Charoen Pokphand Group and External Business Environment - Assignment Example

Charoen Pokphand Group of the of the No. Contents Introduction 3 Company and External Business Environment 3 Company Profile 3 Customer Analysis 3 Competitor Analysis 4 Market Share Analysis 4 Type of Market Structure 4 Substitution Analysis 4 Demand Analysis 5 Production and Cost Scale 5 Macro Business Environment 7 Political Condition 7 Economic Condition 7 Company Analysis 9 Business Sustainability Practice 9 Production Positive Externality 9 Production Negative Externality 9 Consumption Positive Externality 10 Consumption Negative Externality 10 Analysis 10 Conclusion 10 References 11 Introduction Commercial activities of a profit making organization have become complex in the current epoch. The state of business affairs of a company and its precise outcomes are highly influenced by its internal and external business conditions. This business study report throws light on the trading affairs of a popular conglomerate of Thailand, Charoen Pokphand Group (Yabushita & Suehiro, 2014). The report will illustrate the extent of market competition faced by the company. In the modern era, the nature of demand faced by a product or service significantly depends on the degree of business rivalry existing between the firms. A company frames its positioning, branding and segmenting strategies, after considering the business strategies introduced by its primary competitors (Yabushita & Suehiro, 2014). However the report will show that the aggregate profitability, cost and revenue experienced by a company are significantly dependent on the nature and efficiency of its factors of production. The scale and scope of commercialization practiced by a company depends on these factors (Colquitt, et al., 2013). Along with internal business aspects, commercial prosperity of a company depends on the external political and economic conditions. The report will show that political and economic outcomes of Thailand will create significant impact on the business of Charoen Pokphand Group. Finally the researcher will provide a brief focus on the role of sustainability in the modern business world. Thus long run success of a company depends on a series of macroeconomic and internal business interaction. Company and External Business Environment Company Profile Charoen Pokphand Group (CP) known as one of the biggest conglomerate of Asia. The company was founded in 1921 and its headquarters are located in Bangkok, Thailand (Yabushita & Suehiro, 2014). After its inception, the company has considerably expanded the scale and scope of business internationalization. At present, CP provides its services and products in more than 20 countries of the world. The business of CP is segmented in three major industries, namely telecommunications, retailing and food and agro-industry. The company has its own restaurants, telephone companies, hypermarkets, convenience stores (Yabushita & Suehiro, 2014). It also provides internet services to its customers and sells certain edible items such as meat and frozen food. Customer Analysis Charoen Pokphand Group is a giant multinational company of Thailand and it trades its products and services to government, corporate companies and also common household customers in the market. CP Group provides information technology solutions to its business clients in the market. The e-solution services of the company are provided by its two information technology businesses namely, Freewill Solutions Co., Ltd and Pantavanij Co., Ltd (CPG, 2014a). These two companies provide services to the public and private firms of Thailand and make them more competitive in the market. Some restaurants and retailing stores of Thailand are also prospective customers of CP Group. The organization serves its consumer clients in the market through the services of Charoen Pokphand Foods Public Company Limited. This branch of the company provides animal feed, meat, frozen food and animal breeder services to the non business clients of Thailand and other countries. The primary consumer clients of the company are young individuals and housewives. The government authorities of Thailand and some other countries of Asia such as Chian, purchase some products and services traded by CP Group. These are industrial and automotive products, petrochemicals and real estate development services. Competitor Analysis CP Group is one of the largest agro-based conglomerates of Asia but the organization faces certain threats of market rivalry. The potential competitors of CP Group are other conglomerate companies such as Hindustan Lever Ltd., Nisshin Oillio Group, Unicharm Corp., Nippon Flour Mills Company Ltd., Sumitomo, China Resources Enterprise Ltd and Smithfield Foods Inc (CPG, 2014a). Most of the potential market rivals of the company are located in Thailand and other countries of Asia. Market Share Analysis CP Group tries to enhance its market share by introducing greater diversification in its product and service offerings. In 2012 it was estimated that the net market capitalization of CP Group was worth $ 8 billion (CPG, 2014a). CP Group shares a large market share in Asia but the business share of the company in the global market is relatively low. More than 86% of the products and services offered by the company are traded in Thailand. The market share of the organization is more than 60% in its domestic market but in the foreign market its share is less than 20% (Colquitt, et al., 2013). Type of Market Structure Charoen Pokphand Group conducts its business in a monopolistically competitive market structure. The organization experiences infinite number of business and consumer clients in the market. However the number of potential sellers within each of its industrial segment is limited. The competitors of the company, operating their business in the agro, telecommunications and retailing sector provides qualitatively differentiated products and services to the customers. Being a monopolistic company, CP Group incurs significant expenses in advertising and promotional activities. Through increased promotional activities, the company tries to augment its core competency in business and expand its owned share of prospective market demand (Colquitt, et al., 2013). Furthermore, CP Group is a price maker for its own product and service offerings. Substitution Analysis Two products are considered to be substitutes in the market, if they are capable of satisfying a similar type of demand. Close substitute products experience high cross elasticity of demand between them. CP Group sells processed meat, frozen food and agricultural food products in the market (Yabushita & Suehiro, 2014). It also sells some customized animal and cattle feeding products in some marketplaces. Similar types of frozen food and agro-based products offered by other companies are closed substitutes of the food and agricultural products traded by CP Group. Furthermore, the telecommunication, retailing and automotive services traded by other companies are the close substitutes of similar services offered by CP Group. Demand Analysis The cost price of the food and retailing services provided by CP Group comprise a small proportion of the aggregate income earned by consumers. Hence the consumers’ demand for such items is relatively elastic in nature. A light rise in the price of such product lines offered by the company drastically diminishes its demand in the market. According to the mark-up pricing theory: Selling price = Marginal Cost / Price Elasticity of demand CP Group’s products and services face relatively elastic demand in the market, hence elasticity is > 1. Therefore the selling price of the company’s products cannot be marked higher than its marginal cost. Production and Cost Scale The manufacturing and retailing activities of CP Group are accomplished with the help of certain factors of production. Land, labour, capital and entrepreneurship are the four major factors of production used by the organization. The company needs to make a payment for each type of factor. The payment for land is made in the form of rent. The expenditure of labour is incurred through wages, the cost of capital in beared in the form of interest and finally normal profit (total revenue = total cost) is appropriated by the company against the entrepreneurial services. However the aggregate expenses of CP Group can be categorized in terms of fixed and variable costs (CPG, 2014b). Fixed costs experienced by the company are independent of its output level. These costs are also known as the sunk cost of a company. Fixed cost includes the retailing outlet rents, machinery costs and real estate investments of CP Group. Depreciation of the company’s own buildings and machineries are also part of its fixed expenditure. The company will experience these costs even if it ceases its entire manufacturing process. Figure 1: Fixed Cost Fixed Cost FC Cost Curve Output Quantity (Source: Author’s Creation) The above graph shows the horizontal fixed expenditure experienced by CP Group. On the other hand, the variable costs of the company are completely dependent on the level of its output. This cost becomes zero if the company ceases its entire manufacturing process. Wages paid to labourers, cost of raw materials, operational costs, energy or fuel related expenditures and marketing costs of the company are all categorized under section of variable cost. As all the variable factors of production are increased over time, CP Group faces an upward sloping total variable cost curve in business. Figure 2: Variable Cost Variable Cost Variable Cost Curve Output Quantity (Source: Author’s Creation) The above figure shows the variable cost curve experienced by CP Group. Total cost experienced by the company is the sum total of its fixed and variable cost in business. Figure 3: Total Cost Structure of CP Group (Source: CPG, 2014a) The above inverted ‘S’ shaped curve indicates the approximate total cost curve of CP Group. This peculiar shape indirectly proves that (given the constant fixed cost), the variable cost curve of the company is also invested ‘S’ in shape. The total and variable cost curves of CP Group are inverted ‘because of the law of variable proportions. According to this law, the total cost initially increases at an increasing rate and then increases at a decreasing rate, when only one variable factor is constantly increased and the other factors are kept fixed in nature (CPG, 2014a). Thus the variable cost experienced by CP Group is more than its gross fixed cost. When the fixed cost of a company is lower than the value of its variable cost, then it signifies that the scale and scope of its operations is wide. This is because; an organization continues to produce till its product prices are greater or equal to the value of average variable cost (P>= AVC) (Hamrita & Trifi, 2011). Even if an organization shuts down its operations, it experiences the fixed costs in business. It continues to produce as long it is able to cover up the average variable cost. Thus when the variable cost of a company is greater than fixed cost, then its operational scale is huge. CP Group experiences adequate amount of profit in business. In 2013, the net profit earned by the company was 1.64 billion (CPG, 2014a). Despite of experiencing high variable cost in business, the organization experiences profit. It is able to cover up its fixed as well as variable business expenditures. Thus the company owns a large scale business in the global forum, especially in Asia. Macro Business Environment CP Group is a multinational company but it owns a wider market demand share in the major Asian countries. The most prominent business branches of the company are located in Thailand, China, Tokyo, Indonesia, India, Singapore, Vietnam and Bangladesh (Huck, Kübler & Weibull, 2012). However the commercial affairs of the company are primarily dependent on the political and economic situations of its native market, Thailand. Political Condition Thailand is one of the member countries of ASEAN (Association of South East Asian Nations) (Clemens, 2011). Being a member of the association, the public authorities of Thailand encourage free trade in the country. Liberal policies of Thailand’s government regarding international trade have helped to expand the business internationalization process of CP Group. The company faces minimal restrictions while exporting its produce in the foreign markets. However due to occurrence of certain natural calamities such as flood and tsunami, the government of Thailand has increased its excise and corporate tax rates in the country. This has augmented the operational cost of CP Group. The political authorities of other emerging Asian countries such as India, Russia and China, imposes less restrictions on the company’s business branches in their respective markets (Shum & Yam, 2011). This is because the government authorities of these countries attract greater foreign direct investment. Economic Condition The domestic productivity in Thailand could not grow significantly because of the country’s internal political turmoil. In 2013, the estimated growth rate of Thailand’s GDP (gross domestic product) was 2.9% and in 2012 its GDP growth rate was 6.5% (CIA, 2014). This signifies that the domestic productivity of the country is declining over time. Economic growth of the country has slowed down due to the global financial crisis in 2008 and internal political party based commotions. However the per capita income level and aggregate demand of the economy is increasing over time. Per person income of Thailand was $9,100 in 2011 and increased to a level of $9,900 in 2013 (Bolton, Freixas & Shapiro, 2012). Lower domestic productivity and increasing domestic demand has ultimately augmented the level of consumer price inflation (CPI) in Thailand. CPI in Thailand has enhanced the prices level of food products sold in the economy. Inflation is lowering the real purchasing power of the individuals residing in the country and hence diminishing the demand faced by CP Group. The estimated inflation of Thailand was 3% in 2012 and in its unemployment rate in the same year was 0.7% (CIA, 2014). Figure 4: Increasing CPI in Thailand (Source: Trading Economics, 2014) The above graph shows that the CPI rate of Thailand is increasing from 2013 to 2014. Figure 4: Interest Rate in Thailand (Source: Trading Economics, 2014) From the above graph it can be stated that the interest rate of Thailand has declined from 2013 till date. Thailand’s economy is at a stasis stage at present. The domestic productivity of the country is declining over time. Increased political instability and market uncertainty and inflation has reduced the aggregate spending of the consumers in the country. The investment level of the nation has sharply declined by 11% from 2013, till date (Economic Times, 2014). The employment opportunities of the nation are declining over time. The interest rates of the nation are kept low for stimulating the level of its investments and demand. Thailand is currently in a state of recession and the value of its currency is declining in the global market. Due to depreciating exchange rate, the worth of the country’s exports is becoming cheaper than the value of its imports (Economic Times, 2014). All such aspects have adversely affected the business of the domestic companies of Thailand such as CP Group. Company Analysis Recession of the country has lowered the domestic sales of CP Group and also reduced the value of its exports in the foreign markets. However economic growth of certain emerging markets such as India and China has generated greater opportunities for the company to grow in the long run. The products and services traded by CP Group possess the quality of normal goods. Normal goods experience negative price effect and positive income effect. This implies that the demand for such products declines during situations of price rise and increases with the rise in the income level of the consumers. However economic prosperity of other countries such as China and India has increased the sales of CP Group’s products. CP Group is a multinational company and its aggregate revenue as well as profitability depends on the demand of both domestic and foreign markets. CP Group recruits a larger proportion of workforce from Thailand. The government of Thailand has recently introduced a new minimum wage law in the country. Such intervention laws are not liked by free market thinkers (Economic Times, 2014). This law have increased the wage costs of the corporate companies in the country. Thailand has adequate labour resource but if CP Group recruits more workers from the country, it will face higher costs in business (James Parker, 2013). Thus the company should outsource labours from countries experiencing lower wage costs. As the currency value of Thailand is depreciating, the cost of CP Groups imports will be higher than the cost of its exports (Economic Times, 2014). The company should import productive factors from economies experiencing lower currency value than that of its own. Business Sustainability Practice Production Positive Externality CP Group produces certain medicines that are used to cure hepatitis and cardio cerebral diseases. The company makes large innovation related investments inventing new types of life saving drugs. Pharmaceutical business contributes a small proportion of the company’s total revenue. By making such innovative life saving drugs, the organization enhances its brand value in the global forum (Klein‐Marcuschamer, et al., 2012). However the private marginal benefit experienced by the company from such productions is less than the social marginal benefit generated by it. By introducing such valuable medicines, the company saves millions of life’s and enhances human well being. This is a positive externality generated by the company. Production Negative Externality According to the reports of The Guardian, CP Group’s fishing activities are accomplished by slaves or forced labourers. These workers are known to be purchased for US$ 250 and forced to work for more than 20 hours (Bernard, Redding & Schott, 2013). Stories of forced drug use, execution and starvation are also recorded against the company. This is a type of negative externality, where the social cost involved with a particular manufacturing activity of the company is higher than its own private production cost. Consumption Positive Externality CP Group produces and sells good quality agro-food products to the consumers. It also sells innovative seeds, fertilizers and plant protection chemicals in the market. On the other hand, superior business solutions and technologies are also provided by the company to other corporate clients. Consumption of all such products and services generates positive externality in the market (Lin, Baruch & Shih, 2012). CP Group makes other companies more competitive in nature. Growth of these firms generates greater employment opportunities in the market and hence increases individual’s discretionary spending power. The agro based food products sold by the company help to improve the health status of individuals. Good health generates productive human capital in the long run (Lin, Baruch & Shih, 2012). Consumption Negative Externality CP Group sells certain frozen food products in the market. The private cost incurred by the consumers to purchase such products is less than its intrinsic social costs. Frozen foods contain added preservatives that are often responsible for incidence of chronic degenerative diseases (Lin, Baruch & Shih, 2012). These items sold by CP Group generate negative consumption externality. Analysis The above context shows that conglomerate companies such as CP Group generate certain positive and negative externalities in the market. However companies should ensure that the impact of its positive externalities is always more than the impact of its negative externalities (CPG, 2014b). In the long run, economic prosperity and brand value of a company can improve with the essence of adequate positive externalities. Social responsibility related functions are often conducted by the companies for experiencing greater positive externality. CP Scholarship Program and Agricultural Lunch Project are two popular CSR programs practiced by CP Group (CPG, 2014b). Conclusion The business study research report shows that Charoen Pokphand Group is a popular conglomerate company in the global market. The commercial affairs of the organization are significantly affected by the changes in the external business environment. Recession and political issues of Thailand has increased the operational cost and declined the domestic revenue of the company (CPG, 2014b). In order to gain larger share in the market, CP Group tries to diversify its product and service offerings. After making adequate research and development related investments, the company extends its business in new markets such as China, Indonesia, Malaysia and India (CPG, 2014b). However the organization faces high threats of market competition and experiences elastic demand for its products. Long run revenue and profit of the company can improve with the help of improved promotional activities. However greater positive externality and lesser negative externality generation can also help to augment the commercial prosperity of the company in the long run. References Bernard, A. B., Redding, S. J. & Schott, P. K. (2013). Testing for Factor Price Equality with Unobserved Differences in Factor Quality or Productivity. American Economic Journal: Microeconomics, 5(2), 135-163. Bolton, P., Freixas, X. & Shapiro, J. (2012). The credit ratings game. The Journal of Finance, 67(1), 85-111. CIA. (2014). The World Fact Book. Retrieved from https://www.cia.gov/index.html. Clemens, M. A. (2011). Economics and emigration: Trillion-dollar bills on the sidewalk?. The Journal of Economic Perspectives, 83-106. Colquitt, J. A. Scott, B. A. Rodell, J. B. Long, D. M. Zapata, C. P. Conlon, D. E. & Wesson, M. J. (2013). Justice at the millennium, a decade later: a meta-analytic test of social exchange and affect-based perspectives. Journal of Applied Psychology, 98(2), 1-199. CPG. (2014a). Information Technology. Retrieved from http://www.cpthailand.com/en/our_business/information_technology.aspx. CPG. (2014b). Our Business Groups. Retrieved from http://www.cpthailand.com/OURBUSINESS.aspx. Economic Times. (2014). State of Stasis. Retrieved from http://www.economist.com/blogs/banyan/2014/03/thailands-economy. Hamrita, M. E. & Trifi, A. (2011). The relationship between interest rate, exchange rate and stock price: A wavelet analysis. International Journal of Economics and Financial Issues, 1(4), 220-228. Huck, S., Kübler, D. & Weibull, J. (2012). Social norms and economic incentives in firms. Journal of Economic Behavior & Organization, 83(2), 173-185. James Parker. (2013). Thailand Introduces Nationwide Minimum Wage. Retrieved from http://thediplomat.com/2013/01/thailand-introduces-nationwide-minimum-wage/. Klein‐Marcuschamer, D., Oleskowicz‐Popiel, P., Simmons, B. A. & Blanch, H. W. (2012). The challenge of enzyme cost in the production of lignocellulosic biofuels. Biotechnology and bioengineering, 109(4), 1083-1087. Lin, C. P., Baruch, Y. & Shih, W. C. (2012). Corporate social responsibility and team performance: The mediating role of team efficacy and team self-esteem. Journal of business ethics, 108(2), 167-180. Shum, P. K. & Yam, S. L. (2011). Ethics and law: Guiding the invisible hand to correct corporate social responsibility externalities. Journal of Business Ethics, 98(4), 549-571. Trading Economics. (2014). Thailand. Retrieved from http://www.tradingeconomics.com/thailand/interest-rate. Yabushita, N. W. & Suehiro, A. (2014). Family business groups in Thailand: coping with management critical points. Asia Pacific Journal of Management, 1-22. Read More