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Electolux annual report analysis

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  • 1. Reims Management School Electrolux Annual Report Analysis The Good, The Bad and The Ugly Group 4 Christian Lawo Harshit Krishna Markus Schade Nitin Nagori
  • 2. Electrolux Annual Report Analysis 1. Market Overview Summary scoring 1. Competitive Environment 2. Regulatory Environment 3. Macro Environment Comprehensiveness 7/10 6/10 8/10 Accessibility 6/10 7/10 9/10 The headline states the overall problem of the market environment very precisely. Competitive Environment Group 4, International Performance Management Page 1
  • 3. Electrolux Annual Report Analysis These are some very good examples about the competitive environment of Electrolux. They give us enough information about the situation with major competitors. The acquisition of two former competitive companies (the Egyptian Olympic Group and the Chilean CTI) is mentioned and outlined as a big goal. They give a market outlook in general and what it means to the company in particular, e.g. launching new products in Latin America, the improvement of the US market or the rising of material prices in Sweden. So this information is both accessible and comprehensive. One only could say that Electrolux might have gone more into detail dealing with this information by showing more graphs and statistics with real numbers than just writing a text about it. One reason why they might not have done so is drawn in the conclusion. Regulatory Environment In fact, this is the only part which can be found in the annual report about the Regulatory Environment. As also drawn in the conclusion, this should not be called “the bad” because there are no more regulations than stated above. What has changed in the company is comprehensive and accessible, which is very good. But on the other hand, as it can be repeated, this could have been explained in a more detailed way. Group 4, International Performance Management Page 2
  • 4. Electrolux Annual Report Analysis Macro Environment Group 4, International Performance Management Page 3
  • 5. Electrolux Annual Report Analysis  As we can see, the annual report concerning the Macro Environment is presented in a very good way by showing graphs and some statistics of the different markets with its demographics and market shares. The change in the interest rates on the other hand is described in a texted version. Conclusion Despite the critical importance of such information, our research has shown that Market Overview information is might be less well communicated and consequently not understood as clearly as one might expect. The Electrolux´s annual report showed that it is also possible to give the reader some information about the competitive and the macro environment. In general we can say that they did “good” at these two analyses but about the regulatory environment, very little was said, which does not directly mean that this is “bad” because there simply are not big changes regarding deregulation or privatization for instance. In fact, this was done in not great detail, but it was mentioned in the introducing words of the report. Companies might sometimes justify their silence on such issues by claiming that those who need such marketplace information can glean it from other sources. Advocates for better disclosure, on the other hand, contend that Market Overview information is too critical to an accurate assessment of a company’s performance to rely on analysts, competitors, or other market commentators to provide it. Group 4, International Performance Management Page 4
  • 6. Electrolux Annual Report Analysis 2. Strategy & Structure Summary scoring 1. 2. 3. 4. Goals and Objectives Governance Risk Framework Organizational Design Comprehensiveness 8/10 9/10 8/10 9/10 Accessibility 10/10 8/10 6/10 9/10 Goals and Objectives The superior goal of Electrolux, which is already given in the headline, is to achieve the position as a market- leader, with cost-efficient production and successful technology and innovation is described quite short. Only a few sentences should present the company's main goal. In my view some statistics could highlight this important point of the annual report extremely. In comparison to the previous aim the financial goals are presented very nice. The huge numbers remain in the head and come along with a short explanation. At first two easy sentences introduce the issue for a better understanding. Group 4, International Performance Management Page 5
  • 7. Electrolux Annual Report Analysis . The simple time bar shows the strategy Electrolux went the last years very well and tries show the future objective, the profitable growth. The time bar is presentable and easy to understand for beginners, too. Electrolux ability to increase profitability and shareholder value is based on three elements: - strong brands and cost-efficient operations innovative Products Here are these important points mentioned and explained in a few words. From my opinion it should be necessary to clarify the elements more to understand the importance for the profitable growth. Governance: The governance is illustrated very clearly in a graphics. I think there is no better way the relation between the parts of the governance. For a better comprehension, how the internal bodies are working, there is a written explanation about these parts. One more graphic shall show the duties of the “President and Group Management” and the “Business Sector Board”. Group 4, International Performance Management Page 6
  • 8. Electrolux Annual Report Analysis The decentralized corporate structure is shown in the following graphic arts. To improve the comprehension, the second picture explains the most important bodies in more detail. In the lines before, the internal bodies duties are written and explained, the graphics just simplify these words. Moreover, both bodies are explained in separate sections very well. Also we find that there are 160 companies in more than 150 countries with the parent company AB Electrolux in Stockholm which is listed on NASDAQ OmX. We have a detailed section on the board of directors who are from diverse backgrounds and are capable of governing the company. Risk Framework: At first the 3 factors for success and profitable growth are mentioned, because they represent the biggest sources for risks, if one of them failed. So the success largely depends on the three elements. After that the most dangerous risks are mentioned and in a short written form explained: - Variations in demand Price competition Changes in price for raw materials Exposure to customers and suppliers Access to financing From my point of view the risks are described in a very informative way. The annual report tries to show that the management is prepared for every “emergency case” and Electrolux gives the impression that they are well arranged for every possible danger. Although, the risks for “Changes in price for raw materials” are explained in the previous text, there is a special data, where the prediction for raw materials is more defined. Group 4, International Performance Management Page 7
  • 9. Electrolux Annual Report Analysis Raw materials: In the data, a prediction for the price changes for steel and plastics are shown. There is no information about the other important raw materials, copper and aluminium. The lack of information gives me the feeling that Electrolux try to hide these facts to disguise any risks. In addition I think a prediction around 10% is quite imprecise and gives a bad outlook for the future. Independent of the prediction, Electrolux gives the impression to be well prepared for any up- and downturns in material prices. In the previous text it is explained, that Electrolux has bilateral agreements and raw materials are purchased on spot prices to avoid any risks. In conclusion the “Electrolux Annual Report” presents a detailed risk framework, but also some lacks of information, which gives the feeling of a risky situation. Organizational Design: Electrolux has a very clear organisational Design. Under the CEO there are four Major Appliances heads. From my point of view, the geographical layout makes sense, because there a different interests about the products. The Major Appliances division orients itself at the preferences of their geographical areas. Two more heads are responsible for the two smaller business areas (small Appliances, Proffesional Products). I think it´s an extremely good idea to show the heads i.e the responsbile person for a business division. It gives the reader a feeling of safety. The Electrolux corporate culture in combination with a strong set of values form the core of the Group’s operations. Wherever Electrolux operates in the world, the company applies the same high standards and principles of conduct. Group 4, International Performance Management Page 8
  • 10. Electrolux Annual Report Analysis 3. Managing for Value Summary scoring 1. 2. 3. 4. 5. 6. 7. Financial Assets Physical Assets Customers People and Culture Innovation and Products Brand and Intellectual Assets Processes and Supply Chain Comprehensiveness 8/10 6/10 7/10 9/10 10/10 10/10 9/10 Accessibility 9/10 7/10 7/10 10/10 10/10 10/10 10/10 Financial Assets The financial assets look good. They have wealth of information, which means they are comprehensive and accessible as well. But there are some questions for example the rise in Goodwill in year 2011 as compared to 2010 is astonishingly high. Physical Assets Acquisition of Egyptian company Olympic group and Chilean company CTI. We do not get a very good idea of where the operations are located and how many factories, Electrolux has. They are only shown briefly in one chart in operations. We get to know the plants but not comprehensively. It is also not quite accessible, as one has to go through a lot of financial data to get their value. Group 4, International Performance Management Page 9
  • 11. Electrolux Annual Report Analysis People & Culture Group 4, International Performance Management Page 10
  • 12. Electrolux Annual Report Analysis An initiative called Electrolux Ethics helpline, a whistle blowing system is being started. They have also told about the current number of employees in each region. Though they say they promote a culture of innovation and diversity, no hard numbers are present, only descriptions are present but no concrete KPIs. They have told at length about the remuneration, fixed pay, variable pay, short term incentives, long term incentives, insurance benefits and severance rules. They also have an Employee engagement index, but have provided any data on that and only verbally told the results are positive. They also have lot of awards to promote sustainability, customer orientation, which is a good thing. It is both comprehensive and accessible. Customers We do not get to know about the customers explicitly. But most of the customers are retail and they describe about the markets and innovation. They also have a lot of feedback from customers. Most of the customers are retail and professionals such as restaurants, buildings etc. But customers are central to their strategy. It is not comprehensive and accessible though. Innovation & Products A new initiative called Innovation triangle in Group Management. They have given great details about the products, new ranges and new innovations. They have also talked about how the different products are faring in different markets. They also aim to provide best in class service. Brands & Intellectual Assets Group 4, International Performance Management Page 11
  • 13. Electrolux Annual Report Analysis They have started a lot of initiatives like Design lab, Vac from the sea, Innovative design and the Cube. They are getting constant feedback from consumer surveys for the designs they create. Also Cube is a restaurant which is going to promote the rich heritage. In addition Vac from the sea is a mission to remove plastics from the sea which shows they are socially responsible. Also the people, board of directors’ information is available. It is both comprehensive and accessible. Processes & Supply Chain We get to know a lot about the goals and objectives. Also we see how new processes will decrease cost and improve capacity. Group 4, International Performance Management Page 12
  • 14. 4. Performance Electrolux Annual Report Analysis Summary scoring 1. 2. 3. 4. 5. Risk Profile Economic Performance Segmental Analysis Environmental and Social Performance Accounting Policies Comprehensiveness 9/10 8/10 8/10 4/10 10/10 Accessibility 10/10 7/10 5/10 9/10 9/10 Risk Profile There is clear disclosure of current risk position in the notes section (Financial Risk Management, Accounting Principles, and Financial Instruments). A summary figure for exchange rate and raw material price risk follows: Economic Performance The Electrolux group gives along with its financial reports, an explanatory interpretation of all the critical items apart from the further information in the ‘notes’ section. Although this might be an exercise in painting a favourable picture of the group, it might help the retail investor make more sense of the reports. Also the impact of important events in the year on company finances is included in the report. The plus is that this is presented separately in a section on financial position as against in MD&A as is the norm. A breakdown of change in net assets over the financial year follows: Group 4, International Performance Management Page 13
  • 15. Electrolux Annual Report Analysis Segmental Analysis The annual report is formed as per the formal structure of subsidiary companies as required for tax purposes but each company may span multiple segments and these segments are ultimately responsible for operating performance. This information is in some detail disclosed towards the end in the ‘notes’ section instead of as a primer in a MD&A-like section. Moreover, on this pretext operating performance is but no financial information is provided as per segments. Nevertheless the mapping is clear and one can trace the revenues to different segments even though this analysis is divided geographical area-wise. An excerpt follows: Group 4, International Performance Management Page 14
  • 16. Electrolux Annual Report Analysis Environmental and Social Performance Electrolux is a case of integrated reporting where all relevant information on their social and environmental initiatives is part of the annual report. They are more focussed on environmental initiatives being an appliance company (high polluting effluents). The numbers are representative but apparently not exhaustive and as such, the section is a small part of the overall report. Yet some critical information like those on their sourcing practices and social contributions is provided. Peer comparison or a timeline format could have made this more comprehensive. Group 4, International Performance Management Page 15
  • 17. Electrolux Annual Report Analysis Accounting Policies (ethical) Differences in the Electrolux Group’s reports prepared as per IFRS, and those of its Swedish parent company, prepared as per Swedish GAAP could lead to several common liabilities being identified in such a way as to reflect favourably upon either entity’s financial position. There is surprising amount of clarity on this at the outset and all points of differences are clearly outlines such that the two statements can be reconciled. An outline of main differences as in the annual report follows: Final Conclusion Electrolux is ranked third in terms of quality of reporting by Deloitte in 2011. Our analysis reveals that they are not only very transparent in disclosing the company information, but they also do a great job of making it easy to understand for the layman investor and experts alike the specific picture of the company they want to portray. Group 4, International Performance Management Page 16