1. Nokia Lumia 920
27
Table of Contents
HYPERLINK l "_Toc348360634" 1. Executive Summary 4
HYPERLINK l "_Toc348360635" Introduction 4
HYPERLINK l "_Toc348360636" 2. Corporate Profile and
Nature of Business 4
HYPERLINK l "_Toc348360637" Company Background 4
HYPERLINK l "_Toc348360638" Description of Business and
Product 5
HYPERLINK l "_Toc348360639" Core Competencies 5
HYPERLINK l "_Toc348360640" Description of Product 5
HYPERLINK l "_Toc348360641" Key Milestones 6
HYPERLINK l "_Toc348360642" Background for Exporting 6
HYPERLINK l "_Toc348360643" 3. Management and Human
Resources 7
HYPERLINK l "_Toc348360644" New Export Structure7
HYPERLINK l "_Toc348360645" Senior Management Roles
and Background 7
HYPERLINK l "_Toc348360646" External Expertise 9
HYPERLINK l "_Toc348360647" 4. Target Market and
Environmental Scan 10
HYPERLINK l "_Toc348360648" Environmental Scan 10
HYPERLINK l "_Toc348360649" Gross Domestic Product
(Purchasing power parity) 10
HYPERLINK l "_Toc348360652" Inflation rate (Consumer
prices) 10
HYPERLINK l "_Toc348360654" Business Climate for the
phone industry 11
HYPERLINK l "_Toc348360655" Major Commercial Risks 12
HYPERLINK l "_Toc348360656" Consumer Profile 12
HYPERLINK l "_Toc348360657" Nokia’s Ability to Meet
Market Demands 12
2. HYPERLINK l "_Toc348360658" 5. Market Entry and
Marketing Strategy 12
HYPERLINK l "_Toc348360659" SWOT Analysis 13
HYPERLINK l "_Toc348360660" Product, Place, Price and
Promotion Strategy 14
HYPERLINK l "_Toc348360661" Criteria of selecting Export
Partner 14
HYPERLINK l "_Toc348360662" 6. Operations Overview and
Supply Chain Management 15
HYPERLINK l "_Toc348360664" Key Changes as a Result of
Exporting 16
HYPERLINK l "_Toc348360665" Maintenance of Competitive
Advantage 16
HYPERLINK l "_Toc348360666" 7. Financial Analysis and
Risk Management 17
HYPERLINK l "_Toc348360667" Financial plan 17
HYPERLINK l "_Toc348360668"Pre-operational costs 17
HYPERLINK l "_Toc348360669" Working capital 17
HYPERLINK l "_Toc348360670" Proforma profit and loss
account 18
HYPERLINK l "_Toc348360671" Export Cost Accounting 19
HYPERLINK l "_Toc348360673" Impact on Company’s Cash
Flow20
HYPERLINK l "_Toc348360676" Financial requirements 21
HYPERLINK l "_Toc348360677" Payment Method 21
HYPERLINK l "_Toc348360679" Profitability of Venture 22
HYPERLINK l "_Toc348360681" Risk Management Strategy23
HYPERLINK l "_Toc348360682" 8. Conclusion and
recommendation 23
HYPERLINK l "_Toc348360683" Conclusion 23
HYPERLINK l "_Toc348360684" Recommendation 23
HYPERLINK l "_Toc348360685" References 24
1. Executive Summary
3. Nokia Corporation is a Finnish company that deals in mobile
phone. It produces high quality phones which it supplies
worldwide. For a long period of time, the Company has been the
leading vendor of mobile phones. Its core competencies are
customer satisfaction, passion for innovation and continuous
learning.
Market Potential: The Company seeks to venture into the new
market of Casablanca. Grand Casablanca has an estimated
population of 3.85 million people majority (60%) of who are
between 15 and 60 years. The demand for smartphones in
Casablanca is high with Industry figures suggesting that there
are more than 600,000 smartphones in circulation, and annual
growth is more than 200%.
Manageable risks: Risks such as Shipment delays, incomplete
documentation and credit defaults and currency fluctuations are
all expected but manageable risks. This will be overcome by
the market entry strategy of partnering with local operators and
distributors.
Recommendation
The business plan should be presented to the senior management
for their deliberations. Upon approval, should begin to
incorporate the export structure. The position of Export
Operations Manager will need to be filled. Afterwards, suitable
local partners should be contacted so that its implementation
can start.
Introduction
This business plan aims to establish the feasibility of Nokia
4. entering the new market of Casablanca, the capital city of
Morocco to supply its new Smart phone Nokia Lumia 920. The
plan includes a detailed analysis of Nokia’s operational and
financial strength that would enable it to exploit the demand of
Smart phones in Casablanca.
2. Corporate Profile and Nature of Business
Company Background
Nokia is a Finnish Multinational Information and
Communication Technology corporation with its headquarters in
Espoo, Finland. Its main products are mobile phones, Smart
Phones and other portable telecommunication devices. It also
specializes in internet services, which includes applications, and
games development among other services.
Description of Business and Product
Nokia was the world's largest manufacturer and vendor of
mobile phones in 2011, with global market share of 23%.
However, this has been declining as a result of the growing use
of smartphones from its competitors such as Apple and
Samsung. Apples iPhones were highly demanded because they
were running on iOS while Samsung’s smartphones were
running on Google’s Android OS which were both user friendly
compared to Nokia’s Symbian OS. To counter the decline,
Nokia has had a strategic partnership with Microsoft, where all
Nokia smartphones will be running on Microsof6t’s Windows
Phone operating system replacing Symbian. As a result, Nokia
has unveiled a number of Windows Phone handsets with the
latest being Nokia Lumia 920. To expand its network, the
company has partnered with NOKIA mobile company as well as
Siemens Network to create what is now known as Nokia
Siemens Network.
Core Competencies
Nokia's has an official corporate culture manifesto called The
Nokia Way, which has enhanced speed and flexibility in
5. decision making. The company’s core competencies are rooted
in this manifesto. These are:
Customer Satisfaction: this quality has enabled the company to
win customer loyalty.
Passion for Innovation: this has enabled the company to beat its
competitors in the market.
Continuous learning: this has enabled the company to learn
from its mistakes as well as the mistakes of its competitors.
Description of Product
Figure 1: Nokia Lumia 920: The world’s most innovative smart
phone.
Nokia Lumia 920 is a smartphone developed by Nokia that runs
the Windows Phone 8 operating system. It was first released on
November 2, 2012. It has a 1.5 GHz dual-core Qualcomm Krait
CPU and a 4.5″ IPS TFT LCD which has a high-sensitivity
touchscreen which can be used with the gloves worn by the
user. It supports inductive charging (it can be charged by being
placed directly onto a charging pad). It also has a 8.7 megapixel
pure view rare camera with optical image stabilization for still
images and videos. It comes with 32 GB internal storage, but
does not support expansion using memory cards.
Key Milestones
Table 1:Key Milestones
Nokia N95 Smartphone
6. Nokia N97 Smartphone
Nokia N8 Smartphone
Nokia 808 pureview
Lumia 710 & 800
Released march 2009
Released June 2009
Released September 2010
Released September 2010
Released February 2012
Properties: 5 megapixel camera and sliding multimedia keys.
Properties: sliding QWERTY. (S60 5th
Properties: First Symbian 12 megapixelautofocuslens.
(Symbian^3)
Properties: Last Symbian smartphone features a 41 m .p. camera
and a 1.3 GHz CPU.
Properties: First running on Windows phone operating system.
Source: Nokia.com
Nokia has undergone many innovative steps before arriving at
Lumia 920 which is the world’s most innovative smartphone.
This has been a continuous improvement of its earlier phone.
This has seen it achieve key milestones like Nokia N95
(Released March 2009) all the way to Nokia 808 Pureview
(Released September 2010) which is the predecessor of Lumia
920.
Background for Exporting
Until 2011, Nokia has been the world’s leading vendor of
mobile phones in the world. Nokia operates in over 120
countries and sales in over 150 countries worldwide. This
success story has been subject to many economic factors
outlined below:
Market Potential: There are about 36.5 million mobile phone
subscribers in Morocco, representing a penetration rate of just
over 113%. Smartphones are increasingly becoming more
popular. Many Moroccans are buying smartphones, taking
7. advantage of deals offered by phone manufacturers such as
Apple, Samsung and Blackberry, as well as growing 3G access.
Industry figures suggest that there are more than 600,000
smartphones in circulation, and annual growth is more than
200% according to the National Telecoms Regulation Agency
(ANRT).
Global demand for Smartphones: All over the world demand for
smartphones has gone high. Everyone wants to be connected to
the internet using a device that can as well serve many other
purposes such as online purchases. Morocco's IT sector is
growing at a double-digit pace. Internet access has expanded by
three-quarters in 2011 while the mobile phone market increased
by more than 14%, according to the National Telecoms
Regulation Agency (ANRT).
Manageable Risks: Overcoming risks and barriers in Casablanca
market achievable through Nokia’s existing strengths. Initial
review of Moroccan market has revealed that, despite steady
growth in the use of smartphones, there are remarkably few
available local applications. This is a risk that Nokia can
overcome by promoting local talents to be innovative.
Product Fit:The Moroccan public authorities and mobile
operators have embraced the emergence of smartphones. They
are also committed towards the development of applications for
public services, companies and other operators.
PRODUCTION
MANAGER
MARKETING
MANAGER
EXPORT OPERATIONS MANAGER
HR
MANAGER
FINANCE
MANAGER
REGIONAL MARKETING REPS
8. ADMINISTRATIVE ASSISTANTS
R & D
PRESIDENT
MARKETING
PRODUCTION
OPERATIONS
HR
FINANCE
3. Management and Human Resources
New Export Structure
Figure 2: Nokia’s New Export Structure.
4. Senior Management Roles and Background
President: XXXXXXXXX
Key responsibilities as pertains to international trade:
- Oversees smooth running of the company.
- Makes final decisions on marketing strategy
-Instills the company’s new export initiative vision.
Background:
Mr. XXXXXXXXX was born in the Grand Casablanca region of
Morocco. He pursued a bachelor’s degree in
telecommunications and a master’s degree of the same in
Massachusetts University. Mr. XXXXXXXXX also has masters
in business administration. He has a wide experience in
managing international business having worked in various
international organizations
9. Finance Manager: yyyyyyyyyy
Key responsibilities as pertains to international trade:
- manages all company budgeting activities
-Preparers the company’s financial statements.
- advises the company on credit terms
- determines Nokia’s borrowing needs and initiates discussions
with banks institutions.
Background:
Mr. yyyyyyyy is a Certified Public Accountant and has worked
in the financial departments of various Casablanca based
institutions. He is also a member of Institute of Certified Public
Accountants of Morocco. Prior to joining Nokia, Mr. yyyyyyy
has been running a highly successful private consulting firm in
Casablanca.
Production Manager: Mr. zzzzzzzzz
Key responsibilities as pertains to international trade:
- sets production schedule and directs production staff
- Works closely with the Operations Manager to determine
production needs
- manages routine maintenance and repair schedule of
equipment
- oversees materials management
Background:
Mr. zzzzzz was born and raised in Alexandria, Egypt and
entered the phone production industry as intern in Samsung’s
Alexandrian plant. After graduating from Alexandria
University, Mr. zzzzzz joined the same company where he
worked for 10 years before joining Nokia.
Marketing Manager: Ms. ttttttttt
Key responsibilities as pertains to international trade:
- developing marketing strategies for Nokia.
- liaising closely with regional marketing representatives.
- overseeing production of promotional materials
- developing Nokia’s marketing literature.
10. Background:
Ms. tttttt was born and raised in Kenya. She joined University
of Nairobi for a marketing degree. She also has a masters’
degree in strategic marketing from London School of Business.
She has worked as senior marketing manager at Kenya’s leading
mobile telephony service provider Safaricom. She oversaw the
marketing of Kenyan’s mobile banking industry dubbed as M-
pesa.
Export Operations Manager:Mr.qqqqqqq
Key responsibilities as pertains to international trade:
- manages all the export operations activities of Nokia in
Morocco.
- Works closely with the production manager to determine
production needs.
- Supervises all the logistics issues of Nokia in Morocco.
Background:
Mr. qqqqqq was born and raised in Japan. He is an expert in the
Japanese production and operations techniques. Prior to being
posted to Morocco, Mr. qqqqqqq has been working as Nokia’s
regional operation’s manager in Middle east. He is fluent in
French, the business, government and diplomatic language of
Morocco as well as basic Arabic, which is the, official
language.
A close examination of Nokia’s management structure reveals
much inherent strength: A diverse management team. Over 70%
of Nokia’s workforce comes from foreign countries. This
multicultural background creates acceptance of cultural
differences hence enabling the company to overcome cultural
and language barriers.
International trade experience: Many of Nokia’s management
team has an experience in international trade hence it will be
easy for them to cope with challenges that emerge along the
way.
11. External Expertise
Despite these strengths, Nokia lacks expertise in several areas,
which it will, need to outsource.
International Lawyer: Consultation with a lawyer well versed in
international trade law and experienced in North African
practice especially in Morocco is extremely important in
identifying legal costs and risks involved. Nokia will also need
a lawyer to draw up its terms and conditions for its contracts
with foreigners and buyers.
Freight Forwarders: Nokia will also need to use an external
transporter for its phones, but will have increased reliance on
substantial international shippers such as EMS and DHL
Express, two companies that are internationally reputed and also
run their operations in the Atlantic ocean coastline where
Casablanca is strategically situated.
Banking and Insurance: Nokia’s export strategy will involve
extra shipping costs and risks. This will call for short-term loan
from its current National Bank of Finland as well as export
insurance from its High seas Insurance Company of America.
Translators: Marketing literature for the Moroccan market will
need to be translated into Arabic, the official language of
Morocco as well as French the business, government and
diplomatic language. Experienced translators will be required
who can also assist the company in developing gorgeous catchy
slogans for its brand.
4. Target Market and Environmental Scan
Environmental Scan
Morocco has proximity to Europe. This strategic geographical
location plus a relatively low labor costs has helped her to build
a diverse, open, market-oriented economy. In the 1980’s
Morocco adopted pro-market reforms, overseen by the
12. International Monetary Fund (IMF). Since taking the throne in
1999, King MOHAMMED VI has presided over a stable
Moroccan economy marked by steady growth, low inflation, and
generally declining government debt. Industrial development
strategies and infrastructure improvements – for instance a new
port and free trade zone near Tangier - are improving Morocco's
economic competitiveness. Key sectors of the economy include
agriculture (16.6%), industry (32.2%) and services (51.2%)
according to the (2011 est.) In 2006, Morocco entered into a
bilateral Free Trade Agreement with the United States; it
remains the only African country to have one. In 2008, Morocco
entered into an Advanced Status agreement with the European
Union.
(CIA – The World Fact book, Morocco, 2009)
Table 2: Key Economic Indicators
Economic Indicator
Morocco
Gross Domestic Product
(Purchasing power parity)
note: data are in 2011 US dollars
(2011 est.)
$163 billion
(2010 est.)
$155.8 billion
(2009 est.)
$150.1 billion
Gross Domestic Product
(Real growth rate)
13. (2011 est.)
4.6%
(2010 est.)
3.7%
(2009 est.)
4.9%
Inflation rate
(Consumer prices)
(2011 est.)
1.9%
(2010 est.)
1%
Table 2 above provides a longitudinal profile of Morocco’s
economic performance and reveals several factors that create a
positive investment climate. A steady increase in GDP and
decline, in inflation, denotes a well-managed economy that has
a positive growth which is exceptionally conducive for direct
foreign investments.
Business Climate for the phone industry
In 1993, the government of Morocco introduced tough
privatization reforms which change her economy into a liberal
one governed by market forces of demand and supply. This has
led to steady yearly growth in the region of 4–5% from 2000 to
2007, including 4.9% year-on-year growth in 2003–2007.
Telecommunication sectors have gone strong, due to a steady
economic growth. In 2010, the country was about to reach 32
million subscribers to mobile telephone lines. At the end of
2009, it had just over 25 million lines, which means a growth in
this sector of 26%. The increase in applications for mobile
phones and increased competition in the telephone market has
brought this rate upward. (Moroccan National Agency of
Telecommunications, 2011)
These economic conditions have both positive and negative
14. implications for Nokia.
Positive:
Lower Costs – To create a conducive environment for direct
foreign investments, Moroccan authorities has progressively
reduced its high import tax. This reduction will amount to
significant savings for Nokia.
Higher International Standards –Since Morocco entered into a
bilateral Free Trade Agreement with the United States in 2006
and Advanced Status agreement with the European Union in
2008, the quality of phones entering Morocco must meet high
international standards. This is advantageous for Nokia which
produces durable phones like Nokia Lumia 920 since fake pones
will have minimal entry.
Negative:
The drawback of liberalizing the Moroccan economy (especially
the telecommunications sector) is the influx of other foreign
competitors like Samsung and Apple who are also in the
business of producing smartphones.
Major Commercial Risks
Poor Legal Protection – Morocco being a developing country
has weak a weak judicial system which is yet to catch up with
economic reforms. This will leave Nokia vulnerable hence
resulting to increased legal costs.
Poor Intellectual Property Protection - Due to weak legislation
in relation to Intellectual property fake Nokia Lumia 920
phones may be introduced into the market hence diluting
Nokia’s market share.
Consumer Profile
Primary market: Casablanca.
Casablanca being the economic hub of Morocco will be Nokia’s
primary. The population of Grand Casablanca was estimated in
2005 at 3.85 million. 98% live in urban areas. Around 66% are
between 15 and 60 years of age. The population of the city is
15. about 11% of the total population of Morocco. The 15-60 age
groups will form Nokia’s primary market. Since the majority of
the population is business people, they will distribute the
phones to other regions of Morocco hence reaching to our
secondary market.
Nokia’s Ability to Meet Market Demands
Sustainable Supply– Smartphones are in their beginning stages
of the product life cycle in Morocco. This implies that the
demand will not go down any soon. The supply will be
enhanced by Nokia Siemens Network that will ease the supply
chain management.
Quality smartphones-Nokia phones are internationally renowned
for their high quality and durability. This is because Nokia has
partnered with other great companies like Microsoft, Siemens,
and AT&T who buffer the quality of the phones.
Innovation-this is one of Nokia’s core competencies. Production
of innovative products like Nokia Lumia 920 will enable the
company to meet the market demand for a long time.
5. Market Entry and Marketing Strategy
This business plan proposes that Nokia’s market entry strategy
should take the form of a partnering arrangement with local
mobile phone service providers as well as local mobile
distributors. The merits and justification for this proposal will
be discussed within the context of a SWOT analysis on Nokia
Corporation and benefits the company can expect to accrue
through this partnership.
SWOT Analysis
Strengths
Nokia is famous worldwide as one of the leading mobile phone
vendors. This has been enabled by its commitment to
innovation. As a result, Nokia has a research and development
team that has a full-time commitment to researching new
16. technologies and designs.
Weaknesses
Financial resources - To produce quality smartphones, Nokia
must partner with other companies to purchase hardware and
software. This highly constrains the financial resources of the
company.
Inexperience– Nokia lacks connections and distribution
networks in the Moroccan market. Not being able to access a
strong distribution link into Morocco could hamper the
company’s entry strategy into the country and prevent it from
performing effectively against aggressive competitors like
Samsung, Apple, HTC and Alcatel.
Opportunities
Target Locations– Casablanca, the economic capital of Morocco
are the prime target for Nokia’s initial entry.
Product - The markets crave for sleek smartphones has provided
Nokia with the opportunity to sell the world’s most innovative
smartphone.
Threats
Threats in Morocco will come from Nokia’s competitors. These
are Samsung, Apple, HTC and Alcatel.
Market Entry
Partnership with Telecom operators
Nokia will partner with local mobile phone service providers as
its sales agents.
These telecoms operators are Maroc Telecom, holding 60.71%
of the market and Meditel, holding 36.69% of the market among
other mobile phone distributors.
This approach has the following advantages: Low Risk:
Partnership can be terminated upon unsatisfactory performance.
Low Investment: Payment from Nokia will only be through
17. commission of sales.
Already established distribution network.
Local knowledge of the economy.
Upon finding an appropriate partner to undertake this
relationship, Nokia will enter into a one-year contract, with the
agent. However, routine reviews of the partnership will be made
by both parties with negotiations on the renewal of the
partnership to be held on an annual basis.
This entry strategy can be verified within the context of the
company’s product, pricing, place and promotion strategy.
Product, Place, Price and Promotion Strategy
Product Strategy
Local partners already have established distribution networks,
which will save, Nokia a lot of time and costly research. The
local partner would also be best suited to predict upcoming
trends in the market and advice on minor modifications needed
to Nokia’s current product. There are also regional differences
between local markets that only a business could pick up
through extensive experience in a country.
Pricing Strategy
Nokia Lumia 920 is a very innovative smartphone hence it can
be sold at a premium price. A high premium price commanded
by a product often requires justification of the product’s cost.
With the expertise and help of a local partner, Nokia can refine
its messaging to emphasize on the quality and innovativeness of
the phone as support for its higher cost.
Place Strategy
A local partner who understands Morocco well will help Nokia
deal with customs and documentation procedure without a
tremendous hustle hence saving on time and cost.
Promotion Strategy
A local partner will help Nokia translate its marketing literature
18. into a form that the local residents will understand. This will
help spearhead a very strong brand.
Criteria of selecting Export Partner
The partner must possess the following qualities:Has well
established distribution networks in morocco
Established in Morocco for more than five years
Financial stability and a history of timely payment Timely and
satisfactory delivery of product to customers
6. Operations Overview and Supply Chain Management
Smooth operations are key to the success of Nokia as a phone
manufacturer.
Domestic versus Export Operational Structure
PRESIDENT:
Authorizes proposals from Production Team
OPERATIONS MANAGER
Coordinates all the teams
PRODUCTION MANAGER:
Receives orders from the operations team and then
Supervises then production process
H.R. MANAGER
Hires the needed workforce
MARKETING & SALES MANAGER:
-Prepares marketing and promotional materials.
-Receives orders from customers, processes them and then
delivers the products.
FINANCE MANAGER:
- invoice customer upon delivery of products
- track payment and follow up with payment reminder
- prepare financial statements to reflect sales
Domestic Operational Structure
Export Operational Structure
PRESIDENT:
Authorizes proposals from Production Team
19. EXPORT OPERATIONS MANAGER
Coordinates all the export operations
PRODUCTION MANAGER:
Receives orders from the operations team and then
Supervises then production process
H.R. MANAGER
Hires the needed workforce
MARKETING & SALES MANAGER:
-Prepares marketing and promotional materials.
-Receives orders from customers, processes them and then
delivers the products.
FINANCE MANAGER:
-prepare financial statements
- obtain export credit insurance
- invoice partner upon delivery
- track payment and follow up with payment reminder
Key Changes as a Result of Exporting
The main difference between the domestic and the export
operational structure is that the role of the operations manager
is now in the hands of an Export Operations manager. The
Export Manager is in charge of the partner contract, establishes
the sales volume with the partner and sets the purchasing
schedule for the year. The rest of the teams function as outlined
20. above.
Maintenance of Competitive Advantage
Nokia will remain competitive in the mobile phone production
industry because of its full time commitment to innovation by
the highly skilled R & D team. Also, access to state-of-the-art
technology will always keep it ahead of the competitors.
Production of superior products will, as a result, enable the
company to fix premium prices.
7. Financial Analysis and Risk Management
Financial plan
Pre-operational costs
Pre-operational costs that the business expects to incur are
included in the Table 3 below.
Cost component
Amount (US$)
Machine and equipment
345,000
Other equipment
57,000
Fixture and fittings
100,000
Materials
100,000
Deposit for rent
20,000
Deposit for water
1,000
Deposit for electricity
3,000
Advertisement campaigns
20,000
Hiring employees
23,000
Business licenses and permits
14,000
21. Transport and Communication
10,000
TOTAL
693,000
Table 3: Pre-operational costs
Source: Author (2013)
Working capital
Working capital will be calculated as follows:
Working capital= Current Assets-Current Liabilities
At start-up, the working capital shall be = US $ 307,000
Proforma profit and loss account
The table 4 below shows the projections for profit and loss
account.
ITEM
2012
2013
2014
US$
US$
US$
Service revenue
2,400,000
3,120,000
3,432,000
Direct costs
572,832
630,115
693,127
Gross profit
1,827,168
2,489,885
2,738,873
23. Cumulative profits
791,864
2,654,228
4,880,422
Table 4: Proforma profit and loss account
Source: Author (2013)
Assumptions
The business will pay tax of 15% on profit before tax, and this
percentage is expected to remain constant for the first three
years of operation.
The service revenue will grow by 30% per year.
The direct costs are assumed to increase by 10% while the
indirect cost will increase by 30% per annum.
The direct costs include the costs of direct labour and direct
material. The direct cost per phone is US $ 91.80 X 6240
phones per annum= US $ 572,832.
The number of phones is calculated at 20 per day, 20X6 days
=120 phones per week and 120X52 weeks = 6240 phones per
year.
The indirect cost per phone was calculated to be US $ 127.4 per
phone. Therefore, annual indirect cost is calculated as
US$127.4X6240 = US$795,163
The indirect cost include the cost of all overhead expenses such
as indirect labour, interest expenses, operating expenses, and
support services.
Export Cost Accounting
Proforma balance sheet
The following table presents the projected balance sheet of
Nokia
Jan-2012
Dec-2012
Dec-2012
24. Dec-2012
ASSETS
US$
US$
US$
US$
Fixed Assets
Machine and equipment
402,000
402,000
402,000
402,000
Fixtures and fittings
100,000
100,000
100,000
100,000
Total value at cost
502,000
502,000
502,000
502,000
Less accumulated depreciation
100,400
160,720
208,976
Net Book value of assets
502,000
301,600
241,280
193,024
27. 600,000
600,000
600,000
Net profit(loss)
791,864
2,654,228
4,880,422
TOTAL EQUITY
1,000,000
1,706,356
3,469,465
5,580,422
Table 5: Proforma Balance sheet
Source: Author (2013)
Assumptions:
The depreciation on the fixed assets is 20% calculated on
reducing balance.
The business will have debtors owing US$ 46,000 as at the end
of the first year due to its credit policy. This is because the
business will relax credit facilities in order to attract more
customers within the inception year. However the business will
tighten its credit policy to recover debts and reduce debtors
balance to US$22400 in the second year, but this is expected to
rise to US$ 25,300 as the business gets more clients who might
still opt for credit facilities.
Impact on Company’s Cash Flow
Projected cash flow statement
The table 6 below shows the cash flow projection for the first
year of operations.
ITEMS
JAN
FEB
MAR
APR
MAY
35. Net cash
524,608
589,215
653,822
718,430
783,037
847,645
912,253
976,861
1,041,468
1,106,076
1,170,684
1,182,291
Break even analysis
Gross profit in the first year (indicated in the profit and loss
account is US $ 1,827,168
Gross profit margin= (1,827,168/2,400,000) 100= 76%
Total Overhead for the first year= US$ 895,563
Breakeven level of sales= (overhead expenses/gross profit
margin) X100
= US$ (895,563/76) X100= US$ 1,176,329
Financial requirements
As at start up, the business will require US$. 1,000,000.
Item
Amount (US$)
Pre-operational costs
693,000
Working capital
307,000
Total
1,000,000
Payment Method
Proposed capitalization
36. The total investment in the business at startup will be US$
1,000,000. This will comprise of the owner’s equity of US$
600,000, partners contribution of US$ 100,000 and bank loan of
US$ 300,000 borrowed from National Bank of Finland.
Source of capital
Amount (US$)
Owner’s equity
600,000
Partners contribution
100,000
Bank loan
300,000
Total
1,000,000
The loan will be repaid in 36 equal monthly installments at an
interest rate of 15% per annum calculated on reducing balance.
Profitability of Venture
Projected profitability ratios
The proprietor projects the following profitability ratios for the
business in the first three years of operation.
The calculations are as follows:
Gross margin= (Gross profit/service revenue) X100
Return on equity= (Profit after tax /owner’s equity) X100
Return on assets= (profit after tax add interest/investment)
X100
Year
Gross Profit Margin
Return on equity
Return on assets
2010
76%
46%
158%
2011
37. 79.8%
54%
371%
2012
79.8%
40%
443%
Risk Management Strategy
Commercial Risk: Shipment delays, incomplete documentation
and credit defaults are all events that could prevent Nokia from
receiving payment in accordance with the contractual terms of
the sale.
Currency Risk: The Moroccan currency Dirham is subject
fluctuation. This will affect Nokia’s business negatively
unsustainable.
Risk mitigation
Strict credit facilities will help reduce the number of
defaulters. Proper documentation will also help reduce shipment
delays. Agreement with the partners will help deal with
currency fluctuations.
8. Conclusion and recommendation
Conclusion
The purpose of this business plan was to evaluate the feasibility
of Nokia exporting its Nokia Lumia 920 to Casablanca
Morocco. Market analysis has shown that Casablanca is a
suitable opportunity which can be exploited if the company
focuses on its core competencies, as well as partnering with
local telecom operators and mobile phone distributors.
Recommendation
This report should be presented to the senior management for
their deliberations. Upon approval from senior management
officials, Nokia should begin to incorporate the export
structure. The position of Export Operations Manager will need
38. to be filled. Senior manager and departmental meetings need to
begin incorporating the export venture into their domestic
operations. Afterwards, suitable local partners should be
contacted so that its implementation can start.
References
Brown, R., Gutterman, A. S., & Curry, J. E. (2011). A short
course in international business
plans: Charting a strategy for success in global commerce.
Petaluma, Calif: World Trade
Press.
Feenstra, R. C. (2004). Advanced international trade: Theory
and evidence. Princeton, NJ [u.a.:
Princeton Univ. Press.
Harris, W., Cozens-Hardy, W. H., & Bank of British West
Africa, Ltd. (1919). Modern
Morocco: A report on trade prospects, with some geographical
and historical notes.
London: Adams Bros. and Shardlow, printers.
Hufbauer, G. C., & Brunel, C. (2009). Capitalizing on the
Morocco-US Free Trade Agreement:
A road map for success. Washington, DC: Peterson Institute for
International Economics.
Lamb, C. W., Hair, J. F., & McDaniel, C. D. (2012). Essentials
of marketing. Mason, Ohio:
South-Western Cengage Learning.
Mjigal, T. (2010). Tactical management in the secular bear
market: How tactical management
and market phases can. S.l.: Authorhouse.
Morocco: Financial System Stability Assessment including
Reports on the Observance of
Standards and Codes on the following topics : Banking
Supervision, Insurance
Regulation, Securities Regulation, Payment Systems, and
Monetary and Financial
Policy Transparency. (2003). Washington, DC: International
monetary
39. fund (IMF.
Pizam, A. (2010). International encyclopedia of hospitality
management. Amsterdam:
Elsevier/Butterworth Heinemann.
Rivera-Batiz, L. A., & Oliva, M.-A. (2003). International trade:
Theory, strategies, and
evidence. Oxford [u.a.: Oxford Univ. Press.
Stutely, R. (2001). The definitive business plan: The fast-track
to intelligent business planning
for executives and entrepreneurs. Harlow: Financial Times
Prentice Hall.
Canada’s Glitter
Diamonds for Export
FITTskills Sample
Business Plan
The sole purpose of this project is to provide a sample idea of a
finished
business plan for students as they prepare an International
Business Plan for
the FITTskills International Trade Management course. Use of
any material
or data contained within this project is strictly prohibited.
40. This project is reproduced with the author’s express permission.
All
information contained within the document is considered
confidential.
Contents may be duplicated by FITT Educational Partners for
learning
purposes only. Duplication for any other reason is strictly
forbidden.
FITT would like to thank the author, Leslie Lai, for allowing
FITT to use this project as a sample.
Diamonds for Export FITTskills:
International Trade Management
Table of Contents
1. Executive Summary
...............................................................................................
. 3
2. Corporate Profile and Nature of Business
............................................................... 4
- Company Background
- Description of Business and Product
- Core Competencies
- Description of Product
- Key Milestones
- Background for Exporting
3. Management and Human
Resources...................................................................... 9
41. - New Export Structure
- Senior Management Roles and Background
- External Expertise
4. Target Market and Environmental Scan
................................................................ 12
- Environmental Scan
- Business Climate for Diamond Industry
- Major Commercial Risks
- Consumer Profile
- LaiFan’s Ability to Meet Market Demands
5. Market Entry and Marketing Strategy
.................................................................... 17
- SWOT Analysis
- Market Entry
- Product, Place, Price and Promotion Strategy
- Criteria and Sourcing of Export Partner
6. Operations Overview and Supply Chain
Management.......................................... 25
- Domestic versus Export Operational Structure
- Key Changes as a Result of Exporting
- Maintenance of Competitive Advantage
7. Financial Analysis and Risk Management
............................................................. 30
- Current Financial Standing
- Export Cost Accounting
- Profitability of Venture
- Impact on Company’s Cash Flow
- Payment Method
- Risk Management Strategy
8. Conclusion
...............................................................................................
42. ............. 35
FITTskills Sample Business Plan 2
Diamonds for Export FITTskills:
International Trade Management
Executive Summary
Laifan Polishers Ltd., located in Toronto Canada is currently
the third largest producer of
diamonds by value in the world, Canada’s diamonds are gaining
international recognition for
their value and quality. LaiFan Polishers Ltd.’s core
competencies lie in polishing and cutting
high gem quality Canadian diamonds. Its high craftsmanship
and specialty cuts translate into a
product that is ready-made to meet China’s market demand for
large carat, high value
diamonds. The company has recorded seven years of steady
domestic sales and feels it is now
ready to expand to the Far East, to capture China’s growing
demand for diamond jewellery. In
this business plan, the company sought to measure the market
opportunity and external threats
against a specific set of criteria and company objectives to
determine the feasibility of pursuing
this plan. Results indicate:
Market Potential: China offers a large pool of customers
amounting to approximately 100
million people in the luxury goods consumer category. The
country’s growing economic
43. prosperity, large population and staggered growth, particularly
in Shanghai, Beijing and
Guangzhu, offers a sustainable and long-term category of
customers for LaiFan’s premium
priced diamonds. First year sales in the market expect to total
over Can$350,0001, representing
an 18% net profit for LaiFan Polishers Inc.
Manageable Risk: Competitive threats and commercial risks can
be overcome by LaiFan’s
strengths in developing innovative cuts and designs. Its niche
position is further enhanced with
its access to a steady supply of Canadian diamonds, an
increasingly important factor as world
supply levels fail to keep up with demand. Currency exchange
fluctuations and commercial risks
can be mitigated through sound financial planning and the
purchase of EDC’s export credit
insurance. With a payback period of 10 months and return on
investment of 18%, the proposed
market entry strategy of partnering with a local diamond
polisher in China is feasible within
LaiFan’s current financial strengths. This partnership will
enable Laifan to benefit from an
established distribution network and local design interests
Product Fit: LaiFan’s product fits well with the Chinese
consumer’s demand for glitzy, high
quality diamonds that exude Western opulence. The product fit
translates into fewer costs for
product modification. Company branding to enhance LaiFan’s
product image in the Chinese
market will be achieved through the use of a local marketing
consultant to execute a strategic
long-term marketing plan for the company.
44. Recommendations are thus for LaiFan to pursue moderate first
steps in exporting to China.
Action items and next steps stemming from this report include:
Presentation of the business plan to garner senior management
support
Incorporation of the company’s new exporting initiative into
LaiFan’s corporate vision
Securing a qualified Export Manager to spearhead the
company’s export initiative
Consulting with in-market experts, jewellery associations and
Canadian Trade Officers in
China to research options for a compatible co-manufacturing
partner in China.
1 All denominations used in this report reflect Canadian
currency, unless otherwise noted. Currency
conversions performed on U.S. denominations based on Bank of
Canada rate of 1.2428, posted on
February 3, 2005. Currency conversions performed on Chinese
Yuan denominations based on Bank of
Canada rate of .1502 posted on February 3, 2005.
FITTskills Sample Business Plan 3
Diamonds for Export FITTskills:
International Trade Management
Introduction
45. This business plan seeks to establish a process for bringing the
company’s exporting vision to
fruition. The report conducts a thorough analysis of the
company’s operational and financial
strengths and measures these assets against market opportunities
and threats to determine
feasibility of pursuing exports. This report concludes with
recommendations and an action plan
for the company’s next steps.
Corporate Profile and Nature of Business
Company Background
LaiFan Polishers Ltd. specializes in the cutting and polishing of
Canadian diamonds. Based in
Toronto, Canada, operations began in 1998 coinciding with the
opening of Canada’s first
diamond mine - EKATI Diamond Mine near Lac de Gras,
Northwest Territories. LaiFan’s factory
is housed in Etobicoke in a two level 21,000 square foot
building. The company has eleven full-
time and twelve contract staff and is presently divided into four
divisions. It is headed by Mr.
Jeffery Fan who has been in the diamond trading and polishing
business for over 25 years.
Style of Corporation
LaiFan Polishers Ltd. is federally incorporated, subject to
several benefits it would not receive in
a sole proprietorship operation or provincial incorporation
including the right to carry on
business anywhere in Canada under its current name, limited
liability for the owner and lower
corporate tax rates (Industry Canada, 2004).
Description of Business
46. Table 1: Value of World Diamond Production1
The Diamond Pipeline, 2003
Rough
Diamond
Production
Rough
Purchased for
Production
(polishing)
Value of
Polished Ex-
production
Polished
Diamond
Content
in Retail Sales
Retail Sales
of Diamond
Jewellery
$12.4 billion $13 billion $19.6 billion $21 billion $79.3 billion
Source: Government of the Northwest Territories Resources,
Department of Resources, Wildlife and
Economic Development, 2004.
The diamond pipeline represents the incremental increases in
value as the rough stone moves
through the supply chain to its final retail stage. LaiFan’s
operations rest between stages 2 and
3 of the pipeline. With annual sales of approximately Can$1.5
47. million2, LaiFan is classified as a
small to medium sized enterprise (Ontario Exports Inc.).
LaiFan’s procurement activities reflect current standing
agreements with the majority owners of
Canada’s only two diamond mines: BHP Billiton Diamonds Inc.
who owns a portion of EKATI
Diamond Mine, and Rio Tinto plc of London England who owns
a majority share of the Diavik
Diamond mine. Both mines hold two sightholdings a year where
their rough stones are sorted
into predetermined valuations and sold to LaiFan. Purchase
transactions are conducted in cash
only and are nonnegotiable.
2 Source: The author’s description of the diamond
manufacturing process in based on several sources:
Hardness 10; Conversation with Don Law-West, Indian and
Northern Affairs Canada; “How Diamonds
Work”, Kevin Bonsor; Russian Gemological Server”
FITTskills Sample Business Plan 4
Diamonds for Export FITTskills:
International Trade Management
LaiFan’s current business consists of sales to jewellery
wholesalers, independent jewellers and
to two of Canada’s largest jewellery retailers: Peoples Jewellers
and Henry Birks & Sons Inc.
Over 85% of the company’s diamonds are cut and polished to be
set in ring and necklace
48. jewellery with the remainder cut and polished for a variety of
other jewellery including bracelets
and watches.
Core Competencies
LaiFan’s core expertise is in processing rough diamond stones
into cut and polished diamonds.
Its manufacturing process consists of four main stages2:
1. Cleaving: The first stage of manufacturing whereby the rough
stone is split into smaller,
manageable components.
2. Sawing: Diamonds that cannot be cleaved and require finer
treatment enter this stage.
A laser or manual saw is applied to cut off odd irregularities
and shape it for polishing.
3. Bruting: Workers at this stage begin to smooth the diamond’s
surface and apply facets
according to the predetermined end cut.
4. Polishing: The final stage where the diamond is polished to
maximize its brilliance and
fire.
Following these steps, the diamond is cleaned and sent to the
independent gemological
laboratory, Harold Weinstein in Toronto for independent
grading of quality. A certificate is
produced by the lab denoting the diamond’s features and
LaiFan’s Canadian leaf logo is
inscribed into the girdle of the diamond, with the company’s
initials LF appearing below it.
FITTskills Sample Business Plan 5
49. Diamonds for Export FITTskills:
International Trade Management
Description of Product
LaiFan produces four main diamond cuts3, representing
traditional pieces in the diamond
market. In addition, the company has developed a specialty cut,
The MobiusTM, which was
created and patented in 2000.
Princess: The most popular cut on the jewelry market, the
Princess is a modified brilliant cut with 57 facets (21 crown
facets (the top half of the diamond, above the middle girdle),
32 pavilion facets (the bottom half of the diamond, below the
middle girdle), and four girdle facets). 30% of LaiFan’s
diamonds are princess cut diamonds.
Oval: The oval is a brilliant cut with an
elliptical girdle outline. The diamond features
a circular section with triangular facets. 10%
of LaiFan’s diamonds are of this cut.
Emerald: This is a square step
cut with diagonally cut corners
and two, three, or four rows of
facets parallel to the girdle on the
50. crown and pavilion. 10% of
LaiFan’s diamonds are of this
cut.
Pear: Variation of the brilliant
cut with a pear-shaped girdle
outline and 56 to 58 facets. 25%
of LaiFan’s diamonds are of this
cut.
And LaiFan’s special developed cut, The MobiusTM - an oval
brilliant cut featuring a three twist
mobius band lasered into the center of the diamond. 25% of
LaiFan’s diamonds are of this cut.
Mobius band
Source: The Geometry
Center
3 Source for diamond cut information: International
Gemmological Association
51. FITTskills Sample Business Plan 6
Diamonds for Export FITTskills:
International Trade Management
Key Milestones
Table 2 denotes the key milestones in LaiFan’s history:
Event 1998 1999 2000 2001 2002 2003 2004
Factory opens
Negotiates $250,000 purchasing
contract with BHP Billiton
Negotiates $100,000 purchasing
contract with Rio Tinto
First sale outside of Ontario, in
Vancouver, BC
First year of profit achieved
Company automates production,
purchasing $350,000 of laser
technology, reduces production
staff to 15 instead of 25
$400,000 purchasing contract
signed with Peoples Jewellers,
over 3 year term
52. $350,000 purchasing contract
signed with Henry Birks & Sons,
over 2 year term
Annual Sales $350,000 $700,000 $960,000 $850,000 $890,000
$1.2
million
$1.5
million
Background for Exporting
9/11 and subsequent weak consumer confidence levels softened
sales across the diamond
industry. However, a rebound in the industry since has posted
strong sales and growth for
LaiFan. The company’s stable domestic performance has now
propelled it to consider
expanding sales by exporting to a foreign market. Several
conditions in the global economy
have further fuelled this decision:
Strong Global Demand - In 2003, world diamond retail
jewellery sales increased by 6% over the
previous year, totalling more than $79 billion (De Beers Annual
Report, 2003). This demand is
expected to grow even stronger as a result of a projected
shortfall in the supply of rough
diamonds.
New Markets of Growth – There is a changing shift in the
countries that are leading jewellery
sales. While the United States currently accounts for around
53. 50% of total world diamond retail
sales, 2003 figures reflected double digit growth in Asia and
Arabia markets (De Beers Annual
Report, 2003).
Recognition of Canadian Diamonds – The high gem quality of
Canadian diamonds is attracting
international attention and Canada is now the third largest
producer of diamonds, by value
(Bruce Boyd, Natural Resources Canada). The international
movement to prevent the entry of
conflict diamonds4 in the diamond trade provides a further
opportunity for the promotion of
authentic, high quality diamonds such as those found in
Canadian mines.
4 According to the United Nations, “Conflict diamonds are
diamonds that originate from areas controlled
by forces or factions opposed to legitimate and internationally
recognized governments, and are used
to fund military action in opposition to those governments, or in
contravention of the decisions of the
Security Council.” (United Nations Department of Public
Information, March 21, 2001).
FITTskills Sample Business Plan 7
Diamonds for Export FITTskills:
International Trade Management
Based on these factors, conditions seem conducive to the sales
of LaiFan’s diamonds into new
54. foreign markets. In a previous research report to select the
appropriate first market for entry,
LaiFan established three broad strategic objectives and criteria
and compared market
conditions in the target country against these criteria. It was
concluded that China would serve
as an excellent target market. This conclusion was supported by
a number of findings:
Market Potential: The pool of approximately 200 million
middle-class consumers in China is
larger and growing faster than any other emerging market with
buyers carrying the purchasing
power to make luxury good purchases such as diamonds.
Product Fit: Once ostracized by Deng Xiaoping’s government as
symbols of Western
ostentation and corruption, diamond jewellery is enjoying
renewed popularity. The in-pouring of
Hollywood movies, foreign multinational chains and American
pop icons is fuelling consumer
demand for Western products. To that end, LaiFan’s diamonds
fit very well with the Chinese
market’s desire for large, high gem-value diamonds from a
foreign source. This translates into
lower product modification costs for LaiFan and a strong ability
to compete by offering a steady
supply of the stones.
Manageable Risk – As a criteria for pursuing the export
opportunity, the target market must
present risks that are manageable within the context of the
company’s existing strengths and
resources. Initial review of China’s commercial infrastructure
and competitive environment
55. revealed that LaiFan was in a position to overcome weak legal
protection and obtain market
position in the country.
This report now moves to expand on these initial findings and
assess the opportunities and
threats in China against LaiFan’s operational and financial
strength. Implications of this analysis
are subsequently defined in the marketing and market entry
sections. Similar to the criteria set
out in the last research report, analysis of data in this report
will be measured against the three
criteria previously established and summarized again below:
Market Potential: The new market must possess a sustainable
and growing consumer
base.
Manageable Risk: Overcoming risks and barriers in each
market must be achievable within
the context of LaiFan’s existing strengths.
Product Fit: LaiFan’s product should be compatible with
consumer demand and
implications for product modification achievable within the
realm of the
company’s resources.
FITTskills Sample Business Plan 8
56. Diamonds for Export FITTskills:
International Trade Management
Management and Human Resources
Figure 1: LaiFan’s Export Structure
Regional Sales
Reps
Master Cutter Administrative
Assistant
Shipping
Clerk
Sales & Business
Development Manager
Production
Manager
Export
Manager
Logistics
Manager
57. Finance
Manager
President
Sales & Business
Development Production Logistics Finance
Cleavers Sawers Bruters Polishers R&D
Figure 1 proposes the ideal structure for LaiFan in its initial
export stage. This structure differs
from its current domestic setup with the introduction of an
Export Manager who now plays a
central role in coordinating the company’s export activities
across all of its existing divisions.
The ideal profile of the Export Manager thus includes a good
mix between desired skills,
background and experience. Table 3 summarizes the criteria
LaiFan will place on candidates for
this role.
Table 3: Hiring Criteria for Export Manager
Skills Background & Experience Desirable Personality Traits
Good analytical and problem
solving skills
Detailed understanding of the
international trade
environment, preferably of
China and the Asia Pacific
region
58. Experience managing budgets
Negotiation skills
Fluent in Mandarin Chinese
Innovative and versatile
10 years or more experience in
exporting and international
trade, preferably in the Asia-
Pacific region
Experience in the diamond
industry, particularly in the
diamond manufacturing sector
Experience developing market
entry strategies
Open to cultural differences
Team-oriented
Comfortable with working non
conventional hours
High self confidence
Flexible and adaptable
FITTskills Sample Business Plan 9
Diamonds for Export FITTskills:
International Trade Management
At the senior management level, the head of each department
59. will work closely with the new
Export Manager to coordinate the additional sales, production,
labelling and packaging activities
in selling the diamonds overseas. The role of existing senior
management is therefore extremely
critical to the company’s transition to the new structure. The
following presents brief bios of
senior personnel with an emphasis on their roles in the new
structure.
President: Mr. Jeffery Fan
Key responsibilities as pertains to international trade:
- oversees all operations and ensures smooth integration of the
Export Manager role
- leads negotiations and makes final decisions on market entry
strategy
- instils a renewed company vision that embraces LaiFan’s new
exporting initiative
Background:
Mr. Fan was born in Lan Tian, Xin Jiang province, the center of
China’s jade industry and grew
up as an apprentice in a jade factory. Pursuing an interest in
diamonds, Mr. Fan trained in Israel
and New York City in diamond polishing and cutting
techniques. Upon immigrating to Canada,
he ran his own jewellery store for fifteen years in downtown
Toronto and enrolled in Aurora
College’s twenty two week Canadian diamond polishing
program.
Sales and Business Development Director: Mr. Keynan Gujarit
Key responsibilities as pertains to international trade:
- manages purchasing contracts with the EKATI and Diavik
60. mines and will lead
negotiations on increased purchase volumes for the Chinese
market
- works closely with Export Manager to determine purchase
volumes ahead of
negotiations
- oversees work of three regional sales representatives and will
incorporate international
sales calls into their work portfolio
- participates in international diamond trade shows in China
Background:
Mr. Gujarit worked for India’s largest jewellery wholesaler as
Sales Director in Mumbai and sold
silver and gold jewellery to Canadian retailers. He moved to
Canada in 1992 and joined
LaiFan’s operations as the sales lead when it opened in 1998.
Logistics Manager: Ms. Cathay Banton
Key responsibilities as pertains to international trade:
- oversees materials management for packaging of diamond
products
- sets logistics schedule and oversees the packing and shipping
of diamonds
- works closely with Export Manager to determine shipping
strategy
Background:
Ms. Banton began her career in logistics as an Account
Executive in a local courier company in
Sydney, Australia. Prior to joining LaiFan Polishers, Ms.
Banton worked as the Logistics
61. Manager at Kuehne & Nagel’s Chicago office for seven years.
Finance Manager: Ms. Shannon Lum
Key responsibilities as pertains to international trade:
- manages all company budgeting, accounting and billing
activities
- works closely with senior management to determine financial
activities to support the
increased purchase volume of diamonds for export
- advises on credit terms to offer foreign buyers that will be
most beneficial for LaiFan
- determines LaiFan’s borrowing needs and initiates discussions
with banks to borrow
funds
FITTskills Sample Business Plan 10
Diamonds for Export FITTskills:
International Trade Management
Background:
Ms. Lum is a Certified General Accountant and has worked in
the financial departments of
various Hong Kong-based institutions prior to immigrating to
Canada in 1993. Ms. Lum then
operated her own independent accounting practice for five years
upon moving to Canada. Ms.
Lum studied and is fluent in Mandarin Chinese.
Production Director: Mr. Torin Sandler
Key responsibilities as pertains to international trade:
62. - sets production schedule and directs production staff
- works with Master Cutter to establish cut styles
- works closely with the Export Manager to determine
production needs and schedules
additional production hours accordingly
- manages routine maintenance and repair schedule of
equipment
- oversees materials management
- oversees Research and Development Associates to innovate
new diamond cuts
Background:
Mr. Sandler was born and raised in Jerusalem, Israel and
entered the diamond industry as an
apprentice in his father’s diamond polishing factory. Upon his
father’s retirement, Mr. Sandler
took over the factory of one hundred staff and managed it for
ten years before selling it. Mr. Fan
had trained in Mr. Sandler’s factory when living in Israel and
hired Mr. Sandler when he moved
to Canada.
Having reviewed LaiFan’s management structure, there are
several inherent strengths that will
support its new export initiative:
A diverse management team and workforce. Over 85% of
LaiFan’s workforce comes
from countries outside of Canada. This multicultural
background harnesses greater
acceptance of cultural differences and better ability for the
company to overcome cultural
63. and language barriers.
Experience in international trade: Many of LaiFan’s senior
managers and staff have past
experience in exporting. Collectively, this background presents
a pool of expertise to
manage problems that may arise in the new market.
Despite these strengths, LaiFan does lack expertise and
resources in several areas which it will
need to offset by accessing outside expertise.
Marketing: The company’s strength in polishing and cutting
overshadows a weakness in
marketing ability. LaiFan currently defaults to using its
company brochures to promote its brand.
With the industry’s charge towards heavy branding of company
names, poor marketing could
hinder the company’s competitive stance in the Chinese
Mainland.
LaiFan currently does not have the in-house resources nor the
expertise to undertake a
proactive marketing strategy. The development of such a
strategy would thus be best led by an
outside marketing consultant. The consultant would be hired to
review LaiFan’s current
marketing literature to determine language and messaging
modifications required, and to
develop a long-term marketing strategy for LaiFan in China.
64. FITTskills Sample Business Plan 11
Diamonds for Export FITTskills:
International Trade Management
International Lawyer: Advanced consultation with a lawyer well
versed in international trade law
and experienced in China practice is critical to identifying legal
costs and risks. LaiFan will also
need the lawyer to draw up the terms and conditions of its
contracts with a foreign partner or
buyer.
International Tax Consultant: Although LaiFan employs a
financial officer, Ms. Lum is not
experienced in China’s tax structure. Advanced consultation
with an international tax consultant
is therefore necessary to determine LaiFan’s tax obligations in
China, and the implications this
will have on its Export Costing, cash flow and market entry
strategy.
Freight Forwarders: The company will continue to use an
external transporter for its diamonds,
but will have increased reliance on major international shippers
such as United Parcel Service
of America, Inc. and DHL Express, two companies that are
internationally reputed and well
represented in the Chinese market. Both can advise on customs
and documentation
requirements in the Chinese market.
Banking and Insurance: Increased purchasing requirements and
65. new export initiatives translate
into additional costs for LaiFan. Specific costs associated with
the new venture will be discussed
in greater detail in the Financial Analysis section, but do imply
that the company will need to
undertake additional borrowing activities. LaiFan’s Finance and
Logistics Managers will lead the
discussions with Export Development Canada (EDC) to
establish export insurance protection,
and with its current bank, Royal Bank of Canada, to obtain a
higher line of credit and a short-
term loan.
Translators: Marketing literature for the Chinese market will
need to be translated into Mandarin.
Experienced translators will be required who can also assist the
company in developing catchy
slogans or branding messages.
Target Market and Environmental Scan
This section of the report strives to achieve several objectives:
Present a broad overview of economic and market conditions in
China
Discuss the business climate as specific to the diamond
industry
Identify risk factors the company will have to mitigate
Zone in on the target market and target region of initial entry
for LaiFan’s product
Environmental Scan
Rapid evolutions in China’s political, economic and commercial
infrastructure are creating a
business climate increasingly favourable for the diamond
industry. China is the world’s fourth
66. largest country by size and the number two economy measured
by purchasing-power parity
(CIA – The World Factbook, China, 2004). The country is
divided into twenty-two provinces, five
autonomous regions, four municipalities and two special
administrative regions and is home to
1.3 billion people (CIA – The World Factbook, China, 2004).
China is a one party state, governed by the Communist Party led
by Hu Jintao (Ambler and
Witzel, 2004). Over the past twenty years, the country has
gradually embraced market-oriented
reforms and decentralized economic decision-making.
FITTskills Sample Business Plan 12
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Table 4: Key Economic Indicators
Graph 1: GDP Growth
Economic Indicators China
Gross National Income
- 2002
- 2003
- 2004
$1.6 trillion
$1.9 trillion
$2.1 trillion
69. ca
st)
Year
% China
Sources: The WorldBank Group; EDC Market Forecasts,
2004; International Monetary Fund, 2003; CIA – The
World Factbook, 2002, 2003, 2004, 2005
$65.1 billion
$71.3 billion
$74.5 billion
Table 4 and Graph 1 provide a longitudinal profile of China’s
economic performance and reveals
several trends that support a positive investment climate:
Stability – Despite nominal fluctuations, the country’s GNI and
GDP levels are relatively stable,
at times reporting an upward trend. Inflation rates also appear to
be well managed and rest
within a low-risk range (EDC Global Export Forecast, 2004). In
a conversation with Phillip
Wong, Ontario Exports Inc.’s International Marketing
Consultant for the Asia-Pacific region,
China’s increasing exports and diversified export portfolio
mitigates the risks of over-
dependence on one trade partner, decreasing its susceptibility to
averse economic conditions in
one market. Taking the United States market as an example,
China only exports 22% of its
products and services to the U.S. compared to Canada which
70. exports 89% of its goods and
services to the U.S. (CIA – The World Factbook, China, 2003,
Ontario Exports Inc. - Trade
Factsheets).
Positive Growth – Steady increases in GNI and Foreign Direct
Investment levels denote growing
wealth and a favourable investment climate. China’s Ministry of
Commerce reported a 7.6%
increase in the number of new foreign-invested venture licenses
in 2004, totalling 43,664 (CIA –
The World Factbook, China, 2004).
These facts point to a nation with increasing prosperity and a
growing pool of customers
capable of affording luxury goods. The country’s stable
economic and political climate also
reveals a low risk environment for civil strife and sudden
currency devaluations in the Chinese
Yuan. Despite these facts, LaiFan still has to carefully monitor
trends amidst industry analyst
warnings of potential risks. In EDC’s presentation of its 2004
Global Export Forecast, Chief
Economist Stephen Poloz warned of overheating in China’s
economy in 2005 and 2006, a
condition fuelled by soaring bank credit and rapid increases in
money supply. Unexpected
anomalies such as the region’s SARS epidemic in 2003 which
cost Asian economies $16.5
billion to address further underscore the importance for foreign
companies to buffer against
such risks.
FITTskills Sample Business Plan 13
71. Diamonds for Export FITTskills:
International Trade Management
Business Climate in Relation to Diamond Industry
In 2000, China opened the Shanghai Diamond Exchange, a first
step in its aggressive plans to
build a strong domestic diamond industry. According to Martin
Rappaport, in March 2004,
diamond trading volumes increased 91% to $40.7 million, with
diamond imports rising 48% to
$12.2 million and the rough diamond trade soaring 270% to
$3.71 million. Analysts predict the
country will account for 10% of the world’s total sales of
diamond products by 2010.
These conditions have both positive and negative implications
for LaiFan. Strategies for
overcoming negative conditions will be discussed in greater
detail in the Market Entry section of
the report.
Positive:
Lower Costs – To develop a more competitive trading
environment, China has progressively
reduced its high import tax on raw and processed diamonds
from 33% to 10% (People’s Daily
Online, 2002). This reduction can amount to significant savings
for LaiFan.
Higher International Standards – The Shanghai Exchange was
inducted into the World
Federation of Diamond Bourses in New York in May, 2004
(World Diamond Council, 2004). The
rigorous guidelines imposed on China’s diamond activities as a
72. result of entering the
international community upholds a standard that will protect the
credibility of diamonds in a
market plagued with counterfeit brands and imitation jewellery.
Negative:
The downside to liberalization of the diamond trade is the
influx of foreign competitors who are
setting up polishing factories in Shanghai as well as in the
Southern provinces of Guangdong
and Shandong. These factories possess a competitive threat to
LaiFan along several planes:
Greater Product Mix – Foreign polishers from Belgium and
Israel trade in higher gem quality
diamonds with more sophisticated craftsmanship. The increased
supply of such diamonds in the
market dilutes LaiFan’s claim that its diamonds are unique in
these qualities.
Competitive Pricing – Local jewellery retailers are more
inclined to purchase diamonds from
polishing factories in China. Diamonds from these factories are
cheaper due to their use of
lower wage workers and exemption from taxes by re-exporting a
portion of their product out of
China. As a result, retailers have larger profit margins and can
exact price penetration strategies
to compete more aggressively in the market.
Advanced Technology and Know-How – LaiFan’s competitive
standing against local Chinese
manufacturers has been its progressive use of technology to
streamline its manufacturing costs
and increase productivity. Its workforce is highly trained to
operate laser machinery to effect
73. more refined cuts. This ability will however, become
increasingly challenged as Israeli and
Belgium owners bring in advanced technology from their
countries to automate their processes
and transfer knowledge and skills to the local labourforce (Asia
Times, November, 2002).
Major Commercial Risks
This section concludes with a discussion on China’s weak legal
infrastructure as a risk for
LaiFan’s operations.
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China’s rapid economic growth is outpacing reforms on foreign
investment and its present legal
framework is poorly equipped to govern more complicated
business transactions (Ambler and
Witzel, 2004). Regulations are frequently changed and
inconsistently enforced with parts of
commercial law often contradicting one other. This has several
implications for LaiFan:
Poor Legal Protection – A weak legal infrastructure complicates
access to protection against
unfair treatment from a foreign partner or buyer. Legal advice
must thus be sought in advance of
any negotiations with local buyers or sales agents. Guanxi is
74. still extremely important and
supersedes many written regulations and the tremendous
discretion of government officials in
exercising approval powers cannot be underestimated (Ambler
and Witzel, 2004).
Resolution of Disputes – Litigation is not a popular option in
China as there is a strong
preference for the resolution of disputes through conciliation, to
save face. Dispute resolution
procedures need to be well defined in any export contracts with
local businesses and a good
translator is often needed should the dispute land in court.
Poor Intellectual Property Protection – The Chinese market is
notorious for constant breach of
intellectual property rights. According to a Bloomberg report,
half of the US$100 million in
counterfeit goods seized by customs officials in 2002 were from
China (Bloomberg, 2002). Such
breaches pose a grave threat to LaiFan’s strategy on developing
a well-branded Canadian
image. Strategies to combat this situation include early
registration of its patented cuts in the
market, educating buyers on distinguishing between real and
fake pieces and increasing
innovation of patented cuts to make it difficult to replicate
pieces.
Consumer Profile
15% of China’s population is designated as middle class
(Ambler and Witzel, 2004) which
equals roughly 200 million people. According to China’s Chief
Trade negotiator, this number is
expected to rise to 400 million in 2010 (Yap, 2004). Jewellery
75. has now become the third most
frequent item purchased by disposable income and in a report by
the International Herald
Tribute, the average middle to upper-middle income consumer
had an average of $8,500 yuan
in disposable income in 2003, 36% more than in 1998. In the
past four years, China’s retail
sales growth has outpaced that of the United States, totalling
$205 billion in 2003 (Yap, 2004).
While wages across the country have been steadily increasing,
regional disparities are salient
when you compare the annual per capital disposable income of
city residents – an average of
$1,200 for city residents versus $395 for rural residents (China
Statistical Yearbook, 2003). The
majority of the wealth is concentrated in the eastern coastal
cities of Shanghai and Beijing and
in the Southern part of Guangdong province (Ambler and
Witzel, 2004).
China’s Middle Class Consumer
LaiFan’s strategy to target the middle to upper middle income
bracket of China’s population can
be justified when one analyzes the size and buying power this
subgroup represents.
Several conclusions can be drawn about this:
• There is a large base of potential consumers for LaiFan’s
product concentrated in the
lower middle to upper middle class range.
• The target consumer can be further segmented to consist of the
middle to upper
middle class populations as they possess the buying power and
76. disposal income to
purchase luxury goods.
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Primary Markets: Shanghai, Beijing and Guangzhou
China’s growing wealth is not equally distributed and to strive
to sell across the entire country
would be mismanagement of the company’s time and resources.
The ailing conditions still
present in the Western provinces become apparent when you
consider in cities such as
Xinjiang, Guizhou and Yunnan, the government has struggled to
sustain adequate job growth
for tens of millions of workers laid off from state-owned
enterprises, migrants, and new entrants
to the work force. Eighty to one hundred and twenty million
surplus rural workers float adrift
between villages and the cities, many surviving through part-
time, low-paying jobs (CIA – The
World Factbook, 2004).
Leading the country’s charge in economic growth, Shanghai,
Guangzhou and Beijing are three
important markets for LaiFan to target first entry into. Of the
three, Shanghai claims a
heightened role in this development and should be greatly
focused on in the company’s initial
entry. With a population of 16 million, the city contributes one
twelfth of China's total industrial
output value, a quarter of its total exports and one eighth of the
77. nation’s financial revenue
(Shanghai Foreign Investment Service Center).
China’s Jewellery Consumer
Having established the target market group, this section now
moves to better define the buying
trends of LaiFan’s export customers.
According to Ken Fong, Marketing Manager at the Hong Kong
Trade Development Council,
increased buying power, lower jewellery import tariffs and a
standardization of China’s jewellery
market have all led to new dynamics in jewellery buying trends.
These include:
Shift in Purchase Motivation - Jewellery was once purchased
for investment purposes, often to
hedge against inflation and rifts in the economy. Consumers
now buy jewellery for their
aesthetic value and personal pleasure rather than for long-term
investment.
Type of Jewellery Purchased - Gold jewellery, once the
treasured favourite in the country, is
now competing for buyer preference with platinum and diamond
jewellery. An increasingly open
market to jewellery imports further raises local awareness of
other alternative pieces.
Branding is increasingly important with the Chinese buyer, a
fact reinforced by the growth of the
luxury brand market (Benson and Whitcomb, 2003).
International fashion houses such as
Giorgio Armani and the Paris-based Cie Financiere Richemont,
which owns Cartier, are
expanding in China (Yap, 2004). The role of the younger
78. consumer has also grown increasingly
important, a group that is extremely fashion-conscious and
influenced by Western trends (Ken
Fong, HKTDC).
The role of the female consumer cannot be underestimated as
women in China increasingly
make the purchasing decisions. Female employees total 330
million in the country, accounting
for 46% of the total workforce, an increase of 0.3% from 1995
(All-China Women’s Federation,
2004). Women’s education levels are also rising. Over the last
seven years, the number of
female students completing adult higher education increased
37.6% (All-China Women’s
Federation, 2004), denoting a population that is increasingly
independent and influential.
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LaiFan’s Ability to Meet Market Demands
Having better defined local market demands, several features of
LaiFan’s diamonds
differentiates it from its competition and makes the company
well suited to meet current
demand:
A Canadian Source – There is much opportunity to actively
export Canadian diamonds into the
region. LaiFan’s product would be one of the first in China
from a Canadian source, allowing
79. LaiFan to claim it holds a unique position in the market.
Sustainable Access to Supply – Diamond jewellery is in the
beginning stages of the product life
cycle in China. The predicted shortfall in supply in the near
future will lead diamond traders to
seek a reliable and sustained access to diamonds. Canada’s two
operational mines are young
and both have expected life spans of another twenty to twenty
five years. There are two
additional diamond mines expected to open by 2010 in the
Northwest Territories. In contrast,
some of the world’s largest diamond mines that supply the
rough to factories in China have
been in operation for greater than ten years and are reaching the
end of their lifespan. For
example, the Mir pipe in Russia, which has been in operation
since the 1950s, recently
surpassed its lifespan and was decommissioned (Natural
Resources Canada, 2004). Research
to find new deposits is a very lengthy and expensive process
and this shortfall in supply will
drive up demand for Canadian diamonds.
Quality Diamonds
Canadian diamonds are becoming internationally renowned for
their high gem quality because
of their origin in kimberlite pipes which trade for a larger value
in the marketplace (Bruce Boyd,
2004).
Innovation
LaiFan’s automated technology is cutting edge in the industry
and allows for greater and more
precise cuts on traditional pieces such as the Princess Cut and
the Round Brilliant. In a market
80. where size and shine are the predominant buying criteria, a
refined cut that can maximize the
flare of a diamond would do extremely well in China. The
increased productivity and finishing
time to produce a polished diamond allows LaiFan to supply its
product faster to a market that is
largely being supplied by manual labour. LaiFan is also unique
in that it houses an in-house
research and development department. Though small, the two-
person team presents an added
advantage for the company to produce and patent unique cuts
faster than other factories who
concentrate on the processing aspect of polishing diamonds
only. As diamond jewellery moves
through the product life cycle, this allows LaiFan to introduce
new and innovative cuts to the
market, offering alternatives to traditional pieces the market
may tire of.
Market Entry & Marketing Strategy
This section proposes that LaiFan’s market entry strategy take
the form of a partnering
arrangement with a local polishing plant in China. The merits
and justification for this proposal
will be presented within the context of a SWOT analysis on
LaiFan Polishing and the benefits
the company can expect to accrue through this partnership.
SWOT Analysis
Strengths
Within its first seven years of existence, LaiFan has become a
reputable leader for its ability to
value-add to a raw commodity through the use of advanced
technology. The company’s
81. FITTskills Sample Business Plan 17
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obsession with quality echoes throughout its operational
structure, beginning from the
procurement stage through to the delivery of its product to
customers.
Innovation occurs through LaiFan’s use of three state-of-the-art
ROFIN RX3000 C02 laser
machines to perform more refined and precise cleaves that
result in better cut diamonds.
Consequently, LaiFan’s diamonds command a much higher
mark-up of 75%, compared to the
industry average.
LaiFan’s small research and development team further expedites
new innovations by dedicating
full-time commitment to researching new technologies and
designs. It was the first to respond to
market demand for a specialty cut, away from routine
traditional pieces, and introduced the
patented “Mobius” design.
Weaknesses
Three main internal weaknesses hinder LaiFan’s competitive
strength in China:
- Financial resources. LaiFan is a small operation with limited
resources to create a brand
new export division. The strict purchasing schedule dictated by
the diamond mines
82. places an added strain on the company’s cash flow during
specific times of the year.
This reduces the company’s ability to invest aggressively in a
new export initiative as
well as reduces its capability to withstand significant losses
should its export initiatives
fail.
- Weak Marketing Ability. Already discussed in the
Management and Human Resources
section of the report, LaiFan has neither the marketing budget,
nor the in-house
expertise to develop an extensive marketing strategy. In an
industry where large
competitors such as De Beers and Cartier launch multi-million
dollar advertising
campaigns, this weakness can significantly impede recognition
of LaiFan’s product over
competing brands.
- Inexperience. Although LaiFan’s workforce is extremely
diverse, concerted efforts
across the company to pursue exporting activities is a new
vision and presents a large
learning curve for all involved. A more important aspect of the
company’s inexperience is
a lack of connections and distribution networks in the Chinese
market. Not being able to
access a strong distribution link into China could hamper the
company’s entry strategy
into the country and prevent it from performing effectively
against aggressive
83. competitors.
Opportunities
Target opportunities were presented and justified in the
preceding section and will be
summarized again at a high-level in this section.
Target Locations - Beijing, Shanghai and Guangzhou’s lead in
the country’s wealth and middle-
class boom make them the prime centers of target for LaiFan’s
initial entry.
Product - The market’s crave for large gem quality pieces
means a higher level of acceptance
of LaiFan’s product requiring fewer modifications.
Consumer Type - As the target market analysis demonstrated,
there is a large and growing
base of consumers for LaiFan’s product within the middle to
upper middle class segments of the
population. Selling to this pool of customers still allows LaiFan
to price its diamonds to about a
65% mark-up.
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Threats
External threats in China takes the form of domestic and foreign
competition. At one level are
jewellery products other than diamonds that compete with
84. LaiFan for jewellery sales. At the
other level are diamonds produced within China and from
outside of China.
Other Products as Competition - Despite the new attraction to
diamonds, traditional pieces such
as jade, platinum and gold are still very popular, especially with
the older generation (Ken Fong,
HKTDC).
It is also important to note the growing prevalence and threat of
fake diamond jewellery pieces.
Cubic zirconia and synthetic moissanite jewellery exude similar
brilliance and fire as genuine
diamonds but retail for half the price. Improvements in
technology will increasingly make these
pieces more desirable to consumers who seek less expensive
jewellery with the same flair of
real diamonds.
Domestic Diamond Producers - China Diamond Corporation is
the country’s largest diamond
producer and controls four mining properties in the country
(AZoMM, 2004). Roughly more than
50% of the stones recovered from the company’s 701 Changma
mine are gem quality stones.
The country thus has access to a supply of polished and ready to
set diamonds.
Regional Competitors - China’s jewellery industry is heavily
dominated by retailers from Hong
Kong that carry strong branding through chain stores. Similar
cultural background and
preferential treatment of Hong Kong products as a result of the
Mainland and Hong Kong Closer
Economic Partnership Arrangement (CEPA) gives added
85. advantage to Hong Kong players
(Raymond Yuen, HKTDC).
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Market Entry
Table 5 summarizes several feasible market entry options and
their pros and cons for LaiFan
Polishers.
Table 5 – Market Entry Options
Market
Entry
Option
Advantage Disadvantage
Sales Agent Low Risk: Partnership can
be terminated upon
dissatisfactory
performance.
Low Investment: Payment
from LaiFan tied to
commission from sales.
Established distribution
network.
86. Local knowledge.
Additional costs: Increased staff wages as a result of
increased activity.
Potential intellectual property infringement by agent.
Chinese commercial law still underdeveloped and
often favour the local agent. Contractual disputes
would be costly and time-consuming.
Less incentive to commit to LaiFan’s product if other
clients have larger portfolios or offer larger
commissions.
Manufacturing
Plant in China
Cheaper labour costs. Most labour is manual labour and
productivity is
slower than automated process in Canada.
Major capital investment costs: A minimum of
US$140,000 is required of registered capital with a
minimum of 15% paid up within three months and the
balance paid up within a year (Offshore.com, 2004)
Failure of operations in China represents major
financial loss that may not be recovered by its
domestic operations.
Cannot access tax breaks in special economic zones
as company is not exporting goods out of China.
Co-
manufacturing
87. Partnership
Agreement
Less investment than
setting up a local
manufacturing plant.
Access to local knowledge.
Due diligence in protecting intellectual property rights.
Transfer of knowledge to local partner could enhance
its position as a future competitor.
Access to local distribution
network.
The third option presented above is the most feasible in terms of
LaiFan’s current financial and
risk management abilities. Working with a local partner will
facilitate LaiFan’s entry into China
through:
Providing local experience and networks
More efficient working process – the hours in China are longer
than in Canada and
output can be greater with a larger workforce
An economy of scale that the company may not otherwise have
if it opened up its
own factory in China
88. The proposed co-manufacturing partnership will consist of
LaiFan undertaking the initial three
steps in the polishing chain: cleaving, sawing and bruting of the
rough diamonds. At this point,
the diamond will be cleaned and packaged by its logistics
department, then sent to the local
partner in Shanghai where it will complete the polishing and
faceting of the diamonds according
to LaiFan’s cut design, licensed for use to the partner. The
diamonds will also undergo the final
FITTskills Sample Business Plan 20
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brillianteering stage in China and be inscripted with the
traditional Canadian maple leaf emblem
with the co-initials of LF and the partner company appearing
beneath the logo. The partner will
make an initial payment on LaiFan’s semi-processed diamonds
on net 30 day credit terms. A
further commission of 20% on the sales value of the polished
diamonds will be forfeited to
LaiFan once the diamonds are sold in the retail market. The
commission will also be made on
net 30 day terms.
Upon finding an appropriate partner to undertake this
relationship, LaiFan will enter into a one-
year contract, with a purchase schedule set out for the year and
licensing of its patented cuts to
the partner to cover this one year period as well. Routine
reviews of the partnership will be
89. made by both parties with negotiations on the renewal of the
partnership to be held on an
annual basis.
This report now moves to support the merits of this strategy
within the context of the company’s
product, pricing, place and promotion strategy.
Product
In the absence of a large marketing budget, the proposed
partnership could act as a bridge to
better connect LaiFan’s product to consumer demand:
Distribution Network: The partner would be expected to have an
established network of
buyers. Accessing this network would expedite LaiFan’s entry
into China and save it time
and costly research to tap into this network on its own.
Local Knowledge: The local partner would be best suited to
predict upcoming trends in the
Chinese market and advise on minor modifications needed to
LaiFan’s current product.
There are also regional differences between local markets that
only a business could pick
up through extensive experience in a country. The local partner
could thus help LaiFan fine-
tune its product and market entry strategy to better match
regional demands.
Price
Two conditions about pricing in the diamond industry will
govern the pricing strategy that LaiFan
uses:
90. 1) Widespread industry consensus that a shortfall of supply will
keep diamond prices
elevated well into 2010.
2) Limited range and flexibility for diamond traders at the
polishing stage to set pricing
strategies. The greatest discretion and flexibility in pricing
occurs at the retail stage,
where mark-up can be made as high as 200%. This flexibility
unfortunately does not
exist at the polished and semi-polished stage as rough and
polished diamonds are
strictly priced according to the Rappaport Diamond Report (Don
Law-West, Indian and
Northern Affairs Canada). The report is an industry standard
based on global supply and
demand dynamics and reflects prices of small brilliants to
stones of 5 carats, of colour D
to M and from “pure” to “pique 3”.
Despite the rigid pricing structure, shortage of similar sized and
graded diamonds in China
means LaiFan’s diamonds would command a premium price in
the market. Noting that the same
carat diamond in China is not necessarily graded at the same
standard, the higher price that
Canadian diamonds command in this market thus resembles a
market skimming strategy. This
strategy supports the results discussed in the target market
section of the report where LaiFan’s
91. FITTskills Sample Business Plan 21
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target market would have to preclude the lower end of the
middle class category, who do not
have the purchasing power to afford LaiFan’s pieces.
The merits of the proposed partnership strategy become evident
again at this stage of the
analysis. A high premium price commanded by a product often
requires similar messaging to
justify the product’s cost. With the expertise and help of a local
partner, LaiFan can refine its
messaging to emphasize the diamond’s quality as support for its
higher cost.
This said, there are two areas in pricing which LaiFan does have
control over when pricing its
diamonds to its partner: the shipping terms used, and the
currency payment will be made in.
In Appendix A – Export Cost Accounting, LaiFan has calculated
its pricing to its partner based
on the Incoterm CIP Shanghai. This term is potentially the most
reasonable one to negotiate
between two parties who have no familiar history with one
another. CIP also presents a
balanced share of the risks and costs as LaiFan manages the
responsibility for transportation to
Shanghai and the partner oversees the entry of the product
through local customs. As the
Export Cost shows, using the CIP Incoterm, the $16,000 cost of
92. transportation and insurance
specific to the CIP term still makes the export venture feasible
and profitable for LaiFan.
The sales price will be set in the foreign buyer’s currency –
Chinese Yuan. This decision was
made based on an assessment of environmental conditions
including the foreign exchange rate,
inflation, laws and regulations in China. The environmental
scan reveals that China has a stable
foreign exchange and inflation rate with low risk of currency
devaluation. Quoting in Chinese
Yuan will help the partner clear the goods through the Shanghai
Diamond Exchange which
operates in local currency and will make for more favourable
negotiating terms between the two
partners.
Place
LaiFan’s shipping strategy is very dependent on its partner’s
intimate knowledge of China’s
customs and documentation procedure. In a telephone interview
with Philip Yue, Operations
Manager of Kuehne & Nagel, diamonds are considered high
value products and as such, are
very vulnerable to theft. Air transportation is the main mode of
delivery used in the industry and
once in-land, diamond traders use high security trucks to
transport the diamonds to their final
destination.
Under the CIP Incoterm, the risk passes from LaiFan to the
importer when the cargo is handed
to the first carrier (FITTskills International Trade Logistics).
However, responsibility for the costs
stay with LaiFan until the goods actually arrive in Shanghai.
93. The term offers a good risk
management opportunity for LaiFan because it does not have to
worry about finding a local
customs broker to clear the goods. LaiFan’s responsibilities
before the goods leave Canada
then are that it must prepare all the certification for the
diamonds and complete other export
paperwork.
Certification includes a report from a gemmological lab and a
Kimberely Certificate, to prove that
the diamonds are from a non-conflict source. Documentation
includes a B13A, three copies of a
commercial invoice, the shipper’s waybill and evidence of
insurance.
As the Canadian government does not restrict the export of
diamonds, no Export Permit is
required to clear the goods (Canada Customs and Revenue
Agency). There are also no
restrictions of the importation of diamonds into China.
According to Samira D’Costa, FedEx
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Sales representative, these documents do not need to be
translated for accompanying the
goods into China.
Transit points for LaiFan will thus be two areas. LaiFan will
have UPS pick up the shipment from
94. its factory in Toronto. Its diamonds will land at Pudong
International Airport in Shanghai and be
transported by Brinks armoured car to the Shanghai Diamond
Exchange where they will clear
customs. Clearance of the goods in China will be managed by
LaiFan’s partner who will need to
hire a local customs broker. According to the HKTDC,
documentation requirements are handled
by the Chinese importer and include the bill of lading, invoice,
shipping list, sales contract, an
import quota certificate for general commodities, import
license, inspection certificate issued by
the State Administration for Import and Export Commodity
Inspection (SACI) or its local bureau,
insurance policy, and customs declaration form (Raymond
Yuen, HKTDC).
The packaging of the diamonds will need to be enhanced due to
the extra travel time they are
subjected to. To prevent the shape of the diamonds changing
through contact with other
materials during transportation, they will be wrapped very
tightly in heavy duty parcel paper.
There will also be a paperweight placed in the parcel paper
before it is folded to prevent the
diamonds from “jumping” in shipment. The parcels are lined
with double layers of soft cotton
fabric liners, instead of the regular single layers. As with
domestic shipments, the diamonds will
be placed in aluminum parcel boxes, but packed more compactly
to prevent shifting or
movement.
Promotion Strategy
Diamond conglomerates such as De Beers, Tiffany’s and
Cartier, are spearheading the
