Blades plc is a U.K.-based company that has been incorporated in the United Kingdom for three years. Blades are a relatively small company, with total assets of only £15 million. The company produces a single type of product, roller blades. Due to the booming skateboard market in the United Kingdom 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 United Kingdom, 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 percent 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 United Kingdom 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 United Kingdom at this time seems pointless.
Ben Holt is considering the following: If Blades cannot penetrate the U.K. 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 U.K. sales by exporting to Thailand, an economy still in its infancy and just beginning to appreciate leisure products such as roller blades. 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 United Kingdom if its U.K. 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.
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.
Work in a group of 2- 3 persons. You are required to complete the following questions related to the case study provided above.
- What are the advantages Blades could gain from importing from and/or exporting to a foreign country such as Thailand?
- What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run?
- Which theories of international business apply to Blades plc in the short run? In the long run?
- 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?