Reference no: EM131042903

Developing a Multinational Sporting Goods Corporation

In every chapter of this text, some of the key concepts are illustrated with an application to a small sporting goods firm that conducts international business. These "Small Business Dilemma" features allow students to recognize the dilemmas and possible decisions that firms (such as this sporting goods firm) may face in a global environment. For this chapter, the application is on the development of the sporting goods firm that would conduct international business. Last month, Jim Logan completed his undergraduate degree in finance and decided to pursue his dream of managing his own sporting goods business. Logan had worked in a sporting goods shop while going to college, and he had noticed that many customers wanted to purchase a low-priced football.

However, the sporting goods store where he worked, like many others, sold only top-of-the-line footballs. From his experience, Logan was aware that top-of-the-line footballs had a high markup and that a low-cost football could possibly penetrate the U.S. market. He also knew how to produce footballs. His goal was to create a firm that would produce low-priced footballs and sell them on a wholesale basis to various sporting goods stores in the United States. Unfortunately, many sporting goods stores began to sell low-priced footballs just before Logan was about to start his business.

The firm that began to produce the low-cost footballs already provided many other products to sporting goods stores in the United States and therefore had already established a business relationship with these stores. Logan did not believe that he could compete with this firm in the U.S. market. Rather than pursue a different business, Logan decided to implement his idea on a global basis. While football (as it is played in the United States) has not been a traditional sport in foreign countries, it has become more popular in some foreign countries in recent years. Furthermore, the expansion of cable networks in foreign countries would allow for much more exposure to U.S. football games in those countries in the future. To the extent that this would increase the popularity of football (U.S. style) as a hobby in the foreign countries, it would result in a demand for footballs in foreign countries.

Logan asked many of his foreign friends from college days if they recalled seeing footballs sold in their home countries. Most of them said they rarely noticed footballs being sold in sporting goods stores but that they expected the demand for footballs to increase in their home countries. Consequently, Logan decided to start a business of producing low-priced footballs and exporting them to sporting goods distributors in foreign countries. Those distributors would then sell the footballs at the retail level. Logan planned to expand his product line over time once he identified other sports products that he might sell to foreign sporting goods stores. He decided to call his business "Sports Exports Company." To avoid any rent and labor expenses, Logan planned to produce the footballs in his garage and to perform the work himself. Thus, his main business expenses were the cost of the materials used to produce footballs and expenses associated with finding distributors in foreign countries who would attempt to sell the footballs to sporting goods stores.

1. Is Sports Exports Company a multinational corporation?

2. Why are the agency costs lower for Sports Exports Company than for most MNCs?

3. Does Sports Exports Company have any comparative advantage over potential competitors in foreign countries that could produce and sell footballs there?

4. How would Jim Logan decide which foreign markets he would attempt to enter? Should he initially focus on one or many foreign markets?

5. The Sports Exports Company has no immediate plans to conduct direct foreign investment. However, it might consider other less costly methods of establishing its business in foreign markets. What methods might the Sports Exports Company use to increase its presence in foreign markets by working with one or more foreign companies?