Purchasing Power Of Parity

February 17th of 2012
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If we were trying to increase the profits of a company that wants to invest in new markets but that is going trough a very good moment, exporting to Kuwait would be a very good alternative.
Starting to anaylise the economic effort we can see that the Purchasing Power of Parity (PPP= GDP/POPULATION) is higher in Kuwait than it is in Spain so we have:
Po=PPP Spain=$30600 (Data are in 2011 US dollars)
Pd= PPP Kuwait=$47000
Economic Effort=Po/Pd=30600/47000= 0.651
As the PPP is telling us the quantity of money we would need to buy the same product in 2 countries and we see that Kuwait has a higher GDP per-capita, this means that the economic effort that a person in Kuwait has to make in order to get a product, in these case talking about undergarments is0.651 lower than the effort a person has to make in Spain. But despite of this fact, is important to have in mind that the Filipinos in Kuwait do not correspond to a 100% of the population. In fact Filipinos are just 75’000. And this supposes that it would be a risk to assume that Filipinos in Kuwait have the same PPP as other people.
In the other hand, the problem that Mr. Romero has aboutdeciding weather to produce with synthetic fiber or cotton is because he doesn’t know the target market. As much as he might think Filipinos want to lower their costs, buying cheaper products, quality gives always and advantage, not only because there’s people that always prefers quality but also because it comes with more profits. So it would be a risk to start producing weather products with syntheticor a 100% cotton fiber if he doesn’t know well his target population.
In matters of cost, we know that as Gibraltar is an off-shore tax heaven is a very good way to export without having to care for additional taxes. So we know that it costs and average of 0.60 USD to produce a unit of undergarment made of synthetic fiber. Now, if we add the shipping costs from Seville to Kuwait thatcorresponds to 0.15 USD, we now have a total of 0.75 USD. But now we have to count the EXW costs, assuming that the minimum price is 3.5USD. Discussing the latter, we know that EXW is a very secure way to export, as the selling part doesn’t take any risk and the buyer takes care of the transportation expenses. But know we have to think; is it worth to pay 5 times what the actual undergarment costs in orderto export it? In this case Mr. Romero would have to make a very detailed investigation of the market in Kuwait and especially in the Filipinos to know if they are willing to take this risk. So know we face a very big problem that is that as much as Mr. Romero wants to reduce his risk, this can cost him much more. Probably the statistics he has about the Filipinos market and the undergarment marketin Kuwait for the past years, corresponds to huge companies that trying to invest in this country make high investments in a way they can probably export in mayor quantity. And what Mr. Romero will try to do would be the opposite, trying to export in very low quantities to very specific parts of the markets as hotels, or home selling as promotional tools. If he wants to do that then he has todeal whit merchandisers and we know his request was not having to work with Spanish ones, but rather to look if he was able to look for Arabic merchandisers. Here we have another problem, he doesn’t even know how the Arabic merchandisers work, probably they are worse than the Spanish ones or may be a lot better but it is again, having to take a risk.
So as we are trying to look for a way to savethe company we are facing a very big issue and is the uncertainty that Mr. Romero has about the market we wants to invest in. As the Upsula Model predicts, with out market knowledge there is now way that good commitment decisions can be made and then as a consequence current activities won’t work well and market commitment will fail. As we know the experiential knowledge can only be acquired...