Risk Management In The Boots Group Essay Online For Free - Free Essay Example

Sample details Pages: 9 Words: 2823 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Risk management identifies and analysis risks that an organisation is exposed to. An assessment can be carried out in order to see the potential impacts on a business. This can also help to decide what action can be taken to eliminate or reduce risk. The business can then deal with the impact of unpredictable events leading to loss or damage. Within this report, a risk audit will take place for a particular company and identifying both internal and external critical risks. Though past and present events are not perfect forecasters it must be remembered that it is a good point to start looking for the outcome of future events. Overview The report will use Boots Group as an example of a large business managing risk. Boots are now known as Alliance Boots plc, due to their acquisition by Unichem (previously known as Alliance Unichem). The Boots Group was established in1849 when herbal remedies where sold within a family business. Over the next hundred years, it developed into a multi national company with a thousand plus stores, ranging from departmental stores to small pharmacies, in the UK and wholesale businesses around the world. With the boots brand reaching its 160th anniversary, it proves the company is going from strength to strength. Boots is the principal brand in the health beauty division (www.datamonitor.com) Now known as alliance boots, the company is a leading international pharmacy led health and beauty group delivering a range of products and services to customers. (www.allianceboots.com) Alliance Boots is occupied within wholesaling and retailing of pharmaceuticals. The following items are included within their range pharmaceuticals, skincare products, beauty products, optical and eye care products, diet and fitness products, perfume and fragrances, baby care products and toys, baby food and finally giftware. With over 2,600 boots stores, they believe that with various locations it helps offer customers products and services that at the same time will be looked after by specialist welcoming people. (bootsuk.com) Boots leading competitors are believed to be under two sections firstly, the non food and lastly the pharmacy sector. With supermarkets able to sell products at a more reasonable price for consumers, boots have found their main competition within personal care to be rival supermarket chains such as Tesco, Sainsburys, Asda and Morrisons. All these four supermarkets have ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦larger market shares than Superdrug. (www.bized.co.uk) However, according to the companys profile the top competitors for the merger between Alliance Boots. Examples include large supermarkets (Asda Group Limited, J Sainsbury plc), Pharmaceutical manufacturers (for example, Johnson Johnson and LOreal S.A) and high street retailers such as Body Shop International PLC. With such rivals, as mentioned above, Boots fall under what is known as oligopoly. This exists when a m arket is dominated by a small number of large firms. Such a market can appear highly competitive, because each producer fights hard for particular market niches. (Marcousà © et al, p. 194) Oligopolies cannot compete on just competitive pricing therefore, having to rely on unique selling points and spend large amounts on promotion to attract customers. The larger supermarkets also have a pharmacy department where they, similarly to Boots, provide prescription drugs and also sell toiletries in direct competition to Boots and toiletries retailer Superdrug. Risk Profiling The Boots management are likely to produce a risk profile. Risk profiling is simply an outline of the risks that the organisation is exposed to. This profile would be created during a risk analysis, which in turn, can be used for planning the management of risk. The types of threats are examined by the organisation and the likelihood of any undesirable effects that may occur and the manner of interruption and any costs connected with each particular risk. The management would generally prioritise the likelihood of risk and produce an action plan for the more serious items. Risk can be catogrised into either financial or heuristic risk and can be identified as internal or external risk. Boots produce a summary version of this as shown in Appendix A. Financial To reduce the exposure of financial risk at a firm, a procedure needs to be processed to evaluate and manage current and possible future financial risks. This helps to decrease a firms introduction to risk. Managers dealing with financial risk must recognise the risk and assess all possible solutions and outcomes. From there, it is important to take the necessary steps in order to lessen the risk. However, it must be remembered that financial risk management cannot prevent a firm from all potential risks due to the fact that there are times where unforeseen circumstances may occur with no warning and therefore it maybe unab le for the firm to address the situation as quickly possible. For example, they would catogorise their risk in terms of impact and probability. This can be done by using the diagram below: Some examples of financial risk are: the financial impact of fire burning down a building. This is unlikely to happen very often but the impact would be financially severe. Boots would manage this risk by having fire prevention tactics, for example, sprinklers and fire extinguishers and insurance. the impact of a recession. The impact is high, as is the probability. This has happened recently and therefore having insured a previous plan, Boots were able to cope with the economic change. Shoplifting. Individual incidents do not cost Boots large amount of money. However, probability is high. Therefore, they would have control management in place. Unknown issues are known to be of low probability and low impact. Sometimes management do not know what the next risk will be and therefo re can not insure and control for it. This may be a risk that just has to be accept. Boots plc (as it was previously known as) was placed on the stock market before the merger and because of this, financial records are easily accessible to the public. Alliance Boots plc was acquired by AB Acquisitions Limited on 26 June 2007 for 1139 pence per share. The listing of Alliance Boots shares on the London Stock Exchange was withdrawn from the London Stock Exchange on Thursday, 28 June 2007.) (www.allianceboots.com) From the end of year financial records of 2008 and 2009 (Appendix B C), ratios (Appendix D) can be established; helping to see the progress of the business. Comparisons will be made from year ending 2008 to the change in 2009. 1] Return On Capital Employed: Return On Capital Employed has increased by a total of 1.2 % from year ending 2008, to 2009. Return on Capital Employed compares profit to Capital Employed. This has increased by 31%, however, with a low inc rease of 2% in the capital employed. This meaning that they are making profit for a given amount of financial investment within the company. 2] Gross Profit Margin: Boots gross profit margin, have declined from 24.9% in year ending 2008 to 23.5% in year ending 2009. This reduction may be due to Boots reducing the sale price of items in order to sell more units therefore leading to a lower profit margin. Positively though the Gross Profit has increased from  £2,956 million to  £4,048 million which further backs up this theory. 3] Net Profit Margin: The profitability has reduced by 0.4% indicating that their fixed costs have increased. Fixed costs are overhead items that would be generally be spent whether the store sells an item or not. They could include Insurance costs, cost of heating and lighting the shops, business rates and leasing the building. The figures shows that revenue has increased by 45%, however the net profit has increased by a somewhat lower figure o f 31%. This indicates that fixed costs have increased. 4] Asset Turnover: This means that, in year ending 2009, the generated sales of  £1.33 for every  £1 of investment. From viewing the figure of  £0.94 in the previous year, it can be seen the figure has improved by  £0.39. This further indicates that sales have improved for a given amount of investment within the company. 5] Inventory Days: Inventory days have reduced by 15.5 days demonstrating that the company keeps less stock. This is a positive step due to the fact that there is less risk of stock redundancy; damage, theft and also they will be paying less finance on holding the stock. 6] Non Current Asset Turnover: This is the large capital items within the business, for example, buildings, shop shelving and tills. Revenue has increased significantly in the year ending 2009 by  £5330,000,000; however, the non current assets are very similar to the previous year. This means that the company uses th eir non current assets more efficiently. 78] Current Ratio and Acid Test/ Quick Ratio: This is a measure of financial risk and along with the acid test ratio helps measure liquidity. Ideally, both of these should be a figure over one : one. The assets should exceed liabilities. This means that the company has enough current assets to pay their current liabilities. In 2009 the Current ratio had reduced to 1.2:1, although this is above recommended 1:1 ratio, it indicates that there is some concern with regards to cash flow. The acid test has also deteriorated to 0.8 : 1 and this indicates that if all the current liabilities were requested to be paid by Boots it would not have enough cash and cash equivalents to pay these debts. This further indicates a cash flow problem. 9] Gearing: This is a measure between debt and shareholder sourcing funds. At present, shareholders fund more of the business than debt. Given the interest cover ratios it would not be advisable to recomme nd Boots obtaining any more finance from loans. If they need to obtain further finance they need to think of other ways such as a share issue. 10] Interest Cover: This shows whether there is enough profit to pay interest on loans. In the year ending of 2007/2008 there was not enough interest cover, being able to cover only 90% of the interest repayments, compared to the next financial year ending of 2008/2009 where there was just adequate funds. This could be a problem as it indicates another serious risk to the business and therefore, in theory, banks could force businesses to close if the interest is not paid. Internal Risks An internal risk is one that can be obtained is a risk that is effected by the action of the organization itself or one of its employees. Uncompetitive Pricing of Boots Boots sell their products at a higher price than the competition. This could be a large risk to Boots especially in the current economic times. Though the current economy is s lowly coming out of the recent recession, Boots is amongst the most expensive of all retailers when comparing common products to their competitors, according to the company profile published in September 2009. (www.dadamonitor.com) The 2009 recession hit several businesses and affected sales, however, Boots seems to be striving throughout as the company charges 6% more than the average price that their competitors offer. (company profile, datamonitor.com, 2009) As well as this, the companys profile also states that Boots is around 20% more expensive on common products against the leading supermarket Tesco. Boots is managing this risk by having a well established company with consumers dedicated to buying the companys own branded products (ie a unique selling point), special offers (such as 3 for 2 and/ or half price offers) and incentive cards (Boots Advantage Card). Boots have a scheme of what is known as the Boots Advantage Card. This means that for every  £1 spent the cus tomer receives four points. The points turn into money that can be used against another purchase within the store. The consumer does not have a time limit on when the points need to be used by. This could be one of the other main reasons customers continually come back. The points can be collected and eventually used again against future purchases. Human Resources The term used for the division within an organization that focuses on activities relating to their employees. Activities within this department include hiring of new employees, training of current employees, employee benefits and maintenance. It can also be known as the personnel department. Information found to members of the public from alliance.com can see that the company offer students and graduates opportunities to become part of the alliance boots team. Not only do they have an active internship programme students can be on a 3 6 month paid placement with help from a mentor but also have partnerships with various business schools in different countries. The programme offers visits to an assortment of institutions, selected student forums and meetings with the support of our local businesses, where we aim to give an insight into our profession. (www.allianceboots.com) The company states their intention for graduates and students as follows: Go directly to the source of excellence to find our future employees and offer them the first step in a career that presents considerable opportunities and professional development. (www.allianceboots.com) On the other side, the opportunity for pharmacists must be mentioned as well. The company states on allianceboots.com that they offer the profession competitive salaries and a range of training with prospects of future career development. Boots.com and allianceboots.com allows applicants to apply via the website for the various vacancies available. This is a modern step compared to sending CVs into an office, making phone calls and so fo rth. To maintain employee morale, Boots offers a number of rewards and benefits for their staff. Some examples of the benefits are listed below: company discount (22.5% off Boots items and 12.5% on other products) Note: staff discount can be used on the website. Reduced prices on health and dental care. Possibility to earn up to 40% discretionary bonus based upon levels of customer care, sales and company profit. Interest free loans and car loans. Generous holiday allowance. Lifestyle benefits for the individual and their family. External Risks An external risk is one that cannot be obtained by the company. If an unwanted event were to happen, the company maybe forced to renegotiate terms of reference, either demanding additional resources or adjusting stakeholder expectations. Changes and trends in consumer behavior The risk of this being that Alliance Boots could be adversely affected by changes in consumer spending levels, shopping habits and pref erences, including attitudes to our retail and product brands. (Alliance Boots, 2008/2009 Annual Review, p. 42) The companys response to this is our commercial skills and ability to respond flexibility to changing consumer demand are highly developed. Our strategy is to continue to enhance our market leading position in pharmacy-led health and beauty retailing in the UK, backed by differentiated brands and expert customer service. (Alliance Boots, 2008/2009 Annual Review, p. 42) With the recent recession and the low interest rates, businesses would benefit from slashing retail prices. Analysing customer behavior is essential in order to understand and predict the way and how much customers spend money during a crucial time in the economy. During this period, consumers are naturally weary of their money spending and as a result spend less. This helps to keep customers coming into the store and spending as well as maintaining a strong image. Impact of regulation A major ri sk to Boots is changes made by the government to licenses and regulations. This could mean that they are no longer able to sell a particular item or that there are extra requirements required from the retailer in order to sell the product. Within the retail industry the government has instigated quick changes especially relating to health risks and the retailer has had to burden the cost of the required changes. Companies within Alliance Boots Pharmaceutical Wholesale Division are expected to change from time to time when it comes to rules and regulations relating to such things as product margins, product traceability and the conditions under which products must be stored. Changes to these could affect profitability. (Alliance Boots, 2008/2009 Annual Review, p. 42) Boots manages this type of risk by helping to be an advisor to the government and policy makers. This strength of relationship ensures that they are kept abreast of changes at an early stage of the process. ÃÆ'  ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦through active involvement in policy-making processes, understanding and contributing to government thinking on regulatory matters and building relationships with regulatory bodies directly and through representation in relevant professional and trade associations. (Alliance Boots, 2008/2009 Annual Review, p. 42) Conclusion Boots plc merged with Alliance to create the now known company as Alliance Boots plc. Boots name has become an international highly branded business with a reputation that exceeds them. Boots needs to keep ahead of their competitors in order to control potential risks. Financially, the company manages risks professionally, however, Boots larger risks are cashflow and debt control. Companies have both internal and external risks that need to be considered along side taking financial care. The two aspects are just as important as each other. The examples of the internal and external factors have been considered, as have many more a nd therefore proves that Boots has taken record of potential risks and have measures in place if such incidents were to happen. Don’t waste time! Our writers will create an original "Risk Management In The Boots Group Essay Online For Free" essay for you Create order