Formulating Marketing Strategies

Marketing Strategies for New Market Entries

Strategies for Growth Markets

Brands, Consumer marketing, Distribution, Entrepreneurial finance, Market entry, New product
marketing, Product development.

Today, the economic boom and liberalization in China provides a great opportunity for the foreign
companies who want to shift the competition from individual countries to a global level. However,
enter this huge market with what kind of entry mode, remain inconclusive.

The choice of entry mode into the Chinese market for Icebreaker has a major impact on the
success of a firm's international operations. Not only the company will explore a huge potential in
China, but also require a big input from Icebreaker, such as finance, human capital, and all other
resources. There are several factors will have influence on choosing what entry mode, such as
Chinese economics environment, culture, legal, and even the company’s international
strategy. (see Appendix 1) In the previous part of this report, we have done the research and an
analysis on the Chinese environment, and company international strategy. These will help to
conclude an entry mode for Icebreaker entering China.

Generally, there are server ways to enter a foreign market, exporting, International Licensing,
International Franchising, Foreign Direct Investment as well as other special modes. The
Dunning’s eclectic theory provides a useful insight into the factors that will influence on
choosing the entry mode. According to John Dunning, there are three factors affecting
company’s foreign investment, the ownership advantage, location and Internalization
advantage. The ownership advantage says that the company must own some unique competitive
advantage, such as a brand name, ownership of proprietary technology, the benefit of economies
of scale…etc. From the research, the company indeed owns some competitive advantage, the
unique and prime materials from New Zealand Merino, an international brand even though it is
not well known in China. And the production line established in China to cope with a massive
demand all over the world, with an economies of scale. Icebreaker invested in China in 2002 when
it funded its first manufacture in Shanghai. This decision results from a location advantage, where
China could provide lower labor cost, great skills of making clothing, lower operating cost, and
great policy from the Chinese government taxing on foreign companies. We have also seen
Icebreaker has used such advantage and made a successful move. Another factor, the
internalization advantages is also critical when company choose an entry mode. According to the
theory, if the level of transaction costs (costs of negotiating, monitoring and enforcing an
agreement) are high, the firm may rely on FDI and Joint Ventures. On the other hand, if such costs
are low, the company may want to choose franchising, licensing or contract manufacturing. For
Icebreaker, it chooses to have their own manufacture in China, because it is going to be a huge
cost to monitor and control the quality of its product. The company will be better off to have a full
control in manufacture as there are more uncertainly in the Chinese Market.

However, Icebreaker has not stepped out for any sells in China, even with an established
manufacturer in Shanghai. Icebreaker decides to keep the quality and its brand as high classes not
only in China, but also all over the world. We recommend that Icebreaker should take a full
control on its selling office in China. The office can be setup in Shanghai within the manufacture
site. This provides an advantage in cost efficiency, and closer communication with the production
line. From the research, the Chinese market is still not big enough today for the outdoor sports, the
Chinese view it as a luxury activities with high standard of living. Only few people today are able
to pay for the products. The icebreaker is also not well known in China, compare with other
competitors such as Columbia and TheNorthFace. Therefore, we strongly recommend Icebreaker
should not invest too much in opening any shops or freestanding stores. Instead, Icebreaker needs
to work together with some Brands Consultants in China to promote its brand name first and let
everyone know the New Zealand Icebreaker. Soon after the Chinese get familiar with the brand,
Icebreaker will need to recruit some sale agents such as the outdoor sports specialist, sport shops
and maybe stores or hotels at the tourism site. At this stage, the sales agents will promote the
products and receive feedback from the market. Icebreaker could use this experience to develop its
product and set an appropriate marketing strategy. Once Icebreaker has positioned itself in the
Chinese market, it may attract more investors who want to be the sale representative. At this stage,
the company could recruit them and start some franchising store. The local investors will pay for
setting up those stores and Icebreaker will help to do the renovation and brand promotion. We
believe it is not a good time for Icebreaker opening their own shop when it is still uncertain in the
market. It is also not worth to put money in at beginning.

We understand that Icebreaker has its own distribution team in Australia and USA. However, it is
a bit different in operating in China compare that in the other market. The Chinese market is still
developing and with a big different environment. The Chinese people have a different prescription
compare with westerner. To rely on local distribution agent is more efficiently at beginning.

Breaking the ice

New Zealand's pioneering Icebreaker clothing brand recently gave members of the rag trade from
around the world a grass roots view of how it is evolving into an international company.
Icebreaker launched its 2003 product range alongside Auckland's Fashion Week in October.

Managing director Jeremy Moon and his team hosted trade representatives from Canada, Japan,
Switzerland, Australia and England who had previously only communicated electronically. They
were taken on a South Island tour to a Merino station so they could see the story of Icebreaker
clothing from the beginning.

Accompanying them were local retailers who had 'given the brand a chance' and opened the way
for it to expand overseas. "There was a real sense that we were a global company," says Moon.

Icebreaker clothing is made of 100 percent Merino wool from leading high country sheep stations
and has the reputation of being soft, strong and is machine-washable. It's branded as 'the warmest
and best performing thermal bodywear available'.

In 2001 Icebreaker rated fifth on Deloittes Fast 50 with 345.7 percent growth. This year it had
dropped to tenth place but is still rapidly building its reputation with 271.7 percent growth. Its
approach to technology is a cautious one that ties investment to a business case.

Icebreaker has a staff of 20 in the capital city selling to 500 stores across 10 countries and a
network of one to 20 people representing the brand in each export market. "We don't have an
intranet and rely mainly on email and a 'sophisticated' information system anyone in the company
can access remotely," says Moon.

The adventure-wear exporter formed in 1995, and initially saw its web presence as a means of
building brand loyalty, but is now expanding its site to become more interactive.

"We've always viewed the web cautiously (www.icebreakernz.com). It can be a black hole of
expenditure. When you are a fast growing company you need to be careful what you invest in. We
only wanted to put the face of the brand on the web and keep it simple until we understood more
about what it could offer us," says Moon.
Until now that's been limited to placing the consumer catalogue on the home page - essentially
"transferring some graphic design from one medium to another rather than some complicated web
strategy".

Icebreaker has just come through a three-month process of planning its next steps with the web to
create greater customer involvement and ultimately increase traffic to the retail outlets. This will
be achieved through "good design, ongoing freshness and having people behind the scenes
supporting everything we do".

The key will be integrating a database to run surveys to improve the level of customer feedback so
it can learn more about who's wearing Icebreaker clothing and what kind of activities they're into.
"This will help us progressively tailor packages and provide better services through the web as
different customer segments emerge," says Moon.

"If we can build up a profile of customers who wear Icebreaker for sailing, snowboarding or
mountain biking and involve other organisations then when we can notify them of experiences that
suit their taste," he says. Messages with web links will be generated from the database over the
next three to six months.

"We try to stay small and focused and not let technology get in the way. It's so easy to over
complicate things. We've had to have the discipline of looking at the web as a business case before
we start throwing too much money at it," says Moon.

"What we do on the web we want to execute superbly because there are so many web promises
that simply don't work and its so easy to fall flat on your face. We are looking at cautious,
strategic initiatives," he says.

cebreaker used the outsourcing model from the start but it was only recently that iconic Kiwi
brand Swanndri took the painful decision to close its manufacturing plant in Timaru, at the cost of
12 jobs. This was obviously devastating for the families concerned but essential for brand survival
in a globally competitive world.

Ultimately one would hope that with its new high fashion product, Swanndri will receive better
margins and provide higher paying jobs, be that in the design side or marketing side of the
business.

This is a challenge for New Zealand manufacturing but according to Gibson it is not the end for
New Zealand. "Short run, high technology manufacturing is a strong New Zealand capability," he
says.

This brings us back to China and the desire for a free trade agreement with the new economic
giant. The pessimists are saying that size is power and in an economic sense, New Zealand has
neither. Many believe any agreement will be one-sided. Already more than 30 percent of the $6.3
billion worth of consumer goods imported into New Zealand comes from China and The Retailers
Association (as reported in the New Zealand Herald) say goods of Chinese origin now account for
more than half the total of consumer sales in the major chain stores.

One of the key roles of NZTE is to ensure Kiwis are realistic about China. Gibson talks about
working with New Zealand companies, "to ensure some risk mitigation around their market
entry".

"A free trade agreement with China is extremely important," he says. "It is a market of enormous
potential but one which will be extremely challenging for New Zealand."
NZTE has set up a New Zealand Focus Centre in Hong Kong which is targeted at mainland
Chinese buyers. NZTE has also created a strategic partnership with a very large food distributor
and partnered a number of New Zealand companies with that distributor. In Shanghai a New
Zealand Wood Centre has been established to showcase six or seven Kiwi companies.

The Chinese market is not easy. It has distribution challenges and most concerning are the
problems of intellectual property and piracy.

There is a commonly held view that a free trade agreement will merely mean an exchange of
commodities for cheap labour. But China is a rapidly modernising country with the most modern
high-tech equipment. It is not just a bunch of sweatshops churning out low-cost items. As the
economy is being transformed there are opportunities for high-spec, highly advanced products that
New Zealand marketers can offer.

Design and Rule

Marketing Magazine spoke to Jeremy Moon, CEO and founder of Icebreaker New Zealand and
chairman of Better by Design, which promotes a design-led business approach.

The largest buyer of New Zealand merino in the world, Icebreaker now sells in more than 1500
stores across 20 countries. Everything it makes is 100 percent pure New Zealand merino, sourced
directly from the growers across the Southern Alps.

About one third of the product is made in New Zealand and the rest in Europe and Asia.

Icebreaker started supplementing its New Zealand-based production with offshore made product
in 2002 to cope with growth and to gain access to new technology. The transition was managed so
as not to create job losses in New Zealand. From 2002 to 2005 Icebreaker more than doubled in
size in both staff and revenue.

"The majority of Icebreaker sales are international," says Moon, "so a supply model was needed
that would be internationally competitive."

There are four components that determine where a product is from: Where the design centre is
located, where the ownership and head office are based, where the raw material comes from and
the nationality of the machinist.

"From the point of view of overseas retailers, the nationality of the machinist has the least impact
and the New Zealand design and pure New Zealand merino has the greatest impact. That is what
people pay a premium for," remarks Moon. "In fact, Icebreaker's retailers don't want it 'made in
New Zealand' as that would make it too expensive and the market would significantly reduce."

Moon says he is totally committed to building an international brand from New Zealand and will
build the type of business model that fits that vision, rather than working out what can be made
based on what is able to be produced here.

The apparel industry in New Zealand is typically one to two decades behind the rest of the world
and there has been very little capital investment in recent years. This, says Moon, is not about to
change, as the industry is in decline. "If we make everything in New Zealand for the sake of
making in New Zealand, then we will be overtaken by competitors in other countries that have
access to the technology and efficiency that we unfortunately don't have here. And are unlikely to
have, given our cost base and distance from market. We work with about five very good
manufacturers here but there are also many in New Zealand that are simply not world class and
never will be."
Moon believes there are some things that should be made and exported from New Zealand. High
value niche products (boats and furniture) and 'taste' based products such as food and wine. But
not high volume products based on low or semi-skilled manufacturing.

There is an opportunity to focus on meeting niche needs by building design-centric companies in

New Zealand and leveraging off international supply chains that are world class, maintains Moon.
"We don't need to own the machines to get things made, we need to own the IP."

When the New Zealand dollar moved from US$0.50 to US$0.70, the costs of exporting New
Zealand made products went up 40 percent without a corresponding benefit to overseas
consumers. Overseas consumers aren't going to pay more just because the Kiwi dollar is strong, so
prices of New Zealand made product had to drop. This made many New Zealand-based profit
margins very thin and in many cases unsustainable.

"I feel very strongly that for us to succeed as a nation we have to lose the old-fashioned attitude
that we have to make everything ourselves, here. For me it's a disadvantage to see the machinery, I
would rather see our customers. If we were attached to only 'made in New Zealand' then we would
have missed out on the opportunity to build an international brand from New Zealand. Instead we
do what we are best at from New Zealand, which is design, running the company, and in our case
growing the pure merino. We have built an international supply chain from New Zealand to Asia
to Europe that gives us access to the best technology and capacity so we can deliver to our
retailers across the world on time. That's what our customers want, a world-class product that tells
an authentic New Zealand story," says Moon.

"They don't care where the final construction is as long as it is high quality, strictly ethical, on
time, and at a fair price, which in our case is a premium price."

In the past year Icebreaker has grown its Wellington team from about 30 to 50. The 20 new people
are highly skilled in supply chain management, logistics, quality control, design, marketing, sales
and finance. It also has a team of 20 in the United States and a team of 30 in Europe. These are the
types of jobs being created for New Zealanders from the type of model Moon recommends.

When asked if the production shift to Asia tarnished the Kiwi image of iconic Kiwi clothing
brands like Icebreaker and Swanndri, Moon responded: "No, a Kiwi image is determined by the
people behind the company and the ideas behind the brand, not where a machinist is physically
located. Are we doing this just to save money and increase profits? No. It's about access to
technology, capacity to grow, and freedom from the fickle New Zealand dollar, not just about
price."