Introduction
Ruritania is a beautiful country; however, its economy has been through a crisis. Over the past decade, the country has been experiencing a fall in the standard of living and the government is spending a lot of finances on unproductive jobs and wasteful subsidies. The main challenge facing Ruritania’s policymakers is to reduce government spending without interfering with the vital economic components that provide essential services such as health care and schools. A key element in the country’s revenue stream is exported. Expansion of the company’s business in Ruritania can ensure increased returns for the UK Company. By capitalizing on its existing potency and unique resources, the company can effortlessly gain a competitive advantage in Ruritania and realize high returns on the capital invested. Through global expansion, the company can manage to choose suitable locations for its manufacturing plant in the city centres and towns. The company can be able to succeed in its expansion strategy because it will be able to capitalize on changes in the manufacturing sector. Through this strategy, the company can realize high economic growth which offsets its low-profit margins and enables sustainability of the cooperation’s price-based competitive advantage.
In addition to the reinvestment of margins, it can achieve differentiation through its products as well as imperfect mobility of its brand name, which is inimitable. As the treasurer of a company based in the UK, my responsibility is to analyse the financial situation in Ruritania where the company is planning to expand its services. The company’s growing customer base will be global business entities. The expansion choice of Ruritania is substantially based upon the expectation this country is or will be strategically important in global competition. It is targeted as a potential market for expansion not only for the market opportunities but also for the possibility of a successful strategic alliance with a Ruritania manufacturing industry. This could be considered one of the more important benchmarks of the strategy. Not only does it open other markets to increase sales and revenue, creating an opportunity for greater economies of scale, but Rutarinian is recognized for the precision processes used in their manufacturing processes.
Financial Performance, Profitability & Investment Analysis
Analysis of our company’s financial statements reveals the following:
- Weak/unstable Profitability– (ROCE), (ROSF) & profit margin decline during
- Efficiency– Reduction in debtor & creditor days.
- Liquidity consistency– strong current assets to liabilities
- Accumulated borrowings from (2001-03) – risks on high-interest payments.
- Steady dividend yield & payout– signify investor confidence.
- Steady share price & P/E– future business confidence.
Financial Evaluation
The unstable segmental growth could lead to future risks, mainly from external competition. Diversifying services in European markets would overcome limitations (Omolewu, 2007). Highly concentrated E.U markets result in diminishing growth and vulnerability. Generally, there is constant revenue and profit growth, together with a strong balance sheet. Establishing operations in tax-relief countries further creates a financial advantage. Despite this, the firm should not depend too much on debt financing to achieve sufficient growth (Barney, 2007). Other performance measures that can be used to measure the success of a strategy include the variation of the actual production volume from the actual volume. Return on investment is the most widely used and it gives results that can be easily evaluated. Concerning performance measurement based on the number of changes in the strategy, this should be completely eliminated since it is a sign of incorrect strategy formulation. Proper environmental evaluation ensures that the named strategy can be well implemented with changes only in the implementation phase. A strategy is a roadmap; hence if properly formulated should have very few adjustments (Burdett, n.d.).
Ruritania is a developed nation that stands to enjoy most of the benefits in the European Union. Such benefits are a competitive advantage over other nations due to its growth in the economy, availability of labour force and high chances of economic growth due to immigration. If Ruritania becomes a member of E.U, the company stands to benefit from regional integration and access to a skilled labour force. It will be able to repatriate funds to its mother country and has had access to the availability of cheap labour. Its production is believed to rise and also its region is deemed to be empowered. It is expected about 90% of the company’s manufacturing would be done in Ruritania if it succeeds in becoming a member of the E.U.
Since the 1930s, the EU has been experiencing periods of economic recession which is expected to continue with a shrinking GDP. There has been evidence of some signs of economic improvement although the recovery process is still uncertain. The majority of the states that have recently been incorporated in the union are poorer than the existing ones and have contributed to the drain in the economy. Most of them are not ready to adopt the euro making it even harder for the monetary and economic union. These are some of the risks that the new company is likely to encounter once Ruritania is affiliated with the EU.
Economic Analysis of Ruritania
Structural changes have occurred in Ruritania concerning gross domestic product. The sectors that have grown most rapidly are construction, transportation and communication, manufacturing, electricity, services, and finance. Lower rates of growth have prevailed in agriculture, mining, and trade. In terms of percentage shares, the most striking change has been a decline in the share of agriculture and a rise in the share of industry (Mintzberg, 2003). The economic issues that the company is likely to encounter in its global expansion are stiff competition especially on prices, seasonality issues and high capital requirements. Stiff competition is likely to emerge from manufacturing companies that have been in operation for a long time in Ruritania. The enhancement of transport and communication network will benefit the country as it expands into Ruritania. This calls for different strategies for entry into the market. In general, the goal is to seek a mixed strategic alliance.
In the theory of economic development, great emphasis is placed on the size of investment and its share in the GNP. For the last five years, the annual growth rate for Ruritania averaged about 6% per annum although a substantial decline was observed last year. It is expected that the rate of growth will soon pick up and may even exceed the 6% recorded in the last five years. This high rate of economic growth will be a benefit to the new company because as the economic growth increases the capita income also rises implying that consumers will have more disposable income to purchase the company’s products. Over the last five years, the country has been experiencing a stable rate of price inflation estimated at 5.2% per annum. The ratio of gross fixed domestic investment to GNP hovered around 13% from 2000 to 2008. These high ratios on investment to GDP for Ruritania have been challenged by several economists. The rapid growth in GDP during this period implies a rather high investment ratio. This follows from the definitional relationships among the capital-output ratio, the investment ratio, and the rate of growth in GDP. If the estimates for GDP were increased and those for investment reduced, the result would be to reduce the already low values (Goldsworthy, 1998).
Financial Sector
Ruritania has a well-developed financial sector with privatized and government participation. The banks are stable enough to sustain the growing economy. Microfinance institutions have emerged in the country giving support to the small scale traders who are distributed all over the country. The insurance companies are stable enough and can handle big losses without going under. At the same time, there are reinvestment insurance companies in the country which help in maintaining stability even further. The banking sector has enabled firms to get loans at favourable rates (International Centre of Research and information on Public and Co-operative Economy, 2010).
The economic crisis that hit the country proved a lot about Ruritania; it has been described as one of the countries in Europe that were able to record a sensible economic growth rate after the crisis. The commitment to international specialization does require Ruritania to expand its capacity to export if it is to sustain its momentum of growth. A reduction in foreign exchange receipts, for instance, because of a fall in exports or a reduction in military activities, could force a contraction in domestic investment in order to bring imports down. Similarly, plans for continued growth in investment expenditures may have to be scaled down unless exports grow. It is for this reason that a policy of promoting industries solely to supply the domestic market may create difficulties in the future (Puri, n.d).
Ruritania International Market
International business is the exchange of goods, services or capital between different countries. It has been in existence many years ago although much of its significance has been recognized recently. There is some evidence from both small and large countries of the benefit of international business. As nations come together, citizens benefit from access to a wide variety of goods and services, increased employment opportunities and improvements in health and standards of living. In a period of about twenty years, a big number of countries have entered into global economies leading to a reduction in the number of people living in poverty.
The benefits of international business come along with some risks. These are a result of capital movements among nations. IMF employs policies from time to time that helps nations to manage some of these risks. It offers technical assistance in some of the macroeconomic policies, the exchange rate and the financial sector. Governments are finding it difficult to respond to their domestic issues as they used to do. There have been many trade agreements that influence the performance of member countries and which put restrictions on the use of their monetary policies. These governments have to rely on the international monetary fund for regulations. Poor nations are becoming poorer day in day out because of the low comparative advantage they have in international trade. They have to rely on the World Bank for aids and grants for development. This may have adverse effects for the company as it expands into Ruritania. If Ruritania experiences an increase in its inflation rates, the buying power of consumers will be reduced due to the increased price and this may affect the company that is planning to expand to this country as it may suffer losses especially during its introduction stage.
As the company expands, into new territories, it has to expand its risk management and contingency plans to suit the local laws and conditions of Ruritania. Most countries have similar laws when it comes to discrimination and ethical practices. Ruritania is a fast-developing nation trying to implement and adhere to the same global policies. Some identified risks the company needs to be aware of arising from the following:
- Discrimination lawsuits through employee malpractice,
- Corporate social responsibility issues, and
- Ethical dilemmas
These risks are going to have a negative impact on the company. It may spend a lot of money and time on lawsuits and labour relations matters, not to mention, its requirement to uphold social responsibility. Moreover, before it starts operating in Ruritania, it will have to send some staff to survey the area and even to make the establishment which will not only be an expensive process but the staff may be treated as expatriates.
In Ruritania, the income elasticity of demand for imports is high, and the current account deficit typically expands during economic booms. If the public deficit was driving these events, one would expect to observe a positive relationship between fiscal impulse and the current account deficit. Between 2005 and 2009, the relationship between fiscal deficits and external deficits was positive. However, after 2009, the relationship was negative, since strong economic growth also generates higher tax revenue from business and sales taxes. Furthermore, increased imports also resulted in high tariff revenue. Since the strong economic growth was due to export and investment growth rather than fiscal stimulus, the unplanned fiscal impulse moved inversely with the current account deficit (Mobuis, 2006).
From 2005 on, Ruritania was enjoying an economic boom led at least in part, by external events. If adjustments were not demonstrably in place by then, some doubt must remain as to whether Ruritania adjusted significantly at all. If not, then it might reasonably be thought that Ruritania was simply lucky. It could then be said that Ruritania borrowed its way out of the need to adjust to the terms of trade decline of the 1990s and early 2000s and that it was saved from long-term consequences of this non-adjustment by an externally led boom (Macdonald Fraser, 1974). If the country incurs an increase in interest rate, the buying power and lending ability of financial institutions will be reduced. A high-interest rate would mean a high cost of investments and this can be detrimental to the UK company in Ruritania.
Fiscal & Monetary Policy
At a theoretical level, fiscal policy is more likely to be effective under a fixed exchange rate regime than under a flexible exchange rate. Fiscal policy, therefore, seems good for a significant stabilizing or destabilizing role in the Ruritania context, as has indeed been suggested in the literature on Ruritania’s adjustment experience. Ruritania’s consolidated public sector consists of the central government, local government, and public enterprises. The fiscal position of the consolidated public sector is dominated by that of the central government. The deficits of the public enterprises have on average been smaller than those of the central government and have tended to move with them. Local government deficits are insignificant. Ruritania’s boom was fuelled by unprecedented levels of foreign and domestic investment. Overheating was avoided through a fiscal contraction in which large fiscal surpluses offset the domestic monetary expansion that would otherwise have resulted from the conversion into baht of the large current account surpluses in the hands of the private sector (Willis & Primack, 1977). After 1990 this boom slowed, because of domestic political conflict and also the growing congestion of infrastructure facilities overburdened by the pressures resulting from the boom.
Both fiscal and monetary aggregates seem to have been expansionary during periods of low inflation and low growth, and contractionary in the reverse. The country has a high literacy level. The level of skills is high and our company is likely to benefit from low labour costs. This high level of literacy is facilitated by the government’s spending on education (International Institute for educational planning, 2006).
The table below shows how the government expenditures are distributed in the education sector.
Government spending on education in 2001 (in millions of US $).
In the calculation of the percentage allocation of public education expenditure (Column 6) and the unit costs (Column 7) per level of education, expenditures for the central administration and miscellaneous items were distributed among the various levels of education in proportion to their direct expenses.
Government spending in Ruritania will affect the company in that; it will have access to a skilled and cheap labour force as the government has devoted itself to educating the citizens. Also, the government is willing to spend on other social amenities and this means that citizens will have more money to spend on other things. This might increase demand for the company’s products.
Ruritania in the European Union
Since its origin, the EU has been experiencing issues in politics brought about by its enlargement. EU membership has increased drastically from 6 member states to the current 27 members. This increase was highest in 2004 when 10 states from central and Eastern Europe joined the union. These enlargements have had both economic and political impacts. Patterns of integration have been affected on matters of security, economic development, and the levels of agriculture. The majority of the states that have recently been incorporated in the union are poorer than the existing ones and have contributed to the drain in the economy. Most of them are not ready to adopt the euro making it even harder for the monetary and economic union (El-Agraa, 2007).
Most of the EU member states have a declining GDP as a result of the increase in the population of the old people (65 and above) than in the young ones (0-15 years). Although Unemployment rates have declined, we still have a high number of young people being unemployed. If something is not done to improve employment among the youth, most of the countries will be at higher risks of poverty. Ruritania has a large economy, and it is believed to be among European’s largest military forces and this will influence the EU’s current position in a great way. It has a strategic geographical location and economic stability and still holds some of the cultural ties which give it regional power. Since the 1930s, the EU has been experiencing periods of economic recession which is expected to continue with a shrinking GDP. In December 2008, the European Economic Recovery Plan (EERP) was launched which was to help restore and stabilize the economy. The main objective of EERP was to restore economic confidence through strategic investments and improvement in business and labour markets (European Commission, 2009). The commission carried out an analysis which reviewed that unless policies were implemented to tackle the challenge, EU’s GDP could fall to significantly low levels.
Factors that could lead to this are:
- high levels of unemployment which leads to loss of skills
- Low investment levels will result in a decrease in the stock of infrastructure and equipment or become outdated.
- Research and development may be cut back which will result in low levels of innovativeness (Brady, 2010).
It is believed that by fully becoming an EU member, Ruritania will achieve regional power which will not only benefit it economically but also its military force. This would be a benefit to our company as it expands into Ruritania. EU is one of the major universal economic players, being affiliated with it adds economic benefit to that country. Ruritania’s strategic geographical location will also be of benefit to the nation. The artistic and extraordinary ties in the country provide a comparative advantage to Ruritania compared to the other members of the EU.
In times when the company is faced with a lack of competent staff locally, it can easily access them from any of the members of the EU if Ruritania becomes a member. It benefits from expanded markets internationally where the country can sell or purchase products without difficulties. Citizens will have a wider variety of goods and services to choose from (Levy, 2010). These expansions in the markets will lead to improvement in economic development and living standards. Ruritania will be able to minimize the level of its unemployment because many of the qualified workers who are unable to secure employment places locally can be allowed to work temporally in any of the other countries. Ruritania is a developed nation that stands to enjoy most of the benefits in the union. Such benefits are a competitive advantage over the other nations due to its growth in the economy, availability of labour force and high chances of economic growth due to immigration. It will also benefit from regional integration and access to a skilled labour force. The company will have to abide by all state and local laws and enact a complicit information security policy, which will encompass all their corporate culture as a whole and be applied to all-new locations. Its risk management plan will have to include training sessions for all managers on good ethical decision-making. Management needs to be taught contingency plans for looming risky situations and the steps necessary to mitigate them.
Conclusion
The analysis described above can help in the determination of our company’s market growth (or decline) in Ruritania and the implication of its strategic business unit. If an economic recession occurs, the economic forces may have a considerable bearing on the future market strategies through ripple effects on the political and socio-cultural factors. Political factors put a restriction on the development of the industries by putting tough taxes and regulatory requirements. However, through the above analysis, it is clear that Ruritania is a viable country for any investor to consider venturing into it. It has a strong economic position and also the political situation is stable.
Although it is a good idea for the country to join the EU, there are negative effects associated with that absorption. First, currently, EU has enlarged at a very high rate and it is congested with members. Its economy has gone down, and it is at the stage of recession which will take a long time before recovery takes. Upon joining this union, Ruritania will suffer from economic depression because most of the citizens in other countries who have been affected by the recession will tend to seek refuge in Ruritania thereby straining its economy. This will lead to negative sequences for the company. If a new government takes over and changes the existing policies, this would be unfavourable to the organisation as it would lose a significant amount of money, also if there is an increase in tax and interest rate the organisation pays out more and this might have negative impacts to it.
References
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