Question 3c
Sberry: Company information
Sberry manufactures products which have a short lifecycle due to technological obsolescence. It aims to keep each product in production for at least 18 months so that it can recover the high cost of product development and make an acceptable profit before the product becomes obsolete. Sberry has always manufactured its products in its home country of Deeland, from where all materials are also sourced.
Sales opportunity in Kayland
An opportunity has been identified to export one of three newly developed products, Red, Blue and Green, to Kayland, due to citizens’ increasing levels of income there. The rate of technological obsolescence is slower in Kayland than in Deeland. The estimated levels of demand, selling prices and costs of the three products are shown in Appendix 1.
Stakeholders’ views on the risks of the Kayland opportunity
Three of Sberry’s key stakeholder groups, employees, directors and shareholders, have been consulted for their views on the proposal to export to Kayland and, in particular, on which of the three newly developed products to export there.
The employees have a cautious approach to the proposal following the recent failure of another product launch. That product was withdrawn as it breached poorly understood safety regulations and a number of employees lost their jobs as a result.
The directors, all of whom are individually wealthy, have served on the board for many years and are keen to earn the large bonus which is currently offered solely on the total profit made by the new product over its lifecycle.
The shareholders neither avoid nor seek risk, but they are keen that the company considers the external environment in Kayland in order to maximise performance there, whichever of the products is chosen to be exported. They have asked for a PEST* analysis of the environment in Kayland to be produced. A first draft of this has indicated that the exchange rate between the Deeland dollar (D$) and the Kayland dollar (K$) is a key economic factor which may affect performance.
*Political, economic, socio-cultural and technological
Required:
(c) Advise the shareholders how analysing the external environment in Kayland using a PEST analysis can help Sberry maximise its performance there. You are NOT required to produce a PEST analysis. (6 marks)
Appendix 1
Estimated levels of demand, selling prices and costs of the three newly developed1 products
| Red | Blue | Green | |
|---|---|---|---|
| Total demand (units)2 | 50,000 | 60,000 | 160,000 |
| Selling price (K$)3 | 8·00 | 9·00 | 6·00 |
| Total unit cost (D$)4 | 2·40 | 3·00 | 2·50 |
| Notes to the appendix |
|---|
| 1. Development costs are sunk costs and can be ignored. |
| 2. The estimated product life of each of the three products is the same and the total demand is for the whole life of the product. |
| 3. The current exchange rate between the D$ and the K$ is D$1·00 = K$2·00. Sberry’s finance director has estimated that over the life of the product there is a 75% probability that the average exchange rate of the D$ will strengthen by 10% against the K$, and a 25% probability that the average exchange rate of the D$ will weaken by 10% against the K$. |
| 4. At the current exchange rate, 50% of the total costs for each product is for materials which are imported from Kayland and invoiced in K$. There will be no opening or closing inventory, whichever of the three new products is chosen. |