Growing up in China: The Babycare Ltd, a Harvard - Term Paper Example

Growing up in China: The Babycare Ltd, a Harvard The business world is an ever changing environment which requires companies to adapt their business strategies to the realities of the marketplace. One of the most common expansion strategies is for companies to seek penetration in new marketplaces. International expansion has become a commonplace occurrence in the 21st century. The international expansion strategy has moved beyond a potential opportunity, nowadays it has critical for the survival of many businesses (Indus). There are over 200 countries around the world with different characteristics that make each marketplace unique in its own right. Emerging markers are one of the most attractive propositions for any business entity. One of the largest emerging market places in the world is the People’s Republic of China due which represents the largest marketplace as far as potential customers due to its massive population of 1.3 billion people. This paper discusses the case of the a company called Babycare Ltd, which started a successful operation in China and is currently seeking venture capital to expand within the emerging Chinese marketplace. In order to achieve success in any marketplace a company must offer a product or service that is either needed or very attractive to the target population. Within an emerging marketplace a company must place greater emphasis in matching the product or service with the customer profile because in such places the gross domestic product of the general population is still low in comparison is fully developed nation such as the United Kingdom or the United States. An emerging market is a foreign economy that is developing in response to the spread of capitalism which is considered a business location that offers a high reward / high risk proposition (Answer, 2009). Babycare Ltd successfully penetrated the emerging Chinese marketplace due to its unique business model which adapted well to the idiosyncrasies of this particular marketplace. In China overpopulation has been a huge problem which posed a long term threat for the nation since the 2nd half of the 20th century. By the 1970’s the government knew it had to take measures to stop the proliferation of the Chinese race. China since 1979 has had an official governmental policy of one child per marriage (Reproderechos, 2009). This peculiar cultural phenomenon created an opportunity for Babycare Ltd. There is very close bond between a child and their parents when the child is the only offspring of the family. The parents of only will give anything to provide the child with the best care, resources, and educational opportunities. The low governmental resources of China do not allow the healthcare system to provide its people with all the services the citizens need. One area of great concern with the healthcare needs of China was prenatal care and education about the newborns child development. The product and service offering of Babycare Ltd. attacked this niche market in China. The China marketplace has been historically a difficult market to penetrate for a variety of reasons. One of the biggest obstacles is how the distribution channels work in China. Distributors in China require companies to give up 30-50% of every revenue dollar to them, the media channels are very expansive, and it is customary for distributor to operate under 120-190 account receivable cycles (Desai & Veblen, 2003). These factors increase the risk of any investment in China. Babycare already has a successful business established in China. Their business model eliminate the effect of the three negative variable mention before because there is no need for external distributors, all sales are cash basis, and the marketing is done in house due to the nature of the business. Babycare Ldt. is dedicated to providing child health care information and nutritional products to mothers by sales agents who are typically mothers themselves who build close personal relationships with the clients. Since there no middle man the profitability of the business is extremely high with gross margins above 80%. The company also has a very smart plan for customer retention because there products are different products available to meet the future child development needs until the age of 6. Investing in this company for me is a very attractive proposition. The company ensures that its products will not be replaced by cheap imitators by purchasing the ingredients for its child supplements from top manufacturer in the United States. The profitability of the company is beyond the norm in China and the fact that sales representatives have the future product ready for its customers once they grow ensures very high customer attrition. The company’s services seem to be perfectly aligned with a culture that places a high value in the well being of its children. Also since there is only one child per matrimony a family is more willing to spend extra on that child since that type of economical commitment will not occur again within their lifetime sine the citizens know there will only be one child in the family. The data provided by the company about the justification for the investment based on its future use is very encouraging. The company currently seeks the investment of expand into other cities within China. The have identified approximately 90 of them. These cities have the peculiarity of having worst healthcare system than the larger cities, thus the need for the company’s services is ever greater on these 2nd tier cities. There are four investment offers on the table for Babycare Ltd. The company reached a point in their progression as a firm that has forced them to react quickly to the offers on the table or run the risk of the firm going out of business. The company cash flow position can not maintain the operation open for too much longer. There are investors who have put money in the firm in the earlier rounds of investment. These investors in a perfect world would not under circumstance want capital coming into the company that will dilute their original investments, but under the current circumstance of the possible of a shutdown management must consider the going concern of the firm over the individual interest of a group of investors. The board of directors specified that there is a need for 2.5 million and that they are willing to accept a valuation model that placed the value of the company between $20-30 million. The first offer is a $1 million offer that places the value of the firm at $8 million. This offered came from the existing investors of Babycare Ltd. and has the flexibility of doing another round of investing after six months to a year once the marketplace improves. The offer seems to look out for the interest of the current investors and fails to meet the $2.5 million requirement. This offer should be rejected. There is second option on the table to raise $2.5 million from Franklin Templeton Investment by creating a convertible bond at 10% for 4% which could be converted by the buyer at a $22 million valuation. Despite meeting the min. investment criteria this option creates unnecessary debt and if converted would sell the stocks at a lower price than the company can get elsewhere. This offered should be rejected as well. The best alternative for the company lies between the two remaining offers. There is a $6 million offer at $26 million valuation from a large firm in the healthcare industry. The other offer is form a Honk Kong based firm which offered $2.5 million at a $19 million valuation. In the package this firm offered technical consulting assistance for the expansion plan. The lower offer has added value and provides the lower dilution of the company, but in the end the best offer on the table is from the healthcare provider which is offering an additional $3.5 million of working capital. The $6 million offer is the best offer and should be accepted by Babycare Ltd. References Anwers.com (2009). Emerging Markets. Retrieved February 4, 2009 from http://www.answers.com/topic/emerging-markets Indus.org. International Business Expansion. Retrieved February 4, 2009 from http://www.indus.org/mdp/manage/45inter.htm Reproderechos.org (2009). China Turns One-Child Policy into Law. Retrieved February 4, 2009 from http://www.reproderechos.org/ww_asia_1child.html Read More