External Capital Funding Investment

 

 

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Nordstrom’s Investment Project: Risk Analysis

Caitlin Burroughs

Southern New Hampshire University

MBA 640 Finance Economics & Decision

Professor Agbemble

November 19,2021

 

The proposed project is the opening of new Nordstrom’s and Nordstrom rack brick-and-mortar stores in Japan. The investment is aligned with Nordstrom’s financial goals of increasing its market share and driving profitable growth. The investment will enable Nordstrom to incorporate its assets in the new marketplace and further develop its distribution channels. The investment will improve Nordstrom’s range of price points and increase connectivity between its physical and digital inventories. The new project will increase customer options and ensure incremental sales and long-term profitability for the firm. Nordstrom requests a loan of $350,000 for different expenses. They include renting a store, licenses and permits, marketing and promotion, salaries, and intellectual property, among other expenditures. Nordstrom intends to meet this budgetary target and has considered alternative funding mechanisms, including crowdfunding, to leverage its vast networks and connections. The firm is also pursuing grants from authorities because the investment promises high chances for success.

Section IV Risks:

Nordstrom should ensure an adequate understanding of its internal and external risks with its plans for expanding into the Japanese market. Japan is an effective place for expanding its operations due to its cultural and fashion similarities with the western markets and a strong economy (Saxena & Tripathi, 2015). To determine how smoothly it can run its operations, Nordstrom will have to consider the differences in its current and target markets. This aspect would ensure merchandise optimization, technology incorporation, and loss prevention.

Internal

Some of the significant internal risks attributed to Nordstrom’s international expansion include communication, public scrutiny, internal expansion education, and resources. Disagreements and resistance could develop as employees debate the planned actions (Bell, 2018). Workers and other stakeholders could be less receptive to opening the first store in Japan due to variations in its political, cultural, and contextual attributes. Inadequate communication and resistance would inhibit Nordstrom from attaining its financial goals. It is because workers would be performing suboptimally and lacking the motivation to drive the firm’s mission. Nordstrom needs a robust communication plan to communicate its vision and direct employee activities. It requires open communication and two-way feedback processes to gauge employee performance and acquire strategic insights from workers. This information would be crucial for improving performance and guaranteeing success in the new market.

Project planners may be reluctant to support the investment because of the need for customizing and localizing the brand to fit the Japanese context (Marsillac & Roh, 2014). Effective communication and adopting continuous learning would help to fill gaps in internal expansion education. Employees and decision-makers may lack adequate international expansion education, which could inhibit Nordstrom’s ability to launch its stores in Japan. This aspect could expose the new project to multiple financial and performance risks, especially when they lack adequate understanding of the internal structures and processes in the new store and market (Bell, 2018). Nordstrom could address this issue by using insights from its past experiences expanding internationally. This approach would enable Nordstrom to leverage its local and regional expertise as strategic resources for penetrating the target market.

Stakeholders and organizers of the new project should recognize that all their initiatives will be publicly scrutinized and criticized. Therefore, they should develop practical communication approaches to prevent negative reviews and news from affecting their team’s morale for the project. The internal opportunities Nordstrom will acquire from investing in Japan include increased sales, job growth, and data collection to inform other future international expansion initiatives. The firm has experience expanding into other regions such as Canada and Australia. The experience provides them with the knowledge that would help to focus on different strategies’ strengths and weaknesses (Marsillac & Roh, 2014). Expanding into japan will be the perfect time to seize the opportunity to establish a store in a new context and make fewer mistakes during the launch.

Nordstrom faces various internal risks associated with limited resources underperformance of its digital assets, such as the online retail servers. This aspect could affect its financial performance considering the plans for investing in a market whose clients are tech-savvy and increasingly use e-commerce approaches (Bell, 2018). Focusing on the brick-and-motor store may deny the firm strategic opportunities to use modern and digital operation approaches. Nordstrom could address this issue by increasingly focusing on international expansion into other promising markets. This would enable it to offset the risks encountered in one market with opportunities in others, preventing the firm from running losses.

External

Nordstrom could encounter multiple external risks while establishing its operations in Japan to cultural, political, and contextual variations. Other threats emanate from global financial instabilities and trends, such as the COVID-19 pandemic (Kanno, 2021). Nordstrom should recognize that Japanese fashion is highly trending, with popular styles featuring in movies, songs, shows, and exhibitions across the globe. This aspect implies that the Japanese style has contributed to fashion’s history in multiple ways. Nordstrom must develop adequate knowledge of this unique fashion to determine the most appropriate product offering for the new target market. This aspect requires an understanding of the unique and unforgettable Japanese heritage and culture that have significantly influenced and popularized the nation’s fashion and styles. Japan has a rich culture that has influenced rare fashion interpretations and styles (Monden, 2014). Such designs have become a standard part of the contemporary street fashion couture. An alternative approach for filling the cultural knowledge gap would be recruiting workers from the target market to leverage their unique knowledge and insights regarding Japanese fashion and culture. This approach would attract multiple clients as they would be confident that the store will fulfill their fashion and wear needs. Customers would also be increasingly willing to visit the store or purchase the brand from different platforms.

Nordstrom should focus on providing its new market with unique brands and styles aligned with its extensive history of being an influencer and borrowing from other fashion cultures. The United States has significantly influenced Japanese culture and fashion through constant media exposure of designers and styles that influence Japanese clients. Japanese contribution to modern fashion is becoming increasingly apparent (Monden, 2014). Therefore, Nordstrom should conduct broad market research to identify various consumer profiles. This approach would help develop effective marketing and targeting plans that are crucial for successful operations. Adequate market research would enable Nordstrom to understand the inspiration sources for leading designers from Japan. This aspect would provide crucial information, ideas, and blueprints for developing new brands and adding to its intellectual property portfolio.

Fashion is regarded as a matter of aesthetics and politics. Nordstrom must familiarize itself with the policies for fashion in Japan to ensure smooth operations and avoid fines. Japan has open policies for foreign fashion brands due to the few tariffs and non-tariff barriers (Monden, 2014). Despite the favorable political climate, Nordstrom should observe sound business practices to ensure financial success. These practices include ensuring timely communication and delivery to ensure convenience for clients. Before investing in Japan, Nordstrom should recognize that the nation is categorized as prone to natural disasters. This aspect is because of the geological location that makes it prone to natural disasters such as earthquakes, tsunamis, and volcanic eruptions (Kumasaki et al., 2016). Therefore, Nordstrom should develop effective strategies such as taking insurance cover against such disasters. Knowledge of such disasters would also enable the firm to choose a strategic and safer location for establishing its stores. This aspect would help to minimize losses from closures and downtimes.

Microeconomic

Japan is a vast fashion market that presents multiple opportunities for American apparel and fashion stores. Nordstrom should focus on different products, such as contemporary women’s wear. It should also provide products made from high-quality fabrics and other unique items with great details. Japan is a highly competitive market. For Nordstrom to succeed, it must ensure that its products are unique, fashionable, and high quality. Past reports on the Japanese market have revealed crucial details regarding different product segments (Nobbs et al., 2012). The data showed that the women’s wear market is sophisticated, and suppliers must deliver small lots within short cycles. Differentiating the brand and providing high-quality products would enable Nordstrom to increase its price elasticity and increasingly take advantage of the Japanese market. This would enable the firm to take advantage of the diverse consumption patterns and the growing demand for exclusively high-quality fashion products.

The overall Japanese fashion trends resemble those in other parts of the globe, such as the west. In Japan, the recent trends towards premium jeans have been diminishing. However, there has been an increasing demand for dresses or tunics and leggings. The best approach for attaining competitive advantages in the Japanese market is selling high-value-added products such as those manufactured in the United States (Nobbs et al., 2012). The unique and high-quality fashion items would provide Nordstrom with better chances for success than when selling contracted out and items not produced in America. Nordstrom should recognize that Japanese firms and brands would have various advantages over American suppliers. Domestic designers and retailers can react faster to changing fashion trends, enabling them to seize rare opportunities. Such firms also have adequate consumer knowledge enabling them to design and fit their products according to the Japanese size standards.

Alternate financial scenarios

A reduction in sales by about 20 percent of the base assumption could have dire implications for Nordstrom’s financial performance. It would imply that Nordstrom cannot generate adequate revenue to meet its profit targets. This aspect would result in deteriorating financial performance and rising costs. Reduced sales would kill the morale of different workers, administrators, and stakeholders. This aspect could make them less confident about their chances for success in the new market (Wales et al., 2013). It could affect their long-term initiatives and productivity, making it challenging to attain the base assumption sales level. Reduced sales below the base assumption would make the project less attractive to investors. This aspect would make them less willing to provide additional capital and resources for sustaining the project and its operations. Reduced sales would also imply that the firm would lack adequate revenue for meeting its different costs such as rent, power and water bill, and salaries. The firm would be forced to seek more funding, driving it deeper into debt.

The projected financial performance would improve substantially when the venture’s sales are 20 percent higher than the base assumption. This aspect would imply that the firm has implemented adequate marketing, research, and promotion approaches to facilitate adequate brand awareness. It would also mean that the firm has a sufficient understanding of the local market and its clients, providing customized products that meet their unique needs (Wales et al., 2013). Attaining higher sales would provide the venture with additional revenue and capital needed for further expansion and improving the quality of current products and services. This aspect would make the new venture increasingly attractive to investors. It would increase their willingness to allocate additional funds for supporting different operations and expansion initiatives. Such trends would also increase the morale of workers and other stakeholders as the firm has adequate revenue for meeting its costs and implementing different plans such as reward and recognition programs.

Analysis of the two scenarios shows the need for Nordstrom to implement practical approaches that would enable it to meet or exceed its sales estimates. This aspect is crucial to ensure that the firm attains its financial projections and adequate revenue for sustaining operations. The analysis showed that the firm’s sales performance would significantly influence employee and investor perceptions. It would impact the employee motivation levels and investors’ willingness to provide additional funds for meeting current costs and pursuing the expansion plan (Wales et al., 2013). Therefore, Nordstrom should implement effective and continuous monitoring and reporting approaches in its sales and marketing areas. This aspect would help identify variations in consumer patterns and inform the firm about the periods that it might require to intensify its marketing initiatives or maintain them at their current level.

Net present value

Net present value is applied in capital budgeting and investment planning for analyzing the profitability of an investment or project. Net present value helps to find today’s value of future payment streams. It is determined by the difference between the present value of cash inflows and cash outflows over a given duration (de Souza Rangel et al., 2016). Increased sales above the assumed baseline imply a positive net present value, while reduced sales imply a negative value. Investments with a negative net present value should be avoided. At the same time, those with a positive score imply that the discounted present value of their future cash flows is positive and attractive. This aspect implies that the time value of money changes, and Nordstrom should focus on projects that would provide it with positive future value.

Internal rate of return

Internal rate of return is a discount rate that considers the net present value of all cash flows as zero in discounted cash flow analysis (de Souza Rangel et al., 2016). Internal rate of return is used in financial analysis for estimating potential investments’ profitability. Increased sales above the assumed baseline would increase the internal rate of return, while reduced sales would lower it. Investments with a high internal rate of return would be more desirable for the undertaking. This aspect is because they would increase the time value of money. The internal return rate is uniform for different investments, making it practical for ranking multiple prospective projects. The internal rate of returns is effective for capital planning and comparing investment options with similar attributes. The projects with the highest rates would be considered to be the best.

Payback values

The payback period implies the duration taken to cover a project’s costs. It defines the time taken for an investment to reach a break-even point. Increasing sales would imply a shorter payback period, while reducing sales would mean a longer duration. Projects with shorter payback periods are more attractive to investors. The payback period disregards the time value of money as it does not consider what occurs after covering the costs (de Souza Rangel et al., 2016). This aspect implies that it ignores the investment’s overall profitability. Nordstrom should implement adequate measures for improving the project’s performance and sales. This approach would reduce the payback period and make the project more attractive to investors.

 

References

Bell, C. (2018). External Capital Funding Investment: Proposal for Nordstrom. https://chrisbell.com/SNHU/MBA-Finance/MBA-640-finance-economic-decision-making/nordstrom-internal-external-risks.php

de Souza Rangel, A., de Souza Santos, J. C., & Savoia, J. R. F. (2016). Modified profitability index and internal rate of return. Journal of International Business and Economics4(2), 13-18.https://doi.org/10.15640/jibe.v4n2a2

Kanno, M. (2021). Assessing the impact of COVID-19 on major industries in Japan: A dynamic conditional correlation approach. Research in International Business and Finance58, 101488. https://dx.doi.org/10.1016%2Fj.ribaf.2021.101488

Kumasaki, M., King, M., Arai, M., & Yang, L. (2016). Anatomy of cascading natural disasters in Japan: main modes and linkages. Natural Hazards80(3), 1425-1441. https://doi.org/10.1007/s11069-015-2028-8

Marsillac, E., & Roh, J. J. (2014). Connecting product design, process and supply chain decisions to strengthen global supply chain capabilities. International Journal of Production Economics147, 317-329. http://dx.doi.org/10.1016/j.ijpe.2013.04.011

Monden, M. (2014). Japanese fashion cultures: Dress and gender in contemporary Japan. Bloomsbury Publishing. ISBN: HB: 978-1-4725-3621-1

Nobbs, K., Moore, C. M., & Sheridan, M. (2012). The flagship format within the luxury fashion market. International Journal of Retail & Distribution Management.http://dx.doi.org/10.1108/09590551211274928

Saxena, A., & Tripathi, P. S. (2015). Impact of Japan’s demography on its apparel market: an overview. JIMS8M: The Journal of Indian Management & Strategy20(4), 14-19.http://dx.doi.org/10.5958/0973-9343.2015.00028.9

Wales, W. J., Parida, V., & Patel, P. C. (2013). Too much of a good thing? Absorptive capacity, firm performance, and the moderating role of entrepreneurial orientation. Strategic Management Journal34(5), 622-633.

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