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Strategic fit in a new market – H&M’s expansion to China

Author: Helene Juliusson
Supervisor: Jakob Lindahl
Cand.merc int. in Business and Development Studies
Copenhagen Business School
Date: 26 May 2015
Number of tabs: 163 129

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Images from: http://butterboom.com/new-stores/its-here-hm-opens-in-hong-kong/
http://butterboom.com/new-stores/hm-opens-3000th-store-chengdu-china/
http://wanphing.com/tag/fashion/

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Table of contents
1. Introduction ........................................................................................................................................... 6
2. Methodology ....................................................................................................................................... 10
2.1 Research philosophy ......................................................................................................................... 10
2.2 Research approach ............................................................................................................................ 12
2.3 Research strategy .............................................................................................................................. 13
2.4 Research choices ............................................................................................................................... 15
2.5 Time horizon ...................................................................................................................................... 16
2.6 Research techniques and procedures ............................................................................................... 16
2.7 Limitations ......................................................................................................................................... 17
2.8 Summary of research methodology and method ............................................................................. 17
3. Literature review ................................................................................................................................. 19
3.1 International expansion .............................................................................................................. 20
3.1.1 Driving forces for internationalization ....................................................................................... 21
3.1.2 Market studies............................................................................................................................ 22
3.1.3 Entry strategy ............................................................................................................................. 24
3.2 Marketing .......................................................................................................................................... 27
3.2.1 Marketing mix ............................................................................................................................ 28
3.4 Strategic fit ........................................................................................................................................ 34
3.4.1 Definitions of strategic fit ........................................................................................................... 34
3.4.2 Strategic fit characteristics ......................................................................................................... 36
3.4.3 How to measure strategic fit ...................................................................................................... 39
3.5 Summary literature review and theoretical framework ................................................................... 41
4. The case company ............................................................................................................................... 42
4.2 The H&M group ................................................................................................................................. 42
4.3 H&M group China .............................................................................................................................. 46
4.2 H&M marketing mix .......................................................................................................................... 51
5. Market Analysis ................................................................................................................................... 57
5.1 PEST analysis...................................................................................................................................... 57
5.2 Porter’s five forces ............................................................................................................................ 63
6. Analysis ................................................................................................................................................ 68
7. Discussion ............................................................................................................................................ 75

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8. Conclusion ........................................................................................................................................... 78
9. References ........................................................................................................................................... 81
10. Appendix.......................................................................................................................................... 87
9.1 Appendix A – Brands in the H&M Group........................................................................................... 87
9.2 Appendix B – H&M international expansion ..................................................................................... 88
9.3 Appendix C – H&M organizational structure .................................................................................... 89
9.4 Appendix D – H&M sales performance 2007-2014 ........................................................................... 89

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Executive summary

Strong economic growth, increased domestic consumption, these are statements often heard in
combination with China and its economic status. The Chinese market is considered to be highly
dynamic and to offer plenty of opportunities for international retailers. The vast market with its
1.3 billion potential consumers can make any business developer dream about sales going
through the roof and a forever green bottom line. However, it is not always easy to assess and
understand how to expand to a market that is likely to be relatively different from ones
domestic market. Moreover, business developers need to understand what global strategies can
applied to fit the new market and what strategic choices need to be adapted (if any). The aim of
this thesis is to provide an answer to this issue.

This thesis investigates H&M that expanded to China in 2007. First the thesis presents the
methodology and research procedures chosen to provide an answer to the research question:
How does H&M’s strategy apply to the new business environment in China and how does the
strategic fit between H&M and the Chinese market influence the company? Second, relevant
literature in the fields of international business, marketing and strategic fit are assessed to
provide a theoretical framework for the thesis. Third, the Chinese market is investigated
through market studies based macro and micro level factors. Fourth, the case company and its
development and strategies are assessed with a focus on the marketing mix. Fifth, the analysis
section combines the above chapters to evaluate whether H&M managed to obtain a beneficial
fit with the Chinese market. Sixth, the discussion part highlights the importance of the findings
in the analysis.

H&M expanded to China by largely applying its existing strategies that were used in its global
markets. The retailer made few significant changes to its strategy and these were related to
price, icon style collaboration and what social networks the company used to promote its
products and brand. H&M was well received on the Chinese market and its performance was
much higher than previously anticipated by the company. H&M’s year-on-year sales increased
between 2007 and 2014 and the growth target of opening new shops with an annual rate of 10-

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15 percent was easily obtained. The actual rate of store openings in China was between 42 and
108 percent during the same period. The reason that H&M chose to follow, to a large extent,
the same strategy in China as in many others of its international markets is most likely to be
able to leverage economies of scale.

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 1. Introduction

“"My grandfather wanted H&M to always have the mindset of a small company. There is no
room for prestige here. We insist on an open-door policy, and no hierarchies," Mr. Persson says.
These ideals, he maintains, are the reason the company is profitable in every country in which it
operates.2”

As the second largest retailer in the world, H&M has successfully established its brand and its
products in multiple foreign markets since its inauguration in Sweden in 1946. Today, the group
includes several different brands with shops in 53 countries. One of the H&M’s most dynamic
markets is China, which it entered in 2007. Compared to many competitors H&M entered the
Chinese market relatively late. In comparison, the Danish retailer Besteller entered the market
in the 1970s and the sports brand Nike in the 1980s. However, Inditex, which is H&M’s strongest
competitor, entered China with its largest brand Zara in 2006, thus, only one year prior to H&M.
It is possible that H&M’s strategy to enter the market at a later stage was made in order to be
able to assess the success of other retailers before establishing its brand there. It is reasonable
to assume that the potential differences in tastes, sizes, marketing and advertising possibilities
between China and Western Europe required careful investigation before making the decision
on how to enter the new market. By establishing in China later than its competitors, H&M
would have had the opportunity to make post-market studies related to competitors’ success
and failure in the target country.

International expansion has been treated in business and academic literature (Dunning, 2000;
Ghemawat, 2001; Lasserre, 2007). Differences between developed and emerging markets have
also been discussed by several scholars such as Ghemawat (2001), Arnold & Quelch (1998), and
Khanna & Palebu (2006). Indeed, a deep understanding of internationalization of the firm and of
the nature of emerging markets is argued to be a key success factor for a successful expansion.
An enlargement into the Chinese market is an expansion into an economy in transition from
having been planned and managed by the government to become increasingly dependent on

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http://online.wsj.com/news/articles/SB10001424052970204826704577074052812729344

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market forces, as supply and demand. This dynamic environment can create a lot of
opportunities for companies that can reap the benefits of the more open economy. China has
been the focus of internationalizing companies in the era of globalization due to the large
market potential offered by its vast population of 1.3 million people and growing consumption
(BCG, 2011). However, many multinational companies that have established in China have
experienced a worse performance than anticipated (Ghemawat, 2001). These numerous failures
find their origin in various factors such as the country’s vastness, cultural differences and also
regulatory barriers or, possibly, lack of strategic fit – a concept that will be treated more
exhaustively below. Even though China lately has adopted several international standards
imposed by the accession to the WTO it can still be complicated for foreign companies go get a
good understanding of the market and how to best apply their strategy. As a late comer to the
market, H&M had time to study its competitors and their performance in China to assess if
current strategy would be applicable to the new market. H&M’s business model is based on
wholly owned operation in each of its foreign markets when allowed by local regulation. The
head quarter in Stockholm controls the global strategy as well as the design of the apparel that
is subsequently pushed in all the company’s markets. Moreover, the marketing strategy is
primarily made in Stockholm and rolled out at a global level, even though local adaptations are
sometimes made. Hence, much of the strategy is concentrated in Stockholm and later applied to
the new markets which seem to leave little room for adaptations to obtain a fit between
operations and the market if necessary.

H&M’s ideals based on no prestige and low levels of hierarchy, as mentioned above, have
helped the brand to expand successfully to new markets around the world. However, to apply
these ideals to China could prove to be a challenge since Chinese and Swedish cultures and
preferences can be considered to be very different. One example is Hofstede’s ‘Dimensions of
national cultures’ that uses six types of dimensions to plot cultures against each other. China
and Sweden are highly different in individualism and indulgence (China scores low whereas
Sweden scores high). The countries are also different in what regards power distance and

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masculinity (related to achievement and prestige) where China scores high and Sweden low3.
This indicates that different marketing strategies could potentially be used in the two markets
to ensure highest possible performance. A marketing message promoting a message about
finding yourself and do what is best for the individual might not be perceived the same way in
China as in Sweden. However, to run two different strategies, in particular in relation to
marketing can prove to be expensive and also harmful to the brand’s global image that risk to
become watered down if different messages are promoted in various markets.

Local preferences and structures can prove to be obstacles for international companies in their
efforts to increase their global market share, in particular when they expand to markets that
differ significantly to the market where they are currently operating. To align strategy and
internal operations to a foreign market with dissimilar features compared to the domestic
market, such as physical and marketing infrastructures, is a challenge for many companies, and
some trial and error is likely to be take place before the right strategy is adopted. The company
needs to consider if it can sell the exact same products in the new market or if consumer tastes
and needs for the products are different to the extent that it would make sense to promote a
new product line or only a sample of the global one. As an example, Nike changed the soles of a
line of its basketball shoes offered in China due to a preference for more durable material. Also,
marketing strategies and channels need to be revised since the marketing infrastructure, how
people perceive the message and interaction between consumers and brand are likely to be
different in various markets. For example, marketing through what is considered the traditional
marketing channels such as TV and radio are highly expensive in China and they only reach a
limited number of the consumers. Instead, young, Chinese consumers emphasize online
channels and the retail store itself as important means for marketing (Forbes, 2011). Also, once
the potential differences have been understood, it is important to assess whether it will be
worth its while for the company to adapt to local preferences or whether it would better off by
rolling out its global strategy when expanding internationally.

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http://geert-hofstede.com/countries.html

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The concept of strategic fit has not been extensively treated in previous literature about foreign
direct investment but is an important element to performance in foreign markets. Strategy in
general is created with a long-term vision on how to improve the performance of a company.
When expanding into a new market it is important to assess whether the current strategy, in its
entirety or partly, can be applied to the new market or whether changes are necessary. What is
important is to keep consistency between the strategy, operations and the new market. It is
possible that to copy and paste the strategy used in the domestic market onto the new market
will entail some complications. Moreover, it is equally likely that, for any company, to make too
many adaptations to its current strategy to fit the new market will also lead to difficulties.
Hence, the importance of assessing the strategic fit between the market and the internal
operations.

The focus of this thesis is H&M’s expansion into China and the strategy the company applied
since entering the country in 2007 and whether the retailer managed to find the strategic fit to
be successful in this new market.

Research question for this thesis:

How does H&M’s strategy apply to the new business environment in China and how does the
strategic fit between H&M and the Chinese market influence the company?

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 2. Methodology
The purpose of the methodology section is to explain in detail the chosen methodology and
methods. In order to come up with a relevant and exhaustive answer to the research question,
it is important that the research process is guided by a clearly defined research methodology.
Other researchers would then be able to replicate the methodology to other cases and research
questions to test its validity. The outline of the methodology chapter follows, to some extent,
the ‘research onion’ created by Saunders et al. (2009). The methods in each layer are
highlighted in figure 1 below and will be introduced in a more detailed fashion. Consequently,
this chapter has six sub-sections (i.e. the number of steps of the research process). The research
‘onion’ will be guiding the methods of this thesis even though other methods also will be
assessed and applied.

2.1 Research philosophy

The choice of research philosophy influences the process leading up to the researcher’s
conclusion and is the foundation for the research strategy and methods. Conducting a study in

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the social sciences field offers several options of philosophy. The choice depends on the
researcher’s experience and reveals the assumptions of the surrounding world even though the
main guidance comes from the research question itself. The applied research philosophy affects
how the research will be carried out and what results will be highlighted (Saunders et al., 2009).

The four research philosophies highlighted by Saunders et al. (2009) are pragmatism,
interpretivism, realism and positivism. The first is a practical approach allowing for a mix of
different philosophies. The second highlights the importance of understanding differences
between people and their acting. The third holds the position that matters exist whether we are
aware of their existence or not. The last refers to a research approach where the focus is on
observation and an end-product easily applicable to other, similar, cases. Saunders et al. (2009)
admit that mixed methods is possible when choosing the research philosophy which is largely
the view of the pragmatist. However, in this paper I will focus on the interpretivistic approach
but mix it with pragmatism as the case study includes marketing models that are influenced by
the social actor. However, financial figures, results and other outcomes are better viewed
through the pragmatist lens.

Interpretivism/pragmatism

This thesis will be guided by interpretivism combined with a pragmatist lens. Interpretivism is an
approach to social sciences that acknowledges that the ‘social actor’ – the human – is important
to the research findings. It is often contrasted with positivism that is a more objective approach
that isolates the researcher from the case that is studied. In interpretivism, the social actor is
researched through an interpretation of his doings but the interpretation is also influenced by
the researcher’s own experiences and the sense she gives to the social actor that is investigated.
However, it is important for the researcher to understand the researched events from the point
of view of what is being researched. In business and management research this philosophy of
science is widely used since business cases can be are exceptional and far from the natural
scientist’s laboratory where specific subjects can be isolated to ensure coherent and stable
experiments. In business research there are several factors such as surrounding events and
persons that will impact the process and the answer of the research question – most which

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cannot be isolated from the research topic or case that is being studied. However, to choose
interpretivism as approach it becomes more complex to generalize the findings and apply these
to other cases since each case is considered to be highly unique. Nonetheless, the business
world is today changing rapidly and the need to generalize has become less prevalent.
(Saunders et al. 2009). The world is dynamic and prone to change and the agents acting in this
dynamic environment are also capable of changing the social world (Bhaskar, 2010). As
mentioned, the interpretivistic approach can be combined with the pragmatist’s approach that
acknowledges that a deeper understanding of social actors and our own interpretation are
important in guiding our understanding of the world even though it is still important to consider
the possibility that not one single philosophy is better than another. Many research questions
require a mix of methods since data sources can vary from qualitative to quantitative in order to
provide a comprehensive answer. Interpretivism combined with a pragmatist lens is a more
accurate choice for social science research compared to positivism which too narrow for the
broad spectra of factors that need to be taken into consideration to find an answer to the
research question. Furthermore, a social scientist does not have the luxury of a laboratory
wherein it can single out one specific unit and investigate it in its isolation.

2.2 Research approach

To define a research approach assists the researcher in his aim to outline an appropriate
research design and strategy (Easterby-Smith, Thorpe, Jackson, & Lowe, 2008). This section
introduces the deductive and inductive research approaches. The first refers to application of
theory and creation of hypotheses that are tested during research process. Deduction is
primarily connected to natural sciences due to its rigorous testing processes. It aims at
explaining cause and effect between two or more variables. In the deductive approach the
researcher needs to be objective and try to stay independent to what she is investigating.
However, complete objectiveness and independence is difficult as even the initial questions in
any research are based on the researcher’s own decisions. On the other hand, the inductive
approach refers to the creation of theory. This approach starts with the collection of data that is
later analyzed before a theory is developed. It is used to create an understanding of the event
(Saunders et al., 2009).

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This thesis is treating the subject of international expansion and how well the expanding
company fits with its new business environment. The research approach is based on deductive
reasoning as already existing theory is used to explain the firm’s activities in the new market
and of it achieves strategic fit with the same. To use a deductive approach by applying a theory
will unveil if the case company’s approach to the new market was a good choice or if
adaptations to strategy would have made the company better off.

2.3 Research strategy

The research strategy is the third layer of the research onion in figure 1. Several factors such as
the nature of the question, the objectives, the time-frame and the existing knowledge in the
field of investigation impact the choice of research strategy. Saunders et al. (2009) outlines
several strategies such as experiment; case study; and survey. The focus in this thesis is on the
case study approach since it fits the research objectives of investigating if the success of
international expansion implies that the firm needs to obtain strategic fit with the local business
environment. An experiment is more likely to take place in a laboratory where the researcher is
able to single out specific events and keep everything else stable. This approach is also easily
applicable to other experiments since all the factors would be noted down. However, in
management research the subject is generally more complex and it is not possible to separate
one factor from another which is why the experiment approach is not a valid choice for this
specific case. Moreover, the survey strategy is quantitative method often combined with a
deductive approach that is often used together with management research since it renders it
possible to collect a significant amount of data from which the conclusions subsequently are
made. However, as this thesis has a qualitative focus this method is not chosen whereas the
case study approach fits the aim of this thesis and will thus be applied (Saunders et al., 2009).

Case study

This thesis will be based on a case study approach to research since it is a qualitative study of
one organization’s fit with its external environment and thus suits the case study approach. A
case study is based on contemporary events that are observed or investigated by the
researcher. Yin (2003) describes two types of single case studies: holistic and embedded. The

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holistic type has one unit of analysis whereas the embedded type includes several units of
analysis. As this thesis includes more than one unit of analysis (implicit to assess strategic fit) the
focus will be on the embedded case study. Further, he argues that a single case study is useful
when it meets one (or more) of five conditions:

1) when the case is testing a specific theory;

2) when the case is unique;
3) when the case is representative;
4) when the case has a revelatory purpose;
5) when the case has a longitudinal purpose.

Consequently, it is important to define the unit of analysis (organization, individual, country)

and the purpose of the research already at the outset. Furthermore, the importance of context
is highlighted in relation to case-based studies. The unit of analysis and its surrounding
environment cannot be entirely separated which is also a reason why the case study is a viable
choice in combination with an interpretivistic approach (Saunders et al., 2009; Yin, 2003). The
objective of a case study can be to build or test a theory based on several data collection
methods. However, the research question and the study design need to be clearly defined to
obtain a successful result (Eisenhardt, 1989).

Reliability is important for case studies since a proof of reliability means that the research
procedures will derive at similar findings, independently of whom the researcher is and when a
new study is taking place (Saunders et al., 2009). In order to come up with consistent
conclusions, the researcher needs to consider the likelihood that he or a colleague, using the
same measures at another point in time, would get the same results. Transparency in how the
data analysis was conducted is also crucial for the study to be reliable (Easterby-Smith et al.,
2008). To ensure the reliability of this study, there is a thorough methodology and method
chapter in this thesis. Hence, other researchers will be able to assess the methods and theories
to replicate the study on other cases if necessary. Saunders et al. (2009) and Yin (2003) agree
that a clearly defined case study method can be replicated and applied to other studies.
However, replication does not refer to generalizability, and I want to stress the fact that the aim

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with this case study is not to make industry-wide generalizations. It is rather an approach to
create deeper knowledge in the field of international business and strategic fit. Moreover, to
investigate an international retailer company’s operation fits the requirements of a
representative case. Even though quite extensive research has been undertaken in the field of
international business operations, there is a lack of literature where this theory is applied to the
expansion of an international retailer from a small economy establishing in a developing market
with the objective to serve the local market. Also, there is a significant lack of academic papers
dealing with the strategic fit of the company’s culture, its activities and the location choice.
Finally, this thesis is based on a single case study in that the investigated processes and
conclusions drawn are based on one firm’s operations only. The units of analysis are the case
company, H&M and the contextual environment in China.

2.4 Research choices

Saunders et al. (2009) introduce two types of research choice: quantitative and qualitative. The
choice relates to the data collection and analysis processes. The first one refers to data collected
in a numerical manner which are later analyzed through statistics. The second choice is based
on non-numeric methods such as interviews, observations and review of documents. The two
methods are not mutually exclusive but can be combined into a mixed methods approach. Also,
triangulation of data permits the use of one or several methods in various configurations – the
multi-method approach. If triangulation of data arrives to the same or similar findings the
validity of the conclusion is increased. Triangulation also helps to solve issues of reliability since
the same data is presented in several different ways. To be able to triangulate the data would
help the research to meet criticism towards any of the research choices. Qualitative research
has been criticized due to its inclination towards an inductive research approach, and thus
lacking a theoretical framework, as well as having high uncertainty, it is a valid method if the
researcher is able to justify the criteria and analyses choices. Quantitative data has been
criticized since it is isolating the numbers from the social actor and thus does not take all
variables into consideration (in that it considers that it is possible to be perfectly objective
towards the research) (Jonker & Pennink, 2009). This research is based on a multi-method
research approach. Qualitative data is gathered through the review of articles, books and

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secondary data sources as well as from annual reports, and social media networks as primary
data sources. Quantitative data from financial analyses and databases are used to assess
performance and contextual environment.

2.5 Time horizon

The onion displays two time-based classifications: cross-sectional and longitudinal. The first is
referred to as a snapshot of events taking place at a certain time. The second has a longer time
perspective and assesses the unit of analysis over a specific period of time. Saunders et al.
(2009) argue that, despite time constraints, it is possible to conduct a longitudinal study by
using data collected prior to the current research. The data can then be re-analyzed and would
add to the longer time-frame. This thesis has a longitudinal approach in that it will analyze the
case company’s arrival in the new market until its practices today in order to be able to
establish the strategic fit and its impact on the success in the new market.

2.6 Research techniques and procedures

This section outlines the methods that will be used to answer the research question and
represents an important part of the research design. It is the sixth and final layer of the research
onion. The confines of the research process are also included to show that the researcher is
aware that there some limitations to the process and that the findings could look differently in
the case the researcher would have had access to other data.

Secondary and primary research

Secondary data is data that has been collected and published by someone else than the
researcher. To assess the secondary data it is necessary to conduct an extensive literature
research prior and during the writing of any project. This is made in order to avoid investigating
an area that has already been researched and validated numerous times. It will also give the
researcher the necessary basic knowledge that will enable her to progress in her research as it
will add to her knowledge and also reveal gaps in the literature. Primary data is data that come
directly from the source of information such as interviews, focus groups, annual reports and
social networks (Saunders et al., 2009).This thesis will be based on documentary secondary and
primary data sources to enable the researcher to triangulate and compare the data before

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arriving at a conclusion. Data sources that are used in the thesis are academic articles,
journalistic material and commercial data. Also, some of the data will come from non-written
material, such as audio-casts and video recordings. Moreover, social networks are included in
the research process and are used to understand how the case company is leveraging different
networks on the global and local markets.

2.7 Limitations
This thesis is solely based on data obtained from online sources such as reports, web sites,
articles and offline sources such as books and academic literature, which represents one of its
biggest limitations. To conduct interviews with key managers in the case company could have
provided valuable insights about the company’s strategy and the process of expanding into the
new market, which would have been an appreciated contribution. Another limitation lies in the
inability to access Chinese resources of information due to lack of Chinese language skills. To be
able to read and analyze secondary data about China in Chinese would have opened up for
bigger opportunities in creating a deeper understanding of the Chinese business environment.
Even though translation programs such as Google translate can give good indications it does not
replace the ability to search and read in the local language. Finally, financial data released by
the case company does not always separate its performance on the Chinese market but
presents cumulated numbers for its global market which renders it complicated to single out
the individual Chinese performance. However, the annual reports together with other financial
reports, and news still gives a quite clear overview of the case company’s performance on the
local market.

2.8 Summary of research methodology and method

Above, I have introduced the research methodology and method that guide the design and
analysis of this paper. An interpretivistic approach with a pragmatic lens is utilized to answer the
research question. This philosophical methodology guides the choices of strategy and data
collection. The research question will be answered by using a case study approach. The
information will come from secondary and primary data sources. The consequences of the
limitations to the thesis are potentially that the findings look different compared to if the

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research had had the appropriate language skills and access to key staff in the case study
organization. Figure 2 represents a visual of the research process.

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 3. Literature review
The aim of a literature review is to introduce and critically assess what has already been written
in a chosen topic. This is important since previous and current understanding of a topic will
guide the researcher in the aim to investigate new subjects or new angles of older theories. The
element of criticism is important since if the previous theories and research findings were
perfect, there would be no need for further investigation (Saunders et al, 2009). In this paper,
the literature review also serves as a basis for the theoretical framework that is applied to
analyze the research question outlined below:

How does H&M’s strategy apply to the new business environment in China and how does the
strategic fit between H&M and the Chinese market influence the company?

In the field of international expansion, focus has traditionally been on traditional literature
about foreign direct investment (FDI). Academia has focused on the questions why and where
companies expand across borders and how the processes from idea to implementation are
structured. Classical theories are the resource-based view (Barney, 1991), transaction cost
economics (Williamson, 1981), the Uppsala model (Johanson & Vahlne, 1977, 2009) and the
PEST analysis. With growing economies in Asia and Latin America, the last decades have also
seen a surge in academic literature treating the subject of a Western firm entering an emerging
market and what strategies to use for a successful entry (Khanna & Palepu, 1997; Meyer, 2002).
However, once a company is established on the local market a new set of questions arise, e.g.
did the firm choose the right strategy for the market and is the firm well aligned with its new
business environment?

This literature review addresses briefly traditional FDI literature such as the resource-based
view, market study theories and entry strategies since it is important to understand the
processes before a company expands into a new market. The reasons why a company chooses
to expand abroad will facilitate the choice of features to assess when studying the strategic fit
between the company and its new business environment. Factors affecting the fit are likely to
be different if the company is expanding for production purposes relative to expansion for
commercial purposes since the approach to the market will be different. As an example, a

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retailer expanding to sell in the target market will need an increased understanding of local
consumer behavior and preferences compared to a manufacturer expanding for production
purposes who will need a better understanding of local regulations related to environment and
labor laws. Moreover, market features of the local market and entry strategies are also
important to understand since these will have an impact on the success or failure of the
internationalization. Without an understanding of the target market’s features the company is
unlikely to achieve a fit with the new environment and is thus less likely to be successful since
common, but misguided, practices might be used. Moreover, the entry strategy is important
since a well-tailored entry strategy will reduce the need to make adaptations to business
strategy later in the internationalization and expansionary process. The focus of this literature
review is strategic fit between marketing strategy and the new environment since globalization
of markets and products is becoming increasingly common (Fram & Ajami, 1998; Levitt, 1983).
Thus, it is important to understand if a marketer will be able to use the same approach in all
markets as a part of a cost efficient strategy or if local adaptations are necessary to improve
performance. Marketing literature is included as an important part of the literature review to
enable an analysis of the case company’s approach to marketing on the local market. The
importance of strategic fit between current strategy and the new market is discussed with an
emphasis on a fit related to companies that expand abroad with market-seeking purposes. The
structure of the literature review is displayed in figure 3 below.

3.1 International expansion

Traditional FDI literature includes reasons why a company chooses to expand abroad (Dunning,
2000), pre-market studies to assess the market structure (PEST analysis, Porter (1979)), as well
as internationalization path and entry strategies (Johanson & Vahlne, 1977; Meyer, 2002). In the
below section some of the theories and models will be introduced since, as explained above,

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they add to the understanding of marketing choices and strategic fit which is the focus of this
thesis. The reason that traditional FDI literature is not included to a greater extent is that
traditional theories about FDI in general elaborate on a company’s reasoning and choices prior
to the implementation phase of establishing in the new country. Previously, focus has also been
on understanding how firms expand to foreign markets and whether they use a systematic
approach by initially moving to neighboring markets or if they launch in distant markets shortly
after the expansionary decision has been made (Johanson & Vahlne, 1977). However, the focus
of this thesis is based on the implementation and post-implementation periods in a local
market. This focus is chosen to understand if a global marketing strategy is applicable
throughout markets or if a strategic fit between the company, its operations and the new
market is necessary. To understand whether a globalization or adaptation of the strategy to
obtain strategic fit and thus potentially improve performance is becoming increasingly
important since an increasing number of companies are expanding across borders and will need
guidance in their choice of strategy. Moreover, classic internationalization theories such as
Johanson & Vahlne’s Uppsala model (1977) can be considered too static for the business
environment wherein companies are operating today. Today’s international or global market is
more dynamic and for organizations using the internet as a facilitator to do business and to sell
its products it might be easier to achieve a quicker break-through in new markets relative to the
incremental process of expanding first to one country and subsequently to another (Forsgren &
Hagström, 2007).

3.1.1 Driving forces for internationalization

The driving forces behind the decision to expand internationally are likely to affect the chosen
strategy in the new market and, in the end, the fit with the market. Dunning (2000) argues that
there are four main strategies driving a company to expand beyond its domestic borders:
resource-seeking; market-seeking; efficiency-seeking; and strategic asset seeking. The first
relates to location specific advantages in the host country in terms of natural resources and
labor to mention a few examples. The second is demand-oriented and aims to provide goods
and services to the host market. The third is linked to specialization and a more efficient division
of labor between home and host country. The last one refers to the objective of creating new or

21
leveraging existing assets in the new market to improve the firm’s competitive advantage vis-à-
vis its competitors. Notably, mixed motives can be a driver behind the decision to expand
internationally even though one focus area is common and will guide the company in its
assessment of the target market. Moreover, there are evidently other strategies or driving
forces behind international expansion such as acquisition of new technologies that are not
available in the domestic market to name but one (Amighini, Rabellotti, & Sanfilippo, 2012). This
thesis will investigate the case company’s driving force behind its decision to expand to China
and assess how this had an impact on overall strategy in the new market.

3.1.2 Market studies

Prior to entering a new market, the firm needs to assess the new business environment to
improve the understanding of the market and the best structure of the market strategy. The
market environment studies are also important to improve understanding of opportunities and
threats in the market. However, even though these are made prior to the expansion they will be
able to guide the firm to choose appropriate strategies for the market. In addition, with a
changing market environment, as is the case in many transition economies since they are
changing from a planned to a (social) market economy, the market environment studies
become an iterative process. Traditionally, market studies have focused on economic factors
such as the country portfolio analysis. It measures the income per capita on the horizontal axis
and the product performance on the vertical axis. Hence, this model uses economic and
technological progress to estimate the attractiveness of a market (Ghemawat, 2001). However,
these variables alone are not enough to indicate long-term potential of a market. Even though
the current performance of a product category is low it does not necessarily mean that the
market has low potential but can be an indicator that there is potential for strong future
demand once the market is ready for the product. Moreover, physical and cultural distances
between home and foreign market can help guiding the company towards the markets in which
it will potentially be successful – an argument also emphasized by Ghemawat (2001).

Economic growth and market potential are not the only factors that influence the decision to
expand to a particular market but other factors that are likely to have an impact on strategy
decisions made after the implementation are equally important. The PEST analysis is a common

22
tool to analyze the macroeconomic environment and to assess if the target market is attractive
regarding the surrounding business environment. The PEST model includes political, economic,
social and technological factors. These are assessed in relation to the country’s situation and the
progress of each factor respectively4. However, the model’s main weakness (but also strength)
is that it is not specified what is included in each head category. The researcher can thus freely
choose the factors that will be analyzed. Hence, the PEST analysis can be criticized for giving the
researcher too much freedom and increasing the risk for creating a biased research framework.
This should not be a great issue as long as the researcher clearly states her or his definitions
included in each category of the PEST analysis. However, even though this analytical framework
is likely to capture the macroeconomic features it does not necessarily take into account the
industry specifics that influence the company’s decision. Diverse industries will emphasize
different factors of the external environment and this should be considered when making an
environmental scanning.

Lasserre (2007) introduced an ‘industry opportunities assessment’ wherein the company is

encouraged to analyze the following: the quality of the industry’s competitive structure; the
availability of resources; and government incentives. The first builds on Porter’s five forces and
determines the long-term potential of the industry. Porter’s five forces is a common tool to
assess the industry level and micro features in a market. These include, bargaining power of
suppliers, threat of substitutes, bargaining power of buyers, threat of new entrants and,
industry rivalry (Porter, 1979). The second is divided into human, natural and infrastructure
resources that all can be of strategic importance to the company. The third depicts the country’s
quality of transport and communication infrastructure as well as the presence of supporting
services. The level and quality of competition is an important factor to post-implementation
success. If the firm enters the market when it has already reached maturity in terms of number
of competitors the risk for failure increases since the focus will be on taking market shares from
incumbent players rather than being able to reap the benefits of new market shares that are
created in a growing market. Infrastructure, transport and communication possibilities are
important for ease of doing business. However, emerging markets are likely to develop their

4
http://www.netmba.com/strategy/pest/ (last accessed 2014-12-03)

23
infrastructure and communication networks continuously and to assess the above-mentioned
factors is likely to be an iterative process that will continue after implementation as well – the
model introduced by Lasserre (2007) is simply a snapshot in time and lack a dynamic factor. The
market environment studies guide researchers and business developers in decisions that will
increase the success in foreign markets. Today, firms have several tools and theories to guide
them and the choice is likely to depend on the underlying reasons for the expansion and the
company’s expectations on performance after the expansion. However, the models are static
and lack a dynamic element to capture the fast moving business environment as it is developing
today (Axinn & Matthyssens, 2002). Moreover, these models are unable to explain the success
or failure of an entry strategy and depend on further theories and models to assess if the choice
to expand abroad was beneficial for the company. This thesis will include assessments of the
PEST analysis and Porter’s five forces to create an improved understanding of the case
company’s new market. However, these models will be extended with the concept of strategic
fit between the market and the case company to better explain the performance of the firm in
the new market.

3.1.3 Entry strategy

After having assessed the market the next step in international expansion is to create an entry
strategy that is aligned with company operations and the new business environment. Hence,
already at this stage, the firm is able to influence the post-market strategic fit. Scholars debate
whether a standardized approach should be used across global markets or whether the firm
should adapt to local circumstances in the host market (Gabrielsson, Gabrielsson, & Seppälä,
2012; Ohmae, 1985; Yin, 2003). The general reasoning is that if the home and the host market
have similar characteristics a standardized approach will be applied. The similarities between
the markets will enable the firm to leverage already existing knowledge and processes and thus
reduce the costs of the international expansion. However, if there are large discrepancies
between the markets the firm can consider adaptations to the local environment (Lasserre,
2007). Hence, to enter a foreign market is a process consisting of several complex dimensions.
Meyer (2002) divides these dimensions into two categories, primary strategic decisions and
supporting operational strategies. The first set refers to location, entry mode and timing

24
whereas the latter refers to marketing, human resources management and logistics. Location is
related to market environment studies and the attractiveness of the market. The entry mode
and timing are briefly discussed below, as these are likely to influence the initial fit between the
company and its new business environment. Human resources management and logistics are
excluded from the debate since they are out of the scope of this paper. Finally, marketing
practices are included in the discussion below. Nonetheless, to simply assess the above
variables will not enable the researcher to understand the post-entry phase success or failure in
the new market.

The choice of entry mode is an important factor linked to entry strategy. According to Lasserre
(2007), the company should base its entry mode decision on two factors, namely ownership and
intensity of investment. The first decision is related to whether the company should enter the
market with full control over its operations or by collaborating with a local company. The
second relates to the significance of the investment that will be made. Cavusgil, Ghaury, and
Agarwal (2002) outline three categories of entry mode strategies: export, contractual and
investment. The first category is an example of market seeking internationalization where there
is little risk for the firm since no major investment or commitment is made. A contractual
agreement requires more effort from the expanding company in terms of creating, enforcing
and supervising the contractual terms. The advantage of such a governance mode is lower
capital requirements compared to investment and a faster access to resources and the local
market. Finally, investment strategies generally have a long-term perspective and require
significant capital and commitment. Greenfield operations, mergers and acquisitions (M&A) and
joint ventures (JV) are examples of investment strategies. Here, the advantages are increased
amount of control over the activities and output. Lasserre (2007) argues that JV strategies are
used as the most common entry mode in emerging markets. A JV includes two (or more) parties
that all owns equity in the new venture. The JV can be classified minority, fifty-fifty, or majority
depending on the amount of equity owned by the company and its partner. The business
environment in the host market along with local government requirements and the firm’s
business model are likely to guide the entry mode decision. Greenfield operations are the most
capital-intensive mode of entry where the firm is building its new business from scratch in the

25
new country and is the sole owner of its operations. The choice of entry mode is likely to have
an impact on the strategic fit and increase or decrease the firm’s ability to influence the fit
between the company and the market.

The choice of when to enter an emerging market is an important factor to overall international
strategy. It is often a matter of whether the company should be a first-mover or a follower in
the new market. Meyer (2002) argues that even though many advantages are linked to being
the first operator in the market – such as access to distribution networks and brand building –
the company is not always able to leverage these advantages. Lasserre (2007) claims that, in
particular in relation to emerging markets, a first-mover advantage can be offset by under-
developed infrastructure, unsophisticated demand and lack of appropriate distribution
networks supports this view. Hence, the set-up costs of being the first foreign player in the
market would be too high. Arnold and Quelch (1998) state that even though there are
disadvantages linked to being a first-mover, these are mainly offset by the advantages. Strong
government relations, pent-up demand, and the opportunity to build a good reputation to a
relatively low cost are some of the benefits (Arnold & Quelch, 1998; Khanna & Palepu, 1997).
Moreover, first mover advantages or lack thereof is likely to depend on the nature and
experience of the firm. However, traditional entry strategies have been criticized for being too
focused on firms from developed countries and to be outdated in today’s fast-moving economy.
They are also unable to explain the success or failure in the post-implementation phase
(Andersen, Ahmad, & Chan, 2014). It is likely that the timing of entry has an impact on the
strategic fit between the market and the firm’s current operations and strategy, in particular in
relation to emerging markets or transition economies. Nonetheless, a successful entry strategy
also depends on how the company will market its products in the local market. In addition to
good timing the expanding company also needs to approach the market in an appropriate
manner to convince consumers about its products superiority. This thesis will assess the case
company’s entry strategy in terms of timing and ownership as these factors are likely to impact
the post-implementation fit with the new market.

26
3.2 Marketing
Marketing is a broad concept that includes several different specialties such as content
marketing, relationship marketing and social media marketing to mention a few. However, in its
broadest sense, marketing connects the firm with its current and prospect clients. The purpose
of marketing is to get the audience or the potential consumers’ attention in order to sell a good
or a service (Grönroos, 2006). The latest definition of marketing, approved by the American
Marketing Association in 2013, emphasizes the importance of the activities creating value for
the customers. Value creation is the most important aspect to marketing and is seen as a
process or bundle of activities directed towards the target group.

As can be interpreted by the definition of marketing above it is a multidimensional concept

including several theories and models whereof a few will be introduced below and narrowed
down to what will be applied in the discussion part of this thesis. Marketing is often divided into
strategic and operational marketing activities. According to Leventhal (2005), a marketing
strategy should be market driven and focus on the customers. Moreover, the strategy should be
included in a long-term strategy for corporate performance and not be considered as a function
that can be rapidly altered and whose budget can be cut to realize short-term gains.
Nonetheless, El-Ansary (2006) states that marketing strategy needs to be divided into sub-
strategies related to targeting, segmentation, position and differentiation. Market segmentation
and product differentiation are two marketing strategies that often are combined and would be
considered as strategic by El-Ansary’s standards. The first concept refers to the heterogeneity of
markets that enable the marketer to slice the market into several segments with differing
demands to which the company would offer its products. The second refers to the perceived
differences between own and competitive products – these differences can be either physical or
connected to a brand name (Dickson & Ginter, 1987). Similar strategies will enable the company
to target the appropriate segment of the market by highlighting the differentiating factors that
will induce the consumers to buy. On the other side of the spectra, an operational marketing
dimension is relationship marketing. It was first introduced by Berry (1983) as a means to
highlight the importance of a good relationship between corporations and clients. The
relationship is in focus to create trust between the two parties and to encourage repeat

27
purchase and loyalty leading to profit (Grönroos, 1994). However, it is a complex process to
quantify and measure the value of a relationship – in particular, when including the factor of
time in the case the relationship is a long-lasting one (Ballantyne, Christopher, & Payne, 2003)
To assess the (potential) value during the initial steps of the relationship is complicated since
not enough data is available. Furthermore, what is missing in Berry’s theory of relationship
marketing is the political environment as an actor and influencer in the relationship created
between the company and the consumer. The political environment is defined as the
government, laws, regulations and pressure groups whereof the government is often perceived
as the strongest actor. Through legislation, technical standards and norms the government can
affect the boundaries of a relationship for other actors in the economy. Laws are promulgated
to protect organizations from one another, to protect the consumers from corporations
and also to protect the society at large (Kotler, Armstrong, & Harris, 2013). Common
government actions are restrictions on marketing actions on tobacco and alcohol related
products. In China, the luxury segment is regulated to avoid an emphasis on the gap between
rich and poor in the country. Religion can also affect the framework of relationship marketing
through its normative influence in certain countries of what is perceived as socially acceptable
(Sheth & Parvatiyar, 1995).

To fit the aim of this thesis a pragmatic view towards marketing is considered. El-Ansary (2006)
considers the marketing mix, first introduced by Borden (1964) to be part of operational
marketing practices used to implement the strategy. It is a framework including several factors
related to a company’s go-to-market strategy and useful when assessing the marketing aspect
of international expansion. This strategy is offering a practical approach to marketing and will be
discussed more in detail below.

3.2.1 Marketing mix

The marketing mix is a conventional framework that considers the four dimensions of price,
product, promotion and place respectively (the 4Ps) that can help the marketer in the pursuit of
an appropriate strategy in the local market. Despite being several decades old, the variables in
the marketing mix are still used to guide marketing decisions that potentially will create value
for the target customer segment in any market. The model was long unchallenged even though

28
scholars added some extra variables to the mix at times when it was deemed as being too
shallow (Grönroos, 1994). Indeed, the marketing mix has been criticized in academia on several
points. First, the framework does not take into consideration all aspects of marketing. Second,
there is no clearly defined structure as what variables each P consists of (Van Waterschoot &
Van den Bulte, 1992). Third, no strategic dimension is included in the mix (Ohmae, 1982).
Fourth, the customer dimension is not included in the mix (Constantinides, 2006). However,
Möller (2006) is defending the marketing mix and argues that it is misread by its critics. Even
though, as some scholars argue (Grönroos, 1994), the world is moving from transactional
marketing to relationship based marketing the mix is still not redundant in relation to influence
consumers in their buying process (Möller, 2006). The mix is the practical output of strategy that
is applied to different markets and its operational purposes serve the aim of this thesis. Hence,
each variable is discussed below in relation to whether the factor can be directly applied to the
any market or if adaptations are needed for it to fit and improve performance in the new
business environment.

Price

To offer the same products at different prices in various markets is a sensitive topic and
increasingly so due to consumers’ opportunity to compare prices and also buy from neighboring
markets if these are offering the product at a lower price (Accenture, 2012). Globalization and
internet have increased the price transparency throughout markets and thus made it more
complicated for companies to offer differentiated pricing (Melewar & Smith, 2003). Supply and
demand factors will also influence the pricing decision since firms in markets with few suppliers
but high demand can be tempted to increase local prices. Moreover, the pricing decision is also
influenced by local market and industry standards and regulations (Powers & Loyka, 2010). One
example is the lowered priced cigarettes sold on the Luxembourgish market compared to
neighboring markets due to a lower TVA applied to tobacco products in Luxembourg. Lasserre
(2007) argues that to provide the same price model throughout different markets is a valid
model for highly standardized products and where no local regulations, related to pricing, apply.
This strategy will avoid arbitrage and protect brand integrity. However, a standardized pricing
does not consider the demand in the local market and the consumers’ value perception in
29
relation to the product. Moreover, Batra (1997) argues that the size of China enables companies
to propose lower prices due to the opportunity of economies of scale. In addition, consumer
segments and purchasing power is likely to differ between a developed market and a transition
economy (T. Khanna & Palepu, 2006).

Product

The product is generally in focus in international expansion and implementation since this is
what the company wants to push on the new market. To optimize sales it is important that the
products fit the market needs and preferences but also that it is economically viable to adapt
any product to the local market – should this be necessary (Powers & Loyka, 2010). Lasserre
(2007) introduced a decision making model to find out if it is economically valid to adapt the
product to local preferences (see figure 4).

30
The first factor is similarity of customer needs as shown on the horizontal axis; the second factor
is the amount of products that needs to be manufactured to make a profit as described in the
vertical axis. In order to optimize its processes and profit, the company should standardize its
product offer if customer taste is similar and a high amount of products is required. This is
referred to as global standardization. However, the firm should choose modular standardization
if the minimum size of production is high but the consumer preferences vary. This strategy
enables the firm to reach economies of scale on the first production processes with the option
of product adaptation at a later stage. When low levels of production are needed in
combination with similar consumer preferences, the company can choose to standardize its
processes even though the location of the production will be localized – process
standardization. Finally, if consumer tastes are different and the minimum size of production is
local, the company needs to conduct local adaptation to be economically viable. In fast fashion
retail, economies of scales are preferred to keep the costs low while still being able to quickly
push products to the market. However, the important question is whether it is feasible to push
all the same products to all the markets.

Promotion

The promotion decision is an important aspect when the company needs to decide whether it
should roll out global advertisements in all its markets and whether it should offer the same
promotions in all countries (Theodosiou & Leonidou, 2003). According to Lasserre (2007) there
are three advantages of choosing a global promotional message: strategic, economic and
organizational. By having one unified message the company strengthens its corporate identity
and saves time to market. However, it can be hazardous to choose a globalized strategy if the
local market is not susceptible to the global message and cultural differences are significant
(Karande, Almurshidee, & Al-Olayan, 2006; Powers & Loyka, 2010). T.-S. Chan and Cui (2004)
argue that firms need to familiarize themselves with local preferences that, potentially, can vary
between regions in the same country if it is a large market. Consequently, local adaptations to
message and packaging can be necessary to perform in the new economy. However, the market
in a transition economy is likely to change at such a rapid pace that what is a valid promotional
strategy today might no longer be valid tomorrow (Batra, 1997). Moreover, Wen and Zhang
31
(2012) consider that even though distribution channels and infrastructure are not always in
place for marketing and communication in China, consumers often rely on a brand name that
they know which increases the significance of the brand awareness. Foreign brands are often
associated with greater quality, which is something they can leverage in their promotional
material in emerging markets. Nonetheless, brands will have to provide the expected quality
since consumers in today’s China are likely to return to local brands if the international brand
does not deliver as expected.

Place

Place refers to transportation, distribution and inventory of the product. Distribution is likely to
be highly standardized across markets. However, local requirements and market characteristics
influence the distribution used by the company (Powers & Loyka, 2010). For a retailer, place
would traditionally raise the questions if the company should open its own shops or whether it
should push its products through department stores or franchisees. It would also need to assess
if distance selling by using catalogues would make sense based on the level of infrastructure in
place and the habit of not trying on the clothes prior to buying. Today, due to e-tails increasing
popularity the retailer also needs to consider if opening up a web shop would be necessary or
maybe even vital for success in the new market. Albaum, Tse, Hozier, and Baker (2003) argue
that standardization of distribution is a cost efficient strategy choice and circumvent the
challenge of creating different, successful, strategies in multiple markets.

The marketing mix relates to one of the main challenges for the marketer in a new market,
namely, the decision whether to use a standardized, global, strategy or to adapt the marketing
operational strategy to the local circumstances. Each part of the mix needs to be analyzed,
assessed and adapted if it turns out that the appropriate strategy was not chosen. Figure 5
outlines some of the questions that the expanding company needs to consider when venturing
into a new market.

32
The questions included in figure 5 needs to be taken into consideration when implementing a
marketing strategy in a new market. It is a relatively simple and descriptive model that enables
the business developer to move forward in the market whereas it does not take into
consideration whether the decisions fit the new market environment. The 4Ps are simply
assessed as independent factors without consideration to the external environment. The
marketing analysis in this thesis will be based on the marketing mix since, despite its
shortcomings; it is a model that has been thoroughly tested in the literature and is still
commonly used today by marketers and strategists. However, the mix will be complemented
with the strategic fit, which is a concept that enables the mapping of firm specific and external
factors. To add another theory to the marketing mix will enable for a better understanding of
how an expanding company can leverage its current practices in a new market and how this
impact the performance in the new business environment – including, to some extent, the
political external environment. Strategic fit will be discussed in-depth and clearly defined in the
following chapter.

33
3.4 Strategic fit
Strategic fit is a concept that has several interpretations in the management literature.
Different scholars emphasize different parts of strategy and other parts of the company or the
external environment it should be aligned with. Some of the interpretations will be discussed
and evaluated below. Finally one interpretation will be chosen to guide the analysis of the
research question. Furthermore, a part from discussing what strategic fit means it is also
important to understand what its characteristics are, how the fit is achieved and if it will affect
overall performance. The review of strategic fit will start with a discussion of the concept in a
broad sense and get narrowed down to the particular features that will be used for the analysis
part in this thesis. Finally, the overall focus in this thesis will be on external strategic fit since the
case study is based on international expansion and includes the host market as a part of its
analysis.

It has been argued that the world is moving towards a convergence in taste and preferences and
that the same marketing strategy would be equally successful in different markets (Ohmae,
1985; Yip, 1994). However, this view is contested by other scholars who argue that global firms
still need to consider local adaptations to their marketing strategies – particularly when
operating in emerging markets that are very different from the developed domestic market (T.
Khanna & Palepu, 2006). Whether or not markets are globalized, the expanding company needs
to find a fit with its new market to enhance performance and the strategic fit discussion is
mainly considering definitions of strategic fit and if a company should standardize or localize its
strategies.

3.4.1 Definitions of strategic fit

Hill & Brown (2007, p.1333) define strategic fit as “… the degree of linkage or consistency
between the competitive priorities, delivery system and infrastructure of an operation”. Even
though the focus in the definition is on internal dimension, Hill and Brown (2007) agree that the
concept strategic fit has an external dimension as well. The external dimension refers to the fit
between the firm, its operations and the competition in the market and is thus the context
where the firm implements its strategy. The internal dimension assesses how well the firm
aligns its business and operational strategies whereof the marketing strategy is one part. The

34
different functions in a company need to be aligned to ensure internal strategic fit. Moreover,
Hill & Brown (2007) highlight the fact that most research related to strategic fit has been done
in the manufacturing industry and argue that there is little research conducted in the services
industry. Their research is based on domestic firms in one single country and even though they
consider the element of external fit the focus is on internal factors. Furthermore, there is little
focus on other industries such as the retail and fashion industries. Finally, since Hill & Brown’s
research paper is mainly about internal fit it is too simplistic when considering international
expansion where external factors are also important to take into consideration.

A second definition of strategic fit that gives more importance to the alignment between
internal operations and the business environment is given by Lee & Kim (2012, p. 31) who
emphasize “...that a strategy can work for an organization only when it fits well with the
organization’s external and internal environments.” This definition clearly highlights the internal
and external factors but does not specify what these factors are which gives a lack of clarity and
opens the definition up to interpretation. Moreover, their research is based on federal agencies
which, in general, has a different type of business model compared to companies in the private
sector. In addition, the focus of their paper is on implementation of performance management
systems in federal agencies rather than a private company’s implementation strategy in a
foreign market and thus does not fit the objective of this paper.

Lillis & Macaulay (2012, p. 40) define strategic fit as:”…the degree of linkage or consistency
between what the business strategy has specified as the means by which competitiveness will be
achieved and the delivery system and infrastructure of its operations.” The competitiveness
factor in strategic fit is explained as an objective of the strategic fit and the infrastructure and
operations used to obtain it are the measures. However, even though this definition includes an
important performance influencer, the competitor, it does not include the external
environment, which is likely to affect the company’s performance in a new market.

Another definition, proposed by Gabrielsson et al. (2012 p. 29) is more marketing oriented: “The
strategic fit perspective emphasizes the need to maintain a close and consistent linkage between
a firm’s marketing strategy and the context in which it is implemented.” Strategic fit between

35
marketing, environment and internal processes is argued to improve performance. They state
that the product range and the choice to standardize or localize the product are two important
choices related to marketing and fit during international expansion. Moreover, they argue that
previous international experience will influence the firm’s marketing strategy in the target
market. Overall, their findings show that a standardized marketing strategy is beneficial for the
firm, provided there is a fit with the external environment. One of the main reasons to choose a
standardized strategy, according to Gabrielsson et al. (2012) is that pressure from a globalized
environment makes it a more viable choice. This definition of strategic fit has a focus on a fit
between the organization and its external environment and will thus guide the analysis of this
thesis.

3.4.2 Strategic fit characteristics

After having introduced several definitions of strategic fit, its characteristics will be discussed
below and be used as a basis to facilitate the analysis of strategic fit at a later stage in the thesis.
Zajac, Kraatz, and Bresser (2000) made a study based on American loans and savings institutions
in the US wherein the strategic fit measured the alignment of the organization and its external
environment. Admittedly, this study only considers companies conducting business in their
domestic market whereas presumably it is a more complex process to obtain strategic fit
between a company and its foreign market due to factors such as distance, culture and
language barriers. Nonetheless, Zajac et al. (2000) state that the strategic fit should be viewed
as a dynamic concept rather than a snapshot of a particular period in time, which implies that
strategic fit is a concept that can be evaluated on a continuous basis and be improved over
time. Moreover, Lukas, Tan, and Hult (2001) argue that since the firm cannot control its
environment it will, generally, be better off by continuously adapting and accepting to make
strategic changes to improve performance in the new market. Furthermore, Zajac et al. (2000)
introduce several external factors inductive to organizational change. They argue that there are
specific conditions under which it is valid to research whether a company manages to obtain
strategic fit. First, a changing environment is necessary. Second, the environment and firm
attributes need to differ. Third, the choice of strategy is not a straightforward one. Fourth,
factors influencing the strategic fit should be clear. Finally, performance measurement is

36
important. As organizational factors, the company’s competencies and internal resources are
prevalent. The environmental factors include micro and macro factors that have an impact on
the business such as competition and economic policies in the host market. Their model is
introduced in figure 6 below.

As can be seen in figure 6 above, Zajac et al. (2000) highlight four types of strategic (mis)fit. All
are dynamic and depend on the company’s action in relation to the external environment.
These different scenarios are introduced in figure 7 below.

37
Zajac et al. (2000) argue that previous assumptions about strategic fit referred to it as appearing
during a static period with an assumed bivariate relationship. The dependent variable was the
organizational structure and, as such, also static. Only one independent variable was included
which was the environmental factors in the new context. The conclusion was often assumed to
be that strategic fit was easy achievable for organizations operating in similar markets.
However, today’s business operations require a more dynamic view of strategic fit – also in
terms of the time frame to which it is applied. The factors affecting strategic fit or misfit are
related to organizational strategy (e.g. the marketing mix) as well as environmental factors and
organizational contingencies. The proposed view of strategic fit is considered to be dynamic
since several factors are included and which are not considered as a snapshot in time. The
relationships and variables are introduced in figure 8 below.

38
According to Gaberielsson et al. (2012) it is possible for firms to achieve strategic fit through
adaptation and that companies with specific characteristics have a greater chance to succeed
compared to others. They consider that large multinational corporations from big, domestic,
economies have a larger customer base and thus, generally more resources that will help them
to succeed in achieving strategic fit in their new markets compared to smaller companies. To
achieve strategic fit seems then to be a matter of resources, which is reasonable since the
company can use a larger budget to assess the new market, create and apply an appropriate
(marketing) strategy. Regarding the size of the domestic market, it can be argued that Sweden is
a small and open economy. Nonetheless, it is a bold assumption to state that all the firms from
this country face resource constraints and, consequently, are unable to adapt to the foreign
country’s business environment. Furthermore, it is easier to achieve strategic fit in markets that
are similar to the home market. Strategic fit is more complex to obtain in a highly different
market with another infrastructure, preferences and business structure, in particular if the
company chooses to keep its current strategy (Albaum et al., 2003). However, Zajac et al. (2000)
also argue that to obtain strategic fit with the external environment might require too many
internal changes and create a misfit with company culture. Hence, it is not always beneficial for
a company to change its strategy when entering a new market.

In this thesis, Zajac et al. (2000) matrix’ based on strategic fit or misfit will be applied to assess if
the case company managed to obtain strategic fit or if too many or too few changes were made
to the strategy in order to obtain an appropriate fit. They dynamic element proposed by Zajac et
al. (2000) and Lukas et al. (2001) will be included to assess if the case company made changes
over time to improve the strategic fit with the host country. However, to be able to assess the
fit specific factors need to be considered and evaluated, these will be introduced below.

3.4.3 How to measure strategic fit

According to Zajac et al. (2000), Lukas et al. (2001), and Lillis and Macaulay (2012) strategic fit
has an impact on performance. The scholars, Xu, Cavusgil, and White (2006) explore how this fit
affects performance. They argue that a company is unlikely to benefit from using a standard
marketing strategy globally due to differences in taste and preferences. However, they consider
that a global strategy can be beneficial in the following dimensions, competitive position,

39
opportunities in the new market and the product life cycle. Moreover, when external factors
such as the local market and consumer taste are similar in the home and the host country, it can
be advantageous for performance to keep the same strategy. Nonetheless, the political actor is
equally important to take into consideration due to the significant impact it can have on
business behavior in particular markets. One example is the search engine Google that decided
to exit the Chinese market in 2010 due to a disagreement over Chinese government censorship
policy (Kotler et al., 2013).

Xu et al. (2006) introduce a purely quantitative measure of strategic fit based on: profit, return
on investment, and cash flow which are clear indicators of economic performance but less
reliable for long-term purposes. Lukas et al. (2001) combine financial indicators with qualitative
measures related to strategy decisions and outcome to measure strategic fit for companies
operating in China. Lillis and Macaulay (2012) focus on the strategic fit of services companies’
strategies and operations. However, they also include the business environment as a factor
complicating the ability of achieving strategic fit and they argue for a dynamic approach to
strategic fit. They introduce three methods to assess strategic fit:

1) Step-by-step, gap-based, audit methods set in place to identity gaps between required
practices and current practices
2) An audit of the performance measurement system – to measure the result of
operational activities and the competitive objectives, one challenge that companies are
facing is that their competitive priorities have changed even though they still use the
same operational activities in an attempt to obtain these objectives – strategic misfit.
3) Knowledge audits – used in order to discover previously hidden capabilities within the
firm that can be used to alter the business strategy.

This thesis will assess strategic fit based on quantitative factors such as financial performance
and growth but will also include qualitative factors related to how the company was received
and perceived in the new market.

40
3.5 Summary literature review and theoretical framework
The above chapter outlines the literature that has been reviewed and assessed while working
on this thesis. It also explains what theories and models will be applied to provide an answer to
the research question. Traditional FDI literature will be considered to the extent that it guides
the researcher to understand the initial steps of the international expansion of H&M to China. In
particular, the driving forces for internationalization will be assessed together with the choices
of entry mode and timing. Moreover, the PEST analysis and Porter’s five forces will help the
researcher to understand the new environmental context wherein H&M now operates. To
comprehend the characteristics of the new market will help the researcher to assess the fit
between H&M, its marketing strategy and the context. The marketing mix is the guiding model
to assess H&M’s marketing strategy as it as a pragmatic and operational model that can be
applied to strategic and operational decisions. Finally, Strategic fit will be assessed by evaluating
how well H&M has been received by the Chinese consumers in the market and social media.
Financial performance will also be taken into consideration when deciding on whether H&M has
achieved a fit with its market. Any adaptations made by H&M to obtain a fit will be assessed and
discussed in the analysis part of this thesis.

41
 4. The case company

4.2 The H&M group

The H&M group, henceforth referred to as H&M, is a Swedish fashion retailer consisting of six
brands: H&M, Weekday, COS, Cheap Monday, Monki and & Other Stories. A figure with all H&M
brands can be found in appendix A. The main focus of this thesis is the H&M brand – which is
the largest brand of the group. Its objective is to provide “Fashion and quality at the best
price”5. H&M has been a family run business since its initiation in 1947. The current CEO, Karl-
Johan Persson, is the grandchild of the founder, Erling Persson. In 2014, H&M had 3 511 stores
throughout the world. It is a fast fashion retailer with global operations. However, it is the
European market that provided 77 percent of turnover in 2013 (H&M, 2014). The group’s
growth target is set to 10-15 percent annually, which it obtains by expanding into new markets
as well as by increasing its market share in existing markets. It is the second largest fashion
retailer in the world, only preceded by Spanish Inditex, which includes retail shops such as Zara,
Massimo Dutti and Bershka (McLaughlin & Cruz, 2013). H&M is listed on the Swedish stock
market NASDAQ OMX Stockholm and the majority shares are owned by the founding family.
The company’s key figures are listed in figure 9 below.

5
http://about.hm.com/content/hm/aboutsection/en/About/Facts-About-HM/Idea-to-Store/Idea-and-
Design.html#cm-menu

42
History of the H&M Group

H&M was founded in Västerås, Sweden, in 1947 when the first Hennes store was opened by the
entrepreneur Erling Persson. Prior to opening his first retail store, he had been on a trip to the
USA where he was inspired by the concept of fashionable clothes to affordable prices. Persson’s
business model was based on fast clothing turnover and a positioning of the shops where the
people and the money were – on the central shopping streets. In order to increase flexibility and
to be able to quickly follow new opportunities, Hennes rented its locations instead of buying any
real estate6. In 1952, the company expanded to Stockholm where it opened its second shop. In
addition, in the 1960s, there was an increased demand for men’s clothing. Consequently,
Persson acquired another retailer, Mauritz Widfors, which provided hunting and fishermen
apparel and thus H&M extended its offer to include clothing for men. This was in 1964 and the
year that Hennes & Mauritz (H&M) was created. The first international shop was established in
Norway in 1964 and H&M expanded into Denmark in 1967. In 1974 H&M entered the Swedish
stock exchange and two years later the first non-Scandinavian shop opened in London.
6
http://www.handelnshistoria.se/profiler/kopman-och-entreprenorer/hms-grundare-erling-persson-fran-ostbud-
till-imperieskapare/

43
However, the broader expansion to other European countries mainly took place in the 1990s.
The first American and Asian stores opened in the 2000s (H&M, 2014).

While expanding internationally, H&M also added new brands to its portfolio. It launched
Collection of Style (COS) in 2007 and immediately opened up eleven stores in Europe. H&M
wanted to broaden its consumer base and the new concept targeted a higher income level
group with a more classic approach to fashion compared to the original H&M stores (H&M
Annual Report 2007). In 2008, H&M acquired FaBric Scandinavian AB which included the brands
Monki, Weekday, and Cheap Monday. The reason for the acquisition was the acquired group’s
growth potential on the international market (H&M, 2009). & Other Stories was H&M’s latest
launch and was introduced to the market during the spring in 2013. It targets consumers that
are highly fashionable but want to create their own style by combining different accessories
with quality clothing. & Other Stories was launched with physical shops in seven markets and as
e-commerce in ten online markets – all in Europe (H&M, 2013). The countries and years of
H&M’s international expansion can be seen in appendix B.

Business model

The H&M brand was positioned as affordable clothing in the fast fashion industry. The CEO,
Karl-Johan Persson, stated that H&M’s aim was to promote democratic fashion where everyone
can find their style to a fair price7. The fast fashion business model is based on a concept of
shortening the lead time between design and store availability of the product. Important factors
in the model are cost, speed and style (Runfola & Guercini, 2012). H&M supplied small
quantities of the latest fashion several times per month to its shops. In combination with regular
deliveries, the retailer established a cost-conscious strategy from design to production and
distribution of its apparel. Many of the operations were centralized to the Stockholm office, see
appendix C for further details. One of these was the buying department – consisting of 100
buyers. The 150 designers that created the new fashion lines were also in Stockholm and
responsible for the new collections. However, the head office in Stockholm was helped by the
national offices that were found in the majority of the retailer’s sales markets, e.g. in detecting

7
http://www.chinadaily.com.cn/business/2012-10/01/content_15794506.htm (last accessed, 2015-03-01)

44
new tendencies. Employees at the national offices were discovering new trends by street
spotting and also by more traditional methods such as focus groups. These trends guided the
H&M launches of the two major, annual, collections and for its multiple smaller collections that
were launched throughout the year. One of the major collections was launched during the
spring and the other one during the fall. A part from trend analyses, other influencing factors for
a new fashion collection and product distribution were the previous years’ sales results and the
customer demand in different markets. Hence, inventory and stock management were
integrated operations. Notably, H&M developed an advanced, in-house, IT-platform, common
to all the shops, that permitted the various H&M stores to keep track of sales/stocks and
enabled efficient inventory management (H&M, 2014).

Transport and distribution were, generally, outsourced to a third party provider (E-
BusinessWatch, 2011). Moreover, H&M did not manufacture any products but outsourced its
entire production to low cost labor markets in Europe, Asia and, more recently, also to Africa.
H&M had approximately 800 independent suppliers worldwide. Even though the retailer
outsourced its production, the structure of its supply chain was based on using as few
middlemen as possible in order to speed up the time to market – a vital part of the fast fashion
industry. Due to the company’s efficient supply chain and its offer-follow-up-system to track
orders it could keep a quick product turnover in the shops. The product lead times varied from
six weeks to six months, with shorter lead times for high fashion apparel (H&M, 2014). For
seasonal fashion, which was produced in Europe, H&M used a rapid reaction supply chain and
sent the clothes from Europe to China quickly via air freight8. However, 90 percent of all
transports were either done by shipment or railroad. As for the suppliers, they were managed
by the local buying and production departments. Approximately, 20 national production offices
were located in the local markets and were responsible for that buyers placed their orders with
the correct supplier, the quality of the apparel and to audit the of code of conduct in the
supplier plants. Hence, the production offices managed the day-to-day tasks with the suppliers

8
http://www.prnewswire.com/news-releases/ceocio-china-business-feature-fashion-magnates-supply-chain-
contest-in-china-58134907.html (Last accessed 2015-03-01)

45
and mainly hired local staff with better knowledge of the local markets compared to expatriated
staff.

H&M kept its strategy to work as a wholly-owned company where it is possible, which
sometimes had the consequence of the company withholding from entering a market unless
this was possible. This choice of strategy stemmed from the fact that H&M wanted to keep full
control over its operations in its markets. However, in some markets, such as the Middle
Eastern markets, H&M was bound to franchise and cooperated with local players to launch the
brand in these countries. Before expanding into a new market, H&M assessed the country
attractiveness based on infrastructure, political risk, economic growth, purchasing power and
demographics and by taking a long-term perspective. These criteria also applied to the
expansion into a new city within an existing market. Moreover, to reduce capital risk and to
keep the company flexible H&M also continued to rent its store space in the majority of its
markets (H&M, 2014).

4.3 H&M group China

H&M started its operations in China by working with local manufacturers in the 1970s (Yang,
2014). The retailer used local agencies when it opened its own office as a part of its East Asian
strategy (Fang, Olsson, & Sporrong, 2004). Approximately 60 percent of H&M’s products were
sourced from Asia, of this, 50 percent was sourced from China. It was mainly clothing that was
not part of the fast fashion collections but that were part of permanent collections at H&M that
were produced in Asia. This is due to previous restrictions on export of textiles and to keep lead
times to the European markets short for seasonal items. However, H&M decided to also enter
China to market and sell to local consumers – this in order to reap the benefits of a growing
economy and a large population.

46
Entry decision and early presence

In 2007, H&M opened its first Chinese stores in locations where it had prior experience with
established production offices, Hong Kong and Shanghai. The retailer was a follower (as
opposed to a first-mover) in the Chinese market. As an example, UNIQLO opened its first shop in
China in 2002, H&M’s biggest competitor, Spanish Inditex, opened it its first store in 2006 (CBRE,
2013). H&M’s decision to launch in China was based on the reasoning that the spending power
was steadily increasing as a significant amount of people were moving from the low-income
segment to the middle-income segment. Furthermore, H&M assessed that fashion had become
an increasingly important part of Chinese society which allowed for increased individuality and
possibility to express oneself through ones clothing (Bloomberg, 2007). Based on the above
statements, Eriksen (H&M’s previous CEO) argued that China had the potential to become
H&M’s biggest market. He also stated that H&M could use the experience gained in the
different, yet similar, market in the USA, where the company established in 2000. He
particularly pointed out that H&M had learnt from having operated in a vast market with a large
population and where regional differences were common (Boutrup, 2007). Moreover, Eriksen,
stated that the amount of products sourced from China was likely to increase with higher sales
and an increase in demand in the local market – making China an increasingly important
location for production and sales (Hellstrom, 2007).

China launch

The 10th of March 2007, H&M opened its first East Asian store on Queen’s Road, in the Central
district in Hong Kong. The busy street that previously held many financial institutions had
become the number one choice for fashion retailers that wanted to open up flagship stores as
storefront to the rest of China. Even though rents were highly expensive on this street, it was a
way for the retailer to create brand awareness since many tourists from the mainland visited
Queen’s Road when visiting Hong Kong. Moreover, to open flagship store in the Central district
could be seen as evidence of the company being already successful and serious in its
commitment to the Chinese market.

47
The day of the launch, more than 1000 people queued outside the store before it opened, at
11am. Some of these people had queued more than 48 hours to be the first visitors to the first
H&M shop in Hong Kong. In order to attract potential clients, H&M had promoted a limited
amount of trench coats signed by Madonna, who was the company’s style icon representative
during that spring. In addition, the Madonna collection was pre-released in China as the rest of
the world would have to wait two more weeks before being able to buy it. Most of the clients
were teenagers or young adults (Times, 2007). However, the main launch of the H&M brand
was the opening of the flagship store in Shanghai the 12 th of April. The location for the shop was
the prestigious Lu Wan district in Shanghai9. H&M overtook the old premises of the Italian
retailer Benetton who, after four years, cancelled its contract due to soaring rents10. A pre-
launch event was held at the Science museum of Shanghai the evening before the opening with
a show by Kylie Minogue celebrating H&M’s arrival to mainland China. H&M had also invited
local celebrities such as Du Juan, Lee Xiao Ran, and Zhao Wei to attend the event. The reason for
inviting Kylie Minogue was that she was H&M’s co-designer for the limited beach collection
offered by the company in 2007. In addition, this collection was launched four weeks earlier in
Shanghai compared to the rest of the world11. The quote below shows the grandeur of the
launch event in China and the importance H&M attributed to its new market.

“Arriving guests were serenaded by a three-hundred-strong female choir singing acapella Kylie
songs, before entering a glittering kingdom where the Science Museum’s 2,000 square metre
floor was transformed into a shimmering sea of 100 kilos of Swarovski crystals. And five million
mirrored disco ball squares covered everything from a gyrating surf board where people had
their picture taken to Ming Dynasty-style vases full of complimentary mirrored pop badges to
commemorate the occasion, and Studio 54 disco-lush revolving circular beds were mirror-clad
and laden with sparkling silver cushions. Sparkle was also added to the event by Shanghai’s

9
http://about.hm.com/en/news/newsroom/news.html/en_gb/307064.html
10
http://www.at0086.com/at_News%5C289%5C340200534287198.html
11
http://about.hm.com/en/news/newsroom/news.html/en_gb/307064.html

48
starry likes including: Asian film star Zhao Wei; top model Du Juan and TV star Lee Xiao Ran. The
new Shanghai H&M store is situated at 645-659 Middle Huai Hai Road. ”12

Expansion China

The Chinese market is segmented into first, second, third and fourth tier cities, the classification
depends on the city GDP per capita and development. Figure 10 introduced the classification of
first and second tier cities is introduced below.

As mentioned, H&M focused on first-tier cities when it first entered China and established its
first flagship stores in Hong Kong and Shanghai on two of the busiest streets in respective city.
The first shop that opened in Hong Kong was 3500 square meters split on four floors 13. Also, the
first Shanghai shop had four floors. H&M opened three shops in Hong Kong and Shanghai during
its first year in China. Smaller shops were opened when the Chinese consumers were
acquainted with the brand14. The first shop in Beijing opened in 2009 at Qianmen, a pedestrian
street close to Tiananmen Square and a major shopping street (H&M, 2010). It was a flagship
store that was closely followed by an opening of other stores in the capital. In 2010, H&M
started a more focused expansion into second tier cities at the same time as it continued to
expand into first tier cities (H&M, 2012).

H&M’s expansion strategy was based on location and the retailer confirmed that it would rather
wait to open a store in a city than to open it in a less than optimal location15. Other H&M brands
such as Monki was launched in 2010 with Hong Kong as a test market, followed by COS in

12
http://news.cision.com/h---m-hennes---mauritz-ab/r/h-m-lands-in-china--shanghai-store-opens-today,c307064
13
http://www.hkdigit.net/2007/03/hm-grand-opening-in-hong-kong/
14
http://www.chinaeconomicreview.com/node/56727
15
http://africa.chinadaily.com.cn/entertainment/2013-10/09/content_17019349.htm

49
201116. H&M also introduced its specialty shops in China and opened its first male clothes in
Shanghai in august 2013.

Strategy China

Hong Kong and Shanghai became the test grounds for the expansion into East Asia. One reason
was H&M’s familiarity with these areas due to the production offices that were established
there in the 1990s. Thus, H&M already had a functional network and business knowledge in
these cities (ChinaDaily, 2007). The retailer entered China with the objective of growing 10 to 15
percent annually as this was the global growth target and needed to be able to move shops to
new malls that gained in popularity. Furthermore, experience from the US market had taught
H&M that it was cheaper and more efficient to outsource logistics and the company chose to do
so also in China (Boutrup, 2007). H&M was consistent with its strategy not to buy any store
locations but had lease agreements for its shops in Hong Kong and Shanghai. Renting instead of
buying was more important in China than in other markets due to the H&M management’s
expectation of a fast changing business environment.

Initially in China, H&M followed the same strategy as other foreign retailers and established first
in the bigger Chinese cities, whereas the two and three tier cities remained relatively
unexplored (H&M, 2014)(AR, 2013). As a complement to the physical shops, H&M also
developed an online presence in China. The retailer has an online shop in the Chinese market
since 2014. Prior to opening the online store, H&M had a website where the Chinese consumers
could view clothes and pricing and make their buying decisions before going to the physical
shops. Nonetheless, according to Niels Vinge, H&M’s director of investor relations, there was
still a huge potential for physical shops, in particular in well located malls. Even though store
space was scarce and expensive H&M had an advantage with its strong brand name than could
be used as leverage when negotiating for store space and rental terms. In general, there was a
10 percent increase of visitors to a shopping center when H&M opened a shop there (Hansegard
& Burkitt, 2011). A concrete example is the fact that H&M overtook Nike’s lease in a flagship

16
http://red-luxury.com/brands-retail/hm-targets-china-for-upmarket-monki-cos-labels

50
store in Beijing even though Nike was willing to continue the contract with its landlord. The
landlord preferred H&M’s young and fashion-oriented profile17.

H&M generally used a mix of expatriates and local employees in local markets. The importance
of expatriated staff was higher during the initial steps of the expansion. Knowledge sharing took
place between different local offices since staff from different H&M markets visited each other’s
offices to learn about operations and business processes. Moreover, the head quarter gave
support and trainings to local offices to improve performance. During the first years in China,
H&M engaged expatriates from seven different countries but employed a majority of local staff
(H&M, 2009).

4.2 H&M marketing mix

Price

The H&M brand was globally positioned as low cost and provider of affordable fashion. The
retailer said it offered democratic fashion with prices that enabled even lower income
consumers to buy and change fashion styles throughout the year. However, in China, H&M
entered the market in the segment between low cost apparel and luxury fashion. Consequently,
H&M priced its products higher in China compared to its other markets and served the mid-tier
segment of the Chinese consumers. These were generally young professionals that belonged to
the growing middle class. Hence, even though H&M was referred to as “cheap chic” in Europe,
the group targeted higher income groups in China. For example, a dress that cost $34,95 in the
USA sold for $47,78 in China. H&M’s biggest competitors in the Chinese market, Uniqlo and
Zara, followed the same pricing strategy and marketed their products to a higher price in China
compared to their local markets as well18.

17
http://www.chinaretailnews.com/2013/04/29/6537-nikes-beijing-flagship-store-replaced-by-hm/ (last accessed
2015-03-01)
18
http://www.chinaeconomicreview.com/node/56727

51
Product

The H&M clothing was divided into three categories: basics, current fashion and high fashion19.
The mix of the product range in the local shops depended on customer demand, based on the
last season’s sales, the store’s location and its size. High fashion clothing was only sold in the
bigger cities since these were produced in limited quantities. The H&M strategy was based on
economies of scale and large production batches for its products. Consequently, 80 percent of
store content remained the same globally and shops looked largely the same regardless if the
consumer was in Sweden or in Taiwan. However, the retailer made local adaptations when
necessary. For the Chinese market, H&M conducted focus groups to assess the size and color
preferences for the clothing. As a consequence, the retailer decided not to adapt the sizes to
the Chinese population and the first shops in Hong Kong and mainland China used the generic
H&M interior as a basis (Boutrup, 2007). Nonetheless, a few modifications in China were made.
One example is that green hats were not offered in China due to an old saying that wearing a
green hat refers to cheating. Furthermore, the white daisies used as a print on several clothes in
the global collection were not launched in China since white flowers are connected to death
(Madden, 2012). However, the product offer stayed mainly the same on the Chinese market as
on the global market and no changes were made to existing products.

Promotion

H&M worked with TV commercials, design collaboration/endorsement marketing and social

media to mention a few strategies the retailer used to promote its brand globally. Moreover,
the web site and the shops were important means to enhance the brand image. The campaigns
and store designs were created at the head quarter in Stockholm by the H&M marketing
department and subsequently dispatched to local markets. Campaigns always included the
designs of the season and also the price of the clothes that were broadcasted. The models used
in advertisements displayed a healthy image of the brand. H&M often mixed models of different
ethnicities to appeal to global consumers. Furthermore, design and style icon collaborations
were an important part of H&M’s strategy since 2004 when the brand had its first collaboration

19
http://about.hm.com/en/About/facts-about-hm/idea-to-store/planning-and-buying.html

52
with the German designer Karl Lagerfeld. Since, the brand has successfully collaborated
together with many famous designers and been endorsed by global artists such as Madonna,
Kylie Minogue and Beyoncé.

H&M’s basic marketing strategy in China was based on eventful openings of flagship stores on
important shopping streets to raise brand awareness. Once the flagship store was well received
and the customers acquainted with the products, H&M opened up smaller shops in the same
city. First, H&M targeted the top-tier cities in China where spending power was high and where
the sense for fashion was more developed compared to smaller cities. The objective was to
create a buzz around the brand and establish H&M as an already famous brand in China.
“Because launching ad campaigns is expensive in China and Zara and H&M had few stores until
recently, these brands have generally relied less on advertising and more on generating buzz
through flagships and events20.”

Moreover, H&M leveraged collaboration with style icons in China by giving the Chinese
consumers prior access to large collections by Madonna and Kylie Minogue during the launches
in Hong Kong and Shanghai. Regarding style icon collaborations, H&M’s advertisement for these
product launches did not differ between global and local markets. The same David Beckham clip
could be viewed on Chinese social networks as well as the global networks. In addition to global
collaborations, local endorsements were important to H&M when promoting itself on the
Chinese market. In 2013, H&M cooperated with Tine Leung – a Hong Kong based fashion
blogger – to make a Hong Kong life city guide. The video is mainly about Hong Kong rather than
about the H&M brand. However, it created brand awareness and showed certain humility in
that H&M was willing to learn more about its new market 21. H&M also ran campaigns with local
focus such as the Chinese New Year campaign 2014 where the target markets were China, Hong
Kong, Singapore and Malaysia. The campaign used two, well-known, Asian super models to
endorse the brand – Sui He and Tian Hi22. In addition, Anna Dello Russo’s collection of
accessories promoted by H&M in 2012 used local endorsement by the famous Chinese actress

20
http://www.chinaeconomicreview.com/node/56727
21
https://www.youtube.com/watch?v=GqkLt1NZxWs
22
http://www.gua.com.my/seroja/fesyen_rekaan/H_M_Celebrates_The_Year_Of_The_Horse.html

53
Fan Bing who was photographed in the jewels. The photos were, subsequently, launched on
Weibo where they created a high buzz for the collection and increased H&M’s brand awareness.
The local celebrity endorsement was deemed necessary since H&M anticipated that Anna Dello
Russo was not as known in China as in other markets (Schuster, 2014).

Place

H&M operated through three sales channels: stores, catalogues and internet. The physical
shops constituted the most important sales funnel for H&M who had more than 3000 shops in
2013. H&M had three types of stores which were normal stores, flagship stores and specialty
stores. Normal shops included a part of the H&M product range and were the most common
type of shop. Flagships shops were bigger and included the entire array of the H&M clothing
products for women, men and children. Specialty shops were focused on men or children fabrics
only. The catalogues were not found in all markets but were focused on the Scandinavian and
German markets. The internet shops were found in 14 of H&M’s markets and enabled the
consumers to easily access the H&M clothing from home. Nonetheless, the physical shops were
H&M’s most important distribution channel. In addition to the e-commerce, H&M also had an
online presence on global social networks such as Twitter, Facebook and YouTube where it
broadcasted its commercials, ran campaigns and interacted with its consumers to strengthen
brand identity (H&M, 2014).

In China, the consumers had access to physical shops and the e-commerce but the catalogues
were not distributed. As in other markets, the shops were split by flagship, specialty and normal
shops. In general a flagship store was launched in a city before smaller stores were established.
Moreover, H&M launched its online shop in China during the spring 2014. Prior to the e-
commerce the retailer already had the product website available for consumers that wanted to
view the products and find information about pricing and the brand. In general, the global and
local e-shops had the same structure with product offers for ladies, men, children and H&M
home. However, a few differences were present. The Chinese web site highlighted promotions
and discounts to a greater extent and local holidays messages were communicated on the site.
Moreover, H&M Life was more emphasized on the Chinese site. H&M’s online presence in China

54
also included the social networks Sina Weibo, Youku and Douban which were regularly updated
in order to keep a close contact with local consumers. The Chinese networks where H&M was
present are listed below.

 ~853 000 follower on Sina Weibo 201523

 Official Youku channel24
 ~65 000 followers on Douban25

Sina Weibo is a Chinese social network where the company can post short updates as can be
done on the micro-blog Twitter and where followers can like, comment and share the content.
The H&M Weibo site was quite different from the company’s Facebook and Twitter pages and
more customized towards local users. Youku is the Chinese equivalent of YouTube. H&M was
operating on both video channels and displayed the same promotional video material on the
landing pages in 2015 – showing signs of a global marketing strategy.

Performance in China

In general, an H&M store becomes profitable after a short while in its Western markets, if this is
not the case the shop is either completely closed or replaced to a more profitable location.
Since 2007, H&M increased its sales (incl. VAT) from 92 to 177 billion SEK (for further details
refer to appendix D).Even though growth was slower during the crisis years 2008 and 2009 H&M
managed to increase sales (H&M, 2012, 2015). As can be seen in figure 11 below H&M’s
economic performance was stable and particularly strong during the first years of the expansion
to China where annual sales grew between 83 and 42 percent. For the years 2013 and 2014
H&M chose not to disclose figures specific for the Chinese markets that are comparable with
previous years’ figures. However, net sales in China was stated to be 5 957 million SEK in 2013
and 8 018 in 2014 which gave a year-on-year growth of 35 percent. The slowed growth in sales
was aligned with the slowed growth in opening up of new shops on the Chinese market.

23
http://www.weibo.com/hm
24
http://tvs.youku.com/hm
25
http://www.douban.com/group/40831/

55
However, H&M was well above its target growth of shop and sales increase of 10-15 percent
during all the years it operated in China.

H&M’s brand image in China was overall positive with the Chinese consumers appreciating the
retailer’s efforts in mixing global and local marketing strategies. Moreover, as H&M worked with
local key opinion leaders in the fashion field it was successful in promoting its new launches
online and in social networks – channels that became increasingly important in China (Verot,
2014).

56
 5. Market Analysis

5.1 PEST analysis

The Chinese macro environment is analyzed through the political, economic, social, and
technological factors included in the PEST analysis. The time frame for the research is between
2007 and 2014 which are also the years when H&M was present in China. The different
elements of the model influenced H&M’s strategic fit with its environmental context.

Political

In 2007, China was politically stable with no war and low social turmoil in the country. Hence, to
establish a business in China did not entail a great physical risk for any foreign investor’s staff or
its capital goods. One reason for the political stability in the country was the fact that China was
a one-party state with no general elections for parliament. Political power is concentrated to
key representatives. Moreover, political stability enabled China to conduct policies to enhance
the economy and market performance that will be the focus of this section.

In the beginning of the 2000s, China initiated the ‘Go West Policies’ with the objective to
improve the economic conditions in the western part of the country that had not experienced
the economic growth entailed by the opening up policies and the creation of the special
economic zones in the East of China that took place in the 1980s and 1990s. Western China
accounted for 60 percent of the country’s surface but only 25 percent of its population. Since
the policy was initiated, a 4000 km long gas pipeline and a railway of 2000 km have been built to
favor the shipment of energy and goods (Moody, Hu, & Ma, 2011). Prior to 2000, the Western
region attracted a bare 5 percent of foreign investment which has now increased. Companies
that established in the west after the policy was initiated enjoyed a corporate tax of 15 percent
instead of the common 25 percent which spurred foreign investment (Moody et al., 2011;
Plafker, 2001).

The 11th of December 2001, China entered the WTO and became a part of the global trade
system. China amended more than 7000 quotas, tariffs, and other trade barriers during, prior

57
and after its accession to the WTO to align with global standards and to move towards a market-
based economy26. Previously, the Chinese economy was, to a large extent, driven by relations,
as opposed to by market factors, and relationships were an important factor when conducting
business in China. Guanxi describes the connection and ongoing relationship between two
different parties such as a manager and a government official (Xin & Pearce, 1996). The
importance of guanxi decreased with the inauguration to the WTO but still stayed crucial when
negotiating with government officials and when negotiating contracts. However, the terms of a
contract was prevalent and more important than a guanxi connection (Mia, 2009). Despite
China’s efforts and fast-growing economy, it is still considered to be a transition economy that is
moving from a planned economy to a market economy. The international society is asking for a
more stringent implementation of the laws that were amended following the WTO
membership. However, two different types of demands were posed on China: external demands
required further opening up whereas internal demands required continuous protection and
development27. Nonetheless, China experienced close to a double digit growth rate during
the decade after its WTO entry and increased its share in world28 output from two percent to
thirteen percent during the same period. China is now considered the second economy in the
world after the USA (OECD, 2012).

Economic

The Chinese economy experienced strong growth the first years H&M operated in the country.
This despite the financial crisis in 2008 as can be seen in figure 12 below. When H&M entered
China the GDP had a growth rate of 11,9 percent in 2007 and even though the growth slowed
during the financial crisis it was still relatively strong compared to the European market 29.

26
http://www.economist.com/node/21541448
27
http://www.wto.org/english/thewto_e/acc_e/s7lu_e.pdf (last accessed 2015-04-24)
28
Measured on a purchasing power parity basis
29
http://www.indexmundi.com/g/g.aspx?v=66&c=ch&l=en

58
Lardy (2012) pointed out two issues with the Chinese economy that still persisted after the
economic crisis: too much dependence on exports and residential property prices. Cheap
exports were made possible due to state subsidies for water, electricity and access to cheap
bank loans. China had 33 percent of the global textile market which was one of its biggest
exported products. Its main trading partners were the USA and Europe whose economies
slowed down significantly during the crisis. The economic slowdown of key trading partners
meant a threat to the Chinese economy that was dependent on its export to maintain constant
economic growth. The issue with the elevated residential property prices was directly
connected to the low disposable income in Chinese households which, in turn, had an impact on
domestic consumption. The high property prices were mainly a consequence of increased
interest rates that were applied to keep investors and real estate agents out of the market
(Lardy, 2012). However, the large domestic market was considered one of China’s biggest
advantages when the crisis hit and domestic consumption was encouraged which favored
companies as H&M selling in the local market.

To further enhance growth, it is important with a strong middle class that can drive the
economy forward (Lasserre, 2007). The Chinese consumers were divided into four segments:
poor; mass middle class; upper middle class; and affluent. The middle class with annual earnings
between 60 000 and 229 000 CNY grew from four percent of the urban Chinese population in
2000 to 60 percent of the urban population in 2012. Moreover, the mass middle class (annual
59
earnings between 60 000 and 106 000 CNY) was the biggest segment in China and constituted
54 percent of total consumption in 2012. The majority of the middle class is found in first and
second tier cities. However, the middle class in third and fourth tier cities were growing at a
quicker rate (Barton, Chen, & Jin, 2013).

Social

The Chinese society is based on a mix of Confucianism, Daoism and Buddhism. These roots
characterize China as a collectivist society – an ideology that has been challenged by generation
Y. This generation was born during the 1980s – 1990s and often as the only child in the family
due to the one-child policy. Consequently, this generation embraced individuality and related
values to a larger extent than their parents’ generation. Also, generation Y was more
technologically savvy compared to older generations and were able to establish a “me culture”
where focus was more on the individual than the group (Barton et al., 2013). Moreover,
globalization contributed to increase the focus of the individual in China. It was possible for
(young) Chinese to express themselves through various internet channels such as blogs, Renren
and Weibo30. It was also possible for the new generation to afford clothing and products that
not only served a practical purpose but that also allowed them to express who they were
through their clothes and style.

Technology

The technology factor generally includes spending on research and development (R&D),
technology incentives and innovation and how well-developed the country is in technological
terms. In this paper, the focus is on the usage of internet and China’s online users since this
technological aspect is growing in China and is important to retailers who communicate through
online channels.

In 2014, the number of internet users in China was 632 million, an increase from 111 million
users nine years earlier. The number of active smart devices (phones, tablets) was 700 million.

30
Renren is the Chinese equivalent to Facebook and Sina Weibo is the equivalent to Twitter.

60
These numbers give an indication of internet’s breakthrough and usage in China. Approximately
24 percent of the users were using the internet on a mobile device in 2005 compared to 81
percent in 2013. The internet penetration rate increased from 8.5 percent to 45.8 percent
during the same period. People aged between 20 and 39 were the most common users of the
internet during this period (Woetzel et al., 2014). The internet usage and penetration is
visualized in figure 13 that also makes a comparison between China and the US.

Even though internet penetration is large and growing in China it varies between different
regions. Beijing together with Shanghai and Guangdong had the largest internet penetration
rates whereas Tibet and Guizhou had lower amount of users but higher growth (see figure 14
below). High income regions with well-built infrastructure tend to have more internet users and
China’s focus on developing the western region contributed to increase the number of internet

61
users in that area. Lower literacy rates were also a contributing factor to the lower use of
internet services in the rural areas. One of the most popular chatting systems in China – WeChat
– is now moving closer towards the e-commerce sector. Together with retailers, it offers the
consumers the opportunity to use their WeChat account to make buying decision and pay.
Examples of companies that already have WeChat service accounts are McDonald’s and
Starbucks (Milward, 2014).

E-tail is retail commerce that is carried out online where the consumers can buy their products
directly from an internet site without ever entering any physical shop. Depending on the
company, e-tail is accessible from computers and various mobile devices. In this thesis, e-tail
and e-commerce are used interchangeably. Approximately $300 billion was spent by consumers
on e-tail in 2013 and China’s internet economy’s share of GDP is at 4.4 percent which is higher
than the USA and Germany. The e-tail accounted for 7-8 percent of total retail sales. Tencent
and Alibaba are the biggest players on the online market in China (Bischoff, 2014). Clothing
belongs to one of the most common goods purchased online together with books and consumer
electronics (Milward, 2014).

62
5.2 Porter’s five forces
To understand the strategic fit between a company’s strategy and its contextual environment it
is important to assess the industry factors in the new market. If the firm fails to understand
these factors it cannot create an appropriate strategy that will help it thrive in its new
surroundings and it will not be able to make a post-implementation evaluation of any potential
strategic gaps between current and desirable position.

Threat of substitutes

Products in other industries that can replace the products in the analyzed industry constitute
the threat of substitutes. For the fast-fashion industry that targets the consumers in the middle-
income segment luxury fashion or low priced, non-branded, apparel are examples of
substitutes. In the 2000s, the luxury segment grew rapidly in China as its high income class was
growing and luxury products were a means to show success and status. Gift-giving, which were
also popular in China, contributed to a growing luxury segment. Moreover, increased disposable
income had as a consequence that consumers could spend an increasing amount of money on
life-style products and services – thus having the opportunity to substitute fashion purchases
with services or other products. However, in 2013, the Chinese government banned radio and
TV ads promoting expensive gifts, which was an expansion of the regulation passed in 2011 that
banned words such as luxury and royal from billboards in Beijing. The first regulation was
applied to fight corruption and the second to avoid reminding people about the growing income
gap (Phillips, 2013). Moreover, growing disposable income also implied a growing middle class
which was H&M’s target group and as clothing still remained a necessary good the threat of
substitutes was relatively low even though it was increasing in China (CBRE, 2013).

Buyer (customer) power

The buyer power refers to the power the buyer has over the provider of goods or services. Due
to increased wages in China and a large offer of different retailers, the buyer power was strong

63
as the consumer had a multitude of options when making its buying decision. Chinese
consumers were often characterized as having low brand loyalty and of being able to move from
one brand to another if the perceived value proposition, in terms of price and quality, was
better. Moreover, the expanding e-commerce gave Chinese consumers increased power since
they were able to quickly find and compare products (Chan, Chen, & Ying, 2013). To convince
consumers to choose the H&M brand the retailer needed to be able to provide a product that
was perceived to be of higher quality compared to its competitors and offer it to a price that
was not deemed too high nor too low. Moreover, to mix and match high end labels with fast
fashion was the new trend in China where mid-range consumers invested in a few key designer
clothes and matched them to lower priced apparel. The burgeoning middle class had adapted
the mix and match trend which also fit companies such as H&M (J. Lu, 2013).

Moreover, as the middle class embraced social media and digital, the consumers were likely to
discuss their favorite brands and least favorite brand on social networks. This possibility
increased the buyer power as word-of-mouth was one of the most important information
channels for Chinese consumers. Furthermore, the online opportunities changed slightly the
market and emotional selling (highlighting perceived benefit rather than the functionality of the
product) became more important since retailers were now increasingly promoting its brand
image online. Hence, brands with experience in appealing to customers’ feelings would be one
step ahead even though a dual marketing strategy was proposed by several actors on the
market (Li, 2014).

Threat of new entrants

The threat of new entrants assesses if competitors are likely to enter the industry due to low or
high barriers of entry. The Chinese fast fashion market became increasingly competitive with
foreign and domestic players catering to the same customers. It was also a fragmented market
and brand loyalty was generally low (Chan et al., 2013). The top ten fashion retailers made five
to six percent of total annual sales for the entire sector. Furthermore, the Chinese retail
segment was a high growth market with an annual growth rate of fifteen percent (Lu, 2010).
The quick growth rate and low brand loyalty were likely to attract further fast fashion retailers

64
to establish. The fact that fashion retailers could enter the market through either wholly-owned
operations, franchising or joint ventures contributed to an easier entrance for new,
international, players. Hence, the threat of new entrants was high.

Supplier power

Supplier power refers to the influence any supplier can exercise on its buyer. A concentration of
suppliers, volume and differentiation of products all affect supplier power. Standardized
products and a high concentration of purchasers lower the supplier power since the product is
easily produced and the switching costs from one supplier to another is relatively low. The
apparel, such as fast fashion clothing, offered standardized products and relatively low
switching costs as many suppliers offered similar products. In 2013, China’s manufacturing
sector experienced a drop in demand for apparel production (up to 30 percent for some
manufacturers). One reason was lower demand from main markets such as Europe and the USA
due to the financial crisis in 2008. Another reason was the wage increase of blue collar workers
in China which made labor more expensive relative to labor in neighboring countries. Improved
work conditions also entailed greater costs to the apparel manufacturing and was generally
transferred to the purchaser31. Hence, the supplier power of apparel manufacturers was low in
China.

Another important supplier to retailers such as H&M was real estate owners since H&M was
renting its store space. Commercial property rents increased with 20.5 percent between 2008
and 2013 caused by an increasingly competitive environment. Many retailers tried to secure
prime locations in popular shopping malls and streets (CRBE, 2013). Rents soared in popular
areas of first tier cities where there were fewer opportunities to add store space compared to
lower tier cities. Consequently, the company that was capable to pay the highest price and who
was estimated to bring the most customers to the mall or to the street would win the
negotiation over store space. However, in second and third tier cities the construction rate of
new malls and shopping areas was fast and the vacancy rate relatively high (Hart, 2012). Hence,

31
http://www.scmp.com/business/china-business/article/1408015/chinas-factory-towns-fall-quiet

65
real estate agents and companies had high negotiation power regarding the rent and terms of
the contract in first tier cities such as Hong Kong and Beijing but less so in second and third tier
cities.

Intensity of competitive rivalry

The intensity of competition is decided by the number and power of competitors in a particular
field of expertise. H&M entered China in 2007 when many international and local fashion
retailers were already present on the Chinese market. Competitors fought for premium retail
space, distributor networks and strategies to convince consumers to buy their products. The
intensity of competition increased between 2008 and 2014 due to new, international, entrants
to the Chinese retail markets such as Bershka and Forever 21 (CBRE, 2013). Figure 15 below
shows the international fast-fashion retailers established in China the last fifteen years.
Moreover, local retailers with better understanding of the market, a good network and
knowledge about consumer preferences were expanding simultaneously as foreign companies
enter China. Hence, the intensity of competitive rivalry is high.

66
Figure 16 below shows a summary of Porter’s five forces in China related to the fast fashion
industry.

67
 6. Analysis
This part combines the findings of the last parts related to the contextual environment in the
Chinese market analyzed through the PEST analysis and Porter’s five forces and the case
company’s, H&M, strategy. The analysis chapter discusses in particular whether H&M was able
to obtain strategic fit with the Chinese market and if it was necessary for the retailer to apply
any adaptations to its core strategy to do so.

H&M expanded into China with obvious market-seeking purposes. The retailer had assessed
consumers’ spending power and attitude towards fashion as well as the population growth to
make sure that the timing was right. One of H&M’s strengths when expanding into China was
that it already had extensive experience from previous international expansions. Moreover,
even though competition was strong in the Chinese market brand loyalty was low and the
market was highly fragmented and offered opportunities for new comers. Individual values and
fashion had become increasingly important in China as the young Chinese embraced Western
values to a greater extent than previous generations. Disposable income also increased rapidly
after the Chinese accession to the WTO which enabled consumers to spend more of their
income on goods other than necessities. Even though the Chinese upper middle class and high
class had an aptitude for luxury goods the Chinese government issued policies discouraging the
expensive gift-giving and the use of particular words related to luxury goods in commercials – to
the benefit of fast fashion retailers such as H&M who targeted the middle-income segment and
who were perceived to be fashionable and of decent quality.

H&M followed its core strategy and established as a wholly owned company in China. To be the
owner of operations in the Chinese market gave H&M the flexibility to implement its own
expansionary strategy, including what cities to expand to and the timing for expansion to each
city. Moreover, by renting store space H&M could also relatively quickly set up a shop in
upcoming and buzzing shopping streets and shopping malls. This strategy fit a fast-moving
market such as China and gave the retailer flexibility that could be used as competitive
advantage. H&M’s entry strategy built on a staged entry model which consisted of opening the
first stores in Hong Kong and Shanghai where the retailer had previous experience and that also
served as storefront to the rest of China. Moreover, the brand created large launch events on

68
both launch occasions to acknowledge the commitment to its new market and its consumers.
Once H&M had received positive response from the first two cities it ventured further into
mainland China since the brand now had created a buzz and recognition necessary to expand
further. Subsequently, H&M expanded into second and third tier cities while continuing to grow
in the larger cities. H&M followed a similar launching and expansionary strategy as many of its
international competitors in the Chinese market. It is a strategy that fit the market as
conventional marketing methods were not likely to have the same breakthrough effect, in
particular if the brand was unknown on the market. By creating large launch events and thus
making a big splash in the market H&M created enough buzz about its brand as being successful
and committed to China. Also, to focus on two major cities that attract many visitors from other
parts in China enabled H&M to increase the knowledge about its brand in other parts of the
country prior to establishing a shop in these regions.

H&M deviated slightly from its price model when establishing in the Chinese market. In China,
H&M targeted the middle income segment whereas it commonly positioned its brand for low to
middle income segments in its other markets. This strategy was adopted to meet the unfilled
demand for fashion that provided good quality but that was not considered a luxury good.
H&M’s international competitors also chose to set their prices slightly higher in the Chinese
market compared to the Western markets. Moreover, many retailers that provided clothing for
similar prices offered sportswear which was not suitable work wear for fashionable youth which
was H&M’s target segment. As mentioned, the fashion market was highly fragmented and
brand loyalty was low which gave H&M a needed opportunity to establish and gain market
share. In addition, to target the young Chinese in the growing middle class gave H&M the
opportunity to gain a foothold in a market that is likely to continue to grow. Despite a higher
price level, H&M was well received in China with customers that queued outside the shops
when they first opened.

The price changed slightly but the product offer stayed the same in the Chinese market. H&M
entered the market with the same product range it offered to the global market. The retailer
leveraged the increased interest in global trends and fashion that started to appear in China. To
keep its product range constant in all markets also enabled H&M to continue to achieve
69
economies of scale in terms of design and production. However, small local adaptations were
made in terms of product range since the significance of colors and specific patterns were
different in China compared to other markets. It is difficult to say whether these changes were
beneficial for the retailer as it is not possible to assess the customer reaction if the restricted
collections had been launched in China. However, it is reasonable to believe that the changes
were favorable for the company in the sense that the retailer mitigated a potential loss of sales
and damaged brand image by withholding particular collections from the local market. The
collections were launched in China at the same time as the rest of the world which, once again,
enabled H&M to leverage economies of scale in terms of products and marketing efforts. The
exceptions to the timing of collection launch were related to the launch of the brand H&M in
China where the retailer chose to pre-launch specific collections to honor its new market.

In China, H&M communicated its launches of new collections on posters, its website, and its
shops and in social media. This largely followed the retailer’s strategy in other markets even
though the usage of TV commercials was lower. H&M was present on social networks such as
Weibo and Youku where it promoted the brand through videos, local endorsements and by
keeping an ongoing conversation with its customers. H&M also had a strong social presence on
its global markets in networks such as Facebook, Twitter and YouTube. Hence, the social
network focus in China was an extension of H&M’s global strategy of engaging socially with its
customer – even though the focus networks differed. As word-of-mouth was considered a very
important means for brands to establish good brand image and brand loyalty in China the
applied social media strategy was well aligned with how brand perception was built in China.

H&M used endorsement marketing globally with well-known, global, celebrities. H&M kept this
strategy in the Chinese market but adapted the approach slightly to better fit local expectations
and preferences. Even though it can be argued that China had become increasingly westernized
the last decades local music and TV celebrities were likely to cause a bigger breakthrough, in
particular in smaller cities where global entertainment was not as known. Hence, H&M let
Chinese super stars be photographed in their clothes and jewelry, pictures that were
subsequently spread on the local social networks. This strategy was well received in the Chinese

70
market with consumers appreciating the fact that their idols were dressed in H&M whereas less
known, global, stars were unlikely to have had a similar impact.

H&M followed its global strategy when setting up its physical shops in China and could leverage
economies of scale for its shop design that was made in Stockholm. The retailer also decided to
follow the same strategy in terms of product range based on the type of shop (flagship, normal,
and specialty). A difference between global and local markets was that fewer specialty shops
had opened in China who got its first shop specialized for men in 2013. H&M launched its online
shop in China in 2014 – seven years after the initial launch in the market. However, the website
had been online on the Chinese market since the start even though the consumer could
previously not do their shopping online. The Chinese e-commerce and website were similar to
the equivalents in H&M’s other online markets. However, H&M launched its e-commerce in
China at an earlier stage compared to many of its other markets where the retailer has been
present for a longer time but where it chose not to open an e-commerce. To establish an e-shop
relatively early on the Chinese market was likely to have been a good strategic move by H&M. E-
tail increased significantly in China during 2000s as the internet penetration and usage of mobile
devices also became increasingly important. However, as H&M has not yet released a split of its
sales between e-tail and physical shops for the Chinese market it is difficult to assess whether
the retailer should have changed the approach or whether the global strategy is well
performant in the Chinese market.

Figure 17 sums up the environmental context, the H&M strategy in the local market (adapted or
not) and if a strategic fit was achieved.

71
Figure 17 Strategic fit between H&M’s strategy and the Chinese environment

Environmental context H&M Strategy Strategic fit

’Go west policies’ – favorable Focused initially on 1st and Good timing and fit as H&M's
policies and measures were 2nd tier cities but expanded expansion strategy was
initiated by the Chinese into 3rd and 4th tier cities aligned with the Chinese
government and grew the when experience with the government's policies to
potential market for foreign market grew promote less developed
companies markets
Chinese WTO accession in 2001 Entered after China's WTO The timing was good as the
to which subsequent accession economy grew rapidly after
amendments of policies made it the WTO accession. Thus, the
easier to do business with and in strategic choice of timing was
China well planned
Strong economic growth and Targeting young Good fit as the H&M
increased spending power professionals in middle targeted similar segments in
income segment its global markets, slight
adaptation made since H&M
targeted lower income
segments in other markets as
well which was not the case
in China
Government policies to Targeting middle income Good fit as H&M targeted
discourage promotion of luxury segment but collaborations middle income segment but
goods and expensive gift-giving with high-end fashion continued its collaboration
designers to appeal to with high end fashion
higher end clients designers to appeal to
consumers with a flair for
luxury which was the case in
China where, despite

72
 government policies, the
emphasis on high end
products was significant

Domestic consumption Rapid expansion on the Good fit and good timing,
encouraged after the financial Chinese market with new H&M leveraged the
crisis 2008 shop openings annually government’s emphasis on
domestic consumption in the
Chinese market
Growing middle class in 3rd and Expansion to 3rd and 4th Good fit as, after having
4th tier cities tier cities once established gained experienced in 1st
in 1st and 2nd tier cities and 2nd tier cities, H&M
expanded to 3rd and 4th tier
cities which followed its
staged expansionary strategy
made in other markets as
well
New values with generation Y Promoted global brand Good fit as the global brand
such as individualism and message on the Chinese message about expressing
increased focus on global trends market with very few local oneself and to create self-
and values adaptations identity through fashion was
well received in the Chinese
market
Increase of internet penetration H&M followed its global The adaptation to change
and increased usage of computer strategy to promote its from global to local network
and mobile devices brand on social media was a good decision as China
networks but used local does not enable access to all

73
 networks to reach the non-Chinese social networks
Chinese consumers (Facebook is inaccessible in
China)

E-commerce became increasingly Established an online web Good fit but as e-commerce
important site where clients could was deemed highly
view products, prices and important for success due to
shops and launched e- the rapid increase in e-tail
commerce after 7 years in H&M should have considered
the market to launch its e-tail at an
earlier stage
Word of mouth off and online Strong online presence in Followed global strategy but
important for brand perception major Chinese social applied on local networks to
networks where discussion meet the new consumers,
was conducted with local endorsements were
consumers promoted in the local
networks together with the
global endorsements
Competitive and fragmented Positioned in the growing Adaptation from global
market fast fashion segment for positioning of cheap,
middle-income groups democratic, fashion but
followed core strategy of
fast-fashion

74
 7. Discussion
This chapter discusses what was done in the thesis and how the different methods and models
helped to answer the research question. The objective of the thesis was to found out if and how
H&M obtained a strategic fit with the Chinese market when it expanded to this new market in
2007. To do so, the researcher chose to use a case study approach based mainly, but not
exclusively on qualitative data – financial data was included as quantitative data to assess
financial performance in the case company. The Chinese market was assessed through the PEST
analysis and through Porter’s five forces since strategic fit implies a comparison between two
variables which, in this thesis, were H&M as case company and China as the contextual
environment. The focus of the case company was its global operational strategies and how
these were applied to the Chinese market. Subsequently, the retailer’s China strategy was
analyzed and it was assessed whether H&M managed to obtain strategic fit with its new market
and how many (if any) adaptations to the strategy had to be done. The focus of the case
company was mainly on its marketing strategy which was assessed through the classical market
mix, also referred to as the 4Ps.

H&M expanded to China by largely applying its existing strategies that were used in its global
markets. The brand was well received on the Chinese market as the company managed to
create a buzz and high expectations before launching its first shops in Hong Kong and Shanghai
– a strategy that they leveraged when they expanded to other new cities in China. As a
consequence, consumers were queued outside the new shops several hours prior to opening to
be able to benefit from promotions promised to the first shoppers in the new shop. Moreover,
H&M filled a gap between low cost apparel and luxury fashion items. The retailer targeted
young professionals in the middle income segment. This target group had a disposable income
that was increasing and wanted to move from low cost and low quality but did not gain enough
to buy high end fashion. Furthermore, they belonged to Gen Y who was a generation that, in
general, grew up as the only child due to China’s one-child policy and who embraced more
individualistic values compared to previous generations – one outcome was to express one’s
identity through fashion. Hence, the fast fashion section wherein H&M operated appealed to

75
this segment since the consumers could acquire several fashion items to a good price while
keeping the notions of fashion and quality.

Even though H&M decided to follow its core strategy when expanding into China it made a few
adaptations to better serve the local market. The most remarkable of these changes was the
price change. The product range offered in China is priced approximately 10 percent higher
compared to H&M’s domestic market Sweden. H&M followed its competitors’ strategy
regarding the price increase, for example, Zara entered China one year prior to H&M with the
same strategy. Moreover, H&M increased its online presence when launching in the new
market as the retailer realized that it would not be possible to leverage its existing social
networks as some of them were blocked by the Chinese government. Instead, H&M joined the
most common Chinese social networks such as Weibo, Douban and Youku in which they
engaged with consumers. The retailer launched its global commercial messages also in the
Chinese networks but sometimes made smaller, local, adaptations to let local celebrities
endorse the brand and its products rather than solely using global style icons – this in order to
better reach its local audience. The product range was around 80 percent the same in China as
on the global market which is a common strategy for H&M. No adaptations to sizes or design
were made but H&M avoided launching collections whose colors and patterns could have been
perceived as offensive on the Chinese market. H&M decided to follow its core strategy in
relation to a majority of functions which proved to be a successful choice. The retailer’s
performance on the Chinese market was above expectations and the company experienced a
growth rate between 42 and 108 percent between the years 2007 and 2014 (on a year-on-year
comparison) which was well above the annual target of 10-15 percent.

The reason that H&M chose to follow, to a large extent, the same strategy in China as in many
others of its international markets is most likely to be able to leverage economies of scale.
Functions such as design, marketing and purchasing are centralized to the head office in
Stockholm and dispatched to international markets. One reason that H&M waited with entering
the Chinese market (it was a follower) can be that it wanted to assess how well international
competitors performed. Another reason can be that H&M wanted the Chinese market to be

76
ready for the retailer’s approach to fashion and waited until Gen Y to embrace global fashion
notions.

These findings are important since they give an indication to whether it is possible to use a
global strategy in local markets that are perceived to largely differ from the company’s domestic
market. In particular, as Chinas has been and still is a market in focus for business developers
due to the size of the potential market with 1.3 billion people and an economic growth that is
stronger than in most part of the world. Moreover, the Chinese government’s focus on easing
up policies and legislation to facilitate for foreign companies to trade with and to do to business
in China increases the country’s attraction to foreign investors. Finally, China is currently
promoting domestic consumption which increases the sales potential for retailers operating
locally. However, many companies have expanded to China and failed since they either did not
understand the market correctly or the market was not ready. The research conducted in this
thesis can help business developers to assess the market situation and what strategic steps that
needs to be considered when expanding to this dynamic market. Further research is needed to
better understand the dynamic perspective and how the market is changing, as it is a fast-
moving market, and how existing retailers react to these changes. It would be interesting to
understand if the companies choose to adapt strategies to follow the dynamics of the market or
if they consider themselves so well established, with a strong consumer base, that they chose to
continue to follow its core strategy even though the market changes.

77
 8. Conclusion
The aim of this thesis is to understand if H&M was able to apply a global strategy on the Chinese
market or if any adaptations were necessary to make in order to obtain strategic fit with the
new market. The particularity with the Chinese market is its fast economic growth and dynamic
consumer environment that makes it a complex market to understand. To investigate how a
successful retailer navigates in this market and what strategy it applies will improve general
understanding of expansion to China. The contribution of this thesis is mainly related to the
business field and its actors can use the findings to guide their strategic decisions when
operating on the Chinese market.

Relevant literature related to international business, marketing and strategic fit has been
reviewed to establish a theoretical framework that guided the analysis. Strategic fit between the
company, its strategy and the context wherein it is implemented is a concept that is becoming
increasingly important since more companies are expanding internationally and need to
understand the implications this will have on the firm in the new market – and in the end, on
overall performance and strategy. This thesis investigates the research question “How does
H&M’s marketing strategy apply to the new business environment in China and how do the
strategic fit between H&M and the Chinese market influence the company?”

To find the answer to this question this thesis first reviews the characteristics of the Chinese
business environment. First, macroeconomic factors included in the PEST analysis are
investigated to get a better understanding of the overall country situation. Second, the industry
level factors were assessed through Porter’s five forces. This improves the knowledge about the
competitive landscape in the new market and how a company can position itself within this
micro level environment. Third, the case company H&M was analyzed with a focus on current
global strategies and, subsequently, how these strategies were applied to the Chinese market.
Finally, the analysis assessed the strategic fit between H&M’s strategic choices and the context
wherein it was operating.

To a great extent, H&M applied its global strategy on the Chinese market with a few exceptions.
The retailer’s strategy seems to have fit the contextual environment in China as the brand was

78
well received on its new market. H&M increased annual sales on a year on year basis in China,
despite the financial crisis that occurred in 2008. Moreover, the retailer was able to keep its
expansionary growth goal of increasing the number of shops with around 10-15 percent
annually. In China, H&M opened up new shops with an annual rate between 42 and 108 percent
between 2007 and 2014. The growth was higher during the first years of operations whereas it
has slowed down the last years even though it stays well above H&M’s stated goal of 10-15
percent. Two big changes that H&M did to fit its new market were to increase product prices
and to establish a presence on local social networks. H&M followed competitor strategy when
placing its pricing a bit higher on the Chinese market compared to its domestic market – thus, it
catered to the middle income segment. The strategic choice to add local Chinese networks to its
online operations was well received in China where H&M quickly created a buzz and acquired
local fans. Social media is an extension to word-of-mouth as an important marketing channel in
China and it is crucial to implement a successful strategy in these channels since news spread
rapidly between consumers. Even though H&M launched in the Chinese local networks the
retailer leveraged its global marketing efforts in these channels. However, H&M also used local
celebrities for brand endorsement and to launch its collections locally. The attention paid to
local celebrities can be considered to an already existing strategy of icon style collaboration.
Hence, the strategy did not change but the operational implementation of the strategy was
adapted to local conditions. As Chinese consumers, in particular the younger generations,
consider the internet as a useful source for information H&M made the right decision to adapt
some of its online strategy implementation to better fit the local market. Moreover, H&M’s
choice to launch its e-commerce in China was also a good fit with the Chinese market where e-
tail is increasing continuously. It is possible that the retailer should have considered launching
the e-tail at an earlier stage to better serve the growing segment of consumers that prefer to do
their shopping online.

As mentioned above, these research findings can help business developers to make better,
strategic, decision prior to launching in new markets – in particular China. It is important that
the business developer understand the dynamism of the Chinese market and the opportunities
these create for those who can leverage them. However, the thesis also raises some questions

79
that can serve as a basis for future research. An interesting angle could be to investigate the
importance of social networks to a brand’s success in China and whether it would be enough to
leverage a global strategy only or if it is necessary to adapt to local preferences (as did H&M).

80
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 10. Appendix

9.1 Appendix A – Brands in the H&M Group

87
9.2 Appendix B – H&M international expansion
Year Country Year Country
1947 Sweden 2008 Jordan*
1964 Norway 2008 Kuwait*
1967 Denmark 2008 Lebanon*
1976 UK 2008 Morocco*
1978 Switzerland 2008 Oman*
1980 Germany 2008 Qatar*
1989 Netherlands 2008 Saudi Arabia*
1992 Belgium 2008 United Arab Emirates*
1994 Austria 2008 Israel*
1996 Luxembourg 2009 Russia
1997 Finland 2010 South Korea
1998 France 2010 Turkey
2000 USA 2011 Romania
2000 Spain 2011 Singapore
2003 Poland 2011 Croatia
2003 Czech Republic 2012 Malaysia
2003 Portugal 2012 Thailand*
2003 Italy 2012 Mexico
2004 Canada 2012 Bulgaria
2004 Slovenia 2012 Latvia
2005 Ireland 2013 Chile
2005 Hungary 2013 Estonia
2007 China 2013 Lithuania
2007 Slovakia 2013 Serbia
2007 Greece 2013 Indonesia*
2008 Japan 2014 Australia
2008 Bahrain* 2014 Philippines
2008 Egypt*

Source: H&M annual reports 2007-2014

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9.3 Appendix C – H&M organizational structure

Source: H&M Corporate Governance Report 2014

9.4 Appendix D – H&M sales performance 2007-2014

Financial year 2007 2008 2009 2010 2011 2012 2013 2014
Sales incl VAT, SEK million 92 123 kr 104 041 kr 118 697 kr 126 966 kr 128 810 kr 140 948 kr 150 090 kr 176 620 kr

Source: H&M annual reports 2007-2014

89