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A Critical Analysis of the Business Strategy used by BHS from 2000 to 2015 and it’s Implication on the Company’s Collapse

  • 13 Pages
  • Published On: 19-10-2023

INTRODUCTION

Business strategies play a crucial role in the success of commercial entities as it provides secure future as well as strengthen position in the market. The present business report seeks to analyses how different strategic decisions that had led British Home Store Ltd. (BHS) to decline and collapse. The business strategy had serious flaws, which led towards the collapse of the company and detail evaluation of same will be done.

British Home Store was initiated in 1928 in Brixton London. It was considered to be British competitor to American Woolworths. They started with the plan to sell each and every product a shilling and for the same they had employed 12000 people. However, their strategies get miserably failed. There were several reasons due to which BHS was not successful.

Sir Philips Green sold one of the biggest departmental stores of the UK to Sir Dominic Chappell for just £1 in March 2015 and soon after the purchase, the departmental store crashed leading to significant problems for the employees and employers.

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A government report provided by Work and Pensions and Business, Innovation and Skills Committees in 2016 had indicated that the strategic choices made by Sir Philip Green were implicated in the firm’s collapse, the deficit of £571m in the pension scheme and the potential loss of 10,000 jobs. It is arguable that the business strategy of the company contained serious flaws as they were not to the eventual benefit of significant stakeholders in the company.

The collapse of BHS brought to light potentially unethical actions by business owners that cannot be legally challenged making a considerable profit at the expense of relatively impotent stakeholders, namely the employees and the pensioners. (Morris and Allen, 2015).

Vast sums are spent on mergers and acquisitions, but there is a significant failure rate that exceeds 70% (Bouncken and et.al.,2015). This raises the question as to whether there was a real intention for the initiative to succeed or whether it was a means to an end. This is particularly relevant to the BHS collapse but indicates that the BHS situation has highlighted a pervasive practice. There exists a machismo element that rewards the returns, regardless of implications (Hesping, F.H. and Schiele, 2015) Strategies do not always implement practices that maximise shareholder value.

A contingent plan might well evolve from a strategy designed with a benign intention to add value to a particular element (Veleva and et.al. 2015), The strategic choices are vulnerable to misdirection, arguably as in the case of BHS , where the Arcadia Group benefited vastly from the Business Strategy employed after the Philip Green acquisition. In that instance, a failure to maintain the value of the employees’ pension fund, whilst paying top executives and their advisor's massive salaries and fees and obtaining massive loans to fund dividend payouts, inter-company transactions, and takeovers all go under the benign term of “creating shareholder value.”

The Insolvency Service and the Pensions Regulator are also investigating BHS’ financial affairs, and the Serious Fraud Office is considering launching an investigation. The administrators reported that they had uncovered a number of financial transactions within BHS requiring further investigation, and raised questions about transactions under Green.

The parliamentary pensions committee summoned Green to answer questions about his management of the company, the pension fund and his decision to sell BHS to Chappell. Labour Party MP Frank Field, who chairs the committee, has called on Green to put £571 million into the pension scheme, with other MPs saying that Green should be stripped of his knighthood if he refuses to plug the gap.

Business Strategy is fundamental in maximising the performance of an organisation and benefiting the major stakeholders (Gaziulusoy, 2015). The theories of Business Strategy have evolved over the last several decades, with some theories, such as Game Theory and the Nash Equilibrium gaining prominence.

Game Theory is a mathematical and analytical tool (West and Ibrahim, 2015), but which, is only emerging as technological advances in computing software can now simultaneously manage multiple and complex interactions in a way that has been hitherto impossible (Strumickas and Valanciene, 2015). The relevant question here is the degree to which the strategic choices employed at BHS were part of a game with an ulterior motive of winning at all costs. That is to say, was BHS kept alive solely for strategic advantage and for use as equity to establish Arcadia Group’s ascendency?

Before Nash, Game Theory had been based upon the concept of Dominance, which disregarded the strategic choices of others (Camerer and Weigelt, 1988). Nash’s argument hypothesised better outcomes if a strategy incorporated anticipation of the strategies of others (Camerer and Weigelt, 1988).

The report will seek to analyse the strategic choices with regard to pricing, growth, reorganisation and equity acquisition/manipulation.

Pricing strategies use an estimation and anticipation of the competitor’s actions, compatible with the “Nash equilibrium” and relevant to decision making for innovation, entering new markets, acquisitions and mergers (Hill and Schilling, 2014).

Growth strategies diversify or concentrate organisational strengths (Swayne and Ginter, 2012). Diversification and restructuring strategies include reorganisation of operational units, downsizing through, globalising products or services and customising products for diverse markets.

The culture of the organisation is frequently blamed for failures, but this is not necessarily the issue and presents as a symptom rather than the root cause (Rothaermel, 2015). It seems that there should be strong evidence to support the argument that Philip Green and his wife were always intent on taking and using the assets and equity of BHS , regardless of the fate of the company.

Historically, Institutional Theory (Hitt and et.al. 2012) focused on institutional structures and the manner and degree by which institutions will evolve and change over time. It considers the influence of cognitive, normative and regulative structures as a stable operating environment to define organisational culture and constrain decision-making to preserve legitimacy (Goetsch and Davis, 2014). BHS was arguably an institution that was destabilised by the new strategic choices and irreparably damaged.

Transaction Cost Economics (TCE) focuses on the internal organisation and the balance between internal transactions and external forces (Ward and Peppard, 2016). The rationale specifically motivated of each creates a contract that has both benefit and detriment for both sides which is in constant flux, and opportunistic actions may present a moral hazard that must be negotiated (Freeman and Kling, 2014). Resource-Based Theory (RBV) views a firm as a bundle of varied resources, some of which will transmute, and some, which are fixed in quality (Porter, 1985). A firm that is exploitatively organised can make strategic advantage of the resources (Barney, 1991). The Network View (Burt, 1992) positions the firm within a connective framework and sees a correlation between the levels and diversity of connectivity and the strength of the organisation. There was no significant attempt to revamp the BHS image or, more importantly, to exploit the vast potential of internet sales.

Resource Dependent Theory argues a strategy that mixes co-operation and competition (co-opposition), and those firms must seek control of critical resources for survival (Mittelbach, 2012). In the case of BHS, the critical resources were diluted, to the detriment of the organisation’s future potential. These will be internal and external as the firm operates in a fluid environment that prompts adaptation and innovation (Steenkamp and Geyskens, 2012). Knowledge-Based View, is not, per se, theory, but a viewpoint that extends the premise of the RBV and sets knowledge at the heart of the organisation, from which can be derived competitive advantage (Wever and et.al., 2012)

Agency Theory (AT) also seeks to analyse and quantify/qualify the goal setting and risk sharing in the contracts between the principal players and those whom they employ as their agents. In this context, Boards of Directors are the agents employed by shareholders to monitor the company’s executives. Agency Theory argues that both sides will operate to promote their own self - interest, but that efficiency will be maximised if risk and information can be shared (Shafritz and et.al. 2015).

Strategic Management Process Framework (SMPF) takes the purpose or mission of the organisation as a benchmark, against which strategic decisions can be measured (The financial skulduggery behind the collapse of UK retailer BHS, 2016). In the case of the BHS failure, it is questionable as to whether there was any clear mission statement with respect to the promotion and constructive development of the organisation. Rather, it would seem, that all positive motivational decisions centred upon the twin goals of maximising return for the implicated major shareholders [Phiip Green and his wife Tina] and the establishment of the Arcadia group as a competitive and financially viable business concern.

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Aims and Objectives

The aim of the study is to critically evaluate the business strategy of BHS that resulted in the company’s collapse.

Objectives of the study are listed as follows:

  • To identify the BHS business strategy used by BHS between 2000 and 2015.
  • To evaluate what elements of the business strategy contributed to its collapse.
  • To recommend alternative solutions/best business practice,/identify legislative initiatives

Identified Issues

Product strategy

Product offering by BHS was one of the major reasons due to which fortune of the company has been declined. In 2000, BHS was able to attract 13.4% of all clothing shoppers through their doors. Study of Conlumino shows that they had attained a 2.3% market share of clothing sector. However, over the years this has been reduced Chain was able to attract only 8.2%, and their market share was restricted to 1.4%. Organization was not able to meet up changing requirements of the market and there was a constant decline in their market share as well as revenues. Changing British taste and intensification of competition led to the failure of business.

This decline had indicated the fact the BHS strategies became irrelevant as it was not even able to retain their “core older audience”. Customers of BHS were switching over to competitors, and as a consequence, there was an adverse impact on rating regarding quality, value, price and range. This was all because of increasing alternatives with customers. Main competitors were Primark and TK Maxx. Each of them was providing something unique like Primark was providing valuable products of the basic market under one roof and TK Maxx was providing the aspirational product at reasonable prices.

Other competitors like Debenhams and M&S had offered upmarket proposition and had made efforts for an increase of market share. Similar strategies were also adopted by N Brown and Shop direct to compete with market rivalries.

Study of Honor Westnedge (Verdict Retail analyst) shows that “management of BHS do not have brand desirability”. On the other hand, other market players had focused on youth by developing their name in the market. For this aspect, they had formed effective promotion strategies in order to develop their brand value. Some organisations focused on sports persons.

Stores

Another major reason for decline and collapse of BHS was their stores which were not effective in comparison to other competitive department chains. It can be noticed through their non-viable business strategies. They had sold their Oxford Street Flagship earlier in order generate funds for their operational activities. This approach shows a stark contrast to the flagships of other nearby department stores. Due to their strategy, other retailers and business entities start monitoring estate of BHS.

According to analysis of Cushman & Wakefield UK and European retail head Justin Taylor, other retailers and businesses are already focusing on the operations of BHS’s estate.“ The choice of restaurant and cinema operators release significance in big idle sites with the intention of attaining upper floors, and a large amount of interest is being expected from retailers and other customers who are interested in exploiting these prime location sites,” he says.

Pension deficit

A total deficit of £571m has been observed in two pension schemes of BHS’s which include around 20,000 employees. The present deficit is more than the value of existing scheme’s assets; due to which the retailers have to face obstacles in finding buyers for the business as a whole.

Sir Philip Green, owner and former of BHS’s has to face many problems for contributing the cost of bailing them as the schemes were assessed for entry into the Government-backed Pension Protection Fund, last month. A payment of £280m is to be paid to the pension regulators, according to the provisions but Green has offered to put only £80m into the BHS pension scheme. A payment of 90% of the due amount is expected by the staff of BHS.

Rent hikes

An unsustainable rental and lease cost have been borne by the company. The reason behind it was predetermined long- term contracts which were subject to the policy of upward rent only. The regular payment above the market rate was paid for approximately 164 stores, according to the analysis of BHS management. The need of reducing rents was observed as a necessity by chief executive Darren Topp during the month prior to last month’s CVA. According to his analysis, the rent was paid above the market rate at various stores because the agreement was made when the retail world was very different.

As in the case of the store in Clydebank, Scotland the contract of lease was agreed in 1979and same terms were to be followed till 2103. According to data available BHS is paying £404,000 a year which is approximately 65% more than the market rate. Therefore, rents of BHS’s shops were slashed in last month’s Company Voluntary Arrangement. Even though CVA reduced the rent up to 75% on approximately 87 shops, the selling price of the property was disappointing.

Poor decision-making

The purchasing cost of BHS was £200m. It was purchased in the year 2000, but the same was sold for £1 to Retail Acquisitions last year. This decision gave rise the question on the ability of new owners, as it was now to be continued by former bankrupt Dominic Chappell, who was to give a new life to the business.

A retail analyst at Economic Intelligence Unit Jon Copestake, who is a retail analyst at Economic Intelligence Unit says: “As the retail chain has been purchased for just £1, it represents that the decision of acquisition is not a wise one and the same can be presumed by its purchasing cost.

“Its owner Dominic Chappell is a former racing driver with more experience of bankruptcy than retail. In addition to his hefty salary, he has been involved in a number of questionable transactions, such as reportedly diverting funds borrowed by BHS to its directors while pushing landlords to accept rent reductions.

“BHS has experienced a successful repositioning in the retail side of the brand, but the no major materialisation has been observed in the product portfolio. The present plan is to focus on selling the prime properties so that the creditors can be paid and all the planning has been projected accordingly. However, in a statement of Chappell, it was stated that “No one can be blamed for the decision and it is only due to a combination of poor trading and unable in raising money from the property portfolio”.

Dividend Payments in Contradiction to Firm’s Success

Between 2002 and 2004 dividends of £423m were paid by BHS and most of these went to Sir Philip Green and his wife, Tina. (Work and Pensions and Business, Innovation and Skills Committees, 2016).

Despite the high dividend payments, traditionally paid when a firm is doing well, BHS was struggling to maintain its competitive edge on the high street and had failed to respond and invest in the challenge of Internet marketing in 2015 (Cumbo, 2016).

Creative Debt Restructuring

In 2015, despite the pension deficit and the problems with the recovery scheme, BHS was sold for £1 to Retail Acquisition (Economist.com, 2016).

In an accounting exercise, £215m of debts was written off at the time of this transfer of ownership. (Vandevelde, 2016)

Regulatory Failures and Associated Strategic and Ethical Issues

The BHS failure is a high-profile scandal that has focused attention on the regulations surrounding the pension schemes in British companies. Currently, the Pension Protection Scheme indicates that close to 80% of defined pensions schemes in the UK are running at a deficit (FINANCIAL RESULTS FOR THE YEAR ENDED 30th AUGUST 2014, 2015).

In 2013 the BHS pension scheme was in the recovery plan that was apparently designed to bring into surplus by 2036. However, the company’s payments were not even meeting the payout obligations of £9.6m in 2005.

Contribution

There is a gap in the research available that specifically addresses and identifies strategic decisions in mergers and acquisitions. The proposed research will contribute to the body of case study reporting and will present an identification of the errors in strategic decision making that in turn contributed to the collapse of BHS, appropriating priority and responsibility. As in the present case, the predetermined terms of the contract for more than reasonable period proved to be the major cause of failure of the company. It has been bearing losses for many years and even after rectifying the terms, the decision was not proved beneficial for the company. For the same reason, it received an unsuitable amount by selling its properties.

Identifying errors and alternative strategic choices will serve to add to the case study resources available in the research community particular to the UK retail sector. The explanation that has been provided in the report regarding scandals that were observed in BHS will make aware the industry regarding it and will warn them to take appropriate actions on time so that they do not suffer afterwards. The report has emphasised the major areas where failure was observed in internal control and the situations which it has to face because of it. It could be taken as an example or a warning so that the same does not occur in any other’s organisation. Further, it will provide guidance to entrepreneurs to make better decisions for business else it can lead to severe business losses.

References

Books & Journal

  • Bouncken, R.B.and et.al.2015. Coopetition: a systematic review, synthesis, and future research directions. Review of Managerial Science. 9(3). Pp.577-601.
  • Freeman III, A.M. and Kling, C.L. 2014. The measurement of environmental and resource values: theory and methods. Routledge.
  • Gaziulusoy, A.I. 2015. A critical review of approaches available for design and innovation teams through the perspective of sustainability science and system innovation theories. Journal of Cleaner Production, 107.Pp.366-377.
  • Goetsch, D.L. and Davis, S.B. 2014. Quality management for organizational excellence. Pearson.
  • Hesping, F.H. and Schiele, H. 2015. Purchasing strategy development: A multi-level review. Journal of purchasing and supply management. 21(2). Pp.138-150.
  • Hill, C.W. and Schilling, M.A. 2014. Strategic management: theory: an integrated approach. Cengage Learning.
  • Hitt, M.A. and et.al. 2012. Strategic management cases: competitiveness and globalization. Cengage Learning.
  • Mittelbach, G.G. 2012. Community ecology. Sunderland, MA: Sinauer Associates.
  • Morris, M. and Allen, J. 2015. Is the business model a useful strategic concept? Conceptual, theoretical, and empirical insights. Journal of Small Business Strategy. 17(1). Pp.27-50.
  • Rothaermel, F.T. 2015. Strategic management. McGraw-Hill.
  • Shafritz, J.M., Ott, J.S. and Jang, Y.S. 2015. Classics of organization theory. Cengage Learning.
  • Steenkamp, J.B.E. and Geyskens, I. 2012. Transaction cost economics and the roles of national culture: a test of hypotheses based on Inglehart and Hofstede. Journal of the Academy of Marketing Science. 40(2), Pp.252-270.
  • Strumickas, M. and Valanciene, L. 2015. Research of management accounting changes in Lithuanian business organizations. Engineering Economics. 63(4).
  • Swayne, L.and Ginter, P.M. 2012. Strategic management of health care organizations. John Wiley & Sons.
  • Veleva, V.and et.al. 2015. Understanding and addressing business needs and sustainability challenges: lessons from Devens eco-industrial park. Journal of Cleaner Production. 87. Pp.375-384.
  • Ward, J. and Peppard, J. 2016. The Strategic Management of Information Systems: Building a Digital Strategy. John Wiley & Sons.
  • West, D. and Ibrahim, E., 2015. Strategic marketing: creating competitive advantage. Oxford University Press.
  • Wever, M., Wognum, P.M., Trienekens, J.H. and Omta, S.W.F., 2012. Supply Chain‐Wide Consequences of Transaction Risks and Their Contractual Solutions: Towards an Extended Transaction Cost Economics Framework. Journal of Supply Chain Management. 48(1). Pp.73-91.

Online

  • FINANCIAL RESULTS FOR THE YEAR ENDED 30th AUGUST 2014.2015. [Online]. Available on .[Accessed on 23rd November 2016]
  • Shaoul, J., 2016. The financial skullduggery behind the collapse of UK retailer BHS. [Online]. Available on . [Accessed on 23rd November 2016]

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