Group Assignment

Company Report :

Harvey Norman Holdings

7081 Global Business

Lecturer: Dr Susan Freeman

Contributors

Armand Lemoine

James Wohlers

Param Ramanan

Tas Barmada

Executive Summary

This report aims to analyse the business activities of listed Australian durable goods retailer Harvey Norman International Holdings (HNH). In particular, HNH’s efforts developing its overseas enterprises in countries including Slovenia, Singapore, Malaysia and Ireland between 1999 and 2006 are examined in terms of shareholder wealth creation.

Over a twenty year period commencing in the mid to late 1980’s, HNH has developed a significant domestic durable goods retail business across the eastern and southern seaboard of Australia. Constructing large department style superstores, located in both metropolitan and regional areas, HNH has created a substantial bricks and mortar retail empire. With a unique business model that encompasses franchising specialised market categories and segments within its superstores, HNH has created wealth through developing cash flows from both wholesale margins and rental income. The premium added to the location as a destination store increased real estate values further adding value to HNH asset base.

Constrained by a mature and saturated domestic market HNH initiated overseas expansion plans in the late 1990’s and achieved overseas store openings in the early 2000’s. Particular locations targeted included New Zealand, ASEAN countries including Singapore and Malaysia and European Union Countries including Slovenia, Croatia and Ireland.

Analysis of HNH overseas expansion strategy, execution and outcomes was undertaken to understand the path taken, the challenges presented and overcome and the net result in terms of shareholder wealth creation. While HNH founder and current Chairman, Gerry Harvey, can be lauded for both decades of success in domestic markets and an entrepreneurial risk taking capability, research indicated two substantial changes have occurred in western economies which require serious consideration for future expansion.

A global financial crisis, initiated in 2007, and not yet fully resolved to this day has placed consumer spending under pressure, especially debt fuelled investment such as house construction and the complimentary supporting industries including household goods. Secondly, the rapidly emergent trend of direct business to customer online retail requires a serious reevaluation of the bricks and mortar department store model.

Future recommendations include greater allocation of capital to online retailing in both the domestic and overseas markets. Further initiatives suggested include targeting rapidly industrialising countries with large populations, rising per capita GDP and close proximity to both Australia and product suppliers, notably China, Indonesia, South Korea and Taiwan.

Table of Contents

1. Introduction

2. Harvey Norman Holdings

3. Country Analysis

4. Expansion Strategy

5. Summary and Conclusions

6. References

1. Introduction

In the context of Global Business, themes explored include globalisation theory, regional economic integration, cultural implications of business operations in the chosen country and strategic considerations.

Specific international commerce issues and risks are examined including foreign currency transactions and exchange rates, supply chain management, infrastructure and institutional integrity, geography and transport.

HNH strategy is analysed in terms of its effectiveness based on identified competitive advantages of its business model in contrast with the comparative advantage of doing business in Slovenia. The success of HNH’s approach is summarised with relevant insights and conclusions. Emergent dominant trends for the durable goods retail sector are identified along with their likely effects on HNH enterprise and recommendations made regarding future possible strategies.

2. Harvey Norman Holdings

Harvey Norman Holdings Limited (HNH) overarching shareholder wealth creation strategy comprises establishing and maintaining profit streams from retail sales, property lease operations and capital appreciation from retail and commercial property development. Acquiring prime sites, constructing multi channel retail superstores, HNH creates and operates destination retail outlets for consumer durables including whitegoods, home furnishings, computing and electronic devices, flooring and bedding. (au.investsmart.com.au 2012)

Individual franchisees in each of these segments operate within the superstore and HNH bears no operational effort (http://www.fundinguniverse.com 2012). HNH derives revenue streams from percentage of sales of wholesale goods to franchisees, lease payments on premises and trading profits on real estate development. In return HNH leverages volume buying power for many stores to secure goods for franchisees at competitive prices and performs advertising and promotional activities nationally developing store traffic, brand awareness and consumer loyalty. Particular value creating and risk management strategies of HNH include requiring suppliers to bear the working capital cost of inventory and ensuring stock lines turnover rapidly to avoid holdings of slow moving or discounted product.

As at 31 December 2009, there were 195 franchised complexes throughout Australia trading under 3 brand names: Harvey Norman (166 complexes), Domayne (15 complexes) and Joyce Mayne (14 complexes). The retail offering in offshore markets has rapidly expanded over the past few years and there are 70 company-owned stores located in New Zealand (31 stores), Republic of Ireland (14 stores), Northern Ireland (2 stores), Singapore (14 stores), Malaysia (6 stores) and Slovenia (3 stores) (harveynormanholdings.com.au 2012).

2.1 Background

HNH stamped its dominance as Australia’s leading retailer in computers foremost and closely followed by electrical and furniture segments during the 1990’s through a strategy of combining three key departments in large super stores. Observed in America by founder Gerry Harvey, and adapted to suit Australian consumers (Anon 2012). A distinct difference was to tone down the glamour of the super store with less “bells and whistles” such as in store live entertainment, while attractive to American consumers, had less appeal to Australians. HNH positioned itself at the value end of the retail segment, delivering a huge range in one store, gave the consumer an overwhelming feeling of choice and created an image of the market leader in technology. Convenience enjoyed by the consumer was coupled with the benefit of interest free terms or Flexi rent, quick delivery and assurance of full warranty and after sale service.

Growth HNH achieved can be attributed to several factors. An ability to saturate the market with store locations throughout Australia including regional areas ignored by competitors Myer and David Jones, enabled market share to expand rapidly (http://www.fundinguniverse.com 2012). Capital required to achieve this was provided by the sales boom of computers during the 1990s (Anon 2012) and backed by funds from a stock exchange listing in 1987 enabled superstore construction in areas supported by sufficient population. Smaller stores opened in regional centres such as Mildura while acquisition of competitors such as Joyce Mayne in 1998, followed by Clive Peters and Rick Hart stores provided existing customer bases in key locations (www.fundinguniverse.com 2012).

Continued growth and success into the 2000’s may have led HNH management to develop an invincible attitude that led to expansion in wider scopes of retailing from toys, nursery products and sporting goods with mixed results (smarthouse.com.au 2012). Rebel Sport, acquired in 2001 for $16.1 million (Anon 2012) was sold fourteen months later for $12.9 million, illustrating the fundamental dangers of moving away from core competencies and the limitations a company of any size can have when it fails to research the industry.

2.2 Key Milestones


1982	Gerry Harvey and Ian Norman sell their stake in the Norman Ross retail chain and set up a new store under the Harvey Norman name.
1987	Harvey Norman goes public on the Australian Stock Exchange.
1991	Harvey Norman launches a computer superstore.
1997	The company opens its first store in New Zealand.
1998	The Joyce Mayne furniture and appliance chain and Archie Martin Vox stores are acquired.
1999	A joint-venture to enter the Singapore market is founded.
2001	The company acquires the Electric City chain and rebrands all Singapore stores as Harvey Norman; majority control of Rebel Sport retail chain is gained.
2002	The company's first store in Slovenia opens.
2003	Harvey Norman opens its first store in Malaysia and first two stores in Ireland.

2.3 Pressure to Expand

Financial and retail analysts question whether HNH is a retailer or a property investor, as total investment in real estate is $2.1 billion, a significant proportion of shareholder equity. Unlike competitor JB Hi-Fi, HNH, for the most part, avoided major shopping centres such as Westfield and Centro, developing their own sites instead. Success of HNH superstores attracted other complimentary retailers, enhancing the yield on the property investment and avoided the punitive location leases and charges levied by major shopping centre operators. HNH founder, Gerry Harvey’s comment encapsulates the relentless shareholder pressure behind the drive to expand the business;

“Ten years ago, he says, after spending $20 million to build an outlet in Australia, it would be valued at between $25 million and $30 million on completion and making $1 million to $1.5 million a year in profit. Today, that story has changed. If we do a $20 million build, it will be valued for $17 million and make nothing to $500,000 a year.” (AFR.com 9 Jan 2012).

Using a wholly owned subsidiary entry strategy for overseas expansion, HNH underwent an internationalisation process (Dowling et.al 2009), exporting their unique intellectual property comprising knowledge of durable goods retailing and commercial property development and applied these to global markets. To succeed, this model relies on both local knowledge and favourable preconditions in the host region as merchandising and sale of goods to consumers feature little in the way of barriers to entry as protection from competition. Measured against Dunnings OLI Model (Dunning 1980), HNH can be perceived as having ownership advantages however the means by which to test the strength of this is to enter a market and measure the results.

2.4 International Business Strategy

Analysis of HNH Annual Reports (HNH 1999-2012) indicates little in the way of strategic planning in terms of an expansion strategy beyond an identified need to attempt it. In this same period, the phenomena of globalisation and internationalisation of business is likely to have been at its greatest in modern history (Bernstein 2004) hence it is surprising why HNH appears not to have adopted lessons either from the experience of other multinationals nor the numerous academic studies available. By example, expansion into the country of Slovenia anecdotally appears to have been selected as HNH founder, Gerry Harvey, had an existing relationship with whitegoods manufacturer Gorenje indicative of the use of a network and relational assets by proxy in support of the expansion strategy (Dowling et. al. 2009). Macroeconomic analysis of Slovenia, comparison with other HNH target destinations and discussion follows to understand what conditions were present and key factors contributed to HNH’s results. (sloveniatimes.com 2012)

3. Country Analysis

Within the last decade, HNH’s global expansion has incorporated forays into countries in the Australia New Zealand economic free trade area, two ASEAN countries and the European Union.

	Slovenia	New Zealand	Malaysia	Singapore	Ireland
Economic Bloc	European Union	ANZ Free Trade region	ASEAN	ASEAN	European Union
Total Population	~ 2 Million	~ 4.3 Million	~29 Million	~5.3 Million	~4.6 Million
Per Capita GDP	$28,800 USD	$28,000 USD	$16,200 USD	$59,700 USD	$42,900 USD
Gini income coefficient	0.284	0.362	0.462		0.39
GDP	~$55 Billion	~ $122 Billion	~460 Billion	~ $315 Billion	~E159 Billion
Political Ideology	Democratic	Democratic	Democratic	Benevolent Dictatorship	Democratic

(cia.gov 2012)

3.1 Slovenia

Democratically governed and majority Roman Catholic (58%), the majority of the population is ethnic Slovenian (83%) with other minority groups comprising small percentages of Serbians, Croatians, Bosnians and other Eastern European nationalities (www.slovenia.info 2012). Australia is similarly multi cultural. Joining the European Union in 2004 the Euro was adopted as Slovenia’s currency January 2007. During March 2004, Slovenia transitioned from borrower status to a donor partner with the World Bank indicating its achievement in economic management. The real growth rate of Slovenia as of 2001 was -0.2% with an unemployment rate of approx 11.8% The industry composition of the GDP is Services 70.6%, Manufacturing 26.7% and Agriculture 2.6%. (cia.gov 2012).

Interestingly, Slovenia placed restrictions on foreign direct investment to aid in managing inflation, fearing locally owned assets would be accumulated by foreigners. (dfat.gov.au 2012). This has the effect of curtailing Slovenia’s economy, retarding economic growth and decreasing the disposable income of citizens, factors to be considered when contemplating investment in a country.

4. Expansion Strategy

Analysis of HNH’s Slovenian expansion strategy provides a useful case study of what can go right or wrong when Australian enterprises diversify into international markets. Consider Porters Diamond (Porter 1990), traditionally employed to explain the determinants of national competitive advantage, this can also be used as an analytic tool to understand how firms may develop entry and competition strategies in those markets. Characteristics specific to HNH are detailed in the following table:

	Factor Endowments	Demand Conditions	Firm Strategy	Related and Supporting Industries
Slovenia	· Part of European Union 2004 onwards · Proximity to Western European Countries eg Italy, Austria and exposure to “duty free tourist shoppers”	Recovering from war late 1990’s onward	Foreign direct investment.	Continental Europe export possibilities Jet to let foreign property investors driving up real estate prices
New Zealand	· Close physical and cultural proximity to Australia · Common language · Similar culture · ANZ Free Trade Agreement · Common VISA	Economic development in line with mature, developed western economies	Foreign direct investment / local partnering	Easy credit availability House building boom
Ireland	· Common Language · Historical Connection · Some cultural proximity to Australia	Growth boom in 2000’s fuelled by economic policies. Characterised as a “Celtic Tiger”	Wholly owned subsidiary/local partnering	Easy credit availability House building boom Loose credit conditions Large multinational FDI in high value add industries creating strong demand conditions & inbound immigration.
Malaysia	· Close proximity to Australia · Relatively young demographic	High growth emerging economy characterised as an “ Asian Tiger”	Extension of the Singapore business.	Emerging high value manufacturing location
Singapore	· Close Proximity to Australia · Transport advantages	High growth emerging economy characterised as an “ Asian Tiger” Well managed economy	Joint venture with local partner then takeover of existing Pertama retail chain.	Global transport hub Government encouraged FDI in a wide range of high value industries
Croatia	· Proximity to Slovenian beach head · Proximity to EU	Recovering from war late 1990’s onward Economic growth.	Wholly owned subsidiary	Transport and manufacturing.

(www.fundinguniverse.com 2012)

A useful heuristic tool is analysis of both competitors and other businesses that have succeeded internationally. By observation of competitors, it can be seen if consideration was being given to expansion into HNH’s target markets and by asking why or why not, significant insight could be gained. Similarly, observation and analysis of other multinationals in related industries that have succeeded would likely have provided lessons that reduce risk and increase the probability of success. Expansion of US coffee retailer Starbucks into the Chinese market (Dowling et. al. 2009 pp89-90), exemplifies the risks of directly transplanting the home market business model without regard for cultural sensitivities.

4.1 Target Market Selection Strategy

Slovenia, recognised as a trading hub for household items between Central and Southern Europe (www.worldfurnitureonline.com 2012) was potentially chosen by HNH for its location advantages (Dunning 1980). Additionally, economic, cultural and political conditions were estimated as conducive to success.

Anticipating a rising middle class and rising house prices (Hall 2008), HNH entered Slovenia, constructing its first superstore in Ljubljana in 2002 (dfat.gov.au 2012) as a foreign direct investment. Perhaps influenced by its connections with Slovenian whitegoods supplier Gorenje, HNH perceived an opportunity overlooked by many of the larger European and British retail chains such as Curry’s in the UK but seemed to underestimate the emergent effects of global ecommerce retailers including Ebay and Amazon to deliver similar offerings to worldwide consumers at even cheaper prices. Particularly damaging to HNH in Australia has been online competitor Kogan Technologies, (www.kogan.com 2012) significantly impacting sales of flat screen televisions.

HVH achieved a first mover advantage in Slovenia which allowed them to progress down the experience curve (Dowling et.al 2009 pp370-371) ahead of future competition however this does not enable a sustainable long term advantage. Educating consumers to new technology and western lifestyle becomes a pioneering cost for the first mover. Without a distinct competitive advantage however, this benefit disappears over time as competitors, observing HNH success, are attracted to the market and HNH remaining advantage is underpinned by brand awareness and customer loyalty, both of which are vulnerable to price competition in a competitive market. While HNH does not appear to have followed formal international expansion models, their approach in Slovenia could possibly be described along the lines of a defacto Uppsala model (Johanson and Vahlne, 1977), testing target markets by constructing one store at a time and learning over time.

Scale of entry risks and rewards may have been considered by HNH, waiting three years to open a second store in Slovenia and taking ten years to reach five stores. Slow entry has hampered profits and growth, allowed local retailers to improve and potentially opened the door for another major retailer to enter. However it also enabled lessons to be learnt at lower cost and allowed HNH to enter Irish and Singaporean markets simultaneously as not all capital was committed to one location, providing the benefit of regional diversification.

4.2 Operational Strategy

HNH’s implementation strategy sent expatriate Australian managers to initiate superstore start up and train local hires for ongoing operations. Interestingly, with Slovenia’s population of approximately two million, even if HNH was able to monopolise the chosen market segments, the total market potential was at best, modest, the capital and managerial effort needed to achieve this may have been better spent elsewhere. It can be speculated that Slovenian expansion may have been part of a larger European strategy. It is possible HNH could have more easily entered a mature market, identifying and acquiring an existing chain with a failing business model and affected a turnaround using the in house HNH expertise.

Firms entering a new country without an exclusive product find there is pressure for local responsiveness (Dowling et. al. 2009 pp374-375). Anecdotally, HNH appears to have initially misread customer tastes and preferences in Slovenia; “a large glamorous superstore was constructed in Ljubljana and stocked with expensive double door fridges. Most Slovenians live in small apartments in what was a war damaged city, preferring and affording only small fridges.” (Anon 2012). Eventually, catering for low cost and sensible sized products HNH better met local consumer needs which were far different to the Australian customer ultimately evolving their strategy to a localisation strategy as Dowling describes (Dowling et. al. 2009 p379). As HNH don’t manufacture but source products both locally and globally, cost pressure is addressed by increasing the business size to achieve volume buying power. HNH initial marketing efforts for their store and products was also revamped to better appeal to consumers, unaware of the HARVEY NORMAN brand, unlike the Australian consumer, bombarded for decades with advertising.

Small, basic items yield small margins and results from Slovenia have been modest to date. (ref ) It does not appear HNH performed any market research to indicate if potential customers would travel from Italy or Austria to purchase goods cheaper in Slovenia. A quick glance at any European map indicates the challenge of travelling across the Alps to undertake this journey. If HNH had long term expansion plans to continually replicate across both European and ASEAN market regions, these have been curtailed by both the global financial crisis from 2007 onwards and the phenomenon of internet retailing reaching a rapid growth phase.

5. Summary and Conclusions

HNH created and operated a successful, workable business model in Australia suited to local conditions, culture and circumstances over a twenty year period. Overall, HNH domestic success can be partially attributed to its model as a navigable framework to deliver consumer value in its chosen enterprise and partly along the lines of the phrase; “a rising tide lifts all boats”. In other words, the general economic environment in the period 1991 to 2007 was rewarding for many businesses with a robust model and aggressive expansion strategy. The global financial crisis from 2007 onwards has exposed flaws and weaknesses in both models and management teams of many organizations and industries. In HNH’s case, the rise of online ecommerce has proven particularly troublesome in the local market, with discount competitors eroding HNH’s sales and profitability in consumer electronics, computers and audiovisual product segments (smarthouse.com.au 2012). With a relatively low barrier to entry, it is likely more online competitors will emerge worldwide.

Attempts to transplant HNH’s model overseas have been met with much more volatile results. Some or all of the key success factors that were enablers for Australian operations were absent or different in the chosen international markets. Additionally, much of the available wisdom and research body of knowledge for international business strategy and operations does not appear to feature in HNH’s expansion planning.

The particular case of Slovenia highlights some of the fundamental issues. While HNH is reporting overseas enterprises are profitable, it is not possible to determine at what opportunity cost in terms of management effort and shareholder capital. It has taken over a decade to bring these businesses to maturity.

HNH had an opportunity to learn from its own success. Operations in New Zealand were quite successful on most measures. Distilling the key success factors from this effort including, proximity to home market, similarities in language and culture, minimal exchange rate delta, low worldwide interest rates, and disinflation in durable goods. The broader international strategy was much riskier, incorporated expansion into different cultures, religions, time zones, world hemispheres, geographies, demographics and currencies. Further, this was undertaken in an adhoc and scattered approach resulting in a lack of focus and stretching limited managerial resources.

It is recommended to the board that future expansion strategies are focussed with particular emphasis on the following macroeconomic characteristics in any target market.

1. Large absolute population size and high population densities in large cities.

2. Rising middle class with a young demographic.

3. Evidence of rapid industrialisation within the host country.

4. Rising per capita Gross Domestic Product.

5. Evidence of political and legal infrastructure supportive of capitalist ideology and norms.

6. Ease of doing business and foreign direct investment.

7. Well developed telecommunications infrastructure and internet connectivity.

8. Evidence of a consumer propensity to purchase goods online.

9. Well developed transport infrastructure across all modes.

	Australia	China	Indonesia	South Korea	Taiwan
Total Population	~ 22 Million	~1.2 Billion	~237.4 Million	~ 50 Million	~23 Million
Per Capita GDP (2011)	$69,000 USD	$8,400 USD	$4700 USD	$32,400 USD	$19,900 USD
Gini income coefficient	0.331	0.415	0.343	0.31	0.342
GDP Growth Rate	3.4%	10%	6.2%	3.9%	4.0%
Political Ideology	Democratic	Communist Ideology with Capitalist Features	Democratic	Democratic	Democratic

Relative economic conditions in potential overseas expansion locations (cia.gov 2012)

These recommendations are made as minimum requirements for a fertile business environment that will provide the context for application of the business model with maximum use of existing expertise (Bernstein 2004). A rapidly expanding, large consumer class is likely to provide years of expansion potential despite the entry of many competitors as demand conditions are high but market development and sophistication is low. Rising real estate values are supportive of the build, own, operate model for the superstores however the online retailing model requires consideration. Additionally, expanding markets provide the opportunity to make and recover from strategic or tactical errors without jeopardising the entire business.

Operationally, HNH should strongly consider the effects of technological change and how consumers of tomorrow are likely to satisfy their needs and wants. There is an undeniable shift toward purchasing many goods online which may undermine HNH’s existing property development strategy. The structural cost advantages possessed by online only retailers must be countered with an intensely attractive reason for consumers to travel to stores and pay a premium for the experience. Alternatively, HNH could redeploy future investment into online only retailing, jettisoning the property development and reinforcing the business model where it has identified strengths.

While the window to achieve first mover advantage in optimal markets may have passed, there is likely many years of growth ahead if the market maturity model is considered (Dowling et. al. 2009). Potential markets to consider include China, Indonesia, South Korea and Taiwan. These have the additional potential benefit of being supplier countries thus reducing logistics overhead. Issues to consider include adaptability of expatriate managers, mentors, teachers or trainers to local customs and mores. This is particularly true in Asian nations where personal relationships predominate in business success and this may be addressed by choosing Australian educated foreign nationals for key roles.

6. References

Anon 2012. Personal conversation between an ex Harvey Norman executive and one of the authors, J.Wohlers.

Bernstein W.J, 2004, The birth of plenty: How the prosperity of the modern world was created. McGraw Hill Companies 2 Penn Plaza New York NY. United States of America.

Dowling, P, Leisch, P, Gray, S, Hill, W, 2009, International Business Asia Pacific Edition McGraw Hill Australia Pty Ltd. 82 Waterloo Rd North Ryde NSW 2113.

Johanson , J Vahlne, J.E, 1977 The Internationalisation process of the firm: A model of knowledge development and increasing foreign market commitment. Journal of International Business Studies 8(1): 23-32.

Hall, L, 2008 Buying Property In Eastern Europe: The essential guide to purchasing property in 13 countries, from the Baltic to the Balkans. How To Books Ltd. Spring Hill House Begbroke Oxford OX5 1RX. United Kingdom.

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html viewed 3 Oct 2012.

http://www.fundinguniverse.com/company-histories/harvey-norman-holdings-ltd-history/ viewed 24 November 2012.

http://www.harveynormanholdings.com.au/pdf_files/Company_Profile_2012.pdf viewed 24 November 2012.

http://www.dfat.gov.au/geo/slovenia/slovenia_brief.html viewed 24 November 2012.

http://www.kogan.com/au/about/ Viewed 24 November 2012.

http://afr.com/p/national/go_harvey_go_overseas_says_gerry_jxO1zwOEyTvFJLi3Zi3TsL viewed 24 November 2012.

http://www.harveynormanholdings.com.au/

http://www.sloveniatimes.com/interview-janusz-miluch-lafarge-cement viewed 24 November 2012.

http://smarthouse.com.au/Comment/D4D9E8P6 Why Harvey Norman Should be broken up or sold. Viewed 24 November 2012.

http://www.investsmart.com.au/shares/asx/HARVEY-NORMAN-HOLDINGS-LIMITED-HNH.asp Fraser G. The AGE online 14/03/2012

http://ec.europa.eu/environment/emas/casestudies/gorenje_en.pdf viewed 25 November 2012.

http://www.glasslovenije.com.au/acrobat/september2002-eng.pdf viewed 25 November 2012.