Megahertz Communication

Description of the Organization

Megahertz Communications is a U.K based company that specializes in the building of broadcasting systems. Created in 1982, Megahertz designs, manufactures, and installs TV and radio broadcasting systems. They also build broadcasting and news-gathering vehicles with satellite links. Megahertz builds everything in-house, from satellite trucks to custom desks and cabinets used in newsrooms. Megahertz International was set up by Ashley Coles in 1998 as an international subsidiary of Megahertz Communications. The goal of Megahertz International is to sell products to the Middle East, Africa, and Eastern Europe.

The Middle East, Africa, and Eastern Europe were growing markets that were not being serviced by any companies in the broadcasting industry. Megahertz International's plan was to provide turnkey solutions to these emerging foreign markets. Megahertz International offers custom-designing, manufacturing, installation, and testing of broadcasting systems. To market towards new clients, Megahertz hired salespeople with significant experience in these regions and opened a foreign sales office in Italy. They also displayed their products at a number of exhibitions that focused on the target markets, sent mailing and email campaigns, and set up a Web page.

Megahertz International expanded quickly. By 2000, they had sold products to Namibia, Oman, Romania, Russia, Nigeria, Poland, South Africa, Iceland, and Ethiopia. There were seventy-five employees working on the international business and generating ten million pounds a year. They even earned the Small Business Export Award from the British government in January of 2000. Although they had great success in growing their company, they had problems securing financing for their international business with developing countries. In the end, AZCAR of Canada purchased Megahertz International to gain access to the expanding European market. Megahertz benefited from the additional working capital that enabled it to take full advantage of export opportunities.

Report

The Megahertz case study relates to chapter 13 because the chapter discusses the mechanics involved in exporting, not just the benefits and affects of exporting. Megahertz had to do research to find the target markets, tailor its marketing campaigns; tailor its products, and secure financing for a somewhat risky business. Chapter 13 explains what companies must do in the way of research, hiring specialized employees, and securing financing for international ventures. Megahertz had to hire salespeople with experience in the foreign regions and people to work in a foreign sales office. They also had to research which countries to enter, and if there were any other companies servicing that area. Their biggest problem was securing financing even with letters of credit and export insurance documentation. Megahertz even tried to use lending companies that specialized in financing international trade, but they charged excessive interest rates. If Megahertz had used an export management company, they may have been able to avoid the problems with financing, because the EMC could secure financing easier, due to its preexisting relations with banks. Megahertz was able to avoid many of the common pitfalls associated with international exporting because they identified the need for broadcasting systems in developing markets and they tailored their products to their customer's needs. Megahertz is a good example of how smaller companies can greatly benefit by exporting their good and the challenges even prepared businesses face.

Problem Analysis

For Megahertz to expand its business, in 1998 Megahertz International was developed to sell products to the Middle East, Africa, and Eastern Europe. Megahertz's approach to get business from these broadcasting systems illiterate countries was to offer them custom designs, manufacture, installation, and testing. The response from these countries was positive, and Megahertz began business with several different countries in each region. Soon after business was conducted, however, Megahertz ran into some trouble. Since most of these countries were under-developed, they were unable to provide the money as fast as Megahertz would have liked. This brought on major financing problems for Megahertz. Megahertz's bank account was constantly changing; sometimes there was next to nothing in the bank and sometimes there was plenty of money. What Megahertz needed was additional working capital to finance the purchase of material to produce their systems. Since some of Megahertz's customers were unreliable for payments to be paid on time and the constant fluctuation of currency, banks turned them down because of the amount of risk. Megahertz then turned to lending companies that specialize in financing international trade. However, because of the extremely high interest rates, their profit margins became too diminished.

Alternatives

Although Megahertz had great success and was awarded the Small Business Export Award the company still had major financial problems. The company's week to week financial situation was constantly up and down. One week there could be nothing in the bank and the next there could be ₤300,000. There were many problems that affected this erratic situation.

The main problem that Megahertz had in expanding international operations to growing markets was getting money to finance an order. Twenty percent of work time was spent on pre-shipment financing or chasing money. The company needed additional working capital to finance the purchase of component parts that go into the systems it builds for customers. This was a problem because banks were very cautions when they heard that customers were from Africa and Eastern Europe. The banks were worried that Megahertz would not get paid on time, or at all. They also had concerns that currency fluctuations would reduce the value of payments to Megahertz.

Although Megahertz had a letter of credit and export insurance documents, the banks still worried that lending the money to them was too risky, and they declined the company's request.

In order to finance operations, Megahertz turned to lending companies that specialized in financing international trade. These companies charged high interest rates greater than what a bank would charge. Growth was too slow and these high interest rates had a major financial impact on the setback of the company. As a result, the company was sold to AZCAR of Canada; this gave the company additional working capital and full advantage of export opportunities.

One alternative to Megahertz International's