IB BUSINESS MANAGEMENT HL, Paper 2, November, 2008, TZ0, Solved Past Paper

Wal-Mart, a leading global retailer, has decided to sell its 85 German stores to Metro after eight years of losses. This decision marks a significant international withdrawal for Wal-Mart, which continues to expand profitably in other regions like Latin America and China. The German market posed several challenges for Wal-Mart, including intense competition from domestic discount stores, strong trade unions opposing new working practices, consumer resistance due to cultural differences, and an unfavorable economic environment.

Metro, Germany's largest retailer, aims to use this acquisition to increase its market share and profitability through internal economies of scale, rationalization, and cost-cutting measures. However, several stakeholder groups have expressed concerns about the proposed sale, fearing that Metro will gain excessive power in the retail sector.

Retail analysts suggest that Wal-Mart's withdrawal from Germany, resulting in a $1 billion loss, could negatively impact its brand image in Europe and globally. They argue that Wal-Mart should have considered alternative marketing strategies or joint ventures with German retailers.

Protect Ltd is an Australian company specializing in leisure clothing. They import materials from Asia to produce high-quality clothing for walkers and joggers. While they have a significant share of the domestic market, they have also expanded their reach by exporting to Europe, with exports accounting for 60% of their total sales revenue. Recently, their research and development department has invented a new lightweight, breathable, and waterproof fabric. Initial market research has shown positive feedback from existing customers and potential applications in various sports markets. To manufacture garments using this new fabric, Protect Ltd will need to invest in new manufacturing equipment. The research and development team believes they can further enhance the fabric's strength to make it suitable for contact sports like rugby and American football.

The board of directors has identified three strategic options:

1. Sell the patent for the new fabric to a leading sportswear manufacturer for $10 million, considering the competitive nature of the sports market.
2. Purchase machinery for $2 million to manufacture the new fabric as outdoor clothing. This option has an estimated 80% success rate, with potential returns of $20 million. However, failure would result in a $5 million loss.
3. Conduct further research and development to improve the fabric for sports use, costing $2 million. If unsuccessful, this would result in a $5 million loss. However, there is a 60% chance of success. If successful, they could either sell the improved fabric patent for $25 million or manufacture it themselves at an additional cost of $2 million. The latter option has a 50% chance of a successful market launch, with estimated returns of $72 million, but a failed launch would lead to an $8 million loss.

The board is also concerned about the economic conditions in Europe, with expected increases in inflation and interest rates. Additionally, the Asian currency markets are volatile, with expected rises in exchange rates.