The Random Walk Theory suggests that stock market prices do not have any patterns and that historical pricing cannot be used to predict future prices. Believers of the theory think people are wasting their time trying to analyze data to determine the direction of stock prices. Experiments have shown that investors could study stocks then invest in those stocks would not make as much money as investors throwing darts at the stocks and investing in them. Followers of the theory think that beating the market is impossible without assuming additional risks (Shea, 2003).
According to the Random Walk Theory prices are affected only by new and unexpected information arrival in the market. This financial theory holds true with negative media releases such as Kmart stock falling after posting quarterly losses and statements indicating struggling with competitors. (www. cba. uh. edu) In order for the Random Walk Theory to work in favor of Lawrence Sports and Kmart, the media will have to report positive findings on the company. According to Howard (2005), stock prices are random in short-term investments but eventually level out long-term based on the financial position of the company.
According to Reichgott (2004), early in 2005 Kmart merged with Sears (now Sears Holdings) in an $11 billion deal. Sears Holdings is the third largest retailer today. The new strategies for the company include improving customer service and the quality of the products, forcing the right disciplines, adjusting the cost structure, and creating an atmosphere of teamwork and collaboration. (www. searsholdings. com) Simulation Two The second simulation highlights a growing and important trend in business today – globalization. Companies look to expand their business to customers world-wide or perhaps enter into a new niche.
One approach to entering the world-wide market is to expand current business operations into the desired countries or increase the product line to reach the niche. Often this approach is time consuming and expensive. A more expeditious approach is to acquire a local company currently in the desired market. There are challenges to this approach such as possible international litigation blocking the acquisition from occurring to difficulties identifying criteria necessary to evaluate the effectiveness of the acquisition. In the simulation, First South Pacific Bank (FSPB) operated predominately in the United States and Europe.
While growing into one of the largest banking institutions in the world, FSPB neglected the Asian market. Seeking to gain entry into Asia, senior management decided the best course of action was to enter the Republic of Kitanesia via the acquisition of an existing, local bank. The key to this venture is to identify the segments in which to operate, identify local companies currently operating within that segment and evaluate the candidates-based upon various criteria. Similar to First South Pacific Bank is Starbucks Corporation. Starbucks has a history in the United States dating back to the early 1970’s.
It began expanding across the United States in the late 1980’s eventually becoming a household name by the early – mid-1990’s. (Starbucks, 2006). The company slowly began expanding internationally, initially through expanding its operations into Japan, Singapore, New Zealand, China, India and Europe. To further expansion, Starbucks reached joint venture deals with SAZABY in Japan, Delek Group in Israel and Shaya Kahve Sanayi Ve Ticaret in Turkey. (Marketline Business Information Center, 2006). Even with these partnerships, one of Starbucks’ major weaknesses is its reliance on the US market.
Despite operating 8500 retail locations across 32 countries, the company’s revenue is derived nearly 85% from sales within the United States. (Marketline). Should economic conditions worsen or competition increase, the US market could suffer sluggish sales. Under-performing US operations could negatively impact the entire corporation. Being an international brand and expanding into other products such as water, ice cream and blended tea products, Starbucks should consider expanding international operations to offset losses resulting from potential diminished US sales.
Another weakness of Starbucks is that the international alliances it has formed in the past have not always been successful. Japanese Starbucks have experience sluggish sales, in 2003 it ended the joint venture with the Delek Group in Israel, resulting in the closing of its stores in Tel Aviv. (Marketline) This has not only hampered growth in the region, but adversely affected Starbucks international operations. The challenge to Starbucks is to find a way to successfully expand internationally and balance profits more evenly world wide.
With the limited success of business expansion and joint ventures, perhaps Starbucks should research growing markets and acquire local companies that are already successful in the region. One potential opportunity may lie in the Italian hot beverage market. Italy represents 11. 8% of the hot drink market in Europe. The beverage of choice is predominately coffee (78. 6%). This is a market that has experienced increased growth over the past few years, growing in 2005 by 6. 1% to $3. 1 billion US. The forecast for the industry is promising, with revenues in 2010 estimated to be $4. 2 billion US, an increase from 2005 of 32. 9%.
(Datamonitor, 2005). The market has three major companies which combine to represent nearly 70% of the market share. Illycaffe S. p. a. is the leader with 30. 9%, followed by Nestle S. A. (21%) and Luigi Lavazza (17. 9%). Nestle is the world largest food processing company, so the chances of acquisition is minimal. Illycafe operates in 70 countries, with 500 locations world-wide. It experienced revenue in 2004 of $255 million (8% increases from 2003). (Datamonitor) Luigi Lavazza is a privately held company and financial information is not available, however; more than 75% of Italian coffee drinkers consume at least one of the products.
(Datamonitor). The Capital Structure Theory suggests that a firm’s value is unaffected by its financing methods. Optimal capital structures are determined by the trade-offs associated with the costs and benefits of debt financing. (Modigliani, F. and M. Miller, 1958) The analysis of the capital structure of Illycafe, Lavazza, and Starbucks could determine if either company would be a possible target for acquisition. A weakness is that changes in the capital structure do send signals to the marketplace and affect the value of the firm.
Should Lavazza decide to transform itself from a private company to a publicly traded corporation, the value would be affected and possibly cost Starbucks more to acquire. An increase in value could diminish the benefits of such a merger. The viability of Starbucks using a merger to infiltrate the Italian hot beverage market would be strong. Based on previous international expansion strategies that have produced lackluster results, a merger would represent a lower cost to Starbucks. In the past, trial and error as resulted in the company expending large sums of money to enter a market, only to end up unsuccessful.
The costs of continual trial and error would escalate beyond that of purchasing a successful local company. The benefits to such a merger in addition to the monetary savings would be an immediate presence in a growing market. Waiting too long to enter through traditional business expansion would result in a lower market share as competition would be already present. Through a merger, Starbucks would have the opportunity to maximize profits and expand its world-wide revenue base. In doing so, should the US market dip, the corporation would still have other areas to off-set the declining sales in one segment.