Stephan's Test

Asia-Pacific Business Module 1

Module Objectives To provide a foundation of business and marketing practices unique to the Asia-Pacific region. To familiarize candidates in general economic and business climate affected by the PEST environment. Foreign investments and their impact on Asia-Pacific countries.

Desired Outcome Understand how changing PEST environment in the Asia-Pacific region impact managerial and business practices Appreciate relationship between business and government Understand the dynamics of interactions and influence of the countries within the Asia-Pacific region and the regionalisation Prepare for greater study of China, Japan and Korea

Contents Overview of the Asia-Pacific region The Macro and Micro-environment Marketing practices Management practices Some key pointers - The Chinese family business - Negotiation techniques Conclusion

Overview of the Asia-Pacific Region North-East Asia - Japan, Korea, Taiwan, China South-East Asia - Myanmar, Laos, Thailand, Cambodia, Philippines, Vietnam, Malaysia, Brunei, Singapore, Indonesia, East Timor Rest of the Asia-Pacific Region - Australia, New Zealand, Nepal, Bhutan, Bangladesh, Pakistan, India, Sri Lanka

Why the strong interest in the Asia-Pacific Region Opportunity Needs of 2.5 billion people 60% of the world’s population Threat Perceived and often times real threat to developing businesses of Latin America Diversity Need to understand the wide diversity of cultures Stages of economic development range from underdeveloped nations , e.g. Myanmar, Laos, to, to fully developed nations like Japan - presents both threats and opportunities

Why the strong interest in the Asia-Pacific Region Huge potential for infrastructure projects Emergence of consumer credits Manufacturing similar consumer goods as Latin economies IT: IT demand in U.S. accounted for nearly 40% of economic growth in Asian countries

NIE Newly Industrialized Economies Consist of South Korea, Taiwan, Hong Kong and Singapore 1997 to 2002: Most successful economies in the world with sustained growth rates of 7-8% p.a. 2001 to present 4-5% p.a. The only economies in the developing world likely to catch up with industrialized countries in terms of technology, infrastructure and per capita income

Macro Micro Business is affected by key changes in the macro and micro-environment Changes can present opportunities or threats for businesses Factors affecting the macro-environment are political, economic, social and technological Trading practices, channels of distribution, the competitive environment, form part of the micro-environment

Macro Political Legal Social/Cultural Economic IT

The Political Environment Political systems can vary from democratic to totalitarian Political philosophy covers issues as government intervention, role of market forces and attitudes towards profit and risk towards a foreign firm China, and until the 1990’s S. Korea, is a mixture of capitalism and socialism

Asian Nationalism Nationalism could affect attitudes towards foreign made products and foreign owned companies Japanese, for example, favour Japanese made products, although the trend is slowly changing Chinese perfer mainland Chinese computers – Lenova and Toshiba Procurement of goods or services for government use - usually preference is given to local companies

Legal Most countries have laws and regulations covering: Foreign imports Foreign direct investment Forms of market entry, such as licensing and franchising Local content requirement Laws governing imports include: Tariff/non-tariff barriers Quotas Subsidies to local producers Health (Nestle) Exchange controls

Economic Each Asian country has its own currency. Different degreed of convertibility The convertibility of a currency determines how difficult it is to convert one currency to another China: Yuan is not convertible into foreign currency. One can only change $50000 of a foreign currency into Yuan per day HK: Banks, not governments, issue currency

Economic Taxation Hong Kong/Singapore have no Incentives

Social/Cultural Understanding the social/cultural environment is important because: Product features, packaging and advertising strategies must be sensitive to cultural differences Business negotiations involve individuals from different cultural backgrounds - misunderstandings can arise from lack of knowledge of cultural backgrounds Choice of markets to penetrate may be influenced by cultural factors, e.g. it is generally easier to introduce a product to another country whose culture is similar to the home country

Social/Cultural Management Some managers are very international in their outlook. Different people from different cultures behave differently Others: what works well at home should work well abroad Marketing Main elements of culture which impact on marketing are: Religion Values and attitudes Language (both verbal and non-verbal) Names and customs (a name like ‘Lostalot’ - an anti-wrinkle cream from Shishedo, would not sell in HK or Singapore) Manners (Japanese, for example, would find a direct ‘no’ rather offensive)

IT Most major countries more developed that Colombia. Singapore is highly developed in the IT and communications infrastructure. India is the IT capital of Asia, yet barely half the population own home computers Korea : Ubiquitous broadband Innovation :New product, process and information technologies allow companies to seek competitive advantage in global market

Micro The competitive environment Impact of multi-national companies (MNC’s) Distribution chain Common trade practices The firm - including market entry strategies and risk management

The Competitive Environment In doing a competitive analysis of foreign markets, it is necessary to first of all look at the competitive structure. Having done that, the company looks at the competitive position, then finally formulate a competitive strategy to minimise risk of failure in market entry.

The Competitive Environment Competitive structure - the broad competitive environment and structure of the industry including the number and size of competitor, the extent of competitive rivalry, exit and entry barriers, the relative power of buyers, and the threat of suppliers Competitive position - an analysis of the company’s strengths and weaknesses in relation to its competitors Competitive strategy - the overall generic strategy of the firm in the foreign market (cost leadership, differentiation, or focus)

Impact of Multi-national Companies Multi-national companies from U.S., Europe and Japan and to a lesser extent Taiwan and South Korea, have a strong presence in many Asia-Pacific countries. They often dwarf the thousands of small businesses in each country they are in, and thousands of workers are directly or indirectly employed by them. It is therefore important to understand the impact MNC’s have on the home and host countries.

Impact of Multi-national Companies Setting up operations in foreign countries could mean loss of jobs for people in the home country It also means an outright transfer of technologies and outward flow of capital Home country exports are reduced

Impact of Multi-national Companies On the other hand, there is a profit motive - costs could be too high in the home country Overseas trade barriers - high import duties by host country may encourage setting up of operations there Huge domestic market in host country Close to source of raw materials, cheap and skilled labour

Impact of Multi-national Companies Utilisation of cheap labour may be interpreted as exploitation by people in the host country The capital market will favour MNC’s rather than small businesses, thus crowding out locals On the other hand, MNC’s provide employment for host countries Earns foreign exchange for the host country Transfer technologies to the host country

Distribution Chain A typical distribution arrangement in Asia-Pacific countries is for a manufacturer to appoint a sole agent to take care of the marketing and distribution of his products. The sole agent will then distribute through a system of wholesalers, who in turn distribute to retailers. Very often, agents have branches in key towns to give better logistics support. Each branch would have its own warehouse and administration team.

Distribution Chain Typical distribution chain: Manufacturer (overseas) => Agent/s => Wholesalers => Retailers => Consumers Manufacturer (local) => Wholesalers => Retailers => Consumers Manufacturer => Agent => Supermarket chains/hypermarkets

Distribution Chain The emergence of large independent chains and hypermarkets in many Asian cities, and the advent of E-Commerce, is beginning to challenge the traditional distribution route. Hypermarkets like Makro and Carrefour are often serviced directly by the agent Very often they act as wholesalers themselves In IT savy countries, bigger supermarkets have introduced orders via computers

Distribution Chain Government tenders are normally dealt with directly by the agent Industrial equipment which require regular servicing are also usually sold by the agent’s own outlets or through exclusive distributors This arrangement is necessary because each distribution point has to have properly trained personnel

Distribution Chain Advantages of using an agent/distributor by a foreign company: The foreign company may not have extensive contacts or resources required to penetrate the new market Contacts are vital particularly when dealing with government or government owned companies May bypass constraints or business ethics or practices

Common Trade Practices Chinese businessmen in China and some traditional Chinese businessmen in other parts of Asia prefer to conduct business in informal settings like over dinners or karaoke lounges Australian and New Zealanders prefer the negotiation table Socialising, relationship building, is an important part of the business process Face saving is an important issue

Common Trade Practices Smuggling and barter trade is common Parallel imports from one Asian country to another could seriously affect business Copyright laws and implementation is still in its infancy Corruption is still rife in many parts of Asia

Common Trade Practices Credit terms in the trade may vary from 30 - 90 days Small retailers normally purchase in cash from wholesalers, for fast moving consumer goods Traditional Chinese wholesalers sometimes sell at cost, and use the cash to roll over to maximise the credit terms given to them

The Company A company, whether or not it is within the Asia-Pacific Region or outside of it has to have the appropriate capabilities if it desires to do business in the A-P Region. The company, for example, has to: Have a geocentric, rather than ethnocentric, orientation Have adequate production facilities to cater for the export market Be prepared to make changes in product and packaging requirements even for small batches Have an export department

The Company The export department must have sufficient staff e.g. one person taking care of ten markets is not sufficient Key personnel must be familiar with international risk management, cross cultural issues and other factors (such as appropriate market entry strategies), associated with doing business outside one’s home country

Market Entry Strategy The basic elements of a foreign market entry strategy are as follows: Assessing products and foreign markets - choosing the product/market Setting objectives and goals Choosing the entry mode - direct export, contractual arrangements like appointing an agent or joint-venture, or investment Designing the market plan Monitoring and controlling the operations

Market Entry Strategy Choice of entry mode can determine a company’s success or failure in a foreign market. Direct export: At a fairly basic level, companies export products based on ‘best price’ to an import agent recommended by friends or associates, or contacts made at trade exhibitions Company personnel rarely visit the import agent and there is little marketing support

Market Entry Strategy Direct export - con’t At a more involved level, company personnel makes regular visits to work with the agent There may be sales representatives paid by the company but attached to the agent’s office A company may also have a regional office in the country of import Such an office normally have a full sales and marketing team

Market Entry Strategy Licensing: Licensing is an arrangement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees or some other form of commission A company with advanced technology or strong brand name can use licensing to improve its profits For example, Disney can license its brand name to another company to put the brand name on caps, shoes, etc; in return for a fee

Market Entry Strategy Franchising: Franchising is a form of licensing in which the franchisor provides a standard package of products, systems and management services The franchisee provides market knowledge, capital and personal involvement in the management Well known examples are MacDonald’s, Kentucky Fried Chicken, 7-11 chain stores and petrol stations

Market Entry Strategy Joint ventures: In a joint venture, the foreign partner and local partner share ownership They share profits as well as risks It could be in the form of a manufacturing plant, a distribution network or massive capital/technology injection, as in huge infrastructure projects involving the building of airports, highways and communication systems

Risk Management Managing risks when doing business in your home country and managing risks when doing business abroad can be quite different Often, you are familiar with the people, the environment, the culture, the systems and the companies you deal with, when doing business in your own country However, once abroad, risk exposure increases substantially - from possible currency exchange losses to copyright piracy, to outright dishonesty on the part of the people you do business with

Risk Management It is important to understand the process and tools of risk management. The risk management process: Risk identification What dangers and possible events can be harmful to the company? Which possible losses of money, material and equipment must be taken into account/ Which events outside the company can disturb or interrupt its operations?

Risk Management The risk management process Risk evaluation What will be the possible maximum/minimum cost of a damage event to the company? How often are they expected to occur? How likely are the different loss events? How critical is each loss event for the existence of the company?

Risk Management The risk management process Risk policy decisions Which of the identified risks is the company prepared to accept? Against which others are protective measures (e.g. accident prevention) indicated? How much money can the company make available for risk reduction?

Risk Management The risk management process Risk control Which measures should be taken to increase the company’s security against unforeseen events? Who will be responsible for these measures and the control of their effectiveness?

Risk Management Tools of risk management Risk avoidance: A conscious decision by the company not to engage in certain activities because the dangers are considered too great to be acceptable.

Risk Management Tools of risk management Risk reduction: Measures designed to improve the security of the company’s operations Risk transfer: Measures designed to shift all or part of the known risk to another company, usually a supplier or a customer - by agreement or through a change in company rules

Risk Management Tools of risk management Risk division: Reduce danger to the company overall by removing risk concentrations (e.g. warehouses) to several locations - or by spreading the risks over several markets, products or operational units Insurance coverage: Determine for which risks the company requires insurance coverage, and combining it with other risk control measures wherever possible

Marketing Practices Heavy advertising is still perceived as good marketing by many small and medium size enterprises Environmental marketing is gaining ground, though still a problem with some chemical industries in India and timber companies in Indonesia Animal rights activists are almost non-existent in Asia and has little impact on marketing activities

Marketing Practices Ethical marketing is self-regulated - consumers’ voice is not as strong as in the West In-door promotions with gifts and lucky draws are popular in many parts of Asia Billboard advertising is prominent in Hongkong, and key cities in China and Indonesia TV remains one of the most popular medium

Management Practices Management styles in Asian companies vary considerably, depending on the size of the company, the number of Western trained managers in the company, and whether the company is a Western MNC or a branch office of an MNC. Or, sometimes, within the same company, there is a mixture of both Western and Asian styles of management.

Management Practices McKinsey’s 7-S framework can be used as a basis for comparison between Western and Asian styles of management: Strategy Western style - planned. Usually top down, rigid. View may be too narrow. Ideas from the top may not necessarily work Asian style - flexible. Customer and staff feedback considered. Staff has ownership of ideas

Management Practices Structure Western style - complex. Usually several layers. Communication both upwards and downwards take a long time to filter through. Result is loss of valuable time. Asian style - simple. Structure usually flatter, allowing for quick feedback e.g. Giordano, the Hongkong clothing chain, has a fairly flat structure

Management Practices System Western style - sophisticated. High degree of control. Rules and regulations abound to ensure conformity, e.g. IBM Asian style - minimum. Enough to keep track, but not to choke. Staff feel that they are trusted

Management Practices Style Western style - bureaucratic. High division of labour. Result is minimum contribution from staff because each staff sees himself/herself as just one of the cogs in the wheel Asian style - entrepreneurial. Quicker response to customer needs

Management Practices Staff Western style - well qualified. Very often, young, inexperienced graduates are appointed to key positions. This frustrates lower level, less qualified staff Asian style - Street smart. Staff can relate to all levels

Management Practices Share values Western style - guided by mission statements which are not often put into practice. Class conscious - management and staff often have separate canteens and separate toilets Asian style - values are put into practice. Top management often spend time on the shop floor not just walking around but actually doing the work

Management Practices Skills Western style - analytical. Volumes of reports are required daily, weekly and monthly. Detailed analysis carried out. Often too much analysis, too little action Asian style - a bit more chaotic. ‘Let’s do it first’ mentality

Management Practices ‘Yes’ men still prevalent Seniority takes precedence over meritocracy (although this is slowly changing) Respect for hierarchy Consensus building (widely practiced by the Japanese)

Management Practices Trust is very important. Contracts are signed, but the spirit in executing the contract is often more important than the contents of the contract Muslims in Malaysia are given time off for prayers on Fridays Very often in family owned enterprises, the owner or his son functions as the patriarch - overseeing and approving every policy, major or minor

The Chinese Family Business Overseas Chinese have a tremendous influence in business in the Asia-Pacific Region, particularly in South-East Asia. For example, Chinese comprise only 2.5% of the population of Indonesia, but they control 73% of the market capital. Likewise, in Thailand, Chinese form only 14% of the population, yet they control 81% of the market capital It is therefore important to have an understanding of the Chinese family business

The Chinese Family Business There are two dimensions of the Chinese family business: Business involving core family members Business involving clans - non-family members, but sharing the same surname or originating from the same province in China

The Chinese Family Business In a business involving core family members, the owner and key family members hold important management positions Power and authority rests with the owners and leadership is autocratic management style is paternalistic

The Chinese Family Business The owner regards business as private property of the core family and is reluctant to share ownership with others Some large Chinese companies, although technically public, are family controlled and influenced Key family members occupy top management positions Secondary key management appointments goes to relatives

The Chinese Family Business The structure is small and simple, with concentration on sales, service or production Only a few larger businesses develop functional departments Rules and systems are often absent (except for the more liberated businesses which hire professional managers) Functions and roles of positions not clearly defined

The Chinese Family Business Specialisation level is low, with a lot of generalists dealing with a range of activities Personal relationships and feelings take precedence over objectivity (giving rise to the ‘yes’ men mentality)

The Chinese Family Business Management control is characterised by emphasis on loyalty and subjective assessment mechanisms There is often a suppression of professional talents There is also a lack of an institutionalised succession mechanism

The Chinese Family Business Chinese clans, particularly the Hakkas, are very closely knit A Hakka businessman in East Malaysia, for example, will be glad to assist a fellow Hakka in Singapore, even if they are total strangers This close association has made it easier for Chinese to develop guanxi (connection/relationship) and guanxi-wang (networking) amongst themselves

Negotiation Techniques With Chinese and Japanese wealth dominating much of Asia, it is worthwhile looking at the negotiating styles of the Chinese and Japanese, as negotiations are often the pivotal point in any business deal

Negotiation Techniques Although Chinese and Japanese are culturally different, they share many similar negotiation techniques They often push for further concessions after agreements are made They are usually tough negotiators

Negotiation Techniques China and Japan are relationship oriented rather than contract oriented Their negotiating teams are normally larger than their Western partners Both China and Japan do not like detailed and restrictive contracts

Negotiation Techniques There are some differences in negotiation techniques between the Chinese and Japanese: Chinese are willing to comprise, whereas Japanese see compromise as defeat Chinese have a more hierarchical approach in decision making whereas the Japanese are more consensus seeking Japanese tend to set a more polite tone to proceedings. Chinese are less likely to be so formal

Conclusion The various slides are just snippets of what candidates need to know. It is not comprehensive, and candidates are expected to read widely, and more importantly, to be able to critically analyse the impact of the various changing forces in the environment, as well as the behavioural/cultural patterns of Asians on business.

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