Customer Limited: Strategic Analysis of Customers

Brief overview of Customers’ Business

Customer Limited (CUS), as an Australian electronics payments systems company, has its stocks listed on the Australian Securities Exchange with the vision to maximize shareholder value by rapidly growing its business and extracting benefits from scale, market position and combined services. CUS is presently pursuing a strategy to build Australia’s leading listed payments business as an overall strategy via organic growth and acquisitions (Johnson, G. and Scholes,1993). Its participation in retail payment areas such as ATMs and EFTPOS are also part of its present strategy (Customers Limited, 2009a). Its revenues come from good sold and services rendered where and they get measured by the fair value of the consideration received and they gets recognized as along as recovery of the consideration is probable with the reliability of measuring the associated costs can be measured reliably (Customers Limited, 2009b).

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With just about few years in existence, CUS had become one of the largest owners and operators of merchant ATMs in Australia. It has also formed a Joint Venture with Bendigo Bank and MasterCard to establish Strategic Payments Services (SPS) being Australia’s newest payments processing business. SPS is expected to have committed values on day one to an amount exceeding 100 million transactions per years. Furthermore, it has a national sales force and offices throughout Australia with its Head Office and Operations Centre located in Melbourne (Customers Limited, 2009a).

Being engaged principally in the provision of automated teller machine (ATM) and payment system services, CUS delivers in two geographical segments: one is Australia and the other is Asia. As of April of 2007, CUS had acquired ATM solutions Australia Pty Limited and the following month after the remaining 50% of the Customers Asia Limited was made part of its ownership (Customers Limited, 2009a).

External Analysis

Macro-environment analysis (PESTEL). What are the 3 main issues? – 4/10

The ongoing recession in many parts of the world and where Australia is also affected with low economic growth (ABC News, 2009) surely affects the industry. The recession is linked with the financial crisis in the US which is believed to have been caused from the crisis in subprime-mortgage. The situation has caused many speculators around the world to put their investments in the US but only to find latter that so many borrowers were not really qualified to pay resulting. This resulted to failure to pay their loans and this triggered a loss for many banks. Lower economic activity which is partly solved may significantly affect the generation of revenues in the computer hardware industry where Customers belongs.

The three main issues include whether low economic growth would persists, whether Australia would also further lower interest rate to address the impending recession and whether lowering the interest rate could either increase or decrease economic activities that would affect Customers in its sale of products and services to clients.

Industry environment analysis of Customers using 5 forces.

This part applies Porter’s Five-Forces Model (Porter, 1980) to determine the industry opportunities and threats. Opportunities are favourable conditions that could increase profitability of the players in the industry while threats are those that could lessen the said profitability for the same players. The company is operating in the computer hardware as it provides ATM to clients. ATM are considered computer hardware that would also make use of computer software, the suppliers of the latter for the operation of ATM are considered its suppliers. The analysis below is based on this definition of the industry.

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Threat from new entrants – (Low)

There is low threat from new entrants in the computer hardware industry because the industry is basically capital intensive. Based on the company’s total assets on its 2008 consolidated balance sheet, about 96% represents non-current assets (Customer Limited, 2009b).

Companies that would enter to the industry could not easily come into the industry because of big amount of investment. This therefore makes it favourable to present industry players because less competition means lower profitability. Although the industry may be expected to grow, the growth could not be easily eaten up by the entry of new players, thus causing present profitability to be at least maintained.

Bargaining power of suppliers – (High)

Bargaining power of suppliers may be considered high because there are numerous buyers or industry players in the computer hardware industry from which these suppliers, which are smaller in number, could sell. Given the low number of suppliers including from outside the Australia, a low rivalry of suppliers as in the case of limited makers of software makes may create some power to drive industry profitability to be become lower.

Given the size suppliers, there appears to strong force. This is therefore an industry threat as could dictate price easier as whey they connive.

Bargaining power of buyers (High)

Bargaining power of buyers is believed to be high because there many customers and there could be little switching cost at all to company’s offering ATM service like the banks. Almost every family or individual that uses payment services are not limited to what Consumers offers and they could have a wide array of choices from market. This is a threat to the industry as it could leave buyers shifting from one service provider to another.

Threat from substitute products — (high)

Threat from substitute is high because the numbers of substitutes are high since ATM service could come from banks and there are other ways of payment systems that could be used as substitute like the use of credit cards and cash as modes of payment. Although companies may be using branding strategy (Plunkett and Attner,1985; Massie, 1987), buyers can become flexible because the technology could be considered fluid.

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Intensity of competition — (high)

There is high rivalry of among existing firms as indicated by the fact that industry averages in terms of profitability are high than that of the company. This is despite the company’ claim that company is most efficient deployer of ATM in Australia. This is therefore an industry threat for players as they compete for the market, since more players mean companies to share in the profits. Competitors may include those banks which may have already their own machines installed already in many of their business.

Internal Analysis – 4/10

The company’s core competencies come from the results of financial analysis. The company is found to have generally acceptable solvency but is burden with some low profitability and low liquidity position. Discussing the capabilities while neglecting the weaknesses would cause a bias basis for strategy so that this part includes also the lack of such capabilities or weakness using financial ratios to evaluate the company’s record for the past five years. Table A below shows the summary of the financial ratios for Customers.

Summary of profitability and efficiency ratios; Source: Reuters.com (2009).
Figure 1. Summary of profitability and efficiency ratios; Source: Reuters.com (2009).

Generally Acceptable Solvency

The debt to equity ratio of Customers is 36.41as against industry average of 36.3. The solvency ratio of the company is almost the same as the industry average and this means the value the company investments from stockholder in relation to creditors is as strong as against its competitors (Meigs, Meigs and Meigs, 1995). This means that more or less the company has also similar level of risks compared with the competitors. In simple terms, the company may be able to manage its long terms risk so that its profitability would be enough to provide funds not only to pay currently maturing obligations but even possibly to provide certain amount of dividends annually to investors if the company does not want to do so and even to make future expansion.

Poor profitability and management efficiency

Average return on equity (ROE) of negative 7.85% for the past five years of Customers shows less superior past performance in relation to the industry average of 9.23%. An average of negative 8% return on equity definitely discourages investors as it would mean that for every 100 US dollars the investors expect to lose about 8 dollars. However, its ROE in the latest 12-month period improved a lot at 2.24% although still lower as against the industry average of 5.92%.

It may be noted that return on equity uses the formula where net profit is divided by the total stockholders’ equity. When compared to Australian base rate of 3% (Housepricecrash, 2009) if money was invested in an Australian bank, its present ROE is still less which makes the finding it would be better to rather make the risk free investment at 3% rather than keeping the money with the company.

Aside from profitability, it is also interesting to know whether the company management is efficient. To measure the latter, this paper uses return on assets (ROA). The company’s ROA of 1.55% for the latest twelve months is still lower than industry average of 2.82%. Even using ROA five-year average, the rate of -4.87% for the company is very much below the industry average of 5.39%. While ROA may indicate profitability measure, the same may also measures management efficiency in terms of profits in relation assets employed in business. ROE on the other hand measures how much management compensates resources invested by stockholders. By comparing the two ratios, it appears that Customers is less profitable and efficient than industry.

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The obvious less profitability and efficiency of the company than industry is not supported by the company’s net operating margin and net profit margin. The resulting operating profit margins for the last twelve month registered at 4.8% as against the industry average of 3%. Operating margin represents the margin after deducting cost of sales or services and operating expenses. The ratios mean that the management of Customers is doing well in management of its business of its revenues over its cost doing business and may mean better motivated employees in delivering value to Customers.

However, from the point of view of stockholder, the company is still less profitable and less efficient than the industry.

Poor liquidity

Liquidity is the ability to meet a company’s currently maturing obligations. It is measured using the current ratio and the quick asset ratio. In the case of the Customers in Table A above summarizes some of the information. When applied to Customers, its computed current ratio is 0.23 as against industry average of 2.38. Quick ratio of the company on the other was reflected at 0.23 as against industry average of 1.99. Both ratios are below 1.0 which indicates very low liquid position.

Customers’ present strategic direction (6/10).

The company’s strategic direction may be assessed to be one which is determined to have attained its some of its goals. This is based on its slightly higher solvency compared with the industry and much improved profitability compared with its earlier year of operations. But much remains to be desired based on liquidity comparison since its present poor liquidity position could result to bankruptcy.

The three major strategic issues faced by Customers taking into account all of the analyses in parts 1 and 2 include the following:

The first issue is whether the company should continue its expansion in the light of the present recession that may be prolonged and its weakness of low profitability. The company have been investing in big amounts for the past few years as could be seen from it cash flow statement and given the low profitability together with the present recession it may not be advisable to make further expansion in it non-current assets.

The second issue is whether further expansion is justified by its liquidity is also one of the issues that must be settled by the company. If past investments do not produce the expected profits that will ensure an acceptable level of liquidity, something may be wrong in the strategies implemented by the company

The third issue is whether company profitability could be increased in the medium term and in the long-run given the changes in the external environment. Investing in non-current or long term assets while facing economic uncertainties and several industry threats may make thing worse.

The company claims to have introduced Direct Charging as way of venturing into other business units that could generate more revenues and better profitability after the company has show dismally low profitability for the past five years. Such a strategy still implies an expansion that may still more cash flow for investments. The company further claims to be planning to extend existing services and develop new complementary services which are being run in parallel to the Direct Charging project. Such plans sound nice to hear but there is no assurance of better future based on industry analysis and macro-environmental analysis that were conducted for the purpose. The company do not have much strengths or core competencies. Only one strength is identified, which is the generally acceptable solvency of the firm. Since solvency is better influenced by higher profitability, the company may eventually lose its still solvent position in the light of the prevailing industry threats and recession.

Part Three – Recommendations and Implementation

Suggest two strategy options for Customers? – 4/10

The two strategy options would include doing the BCG analysis. The two strategy options include divesting or harvest depending on the effect to profitability and cash flow using the BCG matrix.

The strategic option of divesting is applicable when the company is found under question marks under the BCG matrix. CUS may be categorized to be operating in high-growth markets but it only has a low market share. Theoretically, new businesses may commence as a question mark in that the company tries to enter a high-growth market in which there is already a market leader, it would appear that CUS has applied the same but that the results were seen in the income statement for the past five years. The company did have increasing revenues for five years but is profitability was rather dismal and this has cause the company’s cash flow position or liquidity position to suffer. It is admitted that a question mark under the BCG matrix (Kotler, 2004; Churchill, Jr. and Peter, 1995) requires a lot of cash, since the company has to add plants, equipment, and personnel to keep up with fast-growing, and additionally it wants to overtake the leader and that is what the company appears to have done. It had resulted in much cash outflow since the strategy was to keep pouring money into this business. Customers might be better off liquidating or investing its assets or resource to more productive or more profitable industry. Since its latest 12 month ROE is below the risk free rate of 3%, the company should find better ways to earn money by divesting from or liquidating from its present investments before the company could further deteriorate in cash position that would force the company to bankruptcy. Adopting this strategy would indeed protect the company from its weak profitability which is causing problems in is liquidity (Atkinson, Anthony, 2005; Brigham and Houston, 2002; Byars, 1991). This will also protect the company from identified industry threat of high intensity of rivalry in the industry and high threat of product substitute.

Another strategic choice is just to harvest and gather all cash that may be had from the results of its past investment that could provide cash flows in order to keep the company liquid. This could be applicable in areas where it claims leadership as in being the most efficient ATM deployer in Australia (Customers Limited, 2009b). Using this strategy would afford CUS to increase is short-term cash flow despite the consequences in the long-term. This is appropriate for weak cash cows and the future is dim and from whom more cash flow is needed. This is also use in questions marks under the BCG matrix where the company is assumed to be falling under (Kotler, 1994) Since immediate liquidation may not be timely, there is need to use this for the meantime and when the most opportune time comes, the same would be more beneficial to divest from the company’s present investment.

Using gap analysis, what needs to happen to make these strategies work – 6/10

Gap analysis will point whether there is something that must be done between the actual performances of the company with its potential performance. In the case of Customers, it is clear that its stock prices as a barometer of its wealth maximization performance are directly connected with its profitability performance. Please refer to Appendix A. This means that increasing the profitability of the company would surely influence the stock price increase of the company. To increase profitability is a function of increasing revenues and reducing cost and this could be attainable like what happened in 2006 and 2009. Since the company is still profitable and less efficient than the industry average, it could also be assumed that industry average could be considered as the potential level of the performance of Customers. By so attaining its potential the company would take the steps on what it wanted to be as an organization as it defined the same in the corporate vision and mission and as translated in its corporate financial objectives. This would result for the company to be making the best use of its current resources or making the needed investment in capital or technology. This would have the same effect when a company attains its production possibilities frontier (Slavin, 1996).

Another critical area that must be improved using gap analysis is the big gap between the industry average on liquidity and the company’s present poor level of liquidity. Since liquidity is critical to short and long term success of an organization that would help the company in meeting its objective, there is need to prevent the company from becoming bankrupt. This would therefore require the company to improve its cash flow position by generating more revenues and controlling the outflow of some cash outflow that would possible still lower the company’s liquidity position.

Identifying the gap between what is optimally allocated and integrated as against the present level is the purpose of gap analysis and this gap was found applicable as far as the liquidity of CUS is concerned. Since good source of cash flow could come from operation, the strategy for implementation that would attain this would be closely related with the first strategy of the need to improve the profitability of the company.

Appendix A

Graph of Customers Stock Price; Source: Corporate Information (2009).
Figure 2. Graph of Customers Stock Price; Source: Corporate Information (2009).

References

  1. ABC News (2009). Australia dodges recession bullet. Web.
  2. Atkinson, Anthony, et al. Management Accounting. New Jersey: Person Custom Publishing, 2005
  3. Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management. London: Thomson South-Western,
  4. Byars, L. (1991) Strategic Management, Formulation and Implementation – Concepts and Cases, New York: HarperCollins
  5. Churchill, Jr. and Peter (1995) Marketing, Creating Value for Customers, Sydney: IRWIN
  6. Corporate Information (2009). Corporate Information Snap Shots. Web.
  7. Customers Limited (2009a) , Company website.
  8. Customers Limited (2009b), Annual Report for 2008.
  9. Housepricecrash (2009). Australian base rate.
  10. Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall.
  11. Kotler, P (1994). Marketing Management, Analysis Planning, Implementation and Control, London: Prentice Hall International
  12. Massie, J. (1987) Essentials of Management, Prentice-Hall International (UK), London
  13. Meigs, R,. Meigs, W., & Meigs, M. (1995) Financial Accounting, New York: McGraw-Hill,
  14. Plunkett and Attner (1985). Introduction to Management. Boston: PWS-Kent Publishing Company
  15. Porter (1980) Competitive Strategy, London: Free Press
  16. Reuters.com (2009). Company Overview.
  17. Slavin, S. (1996) Economics , Fourth Edition, London: IRWIN

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