressures are not yet conspicuous, when the production begins even time pressures would become important for development of the new product. An alternative costing methodology would be based on no cost targets approach in which the focus would be on design and features and upgradation of the new product rather than the cost. However in this case, Turnerwood seemed to have given equal emphasis to design and upgradation through new product development initiatives along with maintaining specific cost targets. Bibliography Abratt R.;Beffon M.;Ford J. (1994) Relationship between Marketing Planning and Annual Budgeting Marketing Intelligence & Planning, Volume 12,Number 1, pp. 22-28(7) Coles J.W.;McWilliams V.B.;Sen N. (2001) An examination of the relationship of governance mechanisms to performance Journal of Management, Volume 27,Number 1, pp. 23-50(28) Correnti S.;Nealon P.A.;Sonlin S.M. (1998) Total Integrative Risk Management: A Practical Application for Making Strategic Decisions Insurance: Mathematics and Economics, Volume 22,Number 3, pp. 302-302(1) Everaert P.;Bruggeman W. (2002) Cost targets and time pressure during new product development International Journal of Operations & Production Management, Volume 22,Number 12, pp. 1339-1353(15) Hoque, Mahfuzul;Monden, Yasuhiro (2003) An empirical study on simultaneous achievement of quality, cost and timing in product development International Journal of Manufacturing Technology and Management, Volume 4, Numbers 1-2, pp. 1-20(20) Hiang, Liow Kim;Ooi, Joseph T.L. (2000) Current issues in strategic corporate real estate asset analysis and management Journal of Corporate Real Estate, Volume 2,Number 3, pp. 240-249(10) Kelly, James;Gennard, John (2007) Business strategic decision making: the role and influence of directors Human Resource Management Journal, Volume 17,Number 2, pp. 99-117(19) stermark R.;Sderlund K. (1999) A multiperiod firm model for strategic decision support Kybernetes: The International Journal of Systems & Cybernetics, Volume 28,Number 5, pp. 53-55(3) Smit, Han T. 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