Explorative interview with Hugo Boss

Page 57 of 94

Furthermore, the interaction term has a negative value which means that the moderating effect is negative.

Internationalization to emerging markets will thus weaken the impact of innovation on firm performance.

This is an interesting find, as the driving factor for conducting this research was to examine whether the growing need to be present in emerging markets would have a positive or negative impact on firm

performance and innovation, as emerging markets do not present the same institutional efficiency found in developed economies (Carnahan et al., 2010).

The explanation behind this result can likewise be found in institutional theory. Companies that internationalize to emerging markets will likely encounter institutional voids, which creates greater challenges for the company (Johanson & Vahlne, 2009). Partnerships were determined to be important for innovational capabilities when internationalizing, however, with institutional voids, companies will suffer from asymmetric information which leads to higher due diligence costs (Berg et al., 2017; Carnahan et al., 2010). Liability of foreignness, as defined by Cuervo-Cazurra (2007), is another likely explanation for the relationship, as advantages from innovational activities in advanced economies, may become a disadvantage in emerging markets from the increased need to protect the corporate knowledge independently from legal institutions. Furthermore, as explained in the findings between innovation and internationalization to

emerging markets, lower innovational activities in emerging markets, means that fashion companies may not gain valuable knowledge and resources from entering the markets (Liu et al., 2017; Page, 1994).

Page 58 of 94

but then if they pass the first gate where we want them to look into it, then they will get free time from the supervisor, about 10%-20%, to work on the idea” (Kirchmaier, appendix 6). This is especially crucial as theory predicts that firms that are more committed to learning by incorporating innovation into their processes will also possess higher innovative capabilities. This is also shown through Hugo Boss’ ability to develop industry leading AI in their production site in Izmir, Turkey (Kirchmaier, appendix 6).

As corporate learning occurs through its members, firms will benefit by creating an environment, where the corporate members are encouraged to actively acquire knowledge, which can then be shared throughout the organization. Hugo Boss achieves this through the “Hugo Boss University” that shares crucial information to employees, while encouraging educational seminars and conferences for key members within strategy.

“We have a Hugo Boss University, where every employee can select what they want training in. […] Besides this, especially in my department as we are responsible for having new ideas and driving the growth of the company, we are free to attend conferences and seminars outside of Hugo Boss. […] We also connect with other industry leaders to understand how their supply chain works, or what are they doing to satisfy their customers more, how do they work with customer data” (Kirchmaier, appendix 6).

How a fashion company manages innovation and encourages learning within the organization is consequently impactful on the innovational skills.

Theories on internationalization can also be identified in the strategic considerations behind Hugo Boss’

internationalization pattern. Although the Uppsala internationalization model has been considered to best describe early internationalization patterns in companies, the concept of gradual commitment is clearly displayed in Hugo Boss’ internationalization considerations.

“we always look at how big the premium segment is, how the competition is, and then we select our entry mode. Do we choose a franchise partner that supports us in the market or will we do it ourselves with our own retail stores, which is always tied to more investment which is a disadvantage, so we only do it if the premium segment is big enough. […] If we enter a market with franchising, we evaluate how they do business and how successful they are, and after some time, if we find that the market is big enough, then we take it back”

(Kirchmaier, appendix 6).

This means that market size is the main determinant for how Hugo Boss chooses to enter a market, which is also in line with the eclectic paradigm. Through franchising agreements, the company will benefit from inwards knowledge spillover by learning how to best navigate the market when evaluating the performance,

Page 59 of 94

after which full control of the subsidiary will be taken back, thereby gradually increasing commitment as knowledge is gained.

When it comes to internationalization to emerging markets, however, institutional environments are equally as important. In relation to Hugo Boss, Kirchmaier states that institutional considerations were:

“not the case in the past, but now we think about the institutional environment and whether there is corruption, because you as a company do not want to get involved in it. So, it is a factor, but not the most important one [...], so we focus more on how expensive the work force is, how good the infrastructure is etc.” (Kirchmaier, appendix 6).

Lack of institutional considerations might harm the performance in an emerging market, as identifying institutional voids is crucial for both the strategic development and the degree of successful market entry.

Offshoring innovation to an emerging market was also theorized to improve efficiency which in turn would improve performance. However, Hugo Boss reveals another aspect that need to be taken into consideration before offshoring innovation.

“Izmir is a special case because it is our biggest [production facility]. We also have a production facility in Metzingen in Germany, but as it’s small it wouldn’t have much impact and it’s the same with Italy, so the focus is mainly in Izmir, but if the research was good then we will transfer it to the other facilities. And it makes sense to bundle the resources somewhere and spread it afterwards” (Kirchmaier, appendix 6).

Both dispersing innovation across different geographical locations and locating R&D departments near production facilities were theorized to both improve innovational capabilities and increase efficiency.

However, offshoring innovational activities near production sites should also be done in consideration to the size of the production facility. Smaller production sites might not have the resources to implement

innovational findings right away, which negates the purpose of placing the two activities in proximity of each other.

An important source of knowledge is the retail points, however, Kirchmaier reveals that the communication between sales and design is low. “This is a point where we could really improve, because the design team does not get all the information from the different countries” (Kirchmaier, appendix 6). This opens the question of whether lack of communication between two ends of the value chain, is a common area of improvement in fashion that could influence firm performance.

The insight gained from the interview indicates that looking into corporate learning, innovational

management, and institutional considerations in emerging markets in the case analysis, might further explain

Page 60 of 94

findings from the quantitative data and provide best practice insights in terms of innovation and emerging markets.