Analysing the attractiveness of new and less- developed European markets for Boom

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Analysing the attractiveness of new and less- developed European markets for Boom

Student: May 2005, Groningen J.P. Schutter (s1152076)

University:

Dr. W. Westerman Mr. drs. H.A. Ritsema Rijksuniversiteit Groningen Company:

Boom Jan Janssen

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Preface

This thesis is written as part of the specialisation Financial Value Management of the faculty of Management and Organisation at the Rijksuniversiteit Groningen. In order to write this thesis, I did an internship at Boom for half a year. This thesis describes the research process that was carried out during and after that period.

I would like to take this opportunity to thank the people that helped me to succeed in writing this thesis. First of all, I would like to thank W. Westerman and H. Ritsema, who supervised this research process on behalf of the Rijksuniversiteit Groningen.

Secondly, I would like to thank Jan Janssen and Brooke Shields for guiding me on behalf of Boom.

In addition, I would like to thank all the interviewees: the employees of Boom, Gerben Dijkstra and Nico Mensink (both of FMO). In addition to these interviewees, I would like to thank Bartjan Pennink, Bas Schrama and Douwe Snel for their support. Finally, I would like to thank Kees Faesenkloet for his assistance in writing this thesis.

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Management summary

The research that is described in the thesis is carried out for the New Business Development department of Boom. This department lacked a systematic method by which the attractiveness of new and less-developed European markets can be analysed. The research was limited to new and less-developed markets that are located in Southern or Eastern Europe. In order to solve the research problem, the following research goal was set: “To provide the New Business Development department of Boom with a checklist, which enables the firm to analyse the attractiveness of new and less-developed European markets in a systematic manner”.

This goal was achieved by answering the central research question: “How does Boom analyse the attractiveness of new and less-developed, European markets, and which alternative analyses could assist Boom in order to make balanced and reliable decisions?” Interviews and cases are used to describe the analyses that Boom performed in the past and performs at present.

The attractiveness of new and less-developed markets for Boom is found to consist of the long-term sales growth potential and the potential profitability of future Boom business; Boom’s objectives are to focus on a 2% market share of the clothing market in Europe and to achieve an EBIT-margin of at least 11%. Elements that Boom considers in its analyses of the attractiveness of target markets are:

demographic and economic variables, sales potential, distribution potential, competition and business model. The first two elements give an overview of the country by focusing on the number of inhabitants, size of the economy and size of the clothing market. The prospect of obtaining the target market share of 2% will be influenced by the other three elements. A low distribution potential as well as fragmented competition and low diversity of business models will negatively influence this prospect and the attractiveness of the market as a result.

Three issues surfaced that may prevent Boom from making balanced and/or reliable decisions: the subjectivity of the analyses, the lack of emphasis on risk and the lack of emphasis on return. These issues had to be addressed by the checklist. A checklist assists Boom with making reliable decisions by reducing the subjectivity of the analysis of the attractiveness of a new or less-developed market. By explicitly stating the data that have to be taken into account when assessing attractiveness and suggesting a way of interpreting the data, the subjectivity of the measured attractiveness is reduced. The checklist suggests comparing the target market with similar markets, in term of geographic location, and considering both the current state as well as the dynamics of the analysed elements.

Analyses that are not performed by Boom are included in the checklist to help place an emphasis on risk and return. The analyses that are performed by FMO, a Dutch development bank, serve as an example of how Boom may place an emphasis on risk. An emphasis on return is also required since Seaman focuses on the return that it receives in exchange for investing in Boom. Seaman has the choice of investing in the brands that provide the firm with the highest return.

The checklist should be seen as a tool in an assessment procedure. The decision to make a commitment, by entering a new market, is often the result of a complex decision-making process instead of a clear-cut decision made by a specific person on a specified time. The checklist merely aims to assist the New Business Development department of Boom in analysing the attractiveness of new and ELDSEE-markets in a systematic manner and not in making decisions in a systematic way.

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Table of contents

Preface... 2

Management summary... 3

1. Research design... 6

1.1 Introduction ... 6

1.2 Boom ... 6

1.3 Research problem ... 6

1.3.1 Research goal ... 8

1.3.2 Central research question ... 9

1.3.3 Analytical model ... 9

1.4 Research Process... 11

1.4.1 Research design in research steps... 11

1.4.2 Limiting conditions ... 15

2. General overview of analyses on new and ELDSEE-markets ... 16

2.2 Decision-making process on new and ELDSEE-markets... 16

2.3 Boom Business models... 17

2.4 Boom’s motives for international expansion ... 19

2.5 Goal of analyses ... 20

2.6 Wholesale analyses... 22

2.6.1 Level of analysis... 22

2.6.2 Wholesale Partners ... 23

2.7 Retail analyses... 25

2.8 Investment, risk and return ... 26

2.9 Summary ... 29

3 Analyses by Boom in the past and at present ... 30

3.2 Analyses by Boom in the past ... 30

3.2.1 Case: Eastern European markets (1999)... 31

3.2.1.1 Strategic analyses: market characteristics & assumptions ... 31

3.2.1.2 Strategic analyses: ways of entering the market ... 34

3.2.1.3 Financial analyses ... 35

3.2.1.4 Evaluation ... 39

3.2.1.5 Concluding ... 40

3.3 Analyses by Boom at present ... 42

3.3.1 Case: Italy (2004) ... 42

3.3.1.2 Strategic analyses: way of entering the market ... 43

3.3.1.3 Financial analyses ... 44

3.3.2 Case: Acceding EU Countries (2004) ... 47

3.3.2.2 Strategic analyses: changing the business model ... 49

3.4 Conclusions of the cases ... 51

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3.4.1 Detailed Information on past and current analyses... 51

3.4.2 Issues ... 51

4. Addressing issues with alternative analyses ... 53

4.2 Alternative analyses in general ... 53

4.3 Risk ... 54

4.3.1 Country risk... 55

4.3.2 Commercial risk ... 57

4.3.3 Evaluation of risk analyses ... 57

4.4 Investments and return ... 58

4.6 Summary ... 60

5. Formulating the checklist ... 61

5.2 Goal and structure of the checklist... 61

5.3 Long-term sales growth potential... 63

5.4 Potential profitability ... 66

5.5 Concluding ... 69

6. Applying the checklist ... 72

6.2 Long-term sales growth potential of Greek market... 72

6.2.1 Demographic and economic variables... 72

6.2.2 Sales potential ... 74

6.2.3 Distribution potential... 75

6.2.4 Competition ... 76

6.2.5 Business model... 77

6.3 Potential profitability of the Greek market ... 77

6.3.1 Risk ... 77

6.3.2 Return on investment... 79

6.4 Summary ... 81

7. Conclusion, evaluation and recommendations ... 82

7.2 Conclusion ... 82

7.3 Evaluation of the checklist ... 85

7.4 Recommendations... 87

Bibliography ... 90 1. Definitions... Error! Bookmark not defined.

2. Relevant literature per author... Error! Bookmark not defined.

3. FMO datasheet... Error! Bookmark not defined.

4. Corruption Index ... Error! Bookmark not defined.

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1. Research design 1.1 Introduction

In this chapter, an overview of this thesis will be given by clarifying the research problem and the research process through which this problem will be solved. In section 1.2, Boom will be introduced to provide background information on the owner of the problem. The subsequent section (section 1.3) will state the research goal and the central research question and contains the analytical model. The research process is described in section 1.4 by elaborating on the research steps and their corresponding chapters. This chapter will be concluded by the conditions that limited the research process and the resulting research product.

1.2 Boom

In this section, a general overview of Boom will be given. Boom is a clothing company and is based in Europe.

1.3 Research problem

In this section, the research problem will be discussed. The New Business Development (NBD-) department of Boom has a problem. The problem is the lack of a method by which the attractiveness of new and less-developed European markets can be analysed systematically. This thesis will focus on southern and eastern European markets since most new and less-developed markets for Boom are located in Southern and Eastern Europe. New markets are defined as southern and eastern European markets in which Boom merchandise is not yet for sale. The Italian market is an example of a new market. The phrase “existing less-developed southern and eastern European markets” (ELDSEE) is used in this thesis to describe the southern and eastern European markets in which Boom merchandise is available for sale, and that offer perceived potential. The Greek market is an example of an ELDSEE- market. From now on, “new southern and eastern European markets” are referred to as new markets and less-developed southern and eastern European markets are referred to as ELDSEE-markets.

This research looks at the way Boom analyses the attractiveness of new markets as well as ELDSEE-markets. Boom will analyse the attractiveness of a new market in order to decide if it will enter that market. The ELDSEE-markets are included in this research since the analyses on these markets partly overlap with analyses on new markets. When assessing the attractiveness of changing a business model in an existing less-developed market, analyses on the attractiveness of this market will be part of the process. This overlap is shown in figure 1. The group of analyses that are performed for both the new markets as well as the ELDSEE-markets in order to assess market attractiveness is the object of this research. Boom may want to change its business model in an ELDSEE-market due to the perceived potential to increase performance in this market. Additional motives to change the business model include a change in focus or Boom wanting to safeguard its brand identity. An example of a motive is that Boom believes it can increase its performance in the Greek market by buying out its current distributor. This distributor opens stores on behalf of Boom and sells the Boom merchandise to wholesale customers. Another example of a change in business model is the opening of own retail stores instead of distributing the Boom merchandise through a concession partner. These examples will become clearer after the explanation of the different ways that Boom conducts its business, the so-called business models, in the second chapter.

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Throughout this thesis, the word “analyses” is used in conjunction with assessing the attractiveness of a market. This word is used to refer to activities that are undertaken with the common goal of assessing the attractiveness (for Boom) of a market. These activities can be split into two groups: collecting the data and interpreting the data.

The first group of activities involves collecting data on the market characteristics of a target market. Collecting the relevant data is at least as important as interpreting this data for decision-making purposes. In this thesis therefore, the word “analyses” will refer to both the collection of the relevant data as well as the interpretation of this data. In the decision-making process on changing the business model in ELDSEE- markets, the analyses Boom can undertake can be divided into three groups:

analyses of the attractiveness of the ELDSEE-market, analyses of the current Boom business in that market and analyses of the possible changes in business model.

The first group of analyses will look at market characteristics of a target market. The analyses of the way of entering the market (with a chosen business model) are also included in this group of analyses. This first group of analyses is the object of this research; these analyses treat the ELDSEE-markets as if they were new markets in which Boom considers entering. The second group of analyses assesses the performance of the current Boom business in an ELDSEE-market. This could involve looking at the financial position of a third party and at the performance per store.

These two groups of analyses are followed by analyses of possible changes in business model. These analyses will generate, given the current business, strategic options on how to change the way of doing business (changing the business model) in a particular market. This group of analyses differs from the first group of analyses (which also deals with business models) since these strategic options take into account the possible additional costs arising from the existing business, e.g. the costs of buying out a distributor. In figure 1.1, the overlap between analyses on new markets and ELDSEE-markets is shown.

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Figure 1.1 Analyses on new markets and ELDSEE-markets.

1.3.1 Research goal

The need for knowledge in this research is not limited to assessing the attractiveness of a particular market; this research concerns a methodology that can be used to assess the attractiveness of new and ELDSEE-markets in general. The result of this thesis will be a methodology to analyse the attractiveness of new markets that Boom considers entering and to analyse the attractiveness of ELDSEE-markets in which Boom considers to change its business model. The goal of this research is to provide the New Business Development department of Boom with a relevant product of knowledge, which enables the department to solve its problem by systemizing Boom’s and alternative analyses. This product of knowledge is a checklist that aims to assist the NBD-department of Boom in analysing the attractiveness of (new) markets in a systematic manner. The research goal is:

“To provide the New Business Development department of Boom with a checklist, which enables the firm to analyse the attractiveness of new and less-developed European markets in a systematic manner.”

The checklist will systemize the analyses that are performed at Boom; this involves identifying the relevant analyses as well as putting them in order. If alternative analyses turn out to be relevant, they will be included in this checklist as well. The

2. Analyses of current Boom business

3. Analyses of possible changes in business model

1. Analyses of the attractiveness of the market

Research object New markets

One group of analyses to determine the attractiveness of

entering the market

ELDSEE-markets Three groups of analyses to determine the attractiveness of

changing the business model

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New Business Development department will be able to use the checklist when it has to analyse the attractiveness of a new or ELDSEE-market. A standardised set of analyses concerning the attractiveness of the market becomes available by explicitly stating the relevant analyses that can be used in order to assess the attractiveness of these markets.

1.3.2 Central research question

The research goal will be achieved by answering the following central research question:

“How does Boom analyse the attractiveness of new and less-developed, European markets, and which alternative analyses could assist Boom in order to make balanced and reliable decisions?”

New markets will be analysed in order to determine whether the attractiveness of the market justifies a market entry. If the attractiveness is perceived to be too low, Boom will not enter the new market. Boom has already entered into ELDSEE-markets however, and a measured attractiveness of the market might result in a change in the current business model. If the attractiveness of the market is too low, Boom might decide to terminate its business in that market. This decision should be based on reliable information and all relevant aspects of the market for Boom should be taken into account. It is impossible however to investigate all these aspects in depth due to limited time and resources. As a result, choices between analyses that can be performed have to be made. The selection should result in a balanced and reliable measurement of attractiveness. Obtaining such a balanced and reliable measurement of attractiveness is a condition to make balanced and reliable decisions.

1.3.3 Analytical model

The analytical model in figure 1.2 shows concepts in relation to the conducted research and provides the reader with an overall overview of the research. The rationale behind the analytical model is that systematic analyses are the result of a sound decision-making methodology. This research deals with the decision-making methodology in order to come up with a systematic analytic tool, a checklist. In this research, this checklist will be geared to analyse the attractiveness of new and ELDSEE-markets.

The objectives of Boom, which are derived from Boom’s strategy, will indicate what should be analysed. By comparing the Boom objectives with the Boom analyses, the relevance of the Boom analyses can be determined. The Boom analyses will have to diagnose the relevant variables (that is: given the Boom objectives); the results of these analyses will be compared with the objectives of Boom in order to judge the attractiveness of a new or ELDSEE-market. The alternative analyses should also take into account the Boom objectives, since these analyses also have to analyse the relevant (given the Boom objectives) variables.

In order to obtain a sound decision-making methodology, the (financial and strategic) analyses that are made by Boom will be compared with alternative analyses.

Alternative analyses, both strategic as well as financial, are defined as all analyses that Boom did not perform in the past nor performs at present. The alternative analyses will be based on insights from Financial Value Management or based on the experience of other companies that analyse the attractiveness of markets. The

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evaluation of Boom’s and alternative analyses will lead to an enhanced balance in and reliability of the analyses that are part of the systematic method. Assumptions serve as input for Boom’s analyses as well as alternative analyses. These assumptions will be looked at as well since they influence the results of the analyses.

The definitions of the used concepts and phrases are given in the appendices.

Figure 1.2: Analytical model

Boom Strategy

Alternative analyses:

• Financial

• Strategic

Decision-making methodology

Assumptions

Financial Value Management

Experience of other companies Boom

Assumptions

Boom Objectives

Systematic method Boom’s analyses:

• Financial

• Strategic

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1.4 Research Process

1.4.1 Research design in research steps

In the figure below, the research steps of the research process are shown graphically.

The first three steps are used to develop a checklist which will be applied and evaluated in steps four through six.

Figure 1.3: Research process in research steps Describe the analyses that

Boom performed in the past and performs at present.

Use literature and other sources to find alternative analyses that Boom can use in the future.

Analyse the attractiveness of the Greek market with alternative analyses.

Analyse the attractiveness of the Greek market with Boom’s analyses.

1

2

3

4

5 Developing checklist

Evaluate checklist

6 ^Applying

and evaluating checklist Systemize the current analyses

by Boom. Select and systemize future analyses.

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Step one of the research process will be to describe the way that Boom analyses new markets and ELDSEE-markets. The following sub question will be answered in this research step: “How did Boom analyse new and ELDSEE-markets in the past and how does it analyse new and ELDSEE-markets at present?” A general overview will be given at first in order to provide the reader with information on the framework of the analyses and an understanding of the underlying business. Secondly, cases are used to describe Boom’s analyses. The goal of using the cases is twofold:

collecting detailed information on aspects that were discussed in the general overview and identifying issues that might prevent Boom from making balanced and/or reliable decisions with respect to new and ELDSEE-markets.

The first purpose of using the cases is the collect detailed information on some of the aspects of the analyses. Boom does not use a standardised set of analyses when analysing new and ELDSEE-markets. By combining the different analyses that are performed in the upcoming cases, a standardised set of relevant analyses can be composed. This set of analyses, consisting of analyses that Boom prepared in the past and at present, will be included in the checklist.

The second purpose of using the cases is to identify issues that might prevent Boom from making balanced and reliable decisions. The issues might come up during the cases or during the evaluation of these cases. Issues arising from the cases will be addressed by suggesting alternative analyses in research step two.

The cases that will be discussed can be distinguished by considering when the analyses were performed. Firstly, the focus will be on the way Boom analysed new and ELDSEE-markets in the past. Analyses of the attractiveness of eastern European markets in 1999 will serve as an example of the past. The person who carried out the analyses of this case will be interviewed in order to gather the relevant data. Secondly, the focus will be on the analyses that Boom performs at present.

Two cases will provide input for this part of research step one: a case on eastern European markets and a case on the Italian market, both dated 2004. The way of collecting data in these two cases is twofold: documentation on these cases will be used and people that contributed to the research will be interviewed. Boom’s motives for international expansion will be discussed in this first research step as well.

There are two reasons why the past is explicitly dealt with in this thesis. Firstly, it is a way of considering how analysing the attractiveness of markets evolved. By looking at the past, it is possible to gain an insight in the reliability of the analyses that were performed at that time. In other words, it is possible to analyse whether or not the markets are as attractive as they were perceived to be at the time. The second reason is that by describing the analyses and the resulting actions of the past, a better understanding of the choice for the current analyses can be obtained. The case of the eastern European markets that will be described in section 3.2.1 is representative for the analyses performed on new and ELDSEE-markets. This case was chosen as it assesses the attractiveness of eastern European markets (which are all either new or ELDSEE- markets) and was performed in 1999. As has been argued in section 1.3, the group of analyses on the attractiveness of new or ELDSEE-markets will be regarded to be identical for both types of market. Therefore, a case of either a new or an ELDSEE-market could be used to describe the analyses that Boom made in the past. This case is an even better example of the analyses in the past since Boom selected the most attractive eastern European markets (whether new or ELDSEE- market) in this case. Therefore, it provides a good insight in the criteria that Boom used to judge the attractiveness of a market. By choosing the case on the eastern European markets, the past is represented by the analyses that were performed in 1999. This chosen year in time is not representative of all years in the

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past since, as argued, the performed analyses evolve in time. However, this case is representative for analyses on new and ELDSEE- markets in that year and the analyses of that year can then be compared with analyses performed at present.

Thereby, discussing this case satisfies the objectives of looking at the past.

In the second step of the research process, alternative analyses will be formulated.

The following sub question will be answered in this research step: “which alternative analyses could assist Boom in order to make a balanced and reliable decision?”

Based on Financial Value Management insights and experience of other companies that analyse the attractiveness of markets, alternative analyses will be suggested.

The data collection will be based on studying literature and on interviewing an employee of FMO. FMO supports the private sector in developing countries, for example in central and Eastern Europe. Its goal is to: “contribute to the structural and sustainable economic growth in these countries and, together with the private sector, obtain healthy returns¹.” In order to achieve this goal, FMO provides financing for projects in these markets. Before financing is granted, the viability of the project in general and the attractiveness of the target country are assessed.

In the following third step of the research process, the checklist will be built up by systemizing Boom’s current analyses and selected alternative analyses in order to address the sub question: “how can Boom’s analyses be integrated with the future analyses in a systematic way?” The main goal of this checklist is to systemize the analyses that Boom used or uses to assess the attractiveness of new and ELDSEE- markets. The second goal is to include alternative analyses that address issues in order to be able to make balanced and reliable decisions. Some selected alternative analyses (also called future analyses) will be taken up in the checklist.

Step four of the research process will focus on applying Boom’s analyses to the Greek market. The sub question that will be answered in this research step is: “what are the results of analysing the attractiveness of the Greek market with Boom’s analyses?” In step five of the research process, the attractiveness of the Greek market will also be analysed with the alternative analyses that were selected in the second research step. During this research step, the following sub question will be answered: “what are the results of analysing the attractiveness of the Greek market with alternative analyses?” The goal of applying the checklist is to show how the checklist can be applied and to see if issues come up during that process.

During step six, the last step of the research process, the checklist will be evaluated.

The sub question that will be addressed in this research step is: “what are the reliability and the relevance of the checklist?” This evaluation will give guidance on how to use the checklist and will highlight issues that may come up during the application of the checklist in research steps four and five. The results of applying the checklist will give an indication of the attractiveness of a new or ELDSEE-market.

The level of attractiveness that is solely based on Boom’s analyses might be different from the level of attractiveness based on the alternative analyses. The relevance of the checklist will be safeguarded by constant interaction with the NBD-department of Boom and by considering Boom’s objectives in order to determine the goal of the analyses. The checklist will be valid for new southern and eastern markets as well as ELDSEE-markets.

1 www.fmo.nl

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Chapter 2

“General overview of analyses on new and ELDSEE- markets”

Step 1

Chapter 3

“Analyses by Boom in the past and at present”

Past:

Eastern European markets (1999)

Present:

Italy (2004) &

Eastern European markets (2004)

Step 1

Chapter 4

“Addressing issues with alternative analyses”

Present

Step 2

Chapter 5

“Formulating the checklist”

Present

Step 3

Chapter 6

“Applying the checklist”

Near Future:

Greek market

Step 4 Step 5

Chapter 7

“Evaluating the checklist”

Future Standard

Step 6

Developing checklist Applying and evaluating

checklist

1.4.2 Research process in chapters

In figure 4, the chapters are linked to the research steps. Also shown is the focus in time and the relevant cases; the chapters are ranged according to sequence in time.

A distinction is made between developing the checklist on one hand and applying and evaluating checklist on the other hand. The checklist that is the result of research steps one, two and three will be applied in steps four and five. The evaluation of the checklist will take place in research step 6.

In chapter 2, “General overview of analyses on new and ELDSEE-markets”, the first part of step one of the research process will be described². A general overview will be given at first in order to provide the reader with information on the framework of the analyses and an understanding of the underlying business. This chapter includes the current Boom strategy on European markets and will discuss general motives for international expansion.

Figure 1.4: Overview of chapters and related research steps.

The second part of step one of the research process is discussed in chapter 3:

“Analyses by Boom in the past and at present”. This chapter will first describe the analyses of the attractiveness of new and ELDSEE-markets that Boom performed in the past. For this purpose, the analyses on eastern European markets in 1999 will serve as an example. Subsequently, the analyses conducted in 2004 on the Italian

2 This research step is previously shown in figure 1.3.

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market and, again, the eastern European markets provide an overview of how Boom analyses new and ELDSEE-markets nowadays.

The fourth chapter, “Addressing issues with alternative analyses”, will focus on present issues and examines which analyses could assist Boom in order to make balanced and reliable decisions as a result of analysing the attractiveness of new and ELDSEE-markets. This chapter corresponds with the second step of the research process.

In chapter 5, the third step of the research process will be covered and involves formulating a checklist. After applying the checklist in chapter six by working through research steps four and five, the checklist will be evaluated in chapter seven. This evaluation will give guidance on how to use the checklist and will highlight issues that may come up during the application of the checklist.

1.4.2 Limiting conditions

This research is limited by conditions that are related to the process and conditions that are related to the product.

Process related

1. The field research has to be conducted in a period of six months.

Product related

2. The produced checklist will focus on Boom and its results are not intended to be relevant for other companies.

3. The produced checklist will only be valid for southern and eastern European markets. These market can be divided into new and ELDSEE-markets, as defined in appendix 1.

4. This research will focus on the Boom brand only.

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2. General overview of analyses on new and ELDSEE-markets 2.1 Introduction

This research will focus on two sorts of organic growth opportunities: market entry, into new southern and eastern European markets, and growth in existing markets, as a result of changing the business model in ELDSEE-markets. These organic growth opportunities are defined as forms of internal growth. Another example of internal growth is growth as the result of the development of new products. External growth is not being dealt with in this research. Examples of external growth are acquisitions, mergers, joint ventures and strategic alliances (Schlosser, 2002:277).

This general overview of the analyses on new and ELDSEE-markets provides information on the framework of the analyses and an understanding of the underlying business. In section 2.2, the decision-making process will be discussed and Boom’s business models are considered in section 2.3. In section 2.4, Boom’s motives for international expansion will be discussed. The goal of the analyses and a general description of the analyses from a wholesale and retail perspective are given in sections 2.5, 2.6 and 2.7 respectively. Section 2.8 elaborates on investment, risk and return and this chapter is concluded with a summary in section 2.9.

2.2 Decision-making process on new and ELDSEE-markets

The projects at Boom, during which organic growth opportunities are analysed, consist of two phases. For the moment it is assumed that decisions on future actions are made as a result of two decision-making processes and are made at the end of both phases. The first phase is taken care of by the New Business Development (NBD) department of Boom and will result in a strategic plan³. The second phase of the project is carried out by Boom employees that are responsible for the retail or wholesale planning for the region of the target market. This second phase possibly results in a business plan.

Table 2.1: Phases in projects on new and ELDSEE-markets

The decision-making process in phase one and the analyses that are prepared in this phase are described based on interviews with employees of the NBD-department.

This New Business Development department of Boom carries out projects related to business analysis, business planning, acquisitions and organic growth opportunities.

Senior management initiates those projects for various reasons. Possible occasions for the start of a project include: a proposal by an external party, a change in legislation, a change in focus or company strategy. One of the main tasks of the New Business Development department is to contribute to the projects on organic growth opportunities by preparing strategic plans on new markets and on ELDSEE-markets.

3 Boom does not call these plans strategic plans; it rather refers to business plans. In order to distinguish between high level plans with a timeframe of a couple of years and detailed plans with a timeframe of only one year, the terms strategic plan and business plan will be used respectively.

Projects on New and ELDSEE markets

Phase one Phase two

Performed by New business Development department Wholesale or Retail planning departments Kind of analyses Strategic analyses Strategic and financial analyses

Resulting product Strategic plan Business Plan

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A strategic plan is a high level plan, with the time frame of a couple of years, which represents a strategic intention. This plan is the result of strategic analyses. This strategic plan states the main actions that can be undertaken within a couple of years.

Strategic plans are prepared by the New Business Development department of Boom in the first phase of the project. Through desk research, the NBD-department is able to prepare strategic analyses on new and ELDSEE-markets. This first phase is meant to inform the Strategic Council (which consists of the top management) on the strategic issues of entering a new market or to change the business model in an ELDSEE-market. These strategic issues include the exploitation of perceived growth potential and the required allocation of resources.

If the strategic council expresses the intention to carry on the project (by approving the strategic plan), another decision-making process starts in the second phase during which the strategic plan will be worked out in much more detail. The decision- making process and the analyses that are prepared in this second phase will be described based on information from interviews with the relevant wholesale and retail planning departments. The NBD-department will not perform this second phase of the project although it might be asked to assist. Boom employees that are responsible for the retail or wholesale planning for the region of the target market will perform this research. The central retail department in Amsterdam performs the analyses on behalf of the retail business planning while employees that are based in the region perform the analyses for the wholesale planning. External parties, such as accountants that perform the financial due diligence, will also be involved in the second phase of the project. The detailed research that is done in the second phase will result in a business plan. This is a detailed plan, which presents the operational targets and is partly the result of strategic and financial analyses. This plan usually has the time frame of one year whereas the strategic plan will look at a longer period of time. Based on the findings of the second phase of the project, a final decision will be made. By the way, the decision-making process in the second phase of the project can be stopped regardless its stage. Since the attractiveness of new and ELDSEE-markets is analysed in both phases of the projects (even though on another level of detail) they are both object of this research. A good insight in the detailed analyses of the second phase will result in the performance of relevant analyses on a higher level in the first phase.

2.3 Boom Business models

The second phase of the projects on new and ELDSEE- markets is taken care of by departments of either the wholesale or the retail function, depending on the choice that is made in phase one. In this section, the Boom business models will be described in order to gain a better understanding of the choice between those functions.

A business model represents the way Boom conducts its business. A choice for a business model implies a choice for a certain level of control and investment as well as the associated risk. This control aspect is reflected in the ownership of the inventory, selection of Boom merchandise in a store, the layout and design of a store and the flows of merchandise and money. Boom might control the business completely or shift part of this control to a third party. When Boom considers entering a new market, or changing its business model, it has the possibility to choose between several business models. These business models can be grouped by distribution channel: wholesale, retail or home shopping. The wholesale and retail function can be distinguished from each other by identifying the owner of the stock of

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Boom merchandise. If Boom does not own the merchandise, the business model is a wholesale business whereas it is retail business if Boom owns the merchandise.

For the wholesale business, a third party is used to sell the merchandise to the consumer. Since this third party buys the merchandise of Boom before it is sold to the consumer, the third party incurs the risk of not selling this merchandise (the inventory risk). Furthermore, the third party selects the Boom merchandise that it will offer to the consumer. The wholesale function consists of three business models.

These wholesale business models are:

• Traditional wholesale

• Franchising

• Using a distributor or agent

The traditional wholesale business model is described above. The other two wholesale business models differ from this business model with respect to some aspects of conducting business. A franchise store is opened specifically for Boom and is operated by a franchise partner. This partner will have to invest in a new store.

Boom may assist the partner by contributing to the investment, selecting the Boom merchandise and taking back unsold merchandise. The level of assistance depends on partner specific agreements. To induce wholesale partners to open a franchise store in markets with a high cost structure, Boom could make an investment of up to 50% of the total investment in the store. The level of contribution depends on the market characteristics and their influence on the level of investment that is needed to open a new store. Another business model is the use of a distributor (or an agent); in effect this business model is similar to the traditional wholesale business model since Boom only sells the merchandise. This distributor may set up a sales network of franchise partners. In addition, it might open stores itself as well.

The retail function consists of two business models. These retail business models are:

• Own retail stores

• Using a concession partner

In case of opening its own retail stores, Boom will make all the required investments and has full control over its business. As a result, it will also assume all the risk. In case of a concession partner, the investment in a new store may be shared with a partner. The retail partner will operate the store and will receive a fee of a fixed percentage of sales in return. Boom still assumes the inventory risk however.

Therefore, Boom selects the merchandise that will be offered to the customer in that particular store. Concession partners that are planning to open a store might receive a contribution from Boom, consisting of a part of the investment in hardware, the real estate agent fee, some marketing expenditure or a general payment. As a result, the contractual agreements will reflect the amount of risk that Boom will take (in addition to the choice for a business model).

Factory outlets are considered as a special retail business model. In factory outlets, unsold Boom merchandise is offered at a discount. These factory outlets are usually based outside major cities and are characterised by their large size. Boom locates its factory outlets mainly in existing outlet centres, especially in the United Kingdom.

Boom sometimes tries to establish new locations by itself although this may be very difficult due to local legislation. One of the goals of establishing factory outlets is to reduce the amount of unsold merchandise in the traditional retail stores. Factory outlets are usually not considered when entering a new market or changing the business model in an ELDSEE-market. At present, Boom neither considers entering new markets by using the home shopping distribution channel, nor does it consider

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changing its business model in an ELDSEE-market into home shopping. At present, the home shopping channel is mainly used in the German market. This thesis will mainly concentrate on the wholesale and retail functions.

The choice for a specific business model depends on the market characteristics and the risk that Boom is willing to take⁴. Boom will consider the market characteristics, such as the availability of partners and the commonly used distribution channel, in order to identify a suitable business model. At the same time, Boom will determine the risk that it is willing to take. The risk for Boom will increase as the size of the investment increases. The size of its investment in a new market or an ELDSEE- market is to a great extent the result of the mode of entry⁵. The investment related to starting up a wholesale business is small compared to an investment in retail business, since opening a (own) retail store requires an investment in real estate.

Furthermore, Boom runs the inventory risk if a retail business model is used. As a result it is riskier to enter a new market with a retail business model.

2.4 Boom’s motives for international expansion

Why does Boom want to expand beyond its home market, the Netherlands? Boom will enter new markets due to the perceived long-term growth potential and in order to make an additional profit. Boom’s mission statement explicitly addresses its desired expansion in new and ELDSEE-markets by stating that Boom aims: “To become the leading fashion and accessories company in Europe”. One of the conditions of this expansion is that new markets should be developed without adding complexity to the European business (Boom internal document, Boom Multi market vision). New markets should contribute in such a manner that the overall objectives for Europe are not jeopardised. Boom’s objectives for the European market can serve as targets for entering new markets and changing the business model in ELDSEE-markets; these objectives are ⁶:

• to sustain sales growth of at least 15% per year.

• to focus on a 2% market share of the clothing market.

• to achieve an EBIT-margin of at least 11% per year until 2007.

To see the expansion of Boom in new (and ELDSEE-) markets in perspective, it is now assumed that Boom analyses the attractiveness of these markets in order to establish its own business using Foreign Direct Investment. Hymer, one the founders of theory on Foreign Direct Investment, states that FDI should be related to a specific advantage of the investing firm. Dunning elaborated on FDI theory and introduced his eclectic theory. This theory integrates business-, trade and location theories (Ven, 1996:77). According to this theory, FDI will be made if three conditions are satisfied (Madhok 2001: 243):

1. The firm has to possess a competitive advantage

2. There is some benefit to undertake the relevant set of activities internally within the firm, instead of licensing its products or exports

3. There is a need to combine this advantage with some location specific advantages of host countries

4 In practice, Boom will consider setting up a wholesale business at first when entering a new market. This is due to the fact that the profit margin of the wholesale business is higher compared to retail and the cost of setting up a wholesale business is considerably lower.

5 Obviously, the change in business model also reflects the amount of risk that Boom is willing to take. The main difference in this case is that the change of business model will also take into account the potential cost related to terminating the existing business model.

6 Boom strategy formulated in November 2003

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As a start, we have a look at the first condition. This competitive advantage could exist of a specific type of knowledge or skills. One of the strengths of Boom is being able to target the desired customers for their product line and to offer their products at a (perceived) fair price. Boom perceives its market positioning and the effect of its brand identity expressed in its global store concept, to be its main competitive advantage in the international environment.

The second condition is satisfied if Boom perceives to benefit from exploiting the business itself instead of using third parties, by licensing its business for example.

This could in fact form a main motive to buy out a third party (a change in business model) in an ELDSEE-market, since controlling the business will generate higher profits⁷. The last condition concerns the need to use its competitive advantage outside its home market. It makes sense that Boom wishes to expand internationally in order to achieve its European growth objective.

Dunnings theory is criticised for not taking into account joint ventures and partnerships. These forms of international entrepreneurship are indeed very relevant for Boom. Madhok and Phene (2001) elaborate on Dunnings theory by focusing on a firm level perspective of comparisons of the multinational firm to its global competitors (Madhok, 2001:243). These authors strive to extend the eclectic paradigm to contain both an economic as well as a strategic management perspective. The eclectic paradigm answers the question on how a multinational firm arises and explains FDI by looking at efficiency. Nowadays however, the global business environment has changed and many companies are present in many countries. The extended framework as presented by Madhok and Phene justifies the continued existence of multinational firms. They state that this existence is based on the management of knowledge creation and transfer.

Now that Boom’s motives for its international expansion are examined and placed in perspective, this chapter will continue by elaborating on the goal of the analyses.

2.5 Goal of analyses

In section 2.3, a distinction was made between the wholesale function and the retail function. Both functions analyse the attractiveness of markets although some departments will take a wholesale perspective and other will analyse the attractiveness from a retail perspective. Since a new market is often firstly entered into with wholesale business, the (relevant) wholesale department is the first function to analyse the attractiveness of a market. If Boom considers entering an existing wholesale market with retail business as well (or vice versa), the attractiveness of changing the business model will be analysed⁸. This change is referred to in chapter one in general and in figure 1 in particular.

7 Even though Boom will benefit from exploiting an established business itself, other business models will also be used in new and ELDSEE-markets. As discussed in section 2.3, Boom will use retail and wholesale partners very often in new and ELDSEE- markets.

8 This is only one possible way of changing the business model. Changing the business model is defined as: Either changing the way in which the wholesale (or retail) business is conducted, or adding retail business to a market in which wholesale business is already established (or vice versa). The objective of this change is to accelerate growth in a profitable way.

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Figure 2.2: Boom brand profit and loss account in percentages

We now arrive at a crucial issue: “what goal does Boom have when it analyses the attractiveness of new or ELDSEE-markets?” This goal is linked to the Boom objectives that represent the overall goals. Boom determines the attractiveness of a market by looking at the long-term sales growth potential and the potential profitability of the Boom business in that specific market. Therefore, the goal of analysing new and ELDSEE-markets will be to judge the potential for profitable Boom business in the future. The profitability is discussed in this section while the sales growth potential will be discussed in sections 2.6 and 2.7.

At Boom, it is common to determine the overall profitability by looking at the earnings before interest and tax (EBIT). The rationale behind this practice is that the effects of interest and tax on profitability are not influenced by the core activities of Boom. The wholesale and retail functions will report to Sales Office Contribution only, since the divisional and central costs cannot be split into wholesale and retail parts. Marketing expenditure is one example of a divisional cost that cannot be split per function.

Divisions, such as Boom Men and Boom Women, do control divisional costs and that is why they will report until Direct Operating Profit (DOP). The Direct Operating Profit can be calculated by subtracting the divisional costs from the Sales Office Contribution. Profitability expressed by the EBIT- margin will be determined on the Boom brand level.

The wholesale function prepares profit and loss accounts that report until the Sales Office Contribution (SOC) line. Sales Office Contribution is calculated by subtracting the sales office cost from the gross profit. In 2003, the gross margin for the Boom wholesale business was 46% of net sales while the sales office contribution was 32%

of net sales. Boom will aim for a wholesale retail Sales Office Contribution of about 35% of net sales.

The retail function reports until SOC, in line with the wholesale function. In 2003, the gross margin for the Boom retail business was 67% of net sales while the Sales Office Contribution was 15% of net sales. Compared to the Boom wholesale function these percentages are much higher and lower respectively. This makes sense since retail prices (the consumer price) are higher than wholesale prices (the price that is being paid by a wholesale customer). Furthermore, sales office costs for the retail business are much higher compared to the wholesale business due to higher costs for personnel and rent. Boom aims for a Sales Office Contribution of 15% of net sales.

Total Wholesale Retail

100% 100% 100%

50% 46% 67%

-24% -14% -52%

26% 32% 15%

-5%

20%

-11%

10%

EBIT margin

Sales Office Contribution

Divisional Costs DOP

Central Costs Net Sales Gross Profit Sales Office Costs

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The profitability goals with respect to assessing the attractiveness of new and ELDSEE-markets are now clear: the wholesale function aims for a potential SOC of around 35% of net sales while the potential SOC for the retail function should be around 15% of net sales. This section will continue by providing a general understanding of the analyses that were prepared by the wholesale function (section 2.6) and the retail function (section 2.7). This distinction is made since the nature of the two functions is significantly different. As a result, different factors will be taken into account when analysing the growth potential from a wholesales perspective or from a retail perspective. Based on the analyses of the attractiveness of the market in the first phase of the project either the wholesale or the retail function will carry out the second phase of the project.

2.6 Wholesale analyses

The wholesale function can be split into regions. Boom divided Europe into the regions North, Central and South. The focus of this thesis will be on the South region since this region covers all new and ELDSEE-markets such as the eastern European, Greek and Italian markets. Boom Eastern Europe (Boom EEU) is part of the South region and its analyses are representative for the analyses that are prepared on new and ELDSEE-markets. Boom EEU prepared the cases on the eastern European and Italian markets (even though this latter market is not covered by Boom EEU officially).

In order to be able to describe the analyses of the wholesale function that were made in the past and are made at present, Mr East and Mr North of Boom EEU were interviewed. Mr North was responsible for the early growth of Boom into Eastern Europe and his core activities are still related to the expansion of Boom into Eastern Europe. He spends a substantial amount of his time in these markets. During these visits he gains a better understanding of the markets and he looks for potential wholesale partners at the same time. To illustrate this: he will find out who the owners of established stores are by asking around or visiting the embassy. Mr East used to work at the central finance department of Boom until 2001, when he was transferred to Boom Eastern Europe (Boom EEU) in Budapest. His main tasks are related to planning and control, and business support (mainly financially).

During the interviews with Mr East and Mr North, we discussed the analyses from a wholesale perspective that are made by Boom Eastern Europe in the second phase of the projects on organic growth opportunities. Boom Eastern Europe takes care of the second phase of the projects on organic growth opportunities in eastern European markets if the target market is covered by Boom EEU. Boom Eastern Europe focuses on the wholesale business and gathers information in these markets when analysing the attractiveness of new and ELDSEE-markets. Every year, Boom EEU prepares a forecast profit and loss account until SOC as part of its yearly business plan. This forecast profit and loss account consolidates all wholesale sales to third parties in eastern European markets.

2.6.1 Level of analysis

According to Mr East, analyses on country level should be the highest level (the less detailed) on which the attractiveness of markets is analysed. Even though some generalisations can be made for a group of countries, it is not helpful to assume that these generalisations apply to every market (on country level) that is included in the group. It is not useful to analyse a group of countries merely because they have some common denominators. The common denominators of a group of countries just provide some background information. An example from the cases is the communist