FDA Business and Management level I Working in an International context Marks and Spencer’s Expansion into China Contents Page 1. Introduction 2. Main factors influencing M&S to invest so heavily in china 3. Methods of FDI used by M&S In China 4. Differences in Business Model from China and Europe 5. Cultural & Organisational Risks 6. Future recommendation 7. Bibliography 8. Appendix ? 1. Introduction The following report will address the expansion options available to Marks and Spencer (M&S) in China and Europe.
The report will outline a recommended strategy plan for expansion in both areas, as well as give recommendations for future expansions in other countries. Marks and Spencer is one of the leading retail companies in the UK. M&S strategy is based on its vision mission and values which are: Vision: The Standard against which all others are measured Mission: Making inspirational quality accessible to all Values: Quality, Service, Innovation and trust. (Company Report, 2005) Marks and Spencer operates in 29 countries across Asia, Europe and the Middle East with a total of 361 stores between them.
M&S are already operating in a wholly owned store in Hong Kong. The Focus of this report is on the store in Shanghai as it is the first in mainland China. There are various influencing factors that contribute to M&S’s attraction into China. For any company doing business abroad there are practices and customs that they need to take into consideration these will be outlined through the report. 2. Main factors influencing M&S to invest so heavily in china China is continuously increasing its attraction to business around the world resulting in more companies looking to do business with China.
BRIC countries are becoming a very popular option for companies in regards to expansion however China has the largest market size which is the sum of all three other BRIC countries together. Market growth in China is stable as it has continued to grow with a double digit growth rate since 2005 up to 2010. China has also the largest population in the world and is continuously growing with over a billion people currently settled their. This acts as a very positive influence to companies contemplating an expansion as their products will have the opportunity to be accessed by over 20% of the world’s population.
China is also the largest exporter in the world, although they are starting to decrease their exports. This is a benefit to any company as the cost of their logistics would have a significant decrease. It is also important to notice that some of Chinas old culture is disappearing enabling this new ‘showboating culture’ to take place. Increasing amounts of the Chinese population are becoming more interested in western brands as they believe it’s a social/wealth indicator. This would be a benefit to English retailers as it grants them security in their products being bought by the Chinese population.
Products would be viewed as a luxury and this is very important to the Chinese population as they very conscious as to what others think of them. Another appealing factor that makes china a good expansion move is there industry structure as it has a very fragmented market; most Chinese retailers tend to be regional, as well the size of retailers are very small resulting in a massive opportunity for foreign retailers to come in. Technological factors also play a big part in making China a more appealing expansion prospect. They have the best infrastructure compared to other developing nations such as India.
On top of this their government encourages retailers to embrace a more advanced information system. 3. Methods of FDI used by M&S In China There are a number of different market entry strategies that allow retailers all over the world to expand into foreign countries. There are two main methods of Market entry; Direct and indirect distribution. M&S use both types of market entry methods across the globe. These will be explained later in the report outlining where they use each type of method and the advantages and disadvantages. On 2nd October 2008 M&S opened their first store in mainland China, using a direct form of investment.
The store in Shanghai is now one of many wholly owned subsidiaries in mainland china. A wholly owned store is when the company has full ownership as oppose to going into business with another investor or retailer abroad. Due to the fact their stores are wholly owned this draws up many advantages for M&S such as keeping control of their stores, which is a big factor when abroad as foreign investors could go against your beliefs and damage your reputation however because of this it can be seen as a disadvantage as you may not be experienced in the market and the advice of a partner when doing business abroad could prove to be beneficial.
Another major advantage is that profit is maximised as you do not have to split it with any one else. In M&S case in China it comes as an added advantage that it is a very attractive country to do business in due to low wages and lower corporation tax if any. However a wholly owned entry strategy faces some disadvantages; M&S will be making a significantly large investment this could lead to financial exposure. On top of this by rapidly expanding abroad they are involved in long term commitment and if something goes wrong within a country it can lead to huge losses.
M&S stores tend to only be wholly owned within the UK and Republic of Ireland, and it comes as a surprise as to why the stores in China are wholly owned. The reason for this is because M&S expanded into Hong Kong in 1980’s by franchise, which was soon changed into a wholly owned store. Due to bad financial results in Europe it had become apparent that M&S Global ambitions had failed and as a result come to a halt. Rialp (2006) states that, “by 2002, M&S had failed to sell its 10 Hong Kong stores to a local franchisee and acquired direct ownership of the stores”.
At this time M&S came up with a restructuring plan which was basically to focus on its home UK market rather than growth on international market. As M&S still had a presence in Hong Kong they were able to conduct some market research to understand Mainland Chinese people and their buying behaviour. The results showed that tourist from areas in mainland China represented almost 30% of their customers in their Hong Kong stores. From these results alone it shows a clear indication that a move to Mainland China would be a very beneficial move and as a wholly owned store was used in Hong Kong showing no major problems.
It would be ideal to share a similar strategy in Mainland China as they are very similar. M&S has other market entry strategies that they have used in different countries around the world which could also be used in China. The two other strategies that they use are joint venture and franchise which is an indirect market entry strategy. One of the main advantages of these forms of market entry is that M&S could gain from local Knowledge of the agent or distributor that they are in partnership with.
Both of these models can be used within China, however, wholly owned entry bares the most advantages in regards to profit. This is obviously a big factor to M&S. However, from this statement made on the M&S international site, “We continued to enhance our expertise in Shanghai, establishing a strong local management team to ensure we have the right offer for our customers in this region. We also opened a new warehouse and increased our local sourcing activities.
We now offer sizes 4 and 6 in our womenswear ranges and have tailored our men’s shirts and trousers to give the best fit for local customers” (Marks & Spencer’s 2011). This statement shows that M&S has overcome a major disadvantage that they may have faced. As they have been able to team up with people from the local area in order to change their products to tailor the needs of the Chinese public such as “size 4 and 6 in womenswear”. As they have overcome this problem a wholly owned store is best suited for them and although other alternatives are available this one offers the most positives.
An indirect method that M&S may use to further emphasise their presence in China is Piggy Backing with HSBC. The reason for this is that M&S currently bank with HSBC who as a company have a very strong presence in China. If they could possible emphasise their association with HSBC it may boost the Chinese public’s confidence in shopping with M&S. 4. Differences in Business Model from China and Europe As mentioned previously M&S have use different entry strategies, the choice of method depends on mainly the country and in some cases the circumstances.
The main entry strategies used in Europe is mostly Joint ventures and franchise. In Central and Eastern Europe, M&S have opened 12 new Joint venture stores mainly in Czech Republic and Poland. They also have a presence in Greece through joint venture however M&S have suspended expansion in Greece due to the economic situation. A Joint Venture is when a partnership arises between two or more companies as they join together in order to create a separate legal entity. This entails a split in profits or losses by the two companies.
This is the preferred mode of entry of governments of developing countries as it helps develop local expertise and create jobs. Even though China is a developing country it was a smart move by M&S, as it was accepted by China, not to create a joint venture in China as joint venture partners can turn into very fierce competition. This has been the case many times in China with ORACLE as a classic example. (See appendix 1) There are a number of reasons that make a joint venture appealing such as companies being able to produce high profits whilst minimising the risk.
The main reason companies involved in joint ventures are able to do this is due to: -Local partners Knowledge of the market -Local partners political connections -Shared resources -Trade barriers are often avoided As listed above all these factors ease the risk on companies as well aspects that increase profit. However being in a joint venture exposes some disadvantages such as the fact that profits are shared this could result in conflict with the partner and eventually could lead to control being loss between partners. It is also very difficult to terminate a joint venture.
M&S have also opened 13 new franchise stores within Europe; “five new stores in Russia, four in Turkey and four in the Ukraine with our franchise partner Fiba” (M&S 2011). Franchising is when the franchisor (M&S) will give the franchisee right to use brand name, trademarks and business Know how for a fee or royalty. Franchising is a better suited method of entry for retailers and is one the fastest growing methods of entry. An advantage of franchising is the fact that the franchisor has less risk whilst having a high level of control.
However, there are many disadvantages that franchises face as success mainly depends on three factors: 1. Product standardization 2. High identification through promotion 3. Effective cost control Product standardisation is an important factor and could be crucial in determining M&S success. When a county enters a foreign country, preference of taste is likely to change especially in large countries. Franchising would not work in china due to the large difference in taste. M&S have also moved back into France, choosing a wholly owned market entry strategy.
This is the first store in Europe outside of the UK and Republic of Ireland that is wholly owned and is also a flagship store which may be part of the reason M&S have broken there trend in mainly using franchises and joint ventures in Europe. To complement their Flagship store in Paris M&S have chosen to open a number of M&S Simply Food stores around the area of where their flagship store. The reason they may have chosen to use Franchise as this entry method could be because they wanted the standard of the English products the French already like, such as lemon curd to remain the same.
They may have also chosen this as it is likely that the French taste is different to the English. By getting someone who has the knowledge of the French consumer’s taste same could prove beneficial as M&S will ensure the quality of the standard of the products remains the same. 5. Cultural & Organisational Risks As M&S have already expanded into china it is essential that they learn about differences in business culture, business etiquette, meeting protocol and negotiation techniques in order to maximise the potential of their venture.
It is not only China that has different culture and etiquette it is all countries and it is important for M&S to be fully aware of the risks they may face before planning to expand in to a foreign country. It is believed that the reason for M&S failure in France in 2001 was due to placing their shop on the wrong side of the road. As it is a culture in France to place retail outlets on one side of the road and residential housing on the other. It is imperative that similar mistakes like this do not happen again, and M&S become a versatile business that is able to adapt to other cultures.
M&S believe there is a huge potential in fashion in China they have already adapted to the sizes they offer making them better suited for the Chinese customers. It would also be advised that if they are planning to sell food to adapt to what the Chinese customers would like due to the huge difference in taste. Firstly in France M&S have opened their flagship store it is located on the Champs-Elysees, they may face future problems due to the colour of its building as all the building on that road are pure white on the exterior. Even McDonald’s had to change the colour of their traditional yellow golden arches.
There have been cases in the past where companies have entered China and have not lasted long mainly because they were not aware of the Culture and etiquette. These are some business practices that companies should be aware of: -Relationships: Chinese consider mutual relationships and trust very important, they believe that when doing business you are representing your company and thus should remain professional at all times. Jokes should be kept to a minimum as they fear they may get lost in translation. They believe an intermediary should be used as they believe it has multiple advantages. Gifts: Gifts are a very important factor, when doing business in china unlike other countries, China do not believe that gifts carry any negative effects. They should be inexpensive and be given at times to say thank you and act as a sweetener for future deals. China is known for hospitality and good manners and feels that clients should not be shy to specify what you want. -Negotiations: as mentioned earlier they like the use of an intermediary as this may help in negations. They believe there should be a lot of room for compromise as the skill to negotiate is very important. 6. Future recommendation
M&S has already done exceptionally well in expanding to areas they have done. They have been able to spot opportunities in developing countries and find a suitable market entry strategy to expand into those countries. If M&S wanted to continue their international Growth it would be advised that they moved into South America in two of the most emerging economies; Brazil and Mexico. The reason it would be advised to expand in these areas would be that Brazil is the last BRIC country that they have not moved into along with Mexico being the last MIST country that M&S don’t currently trade in.
It would be a good idea to open a flagship store in Mexico that would be a Joint Venture as it has the most benefits out of all the different types of Market entry strategies. Mexico’s economy is expected to be better than the UK in an estimated 30 years, it would be ideal to build a strong presence there. By using a joint venture, it enables M&S develops local expertise. It would be advised to use the same method of entry in Brazil. As again it maximises profit whilst reducing the risk. It would be a very valuable move as the Olympics are to be held in Brazil in 2016 as well as the World Cup in 2014.
This will raise Brazil’s economy massively and will attract consumers from all over the world which may be a huge opportunity to raise brand awareness for M&S. Both Countries have different Business culture and Etiquette that will need to be understood before entering as it would be detrimental and could leave a bad impression of M&S in America. (Demographics of Mexico and Brazil can be found in appendix 3 & 4). 7. Bibliography Books: Rialp, A (2006). International Marketing Research Opportunities and Challenges in the 21st Century. 17th ed. Oxford: Emerald Group Publishing. p202-205. Websites:
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World Atlas. (2012). Population of all countries. Available: http://www. worldatlas. com/aatlas/populations/ctypopls. htm. Last accessed 16 May 2011. World Trade Organisation. (2012). World Trade. Available: http://www. wto. org/. Last accessed 16 May 2011. ? 8. Appendix Appendix 1 – Oracle Is a company which expanded to China as part of a joint venture, after working alongside a Chinese for a couple of years. When the Chinese got all the information they required they turned against Oracle, which as a result forced them out of the country. Appendix 2 – Business Culture Guide Confucianism
In essence Confucianism revolves around the concept of harmonious relationships. If proper behaviour through duty, respect and loyalty are shown in the relationships between a ruler-subject, husband-wife, father-son, brother-brother and friend-friend, society as a whole will function smoothly. When doing business in China it is possible to see how Confucianism affects business practices. Of the less subtle manifestations are an aversion to conflict, maintenance of proper demeanour and the preservation of ‘face’. Face Roughly translated as ‘good reputation’, ‘respect’ or ‘honour,’ one must earn the subtleties of the concept and understand the possible impact it could have on your doing business in China. There are four categories of face. 1) where one’s face is lessened through their involvement in an action or deed and it being exposed. The loss of face is not the result of the action, but rather it’s being made public knowledge. 2) when face is given to others through compliments and respect. 3) face is developed through experience and age. When one shows wisdom in action by avoiding mistakes their face is increased. 4) where face is increased through the compliments of others made about you to a third party.
It is critical that you give face, save face and show face when doing business in China. Doing Business in China – Meeting & Greeting Doing business always involves meeting and greeting people. In China, meetings start with the shaking of hands and a slight nod of the head. Be sure not to be overly vigorous when shaking hands as the Chinese will interpret this as aggressive. The Chinese are not keen on physical contact – especially when doing business. The only circumstance in which it may take place is when a host is guiding a guest. Even then contact will only be made by holding a cuff or sleeve.
Be sure not to slap, pat or put your arm around someone’s shoulders. Body language and movement are both areas you should be conscious of when doing business in China. You should always be calm, collected and controlled. Body posture should always be formal and attentive as this shows you have self-control and are worthy of respect. Business cards are exchanged on an initial meeting. Make sure one side of the card has been translated and try and print the Chinese letters using gold ink as this is an auspicious colour. Mention your company, rank and any qualifications you hold.
When receiving a card place it in a case rather than in a wallet or pocket. Doing Business in China – Building Relationships Relationships in China are very formal. Remember, when doing business you are representing your company so always keep dealings at a professional level. Never become too informal and avoid humour. This is not because the Chinese are humourless but rather jokes may be lost in translation and hence be redundant. When doing business in China establishing a contact to act as an intermediary is important. This brings with it multiple benefits. They can ct as a reference, be your interpreter and navigate you through the bureaucracy, legal system and local business networks. Doing Business in China – Giving Gift Etiquette Unlike many countries, the giving of gifts does not carry any negative connotations when doing business in China. Gifts should always be exchanged for celebrations, as thanks for assistance and even as a sweetener for future favours. However, it is important not to give gifts in the absence of a good reason or a witness. This may be construed differently. When the Chinese want to buy gifts it is not uncommon for them to ask what you would like.
Do not be shy to specify something you desire. However, it would be wise to demonstrate an appreciation of Chinese culture by asking for items such as ink paintings or tea. Business gifts are always reciprocated. They are seen as debts that must be repaid. When giving gifts do not give cash. They need to be items of worth or beauty. Do not be too frugal with your choice of gift otherwise you will be seen as an ‘iron rooster’, i. e. getting a good gift out of you is like getting a feather out of an iron rooster. Doing Business in China – Meetings and Negotiations
Meetings must be made in advance. Preferably some literature regarding your company should be forwarded to introduce the company. Try and book meetings between April – June and September – October. Avoid all national holidays especially Chinese New Year. Punctuality is vital when doing business in China. Ensure you are early as late arrivals are seen as an insult. Meetings should begin with some brief small talk. If this is your first meeting then talk of your experiences in China so far. Keep it positive and avoid anything political. Prior to any meeting always send an agenda.
This will allow you to have some control of the flow of the meeting. The Chinese approach meetings differently, so rather than beginning with minor or side issues and working your way up to the core issue, reverse this. The Chinese are renowned for being tough negotiators. Their primary aim in negotiations is ‘concessions’. Always bear this in mind when formulating your own strategy. You must be willing to show compromise and ensure their negotiators feel they have gained major concessions. Make sure you have done your homework before doing business in China. The Chinese plan meticulously