University of South Wales

Business School
AF4S31-V1: Strategic Financial Management

Masters in Business Administration (MBA)

Instructor: Janell Komodromou

Student Number: R1508D933901

Prepare a report for your manager which:

1) Using the Annual Report of Marks and Spencer available at the following link:

http://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf

a) Explains the term ‘stakeholder’ and identifies three types of stakeholder of Marks and
Spencer.

b) Analyses how the ‘Creating Sustainable Value’ report helps Marks and Spencer’s
demonstrate its performance in terms of its corporate and social responsibilities.

2) Analyses and evaluates the financial position of Dorman Co. using a range of financial
ratios to meet the requirements of potential customers, investors, lenders and suppliers.
Your analysis should:

a) Explain the purpose and relevance of the chosen ratios.

b) Include the results for each chosen ratio and reasons for the movement between the two
years.

c) Highlight any aspects of the performance of Dorman Co. which would give cause for
concern.

d) Critically evaluate the application of financial ratios in interpreting and measuring the
performance of a company.

Word Count: 2738

1 (a) Marks and Spencer Stakeholders

Headquartered in London, Marks and Spencer is an international retailer which was formed
through a partnership between Michael Marks and Thomas Spencer in the year 1884. The
organisation specializes in cloth lines, home appliances and high end food products.
Successful businesses are built on the groundwork of good working relationships which
foster trust and open communication, as key aspects of profit growth for the organisations. It
is, therefore, significant for a business, like Marks and Spencer, to balance the interest of its
various stakeholders.

Freeman (2010) notes that, “A stakeholder in an organization is (by definition) any group or
individual who can affect, or is affected by, the achievement of the organisation’s
objectives.” BusinessDictionary.com (2017) defines the term stakeholder as a “person, group
or organization that has interest or concern in an organization (where) stakeholders can affect
or be affected by the organization's actions, objectives and policies.” These interests can be
intellectual, social, financial or environmental. InvestorGuide.com also defines a stakeholder
as, ‘a person or body that is directly or indirectly involved with a company or organisation
and has an interest in ensuring that it is successful.” The idea that stakeholders are somehow
involved with a company shows that they are a critical aspect in the success of an
organisation.

There are two types of stakeholders namely primary and secondary stakeholders. According
to Boundless.Com (2017), ‘primary stakeholders are usually internal stakeholders who
engage in economic transactions with the business, for example, management, employees,
and shareholders; while secondary stakeholders are usually external stakeholders who may
not necessarily engage in direct economic exchange with the organization, for example,
suppliers, community groups, customers and government organizations. According to Marks
and Spencer Annual Report (2016: page 1) the company is committed to delivering
sustainable value for its stakeholders. Three examples of Marks and Spencer Stakeholders
include Customers, Shareholders and Suppliers.

Marks and Spencer’s most important stakeholder can be argued to be its customers. These are
individuals that support and invest in the business by purchasing the products being offered.

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According to Drucker, (2017), “The customer can always to choose to take his business to a
competitor so it is essential that we continue to innovate, to offer good products and good
value for money.” Without customers, the company would not be successful because it is
through these customers that Marks and Spencer can afford the investments it has made in
setting up its retail stores and expanding its business. Hence the reason why they have made
customers the centre of their business.

They need customers coming in regularly to buy groceries from them and as such have made
customers the centre of their business. A satisfied customer is worth 10 more customers so
even the experience Tesco gives its customers reflects where they are going as a business.
Tesco has loyalty programs, product promotions and have even rolled out the same day
grocery click and collect service. Steve Rowe, the Chief Executive, (2016 page 6) even
highlights the importance of customers to their business. I quote, “We are at our best when
we are completely focused on our customers. My plan is to keep things simple by putting
them at the heart of M&S – every decision starts with them.” The fact that Marks and
Spencer’s Customer Insight Unit makes sure that the customers’ needs inform every aspect of
decision-making has enabled the company to align its business strategies and gain consumer
satisfaction as the customer needs are met.

“Our customers are our most important stakeholders. Through detailed understanding of
their needs and changing behaviours, we can achieve our core purpose of making every
moment special. Our Customer Insight Unit analyses feedback from over 60,000 customers a
month. We also gather insights from our team of over 65,000 employees who serve customers
in our stores. Furthermore, we engage with over 5 million followers daily on social media.
By continually analysing what they tell us, we can equip our people with the insight to learn
and adapt to meet our customers’ needs.”

Marks and Spencer Report (2016: page 10)

Knowing what the customers want and what is satisfactory to them helps Marks and Spencer
tailor its products, channels and services around them so that they have more reasons to shop
with the organisation, and hence gaining more competitive advantage in the market place.
Marks and Spencer’s stakeholder management has, therefore, enabled the company to
identify its existing positive relationship with its stakeholders, (Robert, 2003).

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The second most important stakeholders are the shareholders. A shareholder can be described
as an individual or institution that legally owns a share of stock in a public or private
corporation (Boundless.com 2017). These are the people regarded to be at the top of the
business because they are in control of all of Marks and Spencer’s transactions. As investors,
they have a direct interest on profits made by the company. These are the founders and the
decision makers of the company. This group has an overall say in all the major decisions
regarding the business. Anything that affects the larger body is discussed by the board and
proposed to shareholders for final say. They have the power to overturn decisions, whether
bad or good. Their interest in the business is clearly seen by how they invest their finances
into the business. Therefore, meaning to say that if the business loses money, so do they and
if it prospers, so do they. Helen Weir (2016; page 22), the Chief Finance Officer, notes that,
“We are committed to delivering profit for our shareholders by putting our customers at the
heart of everything we do.” Marks and Spencer, through the use of Plan A, strives to
“strengthen its financial position through the delivery of improved profits and strong cash
flow (Marks and Spencer Report 2016; page 10).” Driving value for shareholders underpins
the organisation’s business strategy and therefore Marks and Spencer remains committed to
delivering improved and stronger returns to its shareholder.

The third most important type of stakeholders are the employees. These are people who work
for an organisation and are paid for their service and time. The Marks and Spencer Board
(2016: page 34) recognises that “to be successful over the long-term it has a wider duty to
care for the interests of employees, customers and the communities in which the Company
operates, and whose support is required to create sustainable value.” Employees are the first
point of contact with customers so they have a direct influence on whether a client returns or
gives a disapproving review of their service to other clients. Drucker, (2017) argues that, “the
employees are the ones who create and deliver the products or services that the customers
consume. If we lose or antagonize our best employees then customer service will suffer so we
need to look after them. If we want to attract and retain top talent at all levels then we have to
offer terms and conditions that are attractive.”

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The loyalty and commitment every employee brings to the table within the Marks and
Spencer organisation has a direct correlation to the growth of the business. If employees have
a sense of ownership, security and have a sense of belonging to the business, they are likely
to practice good customer care which in turn will result to customer loyalty. Marks and
Spencer values the importance of employees in their organisation to the extent that it has
established a committee that receives updates on a variety of employee engagement
initiatives while making use of the annual ‘Your Say’ employee survey which asks
employees about the fairness and reasonableness of employee pay and benefits, (Marks and
Spencer Report 2016: page 56). The company has also done this by practically showing its
commitment in the employee retirement, promotion, appraisal, training and development and
recruitment and selection processes as a way to ensure confidence and comfort for their
employees and thereby enabling them to perform their effectively and produce quality
products and services.

1 (b) Analyses of the Creating Sustainable Value report in line with corporate social
responsibility.

Corporate Social Responsibility (CSR) can be described as a concept whereby organizations

consider the interests of society by taking responsibility for the impact of their activities on
customers, employees, shareholders, communities and the environment in all aspects of their
operations. It involves organizations voluntarily taking further steps to improve the quality of
life for employees and their families as well as for the local community and society at large.
All the Corporate Social Responsibility activities done by Marks and Spencer are classified
under its Plan A. As a way of improving the marketing concept, companies should balance all
the things they do against the needs of the society in which they operate. Steve Rowe (2016:
page 1) notes that, “We know Plan A is a ‘win win’ approach – a simpler, more efficient, less
wasteful business is better for the planet and for our bottom line – so we’ll chase that even
harder, (Plan A Report 2016).” Plan A was launched in 2007 to move away from CSR,
towards a more holistic approach that addresses all the sustainability issues affecting Marks
and Spencer’s business and supply chains (CorporateMarksandSpencer.com 2017).

Through Plan A, one of the company’s role is to convene and lead coalitions in showing
Government leaders that decisive climate action is good for economic growth, jobs and
societal wellbeing. The Plan A (2016) report notes a number of corporate social responsibility

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activities that Marks and Spencer has engaged in to help the society that it operates in. this
includes, “playing a central role in driving common action on forced labour, deforestation,
low carbon refrigeration, food waste and the circular economy, together with many of the
world’s largest consumer goods companies.” It clearly incorporates Caroll’s four categories
or domains of Corporate Social Responsibility namely: Economic, Legal, Ethical and
Philanthropic.

It has been ten years since the launch and yet Plan A continues to help get ahead of the fast
changing social, environmental and economic shifts in the global economy. Important
achievements to note, that Marks and Spencer has fulfilled through Plan A include the
following activities:

ECONOMIC ACTIVITIES:

 The launch of re-usable shopping bags made in the UK from up-cycled hotel linen
whose profits from all sales were donated to UNICEF to protect children in danger.
 The launch of the Sparks customer reward card in October 2015 where in addition to
discounts and other benefits, card holders can nominate a charity to receive 1p from
every transaction they make with M&S.

ENVIRONMENTAL ACTIVITIES:

 For the fifth consecutive year Marks and Spencer sent no waste to landfill and
reduced its total amount of waste by 9% in 2016 compared to 2015.
 The launch of the M&S Energy Community Energy Fund in July 2015 where the
company received 246 applications but had 21 winners who received two national
prizes of £40,000 and £20,000 and funding for 19 regional projects of £12,500.

SOCIAL (ETHICAL) ACTIVITIES:

 Through offering support to more than 5,800 young unemployed people, with 60% of those
who completed their placement finding employment.
 Raising £5.25m for health and wellbeing of charities. This included £2.4m for Breast Cancer
through conducting activities such as Breast Cancer Awareness Month, Fashion Targets
Breast Cancer and Charity Christmas cards. Marks and Spencer Cafes also hosted Macmillan

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 Cancer Support’s World’s Biggest Coffee Morning, which together with other activities
throughout the year, raised over £2.2m including more than £1m raised by M&S employees.

SUPPLY CHAIN (PHILANTHROPIC) ACTIVITIES:

 48% of all Marks and Spencer food products are now provided by Silver level suppliers.
 The removal of all plastic microbeads that can cause marine pollution from Marks and
Spencer wash-off cosmetic personal care products, as of January 2016 and also 28% of the
leather used in 2016 came from Leather Working Group certified tanneries.
 Training of 762,000 workers in the Marks and Spencer Clothing & Home Supply Chain since
2010.

According to the Creating Sustainable Value report, Marks and Spencer is well vested in
considering the interests of the society. The report argues that, along with serving the
organisation’s customers well, forging strong links with the communities in which they live
creates long-term value. Therefore by supporting causes close to their customers’ and
people’s hearts, they ensure that these key stakeholder groups work together for the good of
their local neighbourhoods, (Marks and Spencer Report 2016: page 11).

2. Report on Financial Statement Analysis of Dorman Company as at 31 August

According to Lan (2012), “Ratio analysis is a tool that was developed to perform quantitative
analysis on numbers found on financial statements.” It is, therefore, important to analyse
trends in company ratios instead of solely emphasizing a single period’s figures.

Profitability Review

The company experienced a 23.69% increase in sales in the current period under review,
though the gross profit margin1.1 marginally decreased from 41.77% to 41.56% for current
year.

This can be an indication that:

1) Cost of goods sold was high due to inefficiencies in procurement channels

2) The pricing model is flawed and could be a result of cheap pricing resulting in
increase in sales but reduced gross profit margin, hence a need to consistently review and

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make correct application of pricing model to ensure that the company maintains a profitable
product mix.

A further scrutiny of the Profit after tax1.2 shows a further reduction in profitability from
27.87% in prior year to 20.78% in current year. This is worrying to both shareholders and
possible investors as it shows management’s failure to contain costs and bring value to its
shareholders

By calculating the return on capital employed1.3 (ROCE) it is evident that the shareholders
have lost value as current return on capital is 17.59 % compared to a return of 23.93 % in the
prior year, a reduction in value of 6.34%

Solvency Review

This brings to scrutiny the going concern ability of Dorman Co and the current test ratio
shows that the company has an asset cover over its current liabilities of 1.19 a figure well
below the industry average of 1.5 the acid test ratio is below 1 at .70 meaning the company is
not liquid enough to cover its current liabilities in the short term period.

Efficiency Review

Of particular interest will be how Dorman Co has been able to efficiently run its business.
These ratios look at management of inventory and how the company is able to make
maximum use of credit available to them and how the company is also able to manage credit
made available to its clients.

Hence looking at performance of Dorman it is notable that its account receivable measure
shows an average of 90 days period in current year when in prior year it was 55 days. This
can mean management has increased credit repayment days to its clients. On the other hand
account payable days stand at 138 days in current year which can be acceptable if the
company has agreed with their suppliers on extended payment terms, but can be a challenge
if delayed payments are due to cash flow constraints because then the credit rating of the
company goes down and the company can be forced to source goods on cash basis and thus
loose the financing advantage of credit supplies further constraining its cash flow.

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Shareholders value review

In looking at the performance and management of Dorman it is also to have a critical to also
appraise the shareholders as to the security of their investment and whether they are obtaining
value from the investments. In evaluating we look at the net worth and the net worth
valuation shows that there has been a decrease in shareholders worth in comparison to assets
from 67% to 56%. In the event of shareholders wanting to sell, their shareholder value is
reduced and there might be forced to sell at below the initial cost of shares.

Using the reverse of this ratio by looking at how much assets cover shareholders’ funds we
see a slight increase from a prior year cover of 1.25 to 1.32 in current year.

It is also crucial to look at asset cover of liabilities and in our case study this cover has been
falling as liabilities now stand at 43.78% an increase from prior year’s figure of 33.08%
meaning that our liabilities have increased at a higher rate than our assets which is not a good
thing.

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REFERENCES

Boundless.Com (2017). Shareholder Definition. Retrieved on 21 April 2017 from:

https://www.boundless.com/users/14854/textbooks/organizational-
communications/introduction-to-organizational-communications-1/introduction-to-
organizational-communications-2/types-of-stakeholders-12-13355/

BusinessDictionary.com (2017). Stakeholder Definition. Retrieved on 20 April 2017 from:

http://www.businessdictionary.com/definition/stakeholder.html

Drucker, P. (2017). Who Are A Company’s Most Important Stakeholders? Retrieved on 22

April from: http://www.destination-innovation.com/who-are-a-companys-most-important-
stakeholders/#

Freeman, R. E. (2010). Strategic Management: A Stakeholder Approach. New York:

Cambridge University Press.

Grayson, D. Embedding corporate responsibility and sustainability: Marks and Spencer.

Journal of Management Development, Volume 30, Issue 10, Pages.1017-1026.

Hill, R. A. (2012). Strategic Financial Management. Kindle Edition. Bookboon.com.

InvestorGuide.com (2017). Stakeholder Definition. Retrieved on 20 April 2017 from:

http://www.investorguide.com/definition/stakeholder.html

Robert P. (2003). Stakeholder Theory and Organizational Ethics. Berrett-Koehler Publishers

Samantha M, (2012). Stakeholders: essentially contested or just confused? Journal of

Business

Ethics108 (3): 285–298.

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Woods, F. and Sangster, A. (2008). Frank Wood’s Business Accounting, Volume 2: 11th
Edition. England: Pearson Education Limited.

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APPENDIX

Workings to Dorman Company Financial Statements Review

YR 20X1 YR 20X0
        Formulae Workings Answer Workings Answer
1 PROFITABILITY RATIOS  
   
$ $
Gross Profit 6,400.00 5,200.00
1. $ $
1 Gross Profit Margin Sales 15,400.00 41.56% 12,450.00 41.77%
   
$ $
Net Profit After Tax 3,200.00 3,470.00
1. $ $
2 Profit After Tax Sales 15,400.00 20.78% 12,450.00 27.87%
   
1. Profit Before Interest & Tax $4040-$610 $4340-$260
3 Return On Capital Employed Total Assets - Current Liabilities $24900-$5400 17.59% $19500-$2450 23.93%
   
2 SOLVENCY RATIOS  
   
$ $
Current assets 6,400.00 3,200.00
2. $ $
1 Current ratio Current Liabilities 5,400.00 1.19 2,450.00 1.31
   
2. Acid test Ratio Current Assets -Inventory $6400-$2600 0.70 $3200-$1300 0.78

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 $ $
2 Current Liabilities 5,400.00 2,450.00
   
3 EFFICIENCY RATIOS  
   
Accounts receivable*365 $3800*365 $1900*365
3. $ 90
1 Accounts Receivable Days Revenue 15,400.00 Days $12,450 55 Days
   
Accounts Payable*365 $3400*365 $2150*365
3. 138 $
2 Accounts Payable Days Purchases $9,000 Days 7,250.00 108 Days
   
  SHAREHOLDER RATIOS  
   
$ $
Share holder Funds 14,000.00 13,050.00
4. $
1 Net Worth Total Assets 24,900.00 0.56 $19,500 0.67
   
Total Liabilities ($5400+$5500) ($2450+4000)
4. $
2 Debt Ratio Total Assets $24,900 43.78% 19,500.00 33.08%
   
$ $
Fixed Assets 18,500.00 16,300.00
4. Non-Current Assets / Net $
3 Worth Share Holder Funds 14,000.00 1.32 $13,050 1.25

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Ratios Used

1 Profitability ratios

1.1 Gross Profit = Gross Profit / Sales

1.2 Net Profit after Tax =Net Profit/Sales

1.3 Return on Share Capital (ROCE) Profit before Interest & Tax / Total assets- Current
Liabilities

2 Solvency Ratios

2.1 Current Ratio = Current Assets /Current liabilities

2.2 Acid Test Ratio= Current Assets – Inventory/Current Liabilities

3 Efficiency Ratios

3.1 Accounts receivable days= Accounts receivable/Revenue*365

3.2 Accounts payable days = Accounts Payable/Purchases*365

4 Shareholder ratios

4.1 Net Worth = Shareholders funds/total assets

4.2 Debt Ratio = Total Liabilities/Total Assets

4.3 Non-Current Assets Net Worth= Fixed Assets/ Shareholders Funds

4.4 Non-current assets net worth= Fixed assets/ shareholders’ funds

4.5 Debt ratio = Total liabilities/Total assets

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