The Internationalisation Process of Hugo Boss - Case Study Example

 The internationalisation process of HUGO BOSS AG Introduction Formed in 1923 by Hugo Boss as a clothing manufacturer in Metzinger, Germany, the company emerged from bankruptcy in 1931 with six sewing machines (Vangkilde, 2013). That same year, it began manufacturing varied clothing items for the Nazi Party which aided in it becoming profitable (Vangkilde, 2013). The post-war period saw the company operated by Hugo Boss’ son-in-law, Eugen Holy in 1950 who focused on work uniforms and men’s suits as a supplier (Vangkilde, 2013). The latter area (men’s suits) proved to be highly profitable and the company expanded its ready-made suits into a branded line under Eugen Holy’s sons’ (Jochen and Uwe) in 1969 (Zentes et al. 2017). This lead to the company also introducing branded fragrances, sponsorship deals for exposure (Formula 1 and the Davis Cup) and the production of other branded lines (Zentes et al. 2017). Today, the company is a global operation with 2.7 billion Euros in sales that is distributed through company stores, department store outlets and digital channels (Hugo Boss, 2017). Figure 1 - Hugo Boss Distribution Channels (Hugo Boss, 2017, p. 32) This study will delve into the patterns and process of internationalisation for the company. Subsequent sections will explore its approach, competitive aspects, selection of market entry and other factors. These will aid in understanding the strategies, models, and theories utilised and how these might be or will be successful in the future. Minimising Risks As an international fashion retailer, the company’s domestic operation represents its strategic planning and administrative centre (Hugo Boss, 2017). Its 2012 Annual Report (Hugo Boss, 2012, p. 30) stated that is own retail distribution channel represented “the importance of mono-brand points of sale is growing significantly”. The company’s 2017 Annual report (Hugo Boss, 2017, p. 32) provided the following “Over the last few years, the share of sales generated by the Group’s own retail business has grown substantially. Today, it accounts for 63% (2016: 62%) of Group sales…The Group is increasingly linking its physical retail stores with its e-commerce business.” Figure 2 - Hugo Boss Sales by Retail Channel (Hugo Boss, 2012, p. 41) Figure 3 - Hugo Boss Sales by Retail Channel (Hugo Boss, 2017, p. 33) Increased internal control over product sales optimises operations, manufacturing process, re-supply, and fashion releases. A key example is Zara (that is in the Inditex Group that includes Zara Home, Massimo Dutti, Bershka, Oysho, Pull and Bear, Stradivarius and Uterqüe totaling over 7,000 stores) that has become the world’s largest fashion retailer (Olanubi, 2017). The internally owned Zara concept has made it the number one global fashion retailer also extends to other examples: Table 1 - World’s Largest Fashion Retailers (Olanubi, 2017, p. 1) In citing the success of Inditex, an article in The Telegraph (Ruddick, 2014, p. 1) pointed to “the connection between stores, the in-house designers, and its factories.” This concentration of the company’s control over the retail sales process provides it with direct feedback on customer preferences and changing trends that is basically not possible from wholesale operations (Ruddick, 2014). Styles that are not moving can be quickly phased out and replaced by new or more variations of existing styles (Wheelwright, 2010). This minimises manufacturing exposure, inventory carrying costs and lines subject to discounting because they are not moving (Wheelwright, 2010). This is a key formula in the Zara model that allows the company to reap a profit margin of 28 percent (Olanubi, 2017) as opposed to the industry average of 5 percent (Lohrey, 2017). The large size, common language, regulations, laws, and huge upper middle class has resulted in the United States becoming the company’s largest and most important singular continuous country market (Reuters, 2018). These represent a key reason why this market, along with Western Europe was selected as the lead regions for the company’s own retail strategy (Melville, 2015). It was researched as a leading market (United States) even though the company did not indicate that its strategies were devised with any singular region or country in mind. International Approach to Reduce Risk In Domestic Operation A number of profit warnings the company had in 2016 resulted in the appointment of Mark Langer as the company’s new CEO (Hendriksz, 2016). Whilst the reduction of wholesale channels has helped to increase revenues and margins, it still leaves the company open to risks (represented by excessive inventories, fast-changing consumer taste, slow trend feedback from wholesale channels and exposed manufacturing, distribution and inventory costs) (Hardesty and Left, 2010). To combat this, Langer is emphasising digitisation as a key part of his strategic plan that includes core brand concentration to increase premium brand positioning as well as improvements in distribution (Hendriksz, 2016). The above risk factors are chronicled by Routroy and Shankar (2014) as well as Han et al (2013) who state companies face logistical risks (inventory, distribution, and shipment delays), along with financial risks (overstocking and returns, manufacturing and supply costs, financial commitments, currency fluctuations, etc,). The above also includes political, regulatory, interest rate, credit and economic risks under modern portfolio theory (Han et al. 2013). The new retail and digitalisation strategies of the company can be equated to what Salmon and Tordjman (1989) stated as global strategies. These consist of either adapting to local markets, utilising resources to achieve economies of scale or both. As a fashion retailer, Hugo Boss does not adapt its fashions, thus its approach is its new company-owned retail channel change to achieve economies of scale as well as heighten customer contact and awareness. The shift to company retail operations reduces risk in terms of geography, supply chains and time zones as the predictions regarding inventory types is easier to control (Routroy and Shankar, 2014; Han et al. 2013). This is because as products are sold, the information is passed directly to internal operations as opposed to the delay experienced by wholesale sales (Routroy and Shankar, 2014; Han et al. 2013). This is why Zara has been able to reduce overhead costs and dramatically increase margins (Ross, 2015). International Approach to Reduce Risk In Domestic Operation Terminology represents an important aspect regarding understanding the approach of Hugo Boss to its markets. This was brought forth by Heifferich et al (1997) that referred to the company’s use of multinational (meaning economies of scale), versus global (adaptation of products to fit local market tastes) as brought forth by his reference to Salmon and Tordjman (1989). Heifferich et al (1997) also referred to Treadgold (1988) that uncovered that Hugo Boss’ entry mode and operating strategies represented international (company-owned stores) and multinational involvement (store ownership). Hugo Boss has demonstrated a reactive approach to internationalisation in terms of expanding into other markets to broaden its reach. The company’s approach has been confused as its variable pricing brand strategy has been in reaction to all of the different types of competitors it has (luxury and premium) that has defused its marketing strategy. The reactive aspect represents its current multiple brand positioning (Black, Orange, Green, and Red), along with more emphasis on womenswear and fragrances since its high-end fashion line has not been received well. Figure 4 - Hugo Boss Product Lines (The Hugo Boss Group, 2017, p. 1) Table 2 - The Hugo Boss Diversified Product Line’ (The Hugo Boss Group, 2017, p. 1) The above provides insights regarding how the approach of the company in the 1970s was reactive as it sought to establish an international presence. This shifted in 2012 when it determined its wholesale oriented strategy and failure to establish itself as a luxury brand has not succeeded. This resulted in another reactive approach using the proven company retail-oriented model that was based in part on Zara. The move of Hugo Boss toward company-owned stores and a more controlled distribution channel (Alexander and Myer, 2007). The many regions and markets the company is in represents an example of Treadgold’s entry strategy that considers the conceptualisation as well as the measurement of a firm’s entry mode (Picot-Coupey, 2014). The above list also includes differences represented by religion, education, and industrial development (Picot-Coupey, 2014). The demographic profile and positioning of the company’s products mean that these factors are less of an impediment as the customers tend to be educated, globally exposed (meaning worldly to a degree) and thus seek to follow fashion trends (Nwanko et al. 2014). Hollander’s transactional leadership (Hollander and Julian, 1970; Hollander, 2012) is an important aspect in considering the shift of Hugo Boss to a new CEO. Langer has been instrumental in shifting the distribution channel focus of the company to its new retail approach that seeks to solve the brand’s differentiation issues in a market crowded with luxury and premium brands. The leadership of Langer has added digitalisation strategies to this plan (social media and other electronic means) to increase reach to prospective consumers that is cost-effective (Hendriksz, 2016). The issues represented by broad sales pricing and product lines has been changed to one of “…introducing a global harmonisation of its sales prices as well as key structural improvements to its distribution and a consistent worldwide brand image” (Hendriksz, 2016, p. 1). The mandate created by bringing in Langer as the new CEO represents what is called the transactional leadership model that represented the social contract provided by the board concerning their confidence in his leadership and decision making (Hendriksz, 2016). Hugo Boss Market Entry Motivation Aspects The information under the 4Ps provides a telling look at the issues the company has faced due to its failed attempt to position itself as a luxury brand. This has caused it to pull back into the premium brand segment. The following summarises the company’s approach to market entry and the factors that have caused a change in its initial strategies: Table 3 - Hugo Boss Market Entry Summary and Factors (1 of 2) Table 3 - Hugo Boss Market Entry Summary and Factors (2 of 2) (Wenting and Frenken, 2011; Vangkilde, 2013; Hugo Boss 2012: Okonkwo, 2016; The Hugo Boss Group, 2017; The Hugo Boss Group, 2017) In terms of analysis, Porter’s competitive advantage represents the company utilising a narrow target based on differentiation focus: Figure 5 - Porter’s Competitive Advantage (Porter, 2008, p. 12) Hugo Boss has followed the Strategic International Retail Expansion (SIRE) Model that has connections to stage theory (Sternquist, 1997). This refers to the fact that global retailers tend to internationalise by using a standard retail format using resource advantages that are firm-specific (Sternquist, 1997). This helps to explain why Hugo Boss started with the wholesale distribution approach (to learn about the markets entered) and then shifted to a company owned retail format to establish retail outlets and other distribution channels The following illustrates the approach under SIRE utilised by the company: Figure 6 - Hugo Boss Application of the SIRE Model *The above figure was adopted from a model of SIRE that was obtained from the indicated source (Course Hero, 2016, p. 1) The areas indicated in green reveal the strategic management decisions and approaches used by Hugo Boss regarding its international approach to reducing risk as explained in the preceding segments. Conclusion This exploration of the internationalisation process of Hugo Boos revealed its reactive approach used the similar strategies of other luxury fashion firms (wholesale distribution) that did not account for a number of highly important considerations. The first represented the company did not have a reputation as an established luxury line. Competing with established brands such as Armani, Gucci and others meant the consuming public did not perceive it in the same category. As a result, Hugo Boss; products were not sought out specifically when consumers visited wholesale outlets. Rather, the company was lost in the broad array of other premium fashion houses as opposed to having an established following. The company slowly came to realise this flaw in its internationalisation strategy adopted a European approach of branded stores that resulted in captive audiences. Zara, H&M, and others successfully used this to create a following that positioned them in the market segments they sought to establish. These reaction strategies represented a market follower approach as opposed to an innovative leader. The above broad yet telling analysis of Hugo Boss resonates throughout this examination. The above is evident in its varied brands (Black, Orange, Green, Red) as well as its broad pricing strategies that attempt to appeal to a wide consumer base that trades on a recognised name that does not have an established fashion reputation. The internationalisation of the company failed to create the image of a fashion house. This has been a key flaw in its process. Whilst the company has managed to achieve some measure of success internationally, it has been the name of the brand that has succeeded more than being known for any particular successes in fashion. The above aptly points out that Hugo Boss will need to find a way to convince the public that it does more than make quality goods. It will need to introduce fashion styles as well as heighten its perception in fashion shows and among critics. As it stands, the company is a premium price brand that seems to be settling in as a mass-market retailer with little to distinguish it from others in that segment. 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