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International Business strategy for Arcelik Home Appliances

Arcelik Home Appliances is the leading manufacture of home appliances in Turkey with a market share of 50% in the domestic market as at 2003 (Chemawat, 2008). It supplies the market using two brands namely Arcelik and Beko. The company has adopted an international expansion strategy and has already been marketing its products to more than one hundred (100) countries mainly in Western Europe, Eastern Europe, Latin America, Asia, and North Africa (Chemawat, 2008). Arcelik was originally founded to produce metallic office furniture in 1955 but diversified into production of household appliances shortly after. It has been hailed as the first company to introduce appliances such as washing machines and refrigerators to the Turkish households. Arcelik would face further challenges when it became apparent that the Turkish government would be participating in the European Community’s tariff reduction which was meant to reduce to zero from 1992 to 1996 (Chemawat, 2008). The challenge would be competition from other manufactures from the European Community who would be able to sell their products at more competitive process in the domestic market. Arcelik overcame this challenge by investing heavily in research and development thereby substantially improving the quality of their products. The company is currently the leading holder of patents in the Turkish market. This strategy cemented its market leadership in the domestic market as consumers preferred to spend a little more to obtain goods whose durability could be assured. This preference was also enhanced by Turkey’s fluctuating market where inflationary forces were highly unpredictable with the greater odds being to the consumer’s disadvantage. Arcelik would later grow to establish its market dominance in Turkey for decades but would later face challenges that would trigger its focus on international expansion to ensure its survival and growth.
Arcelik’s motives for international expansion The focus on international expansion by Arcelik was triggered by the economic crisis that hit Turkey in 2001. This crisis had led to soaring levels of unemployment and a significant reduction of market demand by an estimated figure of 35% (Chemawat, 2008). This strategy mainly comprised increasing exports as well as engaging in international acquisitions. The economic crisis in Turkey must have proved to Arcelik the vulnerability of firms wholly dependent on domestic markets. Pressures from business cycles, inflation, interest rates, exchange rates and political forces are prevalent in domestic markets. On the other hand, international markets tend to be better insulated from such pressures since they will rarely apply across several countries. Economic crisis in one market would normally not be prevalent in the rest of the markets hence multinationals can ensure stability by marketing their products across many countries. Arcelik had to get a way to survive the economic crisis in 2001 and as well ensure that future company performance was stabilized by reducing its level of vulnerability to domestic market fluctuations. Arcelik also sought to focus on international expansion in order to increase its level of production and increase its economies of scale (Chemawat, 2008). This means that with additional production, the cost of producing each unit product becomes significantly lower hence allowing a company to make higher margins per unit or allowing them to charge lower per unit without incurring any losses. Economies of scale allow a company to remain competitive in the ever-evolving economies. To ensure that the economies of scale do not end up in accumulation of dead stock, or in the escalation of warehousing and storage costs, Arcelik would need to look to markets that would be able to support its intention of increasing the economies of scale through a larger demand. The national demand within Turkey would not be able to absorb these additional products hence the rationale behind Turkey looking to expand international trade. The level of demand for home appliances in Europe alone is about 25% of world demand (Chemawat, 2008). Arcelic sought to tap into this huge demand to support its competitiveness and the large levels of production occasioned by their strategy of maximizing on the economies of scale. International expansion can also be explored where a company seeks to lower its production costs by having a significant proportion of their production done from regions where the cost is lower than in the domestic market. One of the major factors of production that normally influence the decision of overseas production is labour. When considering labour, it is imperative that a company weighs between the benefits of the savings from paying the lower labour cost, the differences in the productivity of the workers between the higher wage and lower wage areas, and the transport and storage cost implications. It is also worth noting that in many cases, where the labour costs are low, other factors of production such as land would also be relatively lower. The labour cost in Western Europe is estimated to be five times that in Turkey. Labor cost in Turkey is three times that in Eastern Europe (Chemawat, 2008). In China, it is four times lower than in Turkey. Labor productivity also varies and must be taken into account. For instance, in China, labour productivity is just half of that in Turkey. Additional transportation costs are determined by both the distance between the production facilities and the legal environments of the countries through which the products must cross to get to its intended markets. Access to international markets is crucial to any organization that seeks to expand itself. Domestic markets will often in many cases be found insufficient to support the growth targets that the companies set for themselves. They are also in many cases unable to enable an organization to recoup the investments they may make in research and development in time. The complexity and the level of innovations in the global market is advanced and often leads to production of new and better fulfilling products. This significantly reduces the product life cycles and the companies engaging in research and development need to gain assurance that their investments can be recouped before the products lose demand. This assurance can only be found by marketing extensively in the international markets where the demand is much larger and can ably support the level of sales needed. Arcelik was motivated to focus on international markets since it had opted to distinguish itself as a research and development specialist who focused on the production of quality and durable products. These features would mean that it would need to charge relatively higher prices for the products. On the other side, the products from other European countries were finding their way into Turkey due to the zero tariff arrangement with the European countries. The entry of other products in Turkey meant that Arcelik would either have to lower their prices in order to maintain its domestic share market, or expand its operations to European and other markets in order to maintain or increase its level of sales to clients that focus more on quality, suitability and durability of the products they purchase.
Arcelik’s options for expansion In order to realize its goal of expansion into the international markets, Arcelik has adopted a number of options to help them realize this goal. The international market entry options adopted by Arcelik include use of exports, international acquisitions, use of private label contracting, and product diversification.
Organic domestic growth and use of exports Arcelik ensured growth domestically by ensuring reliable accessibility to the market using exclusive distributors and agencies who also served as centres for offering after sales services. This exclusive network also served as an entry barrier for any new market operators.
Exporting entails maintaining the company’s operations in the home market and selling the products in overseas markets (Giroud, Sinkovics, and Yamin, 2011). It is hailed as the least costly mode of foreign market entry but at the same time the most vulnerable to various entry barriers as government regulations. The cost effectiveness of this entry method is enhanced by the fact that it requires no involvement with the foreign governments or the companies operating in the target market. It is often seen as the best mode of entry for an organization operating on a lower scale. With subsequent growth of exports, the company may open sales agencies in the foreign markets to be the link with the company’s clients overseas. By 2003, Arcelik had grown to be the leading player in Estonia and Lithuania with a market share of 25% in these two markets. It also had a commanding presence in the rest of Eastern Europe. The presence of Arcelik’s sales agencies helped grow significantly in Western Europe with a markets share of 15% in the United Kingdom. Arcelik also conducted a successful export strategy gaining a 70% market share in Romania with its Beko brand. The net effect of these exporting strategies was a significant increase in Arcetik’s production capacity from 440,000 to 750,000 in 2003 and 2004 respectively (Chemawat, 2008).
International acquisitions This mode involves a company buying out another firm operating in the target market hence assuming full legal rights over it. This method is hailed as the best mode of expansion into other markets since it grants a company total control over the foreign subsidiary as well as full profits generated thereafter (Giroud, Sinkovics, and Yamin, 2011). The full control over the activities of a subsidiary is viewed as essential in ensuring they run in accordance with the philosophies of the parent company hence ensure the goals of the company are achieved as intended. The targets for acquisition would need to have the unquestionable ability to complement Arcelik’s growth strategies. Arcelik would also evaluate the foreign firm’s brands and take consideration on how these brands would help strengthen them as well as complement their capabilities. The target subsidiary’s contribution to sustainable growth was also a key factor. Arcelik’s acquisitions in 2002 include Bloomberg, Electra, and Flavel and Leisure in Germany, Austria and the UK for the two latter brands (Chemawat, 2008). They also acquired Arctic in Romania. The acquisitions of brands in the target markets was likely informed by the fact that many consumers tend to prefer purchasing brands that they can identify with: the brands they consider national brands. These acquisitions tremendously increased the product range offered by Arcelik and lead to its significant growth within the European markets.
Use of license contracting Licensing involves the company transferring certain rights to another firm to enable it manufacture products using its brand. In licensing, the consideration that the licensor gets is only the royalty or the license fee (Giroud, Sinkovics, and Yamin, 2011). It does not take part in profit sharing or any other marketing processes of the licensee. Licensing offers the advantage of enabling a firm to avoid government regulations and other restrictive policies such as tariffs and quotas. It also enables market penetration without involving extensive capital expenditures. However, this method is highly restrictive in the level of control the company can have over the activities of the licensee. There is also the risk of the licensee gaining the technical expertise and becoming a competitor in the production of close substitutes after the expiry of the mutual arrangement. Arcelik’s production in 2004 comprised 40% from various licensing arrangements (Chemawat, 2008). This complimentary effort helped ensure Arcelik’s brand presence in the European’s markets.
Diversification into other businesses within Turkey In order to enhance further growth in the domestic market, Arcelik sought to capitalize on its elaborate distribution network to provide consumers with additional products. By 2004, Arcelik was offered various types cellular phones and was already getting into arrangement with various Japanese firms to act as distributors of various electronic products. The diversification proved to be a great success and further cemented Arcelik’s leadership in the Turkish market.
Additional Options for Expansion Arcelik’s ambitious goal of achieving revenues of three billion Euros in the next year may be difficult to realize unless additional methods were employed to ensure its continued growth in the international markets. Domestically, Arcelik could opt to but out local competitors in a bid to solidify its hold on the local market. This solidification would help reduce the downward pressure on its product prices by reducing the significance of competition locally. In addition, the additional channels of distribution gained through any such acquisition would act as an entry barrier to any foreign firms hence ensuring steady domestic growth. Internationally, Arcelik could embrace a number of methods to ensure its continued growth. These methods include engaging in Joint ventures, franchising and use of strategic alliances.
Joint Ventures Joint ventures involve the formation of a partnership arrangement with a different company where the parent companies provide the resources to operate it, share responsibility on management, and share profits realized thereafter (Giroud, Sinkovics, and Yamin, 2011). This type of venture is especially popular where it comes to sharing the intelligence and technical knowhow required for research and development. With their determination to distinguish themselves as the masters of innovation and product development, this method can be used to ensure its rapid growth. Instead of engaging in competition with the already existing companies in the foreign market, Arcelik could identify a strategic partner who knows the market remarkably well. They could then research into the market needs in a bid to try and unveil any unsatisfied demands in the market. Having found the features lacking in the products found in the market, they could, through the joint venture develop new products that would suit this need and capture the unreached market. This method would be convenient to Arcelik since it would not involve many unnecessary government regulations that normally bar entry. In addition, such a venture, if well implemented would easily capture the market as it would be riding on the goodwill and distribution network of the strategic partner in the foreign market.
Franchising Arcelik needs to consider franchising in order to minimize the risks involved with the licensing as it currently practices. Here, Arcelik would transfer some rights to the franchisee to produce the products under its brand but will reserve the right to provide some aspects of technical support (Giroud, Sinkovics, and Yamin, 2011). This way, Arcelik will be able to be abreast with the activities of the franchisee. In addition, in Franchising, the royalty is based on the amount of sales hence Arcelik will be able to generate higher revenues in the event the franchisor is able to realize significantly higher sales. Franchising is easy to start since the franchisor incurs minimal capital cost hence Arcelik can expand into more foreign markets with relative ease. Moreover, the franchisee assumes all the risks and foots for all costs of labour and facility establishment. The company will also be able to avoid any political risks associated with foreigners operating in national markets. Arcelik can therefore easily expand its scale of production without worrying about high capital expenditure hence edging closer to achieving the revenue targets
Strategic alliances A strategic alliance differs from joint ventures in that it does not necessarily involve formation of a legal entity. Strategic alliances are formed to enable companies use each others’ distribution networks, technologies, production capacities, management experience and others (Giroud, Sinkovics, and Yamin, 2011). One very essential factor in ensuring product penetration in the market is the distribution network. This has been evident in the manner in which Arcelik has been able to capture the domestic market by using effective distribution networks in Turkey. Arcelik should also try to replicate this experience in the foreign markets. However, by virtue of the fact that it’s a foreign market, they may not have the resources to establish an effective distribution network in those markets. It would therefore be relatively more convenient to identify foreign companies with a distribution network that serves their target customers effectively, and then enter into a strategic alliance with them. This may be companies offering similar products or those making completely different products. When the products are easily available to the consumers, they more likely to buy these products and this would lead to an increase in the amount of sales realized by Arcelik. The strategic alliance could also involve sharing of certain technologies between the companies in question. Arcelik could choose to leave the production of a certain product components to a company with a comparative advantage in its production in exchange for providing a component which it can produce more efficiently. This exchange could lead to lowering the production cost which would be useful in helping the company become more price-competitive in the market.
Conclusion Arcelik’s growth is mainly dependent on how the company can enter and prosper in the international markets. This is because it is already commanding the domestic market in Turkey and may have limited growth opportunities locally. Growth and diversification are often related as is evident from Arcelik’s company history. Arcelik has grown in the past by steadily improving on the product range that it offers to the market and this diversification should be continued to ensure continued growth.

The Pros And Cons Of Market System Economics Essay

The pros and cons of market system have been debated for years. Some say that it is good, however some say in a different way. In fact each systems, either capitalism, which is also known as market system, or socialism have their advantages and disadvantages.
1.2 Question 1 – Pros of Market System 1.2.1 Encouraging Competition Market system encourages competition between firms. Besides allowing everyone to own private property, there will be less complicated rules and procedures like red tapes for investors to invest in the country, which encourage more investors to invest in the country. This can be proven by United States, where the investment rate in the country is high because of more than 60% of lands is owned privately (Economic Research Service, 2002).
When there is more investors invest in the country, consumers benefit. This is because there will be many firms in the market, and they compete with each other to obtain sales. They cannot increase the price as they wish; this will cause the firms to lose customers. Besides, firms will compete with each other by producing better quality products. Varieties of products increase as well. This is due to the supply and demand theory; if there is demand for particular product, supply of the product will be available, vice versa.
When there are many firms in the industry, investors benefit. Firms have incentive to be productively efficient by cutting costs to improve productiveness in order to compete with other firms. Firms that failed to do so will go out of the business. On the other hand, firms that worked hard will be rewarded. They are able to grow their assets as much as they can, since there is no limit to how much wealth an individual can accumulate. In the long run, this will lead to economic growth.
United States, which practising capitalism, is one of the first world countries (Nations Online, 2010).
Source: World Economic Outlook Database, 2005 [*]
Figure 1.1: Top 10: First World Countries in terms of their Gross National Income
United States’ Gross National Income (GNI) per capita is $41,941. This ranking position shows that United States has a high GNI. In another word, United States has a high economic growth. And this proves that market system can lead a country to sustainable economic growth. Indirectly, the number of people living in poverty will decrease. United States has a low poverty rate of 12% in 2004, while the highest poverty rate of that year is 81% in Gaza Strip (NationMaster, 2004).
1.2.2 Efficient in Allocation of Resources Figure 1.2: Graph of Supply and Demand Curve in Market System
In market system, resources are allocated by market itself, it relies mainly on the market forces to allocate resources. If the price is higher than P1, there will be occurrence of surplus in the market. The price will fall as suppliers are trying to dispose extra stock. This will lead to the expansion of demand curve as consumers are more interested with product instead of substitutes. At the same time, contraction of supply curve occurs. This is because producers are more interested with substitutes; hence they will switch to the substitutes.
On the other hand, if the price is lower than P1, shortages will be occurred. The price will rise since there are more buyers than suppliers. This will lead to the contraction of demand because consumers will switch to substitutes. The expansion of supply curve happens since producers found that product is more attractive than substitutes, so they switch away from substitutes.
Either when the price is at P2 or P3, it will end up with the price of P1. This is because market system is depends on the demand and supply sides in order to get an equilibrium point. Thus firms won’t produce goods that consumers don’t want, and they won’t raise the prices as they wish. This is because these of firms will be eliminated. By this force, there will be lesser firm to waste resources to produce things that consumers don’t want. Not only consumers will be benefited, scarce resources will also be allocated efficiently.
1.2.3 A Market with Less or Without Taxes When there is market system, it is basically a tax-free market. Even if there is any taxes, taxes are lesser compare to market which intervened by government. Hence consumers gain benefit because the products sold will not taxed by government; consumers can purchase cheaper products.
On the other hand, firms also have advantages because the revenue earned will not be taxed by government and hence firms gain more profits. This encourages more investors to invest in the country. These profits incentives encourage firms to be more efficient too. Firms can improve existing products and at the same time innovating new products, which benefit consumers. Consumers also gain advantage because firms can cut the product selling costs due to more profits earned.
1.3 Question2 – Cons of Market System 1.3.1 Monopoly Power In contrast, many of the pros of market system are also its cons. Although it seems to be good that market forces determine the price of product, it is not the same case when it comes to monopoly industry. Firms will exploit consumers by charging high prices, yet selling consumers less innovative products. Consumers have no choices besides purchasing from firm. This is because there is no similar substitute for consumers as the entry to barrier is high. And this decreases the gratification of consumers.
Monopoly power is also harmful to the firms. When there is no government intervention, firm with monopoly power will use its power to avoid competitors from entering the market. For example the firm will use predatory pricing method by reducing its products’ costs less than production costs to defeat competitors. This is harmful to consumers as the firm will later increase the price as high as possible. On the other hand, investors will not invest to the country anymore because the “bully practices” causing unfair to the investors.
A report has shown that Microsoft has harmed public by retarding innovation, denying consumers’ choices, degrading product’s quality, and increase product’s selling cost (Jackson, n.d.). Microsoft has been exploiting consumers through preventing its products to be developed, and at the same time avoiding other software companies from devoting time and capitals into new products. This leads to a bad investment climate seeing that the public has been exploited, and there is no longer a balance range for social interests.
Government intervention to the market is important. Action like setting act is needed to control anti-competition behaviour. For instance, in United States, Sherman Act is set to abolish monopoly practice (Federal Trade Commission, 2010). With this regulation, investors are easier to enter the industry as everyone has the equal opportunity. Besides, consumers also gain benefit as the price of the product is cheaper, and there will be more choices for consumers.
1.3.2 Equal Distribution of Income Market system causes inequality. Wealth tends to redound to a small percentage of the population, where individuals who are rich will become richer. On the other hand, individuals who are not rich will never get rich. Same to the market, large organisation will be getting larger; while small business will remain small.
In 2007, United States has a Gini index of 45.0 (CIA World Factbook, 2010). The Gini index is a measurement for household incomes inequality, the higher the value, the more the inequality. The highest ranking of the same year is Bosnia and Herzegovina, with a Gini index of 56.2. This shows that United States’ income distribution is unequal.
Hence, government interference to the economy is important. With government intervention, where government imposes different tax rates to different income groups in United States, individuals have a more equal income as high income earners will be taxed more and low income earners will be taxed less (Tax Foundation, 2010). The same thing goes to the firms; small business will be imposed lesser tax and incentives are given. This encourages positive ‘investment climate’ in a country because this is fair for investors to invest in the country. At the same time individuals’ social interest increases too.
1.3.3 Underproduction of Public Goods In market system, where there is no government intervention, will be lack of public goods like street lights and highways. Since public goods benefits to everyone including nonpayer, it will be ends up with nobody paying for it. On the other hand, private firms will not use their profits to provide free service. This shows that market system fails to provide public goods.
A country without public goods is a country which lack of infrastructure. Lack of infrastructure is bad for both individuals and investors. If a country is built without providing street lights, is that everyone staying at home and not going out at night? Furthermore a totally dark night increases criminal rate, this causes consumers and investors to feel insecure. And this eventually leads to a bad ‘investment climate’.
To avoid this bad ‘investment climate’ happens, government has to intervene into the economy by imposing tax to everyone. The purpose of collecting taxes is to build public goods since everyone is not paying for it if they are not forced to do so.
1.4 Question3 – Government Policies to Improve ‘Investment Climate’ 1.4.1 Policy to Encourage New Businesses In Malaysia, it takes an average of 144 days in registering property; it ranks 67th among 178 countries for the ease of registering property. Besides, starting a business, which involves 9 government-required procedures, takes about 24 days; it ranks 74th in the list (U.S. Department of State, 2010). These are the complex rules and red tapes by government will reduce investors to invest in Malaysia.
A new policy: Malaysian Corporate Identity Number (MyCoID) has been introduced by the Prime Minister of Malaysia, Datuk Seri Najib Abdul Razak. MyCoID is the company number that will be used as a single serial reference number for various registrations and transactions at relevant government agencies (Sun Media Corporation, 2010). This can reduce the time used to start up a business to 3 days only. With this new policy, investors will be more interested to invest in Malaysia, as the business start up time reduces from 24 days to 3 days, which has fasten the process about 7 times. With this, consumers benefit as there will be more firms, and consumers can have more choices.
1.4.2 Policy to Abolish Corruption In 2010, Malaysia ranks 56th in Transparency International’s Corruption Perception Index among 178 countries (Star Publication, 2010). It is getting worse, as 2009 Corruption Perception Index was 4.5 and in 2010, the index score is 4.4. In 2007, the ranking was in 43rd, just in three years time, the ranking fell from 43rd to 56th! This is an important issue that government should take note about it. When a country is with a high corruption rate, the number of investors will be drastically reduces. This is because bribery causes unfair to the investors. And their confidence toward to country will be losing.
A new set of policies have been set by government recently. To tackle grand corruption, they have to enforce existing political laws (PEMANDU, 2010). Besides, announcement of zero tolerance policy has been made. Government will reinforce whistleblower protection too. In addition, government will endeavour to complete prosecution of corruption cases within a year, particularly for public interest cases to regain public’s confidence on government. Stiffer punishments for those guilty of corruption are enforced as well. Convicted public officers will receive harsher penalties. Lastly, a public name and shame database of convicted offenders will be developed; it can be a deterrent and can facilitate employment decisions. These actions can reduce corruption rate efficiently and able to attract and retain more investors’ confidence towards Malaysia.
1.4.3 Policy for Equal Income Distribution Malaysia has a high Gini index with the value of 46.1 in 2002; the rank of 36 compared to over hundreds countries (CIA World Factbook, 2010). This shows that Malaysia has high unequal income distribution. An unequal income distribution will cause less investors invest in Malaysia as it will be unfair for them, especially if the business is small. Besides, individuals will be demotivated to work as their wealth will not grow much while the small population of high income earners will become wealthier over time.
Hence Malaysia government collect corporate and personal taxes. Different rates are available for different groups of income earners. For low income earner group, where income is lesser than RM2,500 are not required to pay for income tax. For high income earner group, the tax imposed is from the range of 1% to 26%. This goes the same to the firms. Corporate with paid up capital more than RM2.5 million has to pay 25% corporate tax. This policy makes the gap between different classes income earner smaller. When there is low unequal income distribution, investors will be interested to invest in Malaysia. At the same time, individuals are motivated to work as there is no unfairness in distributing income. It will help Malaysia’s economic growth to be higher in the long run.
1.5 Conclusion The market will be perfect, if there is a mix economy, where the market is run by capitalism and government at the same time.
2.1 Question 1 2.1.1 Introduction In the past, oil price is determined by the supply side (Gibson, 2009). OPEC used to control oil prices by controlling supply. However, from 1990 onwards, this has changed. The oil price is depended on the demand side (Gibson, 2009). The more the demand of oil, the higher the price is.
Source: WTRG Economics, 2009
Figure 2.1: Crude Oil Prices – 2008 Dollars
Figure 1 shows the wide price swings of crude oil from 1947 to 2009. The unsteady prices are caused due to various reasons, for example oil price increases when revolution occurs; and oil price decreases when there is a recession.
Conversely, APS Review Oil Market Trends (2004) posted that not only demand affecting the price of oil, there are some factors like American Strategic Petroleum Reserve (SPR), and European winter affecting oil prices.
2.1.2 Forecasting Oil Price in 2012 The Past Trend Source: IOGA, 2010
Figure 2.2: Yearly Average Crude Price – 1977 to Present
The price oil crude oil was lesser than $40 per barrel before 2004.
Source: International Energy Agency, 2010
Figure 2.3: Total IEA – Average CIF Costs of Imported Crude Oil
After the price hit $50 per barrel in 2005, the price become unstable, it rises and drops frequently. In 2008, the price even hits over $130 per barrel. After that, the price drops until it is lesser than $50 per barrel. The Future Trend The price of oil will be increasingly higher each and every year because of the scarcity of oil. Through the past trend, I can foretell that the price of oil in 2012 will be within the range of $100 and $200 per barrel.
According to Morgan Stanley (2009), oil prices will be $85 per barrel in 2010; and it would rise until $95 and $105 in 2011 and 2012 correspondingly. At the beginning of 2010, Morgan Stanley reported that at the end of 2010, oil prices would be $95 per barrel; while at the end of 2011 and 2012, oil prices would be $100 and $105 per barrel respectively.
On the other hand, in 2008, the chief economist of CIBC World Markets, Jeff Rubin said that the price of crude oil would be $150 per barrel in 2010. This price growing phenomenon will sustained in years, hence in 2012, the price would be over $200 per barrel. Again in 2010, Jeff Rubin said that the price of crude oil will hit $100 per barrel in 2010, and in 2012, the price will reach $225 per barrel (Carrett, 2010).
Although Jeff Rubin has predicted correctly that oil price will hit $50 before 2005, and he foresaw the huge price spike for oil in 2008 (, 2010), it is impossible that the oil price will exceed $200 per barrel in 2012. The $200 per barrel oil is coming soon, either in the next five years, or the next eight years, but it won’t be in the next two years.
2.1.3 Reasons behind Forecasting Supply Side of Oil The Thunder Horse Oil Field, which is located at Gulf of Mexico, is the largest semi-submersible oil platform. It is owned by British Petroleum and ExxonMobil. Today, British Petroleum produces approximately 400,000 boe/d (barrels of oil equivalent per day), from nearly two dozens of fields (BP, 2009). Among 400,000 boe/d, 250,000 boe/d is produced by Thunder Horse. British Petroleum wished to have a production of 4 million boe/d at Thunder Horse in 2020.
However British Petroleum’s wish could not comes true because of hurricanes. In 2008, Hurricane Ike and Gustar hit Thunder Horse. This has caused the increase in oil price at West Texas Intermediate, where the price increased in 10% to $70 per barrel, while the price at gas stations rose by 50%, to $3 per gallon (Rubin, 2010). When Hurricane Ike hit Thunder Horse again in 2008, gasoline prices have soared to as much as $5 per gallon (Rubin, 2010). It was followed by Hurricane Gustar and Ivan. This has leaded the shut down of half of the production, where approximately 500,000 people unemployed; recession occurred. At the same time, oil price increased because of the reduction of oil supply. Demand Side of Oil When the world oil price is increasing, everyone in the world is paying for the expensive oil, except for the countries in OPEC. Hence when everyone is consuming less because of the expensive oil, people in OPEC countries can consume the oil as usual, or even more, because they are not affected by the high oil prices. For instance, Ski Dubai, where the Ski Dubai’s Snow Park ‘supply’ the snow for 3,000 square meters of year round perfect snow in one of the world’s hottest deserts (Rubin, 2010). These artificial snows are made of oil. Ski Dubai uses 3,500 barrels of oil a day, which can be used for one month by American drivers pumping their gas tank.
Almost 90% of every barrel of oil consumed in the world goes for transport fuel. This is because the world economy is growing, especially in BRIC countries: Brazil, Russia, India, and China. In these countries, car sales are booming. Unlike America, where the car sale only grows 1% to 2% in the best economic times, car sales in BRIC countries are growing at ten to twenty times to that pace (Rubin, 2010). When the demand for car is rising, the demand of oil is rising; cars need oil to operate. There are more cars in the road when Tata Nano in India and Chery in China are introduced to the market. These cars are so cheap that the prices are between ranges of $2,500 to $10,000. It seems to be a miracle for many people, as they finally afford to buy a car. However it is actually a nightmare, where the cars in the road increase and will lead to high oil prices. Increase in Demand and Decrease in Supply When the decrease of supply and increase of demand happen at the same time, the price of the product will increase.
Figure 2.4: Graph of Increase in Demand more than Decrease in Supply
Figure 2.5: Graph of Increase in Demand less than Decrease in Supply
Either increase in demand more or increase in demand less than supply, it will result to the increase in oil prices. Hence oil prices will hit more than $100 in 2012.
2.1.4 Conclusion In 2012, the oil price will not hit over $200 per barrel because when oil price hits over $100, recession will occur; just like what had happened in 2008. When oil price increases, there will be a massive knock-on effect. Starting by increasing in prices of goods and services, which will eventually leads to slowdown in economic activities, as consumers refuse to spend more. Then recession happens; some firms close down and there is high level of unemployment. Due to economic contraction, consumption of oil decreases as well and there will be a sharp decrease in oil price.
2.2 Question 4 2.2.1 Introduction Apple Inc. has been a leading company in electronic products. It was established on 1st April 1976 in US by Steve Jobs, Steve Wozniak, and Ronald Wayne (Apple, 2010).
During a conference call with investors, which held by Tim Cook, the Chief Operating Officer of Apple Inc., a question was raised up. Someone asked about how Apple Inc. would function without Steve Jobs, the Chief Executive Officer and the co-founder of Apple Inc., as he was unable to run the business operation due to medical leave (Cable News Network, 2009). Tim Cook answered:
‘We believe that we are on the face of the earth to make great products and that’s not changing. We are constantly focusing on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects, so that we can really focus on the few that are truly important and meaningful to us. We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot. And frankly, we don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change. And I think regardless of who is in what job those values are so embedded in this company that Apple will do extremely well.’
Cook’s statement clearly explained that Apple Inc.’s mission, which is designing and making great electronic products, will not change. While Apple Inc.’s vision is to focus on what that is truly important to the company.
2.2.2 SWOT Analysis on Apple Inc. Figure 2.6: Table of SWOT Analysis on Apple Inc.
Apple Inc. has a strong brand, with a high reputation as its strengths. This is because a well-known brand with a good reputation attracts customers. Apple Inc. is a highly diversified company in technological products. It sells not only software, but also hardware. This can attract different types of customers which can lead to higher revenue. In addition, Apple Inc. has a strong international presence. It has more than 300 stores worldwide, and has online store where the products are sold (Apple, 2010).
The most visible weakness of Apple Inc. is selling expensive technological products compare to its competitors. Consumers who cannot afford such expensive products will choose to purchase from Apple Inc.’s competitors, such as Dell and Nokia. Apple Inc. should perhaps do some promotions sometimes to attract more customers. Besides, Apple Inc. loses its sales in personal computers to other competitors because of its operating system supports limited software. Apple Inc. should improve more in its software so that consumers will not stick only to Window’s software. Another weakness to Apple Inc. is the criticisms to the company. Types of criticism to Apple Inc. will ruin its reputation. So Apple Inc. should take some actions to abolish these rumours.
The opportunity for Apple Inc. to be more successful is to sustain a low-cost leadership. Technological products are expensive, if Apple Inc. makes its price lower than other competitors, yet providing a good quality products, it probably will turn one of its weakness into strength. Apple Inc. is great in innovation. If it can keep up with great and innovative products from time and time, Apple Inc. could increase its market share without decrease any of the product price. Apple Inc. should market Itunes as well since demand for online music is increasing.
It is not easy to be in this industry. Technology changes rapidly; it takes a little time to switch to new technology. There is also a very high level of competition in the industry because it is profitable. So Apple Inc. should focus in its research and development department in order to lead the industry. Economy crisis such as recession is a treat too. This is because Apple Inc. is selling its products in a high price. During recession, consumers are not willing to spend much, so they will purchase from other cheaper brands. Apple Inc. should aware of this to avoid losing its customers.
2.2.3 Porter’s Five Forces Analysis Personal Computers (Mac) Cell Phones (iPhone) Portable Music Devices / Online Music Services (iPod / iTunes) Threat of New Entrants Low Low Low Economies of scale
Economies of scale
Economies of scale
Product differentiation
Product differentiation
Product differentiation
Cost advantages
Cost advantages
Cost advantages
Threat of Substitute Products or Services Low Low Moderate Switching costs
Switching costs
Switching costs
Substitute’s performance
Substitute’s performance
Substitute’s performance
Buyers’ willingness to change
Buyers’ willingness to change
Buyers’ willingness to change
Bargaining Power of Buyers Moderate Low Low Buyers are fragmented
Buyers are fragmented
Buyers are fragmented
Substitute available
Substitute available
Substitute available
Product differentiation
Product differentiation
Product differentiation
High price sensitivity
Low price sensitivity
Low price sensitivity
Bargaining Power of Suppliers Moderate Low High Suppliers have power to impact prices
Suppliers have power to impact prices
Suppliers have power to impact prices
High switching cost by suppliers
High switching cost by suppliers
High switching cost by suppliers
Existence of illegal free music download
Competitive Rivalry High High Moderate A few competing firms, with a clear leader
Large number of competing firms
A few competing firms
Existence of low priced PC makers
Figure 2.7: Table of Porter’s Five Forces on Apple Inc.
Competitive rivalry is the largest external force to Apple Inc. In computer industry, Apple Inc. is neither leading company, nor low-cost leader in computer industry; it has a high competitive rivalry. In cell phone industry, there are many competitors like Nokia, Samsung and etc. Luckily among the high degree of competition, Apple Inc. has a market share of 28%, which is higher than most of the competitors (AppleInsider, 2010). Although there are only a few competitors in portable music industry, Apple Inc. has to keep its product innovative to prevent other competitors take over its leading position.
Overall, Apple Inc. is not affected much by these threats. The barrier of entrance to technological product industry is high. A new firm needs a huge number of capitals to enter this industry. Besides, a new firm will not have a strong reputation on its brand. Thus fewer consumers will purchase it. This causes the firm has to produce products in a high cost because unable to achieve economies of scale. The threat of substitute products is low too. This is because Apple Inc. produces differentiated products compare to other competitors. It seemed to be a weakness as the operating system support limited software. However this causes the switching cost to other brands higher, so consumers will not change to other products. As the quality of Apple Inc. products are good, it creates many loyal customers. 80% of the customers who are using Apple iPhone will continue purchasing iPhone in the future (AppleInsider, 2010).
2.2.4 Boston Matrix Figure 2.8: Boston Matrix on Apple Inc.
Apple Inc. sells three main products: Mac, iPod and iPhone. iPod and iPhone are in the category of star in Boston matrix. iPod has a high market share of 73.8% and a high market growth with a sales of 225 million unit iPods in 2009 (AfterDawn, 2009). Among so many competitors, iPhone has a high market share of 28%, which is the second smartphone highest market share (AppleInsider, 2010). It has a high market growth that 10 million units of iPhone will be sold in 2010 (Reuters, 2010). However, Apple Inc.’s personal computer is not doing as well as iPod and iPhone. It has a low market share of 10.4% and has a sales figure of 1.83 million personal computers for a quarter (9to5 Mac, 2010).
Apple Inc. has to secure the dominance of the growth market on iPod and iPhone. At the same time, Apple Inc. needs to improve on its software. Mac has a low market share and market growth is because of its operating system support limited software. This means consumers who purchase Mac could not use Windows software. Apple Inc. has to innovate and improve better software to gain more customers.
2.2.5 Conclusion Overall, Apple Inc. is doing perfectly in the business. As a leading company in technological products, Apple Inc. has to keep focus not only on itself, but also its competitors. Apple Inc. needs to improve on its weaknesses to avoid competitors from taking over its leading position. It also needs to prevent the threats to become its weaknesses. In addition, it has to put effort to change its opportunity into its strengths to become a better company. Lastly, its mission and vision have to always be on the first place before making any decisions.
2.3 Question 5 2.3.1 Introduction Monopoly is usually defined as an industry where there is only a seller. In UK, when a single firm or a group of linked firms have more than 25% of the output of a product in the hands, monopoly is formed in that particular industry (Griffiths and Wall, 2008). There are two types of monopoly: natural monopoly and coercive monopoly.
When a firm has monopoly power, it will only face a little competition. Hence the firm will be a price maker; it can set the price for a product based on its market share within a particular market. This usually occurs when there is coercive monopoly.
2.3.2 Disadvantages of Monopoly Monopoly Exploits Consumers Some observers argue that companies should not have monopoly power because monopoly exploits consumers. When there is monopoly, there is an extremely high barrier to entry for other firms; hence there is no close substitute for a particular product. The firm will have the ability to control the price of the product to some degree.
Figure 2.9: Graph of Inelastic Demand
Figure 1 shows the exploitation of monopoly firms to