Successful businesses know when and how to adapt and change. This involves growing some areas of activity and cutting back on less profitable areas. Companies can often benefit from acquiring businesses operating in overseas markets. For example in Europe, the USA or the Far East, the availability of new customers or cheaper costs of employing people may give competitive advantage.
This case study describes and analyses the growth of the Davis Service Group. The term Group describes companies that are joined together with a shared ownership. The Davis Service Group provides textile maintenance services in the UK and Europe. This includes linen hire, workwear rental, dust control mat, laundry and washroom services.
The Group operates across Europe from its London headquarters. It employs 16,000 people and has an annual turnover of more than £700 million. The Davis Service Group used to be a conglomerate. A conglomerate is a group consisting of businesses focused on different markets.
In 2001, the Davis Service Group consisted of three main operating companies each of which was the UK market leader in its own sector:
- Sunlight (textile maintenance) hiring sheets to hotels, hospitals and private businesses.
- Sunlight was the original company from which the Group developed
- Elliott (building systems) hiring modular buildings for temporary office space
- HSS (tool hire) operating through 450 outlets in the UK
Although these companies were strong, they operated only in the UK which had become a mature market. This means that there are fewer opportunities for growth. Sunlight was the strongest performing part of the business with 45% of revenues at that time.
Therefore, to improve return on investment to shareholders, the company chose to focus on the linen hire and textile maintenance part of the business and look for ways to grow it overseas.
Strategic choice
Davis Service Group had a number of options to choose from to follow its strategy of overseas growth. A strategy is a plan that a company develops and implements. Strategic choice involves deciding:
- what business sector or market to expand into
- when to expand
- how to expand for example, whether to take over another company, set up a joint venture or set up a new company
International expansion
Expanding into other countries can be a good way to grow a company. In particular, expanding into other areas of the European Union (EU) provides many opportunities for a UK business. The EU currently has 27 member countries. It is a huge potential market. Any business in the European Union has over 500 million customers on its doorstep.
Goods and services can flow freely in the single European market. This means it is much easier to do business in the EU. Trade within this area has risen by 30% since 1992. The development of fast transport links, for example, the Channel Tunnel, high-speed trains and cheaper air links, means people can travel to and across Europe more easily. The Internet and email enable companies to communicate instantly.
British firms locating factories and offices in the EU are able to benefit from a skilled labour force. Within Europe, most member countries use a common currency the Euro. This makes it easy to trade within this market place.
Barriers to international expansion
When a business decides to expand overseas, there are a number of factors which may present barriers that it needs to consider:
- Language differences can lead to confusion. However, English is the main global business language spoken by many people within the EU.
- Currency differences. Most countries within the EU use the Euro. The UK uses the British pound. The value of the pound can go up or down against the value of the Euro. This can make it difficult for a business to predict what its costs and revenues will be. If the pound has a lower value than the Euro, a UK business would pay more for imported materials but receive less for its exported finished products. This would mean less profit.
- Cultural differences. Ways of behaving and doing things vary between countries and even within countries. In business, some behaviours such as buying decisions may be the same. In other cases it is important to respect local differences, for example, how you greet someone new for the first time.
- Legal and administrative differences may vary across countries, for example safety standards for buildings. However, there are international standards that create common requirements.
- Skill levels may vary between countries. In setting up a business that needs particular skills, it makes sense to focus activities in countries where those skills exist.
Inorganic growth
A business can develop by organic growth or inorganic growth. The term inorganic growth describes how a business grows by joining one or more companies together. This can be by:
- merger- two firms join by agreement. Mergers make it possible to share the resources of the two organisations and focus on the best activities of each.
- takeover – one company buys at least 51% of the shares of another company. This enables the company with the larger number of shares to have control over the other business and select which activities to keep.
Integration
Horizontal integration refers to a situation where two firms at the same stage of production join. If Sunlight joined another firm hiring sheets to hotels and hospitals in the UK, this would be an example of horizontal integration.
In contrast, vertical integration joins businesses at different stages of production. For example, Sunlight could join with a company that makes hotel sheets. This shows backward vertical integration where Sunlight benefits from controlling the supply of the sheets it uses. This ensures quality control and on-time delivery.
A business could also consider forward vertical integration. For example, it could join with a distribution company to economise on its transport costs. This could also benefit Sunlight by showing its environmental responsibility.
The Sunlight business was partially vertically integrated by including the cleaning and delivery processes in its service. The advantage of vertical integration is that it gives the business greater control over the supply chain of its product or service.
Acquisition
In 2002, the Davis Service Group acquired Berendsen, a company operating in Denmark, Sweden, Norway, Austria, the Netherlands, Poland and Germany. Berendsen was an ideal acquisition because, like Sunlight, it was the market leader in providing textile services in its geographical area.
It was better for the Davis Service Group to take over Berendsen rather than set up a new rival company in Europe. Building on Berendsen”s local experience and local market contacts, Davis Service Group could buy into established networks and customer relationships.
When the Davis Service Group took over Berendsen, Berendsen was not performing financially as well as it could. Profitability was below that achieved by Sunlight. The Davis Service Group already had proven management systems in providing textile services.
Taking over Berendsen, rather than merging with it, gave Davis Service Group the control to put the best systems in place at Berendsen. It was able to:
- reduce operating costs, for example, closing down some locations where Berendsen had two outlets operating in the same area
- strengthen the management of the two companies
- save fixed costs, by cutting out the central headquarters of the company. This put Berendsen in a stronger position to improve its sales and profits
Horizontal integration made sense. Sunlight and Berendsen are specialist companies at the same stage of production. It was possible to pool the knowledge and expertise of the two companies so that both benefited.
Strategic fit
The factors that might have been barriers to international growth were easy to overcome in this acquisition:
- Language: Berendsen’s business operates across several European countries and uses English as a common language.
- Cultural differences: buying patterns and the culture in the areas where Berendsen operates are similar to the UK.
- Currency: the countries in which Berensden operates already used the Euro or had currencies linked to the Euro.
Financing the takeover was straightforward: there was a close strategic fit with what Sunlight already did well, which was easy for shareholders and banks to understand. £150 million was raised through selling more shares to existing shareholders. The remainder of the £425 million to purchase Berendsen came from new bank borrowings.
The Davis Service Group successfully delivered the promised returns to its shareholders over the period 2002-2005 and has seen its share price rise accordingly.
The next phase of growth involved some additional small takeovers of companies to strengthen the business position. The focus was on keeping the most efficient units in the growing company. These additional takeovers added a relatively small workload without the need for substantial investment.
Organic growth
Organic growth is when a company increases the turnover of the existing business.
Much of the growth of Sunlight and Berendsen involves organic growth. These businesses are market leaders that have been able to learn a lot from each other and share good ideas and best practice.
As part of the Group, these companies have increased their customers in existing locations, as well as in other areas of the rapidly developing EU market. Trade and living standards in the EU are growing fast.
Large global companies are opening up new sites and they require textile services from Sunlight and Berendsen. Countries like Poland, which joined the EU in 2003, are experiencing growth in key sectors such as manufacturing so more uniforms are needed. New EU legislation also provides an opportunity for Davis Service Group. For example, the need for protective uniforms for industrial workers provides plenty of new contract work for textile services.
Organic growth – building on existing resources – is sometimes the only way to grow. For example, in many Eastern European countries that were part of the former Soviet Union, there are few companies suitable to take over. Most businesses in these countries had previously been government-owned. They had poor equipment and/or had no need to rent out textiles.
Conclusion
The Davis Service Group needed to grow. Of its original three divisions, the linen hire and textile maintenance services provided by Sunlight offered the greatest opportunities because of the strategic fit factors.
The Group’s other businesses were sold off to concentrate on the potential of the enlarged European textile maintenance business and to provide funds to invest further in this business.
The Davis Service Group is an international business. However, it believes in giving local people responsibility for managing the markets they know best. It has a decentralised approach. The small London Head Office has just 17 people working there. Local managers manage local companies using their expertise in their own markets.