Examine the strengths and weaknesses of the business by performing an internal audit on their current situation - By undergoing an external audit, explore the situations that could cause opportunities and threats to the business.

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Business Studies Project 2002

 

Primary Objective

  • Examine the Strengths and Weaknesses of the business by performing an internal audit on their current situation. By undergoing an external audit, explore the situations that could cause Opportunities and Threats to the business.

Secondary Objectives/ Investigations

  1. Brief introduction about the company, its history, and its market.
  2. Define ‘SWOT Analysis’, explaining why it is used and how it can be used as a method of scientific management to help the business.
  3. Identify the Strengths and weaknesses of the Business by analysing the characteristics of different functional areas in the company:

  1. Finances: Analyse the current financial situation in the business. A study of the Balance Sheet and the Profit or Loss account will enable the process of ‘Ratio Analysis’ to take place.
  2. Marketing: Analyse the strategic approach held by the business towards their products. This will reveal why their sales performance is what it is. It will also suggest how useful the products are to the business, and give an indication of how they will perform in the future.
  3. Operations management: The techniques, locations and assets used can be analysed. This will explore the benefits that are gained and the losses that are suffered due the circumstances.
  4. Human Resources: The management techniques used can be studied and compared to those suggested by management theorists. Furthermore, the standards of communication and motivation can be observed, to show whether there are any problems, or if the business is enhanced in any way.

  1. Identify the possible opportunities and threats to the business, by looking at external events that could affect the business. These factors are out of the business’s control:
  1. Market Factors: This will analyse the sales turnover, to suggest what may happen in the future. The growth or decline of the market will be monitored to predict how the business may be affected in the future.
  2. Political factors: The potential changes in legislation need to be studied carefully, to see how they will affect the business. The UK governmental issues will be addressed to show how the business could take advantage of current situations.
  3. Economic Factors: The state of the economy needs to be observed. In particular the current rates of interest, and the resulting value of the pound will be the issues that concern the manufacturing industry.
  4. Social Factors: Attitudes towards the industry held by consumers that could influence sales must be analysed. The areas of the business that could cause ethical debate must also be addressed to see how they could affect the business.
  1. Evaluate all the analysed information to conclude what features are strengths, weaknesses, opportunities and threats. From this, recommend what the business should do.

  1. Berwin and Berwin Ltd: The background

The business formally started in 1922, when on their way to New York, the Berwins discovered Leeds, and thought it an ideal location. The company initially started to manufacture raincoats, however, due to prominent sales during the Second World War, they expanded and concentrated on suits, seeing it as a product of the future. At this time, Leeds was seen as the clothing centre of Europe.

Foreign competition started to cause problems for the company, especially as they had invested more capital into management and industry, with cheap access to labour and materials. This left a third generation market in the UK, with ageing equipment and materials.

In the 80’s, they moved away from being an independent manufacturer (selling to individual customers), and sold their products to London based companies, the output 1500 suits per week. To survive, they had to sell to bigger retailers, and bought Langthwaite factory, which came with a garment division left by the previous owners. Production increased to 6,500 suits per week. Price became a major factor in keeping up with competition, so they invested more in brands (making items under the name of other companies, e.g. Ben Sherman), rather than selling private label (producing items with their own name), which left them with enough products to satisfy all types of customers.

Berwin and Berwin started making suits abroad in the late 90’s, and closed the factory in Leeds as a place of production. They expanded overseas and found an English owned company in Hungary who were willing to sell, for a nominal exchange. They employed 1600 people, and made 12,000 suits a week. This meant the factory in Langthwaite had to be downsized to produce 2,500 suits a week. Leeds became solely an administrative and distribution site, and now only employs 450 people in the UK.

The Market

Primarily, Berwin and Berwin supplies to the UK market that is non- Marks and Spencers. Out of all the manufacturers who supply to non- Marks and Spencers, Berwin and Berwin is the largest in terms of production and capacity. Berwin and Berwin supply to many high street shops, such as ‘Next’, ‘House of Fraser’, ‘Slaters’ and ‘John Lewis’, to name a few. A further 25% of all products are exported to outside the UK for sale in Paris.

The Product

The primary product manufactured by Berwin and Berwin is men’s suits. Other products include some ladies business suits. Of their own brand products, they manufacture men’s casual wear, shirts and ties. Recently, Berwin and Berwin have decided to sell their suits 2-fold: Branded, and Private label. ‘Branded’ operates when the customer gives Berwin and Berwin the specifications and requirements for the suits, which are then made with the label of the customer inside it. ‘Private label’ suits are those made by the company, and then labelled with their own brand names; ‘Berwin and Berwin’ and ‘Daniel Hector’.

The Competition

The main competition on the branded side are: ‘Pierre Cardin’, and ‘Balmain’. The main competition from the private label side derives from other countries, in particular: Malta, Hungary, Czech Republic and South Africa.


SWOT Analysis as a component of Scientific Management

To undergo a scientific approach to decision making for a business, the first step is always auditing the current position. The SWOT analysis is only the first part of the scientific management approach, and has many useful features:

  • It is a systematic analysis on which to base decisions
  • It relates the position of the business to the market in which it operates
  • It highlights changes in the market and encourages an outward-looking approach: PEST looks at the Political, Economic, Social and Technological exogenous effects that could have an impact on the performance of the business.
  • It assists an asset-led approach to marketing by encouraging firms to develop and build upon existing strengths
  • It determines the organisation’s position and therefore helps shape strategy in order to achieve aims and objectives.
  • It outlines the constraints and obstacles that will limit their objectives.

All these points are summarized in ‘The Decision Making Model’, and can be related to all businesses:


Financial Aspects

  1. The Profit and Loss Account

  • This is a statement recording all the firm’s revenues and costs within a past trading period.
  • In this situation however, only limited data was provided, so not all the usual figures can be shown.
  • This account calculates the profit by subtracting the costs from the sales revenue, therefore indicating how the business has performed in terms or keeping its sales high, and its costs low.

  • Below shows the turnover, costs and profits that were attained from 1997 – 2001: NB- all numbers in brackets represent negative values

  • Although the turnover is increasing, it is apparent that the costs are increasing at a faster rate, causing the profit to decrease.

  •  In 1991, the annual turnover was approximately £4, 000, 000, so the potential good news from this account, is that the turnover is steadily increasing.

  • The issues of a low and decreasing profit are serious, and will need some further investigation. It must be remembered though that a low profit does not mean everything; profit maximisation is a long-term business objective. Profit is simply a measure of how well the business is doing in terms of a reward for shareholders, and the business can survive without it in the short term. The cash implications however are serious, and will be addressed in the balance sheet.

  1. The Balance sheet

  • The balance sheet is an accounting statement that gives a snapshot of a firm’s assets and liabilities at the last day in the accounting year.
  • The benefits of a balance sheet, which are not gained from a profit or loss account, are that it gives information about the company’s stability, and its ability to pay debts and expand. Whereas a profit or loss account shows how the company has done in previous years, the balance sheet explores the company’s potential for the future. In general, it shows what the business is worth, and asks questions such as can it afford to grow/ is it a safe investment? Below is the balance sheet from the last 3 years available:

It is important to note that this is only a snapshot of the accounts, and may not fairly and accurately portray how the business has performed in the entire year. It is also possible that the accounts have been dressed up, to improve the their appearance to all the different possible stakeholders.


  1. Ratio Analysis

  • Ratio analysis is the best way to appraise and judge the financial health of the business from the data provided in the balance sheet.
  • The ratios that are calculated can be compared to past figures, budgets, or to competitors. The ratios for 2000 will be calculated below, and compared with those provided by mintel from previous years. However, ratio analysis does not provide a complete and exhaustive analysis of a company, and there are several other factors that the stakeholders and the company will need to take into account, in order to get the full picture of its financial position.
  •  The data that could not be obtained which would be extremely useful is information on how other businesses in the same industry have performed. The three types of ratios used will be able to indicate how the business is performing in terms of profitability, liquidity, gearing and management of assets.

Below are all the ratios already calculated. The calculation method, and features of each ratio are described afterwards in turn.


  1. Profitability Ratios

These measure the relationship between gross/net profit and sales, assets and capital employed, and are an indication of how the business is performing overall. The comments suggest how the ratios individually can be improved, and do not reflect an overall recommendation of what the business should do.

RETURN ON CAPITAL EMPLOYED

This is an essential ratio, as it measures the efficiency with which a firm generates a profit from the long-term finance that has been invested in it. It provides an idea of what annual percentage return the shareholder will receive from the money invested in it. This can be calculated by the formula:

ROCE = OPERATING PROFIT/ CAPITAL EMPLOYED X 100%

Calculation of ROCE for 2000:

ROCE =  (£962,000) / £2906,000 X 100%= (33%)

  • This is a relatively low value, however, assumptions cannot be made until it is compared to the values from previous years, and to the current rate of interest. The higher the value, the more attractive to shareholders.
  • Average Interest Rate for 2001: 6%
  • The figures show that over the last few years, the ROCE has worsened, and is currently at the lowest point it has been in a while.
  • Seeing as most companies would view a figure of 20% as reasonable, it is clear the Berwin and Berwin Ltd are underachieving, by approximately 53%.
  • The fact that they are earning less than what the actual interest rates are, suggests that it would be an incredibly poor investment choice. This could lead to more future problems for the business, as they will find it hard to attract more capital.
  •  Unfortunately, the profit and loss account cannot be provided in any more detail, which means the exact cause of the deterioration of profit cannot be determined.

ROCE can be broken down to further analyse where the problems are coming from:

  • This shows that ROCE = Asset Turnover Ratio X Net Profit Margin.

This means that to maintain a high Return on Capital Invested, both the Asset Turnover ratio and the Net Profit margin must be high. Therefore, the poor level of return is either due to a poor level of asset management, or poor profit margins. The return on capital employed can by increased by either increasing the levels of profit margin, or increasing asset turnover.

NET PROFIT MARGIN

This measures the difference between the profit after overheads have been calculated, and the level of sales turnover achieved. It is calculated by:

Net Profit Margin = (Gross Profit – Overheads) / Sales Turnover X 100

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With this ratio, the higher the percentage value that is produced, the better, as it shows how well the company controls its overhead expenses. The efficiency can be calculated by comparing the figure to that of the previous years, and to the gross profit (attained from Key Notes)

The results show that there is a significantly high Gross Profit Margin, relative to the Net Profit Margin. This suggests that there has been a failure to control expenditure on overheads, however, it may suggest that heavy marketing expenditure has been used to boost the value of ...

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