Global Strategic of Australian Manufacturing Company Investment - Billabong - Case Study Example

International Business Strategy Name: Lecturer: Course: Date: Executive Summary To overcome the low profitability over the last five years, Billabong has to adopt a strategy capable of boosting its sales. Billabong has to identify promising markets in Europe with a huge market. It has to identify a vibrant emerging market for clothing and textile. Based on industry analysis, Billabong’s target market should be (18- and 35-year-old Caucasian urbane male and females) in Sweden. The report recommends that the company should seek to expand its business in Sweden through a strategic alliance with H&M to enter the Swedish market and to position itself successfully. Table of Contents Table of Contents 3 Introduction 4 Data collection and analysis method 5 Review current international business and economic environment 5 Industry trend 6 Competitive Analysis 7 Sales and Profitability 7 Buyer Analysis (Market Segmentation) 8 Demographic Segmentation 8 Geographic Segmentation 9 Psychographic Segmentation 9 Target country location analysis 9 Entry mode strategy to enter the new industry 10 Ownership advantage 10 Location advantages 11 Internalization Advantage 11 Strategic Positioning through Strategic Alliance 12 Conclusion and Recommendations 13 References 14 Introduction Billabong International Limited is an Australia-based clothing manufacturer that has, since the 1980s, expanded globally through acquisitions and franchises. The company engages in apparel and eyewear marketing, wholesaling, distribution and retailing. It sells its brands in over 100 countries, with the major regions being Europe, North America and Australia. The company has experienced a sharp decline in sales since the 2009 global financial crisis (Billabong 2014). In August 2012, the company presented a four-year plan to return the business to a positive financial and sales growth path. The plan included leveraging the brand, expansion, e-commerce offerings and improved supply chain. In view of this, the company can seek strategic alliance to improve its supply chain and to increase profitability (Kelly 2014). The company has a well established customer base and brand loyalty in North America and Australia. However, Europe presents a major challenge for the company. Although the company is recognised that in most European countries, particularly because of its boardsports brands, it has a small customer base and faces stiff competition in the Scandinavian region of the continent. This report seeks to identify a location in which Billabong should invest in. It also seeks to recommend a local firm in the targeted location Billabong can partner with in a strategic alliance and the business level strategies that should be used in the newly formed business relationship (Billabong 2014). Data collection and analysis method Qualitative case study research design was used to collect and analyse data on the Swedish clothing and textile and fashion industry (Olsen and 2004). The research literature surveyed included published company reports, industry reports and research journals that explored the Swedish and Australian industry. Literature on theoretical concepts, models and conceptual frameworks were also researched to justify analysis and arguments. Systematic analysis of past studies that are published in English was done to suggest recommendations. Review current international business and economic environment Billabong’s financial position has been on the decline since 2009, when the profits went down by 9.2 percent to $160.2 million compared to the previous financial year. In addition, earnings per share decreased by 11.2 percent despite a rise in sales revenue due to the company’s new acquisitions and the adverse surges of the Australian dollar. Its operations in North America have been hit the hardest since the economic meltdown of 2009, despite being offset by sales growth in Europe and South America (Billabong 2013; 2014). The company has experienced sterling performance in Europe, with nearly 24 percent annual increase in sales revenue from the region. Australia has also managed a growth of 8 percent, although largely because of the resilience of the country’s retail market and support from federal government’s economic stimulus packages (Henisz n.d). Markets in Europe are predicted to remain stable over the next decade. Five years after the 2009 global financial crisis, World Bank report shows the global economy signals bouncing back in 2014 enhanced by recovery of high-income economies such as the United States and Australia (World Bank 2014). The growth further shows that emerging markets such as China and Sweden are also firming, credited to high rate of foreign direct investments (FDI) in these countries. Although high, the prospects for growth are sensitive to the narrowing of monetary stimulus in the developed nations and structural shifts in emerging economies. Other factors include regulatory reforms to invite investments (Hallgrimsdottir 2011). A study showed that Central Asia and Eastern Europe led in the reforms in 2013. The World Bank (2013) ranks Sweden among the top 15 most business-friendly environments globally. Industry trend The Swedish clothing and textile industry is export-dependent. There is a great confidence in the growth of lifestyle and design of the Swedish industry (Fredriksson 2011). The industry has witnessed a significant growth since the 1990s. Sweden is a major player in apparel retailing and distribution in the whole of Northern Europe. In 2007, imports of undergarments peaked at EUR2.1 billion, with some 45 percent originating from developed nations. The value of the industry is estimated at around SEK206 billion, with SEK129 of the amount consisting of large retailers (Filippa 2011). The large retailers mostly sell imports. In addition, Swedish retailers are often on the watch out for foreign Western brands and foreign manufacturers. This means that Billabong can benefit significantly when it seeks a supply chain strategic alliance that can leverage the promising Swedish large retailers (Holm & Tjburgm 2013). The Swedish industry experiences huge amounts of new clothe brands launched each year. This offers Sweden a market to launch its innovative and vibrant clothing brands each year. Competitive Analysis The Swedish competitors mainly focus on export diversification and production of high quality clothing. Competition is based on technological innovation quality and design. Billabong has a reputation for high quality and innovative designs, which fits well with the Swedish market. The apparel market is also less concentrated, with about 31 percent of the overall garment sales originating from only five leading retailers, mainly Dressman, MQ, KappAhl, Lindex and Hennes & Mauritz (H&M). This means the barrier of entry is less moderate. Swedish retailers employ the use of vertically-integrated roles in their value chain. Business operation areas include marketing, branding, retailing and distribution. The four form Billabong’s core business areas (Gardelius & Olsson 2009). The top suppliers in Sweden include China, Turkey and Bangladesh. Sales and Profitability In 2011, the total sales in the industry was estimated at SEK206 billion, with exports accounting for 60 percent and 40 percent from the domestic market. Wholesale and retail trade accounted for 43 percent, manufacturing 8 percent, ecommerce 4 percent and agency trade 2 percent (Portnoff 2013). The most profitable company in the industry, in 2011, had a return on capital employed of 133 percent, while the least profitable had negative earnings before taxes and inters, which resulted to return on capital employed of -54 percent. This shows that the industry is greatly profitable, hence offers Billabong growth potential (Portnoff 2013). Buyer Analysis (Market Segmentation) Swedish consumers are highly aware and have a high buying power. This presents a ready market for Billabong’s range of products. They also value high standards of living and value products based on quality rather than price, which implies a ready market for Billabong’s high-end eyewear products (Portnoff 2013). Demographic Segmentation Age: The 18- and 35-year-old market segment form part of the population that prefer foreign Western apparel. Sweden’s latest generation has been socialised into early consumption and hence starts consuming fashion apparel at an early age (Holmberg & Ohnfeldt 2010). Billabong offers diverse products, which are mostly for the youthful population. Income: The upper middle class and the high income earners are predominant in Sweden. The company offers high-end products, such as eyewear and boardsporting gear, preferred by the middle class and the high income earners. Income: Sweden consumers of foreign clothing are mostly high income and middle class levels. Billabong offers diverse products, which is appreciated by the high income and middle class consumers (Gardelius & Olsson 2009). Race: Sweden is mostly made up of Caucasian/White racial groups. Billabong manufactures apparel and accessories that are geared towards the Western nations. Gender: Female consumers form a majority of the buyers of apparel in Sweden. Averagely, Swedish women spend some US$ 845 on clothes each year, about a half of what men spend (Gardelius & Olsson 2009). Billabong offers products suited to both the female and male consumers. Geographic Segmentation Region: Most consumers of high-end clothing originate from the high population metropolitan areas. Billabong manufactures chic and fashionable clothing that are appreciated in the Metropolitan areas. Psychographic Segmentation Lifestyle: Sweden consumers appreciate high life and foreign culture. This signals potential for Billabong products to gain recognition in Sweden. Attitude: Swedish consumers have carefree attitude. Billabong products are diverse, with some targeted at consumers with carefree attitudes. Based on the analysis, Billabong’s target market should be (18- and 35-year-old Caucasian urbane male and females) in Sweden (Gardelius & Olsson 2009). Target country location analysis Because of Sweden’s limited domestic market and small size, domestic firms often seek for international firms. The small size also enables Sweden to integrate well with the international trade (SACC 2014). Stockholm offers a strategic location, where Billabong can enter the industry. Stockholm residents comprise of people from different parts of the world, particularly from Western nations whose markets appreciate Billabong products. The strategic geographic position of Stockholm is also a factor to be considered. It is rich in the target market (18- and 35-year-old Caucasian urbane male and females) and offers opportunities for expansion. Stockholm market is also appealing market, typical of an emerging market. It is also Sweden’s fashion hub with high customer buying power and sustains growth given the low competitor intensity. In this case, Stockholm offers long-term growth opportunities (Gardelius & Olsson 2009). Entry mode strategy to enter the new industry This report proposed the Dunning's eclectic theory as the conceptual model for entry. The theory proposes the analysis of OLI (ownership, location and internalisation) factors in determining the entry mode. The paradigm suggests that the business will engage in FDI if the investment is beneficial to a firm (Agarwal & Ramaswani 1992). Several factors influence Billabong's critical strategic decisions. These include ownership advantages of a firm, market ownership advantage, and internalisation advantages of integrating transactions in the company. Normative decision theory postulates that a firm should choose foreign market entry based on tradeoffs between the returns and risk. The choice should provide optimal risk-adjusted return-on-investment (Agarwal & Ramaswani 1992). Ownership advantage To compete with Swedish firms, Billabong must have superior skills and assets to counter the high cost of entering the market. Its power is reflected by its large size and experience in operating multi-nationally, in addition to the ability to create differentiated products. It also needs the financial and asset power to compete with firms in the host country. The resource will enable it to absorb the marketing costs, negotiate contracts and enforce patents, as well as attain economies of scale. Its high level of multinational experience also influences its entry choice. It should therefore use strategic alliance or joint venture as mode of entry (Agarwal & Ramaswani 1992). Location advantages Market potential is a critical determinant of foreign investment. In such market, investment modes should provide long-term profitability through economies of scale as well as lowered marginal production cost. Since the economies of scale are not significant, Billabong should not consider investment modes of entry. Hence, the possibility of facing barriers from regulators such as Swedish Trade Council also exists. Other likely barriers include corporate taxes, inflation and trade agreements. Labour cost is generally high while at the same time access to highly-educated workforce is easier. Establishing a labour force is hence complicated in the industry. Additionally, since Sweden has some restrictive investment policies, it should consider joint venture mode of entry (Gardelius & Olsson 2009). Internalization Advantage Low-control modes are perceived to be superior for many transactions as they allow for many transactions since they allow a company to benefit from economies of scale of the marketplace (Deloitte 2010; Sparling & Cook n.d).. Low external uncertainty makes enforcement of contracts cheaper. At the same time, having low number of problems makes enforcing of contracts meaningless and inefficient as a firm many not find partners. Under these scenarios, sole venture modes and exporting offers better control because of retaining skills and assets (Agarwal & Ramaswani 1992). Strategic Positioning through Strategic Alliance Co-evolution theory suggests that firms can enter strategic alliances for exploration and exploitation reasons. Exploitation depicts leveraging the Swedish partner firm’s competitive capabilities to launch itself into the market. Exploration means establishing new innovative capabilities to gain to compete successfully in the market (March 1991). In this respect, Billabong should use the exploitation option to attain residual revenues and to gain competitiveness by selecting an already established and competitive partner. In this way, the company’s business will be able to gain organic growth in the new market, defray cost of marketing, access strategic markets across Sweden as well as benefit from the partner’s managerial resources (Akio 2004; Comi & Eppler 2006). Billabong should also use its new partner to intensify its business activities in Sweden. This principle is based on agency theory, which suggests using partner firms as agents that can be used to increase business activity. Billabong should balance competition and collaboration within the alliance while at the same time avoiding opportunistic behaviour to limit future conflicts (Kale & Singh 2009). Billabong should select a strategic partner through extensive analysis of variables, such as the financial and managerial resources of the prospective partner. According to Holmberg and Cummings (2009), businesses should use four-way criteria. First, align strategic alliance to corporate objectives, develop a group of critical success factors it can use to evaluate the activities of the alliance, map out the new partner’s industry and apply dynamic partner selection analysis tool in evaluation of the potential of gaining strategic or competitive objectives through the alliance. Hence, Billabong should align the objectives of the strategic alliance to corporate objectives. For instance, it should select a partner firm that has certain strategic objectives that related to its competitive objectives. Second, Billabong should develop critical success factors related to its objectives of achieving competiveness (Holmberg &Cummings 2009). These should later be used to measure the extent the partnering firm can help Billabong achieve competitiveness. Next, Billabong should create potential partner map to asses potential partners within the industry. This report suggests the use of Brandenburger and Nelebuff’s Value Net model to classify the prospective partner firms. The model proposes review of firms based on their reach to customers, supply chain and competiveness. The targeted partners are Dressman, MQ, KappAhl, Lindex and Hennes & Mauritz (H&M). Swedish retailer H&M dominates the market for women and men’s apparel. It has the largest supply chain compared to the other four. It also operated about 120 stores in Scandinavian countries. It also has operates stores for sportswear and welcomes possibility for joint venture with companies offering same product which seek to share supply chain or distribution channel. Since H&M has similar strategic and competitive objectives to that of Billabong, and is based in Stockholm, it has good financial resources, large customer base, distribution channels and is highly reputable, it should be selected for partnership. Conclusion and Recommendations To overcome the low profitability over the last five years, Billabong has to adopt a strategy capable of boosting its sales in Europe. Sweden is selected since it has stable business and economic climate, exchange rate, low inflation level and economic climate, which reduce investment risks involved in entering new markets. Based on industry analysis, Billabong’s target market should be 18- and 35-year-old Caucasian urbane male and females. Since country has a highly perceived market potential and business regulations, while Billabong has high multinational experience, and high capital and human resource, it should choose a strategic alliance mode of entry. The report recommends that the company should seek a strategic alliance with Stockholm-based retailer H&M, which it shares with similar strategic and competitive objectives. Billabong should also use the alliance to create a pool of strategic resources in Sweden to gain competitive advantage. The company can achieve positional advantage using the inter-firm resources such as capital resources, marketing power, brand reputation, technology power and manpower. 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