Activity

Activity objective

To weigh the internationalization of a company as a strategy to stay competitive.

Instructions

Read the following hypothetical case of Electronics International, LTD, and answer the questions below:

ELECTRONICS INTERNATIONAL, LTD.

Electronics International, Ltd., is a large consumer electronics manufacturer based in Southampton, England. Its product line consists of CD players, DVD players, home entertainment systems, and so on. Annual sales in 2004 were $186 million, 44 percent of which came from overseas sales. Most of the company’s exports went to developing countries in Asia and Africa, with a small percentage of its products going to Turkey and Greece. Its most important export market is Zempa, a relatively prosperous developing country in the western part of Africa.

Exports to Zempa total nearly 26 percent of all export revenues and have been showing an up-ward trend for the past six years. Total sales to Zempa in 2005 were $120 million, up from $40 million in 1998 and $110 million in 2004. The company controlled approximately 20 percent of the audio products market in Zempa, with the rest being taken up by other competitors, all of whom were overseas corporations. Zempa has no audio products manufacturing industry, and all domestic requirements were met through imports. Electronics International was the third largest player in the Zempa market, with the top two slots being occupied by a German company and a Japanese company. Electronics International’s products were well established and enjoyed considerable customer loyalty. Recently, some problems have emerged. The government of Zempa has become increasingly concerned about the relatively backward state of its manufacturing industry and wants to rapidly industrialize the economy by attracting overseas investment in key sectors. One of the important priorities for the Zempa government in this connection is the consumer electronics industry. As a part of its policy to develop the local economy by stimulating domestic manufacturing activity, the Zempa government inquired with each of the major exporters of consumer electronics products about setting up domestic production facilities in Zempa. The managing director of Electronics International received a letter from the Zempa government, inviting the company to set up a manufacturing facility in Zempa, and promising considerable official assistance should the company decide to do so.

Electronics International was asked to evaluate this offer and to reply within three months. The Zempa government said that the other leading suppliers were also considering setting up local manufacturing establishments in Zempa. The idea of setting up a manufacturing operation in Zempa did not appeal initially to the managing director of Electronics International. The company was doing well as an exporter and sales had been increasing each year. There had been no difficulties in shipping its products, and most of the goods were transported by sea and costs were acceptable. True, there were some problems with the local customs authorities, but they were not insurmountable.

The distributors were good, reliable people who were pushing sales hard and were meeting their contractual obligations to the company without any major problems. The government’s regulations regarding remittance of payments for imports and exports were tedious and at times a little frustrating, but with the help of the company’s local agents, most of the issues regarding repatriation of exchange proceeds were resolved in reasonable time. Therefore, why should the company think of setting up manufacturing operations in Zempa? The infrastructure for industry in Zempa was relatively undeveloped.

The electricity supply was especially unreliable. There was little trained manpower, and the production of electronic products requires workers who are adept at carrying out delicate assembly tasks. The managing director was about to dictate a letter thanking the government for the invitation to set up a factory and conveying the company’s decision to stay on only as an exporter, when he decided to consult Bill McLowan, the strategic planning director at Electronics International. A couple of days later, McLowan presented a seven-page executive memo that differed from the thoughts of the managing director. Five main points were raised in the memo:

1. Zempa is a valuable market for Electronics International, and as the economy of the country develops, the market size is likely to continue to grow rapidly. What is therefore needed is not only an increase in sales volume but also an increase in market share. The memo pointed out that although the sales of Electronics International’s products had risen steadily over the past six years, its market share had stagnated while those of its main competitors had increased.
2. The Zempa government not only had invited Electronics International to set up manufacturing facilities, but also had solicited investments from its two major competitors. If both competitors accepted the invitation and set up local manufacturing operations, they could outprice Electronics International from the Zempa market because costs of local production were bound to be lower, given the lower wage rates and other input costs.
3. Zempa was under increasing domestic and external economic pressure. There was considerable inflation, primarily because of a substantial federal budget deficit (the government had not been able to raise required levels of revenues). Although the external balance position had been comfortable in the past five years because of firm commodity prices (commodities were the main exports of Zempa, generating 95 percent of export revenues), indicators of a weakening were already apparent. In the event of a balance of payments crisis, the government was likely to limit imports, and one of the first items to be put on the banned list would be consumer electronics, because they would be deemed nonessential in the face of competing demands from such imports as defense equipment.
4. Although there were some impediments to the establishment of manufacturing operations, at this stage the government had assured the company of all assistance. If the company went in now and the other competitors did not, it would gain considerable leverage with the home government, which could be used to attack the dominance of the competition.
5. There were certain risks—the local currency might depreciate, and the lack of training of local workers and the state of local infrastructural facilities might impair the efficiency of the plant. Other constraints might be imposed later on the manufacturing operation. Given the emerging scenario, however, these risks were worth taking, and the company should at least in principle accept the invitation from the government of Zempa and prepare for further negotiations.
   McLowan’s memo seemed to open a new line of thought, but it did not convince the managing director. He asked his secretary to organize a meeting of the international investment committee to discuss the issues of exporting and direct investment in Zempa. 

Answer the following questions:

1. How would you frame the story? Write a short summary of the case (about 200 words) in first person, as if you were the CEO of the company.
2. What strategy should Electronics International adopt in this situation?
3. Should the company continue exporting or make a direct investment?
4. Are there any other alternatives open for Electronics International?

Checklist

The questions are answered in detail and completely.