Business Studies A Level

Higher School Certificate

June 2015 Paper 32

Essay- June 2015 Paper 32 Mbella Farms (MF)

Question 6- Evaluate the importance of the data in Appendix 2 and Appendix 3 to MFs directors
when making the strategic choice whether to enter the market in country X. [20]
The strategic choice of entering the market in country X can be regarded from the growth
perspective of the Ansoff Matrix, classified as market development since MF would be selling an
existing product in a new market. It is indeed a strategic decision since it might affect the long term
success of MF and one has to understand that it might be very costly, requiring huge investment.
That is why it would be advisable to examine carefully Appendix2 and 3 prior to this move.
The 20% average import tariff might not be attractive to MF because it might act as a restriction in
terms of its competitiveness. The import tariff is a barrier to trade and this form of tax on MFs
maize products will cause their prices to be higher compared to local businesses in country X.
Therefore, it is true that customers will have access to a wider choice but might end up buying from
locals at a lower price. Therefore, the investment made into this growth strategy might not work
excellently if it takes too much time to break even. However, given that trade barriers are to be
removed by the newly elected government implies free trade and this could be advantageous since
there shall be no restrictions in terms of quota, tariffs amongst others. Therefore, MF could export
an unlimited quantity of its maize product without restrictions if there is high demand in country X.
If the tariff is removed, MF will be in a position to compete with local firms in country X and provide
the maize products at similar or even lower prices assuming that it goes on with the project that will
reduce average costs further as detailed previously in the case study. However, there is no
guarantee that the current government will be in power for a long period since data in Appendix2
reveals that in the past 3 years, it is the fourth time that the government has changed. Therefore, it
might be a very risky decision as the legislation might be subject to changes. If there is a change of
government again, it might not necessarily invite foreign businesses to enter its country in an
attempt at protecting local businesses. Overall, there is the element of uncertainty with this
decision.
The GDP at 7% suggests a growing economy and this might be favourable for MF assuming that the
standard of living is improving there. An improvement in living standards would be the result of
increasing employment and income levels. Assuming these to be happening in country X, people
would be able to afford maize products if they were not previously able to. In this case, it might
indeed be profitable for MF to enter the market. Again, there is no guarantee that customers will
buy from MF since there might be other local firms providing those maize products. There might
also be other international firms wanting to enter country X with maize products just like MF. They
might also want to take advantages of the incentives that will be offered by the new government.
Therefore, MF will need to adopt other strategies to cope with competition.
Inflation might be a problem as at 10%, it might be costly for certain operations of MF. Certain costs
like transportation and retailing might be high because of this external factor. As such, the prices
charged by MF for the maize products might appear high in the eyes of the customers. With
inflation, the value of money in country X will be lower affecting customers purchasing power. As a
result, there is no guarantee that MF would benefit from increased revenue. However, MF can cater
for increasing costs through the subsidies which would be provided by the new Government. These
would decrease cost of production and place MF in a better position that local businesses in country
Gooroochurn Kentish
kentishgooroochurn@yahoo.com

Business Studies A Level

Higher School Certificate

June 2015 Paper 32

X. Appendix 3 shows that 35 % of investment would come from Government grants and subsidies
and this is quite a huge sum. Still, MF is not guaranteed of securing the subsidies and investment
grants as the case study reveals that the Government prefers joint ventures for such projects. If MF
goes for a joint venture simply to gain access to country X together with the facilities offered by the
government, it will have to share profits and might also be affected by culture clash.
25% exchange rate depreciation is a lot against the $. This might be interpreted in two ways. Firstly,
it might be an advantage for MF given that it trades in $. By exporting its maize products to country
X, it might earn higher revenue because the customers in country X will have to spend more of their
local currency against the $. However, on the other side, MF might look unattractive because of the
currency depreciation. Country X would prefer to trade with other countries supplying maize
products and if this is the case, it might affect MF negatively.
35% of the population in country X is under 25 years implies a high supply of labour pushing the
wages down. If MF has to set up in country X it could definitely be an advantage since it will benefit
from lower labour costs which might lead to higher profit margins as profit is the difference between
revenue and costs. MF could set up quickly with the vast pool of labour available. However, if the
decision about expansion in country X is dictated by export instead of FDI, the business might not
necessarily see a high demand for its maize cereals. With the low wage rate stated previously, those
youngsters might not demand cereals for breakfast but instead look for cheaper alternatives.
Therefore, MF would be losing a high amount of customers in terms of the youngsters who would
not be able to afford. As such, there is no guarantee of increasing profits.
Overall, it can be concluded that the decision has to be carefully thought and MF should not rush to
enter country X. The external factors discussed above might act as barriers to a certain extent and
might not lead to success of MF in country X. The biggest advantage would however be that the
new Government is planning to remove the trade barriers and this might act as a driving force for
MFs strategic decision. One main issue about the data provided in the Appendix2 is that it is data
about the economy in general and there is no indication about research on the industry in which MF
deals. Therefore, there might be misinterpretations as the data might be interpreted differently by
businesses from different industries. The case study also lacks information whether MF has
conducted enough market research or not. The finance director had indeed researched data about
the general state of the economy in country X but there is no mention about maize related products
in the data. One should also consider that data in table 3 cannot be ignored. For instance, based
on the decision tree analysis, an annual return of $2m might be acceptable to go forward with the
expansion project in country X. With its actual operations, MF has made a retained profit of $2m in
2014 in its own country. Therefore, earning an additional $2m abroad is worth the decision.
Investment appraisal data might also be acceptable as the project would take 3 years only to recover
the initial outlay. Still, there is no other information to judge this payback against, for instance, what
is the acceptable payback period set by management or what is the payback period of an alternative
strategic decision of MF. Again, interpretation of data has to be made carefully. The data in
Appendix3 is mainly based on forecasts, which might not necessarily occur in reality while data in
Appendix2 is factual and up to date, based on research. Therefore on a personal level, MF could go
forward with the expansion of its maize products in country X.

Gooroochurn Kentish
kentishgooroochurn@yahoo.com