Case Study Poseidon plc
Poseidon manufactures water pumps in the UK and has a turnover of £200million and a profit of £30million per year. Currently it exports to the United States and African countries, sales amounting to £80 and £20 million respectively. Every production facility in Poseidon runs its own profit and loss account ensuring that everyone feels responsible for the profitability of the company.
Poseidon pursues global research and development focusing on the engine and hydraulics product areas. The applications technology is divided regionally to ensure proximity to customers, thus enabling Poseidon to develop customized solutions in partnership with customers. Rather than just developing products to customer specification, Poseidon focuses on advancing the technology and finding ground-breaking solutions that will provide significant benefit to the customer.
The Board of Directors at Poseidon are now considering setting up manufacturing plants in both the United States and South Africa. The Board are particularly concerned that they are able to explain their presence as being beneficial to the local environment whilst they feel that they cannot really deny that their main motive is profit maximisation.
You are employed as their international financial management expert and they express a number of concerns about the investment projects in South Africa and the United States.After boardroom discussions, they ask you to prepare a report that analyses the following issues that they feel will affect their decision to invest abroad.
1) The Board want to know about the current and possible future effects of a devaluation of the Dollar, a scenario that they think ought to be an important part of any planning. In particular one of the Directors comments that: We are in stiff competition in the US with local companies and a devaluation of the dollar could make us uncompetitive, he quotes an import elasticity of about 1.2 for their product line that he read off the internet.
2) The proposed investment in South Africa is also of great concern to the Board. In particular they perceive that there might be resistance in particular from a local manufacturer of water pumps. The Board would like you to outline the possible threats and how Poseidon might respond to them.
3) Most of the sales in Africa are in rand and sales to the United States in euros. The Board are will consider changing this arrangement but want you to outline the effects of currency variation of citing production abroad and possible policy changes. They estimate that in the case of the US, most of the costs would be incurred locally if production was moved over there. However, with regard to South Africa there would be a strong imported element from its production plant in Europe.
You are required to prepare a 2,500 word report responding to the concerns raised by the Board.