Essentials of Managerial Accounting - Essay Example

Tesco Case Study Table of Contents Introduction 2. Tesco – Company Overview 3. of the competitive environment in which the firm operates 4. Tesco – Financial performance 4.1 Ratio Analysis 5. Current corporate strategy 6. Conclusion - Recommendations for the firm’s strategic direction in the next 2 years 6.1 Balanced Scorecard Analysis References Appendix 1. Introduction The stabilization of organizational growth has been traditionally one of the major concerns of leaders in firms worldwide. In extremely competitive markets, the achievement of a stable growth can be a challenging task especially when the overall financial environment does not favour innovative strategic projects. However, firms that are well established in their market are not particularly threatened by the expansion of globalization – and the following increase of competition in all industries. Current paper focuses on the examination of financial performance of a well-known British firm: Tesco. Currently, the firm is considered to be the most powerful competitor in the British supermarket industry – being involved also in activities of the retail sector, such as the provision of financial, insurance and telecommunication services. The high diversity in the firm’s activities and the support of promotion across its product line can been considered as the major advantages of the firm towards its rivals. However, the firm’s performance has not always been high; variations can be identified in the level of the firm’s growth, as proved through the firm’s financial analysis. In any case, these variations are temporary and have not influenced the level of the firm’s profitability – as verified using a series of relevant ratios. The stabilization of the firm’s growth would be achieved through the introduction of a series of measures, i.e. the alteration of the firm’s existing strategic plans. A balanced scorecard has been developed indicating the policies required for the increase of the firm’s competitiveness – referring to the achievement of a stable growth within the specific industry. The achievement of a continuous growth could be depended on the ability of the firm’s managers to understand organizational needs and potentials – as these elements have been incorporated in the Balanced Scorecard. 2. Tesco – Company Overview Tesco is one of the leading supermarkets in Britain. The firm’s activities are expanded above the traditional grocery sales – financial, insurance and telecommunications services are available to the firm’s customers. Currently, the firm is first among the other firms of the particular industry. However, its growth is not stabilized – taking into consideration the fact that its rivals have achieved a higher rate of growth – compared to their performance in the previous years. This fact is clearer in the case of Sainsbury’s – another major competitor in the British supermarket industry – which increased its market share at the level of 16.4% - compared to 16.1% of last year (Wood, 2010). Managers in Tesco have introduced a series of offers and benefits for the clients – such as vouchers of increased value for the customers with Club Card - aiming to increase the firm’s profitability up to the end of the year (Wood, 2010). The stabilization of the firm’s growth would be a difficult task – taking into consideration the level of competition developed in the particular industry (as explained below). However, through the introduction of appropriate strategic plans – as suggested in the form of a Balanced Scorecard, see the Appendix section – the firm could reach a stable rate of growth towards its competitors. 3. Description of the competitive environment in which the firm operates The supermarket industry in Britain is well developed; in 2010 the industry’s sales have been estimated to £4.7bn (Market Research, October 2010). The major competitors in the industry are the following ones: Tesco, Asda, Sainsbury’s and Morrison’s The performance of the firms operating in the particular industry shows signs of continuous growth – a fact related probably with the range of activities in whish these firms are involved; indeed, all firms of the particular sector have expanded their operations above the traditional activities of supermarkets: electronic equipment, financial and insurance services and pension schemes are among the products available by the firms operating in the British supermarket industry. Up today, the firms operating in the British supermarket industry have managed to achieve a continuous growth; however, in the years that follow, this trend will be differentiated. More specifically, instead of the 26.7% of growth achieved by supermarkets in Britain from 2005 onwards, the next years the level of growth of these firms is not expected to be higher than 12.6% (Market Research, October 2010). In accordance with a recent report the current share of Tesco in the British supermarket industry is estimated to 30.7% - increased from the 30.6% of last year (Wood, 2010). A differentiation in the level of growth of the firms of the particular industry has been identified since the beginning of the year: Asda had a 4.3 percent of growth, lower than Tesco, which achieved a 5.5 percentage of growth. The other two major competitors in the industry had also high levels of growth; more specifically, the Sainsbury’s market share has been increased by 6.8 per cent while Morrison’s achieved the highest growth: its market share was increased by 10.6 per cent (ISN, February 2010); it should be noted that up today, the level of these firms’ profitability has been differentiated: the growth of Morrison’s has been delayed – because of the acquisition of Somerfield – while Tesco managed to increase its market share – as revealed through the Graph 1 – Appendix. The above figures indicate the high competition in the particular industry; they also reveal the emergent need for restructuring the strategic plans of Tesco: the firm did not manage to effectively compete its rivals reaching just half of the percentage of growth achieved by another major competitor, Morrison’s. The level at which Tesco’s existing organizational policies need to be restructured will be identified through the examination and the analysis of the firm’s figures for a period of 2 years, i.e. from 2009 onwards. 4. Tesco – Financial performance The financial performance of Tesco can be understood through the ratio analysis presented below; it is made clear that the company has a stable growth and its potentials for further increase of its profitability are high. The limitations of the company competitiveness in its market could be possibly identified but it is made clear that such delays have been temporary – in general a trend for continuous financial development can be identified by studying the firm’s financial statements –as they are reflected in the figures presented below. A series of profitability ratios have been chosen in order to show the level of the growth in the last 2 years, i.e. from 2009 onwards. It should be noted that the profitability ratios show not only the firm’s ability to be developed towards its rivals but also its potentials to recover from a strong crisis. As for the periodical delays in the firm’s financial performance, as they can be located in the figures analyzed below, these could be avoided by using an appropriately customized Balanced Scorecard – as explained in the sections that follow. 4.1 Ratio Analysis Operating profit margin Formula: Operating profit margin = Operating Income / Net sales a. 2009 3169/53898= 5.8% b. 2010 3457/56910= 6% The operating profit margin ratio is used in order to show the potentials of the firm to respond to its financial obligations – expenses of all types; the specific ratio is expressed through a percentage that shows the percentage at which the firm’s funds in the beginning of each year are adequate in order to cover the firm’s expenses. In the case of a low operating profit margin ratio it is assumed that the firm has difficulties in covering its expenses – as this difficulty is revealed through the money available for the payment of organizational expenses in the beginning of the year (Proctor, 2009). In accordance with the above, a low operating profit margin ratio could indicate the necessity for the identification of a source of financing for covering the firm’s expenses; on the contrary a high operating profit margin ratio would indicate a firm, which is independent from its creditors – having the ability to meet its financial obligations without external support. Net profit margin Formula: Net profit margin = Profits after taxes / Revenues a. 2009: 5.9% (Financial Highlights, corporate website) b. 2010: 6.1% (Financial Highlights, corporate website) The net profit margin is used in order to identify the level of the firm’s growth. More specifically, through the specific ratio the ability of the firm to achieve a profit for every $1 of its equity – more precisely, from the money invested on the various organizational activities – is identified (Needles et al., 2007). In accordance with the above, the low net profit margin ratio reveals limited profitability of the firm, a problem that should be addressed by introducing effective strategic plans. On the other hand, the high net profit margin ratio proves that the policies of the firm are effective as this effectiveness is reflected in the increase of the firm’s profitability through the years (Jackson et al., 2008). It should be noted, that a net profit margin ratio near to zero shows that no profit is derived from the investment made on the firm’s activities – the firm’s profits are equal to the investment made, a fact that can be interpreted as a payback of the relevant investment – without any profit (Proctor, 2009). It is possible that the net profit margin ratio is negative, a fact that shows losses in regard to the funds invested on the firm’s projects. Return on total assets Formula: Return on total assets = Net income/ Total assets b. 2009 2917/45166= 6.4% c. 2010 3176/45650= 6.9% The potentials of the firm to achieve profit using the funds invested on its activities is also indicated through the return on total assets; the difference of this ratio from the net profit margin ratio is that the latter reflects the firm’s profitability for each $1 invested on the firm’s activities, while the return on total assets reflects the profit that can be potentially achieved through all the firm’s assets, or else through all the funds invested on organizational activities (Heisinger, 2009). From this point of view, the return on total assets would be of similar level with the net profit margin ratio. However, it is possible that the two ratios are differentiated on the following scope: if the firm’s assets are of high value, then they are able to support the achievement of profit, even if the overall potentials of the firm to achieve a profit are low – as indicated through a low net profit margin ratio. Return on stockholder’s equity (ROE) Formula: Return on stockholder’s equity = Profits after taxes / Total stockholders’ equity 2009: 23% (Financial Highlights, corporate website) 2010: 23.5% (Financial Highlights, corporate website) The return on stockholder’s equity ratio is used in order to identify the potentials of the firm to achieve profits through the investment of its stockholders; a high ROE ratio, indicates that the profit of the firm’s stockholders is highly taken into consideration when developing the organization’s strategic plans (Heisinger, 2009). On the contrary, a low ROE proves that the increase of shareholders’ equity is not among the firm’s priorities; rather the achievement of other goals, like the stabilization of the firm’s growth or the increase of the firm’s competitiveness in its industry is considered as of primary importance (Rich et al., 2009). From this point of view, the level of ROE in a specific organization indicates the level at which shareholders influence the organization’s strategic decisions. In Tesco, the level of return on shareholder funds – as presented above, is considered as satisfactory taking into consideration the strong industry competition and the pressures in the global financial market. Moreover, the level of ROE for 2009 and 2010 has remained stable, a fact that shows the stability in the firm’s performance – at least, as of the effects of its performance on its shareholders. 5. Current corporate strategy The firm’s current strategy – as described in the corporate website – focuses on the achievement of the following targets: a) continuous growth – by offering to the customers new products and by expanding in new markets, b) to become a strong competitor in the worldwide retail industry, c) to increase the power of the firm within the British market, d) to have an equal development in regard to the food and the non-food products, e) to introduce innovative business schemes, as for example the Tesco Finance scheme, f) to emphasize on the needs of the community (Tesco, corporate website, 2010). The achievement of the above targets is attempted through a series of initiatives, including provision of benefits to customers, promotion of sustainability through the firm’s activities, support of the community and so on. However, the decrease of distance between the firm and its competitors – as explained above – proves that strategies need to be introduced for the increase of the firm’s competitiveness in its industry – taking into account the relevant policies of competitors (Porter, 2008). Such plans are suggested in the next section – using an appropriately customized Balanced Scorecard scheme. 6. Conclusion - Recommendations for the firm’s strategic direction in the next 2 years 6.1 Balanced Scorecard Analysis As proved through the examination of the firm’s financial performance, the achievement of the corporate strategies – as described above – can face difficulties; this problem can appear mostly because of the lack of stability in the industry’s performance – a problem that is expected to become more severe in the years that follow – as explained previously. For this reason, it is necessary that the firm’s strategic plans are reviewed using a Balanced Scorecard framework – see Graph 2, Appendix (based on the theory of Balanced Scorecard as suggested by Kaplan and Norton, 2001 – also in Kaplan and Norton, 2002). The key elements of the Balanced Scorecard scheme (see Graph 3, Appendix) suggested for Tesco corporation should be the following ones: a) increase of the emphasis given on the firm’s shareholders; the current status of communication between the firm and its shareholders is characterized as satisfactory – see the corporate website; however, as the firm continuously expands its activities it would be really helpful for the relationship between the firm and its shareholders to be improved; the establishment of regularly meetings – except from the existing ones – for informing shareholders on the firm’s activities in the British and the global market would be an important plan of this type, b) differentiation of the approaches used for communicating with clients; currently, the firm relates its clients mostly to its financial performance; apart from the financial benefits offered to the customers, the relationship between the firm and its clients should be characterized by increased confidence and loyalty – a target that would be achieve through the development of activities like seminars for the information of customers on new products/ environmental challenges and so on, c) the training provided to the firm’s employees should be also increased and improved; emphasis should be paid on the increase of the employees’ satisfaction in the workplace but also on the increase of their skills in regard to their position in the organization, d) a clear framework of the firm’s internationalization efforts should be developed so that the shareholders and the customers to be aware in the firm’s performance in the global market. References Heisinger, K. (2009). Essentials of Managerial Accounting. Cengage Learning Jackson, S., Sawyers, R., Jenkins, G. (2008). Managerial Accounting: A Focus on Ethical Decision Making. Cengage Learning Johnson, G., Scholes, K., Whittington, R. (2008). Exploring Corporate Strategy. Pearson Education Kaplan, R., Norton, D. (2001). The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Harvard Business Press Kaplan, R., Norton, D. (2002). The balanced scorecard. Harvard Business Press Needles, B., Powers, M., Crosson, S. (2007). Financial and Managerial Accounting. Cengage Learning Porter, M. (2008). On competition. Harvard Business Press Proctor, R. (2009). Managerial Accounting for Business Decisions. Pearson Education Rich, J., Jones, J., Heitger, D. (2009). Cornerstones of Financial & Managerial Accounting. Cengage Learning Online sources Balanced Scorecard Institute, 2010, online, available from http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx ISN – International Supermarket News, December 2010, Market Share Drop For Asda Supermarkets in the UK, online, available from http://www.internationalsupermarketnews.com/index.php?option=com_content&view=article&id=2940:market-share-drop-for-asda-supermarkets-in-the-uk&catid=1:latest-news&Itemid=50 Reuters, December 7, 2010, Tesco gains UK grocery market share – Kantar, online, available from http://www.reuters.com/article/idUSLDE6B61DS20101207 Tesco (2010) corporate website, available from http://www.tescoplc.com/plc/about_us/ Tesco, 2010, Financial Highlights, corporate website, http://www.tescoplc.com/plc/ir/financials/fiveyearsummary/ Verdict Research Ltd, October 2010, UK E-retail Grocery Retailers 2010, online, available from http://www.marketresearch.com/product/display.asp?productid=2890527 Wood, Z., December 7, 2010, Tesco regains market share as Morrisons slips, online, available from http://www.guardian.co.uk/business/2010/dec/07/tesco-market-share-sales Appendix Supermarkets in Britain - Market share in percent: 12 wks to 12 wks to pct change Nov 28, 2010 Nov 29, 2009 in sales Tesco 30.7 30.6 4.4 Asda 17.0 17.0 4.2 Sainsbury 16.4 16.1 6.5 Morrison 12.0 12.1 3.0 Co-operative* 6.7 5.3 30.8 Somerfield* 0.3 2.3 -85.1 Waitrose 4.1 3.9 9.4 Aldi 3.1 3.1 4.4 Lidl 2.4 2.4 6.1 Iceland 1.8 1.8 3.1 Graph 1- Market Share of Supermarkets in Britain – change between 2008 and 2009 (source: Reuters, December 7, 2010) Graph 2 – Balanced Scorecard – common form (Source: Balanced Scorecard Institute, 2010, Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January-February 1996): 76) Graph 3 – Suggested Balanced Scorecard for Tesco Read More