Thursday, June 18, 2020
Case study growing and strengthening market shares - Free Essay Example
Brief 191630 Scenario Background Serene Hall is a health spa resort located in the centre of England. It provides a range of health and beauty services and comes under leisure industry. Looking Ahead The management is desirous of the following: Ascertain and guide the company to Plc status within the next two years. Sustain growth and strengthen its market share. Dimensions Proposed by Directors of Serene Hall Growth can be achieved by looking at business opportunities along several dimensions. Dimensions proposed by the directors of Serene Hall are: Finance Director: reduction in companyà ¢Ã¢â ¬Ã¢â ¢s debt Marketing director: better marketing to boost profits Operation director: controlling expenses Options for Growth Under Consideration Option 1: Acquisition of à ¢Ã¢â ¬ÃÅ"New Youà ¢Ã¢â ¬Ã¢â ¢ Option 2: Upgrade Serene Hallà ¢Ã¢â ¬Ã¢â ¢s facilities Option 3: Withdraw from the market Analysis of the proposed growth strategies should be done taking into account: Operational skills or core competencies of business Privileged assets held by the business that are hard to replicate by competitors Growth skills Special relationships that can open up new options Analysis of Option 1: Acquisition of New You Option 1 is a clear case of acquisition. Acquisition approach appears provides all the benefits with a few shocks. With the right acquisition an organisation can solve its current resource limitations. Bringing à ¢Ã¢â ¬ÃÅ"New Youà ¢Ã¢â ¬Ã¢â ¢ into Serene Hallà ¢Ã¢â ¬Ã¢â ¢s business portfolio through acquisition will have its instant benefits. It will: Provide economies of scale by reducing duplicate departments or operations and lowering the costs of the company. Serene Hall is expected to have cost savings on amalgamation of up to Ãâà £4m in both years 1 and 2. Increase capacity and market share through the control of a major competitor. Serene Hall has a market share of 21.2%. It is expected to get a projected market share of 49.2% through acquisition of New You. Serene Hall will have more than 50% market share in all three services: health and fitness, body treatments, natural healing and alternative therapies. Post acquisition, the projected status of competitors will be: Leisure Industry à ¢Ã¢â ¬Ã¢â¬Å" Health Beauty Sector Major Competitors Projected Market Share 2004 Company Name Health Fitness Body treatments Natural Healing Alternative Therapies (includes detox) Market share % Serene Hall 66 65 70 49.2 Old Hag 12 4 27 8.6 Rags2Robes 10 10 10 8.6 Good Looks 4U 13 18 12 10.0 Other 30 30 23 23.6 % of total sales 47 25 28 100 Increase revenue by doubling its power by capturing increased market share to set prices. It will lead to improved market prices due to the reduction in competition producing additional cash inflows of up to Ãâà £10.6m annually in years 1 à ¢Ã¢â ¬Ã¢â¬Å" 5 inclusive. Make cross selling possible. As Detox treatments are complementary in markets to other beauty treatments, Serene Hall will have the cross selling options where goodwill exists and the cost of sales is much less. Reduce the number of competitors and thus reduce the risk of competitive margin erosion. Enable geographical diversification. Through acquisition of New You, Serene Hall will be able to start to expand throughout England à ¢Ã¢â ¬Ã¢â¬Å" to an already existing market. Prevent merger or acquisition of New You by any other competitor. This becomes especially relevant given that the market is already shuffling with rumours of a New You à ¢Ã¢â ¬Ã¢â¬Å" Old Hag merger. If the merger happens the market share of the merged company will be 36.6%, far ahead of Serene Hallà ¢Ã¢â ¬Ã¢â ¢s share. If the acquisition does not happen and the NewYou- Old Hag merger happens, the projected status of competitors will be: Leisure Industry à ¢Ã¢â ¬Ã¢â¬Å" Health Beauty Sector Major Competitors Projected Market Share 2004 Company Name Health Fitness Body treatments Natural Healing Alternative Therapies (includes detox) Market share % Serene Hall 32 37 10 21.2 New You à ¢Ã¢â ¬Ã¢â¬Å"Old Hag merger 46 32 87 36.6 Rags2Robes 10 10 10 8.6 Good Looks 4U 13 18 12 10.0 Other 30 30 23 23.6 % of total sales 47 25 28 100 However, acquisition will also have its drawbacks. Acquisition will help Serene Hall hedge against competition. However, Serene Hall can achieve the objective of hedging its investment at less cost through diversification rather than acquisition. Acquisition may make an Serene Hall unmanageable It will involve some rationalisation of the office facilities and the possible redundancy of some staff. However, there may be job / training opportunities if Serene Hall decide to adopt the increasingly popular Detox services provided by New You. Require massive initial investment (Ãâà £60 million in year 0). The organisation may have to borrow funds for investment and thus increase its debt. The following table indicates the financial implications of acquisitions. Financial Implications of Acquisition Year 0 1 2 3 4 5 6 7 8 9 10 Cash Outflow / Inflow (in million Ãâà £) (40) 20 20 20 20 20 20 20 20 20 20 Cost savings (in million Ãâà £) 4 4 Additional Cash flow from sales (in million Ãâà £) 10.6 10.6 10.6 10.6 10.6 Cash flow from sale of assets of acquired company (in million Ãâà £) 30 Cash from sale of stock (in million Ãâà £) 5 Cash expenses on acquisition (in million Ãâà £) (20) Redundancy relocation provisions (in million Ãâà £) (5) Other contingencies (in million Ãâà £) (3) (3) (3) (3) (3) Research Development costs (in million Ãâà £) (4) (5) Cash Flow before Tax (60) 57.6 26.6 27.6 27.6 27.6 20 20 20 20 20 Tax (25%) (14.4) (6.65) (6.9) (6.9) (6.9) (5) (5) (5) (5) (5) Cash flow after tax (60) 43.2 19.95 20.7 20.7 20.7 15 15 15 15 15 Assumptions: Year 0 is year 2003 There will be no cost savings after year 2 Purchase price is take at the higher amount of Ãâà £40m ( on a conservative side) As annual cash inflow is expected to range between Ãâà £0 to Ãâà £40m beginning year 1, average cash flow is taken for analysis purposes. Average cash flow is Ãâà £40m / 2= Ãâà £20m All the cash flows are expected in real terms. (i.e. after allowance for inflation). In other words, the cash flows do not need to be discounted. Cost savings on amalgamation of up to Ãâà £4m in both years 1 and 2 does not mean increase in cash flows but indicates saving in cost and therefore increase in profits. This increase is also taken into consideration for calculation of tax. Total Net Cash flow after taxes = Ãâà £140.25 m Serene Hall will be able to recover its investment cost within the first 2-3 years. Analysis of Option 2: Investment to Upgrade Facilities Option 2 is a clear case of organic growth through upgrading. Organic growth is growth that comes from a companyà ¢Ã¢â ¬Ã¢â ¢s existing businesses as opposed to acquisitions. It does seem to be the most perfect way of growth of Serene hall as demand for simple relaxation and beauty enhancement is rapidly increasing and at the moment demand is exceeding supply. Organic growth will prove to be a less cost burden per year ( Ãâà £60m spread over 3 years as against Ãâà £60m in the very first year under acquisition), highly controlled and least risky option. In addition, it will not involve issues that arise when there is amalgamation of management teams. Serene Hall can use its existing facilities and can get into Detox business where it is lacking behind (has only 10% market share) its competitors. Perhaps Serene Hall can invest in for 24 x 7 facilities for Detox services and build in clientele as even New You that specialises in Detox services does not have 24 x 7 facilities. This becomes even more relevant given the findings of the market research suggesting that the demand for such facilities is likely to carry on increasing over the next 10 years. However, even though the option is attractive, organic growth is undoubtedly fraught with risk of narrow vision . This option will offer a poorer cash flow position. If Serene Hall choose this option then positive cash inflow will only begin in year 3 at the earliest and will be around Ãâà £18m. If the current year is 2003, Serene Hall will only be able to recover the investment cost of Ãâà £60m in the first three years sometime in 2009-10 as against around 2005-06 in the case of acquisition. This will also not help Serene Hall get Plc status within the next two years. Though the annual burden of investment will be lower than that under acquisition, the total cost of investment is the same under both options (Ãâà £60m). Option 1 gives additional benefit of increased sales revenue, cost savings and almost double market share. Analysis of Option 3 : Withdrawal and Closure This is essentially a retreat strategy in the face of competitive pressure. Businesses may benefit from a retreat strategy only when the demand is falling and market research does not indicate a positive picture. Neither of the two is happening in the current scenario. The sector is functioning comfortably and enjoying increasing profits, as the population becomes more and more health and appearance conscious. Even though competition is looming, so is demand. This is clear from the fact that Serene Hall itself is operating with a full order book and little if any slack. Withdrawal from business will generate a net cash flow of Ãâà £49 m (Ãâà £63 m Ãâà £14 m) over the next three years. This is a myopic view and it does not make the option any attractive. In addition, acquisition option is generating a higher cash flow plus other benefits. However, while analysing the strategy Ãâà £50 m on the Hall in the last 10 years may be ignored as they amount to sunk cost. Conclusion: Given that the management of Serene Hall is desirous to sustain growth and strengthen its market share and also ascertain and guide the company to Plc status within the next two years, growth through acquisition seems to be the best option. This is especially true when the Health and Beauty sector in which Serene Hall is existing is likely to grow in the years to come. Neither Option 2 nor option 3 will not help Serene Hall in either ensuring a sustained growth or acquiring plc status in the next two years. Therefore, Serene Hall should opt for acquisition of New You as the advantages of acquisition outweigh its drawbacks. However a decision should only be reached after an in-depth analysis of the following issues: How will the acquisition affect Serene Hallà ¢Ã¢â ¬Ã¢â ¢s existing and future business? How is it going to affect sales and revenue, the engagement process or brand collateral? What will be the impact of bringing together two markets, revenues and skills banks? Page | 1
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