Corporation Identification
With the new trends emerging in the international and domestic markets, corporations require outstanding strategies and strong structures to face challenges on new requests. Therefore, it is of great importance that organizations can find ways to extend and understand its products and services according to the new market trends (Jensen and Sandström, 2011). However, when business units of organizations fail to reach their projected performance, it is then when strategic directions should be reviewed and redirected to approach all the factors affecting it. In other words, business units individually need to develop strong and competitive strategies to stay competitive to its internal and external challenges in order to constantly achieve customer satisfaction (Wiersema and Bowen, 2007). Business units characterizes an overall impression of a diversified corporation. Consequently, corporations can then redesign their strategy based on the performance of the business unit, with decisive actions such as merging, acquiring, downsizing or selling in order to recover or respond to the market and gain greater market share (Haleblian et al., 2009). This report aims to analyze the competitive environment and corporate level strategy for Wesfarmers Limited. The research is based on scholarly journals and secondary sources. Section 1 will aim to identify the corporation with a diagram to represent the relationship of the strategic business unit (SBU) to the corporation. This report also aims to provide the summary for the business unit which holds the greatest revenue along with the study of its sustainable competitive advantage. VRIN model will be used to analyze the source of competitive advantage. PESTEL analysis will be conducted based on the industry they are in, followed by a SWOT analysis. Future strategic merger, acquisition or downsize will be recommended based on the all the analysis and the report will be finally concluded.
“Wesfarmers Limited (Wesfarmers or ‘the group’) is engaged in diverse business operations covering supermarkets, liquor, hotels and convenience stores; department stores; home improvement and office supplies; coal mining, chemicals, energy and fertilizers; and industrial and safety products. The group classifies its business operations into eight reportable segments: Coles; Home Improvement; Kmart; Target; Officeworks; Resources; Industrial and Safety (WIS); and Chemicals, Energy and Fertilizers (WesCEF). Wesfarmers primarily operates in Australia, New Zealand and the UK. It is headquartered in Perth, Australia” (MarketLine, 2017). Strategic Business Units (SBU’s) of this corporation will be studied and discussed in this report.
“Diversification is a corporate strategy which seeks to increase profitability through make and sale of new products or product line in the new markets having no interface with the existing market of company’s existing products” (Rumelt, 1998). Wesfarmers is a highly diversified and successful corporation. It employees more than 200,000, making it Australia’s biggest private sector employer. It ranks amoung the top-ten companies in Australia with businesses in retailing (Coles, Kmart, Target), home and office supplies (Bunnings, Officeworks), insurance, resources (coal mines), chemicals, energy and fertilizers (includes plastics), industrial safety, and more. The diagram below shows all the SBU’s relation to Wesfarmers corporation:
Diversification
Wesfarmers Limited presented a total revenue of AUD 68.4b at 30 June 2017 (Market Line, 2017) and the business unit, Coles generated AUD 39.2b (57.29% of the total revenue) and an increase of which shows that the business unit Coles, has been generating the greatest revenue compared to the rest and will be considered as the strategic business unit of the corporation. It was followed by Home improvement generating AUD 13.6b (19.84% of total revenue) (Wesfarmers Limited, 2017). However, the difference in the rate of return on capital employed (ROCE) decrease for both Coles and Home Improvement was more than double with a decrease of 1.5 and 3.6 percent respectively. This shows that Coles could sustain the impact on the decrease in ROCE better than Home Improvement. However, Chart 1 shows the segment result (EBITDA) of different business unit, which is a decrease comparing to other BU’s; projecting Coles to be a weaker BU to the corporation when comparing it to their main competitor Woolworths who broke its 7.5-year losing streak to beat arch rival Coles sales growth (Low, 2017). This suggests that Home Improvement has a higher segment growth in FY2017 compared to FY2016 and Coles has hit the lowest result in FY2017 after FY2013 while the rest of the BU’s projects a steady increase.
The ability gained through attributes and resources to perform higher through the ability gained through attributes and resources in the same industry or market is termed as competitive advantage (Porter, 1985). Organizations who are considered to be following a unique value creating strategy when the strategy is not followed by its current or potential competitors; and when competitive corporations are unable to follow its high-output strategy, it is termed as sustainable competitive advantage (Barney, 1991).
The four criteria of sustainable competitive advantage are; valuable capabilities that helps a firm to neutralize threats or exploit opportunities, rare capabilities that are not owned by the competitors, costly-to-imitate capabilities that can have a historical, social complexity and ambiguous cause and non-substitutable capabilities that has no strategic equivalent (Hitt, Ireland and Hoskisson, 2017). The data from the below table shows the outcomes from combinations of the criteria for sustainable competitive advantage in respect to the plans, strategies, contracts and agreements, acquisitions/mergers/takeovers that has been derived from (MarketLine, 2017).
Competitive |
Description |
Is the |
Is the |
Is the |
Is the |
Competitive |
Performance |
Advantage |
Capability |
Capability |
Capability |
Capability |
Consequences |
Implication |
|
Valuable? |
Rare? |
Costly to |
Non- |
||||
Imitate? |
substitutable |
||||||
? |
|||||||
2017 |
|||||||
Plans/ |
In June, the company planned to invest |
Yes |
No |
No |
Yes |
Partly |
Below- |
Strategy |
in Bunnings Warehouse stores across |
competitive |
average |
||||
the UK and Ireland over the next three to |
returns |
||||||
five years with GBP500 million. |
|||||||
Contracts/ |
Coles entered into a 10-year agreement |
Yes |
Yes |
No |
No |
Temporary |
Average |
|
Agreements |
with Citi, one of the leading global credit |
competitive |
returns |
to |
||||
card providers, to distribute Coles |
advantage |
above |
||||||
branded credit cards. According to the |
average |
|||||||
terms of the agreement, Coles will |
returns |
|||||||
continue to distribute credit cards under |
||||||||
its own brand. |
||||||||
Plans |
The group announced that it is |
Yes |
Yes |
Yes |
Yes |
Sustainable |
Above |
|
/Strategy |
evaluating all strategic options for the |
competitive |
average |
|||||
resources business with a view to |
advantage |
returns |
||||||
maximizeitsshareholdervalue. |
which |
|||||||
Wesfarmers is looking into a wide range |
reflected |
in |
||||||
of options, including operational and |
the FY2017 |
|||||||
divestment. |
||||||||
Acquisitions/ |
The group acquired Homebase, one of |
Yes |
No |
No |
Yes |
Competitive |
Average |
|
Mergers/ |
the largest home improvement and |
partly |
returns |
|||||
Takeovers |
garden retailers in the UK and Ireland, |
which |
||||||
from Home Retail Group. |
reflected |
in |
||||||
the FY2017 |
||||||||
6 |
2015 |
||||||||
Acquisitions/ |
Wesfarmers acquired a 13.7% interest in |
Yes |
Yes |
Yes |
No |
Sustainable |
Above- |
|
Mergers/ |
Quadrant Energy Holdings |
competitive |
average |
|||||
Takeovers |
advantage |
returns |
||||||
which |
||||||||
reflected |
in |
|||||||
the FY2017 |
||||||||
2014 |
||||||||
Acquisitions/ |
The group’s Industry segment acquired |
Yes |
Yes |
Yes |
No |
Sustainable |
Above- |
|
Mergers/ |
the Workwear Group of Pacific Brands. |
competitive |
average |
|||||
Takeovers |
advantage |
returns |
||||||
which |
||||||||
reflected |
in |
|||||||
the FY2017. |
||||||||
Contracts/ |
The group’s Resources segment, |
Yes |
Yes |
Yes |
Yes |
Sustainable |
Above |
|
Agreements |
Wesfarmers Resources, agreed to |
competitive |
average |
|||||
acquire Mineral Development Licence |
advantage. |
returns |
||||||
162 (MDL 162) from Peabody Energy |
reflected |
in |
||||||
Budjero, an Australian subsidiary of |
the FY2017 |
|||||||
Peabody Energy Corporation, a US- |
||||||||
based private-sector coal company |
||||||||
7 |
Contracts/
WesCEF division signed an agreement |
Yes |
Yes |
Yes |
Yes |
Sustainable |
Above |
||
Agreements |
to sell its 40% interest in the Western |
competitive |
average |
|||||
Australian-based industrial gas producer |
advantage |
returns |
||||||
and supplier, ALWA, and its associated |
reflected |
in |
||||||
interest in the Kwinana Industrial Gas |
the FY2017 |
|||||||
Joint Venture (KIGJV) to Air Liquide |
||||||||
Australia (Air Liquide). On completion of |
||||||||
the transaction, Air Liquide would own |
||||||||
100% of ALWA and KIGJV. |
||||||||
Wesfarmers agreed to sell the Australian |
Yes |
Yes |
No |
No |
Temporary |
Average |
||
andNewZealandunderwriting |
competitive |
returns |
to |
|||||
operations of its insurance division to |
advantage |
above |
||||||
Insurance Australia Group, an insurer |
average |
|||||||
with a portfolio of brands in Australia, for |
returns |
|||||||
AUD1,845 million |
||||||||
Coles formed a property joint venture |
Yes |
Yes |
No |
No |
Temporary |
Average |
||
with ISPT, a leading Australia-based |
competitive |
returns |
to |
|||||
property fund manager. As per the terms |
advantage |
above |
||||||
of the agreement, ISPT would acquire a |
average |
|||||||
75% interest in an initial portfolio of 19 |
returns |
|||||||
Coles-owned shopping centers for about |
||||||||
AUD400 million. |
||||||||
8 |
Operating environment of a firm directly or indirectly corelates to its external environment. They can derive conclusions that can lead to a more accurate strategic plan (Ketchen Jr and Shook, 1996). Areas of opportunities and skills can be identified and further explores the opportunities and threats (Yüksel, 2012). The strategic decision can be determined as the external analysis of the organization. The external analysis can provide a better insight on the performance of the organization can be better determined when having a clear insight on the external analysis (Santini, 2013). Developing internal skills is an integral part of sustainable competitive advantage and knowledge of the external environment aids core competencies and new capabilities (O’Regan and Ghobadian, 2004)
Corporation Revenue Centres
Porter’s PESTEL model was discovered to be used as a tool to analyze the external landscapes of environment in different aspects such as; political, economy, socio-cultural, technology, environmental and legal (Cook and Barry, 1995). The political aspect analyses the factors such as political system stability, relations with different regions, employment laws and trade regulations (Yüksel, 2012; Shabanova et al., 2015; Srdjevic et al., 2012). The economic aspect analyses factors such as; foreign investment, inflation, unemployment, energy cost, interest rate, long-term and short term impact on economic growth (Shabanova et al., 2015) The social cultural aspect analyses the social, cultural and demographics that includes lifestyle and education (Atighechian et al., 2016). The technology aspect analyses the areas where the corporation may have various positive and negative impacts on factors such as infrastructure, infrastructure activities, technology investment policies, and innovative technology (Aharonson and Schilling, 2016). The environment aspects analyses on the idea of the future sustainability of an organization, which also includes opportunities to tourism, weather, geographical conditions (Jondle, Ardichvili and Mitchell, 2013). If the corporation operates in multiple countries, it should analyze legal aspects and factors such as consumer rights, judicial system, laws and regulations of the operating country (Yüksel, 2012).
In order to adjust with the changes made by government relating to tax and other regulations as necessitated by the Australian Competition and Consumer Commission (ACCC), political policies and laws are required. Every state of the country have their specific laws which makes it necessary to recognize the respective differences while operating in different states. Similar to the case of USA and UK, Australia also has a variety of legal, regulatory and political practices.
The interference of the federal government have been witnessed a number of times in order to reduce the entry barriers and giving the consumers with more power in comparison with the two major supermarkets. When 20 cents discounts were being provided to the customers by Coles Express which was subsequently misleading the consumers, there was an intervention of the government. The changes introduced by government such as the $5 note resulted in significant costs for Coles due to the non- recognition of monetary value by self- checkout machines.
The ban on plastic bag enforced by the South Australian Government on all Coles Departmental Stores and Supermarkets necessitated the purchase of plastic bags by the customers in case they do not carry their own environmental friendly shopping bags. This ban on plastic shopping bags was not imposed by other states in Australia.
Source Of Sustainable Competitive Advantage
There is low unemployment rate in Australia which can further be reduced with the help of increasing store openings in Australia. The interest rates and inflation rate will contribute towards the buying power of the customers.
A vital role is played by trade and investment in the economy which has strong relationships with various countries for the purpose of ensuring the effective maintenance of partnerships and trade agreements. The exchange rates and taxes are considered to be important as most of the goods and products are imported. There is no volatility in the corporate tax rate which remained steady at 30% after 2006 (International Monetary Fund, 2017). The goods and services in Australia suffer from fluctuating tax rates from the past 10 years which have brought uncertainty to businesses. There is a stable trend in the taxes on international trade in Australia with a maximum of 2.52% and a minimum of 1.81% in the last year (International Monetary Fund, 2017).
The growth in Australian population has led to the increased demand for household goods. (Australian Bureau of Statistics, 2017). Increased demand for fat free foods and gluten-free foods has led to the requirement of adjustment in shelving within aisle for catering the shifting demand within business units that are responsible for selling food products.
Bunning made sustainability commitments by introducing campaigns and offering financial assistance. This includes garden workshops, project assistance and sausage sizzles and makeovers.
Priority is given to training and development programs for ensuring strong culture within organization and safe working environment for employees. Departmental stores such as Room to Read and Salaam Baalak are heavily invested by various community organizations overseas which focus on assisting children and families at the times of need.
The combination of digital and retail formats is allowed by business units into one which allows the organization to target larger market which in turn will also provide the customers with online shopping platform. Regular servicing, updating and maintaining is required by equipment that are utilized which includes self- checkout machines, computer units and testing systems. Performance of the business is impacted by the instant communication between consumers and business through social media.
Online shopping experience is provided to the customers by Coles which has changed the way in which goods are provided and delivered to the customers. Various electronic products and devices are offered by Bunnings which is important to the existing revenue. The Automatic Technology (ATA) performs its work with D&D Technologies for producing a system with the help of which remote access is provided to the garbage gates and doors. Sales can be improved through technological advances in products and equipment. The relationship of Bunning will get influenced with suppliers, employees and customers by technological innovation as it will improve transactions and communications.
Certain practices have been listed by Australian Government within retail industry such as process for waste management, use of plastic bags, sustainability reporting and recycling (department of industry and innovation). Environmental impacts are managed by Bunnings within its business operations.
Energy usage levels are reduced by Coles at specific petrol stations, supermarkets and stores for contributing to sustainable environment. This includes changed refrigeration type for reducing energy, solar panels usage and use of LED lights. The reduction in transportation trucks assist in contributing cleaner air.
There is very limited impact of the products of departmental stores on the environment. ‘Better Together’ program focuses on environment, people and working conditions. Global environmental danger is contributed by internationally sourced products and air pollution is contributed by transportation of goods.
Success of an organization depends on the wellbeing and health of the individuals. The implementation of Health and Safety Standards is necessary across all stores along with the entitlement of the employees to the policies of Fairwork Australia. The change in laws relating to Tobacco and Alcohol provides that it can only be used by individuals over 18 years of age. All the stores across the world has to adjust due to the change in laws of displaying tobacco.
The laws and regulations applicable to the wholesale and retail trade industry must be complied by Bunnings in electrical products, building supplies, hardware and floor coverings. Codes and safety standards are compulsory to be followed by Bunnings as regulated under The Australian Competition and Consumer Commission (ACCC). The products imported by Wesfarmers are subject to licensing and permits under the Australian Business License and Information Service (ABLIS). Australian national Fairwork and Health and Safety laws are required to be complied by Wesfarmers for all employees. Retail and wholesale trade industry also suffers from the application of taxation rules such as GST for export and imports.
Strengths |
Weakness |
Strong focus on Coles business boosting |
Significant reliance on the Australian |
the group’s top-line growth |
market |
Investments in Bunnings |
Product recalls could affect the group’s |
brand image |
|
Strategic options for maximizing |
|
shareholder options |
|
Diversification of portfolio through the |
|
acquisition of Quadrant Energy |
|
Energy usage levels are reduced by Coles |
|
contributing cleaner air |
Opportunities |
Threats |
Australian national Fairwork and Health |
Rational changes in the legal, regulatory |
and Safety laws benefits the wellbeing of |
and political environment. |
the workers |
Labor costs are rising every year |
The combination of digital and retail |
|
formats in retail industry boosts |
|
performance |
|
Priority is given to training and |
|
development programs for ensuring strong |
|
culture within organization and safe |
|
working environment for employees. |
Downsizing can be defined as the reduction in the operating costs of an organization by way of reducing the number of employees (Nelissen and van Selm, 2008). It occurs due the reason of deficient performance or poor economic conditions. It also occurs due to high expenditures and costs suffered by the company which necessitates reducing the number of employees so that costs can be lowered, and profitability can be maintained. It can also be a result of merger between two companies which requires reduction in the operating costs by reducing its employees (Brush, Dangol and O’Brien, 2012)
The terms mergers and acquisitions are considered as synonyms but have different meanings. Merger takes place when two companies are combined into one entity or when one company buys another company (Bris and Cabolis, 2004).
Acquisition always involves a purchase. The takeover of a company is also called acquisition when the existence of the acquired company comes to an end and a new owner is established (Itoh and Morita, 2016). Merger takes place between two companies which are of same size and agrees to proceed as a single newly formed company instead of operating with different owners. The manner of purchase also constitutes a difference between two legal figures. It means that hostile purchases are called acquisition and negotiations made in peaceful environment are called mergers (Eckbo, 2013)
Various recommendations have been made for future downsizes acquisition or strategic merger of Wesfarmers Limited business units. The company should analyze the reasons and improvements that can be obtained from downsizing, expanding or selling. Firstly, synergy should be looked for the company which will improve the performance and reduce the costs by way of combining business activities (Kumar and Bansal, 2008). Secondly, merger and acquisition will provide benefit of diversification to Wesfarmers which in turn will reduce the impact of industry performance on the profitability of Wesfarmers (Arikan and Stulz, 2016). Thirdly, the opportunity of expanding the market share is provided by merger by purchasing the business unit of the competitor for a price. The products and customers are kept by the acquired business unit (Hoberg and Philips, 2010). Some business units of Wesfarmers such as Home Improvement through which great profits were obtained on 30th June 2016 under Bunnings brand and Chemicals Energy and Fertilizers could obtain benefits of acquiring and merging with the distributors or suppliers. Costs can be eliminated with the help of buying them as the margins can be saved that were added to the costs by the supplier, known as vertical merger (Fronmueller and Reed, 1996). Some information should be taken into consideration at the time of taking the decision related to merger and acquisition. As an investor in a company, Wesfarmers should consider the benefits arising from the purchase. First step for consideration is valuation. The target company will be valued as high as possible from the seller’s end and at the lowest price possible from the buyer’s end. Therefore, knowledge regarding various methods should be obtained in order to make the proper assessment of the target company which includes replacement cost, comparative ratio and discounted cash (Ebner, 2016). Second step includes proceeding with an offer. After decision regarding merger and acquisition is taken by top managers, the starting of the deal should take place with tender offer. At this stage, it is recommended that Wesfarmers should function with investment bankers and financial advisors. The deal ends when an offer is made by both parties that satisfy both parties after negotiation of the demanded amount (Lai and Van Order, 2014). Scrutiny is also faced by some companies from regulatory bodies and this should be understood by the company. This happens in cases when big size of the companies enables them to create monopoly or a threat in the industry (Collan and Kinnunen, 2011). After the deal is finalized by the companies, payment is made through cash, stock or both.
Conclusion
Wesfarmers as a corporation have been able to sustain their competitive advantage through various unique strategies implemented through their business units including strategies that include low-cost and diversification of its products. Hence it has made itself competitive to its other competitors in the same industry. The revenue of the strategic business unit, Coles is the highest among all the other business but has a considerable low profit percent. The VRIN model analyzed what internal factors are valuable, rare, cost-to-imitate and non-substitutable for strategic options to maximize shareholder options. The PESTEL analysis could define the political, economic, socio-cultural, technology, environment and legal environments of the corporation to remain sustainable in the highly competitive market. The major strength of the corporation is its ability to strengthen the focus on Coles business as boosting the group’s top-line growth. The major weakness will be that it is significantly reliable on the Australian market. New technological advancements has given an edge to find new opportunities and the corporation should be aware of the increase in labor costs every year as it employees a large number of workers. On the whole, it is recommended for Wesfarmers to downsize Coles, diversify and acquire new product lines, and merge with partners in different parts of the world.
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