Challenge 4 Business Opportunities in High Potential Developing Countries

Executive Summary

American Colonial Heritage (ACH), a US furniture manufacturing company has got an opportunity to put in a proposal to supply the US state government. If it grabs this opportunity, it would be the biggest of all its contracts so far. Since the US operations did not hold any potential to expand manufacturing, the international markets China, India and Vietnam (Acquiring Quan Thanh Furniture or Greenfield option) are explored and the options of whether to expand or not ,are being evaluated.

Given the companys concerns about quality, ethics, cost and future growth, it is recommended not to expand right now, however this should be a future course of action for the company.

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Situation Analysis:

American Colonial Heritage (ACH) has got an opportunity to put in a proposal to supply the US state government. If it grabs this opportunity, it would be the biggest of all its contracts so far. Since the US operations did not hold any potential to expand their manufacturing facilities, the international markets China, India and Vietnam are to be explored in order to grab the contract.

ACH is highly concerned about the high quality of products and ethical standards. Also cost, time and future growth, are areas of concern when planning to expand internationally. The fact that this opportunity has crop up before ACH is for the reason that the biggest furniture company of US, who won the $1 billion bid for this contract has been repeatedly late in delivering the products and the quality has also been declining. This again ensures that the quality and time are the areas of concern for the government as well.

As far as China is concerned, the Chinese government had been actively expanding industrial zones to support and expand production capacity and also its the largest furniture exporter to the US. However, US manufacturers had complained about dumping of products in the US market for which anti dumping fees of about 4.5 % had been imposed on goods from china. Also there are complaints regarding quality which is one of the most important factor for ACH as well as the Government. The estimated cost, another important factor, is $408 (Exhibit 1) which is likely to increase in future, as one banks report on China noted that its been rising in recent years. Not only this there is little or no environmental or workforce legislation in China.

In India, the market seems to be quite fragmented. The abundance of skilled and flexible labor is available, which might be seen as a good signal for quality.There is a future growth potential as well because of the large population and growing middle class and their shift in taste towards the Western-style furniture. However, there may be bureaucratic troubles, which would be a serious concern for ACH. Also the estimated cost, an area of concern for ACH, is $415 which is greater than that of China and Vietnam (Exhibit 1).

In Vietnam there are two options, first, to acquire Quan Thanh Furniture (QTF), one of the largest manufacturers and exporters in Vietnam. Its high quality premium brand had earned prestigious awards for Vietnams best product. It exports about 80 % of its goods to foreign markets including US, it also gains market share over local competitors. According to the Ministry of Trade, the countrys woodwork export earnings are expected to grow at rates of over 40 % per annum for the next few years. The international analysts assessed operating risk in Vietnam as moderate and security risk as very low. However there was no system of common law and the judicial decisions were often arbitrary, apart from this another issue for the foreign investors was the complexity and opacity of the tax system which would again be an issue of concern for ACH.

The second option in Vietnam is the Greenfield option. Other issues of concern remaining the same as for acquisition of QTF, the investment in this would be greater than acquiring QTF (Exhibit 2) and the expected Internal rate of return (IRR) and time involved in completion would be on a lower side (Exhibit 2).

Considering the above analysis and also the fact that ACH has to prepare the government proposal in a weeks time and has to decide on the issue at an earliest, the idea of international expansion of the business has to be evaluated not only to get this proposal, also ACH has to plan for future growth of the company as well.

Problem Statement:

Whether to expand internationally to find a source of supply that could be engaged quickly to get the government deal or not to expand right now.

Options:

1. To expand the business internationally in order to get the Government contract. 2. Not to expand right now, however get insights about the international markets and plan a future course of action.

Criteria:

1. Future Growth potential 2. Standard quality 3. Legal issues.-Ethical standards. 4. Low cost Labor, Raw material, Operating and Shipping cost

Evaluation of Options:

1. To expand the business internationally in order to get the Government contract. Considering the fact that ACH has to prepare the proposal in a weeks time and also as per the analysis none of the countries under consideration China, India and Vietnam qualifies on all the criteria under consideration. Therefore taking a major decision of expansion in either of the countries in a hurry would not be a feasible option.

2. Not to expand right now, however get insights about the international markets and plan a future course of action. The government order though seems really temping but international expansion is a major decision. ACH should perform a comprehensive market research on all the prospective countries. The overall analysis performed regarding the markets in each of the country under consideration, is not a well planned or thought off analysis. Therefore the important aspects of quality, growth, cost and time which ACH can not ignore should be considered and well planned before taking a major decision of international expansion. Therefore, ACH should not expand right now to get the government order but definitely should research on expansion.

Recommendation: Not to expand right now, however get insights about the international markets and plan a future course of action.

Action Plan: Hire a team of Consultants from outside to perform market research for ACH. Discuss with them the companies core values and areas of concern.

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