Marks and Spencer PLC

An Analysis

Contents

1.0 Introduction

1.1 Marks and Spencer’s Strategy

1.2 Key Value Drivers

1.3 Critical Success Factors

1.4 Ratio Analysis

1.5 Summary

1.6 References

1.7 Appendices
1.0 Introduction

The following report will look at Marks and Spencer PLC, and identify and
evaluate the organisations current strategies, critical success factors and the
key value drivers, and determine the consequences for enhanced shareholder
value.
Marks and Spencer PLC, is one of the UK’s leading retailers, with over 21
million customers visiting their stores every week. The company sells clothing,
home products and food. The company states its core values to be, quality,
value, and innovation.
1.1 Current Strategy

When looking at strategy, the company lists a number of things it wishes

to improve on and develop as a business. The organisation plans to grow
within the next 5 years. The business is concentrating on the core UK
business, looking to improve a number of its key business areas such as its
food and clothing ranges. The company is also looking to build its multi-
channel and international capabilities.
The company has highlighted that over its first three years of its new
strategy, the focus will be on the core UK business, the Brand, its Stores, and
its Clothing and its Home and Food business.
The organisation has highlighted that its work within the first three years
to build its International and multi channel capability, will allow them to really
build, scale, and grow their revenues in each area of the business in the
following years.
The strategy looks at the investment needed for the ideas they have to be
put in place. The organisation states that the plan will be delivered through
additional capital investment in their stores, systems and marketing. In
addition to their current capital expenditure run rate of c.£550m per annum,
they anticipate to spend a further c.£300m per annum over the next 3 years,
giving a total of £850m - £900m per annum. The company will be taking an
IRR of between 12-15% on the additional investment. Of the £850m - £900m
additional capital investment, £600m will be invested into improving the UK
business and a further £150m in each multi-channel and International
respectively. All of the additional investment will be funded from existing cash
flows and the company remains committed to maintaining an investment
grade credit rating.
(http://corporate.marksandspencer.com/aboutus/our_plan, retrieved 19/01/11)

1.2 Value Drivers

Grundy et al (1998) states that a number of writers have attempted to

place finance in a strategic perspective. An example highlighted is Rappaport
(2) emphasising the need to consider the extent to which corporate and
business strategy creates or destroys shareholder value. Grundy et al (1998)
maintains that, value drivers are both the internal and external underlying
influences, which generate present and future cash inflows. Value drivers can
generate cash either directly or indirectly (in the latter case they may be
produced by some internal service or other infrastructure)
Rappaport’s core value drivers either focus mainly on internal factors or
deal with the interface between the company and its environment. For
example Rappaport lists sales growth, competitive rivalry and margin as value
driver. Sales growth, as it drives cash inflows and helps produce economies
of scale, Competitive rivalry, as an indirect value driver, as acute competitive
rivalry can often lead to discounting, price wars and severe reduction in
margins; Margins are seen as the most important value driver in Rappaport’s
case, as it follows on from competitive rivalry (and the company’s own
competitive strength in adding value at low (relative) cost. As Rappaport
points out, margin is particularly sensitive to the degree of competitive rivalry
in the market.
When looking at Marks and Spencer’s and the possible value drivers
that they would consider, there are a number of possibilities due to the nature
of the business and its different business concentrations. When looking at the
food side of the business, the value driver they could consider could be, brand
and service differentiation; this is because the company try to differentiate
their products from others in the market by taking a more ‘high end’, ‘high
quality’ approach with their food products, as well as their service within their
stores. This could also be applied to their clothing and home products.

1.3 Critical Success Factors

Grundy et al (1998) states that critical success factors are those aspects of
strategy in which an organisation must excel to out-perform competition and
are underpinned by core competences in specific activities or in managing
linkages between activities. Critical Success factors are therefore specific
areas in the business value system which managers need to focus on to
achieve superior performance.
Smith (2005) maintains that Beishel and Smith (1991) highlight 5 key
areas that critical success factors could be in; quality, customer service,
resource management, cost, and flexibility are all listed as key areas in which
critical success factors could be based.
When looking at Marks and Spencer and their strategy, it could be said
that they will have a number of different critical success factors due to the
different business areas. One factor that will be the same throughout all will
be the quality offered to customers. This is something that as a brand Marks
and Spencer strive to achieve. Other success factors in relation to the
business strategy could be, flexibility; due to the changes the business is
looking to make with its departments in its stores, looking at an enhanced ins-
store environment with better migration between product areas, a degree of
flexibility will be needed from both managers and other employees, to ensure
that the changes are successful and the benefits are felt by the customers.
1.4 Ratio Analysis

When looking at the performance of Marks and Spencer and the ratio
analysis results (found in appendices) it shows clearly the financial
performance of the company over the last 5 years.
When looking at the pre-tax profit of the organisation, it is clear that
whilst turnover has increased year on tear, profit has taken a fall since 2009.
This is shown through the profit figures, as well as through the profit margin
ratio.
The company, when looking at the ratios, is not performing as well as it
was in 2005; when looking at the ROCE ratio, it is clear that the percentage is
lower than in 2005. Proctor (2009) states that the ROCE is the rate at which
the business is earning profit relative to the amount of money invested. The
figure of 13.35% shows that the company is not making as much profit for the
amount of money invested, as it was in 2005.
When looking at the liquidity ratios, it could be said that the company is
still underperforming, although, there has been a steady increase in both the
current ratio, and the liquidity ratio. As illustrated in his book, Dyson (2007)
states the liquid ratio measures the extent to which assets can be turned into
cash quickly; this figure has steadily increased since 2005, meaning that
Marks and Spencer can turn its assets into cash quickly, possibly because it
is not tied-up in stock, as the goods have been processed and are ready for
sale. The increase in the current ratio is also a favourable increase, as the
company will be able to find the money easier, to pay of its current liabilities if
they are called in.
 Through looking at the ratio analysis of Marks and Spencer, it is clear
that the company is doing better in some areas now than it was in 2005, but
also doing worse in some areas.
The lowered gearing ratio of the company, coupled with its more
favourable liquidity ratio results, and increased turnover and successful
trading, illustrated by the increased Gross profit ratio, the company may prove
to be an attractive investment opportunity.

1.5 Summary

When looking at the strategy of Marks and Spencer, as well as the

financial data available, it is clear that the company is looking to the future,
closely concentrating on it UK stores. This is mainly due to heightened brand
recognition within the UK.
The company’s financial performance has fallen in recent years,
although, this could have been, and is most likely due to the current economic
downturn, as illustrated by Poulter (2009) in his newspaper article. This may
create problems, when trying to attract new investment, as trying to keep the
current shareholders involved with the company. As illustrated by the ROCE
ratio, the company is not making as great a return on its investments,
especially when compared to 2005.
However the shareholder fund has increased steadily since 2005, and
the company is not as highly geared as it was in 2005, meaning it has more
access to funds from the shareholders, and therefore may be more attractive
to potential investors, which is important when trying to implement a new
strategy such as the one they have chosen.
In regards to shareholder value enhancement, the increase in revenue
may prove to be beneficial, so long as the company can reduce its costs in
some area, in order to provide its shareholders with a more favourable return.
(http://ezinearticles.com/?How-To-Increase-Shareholder-Value&id=376713
retrieved 20/01/2011)