Nordstrom Company: Internal Risks, Opportunities, And External Risks

Most businesses face a landscape of uncertainty and a never-ending stream of risks and opportunities. Managers must continually project the likely financial impact of decisions, make recommendations, act on those decisions, determine how to pay for them, and evaluate the costs and effectiveness of what has been done. Many decisions are short-term, routine, and operational. Others are longer-term investment decisions that require substantial new resources, such as
developing new services, expanding into new geographic markets, or undertaking business combinations or spin-offs. Each requires managers to forecast, plan,and make decisions based on a thorough understanding of both internal and external factors that can affect a company’s financial success. 

History of Nordstrom Company

Nordstrom Company was established in 1901 by Swedish American John W. Nordstrom and Carl F. Wallin. It initiated its business as a shoe retailer and expanded its inventory to entail clothes, accessories, handbags, jewels, cosmetics and perfumes. In present times, and Nordstrom is one of the leading fashion retailers. It offers a wide range of best quality clothes, shoes and accessories for men, women as well as for children in their stores across the country (History of Nordstrom, Inc. (2017).

Furthermore, they continue to remain committed to the simple idea on which the company was established that is earning the faith of consumers, one at a time. Now, the company wants to expand its business in Dubai. Present report analyzes all the variants comprising internal risk and opportunities as well as external risk along with the impact of all the variants on financial estimates investment project. Moreover, alternate financial scenarios have been discussed in order to assess the sensitivity analysis of the project.

Internal risks and opportunities

Internal Risk

Competition:  An intensive competition is to be faced on national as well as international level as Nordstrom Inc. As diverse retailers provide similar merchandise in order to compete on the basis of price or other variants. The fact cannot be denied that the success of an organization in a competitive market is dependent on its sustainability (Odeschini, Cortimiglia,  Callegaro-de-Menezes,  and Ghezzi, 2017). It is important for the company to earn profits else the survival of a company will be difficult.

Moreover, investors choose to invest only in the company which is financially strong. Further, according to Gardetti and Torres (2017), the two things which are important for the company to expand and they are management stability and branding stability. The extent of competition in the area, i.e. Dubai in the present case will assist in ascertainment of the price of the product in financial estimates. The same will lead to a company’s overall intuition of being sound and steady venture.

Complexities in the structure of organization: Being a fashion retail outlet Nordstrom requires making changes as per the need of market as well as customer, the same lead to enhance complexities in operations of the organization.  If the structure is not formed in a correct manner than the objectives of the company cannot be achieved and also it will not be able to operate efficiently (Casadei and Gilbert 2018).

Internal risks and opportunities

In order to evaluate the risk of a company’s organizational structure, the assessment of job positions, hierarchy and lines of communication should be done. Further, if the structure is not clearly described and all job positions that are working in tandem with one another the company will not be able to achieve its objectives. The specified risk will affect the cost estimation of the project. The higher the changes required, the more the cost is to be paid for the same.

Customer Trend / Preferences: Customer can be referred to as a new point of sale. Thus, it is significant for the company to be innovative whether it is related to the expansion of product, marketing and promotion, staff welfare or shopping experience. In case the lack of above-specified variants by the company than it could provide a big chance for other rivalries to fetch their share. Since, if there is no modernization by the company, then it will remain sluggish, staid and extraneous in a modified market environment.

As per assertions of Guercini and Milanesi (2017), if a company wants to survive in the market, it is necessary to assess the customer trends, without same Nordstrom can’t compete with its rivalries. For instance, the peak and lean season could be ascertained, and the same will assist in making an estimated figure of sales. The extent of loss company will have to bear in the lean season due to the downfall in sales could be ascertained through it.

Opportunities

Unique designs: The Company Nordstrom has the opportunity of expanding its business since it has unique designs. Further, the company has many designers on board who comprehends the brand of Nordstrom Company and the psyche of the consumers who visit Company as well. This implies that the clothes which are produced by the company are superior in quality as well as elegant and excellent finishing.

It should be considered that not only qualities of clothes which are produced by Nordstrom are best; moreover, they have immense finishing as well (Cheng, Fu and Lai, 2018). The same can be proven as an opportunity for the company in order to expand its business. Hence, the same will affect financial estimates of the company as if unique designs are acceptable by a customer of the new market than the figure of sales can be enhanced. However in contradictory condition expenses relating to research on the choice of people is to be enhanced.

External risks and its impact on financial success of investment project

Strong existence: Nordstrom is making an attempt to expand its business in Dubai as well. Presently, it has its stores in the United States and fashion boutiques in European countries. The same implies that the company is expanding its presence all over the world along with the expansion of its brand. The estimation of sales figure is dependent on the expectation of presence in the new area. Moreover, success in another foreign country can be taken as a base for the same, as it will assist in making appropriate financial estimations. Thus, it can be assessed that if there is strong presence than the figures can be enhanced On the other hand, if the company does not have a strong presence in the market than in that case there is the need of lowering down of figures.

External risks and its impact on financial success of investment project

Political Aspects: Political factors have a significant impact on a decision relating to the expansion of the business of an organization (Meyer and Peng, 2016). For instance, an enhancement in the frequency of terrorist attack has turned stressed diplomatic relations with its neighbours. Another example of the same can be said growing nuclear threat have enhanced stress level between North Korea and the United States. Further, if there is a situation of any terrorist attack or any natural disaster in the country than it will not only affect the people but also the local communities, organizations and infrastructure.

Due to the above-specified reason; political factors are assessed in detail before entering a new market. Hejazi Nia, (2014), asserted that Existence of stringent or critical political conditions might lead to the organization in the position of winding up. In addition to this, it can also lead to complexities in operation of organization (Datta, Ailawadi and Van Heerde, 2017). Even the increasing rate of natural disasters influences the organization and its functioning negatively. It can be concluded from the above discussion that making estimation relating to political variants which determine the extent of availability of external risk is a tough job. In case political peace is available than it is possible that Nordstrom investment decision is proven in its favour. However, in case political issues exist than it might be possible that it has to suffer hard times.

Culture: Culture has been the main external risk variant which is necessarily required to be assessed in case an organization is entering a new market (Ayers and Odegaard, 2017 ). It is believed as one way for emerging market fashion players in order to attain larger global share through leveraging with cultural capital. The culture of the new market, i.e. Dubai is not the same as of the United States. Thus, Nordstrom is required to develop such a culture which can be continued as an ongoing activity. It is not an easy task to develop a culture as choice and perspective of people change in a continuous manner (Ozkan, 2018 ).

Impact of microeconomic factors on business

Nordstrom Inc is required to make people believe that they are changing their products in accordance with latest trends. The estimations of revenue are dependent on the success rate of making people believe the culture developed by their organization in the perfect one (Baumol and Blinder, 2015). The greater the extent Nordstrom is able to develop culture and evolve the variant of the culture of Dubai in its organization; specifically for outlets in this area the more percentage of success of investment can be estimated.

Brand value of competitors: Company Nordstrom has developed significant brand value across the world. Further, the performance, as well as the quality provided by the company, has also enhanced over the years. The same might be affected by the brand value of competitors in the new country. It is a tough task to give competition to the existing brand value of the new area. Hence the extent to which brand value can be continued will decide the success rate of an investment decision (Fernie and Grant, 2015).

Impact of microeconomic factors on business

The considered company is engaged in a competitive industry which is directly affected by microeconomic factors. Considering the trend in income, sales and expenditure can be direct with price elasticity in the fashion industry (Mokhova and Zinecker, 2014). However, this factor can be mitigated as businesses can do well even with the bad economic phase by reducing their expectations from the market. In a downtrend, people will not simply stop purchasing; either people will buy less, or they will make more economical purchases (Baumol and Blinder, 2015). Businesses can survive in the market by changing its expending strategies, and through this, they can still earn profits.

Trends in business distinct and areas have an instant effect on the fashion industry. For this aspect, the company is not required to observe merely the economic trends close to business premises as mainly they are required to look at the economic environment of the business customers (Baker, 2018). Such microeconomic situations mainly effect on the enterprise. Therefore, business decisions must be based on falling and growing expectations of business customers.

Alternate financial scenarios

Part A

In a sensitivity analysis, it shows effect how the diverse values of an independent variable can make on the specific dependent variable supported by a specified set of assumptions. This method is utilized in particular boundaries. 

Table 1: Statement showing financial figures if sales increased by 20%

Table 2: Statement showing financial figures if sales decreased by 20%

By considering the above figures, it can be noticed that with the change in sales value there is a significant difference in the percentage of profit margin. Increase in sales will increase the overall inflow which will increase the return on the investment. On the other hand, in the case of the decline of sales, return on the project will be adversely affected.

Part B

It is important to identify the time value of money and risk for the process of financial decision making. However on any case, if cash flows and risks are not recognised, then it’s possible for a company to make decisions which are not focused on important goals of exploiting the welfare of the owners (Sharan, 2015).

The theory of time value of money assists in reaching at the equivalent value of the dollar amount that occurs at dissimilar points of time into corresponding standards of a particular point of time (Bridge and Dodds, 2018).

The cash occurs at various points of time which can be compared by the following methods-

• By comparing the present amount of investment to the future period cash flows therefore by computing their worth in terms of present money.
• Discounting of the future amount to the present date therefore by searching out the present value (PV) of future value (Abor, 2017).

By applying this concept, impact on investment appraisal decision:

Table 3: Result by different investment appraisal techniques

By considering the results of investment appraisal techniques, it can be noticed that with the increase in sales NPV and IRR increases and payback period declines which make the venture more profitable. Further, on the contrary side, the decline in the sales made NPV and IRR negative, and this means the project is not even able to provide the initial amount invested. This factor shows the importance of forecasting in business and consideration of sensitivity analysis for decision making.

Conclusion

It can be concluded that the investment decision of Nordstrom Inc. should be made after assessing the external as well as internal risk variants. In order to avail the benefit, the company should focus on available opportunity and implement them in order to mitigate the risk variant. Lastly, as in normal scenario, the payback period is three years, which represent that if the factors are in favour of the organization, it will be able to earn an appropriate return from the investment.

References

Abor, J.Y., (2017). Time Value of Money. In Entrepreneurial Finance for MSMEs (pp. 259-291). Palgrave Macmillan, Cham.

Ayers, J. B., & Odegaard, M. A. (2017). Retail supply chain management. CRC Press.

Baker, A.J., (2018). Business decision making. Routledge.

Baumol, W.J. & Blinder, A.S., (2015). Microeconomics: Principles and policy. Nelson Education.

Bridge, J. & Dodds, J.C., (2018). Managerial decision making. Routledge.           

Casadei, P., & Gilbert, D. (2018). Unpicking the fashion city: global perspectives on design, manufacturing and symbolic production in urban formations. Creative Industries and Entrepreneurship: Paradigms in Transition from a Global Perspective, 79.

Cheng, P., Fu, Y., & Lai, K. K. (2018). Supply Chain Risk Management in the Apparel Industry. Routledge.

Datta, H., Ailawadi, K. L., & van Heerde, H. J. (2017). How well does consumer-based brand equity align with sales-based brand equity and marketing-mix response?. Journal of Marketing, 81(3), 1-20

Fernie, J., & Grant, D. B. (2015). Fashion logistics: Insights into the fashion retail supply chain. Kogan Page Publishers.

Gardetti, M. A., & Torres, A. L. (2017). Sustainability in fashion and textiles: values, design, production and consumption. Routledge.

Guercini, S., & Milanesi, M. (2017). Extreme luxury fashion: business model and internationalization process. International Marketing Review, 34(3), 403-424.

Hejazi Nia, M. (2014). Emotionally Rational Consumer's Demand: Empirical Analysis of Fashion Industry.

History of Nordstrom, Inc. (2017). [Online]. 

Meyer, K., & Peng, M. W. (2016). International business. Cengage Learning.

Mokhova, N. & Zinecker, M., (2014). Macroeconomic factors and corporate capital structure. Procedia-Social and Behavioral Sciences, 110, pp.530-540.

Ozkan, N. (2018). Impacts of Product Design Changes on Suppliers: A Case Study of the Fashion Industry (Doctoral dissertation, School of Management).

Sharan, V., (2015). Fundamentals of Financial Management, 3/e. Pearson Education India.

Todeschini, B. V., Cortimiglia, M. N., Callegaro-de-Menezes, D., & Ghezzi, A. (2017). Innovative and sustainable business models in the fashion industry: Entrepreneurial drivers, opportunities, and challenges. Business Horizons, 60(6), 759-770.