Ateneo de Davao University

E. Jacinto St., Davao City, Philippines

BLADES, INC. CASE

CHAPTER 1

Submitted By:
Huelar, Jehza Mae S.
Andripa, Mitz D.
Mozo, Mayence C.
Tan, Henry S.
De Guzman, Archie James R.
Chua, Ingrid
BSF-4A

Submitted To:
Mr. Jose Karlo Caballero

May 2014
I. INTRODUCTION
A. BACKGROUND OF THE CASE
Blades, Inc. is a U.S.-based company that has been incorporated in the United States
for 3 years. Blades is a relatively small company, with total assets of only $200
million. The company produces a single type of product, roller blades. Due to the
booming roller blades market in the United States at the time of the companys
establishment, Blades has been quite successful. For example, in its first year of
operation, it reported a net income of $3.5 million. Recently, however, the demand
for Blades Speedos, the companys primary product in the United States, has
been slowly tapering off, and Blades has not been performing well. Last year, it
reported a return on assets of only 7 percent. In response to the companys annual
report for its most recent year of operations, Blades shareholders have been
pressuring the company to improve its performance; its stock price has fallen from
a high of $20 per share 3 years ago to $12 last year. Blades produces high-quality
roller blades and employs a unique production process, but the prices it charges are
among the top 5 percent in the industry.

B. PROBLEM STATEMENT
Blades shareholders have been pressuring the company to improve its performance
since Blades has not been performing well recently. Ben Holt, the companys chief
financial officer (CFO), is contemplating his alternatives for Blades future. There
are no other cross-cutting measures that Blades can implement in the United States
without affecting the quality of its product.

Given with this information, as a financial analyst of Blades Inc., what would be
the best decision of the company? Is it good for them to import some parts from
overseas or expand the companys sales to foreign country considering the
advantages Blades could gain from importing from and/or exporting to a foreign
country such as Thailand and the disadvantages they could face as a result of
foreign trade in the short run and in the long run. Which theories of international
business described in chapter 1 that could apply to Blades Inc., in the short run and
 in the long run? What long-range plans other than establishment of a subsidiary in
Thailand are an option for Blades and may be more suitable for the company?

II. A. AREAS OF CONSIDERATION

Ethical considerations: Given the companys limitations, the analysis of importing and/or
establishing new subsidiary should be considered. Since the company have no experience
regarding international trade (exporting/importing and establishing foreign subsidiary), the
company have the right to withdraw or not to participate in the said activity.

Practical considerations: If the company wishes to engage in international trade, analysis

on the companys choices should not be biased and each selection should have the same
weight in accordance to ways on how to conduct it.

B. THEORIES

Imperfect Market

The perfect market, as defined in economic textbooks, is not a truly achievable goal, but is
still a beneficial model that provides a starting point for observation of our present market
status. Practically, the imperfect market is the only kind that really exists. Even in the
United States, the most advanced financial market in the world, there are still numerous
cases of price corruption, improperly disseminated information and other market
inefficiencies.

Theory of International Trade

International Trade takes place because of the variations in productive factors in different
countries. The variations of productive factors cause differences in price in different
countries and the price differences are the main cause of international trade. There are
numerous advantages of international trade accruing to all the participants of such trade. A
few of such advantages are mentioned below:

Efficient use of productive factors: The biggest advantage of international trade relates to
the advantages accruing from territorial division of labor and international specialization.
International trade enables a country to specialize in the production of those commodities
in which it enjoys special advantages. All countries are not equally endowed with natural
resources and other facilities for the production of goods and services of various kinds.
Some countries are richly endowed with land and forest resources, which others happen to
have abundant capital resources. Some others have abundant supplies of labor power.
Without international trade, a country will have to produce all the goods it requires
irrespective of the costs involved. But international trade enables a country to produce only
those goods in which it has a comparative advantage or an absolute advantage and import
the rest from other countries. This leads to international specialization or division of labor,
which, in turn, enables efficient use of the productive factors with minimum wastages.
Specialization would also lead to economies of scale and which, in turn, would lead to
reduction of cost of products and services.

Equality in commodity and factor prices: International trade leads to an equality of the
prices of internationally traded goods and productive factors in all the trading regions of
the world. It should, however, be remembered that the gains arising from international trade
shall be available to the participating countries only if trade is free and unfettered. If the
trade is subjected to tariff and non-tariff restrictions by the trading countries, the gains of
international trade get nullified in the process to a large extend.

Comparative Advantage

The ability of a firm or individual to produce goods and/or services at a lower opportunity
cost than other firms or individuals. A comparative advantage gives a company the ability
to sell goods and services at a lower price than its competitors and realize stronger sales
margins.
 Product Cycle Theory

Theory suggesting that a firm initially establish itself locally and expand into foreign
markets in response to foreign demand for its product; over time, the MNC will grow in
foreign markets; after some point, its foreign business may decline unless it can
differentiate its product from competitors.

III. DISCUSSION

The advantages Blades, Inc. could gain from importing from Thailand include potentially
lowering Blades cost of goods sold. If the inputs (rubber and plastic) are cheaper when
imported from a foreign country such as Thailand, this would increase Blades net income.
Since numerous competitors of Blades are already importing components from Thailand,
importing would increase Blades competitiveness in the U.S., especially since its prices
are among the highest in the roller blade industry. Furthermore, since Blades is considering
longer range plans in Thailand, importing from and exporting to Thailand may present it
with an opportunity to establish initial relationships with some Thai suppliers. As far as
exporting is concerned, Blades, Inc. could be one of the first firms to sell roller blades in
Thailand. Considering that Blades is contemplating to eventually shift its sales to Thailand,
this could be a major competitive advantage.

There are several potential disadvantages Blades, Inc. should consider. First of all, Blades
would be exposed to currency fluctuations in the Thai baht. For example, the dollar cost of
imported inputs may become more expensive over time if the baht appreciates even if Thai
suppliers do not adjust their prices. However, Blades sales in Thailand would also increase
in dollar terms if the baht appreciates, even if Blades does not increase its prices. Blades,
Inc. would also be exposed to the economic conditions in Thailand. For example, if there
is a recession, Blades would suffer from decreased sales to Thailand.
In the long run, Blades should be aware of any regulatory and environmental constraints
the Thai government may impose on it (such as pollution controls). Furthermore, the
 company should be aware of the political risk involved in operating in Thailand. For
example, the likelihood of expropriation by the Thai government should be assessed.
Another important issue involved in Blades long-run plans is how the foreign subsidiary
would be monitored. Geographical distance may make monitoring very difficult. This is
an especially important point since Thai managers may conform to goals other than the
maximization of shareholder wealth.

There are at least three theories of international business: the theory of comparative
advantage, the imperfect markets theory, and the product cycle theory. In the short run,
Blades would like to import from Thailand because inputs such as rubber and plastic are
cheaper in Thailand. Also, it would like to export to Thailand to take advantage of the fact
that few roller blades are currently sold in Thailand. Both of these factors suggest that the
imperfect markets theory applies to Blades in the short run. In the long run, the goal is to
possibly establish a subsidiary in Thailand and to be one of the first roller blade
manufacturers in Thailand. The superiority of its production process suggests that the
theory of comparative advantage would apply to Blades in the long run. However, the
product cycle theory also applies to Blades, since its U.S. sales are declining and Blades
feels that it must eventually establish a subsidiary in Thailand in order to preserve its
competitive advantage over Thai competitors.

Since Ben Holt is very unfamiliar with international business, and since Blades has never
operated outside the United States, establishment of a subsidiary in Thailand is probably
not the best way for Blades, Inc. to gain a foothold in Thailand in the long run. Blades
should initially consider a joint venture with Thai firms that manufacture roller blades. The
advantage would be access to Thai distribution channels, familiarity of the Thai firm with
customs and ethics in Thailand, and an established market. Of course, since Blades
production process is unique, a joint venture would provide the Thai subsidiary with
knowledge of the production purposes, which it may duplicate after the joint venture
terminates.

IV. CONCLUSION
 Based on the discussion above, Ben Holt is very unfamiliar with international business,
and Blades has never operated outside the United States, hence, establishment of a
subsidiary in Thailand is probably not the best way for Blades, Inc. to gain a foothold in
Thailand in the long run. However, the company can import products from Thailand for
their business operation since Thailands product are cheaper and more affordable
compared to the products of United States. Moreover, Blades Company should initially
consider a joint venture with Thai firms that manufacture roller blades. With this, the
company will be familiarized with Thais firms, customs and ethics. Thus, the Company is
able to analyze more of their production process in the longer run (during and after the joint
venture).

REFERENCES
Imperfect Market. Retrieved from http://www.investopedia.com

Theory of International Trade. Retrieved from http://www.brownconsultancy.com

Comparative Advantage. Retrieved from http://www.investopedia.com

Harvey, Campbell R. (2012). Production Cycle Theory. Retrieved from http://financial-

dictionary.thefreedictionary.com

Blades Inc. Case. Retrieved from http://www. http://wenku.baidu.com