[Report] How effective is the international strategy adopted by Sports Direct International plc in driving its growth? (MG5565)January 13, 2022 2022-01-13 18:13
[Report] How effective is the international strategy adopted by Sports Direct International plc in driving its growth? (MG5565)
[Report] How effective is the international strategy adopted by Sports Direct International plc in driving its growth? (MG5565)
As a multinational corporation, Sports Direct International plc is bound to adopt an international strategy that will enable it venture into new physical markets and market niches. Additionally, in the current wake of globalisation, firms are diversifying their risks by expanding the markets and product portfolios. To this end, this essay looks at the international strategy adopted by Sports Direct International plc and the effectiveness of this strategy. The firm, attributing to the nature of the products it deals with, that is, sports merchandise, applies the global strategy in conducting its operations internationally. The strategy befits these operations and an analysis into the firm’s international operations using theories on international strategies shows the effectiveness of the firm’s global strategy in driving its growth. The theories applied by the essay include Dunning’s eclectic paradigm, the Internationalization theory and the Transaction costs theory. Majorly, the firm has made use of indirect knowledge acquisition, given it conducts so many acquisition of other firms, to facilitate its expansion strategy. The essay recommends that the firm should apply more geographical diversification and further embrace technology (online platforms) in order to stand at a better growth platform.
Sports Direct international plc is a multinational corporation dealing with retail of sports and leisure equipment, clothing, footwear and accessories. It was established in 1982 by Mike Ashley and has since grown through mergers, acquisitions and partnerships to be among the market leaders in the retail industry (Sports Direct plc, 2014a). Listed among the FTSE 100 companies, the firm is the leading UK’s sports retailer by revenue and profits, it also boasts of direct operations in over 19 countries and indirect operation in over 100 countries (Sports Direct plc, 2014b). In the contemporary business world, strategic decisions to enter new markets or to internationalise are becoming critical especially for multinational enterprises. As a result the strategies that a firm employs in reaching for the international market are paramount for its success against other industry players (Arregle et al., 2013). To this end, this essay looks at the international strategy applied by Sports Direct, that is, global strategy, and its importance. Additionally, it elaborates the theories surrounding the global international strategies and uses them to analyse the firm and give recommendations.
2. Effectiveness of the global strategy for Sports Direct
Sports Direct deals with retail of sport brands such as Dunlop, Lilywhite, Nike, Puma, Reebok, Adidas, Everlast among others manufactured in-house and by independent companies. Sports merchandise is used in the same activities over the world and thus the manufacturers tend to standardize it as though it were intended for one big market. Also, Sports Direct advocates for consistency of quality regardless of the markets for which the products are targeted. Due to the nature of Sports Direct’s operations, its international strategy falls under the realm of global strategy. According to Ireland, Hitt and Hoskisson (2008), global strategy is a plan under which a firm sells standardized products across different markets sacrificing responsiveness to local requirements in favour of efficiency. The global strategy places emphasis on centralization of operations and more importantly on quality and reliability of the products. Additionally, the global strategy goes along with the current Sport Direct’s strategic outlook because of the firm’s intention of increasing its market share in the UK and internationally in general. As part of its expansion strategy, it intends to provide more customers with a greater range of more high value sports brands. Their brands division is currently involved with the development of licensed products, monitoring licensees and their manufacturing activities to ensure product quality and presentation and the consistency of the two (Sports direct plc, 2014c).
Moreover, in the current wake of globalisation, research and development has become an invaluable tool for multinational corporations to increase their competitiveness. The main focus of research and development is to create products unique to customers that create an edge over what the rivals offer (Sambharya and Lee, 2014). The global strategy emphasis on efficiency and efficiency create competitiveness. In this case, standardisation of products sold by Sports Direct has given it an edge given that most of the products are unique and hard for international and local competitors to imitate. The firm’s suppliers such as Nike apply the latest technologies and patent them – such as Nike’s Flyknit technology – and this makes it easy for Sports Direct to effectively compete against rivals (Nike Inc., 2014). Additionally, the brands that the firm deals with are renowned quality brands and perceived as superior brands worldwide. Such brands, that is, Nike, Reebok, Puma, Adidas and Evelast, are a way for Sports Direct to boast of differentiation in its range of products. Differentiation, consequently offers a firm with leverage to charge higher prices than rivals, eliminate the threat of substitute products and create and maintain customer loyalty (Makadok and Ross, 2012). Eliminating substitutes and rivals is essential for the firm’s global competitiveness.
3. Theories for international strategy analysis
The global strategy, being an international strategy, can be explained by a keen analysis of the following theories on international strategy.
3.1. The eclectic paradigm
Dunning’s eclectic paradigm is an approach that focuses on production carried out through foreign direct investment. He explains the motives, reasons, location and ways by which multinationals’ operations are conducted. This paradigm combines various theoretical approaches that it brings out in as the OLI (ownership, location and internalisation) arrangement. Ownership advantages are those that a firm can extrapolate to its operations internationally. Such advantages provide an MNC (Multinational Corporation) with a competitive edge given it holds access to a particular resource, capability or asset that creates value. Such advantages include improved technology, innovations, skill capacity, and efficient production methods amongst others (Silva Lopes, 2010). Location advantages, on the other hand, accrue to an MNC when its physical location gives it access to cheaper production methods/factors, accessibility, favourable government policies, availability of immediate markets et cetera. Location advantages affect how ownership advantages are exploited. Internalization advantages are realised as a result of own production as opposed to partnerships or licensing (Ferreira et al., 2013).
3.2. Transaction cost theory
The transaction costs theory was developed by Ronald Coase to explain transactions within an economy. To achieve this, the theory elaborates on the costs associated with providing a service or a good through the market and the costs of having it provided from within the firm (Iacobuta, 2009). The transaction cost theory notes that transactions can be organised through either one of the three structural alternatives, that is, markets, hybrids (such as joint ventures and franchises) and hierarchies (such as firms). Consequently, this theory also explains the existence of companies and why the companies expand to other markets. The rationale in this theory is that companies try to minimize the costs of exchanging resources within the environment and minimizing routine internal costs. Companies, therefore, thrive in situations where the economy’s costs of exchanging resources are higher than the internal routine costs for coordinating activities. In such situations the firms will find it viable to expand to different markets especially where the costs of exchanging resources within the environment are high, for example, when a firm can produce at a cheaper cost than through outsourcing. If the converse happens, firms tend to downsize or avoid creating subsidiary manufacturing plants (vertical integration) in the affected environments.
The role of managers, in the perspective of the transaction costs theory, is to make decisions that will end up minimizing transaction costs, which include expenses associated with identifying qualified exchange partners, getting contracts and signing them, monitoring and enhancing performance and adapting to the dynamic nature of the market. A manager has to indentify the uniqueness of each transaction, for example, asset specificity and the prevailing market conditions then decide the best structural option. When a manager succeeds in matching each transaction’s specific attributes to the structural alternatives available, the performance of the firm is consequently maximised (Crook et al., 2013).
3.3. Internationalization theory
The internationalization theory elaborates on the logic of companies operating in one country – basing their production on one company location – as opposed to setting up manufacturing sites in different locations. The first major argument that that theory presents on internationalization of multinational corporations (MNCs) puts weight on the issue of technology transfer. According to research, combining technology from abroad with the domestic technology is the most effective method of technology transfer (Belderbos, Van Roy and Duvivier, 2013). However, when technology is tied up to knowledge transfer, it becomes difficult to transfer it to a potential buyer because the buyer may not accurately judge the actual value of knowledge. This is besides the fact that knowledge, being intangible, cannot be packaged and sold in quantified units. In cases where the knowledge is bound by intellectual property rights, it is also difficult to obtain full rights to it. It is also more profitable to just set up operations in a foreign market As a result, it is imperative for an MNC to establish its own operations in a new foreign market than selling its technology to a firm operating in such a market (Lichtenthaler and Lichtenthaler, 2010).
A different view of this theory is based on market knowledge. In traditional approaches to internationalization, knowledge acquisition and implementation did not play a very central role to internationalization but contemporary approaches attribute their success to the application of knowledge in explaining the process of internationalization. One common idea in both the traditional and contemporary approaches is that they perceive knowledge as effective in achieving stable international operations (Kaarna, 2010). Knowledge can be acquired directly, that is, through experience in the current operations of the firm in a foreign market, or it can be acquired indirectly by learning from other players in the particular industry. Indirect knowledge acquisition may involve getting into strategic alliances, licensing subsidiaries or acquiring firms that are already well versed with the foreign market (grafting) (Babinska, 2013).
4. A strategy analysis for Sports Direct
4.1. Ownership, Location and Internalization (The Eclectic paradigm)
Sports Direct is a well-known brand that has been around for more than two decades. The owner Michael Ashley drove the firm from nothing into the listing of the FTSE 100 companies (Viner, 2013). This means that Sports Direct is among the most valuable British brands and as a result, the firm can boast of possessing a strong brand image that can be used to create a competitive edge. Additionally, the firm has integrated backwards – vertical integration – and owns most of the brands that it sells such as Dunlop Slazenger, Karrimor, Kangol, Lonsdale, Donnay, Golddigga, JJB Sports among others. Being the retailer of brands that it manufactures, the firm has consistently managed to drive competitors out of business. Consequently, the firm has managed to capture new markets because it can offer price discounts attributed to being a manufacturer and a retailer. As Jones and Wren (2012) note, having access to a particular resource – in this a large capital base – to which other firms cannot access can be a reason for a firm to grow its market share.
Other than ownership, the location of Sport Direct’s production facilities and initial stores is in the UK. The UK is ranked among the CRT-1 countries meaning it has the lowest risks affecting business activities which include political risks, financial risks and economic risks (AMB, 2014). The UK economy has shown considerable stability in growth and performance over the years and thus it acts an economic hub of the European Union countries (Singh, 2014). The firm continues to expand its operations in the European Union region which is also marked as CRT-1 region and consisting of 28 countries that account for 23% of the world’s gross domestic product (GDP) (AMB, 2014). On matters of internalization, the firm has kept most of its inbound operations in-house except for the supplies it gets from brands that it doesn’t produce but still has numerous retail stores franchised to it.
4.2. Transaction costs and internalization
As AMB (2014), notes that European Union and the Western Europe region in general provide good conditions that would make a business flourish. Iacobuta (2009), in explaining the transaction theory economics, points out that when the structure of the market can provide the necessary conditions for facilitating exchange of resources (interdependency) between economic players, then firms thrive. The European Union is the major market for Sports Direct. The firm makes direct sales in this region through the groups store sale. To facilitate internal operations, the store relies on acquisitions, both horizontal and vertical, which have enabled it to internalise production partly. A brand such as Dunlop which is well known for tennis rackets was once an independent company that produced sports gear and acted as a supplier to Dunlop. However, the Sports Direct acquired the firm and currently conducts the production and sale (Sports Direct plc, 2014c). Additionally, the firm pushes as much as it can of its brands through its official stores and its website, sportsdirect.com. The website, for example, has makes up over 17% of the firm’s sales. However besides the need to internalize operations, Sports Direct has a proliferation of external activities that deal support internalized operations. The firm has maximised on sales by acting as a supplier to other retailers. The firm works with a network of licensees – businesses which it licenses to distribute its products – that allow it to venture into markets that it would not otherwise reach. The licensees are monitored to ensure consistency of the brands worldwide (Sports Direct plc, 2014c).
Another peculiar feature of Sports Direct is its approach to new markets. The firm is currently aiming at increasing its market share in the UK, besides being the largest sports retailer there, and the western region as a whole. According to Lichtenthaler and Lichtenthaler (2010), it is more profitable for a multinational cooperation to set up its own operation in a foreign market than selling its technology to other companies. The same strategy has applied for Sports Direct when venturing into most of the new markets in the European Union nations. This is evidenced by the opening of new group stores; the recent ones being stores opened in Portugal (Sports Direct plc, 2014a). When acting as a retailer, the firm is able to net in ore profits than when it is dealing with market intermediaries. However, Sports Direct does not stop at investing in its own operations. The firm expands through acquisitions. In fact this is the major priority for the firm given has acquired several manufacturers along the way together with their technology and operations. Sports Direct plc benefits more because it does not need to invest in the capital and equipment as would happen in the case of setting up new manufacturing plants. According to Gatgens (2011), this is the best entry strategy for firms using the global strategy.
According to Babinska (2013), these acquisitions do happen by chance; rather, they are part of the strategies that multinational corporations use to enter into new market segments region-wise and niche-wise. One of the priorities of Sports Direct is to increase the product portfolio for its customers. It has achieved this over time by performing horizontal integration. For example in 2008, it acquired Everlast Worldwide Inc – an American brand dealing with the design, manufacturing and licensing of boxing and martial arts sporting equipment. In the same year, it took over Field and Trek. Through the Everlast acquisition the firm was able to enter the American market and broaden its product portfolio using the renowned boxing giant. Whilst the firm runs some of the acquisitions such as Everlast in on their original brand names, some of them such as the UK based retailer, Republic, are bought and assimilated to the current brands.
According to Fletcher, Harris and Ritchie Jr. (2014) the concept of international knowledge acquisition is essential to firms; especially multinational corporations. International knowledge about the markets and economies is the basis of strategic success it is gotten through direct and indirect means. Direct sources include the experience of the firm in operating in the industry while indirect knowledge is gotten through consultations, governments et cetera. Sports Direct plc has managed to actualize this concept through mergers and acquisitions. According to Ulijn, Meijer and Duysters (2010) acquisitions facilitate indirect knowledge, skill and technology acquisitions and as evidenced above, the firm has made numerous acquisitions since its inceptions. The firms it has taken over are located in regions that it intends to expand to such as America and the European Union. Besides regions, it has entered into new niches such as boxing by acquiring the Lonsdale brand and tennis through renowned supplier Donnay.
The global strategy befits the nature of operations of Sports Direct International plc. The subsidiaries that it own and the firms it retails merchandise for produce standardized products and as evidenced by the global strategy, it would be absurd if the firm tried tailoring the products to a specific market given the uniformity of sports requirements across the world. The major focus of the firm, according to the analysis of the theories on international strategy, is to continuously acquire knowledge on new markets through different means such as the acquisition technique it has observed. Additionally the firm has ownership and location advantages (from the eclectic paradigm) that it can use to propel internationalization. A continued application of the global strategy will create a better platform for the firm to remain a global leader.
Sports direct international plc has excelled as a multinational corporation as evidenced by direct operations in over 19 countries. A major strength it has is the strong sports product portfolio that it holds and the application of the global strategy. The company owns brands such as Sports Direct, Slazenger and Lonsdale which offer a wide range of standardised products in the sports segment. Other company brands such as Lilywhite’s and Antigua focus on men’s, women’s and children’s lifestyle apparel and sportswear. Being a specialist in standardised sports brands the firm has managed to stay relevant in the UK and other nations that it operates. However, this has not been the only edge that has put sports direct on the lead. The firm has achieved internationalization through acquisitions (Marketline, 2014). Being keen on both vertical and horizontal integrations and partnerships, the firm has managed to effectively eliminate competition and thrive in new markets and niches through indirect knowledge acquisition. Even though this is beneficial to the firm, it has left a weakness gap because the firm’s major stores are located in the United Kingdom and consequently the firm largely depends on the UK market. Country specific trends such as changes in regulatory systems, financial crises et cetera could affect its operations substantially. To avoid this, it is recommendable that the firm diversifies its operations geographically into regions away from the European Union such as Asia, Australia and America. Again the UK economy is faced by rising labour costs and tighter regulations that squeeze on the profits. Recently the firm was on the spotlight for hiring workers on “zero-hours” contracts (Lunn, 2014). Such trends can be avoided by diversifying operations geographically. Another aspect in the international strategy is the relationship between globalization and technology. In the UK for example, the usage of online platforms has shown a significant growth and also the firm has reported mobile users accounting for almost 25% of visits to Sports Direct website (Sports Direct plc, 2014b; Euromonitor International, 2013). It is thus imperative that the firm continues to invest in online platform in order to reach more customers domestically and globally as part of the internationalization theory implementation.
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