Critical analysis of market entry strategy of Bershka BSK Espana S.A.

Critical analysis of market entry strategy of Bershka BSK Espana S.A.

Critical analysis of market entry strategy of Bershka BSK Espana S.A.

Abstract

report critically analyzes the Norwegian apparel market evaluating its attractiveness suggesting potential market entry for Bershka BSK Espana S.A. The report starts with the critical literature which describes tools and frameworks used for analysis. The next part of the report concentrates on the evaluation of the apparel industry. For the purpose of analyzing the major forces impacting the companys profitability level and the intensity of rivalry, Porters five forces framework was used, following the PEST analysis to estimate the external environment of the company. Competitors analysis was then conducted to determine key competitors and their position on the market. Detailed analysis of key success factors was used with the evaluation of companys ability to meet those factors. Then, the report focuses on the companys overview including its business model and forms of development. To evaluate companys competitive advantage Porters generic strategies framework was used followed by integration-responsiveness framework to analyze companys strategy. The next part of the report reviews the issue of market entry strategy constituting the base for conclusions and recommendations. The results of the report suggest that Norwegian apparel market is an attractive destination for the company due to the favorable forces influencing the environment. The structure of the companys business model is another factor suggesting that the expansion on this market can be successful. However, there are some aspects the company should take into account before entering this market like the power of advertisement or the possibility of online shopping.

The aim of the assignment is to critically evaluate the Norwegian apparel market and analyze the potential market entry strategy of Bershka BSK Espana S.A.

Critical literature review

Companies decide to expand their businesses on overseas markets due to different motives such as gaining access to new markets, decreasing risk resulting from diversification in different countries, balancing losses in one country by earnings in other country or gaining greater profit from large investments to name a few (Rodriguez et al 2010). Yip (2003) in turn, groups different motives into four drivers of internationalization distinguishing market, government, cost and competitive drivers. However, as Conconi et al (2013) note, companies face also significant uncertainty when internationalizing as they are often unaware of local and legal regulations, unsure of the extent of demand or adequacy of their products to local preferences. Therefore, it is important for companies to perform market evaluation in order to obtain as much information as possible to decide whether to enter a particular market or not (Graham 2004).order to evaluate the apparel market, PEST analysis was used to take a closer look at the external environment in which the company will operate what will allow the company to take advantages of opportunities and lessen the threats (UW, n.d., Papers4You. Com, n.d.). Kotler points out (1998) that the analysis enables to comprehend the market, companys position and both its potential and directions of operation. Jurevicius (2013) sums up that «the outcome of PEST is an understanding of the overall picture surrounding the company». In addition to PEST analysis, Porters five forces framework was also used to evaluate the environment of apparel industry since the framework allows to categorize and analyze major forces influencing the intensity of industry rivalry and its profitability level (Jurevicius 2013).order to define the companys competitive advantage, Porters generic strategies have been used. Porter (1998) claims that by skillfully aiming at the cost leadership, differentiation or focus strategies a company can achieve substantial and sustained competitive advantage over its competitors., the appropriate entry market strategy is another issue with which international companies have to struggle (Hill 2012). Young et al (1989) in turn, emphasizes that this choice can have a significant influence on a companys performance when operating on a new market and also stresses that this decision is one of the most complex a company can face. According to Hill (2012, p. 486) «the various modes for serving foreign markets are exporting, licensing or franchising to host-country firms, establishing joint ventures with a host-country firm, setting up a new wholly owned subsidiary in a host country to serve its market and acquiring an established enterprise in the host nation to serve that market». Each of these strategies has advantages and drawbacks. The extent of those advantages and drawbacks is related to a number of factors involving transport costs, trade barriers, political risk, economic risk, business risk, costs as well as companys strategy. Young et al (1989) also emphasizes that control is one of the crucial factors influencing the success of a company in a new market.is a complicated process demanding preparation and adequate research in order to be successful. There are lots of frameworks and analysis making this process easier allowing companies to predict how much profit they can gain. Last but not least, entry market strategy is also crucial for the companys success therefore it is important to choose such a strategy that will be adequate to the conditions and the environment on particular market.industry overviewstrategy industry market

In the past years Norways apparel market recorded growth both in volume and value sales which both amounted to 2.4% on average providing a constant growth year by year (Appendix 1 and 2) (Euromonitor, 2013a). High level of GDP per capita standing at US$101,518 together with low unemployment rate totaling 3,5% in 2012 sustained the strong national economy and contributed to the positive development of the market inspiring consumers to increase their expenditure on apparel (Euromonitor, 2013a; Euromonitor, 2013b; Euromonitor, 2013c). In the following years up to 2017 the Norwegian economy is expected to continue its progress with growing real GDP on average by 2.4% (Appendix 3). Both volume and value sales are expected to grow each year by 1.7% and 1.6% respectively (Appendix 4 and 5) (Euromonitor, 2013a; Euromonitor, 2013h). Growing GDP per capita, stable low unemployment rate, rising disposable income and positive changes in volume and value sales terms will continue to provide constant development of the apparel industry indicating the optimistic and positive forecast performance for the following years (Euromonitor, 2013a; Euromonitor, 2013b; Euromonitor, 2013c).to rising disposable income, Norwegian consumers have more money to buy clothing especially that apparel serves as a way of expressing their personality (Euromonitor, 2013a; Euromonitor 2013d). However, they are quite highly influenced by media and icons and this trend is expected to increase. Young consumers will remain the most sensitive segment to price changes (Euromonitor, 2013a).based retailing remains its dominant position in apparel distribution channel with apparel specialist retailers being on top and contributing to 76.7% of apparel sales in 2012 (Appendix 6). However, increasing interest in using internet retailing is expected to continue taking shares from store-based retailing (Euromonitor, 2013a).Norwegian apparel market is dominated by international brands among which H&M, Cubus, Kappahl and Dressmann are the main competitors holding altogether around 24% of total apparel market value (Appendix 7) (Euromonitor, 2013a).the perspective of doing business, Norway is a highly attractive destination for capital investment being ranked 6th for the Ease of Doing Business in 2013 with small but rich population (Euromonitor, 2013b; Invinor, 2013). The corporate tax rate amounts to 28% which is above the Europe average (Appendix 8). However, Norwegian corporate tax rate is a flat tax and is to be reduced to 27% in January 2014 (Invinor, 2013).

Porters Five Forces framework

Porters Five Forces has been used to further analyse the Norwegian apparel industry. The framework can help the company with better understanding of the structure of the industry and revealing the most important aspects of the competitive environment as well as industrys current profitability (Porter, 2008). In order to clearly define the following forces, the buyers will be taken as individual consumers while textile producers and workforce as the suppliers.

Summary

Although Norwegian apparel industry is quite fragmented, its moderate growth within past years helps to abate the intensity of rivalry. Due to the liberalization of international trade, suppliers power is weakened by the competition from producers in low-wage regions. In spite of the lack of switching costs, buyers power is weakened due to their susceptibility to branding and advertising. Since demand patterns change rapidly, companies, while attempting to maintain market share, aim to gain customers by utilizing brand positioning and running marketing campaigns. Low entry barriers together with moderate capital requirements creates high possibility for new entrants. Although there are no substitutes for garments, there are some alternatives to retail chain in the form of home-made, custom-made or second hand clothing. However, their threat is not significant to market players (Datamonitor Plc 2011).more detail please see Appendix 9.

PESTLE analysis

With stable economy and politics combined with rare corruption, Norway is an attractive destination for new entrants (Hamre et al. 2010). The country respects almost all EU directives as a result of being a member of the European Economic Area (AMB Country Risk Report 2013). Between 2013-2020, growing per capita annual disposable income on average by 2.15% (Appendix 10) together with rising per capita consumer expenditure on clothing and footwear on average by 1.35% (Appendix 11) will allow Norwegian consumers to enjoy their discretional spending (Euromonitor 2013a; Euromonitor, 2013f). The slowest growth in population will be seen in the 10-24 age group (Bershkas target group) and will amount to only 7.23% in 2010-2020 (Appendix 12) (Euromonitor 2013c). The fact that sport activities are supported by the government can boost expenditure on sport apparel, so as growing interest in sport activities and healthy lifestyle (Euromonitor 2013a, Euromonitor 2013d). Natural fabrics are gaining more interest (Euromonitor 2013a). Being aware of their higher quality, Norwegian customers are more willing to pay higher prices. The apparel sales via internet retailing is expected to continue its increase (Euromonitor 2013a). The fact that «internet retailing remains more popular amongst younger consumers» (Euromonitor 2013a) is likely to benefit Bershka. A foreign company that enters the Norwegian market using wholly owned unit does not need to apply for approval or concession when buying a property (uipi.com, n.d.). In June 2014, Norwegian government will be the first in Europe to introduce restriction prohibiting the use of perfluorooctanoic acid (PFOA) in consumer products, applied also to textiles, in the quantity higher than one microgram per square meter (ul.com 2013).

Competitors analysis

The Norwegian apparel market is fairly fragmented with international brands being the key players. Following companies H & M Hennes & Mauritz AB, Varner Gruppen AS (Cubus and Dressmann chains) and KappAhl AB hold the leading position accounting together for about 27% of market value share in 2012 (Appendix 15) (Datamonitor Plc 2011; Euromonitor 2013a). «The popularity of the companies positioned at the low end of the market is also supported by their wide and large portfolios» what «remain the important factors in the competition» (Euromonitor 2013a).

H&M Hennes & Mauritz

Hennes & Mauritz (H&M) is a Swedish clothing company offering its products for women, men, teenagers and children which opened its first overseas store in Norway in 1964 (MarketLine 2013b; visitvasteras.se 2013). In 2012 it had 111 stores in Norway (Appendix 16) holding 10.1% of market value (Appendix 15) and 2,776 stores around the world. In 2012 the turnover of the company, including VAT, amounted to around US$ 21,66 billion (about.hm.com 2013a).

Varner Gruppen

Varner Gruppen is a Norwegian clothing company owning, among other chains, Cubus and Dressmann (MarketLine 2013c). The company has 595 stores just in Norway while around 1,316 stores (Appendix 18) in 8 European countries (Euromonitor, 2013g). The profit earned in 2012 amounted to US$162,843 (Appendix 18). Together both chains account for 10.2% market value (Appendix 7) while the company overall accounts for 13.1% (Appendix 15) (Euromonitor, 2013a; Euromonitor, 2013g).

KappAhlis a Swedish company offering its clothes for women, men and children putting, however, the main focus on women aged 30-50 (Euromonitor, 2013e). The company opened its first store in Norway in 1988 and 14 years later it had 103 stores in Norway holding 4.1% of market value (Appendix 15) (kappahl.com 2013b; investors.kappahl.com 2013; Euromonitor, 2013e). Its turnover for 2011/2012 amounted to US$6,67 million (kappahl.com 2013a).

Key success factors of the industry

Quality of products and brand reputationNorwegian customers quality is important thus they are prone to pay more in order to maximize the clothing replacement cycle. Due to higher awareness of natural fabrics and their quality, organic garments are gaining more and more popularity. Brand reputation is also important, especially that Norwegian customers pay lots of attention to working conditions for employees in the production and perceive them as a necessary factor while producing high quality garments. Therefore, the domination of global brands will be dependent on the reputation the companies will present (Euromonitor 2013a).

Combining differentiation with low cost

Since apparel industry is fairly fragmented allowing customers to choose from variety of products it is important for companies to differentiate their offer and make their products be superior in some way to those offered by competitors (MarketLine 2013a, Bordean et al. 2010). However, in order to be successful, companies have to combine differentiation with low cost employing different factors like economies of scale, technological advantages, outsourcing or learning effects that will enable them to save cost where possible and thereby make their price be competitive at the end (Bordean et al. 2010, Grant 2010).

Responsiveness to customers taste preferences

Since Norwegian customers use apparel as a way of expressing their personality it is important for companies to adjust their products to the changing trends and specific Scandinavian taste which is a combination of classic style and latest fashion trends as well as comfort and innovation. Fashion can be seen everywhere in Norway, also in gyms where people like to wear trendy clothes as they want to look good while working out. (Euromonitor 2013d).

Fast response to changing fashion trendsfashion trends change rapidly, so do customers demands, it is important for companies to react quickly to those changes. It not only allows companies to cut some costs but also to gain competitive advantage since the faster the response is, the more customers can be gained (Crofton and Dopico 2007). Rapid reactions allow also to reduce the amount of inventories left since those quick reactions enable companies to quickly cancel further production if particular product turns out to be unsuccessful «thus avoiding further accumulations that prompt the profit-draining clearance sales» (Crofton and Dopico 2007, p. 44).

Company overview

Bershka is one of the eight concepts belonging to the Inditex Group created in April 1998 and addressed to the youngest target segment aged 13-23 in retail and fashion (Inditex, 2013a). Its offer is composed of the following product lines: Bershka, BSK and Men (bershka.com).

Bershkas buisness modelintegration

Bershkas business model is based on a high degree of vertical integration with a focus on customer orientation. The company is involved in each stage of the fashion process (design, manufacture, logistics and distribution) (Appendix 24). Due to vertical integration, the company is able to openly and quickly communicate within and between different teams during the process of design the products (Eriksson and Jonsson 2011). Vertical integration allows the company to control a high part of its activities without being depended on external firms what also shortens the production cycle and allows quicker response to customers demands (Vincent et al. 2013; Heres 2007).

Entering new markets

There are many strategies to enter new market, but not each one suits the companys business model. Brand image is an important asset of Bershka since it does not cut down its activities to apparel production but also provides service in its stores. Therefore, both exporting and licensing forms of market entry would not completely match the companys business model. For Bershka the most important factor when entering a new market is the control that the company always tries to have over its operations. That is why, the main strategy for the company is wholly owned subsidiary «using greenfields over acquisitions» (Heres 2007, p. 101). However, within last years, the company has developed other alternative forms of entry like joint ventures and franchising agreements but always trying to maintain as high level of control as possible. Nevertheless, FDI is treated as the best way and alternatives are used only when there occur some obstacles which make it difficult for FDI to be used (Heres 2007).

Porters generic strategies framework

Michael E. Porter proposed generic strategies as ways of gaining competitive advantage (mindtools.com 2013).order to be competitive Bershka concentrates on each of Porters generic strategies, however it pursues more of differentiation focus strategy than cost leadership strategy since customers constitute an important part of companys business model and are the main focus of each of companys actions. It is important for the company to be highly responsive to customers taste preferences and to satisfy not only their fashion desires but also those desires connected with shopping experience (Eriksson and Jonsson 2011).

Bershka pays lots of attention to constant flow of information regarding customers needs and preferences, «and these are answered with clear market segmentation and product differentiation» (Mazaira et al 2003, p. 223). Each Bershkas store is a source of information for the company since it receives a daily feedback from each store manager regarding «the demands of customers and the sales trends» (Lopez and Fan 2009, p. 281) which is then used by designers to analyze the success of products and use to create new products or modify the existing ones. Store managers possess also great autonomy which allows them to select those products they believe will be in demand from wide and constantly updated offer (Crofton and Dopico 2007). «In particular, store managers have a key role in adapting the fashion portion of the assortment and fine-tuning the fashion-versus-basics mix» (Bernstein Research, 2008). Thanks to the Bershkas centralized logistic centre, «each store can regulate the flow of products itself» (Eriksson and Jonsson 2011).

Companys position on key success factorstries to meet key success factors of the industry by employing particular actions. Customers are an important part of companys business model and every decision that the company makes focuses on customers general satisfaction. That is why, Bershka provides small deliveries twice a week which together with constant feedback from store managers allow the company to respond quickly to customers taste and preferences. Daily analysis of products success by designers also helps the company be more responsive to changing fashion styles. The company also combines differentiation with low cost as it saves some cost by providing small deliveries and by being in contact with store managers (Crofton and Dopico, 2007). Having one central distribution also allows the company to cut some cost just as spending little on advertisement. To differentiate itself from the competitors, Bershka puts lots of emphasis on stores interior and window display which serve as a marketing channel and a meeting point where customers can unite with fashion. Since the price of the products is a vital factor, Bershka firstly identifies the price customers are willing to pay for competitors products and then sets its target price for its products which is lowered by 15%. In order to sustain such prices, the company searches for those suppliers through which adequate margins can be maintained (Chapter 5.2.).

Critical evaluation of chosen issue

The strategic issue selected for this paper concerns market entry strategy of Bershka for Norwegian apparel market. In previous chapters, several important factors regarding the issue were discussed thus this chapter focuses on reviewing them and summing them up to clearly state whether the company should or should not enter the Norwegian apparel market.Norwegian apparel market is an attractive destination for Bershka as the low power of suppliers allows the company to choose those suppliers with whom the collaboration will be the most profitable for the company. Moderate power of buyers lessens the pressure they can exert on prices. Although there are no substitutes for garments, there are some alternatives to retail chain in the form of home-made, custom-made or second hand clothing (Chapter 4.1.). However, their threat is not significant to Bershka as Norwegians are a demanding nation with both quality and eco-friendly orientation (Chapter 4.1. and 4.2.). Although the rivalry is strong on this market, its consequences should not be as sensible for Bershka since the company has a well-developed business model which is vertically integrated thus its dependence on local partners is small (Heres 2007). Moreover, its business concept is successful to such an extent that other companies like Benetton or C&A wants to attempt to replicate its particular elements (The Economist 2012). Restrictions concerning the PFOA will not be so influential for Bershka since the company has its own restrictions regarding the PFOA and other chemicals that are used in manufacturing processes aiming to eliminate all PFCs until 2015 (Inditex Individual Action Plan 2012)., there are some conditions which the company should take into account when entering and operating on the Norwegian apparel market. First condition concerns selling Bershkas products also via internet retailing as this form of distribution is expected to gain more and more popularity (Chapter 4.2.). Moreover, most of major competitors, that is H&M and Varner Gruppen, already have online shops (Euromonitor 2013g and dailymail.co.uk 2013). Offering the possibility of online shopping will also allow the company to appeal to younger consumers as they tend to shop online the most often (Chapter 4.2.). Another condition concerns the advertisement. According to the business model presented in Inditex Global Growth Opportunities (Inditex 2012) each brand entering a new market does not use advertisement. However, in case of Bershka, advertisement is important to draw Norwegian consumers attention to companys products. The importance of the advertisement results from Norwegian being highly influenced by media and their icons in music, cinema or fashion industry (Euromonitor 2013a). According to Euromonitor (2013a) this trend is expected to increase so as the usage of celebrities for marketing purposes.

«The selection of the entry mode influences the future performance of theand it requires extensive attention» (Heres 2007, p. 101). Especially that the potential market is the first choice that the company makes later on deciding which entry mode will suit the situation best. Although there are lots of possibilities to enter a new market, the company concentrates on three entry modes: franchising, joint ventures and wholly owned subsidiary. The difference between those forms of development is mainly expressed by «the degree of ownership and market commitment» (Heres 2007, p. 101) with location playing also a vital role. Since the company has always tried to maintain possibly high level of control, using wholly owned subsidiary seems to be the right choice for Bershka (Heres 2007). Such a strategy was also used for most of Scandinavian countries when other brand, Zara, was opening its first stores (Appendix 29) (Lopez and Fan 2009). Furthermore, Norway is a country with high growth potential, stable economy and quite low business risk what indicates that this strategy can be considered as the most suitable for this country (Chapter 5.1.2. and AIG n.d.)

Conclusions and recommendations

Bershka has fair chances to succeed on the Norwegian apparel market due to the construction of its business model and the characteristics of the market itself. Norwegian apparel market is characterized by several key factors which constitute companys success and these are quality of products, so highly valued by Norwegian consumers, the speed of response to changing fashion styles and Norwegians preferences as well as the reputation of international brands, so highly acclaimed by Norwegian consumers. Combining differentiation with low cost also cannot be omitted, especially that apparel market is quite fragmented. In order to be successful the company has to distinguish its products to some extend remembering as well to save cost where possible so that the final price of products is competitive. Bershkas business model enables the company to meet those key success factors due to its vertical integration which enables the company to control major of its manufacturing activities resulting in being less dependent on external firms and speeding up the production cycle. Thanks to its model the company is also able to cut costs where possible as it prefers small delivers that allow faster response and less inventory at stores. Constant communication with store managers plays also an important role in companys success as their feedback allows designers to quickly modify products. Putting lots of emphasis on store interiors and using display windows instead of advertisement are what makes Bershka different from its competitors.wholly owned subsidiary as a mode of entry also seems to be the right one for Bershka since the company always strives for having as much control as possible using this form of development for countries being economically stable with high growth potential and low business risk., in order to attract Norwegian consumers, the company should consider using the advertisements and celebrities to promote their products as prime locations may not be sufficient. Furthermore, the possibility of online shopping is considered to be valued among young consumers therefore it is also advised to consider the investment in online store at the beginning of the expansion.

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