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Essay: M & S internal and external environment analysis with key risks

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  • M & S internal and external environment analysis with key risks
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M&S describes itself as “a leading retailer with a strong and unique heritage of brand values, extraordinary colleagues and customers who want to see it succeed again” (Marks & Spencer PLC, 2019). We focus on delivering quality products and great value through our own-brand business model. Given the current retail and business climate, some of our strategic goals include becoming a digital first retailer, cost savings of £350m by 2020/2021 and reshaping of our customer profile in our clothing and home departments (Marks & Spencer PLC, 2019).

M&S finds itself in a very difficult environment, both internally and externally. After conducting a thorough environmental analysis of the firm (Figure 1, Appendix), I have identified 4 key risks for M&S:

1. Failure to exploit the online food market through a joint venture with Ocado

  • Currently, M&S’ food departments and stores are considered highly inconvenient (Marks & Spencer PLC, 2019)
  • The online food retailing market is forecast to grow by £6bn to £23bn by 2023 (Marks & Spencer PLC, 2019), the fact that M&S does not have a platform to sell groceries online is a great threat considering the market potential.
  • It is essential M&S takes advantage of the online food retailing trend and improve its convenience and availability for customers. Failure to do so is likely to inhibit future growth and potentially result in sales decline.

2. Failing to adapt to consumer retail needs

  • Up to 50% of M&S stores have not been refurbished in the last 10 years (Marks & Spencer PLC, 2019). Stores are not in line with consumer preferences or the competition.
  • High street footfall is down 10% (Makortoff, 2019) with consumers now spending £1 in every £5 online (BBC News, 2019)
  • M&S is struggling with online sales due to website limitations (Marks & Spencer PLC, 2019)
  • The “Fast Fashion” trend is capitalizing the retail market, increasing competitive pressures.
  • M&S is failing to satisfy consumer needs and are far behind the competition, resulting in us losing existing customers and failing to attract new ones.

3. Ageing customer base affecting long term sales growth

  • In a style perception survey, only 58% of customers rated us highly on style (Marks & Spencer, 2019)
  • In a value for money perception survey, only 65% of customers rated us highly on value for money (Marks & Spencer, 2019)
  • This demonstrates the reputational damage M&S is facing, we are not appealing to the fashion conscious or family persona we aim to target and as a result our customer base is narrowing dramatically, negatively impacting sales growth, revenue and brand value.

4. Failing to adapt to respond to the challenges Brexit presents may impact business performance

  • Retail industry considered highly sensitive to economic uncertainty (FTI Consulting, 2019)
  • Import and export duties could increase the cost of importing products sourced in the EU (Willis Towers Watson, 2019)
  • Retail labour market relies on of 300,000 EU employees, tightening the labour market (FTI Consulting, 2019)
  • Changes and additions to regulations following the UK’s departure from the EU may have a cost impact (Willis Towers Watson, 2019)
  • This could have major impact on multiple aspects of the business

Risk Matrix:

To assess the potential impact and severity of these risks, please find them mapped on the risk matrix below:

M&S Governance Structure & Approach To Risk:

Figure 3 indicates strong information flow throughout the organisation and that the board is in touch with all activities. M&S assigns responsibility of risk management to the Audit Committee. This is split into different committees and then assessed on a business function level. Extra insight into this can be found below:

It reflects responsibility for ongoing management and assessment of risks lies with each functional area, with oversight and direction from the Audit Committee, conducting activities such as risk registers and matrices. In addition, a top-down approach creates a consolidated view of group wide risks, linking to strategy and external factors. Implementation of both a top-down and bottom-up approach is considered the most effective way to manage risk (Linkov et. al, 2014), suggesting a thorough process is in place. M&S incorporates nomination, disclosure and renumeration committees, all appropriate to facilitate effective performance and responsibility (Hopkin, 2019). With 5 non-executive directors, it is well balanced with internal and external members, important for monitoring management effectively (Solomon, 2007).

However, gender imbalance exists which could be improved going forward. In evaluating the board’s obdurate effectiveness, Hopkin recommends evaluating factors such as membership, purpose, involvement & accountability and performance & impact (Hopkin, 2018). Key notes on the board include (Marks & Spencer PLC, 2019):

  • All board members have a wide range of highly relevant knowledge and experience.
  • Responsibilities within sub-committees.
  • Discussion and challenging is strong amongst the board.
  • Responsible for creating and overseeing the group strategy.
  • Attendance during board meetings is high, with other managers invited on occasions to provide further insight.

Despite this strong structure, it lacks effectiveness due to clear disconnection within the organisation. Governance and activities are taking place within silos. This is apparent within risk management, where each functional area is responsible for risk assessments (Marks & Spencer PLC, 2019). Conducting activities on an individual department basis creates a disconnection and is an ineffective approach. Secondly, M&S does not have a strong risk aware culture. Risk awareness does not flow fully through the entity to those below management. Hopkin identifies a risk aware culture is achieved through leadership, involvement, learning, accountability and communication (LILAC) (Hopkin, 2018). M&S fails to involve all employees in the risk management process, eliminating those below management. Communication is poor due to the silo effect and there is no evidence of those below management being informed of key risks, creating disconnection. This poor risk culture is preventing the thorough structure in place being fully effective

According to the IRM’s risk capability assessment criteria, I believe M&S has elements of a reactive and proactive attitude to risk (IRM, 2019). M&S has overlooked risks & their significance previously, for example failing to recognise new competitors such as Next and GAP poaching their customers (Hayes, 2018). M&S highlights risks in response to things rather than being proactive. As previously discussed, M&S has a strong governance and risk management process, however as this is not fully integrated, it limits our proactiveness.

Risk Appetite:

I would argue we have a cautious risk appetite. M&S has not experience much change in the past 10 years. As Rayner argues, more risk averse organisations tend to “stick with what we know” and be too internally focused (Rayner, 2004). This is exactly the case with M&S, and we have previously found ourselves “misaligned with the external environment” (Hayes, 2018) representing our risk averse nature. The board often overlook risks, for example in 1998 when profits suddenly fell by 23%, the board was still forecasting 10% sales growth (Rayner, 2004), suggesting we failed to take the warning signs seriously. Following a recent management overhaul, I believe the firm is more open to risk to meet strategic objectives. This is evident with the decision to create a joint venture with Ocado. You could argue that we are being more “open” to risk due to its high financial cost of £750 million. However, we could have established our own online platform & distribution network, suggesting we are not fully open to risk. Based on past and current activities, it is fair to conclude M&S has a cautious risk appetite. This can be seen on the risk matrix below:

Risk Mitigations & Response:

M&S have outlined a number of migrations and controls (Figure 2, Appendix) to reduce the impact and/or likelihood of the key risks previously outlined.

Failing to adapt to consumer retail needs:

A number of detective controls have been implemented such as website improvements and a review of prices, promotions and product ranges (Marks & Spencer PLC, 2019). M&S is simply reacting to market and consumer trends and is simply playing catchup to the competition. M&S needs to become more proactive and respond faster to consumer needs.

Failure to exploit the online food market through a joint venture with Ocado:

A number of preventive and corrective controls have been implemented to help prevent the likelihood of this risk occurring including the establishment of a joint working group with Ocado to coordinate activities prior to launch in September 2020 (Marks & Spencer PLC, 2019).

Ageing customer base affecting long term sales growth:

Preventive and detective controls are currently being used such as new marketing campaigns and promotions to attract a more “family-aged” customer (Marks & Spencer PLC, 2019). M&S has made some good progress in appealing to these customers. However, mitigations have been restrained by poor stock availability online, failing to build brand loyalty with new customers.

Failing to adapt to respond to the challenges Brexit presents may impact business performance:

Preventative and corrective controls have been put in place to effectively plan for Brexit, including scenario planning and stock building of key products sourced from the EU. I feel M&S is managing this risk well through considering a range of outcomes and ensuring we have the latest updates from the government committee (Marks & Spencer PLC, 2019). Furthermore, this risk is managed by a “cross-business working party”, avoiding a silo effect.

The impact of these controls can be seen below:

Improvements should be made to the risk controls regarding the ageing customer base and the failure to adapt to consumer needs. I currently believe the controls are not enough to reduce the threat to within M&S’ risk appetite.

Better Management of a Key Risk

In my opinion, M&S needs to consider the risk and the impact of having an ageing customer base further. Both the chairman and the CEO have been highlighting this as an issue for a number of years, yet the lack of response to this risk increases its importance and potential impact. M&S’ predominant response to this risk is through adapting its marketing, specifically digital marketing campaigns to try and appeal to the “family-aged”. Style & value perception are key factors contributing to the ageing customer base. These low perception figures (Marks & Spencer PLC, 2019), should provide huge warning signs. Through failing to react to these warning signs for a number of years, “M&S has broken the golden rule of reputation risk management” and neglected some of their key objectives and values (Rayner, 2004). As the figure below shows, our market share is decreasing, and this will only continue further if this risk continues to be overlooked.

Alongside the development of current controls, I believe our “Sparks” loyalty scheme should be relaunched and improved. Our CEO recently admitted the scheme does not reward customers enough (Marketing Week, 2019). Research has shown that the effectiveness of these schemes is dependent on consumers appreciating the benefits and rewards and if this is the case then it will build up customer loyalty (Demoulin & Zidda, 2008).We should use the consumer insights team and the focus groups to identify what rewards would be beneficial to customers, particularly the “family-aged” customers. Once identified and assessed for implementation, it is essential to ensure spread the message to consumers, potentially through newly adopted digital marketing techniques such as Instagram which has previously benefitted the firm. Having attractive rewards to “family-aged” customers may encourage new customers to start shopping with M&S, widening our customer base and reducing dependency on older generations. Furthermore, Improvements may also help to improve the value perception rating and reputation, which has been decreasing over the years (Marks & Spencer PLC, 2019). However, these benefits do come at some cost to the firm. Time and monetary costs will be incurred with the market research and consumer insights team.

13.12.2019

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