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CEE – HND Business

Course Module: Unit 7


Course Title: Business Strategy
Semester: April – July 2010
Time: Morning Batch Thursday

Assignment Title
Strategy Evaluation and Selection
WHSmith

Tutor: Ms. Uzma Sajjad Farooq


Student: Rashida Yvonne Campbell
Hand in date: 10th June 2010
Assignment: No. 2

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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: Background 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 from
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

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Assignment Task: WHSmith Case Study

Individually read the case study. Answer the following questions and perform its analyses:

 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?

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1. Identify some businesses from which the company withdrew and
analyze the reasons why.

Table 1: WHSmith withdrew from the following businesses

YEA BUSINESS SOLD BUYER AMOUNT


R
1996 *Heathcote Books John Menzies Undisclosed sum
wholesale bookselling
*Niceday Stationary Guilbert of £142 million
France
*Paperchase (chain of 12 Graphite £1 million
stores) Capital

*50% share of DIY stores Boots £1 gift voucher (a


loss of £63.5m)
1997 The Wall (US music Camelot £28 million
retail) Music Inc
Stake in Virgin Cinemas French Undisclosed sum
Cinema
Group
1998 *Waterstone’s Book EMI Group Plc £300 million
store
75% Virgin Our Price Virgin Group £145 million
music retailing
TOTAL £616+ million
(Source of information regarding the amounts the businesses were sold for are posted under references web-
links)

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:
 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.
 Also a brief understanding of the leadership and power changes that occurred
before 1996 contribute to the analysis of ‘why’ WHSmith disposed of such

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businesses. As these changes also influence the direction and strategy choices made
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.
 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 WEAKNESSES of WHSmith

Own Brand (quality & value) Competitors Up-market quality brand


Positioning & Locations Differentiation
Turnover & Revenue Changing Leadership Power
Competencies: Books, Magazines, Lack of Focus
Stationary, Newspapers etc. Dull shops and representation of products
Experience - almost 200 years Over staffed & little knowledge
Own publishing of Educational branded Already undertaken diversification too
British national curriculum help and support widely
books (good demand) Lack of premium academic literature
Improved product range includes DVD’s, Ambiguous customer segment (who are the
CD’s, Videos etc prime customers?)
WHSmith Travel (Europe & US)

OPPORTUNITIES of WHSmith THREATS of WHSmith


Political/Economic changes (Recession)
Using strengths to overcome Threats and Law changes in new legislation in 1995-Net
turn them into Opportunities. The Book Agreement Legislation meant the
Opportunities once dissolved into the lifting of ‘fixed prices of books’ resulted in
organisation effectively should become part more Price Competition of books in the UK.
of the core strengths of the company. Supermarkets expansion during the
Using WHSmith Revenue to buy up recession and new laws allowed them to
competitors and integrate wholesale undercut the traditional book sellers like
bookselling WHSmith. Supermarkets large competitors
with Sub-urban presence.
Medium-sized competitors but with High St
presence Such as Paperchase, Ryman’s,
Staples etc.

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B&Q and Homebase *Amazon
In October 1995 Bill Cockburn 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 way 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 gain 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 workforce 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). Instead 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 summarise 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.

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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 business during that time in an attempt to restore it to profitability. It
proved a financial catastrophe, consistently losing ground to 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-do-
it-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 consumers.
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)

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Summary of the Withdrawal Reasons

 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 insufficient.
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 down-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-and-
strikes-it-rich.html)

 The demerger of Waterstone's is consistent with the board's strategy of


strengthening WHSmith's position as the leading popular bookseller, stationer and

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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
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.

 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 1997 1998 1999 2000
Total Number 907 1,159 1,150 1,239
of Stores
Total Retail 258.2 337.3 336.0 339.9
Space
Total 18,749 22,661 22,874 22,018
Employees
News Distribution 8,467 7,873 7,648 7,906
Total Full/PT
Employees
(Source adapted from handout Exploring Corporate Strategy Exhibit 5, pg 6)

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Table 3: Annual Turnover for Business Units 1999/2000
Business Unit Description Annual Turnover
£million
WHSmith High Street Retail Outlets High St & Shopping 1,058
Mall
WHSmith Europe Travel Retail UK Airports & Railway 265
Stations
WHSmith USA Travel Retail Airports & Hotels 192

WHSmith Asia Travel Retail Singapore, Hong Kong & 12


Australia
WHSmith.Co.UK Online Retailing Service 7
Hodder Headline Book Publishing 105
WHSmith News Newspaper, Magazine wholesaling, 945
Distribution marketing & distribution

  TOTAL 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 enhance 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 (carrying 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
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would be available only through the chain. Hodder Headline had an educational publishing
division and this would help WHSmith to 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 Table 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 8,467
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 Bill 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

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players like Amazon had already established and captured the majority of the online users in
this sector globally. They succeeded due to its distribution and storage facilities and
specialised on core operations 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 areas:

 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.

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Figure 2

Strengths: Weaknesses:
 In 1998 it lost a contract of £6 million.
 Market leading business  75% of turnover came from its long-
 market share 35% term contracts.
 Newspapers 36%  2000 growth in magazines slowed
 It has provided good cashflow to the down.
Group with an average cash  Distribution is a major logistical
conversion rate of over 100%. exercise needs sophisticated updated
 Investments in systems of technology and equipment
approximately £23m since 1998  Timely distribution, not meeting
provided enhanced customer sufficient quantities to match supply
service and new revenue and demand
opportunities.  Newspapers have limited shelf-life.
 2004 first half performance News this morning is history by evening
profitability improved: trading profit  Retailers complained due to mismatch.
margins increased from 2.5% to £36 million a year lost
3.0% between 2001 and 2003.
 Cost control strategies, increased
efficiencies and improved service.
 Contract renewal with the major
magazine distributor, Frontline, has
recently been renewed.

Opportunities: Threats:
 At the time their customers bargaining
 Improve Critical success path factor power was strong and pushed for
 Joint venture to improve resources extra discounts for bulk arrangements
and strengths resulting in profit margins being
 Venture to improve bargaining power reduced.
with publishers and suppliers  Dissatisfied customers threat of
 Invest in current distribution system seeking alternative distributors
and sell off other business units to  Regional Distribution companies
raise capital  Local distribution companies
 Take Over of smaller distribution  Competitors such as the large
companies and regional distribution supermarket chains now selling and
companies distributing newspapers and
 Create more contracts with large and magazines
small publishers even at the local level  Economic forces
 Internet trading, more online soft 13
 Move into more suburban, rural areas
of the country to increase market copies of journals, newspapers etc.
share and growth
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:
 The joint-venture with Tesco’s created huge growth opportunities in resources,
location and business network. An asset that all businesses would strive for.
 The combined companies had the opportunity to become the single wholesaler to
supply the UK retailers.
 They benefit from ‘in-house’ sales supplying their own retail businesses a double
fold on profit.
 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.
 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.
 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.
 Performing as one supplier and distributor allows the News Distribution to exercise
more bargaining power with both publishers and customers nationally.
 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.
 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.
 Previously both Tesco and WHSmith lost sales, now with more bargaining power
they can set prices using monopolistic features to benefit from surplus (abnormal)
profits to recoup lost sales.
 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.

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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:

 Economies of Scale
 Capital Requirements and set up costs
 No brand recognition
 Switching costs
 Distribution Channels
 Experience
 Contracts & agreements with publishers and
retailers

Customers
Suppliers
Industry Competitors Under the Merged Tesco and
The Suppliers are the publishers
WHSmith News Distribution
of the newspapers, magazines Tesco/WHSmith customers would lose their
journals etc. The suppliers
bargaining power, as they are
bargaining power is reduced Regional & Local subject to one main supplier.
under the Tesco/WHSmith News Distributors
Distribution as it is the main
Such a service is not easily
national distributor that can John Menzies Distribution copied
provide the fast efficient service (mainly in Scotland)
due to all its resources
Customers are not able to by-
*Little rivalry amongst pass them
If each individual publisher of competitors as
supplies unites together they
If all the retailers unite and
can achieve strong bargaining
approach Tesco/WHSmith they
power
will gain better bargaining power

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 receive
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 disposal are:
 No market freedom in customer choice.
 Independent retailers would loose out and be pushed out of business due to the
monopolistic forces that the company can exercise.
 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.
 Regional distribution would be abandoned in favour of national distribution.
 The deal meant that over 50% of the magazine distribution market would be
controlled by WHSmith, leading to unfair competition.
 The merger would eventually show an impact on small publishing houses and
independent retailers.
 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.
 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.
 Regional and local newspapers would be hit the hardest because they had contracts
direct with retailers.
 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
 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

16
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
reduced shareholder value. Directors, CEO and Finance Officer started to question
the benefits of the merger.
 Threats from Emap, BBC’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.
 Another major argument in favour for its disposal arose when disagreements from
G&J publisher of Prima and Best magazine and its publications were withdrawn from
the shelves on refusal to sign a deal.
 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 to reconsider their joint-venture with
Tesco’s. The already large successful publishers managed to use their strengths in their
product brand titles together with unification in exercising 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.

Figure 4 Boston Matrix

Market Market
Share High Share Low

Market Growth High Star


WHSmith News Question
Distribution post- Marks ?
merger experiencing
monopolistic control

Cash Cow Dog


News Distribution Large profit loss,
Market Growth Low publisher bargaining
move to this gradient
when publishers pull power shifted the
out of contract and News Distribution to
product withdrawal this gradient and then
17
demerger
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-distribution-
wing.html)

4. Examine why the company acquired certain businesses?

Table 4
Year Acquisition
1998 John Menzies retail chain of which it previously sold Heathcote to in 1996
Internet Book Shop
1999* Helicon Publishing an electronic publisher
Hodder Headline Publishers (more academic)
Wayland Publishing Limited (specialising in school books)
2000 The Benjamin Company Stores in the USA
Hazelwood Enterprises Inc. Retail outlets in 71 hotels based stores
2007* UNS Hospital group limited (http://www.whsmithplc.co.uk/WHSPLC-IR-AR09.pdf)

Acquisitions should be considered as part of the overall strategy for any business in any
sector. Acquisitions can be part of a strategy to:
 Solve a problem
 Growth
 Diversification
 Enter new markets
 Develop new products
 Elimination of competitors ALL RELATED TO PROFIT
 Improve weaknesses and/or SUSTAINABILITY
 Overcome threats
 Maximise human resource expertise
 Maximise tangible assets
 Gain knowledge/skills in new products or services
 Response to PESTLE factors
 Enter new mature markets

18
 Spread Risks

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 would
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:
 It will secure the supply of components and materials and this would lower the
supplier bargaining power
 Stronger relationships with the final consumer
 The would gain a share of the profits at all the stages of the value chain
 It provides a more effective differentiations strategy
 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 acquisition 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 functions, 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 organisation 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 and examined.

Figure 5 Ansoff Growth Vector Matrix

PRODUCT
PRESENT NEW
Market Penetration Product Development
PRESENT For growth or consolidation to WHSmith’s Acquisitions of the
maintain position or withdrawal Publishing businesses are practices of
product development strategies.
MARKET Market Development Diversification
WHSmith’s Organic Growth in
NEW acquisitions of UNS Hospital
locations for the Travel sector of
the business
PRODUCT MARKET SHARE

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 well as purchasing

20
food, drink and confectionery. Consequently, there is a limited demand for entertainment
and stationery products and the stock and format of each Travel store reflects this. They
gained new distribution channels and were able to attract new 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, E-
Newspapers, 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 strategies;
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 publications. 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, this 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 railway 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

21
two major areas: Retail High Street Stores and the Travel Retail stores as prime drivers for
generating profits.

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 bearing 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 forces 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 methods 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 for 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 has 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-PR-
231106Moto.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:
 The acquisition must provide advantages in the product or service
 Synergies must be identified
 It should eliminate competition
 Provide maximum utilisation
 Obtains greater production capacity
 Improve bargaining power
 Benefit from economies of scale
 Checks and monitoring of the external environment factors
 Human knowledge and skills should be maximised
 The pooling of cash/profit resources of both the companies in order to dissolve the
acquired company the simulation process should be efficient and effective
 The assets should be beneficial rather than costly
 Innovation advantages
 The chance of spreading risk
 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-distribution-
wing.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

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