Evaluating Internationalisation Strategy for Boffi - Example

Evaluating internationalisation strategy for Boffi Name Class Unit 1. Executive summary This management brief independently evaluates the internationalisation strategy for Boffi and comes up with recommendations to the board of directors on the suitable future internationalisation option for the business. The brief carries out a concise summary of the environmental analysis for Boffi. Analysis shows that there is need for Boffi to internationalise. This is attained through a detailed SWOT analysis for the firm which presents evidences of finding. The internationalisation is proposed for Brazil, Hungary and South Africa. To analyse internationalisation, the brief looks at the motive for internationalisation, evaluation of national competitive advantage and lastly the entry mode suitability and feasibility. The brief chose entry through use of a subsidiary. The brief finally gives recommendations which include pros and cons. It is recommendable for Boffi to consider future expansion to Brazil Hungary and South Africa. Table of Contents 1. Executive summary 2 Table of Contents 3 2. Introduction 3 3. Summary of Environmental Audit (Current markets) 4 Strengths 4 Weakness 5 Opportunities 5 Threats 5 Discussion of analysis 5 4. Internationalization 6 External Analysis 6 Micro and macro analysis of South Africa, Hungary and Brazil 6 Industry lifecycle 9 Motive for Internationalization 17 Organisational factors 17 Environmental factors 17 Evaluation of National Competitive Advantage 18 Porters diamond 18 Mode of entry 21 Evaluation of the entry through subsidiary 21 5. Conclusions and Recommendations 22 6. References 23 2. Introduction Internationalisation is market decisions that are made in a rational manner. This is based on the analysis of the market entry and transactional costs (Mayer and Ottaviano, 2008). Internationalisation is a process in which a firm increases their foreign market commitments (Jones and Coviello, 2005). Boffi is a company founded in 1934 by Piero Boffi in Italy. The company started from humble beginnings based on creativity and entrepreneurship as its main principles. At the moment, the company is well known for their manufacture of high end kitchen and bathrooms furniture among other products (Boffi, 2015). The company has a highly flexible production line with state of art operations. The management brief is based on Boffi internationalisation strategy of business. This will help in making recommendations to the board of directors on the most suitable internationalisation options available for Boffi. The management brief includes; environmental audit, internationalisation and finally conclusion and recommendations. 3. Summary of Environmental Audit (Current markets) Based on the resource view of the firm, a firm is expected to build on its internal strengths in order to deliver value to the stakeholders and customers. SWOT analysis is vital in determining the firm internal and external environment (Hollensen, 2015). Strengths Boffi is a well-known brand hence capable of attracting key demographic customers. Boffi has a strong management culture. The management has been able to steer the company to international level through appropriate decision making. Boffi culture is based on innovation, creativity and entrepreneurship. Boffi has adequate resources at their disposal. The firm has been able to establish a supply chain that is resilient coupled with appropriate distribution network. The firm respects the environmental standards in place and works in ensuring that there is sustainability. This is through an elaborate sustainability plan (Hollensen, 2015). Weakness Despite being an international brand, Boffi market is not well distributed. The firm relies on the European and US market which makes it susceptible to market shocks. Despite their marketing model promoting affordable prices, the firm has been associated with low level of customer service (Hollensen, 2015). Opportunities Boffi should move into the international market through focusing on the emerging markets. The rise of the emerging markets presents a great opportunity for the firm to expand based on their ability to produce at low prices and high volumes. The firm should take internationalisation opportunity to reduce the venerability to market shocks especially during recessions. The rise of technology presents the firm with a lot of opportunities in e commerce (Hollensen, 2015). Threats With the growing competitive market in the furniture industry, firms have been trying to copy each other’s models. The firm faces a threat from rising levels of competition in the industry. There are also economic concerns of rising costs of living and reducing disposable incomes which might affect the industry. With overdependence on single markets, the threat from changing market conditions is very high. The firm is also threatened by the entry of small retailers in the industry (Hollensen, 2015). Discussion of analysis The SWOT analysis has presented an established instrument which can be used to analyse the internal and external environment for Boffi. Through the analysis, it is evident that Boffi can utilise their strengths and work in reducing their weakness. This will make it possible for Boffi to take opportunities that are available in the industry. Through environmental analysis, it is evident that Boffi should internationalise their operations. Boffi environment will help in shaping their mission, vision and objectives. To be successful, Boffi has to be in tune with their external environment. There must be a strategic fit between what the environment wants and what Boffi has to offer (Jones and Coviello, 2005). The analysis shows that Boffi has to consider emerging markets as their new opportunities. This will give the firm a chance to increase their market share. Boffi expansion plans should focus on Brazil, Hungary and South Africa (Nayyar, 2008). 4. Internationalization External Analysis Micro and macro analysis of South Africa, Hungary and Brazil South Africa South Africa has a large and growing market for furniture. There are about 2,200 registered furniture businesses in South Africa. The country has a labour intensive furniture industry. With an increase in disposable income, Boffi can benefit a lot from the South African market (Nayyar, 2008). Pestel analysis for South Africa (macro) (Van Wyk and Custy, 2004) Political South Africa has a stable government The country is one of the emerging markets. The country has attractive economic policies and has little trade restrictions. South Africa is a member of WTO. Economic The country has a purchasing power parity of 524.341 billion with an unemployment rate of 24%. The country has a low inflation rate of 3.7% and a disposable income of 2.7%. The interest rates are set at 5.50%. The level of disposable income has been rising which is good for Boffi business. Social The country population is estimated at 49.99 million. The country spends high on education and the literacy level is at 86.4%. Technological South Africa is one of the most technologically advanced countries in Africa. The country has high internet connectivity which is vital for Boffi. Use of modern technology is highly utilised in the industry. Environment South Africa has high commitment to environment. There are environmental laws which have to be observed by any firm operating in the country. Legal South Africa legal system is free and fair. Businesses are protected by the law from unhealthy competition. Businesses operating in South Africa are expected to be registered before starting their operations. Porter 5 forces (micro) (Van Wyk and Custy, 2004) Competition rivalry (Low) There is low concentration ratio The numbers of furniture industries are not high. There are low switching costs Threat of new entrants (high) The government is encouraging new FDIs in furniture industry Low barriers to entry compared to developed countries Threat of substitutes (high) There are a lot of small firms offering substitutes Low switching costs Substitutes are of good through lower quality Bargaining power of the suppliers (medium) Suppliers may collude to increase bargaining power There are few substitutes to suppliers Suppliers’ product is critical There are strong suppliers Bargaining power of the customers (low) Customers are less concentrated than buyers There is high level of differentiation in products Threat of backward integration is low. Industry lifecycle The South Africa furniture industry is at the mature stage of its lifecycle. Boffi will thus be required to maintain innovation to ensure growth (Nayyar, 2008). Hungary Hungary has an economy which has attracted a lot of foreign direct investments. The country is well placed in competitiveness and the investors are mostly satisfied. The country has low taxes, legal stability and low labour costs. Boffi can benefit a lot through investing in Hungary furniture industry (Tracogna, 2013). Pestel analysis for Hungary (macro) (Chikán, Czakó, and Zoltay-Paprika eds., 2002) Political Hungary has stable government which is attractive to the investors. The government has been working to provide the investors a safe working environment. The country has been supporting free trade and is a member of WTO. Economic Hungary economy has a freedom score of 66.8 and is ranked 25th out of 43 European countries. The country has an open economy with an inflation of 1.7% and a population of 9.9 million. Social The country has a high literacy level with low number of early school leavers. The country has high job security and low working hours. The country has a large middle class which can be tapped by Boffi. Technology Hungary is well advanced in technology. The country has innovation policies where research and development is emphasized. There are adequate trained individuals on technology. Environment Hungary has been making major transitions on environment since 1990. Air pollution and emissions has been acted upon through laws. Boffi will be expected to follow the environment laws in the country. Legal The legal system in Hungary is based on the European laws. The country laws protects free business environment and ensures that there is no unfair competition. Boffi is expected to adhere to business laws and observe domestic laws when operating in Hungary. Porter 5 forces (micro) (Chikán, Czakó, and Zoltay-Paprika eds., 2002) Threat of new entrants (medium) Hungary has open market which eliminates most barriers to entry. High cost of assets There are established industries in furniture market. Competitive rivalry The market is competitive with companies such as IKEA already established in Hungary The concentration ratio is high There are high exit barriers due to high investment on equipments Threat of substitutes Threat of substitutes is medium. There are other companies with kitchen and bathroom accessories made of different raw materials such as IKEA Substitutes are cheaper than industry product Supplier power (medium) Suppliers may work together to enhance bargaining power. There are few substitutes to supplies There are dominant suppliers Bargaining power of the customers Customers have low bargaining power. Customers are less concentrated that sellers There is high differentiation in the products Industry lifecycle Hungary furniture industry is at the mature stage of its lifecycle. This implies that Boffi will be required to enhance creativity and innovation to maintain a competitive advantage (Tracogna, 2013). Brazil Brazil has a huge market which is vital for Boffi expansion (Nayyar, 2008). The domestic consumption of furniture in Brazil has been on rise. By expanding to Brazil, Boffi will be able to expand their presence in South America where they have a low market share (Passos, Spers and Wright, 2015). Pestel analysis for Brazil (macro) (Nayyar, 2008) Political Brazil has a stable government which is proactive. Corruption is a major problem in the Brazil government. Economic Due to large FDI, Brazil economy has been growing fast. The gap between the rich and poor is declining and there is high disposable income. High taxation rate compared to other economies such as Greece. Social Brazil has economic inequality and about 20% of the population lives below the poverty line. The country middle class is growing with higher disposable incomes. Technological factors Compared to other developing countries, Brazil has weaker technological infrastructure. The country IT sector is growing fast. Environment Brazil is committed to ensuring there are low emissions to protect environment. There are environment laws which Boffi has to follow in Brazil. Legal Brazil has adequate laws which protect foreign investors. The main threats are from corruption and counterfeits. The country has antidumping laws and tariffs. Porter 5 forces (Micro) (Nayyar, 2008) Competitive rivalry There is moderate competition in the Brazil furniture industry. Most of the competitors are domestic The concentration ratio is medium Threat of new entrants Medium threat of entry The kitchen furniture industry requires a lot of capital investment and technology. Boffi has great brand loyalty globally Threat of substitutes Low threat from substitutes Kitchen and bathroom furniture are not easily substituted especially in the luxury housing. Substitutes are inferior. Bargaining power of suppliers Threat from suppliers is medium There are cases of suppliers cooperating informally. There are few substitutes to suppliers Suppliers are in a better bargaining position. Bargaining power of the customers Low bargaining powers of the customers Customers are less concentrated and growing middle class is less price sensitive Kitchen and bathroom furniture is highly differentiated Low chances of backward integration Lifecycle The furniture industry in Brazil is in its growth lifecycle. This implies that there is high growth of the furniture segment in the country. At this stage of lifecycle, there are many opportunities that the firm can exploit in the country (Passos, Spers and Wright, 2015). Motive for Internationalization Organisational factors Firm specific factors Firm size Boffi is a large company and has exhausted their opportunity to grow in the home market. This implies that Boffi has to look for offshore market in order to grow. Operating in diverse markets will make Boffi more resilient and better in managing risks (Jones and Coviello, 2005). International appeal Boffi products have an international appeal. This leads to the need to look for more markets globally. The expansion plan will make it possible for the firm to reach the global market in countries where Boffi has no presence. Environmental factors Attractiveness of the host country The attractiveness of the opportunities presented by the three markets makes it vital to invest in them. The firm should exploit the opportunities presented to gain a competitive edge in the industry (Nokelainen, Lamberg and Laurila, 2014). Evaluation of National Competitive Advantage Porters diamond (Márkus, 2008) Brazil (Nayyar, 2008) Factor conditions Brazil has skilled labour resources and technological base. The country has adequate infrastructure which are required by Boffi The factors are; adequate human resource, material resources and knowledge resources Home demand conditions The demand for kitchen furniture and bathroom accessories is high The market is growing at an impressive rate The country is favourably placed in furniture industry Related and supporting industries The supporting industries in Brazil are competitive hence more cost effective and innovative inputs Firm strategy The country culture is favourable for Boffi Boffi will have to strategize on management structure, motivation and interaction among related companies based on Brazil culture. Firms are less hierarchical in Brazil There is medium competition rivalry Hungary (Chikán, Czakó, and Zoltay-Paprika eds., 2002) Factor conditions Hungary has adequate skilled labour There is adequate natural resources and technological base Demand conditions There is high domestic demand for kitchen and bathroom furniture The local market is highly demanding leading to a national advantage There is high anticipation for global trends Related and supporting industries There are international competitive supplying industries as well as supporting industries Firm strategy, structure and rivalry Hungary companies tends to be less hierarchical The level of competition rivalry makes the industry attractive Local rivalry will lead to innovation and improvements South Africa (Van Wyk and Custy, 2004) Factor conditions South Africa has adequate natural resources for the industry The country has adequate and trained workforce The level of technology in the country is sufficient for Boffi Demand conditions The composition of home demand will require innovation and upgrade for Boffi The high demand in the local market will lead to national advantage The market is strong in trend setting leading to anticipation for global trends Related and supporting industries The supporting industries in South Africa are competitive There is availability of more cost effective and innovative inputs Suppliers are not strong global competitors Firm strategy, structure and rivalry Firms in South Africa tend to be hierarchical. The level of rivalry makes the industry attractive There is high innovation by the local industries Mode of entry A firm can enter into the new market through joint ventures, franchising, export, licencing and creating a subsidiary among others. To enter into the new markets, it would be preferable for Boffi to establish subsidiaries. In the emerging economies, the local buyers may closely identify with the local companies as opposed to overseas firms (Mayer and Ottaviano, 2008). Evaluation of the entry through subsidiary Use of subsidiary will enable Boffi to source the local manufacturing technology easily. The subsidiary will act as a vehicle to deal with the overseas market rules more easily (Birkinshaw and Hood, 1998). It may take a long time for Boffi to establish an overseas operation in chosen countries. Despite this, use of subsidiaries will eventually lead to a great overseas presence with minimal risks. In Brazil, subsidiaries are preferred before the firm establishes location (Nokelainen, Lamberg and Laurila, 2014). Subsidiaries have established distribution channels in the industry (Birkinshaw and Hood, 1998). This implies that through use of subsidiaries, Boffi will be able to reach a large market share in a short time than establishing a location. The subsidiaries have outlets in furniture malls, marts and also online presence. They have already established their customer base making it easy to market Boffi products. In foreign market, the furniture is expected to embrace elements of culture, nature and environment while at the same time remaining trendy. This can be achieved through use of subsidiaries that are well versed with the country culture and trends (Mayer and Ottaviano, 2008). 5. Conclusions and Recommendations The decision to internationalise is very important for Boffi. It’s highly recommendable for Boffi to consider expanding to Brazil and South Africa and Hungary. The countries are large economies with vast opportunities for the firm. The countries have sizeable populations with disposable incomes. Despite this, the firm will have to look into some of the considerations as they expand. Boffi should exploit their strengths and eliminate their weaknesses in order to fully exploit the foreign markets. As the firm internationalise, it should focus on reducing costs and risks. Boffi should work to ensure that they reduce their overdependence on the European and US market. This will ensure that the firm is not highly exposed to market fluctuation risks. The firm should diversify their markets through overseas ventures as explained. Lastly, Boffi should continue upholding their innovative culture. To sum up, the main benefits that will be attained through internationalisation are; increased market share, reduced market risks, increased sales, gaining a competitive advantage and exploiting opportunities overseas. Despite this, the firm risks failing to meet the sales target overseas, foreign rules and regulations and exposure to market volatility in foreign economies. This leads to the need to use a subsidiary as the entry mode. A subsidiary will enable Boffi to reduce risks in the foreign market. This is due to fact that the subsidiary is well exposed to the market conditions hence has adequate knowledge on rules and regulations. Use of subsidiary will enable Boffi to expand their market share fast, use already established distribution network and appeal more to the local population. It is therefore advisable for Boffi to use subsidiaries in future expansion Hungary, South Africa and Brazil markets. 6. References Birkinshaw, J. and Hood, N., 1998. Multinational subsidiary evolution: Capability and charter change in foreign-owned subsidiary companies. Academy of management review, 23(4), pp.773-795. Boffi, 2015, Collections, Viewed 15th December 2015, http://www.boffi.com/en/collections.aspx Chikán, A., Czakó, E. and Zoltay-Paprika, Z. eds., 2002. National competitiveness in global economy: the case of Hungary (Vol. 4). Akadémiai Kiadó. Hollensen, S., 2015. Marketing management: A relationship approach. Pearson Education. Jones, M.V. and Coviello, N.E., 2005. Internationalisation: conceptualising an entrepreneurial process of behaviour in time. Journal of International Business Studies, 36(3), pp.284- 303. Márkus, G., 2008. Measuring company level competitiveness in Porter‘s Diamond model framework. In FIKUSZ 2008 Business Sciences-Symposium for Young Researchers: Proceedings (pp. 149-158). Mayer, T. and Ottaviano, G.I., 2008. The happy few: The internationalisation of european firms. Intereconomics, 43(3), pp.135-148. Nayyar, D., 2008. China, India, Brazil and South Africa in the world economy: Engines of growth? (No. 2008/05). WIDER Discussion Papers, World Institute for Development Economics (UNU-WIDER). Nokelainen, T., Lamberg, J.A. and Laurila, J.S., 2014, January. Globalisation and Competitive Strategy: A History of Competitive Stagnation. In Academy of Management Proceedings (Vol. 2014, No. 1, p. 15911). Academy of Management. Passos, C.A., Spers, R.G. and Wright, J.T.C., 2015. The Efficiency and Strategy of Companies Operating in the Popular Market: A Study on the Furniture Industry in Brazil. Journal of Management Research, 7(4), pp.111-131. Tracogna, A., 2013. Hungary Furniture Outlook (No. W02HU). Centre for Industrial Studies (CSIL). Van Wyk, J. and Custy, M.C., 2004. Doing Business in South Africa. Thunderbird International Business Review, 46(4), pp.419-442. Read More