Putting the interests of the shareholders as top priority should be of great importance to business leaders. Failure to do so may cause the company to collapse as in the case of Enron Empire and its associated demise of Andersen (Sadler & Craig, 2003). It may also result into a legal battle and even prison sentences. The top agenda for strategic management in the 21st century is corporate governance, ability to attract and retain top talent, relationships with stakeholders and reputation building.
There are three categories of company purpose or mission; to create shareholder value; meeting needs and expectations of employees, customers, community, suppliers and investors; a purpose can also be aspirational and idealistic. The mission of Wooden Post Ltd. can be described as one that looks forward to meet needs and expectations of; employees, customers, community, suppliers and importantly investors.
Every business should be able to identify the success factors in its market. For example Wooden Post Ltd needs a good market share in order to counter competition from its competitors. Moreover, site location of the plants is crucial in cutting down on the transportation cost which on the raise. It is important for the plants to be located close to the sales outlets so that the transportation distance becomes shorter. Therefore it is of essence that the management identifies and acquires appropriate locations.
Normally strategic decisions take at least two or three years for them to be proven to be right or wrong. They are usually irreversible or at least reversible at a substantial cost. With this understanding and considering my role in the company, it means that I should be cautious to only support the most viable strategic decision. For the reasons explained further in this paper, I would support the option of acquiring the assets of suitable competitors to strengthen the total UK market share.
Acquisition of London Counties
I believe this to be the best option of the three given by the consultants. This is because its benefits are enormous compared to the other options. The long term benefits in cost savings on supplies will help the company increase its profit growth. The upgrade of the Wooden Post’s eastern UK facilities in order to complement the London Counties purchase has great potential. The upgraded facility will increase production significantly. Moreover, the cost of overheads will be reduced since there will not be two separate facilities operating. For instance, the services of an accountant will be based under one roof other than separate accountants for the two companies. This brings economic gain to Wooden Post through reduction of cost of operation. Sale of London Counties assets will provide Wooden Post with the funds required to increase production and catering for other operational costs.
Except for the for the foreseen reduction in cash flow and the disagreement between the members of the management team over the hurdle rate, the strategy seems largely beneficial to Wooden Post Ltd. Most of the factors that could lead to reduced cash flow are short-term. Except for anticipated contingencies the other factors; Redundancy and relocation provisions, research and development, and unification of the distribution network are expected during the first two years of the acquisition. This means that from the third year these hurdles will have been overcome and the company’s cash flow starts increasing.
This strategic decision, in consideration of all the factors discussed will provide the company with high return on investments and profit growth. These are necessary in transforming Wooden Post Ltd into a public company in the next two years. The potential investors must be satisfied with the financial health of a company before investing in it. Moreover, when the company is turned public it will be able to raise more capital through issuing of shares and have a greater borrowing power. This will help the company to optimize its production and sales. With more capital the company can also explore other areas of business and penetrate new markets. A public limited company also has the advantage of acquiring the services of experts to take up the management of the company.
Justification of financial and accounting tools used
The business tools used in evaluation of the case are very reliable because they revealed the financial health of both Wooden Post Ltd and London Counties. Financial accounting tools for business decision making were used to inspect and assess internal controls and accounting policies of the companies. These tools include financial ratios and forecasting.
Financial ratios are leading indicators used to evaluate a company's financial performance. The usual types of ratios are those that mainly describe asset turnover, quantity, profitability, and financial leverage. The financial statements of the company are used to directly compute the financial ratios and then compared to rivals or the industry average. Financial ratios typify a benchmark-style analysis and determine the efficiency of a company’s financial processes. Liquidity ratios furnish a company with information concerning its ability to satisfy short-term financial obligations. it is through this financial tool that it was possible to establish that the liquidity of London Counties is low hence financially unstable. This was caused by the company’s neglect of investments and hence has few short-term assets. Profitability ratios help in determination of the amount of profit made on sales of goods and services. They analyze sales, net income; cost of goods sold, and total assets. As a result of reduced market share, London Counties has experienced reduced sales however due to its close proximity to the source of raw materials the cost of production of timer posts is low. The total assets of London Counties are low due to neglect of investment as mentioned earlier. On the other hand Wooden Post Ltd registered increase in sales. The company has a strong asset base also.
Forecasting attempts to find out possible amount of sales that could be made in a particular economic marketplace and area. Accounting forecasts normally bears in mind the number of consumers and the market, accessibility of alternative or inferior goods, business rivals offering the same goods or services, as well as company’s ability to produce low-cost but high-quality products. It is through forecasting that the consultant was able to predict the benefits that Wooden Post Ltd is likely to gain by acquisition of London Counties.
Evaluation of options per criterion
Evaluation of the options given by the consultant to arrive at the best option requires the participation of all managers. What is necessary to Wooden Post Ltd at this critical moment is strategic planning. Strategic planning is the conventional consideration of a company’s future path. Different business analysis tools including SWOT analysis are used in strategic planning. It should deal with a t least one of these questions: what do we do, for whom do we do it for, and/or how do we excel. Many companies view strategic planning as a process of determining where a company will be in the next 3 to 5 years. However it can extend its vision to even 20 years. In the case of wooden post ltd it strategic plan goes to 10 years. To be able to know where it’s going, a company should understand its current position and from this it can determine where to go and how to get there.
Decision matrix was used to evaluate and prioritize the options for strategic planning. Every option was evaluated against a set criterion of return of investments and profit growth. In other words it employs l-shaped matrix. All options were ranked in order for each criterion according to how much they met the criterion. The option that was least desirable was numbered 1.
Return on investment (ROI)
Return on investment can be defined as the ratio of money earned or lost on an investment in relation to the sum invested. Keim (p.81) sees return on investment as a “performance metric” to compare return of an investment to the investor’s expected return. The shareholders of Wooden Post Ltd will definitely be concerned with the returns on investment of the company as it is an indicator of the company’s financial health. In order for Wooden Post to attract investors, on being turned into a public limited company, it should have a reasonable return on investment.
For Wooden Post Ltd to increase its return on investment it is important to cut down in production cost. Trimming transportation cost is crucial to the company. One of the basic ways of doing so is to bring the company nearer to the source of raw materials as well as sales outlets. The first option proposed by the external consultant provides this necessity. If Wooden Post acquires London Counties, then the sales outlets of London Counties, the largest supplier of timber posts since 1940s, in the London area will bring sales outlets nearer. London Counties is also closer to the source of timber in the London area.
The acquisition of London Counties will increase the capital base of Wooden Post Ltd as some of its assets will be sold out. Assets can be categorized into four groups as explained by Eisen. These are current assets, investment property, plant and equipment as well as intangible assets (Eisen, 2007 p. 3). Current assets are such as cash and others that can be converted into cash, be used up or disposed within one year. Investments are long-term in nature and are not utilized in the normal running of a company. Also they are not expected to be converted into cash within the next one year. Property, plant, and equipments are considered long-life assets used in continuing running of a company and will continue to be used for more than a year. They are also referred to as fixed assets (Peterson, 2002 p. 15). Example of fixed assets are; buildings, land, equipment and machinery. Intangible assets are long-term and do not have physical substance. However they are of value to the company owners. They include trademarks, copyrights and goodwill. All these assets can be used to increase the profits of timber business in Wooden Post Ltd. For example the expensive London Counties headquarters can be disposed of in order to obtain more capital needed to increase production and cater for other operations in Wooden Post Ltd. Due to the explanations given above, acquisition of London counties was numbered 3.
The second option is upgrading Wooden Post's capacity in the western UK market. Welshpool plc is seen as the leading Wooden Post supplier to the building trade north of London. This shows that Welshpool plc makes a lot of sales. This way it is able to attract investors because high sales contribute to profitability ratio. However it is anticipated that the move will yield lesser cash flow. On this note this option was numbered 2.
The third option was numbered 1 meaning it was the least preferable option. At this moment wooden ltd cannot pull out of business. The objective of the company is to turn it to a public limited company in the next two years. Part of the management team like the marketing director, a finance director and an operations director joined the company five years ago. They were given 10% shares as a 'golden hello' and promised a further 15% as bonuses in the next five years.
Profit growth of a company can be realized if it sells products in a rapidly growing market, increases the amount it sells to its existing customers, gains market share from its competitors, diversifies into new lines of business (Hill & Jones, 2009).Due to low projections of profit growth for Wooden Post as a result of increased cost of production acquiring the assets of London counties will increase projections of profit growth. Thus Wooden Post expands its market share hence increasing its profits. This move is approximated to lead to 49% market share. This way it will be much easier for the Wooden Post Ltd to counter competition from other rivals. In the presence of stiff competition companies with a small market share are more likely to bow to pressure. The company can also benefit from resources available in its large market share (Stoneman, 1976). Another benefit of large market share is that a company spends less in advertising and sales promotion (Lamb et al, 2008). Since London Counties has managed to establish a stable market as well as strong links with councils within London area it will be easier for the Wooden Post Ltd to penetrate this new market.
London counties deals in four main product areas in the industry all of which it has reasonable market share. Therefore the acquisition will diversify product areas for Wooden Post and consequently realizing the benefits of diversification. There are three main advantages of diversification as discussed by Griffin. Firstly, it reduces the company’s dependence on a single business activity thus reducing the “economic risk” (Griffin, 2008 p. 215). Should one of the company’s businesses lose money, the company can continue surviving on the healthy business. Secondly, diversification reduces costs associated with managing one business. Lastly, it allows a company to exploit its capabilities and strengths in more than one business activity.
It is not Wooden Post Ltd only that is having management problems; London Counties is also having them. This means that it is also finding strategies to deal with its management problems that led to fall of its market share. It neglected the need for investment and instead focused on building a personal culture and charitable activities. This ultimately means that the company has little investment assets. London Counties may be contemplating complete withdrawal from the industry and hence a move by Wooden Post Ltd to acquire it could be the most welcomed option for it. The purchase price will help London Counties to venture into other business activities. All these factors explain why London Counties will also view the acquisition By Wooden Post as an opportunity in their best interests. Based on the profit growth the alternative of acquisition of London Counties was numbered 3.
Upgrading wooden POST's capacity in the western UK market would lead to a cash flow of £15m annually starting in Year 3 at the earliest. This is little as compared to the first option which would yield £ 40m from year 0 to 10 inclusive. This option means that wooden post would engage in a joint venture with Welshpool plc in the western region and Glens in the northern regions. A joint venture with Welshpool plc would strengthen WOODEN POST's competitive position significantly. If the rumors of new share issue for upgrading of eastern UK facilities then it may be difficult for wooden post to carry out both upgrades simultaneously. Eastern UK facilities would be given the first priority since the company has a high market share. This means that upgrading of the western UK facility will be given less attention leading to even much less cash flow. For this reason this option was numbered 1.
The third option suggests that wooden post completely closes down its operations in western UK and instead exploiting WOODEN POST's strategic position in the eastern UK. The eastern facility would be run to its optimum capacity while on the other hand reducing sales in the west. Closure of the Western Division would yield additional cash but there would be closure costs. Wooden Post having spent about £50m in expanding the western UK markets for six years its closure would mean immediate sales rundown and loss of an estimated 6% of total market share. Despite this loss this option would lead to increased cash flow because the marketing director would have his work load reduced and thus focus more on building new markets within the smaller market area. Just like the second option it would take three years before any benefits were realized. Due to the potential of this option to yield more cash flow than the second option it was numbered 2. Calculation of the total score for each option per each criterion, the first option becomes the best alternative with a total of 6.
In summing up, the acquisition of London Counties is highly risky but enormously profitable. In business it is said that the more risky a business opportunity is, the more benefits will be realized if it succeeds. Acquisition of London Counties would increase capacity, market share and valuable distribution channels through control of a major competitor as explained by the consultant. It is necessary for Wooden Post Ltd because it has more potential for high return on investments and profit growth. The few anticipated problems that could lead to reduced cash flow can be overcome in the first two years of acquisition of London Counties. This means that the next eight years of the ten year time plan, increased cash flow can be anticipated. The increased returns on investment and profit growth will be a major attraction for potential investors to invest in Wooden Post when it is converted into a public limited company. Consequently, the company will be able to gain more capital through floating of its share in the stock exchange. The company will have a greater borrowing power as well as readily acquire services of experts. The financial tools for business decision making used in evaluation of financial health of both companies were valid and reliable. They help mangers in making critical decisions concerning their companies. In this case, financial ratios and forecasting were used. Financial ratios used are such as liquidity and profitability ratios. Without these tools the options given by the consultant could neither be valid nor reliable.