WHSmith strategy evaluation and selection

CEE HND Business Course Module: Course Title: Semester: Time: Unit 7 Business Strategy April July 2010 Morning Batch Thursday Assignment Title Strategy Evaluation and Selection WHSmith Tutor: Student: Hand in date: Ms. Uzma Sajjad Farooq Rashida Yvonne Campbell 10th June 2010 Assignment: No. 2 1 Table of Contents Assignment Task: WHSmith Case Study ................................ ................................ .............. 3 1. Identify some businesses from which the company withdrew and analyze the reasons why. 4 Table 1 ................................ ................................ ................................ .............................. 4 1.1 An In-depth Analyses regarding decisions of withdrawal: Back ground study ........... 4 Examine the various tables providing data on sales, profits, store numbers, floor trading space and numbers employed. What is your interpretation of these? ................................ .. 9 Table 2: Total Number of Stores, Retail space, News Distribution and Employees fro m 1997 to 2000. ................................ ................................ ................................ .................... 9 Table 3: Annual Turnover for Business Units 1999/2000 ................................ ............. 10 2. What are the arguments for WHSmith disposing of its News Distribution business? What are the arguments (benefits) for retaining it? ................................ ............................ 12 3.1 WHSmith News Distribution before the Joint -Venture with Tesco s........................... 12 Figure 2 ................................ ................................ ................................ ....................... 13 4. Examine why the company acquired certain businesses? ................................ ................ 18 Table 4 ................................ ................................ ................................ ............................ 18 5. Analyze market penetration and product development strategies? ................................ 20 Figure 5 Ansoff Growth Vector Matrix ................................ ................................ ............. 20 Conclusion ................................ ................................ ................................ .......................... 21 Recommendations ................................ ................................ ................................ .............. 22 Comparison of other Companies ................................ ................................ ......................... 23 Recommendation of other companies ................................ ................................ ................ 24 References ................................ ................................ ................................ .......................... 25 Website References ................................ ................................ ................................ ............ 25 2 Assignment Task: WHSmith Case Study Individually read the case study. Answer the following questions and perform its analyses: y Identify some businesses from which the company withdrew and analyze the reasons why. Examine the various tables providing data on sales, profits, store numbers, floor trading space and numbers employed. What is your interpretation of these? What are the arguments for WHSmith disposing of its news distribution business unit? What are the arguments for retaining it? Examine why the company acquired certain businesses? Analyze market penetration and product development strategies? y y y y 3 1. Identify some businesses from which the company withdrew and analyze the reasons why. Table 1 : WHSmith withdrew from the following businesses BUSINESS SOLD BUYER AMOUNT YEAR 1996 *Heathcote Books wholesale bookselling *Niceday Stationary John Menzies Undisclosed sum £142 million £1 million Guilbert of France *Paperchase (chain of 12 Graphite stores) Capital *50% share of DIY stores Boots 1997 The Wall (US music retail) Stake in Virgin Cinemas 1998 *Waterstone s Book store 75% Virgin Our Price music retailing Camelot Music Inc French Undisclosed sum Cinema Group EMI Group Plc £300 million Virgin Group £145 million £1 gift voucher (a loss of £63.5m) £28 million TOTAL £616+ million (Source of information regarding the amounts the businesses were sold for are posted under references weblinks) 1.1 An In-depth Analyses regarding decisions of withdrawal: Background study To conduct an in-depth analysis of Why WHSmith withdrew from the above businesses the following areas need to be understood: y SWOT analysis identification needs to be performed from the period 1996 to 1998 providing more details on the background to the decisions of acquiring and setting up joint-ventures and mergers for the above companies from which it withdrew. y Also a brief understanding of the leadership and power changes that occurred before 1996 contribute to the analysis of why WHSmith disposed of such businesses. As these changes also influence the direction and strategy choices m ade 4 by WHSmith during these years. Strategies such as Vertical Integration Merger these are Heathcote Books, Niceday stationary and Paperchase firms in the same industry. A strategic management tactical decision is to buy competitors that are selling similar substitute products or more premium products like Paperchase; by applying business methods and theories that examine the competitive market turning threats into opportunities and those opportunities into improved strengths of the organisations main core competencies. y The strategic decision and movement made by WHSmith is Horizontal diversification under which a firm develops or acquires new products that is different from its core business in WHSmith s case this is its DIY venture WHSmith core business is retail selling newspapers, magazines, journals, periodicals, books and stationary items and the more recent move to increase its product range of DVD s, CD s, Video etc. SWOT analysis of WHSmith prior to 1996 Figure 1 STRENGTHS of WHSmith Own Brand (quality & value) Positioning & Locations Turnover & Revenue Competencies: Books, Magazines, Stationary, Newspapers etc. Experience - almost 200 years Own publishing of Educational branded British national curriculum help and support books (good demand) Improved product range includes DVD s, CD s, Videos etc WHSmith Travel (Europe & US) OPPORTUNITIES of WHSmith Using strengths to overcome Threats and turn them into Opportunities. The Opportunities once dissolved into the organisation effectively should become part of the core strengths of the company. Using WHSmith Revenue to buy up competitors and integrate wholesale bookselling WEAKNESSES of WHSmith Competitors Up-market quality brand Differentiation Changing Leadership Power Lack of Focus Dull shops and representation of products Over staffed & little knowledge Already undertaken diversification too widely Lack of premium academic literature Ambiguous customer segment (who are the prime customers?) THREATS of WHSmith Political/Economic changes (Recession) Law changes in new legislation in 1995 -Net Book Agreement Legislation meant the lifting of fixed prices of books resulted in more Price Competition of books in the UK. Supermarkets expansion during the recession and new laws allowed them to undercut the traditional book sellers like WHSmith. Supermarkets large competitors with Sub-urban presence. Medium-sized competitors but with High St presence Such as Paperchase, Ryman s, Staples etc. B&Q and Homebase *Amazon 5 In October 1995 Bill Cockbu rn left the public sector Post Office and took his new position as CEO of the WHSmith Group. This change of leadership power led to new business strategies. At the time the group had a £2.7 billion turnover and 33,000 staff which run 549 W H Smith shops. It owned Waterstone's, Virgin Our Price (with a 75% share) and Britain's biggest newspaper and magazine distribution company as well. Despite its prominent position as one of the best known names in the high street, it is widely perceived to have lost its w ay in the fast-moving retail market of the '80s and '90s. A lack of focus on exactly what its W H Smith stores should be selling . Source: http://www.independent.co.uk/news/business/wh-smith 1.2 Withdrawal of Heathcote, Niceday Stationary , Paperchase and DIYstores: Possible Triggers The SWOT diagram indicates the reasons behind the purchasing of Heathcote, Niceday and Paperchase. It shows that at the time those strategic business choices were made so that WHSmith could improve and further strengthen its core competences, develop its products and offer more variety. These choices also helped to gai n more market share, reduce competition on the High Street and take advantage of wholesaling. WHSmith reacted to the uncontrollable external economic, political and legal factors by using its resources such as revenue, experience and employee resources to turn those acquired businesses into strengths. The aim was to position themselves competitively against the supermarket rivals. After spending an estimated £435 million to fund acquisitions and organic growth over the previous years, the company announced the sale of some of its largest noncore businesses and a refocusing on the traditional retail operations . (As the U.K. financial journal Investor's Chronicle put it .) Clearly Bill Cockburn had new strategies for WHSmith he became the new CEO during an economic downturn, WHSmith chain was suffering from a decline in sales/profits, the annual report for 1995 stated: dull and neglected stores, previous management neglected the core business and spent revenue on diversification ventures, resulting in 7.6% reduction in group profits; new laws affected price competition, increased competition from rapidly expanding large supermarket chains who were expanding into non food items such as stationeries, books, newspapers, videos, music CD s etc. During the time of the early 1990 s consumer patterns of spending behaviour had also changed mainly due to the recession and expansion of supermarkets. The UK consumer confidence was low, people were saving and eating out less and the job market noticed a change in the workf orce where people were taking on more than one job and housewives returning back to work. This all favoured and helped the boost in supermarket growth. People had less money and time to spend on the High Streets (partly due to the early closing hours). Ins tead people preferred to shop in the evenings after work at their more convenient local supermarket. In addition new legislation regarding trading ours was lifted and now stores especially supermarkets were allowed to operate on Sundays, public holidays and 24 hours. Consumers could now buy everything they needed from under one roof. All these factors su mmarise the reasons why WHSmith was losing sales and profit. For the fiscal year 1996, WH Smith posted a pre -tax loss of £195 million, the first loss in the 204 -year history of the company. 6 Unrelated Diversification DIY (Do It Yourself) stores. Wednesday, 12 June 1996 Boots and WH Smith finally ended their disastrous Do It All DIY joint venture yesterday. Boots has agreed to take control of WH Smith's 50% share of the loss-making business. Do It All was originally created by WH Smith in 1979 when the company acquired a DIY chain. 1990 it was merged with the rival Payless DIY chain, owned by the Boots Group. The combined group in which WH Smith and Boots both had a 50% share was rebranded under the Do It All brand. Fortunes did not improve, however, and in June 1996, after periods of substantial losses, WH Smith sold their share in the company to Boots for a £1 gift voucher, giving the latter full ownership. The chain employs 6,600 staff. The decision to walk away from the six-year partnership will cost WH Smith a total of pounds £63.5m. This includes £50m staggered payment to cover the cost of selling unwanted stores. It is also waiving £13.3m loan to the chain. WH Smith had invested a further £75m in the bus iness during that time in an attempt to restore it to profitability. It proved a financial catastrophe, consistently losing ground t o rivals such as B&Q-owned by Tesco and Sainsbury Homebase. The decision to end the venture is part of a four -month strategic review of the WH Smith retail empire undertaken by the new chief executive, Bill Cockburn, commenting on the Do It All decision, he said: "With hindsight, the venture was a disaster. But at the time of the merger the DIY market was booming and it looked like a good deal." (Source adapted from: http://www.independent.co.uk/news/business/wh-smith-pulls-out-of-doit-all-at-cost-of-pounds-63m-1336714.html) Related Diversification Waterstone s The chain was founded by Tim Waterstone after he was sacked by W H Smith. In 1989, W H Smith took a share in the chain, and Tim Waterstone sold out to them in 1993. It was clearly differentiated from the WHSmith brand in targeting the academic and serious reader. WHSmith took advantage of its strengths and benefited from horizontal integration. It was therefore a logical fit with the main WHSmith brand in much the same way that VW and Audi brands are owned by the same German car group but targeted at different cons umers. Branches of WHSmith and Waterstone were complimentary High Street brands with obvious synergies and economies of scale. In 1998, WHSmith sold the chain for £300m to EMI Group. WH Smith chief executive said the group had planned to float Waterstone's , but changed its plans after receiving "a firm offer at a good price". He added: "Waterstone is an excellent business and I think this is the best result for shareholders, staff and customers . We can now concentrate on developing WH Smith as a mid -market popular specialist retailer with core strengths in books, newspapers, magazines and stationery." (Source: http://news.bbc.co.uk/2/hi/business/59970.stm) 7 Summary of the Withdrawal Reasons y A new CEO meant new strategies to overcome the declining performance and focus of the core businesses. Disposal of Heathcote was mainly due to financial reasons: poor performance and cost of investment needed to maintain this side of the business did not meet its benefit. Heathcote had incompatibility issues with WHSmith. There was a need to improve net margins by increasing customer satisfaction and sales. Wholesale involves good efficient supply chains and logistics. WHSmith was unable to match its strengths to operate this business profitably. It can be argued that it was under performing that WHSmith did not report its turnover contribution to the WHSmith group in the annual report of 1995. Furthermore the amount Heathcote was sold for to the purchaser John Menzies is undisclosed. It was necessary to dispose of Heathcote. Bill Cockburn had new strategies for WHSmith apart from the disposal of unprofitable businesses; Cockburn had plans to improve the existing High Street stores giving them a new makeover and plans for growth through acquisitions. Both strategies are costly and with WHSmith making losses they need to raise capital to fund such ventures. The Disposal of Niceday stationary to Guilbert of France would provide a good return of £142 million. Those businesses that are not making sufficient profit for the company to achieve its long-term objectives would also be disposed (according to Bill Cockburn in a press release). Paperchase met this criteria and it can be noted that the little revenue contribution towards the Smith Group brought in by Paperchase was insuffici ent. The sale of Paperchase to Graphite Capital of £1 million is also a small sum for such a large company as WHSmith with a turnover of £2.7 billion. WHSmith needed help to reduce a £170 million debt left over from the company's previous rash of acquisitions. (source: www.answers.com/whsmith) The disposal of DIY was an inevitable decision that was perhaps overdue, the recession and the housing market d own-turn and negative equity experienced by the UK population would leave this sector of the market years to pick -up again. This decision made by Bill Cockburn was clearly due to financial reasons and it assisted with retrenchment. There was no longer any need to pay the 6,600 employees that was needed to run these stores. The exit barriers were high and this could be the possible reason for selling their stake for a £1 gift voucher to Boots. (Source: http://www.faqs.org/abstracts/Business-international/What-a-nice-deal-RBDC-digs-for-deal-andstrikes-it-rich.html) y y y y y The demerger of Waterstone's is consistent with the boar d's strategy of strengthening WHSmith's position as the leading popular bookseller, stationer and news and magazines vendor. The demerger will enable management to focus on the core W H Smith business. It is noticeable that WHSmith aimed to raise capital 8 through the demerger of Waterstone for various financial reasons. They had intended to float the company but were able to receive a good firm financial offer instead and therefore took this option to fulfil its objectives. y The capital gained from all the disposals would allow Bill Cockburn to continue with his strategies and a re-modelling program was launched, spending on advertising was increased, and the management took a more aggressive approach to promotions. Cockburn wanted to focus on WHSmith s strengths in High Street retail stores, since they are the key business profit areas. These have been neglected, lost direction/focus, reduction in sales and customer services need improvement. The key to rejuvenating the company, though, will be sorting out just what it sells in its 400 W H Smith high-street stores (the other 149 are in airports and stations). They provided the bulk of W H Smith Retail's £927 million turnover in the last financial year, but have recently suffered from falling profits (down 27% to just below £48 million in 1995/96) and a lack of direction. In Cockburn's own words But it is still hard to know what Smith's retail proposition is. Do you go there to buy newspapers, Books, Pens, Stationery, Videos or Music? It's no wonder that 38% of the people who wander into Smith's wander out again without buying anything . (source: http://www.managementtoday.co.uk/search/article/410297/uk-davidson-interview-bill-cockburn/) Examine the various tables providing data on sales, profits, store numbers, floor trading space and numbers employed. What is your interpretation of these? Table 2: Total Number of Stores, Retail space, News Distribution and Employees from 1997 to 2000. YEAR Total Number of Stores Total Retail Space Total Employees 1997 907 258.2 18,749 1998 1,159 337.3 22,661 1999 1,150 336.0 22,874 2000 1,239 339.9 22,018 7,906 News Distribution 8,467 7,873 7,648 Total Full/PT Employees (Source adapted from handout Exploring Corporate Strategy Exhibit 5, pg 6) 9 Table 3: Annual Turnover for Business Units 1999/2000 Business Unit Description WHSmith High Street WHSmith Europe Travel WHSmith USA Travel WHSmith Asia Travel WHSmith.Co.UK Hodder Headline WHSmith News Distribution Retail Outlets High St & Shopping Mall Retail UK Airports & Railway Stations Retail Airports & Hotels Retail Singapore, Hong Kong & Australia Online Retailing Service Book Publishing Newspaper, Magazine wholesaling, marketing & distribution TOTAL Annual Turnover £million 1,058 265 192 12 7 105 945 2,584 (Source adapted from handout Exploring Corporate Strategy Exhibit 1, pg2) 2.1 Table 2 Analysis The total number of stores includes the High Street retail stores, Travel stores in Europe, USA and Asia. Bill Cockburn s strategy was to dispose of business units that were un profitable and reinvest the income earned from the selling of those units to improve and concentrate on WHSmith s core businesses (High St and Travel). It can be noted from Table 2 that the store numbers have increased from 1996 to 2000 to meet Cockburn s objectives. While continuing with efforts to enhanc e the performance of the WH Smith chain he also moved quickly to use the proceeds of the divestments to fund targeted acquisitions . In March 1998 the Company acquired John Menzies' retail outlets for £68m, which for many years were the main rival to the company's small railway-station outlets. This purchase also cleared the way for W H Smith's retail expansion into Scotland. Prior to the takeover, Menzies' larger Scottish stores (carr ying a very similar range of products to High Street W H Smith stores elsewhere) dominated the market. WHSmith gained 140 retail units in England and Wales, which were rebranded under the WH Smith name, and about 90 stores in Scotland, which continued to use the John Menzies name under a license arrangement (there having been no WH Smith outlets in Scotland). WH Smith also bought the Internet Bookshop that same year, re -launching it the following year as WHSmith.co.uk, an e-commerce site selling books, CDs, videos, and DVDs. WH Smith also made a surprising move into book publishing during 1999, first acquiring Helicon, the leading U.K. publisher of consumer and educational reference material, and then purchasing Hodder Headline for £185 million. By becoming a content producer, WH Smith hoped to distinguish its retail chain from its competitors by developing proprietary products that would be available only through the chain. Hodder Headline had an educational publishing 10 division and this would help WHSmith t o improve its own brand titles and develop itself as a publisher. Furthermore this would also feed through to online content. Finally Bill Cockburn stressed that part of his strategic plans was to necessitate the restructuring of the organisation. In Tabl e 2 the figures from 1997 to 2000 shows the total number of employees shifted from 18,749 to 22,018, as the organisation expanded the human resources needed for this expansion also increased. However with any restructuring within an organisation especially during acquisition there will be a reduction in the number of employees. For WHSmith during the period of Bill Cockburn s leadership the reduction of employees was noticeable for those who operated in the News distribution sector and the change affected a mixture of full and part-time employees. The figures in 1997 are 8,46 7 and reduced to 7,906 by the year 2000. This was also partly due to the cost -cutting strategies at that time. These retrenchments were the decisions of Cockburn s strategy. Cockburn made other changes as well, including a workforce reduction of 1,100, the closing of the group's Sloane Square headquarters, and the writing off of a significant amount of stock at the WH Smith chain in an effort to narrow the offerings and free up space for more productive lines.´ (Source: http://www.whsmithplc.com) 2.2 Table 3 Analysis The above information and analysis concludes WHSmith s CEO Bill Cockburn had pursued his strategic growth plans and strengthening core business units through acquisitions of main competitors. A major strength of WHSmith (see SWOT diagram) is its locations. Since WHSmith had no presence in Scotland; therefore acquiring John Menzies allowed WHSmith to gain market share, growth, stores, selling space, employees and revenue. The number of total stores in 1997 was 907 and increased to 1,239 by the year 2000. Similarly retail selling space was 258 in 1997 and increased to 339 by the year 2000. Hodder Headline also contributed toward these figures. Growth is the key factor for the data presented in Table 2, as WHSmith acquired more businesses and ventured into new markets its indicators also raised. Table 3 represents the effects of these strategies in terms of profit. Following on from Bil l Cockburn s growth and strengthening strategies, he was determined to improve the turnover portfolio of WHSmith, due to the 1996 announcement of its first ever loss in its trading history of 204 years. Shareholders are one of the firm s major concerns. Increasing profits was a must. Combining the data from Table 2 and Table 3, it illustrates the company s movements had benefited from synergies. The improvement on its core business shows that in Table 3 it was responsible for the 1,058 million turn-over during the period 1999 -2000. Similarly Hodder Headline was responsible for 105 million turn-over during 1999-2000. The downside of Table 3 is its Asia Travel and online businesses. WHSmith diversified widely and expanded too quickly into new markets, the company s lack of knowledge and understanding in the Asia region shows in the turnover column in Table 3, although it obtained some revenue, it is a poor performance indicator when compared to the other business sectors. WHSmith online also indicates insufficient revenue. As technology and communication boomed during the 1990 s businesses exploited and took advantage of Internet opportunities in trading. When WHSmith launched there online service, it could be argued that it provided a unique offering, but they entered this market too late, bigger players like Amazon had already established and captured the majority of the online users in 11 this sector globally. They succeeded due to its distribution and storage facilities and specialised on core operation s that brought the bulk of revenue. WHSmith was unable to compete with Amazon. Table 3 is best summarised with reference to the CEO s statement: 'We have a tremendous strength', says Cockburn, 'in that our high street sites are very well located. High Street Retail has made further progress in its recovery plan with the focus on increasing profitability and improving cost control. Travel Retail has continued to build on its good first half trading results. In a challenging market, News Distribution has delivered a solid performance. The annual report announces that the strategic review 'prioritised the improvement of customer service, profitability, new margins and sales.´ (Source: http://en.wikipedia.org/wiki/W_H_Smith#cite) 2. What are the arguments for WHSmith disposing of its News Distribution business? What are the arguments (benefits) for retaining it? Up to this point WHSmith s core markets and strengths were divided into three main area s: y y y High St & Shopping Mall Retail stores UK, Europe Travel Retail stores News Distribution 3.1 WHSmith News Distribution before the Joint-Venture with Tesco s WHSmith News Distribution before entering a joint venture with Tesco s is best visualised using the SWOT diagram. The SWOT factors would change considerably when WHSmith enters the joint-venture. The Weaknesses and threats would no longer exist. There exist several reasons for retaining the news distribution business and it is best to identify the background to the merger from the perspective of WHSmith. The reasons can be identified on the SWOT diagram. From this analysis an understanding of the strengths of WHSmith s competitive positioning can be noted and therefore provide the main indicators that favour retaining the business over its disposal. 12 Figure 2 Strengths: y Market leading business y market share 35% y Newspapers 36% y It has provided good cashflow to the Group with an average cash conversion rate of over 100%. y Investments in systems of approximately £23m since 1998 provided enhanced customer service and new revenue opportunities. y 2004 first half performance profitability improved: trading profit margins increased from 2.5% to 3.0% between 2001 and 2003. y Cost control strategies, increased efficiencies and improved service. y Contract renewal with the major magazine distributor, Frontline, has recently been renewed. Weaknesses: y In 1998 it lost a contract of £6 mi llion. y 75% of turnover came from its longterm contracts. y 2000 growth in magazines slowed down. y Distribution is a major logistical exercise needs sophisticated updated technology and equipment y Timely distribution, not meeting sufficient quantities to match supply and demand y Newspapers have limited shelf-life. News this morning is history by evening y Retailers complained due to mismatch. £36 million a year lost Opportunities: y Improve Critical success path factor y Joint venture to improve resources and strengths y Venture to improve bargaining power with publishers and suppliers y Invest in current distribution system and sell off other business units to raise capital y Take Over of smaller distribution companies and regional distribution companies y Create more contracts with large and small publishers even at the local level y Move into more suburban, rural areas of the country to increase market share and growth Threats: y At the time their customers bargaining power was strong and pushed for extra discounts for bulk arrangements resulting in profit margins being reduced. y Dissatisfied customers threat of seeking alternative distributors y Regional Distribution companies y Local distribution companies y Competitors such as the large supermarket chains now selling and distributing newspapers and magazines y Economic forces y Internet trading, more online soft copies of journals, newspapers etc. 13 3.2 Arguments for Retaining the News Distribution Studying the SWOT diagram the arguments for retaining the business would be feasible after the joint merger with Tesco s, since the merger would eliminate the weaknesses and threats and as can be noted from the movement of the SWOT diagram the company would be able to maximise advantage of its opportunities and turn them into strengths. The main arguments to retaining the merged news distribution are: y The joint-venture with Tesco s created huge growth opportunities in resources, location and business network. An asset that all businesses would strive for. y The combined companies had the opportunity to become the single wholesaler to supply the UK retailers. y They benefit from in-house sales supplying their own retail businesses a double fold on profit. y The geographical locations coverage is extensive; the distribution would service the majority of the UK s High Streets via WHSmith and the suburban and rural areas via Tesco s supermarket stores. Therefore the distribution spread and reach is wide and varied. Excellent positioning and benefits to organisations, where previously distribution was restricted and now it can service the majority of the UK s districts. y From the stand point of the merged distribution, both partners are yielding strengthening power and acting as a monopolistic supplier-distributor of Newspaper and magazines. This is an advantage for any organisation. No business would dissolve such a position. y The News Distribution will gain combined human resources and experience which will result in specialisation. The ideology of reaching specialism is arguable better for the consumer. y Performing as one supplier and distributor allows the News Distribution to exercise more bargaining power with both publishers and customers nationally. y Another reason for retaining the merger is the advantage of economies of scale; this should in theory assist toward achieving cheaper prices to the end user. y The combined resources of already two large organisations indicates an increase in vehicles, storage space, equipments, technology and assigning employees to the task is maximising utilisation of the resources providing twofold benefits. There would also be job creations for new and more positions to operate the business. y Previously both Tesco and WHSmith lost s ales, now with more bargaining power they can set prices using monopolistic features to benefit from surplus (abnormal) profits to recoup lost sales. y Other arguments for the benefits of the business are its large customer base providing large profits Tesco owning 7% sales of £1.8 million of the newspaper and magazine market, while WHSmith owning 16% sales. This could prove beneficial for shareholders. 14 3.2.1 Summary of Arguments for Retaining the Business A summary of the main arguments for retaining the merged news distribution of Tesco and WHSmith is mainly from the perspective of the owners of this merger. The distribution sectors main advantages are best described on Porter s five forces: Figure 3 Five Forces Potential Entrants Blocked out by Tesco & WHSmith due to new entrants lack of: y Economies of Scale y Capital Requirements and set up costs y No brand recognition y Switching costs y Distribution Channels y Experience y Contracts & agreements with publishers and retailers Suppliers The Suppliers are the publishers of the newspapers, magazines journals etc. The suppliers bargaining power is reduced under the Tesco/WHSmith News Distribution as it is the main national distributor that can provide the fast efficient service due to all its resources If each individual publisher of supplies unites together they can achieve strong bargaining power Industry Competitors Tesco/WHSmith Regional & Local Distributors John Menzies Distribution (mainly in Scotland) *Little rivalry amongst competitors as Tesco/WHSmith is acting under monopolistic conditions Customers Under the Merged Tesco and WHSmith News Distribution customers would lose their bargaining power, as they are subject to one main suppli er. Such a service is not easily copied Customers are not able to bypass them If all the retailers unite and approach Tesco/WHSmith they will gain better bargaining power y Substitute No available substitute for this service if Tesco/WHSmith are dominating the market 15 The arguments for retaining the WHSmith News Distribution is assuming the benefits are valid after the merger with Tesco s had evolved. Discussing the arguments for retaining the business before the merger would have little benefits since WHSmith started to re ceive losses. On completion of the merger and the operation of the business would it then provide beneficial results for the companies and therefore from the organisations perspective is it worth retaining the news distribution for reasons mentioned above and summarised in Porter s five forces. 3.3 What are the arguments for WHSmith disposing of its News Distribution business? The main arguments for the disposal of the news distribution derive from the negative responses from the publishers, retailers, Newspaper Publishing Association (NPA) and Periodical Publishers Association (PPA). Other factors also contributed toward the arguments of disposal such as change of leadership, EC Law, Office of Fair Trading and members Parliament. The main points for dis posal are: y No market freedom in customer choice. y Independent retailers would loose out and be pushed out of business due to the monopolistic forces that the company can exercise. y NPA are external stakeholders and acted as a pressure group and reported the affects and outcomes of this joint -venture to members of Parliament requesting a block to the merger. y Regional distribution would be abandoned in favour of national distribution. y The deal meant that over 50% of the magazine distribution market would be controlled by WHSmith, leading to unfair competition. y The merger would eventually show an impact on small publishing houses and independent retailers. y Consumer choice would be restricted and customers will be forced to purchase the products from either large stores such as WHSmith and Tesco. An example of this can be traced back to the late 1980 s 1990 s during the expansion and growth of supermarkets, consumers saw less of the small retail shops in operation, as they were slowly eaten away by large supermarkets, the disappearance of the milk-man, local butcher, dairy shops, bakery etc. Supermarkets exercised price powers, to push out the many smaller competitors. y Smaller businesses are the main target sufferers, as they cease trading it also results in job loses for both the retailers and publishers approximately 6,000 8,000 retail outlets would be out of business. y Regional and local newspapers would be hit the hardest because they had contracts direct with retailers. y The Office of Fair Trading investigation would not favour the impact of the continuing power and surplus profits being enjoyed by the joint -venture and would disapprove of the unfair competition left available to consumers y The Daily Mail and Associated newspaper terminated two-thirds of the newspaper supplies with WHSmith as a result of expressing supplier power; WHSmith was not prepared for such a response and thus making a loss of £100 million from Smith s revenue. Such losses are view by management as unacceptable and would result in 16 ce s e e v e ec s F ce ce s e es e e e s e e e y Thre s rom Emap, BB s magazines, Frontline and Seymour also wanted to terminate contracts worth £500 million total value Leaving WHSmith to justify these results to the Board and its shareholders y Another major argument in favour for its disposal arose when disagreements from G& publisher of Prima and Best magazine and its publications were withdrawn from the shelves on refusal to sign a deal. y More pressure added toward the disposal when PPA searched an alternative hub for distribution with the possibility of a direct root from publishers to retailers omitting the wholesale-distributor. The PPA also focused on protectionism for 40,000 smaller retailers protesting for their fair trading rights. What initially appeared to be a beneficially monopolistic joint-venture for WHSmith with increased strengths and bargaining power over their suppliers (publishers . It was the reaction of the Suppliers in their withdrawal of product lines and loss of contracts costing WHSmith reduced revenue that caused the need t reconsider their joint-venture with o Tesco s. The already large successful publishers managed to use their strengths in their product brand titles together with unification in e ercising this bargaining power led to huge costs and profits. Other pressures from EC Law on competition of such mergers did not approve, the intervention of OFT, the PPA and the changes of ownership, Board members and CEO s, the strategies of the company constantly changing; these factors contributed toward the reasons for the disposal of the demerger. The News Distribution business of WHSmith can be plotted on the Boston Consulting Group Matrix to evaluate its position. 0378 ¥© ¢ ¥  ¤     ( @ © ¤ © & ¤    ) & A 9   ¥ A   %$ # "! ' e F e4 nM x Market Share Hi h Market Share Lo Market Gro th Hi h 9 @ Star WHSmith News Distribution postmerger experien ing monopolisti control Question Marks ? Cash Cow B @ Dog Large profit loss publisher bargaining power shifted the News Distribution to this gradient and then demerger C Market Gro th Lo @ News Distribution mo e to this gradient when publishers pull out of contract and product withdrawal ¡ ¡  £ ¥ ©   £ §     ©¨ § ¢¦¤ ¦¥ £ ¤ £ ¢     ¡ ¡ ¡   57 5 6 4 32 0 1 17 As a result, WH Smith now has limited operational synergies and the Board believes that there is no continuing strategic logic for them to remain part of the same group. Accordingly, the Board believes that it is now appropriate to separate the two distinct businesses into independently listed entities. This will allow both businesses to benefit from greater management focus on their respective strategies as independent businesses. As an independent listed UK retailer, the Board believes the WH Smith Retail business will also benefit from greater focus, enabling the High Street Retail business to continue the delivery of its recovery plan and the Travel Retail business to continue with its growth path . In 2006 the demerger took effect on 30 August 2006. (Source: http://www.telegraph.co.uk/finance/2936683/WH-Smith-demerges-its-news-distributionwing.html) 4. Examine why the company acquired certain businesses? Table 4 Year 1998 1999* Acquisition John Menzies retail chain of which it previously sold Heathcote to in 1996 Internet Book Shop Helicon Publishing an electronic publisher Hodder Headline Publishers (more academic) Wayland Publishing Limited (specialising in school books) The Benjamin Company Stores in the USA Hazelwood Enterprises Inc. Retail outlets in 71 hotels based stores UNS Hospital group limited (http://www.whsmithplc.co.uk/WHSPLC-IR-AR09.pdf) 2000 2007* Acquisitions should be considered as part of the overall strategy for any business in any sector. Acquisitions can be part of a strategy to: y Solve a problem y Growth y Diversification y Enter new markets y Develop new products y Elimination of competitors ALL RELATED TO PROFIT y Improve weaknesses and/or SUSTAINABILITY y Overcome threats y Maximise human resource expertise y Maximise tangible assets y Gain knowledge/skills in new products or services y Response to PESTLE factors y Enter new mature markets y Spread Risks 18 WHSmith had completed numerous acquisitions that date back to 1903 when it acquired its first printing works business. WHSmith main core business is retail and it had already diversified into publishing its own brand titles in line with the GCSE syllabus books, a range of educational books were available for 3 -11year olds and these were unique to the High Street. The company also produced other educational text books for home learning and support such as the Teach Yourself brand. In 1999 Chairman Jeremy Hardie stood down and Martin Taylor became Chairman. New leadership meant new strategies as can be noted from Table 4, within a short period of time from February 1999 to May 1999 Smith acquired three Publishing businesses. Acquisitions such as these provided Smith with the benefits of Horizontal integration the publishing side is complementary to the company s present activities. The reasons of which are listed above. These acquisitions also fit within the vertical integration method of acquiring businesses, as the publishing side means Smith would be its own supplier of certain books and distributor in the retail sense (it woul d supply its own published books to itself at the retail stores and online stores). The main reasons why WHSmith would take such a venture are to gain the following advantages: y It will secure the supply of components and materials and this would lower the supplier bargaining power y Stronger relationships with the final consumer y The would gain a share of the profits at all the stages of the value chain y It provides a more effective differentiations strategy y It creates stronger barriers to entry More recent acquisition has been identified in Table 4 year 2007, UNS Hospital group limited, reason why WHSmith has chosen this option as part of its strategy, is to maximise benefits of organic growth. This is a primary method of growth for many organisations for various reasons. It is achieved through the development of internal resources. This would strengthen and provide growth opportunities for WHSmith Travel business unit. WHSmith reported: We have developed a new hospital -specific format that takes traditional WHSmith strengths and integrates ranges tailored to hospital staff, patients and visitors. This includes core ranges such as books, news and magazines combined with a greater variety of lunch options, an improved convenience range and basic groceries such as bread and milk. We continue to see good organic growth opportunities in this channel via this wider category mix and new space. Travel achieved total sales growth of 8% and profit growth of 17%. To integrate acquisitions takes experience and synergies in order to reap benefits. WHSmith has managed this implementation of this strategy with little difficulty. UNS Hospitals trades as United News and has 72 retail units and 8 Caffe Nuovo coffee shops in 62 hospitals throughout the UK. UNS Hospitals has developed a leading position in the hospital sector and has a strong and experienced management team. WHSmith currently has 8 units trading in 7 hospitals and this acquisiti on significantly strengthens their presence in this growing channel. Exceptional integration costs will be around £1m . The acquisition of 80 UNS units have now been re-branded and the UNS chain is now fully integrated into their central functions, including all Head Office and field fu nctions, and all supply is now through Smiths distribution centres. The acquisition has resulted in WHSmith growth path into new Market Development benefits. 19 However, acquisitions can have a poor record of success if a lack of understanding and poor implementation tactics exist. The risk factors must be addressed and included as part of the strategy. 5. Analyze market penetration and product development strategies? One way of looking at risk is to use the Ansoff matrix. This was first published in 1957 as a way of categorising market strategies, but it has equal relevance when thinking about acquisitions. The acquisitions completed by WHSmith of the Travel business and Publishing businesses can be plotted on the Ansoff Matrix to understand how the organi sation utilized Market Penetration and product development strategies. WHSmith has over the years in their business trading practiced all the strategies under the Ansoff Matrix gradients. However the two main acquisition areas will only be addressed an d examined. Figure 5 Ansoff Growth Vector Matrix PRODUCT PRESENT NEW Market Penetration Product Development For growth or consolidation to WHSmith s Acquisitions of the maintain position or withdrawal Publishing businesses are practices of product development strategies. Market Development Diversification WHSmith s Organic Growth in acquisitions of UNS Hospital locations for the Travel sector of the business PRODUCT MARKET SHARE PRESENT MARKET NEW Related Vertical/Horizontal Integration Publishing Business acquired by WHSmith is an example of both vertical and horizontal integration WHSmith Organic growth for its Travel business sector adopts the Market Development strategies; the firm sought new markets for its current products. They identified new geographical areas and spread throughout the UK. They recognised the need to be selective in the type of products available. There was a need for Travel s stores sell a more tailored range of products than High Street stores, to cater for people on the move or in need of a convenience offer. Travel s typical customer has less time to browse than the High Street customer and is more interested in reading materials for a journey as w ell as purchasing food, drink and confectionery. Consequently, there is a limited demand for entertainment 20 and stationery products and the stock and format of each Travel store reflects this. They gained new distribution channels and were able to attract n ew customers. These methods of growth have supported WHSmith to allow them to offer there customers the best in the travel retail sector. (2 May 2007 http://www.whsmithplc.co.uk/WHSPLC-PR-020507.pdf) The acquisition of the publishers is adopting related diversification of both horizontal and vertical integration. The reasons for this have already been discussed previously. This strategic method allows the company to take advantage of the gradient product development. The rationale for such acquisitions was to strengthen the publishing stream of WHSmith s portfolio. Performing heavy investments of £6 million for Helicon publishing and £192 million for Hodder Headline. The purpose behind these two acquisitions allowed Smith to maximise its educational publishing division and develop itself as a publisher of mainstream books. The late 1990 s had experienced an explosion of Internet trading and in particular books with rival firm Amazon. Changing patterns in consumer behaviour with time constraints, moving toward a Greener world led to increased sales of E -Books, ENewspapers, E-Magazines etc. WHSmith need strategies to respond to these factors. The acquisition of Wayland Publishing would service this need. Hodder s knowledge, skills, resources and experience would also benefit WHSmith with their diversification strat egies; with their range of electronic books in conjunction with Helicon with the intentions to launch the first interactive encyclopaedia. The objective here would allow WHSmith to secure dominance of growth in the new markets especially online publication s. There are major benefits of the strategies associated to this gradient. Conclusion It has a history of acquisitions, diversification, expansion/growth, mergers and disposals ; thus providing WHSmith with profit and losses. Their acquisitions date back to 1903 when it acquired a printing company, th is has given them extensive experience in acquisitions and risk taking. They maintain core strengths in location and positioning choosing strategic localities since 1848 with its first bookstall at Euston railwa y station. Throughout the years it established its core business in newspapers, magazines, periodicals, books and later stationeries and their brand name was associated with quality. From the mid -90 s they took advantage of opportunities such overseas expansion. It started diversification strategies into Travel, joint-ventures in DIY, progressed with product ranges as technology changed and consumer interests moved towards the entertainment industry. The organisation matched the external environment and adjusted its products offerings. Later Economic, Political and Legal factors contributed to the reduction in performance. This was responsible for the price competition and the 1990 s recession mainly affecting WHSmith s DIY sector. The changes to top management leadership and strategy styles also contributed to the decreasing performance. The lack of good telecommunications, software information technology advances and logistical distribution weaknesses revealed the reduction in profits and in 1996 reporting losses for the first time. Strategies to diversify widely and quickly losing focus on their core business strengths left the organisation at a poorer competitive edge, which proved costly for WHSmith. Evidence of this is noted in the businesses it divested and demerged from. The ability to identify and employ the correct mixture of resources for their ventures and lack of forecasting has left WHSmith with only two major areas: Retail High Street Stores and the Travel Retail stores as prime drivers for generating profits. 21 Recommendations WHSmith is a company which in the face of falling profits began to expand in all directions and unsuccessfully squeeze their brand. Their return to their roots as described in the 2004 Annual Report now appears to be be aring fruit. The ideal strategy for WHSmith in the last decade would have been to focus on its core activities and increase efficiencies with new technologies, improve buying power, sell more higher margin items and follow their customers habits with sales of newer lines. WHSmith did not follow this path but instead decided to try to leverage its brand, stretching the brand as WHSmith described it , and expand vertically, horizontally and diagonally searching for new revenue. WHSmith should build on its position as the UK s most popular stationer, bookseller and newsagent by continuing to grow its strongly performing Travel business and delivering its High Street plan. Travel should focus on delivering value to shareholders through organic growth in its existing outlets, securing new contracts, trialling new formats, increasing average transaction value and making improvements to trading efficiency. They must invest where they will achieve a return on investment above their cost of capital. While external economic and other factors might affect them, they need to monitor the external environment more closely with contingency plans and adopt appropriate strategies. It is also important to respond to changes quickly unlike their response time to launch the online trading. The market was already mature by the time WHSmith entered this form of distribution. The key problem was expansion using various strategy methods without adopting the correct strategic plan and neglecting all other business for ces such as legal changes, recession, and industry bargaining power and consumer patterns. WHSmith needs to focus on their strengths, resources, employees, technology changes that can improve business activities, perform better speculation, forecasting met hods and political movements. For example, political movements such as the joining of the EU may affect businesses in various ways; there maybe tighter restrictions on trading or directives that lift restrictions in which case would open up opportunities f or more businesses. Organisations in the business world are moving closer to globalisation opening up the opportunity for more travel in some cases and due to modern information systems and sophisticated software less travel. However the travel industry h as seen an increase in travel over the past two decades. Therefore is would be recommendable for WHSmith to continue to improve and grow its Travel Retail stores and spread into new markets. Where resources prevent restrictions the idea of franchising should be considered. There are still opportunities to move into more travel areas such as the main motorways that link the UK s main cities together; these have every few miles service stations that already have the selling space. Smith needs to consider agreements with these companies such as RoadChef, Welcome Break, Moto; these are all located along the main M1, M62, M4, M3 etc. The opportunity for growth nationally is huge. Source: http://www.whsmithplc.co.uk/WHSPLC-PR231106Moto.pdf) Other new markets should be viewed as an international opportunity and aim to trial different operating models: directly run, partnership and franchise. 22 Comparison of other Companies The comparisons of the companies are regarding their acquistions with reference to the Ansoff Matrix. Market extension Through acquisition Tesco acquired T&S Stores a chain of convenience stores as a means of entering a new market sector, but using the same products it distributed in its larger stores. In Ansoff terms, this is a market extension strategy. The acquisition of T&S Stores enabled Tesco to start operating 800 convenience stores the day after the acquisition. Consider the alternative of organic growth, and the amount of time, effort and resource required achieving similar foothold and you can see how acquisitions can provide a shortcut to success. Market Penetration In the same sector as Tesco, Morrison s acquisition of Safeway represents Market penetration. Although this is intrinsically lower risk, it has taken several years for this acquisition to bear fruit, at least partly because the Morrison s management team underestimated the resources required to integrate the two businesses. Product Development Through acquisition is very common in the IT Industry and one illustration is Sage Software s development of accounting and ERP systems. Sage began as a provider of accounting systems for the smaller businesses, but through a number of bolts on acquisitions can now offer systems for businesses of many different types and sizes. Diversification This is the strategy with the highest risk. This was very common in the 1970 s and 1980 s. The Hanson Group, Williams Holdings and others acquires substantial, unrelated businesses. More recently, diversifiers have looked for some commonality of customer, product or service, positioning the strategy close to the very centre of the matrix. Such related diversifications are much more likely to succeed. Similarly The Virgin group are major advocates of diversification into unrelated businesses, from transportation, music, entertainments, drinks, wedding clothes and the list goes on. These are examples of strategic acquisitions completed by substantial companies. They specialise in bringing knowledge, skills and experience to the marketplace. 23 Recommendation of other companies Companies intending to practice acquisition strategies as a means of growth and profitability, the organisations must consider the aspects: y The acquisition must provide advantages in the product or service y Synergies must be identified y It should eliminate competition y Provide maximum utilisation y Obtains greater production capacity y Improve bargaining power y Benefit from economies of scale y Checks and monitoring of the external environment factors y Human knowledge and skills should be maximised y The pooling of cash/profit resources of both the companies in order to dissolve the acquired company the simulation process should be efficient and ef fective y The assets should be beneficial rather than costly y Innovation advantages y The chance of spreading risk y Improve overall strengths The incorporation of all the above recommendations should be a check list and included in the strategic planning process. Each organisation should decide the type of method it sees fit, that is related to the Ansoff matrix in either choosing one of the gradients or a mixture of the gradients in extension, development, penetration and or diversification. 24 References Humes, Christopher Brown, "DIY, Disillusionment, and Divorce," Financial Times, August 22, 1996 Bagnall, Sarah, "New WH Smith Chief Plans Strategic Review," Times (London), January 25, 1996. "Battle of the Newsagents," Economist, December 2, 2000 Smith, Alison, "WH Smith to End Distribution Fight," Financial Times, January 3, 2001 "Shelves Look Bare at WH Smith," Financial Times, June 24, 1997 Rees, Jon, "Can WH Smith Get Its Act Together ?" Marketing Week, June 2, 1995 Humes, Christopher Brown, " DIY, Disillusionment, and Divorce," Financial Times, August 22, 1996 Website References http://www.ukbusinesspark.co.uk/whsmitha.htm http://www.whsmithplc.co.uk/WHSPLC-PR-020507.pdf http://www.telegraph.co.uk/finance/2936683/WH -Smith-demerges-its-news-distributionwing.html www.whsmithplc.co.uk http://www.whsmithplc.co.uk/WHSPLC-IR-AR09.pdf http://www.alacrastore.com/storecontent/Thomson_M&A/WH_Smith_PLC_acquires_UNS_ Group_Ltd-1962010040 http://www.whsmithplc.co.uk/WHSPLC-PR-190308.pdf 25