Class: BBA (Hons.
)
Assignment: International Finance
Case Study: Blades plc - International Expansion
Submitted by:
[Group 5th]
[Yaseen, Tayyab, Zain, Abu Bakar, Husnain, Umer, Huraira]
Case Study
Decision to expand internationally
Blades plc is a UK-based company that has been incorporated in the UK for three years. Blades
is a relatively small company, with total assets of only £15 million. The company produces a
single type of product, rollerblades. Due to the booming skateboard market in the UK at the
time of the company’s establishment, Blades has been quite successful. For example, in its first
year of operation, it reported a net income of £3.5 million. Recently, however, the demand for
Blades’ ‘Speedos’, the company’s primary product in the UK, has been slowly tapering off,
and Blades has not been performing well. Last year, it reported a return on assets of only 7
percent. In response to the company’s annual report for its most recent year of operations,
Blades’ shareholders have been pressuring the company to improve its performance; its share
price has fallen from a high of £20 per share three years ago to £12 last year. Blades produces
high-quality skateboards and employs a unique production process, but the prices it charges
are among the top 5 per cent in the industry.
In light of these circumstances, Ben Holt, the company’s Director of Finance, is contemplating
his alternatives for Blades’ future. There are no other cost-cutting measures that Blades can
implement in the UK without affecting the quality of its product. Also, production of alternative
products would require major modifications to the existing plant setup. Furthermore, and
because of these limitations, expansion within the UK at this time seems pointless.
Ben Holt is considering the following: if Blades cannot penetrate the UK market further or
reduce costs here, why not import some parts from overseas and/or expand the company’s sales
to foreign countries? Similar strategies have proved successful for numerous companies that
expanded into Asia in recent years to increase their profit margins. The Managing Director’s
initial focus is on Thailand. Thailand has recently experienced weak economic conditions, and
Blades could purchase components there at a low cost. Ben Holt is aware that many of Blades’
competitors have begun importing production components from Thailand.
Not only would Blades be able to reduce costs by importing rubber and/or plastic from Thailand
due to the low costs of these inputs, but it might also be able to augment weak UK sales by
exporting to Thailand, an economy still in its infancy and just beginning to appreciate leisure
products such as rollerblades. While several of Blades’ competitors import components from
Thailand, few are exporting to the country. Long-term decisions would also eventually have to
be made. Maybe Blades plc could establish a subsidiary in Thailand and gradually shift its
focus away from the UK if its UK sales do not rebound. Establishing a subsidiary in Thailand
would also make sense for Blades due to its superior production process. Ben Holt is reasonably
sure that Thai firms could not duplicate the high-quality production process employed by
Blades. Furthermore, if the company’s initial approach of exporting works well, establishing a
subsidiary in Thailand would preserve Blades’ sales before Thai competitors are able to
penetrate the Thai market.
Task
As a financial analyst for Blades plc, you are assigned to analyze international opportunities
and risk resulting from international business. Your initial assessment should focus on the
barriers and opportunities that international trade may offer. Ben Holt has never been involved
in international business in any form and is unfamiliar with any constraints that may inhibit his
plan to export to and import from a foreign country. Mr Holt has presented you with a list of
initial questions you should answer.
Summary
Blades plc is a small UK company that makes rollerblades. It was successful initially, but sales
have slowed down recently. The company wants to improve its performance and is considering
importing parts from Thailand to reduce costs and exporting products to Thailand to increase
sales. Thailand has low costs and a growing market for leisure products like rollerblades.
Blades plc thinks it can succeed in Thailand because of its high-quality production process and
limited competition. However, the company needs to consider the risks and challenges of
international trade, such as cultural and language barriers, different business practices, and
potential trade restrictions.
Questions & Ans.
1. What are the advantages Blades could gain from importing from and/or exporting
to a foreign country such as Thailand?
Ans: Advantages:
i. Reduced costs: Blades could significantly reduce its production costs by importing
components like rubber and plastic from Thailand, where Labor and raw materials
are generally cheaper.
ii. Market Expansion: Exporting to Thailand, a growing economy with a rising
middle class, could provide a new market for Blades' products, helping to offset
declining domestic sales.
iii. Diversification: International trade can reduce dependence on the UK market and
spread risk.
iv. Enhanced Profitability: By reducing costs and expanding sales, Blades could
improve its overall profitability and shareholder value.
v. Technological Advantage: Blades' superior production process could give it a
competitive edge in the Thai market, allowing it to command premium prices.
2. What are some of the disadvantages Blades could face as a result of foreign trade
in the short run? In the long run?
Ans: Disadavntages in Short Run:
i. Currency Fluctuations: Changes in exchange rates could impact Blades'
profitability, particularly if the Thai baht appreciates against the British pound.
ii. Cultural Differences: Understanding and adapting to Thai business practices,
cultural norms, and consumer preferences could be challenging.
iii. Political Risks: Political instability or changes in government policies in Thailand
could disrupt Blades' operations and exports.
iv. Supply Chain Risks: Dependence on foreign suppliers could expose Blades to
risks such as supply disruptions, quality issues, and trade barriers.
Disadvantages In Long Run:
i. Competition: As the Thai market matures, Blades may face increased competition
from local firms or other foreign entrants.
ii. Regulatory Hurdles: Navigating complex Thai regulations related to imports,
exports, and foreign investment could be time-consuming and costly.
iii. Repatriation of Profits: Restrictions on repatriating profits back to the UK could
limit Blades' ability to reap the full benefits of its foreign operations.
iv. Cultural and Political Challenges: Long-term operations in Thailand could
involve adapting to evolving political and cultural landscapes.
3. Which theories of international business described in this chapter apply to Blades
plc in the short run? In the long run?
(There are at least three theories of international business: the theory of
comparative advantage, the imperfect markets theory, and the product cycle
theory. In the short run, Blades would like to import from Thailand because
inputs such as rubber and plastic are cheaper in Thailand. Also, it would like to
export to Thailand to take advantage of the fact that few rollerblades are
currently sold in Thailand. Both of these factors suggest that the imperfect
markets theory applies to Blades in the short run. In the long run, the goal is to
possibly establish a subsidiary in Thailand and to be one of the first roller blade
manufacturers in Thailand. The superiority of its production process suggests
that the theory of comparative advantage would apply to Blades in the long run.
However, the product cycle theory also applies to Blades, since its U.S. sales are
declining and Blades feels that it must eventually establish a subsidiary in
Thailand in order to preserve its competitive advantage over Thai competitors.)
Ans: In Short Run:
• Comparative Advantage Theory: Theory states that countries should specialize
in producing goods they make most efficiently and trade for others, boosting overall
economic gains.
• Absolute Advantage Theory: Theory means a country should make and sell what
it produces best and buy what others produce better.
Long-Run:
• Internalization Theory: Establishing a subsidiary in Thailand could allow Blades to
control its operations, reduce transaction costs, and protect proprietary technology.
• Resource-Based View: Blades' unique production process could be a source of
sustainable competitive advantage in the Thai market.
• Product Life Cycle Theory: Shifting focus to new markets as UK sales decline.
4. What long-range plans other than establishment of a subsidiary in Thailand are
an option for Blades and may be more suitable for the company?
Ans: Blades could consider the following long-range plans:
• Joint Ventures or Alliances: Partnering with a local Thai company could provide
Blades with access to the local market, distribution channels, and expertise.
• Licensing: Blades could license its technology or brand to a Thai company, allowing
it to enter the market without significant capital investment.
• Diversification: Blades could explore diversifying its product line or targeting
different market segments to reduce its reliance on the rollerblade market.
• Focus on exporting to other countries with growing demand for rollerblades.
CASE I: DECISION TO EXPAND INTERNATIONALLY
1. What are the advantages Blades could gain from importing from and/or
exporting to a foreign country such as Thailand?
The advantages Blades, Inc. could gain from importing from Thailand include
potentially lowering Blades’ cost of goods sold. If the inputs (rubber and plastic)
are cheaper when imported from a foreign country such as Thailand, this would
increase Blades’ net income. Since numerous competitors of Blades are already
importing components from Thailand, importing would increase Blades’s
competitiveness in the U.S., especially since its prices are among the highest in
the rollerblade industry. Furthermore, since Blades is considering longer range
plans in Thailand, importing from and exporting to Thailand may present it with
an opportunity to establish initial relationships with some Thai suppliers. As far
as exporting is concerned, Blades, Inc. could be one of the first firms to sell
roller blades in Thailand. Considering that Blades is contemplating to eventually
shift its sales to Thailand, this could be a major competitive advantage
2. What are some of the disadvantages Blades could face as a result of foreign
trade in the short run? In the long run?
There are several potential disadvantages Blades, Inc. should consider. First of
all, Blades would be exposed to currency fluctuations in the Thai baht. For
example, the dollar cost of imported inputs may become more expensive over
time if the baht appreciates even if Thai suppliers do not adjust their prices.
However, Blades’ sales in Thailand would also increase in dollar terms if the
baht appreciates, even if Blades does not increase its prices. Blades, Inc. would
also be exposed to the economic conditions in Thailand. For example, if there is
a recession, Blades would suffer from decreased sales to Thailand.
In the long run, Blades should be aware of any regulatory and environmental
constraints the Thai government may impose on it (such as pollution controls).
Furthermore, the company should be aware of the political risk involved in
operating in Thailand. For example, the likelihood of expropriation by the Thai
government should be assessed. Another important issue involved in Blades’
long-run plans is how the foreign subsidiary would be monitored. Geographical
distance may make monitoring very difficult. This is an especially important
point since Thai managers may conform to goals other than the maximization of
shareholder wealth
3. Which theories of international business apply to Blades plc in the short
run? In the long run?
There are at least three theories of international business: the theory of
comparative advantage, the imperfect markets theory, and the product cycle
theory. In the short run, Blades would like to import from Thailand because
inputs such as rubber and plastic are cheaper in Thailand. Also, it would like to
export to Thailand to take advantage of the fact that few rollerblades are
currently sold in Thailand. Both of these factors suggest that the imperfect
markets theory applies to Blades in the short run. In the long run, the goal is to
possibly establish a subsidiary in Thailand and to be one of the first roller blade
manufacturers in Thailand. The superiority of its production process suggests
that the theory of comparative advantage would apply to Blades in the long run.
However, the product cycle theory also applies to Blades, since its U.S. sales are
declining and Blades feels that it must eventually establish a subsidiary in
Thailand in order to preserve its competitive advantage over Thai competitors.
4. What long - range plans other than establishment of a subsidiary in
Thailand are an option for Blades and may be more suitable for the
company?
Since Ben Holt is very unfamiliar with international business, and since Blades
has never operated outside the United States, establishment of a subsidiary in
Thailand is probably not the best way for Blades, Inc. to gain a foothold in
Thailand in the long run. Blades should initially consider a joint venture with
Thai firms that manufacture roller blades. The advantage would be access to
Thai distribution channels, familiarity of the Thai firm with customs and ethics
in Thailand, and an established market. Of course, since Blades’ production
process is unique, a joint venture would provide the Thai subsidiary with
knowledge of the production purposes, which it may duplicate after the joint
venture terminates.