Financial Statement Analysis
“Japan Airline vs Nippon Airline”
http://www.jal.co.jp/en/
http://www.ana.co.jp/eng/aboutana/corporate/ir/
Gangerel, Lkhagvajav
Pham, Thi Thuy Ha
Khakimov, Muzaffar
Tomiyama, Shota
Lim, Kustini
International University of Japan, 2006
https://www.iuj.ac.jp/
Executive Summary
Japan Airline Corporation (JAL) and All Nippon Airline (ANA) are two major players in air transportation in Japan. They are competing with each other in air transportation, travel services and airline-related businesses, which are their major businesses. Both of them face difficulties of the airline industry in general but JAL’s business has fluctuated much more than ANA has in recent three years. Even though the two companies have set up medium-mid term business plans to 2007 and stressed the priority to maximize the benefits of shareholders, it is risky to invest in their projects. Based on the financial statement analysis, we recommend investors to invest in ANA.
1. Business Overview
1.1 Japan Airline Corporation (JAL)
Being established quite recently, in 2004, JAL Group is a holding company, which comprises of 288 subsidiaries and 96 affiliates which are diversified into four segments: air transportation, airline-related, travel services, and others. The holding company develops Group’s targets and strategies, and defines the optimum allocation of management resources in order to maximize corporate value.
Air transportation:
The air transportation segment involves 11 consolidated subsidiaries, which are dislocated all over Japan’s important geographical areas and economic zones.
Airline-related business:
Airline-related businesses include passenger services and cargo handling, in-flight catering, aircraft and ground equipment maintenance, and aviation fuel supply, involving 105 subsidiaries and 74 affiliates.
Travel services:
A total of 53 subsidiaries and 3 affiliates are engaged in the travel services business, developing and marketing travel packages which include air travel on the 11 air transportation subsidiaries.
Other businesses:
• Hotel and resort business
• Credit card and leasing business
• Commercial, distribution and other business
1.2 All Nippon Airline (ANA)
Starting from 1952, All Nippon Airways Co., Ltd. (ANA) is the world’s 10th largest airline, with more than 48 million passenger turnover a year. Likewise JAL Group, ANA is functioning in following four main businesses.
Air Transportation:
Experiencing 865 flights a day on 132 domestic and 488 flights a week on 35 international routes ANA serves annually 44.5 million passengers and 4.1 million passengers accordingly. Company has a market share of about 50% in domestic flights and is a leading member of Star Alliance, the world’s largest airline alliance. ANA transports annually 510,000 tons of cargo and mail on domestic market and 250,000 tons internationally.
Travel Business:
ANA developed Hallo Tour overseas travel packages and ANA Sky Holiday domestic travel packages. It uses its advantage having hotel chains and transportation facilities.
Hotel operations:
The Company manages hotels, centered on major cities in Japan, and provides hotel chain management support.
Other businesses:
In other businesses, ANA’s operations are principally related to air transportation, including information and telecommunications, trading, retailing, real estate and building maintenance, ground transportation, distribution and aircraft equipment repair.
2. Brief analysis of common sized financial statements
ANA plans to cut costs by ¥13.0 billion, and, to build a corporate constitution that is less susceptible to changes in the operating environment, so it will reduce indirect fixed costs and continue to maintain a strong focus on cutting costs where appropriate.(see Appendix 1)
Having analyzed key financial ratios of JAL Group we can see that situation in JAL Group is not financially stable. ROE and ROA fluctuates within 3 years rapidly as they had huge loss in 2004 amounting 84 billion yen. This loss also influenced on many other ratios as well. Although JAL Group has recovered from 2004 year’s loss and stabilized its EPS ratio, it is too early to decide whether we can invest in this company or not.
The situation with ANA looks promising. Also ANA acknowledges fall in sales, key ratios of the company look quite stable. Stability in growth and improvement are evidenced by recovering and constant increase in ROA and ROE ratios throughout three years. The Company managed to increase EPS to 17.26 and return on sales to 2.09%. Looks as though ANA is getting rid of bulky debt burden by constantly reducing its Debt-to liabilities ratio.
3. Revenue Growth
The revenue figures in Graph-1 come from the operating revenue figures in Consolidated Statement of Operations provided in JAL and ANA’s websites. For both airlines, the operating revenue includes revenue from passengers, cargos, and other revenues. From the graph, we can see that from 1995 to 2005 both airlines have stable and increasing trend of revenues. Although JAL seems to have more revenues compared with ANA, it doesn’t certainly mean that JAL has more profit than ANA. JAL has more assets than ANA; conversely JAL also has greater operating expense than ANA does. Please refer to Graph-1 in the Appendix 4.
In overall, JAL’s revenue increase from 1995 to 2005, except year 2002 and 2004. This fluctuation might be caused by decreased revenue from international air transportation business due to terrorisms on September 11(2001), SARS (2002), and war in Iraq (2004).
4. Cash flow analysis
4.1 Primary sources of cash and their stability
In terms of both companies, primary sources of cash and their stability are almost identical. Primary sources are: passenger revenue, and incidental and other revenues from investing activities; proceeds from sales of property and equipment and collection of long term loans receivable from investing activities; proceeds from long term loans and proceeds from issuance of bonds from financing activities. Moreover, JAL has one more additional primary source of cash from investing activities, collection of long term loans receivable.
Except proceeds from sales of property and equipment, these primary sources of cash are stable in terms of both companies. Primary sources of cash are illustrated in Appendix 3.
4.2 Primary uses of cash
Primary uses of cash are slightly different from each other in terms both companies.
1. JAL- Primary uses are: wages, salaries and benefits, aircraft fuel, landing fees and other rent, incidental and other expenses, interest paid from operating activities; purchases of property and equipment from operating activities; repayment of long term loans, redemption of bonds from financing activities.
2. ANA- Primary uses are: wages, aircraft and flight operations, flight control and ground handling, reservations, sales and advertising from operating activities; purchases of property and equipment from operating activities; repayment of long term loans, repayment of bonds from financing activities.
Primary uses of cash are illustrated in Appendix 4.
4.3 The main differences in cash flow statement between the two companies
As for JAL, it has been consuming relatively more cash in wages, salaries and benefits, and charged cash in redemption of bonds. As for ANA, it has been using relatively more cash in aircraft and flight operations, and charged cash in repayment of bonds as opposed to redemption of bonds, the case of JAL.
For further details of cash flow sources and uses in figures please refer to Appendix 5 and 6.
5. Accounting policy
5.1 Basic of Presentation
Basically, ANA and JAL have the same accounting policies on their major business (passengers and cargos). The differences between these policies do not influence the comparison of the two companies. The two companies have the same basic of the presentation policy of their consolidated financial statements. This policy includes:
- Consolidated Financial Statements (CFS) are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards
- CFS are complied with the Financial Service Agency as required by the Securities and Exchange Law of Japan
- Additional financial information are added for readers outside Japan
However, JAL has an additional policy, which states that the amounts less than 1 million Yen have been omitted on CFS.
5.2 Revenue Recognition, cash equivalences, depreciation
The two companies have the same revenue recognition policy, which states that Passenger revenues, cargo and other operating revenues are recorded when services are rendered. They also have the same cash equivalents policy, in which cash equivalents are defined as highly liquid, short-term investments with an original maturity of 3 months or less. They share the same policy on bond issuance costs, which are principally capitalized and amortized over a period of 3 years, and the same depreciation methods for main Property, Plant and Equipment.
5.3 Inventory
ANA’s inventory policy states that inventory includes aircrafts, spare parts, supplies and stock in trade of consolidated subsidiaries. This policy considers that cost-flow is determined by the moving average method for aircrafts and spare parts and the FIFO method for miscellaneous supplies. However, there is no information about the inventory policy and cost-flow assumption available on JAL’s annual reports.
5.4 Securities
Both companies also have the same securities policy that includes the main points below:
- Securities are classified trading, held-to-maturity, other securities
- Trading securities are carried at fair value
- Held-to-maturity securities are carried at amortized cost
- Marketable securities classified as other securities are carried at fair value with changes in unrealized holding gains or losses, net of the applicable income taxes, included directly in shareholders’ equity
- Non-marketable securities classified as other securities are carried at cost
Beside these points, JAL has an additional point stating that cost of securities sold is determined by the moving average method.
5.5 Other policies
The two companies differ in the policies on foreign currency, derivatives, pension and retirement benefits and leases because they have different minor businesses.
6. Risks
6.1 Business risk
Both ANA and JAL have the same business risks. The first risk they face is strong competition in international routes around the world in coming time. Since international routes are their major business, this competition will make their overall business vulnerable. Furthermore, they will face stiff competition from airlines in Asia such as Singapore Airline and Cathay Pacific Airways. Both have positioned China as the most profitable and major pillar of future growth. To achieve this goal, they need to compete more with Asian airlines who also want to tap prospect Chinese markets. Another potential business risk is unpredictable events such as terrorism, war, outbreaks of diseases and natural disasters. Recently, the airline industry has experienced serious losses due to SARS disease, the terrorism attack in America Sept. 11, 2001 and the war on Iraq. Those unpredictable events might happen any time and therefore make the airline industry go bankrupt if airline transportation demand falls down seriously. Thus, ANA and JAL should well prepare for such risks with solid operation strategies.
6.2 Operation risk
Both companies are facing and will face continuous increase in fuel price. The war on Iraq has made crude oil prices surge significantly in the past 2 years and the rise in fuel price is predicted to continue fluctuating in coming time. This fluctuation will be a serious effect on their operating activities because operation costs will increase in proportion with the increase in fuel price but the service price can not increase proportionally. Therefore, the fluctuation of fuel price is a major operation risk that they face and will face.
Beside, the two companies face a risk of foreign currency exchange rate fluctuations. Because the purchase of fuel is paid on foreign currencies, the depreciation on Yen will have significant effects on their profits. ANA faces a rise in landing, navigation and other airport usage fees.
6.3 Financial risk
6.3.1 Short-term solvency risk
There is a risk of short-term solvency at ANA because its current ratios have been decreased from 1.12 in 2003 to 1.05 in 2004 and 0.83 in 2005. While there is probably no risk at JAL since its current ration have increased from 0.86 in 2003 to 0.93 in 2004 and 1.20 in 2005 (see Table 1 and 2).
6.3.2 Investment risks
There are potential risks of uncollectible loans and losses on investments because both firms have very low ROA and return on sales ratios. The ROA of ANA in recent 3 years increased from -1.9% to 2.55% that of JAL fluctuated significantly. The return on sales of ANA in recent 3 years increased from -2.32% to 2.09% and that of JAL fluctuated dramatically. It means that these companies have a large assets, low earnings and intense competition. From lenders’ point of view, there is a high risk of uncollectible loans. The ROE of ANA in recent 3 years increased from -21.7% to 22.21% and that of JAL fluctuated significantly from year to year. Those low and fluctuated ROE indicate that shareholders take a high risk of losing money on their investment in JAL and might have potential risk in investing in ANA. In other words, it is risky to invest in JAL and ANA and even more risky to invest in JAL.
6.3.3 Long-term solvency risk:
There is probably no long term solvency risk at ANA and JAL. The long term debt-to-equity ratios of ANA in recent 3 years decreased from 0.69 to 0.55 and that of JAL increased and remained stable at 0.55. The long term debt + current liabilities over total assets of ANA in recent 3 years decreased from 0.91 to 0.86 that of JAL increased from 0.79 to 0.81. We can see clearly that JAL has lower long term debt-to-equity and long term debt + current liabilities-to-total assets ratios than ANA but both of them face no long-term solvency risk since their assets and equity are greater than their long term liabilities.
7. Strategy
7.1 JAL Group Strategy
Management Strategy:
JAL Group has prepared its 2005–2007 Medium-Term Business Plan laying out three strategies: restructuring its international passenger business, revamping cost structures, and aggressively expanding growth markets. The Group has defined clear setting in order to achieve corporate value and profitability.
Operations strategy:
The Group will focus resources on high-profitability and high-growth routes, while eliminating low profitability ones, reallocating resources to build a profit-oriented network. Also it will expand JAL’s ways, where operating costs are nearly 10% under JAL’s, from 120 flights per week (20%) in fiscal 2004 to 180 flights (27%) per week in fiscal 2007, thereby improving profitability on fast growing routes.
Fleet Efficiency:
JAL will fly fewer models and configurations, reducing the number of configurations in our fleet from 32 to 25. It will pursue fleet downsizing, reducing the percentage of Boeing 747s, 747-300s, and 777-300s from 62% to 54%.
Sources of revenues:
1. Restructure international passenger operations
According to the 2005–2007 Medium-Term Business Plan, JAL will restructure international passenger operations. The Group is recovering from recent falls in international passenger business. It will start a positive feedback loop involving restructuring, recovering funds, reducing debt, and speeding up fleet modernization, thereby further improving our cost competitiveness.
2. Revamp cost structure
The second restructuring initiative is on the cost side. It can be broadly divided into two categories: structural reforms that will yield ongoing benefits and emergency measures such as cutting salaries and general expenses. In fiscal 2005, emergency measures will contribute more than structural reforms, but as the effect of the structural reforms gradually make themselves felt we expect a ¥75 billion impact in fiscal 2007, growing to more than ¥100 billion.
3. Aggressively develop growth markets
In addition to the two structural reforms presented thus far, the 2005–2007 Medium-Term Business Plan calls for a focus on expanding growth markets. The Group believes it will tailor its strategy here for each segment of the business, aggressively expanding our business in China and other Asian countries, where rapid growth of the business is expected, improving convenience for domestic passengers by improving service, and aggressively developing growth markets within the cargo business.
Product Mix strategy:
In the airline-related business, the recovery in demand boosted sales at in-flight catering companies, and the Narita-area auxiliary power unit business performed strongly based on increased sales to foreign carriers. Revenues for the airline related business thus amounted to ¥293.7 billion, with operating income reaching ¥5.3 billion.
Demand for travel services rose sharply over the previous year for all regions with the exception of Europe and Oceania. Domestic tourism demand also remained strong. As a result, the travel services business reported sales of ¥424.5 billion, with a ¥0.2 billion operating loss.
Other businesses:
In other business segments, primarily hotels and duty-free shops, The Group has benefited from recovering demand. Credit card business revenue increased as the number of JAL Card cardholders grew, as did revenue at Blue Sky shops and restaurants at domestic airports. Revenues from related operations as a whole thus amounted to ¥268.0 billion, with operating income of ¥10.0 billion.
7.2 ANA Strategies
Financial Strategies:
ANA's profitability indicators such as ROA and the operating income margin, are aimed at bringing it to a level that will enable us to compete with the top airlines in Asia, such as Singapore Airlines and Cathay Pacific Airways. It will improve our balance sheet and accumulate profits so that our debt/equity ratio improves to about four times by the fiscal year ending March 2008. Also, it will work to meet the expectations of shareholders, further enhance ANA’s enterprise value, and continue to provide stable dividend payments in the fiscal year ending March 2006 and thereafter.
Operation strategy for international and domestic routes:
At Narita Airport, the company will leverage the opportunity presented by the likely increase in the number of slots over the next three years and bolster its own network. In the development of routes to Europe, the United States, and Asia, it will strategically select bases that are highly profitable and enable it to maximize the advantages of Star Alliance. And ANA will reinforce its China network to center on Narita, Kansai, and Centrair.
Under the new mid-term corporate plan, ANA assumes that demand on domestic routes will basically remain flat. To bolster its ability to compete with other companies, it will implement a range of differentiation strategy measures. One example is an integrated transportation strategy, under which the company will strengthen the tie-ups with ground transportation companies. In conjunction with the December 2004 opening of the second terminal at Haneda Airport, ANA began new services in line with the concepts of “simple,” “convenient,” and “focus on the individual” principles. Super Seat Premium, which enables passengers to experience air travel that is more comfortable and relaxing, is an ANA’s original service. ANA expects the effects of this differentiation, such as an increase in frequent flyers, to lead to a steady improvement in The Company’s results. By the end of March 2006, it will expand the number of Super Seat Premium available seats to 2.5 million, 2.5 times the number available currently.
Cargo services:
ANA will bolster cargo operations as its third core area of business, following domestic and international passenger services. In the fiscal year ending March 2006, it will expand to several Boeing 767-300 freighters and reinforce our operations on domestic and international routes. China has become Japan’s largest trading partner, and it is believed that the Chinese market will record further growth. ANA’s network of routes between Japan and China aims for ¥100.0 billion in revenues by the end of March 2008.
Cost cutting initiatives as part of operations strategy:
A key part of ANA’s efforts to reduce costs is the steady execution of our Fleet Strategy and Human Resource Strategy in the medium to long term. We will also trim variable operating costs by reevaluating the routes, and improving the productivity of ANA Group companies.
8. Recommendation for Investors
Based on the revenue figures, both JAL and ANA seem to have stable and increasing revenue. But, according to the financial statement analysis, we recommend investors to invest in ANA, rather than in JAL. Although JAL has better current ratio indicators, it is obvious that ANA’s income is more stable within last 3 years and its return on sales is increasing steadily. On the contrary, JAL’s return on equity is fluctuating significantly in aforesaid period of time. Because ANA’s coverage ratio is higher than JAL, the safety of investment money in ANA is better than that in JAL. Moreover, ANA’s market capitalization is approximately 1.5 times higher than JAL’s according to our independent research.
In conclusion, ANA has more stable business, better financial ratio growth and more favorable investment perspectives for potential shareholders. ANA also has better management quality and risk hedging strategies which may lead to more efficient operation cycle and cash flow. Therefore, we recommend investors to invest in ANA.
Thursday, March 23, 2006
Dividend Policy at FPL Group Inc
Dividend Policy is Irrelevant
http://www.fplgroup.com/
IUJ, Spring 2006
Pham Thi Thuy Ha
Why do firms pay dividend?:
- Firms pay dividends to balance their asset and capital structures when their earnings outstrip their investment opportunities.
- Firms pay dividends to mitigate agency problems when they have excess earnings.
Cons of cash dividend payment:
- A dividend policy is irrelevant or has no impact on the firm’s value because investors have the ability to create "homemade" dividends.
- Little to no dividend payout is more favorable for investors. This is because taxation on a dividend is higher than tax on capital gains.
- Dividends are taxed as ordinary incomes
- Dividends can reduce internal source of financing
- Once established, dividends cuts are hard to make without adversely affecting a firm’s stock price
Pros of cash dividend payment:
- Cash dividends can underscore good results and provide support to stock price
- Dividends may attract institutional investors who preferred some returns from dividends
- Stock price usually increases with the announcement of a new or increased dividends
- Dividends absorb cash flow so they may help reduce agency problems
Major issues of FPL in 1994:
- Negotiation between FPL and FERC (Federal Energy Regulatory Commission) to settle the lawsuit against FPL for changing excessive rates and denying fair access to its transmission system.
- Lower investment rate due to the fact that FPL probably does not raise dividends as discussed
- Suggestion of dividend cuts by FPL’s managers
- FPL’s stock price has fallen by 19.6% while the S&P index has decreased by 22.1%
- Rising interest rate and increasing competition in electric industry
From investors’ perspective, the current payout ratio is appropriate to some extent:
- FPL’s current payout ration = cash dividend/net income = 461693/248749 = 107.7%. According to the exhibit 9, FPL has the highest payout ratio in comparison to other electric utilities in the same industry.
- For institutional investors who hold 36.9% of FPL’s total common stocks, this payout ratio may be appropriate because they likely prefers high payout ratio in seeking for high earnings from their investment. If FPL tries to maintain this ratio, it can satisfy those small investors but it has to increase this ration over time to satisfy these investors’ expectation.
- For individual investors who hold 51.9% of FPL’s total common stocks, the payout ration has little meaning because they can use homemade dividend strategy to obtain capital gains rather than receive cash dividends due to higher taxes imposed on dividends. Furthermore, they do not need dividends to convert shares to cash. FPL’s decision to cut payout ration does not really affect the value of these individual investors.
- In my opinion, FPL currently maintains an inappropriate payout ration. Given the situation that the new regulation will be soon implemented, FPL will face strong competition not only from Florida but also from all other possible states. FPL can not protect itself by restricting access to its transmission system since it was sued for doing so. To prepare for competition and sustainable growth in near future, the best way FPL can do is to use its excess cash to invest in new positive NPV projects. Therefore, FPL should not maintain the high payout ration at 107.7%. Instead, it should lower this ratio to or below the average ratio of the industry (82.9%) since the dividend cut does not lower the firm’s value.
Recommendations on FPL’s stocks:
- First, FPL should declare to cut dividends. The company should not worry about a lawsuit against its lower dividend policy as the dividend cut does not affect the majority of its investors (individual investors). Upon the announcement of dividend cut, the stock price can decrease so FPL should use its excess cash to buy back its stock to increase the stock price whenever it falls down.
- Then, FPL should use Buy and Hold strategy to repurchase its stocks and hold them regardless of market fluctuations. This solution as a long term investment can help FPL increase its stock price which has fallen in early 1994. By doing so, FPL can get rid of its excess cash of $150 million per year. FPL also can use this strategy to increase incentive compensation by granting stock options to employees and thus, increase employment commitment and recruiting attractiveness to have competent personnel for future growth.
- FPL should use its excess cash to invest more in new profitable projects, acquire new companies and profitable assets, and reinvest in financial assets.
http://www.fplgroup.com/
IUJ, Spring 2006
Pham Thi Thuy Ha
Why do firms pay dividend?:
- Firms pay dividends to balance their asset and capital structures when their earnings outstrip their investment opportunities.
- Firms pay dividends to mitigate agency problems when they have excess earnings.
Cons of cash dividend payment:
- A dividend policy is irrelevant or has no impact on the firm’s value because investors have the ability to create "homemade" dividends.
- Little to no dividend payout is more favorable for investors. This is because taxation on a dividend is higher than tax on capital gains.
- Dividends are taxed as ordinary incomes
- Dividends can reduce internal source of financing
- Once established, dividends cuts are hard to make without adversely affecting a firm’s stock price
Pros of cash dividend payment:
- Cash dividends can underscore good results and provide support to stock price
- Dividends may attract institutional investors who preferred some returns from dividends
- Stock price usually increases with the announcement of a new or increased dividends
- Dividends absorb cash flow so they may help reduce agency problems
Major issues of FPL in 1994:
- Negotiation between FPL and FERC (Federal Energy Regulatory Commission) to settle the lawsuit against FPL for changing excessive rates and denying fair access to its transmission system.
- Lower investment rate due to the fact that FPL probably does not raise dividends as discussed
- Suggestion of dividend cuts by FPL’s managers
- FPL’s stock price has fallen by 19.6% while the S&P index has decreased by 22.1%
- Rising interest rate and increasing competition in electric industry
From investors’ perspective, the current payout ratio is appropriate to some extent:
- FPL’s current payout ration = cash dividend/net income = 461693/248749 = 107.7%. According to the exhibit 9, FPL has the highest payout ratio in comparison to other electric utilities in the same industry.
- For institutional investors who hold 36.9% of FPL’s total common stocks, this payout ratio may be appropriate because they likely prefers high payout ratio in seeking for high earnings from their investment. If FPL tries to maintain this ratio, it can satisfy those small investors but it has to increase this ration over time to satisfy these investors’ expectation.
- For individual investors who hold 51.9% of FPL’s total common stocks, the payout ration has little meaning because they can use homemade dividend strategy to obtain capital gains rather than receive cash dividends due to higher taxes imposed on dividends. Furthermore, they do not need dividends to convert shares to cash. FPL’s decision to cut payout ration does not really affect the value of these individual investors.
- In my opinion, FPL currently maintains an inappropriate payout ration. Given the situation that the new regulation will be soon implemented, FPL will face strong competition not only from Florida but also from all other possible states. FPL can not protect itself by restricting access to its transmission system since it was sued for doing so. To prepare for competition and sustainable growth in near future, the best way FPL can do is to use its excess cash to invest in new positive NPV projects. Therefore, FPL should not maintain the high payout ration at 107.7%. Instead, it should lower this ratio to or below the average ratio of the industry (82.9%) since the dividend cut does not lower the firm’s value.
Recommendations on FPL’s stocks:
- First, FPL should declare to cut dividends. The company should not worry about a lawsuit against its lower dividend policy as the dividend cut does not affect the majority of its investors (individual investors). Upon the announcement of dividend cut, the stock price can decrease so FPL should use its excess cash to buy back its stock to increase the stock price whenever it falls down.
- Then, FPL should use Buy and Hold strategy to repurchase its stocks and hold them regardless of market fluctuations. This solution as a long term investment can help FPL increase its stock price which has fallen in early 1994. By doing so, FPL can get rid of its excess cash of $150 million per year. FPL also can use this strategy to increase incentive compensation by granting stock options to employees and thus, increase employment commitment and recruiting attractiveness to have competent personnel for future growth.
- FPL should use its excess cash to invest more in new profitable projects, acquire new companies and profitable assets, and reinvest in financial assets.
IPO Policy
IUJ, Spring 2006
Pham Thi Thuy Ha
Google’s Business:
Google is an American-based internet company that provides 75% of web
searches in the U.S and has a large share in international markets. Its major business is paid-listing, business model that generate revenues by collecting fees of ads on web search engines. Google’s main paid-listings have 2 categories: Premium Sponsorship based on cost-per-click and Adwords based on click-through-rate. Google introduced Search by Location which focuses on contextual and local advertising in 2004.
Strategic threats to Google:
- Strong competition: main competitors such as Yahoo, Microsoft and MSN were investing heavily in in-house search solutions and develop new search technologies.
- Uncertain partnership: Google relies heavily on the partnership with AOL. If this partnership is broken, Google will lose a significant share of revenues.
- Business risk: the transparency of Google’s business is very risky because internet business has no real long-term entry barrier.
- Unsustainable growth: Google’s leadership position in web searches is unsustainable.
Benefits of going public:
- Access to increased funding: a successful IPO creates immediate access to the public market where a firm can get needed funds easily.
- Enhance profile and market leverage: public companies and their products draw much media attention than private companies, thus they have many more chances to get public awareness of their companies and products.
- Increase investor appeal to institutional investors locally and internationally: increased recognition of the company may stimulate greater interest in the company’s shares
- Greater employee commitment and recruiting ability: incentives such as stock options, directed shares programs can increase employee commitment and attract talents.
- Shares as a source of finance: a company gone public can use its common shares to finance acquisitions of other public or private companies.
- Liquidity for shareholders: shareholders can sell their shares easily through stock markets.
- Definitive valuation benchmark: public companies can finance acquisitions through exchanges of stocks.
Costs of going public:
- Spread or underwriting discount: the difference between the price the issuer receives and the price offered to the public.
- Other direct expenses: costs incurred by the issuer that are not part of the compensations of underwriters (investment banks). These costs include filing fees, legal fees and taxes.
- Indirect expenses: these costs are not reported in the prospectus and include management time on the new issue
- Abnormal returns: in a seasoned issue of stock, the price normally drops upon the announcement of the issue. Therefore, new shareholders are prevented from buying overpriced stocks.
- Under-pricing: for IPO, the stock rises after the issue date. This is a loss for the issuing firm because the stock is sold at lower price than its efficient price in the aftermarket.
- Green Shoe Option: the right given to underwriters to buy additional shares at the offered price to cover over-allotments. This is the cost to the firm as the underwriter only buys additional shares when the offered price is below the price in the aftermarket.
Roles of investment bank in IPO process:
- Provide advice
- Market securities
- Underwrite the IPO process
- Determine the correct offering price
- Accept the risk that the market price may fall between the date the offering price is set and the time the issue is sold
Earning of investment banks through IPO process:
- Under the best-efforts method, investment banks do not purchase securities from issuing firms and sell them for profits but act as an agent to sell a firm’s securities and receive commission for each share sold. In other words, investment banks’ revenues are commissions gained from helping an issuing firm to sell their securities
Reasons for Google to go public:
- Need to maintain the leadership position in web search business
- Need to be much more competitive, flexible, fats-response and dynamic in the market
- Need to develop new web search technologies to compete with its major competitors: MSN and Yahoo
- Need to develop new business and invade untapped markets
- Need to diversify its services by contents, communications tools, images, search sites…
- Need to market its products, develop brand awareness and invest more in R&D
All these activities need a lot of money so the best way to get funds is to go public. Google can take benefits of going public mentioned above to achieve its business plans.
Success of IPO in the long run:
IPO will be successful because Google can meet the expectations of its investors since it has:
- A good execution of business plans: for the purposes of an IPO, Google has already a comprehensive roadmap that defines and assesses its growth prospects: its products, markets, competitive arena, business strategies, capabilities and growth objectives to bring benefits (shareholders value) to its investors.
- Advantages in technologies and brand awareness: Google holds enormous traffics, solid engineering experience in web search engines.
- Distinctive competence: Google has capacity to develop superior search solutions and new products to invade in untapped market.
IUJ, Spring 2006
Pham Thi Thuy Ha
Google’s Business:
Google is an American-based internet company that provides 75% of web
searches in the U.S and has a large share in international markets. Its major business is paid-listing, business model that generate revenues by collecting fees of ads on web search engines. Google’s main paid-listings have 2 categories: Premium Sponsorship based on cost-per-click and Adwords based on click-through-rate. Google introduced Search by Location which focuses on contextual and local advertising in 2004.
Strategic threats to Google:
- Strong competition: main competitors such as Yahoo, Microsoft and MSN were investing heavily in in-house search solutions and develop new search technologies.
- Uncertain partnership: Google relies heavily on the partnership with AOL. If this partnership is broken, Google will lose a significant share of revenues.
- Business risk: the transparency of Google’s business is very risky because internet business has no real long-term entry barrier.
- Unsustainable growth: Google’s leadership position in web searches is unsustainable.
Benefits of going public:
- Access to increased funding: a successful IPO creates immediate access to the public market where a firm can get needed funds easily.
- Enhance profile and market leverage: public companies and their products draw much media attention than private companies, thus they have many more chances to get public awareness of their companies and products.
- Increase investor appeal to institutional investors locally and internationally: increased recognition of the company may stimulate greater interest in the company’s shares
- Greater employee commitment and recruiting ability: incentives such as stock options, directed shares programs can increase employee commitment and attract talents.
- Shares as a source of finance: a company gone public can use its common shares to finance acquisitions of other public or private companies.
- Liquidity for shareholders: shareholders can sell their shares easily through stock markets.
- Definitive valuation benchmark: public companies can finance acquisitions through exchanges of stocks.
Costs of going public:
- Spread or underwriting discount: the difference between the price the issuer receives and the price offered to the public.
- Other direct expenses: costs incurred by the issuer that are not part of the compensations of underwriters (investment banks). These costs include filing fees, legal fees and taxes.
- Indirect expenses: these costs are not reported in the prospectus and include management time on the new issue
- Abnormal returns: in a seasoned issue of stock, the price normally drops upon the announcement of the issue. Therefore, new shareholders are prevented from buying overpriced stocks.
- Under-pricing: for IPO, the stock rises after the issue date. This is a loss for the issuing firm because the stock is sold at lower price than its efficient price in the aftermarket.
- Green Shoe Option: the right given to underwriters to buy additional shares at the offered price to cover over-allotments. This is the cost to the firm as the underwriter only buys additional shares when the offered price is below the price in the aftermarket.
Roles of investment bank in IPO process:
- Provide advice
- Market securities
- Underwrite the IPO process
- Determine the correct offering price
- Accept the risk that the market price may fall between the date the offering price is set and the time the issue is sold
Earning of investment banks through IPO process:
- Under the best-efforts method, investment banks do not purchase securities from issuing firms and sell them for profits but act as an agent to sell a firm’s securities and receive commission for each share sold. In other words, investment banks’ revenues are commissions gained from helping an issuing firm to sell their securities
Reasons for Google to go public:
- Need to maintain the leadership position in web search business
- Need to be much more competitive, flexible, fats-response and dynamic in the market
- Need to develop new web search technologies to compete with its major competitors: MSN and Yahoo
- Need to develop new business and invade untapped markets
- Need to diversify its services by contents, communications tools, images, search sites…
- Need to market its products, develop brand awareness and invest more in R&D
All these activities need a lot of money so the best way to get funds is to go public. Google can take benefits of going public mentioned above to achieve its business plans.
Success of IPO in the long run:
IPO will be successful because Google can meet the expectations of its investors since it has:
- A good execution of business plans: for the purposes of an IPO, Google has already a comprehensive roadmap that defines and assesses its growth prospects: its products, markets, competitive arena, business strategies, capabilities and growth objectives to bring benefits (shareholders value) to its investors.
- Advantages in technologies and brand awareness: Google holds enormous traffics, solid engineering experience in web search engines.
- Distinctive competence: Google has capacity to develop superior search solutions and new products to invade in untapped market.
American Home Product Corporation
Repurchase Stock Strategy
IUJ, Spring 2006
Pham Thi Thuy Ha
American Home Product Corporation (AHP), a highly growing American company, has four business lines: prescription drugs, packaged drugs, food products, housewares and household products. For a quite long time, AHP has applied a tight financial control and maintained an aggressive capital structure policy. Its mission is to make money for its stockholders and to maximize profits by minimizing costs. It has been able to finance internally its growth while paying a very high portion of its earning to its shareholders (60%).
Currently, AHP seems to have no business risk but may face a certain risk in the long run. Based on the ratios shown on the attached sheet, AHP should not worry about business risk since its working capital is very healthy ($1472.8 million) and cash excess $233 million. The high ROA, high profit margin, low current-to-asset ration and 49.71 collection days show that AHP can generate cash quickly, thus it can maintain current high growth rate. However, its decreasing annual sales growth from 14.1% in 1978 to 8.8% in 1981 (exhibit 1) shows that it faces future risk of losing market shares in all its business lines if it does not foresee competition and continue to focus on increasing stockholders’ value.
AHP’s current financial performance is very good since it has high ROE (30.3), high quick ratio (42.68), low debt-to-equity ratio (0.09) and low debt-to-asset ratio (0.01). However, the pro forma of different debt ratios show that if AHP increases debt ratio, it will face a financial risk of increased debt-to-equity and debt-to-asset ratios. In other words, it will face solvency problems in long terms. AHP also face liquidity problems since the quick ratios decrease when the debt ratios increase.
In contrast, shareholders’ value increases when debt ratios increase. EPS increases from $3.18 to $3.49. The dividend payout ratio also increases from 0.597 to 0.602. Similarly, the dividend yield from 0.063 to 0.070. It seems that the company can increase shareholders’ value by increasing debt ratios.
Even though AHP has a very good current financial performance, it should change the financial policy to increase debt ratio at a certain level. To meet the goal of increasing shareholders’ value, AHP should not use its excess cash flow to repurchase its stocks because this is only a temporary solution and may generate serious financial problems in the long run. Instead, AHP should use this excess cash to invest in profitable projects to improve its current products and launch new products that meet current market demands. By doing so, AHP can minimize the business risk, prepare itself for competition and increase sales growth. On the other hands, AHP should increase debt ratio to a certain level that is suitable for its business to increase shareholders’ value. This solution does not bring financial risk to AHP but enable it to minimize business risk. If AHP only concerns about how to increase shareholders’ value and ignores market threats, it might lose its business to its competitors.
In conclusion, AHP should change the financial policy to increase debt ratio at a certain level.
IUJ, Spring 2006
Pham Thi Thuy Ha
American Home Product Corporation (AHP), a highly growing American company, has four business lines: prescription drugs, packaged drugs, food products, housewares and household products. For a quite long time, AHP has applied a tight financial control and maintained an aggressive capital structure policy. Its mission is to make money for its stockholders and to maximize profits by minimizing costs. It has been able to finance internally its growth while paying a very high portion of its earning to its shareholders (60%).
Currently, AHP seems to have no business risk but may face a certain risk in the long run. Based on the ratios shown on the attached sheet, AHP should not worry about business risk since its working capital is very healthy ($1472.8 million) and cash excess $233 million. The high ROA, high profit margin, low current-to-asset ration and 49.71 collection days show that AHP can generate cash quickly, thus it can maintain current high growth rate. However, its decreasing annual sales growth from 14.1% in 1978 to 8.8% in 1981 (exhibit 1) shows that it faces future risk of losing market shares in all its business lines if it does not foresee competition and continue to focus on increasing stockholders’ value.
AHP’s current financial performance is very good since it has high ROE (30.3), high quick ratio (42.68), low debt-to-equity ratio (0.09) and low debt-to-asset ratio (0.01). However, the pro forma of different debt ratios show that if AHP increases debt ratio, it will face a financial risk of increased debt-to-equity and debt-to-asset ratios. In other words, it will face solvency problems in long terms. AHP also face liquidity problems since the quick ratios decrease when the debt ratios increase.
In contrast, shareholders’ value increases when debt ratios increase. EPS increases from $3.18 to $3.49. The dividend payout ratio also increases from 0.597 to 0.602. Similarly, the dividend yield from 0.063 to 0.070. It seems that the company can increase shareholders’ value by increasing debt ratios.
Even though AHP has a very good current financial performance, it should change the financial policy to increase debt ratio at a certain level. To meet the goal of increasing shareholders’ value, AHP should not use its excess cash flow to repurchase its stocks because this is only a temporary solution and may generate serious financial problems in the long run. Instead, AHP should use this excess cash to invest in profitable projects to improve its current products and launch new products that meet current market demands. By doing so, AHP can minimize the business risk, prepare itself for competition and increase sales growth. On the other hands, AHP should increase debt ratio to a certain level that is suitable for its business to increase shareholders’ value. This solution does not bring financial risk to AHP but enable it to minimize business risk. If AHP only concerns about how to increase shareholders’ value and ignores market threats, it might lose its business to its competitors.
In conclusion, AHP should change the financial policy to increase debt ratio at a certain level.
Pepsico Chanchun Joint Venture
NPV and Project Evaluation
IUJ, Spring 2006
Pham Thi Thuy Ha
In considering Chinese’s positive political and economic outlook and continued commitment to economic reforms, Pepsico, a leading soft drink manufacturer in the world, decided to develop its market in China by signing a $10-million-agreement with the Chinese government. Among this money, Pepsico spends $4 million in investment in joint-ventures. Pepsico forecasts that the soft drink would grow at 12%/year through 2000 and sees a very potential growth in China. Its strategic goals are to close gap with Coca Cola and before 20th century and to leverage this into industry leadership beyond 2005. To this end, Pepsico developed a Joint Venture (JV) with 2 Chinese partners: The Second Food Factory Chanchun and Beijing Chon Yin Industrial & Trading Company where Pepsico controlled 57.5% interest in the JV, Second Food Factory held 37.5% and Beijing Chon Yin held 5%. Pepsico will sell concentrate to the JV and the JV will bottle and distribute final products.
The project was examined by calculating net present value (NPV) and internal rate of return (IRR) of this project in the view of Pepsico (with concentrate sales) and JV (without concentrate sales). For Pepsico, the net cash flow (NCF) is discounted at U.S. inflation rate. For JV, NCF is in RMB and discounted at Chinese inflation rate. The detail calculation is shown on the attached sheet.
In case including concentrate sales (for Pepsico) (million USD)
NPV: 14,090
IRR: 8.4%
In case without concentrate sale (for JV) (million RMB)
NPV: (14,030)
Based on this result we can see that in this case, the IRR rule is not applicable because the IRR of JV does not exist and Pepsico should reject the project since IRR = 8.4% is less than its huddle rate = 13%. However, according to the NPV rule, Pepciso should accept the project because the NPV is $14,090 million and JV should reject the project because it has negative NPV (-RMB 14,030).
In conclusion, the NPV method should be used to evaluate the project since this method uses cash flow and discounts cash flow properly. According to this method, Pepsico should accept the project because it has positive NPV and JV should reject this project since it gets loss (negative NPV).
IUJ, Spring 2006
Pham Thi Thuy Ha
In considering Chinese’s positive political and economic outlook and continued commitment to economic reforms, Pepsico, a leading soft drink manufacturer in the world, decided to develop its market in China by signing a $10-million-agreement with the Chinese government. Among this money, Pepsico spends $4 million in investment in joint-ventures. Pepsico forecasts that the soft drink would grow at 12%/year through 2000 and sees a very potential growth in China. Its strategic goals are to close gap with Coca Cola and before 20th century and to leverage this into industry leadership beyond 2005. To this end, Pepsico developed a Joint Venture (JV) with 2 Chinese partners: The Second Food Factory Chanchun and Beijing Chon Yin Industrial & Trading Company where Pepsico controlled 57.5% interest in the JV, Second Food Factory held 37.5% and Beijing Chon Yin held 5%. Pepsico will sell concentrate to the JV and the JV will bottle and distribute final products.
The project was examined by calculating net present value (NPV) and internal rate of return (IRR) of this project in the view of Pepsico (with concentrate sales) and JV (without concentrate sales). For Pepsico, the net cash flow (NCF) is discounted at U.S. inflation rate. For JV, NCF is in RMB and discounted at Chinese inflation rate. The detail calculation is shown on the attached sheet.
In case including concentrate sales (for Pepsico) (million USD)
NPV: 14,090
IRR: 8.4%
In case without concentrate sale (for JV) (million RMB)
NPV: (14,030)
Based on this result we can see that in this case, the IRR rule is not applicable because the IRR of JV does not exist and Pepsico should reject the project since IRR = 8.4% is less than its huddle rate = 13%. However, according to the NPV rule, Pepciso should accept the project because the NPV is $14,090 million and JV should reject the project because it has negative NPV (-RMB 14,030).
In conclusion, the NPV method should be used to evaluate the project since this method uses cash flow and discounts cash flow properly. According to this method, Pepsico should accept the project because it has positive NPV and JV should reject this project since it gets loss (negative NPV).
Marriott Corporation
Net Present Value and Project Evaluation
IUJ, Spring 2006
Pham Thi Thuy Ha
Marriott Corporation, an American firm, has 3 major lines of business: lodging, contract service and restaurants. Its growth objective is to remain a premier growth company. The four components of its financial strategy are consistent with this growth objective for the reasons:
Manage rather than own hotel assets: Marriott sold its hotel assets to limited partners to reduce assets and thus, it can increase ROA and thereby increase potential profitability.
Invest in projects that increase shareholders’ value: the discounted cash flow techniques to evaluate potential investments allow the company to invest only in profitable projects. Therefore, it can maximize the use of its cash flow to gain profits.
Optimize the use of debt in the capital structure: because firms with lower percentage of debt have higher value, Marriott uses this strategy to increase its value and thereby increase it profitability.
Repurchase undervalued shares: By buying back its undervalued shares, Marriott can increase PE ration when needed and can make its investors’ holdings more valuable because share prices will increase (increase in ROE). It also can appease investors and avoid pressure to increase dividend, thereby it can use its retained earnings to invest more in profitable projects. This strategy means that Marriott are confident in its future performance.
Marriott use the Weighted-Average-Cost-of Capital (WACC) method to measure the opportunity cost for investments.
WACC = (1-t)rD(D/V) + rE(E/V)
where D and E are the market values of the debt and equity respectively; rD is the pre-tax cost of debt; rE is the after-tax cost of equity; V is the firm value (V=E+D); and t is the corporate tax. This method is applied for Marriott as the whole corporation and for each of its three lines of business. WACC is calculated based on its financial data of 1987 provided in the case.
1. Calculate the debt cost rD
- According to the summary of operation (exhibit 1) t = income taxes/income before income taxes = 175.9/398.9 = 44%
- According to Table A, D/V = 60%. Therefore, E/V = 40%
- Because Marriot is a high-quality rate company and it could pay a spread above the current government bond rates:
rD = S fraction of debt at floating for each line x US government interest rate + S fraction of debt at floating for each line x debt rate premium above government for each line
rD = [0.5x8.72 + 0.4x6.9 + 0.25x6.9] + [0.5x1.1 + 0.4x1.4 + 0.25x1.8] = 0.1041
Because lodging had long useful life, the long term interest rate for lodging line should be the interest rate of 10-year maturity bonds (8.72%). Meanwhile, restaurants and contract services are short term investment so the interest rate for these lines should be the interest rate of 1-year maturity bond (6.9%).
2. Calculate the riskless rate
- First, calculate the weighted average
The weighted average of each business line is based on its profit contribution to Marriott’s total profits. On page 2, the weighted average of lodging is 51%, that of contract services is 33% and that of restaurants is 16%.
Marriott’s lodging line is considered to be in the same market with Hilton, Holiday, La Quinta and Ramada. Similarly, its restaurants and contract services are in the same market as Church, Collins, Frisch, Luby, McDonald and Wendy. To be more conservative and accurate in the estimation of market volatility, Marriott should choose geometric average.
- Second, calculate b
To calculate b, assume that the project has the same risk and the same leverage as the firm overall.
b = S weighted average x the average of equity Beta of firms in the same business lines = 0.51[(0.88+1.46+0.38+0.95)/4] + (0.33+0.16)[(0.75+0.6+0.13+0.64+1.00+1.08)/6] = 0.813
- Third, calculate Risk premium
To better evaluate the market volatility Marriott should choose the time interval of 7 latest years, from 1981 to 1987. Then Risk premium = (Geometric average of long term US government bond return from 1981 to 1987 + Geometric average of long term high-grade corporate bond return from 1981 to 1987 + Geometric average of Standard & Poor’s 500 composite stock index return from 1981 to 1987)/3 = [(1.1682)5x1.2444x0.9731]1/7 + [(1.1783)5x1.1985x0.9973]1/7 + [(1.1471)5x1.1847x1.523]1/7 = 0.1412
- Forth, Expected return or cost of equity is 0.214 (Exhibit 3)
- Fifth, calculate riskless rate (risk free rate) RF
Expected return = RF + b[Risk premium] so RF = Expected return - b[Risk premium]
RF = 0.214 - 0.813x0.1412 = 0.099
3. WACC
WACC = (1-t)rD(D/V) + rE(E/V) = (1 – 0.44)x0.1041x0.6 + 0.214x0.4 = 0.121
IUJ, Spring 2006
Pham Thi Thuy Ha
Marriott Corporation, an American firm, has 3 major lines of business: lodging, contract service and restaurants. Its growth objective is to remain a premier growth company. The four components of its financial strategy are consistent with this growth objective for the reasons:
Manage rather than own hotel assets: Marriott sold its hotel assets to limited partners to reduce assets and thus, it can increase ROA and thereby increase potential profitability.
Invest in projects that increase shareholders’ value: the discounted cash flow techniques to evaluate potential investments allow the company to invest only in profitable projects. Therefore, it can maximize the use of its cash flow to gain profits.
Optimize the use of debt in the capital structure: because firms with lower percentage of debt have higher value, Marriott uses this strategy to increase its value and thereby increase it profitability.
Repurchase undervalued shares: By buying back its undervalued shares, Marriott can increase PE ration when needed and can make its investors’ holdings more valuable because share prices will increase (increase in ROE). It also can appease investors and avoid pressure to increase dividend, thereby it can use its retained earnings to invest more in profitable projects. This strategy means that Marriott are confident in its future performance.
Marriott use the Weighted-Average-Cost-of Capital (WACC) method to measure the opportunity cost for investments.
WACC = (1-t)rD(D/V) + rE(E/V)
where D and E are the market values of the debt and equity respectively; rD is the pre-tax cost of debt; rE is the after-tax cost of equity; V is the firm value (V=E+D); and t is the corporate tax. This method is applied for Marriott as the whole corporation and for each of its three lines of business. WACC is calculated based on its financial data of 1987 provided in the case.
1. Calculate the debt cost rD
- According to the summary of operation (exhibit 1) t = income taxes/income before income taxes = 175.9/398.9 = 44%
- According to Table A, D/V = 60%. Therefore, E/V = 40%
- Because Marriot is a high-quality rate company and it could pay a spread above the current government bond rates:
rD = S fraction of debt at floating for each line x US government interest rate + S fraction of debt at floating for each line x debt rate premium above government for each line
rD = [0.5x8.72 + 0.4x6.9 + 0.25x6.9] + [0.5x1.1 + 0.4x1.4 + 0.25x1.8] = 0.1041
Because lodging had long useful life, the long term interest rate for lodging line should be the interest rate of 10-year maturity bonds (8.72%). Meanwhile, restaurants and contract services are short term investment so the interest rate for these lines should be the interest rate of 1-year maturity bond (6.9%).
2. Calculate the riskless rate
- First, calculate the weighted average
The weighted average of each business line is based on its profit contribution to Marriott’s total profits. On page 2, the weighted average of lodging is 51%, that of contract services is 33% and that of restaurants is 16%.
Marriott’s lodging line is considered to be in the same market with Hilton, Holiday, La Quinta and Ramada. Similarly, its restaurants and contract services are in the same market as Church, Collins, Frisch, Luby, McDonald and Wendy. To be more conservative and accurate in the estimation of market volatility, Marriott should choose geometric average.
- Second, calculate b
To calculate b, assume that the project has the same risk and the same leverage as the firm overall.
b = S weighted average x the average of equity Beta of firms in the same business lines = 0.51[(0.88+1.46+0.38+0.95)/4] + (0.33+0.16)[(0.75+0.6+0.13+0.64+1.00+1.08)/6] = 0.813
- Third, calculate Risk premium
To better evaluate the market volatility Marriott should choose the time interval of 7 latest years, from 1981 to 1987. Then Risk premium = (Geometric average of long term US government bond return from 1981 to 1987 + Geometric average of long term high-grade corporate bond return from 1981 to 1987 + Geometric average of Standard & Poor’s 500 composite stock index return from 1981 to 1987)/3 = [(1.1682)5x1.2444x0.9731]1/7 + [(1.1783)5x1.1985x0.9973]1/7 + [(1.1471)5x1.1847x1.523]1/7 = 0.1412
- Forth, Expected return or cost of equity is 0.214 (Exhibit 3)
- Fifth, calculate riskless rate (risk free rate) RF
Expected return = RF + b[Risk premium] so RF = Expected return - b[Risk premium]
RF = 0.214 - 0.813x0.1412 = 0.099
3. WACC
WACC = (1-t)rD(D/V) + rE(E/V) = (1 – 0.44)x0.1041x0.6 + 0.214x0.4 = 0.121
Business Communication
Memo Sample
IUJ, Spring 2006
Pham Thi Thuy Ha
MEMO
To: All Weymouth Employees
From: Carl Weymouth
Date: September 10, 1990
Subject: Personnel Reduction at Weymouth in coming months
I am very sorry to inform you that our company will face serious difficulties in the near future. According to latest sales forecasts, the company’s revenues will probably decrease by 25% in the next eighteen months due to increasing competition from European and Japanese companies. To become more competitive, Weymouth needs new capitals to buy new equipment and restructure production processes at all mills. Moreover, the company needs to spend more money on controlling pollution levels within the state standards. Consequently, Weymouth must find effective solutions to save as many costs as possible.
Recently, our company has implemented several cost-cutting measures. The company has shut down several less efficient mills and processing plants, and delayed some plant modifications for those that do not meet environmental regulations. The company also has cut purchasing and supply costs, implemented restricted travel expenses and reduced operating expenses as many as it could do. However, these effective measures have not helped Weymouth meet its urgent need for capitals. Therefore, the last solution our company could take is to reduce our employment force by 1000 salaried positions at all levels in coming months.
The company will pay those who must leave the company and have one or more years of service a termination payment, unused vacation for 1990 and accrued vacation for 1991. Our company also pays one-month coverage insurance from the leaving date and a partial insurance at reasonable rates for the following months. The company’s managers will help those former employees search for new jobs.
On the other hand, the company will provide those who stay after this employment reduction with salary increases and improved benefit packages including provisions for retirement, vacations, medical and dental cares, life insurance and stock ownership. In return, those employees have to take more responsibilities and fulfill more job requirements. They also have to create more initiatives and work more effectively for the development of the company.
In coming months, supervisors will inform each employee individually his or her employment status and answer questions he or she may have.
I feel much regret to inform you this personnel reduction plan and look for your profound understanding of this solution. I will do my best to develop the company’s business and hope that former employees will have opportunities to work again at Weymouth.
IUJ, Spring 2006
Pham Thi Thuy Ha
MEMO
To: All Weymouth Employees
From: Carl Weymouth
Date: September 10, 1990
Subject: Personnel Reduction at Weymouth in coming months
I am very sorry to inform you that our company will face serious difficulties in the near future. According to latest sales forecasts, the company’s revenues will probably decrease by 25% in the next eighteen months due to increasing competition from European and Japanese companies. To become more competitive, Weymouth needs new capitals to buy new equipment and restructure production processes at all mills. Moreover, the company needs to spend more money on controlling pollution levels within the state standards. Consequently, Weymouth must find effective solutions to save as many costs as possible.
Recently, our company has implemented several cost-cutting measures. The company has shut down several less efficient mills and processing plants, and delayed some plant modifications for those that do not meet environmental regulations. The company also has cut purchasing and supply costs, implemented restricted travel expenses and reduced operating expenses as many as it could do. However, these effective measures have not helped Weymouth meet its urgent need for capitals. Therefore, the last solution our company could take is to reduce our employment force by 1000 salaried positions at all levels in coming months.
The company will pay those who must leave the company and have one or more years of service a termination payment, unused vacation for 1990 and accrued vacation for 1991. Our company also pays one-month coverage insurance from the leaving date and a partial insurance at reasonable rates for the following months. The company’s managers will help those former employees search for new jobs.
On the other hand, the company will provide those who stay after this employment reduction with salary increases and improved benefit packages including provisions for retirement, vacations, medical and dental cares, life insurance and stock ownership. In return, those employees have to take more responsibilities and fulfill more job requirements. They also have to create more initiatives and work more effectively for the development of the company.
In coming months, supervisors will inform each employee individually his or her employment status and answer questions he or she may have.
I feel much regret to inform you this personnel reduction plan and look for your profound understanding of this solution. I will do my best to develop the company’s business and hope that former employees will have opportunities to work again at Weymouth.
Local and export processing enterprises – similarities and differences
Compare and Contrast Essay
In Vietnam, there are two types of processing manufacturers: local processing enterprises (LPEs) and export processing enterprises (EPEs) I have experienced working for both of them for quite a long time. Someone may argue that there are many similarities between LPEs and EPEs. However, they are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management. EPEs are business models for LPEs to follow.
In terms of legal issues, each of them has different rights and responsibilities. LPEs are owned by Vietnamese nationals or local institutions. LPEs are also restricted to selling their products to local markets and to buying the main raw materials from overseas markets. Besides, LPEs are allowed to hire foreign employees up to 5 percent of their total workforce. LPEs have to pay value-added, import and export taxes. In contrast, EPEs are owned by foreign individuals or institutions. EPEs have to export all their products to overseas markets and to buy the main raw materials from foreign countries. Moreover, EPEs are allowed to hire foreign employees up to 10 percent of their total workforce. But EPEs are exempted from value-added, import and export taxes.
The two types of processing enterprises also differ in technology and production level. Being local companies with limited capitals, LPEs are not usually able to adopt new and expensive technology. The local workforce, which has limited English and technical skills, prevents LPEs from applying new technology from foreign countries. Therefore, LPEs can only produce simple, non-technological products such as garments and shoes. On the other hand, EPEs are usually technology-rich firms with modern production methods because they must satisfy the technological requirements set by the Vietnamese government in order to have a license to operate in Vietnam. Thus, EPEs normally have their higher level of technology and produce highly technological products such as color printers and digital cameras.
Another difference between LPEs and EPEs is the effectiveness of management. LPEs normally have old management systems, which are bureaucratic, inflexible and conservative. These systems slow down the decision making process, thus prevent LPEs from being able to improve fast their production performance, produce new products and grow in highly competitive environments. In contrast, EPEs have networked, flat, flexible, diverse and global management that allows EPEs to respond quickly to environmental changes and adjust their organizational structures to fit new situations. As a result, EPEs are able to operate across the borders, compete in international markets and build networks with international business partners.
Although the two kinds of manufacturers are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management, they do not totally contrast one with another. Having their higher technology level and effective management, EPEs are business models for LPEs to follow. On the other hand, LPEs learn from EPEs not only the new technology they bring in but also the way they manage their business and compete in international markets. Thus both EPEs and LPEs contribute to the diversity and development of the Vietnamese manufacturing industry.
In Vietnam, there are two types of processing manufacturers: local processing enterprises (LPEs) and export processing enterprises (EPEs) I have experienced working for both of them for quite a long time. Someone may argue that there are many similarities between LPEs and EPEs. However, they are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management. EPEs are business models for LPEs to follow.
In terms of legal issues, each of them has different rights and responsibilities. LPEs are owned by Vietnamese nationals or local institutions. LPEs are also restricted to selling their products to local markets and to buying the main raw materials from overseas markets. Besides, LPEs are allowed to hire foreign employees up to 5 percent of their total workforce. LPEs have to pay value-added, import and export taxes. In contrast, EPEs are owned by foreign individuals or institutions. EPEs have to export all their products to overseas markets and to buy the main raw materials from foreign countries. Moreover, EPEs are allowed to hire foreign employees up to 10 percent of their total workforce. But EPEs are exempted from value-added, import and export taxes.
The two types of processing enterprises also differ in technology and production level. Being local companies with limited capitals, LPEs are not usually able to adopt new and expensive technology. The local workforce, which has limited English and technical skills, prevents LPEs from applying new technology from foreign countries. Therefore, LPEs can only produce simple, non-technological products such as garments and shoes. On the other hand, EPEs are usually technology-rich firms with modern production methods because they must satisfy the technological requirements set by the Vietnamese government in order to have a license to operate in Vietnam. Thus, EPEs normally have their higher level of technology and produce highly technological products such as color printers and digital cameras.
Another difference between LPEs and EPEs is the effectiveness of management. LPEs normally have old management systems, which are bureaucratic, inflexible and conservative. These systems slow down the decision making process, thus prevent LPEs from being able to improve fast their production performance, produce new products and grow in highly competitive environments. In contrast, EPEs have networked, flat, flexible, diverse and global management that allows EPEs to respond quickly to environmental changes and adjust their organizational structures to fit new situations. As a result, EPEs are able to operate across the borders, compete in international markets and build networks with international business partners.
Although the two kinds of manufacturers are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management, they do not totally contrast one with another. Having their higher technology level and effective management, EPEs are business models for LPEs to follow. On the other hand, LPEs learn from EPEs not only the new technology they bring in but also the way they manage their business and compete in international markets. Thus both EPEs and LPEs contribute to the diversity and development of the Vietnamese manufacturing industry.
Unilever in India: Hindustan Lever’s Project Shakti
Marketing FMCG to the Rural Consumer
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
HLL has enjoyed a competitive advantage as a sole provider of personal hygiene care products before the liberalization of India’s economy. However, with the entry of foreign MNC, HLL is suffering from stagnant growth and lower profit margin. Project Shakti was created to address these issues. The high growth of Shakti has created managerial challenges to the project management team. As Shakti grows, the current management structure has become inefficient to make it profitable with minimum costs. Thus, restructuring management measure is crucial to sustain Shakti in the long run and to provide HLL with competitiveness.
Challenges of Project Shakti
Rural market is already giving HLL a competitive advantage. But competitors are also tapping into the rural market with existing HLL direct channels. Thus to continue HLL competitive edge, Project Shakti is essential. Until 2004, Shakti is contributing 3.5% (pg 6 & 17: 15 x 20 / 85) towards HLL total revenues and it still has potential to continue growing. This is because personal hygiene awareness is in the increase. Shakti may be able to achieve the founder’s dream of 15%-20% of total revenues, assuming that Shakti can increase the usage rate of current consumer. However it will not achieve the market penetration of over 500 million rural population as this figure signifies that HLL will nearly monopolize the rural market with 80% penetration rate. The greatest challenges that Shakti face are costs and management control to make it profitable.
Managing Project Shakti in the long term
The Shakti system in the beginning of the project was good but not sufficient to handle the growth it had obtained. Thus changes are needed to make it more cost effective and profitable. As Shakti matures, there are a number of entrepreneurs who are more successful than the others. HLL’s RSP can organize a monthly gathering for all entrepreneurs in the same district, encouraging interaction and communication among entrepreneurs. By doing so, the experience and knowledge of the successful entrepreneurs will motivates others. This will increase the efficiency of each entrepreneur (profit increase) and also decrease the amount of time spent by RSP to visit individual entrepreneur, giving RSP more time to explore untapped villages in the same district. Thus the current 500 RSP is sufficient to manage 25,000 entrepreneurs. Also, HLL should be focus only in states with SHG movement to increase its cost effectiveness. HLL should also cultivate more successful entrepreneur from existing entrepreneur as organic growth of these entrepreneur is faster and easier to give profit. As HLL penetration to rural market is only a mere 16% (1 entrepreneur in 5 villages, pg 12), the market potential and market size is big enough to give a fair share to every player, thus the conflict between Shakti entrepreneurs and direct sales channel, if ever arise will be minimal. Moreover, a control measure can be applied by limiting the number of entrepreneur in each district thus minimizing conflict.
iShakti and Shakti Vani – survivals for Shakti
iShakti and Shahti Vani are Shakti’s initiatives created to provide rural India with access to information and social communication. Although the setting up costs for those two programs are quite high, Rs 150 million, funding is likely to be achievable because this cost occupies about 3.6% of Shakti’s revenues (150 / 3.5% x 120,000 (pg 2)) and therefore Shakti itself can finance these programs. Funding is also possibly receivable by persuading other profits centers to invest in the programs and by using the revenues of iShakti to finance Vani. Furthermore, iShakti will have high potential revenues from selling MR to the internal customers and to sell the channel to other interested, non-competitor parties, e.g: banks, insurance companies, farm equipment etc. Vani itself does not generate revenues directly, but it is a powerful tool to increase hygiene awareness in rural India, as a result indirectly increase HLL sales at long term. In short, iShakti and Vani will be workable and scalable to help Shakti success.
Social Impact and Role of Business
HLL should make a social impact on rural India. By involving in the improvement of rural living conditions, HLL can and will continue to enjoy the competitive advantages as the main company to participate in social development. The connection between business and communities will develop lifetime customers for HLL. This involvement may not be the typical role of business, but as long as it is profitable to HLL without compromising moral and legal issues, it will be a good move for HLL to increase its reputation as a socially responsible organization.
Conclusion
Project Shakti started to suffer from growing so big that the current structure needs to be adjusted. Restructuring the managing measure of RSP to entrepreneurs, focusing Shakti in selective districts and prioritizing efforts in existing entrepreneurs, Shakti will generate higher revenues with minimal increase in costs. Shakti should continue as it is providing HLL a distinct competitive edge and increase HLL’s profits and growth. Moreover, Shakti helps to position HLL as socially responsible organization.
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
HLL has enjoyed a competitive advantage as a sole provider of personal hygiene care products before the liberalization of India’s economy. However, with the entry of foreign MNC, HLL is suffering from stagnant growth and lower profit margin. Project Shakti was created to address these issues. The high growth of Shakti has created managerial challenges to the project management team. As Shakti grows, the current management structure has become inefficient to make it profitable with minimum costs. Thus, restructuring management measure is crucial to sustain Shakti in the long run and to provide HLL with competitiveness.
Challenges of Project Shakti
Rural market is already giving HLL a competitive advantage. But competitors are also tapping into the rural market with existing HLL direct channels. Thus to continue HLL competitive edge, Project Shakti is essential. Until 2004, Shakti is contributing 3.5% (pg 6 & 17: 15 x 20 / 85) towards HLL total revenues and it still has potential to continue growing. This is because personal hygiene awareness is in the increase. Shakti may be able to achieve the founder’s dream of 15%-20% of total revenues, assuming that Shakti can increase the usage rate of current consumer. However it will not achieve the market penetration of over 500 million rural population as this figure signifies that HLL will nearly monopolize the rural market with 80% penetration rate. The greatest challenges that Shakti face are costs and management control to make it profitable.
Managing Project Shakti in the long term
The Shakti system in the beginning of the project was good but not sufficient to handle the growth it had obtained. Thus changes are needed to make it more cost effective and profitable. As Shakti matures, there are a number of entrepreneurs who are more successful than the others. HLL’s RSP can organize a monthly gathering for all entrepreneurs in the same district, encouraging interaction and communication among entrepreneurs. By doing so, the experience and knowledge of the successful entrepreneurs will motivates others. This will increase the efficiency of each entrepreneur (profit increase) and also decrease the amount of time spent by RSP to visit individual entrepreneur, giving RSP more time to explore untapped villages in the same district. Thus the current 500 RSP is sufficient to manage 25,000 entrepreneurs. Also, HLL should be focus only in states with SHG movement to increase its cost effectiveness. HLL should also cultivate more successful entrepreneur from existing entrepreneur as organic growth of these entrepreneur is faster and easier to give profit. As HLL penetration to rural market is only a mere 16% (1 entrepreneur in 5 villages, pg 12), the market potential and market size is big enough to give a fair share to every player, thus the conflict between Shakti entrepreneurs and direct sales channel, if ever arise will be minimal. Moreover, a control measure can be applied by limiting the number of entrepreneur in each district thus minimizing conflict.
iShakti and Shakti Vani – survivals for Shakti
iShakti and Shahti Vani are Shakti’s initiatives created to provide rural India with access to information and social communication. Although the setting up costs for those two programs are quite high, Rs 150 million, funding is likely to be achievable because this cost occupies about 3.6% of Shakti’s revenues (150 / 3.5% x 120,000 (pg 2)) and therefore Shakti itself can finance these programs. Funding is also possibly receivable by persuading other profits centers to invest in the programs and by using the revenues of iShakti to finance Vani. Furthermore, iShakti will have high potential revenues from selling MR to the internal customers and to sell the channel to other interested, non-competitor parties, e.g: banks, insurance companies, farm equipment etc. Vani itself does not generate revenues directly, but it is a powerful tool to increase hygiene awareness in rural India, as a result indirectly increase HLL sales at long term. In short, iShakti and Vani will be workable and scalable to help Shakti success.
Social Impact and Role of Business
HLL should make a social impact on rural India. By involving in the improvement of rural living conditions, HLL can and will continue to enjoy the competitive advantages as the main company to participate in social development. The connection between business and communities will develop lifetime customers for HLL. This involvement may not be the typical role of business, but as long as it is profitable to HLL without compromising moral and legal issues, it will be a good move for HLL to increase its reputation as a socially responsible organization.
Conclusion
Project Shakti started to suffer from growing so big that the current structure needs to be adjusted. Restructuring the managing measure of RSP to entrepreneurs, focusing Shakti in selective districts and prioritizing efforts in existing entrepreneurs, Shakti will generate higher revenues with minimal increase in costs. Shakti should continue as it is providing HLL a distinct competitive edge and increase HLL’s profits and growth. Moreover, Shakti helps to position HLL as socially responsible organization.
IKEA Invades America
Low Pricing Strategy
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
The IKEA Group, one of the world’s top furniture retailers, has emerged as the fastest-growing furniture retailer in the US. To become one of the leading furniture retailers in such huge and promising market, it has set an ambitious goal to have 50 stores around the US by 2013. IKEA has 4 branches in Los Angeles alone. From 1997 to 2001, the revenues of IKEA doubled from $66 million to $1.27 billion in five years. Looking at the growth rate over the past decade, it seems possible for IKEA to reach this goal. However, IKEA faced several challenges: American’s mind-set, competition from established furniture retailer and different customer’s preference. To address to these challenges, IKEA needs to apply market leader strategy expanding total market size, defending and developing its market share to achieve this goal.
IKEA Brand: lasting advantage
One of IKEA’s lasting advantages is its brand. To many consumers, IKEA means low-priced furniture, Scandinavian design and style, shopping convenience. IKEA’s cheap furniture does not make consumers feel cheap but rather beautiful, convenient and well-designed. IKEA has a unique shopping culture that makes consumers feel a “real Scandinavian design and style” when they shop. Thus, brand awareness gives IKEA a great power in the US market. However, IKEA’s motto is “low price with meaning”. “With meaning” for US market is different from the other markets. If IKEA can not capture what US customers want, its offerings will become “low price and no meaning”. IKEA already listens to US customers’ needs but it should focus more on local market point of view.
Challenges in America
- Reluctance to change furniture: mind set of Americans
Americans typically have the mind-set that furniture should last a life time, which is not in-line with IKEA’s value that does not include durability in its products. Thus to increase market share in America, IKEA must change the American’s attitude towards furniture as something fun and disposable, furniture is something that add value to lifestyle without incurring too much cost.
- Value added in high-end furniture retailer
As in IKEA motto: low price, there is no delivery and credit services offered. Whereas a typical American furniture retailer (Wal-Mart excluded) offered free delivery service, on top of personal consultation, interior design, credit (easy payment scheme) and huge selection of products. IKEA has to compete not only in price, but also the value added services that these furniture retailers offered as a package together with the furniture purchased.
- Consumer preferences
Another challenge that IKEA faces in America is different consumer preferences and needs. IKEA originated in the Scandinavia has to modify its products to suit America’s furniture market.
Managing sustainable growth for the future
To achieve the 2013 goal, IKEA should apply market leader strategy by expanding total market size, defending and developing its market share. To expand total market size, IKEA should use both new market segment and market penetration strategies. First, it should segment the market to middle-upper class. This particular segment includes young, educated, high mobility home makers that reside in sub-urban America. They are typically open minded and technology savvy which suits IKEA’s brand image and offerings.
Second, IKEA should find new users, uses and increase usage volume of its current customers. To do so, it should encourage and cultivate a new concept of furniture as representative of life style. As life style changes furniture should change too. It should not compete with either high or low-end furniture retailers in U.S (price and quality), but instead use them as benchmark and focus on its niche. IKEA should benchmark its products against hi-end furniture retailers in the US. It should also avoid head-on competition against both high and low-end furniture retailers. Instead it should position itself as a market leader in its niche market.
IKEA should co-create value with customers by establishing “IKEA Club”. This Club is a platform to encourage interaction among IKEA’s consumers so they can teach each other how to buy, assemble and use its products. Beside that, the Club also works as a platform to exchange ideas and experience in using its products. Moreover, it should create a website for potential shoppers to mix and match its products online before visiting its’ stores. This will reduce the shoppers’ confusions and increase customer participation in designing home furnishing using its existing product offerings.
To protect and develop its market share, IKEA should endure IKEA brand by maintaining its company values and unique shopping culture at all stores such as keeping store design, decoration, structure, service. In this case, it needs to modify the product matrix according to US markets by maintaining the price range but increase number of styles that meet the needs and wants of the target market. IKEA also needs to position itself by changing US consumers’ mindset via various IKEA-consumer communication channels.
Conclusion
As mentioned in the case, America’s furniture market is very fragmented. In order to increase the market share, IKEA needs to focus on positioning itself as the one stop centre for all home furnishing needs. IKEA should target their marketing efforts on middle-upper, educated segment of America’s population as they are the one that will be more open to accept new ideas and concept that IKEA has to offer. Also IKEA should differentiate itself, focus on the experience it offers to shopper, not just the low price products. By doing so, the goal of 50 stores in 2013 is not far from reach.
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
The IKEA Group, one of the world’s top furniture retailers, has emerged as the fastest-growing furniture retailer in the US. To become one of the leading furniture retailers in such huge and promising market, it has set an ambitious goal to have 50 stores around the US by 2013. IKEA has 4 branches in Los Angeles alone. From 1997 to 2001, the revenues of IKEA doubled from $66 million to $1.27 billion in five years. Looking at the growth rate over the past decade, it seems possible for IKEA to reach this goal. However, IKEA faced several challenges: American’s mind-set, competition from established furniture retailer and different customer’s preference. To address to these challenges, IKEA needs to apply market leader strategy expanding total market size, defending and developing its market share to achieve this goal.
IKEA Brand: lasting advantage
One of IKEA’s lasting advantages is its brand. To many consumers, IKEA means low-priced furniture, Scandinavian design and style, shopping convenience. IKEA’s cheap furniture does not make consumers feel cheap but rather beautiful, convenient and well-designed. IKEA has a unique shopping culture that makes consumers feel a “real Scandinavian design and style” when they shop. Thus, brand awareness gives IKEA a great power in the US market. However, IKEA’s motto is “low price with meaning”. “With meaning” for US market is different from the other markets. If IKEA can not capture what US customers want, its offerings will become “low price and no meaning”. IKEA already listens to US customers’ needs but it should focus more on local market point of view.
Challenges in America
- Reluctance to change furniture: mind set of Americans
Americans typically have the mind-set that furniture should last a life time, which is not in-line with IKEA’s value that does not include durability in its products. Thus to increase market share in America, IKEA must change the American’s attitude towards furniture as something fun and disposable, furniture is something that add value to lifestyle without incurring too much cost.
- Value added in high-end furniture retailer
As in IKEA motto: low price, there is no delivery and credit services offered. Whereas a typical American furniture retailer (Wal-Mart excluded) offered free delivery service, on top of personal consultation, interior design, credit (easy payment scheme) and huge selection of products. IKEA has to compete not only in price, but also the value added services that these furniture retailers offered as a package together with the furniture purchased.
- Consumer preferences
Another challenge that IKEA faces in America is different consumer preferences and needs. IKEA originated in the Scandinavia has to modify its products to suit America’s furniture market.
Managing sustainable growth for the future
To achieve the 2013 goal, IKEA should apply market leader strategy by expanding total market size, defending and developing its market share. To expand total market size, IKEA should use both new market segment and market penetration strategies. First, it should segment the market to middle-upper class. This particular segment includes young, educated, high mobility home makers that reside in sub-urban America. They are typically open minded and technology savvy which suits IKEA’s brand image and offerings.
Second, IKEA should find new users, uses and increase usage volume of its current customers. To do so, it should encourage and cultivate a new concept of furniture as representative of life style. As life style changes furniture should change too. It should not compete with either high or low-end furniture retailers in U.S (price and quality), but instead use them as benchmark and focus on its niche. IKEA should benchmark its products against hi-end furniture retailers in the US. It should also avoid head-on competition against both high and low-end furniture retailers. Instead it should position itself as a market leader in its niche market.
IKEA should co-create value with customers by establishing “IKEA Club”. This Club is a platform to encourage interaction among IKEA’s consumers so they can teach each other how to buy, assemble and use its products. Beside that, the Club also works as a platform to exchange ideas and experience in using its products. Moreover, it should create a website for potential shoppers to mix and match its products online before visiting its’ stores. This will reduce the shoppers’ confusions and increase customer participation in designing home furnishing using its existing product offerings.
To protect and develop its market share, IKEA should endure IKEA brand by maintaining its company values and unique shopping culture at all stores such as keeping store design, decoration, structure, service. In this case, it needs to modify the product matrix according to US markets by maintaining the price range but increase number of styles that meet the needs and wants of the target market. IKEA also needs to position itself by changing US consumers’ mindset via various IKEA-consumer communication channels.
Conclusion
As mentioned in the case, America’s furniture market is very fragmented. In order to increase the market share, IKEA needs to focus on positioning itself as the one stop centre for all home furnishing needs. IKEA should target their marketing efforts on middle-upper, educated segment of America’s population as they are the one that will be more open to accept new ideas and concept that IKEA has to offer. Also IKEA should differentiate itself, focus on the experience it offers to shopper, not just the low price products. By doing so, the goal of 50 stores in 2013 is not far from reach.
Cumberland Metal Industries
Pricing Strategy
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
Cumberland Metal Industries (CMI), a company specialized in making of curled metal products, has develop a new product, metal cushion pad with health safety and long durability, to help contractors drive piles faster. Based on the successful tests, CMI now wants to launch this new product to the market. The main challenge CMI is facing is to price its new pads. Since the pad is totally new in the market, CMI should use perceived value pricing method and apply marketing mix programs comprised of advertising, education, and distribution channels to launch this product as well as develop it to get full market share in the future.
Perceived Value Pricing – strategy for future success
CMI should set the objective of this new business to be the monopoly and to maximize profits. However, the prerequisite for this objective is to get a patent to prevent this product from being copied and imitated. As long as CMI did not get patent for this product, CMI should not sell it as it would invite the entry of competitors because this cushion pad is not a high technology product and easy to be copied. Thus the following pricing strategy will be based on the scenario of getting patent protection.
To price the new product, CMI should apply perceived value pricing method to deliver its value to customers and CMI must make them perceive this value. CMI also needs to apply several marketing-mix programs such as advertising and roles of influencers to communicate and enhance perceived value in customers’ minds. The price calculation is as follow:
Normal a price of an 11 ½ inch asbestos pad is $3. A CMI’s pad lasts longer than asbestos pads 10 times (conservative estimate: p4). Thus speed and efficiency will be the top priority for marketing and pricing this pad. Based on product life, the pad will only have $30 value. However, based on the data from Colerick test, Corelick spent $1000 for asbestos pads; they use 6 CMI’s pads for the same job. So, it took $1000/6 = $166.67 worth of albestos pads to complete the same work by CMI’s pads. From the Fazio test, it took $400 worth of albestos pads. This has not take efficiency into consideration yet. Assuming that the users do care about speed and efficiency, CMI can charge additional price.
From the Colerick test, the job is to drive 50 feet in to the ground using 300 piles. The albestos pads spend 20mins (150ft/hrs: p.3) on driving and 400mins on set changing. The CMI’s pads spend only 15mins (200ft/hrs: p.3) on driving and 4mins on set changing. We do not need to take the hidden costs into consideration because it is not affected by reducing the driving time or pad changing time. So (420–19)min /60min = 6 hrs 41 min time saving. Because the contractors have to spend $100 per hour, Colerick probably save about $668/6 pads =$111.33 on equipment rental, labor and overhead costs for this work by using CMI’s pads. So the worth of CMI’s pad is $166.67+$111.33 = $278.00
CMI should choose the option to purchase the $50000 permanent tooling, because it will reduce cost per unit by $78.94. By this cost saving alone we can get back the money we invested in the tooling in less than 3 months. This will maximize profit in the long run. The total manufacturing cost will be $69.18/pad. The management wants 40%-50% contributing margin after all manufacturing costs, the price will be about $115 ~ $140 to satisfy the management’s profit expectation. Thus CMI’s should price the pads at $149.00, as this price will have 50% saving for the contractors.
Each CMI’s pad can save a huge among of costs for the contractors. If CMI can get the patent then no competitor can enter the market with the same product. CMI can charge the monopoly profit maximized price, but initially they should give promotional discount of 15% during the introductory phase, that is the first 2 purchases to make customers adopt the new pads because the price can look intimidating. (asbestos pad $3, CMI pad $149).
Marketing-mix strategy to launch and explore market share for new cushion pads
First, CMI needs to get the patent of this new product to protect from competitor entry. As CMI’s objectives is to be monopoly, patent is crucial.
Second, CMI needs to develop distribution channels. Direct channels to contractors who own pile hammers as they contributed high quantity and demand (50% of estimated market share). Also by having direct channels, CMI has more control on the education and monitoring of its clients. After that, CMI should sell to wholesalers and hardware stores to cover the small contractor. CMI should not be too concern about the equipment rental because as CMI’s pads gain popularity in the industry, customers will pressure the rental company to use CMI’s pads.
Third, CMI needs to develop promotional and advertising programs to make customers perceive the value of new pads. CMI needs to educate its consumers in terms of health benefits (no asbestos) and safety (no heating problem) and to add the brand quality by advertising in professional journals. CMI also needs to make the function and merit of the new product to be known by customers, especially the value the new product can create the aspect of health concern.
Fourth, CMI needs to establish a network of influencers or increase public relations. To do so, CMI needs to established networks in a new industry to the company and key influencers to endorse its product. The result from Professor McCormack will be of high value to gain endorsement from consulting firm.
Fifth, CMI needs to do market research, estimate the price elasticity of the new pad and the demand function and then adapt the initial price to the profit maximized price.
Conclusion
CMI’s pads definitely will be the market leader in the industry as it is innovative with high efficiency. Getting patent for this pad will ensure the growth profitability of CMI. In this case, perceived value pricing is used as the pad has more to offer than conventional asbestos. In line with this pricing strategy, marketing mix of advertising, education and distribution play a role in ensuring the success of this product.
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
Cumberland Metal Industries (CMI), a company specialized in making of curled metal products, has develop a new product, metal cushion pad with health safety and long durability, to help contractors drive piles faster. Based on the successful tests, CMI now wants to launch this new product to the market. The main challenge CMI is facing is to price its new pads. Since the pad is totally new in the market, CMI should use perceived value pricing method and apply marketing mix programs comprised of advertising, education, and distribution channels to launch this product as well as develop it to get full market share in the future.
Perceived Value Pricing – strategy for future success
CMI should set the objective of this new business to be the monopoly and to maximize profits. However, the prerequisite for this objective is to get a patent to prevent this product from being copied and imitated. As long as CMI did not get patent for this product, CMI should not sell it as it would invite the entry of competitors because this cushion pad is not a high technology product and easy to be copied. Thus the following pricing strategy will be based on the scenario of getting patent protection.
To price the new product, CMI should apply perceived value pricing method to deliver its value to customers and CMI must make them perceive this value. CMI also needs to apply several marketing-mix programs such as advertising and roles of influencers to communicate and enhance perceived value in customers’ minds. The price calculation is as follow:
Normal a price of an 11 ½ inch asbestos pad is $3. A CMI’s pad lasts longer than asbestos pads 10 times (conservative estimate: p4). Thus speed and efficiency will be the top priority for marketing and pricing this pad. Based on product life, the pad will only have $30 value. However, based on the data from Colerick test, Corelick spent $1000 for asbestos pads; they use 6 CMI’s pads for the same job. So, it took $1000/6 = $166.67 worth of albestos pads to complete the same work by CMI’s pads. From the Fazio test, it took $400 worth of albestos pads. This has not take efficiency into consideration yet. Assuming that the users do care about speed and efficiency, CMI can charge additional price.
From the Colerick test, the job is to drive 50 feet in to the ground using 300 piles. The albestos pads spend 20mins (150ft/hrs: p.3) on driving and 400mins on set changing. The CMI’s pads spend only 15mins (200ft/hrs: p.3) on driving and 4mins on set changing. We do not need to take the hidden costs into consideration because it is not affected by reducing the driving time or pad changing time. So (420–19)min /60min = 6 hrs 41 min time saving. Because the contractors have to spend $100 per hour, Colerick probably save about $668/6 pads =$111.33 on equipment rental, labor and overhead costs for this work by using CMI’s pads. So the worth of CMI’s pad is $166.67+$111.33 = $278.00
CMI should choose the option to purchase the $50000 permanent tooling, because it will reduce cost per unit by $78.94. By this cost saving alone we can get back the money we invested in the tooling in less than 3 months. This will maximize profit in the long run. The total manufacturing cost will be $69.18/pad. The management wants 40%-50% contributing margin after all manufacturing costs, the price will be about $115 ~ $140 to satisfy the management’s profit expectation. Thus CMI’s should price the pads at $149.00, as this price will have 50% saving for the contractors.
Each CMI’s pad can save a huge among of costs for the contractors. If CMI can get the patent then no competitor can enter the market with the same product. CMI can charge the monopoly profit maximized price, but initially they should give promotional discount of 15% during the introductory phase, that is the first 2 purchases to make customers adopt the new pads because the price can look intimidating. (asbestos pad $3, CMI pad $149).
Marketing-mix strategy to launch and explore market share for new cushion pads
First, CMI needs to get the patent of this new product to protect from competitor entry. As CMI’s objectives is to be monopoly, patent is crucial.
Second, CMI needs to develop distribution channels. Direct channels to contractors who own pile hammers as they contributed high quantity and demand (50% of estimated market share). Also by having direct channels, CMI has more control on the education and monitoring of its clients. After that, CMI should sell to wholesalers and hardware stores to cover the small contractor. CMI should not be too concern about the equipment rental because as CMI’s pads gain popularity in the industry, customers will pressure the rental company to use CMI’s pads.
Third, CMI needs to develop promotional and advertising programs to make customers perceive the value of new pads. CMI needs to educate its consumers in terms of health benefits (no asbestos) and safety (no heating problem) and to add the brand quality by advertising in professional journals. CMI also needs to make the function and merit of the new product to be known by customers, especially the value the new product can create the aspect of health concern.
Fourth, CMI needs to establish a network of influencers or increase public relations. To do so, CMI needs to established networks in a new industry to the company and key influencers to endorse its product. The result from Professor McCormack will be of high value to gain endorsement from consulting firm.
Fifth, CMI needs to do market research, estimate the price elasticity of the new pad and the demand function and then adapt the initial price to the profit maximized price.
Conclusion
CMI’s pads definitely will be the market leader in the industry as it is innovative with high efficiency. Getting patent for this pad will ensure the growth profitability of CMI. In this case, perceived value pricing is used as the pad has more to offer than conventional asbestos. In line with this pricing strategy, marketing mix of advertising, education and distribution play a role in ensuring the success of this product.
Autobytel
Marketing Strategy
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
Autobytel is the first mover in the internet new car buying service in the US. It enjoyed miracle growth during its early stage but now is facing strong competition from many sources relating to car buying services. In such increasing competition, it has to reposition itself to differentiate from competitors by offering new services and products such as selling cars direct to consumers and increasing the numbers of dealers and reduce costs. Existing marketing mix should be reviewed to find a balance between efficiency and profitability by focusing on internet advertising and personal touch with dealers.
Facing strong competition in the internet new car buying service
As the number of dealers using online buying services is dramatically increasing, Autobuytel is facing intense competition with other online car-buying service providers such as Microsoft, Dell, who had entered the market, set up dealer networks in a short period, and are nearly catching up with Autobytel by using their brands and existing networks or partnership with companies which already have car dealer network bases. They are not only price-competitive, but also have a wide variety of services like car delivery service by CarsDirect.com. Car manufacturers and dealers also start direct online car-selling service. These competitions make Autobytel difficult to differentiate itself from other online car buying service providers in pricing and servicing.
Restructuring costs for revenue growth
Autobytel’s operating cost is extremely high in comparison with revenues, but increasing at slower rate. In 1996, revenues grew 1733% (Exhibit 1), but costs increased at 757%. In 1997, costs increased at slower rate. As the cost is increasing at a slower rate than revenue, it can still manage cost reduction. Competition will not get easier in the future as it has less than 1% market share. Therefore, it should implement cost control program by setting cost according to revenues. It should be very cautious regarding the budget spent on sales and marketing as the profitable and long lasting business should not spend more than its gain. For example, it should target a certain percentage as its net profit margin before spending on sales and marketing.
Offering new products and adding new dealers and services to grow revenues
Autobytel can sell cars directly to customer because this service will be more efficient and convenient to customers. As the internet purchase is the future trend, by doing so it will definitely becoming a market leader in internet car sales. Thus it can acquire more consumers and get more marginal profits than just as being a liaison. However, it should be cautious in launching this service as not to jeopardize business of existing dealers and also it should consider the cost incurred in this venture. It should first limit this service in area near to car manufacturer sites to avoid incurring inventory cost and increase efficiency of car delivery to customers.
Autobytel should explore its dealer network since 89% of its revenues come from dealer subscription fees. To do so, it needs to help dealers increase sales volumes by granting them a larger geographical territory than car manufacturers do. It also needs to give its dealers support (training services) so that they are not fired by having poor service quality. This will definitely help in increasing the number of dealers and position itself as the synergistic partner for dealers to venture into the new era for business through the internet. Providing training to sales persons will increase the efficiency of the dealer. This will not only strengthened the rapport between Autobytel and existing dealer, but also boost up its reputation as the premium.com company. However, it should restrict its dealers from signing up with competitors to protect its investment and to maintain its competitive advantage (Autobytel University).
Autobytel should add new features into its products and services. First it should develop the current consumer-to-consumer and business-to-business car sales markets into one of its major products and charge the successful transaction at a reasonable price. This is because this service can increase the number of business buyers and consumers via its websites. It needs to focus more on used car sales because these sales can give dealers more margins than new cars do. It should also offer truck, van and bus online buying service with the same system by focusing on business-to-business transactions. This new business is very potential since no one has done it. It should create a “buyer chat room” on its website where buyers can talk with its dealers and other buyers about purchasing decisions so that they feel that they make right choices.
Repositioning and marketing mix programs
Autobytel has to position itself as the complete car guide website which provides not only information on car purchase. The new position statement should be ‘More Than Cars’ where it offers simple way of getting all kinds of information and services related to cars. It should strengthen and maintain its competitive edge by referring consumer to reliable and low-price dealer and service centers. That is to brand Autobytel equivalent to other successful online companies like Amazon.com.
In order to achieve the new positioning, a new set of marketing mix is called for. Autobytel should focus on two ends: the consumer and the dealer. On the consumer, internet marketing and advertising should be continued as the target consumers are those pro-internet shoppers. Traditional advertising should not be continued as it was too costly.
As for the dealer, personal selling is the best way to maintain and gain new dealers. Mass advertising is not recommended as it is not cost effective for Autobytel. This is because Autobytel did not want to target all dealers, but only selected dealers in a certain area that is reliable and have a high reputation.
Conclusion
In short, to growth sustainablly in fierce competition, Autobytel needs to reposition itself to differentiate it from its competitors. To do so, it should take a course of actions to accelerate its revenues such as restructuring costs, offering new products and services, adding new features on its websites as well as exploring its dealer network. Moreover, it needs to change its positioning statement with a set of new marketing mix programs focusing on both customers and dealers.
Marketing Management (MKG1010)
International University of Japan, Fall 2005
Nishino Kei
Pham Thi Thuy Ha
Suwannathat Sanpat
Tan Siew Siew
Zha Li
Executive Summary
Autobytel is the first mover in the internet new car buying service in the US. It enjoyed miracle growth during its early stage but now is facing strong competition from many sources relating to car buying services. In such increasing competition, it has to reposition itself to differentiate from competitors by offering new services and products such as selling cars direct to consumers and increasing the numbers of dealers and reduce costs. Existing marketing mix should be reviewed to find a balance between efficiency and profitability by focusing on internet advertising and personal touch with dealers.
Facing strong competition in the internet new car buying service
As the number of dealers using online buying services is dramatically increasing, Autobuytel is facing intense competition with other online car-buying service providers such as Microsoft, Dell, who had entered the market, set up dealer networks in a short period, and are nearly catching up with Autobytel by using their brands and existing networks or partnership with companies which already have car dealer network bases. They are not only price-competitive, but also have a wide variety of services like car delivery service by CarsDirect.com. Car manufacturers and dealers also start direct online car-selling service. These competitions make Autobytel difficult to differentiate itself from other online car buying service providers in pricing and servicing.
Restructuring costs for revenue growth
Autobytel’s operating cost is extremely high in comparison with revenues, but increasing at slower rate. In 1996, revenues grew 1733% (Exhibit 1), but costs increased at 757%. In 1997, costs increased at slower rate. As the cost is increasing at a slower rate than revenue, it can still manage cost reduction. Competition will not get easier in the future as it has less than 1% market share. Therefore, it should implement cost control program by setting cost according to revenues. It should be very cautious regarding the budget spent on sales and marketing as the profitable and long lasting business should not spend more than its gain. For example, it should target a certain percentage as its net profit margin before spending on sales and marketing.
Offering new products and adding new dealers and services to grow revenues
Autobytel can sell cars directly to customer because this service will be more efficient and convenient to customers. As the internet purchase is the future trend, by doing so it will definitely becoming a market leader in internet car sales. Thus it can acquire more consumers and get more marginal profits than just as being a liaison. However, it should be cautious in launching this service as not to jeopardize business of existing dealers and also it should consider the cost incurred in this venture. It should first limit this service in area near to car manufacturer sites to avoid incurring inventory cost and increase efficiency of car delivery to customers.
Autobytel should explore its dealer network since 89% of its revenues come from dealer subscription fees. To do so, it needs to help dealers increase sales volumes by granting them a larger geographical territory than car manufacturers do. It also needs to give its dealers support (training services) so that they are not fired by having poor service quality. This will definitely help in increasing the number of dealers and position itself as the synergistic partner for dealers to venture into the new era for business through the internet. Providing training to sales persons will increase the efficiency of the dealer. This will not only strengthened the rapport between Autobytel and existing dealer, but also boost up its reputation as the premium.com company. However, it should restrict its dealers from signing up with competitors to protect its investment and to maintain its competitive advantage (Autobytel University).
Autobytel should add new features into its products and services. First it should develop the current consumer-to-consumer and business-to-business car sales markets into one of its major products and charge the successful transaction at a reasonable price. This is because this service can increase the number of business buyers and consumers via its websites. It needs to focus more on used car sales because these sales can give dealers more margins than new cars do. It should also offer truck, van and bus online buying service with the same system by focusing on business-to-business transactions. This new business is very potential since no one has done it. It should create a “buyer chat room” on its website where buyers can talk with its dealers and other buyers about purchasing decisions so that they feel that they make right choices.
Repositioning and marketing mix programs
Autobytel has to position itself as the complete car guide website which provides not only information on car purchase. The new position statement should be ‘More Than Cars’ where it offers simple way of getting all kinds of information and services related to cars. It should strengthen and maintain its competitive edge by referring consumer to reliable and low-price dealer and service centers. That is to brand Autobytel equivalent to other successful online companies like Amazon.com.
In order to achieve the new positioning, a new set of marketing mix is called for. Autobytel should focus on two ends: the consumer and the dealer. On the consumer, internet marketing and advertising should be continued as the target consumers are those pro-internet shoppers. Traditional advertising should not be continued as it was too costly.
As for the dealer, personal selling is the best way to maintain and gain new dealers. Mass advertising is not recommended as it is not cost effective for Autobytel. This is because Autobytel did not want to target all dealers, but only selected dealers in a certain area that is reliable and have a high reputation.
Conclusion
In short, to growth sustainablly in fierce competition, Autobytel needs to reposition itself to differentiate it from its competitors. To do so, it should take a course of actions to accelerate its revenues such as restructuring costs, offering new products and services, adding new features on its websites as well as exploring its dealer network. Moreover, it needs to change its positioning statement with a set of new marketing mix programs focusing on both customers and dealers.
Conflict and Negotiation Styles of Japanese People
Conflict Handling Styles
1. Avoiding style: unassertive and uncooperative behavior
2. Forcing style: assertive and uncooperative behavior
3. Accommodating style: unassertive and cooperative style
4. Compromising style: behaviors at intermediate level of cooperation and assertiveness
5. Collaborating style: strong assertive and cooperative behavior. This will lead to a win-win solution
Negotiation tactics
Japanese have 3 keys to succeed in negotiating:
- Appropriate information
- Time to negotiate
- Feeling of power
They pay mush attention to personal relationships and ask questions that do not relate to matters in hand.
Japanese managers take real interest in their workers’ private life
So Japanese negotiation style is personal and culture-related
1. Avoiding style: unassertive and uncooperative behavior
2. Forcing style: assertive and uncooperative behavior
3. Accommodating style: unassertive and cooperative style
4. Compromising style: behaviors at intermediate level of cooperation and assertiveness
5. Collaborating style: strong assertive and cooperative behavior. This will lead to a win-win solution
Negotiation tactics
Japanese have 3 keys to succeed in negotiating:
- Appropriate information
- Time to negotiate
- Feeling of power
They pay mush attention to personal relationships and ask questions that do not relate to matters in hand.
Japanese managers take real interest in their workers’ private life
So Japanese negotiation style is personal and culture-related
Carly Fiorina – Leadership Capability
IUJ, Fall 2005
Pham Thi Thuy Ha
Sense-making
Coming to understand the context in which you are operating:
Fiorina has a strong sense of understanding the context to map the external terrain. At AT&T, she recognized the phone-equipment manufacturing unit’s potential for growth in emerging market such as Asia and the firm’s capability to supply a switch able to handle both wireless and long-distance traffic. At HP, she boldly declared her intend to merge HP with Compaq as she sees the merge will make the two companies be more efficient and cost effective.
Creating a map that represents the current situation of the group or organization:
She has a savvy approach to customers to understand what they want and how to fulfill their need and wants. That’s why she could always expand the business of her company.
Making sense of the environment:
She saw the market moving quickly and the pace of change accelerating. This sense-making distinguishes her as a great leader who can discover the new terrain for HP as the environment changes.
Relating - centers on the leader’s ability to engage in inquiry, advocacy, and connecting
Inquiry:
Fiorina does not always listen and understand what others are thinking and feeling. She ignores others while implementing her decisions without explicit reasons. She also does not care about the critics against her leadership style “management with flying around”. In this context, she is right to act like that to maintain her position as a female leader, strengthen her executive power and make her management more efficient to manage HP as a world-wide company.
Advocacy:
She is always clear about her own point of view and trying to influence others of its merits. She is able to tell the truth about what needs to be done and clearly define what is and is not acceptable performance. This ability helps her communicate broad strategies, deep knowledge of operations, visions and instructions clearly to her management team and employees.
Connecting:
She is able to cultivate her followers who help each other to accomplish their goals. She also developed a personal touch that inspired intense loyalty among her followers and the ability to build collaborative relationships with others to create coalitions for change. For instance, she has a strong ally with HP board members. The 51.4% vote of HP’ shareholders for the merge HP-Compaq is her success in building coalitions for change as she planned.
Visioning
Creating a compelling, shared and meaningful vision:
She changed the vision of HP from a stand-alone product/service provider to a company that provides an integrated suite of information appliances, highly reliable IT infrastructure and e-service, or to expand HP in a new direction at “Internet speed” and customer orientation. This compelling vision motivate HP’s people to change their current view and ways of working, and work hard to reach it. This shared vision enables them to act together, become bound together around a common identity and sense of destiny. This vision also provides them with a sense of meaning about their work and the difference they will make. Therefore, HP could offer its own e-services and develop e-speak, package online services tailored to customers’ needs during her first year at HP.
Inventing
Changing the way that people work together:
Knowing that the shift of this vision only can be achieved with corresponding changes in organizational structure, she changed the way people work by restructuring HP into four organizations: two focusing on sales and the others focusing on products.
Creating a whole new way of approaching a task: She recognized the need for a new leadership style and faster actions for the new vision. So she decided to change HP from a fully integrated, product-focused business to a more disintegrated approach focusing on product generation, customer-facing and support activities. She also changed her leadership style by using internal Web and message boards to communicate with workers instead of visiting and talking to them in person as the old leadership style.
Creating new approach, new solutions, new practices:
To achieve the goal, she changed the culture and work habit to make employees be more efficient. She encouraged research to explore new technologies and develop new products. She also created the “rules of garage” to motivate new and innovative ideas.
Inventing goes hand-in-hand with sense-making:
She blended sense-making with inventing. Together with the above initiatives, she developed HP’s brand by generating a branding campaign that sent new messages to customers, competitors and industry partners to build a lasting image of the company and brand awareness for its further sustainable development.
Her strong capability of sense-making, visioning, relating and inventing makes Fiorina become a powerful and talented female leader in the American corporate world.
Pham Thi Thuy Ha
Sense-making
Coming to understand the context in which you are operating:
Fiorina has a strong sense of understanding the context to map the external terrain. At AT&T, she recognized the phone-equipment manufacturing unit’s potential for growth in emerging market such as Asia and the firm’s capability to supply a switch able to handle both wireless and long-distance traffic. At HP, she boldly declared her intend to merge HP with Compaq as she sees the merge will make the two companies be more efficient and cost effective.
Creating a map that represents the current situation of the group or organization:
She has a savvy approach to customers to understand what they want and how to fulfill their need and wants. That’s why she could always expand the business of her company.
Making sense of the environment:
She saw the market moving quickly and the pace of change accelerating. This sense-making distinguishes her as a great leader who can discover the new terrain for HP as the environment changes.
Relating - centers on the leader’s ability to engage in inquiry, advocacy, and connecting
Inquiry:
Fiorina does not always listen and understand what others are thinking and feeling. She ignores others while implementing her decisions without explicit reasons. She also does not care about the critics against her leadership style “management with flying around”. In this context, she is right to act like that to maintain her position as a female leader, strengthen her executive power and make her management more efficient to manage HP as a world-wide company.
Advocacy:
She is always clear about her own point of view and trying to influence others of its merits. She is able to tell the truth about what needs to be done and clearly define what is and is not acceptable performance. This ability helps her communicate broad strategies, deep knowledge of operations, visions and instructions clearly to her management team and employees.
Connecting:
She is able to cultivate her followers who help each other to accomplish their goals. She also developed a personal touch that inspired intense loyalty among her followers and the ability to build collaborative relationships with others to create coalitions for change. For instance, she has a strong ally with HP board members. The 51.4% vote of HP’ shareholders for the merge HP-Compaq is her success in building coalitions for change as she planned.
Visioning
Creating a compelling, shared and meaningful vision:
She changed the vision of HP from a stand-alone product/service provider to a company that provides an integrated suite of information appliances, highly reliable IT infrastructure and e-service, or to expand HP in a new direction at “Internet speed” and customer orientation. This compelling vision motivate HP’s people to change their current view and ways of working, and work hard to reach it. This shared vision enables them to act together, become bound together around a common identity and sense of destiny. This vision also provides them with a sense of meaning about their work and the difference they will make. Therefore, HP could offer its own e-services and develop e-speak, package online services tailored to customers’ needs during her first year at HP.
Inventing
Changing the way that people work together:
Knowing that the shift of this vision only can be achieved with corresponding changes in organizational structure, she changed the way people work by restructuring HP into four organizations: two focusing on sales and the others focusing on products.
Creating a whole new way of approaching a task: She recognized the need for a new leadership style and faster actions for the new vision. So she decided to change HP from a fully integrated, product-focused business to a more disintegrated approach focusing on product generation, customer-facing and support activities. She also changed her leadership style by using internal Web and message boards to communicate with workers instead of visiting and talking to them in person as the old leadership style.
Creating new approach, new solutions, new practices:
To achieve the goal, she changed the culture and work habit to make employees be more efficient. She encouraged research to explore new technologies and develop new products. She also created the “rules of garage” to motivate new and innovative ideas.
Inventing goes hand-in-hand with sense-making:
She blended sense-making with inventing. Together with the above initiatives, she developed HP’s brand by generating a branding campaign that sent new messages to customers, competitors and industry partners to build a lasting image of the company and brand awareness for its further sustainable development.
Her strong capability of sense-making, visioning, relating and inventing makes Fiorina become a powerful and talented female leader in the American corporate world.
Roussel-Uclaf
IUJ, Fall 2005
Pham Thi Thuy Ha
Organizational set model analysis
Input set: Roussel-Uclaf (RU) has established cooperative R&D agreements with leading French universities and research organizations who provide RU with technology development and knowledge to create new products. This is RU’s advantage to be a leader among other pharmaceutical companies. RU also has a strong partnership with Dr. Baulieu who is a star on French medical research a prominent researcher in the world’s medical research community to acquire new knowledge for R&D.
Output set: RU’s customers of RU486 are women who prefer buying it because it provides greater privacy, les invasive and avoids anesthesia. RU cares about distributors in eastern Europe where it will not control black market if selling RU486. RU also concerns about poor medical conditions of customers in developing countries where RU can not estimate how big the market should be.
Regulatory set: The French government authorized RU to commercialize RU486. UK and Sweden’s governments also approved RU. But the US government under Reagan and Bush administrations did not favor RU486 so RU could not sell them in such huge market. Until the Clinton administration can RU receive encouragement to produce RU486 in the US.
Set of competitors: RU has almost no competitor who can produce the same product.
Stakeholder model analysis
Interests of stakeholders: RU faces strong conflicts of what its stakeholders want. Inside RU, executives and employees are themselves divided about the ethnics of marketing RU486. Outside RU, the same controversy arises among RU’s subsidiaries. RU’s mother company, Hoechst, has different interest with RU: while RU wants to launch RU486, Hoechst does not want to market it because of the fear that public opinion will destroy Hoechst’s economic power and reputation and boycott all its products. Furthermore, there are strong opposition of local, national governments and local communities in the US and in the rest of Europe where RU want to sell its product. These institutions are against abortion and therefore try to prevent RU from selling RU486. The reason of these conflicts is that RU does not mobilize the interests of these external stakeholders, co-build the acceptance of abortion between internal stakeholders and among external stakeholders. RU also does not co-opt these sets of stakeholders to accept RU486. RU has only a coalition-building with WHO by signing an agreement to conduct test in the developing world thus paving the way for RU to sell it in there. But this coalition is not strong enough since WHO depends on the US’s money.
Power and influence of stakeholders: The Health Ministry of France uses its power, influence and legal right to force RU to sell RU486. Therefore, after a long time of debates against public oppositions, RU486 can be is produced in France and soon occupies most of French abortion clinics. Without this intervention, RU could not be able to sell RU486 since public oppositions against the company are very strong.
Institutional field model to analyze the interactions between organizations and their environments:
Share beliefs: The French society share the belief that abortion is right with RU so it accepts RU486 as the most powerful tool for women for avoid undesired pregnancy. Then the UK, China and Sweden’s societies do too. The CEO of RU also believes personally that it is worth to launch RU486. Other groups in the US also support RU and push it to sell RU486. But the US and Singapore, people, anti-abortion groups and social wisdom are strongly against abortion because they believe in the right-to-life.
Shared values: in Italy, Austria, catholic countries of south Europe people and governments still do not agree whether abortion is right and women should have free choices to use RU486. They do not share with RU that RU486 is the right way to help women in abortion.
Mindsets: The change of mindsets against abortion is very difficult since they are well rooted in people’s mind, especially in America. So RU can not easily get social approval from the US and other countries.
Coercive isomorphism: RU is between two forces: the Clinton administration now urges RU to test and produce RU486 in there while abortion remains highly charged political and cultural issue and anti-abortion pressure rises to threat the boycott of RU’s products.
Isomorphism: Someone suggests RU to do the same way as IUDs, a pharmaceutical firm having similar process to RU had done earlier: give the license for technology for a non-profit Population Council and let it find a smaller company that is willing to produce RU486.
Normative isomorphism: Dr. Baulieu was awarded the 1989 Albert Lasker Award for Research in Clinical Medicine for his contribution to the knowledge of steroid hormones included RU486 in New York. This means that this professional organization has proved that RU486 is the right way to help women in abortion.
Pham Thi Thuy Ha
Organizational set model analysis
Input set: Roussel-Uclaf (RU) has established cooperative R&D agreements with leading French universities and research organizations who provide RU with technology development and knowledge to create new products. This is RU’s advantage to be a leader among other pharmaceutical companies. RU also has a strong partnership with Dr. Baulieu who is a star on French medical research a prominent researcher in the world’s medical research community to acquire new knowledge for R&D.
Output set: RU’s customers of RU486 are women who prefer buying it because it provides greater privacy, les invasive and avoids anesthesia. RU cares about distributors in eastern Europe where it will not control black market if selling RU486. RU also concerns about poor medical conditions of customers in developing countries where RU can not estimate how big the market should be.
Regulatory set: The French government authorized RU to commercialize RU486. UK and Sweden’s governments also approved RU. But the US government under Reagan and Bush administrations did not favor RU486 so RU could not sell them in such huge market. Until the Clinton administration can RU receive encouragement to produce RU486 in the US.
Set of competitors: RU has almost no competitor who can produce the same product.
Stakeholder model analysis
Interests of stakeholders: RU faces strong conflicts of what its stakeholders want. Inside RU, executives and employees are themselves divided about the ethnics of marketing RU486. Outside RU, the same controversy arises among RU’s subsidiaries. RU’s mother company, Hoechst, has different interest with RU: while RU wants to launch RU486, Hoechst does not want to market it because of the fear that public opinion will destroy Hoechst’s economic power and reputation and boycott all its products. Furthermore, there are strong opposition of local, national governments and local communities in the US and in the rest of Europe where RU want to sell its product. These institutions are against abortion and therefore try to prevent RU from selling RU486. The reason of these conflicts is that RU does not mobilize the interests of these external stakeholders, co-build the acceptance of abortion between internal stakeholders and among external stakeholders. RU also does not co-opt these sets of stakeholders to accept RU486. RU has only a coalition-building with WHO by signing an agreement to conduct test in the developing world thus paving the way for RU to sell it in there. But this coalition is not strong enough since WHO depends on the US’s money.
Power and influence of stakeholders: The Health Ministry of France uses its power, influence and legal right to force RU to sell RU486. Therefore, after a long time of debates against public oppositions, RU486 can be is produced in France and soon occupies most of French abortion clinics. Without this intervention, RU could not be able to sell RU486 since public oppositions against the company are very strong.
Institutional field model to analyze the interactions between organizations and their environments:
Share beliefs: The French society share the belief that abortion is right with RU so it accepts RU486 as the most powerful tool for women for avoid undesired pregnancy. Then the UK, China and Sweden’s societies do too. The CEO of RU also believes personally that it is worth to launch RU486. Other groups in the US also support RU and push it to sell RU486. But the US and Singapore, people, anti-abortion groups and social wisdom are strongly against abortion because they believe in the right-to-life.
Shared values: in Italy, Austria, catholic countries of south Europe people and governments still do not agree whether abortion is right and women should have free choices to use RU486. They do not share with RU that RU486 is the right way to help women in abortion.
Mindsets: The change of mindsets against abortion is very difficult since they are well rooted in people’s mind, especially in America. So RU can not easily get social approval from the US and other countries.
Coercive isomorphism: RU is between two forces: the Clinton administration now urges RU to test and produce RU486 in there while abortion remains highly charged political and cultural issue and anti-abortion pressure rises to threat the boycott of RU’s products.
Isomorphism: Someone suggests RU to do the same way as IUDs, a pharmaceutical firm having similar process to RU had done earlier: give the license for technology for a non-profit Population Council and let it find a smaller company that is willing to produce RU486.
Normative isomorphism: Dr. Baulieu was awarded the 1989 Albert Lasker Award for Research in Clinical Medicine for his contribution to the knowledge of steroid hormones included RU486 in New York. This means that this professional organization has proved that RU486 is the right way to help women in abortion.
Workforce Management: Employment Relationships in Changing Organizations
IUJ, Fall 2005
Pham Thi Thuy Ha
Wichita – success of the change initiative
Problems:
- High maintenance, fixed and operating costs.
- Razor-thin margins and low productivity (the facility consistently underperformed).
Reasons of the success of the initiative: the change was done through the right model and dimensions.
- Blocks to change: there is no block to change in Wichita. All employees were not resistant to change, instead they were willing and ready to change. Thus, there were no organizational inertia and no anticipated consequences of the change. This is because Jimenez integrated successfully the change initiative with key human resource practices, here is Keller.
- Model of change: the change initiative follows Tichy and Anne model in which there are 3 stages of changes: recognizing the need for change by generating a feeling of need to change and overcoming the cultural resistance to change in Wichita; creating a new vision by diagnosing the problem and mobilizing commitment of employees; managing the change. The role of Keller as a leader of change is a key for the success of the initiative. He extolled the importance of the initiative in the mind of his colleagues and acted consistently to involve and engage them in the process of change so that they were motivated to change.
- Dimensions of change: the four dimensions of the change initiative are incremental, continuous, bottom-up and emergent. Scope of change: the change efforts were incremental, being local in Wichita and involving in modifying its culture to one that values being more open about problems rather than hide them. Pace of change: the change is continuous by proceeding over time and one change leads to another. Source of change: the change is bottom-up. Even though the change is first driven by the CEO but it is broader, located farther down Wichita and is done by its employees. Process of change: the change is emergent because it started with no explicit maps (beginning with the meetings of the “problem chart”) but developed well over time and one change leads to another. Therefore, Wichita’s employees were socialized together as a unit, were willing to change continuously and thus the initiative was successful.
Lubbock
Problems: Lubbock has the same problems ad Wichita
- High maintenance, fixed and operating costs.
- Low productivity low productivity (the plant rarely met the production’s goal).
Reasons why the initiative was not successful: the change was done through the wrong model and dimensions.
- Blocks to change: there are serious blocks to change in Lubbock. All employees were strongly resistant and reluctant to change because of the human nature, organizational inertia and increasing forces from the management (Jimenez and her team) that block the change. Thus, anticipated consequences of the change occurred when implementing the initiative.
- Model of change: the change initiative follows Beckhard and Harris model in which the change focuses mostly in the future state. Jimenez and her team made erroneous assumptions about how Lubbock currently operates and about what groups and sub-units will be the most affected by the change. They ignored to think about the present stage to understand Lubbock’s managers and its employees’ attitude toward the change and its capacity to make the proposed changes in the proposed time frame. They also did not think about the transitional stage when Lubbock’s people are leaving the old system and learning how to make the new system work. Rather they focused only on the future stage with wrong assumptions. Furthermore, they could not integrate the change initiative with key human resource practices who can act as a leader to involve and engage employees to participate in the process of change like Keller at Wichita.
- Dimensions of change: the four dimensions of the change initiative are the inversion of those applied at Wichita: radical, punctuated, top-down and planned. Scope of change: the change efforts were radical - the change involved in fundamental changes inside Lubbock. Pace of change: the change is punctuated - having a clear beginning and an end as scheduled by the team. Source of change: the change is top-down. Unlike Wichita, the meetings of “the problem chart” are compulsory and set by the team. Process of change: the change is carefully planned - the team diagnosed the fundamental problems of Lubbock and applied the model of change that was already very successful at Wichita.
Jimenez thought that she could succeed in applying the change model in Wichita to Lubbock. However, the above analyses show that in fact she had modified this model before implementing it at Lubbock. Therefore, the change initiative was not successful.
Pham Thi Thuy Ha
Wichita – success of the change initiative
Problems:
- High maintenance, fixed and operating costs.
- Razor-thin margins and low productivity (the facility consistently underperformed).
Reasons of the success of the initiative: the change was done through the right model and dimensions.
- Blocks to change: there is no block to change in Wichita. All employees were not resistant to change, instead they were willing and ready to change. Thus, there were no organizational inertia and no anticipated consequences of the change. This is because Jimenez integrated successfully the change initiative with key human resource practices, here is Keller.
- Model of change: the change initiative follows Tichy and Anne model in which there are 3 stages of changes: recognizing the need for change by generating a feeling of need to change and overcoming the cultural resistance to change in Wichita; creating a new vision by diagnosing the problem and mobilizing commitment of employees; managing the change. The role of Keller as a leader of change is a key for the success of the initiative. He extolled the importance of the initiative in the mind of his colleagues and acted consistently to involve and engage them in the process of change so that they were motivated to change.
- Dimensions of change: the four dimensions of the change initiative are incremental, continuous, bottom-up and emergent. Scope of change: the change efforts were incremental, being local in Wichita and involving in modifying its culture to one that values being more open about problems rather than hide them. Pace of change: the change is continuous by proceeding over time and one change leads to another. Source of change: the change is bottom-up. Even though the change is first driven by the CEO but it is broader, located farther down Wichita and is done by its employees. Process of change: the change is emergent because it started with no explicit maps (beginning with the meetings of the “problem chart”) but developed well over time and one change leads to another. Therefore, Wichita’s employees were socialized together as a unit, were willing to change continuously and thus the initiative was successful.
Lubbock
Problems: Lubbock has the same problems ad Wichita
- High maintenance, fixed and operating costs.
- Low productivity low productivity (the plant rarely met the production’s goal).
Reasons why the initiative was not successful: the change was done through the wrong model and dimensions.
- Blocks to change: there are serious blocks to change in Lubbock. All employees were strongly resistant and reluctant to change because of the human nature, organizational inertia and increasing forces from the management (Jimenez and her team) that block the change. Thus, anticipated consequences of the change occurred when implementing the initiative.
- Model of change: the change initiative follows Beckhard and Harris model in which the change focuses mostly in the future state. Jimenez and her team made erroneous assumptions about how Lubbock currently operates and about what groups and sub-units will be the most affected by the change. They ignored to think about the present stage to understand Lubbock’s managers and its employees’ attitude toward the change and its capacity to make the proposed changes in the proposed time frame. They also did not think about the transitional stage when Lubbock’s people are leaving the old system and learning how to make the new system work. Rather they focused only on the future stage with wrong assumptions. Furthermore, they could not integrate the change initiative with key human resource practices who can act as a leader to involve and engage employees to participate in the process of change like Keller at Wichita.
- Dimensions of change: the four dimensions of the change initiative are the inversion of those applied at Wichita: radical, punctuated, top-down and planned. Scope of change: the change efforts were radical - the change involved in fundamental changes inside Lubbock. Pace of change: the change is punctuated - having a clear beginning and an end as scheduled by the team. Source of change: the change is top-down. Unlike Wichita, the meetings of “the problem chart” are compulsory and set by the team. Process of change: the change is carefully planned - the team diagnosed the fundamental problems of Lubbock and applied the model of change that was already very successful at Wichita.
Jimenez thought that she could succeed in applying the change model in Wichita to Lubbock. However, the above analyses show that in fact she had modified this model before implementing it at Lubbock. Therefore, the change initiative was not successful.
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