How Can FEMILET A/S Enter the French Market?

HA - Bachelor Project How Can FEMILET A/S Enter the French Market? Made by: Karina Hjørringgaard Jesper Bak Larsen Submission date: May 29, 2008 Supervisor: Kim Germer

Table of Contents 1. Executive Summary...2 2. Formulation of the Problem...4 3. Methodology...5 3.1 Choosing a methodological approach...5 3.1.1 The epistemology of the three approaches...5 3.1.2 The ontology of the three approaches...5 3.2 The Systems Approach...7 3.2.1 Ontology...7 3.2.2 Epistemology...8 3.2.3 Scientific Ideals...8 3.3 Operative Paradigm...9 3.4 Summary of Methodology...11 4. Theory...12 4.1 Theoretical Tools...12 4.1.1 E. Jerome McCarthy s 4 P s...12 4.1.2 Michael E. Porter s Value Chain...13 4.1.3 Michael E. Porter s Five-Forces...15 4.1.4 PEST-Analysis...17 4.1.5 SWOT-Analysis...18 4.1.6 Summary of Theoretical Tools...19 4.2 Theory Regarding Entry Modes...19 4.2.1 Theoretical Entry Mode Decision Factors...19 4.2.2 Theory about the Main Entry Modes...22 4.2.3 The Four Entry Mode Factors of Pavlos Dimitratos...27 4.2.4 Summary of Theory Regarding Entry Modes...28 5. Analysis I: Internal & External Analysis...29 5.1 Internal Analysis of FEMILET...29 5.1.1 The FEMILET Company...29 5.1.2 Financial Analysis of FEMILET...30 5.1.3 Marketing Mix of FEMILET...31 5.1.4 The Value Chain Activities of FEMILET...34 5.1.5 Summary of the Internal Analysis...35 5.2 External Analysis of France and the French Market...36 5.2.1 Analysis of the Macro Environment...36 5.2.2 Industry Analysis of the French Lingerie Market...38 5.2.3 Summary of the External Analysis...42 5.3 The Strategic Status of FEMILET...43 6. Analysis II: Entry Mode Selection...44 6.1 Pre-analysis...44 6.2 Comparative Analysis of Entry Modes Selection...45 6.2.1 Export Modes...45 6.2.2 Intermediate Entry Modes...47 6.2.3 Hierarchical Entry Modes...49 6.3 Comparative Discussion of the three Entry Modes...50 6.3.1 Recommendation Regarding Choice of Entry Mode...53 7. Conclusion...54 8. Perspectives...55 9. Literature used...56 Group 35 Page 1 of 56

1. Executive Summary FEMILET is a Danish lingerie company, which has been in business since 1923. Today the company has a solid position in the Danish home market with a 17-20% market share. Based on FEMILET being a small company striving to sell more in European markets this project seeks to answer the question, How Can FEMILET A/S Enter the French Market? That FEMILET will enter the French market is throughout this project a presumption. Though, entering the French market could be worth considering for FEMILET based on the French market being characterized as an atomistic market, with a total market value of 1.9 billion in 2005, as well as being the second largest lingerie market in Europe. This study is conducted through the systems methodological approach. The epistemology of the approach induces that FEMILET and its environment is considered unique and qualitatively measurable. Thereby, the generated knowledge becomes system dependent. The ontology of the approach entails that the world of FEMILET is objectively accessible, while also being a system constituted by relational parts, where the whole is not the sum of its parts because of synergistic effects. The scientific ideals are concerned with final explanations and research criteria as well as the techniques applied. The methodological foundation of the study indicates that the examination, of which entry mode FEMILET shall choose when entering the French market, must consider the influence of internal as well as external factors. Hollensen (2007) and Dimitratos (2004) have studied factors influencing choice of entry mode. Therefore, a theoretical presentation based on these factors, of the two researchers respectively, creates part of the basis on which the study of the best entry mode for FEMILET is carried out. The other part is concentrated in a theoretical presentation, through Porter s Value Chain perspective, of the various entry modes which can be an opportunity for FEMILET to consider. This perspective of the value chain is applied throughout the project as a tool in the study of which entry mode FEMILET shall choose when entering the French market. Furthermore, Porters Five Forces, a PEST analysis, the 4 P s of McCarthy and a SWOT matrix are tools, which are used in connection with the data collection process. In order to provide the information needed, to analyse FEMILET according to choice of entry mode, an internal and external analysis of the company are conducted. These constitute the first part of the analysis in the project. Through the internal analysis, a general description of the company is carried out along with a financial analysis and an analysis of the marketing mix and value chain activities of FEMILET. The external analysis is structured by an analysis of the macro environment, through a PEST-analysis, and an industry analysis of the French lingerie market through Porter s Five Forces. Due to the systems methodological approach, the relations between the factors from the internal and external analysis must also be studied. This is met by summarizing and viewing the findings of the external and internal analysis in connection to each other through the creation of a SWOT matrix, whereby the strategic status of FEMILET is presented. Based on the external analysis of the French market, the internal analysis of FEMILET and the study of the various entry modes as well as factors influencing these, the second part of the analysis Group 35 Page 2 of 56

of how FEMILET shall enter the French market is carried out. This part of the analysis is structured by the idea of a funnel whereby the entry modes are examined and deselected in proportion to the business and market characteristics of FEMILET. Hereby, a narrowing of the various entry modes ends up with a focus on three entry modes, which are selected and examined in a comparative analysis and discussion. These three entry modes are franchising, the piggybacking export mode and joint ventures. These modes are selected particularly because of their ability to promote the FEMILET brand on the French market by using collaboration. Moreover, these modes correspond to the limited financial resources of the company. The result, and hereby the conclusion of the study regarding which entry mode FEMILET shall choose when entering the French market, is that theoretically FEMILET can enter the French market in several ways, but according to the analysis in this study only a few suitable options exist. Beside the factors influencing choice of entry mode presented by Hollensen (2007) and Dimitratos (2004), the choice of entry mode depends especially on the degree of risk, resource commitment, flexibility and control demanded by FEMILET. Therefore, two recommendations are made depending on the desired market involvement. If a low risk, low resource commitment, limited control and high flexibility are wanted piggybacking is a possibility. Through this mode the French market is entered but there is a chance that the entry mode does a relatively weak job in establishing the brand in the market. If a higher risk, higher resource commitment, more control and less flexibility can be accepted a joint-venture is recommended. By using the joint-venture as entry mode a franchise concept is to be established within the joint-venture. The advantage of the jointventure is that the benefits of franchising are kept while risk and resource commitment are shared with a local partner. This entry mode combination is recommended because it fits the business of FEMILET and its surroundings. It is the entry mode most likely to make a difference in the French market because franchised concept stores, established in cooperation with a local partner, do the best job in creating brand awareness of the FEMILET brand. Karina Hjørringgaard Jesper Bak Larsen Group 35 Page 3 of 56

2. Formulation of the Problem FEMILET is a Danish lingerie company experiencing growth. Part of the growth comes from export activities. The internationalisation process of the firm has taken place in stages, starting from a solid position in the Danish home market with a 17-20% market share neighbouring countries Sweden and Norway have been conquered [Hollensen 2007, p. 679]. Furthermore, local importers sell the products in Holland, Germany, England, Ireland and even Russia [Dagbladet Børsen 25/9-2007]. In an internal perspective FEMILET is a small company which is striving to sell more in European markets where competition is intensive. The 2007 annual turnover was not disclosed, but the net profit reached DKK 2,4 million indicating limited resources for international markets [FEMILET A/S, Annual Report 2006/2007]. With a total market value of 1.9 billion in 2005 France constitutes a large European market for lingerie. In fact, France is the second largest lingerie market in Europe next to Britain [French Fashion Institute 2006]. Furthermore, lingerie sales represent approximately 20 percent of the total French women s wear sales and despite the recent economic recession in France the lingerie sales have not been particularly affected. In short, several factors indicate high sales potential in the French market [Hollensen 2007, p. 682]. The French women are characterized by their interest in fashion. Their fashion preferences correspond to FEMILET s aim at following the existing trends, while a focus is placed on producing lingerie to different lifestyles, and by that also to an active lifestyle [Hollensen 2007, p. 682]. Also the fact that women in southern Europe generally purchase more lingerie than women in northern Europe points in the direction of France being an attractive market for FEMILET to enter [Hollensen 2007, p. 680]. Concerning competition, there has been a development in France where inexpensive Chinese products are coming to the country in large amounts [International Herald Tribune 13/1 2006]. Instead of presenting cheap lingerie FEMILET can enter the market with quality products designed in Denmark. Thus, FEMILET is primarily a high-end brand aiming for the upper price segment. FEMILET s experience so far on different markets can be an important factor in the process of penetrating the French lingerie market. The above mentioned factors are determining for the formulation of the following problem, presuming that FEMILET has an interest in the French market: How Can FEMILET A/S Enter the French Market? Group 35 Page 4 of 56

3. Methodology In this chapter the methodological approach of the project is chosen. In relation to this the associated ontology, epistemology and scientific ideals are presented. Finally, the operative paradigm is outlined and depicted through a research design. 3.1 Choosing a methodological approach This part of the chapter concerning methodology focuses on the process of choosing the right methodological approach for the project. This is preceded by making a short discussion of the main characteristics of the analytical, the systems and the actor s methodological approach. This discussion will conclude in a presentation of the arguments which constitute the choice of methodological approach for this project. 3.1.1 The epistemology of the three approaches The epistemology 1 of the analytical approach is characterized by knowledge being universal and quantitative, while knowledge is generated about causal laws. The aim of the approach is to achieve general truths, principles and universalities. A specific characteristic is that knowledge about the whole, as for example an enterprise, is generated through explanations of its parts and by that through the elements that constitute the enterprise [Arbnor et al 1997, p. 50-54]. From the systems approach point of view, enterprises are unique and therefore they should be studied according to their uniqueness and with a qualitative perspective. By that, the systems approach rejects that one should aim for universal knowledge. Also the systems approach will argue that knowledge about the whole is achieved through explaining the parts through the characteristics of its whole [Arbnor et al 1997, p. 64-69]. Regarding the actors approach, it adopts another position as it argues that knowledge about a whole, like for example FEMILET, is created through the understanding of different actors and their reality, while at the same time there is an agreement with the systems approach regarding knowledge being qualitative and unique. This is related to the focus of the approach of knowledge being generated about social constructions, dialectic relations and subjective meaning structures [Abnor et al 1997, p. 71-79]. The actors approach differentiates from the other two approaches by its focus on the subjective meanings of the actors and the creator of knowledge s active part in the flow that he or she is trying to explain [Abnor et al 1997, p. 425-426]. 3.1.2 The ontology of the three approaches Like the epistemology, the ontology 2 of the three approaches is also different. The analytical approach believes in an objective world, where a man is either irrational or rational, and the world 1 Definition: Conception of science and knowledge [Heldbjerg 2006, p. 28] 2 Definition: Conception of reality [Heldbjerg 2006, p. 28] Group 35 Page 5 of 56

is believed to be constituted by independent parts between which there are causal, logical or statistical relations [Abnor et al 1997, p. 60-64]. Opposed to this view the systems approach emphasizes the world as being objectively accessible instead of objective in its ground nature, and also the world is viewed as a system constituted by relational parts. In the systems approach the focus will often be on finale relations between the parts, which are connected with the believe in synergies as a result of the whole being more or less than the sum of its parts [Abnor et al 1997, p. 70]. This also means that the existence of both positive and negative synergies is acknowledged by the systems approach while ignored by the analytical approach. From the perspective of the systems approach a mistake is made by the analytical approach when trying to isolate a number of variables from different contexts which because of the different contexts have different meanings. By doing this, the belief that the content of the variables is determined by the systemic composition is ignored [Abnor et al 1997, p. 422]. Contrary to the analytical approach this approach furthermore denies the usefulness of looking for causal relations, instead the systems approach looks for forces which influence the system as a whole. This factor is closely connected to the believe in the impossibility of removing any of the factors from a system picture without risking that the total picture will be affected, as opposed to the believe of the analytical approach [Abnor et al 1997, p. 65-66]. Compared to these two approaches the actors approach adopts a third view. Unlike the two other approaches the actors approach see the world as subjective while there is also more than one world. The reality assumed by the actors approach exists as a social construction which consists of different levels of meaning structures and therefore it is dependent on observers. Also this approach deviates from both of the other approaches regarding human beings and reality as standing in a mutual dialectic relation to each other, meaning that we create reality at the same time as it creates us [Abnor et al 1997, p. 70-79]. In general, the scientific ideals of the three methodological approaches are different like the epistemology and ontology. All these elements are determining which methodological approach that is chosen for this project. The systems approach is applied throughout this project because of the confidence that a business like FEMILET can be researched most effectively through the belief that the objective world and the enterprise are systems with focus on the constituting parts as well as the relations and synergies. This reflects that the entry modes of FEMILET must be researched through the different departments, sales units, the surroundings etc. as well as through the relations and synergistic effects of these factors. By this, it is rejected to research the entry modes through researching the elements, of which the enterprise is constituted, as individual elements. It means rejecting the analytical approach because this is one of its main characteristics. Furthermore, it is refused to aim for a researching result which can be used to generalize. Also the view of an enterprise, like FEMILET, as being a unique business containing problems, which is to be handled by the aim of explaining, is determining for the use of the systems approach. According to the actor s approach the company is also considered unique, but through a subjective perspective, which is discarded in this study. Group 35 Page 6 of 56

3.2 The Systems Approach The following paragraphs will focus on the systems approach because this methodological approach has been chosen for the study. Therefore, a more detailed explanation of the approach and its associated consequences will be presented. First the ontology and epistemology is considered before scientific ideals with focus on specific research criteria and data requirements are discussed. 3.2.1 Ontology The ontology of the systems approach is characterized by looking at the world as a great complex unity containing interrelated components, where the context cannot be ignored when looking at a single component. The complexity of the world is tremendous and the approach tries to comprehend complex structures by looking at especially the relations between components. In the systems approach the world is considered objectively accessible, meaning that a study is trying to reproduce or look into an existing objective reality [Arbnor et al 1997, p. 250]. Arbnor & Bjerke (1997) defines a system in the following way: A system is a set of components and the relations among them [Arbnor et al 1997, p. 111]. A distinct feature of a system is that the whole consists of more or less than the sum of its parts. Thus, synergy exists due to relations and interaction between the parts creating positive or negative common effect [Arbnor et al 1997, p. 65]. In the case of FEMILET, the company is seen as more or less than the sum of its single parts which is a conclusive ontological implication. Systems can generally be considered open or closed. In this study, as in most business studies, the system is viewed as open because it has connections to its environment. In other words, it is subject to input/output processes, with parties beyond its system borders, whom it has no control over. All factors influencing the company are to some extent important as well as necessary and cannot be removed or ignored when trying to explain or understand the real system of FEMILET [Arbnor et al 1997, p. 65]. This underlines the ultimate presumption about totality and the importance of a holistic view, where both underlying subsystems and the surrounding supersystem, are taken into account. From a systems point of view, social structures are influenced by internal and external factors with varying consequences. In the case of FEMILET, this calls to the importance of considering both internal and external factors which are relevant to the company and not only looking at the company single-handedly. It is, for instance, interesting to look at external factors such as culture, competitors and buyer characteristics when determining FEMILET s entry in France. These external factors and their interaction with internal factors are decisive when analyzing and discussing which entry mode fits best according to the characteristics of FEMILET s internal capabilities and the context the company is working in. Considering the single parts aside from their surroundings does not make sense because the interdependency cannot be ignored. A system exists and evolves together with its environment and is constantly adapting to external input in the form of information [Arbnor et al 1997, p. 123]. Group 35 Page 7 of 56

3.2.2 Epistemology In the systems approach knowledge is considered unique and qualitative. Knowledge is unique because a study will result in a rather unique system-dependant case and will not stand as general absolute knowledge [Arbnor et al 1997, p. 70]. This implies that the system analysis of FEMILET, undertaken in this study, cannot be used as a general system model. Furthermore, this concept of contextual dependency means that the analysis and advice in this study will focus specifically on the real system that FEMILET constitutes. As just explained, knowledge depends on systems and explanations are made in terms of system characteristics. The systems approach explains or understands single parts through the characteristics of the common whole [Arbnor et al 1997, p. 52]. If looking at, for instance, the marketing efforts of FEMILET the characteristics of the entire company are used as a framework for understanding the specific subsystem. But at the same time it is important to remember that even though knowledge is created about the whole it is decisive that the single parts are taken into consideration. Knowledge generated in the systems approach is qualitative because unique relations and structures cannot be entirely quantitatively measured. Therefore, the aim of a data collection in a certain system is to find information about unique relations which are parts in constituting a larger whole. 3.2.3 Scientific Ideals An important part of the methodological foundation of the study is research criteria. It is necessary to consider the concepts of objectivity, reliability and validity in order to secure the quality and relevance of the generated knowledge. One must therefore consider the view of the systems approach on these research criteria concepts. First of all objectivity must be secured according to the ontology of the systems approach. Objectivity is secured by looking at the object under study the system without any personal subjective values influencing the study. Such values are certainly not easy to fight back and this points at the so-called objectivity problem [Arbnor et al 1997, p. 249]. The concept of reliability has to do with whether a study can be carried out again with the same results. Therefore, reliability is often not considered important to the systems approach because of the use of qualitative as well as quantitative techniques [Arbnor et al 1997, p. 231]. Instead the approach focuses on securing the validity of a study. The concept of validity is quite different from the analytical approach because personal judgement plays an important role when assessing system validity [Arbnor et al 1997, p. 233-234]. This has to do with the fact that the results should be useful, trustworthy and correspond to the context of the real system. According to Arbnor & Bjerke, (1997) a guiding purpose can be used as a validity control. The guiding purpose is used when applying measurements and the like. One way of securing that the system of FEMILET is actually measured correctly is to reflect the real system from as many angles as possible [Arbnor et al 1997, p. 234]. This implies studying as much secondary material as possible to sort of get the whole story about the company. Group 35 Page 8 of 56

According to the techniques and tools used in the systems approach, focus is on both secondary material from external and internal sources and primary material from direct observations and interviews. Secondary material from external sources is used with great care because such data may not directly deal with the system under study. This includes case-studies and general system theory. The characteristics of the real system must be considered throughout the study and external secondary material is therefore primarily useful when analyzing facts about the surrounding environment. On the other hand, secondary material, from internal sources such as documents from FEMILET, is very much applicable. This is due to the fact that such data are created inside the system and therefore deal with the complexity, conditions and relations that the system is actually experiencing [Arbnor et al 1997, p. 228]. 3.3 Operative Paradigm After discussing the methodological approach it is now time to connect this to the study area by constructing an operative paradigm. A research design will be used to depict the basic structure of the operative paradigm. According to Arbnor & Bjerke (1997), the purpose of an operative paradigm is to create a fit between ultimate presumptions about a methodological approach and the nature of the area under study [Abnor et al 1997, p. 217]. Therefore, the systems approach and the company of FEMILET has to be connected. The logical structure of the study is inductive which demands a specific order through certain phases of the study. Induction implies that empirical data comes before theory and theory is used only when trying to explain or understand empirical data [Riis 2005, p. 29]. Regarding the methodological procedure, focus is on how techniques are being used through the study. Especially the techniques used in the data collection process as well as the techniques used to secure validity and objectivity in this project are important. The selection of data is based on techniques like case studies such as Hollensen s (2007) case about FEMILET, historical studies such as Johanson and Vahlne (1977) and also observations carried out by others as for example the ones made about the development of FEMILET, referring to paragraph 5.1.1. The data collection in this project is also concerned with existing secondary material from external sources whereby previously collected data is contextually incorporated in relation to FEMILET. These techniques are well approved by the systems approach in general [Arbnor et al 1997, p. 222-242]. Concerning the methodological procedure, all data, which are included in the project, must be in line with the ontology, epistemology and scientific ideals of the systems approach, referring to paragraph 3.2.1-3.2.3. How the validity is secured is for example by involving several different sources to get the study area examined in the best possible way, e.g. this is showed through the various factors which are presented in the project as factors influencing the choice of entry mode. Based on the same principle are the other two elements secured. Though, when the basic assumptions of the systems approach are respected the most important element regarding the methodics is to determine relations [Arbnor et al 1997, p. 295]. It must be accentuated that a technique becomes a method Group 35 Page 9 of 56

when, through the application of a methodological procedure, it is incorporated or developed in relation to the methodological approach which in this case is the systems approach [Arbnor et al 1997, p. 17]. By that, the study of which entry mode FEMILET should choose when entering the French market, must include a study of internal and external factors regarding FEMILET and the French market as well as the behaviour of the system of FEMILET and its various relations. FEMILET has been contacted and encouraged to participate in the study but they have rejected the proposal with reference to limited resources. If FEMILET had agreed to participate in this project through for example an interview, the techniques concerning making a personal interview as well as techniques regarding asking questions would be important for the completion of the study. Since this is not the case these considerations are not examined further. Figure 1 shows the practical application of methodical procedures through methodics in the form of a research design. The Systems Approach FEMILET A/S World FEMILET A/S, The lingerie market The problem of entering the French market FEMILET A/S in a future perspective Formulation of the Problem Methodology Theory Analysis I: Internal analysis of FEMILET External analysis of FEMILET Analysis II: Comparative analysis and discussion of entry mode selection Recommendation Conclusion Perspectives Means Secondary data about FEMILET and the French lingerie market Theories and models: McCarthy s 4 P s Porter s Value Chain Porter s 5-Forces PEST Analysis SWOT Analysis Entry Modes Theory by Hollensen, Root and Dimitratos Various scientific articles Figure 1: Research Design of the Study [Based on Marita Svane: Business Research Methods, Lecture 10/4-07] The theoretical means are initially presented in a theory chapter before applied in analysis I and analysis II. Analysis I looks at FEMILET from an internal and external perspective. The internal analysis of FEMILET makes use of McCarthy s 4 P s and Porter s Value Chain. When analyzing France and the French lingerie market, in the external analysis, Porter s 5-Forces is used along with a PEST-analysis. The SWOT-model is used for summarizing and connecting the findings in the internal and external analysis. This model is used because it has the ability to create an overview of FEMILET s strategic status and thereby it constitutes a platform for further analysis. The main body of theory is concerned with entry modes in a value chain perspective. Porter s theory about the value chain is used as a point of reference while Pavlos Dimitratos (2004), Franklin R. Root (1998) Group 35 Page 10 of 56

and Svend Hollensen (2007) are the primary sources on knowledge about the specific entry modes. Furthermore, Hollensen s text (2007) on global marketing and several scientific articles will be included throughout the study. When using the above mentioned means the focus will throughout the research process be on the mindset of the systems approach. 3.4 Summary of Methodology This summary of the chapter concerning methodology is based on Figure 2, meaning that the outlines of the chapter will be explained through the figure. This chapter have worked towards first to state the reasons for having the systems methodological approach as a foundation, these main arguments appear through the following explanation of Figure 2. Afterwards the purpose has been to explain the connection between the systems methodological approach, with its ultimate presumptions, and the area being studied in this project, which is FEMILET s entry in France. This is what Figure 2 underlines. The figure shows that a paradigm developed by theorists of science describes the relation between the ultimate presumptions and the use of a methodological approach. At the same time the methodology attempts to describe the relationship between a methodological approach and the area to be studied through the operative paradigm [Arbnor et al 1997, p. 10-17]. Theory of science Methodology Ultimate presumptions Paradigm Ontology Epistemology Ideals Methodological approach The Systems Approach Operative paradigm Methodical procedures Methodics Study area Figure 2: Methodology [Based on Arbnor et al 1997, p. 17] For this project, grounded in the systems methodological approach, the paradigm is consisting of: 1) the epistemology with focus on knowledge being unique, qualitative and system dependent. 2) the ontology with focus on the world being objectively accessible, while also being a system constituted by relational parts, where the whole is not the sum of its parts because of synergistic effects. 3) the ideals with focus on final explanations and research criteria such as objectivity, reliability and validity. The ideals also consist of techniques where case studies, observations and historical studies are in centre. Group 35 Page 11 of 56

The paradigm is connected with the operative paradigm with its: 1) methodological procedure with focus on how techniques are used in the data collection process as well as how they are used to secure validity, reliability and objectivity. The selection of data in this project is based on techniques such as case studies, historical studies, observations carried out by others and existing secondary material from external sources. 2) methodics with focus on the development of the techniques used in the study in relation to the systems methodological approach. Hereby, the study of FEMILET according to choice of entry mode focuses especially on relations. The connection between the paradigm and the operative paradigm determines how the problem formulation of this project is to be researched. The study will be based on the mentioned criteria as well as relations by using the means presented in the operative paradigm in paragraph 3.3. 4. Theory In this chapter the theories, models and scientific articles, which will create the foundation for the analysis in this project, will be presented. An important element in the theory chapter is how and why the theories, models and scientific articles are used in the analysis and by that also how the theories are used to collect the needed information, which the results in the analysis are based on. For this reason the aim of the theory chapter is to give a short presentation of the characteristics of the theories, models and scientific articles and present how they will be used through the project. 4.1 Theoretical Tools The following paragraphs outline important characteristics about the theoretical tools and models used in the internal and external analysis in this project. It will be explained why the theoretical tools and models are used, how they are used and how they correspond to the methodology of the systems approach. All the theoretical tools and models are selected because of their ability to be operationally applied when explaining data. 4.1.1 E. Jerome McCarthy s 4 P s The current marketing mix of FEMILET is to be analyzed using E. Jerome McCarthy s 4 P s: product, price, place and promotion. The marketing mix must be analysed in relation to FEMILET because such an analysis will contribute with decisive factors, which are important to consider when the aim is to find out which entry mode FEMILET should choose when entering the French market. The 4 P s are defined as the set of marketing tools a firm makes use of to pursue its marketing objectives [Kotler & Keller 2006, p. 19]. These objectives concern how to influence the trade channels as well as final consumers. McCarthy s 4 P s are therefore relevant factors to look at when needing to capture important insights about FEMILET s marketing decisions according to choice of entry mode because the entry mode choice must support and strengthen the marketing objectives. The principles behind the 4 P s corresponds to the ontology of the systems approach, as Group 35 Page 12 of 56

described in paragraph 3.2.1, because it acknowledge that several interrelated factors all together creates the marketing mix offered to the target market. Thereby, the single marketing components are analyzed separately but it is their relations and common effects which make a difference in the target market. This is important when considering whether an identical or new marketing mix is to be used abroad where the environmental context is different. Therefore, the 4 P s provide an applicable analytical framework being well aware that other marketing parameters exist as well. The important thing is to get in dept with the primary parameters that can directly influence the final choice of entry mode. If specific data about a certain parameter cannot be found it is acceptable as long as the overall characteristics of the parameter is covered. According to Kotler & Keller (2006) there are several factors which make up each P in McCarthy s marketing mix. Depending on which type of industry the firm is part of some of the factors are more important than others. In relation to FEMILET, the relevant factors concerning the product parameter are more specifically product variety, quality, design and brand name. Hereby, these four factors are the ones who must be examined in relation to FEMILET regarding the product parameter. The factors are important to consider when evaluating if and how the products can be sold abroad. They are selected among all factors of Kotler & Keller (2006) because they can create differentiation and thereby strengthen the attractiveness of the products. Regarding the price parameter two factors from Kotler & Keller (2006) are in focus. These are list prices and discounts because these factors are decisive in respect to the foreign competition of FEMILET. Regarding the promotion parameter sales promotion, advertising and the sales force of FEMILET will be examined because these activities are important according to the ability of FEMILET to promote it self and accentuate what the business can offer. Concerning the place parameter three factors from Kotler & Keller (2006) are in focus. These are channels, coverage and locations because these factors can outline how the distribution of FEMILET is arranged today. This can be important knowledge when considering distribution at the French market [Kotler & Keller 2006, p. 19]. All in all, this paragraph has presented which factors are to be studied in the analysis of the marketing mix of FEMILET as part of the internal analysis of the company. 4.1.2 Michael E. Porter s Value Chain Michael E. Porter s Value Chain concept will be used as a general point of reference in relation to both the theoretical presentation of entry modes and the internal analysis of FEMILET. This is due to the explanatory power of the value chain concept and its ability to identify important sources of value creation. This is decisive to consider in relation to FEMILET because of the decision concerning which activities the company should handle it self when entering the French market. Porter (1985) introduced the value chain as a systematic way to examine all the activities a firm performs and how they interact. Thereby, the value chain with its unique individual parts interacting to form a whole corresponds to the principles of the systems approach as outlined in paragraph 3.2.1. Porter (1985) describes internal linkages within the value chain and in a system perspective Group 35 Page 13 of 56

this can be seen as relations generating synergy. The value chain disaggregates a firm into its strategic activities in order to understand the behaviour of costs and find sources of differentiation. This is closely related to the main role of the value chain which Porter (1985) emphasizes by writing that the fundamental role of the value chain is identifying sources of competitive advantage [Porter 1985, p. 33-34]. Figure 3: Michael E. Porter's Value Chain [Porter 1985, p. 37] Figure 3 shows Porter s Value Chain. In the model value activities are divided in two, which are primary activities and support activities. The primary activities are the upstream activities involved in the creation of a product and its downstream sale and transfer to the buyer as well as after sales service. These primary activities can be divided into the five groups listed in Figure 3: inbound logistics, operations, outbound logistics, marketing & sales and service. Support activities support the primary activities and each other through providing inputs, technology, human resources and different firm wide functions. All together, this indicates that the value activities are the building blocks of competitive advantage. Besides the value activities a margin exists. The margin is the difference between total value and the cost of performing the various value activities [Porter 1985, p. 33-39]. A simplified version of Porter s Value Chain will be used throughout the project. Thereby, Porter s concept of the value chain is applied but fewer activities are considered than in the original model. Hollensen (2007) argues that Porter s Value Chain consists of a system of interrelated activities and therefore the activities can be reduced in number without loosing the basic idea. Hereby, Hollensen (2007) presents a model which supports the basic idea and belief in Porter s Value Chain theory but at the same time simplifies the model as only primary activities are considered in the simplified version. This is not a problem, in relation to the choice of entry mode for FEMILET, because support activities do not necessarily vary from one entry mode to another and they are not directly necessary when the aim is to capture the characteristics and differences of the different entry modes. Group 35 Page 14 of 56

By this, it is not ignored that the support activities can be shared between the home country and a foreign country. The four primary activities considered are labelled R&D, production, marketing and sales & services which is in line with the simplified value chain used by Hollensen (2007) [Hollensen 2007, p. 22]. R&D deals with technology, research, development, design and other aspect regarding the psychical appearance of the products. Production involves purchasing, scale economies, capacity, productivity and other aspects regarding the making of the products. Marketing has to do with marketing information, distribution, pricing and branding. Sales & service includes management of the sales force, merchandizing, logistics, legal terms and customer service [Hollensen 2007, p. 22]. This shows that through these four activities all activities in a company are represented. By focusing on these primary activities the simplified model is generally more focused concerning what it is to be used for during this project. By this, the simplified version is creating more overview and focus than Porter s original Value Chain when the aim in this project is to use the value chain perspective to examine which entry modes FEMILET shall consider. Figure 4: The Simplified Value Chain [Hollensen 2007, p. 22] This simplified value chain, depicted above, is used because of its ability to capture differences between the various entry modes that can be applied by FEMILET. By using the value chain as a common point of reference comparisons can be made with the aim of finding the entry mode which will fit FEMILET the best. When entering the French market, FEMILET needs to decide whether the responsibility for the single value chain activities is to be moved to France or is best handled centrally from headquarters in Denmark. This decision of whether to centralize or decentralize can be based on the core competencies of the company. According to Hollensen (2007), the value chain activities should principally be carried out where there is the highest competence and the most cost effectiveness. This implies that the value chain activities involving core competences of FEMILET should be secured in the company. Three criteria can be used to asses the company s core competences. First of all, a core competence is a source of competitive advantage because it makes a significant contribution to perceived customer benefits. Furthermore, it can be exploited in a wide variety of markets. Finally, it is difficult for competitors to imitate [Kotler & Keller 2006, p. 39]. If these criteria are met a true core competence exists and its associated value chain activity should be controlled by FEMILET. 4.1.3 Michael E. Porter s Five-Forces Michael E. Porter s Five Forces will be used as a framework for structuring the external analysis of the French lingerie industry and its competitive structure. The five forces are used because of the ability of the theory to create an overview of an industry through the examination of five broad parameters. Thereby, relevant knowledge about the French lingerie industry can be obtained in Group 35 Page 15 of 56

relation to FEMILET. Together the five forces are measuring the profitability of the industry by analyzing the intensity of competition [Porter 1985, p. 5]. The knowledge concerning the actual competition on the market can be used by FEMILET when formulating a competitive strategy or choosing an entry mode that is relating the company to its environment. The principle of connecting the company to its environment corresponds to the internal-external processes that are part of the ontology of the systems approach, with reference to paragraph 3.2.1. The ontology of the systems approach also fits the fact that several factors are taken into consideration when trying to comprehend the complexity of a certain industry. Furthermore, Porter (1985) sees every industry as being unique, which is in line with the epistemology of the systems approach, as described in paragraph 3.2.2. Thereby, the strength of the individual forces changes from industry to industry and their relations and common effect are system dependent. POTENTIAL ENTRANTS Threat of new entrants SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Bargaining power of buyers BUYERS Rivalry Among Existing Firms Threat of substitute products or services SUBSTITUTES Figure 5: Porter s 5-Forces Driving Industry Competition [Porter 1980, p. 4] The five forces, depicted in Figure 5, are potential entrants, buyers, substitutes, suppliers and industry competitors. While potential entrants and substitutes evaluate threats, buyers and suppliers are concerned with the strength of bargaining power. The industry competitors are firms operating in a specific industry which are rivalling each other for market shares and so forth. According to Porter (1985), several factors are determining the strength of each force. In this project specifically selected factors will be examined based on their relevance in relation to FEMILET. Regarding potential entrants entry barriers such as government policy, economies of scale and capital requirements are considered. These factors are in focus because of their influence on the threat of new competitors entering the French lingerie market. When looking at substitutes the relevant factors to accentuate are buyer propensity to substitute and general customer behaviour. Thereby, the strength of close and distant substitutes, which FEMILET will be competing against in France, will be assessed. The bargaining power of suppliers will be measured by examining the Group 35 Page 16 of 56

differentiation of inputs, the supplier concentration, the importance of volume to suppliers and the threat of forward integration where suppliers become lingerie producers. By considering these factors knowledge will be gained about how much strength suppliers have according to the competition in the French lingerie industry. Regarding buyers it is relevant to include buyer concentration as well as buyer volume and buyer characteristics. Regarding potential industry buyers, it is also relevant to consider their ability to backward integrate, whereby current buyers becomes lingerie producers. The reason is that such movements can change the entire structure of the French lingerie industry. The rivalry among industry competitors are determined by examining industry growth, product differences, brand identities, diversity of competitors as well as concentration [Porter 1985, p. 6]. Thereby, the intensity of rivalry in the French lingerie industry can be measured which is important when analysing the entry mode decision of FEMILET. When knowing the strength of each force and its underlying determinants the entry mode for FEMILET in France can be adjusted in line with the actual findings. This requires solid data for the industry analysis, which is to be carried out, because the quality of this analysis is closely related to the quality of the data it is based on. The more detailed and accurate information accessible the better it is. Though, it is an overall picture that is sought and as such it is acceptable if mainly secondary industry data can be obtained. 4.1.4 PEST-Analysis In the external analysis of the French macro environment a PEST-analysis will be applied. A PESTanalysis consists of political, economical, social and technological factors in the macro environment. These are all factors which can influence the company but they cannot be directly controlled or changed by the company. Thereby, such factors must be taken into consideration and dealt with in order to operate within the environment [Crossan, Fry & Killing 2005, p. 60]. By this, the PEST-analysis is included with the aim and intention of creating an overview of the macro environment of France. The four factors in the analysis are relevant for FEMILET to know according to the choice of entry mode. The political, economical, social and technological factors characterize the broad environment of a market. Minor details and specific country information can of course be relevant but the aim is to get the broader picture. The analysis will be based on publicly accessible data sources such as information from the French government, official statistics and other credible external sources. Regarding the political factor in the PEST analysis of France, focus is on the political stability and thereby also the degree of power by the central government [Hollensen 2007, p. 248]. This focus is due to what information that is important for FEMILET according to the company s choice of entry mode and thereby degree of resource commitment as well as risk. When the economical factor of the PEST analysis is to be analyzed in relation to the French market, focus will be directed at the economic development and hereby the GDP growth rate as well as the price stability in the country [Hollensen 2007, p. 248]. This is due to the indication value of this factor in relation to how Group 35 Page 17 of 56

FEMILET shall enter France regarding the degree of resource commitment as well as risk in relation to the overall demand on the lingerie market, which can be affected by long term conjectural changes. Opposed to the economical factor of the PEST analysis, the analysis of the social factor will concentrate on aspects of the country s culture. For FEMILET to adjust its choice of entry mode to the French market, it is necessary for the company to have knowledge about what drives customer behaviour in the market [Hollensen 2007, p. 250]. Furthermore, it is important to study factors such as power distance, masculinity, uncertainty avoidance, confusion dynamism and individualism, which are five often used dimensions on culture. These factors are especially important if FEMILET, according to choice of entry mode, should consider collaborating with a partner. Regarding the technology factor of the PEST analysis, focus is to be directed at the degree of technological advancement. The reason is that this factor contributes to indicate the development level of the country, which FEMILET must adjust to when deciding how to enter the French lingerie market. 4.1.5 SWOT-Analysis The aim of the SWOT-analysis is to consider the strategic status of FEMILET based on the internal and external analysis of the company. Thereby, the analysis and its associated matrix are used to summarize the findings, which will connect the internal and external analysis. The concept of the SWOT-analysis is used because of its ability to create an overview of FEMILET s internal strengths and weaknesses as well as external opportunities and threats [Kotler & Keller 2006, p. 52-54]. This makes it possible to consider the strategic possibilities and potential problems when analyzing which entry mode to use in France. The internal-external perspective in the SWOT-analysis furthermore corresponds to the ontology of the systems approach as outlined in paragraph 3.2.1. According to Kotler & Keller (2006) a primary purpose of the external environmental scanning is to find new opportunities, trends and potential threats which can affect the company. In the case of FEMILET, the external environmental scanning is made through the application of a PEST analysis of the macro environment as well as through an analysis of the French lingerie industry. Based on the findings in these paragraphs the primary opportunities and threats can be accentuated whereby an overview of the external environment is created. This overview can then be compared to the overview created by the factors of the internal environment. The external factors must be considered in relation to the capabilities of the internal strengths and therefore it is relevant to consider the possibilities and limitations of the company [Kotler & Keller 2006, p. 52-54]. The internal factors in the SWOT-analysis are based on an analysis of the marketing mix of FEMILET, a financial analysis and an analysis of FEMILET s value chain activities. When both the key internal and external factors are listed a platform for the final choice of entry mode in France is created. Thereby, the SWOT-analysis shall constitute a bridge between analysis I and analysis II. Group 35 Page 18 of 56