International Business: the Swiss Companies Gold Quality Case Study

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Entry Modes the Representative Firm (PAMP) Uses

It is reported that 60% of the refined gold across the globe comes from four firms located in Switzerland (Baldwin, 2011). This trend seems likely to persist given the degree of care taken by the firms to prevent adulteration of their product. Due to this vigilance the world’s largest bullion exchange located in London, relies exclusively on the Swiss for the purity of the 400oz bars traded (Baldwin, 2011).

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However, in recent years, there has been a need to consider production of gold at other sites. This has arisen due to the fact that the demand for gold has increased due to changes in the economic climate (Baldwin, 2011). Despite the increased demand the Swiss companies’ production costs are rising due to the increased strength of the Swiss Franc.

This has led to a dilemma due to the fact rivals are able to offer lower production costs. However, the Swiss companies cannot move to cheaper sites due to the fact that the country offers greater safety. This is supported by the fact that Switzerland is the only country around the world with laws for precious metals (Baldwin, 2011). Based on this legislation, every refinery must have staff employed by the government responsible for purity controls in house.

This is the primary reason that producers cannot anticipate leaving the country for cheaper production sites. It is reported that in the precious metal industry, reputation is the main driving factor (Baldwin, 2011). It is reported that some of the main products produced here account for as much of half the company sales. The main reason for the major sales associated with the PAMP bars is the fact that their purity can be relied on within the industry. This comes following reports that as much as 90% of gold jewelry samples produced in locations such as India were mixed with other metals (Baldwin, 2011).

Upon analysis of the article, it is possible to observe that the entry mode used by PAMP is that of exporting. This method is among the first methods used by firms to internationalize their activities (Hill, 2010). In direct exporting, the enterprise is directly involved in the sale and distribution of its products abroad. In line with this drive to increase business due to the rising production costs the company has resorted to minting gold coins as a consumer product (Baldwin, 2011).

This approach to business has already begun to bear fruit for the company which reported that the retail products were accounting for 10% of sales and 30% of profits (Baldwin, 2011). These coins unlike the 400 ounce gold bars are not designed to be stored in vaults over long periods of time. These coins are meant to provide a suitable alternative for individuals interested in investing in gold to protect wealth from currency changes (Baldwin, 2011). In keeping with the need to market the new product across the globe, the company has customized different coin designs for different regions.

This mode of entry is suitable for the gold refiners given the need to protect ownership as the case with gold products sold in the international market. In addition to that the entry mode is considered favorable due to the low costs involved in the undertaking (Hill, 2010). In addition to that it has been observed that this mode of entry allows the company to take advantage of economies of scale during production thus lowering costs further (Hill, 2010).

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The main advantage associated with this mode of entry can be attributed to the fact that the Swiss companies have developed a reputation with regard to product quality (Baldwin, 2011). Due to the use of this approach these refiners can ensure that they continue to produce high quality gold.

How the Appreciation of the Swiss Franc Has Impacted on PAMP’s Profit

The Swiss firms involved in the production of gold have in recent times faced serious economic challenges that can be attributed to the appreciation of the Swiss Franc (Baldwin, 2011). This arises due to factors such as demand and supply which play a major role in changing price or profits of the completed product. It has been reported that the domestic costs of producing goods for export is affected by changes experienced in the local currency. This is due to the fact that when prices in the market remain the same while changes are observed in costs, the result is there is a decline in the profit margin (Hill, 2010).

This trend has been made more complex due to the fact that the increased strength of the Franc has made the cost of production much cheaper in competing countries (Baldwin, 2011). This suggests that the same product costs more to produce in Switzerland, while it may cost less in other countries. The end result being the Swiss gold refiners are beginning to lose money due to the requirement to satisfy higher production costs. One solution to improve the situation would require the refiners move their production facilities to cheaper sites. Unfortunately, this option is not even worth considering given that the Swiss refiners have built a reputation that may be difficult to maintain if they were to relocate to cheaper sites.

This position with regard to the Swiss Franc suggests that in the future the survival of the refiners will rely heavily on their ability to predict changes in the currency. One approach that can be used to achieve this is through the balance of payments methodology.

This would involve the observation of the nation’s balance of payment accounts. The balance of payment account is divided into two parts. The first part is the current account and the second part is the capital account (Hill, 2010). The current account is used to measure trade in tangible items such as cars, and manufactured goods such as gold. The capital account measures flows of money such as those invested in stocks and bonds.

The surplus or deficit between the goods exported and those imported is known as the trade balance (Hill, 2010). A suitable approach to predict the country’s future financial performance can be established after a careful analysis of the trade and capital flows. In this methodology, any transaction made is entered twice; once in the current account and once in the capital account. Based on this, therefore, if the trade flow balance is negative it can be said that the country is buying more from foreigners than it is selling.

On the contrary, appositive balance indicates that a country is selling more than it is buying. If the overall trade and capital balance is positive, there will be an appreciation in currency and the opposite if the balance is negative. Through this approach therefore the refiners may be able to predict trends affecting the Franc and react in advance to avoid losses associated with currency change.

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Another approach that can be used to determine or predict the changes in the Swiss Franc is the use of the interest rate parity method. This method relies on the fact that interest rates can be determined in the market by the forces of supply and demand (Hill, 2010). The interest rate parity methodology is based on the law of one price in the securities market. Based on this, therefore, when quoted in a common currency, a similar price should be recorded for identical securities in all markets (Hill, 2010). In this determination, the method gives consideration to the spot and forward exchange rates between two countries.

In line with this, a relationship can be drawn between foreign exchange and money markets. It can thus be assumed that observation of the market is based on statistics that the currency with a higher interest rate will depreciate while the currency with a lower interest rate will be appreciated in value (Hill, 2010). This analysis can be utilized by the refiners to anticipate changes in the Swiss Franc and make necessary adjustments to facilitate profit generation.

PAMP’s Adjustment of Its International Business Activities in Response to the Profit Squeeze on Its Bullion Sales

In response to the decline in profits received from the sale of bullion the Swiss refiners have resorted to the production of gold coins as a consumer product (Baldwin, 2011). This response suggests the use of an export entry mode in which firms serve a foreign market with products manufactured in the home market. This approach may further be distinguished based on the level of a firm’s forward integration toward exporting activity.

This mode of entry is considered to be suitable, since it has been reported that internationalization models suggest that firms should follow a sequential path to international involvement (Hill, 2010). This position suggests the use of low risk entry modes such as exporting. The use of exporting as an entry mode leads to export diversification benefits due to four main reasons. First, it has been observed that exporters face much higher exchange rate exposure when compared to multinational companies. This comes about due to the fact that their costs are reflected in a single currency while revenues resulting from sale of products come from foreign market currency (Hill, 2010).

This leads to high transaction risk given that exchange rates are volatile and futures foreign exchange market do not exist for certain currencies. Thus the major benefit that comes from export diversification is the reduction in transaction risk (Hill, 2010). This advantage is particularly strong for firms with products such as gold which target narrow market segments.

Another advantage that the refiners can benefit from when using exporting as the entry mode into the international market is the ability to target market segments. It has been observed that through exporting, a firm is able to target similar market segments across several countries (Hill, 2010). This is especially beneficial to the firms producing gold products due to the fact that the segment targeted is relatively small.

Based on the size of the segment, it is likely that the potential market in any country will become saturated fairly quickly (.Central Intelligence Agency, 2010). When this case happens, the next available option will be to target similar segments in different countries (Hill, 2010). Given that this appears to clearly reflect the position with regard to gold products, it will appear that the decision to select the exporting option is suitable as it will avoid unnecessary expenditure.

Another advantage associated with the exporting entry mode can be attributed to the scaling advantages associated with the method. It has been observed that most export promotion programs are aimed at increasing sales within specific markets. Due to this fact a firm will often produce products that are suitable for the foreign market (Hill, 2010). In line with this, it can be observed that this approach has been utilized by the refining companies in the production of gold coins designed for specific regions. This design is a shift from the conventional ingots and is made to appeal to popular taste. The gold coins are designed with a variety of motifs that have been created for the different markets.

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The final advantage associated with the exporting option can be traced to the fact that exporting firms can leverage their accumulated knowledge to their advantage. This is possible due to the fact that this knowledge can be utilized in other economically and culturally similar markets (Hill, 2010). This position suggests that exporting firms can achieve and leverage their competitive advantages through targeting a variety of foreign markets. This case has already been used in the variation in design of the gold coins currently on sale across the globe (Baldwin, 2011).

General Response of Swiss Exporters and the Government

It was observed that due to the appreciation of the Swiss Franc gold refiners were experiencing declines in profits. This trend had a negative effect on refiners who were forced to continue business in the country due to safety related factors (Baldwin, 2011). In response to the pressure on the refiners these companies resorted to a strategy that would help them increase their sales. The strategy involved the production of designer gold coins that were aimed at making gold a consumer product and broaden the target market (Brown, 2011).

This approach saw the production of coins which weighed significantly less than the traditional 400 ounce bars. These gold coins were crafted with various designs that were adapted to match the needs of the target market (Baldwin, 2011). As a result, there has been an increase in sales with as much as 30% of profits being attributed to the sale of these retail products (Baldwin, 2011).

In light of the relation between the balance of payments and the currency movement, it was noted that the surplus balance had caused the Franc to appreciate (Hill, 2010). As the trend continued, internal production costs began to rise and the government began to indicate concern with regard to the trend. Following this, the government initiated a pan that was aimed at intervening in the foreign exchange market so as to stop further appreciation of the currency. These measures included strategies that were specifically aimed at reducing the excessive appreciation against the Euro (Hill, 2010). These actions were successful and some degree of change was observed.

References

Baldwin, L. (2011). . Bloomberg BusinessWeek. Web.

Brown, C. (2010). It’s the Great Gold Bar. Bloomberg BusinessWeek. Web.

Central Intelligence Agency (CIA). (2010). The CIA World Factbook 2010, Book 2010. New York: Skyhorse publishing.

Hill. C. W. L. (2010). International Business: competing in the global marketplace. Printed in USA: McGraw-Hill/Irwin.

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