Strategic Risks Evaluation

Executive Summary

Strategic Risks Evaluation Globalization refers to the ways in which regional and national economies, cultures and societies have connected through international networks of communication, trade, transportation and immigration. International trade has increased the scope and pace at which the businesses are conducted across nations. This report discusses the impact of globalization on international business while keeping the apparel industry into consideration. Expansion risks and the effective response strategies of the apparel industry are being evaluated while incorporating the examples of H&M, UNIQLO, Nike and ZARA. The expansion risks discussed in the report include global workforce management risks, competitive risks, cross-cultural risks, technology risks and environmental risks. Potential risks responses in response to all these mentioned risks have also been evaluated. The report examines how UNIQLO and Nike have suffered heavy legal lawsuits due to poor working conditions for employees. Furthermore, the fast-fashion strategy has been recommended in response to the competitive threats associated with global expansion. Technology risks reveal how international apparel companies who do not match the fast-paced digital world by exploiting online channels like Forever21 lag behind the competition. The report also explores how the apparel industry is considered to be the most polluting industries in the world. As a result, companies like UNIQLO have adopted sustainability strategies to ensure less carbon footprint and water consumption while producing clothing items in the host countries. Finally, globalization and glocalization strategies have been discussed in response to the cross-cultural risks.

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Introduction

With an improvement in transport, technology, business, communication and economic activities, companies struggle to adopt better strategies and survival. Restricted markets, demand for low-priced resources, competitive pressures and several other challenges have forced enterprises to enter the global market (Lechner and Boli, 2020). Globalization motivates businesses to considerably enhance the types and volume of cross border transactions in services, goods and capital and increase internalization (Steger, 2017). However, when businesses go global, they come in contact with factors like political systems, culture, language, legal systems, infrastructure and economic situation of the host country. As globalization encourages business to expand, they are faced with many strategic risks present in the host countries (Cartwright, 2017). Cross-cultural risks, economic risks, marketing risks, political risks, infrastructure risks, operations mismanagement risks and many more come with business expansion. The apparel industry is an extensive industry associated with designing and selling clothing, accessories and footwear. Products sold by an apparel industry can be basic, for instance, garments, to luxury items like alligator skin purses and cashmere sweaters (Martino, Fera, Iannone and Miranda, 2017). Some of the above mentioned strategic risks will be discussed in this report while keeping the apparel industry into consideration.

Strategic risks faced by global businesses

Global workforce management

Enhancing global competition, workforce expectations and employee regulations are increasing a need for global workforce management amongst international apparel manufacturers and multinational corporations (Vance and Paik, 2015). Having a global workforce has a steadily higher risk for a multinational clothing enterprise because economic and security interests have caused the host countries’ governments to impose employee regulations and policies (Suby and Dickson, 2015). Failure to comply with such employee regulations can result in the imposition of strict penalties on the international apparel business undermining its reputation and revenues (Hugos, 2018). Nike Inc. is considered to be one of the most recognized global apparel companies in the world. With the international expansion, Nike transferred its business operations in multiple countries around the world, for instance, Taiwan, Thailand, Vietnam, Mexico, India, China, and Sri Lanka etc. (Distelhorst, Hainmueller and Locke, 2017). However, the company has been accused of poor global workforce management in some of the host countries where it expanded. The contract factories of Nike have faced severe backlash because of low wages and substandard working conditions (Bernardis, 2019). As a result, the company was admonished by several workforce watchdogs groups, and lawsuits were filed against Nike. In addition, the company was boycotted by many students of the developing host country universities as a result of unfair labour practices (Michaels and Hennebel, 2019). Hence, international businesses must ensure a proper working environment for the employees handling their host countries operations.

Competitive Risks

These risks are the type of risks that can cause an international business to lose its revenues as the competitors continue to innovate and improvise (Boix-Palop, 2016). This is one of the most observed risks in the global apparel industry as today’s fashion industry is increasingly competitive. Wealthier and developed countries are engaged in massive fashion consumption with ever-changing customer preferences (Ghavamifar, Makui and Taleizadeh, 2018). Hence, international apparel companies are in a constant need to refresh product ranges as they expand across regions. Global fashion companies are now focusing more and more on the idea ‘Hear Today, Gone Tomorrow’ portraying their trendy and up to date items. Marks and Spencer is a famous example of an apparel company that has failed to innovate as per the changing global customer needs and preferences. While on the contrary, Zara uses a fast-fashion strategy by introducing new styles frequently to respond to global fashion trends and customer expectations efficiently (Wood, 2019).

Cultural Risks

Customers belonging to different cultures can have different values, attitudes and beliefs that have a substantial effect on their buying behaviour (Adekola & Sergi, 2016). However, with an increase in globalization, homogeneity of customer behaviour within the countries is vanishing, and communities across various countries are emerging (Mayakova, 2019). As a result, international apparel companies find it extremely hard to position themselves in the host country’s market. Some global apparel companies are trying to respond more to each culture’s distinct customer requirements. However, some international apparel companies like H&M are trying to bring cultural consonance by bridging the intercultural differences. In addition, some companies are also trying to find a middle ground, such as UNIQLO (Vandevelde, 2017). Therefore, it is crucial for companies to cater to the particular needs and wants of customers present in different market segments.

Technology Risks

One crucial aspect of globalization is technological evolution, and the companies that wish to go global cannot do so without exploiting the technology. The global apparel industry is also observing undergoing large scale digital challenges. A rise in technology has had a direct impact on customer’s purchasing behaviour, and international apparel companies must respond to it (Nicolaiov, Florea and Loghin, 2013). For instance, Forever 21 is a prominent example of a global clothing brand that suffered from retail failures after the popularity of e-commerce sales in the international market. Unlike many competitors, Forever21 lagged in providing online shopping experience to its international customers (Maheshwari, 2019). Therefore, international apparel companies must be able to innovate frequently to stay ahead of the fast-paced global competition.

Environmental Risks

Environmental risks are the most common risks associated with the apparel industry. As the global apparel companies expand across various host countries, they are subjected to strict environmental regulations and policies imposed by the host government (Adam and Allan, 2013) China is referred to as the world’s biggest producer of textile. Hence, the country has been recognized as the worst polluter in terms of water pollution and carbon emission. A major shift in the Chinese consumer’s mind-set regarding the clothes that do not contaminate their waters means that a necessary change in the fashion industry is on the horizon (Zhu and Pickles, 2014). China, being the biggest producer of fashion raw materials, has imposed strict environmental laws and policies (Liang and Xu, 2018). It is estimated that for an apparel company to produce one basic cotton shirt, 200 litres of water which is approximately one tub of water is being used (Zheng and Shi, 2017). Hence, ‘water pollution prevention and control action plan’ released in 2015 in China is a significant environmental regulation that can affect many international apparel companies around the globe. Therefore, global apparel companies are engaging more and more in projects like greener supply chain, reduction in carbon emission, energy and water reservation to avoid hefty lawsuits as a result of strict environmental regulations of the host countries (Yang, He, Chen and Wang, 2020).

Potential risk responses by global organizations

International workforce management strategies

International apparel businesses that are associated with managing global talent across various countries are improving workforce management through numerous steps and strategies. Establishing global pay structures, reward programmes, addressing global labour compliance, improving workforce conditions and apprehending the global currency considerations are all the steps taken by international apparel companies to effectively manage the global workforce (Beamond, Farndale Hartel, 2016). After public outcries against Nike’s poor labour practices, the company has developed a corporate website reporting. Such a website assures transparency by revealing the conditions for employees in Nike factories in developing host countries (Tobah, 2012). The website shows that Nike has ensured carbon neutrality in the contracted factories of the host countries. In addition, Nike also increased the wages of host country employees, matching market wages (Pierce, 2020). Furthermore, UNIQLO faced similar legal lawsuits in its host country China after labour watchdog parties claimed that the global apparel company offers a hostile working environment to its Chinese workers. As a result, the international clothing giant was called out by two non-profit companies called Scholars Against Corporate Misbehaviour (SACM) and War on Want and Students. Finally, the apparel company ensured transparency and sustainability in its host country’s supply chain (Rogers, 2020).

Continuous innovation – Fast-fashion strategy

Globalization has led to increased competition in the apparel industry as the tastes and preferences of customers change quickly due to international trends in the fashion industry. As a result, global apparel industries are involving ‘fast-fashion strategy’ as a new business strategy (Arrigo, 2016). This strategy allows international apparel companies to design clothing items based on global fashion trends quickly and at a cheaper cost. Zara is a famous example of a global apparel brand that has adopted this strategy. The company has gained a competitive edge over its global competitors by offering trendy clothes at low prices (Caro and Albeniz, 2015). In addition, other popular international apparel companies that make the fast fashion possible by quickly responding to the ever-changing consumer demands include UNIQLO, Forever 21 and Gap. UNIQLO adopts a different approach than Zara when it comes to targeting the dynamic preferences of global customers (Parietti, 2019). While Zara takes approximately two weeks to bring a large variety of new trendy outfits from factories to stores, UNIQLO takes exactly the opposite approach. The international brand focuses on developing a few styles of urban practical basics instead of a large variety (Binlot, 2019).

Digital Strategy

It has become necessary for the international apparel companies to leverage on the digital while expanding in the host countries (Gonzalo, Harries, Altable & Villepelet, 2020). E-commerce has changed the business landscape of various markets, including apparel with international customers shopping through online channels. The digital strategy allows apparel companies to build a competitive advantage over international competitors through technology (Yeow, Soh & Hansen, 2018). For instance, the digital approach of UNIQLO has allowed the organization to develop new online stores in Southeast Asia as the company understands the significance of exploiting online expansion channels in today’s world. Currently, 9.9% of the global sales of UNIQLO are through online channels, and the company wishes to expand the online international channels (Takada, 2017). Similarly, Forever21 has been dealing with the digital challenges by developing Global e’s that will help the multinational company to sell to foreign markets, including Canada, LATAM and APAC (Kats, 2017).

Sustainability Strategy

Adopting sustainability strategy has become an essential part of the business strategy of the apparel industry. This is because the apparel industry is considered to be one of the most exploitative sectors of the world as the major driver of sourcing strategy adopted by numerous international clothing brands is low-cost production (Sun, 2018). UNIQLO is an example of a global apparel company that has adopted a sustainability strategy to deal with the host countries environmental regulations. The company introduced the ‘LifeWear’ concept promoting a sustainable society (MartinRoll Business and brand leadership, 2020).

Standardization and Glocalization Strategy

International apparel companies respond to cultural risks by adopting different strategies. Standardization strategy is the one in which the global companies treat the entire world markets as one with little variations in the standardized product. International apparel brand ZARA uses such a strategy by developing a global image and not hiring celebrities belonging to particular host countries and markets (Hay, 2007).

On the other hand, glocalization strategy is the one in which international businesses act local but think global. Apparel brands that adopt this strategy build a global brand by localizing some aspects according to the cultural requirements and customer preferences of the host country. UNIQLO adopts this strategy as the global apparel company engages in various collaborations with designers present around the globe to develop something unique for each country they operate in. In doing so, the apparel company also maintains a global image by hiring global ambassadors for the brand such as tennis world champion Roger Federer and golfer Adam Scott (Christine, 2020).

Figure 1: Potential risk responses by global fashion companies

Conclusion

Globalization is becoming a crucial characteristic of the global economy. The modern international enterprises lead and drive this process of globalization by expanding into host countries. However, expanding the geographic footprint of a company has always had both advantages and threats. Some of these risks have been discussed in this report in reference to the practical example of ‘apparel industry’. The expansion risks and potential risk responses of apparel companies like ZARA, UNIQLO, Nike and H&M are being discussed in the report. Supply chain risks, competitive risks, cross-cultural risks, technology risks and environmental risks of international apparel companies are evaluated. In addition to that, potential risk responses such as global workforce management, fast fashion, digital, sustainability, and globalization and glocalization strategies have been suggested.

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