TABLE OF CONTENTS Abstract2 Introduction2 Business description and main activities3 Harvey Norman Resources5 Tangible Resources5 Profit from continuing and discontinued operations6 Profit from property6 Sales at franchises7 Sales at company-owned stores8 Intangible Resources8 Computer software and licence property8 Goodwill9 Harvey Norman Invisible Balance Sheet10 Internal Capital11 External Capital13
Individual Competence14 Recommendations15 Conclusion17 Appendix19 Appendix 119 References20 Abstract Harvey Norman is one of the biggest consumer electronic retailer in Australia (D Richard, 2010), well-known for its recognisable brand name and local community involvement, Harvey Norman had achieved steady growth since its establishment on 1982 with 195 stores nationwide and 69 stores outside Australia.
The success of Harvey Norman can’t solely be attributed to its services performance as a retailer nor solely to its physical assets and property, this report will examine the structure and resources of Harvey Norman both physical and intangible with a focus on the latter, of importance are intangible resources that give competitive advantage from its individual competence, internal, and external capital, an invisible balance heet will also be derived to put these intangible resources in perspective. Following that a recommendation for Harvey Norman management will be presented on sustaining its competitive advantage and growth through the management of intangible. Introduction It has been far-known that a company’s financial annual report has limitation as it does not have a detailed explanation on the true value of company’s intangible assets and resources.
Sveiby suggests that as external shareholders, investors are willing to know on the true worth of the company; not just based on its financial calculation, but more towards its know-how capital, employees’ intelligence and experiences, internal company’s structure, external relationships and more importantly, the company’s revenue-generating resources. Nevertheless, it is only ‘what’s on the surface’ that gets measured in the annual reports such as office furniture instead of the employees’ knowledge.
This report was developed to provide insights on the management of tangible and intangible resources of Harvey Norman Holdings Limited, with the latter being the more important highlight on this report. It will also provide details on the invisible balance sheet owned by the company by outlining some key invisible organisational resources. In the end, this report will offer recommendations to be implemented by the company to better manage its key intangible resources.
By analysing and looking into these intangible resources, shareholders are in the hope to look for signals beyond the financial annual report and are to be given true indicators on the company and its staff’s production capability, stability, know-how capital and profit potential, on which their decision to sell or keep their shares are based on. Business description and main activities Harvey Norman Holdings Limited is a franchisor and an Australian public company, which has expanded internationally, including New Zealand, Ireland, Singapore, Malaysia and Slovenia (Annual Reports 2009).
According to 2009 Insider Retailing article, the company is now ranked third on the Australia’s top 10 retailers and is the leading non-food retail chain in Australia. Within its franchising system, the company offers extensive products range, cutting edge technology, and market leadership in most product categories. Harvey Norman Holdings Limited grants franchises to independent business operators under three leading brand names, i. e. Harvey Norman, Domayne and Joyce Mayne. As at December 2009, there are 635 Harvey Norman, Domayne and Joyce Mayne franchisees in Australia (Company Profile 2009)
As stated in the company profile, the principal activities of the company are embedded in its integrated retail, franchise and property system. The company’s retailing system include sale of furniture, bedding, computers, communications and consumer electrical products online as well as in-store. Within its franchising system, the company provides retailing strategy and marketing techniques in turn for receiving the franchisees fees that are based on sales. Harvey Norman is said to be ‘part retailer, part property-trust’ as the company property holdings account for nearly 50 percent of its total assets (Money manager, 2008).
These assets also produce main source of income for the company including regular rental income from the franchisees, and also acting as an investment income where it can successfully develop properties from vacant land to retail complexes. The major benefits of this integrated model enable Harvey Norman to lower the cost of debt financing by securitizing a portion of income-producing property portfolio. This would free up capital and helps to boost returns. In terms of the history development of Harvey Norman, appendix 1 illustrates the important evolvements. It has been one of the dominant leaders of Australian retail industry since 1970s.
Based on the business performance of last few decades, Harvey Norman has shown a rapid growth compare to its competitors. Harvey Norman Resources Tangible Resources According to the company’s profile, Harvey Norman Holdings Ltd is one of leading retail chains in Australia, which has franchisors, company-owned stores and properties across the world (Australia, New Zealand, Slovenia, Ireland, Singapore, Malaysia). The franchisees retail products are Electrical, Computers & Communications, Small Appliance, Furniture, Bedding & Manchester, Home Improvements, Lighting and Carpet & Flooring.
The company generates its profit both from continuing and discontinued operations, and its main continuing operation comes from the franchises sales in Australia, New Zealand, Slovenia, Ireland, Singapore and Malaysia. The profit also comes from the revaluation increments of properties owned by company in Australia and overseas. Profit from continuing and discontinued operations According to the 2009 Annual Report, the Harvey Norman’s net profit for year comprised of profit from continuing operation and discontinued operation. In 2007, the net profit for year was $407. 5 million, and $324. 10 million of it comes from continuing operation, the other $83. 15 million was from discontinued operation. However, the net profit for financial year 2009 significantly dropped to $214. 35 million compared with $358. 45 million in year 2008. One reason of this decline is the absence of profit from discontinued operation. In 2007, company got discontinued profit $83. 15 million after tax on sale of its controlling interest in Robel Sport Limited, however, there was no profit gain from discontinued operations in 2008 and 2009.
The other reasons of decline in profit in 2009 are property revaluation increments and retail operation from New Zealand decreased, expansion in Northern Ireland, and start-up investment cost and trading losses in OFIS in Australia. Profit from property The property owned by company also contributes to profit. It includes investment property in Australia; owned land & building in New Zealand, Singapore, Slovenia; plant and equipment; and joint venture properties. In 2007, the net revaluation increment before tax & minority interests recognized in income statement was $65. 68 million. In 2008, this number was $102. 8 million and $9. 68 million in 2009. The net profit of 2009 declined 40. 2% compared with previous year (Annual Report, 2009) Sales at franchises The franchisee sales revenue increased steadily from 2007 to 2009, from $4. 50 billion to 5. 06 billion (the sales made by franchisees in Australia do not form the consolidated financial results). The franchising operations segment result before tax also increased because of higher franchise fees and lower franchise tactical support based on Annual Report 2009. The sales revenue made by franchisees at overseas increased in 2007 when translated into Australian dollars.
The sales revenue from Ireland increased 131. 85% because of new store opened and effective promotion activities. However, there were $9. 52 million and $49. 33 million operation losses in 2008 and 2009 due to economic recession in Europe and other factors, such as difficult UK retail market, worse trading conditions in Ireland and increasing inflation. Moreover, there is no improvement in near future at Ireland franchisees according to management analysis. The economic recession in New Zealand and the devaluation of NZ dollars also resulted in the decrease of franchising operations segment result in New Zealand from $52. 0 million in 2008 to $44. 42 million in 2009. The Asia sales also got negative impact from closure of the export and distribution business in Singapore and Malaysia. However, there was increase in Slovenia retail segment result from $0. 58 million in 2007 to $3. 12 million in 2009 because of increasing brand recognition and appreciation of Euro related to Australian dollars. Sales at company-owned stores The company-owned stores include ‘Harvey Norman’, ‘Norman Ross’ branded company-owned stores in New Zealand, Ireland, Northern Ireland, Singapore, Malaysia, Slovenia and OFIS brand name in Australia.
The number of these stores increased from 53 in 2007 to 69 in 2009, and the sales revenue of owned stores also increased from $1,329. 43 million to $1,440. 65 million. However, in New Zealand, one new store branded Norman Ross (discount retailer of electrical & computer goods) was opened in December 2007 but closed in June 2008 only after six months operation. And other five OFIS brand stores in Australia were closed in February 2009 after eight months operation. Intangible Resources
It is stated in the 2009 annual report that the company’s intangible resources include computer software, goodwill and licence property. Computer software and licence property The licence property and capitalized computer software assets are recorded at cost and are amortised on a straight line basis over their estimated useful lives but not over 7. 5 years. The value of current licence property decreased every year in the period of 2007 to 2009, therefore the licence property was amortised every year and there could be no current licence property purchased in last three years.
In 2009, the net book value of non-current licence property increased significantly from $251,000 to $892,000, therefore, there could be a great mount of new licence property purchased because the licenece property was amortised every year. The computer software was capitalized at cost and written down when certain impairment expense happened. The cost of computer software increased every year from 2007 to 2009, the company could increase the investment in information technology system. The core global merchandise management system could be one of these computer software investments.
This merchandise management system centralized overview of all merchandising related information for enterprise and its franchises, which helps to reduce the key cost and improve profitability. Goodwill Goodwill was measured at cost on acquisition, which cost was excess the net fair value of business. Goodwill was reviewed annually or impaired when the changes indicated that the carrying value may be impaired. In 2007 and 2008, the carrying value of goodwill did not change, but it increased $1,000 due to the net foreign currency difference arising from foreign operation.
Harvey Norman Invisible Balance Sheet According to the Harvey Norman 2009 balance sheet, the company has about $18million in intangible assets comprises of its capitalized computer software assets, goodwill and license property. This report will look deeper into the company’s intangible assets by analyzing its invisible balance sheet to arrive at its true value. Based on its 2009 annual report, Harvey Norman has around $3. 51 billion in market capitalization, while its book value is $2 billion, making the company’s hidden value to arrive at around $1. 5 billion worth.
Harvey Norman intangible balance sheet can be summarized from the diagram 1 shown below: Diagram 1: According to Sveiby’s article, ‘a know-how company’s balance sheet’ is the summary of its hard assets, financing as well as organizational value. Harvey Norman hard assets consist of working capital, and fixed capital. Based on its annual report’s figures, The Harvey Norman working capital is around $156 million is the difference of its current assets ($1. 535billion) and current liabilities ($1. 379billion). Its fixed capital includes its property, plant and equipment as well as its investment properties, totalling to $1. billion. Therefore, the total of Harvey Norman tangible, hard assets is worth about $2billion. To fund these hard assets and for other financial assets, Harvey Norman had borrowed $580million in debt and $2billion worth of equity, totalling to around $2. 5billion worth of financial capital (Annual Report 2009) Apart from the hard assets included in the Harvey Norman’s balance sheet, its organizational value is far more important in detecting the company’s intangibles. Harvey Norman organizational, know-how value comprises of its internal capital, external capital and individual competence.
Internal Capital According to Sveiby’s article, “The invisible balance sheet”, internal structure of an organization consists of patents, concepts, models as well as computer and administrative systems owned by the particular organization. It also incorporates the culture around the people working inside the company. Harvey Norman has a strong internal structure system, called the Integrated Retail, Franchise and Property system that is believed to always been part of the company culture, helping the company in achieving economies of scales and competitive advantages.
Harvey Norman has also been putting its financial resources towards stronger internal IT structure. One example is by automating its purchase ordering process. Additionally, Harvey Norman gives flexible management style to every franchisee’s stores. This is reflected as most of them tend to have desire to blend into the local communities by using local electronics installations and cleaning services for example. It also offers distinct franchising system, allowing specialization of sales and purchasing methods by staff as explained by the company’s 2009 annual report.
On the other hand, however, the Harvey Norman franchise system was criticized on its inflexibility and complex approval process. One example is the fact that the franchisees have to go through the franchise committee only to decide on which product to buy as stated in EveryFranchise 2009 article. Also, the company is said to not have sufficient e-commerce infrastructure which is believed to be a crucial investment for future retail growth. Gerry Harvey, the chairman of Harvey Norman believes that the e-commerce sales channel would never work based on his experience and research on Australian buying behavior.
Another flaw in the franchise structure of Harvey Norman is that there is no share of credit upon online buying (Smartoffice article, 2008). All online purchases are recorded as the sales of the company headquarter, not its local franchisee. This has made the franchise owners to not support the online buying system. The article explains that the opposite is true for companies like JB-Hi Fi and Best Buys who have heavily invested their resources into its online operations that will not only build online sales but drive more traffic to their stores.
It is obvious that the internal structure of Harvey Norman, like many other businesses, has its own advantages as well as flaws to be improved. External Capital External structure consists of brand names, trademarks, image and reputation. Thus, it involves also maintaining relationships with customers and suppliers. There is always an element of uncertainty in external structure as company’s reputation or image can change overtime. For a retail company like Harvey Norman, most of their intangible values are generated from their outward competence to generate more revenues.
Currently, Harvey Norman has a dominant position in Australian retail market, with a strong brand and customer base. Harvey Norman is also said to have an excellence in customer service level (Aus Business, 2009). Moreover, Harvey Norman offers flexible payment options for its customers through installments, unlike its competitor, JB Hi-Fi who only offers credit card or cash as payment methods. However, by offering customers with many payment options, Harvey Norman is at risk to have high days in receivables.
It is believed that by Harvey Norman effectively solves its customer problems and increases its service level; customer relationships, company image and networks will also be strengthened. Besides customer relations, it is also important for Harvey Norman to maintain strong relationships with its suppliers as strong supplier relationships could lead to a competitive advantage that is hard to imitate. Harvey Norman is to keep its image and reputation as a trusted and reliable company to have relationship with.
While it is important to maintain the brand name, Harvey Norman needs to also look at the ways to keep marketing costs down as what JB-Hi Fi did by putting their stores in large customer traffic areas to minimize marketing costs, i. e. 9. 9% of revenue, compared to Harvey’s 22%, as said in the Oz bankers’ article. Individual Competence Sveiby’s article explains that individual capital includes a company individual’s professional competence and their abilities to solve the problems of their customers. These are the individuals who bring revenue to the company.
Individual capital is built through education, professional experience, personal reputation, personal relations with customers and professional colleagues. As said in one technology forums, Harvey Norman offers more training and development to its employees than its competitor, JB-Hi Fi although it was said to be inconsistent depending on the manager’s attitude on its staffs. Individual capital relates to individual competence which is build and maintained in an organization that treats their employees well and fairly.
Therefore, in Harvey Norman, such competence is rewarded by compensation given in forms of employees’ discounts, sales commissions, stock options, and other non-monetary benefits such as education. The individual capital is crucial to business like Harvey Norman as it is relying on its store sales employees knowledge and experiences to bring more revenue to the company by selling its products and also solving customers’ problems. The company is also relying on its upper employees for making marketing and strategic decision for the company. Recommendations
With the recovering of the global economy and increasing consumers’ confidence, Harvey Norman faces a good prospect for its growth and profitability on both domestic and international market. Like most other service-based business, Harvey Norman needs to leverage its strength and competency within its intangible resources to deliver outstanding services and retain customers both on local and international markets. Within the local Australian market, Harvey Norman faced stiff competition from other major consumer electronics chain-store such as JB Hi-Fi or Dick Smith.
Although there is certain benefits from Harvey Norman unique business model which stem from local franchise-owner management, there is strong disadvantage on competing over a wider national region where it lacks the focus of a single business direction and efficiency of overhead cost allocation. It is thus recommended for Harvey Norman to retain its intangible on local expertise and local management, while at the same time also courting them along with regional leads to participate on collaborative projects and initiatives.
The objective of these projects would be to strengthen individual local store manager ties to the whole of Harvey Norman business and encourages them to participate and be involved to act as a business unit. Over time the benefit from closer relationship and interaction between franchisee would allow Harvey Norman as a whole to implement store-wide policies and projects, a more efficient allocation of infrastructure costs, and also act as a cohesive unit like its main competitors while still maintaining its competency on local expertise and local community ties.
With this strategy it’s very likely for central management to face initial resistance to change from franchisee, at least during the earlier period of implementation. Despite Harvey Norman’s stellar performance within the Australian market, the same could not be said for its overseas operation where the results are more varied, a case in point is its operation in Ireland where its stores still struggle to produce profit and induce growth.
Outside of the familiar Australian market, one of the biggest mitigating factors against Harvey Norman is its lack of brand awareness and customers’ goodwill on international market, it’s brand name ‘Harvey Norman’ does not carry the same weight internationally as it does within Australia. Another mitigating factor is the lack of expertise and local knowledge of management expertise, unlike its local operation Harvey Norman could no longer claim its image as the friendly local retailer with local expertise.
With the goal of overseas operation growth in mind, it’s recommended for Harvey Norman to transfer as appropriate some elements from its Integrated Retail, Property and Franchise system and local management expert franchisee strategy as it’s done in Australia to its international operation. With consideration to budget allowance, an aggressive marketing campaign involving local community on overseas operation can be conducted to promote Harvey Norman brand as a global brand with local expertise and involvement.
In the long term this campaign will improve overseas customers’ perception of Harvey Norman as a friendly reliable store that contributes to their community. Another good course of action for Harvey Norman strategy on overseas growth is to increase its solicitation to potential franchisee, given the right circumstances Harvey Norman’s integrated franchise system which allow for difference on local management will allow for significant growth at international market while still maintaining the same laissez-faire style of store management as in Australian market.
Harvey Norman as a global brand will grow as the number of franchisee increases. Conclusion Harvey Norman has enjoyed continued growth and profitability within Australian market since its establishment on 1982. Attribution to these successes goes beyond the services it provided as consumers discretionary retailers, even more significant is Harvey Norman immeasurable intangible resources on the form of its unique franchise and property structure and off-hand branch management.
Under its integrated retail, franchise, and property system Harvey Norman is able to continuously grow while sustaining a healthy cash-flow from its franchisee, those franchisee themselves are given a degree of flexibility on store management and encouraged to involve their local business and communities, which in turn enhance Harvey Norman branding as a reliable and friendly local business. Amid these successes the ecent global financial crisis had lowered consumer discretionary spending confidence which tied directly to the slowing growth and profit within Australian market, and a more adverse effect internationally where Harvey Norman brand carries a weaker effect on a global market. It is thus recommended for Harvey Norman to retain its growth rate both domestic and internationally by leveraging its core strength and competency within its intangible resources, that is its franchise and property system and local management.
What can be best improved is to encourage its franchisee management to be closer relationally to headquarter and participate more on store-wide projects possibly by including a major incentive for the local franchisee. A more integrated structure and participation like traditional retail structure will bring the benefit of increased economy of scales and efficiency ideally while also increasing the profit-sharing for individual stores, closer co-operation would also allow Harvey Norman group as a whole to tackle large scale infrastructure project that will bring big dividends over the long term. Appendix Appendix 1 982| 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. | Source: Harvey Norman Company Profile,2010 References Atkinson, B, 2009, Australia Top 20 Retailers Ranking, Insider retailing, accessed 20 April 2010, ;http://www. insideretailing. com. au/Latest/tabid/53/ID/5551/Australias-top-20-retailer-rankings. aspx; Canavan, G, 2008, Harvey Norman Holding Stocks (HVN), Sydney Morning Herald, accessed 21 April 2010, ;http://www. moneymanager. com. au/articles/2008/06/09/1212863542134. tml; John D. HarveyNorman. com. au Australian Superstore review, Aus Business Review. Accessed 21 April 2010, http://www. ausbusiness. net/review/harveynorman-com-au-harvey-norman-catalogue/ Richard, D. 2008, “Why Gerry Harvey is wrong and JB-Hi Fi right” , Smart Office, Accessed 21 April 2010, http://www. smartoffice. com. au/Business/Retail/B6X2M6S2? page=2 Richard D, 2010, Harvey Norman Slammed but don’t Knock Management, Smart House, accessed 30 April 2010, ;http://www. smarthouse. com. au/TVs_And_Large_Display/Industry/U9A3V3C9;
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