The Rationale of Birkenstock Internationalization Strategy

Birkenstock Orthopedic GmbH & Company is a German manufacturer and distributor of sandals and other shoes. The firm is headquartered in Neustadt, Germany. Birkenstock prides itself as the inventor of footbed since 1774. The company is a family owned business that engages in the manufacture of orthopedic shoes. The company manufactures its products in Germany. The products are made from both industrial and hand methods to produce the highest quality standards which meet and exceed the shoe industry. The essential materials the company uses to manufacture its products include natural latex, copper, wool felt, brass, leather, and cork. The materials are sourced from Europe. The company has since internationalized into several countries around the world including the United States. The company manufactures and sells some products grouped based on demographic factors such as age and gender. As such, there are products for women, men, Boys, girls, and professionals.

Rationale

As the business world continues to globalize, there are new opportunities for multinational companies such as Birkenstock. However, there are also threats that organizations must address to remain successful and competitive. Companies operating in the global business environment face several risks, including political instability in some countries, the changes in the technological landscape, fluctuations in social demographics and environmental regulations, and different legal requirements. Additionally, the global business environment is highly competitive, and unless companies can develop innovative and sustainable competitive advantages, they may fail to grow and expand their international ventures (Barney, 2014, p. 43). Therefore, as Birkenstock prepares to internationalize its operations into untapped global markets further, it is essential for the management to understand the market and business dynamics in those countries, especially about the worldwide show manufacturing and distribution industry (Birkenstock 2018).

There is a plethora of reasons for the internationalization strategy for Birkenstock. The advantages include first-mover advantages, the potential for growth, a large market in the host country, economies of scale, access to more customers, and even government incentives. Furthermore, the economic growth rates in Europe are low when compared to the newly emerging markets such as China, India, and even Brazil (Wei, 2009, p. 725). Therefore, by internationalization strategy, the Birkenstock will access new markets which will increase its revenues as well as its profitability margins. Furthermore, as a company that has a unique shoe product, it will enjoy an advantage over its competitors in the global market and subsequently increase its market share and revenues (Lasserre, 2017, p. 67).

Going into the global market has also provided the Birkenstock Company with an opportunity for growth (Law, 2017, p. 56). As a company with a foundation in both the local and international markets, further internationalization will provide the company with more growth opportunities thereby becoming a world leader in the shoe manufacturing and distribution industry.

Literature Review

There are many theories which can explain the expansion and internationalization of the Birkenstock Company into the global market. The models include the Uppsala model and eclectic model (Brandenburg et al., 2014, p. 305).

The Uppsala theory

The Uppsala internationalization theory is derived from the behavioral theory of the firm, which describes the internationalization of a company as consisting of processes where an organization gradually increases its involvement in the international operations (Attridge et al., 201, p. 256). The process involves an association between knowledge development about the foreign market and its operations and the increased commitment of resources to this market. The main issue in regards to this issue concern how a firm learns and how this learning affects their investments in the international market.

The primary assumption of the Uppsala model is the establishment of chain and psychic distance. It upholds that the interest and subsequent commitment of resources to the internalization market develop because of an established chain, involving sequences of stages which can be made in small increments for every new step. It starts with smaller investments but increases into more considerable investment as more chain is developed. The process does not involve regular export activities, but companies are exporting its products do this through independent representatives. Such companies also offer significant sales subsidiaries. As a firm continues to understand a given market, the ore the psychic distances close and the more, an organization is willing to invest further resources in exploiting opportunities in this market (Dodgson, 2018, p. 54). Therefore, it can be concluded that a firm will only enter into a market which it understands appropriately, where it can foresee opportunities which can help it achieve its strategic objectives and goals (Nielsen and Nielsen, 2011, p. 189). Figure 1 below illustrates how a firm internationalizes as explained through the Uppsala model.

Figure 1: the internationalization process as explained through the Uppsala model (Yang, Hong, and Modi, 2011)

The Birkenstock and the Uppsala model

The internationalization process of Birkenstock into the global market can be strongly correlated to the Uppsala Internationalization model, which suggests brands enter sequentially into new markets before while systematically increasing their commitment to these markets, such as wholesaling after establishing a franchise.

First, the company learned about the international market through proper markets scanning which enabled it to identify the risks as well as the opportunities in that market (Bharadwaj, El Sawy, Pavlou, and Venkatraman, N 2013, p. 475). For example, the United States market provides growth and expansion opportunities for the company to due to the broad market and customer base in the country. As a result, the company developed more interest in the country and followed this through continuous development and investment into the United States. The knowledge about the foreign markets has enabled the company to decide whether to expand into those countries or not (Nishitateno, 2013, p.56). Only countries where the Birkenstock has gathered knowledge and evidence satisfactorily are invested in. The nations with unfavorable market conditions such as volatile political environment, poor infrastructural resources, and poor economic performance and stability are usually avoided. Further knowledge of these markets dictates how much the company will be willing to invest (Dunning, 2013, p. 54). Therefore, as the company continues to gain more knowledge about the international market, so will it continue to internationalism and expand its business operations across different countries.

Analysis of Competition

Birkenstock has a huge number of competitors in the shoe manufacturing industry, more so in the podiatric products. Some of the main competitors are Crocs, Havaianas and Ugg companies.

a) Crocs

Crocs is a relatively new company, having been established in 2002. However, its growth rate has been impressive and similar to Birkenstock products, its shoes have been applauded for their pediatric benefits. Its growth has been tremendous, having established its products in more than 90 countries in the world (Johnson, 2016). Crocs internationalization approach can best be related with the Dunning’s eclectic approach, which emphasizes on Ownership-Location-internalization (OLI) framework, as it owns production units in Europe and China, which gives it ownership advantage over other competitors

b) Havaianas

The second competitor is the Havaianas brand of flip-flop sandals which has been recognized as the most popular brand of sandals in the world. The Brazilian sandal maker, Alpargatas owns the brand is the first ever to mass produce flip-flops out of rubber. The brand main strength has been its affordability in a wide range of population demographics which made3 it popular among the lower earning populations (Konyk,2016). The brand uses the Diamond model of internationalization as it considers factors such as the demand, rivalry and proximity to maximize its sales in the American and European nations with minimal establishment in Asian market, which has higher rivalry.

c) Ugg

Ugg is an American footwear product which predominantly deals with woolen and sheepskin products. Although more commonly known for its boots, their sandals are also popular though not as extensively as the other two of Birkenstock’s competitors. However, these sandals are more similar to Birkenstock’s sandals than the crocs and Havaianas. Unlike the Crocs and Havaianas, Ugg sandals are more warmth and comfort oriented and less suitable for wet situations. Ugg also uses the Michael Porter’s Diamond Model as it maximizes its marketing in European and North American countries where demand for warm clothing during winter is high (Haufler, 2013).

The different internationalization approaches suggest that different products and organizations may need to use different tactics as some approaches may not be suitable for some other products. For instance the need for woolen products reduces during warm to hot seasons which may mean they will need to be flexible. Furthermore, the structure of a company will affect the internationalization tactic they will use.

The international expansion proposal

Entry mode

There are several strategies of market entry from which Birkenstock can choose from.

Exporting

Currently, the company uses thee shipping strategies to market and sell its products in the international market. The procedure involves manufacturing in Germany and then transferring the manufactured products and goods to the retail stores established across the world. The plan has several benefits including the ability to operate a low-cost approach because of the low cost of operations (Goksoy, Ozsoy, and Vayvay, 2012, p. 90). However, caution should be taken through this strategy because it can cause a company to lose focus on its home market as well as the already existing customers (O'Hagan and Mangiron, 2013, p. 60). Furthermore, the company may lose some control in the international market as opposed to what it is used to in the domestic German market.

Joint venture

A joint venture describes a strategy where two or more companies combine their resources and expertise to achieve a common objective. According to Grant (2016, p. 56), a joint venture describes a business arrangement where companies agree to pool their expertise and resource to achieve a task or a project. In joint ventures, every member of the agreement is responsible for the loses accrued, profits generated, and costs associated with establishing the business (McDougall, Shane, and Oviatt, 1994, p. 472).

Using the joint venture strategy will provide Birkenstock with several advantages and benefits which when used correctly can be a source of competitive advantage. Firstly, the company will access new markets. Secondly, the organization will have an increased capacity. Joining resources together not only helps organizations to gain more resources but also helps it to expand its capacity (Griffin and Pustay, 2012, p. 42). The ability to expand capacity means that the company will have to produce more shoes on large-scale thereby gaining the economies of scale advantages which is especially elusive for companies which are domestic-based (Vahlne and Johanson, 2017, p. 149).

Thirdly, the company will have to share its costs and risks with other companies thereby lessening the burden of possible company dissolution. According to Merschmann, and Thonemann, 2011, p. 47), joining a joint venture is one of the ways companies can use to diversify the risks which face their operations in the local market. The fact that the risks and losses will be shared among different entities is an implication that the risks will reduce and injuries will also decrease.

Location

It is suggested that further internationalization should focus on the Chinese and Indian markets. The markets are classified as the modern emerging economies. The growth in these countries is driven by the fact that the governments have put in place several incentives to attract foreign investors. Furthermore, the states have the largest population in the world, and this is necessary as the community will provide more markets for the company’s products (Wheelen, 2012, p. 78). Having access to a broader market is the basis for internationalization strategies and the chance to investing countries such as China and India where there is an increasing number of middle-class consumers is an opportunity that Birkenstock should exploit to obtain competitive advantage (Rothaermel, 2015, p. ). Finally, the locations have been chosen because they already have well-developed shoe market industry and there are companies which can form a joint venture with Birkenstock.

Short Term expansion in the U.K

The new trend in the world with increased demand for organic, environment friendly products has also been huge in the United Kingdom. Birkenstock can use its renowned recognition for animal friendly and environment friendly efforts to establish itself as a beauty product brand in the UK.

The Mode of Entry: Using the 4P’s strategy

a) Price: A range of £4.50 - £45.99 (Birkenstock, na).

b) Promotion: The organization can market its beauty products by first establishing a beauty product only pop up store. To improve its competitiveness more emphasis should be made on giving their visitors an impressive in-store experience (Mintel, 2018).

c) Product: Beauty and Personal care

d) Place: London

The strengths of this tactic are that it can be good to establish the dynamics of the market while also being low risk.

The threat to its success is that, for one customers may be skeptical of these beauty products.

Medium Term Expansion in China and India

The Chinese and Indian markets contain large populations with diverse consumer needs and pricing which calls for a calculative entry into their markets.

The 4P’s strategy to use can be:

a) Price: Considering this is a medium term expansion, for both markets, Birkenstock should push for their medium and lower priced products. ($4 – $20). It should also market the more expensive products for the high net worth people in the two markets (>$30)

b) Promotion: Reinforcing the brand’s Image to enhance customer loyalty

c) Product: Full range Birkenstock products, with emphasis to lifestyle products.

d) Place: For India Birkenstock can first establish a flagship store in one of the tier one cities. Mumbai.

Birkenstock can approach the Chinese market from the online frontier by establishing a store in the T-Mall (an online retail website) as this is the latest and domineering method of purchase; Guangzhou city would be appropriate as it is a major trading hub.

Options and costs

There are several options which the company can use to be competitive and sustainable I the international market. The strategies include cost leadership, differentiation, and focus.

Cost leadership

Cost leadership is one of the porter’s generic strategies which can enable organizations to gain competitive advantage and outsmart the competition. According to Nasri and Ikra (2017, p. 76), a cost leadership strategy describes a strategy where a company can project itself as the cheapest manufacturer and provider of a given product thereby being able to sell them at lower prices. With regards to Birkenstock, the company can position itself as the cheapest producer or manufacturer of shoes in the new market (Rushton, Croucher, and Baker, 2014, p. 68). However, since several manufacturers are already using the strategy in the Chinese and Indian markets, the approach will not yield any tangible value for the company.

Differentiation strategy

The differentiation strategy is the most preferred and as a result, the recommended approach which Birkenstock should use when it internationalizes into the Chinese and the Indian markets. Differentiation strategy, according to Nath, Nachiappan, and Ramanathan (2010, p. 327), describes a marketing approach that a firm can use to position itself as a producer of unique products which the customers will always find to be better than those produced by the competitors. If the plan becomes successful, then the company will access several opportunities (Sabou, 2009, p. 459). Since the Indian and the Chinese shoe manufacturing and distribution markets already have several firms, the company’s choice to operate under the differentiation strategy is the only option it can use to gain substantive and sustainable competitive advantages. Second, the differentiation strategy will enable the company to create and maintain value for its products. According to Altintaş and Tokol (2013, p. 321), a when a firm employs the differentiation strategy as opposed to cost leadership, it creates perceived value among the existing customers as well as the potential consumers. As a strategy which focuses on the creation of value, the differentiation strategy will enable the company to cost save and achieve durability of products as compared to those produced by its competitors (Sharma, 2010, p. 68). Therefore, the strategy not only helps organizations to achieve value but also promotes sustainability of products. Finally, the policy will allow Birkenstock to compete on the non-price competition.

Impact analysis

The impact of the internationalization strategy will be felt within the firm and the domestic and international markets. First, the approach will increase the company’s operations and resources. The joint venture will improve the reach of the company regarding customer access and level of services (Tregear, 2015, p. 69). However, the company will have to invest a significant amount of resources to achieve this objective.

Risk assessment

The risks which the company faces can be assessed through the PESTEL model

Political risks in Indian and Chinese markets are relatively low because the governments have experienced relatively stable political atmosphere for a long time. The economic risks are also minimal because economic indicators such as GDP, inflation, and employment rates in the new markets are positive and healthy. Chinese GDP is currently the largest in the world followed by the United States (Shenkar, Luo, and Chi, 2014, p. ). The Indian GDP has also been on the increase for the past decade. Both countries have experienced an upsurge of middle-class consumers due to increasing amounts of disposable incomes. The environmental risks are, however, high (Wild, Wild, and Han, 2014, p. 56). India and China have some of the most stringent environmental control policies which all companies must adhere to (Konyk, 2016, p. 67). The technological factors which influence the shoe manufacturing industry have advanced, and companies without innovative products are easily put out of business by those companies which have advanced creativity and innovation (Katz, Du Preez, and Schutte, 2011, p. 76).

Short and medium term outline plan

The short-term plan

The company will have to conduct a market survey and identify the potential companies with which it can enter into joint venture with (Sturgeon and Kawakami, 2010, p. 56). The process should take at most two months

Long-term plan

The company should identify and approach a company with which it will enter into joint venture with. The process will involve making arrangements to sign contracts and agreements to share resources and market products in the Chinese and Indian markets (Kelemen and Némethné Tömő, 2010, p. 194).

Conclusion

As domestic markets in the show manufacturing industry become more competitive, it is essential for Birkenstock to internationalize its operations into the Chinese and Indian markets. The theory which best explains the company’s internationalization strategy so far is the Uppsala internationalization strategy. The theory posits that a company’s interest in the foreign market develops as a result of having enough information and knowledge about those markets and then extends further as the company invests resources. Although the cost leadership strategies can be helpful in this industry, especially with the domestic markets, the differentiation strategy is the most appropriate in this case. Also, the company has been using the exporting approach to sell in the foreign markets. However, a joint venture has been proposed as the best strategy for entering into the new markets. The impacts of this strategy include increased sales, economies of scale, and increased innovation.

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