International Firm Strategy and Structure - River Island - Case Study Example

The Business School 09/10 Assessment 2: Individual Report International firm (growth) strategy and structure Module Code: 44305 Module Title: International Business and Management Level: 5 Element: 2 Weighting: 60% Module Leader: Dr. Dimitrios Tsagdis Table of Content page 1. Executive summary 3 2. River island case study 3 2.1. Internationalisation strategy 5 3. Benefits reaped from international business 6 4. River Island competitive strategy 7 5. Terms of reference 7 6. Literature review 8 6.1. Market segmentation 8 6.2. Competitive advantage 9 7. Problem identification 12 8. Evaluation of alternative 15 9. Recommendation 16 10. References 19 11. Appendices 20 1. Executive summary Business has entered the era of the one-world market. Increasingly, companies are going overseas to attain sales and profits unavailable to them in their home markets. As a result, every firm, including those with purely domestic operations, is facing increased pressure from foreign competitors. Foreign business has changed the image of firms business and managing. The key feature of the internationalisation of firms has been the improvement of equity joint ventures, even though majority of the foreign funded business enterprises have been established. Some of the joint ventures have involved taking over the already existing state owned enterprises’ plants, whereas others have been established from the scratch (Naughton, 1996). Firms have progressively developed their doors to overseas funds and continue to do so in the current. Most of the multinational firms from the Europe countries, Japan and United States have been prominent in establishing up the bigger joint venture firms in parts of Africa and Asia and importantly they have enabled advanced technology transfer. Most of the internationalized enterprises encompass small-scale operation which had been founded by foreign investors who are overseas, particularly for the case of Taiwan and Hong Kong. To have a better understanding of international firm (growth) strategy and structure, we shall make use of River Island case study to critically analysis aspects of international business. 2. River Island Case study River Island was established in 1948 by the Lewis family. It started off as a family owned company and is now one of Britain’s well know high street fashion brand aimed at the younger generation and is wholly own subsidiary company. It started off with a small shop in east London selling ladies clothing. Currently they sell a wide range of ladies and men clothing as well as accessories and shoes. Stores can be found throughout the UK and Ireland as they have over 200 stores nationwide. They also operate a few stores in Turkey, Poland and the Middle East. Initially, the brand name was not always known as River Island, was previously called Chelsea girl and concept Man. The name River Island was established in the early 90’s. The Lewis trust group is the parent of a range of business including River Island, Hotel ownership and a range of financial and investment activities. They operate in 11 countries thought out the world and have over 10,000 employees. They are a Long term property development and investment business and over the last 30 years have built up a wide ranging portfolio of assets in all read estate in UK and US as well as other European and Asia markets. In UK they are financial partners in the home building sector and development partners in commercial and mixed use scheme for a number of institutional investors. At the moment, River Island is not a worldwide brand yet but they are initiating international growth to expand their stores internationally and become a worldwide recognized label. Some of the countries the firm is planning to venture in could include USA and Asian regions such as Hong Kong. The reason for the expansion of their stores into these countries is that it’s a profitable venture also because there is a reasonably sized market for their products. A great example of a brand trading in international business is growth and development strategy of H&M. The firm has opened stores in Hong Kong and all over America and they are very successful. It has managed to sell their products at exactly the same price as in the UK. Also their product range is the same throughout the world. This doesn’t guarantee that River Island will be as successful as H&M as its product is slightly different. So to compete with them, River Island might need to change or add some new products to suit the specific markets and venture in diverse regions. For this case Mc Donald’s is a good example of a company which tailors their product to meet the consumers needs in each country. For instance In Hong Kong Mc Donald’s sell dishes with rice to obviously suit the Asian taste. River Island could implement this strategy to their advantage when they expand in to other countries. 2.1. Internationalisation strategy a) Focusing on foreign direct investment. This is seen to have a positive impact on internationalisation of business practices for example operation of H & M. The size of the firm is expected to have a bearing on organizational inertia influencing the speed and extent of change. Moreover the location of some international firms like McDonald is seen to have effect on the pattern of FDI of those particular firms in those regions. b) Move towards a market oriented economy The company has continued to bring both the production facilities within its market. Moreover, River Island market has been and is still oriented market practices. c) Incorporations of equity joint ventures This is the channel of absorbing foreign technology. This is one way River Island has used to achieve the economic growth and development since the new technology tends to ease things and make the industry to be competitive in its production activities (Drucker, 2006). d) Social stability This has been achieved by the firm so that, the growing opposition to policies of pushing forward the reforms could be minimized and hence moving into globally free trade. e) Managerial innovation The management of the firm has made it possible for coming up with innovative management practices which are geared towards achievements of organizational goals plus those of the country (Naughton, 1996). The internationalisation of River Island stores has imposed materialistic measures such as competitions to other firms because of the international systems for instance technological advancements and trade expansion. 3. Benefits reaped from international business a) The market size is rapidly increasing with the expansion of its stores overseas creating favourable economic regions for the firm. b) The company has been able to gather vital information about other firms or competitors’ activities within a business bloc. This information has always been of importance since it has been used to strategise on how to improve their services so as to conquer the market. c) The firm has enjoyed its operation in free trade zone of its country’s business bloc with common policies. This has tried to eliminate some of trade barriers in the market hence boosting its business activities, also minimising the costs of the company in terms of tax or custom duties. 4. River Island competitive strategy River Island identified opportunities to reduce supply chain costs substantially, and achieved targeted savings. The priorities were to eliminate duplication and to increase transparency. Some of the savings were achieved by using fewer suppliers and by working more effectively with them. This enabled the firm to get goods to the shops faster and to respond more quickly to emerging customer demands. By re-establishing closer working relationships with its supply partners - historically a unique strength – River Island wanted to achieve further improvements in quality, value, product appeal and availability. Using information about customer preferences, buyers were better able to give suppliers the information needed to be more flexible and efficient in production. The company admitted that the speed of the changes made, and the replacement of a major supplier, did create availability problems in the autumn and spring - particularly in knitwear and lingerie. A focus on the best-selling products, particularly basic items like socks and knickers, sought to ensure that customers noticed an improvement in availability. The firm has concentrated on regaining the loyalty of its core customers, who prefer classically stylish clothes. In the past, the company had resisted splitting its traditional brand name, preferring to leverage the power of a single name that became synonymous with the company. As part of its new plan to segment products across different lifestyles, the company recognized that this was no longer tenable. For instance, the appointment of experienced designers to design and supply a collection for the fashion conscious woman. Supply chain issues have also been attended to. 5. Terms of reference This report has been commissioned by Sabrina Callaghan who gave a commissioning brief about the River Island. The proposed report will mainly cover international firm strategy and structure. The main issue will be covered by discussing the problems and benefits of trading overseas. Issues and problems will be analysed throughout the report and come up with possible solutions to overcome these problems. The study has been developed because of the dynamic changes in the business world that have posed a challenge to the firms that are engaged in the international businesses. Majority of these firms have set their entry to global market because of existing opportunities. River Island has not been left behind; it has opened numerous stores in UK and Ireland as well in Middle East, because of the benefits entailed in such involvement. Opening more stores internationally means more profit for the company and achieving a worldwide recognition because of brand name. The report will be conducted by using SWOT analysis and interviewing part of firm’s stakeholders. Some constraints are likely to occur during the study, like time limit; the available time to work on the report is minimal, costs; the expenditures involved in gathering the information may be high and lack of openness, some stakeholders may fail to share the private information of the firm with a stranger or some information may be sensitive to be shared out. The report shall directly look at recent relevant overseas business experiences by analysing useful ideas and models involved. During the report presentation, the consultant/writer will produce a report examining potential firm’s strategies for overseas trading, by stating benefits of such ventures and highlighting any problem associated with such trade plus solutions stated problems. Additionally, recommendations for preferred approach and the proposed organisational structure will be provided. The remaining part will be on the board’s court for a consideration. The board may either suggest for a further report from the consultant or sort for the implementation of the report findings. 6. Literature review Significant changes in the retail sector have been observed during the pat few decades and modern retailing especially in clothing industry has been referred to as ‘‘lean retailing’’ in a most recent comprehensive study (Abernathy et al, 1999). The technological changes have had a great influence in the clothing industry, for instance, the building blocks of lean retailing have comprised of bar codes and uniform product codes across firms. The change most visible to consumers is the expansion of large shopping malls at the outskirts of the cities and major towns at the expense of downtowns or city centre departmental stores and boutiques. The concentration in the outskirts of towns has been aroused by more buying power for the retailer and thus increased bargaining power towards suppliers. Morris and Siegel (2000) points out that the technology has also allowed retailers in the industry to keep track of inventories. Such information is only valuable if it can be used for adjusting the supply of garments to consumer tastes as the information becomes available. Such changes call for a repeated supply of garments in small numbers which is viewed to be against the conventional stocking of the conclusion of the season. In order for suppliers to be able to provide frequent supplies and make changes in the product spectre at short notice, retailers need to share point of sales data with suppliers. As the internationalisation of business grows, there is an increasing challenge being faced to deal with cultural differences. In one survey, cultural differences ranked first among all eight issues listed as potential barriers, including law, price competition, information, language, delivery, foreign currency, time differences, and cultural differences. Naughton (1996) asserts that those great opportunities have been created for global collaboration but these opportunities are accompanied by a unique set of problems and issues relating to effective management in the international environment. The social and cultural nuances that enter the picture when dealing with foreign business partners may make for entertaining conversation in subsequent years, but the daily effort that is required for operations can sometimes be hard on business relationships, especially in the early stages (Warner, 1997). Large size and many outlets for delivering its services and goods to the right people and at the right time are very vital for firms that want to go international. The large size in itself is a source of economies of scale which enables the firms to produce at a low cost as well as sell at a low price if it wishes to do so (Drucker, 2006). The firm has portrayed themselves as being more responsible than the rivals and by so doing they have been able to win the hearts of many people they deals with for example by designing products in such a way that they are user friendly and focused towards making the environment healthy for example using biodegradable wrappers. The increasing internationalisation of business calls for managers to have a global business perspective and an understanding of the different forces of the markets that affect the surroundings in which they operate or one which they are planning to venture in. Decision making in the international surroundings is more complex and having an understanding of the forces of international business like external forces (socio-cultural, political forces, economic and financial forces) will help international managers to be alerted to new opportunities, and structure their business to fit into such surroundings. Even though managers have no direct control over external forces, knowledge of these forces will better prepare them for greater success in the international business environment. 6.1. Market segmentation River Island has tried to segment their market, which has been seen as the way to advance in business. Businesses that consume a firm’s commodities have been put in groups depending on how the management of the firm has decided to classify its segments. Business segmentation refers to the division of the market of a business into division that has related characteristics (Daniel & Peter, 1996). It is also called market fragmentation and it entails dividing a market for a product or service into groups of customers with identifiable needs and characteristics. This process of segmentation will highly depend on various things, namely quality of information available in the company-that’s companies own abilities and technology and also the type of decision a company wishes to make. This is a clear show that island firm’s segmentation could vary with the way company view the market and whether this involves the present or future offer. The first level of service verses good shows the macro segment. Moreover it can be found out that competitors in the hospitality market could produce different market segmentations. Also segmentation in the market will try to show closely related groups of customers. This has been possible in the provision of catering services in other countries. Macro segmentation refers to the division of the market into very broad groups those have general characteristics that are related. Such grouping can be based on the region, country of the customer or any other general characteristic. Usually firm segmentation does market division based on whether the business is a customer of a good or service. Therefore macro segmentation is based on the nature of the prime good or service dealt in. 6.2. Competitive advantage Competitive advantage refers to the ability of a nation of a firm to produce at low cost and sell at a fair price. It emanates from a low cost structure of the business. In other words, it is the low cost enjoyed by a firm than its rivals thus enabling it to sell less or make greater profits at the same price level as its rivals because of large sales (Naughton, 1996). Competitive advantage for River Island has been gained through many ways but it is important to note that it is the company’s business strategies laid down that gives a firm this advantage. Thomas Stewart once said, “Intellectual capital is the sum of everything everybody in a company knows gives competitive edge”. Thus intellectual power is one of the greatest sources of competitive advantage for any firm. 7. Problem identification Many of the `painful decisions' related to River Island’s traditional UK supply base, which had been decimated in the scramble to reduce costs. In some ways, this had made the slowness to respond to market changes even worse. A former employee of a former firm supplier, which has now closed most of its UK factories, commented on the recent changes: Three years ago River Island operated a very standard, much formalised route from order to contract, production and distribution. Each item had to have a River Island garment number as identification all the way through production, which precluded suppliers from manufacturing items for other retailers. More recent supplier rationalisation has changed this approach, but it is still much formalised and in reality a more informal approach is taken on a daily basis to actually get things done. Much of the manufacture of River Island products had been transferred abroad because of overseas trade. There is very little capital expenditure in clothing. Typically, raw materials account for 50 per cent of the product cost, and labour for 30 percent. Labour costs are much cheaper in countries like Turkey, Poland and Middle East, but this has had a significant impact on lead-times: it takes four to six weeks to ship from the Far East. Airfreight is used sparingly, as it has not been possible to get the type of costs required for routine airfreight. When buying standard ranges there is a balance between buying few colour ranges at higher volumes, or more colours at lower volumes. Combinations add to complexity: if there are eight colours and eight sizes, there are 64 stock keeping units (SKUs) in the range. The firm bought in a ratio across sizes based on sales history, but actual sales in a season - especially colours - were difficult to forecast. Responding to changes in volume and mix in the marketplace was difficult enough for the ponderous River Island systems, but the company's insistence on a single brand-clothing bring further problems: the firm procedures do not allow flexibility for short lead times. Had they agreed to sub brand in the past, it would have been possible to produce to different quality standards for different product ranges. According to Abernathy et al (1999), new product development has also been slow and costly. All suppliers have been asked to develop all ranges – by deciding who would manufacture what and where. This increases development costs all round. The company has become more skilled at assessing supplier capabilities in advance. Suppliers who are low-cost producers receive orders for commodity products, while those with strengths in product or material development receive orders for more innovative lines The successive management found looming problems in the company and each came up with his own strategies of solving this and giving sound solutions. No one can dispute the fact that the world economy is increasingly globalising as we move into the 21st century. 8. Evaluation of alternatives Intellectual capital is one of the most vital constituents that a firm needs in order to gain competitive advantage; lack of the same will seriously affect the ability of the firm to gain competitive advantage over the others. Language barrier is also an obvious issue when opening a store in a non- English speaking country such as Hong Kong. Overcoming this issue should not present a challenge, as River Island product is not language based, and they could develop a website in the country’s native language. Expenses such as the cost of opening new stores, hiring staff and shipping stock, must also be taken into consideration as well as the cost of new products to be introduced to suit the target market. If the market research is not carefully undertaken the business will not be successful. Prices of the products will also be a major factor to take in consideration as each country’s GDP is different so the product price must suit the country’s cost of living. Socio- political factors such as cultural barriers should be considered when expanding a business into another country as it affects the business prospects of starting up. Tax rates vary in different countries and that affects the decision of which country to expand into. Tax rates are relatively low in Hong Kong which should prove as an advantage for River Island. Also American rates are similar to UK rates so that shouldn’t be a higher cost for the firm. Strategic factors such as the infrastructure should be though about before entering a business into a new country, as a company like River Island is a high street fashion brand and would only survive in a city or a big town where there is a market for their products. Hong Kong and most of America’s large cities such a New York are very developed and present a large demand for fashion clothing items. Benefits of expanding River Island are obviously a more profitable choice for the company as it reaches a broader market. It will also create more jobs worldwide and help the local economy. By gaining a worldwide established name will give the company an international status and increased its reputation. To sum up the part, it should be noted that achieving their goals of expansion by implementing the strategies that have been mentioned which are achievable within their financial capabilities. The targets are realistic and the few obstacles are relatively easy to overcome. River Island also planned to regain the confidence of its customers in the quality and fit of its clothing. It chose to sharpen pricing by rebalancing the price structure and by extending the range of entry prices. The aim was to deliver inspirational quality at great value. Another range called The Autograph was created by top designers to offer fashion items at High Street prices. A compromise was reached in sourcing this range, which was originally produced in UK factories but moved to Portugal. This had the benefit of cheaper labour costs than the UK and shorter lead-times than the Far East. 9. Recommendations A key part of the recovery plan should include major improvements in product appeal, availability and value in order to rebuild relationships with the core women’s wear customer base. 9.1. Organization structure River Island structures should be designed in a manner to enhance power and reflect vital roles in addition to relationships in a hierarchical structure emphasizing on strategy from the management as well as establishing co-ordination, and communication in employees. The control system should focus on monitoring the policy and procedures in the organization. It is also important for the management to comprehend the cultural web of the organization since this could help in positioning itself culturally and becoming more creative, innovative and in repositioning to deal with external competitions. 9.2. Social trends Analysing social trends can be beneficial for the businesses as it widens societal influences to create opportunities. For example societal interest in certain design of clothing or features. Positive image among the stakeholders such as customers and suppliers gives opportunities to business, hence they is need for River Island to invest heavily on this. By understanding demographic forces will help firm to direct its activities in planning and forecasting the demands (current and future). 9.3. Environment management process With increasing concern for the environmental impact is a growing issue for the international businesses. River Island should be environmental friendly and focus on special programs on conserving natural resources that reduces its environmental footprint, and recycling waste. 9.4. Technology River Island needs to undertake many transformations in technology change to compete ahead. It has to develop its increasing power of internet usage, barcode usage, electronic cards and mobile communications to meet the current needs of consumers. These developments could enable it to keep more data records and make it feasible to share information quickly and at a low cost. This will also be advantageous to firm, since it could lead to mass marketing, understanding the consumer psychology, habits and preferences. For example the firm should communicate its ideas with young customers on improvising the hotel through blogs. Technological advance is an added cost which is a threat as many people may be uncomfortable paying extra for it. Others recommendations; Investing in a strong brand and consistency in their delivery on their brand promise, in their products, services and actions. Closing the least efficient local plants and converting the best into International Production Centres. Innovation delivery through investing in world class strength in consumer insights, technological prowess and superior market networks. Developing people’s leadership in talent engagement and aligning them to benchmarking of their performance. 10. References Abell, D.F. 1980. Defining the Business: The Starting Point of Strategic Planning, Prentice-Hall: Englewood Cliffs. Abernathy, F.H., Dunlop, J.T., Hammond, J.H. and Weil, D, 1999, Lean Retailing and The Transformation of Manufacturing – Lessons from the Textile and Apparel Industries, Oxford: Oxford University Press. Daniel, M and Peter, N., 1996. Business-to-Business Marketing, New York: Palgrave Macmillan Drucker, P.F., 2006. Management Challenges for the 21st Century. New York: Harper Collins. Kaysen M. & David, G., 2005. Social Corporate Responsibility: Western Countries Approach. London: Oxford University Press. Naughton, B., 1996. Growing out of Plan, Cambridge: Cambridge University Press. Perry, E. 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