With the proposed expansion of CPI in other countries like Brazil and the some European states, we need to consider three things: 1) the market share of giant corporations in the same business, 2) the company’s capital size, and 3) the price elasticity of the products to be sold (in those countries). While all these factors are of salience in the company’s operations, it is assumed that the relative complexity of the market is an avenue of uncertainty.
Other factors like political stability may influence considerably the company’s operations as much as the presence of giant corporations in the business. The presence of giant corporations in the same business can be staved-off by setting commercial offices in places that are without the presence of these corporations. For example, if giant corporations are well concentrated in a particular city, the company should establish subsidiaries in semi-urban areas. This would stave off competition as well as maximizing the limited consumer base (semi-urban areas have a considerable consumer size).
The company’s capital size should also be considered. Capital provides a firm the working materials to produce goods and services to the public. Capital and labor make up the so-called “inputs of production” of a firm.
Therefore, if the company is going to expand overseas, it must first negotiate on the volume of capital that is needed for expansion (and of course, the associated risk). In this case, 5 to 20 % of the company’s capital will be used for expansion. This is a fair evaluation of risks involved in the venture as well as the proposed distribution of capital in “host” countries. The real problem though lies in determining the price elasticities of products to be sold in the market.
Although the company fared well by concentrating its sale to regional places, this would not be the same when it goes international. Price elasticities generally become stable and somewhat inflexible once prices also become inflexible. The implication: those companies with large capital bases will tend to survive; those with small capital bases will either merge to survive or exit in the market. Even if the company set-up subsidiaries in semi-urban places to prevent competition, there is no assurance of success. Below we shall discuss nature and definition of price elasticities.
There are two primary types of elasticities: price elasticity of demand and price elasticity of supply. Here we are concerned only with the former since the company’s expansion abroad depends on the sensitivity of consumer demand to price changes. Price elasticity is defined as “the measure of responsiveness of a factor or variable to another factor or variable” (Buchholz, 1996).
Price elasticity of demand is defined as “the measure of responsiveness of quantity demanded to a change in price, all other things held constant (ceteris paribus)” (Price Elasticity of Demand, 2007). General relations of price elasticity of demand: • If PED >you then Require is Price Elastic • If PED = one particular then Demand is Device Elastic (equal response) • If PED< 1 after that Demand can be Price Inelastic In the case of products manufactured by CPI, specifically Extremely Clean, this generally activities the third regards. If Extremely Clean increases the prices of its product by five per cent, percentage difference in quantity demanded would be less.
The implication: by establishing subsidiaries in places where there is the minimal occurrence of huge corporations, Very Clean could control minimally the prices of its product due most likely to the comparable inflexibility of consumer demand. This would improve profit. Even if giant organizations enter, earnings would tend to be steady because client demand is stable.
This will generally reduce the overall risk of the company.