TAIHO PLASTICS INDUSTRIES PRIVATE LIMITED

________________________

A Written Analysis of a Case

Submitted to
FERNANDO B. BALMOCENA, Ph.D., M.B.A.
Professor
Master of Business Administration
XAVIER UNIVERSITY
Cagayan de Oro City
___________________________

In Partial Fulfillment
of the Requirements for the Course
DYNAMICS OF MANAGEMENT
(MBA 111)
by
ROSELLA S. ABENIO
IVY L. CAMANCE
IRENE D. CO
ABNER C. ESPINOSA

Table of Contents

I.
II.

III.
IV.
V.

Executive Summary
Facts of the Case
A. Company Background
B. SWOT Analysis
C. Analysis of Exhibits
D. Assumptions of the Case
Problem
Alternative Solutions
Conclusion

I.

------------------------------------------

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2
8
10
16
17
18
30

Executive Summary

The purpose of this report was to analyze the case of Taiho Plastics Industries
considering its plan to expand production and penetrate the U.S. market.

This report has considered three modes of entries to international market, namely:
joint venture, indirect exporting, and direct exporting that are applicable for Taiho
Plastics Industries in view of its companys condition.
Joint venture is a strategic alliance between two or more individuals or entities to
engage in a specific project or undertaking.
Indirect exporting entails contracting with intermediaries in the producer's home
country to perform export functions; these are intermediaries such as an export
management company (EMC) or a Trading company. These intermediaries are
responsible for finding foreign buyers in the target market, shipping products and
receiving payment.
Direct exporting involves direct marketing and selling to the client that is contracting
with intermediaries located in the foreign market to perform export functions;
intermediaries include foreign based sales agents and distributors. These intermediaries or
agents perform downstream value chain activities in the target market.
After taking into consideration the three modes of entries to international market, it is
recommended that the Direct Exporting would be the most suitable course of action since
the company is not new to this and that cited advantages are in line with the companys
future plans.

II.

Facts of the Case

A. Company Background
Taiho Plastics Industries Limited is a family-owned business engaged in the
manufacturing of plastic bags. In 1976, Mr. Wong, co-owner of the company, took
over the management of the company. Since then he has been impulsive about the
companys growth. In 1984, Mr. Wong made changes in the companys plans which
include expanding the production and penetrating the U.S. market. This brought about
after assessing the companys position based on performance and trends in the
industry in 1983.
Amidst the recession in the industry, the company invested $1.7 million to replace the
outdated Hong Kong extruder with more efficient Japanese machinery, and purchased
twelve cutters worth $3.5 million that were financed through loans. Consequently, he
was able to purchase the machines at a good price and on favorable terms. The
investment is to address change in the industry where manufacturing of plastic bags
requires automated machines rather than labor extensive. Hence, the idea of investing
in better machinery is seen as inevitable to stay viable in the international market.

Production

Taiho uses Rotogravure printing process which is reputed to produce prints that
are sharper and better toned than those from another process known as

Flexographic printing.
Printing cost decreases with the increase in the number of plastic bags being

printed.
The maximum working capacity of the machines is 350 tons per month.

Cost of production has fallen from $3,914,831 in 1980 to $3,846,254 in 1981.

The company may increase the number of shifts per day (from 1 to 3 shifts)
depending on the work load to meet the production datelines and high volume

orders.
Production is stopped once every two weeks to allow both man and machine to
rest.

Stock Planning and Delivery

Plastic resins are the main raw materials which form 65% of total cost in
competition to direct costing and overhead which account for 25% and 10%,

respectively.
The amount of materials purchased depends on the monthly requirements and

financing available.
Taiho buys its resin from Japan, the U.S. and some European countries through

their local agencies.

It is common to order raw materials three to four months in advance.
Taiho is in good terms with its suppliers and so far has only experienced minimal

problems even during times of tight supply.

The company does not practice any formal system of stock control. It restocks
every 15 days and if the company should require more, it will resort to spot
buying.

The Market

Plastic bags used in Singapore include vest bags, carrier bags, garbage bags, food
wrapping bags, industrial packaging bags, and market bags. The market segments
for these bags are the following:
(1) supermarkets and emporiums

(2) retail stores

(3) food stalls and market places
(4) industrial users
(5) transportation industry
(6) construction industry

Supermarkets and emporiums use mainly vest bags and smaller volumes of carrier

bags and plain wrapping bags. The consumption of this segment varies.
Price undercutting is common in the local market.
Mr. Wong indicated that there is already evidence of a few competitors in the
other segments lowering their prices. If the situation worsens, Taiho may have to

review its prices in the local market.

Taiho is now concentrating on supermarkets and emporiums where there is
demand for bags of a higher quality and print.

Sales

Sales operate on a contractual basis and orders have been regular. A single order
of 50,000 bags is considered a small order while 5 million bags is considered a

large order.
Taiho usually rejects any single order of less than 10,000 bags but local order of

5,000 have been accepted.

Profit margins based on export prices are in the range of 5% to 10%.
The company operates on a cash basis and payment is expected 7 days after
delivery. However, it allows clients in Singapore 90 days credit but average pay-

up time is 103 days. Bad debts have not been a serious problem.
Taiho enjoys a core of regular customers, a few of which are large buyers.
Mr. Wong supplies not more than 50% of each clients requirements and this helps
to reduce dependence and risk.

Products gained a reputation of quality and the company won an international

award for it.

Taiho prices are competitive in the export market but if compares with other

manufacturers selling to the local market, its prices are among the highest.
Australia accounts for 80% of sales, Holland and the U.S. 10% and another 10%
from domestic demand. The plastic bags are handled by fifteen distributors in

Australia and one each in U.S. and Holland.

There has been a sudden increase in demand for plastic bags in the U.S.
Mr. Wong believed that the key to expansion is to look West and is currently
trying to establish contacts in the States.

Competition

Manufacturer from the West needed minimum orders of 250,000 pieces to be

profitable.
Mr. Wong foresees that many local companies will be forced out of business
because large importers like the U.S. and Australia may find it feasible to produce
their own bags due to the recent developments of automated machines that can be

operated at lower unit cost.

Two companies that stand out in terms of the size of the operations and finances:
1. Lamipak
Expanding fast and is currently the largest manufacturer of polyethylene

plastic bags with operation capacity of 2,000 tons per month.

Switch to high speed and more advanced machines.
Took a world-wide patent on its co-extrusion of a multi-layer film duthene

which allows for bags to be easily opened.

Active in R&D and spends about 5% of revenue on this activity
There is a wide product range which includes both innovative and

modified bags.
With 20 specialists who have recently developed several new products.
Exports take up 90% of its total output

Its main market is the U.K. and some other countries in the EEC and the

Middle East.
Exports to the U.S. amount to 5-10% but Lamipak expects this proportion
to increase to 50% in three to five years.

2. Maya Plastic
Invested into venture to wholly-owned subsidiary bought Singapore PE
(oldest polyethylene manufacturer in 1970s) and Nakamura automatic

vacuum forming machine

The operating capacity was 1,900 tons per month
Diversified their production from polyethylene bags into polysterene paper

(PSP)
Eighty percent of its PSP sheets are sold locally and the remaining 20% to

Malaysia and Indonesia.

Engaged the services of specialist in plastic chemistry to ensure high
quality of their products and allocated $200,000 for testing equipment

Employees

The number of employees has fallen from 150 to 65.

Workers have been with the company for a long time and cannot keep up with the

changes in the industry

To address the employees need to adopt with the new machines, Mr. Wong sent
few of his supervisors for a training and his production manager for a two-year

course in production management

Mr. Wong intends to increase personnel and put up one extra shift to increase
output per month by 115% to 450 tons in the coming year.

Taiho has no immediate objective to compete head-on with Lamipak or Maya whose
approaches are different from those other local firms. Taiho is now paying more
attention to the development of more innovative bags; and expand its base in the U.S.
once it could come up with strong financing. Mr. Wong forecasted that Taihos sales in
1985 will reach $12,000,000.

B. SWOT Analysis
Strength
1. Taiho uses Rotogravure printing process which is reputed to produce prints that
are sharper and better toned than those from another process known as
Flexographic printing.
2. Taiho is in good terms with its suppliers and so far has only experienced
minimal problems even during times of tight supply
3. Products gained a reputation of quality and the company won an international
award for it.
Weakness
1. Prices of Taiho are competitive in the export market but in local market, its
prices are among the highest
2. Workers have been with the company for a long time and cannot keep up with
the changes in the industry
3. The company does not practice any formal system of stock control

Opportunity
1. Maximum working capacity of the machines is 350 tons per month, in 1983
total sales is at 2,040 tons or equivalent 170 tons per month hence with the

existing machines, Taiho has the capability of producing double than it

currently produce.
2. There has been sudden increase in demand for plastic bags in the US.

Threat
1. Price undercutting is common in local market
2. With the recent development of automated machines that can be operated at a
lower unit cost, large importers like US and Australia may find it feasible to
produce their own bags
3. Competitor Lamipak, the largest manufacturer of polyethylene plastics bags,
expects exports to the US will increase from 5 to 50% in three to five years.

10

C. Analysis of Exhibits

Exhibit 1
Performance Data
1979 - 1983
Actual Data
1979
Sales (in $)
Sales (tons)
Gross profit (in $)
Net profit (in $)

1980

4,504,000
1,635
720,640
60,000

1982
5,617,00
0
1,800
730,000
1,621

1980
0.53
(0.23)
1.97

1981
0.90
(0.03)
2.04

1982
0.88
(0.04)
2.13

1980
-12%
-6%
452%
-30%

1981
2%
16%
45%
-3%

5,068,000 4,437,000
1,500
1,410
89,996
496,944
89,000
62,000

Ratio Analysis
Current ratio
Working capital
Sales/Total Assets
Growth Rate
Sales (in $)
Sales (tons)
Gross profit (in $)
Net profit (in $)

1979
0.55
(0.22)
1.84

1981

Forecast
1983
1985
7,200,00
0 12,000,000
2,040
3,407
990,000 1,653,300
43,527
72,690

1982
25%
10%
1%
-97%

1983
0.74
(10.14)
1.89
1983
28%
13%
36%
2585%

Interpretation:
1. Sales of Taiho shows a sustainable increase starting 1981. Sales forecast of P12
million in 1985 is approximately 67% or average of 37.5% increase per year in
1984 and 1985. This increase is attainable for Taiho. Forecasted sales per tons at
3,407 is still within the maximum capacity of Taiho at 4,200 tons hence, this
forecasted sales can be achieve at the present machineries.
2. Current sales per tons of Taiho is approximately at 50% of its maximum capacity.
Hence, Taiho still has enough capacity for expansion.

11

Growth
from 1983

67%
67%
67%
67%

3. Gross profit shows a sustainable increase over the years. With the forecasted
increase in sales in 1985 by 67% from 1983, gross profit will yield to $1.65M in
1985.
4. Net profit from 1979 to 1983 is erratic. This is mainly due to payments of
financing expenses for long-terms debts and loans. By 1985, profit is expected to
increase due to the forecasted increase in sales. This is assuming that annual
financing expenses is the same or decrease if portion of the loan will be paid.
Also, gross profit will increase because as the number of tons produced increases,
cost of production will decrease.
5.

Ratio analysis of Taiho from 1979 to 1983 shows that:

a. Current ratio is lower than 1 and its working capital is negative which means
that current asset is lower than its current liability. This would mean that short
term debt paying ability is low.
b. Sales to total assets of Taiho is higher which shows that the company is
efficient in its use of its assets in generating revenue.
Despite Taihos efficiency in the usage of its asset, its short-term debt paying
ability is still low. This is probably because Taiho has not yet maximize the
use of its new equipment and it is already starting to pay for the current
portion of long-term debt.

Exhibit 2
PRODUCTION CAPACITIES
Capacities
Estimated percentage
(tons per month)
of firms

12

15 to 70
71 to 120
121 to 300
Above 300

48%
26%
19%
7%

Interpretation:

Above production capacities of suppliers in Singapore shows that Taiho belongs

to 7% firms which produces above 300 tons per month. However, Taihos sales to
Singapore is only 10% of its total sales, with this we can infer that total demand for
plastic bags in Singapore is low so Taiho cannot achieve its desired expansion in
Singapore.

13

Exhibit 3
Estimated Total Monthly Costs of Manufacturers
(in thousand $)

50
Cost Item
Depreciation
Factory Rent
Sell & admin exp
Wages
Utilities
Maint & spares
Printing ink
Supplies
Packing materials
Others (misc)
Interest
Total Cost
(excluding resins)
Cost of resins (at
$1962/ton + 5%
wastage
Total Cost
Total costs/ton of
resin

Cost
3.9
7.0
4.9
15.5
7.0
0.3
1.5
0.3
0.2
1.0
1.0

44.3
103.0
147.3

Normal Operating Capacity (tons per month)

100
200
%
Cost
%
Cost
%
2.6%
7.8
2.7%
15.8
2.8%
4.8%
12.8
4.4%
22.0
3.9%
3.3%
9.2
3.2%
15.8
2.8%
10.5%
26.7
9.3%
47.7
8.4%
4.8%
14.0
4.9%
28.0
5.0%
0.2%
0.4
0.2%
1.0
0.2%
1.0%
3.0
1.0%
6.0
1.1%
0.2%
0.6
0.2%
1.2
0.2%
0.9%
4.0
1.4%
7.9
1.4%
0.7%
2.0
0.7%
4.0
0.7%
0.7%
2.0
0.7%
4.0
0.7%
3
0.
1
%
82.5 28.6%
153.4 27.1%
69.9%
100%

$886

206.0
288.5

71.4%
100%

$825

412.0
565.4

72.9%
100%

400
Cost
31.2
26.0
28.3
83.5
56.0
2.0
12.0
2.4
15.8
8.0
8.0

%
2.8%
3.3%
2.5%
7.5%
5.1%
0.2%
1.1%
0.2%
1.4%
0.7%
0.7%

283.1

25.6%

824.0
1,107.1

74.4%
100%

$767

Above table shows that as the number of tons produced increase, cost of
production per ton will decrease.

14

$708

Exhibit 4
Export of Plastic Bags - by country
(in thousand $)
Country
Australia
Belgium & Luxembourg
France
Germany Fed. Rep.
Italy
Malaysia
Netherlands
Saudi Arabia
UAE
United Kingdom
USA
Yemen
China Peo Rep
Brunei
Aden
Sabah
Bahrein
Papua New Guinea
Others
Total

Country
Australia
Belgium & Luxembourg
France
Germany Fed. Rep.
Italy
Malaysia
Netherlands
Saudi Arabia
UAE
United Kingdom
USA
Yemen
China Peo Rep

1979
Value
%
3,876
8.7%
383
0.9%
2,933
6.6%
2,232
5.0%
562
1.3%
387
0.9%
6,302
14.2%
1,920
4.3%
774
1.7%
20,026
45.1%
352
0.8%
1,381
3.1%
33
0.1%
233
0.5%
0.0%
240
0.5%
450
1.0%
121
0.3%
2,213
5.0%
44,418
100%
Growth Rate
1980
1981
40%
25%
235%
47%
156%
6%
182%
-70%
350%
-66%
134%
19%
-5%
10%
555%
-8%
121%
-11%
-48%
37%
-1%
217%
150%
-25%
61%
-81%
15

1980
Value
5,443
1,283
7,496
6,301
2,527
907
5,996
12,582
1,710
10,340
347
3,448
53
659
470
553
451
419
3,734
64,719

%
8.4%
2.0%
11.6%
9.7%
3.9%
1.4%
9.3%
19.4%
2.6%
16.0%
0.5%
5.3%
0.1%
1.0%
0.7%
0.9%
0.7%
0.6%
5.8%
100%

1981
Value
6,785
1,883
7,967
1,883
852
1,080
6,595
11,531
1,519
14,209
1,101
2,600
10
698
333
292
782
709
5,070
65,899

%
10.3%
2.9%
12.1%
2.9%
1.3%
1.6%
10.0%
17.5%
2.3%
21.6%
1.7%
3.9%
0.0%
1.1%
0.5%
0.4%
1.2%
1.1%
7.7%
100%

Brunie
Aden
Sabah
Bahrein
Papua New Guinea
Others

183%
100%
130%
0%
246%
69%

6%
-29%
-47%
73%
69%
36%

Interpretation:
1. Table above shows sudden of growth of demand for plastic bag in the USA.
Growth rate in 1981 at 217% is the highest growth among all countries. Assuming
that this growth will be sustained, forecasted growth in USA will be:
USA

1979

Percentage Increase
352

In thousand dollar

1980

1981

1982

1983

1984

1985

-1%

217%

117%

117%

117%

117%

347

1,101

2,392

5,198

11,296

24,545

By 1985, demand for USA will yield to an increase of $19,345,000 from 1983.
This is more than enough to cover for the $4,800,000 forecasted increase in sales
of Taiho by 1985. The graph below shows the forecast for U.S.

Forecasted Demand in U.S.

30,000
25,000
20,000

f(x) = 115.45 exp( 0.76 x )

R = 0.98

15,000
10,000
5,000
1979

1980

1981

1982

16

1983

1984

1985

2. Countries with the highest demand such as United Kingdom and Saudi Arabia has
shown unstable growth. Demand in United Kingdom decreased to by 48 in 1980
and increase to 37% in 1981 while demand in Saudi Arabia has shown 8%
decrease in 1981.
3. Almost all other countries have shown a substantial increase of demand in 1980
but by 1981, growth rate was not sustained resulting to a substantial decrease.
D. Assumptions of the Case

Fluctuations on Foreign exchange rate conversion for the next five years will be

minimal.
Portion of Taihos current asset includes minimal amount of finished goods

inventory.
Taiho has only one warehouse location located near its manufacturing site.
Raw materials inventory is at minimum level.
Political, socio-cultural and legal aspects in US market are favorable to Taihos

plan for expansion and penetration in US market.

No government ban related to Taihos expansion in other countries.
Sales are on cash basis except from Singapore market.
Engaged in long-term loan from banks to finance its investment in machineries.
Forecasted increase in growth based on previous years growth rate.
The sudden increase in U.S. as shown in the exhibit is assumed an exponential
increase.
III.

Problems

Major problem: To expand its production and penetrate the US.

Minor problems:
a. The company does not have strong financing capability;
b. The company does not have enough personnel to work for the planned
expansion; and
c. The company does not practice any formal system of stock control.

17

18

IV.

Alternative courses of Action

1. Expand and penetrate U.S. through a joint venture with an established

company in the U.S.
Through a joint venture, Taiho can gain access to partners resources, including
markets, technologies, capital and people. This will address Taihos financing
problem since the company will no longer need to raise the capitalization on its
own.
Also, with a Joint Venture, Taiho can gain easy access to market because of
participation of an established local entity. This can provide instant access to
established, efficient and effective distribution channels and accessible customer
bases. This is important to Taiho because creating new distribution channels and
identifying new customer bases can be extremely difficult, time consuming and
expensive activities.
In addition, shown below are the advantages and disadvantages if Taiho will
engage in a Joint Venture:

ADVANTAGE
Provide opportunity to gain new

capacity and expertise

Allows Taiho to enter gain new

DISADVANTAGE
It takes time and effort to build the
right relationship and partnering with

technological knowledge access to

another business can be challenging.

There is an imbalance in levels of

greater resources, including

expertise, investment or assets brought

specialized staff and technology

into the venture by the different

sharing of risks with a venture

partners.
Different cultures and management

partner
19

ADVANTAGE
Enables growth without having to

DISADVANTAGE
styles result in poor integration and co-

borrow funds or look for outside

operation.
The partners may not provide enough

investors
leadership and support in the early

stages.
Embarking on a Joint Venture can
represent a significant reconstruction
to Taihos business. However
favorable it may be to its potential for
growth, it needs to fit with the overall

business strategy.
The partners may want to maximize
the advantage gained for the joint
venture, but they also want to
maximize their own competitive

position.
The joint venture attempts to develop
shared resources, but each firm wants
to develop and protect its own

proprietary resources.
The joint venture is controlled through
negotiations and coordination
processes, while each firm would like
to have hierarchical control.

20

2.

Expand and penetrate U.S. through Indirect Exporting

Indirect exporting entails contracting with intermediaries in the producer's home
country to perform export functions; these are intermediaries such as an export
management company (EMC) or a Trading company. These intermediaries are
responsible for finding foreign buyers in the target market, shipping products and
receiving payment.

DISADVANTAGE

ADVANTAGE

Fast market access

Little or no financial commitment as the

optimum market potential and

clients' exports usually covers most

opportunities for marketing, thus

expenses associated with international sales

Low risk exists for companies that are still

mistakes and miscalculations in

their actions affect the income of

developing their R&D, marketing, and sales

Not all brokers are using the

strategies
It provides a way to penetrate the foreign

producers of export goods

May lead to diminishing returns in

markets without the complexities and risks

the long run as trading partners try

of more direct exporting. The international

to get maximum profit from their

organization can start exporting with no

service as mediators

21

DISADVANTAGE

ADVANTAGE
incremental investment in fixed capital, low

business activities in international

startup costs and few risks, but with

Has little or no control over the

prospects for incremental sales.

The exporter will not have to worry about

markets

By using an intermediary, the

managing product distribution in a foreign

indirect exporter may lose out on

country as this is done by an export partner.

It does not require a lot of organizational

brand recognition and loyalty in

international markets, thus leaving

effort or commitment of staff workers; it

this opportunity and domain to
employs a small number of employees as
larger firms
the main work is carried out by foreign
trade partners.

The producer may lack recognition

from the end users of the product

In the event that this export strategy does

or service, who are much more

not lead to achievement of goals, the

familiar with the end product

exporter can easily withdraw from the

market.

Profits are lower compared to

direct exporting

The company is deprived of direct

communication with the end users.

Wrong choice of market and

distributor may lead to inadequate
market feedback affecting the
international success of the

22

company.
Inability to learn how to operate

DISADVANTAGE

ADVANTAGE

overseas

As in the case of Taiho Plastics Industries where financial capabilities and

organizational structure is currently in crisis, this export strategy may be a better
alternative for it only entails low startup costs and few risks with prospects for
incremental sales, it does not require organizational effort, and is ideal for
companies that are still developing their R&D, marketing and sales strategies.
However, this strategy held Taiho with no control over the business activities in
the international market, and at the same time it may lose out on brand
recognition and loyalty in international markets as a consequence of using
intermediaries. This is contrary to what Taiho is planning of expanding production
and penetrating the U.S. market and be able to stay viable and competitive in the
international market.
3. Expand and penetrate U.S. through Direct Exporting
23

Direct exporting involves direct marketing and selling to the client that is contracting
with intermediaries located in the foreign market to perform export functions;
intermediaries include foreign based sales agents and distributors. These intermediaries or
agents perform downstream value chain activities in the target market.
Since Taiho has an accessible market, direct exporting of products is a viable option. The
company is not new to exporting, but the main task on hand is finding a suitable
intermediary firm or agent/sales representative that can handle most export details. This
alternative course of action will suit best for Taihos plan to expand in US market.

The following are agents or intermediaries that Taiho needs to have in a direct exporting:
a. Foreign/Import distributors
Import distributors purchase product in their own right and resell it in their local
markets to wholesalers, retailers, or both. Importing distributors are a good market
entry strategy for products that are carried in inventory just like plastics. The plastic
bags are handled by 15 distributors in Australia and 1 each in US and Holland. In
Australia, Taiho has an extensive network covering all major cities.
b. Sales representatives
Sales representatives represent foreign suppliers/manufacturers in their local markets
for an established commission on sales. Provide support services to a manufacturer
regarding local advertising, local sales presentations, customs clearance formalities,
legal requirements.
ADVANTAGE

DISADVANTAGE

Taiho will be able to establish a direct

contact with a foreign trading partner,

Higher start-up costs and higher risks

as opposed to indirect exporting

24

ADVANTAGE

DISADVANTAGE

and has the best opportunity for direct

Requires higher investments of time,

participation in foreign transactions.

This will offer Taiho for potential higher

resources and personnel and also

profits because of more direct contact.

Taiho will be able to have a closer

organizational changes
Greater information requirements
Longer time-to-market as opposed to

indirect exporting
Direct exports are affected by other

relationship with foreign buyers and the

marketplace.
Taiho will have a control over selection

conditions like deterioration of

of foreign markets and choice of foreign

representative companies.
Target management and control of the

exchange rates
Direct
exporting

may

be

inappropriate for goods such as those

sales become possible which is

which may have high transport costs

unrealistic in the case of indirect exports.

Good information feedback from target

or goods that require complex after

-sales

service

which

cannot

be

market, developing better relationships

with the buyers

Better protection of trademarks, patents,

goodwill, and other intangible property

Potentially greater sales, and therefore

granted by resellers.
Extra costs because it takes more time
to develop extra markets, and the pay

back periods are longer,

Up-front costs for developing new

greater profit, than with indirect

promotional

materials,

allocating

exporting
Target management and control of the

personnel

sales become possible which is

administrative costs associated to

unrealistic in the case of indirect exports.

Opportunities for growth through market

market the product.

Taiho may need to modify their

diversification. Substantial market

products to meet foreign country

potential exists outside the home

safety and security codes, and other

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to

travel

and

other

ADVANTAGE

DISADVANTAGE

country.
Selling to multiple markets allows Taiho

payments using the methods that are

their risk.
They will not be tied to the changes of

available (open-account, prepayment,

Hence, it will make them maximize what

they can produce over the new foreign
market.
Capturing an additional foreign market
will usually expand production to meet
foreign demand. Increased production
can often lower per unit costs and lead to
greater use of existing capacities. Now
the company will be able to maximize
their production capacity form 350-400

tons.
Compensate for seasonal demands.
Since the company is affected by certain
seasons domestically, they may be able
to sell their products or services in

import restrictions.
Financial risks like collections of

to diversify their business and spread

the business cycle of domestic market.

foreign markets during different seasons.

Expand Life Cycle of Product

26

consignment, documentary collection

and letter of credit) are not only more
time-consuming than for domestic
sales, but also more complicated.

To expand production in the U.S. through direct exporting, Taiho will make use of the
following strategies:
a. Financing Strategy
Taihos present production is at 50% of its maximum capacity (see exhibit 1) hence,
the company still has 50% capacity that can be used for its expansion. With this, in its
earlier expansion, Taiho does not need yet to acquire additional machineries.
Financing needs of Taiho will focus in financing its increased production. When the
company will be able to strengthen its financial capability and has already maximize
its capacity, only then will the company need to invest in new machineries.
At present, Taihos present financial capability is not so good. Its current ratio is
below 1 and working capital is negative which means that its current asset is not
enough to pay for its current liabilities (refer to Exhibit 1). In order for Taiho to
expand in US, it must secure financing, either internally or through venture capitalists
or lenders to finance its production. Hence, the company will need large supply of
resins which is imported from its supplier or the subsidiaries of resin manufacturers in
Singapore.
Taihos ability to meet current obligation is unstable or fluctuating. In order to solve
the financial difficulty, Taiho will have to make use of its good relationship with its
suppliers by availing of the resin supply through longer credit terms of up to 90 days
ensuring that the company will have sufficient cash or operating lines of credit.
In order to make sure that the supplier may agree of the longer credit terms, Taiho
may enter into a Letters of Credit which will be issued by the bank and provides
assurance to the creditor that the credit will be paid. A letter of credit is a letter from a

27

bank guaranteeing that a buyer's payment to a seller will be received on time and for
the correct amount.
b. Collection Strategy
To support the financing strategy above, Taiho may allow credit terms for its
customers in the U.S. in order to generate more sales. The company may establish
credit terms of upto 30-days and give 2% cash discounts for any prompt payments
made within 10-days. This will entice clients to buy and therefore, allows the
company to generate cash in a short period as well as generate more income than it
used to.
Taiho must also consider its operating cycle-the period of time required for a
merchandising company to convert its inventory into cash. The cash conversion cycle
of the company should be shorter to have a higher working capital. This will help the
company to improve its current ratio and same goes with the companys working
capital ratio.
c. Pricing Strategy
Among Taihos strength is its reputation of quality products from which the company
has won an international award for it. This is one of Taihos advantage over its
competitors. In order to further its competitive advantage, Taiho must also come up
with a pricing strategy to entice its market.
In its initial expansion, Taiho may make use of Marginal-cost pricing. This is a
practice of setting the price of a product at or slightly above the variable cost to
produce it. As a result, prices will be lower. This is a good market entry strategy to
encourage customers to avail of Taihos products. Once Taiho have already penetrated
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its market and prove the quality of its products, Taiho can then apply competitive
pricing strategy.
d. Inventory Management
Taiho must decide the maximum and minimum level of stocks and supplies that need
to be kept in the warehouse. It must also set optimized re-order levels, safety stock
levels (below which supply must not be allowed to fall) and an average inventory
level considering delivery lead time of raw materials to ensure costs are contained.
e. Organizational Structure
With Taihos insufficient number of personnel to carry-out the companys production
operations, it must have additional staffers by hiring skilled workers. This is also to
address increase in the number of shifts per day. Existing and additional employees
must be trained well with the new method used in production process.

f.

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V. Conclusion
As globalization progresses, international expansion flows along with it. In view of
this case study, several factors were considered as the company ventures to a larger
scale. The company must understand the nature of the global environment because
ongoing changes in that environment are creating a plethora of opportunities, threats,
and challenges. The desire of Mr. Wong, the co-owner of family-owned Taiho, gives
way to a vision for the business to soar heights in international market. The process
will not give Taiho a smooth sail, thus, for it to work out, it must do careful planning,
having a best strategy and analysis of it market and competition.

Going forward,

Taiho sees continued international expansion as a major engine of growth.

Taihos aim is to expand production and penetrate in US Market. Taking into account
all the aspects discussed in the case of Taiho, the analysts have come up with three
different alternative courses of action to address its major problem. These three
alternatives include expand and penetrate U.S. through Joint Venture, expand and
penetrate U.S. through Indirect Exporting, Expand and penetrate U.S. through Direct
Exporting, respectively. Though there are many different modes of entry in
international market, these are utmost appropriate to Taiho considering its operation
and financial stability. To further differentiate each alternative, the analysts
enumerated various advantages and disadvantages. Identifying the best alternative
gives a tight selection process because each possess varied proposals to Taiho.
Nevertheless, when it comes to the best alternative, the analysts single out alternative
course of action #3- Expand and penetrate U.S. through Direct Exporting. Through
Direct Exporting, Taiho will be able to establish a direct contact with a foreign

30

trading partner, and has the best opportunity for direct participation in foreign
transactions. Furthermore, Taiho will have a control over selection of foreign
markets and choice of foreign representative companies. They will not be tied to the
changes of the business cycle of domestic market. Hence, it will make them
maximize what they can produce over the new foreign market. Maximization of sales
and increase in profit are among the benefits. Taken together, these factors or
advantages will help Taiho achieve its goal of expanding and penetrating US market.
Therefore, the analysts prefer Direct exporting over Joint venture and indirect
exporting. The best alternative chosen may not eliminate threats and challenges, but,
through the proper action taken by Taiho including thorough preparation, this will
yield greater success to the company.

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