Question 1: Is it the right time to think about expansion? Why?
The Jabwood International Company should think about expanding its functions into other foreign countries now due to the present circumstances that have been experienced of late. The company relies mostly on the sale of TANITA wood products of which it has exclusive rights to distribute the products to the Middle East companies. The exclusivity however is about to be jeopardized with the low returns that has been experienced. The trading company in Russia wishes to remove the exclusive rights of Jabwood International and allow other trading companies from different countries the chance to distribute the products. The Jabwood International should therefore implement ways of saving its funds and economic power by creating alternatives in case the exclusive rights are stripped from them. These ways to be implemented mainly focus on the expansion of the wood services to other countries such as Saudi Arabia and Lebanon.
Question 2: Use the macroeconomic indicators to evaluate the country attractiveness of the two proposed options.
In Saudi Arabia, the GDP of the country is mainly found through trade options. The level of GDP that is related to the trading of the country is more than 50%. The country is developing fast and this means that the real estate’s growth is imminent as more and more people will be settling in the urban areas according to the figures provided. The country does not have its own wood supply and is dependent on the imported wood products. The country offers good marketing venue as the wholesalers enjoy high bargaining power different from other countries that insist on specific types of wood products. According to the report, recent regulations have increased the attractiveness of the country in terms of being a marketing area as the value-added wood products have been exempted from import duties. The advantage is to both the country and the wood sellers.
In China, the estimated numbers of housing units needed in 2013 are about 10 million new housing units. The high population of the country offers good market opportunities for companies that engage in wood and wood products. The larger percentage of people in the country live in the rural areas compared to those in the urban areas. The market opportunities are raised by this fact since the rural people are the ones who prefer wood and wood products in the building of their housing units. Even though the country is a producer of the wood based panel (WBP), the population that requires the product is larger than the production capacity of the country. The international companies are thus expected to satisfy the remaining population that is not catered for by the local products.
Question 3: Which factors should the country watch?
There are several factors that both countries should watch for. The corporate tax that the countries are charging as well as the import duties are high and may discourage the foreign investors from investing in the country. The countries should also watch out for the number of the investors arriving in the country and monitor so as to reduce the chances that the local companies might be in jeopardy. The monitoring activity will reduce cases of dumping.
Question 4: Evaluate the competition in each country using Porter’s 5 forces framework.
In Saudi Arabia, the threat of new entrants in the market is high since the country has a high purchasing power that attracts many foreign trading companies. However, the country requires specific types of wood products and does not accept substitute products. Since Jabwood International was there previously, it understands the requirements of the market in that country. There is high buyer bargaining power in the country and this requires careful price allocation. The suppliers have low bargaining power as they are only required to bring in high quality products and sell. There is intensive competitive rivalry based on the fact that the bi companies that are present in the business are owned by powerful families in the country.
In China, there is the threat of new entrants as many countries have invested in the country in the quest for fulfilling the population’s needs. There is the threat of substitute goods as many people are now opting for steel and concrete as they look for long lasting building materials. The bargaining power of the buyers is not high due to the Communism system. The suppliers also have low bargaining power due to the presence of many countries investing in China thus monopoly cannot be experienced.
Question 5: Construct a SWOT analysis for expansion in each of the two countries considered and the implications of the analysis.
In Saudi Arabia, the strengths that the Jabwood International Company has over other companies are that; the company had a subsidiary in the country and therefore knows the marketing strategies needed to make successful sales. The customer relationships in the area are important too. The company is familiar with global orders and is able to handle high purchase demands. The Jabwood Company has strong relations with its main supplier of TANITA in Russia. The company has been able to play the intermediary role between Western suppliers and the Middle Eastern buyers. The main weakness is that the company relies on only one product for a large percentage of the overall revenue it receives. The main opportunities of the company are that the country of Saudi Arabia offers perfect market regulations for the growth of the business. The purchasing power of the country is also high. The threats that Jabwood Company faces are related to the companies that have established themselves in the region especially on the docks.
In China, the Jabwood Company has strengths in different parts of its production activity. Fayez, who is the manager, has more than years of expertise in the evaluation and choice of the best types of wood. Such experience gives the company an upper hand in satisfying the customers over the other companies. The company is also able to interact well with the Western suppliers due to prolonged business relations over the many years. The company will therefore be able to have assured supply of wood and wood products. The weakness that the company has is that, there are other countries that have already invested in the market and penetrating the wood market in the country will be somehow hard. The main opportunity that presents itself is the high purchasing power of the country as well as the high population that requires the wood products. The high population offers a good avenue for the company to invest and increase its revenues. The threats are the already present investors who provide a hard time for the Jabwood Company to invest.
The analysis above shows that the Jabwood Company has better chances of success when it expands into Saudi Arabia market first than investing in the China market. The company can later invest into the China market due to the high purchasing power of China.
Question 6: Estimate the maximum potential share in Saudi Arabia and China.
Saudi Arabia is a familiar market for Jabwood Company. The market share is 5%. The estimated target market is 100,000 cubic meters of the product to be sold. The estimated revenue thus is US$ 30,000,000. The sales for the first year are 10% of the target market and the sales are US$ 3,000,000. The estimated growth in year 2 will be 100% of year 1 which will result in sales of US$ 6,000,000. In year 3, the estimated growth is 50% of year 2 which will be US$ 9,000,000. In the local currency, the target market is 112,500,000 Riyals. The estimated first year sales are 11,250,000 Riyals. The estimated second year sales are 22,500,000 Riyals. The estimated sales for year 3 are 33,750,000 Riyals.
China is a new market for Jabwood Company. The market share is also 5%. The estimated target market is 100,000 cubic meters of the product to be sold to this market too. The estimated revenue thus is US$ 30,000,000. The sales for the first year are 2% of the target market and the sales are US$ 600,000. The estimated growth in year 2 will be 0% of year 1 which will result in the same sales amount of US$ 600,000. In year 3, the estimated growth is 100% of year 2 which will be US$ 1,200,000. In the local currency, the target market is 191,100,000 Yuan. The estimated first year sales are 38,220,000 Yuan. The estimated second year sales are still the same 38,220,000 Yuan. The estimated sales for year 3 are 76,440,000 Yuan.
Question 7: Identify the potential modes of entry Jabwood should consider when expanding.
There a few method of market entry that the Jabwood company may use in the marketing of their products. Direct export is advisable to the China market due to its distance from the main company having in mind that the company reserves the managerial posts for family members. Indirect exportation is also recommended to Saudi Arabia since the company was previously present in the country and therefore knows of the best methods to achieve higher sales from inside. However, corporate tax on the foreign companies in the two countries is high and thus the companies will be losing a lot by paying the tax. There is the option of franchising where the Jabwood Company may enter into agreements with companies in the trading country so as to work together. The method of franchising has little losses and the cost is minimal too. Licensing allows the company to work from inside the host country for a period of time after acquiring a license to do business from inside the foreign country.
Indirect exportation is recommended as the company is pretty familiar with the different things to do when establishing subsidiaries in foreign countries.
Question 8: What should Fayez Jabado do?
In light of the analysis of the current situation as well as the available opportunities, Fayez should establish methods of immediately reviving the subsidiary offices that were in Saudi Arabia. The offices should be assigned to his brother and act as a cushion in case the company is stripped off the exclusive rights of selling TANITA products from Russia. The situation that will arise in Saudi Arabia will allow the evaluation on when to indulge into the foreign investment into China.
References
Daniels, J. D., & Radebaugh, L. H. (1998). International business: Environments and operations. Reading, Mass: Addison-Wesley.
Jabado, R., Obeid, H., & Danhash, B. (2012). Jabwood International: The Risky Business of Expanding East. Richard Ivey School of Business.
Klug, A., Young, W., Bordo, M. D., & Schiffman, D. (2006). Theories of international trade. London: Routledge.
