The Partnership between Indian and European Company - Example

Wooden Furniture Business in India A Business Plan Business proposal made by [YourName] Associates on behalf of their client HOC - India Name: Instructor: August 18, 2009 University: Table of Contents Table of Contents 2 0-0: Executive Summary 3 Cultural Factors: 4 0-1: Culture: 4 0-2: Importance of Culture in n Business: 4 0-3: Indian Culture and its Characteristics 5 0-2 Behavior of Indian Consumer: 6 Business Factors: 7 1-0: Companies’ Introduction 7 2-0: Proposal Brief 7 3-0: Opportunity Rationale 8 4-0: Proposed Business Legal Status 9 5-0: Industry Structure in India 11 6-1: Proposed Production Mix 4 14 7-0: Factory Machinery Requirement 4 14 8-0: Human Resources 14 9-0: Land and Building 1 15 10-0: Project Costs 3 15 11.0: Main Assumptions2 &3 16 12-0: Online Store: 18 13-0: Conclusion 19 14-0: Recommendations 19 Appendix: 1 21 Appendix: 2 22 Appendix: 3 23 R E F E R E N C E S: 25 0-0: Executive Summary {yourName} Associates has conducted a prefeasibility study and prepared joint venture proposal between HOC- and IKEA-Sweden. Following pages describe the main factors involved in this prospective joint venture and elaborate various business and culture related issues HOC- must consider before joining hands with international business giant IKEA. This proposal is based on ground facts and realities showing good viability of a business partnership between a India and a European company. For the reason of analysis and rationality of this project we have studied the market carefully and other than the increasing raw material and production cost, found no negatives which could convince us to go against this project. Increasing cost of raw material, and production cost and that remains same globally. The support from public and financial sector are two major strengths of this project which make us convinced to propose the earliest application of this partnership. Cultural Factors: 0-1: Culture: This part of report aims to provide an insight into the culture of Indian region with close focus on where the joint venture would take place. Characteristics of culture in general and in particular are highlighted. The cultural differences that exist in India have been studied in this part of the report. Sociological and Psychological influences on consumer behavior in consumer groups have been identified and discussed. We selected Marketing department for obtaining information about marketing plan and strategies adopted for making an appeal to target market. Conclusion and recommendations for improvement in marketing strategies are also presented. 0-2: Importance of Culture in n Business: Scholars and marketers are unable to agree on a common definition of culture. An anthropologist named as Erika, R. (2003) defined culture as entire compound that comprises information, facts, belief, tradition, faith, ethics and other abilities possessed by a human being as a society member. Scholars and marketers had given hundreds of definitions after this definition. Greet Hofstede known as expert on cross-cultural differentiations provided definition of culture as the joint and collaborative training of mind that differentiates the members in one human group from other member. Summing up these definitions culture can be termed as a system that provides and supports the values and standards shared by a group of people and combined together to form an aim and standard for living. (p 123) “The culture of a group can now be defined as a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems”. (Schein 373-374) 0-3: Indian Culture and its Characteristics Background of India with regard to religion and culture has tremendous importance. A large segment in population of India presents an exclusive chance for a deep and thorough study with special emphasis on cultural changes that affect the social and psychological changes in India. All three major religions Islam, Buddhism and Christianity are respected highly in the entire Asian region. To understand the link between culture and psychological nature in India we have to recognize the psychiatric problems such as anxiety, stress, mood disorders and feeling of shame. Terror, dread, ego and self-mastery are also included in these problems. Further development of knowledge about culture of India and its link with consumer behavior is due to elements such as education, family; average poor standards of life, employment and marriage. A huge variety of cultural and religious, as per Baker M. (2002), variation exists in India where people are different from the western world. Various studies have suggested that understanding the culture and cultural differences point towards level of captivations and organizing public behavior that indicate and influence standards and quality of life. (p 456) The gender concern has been under consideration of researchers in India that reveals more complexities in female category to cope with the pressure generated from their families in particular and society in general. This pattern reflects the issue that lead to highlight the injustice and discrimination. Some of the studies made in India disclosed that the employment rate in economy is too high and large volumes of people at employment are treated unjustly. There is a need of general awareness development about cultural differences in India and it is to be understood for the purpose to establish a strong link between marketers’ activities and the consumer behavior. The demographic set of information, the data about country, issues of gender differences, education levels and rate of employment worth a deep study. The extensive efforts to study quality of life and standard of living and the insight into stigma can provide solutions to the complexities in culture. The family set up, health concerns and the political and legal environment contributes to the difference in culture that need to be taken into consideration by the marketer to feel the impact of culture on consumer behavior in India. 0-2 Behavior of Indian Consumer: The customers’ needs, preferences, motivations, beliefs are worth for study. When Kodak launched Advanta camera it was positioned as a high price product. The company boosted it as a highly advanced technology but the market comprise mostly of baby boomers. The simplicity element crosses complexities and became priority of consumers. As such a study of customers, according to Engel, J (200), helps us to understand in the stages of product development process and all elements of marketing mix. (p - 265). Consumer buying behavior is in fact a motivated response provided by them. The stimuli of marketing mix cross the threshold into buyer’s consciousness. It is the job of a marketer to develop a clear and precise understanding as to what happens in the consciousness and awareness between the entrance of outside motivation and the consumer’s buying decision. (Engel, J. 2000). The buying decision of consumer is directly influenced by psychological, cultural and personal factors. Business Factors: 1-0: Companies’ Introduction 1-1: HOC is a £3billian superstore chain of in India having seven supper stores in major cities of India working on Wal-Mart strategy with an ambition to provide maximum assortment at affordable prices under one roof. 1-2: IKEA is an established brand in home furniture and household items. IKEA produces and sells its products in about fifty countries around the world. AKEA presently has lesser number of showrooms and manufacturing facilities in Europe and not even one in India. 2-0: Proposal Brief This proposal aims at establishing a profitable joint wooden furniture manufacturing unit. Sale of produced furniture can be under different ways which both partners will decide on; such as sale at existing HOC super stores in seven cities of India, export of furniture to any of IKEA locations or any other way of selling. Proposal initiates only manufacturing joint efforts. Sale of furniture can be made by mutual understanding and decision of both companies. IKEA could also export furniture made here to any of its showroom around the world. Project, initially will fulfill the needs of local market and then import by any means will be considered by joint board of both companies. India is renowned for its artisanship; hand carved wooden furniture and traditional styles. Furniture industry in India is very fast growing because of growing economy and increased per capita income of working class specially upper-upper and middle upper income groups. Government has encouraged building and construction industry a lot during last seven years. Many international consortiums have emerged in India construction and development scenario. Many new mega building and housing projects are on the way. Different huge projects in coastal cities are another new chapter in the country’s history of construction. Gwadar is coastal city and its new developed and partly opened port is just a beginning for the huge international business this trade hub will do in next coming years here. Government’s liberal trade and business policies strongly encourage foreign investment and foreign investors enjoy special tax rebates and various other financial privileges. 3-0: Opportunity Rationale India wooden furniture’s demand is increasing in the domestic market as well as in the international market because of its traditional appeal and durability. Furniture is the major item given to daughters in dowry and demand is increasing day by day. Spring and winter seasons are peak selling periods of furniture due to the reason those maximum weddings are planned in these seasons. Increased construction and expansion of cities and suburbs are also cause of increasing furniture demand. Volume of furniture industry has increased by 130% over last five years. Demand of India furniture has grown by 8% in Europe sector. Huge potential market is looking for some manufacturer to offer trendy, stylish and light weight furniture. Demand of furniture is stable through out the year but demand from October to February remains on higher side. 4-0: Proposed Business Legal Status It is recommended that this project should be started as private limited company under corporate act of United Kingdom. In India, businesses formed under companies ordinance, enjoy various benefits. As this investment increased rate of employment in country, people also give respect to the companies from foreign origin. We propose to start at a smaller level by forming a private limited company only with the funds of our two companies. Just after two to three years, once we get introduced in the market and have an on going sales pattern, we would need more investment to put in our production function. At that time, we can convert our private limited company into a public limited company and would become on the list of India Stock Exchange that is third largest stock exchange in European region. In this way, we see the bright future of our partnership that would enjoy tremendous success and profits in India market. 4-0: Capacity of Project The proposed project will meet all manufacturing standards and needs to produce complete furniture range. Our show rooms and factory will work on 300 days per year basis. Our project is supposed to have modern machinery, latest equipment, expertise is light weight and modular home furniture and a global repute ( IKEA’s expertise) ; and all these we need to grow in the market in a shorter time. Our project will have, in the beginning, enough capacity to meet the demands of ten main cities and surrounding areas where we already have our supper stores. This significantly good capacity will be another boost for the rapid growth of our partnership in this potential fertile market. Secondly, we have another edge over existing furniture manufacturers here, that we could produce lighter and modern furniture articles in local market. This unique capability of our project will make its smooth transition into existence possible in a lesser time. 4.6 Project Investment Total investment required for the project is £ 2 million. 4.7 Proposed Product Mix Project will be capable of managing all types of furniture products, used in offices & homes such as bed sets, sofa sets, chair, kitchen cabinets, kid’s furniture, toddler’s furniture, office tables, chairs, lawn furniture etcetera. 4.9 Proposed Location 5 Local Furniture demand is directly related to the population living in a locality. Therefore, the demand for wooden furniture is higher in heavily populated cities of India like Manchester, London, Birmingham, Leeds, Glasgow, Sheffield, Bradford and Bristol etc. Among the mentioned ones, we rated Manchester as number one option because of its geographical location, availability of raw material, skilled labour and easy access to all of our concerned major markets. It is has strong market and its own economic strengths. Strong industrial culture, various industrial zones, and highly assertive business culture are few benchmarks of this market. 5-0: Industry Structure in India 5-1: Furniture Importing Countries5 Description Import Value in US £ Millions India 6,723 Germany 1,772 France 1,303 United Kingdom 1,222 Japan 1,024 Netherlands 695 Switzerland 655 Hong Kong 636 Austria 504 Major portion goes to Bedroom furniture. 6-0: Furniture Production Process: 1 & 5 1 Purchase of Wood Wood is purchased after Quality inspection. In determining quality following points are Considered: Age of Wood Dryness of wood Its surface, which should be plane without holes etc 2. Cutting of Wood When purchased, the wood of natural form, this wood after purchase is cut into different sizes of blocks and slabs. 3. Drying Processing The wood become more precious after it is seasoned. Its market price and durability increases. Process is applied on dried wood instead and other blocks/slices are seasoned through different methods such as: Slicing, Boiler, Condensation, Vacuum, Temperature maintenance. 4. Idea and Design Select Selection of furniture design is always important before manufacturing of any furniture product. A unique and valuable design is selected. Elegant design is a sure way of success for attractive and presentable products. 5. Slice Cutting After the wood is seasoned its blocks are made into slices in different required forms and shapes. Such shapes associate with the finished product to be made with the wookd. 6. Molding of Wookd Molding is the next step where slices of wood are set for molding and are converted into different shapes accordingly. 7. Shaping and Carving Carving and shaping mean application of various elegant patterns and styles by way of carving in the wood. It is a quality and skillful artwork of course. 8. Assembling/Fitting Assembling comes afater the different pieces are carved & their molding is done properly. Such pieces are put together to form a finished product. 9. Final Touch (Paint/Polishing) After all the semi finished product is set for painting and polishing to make a unique and valuable final product. Surface of the product is made smooth before applying paints and polishing to ensure good quality. After the base is prepared final finishing is applied depending on requirement in term of paint/polish. Upholstery of fabric is carried out according requirement of design. 6-1: Proposed Production Mix 4 Description Percentage Bed Set 40% Dinning Set 20% Sofa Set 40% Total 100% 7-0: Factory Machinery Requirement 4 Description Required Cost per machine (£) Total Cost (£) Cutter 1 25,000 25,000 Gauge 1 20,000 20,000 Planer 1 15,000 15,000 Moulder 1 15,000 15,000 Chapaka 1 10,000 10,000 Grinder 1 10,000 10,000 Drill machine 1 12,000 12,000 Compressor 1 15,000 15,000 Miscellaneous Tools (Paint Gun etc.) 20,000 Installation costs for machines 10,000 Office Equipment 32,000 Total 184,000 8-0: Human Resources Description No. Monthly Salary £ Total Annual Salary £ Production supervisor 1 6,000 72,000 Carpenter 1 5,000 60,000 Polish master 1 5,000 60,000 Paint master 1 5,500 66,000 Helpers 6 2,000 144,000 Total 402,000 9-0: Land and Building 1 The land sufficient for setting up the proposed wooden furniture manufacturing unit is approximately 1 kanal14 (4,500 sq. ft) production area (Factory area), while the covered area of furniture depends on area available & financial resources available. For the proposed project 1,600-sq. ft showroom area is assumed. Description Area (Sq. ft) Factory Main Hall 800 Paint Room 300 Polish Room 250 Store for finished product 700 Open Space 2,450 Total 4,500 Location of Factory: We propose Ohio or New Jersey factory site for factory site due to easy availability of raw material of all types including various qualities of wood, furnishing products, machinery and equipment. Skilled labour is also in abundance in these areas. 10-0: Project Costs 3 Description Amount (£) Machinery & Equipment for Manufacturing 152,000 Office, Furniture & Equipment 107,100 Shop Setup Cost and Interior 156,000 Pre-operating Costs (Misc. Exp) 60,000 Total Capital Expenditure 475,100 Raw Material Inventory (Purchases) 220,630 Finished Goods Inventory (Purchases) 836,352 Upfront building Rental (Advance) 144,000 Building Rent Security (Refundable) 72,000 Cash 300,000 Total Working Capital 1,572,982 Total Project Cost 2,048,082 Project Returns NPV @ 18.5% 1,800,496 IRR 44% Payback Period 6.5 Years Project Financing Details Description Percentage Amount in (Rs) HOC 30% 614,424 IKEA 70% 1,433,658 Total 100% 2,048,082 11.0: Main Assumptions2 &3 Operating Assumptions Factory Hours Operational per day 8 Days operational per month 25 Days operational per year 300 Showroom Hours Operational per day 11 Days Operational per month 25 Days Operational per year 300 Economy Related Assumptions Annual Electricity Price Growth 10% Annual Salary Growth Rate 10% Rent Growth Rate 10% Annual Sale Price Growth Rate 5% Annual Raw Material Price Growth Rate 2% Expense Assumptions Communication Expense 5% of Administrative Costs Transportation Expense 3% of Cost of Goods Sold Marketing Expense 0.50% of Revenues Cash flow Assumptions Initial Cash in Bank £ 300,000 Accounts Payable Cycle in (Days) 30 Finished Goods Inventory in (Days) 60 Raw Material Inventory in (Days) 30 Rent Assumptions Refundable Rent Security Factory (months) 2 Refundable Rent Security Showroom (months) 2 Pre-paid Rent in (months) 6 Depreciation Expense Depreciation Method Reducing Balance Depreciation Rate (Annual) 10% Financial Assumptions Project Life 20 Years Debt Equity Ratio 30:70 Return on Equity 35% Interest Rate on Optional Long Term Debt 12% Long Term Debt Tenure (Optional) 5 Years Number of Payment/Year 4 . Net Present Value Rate . (Weighted Average Cost of Capital) 18.50% . Income Tax Rates Private Limited Companies Rates . Revenue Assumptions (First Year) Description Pro duct Mix Sale Price Bed Set Superior 10% 48,000 Fine 30% 37,000 Normal 60% 32,000 Dinning Set Superior 10% 40,000 Fine 30% 30,000 Normal 60% 25,000 Sofa Set Superior 10% 40,000 Fine 30% 25,000 Normal 60% 20,000 Cost of Goods Detail (First Year) Description Product Mix Cost Price Bed Set Superior 10% 19,080 Fine 30% 12,295 Normal 60% 15,970 Dinning Set Superior 10% 19,135 Fine 30% 16,100 Normal 60% 15,015 Sofa Set Superior 10% 20,625 Fine 30% 16,465 Normal 60% 13,745 12-0: Online Store: We recommend the launch of online store for this project. We have strong recommendations for this aspect as online purchasing is increasing day by day. And according to recent studies, rate of increase in online shopping is much higher than rate of increase in traditional store retailing. We suggest that project must be added in IKEA’s global website www.ikea.com as this will increase the goodwill and potential of this partnership. 13-0: Conclusion Culture is the most fundamental determinant of behavior and attitude of a person. It forms beliefs and faith in the society. Asian culture is different and distinctive in nature. The presence of many religions is one of the main reasons for the cultural differences found in Asia. The marketers operating in different cultures are to understand the dynamics of culture. The psychological and sociological factors have a deep and inside relation with the consumer behavior. The consumer buying behavior is highly affected from these elements of human nature. Asian culture is all together different not only from west but also within Asia the cultural-differences exist. These differences are directly related with the behavior of consumer. As such a marketer that is operating in Asia needs to understand the dynamic and complexities of Asian markets and develop its marketing plan in a manner that can serve better to the needs of consumers in Asia. 14-0: Recommendations Following recommendations are made to the stores that had been visited and also for the marketers in Asia: Marketing mix elements are to be analyzed while making strategies. In our opinion, keeping in view the overall standards and the quality of life, low pricing should be emphasized and promoted Direct Mails and telemarketing are found to be more useful in communication and sale process The marketers should define their target market with utmost care and in vigilant manner so the tailored made products can be delivered. There is a dire need for enhanced research activities. Stores that have assessed the importance of research are found more successful. The activities of the stores need to be more focused towards consumers and the satisfaction level of consumers is to be place on high priority. The sociological and psychological influence of culture on consumer behavior is to be assessed effectively so as to cater the needs of target markets thus accomplishing the aims and objectives of stores. Appendix: 1 14-0: Furniture Manufacturing Cost for a Double Bed Set: 1 Appendix: 2 15-0: Manufacturing Cost for a Sofa Set 1 Appendix: 3 16-0: Manufacturing Cost for a Dinning Set 1 R E F E R E N C E S: 3David Folls (1999),”Study Wooden Furniture Manufacturing Unit”, 2nd edition, McGrawHil - India 2Reu-De-Johen (2003), “Project planning”, P341, Dolphin Publishers Spain Tom Cannon (2003), “Welcome to the Revolution’, PIMAN Publishing 1Export Promotion Council’s, Exporting Woodcrat – 2005. 5Journal of Manufacturing (2004/1) Pre-feasibility Study Wooden Furniture Manufacturing Unit, PREF-70/January, 2004/1 Erika, R. (2003). Staying Power. 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