Does this acquisition fit both WHL and DJS? The Vision, Mission and Core Values
With the increasing competition, global businesses are finding it extremely important to adopt new strategies to sustain their competitive advantage in the market. Such was the case of Woolworth’s, South Africa when it agreed to acquire Australian based merchandiser, David Jones for two billion dollars(Harper, 2014). The present paper is a case analysis of the odds of success for both companies after the acquisition.
According to George Cairns, the CEO of David Jones, the proposal from Woolworths was persuasive, and it represented a substantial premium to the ‘intrinsic values, recent share prices, and broker valuations,’ showing that he is convinced the bid is advantageous. Nonetheless, it is important to examine the intrinsic values in depth before considering an acquisition.
Before any company acquires or merges with another, it is important to agree on certain issues concerning their strategic plans(Mergers, 2014). Additionally, it is important that strategic tactics be in line with their M&A tactics and on the dependence of various metrics to triangulate values, explain and settle on the conditions outspokenly(Sanjeev & Gupta, 2013). If the companies’ core values, mission, and visions are triangulated and aligned, then the acquisition is a good fit.
Woolworth’s vision has always been to be visible worldwide in all the department chain store within the fashion industry. According to the company’s management, the vision can be achieved through several ways including creating a larger brand in the southern hemisphere, expanding in an industry highly faced by local competition and doubling the number of departmental stores across Africa. On the other hand, DJS vision is to be the best department store in Australia. It is therefore important to define how DJS helps Woolworths double it merchandises in Africa, yet the company’s vision revolves around expansion in the Australian market.
The WHL was established with a mission to ‘deliver the best in convenience, value, and quality to the clients.'(Keith, 2012). On the other hand, DJS was founded with a mission to ‘sell the most exclusive products to carry stock that embraces daily wants of the consumers.’ The mission statements seem to align, as both companies are set to deliver the best to all their clients, making the acquisition a good fit.
Mergers and acquisitions will always be faced with challenges even when the mission and vision statements align(Sanjeev & Gupta, 2013). It is therefore important that companies strive to solve these issues by ensuring that the challenges are harmonized on both sides.
WHL’s and DJS’s Current Competitive Strategies
Competitive strategies of companies are best analyzed using Porter’s differentiation approach. Differentiation entails offering different products and services (Boehe & Cruz, 2010). Differentiation can be done sturdy internal skills or unique branding. The objective of this strategy is to ensure that most of the products offered by a firm are impossible or tough to duplicate.
David Jones is identical with development and panache. The company recognizes and embraces the importance of outstanding services to their clients. Before the acquisition, the company had already introduced new brands that are recognized globally, coupled with a loyalty program. This description shows that David Jones values differentiation as one of its key strategies. It can, therefore, be described as an upmarket merchandiser. One of the objectives of the organization has been to supply its customers with unique and quality merchandise, as reflected in their mission statement.
Nonetheless, differentiation strategy is not without challenges. One of the main difficulties associated with differentiation strategy is its inability to help organizational operations when the market is large. Additionally, research shows that it is difficult for fashion merchandisers to sustain a competitive advantage over their competitors in the long run. Furthermore, fashion merchandisers often face differentiation quandary. With the increase in both market share and competition in Australia, it is challenging for DJS to employ differentiation in retailing. The acquisition by Woolworth’s, therefore, puts DJS at a position where they can enlarge their market share. However, this might prove difficult since the organizations operate in different places.
Differentiation approach is evident at Woolworths. From the mission statement, the organization aims at creating quality and panache, which can only be achieved through the merchandise of unique brands. Woolworths further enjoys a competitive advantage over DJS since it has more store experience. Nevertheless, although both organizations embrace a differentiation approach, Woolworths has the vision to expand it further stores to the Southern Hemisphere and double its market across Africa. As discussed above, the differentiation approach is not ideal for companies that cover huge markets. Woolworths is therefore forced to amalgamate different strategies to sustain its competitive advantage in the long run. For instance, the company utilizes economies of scale to expand its operations in Africa. Economies of scale allow an organization to take advantage of minimum costs of production(Clark, 2010). For Woolworths’s, this economy of scale could be achieved by stocking large numbers of products to ensure that the company minimizes supply costs, thus increasing their overall revenue. Economies of scale, therefore, enabled multinationals to use the cost leadership approach.
Use of the Five Force Model to Analyze Reasons WHL wishes to Acquire DJS: Competitive Advantages for the Acquisition
Economies of scale also allow companies to sell its products to the clients at low costs(Clark, 2010). Woolworths seems to have embraced this; offering quality at a lower cost. Low costs allow the company to attract massive numbers of consumers, thus increasing the level of sales annually. Woolworths, unlike DJS, utilizes a combination of strategies to sustain its market share.
Use of the Five Force Model to Analyze Reasons WHL wishes to Acquire DJS: Competitive Advantages for the Acquisition
The Porter’s Five Model includes analysis of supplier power, substitutes, industry rivalry, purchasing power and the threat of new entrants(Zubin & Tultaev, 2014).
If Woolworths acquires the thirty-eight outlets run by DJS, it would mean that it gets the merchandiser-buyer power, translating to the ability to compete with both local and international rivals Australia is among the richest countries in the world, meaning that the household income is high, raising the level of demand for goods(Ahern, 2012). At the time of the bid, Credit Suisse Group AG noted that the Australia was the second richest nation in the world due to the low inflation rates at 2.5% and rise in merchandise sales, house prices and consumer confidence. Additionally, individual households tend to fall at a time of economic boom.
A raise in household incomes translates to low buyer bargaining power since the demand for good increases because the consumers have more money in their pockets, reducing their price sensitivity. High demand means that merchandisers make massive sales, increasing their profits.
High supplier bargaining power is often dangerous for a company which operates in an industry that is incapable of passing the cost burden to the consumer(Li, 2012). However, the fashion industry’s suppliers have a relatively low bargaining power. For instance, labor is readily available in the fashion industry, making it difficult for the suppliers to hike costs.
Substitutes
The threat of substitutes appears low in the Australian Fashion Industry. However, considering that individuals can still buy used fashion items or even make the items themselves i.e. ‘do it yourself’, the threat of substitutes has often been ignored(Pookulangara & Shephard, 2013). This is because Australians can still make fashion items without requiring expertise.
The fashion industry is very vulnerable to new entrants especially to the availability of cheap labor. In the fashion industry, labor is available for both the manufacturers and the merchandisers, making it difficult for established companies to sustain the cost advantage, which has increased competition for Woolworths as all the merchandisers can open and operate new stores. Additionally, Woolworths still faces competition from American and European countries. Nonetheless, due to variations in seasons in the northern and southern hemisphere is a major barrier to entry because summer in the northern hemisphere occurs when during southern hemisphere’s winter season, reducing competitors from the northern hemisphere.
Since barriers to entry are few, there are many competitors in the fashion industry. From the case study, the main local competitors to Woolworths include Kmart and Myer, while the global competitors include Arcadia Group Plc.’s, Topshop Inditex SA, Henness, Mauritz B and Zara, challenging the fashion merchandisers both in South Africa and Australia to work towards sustaining their competitive advantage For Woolworths, the large revenues ($2.16 billion) greatly helps in maintaining competition with the entrants.
Competitive analysis can be carried out using Porter’s generic strategy, Johnson’s Business Approach and merchandising. All the approaches are homogenous since they concentrate on the market and the cost. Woolworths attains several advantages from its acquisition of DJS including the current capability of Ian Moir in the fashion industry, increase in entry barriers for northern hemisphere competitors, auspicious seasonability that matches the fashion industry, the low level of buyer bargaining power in Australia after acquisition and expansion of its already large revenues.
The SWOT models explore the strengths and weaknesses (internal factors) and the opportunities and Threats (external factors) affecting an organization.
Strengths
One of the main strengths attributed to Woolworth’s is its ability to sell their products at a lower cost than most competitors, which has made it a leader in the industry. Acquiring DJS would further strengthen the company’s position since DJS is an already established brand in Australia and thus has a pool of loyal customers.
Weaknesses
The major weakness faced by WHLS that hinders its growth strategy is the impact by the external environmental conditions that hinder the corporation from expanding. Acquisition will diversify the risk of running the business in regulated environments in the long run(Meucci, 2010).
Opportunities
The fashion and the merchandise industries in Australia continue to grow especially due to the advancement in technology and the availability of cheap labor. Acquiring DJS gives WHLS an opportunity to expand its market share, thus increasing its revenues.
Threats
The main threat to the fashion industry is intense competition. Woolworths also faces competition from northern hemisphere fashion industries. The acquisition of DJS will increase the competitiveness of Woolworths, and it will be able to sustain its competitive advantage over its competitors.
The acquisition of DJS will improve Woolworth’s competitiveness both in Australia and across the world. Although DJS is based in Australia, the additional revenue made from the sales will allow the company to double its territory in Africa and open stores in various countries across the world because Woolworths gets 16% of its total revenue from Australia and thus a boost in Australian Sales would increase the profits.
Woolworth’s adopts various strategies to achieve its goals. Key among them is the cost-leadership approach, product proliferation, customer-focused development and strategic alliance.
As discussed earlier, Woolworths is one of the cheapest merchandisers in Australia and SA, offering their products at very low costs about their competitors. In addition to cost-leadership, the company also uses product proliferation/ differentiation which entails producing quality products that cannot be easily duplicated by competitors. Although the use of different strategies can be harmful to an organization and can lead to ultimate failure, this seems to be working for WHS, which has continued to expand globally over the years.
Woolworths used acquisition in this case because it would be able to combine strategic alliance approach with product proliferation. Strategic alliance allows a company to make extra profits which the company could not make otherwise while at the same time diversifying risk(Holmberg & Cummings, 2009). The acquisition of the 38- stores would enable Woolworths to make extra revenue, which it would use to expand its chain in Africa. Additional, acquiring DJS meant providing a new range of differentiated products to their clients(Meucci, 2010)which would increase the market share, thus seemed like a viable approach especially since the company had been successful when it purchased Dan Murphy’s Liquor Stores in 2006 with a similar objective.
Why choose to acquire DJS now? Is it a good timing for it to implement this acquisition strategy?
Woolworths chose to acquire the DJS at the time since the company was undergoing tough financial times, having made declining sales for 12 months consecutively. Furthermore, it would not be wise to lose a company that has already established its brand in Australia to one of the main competitors, Myer. The timing of the acquisition was right since the Australian economy was booming, meaning that the purchasing power was high; increasing the demand for products and thus Woolworths would make massive sales(James Bishop, Christopher Kent, 2013). Additionally, the interest rates were low, and thus the credit would be cheaper.
The competitors can adopt both external and internal growth strategies to sustain their competitive advantage. One such strategy is focus strategy (internal). Since it is hard for competitors to achieve low prices and assume the cost-leadership strategy used by Woolworths, the competitors can focus on particular components which could include a product, a market segment or even a specific technology(Ray Gehani, 2013). For instance, if a competitor approaches a focus strategy based on differentiation, it would mean that the particular product would be expensive in a particular place, attracting more revenue. Further, the companies can use innovative strategies to come up with more quality and differentiate products compared to those offered by Woolworths(Pantano, 2014).
Additionally, the competitors can also use the diversification strategy (external) where they can also acquire other companies in the same industry to diversify the risk(You & Daigler, 2010).
Conclusion
The main idea behind the acquisition was to expand in a market targeted by global competitors, key among them Inditex SA, Hennes and Mauritz AB. According to Ian Moyer, Woolworth’s CEO, purchasing David Jones would expand the southern hemisphere brand. Furthermore, the acquisition would not only increase its presence in the market but would also increase its buyer power to compete against other multinational competitors.
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