Introduction
The case of Ongko Furniture is the classic case of a small to medium enterprise that is facing the global challenges brought up by globalization. Mr. Jaya Ongko has been manufacturing handcrafted furniture products for the past three decades and has witnessed his business expansion at an incredible rate during the first decade. Nevertheless, during the second decade of operations, a combination of internal and external factors lead to increasing problems for his small firm. The case of Ongko Furniture is the classic case of a company facing stiff competition from globalization and the internalization of trade. At the present moment of difficulties, it is clear that Mr. Ongko will have to undertake a significant transformation process in order to safeguard his business we find many finance concepts that many other firms around the world use today. They range from the concerns related to the rise of operational costs to the investments in research & development and innovative technology.
Recommendations
Rising competition is one of the major factors that influenced the small firm of Mr. Ongko during the 1990s. This rising competition and other internal factors like the ‘waking up’ of local communities, increase in population and in the job offers influenced in raising the cost of labor substantially. We see that operational costs for Ongko have been rising dramatically. In fact, they have passed the budgeted values.
The actual cost of goods (high-end and mid-end products) is $495,430 or $14450 over the predicted budget. This will be his first step toward remaking his company very profitable again. In order to do this, it will be necessary to change the business model he has been pursuing until now. Nevertheless, this reformation has to be gradual without improper expenditure or loss of revenues otherwise it can result in a financial catastrophe.
The first recommendation for Mr. Ongko is that he should redirect its firm toward the production of mid-end products more and gradually reduce the high-end ones. The reason is that high-end products require more labor time, induce more costs and, especially, their sales have been going down from January to June. In fact, their sales have been way below the budgeted ones. Quite the opposite is true for the mid-grade products. Their sales have been booming during the past six months. In fact, since January they have been selling in more numbers than what was predicted in the budget. They have also been constantly increasing more than the budgeted increase. Furthermore, the mid-grade products require less labor, materials and effort to produce. That is why the first move of Mr. Ongko would be to transfer more capital and workforce toward the production of mid-grade goods. Of course, he is not to close down, for the moment, his high-end goods production in order to retain the network of suppliers and customers from foreign markets. He could also outsource some of the production to another country. When approached by his Brazilian distributor for a merging he hesitated due to the unstable political and financial conditions of that country. Nevertheless, since some of his major clients are based in that region he could use this opportunity to outsource part of his production.
This way he will be able to get cheap raw materials and labor from the local area and cut significantly the costs of transportation to his Latin American or North American clients. There, he could also specialize in producing what the local market demands more of his products. In fact, that is what many business firms are doing today (Emery, 2007). In a certain sense, he is to form a subsidiary in that region. And a final consideration in this scenario would be to improve the level of technology in the manufacturing process. This situation would require a significant financial investment. Nevertheless, it would benefit the company in the long run. Mr. Ongko can use the money available from the gradual restriction of high-end product manufacturing to invest in technology upgrades. Or he can even use a bank loan.
Another scenario for Mr. Ongko would be to direct more attention toward the internationalization of his operations. One of the first things to do is to select between the foreign market he wants to export and concentrate on those markets that will benefit him the most. Actually, he is exporting to more than 20 different foreign countries. This has increased the risk potential for his firm. For a company, going global does not mean expanding in every single market on the globe, but focusing on such international markets that will benefit it the most (Mullins, Walker Jr, & Boyd, 2008).
One of the situations he has to consider is to transform part of his firm into a chain distributor of the Danish firm seeking to operate in Asia. He could approach the firm and offer them a partnership where Ongko would offer his existing network of distributors in the region. He can benefit from the patent on furniture coating he has.
Thus, he could offer the Danish firm the possibility to supplement their products with this furniture coat. In fact, he knows that there is a significant market demand for finished coating of furniture in Asia.
This way, Ongko specializes in primarily making only furniture coats and being the representative of the Danish firm. This Danish firm has also a big advantage that produces goods with a very favorable cost. This is due to the advanced robotic technology they use in their fabrics in Denmark. Thus, he would significantly cut the operation costs for the Asian markets and retain a considerable level of sales due to the combination of the low cost of products and the market distinction for the quality, especially that of furniture coating.
In this possible scenario, Mr. Ongko would have to deal with some serious international financial structure problems. Since he is going to be the representative of the Danish firm in the Asian market he would have to expand as much as it can in the countries of the region. The first major difficulty is the different currencies he would have to operate. This would impact his operating costs since the fluctuations in exchange rates and rates of inflation will have an effect on his operating costs and cost of capital (Resnick, 2007). The Asian countries have different political and economic backgrounds with huge differences among them. Another important aspect he would have to take into consideration is the tariffs and restrictions of trade that some countries may have. There is no common trade area between them and different tariffs and rules may apply. These are all costs that Mr. Ongko should take into consideration very carefully.
Conclusion
The case of Ongko Furniture is the classic case of a small to medium enterprise that is facing the global challenges brought up by globalization. The firm is facing stiff competition from globalization and the internalization of trade. At the present moment of difficulties, it is clear that Mr. Ongko will have to undertake a significant transformation process in order to safeguard his business we find many finance concepts that many other firms around the world use today. The above-descripted alternatives, recommendations, are two possible ‘way outs’ for Mr. Ongko and his manufacturing firm.
Reference List
Emery, D. (2007). Corporate financial management. Pearson: Prentice-Hall.
Mullins, J., Walker Jr, C., & Boyd, H. (2008). Marketing management: A strategic decision-making approach. Boston: McGraw-Hill Irwin.
Resnick, E. (2007). International financial management. Chicago: McGraw-Hill.