case study (Otto) (The Invisible Global Retailer and It Reentry into US Markets), business and finance homework help

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I need the answers of these three questions in details (into, body, conclusion)

Opening Case: The Invisible Global Retailer and It Reentry into US Markets

  • How do non-German markets figure into the Otto Group’s strategy?
  • What do you think the firm has had to do to plan for this level of international expansion?
  • Which country-entry modes does the firm appear to prefer? Does it vary these modes?

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This is “International Expansion and Global Market Opportunity Assessment”, chapter 8 from the book Challenges and Opportunities in International Business (index.html) (v. 1.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/ 3.0/) license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz (http://lardbucket.org) in an effort to preserve the availability of this book. Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page (http://2012books.lardbucket.org/attribution.html?utm_source=header). For more information on the source of this book, or why it is available for free, please see the project's home page (http://2012books.lardbucket.org/). You can browse or download additional books there. i Chapter 8 International Expansion and Global Market Opportunity Assessment WHAT’S IN IT FOR ME? 1. What are the inputs into global strategic move choices? 2. What are the components of PESTEL analysis and the factors that favor globalization? 3. What are the traditional entry modes for international expansion? 4. How can you use the CAGE model of market assessment? 5. What is the importance of and inputs into scenario analysis? This chapter pulls together all the information about choosing to expand internationally and possible ways to make that choice. Section 8.1 "Global Strategic Choices" shows that choosing to expand internationally is rarely black and white. A wide variety of internationalization moves are available after choosing to expand. Moreover, some flatteners make global moves easier, while some make them more difficult. Indeed, even importing and outsourcing can be considered stealth, or at least early, steps in internationalization, because they involve doing business across borders. In Section 8.1 "Global Strategic Choices", you will learn the rationale for international expansion and the planning and due diligence it requires. 393 Chapter 8 International Expansion and Global Market Opportunity Assessment This chapter also features a richness of analytical frameworks. In Section 8.2 "PESTEL, Globalization, and Importing", you will learn about PESTEL, the framework for analyzing the political, economic, sociocultural, technological, environmental, and legal aspects of different international markets. Section 8.3 "International-Expansion Entry Modes" describes the strategies available to you when entering a new market. Section 8.4 "CAGE Analysis" will demonstrate how globalization and the CAGE (cultural, administrative, geographic, and economic) framework address questions related to the flattening of markets and how the dimensions they help you assess are essentially flatteners. Finally, in Section 8.5 "Scenario Planning and Analysis", you will learn about scenario analysis, which will prepare you to begin an analysis of which international markets might present the greatest opportunities, as well as suggest possible landmines that you could encounter when exploiting them. 394 Chapter 8 International Expansion and Global Market Opportunity Assessment Opening Case: The Invisible Global Retailer and Its Reentry into US Markets Which corporation owns 123 companies, operates in twenty-seven countries, and has been in the mobile-phone business for over a decade? If you don’t know, you’re not alone. Many people haven’t heard of the Otto Group, the German retailing giant that’s second only to Amazon in e-commerce and first in the global mail-order business. The reason you’ve likely never heard of the Otto Group is because the firm stays in the background while giving its brands the spotlight. This strategy has worked over the company’s almost eighty-year history, and Otto continues to apply it to new moves, such as its social media site, Two for Fashion. “They are talking about fashion, not about Otto, unless it suits,” explained Andreas Frenkler, the company’s division manager of new media and e-commerce, about the site’s launch in 2008.Lydia Dishman, “How the Biggest Online Retailer You’ve Never Heard of Will Take the U.S. Market,” BNET, April 16, 2010, accessed August 20, 2010, http://www.bnet.com/blog/ publishing-style/how-the-biggest-online-retailer-you-8217ve-never-heard-ofwill-take-the-us-market/248. The site is now one of the top fashion blogs in Germany and is an integral part of the retailer’s marketing strategy. Leading through Passion, Vision, and Strategy Today, the Otto Group consists of a large number of companies that operate in the major economic zones of the world. The Otto Group’s lines of business include financial services, multichannel retail, and other services. The financial services segment covers an international portfolio of commercial services along the value chain of retail companies, such as information-, collection-, and receivable-management services. The multichannel retail segment covers the Otto Group’s worldwide range of retail offerings; goods are marketed across three distribution channels—catalogs, e-commerce, and over-the-counter (OTC) retail. The third segment combines the Otto Group’s logistics, travel, and other service providers as well as sourcing companies. Logistics service providers and sourcing companies support both the Otto Group’s multichannel retail activities and non-Group clients. Travel service providers offer customers 395 Chapter 8 International Expansion and Global Market Opportunity Assessment travel offerings across all sales channels. Unique to the Otto Group is the combination of travel agencies, direct marketing, and Internet sites. The combined revenue of these three ventures is growing rapidly, even during the global economic downturn. The travel service revenues for 2010 were 10 billion euros, or about $12 billion.“Otto Group: Private Company Information,” BusinessWeek, accessed February 7, 2011, http://investing.businessweek.com/ businessweek/research/stocks/private/snapshot.asp?privcapId=61882597. Even though it operates in a variety of market segments, business ideas, and distribution channels—not to mention its regional diversity—the Otto Group sees itself as a community built on shared values. Otto’s passion for success is based on four levels of performance, which together represent the true strength of the Otto Group: “Passion for our customers, passion for innovation, passion for sustainability, and passion for integrated networking.” Each one of these performance levels is an integral element of the Otto Group’s guiding principle and self-image.“Accelerating toward New Goals,” Otto Group, accessed August 20, 2010, http://www.ottogroup.com/en/die-otto-group/ daten-und-fakten/segmente.php. Future growth is guided by the Otto Group’s Vision 2020 strategy, which is based on achieving a strong presence in all key markets of the three largest regions—Europe, North America, and Asia. In doing so, the Otto Group relies on innovative concepts in the multichannel business, on current trends in ecommerce, on OTC retail, and on developments in mobile commerce. In keeping with that vision, its focus for near-term expansion is on expanding the Group’s strong position in Russia and increasing market share in other economic areas, such as the Chinese and Brazilian markets. Investment options in core European markets are continually being reviewed to strengthen the multichannel strategy. As a global operating group, Otto aims to have a presence in all major markets and will continue to expand OTC retailing. 396 Chapter 8 International Expansion and Global Market Opportunity Assessment © 2011, Otto Group In 2010, for instance, the Otto Group continued to develop its activities in the growth markets of Central and Eastern Europe. Through takeovers and the acquisition of further shares in various distance-selling concepts, including Quelle Russia, the Otto Group has continued to build on its market leadership in Russian mail order. A further major goal for the future is to expand OTC retail within the multichannel retail segment, making it one of the pillars of Otto alongside its e-commerce and catalog businesses. The foundations of valueoriented corporate management are reflected in the uncompromising customer orientation evident in business activities with both end consumers and corporate clients. The strategy envisages targeted investments that provide the Otto Group with “Best in Class” business models. Otto not only draws on an excellent range of customer services as the basis for its success in its core business of multichannel retailing but also offers an array of retail-related services for its corporate clients. In the future, the company is looking to expand these services, moving beyond its core business. The buying organization of the Otto Group has been repositioned under the name Otto International and is now a firm fixture in the world’s key sourcing markets. Otto International’s corporate clients stand to benefit directly from the market power of the Otto Group while providing the volumes to make their own contribution to its growth. 397 Chapter 8 International Expansion and Global Market Opportunity Assessment The US Market Reentry Initiative Germany remains the Otto Group’s most-important regional sales market, followed by France, the rest of Europe, North America, and Asia. In the United States, Otto set up a greenfield division called Otto International and quietly launched Field & Stream 1871, a brand of outdoor clothing, outerwear, footwear, and accessories, in 2010. The products are available only on the Field & Stream e-commerce site. As always, the Otto name is almost nowhere on the site, being visible only on the site’s privacy policy page. Industry experts thought it surprising that Otto launched the clothing line because it had previously left the US market after its acquisition of Eddie Bauer’s parent company, Spiegel, failed in 2009. Still, the Otto Group has received much acclaim for its innovations in the retail arena. For example, according to a Microsoft case study, Otto was the first company (1) to use telephone ordering, (2) to produce a CD-ROM version of its catalog in the 1990s (to deal with slow dial-up connections), and (3) to build one of the largest collections of online merchandise, at http://www.otto.de.“Microsoft Case Studies,” Microsoft, accessed August 20, 2010, http://www.microsoft.com/casestudies/ Case_Study_Detail.aspx?CaseStudyID=200504; and “Otto Group: OTTO,” accessed February 7, 2011, http://www.ottogroup.com/otto.html?&L=0. So the Otto Group may have other innovations planned for Field & Stream. But the US fashion market is saturated with competitors. As WWD reported, Otto may do better to focus on growing its own retail brands and utilizing its impressive inhouse manufacturing and logistics divisions, which are now Otto’s fastestgrowing segment.Thomas Brenner, “Otto Group: A German Giant Tiptoes Back to the U.S.,” WWD, April 14, 2010, accessed February 7, 2011, http://www.wwd.com/wwd-publications/wwd/ 2010-04-14?id=3036440&date=today&module=tn/today#/article/retail-news/ otto-group-a-german-giant-tiptoes-back-to-the-u-s-3036500?navSection=issues &navId=3036440. Otto could use these divisions to build other retail operations—while keeping a low profile, of course. 398 Chapter 8 International Expansion and Global Market Opportunity Assessment Opening Case Exercises (AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills) 1. How do non-German markets figure into the Otto Group’s strategy? 2. What do you think the firm has had to do to plan for this level of international expansion? 3. Which country-entry modes does the firm appear to prefer? Does it vary these modes? 4. After the Otto Group failed in its first effort to enter the US market with Spiegel, why would it try again? 5. How does this latest effort to enter the US market differ from its prior attempt? 399 Chapter 8 International Expansion and Global Market Opportunity Assessment 8.1 Global Strategic Choices LEARNING OBJECTIVES 1. Learn about the rationale and motivations for international expansion. 2. Understand the importance of international due diligence. 3. Recognize the role of regional differences, consumer preferences, and industry dynamics. The Why, Where, and How of International Expansion The allure of global markets can be mesmerizing. Companies that operate in highly competitive or nearly saturated markets at home, for instance, are drawn to look overseas for expansion. But overseas expansion is not a decision to be made lightly, and managers must ask themselves whether the expansion will create real value for shareholders. Companies can easily underestimate the costs of entering new markets if they are not familiar with the new regions and the business practices common within the new regions. For some companies, a misstep in a foreign market can put their entire operations in jeopardy, as happened to French retailer Carrefour after their failed entry into Chile, which you’ll see later in this section. In this section, as summarized in the following figure, you will learn about the rationale for international expansion and then how to analyze and evaluate markets for international expansion. 400 Chapter 8 International Expansion and Global Market Opportunity Assessment Rationale for International Expansion Companies embark on an expansion strategy for one or more of the following reasons: • To improve the cost-effectiveness of their operations • To expand into new markets for new customers • To follow global customers For example, US chemical firm DuPont, Brazilian aerospace conglomerate Embraer, and Finnish mobile-phone maker Nokia are all investing in China to gain new customers. Schneider Logistics, in contrast, initially entered a new market, Germany, not to get new customers but to retain existing customers who needed a third-party logistics firm in Germany. Thus, Schneider followed its customers to Germany. Other companies, like microprocessor maker Intel, are building manufacturing facilities in China to take advantage of the less costly and increasingly sophisticated production capabilities. For example, Intel built a semiconductor manufacturing plant in Dalian, China, for $2.5 billion, whereas a similar state-of-the-art microprocessor plant in the United States can cost $5 billion.“2011 Global R&D Funding Forecast,” R&D Magazine, December 2010, accessed January 2, 2011, http://www.rdmag.com/tags/publications/global-r-and-d- 8.1 Global Strategic Choices 401 Chapter 8 International Expansion and Global Market Opportunity Assessment funding-forecast. Intel has also built plants in Chengdu and Shanghai, China, and in other Asian countries (Vietnam and Malaysia) to take advantage of lower costs. Planning for International Expansion As companies look for growth in new areas of the world, they typically prioritize which countries to enter. Because many markets look appealing due to their market size or low-cost production, it is important for firms to prioritize which countries to enter first and to evaluate each country’s relative merits. For example, some markets may be smaller in size, but their strategic complexity is lower, which may make them easier to enter and easier from an operations point of view. Sometimes there are even substantial regional differences within a given country, so careful investigation, research, and planning are important to do before entry. International Market Due Diligence International market due diligence1 involves analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market. Market due diligence relies on using not just published research on the markets but also interviews with potential customers and industry experts. A systematic analysis needs to be done, using tools like PESTEL and CAGE, which will be described in Section 8.2 "PESTEL, Globalization, and Importing" and Section 8.4 "CAGE Analysis", respectively. In this section, we begin with an overview. Evaluating whether to enter a new market is like peeling an onion—there are many layers. For example, when evaluating whether to enter China, the advantage most people see immediately is its large market size. Further analysis shows that the majority of people in that market can’t afford US products, however. But even deeper analysis shows that while many Chinese are poor, the number of people who can afford consumer products is increasing.Art Kleiner, “Getting China Right,” Strategy and Business, March 22, 2010, accessed January 23, 2011, http://www.strategy-business.com/article/00026?pg=al. Regional Differences 1. Involves analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market. 8.1 Global Strategic Choices The next part of due diligence is to understand the regional differences within the country and to not view the country as a monolith. For example, although companies are dazzled by China’s large market size, deeper analysis shows that 70 percent of the population lives in rural areas. This presents distribution challenges given China’s vast distances. In addition, consumers in different regions speak different dialects and have different tastes in food. Finally, the purchasing power of 402 Chapter 8 International Expansion and Global Market Opportunity Assessment consumers varies in the different cities. City dwellers in Shanghai and Tianjin can afford higher prices than villagers in a western province. Let’s look at a specific example. To achieve the dual goals of reducing operations costs and being closer to a new market of customers, for instance, numerous hightech companies identify Malaysia as an attractive country to enter. Malaysia is a relatively inexpensive country and the population’s English skills are good, which makes it attractive both for finding local labor and for selling products. But even in a small country like Malaysia, there are regional differences. Companies may be tempted to set up operations in the capital city, Kuala Lumpur, but doing a thorough due diligence reveals that the costs in Kuala Lumpur are rising rapidly. If current trends continue, Kuala Lumpur will be as expensive as London in five years. Therefore, firms seeking primarily a lower-cost advantage would do better to locate to another city in Malaysia, such as Penang, which has many of the same advantages as Kuala Lumpur but does not have its rising costs.Ajay Chamania, Heral Mehta, and Vikas Sehgal, “Five Factors for Finding the Right Site,” Strategy and Business, November 23, 2010, accessed May 17, 2011, http://www.strategybusiness.com/article/10403?gko=e029a. Understanding Local Consumers Entering a market means understanding the local consumers and what they look for when making a purchase decision. In some markets, price is an important issue. In other markets, such as Japan, consumers pay more attention to details—such as the quality of products and the design and presentation of the product or retail surroundings—than they do to price. The Japan ...
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