Wednesday, March 21, 2012
A new topic?
OK, we've done great things in getting into international relations. This is important I think for it shows the important nature of international events and the possibility of the firm to be prepared for its reaction. There's not much we can do to control international events, after all. There are two topics in the course material coming into play here. First, is the CAGE test and next is the RATs test. The CAGE is that we consider relative distance culturally, administratively, geographically, and economically in determining opportunity. In the case of Iran or others I suppose we'd try to find things that were CAGE appropriate or at least not so distant as to cost too much to approach. In terms of RATs.. a topic or market should be relevant, appropriable, and transferable to our business model (or our business model is the other way - relevant, appropriable and transferable to the topic or market). How would you go about creating a schematic or metric to match CAGE and RATS to models or markets in a market for Shimano or in a country specific area like Iran?
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Has anyone else felt a little frustrated by the fact that, as a privately-held company, Gore doesn't have to release information to the public? It seems like every article I find about Gore is praising its lattice system but not going in depth to the companies manufacturing or marketing capabilities, etc.
ReplyDeleteP.S. Yes I know that this comment has nothing to do with the post.
Jared - I hear you. I was very surprised to hear that they had never gone public. It would be interesting to ask the Gore executive the reasoning behind staying private. Do they feel that it helps them maintain their unique business structure?
DeleteThat's the number one question for Dr. Begovac (although I bet he will decline to answer).
DeleteMaybe the Gore family, who owns, what, 70% of the stock, simply feels that they have enough money already. I bet the employees who have received stock as compensation would love an IPO.
Look through some of the cases, esp the second one - it addresses that part. I think they felt they wanted creative competence without a Board and stockholder intervention. Look through things.. see what you think..
DeletePublic companies are under greater scrutiny, they have more regulation, more pressure to perform, and maybe these controls would stifle the creative culture that Gore has created. One of the major reasons to go public is to get access to greater capital. It appears that Gore has other ways of obtaining capital. Public companies must also become more transparent with their financials and business operations and they may believe that this exposure to the outside will reveal too much.
DeleteIt could also be that Gore has some weaknesses they don’t want the public or their competitors to know about. The decision making processes will also likely be altered, slowed down, or complicated. These things could all affect Gore’s Mojo. Alternatively, there are greater opportunities to promote your company. Positive financial performance could bolster some of those intangibles like company perception, brand capital, and competitive advantage. It will be a good question to ask.
I found a number of articles about GORE in ABI/Inform Complete (The Proquest Database: this database has a lot of news and trade publication articles), and also in Business Source Premier (an Ebsco Database). These articles went into more detail about Gore’s process and actions than the Gore website but all the articles were generally positive. Perhaps Gore has processes in place to make sure they are consistently portrayed in a positive light in the media. For example, last year Columbia filed a complaint with the Commission of the European Union that Gore wasn’t following competition laws, but I haven’t found any information on the outcome.
DeleteThere are reasons for structuring as S Corp or Partnership or sole proprietor. One is to avoid the really pretty difficult issues of the SEC jurisdiction for shareholder accountability. While for us, SEC regs have value, for Gore, Inc. I would think the perception is one of a perceived and unnecessary risk behavior in adverse interests to the shareholder or institutional investor. Sure, it's inconvenient to find information but it'll be necessary here and in other endeavors you'll face. Gore probably provides internal sources of capital for projects, patents, and then reaps the benefits. With sales of more than $3 bn, I'm very sure they can afford that. They'll also have D&B ratings for banks, and very likely private silent or active investors from employees, family or interested outsiders. Reporting is less stringent, and the ability of the company to react quickly to an opportunity is preserved.
DeleteReading the second case does shed some light onto why Gore would want to remain private. There could definitely be some benefits to going public; access to additional funds to support more R&D, and an IPO would most likely generate a large pay off to employees and the Gore family. But by going public, the company would have to answer to its investors for all decisions made. I could see how this could significantly impact the culture of the company. For example,at Gore any idea gets 100% funding, some projects work some projects fail. I think if the company were public, investors would require the company much more selective in the projects that were funded.
DeleteOne of the articles I read in Fast Company discusses Gore's sustained innovation in relation to lack of pressure from reporting quarterly results. Gore is committed to delivering cutting-edge, quality products and have been able to do so in part because of the potential flexibility comes from being privately-held. Rather than rush to market with a substandard or "copycat" product Gore creates an environment where patience and quality is valued. The results can then be measured in revenues and double-digit growth rates.
DeleteI think it boils down to the way they want to keep control of their company. As soon as you go public you suddenly have all these pesky stockholders demanding returns. Gore's particular structure not only allows for failure but in some cases celebrates it as well and if they had the wrong B.O.D. they could have some conflict with that. And since they don't seem to need the additional funding at this point they probably don't want to lose their control.
DeleteI honestly don't see any great advantage for Gore to go public. Unless there is an internal need for aditional capital but I doubt that is the case. Gore stresses that they hold to a "Long Term" outlook on business. Many of their great successes were R&D skunk-works projects that would have never been funded under the pressures of investor requirements.
DeleteThat being said, I have seen the internal operations of some privately owned companies and it is not as pretty and organized as publicly owned companies. Because of the lack of transparency and detailed scrutiny, their operations are un-evolved and inefficient. I hope that this does not apply to Gore.
Well I’m in the same boat that Travis, I don’t know how much more Gore would benefit from going public, I share the vision that by going public without an explicit and eminent need for it will impaired the company decision making process, and for a company like Gore it can handicap the company in many ways such as delay of process and increase of bureaucracy. As per capital, doesn’t seems like Gore needs to go public in order to acquire investment capital nor to increase its R&D. Why go public, with such structure and success?
DeleteGore has been generating profits for the last 50 years and I feel a major reason for their success has been their decision to remain private. The lattice culture they have instilled within their organization is very difficult to emulate. Going public would place pressure on delivering short-term gains at the expense of their current long-term perspective. I agree that culture is beaten to death in every article written about Gore, but it’s a firm specific advantage that applies to many different cultures around the world. Terri Kelly discussed culture in an interview and how they have been able to apply it internationally… “The values that we possess in the US are universally the same ones they want in Asia. Who among us doesn’t want to be believed in? Who doesn’t want to feel that they can make a contribution? Most people want to be part of a team.”
DeleteI want to take a min to talk about the G element in CAGE. One of the important issue facing global businesses is the difficult reality of global expansion and working from large distances. It seems to not be so much of a problem this day and age with the use of technology, but it still exists. We learned in class that G stands for Geographic distances. When considering geographic distances we have to look into the physical distance between countries, the ease of transportation, and ease of access into the country. We have to make sure that the G is a good fit for our business. For example: It doesn’t make much sense to introduce a product like ice-cream to a remote chain of islands where the only transportation is done by boat.
ReplyDeleteThis issue is a large factor in our case this week. For CEMEX, the high volume/weight and low value of cement makes it hard to transport. This has caused the markets to be very regional and supported by a network of production facilities. the example given is that 90% of the product is sold within 300 miles of the production plant.
DeleteCEMEX over came this "G" by aggressive acquisition of production within target markets. The other way they overcame the geographic challenges and leveraged it into an advantage was the use of their ocean vessels and floating silo's.
Geographical distance is an element of huge consideration when determining whether to expand internationally, or even domestically for that matter. Especially with today's fuel prices. One thing I think banks and other financial institutions are able to leverage on (including ICICI from the case this past week) is an Internet based presence. Embracing the internet allows businesses this type of service industry to expand across borders without having to worry much about how to get its product throughout the regions. Marketing, cultural preferences, regulations, and other government requirements is a different issue that would need to be examined.
DeleteThe next part of CAGE I want to comment on is the (E) for Economic distance. Economic distance represents the differences in consumer wealth, income level and distribution, infrastructure characteristics. Economic distances include cost and quality of natural, financial and human resources. For example, it would not be a wise business decision to put a Gucci store in Ethiopia.
ReplyDeleteI think the economic distance gap can be lessened by applying different business plans. For example, Costco probably wouldn’t do well in a place like Iran where income is so low. In lower income areas, people can’t afford to buy in bulk, even though it is cheaper in the end, because the money has to be spread out among all necessities. In Iran perhaps a business plan that focused on smaller packaging, and therefore cheaper per purchase, would be more applicable. Another thing to consider when trying to cross an economic distance is determining what products will sell in that economy. Perhaps out of a business in the US that has 100 products or services, only 10 are a fit for an economy like Iran’s. Focusing on getting those applicable items/services to be successful in the new economy, instead of the companies entire portfolio, would create an opportunity to enter a new economy.
DeleteI can see it now... Gucci Addis Ababa, the top distributor for high quality Ethiopian Fashion. Complete with an order of Injira.
DeleteWhen I read the CAGE article last week, it talked about taking distance seriously and mentioned that the further away a business is from its target market, the smaller a company's sales. It also talked about physical distance and the presence or absence of common borders and how they affect business. As geographical distance increases between countries, FDI becomes more apparent.
ReplyDeleteIn the case of Shimano, the company currently does business in Asia, North America, South America, Europe, and Australia, and continues to look for opportunities to expand. In my research of the company I came across an article in Bicycle Retailer & Industry News entitled, Shimano Posts Modest Growth. In this article, it states that Shimano expects sales in Asian economies to continue to increase. This may be due in part to the CAGE framework at the country level where geographic distance plays a role.
Business on the home front; however, continues to be impacted as the Japanese economy has been in turmoil since the 2011 earthquake and tsunami. The article goes on to say that "rapid changes to currency exchange rates make business difficult for Japanese exporters." As I look at the CAGE framework, I believe the issue with currency falls under administrative distance.
With the growth of e-commerce, many companies are finding it necessary to establish a strong Web presence. By doing so, they can be one step closer to their customers, without ever leaving the home front. Social media is adding another layer to this mix and also impacting the way companies do business today.
Years ago, we relied on desktops or laptops to access the Internet; today, our mobile devices are our lifeline. Information is only a click away. According to the Internet newspaper, The Huffington Post, “by 2016, there will be approximately three billion Internet users globally.” “In the same year, the combined Internet economy among G-20 member nations is expected to reach nearly $4.2 trillion.”
Dr. Pete, what are your thoughts on this and will the geographic part of the CAGE framework continue to be relevant? I believe it will still play a role. Do you agree?
A good question and observation to be sure.... In my thoughts I think geography is still relevant. Remember, this is a decision making analysis technique. Together, they can point to demand strategies, demand mapping, benchmarking where others are, scenario building, and through value chain it can point to the margin producing elements that are required for addressing the geographic, cultural, administrative and economic distances. For instance, logistics and cost strategies are important esp if going to a geographically driven strategy. Also, the divisional or cell type of organizational structure may service specific geography better than home base could. I think a further point is that geography is important to consider esp is thinking about upstream and downstream strategies for important supplies or distribution, eg rare earth metals... Of course, administrative (eg government) and cultural barriers also apply. So your question of what do I think of this? I think it's all important and is used in the analytic frameworks for different business transactions, strategies, or scenario analyses.
ReplyDeleteRemember also - all that glitters isn't gold. I'm always very cautious about models like CAGE, BCG, McKinsey, Bain because they make it into the case and HBR writing to add to the practitoner's literature but also potentially to generate consulting clients. There's evidence to support CAGE, and RAT, and the consultancies are all of high quality. My concern is that a firm should act in its own enlightened self interest and try to decipher what's revenue driven by other firms and what poses as academic and what does both. With a good view to that, people can make informed decisions.
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DeleteThis theology applies to the risk management of business. Risk is not universally equal to all people or companies. Risk is a derivative of market knowledge, corporate capabilities, and a range of other factors. What is risky for one company is not for another.
DeleteFollowing the CAGE and RAT measurement tools are a good exercise but they can only take you so far. The rest is subject to FSA and the way they correlate to the market variables. The risk involved with taking a company to international markets can be mitigated through developing the needed FSA's.
Good point, Dr. Pete. I agree that firms should act and make informed decisions that suit their strategies. Thanks for your response.
ReplyDeleteI thought the Nokia article brought up some good examples of how the Administrative section of CAGE can help a business. There was a focus on education systems that helped to provide the resources need for strong R&D. Government policy also helped to liberalize the capital markets and make capital more easily accessible.
ReplyDeleteChina is also an interesting example of how administrative policies can affect business. China has become much more progessive in its business environment, but there are still many administrative issues to consider when doing business in China. For instance, when they had the Olympics over there, I remember reading about how the Government required certain businesses to close for an extended period of time. The closure of the business significantly affected the income of the business owners.
Another issue we touched on in class was the absence of protection of intellectual property in China.
Here is a great article that speaks to Chinese perception regarding IP... Arbitrage? http://jurist.org/dateline/2012/03/jiamin-chen-china-ip.php
DeleteAnother administrative advantage Nokia saw that contributed to their success was the competitive environment within Finland. While other countries were nationalizing their telecommunications industries, Finland took the opposite approach. By choosing not to nationalize telecommunications forced many companies to innovate in order to stay competitive. This environment forced Nokia to make R&D investment decisions to gain a competitive advantage.
DeleteThe CAGE/RAT stuff provides an excellent tool for analysis in IB. I watched a news story about a company (at the moment, don't remember precisely who...maybe RIM) discussing expanding. The spokeswoman touched on all four of those stories in one 5 min interview. Also, Friday's NYT provided an excellent example in the B-section too. Tie CAGE/RAT with enhancing the value chain through competitive advantage of nations and I think you've got a pretty comprehensive overview that will prepare a company for reaction to almost any current event, but more importantly, planning for operations in advance, or to use the b-terminology, "PROACTIVELY LEVERAGE DYNAMIC CAPABILITIES TO ENHANCE COMPETITIVE SPACE." (silly, no?)
ReplyDeleteIf I were Shimano I would not want to be in Iran right now due to the sanctions that have been placed on it as well as other coutnries that do business with Iran. Economically Iran is being shut off from the world to trade. This is impacting currency, foreign exchange, taxes, inflation, etc. How would Shimano be able to get money out of Iran, or get products into and out of Iran?
ReplyDeleteI get what you're writing. The pragmatics of being in Iran are difficult at best. Since we're writing on CAGE/RAT, how has the cultural, economic, administrative or geographic distance changed over the years for a Japanese company in Iran? Is the market still accessible? Relevant? Transferable using firm specific advantage? Is it at this time? What's missing? Will it be later? What needs to happen in order to address this market at a later date?
DeleteI get what you're writing. The pragmatics of being in Iran are difficult at best. Since we're writing on CAGE/RAT, how has the cultural, economic, administrative or geographic distance changed over the years for a Japanese company in Iran? Is the market still accessible? Relevant? Transferable using firm specific advantage? Is it at this time? What's missing? Will it be later? What needs to happen in order to address this market at a later date?
DeleteI get what you're writing. The pragmatics of being in Iran are difficult at best. Since we're writing on CAGE/RAT, how has the cultural, economic, administrative or geographic distance changed over the years for a Japanese company in Iran? Is the market still accessible? Relevant? Transferable using firm specific advantage? Is it at this time? What's missing? Will it be later? What needs to happen in order to address this market at a later date?
DeleteI think the likely international restrictions on Iran will open a vast array of opportunities for international firms. I say this based upon my experience in Iraq, where every major manufacturing facility and power plant had German or French made equipment and supplies. As sanctions tighten, the benefit of bypassing the sanction becomes even more profitable. If the firm is already established in Iran or a neighboring country (Iraq), then defining those black market channels is just that much easier.
ReplyDeleteIn terms of a RAT test I think cement hits the nail on the head. The CEMEX article about cement applies quite swimmingly here defining a RAT product. Cement is relevent appropriable and transferable in terms of global demand everywhere. Unless you live in an igloo in the Antarctic or among the Aborigines: buildings are all over the world. Concrete is the base substance. Its formula (unless you are going to make a substandard product) is basically the same. There is no secret ingredient to boost a competitive advantage. It is a product demanded in a market wherein the "game" of global business is 'a foot'. Success lies not in having a superior product but how you play the game; Capitalism in its purest form.
ReplyDeleteIt seems like Cement, Concrete, Aggregates and related products are products that falls easily into the CAGE test, once those products are used worldwide and doesn’t contradict with any political or religious law, thus we see that culturally, administratively, geographically and economically CEMEX doesn’t conflict with any country, as far as I am concerned, and the demand surely is in favor of the industry. Construction continues to go up, either by the private sector or by government expenditure, in all of it cement and concrete is not an option but a necessity. Thus I see a prosperous future for the industry as whole.
ReplyDeleteThe thing is that even if GAGE and RATs works for you at a certain point in time, it seems like any of these factors can change on your product and create an unfavorable environmnt for your product. Just like it happened with CEMEX when they were trying to expand to the USA. At first the market seemed perfect for them, but then current firms felt threatened and accused them od dumping. Causing the US to apply heafity duties on cement from Mexico. So it seems that even if all aspects of CAGE and RATs can be at you favor during a time, any of those parts could change and push out of the market.
ReplyDelete