Harvey Norman Holdings Ltd Business Strategy - Case Study Example

Strategic Business Analysis: Case Study of Harvey Norman Holdings Ltd Name: Course: Institution: Tutor: Executive Summary The following report is based on a case study about Harvey Norman’s strategic business plans. Harvey Norman is an Australian retailer with overseas investments in a number of countries. Over the years, the company has cut a niche as one of the most successful and a leading retailer in Australia. Through a cost leadership strategy, the company has grown over the years to become a major player in the Australian retail industry and has capitalized on this position to expand into the international market. Although Harvey Norman is strategically positioned in the industry, the Australian retail industry is very volatile and highly saturated. This calls for the company to consolidate its strategic competencies in order to be able to survive future competition. Strategic Business Analysis: Case Study of Harvey Norman Holdings Ltd Company Background Harvey Norman Holding Ltd is an Australian retail company that grants franchise rights to independent business owners who retail products for home and office use. The main categories of products sold by Harvey Norman’s franchises include: electrical appliances; computer and communications; bedding and Manchester; small home and office appliances; furniture; carpet and flooring materials and lighting. Established in early 1960s, Harvey Norman has successfully expanded to become a household name in Australia. The company attributes its outstanding performance over the years to a successfully integrated franchise, retail, and property management system. As at January 2012, there were 216 Harvey Norman franchise complexes operating in Australia. The company’s retail offering in offshore markets has expanded rapidly in the past few years and currently the company has stores in New Zealand, Northern Ireland, Slovenia, Singapore and Malaysia. The company intends to expand its presence in Europe and Asia and has long term plans to open stores in North America (Harvey Norman, 2011). Harvey Norman has successfully capitalized on its dominant domestic market position, low gearing and strong financial stewardship to seize opportunities in the market to open more stores. Through acquisitions and subsequent branding, the company has bolstered its dominance in the local market and successful foreign market entry. Harvey Norman’s strategic objective is to maintain market leadership in the domestic retail industry and to establish market presence across the world. In its mission statement, the company is committed to delivering an innovative and best retail experience to its customers. The company implements this mission by offering affordable, high quality and reliable products which appeal to both low income and high income earners (Harvey Norman, 2011). Macro-Economic Analysis of the Australian Retail Industry Depending on how they respond to internal and external challenges, Australian retailers could be facing a difficult situation in the future. The macro-economic environment of Australia’s retail industry can be classified into external and internal factors influencing trends in the industry. The main external factors affecting the industry include: growth of online shopping; interest rate fluctuations; foreign brands entering the market; tightening capital markets and bank facilities and high cost of doing business in Australia. The main internal factors affecting the industry include resistance to change; too much inventory and proliferation of young management teams (PCI, 2011). By understanding the above factors, Harvey Norman can easily navigate the current and possible future economic challenges facing the Australian retail industry. For instance, growth in the popularity of online shopping has received considerable media coverage and is expected to grow by 6% per annum over the next few years. The stability of Australian dollar against major currencies, low cost technological advancements and the willingness of overseas suppliers to reduce profit margins have led to the increase in the popularity of online shopping. These factors have, however, created strong competitive risks for Australian retailers (Access Economics, 2003). In the recent years, a number of overseas brands have entered the Australian retail market including Costco, GAP, Zara and Banana Republic. Since these brands are widely known in the international market, they pose considerable threats to domestic retailers in Australia. Nevertheless, some of these overseas companies are faced with challenges of their own which allows Australian retailers to successfully compete with foreign brands. Interest rate fluctuations affect all businesses in different ways. When interest rates increase, consumers are left with less disposable cash. Rising interest rates place more pressures on retail owners. Moreover, Australia’s retail industry continues to deal with the general lack of confidence among investors. Since the global economic crisis of 2008, private equity firms and banks have been less tolerant to poor performing stocks and businesses. Private equity firms have become more risk-averse in most of their investment decisions ensuring that retail businesses seeking loans have solid foundation, valid business plans and experienced management teams. Banks which could previously acknowledge covenant breaches have strengthened loopholes and are set to withdraw support for non-performing retail businesses (ABS, 2011). The ever increasing cost of doing business in Australia has placed considerable pressures on retailers. These costs include highest rents in the world and high staffing costs. Minimum rate in Australia is between $13 and $20 while in the United States it is only $7.25. Additionally, import duty costs are very high and since Australia’s products volumes are lower than other countries, freight costs are higher. As such, Australian retailers, include Harvey Norman which boasts of stores in foreign countries, must be efficient in order to compete in the ever changing retail industry. This challenge is compounded by the fact that Australian retailers have historically resisted cultural change. For instance, most Australian retailers have been slow to move online and reluctant to move business headquarters to suburban areas. Moreover, small retailers have failed to make strategic alliances which are crucial for business growth. Industry Competitive Analysis: Porters’ Five Forces Analysis of Australia’s Retail Industry Harvey Norman is a public company and is listed on the Australian stock exchange. The company operates in the retail industry and its activities consist of integrated franchising, retail and property management. Essentially, Harvey Norman is one of the numerous players in Australia’s retail market which is dominated by four main categories of players: departmental stores; specialty chain stores, supermarkets and small retailers. Specialty chain stores hold about 40% of market share while departmental stores hold 35% of Australian retail market. The rest of the market share is dominated by supermarkets and small retail stores. As such, the threat of substitute products and the intensity of competitive rivalry are very high. Specific competitors of Harvey Norman in Australia include David Jones, Myer, Kmart, Retail Holdings and the Coles Group of companies (ARA, 2011). Generally, the Australian retail industry enjoys a very profitable market and is consistently supported by government subsidies and low tax system. This has resulted in many new entrants including foreign retailers entering the Australian market. Since joining the world trade centre, Australia opened its market to foreign investors by lowering tariffs on imported goods. This move significantly increased the threat of new market entrants from foreign countries. In fact, some of the companies that pose the greatest competition to Harvey Norman are foreign owned (mostly from Britain, Canada and the US). Unless the entry of new firms is blocked by incumbent firms, profits will tend to zero and the market will become unattractive (ABS, 2011). Regarding the bargaining powers of buyers and suppliers, major retail companies are concentrated in the Eastern coastal regions to take advantage of the large population in the region. Australia’s eastern region not only has a high concentration of potential customers but is also close to suppliers in North America. Because the retail industry has fully matured, consumers have a wide range of brands to choose from. Because large departmental stores have over the years offered reliable cost-efficient and high quality products, Australia has witnessed shifts in the economics of the retail industry. Generally, supermarkets and small retailers are fast losing to specialty chain stores and departmental stores (Access Economics, 2003). The pressure for local adaptation in foreign countries is very high. Although Harvey Norman prides itself of excellent customer service experience, the company needs to adapt to the local cultures in foreign countries. In addition, local laws and regulations need to be adhered to strictly, for instance, the company got a bad publicity in Slovenia because it failed to follow some important laws and regulations. Generally, Harvey Norman needs to implement a transnational strategy to help deal with local market conditions and keep prices low. Such a strategy will allow the company increase knowledge flow and learning of foreign markets (Access Economics, 2003). Internal Resources Capabilities and Strategic Competencies i. The company has successfully built new stores in foreign countries in Asia and Europe. The stores are being managed efficiently and are adapting to the local culture effectively. ii. Intangible resources: Harvey Norman has an exceptional brand reputation in Australia. This brand reputation has matured as a result of the company’s emphasis on excellent customer service experience and responsiveness to social and environmental issues. iii. The company has excellent employee loyalty because it allows its employees to take stock ownership and involve them in profit sharing. This makes employees to act like the real owners of the company (Harvey Norman, 2011). iv. Financial resources: Harvey Norman has plenty of financial resources and this is one of the reasons it is a leading retailer in Australia. The company uses its profits to sustain its global expansion efforts and to attract the most talented human resources. v. Strategic capabilities: Harvey Norman’s core competencies are its flexible supply chain management system and strong emphasis on customer value focus. The company uses a hub and spoke distribution system which allows it to minimize unproductive space by replenishing stock in stores quickly. The company’s state of the art information system tracks in store sales and transmits information to suppliers. vi. Harvey Norman operates as an aggregator, distributor and retailer of a wide variety of consumer goods. Because of its huge operations and financial size and the zest with which it negotiates contracts, Harvey Norman has established itself in a key position in the supply chain of its suppliers. This position has enabled the company to obtain superior price breaks relative to its competitors. Because of the efficiency of its distribution and store model, Harvey Norman has also achieved a well entrenched position with its customers (that of being the lowest cost consumer goods retailer). In general, the value that Harvey Norman provides is two fold: it provides a value of efficiency to its suppliers by operating as a large, stable channel for sale of goods. Secondly, it provides value to customers by offering an aggregation of a wide variety of consumer goods which retail at low prices (Harvey Norman, 2011). vii. Online presence: Harvey Norman has maintains a sophisticated online presence through which it interactively engages with customers in business-to-consumer transactions. One of the keys to success in this realm of online business is the ability to fulfill large quantities of orders efficiently. The company’s high efficient back-end fulfillment system allows the company to optimize large shipments of varied products to relatively few locations. viii. Harvey Norman operates a private satellite communications system thorough which it coordinates the activities of its franchises and manages the supply chain system. The communication system allows the company to accurately track sales, replenish inventory, process payments and manage human resources all in real time. All these internal competencies and capabilities if aligned well with the company’s strategic mission will enable it sustain competitive advantages in the market and survive future competition. The competencies will enable the company to adapt to local markets, locate opportunities in optimal locations and attain economies of scale. Analysis of Harvey Norman’s Generic Business Strategy For many years, Harvey Norman’s business model has been focused on cost leadership strategy. In fact, the company is domestically known as a cost leader for the following reasons: i. Harvey Norman has essentially, eliminated the middle man and brings products more directly to consumers. This allows the company to be competitive in pricing. ii. Its target market, low to middle income households is very large especially in rural and suburban areas. The company enjoys strong following on its retail outlets and this allows it to provide a wide variety of products including brand names in close proximity to customers. iii. The company has for a long time remained cost-effective by streamlining the sourcing process. Inventories in stores are owned by franchises thereby reducing the accounts payable. Once consumers purchase items, payment is immediately reflected to the suppliers and the suppliers takes prompt steps to adjust in store inventory accordingly. This process cuts out the need for the time consuming procurement process (Harvey Norman, 2011). iv. Harvey Norman has over the years accumulated so much power that suppliers are willing to cut costs in order to remain Harvey Norman’s supplier of choice. In general, Harvey Norman has chalked out an aggressive expansion plan to accelerate its global growth in the near future. The company aims to double its revenues in the next five years and plans to achieve this by opening more stores in foreign countries. While continuing its aggressive expansion into the international market, the company has launched various innovative programs to enable easy penetration of foreign markets (Harvey Norman, 2011). For instance, the company in 2007 began remodeling its foreign stores to fulfill the needs of customers in different countries. The company has long realized that the one-size-fits-all concept no longer works in the retail industry. In Australia, Harvey Norman plans to increase the number of stores and to introduce new product varieties. The company’s customer focus orientation emphasizes on the importance of offering high quality services at the best prices. In light of this consideration, Harvey Norman’s business strategy is strongly characterised by price reduction and maximum volume, thin margins and efficient distribution. References ABS (Australian Bureau of Statistics) 2007, Information paper: Experimental Estimates of Industry Multifactor Productivity, Cat. no. 5260.0.55.001, ABS, Canberra. Access Economics 2003, The impact of deregulating retail trading hours: Submission to the Western Australian review of retail trading hours, Report prepared for the Shopping Centre Council of Australia, March. ARA (Australian Retailers Association) 2011, Federal Minimum Wage Review, Submission to Minimum Wage Panel of Fair Work Australia, March. Harvey Norman financial report 2011, Available at http://www.harveynormanholdings.com.au/pdf_files/2011_Annual_Report.pdf PCI (Productivity Commission Inquiry Report) 2011, Economic Structure and Performance of the Australian Retail Industry. Productivity Commission Inquiry Report No. 56, 4 November 2011. Read More