Introduction of International Kiwi Cheese Company
International business has become the most essential element of business all over the world. It is also referred to as Global Business, which means it involves the transfer of goods, services, and technology from one country to another country. It mainly involves exports and imports. International business has become a major source of earning foreign exchange countries (Paul, 2008). Exports help a country to increase its foreign exchange and to increase its profitability. The company indulged in exports normally earns huge profits and can reduce various kinds of risks. Although there are various kinds of risks involved in international business like credit risk, currency risk, political risk, etc. a company or country by managing such risks can increase its efficiency (Cherunilam, 2010). This report analyzes and identifies the international business strategies and risks that Kiwi Cheese, a cheese manufacturing company in New Zealand faces and various other issues involved in exporting have been discussed.
Brief Introduction of the Company
Kiwi Cheese Limited is a cheese manufacturing company and is based in New Zealand. It manufactures cheese, which is quality-wise very superior. The company is also into export business as it is planning to export the cheese to India as an import enquiry from a prospective importer in India has been received via the net. A company in India from Mumbai named Asma wants to be in a trade relationship with Kiwi Cheese and wants to import cheese from the company.
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Benefits to Kiwi Cheese to export the cheese to India
There are various benefits to Kiwi Cheese Limited to export cheese to India, which are as follows:
- Increasing sales: The most important benefit of exporting is an increase in sales. By exporting the cheese to India Kiwi Cheese can substantially increase its sales. As it produces quality cheese and has already expanded its market share in the local market in New Zealand it can easily export cheese to India and can have the benefits of increase in sales (Specialty Cheese Can Benefit from Export Market, 2008).
- Increase in profits: The main purpose of exporting is to expand the profits and generally companies enter into the exporting business to increase their profits. If Kiwi cheese exports the cheese to India, it can increase its profits by increasing its sales. It can have high-profit margins by exporting cheese of good quality.
- Economies of Scale: A major advantage of Exporting is considered to be the Economies of Scale which results from the increase in the volume of production. When there is an increase in production, various costs can be spread over a large volume and thus unit per cost can be decreased. Kiwi Cheese can also achieve Economies of scale by exporting cheese and thus can increase its overall profitability and decrease its costs (Benefits of Exporting, 2013).
- Innovation: As the company exports, it will exposed to more competition and new technologies. It will require focusing on different customer requirements and thus will innovate itself. By using new technologies in the production processes it can be advantageous to the company. A different cultural environment to which it will be exposed will help the company to boost its productivity, skills and innovation.
- Improving efficiency and product quality: By entering into the global market through exporting the company can become more efficient. The global market is highly competitive and the company is required to be quality conscious. As the company is already famous in the local markets of New Zealand, by exporting quality cheese, it can improve its efficiency and focus on product quality (Jesse, 2005).
- Untapped markets: Export is a way to reach the untapped global markets. The untapped markets all over the world may likely drive the export activities of a company. The company by exporting cheese to India can reap the benefits from tapping such an untapped market and can also take other advantages such as increase in sales, increase in profitability, etc. Kiwi cheese can have high benefits by exporting cheese to India (Greasley and Oxley, 2009).
Risks to Kiwi Cheese to export
There are many kinds of risks associated with export and a company faces a number of risks when it exports the products. Various risks, which Kiwi cheese can face, are:
Political risks - The major risk, which is being faced by the exporters, is Political risk. The changes in government policies regarding export and import or instability in government will have an effect on the export and import business. It can create disruption in the export business or can prevent the completion of the export contracts. Thus, an exporter should have a proper understanding of the government policies regarding the import and export of the importer’s country. As far as Kiwi cheese is concerned, it should understand the government policies of India to save itself from political risk (Nestmann, Moser and Wedow, 2008).
Credit risk - Exporters normally face credit risk and it is considered as one of the major risks in export and import. Credit risk refers to the risk of non-payment or fraud by the foreign importers. Due to the long distance, it usually becomes difficult for the exporter to verify the creditworthiness and reputation of the importer. If an exporter is unaware of the importer’s creditworthiness then there is a large risk being associated with the non-payment of money (Unterman, 2008).
Exchange rate risk - Another risk, which exporters face, is Exchange rate risk. it arises due to the fluctuations in the value of the currency. As there is uncertainty associated with the future value of a currency, the export value or amount to be received by the exporter will be affected by the exchange rates or by fluctuations in the value of a currency (Abor, 2005). If the exchange rate depreciates then it will be a loss to the exporter. Kiwi cheese can face this risk while exporting cheese as in a case when the exchange rate between NZD and Rupees depreciates then Kiwi cheese can have a loss and thus is a major risk for it (Du and Zhu, 2001).
Legal risk - As different countries are governed by different rules and regulations, it can have an impact on exports and imports. As international laws and regulations change frequently, it is a risk to exporters and importers. The legal aspects of trade should be properly assessed while exporting or importing. The difference in laws of export and import countries can have an impact on various aspects of export agreements like taxation, currency dealings, etc.
Transportation and Logistics risk - During transportation there are a variety of risks due to which the goods or products may damage. All kinds of risks, which are associated with the transportation of products while exporting, are known as Transportation risks. The risk of theft, damage or the risk of goods not even arriving, etc. are covered under such type of risk. Logistics risk on the other hand relates to international logistics, in particular to the contract of carriage. Both the exporters and importers must understand their legal rights so that they can claim against carriers. The contract of carriage is between the shipper and the carrier.
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Risk management strategies we can use to eliminate, minimize or retain these risks
The following diagram shows the five-step risk management procedure to minimize and eliminate the risks associated with the Exports.
- Identify the risks: The first step in a risk management procedure is to identify various risks associated with the exports. In this step, risks like credit risk, political risks, exchange rate risk, etc. are properly identified and their impact is assessed.
- Assess the risks: At this second stage of the risk management procedure, weights are assigned to the seriousness of the risk, which means weights are assigned based on the impact a risk can have on the exports. Some of the risks can also be insured like credit risk, country risk transportation risk, etc.
- Plan: At this step, proper planning should be done to minimize the impact of such risks. It can be done through hedging risk by various forward and future contracts, swaps and options, etc. These options should be properly analyzed and their advantages and disadvantages should be assessed.
- Implement: At this stage of the risk management procedure, the planned actions or strategies should be implemented. Proper implementation should be done to mitigate the risks.
- Communicate: This is the reward and futures contract that can be used by exporters to hedge the exchange rate risk. Many exporters prefer forex exposures, by which an export contact, say in NZD can be linked with an import contract also in NZD or by matching the assets and liabilities being held by them, to hedge the export risks.
International business provides various kinds of opportunities and benefits to a company. By exporting a company can increase its sales, and profits, earn foreign exchange, can innovate its production facilities and technology, reach economies of scale, focus on product quality and efficiency, can reach untapped markets and can also reduce risks related to seasonal fluctuations. Export provides a company with various advantages but also possesses various risks which a company should mitigate like credit risk, political risk, transportation risk, legal risk and most importantly currency or exchange rate risk. A company by properly preparing a risk management strategy can combat such risks (Coade, 1997).
In this report, Kiwi Cheese has used the Free on Board method of quoting as it is less expensive for the company and also it is more beneficial for it. For a safer and secure payment and to reduce the risk related to credit the company has used the Letter of Credit payment system, which will ensure that the company receives timely payment.
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