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 the Gross Profit. Therefore, increasing the turnover and keeping the same overheads, or decreasing the overheads whilst maintaining the same sales turnover, could improve the NET profit Margin.
ASSET TURNOVER RATIO
This ratio measures what amount of sales the business can generate from its current asset base. It is important that the assets are used to their full potential, or to use modern jargon, managers must ‘make the assets sweat’.
ASSET TURNOVER = SALES TURNOVER / ASSETS EMPLOYED
If the asset turnover ratio is low, then this means the business needs to be making a high profit margin on what they sell, otherwise they will never sustain a strong profit. If it is high, then only a small amount of profit is required for the products, because they will all add up to contribute towards a strong profit margin.
The figure for 2000 means that for every £1 spent on assets, £8.08 worth of sales revenue can be generated from it. Although the figures are fluctuating, they are still considerably high for a business in the manufacturing industry, and it means that their profit margins do not need to be particularly high.
- The results from the Net Profit Margin, and the Asset Turnover Ratio indicate that the cause of the poor ROCE is due to an abysmal Net Profit Margin. This means that at the moment, even if the asset turnover the asset turnover ratio increases, the ROCE will do even worse.
- Activity Ratios
These asset utilization ratios are concerned with how well an organisation manages its assets. They consider the current situation in terms of stock, debtors and creditors. Unfortunately, the cost of sales could not be established, so the stock turnover ratio has to be based on sales turnover, as opposed to cost of sales.
STOCK TURNOVER
This ratio measures the number of times a year a firm sells and replaces its stock. As this shows the efficiency with which the business is managing its stock, the higher the value, the better.
STOCK TURNOVER = SALES REVENUE / STOCK
- This shows that over time, despite small fluctuations, the overall situation has improved,
- The actual values cannot be interpreted in too much detail however, as it needs to be compared with other businesses in the same industry.
- Allowing for holidays, this ratio suggests that in 2000, the business turned over stock every 40 days.
This would mean that the cash flow levels would be optimised for the business, which will be appreciated when the business experiences cash-flow shortages
DEBTOR’S COLLECTION PERIOD (measured in Days)
This ratio shows how long it takes on average it takes a company to collect the debts that are owed to it by debtors. It can be calculated by:
DCP = DEBTORS / SALES TURNOVER X 365
As this shows how long the business takes waits to receive the money owed to it, the shorter the period, the better. A low figure is good news for cash flow and liquidity.
It is clear from the results that the collection period is continually reducing, which means that cash flow and liquidity will be improving. These figures however would have to be checked against the official credit policy of the business, i.e. a credit controller in the accounts department, should be monitoring any overdue payments, and chasing them up. It must be remembered though, that having a long debtors collection period is often used as a viable marketing strategy.
- Liquidity Ratios
These evaluate the financial stability of the business for the short-term by studying the relationships between current assets and liabilities. (‘Current’ implies less than one year)
CURRENT RATIO
This ratio essentially shows the balance between cash and assets that will soon be converted to cash, and debts that will soon have to be paid into cash. Generally, the higher the value, the better, as a low value may mean that the business may not be able to pay off its debts. However, an extremely high ratio may suggest that the business is inefficiently using its long-term finance. Below is the calculation for the current ratio from 2000:
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
Current Ratio 2000 = £6,335,000 / £6,820,000
= 0.93:1
A decent benchmark for the current ratio is 1.5:1, i.e. the business has £1.50 worth of assets for every £1 worth of debts. The calculation shows that the current ratio is 0.93:1, (there are less assets than debts) which means that the business may well be unable to pay off its debts. This ratio can be improved by selling under used fixed assets, or by undergoing ‘sale and leaseback’.
ACID TEST/ QUICK TEST RATIO
This ratio shows the worst-case scenario view of whether the business will be able to pay its bills/ debts over the next year. This difference between this ratio and the previous ‘current’ ratio, it that this one excludes ‘stock’ from the current assets, taking up the presumption that the stock may not be sold.
ACID TEST RATIO: (DEBTORS + CASH) / CURRENT LIABILITIES
Acid Test Ratio 2000 = £3,552,000 / £6,820,000
= 0.52
As this ratio represents the worst possible view of short-term cash, it is imperative that the value is greater than 1. As the result indicates, the ratio is only half the recommended minimum value, suggesting that the short-term financial health of the business is in serious trouble.
- Gearing Ratios
Like the previous two ratios, these show how dependant the business is on borrowing money, except it is more focused on the long-term health of the business’ finances. The gearing ratio actually measures long term loans as a proportion of the business’s total capital employed. It shows how much a business relies on borrowed money, and indicates how susceptible and vulnerable it is to financial setbacks. Below shows the gearing ratio for 2000:
GEARING = LONG TERM LIABILITIES / CAPITAL EMPLOYED X 100%
Gearing for 2000 = £1,480,000 / £2,906,000 X 100%
= 50.9%
The result indicates that half of all the finance invested into the business has been derived from long-term loans. As a rule, the maximum advised level of gearing is 50%, so Berwin and Berwin appear to be on the borderline. They would however, be unable to increase their loans from the bank, because banks, as a principle, are only willing to represent half of the financial backing at most. The high gearing also indicates that the business would be a risky investment for potential investors.
- Limitations of Ratios
- When performing ratios, the figures used are just those that stood at the end of the year, and may not fairly represent what took place during the course of the financial year.
- The accounts that were used to calculate the ratios were only based on past figures, and bear no indication of a forecast
- These ratios are purely quantitative sources of information, and reveal very little about important qualitative issues that may have concerned the business during the year.
- Marketing Aspects
- Product Development
As Berwin and Berwin are in an industrial market, aspects such as advertising and promotion, have little effect. Their customers are other business so the factors that will determine how well they appeal to customers are the products that they provide and the price at which they sell them. Berwin and Berwin Ltd specifically did not wish to release figures about how much they sell their products to their customers, as they are a private business, and would not wish for this information to be release. This will unfortunately mean that the pricing strategy cannot be analysed. Following is the product range of Berwin and Berwin Ltd:
- Branded Men’s suit wear
- Women’s suit wear
- Men’s casual wear
- ‘Private Label’ Men’s suit wear.
- Men’s suit wear has always been the initial core business, and the company is almost fully dependant on the success of this product.
- In the last few years, Berwin and Berwin have attempted to expand into Women’s suits and Men’s causal wear. As a result, (as can be seen in finance section) the sales turnover has increased, however, the costs have increased by even more.
- The competition for Private Label products derives from other countries, in particular: Malta, Hungary, Czech Republic and South Africa.
- See section 1 for the background to ‘Branded’ and ‘Private label’ suits.
There are only three suit manufacturers of any size based in the UK, and since taking on the Ben Sherman license, Berwin and Berwin has become the biggest private business supplying to the non-Marks and Spencer’s industry:
Suits are products with an extremely long life cycle, and there is no real need for the business to diversify. Fashion however, is ever changing, and there is a constant need for the business to react to how consumer preferences change.
This can be done by updating existing products, and there is no requirement to create new products. The diagram below shows how the business has tried to launch new products, and shows also how there is a risk involved.
‘Ansoff’s Matrix’ is basically a grid consisting of four cells, providing a business with a range of options concerning their products, each with a different degree of risk belonging to it:
- Berwin and Berwin are currently located in the top/right corner of the grid (as they have attempted to launch new products). The diagram indicates that this is a fairly risky place to be. In a market where products have such a long life cycle, it would be incredibly difficult to develop a new product and make it successful without enduring significantly high costs.
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This suggests that Berwin and Berwin would have been better off staying in the top left corner of the grid; from section 1.3a, it has been revealed that the business needs to reduce costs, and not spend more money on developing new products.
- The products link well into the Boston Matrix, which shows how different products in different stages of the life cycle can affect the overall business:
The Boston matrix
- Cash Cow: The product has a high market share of a non-growing market. This is called the cash cow, as it has generated large amounts of cash, which is used to help other products on other cells.
- Problem Child: The product has a low market share in a fast growing market. It is called problem child, as it generates large amounts of negative cash flow, which is required for it to survive.
This diagram shows how Berwin and Berwin Ltd have got three products in a fast growing market, but with a low market share. This means that for them to survive against competitors, they would have to have a lot of money invested into them, and at first, the products would not be generating much profit, as they are in the early stages of the product life cycle.
The product cycle shows what stages a product goes through, and the sales turnover and net profit are affected by these stages. In the clothing industry however, the products all have an extremely long life cycle. To relate the cycle to the clothing industry, it means that once a particular type of clothing has been recognized, it will remain a strong source of cash a long period time.
Unfortunately, as can be seen from the Boston Matrix, 3 products are still a long way from being recognized under the Berwin and Berwin label. This doesn’t mean that Women’s suits and Men’s casual wear are not developed products, it means that they are not developed under the existing brand name of the business.
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In the diagram below, the number 1 represents where Men’s suits are, and the number 2 shows where Men’s Casual Wear, ‘Private Label Suits’, and Women’s Suits are:
- This shows that the business will be experiencing high levels of cost whilst it endures the process of developing the three products. This can have serious implications:
- Cash flow will be heavily negative; all the costs of product development, market research, promotion and setting up production facilities will be incurred.
- Sales revenue will eventually emerge, but it will be a slow process, as the products in this industry take a long time to progress through the life cycle.
- Capacity utilization will be low, as there will be a relatively small customer base for the new products.
- This will increase the average cost per unit, as the overheads will be higher than need be.
- The diagram also shows the benefits that arise due to the position of the core product: Men’s Suits.
- Eventually, the cash flow becomes positive, and will stay there for a long time once the product has been recognized under the brand.
- Combined with information from the other charts, it suggests that the vast amounts of money raised from the Men’s Suits, will be needed to support the development of the more modern products.
- Marketing Approach
- Berwin and Berwin adopt a style of being ‘market orientated’. This means that they are outward looking, i.e. looking at consumer desires and pressures.
- This is opposed to product orientation, which is more inward looking. I.e. looking at its own production needs, strengths and limitations.
- Being market orientated means that the business will be able to produce products that are highly demanded, which should ensure a stable turnover.
- Unfortunately the costs of this will be high, as the workers will need to adapt their skills to the requirements of the skills needed to construct the products.
- New machinery and equipment could also be required, and the current assets may not be able to produce the desired products.
- Branding
- A brand image represents a product’s personality/ identity in the eyes of the customer. The image will consist of various emotions, perceptions and associations
- Although the business is selling to other businesses, the eventual customer will be the public high street consumer, so it will be essential to build up a large consumer base. In an industry centred around fashion, if the brand is not highly thought of by the public, it will be hard to sell to the primary businesses.
- By creating a strong brand name for their Private Label goods, consumers will feel confident buying them, knowing they are getting quality, and a recognized name to show off.
- Once a customer base has been established, customers will be loyal to the brand, and stick to the same make in the future. This would be a huge advantage with such an expensive product.
- Production
- This topic concerns where, how and why the products are produced in the way that they are.
- Location
Choosing a location to produce and sell a product is an incredibly crucial decision for a business. It is especially important in the manufacturing industry, because the scale of which costs are incurred enormous.
With the exception of the small factory in Langthwaite, Berwin and Berwin only have buildings in the UK for the use of administration and distribution. The factories used to produce all the clothing are in the Czech Republic, and Hungary. The move away from the UK has many implications:
Advantages
- The cost of land is cheaper in Hungary and Czech Republic than in the UK, as land is of a much wider availability. This will contribute strongly towards reducing the overheads, therefore making the average cost of each product less.
- The standards of living and average pay rates (including exchange rates) are much lower in the European countries, as they are less developed countries. Again, this will reduce the fixed costs.
- The raw materials required for the manufacture of the clothing are much more accessible in Hungary and Czech. Republic. This saves costs on importing materials, and will reduce the variable costs.
- Both Hungary and the Czech Republic have a history of manufacturing clothing, in particular Suits, which should make it quite an easy task to find skilled labour.
Disadvantages
- The distribution point is in the UK, which means that all products will have to be sent from the European countries, to the UK. This will incur extra costs, and could possibly lead to delays in the arrival of stock.
- Both the countries are over half a day away from the UK via air travel. This means it will be hard for the Operations director based in Hungary to communicate with the Managing Director and other directors.
- Leading on from this, potential customers would be inclined to visit the factories, which lead to a build up of travel costs.
- Production Method
Berwin and Berwin Ltd, like all other business has the choice of three different types of production:
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Job specific production: Each unit of output is specific and unique to requirements of an individual customer
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Batch production: A group of identical units are produced all at the same time
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Flow production: There is a continuous process of production, with a constant flow of output moving through the various stages of production.
The method utilized by the business is ‘batch production’ there are many reasons why the other two options were not viable:
- They produce to other businesses, who will be requiring a certain quantity of the same product, so job production would be completely inefficient.
- In the manufacturing industry, job production techniques would cause huge diseconomies of scale: As the output increases, the cost per unit will also increase.
- Flow production will not allow for any variety of flexibility in the products. This would mean that every single (e.g.) suit would be exactly the same. In the clothing market, this would strongly affect the sales, as clothing is a product which consumers prefer to own (relatively) uniquely.
The ‘batch production’ method employed provides benefits and problems that are extremely relevant in the clothing industry:
Advantages
- This is a relatively low cost production method, enabling economies of scale with large output volumes, and costs spread over the output. As keeping costs down is an imperative part of competing with other manufacturers, this is an ideal process.
- Once a batch has been completed, the business will hold stock, ready to provide to the customer. This is large advantage is the clothing/ fashion industry, especially the supplying side; as stocks run out in high street shops, they will want the new stock immediately so they don’t lose sales. By using batch production, Berwin and Berwin will be able to supply the stock immediately after the request has been put through.
- By using this process, as opposed to the flow process, variety and flexibility is fully enabled by modifying or completely changing each batch. As mentioned before, this is crucial, as the general public would not all want to be wearing identical clothing.
Disadvantages
- Holding stock can have its drawbacks, as it may take up space, and in an ever-changing world of fashion, the products may become obsolete.
- The batch processing technique limits the degree to which the products can be customized.
- Quality Control
- Quality Control refers to the systematic attempt by the business to ensure that its production reaches its target level of quality.
- From a visit to the factory in Langthwaite, it was concluded that a system of Total Quality Management was employed. It operated in the following way:
- The material was cut out/ sown together by the first stage on the production line, and passed onto the next stage.
- Before being passed on, the items were checked over.
- Once passed over, the next stage could not take place properly if the work from the previous stage had been done incorrectly.
- Once the garments have been completed by all attaching all the components, they are scanned for any remaining pieces of metal that could have been left behind, e.g. a pin.
- If any errors that can’t be completely resolved are found up to this point, the product is unlikely to progress into the final stages.
- The products are hung up, cleaned and dusted and checked that they match the criteria specified by the customer.
- Every single item is then passed into the quality checking room, which thoroughly monitors each product to ensure that the quality is 100%.
- Total Quality Management is a process that attempts to establish a culture of quality, affecting the attitudes and actions of all the employers. It does this by eliminating all errors and waste from all levels within the organisation.
- By using this approach, Berwin and Berwin are effectively operating a system of lean production, which has a ‘right first time’ philosophy. This method has a few drawbacks, but also brings benefits to the company:
Negatives
- Getting it right first time means there will be less buffer stock to fall back on. With clothing this can be quite risky, because if the stock runs out, it will take a long time to produce it again.
- First class equipment that is necessary will require large amounts of capital expenditure. Again this will hit the business hard, as they are a highly capital intensive business, and this will generate huge costs.
Positives
- If there are no errors, the productivity will be increased which will lower the overall cost of production.
- Obviously, there will be high quality control, so customers will not have concerns over the quality of the products. This is a particular advantage in the clothing industry, as quality will provide a strong competitive advantage.
- As will be addressed is section 4.2, there will be a high employee job interest.
- Stock Control
- Berwin and Berwin Ltd operate a system of ‘Just in Time’ stock control. This means that finished goods are ready to be sold as and when they are demanded.
- This is a particularly appropriate system for the business, as they operate a system of forward ordering. This means that customers put in an order for the Suits well in advance (5 months). Once an order has been received, the business can meet the requirements and have the goods ready for the deadline.
Just in Time Production
- This method of production attempts to do away with holding stock altogether. The output is ‘pulled through’ by the customer, meaning that units of output are only made when the customer demands them. This can have many advantages:
- There is no cash ‘tied up’ in stock. This means there is no opportunity costs, as debts and interest payments will be able to be met as soon as possible.
- There is no risk of obsolescence or deterioration. Fashion clothing may be left without any demand after a while, however this won’t happen if customers have already requested them.
- There will be little costs of storing and insuring the stock. This won’t be of too much significance when dealing with clothing, as they are not that bulky or expensive.
- Just in time will remove any room for error or low productivity.
- There are benefits of holding stock, which the business can survive without; changing consumer demand will not affect Berwin and Berwin, as the customer will have already placed an order. The only risks are:
- Machine breakdown
- Employee absence/ error
- Let down by supplier
- These problems could well occur, and will leave the business without any extra stock to reply upon. This could result in losing the sale, and could damage the long-term relationships with customers.
To be able to use Just in Time Production therefore, the business is relying on certain factors remaining constant:
- Highly predictable demand. (Guaranteed by forward ordering)
- Very reliable suppliers
- Very reliable equipment
- Very reliable and flexible employees
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A total dedication to lean production with a ‘right first time’ mentality.
Human Resources
- All of this section is based on a visit to the UK factory in Langthwaite, where I questions where put to many members of the productions line, and to the managing director. A list of these questions can be found in Appendix 1, page 42.
- Business Culture
This can be defined as the accepted set of attitudes, values and habits in an organisation(Its ethos). The direct impact of culture upon motivation is through what Mayo described as ‘Group Norms’: the types of behaviour and attitudes that are seen as normal within the business.
- As a result of the Total Quality Management system, employees are strongly focused on doing their tasks to the highest degree of accuracy.
- If a member of staff is absent for whatever reason, their place in the production line is immediately filled so that production can continue as normal.
These factors suggest a strong business culture, however other aspects of how the business works may suggest that the business culture is rather weak:
- The communication from high levels of staff to lower levels of staff is almost non-existent.
- The communication to lower levels of staff about how, why and where the business is moving is again almost non-existent.
- The organisation structure has many layers, and delegation is very limited.
The organisation structure is the formal (pyramid) hierarchy. This has implications for Berwin and Berwin Ltd:
- The chains of command are very long, and it takes a while for a labourer in the production line to address an issue with the production director.
- The overall span of control is very low. This means that the managers and middle managers have very little subordinates for whom they are responsible.
- Management style/ leadership
There are three main styles of leadership that could be adopted by Berwin and Berwin Ltd:
- Democratic: Authority and decision-making are delegated throughout the staff, so that the workers feel empowered.
- Paternalistic: Managers set their objectives by deciding what is best for the employees. The best interests are kept for the workforce, however delegation does not exist.
- Autocratic: the assumption that information and decision-making are best kept at the top of the business.
From the visit to Langthwaite, it was concluded that Berwin and Berwin Ltd adopt an autocratic approach:
- Workers were given their skilled tasks to perform, and every one was treated as equals in the production line.
- There was no room for opinion on how things should be done.
- The workers didn’t seem to know, or want to know what was happening with the business on a wider scale.
- Workers were paid for the amount of time worked
It can be concluded that Managers in Berwin and Berwin are what McGregor describes as Theory X managers. This assertion means they believe that workers will avoid work if they can, want as little responsibility as possible, and that employees need to be controlled and coerced. This links into F.W.Taylor’s view of ‘a fair day’s work for a fair day’s pay’
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This has resulted in Berwin and Berwin being a very centralised business: only the top levels in the hierarchy have the authority to make decisions. This has its advantages and disadvantages:
Advantages
- There is a tight control over the performance of all employees, in particular, those who are inexperienced.
- Since instructions are given without much consultation, decision-making can become a very fast procedure.
Disadvantages
- There is little scope for delegation, which could lead to problems with motivation.
Whether or not this is the most effective approach for the business is dependant on various factors:
- The abilities of ordinary employees and middle managers
- How much time pressure the business is under
- The risks involved if a bad decision is made
These are all subjective matters, however, the impression is gained that these factors would all require an autocratic style of management.
An easier way of looking at this is by placing the management style of Berwin and Berwin Ltd into Blake’s grid. Blake placed all the types of management style in a spectrum so they characteristics of them could be compared. He offered the following characterisation of management styles:
1,1 Style: otherwise known as laissez-faire management. Managers here basically abandon leadership, and will put in the minimum effort required to keep their job. Here, the manager acts more as a messenger than a leader. As a result, morale and productivity are very low.
1,9 Style: otherwise know as the country-club style. Here, the manager is completely devoted to impressing and pleasing the employees. Productivity issues are completely neglected, as the manager is unwilling to damage relationships with workers.
9,1 Style: this reflects the views of F.W.Taylor’s. Productivity is the main focus, and as a result employee interest and satisfaction is completely disregarded.
9,9 Style: Managers conduct themselves in such a way that they treat productivity and job satisfaction as equally important issues.
Blake’s Managerial Grid
- It can be concluded that Berwin and Berwin Ltd adopt a 9,1 style, as it is clear that production is there main priority.
- Motivation
The previous two sections can provide a background as to why the current levels of motivation are what they are, although other factors must be stated which have not yet been covered:
- Over the past few years, as a result of fast growth, Berwin and Berwin Ltd have overtraded and over expanded. As a result of this, they must undergo a process of downsizing.
- The UK factory simply cannot be afforded any longer and will soon have to close down.
From this, and from sections4.1 and 4.2, there appears to reasons for both high and low morale:
Reasons for high morale: -
- Job enrichment: This is defined by Herzberg as ‘ giving people the opportunity to use their abilities’, and implies giving workers a range of responsibilities and activities. This was highly evident in Langthwaite, as the workers were skilled in many parts of the production line, and often had to fill in for people who were absent. This reduces the amount of repetitive labour they need to perform, and makes the job more interesting. These workers, as they gain more experience, are able to train and supervise new employees.
- Total Quality Management: This has already been defined in section 3.3. Workers are made to check not only their own products, but also those of other workers. This process acts as an incentive for workers to work hard, and be happy knowing they are being observed. This issue of being motivated by knowing you are under observation was initially discovered in the Hawthorne experiment, and can be found in more detail in the Hawthorne studies.
Reasons for low morale: -
- Lack of delegation, low empowerment: This implies that workers are not given any opportunities to make decisions, or to hold any authority over anybody else. This could well frustrate employees; as explained in Maslow’s hierarchy of needs, workers need to maintain degree of self-esteem. This will not be achieved if they know they are being used merely as ‘tools’, and make no significant individual contribution towards the overall business.
- Lack of communication: there is no way that Berwin and Berwin can avoid retrenchment, and to do this, they will have to make redundancies. One of the fundamental principles of making redundancies is making sure that all the stakeholders are kept fully informed at the current situation. If this is not done, it will only anger the employees, and make them all uncertain about their future at the company. This breaks Maslow’s essential need of safety, and can cause disastrous effects within the workforce. Unfortunately, no employees seemed conscious that there were going to be significant cut backs, and this can only lead to future complications
- The pay system operates in a manner that employees have to work a certain amount of hours per week, and are paid for the amount of hours they do. This discourages them from increasing their productivity, and provides less incentive to work harder.
- Skilled labour
This is a much more specific point, relating only to Berwin and Berwin Ltd. With factories in and out of the UK, the company is noticing significant differences between locations in relation to human capital:
- It is becoming ever increasingly difficult to find skilled textile manufacturers in the UK
- As the machinery becomes more modern, less and less workers have the knowledge or understanding to use it.
- The cost of labour in Hungary and Czech Republic is much cheaper than that in the UK.
- There is an abundance of skilled, willing labourers in these countries.
Sources of Info.
- The data from this section was received from a general chat from employees in the Langthwaite factory, and with the Managing Director.
- As a result, the ideas conveyed in this section are not exact facts, but are more impressions gained.
External Economic and Social Factors
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Turnover Trends
Turnover trends are extremely useful in forecasting how prosperous the sales will be for the business in the future. A process called ‘extrapolation’, based on time series data, can reach a forecast. Extrapolation basically means predicting future trends based on information from the past. Due to limited access to data, only extremely recent figures could be established, which unfortunately will harness the accuracy of the predictions. It must also be noted that the future is not likely to be a continuation of what has happened in the past, and so the forecast becomes more and more inaccurate as time goes on. Many factors could potentially change what will happen to sales volumes, and these issues are addressed in the opportunities and threats sections.
Quarterly sales (£000s)
Firstly, the ‘trend’ needs to be calculated. This will be based on a technique called ‘moving averages’. This is done by adding up the 4 quarters, and dividing by 4. When this is done, the calculation must ‘shift’ forwards one to include the next quarter, and neglect the first quarter from the previous calculation:
(5562 + 3595 + 6233 + 6098) / 4 = 5397
(3595 + 6233 + 6098 + 5806) / 4 = 5458
Once this has been done, the 4 Quarter Moving Average is complete. The next stage is to average each of the values from the 4 Quarter Moving Average. This is done by adding together each pair of numbers in order, and dividing by two. This then provides the Centred 4 Quarter Moving Average. The final stage is to calculate the Average Seasonal Variation, calculated by averaging the Seasonal Variation, which can be done by subtracting the Centred 4 quarter Moving Average from the Actual Sales:
The next stage is to calculate how much the trend is increasing on average each quarter. This is calculated by:
Extrapolation = (most recent trend value – first trend value) / number of increases
= 8024.4 – 5427.5 / 7 = 371 per quarter
The formula to calculate the forecast for the required quarter is:
Actual Sales Forecast = last trend value + (extrapolation X number of quarters ahead) + ave. seasonal variation
Q1 2002 = 8024.4 + (371 X 3) + 294. 85 = 9432.25
Q2 2002= 8024.4 + (371 X 4) +(2098.4) = 7410
Q3 2002= 8024.4 + (371 X 5) + 598.55 = 10477.95
Q4 2002= 8024.4 + (371 X 6) + 459.95 = 10710.35
Q1 2003 = 8024.4 + (371 X 7) + 294.85 = 10916.25
On the following sheet is the graph to show the predicted sales volume. From this, the following information is apparent:
- In the last few years, the sales has been increasing overall
- The sales figures peak around August (quarter 3)
- The sales figures fall at around June (quarter 2)
- The broad outlook on the future should be a gradual increase of sales turnover, although there will be occasional dips in sales.
The graph only predicts the forecasts for the short-term future, because if the extrapolation continued further, it would probably be highly inaccurate. Once again, as the access to further data was not permitted, only the sales values for the last few years could be calculated. Obviously, if the figures could be looked at further into the past, it would allow a more reliable forecast to be made.
- Market Behaviour
Many external factors in the market for Suits and Men’s wear will affect how the business performs. Some of the key external influences are highlighted below. All of the following information was gathered from Mintel.
- In 2000, £7400 million was spent on men's wear in the UK, and this has suggested that market size is growing by 4.5% per annum.
- The amount spent on importing suits from foreign companies was £153m in 1994, £267m in 1998, and £270m in 1999
- The amount of suits imported from foreign companies represents 10% of the total suit market.
This information suggests that even though Suits are becoming more and more demanded, they are also becoming more and more supplied. This means that competition in terms of manufacturing and supplying will be becoming fiercer. The increase in suppliers derives from foreign countries.
This could be a particular problem for Berwin and Berwin, as these countries include Malta and South Africa, as well as countries that they already produce in. (Hungary, Czech Republic) These other firms will have their own access to raw materials and cheap labour, and will be highly demanded in the UK, as their products are quite unique and original.
The market can also be looked at in comparison to other markets in UK, and the products also can be compared amongst each other:
- These two tables display how much money is spent on men’s clothing, and more specifically suits, in relation to other products. Berwin and Berwin must be aware of many situations that they can exploit, and that could cause them harm:
- The amount spent on clothing in relation to other household products is decreasing. This might suggest that the importance of suit-wear is decreasing. This could have serious effects if it continues, as customers will be demanding less, and willing to pay less.
- It is also apparent that only about 20% of men buy a suit each year. As this is the main core product, it is alarming that there is only a small demand for them.
- It is evident that more money is spent on average on jackets than on suits, suggesting that they are regarded as higher value products. Berwin and Berwin could exploit this by developing their product range further by supplying jackets.
- The figures also suggest that suits are only very slightly price elastic. This means that as the price increases, the demand is not really affected. This can be deduced form the fact that suits sell just as well whether they are £100 or £175. This is a rare feature in the table, and suits and overcoats are the only products that behave in this way. This can be exploited by increasing the prices of the suits to customers, so that they are retailed at a higher value. It could well be possible that lowering the price could ‘cheapen’ the product, and this should certainly be avoided.
- Social Issues
This topic deals with how social views have changed to affect the performance of the business, and also what social responsibilities the business has to be aware of.
The company must be aware of the increasing process of ‘casualization’. This American term describes the process of casual wear becoming more and more evident in every day life. A current strategy being used by modern managers is to make the working atmosphere lass formal by allowing the uniform system to be abolished. This has led to casual wear being worn in offices, and gradually suits will be becoming less fashionable in the work place.
As suits are the main product, and working men and women represent the majority of the market, this process could be particularly damaging to the business.
Ethical Responsibilities
Berwin and Berwin Ltd, like many other manufacturing businesses, have not made an attempt to be seen as a highly ethical and socially responsible business. One example of this is the exploitation of cheap labour in foreign countries that they carry out.
Although this gains a competitive advantage in terms of cutting costs, there are advantages the business would gain if they sent out an image of a business that acts ethically. For example, they could train and employ staff abroad in the same way that they do in the UK, and pay more than the minimum. They could also make an attempt to reduce the pollution emitted through the factories. These advantages would be unique to themselves in this industry, as it is a stance that has not been exploited by other companies:
1) Attracting and retaining high quality employees.
2) Attracting new consumers, who may base themselves around an image of being ethically and socially responsible.
3) Generating good publicity.
4) Attracting ethically minded investors
5.4 Political Factors
As is common in every business and industry, political factors present many constraints, but can occasionally give benefits to the business.
Constraints
Labour legislation:
Since moving abroad, Berwin and Berwin have had to meet new requirements and follow certain laws concerning employees. One major problem is that life is very different in Hungary and Czech Republic, as workers have different rights and different demands.
At the moment, as unemployment is quite high in these countries, the minimum wages are much lower than those in the UK. This also means there are many people available for jobs. Soon, as more businesses set up in these underprivileged countries, unemployment will decrease, and wages will be gradually forced upwards. Therefore, the company must be prepared for long term cost increases.
Tariffs:
A tariff is a tax, which is placed on an imported good, which makes the imported good more expensive, making the domestically produced good more appealing and competitive.
Even though labour and material costs are quite low, costs are being incurred though tariffs. Imports from Hungary and the Czech republic are being taxed, in a government policy of protecting its domestic businesses from more competitive foreign imported goods.
These countries will soon be joining the European Union, in what is described as ‘enlargement’. This will mean that the tariffs will disappear, and will reduce costs for the business.
Benefits
Government Subsidies
Government subsidies are sums of money paid by the government to the producer, which act as incentives to operate in the best interests of the general public.
This issue is particularly relevant to Berwin and Berwin Ltd, and their plans for production in Langthwaite.
Langthwaite is an isolated small town with a population of about 800 people. The majority of these people are employed in the Langthwaite factory. This means that Berwin and Berwin Ltd and the population of Langthwaite, are interdependent on each other; the factory needs workers, the workers need a job.
So far, Berwin and Berwin have applied unsuccessfully for a subsidy of some sort to aid them with the currently unaffordable UK costs. However, if they cannot afford the factory, they will have to close it down, resulting in a huge loss of jobs. This would leave the majority of the town of Langthwaite in financial crisis.
Berwin and Berwin must exploit the geographical advantage they bring to these workers, and should make a strong appeal to the government.
5.5 Economic Factors
The state of the UK economy can affect all business, but can have particular implications on the situations that Berwin and Berwin Ltd are in. These factors are:
- Interest Rates
- The strength of the pound
Interest rates are currently falling in response to a continued low inflation (The RPIX is below target):
The graph shows that the UK is currently experiencing low rates of interest, and this looks to be decreasing further. This can affect the business in several ways:
- They will not be spending too much money on paying interest on their bank loans.
- The general public will be encouraged to purchase more items with credit, and as a result, retailers will want more stock.
The exchange rate will depreciate, and the pound will get weaker. This will mean that in the European countries, the pound will not be worth as much, and could slightly increase the expenditure required overseas.
5.6 Porter’s Forces
Porter’s model helps to summarize the current position of the business in its operating environment:
Markets will have similar characteristics, consisting of:
- Intensity of rivalry
- Threat of entry to the industry by new competitors
- Threat from substitute products or services
- Power of suppliers
- Power of buyers
Berwin and Berwin Ltd can be assessed to see how they are affected by all of these factors:
- In the UK, there are only a few other businesses that distribute suits to retailers. It is an oligopolistic market, as these few firms dominate the market. This means the competition is quite fierce.
- In the clothing manufacturing industry, and in particular, suit manufacturing, businesses from around the world are able to move into other countries to manufacture, and sell to other countries as well. There are no barriers to entering the market, so Berwin and Berwin could find themselves under threat from new competition at any time.
- Suits are quite a unique product, and cannot really be imitated. This means that the industry is not under threat from similar products.
- Many different companies, from many different countries, supply the industry’s inputs. As a result, the power of the suppliers is quite limited, as they need as many customers as possible.
- Marks and Spencers is the single most powerful buyer in the industry. As a result, it is difficult to deal with them and keep profits high. All other customers are independent, and so cannot manipulate the manufacturers.
- Evaluation, Conclusion and Recommendations
- From all the data that has been analysed, it has been established where the business stands at the current moment in time. These need to be summarized before the final recommendations are made.
- Strengths
- The profit and loss account and turnover trends show that Berwin and Berwin Ltd are receiving an extremely high sales turnover. This value of around £35 million per year looks to be increasing, and provides the business with huge potential for their future financial health.
- The ratios suggest that the business is managing its assets and its stock extremely well. The assets are being made to ‘sweat’, and are being used efficiently, and the stock is being turned around at a promising steady rate. As a result, the business can be confident that the money that they are investing is not going to waste.
- It has been revealed that the company has started selling new products in their current market, and they have started selling their current products in new markets. This situation means they have steered clear from ‘putting all their eggs in one basket’. As a result, they will be offering a wider range of products, and they will be increasing the size of their consumer base.
- It is evident that Berwin and Berwin have a large market share. This must be exploited to maximise the benefits available. A large market share means they can take advantage of goodwill, and use their name to promote new products, or persuade customers to spend more intensively on their products.
- The main products are men’s suits. This product appears to be generating large amounts of cash for the business. It has become apparent that this product has a long life cycle, and will continue to sell well for a long period of time. This means that the business can rely on this product to help financially with other projects.
- Berwin and Berwin Ltd have proved to be a market orientated business, and will put the needs of the customers first. This is a huge advantage; they will be able to supply whatever is demanded, demonstrating how flexible they can be.
- In moving abroad, the business has managed to find an abundance of cheap labour and land. This means they will be able to reduce costs significantly, and gain a competitive edge over other businesses in the same industry. The new labour force is skilled, which is becoming more and more expensive in the UK.
- The production methods that are utilized have proved to be very advantageous. By using total quality management, the working attitude is kept focused on getting things right all the time. The higher quality will be a major factor in determining which manufacturer is chosen to supply the retailer. The process of batch production enables the business to produce stock rapidly, efficiently and flexibly. There is no requirement for stock to be held, so the cash flow is kept as high as possible.
- The management style has been defined as autocratic, implying that the employees are heavily focused on the jobs that must be done, and are not allowed to get distracted.
- Weaknesses
- Both the balance sheet and the profit or loss account show that the costs for the business are enormously high. The costs of around £35 are fractionally higher than the sales revenue, and this is resulting in a loss of profit. The poor net profit ratio suggests that it is the overheads that are causing the high costs. The implications of this are that the business is now making a loss during the year.
- The Return on Capital Employed ratio is a strongly negative figure. This means that they are continuously losing a proportion of the money that has been invested into the business. This will make it unlikely for the business to find any investors.
- The liquidity ratios suggest that the business is below the minimum advised levels of cash flow. This means they may struggle to meet debts, and will find it hard to purchase new equipment/ stock.
- It is evident that over half of the money invested into Berwin and Berwin is derived from bank loans. As they will not be able to re-pay these loans in the short term, the loans will be gaining interest until the cash flow levels are high enough to pay off the debt. Furthermore, the business will find it almost impossible to receive any more loans from the bank.
- The move into new markets, and selling new products is quite risky; the new products may not sell well, as the company is not recognised for their expertise in the manufacture of casual wear and women’s suits. The move into new countries is also unsafe, as they will be inexperienced in the customer tastes and preferences in the new market.
- The Boston Matrix reveals that three of the products being manufactured by Berwin and Berwin Ltd are categorized as ‘problem child’. This means they are going to be generating negative cash flow, and are unlikely to bring in many sales in the near future.
- By being market orientated, the business is intending on finding out what the customer will want, and they do whatever it takes to provide it. This may mean having to employ new staff, or employ new capital equipment, and will incur several high costs.
- Opportunities- Based on external factors
- It is apparent that the sales turnover has been increasing, and is forecasted to carry on steadily increasing. This is extremely positive news for the business, as it means they do not need to devote excessive amounts of time money and effort into increasing sales.
- It has been established that the market size for men’s clothing is growing each year by about 4.5%. This means that retailers will be demanding more from the manufacturers, and will probably be spending more intensively.
- Berwin and Berwin Ltd could apply for a subsidy, as they financially support the town of Langthwaite, and are currently being taken for granted.
- The low interest rates mean it would be a good time for Berwin and Berwin to invest in some new capital. Although this would cost money, it would be better than doing the same thing when interest rates are high.
- For their fixed assets, they could adopt a system of ‘sale and leaseback’. The sales will generate cash, and they could then rent back the required equipment. This would provide extra short-term cash.
- Threats-Based on External factors.
- It is becoming less and less fashionable to wear suits in the working environment. This concerns the main target consumers for the business, and could affect the demand for suits in the long term
- Only 20% of men buy a suit per year, suggesting that they are not essential items, and are perhaps more of a luxury good.
- The amount spent on men’s clothing in relation to other household goods is steadily decreasing. This implies that all suit manufacturers and retailers are coming under competition for completely different products, which they have no control over.
- The high costs being suffered will result in a necessary increase in sales prices. This could be exploited by e.g. firms from other countries who have access to cheaper materials and labour.
- Recommendations
It can be concluded that Berwin and Berwin Ltd have many strengths in the business, however, they are currently encountering several problems, which could lead to serious failures. It seems as though the main problems are:
- Incurring extremely high costs
- Not gaining a significant profit margin on products
Other than ‘sticking at it’, and hoping for better fortune, there are only a few alternative viable solutions:
Downsize
One option is for Berwin and Berwin Ltd to eliminate all unnecessary costs. These would include:
- Close down the factory in the UK
- Made redundant any employees that cannot be replaced by delegating tasks. (In the Leeds distribution and administration centre)
- Sell any fixed assets that the business can survive without
- Lower expenditure on marketing, and research and development
Change the strategic approach
With the amount of money already invested in capital equipment, it would be possible for the business develop their product quality even further. The attempts at diversification could be scrapped, and the business could focus on differentiating their core product, so that it could be sold at a higher price. This strategy is highlighted under one of Porter’s generic strategies:
This diagram shows how success can be obtained, even if low costs are not a feature of the business’s marketing strategy. Berwin and Berwin Ltd could make full use of their highly expensive capital machinery, and gain a competitive advantage by pursuing differentiation. This would have to be done with the ‘private label’ suits, as they are the ones designed by Berwin and Berwin themselves.
- This USP that is created will allow Berwin and Berwin Ltd to charge higher prices
Alternatively, they could adopt a similar approach, except instead of differentiating, they could focus their products on the segment of the market that is populated by those who are willing to pay any price as long as they get the quality.
- These suggestions are rather bold, and would have to be thought through in more detail, to decide whether or not it would be possible for the business to cope with them.
If these are not possible, then the business has many options, included if need be, merging with another business to reduce overheads, or even selling the business, but these would depend on what the objectives of the owners are at the moment.
Appendix 1
Verbal questions directed towards employees in the Langthwaite factory. Analysis is based on these answers:
- Is the working environment pleasant?
- Are you enjoying your job?
- How often is somebody absent?
- What happens when somebody is absent?
- Do you get paid more for the more work you do?
- If you have a problem, is it solved quickly?
- How often to you speak to the top management?
- Do you know how the business is performing overall?
Other questions, focused on the business as a whole were asked to the Managing Director and Sales Director; Simon Berwin:
- Is it a business objective or strategy to ensure the happiness of employees?
- Is it more important to ‘get the job done’, or to keep the employees happy?