Introduction
The current position of Wesfarmers is largely due to the Global Financial Recession that threatened to grind its operations to a halt but thanks to the company’s broad conglomerates, it has managed to sail through, albeit with some financial shortcomings.
Wesfarmers’ acquisition in November 2007of Coles Group, which was one of the leading retailer chains in Australia, made it the biggest retailer and private employer in the country. However, the purchase, which was worth $19.3 billion, left Wesfarmers without adequate funds to operate its numerous businesses.
The global financial crisis further compounded the financial status of Wesfarmers between 2008 – 2009 (Huang, 2010).
Wesfarmers’ management and leadership style, however, has also enabled it to be the brand name that it is in the Australian markets. At corporate level, the company has directors who manage different functions and at the same time head various divisions.
This lessens the bureaucracy that would have otherwise existed between senior management, middle, and lower management levels. Moreover, the choice of these managers is made on merit and experience while underscoring teamwork for the success of the company. This paper, therefore, attempts to answer the CEO’s, Richard Goyder (Huang, 2010).
Macro-Environment Analysis Summary
Political/Legal Forces
The politico-legal environment in Australia provides a good ground on which Wesfarmers can thrive.
The Australian government has provided good infrastructure for movement and communication within the country and given Wesfarmers’ diverse businesses it can easily communicate with customers, make deliveries, and receive supplies for its stores. Although it is headquartered in Perth, Western Australia, it is able to easily conduct its business all over the country.
The sound infrastructure provides opportunity for Wesfarmers especially its online divisions (Coles online supermarket), which requires Internet thus making this division a viable project.
Trade liberalization has also opened up a wealth of opportunities in economies such as the European Union markets with un-entered and new target markets which the company can take advantage of (Mahadevan, 2004).
Economic Forces
With the global financial crisis behind it, Wesfarmers can exploit the budding post-financial crisis economy of Australia. The Reserve Bank of Australia has directed commercial banks to drop their lending rates from 10.2% in 2009 to 8.91% in 2011 (Juckes, 2009).
This is an indication of the brighter future for Wesfarmers because it can obtain loan cheaply to undertake its operations. Coupled with the low inflation in the country, people have money to spend and owing to Wesfarmers’ diverse businesses, at least one-half of its divisions must record increase in sales.
Equally important is the exchange rate against US dollar, which is AUD 1.08233 per USD. and AUD 1.35 per Euro (Juckes, 2009). International trade thus poses a great opportunity for Wesfarmers’ numerous businesses with relatively better returns.
Socio-Cultural Forces
The social dynamics of the Australian population provide an opportunity for Wesfarmers to expand its business and sustain its growth rate.
The company runs a total of nine divisions with various businesses and owing to the consumerist nature of Australians, they often flock retail stores to purchase food suppliers, home appliance stores, among others. In this era, the Y generation is the spendthrift customers who must be impressed by the products.
Quality issues emerge strongly and must be addressed by the company for it to cash in on this dominant group. Australians have become conscious about the effects of junk food and green energy both to their lives and to the planet.
Wesfarmers energy generating divisions face close down due to perhaps boycott if it does not generate clean energy in the near future. Similarly, the retail division that deals in human food must produce whole grain stocks and reduce the junk type in order to make the business sustainable in the long-run.
Technological Forces
Technology has an irresistible influence to the operations of a company’s activities. The advancement has been so rapid that a company that lags behind is working its way out of business.
The federal government in cooperation with state governments has ensured that there is sound infrastructure that facilitates the availability of technology in every corner of the country. Consequently, companies have adopted the use of technology to give them a competitive edge.
Wesfarmers can use its scarce resources to institute a management information system where technology is used to effectively and efficiently manage the daily operations of the company, more so given that it is a large conglomerate.
The acquisition of Coles, for example, enabled Wesfarmers to have an online supermarket where customers can place and pay for their orders upon delivery (Huang, 2011).
Environmental Forces
Issues dealing with environment issues have significantly affected the modern macro-environment for most companies, including Wesfarmers, in the negative. The reason being they have influence on the financial arena such as decline of profit for green and carbon compliance schemes deployed by the Australian government.
These forces, irrespective of the industry, are set on long-term basis hence their influence of a company’s growth cannot be underestimated.
As the cost of common resources increase such as the cost of crude oil, costs of other resources also rise thus increasing wholesale and supplier costs. Consequently, the potential profit and growth are reduced and felt by associated organizations (Baker, Graham & Harker, 1998).
Industry-Environment Analysis Summary
Threat to New Entrants
According to Porter, the threat to new entrants in any industry is caused by many factors that may shield a given company from cutthroat competition by new companies.
Wesfarmers is a large conglomerate with ten divisions and various businesses. It means that a company needs high economies of scale to enter such a business.
Moreover, capital requirements as well as switching costs are high thus complicating the entrance of new companies. Although access to distribution and government policy may encourage new entrants to venture into the business, the stakes are somewhat insurmountable (Hill & Jones, 2009).
Rivalry within the Industry
Wesfarmers operates in many industries and within these industries, rivalry is high. There may not be rivalry against Wesfarmers as a conglomerate but its divisions and businesses have rivals.
The high growth of industries such as the hardware industry, chemicals and fertilizer industry, electronic industry among others, has led to intense rivalry in the divisions within which these industries fall in Wesfarmers. The easy exit to barrier also makes the rivalry high in the mentioned industries (Hill & Jones, 2009).
Power of Substitutes
Just as in the case of industry rivalry, Wesfarmers feel the power of substitute products/services at divisional level where individual businesses respond differently. Price performance of substitutes relative to Wesfarmers’ often sways sales especially if the latter is high.
Customers’ switching costs and brand disloyalty increases the threat of substitutes if it is low and high respectively (Porter, 2004). For example, the Bunning business unit of Wesfarmers that deals in electronics for home improvement and office equipment has the products of Woolworths to reckon with in the market (Huang, 2010).
Bargaining Power of Suppliers
Wesfarmers has numerous suppliers who make deliveries to its various divisions. The bargaining power of suppliers will be high when they are few but as it can be construed from the case study; Wesfarmers reduces this bargaining power by contracting tens of thousands of suppliers for the purposes of growth and sustainable development (Huang, 2010).
Therefore, the high concentration of suppliers makes it difficult for them to wield power over Wesfarmers.
Bargaining Power of Buyers
There is a real threat of bargaining power of buyers for Wesfarmers due to their concentration in comparison to the industries’ concentration. Although, Wesfarmers deals with thousands of clients, there are also rival companies that operate in the same industries hence giving buyers considerable bargaining power.
Buyers have no switching costs at all and can easily change their stores. The absence of threat to backward integration, however, enables Wesfarmers to regulate this bargaining power (Porter, 2004).
Internal Analysis Summary
Wesfarmers is the leading business conglomerate company in Australia with numerous divisions and businesses. By 2009, it had nine business divisions after acquiring numerous companies.
The company’s financial performance of the years 2008 and 2009 attests to Wesfarmers’ solid financial status leaving its closest rival by a wide margin. In 2008, for example it collected $50,982 million worth of revenue while in 2009 the figure went down by $17,398 due to global financial recession (Huang, 2010).
Tangible Resources
Tangible resources of Wesfarmers comprise the physical plants and equipment that it controls; technological infrastructure; financial status; and organizational culture and management (Harrison & John, 2009). Wesfarmers thrives in acquisition of other businesses hence has a strong asset base.
The ten divisions of the company have numerous plants and equipment that are under its control. It uses these plants and equipment to produce quality products and provide services that enables it to distinguish itself from the rest.
The financial status of Wesfarmers has not been healthy since the end of global financial recession of 2008/2009. The purchase of Coles Group in 2007 at the cost of $19.3 billion left the company in debt making it difficult to wade through the murky waters of recession (Huang, 2010).
However, with the latter gone and banks resuming lending at fairly affordable interest rates, Wesfarmers will be able to turn its businesses around and achieve targeted results.
Intangible Resources
Wesfarmers has a wealth of intangible resources that comprise its human resource that is well trained and disciplined. With a staff of about 200,000, the company must nurture and earn the loyalty of its employees.
Top managers, for example, must attend the Harvard Advanced Management Program before taking office (Huang, 2010). Until recently, the reputation of Wesfarmers has been good, in fact, it was ranked very high courtesy of its high standard of corporate governance and economic performance.
Finally, Wesfarmers is known for making strategic alliances with other companies preferring their acquisition. The company acquired Western Colleries, Federation Insurance, Coles Group, among others. This has enabled it to acquire its position countrywide as the leading conglomerate with many divisions and business units in Australia.
Gaps and Current Strategy Analysis
Macro-Environment
Wesfarmers corporate strategy of enhancing growth through acquisition is considered to be in line with forces of the macro-environment. The company has forestalled further acquisitions due to the effects of the 2008/2009 global financial crisis and it is currently battling to offset its liabilities and integrate Coles Group within it.
The recovering economy of Australia is projected to continue in the next few years before it finally stabilizes. During this recovery process, Wesfarmers can seize the moment and restructure its capital structure. The low inflation rates and affordable lending rates offered by commercial banks are economic stimuli that the government is putting in place to enable firms to recover.
Industry Environment
Wesfarmers has dominated the industries where it operates thanks to its large conglomerates. The trend in these industries, however, is characterized by intense competition, high bargaining power of buyers, low supplier power, high threat of substitute products, et cetera.
Wesfarmers’ business strategy can be said to have influenced some of these forces to stand as they are at present. To this extent, it suffices to say that Wesfarmers’ business strategy is congruent with the industry-environment.
Internal Environment
Analyzing the internal environment of Wesfarmers, it emerges that the company has a strong tangible resources that can sustain its growth and development. The management style and the organization culture are some of the areas of competencies that give it competitive advantage over other players in the industry.
The organizational structure allows for ease of interaction between lower level management and senior management hence enabling adherence to corporate strategy at operational level (Huang, 2010).
Moreover, the four elements that drive Wesfarmers’ organizational culture: shareholder focus, growth philosophy, accountability, and climate; facilitate the achievement of its corporate objective.
Richard Goyder’s worry of what corporate strategy to use to enable Wesfarmers to sustain its competitive advantage can be answered in Trevor Eastwood’s objective that catapulted the company to Australian Stock Exchange market more than a quarter-century ago.
He should therefore, concentrate on the use of return on equity and return on capital to set targets for each division and measure the performance accordingly.
After setting these performance-based targets, the business unit should be allowed to formulate its strategy to achieve the target, as characteristic of Wesfarmers (Huang, 2010). However, the divisional managers must be responsible for the outcome of such strategy as consistent with the spirit of accountability.
Recommendations
Wesfarmers will need to borrow money from the commercial banks and pump it into the businesses in order to turn Coles Group around.
Given that the return on capital for the group’s business units are low, Wesfarmers senior management team should invest in these business units by allocating a proportionate amount of capital with reasonable disregard to its non-viable current capital and investment allocation policy (Huang, 2010). In fact, it is high time the company abandoned this policy and replaced it with the Igor Ansoff’s matrix model (PP, 2002).
It is recommended that the company maintain its diversification strategy, which has seen its brand in almost all industries in the Australian market. Wesfarmers is able to cash in on all market segments using this strategy hence expediting the process of achieving its corporate strategy.
At present, it should stop making further acquisitions and concentrate on the ones it has in order to get the best out of them. The secret of managing the big conglomerate lies on the two of the company’s four-pronged approach of its organization culture: philosophy and accountability.
While the company’s philosophy focuses on managerial and employee behavior, accountability ensures the autonomous operation of business units with decision-making responsibility and accountability (Huang, 2010).
The company should make e-business a major component of its businesses instead of dedicating it to a single business unit, Coles Online.
The world has gone global and many customers are increasingly to online shopping and therefore Wesfarmers should guarantee its existence by establishing a strong Internet business network in all its business units.
Furthermore, the management information system of the company is not well established and given the system’s importance for managers, Wesfarmers should make a priority.
The strong communication infrastructural network will facilitate Wesfarmers’ exploitation of the Internet revolution (Li, 2007).
With the Internet revolution and well established infrastructure in place, Wesfarmers should now go global. The macro-environment has provided trading blocs such as the EU with a total of twenty-seven countries and still expanding, which the company can seize as trade partner besides dominating the domestic industry.
In fact, a robust turn-around of the entire company would dictate that once considerable financial base has been established, branches should be opened in these countries to enable it meet its corporate objective, which is to maximize shareholder’s equity (Huang, 2010).
Conclusion
Wesfarmers is a big conglomerate that operates in different industries in Australia as a result of its diversification. Its success has been partly due to the strategy of acquisition and partly due to sound management. Although it was affected with 2008/2009 global financial crisis, it did not collapse.
The external and internal analyses have revealed the gaps and influenced recommendations that need to be worked on to enable the company to continue growing.
References
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Huang, X. 2010, Case 3: Wesfarmers in 2010. Edith Cowan University.
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Li, F. 2007. What is e-business?: how the Internet transforms organizations. New York, NY: Wiley-Blackwell.
Mahadevan, R. 2004. The economics of productivity in Asia and Australia. New York, NY: Edward Elgar Publishing.
Porter, M. 2004. Competitive strategy: techniques for analyzing industries and competitors. New York, NY: Free Press.
PP (Perseus Publishing), 2002. Business: the ultimate resource. Detroit, Michigan: Perseus Publishing.