Monthly Archives: May 2020

Ten Important Lessons From the History of Mergers & Acquisitions

The history of mergers and acquisitions in the United States is comprised of a series of five distinct waves of activity. Each wave occurred at a different time, and each exhibited some unique characteristics related to the nature of the activity, the sources of funding for the activity, and to some extent, differing levels of success from wave to wave. When the volume, nature, mechanisms, and outcomes of these transactions are viewed in an objective historical context, important lessons emerge.

 

The First Wave

The first substantial wave of merger and acquisition activity in the United States occurred between 1898 and 1904. The normal level of about 70 mergers per year leaped to 303 in 1898, and crested at 1,208 in 1899. It remained at more than 300 every year until 1903, when it dropped to 142, and dropped back again into what had been a range of normalcy for the period, with 79 mergers, in 1904. Industries comprising the bulk of activity during this first wave of acquisition and merger activity included primary metals, fabricated metal products, transportation equipment, machinery, petroleum products, bituminous coal, chemicals, and food products. By far, the greatest motivation for these actions was the expansion of the business into adjacent markets. In fact, 78% of the mergers and acquisitions occurring during this period resulted in horizontal expansion, and another 9.7% involved both horizontal and vertical integration.

 

During this era in American history, the business environment related to mergers and acquisitions was much less regulated and much more dynamic than it is today. There was very little by way of antitrust impediments, with few laws and even less enforcement. 

 

The Second Wave

The second wave of merger and acquisition activity in American businesses occurred between 1916 and 1929. Having become more concerned about the rampant growth of mergers and acquisitions during the first wave, the United States Congress was much more wary about such activities by the time the second wave rolled around. Business monopolies resulting from the first wave produced some market abuses, and a set of business practices that were viewed as unfair by the American public. Even the Sherman Act proved to be relatively ineffective as a deterrent of monopolistic practices, and so Congress passed another piece of legislation entitled the Clayton Act to reinforce the Sherman Act in 1914. The Clayton Act was somewhat more effective, and proved to be particularly useful to the Federal Government in the late 1900s. However, during this second wave of activity in the years spanning 1926 to 1930, a total of 4,600 mergers and acquisitions occurred. The industries with greatest concentrations of these activities included primary metals, petroleum products, chemicals, transportation equipment, and food products. The upshot of all of these consolidations was that 12,000 companies disappeared, and more than $13 billion in assets were acquired (17.5% of the country’s total manufacturing assets).

 

The nature of the businesses formed was somewhat different in the second wave; there was a higher incidence of mergers and acquisitions to achieve vertical integration in the second wave, and a much higher percentage of the resulting businesses resulted in conglomerates that included previously unrelated businesses.  The second wave of acquisition and merger activity in the United States ended in the stock market crash on October 29, 1929, and this altered – perhaps forever – the perspective of investment bankers related to funding these transactions. Companies that grew to prominence through the second wave of mergers and acquisitions in the United States, and that still operate in this country today, include General Motors, IBM, John Deere (now Deere & Company), and Union Carbide. 

The Third Wave

The American economy during the last half of the 1960s (1965 through 1970) was booming, and the growth of corporate mergers and acquisitions, especially related to conglomeration, was unprecedented. It was this economic boom that painted the backdrop for the third wave of mergers and acquisitions in American history. A peculiar feature of this period was the relatively common practice of companies targeting acquisitions that were larger than themselves. This period is sometimes referred to as the conglomerate merger period, owing in large measure to the fact that acquisitions of companies with over $100 million in assets spiked so dramatically. Compared to the years preceding the third wave, mergers and acquisitions of companies this size occurred far less frequently. Between 1948 and 1960, for example, they averaged 1.3 per year. Between 1967 and 1969, however, there were 75 of them – averaging 25 per year.  During the third wave, the FTC reports, 80% of the mergers that occurred were conglomerate transactions. 

 

Although the most recognized conglomerate names from this period were huge corporations such as Litton Industries, ITT and LTV, many small and medium size companies attempted to pursue an avenue of diversification. The diversification involved here included not only product lines, but also the industries in which these companies chose to participate. As a result, most of the companies involved in these activities moved substantially outside of what had been regarded as their core businesses, very often with deleterious results. 

 

It is important to understand the difference between a diversified company, which is a company with some subsidiaries in other industries, but a majority of its production or services within one industry category, and a conglomerate, which conducts its business in multiple industries, without any real adherence to a single primary industry base. Boeing, which primarily produces aircraft and missiles, has diversified by moving into areas such as Exostar, an online exchange for Aerospace & Defense companies. However, ITT has conglomerated, with industry leadership positions in electronic components, defense electronics & services, fluid technology, and motion & flow control. While the bulk of companies merged or acquired in the long string of activity resulting in the current Boeing Company were almost all aerospace & defense companies, the acquisitions of ITT were far more diverse. In fact, just since becoming an independent company in 1995, ITT has acquired Goulds Pumps, Kaman Sciences, Stanford Telecom and C&K Components, among other companies.

 

Since the ascension of the third wave of mergers and acquisitions in the 1960s, there has been a great deal of pressure from stockholders for company growth. With the only comparatively easy path to that growth being the path of conglomeration, a lot of companies pursued it. That pursuit was funded differently in this third wave of activity, however. It was not financed by the investment bankers that had sponsored the two previous events. With the economy in expansion, interest rates were comparatively high and the criteria for obtaining credit also became more demanding. This wave of merger and acquisition activity, then, was executed by the issuance of stock. Financing the activities through the use of stock avoided tax liability in some cases, and the resulting acquisition pushed up earnings per share even though the acquiring company was paying a premium for the stock of the acquired firm, using its own stock as the currency.

The use of this mechanism to boost EPS, however, becomes unsustainable as larger and larger companies are involved, because the underlying assumption in the application of this mechanism is that the P/E ratio of the (larger) acquiring company will transfer to the entire base of stock of the newly combined enterprise. Larger acquisitions represent larger percentages of the combined enterprise, and the market is generally less willing to give the new enterprise the benefit of that doubt. Eventually, when a large number of merger and acquisition activities occur that are founded on this mechanism, the pool of suitable acquisition candidates is depleted, and the activity declines. That decline is largely responsible for the end of the third wave of merger and acquisition activity. 

One other mechanism that was used in a similar way, and with a similar result, in the third wave or merger and acquisition activity was the issue of convertible debentures (debt securities that are convertible into common stock), in order to gather in the earnings of the acquired firm without being required to reflect an increase in the number of shares of common stock outstanding. The resulting bump in visible EPS was known as the bootstrap effect. Over the course of my own career, I have often heard of similar tactics referred to as “creative accounting”. 

 

Almost certainly, the most conclusive evidence that the bulk of conglomeration activity achieved through mergers and acquisitions is harmful to overall company value is the fact that so many of them are later sold or divested. For example, more than 60% of cross-industry acquisitions that occurred between 1970 and 1982 were sold or divested in some other manner by 1989. The widespread failure of most conglomerations has certainly been partly the result of overpaying for acquired companies, but the fact is that overpaying is the unfortunate practice of many companies. In one recent interview I conducted with an extremely successful CEO in the healthcare industry, I asked him what actions he would most strongly recommend that others avoid when entering into a merger or acquisition. His response was immediate and emphatic: “Don’t become enamored with the acquisition target”, he replied. “Otherwise you will overpay. The acquisition has to make sense on several levels, including price.” 

 

The failure of conglomeration, then, springs largely from another root cause. Based on my own experience and the research I have conducted, I am reasonably certain that the most fundamental cause is the nature of conglomeration management. Implicit in the management of conglomerates is the notion that management can be done well in the absence of specialized industry knowledge, and that just isn’t usually the case. Regardless of the “professional management” business curricula offered by many institutions of higher learning these days, in most cases there is just no substitute for industry-specific experience. 

            

The Fourth Wave

The first indications that a fourth wave of merger and acquisition activity was imminent appeared in 1981, with a near doubling of the value of these transactions from the prior year. However, the surge receded a bit, and really regained serious momentum again in 1984.   According to Mergerstat Review (2001), just over $44 billion was paid in merger and acquisition transactions in 1980 (representing 1,889 transactions), compared to more than $82 billion (representing 2,395 transactions) in 1981. While activity fell back to between $50 billion and $75 billion in the ensuing two years, the 1984 activity represented over $122 billion and 2,543 transactions. In terms of peaks, the number of transactions peaked in 1986 at 3,336 transactions, and the dollar volume peaked in 1988 at more than $246 billion. The entire wave of activity, then, is regarded by analysts to have occurred between 1981 and 1990. 

 

There are a number of aspects of this fourth wave that distinguish it from prior activities. The first of those characteristics is the advent of the hostile takeover. While hostile takeovers have been around since the early 1900s, they truly proliferated (more in terms of dollars than in terms of percent of transactions) during this fourth wave of merger and acquisition activity. In 1989, for example, more than three times as many dollars were transacted as a result of contested tender offers than the dollars associated with uncontested offers. Some of this phenomenon was closely tied to another characteristic of the fourth wave of activity; the sheer size and industry prominence of acquisition targets during that period. Referring again to Mergerstat Review‘s numbers published in 2001, the average purchase price paid in merger and acquisition transactions in 1970, for example, was $9.8 million. By 1975, it had grown to $13.9 million, and by 1980 it was $49.8 million. At its peak in 1988, the average purchase price paid in mergers and acquisitions was $215.1 million.   Exacerbating the situation was the volume of large transactions. The number of transactions valued at more than $100 million increased by more than 23 times between 1974 and 1986, which was a stark contrast to the typically small-to-medium size company based activities of the 1960s.

 

Another factor that impacted this fourth wave of merger and acquisition activity in the United States was the advent of deregulation. Industries such as banking and petroleum were directly affected, as was the airline industry.   Between 1981 and 1989, five of the ten largest acquisitions involved a company in the petroleum industry – as an acquirer, an acquisition, or both. These included the 1984 acquisition of Gulf Oil by Chevron ($13.3 billion), the acquisition in that same year of Getty Oil by Texaco ($10.1 billion), the acquisition of Standard Oil of Ohio by British Petroleum in 1987 ($7.8 billion), and the acquisition of Marathon Oil by US Steel in 1981 ($6.6 billion).  Increased competition in the airline industry resulted in a severe deterioration in the financial performance of some carriers, as the airline industry became deregulated and air fares became exposed to competitive pricing.

 

An additional look at the ontology of the ten largest acquisitions between 1981 and 1989 reflects that relatively few of them were acquisitions that extended the acquiring company’s business into other industries than their core business. For example, among the five oil-related acquisitions, only two of them (DuPont’s acquisition of Conoco and US Steel’s acquisition of Marathon Oil) were out-of-industry expansions. Even in these cases, one might argue that they are “adjacent industry” expansions. Other acquisitions among the top ten were Bristol Meyers’ $12.5 billion acquisition of Squibb (same industry – Pharmaceuticals), and Campeau’s $6.5 billion acquisition of Federated Stores (same industry – Retail). 

 

The final noteworthy aspect of the “top 10” list from our fourth wave of acquisitions is the characteristic that is exemplified by the actions of Kohlberg Kravis. Kohlberg Kravis performed two of these ten acquisitions (both the largest – RJR Nabisco for $5.1 billion, and Beatrice for $6.2 billion). Kohlberg Kravis was representative of what came to be known during the fourth wave as the “corporate raider”. Corporate raiders such as Paul Bilzerian, who eventually acquired the Singer Corporation in 1988 after participating in numerous previous “raids”, made fortunes for themselves by attempting corporate takeovers. Oddly, the takeovers did not have to be ultimately successful for the raider to profit from it; they merely had to drive up the price of shares they acquired as a part of the takeover attempt. In many cases, the raiders were actually paid off (this was called “greenmail”) with corporate assets in exchange for the stock they had acquired in the attempted takeover. 

 

Another term that came into the lexicon of the business community during this fourth wave of acquisition and merger activity is the leveraged buy-out, or LBO. Kohlberg Kravis helped develop and popularize the LBO concept by creating a series of limited partnerships to acquire various corporations, which they deemed to be underperforming. In most cases, Kohlberg Kravis financed up to ten percent of the acquisition price with its own capital and borrowed the remainder through bank loans and by issuing high-yield bonds. Usually, the target company’s management was allowed to retain an equity interest, in order to provide a financial incentive for them to approve of the takeover.

 

The bank loans and bonds used the tangible and intangible assets of the target company as collateral. Because the bondholders only received their interest and principal payments after the banks were repaid, these bonds were riskier than investment grade bonds in the event of default or bankruptcy. As a result, these instruments became known as “junk bonds.” Investment banks such as Drexel Burnham Lambert, led by Michael Milken, helped raise money for leveraged buyouts. Following the acquisition, Kohlberg Kravis would help restructure the company, sell off underperforming assets, and implement cost-cutting measures. After achieving these efficiencies, the company was usually then resold at a significant profit.

 

Increasingly, as one reviews the waves of acquisition and merger activity that have occurred in the United States, this much seems clear: While it is possible to profit from the creative use of financial instruments and from the clever buying and selling of companies managed as an investment portfolio, the real and sustainable growth in company value that is available through acquisitions and mergers comes from improving the newly formed enterprise’s overall operating efficiency. Sustainable growth results from leveraging enterprise-wide assets after the merger or acquisition has occurred. That improvement in asset efficiency and leverage is most frequently achieved when management has a fundamental commitment to the ultimate success of the business, and is not motivated purely by a quick, temporary escalation in stock price. This is related, in my view, to the earlier observation that some industry-specific knowledge improves the likelihood of success as a new business is acquired. People who are committed to the long-term success of a company tend to pay more attention to the details of their business, and to broader scope of technologies and trends within their industry.  

 

There were a few other characteristics of the fourth wave of merger and acquisition activity that should be mentioned before moving on. First of all, the fourth wave saw the first significant effort by investment bankers and management consultants of various types to provide advice to acquisition and merger candidates, in order to earn professional fees. In the case of the investment bankers, there was an additional opportunity around financing these transactions. This opportunity gave rise, in large measure, to the junk bond market that raised capital for acquisitions and raids. Secondly, the nature of the acquisition – and especially the nature of takeovers – became more intricate and strategic in nature. Both the takeover mechanisms and paths and the defensive, anti-takeover methods and tools (eg: the “poison pill”) became increasingly sophisticated during the fourth wave. 

 

The third characteristic in this category of “other unique characteristics” in the fourth wave was the increased reliance on the part of acquiring companies on debt, and perhaps even more importantly, on large amounts of debt, to finance the acquisition. A significant rise in management team acquisition of their own firms using comparatively large quantities of debt gave rise to a new term – the leveraged buy-out (or LBO) – in the lexicon of the Wall Street analyst. 

 

The fourth characteristic was the advent of the international acquisition. Certainly, the acquisition of Standard Oil by British Petroleum for $7.8 billion in 1987 marked a change in the American business landscape, signaling a widening of the merger and acquisition landscape to encompass foreign buyers and foreign acquisition targets. This deal is significant not only because it involved foreign ownership of what had been considered a bedrock American company, but also because of the sheer dollar volume involved. A number of factors were involved in this event, such as the fall of the US dollar against foreign currencies (making US investments more attractive), and the evolution of the global marketplace where goods and services had become increasingly multinational in scope. 

 

The Fifth Wave

The fifth wave of acquisition and merger activity began immediately following the American economic recession of 1991 and 1992. The fifth wave is viewed by some observers as still ongoing, with the obvious interruption surrounding the tragic events September 11, 2001, and the recovery period immediately following those events. Others would say that it ended there, and after the couple of years ensuing, we are seeing the imminent rise of a sixth wave. Having no strong bias toward either view, for purposes of our discussion here I will adopt the first position. Based on the value of transactions announced over the course of the respective calendar years, the dollar volume of total mergers and acquisitions in the US in 1993 was $347.7 billion (an increase from $216.9 billion in 2002), continued to grow steadily to $734.6 billion in 1995, and expanded still further to $2,073.2 billion by 2000.    

 

This group of deals differed from the previous waves in several respects, but arguably the most important difference was that the acquisitions and mergers of the 1990s were more thoughtfully orchestrated than in any previous foray. They were more strategic in nature, and better aligned with what appeared to be relatively sophisticated strategic planning on the part of the acquiring company. This characteristic seems to have solidified as a primary feature of major merger and acquisition activity, at least in the US, which is encouraging for shareholders looking for sustainable growth rather than a quick – but temporary – bump in share price. 

 

A second characteristic of the fifth wave of acquisitions and mergers is that they were typically more equity-based than debt-based in terms of their funding. In many cases, this worked out well because it relied less on leverage that required near-term repayment, enabling the new enterprise to be more careful and deliberate about the sell-off of assets in order to service debt created by the acquisition.  

 

Even in cases where both of these features were prominent aspects of the deal, however, not all have been successful. In fact, some of the biggest acquisitions have been the biggest disappointments over recent years. For example, just before the announcement of the acquisition of Time Warner by AOL, a share of AOL common stock traded for about $94. In January of 2005, that share of stock was worth about $17.50. In the Spring of 2003, the average share price was more like $11.50. The AOL Time Warner merger was financed with AOL stock, and when the expected synergies did not materialize, market capitalization and shareholder value both tanked. What was not foreseen was the devaluation of the AOL shares used to finance the purchase. As analyst Frank Pellegrini reported in Time’s on-line edition on April 25, 2002: “Sticking out of AOL Time Warner’s rather humdrum earnings report Wednesday was a very gaudy number: A one-time loss of $54 billion. It’s the largest spill of red ink, dollar for dollar, in U.S. corporate history and nearly two-thirds of the company’s current stock-market value.” 

The fifth wave has also become known as the wave of the “roll-up”. A roll-up is a process that consolidates a fragmented industry through a series of acquisitions by comparatively large companies (typically already within that industry) called consolidators. While the most widely recognized of these roll-ups occurred in the funeral industry, office products retailers, and floral products, there were roll-ups of significant magnitude in other industries such as discrete segments of the aerospace & defense community. 

 

Finally, the fifth wave of acquisitions and mergers was the first one in which a very large percentage of the total global activity occurred outside of the United States. In 1990, the volume of transactions in the US was $301.3 billion, while the UK had $99.3 billion, Canada had $25.3 billion, and Japan represented $14.2 billion. By the year 2000, the tide was shifting. While the US still led with $2,073 billion, the UK had escalated to $473.7 billion, Canada had grown to $230.2 billion, and Japan had reached $108.8 billion. By 2005, it was clear that participation in global merger and acquisition activity was now anyone’s turf. According to barternews.com: “There was incredible growth globally in the M&A arena last year, with record-setting volume of $474.3 billion coming from the Asian-Pacific region, up 46% from $324.5 billion in 2004. In the U.S., M&A volume rose 30% from $886.2 billion in 2004. In Europe the figure was 49% higher than the $729.5 billion in 2004. Activity in Eastern Europe nearly doubled to a record $117.4 billion.” 

 

The Lessons of History

Many studies have been conducted that focus on historical mergers and acquisitions, and a great deal has been published on this topic. Most of the focus of these studies has been on more contemporary transactions, probably owing to factors such as the availability of detailed information, and a presumed increase in the relevance of more recent activity. However, before sifting through the collective wisdom of the legion of more contemporary studies, I think it’s important to look at least briefly to the patterns of history that are reflected earlier in this article.

 

Casting a view backward over this long history of mergers and acquisitions then, observing the relative successes and failures, and the distinctive characteristics of each wave of activity, what lessons can be learned that could improve the chances of success in future M&A activity?  Here are ten of my own observations:

  1. Silver bullets and statistics. The successes and failures that we have reviewed through the course of this chapter reveal that virtually any type of merger or acquisition is subject to incompetence of execution, and to ultimate failure. There is no combination of market segments, management approaches, financial backing, or environmental factors that can guarantee success. While there is no “silver bullet” that can guarantee success, there are approaches, tools, and circumstances that serve to heighten or diminish the statistical probability of achieving sustainable long-term growth through an acquisition or merger.
  2. The ACL Life Cycle is fundamental. The companies who achieve sustainable growth using acquisitions and mergers as a mainstay of their business strategy are those that move deliberately through the Acquisition / Commonization / Leverage (ACL) Life Cycle. We saw evidence of that activity in the case of US Steel, Allied Chemical, and others over the course of this review.
  3. Integration failure often spells disaster. Failure to achieve enterprise-wide leverage through the commonization of fundamental business processes and their supporting systems can leave even the largest and most established companies vulnerable to defeat in the marketplace over time. We saw a number of examples of this situation, with the American Sugar Refining Company perhaps the most representative of the group.
  4. Environmental factors are critical. As we saw in our review of the first wave, factors such as the emergence of a robust transportation system and strong, resilient manufacturing processes enabled the success of many industrial mergers and acquisitions. So it was more recently with the advent of information systems and the Internet. Effective strategic planning in general, and effective due diligence specifically, should always include a thorough understanding of the business environment and market trends. Often times, acquiring executives become enamored with the acquisition target (as mentioned in our review of third wave activity), and ignore contextual issues as well as fundamental business issues that should be warning signs.
  5. Conglomeration is challenging. There were repeated examples of the challenges associated with conglomeration in our review of the history of mergers and acquisitions in the United States. While it is possible to survive – and even thrive – as a conglomerate, the odds are substantially against it. Those acquisitions and mergers that most often succeed in achieving sustainable long-term growth are the ones involving management with significant industry-specific and process-specific expertise. Remember the observation, during the course of our review of fourth wave activity, that “the most conclusive evidence that the bulk of conglomeration activity achieved through mergers and acquisitions is harmful to overall company value is the fact that so many of them are later sold or divested.”
  6. Commonality holds value. Achieving significant commonality in fundamental business processes and the information systems that support them offers an opportunity for genuine synergy, and erects a substantive barrier against competitive forces in the marketplace. We saw this a number of times; Allied Chemical is especially illustrative. 
  7. Objectivity is important. As we saw in our review of the influence of investment bankers vetoing questionable deals during second wave activities, there is considerable value in the counsel of objective outsiders. A well-suited advisor will not only bring a clear head and fresh eyes to the table, but will often introduce important evaluative expertise as a result of experience with other similar transactions, both inside and outside of the industry involved.
  8. Clarity is critical. We saw the importance of clarity around the expected impacts of business decisions in our review of the application of the DuPont Model and similar tools that enabled the ascension of General Motors. Applying similar methods and tools can provide valuable insights about what financial results may be expected as the result of proposed acquisition or merger transactions.
  9. Creative accounting is a mirage. The kind of creative accounting described by another author as “finance gimmickry” in our review of third wave activity does not generate sustainable value in the enterprise, and in fact, can prove devastating to companies who use it as a basis for their merger or acquisition activity.
  10. Prudence is important when selecting financial instruments to fund M&A transactions. We observed a number of cases where inflated stock values, high-interest debt instruments, and other questionable choices resulted in tremendous devaluation in the resulting enterprise. Perhaps the most illustrative example was the recent AOL Time Warner merger described in the review of fifth wave activity.

Many of these lessons from history are closely related, and tend to reinforce one another. Together, they provide an important framework of understanding about what types of acquisitions and mergers are most likely to succeed, what methods and tools are likely to be most useful, and what actions are most likely to diminish the company’s capability for sustainable growth following the M&A transaction.

Warehouse Ownership Classification in the Interlining Industry

Facing with the fierce competition in the global market, each manufacturer is putting every effort to develop its own competitive edge. This is especially true in the interlining industry. One of the aspects for an interlining supplier to achieve competitive edge is to lowering costs while increasing efficiency. Whilst lowering the storage cost is a means for an interlining supplier to focus on. Before making a strategic planning to lower the storage cost, an interlining supplier is necessary to understand the basic concept of warehouse ownership classification.

Warehouses in the manufacturing industries are generally classified by the ownership. Under this idea, warehouses can be classified as private warehouses, public warehouses and contract warehouses.

1. Private Warehouse

A private warehouse, as a type of warehouse ownership classification, is operated by the firms or organization that owning the products stored in the facility. These firms or organizations may be factories, trading companies or wholesalers. The building of the warehouse can be owned or leased. The critical point for a firm to decide whether to own or lease the facility is the financial concern. Sometimes it is not possible to find a proper warehouse to lease. Take an interlining supplier for example; the storage racks or other physical nature in a leased building may not be suitable for the storage for interlining products like woven interlining, non-woven interlining and fusible interlining. Under this circumstance, design and arrangement need to be taken place for construction. On the other hand, at a particular connection for logistic purposes, a firm may have difficulties in finding a warehouse for ownership.

The major benefits of a private warehouse are flexibilities, control, cost and some intangible attributes. A private warehouse is more flexible than a public one, as the operating policies and process can be adjusted to meet the special needs of a customer or the product itself. Also, a suitable course of action can be taken to meet specific requirements for logistic purposes.

Private warehouse offer stable control since the firm has the sole authority on warehouse management to optimize activities. For example, the control on warehouse operations for an interlining product like woven interlining, non-woven interlining and fusible interlining can integrate with the logistic operations of an interlining supplier.

Usually a private warehouse is considered less costly. One of the reasons is that a private warehouse is built within the manufacturing base of a supplier; therefore, the fixed and variable components may be lower than a public warehouse. Furthermore, a private warehouse is not profitable to the owner of the facility.

A private warehouse may also have intangible benefits. For instance, a warehouse with the name of an interlining supplier for woven interlining, non-woven interlining and fusible interlining may provide marketing advantages. The customers may have the perceptions of stability and reliability towards the supplier.

2. Public Warehouse

In contrast with a private warehouse, a public warehouse as another type of warehouse ownership classification is operated independently by a business to offer wide range of for-hire services related to warehousing. Such warehouses are extensively used in the logistic systems to reduce the supply chain costs. A public warehouse can be hired for a short or long-term, based on the policies of the facility and the needs of the customers.

In a financial view, lower cost on warehousing may achieve by hiring a public warehouse than owning a private warehouse. The share resources and economic scale in a public facility may result in lower operational cost. Another benefit of public warehousing is that customers like interlining supplier for woven interlining, non-woven interlining and fusible interlining do not need to spend a huge investment on the facilities. Furthermore, a public warehouse allows the users to change the number and sizes of warehouses easily to meet special demands.

Users in a same public warehouse may share scale economies by the leverage of combined requirements from users. Such leverage ranges fixed cost from to operating cost. Transportation cost may also be leveraged in a public warehouse. For example, a public facility can arrange combined customer delivery consolidation, to deliver the woven interlining products of the first interlining supplier with the non-woven interlining products of the second interlining supplier to the same destinations.

Because of its flexibility, scalability, services and variable cost, public warehouses are popular by many firms. In general, a public warehouse as a type of warehouse ownership classification can design and perform special services to meet customers’ operational requirements.

3. Contract Warehouse

A contract warehouse, as a third type of warehouse ownership classification, has the attributes of both private and public warehouses. A contract warehouse can also be understood as a customized extension of a public warehouse, which is a long-term business arrangement to provide specific and customized logistic services to the customers. It is also thought that a contract warehouse is a form of business process outsourcing in a logistic perspective. In this relationship, the client and the service supplier share risks concerning the warehousing operations.

In general, many companies tend to utilize a combination of private, public and contract warehouses. Basic knowledge of the warehouse ownership classification will serve as a managerial guide on how to develop a warehouse deployment strategy. Such warehouse planning focuses on two aspects, namely, 1) the number of warehouses required and 2) the warehouse ownership used in specific markets. The focus on these two aspects will create warehouse segmentation for specific markets, which can provide more tailored and focused logistic capabilities to customers.

4 Ways for J Nuts Manufacturers to Boost Their Sales

The yearly sales quota contributes to the success of a company. The number of products manufactured depend on the amount they sell and vice versa. This follows the longstanding supply and demand principle.

The technological advancements and changes in the way consumers behave have brought about new developments in the industry’s sales strategies. Since it is efficient for the J nuts manufacturing process, it can also be right for sales.

It is relevant to welcome innovation, especially now at both production line and sales office. These are 4 ways to help manufacturers in their efforts to boost sales and stay competitive on the market:

Sales and Marketing Alignment

Sales and marketing alignment aims to let the two groups communicate more efficiently and create goals that depend on mutual accomplishments to succeed. “Smarketing” as this sales marketing tactic is called, relies on the marketing team to give a predetermined lead number that can be followed up by the sales department. In addition, sales and marketing alignment needs a modern CRM.

J nuts manufacturing companies can measure all goals and results, therefore it is easy to boost sales just by reassessing the performance, and finding out the number of leads that they need to make the amount of sales required. Also, it lets the manufacturer decide on the things to invest in and the channels to target to have more leads.

Focus Efforts on Current Accounts

An effective way to boost revenue is through customer retention, which is the ability of a J nuts manufacturer to keep its current customers. As an example, a 5% increase in customer retention can boost revenue to up to 95%.

Targeting existing customers gives a higher turnover rate since they have a tendency to buy more products than new visitors. Because the company has already established a business relationship with them, the marketing costs of the latest offers or one-time deals are lower.

Aim for New Accounts Rather than New Markets

All customers have their own reasons and pain points to consider buying various products. Their motives can range widely therefore it is critical to treat every potential buyer in a different way and create a pitch that targets them in particular.

A sales team can contact potential customers to start communication and ask questions to know their pain points. This information will be the basis on which the J nuts manufacturing company will draft a customized sales offer to be presented to the prospect.

This may take longer to prepare, but it is a more effective way to land sales as compared to sending a regular sales pitch out to the market.

Nurture and Develop Consumer Fans

80% of sales revenue comes from only 20% of their consumer base, as per Pareto’s law. To give it a try, they have to nurture high potential buyers and do the necessary steps to convert an additional 10% to 20% to join that group.

Using a solid content marketing strategy is a cost-effective way to achieve this. When offering free educational materials about products like blog posts, webinars, tutorials and guides, they care for these valuable accounts and lead them to the right direction.

Eventually, the J nuts manufacturing company will win real fans that have the capability to keep their business from falling.

Software As a Service (SaaS)

Software as a service, also known as SaaS, is generally considered to be a software application hosted by a vendor on the Internet that can be shared by different users on requirements on request. In some cases the package can also be downloaded by users who will run until the end of the period of time. As the underlying technology, SaaS developed into one of the most common delivery models that supports Web services and service-oriented architecture (SOA). With the growth of broadband services, SaaS is available for more users throughout the world.

The On Demand Computing software delivery models and ASP (application service provider) are closely related to software as service products. SaaS has been identified as two slightly different delivery modules, the first one being the hosted application management (hosted AM) model which is similar to ASP, which is a commercially hosted module available and delivered over the net to actual users. The other one is software on demand model, in which the service provider gives network-based access of a single copy of the software application to users. This application has been created specifically for SaaS distribution.

Software as a service has several benefits, and the few important ones are as follows:-

* Easier administration
* Automatic updates and patch management
* Compatibility: All users will have the same version of software
* Easier collaboration, for the same reason
* Global accessibility

What if you want to start developing SaaS?

If you are having an ambition to start a SaaS business you would need to have technical as well as marketing skills in the team. Even if you are considering in contracting out a large portion of the software to a third party, you would still be requiring a technically savvy director or manager with your company. Considering that you have outsourced your software development part, you would still need to have the supervision by one of your experienced manager to find out if the development is going on well.

Marketing your software as a service should start long before you take up development of the software. This would especially be directed towards your competitor research and into SaaS already in the market, and the traditional software that your prospective customers use. You need to do extensive customer research, looking into the demographics of these target users. The information out of these two researches done is the most important data to have before you launch your development program.

Concerns of SaaS customers:

Software as a service is not an answer to every type of application and is not applicable to every user. For hosted services, some customers have reservations. They are reluctant to store their data on a remote server via the Internet, which were being stored in their hard disks before. There are specific security risks involved for sensitive data, and these customers worry about the privacy as well. In order to convince the customers of your services, you should be prepared to answer to all the questions raised by them and also convince them about the security that your service offers.

A Guide to Transforming Your Software Product into a Service – Software as a Service

There is a growing market demand for more economical and efficient enterprise applications for a growing global market. The combination of the ubiquitous Internet and the availability and legitimacy of open source software creates substantial economic and opportunity for software vendors to provide Software as a Service (SaaS).

Software as a Service is a model in which the software vendor provides an Internet hosted version of their application (in house or at a managed 3rd party site) that is accessed by customers from the website and paid for on a per-use, per-project or subscription basis.

The SaaS model offers significant benefits to software vendors and their customers. The SaaS model offers customers cost-effective subscription-based or per-use pricing, eliminating the need for substantial capital outlays to purchase perpetual software licenses. It also eliminates the initial outlay and on-going costs and risks of installing, supporting and maintaining in-house hardware and the associated IT staff. In addition, user access and application performance can be dramatically improved with Internet-based, on-demand, 24×7 systems. The SaaS model opens new markets to software vendors. Established software companies can broaden their market reach by offering SaaS solutions to small and midsized enterprises. Other benefits include the financial advantages of predictable recurring revenue streams and strengthened relationships with customers. Software vendors migrating to or developing products from the outset as SaaS offerings will have a significant competitive advantage when competing with traditional license-model vendors.

Realizing the benefits of the SaaS model may require fundamental changes to a software vendor’s business model, software architecture and operational structure. This white paper provides an overview of the issues associated with the software application itself and the development considerations associated with moving to a SaaS model.

Time is of the essence. As with any new business model, the rewards often go to early market entrants. Accelerating the time-to-market of your software deployment is critical to your business success. Outsourcing product modifications to implement your SaaS offering, with the assistance of an expert services team, and engaging an optimal on-demand service delivery firm will accelerate your time-to-market and insure an on-time, on-budget, on-scope implementation.

The Challenge of Transforming Your Software

While there are a multitude of benefits in providing Software as a Service, traditional software companies may face challenges in moving to this model. First, your software must be web-enabled with all functions carried out by the user using a web browser. If you have a client-server application, you must replace the functionality implemented in the client with HTML, and possibly other technologies (XML, Java, etc.), that can be displayed by a web browser over the Internet. Next, in order to gain operational efficiency, your software needs to be multi-instance. You move from single-instance to multi-instance by loading multiple copies of your software on a single set of servers. Multi-instance enables you to share the cost of a server across multiple customers. Additional productivity enhancements and economies may be gained by moving to multi-tenant SaaS, or replacing proprietary commercial software with open source software. Web services provide an opportunity for integration with other applications and data flows.

Single Instance Applications

Traditional client/server applications are single instance. They require software to be installed on the user’s computer to carry out computations and provide functionality. Clients often implement highly interactive features and enable the user to manipulate large amounts of data. This can be very difficult to implement in a traditional HTML, request/reply web application interface that requires frequent page refreshes. Migrating from client/server to an Internet-based SaaS model is highly dependent on your specific application.

Today, new Rich Internet Application (RIA) technology is available from Macromedia, Laszlo Systems and others that give web applications the look-and-feel and functionality of a desktop application or client. RIA requires little or no software be installed on the user’s client computer. The most that is needed is a small browser plug-in or Java applet. This fundamental change to the user interface converts your client /server application to a single-tenant web application.

Web applications may be single instance or multi-instance. A single-instance web application is typically installed on dedicated servers in the customer’s data center and used only internally, behind the firewall. At installation time, your software is configured to consume whatever system resources are needed and available on the computers.

When a web application is offered as a service over the Internet, it should be hosted in a professional data center. This will minimize costs and delivery high quality service to your customers. If you have a single instance application and more than one customer, one approach is to install a new instance of your software on a dedicated server for each customer. This may work for a few customers or some big accounts, but it does not scale effectively for large numbers of customers. It also cannot be used for small and medium sized customers that cannot afford the set-up costs.

Moving from Single to Multiple Instances

An alternative to individual customer dedicated servers is to install multiple copies of your software on a single set of servers. This is called multi-instance. Multi-instance enables you to share the cost of a server across multiple customers. Most business applications use a database and each additional copy of the software installed requires a new database instance as well.

Installing multiple copies of your software on one set of servers may not be as easy as it sounds. Installation procedures need to be modified so that each instance is installed without disrupting resource allocation or the security of the other previously installed copies of the software.

There is a limit to the number of instances that can be installed and eventually system resources will be consumed. System resources include shared memory, process semaphores and other internal operating system parameters. So the question becomes, “How many copies of your software can you install on a server?”

Obviously, you can keep installing instances of your software until resources are exhausted. However, you must also consider the performance of the system under load by users. Typically there are a maximum number of simultaneous users your software must support and minimum performance or response time requirements that must be met to satisfy customer commitments.

An accurate answer to the “How many copies of your software can you install on a server?” question is derived by testing the software as you add additional instances. This is best done with automated testing software tools that can simulate the desired number of users placing a load on the system.

The testing process is to determine the optimal number of instances and the resulting performance. This is accomplished by installing additional instances of your application, and carefully monitoring system resources and running user load tests using variable traffic modeling to determine the point at which returns diminish.

This process of maximizing the number of instances on the servers can take one to three weeks depending on the size and complexity of your system, the quality of your installation process whether you have already created automated user load testing scripts and procedures.

Minor code changes may be needed to move to multi-instance. For example, if your application reads and writes a file with a hard-coded filename and location on the disk, then the file must be created in different locations for each instance to avoid conflicts between each instance. These problems will be discovered and changes will need to be made during the one to three weeks.

Next Steps – Improving Functionality and Reducing Costs

Once your software is running effectively as a multi-instance SaaS application, you may want to pursue a multi-tenant architecture. In a single instance, multi-tenant architecture, multiple customers share a single instance of your software. Migration from multi-instance to multi-tenant can be a significant project and may even require a rewrite of your application from the ground up. The efficiencies gained in moving to multi-tenancy need to be closely examined. You might find your resources better spent in other ways.

Another possible step would be to focus on driving costs out of your model. Many applications have dependencies on expensive proprietary databases and/or middleware. Significant savings can be realized by migrating to lower cost or open source alternatives. An investment here might provide significant savings in operating costs that would be transparent to your end users and very beneficial to your bottom line.

You might also consider adding web services for inter-process communications. This will be particularly appealing if your application is part of a workflow with information passing-to or gathering-from another application. Designing with web services in mind will minimize long-term integration requirements.

A Single Instance, Multi-Tenant Web Application

Software companies have created web applications for over ten years now. These are often installed on the Intranet of a customer and only used internally, behind the firewall. This single instance of the software is used by just one customer. This is both single-instance and single-tenant.

You saw above how you can install and test your software to make it multi-instance — having multiple copies running on one server. However, each copy is a single-tenant web application.

Single-tenant web applications can be modified to support multiple customer tenants on the same instance. Multi-tenant web applications minimize the amount of hardware needed to support multiple customers. Also, customers can self-provision their use of your software by signing up for an account and entering payment information. This minimizes, and often eliminates, the amount of support needed to set up a new customer.

One of the modifications to support multi-tenant is the creation of a user interface for user provisioning of accounts in the system. Another modification, depending on the requirements for integration with other enterprise systems, is an LDAP interface for convenient provisioning and administering of user accounts. Modern database technology can enable quick duplication of the data model so each customer has its own copy of each table in the database. This is an elegant way to keep customer data separate when stored in the single database instance used for the service.

Templates for configuration of the software should be provided to accelerate customization and adoption of the service by new customers. Templates support various scenarios of system usage by customers.

A system management dashboard showing system use by all tenants may be required. A mechanism must be available to measure system usage for purposes of billing as well as monitoring system load. Administrative accounts for customer support purposes may also need to be implemented.

It may be necessary to enhance the reliability of the back-end, using database technology to implement parallel servers at physically distant locations, to ensure constant up time during periods of natural or man-made disasters.

Maintaining Performance of Your Multi-Tenant Web Application

Multi-tenant applications must deal with several issues that are not as pronounced in single-tenant and client/server systems. Because multi-tenant systems are available over the public Internet, usage may be unpredictable. Therefore, demand planning must be done more carefully. The systems should be instrumented to detect increasing usage so additional hardware and bandwidth are provided to maintain service levels.

Driving Down Costs by Moving to Open Source

Many software developers are agnostic about the application server and database software used by their applications. The customer often dictates these choices. If your customers want to use Oracle as the database, then you must support this popular choice. Your software must have modules to support each database technically. Business-wise, you pass along the cost of the database license to the end customer, if they do not already own a license.

But what database should you choose for your software when it is offered as a service? There may not be a need for the technical features of an expensive commercial database. Moreover, the economics of offering your software as a service may preclude the expense of a commercial database license fee.

Therefore, many companies converting their software to a service will choose one of the low or no cost open source databases available today. These database choices are now widely used and robust. Advanced features such as redundant clustering and automated backup capabilities rival those of commercial databases.

If your application does not yet support one of these databases, a few technical issues need to be overcome. The format and syntax of most SQL used to access and manipulate data in a database is standard. However, almost every database vendor extends SQL and many applications use these extensions, such as special functions to modify and compare data. There can be many variations in how each database vendor treats cursors, triggers, data types and package variables. If you use SQL extensions in your application, you will need to recode these SQL statements to work with the target open source database.

Migration to on demand delivery models works cohesively with bootstrapped technology deployment and investment. Even if the open source database software does not have all the features you want to have or if they run a little slower, you may have no choice economically when you first start offering your software as a service. It may not make financial sense for you to invest tens of thousands of dollars in a commercial database license while you can only charge a few hundred dollars per subscriber. Over time, as your subscriber base grows, you may choose to switch to the commercial database. Until you can afford it or activity levels grow to high levels, open source database solutions may be your only practical solution.

Another relatively expensive part of your software is the license required for a commercial Java application server. This is another category of software where several open source options exist. Generally, conversion over to an open source application server is relatively straightforward. All must comply with the specification for Java 2 Enterprise Edition (J2EE) and your code should not need any modifications.

However, there are differences in how you install your code in the application server. The installation and set up process is well documented for all open source application servers. You must modify your installation process to accommodate the requirements of the application server you use.

Again, the business case is clear. A huge community of users has made open source application servers a safe choice. The cost of a commercial application server is difficult to justify when you are just starting out offering your software as a service. As with the conversion to-and-from an open source database, you can always switch back to a commercial application server as your subscriber base grows.

Web Services For Data Transfer and Integration

When customers install your software in their own data center, behind their firewall, they are able to integrate the software with other applications and data sources. When you make your software available as a service over the Internet, then integration is not as easy. Authentication and encryption must be provided to enable safe data transfers.

The most popular approach to data transfers and integration over the public Internet is with web services, the SOAP protocol and WSDL. If your application has an Application Programming Interface (API) in a native language like Java or C++, you will need to create a web services interface that uses the API to communicate with your software and enables bidirectional data flow with the external world using SOAP.

Time to Market

Time is of the essence. As the new SaaS model is adopted, early entrants will have a significant advantage. Evolving your application to web-enabled, multi-instance will allow you to become a SaaS player quickly. Time to market issues should be considered when deciding whether to partner with experts or pursue migration and infrastructure development in-house.

The Advantages of Outsourcing Software Development

Outsourced developers, who are experienced with SaaS, can help you move forward quickly in migrating to this new model. They can provide installation and load testing to determine the optimal set-up for your multi-instance configuration; adapt your software to migrate from multi-instance to multi-tenant; or develop a multi-instance or multi-tenant application from your client/server application.

Importantly, an outsourced developer can modify your existing software product without disrupting the flow of new features and enhancements that your present customers expect. With a managed outsourcing relationship, you can continue to focus on your current business while outsourced developers are creating software to support your new business model. Outsourced developers will provide you both a cost and time savings in reaching the SaaS model.

To take a competitive advantage in your space by utilizing SaaS, you should consider working with an experienced vendor to guide you through the process of transforming your application.

Who is Using Software-as-a-Service?

Software as a Service (SaaS) has been touted as the answer to I.T. Manager software administration’s nightmare. Simply stated, SaaS is a replacement for business software that is not available for a paid subscription model when you travel for software use. The use of subscription software is most often via the internet to software vendor websites that are hosted on their computers. For I.T. Manager, the benefits are many; no hardware to buy or maintain, no software patches and updates to apply, no complicated licenses to decipher, and no deployment of applications to corporate PCs and laptops.

So who is actually using SaaS? The frugal who understand value, of course.

This author has been actively selling software services to small and medium businesses and has noticed this interesting trend. While everyone has heard of the poster children of SaaS: Google Apps, SalesForce.com, RingCentral.com, and so on; the true success of SaaS will be the proliferation of many niche products that are migrating to the subscription payment model. This author has found that thrifty organizations are most open-minded to the value of membership software. Concentrating marketing and sales on these groups yields the most results.

Early Adopters
Being frugal does not mean being cheap. Quite the opposite, it’s knowing how to stretch a dollar the furthest and be willing to spend that dollar. It’s no surprise that the early adopters of SaaS are the small technology and start up companies. Entrepreneurs are never shy about trying new ideas and rewriting the book on how one should run a business. If there is a service that can stream line running a business, then it’s a no brainer. SaaS products often replace the need for a dedicated employee for routine business tasks. FreshBooks.com is a great example; a small company certainly can save time, money, and possibly a new hire when implementing this totally online invoicing system.

The Surprise Users
Industries that have been around for a long time, manufacturing, transportation, and so on, are embracing SaaS. One can not judge the tech savvy level of an organization by the size of its I.T. budget. Traditional companies often have small I.T. departments, but they understand and appreciate technology as much, if not more, as their larger I.T. department counterparts. They have been taught over the years, over the decades, the success to technology is evaluating the actual cost and benefit to any capital purchase. Let’s give them a star for following common sense.

Who’s Not a Fan
Self proclaimed sales experts often teach to pursue organizations with the largest budgets. This least cerebral approach dictates that if someone spends millions every year on software, they would have no problem parting with a mere few thousand on yet another software product. This is completely false within the real world. Large I.T. departments, relative to any size company, are often the least likely to pursue subscription software. There may be many reasons why, but essentially they boil down to two motives. Large I.T. departments are often mini software companies themselves. Teams of software developers, often with no decision making powers, easily dismiss reviews of software service products out of complacency for their own projects and desires to make the next cool app themselves. SaaS often leaves a sense of obsolescence for the team that should have already been providing this service.

Secondly, organizations with large technology infrastructures often fall under the I.T. black hole mentality. This is the paralysis of everyone else in the company to shut down common sense and channel all technology related thoughts to the I.T. Department. Bureaucracy here kills innovation.

Software-as-a-Service is many things. This is a new approach to software, as you might expect, with service as its main benefit. Services for managing software, and sometimes building it, have been handled by internal I.T. department. This is a service that can now be purchased as a subscription such as fees for your favorite country club. Why build and maintain your own golf course when you can play rounds whenever you want with your club membership?

Partners & Suppliers in the Oil & Gas Services Sector – Part 2

9. Prosafe ASA (Norway)

Prosafe operates globally and has about 340 employees. The company is headquartered in Larnaca, Cyprus and is listed on the Oslo Stock Exchange with ticker code PRS. Operating profit reached USD 222.2 million in 2007.

Prosafe comprises a parent company and the business division Offshore Support Services, the world’s leading owner and operator of semi-sumbersible accommodation/service rigs.

Prosafe has more than three decades of operational experience from the world’s largest oil and gas provinces. With an excellent uptime record, a solid financial performance and the ability to offer innovative in house technology and cost-efficient solutions, the company has positioned itself as a provider of high quality services.

Prosafe owns and operates 12 accommodation rigs (flotels).

10. Reservoir Exploration Technology (Norway)

Reservoir Exploration Technology ASA (RXT) is a marine geophysical company specialising in multi component seismic sea-floor acquisition.

Until May 2006 RXT has been operating one crew in the Gulf of Mexico, a dual vessel operation comprising a shooting vessel and a cable/buoy handler. Their GOM operations started in June 2004 and have demonstrated the superior imaging capabilities of the VSO sensors and cables.

RXT is planning a change according to the info on their site: “What we are going to do; Innovative business models to drive the marine multi-component business: In producing fields, For obstructed area long-offset applications, For time lapse 3D, Develop a “tool box” of acquisition methods (For deep water, For shallow water, For transition zone), Focus completely on what we do best: Marine acquisition.

Vision-statement: “to become the leading supplier of multi-component sea-floor acquisition.”

11. SBM Offshore (Netherlands)

SBM Offshore N.V. is a pioneer in the offshore oil and gas industry. Worldwide, we have over 4,000 employees representing 40 nationalities, and are present in 15 countries. Our activities include the engineering, supply, and offshore installation of most types of offshore terminals or related equipment. In addition, SBM Offshore owns and operates its own fleet of Floating (Production) Storage and Offloading units. SBM Offshore has a track record of developing innovative, cost-effective solutions for the ever-changing needs of its Clients. Each company of the group contributes its technical expertise, making SBM Offshore a market leader.



became a pioneer in Single Point Mooring (SPM) systems, dynamically positioned drilling vessels, jack-up drilling rigs, and heavy offshore cranes.

SBM Offshore’s present activities include the engineering, supply, and offshore installation of SPM systems for offshore loading and unloading of vessels or the permanent mooring of offshore oil production and/or storage vessels, as well as the turnkey supply of complete floating facilities for the production, storage, and export of crude oil and gas.

The latter comprise (FPSOs), (FSOs), (TLPs), (FPUs) and (MOPUs).

12. Sevan Marine (Norway)

Business Model

Sevan Marine ASA is listed on Oslo Børs (ticker SEVAN) and is specializing in building, owning and operating floating units for offshore applications. The Company has developed a cylinder shaped floater, suitable in all offshore environments. Presently Sevan Marine has four floating production, storage and offloading units (FPSOs) and three drilling units contracted to clients. The Company is also developing other application types for its cylindrical Sevan hull, including floating LNG production and power plants with CO2 capture.

The Company’s business strategy is based on a Build-Own-Operate model, which gives Sevan control over the value creation chain.

13. Saipem (Italy)

“The Group is now the largest, most powerful, most international and best balanced turnkey contractor in the oil and gas industry.” The organization has been rationalised into three global business units: Onshore, Offshore and Drilling. It enjoys a superior competitive position for the provision of EPIC/EPC services to the oil industry both onshore and offshore; with a particular focus on the toughest and most technologically challenging projects – activities in remote areas, deepwater, gas, difficult oil.

Along with its strong European content, the major part of its human resource base comes from developing countries. Saipem employs over 30,000 people comprising more than 100 nationalities… it employs large numbers of people from the most cost effective developing countries … and has sizeable service bases in India, Croatia, Romania and Indonesia.

Saipem has a distinctive Health & Safety Environment Management System and its Quality Management System has been granted ISO 9001:2000 certification by Lloyd’s Register Certification.

14. Subsea 7 (Norway)

Subsea 7 is one of the world’s leading engineering and construction companies offering all the expertise and assets that make Subsea Umbilical, Riser and Flowline (SURF) field development and operation possible.

With a multi-national workforce in excess of 5,000 personnel, the company’s offshore operations are supported out of the North Sea, Africa, Brazil, Gulf of Mexico and Asia Pacific.

Subsea 7’s experienced and skilled project managers and experienced engineers offer all the disciplines that make subsea oil & gas development and operation possible, including complete EPIC services, and life of field IRM services.

These services are supported by a modern fleet of pipelay, construction, diving and ROV support vessels. Global Operations include logistical and spool bases which are supported by dedicated in-house survey and positioning resources together with technology development, including robotic intervention services.

“Our deep-rooted health, safety, environmental and quality culture is inherent in all we have achieved to date and remains the pivotal foundations of performance.”

15. Technip (France)

Engineering, technologies and construction services for Oil and Gas, Petrochemical and other industries.

“Backed by 50 years of experience and thanks to the expertise and know-how of its teams, Technip is a key contributor to the development of technologies and sustainable solutions for the exploitation of the world’s energy resources.”

2007 key figures: 23,000 employees in 46 countries, Industrial assets on five continents, A fleet of 19 vessels by 2010, Operating income from recurring activities: EUR247 million, Revenues: close to EUR 7.9 billion.

Fields: subsea, offshore and onshore.

16. TGS Nopec (Norway)

TGS-NOPEC Geophysical Company (TGS) is a principal resource for global non-exclusive geoscientific data products and services in the oil and gas industry. Countries worldwide have entrusted TGS to assist with licensing rounds and the preparation of regional data programs. This global presence, which includes offshore surveys conducted in more than two dozen nations, is made possible by a diverse staff on three continents. Success in this competitive marketplace reflects a proud reputation for benchmark quality and personalized service.

1. Geophysical products & services. TGS specializes in the design, acquisition and processing of 2D and 3D multi-client seismic surveys worldwide.

2. Geological Data products & services. An industry-leading digital well log collection, well data management & services, multi-client interpretive products and subsurface consulting are also available from TGS.

3. Imaging Services. TGS delivers advanced high performance imaging and software solutions to support its geoscience data programs.

17. John Wood Group (GB Scotland)

Wood Group is an international energy services company with $4.4bn sales, employing approximately 25,000 people worldwide and operating in 46 countries.

Wood Group is an international energy services company with more than $4.4bn sales, employing approximately 25,000 people worldwide and operating in 46 countries.

The Group has three businesses – Engineering & Production Facilities, Well Support and Gas Turbine Services – providing a range of engineering, production support, maintenance management and industrial gas turbine overhaul and repair services to the oil & gas, and power generation industries worldwide.

Wood Group is among the global market leaders in: deepwater engineering, offshore pipelines, artificial lift using electric submersible pumps, enhancement of oil & gas production in mature fields, the repair and overhaul of industrial gas turbines.

Wood group focuses on three areas: 1.Engineering and production facilities. Greenfield, infield engeineering, production enhancement and maintenance. 2. Well support and 3. Gas Turbine services. (*)

(*) – Information gathered from the companies websites…

H.J.B.

Understanding Marketing – An Overview of Strategies, Costs, Dangers and Risks

What is Marketing?

Marketing is a business discipline through which the targeted consumer is influenced to react positively to an offer. This can relate to the purchase of a product or a service, the joining of an organization, the endorsement of a candidate or ideology, the contribution or investment in a cause or company, or a variety of other choices of response.

The marketer can use a number of techniques to reach the consumer which can be based on artistic or scientific strategies, or a combination of the two.

Usually, the consumer is identified as a member of a particular segment of the populace, known as a market. For example, markets can be defined by age, income, area of residence, home value, interest, buying habits, industry or profession, etc., which facilitates and simplifies the marketing process. Knowing to whom the marketing effort is appealing greatly assists the marketer in developing appropriate language, reasoning and incentives to find success in its marketing efforts.

Choosing to target a particular market as opposed to the entire universe also greatly controls marketing expenditures but also may limit response. If anyone anywhere can be a customer, sales expectations may be higher but marketing costs will certainly also need to be higher as well with such a huge target as its goal.

To address this dilemma, more creative means of marketing are sometimes utilized to assist with marketing message delivery. If what is being marketed is considered newsworthy and of public interest, editorial coverage in the media can greatly assist marketing efforts. Since this usually is not reliant on major marketing funds other than what is needed to support the development, distribution, and yes, marketing of press releases to editors and publishers, the advantages of such publicity can be priceless, albeit usually miraculous on such a large scale.

Marketing is everywhere!

Everywhere we turn, everything we do is somehow connected to marketing, whether we have been induced to participate in some activity because of it or develop an interest in some idea as a result of it. Whether we realize it or not, there are personal, political or commercial agendas cloaked as news we read in the paper, behind the books, movies and music we experience as part of our culture, and within the confines of our stores and supermarkets where we shop. Of course, we easily recognize the blatant marketing efforts that reach us through direct mail, media advertising, and all over the Internet including the spam we receive ad nauseum. Marketing has become one of the most all-pervasive elements of life and we are fools if we do not question the validity or innocence of everything we read, see and hear.

Marketing is communication and education!

In order to be successful in business marketing, the customer must be reached in a variety of ways. First of all, not every customer gets the daily paper or listens to local radio. We have limited knowledge of which TV station they may watch, where they shop, what roads they travel or where they dine. Depending on what we are marketing, we may have to utilize a whole assortment of avenues of marketing to get their attention. And, if we reach them just once, that is hardly enough to make a lasting impression. Marketing is necessary on a repeated basis in a diverse number of ways in an ever-changing presentation to assure that every customer can relate to it in some way, learn what we are offering and understand how it can benefit them. To achieve long-term customer loyalty, the targeted consumer needs to be coddled into familiarity with what we are selling so they feel it is something they truly want as opposed to having it forced upon them as something they desperately need, only to find out later they were tricked!

Marketing Sounds Expensive!

Yes, marketing can get pricey particularly if it is done on a consistent basis. But in today’s world, we have marketing options we never had even twenty or thirty years ago. Now, instead of paying for expensive printing and postage to mail a brochure or postcard to a targeted consumer, we can utilize email marketing, website presentations or online banner ads to reach the same market, usually at a fraction of the cost. Today, instead of buying expensive print advertising, we can work on improving our website’s SEO (search engine optimization) – (something we can do for free, if we are so inclined) so that people in need of what we offer can find us through Internet searches, rather than our trying to find them at an astronomical expense.

What About Social Media Marketing?

In addition to alternative marketing options already mentioned, there is the latest craze for Facebook, Twitter, LinkedIn, and other incredibly popular social media where people, young and old, spend hours developing relationships with “friends” they may never have met or ever will meet. Yet they share intense secrets of their deepest thoughts and desires as well as actual photographic representations of the same which sometimes land people in trouble with the law, or at the very least, their employer, school or parents.

Whether social media marketing is a worthwhile endeavor for businesses remains to be seen since businesses rarely accumulate millions of followers the way celebrities do. But as a way for customers to interact with a business for which they may have developed a fondness cannot be disputed. Can this translate into more sales for the business? We’ll have to wait and see, while continuing to devote precious time to composing meaningful 140-character tweets and building a Facebook “persona” for the business. From this writer’s standpoint, the only worthwhile social medium for business is that of LinkedIn since it provides a serious platform on which to create a business résumé where anyone interested in your professional stature can quickly summarize your capabilities, experience and accomplishments.

Marketing Can Be Intuitive

Much of what becomes marketing strategy is based more on common sense than on some mysterious scientific formula. As we see on a daily basis in stock market gyrations as well as political leanings, the herd mentality rules. On any particular day, if the Japanese or European stock or bond markets are selling off for one reason or another, you can safely bet that the U.S. markets will follow suit. And in any political race, as we are witnessing in the U.S. presidential primaries, the more one candidate gains ground, baby step by baby step, the more likely that candidate will become the Party nominee. Today’s world is governed by a minute-by-minute opinion survey measured by the endlessly publicized polls where people see what other people are thinking and use those results to form their own opinions. Monkey see, monkey do. The same holds true for marketing.

If we are told that a certain brand of coffee is the leading brand in America, we will probably believe what we are told, assume it tastes best, perhaps buy it ourselves regardless of cost, and perhaps adopt it as our own favorite. All because we were told everyone else was doing it. Safety in numbers, as they say.

It is ironic that those who become successful marketers usually dwell on the outskirts of the herd, have a more astute grasp of mass psychology, and approach business and life in a more innovative, creative and unique way, a mindset they use to formulate the next marketing phenomenon. The world is made up of leaders and followers: a few choice leaders and a glut of followers. It takes a lot more gumption to become a leader than it does to join the herd. That’s why marketing is a profession based in psychological control by a choice few over the mindless masses who have no initiative or courage to decide for themselves.

What is the difference between marketing and selling?

Selling is one aspect of the greater process of marketing. Marketing begins long before the product or service is even ready to sell. Marketing encompasses the concept, naming, branding and promoting of the offer while selling is the much more individualized effort to convince a lead who has possibly responded to the marketing offer to make the purchase. You can’t have one without the other, at least not easily. Marketing is a process by which we strive to reach the final goal of making the sale. Without marketing, the sales process is extremely difficult because the entire onus of educating the consumer about the offer is on the shoulders of the sales representative. On the other hand, if marketing has been successful, the sales rep can waltz in knowing the consumer is well apprised of the offer and can work his magic to convert the prospect into a satisfied customer.

What are some of the instruments of marketing?

There are many ways to market an offer, some of which are expensive, and others of which can be free. The methods we use that cost us dearly may not work as well as some of those we receive as a gift. Among the costly ways are media advertising, direct mail, conference presentations, distribution of printed literature, online advertising, email marketing, etc. Of those that are free are efforts referred to as guerrilla marketing, which are things we do ourselves to spread the word, network and publicize what we are offering. This can include posting flyers on bulletin boards in supermarkets, libraries, delis, small shops, and government offices, etc. Every time we add a tag to our emails where people can click to go to our website, we are using guerrilla marketing at no cost. Making sure we are easily found in Internet searches through search engine optimization of our website or other online presence, is an excellent way to achieve free marketing. One way to do this is to register your company or organization on every possible free online directory in your industry, region or interest group which translates into exponential growth as time passes.

What is viral marketing?

Viral marketing (as it relates to the word “virus,” meaning contagious and capable of spreading) is another means of free promotion facilitated by shrewd decisions we can make to further our cause. The easiest way to define viral marketing is that which is communicated via “word-of-mouth.” Related to the herd mentality discussed above, if a friend or business acquaintance mentions a product or service in a favorable light, we will be much more inclined to remember it and check it out. This can happen in a business meeting, at a mall, at a soccer game or over lunch. However, since most of us spend so much time on the Internet, it can happen practically everywhere we turn by clicking on the “like” buttons on Facebook or the “1” button on Google, among others. These are our personal endorsements where we give a “thumbs up” to something we have experienced and want to share with our friends so they too can enjoy it. Getting your offerings out with such buttons attached can result in viral marketing in your favor.

Viral marketing can have powerful repercussions as experienced by one client with an online auto accessories store. Many of his customers frequent online special interest forums related to the model of car they drive where members discuss products they have installed and the source of their purchase, followed by a link to his referenced website. Such referrals are repeated in other ensuing discussions, multiplying the number of links back to his site, increasing the power of his SEO and catapulting him to the tops of Internet searches for what he sells. He paid nothing for this phenomenon of parlayed good fortune except the daily effort he consistently expends to offer top quality merchandise and equally excellent customer service.

Do you need marketing?

If you are in business, of course you do. While you can attempt to do as much of it as you can on your own, it is advised that you begin with a reliable base of professional name, logo, website and search engine optimization to get started on the right foot. From there, you can work on promotion via guerrilla marketing and seek professional marketing services as needed for special needs, like a strong, effective ad to run, the development of professional sales literature to distribute at an upcoming show, or a direct mail promotion to your list of repeat customers, for example. Some business people choose to handle their own taxes to save on the cost of using an accountant for such critical functions at the risk of getting audited. Likewise, you can certainly attempt to produce marketing tools yourself but for long-term branding purposes and best return on investment, it is advisable to leave marketing development to the professionals.

Niches Lead to Riches

It doesn’t matter WHAT your niche is.

It only matters THAT you have one.

AFTER ALL: Niches lead to riches.

Now, there are two potential types of niches you can leverage:

1. Niche Expertise

2. Niche Market

Having a Niche Expertise means you know a LOT about a SPECIFIC TOPIC that applies to a WIDE AUDIENCE.

So, it’s the answer to the question:

1. What, specifically, are you known FOR?

2. What word do you want to OWN?

FOR EXAMPLE: Let’s say you’re a consultant whose expertise is on how to handle angry, pissed off or difficult customers.

Fantastic! That’s what you’re known FOR.

And the good news is, entrepreneurs with Niche Expertise have several advantages:

They become a big fish in a big pond.

They apply their knowledge cross industrial.

They open wide doors for expanding their businesses.

They diversify their client base, which leads to new business.

They become the obvious expert sought out by the mainstream media.

They allow new markets to add multiple dimensions to their single topic.

Dave Jackson is a good example of this. He’s “The Angry Customer Guy.”

That’s Niche Expertise.

On the other hand, having a Niche Market means you know a LOT about a SPECIFIC GROUP OF PEOPLE to whom you apply MANY TOPICS.

So, it’s the answer to the questions:

1. Whom, specifically, are you known BY?

2. What industry do you want to DOMINATE?

FOR EXAMPLE: Let’s say you’re a consultant who works solely in the Jewelry Retail Industry.

Awesome! That’s whom you’re known BY.

And the good news is, entrepreneurs with a Niche Market have several advantages:

They become a big fish in a small pond.

They apply their knowledge cross-topical.

They open deep doors for expanding their businesses.

They specialize their client base, which leads to repeat business.

They become the obvious expert sought out by industry and trade media.

They allow industry trends to add multiple dimensions to their various topics.

Shane Decker is a good example of this. He’s “The Jewelry Store Guy.”

That’s a Niche Market.

Now, occasionally you will run into entrepreneurs that have both a Niche Topic AND a Niche Market.

FOR EXAMPLE: How to handle angry, pissed off or difficult customers … who shop at retail jewelry stores.

That’s a SUPER Niche!

And although it’s rare, if you can pull it off … good on ya!

You get the best of both worlds.

Either way, you MUST remember this process:

1. Focus first; THEN spray. Either covering your topic or your industry.

2. Develop specialized knowledge. Either about your topic or about your industry.

3. Pick a lane. Either the topic lane or the industry lane.

4. Go with gusto! Either about your topic or about your industry.

5. Become That Guy. Either “for” the topic or “by” the market.

REMEMBER: People prefer specialists.

Turn your niches into riches.

LET ME ASK YA THIS…

Are you niching?

LET ME SUGGEST THIS…

For the list called, “46 Marketing Mistakes Your Company Is (Probably) Making,” send an email to me, and I’ll send you the list for free!

4Ps & 6Ps – Marketing Mix

Marketing mix is one of the major concepts of marketing. According to the traditional base, there are 4Ps of marketing. These are referred to as the marketing mix. But in the modern use of the term, many more Ps have been coined. People have found six, seven even eleven Ps of marketing. In this article we will talk about the 4Ps and 6Ps.

Four Ps

The four Ps of marketing mix consist of Product, Price, Place and Promotion. Product means the thing that you are selling. It can also be a service like the tourism industry.

Price means the rate at which the product is being sold. A number of factors are involved in determining the price of a product. These include competition, market share, product identity, material costs and the value customers perceive of a product. In fact prices are also determined by competitor’s products. If the competitors have the same product, then the price of a product will go down.

Place refers to the real or virtual place from where a product can be bought by a consumer. Another name used for place is called “distribution channel”. Promotion is the way that a product will be communicated to the general public. There are four distinct ways in which this might be done- ‘point of sale’, ‘word of mouth’, public relations and advertising.

Somewhere down the line people felt that four Ps were not enough for marketing mix. It had to face a lot of criticism mainly on the grounds that it was extremely product focused. This was not enough for the economy which is based a lot on services as well nowadays.

Another criticism that marketing mix has to face is that it does not have a ‘purpose’. So it should be looked upon as a tool that sets marketing strategy. Another criticism of marketing mix is that it does not discuss customers. This is why the concept of Six Ps of Marketing mix has achieved relevance.

Six Ps

The six Ps contain all the four Ps of marketing – product, price, place and promotion. In addition, it contains, two new Ps, namely People and Performance.

People include the potential and current customers of the business and how they make their purchase decisions. Market segmentation is also a part of this. It contains the features of market segmentation and the most attractive segments of this market.

The next P is Performance. This implies the performance of the business. The financial and strategic objectives of the business are dealt with here. It is also seen whether these objectives are achievable and realistic or not. The metrics of financial performance are also seen and appropriated in this division.

The six Ps of marketing mix help to overcome the criticisms of the four Ps. Hence the 6Ps serve to be a better alternative as compared to the 4Ps of marketing mix.

Strategy of Foreign Direct Investment (FDI)

Owing to globalization and removal of trade barriers between countries international business has expanded and National Companies have been able to widen their horizons and become a strong Multinational Companies (MNCs). However, a decision to enter a new market and undertake a foreign direct investment is risky therefore a decision to make this step must be started with a self assessment. What are the core motives of pursuing this strategy? Does the firm have a sustainable competitive advantage? Where to invest? How to invest? Use direct investment or joint ventures, franchising, licensing, acquisitions of existing operations, establishing new foreign subsidiaries or just exporting. What is country risk and how to benefit from it? Further we will try to answer these questions.

Companies consider Foreign Direct Investment (FDI) because it can improve their profitability and strengthen shareholders wealth. Mainly they have two motives to undertake FDI. Revenue related and cost related motives. One of revenue related motives is to attract new sources of demand.A Company often reaches a moment where growth limited in a local market so it searches for new sources of demand in foreign countries. Some MNCs perceived developing countries such as Chile, Mexico, China, and Hungary such as an attractive source of demand and gained considerable market share. Other revenue related motive is to enter profitable markets. If other companies in the industry have proved that superior earnings can be realized in certain markets, a National Company may also decide to sell in those markets.

Some Companies exploit monopolistic advantage. If a National Company possesses advanced technology and has taken an advantage of it in domestic market, the company can attempt to exploit it internationally as well. In fact, the company may have a more distinct advantage in markets that have less advanced technology. Apart from revenue motives companies engage in FDI in an effort to reduce costs. One of typical motives of Companies that are trying to cut costs is to use foreign factors of production. Some Companies often attempt to set up production facilities in locations where land and labor costs are cheap. Many U.S based MNCs such as, Ford Motor and General Motors established subsidiaries in Mexico to achieve lower labor costs. Also, a company can cut costs by economies of scale. In addition to above stated motives companies may decide to use foreign raw materials. Due to transportation costs, a company may exclude importing raw materials from a given country if it plans to sell the finished goods back to that country. Under such circumstances, a more attractive way is to produce a product in the country where the raw materials are located.

After defining their motives managers of National Companies need to examine their domestic competitive advantages that enabled them to remain in a home market. This competitive advantage must be unique and powerful enough to recompense for possible disadvantages of operating abroad. The first comparative advantage National Companies can have is of economies of scale. It can be developed in production, finance, marketing, transportation, research and development, and purchasing. All of these niches have a comparative advantage of being large in size due to domestic or foreign operations. Economies of production come from large-scale automated plant and equipment or rationalization of production through worldwide specializations.

For example, automobile manufacturers rationalize production of automobile parts in one country, assemble it in another and sell in the third country with the location being stated by comparative advantage. Marketing economies occur when companies are large enough to use most advanced media that can provide with worldwide identification. Financial economies can be derived from availability of diverse financial instruments and resources. Purchasing economies come from large scale discounts and market power. Apart from economies of scale flourishing Companies benefit from comparative advantage in managerial and marketing expertise. Managerial expertise is an ability to manage large scale industrial organizations in foreign markets. This expertise is practically acquired skill. Most MNCs develop managerial expertise through prior foreign experience. Before making investments they initially source raw materials and human capital in other countries and overcome the supposed superior local knowledge of host country companies.

The third comparative advantage can be a possession of advanced technology. Usually, companies located in developed countries have access to up-to-date technologies and effectively use them as superiority. The fourth advantage is developing differentiated products so other firms unable to copy. Such products originate from profound research based innovations or marketing expenditures. It is difficult and costly for competitors to duplicate such products as it takes time and resources. A National Company that created and marketed such products profitably in a home market can do so in a foreign market with substantial efforts. After examining their comparative advantages companies decide where to invest. The decision where to invest is influenced by behavioral and economic factors as well as of the company’s historical development. Their first investment decision is not the same as their subsequent decisions. The companies learn from their first few foreign experiences than what they learn will influence their following investments. This process is complex which includes analysis of several factors and following various steps. In theory after defining its comparative advantage a company searches worldwide for market imperfections and comparative advantage until it finds a country where it can gain large competitive advantage to generate risk adjusted return above company`s rate. Once choice is made National Company will choose mode of entry into foreign market. Companies use several modes of entry into other countries.

The most common ways are:

• International trade

• Licensing

• Franchising

• Joint ventures

• Acquisitions of existing operations

• Establishing new foreign subsidiaries

Each method is discussed in turn with risk and return characteristics. International trade is a traditional approach that can be used by firms to penetrate markets by exporting or importing goods. This approach causes minimal risk because firms do not place large amount of their capital at risk. If the firm experiences a decline in its exporting it can normally decrease or discontinue this part of its business at a low cost.

Licensing is a popular method for National Companies to profit from international business without investing sizable funds. It requires companies to provide their technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other particular benefits. Licensing enables them to use their technology in foreign markets without a major investment in foreign countries and without the transportation costs that result from exporting. As local producer is located domestically it allows minimizing political risks. A major disadvantage of licensing is that it is difficult for company providing the technology to ensure quality control in the foreign production process. Other disadvantages include: are lower licensee fees than FDI profits, high agency cost, risk that technology will be stolen, loss of opportunity to enter licensee`s market with FDI later.

A joint venture is defined as a foreign ownership that is jointly owned. Companies penetrate foreign markets by engaging in a joint venture with firms that reside in those markets. A business unit that is owned less than 50 percent is called a foreign affiliate and joint venture falls into this category. Joint Venture with a foreign company is effective method if National Company finds a right partner. Advantages of having such partner are as follows: local partner is familiar with business environment in his country, can provide competent management, can provide with a technology that can be used in production or worldwide and the public image of the firm that is partly locally owned can increase sales and reputation. The most important is joint ventures allow two companies to apply their comparative advantage in projects. Despite notable advantages this method has disadvantages too. MNCs may fear interference by local companies in certain important decision areas. Indeed what is optimal from the point of one partner can be suboptimal for the other. Also, partners may have different views concerning dividends and financing.

Acquisition of existing operations or cross border acquisition is a purchase of an existing foreign-based firm or affiliate. Because of large investment required an acquisition of an existing company is subject to the risk of large losses.

Because of the risks involved some firms involve in partial acquisitions instead of full acquisitions. This requires a smaller investment than full international acquisitions and therefore exposes the firm to less risk. On the other hand, the firm will not have complete control over foreign operations that are only partially acquired.

Companies can also penetrate foreign markets by establishing their subsidiaries on these markets. Like to foreign acquisitions, this method requires large investment. Establishing a subsidiary may be preferred over foreign acquisition because in a subsidiary procedures can be tailored exactly to company standards. Plus less investment may be required than buying full acquisition. Still company cannot benefit from operating a foreign subsidiary unless it builds a steady customer base.

Any method that requires a direct investment in foreign operations is referred to as a foreign direct investment. International trade and licensing is not considered to be FDI because it doesn`t require direct investment in foreign operations. Franchising and joint ventures involve some investment but to a limited degree. Acquisitions and new subsidiaries require large investment therefore represent a large proportion of FDI. Many International Companies use a combination of methods to increase international business. For example the evolution of Nike began in 1962 when a business student at Stanford`s business school, wrote a paper on how a U.S. firm could use Japanese technology to break the German dominance of the athletic shoe industry in the United States. After graduation, he visited the Unitsuka Tiger shoe company in Japan. He made a licensing agreement with that company to produce a shoe that he sold in the United States under name Blue Ribbon Sports (BRS). In 1972, he exported his shoes to Canada. In 1974, he expanded his operations into Australia. In 1977, the company licensed factories in Korea and Taiwan to produce athletic shoes and then sold them in Asia. In 1978, BRS became Nike, Inc., and began to export shoes to Europe and South America. As a result of its exporting and its direct foreign investment, Nike’s international sales reached $1billion by 1997 and more than $7 billion by 2010.

A decision of why companies undertake FDI compared to other modes of entry can be explained by OLI paradigm. The paradigm tries to explain why companies choose FDI compared to other modes of entry such as licensing, joint ventures, franchising. The OLI paradigm states that a company first must have “O”- owner specific competitive advantage in a home market that can be transferred into a foreign market. Then the company must be attracted by “L”- location specific characteristics of a foreign market. These characteristics might include low cost of raw materials and labor, a large domestic market, unique sources of raw materials, or advanced technological centers. Location is important because the company have different FDI motives. By relying to location characteristics it can pursue different FDIs. It can implement either horizontal or vertical FDIs. The horizontal FDI occurs when a company locates a plant abroad in order to improve its market access to foreign consumers. Vertical FDI, by contrast, is not mainly or even necessarily aimed at selling in a foreign country but to cutting costs by using lower production costs there. The “I” stands for internalization. According to the theory the company can maintain its competitive advantage if it fully controls the entire value chain in its industry. The fully owned MNC minimizes agency costs resulted from asymmetric information, lack of trust, monitoring partners, suppliers and financial institutions. Self financing eliminates monitoring of debt contracts on foreign subsidiaries that are financed locally or by joint ventures. If a company has a low global cost and high availability of capital why share it with joint ventures, suppliers, distributers, licensees, or local banks that probably have higher cost of capital.

Properly managed FDI can make high returns. However FDI requires an extensive research and investment therefore puts much of capital at risk. Moreover, if company will not perform as well as expected, it may have difficulty selling the foreign project it created. Given these return and risk characteristics of DFI, Companies need to conducts country risk analysis to determine whether to make investments to a particular country or not. Country risk analysis can be used to observe countries where the MNCs is currently doing or planning to do business. If the level of country risk of a certain country begins to increase, the MNC may consider divesting its subsidiaries located there. Country risk can be divided into country`s political and financial risk.

Common forms of political risk include:

• Attitude of consumers in the host country

• Actions of host country

• Blockage of fund transfers

• Currency inconvertibility

• War

• Bureaucracy

• Corruption

A severe form of political risk is the likelihood that the host country will take over a subsidiary. In some cases, some compensation will be paid by the host government. In the other cases, the assets will be confiscated without compensation. Expropriation can take place peacefully or by force.

Beside political factors, financial aspects need to be considered in assessing country risk. One of the most clear financial factors is the current and potential state of the country’s economy. An MNC that exports to a foreign country or operates a subsidiary in that country is highly influenced by that country’s demand for its products. This demand is, in turn, strongly influenced by the country’s economy. A recession in that country can reduce demand for MNC `s exports or goods produced by its subsidiary.

Economic growth indicators positively or negatively can have an effect on demand for products. For instance, a low interest rates boost economy ad increase demand for MNCs` goods. Inflation rate influence customers purchasing power therefore their demand for MNC`s goods. Furthermore exchange rates capable to press on the demand for the country’s exports, which then affects the country’s production and level of income. Strong currency might reduce demand for the country’s exports, increase the volume of products imported by the country, and therefore reduce the production of country and national income.

Assume that Papa and Sons plans to build a plant in Country A. It has used country risk analysis technique and quantitative analysis to derive ratings for various political and financial factors. The purpose is to consolidate the ratings to derive an overall country risk rating. The Exhibit illustrates Papa and Sons country risk assessment. Notice in Exhibit that two political factors and five financial factors contribute to the overall country risk rating in this example. Papa and Sons will consider projects only in countries that have a country risk rating of 3.5 or higher. Based on its country risk rating Papa and Sons will not build a plant in Country A.

If the country risk is too high, then the company does not need to investigate the achievability of the proposed project any further. But some companies may undertake their projects with country risk being high. Their reasoning is that if the potential return is high enough, the project is worth undertaking. When employee safety is a concern, however, the project may be rejected regardless of its potential return. Even after a project is accepted and implemented, the MNC must continue to monitor country risk. Since country risk can change dramatically over time, periodic reassessment is required, especially for less stable countries.