This paper is a detailed analysis of the Associated British Foods (ABF) business operations around the world. It presents a brief discussion of the ABF portfolio. This is swiftly followed by a discussion on one of the subsidiary companies of ABE-Primark, that has shown exceptional performance accruing financial benefits to the firm. Thirdly, the paper discusses the role that the parent firm-ABF plays in the management of operations of its subsidiary firms and the larger conglomerate. Finally, the paper presents a discussion on the diversification of the ABF firm relating this to the historical framework of diversification suggested by scholars Goold and Luchs (1993). Essentially, the paper compares the development of diversification in ABE with intent to draw similarities and differences between them and the framework suggested.
The Associated British Foods Portfolio
An analysis of the business portfolio of ABF provides a detailed description of the diversification that the company has adopted with respect to the structure that the organization has developed in managing the units comprising its associate companies. Foremost, the multiplicity of the products that the subsidiary companies of ABF provide qualifies the parent firm-ABF to be categorized as a corporate diversified firm. This is backed by its capacity of having adopted a product diversification strategy. On the other hand, the company has as well diversified the geographical locations in which it operates. Its operations are distributed in 47 countries around the world from the continent of Europe to the North America, Australia and Southern Africa. Therefore,this as well qualifies the firm under the category of geographic market diversification. Therefore, a combination of the two strategies groups the firm under a product-market diversification strategy. Evidently, this indicates the wide scope of business operations that the firm is engaged in (Barney, 2012, p. 208).
The product diversification of the ABF Company includes five major products namely; Sugar, Agriculture, Retail, Grocery and Ingredients. The range of the products offered by the ABF firm is depictive of the product diversification strategy that it has adopted which according to Barney (2012, p. 209), is an unrelated structure of diversification. The main reason the diversification of the company is described as unrelated is attributable to the nature of the firm’s products. The diversity of the products in terms of the differential nature, in each product that essentially makes them unrelated. This is the main reason the company is grouped under the category of unrelated diversification. Moreover, a salient feature of this qualification is that less than 70% of the firms’ revenue comes from a single business. Notably, none of the five companies comprising the ABF firm contributes 70% of the returns realized from the conglomerate.
Similarly, another qualification is that there are very few links if any between the small businesses that comprise the larger parent company. Conspicuously, the five companies that comprise the ABF firm do not depend on each other to a considerably great extent. This is because each of the subsidiary companies can run without experiencing any effects brought about by developments in other subsidiary companies of the ABF parent firm.
The analysis of the business portfolio of ABF reveals that it is a product-market diversified firm due to the variety in the products and the markets that its subsidiary firms provide and serve across the board respectively. More importantly its diversification is unrelated given that none of its single products depend on the other in the form of links or common attributes. This is an important feature in ensuring the profitability of the organization mainly because the unrelated nature of the products presents fewer financial risks. For instance, losses made from its retail conglomerate can be offset by profits made from its ingredients products firm. The same case could apply either of the other products since they are unrelated and as such do not affect each other’s economic performances.
Justification for the Inclusion of Primark in the ABF portfolio
ABF Primark subsidiary is part of the larger retail companies that are owned by the parent firm ABF. Primark is primarily concerned with the textile business. The company provides employment to more than 48, 000 people across the United Kingdom, Spain, Ireland, Netherlands, Germany, Belgium, Austria and Portugal. The subsidiary firm of the retail chain that is a subsidiary to the ABF Company has over 250 store outlets in these countries. It presents customers with a variety of quality fashion attire at competitive prices (Associate British Foods Plc, 2014).
According to George Weston, the Chief executive of ABE Primark is an exceptional part of the larger ABF firm despite being under its retail chains. The figures projected by the chief executive for the fiscal year 2013 shoe that sales were 24% higher than in the year 2012. This is also reflective in the 75 appreciation that the subsidiary company achieved in its like-for-like growth index. The CEO explains that the contribution that Primark makes to the entire organization is substantive compared to all the other firms individually. This makes Primark the most profitable firm in the ABF conglomerate (Weston, 2014).
Weston adds that the operating profit margin that was realized from Primark in the same period reflects the benefits of lower cotton prices. Nonetheless, the garment purchases are evidence in themselves of the sheer capacity of the company to earn ABF the needed revenues. More to this Primark experienced more openings in terms of expansion of retail space. Figures projected show that the firm has appreciated in the area of ground coverage by 0.7 million sq. Feet since the last fiscal year that ended in 2012. This is against a fixed number of retail stores that are placed at 257 stores. More success was projected for the company due to openings of new stores in selected countries. In Germany, the company projected expansion that included the opening up of two new stores including one in Frankfurt’s Zeil which is one of the country’s premier shopping locations. The profit margin projections according to the CEO would ensure that a further 100, 000 sq. Feet space is occupied by Primark retail stores by the end of the fiscal year 2013. These expansions include the infiltration of the French market by setting up the first ever Primark retail store in France (Weston, 2014).
The Role of the ABF parent firm
The mandate of the ABF parent company is largely a supervisory role. It is tailored towards ensuring that all the five units of the company are functioning profitably. To achieve this, the parent company is run by a board of directors who are mandated with the responsibility of overseeing the operations of the subsidiary firms of the organization. The independent directors are selected carefully to join the board of directors that is collectively tasked with the responsibility of overseeing the operations of all the five companies of the group (Associated British Foods Plc, 2013, p. 5).
ABF’s corporate diversification
The management of ABF has made strategic investments in the coordination of activities between its subsidiary firms so that they work towards common objectives. To achieve this, the firm ABF has established a board of directors who are mandated with the responsibility of overseeing the functioning of the activities of all the five sub-companies of the ABF group. Majorly, this role has been limited to overseeing the operations and ensuring that they meet the stipulated policy dictates that are prescribed by the board of directors. As mentioned earlier in the example of financial policies regarding the policies developed by the board of directors. It is expected that the directives would harmonize activities between the five companies of the ABF group. More importantly it caps on irregularities that may result to instances of money laundering and fraud. Similarly, the policies are tailored towards protecting all the subsidiary firms of the ABF conglomerate from financial risks that may be eminent in the market. This applies to other policies governing pertinent departments of the five constituent companies belonging to ABF to ensure that operations yield maximum benefits for the larger ABF parent firm (Associated British Foods Plc, 2013, p. 21).
This framework adopted by the firm in management of its subsidiary companies is known as portfolio planning. It is a framework that provides managers with a common framework to compare many different businesses. Through this comparison, the management can develop and implement policies that are beneficial, but as well work towards the coordination of activities and operations between the individual firms to achieve collective competitiveness and profitability of the larger parent firm. Principally, from this analysis it is eminent that ABF has developed in line with the historical sketch that Goold and Luchs present(Goold & Luchs, 1993, p. 11).
According to Goold & Luchs (1993, p.12) Portfolio planning, reinforces the virtuous cycle of corporate growth and diversification that are originally founded on the management skills of the firm. Corporate managers can, therefore, correct past diversification mistakes that have resulted in the weakening of the business. For instance financial autonomy of the constituent companies to the ABF conglomerate presents financial risks that are addressed through strict financial policies that unify all the firms as discussed earlier. However, through portfolio planning the management of the organization can ensure that they secure the growth of the business by first ensuring financial security of the conglomerate. Hence, the harmonization of policies through portfolio planning provides a framework through which the business can ensure sustainability of its profits as well as competitiveness. This is especially so when dealing with several differentiated products such as is the case of the ABF conglomerate.
This report has analyzed the operational activities of the Associated British Foods public limited company. It has established that the firm is diversified in the products that it offers to customers as much as it is diversified in the markets that it serves. In addition, the report has discussed its corporate diversification drawing similarities from the diversification framework presented by Goold & Luchs (1993) module. The report has also examined the role of the parent firm ABF in management of its subsidiary companies. Chiefly, the report established that the role of the ABF is supervisory to ensure the sustainability of profitability and competitiveness of its subsidiaries and ultimately the larger ABF conglomerate. The report has as well presented a detailed analysis of the portfolio of the ABF. Centrally, the report finds that the company is diversified in the products that it offers through its subsidiary firms. Similarly, the company is diversified in the markets that it serves. Further, the diversification of its products is unrelated. This is advantageous since it presents limited financial risks as discussed. The paper has presented a detailed examination of the ABF Company in regard to its business operations across the globe.
Associate British Foods plc, 2014. Home>Downloads. [Online] Available at: http://www.abf.co.uk/tools/header/downloads[Accessed 19 February 2014].
Associated British Foods plc, 2013. Annual Results Announccement Year ended 14 September 2013, s.l.: s.n.
Barney, J., 2012. Strategic Management and Competitive Advantage. s.l.:Pearson.
Goold, M. & Luchs, K., 1993. Why diversify? Four decades of management thinking. Academy of management Executives, 7(3), pp. 7-25.
Weston, G., 2014. Home>Downloads. [Online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CDAQFjAB&url=http%3A%2F%2Fwww.ipo.gov.uk%2F2004-6027.pdf&ei=G-sEU9HIOqiW0AWGzoHgCA&usg=AFQjCNEGHhKM_u9R2VYuMLUhOXXb6fY_0Q&sig2=-pyJF7rInPiZl1vMVWBgUQ&bvm=bv.61535280,d.d2k[Accessed 19 February 2014].