International Business Strategy - Koyo Jeans - Case Study Example

International Business Strategy Table of Contents Contents Page Introduction………………………………………………………..3 2. Environmental Audit………………………………………………3 2.1 SWOT Analysis.……………………………………………….3 2.2 Life-cycle Analysis……………………………………….……5 3. Internationalization…………………………………….….……….7 3.1 External Analysis…………………………………….…….…..7 3.1.1 Macro-Environment……………………………..……..7 3.1.2 Micro-Environment…………………………..…..…….9 3.2 Evaluation of National Competitive Advantage…………..…..11 3.3 Evaluation of Modes of Entry……………………………..…..12 4. Conclusion and Recommendations……………………………..…13 5. References…………………………………………………….…...15 1. Introduction International business strategy can best be defined as plans that guide transactions between entities in different nations with the aim of increasing profit. Organizations can adopt international business strategy in order to leverage their competitive advantages and core competencies, opportunistically expanding into foreign markets (Zhao, 2013: 54). Many organizations at some point deal with one or more international partners in the chain of supply, especially where competition is international in nature. As there are appreciable variances in how business is done in different countries, it is essential to understand the linguistic and cultural barriers, as well as legal and political systems of international trade. Maintaining business success for Koyo Jeans will depend on the international strategies the company adopts. These strategies will be the main factors that decide the failure or success of Koyo Jeans’ international expansion (Bruzzi & Gibson, 2010: 14). In order for the business to be profitable, the company’s management should adhere to the strategies to provide direction for their business activities. 2. Environmental Audit 2.1 SWOT Analysis Strengths Koyo Jeans’ international brand has a strong reputation that has been developed over the last decade, which they can leverage (Zhang, 2011). Koyo Jeans’ expansive computer-based system will offer a great advantage for the company in planning and controlling their ordering and inventory. The wholesale low-end products for Koyo Jeans that they sell at affordable prices is an advantage as they achieve a short period of capital returns and inventory cycle, while their high-grade brand should build customer loyalty and a renowned brand name in the long term (Petro, 2012). Weaknesses A shortage of talented personnel within the company could harm their international expansion Koyo Jeans still outsources some of its important production processes, which reduces their profits (business.qld, 2013). Koyo Jeans do not have a strong online presence, which is resulting in a loss of opportunities for the company. Opportunities There are potential markets for Koyo Jeans in the North of China, while online expansion could enable them to meet the emerging needs of their young customer base (Yeung et al, 2011: 230). New products could help Koyo Jeans diversify their customer base and expand their business New overseas markets could enable Koyo jeans diversify their product portfolio and expand their business, especially as international markets would enable the company increase sales by expanding their business (Lee & Edwards, 2014). Expanding their online forum would also allow Koyo jeans to market their products to a wider customer base at relatively lower marketing expense. Threats Koyo Jeans faces a threat due to rapidly changing trends in fashion, as well as increased competition both in domestic and international markets (Choi, 2012: 65). The slower-than-expected economic recovery in Europe and some parts of the Asian market could hurt the pricing of expensive jeans European fashion markets are in their mature stage, meaning that competition is fierce and that Koyo Jeans has to increase market share that is expensive and difficult (Choi, 2012: 65). Many competitors on the international market possess many competitive advantages that Koyo Jeans has to deal with. 2.2 Life Cycle Analysis Life-cycle analysis in the case of Koyo Jeans can be used to assess the impact of their products on the environment, while also enabling the company assess their design decisions and processes so as to improve sustainability (Wenting & Frenken, 2011: 1036). In this case, Koyo jeans would have to consider all life-stages from their textiles and fibre to the end consumer to disposal and reuse/recycling. The product life-cycle in the fashion industry is relatively short because of regular changes in tastes and trends (Jackson & Shaw, 2011: 46). Generally, the product life-cycle of Koyo jeans begins with introduction of their products where they make products available for their customers with the new item being adopted by fashion leaders. A lot of prominence is given to the new products using celebrities and other visible individuals. During the growth phase, Koyo Jeans has to ensure that there are sufficient stocks to avoid customer disappointment. Their products will promote themselves at this stage as customers can see them in magazines and newspapers (Gerber & Saiki, 2010: 24). In the maturity stage, Koyo Jeans may ensure continuous supply by ordering more stock as they continue to advertise their products. The saturation phase could involve a reduction of pricing in order for the remaining stock to be cleared, while sales provide additional opportunities to clear their warehouses for other products. Finally, during the decline phase, the customers replace their products with new products as they tire of the old product. During this phase, trends and fashion have moved on (Gerber & Saiki, 2010: 24), which will necessitate a new product from Koyo jeans. The development phase of the product life-cycle comes just before the introduction phase. During this stage, the procurement team at Koyo Jeans chooses styles, materials, and colours in order to produce apparel designs. These materials are provided by suppliers and the finished goods distributed to the company’s warehouses for introduction into the market (Thomson, 2012). Introduction occurs as the consumer sees trends and fashions in magazines and fashion shows. Costs in the introduction phase include updating the ordering system, purchasing new stock, promoting the new products, and the risk that a product may sell poorly. During the early phase of the product life-cycle, the costs will be high and the revenues are low. However, the revenues begin to outstrip the costs as the product enters its growth phase, increasing the venture’s profitability (Thomson, 2012). 3 Internationalization 3.1 External Analysis 3.1.1 Macro-Environment PEST Analysis Political Factors Regarding government taxation, corporate tax could affect the company’s profitability, while income tax could affect customer spending (Poom, 2014). Corporate tax levels in the EU have declined, although deficits in countries like France mean that there is little guarantee that this will be maintained at current levels. Interest rates will also influence expansion strategy with interest rates in Europe standing at historically low levels, making it easier for Koyo Jeans to borrow for capital expansion at reduced rates (Wit & Meyer, 2013: 49). Finally, the relatively stable political environment in China and France provides a low-risk investment opportunity. Economic Factors Since Koyo Jeans uses a differentiated strategy, fluctuations in the economic environment have more impact on their profitability than if they were operating in the budget sector of the fashion market (Cullen & Parboteeah, 2010: 23). The economic crisis greatly affected the economic situation of Koyo Jeans’ target markets. GDP growth in European markets has stagnated over the past two years. However, while unemployment levels have been increasing in the past five years, levels of disposable incomes seem to be increasing as of 2013 (Wild et al, 2014: 20). For Koyo Jeans, this could significantly impact on their internationalization strategy. Socio-Cultural factors The fashion industry is a cultural and social industry, which means that these factors especially influence this industry (Cullen & Parboteeah, 2010: 25). An aging European population could be either a threat or an opportunity. While it may result in companies adapting their product portfolio to appeal to this generation, competition for the younger demographic could also increase. The diverse populations in countries like France would also require fashion companies to align their range of products to particular socio-cultural segments. The work-force would also be culturally diverse, which would have implications for the organizational culture (Cullen & Parboteeah, 2010: 25). Technological Factors Technological advances influencing the fashion industry are mainly communication and internet based, including the pervasion of broadband technology (Deviney et al, 2010: 66). Internet capability advances should allow firms to develop online business models to complement traditional retail establishments. Consumers now also expect fashion companies to interact with them on social media platforms, which are becoming increasingly important in the success of marketing strategies. Other technological developments like apps and smart-phones have also allowed companies to increase interaction with consumers, enabling these companies to leverage the benefits of both traditional brick-and-mortar stores and online stores (Deviney et al, 2010: 66). 3.1.2 Micro-Environment Porter’s Five Forces Analysis Intensity of Competitive Rivalry The presence of established companies in the fashion market and the increase in companies using online platforms may pose a threat to Koyo Jeans. The intensity of competitive rivalry in this market is high as the global fashion market grows with economic recovery and demand increasing from Chinese shoppers (colliers.com, 2012). Some competitors in these markets have large marketing and financial resources, which means they could compete more effectively in case the economic weakness worsens. Bargaining Power of Customers The bargaining power of customers in this market is medium as wholesale customers hold some level of bargaining power. These customers hold this power as they can substitute Koyo Jeans’ products with products from other competitors. However, Koyo Jeans and other players in the market also enjoy brand loyalty due to their high quality products and differentiated product portfolio, which will temper the customers’ bargaining power due to switching costs (Mun, 2012: 41). Threat of New Entrants This threat ranges from low to medium informed by restriction of new entrants by capital investment requirements, while the emergence of internet-based companies could lead to more entrants. New entrants would require large capital resources in branding, marketing, and floor space, which are important for attracting high to middle-income earners to Koyo Jeans (Liu et al, 2011: 1294). However, lower barriers in internet business entry may attract new companies to begin selling accessories and apparel online. Bargaining Power of Suppliers This threat is low due to the diverse base of suppliers. Most of Koyo Jeans’ production is carried out in China, where there is cheap labour and their wide geographical base of suppliers limits their bargaining power. Appreciating costs of labour and raw materials are shared generally by the suppliers through pricing. Still, the suppliers have limited bargaining power as none of them produced over 5% of Koyo Jeans’ total production in 2012 (Tam, 2012). Threat of Substitute Products This threat ranges from low to medium with counterfeit products presenting the biggest threat. Most of Koyo Jeans’ products are purchased by upper and middle class customers that prefer high-end brands, meaning that demand is expected to continue (euromonitor.com, 2014). However, in markets like China, the threat of counterfeit products is a growing problem. With the ever-increasing quality of counterfeit products, there is a risk that the company’s brand value could be diluted in future. 3.2 Evaluation of National Competitive Advantage Factors of Production China has abundant natural resources with several regions producing abundant amounts of cotton, wool, silk, and hemp, while chemical fibre raw material is also produced at a significant scale (Meinshausen & Schiereck, 2011: 288). Transportation is also convenient, while the country has rich resources in labour with a population of over 1 billion people. Moreover, China is also rich in knowledge and education resources. However, a lack of skilled management and technology talents, coupled with R&D deficiency and low penetration of information technology in textile zones, could disadvantage Koyo Jeans (Liu et al, 2011: 737). Demand Conditions Domestic demand conditions portend a significant influence on any industry’s competitiveness. For Koyo Jeans and other fashion companies in Hong Kong and the wider China, market demand is more than adequate with the country’s significant population (Evans & Jeffrey, 2013: 22). With increasing living standards and income levels, domestic demand for clothing should only increase. However, the demand for high-end fashion is not as refined in China because of traditions and preferences. Therefore, Koyo Jeans and other fashion companies in the country need the industry to develop a taste for high-end fashion to optimize its potential domestic demand. Related and Supporting Industries The fashion industry’s competitiveness is influenced by how competitive upstream and related industries are internationally. Clothing and textile clusters are still in their primary stage, the level of specialization and division of labour is not as high (Evans & Jeffrey, 2013: 22). Supporting and related industries are still few in number, while there is need for additional development of the industry chain. The preference for small and complete enterprises has affected the growth of medium and large enterprises, reducing overall development of the fashion industry. Moreover, this has also harmed the rate of technological innovations within the industry. Firm Strategy, Structure, and Competition The way that companies are set up, managed and organized and the state of competition in the industry, is another critical factor in determining international competitiveness. While some firms have turned their focus to product differential construction and branding, majority of companies in the fashion industry still depend on selling large quantities at low prices to remain profitable (Sung, 2012). This strategy has not been conducive for sustainable development in the clothing, textile, and fashion industry cluster as it has led to low-grade products with low value addition flooding the domestic and international markets. 3.3 Evaluation of Modes of Entry Koyo Jeans could use the licensing channel, which includes the franchising alternative that would see Koyo Jeans lease their rights to use its brand and business model for a prescribed period to a partner in its target international markets (Ling, 2011: 114). This mode of entry would enable Koyo Jeans’ access to better talent in overseas markets like France, easy expansion capital as the franchisee pays for buying the outlet, and minimized growth risk, as Koyo Jeans would invest relatively little into the locations. However, they would have less control over franchisee management as they would be independent, which could harm their reputation if the franchisee has different goals. Franchising would also lead to a weaker core community, and challenges with innovation as the franchisee has to accept any new ideas before implementation (icc.org, 2013). Koyo Jeans could also use a strategic alliance as a mode of entry, in which they would come to an arrangement with another company for strategic cooperation (Wit & Meyer, 2013: 49). This would not involve any license/franchise agreement or joint ownership and would, instead, see Koyo Jeans partner with a foreign company to develop synergy. For example, they could be involved in joint advertising programs, as well as joint R&D programs. However, strategic alliances could lead to loss of competitive advantage, especially if a smaller company allies with a bigger one. Still, small and medium sized firms like Koyo Jeans find that strategic alliances allow them to enter foreign markets when doing so alone would have been too difficult due to entry barriers and capital shortfalls (Wit & Meyer, 2013: 49). A third mode of entry is indirect exporting, in which they would rely on export intermediaries to import and distribute their products (Johnson & Turner: 2010: 51). Exporting would allow fast market access, resource concentration towards production, little financial commitment as exports cover international sales expenses, and low risks for Koyo Jeans that still considers its domestic market as the most important. However, exporting would leave the company with minimal control over marketing and distribution, while incorrectly choosing a distributor would lead to insufficient feedback from the market. Moreover, exporting would lead to potential decline in sales, especially if Koyo Jeans selects a specific market/distributor incorrectly, which would hinder Koyo Jeans’ functional ability (Johnson & Turner: 2010: 52). Finally, the company could lose market share to its competitors quickly. 4 Conclusion and Recommendations International expansion for Koyo Jeans has become an important part of its business growth strategy, particularly as it will provide the company with great opportunities for rapid growth and development. The company has major opportunities to diversify its products and markets in Europe and China, while it should also seek a larger online presence. Expanding into the northern hemisphere to Europe would also increase the life-cycle of their products as they can sell clothing over the entire year, for example by continuing the sale of summer clothing in Europe during summer. Moreover, these international markets are politically stable and have new markets and opportunities due to demographic changes and the uptake of internet technologies. However, the stubborn stagnation of the EU economy could prove a hindrance to profitability in these markets. As a result, the best mode of entry for Koyo Jeans would be franchising, as it will increase Koyo Jeans’ brand recognition in Europe, while reducing the degree of risk with the economic conditions not still normalized. References Bruzzi, S., & Gibson, P. C. (2010). Fashion cultures: Theories, explorations, and analysis. London: Routledge. business.qld. (2013, November 15). Getting into the clothing retail industry [Online] Available from Business and Industry: [3 November 2014] Choi, T.-M. (2012). Fashion supply chain management: Industry and business analysis. Hershey, PA: Business Science Reference. Cullen, J. B., & Parboteeah, P. (2010). International business: Strategy and the multinational company [Online] 2nd edn. New York: Routledge. Available from: [3 November 2014] colliers.com. (2012). Research & Forecast Report: Hong Kong Retail Market [Online] Available from Colliers International: [3 November 2014] Devinney, T. M., Pedersen, T., & Tihanyi, L. (2010). 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