Managing International in Luxury Goods - Case Study Example

Module International Business Strategy Module Number: 301LON Module Andrew Wiggan Assessment 2: Individual Report. Management Report.BOFFI: Managing International in Luxury Goods. Word count: 2500 max. Date of Submission: 7/4/2014 9 00 Name: Darya Kachmazova Student ID: 4686426 Contents 1 Executive Summary 4 2 Introduction 4 3 Internal Analysis 5 3.1 Value Chain 5 3.2 SWOT Analysis 7 7 3.3 TOWS Analysis 8 3.4 Strategic Capabilities 8 3.5 VRIN 9 4 External Analysis 9 4.1 PESTEL Summary 9 4.2 PESTEL China 11 4.3 PESTEL Canada 12 4.4 Porter’s Five Forces Summary 12 4.5 Porter’s Five Forces China 14 4.6 Porter’s Five Forces Canada 15 4.7 Motives for Internalization 16 4.8 Motive for FDI 16 4.9 Industry Life Cycle 16 4.10 National Competitive Advantage 19 4.11 Modes of Entry 20 5 Recommendations 20 6 Conclusion 21 7 Appendix 21 7.1 PESTEL USA 22 7.2 PESTEL Italy 23 7.3 PESTEL Korea 24 7.4 Porter’s Five Forces USA 25 7.5 Porter’s Five Forces Italy 26 7.6 Porter’s Five Forces Korea 27 8 Reference 28 Table 1. SWOT Analysis 7 Table 2. TOWS Analysis 8 Table 3. Strategic Capabilities 8 Table 4. VRIN. 9 Table 5. PESTEL Summary 9 Table 6. PESTEL China 11 Table 7. PESTEL Canada 12 Table 8. Porters Five Forces Summary 12 Table 9. PESTEL USA 22 Table 10. PESTEL Italy 23 Table 11. PESTEL Korea 24 Figure 1. Value Chain 6 Figure 2. Porters Five Forces China 14 Figure 3. Porters Five Forces Canada 15 Figure 4. Porters Five Forces USA 25 1 Executive Summary External analysis of America presents that the country is a good opportunity with an expanding market promising a good future. On the other hand, Korea is disturbed by lack of people support from foreign companies and cultural differences in supply chain. Italy presents a saturated market and firms are looking outwards for newer markets. USA and Canada presented good markets for expansion owing to high levels of luxury demand as derived from the external analysis. Italy ensures survival because of niche product being offered within the country by Boffi, which has a separate demand for itself. China assures large and growing markets. Canada presents a competitive picture for the kitchen and bath industry in the country. Internal Capabilities that the company has strength in its supply chain and distribution capabilities but needs to improve on its lean period in order to retain customer demand in existing as well as new markets. Quick delivery of products is necessary to retain consumer demand. The SWOT presented that the company has to promote its ‘Made in Italy’ capability in order to have strength in demand. Internal analysis of Boffi presents company strength in its brand name and Italian origin and also highly controlled supply chain for high quality customized products. Tremendous opportunity is expected in markets like China and India where the luxury segment is growing rapidly. It is recommended that the company looks at establishing assembly units in host countries to reduce wait time for customers. 2 Introduction Boffi is identified as the Rolls Royce of the bathroom and kitchen industry providing luxury solutions to kitchen, system and bath needs. Italy comprises of 223 outlets of Boffi while its international presence counts up to 195 stores across 60 countries. Boffi is unique in the market because of its unique product offering. It has made a perfect mix of modern production techniques and artisan convention to bring the best of design and refinement essentials in its products (Europeankitchendesign, 2014B). The products are a classic combination of modern techniques and traditional designs. The company operates a highly controlled production technique to produce quality products. As a part of its strategy, they enter into collaborative partnerships with companies who are engaged in different but synergy based products with a view to expands its core competency (Boffi, n.d.). Kitchen and bath industries were initially made out of assembly of different parts and products. It has gradually grown into specialised segments with businesses specialising in providing high-end kitchen and bath units. Italy and Germany are the leading countries in provision of luxury solutions for kitchen and bathroom needs. There are three broad types of companies within this industry, Design based, production and brand based and price based. The paper is aimed at strategy analysis for Boffi in its internationalization attempt. It goes through the company’s industry lifecycle process and a detailed SWOT analysis to establish a comprehensive environmental audit and moves further to explore the external environment for two host countries, US and Korea to understand company’s motive for internationalization. The paper thus evaluates the competitive advantages and entry modes for such internationalization activity. 3 Internal Analysis 3.1 Value Chain Firm Infrastructure: Boffi Spa, Boffi Trade, Stores & Studios HRM: CEO, Distribution Manager, Store Teams & Agents Technological Development: Specialised Staff, Modern Eco-friendly machinery and raw materials Procurement: Quality raw materials, Acquisition of niche brands E.G.: Norbert Wangen Figure 1. Value Chain Inbound Logistics: Supply from local market allows retaining the ‘Made in Italy’ brand. Home country supply allowed for reliability in production system and gaining economies of scale due to large scale production. Operations: Use of raw materials in production sourced from the home country allow for maintenance of uniformity in quality which helps to retain company brand name. It also strengthens ties for the company with the suppliers for long term relationships. Outbound Logistics: Company controlled distribution network brings in an assurance of quality maintenance right from the production to the distribution stage. It also reduce costs of wear and tear of mishandling by other suppliers. Marketing & Sales: Boffi markets its products through displays at international fairs, selling through brand outlets and multi-brand chains stores and releasing specialized press reports. Such marketing strategy allows for high internal control and hence quality maintenance. The brand recognition and luxury feel is maintained through owned store distribution. Service: The staff is trained for specialized customer care and each store has designated expert servicemen. This is necessary to serve the affluent clientele of Boffi who want customised and specially designed products and are ready to pay premium prics for it. (Schmitz, 2005; CBI, 2006). 3.2 SWOT Analysis Table 1. SWOT Analysis 3.3 TOWS Analysis Table 2. TOWS Analysis 3.4 Strategic Capabilities Table 3. Strategic Capabilities Resourses Competence Threshold Capacities Threshold Resources: Tangible Intangible Threshold Competencies Capabilities for Competitive advantages Unique Resources: Tangible Intangible Core Competencies BOFFI goes strong with its production units and machinery including facilities for storage and market information, however development of technical knowhow, improve of quality of labour are required for production of high quality furniture and financial strength. Besides, Boffi is unique, innovative and new in terms of designer’s ideas on furnishing but a company can protect such technologies and ideas through patents and create designs that are specific to Boffi alone. 3.5 VRIN Table 4. VRIN. 4 External Analysis 4.1 PESTEL Summary Table 5. PESTEL Summary Country USA Italy Korea China Canada Political Strong democracy provides necessary support however faces terrorism threat Import export promotions, peaceful neighbour relations facilitate existence of Boffi . Centralisation of power and strength of European relations provide impetus to Boffis market while North Korean relationships are deterrent to the business. The Marxist nature of polity provides government stability Foreign companies have to pay a high price for business in China. Peaceful neighbour relations, strong democracy promote Boffi’s international business. Economic Financial crisis has left behind high levels of unemployment and low disposable incomes for luxury spending reducing Boffis market.. GDP and per capita income is among the highest in the world. Strong economy is supported by high promotion of exports. Large luxury segment is assured through high population and high per capita income.. 30% tax rate for MNC’s prove to be quite a bane for foreign companies but they still see China as an attractive market with high population and growth rate. Hit by the recent financial crisis, Canada is recovering and high exports and wider reach shall promote good trade. Social Highly developed country that has one of the highest labour productivities in the world. Country’s low domestic population offers a small local market forcing Boffi to look outwards. The country operates with a separate culture and value system which makes the market quite different. This invites greater attention to details from Boffi. Chinese people have a very strong emotional culture where relationships precede business deals. Trust is of supreme importance and such unique culture needs special attention by each foreign country. The rate of growth of population is 1.2% which does not promise a wide market in future. However, the rich and affluent class segment is large and growing. Technological The country is thrives on innovative businesses and companies get huge support from government for innovative products. The country spend largely on internet development and is gaining focus towards aerospace technology and automotive Reduced availability of natural resources and opposition towards foreign companies make Boffi’s sustenance in Korea unreliable. The country is a global leader in supercomputers, telephone technology and a leader in electronic exports. It is also gaining strength in automotive and spare parts. The country is renowned for having one og the best technologies in mining and companies are supported well by the government on innovative ventures. Environmental The country operates with strictness regarding legal and procedural compliances while maintaining strict environmental regulations and norms. Italy has been instrumental in successful usage and establishment of renewable energy sources. It also gets good governmental support. The country has strict compliance and adherence norms for environment protection. The government is quite active on such matters. Heavy reliance on coal for energy is seeing a gradual change in China. The country promotes alternative energy powered companies. The country has far less population and is geographical located in the region with extremes of temperature. Wind power is highly used as an alternative source of energy. Legal Extremely low savings rate and has led to huge FDI inflow and as a result the nation has a lot of foreign establishments Law is slow and legal proceedings are sluggish as well as expensive. Corporate taxes remain very high which again takes away a large share of company profits. Korean law is highly favourable to domestic companies and IPR protection for foreign multinationals becomes a problem. Tax structure, however, is favourable for foreign establishments The legal norms for multinationals are strict while the country’s law does not provide much support for IPR infringement of foreign companies over their domestic ones. Federal governance, centralisation d power and three layered distribution of the legal system has a very strong presence in Canada. 4.2 PESTEL China Table 6. PESTEL China 4.3 PESTEL Canada Table 7. PESTEL Canada 4.4 Porter’s Five Forces Summary Table 8. Porters Five Forces Summary Forces/Country Italy USA KOREA China Canada Rivalry High High High Low Low The country has huge competition from foreign players who have eveloped their separate niche for high quality products. USA is one of the most developed nations with a mushrooming population of local small and large players in the kitchen and bath industry which offer strong competition to Boffi. Intense competition if quick service companies dominated by small local players offers very little market to niche segment of Boffi. China lacks in quality and luxury good production. The local players primarily cater to low quality and budget needs. Numerous local players and few large players have dominated the market. Structured kitchen and bath solutions have tremendous demand. Supplier Power Low Low Low Low Low There are multiple small and large players in Italian furniture industry because of the renowned ‘Made in Italy brand for furnishing. This makes bargaining difficult for suppliers. Boffi believes in retaining its “made in Italy’ brand name with sourcing of quality raw materials from the same place and restricting their production to Italy. Boffi believes in maintaining uniformity is quality of its products for hich it gets all production activity done in Italy which makes the power of suppliers low in the other countries Boffi sources all its inputs from home country and hence the power of suppliers is low. Boffi sources all inputs from home country and hence the power of suppliers is low. Buyer Power High High High Low Low Italian furnishing expertise offers a huge number of options for buyers of Made in Italy rand which makes their power stronger. High number of substitutes is available for quality products. There are different companies selling different niches which make buyer power high. Numerous choices from local as well as foreign player increase buyer power. Provider of luxury segment kitchen and bathroom solutions are very few. Demand for luxury needs is increasing despite a slow growing population. Number of players in the luxury segment is low. Threat from Substitutes High High High Low Low Huge number of suppliers provide for different niches of luxury furniture which makes substitute threat high. Providers of complete living solutions and such other players give stiff competition and increase the threat from substitutes People prefer to buy local than foreign and also the presence of huge number of players makes substitute threat high Low end produce does not provide much threat to quality products of Boffi. Canada has fewer organised large furniture companies and huge number of small and 4.5 Porter’s Five Forces China Put examples on how Boffi related to the industry in China, do not just write general information on Porter’s Five Forces. Link it to the country and to a company. Figure 2. Porters Five Forces China Rivalry: Low: With increasing urbanisation, China is looking for brand and developments in Design, features and efficiency in the kitchen and bath furniture. The urban segment is rising primarily in regions around Beijing but there are a huge number of players who have been producing large scale standardised products. Hence wih low brand availability, the rivalry in luxury segment like Boffi remains low. Supplier Power: Low: Boffi would produce all the orders in Italy and they have their own supply chain in the production system which helps them to maintain their ‘Made in Italy’ brand. This provides little opportunity for other suppliers. Buyer Power: Low: Chinese manufacturers have been serving to the mass demands and companies like Fotile, Robam and Sacon and Dandy are among the premium manufacturers who work within the limited east region. Since there is limited number of companies, buyers have few choices. Threat from substitutes: Low: Low-end produce does not provide much threat to quality products of Boffi. Little competition Is faced from Fotile, Robam and Sacon and Dandy who operate within a limited region. Entry barriers: Medium: Establishment costs are very high for a furniture industry. Also China has strict regulations with foreign companies. On the positive side, presence of huge market and limited players provides an attractive opportunity in China. 4.6 Porter’s Five Forces Canada Figure 3. Porters Five Forces Canada Rivalry: Low: numerous local players like Delta and few large players like Woodworking have dominated the Canadian market. The country brings in huge demand for a niche product within the kitchen and bath furniture market. Supplier Power: Low: Boffi retains its brand name by producing and sourcing all of its furniture from Italy which gives other suppliers little opportunity. Buyer Power: Low: Low rate of growth of population has decreased the demand howver, the luxury segment is been seen to be rising which makes market for Boffi much larger. Also, there are very few players who can offer artistic designs like Boffi in Canada. Threat from substitutes: Low: Very few big companies like Woodwork have and organised and structured kitchen and bath solution but numerous small players cannot match the standard set by Boffi. Entry barriers: Low: Limited availability of luxury needs within the kitchen and bath segment leave huge market accessibility for Boffi in Canada. 4.7 Motives for Internalization The prime motive for internationalization was penetration into newer markets and expansion of product base. Boffi wanted to target the ultra rich segment that went to local manufacturers for customized kitchens. They wanted to expand into the luxury kitchen and bathroom segment that was entirely customized to suit the client’s needs (Lojacono, 2010). The local market in Italy was saturated by furniture suppliers and the niche Boffi served had tremendous competition There was a growing demand for high quality kitchen and bathroom furniture in the growing luxury segment of developed nations. Boffi offered artistic creations that were custom made and this unique feature was expected to have a great demand in international markets. 4.8 Motive for FDI Market Seeking Motives: The prime motive for foreign direct investment in Canada would be for getting a new market that assures high market share due to the lack of high-end kitchen and bathroom suppliers in the country. Resource and Asset Seeking Motives: In case of China, the country looks for new market because the country has huge number of suppliers of cheap and affordable furniture but companies that cater to the luxury needs of the growing affluent segment are few. 4.9 Industry Life Cycle Boffi is encapsulated within the growth stage of the industry life cycle. Boffi is regarded as a major player in the luxury segment of the kitchen and bathroom industry. It is undertaking product as well as market expansion. The company is entering the wardrobe division and shifting to complete home solution needs. It has also entered various foreign markets while keeping its production base in Italy. The company also plans to grow in size through strategic acquisitions like Norbert Wangen and grow fast rather than the organic mode which it had been following till date (Europeankitchendesign, 2014A). Figure 1: Industry Life Cycle Analysis China has limited number of players within the affluent segment. The luxury needs within the industry of kitchen and bath appliances is slowly emerging with the rising urban and high income society. Thus, the luxury kitchen market is in the Development stage of the Industry Life Cycle. The Canadian market has a few number of large players but the demand supply gap in the industry is yet to be fulfilled which puts Canada on the Growth phase of the Industry Life Cycle. Figure 3: Industry Life Cycle Analysis America: Boffi in USA market is characterized by the Shakeout phase in the Industry Life Cycle. Boffi has also customized its price list for USA to incorporate the client’s customized needs and huge market demand. USA is highly populated with companies that serve the luxury kitchen and bath needs. However, the country is looking at foreign scope since the domestic demand is saturated. Korea: Boffi in Korea in undergoing a growth phase in Korea. The company is still adapting to country culture and aligning its production facilities to remove the shortcomings in terms of long lead times (Baker and Hart, 2007). Korean markets are in a decline stage for the foreign players in the luxury segment. Discouragement faced from local players in driving out foreign companies from the country. Italy: The market is filled with similar producers and Boffi’s quality products are no different in Italy. The demand is limited due to limited population and hence it has to adopt an internationalisation strategy. The Italian luxury kitchen and bathroom market in encapsulated somewhere in high growth stage of the industry life cycle. The country is a speciality producer of furniture needs and has been exploring newer market and innovating products to expands its market share and hence profits. Canada: The Canadian market has a huge number of players in the furniture industry who also provide quality products to the rising luxury segment. It is in a shakeout phase because the producers in Canada are also looking at exports for survival within the country. The consumers are very selective in their purchase. The Canadian market for luxury kitchen and bathroom solutions is reviving back to the growth stage after the recent economic crisis. Demand from foreign markets is also encouraging exports. Domestic demand is expected to rise up. China: This is in its development phase where few players and large market offers tremendous potential for Boffi. The Chinese luxury kitchen and bathroom market is in the introduction stage. Foreign companies are entering the country to provide luxury solutions. Home country specialises in low quality affordable furnishing solutions. (Europeankitchendesign, 2014A). 4.10 National Competitive Advantage Figure 2: Porter’s Diamond Model for National Competitive Advantage (Source: JBDON, n.d.) Firm strategy, structure and rivalry: Italy has the highest amount of exports in the furniture department where kitchen segment was one of the fastest growing divisions in 2008. The company has a strategy to sell unique designs in kitchen and bathroom furniture to the luxury clientele. Tremendous competition is faced form manufacturers within Italy who engage in similar product category meant for the luxury segment. Competitiveness of related and supporting industries: Italy has the highest amount of exports in the furniture department where kitchen segment was one of the fastest growing divisions in 2008. Local Demand Conditions: Italian furniture industry has been going through a declining trend in local demand. It has been hit hard by the economic crisis which one of the major reasons for companies to look outward. Factor Conditions: high end kitchen and bathroom furniture requires highly skilled labour and good furniture technical knowhow. Artisans and designers set apart the features in terms of design for luxury segment. Since furniture is a specialty of Italy, such factors were available in plenitude. Intensity of Rivalry: in 2008, the country had over 908 small and medium sized kitchen suppliers. The number of smaller firms was much more than the larger firms. Artisans were also widely available. Intense rivalry in the home country also forced large players to seek new markets abroad (Porter, 2013). 4.11 Modes of Entry Suitability: The American entry was justified on the grounds that it has one of the largest luxury markets and one of the most developed economies. However there is intense competition building up from German companies and other large producers already in USA. The Korean market is a smaller market for luxury goods and it is highly internalized. Foreign companies are being increasingly discouraged and the entry in Korea is not very promising. The company has to reduce lead-time and revive the concept of home country manufacturing to establish a strong foothold in Korea (Whitelock, 2002). The Italian markets are highly saturated and the niche catered by Boffi has limited demand from the ultra rich segment, which appreciates artistic creations. The Chinese market has huge demand coming from the affluent segment and the entry has high suitability and justification for capturing a new and large market. The Canadian market has rising affluent section, which might create demand however, established presence of other large payer brings in tough competition. Feasibility: The American market is hit by the recent recession and is reviving gradually; however, high competition from the German and other local large brands needs to be competed through innovative designs and artistic features. The Korean market is seeing a gradual decline in foreign players. Sustenance in Korea can come through central support and solidarity from local suppliers. The company shall have to shift production process within the country so as to reduce lead time and gain local supplier support (Ferrell and Hartline, 2010). The Italian market does not offer much expansion opportunities owing to limited demand generation. The Chinese markets offer high scope and huge demand. Feasibility can be assured through establishment of a manufacturing settlement of the company within the country. The Canadian market feasibility is possible only when the demand niche is created. Competition has to be phased out by increased promotion of niche product and such can only assure of feasible internationalisation strategy. 5 Recommendations Boffi should focus on entering the Chinese markets. Huge and growing affluent section promises a great market. Additionally, it can benefit from economies of scale by large-scale production of quality produce. Early mover advantage presents high opportunities. Pros: China promises a large market owing to population and a huge luxury segment in the eastern region. The company can also benefit from large-scale production owing to huge expected demand in the country. Early movers present huge opportunities for large market share. Cons: Italian production can potentially increase lag time in delivery, which might be a deterrent to business. Chinese producers might copy products and sell cheaper versions that might take away huge market share. 6 Conclusion The US market offers a huge potential and appears as an attractive investment choice. The market promises a huge market for luxury good buyers. The Italian market is in a maturity phase when the players are trying to look for more demand in new locations. Rivalry within the nation is also very high. The Korean market is highly disturbed by the governance. Growing hatred for foreign companies and persistent instability due to differences with North Korea are deterrent to company’s future prospects. The Canadian market is full of high-end kitchen and bathroom solution providers and market share capture shall be difficult despite the growing luxury segment. The Chinese market offers huge potential in terms of market size as well as benefits of early mover. 7 Appendix 7.1 PESTEL USA Table 9. PESTEL USA 7.2 PESTEL Italy Table 10. PESTEL Italy 7.3 PESTEL Korea Table 11. PESTEL Korea 7.4 Porter’s Five Forces USA Figure 4. Porters Five Forces USA Rivalry: High: USA is a huge market with a number of players in the kitchen and bath industry and therefore the rivalry remains quite high. Supplier Power: Low: Boffi has its raw materials sources from home country which makes supplier power in USA for Boffi low. Buyer Power: High: Buyer bargaining power is high because of the presence of multiple substitutes. Threat from substitutes: High: due to the presence of quite a number of firms the presence of substitute is extremely high and hence the threat from substitutes in USA is high. Entry barriers: High: USA is dominated by a huge variety of local as well as foreign brands where big firms take up the larger market share. The industry also requires high capital investments and hence the barrier to entry is extremely high (Johnson et al., 2011). 7.5 Porter’s Five Forces Italy Figure 5. Porters Five Forces Italy Rivalry: High: German players give high competition in quality products. Supplier Power: Low: huge number of suppliers for furniture industry makes the supplier power low. Buyer Power: High: buyers have tremendous choices in substitute items for kitchen and bath furnishing. Threat from substitutes: High: there are a huge number of suppliers for high end products like BOFFI in Italy. Entry barriers: High capital investment requirement deters entry of new players. Italy has a huge number of renowned furnishing brands producing high quality furniture. 7.6 Porter’s Five Forces Korea Figure 6. Porters Five Forces Korea Rivalry: High. Well established local firms and plenitude of foreign brands in Korea makes rivalry high in the industry. Supplier Power: Low: Boffi sources all its inputs from home country and hence the power of suppliers is low. Buyer Power: Consumers do not want to wait for 2 months for their kitchens to arrive. They have wide choices when it comes to substitute companies and products. Threat from substitutes: High: Kitchen and bath solution can face substitution from providers of complete living solutions and local kitchen and bath solution companies. Entry barriers: High: There are a number of established brands in the same industry established within the country. Also the entry of foreign companies is tough due to the growing challenges for foreign firms in the Korea. 8 Reference Read More