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Person1 (Addressing Q1):
Bicker AG has decided to expand into Latin America and now needs to select three countries out of seven potential candidates.
Our methodology for helping Bicker AG to make the selection is based on:
- Market potential,
- The ability to diversify the Macro-economic risk, and
- The country’s specific business and political risks
For the Market potential, we rated each candidate countries based on a number of relevant factors provided by the Zurich Risk Room. This table summarise the result. (It shows) Mexico has the best potential for growth, while Argentina is expected to yield least return.
One of the key reasons for expansion outside Europe is to diversify Economic Risks. We rank the countries based on their ability to diversify Euro-zone (slow down) risk and Business cycle risk. In this snapshot, the green line, Mexico, is the best in for Euro zone slow down and Business cycle indicator risk, while Venezuela, the red line, is adding to the overall Business cycle indicator. This summarises the result. Mexico is best country for diversifying both Euro-zone slow down and business cycle risks.
For political and business risk of the candidate countries, we weighted the risks based on their relevance to Bicker AG’s business and how easily they can be mitigated, and then calculate their overall risk ratings. This table shows the result. Our rating and Zurich Risk Room metrics actually give the same ranking of the candidate countries (and this gives us a lot confidence in our results). In this case, Uruguay is the least risky country. Furthermore, Uruguay and Ecuador actually have the best improvement in their overall riskiness between 2007 and 2014.
Person2 (Addressing Q1 cont):
The final phase involves the aggregation of all the above parts of the analysis.
Clearly, it is evident that Venezuela and Argentina are not good candidates and Mexico is the best (choice) among the seven countries. Now, the remaining four countries carry their own merits. Columbia and Brazil have a very good market potential and are the most effective among the four in diversifying macro-economic and market risks. Uruguay has the lowest risk level and Ecuador has the best risk improvement over the years.
However, we still recommend Brazil and Colombia because (we believe that) Bicker AG's primary objectives are to achieve growth and minimize the risks arising due to factors such as Euro-zone slowdown. By considering expansion to Latin America, Bicker AG acknowledges the higher risk level in the region. Otherwise, they might as well expand in Europe (i.e. move into other European countries). Having said that a risk adverse company might as well choose Uruguay .Similarly, Ecuador can be a very attractive place for future expansion if its risk level continues to improve at the current rate.
This now brings us to Comparative analysis of our three options (Mexico, Columbia and Brazil) with regards to Bickers' current markets. Firstly, they are the least affected markets due to Euro-zone crisis and also effectively diversify the risks arising due to Business Cycle. Secondly, the risk levels are slightly higher than the current countries and almost equal to the recent countries into which bicker AG has made investments .However, the potential offered by the three countries is much higher than its current markets.
Person 3 (Addressing Q2):
In the three countries Brazil, Mexico & Colombia, the risks to which we have assigned higher weight-age during our rating process have been potentially eliminated. Some of the existing risks, on the surface these risks seem to be high, but can potentially be mitigated.
Burden of Government Regulation in Brazil & Colombia can be mitigated using risk sharing through setting up Joint venture with local players who can navigate the local procedures.
The Burden of Custom Procedure (in Brazil) can be mitigated through Risk Reduction by Localization of the raw materials. This would increase dependence on local suppliers, but this is acceptable because the risk of rising food price in Brazil is low.
Organized Crime and High Income inequalities risk in Colombia & Mexico can be mitigated through risk avoidance strategies by locating the factories and warehouses in crime free (and more developed urban) regions .
There is Poor transport Infrastructure in Colombia & to a certain extent in Brazil. This can be mitigated through contracting with local third party logistics service provider. This is acceptable due to the low contract risk in Colombia.
Person 4 (Addressing Q3):
Zurich Risk Room offers general risk profile about the countries. Bicker AG should also exercise further due diligence for deciding whether to enter a prospect country.
First of all, Bicker AG needs to conduct research on the market status and profit margins in the retail industry of the prospect country. This research will allow Bicker AG to know the competitive environment, customer’s preference and estimated sales and profit that can be expected from investing in the country.
Then, if there the data is available, Bicker AG should analyse cost advantage and Willingness to Pay (WTP) to address where its competitive advantages lies. This can allow Bicker AG to better leverage its strengths and shape strategies.
Bicker AG can also research about the business model of existing players, and both the successful and failing cases of foreign direct investment in the prospect countries. This will allow Bicker AG to understand what changes to it need to make to its current business model. This would, in term, help the company to know whether to adopt a joint-venture or not, and how much localisation is needed.
1. Zurich Risk Room
2. Data provided by World Bank, World Development Indicator (http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_),
3. Pankaj Ghemawat and Sebastian Reiche,National Cultural Differences and Multinational Business, (http://www.aacsb.edu/~/media/AACSB/Publications/CDs%20and%20DVDs/GLOBE/r...)
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