Instructions
The following final examination is worth 45 points. It consists of 5 Essay Questions. The essay
questions are each worth 9 points.
You will have two hours, the entire exam period to finish the test. The five essay questions which are
based on the following fact pattern and schematic drawing will focus on your ability to not only
demonstrate your reading of the textbooks , case studies, and other materials, but to show your overall
level of comprehension of the subject matter through class lectures. You are strongly encouraged to
demonstrate your overall knowledge in a concise accurate manner showing its potential complexity.
Many great answers may be in the form of bullet points with subsequent explanations. Provide
examples / or facts from the fact pattern where appropriate. Organization and analysis are
critical.
Final Examination – Fact Pattern
You have been recently hired as Sr. Vice President, of a soon to be established International Division
for a US based computer manufacturer, Irvine Computer International. (“IrvComp”), a domestic
corporation, based out of Irvine, California. You have profit and loss responsibility for all international
development, transactions and operations, including finance, sales and marketing. IrvComp
manufactures some of the best, “all weather”, “rough and tough”, mini-computers for about $200 USD
each. “The Answer”, as it is known, has been a domestic hit with the highly mobile young crowd
experienced with some of the more advanced technologies. Domestic revenues have been excellent
and growing and are significant enough to begin a rather ambitious international expansion plan.
IrvComp sees itself as an “innovator(???)”. There is a strong corporate social responsibility
component to all its decision-making.
You are now being asked by the CEO and the Board of Directors to review and comment on the
following expansion plan being developed and that the CEO has identified:
IrvComp is considering expanding into both Europe and Asia. It believes that the “Answer” is a “born
global product” and as such may be capable of entering either market given its particular
characteristics and price points. The initial conceptualization of the structure for the expansion is
demonstrated in the attached diagram. As it currently stands, this bifurcated emphasis presents different
opportunities and risks.
As it relates to Europe, you are being asked to develop a profitable European operations based in
Germany. Specifically, Frankfurt, Germany whereby you can address your largest market, and are
beginning to address the rest of Europe. In Frankfurt, you are considering establishing a wholly
owned subsidiary that serves as a secondary manufacturing facility, but essentially a distribution hub
based on a new authorized distributor (“AuthoDis”).
AuthoDis provides some valuable services. AuthoDis knows the local market, has tremendous
experience in computer sales and is widely considered the best in Germany. IrvComp is lucky to have
accomplished such a relationship. Through the distribution contract AuthoDis provides consumer
services including any updates, warranty servicing and some of the preliminary advertising and
promotions. Because of AuthoDis sales are expected to increase rapidly over the next few years. You
suspect that one or more unauthorized distribution points have successfully penetrated(??) the German
market. You are considering expanding to the rest of Europe. Your product is available in 102
keyboard configurations, meaning that you can type using all the European alphabet. The exchange rate
is presently 1 USD = .728 Euros.
On the other side of the world you have just begun to look at Asia. In particular, from your previous
experience working in Asia, you great relationships and feel fairly confident in being able to establish a
strategic alliance in China with Hangzhou Yellow Dragon Company. (“HYD”) In Hangzhou, Zhejiang
to be precise. (The strategic alliance is governmentally mandated(?????) if IrvComp was to
establish operations.) Hangzhou is a very large, highly prosperous city just south of Shanghai. With the
HYD /IrvComp strategic alliance you are seeking to establish the most reliable and inexpensive means
of manufacturing some of the key components of several products. HYD has been known however to
take advantage of new technology. You have not yet determined what those components will be.
Exchange rate is 1 USD = 6. 825 Yuan
Tangentially related to the Asia expansion, the CEO of IrvComp has been approached by a very
wealthy Burmese business man who is looking to establish computer operations in Naypyidaw, the
capital of Myanmar (Myanmar is an extremely impoverished 4th World Country) He has very good links
to the Military Junta and claims he can “guarantee” a successful project. . He is also willing to invest
heavily in any transaction. Myanmar ranks very poorly on the corruption index, but does have a good
source of Indian software and hardware engineers that may provide a very inexpensive source of
“manufacturing capability”. Perhaps just as important is the fact that “The Answer” may provide for
people of Myanmar the ability to enter the “internet age”. Since 2001, the official exchange rate has
varied between 5.75 and 6.70 kyats per US dollar (8.20 to 7.00 kyats per euro). It may have changed
recently.
The CEO values your opinion tremendously, and has asked you to address the following questions on
the basis of your general international management knowledge and on the attached diagram. She asked
the question without thinking through their implications. She asks you to answer each but taking into
account that there might be overlap with one or more of the others questions. She expects you to raise
any and all issues and where appropriate make recommendations.
1.
What are, in general terms, the risks inherent(??) in between the two expansion foci? That is,
what are the advantages and disadvantages of establishing a wholly owned subsidiary in
Germany vs. a Strategic Alliance in China? Is there any alternative structure you might propose
that would maximize our control. Do not focus here on the intellectual property issues.
Answer each of these questions and specifically address the following:
Considering everything you just answered, should IrvComp expand into both
Europe and Asia?
2.
The CEO suspects that as IrvComp begins to expand internationally, the company may be able
to take advantage of more sophisticated accounting and financing incentives. She has heard
about transfer pricing and although she will be receiving a report from the CFO precisely on
this issue, she has asked that you explain the concept from your perspective. Where might it
apply and can the eventual structure be used toward a more expansive, well coordinated global
strategy? Answer each of these questions and specifically address the
following: How might export price escalation and currency risk apply here in
your global expansion strategy? (Draw a diagram if necessary in your
answer.)
3.
The CEO is intrigued by the Burmese opportunity yet has a number of questions. She
understands that you are not an expert in Myanmar. Perhaps most importantly is the fact that
the kyat is not a hard currency and therefore essentially non-convertible. In general terms, is
there any way that we may be able to “cut a deal” without resorting to the Kyat / Dollar
exchange? If there is, what are some of the key issues inherent in working within such an
emerging market as Myanmar for our company / product? Might we be able to “gain” some
good public relations by establishing a presence there? Answer each of these questions
especially focusing on gaining some good public relations. Think this
through carefully!
4.
From an intellectual property perspective the CEO is also concerned. She has asked you to
highlight for her what some of the key issues would be in each of the markets IrvComp is
contemplating operations. She will be receiving a report from General Counsel and
understands that you are not a lawyer, but suspects that there are real risks of intellectual
property infringement in some of the markets being considered. Where do you perceive the
greatest risk and can a non-legal, operational structure be used to minimize the risk? Answer
each of these questions and specifically address the issue of how grey trade
may apply.
5.
Finally, as one of the final steps, the CEO is asking you to create a team (staff) to address all
these issues. She is asking for recommendations as to team composition based on functional
areas, as well as the “type of individuals” that would serve as the basis of the international
division. Are there any general labor concerns that should be addressed early on in determining
the staff and other members of the team? Answer each of these questions and
specifically address the concepts of culture and ethnocentrism.
