Incomplete Paper needs Recommendation and a Table-DUE: Tonight

Objectives Chapter 9 Developing a Strategy and Preparing Country Analysis Reports • Strategic Analysis - Point A: S.W.O.T. Analysis 320 Exploring International Business Environments What You Will Learn - Part B: Infrastructure Analysis - Part C: Managing and Culture Ownership advantages I Location advantages } Internalization advantages l } 1<\;00 } Country analysis ~ /.------..... /' " Figure 9-1: The Process of Internationalization Developing a Strategy ,lnd Preparing Countrv Analysis Reports 321 ··";i':.ii~·"··~··tt,,. • Distribution was shifting away from department and stationery stores to mass marketers.

• In some country markets, consumers favored Parker's expensive fountain pens (e.g. France and Italy), but in many others ballpoint pens were pre­ ferred. This was particularly true in the Scandinavian countries. To make matters worse, Parker did not tailor its advertising for each country mar­ ket. In fact, it developed what advertising experts call "short copy" ads, guided by the belief that the fewer the words, the fewer the number of mistakes that would occur when the original English was translated into the languages of the many nations targeted by Parker. By 1986 the effort had collapsed, and the executive team had been replaced by managers more focused on careful analysis. Parker pens could be sold as a global product in some countries, but in others they would have to be marketed in response to local customs, values, and business practices. 1 fate lan­ s to the :on­ the 19h 'ere lun­ yor hat lter­ ~rna- 19 if, :egic )un­ hap­ sian is in fac­ egic low.

tion .We �er­ ran­ 322 Exploring International Business Environments The goal of strategic analysis is to determine how a company can move from a cur­ Strategic rent point, A, to some future desired point, B. The analysis process requires a deter­ Analysis mination of the current condition of the organization in terms of its strengths and weaknesses and the threats and opportunities it faces. The next step is the identifi­ cation of the desired condition of the firm at a future time, perhaps one year for a short-term or five years for a long-term analysis. One company, Mats'Ushita ofJapan, claims that its long-term planning focuses on 200-year cycles, but most firms believe that realistic strategies only can be formulated for periods up to ten years. The final step involves the identification of how the company will get from point A to point l}"­ !r­ ld fi­ 'a n, 'Ie al nt m $.

m ar ut al re 19 ut is nt b­ 19 ;h le n­ er rs ly y­ st ts ld [l­ r­ It.

th a­ ts 11­ ti­ le Developing a Strategy and Preparing Country Analysis Reports 323 guiding assumption that all possible modes of internationalization might occur. In . t this way strengths and opportunities which really are weaknesses and threats will be revealed.

The SWOT approach also requires a sense of who competitors are and what they are doing, and, again, the focus is on what they are doing globally rather than merely domestically. A number of factors are considered. Products.

A company going international or expanding more into global markets needs to have innovative, differentiated products and, for large companies, full product lines. One-product firms seeking to dump excess u.s. inventory on world markets may have some success, but they certainly do not need elaborate strategic analy­ sis to plan the reduction of warehouse items. A long-range, broad geographic focus, however, requires the ability to meet the needs of foreign distributors, retailers, and end users for a full range of products, in various price categories, which do something not done by local products. Distribution.

Successful producers of both goods and services usually have many routes estab­ lished to the final users. A firm used to only one channel of distribution, however, is unlikely to be in a position to internationalize, since its channel management ability is weak. Moreover, one of a company's great strengths may be its ability to gain power in a distribution channel, perhaps by providing services or financing to channel members. With power comes control, and control can be a source of profit. This is particularly true in international business, where foreigners often have a great deal of trouble penetrating host country markets and managing chan­ nel relations in a profitable manner. Marketing.

Companies which have differentiated products must be able to communicate that fact to the marketplace. Thus sophisticated product and brand managers must be available, as must competent sales, advertising, and promotion managers. Manufacturing.

The major selling point for highly standardized products is price, which for the most part is based on unit cost. Global products producers, then, must have process technologies and manufacturing expertise which keeps unit costs low. This is not as big an issue for differentiated products producers whose products are in big demand in niche markets, but even here a low cost-low price focus is a great strength.

Financing.

As noted above, while access to internally-generated funds are good, a company cannot internationalize without having relationships with big international banks, 324 Exploring International Business Environments In addition, company employees must be competent in managing currency risks, using letters of credit, and procuring commercial and political risk insurance. Management.

Beyond specific international business skills, the SWOT analyst 10Qks at the qual­ ity of management, especially in terms of its flexibility and human resource man­ agement skills. International business requires a willingness to adapt rapidly to changing conditions and the ability to hire or train competent expatriates and to recruit quality host-country nationals. A third desired management strength is an awareness of and sensitivity to stakeholder issues. International firms must oper­ ate under multiple jurisdictions in environments with varied cultures and reli­ gions. All of these entities will make demands on an organization which must be dealt with. Point B: Strategic Fit or Strategic Intent Once a SWOT Analysis identifies a company's current status, the next step in strate­ gic analysis is to determine where the company will be internationally in, say, five years. Two ways of doing this are the strategic fit and strategic intent approaches.

Strategic fit is an exercise for a company which believes it must adapt itself to the international business environment. Strategic intent involves a more active process in which a company decides on its mission and goals and then actively seeks to carry out its plans (see Figure 9-2). Strategic Fit.

Co-Steel Inc. is a Canadian mini-mill producer operating in a number of foreign markets. During the 1980s, it developed a strategic fit analysis of the global steel mar­ ket and found that countries were moving towards protectionism for their steel industries. In addition, it determined that clients wanted to be able to order steel and have it delivered with only minimal delay. Finally, it observed a big increase in inexpensive subsidized steel coming into the markets from Brazil and Korea. 3 To adapt to these changes, the company undertook a number of steps to ensure that it would maintain its high growth well into the 1990s. As part of its adaptation strategy, Co-Steel built plants abroad in the United States and England so that it could avoid any U.s. and E.D. trade barriers which might occur. It also located the factories near major cities so that the waste metal it needed for production would be easily obtainable and its transportation time to major clients could be reduced. This move ensured that it would have a ready supply of product always on hand which could be moved rapidly to customers. Finally, the firm sought to reduce its costs so it could compete with subsidized producers. It did this by decentralizing and letting on-site managers find ways to cut costs, running a lean headquarters staff, providing profit-sharing incentives to employees, and offering on-the-job multiple-skill training. • [Jeveloping a Str,ltegy and Preparing Country Analvsis Reports 325 ... ~~.~~.~~~.Iy~.i~ ....

Strategic intent approach Action options Point B: Where we will be in five years Figure 9-2: The Elements of Strategic Analysis Strategic Intent.

Mid-sized firms like Co-Steel usually follow an adaptive strategy, but other com­ panies, especially large multinationals, are more active and pursue a strategic intent approach in which concrete goals are stated and action plans developed to achieve the goals. General Electric wants its units to rank either number one or two in their markets worldwide, and it will divest if it is unable to meet its goal. Another com­ pany, Spalding, a U.S. golf ball manufacturer, decided that it should sell more of its product in Japan, so it took steps to enter the market in the early 1990s. The balls were sold in boxes of four, but sales were well below expectations. Market research revealed that four is an unlucky number in Japan, and golfers, a superstitious group, avoided the product. General Electric and Spalding illustrate the two sides of the strategic intent coin. An active, creative, hard-charging strategy usually is admirable, but it can be a disaster if a company ignores a detailed evaluation of the country environment where it wants to operate. 326 Exploring International Business Environlllents Core competence The attributes of a company which dif­ ferentiate it from its competition. While a strategic intent approach may foster a weak country analysis, this does not mean that the passive strategic fit approach is best. Although careful busi­ ness environment analysis is good, a company also needs a vision which inspires it. Some corporations develop a vision in terms of a core competence, the attributes of the organization which differentiate it from its competition. Honda's compe­ tence is in motors, and its sense of a core competence influenced th'e firm to estab­ lish an auto manufacturing plant in Ohio to produce the well-known Accord. The Xerox Corporation's competence is in imaging, and it constantly invests in tech­ nology which gives it the power to pick and choose its international markets in an active manner. No matter which country it enters, Xerox knows that it will be a top competitor.

Getting to Point B When a company knows where it is and where it will be, it is ready to identify its options for implementing change. A decision on which options to choose will emerge once country and market analyses have been performed. The change process involves an analysis of organizational structure and competitive focus options. Organizational Structure Options.

When a company becomes aware of how extensive its international activities are likely to become, it is in a position to determine the organizational structure which it needs to develop. In Figure 9-3, five types of organization are listed, and the establishment of these structures is a function of foreign sales as a share of total sales and the diversity of the international product line. i=' .~.. :c;..

> ::::0.... E a.. Matrix organization (or strategic business units) Foreign sales as a percent 01 total sales Figure 9-3: Determinants of Organizational Structure ...

~ f r i I I t r ( r s l­ • . s s .­ I- e I­ II J s 11 e s e Strategic 1 business unit e A semi-autonomous 1 unit with a defined mission focused on certain products and markets. Developing c1 Stralegy ann Preparing C:ountry f�alysis Reports 327 ..

• 328 Exploring Internatiollal Business Envirollillents extends loans to retailers and expects them to do its bidding in return, especially regarding not carrying competitors' products in their showrooms. A fifth strategy is strategic alliances, in which multinationals link up with innovative companies to gain technology and with firms in country markets to gain local market expertise.

Once a company knows where it is now, where it will be or wants to'be in five years, Screening and the competitive strategies and organizational structure options available to move r the firm from its current to its future position, it begins a process of screening and I ~ country analysis. Screening identifies a set of countries which are candidates for the establishment of business activities. These might involve profit-oriented trade and t ! investment, cost-focused investment, or perhaps simply the establishment of a r presence in a country in response to a competitor move. By the time country screen­ ing occurs, the company will have begun to home in on the strategy and structure which is likely to characterize its actions over the next few years, but it always will be primed to change as the international business environment changes. General I Electric is expanding its strategic alliances in East and Southeast Asia, in its effort to become a market leader in a number of markets there over the next five years, ~ and this approach guides it in screening countries. GE asks itself, "Can we find local partners who will help us to become either number one or number two in targeted markets?" However, if it becomes clear, as may well be the case in Indone­ sia, that local partners are more trouble than they are worth, GE may fall back on its ability to go it alone with low-cost, low-price global products either exported to the region or produced in wholly-owned factories. In this case its screening strat­ egy would shift from the identification of a set of countries with powerful and well-connected firms suitable for partnerships to a set with good conditions for foreign direct investment in greenfield operations.

Screening may be based on actual visits to a number of countries to observe con­ ditions and to talk to officials and potential partners or clients. In addition, in-depth analysis of reports and data bases fills out gaps in the picture. Here, print, CD­ ROM, and Internet resources are consulted (see the IBUS 300 Home Page on the World Wide Web). The ongoing strategic analysis guides the research by pro­ viding a set of criteria for selecting a target set of countries. For example, in the early 1990s Tyco Toys sought market expansion and looked abroad for toy-con­ suming nations (see the end of chapter case). It focused in on a set of countries in Europe. At the same time, MatteI wanted to develop its cost control strategy and screened countries for production facilities, eventually concentrating on East and Southeast Asia. After country analyses, Tyco selected four E.D. nations as sites for subsidiaries whose goal was penetrating and expanding toy markets. MatteI select­ ed China as a location for licensing operations and also invested in Indonesia and Malaysia. In both cases the companies' strategic analysis dictated screening activ­ ities and the topics to be emphasized in the country analysis. Although an analysis of the business, economic, political, social, cultural, and infra­ Country structure environment in a country responds to a strategic analysis:in reality it is Analysis an ongoing process. Strategies are constantly changing, as are country environ­ ments, and the nature, scope, and focus of country analyses will change. Moreover, country changes may dictate strategic changes. Until recently, companies seeking lly !gy - itO se.

lfS, lve nd he nd fa m- ITe ,ill ral ort rs, nd in le- on to at­ nd 'or m­ lth D- he '0­ he n- m ld ld or :t­ ld v- a­ is :1­ ~r, Developing a Strategy and Preparing Country Analysis Reports 329 market expansion in Europe analyzed E.D. countries like Spain and Italy for FDI a in production facilities. This made sense, since within-E.D. production eliminated the problem of trade barriers, and labor costs would be moderate in the poorer countries. However, as trade barriers came down in the E.D. over the last 20 years and after the collapse of communist regimes in Central and Eastern Europe, pro­ duction in Poland and Hungary with export to the E.D. became a possibility. New screening and country analyses occurred, and these drove changes in strategies.

General Motors, for example, produces Opels in Germany, but over the next decade it will open factories in Central Europe. Table 9-1 lists the elements of a country analysis, and a sample country analysis report is included in the Appendix to this chapter. Notice that a country analysis has three basic parts, followed by a set of con­ clusions about the country relative to the firm's strategy and a recommendation. The recommendation often has two parts. First, the analyst suggests "go" or "no go" actions. "Go" means that further analysis of markets and entry strategies should proceed. "No go" means that the country is not a suitable candidate for any kind of business involvement. Second, if a "go" recommendation occurs, a suggestion may be made about the timing of the action (now or wait) and the entry strategy Table 9-1: Elements of a Country Analysis 19 330 Exploring International Business Environments i I Part A: Economic, Political, and Legal Conditions Each part of the country analysis has a specific task. Part A covers the business and economic climate. Part Bexamines the infrastructure which supports the econom­ ic climate. Part C looks at the culture and the likelihood that the company's expa­ triates can manage successfully in the country. " Business Climate. No business operations will be successful unless the country has a business cli­ mate which is favorable to companies. Depending on the firm's goals, a number of factors are considered: nd 'm­ pa- cli­ rof :ial lal­ ler­ not ave 7l al lted ~nd­ vity.

mId zed, Var­ ioes sev­ ive­ ; the Developing a Strategy and Preparing Country Analysis Reports 331 pz 332 Exploring International Business Environments Part B: Infrastructure Analysis The focus in this part is on the factors which support the economic and business climate and allow it to function. The important economic infrastructure services to be examined cover power generation, telecommunications, transport, water, san­ itation, and the financial sector. Within social infrastructure, analysts will examine demographic conditions and projections and then home in on the health and edu­ cation resources which influence labor markets and productivity. In some coun­ tries, natural and physical resources may be discussed, especially in conjunction with an analysis of options for locating main offices, production facilities, and sup­ port services (e.g. warehouses). As discussed in the end of chapter case, Tyco chose to locate its E.D. distribution center in Belgium, probably because of its central position and easy access to port facilities at Antwerp, while MatteI's choice of south­ ern China gave it access to the main consumer markets in the country and to export markets through Hong Kong. Part C: Managing and Culture Even if a country has a good economic and legal environment and suitable infra­ structure, its cultural and religious values, beliefs, and practices may create unac­ ceptable conditions for a foreign company. A careful analysis of culture, using the Hofstede scales and other resources, will establish commonalities and differences among host, home, and corporate cultures. Religious practices in Iran during the 1980s and 1990s made it almost impossible for foreigners to do business there, but this was an extreme case. In most situations, expatriates can adopt employee man­ agement practices tailored for the local culture, if they are allowed to do so. The fact is that many corporations use relatively standardized human resource manage­ ment systems because they are comfortable with them and costs are easily con­ trolled. In these cases, culture analysis reveals the strengths and weaknesses of their systems in the target country. For example, we saw in Chapter 7 that Intel urges its staff to be outspoken and discursive, since the company's strategy is based on differentiation through creativity and innovation which emerge out of intense discussions and even conflict. This approach makes employees in the Japanese subsidiary uncomfortable, yet Intel has done very well in Japan. Its expatriate man­ agers, knowing the gap between Intel culture and Japanese culture, do not rely as much on creative conflict in Japan as they do elsewhere, and they are careful in their hiring to select engineers who are somewhat tolerant of Intel's foreign ways.

In addition to managing host country employees, the company must deter­ mine the problems its expatriates will face in the foreign culture and either devel­ op ways to help them cope or provide extra compensation for their extra burdens. One coping devise is language training, but the company has to weigh the costs and benefits of having its expatriates learn the local tongue. If strategy dictates that managers gain broad experience in global markets selling global products, lan­ guage skills may not be important. However, when a firm concentrates on tailor­ ing products and services for selected markets in a few targeted .(;puntries, then language ability is crucial. We can see here how strategy analysis drives screening activities and country analyses. It dictates what is important to a company and ll1ess es to san­ nine edu­ oun­ :tion sup­ hose 1tral IUth­ port 1&a­ nac­ ; the nces phe ,but nan­ . fact age­ :on­ ~s of ntel lsed ~nse lese lan­ vas lin lYS.

ter­ rel­ ~ns.

md hat m­ or­ len ng nd - Chapter Summary Country Analysis Group Report Project Developing a Strategy dnd Preparing Country Analysis Reports 333 what is not and directs its attention to countries with business environments which are suitable platforms to support activities in pursuit of corporate goals.

A company which is internationalizing or contemplating an expansion in inter­ national markets undertakes a complex series of planning efforts involving the following: 334 Exploring International Business Environments Part C: Help your firm's American managers who might work in the country (a) understand the cultural environment they will encounter in the workplace, (B) decide whether or not it is suitable, and (c) develop appropri­ ate ways of managing people, information, and things. Item (c) is the most important. Recommendation: Evaluate the findings and justify a Go/No go recom­ mendation (or wait, use a joint venture, etc.). List in two columns all the pros and cons developed in Parts A, B, and C. Developing a Strategy and Preparing Country Analysis Reports 335 rk Appendix: A Country Analysis Report nt Ie 'i­ ;s, :l­ le ta a The report reproduced here was prepared for a company contemplating an expan­ sion of its U.S. fish processing operations to Thailand. COUNTRY ANALYSIS OF THAILAND NEPTUNE SEAFOODS CORPORATION Prepared by:

Tami Hambleton Kathy Fazekas Julieta Cociasu I ~ 336 Exploring International Business Envil'Onments CONTENTS The Opportunity PART ONE: Political, Legal and Economic Environments Thai Politics and Policy A Legal Guide to Doing Business in Thailand The Thai Economy at a Glance PART TWO: Infrastructure: Natural, Human, and Physical Resources Natural Resources Human Resources Physical Resources PART THREE:

Cultural Environment General Characteristics of the Thai Culture Social Structure Religion Language Cost/Benefit Analysis to Doing Business in Thailand Works Cited xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx T iI " 0 a [ a iJ; v d r-.

t< E 0 0 Thailand will supply inexpensive labor xx which will reduce the company's capital xx and operating costs. xx Direct investment in a subsidiary usually xx is long term. Joint ventures can be aban­ xx doned more easily. I()( Neptune's strategy is I()( to expand sales in Europe, competing (X on the basis of low cost-low price. ex ac ac x Developing a Strategy and Prep,lring Country Analysis Reports 337 The Opportunity With an eye on diversifying Neptune Seafoods' present product line to include yellow fin sole, the Chief Executive Officer has requested that a feasibility study be undertaken. The capital cost (for retrofitting an Alaskan plant with automated Baader fillet machines) to process yellowfin into fillets at one of our existing Alaska operations is extremely prohibitive. Thus we are investigating investment in a secondary seafood processing plant for export-oriented pro­ duction in various Asian countries where the utilization of hand-filleting would significantly reduce the cost of the project. In Neptune's preliminary screening, Thailand surfaced as a key site for our company's business venture. Due to the uncertain future of Yellowfin resources, manufacturing would be on a joint venture basis as opposed to direct investment. We intend to bring in Nep­ tune managers to oversee the production end of our operations; however, we will employ Thai managers to assist with other operational aspects. Our basic thought is to bring whole frozen Yellowfin sole into Thailand, where it would be hand-filleted utilizing local labor, refrozen, packaged, and exported to the United States and Europe. The goal of this environmental analysis is to provide an overview of the suitability of Thailand's investment climate for our project proposal. We have pursued that goal through a three-pronged analysis of: 338 Exploring International Business Environments Neptune's operation could be the target of anti-foreign sentiment. Thai Politics and Policy Historical Overview Historically known as Siam, Thailand was an absolute monarchy under the Rama dynasty until the army seized power in 1947, setting a precedent for a series of military regimes until August 1988, when General Chatchai t Choonhaven was appointed Prime Minister. Thailand has been predomi­ 1 nantly ruled by a succession of military governments with strong leaders act­ ing very much as autocrats, and deriving their legitimacy from the monarchy.

Brief periods of civilian government have been characterized by factionalism among competing interest groups, precipitating further military takeovers designed to restore stability. Changes of government by coup d'etat have been numerous although generally bloodless. The present day Thai monarchy con­ tinues to play an important role in the country's affairs, acting as a stabiliz­ ing force in times of political instability. Following the September 1992 general elections, a democratic coalition emerged to capture an effective lower house majority, with Democratic Party leader Chuan Leekpai elected as the nation's first non-wealthy, nonmilitary leader in 60 years. Short Term Political Forecast The Thai political environment has changed dramatically with the formation of a five-party coalition government under Prime Minister Chuan Leekpai.

The coalition comprises four anti-military parties: the Democratic Party of t Prime Minister Chuan, Palang Dharma (Moral Force), the New Aspiration j Party, and Solidarity, plus the Social Action Party that is generally support­ ive of the military. For the first time civilians now dominate Thailand's gov­ ernment and only time will tell if the military will be content with the new structure. Little unites these parties, and the coalition remains fragile and highly susceptible to interference by the military. As a result, in the short term, the Chuan government appears unstable. l Thai politics are among the world's most unpredictable, and political commentators are not ruling out formation of a new coalition, or dissolution of parliament and fresh elections by year's end. 2 Given Thailand's turbulent political past and uncertain fore­ cast, Neptune's investment decisions should reflect the possibility offuture political upheaval and moderately high country risk. Government Policy The Thai government maintains a competitive, export-oriented, free market philosophy, and encourages foreign direct investment as a means of pro­ moting economic development, employment and technology transfer. 3 Thai­ land's strengths for Neptune include: (1) an open market-oriented economy, Costs imposed on Neptune's imported machinery through tariffs and duties will below.

This service could be very helpful to Nep­ tune, if it pursues the joint venture entry mode.

Neptune will want to agree with its Thai partner on how to settle any disputes between themselves. Developing a Strategy and Preparing Country Analysis Reports 339 GATT, and the free trade rules imposed under the GATT have had a tremen­ dous influence on the pace of liberalization of the Thai economy.s Further, Thailand's support of the GATT and the new World Trade Organization will reduce the operating cost of our investment project. To broaden Thailand's tra­ ditional agrarian base the government has long encouraged industrialization, specifically by making incentives available to encourage investment from domestic and foreign sources. In particular the Chuan administration is focused on developing Thailand's regional areas to address income dispari­ ty between urban and rural districts, and to relieve industrial concentration in the Bangkok Metropolitan Region (BMR). In addition, the Thai govern­ ment strongly supports export activities as a way of generating foreign exchange and avoiding imbalances in the balance of trade. 6 Neptune's export­ oriented project will be seen by the Thai government as a step toward pro­ moting industrialization, employment, and the transfer of knowledge. Investment Climate The government, through the Board of Investment (BOI), Industrial Estates Authority of Thailand (IEAT) and other agencies, encourages investment by providing a wide range of incentives, guarantees, and services to both Thai and foreign investors under the 1977 Investment Promotion Act and the 1979 Industrial Estates Authority Act. The government places considerable empha­ sis on the use of BOI and IEAT privileges to achieve policy targets related to export activities and to the decentralization of industries into the regional areas. In conjunction with fiscal investment incentives, the BOI provides busi­ ness-oriented services. These include the provision of investment informa­ tion, investment opportunity surveys, and of particular interest to Neptune, the identification of potential industry specific joint venture partners. Assistance is also provided to companies in obtaining permits and licenses required for setting up a business in Thailand. In addition to Neptune's qualifying for privileges oriented to exporting, we should seek subsidies by locating in a less developed zone and/ or setting up within an Industrial Estate. A legal Guide to Doing Business in Thailand Business Law Structure Thailand's legal system is based on a civil law system with influences of com­ mon law. Foreigners in Thailand derive their legal rights primarily from the domestic laws of Thailand. In general, we will enjoy the same basic rights as Thai nationals. Thai law recognizes four types of business organizations: (1) the ordinary partnership, (2) the limited partnership, (3) the limited compa­ ny and (4) the public limited company. Each Thai company is registered with the Department of Commercial Registration of the Ministry of Commerce and for taxation purposes with the Revenue department. Besides using the Thai court system, Neptune may establish its own arbitration agreement. At present Thailand is not a member of the International Center for the Settlement of Investment Disputes. 340 Exploring Interncllional f3usiness Environments Many countries make it difficult to get prof­ its out of the country.

This is an important point. Key l.egallssues for the foreign Investor This valuable infor­ mation gives Nep­ tune a sense of what its labor costs will be.

Some foreign " investors avoid unions. Others find them helpful as intermediaries between managers and workers. Developing cl Slrcllegy aile! PI'eparing Country /�cllysis Reports 341 exchange and financial liberalization policy is to create an environment that stimulates a more efficient economic framework; this will help to keep Nep­ tune's cost of doing business low and maintain our competitiveness in export markets for our goods made in Thailand. 9 Labor Regulations Most Thai labor legislation falls under the Labor Relations Act of 1975. The Factory Control Department of the Ministry of Industry also administers labor laws. The Department inspects factories, and has the right to withhold licens­ es if worker safety standards are not met. lO 342 Exploring International Business Environments Roads are clogged with traffic in Thai cities. EIU The Economist Intelligent Unit pro­ d uces useful reports on countries. These are often available in business libraries. The Thai Economy at a Glance Economic Outlook Despite prolonged uncertainty about the coalition government's stability, Thailand's economic growth is expected to be strong over the nE:'xt two years. 12 The export sector has been the principle engine of growth for the Thai econ­ omy. However, in the midst of rapid economic growth, the economy shows sign of overheating, with infrastructure constraints becoming more evident, and continuously rising wages. As a result public investment is being accel­ erated to improve the country's infrastructure so it does not become a major impediment to future growth. Because of rising wages and competition from other emerging markets in the region, Thailand can no longer compete in labor-intensive activities solely on the basis of low labor costs. 13 While rising wages will certainly increase the direct cost of our proposed investment, Thai wages would have to increase substantially to reach Alaskan levels.1 4 Key Economic Investment Indicators Economic statistics are robust almost across the board. The growth in real GOP, forecast at 8.2 percent in 1993, projects an increase over 7.8 percent in 1994, and is expected to continue around 8 percent in 1995. The budget is pro­ jected to remain in surplus in 1995, despite the large jump in public sector spending on infrastructure projects. A rapid increase in credit and liquidity, partly caused by offshore inflows, has served to put downward pressure on interest rates. The prime lending rate is currently about 11.75 percent, down from 14 percent in January 1994. Interest rates, however, have likely reached their bottom, as the rapid growth of liquidity and the pickup in economic activity have led to an upward trend in inflation. During the first quarter of 1994, inflation increased at an annualized rate of 4.8 percent. In the face of rising inflationary pressures, monetary policy will tighten over the remaining course of 1994 and into early 1995. As a result, interest rates have begun to move up. Although the Bank of Thailand (BOT) will be cautious about driving interest rates too high, the lending rate is still likely to move up to a range of 12.25-12.75 percent for the latter half of 1994. Although inflationary pressures showed signs of becoming more serious in 1994 the EIU is predicting that consumer price inflation will fall over a pro­ jected three-year outlook beginning in 1995. With moderately high interest rates and controlled inflation, the currency (which is managed by the gov­ ernment) should remain stable in the 1995-2000 period(question to the stu­ dent: did the currency remain stable in this period? What happened to the Thai bhat? Why did it happen? For information, look at Prof. Nouriel Roubi­ ni's Asian Crisis home page on the WWW). , r Developing cl Strategy and Preparing Country I�cllysis Reports 343 PART TWO: ty, Infrastructure: Natural, Human, and Physical Resources !2 n­ Natural and Power Resources vs The natural resources of Thailand must be adequate to meet the operational 1t, demands of a secondary seafood processing plant, as must access to electric­ ~l- ity. This section covers Thailand's land, regional areas, environmental aspects, or and electricity at Neptune's disposal.

m Thailand at a Glance in Thailand covers 198,500 square miles and has a population of more than 59 19 ai million people, with an excess of five million in the Bangkok area (BMR).

The population growth rate is 1.36 percent, which is comparable to other neighboring countries and is higher than the United States.! The country has four main regions: (1) the Northern Mountains, (2) the Khorat Plateau, (3) the al Central Plain and (4) the Southern Peninsula. 2 To relieve industrial concen­ in tration in the BMR and achieve balanced growth throughout the nation, the D­ Chuan government has pursued a policy of decentralization. Investment )r privileges are in place to support government goals in decentralizing Thai­ y, land's industrial base. For administrative and policy purposes, the country .n has been divided into three "Investment Promotion Zones." Zone 1 com­ n prises the Central Plain. This zone includes the BMR, which has the nation's d highest concentration of people, traffic, and pollution. Zone 2 covers the ten ic provinces surrounding Zone 1. The remainder of the country makes up Zone 344 Exploring Internation'll Business Envirollmenls A large amount of infrastructure data on social and envi­ ronmental issues is published annually by the World Bank.

In developing coun­ tries finding a steady source of electricity is a major issue.

High infant mortality may indicate poor health conditions and low productivity. Songkhla is the second most populated city in Thailand, providing Neptune with a larger base of people from which to draw production workers.

The Southern Industrial Estate, located in Songkhla Province, is targeted for Electronic and Seafood Processing industries. In addition tovBOI tax-based and service related incentives, locating within an Industrial Estate would pro­ vide the following additional benefits: (1) entry permits for skilled foreign workers, (2) complete infrastructure (developed land, utilities, services, cen­ tral waste water treatment facilities, and solid waste treatment facilities) and •• e d d l­ n l- d e e 11 If 11 11

) i t For low value-added, global products such as fish fillets, wage rates are an impor­ tant consideration. Developing a Strategy and Preparing Country Analysis Reports 345 reported, and the Thai people have a high incidence of pulmonary disease.

Thailand is food self-sufficient due to the abundance of agriculture; therefore, malnutrition is of little concern.

The country operates on a multi-tier minimum wage system depending on the cost of living in the different provinces. However, Thai wages are not ade­ quate to support a worker and his/her family; consequently more than 60 percent of the Thai population is in the three lowest income brackets. This disparity is an indicator of potential social unrest in Thailand. However, the Thai people lessen this problem by living in homes with extended families that contribute to the household. In this situation they are able to maintain a mar­ ginally acceptable standard of living. 6 Thai Labor force 346 Exploring International Business Environments Foreign investors often try to borrow money in the host country. However, this is not always possible. Physical Resources In this section we will look at the physical resources in Thailand to determine if transportation, buildings, and financing needed for our project are ade­ quate to suit Neptune's needs. Transportation Transportation in Thailand ranks among the best in Southeast Asia. The coun­ try has about 8,100 miles of paved roads and more than 2,400 miles of railroad track. There are 105 airports available, with 96 that are currently usable, and four international airports that provide daily flights between Thailand and other nations. Zone 3, on the other hand, has a limited transportation infra­ structure except in the Industrial Estates. The limited infrastructure will not inhibit us, because we will be on or close to the Gulf of Thailand, and most of our business will be conducted by cargo ships. Rivers and canals provide local transportation for passengers and cargo. The country has 6 main seaports to handle container cargo: Bangkok, Sattahip, Si Racha, Songkhla, Pattani, and Phuket. Songkhla, Pattani, and Phuket are located in Zone 3. Locating in this area thus would be a huge benefit for our company, because of our requirements to import yellow fin sole, process it on site, and export it to the e i i i Developing a Strategy and Preparing Country Analysis Reports 347 PART THREE: Cultural Environment In our search for a potential market in Thailand, we need to evaluate, under­ stand, and respect the beliefs of the Thai individual as a part of the Thai cul­ ture. In this section we attempt to compare American and Thai culture by analyzing sociological and psychological behavioral patterns, education sys­ tems, religion, and language. A Working Definition: The common beliefs, social forms, and material traits shared by agroup of individuals is broadly defined as culture. In a much larger sense culture is away of life. It integrates human behavior, which includes speech, thought, and action. In this context the individual plays a central role in his!Jter culture. General Characteristics of the Thai Culture Thai cultural characteristics and values have withstood the test of time throughout history. Even in modem times Thailand has been able to retain its cultural independence. This is an astonishing fact for a developing country.

While most Asian countries view Western investment as a threat to traditional values, Thailand is wide open to all modem technology. Thailand has great assimilative capacity, and Thai people know how to move with the times without losing their identities. As a consequence, foreign investors are wel­ come and looked upon as a potential for further development rather than a threat to society. Thai cultural values, then, will dampen country risks due to political upheaval. Another important characteristic of the Thai people is their reluctance to sacrifice the present for the future. There are certainly good and bad effects that emerge from this philosophy, but unlike Western cultures where there is great concern about the "long run," for the Thai people the future is very uncertain and yet to come. 1 Business decisions thus are made quickly and profits are reaped without delay. When doing business in Thailand, Neptune will need to generate some immediate, tangible benefits for its local partners.

Finally, it is important to notice that Thai people always strive to achieve interpersonal harmony. Therefore, expressions of true feelings and disagree­ ment with others are disguised and suppressed. This behavior, commonly known as kreng chai, simply implies being mindful and considerate to others' feelings and wishes. Usually one doesn't want to interfere with what others do; even officials are reluctant in punishing too severely because they want to maintain a good relationship with everyone. The philosophy of sabai and mai pen rai implies flexibility and a high degree of tolerance of deviations from 348 Exploring International Business Environments This kind of decision is common in foreign investments.

The workplace needs to be a social envi­ ronment, not just an economic one. norms, commitments, and obligations. 2 These words are popularly translat­ ed as comfortable and never mind. But this does not mean that Thai people are inconsiderate of their social duties. Forms of behavior regarding commitment to obligation are endless in this country. People live in a continuous circle of accepting and returning favor, the bunkhun relationship. Whliln locating in Thailand, we can expect fair and considerate treatment from the locals, but we also need to respect their way of life. Social Structure The best way to understand Thai social values is to look at the basic unit of society, the family. The typical family is the rural family, which is an extend­ ed family, with several generations living under one roof. This aspect of Thai life is changing as the migration from villages to towns increases due to mod­ ernization. Despite the apparent changes, beneath the surface of urban life traditional Thai values are still strong. This is a reflection of the fact that the majority of city dwellers have come from village backgrounds. In addition, over the centuries the Thai cultural heritage has demonstrated its ability to bend without breaking.

Family ties are very strong in Thai society and a local manager would often be pressured to hire afamily member over the interests of the business. In every acquaintanceship a high level of social harmony is desired. Friendship is val­ ued immensely, based on the idea that "one must help ones' friends." In the home Thai children learn codes of behavior which will guide their whole life, even when they are away from their village. Also, in the crowded home there is little privacy, judged by western standards. But this doesn't seem to both­ er the Thai people; this communal life style instills a strong sense of social harmony in which tact, compromise, and tolerance are essential.

All these social values have very deep roots in the Thai society, and an American firm doing business in Thailand has to look beyond the issue of "cheap" labor to the fact that Thai people value their beliefs and customs more than money.

Religion Religion plays a very important part in a Thai's life. Out of the total popula­ tion, about 95 percent are Buddhists, 4 percent Muslims, 0.5 percent Chris­ tians, and the remainder are Brahmins, Sikhs, Confucians and others. The government and the king uphold and support all religions accepted by the people. Throughout the years all these religions have coexisted in peace and harmony. The majority of the population in the southern region, where we rec­ ommend our company locate, is predominantly Buddhist. Briefly, Buddhism teaches that one's life does not begin with birth and end with di;ath, but is a link in a chain of lives, each conditioned by volitional acts (karma) committed Is Sl th in sh It­ re nt of m V'e of d­ ai d­ fe le n, to ~n y 1­ le e, :'e l­ ,ll n )f 'e l- j- e e d rl.

a Will Neptune have problems if it hires Thai managers from Bangkok?

Is this correct? Should the boss learn the local dialect instead? Should he or she even learn Thai? Developing a Strategy and Preparing Country Analysis Reports 349 in previous existences. In Thailand Buddhism is free of dogma; it is a flexible, moral, ethical, and philosophical framework within which people find room to fashion their own salvation. Our managers need to understand and respect this religion in order to maintain good business relationships and achieve high productivity. Language The official national language spoken by the majority of the population is Thai, believed to have originated from South China. Other important lan­ guages are Chinese and Malay. The people of the southern region speak a dialect which is referred to as Chao Pak Thai, which includes many Malay loanwords. Learning Thai is not a simple matter. The dialects are mutually intelligible, but with difficulty. Central or Standard Thai is widely accepted, but dialect differences are sometimes a point of irritation marking the relations between those whose native tongue is Standard Thai and persons from other regions. If a person fails to speak Thai with the proper accent and fluency, they risk being looked down on. Even though English is a mandatory subject in public schools and a widely accepted language for business in commercial and government circles, a local representative or agent will be necessary to reach the high majority of the non-English speaking work force and/or ven­ dors. 3 In these circumstances we suggest that if our managers want to have successful business relationships and be well integrated in the Thai society, they learn Standard Thai. These language skills will insure the loyalty of the employees and the sympathy of the local elites. Cost/Benefit Analysis to Doing Business in Thailand COSTS BENEFITS - Some Political Instability -Pro-business Government - Continuously Rising Wages -Wage Rates Far Below Alaskan Rates - Lack of Skilled Managerial - Abundant, Inexpensive, Responsive Labor Labor - Low Productivity - Rising Literacy Rate - Underdeveloped Infrastructure - Policies to Modernize Infrastructure - Complex Administrative - Investment Incentives Procedures - Signatory of GATT and WTO - Limited Safe Water Supply - Homogenous and Adaptive Culture i P f 350 Exploring International Business Environments Recommendation In light of our country analysis, Thailand's investment climate has emerged as a positive location for our venture. By operating in Thailand we can reach our goal of rationalizing production in order to increase our b"Uom line. We recommend that Neptune proceed with our project proposal. Works Cited Part One I ~ I Case: Tyco and Mattei: Strategic Failure and Strategic , Success Developing a Strategy and Preparing Country Analysis Reports 351 Part Two 352 Exploring International Business Ellviionments tionalization enjoyed by MatteI and Hasbro, its bigger and more powerful com­ petitors. Without a global presence, Tyco feared that it would lose the business of global-minded retailers such as Toys "R" Us, Inc., which wanted its suppliers to support a just-in-time inventory system in its domestic and foreign markets. Tyco, ranked 22nd among U.S. toy makers in 1986, had risen to fourth place by 1990 on the strength of a number of acquisitions in the United States. 'Its international sales, however, accounted for only 13 percent of the total, so Tyco decided to focus on Europe. It planned to open one European subsidiary a year, with each unit expected to become profitable within 12 months. By 1992, the pace increased with the creation of four European subsidiaries in Italy, Spain, Germany, and Belgium, and the purchase of Universal Matchbox Group, Ltd., a Hong Kong producer of toy vehicles whose product line would be added to popular brands such as View­ Master 3-D viewers, Magna-Doodle draWing sets, and "Sesame Street" preschool items. Tyco's goal was to have 50 percent of total sales from foreign markets by 1996.

While senior executives busied themselves with European expansion, sales of its major U.S. products, Little Mermaid and Crash Dummies, fell. This problem forced managers to tum their attention back to the domestic market, where a short­ age of new products had developed. However, further problems arose when Match­ box sales also fell, especially in Germany. According to company executives, the difficulties with Matchbox were due to com­ ess of ers to Tyco, 90 on :ional focus 1 unit [with gium, cer of View­ chool ~ts by lIes of )blem short­ 1atch­ S, the Tyco) ithan lersey.

:ts tai­ ! mar­ €Over.

~ Tyco ishing opean swith led by rltook iatisfy, nsub­ I order ;igned .

thou­ Developing a Strategy clnd Preparing Country Analysis Reports 353 gium. This move did not have the desired effect, and international sales declined by more than $45 million in the 1994-1995 period. Senior executives began con­ templating a new strategy emphasizing the acquisition of small companies and the establishment of sales offices throughout the world. In addition, Tyco refocused its attention on managing its core products and controlling costs. This new strategy made the company attractive to MatteI, which pursues similar goals, and the two firms merged in 1996. Mattei's Successful Strategy With offices and facilities in 36 countries and sales in 140 nations, MatteI began the 1990s well positioned to expand internationally in accord with a two-part strategy of reaping the benefits of low-cost foreign production and increased global market penetration for its Barbie, Hot Wheels, Disney, and Fisher-Price product lines. These products had reached a mature stage in their U.S. life cycles, but in many foreign markets their allure was new. With aggressive brand marketing and a flexible pric­ ing strategy rooted in carefully controlled costs, MatteI sought to leverage inter­ national sales, already 40 percent of the total, even higher. In addition, the company planned to make acquisitions which added product lines and opened up interna­ tional distribution channels (hence the takeover of Tyco). The Travels of Barbie. MatteI's cost-focused strategy is illustrated by tracing the production of a Barbie doll from the raw material source to the end-user purchase in the United States: 354 Exploring International Business Environments Malaysia. Because assembly occurs in East and Southeast Asian locations, man­ agers keep their transportation costs down by purchasing most Barbie materials in these regions. Japanese and Taiwanese companies supply plastic resins, while Chi­ nese firms provide the cotton cloth for Barbie's dresses. However, the machinery and tools needed to produce the product come from firms in Europe, the U.S., and Japan. Banking, insurance, and transportation services come frd'm Hong Kong. If costs rise in any of these locales, MatteI acts quickly. Since its Chinese production is a licensing arrangement rather than a direct investment, the company can shift assembly operations rapidly to Indonesia or Malaysia. In fact, the presence of the facilities serves as a backup which keeps the Chinese licensees from gaining power. If they made excessive demands on MatteI, presumably it would reduce assembly in China and shift to Southeast Asia. Organizational Structure.

Where Tyco went from a focus on products to a structure built around geograph­ ic areas-Europe and the U.s.-and then back again, MatteI has developed a com­ plex arrangement combining matrix organization and strategic business units (this was the arrangement in the late 1990s; it may have changed since then). In Figure 9-4, five units report to the Chief Operating Officer. Among them, Fisher-Price and Tyco stand alone as strategic business units. The matrix approach involves the sep­ aration of production and marketing, with Worldwide Manufacturing Operations running factories in many countries which produce two-thirds of MatteI's products; the other third is purchased from licensees. MatteI Worldwide concentrates on product development, distribution, advertising, and promotion. While Barbie and the other product lines mostly are standardized global products, managers in the geographical and country divisions of MatteI International engage in glocalization to some extent in response to demand. In some countries-Japan is one example­ Barbie is sold both to parents of children and to older women who have collected ~ ~ Chief operating officer Corporate Worldwide manufacturing operations operations Figure 9-4: Organizational Structure of Matell, Inc. (Late 19905) m­ ,in hi­ ~ry nd .If on ift he er.

Iy '1­ 1­ is ~e d )­ IS ,; n :i e '1 Case Questions for Discussion Developing a Strategy and Preparing Country Analysis Reports 355 versions of the doll since childhood. Moreover, designer-clothed Barbies sell for about $70 in some markets. MatteI's focus on global products, coupled with a will­ ingness to develop niche markets where possible, suggests a level of flexibility in the company supported by its organizational structure and corporate vision. Why China? By the late 1990s, Chinese factories were exporting about $1.7 billion each year in dolls and stuffed toys to the United States. This amount was over three times the size of total US. doll production. An examination of the components of the aver­ age price of a Barbie suggests why China is so attractive:

Materials: $0.65 Labor: 0.35 Overhead and Management: 1.00 Shipping and marketing, wholesale and retail mark-Ups: 7.00 Mattel.e.rofit: 1.00 Price $10.00 With Chinese assembly, labor costs are only 3.5 percent of the market price. The money saved here increases MatteI's profit and provides funds to support the exten­ sive brand management in which the company must engage if it is to maintain its product lines in the US. and create demand for them globally. This cost focus is cru­ cial, since market growth in the United States-still the major market-is flatten­ ing because of demographics. Between 1994 and 1998, the number of children under 5 years of age dropped, and those in the 5 to 14 age group rose only about one per­ cent a year. MatteI's US. profits will have to come from cost-cutting rather than market growth. This is even more important given the rise of toy discounters who demand a low price from their suppliers. In addition to low labor costs, China also is attractive because of the huge num­ ber of workers available and the ability of Chinese licensees to produce products in large volumes and to ship them quickly out of Hong Kong. In addition, as China develops, the toy market should grow, providing MatteI with the opportunity to develop profit-focused FDI to serve both Chinese and Asian markets. With over 800 million children in Asia, 120 million in Latin America, and 70 million in Europe, the location of MatteI's future success seems clear.

Sources: NTDB, U.S. Industrial Outlook, 1993; Los Angeles Times, September 22, 1996, 356 Exploring International Business Environments See Advertising Age, June 2,1986, p. 8. Notes 2 Example provided by J. F. Veiga and his colleagues at the University of Con­ necticut, "International Bungles: An Exercise in Objective or Subjective Uncer­ tainty," no date. 3 Shirley B. Dreifus (ed.), Business International's Global Managemetzt Desk Reference, New York: McGraw-Hill, 1992, pp. 76ff. o