Group Case Analysis
Group Case Analysis:
MABE: Learning to be a Multinational
Max Lopez 104386114
Kendra Davis 104440665
Kwaku Poku 104250158
Shiraz Chaudhry 104453557
Ledya Gorail 104408872
Submitted to: Hongwei Xu
University of Windsor
November 6th, 2018
The main issue in this case is based on Mabe’s relationship with the Spanish manufacturing company, Fagor, and if they should continue their joint venture in Russia. There are many setbacks with this decision including whether or not Mabe should invest in other countries such as India or China or if they should have even acquired Fagor as a manufacturing company. Also, Mabe must determine if they wish to manufacture products locally in Latin America or if they should lower their costs within their joint venture to increase market share.
Mabe has good awareness in the foreign markets in which they operate.
Mabe learned through their experience in expanding to Brazil that cultural differences plays a big part. They learned that the best people to lead operations in foreign countries are the locals that know that industry.
Mabe has strong research and development (R;D).
The goal of their R;D is to develop proprietary technology, reduce reliance on GE and also aid GE in the development of new products.
Mabe has partnerships with some of the world’s leading multinational corporations like GE, Fagor, and Ceteco.
These partnerships allow them to enter foreign markets in North America, South America, and Europe. GE partnership allowed them access to new technologies and technical advice.Fagor partnership gave Mabe access to Fagors frontline washer machines.
Own a large part of the market share in the home appliance industry.
The JV’s that Mabe entered into increased their market share tremendously.
Dependent on joint ventures
Although the JV’s are seen as a strength, they can also be seen as a weakness. Mabe has entered many partnerships and this may very well be because they don’t have the innovative technologies or materials to succeed on their own.
In conclusion, Mabe has many strengths that allow them to set themselves apart from their competitors. These strengths mostly stem from the numerous joint ventures. However, these numerous JV’s can also be seen as a weakness as it may mean that Mabe relies too heavily on their partners for important aspects like resources, innovation, and success in foreign markets.
Research and Development
Value (?) – Mabe’s R;D allows them to develop proprietary technology and to create better and more innovative appliances that are valuable to their customers while at the same time distancing themselves from their reliance on GE.
Inimitability (?) – Mabe is a leading company in the industry that grows through innovation with the help of their R;D, which is completed by skilled workers creating proprietary technology and it cost a large amount of money to do so making it difficult to imitate.
Organized to Exploit (?) – Mabe is constantly innovating and implementing their new ideas to stay ahead of the competition.
Action Learning Teams
Value (?) – Mabe’s action learning teams allow them to determine which new markets to enter after the teams have spent 6-8 weeks observing the target market and making recommendations. It allows for the customers to be offered products that satisfy their needs.
Inimitability (?) – The process of sending these teams to different target markets for months at a time could be quite costly and difficult to imitate.
Organized to Exploit (?) – Mabe makes full use of their action learning teams when it comes to potentially entering new markets.
Value (?) – Mabe has completed a great deal of JV’s in order to lower manufacturing costs and enter into foreign markets which increases revenue and market share. By doing this it allows for MABE to offer a valuable product to a greater amount of customers.
Inimitability (?) – It is difficult to imitate because it took a lot of money and many years to get to the position that MABE is in now, so it would be a disadvantage to competitors cost wise to try to imitate it.
Organized to Exploit (?) – Mabe has continued to enter into JV agreements and expand into other countries using this strategy to allow them to save costs and lower the price of their appliances in order to capture more share of the market.
Mabe’s resources met all the requirements of the VRIO model, that they have a competitive advantage over their competitors that is sustainable which means that it will allow them to be in a more favourable position than their competitors in the long-run.
Financial Analysis (See Appendix A)
Quick and current ratios have gradually decreased in 2007 and 2008 which indicates that Mabe will have problems meeting its current financial obligations. After analyzing the debt and debt-to-equity ratios, it is clear that Mabe’s capital structure is mainly made up of debt which in fact increases the company’s costs due to the long-term interest rate payments that impact Mabe’s working capital significantly. Total assets have increased consistently with shareholders’ equity and total current liabilities in the years 2007 and 2008. In 2007, Mabe had a total revenue of $3,788,084 which led to a net income of $126,688; however, the company’s return on assets and return on equity decreased significantly in 2008 due to the drop of total revenues. Increasing short-term liabilities could impact Mabe’s ability in the near future to meet its current obligations since it does not have a source of constant longstanding revenues.
BRIC Countries (Brazil, Russia, India, and China)
Mabe already has operations in Brazil and are currently deciding whether to enter Russia. Although Russia has been facing problems with human capital and government, Mabe still has the opportunity to enter into India and China. Based on estimations, these four countries will be the largest industrialized countries by 2050, making this a good opportunity.
Energy and Water Efficiency Products
It was found that being innovative and efficient in the appliance sector is a key success factor that Mabe can achieve through their R&D.
When Mabe enters a new international market, they are subject to more competition that they have to outperform (LG, Samsung, and Bosch).
Each country that Mabe operates in has different policies that Mabe must abide by. Russia has been known to have a distrust towards foreign enterprises and are also known for weak legislation, bribery, and corruption.
Since Mabe operates in so many different countries they are susceptible to the appreciation or depreciation in the currencies. When the currency appreciates Mabe’s cost of manufacturing increases but their prices stay cheap and that could pose a problem.
Political There is a variety of political issues that influence the joint venture between Mabe and Russia due to their government controlling business decisions. A few of these factors include bribery and corruption of the state. Investors must understand the Russian market and consider the interference of the government in their business decisions.
Economic In 2008, the Russian economy faced a financial downturn due to a recession which resulted in a deterioration of human capital. However, a few years later Russia has significantly improved as a country. In 2010, Russia had one of the largest land mass in the world with a gross domestic product rate of $1.5 trillion. Also, Russia has the largest income per capita and discretionary income increase compared to the other BRIC countries such as India and China. Social In order for Mabe to partner with Russia, they must consider the cultural norms and values of the country. Russia is very stern on the trustworthiness of those who decide to enter their markets. Also, there are many social factors to consider such as a low life expectancy rate which directly affects individual workers and the business itself. The decline in the population and human capital may result in fewer customers. In Russia, there is a large gap between the young and older demographic. During the recruitment process, Russian employees will consider candidates who are young, have a degree and come from a family of the intellectual elite to easily fit in. Whereas, the older generation who have less education and come from a family from the Soviet era are more likely to be turned down based on the conflict that still exists amongst their ideals. Overall, Mabe must thoroughly consider the demographics of the citizens and the market.
Technological As an appliance company, technological advances are significant to the growth of the business as there are many competitors within the industry. Mabe has kept up to date with technology and improved their high-speed production of appliances.
Environment Russia can be quite a hostile environment for foreign investors as they require an AIDS test in order to obtain a work visa. One of the key success factors for the future of the appliances sector was energy and water efficiency. Based on competitive advantage, Mabe has secured the title as the company is environmentally friendly and has helped reduce pollution and is energy efficient.
Legal Mabe is an appliance company from Latin America, therefore they must follow the regulations and tax system used by the Russian government in order to enter the market. The activities and operations done between Mabe and Russia will be influenced by the exchange rates and rate of interest. Due to the corruption and bribery of the Russian government, there is a corrupt law enforcement and lack of property right protection which may affect the interest of foreign firms.
Porter’s Five Forces
Degree of Rivalry: Major competitors such as Bosch-Siemens and LG take up most of the market share, whereas MABE’s market share is only 1 percent in the Russian appliance industry. Three characteristics that define the household appliance industry are cost-effectiveness, efficiency, and innovation; in addition, the industry is known for its high market size and profitability. In conclusion, the household appliance market is appealing to international investors and the degree of rivalry is considered to be high.
Threat of New Entrants: Various factors need to be considered by investors before entering the Russian household appliance industry: trust concerns, economic and political environment, and the Russian culture. The industry commands high investments for plants development in addition to identifying production standards. The industry is easy to enter; therefore, the threat of new entrants is medium.
Threat of Substitutes: Household machines such as refrigerators and stoves produced by Mabe have been recognized as good quality products. They cannot be substituted easily with other products since they are a necessity that is required in every house. Hence, the threat of substitutes is low.
Buyer Power: There are other options that customers can choose from to satisfy their needs. Thus, buyers have a higher bargaining power in the industry.
Supplier Power: the bargaining power of supplier is low if production is handled by the joint venture. However, if Mabe uses suppliers for its production, suppliers will have a medium bargaining power.
In conclusion, the PESTEL analysis shows that there is some potential in Russia but at the same time there is a high probability of problems that could occur for Mabe if they chose to operate there. The results of Five Forces analysis show that the Russian market is more on the unattractive side but still has the potential to become attractive.
Alternatives and Recommendations
Reduce focus on the Russian market and concentrate on the Chinese market.
The reason why Mabe should reduce their focus on the Russian market and concentrate on the Chinese market is because of the current problems Russia faces. The Russian economy faces volatility of its currency, the Russian Ruble, which may reduce the value of investments in the country. By concentrating effort in the Chinese market, Mabe has the potential of having access to greater, wealthier customers. The Chinese market is one of the biggest developing markets in the world, allowing lots of room for growth. With the expertise that China already has, it will be easier to set up manufacturing facilities, warehouses and even to export goods to other nations (as that’s the main component of their economy)
2. Increase investment and focus on South America
The reason why Mabe should increase investment in South America is because of the emerging markets like Brazil, Colombia, and Argentina. These countries have large populations that are developing a strong, large middle class, that will allow for easy targeting and future growth. Mabe already has investments (facilities and partnerships) in SA ( South America ) which will allow it to continue to invest in places it already has the expertise in operating in, which will allow Mabe to become a dominant force in the region. With a presence already established it won’t be too hard to expand and localize to meet the needs of the local market.
3. Increase investment and focus in Russia
The Russian market for appliances has steadily increased to 12,597,600, compared to last year 11,706,400 appliances. This growth, along with targeting middle price point has allowed for an increase in market share, and by continuing to invest and expand outside of Moscow will allow for potential increase in revenue. With new partnerships with local regional distributors, there is still room for the company to grow and expand.
The recommendation is that Mabe should choose is option 1. The reason why is because Mabe’s current market share in Russia is around 4.9%, a small fraction compared to its major competitors who dominate the market, and because of its current financial constraints, continuing to expand in Russia may not be economically viable for the long run. Investing too much in a market that may not have much future potential, could cost the company millions in potentially lost revenue. The reason why is because the Russian population decreasing, reducing the potential customers in the long term. By expanding into China, Mabe could target a far bigger market. China’s market for appliances is currently 104,157,600 as of 2010, compared to a measly 12,597,600. If Mabe is able to achieve even a measly 2% market share, its revenue will eclipse Russia with ease. By using its current industrial capabilities in Russia (instead of halting them, and writing them as a loss) and exporting the products to China, it can save costs on starting new manufacturing and because both nations share a border, transportation costs will also be reduced. It will also allow Mabe to keep the connections and the trust it has made with Russians.
Mabe should enter the Chinese market by first opening stores/facilities in major cities such as Shanghai and Beijing to reach a higher demand. Mabe can benefit from economies of scale through the rise of demand for appliances within China. Mabe should appease the Chinese market by promoting the quality and uniqueness of their product as the Chinese consumer enjoy either purchasing unique goods or the shopping atmosphere. Prices will be marked-up compared to the Russian market because the Chinese consumer is willing to pay more. The Chinese consumers correlate price with quality, indicating emphasizing on premium pricing will interest Chinese customers.
Mabe should increase promotions through brand awareness and build partnerships within the Chinese markets to increase profitability. Due to the high growth potential of the Chinese market, a small portion of the market profitability can create expansion opportunities. Mabe must maintain a consistent market research overview of the Chinese customers and businesses to sustain a competitive advantage to enhance promotional abilities.
Mabe in the near future should be an established well-known brand in China, with steady income and profit through operations. Mabe should always re-evaluate the market to analyze any threats and/or opportunities that may arise within the market. Continuance on promoting premium pricing and unique capabilities is key, and talks of establishing corporate offices must be considered, for investment opportunities. Preserving satisfaction through customers and business partners will be essential for the long-term success of Mabe.
In regards to Russia’s unstable economy, Mabe should reduce the exchange rate risk linked towards the Russian Mabe management, signing a forward/future contract agreement, eliminating the risk of diseconomies of scales. Mabe should invest in plans of potential international opportunities that exist or develop. Assuming conditions remain within both economies between China and Russia, Mabe should sell their Russian joint venture, and invest within a Chinese market that provides high potential.
APPENDIX A : Financial Calculations
Quick ratio = (Current assets – inventory – prepayments) / current liabilities
Year 2006 = (1,465,662 – 412,894 – 12,764) / 1,010,313 = 1.03
Year 2007 = (1,707,399 – 492,095 – 14,931) / 1,337,046 = 0.90
Year 2008 = (1,687,304 – 539,670 – 7,189) / 1,693,630 = 0.67
Current ratio = (current assets / current liabilities)
Year 2006 = (1,465,662 / 1,010,313) = 1.45
Year 2007 = (1,707,399 / 1,337,046) = 1.28
Year 2008 = (1,687,304 / 1,693,630) = 1.00
Debt ratio = (total liabilities / total assets) Debt to equity ratio = (liabilities/equity)
Year 2006 = (1,992,785 / 2,546,547) =78.25% = (1,992,785 / 553,762) = 3.59
Year 2007 = (2,332,411 / 2,996,445) = 77.84% = (2,332,411 / 664,035) = 3.51
Year 2008 = (2,367,517 / 2,919,408) = 81.10% = (2,367,517 / 551,891) = 4.29
Net Profit Margin = (Net income / sales) Total Asset Turnover = (Net sales/ assets)
Year 2006 = (81,487 / 3,156,260) = 2.58% = (3,156,260 / 2,546,547) = 1.24
Year 2007 = (126,688 / 3,788,084) = 3.34% = (3,788,084 / 2,996,445) = 1.26
Year 2008 = (11,430 / 3,404,803) = 0.34% = (3,404,803 / 2,919,408) = 1.17
Equity Multiplier = (total assets / equity) ROA= (Net profit margin * total asset turnover)
Year 2006 = (2,546,547 / 553,762) = 4.60 = (2.58% * 1.24) = 3.20%
Year 2007 = (2,996,445 / 664,035) = 4.51 = (3.34% * 1.26) = 4.21%
Year 2008 = (2,919,408 / 551,891) = 5.29 = (0.34% * 1.17) = 0.40%
ROE = (ROA * equity multiplier) COGS% = COGS/Total Revenue
Year 2006 = (3.20% * 4.60) = 14.72% = (2,441,751 / 3,156,260) = 77.36%
Year 2007 = (4.21% * 4.51) = 18.99% = (2,940,567 / 3,788,084) = 77.62%
Year 2008 = (0.40% * 5.29) = 2.12% = (2,499,649 / 3,404,803) = 73.42%