Internationalization of Koyo Jeans

9 September 2016

Motive for Internationalization i. Internal Factors9 ii. External Factors9 5. National Competitive Advantage i. Porter’s Diamond10 a) Firm strategy, Structure and Rivalry b) Demand Condition c) Factor Condition d) Supporting Industries ii. Recommendation of country11 6. Entry Strategy12 7. Entry Strategy Evaluation i. Suitability13 ii. Feasibility13 8. Conclusion13 9. Recommendation13 References14 Appendices Executive Summary This report is carried out to recommend an entry strategy for Koyo Jeans for its internationalization purposes.

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A step by step approach has been carried out in order to fully understand its current position and where it can see itself going. Firstly, the environmental analysis of the current markets it operates in has been carried out. The strengths and weaknesses have also been identified in order to base on them throughout the entire analysis and use them to the firm’s advantage. Secondly, new markets have been considered based on research. The motive for internationalization has been established in order to have a concrete understanding of where and why it is looking to expand.

The various factors that are pulling or/and pushing Koyo Jeans have also been examined. 2 new markets have been considered and they will be compared with various frameworks such as Porter’s Diamond to conclude which market is best for Koyo Jeans at the current situation. A country is recommended based on all the above findings. Finally, the various entry strategies are considered and based on the suitability and feasibility of the company’s resources, a single entry strategy is recommended. The report is then concluded based on the entire analysis of the various findings.

Last but not the least, final recommendations are made of what to look out for when expanding and how the entry strategy can be carried out even more efficiently. 1. Introduction 1. 1 Purpose The purpose of this report is to evaluate the internationalization strategy of Koyo Jeans and make recommendations to the Board of Directors on suitable future internationalization options available to the business. 1. 2 Background Koyo Jeans is the brain child of William Cheung, a Hong Kong designer. Having started as a wholesaler, it entered the high-end fashion world as a male brand.

Its target customers are denim lovers aged 18-25 who have an interest in gothic and French romance theme. It is established as a high-end, international brand after opening a shop in Harbour City & winning buyers at Galeries Lafayette. It has ever since been rapidly expanding through franchising, especially in China. Koyo also sponsors outfits of artists & celebrities to increase their brand awareness and presence in the market. Koyo Williams is another brand which is positioned as a high-end fashion brand, but for the purpose of this report the concentration will be on Koyo Jeans.

Franchising and self operated stores have been Koyo’s strategy of expanding. Currently 2. Environmental Analysis (Current Markets) i. Micro Environment (Porter’s 5 Forces) Figure – Hong Kong Figure – France Figure – Singapore Porter’s 5 forces has been applied to analyse the micro environment of Koyo Jeans in the current markets namely Hong Kong, France and Singapore. We can therefore conclude that the bargaining power of suppliers and bargaining power of buyers are relatively high in all the 3 countries.

Koyo goods are all being manufactured in China now; giving the suppliers the upper hand. Apart from well established brands, new entrants are also possible with/without substitute such Cargos and Jeans, therefore increasing the competition for Koyo. ii. PESTEL of Koyo Jeans (Currents Markets) From analyzing the 3 current markets of Koyo (Appendix B), we can conclude that Koyo has been focusing on the Asian market, more specifically Asia-Pacific. We have to consider the fact that Koyo is a fairly new player and therefore has not taken many farfetched risks.

Even though it has a market in France; if we look deeper we can see that it has only one store there. iii. Internal Factors With the help of the Value Chain (Appendix D), we are able to conclude that Cheung was able to add value to the company in 3 key regions which in turn increased the profit margin. Quality textile was sourced from Taiwan at very competitive prices. The operations were streamlined and bettered over time. Lastly, his careful selection of franchises helped him maintain control of the business and there by add value over time. iv.

Lifecycle Analysis – Current Markets Hong Kong: Growth Stage – Although Hong Kong has enjoyed strong growth over the years, the textile industry has been seeing significant slowdown in growth since 2012 Singapore: Growth Stage – Singapore is the 2nd largest market for textile retail in the Asia Pacific zone over the years after Hong Kong and it too is facing the same challenges as Hong Kong France: Maturity Stage – France has been the world renowned market for the fashion industry but it has also been considered a mature market. v. SWOT/TOWS Analysis

With reference to Appendix A, we can conclude the following: Koyo Jeans does produce quality products for its costs. The franchises it chooses to work with also helped it to maintain its service quality and uniform customer experience. It can also be seen as a weakness as Cheung has a strict selection criterion which has slowed the rate of Koyo’s expansion. Koyo has 1 store in France, which is not well known as well. The recession has affected Koyo as people are more likely to buy brands that are already established rather try something new during this time period. 3. External Analysis (New Markets)

Microenvironment (Porter’s 5 Forces) Figure – Brazil Figure – USA From analysing the 2 Porter 5 forces framework of each country, we can say that there is more similarities than differences as both markets are totally new for Koyo Jeans and given that both are geographically distant as well. In Brazil however, due to cheaper cost of production, Koyo can consider it to produce goods in the future. In USA, Koyo can be considered having a stronger global presence. ii. PESTEL of Koyo Jeans (New Markets) From the detailed PESTEL of Brazil and USA in Appendix C we can summarize:

USA has more stable political system than Brazil. Also, corruption is expected in certain cases in Brazil even when every criterion is met. ECONOMIC: Current GDP of Brazil is USD $2. 253 trillion (2012) which is forecasted to increase over the following years while USA is the largest economy of the world with a GDP of USD $16. 6 trillion (2012). SOCIAL: USA has larger literate population and main language is English, while the spending power of the middle class in Brazil is increasing.

People in the USA are more exposed to technology and more comfortable with it, while the government of Brazil is spending 1% of the GDP on R&D to constantly progress in technology. ENVIRONMENTAL: Strong environmental policies are prevalent in both nations while USA has increased co-operation with China. LEGAL: The laws and policies are transparent in the USA while bribery is expected in Brazil in certain cases. In Brazil, sometimes “know-who” is more important than “know-how”. iii. Lifecycle Analysis (New Markets) Brazil: Growth Stage – Brazil is the 4th largest emerging market currently and the retail sector is projected to boom even more.

Not to forget the 2014 FIFA World Cup and Rio 2016 Summer Olympics are also slated to happen in Brazil which again is an advantage. USA: Growth Stage – USA fortunately also falls in the growth stage but it does not have a steady and large growth compared to Brazil. Recession had hit the USA bad and its impact can still be seen in the market. iv. Opportunities & Threats (New Markets) Brazil: Opportunities: As the 5th largest nation in terms of population and 7th largest economy, Brazil is in superb position in economic growth over the following years. It has a strong and growing middle class with increasing disposable income.

Brazil is also a known place for its manufacturing industry. Its exports have also been steadily decreasing over the past years as consumption has increased within the country. Threats: There is imbalance in economic distribution though, therefore affecting the sales potential of companies looking to expand in the long run. USA: Opportunities: USA still holds the position of key influence in economic, political and military environments. Expanding into USA will give a global presence and better chance of being considered an international company and hence increasing brand image.

Threats: The growth of the market is slow compared to Brazil. The economy is still recovering from recession and there is a threat of terrorism when compared to Brazil. 4. Motive for Internationalization i. Internal Factors Wide clothing collection such as jackets, coats, cashmere, wool. Good to production, due to continuous optimization. Koyo Jeans, a more mainstream line for the mass market and Koyo William a higher end, high class one. Franchise business model means able to expand easily. ii. External Factors Push factors: Its main market, China is becoming saturated.

Cheung wants to make his brand an international brand. Pull factors: There are new emerging economies from the past few years. The BRIC nations. Their policies are encouraging foreign companies to set up business in their country. A chance to become international. 5. National Competitive Advantage i. Porter’s Diamond a) Factor Conditions: USA is more technologically advanced given the current situation, although Brazil is working towards it. The use of technology can be a great way to reach consumers. For example, through online shopping.

People in the USA are more comfortable for such methods of purchase and is cost saving for Koyo Jeans as well. b) Demand Conditions: Aging population in USA Brazil as an emerging market has a stronger demand for consumption of goods when compared to the USA. c) Related and Supporting Industries: Large number of suppliers in Brazil who are also competitive, therefore acts as an advantage for Koyo Jeans as it will reduce the bargaining power of suppliers. d) Firm Strategy, Structure and Rivalry: The strategy of Koyo Jeans for expansion has been franchising.

It reduces the cost of investment and at the same time gives more control. In order to follow this trend, USA is more realistic than Brazil as laws and policies are transparent in the USA. ii. Recommendation of country Considering all the data and analysis carried out above, the recommended country to enter for Koyo Jeans would be the United States of America. Although Brazil is better suited for manufacturing of goods/textiles for Koyo Jeans there is much more risk prevailing there as well. Koyo Jeans currently has an established line of production in Taiwan which it has improved over time.

Shifting or changing it to Brazil will only cause Koyo Jeans time and money which it does not have. The cost of production in Brazil is forecasted to rise as everyone is making use of the opportunity. On the other hand, considering Koyo Jeans sets up only retail stores in Brazil, the weather is tropical and not suited for Koyo’s line up. Koyo Jean’s theme of Gothic and French Romance does not have a large market in Brazil as well. USA is better for the seasons for Koyo’s line up. It is where Hollywood is, which is Los Angeles. People are more sensitive to trends and celebrity endorsements.

Having stores in the USA will give an international appeal and considered a global presence. The laws are much transparent and straight forward. It is also better for the long term of Koyo as it can expand to many other cities in the USA. 6. Market Entry Strategy Koyo Jeans should use the direct exporting method to the franchises it gives license to in the USA. Advantages for franchiser: Low investment Can internationalize quickly to many markets Low effort once established Can leverage franchisees’ local knowledge Disadvantages for franchiser: Maintaining control over franchisees may be difficult

Franchiser has limited control over its assets abroad Risk creating future competitors It is usually considered a firm’s first foreign entry strategy because it is low risk, low cost, flexible and also easy withdrawal from the strategy with minimal liabilities if anything is to go wrong. Since Koyo is already exporting from Taiwan to China/Hong Kong, exporting is not a new area for Koyo Jeans. Exporting also has similar advantages to franchising and therefore both can go hand in hand and this is the best strategy for Koyo Jeans given its current situation. 7. Entry Strategy Evaluation i. Suitability

Considering Koyo’s present strategy which has been franchising in the current market, it is more than safe to consider that the proposed strategy above will be suitable for the organization. It will benefit the firm and Cheung in achieving their goals, which is to expand globally with minimum risks. Feasibility As discussed above, Koyo has been expanding through franchising in China, therefore it has sufficient experience in terms of what to expect when choosing the same method to expand abroad. The financial, human, physical and intangible resources all prove to be feasible for Koyo Jeans.

After considering the various factors and strategies, and through thorough analysis the country chosen and the entry strategy for the country will be the best option for Koyo Jeans to expand abroad with the least risk involved. 9. Recommendation It would be a challenge to find the right and most apt franchisees to expand in the USA although they have experience in the field in China. Expanding to another country is always a challenge no matter how familiar it may seem. Koyo Jeans should also consider selling its clothing through online platforms especially when expanding to USA.

Gained chic Galeries Lafayette as a buyer, reinforcing its international reputation. Opened European flagship store in Paris (Etienne Marcel), positioning Koyo as international brand. Events, exhibitions, sponsoring singers, actors TV presenters’ outfits. Weaknesses Staff cannot follow all Cheung’s ideas; Cheung has to train his staff to understand his vision ex, it took them 2 years to understand how to display goods in window shops. Some production processes are still outsourced as Koyo’s workforce is still not fully experienced and training can take long.

Speed is a major concern as it takes 10 days for a logistics cycle. Appeals to a small market segment as it is aimed at young consumers with a penchant for gothic style. Threats Lower consumer spending in Europe due to recession, could hinder Koyo’s expansion into this market. Because of climatic conditions some of Koyo’s collections ex, cashmere, wool, do not have a big market in Hong Kong and in Southern China. Strengths /opportunities Koyo brand gains international expansion and it entered the European market as it opened its flagship store in Paris as well as securing Galeries Lafayette as a buyer.

The Harbour City store opening enhances Koyo’s brand image, positioning it as a high-end brand. This secures Koyo a privileged position in the Chinese market as Chinese consumers have a penchant for branded items where Koyo will have a market for its wide collection & this way it will take advantage of economies of scale, which will lower production costs. Weaknesses/ opportunities Franchise model, Cheung will be more likely to spread his vision more widely, faster High entry standards for new franchisees, will increase his chances to render strategy successful Expand niche

Weaknesses/ threats Expansion in Europe could be hindered by the fact that Cheung’s staff might not be able to follow all of his ideas and therefore Cheung might need to train his overseas staff himself. This could delay progress at franchises in Hong Kong and mainland China. Fail to further expand in Europe because of economic recession, could damage Koyo’s positioning as an international brand as well as its reputation in Hong Kong and mainland China. Strengths/ Threats Europe is plagued by very modest economic growth.

In order to minimize this threat, Cheung should begin Koyo’s expansion into this market region by promoting its more mainstream range Koyo Jeans, which was created for everyday wear as well as being more accessible for consumers with average incomes. He should definitely exclude its more high-class line Koyo William (which is targeted to performers and for the stage) until Koyo will be better established in the European market. Opportunities/ Threats Booming economy in China as well as the rise of its middle class could offset the threat of failing to expand in Europe because of the economic recession.

Strengths/ weaknesses Good quality clothes and international reputation could mean more demand. Appendix B PESTEL of current markets PESTEL of Hong Kong POLITICAL Transfer power from Britain to China No piracy laws in place ECONOMIC Slight growth decline Exchange rate SOCIO-CULTURAL Preference for foreigner brands Cantonese in Hong Kong and Mandarin mainland China TECHNOLOGICAL Competition from online retailers Innovation and Technology Commission (ITC) ENVIRONMENTAL Increased awareness on environmental issues Noise control Ordinance (construction)/ Noise Control Regulation (Vehicles) LEGAL

No enforced regulations against intellectual property infringement Legal clauses for franchises PESTEL of Singapore POLITICAL Government stability Efficient and transparent laws Lowest corporate tax at 17% ECONOMIC Stable currency Insignificant impact of recession SOCIO-CULTURAL Labour market accustomed to expatriates Good literacy rate Widening trends in income inequality Minimum cultural barriers Shortage of skilled labour Aging population TECHNOLOGICAL Ranked 2nd in world class infrastructure – 2013 ENVIRONMENTAL Average EPI rank 69. 6 to 91 Conservation laws LEGAL Ranked 2nd for exiting business

Ranked 3rd best for protection of intellectual Ranked 4th by World Bank for starting business Max 44 hours per week No minimum wage PESTEL of France POLITICAL EU employment and trading laws ECONOMIC Exchange rate Already established high end international brands Recession and austerity SOCIO-CULTURAL Young population migration Language and cultural differences TECHNOLOGICAL Differences in distribution channels ENVIRONMENTAL Sustainable and eco-friendly clothing LEGAL Binding contracts for franchisers/ consignments EU environmental laws Appendix C PESTEL of Brazil POLITICAL Relies on monetary policy.

Interest rate has reduced from 12% in August 2011 to current 10. 5% (expect to reduce further) Possible negative short term forecast for start-up. Due to shortages in food supply, increasing domestic demand, and increases in produces prices are greatly impacting inflation. But with lower GDP growth, inflation rate is expected to reduce to 4. 32%. Important to note that with domestic consumption increasing and oil prices likely to be raised in the future, inflation will remain a challenge. Growth Acceleration Programme – USD 240 billion investment plan Currently the focus is on energy, logistics, social and urban projects.

Many infrastructures under current construction are to facilitate the hosting of 2014 World Cup and 2016 Olympic Games. Current focus is to improve the business environment of the country. For example, improve the efficiency of transport which in turn will potentially attract even more foreign investors. Corruption is expected when business are seeking government contract, and also occurring when business must deal with government regulatory bodies. New entrants may be cornered to commit bribery to obtain contracts. ECONOMIC Current GDP of Brazil is USD 2. 253 trillion (2012). Exports in 2012 totaled USD 201. 9 billion.

Main exports were manufactured goods, iron ore, coffee, orange and other agricultural produce. Its main export partners are China, US and Argentina. Imports amounted to USD 181. 6 billion. Government forecasted the growth of the economy of 3. 5% in 2011, compared with 7. 5% in 2010. Economy composition • Services 64%• Agriculture 8%• Industry 28% SOCIAL There has been a steady increase in consumer demand from the middle class. Current situation is as follows: High class 11% Middle class 67% Lower class 22% Unfortunately still 20% of population is illiterate which makes Brazil fall behind other developing economies.

As a result many companies are reluctant to invest in Brazil’s economy. TECHNOLOGICAL Spending on R&D is stable around 1% GDP. Government makes sure there is constant technological progress and advancement. Information Technology: 1,000,000 new IT professional by 2012 300. 000 of those professional will be required to serve the technology export market. There is regular advancement and progress in this area. Intercommunication and Global Communication: More communication between areas of Brazil develop through the use of internet More access to information technologies mean more access to other area of the world.

Maturity of technology: Recently becoming up to date with use of technology. Technological Accessibility Technological agreement: For example; European Union – Agreement for Scientific and Technological Cooperative (2004) Patents: highest levels of patents application in South America. ENVIRONMENTAL Policies for protecting the environment and reducing deforestation to drastically reduce greenhouse gas emission.

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