ATTEND ANY FOUR CASE STUDIES. ALL CASES CARRIES EQUAL MARKS
CASE - 01: DORCHESTER, LTD.
Dorchester, Ltd is an old-line confectioner specializing in high-quality chocolates. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout western Europe and North America {United States and Canada}. With its current manufacturing facilities, Dorchester has been unable to supply the U.S. market with more than 225,000 pounds of candy per year. This supply has allowed its sales affiliate, located in Boston, to be able to penetrate the U.S. market no farther west than St. Louis and only as far South as Atlanta. Dorchester believes that a separate manufacturing facility located in the United States would allow it to supply the entire U.S. market and Canada (which presently accounts for 65,000 pounds per year). Dorchester currently estimates initial demand in the North American market at 390,000 pounds, with growth at a 5 per cent annual rate. A separate manufacturing facility would, obviously, free up the amount currently shipped to the United States and Canada. But Dorchester believes that this is only a short-run problem. They believe the economic development taking place in Eastern Europe will allow it to sell there the full amount presently shipped to North America within a period of five years.
Dorchester presently realizes £ 3.00 per pound on is North American exports. Once the U.S. manufacturing facility is operating, Dorchester expects that it will be able to initially price its product at $ 7.70 per pound. This price would represent an operating profit of $ 4.40 per pound. Both sales price and operating costs are expected to keep track with the U.S. price level; U.S. inflation is forecast at a rate of 3 per cent for the next several years. In the U.K., long-run inflation is expected to be in the 4 to 5 per cent range, depending on which economic service one follows. The current spot exchange rate is $ 1.50 / £ 1.00. Dorchester explicitly believes in PPP as the best means to forecast future exchange rates.
The manufacturing facility is expected to cost $ 7,000,000. Dorchester plans to finance this amount by a combination of equity capital and debt. The plant will increase Dorchester’s borrowing capacity by£ 2,000,000, and it plans to borrow only that amount. The local community in which Dorchester has decided to build will provide $ 1,500,000 of debt financing for a period of seven years at 7.75 per cent. The principal is to be repaid in equal instalments over the life of the loan. At this point, Dorchester is uncertain whether to raise the remaining debt it desires through a domestic bond issue or a Eurodollar bond issue. It believes it can borrow pounds sterling at 10.75 per cent per annum and dollars at 9.5 per cent. Dorchester estimates its all-equity cost of capital to be 15 percent.
The U.S. Internal Revenue Service will allow Dorchester to depreciate the new facility over a seven-year period. After that time the confectionery equipment, which accounts for the bulk of the investment, is expected to have substantial market value.
Dorchester does not expect to receive any special tax concessions. Further, because the corporate tax rates in the two countries are the same—35 per cent in the U.K. and in the United States—transfer pricing strategies are ruled out.
Should Dorchester build the new manufacturing plant in the United States?
CASE-02: STRIK-IT-RICH GOLD MINING COMPANY
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich’s.
Management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $ 500,000. The current price of gold bullion is $ 425 per ounce and one-year gold futures are trading at $ 450.50 = $ 425 (1.06). Extraction costs are $ 375 per ounce. The firm’s cost of capital is 10 per cent. At the current price of gold, the expansion appears profitable: NPV = ($ 425 -- 375 X 2,000/. 10 -- $ 500,000 = $ 500,000. Strike-it-Rich’s management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $ 390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the later event, the price of gold would increase to at least $ 460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $ 25,000.
What should Strik-it-Rich’s management do?
CASE-03: EFFICIENT FUNDS FLOW AT EASTERN TRADING COMPANY
The Eastern Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer-size quantities, and sells them through sales affiliates in Hong Kong, the United Kingdom, and the United States. For a recent month, the following payments matrix of interaffiliate cash flows, stated in Singapore dollars, was forecasted. Show how Eastern Trading can use multilateral netting to minimize the foreign exchange transactions necessary to settle inter affiliate payments.
If foreign exchange transactions cost the company 5 per cent, what savings result from netting?
EASTERN TRADING COMPANY PAYMENTS MATRIX (S $ 000)
------------------------------------------------------------------------------------------------------------------------------------
DISBURSEME
Receipts Singapore Hong Kong U.K. U.S. Total Receipts
Singapore ---- 40 75 55 170
Hong Kong 8 --- --- 22 30
U.K. 15 -- -- 17 32
U.S. 11 25 9 --- 45
Total disbursement 34 65 84 94 277
CASE-04: EASTERN TRADING COMPANY’S OPTIMAL TRANSFER PRICING STRATEGY
The Eastern Trading Company of Singapore ships pre-packaged spices to Hong Kong, the United-Kingdom. And the United States, where they are resold by sales affiliates. Eastern Trading is concerned with what might happen in Hong Kong now that control has been turned over to China. Eastern Trading has decided that it should re-examine its transfer pricing policy with its Hong Kong affiliate as a means of repositioning funds from Hong Kong to Singapore. The following table shows the present transfer pricing scheme, based on a carton of assorted, pre packaged spices, which is the typical shipment to the Hong Kong sales affiliate.
What do you recommend that Eastern Trading should do?
EASTERN TRADING COMPANY CURRENT TRANSFER PRICING POLICY WITH HONG KONG SALES AFFILIATE.
Singapore Parent Hong Kong Affiliate Consolidated co.
------------------------------------------------------------------------------------------------------------------------------------Sales revenue S $ 300 S $ 500 S $ 500
LESS: Cost of goods sold 200 300 200
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit 100 200 300
Operating expenses 50 50 100
-----------------------------------------------------------------------------------------------------------------------------
Taxable Income 50 150 200
Income taxes (20% / 17.5% ) 10 26 36
----------------------------------------------------------------------------------------------------------------------------------
Net income 40 124 164
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CASE-05: EASTERN TRADING COMPANY’S NEW MBA
The Eastern Trading Company of Singapore presently follows a decentralized system of cash management where it and its affiliates each maintain their own transaction and precautionary cash balances. Eastern Trading believes that it and its affiliates’ cash needs are normally distributed and independent from one another. It is corporate policy to maintain two and one-half standard deviations of cash as precautionary holdings. At this level of safety there is a 99.37 per centchance that each affiliate will have enough cash holdings to cover transactions.
A New MBA hired by the company claims that the investment in precautionary cash balances is needlessly large and can be reduced substantially if the firm converts to a centralized cash management system. Use the projected information for the current month, which is presented below, to determine the amount of cash Eastern Trading needs to hold in precautionary balances under its current decentralized system and the level of precautionary cash it would need to hold under a centralized system.
Was the new MBA a good hire?
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Affiliate Expected Transactions One Standard Deviation
Singapore S $ 125.000 S $ 40,000
Hong Kong 60,000 25,000
United Kingdom 95,000 40,000
United States 70,000 35,000
CASE-06: AMERICAN MACHINE TOOLS INC.,
American Machine Tools is a Midwestern manufacturer of tool-and-die-making equipment. The company has had an inquiry from a representative of the Estonian government about the terms of sale for a $ 5,000,000 order of machinery. The sales manager spoke with the Estonian representative, but he is doubtful that the Estonian government will be able to obtain enough hard currency to make the purchase. While the U.S. economy has been growing, American Machine Tools has not had a very good year. An additional $ 5,000,000 in sales would definitely help. If something cannot be arranged, the firm will likely be forced to lay off some of its skilled workforce.
Is there a way that you can think of that American Machine Tools might be able to make the machinery sale to Estonia?
CASE-07: SIGMA CORPORATIONS LOCATION DECISION
Sigma Corporation of Boston is contemplating establishing an affiliate operation in the Mediterranean. Two countries under consideration are Spain and Cyprus. Sigma intends to repatriate all after-tax foreign-source income to the United States. At this point, Sigma is not certain whether it would be best to establish the affiliate operation as a branch operation or a wholly owned subsidiary of the parent firm. In Cyprus, the marginal corporate tax rate is 15 per cent. Foreign branch profits are taxed at the same rate. In Spain, corporate income is taxed at 35 percent, the same rate as in the United States. Additionally, foreign branch with the U.S. income in Spain is also taxed at 35 per cent. The withholding tax treaty rates with the U.S. on dividend income paid from Cyprus is 0 per cent and 10 per cent paid from Spain.
QUESTIONS:
The financial manager of Sigma has asked you to help him determine where to locate the new affiliate and which organizational structure to establish. The location decision will be largely based on whether the total tax liability would be smallest for a foreign branch or a wholly owned subsidiary in Cyprus or Spain.
CASE 07: STARBUCKS ----- GOING GLOBAL FAST
The Starbucks coffee shop on Sixth Avenue and Pine Street in downtown Seattle sits serene and orderly, as unremarkable as any other in the chain bought 15 years ago by entrepreneur Howard Schultz. A little less than three years ago, however, the quiet storefront made front pages around the world. During the World Trade Organization talks in November, 1999, protesters flooded Seattle’s streets, and among their targets was Starbucks, a symbol, to them, of free-market capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters ad riot police were black-masked anarchists who trashed the store, leaving its windows smashed and its tasteful green-and-white décor smelling of tear gas instead of espresso. Says an angry Schultz: ‘It’s hurtful. I think people are ill-in-formed. It’s very difficult to protest against a can of Coke, a bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous brand and a place where you can go and break a window. You can’t break a can of Coke”.
The store was quickly repaired, and the protesters have scattered to other cities. Yet cup by cup, Starbucks really is caffeinating the world, its green-and-white emblem beckoning to consumers on three continents. In 1999, Starbucks Corp. has 281 stores abroad. Today, it has about 1,200---and it’s still in the early stages of a plan to colonize the globe. If the protesters were wrong in their tactics, they weren’t wrong about Starbucks’ ambitions. They were just early.
The story of how Schultz & Co. transformed a pedestrian commodity into an upscale consumer accessory has a fairy-tale quality. Starbucks has grown from 17 coffee shops in Seattle 15 years ago to 5,689 outlets in 28 countries. Sales have climbed an average of 20 per cent annually since the company went public 10 years ago, to $ 2.6 billion in 2001, while profits bounded ahead an average of 30 per cent per year, hitting $ 181.2 million last year. And the momentum continues. In the first three quarters of this fiscal year, sales climbed 24 per cent, year to year, to $ 2.4 billion, while profits, excluding onetime charges and capital gains, rose 25 per cent, to $ 159.5 million.
Moreover, the Starbucks name and image connect with millions of consumers around tgests that while coffee can command high prices I a slump, food—at least at Starbucks—cannot. One of Behar’s most important goals is to improve that record. For instance, the company now has a test program of serving hot breakfasts in 20 Seattle stores and may move to expand supermarket sales of whole beans.
What’s more important for the bottom line, though, is that Starbucks has proven to be highly innovative in the way it sells its main course: coffee. In 800 locations it has installed automatic espresso machines to speed up service. And in November, it began offering prepaid Starbucks cards, priced from $ 5 to $ 500, which clerks swipe through a reader to deduct a sale. That, says the company, cuts transaction times in half, Starbucks has sold $ 70 million of the cards.
In early August, Starbucks launched Starbucks Express, its boldest experiment yet, which blends java, Web technology, and faster service. At about 60 stores in the Denver area, customers can pre-order and prepay for beverages and pastries via phone or on the starbucks Express Web site. They just make the call or lick the mouse before arriving at the store, and their beverage will be waiting—with their name printed on the cup. The company will decide in January on a national launch.
And Starbucks is bet on even more fundamental store changes. On August 21, it announced expansion of a high-speed wireless Internet service to about 1,200 starbucks locations in North America and Europe. Partners in the project—which Starbucks calls the world’s largest Wi—Fi network—include Mobile International, a wireless subsidiary of Deutsche Telekom, and Hewlett—Packard. Customers sit in a store and check e-mail, surf the Web, or download multimedia presentations without looking for connections or tripping over cords. They start with 24 hours of free wireless broadband before choosing from a variety of monthly subscription plans.
Starbucks executives hope such innovations will help surmount their toughest challenge in the home market; attracting the next generation of customers. Younger coffee drinkers already feel uncomfortable in the stores. The companyknows that because it once had a group of twenty—somethings hypnotized for a market study. When their defences were down, out came the bad news. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Barden, who conducted the research for the Hal Riney& Partners ad agency (now part of Publicis Worldwide) in San Francisco. One of the recurring themes the hypnosis brought out was a sense that “People like me aren’t welcome here except to serve the yuppies,” he says. Then there are those who just find the whole Starbucks scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian terminology of grand and venti for coffee sizes. She goes to Dunkin’ Donuts, saying; “Small,. Medium, and large is fine for me.”
As it expands, Starbucks faces another big risk; that of becoming a far less special place for its employees. For a company modelled around enthusiastic service, that couldhave dire consequences for both image and sales. During its growth spurt of the mid-to late-1990s, Starbucks had the lowest employee turnover rate of any restaurant or fast-food company, largely thanks to its then unheard-of policy of giving health insurance and modest stock options to part-timers making barely more than minimum wage.
Such perks are no longer enough to keep all the workers happy. Starbucks’ pay doesn’t come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former store manager in West Hollywood, Cali; “If I were making a decent living, I’d still be there. “Shay, one of the plaintiffs in the suit against the company, says she earned $ 32,000 a year to run a store with 10 to 15 part time employees. She hired employees, managed their schedules, and monitored the store’s weekly profit-and-loss statement. But she was also expected to put in significant time behind the counter and had to sign an affidavit pledging to work up to 20 hours of overtime a week without extra pay—a requirement the company has dropped since the settlement. Smith says that Starbucks offers better pay, benefits, and training than comparable companies, while it encourages promotions from within.
For sure, employee discontent is far from the image Starbucks wants to project of relaxed workers cheerfully making cappuccinos. But perhaps it is inevitable. The business model calls for lots of low-wage workers. And the more people who are hired as Starbucks expands, the less they are apt to feel connected to the original mission of high service—bantering with customers and treating them like family. Robert J. Thompson, a professor of popular culture at Syracuse University, says of Starbucks; “It’s turning out to be one of the great 21st century American success stories—complete with all the ambiguities.”
Overseas, though, he whole Starbucks package seems new and, to many young people, still very cool. In Vienna, where Starbucks had a gala opening for its first Austrian store last December, Helmut Spudich, a business editor for the paper Der Standard, predicted that Starbucks would attract a younger crowd than the established cafes. “The coffeehouses in Vienna are nice, but they are old. Starbucks is considered hip,” he says.e Starbucks might sell through Japan’s convenience stores. “We wouldn’t be doing this if it wasn’t important both strategically and economically,” he said.
The company has no immediate plans to introduce the beverage in the United States, although it has in the past brought home products launched in Asia. A green tea Frappuccino, first launched in Asia, was introduced in the United States and Canada this past summer, where company officials say it was well-received.
Starbucks has done well in Japan, although the road hasn’t always been smooth. After cutting the ribbon on its first Japan store in 1996, the company began opening stores at a furious pace, and it now has 570. New shops attracted large crowds, but the effect wore off as the market became saturated. Sales began to slow, forcing the company to post a loss in Japan in the fiscal year ended March 2003.
The company has since returned to profitability, and for the fiscal year ended March 31 net profit jumped more than six-fold from the previous fiscal year to 1.17 billion yen. In August, it cleared another hurdle when sales at stores open at least 13 months rose from a year earlier for the first time in four years. It is focusing on continuing this trend by renovating stores and improving service.
Mr.Schultz says Japan is ripe for development, including further store openings. “The wind is at our back here,” Mr. Schultz says.
QUESTIONS:
1. Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets.
2. What are the major sources of risk facing the company and discuss potential solutions.
3. Critique Starbucks’ over all corporate strategy.
4. How might Starbucks improve profitability in Japan? Visit www.starbucks.com for more information.
CASE 2:
WHEN INTERNATIONAL BUYERS AND SELLERS DISAGREE
No matter what line of business you’re in, you can’t escape sex. That may have been one conclusion drawn by an American exporter of meat products after a dispute with a German customer over a shipment of pork livers. Here’s how the disagreement came about.
The American exporter was contracted to ship “ 30,000lbs, of freshly frozen U.ShiddhiVinayak (which produces talcs), Assam Cosmetics (which makes cold cream and body lotions), and Colortek (manufacturer of cold cream, sunscreens, body lotions), among some others.
CASE 4 -- 12
RELIANCE ENTERTAINMENT LEARNS LANGUAGE OF THE YOUTH
The web seems to have caught the fancy of executives at Reliance Entertainment. The company first ventured into the digital space by launching gaming portal Zapak.com. The launch was accompanied by a large-scale, multi-media campaign, with a few of its ads even running into controversy (e.g. Postmen, anyone?).
Post-Zapak, Reliance Entertainment has unleashed a second horse onto the racing track: Bigadda. com, a social net working site aimed at the young, urban populace (15-5 year olds).
According to Rajesh Sawhney, president, Reliance Entertainment, the rational behind Bigaddais simple: India is a young market with more than 54 per cent of its population below the age of 25. Further, broadband penetration is set to increase over the next five years, leading to a consequential rise in online ad spends; currently online advertising is a little less than US $ 100 million industry in India, with 30 million people using the Internet.
“Keeping the Web 2.0 popularity in mind, we have launched Bigadda.com. for the youth,”says Sawhney. In his own words, “Biogadda is a quite a remix of Orkut, My Space and You Tube, but with a difference—it is riding on an Indian flavour to add that edge.” The language, interface and content will primarily make use of fine Indian nuances.
Adda quite literally means a hangout joint, or a community forum for voicing opinions. Therefore, the site hopes to attract Indian all over the world, getting them to understand friendship, whilesharing music and videos the You Tube Way.
To support the launch, a multi-media advertising campaign has been launched, with a budget of US $ 1 million (Rs 4 crore). To begin with, Bigadda.com has been positioned on the thought, ‘Let’s Catch up’, keeping the friendship premise in mind. A TVC has been released, which shows people from different walks of life ‘losing’ things (an attractive woman plucks off a white hair from her scalp, as the super reads, ‘Youth goes’). Similarly, other situations are shown: ‘Money Goes’, Fame Goes’, ‘Children Go’, ‘Love Goes’, and so on. The last shot is that of a group of young people hanging out together, with the super reading, ‘Friends….Stay. Bigadda.com. Let’s catch up’.
The ad has been created by Ideas At Work, a start up creative shop set up by PrashantGodbole and Zarvan Patel, the ex-Rediffusion duo. The radio ads feature commonly used lingo and abbreviations of the youth (the “SMS” generation, so to speak), the connection being that at Bigadda, com, the TG will find ways of expressing themselves in a language they have created. “In a sense, we have created a Bigadda lexicon on radio,” observes Sawhney.
Outdoor as well as Internet campaigns on the same idea have been released in major towns and metros. Ambient media will soon be leveraged across places frequented by the young such as multiplexes, colleges, schools and malls, apart from on-ground and other BTL activities in these areas.
“We’re hoping intense word-of-mouth will drive Bigadda.com,” concludes Sawhney.
CASE 2 - 8
DISNEY’S HONG KONG HEADACHE *
“The launch of its new theme park got off to a rocky start, but Disney’s still got an appetite for the China market.” – Michel Schuman Hong Kong, may 15th, 2008.
The slogan of Disneyland is “The Happiest Place on Earth”, but the experience of Mr LianNing, an engineer who brought his family to Disney;s new theme park In Hong Kong from the southern Chinese city of Guangzhou was far from sastisfactory. He said that he came with an fairly—tale experience but here the park was not big and Disneyland was not different from other amusement parks in China. His seven-year-old daughter Yaqin was happy but her parents were not.
Hong Kong’s Magic kingdom was a $ 1.8 billion theme park which was opened on September 2006. The reason why Disney invested in China was that China was a potentially vast new market for toys, DVDs and movies. The Hong Kong government motivated Disney to come to Honk Kong in the hope o
Indeed, Disney continues to bet that its long-rang investment plans in China will pay off, regardless of the recent headaches in Hong Kong. The firm is still in talks with Chinese officials about opening a mainland theme park, possible in Shanghai, says Rasulo. “Have we made some mistakes?” he asks,” Absolutely. We are in a brand- new market/ We have to keep listening and keep listening and keep learning.” Resorting Tinkerbell’s health only requires a round of applause, but Hong Kong Disneyland will need a bit more work.
QUESTIONS
1. Why did Disney invest in Hong Kong?
2. In your viewpoint what cultural inputs did Disney forget to take into consideration while deciding on the marketing strategies?
3. Prepare a strategic road map for Disney in Hong Kong.
CASE 3 – 6
INDIA AN EMERGING ECONOMY ( MANUFACTURING CASE )
Manufacturing: The India Value Proposition:
India’s GDP of USD 691 bn makes it the 10th largest economy in the world and 4th largest in terms of purchasing power parity. It has become one of the fastest growing economics in
the world---growing at over 8% p.a. for the manufacturing contributes to
79% of FDI investment
27% of India GDP
53% of Indian exports
*India is the world’s second largest small car market.
*One of only three countries that makes its own super
Computers.
*World’s largest producer of milk, tea and pulses and the
World’s largest livestock population.
Exhibit 1
Indian Manufacturing: A macro perspective
• Second largest producer of food including fruits and vegetables.
• World’s largest diamond cutting and polishing centre and the second largest
• Jewellery market.
1. Auto Industry: The Indian auto industry is a USD 44 bn one (Automotive is USD 34 bn and auto components is USD 10 bn .)
2. Chemicals: The size of chemical industry in India (Petrochemicals to paints) is USD 30 bn
3. Electronics: The electronics industry is USD 11 bn (consumer electronics to electronic
Components)This acquisition was a strategic step which facilitated the company to increase its customer base inEurope.
The revenue earned by CPFL in the year 2005 was approximately US $ 7.2 million. The total number of employees working in the company was 50. CPFL’s factory in UK produces precision forged comp
CASE - 01: DORCHESTER, LTD.
Dorchester, Ltd is an old-line confectioner specializing in high-quality chocolates. Through its facilities in the United Kingdom, Dorchester manufactures candies that it sells throughout western Europe and North America {United States and Canada}. With its current manufacturing facilities, Dorchester has been unable to supply the U.S. market with more than 225,000 pounds of candy per year. This supply has allowed its sales affiliate, located in Boston, to be able to penetrate the U.S. market no farther west than St. Louis and only as far South as Atlanta. Dorchester believes that a separate manufacturing facility located in the United States would allow it to supply the entire U.S. market and Canada (which presently accounts for 65,000 pounds per year). Dorchester currently estimates initial demand in the North American market at 390,000 pounds, with growth at a 5 per cent annual rate. A separate manufacturing facility would, obviously, free up the amount currently shipped to the United States and Canada. But Dorchester believes that this is only a short-run problem. They believe the economic development taking place in Eastern Europe will allow it to sell there the full amount presently shipped to North America within a period of five years.
Dorchester presently realizes £ 3.00 per pound on is North American exports. Once the U.S. manufacturing facility is operating, Dorchester expects that it will be able to initially price its product at $ 7.70 per pound. This price would represent an operating profit of $ 4.40 per pound. Both sales price and operating costs are expected to keep track with the U.S. price level; U.S. inflation is forecast at a rate of 3 per cent for the next several years. In the U.K., long-run inflation is expected to be in the 4 to 5 per cent range, depending on which economic service one follows. The current spot exchange rate is $ 1.50 / £ 1.00. Dorchester explicitly believes in PPP as the best means to forecast future exchange rates.
The manufacturing facility is expected to cost $ 7,000,000. Dorchester plans to finance this amount by a combination of equity capital and debt. The plant will increase Dorchester’s borrowing capacity by£ 2,000,000, and it plans to borrow only that amount. The local community in which Dorchester has decided to build will provide $ 1,500,000 of debt financing for a period of seven years at 7.75 per cent. The principal is to be repaid in equal instalments over the life of the loan. At this point, Dorchester is uncertain whether to raise the remaining debt it desires through a domestic bond issue or a Eurodollar bond issue. It believes it can borrow pounds sterling at 10.75 per cent per annum and dollars at 9.5 per cent. Dorchester estimates its all-equity cost of capital to be 15 percent.
The U.S. Internal Revenue Service will allow Dorchester to depreciate the new facility over a seven-year period. After that time the confectionery equipment, which accounts for the bulk of the investment, is expected to have substantial market value.
Dorchester does not expect to receive any special tax concessions. Further, because the corporate tax rates in the two countries are the same—35 per cent in the U.K. and in the United States—transfer pricing strategies are ruled out.
Should Dorchester build the new manufacturing plant in the United States?
CASE-02: STRIK-IT-RICH GOLD MINING COMPANY
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich’s.
Management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $ 500,000. The current price of gold bullion is $ 425 per ounce and one-year gold futures are trading at $ 450.50 = $ 425 (1.06). Extraction costs are $ 375 per ounce. The firm’s cost of capital is 10 per cent. At the current price of gold, the expansion appears profitable: NPV = ($ 425 -- 375 X 2,000/. 10 -- $ 500,000 = $ 500,000. Strike-it-Rich’s management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $ 390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the later event, the price of gold would increase to at least $ 460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $ 25,000.
What should Strik-it-Rich’s management do?
CASE-03: EFFICIENT FUNDS FLOW AT EASTERN TRADING COMPANY
The Eastern Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer-size quantities, and sells them through sales affiliates in Hong Kong, the United Kingdom, and the United States. For a recent month, the following payments matrix of interaffiliate cash flows, stated in Singapore dollars, was forecasted. Show how Eastern Trading can use multilateral netting to minimize the foreign exchange transactions necessary to settle inter affiliate payments.
If foreign exchange transactions cost the company 5 per cent, what savings result from netting?
EASTERN TRADING COMPANY PAYMENTS MATRIX (S $ 000)
------------------------------------------------------------------------------------------------------------------------------------
DISBURSEME
Receipts Singapore Hong Kong U.K. U.S. Total Receipts
Singapore ---- 40 75 55 170
Hong Kong 8 --- --- 22 30
U.K. 15 -- -- 17 32
U.S. 11 25 9 --- 45
Total disbursement 34 65 84 94 277
CASE-04: EASTERN TRADING COMPANY’S OPTIMAL TRANSFER PRICING STRATEGY
The Eastern Trading Company of Singapore ships pre-packaged spices to Hong Kong, the United-Kingdom. And the United States, where they are resold by sales affiliates. Eastern Trading is concerned with what might happen in Hong Kong now that control has been turned over to China. Eastern Trading has decided that it should re-examine its transfer pricing policy with its Hong Kong affiliate as a means of repositioning funds from Hong Kong to Singapore. The following table shows the present transfer pricing scheme, based on a carton of assorted, pre packaged spices, which is the typical shipment to the Hong Kong sales affiliate.
What do you recommend that Eastern Trading should do?
EASTERN TRADING COMPANY CURRENT TRANSFER PRICING POLICY WITH HONG KONG SALES AFFILIATE.
Singapore Parent Hong Kong Affiliate Consolidated co.
------------------------------------------------------------------------------------------------------------------------------------Sales revenue S $ 300 S $ 500 S $ 500
LESS: Cost of goods sold 200 300 200
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit 100 200 300
Operating expenses 50 50 100
-----------------------------------------------------------------------------------------------------------------------------
Taxable Income 50 150 200
Income taxes (20% / 17.5% ) 10 26 36
----------------------------------------------------------------------------------------------------------------------------------
Net income 40 124 164
---------------------------------------------------------------------------------------------------------------------------------
CASE-05: EASTERN TRADING COMPANY’S NEW MBA
The Eastern Trading Company of Singapore presently follows a decentralized system of cash management where it and its affiliates each maintain their own transaction and precautionary cash balances. Eastern Trading believes that it and its affiliates’ cash needs are normally distributed and independent from one another. It is corporate policy to maintain two and one-half standard deviations of cash as precautionary holdings. At this level of safety there is a 99.37 per centchance that each affiliate will have enough cash holdings to cover transactions.
A New MBA hired by the company claims that the investment in precautionary cash balances is needlessly large and can be reduced substantially if the firm converts to a centralized cash management system. Use the projected information for the current month, which is presented below, to determine the amount of cash Eastern Trading needs to hold in precautionary balances under its current decentralized system and the level of precautionary cash it would need to hold under a centralized system.
Was the new MBA a good hire?
------------------------------------------------------------------------------------------------------------------------------------
Affiliate Expected Transactions One Standard Deviation
Singapore S $ 125.000 S $ 40,000
Hong Kong 60,000 25,000
United Kingdom 95,000 40,000
United States 70,000 35,000
CASE-06: AMERICAN MACHINE TOOLS INC.,
American Machine Tools is a Midwestern manufacturer of tool-and-die-making equipment. The company has had an inquiry from a representative of the Estonian government about the terms of sale for a $ 5,000,000 order of machinery. The sales manager spoke with the Estonian representative, but he is doubtful that the Estonian government will be able to obtain enough hard currency to make the purchase. While the U.S. economy has been growing, American Machine Tools has not had a very good year. An additional $ 5,000,000 in sales would definitely help. If something cannot be arranged, the firm will likely be forced to lay off some of its skilled workforce.
Is there a way that you can think of that American Machine Tools might be able to make the machinery sale to Estonia?
CASE-07: SIGMA CORPORATIONS LOCATION DECISION
Sigma Corporation of Boston is contemplating establishing an affiliate operation in the Mediterranean. Two countries under consideration are Spain and Cyprus. Sigma intends to repatriate all after-tax foreign-source income to the United States. At this point, Sigma is not certain whether it would be best to establish the affiliate operation as a branch operation or a wholly owned subsidiary of the parent firm. In Cyprus, the marginal corporate tax rate is 15 per cent. Foreign branch profits are taxed at the same rate. In Spain, corporate income is taxed at 35 percent, the same rate as in the United States. Additionally, foreign branch with the U.S. income in Spain is also taxed at 35 per cent. The withholding tax treaty rates with the U.S. on dividend income paid from Cyprus is 0 per cent and 10 per cent paid from Spain.
QUESTIONS:
The financial manager of Sigma has asked you to help him determine where to locate the new affiliate and which organizational structure to establish. The location decision will be largely based on whether the total tax liability would be smallest for a foreign branch or a wholly owned subsidiary in Cyprus or Spain.
CASE 07: STARBUCKS ----- GOING GLOBAL FAST
The Starbucks coffee shop on Sixth Avenue and Pine Street in downtown Seattle sits serene and orderly, as unremarkable as any other in the chain bought 15 years ago by entrepreneur Howard Schultz. A little less than three years ago, however, the quiet storefront made front pages around the world. During the World Trade Organization talks in November, 1999, protesters flooded Seattle’s streets, and among their targets was Starbucks, a symbol, to them, of free-market capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters ad riot police were black-masked anarchists who trashed the store, leaving its windows smashed and its tasteful green-and-white décor smelling of tear gas instead of espresso. Says an angry Schultz: ‘It’s hurtful. I think people are ill-in-formed. It’s very difficult to protest against a can of Coke, a bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous brand and a place where you can go and break a window. You can’t break a can of Coke”.
The store was quickly repaired, and the protesters have scattered to other cities. Yet cup by cup, Starbucks really is caffeinating the world, its green-and-white emblem beckoning to consumers on three continents. In 1999, Starbucks Corp. has 281 stores abroad. Today, it has about 1,200---and it’s still in the early stages of a plan to colonize the globe. If the protesters were wrong in their tactics, they weren’t wrong about Starbucks’ ambitions. They were just early.
The story of how Schultz & Co. transformed a pedestrian commodity into an upscale consumer accessory has a fairy-tale quality. Starbucks has grown from 17 coffee shops in Seattle 15 years ago to 5,689 outlets in 28 countries. Sales have climbed an average of 20 per cent annually since the company went public 10 years ago, to $ 2.6 billion in 2001, while profits bounded ahead an average of 30 per cent per year, hitting $ 181.2 million last year. And the momentum continues. In the first three quarters of this fiscal year, sales climbed 24 per cent, year to year, to $ 2.4 billion, while profits, excluding onetime charges and capital gains, rose 25 per cent, to $ 159.5 million.
Moreover, the Starbucks name and image connect with millions of consumers around tgests that while coffee can command high prices I a slump, food—at least at Starbucks—cannot. One of Behar’s most important goals is to improve that record. For instance, the company now has a test program of serving hot breakfasts in 20 Seattle stores and may move to expand supermarket sales of whole beans.
What’s more important for the bottom line, though, is that Starbucks has proven to be highly innovative in the way it sells its main course: coffee. In 800 locations it has installed automatic espresso machines to speed up service. And in November, it began offering prepaid Starbucks cards, priced from $ 5 to $ 500, which clerks swipe through a reader to deduct a sale. That, says the company, cuts transaction times in half, Starbucks has sold $ 70 million of the cards.
In early August, Starbucks launched Starbucks Express, its boldest experiment yet, which blends java, Web technology, and faster service. At about 60 stores in the Denver area, customers can pre-order and prepay for beverages and pastries via phone or on the starbucks Express Web site. They just make the call or lick the mouse before arriving at the store, and their beverage will be waiting—with their name printed on the cup. The company will decide in January on a national launch.
And Starbucks is bet on even more fundamental store changes. On August 21, it announced expansion of a high-speed wireless Internet service to about 1,200 starbucks locations in North America and Europe. Partners in the project—which Starbucks calls the world’s largest Wi—Fi network—include Mobile International, a wireless subsidiary of Deutsche Telekom, and Hewlett—Packard. Customers sit in a store and check e-mail, surf the Web, or download multimedia presentations without looking for connections or tripping over cords. They start with 24 hours of free wireless broadband before choosing from a variety of monthly subscription plans.
Starbucks executives hope such innovations will help surmount their toughest challenge in the home market; attracting the next generation of customers. Younger coffee drinkers already feel uncomfortable in the stores. The companyknows that because it once had a group of twenty—somethings hypnotized for a market study. When their defences were down, out came the bad news. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Barden, who conducted the research for the Hal Riney& Partners ad agency (now part of Publicis Worldwide) in San Francisco. One of the recurring themes the hypnosis brought out was a sense that “People like me aren’t welcome here except to serve the yuppies,” he says. Then there are those who just find the whole Starbucks scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian terminology of grand and venti for coffee sizes. She goes to Dunkin’ Donuts, saying; “Small,. Medium, and large is fine for me.”
As it expands, Starbucks faces another big risk; that of becoming a far less special place for its employees. For a company modelled around enthusiastic service, that couldhave dire consequences for both image and sales. During its growth spurt of the mid-to late-1990s, Starbucks had the lowest employee turnover rate of any restaurant or fast-food company, largely thanks to its then unheard-of policy of giving health insurance and modest stock options to part-timers making barely more than minimum wage.
Such perks are no longer enough to keep all the workers happy. Starbucks’ pay doesn’t come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former store manager in West Hollywood, Cali; “If I were making a decent living, I’d still be there. “Shay, one of the plaintiffs in the suit against the company, says she earned $ 32,000 a year to run a store with 10 to 15 part time employees. She hired employees, managed their schedules, and monitored the store’s weekly profit-and-loss statement. But she was also expected to put in significant time behind the counter and had to sign an affidavit pledging to work up to 20 hours of overtime a week without extra pay—a requirement the company has dropped since the settlement. Smith says that Starbucks offers better pay, benefits, and training than comparable companies, while it encourages promotions from within.
For sure, employee discontent is far from the image Starbucks wants to project of relaxed workers cheerfully making cappuccinos. But perhaps it is inevitable. The business model calls for lots of low-wage workers. And the more people who are hired as Starbucks expands, the less they are apt to feel connected to the original mission of high service—bantering with customers and treating them like family. Robert J. Thompson, a professor of popular culture at Syracuse University, says of Starbucks; “It’s turning out to be one of the great 21st century American success stories—complete with all the ambiguities.”
Overseas, though, he whole Starbucks package seems new and, to many young people, still very cool. In Vienna, where Starbucks had a gala opening for its first Austrian store last December, Helmut Spudich, a business editor for the paper Der Standard, predicted that Starbucks would attract a younger crowd than the established cafes. “The coffeehouses in Vienna are nice, but they are old. Starbucks is considered hip,” he says.e Starbucks might sell through Japan’s convenience stores. “We wouldn’t be doing this if it wasn’t important both strategically and economically,” he said.
The company has no immediate plans to introduce the beverage in the United States, although it has in the past brought home products launched in Asia. A green tea Frappuccino, first launched in Asia, was introduced in the United States and Canada this past summer, where company officials say it was well-received.
Starbucks has done well in Japan, although the road hasn’t always been smooth. After cutting the ribbon on its first Japan store in 1996, the company began opening stores at a furious pace, and it now has 570. New shops attracted large crowds, but the effect wore off as the market became saturated. Sales began to slow, forcing the company to post a loss in Japan in the fiscal year ended March 2003.
The company has since returned to profitability, and for the fiscal year ended March 31 net profit jumped more than six-fold from the previous fiscal year to 1.17 billion yen. In August, it cleared another hurdle when sales at stores open at least 13 months rose from a year earlier for the first time in four years. It is focusing on continuing this trend by renovating stores and improving service.
Mr.Schultz says Japan is ripe for development, including further store openings. “The wind is at our back here,” Mr. Schultz says.
QUESTIONS:
1. Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets.
2. What are the major sources of risk facing the company and discuss potential solutions.
3. Critique Starbucks’ over all corporate strategy.
4. How might Starbucks improve profitability in Japan? Visit www.starbucks.com for more information.
CASE 2:
WHEN INTERNATIONAL BUYERS AND SELLERS DISAGREE
No matter what line of business you’re in, you can’t escape sex. That may have been one conclusion drawn by an American exporter of meat products after a dispute with a German customer over a shipment of pork livers. Here’s how the disagreement came about.
The American exporter was contracted to ship “ 30,000lbs, of freshly frozen U.ShiddhiVinayak (which produces talcs), Assam Cosmetics (which makes cold cream and body lotions), and Colortek (manufacturer of cold cream, sunscreens, body lotions), among some others.
CASE 4 -- 12
RELIANCE ENTERTAINMENT LEARNS LANGUAGE OF THE YOUTH
The web seems to have caught the fancy of executives at Reliance Entertainment. The company first ventured into the digital space by launching gaming portal Zapak.com. The launch was accompanied by a large-scale, multi-media campaign, with a few of its ads even running into controversy (e.g. Postmen, anyone?).
Post-Zapak, Reliance Entertainment has unleashed a second horse onto the racing track: Bigadda. com, a social net working site aimed at the young, urban populace (15-5 year olds).
According to Rajesh Sawhney, president, Reliance Entertainment, the rational behind Bigaddais simple: India is a young market with more than 54 per cent of its population below the age of 25. Further, broadband penetration is set to increase over the next five years, leading to a consequential rise in online ad spends; currently online advertising is a little less than US $ 100 million industry in India, with 30 million people using the Internet.
“Keeping the Web 2.0 popularity in mind, we have launched Bigadda.com. for the youth,”says Sawhney. In his own words, “Biogadda is a quite a remix of Orkut, My Space and You Tube, but with a difference—it is riding on an Indian flavour to add that edge.” The language, interface and content will primarily make use of fine Indian nuances.
Adda quite literally means a hangout joint, or a community forum for voicing opinions. Therefore, the site hopes to attract Indian all over the world, getting them to understand friendship, whilesharing music and videos the You Tube Way.
To support the launch, a multi-media advertising campaign has been launched, with a budget of US $ 1 million (Rs 4 crore). To begin with, Bigadda.com has been positioned on the thought, ‘Let’s Catch up’, keeping the friendship premise in mind. A TVC has been released, which shows people from different walks of life ‘losing’ things (an attractive woman plucks off a white hair from her scalp, as the super reads, ‘Youth goes’). Similarly, other situations are shown: ‘Money Goes’, Fame Goes’, ‘Children Go’, ‘Love Goes’, and so on. The last shot is that of a group of young people hanging out together, with the super reading, ‘Friends….Stay. Bigadda.com. Let’s catch up’.
The ad has been created by Ideas At Work, a start up creative shop set up by PrashantGodbole and Zarvan Patel, the ex-Rediffusion duo. The radio ads feature commonly used lingo and abbreviations of the youth (the “SMS” generation, so to speak), the connection being that at Bigadda, com, the TG will find ways of expressing themselves in a language they have created. “In a sense, we have created a Bigadda lexicon on radio,” observes Sawhney.
Outdoor as well as Internet campaigns on the same idea have been released in major towns and metros. Ambient media will soon be leveraged across places frequented by the young such as multiplexes, colleges, schools and malls, apart from on-ground and other BTL activities in these areas.
“We’re hoping intense word-of-mouth will drive Bigadda.com,” concludes Sawhney.
CASE 2 - 8
DISNEY’S HONG KONG HEADACHE *
“The launch of its new theme park got off to a rocky start, but Disney’s still got an appetite for the China market.” – Michel Schuman Hong Kong, may 15th, 2008.
The slogan of Disneyland is “The Happiest Place on Earth”, but the experience of Mr LianNing, an engineer who brought his family to Disney;s new theme park In Hong Kong from the southern Chinese city of Guangzhou was far from sastisfactory. He said that he came with an fairly—tale experience but here the park was not big and Disneyland was not different from other amusement parks in China. His seven-year-old daughter Yaqin was happy but her parents were not.
Hong Kong’s Magic kingdom was a $ 1.8 billion theme park which was opened on September 2006. The reason why Disney invested in China was that China was a potentially vast new market for toys, DVDs and movies. The Hong Kong government motivated Disney to come to Honk Kong in the hope o
Indeed, Disney continues to bet that its long-rang investment plans in China will pay off, regardless of the recent headaches in Hong Kong. The firm is still in talks with Chinese officials about opening a mainland theme park, possible in Shanghai, says Rasulo. “Have we made some mistakes?” he asks,” Absolutely. We are in a brand- new market/ We have to keep listening and keep listening and keep learning.” Resorting Tinkerbell’s health only requires a round of applause, but Hong Kong Disneyland will need a bit more work.
QUESTIONS
1. Why did Disney invest in Hong Kong?
2. In your viewpoint what cultural inputs did Disney forget to take into consideration while deciding on the marketing strategies?
3. Prepare a strategic road map for Disney in Hong Kong.
CASE 3 – 6
INDIA AN EMERGING ECONOMY ( MANUFACTURING CASE )
Manufacturing: The India Value Proposition:
India’s GDP of USD 691 bn makes it the 10th largest economy in the world and 4th largest in terms of purchasing power parity. It has become one of the fastest growing economics in
the world---growing at over 8% p.a. for the manufacturing contributes to
79% of FDI investment
27% of India GDP
53% of Indian exports
*India is the world’s second largest small car market.
*One of only three countries that makes its own super
Computers.
*World’s largest producer of milk, tea and pulses and the
World’s largest livestock population.
Exhibit 1
Indian Manufacturing: A macro perspective
• Second largest producer of food including fruits and vegetables.
• World’s largest diamond cutting and polishing centre and the second largest
• Jewellery market.
1. Auto Industry: The Indian auto industry is a USD 44 bn one (Automotive is USD 34 bn and auto components is USD 10 bn .)
2. Chemicals: The size of chemical industry in India (Petrochemicals to paints) is USD 30 bn
3. Electronics: The electronics industry is USD 11 bn (consumer electronics to electronic
Components)This acquisition was a strategic step which facilitated the company to increase its customer base inEurope.
The revenue earned by CPFL in the year 2005 was approximately US $ 7.2 million. The total number of employees working in the company was 50. CPFL’s factory in UK produces precision forged comp
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