Strategic Management Theory and Practice - David Jones Ltd - Case Study Example

Strategic Management Theory and Practice Your name: Institution name: Table of Content 1.0 Introduction…………………………………………………………….…………p.3 2.0 Is the acquisition fit both companies….…………………………….…………….p.4 3.0 Competitive Strategies…………………………………………………………....p.4 3.1 Woolworths Holdings Ltd………………………………………………p.4 3.2 David Jones……………………………………………………………..p.6 4.0 Porter’s Five Force Model………..……………………………………………….p.7 4.1 Threats of new entry…………………………………………………….p.7 4.2 Bargaining power of supply…………………………………………….p.8 4.3 Substitutes……………………………………………………………….p.8 4.4 Bargaining power of buyers…………………………………………….p.8 4.5 Competitive rivalry…………………..………………….………………p.9 5.0 SWOT model……………………………………………………………………..p.9 5.1 Strengths………..…………………………………………………………p.10 5.2 Weakness…………………………………………………………………p.10 5.3 Opportunities……………………………………………………………..p.10 5.4 Threats……………………………………………………………………p.10 6.0 Acquisition Strategy………….…………………………………………………..p.11 7.0 Defensive Strategies……………………………………………………………..p.12 1.0 Introduction The acquisition of David Jones Ltd has become a historic event for Woolworths Holdings Ltd and has marked a new era for the global retail market. The new strategy has been based on what customers want: world class service and high quality products (Martynova and Luc, 2014). Over the past years, the company has been committed to deliver most quality products and services to its customers, and create value for its shareholders. This deal has helped Cape Town-based Woolworths to “play on the global stage” and “breathe new life” into the David Jones’ brand at a time when apparel companies are expanding in Australia and South Africa. Woolworths Holdings Ltd is well positioned, with world class scale, competitive strengths in branding, and industry leading efficiency. David Jones Ltd product differentiation capabilities, global distribution network, and experienced management team gives Woolworths Holdings Ltd a powerful competitive position in international markets (Martynova and Luc, 2014). Woolworths Holdings Ltd strategy is to further expand its global operations in order to transform itself into a leading southern hemisphere retailer with enough scale to compete effectively with international clothing retailers. Woolworths’ acquisition is aligned to this strategy, enabling the enlarged group to create significant economies of scale and efficiencies that will over time deliver a material improvement in profitability (Ćirović, 2004). This acquisition has created a substantial southern hemisphere business with: the potential to generate substantial operational synergies; 1,200 stores across 15 countries; FY13A sales of over R51 billion; a tangible asset base of approximately R21.4 billion at FY13A; homeware and apparel contributing approximately 65% of combined group sales, based on management estimates; and approximately 43% of total sales generated in Australasia. 2.0 If the acquisition fit both companies The deal has created one of the biggest retail store firms in the southern hemisphere. For, David Jones Ltd, like other retail stores in Australia, the company was grapple with intensifying competition from foreign online retailers that have lured Australian consumers and weak consumer confidence while the Australian dollar strengthened (Ćirović, 2004). Overseas apparel firms like Hennes & Mauritz, Abercrombie & Fitch Co., and Inditex SA’s Zara have all opened retail stores in recent years and have provided competition against Australia’s retail stores and apparel companies (Mihajlov, 2007). The acquisition meant, Woolworths has brought enhanced value proposition, financial strength, additional capabilities and significant scale to accelerate these strategies, delivering on-trend product as part of the most innovative and exciting shopping experience in the apparel market. For Woolworths, this deal was closely aligned in terms of the retail chain target markets and the retail chain wanted to grow its southern hemisphere (Martynova and Luc, 2014). This deal has created one of the world’s largest with meaningful market of scale, Woolworths has been able to leverage on fashion seasonality that enhanced the firm’s sourcing capability (Mihajlov, 2007). The combination of David Jones and Woolworths provides advantages that will benefit both firms and their customers (Ćirović, 2004). This deal has increased market scale that have driven significant economies and efficiencies through enhanced international sourcing and the ability to leverage shared economies trends and seasonality, improving overall profitability and value for the customer 3.0 Competitive Strategies 3.1 Woolworths Holdings Ltd In the last two decade, Woolworths brought a lot of changes in its competitive strategies and these changes have made it to become South Africa’s number one retail supermarket. Today in South Africa, the retail sector has been the dominant force for more than two decades. Woolworths is also considered to be one of South Africa’s fastest growing retail supermarkets in the world (Ćirović, 2004). Interestingly, Woolworths’ marketing strategy has entirely relied on its ‘Royalty Scheme’ which has helped Woolworths to strengthen its market share year-on-year in South Africa. Woolworth’s has two types of customer i.e. internal customers and external customers. Internal customers are those customers found within the retail chain (Martynova and Luc, 2014). It about treating part of the organization as different entities, this means retail chain ought to communicate effectively with internal customers to maximize productivity (Mihajlov, 2007). External customers mainly consist of customers who buy different product directly for the Woolworths stores. They also consists those customers who order for products and services online (Gogan, 2004). Such customers expect to find most of the products they need in the Woolworth stores. They also expect to find a lot of variety in the store (Ćirović, 2004). This means Woolworths need to have many brands which its customers can select. External customers also have higher expectations for the company in the provision of quality products. The battle to win customers will increasingly be fought not just on value for money, convenience, and range (Todorović, 2010). But behaving responsibly, being good neighbors and seizing the environmental challenges. The strategic planning initiatives of Woolworths will have an immense impact on the retail chain financial planning. In the past years, retail chain was focusing on the pricing their products and services at low prices. Low pricing strategy has helped Woolworths to be a market leader within South Africa. Woolworths has set out an expansion strategy to grow its core business and diversify its new products and services in new markets. The strategy will enable the retail chain to deliver strong, sustained growth in the next 10 years (Martynova and Luc, 2014). Woolworths is planning to follow customer into large expanding markets in Australia, Central and Eastern European (CE) countries. Currently, there is high growth rate that have been experienced by the convenience market (Gogan, 2004). If Woolworths fail to pursue global opportunities in future the organization will lose domestic markets because the company will be pushed aside by competitive and strong global competitors (Todorović, 2010). Saturation of home markets, increased intensity of domestic competition and limited potential for domestic growth can result in a price war and this will put pressure on the profit margins of the company. 3.2 David Jones Brand ambassadors are an integral part of David Jones marketing arsenal. Over the years, the retail chain has put a human face to a brand’s values and this has been an effective way of creating emotional connections with its consumers (Todorović, 2010). For instance, having Kerr, a Victoria’s Secret supermodel has given the retail chain a leg up on other apparel firms in Australia. In addition, the apparel chain store has a stable of other brand ambassadors to appeal to specific demographics including newly-signed menswear ambassador Jason Dundas and Samantha Harris as youth ambassador. The David Jones loyalty scheme is tied to a branded American Express card. Customers with this loyalty card are able to earn points for every purchase they made at major petrol stations and supermarkets (Todorović, 2010). This loyalty program also offer holder of this card 48 months interest free, complimentary delivery and the option to delay paying for apparel (clothing) purchases over 250 dollars for 3 months. This scheme is one of the richest loyalty programs that are available in the world, because consumers can redeem their points anywhere not necessarily with their department stores. Licensing out the David Jones brand names has allowed the retail chain to generate revenue (Gogan, 2004). In addition, David Jones Store Card which offers delayed payment options and 48 months interest free along with deferred Christmas payment and invites to shopping events. But it does not have accumulated or currency point is one important element of a good loyalty cards. Lastly, David Jones recently appointed IBM to provide its omni-channel retail (OCR) platform, modeled on international department stores such as the UK’s John Lewis and America’s Nordstrom (Ćirović, 2004). This has increased the amount of product and services that are available for sale online has increase with David Jones aiming to increase its stock keeping units from 10,000 to 100,000 before Christmas 2013. 4.0 Porter’s Five Force Model Woolworth has a firm position with each of its ethnic group, target audiences and latest fashion (Mihajlov, 2007). As it is known that the market for the retail sector is at high demand level, and the fact that fashion in the retail sector is always updated and makes the retail sector act efficient and fast towards achieving and satisfying customers and consumers needs and wants (Ćirović, 2004). In this case, different competitors will try to cut their niche and compete against one another in order to be the market leader (Todorović, 2010). Woolworths has a strong brand and this has given Woolworths power in the retail market. 4.1 Threats of new entry This acts as a barrier to any new competitor trying to enter the market. Customers have already established trust and relationships Woolworths and this makes it difficult for a “newborn company” to challenge the status quo and to build a “name” and reputation for itself (Todorović, 2010). One major threat is the capital costs required to establish a new retail chain outlets, This requires the company to have millions and millions of dollars. Woolworths has enough capital that can enable it to meet its financial needs (Gogan, 2004). Another threat would be that Woolworth has already established the goal that would make the “new born company” into the retail market more of challenge to try and penetrate the industry (Mihajlov, 2007). Another threat is that Woolworths has economies of scale, which include, economic use of by-products, specialization of factors of production, growth of supporting facilities and services is encouraged by the retail’s large scale of operation (Mihajlov, 2007). Lastly, other threats that Woolworths has include cost disadvantages regardless of size, production differentiation, access to necessary inputs, access to distribution channels, switching costs and government policy. Overall, Woolworth is able to overcome these threats at same time, and use these threats to its advantage. 4.2 Bargaining power of supply Woolworth is a leading South Africa retail chain and has the power to exert prices from their supplier onto the sector by reducing the quality or raising prices of the goods or service (Mihajlov, 2007). This can do harm to their competitors or ‘newborn’ entrant. But Woolworth has good brand and has good heritage with its customers, this will be enough without exerting the power of the supplier. 4.3 Substitutes The “threat to substitutes” to Woolworths is low, if customers are not satisfied with price, the goods and services, there are several other retail firms at efficient levels within the retail sector. Direct competitors or substitute involved in this industry are Dimaru and Myer-Grace Bros (Mihajlov, 2007). Threats of substitutes or direct competitors will increase if Woolworths will have low switching costs. In addition, if the price of substitutes "sets the ceiling" for pricing, this will be serious if the price of substitutes is falling. 4.4 Bargaining power of buyers The “bargaining power of buyers” gives the consumers the power to purchase that they desire. If consumers have high bargaining power means reduced profits for the retail firm, concentration of buyers, volume purchases and even switching costs (Gogan, 2004). For example, if Woolworths bring out latest clothing line for the market price, and Dimaru come out with a similar clothing line for the same price, it will depend on the customer choices where they will want to purchase this clothing line. 4.5 Competitive rivalry This relates to the number of competitors in the market, in Woolworth case, there are not many in Australia’s retail sector, but the existing competitors such as Dimaru and Myer-Grace Bros are almost all equal in power and in size. In addition, there is production differentiation and switching costs, visibility in industry growth, corporate stakes, exit barriers and industry over-capacity 5.0 SWOT model 5.1 Strengths Woolworths has a strong brand image, which represents excellent value; also its brand is being associated with good quality and trustworthy goods (Fetch, 2001). In addition, the firm innovative ways has improved and increased the customers shopping experience, also, the capitalizing into insurance and finance have increased its revenue stream. Woolworth’s online business is the biggest online supermarket in Australia (Todorović, 2010). The retail chain was able to sold over 600 million dollars worth of products and services, the online business now operates in over 200 outlets in South Africa alone. Therefore, online business has a strong platform to increase the company’s revenue stream. In the past, Woolworths has successfully developed multi-format strategies, and these strategies have accelerated the company’s advantage (Fetch, 2001). In South Africa, Woolworth’s sales are reported to be 60 per cent larger than its competitors. Additionally, this has made it difficult for its competitors to challenge its scale. 5.2 Weakness Woolworths largely relies on its South Africa’s market, although its other markets globally have been growing, and in the next five years it is expected to contribute large amount of profits (David, 2007). In short term, over reliance of domestic market cannot be seen as a major weakness, but in future when there will be change in the retail market, it would have an effect on Woolworth’s balance of power and also affect it share market (Mihajlov, 2007). Currently the retail chain has large capital expenditure as a result of many investments in opening new outlets (Ćirović, 2004). Since these business expansions are aggressive, the company does not have enough free cash for any other operation. 5.3 Opportunities Woolworths’ beauty and health product lines continue to grow; currently Woolworth is the leading skincare product market in South Africa. Additionally, the retail store is also leading retailer in the baby product markets. At moment Woolworth has been able to open more outlets that deal with skincare and beauty products. Non food retail sector is expected to grow by 15 per cent in Australia over the next years. Woolworths will use its low cost structure and its improved merchandised skills to increase its growth (Fetch, 2001). Additionally, global markets have been projected to increase the company’s earning and scale, taking the retail supermarket onto the virtuous circle of growth. 5.4 Threats The structural changes in retail market has spark a price war, for example, Woolworths’ closes competitor have reduce their prices by up to 2 per cent, and Woolworth is likely to follow soot (Ćirović, 2004). The company expansions into new market has been expensive, entering into a new market with a new brand usually requires a lot of marketing and investment (David, 2007). In addition, the land prices which are low, also the company will incur heavy distribution and operation expenses. 5.0 Marketing Strategies Woolworths Holdings Ltd will is using the takeover of David Jones Ltd to challenge fashion retailers such as Hennes & Mauritz AB (HMB), Inditex SA (ITX) in the southern hemisphere. With combined sale of about 6 billion dollars, this merged group will have more buying power than Debenhams Plc and Abercrombie & Fitch Co. and will be the largest apparel store in Australia. By acquiring an existing global player, the Woolworths has gain market share rapidly, the company established distribution channels and solve problems such as lack of sales and market experience in global markets, acquisition represented the best strategic option for Woolworths (Ćirović, 2004). In addition, Woolworth executives believed they would be able save more than 500 million dollars annually in supply chain efficiencies by combining with David Jones (Mihajlov, 2007). Other benefits that appear to fit into the long-term strategy for Woolworths, including: Instant presence and coverage outside South Africa. 6.0 Acquisition Strategy This deal will help Woolworth compete against apparel chains including Arcadia Group Plc’s Topshop, Fast Retailing’s Uniqlo and Inditex’s Zara (Gogan, 2004). Northern-hemisphere clothing stores have been expanding their networks into Australia and South Africa and other new markets. Fast fashion retail chains are opening up new stores to capture market share and this has created direct competition between David Jones and the likes of H&M and Inditex. Woolworths has also taken advantage of the underperformance of David Jones. David Jones has not done a great job competitively in the last 8 years, the very fact that Woolworths is intending to acquire David Jones is because they actually believe that it can do a better job. Through this acquisition, Woolworth will have the opportunity to fulfill its company’s strategy and to achieve its global leadership in the clothing chain (Gogan, 2004). The widely recognized brand that David Jones from companies such as, Calvin Klein Inc, Marc Jacobs Inc and Tommy Hilfiger Corp. Lastly, David Jones acquisition will give Woolworths international awareness that could assist the company to establish a single global brand; Access to a highly experienced and skilled product development team and a portfolio of technology intellectual property; and Cost savings through economies of scale in best practice sharing and procurement. 6.0 Defensive Strategies As a result of the acquisition, competition between the products of the merging firm is eliminated, allowing the merged entity to unilaterally exercise market power, for instance by profitably raising the price of one or both merging parties’ products, thus harming consumers (Gogan, 2004). Coordinated effects arise where, under certain market conditions (e.g., market transparency, product homogeneity etc.), the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices (Gogan, 2004). As in the case of unilateral effects, the most common form of coordinated effects is in the case of horizontal mergers, i.e. mergers between firms active on the same market. Reference List Ćirović M. (2004), Mergers and Acquisitions,PROMETEJ, Novi Sad David, F.R. (2007). Strategic management: concepts and cases (11th ed). Upper Saddle River, NJ: Pearson Prentice-Hall. Fetch, J. (2001). How to carry out a SWOT analysis, New York: Sage Publishers, pp 23-45. Gogan A. P. (2004), Mergers, Acquisitions, and Corporate Restructurings, PROMETEJ, Novi Sad Martynova, M and Luc R 2014, "A Century of Corporate Takeovers: What Have We Learned and Where Do We Stand?" Journal of Banking & Finance 32.10, 2148-2177. Mihajlov D. K. (2007), Strategy and tactics acquisitions, Faculty of Economics Niš Todorović M. (2010),Business and financial restructuring, Center for Publishing Faculty of Economics Belgrade Read More