what is strategic risks evaluation

Introduction

Globalization refers to interconnected economies, business, culture, and people through the expansion of companies in countries other than their host nations (Johnson, 2002). Companies expand in the global environment to widen their customer market, strengthen brand image and yield strong competitive position in the market. Globalization is essential as it results in the economic integration of brands and boosts up the strengths of the host country and the brand in economic terms (Johnson, 2002). Fashion industry possesses pertinent position in every country. The growth of the global fashion industry is an indicator of consumer’s attitude towards adopting fashion as per new trends. According to statistics, the global apparel and footwear market retail sales were $1.9 trillion in 2019. The growth rate is 5.46% from 2017-2019, with peak growth in 2020 at 6.2% (ISAKOV, 2020). The statistics of the global fashion industry show ultimate consume trend of buying fashion clothes, shoes, apparels, and accessories that can add to their lifestyle and bring limelight to the livelihood of the world. Therefore, the importance of the fashion industry cannot be denied for the whole world. This report conducts a strategic risks evaluation of global fashion industry.

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Some key fast fashion market players are Zara (Inditex), H&M Group, Fast Retailing (Uniqlo), Gap, Forever 21, Mango, Esprit, Primark, and New Look. The fashion industry sales have also shifted towards e-commerce gradually, which has contributed to industrial growth and development in the past decade (Samadi et al., 2011). Nike leads the fashion industry in 2020 with annual revenue of $35 billion and Inditex Flagship fast-fashion brand Zara leads by sale 3 billion units (ISAKOV, 2020). However, the fast fashion market has faced a decline in revenue from $35.8 billion in 2019 to $31.4 billion in 2020, mainly due to economic downfall faced by countries due to pandemic COVID19 (Research and Markets, 2020). The total revenue of the global fashion industry is 1.3 trillion dollars and employs more than 300 million people across the globe (Gazzola et al., 2020). This report aims to evaluate strategic risks that can impact the global business and also locate some potential risk responses. The report intends to study and analyze various examples from leading and fast fashion brands and their potential risk responses to identified risks.

Strategic risks to global fashion industry

The Yip’s globalization drivers’ framework illustrates the nature and extent of potential which exists in an industry to become global (Sparke, 2013). The drivers are illustrated in the figure below:

Figure 1: Yip’s globalization driver’s framework (Ungson & Wong, 2008)

Market and competitive drivers in the global fashion industry shape the opportunity for fashion brands to decide about foreign market entry. Some reasons for local brands and MNEs for international expansion are the market drivers of demand change. Some of these drivers are the convergence of lifestyle, consumer preference change, and establishment of world brand due to e-commerce. The competitive drivers are mainly the push factor of global expansion to other countries which enforce brands to think about their business survival in the local market (Madanoglu et al., 2017). The customer always prefers a global brand over a domestic one to yield positive self-image through fashion (Haroon et al., 2018). A report on global fashion 2020 states the example of Pitti Uomo, one of the largest men’s clothing trade show with 30,000 visitors which adapts to international brands every year and show the risk to brands who chose to avoid globalization (BOF, 2020). The strategic risk of losing market position due to non-expansion of business is thus, a market and competitive driver to indulge in B2B or B2C sales.

Financial risk

Financial profit of global fashion chains is dependent on the business to consumer dealing directly, i.e. physical stores. Many international brands announced financial downfall due to unexpected closure of stores and radical decrease in the number of customers, such as Burberry’s sales fell 48.4 % in June, Capri Holdings reported 70% decline in sales, Debenhams sought bankruptcy protection, Guess Inc. reported revenue fall to $260 million, and Elizabeth Arden filed for bankruptcy in March (Ilchi, 2020). A report on fashion and luxury goods indicates that there is a notable increase of 68 per cent in the interest rate for fashion investors that have resulted in the high price of clothes (Deloitte, 2020). Underdeveloped and developing countries like Pakistan and Vietnam do not spend on high priced clothes regularly and prefer to buy fast fashion brands (ET, 2020). The currency risk also prevails in the global fashion industry as it involves brand equity as well.

On the other hand, the cost drivers such as low labour cost and economies of scale and government drivers to reduce tariffs on imports and shift to open markets have emerged a new way for global market expansion. The 120-year-old company, Marks and Spencer (M&S) is a renowned brand that has worked about all these drivers to expand global operations (Ahmed, 2016). Visual merchandising, strengthening franchise partnerships, and reduced shipping costs offered by countries like China and India have allowed M&S to expand business in said countries. The annual report of M&S indicates that the company is rapidly expanding business operations in not-so-feasible countries like the Czech Republic by working on store outlet and local customer concerns (M&S, 2012). However, the financial risk prevails in all aspects of the M&S business.

Logistics and supply chain risks

The global fashion industry is prone to the risk of supply chain demand and logistics demand fulfilment due to outbreak of COVID-19, the geographical constraints due to extreme weather conditions, political rifts among superpowers such as US and China, the increased in imports taxation by developed countries, Brexit and more. Research has shown that recent COVID-19 has altered the lean supply chain management system due to an observed increase in demand volatility in consumer markets (McMaster et al., 2020). The agile supply chain method has increased inventory storage costs and puts up pressure on global brands to meet the ethical demand of business to encourage people for social distancing and to stay home (Marcus, 2010). For example, only in the region of Asia, the $290 billion textile industry was shut down for weeks due to the closure of manufacturing factories and physical stores (Sen et al., 2020). The closure affected the marginal supply chain system and enforced fashion brands to move towards agile supply chain system. For example, M&S has decreased the size of international goods shipped through the UK by 13%. By doing so, the efficiency in the supply chain system is improved, the cost is reduced, and the raw material is supplied to manufacturing countries in lesser time. As a result, 35% of the stock is now directly moving to required destinations by using linking hubs China, Sri Lanka, Istanbul, and Singapore (M&S, 2012).

Cross-cultural risk

Cross-cultural risk is a term used to describe business risk, which is surfaced when cultural values of consumers are at stake due to product/service (Renn & Rohrmann, 2013). Moreover, the adaptation to new culture also eases out the risk and supports brands to go global without being impeded by political or cultural factors. For example, the Indian model Lakshmi Menon was selected to walk in Paris fashion week, and Christian Dior announced the launch of western luxury segment products in India for the first time (Khvorostyanaya, 2018). Another example is of Gucci’s cultural insensitivity for showing suicidal and racial ads in different countries due to which brand faced a massive backlash from human rights experts (FERGUSON, 2019). The brand is claimed to show insensitivity towards the culture of black people by stereotypically showing their clothing sense.

Potential risk responses

Potential risk responses for countering the strategic risks faced by the fashion industry are timely customer service, improved customer communication, the allocation of resources for risk mitigation and agile conditions, and a holistic, proactive plan and risk mitigation agendas to tackle risks. For example, as a Virtual Fitting Room (VFR), Gap launched the ‘Dressing Room’ app in 2018 to allow customers for a virtual visit to the store (WFMJ, 2020). The Warby Parker collaborated with iPhone app to launch the virtual try-on feature on to facilitate customers sitting at home (Parker, 2019). These steps are proactive to tackle uncertain situations like a pandemic, where a customer can go on with fashion trends and basic life necessities by sitting at home.

In order to combat the identified risks in the global environment, the transnational strategy should be designed carefully. For minimizing the risk impact on a fashion brand, thorough research on host country’s financial market, consumer response, purchasing power, the cultural orientation, the type of legislative constraints for fashion retailers (Coombs, 2014) should be conducted before expanding the business in another country.

A multi-domestic strategy is another potential risk response that can maximize the local market purchasing towards the new product (Daft et al., 2010). The multi-domestic strategy works on local market purchasing behaviour to maximize sales and earn profit in the early days of a business launch. For example, launching an international clothing brand in a developing country with frequent discounts and offers is a strategy to minimize the risk of brand failure in a new market.

Business expansion to new markets on the international forum becomes complex with the host country’s conditions, and when the parent country is not feasible in terms of trading. In this case, the export strategy is not viable (Gokturk et al., 2013). The potential risk response in such condition is to work thoroughly on designing an efficient global strategy which must work on all types of risk before entering in the new market. The optimal global expansion with little or no adaptation to product and services is a way to minimize the risk of cultural failure or financial risk. The key points of cultural analysis of host country, the currency risk, and other aspects of financial risk along with political risk, are to be evaluated well before launching the product as per global strategy.

In context of the cultural risk, the potential risk response to cultural failure is the complete analysis of the host country’s culture and launch products which are culturally competent to the new market. The financial risk can be minimized by examining the value of the host country’s currency in world’s economic scenario and determine the purchasing power of customers accordingly. The transnational strategy is the best amongst all discussed risk responses to yield the optimally beneficial results from the new market. Unless the brand is proficient at establishing research and development in all aspects, the risk probability will remain high in all risk categories. Hence, brands are recommended to engage in R&D to conduct detailed research on countries and present strong feasibility report to plan for brand’s expansion.

Conclusion

Globalization is essential for brands to fight competition and expand customer market. The report identifies financial risk, supply chain risk, country risk and cross-cultural risks to be confronted by brands that intend to expand in other countries. The fashion industry is also prone to these risks, but by working on potential risk response strategies, the chances of being affected by these risks are reduced. By studying the risks, it is concluded that the key reason for the brand’s failure in a new international market is the lack of proper study and analysis of the types of risk. The global fashion industry is also prone to lower currency values, inflation, and cultural norms of every country, the political strategies, economy, and other factors. The industry needs more in-depth insight into risks associated with globalization to support brands that intend to go global and widen their customer market. Therefore, before entering another country, a transnational strategy is suggested as the most feasible potential risk response for fashion brands in order to minimize the probability of business failure in a new country.

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