Internationalization of Koyo Jeans from Hong Kong - Case Study Example

INTERNATIONALIZATION OF KOYO JEANS FROM HONG KONG External Analysis Argentina Porter’s five forces Rivalry According to Christopher and Candace (2013), Argentines apparel is highly fragmented with 65 % of the industry comprising of small family owned enterprises hence a relatively competitive market. The industry comprises of over 11 600 design and manufacturing companies and 30100 retail stores. However, with a growth rate projection of 7 % for the year 2015, market rivalry will intensify (SME Times, 2014). Threat of substitutes The argentine apparel industry is characterized with a relatively high threat of substitute. Cotton forms the principle agricultural produce of Argentina. The availability of cotton has led to the establishment numerous non-jeans designing companies and subsequent proliferation of Asian imports (Ulrike, 2013). Buyer Power The purchasing power of Argentine buyers is relatively average due to the uniform concentration of womenswear, menswear and children wear in the market. However, Marinova and Marinova (2012) projected a rise of consumer purchasing power due to growth of the middle class and increasing consumer fashion awareness. Supplier Power Suppliers in the apparel industry are also highly fragmented, leading to a lower bargaining power. As a result, manufacturers and designers have an extensive pool of suppliers to partner with. Threat of New Entrants Barriers to entry into the argentine clothing industry are relatively average. New entrants face limited competition due to the market fragmentation. On the other hand, large capital, economies of scale and brand loyalty forms key threats to new entrants. Pestel Analysis Political: Argentina has prevalently been marked with political tensions mainly from labor unions due to unpopular regulations impacting on water, food and gas prices. Subsequently, the government has faced with street protests and strikes. The situation has further been worsened by the upcoming 2015 general elections (SME Times, 2014) Economic: Similarly, argentine economic situation is highly risky. A court ruled out in favor of the hold out creditors after the government defaulted on its restructured sovereign debt unlike its neighbor, Argentina continues to express sluggish economic recovery. The situation has led to hyperinflation, rise of interest rates and devaluation of peso (SME Times, 2014). Social: The unprecedented growth of the middle class has led to increased demand in the apparel industry. The emergence of fashion conscious consumers have increased demands for key brands that include Zara, Levi and Christian Lacroix(SME Times, 2014). Technology: Advancement in technology has positively impacted on the apparel industry. The establishment of internet broadband has led to the emergence of online retailing. Information technology has further improved on the strategic management of apparel firms through online marketing, customer relationship systems and feedback through social media. Environmental and Legal: Apparel firms are further subjected to argentine regulations and environmental policies. Some of the key legislations include minimum wage requirements, labeling standards, import restrictions and specific duties (DIEMs). On the other hand, public’s widespread concern for the environment led to the development of environmental policies. Companies are hence mandated to protect and sustain the environment through undertaking of environment assessment impact. Industry Lifecycle Analysis Based on the prevailing external and internal factors in Argentina’s clothing industry, it is evident that the industry is under the growth stage. According to Griffin and Pustay (2010) dominating factors in the argentine apparel industry characterize the growth stage. These include, rapidly increasing demand for fashionable clothing, rise of industry profitability and growth of 35 % in the last five years (Glowik & Smyczek, 2011). Additionally, the stage is marked with the relatively low competition and the fall of prices as new customers emerges and enhancement of the distribution channels due to technological and infrastructural developments. The stage has further been underpinned by the high threat of new entrants into the market mostly from Brazil. Portugal Porter’s five forces Rivalry Has a highly fragmented value chain and textile industry Relatively low retail concentration Increased competition from the Asian producers Growth of specialist chains Intense competition between vertically integrated domestics chains and multinational brands Threat of substitutes High threat of substitutes from the Asian garment imports Continual adoption of nonjeans foreign fashion cultures e. g Chinese and Japanese Fashion dynamics that favor office wear as opposed to casual jeans wear Buyer Power Buyers are highly fragmented. Low buyer bargaining power Supplier Power Low bargaining power of suppliers High density of small suppliers Market characterized with independent suppliers As a result of their fragmentation suppliers have small production volume Forward integration into the retail sector is hindered by few large domestic suppliers Threat of New Entrants Low threat of from new entrants Establish customer base and large geographic spread enhances demand side economies of scale to domestic apparel retailers The few large size apparel firms further enjoy supply side economies of scale to their large size of operations The industry is also characterized with a low cost in switching local suppliers due to due to the strength of the apparel industry. Prevalence of government restriction on foreign apparel investors Pestel Analysis Political Increased uncertainty following 2013 political instability Decline of international market trust Controlled by EU as a consequence of the economic bail out Sluggish recovery from the economic recession Economic Factors Highly liberal economy Highly disparity between income and wealth distribution Rise of VAT on electricity, gas, food and infrastructural services. Declining consumer purchasing power Increasing unemployment rates Socio-Cultural Factors Increased consumer awareness for fashion Preferences for local purchasing Moderate purchasing frequency Price sensitive as results of the economic down turn Adoption of foreign fashion trends due to immigrants influence. Technological Factors Development of online stores Enhancement of consumer relationship through emails, cell phones and social media Advancement of logistics and distribution channels Improved communication channels Increased flexibility of apparel firms to consumer demands Environmental and Legal Factors Policies on the protection and sustainability of the environment Adoption of environment-friendly processes and technologies Government levies on environment pollution Minimum products standards with regard to environmental impacts Implementation of EAI programs Implementation of IVA, IRC and IRS taxes Portugal Apparel Industry Lifecycle Figure (1). Apparel Industry Life Cycle Portugal’s fashion industry is also in the growth phase of industry life cycle. Unlike, Argentina’s market, the continued growth of the Portugal’s industry has been hampered by profound economic and political factors. According to Griffin and Pustay (2010)., the economic situation of Portugal has been worsened by macroeconomic challenges which included perennial trade deficit, dismal GDP growth rate and the extensive public and private debt. UK Porter’s five forces Rivalry Existence of numerous large market players such as Marks and Spencer’s, Next and Arcadia Prevalence of extreme competition from every segment of the industry Industry characterized with market leaders who enjoy competitive advantages such as brand loyalty Market domination of established products lines Subsequent internationalization by market leaders into the emerging markets hence increased revenue (Lutz and Andreas, 2013) Threat of Substitute Majority of the market leaders have their marketing niche through end products, vis a vis, the existence of low-quality substitutes presents low threats to the market. Market consumers are further brand driven thus less affected by price changes in the market. Buyer’s Power Larger number of competitors Consumers have a higher bargaining power Higher consumer power enhanced by the large number of key players in the UK’s apparel’s market Existence of a large number of high brand value products for consumers’ hence wide variety for choice Heightened consumers power has led to the emergence of value addition services by market leaders Suppliers’ Power UK’s apparel industry is marked with few suppliers due to the high cost of raw materials Suppliers in the market hence have a higher bargaining power Supplier’s use of traditional methods of production also contributes to the high cost of raw materials The high-cost real estate also contributes to increasing suppliers power in the industry. As results, market leaders are opting to sources their production phases emerging markets where raw materials are cheap. Threat of New Entrants New entrants pose limited threats to existing market players UK’s fashion industry is extremely saturated with the leading brands The high cost of entry also presents a key challenge to new entrants New entrants, therefore, require extensive capital in terms of funds and resources to venture into the market. Pestel Analysis Political Apparel companies are impacted by the rate of taxes being imposed by the UK government UK’ s current market is dominated with an all time low-interest rates vis a vis, firms are able to borrow from financing institutions Sustained democratic parliamentary system has further ensured political stability thus lowering the political risks Through UK-EU ties, apparel firms in UK have a wider market reach. The rise of VAT has further triggered a decline in the offshoring of domestic manufacturing services The subsequent reduction of corporate tax further results to increased organizational profit. Economical Factors Sustained economic growth and the revisions of economic growth rate from 3.1 % o 3.4 % indicates a favorable market The revamp of UK’s economy has led to increased consumers expenditure Increased level of consumers’ disposable income has triggered increased demand for apparel products Social Factors UK’s apparel consumption has been driven by sustained social dress codes such as office style, vintage fashion, night dressing and casual wear. The emergence of smart dressing by the younger generation has facilitated sustained update of fashion trends in the market. However, the industry has been negatively impacted by aging population which has forced emergent companies to adapt and appeal to their preferences Technological Factors Widespread diffusion of the internet broadband has enhanced communication and online marketing Technological advancements have also led to the adaption of online business models by key players New technologies have further improved on firm’s relationship with their customers through the use of social media Environmental and Legal Factors Apparel firms are subject to UK’s legal minimum wage standards and employment opportunities among others. In addition to UK laws, firms must further comply with the regulations of EU. UK’s fashion industry has further been defined with increased consumer environmental concerns. Maintain consumer loyalty and preferences apparel firms have been influenced to minimize their environmental impacts through the implementation of green and sustainable processes and technology. Industry Cycle Analysis Motive for Internationalization According to Christofor (2008) motivation for internationalization can either be in the form of proactive or reactive motivations. Susman (2007) noted that a proactive internalization is normally driven by internal factors while reactive is driven by external. From the strategic analysis, the internationalization of KOYO jeans is mainly proactive. Therefore, the company is highly motivated by the following international factors, profit advantage, technological advantage, Economies of Scale and production of unique products (Forsman et al., 2002).After establishing itself successfully as premium jeans designer in China and Singapore, the company is highly motivated to exploit profit advantage in the developed markets of Argentina, Portugal, and UK. Additionally, the internationalization process is pegged on the technological advancement which has effectively streamlined chain supply, logistics management and communications (Zhang & Chan, 2011). The company also aims to exploit economies of scale which characterize multinationals in terms of nondependence on a single market dynamics. On the other hand, external factors motivating KOYO jeans to internationalize refers to those factors which the company has limited control over. These factors represent proactive motives. These include competition pressure, overproduction, excess capacity, saturated domestic market and proximity to customers’ location. With regards to the external factors, KOYO jeans will be majorly driven by saturated domestic market and excess capacity in China. The apparel industry of china is awash with both local and international garment companies (Liberman, 2013).  Additionally, with the continued advancement in technology, KOYO jeans have unprecedented exceeded the consumption capacity of Hong Kong’s consumers. Similarly, successful integration of world markets and subsequent marketing has promoted KOYOs products to a foreign market. Therefore, the company is further driven by the need for closer proximity to its European and American consumers (Li, 2007) National Competitors Advantage of UK Figure (2). Porters Diamond Factor conditions The UKs population is highly skilled and trained, therefore, a excellent pool of workforce. However, UK market suffers from limited land resources vis a vis, high cost of raw materials for the apparel industry. Nevertheless, the infrastructural network presents an elaborate and comprehensive transport network favorable for firms. Demand Conditions The prevailing demand conditions for the apparel goods are also positive. The market has been characterized with a rejuvenated consumer purchasing behavior as a result of the increased real income and sustained economic growth. Additionally, the market is characterized with numerous key players thus consumers are highly sensitive product quality. Related Supporting Industries UK’s apparel industry is intertwined with robust supportive industries which include banking, insurance, agricultural sector and the marketing research agencies. The industry is cautioned with low-interest rates which highly encourage borrowing from the financial institutions. The rich foundation of UK’s textile industry ensures availability of all raw materials for the fashion industry. Firm Strategy, Structure and Rivalry UK’s apparel industry is highly competitive and saturated with key brands. Due to intense competition market leaders have developed competitive strategies that ensure profit maximization in the market. Majority of the firms have hence positioned themselves as marketing niche players have embarked on consumer value addition techniques. Based on the previous strategic analysis of the three nations and highlight on UK’s national competitive advantage, the apparel industry of UK is highly in line with the corporate strategy of KOYO jeans. Entry Mode It is highly recommended that KOYO jeans employ joint venture in its entry into the UK market. Following the analysis of the external factors impacting on the UK’s apparel industry, the market is highly saturated with key players hence through market venture with one of the players in the market, KOYO will also share in the strategic advantage over rival firms. Suitability Joint venture mode of entry highly fits within the identified market issues. First, UK’s market is highly competitive, vis a vis, through a joint venture KOYO will be partially shielded from incurring total losses in case of failure. The firm will further overcome the barrier of highly capital requirement through cost sharing. Furthermore, as a new entrant into the market, KOYO will be in a position to gain insight into the market from a strategic position. Marinov & Marinova (2011) further noted that consumers brand loyalty may further be transferred to KOYO products through association. In the long run, the strategy resonates with KOYO’s long term strategy which is diversifying consumer’s market base. Feasibility Through a joint venture, KOYO jeans and its strategic partner will be able to pool together their already extensive resources towards the internationalization process. BY partnering with a market leader in the industry, KOYO will be assured of technological resources and related market knowhow. The feasibility of the joint venture will further be assured by the existence of common performance incentive between the two parties to maximize profits. The strategy will also be underlined by the presence of updated technology which facilitates effective and efficient management of supply chain, logistics and human resources tasks (Fillis, 2002). References Christofor, J. (2008). Antecedents of venture firms internationalization: a conjoint analysis of international entrepreneurship in the net economy. Wiesbaden, Gabler. Christopher W. and Candace A. (2013) Government Effectiveness, the Global Financial Crisis, and Multinational Enterprise Internationalization. Journal of International Marketing 20:3, 65-78 Fillis I. (2002).Barriers to internationalization: an investigation of the craft Forsman M. Hinttu S. & Knock S., (2002). Internationalization from an SME Glowik, M., & Smyczek, S. (2011). International marketing management strategies, concepts and cases in Europe. 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