Business Deconstruced Assignment 2010

Table of Contents

List of Abbreviations

List of Figures

Executive Summary

1 Introduction
1.1 Company profile Avis Europe plc
1.2 Stakeholders and its importance
1.3 Legal Form
1.3.1 Limited Liability
1.3.2 Lifting the veil of incorporation
1.3.3 Corporate governance

2 Analysis of the financial strengths and weaknesses and proposing strategy
2.1 Horizontal analysis
2.2 Calculation and interpretation of four key ratios
2.2.1 Profitability – Roce
2.2.2 Efficiency – Asset turnover
2.2.3 Liquidity – Current ratio
2.2.4 Structure – gearing
2.3 Cash flow
2.4 Avis financial strengths and weaknesses
2.4.1 Comparison to Sixt Ag
2.4.2 Swot Analysis

3 New financial strategy
3.1 Current strategic focus
3.2 Avis new strategy
3.2.1 Ansoff Matrix approach
3.2.2 The Balance scorecard as a strategic management system

4 Bibliography

5 Appendices

III List of Abbreviations

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IV List of Figures

Figure 1: Avis Europe corporate rental revenue by country

Figure 2: Stakeholder groups

Figure 3: Mendelow’s power interest matrix

Figure 4: European Market share of car rental companies

Figure 5: Swot Analysis

Figure 6: The Ansoff Matrix

V Executive Summary

This purpose of this report was to analyse and evaluate the current and prospective financial positions of Avis Europe Plc. Methods of analysis include horizontal analysis, as well as key ratios.

Hence the extremely difficult economic environment in 2009, Avis reflects a good performance and held his position as market leader in Europe. The major results of the analysis indicate that Avis undertook enormous cost reductions by 15.63% due to lower revenue and volumes in 2009 in order to protect their profitability. Strong focus on cash management and cost reduction has lead to a structural lowering of its debt. Avis improved its leverage ratio by 9.39%, which is an important benefit from a lower bowering level and operated more efficiently in 2009.

The report proves that Avis prospects for the future look positive, especially due to its expansion in new markets such as China and its strong position and reputation on a global scale. With the implementation of the proposed new strategy, the future of Avis Europe plc looks very promising.

1 Introduction

1.1 Company profile Avis Europe Plc

Avis Europe Plc is a leading car rental company in Europe, Africa, the Middle East and Asia. The company offers its services through two globally recognised brands, namely Avis and Budget in more than 3,800 locations. The company serves over seven million customers across the network with an average fleet of 100,000 vehicles. It is headquartered in Bracknell, Berkshire and employs approximately 5,967 people (Data monitor, 2009). Due to the commercial ties with Avis Budget Group, as well as with the Wizard rental and reservation system, long term agreements allows Avis to utilize both names, brands and operating systems through master licensing agreements until 2036. The Budget named business is present in 3 continents and serves their customers through 1,000 rental locations in 65 countries. The Avis brand operates within a network of 2,800 locations in 109 countries through wholly-owned subsidiaries in 13 countries and franchisees in 96 countries (Avis Europe Plc, 2009, p. 10). Avis Europe plc serves individual, corporate and insurance/ replacement customers.

The five mayor markets France, Italy, Germany and the United Kingdom generate approximately 86% of the company’s revenue (Avis Europe Plc, 2010 [Online]).

Figure 1: Avis Europe corporate rental revenue by country

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(Source: Own illustration based on Avis Europe plc, 2009, p.11)

1.2 Stakeholders and its importance

Stakeholders in general are according to Freeman as quoted by Maurer (2007, p.62) “any group or individual who can affect or is affected by the achievements of the organisation’s objectives”. In order to respond to the different interest and needs of those stakeholder groups, the researcher emphasizes that they have to be identified first (Harringtion, 2009 [Online]). The power and interest of those stakeholder groups impact upon the organisation and how the business strategy develops.

Figure 2: Stakeholder groups

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(Source: Own illustration)

Avis’ stakeholders include shareholders, employees (including the management), customers, business partners, suppliers and the community. Indirect stakeholders, which also influence the organisation, could be special interest groups, such as environmental pressure groups or the government. These entire stakeholder groups impacts upon Avis’ business, its strategy and thus its performance.

In order to satisfy its stakeholders, Avis engages with them by different means. They aim to contribute positively to the quality of life in the communities where Avis is present and operates (Avis Europe plc, 2009, p.25), which is according to the researcher a convincing example. Furthermore, Avis monitors customer satisfaction mainly through customer surveys.

As this report provides information about Avis financial performance and position with a proposed financial strategy for the future, it is mainly directed to investors and shareholders. Shareholders are identified as shareholders if they at least own one share or stock of the organisation, thence they are owners of the company. Potential investors on the contrary require financial information in order to assess Avis ability to generate cash (Lehrich, 2009 [Online]). The author decided to apply the Mendelow’s Framework in order to emphasize why shareholders are so important within the company. Mendelow developed a framework which positions stakeholder depending on their power which they have upon the organisation and the level of interest, meaning the willingness to influence an organisation, e.g. supporting or opposing a particular strategy (Norton, 2008, pp.36-38).

Figure 3: Mendelow’s power interest matrix

illustration not visible in this excerpt

(Source: adapted from Norton, A. (2008) Integrated Management. Oxford: Elsevier Ltd.)

Avis shareholders need to be kept satisfied, consequently falling into category C. Basically, they are very passive concerning their level of interest. Nonetheless, if they are not satisfied with a particular strategy or situation, they can suddenly become key players and it is the Avis responsibility to fulfil their expectations. Hence the proposed strategy will satisfy the shareholder’s interests.

1.3 Legal form

The Companies Act of 1985 provides two main categories of companies, namely private and public companies.

According to the Companies Act of 1985, a public limited company is a company which is either limited by shares or limited by guarantee and has a share capital. In order to incorporate a company, which is in Avis case a plc, two legal documents need to be complete. The Articles of Association and the Memorandum of Association, which requires the name, the location of the company’s registered office, the objects of the company, its authorised share capital and the limitation of liability clause (Ashton, 2000, p.9). A plc has to have at least two shareholders, two directors, a properly qualified company secretary, as well as share capital of at least £50,000. There are number of other restrictions, which have not to be mentioned in this context according to the researcher. It can invite the public to subscribe for its shares or debentures. Everybody is allowed to acquire shares and can become a shareholder of the company. The main motive becoming a shareholder is sharing prosperity of the company.

1.3.1 Limited liability

Avis Europe plc is a public limited company, being a “body corporate” with a separate existence from its members (i.e. its directors). The organisation has a complete separate legal personality from that of the shareholder. This means it can sue or can be sued in its own name. Due to this separation limited liability is provided for its shareholders, directors and officers (Spedding, 2004, p.96). It is the company itself that carries out the business, hence resulting in unlimited liability of the company. The shareholder’s liability is limited to the money, which they have originally invested in the business. Limited liability reduces the risk with being in business, rather than leading to higher profit or return on capital. In the case of the company’s insolvency the shareholder’s personal assets are thus protected. According to Calder (2008, p.33) limited liability is crucial for individual shareholders as they are not liable. Without limited liability investors would not be willing to buy shares in companies, as they might lose everything in the event of a failure of the institution. The company on the other hand is fully liable for its debts (Sangster & Wood, 2008, p.67). The ultimate majority shareholder for Avis is s.a. D’leteren n.v., which is incorporated in Belgium (Avis Europe plc, 2009, p.56).

1.3.2 Lifting the veil of incorporation

The separation of the company and its members is also known as Veil of incorporation. Nevertheless, a number of circumstances exist that would give the court the power to ignore the fact that the company is a separate legal person. The court is capable of looking behind the legal “veil” that separates the company from its members. This is regarded as “lifting the veil of incorporation”. The identification of the circumstances when the “veil of incorporation” is lifted is really hard (Slorach & Ellis, 2007, p.47).

1.3.3 Corporate Governance

Nowadays corporate governance is critical for all medium and large companies. Corporate governance represents the value, moral and ethical framework under which companies operate and make business decisions (Spedding, 2004, p.320). Corporate governance is mainly concerned with board structure, shareholder reporting and executive reporting, the board of Avis is also responsible for managing the business, as well as controlling the risks to the company’s assets and trading future. Avis intends to provide an effective leadership by setting strategic goals and providing the highest values and standards (Avis Europe plc, 2009, p.29).

2 Analysis of the financial strengths and weaknesses and proposing strategy

2.1 Horizontal analysis

In order to find out about Avis financial performance, the researcher carried out a financial analysis to determine Avis strengths and weaknesses. Beginning with the horizontal analysis, the author will then look at the key financial ratios. This section is extremely significant for Avis’ shareholders, as the author emphasizes the financial situation. All the data and figures have been obtained from the Avis Europe plc Annual Report 2009 and can be found in the Appendix.

Avis revenue from continuing operations felt by 16.3 % from £ 1,668.2m to £1,395.5m compared with 2008. The operating costs have gown down as well by 15.63%. The operating profits have reduced by 28.1%.

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