Nordstrom Inc- Risks case study Internal Risks
Weaknesses- The most important risk is the personnel management for the Abu Dhabi store. Employing staff from its North American market will be expensive for the company and this will call for hiring locals and training them. Since the North American market is relatively homogenous in cultural specificity, inducting and training the new employees will be the most important risk (Kyriazoglou, 2012). This will affect the financial estimates by the added resource allocation for training in order to fit the organizational culture.
Opportunities- The Nordstrom Rack which is has proved to be successful and a big revenue generator for the company may be replicated in Abu Dhabi. This will cater for the lower end market segment. This affords the company the opportunity to capture the market holistically by segmenting on purchasing power of consumers. This model will affect the company’s estimates positively by reducing the capital outlay for a full high-end shop model.
The two most important external risks are the Politics and natural disasters in the new market. The politics may be in the form of government policies which regulate the conduct of foreign nationals and companies. The country being a Muslim nation with a minority population carries the risk of greater regulation with regards to importation of clothing which may not be in alignment with Islamic values.
This may reduce the range of products which Nordstrom may sell in the market, reducing sales and profitability. The company can mitigate this risk by introducing stores localized to be fashionable and trendy within the parameters of the Islamic culture. Specialty store for customer’s conscious of their religious persuasion can be opened while opening universal stores for the expatriate consumers.
The other risk is the natural disaster of flash flooding which is common. This flash flooding may destroy the company stores built on ground levels. The disaster which may occur may incur the firm additional resources in the recovery effort and which will be a financial loss.
The company can prepare in advance by adopting the policy of opening stores on higher levels of
shopping malls and arcades in order to avoid the destruction that results from flash flooding.
Routledge (2012), states that one microeconomic factor that might affect the investment decision is the revealed preference hypothesis which is helpful in understanding the consumer behavior in Abu Dhabi. The preferred current purchasing patterns under budget constraints will affect the type of products Nordstrom can sell in the market. Products within the catalogue of Nordstrom which are closer to the local revealed preference will sell better with minimal marketing and advertising.
Another microeconomic factor is the demand elasticity and price elasticity in the local market. Clothing and apparel are differentiated products and derives demand using the constant elasticity of substitution subutility function (Wolff & Resnick, 2012). Since there is already an “ideal” variety due to the Islamic culture, the love-of-variety elasticity demand will be affected by availability of substitutes. Seasonality will affect the demand elasticity during Islamic festivals when demand is higher.
Alternate Financial Scenarios
Part a- A 20% rise in sales will affect the financial performance in three ways. It will affect the projections in the income statement, cash flow projection and balance sheet. The income statement will be revised to reflect the increased revenue from the sales, while cash flow projection will be adjusted upwards due to the increased cash revenues. The increased sales will dilute reduce the company’s liabilities and increase its equity position as the increased sales will reflect as an asset in the balance sheet.
A reduction in sales by 20% will reduce the projected net income due to the decreased sales while the expenses remain constant. The cash flow projection will also reduce due to the reduced cash revenues which are generated by sales. Nurnberg (2012), states that the balance sheet position will be adjusted to reflect the reduced equity as the shortfall in the sales will be accounted as a liability.
The implications when the sales fall by 20% may imply that the company’s products face declining sales due to superior products of competitors. It could also imply that the price set was not realistic to the market demands. This may call for increased resources in advertising, promotion in the new market in order to penetrate the market.
The implication for the 20% rise in sales may imply that the new products introduced have the potential to rapid increase in sales. It could also imply that the price set was lower than the competitors or is below the true market value. This calls for the proposed investment to maintain the current resource allocation for the investment in the short-term.
Part b- The payback period which ultimately informs the budgeting decision of capital will be influenced by the profitability of the investment. Assuming that the expected base return assumption is a return of $200,000 annually, the fall in sales by 20% will reduce the base assumption to $ 160,000 while the increase in sales will give a new base of $240,000. Assuming the initial investment was $1,000,000, the payback will increase or decrease by 20%. Using the base assumption of $200,000 the payback period would have been 5 years (1,000,000/200,000).
The payback period would increase or decrease by one year.
The calculation for the net present value and the internal rate of return are the same. The net present value when the sales fall by 20% will fall result in a negative present value which indicates the investment will be result in a net loss. The rise in sales by 20% will result in a positive net present value, indicating the investment will be profitable.
The time value of money will be less than its present value in the future if the sales fall while the time value will be more in the future due to its potential earning capacity (Nurnberg, 2012). The formula used is FV= PV(1+i/n)) ^ (nt) where FV=future value, PV= present value, n=number of compounding years, t=number of years. The time value affects the present net value when looking at the net cash inflows at the present and future value and this carries the implication that the investment will result in a net gain/loss in the future depending on sales projected.
Kyriazoglou, J. (2012). ROLES AND RESPONSIBILITIES OF PARTICIPANTS IN
BUSINESS MANAGEMENT CONTROLS. In Business Management Controls: A
guide (pp. 253-271). IT Governance Publishing. Retrieved from
Nurnberg, H. (2012). OBJECTIVES OF FINANCIAL REPORTING, ABORIGINAL COST,
AND POOLING OF INTERESTS ACCOUNTING. The Accounting Historians
Journal, 39(2), 45-80. Retrieved from http://www.jstor.org/stable/43486715
Routledge, R. (2012). ON PRICE-MAKING CONTRACTS AND ECONOMIC THEORY:
RETHINKING BERTRAND AND EDGEWORTH. Cahiers D’économie Politique /
Papers in Political Economy, (63), 171-188. Retrieved from
Wolff, R., & Resnick, S. (2012). Oscillations in Capitalism and among Economic Theories.
In Contending Economic Theories: Neoclassical, Keynesian, and Marxian (pp. 311-346).
MIT Press. Retrieved from http://www.jstor.org/stable/j.ctt5hhkff.11