OVERSEAS EXPANSION OF JEWELLERY BUSINESS

1)

What strategic options will you choose for entering and competing in foreign markets

Inorganic expansion in the international jewellery business market has us to consider and strive for a mix between India and overseas. We have identified that the primary growth will come from the Indian business which has been growing consistently at 40% CAGR over the last 3 years. The Indian Business has nearly 15% EBITDA level margins from the jewellery business and we expect the Indian business to hold the majority of our jewellery portfolio. In India, we are an established player and the time has come when we expand ourselves to lucrative overseas market. Before expanding, we need to identify the markets we want to cater and the SWOT analysis for those regions: Strengths

Unique designs and fabrication methods. An established brand name in the country with years of experience Strong relationships with suppliers as well as galleries. The flexibility to provide custom pieces. Highly successful and recommended product attributes of design , quality and variety A comprehensive distribution network along with a robust and interactive website and a network of galleries.

Weaknesses

Lack of prior experience to international market. Lack of market data, customer preferences, tastes in identified territories.

Opportunities

A growing and highly lucrative foreign market that, to a large degree, is unaware of our product attributes. The possibility to grow the size by injecting fresh and creative designs in a somewhat stagnant industry. Leveraging the strong local presence in a country which is the largest consumer of Gold to establish relations with existing players in big markets like US, Middle east , South East Asia to name a few.

Threats

Replicating the same business model which has given us tremendous success in India. Competition. Foreign laws and jurisdiction. Extent of control exercised on foreign ventures. A slowdown of the economy that will have a reduction on individual's discretionary income.

TARGET MARKETS The key markets in the world are USA, UK, India, Middle East, Turkey, Italy, China and Japan. We have classified these markets as low growth and high growth markets. Accordingly we shall be having different strategies for these markets. Low growth market: The markets where CAGR has been around 5-6%. USA and Europe are one of these markets. In these markets it's going to take a lot of hard work to get noticed. Also due to low growth we wont be able to break even that soon since it's going to be difficult to make a profit there. Since penetration in a stable market is generally difficult, we plan to implement the following strategies: Revenue sharing models like partnership or through Mergers & acquisitions.

Mergers and acquisitions can be profitable as in slow economies being experienced in these markets, we may get a better price for buying out established players. Entry at these times may look unnecessary but since these markets are still the biggest in terms of consumption, we prefer keeping them on our radars. Agreements with end users & art galleries:

We will be focusing on two distinct groups of customers: the end consumer, and galleries (galleries to be used as a distribution channel). The end consumer will also be able to interact with us through our website as well as through personal contact at exhibitions/shows. The galleries (also museum shops, jewelry stores) will be approached through the exhibitions and shows. At these events a long-term relationship will be entered into so that the shops become a retail distribution channel for us. Apart from this,we will be traveling in these markets meeting different galleries and setting up retailing relationships with them. High growth market: Markets with high CAGR of double digits. Middle East is one of these markets and its here where we want to concentrate. In these markets we shall proceed with franchisee and retail

options to promote our brand excellence in India. As a part of this, the important factors we want to consider are as follows: 1. Market size and potential for growth. (This is high as mentioned already) 2. Costs for investments from price offers to advertising, training and even processes & systems modifications to adapt to new strategy , etc. 3. Possible change in product positioning with all negative and positive implications 4. Advantages for the whole product line and company from publicity or advertising to your competitors reactions The strategies followed shall be both market penetration and market development in nature. 1. Cut price or lower your offer. We plan to offer lower prices through special offers and coupons or more product at a discounted price. This will attract new customers and encourage them to try our designs and products. This means that our reach will increase as new clientele will get to know our product attributes and inturn will create a new market share immediately. Since we are supremely confident about our product attributes, we are expecting that many of these clients will like the product, repurchase and become loyal leading to a more long term market share increase. However we are aware of the consequences of price cuts. One big lash back can be our competitors reacting in the same manner thus leading to a price war where margins for every one will reduce. Hence as a remedy, we intend to use this only for a short term as a temporary measure to make our products more accessible.. 2. Promote a new use of the product and enhance its features. We plan to show our clients how the same product can be used with additional features. We plan to but promote it with additional features. This can be achieved by coming up with innovative jewellery designs which for example can be worn on special occasions like marriages, celebrations yet suitable for more formal environment like workplace. Same product, same price, but an effective promotion to both new and existing customers with a new use will surely increase our market share. We believe that this marketing strategy has the potential to attract both new and existing customers to try the product in a new use. Therefore, it increases the purchased quantity and leads to higher market penetration. Also, it leads to more new customers that get to know the product and offers new market share. However we understand and chose not to ignore or depreciate the current characteristics and uses of the product. We dont want to lose our existing customers by any means. After the new use is adopted by customers, we intend to remind them of the typical use of the product in order to preserve our

customer base. Again, there can be a risk of repositioning by mistake, so we plan to monitor our activities and our customers feedback and take any suspicious signs into consideration. The set of strategies mentioned above for both the markets will allow us to achieve the following market mix in foreign lands.

Pricing: The pricing scheme will be based on the cost of the raw materials and the amount of time required in fabricating a piece. We shall also consider the possibility of stocking our most selling designs in these territories. Distribution: The products will be distributed via the website, at the booth at art shows, through a network of galleries and our retail outlets. Advertising and Promotion: The avenues of distribution will also serve as the methods for advertising and promotion. Customer Service: Obsessive customer attention is the mantra. Our philosophy is complete customer satisfaction through our superior product attributes.

2) COST AND BENEFIT ANALYSIS OF MERGERS & ACQUISITION

Cost and benefit analysis is very important from Mergers and acquisition point of view. As this will enable a decision make to understand whether its worth going for or not. Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs. If the discounted present value of the benefits exceeds the discounted present value of the costs then the project is worthwhile. This is equivalent to the condition where we have net benefit as positive or the ratio of NPV (Net present value) of benefit to that of NPV of the costs must be greater than one. In case of more than one option, we must go for the one with highest benefit/cost ratio. If a company say A acquires another company B then there are three major costs involved. Cost of dealing Cost of integration Impact of revenue.

Benefits associated with company A acquiring/merging with company B can be described as bringing synergy which accounts for: Staff reductions - Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts might also include the former CEO, who typically leaves with a compensation package. Improved efficiency- Most of the acquisition and mergers tend to step up the overall efficiency of the new entity. Economies of scale - A bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

ANALYSIS

When a company A acquires another company say B, then it is a capital investment decision for company A and it is a capital disinvestment decision for company B. Thus, both the companies need to calculate the Net Present Value (NPV) of their decisions. To calculate the NPV to company A there is a need to calculate the benefit and cost of the merger. The benefit of the merger is equal to the difference between the value of the combined identity (PVAB) and the sum of the value of both firms as a separate entity. It can be expressed as Benefit = (PVAB) (PVA+ PVB) Assuming that compensation to firm B is paid in cash, the cost of the merger from the point of view of firm A can be calculated as Cost= Cash - PVB Thus NPV for A = Benefit Cost = (PVAB (PVA + PVB)) (Cash PVB) the net present value of the merger from the point of view of firm B is the same as the cost of the merger for A. Hence, NPV to B = (Cash - PVB) NPV of A and B in case the compensation is in stock In the above scenario we assumed that compensation is paid in cash, however in real life compensation is paid in terms of stock. In that case, cost of the merger needs to be calculated caarefully. It is explained with the help of an illustration Firm A plans to acquire firm B. Following are the statistics of firms before the merger A Rs.50 500,000 Rs.25 million B Rs.20 250,000 Rs.5 million

Market price per share Number of Shares Market value of the firm

The merger is expected to bring gains, which have a PV of Rs.5 million. Firm A offers 125,000 shares in exchange for 250,000 shares to the shareholders of firm B. The cost in this case is defined as Cost = aPVAB - PVB Where a represents the fraction of the combined entity received by shareholders of B. In the above example, the share of B in the combined entity is a = 125,000 / (500,000 + 125,000) = 0.2 Assuming that the market value of the combined entity will be equal to the sum of present value of the separate entities and the benefit of merger. Then,

PVAB = PVA+ PVB+ Benefit = 25 + 5 + 5 = Rs.35 million Cost = aPVAB - PVB = 0.2 x 35 5= Rs.2 million thus NPV to A =Benefit Cost = 5 2 = Rs.3 million NPV to B = Cost to A = Rs 2 million. This is a win- win situation for both companies. Hence we can see that based on these figures, Merger/ acquisition is bringing in a net positive benefit which is highly desirable. A company that is aiming to take over another one must determine whether the purchase will be beneficial to them. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. They must ask themselves how much the company being acquired is really worth. This is a very tricky question as no single method is precise enough to give the real value. Deal makers use methods like comparative ratios, PE rations, enterprise value to sales ratio, replacement cost, discounted cash flow etc. to get an insight about this value. Cost benefit analysis really comes handy under these circumstances of uncertainty as there is no single method to tell whether the deal will be right or wrong for the future of the company.Based on the valuations, they give a deal maker clear insight on the ratio of costs and benefits and thus adds an objective punch to an otherwise subjective dilemma.