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)
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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
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Gross Profit 100 200 300
Operating expenses 50 50 100
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Taxable Income 50 150 200
Income taxes (20% / 17.5% ) 10 26 36
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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 the globe. It was one of the fastest-growing brands in a Business Week survey of the top 100 global brands published August 5. At a time when one corporate star after another has crashed to earth, brought down by revelations of earnings misstatements, executive greed, or worse, Starbucks hasn’t faltered. The company confidently predicts up to 25 per cent annual sales and earnings growth this year. On Wall Street, Starbucks is the last great growth story. Its stock, including four splits has soared more than 2,200 per cent over the past decade, surpassing Wal-Mart, General Electric, Pepsi Co., Coca-Cola, Microsoft, and IBM in total return. Now at $ 21, it is hovering near its all-time high of $ 23 in July, before the overall market drop.
And after a slow down last fall and winter, when consumers seemed to draw inward after September 11, Starbucks is rocketing ahead once again. Sales in stores open at least 13 months grew by 6 per cent in the 43 weeks through July 28, and the company predicts monthly same-store sales gains as high as 7 per cent through the end of this fiscal year. That’s below the 9 per cent growth rate in 2000, but investors seem encouraged. “We’re going to see a lot more growth,” says Jerome A. Castellini, President of Chicago-based CastleArk Management, which controls about 300,000 Starbucks shares. “The stock is on a run.”
But how long can that run last? Already, Schultz’s team is hard-pressed to grind out new profits in a home market that is quickly becoming saturated. Amazingly, with 4,247 stores scattered across the United States and Canada, there are still eight states in the United States with no Starbucks stores, Frappuccino-free cities include Butte, Mont, and Fargo, N.D. But big cities, affluent suburbs, and shopping malls are full to the brim. In coffee-crazed Seattle, there is a Starbucks outlet for every 9,400 people, and the company considers that the upper limit of coffee-shop saturation. Ion Manhattan’s 24 square miles, Starbucks has 124 cafes, with four more on the way this year. That’s one for every 12,000 people---meaning that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of 10 per cet or more if the company is going to match its historic overall sales growth. That, as they might say at Starbucks, is tall order to fill
Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication: “A New Starbucks Opens in Rest-Room of Existing Starbucks.” And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets. “We probably self-cannibalize our stores at a rate of 30 per cent a year.” Schultz says. Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Starbucks is at a defining point in its growth. It’s reaching a level that makes it harder and harder to grow, just due to the law of large numbers.”
To duplicate the staggering returns of its first decade, Starbucks has no choice but to export its concept aggressively. Indeed, some analysts give Starbucks only two years at most before it saturates the U.S. market. This chain now operates 1,200 international outlets, from Beijing to Bristol. That leaves plenty of room to grow. Indeed, abot 400 of its planned 1,200 new stores this year will be built overseas, representing 35 per cent increase in its foreign base. Starbucks expects to double the number of its stores worldwide, to 10,000 in three years. During the pase 12 months, the chain has opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off Jakarta. Athens comes next. And within the next year, Starbucks plans to move into Mexico and Puerto Rico. But global expansion poses huge risks for Starbucks. For one thing, it makes less money on each overseas store because most of them are operated with local partners. While that makes iteasier to start up on foreign turf, it reduces the company’s share of the profits to only-20 per cent to 50 per cent.
Moreover, Starbucks must cope with some predictable challenges of becoming a mature company in the United States. After riding the wave of successful baby boomers through the ‘90s, the company faces an ominously hostile reception from its future consumers, the twenty-or thirty some things of Generation X. Not only are the activists among them turned off by the power and image of the well-known brand, but many others say that Starbucks’ latte-sipping sophisticates and piped-in Kenny G music are a real turnoff. They don’t feel wanted in a place that sells designer coffee at $ 3 a cup.
Even the thirst of loyalists for high-price coffee can’t be taken for granted. Starbucks’ growth over the past decade coincided with a remarkable surge in the economy. Consumer spending has continued strong in the downturn, but if that changes, those $ 3 lattes might be an easy place for people on a budget to cut back. Starbucks executives insist that won’t happen, pointing ot that even in the weeks following the terrorist attacks, same-store comparisons stayed positive while those of other retailers skidded.
Starbucks also faces slumping morale and employee burnout among its store managers and its once-cheery army of baristas. Stock options for part-timers in the restaurant business was a Starbucks innovation that once commanded awe and respect from its employees are still paid better than comparable workers elsewhere—about $ 7 per hour—many regard the job as just another fast—food gig. Dissatisfaction over odd hours and low pay is affecting the quality of the normally sterling service and even the coffee itself, say some customers and employees. Frustrated store managers among the company’s roughly 470 California stores sued Starbucks in 2001 for allegedly refusing to pay legally mandated overtime. Starbucks settled the suit for $ 18 million this past April, shaving $ 0.03 per share off an otherwise strong second quarter. However, the heart of the complaint—feeling overworked and underappreciated—doesn’t seem to be going away.
To be sure, Starbucks has a lot going for it as it confronts the challenge of maintaining its growth. Nearly free of debt, it fuels expansion with internal cash flow. And Starbucks can maintain a tight grip on its image because stores are company-owned: There are no franchisees to get sloppy about running things. By relying on mystique and word-of-mouth, whether here or overseas, the company saves a bundle on marketing costs. Starbucks spends just $ 30 million annually on advertising, or roughly 1 per cent of revenues, usually just for new flavours of coffee drinks in the summer and product launches, such as its new in-store Web service. Most consumer companies its size shell out upwards of $ 300 million per year. Moreover, unlike a Me-Donald’s or a Gap Inc., two other retailers that rapidly grew in the United States. Starbucks has no nationwide competitor
Starbucks also has a well-seasoned management team. Schultz, 49, stepped down as chief executive in 2000 to become chairman and chief global strategist. Orin Smith, 60, the company’s numbers-cruncher, is now CEO and in charge of day-to-day operations. The head of North American operations is Howard Behar, 57, a retailing expert who returned last September, two year after retiring. The management trio is known as H2O, for Howard, Howard, and Orin.
Schultz remains the heart and soul of the operation. Raised in a Brooklyn public-housing project, he found his way to Starbucks, a tiny chain of Seattle coffee shops, as a marketing executive in the early ‘80s. The name came about when the original owners looked to Seattle history for inspiration and chose the moniker of an old mining camp: Starbo. Further refinement led to Starbucks, after the first mate in Moby-Dick, which they felt evoked the seafaring romance of the early coffee traders (hence the mermaid logo). Schultz got the idea for the modern Star bucks format while visiting a Milan coffee bar. He bought out his bosses in 1987 and began expanding. Today,
Schultz has a net worth of about $ 700 million, including $ 400 million of company stock.
Starbucks has come light years from those humble beginnings, but Schultz and his team still think there’s room to grow in the United states—even in communities where the chain already has dozens of stores. Clustering stores increases total revenue and market share, Smith argues, even when individual stores poach on each other’s sales,. The strategy works, he says, because of Starbucks’ size. It is large enough to absorb losses at existing stores as new ones open up, and soon overall sales grow beyond what they would have with just one store. Meanwhile, it’s cheaper to deliver to and manage stores located close together. And by clustering, Starbucks can quickly dominate a local market.
The company is still capable of designing and opening a store in 16 weeks or less and recouping the initial investment in three years. The stores may be oases of tranquillity, but management’s expansion tactics are something else. Take what critics call its ‘predatory real estate’ strategy—paying more than market-rate rents to keep competitors out of a location. David C. Schomer, owner of Espresso Vivace in Seattle’s hip Capitol Hill neighbourhood, says Starbucks approached his landlord and offered to pay nearly double the rate to put a coffee shop in the same building. The land-lord stuck with Schomer, who says; “It’s a little disconcerting to know that someone is willing to pay twice the going rate.” Another time, Starbucks and Tully’s Coffee Corp., a Seattle-based coffee chain, were competing for a spece in the city. Starbucks got the lease but vacated the premises before the term was up. Still, rather than let Tully’s get the space, Starbucks decided to pay the rent on the empty store so its competitor could not move in. Schultz makes no apologies for the hardball tactics. “The real estate business in ameridca is a very, very tough game,’ he says. “It’s not for the faint of heart’.
Still, the company’s strategy could backfire. Not only will neighbourhood activists and local businesses increasingly resent the tactics, but customers could also grow annoyed over having fewer choices. Moreover, analysts contend that Starbucks can maintain b\about 15 per cent square-footage growth in the United States—equivalent to 550 new stores—for only about two more years. After that, it will have to depend on overseas growth to maintain an annual 20 per cent revenue growth.
Starbucks was hoping to make up much of that growth with more saes off food and other non coffee items, but has stumbled somewhat. In the late’ 90s, Schultz through that offering $ 8 sandwiches, desserts, and CDs in his stores and selling packaged coffee in super markets would significantly boost sales. The specially business now accounts for about 16 per cent of sales, but growth has been less than expected. A healthy 19 per cent this year, it’s still far below the 38 per cent growth rate of fiscal 2000. That suggests 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.
But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on indefinitely. In Japan, the company beat even its own bullish expectations, growing to 368 stores after opening its first in Tokyo in 1996. Affluent youngJapanese women like Anna Kato, a 22-year-old Toyota Motor Corp. worker, loved the place. “I don’t care if it costs more, as long as it tastes sweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s Shibuya district. Yet same-store sales growth has fallen in the past 10 months in Japan, Starbucks’ top foreign market, as rivals offer similar fare. Add to that the depressed economy, and starbucks Japan seems to be losing steam. Although it forecasts a 30 per cent gain in net profit, to $ 8 million, for the year started in April, on record sales of $ 516 million, same-store sales are down 14 per cent for the year ended in June. Meanwhile in England, Starbucks’ second-biggest overseas market, with 310 stores, imitators are popping up left and right to steal market share.
Entering other big markets may be tougher yet. The French seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch, cofounder of Columbus Café, a Starbucks-like chain. But he wonders if the company can profitably cope with France’s arcane regulations and generous labour benefits. And in Italy, the epicentre of European coffee culture, the notion that the locals will abandon their own 200,000 coffee bars en masse for starbucks strikes many as ludicrous. For one, Italian coffee bars prosper by serving food as well as coffee, an area where Starbucks still struggles. Also, Italian coffee is cheaper than U.S. Java and, say Italian purists, much better. Americans pay about $ 1.50 for an espresso. In northern Italy, the price is 67 cents; in the south, Just 55 cents. Schultz insists that Starbucks will eventually come to Italy. It’ll have a lot to prove when it does. Carlo Petrini, founder of the antiglobalization movement Slow Food, sniffs that Starbucks’ “substances served in styrofoam” won’t cut it. The cups are paper, of course.But the scepticism is real.
As Starbucks spreads out, Schultz will have to be increasingly sensitive to those cultural challenges. In December, for instance, he flew to Israel to meet with Foreign Secretary Shimon Pere3s and other Israeli officials to discuss the Middle East crisis. He won’t divulge the nature of his discussions. But subsequently, at a Seattle synagogue, Schultz let the Palestinians have it. With Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and Saudi Arabia, he created a mild uproar among Palestinian supporters. Schultz quickly back pedaled, saying that his words were taken out of context and asserting that he is “propeace” for both sides.
There are plenty more minefields ahead. So far, the Seattle coffee company has complied as envious record of growth. But the giddy buzz of that initial expansion is wearing off. Now, Starbucks is waking up to the grand challenges faced by any corporation bent on becoming a global powerhouse.
Profit at Starbucks Coffee Japan fell 70 per cent in the first nine months of the year because of growing competition from rival coffee chains. Sales at stores open more than one year fell 16 per cent. The firm expects a loss for the full year.
In a 2005 bid to boost sales in its largest international market, Starbucks Corp. is expanding its business in Japan beyond cafes and into convenience stores with a line of chilled coffee in plastic cups. The move gives the Seattle-based company a chance to grab a chunk of Japan’s $ 10 billion market for coffee sold in cans, bottles or vending machines, rather than made-to-order at cafes. It is a lucrative but fiercely competitive sector, but Starbucks, which has become a household name since opening its first Japanese sore nine years ago, is betting on the power of its brand to propel sales of the new drinks.
Starbucks, working with Japanese beverage maker and distributor Suntory Ltd., is launching the drinks, called Starbucks Discoveries, here today, with plans to extend sales to a total of 10,000 stores in the coming weeks. Starbucks says it hasn’t decided yet whether to launch the product nationwide. Tomorrow, the company also plans to start selling the product in Taiwan.
The Discoveries line is he company’s first foray into the ready-to-drink market outside North America, where it sells a line of bottled and canned coffee. It also underscores Starbucks’ determination to expand its presence in Asia by catering to local tastes. For instance, the new product comes in two variations—espresso and latte—that are less sweet than their U.S. counterparts, as the coffee maker developed them to suit Asian palates.
Starbucks officials said they hope to establish their product as the premium chilled cup brand, which, at 210 yen ($1.87), will be priced at the upper end of the category.
Starbucks faces steep competition. Japan’s “chilled cup” market is teeming with rival products, including Starbucks lookalikes. One of the most popular brands, called Mt. Rainier, is emblazoned with a green circle logo that closely resembles that of Starbucks. Convenience stores also are packed with canned coffee drinks, Including Coca-Cola Co.’s Georgia brand and brews with extra
caffeine or made with gourmet coffee beans.
Starbucks Chairman Howard Schultz declined to speculate on exactly how much coffee 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.S. pork levers, customary merchantable quality, first rate brands.” The shipment had been prepared to meet the exacting standards of the American market, so the exporter expected the transaction to be completed without any problem. But when the livers arrived in Germany, the purchaser raised an objection: “We ordered pork livers of customary merchantable quality—what you sent us consisted of 40 per cent sow livers.”
“Who cares about the sex of the pig the liver came from?” the exporter asked.
“We do,” the German replied. “Here in Germany we don’t pass off spongy sow livers as the firmer livers of male pigs. This shipment wasn’t merchantable at the price we expected to charge. The only way we were able to dispose of the meat without a total loss was to reduce the price. You owe us a price allowance of $ 1,000.”
The American refused to reduce the price. The determined resistance may have been partly in reaction to the implied insult to the taste of the American consumer. “If pork livers, whatever the sex of the animal, are palatable to Americans, they ought to be good enough for anyone,” The American thought.
It looked as if the buyer and seller could never agree on eating habits.
QUESTIONS
1. In this dispute which country’s law would apply, that of the United States or of Germany?
2. If the case were tried in U.S. courts, who do you think would win? In German courts? Why?
3. Draw up a brief agreement that would have eliminated the following problems before they could occur.
a. Whose law applies
b. Whether the case should be tried in U.S. or German courts
c. The difference in opinion as to “customary merchantable quality”
4. Discuss how SRC may be at work in this case
CASE 4 – 4
SALES NEGOTIATIONS ABROAD FOR MRI SYSTEMS
International sales of General Medical’s magnetic Resonance Imaging (MRI) systems have really off in recent months. Your representatives are about to conclude important sales contracts with customers inboth Tokyo and Rio de Janeiro. Both sets of negotiations require your participation, particularly as final details are worked out. The bids you approved for both customers are identical (see tables). Indeed, both customers had contacted you originally at a medical equipment trade show in Las Vegas, and you had all talked business together over drinks at the conference hotel. You expect your two new customers will be talking together again over the Internet about your products and prices as they had in Las Vegas. The Japanese orders are potentially larger because the doctor you met works in a hospital that has nine other units in the Tokyo / Yokohama area. The Brazilian doctor represents a very large hospital in Rio, which may require more than one unit. Your travel arrangements are now being made. Your local representatives will fill you in on the details. Best of luck!
TABLE 1
Price Quotation
--------------------------------------------------------------------------------------------------------------------------
Deep Vision 2000 MRI (basic Unit) Product options $ 1,200,000
• 2D and 3D time-of-flight (TOF)
Angiography for capturing fast flow 150,000
• Flow analysis for quantification of
Cardiovascular studies 70,000
• X2001 software package 20,000
Service contract (2 years normal maintenance, parts,
and labour) 60,000
-------------------------------------
Total Price $ 1,500,00
TABLE 2
Standard Terms and Conditions
Delivery 6 months
Penalty for late delivery $ 10,000 / month
Cancellation charges $ 10% of Contract price
Warranty (for defective machinery) Parts, one year
Terms of payment C O D
CASE 4 -- 11
AVON PRODUCTS IN INDIA
“We Want to be affordable to all consumers across various price points.”
HarmeetS.Pental, Managing Director, Avon Beauty Products India Ltd.
Avon entered India in 1996. The company took two years to test-market their products. After that the product portfolio was made as per Indian consumer’s product and price preferences. The first portfolio of products was for high end customers.
Avon’s multi-level business strategy was not successful in India. In 1998, they dropped the multi-level system and adopted the single-level direct sales structure. It took Avon two years to understand the sales structure strategies in India. One more reason for launching a single level structure was that the model was used all over the world and multilevel sales were Avon’s core competency.
India has a good growth opportunity for Avon products. In the year 2003, Avon registered a growth rate of 34.5 per cent over the previous year.
In the year 2004 Avon introduced several new products in the mass segment, along with attractive prices to be won. Avon had two-fold strategy: to strengthen AVON product portfolio, and to expand its distribution network. Avon wanted to be affordable to all consumers across various price points. It had make-up, skin care and fragrance products priced to suit all segments. It launched 125 new stock keeping units (SKUs) in 2004.
By 2004 end Avon had 1,25,000 distributors through direct channels in 30 cities and another 50 through indirect.
Colour cosmetics are the largest in terms of product sale, and skin care and fragrances have the same percentage sa;es.
The pricing strategy is very simple, price more or less the same as competitors. For example, in the words of Mr.Pental, in mass line, “Avon’s talcs are priced similar to Pond’s, our lipsticks and nail enamels are in the same price bracket as Lakme, and our fairness creams are priced competitively against, say, Fair & Lovely”. To be specific, our lipsticks are now priced upwards of Rs.40, while or least expensive nail enamel is priced at Rs 25. For the record, three years ago, our least expensive lipstick was priced at Rs 80-90, while or lowest-priced nail enamel was priced at Rs 100”.
Avon had a five per cent share of the domestic cosmetics, fragrances and skin care market through direct marketing.
Avon liver aged its distribution network in Jewellery, intimate apparel, and nutrition and well-being products (for example, nutritional supplements and anti-oxidants).
The biggest challenge facing any cosmetics company in India which uses the direct selling channels is that of the proliferation of scam companies. “The Indian Direct Selling Association (IDSA) hadsubmitted a draft act to the Government to regulate the direct selling industry two years ago. The industry has raised several issues such as protecting consumers against pyramid schemes, legitimising the industry, and distinguishing genuine direct sellers from look-alikes.
Avon has third-party contract manufacturers which include Aero Pharma (which manufactures Lipsticks, pressed powders, lip balms, fragrances, scrubs and face masks), Shree 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 of getting good brand name as a tourism destination.
The park was very small and could not match the visitors’ expectations. As per the attractions there were only 16 in number—compared to 52 at Disneyland Resort Paris. There were other issues like bad management which included ticketing and human resource management.
A survey was conducted by Hong Kong Polytechnic University wherein 70% of the local residents polled said they had a more negative opinion of Disneyland since its opening. As per Prof John AP “Disney knows the theme-park business, but when it comes to understanding the Chinese guest, it’s an entirely new ball game.”
Mr Jay Rasulo, Chairman of Walt Disney Parks and Resorts has a different story to tell: “ I feel great about how Hong Kong Disneyland is doing.” Disney’s own surveys of park visitors show an 80% satisfaction rate, among he highest of any of the company’s parks, says Rasulo; “People feel this is a great experience.”
Doing marketing in America is a different ball game wherein the year 2006 disney welcomed its 2 billionth visitor last week. Disney were well knows that imposing a very American sensibility on foreign guests can be a difficult experience. “ When Disneyland Paris opened in 1992, Disney famously banned wine from park restaurants, much to the dismay of European bonsvivants.”
PROBLEM
1. In Hong Kong Disney tried to have a local flavour by having ‘’’’imaginers’’ installed Main Street’s first Chinese eatery, along with Fantasy Gardens where Mickey Mouse, local favourite Mulan and other Disney characters reside so tourists can readily snap pictures with them a priority for many Chinese visitors. “Ironically, Disney’s most high-profile stumble resulted from being too local. When executives decided to server shark-fin soup, a Hong Kong favourite, environmentalist howled and Disney ignominiously yanked it from the menu’’.
2. Culturally the Lunar New Year holiday beginning in January is a popular vacation time in China. Disney neglected to block off the entire week as “special days’ for which visitors required specific tickets. Tourists with valid tickets got turned away at the front gates after the park quickly filled up; the jilted travellers screamed at park employees, while TV cameras filmed one family trying to pass a child over the fence. Henry Tang, the city’s Financial Secretary, voiced concern that this disarray ‘might affect image of Hong Kong’s tourism industry.” Bill Ernest, Hong Kong Disney land’s managing director, says the company “had no idea” that demand would spike so sharply at that time and adds that Disney has since expanded the number of “special days’’ to improve crowd during holidays; “We don’t make the same mistake twice’.
3. Disney has also strained its relationship with Chinese travel agencies, which pay a crucial role in funnelling tourists into the park. Yu Limin, a general manager at China CYTS Outbound Travel Service in Beijing, complains that Disney originally demanded several weeks’ notice when the agency wanted to reserve a guaranteed number of rooms—a nearly impossible deadline, he says, as Chinese travellers often don’t finalize trips more than a few days in advance. Agents also say they make so little money organizing Disneyland trips that they don’t have any incentive to market the park. Disney has tried to improve its ties to travel agents by, for example, boosting the commission they earn on selling tickets and reducing the advance notice needed to secure hotel bookings. “We’re listening to everything they have to say and adjusting where we can, “says Josh D’Admaro, Hong Kong Disneyland’s vice president for sales and travel-trade marketing. But Yu says, Disney is “Still far from understanding the real market in China. They started of doing business the American way. So they have encountered problems”.
4. Some workers assigned to play the parts of supposedly cheery characters like Mickey and Tigger have also complained. In April, the Hong Kong Disneyland Cast Members’ Union made public a litany of gripes over poor pay, excessive work hours and, most of all, the sweltering conditions inside their costumes. Disney counters that the complaints are an “inaccurate representation” of the work environment at the park that staffers have been granted extra rest days beyond those mandated by their contracts, and that their costumes are no different to those worn at its hot park in Florida.
5. The park was not built on a grand scale because the Chinese didn’t grow up with Disney and don’t know the characters as well as Americans and Europeans do, which acts as a constraint on its potential audience. People call it a “great introductory park”. Disney to reach its target of 5.6 million customers started aggressive promotion campaign like offering free tickets for 50,000 Hong Kong taxi drivers {and} share it with their passengers.
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)
4. Engineering: This is a USD 22 bnincluding including heavy and light engineering.
5. Food Processing: Food Processing is a USD 70 bn industry growing at 9% to 12%.
6. Gems & Jewellery: This is a USD 13 bn industry (gold growing at 15% p.a. and Diamond
Growing at 27% p.a.).
7. Leather: Industry size is USD 4 bn.
8. Machine Tools: Industry size is USD 225 mm.
9. Textiles: Industry size is USD 38 bn.
INDIA’S MANUFACTURING COST ADVANTAGES VIS-À-VIS HIGH-COST LOCATIONS
(A) Production design and savings to the extent of 80% vis-à-vis plants in developed countries.
Process Engineering cost markets (due to the low cost, high quality engineering talent in India)
(b) Capital Cost efficiency savings to the extent of 30% to 60% vis-à-vis plants in
Developed markets (due to local fabrication and labour intensiveness).
© Higher Asset utilization—Many manufacturing units in India follow a three shift
Seven day a week (unlike a two shift, five day week in high cost locations).
REGULATORY SCENARIO FOR INDIAN MANUFACTURERS
(1) Government of India offers a five year tax holiday for
(a) Power projects
(b) Firms engaged in exports
(c) New Industries in notified states
(d) Units in Electronic hardware, software parks
(e) EOU’s and Free Trade Zones
(2) Tax Deductions of 100% on export profits
(3) Deduction of 30% on net income for 10 years for new industries
(4) Deduction in respect of certain inter-corporate dividends
CASE 4 -- 9 ( B )
A CASE OF SUNDARAM FASTENERS
Products and Services of Business
“The acquisition of a manufacturing facility in the UK has been a part of SLF’sstrategy to become a global player. The acquisition has given us access to new technology. weare confident that this will become a win-win situation by providing parts from India to the UK company of lower prices, and therefore rendering the UK company more competitive and at the same time providing tremendousopportunity for the Indian plants of SFL to absorb technology and grow”.
COMPANY BACKGROUND
If we ask any person to name the top Indian auto component manufacturer—the answer we will get is the name of Sundaram Fasteners Limited (SFL). SFL is a leading manufacturer of auto components in India since 1966 and is a part of the TVS Group, India. The company manufactures high tensile fasteners, automotive components, automotive and other miscellaneous cold formed/extruded parts, powder metal parts, precision formed gears, iron powders, radiator caps, gear shifters and tyre carriers. Sundram Fasteners has won the ‘Supplier of the Year’ Award in 1996, 1997, 1998, 1999 and 2000 from General Motors, USA.
The company had a turnover of US $ 227.4 million in 2004-2005.
SFL has many subsidiaries, for example, Sundram Fasteners (Zhejiang) Limited is SFL’s subsidiary in China. The Chinese subsidiary commenced its operations in May 2004. Cramlington Precision Forge Limited (CPFL) is a subsidiary of SFL I the UK> SFL also has a subsidiary Bhd in Malaysia named RBI AutopartsSdnBhd in Malaysia. The Malaysia subsidiary is engaged in assembling oil pumps and water pumps for Proton, the Malaysian car manufacturer. To develop additional capability of manufacturing train part SFL developed a joint venture with BleistahlProduktions GmbH & Co. to enable it to tap the huge segment.
Sundram Fasteners in the UK
Sundram Fasteners started its operations in the UK in December 2003. The expansion in Europe was through acquisition of precision forging business of Dana Spicer Europe valued at US $ 2.7 million. The division was named Cramlington Precision Forge Limited (CPFL) a fully owned subsidiary of SFL. 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 components for application in heavy vehicles for on-highway and off-highway applications. CPFL is one the few companies in Europe that produces heavy-duty precision forged differential gears.
CPFL has an impressive client list and supplies clutches to blue chip companies such as MAN, DAF Trucks, Albion Automotive, Scania and Parker in Europe.
.Synergy with Indian Operations
The main reason for success of CPFL auto companies in Europe is the synergies between India and the UK operations. To liverage India’s low-cost manufacturing bases, SFL is carrying out back-end operations in India. This has reduced the product cost and made CPFL cost competitive. Further, CPFL provided SFL with better understanding of the UK as well as the European market, thereby facilitating SFL to keep pace with the latest technologies.
Product Range : Clutch, Differential Gears and Pinions, Drive Gears, Drive Couplings, Axial
Drive Gears, Differential Gears, Shafted Gears and Hydraulic Shafts and
Cylinder Barrels
Technologies : APQP, PPAP and SPC techniques are used for all new product
Introductions in the company.
Future Plans
New investments and diversifying product range of CPFL has planned by the company. The Further, SFL has planned to use the distribution network of its UK subsidiary to market products that are manufactured in India.
SFL is looking forward to commence operations in other countries . The UK subsidiary wil act as a centre to access other countries in Europe by giving the knowledge and launching pad for understanding the dynamic European market and will act as a division with the latesttechnology and skilled labour
CASE 4 -- 10
Case of water purifiers to consumer satisfying products
“In urban India, Hindustan Lever Network (HLN) is our direct selling initiative selling a special range of products. It already reaches 1,400 towns with over 3 lakh consultants. Besides reach, HLN enables dire3cdt interaction with consumers and customises solutions for them to give them a complete brand experience.”
Bringing FMCG Back to Growth Mr. M>S>Banga, 2005.
In 1982, Eureka Forbes (EFL) was started as a joint venture between the Forbes Group and Electrolux of Sweden. Today it is aRs 8000 million multi-product, multi-channel corporation—part of the prestigious ShapoorjiPallonji Group.
EFL introduced direct marketing in India, and pioneered concepts like ultimate vacuum cleaning (through its Euroclean brand), electronic water purification ( Aquaguard), air purification (Euroair) and electronic security solutions (Eurovigil). Today it is Asia’s largest direct selling organization with 7,000 frontline selling professionals touching the lives of 5.6 million homes every month. Its network extends to 180 branch offices across 92 cities with another 450 small towns serviced through franchised direct operations. EFL has also expanded channels to include a 3,800 strong dealer sales network and an institutional sales network. Eureka Forbes is ranked among India’s Most Admired Consumer Durable Companies & a Best Employer. Its methodology been discussed as a case study in the prestigious Harvard Business School (US), on the art of creating an innovative selling and customer contact channel (direct marketing). It has expanded its operations to beyond India, to cover markets in South Ease Asia, Middle East, Europe and its products are exported to over 25 countries across the globe..
Eureka Forbes has always believed I innovating—be it the way its business is done or the type of products it introduces to Indian homes or the unique ways of motivating its employees (affectionately called Eurochamps). Equally important for the company is creating Relationships, with its customers, its employees and of course the community at large. Its vision is to provide a happy, healthy and pollution free environment that is built on trust and lasting relationships with its customers. Today Eureka Forbes enjoys the trust of over six million happy families and is a dominant leader in each of the product categories it is present in. This trust is built on he underlying promise of bringing the best-in-class technology in an easy and acceptable way for the Indian home.
.
Aquaguard range of water purification solutions, India’s only superbrand offers superior technologies that ensure that every drop of water is as pure and safe as water boiled for twenty (or more) minute, irrespective of the source of water. A large range of models, catering to people having access to different water. A large range of models, catering to people having access to different water conditions across the country, makes it the only water purifier to be able to customize solutions according to specific market needs. While Aquaguard caters to the more upper class consumer, to address the all-pervasive need for pure safe water, the company introduced Aqua Sure range of water purifiers that are so effectively designed that they provide safe drinking water to homes even without electricity or a direct supply of piped water. To cater to the consumers visiting retail outlets and malls every day, Forbes range of water purifiers is available on the retail shelf. All water purifiers are rigorously tested in laboratories in India and across the world and this is the only range of water purifiers in India to be endorsed by the prestigious Indian Medical Association (IMA).
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)
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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
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Gross Profit 100 200 300
Operating expenses 50 50 100
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Taxable Income 50 150 200
Income taxes (20% / 17.5% ) 10 26 36
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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 the globe. It was one of the fastest-growing brands in a Business Week survey of the top 100 global brands published August 5. At a time when one corporate star after another has crashed to earth, brought down by revelations of earnings misstatements, executive greed, or worse, Starbucks hasn’t faltered. The company confidently predicts up to 25 per cent annual sales and earnings growth this year. On Wall Street, Starbucks is the last great growth story. Its stock, including four splits has soared more than 2,200 per cent over the past decade, surpassing Wal-Mart, General Electric, Pepsi Co., Coca-Cola, Microsoft, and IBM in total return. Now at $ 21, it is hovering near its all-time high of $ 23 in July, before the overall market drop.
And after a slow down last fall and winter, when consumers seemed to draw inward after September 11, Starbucks is rocketing ahead once again. Sales in stores open at least 13 months grew by 6 per cent in the 43 weeks through July 28, and the company predicts monthly same-store sales gains as high as 7 per cent through the end of this fiscal year. That’s below the 9 per cent growth rate in 2000, but investors seem encouraged. “We’re going to see a lot more growth,” says Jerome A. Castellini, President of Chicago-based CastleArk Management, which controls about 300,000 Starbucks shares. “The stock is on a run.”
But how long can that run last? Already, Schultz’s team is hard-pressed to grind out new profits in a home market that is quickly becoming saturated. Amazingly, with 4,247 stores scattered across the United States and Canada, there are still eight states in the United States with no Starbucks stores, Frappuccino-free cities include Butte, Mont, and Fargo, N.D. But big cities, affluent suburbs, and shopping malls are full to the brim. In coffee-crazed Seattle, there is a Starbucks outlet for every 9,400 people, and the company considers that the upper limit of coffee-shop saturation. Ion Manhattan’s 24 square miles, Starbucks has 124 cafes, with four more on the way this year. That’s one for every 12,000 people---meaning that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of 10 per cet or more if the company is going to match its historic overall sales growth. That, as they might say at Starbucks, is tall order to fill
Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication: “A New Starbucks Opens in Rest-Room of Existing Starbucks.” And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets. “We probably self-cannibalize our stores at a rate of 30 per cent a year.” Schultz says. Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Starbucks is at a defining point in its growth. It’s reaching a level that makes it harder and harder to grow, just due to the law of large numbers.”
To duplicate the staggering returns of its first decade, Starbucks has no choice but to export its concept aggressively. Indeed, some analysts give Starbucks only two years at most before it saturates the U.S. market. This chain now operates 1,200 international outlets, from Beijing to Bristol. That leaves plenty of room to grow. Indeed, abot 400 of its planned 1,200 new stores this year will be built overseas, representing 35 per cent increase in its foreign base. Starbucks expects to double the number of its stores worldwide, to 10,000 in three years. During the pase 12 months, the chain has opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off Jakarta. Athens comes next. And within the next year, Starbucks plans to move into Mexico and Puerto Rico. But global expansion poses huge risks for Starbucks. For one thing, it makes less money on each overseas store because most of them are operated with local partners. While that makes iteasier to start up on foreign turf, it reduces the company’s share of the profits to only-20 per cent to 50 per cent.
Moreover, Starbucks must cope with some predictable challenges of becoming a mature company in the United States. After riding the wave of successful baby boomers through the ‘90s, the company faces an ominously hostile reception from its future consumers, the twenty-or thirty some things of Generation X. Not only are the activists among them turned off by the power and image of the well-known brand, but many others say that Starbucks’ latte-sipping sophisticates and piped-in Kenny G music are a real turnoff. They don’t feel wanted in a place that sells designer coffee at $ 3 a cup.
Even the thirst of loyalists for high-price coffee can’t be taken for granted. Starbucks’ growth over the past decade coincided with a remarkable surge in the economy. Consumer spending has continued strong in the downturn, but if that changes, those $ 3 lattes might be an easy place for people on a budget to cut back. Starbucks executives insist that won’t happen, pointing ot that even in the weeks following the terrorist attacks, same-store comparisons stayed positive while those of other retailers skidded.
Starbucks also faces slumping morale and employee burnout among its store managers and its once-cheery army of baristas. Stock options for part-timers in the restaurant business was a Starbucks innovation that once commanded awe and respect from its employees are still paid better than comparable workers elsewhere—about $ 7 per hour—many regard the job as just another fast—food gig. Dissatisfaction over odd hours and low pay is affecting the quality of the normally sterling service and even the coffee itself, say some customers and employees. Frustrated store managers among the company’s roughly 470 California stores sued Starbucks in 2001 for allegedly refusing to pay legally mandated overtime. Starbucks settled the suit for $ 18 million this past April, shaving $ 0.03 per share off an otherwise strong second quarter. However, the heart of the complaint—feeling overworked and underappreciated—doesn’t seem to be going away.
To be sure, Starbucks has a lot going for it as it confronts the challenge of maintaining its growth. Nearly free of debt, it fuels expansion with internal cash flow. And Starbucks can maintain a tight grip on its image because stores are company-owned: There are no franchisees to get sloppy about running things. By relying on mystique and word-of-mouth, whether here or overseas, the company saves a bundle on marketing costs. Starbucks spends just $ 30 million annually on advertising, or roughly 1 per cent of revenues, usually just for new flavours of coffee drinks in the summer and product launches, such as its new in-store Web service. Most consumer companies its size shell out upwards of $ 300 million per year. Moreover, unlike a Me-Donald’s or a Gap Inc., two other retailers that rapidly grew in the United States. Starbucks has no nationwide competitor
Starbucks also has a well-seasoned management team. Schultz, 49, stepped down as chief executive in 2000 to become chairman and chief global strategist. Orin Smith, 60, the company’s numbers-cruncher, is now CEO and in charge of day-to-day operations. The head of North American operations is Howard Behar, 57, a retailing expert who returned last September, two year after retiring. The management trio is known as H2O, for Howard, Howard, and Orin.
Schultz remains the heart and soul of the operation. Raised in a Brooklyn public-housing project, he found his way to Starbucks, a tiny chain of Seattle coffee shops, as a marketing executive in the early ‘80s. The name came about when the original owners looked to Seattle history for inspiration and chose the moniker of an old mining camp: Starbo. Further refinement led to Starbucks, after the first mate in Moby-Dick, which they felt evoked the seafaring romance of the early coffee traders (hence the mermaid logo). Schultz got the idea for the modern Star bucks format while visiting a Milan coffee bar. He bought out his bosses in 1987 and began expanding. Today,
Schultz has a net worth of about $ 700 million, including $ 400 million of company stock.
Starbucks has come light years from those humble beginnings, but Schultz and his team still think there’s room to grow in the United states—even in communities where the chain already has dozens of stores. Clustering stores increases total revenue and market share, Smith argues, even when individual stores poach on each other’s sales,. The strategy works, he says, because of Starbucks’ size. It is large enough to absorb losses at existing stores as new ones open up, and soon overall sales grow beyond what they would have with just one store. Meanwhile, it’s cheaper to deliver to and manage stores located close together. And by clustering, Starbucks can quickly dominate a local market.
The company is still capable of designing and opening a store in 16 weeks or less and recouping the initial investment in three years. The stores may be oases of tranquillity, but management’s expansion tactics are something else. Take what critics call its ‘predatory real estate’ strategy—paying more than market-rate rents to keep competitors out of a location. David C. Schomer, owner of Espresso Vivace in Seattle’s hip Capitol Hill neighbourhood, says Starbucks approached his landlord and offered to pay nearly double the rate to put a coffee shop in the same building. The land-lord stuck with Schomer, who says; “It’s a little disconcerting to know that someone is willing to pay twice the going rate.” Another time, Starbucks and Tully’s Coffee Corp., a Seattle-based coffee chain, were competing for a spece in the city. Starbucks got the lease but vacated the premises before the term was up. Still, rather than let Tully’s get the space, Starbucks decided to pay the rent on the empty store so its competitor could not move in. Schultz makes no apologies for the hardball tactics. “The real estate business in ameridca is a very, very tough game,’ he says. “It’s not for the faint of heart’.
Still, the company’s strategy could backfire. Not only will neighbourhood activists and local businesses increasingly resent the tactics, but customers could also grow annoyed over having fewer choices. Moreover, analysts contend that Starbucks can maintain b\about 15 per cent square-footage growth in the United States—equivalent to 550 new stores—for only about two more years. After that, it will have to depend on overseas growth to maintain an annual 20 per cent revenue growth.
Starbucks was hoping to make up much of that growth with more saes off food and other non coffee items, but has stumbled somewhat. In the late’ 90s, Schultz through that offering $ 8 sandwiches, desserts, and CDs in his stores and selling packaged coffee in super markets would significantly boost sales. The specially business now accounts for about 16 per cent of sales, but growth has been less than expected. A healthy 19 per cent this year, it’s still far below the 38 per cent growth rate of fiscal 2000. That suggests 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.
But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on indefinitely. In Japan, the company beat even its own bullish expectations, growing to 368 stores after opening its first in Tokyo in 1996. Affluent youngJapanese women like Anna Kato, a 22-year-old Toyota Motor Corp. worker, loved the place. “I don’t care if it costs more, as long as it tastes sweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s Shibuya district. Yet same-store sales growth has fallen in the past 10 months in Japan, Starbucks’ top foreign market, as rivals offer similar fare. Add to that the depressed economy, and starbucks Japan seems to be losing steam. Although it forecasts a 30 per cent gain in net profit, to $ 8 million, for the year started in April, on record sales of $ 516 million, same-store sales are down 14 per cent for the year ended in June. Meanwhile in England, Starbucks’ second-biggest overseas market, with 310 stores, imitators are popping up left and right to steal market share.
Entering other big markets may be tougher yet. The French seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch, cofounder of Columbus Café, a Starbucks-like chain. But he wonders if the company can profitably cope with France’s arcane regulations and generous labour benefits. And in Italy, the epicentre of European coffee culture, the notion that the locals will abandon their own 200,000 coffee bars en masse for starbucks strikes many as ludicrous. For one, Italian coffee bars prosper by serving food as well as coffee, an area where Starbucks still struggles. Also, Italian coffee is cheaper than U.S. Java and, say Italian purists, much better. Americans pay about $ 1.50 for an espresso. In northern Italy, the price is 67 cents; in the south, Just 55 cents. Schultz insists that Starbucks will eventually come to Italy. It’ll have a lot to prove when it does. Carlo Petrini, founder of the antiglobalization movement Slow Food, sniffs that Starbucks’ “substances served in styrofoam” won’t cut it. The cups are paper, of course.But the scepticism is real.
As Starbucks spreads out, Schultz will have to be increasingly sensitive to those cultural challenges. In December, for instance, he flew to Israel to meet with Foreign Secretary Shimon Pere3s and other Israeli officials to discuss the Middle East crisis. He won’t divulge the nature of his discussions. But subsequently, at a Seattle synagogue, Schultz let the Palestinians have it. With Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and Saudi Arabia, he created a mild uproar among Palestinian supporters. Schultz quickly back pedaled, saying that his words were taken out of context and asserting that he is “propeace” for both sides.
There are plenty more minefields ahead. So far, the Seattle coffee company has complied as envious record of growth. But the giddy buzz of that initial expansion is wearing off. Now, Starbucks is waking up to the grand challenges faced by any corporation bent on becoming a global powerhouse.
Profit at Starbucks Coffee Japan fell 70 per cent in the first nine months of the year because of growing competition from rival coffee chains. Sales at stores open more than one year fell 16 per cent. The firm expects a loss for the full year.
In a 2005 bid to boost sales in its largest international market, Starbucks Corp. is expanding its business in Japan beyond cafes and into convenience stores with a line of chilled coffee in plastic cups. The move gives the Seattle-based company a chance to grab a chunk of Japan’s $ 10 billion market for coffee sold in cans, bottles or vending machines, rather than made-to-order at cafes. It is a lucrative but fiercely competitive sector, but Starbucks, which has become a household name since opening its first Japanese sore nine years ago, is betting on the power of its brand to propel sales of the new drinks.
Starbucks, working with Japanese beverage maker and distributor Suntory Ltd., is launching the drinks, called Starbucks Discoveries, here today, with plans to extend sales to a total of 10,000 stores in the coming weeks. Starbucks says it hasn’t decided yet whether to launch the product nationwide. Tomorrow, the company also plans to start selling the product in Taiwan.
The Discoveries line is he company’s first foray into the ready-to-drink market outside North America, where it sells a line of bottled and canned coffee. It also underscores Starbucks’ determination to expand its presence in Asia by catering to local tastes. For instance, the new product comes in two variations—espresso and latte—that are less sweet than their U.S. counterparts, as the coffee maker developed them to suit Asian palates.
Starbucks officials said they hope to establish their product as the premium chilled cup brand, which, at 210 yen ($1.87), will be priced at the upper end of the category.
Starbucks faces steep competition. Japan’s “chilled cup” market is teeming with rival products, including Starbucks lookalikes. One of the most popular brands, called Mt. Rainier, is emblazoned with a green circle logo that closely resembles that of Starbucks. Convenience stores also are packed with canned coffee drinks, Including Coca-Cola Co.’s Georgia brand and brews with extra
caffeine or made with gourmet coffee beans.
Starbucks Chairman Howard Schultz declined to speculate on exactly how much coffee 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.S. pork levers, customary merchantable quality, first rate brands.” The shipment had been prepared to meet the exacting standards of the American market, so the exporter expected the transaction to be completed without any problem. But when the livers arrived in Germany, the purchaser raised an objection: “We ordered pork livers of customary merchantable quality—what you sent us consisted of 40 per cent sow livers.”
“Who cares about the sex of the pig the liver came from?” the exporter asked.
“We do,” the German replied. “Here in Germany we don’t pass off spongy sow livers as the firmer livers of male pigs. This shipment wasn’t merchantable at the price we expected to charge. The only way we were able to dispose of the meat without a total loss was to reduce the price. You owe us a price allowance of $ 1,000.”
The American refused to reduce the price. The determined resistance may have been partly in reaction to the implied insult to the taste of the American consumer. “If pork livers, whatever the sex of the animal, are palatable to Americans, they ought to be good enough for anyone,” The American thought.
It looked as if the buyer and seller could never agree on eating habits.
QUESTIONS
1. In this dispute which country’s law would apply, that of the United States or of Germany?
2. If the case were tried in U.S. courts, who do you think would win? In German courts? Why?
3. Draw up a brief agreement that would have eliminated the following problems before they could occur.
a. Whose law applies
b. Whether the case should be tried in U.S. or German courts
c. The difference in opinion as to “customary merchantable quality”
4. Discuss how SRC may be at work in this case
CASE 4 – 4
SALES NEGOTIATIONS ABROAD FOR MRI SYSTEMS
International sales of General Medical’s magnetic Resonance Imaging (MRI) systems have really off in recent months. Your representatives are about to conclude important sales contracts with customers inboth Tokyo and Rio de Janeiro. Both sets of negotiations require your participation, particularly as final details are worked out. The bids you approved for both customers are identical (see tables). Indeed, both customers had contacted you originally at a medical equipment trade show in Las Vegas, and you had all talked business together over drinks at the conference hotel. You expect your two new customers will be talking together again over the Internet about your products and prices as they had in Las Vegas. The Japanese orders are potentially larger because the doctor you met works in a hospital that has nine other units in the Tokyo / Yokohama area. The Brazilian doctor represents a very large hospital in Rio, which may require more than one unit. Your travel arrangements are now being made. Your local representatives will fill you in on the details. Best of luck!
TABLE 1
Price Quotation
--------------------------------------------------------------------------------------------------------------------------
Deep Vision 2000 MRI (basic Unit) Product options $ 1,200,000
• 2D and 3D time-of-flight (TOF)
Angiography for capturing fast flow 150,000
• Flow analysis for quantification of
Cardiovascular studies 70,000
• X2001 software package 20,000
Service contract (2 years normal maintenance, parts,
and labour) 60,000
-------------------------------------
Total Price $ 1,500,00
TABLE 2
Standard Terms and Conditions
Delivery 6 months
Penalty for late delivery $ 10,000 / month
Cancellation charges $ 10% of Contract price
Warranty (for defective machinery) Parts, one year
Terms of payment C O D
CASE 4 -- 11
AVON PRODUCTS IN INDIA
“We Want to be affordable to all consumers across various price points.”
HarmeetS.Pental, Managing Director, Avon Beauty Products India Ltd.
Avon entered India in 1996. The company took two years to test-market their products. After that the product portfolio was made as per Indian consumer’s product and price preferences. The first portfolio of products was for high end customers.
Avon’s multi-level business strategy was not successful in India. In 1998, they dropped the multi-level system and adopted the single-level direct sales structure. It took Avon two years to understand the sales structure strategies in India. One more reason for launching a single level structure was that the model was used all over the world and multilevel sales were Avon’s core competency.
India has a good growth opportunity for Avon products. In the year 2003, Avon registered a growth rate of 34.5 per cent over the previous year.
In the year 2004 Avon introduced several new products in the mass segment, along with attractive prices to be won. Avon had two-fold strategy: to strengthen AVON product portfolio, and to expand its distribution network. Avon wanted to be affordable to all consumers across various price points. It had make-up, skin care and fragrance products priced to suit all segments. It launched 125 new stock keeping units (SKUs) in 2004.
By 2004 end Avon had 1,25,000 distributors through direct channels in 30 cities and another 50 through indirect.
Colour cosmetics are the largest in terms of product sale, and skin care and fragrances have the same percentage sa;es.
The pricing strategy is very simple, price more or less the same as competitors. For example, in the words of Mr.Pental, in mass line, “Avon’s talcs are priced similar to Pond’s, our lipsticks and nail enamels are in the same price bracket as Lakme, and our fairness creams are priced competitively against, say, Fair & Lovely”. To be specific, our lipsticks are now priced upwards of Rs.40, while or least expensive nail enamel is priced at Rs 25. For the record, three years ago, our least expensive lipstick was priced at Rs 80-90, while or lowest-priced nail enamel was priced at Rs 100”.
Avon had a five per cent share of the domestic cosmetics, fragrances and skin care market through direct marketing.
Avon liver aged its distribution network in Jewellery, intimate apparel, and nutrition and well-being products (for example, nutritional supplements and anti-oxidants).
The biggest challenge facing any cosmetics company in India which uses the direct selling channels is that of the proliferation of scam companies. “The Indian Direct Selling Association (IDSA) hadsubmitted a draft act to the Government to regulate the direct selling industry two years ago. The industry has raised several issues such as protecting consumers against pyramid schemes, legitimising the industry, and distinguishing genuine direct sellers from look-alikes.
Avon has third-party contract manufacturers which include Aero Pharma (which manufactures Lipsticks, pressed powders, lip balms, fragrances, scrubs and face masks), Shree 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 of getting good brand name as a tourism destination.
The park was very small and could not match the visitors’ expectations. As per the attractions there were only 16 in number—compared to 52 at Disneyland Resort Paris. There were other issues like bad management which included ticketing and human resource management.
A survey was conducted by Hong Kong Polytechnic University wherein 70% of the local residents polled said they had a more negative opinion of Disneyland since its opening. As per Prof John AP “Disney knows the theme-park business, but when it comes to understanding the Chinese guest, it’s an entirely new ball game.”
Mr Jay Rasulo, Chairman of Walt Disney Parks and Resorts has a different story to tell: “ I feel great about how Hong Kong Disneyland is doing.” Disney’s own surveys of park visitors show an 80% satisfaction rate, among he highest of any of the company’s parks, says Rasulo; “People feel this is a great experience.”
Doing marketing in America is a different ball game wherein the year 2006 disney welcomed its 2 billionth visitor last week. Disney were well knows that imposing a very American sensibility on foreign guests can be a difficult experience. “ When Disneyland Paris opened in 1992, Disney famously banned wine from park restaurants, much to the dismay of European bonsvivants.”
PROBLEM
1. In Hong Kong Disney tried to have a local flavour by having ‘’’’imaginers’’ installed Main Street’s first Chinese eatery, along with Fantasy Gardens where Mickey Mouse, local favourite Mulan and other Disney characters reside so tourists can readily snap pictures with them a priority for many Chinese visitors. “Ironically, Disney’s most high-profile stumble resulted from being too local. When executives decided to server shark-fin soup, a Hong Kong favourite, environmentalist howled and Disney ignominiously yanked it from the menu’’.
2. Culturally the Lunar New Year holiday beginning in January is a popular vacation time in China. Disney neglected to block off the entire week as “special days’ for which visitors required specific tickets. Tourists with valid tickets got turned away at the front gates after the park quickly filled up; the jilted travellers screamed at park employees, while TV cameras filmed one family trying to pass a child over the fence. Henry Tang, the city’s Financial Secretary, voiced concern that this disarray ‘might affect image of Hong Kong’s tourism industry.” Bill Ernest, Hong Kong Disney land’s managing director, says the company “had no idea” that demand would spike so sharply at that time and adds that Disney has since expanded the number of “special days’’ to improve crowd during holidays; “We don’t make the same mistake twice’.
3. Disney has also strained its relationship with Chinese travel agencies, which pay a crucial role in funnelling tourists into the park. Yu Limin, a general manager at China CYTS Outbound Travel Service in Beijing, complains that Disney originally demanded several weeks’ notice when the agency wanted to reserve a guaranteed number of rooms—a nearly impossible deadline, he says, as Chinese travellers often don’t finalize trips more than a few days in advance. Agents also say they make so little money organizing Disneyland trips that they don’t have any incentive to market the park. Disney has tried to improve its ties to travel agents by, for example, boosting the commission they earn on selling tickets and reducing the advance notice needed to secure hotel bookings. “We’re listening to everything they have to say and adjusting where we can, “says Josh D’Admaro, Hong Kong Disneyland’s vice president for sales and travel-trade marketing. But Yu says, Disney is “Still far from understanding the real market in China. They started of doing business the American way. So they have encountered problems”.
4. Some workers assigned to play the parts of supposedly cheery characters like Mickey and Tigger have also complained. In April, the Hong Kong Disneyland Cast Members’ Union made public a litany of gripes over poor pay, excessive work hours and, most of all, the sweltering conditions inside their costumes. Disney counters that the complaints are an “inaccurate representation” of the work environment at the park that staffers have been granted extra rest days beyond those mandated by their contracts, and that their costumes are no different to those worn at its hot park in Florida.
5. The park was not built on a grand scale because the Chinese didn’t grow up with Disney and don’t know the characters as well as Americans and Europeans do, which acts as a constraint on its potential audience. People call it a “great introductory park”. Disney to reach its target of 5.6 million customers started aggressive promotion campaign like offering free tickets for 50,000 Hong Kong taxi drivers {and} share it with their passengers.
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)
4. Engineering: This is a USD 22 bnincluding including heavy and light engineering.
5. Food Processing: Food Processing is a USD 70 bn industry growing at 9% to 12%.
6. Gems & Jewellery: This is a USD 13 bn industry (gold growing at 15% p.a. and Diamond
Growing at 27% p.a.).
7. Leather: Industry size is USD 4 bn.
8. Machine Tools: Industry size is USD 225 mm.
9. Textiles: Industry size is USD 38 bn.
INDIA’S MANUFACTURING COST ADVANTAGES VIS-À-VIS HIGH-COST LOCATIONS
(A) Production design and savings to the extent of 80% vis-à-vis plants in developed countries.
Process Engineering cost markets (due to the low cost, high quality engineering talent in India)
(b) Capital Cost efficiency savings to the extent of 30% to 60% vis-à-vis plants in
Developed markets (due to local fabrication and labour intensiveness).
© Higher Asset utilization—Many manufacturing units in India follow a three shift
Seven day a week (unlike a two shift, five day week in high cost locations).
REGULATORY SCENARIO FOR INDIAN MANUFACTURERS
(1) Government of India offers a five year tax holiday for
(a) Power projects
(b) Firms engaged in exports
(c) New Industries in notified states
(d) Units in Electronic hardware, software parks
(e) EOU’s and Free Trade Zones
(2) Tax Deductions of 100% on export profits
(3) Deduction of 30% on net income for 10 years for new industries
(4) Deduction in respect of certain inter-corporate dividends
CASE 4 -- 9 ( B )
A CASE OF SUNDARAM FASTENERS
Products and Services of Business
“The acquisition of a manufacturing facility in the UK has been a part of SLF’sstrategy to become a global player. The acquisition has given us access to new technology. weare confident that this will become a win-win situation by providing parts from India to the UK company of lower prices, and therefore rendering the UK company more competitive and at the same time providing tremendousopportunity for the Indian plants of SFL to absorb technology and grow”.
COMPANY BACKGROUND
If we ask any person to name the top Indian auto component manufacturer—the answer we will get is the name of Sundaram Fasteners Limited (SFL). SFL is a leading manufacturer of auto components in India since 1966 and is a part of the TVS Group, India. The company manufactures high tensile fasteners, automotive components, automotive and other miscellaneous cold formed/extruded parts, powder metal parts, precision formed gears, iron powders, radiator caps, gear shifters and tyre carriers. Sundram Fasteners has won the ‘Supplier of the Year’ Award in 1996, 1997, 1998, 1999 and 2000 from General Motors, USA.
The company had a turnover of US $ 227.4 million in 2004-2005.
SFL has many subsidiaries, for example, Sundram Fasteners (Zhejiang) Limited is SFL’s subsidiary in China. The Chinese subsidiary commenced its operations in May 2004. Cramlington Precision Forge Limited (CPFL) is a subsidiary of SFL I the UK> SFL also has a subsidiary Bhd in Malaysia named RBI AutopartsSdnBhd in Malaysia. The Malaysia subsidiary is engaged in assembling oil pumps and water pumps for Proton, the Malaysian car manufacturer. To develop additional capability of manufacturing train part SFL developed a joint venture with BleistahlProduktions GmbH & Co. to enable it to tap the huge segment.
Sundram Fasteners in the UK
Sundram Fasteners started its operations in the UK in December 2003. The expansion in Europe was through acquisition of precision forging business of Dana Spicer Europe valued at US $ 2.7 million. The division was named Cramlington Precision Forge Limited (CPFL) a fully owned subsidiary of SFL. 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 components for application in heavy vehicles for on-highway and off-highway applications. CPFL is one the few companies in Europe that produces heavy-duty precision forged differential gears.
CPFL has an impressive client list and supplies clutches to blue chip companies such as MAN, DAF Trucks, Albion Automotive, Scania and Parker in Europe.
.Synergy with Indian Operations
The main reason for success of CPFL auto companies in Europe is the synergies between India and the UK operations. To liverage India’s low-cost manufacturing bases, SFL is carrying out back-end operations in India. This has reduced the product cost and made CPFL cost competitive. Further, CPFL provided SFL with better understanding of the UK as well as the European market, thereby facilitating SFL to keep pace with the latest technologies.
Product Range : Clutch, Differential Gears and Pinions, Drive Gears, Drive Couplings, Axial
Drive Gears, Differential Gears, Shafted Gears and Hydraulic Shafts and
Cylinder Barrels
Technologies : APQP, PPAP and SPC techniques are used for all new product
Introductions in the company.
Future Plans
New investments and diversifying product range of CPFL has planned by the company. The Further, SFL has planned to use the distribution network of its UK subsidiary to market products that are manufactured in India.
SFL is looking forward to commence operations in other countries . The UK subsidiary wil act as a centre to access other countries in Europe by giving the knowledge and launching pad for understanding the dynamic European market and will act as a division with the latesttechnology and skilled labour
CASE 4 -- 10
Case of water purifiers to consumer satisfying products
“In urban India, Hindustan Lever Network (HLN) is our direct selling initiative selling a special range of products. It already reaches 1,400 towns with over 3 lakh consultants. Besides reach, HLN enables dire3cdt interaction with consumers and customises solutions for them to give them a complete brand experience.”
Bringing FMCG Back to Growth Mr. M>S>Banga, 2005.
In 1982, Eureka Forbes (EFL) was started as a joint venture between the Forbes Group and Electrolux of Sweden. Today it is aRs 8000 million multi-product, multi-channel corporation—part of the prestigious ShapoorjiPallonji Group.
EFL introduced direct marketing in India, and pioneered concepts like ultimate vacuum cleaning (through its Euroclean brand), electronic water purification ( Aquaguard), air purification (Euroair) and electronic security solutions (Eurovigil). Today it is Asia’s largest direct selling organization with 7,000 frontline selling professionals touching the lives of 5.6 million homes every month. Its network extends to 180 branch offices across 92 cities with another 450 small towns serviced through franchised direct operations. EFL has also expanded channels to include a 3,800 strong dealer sales network and an institutional sales network. Eureka Forbes is ranked among India’s Most Admired Consumer Durable Companies & a Best Employer. Its methodology been discussed as a case study in the prestigious Harvard Business School (US), on the art of creating an innovative selling and customer contact channel (direct marketing). It has expanded its operations to beyond India, to cover markets in South Ease Asia, Middle East, Europe and its products are exported to over 25 countries across the globe..
Eureka Forbes has always believed I innovating—be it the way its business is done or the type of products it introduces to Indian homes or the unique ways of motivating its employees (affectionately called Eurochamps). Equally important for the company is creating Relationships, with its customers, its employees and of course the community at large. Its vision is to provide a happy, healthy and pollution free environment that is built on trust and lasting relationships with its customers. Today Eureka Forbes enjoys the trust of over six million happy families and is a dominant leader in each of the product categories it is present in. This trust is built on he underlying promise of bringing the best-in-class technology in an easy and acceptable way for the Indian home.
.
Aquaguard range of water purification solutions, India’s only superbrand offers superior technologies that ensure that every drop of water is as pure and safe as water boiled for twenty (or more) minute, irrespective of the source of water. A large range of models, catering to people having access to different water. A large range of models, catering to people having access to different water conditions across the country, makes it the only water purifier to be able to customize solutions according to specific market needs. While Aquaguard caters to the more upper class consumer, to address the all-pervasive need for pure safe water, the company introduced Aqua Sure range of water purifiers that are so effectively designed that they provide safe drinking water to homes even without electricity or a direct supply of piped water. To cater to the consumers visiting retail outlets and malls every day, Forbes range of water purifiers is available on the retail shelf. All water purifiers are rigorously tested in laboratories in India and across the world and this is the only range of water purifiers in India to be endorsed by the prestigious Indian Medical Association (IMA).
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