Effect of business acquisition to get competitive advantage based on the case study: Acquisition of Somerfield by Co-operative group Background: Business acquisition is one of the most vital tools to expand an existing business effectively. An acquisition takes place when an existing company buys another company which has more or less similar operating activities and ended up controlling it. It is clearly different from merger which is the integration of a business with another and sharing the control of the combined businesses collectively.
Mergers and acquisitions (M&As) have long been considered as an one of the most highly appreciated method to achieve the desired growth rate and satisfying the key stakeholders. With rapid advances in science and technology competition for the same marker has increased significantly and to remain competitive in the market business organizations have considered M&As as an imperative strategic tool. Rising of new financing promises and changes in regulations have made M&As even more popular to create new market, maintain the existing market and acquiring unique technologies and intellectual properties.
However, despite being considered as a pivotal business strategy to achieve target growth the general consensus is that more than eighty percent of the M&A fail to reach the desired financial goal (Nahavandi and Malekzadeh 1993) and fifty percent simply become unsuccessful (Cartwright and Cooper 1995; Child et al. 2001, Sally Riad. 2007). Although M&As have a high failure rate as suggested by previous results careful planning practices can increase the chance of their success.
Although there is no rule of thumb that suits all situations in order to make a successful acquisition one must follow a few basic rules. Any purchaser no matter how the size of the company is must first determiw what strategic aim are they planning to achieve through acquisition. They should also consider what financial benefits will be realized if the aims are achieved. Any chances that the aim will not be achieved should also be taken into consideration before making an acquisition.
One of the major advantages of acquisition is that it is quicker and easier than other strategic alternatives and in order to make an acquisition work business also need to calculate the amount of time that will be required to integrate and obtaining the benefits won by the acquisition. In this study whether acquisition can provide competitive advantage in the market will be analyzed based on the case study of the acquisition of Somerfield by Co-operative group. Co operative is now the fifth leading food retailer (7. % market share) in the UK which operates 3,300 stores of various sizes and has the maximum geographic reach compared to other food retail giants. As food retail business was becoming highly competitive with market dominated by giants like Tesco, ASDA and Sainsbury etc. Cooperative took a strategic decision to expand its business and double its profits over a period of three years by acquiring Sommerfield in 2008 at a value of ? 1. 57bn ($3. 1bn). Literature Review
Acquisition has been in existence since at least 1900s and have been increasingly considered as a popular strategy for firms for strategic expansion. Increased competition for the same market significantly augmented the tendency of business organizations to exploit the competitive advantage that can be secured by acquisition as suggested by the fact that acquisitions completed alone in 1997 valued more than all the acquisitions completed during the 1980s (Hitt et al. , 2001a,b).. Worldwide M&A activity has increased significantly over the past few years as suggested by a M&A activity of $1. 5 trillion in the year 2004 which represents an increase of 40% since the year 2000 (Thomson, 2005). This is a significant growth in activity considering that research has revealed historically, approximately half of the M&A activity have been proven unsuccessful (Covin, Kolenko, Sightler & Tudor, 1997; Gadiesh & Ormiston 2002; Gadiesh, Ormiston & Rovit 2003; Kaplan 2002; Stanwick & Stanwick 2001; Weber, Shenkar & Raveh 1996; Schneider 2003). Managing the process of acquisition correctly is the major challenge to make an acquisition work.
A number of different factors that ranges from setting well defined goals to look for circumstances under which it will make sense to walk away must be carefully considered to make a successful acquisition. In order to carry out an acquisition activity one must first understand whether the business is ready for it. A SWOT (strengths, weaknesses, opportunities and threats) analysis can be carried out to assess the condition of the business as it might give a clear direction about how to take maximum advantage of the strengths, resolve weaknesses, exploit opportunities and avoid threats.
Another way to understand whether the business is ready for an acquisition is to carrying out a strategic gap analysis. This involves identifying where the business stands now where one wants to see it after a defined period of time. By identifying the gap between the two one can decide whether acquisition is well enough to bridge the gap. However the extent of planning and research that can be done before making an acquisition decision does not always prove to be enough as situations outside of control may arise and one have to be prepared for these risks.
Degree of uncertainty and the time and effort that are spent for the deal can in effect damage the performance of the business. The major pitfalls that may occur following acquisition of a business are: 1. The performance of the target business is lower than expected 2. Key people of the target business leave following the acquisition and join another rival business. 3. The cultures of the two businesses are not compatible 4. The business diverted resources from the main aim
In contrast to these inherent risks involved in any acquisition activity and rate of failures suggested by previous research a recent Australian study have found that shareholders value was increased in more of the deals than it was reduced as a result of M&As. Thirty four percent of the deals have increased value whereas thirty two percent reduced value and thirty four percent had no effect. However, this is a significant improvement from the first survey carried out in 1999 where 53% of mergers and acquisitions reduced shareholder value (KPMG, 2003).
Business acquisition can provide competitive advantage in a number of different ways. A firm can score tangible or intangible assets by buying another firm of the same type that are not available to other competitors. Large scale of market can be quickly achieved through acquisition. Unless a business has a large scale it is hard for them to compete effectively in the market. Acqusition can also provide access to vast geographical areas within a very short period of time and exploit the market there before any other competing business reaching that market.
Acqusition can also lead to economical benefits as buying up new properties, services, facilities and products can be more cheaper than actually developing them. Acquisition can also add diversification in the business by adding new product in the product line or by offering new distribution channels. Customer satisfaction is another key factor to remain competitive in the market. Customer satisfaction indicates the value customers get in exchange of paying the price. A company can’t sustain in the market for a long run with dissatisfied customers.
Business acquisition can contribute significantly to customer satisfaction in a number of different ways. Acquisition can make the product more available to the customer who now travels a long way to get the desired product. Acquisition in cases can provide an unique opportunity of cross selling new products to old (existing) customers and cross selling old products to new customers. Aim and Objectives This study aims to identify the competitive advantages that Cooperative group have achieved through acquisition of Sommerfiled. The project specific objectives of this study are to 1.
Determine the effect of this acquisition on customer satisfaction 2. Identify whether this acquisition supports the growth plan of Cooperative group 3. Find out whether the acquisition of Sommerfield helps to increase the profit of cooperative group Methodology This study will be conducted following a qualitative approach for the potential benefits it offers. It is an inductive process used to formulate theory. It allows the researcher to gain more in depth knowledge about the topic being studied. It also helps to make critical decisions by providing valuable insights into various issues related to the topic.
This methodological desigh of study will help us to realize the effect generated by the acquisition of Sommerfield into the competitiveness of Co-operative group. It expands our understanding and broadens our knowledge that might be missed by following other research methods. As previous studies in this area have provided only little information qualitative research method which is more subjective and describes a problem or condition from the viewpoint of those actually experiencing it is more preferable than quantitative method.
Primary data will be collected through interviews of all the parties related with the topic and observation. The main focus group of this study will be the employees of Cooperative group and its customers. As the researcher is connected to the shop it will be convenient to contact the customers in the shop to get an interview. Both male and female customers of different age group will be selected for interviews. Face to face interviews with semi structured questionnaires will be conducted to obtain more in-depth aspects about this acquisition. The interviews will take place in person.
Several questions will be asked during the interview but some of the major questions are * What do you think about the economic benefits Cooperative have achieved through this acquisition * Do you think sales have increased after the acquisition and if so do you think it is because of the acquisition * Are the number of customers increasing with customers switching from other companies to Cooperative * Do you think Cooperative is successful at attracting new customers To maintain the consistency of the data collected common topics will be used in all interviews as this will permit to carry out evaluation of data between interviewees. Secondary data will be collected through various reliable sources which include reference books publications and different websites.