TAIHO PLASTICS INDUSTRIES PRIVATE LIMITED
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A Written Analysis of a Case Submitted to FERNANDO B. BALMOCENA, Ph.D., M.B.A. Professor Master of Business Administration XAVIER UNIVERSITY Cagayan de Oro City ___________________________
In Partial Fulfillment of the Requirements for the Course DYNAMICS OF MANAGEMENT (MBA 111) by ROSELLA S. ABENIO IVY L. CAMANCE IRENE D. CO ABNER C. ESPINOSA
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Table of Contents
I. II.
III. IV. V.
Executive Summary Facts of the Case A. Company Background B. SWOT Analysis C. Analysis of Exhibits D. Assumptions of the Case Problem Alternative Solutions Conclusion
I.
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2 8 10 16 17 18 30
Executive Summary
The purpose of this report was to analyze the case of Taiho Plastics Industries considering its plan to expand production and penetrate the U.S. market.
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This report has considered three modes of entries to international market, namely: joint venture, indirect exporting, and direct exporting that are applicable for Taiho Plastics Industries in view of its company’s condition. Joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Indirect exporting entails contracting with intermediaries in the producer's home country to perform export functions; these are intermediaries such as an export management company (EMC) or a Trading company. These intermediaries are responsible for finding foreign buyers in the target market, shipping products and receiving payment. Direct exporting involves direct marketing and selling to the client that is contracting with intermediaries located in the foreign market to perform export functions; intermediaries include foreign based sales agents and distributors. These intermediaries or agents perform downstream value chain activities in the target market. After taking into consideration the three modes of entries to international market, it is recommended that the Direct Exporting would be the most suitable course of action since the company is not new to this and that cited advantages are in line with the company’s future plans.
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II.
Facts of the Case
A. Company Background Taiho Plastics Industries Limited is a family-owned business engaged in the manufacturing of plastic bags. In 1976, Mr. Wong, co-owner of the company, took over the management of the company. Since then he has been impulsive about the company’s growth. In 1984, Mr. Wong made changes in the company’s plans which include expanding the production and penetrating the U.S. market. This brought about after assessing the company’s position based on performance and trends in the industry in 1983. Amidst the recession in the industry, the company invested $1.7 million to replace the outdated Hong Kong extruder with more efficient Japanese machinery, and purchased twelve cutters worth $3.5 million that were financed through loans. Consequently, he was able to purchase the machines at a good price and on favorable terms. The investment is to address change in the industry where manufacturing of plastic bags requires automated machines rather than labor extensive. Hence, the idea of investing in better machinery is seen as inevitable to stay viable in the international market.
Production
Taiho uses Rotogravure printing process which is reputed to produce prints that are sharper and better toned than those from another process known as
Flexographic printing. Printing cost decreases with the increase in the number of plastic bags being
printed. The maximum working capacity of the machines is 350 tons per month.
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Cost of production has fallen from $3,914,831 in 1980 to $3,846,254 in 1981. The company may increase the number of shifts per day (from 1 to 3 shifts) depending on the work load to meet the production datelines and high volume
orders. Production is stopped once every two weeks to allow both man and machine to rest.
Stock Planning and Delivery
Plastic resins are the main raw materials which form 65% of total cost in competition to direct costing and overhead which account for 25% and 10%,
respectively. The amount of materials purchased depends on the monthly requirements and
financing available. Taiho buys its resin from Japan, the U.S. and some European countries through
their local agencies. It is common to order raw materials three to four months in advance. Taiho is in good terms with its suppliers and so far has only experienced minimal
problems even during times of tight supply. The company does not practice any formal system of stock control. It restocks every 15 days and if the company should require more, it will resort to spot buying.
The Market
Plastic bags used in Singapore include vest bags, carrier bags, garbage bags, food wrapping bags, industrial packaging bags, and market bags. The market segments for these bags are the following: (1) supermarkets and emporiums
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(2) retail stores (3) food stalls and market places (4) industrial users (5) transportation industry (6) construction industry
Supermarkets and emporiums use mainly vest bags and smaller volumes of carrier
bags and plain wrapping bags. The consumption of this segment varies. Price undercutting is common in the local market. Mr. Wong indicated that there is already evidence of a few competitors in the other segments lowering their prices. If the situation worsens, Taiho may have to
review its prices in the local market. Taiho is now concentrating on supermarkets and emporiums where there is demand for bags of a higher quality and print.
Sales
Sales operate on a contractual basis and orders have been regular. A single order of 50,000 bags is considered a small order while 5 million bags is considered a
large order. Taiho usually rejects any single order of less than 10,000 bags but local order of
5,000 have been accepted. Profit margins based on export prices are in the range of 5% to 10%. The company operates on a cash basis and payment is expected 7 days after delivery. However, it allows clients in Singapore 90 days credit but average pay-
up time is 103 days. Bad debts have not been a serious problem. Taiho enjoys a core of regular customers, a few of which are large buyers. Mr. Wong supplies not more than 50% of each client’s requirements and this helps to reduce dependence and risk.
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Products gained a reputation of quality and the company won an international
award for it. Taiho prices are competitive in the export market but if compares with other
manufacturers selling to the local market, its prices are among the highest. Australia accounts for 80% of sales, Holland and the U.S. 10% and another 10% from domestic demand. The plastic bags are handled by fifteen distributors in
Australia and one each in U.S. and Holland. There has been a sudden increase in demand for plastic bags in the U.S. Mr. Wong believed that the key to expansion is to look West and is currently trying to establish contacts in the States.
Competition
Manufacturer from the West needed minimum orders of 250,000 pieces to be
profitable. Mr. Wong foresees that many local companies will be forced out of business because large importers like the U.S. and Australia may find it feasible to produce their own bags due to the recent developments of automated machines that can be
operated at lower unit cost. Two companies that stand out in terms of the size of the operations and finances: 1. Lamipak Expanding fast and is currently the largest manufacturer of polyethylene
plastic bags with operation capacity of 2,000 tons per month. Switch to high speed and more advanced machines. Took a world-wide patent on its co-extrusion of a multi-layer film duthene
which allows for bags to be easily opened. Active in R&D and spends about 5% of revenue on this activity There is a wide product range which includes both innovative and
modified bags. With 20 specialists who have recently developed several new products. Exports take up 90% of its total output
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Its main market is the U.K. and some other countries in the EEC and the
Middle East. Exports to the U.S. amount to 5-10% but Lamipak expects this proportion to increase to 50% in three to five years.
2. Maya Plastic Invested into venture to wholly-owned subsidiary – bought Singapore PE (oldest polyethylene manufacturer in 1970s) and Nakamura automatic
vacuum forming machine The operating capacity was 1,900 tons per month Diversified their production from polyethylene bags into polysterene paper
(PSP) Eighty percent of its PSP sheets are sold locally and the remaining 20% to
Malaysia and Indonesia. Engaged the services of specialist in plastic chemistry to ensure high quality of their products and allocated $200,000 for testing equipment
Employees
The number of employees has fallen from 150 to 65. Workers have been with the company for a long time and cannot keep up with the
changes in the industry To address the employees’ need to adopt with the new machines, Mr. Wong sent few of his supervisors for a training and his production manager for a two-year
course in production management Mr. Wong intends to increase personnel and put up one extra shift to increase output per month by 115% to 450 tons in the coming year.
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Taiho has no immediate objective to compete head-on with Lamipak or Maya whose approaches are different from those other local firms. Taiho is now paying more attention to the development of more innovative bags; and expand its base in the U.S. once it could come up with strong financing. Mr. Wong forecasted that Taiho’s sales in 1985 will reach $12,000,000.
B. SWOT Analysis Strength 1. Taiho uses Rotogravure printing process which is reputed to produce prints that are sharper and better toned than those from another process known as Flexographic printing. 2. Taiho is in good terms with its suppliers and so far has only experienced minimal problems even during times of tight supply 3. Products gained a reputation of quality and the company won an international award for it. Weakness 1. Prices of Taiho are competitive in the export market but in local market, its prices are among the highest 2. Workers have been with the company for a long time and cannot keep up with the changes in the industry 3. The company does not practice any formal system of stock control
Opportunity 1. Maximum working capacity of the machines is 350 tons per month, in 1983 total sales is at 2,040 tons or equivalent 170 tons per month hence with the
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existing machines, Taiho has the capability of producing double than it currently produce. 2. There has been sudden increase in demand for plastic bags in the US.
Threat 1. Price undercutting is common in local market 2. With the recent development of automated machines that can be operated at a lower unit cost, large importers like US and Australia may find it feasible to produce their own bags 3. Competitor Lamipak, the largest manufacturer of polyethylene plastics bags, expects exports to the US will increase from 5 to 50% in three to five years.
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C. Analysis of Exhibits
Exhibit 1 Performance Data 1979 - 1983 Actual Data 1979 Sales (in $) Sales (tons) Gross profit (in $) Net profit (in $)
1980
4,504,000 1,635 720,640 60,000
1982 5,617,00 0 1,800 730,000 1,621
1980 0.53 (0.23) 1.97
1981 0.90 (0.03) 2.04
1982 0.88 (0.04) 2.13
1980 -12% -6% 452% -30%
1981 2% 16% 45% -3%
5,068,000 4,437,000 1,500 1,410 89,996 496,944 89,000 62,000
Ratio Analysis Current ratio Working capital Sales/Total Assets Growth Rate Sales (in $) Sales (tons) Gross profit (in $) Net profit (in $)
1979 0.55 (0.22) 1.84
1981
Forecast 1983 1985 7,200,00 0 12,000,000 2,040 3,407 990,000 1,653,300 43,527 72,690
1982 25% 10% 1% -97%
1983 0.74 (10.14) 1.89 1983 28% 13% 36% 2585%
Interpretation: 1. Sales of Taiho shows a sustainable increase starting 1981. Sales forecast of P12 million in 1985 is approximately 67% or average of 37.5% increase per year in 1984 and 1985. This increase is attainable for Taiho. Forecasted sales per tons at 3,407 is still within the maximum capacity of Taiho at 4,200 tons hence, this forecasted sales can be achieve at the present machineries. 2. Current sales per tons of Taiho is approximately at 50% of its maximum capacity. Hence, Taiho still has enough capacity for expansion.
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Growth from 1983
67% 67% 67% 67%
3. Gross profit shows a sustainable increase over the years. With the forecasted increase in sales in 1985 by 67% from 1983, gross profit will yield to $1.65M in 1985. 4. Net profit from 1979 to 1983 is erratic. This is mainly due to payments of financing expenses for long-terms debts and loans. By 1985, profit is expected to increase due to the forecasted increase in sales. This is assuming that annual financing expenses is the same or decrease if portion of the loan will be paid. Also, gross profit will increase because as the number of tons produced increases, cost of production will decrease. 5.
Ratio analysis of Taiho from 1979 to 1983 shows that: a. Current ratio is lower than 1 and its working capital is negative which means that current asset is lower than its current liability. This would mean that short term debt paying ability is low. b. Sales to total assets of Taiho is higher which shows that the company is efficient in its use of its assets in generating revenue. Despite Taiho’s efficiency in the usage of its asset, its short-term debt paying ability is still low. This is probably because Taiho has not yet maximize the use of its new equipment and it is already starting to pay for the current portion of long-term debt.
Exhibit 2 PRODUCTION CAPACITIES Capacities Estimated percentage (tons per month) of firms
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15 to 70 71 to 120 121 to 300 Above 300
48% 26% 19% 7%
Interpretation:
Above production capacities of suppliers in Singapore shows that Taiho belongs to 7% firms which produces above 300 tons per month. However, Taiho’s sales to Singapore is only 10% of its total sales, with this we can infer that total demand for plastic bags in Singapore is low so Taiho cannot achieve its desired expansion in Singapore.
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Exhibit 3 Estimated Total Monthly Costs of Manufacturers (in thousand $)
50 Cost Item Depreciation Factory Rent Sell & admin exp Wages Utilities Maint & spares Printing ink Supplies Packing materials Others (misc) Interest Total Cost (excluding resins) Cost of resins (at $1962/ton + 5% wastage Total Cost Total costs/ton of resin
Cost 3.9 7.0 4.9 15.5 7.0 0.3 1.5 0.3 0.2 1.0 1.0
44.3 103.0 147.3
Normal Operating Capacity (tons per month) 100 200 % Cost % Cost % 2.6% 7.8 2.7% 15.8 2.8% 4.8% 12.8 4.4% 22.0 3.9% 3.3% 9.2 3.2% 15.8 2.8% 10.5% 26.7 9.3% 47.7 8.4% 4.8% 14.0 4.9% 28.0 5.0% 0.2% 0.4 0.2% 1.0 0.2% 1.0% 3.0 1.0% 6.0 1.1% 0.2% 0.6 0.2% 1.2 0.2% 0.9% 4.0 1.4% 7.9 1.4% 0.7% 2.0 0.7% 4.0 0.7% 0.7% 2.0 0.7% 4.0 0.7% 3 0. 1 % 82.5 28.6% 153.4 27.1% 69.9% 100%
$886
206.0 288.5
71.4% 100%
$825
412.0 565.4
72.9% 100%
400 Cost 31.2 26.0 28.3 83.5 56.0 2.0 12.0 2.4 15.8 8.0 8.0
% 2.8% 3.3% 2.5% 7.5% 5.1% 0.2% 1.1% 0.2% 1.4% 0.7% 0.7%
283.1
25.6%
824.0 1,107.1
74.4% 100%
$767
Above table shows that as the number of tons produced increase, cost of production per ton will decrease.
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$708
Exhibit 4 Export of Plastic Bags - by country (in thousand $) Country Australia Belgium & Luxembourg France Germany Fed. Rep. Italy Malaysia Netherlands Saudi Arabia UAE United Kingdom USA Yemen China Peo Rep Brunei Aden Sabah Bahrein Papua New Guinea Others Total
Country Australia Belgium & Luxembourg France Germany Fed. Rep. Italy Malaysia Netherlands Saudi Arabia UAE United Kingdom USA Yemen China Peo Rep
1979 Value % 3,876 8.7% 383 0.9% 2,933 6.6% 2,232 5.0% 562 1.3% 387 0.9% 6,302 14.2% 1,920 4.3% 774 1.7% 20,026 45.1% 352 0.8% 1,381 3.1% 33 0.1% 233 0.5% 0.0% 240 0.5% 450 1.0% 121 0.3% 2,213 5.0% 44,418 100% Growth Rate 1980 1981 40% 25% 235% 47% 156% 6% 182% -70% 350% -66% 134% 19% -5% 10% 555% -8% 121% -11% -48% 37% -1% 217% 150% -25% 61% -81% 15
1980 Value 5,443 1,283 7,496 6,301 2,527 907 5,996 12,582 1,710 10,340 347 3,448 53 659 470 553 451 419 3,734 64,719
% 8.4% 2.0% 11.6% 9.7% 3.9% 1.4% 9.3% 19.4% 2.6% 16.0% 0.5% 5.3% 0.1% 1.0% 0.7% 0.9% 0.7% 0.6% 5.8% 100%
1981 Value 6,785 1,883 7,967 1,883 852 1,080 6,595 11,531 1,519 14,209 1,101 2,600 10 698 333 292 782 709 5,070 65,899
% 10.3% 2.9% 12.1% 2.9% 1.3% 1.6% 10.0% 17.5% 2.3% 21.6% 1.7% 3.9% 0.0% 1.1% 0.5% 0.4% 1.2% 1.1% 7.7% 100%
Brunie Aden Sabah Bahrein Papua New Guinea Others
183% 100% 130% 0% 246% 69%
6% -29% -47% 73% 69% 36%
Interpretation: 1. Table above shows sudden of growth of demand for plastic bag in the USA. Growth rate in 1981 at 217% is the highest growth among all countries. Assuming that this growth will be sustained, forecasted growth in USA will be: USA
1979
Percentage Increase 352
In thousand dollar
1980
1981
1982
1983
1984
1985
-1%
217%
117%
117%
117%
117%
347
1,101
2,392
5,198
11,296
24,545
By 1985, demand for USA will yield to an increase of $19,345,000 from 1983. This is more than enough to cover for the $4,800,000 forecasted increase in sales of Taiho by 1985. The graph below shows the forecast for U.S.
Forecasted Demand in U.S. 30,000 25,000 20,000
f(x) = 115.45 exp( 0.76 x ) R² = 0.98
15,000 10,000 5,000 1979
1980
1981
1982
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1983
1984
1985
2. Countries with the highest demand such as United Kingdom and Saudi Arabia has shown unstable growth. Demand in United Kingdom decreased to by 48 in 1980 and increase to 37% in 1981 while demand in Saudi Arabia has shown 8% decrease in 1981. 3. Almost all other countries have shown a substantial increase of demand in 1980 but by 1981, growth rate was not sustained resulting to a substantial decrease. D. Assumptions of the Case
Fluctuations on Foreign exchange rate conversion for the next five years will be
minimal. Portion of Taiho’s current asset includes minimal amount of finished goods
inventory. Taiho has only one warehouse location located near its manufacturing site. Raw materials inventory is at minimum level. Political, socio-cultural and legal aspects in US market are favorable to Taiho’s
plan for expansion and penetration in US market. No government ban related to Taiho’s expansion in other countries. Sales are on cash basis except from Singapore market. Engaged in long-term loan from banks to finance its investment in machineries. Forecasted increase in growth based on previous years’ growth rate. The sudden increase in U.S. as shown in the exhibit is assumed an exponential increase. III.
Problems
Major problem: To expand its production and penetrate the US. Minor problems: a. The company does not have strong financing capability; b. The company does not have enough personnel to work for the planned expansion; and c. The company does not practice any formal system of stock control.
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IV.
Alternative courses of Action
1. Expand and penetrate U.S. through a joint venture with an established company in the U.S. Through a joint venture, Taiho can gain access to partner’s resources, including markets, technologies, capital and people. This will address Taiho’s financing problem since the company will no longer need to raise the capitalization on its own. Also, with a Joint Venture, Taiho can gain easy access to market because of participation of an established local entity. This can provide instant access to established, efficient and effective distribution channels and accessible customer bases. This is important to Taiho because creating new distribution channels and identifying new customer bases can be extremely difficult, time consuming and expensive activities. In addition, shown below are the advantages and disadvantages if Taiho will engage in a Joint Venture:
ADVANTAGE Provide opportunity to gain new
capacity and expertise Allows Taiho to enter gain new
DISADVANTAGE It takes time and effort to build the right relationship and partnering with
technological knowledge access to
another business can be challenging. There is an imbalance in levels of
greater resources, including
expertise, investment or assets brought
specialized staff and technology
into the venture by the different
sharing of risks with a venture
partners. Different cultures and management
partner 19
ADVANTAGE Enables growth without having to
DISADVANTAGE styles result in poor integration and co-
borrow funds or look for outside
operation. The partners may not provide enough
investors leadership and support in the early
stages. Embarking on a Joint Venture can represent a significant reconstruction to Taiho’s business. However favorable it may be to its potential for growth, it needs to fit with the overall
business strategy. The partners may want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive
position. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own
proprietary resources. The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
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2.
Expand and penetrate U.S. through Indirect Exporting Indirect exporting entails contracting with intermediaries in the producer's home country to perform export functions; these are intermediaries such as an export management company (EMC) or a Trading company. These intermediaries are responsible for finding foreign buyers in the target market, shipping products and receiving payment.
DISADVANTAGE
ADVANTAGE
Fast market access Little or no financial commitment as the
optimum market potential and
clients' exports usually covers most
opportunities for marketing, thus
expenses associated with international sales Low risk exists for companies that are still
mistakes and miscalculations in their actions affect the income of
developing their R&D, marketing, and sales
Not all brokers are using the
strategies It provides a way to penetrate the foreign
producers of export goods
May lead to diminishing returns in
markets without the complexities and risks
the long run as trading partners try
of more direct exporting. The international
to get maximum profit from their
organization can start exporting with no
service as mediators
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DISADVANTAGE
ADVANTAGE incremental investment in fixed capital, low
business activities in international
startup costs and few risks, but with
Has little or no control over the
prospects for incremental sales. The exporter will not have to worry about
markets
By using an intermediary, the
managing product distribution in a foreign
indirect exporter may lose out on
country as this is done by an export partner. It does not require a lot of organizational
brand recognition and loyalty in international markets, thus leaving
effort or commitment of staff workers; it this opportunity and domain to employs a small number of employees as larger firms the main work is carried out by foreign trade partners.
The producer may lack recognition from the end users of the product
In the event that this export strategy does
or service, who are much more
not lead to achievement of goals, the
familiar with the end product
exporter can easily withdraw from the
market.
Profits are lower compared to direct exporting
The company is deprived of direct communication with the end users.
Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the
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company. Inability to learn how to operate
DISADVANTAGE
ADVANTAGE
overseas
As in the case of Taiho Plastics Industries where financial capabilities and organizational structure is currently in crisis, this export strategy may be a better alternative for it only entails low startup costs and few risks with prospects for incremental sales, it does not require organizational effort, and is ideal for companies that are still developing their R&D, marketing and sales strategies. However, this strategy held Taiho with no control over the business activities in the international market, and at the same time it may lose out on brand recognition and loyalty in international markets as a consequence of using intermediaries. This is contrary to what Taiho is planning of expanding production and penetrating the U.S. market and be able to stay viable and competitive in the international market. 3. Expand and penetrate U.S. through Direct Exporting 23
Direct exporting involves direct marketing and selling to the client that is contracting with intermediaries located in the foreign market to perform export functions; intermediaries include foreign based sales agents and distributors. These intermediaries or agents perform downstream value chain activities in the target market. Since Taiho has an accessible market, direct exporting of products is a viable option. The company is not new to exporting, but the main task on hand is finding a suitable intermediary firm or agent/sales representative that can handle most export details. This alternative course of action will suit best for Taiho’s plan to expand in US market.
The following are agents or intermediaries that Taiho needs to have in a direct exporting: a. Foreign/Import distributors Import distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory just like plastics. The plastic bags are handled by 15 distributors in Australia and 1 each in US and Holland. In Australia, Taiho has an extensive network covering all major cities. b. Sales representatives Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. ADVANTAGE
DISADVANTAGE
Taiho will be able to establish a direct contact with a foreign trading partner,
Higher start-up costs and higher risks as opposed to indirect exporting
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ADVANTAGE
DISADVANTAGE
and has the best opportunity for direct
Requires higher investments of time,
participation in foreign transactions. This will offer Taiho for potential higher
resources and personnel and also
profits because of more direct contact. Taiho will be able to have a closer
organizational changes Greater information requirements Longer time-to-market as opposed to
indirect exporting Direct exports are affected by other
relationship with foreign buyers and the
marketplace. Taiho will have a control over selection
conditions like deterioration of
of foreign markets and choice of foreign
representative companies. Target management and control of the
exchange rates Direct exporting
may
be
inappropriate for goods such as those
sales become possible which is
which may have high transport costs
unrealistic in the case of indirect exports. Good information feedback from target
or goods that require complex after -sales
service
which
cannot
be
market, developing better relationships
with the buyers Better protection of trademarks, patents,
goodwill, and other intangible property Potentially greater sales, and therefore
granted by resellers. Extra costs because it takes more time to develop extra markets, and the pay
back periods are longer, Up-front costs for developing new
greater profit, than with indirect promotional
materials,
allocating
exporting Target management and control of the
personnel
sales become possible which is
administrative costs associated to
unrealistic in the case of indirect exports. Opportunities for growth through market
market the product. Taiho may need to modify their
diversification. Substantial market
products to meet foreign country
potential exists outside the home
safety and security codes, and other 25
to
travel
and
other
ADVANTAGE
DISADVANTAGE
country. Selling to multiple markets allows Taiho
payments using the methods that are
their risk. They will not be tied to the changes of
available (open-account, prepayment,
Hence, it will make them maximize what they can produce over the new foreign market. Capturing an additional foreign market will usually expand production to meet foreign demand. Increased production can often lower per unit costs and lead to greater use of existing capacities. Now the company will be able to maximize their production capacity form 350-400
tons. Compensate for seasonal demands. Since the company is affected by certain seasons domestically, they may be able to sell their products or services in
import restrictions. Financial risks like collections of
to diversify their business and spread
the business cycle of domestic market.
foreign markets during different seasons. Expand Life Cycle of Product
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consignment, documentary collection and letter of credit) are not only more time-consuming than for domestic sales, but also more complicated.
To expand production in the U.S. through direct exporting, Taiho will make use of the following strategies: a. Financing Strategy Taiho’s present production is at 50% of its maximum capacity (see exhibit 1) hence, the company still has 50% capacity that can be used for its expansion. With this, in its earlier expansion, Taiho does not need yet to acquire additional machineries. Financing needs of Taiho will focus in financing its increased production. When the company will be able to strengthen its financial capability and has already maximize its capacity, only then will the company need to invest in new machineries. At present, Taiho’s present financial capability is not so good. Its current ratio is below 1 and working capital is negative which means that its current asset is not enough to pay for its current liabilities (refer to Exhibit 1). In order for Taiho to expand in US, it must secure financing, either internally or through venture capitalists or lenders to finance its production. Hence, the company will need large supply of resins which is imported from its supplier or the subsidiaries of resin manufacturers in Singapore. Taiho’s ability to meet current obligation is unstable or fluctuating. In order to solve the financial difficulty, Taiho will have to make use of its good relationship with its suppliers by availing of the resin supply through longer credit terms of up to 90 days ensuring that the company will have sufficient cash or operating lines of credit. In order to make sure that the supplier may agree of the longer credit terms, Taiho may enter into a Letters of Credit which will be issued by the bank and provides assurance to the creditor that the credit will be paid. A letter of credit is a letter from a
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bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. b. Collection Strategy To support the financing strategy above, Taiho may allow credit terms for its customers in the U.S. in order to generate more sales. The company may establish credit terms of upto 30-days and give 2% cash discounts for any prompt payments made within 10-days. This will entice clients to buy and therefore, allows the company to generate cash in a short period as well as generate more income than it used to. Taiho must also consider its operating cycle-the period of time required for a merchandising company to convert its inventory into cash. The cash conversion cycle of the company should be shorter to have a higher working capital. This will help the company to improve its current ratio and same goes with the company’s working capital ratio. c. Pricing Strategy Among Taiho’s strength is its reputation of quality products from which the company has won an international award for it. This is one of Taiho’s advantage over its competitors. In order to further its competitive advantage, Taiho must also come up with a pricing strategy to entice its market. In its initial expansion, Taiho may make use of Marginal-cost pricing. This is a practice of setting the price of a product at or slightly above the variable cost to produce it. As a result, prices will be lower. This is a good market entry strategy to encourage customers to avail of Taiho’s products. Once Taiho have already penetrated 28
its market and prove the quality of its products, Taiho can then apply competitive pricing strategy. d. Inventory Management Taiho must decide the maximum and minimum level of stocks and supplies that need to be kept in the warehouse. It must also set optimized re-order levels, safety stock levels (below which supply must not be allowed to fall) and an average inventory level considering delivery lead time of raw materials to ensure costs are contained. e. Organizational Structure With Taiho’s insufficient number of personnel to carry-out the company’s production operations, it must have additional staffers by hiring skilled workers. This is also to address increase in the number of shifts per day. Existing and additional employees must be trained well with the new method used in production process.
f.
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V. Conclusion As globalization progresses, international expansion flows along with it. In view of this case study, several factors were considered as the company ventures to a larger scale. The company must understand the nature of the global environment because ongoing changes in that environment are creating a plethora of opportunities, threats, and challenges. The desire of Mr. Wong, the co-owner of family-owned Taiho, gives way to a vision for the business to soar heights in international market. The process will not give Taiho a smooth sail, thus, for it to work out, it must do careful planning, having a best strategy and analysis of it market and competition.
Going forward,
Taiho sees continued international expansion as a major engine of growth. Taiho’s aim is to expand production and penetrate in US Market. Taking into account all the aspects discussed in the case of Taiho, the analysts have come up with three different alternative courses of action to address its major problem. These three alternatives include expand and penetrate U.S. through Joint Venture, expand and penetrate U.S. through Indirect Exporting, Expand and penetrate U.S. through Direct Exporting, respectively. Though there are many different modes of entry in international market, these are utmost appropriate to Taiho considering its operation and financial stability. To further differentiate each alternative, the analysts enumerated various advantages and disadvantages. Identifying the best alternative gives a tight selection process because each possess varied proposals to Taiho. Nevertheless, when it comes to the best alternative, the analysts single out alternative course of action #3- Expand and penetrate U.S. through Direct Exporting. Through Direct Exporting, Taiho will be able to establish a direct contact with a foreign
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trading partner, and has the best opportunity for direct participation in foreign transactions. Furthermore, Taiho will have a control over selection of foreign markets and choice of foreign representative companies. They will not be tied to the changes of the business cycle of domestic market. Hence, it will make them maximize what they can produce over the new foreign market. Maximization of sales and increase in profit are among the benefits. Taken together, these factors or advantages will help Taiho achieve its goal of expanding and penetrating US market. Therefore, the analysts prefer Direct exporting over Joint venture and indirect exporting. The best alternative chosen may not eliminate threats and challenges, but, through the proper action taken by Taiho including thorough preparation, this will yield greater success to the company.
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