The Collapse of British Home Stores

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British Home Stores was a former department store, selling home wears, clothing, electronics, furniture and beauty products. Sir Philip Green had bought the company at 2000 for £200m then sold it for just £1. Why? That is what I am here to explain. With there being 114 stores, how could Mr Green have failed to make enough profit? How bad could the business be to have been so desperate to sell it for just £1? There are three main characters who played a part in this drama: Sir Philip Green himself, Mrs Green (his wife) and former racing driver, Dominic Chappell.

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Things were looking rather smooth within the first four years however, with profits of £208m. Regardless of the profits, sales remained roughly the same. So, what did Mr Green do? Nothing but lower costs and shrink suppliers. What does this indicate about Mr Green? He is intentionally running a business with no more than 2-3-year view- not a long-term business plan for success. Hence, considering to close or sell the business- even for just £1. Mr. Green was known to be a “bully”; one specific supplier was a victim of his inappropriate behaviour. Carol Duncumb, the supplier, had agreed on a £5m contract with BHS at 2003. She is asked to be at the London head courters by Mr Green one day- where she is forced to either send a cheque or deal is off hence cancelling the order book. She had no choice but to send a cheque of £100, 000 as her business would have been in jeopardy otherwise. As Mrs Duncumb said, “A deal is not a deal”- he is not a very reliable or trust worthy man. In fact, this is an act of breach of contract- a type of civil wrong. So, what did Mr. Green do wrong? when it came down to the stores in general, there was no nurture or love from Mr Green. Arcadia Group Ltd had bought the company in 2009. Arcadia is one of the UK’s biggest private fashion retailer with over 680 global locations. It consists of seven vast high street brands: Burton, Dorothy Perkins, Miss Selfridge, Evans, Topman, Topshop and Wallis. Arcadia had invested £600M after it had stopped making profits. So, you would think, just as any other businessman would, Mr. Green would use the £600M to remodel his business plan and stores to keep up with the new demands and trends of the high streets to survive.

Tony Brown explains that “When you have heavy discounts at like Primark in the arena, you have to either follow it down or change your business model”. However, Mr. Green failed to do so; in general, BHS just “lacked focus as to what it was finally, and it certainly felt under invested and under loved” (Caro Duncumb, former BHS Supplier). The BHS store that a former employee, Anne Bostock, had worked in was said to be in rather poor conditions. With the roof leaking and “never fixed” and with most of the tills not working. If anything was to be painted, the staff would have to paint it themselves as BHS failed to ever consider sending any painting company to do the work professionally. Keith Bostock, also a former employee of BHS store, elaborates on how “you had to do the extra mile to look after things and keep things going”. The staff had to deal with extra responsibilities and work loads which they were not paid to do. Philip should have used the Johnson and Scholes context of Suitability, Feasibility and Acceptability as selection criteria to obtain the ideal strategic choice. Suitability: this is where Mr. Green had to understand if the strategic alternatives will help prevent future environmental threats and help make use of opportunities.

Feasibility: Mr. Green could have used the 6M analytical model; money, market, machinery, manpower, materials and make-up.

Machinery: must consider whether the company has the relevant and required machinery or spare capacity to manage the output requirement of each necessity.

Manpower: for any sort of strategic choice, you must conclude whether the current employees and management team have the necessary and required skills and knowledge. This form of analysis consists of three steps: one does the current management team have the required experience to understand the practical strategic alternatives? Two, does the current management team have the adequate understanding and knowledge and capability to select the most worthwhile strategic alternative? Three, with the skills and knowledge, does the management team have the capability to implement the chosen strategy?

Markets: this is where you must evaluate the market size, growth of market, openness of costumers to new products or changes and of course the competitive landscape. I believe this is mainly where Mr. Green went wrong. Not only did he not care much about the appearance and reputation of the stores, but he failed to understand how competitive the landscape was; with Topshop and Debenhams out there, he should have taken more action and taken better care. A new strategic choice was necessary as he had to adapt the business to the new environmental changes and trends.

Materials: focused on the suppliers. Input of any important supplies must be guaranteed for the accomplishment of all strategic choices.

Money: available and needed finances must be taken into account. In general, three financial resources are said to be considered: the availability of financing, cost of financing, and the capacity of repayment for the strategic choice. Of course, the margin for profits will be determined by the cost of financing. Depending on how much there is to repair and alter, if the financing costs are low, there will be a higher safety margin. As a long-term business man, Mr. Green must have been mindful of the fact that financing, when not needed, is always ready and cheap; but when needed, it is always unavailable and expensive. The repayment capacity, of course, is going to involve financing too. With each strategic choice, the cash flows should be consistent. The commitment of different repayment methods must also be considered as well as their consequences if ever breached. For instance, if Mr. Green was more committed to the repayment level for his shoe’s collections, but not as committed to his underwear collections; with underwears being more popular however, this would be a bad business decision. This way, the underwear supplier contract will be breached, and they could no longer supply him with any underwears. Thus, putting his business in trouble as the underwears are more popular with the consumers.

Make-up: this is where organization structure and culture of company is considered. Organization structure must be steady with the strategic choice. Culture of company is very important; work environment of employees is essential to be as comforting as possible. A happy employee equals more productive and hence a happy employer also. Nevertheless, with the roof always leaking and tills never working, it wouldn’t be much of a shock if the employees were never in the mood to work or interact with costumers in a friendly manner. Therefore, decreasing rate off costumers and profit in general. Accessibility: financial aspect and stakeholder aspect are the focus here. The financial aspect concentrates on the financial return of the strategic choices. There are several ways to calculate the financial returns using financial measurements such as net present value (NPV), internal rate of return (IRR) and economic value added (EVA). The stakeholder aspect focuses on evaluating how each strategic choice may affect the stakeholder and the likelihood of their reactions. This is crucial as the new strategy choice would have a higher chance of succession with a stakeholder support. There are many ethical issues with this scandal. Not only did 11, 000 employees lose their jobs but 20, 000 pensioners faced a dreadful cut of 77% from their pension schemes. The deficit changed from £7m in 2006 to £233m in 6 years later. There is only one response to this disaster; Mr. Green must write a beautiful big cheque to make amends to the BHS pension fund. As much of a debt the business may have been in, Mr. Green can most certainly afford to do this simple kind gesture – the Green family just recently purchased a private jet and deluxe yacht for about £146m. Seeing as he can afford such luxurious vacations, then there is no need for the Pension Protection Fund (PPF) to come to the rescue and take him off the hook. The PPF, recognized in 2004, is a government-based scheme that saves bust firms. It pays complete pensions to those retired, with the exception for those who retired early or remain in work- PPF cuts 10%. It is funded by a levy on all distinct benefit schemes.

Corporate governance is very important when it comes to companies; enables effective, tactical and wise management that can provide a long-term success for companies. A key principle of a good governance is transparency. This is where stakeholders and other shareholders are to be informed of any risks involved in any business strategies and what the company plans to do in the future. A well-managed corporate governance will make certain of a corporate success and growth in economy. The investor’s confidence is maintained and hence leading to a raise in effective and efficient capital for the company. The share price will also be positively impacted. The main question here is: is Mr. Green to blame? He may be to blame as he failed to love and nurture his business and employees. As an employee, I would have trust in my employer to direct me to work for just what I am being paid to do. I would trust my employer to keep his word and have a secure pension scheme for me and everyone else. Of course, not one employee experienced this. All he did, was go to a 9 weeks cruise in the Mediterranean when he could have used his assets to remodel and maintain his business in the vast changing high street environment. Nevertheless, as he sold the business to Dominic Chappell for £1, he no longer is responsible to anything related to BHS. As he said himself “If you buy my house and it falls down, is it my fault?”. There is some truth in his statement as evidently the new BHS boss, Dominic Chappell, also clarified; “No one is to blame. It was a combination of bad trading and not being able to raise enough money from the property portfolio”. Not every business goes well; BHS is said to be one of those businesses. However, that doesn’t justify his behavior towards the pension scheme. The precise amount of money Mr. Green had taken out of the business had to be known by the pension regulators, so that they could then measure on what damaging effect that that had on the business. Philip Green wouldn’t give that information. With this suspicious activity, of course it could only mean one thing; Philip Green had the money to balance out the £571m pension fund deficit. As the previous owner of the company, and promising a pension scheme for employees, it was Philips duty and responsibility to fulfill his promise and or give any information required to help maintain the promise. However, if he didn’t have £571m, half would have still been a considerate amount to help with the deficit. Nonetheless, his greed and selfishness got the better of Philip; he is to blame for the £571 pension fund deficit. Within one year from BHS, Dominic Chappelle and his company had taken £11m in fees and salaries and the Select Committee had made it clear that Dominic Chappelle had enriched himself at the expenses of BHS. “the money I took from British Home Stores is totally justified”. Dominic had personally profited of over a million from the expenses of BHS. However, refused to give it back to the pensioners; “I have no intention in giving that money back”. Thus, we can conclude that both Mr. Chappelle and Mr. Green’s are to blame for the destruction of 200, 000 pensioners whose pensions were cut by 77%.

On the other hand, the corporate governance also had a part to play. Corporate governance is very important when it comes to companies; enables effective, tactical and wise management that can provide a long-term success for companies. A key principle of a good governance is transparency. This is where stakeholders and other shareholders are to be informed of any risks involved in any business strategies and what the company plans to do in the future. A well-managed corporate governance will make certain of a corporate success and growth in economy. The investor’s confidence is maintained and hence leading to a raise in effective and efficient capital for the company. The share price will also be positively impacted.

There are also the board of directors; direct stakeholders influencing corporate governance. Shareholders elect directors to represent the shareholders of the company. Important decisions are to be made by the board, such as executive compensation and dividend policy. So, could the directors of BHS have been wrong to advocate such dividends while there was a deficit in the pension fund?

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