Small Business - Developing and Expanding, Coping with Globalization Issues, and Financial Position - Case Study Example

Mini Case Study Name: Institution: Date: 1. Beliefs of Mrs. Cheung regarding developing and expanding business Mrs. Cheung believes strongly that expansion and its outcome of scale were the major drivers in growing the profit margins. Expansion in papermaking needed huge capital outlay as well as a long term outlook. She strategically positioned her company to compete at the top level in the paper industry. Mrs. Cheung believes in listening to one’s instincts and making decision within the nick of time to take advantage of available opportunity. When her employers company went under, Cheung did not hesitate to start her own business enterprise. She started small and grew gradually to become a formidable business that could compete locally and internationally. She believes in seizing opportunities that come up in life. Once one has a chance in life it is important to make good use of it because an opportunity missed cannot be recovered again. No one can redeem lost time or lost opportunity. She believes in strategic takeover and making good use of opportunities. One has to develop when necessary so as to keep up with the market otherwise a company will lag behind. She saw business opportunity in waster paper and undertook to create good out of them. The company started domestically and eventually expanded abroad and became a major exporter of recovered paper from Asia and Europe to China. When the demand for packaging outgrew the production of domestic suppliers, Mrs. Cheung saw a business opportunity to expand. She founded the NDP in 1995. The company expanded rapidly within a short time and by 2008 it had twenty-two paperboard manufacturing machines in five different locations in Vietnam and China churning out 7.85 million tones every year. She believes in taking risk in business with the aim of making profit and utilizing opportunities. Cheung believes in environmental preservation and this can be noted through the various environmental conservation strategies that she applied. Detoxification and recycling of water was core among other initiatives used to reduce wastage. She considers wastepaper as a forest since paper can be recycled generation after generation. This recycling keeps the environment clean and avoids wastage. Her company tried as much as possible despite strict regulations to comply with environmental laws in China. Mrs. Cheung goes for what she believes in and makes the best out of it. She collected waste paper and made it useful cardboard. She believes in diversity. She was able to learn how to adapt in different environments in order to survive as a company. She switched to production of cardboard using waste paper but when the need for packaging material went up, she was right in it. Hard work for her should not be compromised and someone has to get out and get things done in order to achieve success. Mrs. Cheung believes in hard work and determination as the major factors towards success in anything. Her business empire was built from discarded cardboards and other trash. The cartons were gathered in from Europe and the U.S. and shipped to China where pulped happened and re-manufactured into paperboard. As the Chairlady of the company she believes in hard work, perseverance as well as savvy business strategy. She built the company from scratch and took it to a high level of competitiveness in the international industry. She believes in progressive growth and climbing up the ladder. She worked as an accountant before she went on to start her company that deals in scrap paper. 2. Globalization issues in the case and how MNEs may cope with them There are so many global issues that have been brought up in the case study. Multinationals policy makers have to realize that host governments seek to influence directly the process by which any strategy is formulated. Multinational companies face the threat of interference or restrictions from the host country. Inefficient governments interfere with their activities leading to reduced sales and productivity. Political factors entail government policies, laws and regulations as well as administrative orientations that affect operations of multinational corporations (Meyer, Mudambi & Narula, 2011). The Chinese government imposed escalating strict regulations that limited environmental impact and hence compliance was very costly. The expenses that came with environmental compliance led to closing to over five hundred and fifty paper mills in the year 2008. This indicates how environmental regulations can affect business operations. The MNEs deal with challenge of regulation in the host country by ensuring compliance to the set laws to avoid clashing with the host country administration. The MNEs can also invest in countries where there are less strict regulations that make compliance less expensive and bearable. Multinationals also face stiff competition from domestic companies that have advantages in terms of legislation and capacity of production. Local laws favour the local industries and protectionism is used to keep away fierce competition from multinationals. In this case NDP had a strong competitor in the name of Lee & Man Paper Manufacturing Ltd. The company also focused on the same products that were being produced by Cheung’s company. NDP and Lee and Man Paper were major players in the domestic market representing 24% of the entire production in 2008. MNEs can deal with competition through diversifying to other markets with low competition or reducing the production costs in order to increase profitability. MNEs can further ensure that they invest in technology and take advantage of economies of scale that leads to less production costs (Sauvant, Maschek & McAllister, 2010). NDP invested in advanced equipment where it imported paper marking machines from Italy and the United States. Global economic factors also affect the operations of the MNEs. Economic trends dictate the level of markets and disposable income that is available for spending on buying products. The level of economic growth impacts the degree of demand for products being produced by MNEs. The level of economic growth will negatively or positively the production and profitability of MNEs. The 2010-12 Eurozone debt crisis; for instance slowed down economic growth in various European countries when other regions were witnessing economic boom. Greece, Portugal and Turkey underwent turbulent economic times that have a negative impact on MNEs. The global economic crisis in 2008/9 really affected the operations in MNEs in many countries. Sales went down and some banks collapsed unable to stand the effect of the economic crisis. In the case study the economy was spiraling downwards by January 2009. The Financial crisis affected NDP profitability and production. Nine Dragons Paper (NDP) being the largest paperboard manufacturer in the Asia region as well as the second largest in the world witnessed its share price drop. The export-oriented industries severely suffered as the economic crisis spilled from 2008 to 2009. NDP was in a tight spot owing to huge accumulated debt. The global economic environment affects the success of the MNE despite where they are operating from. The target markets of their products have to be stable and growing to ensure increase in profit as well as productivity. The financial markets were halted in 2008 as the economic crisis spread to other parts of the world hence export orders dropped by half, there was a huge drop in sales revenue as well as the debt burden became very clear to all. Therefore, the global economic environment can determine the success of MNEs. The MNEs can mitigate this through diversifying in other businesses as well as in other regions that may be stable and experiencing economic growth (Gao & Pan, 2010). Relying on a single market can be dangerous when the market experiences recession. Diversifying to other markets provides opportunities for growth. 3. NDP’s financial position from the perspectives of existing and potential investor and analyst. From the position of an existing investor there is more to worry about the performance of NDP and its future in the international market. Following the 2008 financial crisis, sales revenue plummeted, export orders dropped by 50% and the debt burden grew bigger. In the April of the same year the company had issued $300 million in unsecured notes and this was the very edge of investment grade. The raw materials prices skyrocketed hence raising the production costs. Rising debt can curtail the growth of the company since the company will be struggling to pay back the debts. The aggressive expenditure program employed by the company was not helpful and it slid into more debt and less profitability. Increased capital spending strains the clash flow activities of the company. The acquisitions that the company has made can increase the production capacity of the company. A potential investor will be worrying about the drop in the share price of the company as well as the closing of closing of about 500 small paper manufacturing plants in one year alone. However, the securing long term contracts with American Chung Nam for the supply of over eighty percept of its recovered paper heralds future growth for the company. The company also acquired wood and bamboo pulp paper project in Leshan in 2008. It further acquired another company named Rui Paper Company for additional supply of bamboo and kraft pulp. This acquisitions as well as the joint venture earlier in the year demonstrate the potential of NDP to grow in future and be profitable. There is possibility of NDP being more profitable after bracing the impact of the financial economic crisis that hit the industry in 2008. Equipment utilization rates averaging about 94% are impressive for the company and there are prospects of the company increasing its productivity despite challenges here and there. The ability of the company to recycle material, use coal fired co-generation power plants and reduction of power by about one third makes the prospects of the company really look up. The company has its own transportation infrastructure which makes transport to be efficient and effective. The cost of production has to be reduced greatly to make sure that sale revenue translates into profits. From the perspective of an analyst, NDP is experiencing mixed fortunes. Heavy capital spending does not translate directly to profits. The aggressive capital expenditure program can either lead to expansion and profitability of the company or more debt and financial crisis for the company. The company has to be prudent in the joint ventures and acquisitions that it is undertaking in order to make sure they all contribute to the growth of the company. Some of the initiatives are long term and the company will continue to experience turbulent economic times before it stabilizes eventually to be profitable. The drop in the share price has the potential of sending wrong signals to the potential investors and worry to existing investors but it is upon the management to reassure both through prudent decision making. Industry experts have projected that future demand may not match the anticipated capacity increase within the paperboard industry. Production had gone down and the demand of raw materials plummeted. From analyst view, NDP may come out strong from the economic crisis or it may lead to constrained production and profitability. Any investor has to be prudent when investing but prospects of long term success of NDP are evident. References Meyer, K. E., Mudambi, R., & Narula, R. (2011). Multinational enterprises and local contexts: The opportunities and challenges of multiple embeddedness. Journal of Management Studies, 48(2), 235-252. Sauvant, K. P., Maschek, W. A., & McAllister, G. (2010). Foreign direct investment by emerging market multinational enterprises, the impact of the financial crisis and recession, and challenges ahead. In Foreign direct investments from emerging markets (pp. 3-29). Palgrave Macmillan US. Gao, G. Y., & Pan, Y. (2010). The pace of MNEs’ sequential entries: Cumulative entry experience and the dynamic process. Journal of International Business Studies, 41(9), 1572-1580. Read More