Analysis of Case Study 6: ‘Michael Hill International: Controlled expansion and sustainable growth’

Introduction

Business strategy is the general plan of major action by which a firm intends to achieve its long-term goals. It provides direction for the strategic actions of the firm. Most firms begin their operations as single-business units. Some firmsas a result of their specialized operations as well as exclusive focus on a specialized business areafor instance McDonalds and Walmartcontinue to thrive. On the other hand, operating largely in one industry or market may make a company vulnerable to business cycles. Should the industryattractiveness decline as a result of a permanent cutback in consumer demand for the business’s products or competition intensifies from existing or new competitors, the firms performance and bottom line is likely to suffer. However, these shortcomings can be addressed by diversifying and operating in distinctive fields through diversification.

Grand strategies fall into four general categories: Growth or expansion, stability, retrenchment and combination. (Rao & Krishna, 2004, p. 249). This paper presents the growth and expansion strategy that was employed by Michael Hill International during their entry into the Australian, Canadian and United States jewelry markets. It will present the strategies that were employed by the company in their expansion and analyze various aspects of its diversification strategies, it will finally conclude by presenting an analysis of the industry within which Michael Hill was operating within.

Elements of Global Strategic Management Apparent In Michael Hill’s Expansion into Australia

According to Grant, Butler, Orr, & Murray(2014, p. 203), in emerging industries at the introduction and growth stages, nurturing and exploiting innovation is the fundamental source of competitive advantage. This implies that the practices of effective strategic management are fundamentally different in emerging industries from other types of business environment.The authors (2014, p. 215) identified different types of global-level strategies such as Standardization Strategy of taking a home-grown product in design, engineering and manufacturing to mass markets; and Global Adaptation Strategy of adapting products to suit the particular characteristics of different markets. From the case study, Michael Hill employed a combination of these two strategies. Initially, when entering a new market, the company would introduce its trademark products and with time and further market analysis, the company would identify the market needs and preferences that are characteristic of the new market and customize their jewelry to fit the new market.

Grant, Butler, Orr, & Murray(2014, p. 218)also identified several global market entry methods. These they highlighted as: exporting, which involves selling a service or product to an international  company,  or customer, or indirectly by using export agents; foreign direct investments which involves a company establishing a company’s own facility under its direct supervision; joint venture  with an established business with a distribution framework and  has knowledge of the foreignmarket; and finally, licensing by giving rights to operate under trademark name in exchange for marketing benefits and royalties. In expanding into the Australian market, Michael Hill employed the foreign direct investment strategy which involved the company establishing its own facility in Australia, notwithstanding the high cost and risk associated with this form of expansion strategy.

The company also employed the diversification strategy in its entry into Australia. A diversification strategy involves a business expanding it operations by adding additional products and services, and markets with the goal of entering a line of business that is different from its present operations (Grant, Butler, Orr, & Murray, 2014, p. 254). It is driven by the desire of a business to grow, reduce its risks and increase its profits.

Analysis ofMichael Hill’s Diversification into Shoes

MHI diversification into the shoe market is an expected step that any manager would undertake. Diversification is considered one of the safeststrategies to undertake in order to cushion a company from over-reliance on one product or service.According to porter, as stated in Reid(2002, p. 124) diversification provides a safety net in the occasion that the business faces a threat in its core operation or key product or service. The step to engage in the shoe market was well informed as it would require limitedinitial investment costs as the infrastructure and value chain was already established, and the company had the willingness to venture into the shoe market.This can be corroborating by the high-profit margin that the shoe business posted in its first year of operation, something that is never expected of any start-up business.

The causes of the drop in profits and subsequent losses in the shoe business were identified as failure to align the shoe business with existing supply chain infrastructure which resulted to operational inefficiencies and the failure of the company to employ its cluster model that had worked successfully in their jewelry market into the shoe market. Rather, MHI had opted to open new shoe stores quickly across the country as opposed to focusing on one geographical area at a time.

Entry Modes intoAustralia, Canada andthe United States

Entry mode into Australia

MHI entry strategy into Australia was an expansion model of ‘controlled, profitable growth’ (Grant, Butler, Orr, & Murray, 2014, p. 451). This growth model encompassed opening one or two store concurrently in a ‘cluster’ prior to moving into a new area. Every new store was left to operate as a stand-alone business and once each store and each cluster was operating efficiently and breaking even the company would expand to a new geographical area. This strategy allowed for stability of Michael hill stores in Australia as the new stores were only left to operate on their own only after they were able to post profits and were efficient in their operations.

The cluster expansion strategy proved to be effective in the Australian market as it resulted to the opening of several additional stores in Australia. This resulted to the Australian market being their most profitable in the long run.

Entry mode into Canada

Having carried out a feasibility studies into overseas market, the second market Michael Hill opted to venture into was the Canadian market. They settled on this market after considering the Canadian market entry barriers which the company found to be low barriers;the relative low risk of the market and its potential to allow for long-term growth of the company.

Michael used the approach of ‘controlled growth’ through cluster-based expansion as their entry strategy into the Canadian market(Grant, Butler, Orr, & Murray, 2014, p. 453). This entry mode involved opening a series of stores at the same time and in the same geographic location, all characterized by heavy publicity and sales promotion. However, due to the relatively low brand recognition of the MHI brand and different jewelry taste of the Canadian consumer, their entry strategy was less successful.

Entry mode into United States

MHI entry into the United States, as opposed to its entry into the Canada market and Australian market was undertaken through an acquisition of a local-based company and rebranding the company. It was different to its previous entry strategies and uncharacteristic of MHI which preferred start-from-scratch market entry.In the United States, Michael Hill concentrated on improving same-store sales in its pre-existing store as well as on increasing sales on its other stores in Canada.

However, their entry into the united stated market was faced with challenges such as increased competition in the market especially from recognized brand names such as Wal-Mart who had rebranded their marketing strategies. Additionally, the entry of MHI was faced with onset of the financial crisis, changing consumption habits by the market consumers in terms of their tastes in jewelry. These challenges made their entry into the United States market unprofitable(Grant, Butler, Orr, & Murray, 2014, p. 458).

It is worth noting that despite the using the same growth strategy in the Australian market and the Canadian market, the cluster model proved to be more successful in the Australian market than in the Canadian market. This goes to imply that there is no specific growth model that is ideal andcan effectively be applied to every market and be successful, rather every market is unique and different strategies work differently on different markets. Therefore, as a manager it is important to take into consideration the various market-specific characteristics before embarking into an expansions strategy in a particular market.

 Factors Michael Hill Included Into the Feasibility Analysis to Expand Overseas

An international strategy usually attempts to capitalize on four benefits: increased market size, the opportunity to earn a return on large investments, economies of scale and learning; and advantages of location (Hitt, Ireland, & Hoskisson, 2006, p. 257). Expansion into new market is considered to be part of a business strategy and is driven by the three goals of business growth, profitability and risk reduction (Grant, Butler, Orr, & Murray, 2014, p. 256).

According to Hendrikse and Windsperger(2004, p. 280), a myriad of factors usually come into play when deciding on entering into a foreign market. They identified factors such as its willingness to learn abroad, awareness of the competition in the corresponding industry in the foreign market and country-specific factors such as economic and political factors that contribute to country risk, cultural proximity, and a country’s openness to foreign businesses.The authors concluded that there is no single most important factor, but rather a combination of factors that affects a company’s decision to move overseas.

Other factors as identified by Sugden and Pitelis(2005, p. 145) included the cost of entering the new foreign market, availability of bench strength for international expansion, the business foundation established at home, availability of the needed resources in the new market in terms of labor and raw material, size and type of local competition in the new market and the option of franchising or use of an international partner. The authors also consider factors such as potential of red tape, availability of finances to sustain an overseas expansion and lastly new market similarity to the domestic market in terms of taste and preferences.

As stated by Hendrikse and Windsperger(2004, p. 280) there is no single most important factor to consider while expanding, but rather a combination of factors that affects a company’s decision to move overseas. Michael Hill being engaged in a market that is highly sensitive to consumers, the factors that are most probable likely to have beentaken into consideration by Michael Hill include: competition in the corresponding industry in the foreign market and country-specific factors such as economic and political factors that contribute to country risk; country’s openness to foreign businesses; and the cost of entering the new foreign market. Other considerations are availability of the needed resources in the new market in terms of labor and raw material, size and type of local competition in the new market, potential of red tape, and availability of finances to sustain an overseas expansion and lastly the foreign market similarity to the domestic market in terms of taste and preferences

The Characteristics of Fragmented Industries

According to Braeutigam and Besanko(2010, p. 330)a fragmented industry is one of the characteristic of a perfectly competitive market. It is an industry that consists of many buyers and sellers, with each buyer’s purchases being so minimal that they do not have any perceptible influence on the market price. Each seller’s output is also so insignificantrelative to market demand to an extent that it has an indiscernible impact on market price. In addition, each seller’s input purchases are so minimal that they have an imperceptible impact on input prices. That is, no firm has a significant market share and is able to influence considerable outcomes within the industry.

This industry is characterized by a large number of small and medium-sized companies and a small number of large companies that populate the structure. There is also a high incidence of privately owned companies. Langford and Male(2008, p. 26)statethat a fragmented market is populated by many competitors who are in a weak bargaining position with respect to both buyers and supplier groupings, and profitability is marginal.Reid(2002, p. 124)furtheradds that in a fragmented industry, such an industry has low seller concentration and typically no stable industry leadership. The author further adds that a fragmented industry is also non-unique in that not all of the full set of hypothetical attributes must be present for a particular industry to be considered as fragmented.

In summary, a fragmented industry is characterizedby: low entry barriers, no scale economies, high transport costs, erratic sales, no bargaining power, specific diseconomies and low overheads. Reid(2002, p. 125) further identifies the following attributes as characteristic of a fragmented industry: diverse product lines, high creative content, close local control, personal service, local image and contacts, diverse market needs, differentiation on image, exit barriers, and local government regulation as well as new industry.

The North American market for jewelry is an excellent example of a fragmented market. Even the larger retailers, such as Walmart, are very small in comparison to the overall scale of the market.

How Companies likeMichael Hill Should Compete in a Fragmented Industry

According to porter, as stated in Reid(2002, p. 124)for companies operating infragmented industry environments, the essence of competition in such markets is personal service, localimage and contacts, close control of operations, and ability to react to fluctuations or style changes.Other strategies that companies in a fragmented industry can employ in order to gain a competitive advantage over its competitors include: Close local control, Differentiation on image, High creative content and diverse product lines.In a fragmented industry, the customer has to deliver himself at his own expense to the firm to receive the service, or alternatively the service had to be produced at the firm’s premises.

The North American market is considered one of the most competitive in the fashion accessories and apparelsmarket. Therefore for a new firm to enter the market and remain profitable, it needs to create a niche for itself that isdifferentiated and ensure that it maintains it’s the position through constant evolution with market trends. In the case of Michael Hill, in order to be competitive in the jewelryindustry in the North American market, they need to employ a combination of competitive strategies. These strategies may range from personalized services, close control of operations, differentiation on image and high creative content, diverse product lines as well as ability to react to fluctuations or changes in consumer styles and preferences. Employing these strategies will place Michael Hill in a more suited position to compete with the industry market heavy weights but since the market is a fragmented industry they should simply be content with break-evening and posting good profits but not being industry leaders.

Conclusion

From the case study, it is apparent that a lot of considerations need to be made before embarking on a diversification strategy, especially expansion strategy and entry into new markets. Market analysis and feasibility studies need to be conducted whereby factors such pre-existing competition, risk and ease of entry, availably of funds to sustain a venture and the foreign market similarity to the domestic market in terms of taste and preferences among many other factors need to be analyzed. It is also crucial that a business analyses every market independently and not relative to another market. This is for the reason that markets and industries are different and they respond differently to different expansion models andstrategies. It is also worth noting that diversification is one of the key strategies that areavailable for any business to allow it to remain running and profitable in the long-run and to provide avenues for the business to grow. It is therefore important that any business, the size notwithstanding, to always have an expansion and diversification strategy in place.

References

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