FdA Business and ManagementBournemouth University Partner

CollegesUniversity Centre Yeovil

International Business:Marks and Spencer’s Expansion

into China

Beverley Cox

Unit

Leader: Dave Howell

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Page Contents

3. Background of Marks and Spencer

4. Main Factors Influencing Marks and Spencer to invest so heavily

in China

6. Method of Foreign Direct Investment Used by Marks and Spencer

in China

i) Wholly Owned

ii) Joint Venture

iii)Mergers and Acquisitions

9. Marks and Spencer in Europe

11. Cultural Differences to be Aware of

13. Bibliography

16. Figure Table

17. Appendices

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Background of Marks and Spencer

On 2nd October 2008 Marks and Spencer (“M&S”) opened their first branch

in West Nanjing Road, Shanghai’s premier shopping street, in what was

their first step in a strategy to making a major engagement in China, that

strategy seeking to open up to 40 stores in China. This Report outlines

the expansion options to M&S both in China and Europe with suggestions

and reasoning for a future strategy to aid their expansion in both areas.

M&S is among the top 6 UK retailers. It operates over 300 stores in the UK

and is present abroad, in 29 countries. Its international operations consist

mainly of franchises but it also owns a number of stores in Hong Kong.

M&S has a turnover of over 7.3 billion (Marks&spencer.co.uk, 2012).

M&S operates in the following segments:

Clothing – M&S offers womenswear; lingerie; menswear;

childrenswear and footwear.

Food - M&S has a range of fresh foods; ready meals, special-

occasion foods and wine.

Home – M&S sell designer furniture and have launched their

accessories/furniture store, ‘Lifestore’, successfully.

Financial: they launched the ‘&more’ card which is both a credit

card and a loyalty card.

Online services: through M&S, you can also order and send flowers

via the internet.

(Marksandspencer.co.uk, 2012)

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1. Main Factors Influencing Marks and Spencer to invest so heavily in

China

China has evolved very rapidly. It is developed in many areas. In

order to get an idea of what factors are influencing M&S to invest so

heavily in China a detailed SWOT analysis has been carried out

(app.1). The SWOT is an important tool which helps organisations

analyse the environment in which they operate to aid effective

strategic decision making (CIPD, 2010). The SWOT was used to

identify the Chinese market currently, what macro environment

factors could affect M&S and what their position within China would

be.

From the analysis, it can be seen that the strengths and

opportunities far outweigh the weaknesses and threats. However,

what is clear is that China is an emerging market that has excellent

growth and an immense population making it a high risk which, if

successful will reap huge rewards for M&S as the greater the risk,

the greater the return (Goetzmann, 1996). As noted in the SWOT,

the Chinese government is working hard to develop infrastructure

throughout their vast and divided country in order to connect the

Chinese population. Once those roads are in place, the Chinese will

overtake the US in the number of cars on the streets, leading to a

boom in industry (Trippon, 2009).

As a state that exports goods on a large scale that were produced

on its own land to foreign countries, China is creating work for their

population whilst becoming ever more industrialised which can only

mean that the state of the economy will be good unlike other

countries that are in recession. An idea of how developed China is

becoming or has become can be given by looking at its GDP. The

current GDP of China is estimated at $6.988 trillion, compare that to

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the USA GDP of $15.065 trillion and the UK gdp of $2.233 trillion and

it can be seen just how developed China is, making its economy a

very close competitor of the USA. This rapid growth potential could

be the driving force for M&S’ investment (Story, 2011).

Since joining the World Trade Organization (WTO) in 2001, China

has become a fearsome competitor on the field of global trade,

increasing exports by almost 600% between 2000 and 2008 and

growing at annual rates averaging 10%. China has achieved these

gains by leveraging its productive capacity, low labour and capital

costs, and strong state support for export-driven growth. In recent

years, China has also employed increasingly complex trade policies

and strategies, both fair and unfair, to advance its economic

interests. Such schemes involve ensuring Chinese manufactured

goods consisted of China sourced components only thereby

eliminating the competition. That said, M&S already use suppliers in

China to produce their products which could see them as a desirable

addition in China in that they are bias to Chinese produced goods.

The seemingly corrupt economy would in turn “look after those that

abide by the rules and culture of China” (Gerwin et al, 2012). Not

only is China a member of G20, it is also a member of the APEC

trade bloc (Asia-Pacific Economic Co-operation) who between the 21

members make up 45% of the worlds trade (BBc.co.uk, 2012).

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2. Method of Foreign Direct Investment Used by Marks and Spencer in

China

Foreign direct investment (FDI) refers to the flow of investment in a

foreign economy as with M&S in China. FDI is the amount of capital

whether long term or short term used to purchase assets in a foreign

country. It is through FDI that a company becomes multinational.

However a large amount of already multinational companies are the

companies that generate a large amount of the FDI flows throughout the

world (Buckley, 2009). China is the second largest recipient of FDI

globally. FDI into China fell by over one-third in 2009 due the Global

Financial Crisis but rebounded in 2010 as can be seen from figure 1:-

Fig.1 (Greyhill Advisors, 2010)

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Historically, FDI which sees companies enter into new economies has

been directed at developing nations as companies from advanced

economies invest in other markets, with the US capturing most of the FDI

inflows. While developed countries still account for the largest share of FDI

inflows, data shows that the stock and flow of FDI has increased and is

moving towards developing nations, especially in the emerging economies

around the world such as China (Economywatch.com, 2010)

There are several types of entry into a country for an organisation

including:-

Wholly owned company or subsidiary

Joint Venture

Merger or Acquisition

i) Wholly Owned

M&S chose to follow the wholly owned company route in order to

enter China (Marks&spencer.co.uk, 2012). This form of entry is

often seen with large sophisticated organisations whose desire is to

make more money abroad. Wholly owned ownership provides the

company with control and the ability to more closely coordinate

operations within the company worldwide (McFarlin et al, 2010).

M&S could have chosen this route for that reason of making more

money but perhaps their decision was closely linked to the cheap

labour and potential market that China has to offer which are two

key components of an attractive country for investment (Piana,

2005).

In order to understand why M&S chose to enter China as a wholly owned

company, the other options need to be summarised:-

ii) Joint Venture

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Joint ventures are bilateral and involve two companies who are within

the same industry but not necessarily from the same country to

partner with resulting strategic advantages for those companies

involved. Typical reasons for joint venture include:-

A need to access technology that could affect competition

Access to distribution channels that may not be available

elsewhere

One company could not raise the capital on its own

The main advantage of joint venture is the cost. Using a joint venture

to enter a country is considerably cheaper than entering as a wholly

owned company obviously because capital is shared accordingly.

The main disadvantage is that if the two companies are from different

companies and therefore cultures, strategic decision making could

become impossible. Research shows that joint ventures have a fairly

high failure rate. Could this be why? (Graham et al, 2005). M&S

however do seem to have an eye on the cultural needs of China.

According to their Annual Report, their local warehouse within China

produces clothes more suitable to the “petite” Chinese

(Marksandspencer.com, 2012).

iii) Merger & Acquisition

Mergers and acquisitions are similar to joint ventures except they

normally occur between two non competitive companies (vertical)

but can occur between two competitive companies (horizontal). An

example of such an acquisition is the purchase of UK based CIP

Technologies (a high tech company) by Huawei (a

telecommunications company based in China). The Chinese

company was looking to holster UK research and development whilst

the UK company was looking to grow. Therefore, Huawei entered the

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UK by acquisition of CIP Technologies at the benefit to both

company’s strategic goals and thereby creating a FDI outflow for

China (Ruthven, 2012). M&S could have chosen to enter by merger

or acquisition if the outcome would have satisfied its strategic goals.

However, the main disadvantages are as with joint ventures - cultural

differences and control of decision making (Rugman et al, 2006).

3. Marks and Spencer in Europe

M&S have their International Business Model readily available and state

that it is “made up of partly and wholly-owned subsidiaries and franchises.

This mix allows us to tailor ownership models that are appropriate for

specific markets, enabling us to build strong partnerships and expand the

M&S brand into new territories” (Marksandspencer.com, 2012).

In October 2011 M&S re-opened their now flagship store in Paris, a

member of the European Union trade bloc. The store originally closed

along with several others due to sliding profits and consumer confidence.

Add these factors to the ever increasing strength of sterling against

European currencies at that time and disaster was inevitable. However

the introduction of the Euro has led to the creation of the European

Financial Stability Facility which is a reform aimed at stabilising the

currency within the European Union. With that in mind and the obvious

willingness of M&S to holster cultural views and needs, it seems that it

was the right time for M&S to re-enter Paris. Again they entered by way

of wholly owned company. The author believes this to be a pretty safe

bet for M&S due to the reforms applicable to currency stabilisation and

the fact that entering a country as a wholly owned company, as

mentioned before, provides greater control (BBC.co.uk, 2012).

It seems that the most effective and profitable way to enter a country is

by way of wholly owned. That way, M&S can utilise a country’s resources

which will be cost effective to the company creating savings and thus

increasing profits. Match that with the ability to adhere and adapt to the

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distinct cultures and leaderships within those economies this can only

mean a recipe for success. Does that make investment in Paris a safe

bet? Looking at the Annual Report of M&S, confidence is obviously not as

strong as their flagship store investment suggests as their anticipated

stores within France are all intended to be by way of Franchise

(Marksandspencer.com, 2012). It seems that M&S are using the wholly

owned process to enter a country and then use simply as an anchor to

utilise available benefits or perhaps because of the well documented

“partnership” between the two countries whereby the leaders of both

have agreed that they will form an alliance against protectionism

(Guardian.co.uk, 2012) meaning markets would open up and provide

opportunities that weren’t already available and M&S have seen this as an

opportunity that could benefit their strategy.

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4. Cultural Differences to be Aware of

Culture:-

“the ideas, customs, and social behaviour of a particular people or

society”

(Oxforddictionaries.com, 2012)

Research of M&S’ involvement with China and Paris has highlighted the

definitive need to comprehend the cultural needs of those economies in

order to “belong”. That said, China and France are not at the same level

developmentally but are very similar culturally. Both China and France

have very masculine cultures whereby they are extremely hierarchical

and inequalities are accepted. M&S would need to bear that in mind. The

UK culture is that inequalities should be minimised and people should be

treated equally regardless of knowledge, status, colour, religion, etc. This

is not the case with China and France (Hofstede, 2001).

A major difference between China and France is that the Chinese put

family and close groups first and not work. This could cause commitment

to employment by M&S to be low when employees put their families and

close units first, unlike with France and the UK who are much more

individualistic states and commit on the basis that they themselves will

reap benefits (Geert-hofstede.com, 2012). That said, individualism within

states comes with economic growth and as China is emerging fast, their

culture will undoubtedly change in line with what is seen within developed

countries such as the UK (Nakata, 2009).

Hofstede through his 5 dimensional model also found that both China and

the UK are masculine countries in that what is said is not always what is

actually meant. There is a need with these countries to have the ability to

read between the lines and M&S should take this into account. France on

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the other hand was found to be a feminine country and that what was said

was actually what was meant but that the downside to being a feminine

country meant that the attitudes towards work were lax in that minimal

hours were worked and plenty of holiday was taken (Hofstede, 2001).

These are just a few considerations that M&S need to take into account

whilst investing in China or Europe. Although M&S have already started

producing clothing in line with local demand within China, ie. petite sizes,

the main point M&S needs to take onboard with regard to investing in any

country, not just with China or Europe, is that although countries contain

millions of people, those people are all individuals but as a whole their

country has a core set of beliefs and assumptions (Lewis, 2006). It is

those beliefs and assumptions that need to be taken into account if they

wish their strategy to become successful and thereby reap the profits.

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Bibliography

BBC.co.uk, 2012. A Guide to World Trade Blocs. Available from: http://news.bbc.co.uk/1/hi/business/4510792.stm 21 January 2012

BBC.co.uk, 2012. The Company File: M&S To Close European Stores. Available from: http://news.bbc.co.uk/1/hi/business/the_company_file/390379.stm 12 February 2012

Benson, L, 2002. China Since 1949. Pearson Education Ltd, Essex

Buckley, P J, 2009. Foreign Direct Investment, China and the World Economy. Palgrave Macmillan. Available from:<http://lib.myilibrary.com?ID=274294> 14 February 2012

Economist.com, 2010. The Rising Power of the Chinese Worker. Available from: www.economist.com 2 February 2011

Economywatch.com, 2010. Foreign Direct Investment (FDI). Available from: http://www.economywatch.com/foreign-direct-investment/ 31 January 2012

Gaebler, K, 2011. Resources for Entrepreneurs: Doing Business in China – Cheap Labour in China. Available from: http://www.gaebler.com/Cheap-Labor-in-China.htm 10 January 2012

Geert-Hofstede.com, 2012. National Culture: China. Available from: http://geert-hofstede.com/china.html 1 February 2012

Gerwin, E, McConaghy, R, 2012. China’s Trade Barrier Playbook: Why America Needs a New Game Plan. Third Way Publishing. USA.

Goetzmann, W, 1996. An Introduction to Investment Theory. Available from: http://viking.som.yale.edu/will/finman540/classnotes/notes.html 10 January 2012

Graham, J P, Spalding, R B, 2005. Going Global: Understanding Foreign Direct Investment. Available from: http://www.going-global.com/articles/understanding_foreign_direct_investment.htm

Greyhill Advisors, 2010. FDI by Country. Available from: http://greyhill.com/fdi-by-country/ 1 February 2012

Hofstede, G, 2001. 2nd Edition. Cultures Consequences: Comparing Values, Behaviours, Institutions and Organisations Across Nations. Sage Publications Ltd. London

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Lewis, R, 2006. 3rd Edition. When Cultures Collide. Nicholas Brealey Publishing. London

Mac.doc.gov, 2012. Business Guides: Intellectual Property Rights. Available from: http://www.mac.doc.gov/China/Docs/BusinessGuides/IntellectualPropertyRights.htm 2 February 2012

McClenahen, J, S, 2012. Industry Week. Made in China: Strategic growth makes this the time to be manufacturing in the People's Republic. Available from: http://www.industryweek.com/articles/made_in_china_1011.aspx 10 January 2012

McFarlin, D, Sweeney, P D, 2010. International Management: Strategic Opportunities and Cultural Challenges. [Taylor & Francis. Available from:<http://lib.myilibrary.com?ID=315089> 14 February 2012

Marksandspencer.com, 2012. Your M&S, International: Wholly Owned. Available from: http://annualreport.marksandspencer.com/financial-review/international.aspx 1 February 2012

Morley Fund Management, 2004. China: Opportunities and Risks for Foreign Companies. Available from: http://www.insightinvestment.com/global/documents/riliterature/367922/china_opps_risks_foreign_cos.pdf 2 February 2012

Nakata, C, 2009. Beyond Hofstede. Palgrave Macmillan. Available from:<http://lib.myilibrary.com?ID=255657> 15 February 2012

Nytimes.com, 2006. World: Asia. Available from: industrieshttp://www.nytimes.com/2006/06/30/world/asia/30aging.html 5 February 2012

Piana, V, 2005. Foreign Direct Investment. Available from: http://economicswebinstitute.org/glossary/fdi.htm 1 February 2012

Powers, J, 2006. China Trade: The Numbers Game. Available from: http://www.china.gaports.com/LinkClick.aspx?fileticket=gtftYmM9S1U%3d&tabid=75&mid=473 10 January 2012

Rugman, A M, Collinson, S, Hodgetts, Richard M, 2006. International Business. Pearson Education UK. Available from:<http://lib.myilibrary.com?ID=60201> 14 February 2012

Ruthven, H, 2012. Huawei Acquires CIP Technologies. Available from: http://www.mandadeals.co.uk/m-and-a-news/1687988/huawei-acquires-cip-technologies.thtml 1 February 2012

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Story, J, 2011. Invest in China for the Long Haul. Available from: http://www.thenational.ae/thenationalconversation/industry-insights/economics/invest-in-china-for-the-long-haul 21 January 2012

Trippon, J, 2009. Why Invest in China? - Investment Opportunities in China. Available from: http://investmentchina.net/investment-china-why-invest-in-china.html 21 January 2012

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Figure Table

No. Content

1. FDI by Country

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Appendices

No. Details

1. SWOT analysis of M&S Investment in China

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