Introduction
It is imperative for all companies to set out their strategic plans which they use as guidelines and these plans indeed assist them in setting up the scope of their operations and controls which in turn ensure the sustainability of business and achievability of profits in the period that lies ahead. As Peter Drucker (1974) stated that ‘the prime task is to think through the overall mission of a business which is an integrated part of strategic planning. Without a precise strategic plan, it becomes somewhat impossible for the companies to obtain their desired objectives. The implementation of companies’ strategic plans through well-directed strategic management initiatives is essential for companies to gain a competitive advantage. This statement will be evaluated in the current paper by examining the case of Marks & Spencer and determining how different ways of strategic management accounting can assist the company in achieving its strategic plans as set out in its Annual Report and Financial Statements 2008.
Strategic Management Accounting
Strategic Management is defined as ‘an ongoing process of formulating, implementing and controlling broad plans guide the organization in achieving the strategic goods available in the internal and external environment’ (Bromwich and Bhimani 1994). Strategic management is a form of descriptive management plans which companies develop for improving their approach to selling their products or services. Strategic management accounting which is a relatively new development in management accounting since the term was introduced by Simmonds (1981) has been defined as ‘accounting for management’ (Ward, 1992) (Ward). This implies that strategic management accounting helps the management to develop financials associated with their alternate business strategies. A more precise definition provided by Bromwich (1990) is the ‘provision and analysis of financial information on the firm’s products markers and competitors’ cost and cost structures and the monitoring of the enterprise’s strategies and those of its competitors in these markets over a number of periods’. This suggests that strategic management accounting does not just emphasize providing financial information related to external factors but also assembling important non-financial information and internally generated information. The implications for strategic management accounting for Marks & Spencer strategic plans set out in its financial report will be discussed in the following paragraphs however before this analysis is carried out a brief history of the company would allow us to delve more into the company’s strategic positioning strategy.
Short History of M&S
The history of Marks and Spencer dates back to 1888 when its pioneer Michael Marks, a Russian expatriate, set up a ‘Penny Bazaar’ where no item was sold at a price more than one penny. After ten years Tom Spencer joined Michael Marks as a partner and the joint effort actually turned the business around and by the early 20th century their business had 12 shops and 24 stalls in covered markets. The partnership excelled in its business ventures and by 1926 Marks and Spencer decided to go public by gaining a listing on the London Stock Exchange. It was not until 1984 that a non-family member was appointed as the Chairman of the company and till then it was the endless endeavors of the family members of both Michael Marks and Tom Spencer which led the development of the company to become a countrywide retail phenomenon. By the 1980s the stock Marks and Spencer was one of the most sought in terms of its holding by shareholders (Whitehead, 1994). Over the years the company has successfully diversified by developing a product portfolio offered to its customers via a chain of retail outlets. The company not just deals in fashion clothing but also succeeded in establishing strong brand affiliation for its products and services including food, furnishings, accessories, property development and financial services. The company-maintained loyalty by establishing close ties with the British suppliers to provide high-quality products to its customers and making its operations simplified. The company has relished upon its relationships with suppliers, employees, and customers to become one of the world’s renowned entities and gain recognition for its self-developed brand ‘St Michaels’. The gushing popularity has allowed the company to have the strongest financials in the retail sector and now Marks and Spencer is one of the UK’s leading retailing company which has over 21 million customers visiting its globally spread network of stores (Burns 2008).
Strategic Plan
The company has set out its strategic plan in its Annual Report 2008 for the next year which suggests that it plans to continue providing high standards of customer-oriented retailing. The focus has been clearly set out in five different objective areas. These objectives will be addressed through an in-depth analysis based on Strategic Management Accounting (SMA) techniques to justify whether their achievability is possible or not.
Activity-Based Management
This technique evaluates a company’s activities which add to indirect costs however in long term they result in achieving a competitive advantage. Marks and Spencer have placed significant emphasis on addressing some issues related to its social and environmental obligations. The company launched is Plan A in January 2007 the company set out a 5-year plan for ensuring that the environmental impact of its business operation is reduced to minimum levels by investing £200mn (FSN 2007). The company is set out to become carbon neutral, culminate waste landfills, and extend sustainable raw material sourcing. Also, it invests heavily in healthy life programs for its employees and developed means of ethical trading. The major contribution of Plan A has been the reduction of CO2 emissions by 48,000 tons or 9% compared to the last year. Despite an increase in the number of stores the energy usage has been reduced by 4% due to the use of renewable energy and the waste sent to landfills is decreased by 6% in 2008. The company expects short-term cost cuttings from Plan A however long-term competitive advantage is achievable from these projects (Sir Rose, 2008). The company also entered into an agreement with N-Power for the largest retail renewable energy project worth £2.0bn which will shift the use of electricity to renewable sources through M&S retail outlets (Wilkes, 2009). The company invests £14.8mn of pretax profits on community programs that are aimed at different development programs.
The company has also invested in expanding its floor space by 5.5% in 2008/09 and modernized further 10% of the existing stores (M&S, 2008). The company views this as an attempt to face the difficult period of economic slowdown by giving their customers a look that may induce them to shop more at M&S thereby gaining a competitive advantage.
Benchmarking
This assesses the practices adopted by a company and compares its performance based on those practices with the goal of improvement (McNair and Leibfried, 1992). M&S has been criticized for not responding quickly to changes in the market trends and competitors’ initiatives. The programs that M&S offers are considered to be reactive to the changes in the market. Different product differentiation and customer relationships programs that a company operates are in response to the steps undertaken by its competitors (Thompson and Martin, 2005). The company seems to lack the due importance it should give to the timing of such steps which can yield much better results.
Competitive Position Monitoring
This provides information regarding business competitors based on sales, market share, volume and unit cost (Simmonds 1981). M&S faces competition from companies in Department Stores Industry in addition to competition in the Appral & Accessories Retail, Grocery Retail and Home Furnishings and Housewares Retail sectors. M&S is the sixth-largest retailer in the UK (M&S, 2008) with 623 stores covering 14.3mn sq ft in the UK (M&S 2008). M&S is the largest clothing retailer and it is mainly used for shopping on special occasions for grocery shopping (Katz, 2009). Other market competitors are Sainsbury, Tesco, Asda, Safeway, Aldi, Waitrose, Selfridges and other local and regional retail outlets. M&S has its own brand whereas most of its competitors have a range of external brands displayed in their outlets. The following the Key Performance Indicators that can be used to provide effective competitive position monitoring of Marks and Spencer:
Information from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)
Table 1: Key Performance Indicators
Figures in Table 1 suggest that the company is lagging behind in the grocery market share this is because the customers do not consider M&S as their choice for weekly grocery shopping and they prefer other retailers which offer different products and brands. The gross profit remains higher than its competitors as the company continues its premium pricing strategy which may not be suitable in the current retail scenario which is pushing away customers from their buying habits. In addition to this M&S has invested expanding its store space by investing in its UK property portfolio and improving the outlook of its store to provide its customers a refreshing shopping experience.
Competitor Cost Assessment
This technique adds more information to the previous method by providing information on the cost structures of competitors (Simmonds 1981). This analysis could be carried out by comparing the cost of sales as a percentage of revenue turnover of all companies:
Figures from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)
Table 2: Cost Comparison
The vertical analysis carried out by simply dividing the cost of sales of each company by their revenue it is clear that the stated controls of M&S are efficient to keep the cost of sales down. Almost 80% of clothing sold in M&S retail outlets is manufactured overseas. This major shift has been mainly due to the company’s decline in the early 1990s which forced the strategists to move from exclusive support for British suppliers to overseas manufacturers.
Competitor Performance Appraisal
Moon and Bates (1993) identified this technique which draws information from published annual reports of competitors and adopts various financial analysis techniques. The important financial information related to M&S and its major competitors is summarized in the following table:
Figures from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)
Table 3: Key Financial Figures
This table indicates that Tesco Plc is the largest in terms of revenue and net profit for the year. The EPS of M&S is higher than Tesco and Sainsbury however it is lower than Next Plc. This is mainly to the difference in the common shares issued to the shareholders. The company has higher total assets compared to Next Plc but lower than others which may suggest higher asset turnover for the company.
Customer Accounting
This technique focuses on customer relationships deriving information from relationship marketing that businesses implement through their marketing communication techniques (Bellis-Jones, 1989). A report published by Scottish Food and Drink suggested that the customers doing their shopping from M&S are of affluent nature as 75% of its customers have an average age of 45 years old that are considered to have considerable disposable income. The company has also developed its promotional strategy that includes exclusive sales periods in seasonal periods. These promotions include either price reductions or typically combined sales i.e. 2 for the price of 1 or similar. The company has been able to gain more sales in the difficult times by cutting down the prices on food and clothing that slowing the decline in the company’s sales from 7.1% to 4.2% (Wilson, 2009).
Strategic Pricing
Over the years, the company has enjoyed its inspirational positioning in the market and has commanded a premium pricing strategy. As the profile of its customers suggests that they have comparatively larger disposable incomes, therefore they expect to pay a premium for M&S products. In return, the company makes all efforts to meet its customers’ expectations regarding quality, innovation and trust. This is the reason that M&S prices are comparatively higher than its competitors’ prices (Hamilton, 2005). This is apparent from the high gross profit margins indicated in Table 1. However, during 2008 M&S reviewed its pricing strategy to attract a broad range of customers as an attempt to prevent further decline in its sales that are badly affected by the downturn in the UK economy. This would increase the price span of products sold in its supermarkets. The company aims to offer pricing which would enable it to perform better than its competitors would. The company maintains a consistent pricing strategy which has helped the company to increase its volume share.
Conclusion
It is concluded from the above analysis that M&S is a strategically strong company however with changing trends in consumer demand and behavior the company needs to focus more on its fashion and design to add more value for its customers. Furthermore, techniques of SMA used in the above analysis may seem to be incomplete because of the information available to the researcher. However, it is clear from the above analysis that M&S will remain a strong participant in the UK retail industry as its position itself in the market as a premium product and service retailer and the brand value attached to the company would ensure that the company survives the economic slowdown in the global and especially the UK economy.
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