Financial Strategy And Corporate Governance Of Debenhams Plc

Financial Strategy of Debenhams Plc

This assignment focuses on the financial strategy and corporate governance of the UK retail company Debenhams Plc. This is a multinational retailer operating under departmental stores format. Main products sold by this company are clothing, furniture and other household items. Debenhams Plc was set up in 1778, however, integrated as Debenhams Limited in 1905. This company has extended its business through several merger and acquisition. During 2016, this company has shifted their focus from clothing to food and beauty products. This company is enlisted in London stock Exchange.

This paper analyses the financial strategy from the financial report published in the company website. Financial strategy is the strategy of the organisation through which it plans to finance the daily operation of the business. Corporate governance aspects of this company are also highlighted in this paper. This paper also highlights the scandal prevention policy of the company. Debenhams Plc is committed to high standard corporate governance for the stakeholders in order to keep sustainability over the long term. Apparel retail market in UK is competitive and the potential competitors of Debenhams are Marks & Spencers, Next, Primark, Tesco and others. Three years financial reports of this company are examining to evaluate financial status of the company along with business level strategy.

The mission of Debenham Plc is delivering a compelling customer proposition, increasing range of products through multiple channel, and increasing brand in UK and in international market.

The formation of Mission of Debenham Plc can be demonstrated through Ashridge Mission Model. Such model integrated the four following elements for achieving targeted organizational objectives.

Purpose: The mission for increasing customer proposition and product range would ultimately increase the profit level of the organization. In this way, it will attract the shareholders, stakeholders. Moreover, the mission of delivering compelling customer proposition would go beyond merely satisfying the customers (Alawneh 2015).

Strategy: Clear mission of Debenham Plc facilitates them in forming effective strategies for performing the day to day activities towards achieving organizational goals.

Values: The mission of the organization fosters organizational values towards pursuing ethical business.

Policies and Behaviour: The mission statement also set guidelines for performing the day-to-day activities towards achieving organizational goals (Babnik et al. 2014).

Management, operational activities and strategies: The mission to provide compelling customer value proposition leads to management to take unique approach for creating unique customer value. It also set specific operational activities for incorporating unique value in the product range (Butler and Booth 2017). Moreover, the mission of enhancing brand value and product range assists the setting effective organizational strategies for achieving organizational objectives.

Corporate Governance of Debenhams Plc

Employee Motivation: Clear mission of the organization facilitates the employees to understand their job role clearly. Moreover, the inspiring mission of the organization motivates the employees towards performing their job role perfectly for achieving overall organizational goals.

Growth and Market Expansion: Increasing product range and enhancing brand value can facilitate the organization towards market growth and market expansion. Moreover, the enhancing brand value of the organization can enhance the acceptability of the products in international market.

Profitability and enhancement of investor confidence: The mission of the organization foster unique value to the products range, which enhance customer attraction and increasing sales volume. Moreover, the enhancing market expansion can also increase the profit potentiality of the organization, which can enhance the investor confidence in investing in this organization.

Strategy of Debenhams Plc is to become an international multi channel brand. Other strategies of the company are focusing on the improving UK retail, delivering a persuasive customer proposition, increasing operational and organisational effectiveness through investment. Business model of Debenhams plc is presented as below:

Factors	Strategic Analysis
Strength	· High brand equity and brand recall among the customer in the fashion world · High brand value has enhanced the scope of international expansion · Sullivan (2017) stated that wide customer base and brand value has initiated the strategies of enhancing product portfolio
Weakness	· Limited global expansion · Brands have still not tapped all customer segment · Limited market share · Alawneh (2015) opined that the organization has given strong focus on the strategies of international market expansion · As per Burgess (2017), the organization is targeted at using cost leadership strategy for enhancing market share
Opportunity	· As per Sullivan (2017), the strategies for franchising can help in market expansion · On the other hand, Alawneh (2015) opined that strong product mix strategy can helped in increasing customer preferences and global expansion
Threats	· High competition in the market · Rising price of commodities has enhanced the operational cost · Babnik et al. (2014) pointed out the strategies of product differentiation has can help in beating the market competition

Table 1: Strategic Analysis through SWOT

(Source: Created by Author)

Factors	Strategic Analysis
Political	· Stable political condition of UK can facilitate business development · Government support for industrialization can increase business growth · Less changes in tax law · Burgess (2017) pointed out less tax change and political support has helped Debenhams Plc towards taking the strategies of increasing stores
Economic	· As per Delen, Kuzey and Uyar (2013), strong economic condition of UK fosters the strategies of huge investment in this market · Less fluctuation in inflation rate helped the organization in taking the strategies of price penetration strategy (annualreports.com 2016)
Social	· Sullivan (2017) stated that modern and sophisticated life style has helped the organization in taking the strategies of wide range or product mix · On the other hand, Pervan and Kuvek (2013) stated that increasing spending power of customers drives the organization to take competitive pricing strategies, which has enhanced profit potentiality
Technological	· According to Sullivan (2017), huge technological advancement of UK has helped the organization to embrace modern technological equipment for smooth business process
Legal	· The organization has taken the strategies of smooth customer feedback for adjusting with the strict consumer law of UK
Environmental	· Larcker and Tayan (2015) opined that the organization has taken the strategies of reduced carbon footprint for sustainable business

Table 2: Strategic Analysis through PESTLE

(Source: Created by Author)

Porter’s Five Force

The investment cost in retail industry is quite high. Therefore, the new entrant will face great barriers in entering in new markets. Moreover, Pervan and Kuvek (2013) opined that the cost leadership strategies and high brand value of the organization like Debenhams Plc can also be great barrier for new entrants. Therefore, Debenhams Plc face less threat of new entrants.

The major substitutes for Debenhams Plc are organic shops, small convenient stores and off licenses. The substitutes provide the same products in quite low price for enhancing customer attraction. However, the quality of such substitutes can be quite lower. In such situation, the product differentiation strategy through high quality has helped Debenhams Plc to beat the threats of substitutes. Moreover, it faces moderate threats of substitutes.

Debenhams Plc faces tough competition from the direct competitors like Demon Tweeks, Derann and Dunelm mill. However, Sullivan (2017) stated that the cost leadership strategy of Debenhams Plc helps the organization in beating the tough market competition.

The suppliers are quite inclined towards providing the raw materials in reputed retail companies. On the other hand, wide availability of retail store has increased the bargaining power of suppliers. However, Larcker and Tayan (2015) opined that the strategies of strong collaboration with the suppliers has reduced the bargaining power of suppliers. The organization faces moderate bargaining power of suppliers.

Competitors Analysis

Wide availability of retail stores has increased the bargaining power of buyers. The organization faces high bargaining power of buyers. However, the strategy of cost leadership has helped the organization to retain the customers.

The organization used diversified source of suppliers for getting supply of unique quality raw materials. On the other hand, Alawneh (2015) opined that the organization maintain long term relationship with the suppliers for getting supply of raw materials in lowest cost. It helps the organization in maintaining the strategy of cost leadership for being market leader. In case of outbound strategy, the organization maintains the same strategy of long term relationship with the carriers for reducing the delivery cost. Furthermore, Babnik et al. (2014) stated that the organization used public relation and sponsor charity event for increasing marketing of their products. The organization uses both online and offline sales strategy for enhancing the sales volume.

According to Alawneh (2015), the organization uses quality assurance strategies for maintaining unique quality in the product range for increasing customer value. The organization used all technically advanced equipments for smoothing the operation process. Furthermore, Burgess (2017) stated that the organization uses the strategy of frequent training program for the employees towards enhancing their skills and maintain the quality of products as well as service.

Fraud prevention policy is a significant policy of an organisation in order to minimisation organisational risks. As mentioned by Larcker and Tayan (2015), fraud in an organisation comes in different forms such as asset misappropriation, financial statement fraud and corruption. The board of Debenhams recognises risks and sets milestones to be achieved for the corporate governance. In order to prevent any kind of fraud in the organisation, diversity policy is adopted. Risk management committee of the organisation implements and monitors preset objectives. They believe in equal opportunity of male, female, and balanced representation of female along with male in all organisational position. There is a structural coherency in the board committee, where the executive and non-executive directors collaboratively take decisions for handing any business scandals. Moreover, collaborative approach in board structure enhanced business involvement, which minimizes the reputational risk of the organization.

A cultural position is set for the employees and management for adopting and implementing policies and promoting legal acquiescence. An ethical standard is set to fulfil strategic objectives. The audit committee evaluates the viability of any project in compliance with the vision statement. This committee ensures appropriate management of business so that financial fraud can be avoided and internal control can be effective (Bhasin 2013). Audit committee reviews the plan of Debenhams for the prevention of fraud, bribery and corruption at the time of financial reporting. Effective composition of board committee drives transparent organizational decisions, which gain the trust of the stakeholders.

Mission of Debenhams Plc

There are two ways available to the employees of Debenhams, through which, employees can raise their concern about the fraud. If any fraud is detected, employees first can approach to their line manager and later to the central human resource team. Employees can also approach to the internal audit and risk management team. The directors are responsible to keep transparency in the financial reporting, disclosure of financial transaction. Transparency is needed to keep in the remuneration report of the directors also in compliance with the Companies Act 2006 (annualreports.com 2016). The committee also examines and safeguarding assets of the company and takes requires steps in order to detect and prevent frauds in this regards.

The audit approach of the company examines risk of fraud in revenue recognition while considering manual adjustment in the revenue side and during preparation of the invoices for the franchises. According to Davies (2012), material misstatement has effect on the company in terms of allocation of resources and efforts. Therefore, it can be said that audit committee, board and directors have significant responsibilities in fraud recognition and prevention in the organisation to keep transparency in the business operation.

Cadbury report 1992 was published to recommends companies to eliminate risks and failure of corporate governance. In this report, the code of practices have been distinguished into four sections such as role of board of directors, role of non executive directors, dealing with their remuneration and addressing the issues with financial reporting (Tricker and Tricker 2015). The annual report and sustainability report 2016 of Debenhams has published report, which includes fraud detection method in all these four sections. Boards take decision after discussion with the directors and non executive directors in accordance with the policy of diversity. All the members of the audit and risk prevention committee, members of executive and non-executive committee to raise issues on fraud and members of boards can make their independent decisions. Shareholders at the AGM approved the remuneration policy. Base salary is reviewed annually and increases in line with the other employees in the group. The remuneration report publishes annual bonus, performance share plan.

A positive increasing profit at the end of the each financial year is a basic strategy of Debenhams. They keep clarity in case of the dividend payment to the shareholders, as increase in shareholder value is a key financial strategy of the company. Dividends are paid in this company twice a year in the form of interim and final dividend. Progressive dividends are paid to the shareholders (annualreports.com 2016). The value of sales is measured in this company through gross transactional value. Revenue, EBITDA, diluted EPS, dividend yield and dividend growth rate are used to measure performance of the business in this company. Key financial ratios are used to evaluate annual performance in the UK market. Financial statements are prepared in accordance with the Interational financial standard.

SWOT Analysis

The organization uses fixed asset tracking software for long term maintenance of fixed asset and prevent any huge loss in the organization. Moreover, the enterprise asset management system helps in maintaining the important fixed assets of the organization. Moreover, the organization also takes care of working capital management through effectively managing inventories, accounts payable, accounts receivable and cash. It ensures the profitability of the organization in an constant basis.  

Debenhams gives priority to the cash flow and right payment of the shareholders, as they are important stakeholder of the business. However, reductions in financial costs are given priority as it reflects the benefits of lower debt level, low interest cost.

Profitability ratios	2014	2015	2016
Net margin	3.77	4.03	3.67
Asset turnover ratio	1.08	1.08	1.08
Return on equity	11.54	11.54	9.89
Return on invested capital	8.41	8.95	8.00
Efficiency ratio
Account receivables turnover	102.56	92.54	90.24
Inventory turnover	5.78	5.98	6.23
Asset turnover ratio	1.08	1.08	1.08
Liquidity ratio
Current ratio	0.64	0.66	0.73
Quick ratio	0.11	0.18	0.25
Debt to equity ratio	0.29	0.23	0.21

(Source: financials.morningstar.com)

Financial results of the company have worsen in 2016 after an improvement in 2015. As described by Bodie (2013), profitability ratio measures the ability of the firm to generate revenue in comparison to its expense. A higher ratio indicates better financial performance. Net profit margin of the Debenhams UK has increased in 2015 but fell in 2016 due to increase in cost of sales and administrative expenses. As mentioned by Delen, Kuzey and Uyar (2013), asset turnover ratio is the value of the revenue in comparison to its assets. Interestingly, asset turnover ratio of this company has been at the same level, which indicates in consistency in generating revenue out of total assets. As pointed out by Halkos and Tzeremes (2012), return on equity is a ratio that indicates the capability of the company to produce profit from the investment of the shareholders. ROE of this company has also decreased in 2016 due to decrease in net profit and increase in stakeholder’s equity in that year. Return on invested capital has also decreased from 2015.

In the words of Kabajeh, Nuaimat and Dahmash (2012), efficiency ratio reflects how efficiently a company is using its assets and liabilities. A higher Account receivables turnover indicates greater efficiency of the firm to utilise assets. However, the results for Debenhams are not satisfactory, as the receivables turnover ratio has been falling over last three years. Increasing inventory turnover ratio is good sign as it indicates how fast the company is able to sell inventory (Pervan and Kuvek 2013). Asset turnover ratio is fixed for this company during three years. It indicates no change in efficiency in utilising assets of the company.

Liquidity ratio indicates the ability of the firm to meet its short term obligations. Investors generally desire a higher current and quick ratio. A value higher than 2 is desirable for both ratios. However, Current ratios are less than 1, indicating current assets is less than current liabilities. Low quick ratio indicates firm has limited liquidity to meet its short-term obligations.  Nevertheless, increasing value for both ratios is positive sign for improvement in financial health. Low debt to equity ratio indicates efficiency of the firm to keep financial cost, borrowing at low level. A decreasing debt to equity ratio indicates betterment of financial =health of the company.

PESTLE Analysis

There Is No Such Financial Innovation In Terms Of Instruments In Debenhams However They Use The Term Gross Transactional Value Gtv Instead Of Gross Revenues. Gross transactional value is the total sales of the company including concessional brands. Gross transactional value improves during the peak season and is driven by strong performance.

The organization can use retail structured product as financial innovation. It can be designed for facilitating highly customized risk-return objectives. It will be accomplished through traditional security like conventional investment-grade bond and replacing the usual payment features with non-traditional pay-offs.

Conclusion

This assignment has discussed the business strategy and business model followed by the UK apparel retailer Debenhams Plc. This company faces significant competition in the UK market with falling share in the apparel retail industry. Therefore, the business policies followed by the company, needs to reviewed by the company. This paper has highlighted the issues with the business policies such as excessive discounts, weak multichannel international business and weak financial performance during 2016. Addressing these issues may improve the business performance of the company. As the current ratio and quick ratios are very low for the company, this company needs to focus on capital structure such as equity and debt to improve liquidity. Further corporate governance policy has been highlighted in this report. The company is expecting tougher consumer environment in neat few years due to Brexit effect. However, corporate governance policy of this company is good to prevent any fraud in the financial and operational matter.

References

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