SWOT Analysis of Autoedge - Case Study Example

Individual project Table of Contents Individual project Table of Contents 2 Introduction 3 Part one 4 The costs 4 Part two 5 Legal factors to be considered 5 Cultural factors to be considered 6 Financial factors to be considered 6 Economic factors to be considered 8 General SWOT analysis 8 Conclusion 9 References 10 Introduction The Autoedge is a U. S-incorporated company that benefitted from the concept and the possibility of outsourcing. Jonathan McAlister founded it in the year 1976. The company’s exact location in the U.S. is Detroit, Michigan. The company deals in the manufacturing of auto engines and other transmission parts, which have been supplied to the top three automakers based in the U.S. The key reason behind outsourcing was to reduce the production related costs such as labor, to avoid the rigid American regulation and to escape the ever-increasing competition in the U.S. However, after years of successful operation, the company’s quality level of products began to deteriorate. Its market was filled with under-performing products, an occurrence that led to a major fall in demand for the U. S. -manufactured automobiles. In addition, the event led to a major loss of the company’s strong customer loyalty and brand name. The company’s market share price dropped from $ 51 to $ 4 per share, marking one of the biggest corporate losses. Consequently, autoedge’s management team and board of directors are considering a change of strategy with great hopes of raising the company’s worth. On that note, relocation back to the U.S marks the center of the company’s strategy. This work is an individual project that is based on the above-introduced company. The project comprises of two parts as follows: part one contains a list of short-term and long-term fixed and variable costs that the company should consider when a relocation to the U.S is decided; the costs to be expected if a no-relocation decision is made; and the financial risks that the both the company and the shareholders would face. Part 2 comprises of a description of some legal, cultural, financial and economic factors to be considered to aid the decision of either maintaining the company’s existence in South Korea or relocate to the U.S. Part one The costs The company realized a major drop in the quality level of its products during its operation in South Korea. The declining economic situation in the U.S characterized by lack of employment opportunities, low Gross domestic product, low interest rates and low inflation rate, has presented the company with an opportunity to relocate and help create more employment opportunities in the U.S. and by extension, improves the level of GDP. If the company returns to the U.S., the following are some of the short-term variable cost to be expected: wages to part-time workers, direct and indirect material, factory overheads, and advertising, distribution and storage costs. The following are some of the short-term fixed costs if the company considers relocating: machinery maintenance, salaries to full-time employees and the cost of capital. If the company relocates, the following will be considered as some of the long-term variable costs: direct and indirect materials, selling and distribution, storage, electricity and other sources of energy, machinery maintenance, and salaries to full-time employees including the CEO. On the other hand, a long run is enough time for fixed costs to change. Precisely, it is not easy for companies to experience long-term fixed cost (Sexton, 2013, p. 270-300). Conversely, the company is thinking of maintaining its current location (South Korea). First, if this strategy is implemented without changing the current CEO, the company risks further loss in the quality of their products. The continued loss in the company’s product quality would be realized if the situation was caused by changing the CEO. On that note, with the less performing CEO in the office, the quality of products is at risk. Second, a further decrease in the company’s product quality would lead a further loss in brand loyalty. Brand loyalty, also known simply as customer loyalty, is a crucial foundation for the company’s success. Therefore, if the company decides to maintain its operation in South Korea, it will lose its loyal customers. Third, the loss of loyal customers would mean a decreased market share. The company would lose its customers to the competitors (Sexton, 2013, p. 270-300). A reduction in the company’s market share would be reflected in the financial performance as reduced sales thus profits. Therefore, if the company decides to remain in South Korea, it will lose sales thus experience lower profits or make losses. Fourth, the company has experienced a major drop in the share prices. If it continues to operate in South Korea, it will further lose the market value of its shares. If that happens, the company will further lose its market value. This would be accompanied by a major withdrawal of ownership by shareholders. Eventually, the company’s very existence would be at risk. Lastly, there is a lucrative opportunity in the U.S due to high unemployment levels. The economic condition in the U.S. is creating an excess supply of workers, thus lowering the cost of labor in the U.S.; therefore, if the company decides to maintain its operation in South Korea, it will incur the opportunity cost of failing to exploit the cheap labor available in the U.S. labor market (Sexton, 2013, p. 270-300). Part two Prior to making any decision, the company should consider the environmental and other factors that will influence its operation in either the U.S. or South Korea. The factors to be described as per this project are legal, cultural, financial and economic as done here below. Legal factors to be considered These are factors pertaining to the formulation and the implementation of laws that adversely or positively influence the company’s operation either in the U.S. or in South Korea. The following are some of the legal factors to be considered: employment law, taxes, economic policies, health and safety laws, environmental laws and competition policy. For instance, the employment law is formulated to regulate issues such as the minimum wage, fair labor practices, child labor provisions and employee-retirement security provisions. The intensity of these regulations is different in both countries, thus influence a company’s financial position. A country that has implemented, say, a higher rate of corporation tax presents more expenses to companies thus reduces the level of profit. Therefore, the management team of the autoedge company should consider the influence of all the legal factors, in both countries, to the company’s operations and financial performance (Paul, 2009, p. 154-245). Cultural factors to be considered These factors relate to the way people live in a country. The way Americans live is different from the way Koreans live. That is, both countries have different cultural practices. Cultural practices influence operations, thus should be keenly considered and respected. Some of the cultural factors are labor unions, the availability of labor force and skills, health, education levels, urbanization, demographic trends, customs, religion and trend. For instance, the availability of a skilled labor force is a factor that should be given more weight when choosing the location of a company. A skilled labor force plays a critical role in quality delivery. Therefore, the company should consider locating in a country with a high supply of skilled labor force in order to achieve a competitive advantage (Paul, 2009, p. 176-245). Financial factors to be considered Financial factors to be considered are the interest rates, inflation rate, the cost of finance and the performance of both money and capital market. These factors are different in both countries and heavily influence a company’s performance. Let us have a look at some methods that are used in the valuation process of a company. They are the NPV, IRR, Payback period and the profitability index. Net present value is a company valuation method that involves the discounting of both the cash inflows and outflows. The discounted outflow is subtracted from the sum of discounted cash inflows to obtain the net present value. The discounting rate is selected based on the cost of finance. According to this method, an investment should be accepted if the net present value is greater or equal to zero. Therefore, a company with a positive net present value is considered more valuable than that with a negative net present value. In that case, a company’s value is lower in a country with a higher cost of capital. Therefore, both the rate of interest and inflation should be considered before a decision is made. Preferably, location should be in a country with lower interest and inflation rate because the cost of capital will definitely be lower (Hitchner, 2010, p. 1200-1292). The internal rate of return- IRR is the cost of capital of a company when the net present value equals zero. IRR of an investment can be obtained using trial and error, interpolation and extrapolation method. The fair value of a company is considered high if the IRR is higher or equal to the cost of finance. According to this method, the return to the shareholders is influenced by the cost of finance. A country with high interest rates will present high cost of finance. Companies in such a country would be unattractive to the investors due to low return on investments. Therefore, the location of Autoedge should be selected based on the interest rate, the inflation rate and most importantly, the cost of capital (Hitchner, 2010, p. 1200-1292). Profitability index- it is the ratio obtained after dividing the sum of the present value of cash inflows by the initial cost of investment. A company whose PI > 1 is considered of high fair value and is suitable for investment. Investment is discouraged in companies whose PI < 1. This tool, also referred to as a value investment ratio, shows the value generated by every dollar invested in a company. From the definition of this company valuation method, it is noticeable that the cost of capital plays an important role in determining the index. Companies located in countries with high cost of finance are less attractive for investment due to less value created by investments. Therefore, interest rate, inflation rates and the cost of capital should be considered before a location decision is made for Autoedge Company (Hitchner, 2010, p. 1200-1292). Economic factors to be considered The following are some of the economic factors to be considered prior to making a decision on the appropriate location of Autoedge: the employment/unemployment rate, the gross domestic product of the countries, the interest rate, the rate of inflation and the exchange rate. The gross domestic product is the value, in monetary terms, of completed products and services that are produced within a country’s boundary in a period. A country’s GDP is a reliable measure of economic performance. The employment rate is another important factor. A country with high unemployment rate sends a message that the demand for workers is low. The opposite of the statement is true. Note that the cost of labor, in a country experiencing high rate of unemployment, is low. The opposite approach is true. Therefore, for the purpose of cost reduction, Autoedge should consider a country with a higher rate of unemployment (Paul, 2009, p. 154-245). The last economic factor to be considered is the exchange rate. It is the price of a local country’s currency against the price of a foreign country’s currency. It is influenced by the demand and supply of currencies in the foreign exchange market. It is also influenced by interest rate and other economic factors. A company located in a country of strong currency is free of risks caused by unfavorable exchange rate movement. Exchange rate fluctuations pose a lot risks to companies. An example of such risk is transaction risk (Paul, 2009, p. 154-245). General SWOT analysis It is highly recommended for a SWOT analysis to be done on the company prior to any location decision. The following are some strengths, weaknesses, opportunities and threats that the company faces. Strength- the company enjoys a great deal of strength from the strong brand and customer loyalty. The continued exploitation of this strength could create a competitive advantage. Weakness- the company’s presence in South Korea has caused the deterioration in the quality of its products. Failure to improve the product’s quality will certainly cost the company its strong brand. Opportunity- high rate of unemployment in the U.S. means the existence of excess labor supply. Therefore, the company has an opportunity to exploit cheaper labor in the U.S. Threat- back in the U.S.; the company will still face stiffer competition and rigid regulations that might negatively influence its operation (Draft & Marcic, 2006, p. 180-186). Conclusion In conclusion, the U.S. has a stronger currency than South Korea. Which means that the cost of finance is lower as compare to the cost of finance in South Korea, thus, making investments more attractive in the companies located in the U.S. Secondly, there are lucrative opportunities in the U.S. due to the availability of labor? Therefore, from an expert opinion, relocation to the U.S. is better. References Draft, R. L. & Marcic, D. (2006). Understanding management (5th Ed.).Australia: Thomson South-Western. Hitchner, J. R. (2010). Financial valuation: Applications and models. Hoboken, N.J: Wiley. Paul, J. (2009). International business. New Delhi: PHI Learning Private Ltd. Sexton, R. L. (2013). Exploring economics. Australia: South-Western Cengage Learning. Sharan, V. (2006). International business: Concept, environment and strategy. Delhi: Pearson Education. Read More