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Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
Business IA for LA Soverign
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Business IA for LA Soverign

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  • 1. Should LA Sovereign pursue verticalintegration by opening a assembly line in India to reduce product costs? Student Name: Methika Gandhi Student (IB Session) Number: 000307123 Subject and Level: Business HL Internal Assessment International School Bangkok Teacher: Mr. Jonathan Lorence Date of Submission: March 8, 2012 Word Count: 1,652 1
  • 2. Contents PageAcknowledgment Page................................................................................................................... 3Executive Summary (Abstract)....................................................................................................... 4Research Proposal....................................................................................................................... 5-6Introduction..................................................................................................................................... 7Procedure....................................................................................................................................... 8Main Research and Findings....................................................................................................... 9-10Analysis and Discussion.............................................................................................................11-13Conclusion and Recommendation..................................................................................................14Works Cited and Consulted............................................................................................................15Appendices................................................................................................................................ 16-19! Appendix 1: PESTLE chart of Investment Options! Appendix 2: Interview with Rohti Kalra, owner of LA Sovereign! Appendix 3: Assemble or Buy Decision! Appendix 4: Estimated Costing for Assembly Line! Appendix 5: Fixed Monthly cost per month! Appendix 6: Assemble and Cost Decision Calculation 2
  • 3. AcknowledgementTo Whom It May Concern:I would like to acknowledge the following:○ Mr. Rohit Kalra, the managing director of LA Sovereign, for his patience, time and assistance incompleting this investigation project. Also for his trust in giving me financial information about hisbusiness.○ Mr. Sujeev Gandhi, business partner of LA Sovereign, for his time and expertise in helping mewith the investigation project. Without whom I would not have been able to produce a successfulreport.Sincerely,Methika GandhiIB Business StudentInternational School Bangkok 3
  • 4. Executive SummaryWith the competitive environment in the indian bicycle market, LA Sovereign India Pvt. plans toincrease it market share. The managers are looking to achieve this by reducing cost and thereforereducing selling prices.They are planing to do this by pursuing vertical integration (Kalra).Therefore it brings up the question:Should LA Sovereign pursue vertical integration by opening a assembly line in India?Currently, the company is importing fully-assembled bicycles from Thailand and China and thetransportation cost can go up to 40% of the total cost per unit. They are selling about 3,000bicycles per month (Kalra). However, all the quantitative data, including the payback periodanalysis and break even analysis, does not support this proposition since the business needs tosell about 4,000 bicycles per month for the investment of a assembly factory to be worthwhile. Thismeans that the firm has to increase their sales by 33% to be successful.Based on the evidence provided it is recommended that LA Sovereign should follow through withtheir plan of vertical integration. They should target to increase their unit sales by reducing sellingprices. The increase in the number of bicycles sold will make the assembly factory viable will openup new opportunities for the company.Words: 200 4
  • 5. Research ProposalResearch Question: Should LA Sovereign pursue vertical integration by opening a assemblyfactory in India to reduce product costs?Theoretical FrameworkRationale for StudyThe objective of the investigation is to access whether the expansion from the tertiary sector to thesecondary sector is worthwhile for LA Sovereign. With an increase in competition the firm islooking to reduce their prices to sustain a competitive advantage and increase market share. Theyare assuming that by pursuing vertical integration, opening an assembly factory in India instead ofimporting fully assembled bicycles from Thailand and China it would allow the firm to reduce thecost of transportation. However, investing in a new assembly line will result in higher start upinvestment and also higher departmental costs.Areas of the Syllabus to be Covered1.6 Organizational Planning Tools- Force Field Analysis, Cost-Benefit Analysis3.2 Investment Appraisal- ARR, payback period, NPV5.3 Break-even analysis5.7 Make-or-Buy DecisionsMethodologyPrimary ResearchQualitative:○ Interview with the manager by telephone to gather background information and the firm’s currentobjectives and potential problems. A SWOT and PEST chart will be constructed based on theinterview.Quantitative:○ Personal meeting with the business partner to obtain financial data to be used in theinvestigation and to ask question based on the given information. The accessibility of the partnerwould allow for more in depth analysis discussions.Secondary ResearchQualitative:○ Labour law regulations, duty structure of importing parts, and regulation of establishing aassembling factory are all required to evaluate the question.Quantitative:○ A historical financial statement regarding total revenue, total costs, retained profits and costs oftransportation will provide. Graphs and charts will be constructed based on the financial data 5
  • 6. Anticipated Difficulties Potential Problems Potential Solutions Difficulties consulting with owner who Let the owner schedule the interview and prepare resides in India questions to make use of the limited time. Also by interviewing the business partner who lives in Thailand when necessary since sometimes personal interviews are more suitable. Owner being biased with his answers in Interviews will be conducted between the owner and order to uphold the image of the firm partner to receive more than one perspective. The firm’s annual reports are not published Assurances were given to the owner that this report will online therefore will be opinionated not be publicized therefore there is no reason for the financial reports to be inaccurate.Action Plan Task & Description Deadline Actual Date Comments/ Modifications (mm/dd/yy) Completed Potential thesis questions 11/16/11 11/15/11 Obtain background information 11/20/11 11/17/11 Primary Research: First interview date 11/26/11 11/26/11 Interview was through Skype since the manager resides in India Research proposal 12/07/11 12/07/11 Secondary Research: Obtain financial 12/15/11 12/10/11 data Primary Research: Second interview 01/10/12 01/10/12 date First draft 02/01/12 01/31/12 Submit final draft 03/08/12 03/08/12Word Count: 494! 6
  • 7. Introduction! LA Sovereign India Pvt. is a company established in 2006 which operates in the tertiarysector selling bicycles in the indian market. They aim to satisfy their consumer’s wants with a widerange of high quality durable bicycles (LA Sovereign). The firm entered a niche market when firstopened since they were the only of premium bicycle importers. The competition consisted of smallscale importers of cheaper quality and large local manufactures (LA Sovereign). However, recentlyother premium branded companies have been introduced in the market. With heavy competition,the company’s objective is to increase market share by decreasing product costs. Therefore:Should LA Sovereign pursue vertical integration by opening a assembly factory in India?! Currently, the company is importing fully assembled bicycles from Thailand and Chinainstead of in a knockdown state. This is done to avoid the risks of wholesalers switching local orcheaper parts if the bicycles came in a knockdown state therefore damaging the brand image(Kalra). However, the transportation costs of fully assembled bicycles are very high and can go upto 40% of the total cost of the bicycle. By importing spare parts and assembling in India the cost oftransportation will decrease and also the import duty of spare parts is lower than fully assembledbicycles (Kalra). Additional investments and costs of running a factory should also be taken intoconsideration in order to determine weather the investment will be worthwhile. 7
  • 8. ProcedureThis investigation consisted of both primary and secondary research. Firstly, an interview wasconducted with Mr. Rohit Kalra, the owner of LA Sovereign Pvt. Ltd. The interview done through avideo conference since he resides in Ludhiana, India. It was initiated through the use of a range ofopen-ended questions to understand in depth the company’s current market position and theircurrent objectives. However, an in-depth face-to- face interaction interview was also needed todiscuss financial information therefore an interview with a business partner Mr. Sujeev Gandhi wasalso conducted. Through both responses, the internal and external factors affecting the operationof the business were discovered. These were analyzed and led relevant opportunities and threatsfor LA Sovereign, which in turn led to the development of both SWOT and force field analysis.The secondary research consisted mainly of analyzing the financial data including the firm’sbalance sheet. The data was obtained from the business partner after the interview. Thesefinancial datas are reliable sources since they have been accurately calculated. In addition, thefirm does not publish their annual report therefore it can be assumed that the firm have notmanipulated the figures to look more flattering for the company image. Lastly, additional secondaryresearch on importing fully assembled bicycles was conducted. 8
  • 9. Results and Analysis Interview: - LA Sovereigns current objective is increase market share which can be achieved by reducing product cost and therefore sale prices. - By entering the secondary sector, perusing vertical integration, the firm will be able to import a great volume of bicycle parts. The import duty rate will also decrease since they are not importing fully assembled products PESTLE Analysis From the information provided by both the owner and partner of LA Sovereign a PESTLE chart was constructed that list external factors that will influence the expansion of the firm (Appendix 1). Firstly, India and Thailand are in the process of concluding the Free Trade Agreement (FTA) which will decrease bicycles import duty. This will allow the firm to benefit more from opening an assembly factory in India. However, import duty is unpredictable as they are constantly fluctuating. If the import duty is high it will result in an increase of the overall product. However, low import duty means greater competition and local firms may begin to import their goods from foreign countries as well. Currently, the transportation cost can go up to 40% per unit therefore the import duty fluctuation has a large impact on LA Sovereign’s bicycle prices. Force Field Analysis Figure 1: Force Field Chart Opening an Assembly Line Factory in India Driving Forces Score Restraining Forces ScoreMore control over running of 3 High cost of investment, 3the firm which may cause short term liquidity problemShorten lead time 3 Proposal to Change: Entering local assembling 4Raise volume of output 2 To open a factory to market may damage brand pursue vertical imageKnowhow from current 1 integrationsupplier Risk of not being able to 2 maintain the high qualityReduce product prices 4 standards in IndiaReduce inventory 2 Total: 15! ! ! ! ! ! ! ! Total: 9 Source: Interview with Owner and Partner (Appendix 1 & 2) 9
  • 10. By analyzing LA Sovereign’s force field analysis it indicates that the driving forces outweigh therestraining forces significantly by 15 to 9. In addition, the business’ objective to reduce productprices is included in the driving forces. It is therefore unnecessary for the business to raise thedriving forces and to proceed with expanding the company.Nonetheless, it is possible for the business to lower the constraining forces. The restraining forcesconsist of the initial investment cost of opening an assembling factory and loosing the firm’simported brand image. The company’s brand image is consider to be the most important factor asit is given the greatest score. The firm can control this by gathering samples of the company’sconsumer demographic to accurately predict the potential outcome. Secondly, the small risk of notproducing the same high quality standards could be solved by acquiring the knowhow from thecurrent supplier since LA Sovereign’s main supplier is a shareholder (Kalra). The advice will allowfor a great start.Break-Even Analysis Figure 2: Break-Even Graph 1000 750 500 250 0 Bicycles 2000 4000 6000 8000 10000 Cost Saving in Rupees Costs of Production in Rupees Source: Financial Report provided by LA Sovereign ( Appendix 4)According to Mr. Rohit Kalra, the company would save about 300 rupees per bicycle (appendix 1).This comes from savings of the freight charges and the lower import duties. The cost ofassembling the bicycles in India will come to as follows. 10
  • 11. According to the break even chart, the more bicycles they are able to sell the larger the saving perbicycle they can achieve. If LA Sovereign assembles 3,465 bicycles per month they would breakeven. This means that they need to sell more than this in order to have any reduction in their costswhile taking into account of diseconomy of scale.Payback on initial investment of the assembly factory in India Payback on initial investment (years) = initial investment / (Import Cost Savings per Unit - (Fixed monthly cost per unit - Variable cost per unit) x number of units per month) / 12 Units Years 3000 10.16 4000 3.16 5000 1.87 1000 0.61 Title 11.0 8.8 6.6 Years 4.4 2.2 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Bicycles 11
  • 12. LA Sovereign is currently selling 3,000 bicycles per month. At this rate it is predicted that it will takethe firm 10.16 years to payback all initial investments. However, if LA Sovereign could increasetheir sales to 4,000 or more bicycles then their payback period will be significantly shorter.The manager of LA Sovereign expects that due to new advancements in technology the assemblyplant could be obsolete within 5 years. Therefore they feel very strongly that they need to be ableto recover their investments before that time. From the information provided, if the firm is able tosell about 3,500 bicycles per month they should be able to achieve this.As long as the company sells more than 3,465 bicycles they will be able to lower the cost ofbicycles. If they reduce their selling price they should be able to increase their sales. As the salesincreases their costs will be lower which will to maintain their current profit margin.Non-Financial AnalysisLA Sovereign differentiates itself from their competitors by providing a wide range of importedbicycles. However, by opening an assembly line in India it is highly possible for the firm to loosetheir prestige brand image. Furthermore, there is also a high investment cost which also includeshiring and training new employees. This can be costly and time consuming and would take yearsto pay off all costs in addition to the initial fixed cost of the factory itself. The company can offsetthis by conveying to their consumers that the assemble factory has the knowhow from their originalsuppliers who are also shareholders in the company.By pursuing vertical integration LA Sovereign would gain more control over the running of thebusiness. This means that the company would be more responsive to customer demands becausethey will be able to supply products in the color and style that in is currently in demand. By beingflexible in their production they will need to carry less inventory.In the past, import duty of LA Sovereign’s bicycle has been a major legislative threat to the firm.The only way to reduce this risk is to import bicycle parts instead of fully assembled bicycles. Thisis because the import duty of spare parts is 3% lower than the fully assembled bicycles. 12
  • 13. 13
  • 14. Conclusion and RecommendationLA Sovereign India Pvt. has an objective to expand to their business by opening an assembly linein India to reduce product cost. Using all quantitative data, including the payback cost and thebreak even analysis, the data shows that at their current sales level of 3,000 bicycle per month it isnot advisable for the firm to pursue vertical integration. However, if they are able to increase theirsales to more than 3,500 bicycles it would be possible to lower their costs. This would in turn allowthem to lower their prices and further increase their units sales while maintain their profit margin.This investigation consists of limitations that are to be noted. The data was based on costestimations provided by LA Sovereign. Any changes in these figure could effect the financialanalysis and could alter to recommendations of this report to a certain extent. Also there is apossibility that the firm will encounters external factors that would fluctuate costs positively ornegatively.Using the information provided I recommended that:• LA Sovereign’s should should follow through with their plan of vertical integration. They shouldstart up their assembly line and at the same time aim to increase unit sales by about 33%. Thiscould be achieved by lowering their sales price and become more competitive. The companyshould not wait for the reduction in cost before they reduce their selling price. Along with anaggressive marketing campaign, the increase in unit sales is highly possible because the companywas established in 2006 the has since been had yearly growth in sales of 15%-20%.•With the vertical integration many other opportunities will open up for the company. Firstly, sincethey are assembling bicycles themselves they will in a better position to cater to the market’sneeds. They should therefore use this flexibility to increase sales by doing market research andidentifying the colors and models that is in demand and supplying it to them.Secondly, with the knowhow that is provided by their suppliers they could be in a position toeventually export bicycles to markets outside of India. This would create further growth for thebusiness. 14
  • 15. Works CitedGandhi, Sujeev. Personal interview. 1 Dec. 2011.Kalra, Rohit. Telephone interview. 26 Nov. 2011.LA Sovereign Bicycles Pvt. Ltd. “Company Info.” LA Sovereign (2006/0 Pvt. Ltd. Web. 17! Nov. 2011"Thai-Indian FTA to be concluded mid-2012." www.nationmultimedia.com. The     Nation, 29 Jan. 2012. Web. 29 Jan. 2012.     <http://www.nationmultimedia.com/business/     Thai-Indian-FTA-to-be-concluded-mid-2012-30174709.html>. Works ConsultedHoang, Paul. Business and Mangement. Melton: IBID, 2007. Print. 15
  • 16. AppendixAppendix 1: Interview with Rohti Kalra, owner of LA Sovereign1. Can you please briefly background on LA Sovereign.LA Sovereign is the only business in India sells a wide range of fully manufactured bicyclesimported from China and Thailand. The mission of the firm is to simply make the bicycles moreaccessible to their customers.2. What are the current strategic aims and objectives that LA Sovereign follows overall?The current objectives are to sustain a competitive advantage of being the one imported bicyclesaffordable to all consumers. Also to maximize profit by reducing costs possibly by pursing verticalintegration.3. What are some of the Strengths, Weaknesses, Opportunities, and Threats is LA Sovereigncurrently facing?Strengths! ! ! ! ! ! ! ! ! ! ! !Design innovation- compared to competitors in the Indian market the business’ designs and qualityare betterClose tie up with supplier- the main supplier is the shareholder of the firm able to give advice whenthe LA Sovereign opens their own factoryWeaknessesHigh cost of transportation for fully assembled bicycles compared to importing partsLong lead time- goods are produces in foreign countries which requires to firm to produce longterm forecast which can be riskyOpportunitiesPotential decrease in duty tax since Thailand and India are working on the Free Trade Agreementhowever LA Sovereign is not sure if bicycles will be includedHigh growth in Indian economy therefore there is more potential for the company togrow ! ! ! ! ! ! ! ! ! ! ! ! !Middle class and upper class are expanding and more customers will be willing to spend onpremium bicyclesThreatsDuty tax are unpredictable – low tax rate means great competition and local firms may begin to import their goods – hightax rate will result in expense goods4. What are some potential external factors LA Sovereign may face by pursuing vertical integration(PEST)?In addition to what was mentioned earlier (appendix 3), new material such as steel, carbon andalloy will allow bicycles to become lighter; however, it will increase the overall cost of production.5. What is the current market position of LA Sovereign? Who are the firm’s major competitors?LA Sovereign’s main competitors consists of Hero and TI (Tube India) which are domestic firmsplus Trek and Firefox which also import their products from foreign countries. The competitivenessof the market is very high; however, there are no sign of threat of substitutes since LA Sovereignhas a competitive advantage in selling wide range of bicycles. 16
  • 17. 6. How much will you save if you import knockdown parts instead of fully assembled bicycles?We would save about 300 rupees per bicycle. This comes from savings from the freight chargesand the lower import duties.Appendix 2: Interview with business partner, Sujeev Gandhi1. What knowledge do you currently have on the expansion of our firm?The all the estimate financial data provided it for a potential of the factory that could assemble upto 10,000 bicycles per month.2. What is the predicted costs and utility of opening into the manufacturing sector?(data provided in appendix 4)Appendix 3: PESTLE chart of Investment Options Political - India and Thailand are working on the Free Trade Agreement (FDA). Since LA Sovereign is the only importer of bicycles from Thailand it will benefit them. Economical - High growth in Indian economy therefore there is more potential for the firm to grow Social - Middle class and upper class is expanding and will want to purchase premium bicycles Technological - New materials such as steel, carbon and alloy can be used to produce lighter bicycles - Necessity for innovative designs will increase overall costs Legislative - Duty tax are unpredictable 1. low import duty means great competition and local firms may begin to import their goods also 2. high import duty will result in higher cost of goods - There is a 3% difference in duty tax when importing bicycle part compared to fully assembled ones Environmental N/A 17
  • 18. Appendix 4: Financial Information on the Investment Provided by the CompanyFigure 4.1: Initial Investment US$ Exchange Rupees Rate Assembly line 100,000.00 52.00 5,200,000.00 Paint Booth 35,000.00 52.00 1,820,000.00 Installation Cost 5,000,000.00 Other Fixed Assets 2,000,000.00 Total 14,020,000.00Figure 4.2: Fixed Cost per Month Workers Per Person Rupees Salary 20 10,000.00 200,000.00 Utilities 200,000.00 Rent 250,000.00 Total 650,000.00Figure 4.3: Variable Cost per Unit Rupees Paint 15.00 Packing 20.00 Miscellaneous 10.00 Total 45.00Figure 4.4: Import Cost Savings per Unit Rupees 1 300 18
  • 19. Appendix 5: Cost Decision CalculationFixed monthly cost per unit = fixed costs per units (from figure 5.2) / number of unitsAppendix 6: Cost of Assemblycost of assembly = variable costs + (fixed costs / units assembled) + ( depreciation*/ unitsassembled)* depreciation is calculated by the taking the initial investment divided by 60 months since the firm wants to depreciate the factory in five years 19

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