How has Conch benefitted from being partly state owned? What are some possible disadvantages of state ownership?
A partly state-owned entity is one that shares its ownership between the Government and the stockholders of the stock market. Hence its funding and decision-making comes from both sides. The same is the case with Conch as almost half its ownership lies in the hands of the state. Conch has access to both funding markets, i.e. stock market and government banks. This is an opportunity that benefits the entity by minimizing the cost of capital whenever they borrow from the market. It is able to choose between the lowest borrowing rates either in the private market or government institutions.
Lower cost of capital means lowers operating costs when, in return, increase operating margins. This is confirmed by the first half of the interim report of Conch for the year 2018. Moreover, state ownership also allows Conch access to the deposits of raw material that is needed by the entity to produce its products. However, being partially owned by the government also makes the entity prone to consequences that are not favorable for it. On one side, where Conch may enjoy lower tax burdens and lower interest rates on its funding, it may have to face strict control and many restrictions from the government upon its decision making.
Furthermore, Conch may come under political influences in an unfavorable way when governments change. A change of government means a sudden change in policies and decision making of the entity that may affect the company’s operation as well as its employees’ efficiency. Conch is almost half controlled by the government, which means it may be threatened by takeovers from other entities. Apart from this Conch may be at risk of bankruptcy as it is financed by both government and private shareholders. So different financing methods bring different financing risks which are directly proportional to default risk of the entity
What organizational structure and international strategy would be optimal for Conch? Explain your reasoning.
Organizational structure plays an important role in the operational efficiency and expansions in national and international markets. Major organizational structures include international divisional structure, global product division, global area division, and finally global matrix. A separate division is made in the international division structure type to look after the growing activities of the entity internationally and report it directly to the CEO. Global area division is focused upon area wise activities of the entity. This type is most suitable for entities which have a few product types. It also makes it difficult to align the products according to all areas of the world. In the global product divisional structure, the entity divides its activities based upon its products. Each product has a different division and reports, product wise (Neelankavil, 2015).
Furthermore, the global matrix is a mix of all structure types. This structure is very complex in nature, and several groups are formed based on products as well as area. In the case of Conch, which is making foreign expansion, the international division structure is most suited to it. Where the domestic operation would be carried out as it is while the foreign operations would be looked after in the international division separately. This way top management remains aware of the situation in international markets very closely. Hence, efficient decision making can be done.
The main international strategies in international business are localization, global, international, and transactional.
In the case of Conch, it aims at maximizing local responsiveness along with gaining benefits by means of global integration. This strategy can only be applied in a perfect situation which is nearly impossible, but Conch can make it possible by making flexible downstream activities, it has access to greater economies of scale and locally adaptive flexible strategies of its downstream activities such as sales and marketing.
Why might Conch require its Malaysian customers to have letters for credit (L/C’s)? Why might L/C’s become less reliable as per payment mechanism in the event of a banking crisis in Malaysia? Explain your reasoning.
A letter of credit is a backup document that is issued by the bank for the verification of credit of an individual or business purchaser. The seller is deemed to be in a safe position as it is assumed that if the borrower is unable to pay back his debts, then the bank will. In other words, a letter of credit guarantees a payment. Capitalization can also be done on these letters of credit, which increases the chances of new business relationships. Since Conch is trading internationally, it is prone to greater risks of non-payments from unknown purchasers. Hence LCs become useful in such circumstances where the buyer and purchaser are unknown to each other.
The letter of credit is issued to the seller on the basis it would put its trust in the bank that is issuing the letter of credit. Since Conch cannot fully rely on its Malaysian customers to pay back for its purchases, the LC is only backup that can be used. However, the LC would not be of any use if the banking sector itself is in crisis. The LC cannot be relied upon if the issuer of guarantee is itself under crisis. The debt of the purchaser is guaranteed by the bank by means of LC, but the bank is not guaranteed by anybody. So, in case of any bankruptcy at the bank’s end it would only cause loss to the seller.
There are different types of letters of credit that carry different terms. It depends upon the transaction which type may be chosen. Hence Conch should opt for the confirmed letter of credit that gives a second guarantee if the primary bank is unable to pay the debt of the purchaser at the time of its default.
How might Conch have to modify its marketing strategy in less developed countries such as Myanmar and Cambodia? What aspects of its marketing strategy might remain the same? Explain your reasoning.
The four Ps that allow the business to accomplish growth and stand out in a highly competitive market constitute of Product, price, placement, and promotion. A successful offer of the product involves the crucial tool of the marketing mix and 4Ps executes the strategy of marketing mix. The internal and external factors in a business environment affect each of the 4Ps in its marketing strategy. Conch’s final product is its cement that it provides to its customers locally and internationally. Cement is a type of product that is standardized all over the world. Hence, not much effort is needed to change its product feature in its marketing mix, and Cement is the main ingredient for building material so it cannot be of low quality especially for big consumers.
Secondly, the pricing is the amount that the final use of the product has to pay. It is set up by adding a margin to the costs of making the product available to its final consumer. Conch may have greater margins as it is saving its costs by achieving economies of scale as it is producing its products on a very large scale. However, Conch is also offering its product to an underdeveloped area where the infrastructure is not so favorable. Transportation is also difficult, and costs may rise. This would give lower profit margins. Hence modification of Price strategy may be needed in underdeveloped areas such and Myanmar and Cambodia. As these areas are not producing much cement product locally, they rely on imports majorly. So Conch may benefit from the situation and set higher prices in these areas. This would not only cover additional transportation costs, but also allow to get better margins from here.
Promotion means letting people know about the product that is being offered by the company. Initially, bigger promotions are needed in Myanmar and Cambodia as they do not have much of relative local products to be relied upon. They look for imports in this sector. So, making use of their need, it is important to do effective promotion in underdeveloped areas so that they are aware of the product that Conch is offering, and promotion needs to be so effective that this armlet does not fall for other similar products. Finally, placement is not a very important P that needs to be focused on in this area as the product is not of a type that needs better looks.
Suppose that following a change in Indonesian tax law, the Indonesian subsidiary’s effective tax rate becomes higher than Conch’s effective tax rate in China. Describe how Conch could transfer some of the subsidiary’s profits to the parent company to reduce the effect of the new tax law.
When entities have expanded globally by means of wholly owned subsidiaries, it has the open option for the allocation of expenses and profits. When the parent and subsidiary are operating in a different location, then tax avoidance techniques can be applied to minimize its taxation costs. Conch is prone to higher tax regimes, its Indonesian subsidiary as compared to its parent company in china. So Conch may opt to record expenses in higher tax jurisdictions to avail tax reliefs and move profits to lower tax jurisdiction areas.
Moving of Conch’s profit from Indonesian subsidiary can be done by intra group trading upon manipulative prices. An artificial reduction of cost of production of Conch’s products can be used in higher tax regime and later inflating the same in the lower tax regime. This would attract letter taxes by showing a lower taxable profit.
Furthermore, the Indonesian subsidiary may qualify as the disregarded entity, which would allow moving money from Indonesia to China and pay taxes by Chinese tax laws. The Chinese parent company would be filing its subsidiaries returns in its consolidated statements under its own tax regime.
What advantages might Conch’s Myanmarese subsidiary enjoy relative to smaller local competitor? What advantages might Mynmarese competitor enjoy?
Global companies that operate across borders enjoy many benefits over small local competitors. They can easily drive local competitors out of the market. Due to its size, assets, and facilities, Conch can influence the local competitors. The major benefits that Conch has over local competitors include advanced technology transfer by means of which advanced products can be carried out. Moreover, research and development when identifying new areas and new customers is a very costly procedure. Conch would benefit here as well as it has huge resources to carry out R&D in Myanmar. Smaller competitors may not afford to go for such high-level R & D.
Above all Conch’s subsidiary enjoys bigger economies of scale as compared to small local competitors which results in higher profit margins for it. The conch’s subsidiary may also offer the highest quality product at a lower price as it is enjoying economies of scale causing less cost for raw materials. This strategy can be applied initially to gain market share and then increase prices once the local consumer becomes loyal to the product.
Myanmarese competitors are smaller and take advantage of its global competitors due to its flexibility and awareness of local markets. Smaller local Myanmarese competitors may grab a more local share as they can easily mold their products according to the needs of local customers, however this process would be difficult for global competitor such as Conch, especially, when the global entity would have to invest in the local Myanmarese economy to gain knowledge about its market and demand. Most multinationals lose ground to local companies as compared to other multinationals. This is majorly because the products that locals offer are more related to their own culture. China’s Ali Baba and India’s Flipkart can be taken biggest examples of this scenario. Both offer the same products but in local cultthe same (Thompson, 2019).
References
Neelankavil. (2015). Basics of International Business. M.E. Sharpe.
Thompson, J. (2019, March 20). How Do Multinational Companies Affect Local Businesses?
