GlaxoSmithKline plc is a public limited company incorporated on 6th December 1999 under English law. Its shares are listed on the London Stock Exchange and the New York Stock Exchange. On 27th December 2000 the company acquired Glaxo Wellcome plc and SmithKline Beecham plc, both English public limited companies, by way of a scheme of arrangement for the merger of the two companies. Both Glaxo Wellcome and SmithKline Beecham were major global healthcare businesses.
GSK plc and its subsidiary and associated undertakings constitute a major global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. GSK has its corporate head office in London. It also has operational headquarters in Philadelphia and Research Triangle Park, USA, and operations in some 117 countries, with products sold in over 140 countries. The principal research and development (R&D) facilities are in the UK, the USA, Japan, Italy, Spain and Belgium. Products are currently manufactured in some 37 countries. The major markets for the Group's products are the USA, France, Japan, the UK, Italy, Germany and Spain.
1.2 Relevance of working capital
Important theoretical developments in finance during the past decade have provided the potential for improved decisions in business organizations. Unfortunately, developments have not been uniform across all areas of financial decision making within and between business organizations. Working capital appears to have been relatively neglected in spite of the fact that a high proportion of business failure is due to poor decisions concerning the working capital of firms (Smith 1980a).
Beyond doubt efficient working capital management help the success of firms in generating value. Operations are results of inter-firm transactions. Therefore, managing working capital investments, finances and operations internally within firms and efficiency with which firms co-operate among them determine their end results.
1.3 The historical perspective of working capital management
Historically, working capital management has passed through different stages, mainly the control, optimization and value measurement. Working capital management originally started as a systematic approach of controlling the incoming, outgoing and remaining balances of cash, receivables and inventories. At this stage the main objective is that working capital is not misappropriated for personal benefits of those who are entrusted with its management. To this end both researchers and practitioners developed various control measures over the receipts and collections of cash, receipts and issuance of inventories as well as the increase of receivables through credit sales and decrease of receivables through cash collection.
Under the optimality management phase, the main focus was not only on the physical safety of working capital items but also on the minimization of related costs and maximization of related income. At this stage different models were developed to ensure that firms do not get problems due to a lack of Liquidity or incur too much cost by holding excesses of working capital levels. Under the control and optimality approaches the amount of accounting profit is taken as a main measure of managerial efficiency.
Under the value measurement approach working capital management concentrated on how to help managers in the creation and measurement of value without disregarding the above two objectives. Particularly, the cash flows approach is used as a main tool to measure the value created by firms.
1.4 Working capital management in developed and developing economies
The importance of managing working capital is magnified when it refers to firms in developing economies. These firms have many problems (McComick, 1999), such as being small in size (in terms of volume of investment and sales) and lack of resources. The list of problems is long and includes low levels of product and process technology, small product markets, lack of access to capital, lack of physical infrastructure and proper institutional framework. Because of their small size, firms in developing economies may quickly be exposed to problems of production capacity to satisfy the demand they may have for their products and this makes inventory management more relevant. Both human and financial resources of the firms in developing economies are also very limited. The human aspect refers to both skilled labour and knowledgeable, experienced and motivated management. Thus the problems of managing working capital investments and short-term debt may be increased by such lack of managerial knowledge. Financially, firms in developing countries lack the opportunity of getting the benefit of financial markets. Even if financial markets exist the small firms have less opportunity to go public and benefit from the financial markets as sources of finance. Even banks will hesitate to provide them with long term loans. Small firms are less known and less equipped with appropriate mechanisms that will help them to provide relevant information to potential financiers. Therefore banks consider loans to small firms as risky and expensive because it takes more time for a relatively less benefit. So, because of these reasons short-term debt management is even more important in developing than developed countries (Fishazion, Von Eije and Lutz, 2001). Proper working capital management is particularly important for the firms in developing countries in order to solve these problems. For example in Pakistan, India and Sri Lanka the firms have their major investment in working capital assets and they mostly use short-term debts as a main financing source. In the absence of long-term investment and capital markets, managers are moreover occupied with the short-term decisions affecting working capital. Therefore it is in working capital related activities that they are trying to capitalize in order to create value for the firms.
Major changes in the economic climate and regulatory environment have seriously altered the conditions for UK companies in recent years. The integration of additional countries in European Union is being accompanied by increasing competition and relocation of production and distribution capacities. Further aspects are country and sector specific economic fluctuations, increasing raw material prices as well as new regulations which have an impact on their financing structure.
2. Research Question & Objectives
2.1 Research Question
How GlaxoSmithKline plc manages their working capital?
2.2 Research objectives
To establish the current status of working capital management in GlaxoSmithKline plc.
To know what importance is ascribed to objectives related to working capital and how are those objectives implemented.
To analyze company-wide approaches which combine all company functions with each other.
To review the purchasing, sales and production processes and to measure are they still managed on an isolated basis as far as working capital is concerned?
To know who is responsible for managing working capital.
To examine the future challenges and to suggest some measures for improvements in working capital management.
3. Literature Review -Key Issues
The importance of working capital management is not new to the finance literature. Over twenty years ago, Largay and Stickney (1980) reported that the then-recent bankruptcy of W.T. Grant, a nationwide chain of department stores, should have been anticipated because the corporation had been running a deficit cash flow from operations for eight of the last ten years of its corporate life. As part of a study of the Fortune 500's financial management practices, Gilbert and Reichert (1995) find that accounts receivable management models are used in 59 percent of these firms to improve working capital projects, while inventory management models were used in 60 percent of the companies. Farragher, Kleiman and Sahu (1999) find that 55 percent of firms in the S&P Industrial index complete some form of a cash flow assessment, but did not present insights regarding accounts receivable and inventory management, or the variations of any current asset accounts or liability accounts across industries. Thus, mixed evidence exists concerning the use of working capital management techniques.
Theoretical determination of optimal trade credit limits are the subject of many articles over the years (e.g., Schwartz 1974; Scherr 1996), with scant attention paid to actual accounts receivable management. Across a limited sample, Weinraub and Visscher (1998) observe a tendency of firms with low levels of current ratios to also have low levels of current liabilities. Simultaneously investigating accounts receivable and payable issues, Hill, Sartoris, and Ferguson (1984) find differences in the way payment dates are defined. Payees define the date of payment as the date payment is received, while payers view payment as the postmark date. Additional WCM insight across firms, industries, and time can add to this body of research.
Maness and Zietlow (2002, 51, 496) presents two models of value creation that incorporate effective short-term financial management activities. However, these models are generic models and do not consider unique firm or industry influences. Maness and Zietlow discuss industry influences in a short paragraph that includes the observation that, "An industry a company is located in may have more influence on that company's fortunes than overall GNP" (2002, 507). In fact, a careful review of this 627-page textbook finds only sporadic information on actual firm levels of WCM dimensions, virtually nothing on industry factors except for some boxed items with titles such as, "Should a Retailer Offer an In-House Credit Card" (128) and nothing on WCM stability over time. This research will attempt to fill this void by investigating patterns related to working capital measures within industries and illustrate differences between industries across time.
Filbeck and Krueger (2005) highlighted the importance of efficient working capital management by analyzing the working capital management policies of 32 non-financial industries in USA. According to their findings significant differences exist between industries in working capital practices over time. Moreover, these working capital practices, themselves, change significantly within industries over time. Similar studies are conducted by Gombola and Ketz (1983), Soenen (1993), Maxwell et al. (1998), and Long et al. (1993).
In Asia, Pandey and Parera (1997) provided an empirical evidence of working capital management policies and practices of the private sector manufacturing companies in Sri Lanka. The information and data for the study were gathered through questionnaires and interviews with chief financial officers of a sample of manufacturing companies listed on the Colombo Stock Exchange. They found that most companies in Sri Lanka have informal working capital policy and company size has an influence on the overall working capital policy (formal or informal) and approach (conservative, moderate or aggressive). Moreover, company profitability has an influence on the methods of working capital planning and control.
In the Pakistani context, Rehman (2006) investigated the impact of working capital management on the profitability of 94 Pakistani firms listed at Islamabad Stock Exchange (ISE) for a period of 1999-2004. He studied the impact of the different variables of working capital management including Average Collection Period, Inventory Turnover in Days, Average Payment Period and Cash Conversion Cycle on the Net Operating Profitability of firms. He concluded that there is a strong negative relationship between above working capital ratios and profitability of firms. Furthermore, managers can create a positive value for the shareholders by reducing the cash conversion cycle up to an optimal level. Similar studies on working capital and profitability includes Smith and Begemann (1997), Howorth & Westhead (2003), Ghosh & Maji (2004), Eljelly (2004), and Lazaridis and Tryfonidis (2006).
Afza and Nazir (2007) investigated the relationship between the aggressive/conservative working capital policies for seventeen industrial groups and a large sample of 263 public limited companies listed at Karachi Stock Exchange for a period of 1998-2003. Using ANOVA and LSD test, the study found significant differences among their working capital investment and financing policies across different industries. Moreover, rank order correlation confirmed that these significant differences were remarkably stable over the period of six years of study. Finally, ordinary least regression analysis found a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policies. The current study further investigates the impact of the degree of aggressiveness of working capital policies on market measures of profitability i.e. market rate of return and Tobin's q as well as the risk of firms.
4. The Research methodology
Research is a process - a series of linked activities moving from a beginning to an end (Bouma and Atkinson, 1995). Bouma and Atkinson propose an outline of three phases in the research process. The first phase is the essential first step requiring a researcher to clarify the issues to be researched and select a research method. In this phase the researcher has to select, to narrow and to formulate the problem to be studied. Here the researcher has also to select the research design, to devise measures for variables, and selects the samples or the units of analysis. This is what this section on research methodology aims to achieve.
In selecting research methodology, author refers to Yin (1994). He suggests that a case study methodology is a preferred research approach where: the research question to be addressed is a type of how-why, control of the researcher over the research is none or very insignificant and the focus is on a contemporary phenomenon within a real life context. Because of these differentiating characteristics the case research method properly fits to the question and objective of this research. The question of this research is: how GlaxoSmithKline plc manages their working capital? It would be difficult to control the working capital management techniques that the firm uses. Management behaviour cannot also be manipulated in the same way as experiments are manipulated. The focus of the research is on finding contemporary working capital management, relevant to GlaxoSmithKline plc.
Case research studies can be exploratory, descriptive, hypothesis testing or explanatory in nature (Sekaran, 1992). An exploratory case study explores new areas of organizational research by making a complete investigation. It is used when the researcher does not know much about the situation at hand or when s/he has no information on how similar problems or research issues have been solved in the past. Before a model is developed extensive preliminary work is done in order to get familiarity with the phenomena and to understand what is happening. It is useful to get a good grasp of the phenomena of interest and for advancing knowledge through good theory building (Sekaran, 1992). A descriptive case study involves describing certain characteristics of the phenomena that the researcher is interested in. It is undertaken in order to ascertain and to describe the characteristics of the variables in the situation. An explanatory case study is concerned with explaining why the variables under study behave in a certain way. Hypothesis testing would be used to explain the nature of certain relationships or to establish the differences among groups.
This research would be critical and explanatory as well. First, I will review literature in order to search for what conceptual internal and external working capital management approaches are available. Secondly, I will search and explain what internal and external working capital approaches GlaxoSmithKline plc use. Finally, I will compare and explain how conceptual expectations and empirical findings differ and forward possible recommendations on how the GlaxoSmithKline plc can use internal and external working capital management approaches in search of creating value. Internally, we study the value creating characteristics of working capital. Externally, we assess business to business co-operation. As a background the research study uses management theories on working capital techniques (Scherr, 1989, Van Horne, 1998), value chain (Porter 1985), value network (Rappaport, 1986) and buyer supplier linkages management (Shank and Govindarajan 1993) in a business to business co-operation. It is based on the idea that, efficient working capital management of a firm's intra and inter-firm value chain linkages (Heck and Zuurbier, 1989) can reduce transaction costs (Williamson, 1986), generate more income and create firm value.
Traditionally, it is believed that objectives of managing working capital can be achieved by managing the internal affairs of a business firm. Managerial rewards were based on how firm managers organize their internal affairs. In the contemporary period of globalization, managers concentrating only on the efficiency of their internal operations forget an important element: that of managing the external linkages (Shank and Govindarajan 1993), which can make a difference in the race for business success. Management in general and that of working capital in particular, has become a two edged sword - internal and external. Internally, various working capital approaches are used to maximize the benefits and reduce the costs of working capital. Externally, the firm- supplier-customer linkages are managed such that the business to business cooperation results in synergy effects on firm value. This is achieved by reducing inter-firm transaction costs and creates firm value in a win-win condition (Rubin and Alvarez 1998).
5. Data Collection
As Yin (1993 p.32) noted one important aspect of a case study is that it enables the use of multiple sources of evidence converging on the same issues. Evidences for case studies may come from a number of sources (Yin, 1994b, p.78): documentary information, direct observation, physical artifacts, interviews, and archival records. Sekaran (1992) also adds the questionnaire as another alternative mechanism of data collection.
Documentary information - includes letters, memoranda and other internal documents, studies of a similar case, articles and information appearing in the mass media. Direct observation - refers to collecting data where the researcher makes a study on the case by direct physical observation of the subjects of the case. Physical artifacts as a data collection mechanism relates to collecting a technological device, a tool or instrument, a work of art, or some other physical evidence. Interviews are personal contact questions put to key respondents. Interviews can be structured or unstructured and can be conducted either face to face or by telephone (Sekaran, 1992). In the case of unstructured interviews the researcher does not approach the respondent with planned sequence of questions that he will be asking to the respondent. Its objective is to formulate a conceptual framework for variables that need further in depth investigation. Structured interviews are conducted when the researcher has a pre-determined list of questions and refers to this list while conducting the interview. Structured interviews are used when the researcher knows what information is needed. They can take the form of open-ended or focused interviews. Open-ended interview questions refer to respondents' opinion about events. In a focused interview the researcher follows certain set of questions derived from the conceptual framework of the case study. A questionnaire is a pre-formulated written set of questions to which respondents record their answers, usually from defined alternatives (Sekan, 1992). A questionnaire is suitable when the researcher knows what is required and how to measure the variables of interest and it can be administered personally or mailed to the respondents. Archival records include financial statements, customers' and suppliers' service records, organizational records etc. Archival records have the advantage of providing stable data, getting data not collected for the case study, exact information and broad coverage.
The sample of the study is GlaxoSmithkline plc which is the multinational company in UK. Because of their relevance to this research I will use archival records, interviews and questionnaires. Focused and open-ended interviews would be conducted with respondents (managers of firms, their suppliers and customers and also their major competitors). Interviews will target directly at the case study topic and to perceive casual inferences. Questionnaires will also be personally administered and collected from the managers. As archival records, the audited (as much as it is possible) financial statements of the firms for seven years (2002 to 2009) would be collected and used in this research. Taking audited financial data of five consecutive years would be the advantage of retrievability, unbiased selectivity (by both researcher and provider) and accessibility.
Time Management:
Below it is described that how I will complete my dissertation within the specified time period. This also shows how I will utilize my time to cover different areas of my study.
Section
% of time allocated to this section
Actual number of weeks
to work on this section
Introduction
10%
1
Literature review
20%
2
Research methods
10%
1
Data collection
30%
3
Analysis
10%
1
Conclusions and
Recommendations
10%
1
References/bibliography
And appendices
10%
1
