1. Should LA Sovereign pursue vertical
integration by opening a assembly line in
India to reduce product costs?
Student Name: Methika Gandhi
Student (IB Session) Number: 000307123
Subject and Level: Business HL
Internal Assessment
International School Bangkok
Teacher: Mr. Jonathan Lorence
Date of Submission: March 8, 2012
Word Count: 1,652
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2. Contents
Page
Acknowledgment Page................................................................................................................... 3
Executive Summary (Abstract)....................................................................................................... 4
Research Proposal....................................................................................................................... 5-6
Introduction..................................................................................................................................... 7
Procedure....................................................................................................................................... 8
Main Research and Findings....................................................................................................... 9-10
Analysis and Discussion.............................................................................................................11-13
Conclusion and Recommendation..................................................................................................14
Works Cited and Consulted............................................................................................................15
Appendices................................................................................................................................ 16-19
! Appendix 1: PESTLE chart of Investment Options
! Appendix 2: Interview with Rohti Kalra, owner of LA Sovereign
! Appendix 3: Assemble or Buy Decision
! Appendix 4: Estimated Costing for Assembly Line
! Appendix 5: Fixed Monthly cost per month
! Appendix 6: Assemble and Cost Decision Calculation
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3. Acknowledgement
To Whom It May Concern:
I would like to acknowledge the following:
○ Mr. Rohit Kalra, the managing director of LA Sovereign, for his patience, time and assistance in
completing this investigation project. Also for his trust in giving me financial information about his
business.
○ Mr. Sujeev Gandhi, business partner of LA Sovereign, for his time and expertise in helping me
with the investigation project. Without whom I would not have been able to produce a successful
report.
Sincerely,
Methika Gandhi
IB Business Student
International School Bangkok
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4. Executive Summary
With the competitive environment in the indian bicycle market, LA Sovereign India Pvt. plans to
increase it market share. The managers are looking to achieve this by reducing cost and therefore
reducing selling prices.They are planing to do this by pursuing vertical integration (Kalra).
Therefore it brings up the question:
Should LA Sovereign pursue vertical integration by opening a assembly line in India?
Currently, the company is importing fully-assembled bicycles from Thailand and China and the
transportation cost can go up to 40% of the total cost per unit. They are selling about 3,000
bicycles per month (Kalra). However, all the quantitative data, including the payback period
analysis and break even analysis, does not support this proposition since the business needs to
sell about 4,000 bicycles per month for the investment of a assembly factory to be worthwhile. This
means that the firm has to increase their sales by 33% to be successful.
Based on the evidence provided it is recommended that LA Sovereign should follow through with
their plan of vertical integration. They should target to increase their unit sales by reducing selling
prices. The increase in the number of bicycles sold will make the assembly factory viable will open
up new opportunities for the company.
Words: 200
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5. Research Proposal
Research Question: Should LA Sovereign pursue vertical integration by opening a assembly
factory in India to reduce product costs?
Theoretical Framework
Rationale for Study
The objective of the investigation is to access whether the expansion from the tertiary sector to the
secondary sector is worthwhile for LA Sovereign. With an increase in competition the firm is
looking to reduce their prices to sustain a competitive advantage and increase market share. They
are assuming that by pursuing vertical integration, opening an assembly factory in India instead of
importing fully assembled bicycles from Thailand and China it would allow the firm to reduce the
cost of transportation. However, investing in a new assembly line will result in higher start up
investment and also higher departmental costs.
Areas of the Syllabus to be Covered
1.6 Organizational Planning Tools- Force Field Analysis, Cost-Benefit Analysis
3.2 Investment Appraisal- ARR, payback period, NPV
5.3 Break-even analysis
5.7 Make-or-Buy Decisions
Methodology
Primary Research
Qualitative:
○ Interview with the manager by telephone to gather background information and the firm’s current
objectives and potential problems. A SWOT and PEST chart will be constructed based on the
interview.
Quantitative:
○ Personal meeting with the business partner to obtain financial data to be used in the
investigation and to ask question based on the given information. The accessibility of the partner
would allow for more in depth analysis discussions.
Secondary Research
Qualitative:
○ Labour law regulations, duty structure of importing parts, and regulation of establishing a
assembling factory are all required to evaluate the question.
Quantitative:
○ A historical financial statement regarding total revenue, total costs, retained profits and costs of
transportation will provide. Graphs and charts will be constructed based on the financial data
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6. Anticipated Difficulties
Potential Problems Potential Solutions
Difficulties consulting with owner who Let the owner schedule the interview and prepare
resides in India questions to make use of the limited time. Also by
interviewing the business partner who lives in Thailand
when necessary since sometimes personal interviews are
more suitable.
Owner being biased with his answers in Interviews will be conducted between the owner and
order to uphold the image of the firm partner to receive more than one perspective.
The firm’s annual reports are not published Assurances were given to the owner that this report will
online therefore will be opinionated not be publicized therefore there is no reason for the
financial reports to be inaccurate.
Action Plan
Task & Description Deadline Actual Date Comments/ Modifications
(mm/dd/yy) Completed
Potential thesis questions 11/16/11 11/15/11
Obtain background information 11/20/11 11/17/11
Primary Research: First interview date 11/26/11 11/26/11 Interview was through Skype
since the manager resides in
India
Research proposal 12/07/11 12/07/11
Secondary Research: Obtain financial 12/15/11 12/10/11
data
Primary Research: Second interview 01/10/12 01/10/12
date
First draft 02/01/12 01/31/12
Submit final draft 03/08/12 03/08/12
Word Count: 494
!
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7. Introduction
! LA Sovereign India Pvt. is a company established in 2006 which operates in the tertiary
sector selling bicycles in the indian market. They aim to satisfy their consumer’s wants with a wide
range of high quality durable bicycles (LA Sovereign). The firm entered a niche market when first
opened since they were the only of premium bicycle importers. The competition consisted of small
scale importers of cheaper quality and large local manufactures (LA Sovereign). However, recently
other premium branded companies have been introduced in the market. With heavy competition,
the company’s objective is to increase market share by decreasing product costs. Therefore:
Should LA Sovereign pursue vertical integration by opening a assembly factory in India?
! Currently, the company is importing fully assembled bicycles from Thailand and China
instead of in a knockdown state. This is done to avoid the risks of wholesalers switching local or
cheaper parts if the bicycles came in a knockdown state therefore damaging the brand image
(Kalra). However, the transportation costs of fully assembled bicycles are very high and can go up
to 40% of the total cost of the bicycle. By importing spare parts and assembling in India the cost of
transportation will decrease and also the import duty of spare parts is lower than fully assembled
bicycles (Kalra). Additional investments and costs of running a factory should also be taken into
consideration in order to determine weather the investment will be worthwhile.
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8. Procedure
This investigation consisted of both primary and secondary research. Firstly, an interview was
conducted with Mr. Rohit Kalra, the owner of LA Sovereign Pvt. Ltd. The interview done through a
video conference since he resides in Ludhiana, India. It was initiated through the use of a range of
open-ended questions to understand in depth the company’s current market position and their
current objectives. However, an in-depth face-to- face interaction interview was also needed to
discuss financial information therefore an interview with a business partner Mr. Sujeev Gandhi was
also conducted. Through both responses, the internal and external factors affecting the operation
of the business were discovered. These were analyzed and led relevant opportunities and threats
for LA Sovereign, which in turn led to the development of both SWOT and force field analysis.
The secondary research consisted mainly of analyzing the financial data including the firm’s
balance sheet. The data was obtained from the business partner after the interview. These
financial datas are reliable sources since they have been accurately calculated. In addition, the
firm does not publish their annual report therefore it can be assumed that the firm have not
manipulated the figures to look more flattering for the company image. Lastly, additional secondary
research on importing fully assembled bicycles was conducted.
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9. Results and Analysis
Interview:
- LA Sovereign's current objective is increase market share which can be achieved by reducing
product cost and therefore sale prices.
- By entering the secondary sector, perusing vertical integration, the firm will be able to import a
great volume of bicycle parts. The import duty rate will also decrease since they are not importing
fully assembled products
PESTLE Analysis
From the information provided by both the owner and partner of LA Sovereign a PESTLE chart
was constructed that list external factors that will influence the expansion of the firm (Appendix 1).
Firstly, India and Thailand are in the process of concluding the Free Trade Agreement (FTA) which
will decrease bicycles import duty. This will allow the firm to benefit more from opening an
assembly factory in India.
However, import duty is unpredictable as they are constantly fluctuating. If the import duty is high it
will result in an increase of the overall product. However, low import duty means greater
competition and local firms may begin to import their goods from foreign countries as well.
Currently, the transportation cost can go up to 40% per unit therefore the import duty fluctuation
has a large impact on LA Sovereign’s bicycle prices.
Force Field Analysis
Figure 1: Force Field Chart Opening an Assembly Line Factory in India
Driving Forces Score Restraining Forces Score
More control over running of 3 High cost of investment, 3
the firm which may cause short term
liquidity problem
Shorten lead time 3 Proposal to Change:
Entering local assembling 4
Raise volume of output 2 To open a factory to market may damage brand
pursue vertical image
Knowhow from current 1 integration
supplier Risk of not being able to 2
maintain the high quality
Reduce product prices 4 standards in India
Reduce inventory 2
Total: 15! ! ! ! ! ! ! ! Total: 9
Source: Interview with Owner and Partner (Appendix 1 & 2)
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10. By analyzing LA Sovereign’s force field analysis it indicates that the driving forces outweigh the
restraining forces significantly by 15 to 9. In addition, the business’ objective to reduce product
prices is included in the driving forces. It is therefore unnecessary for the business to raise the
driving forces and to proceed with expanding the company.
Nonetheless, it is possible for the business to lower the constraining forces. The restraining forces
consist of the initial investment cost of opening an assembling factory and loosing the firm’s
imported brand image. The company’s brand image is consider to be the most important factor as
it is given the greatest score. The firm can control this by gathering samples of the company’s
consumer demographic to accurately predict the potential outcome. Secondly, the small risk of not
producing the same high quality standards could be solved by acquiring the knowhow from the
current supplier since LA Sovereign’s main supplier is a shareholder (Kalra). The advice will allow
for a great start.
Break-Even Analysis
Figure 2: Break-Even Graph
1000
750
500
250
0
Bicycles 2000 4000 6000 8000 10000
Cost Saving in Rupees Costs of Production in Rupees
Source: Financial Report provided by LA Sovereign ( Appendix 4)
According to Mr. Rohit Kalra, the company would save about 300 rupees per bicycle (appendix 1).
This comes from savings of the freight charges and the lower import duties. The cost of
assembling the bicycles in India will come to as follows.
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11. According to the break even chart, the more bicycles they are able to sell the larger the saving per
bicycle they can achieve. If LA Sovereign assembles 3,465 bicycles per month they would break
even. This means that they need to sell more than this in order to have any reduction in their costs
while taking into account of diseconomy of scale.
Payback on initial investment of the assembly factory in India
Payback on initial investment (years) = initial investment / (Import Cost
Savings per Unit - (Fixed monthly cost per unit - Variable cost per unit) x
number of units per month) / 12
Units Years
3000 10.16
4000 3.16
5000 1.87
1000 0.61
Title
11.0
8.8
6.6
Years
4.4
2.2
0
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Bicycles
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12. LA Sovereign is currently selling 3,000 bicycles per month. At this rate it is predicted that it will take
the firm 10.16 years to payback all initial investments. However, if LA Sovereign could increase
their sales to 4,000 or more bicycles then their payback period will be significantly shorter.
The manager of LA Sovereign expects that due to new advancements in technology the assembly
plant could be obsolete within 5 years. Therefore they feel very strongly that they need to be able
to recover their investments before that time. From the information provided, if the firm is able to
sell about 3,500 bicycles per month they should be able to achieve this.
As long as the company sells more than 3,465 bicycles they will be able to lower the cost of
bicycles. If they reduce their selling price they should be able to increase their sales. As the sales
increases their costs will be lower which will to maintain their current profit margin.
Non-Financial Analysis
LA Sovereign differentiates itself from their competitors by providing a wide range of imported
bicycles. However, by opening an assembly line in India it is highly possible for the firm to loose
their prestige brand image. Furthermore, there is also a high investment cost which also includes
hiring and training new employees. This can be costly and time consuming and would take years
to pay off all costs in addition to the initial fixed cost of the factory itself. The company can offset
this by conveying to their consumers that the assemble factory has the knowhow from their original
suppliers who are also shareholders in the company.
By pursuing vertical integration LA Sovereign would gain more control over the running of the
business. This means that the company would be more responsive to customer demands because
they will be able to supply products in the color and style that in is currently in demand. By being
flexible in their production they will need to carry less inventory.
In the past, import duty of LA Sovereign’s bicycle has been a major legislative threat to the firm.
The only way to reduce this risk is to import bicycle parts instead of fully assembled bicycles. This
is because the import duty of spare parts is 3% lower than the fully assembled bicycles.
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13. 13

14. Conclusion and Recommendation
LA Sovereign India Pvt. has an objective to expand to their business by opening an assembly line
in India to reduce product cost. Using all quantitative data, including the payback cost and the
break even analysis, the data shows that at their current sales level of 3,000 bicycle per month it is
not advisable for the firm to pursue vertical integration. However, if they are able to increase their
sales to more than 3,500 bicycles it would be possible to lower their costs. This would in turn allow
them to lower their prices and further increase their units sales while maintain their profit margin.
This investigation consists of limitations that are to be noted. The data was based on cost
estimations provided by LA Sovereign. Any changes in these figure could effect the financial
analysis and could alter to recommendations of this report to a certain extent. Also there is a
possibility that the firm will encounters external factors that would fluctuate costs positively or
negatively.
Using the information provided I recommended that:
• LA Sovereign’s should should follow through with their plan of vertical integration. They should
start up their assembly line and at the same time aim to increase unit sales by about 33%. This
could be achieved by lowering their sales price and become more competitive. The company
should not wait for the reduction in cost before they reduce their selling price. Along with an
aggressive marketing campaign, the increase in unit sales is highly possible because the company
was established in 2006 the has since been had yearly growth in sales of 15%-20%.
•With the vertical integration many other opportunities will open up for the company. Firstly, since
they are assembling bicycles themselves they will in a better position to cater to the market’s
needs. They should therefore use this flexibility to increase sales by doing market research and
identifying the colors and models that is in demand and supplying it to them.
Secondly, with the knowhow that is provided by their suppliers they could be in a position to
eventually export bicycles to markets outside of India. This would create further growth for the
business.
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15. Works Cited
Gandhi, Sujeev. Personal interview. 1 Dec. 2011.
Kalra, Rohit. Telephone interview. 26 Nov. 2011.
LA Sovereign Bicycles Pvt. Ltd. “Company Info.” LA Sovereign (2006/0 Pvt. Ltd. Web. 17
! Nov. 2011
"Thai-Indian FTA to be concluded mid-2012." www.nationmultimedia.com. The
Nation, 29 Jan. 2012. Web. 29 Jan. 2012.
<http://www.nationmultimedia.com/business/
Thai-Indian-FTA-to-be-concluded-mid-2012-30174709.html>.
Works Consulted
Hoang, Paul. Business and Mangement. Melton: IBID, 2007. Print.
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16. Appendix
Appendix 1: Interview with Rohti Kalra, owner of LA Sovereign
1. Can you please briefly background on LA Sovereign.
LA Sovereign is the only business in India sells a wide range of fully manufactured bicycles
imported from China and Thailand. The mission of the firm is to simply make the bicycles more
accessible to their customers.
2. What are the current strategic aims and objectives that LA Sovereign follows overall?
The current objectives are to sustain a competitive advantage of being the one imported bicycles
affordable to all consumers. Also to maximize profit by reducing costs possibly by pursing vertical
integration.
3. What are some of the Strengths, Weaknesses, Opportunities, and Threats is LA Sovereign
currently facing?
Strengths! ! ! ! ! ! ! ! ! ! ! !
Design innovation- compared to competitors in the Indian market the business’ designs and quality
are better
Close tie up with supplier- the main supplier is the shareholder of the firm able to give advice when
the LA Sovereign opens their own factory
Weaknesses
High cost of transportation for fully assembled bicycles compared to importing parts
Long lead time- goods are produces in foreign countries which requires to firm to produce long
term forecast which can be risky
Opportunities
Potential decrease in duty tax since Thailand and India are working on the Free Trade Agreement
however LA Sovereign is not sure if bicycles will be included
High growth in Indian economy therefore there is more potential for the company to
grow ! ! ! ! ! ! ! ! ! ! ! ! !
Middle class and upper class are expanding and more customers will be willing to spend on
premium bicycles
Threats
Duty tax are unpredictable
– low tax rate means great competition and local firms may begin to import their goods – high
tax rate will result in expense goods
4. What are some potential external factors LA Sovereign may face by pursuing vertical integration
(PEST)?
In addition to what was mentioned earlier (appendix 3), new material such as steel, carbon and
alloy will allow bicycles to become lighter; however, it will increase the overall cost of production.
5. What is the current market position of LA Sovereign? Who are the firm’s major competitors?
LA Sovereign’s main competitors consists of Hero and TI (Tube India) which are domestic firms
plus Trek and Firefox which also import their products from foreign countries. The competitiveness
of the market is very high; however, there are no sign of threat of substitutes since LA Sovereign
has a competitive advantage in selling wide range of bicycles.
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17. 6. How much will you save if you import knockdown parts instead of fully assembled bicycles?
We would save about 300 rupees per bicycle. This comes from savings from the freight charges
and the lower import duties.
Appendix 2: Interview with business partner, Sujeev Gandhi
1. What knowledge do you currently have on the expansion of our firm?
The all the estimate financial data provided it for a potential of the factory that could assemble up
to 10,000 bicycles per month.
2. What is the predicted costs and utility of opening into the manufacturing sector?
(data provided in appendix 4)
Appendix 3: PESTLE chart of Investment Options
Political - India and Thailand are working on the Free Trade
Agreement (FDA). Since LA Sovereign is the only importer
of bicycles from Thailand it will benefit them.
Economical - High growth in Indian economy therefore there is more
potential for the firm to grow
Social - Middle class and upper class is expanding and will want to
purchase premium bicycles
Technological - New materials such as steel, carbon and alloy can be used
to produce lighter bicycles
- Necessity for innovative designs will increase overall costs
Legislative - Duty tax are unpredictable
1. low import duty means great competition and local firms
may begin to import their goods also
2. high import duty will result in higher cost of goods
- There is a 3% difference in duty tax when importing bicycle
part compared to fully assembled ones
Environmental N/A
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18. Appendix 4: Financial Information on the Investment Provided by the Company
Figure 4.1: Initial Investment
US$ Exchange Rupees
Rate
Assembly line 100,000.00 52.00 5,200,000.00
Paint Booth 35,000.00 52.00 1,820,000.00
Installation Cost 5,000,000.00
Other Fixed Assets 2,000,000.00
Total 14,020,000.00
Figure 4.2: Fixed Cost per Month
Workers Per Person Rupees
Salary 20 10,000.00 200,000.00
Utilities 200,000.00
Rent 250,000.00
Total 650,000.00
Figure 4.3: Variable Cost per Unit
Rupees
Paint 15.00
Packing 20.00
Miscellaneous 10.00
Total 45.00
Figure 4.4: Import Cost Savings per Unit
Rupees
1 300
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19. Appendix 5: Cost Decision Calculation
Fixed monthly cost per unit = fixed costs per units (from figure 5.2) / number of units
Appendix 6: Cost of Assembly
cost of assembly = variable costs + (fixed costs / units assembled) + ( depreciation*/ units
assembled)
* depreciation is calculated by the taking the initial investment divided by 60 months since the firm
wants to depreciate the factory in five years
19