Unknown Speaker 0:12

Hi, and welcome back. We're into the second half now module four, starting with
section 4.6, which is new market development. And obviously, this is really
important because when you've done your external analysis and your internal
analysis and looked at the types of new products or services you might be able to
make good to think about we're going to sell them go to a new geographic market and
new customer market. How are you going to decide? And what method will you use to
go into that market? First of all, though, I do like to do this more case practice,
we go back to looking at some things really about module three. So there's the big
hint, is four paragraphs here about fluid systems. They're a medium sized company,
and they make and supply high tech valve assemblies for the oil and gas industry.
They have some resources, some functions that are written into this case, and also
some information about what's been happening in their business. So I'd like you to
spend five minutes minimum 10 minutes maximum. And with this, I also want you to do
a SWOT because this is the sort of case where CPA would put it in perhaps with a
couple of extra paragraphs, make it an ER Q question. So you've got written answers
and ask you to do something like a swap. So pause it now you've got the case, pen
and paper, take some notes, and we'll come back with the first quiz questions go
far?

Unknown Speaker 1:47

Okay, quiz, which of the following statements is correct for statements there there
about information related to the case, but conclusions that you should be able to
draw? Pause it and have a go at the quiz?

Unknown Speaker 2:10

Okay, so it's See, they're undertaking a market development strategy. They're
trying to move into the Saudi Arabian market. They're using the same products,
they've got now the same types of products and then tried to go to a new market. So
why might the other ones not really work? The key strategy weakness is that the new
valve design fail. We're drawing too long a bow that we don't know that we need to
stick to case facts, we just have the information that the current valves are
failing and with their contractual arrangements, arrangements is causing an issue
their context setter? No, because that's their ability to influence in terms of the
business relationship. Chevron, we look at their stakeholder engagement. Are they
context setting with Chevron? No, they're not. They're just got the one the one
customer there, so they don't have the power, saying that as a supplier. Okay, next
one. Which of the following is most likely to be a strategic capability for Kluger?
maintenance service? I don't have any relationships or design or manufacturing.
Remember for tests to do here. So if you're not sure about this, go back and look
at that section in module three, pause it and complete the quiz.

Unknown Speaker 3:43

All right. Hope you gave yourself a good minute, minute and a half to do that.
Maven search program is the most likely. So yes, there's enough information in the
case. See sees not correct because it's not that rare, and it can be copied. And
the same issue with D there. It's it's potentially rare. Not necessarily that hard
to imitate. But again, it's most likely there's more information about this one. If
you're not sure. Looking back at the case, they are the only drilling supply
company that flies out their team to do the maintenance on site, which reduces
costs for the client. So it's valuable. Is it rare? Well, this bit helps us decide
that might be the only ones that do it. What about hard to copy, go back to the
previous paragraph. We can see the employees a handpicks over many years, they have
loyalty but also their competitors have high turnover rates. Okay. That means that
it's hard for their competitors to maintain the right people. It will be added to
deliver a maintenance program like this. We can, we can assume, and we can infer
from that that is going to be hard to copy. Is that substitutable? Not really
because remember, substitution is about utilizing another functional capability to
deliver the same outcome we're delivering maintenance on does valve assemblies? Can
we do it another way? The only way I can think of is that we chuck them out and
sell a new one. Right? So something has happened in other industries. If you think
like power tools, and the advent of companies like Bunnings, you buy it, you
utilize it for three months, it breaks and you buy a new one. This is not really
the same. So I don't see that it can be substituted. Excellent. Alright. Okay.
Maintenance costs per rig quality pass rates, rig uptime? Where would they go in
terms of the four perspectives of the balanced scorecard?

Unknown Speaker 6:08

Okay, costs with equipment failure, pass rates, all likely to be an internal
perspective, more, so they're there, they're going to be taking the customer or
learning development, they're not going to be in financial. What other things could
we have? It's not a quiz question. But just some of the measures might be able to
have number of customers number of new customers, that's a real problem for them.
Because we know they just got Chevron feedback scores or some other qualitative
measure about the maintenance, the customer service that they're doing have
experienced in the Saudi market. So think about it or reverse it the other way, if
they were already selling a risk for the company, they lose this contract, and it's
going to be more than damage is going to be devastating. Therefore, they have you
know, the two relate to each other here. Therefore, they have a weak bargaining
position. Even with a new customer who would know if they did their investigation,
that they the company politica only has Chevron's. Again, that new customer would

Unknown Speaker 7:26

have a pretty good bargaining position, opportunities out of the Saudi market when
other contracts opportunity, maybe the new redesign gives them a competitive edge,
but we don't know that yet. From the case information, threats, Chevron walk away,
you can see how threats and weaknesses can be closely related here. And also, we'd
have to pick up here that the costs of the current rig valve assembly failures,
could put them under financial

Unknown Speaker 7:58

distress Dress because it's got that information that says there's a risk here,
they have weak bargaining positions. And when they sign a contract, they were

Unknown Speaker 10:08

all the cost for a failure.

Unknown Speaker 10:11

Right, or another competitor moves in on them beats them to the Saudi market. And
that competitor has potentially location specific advantages. There's simple swap,
if you've got half of these well down, done three quarters of these excellent if
you only got one bullet point, per category, there is not good enough, you need to
go back, spend more time and then try to build it up and do it faster. Because
remember, the time pressure in the exam? Okay, new market development, really well
done on completing that case and doing the questions. Growth options Mazda been
really successful in Australia, what does it do? Well, designs and it builds cars
in Japan, and then sticks them on a boat, even does marketing that's tailored to
the Australian market sales is here, the customer services here. So the knowledge
of the customer needs to be here. So which of the following international growth
options are they doing? And obviously, I'm referring to a specific table, pause it
and complete the quiz.

Unknown Speaker 11:25

All right, export foreign sales subsidiary. How would I get to that? I would look
at figure 4.18. And specifically, I look at domestic what's happening. And then
where is the company going. So domestic is Japan, the country a is Australia, they
do the design production, and they do marketing in Japan, they also do marketing in
Australia, probably head office marketing strategy, integrated campaign orientation
has to be done in the country of selling, and they do the sales, the after sales
service and dealing with customers understanding the customer. So that's why we can
pick this particular one is the correct answer. strategic reasons for entering a
new market, it's related to the market in, in the sense that it's big. It's got
growth potential, the staple factors are in your favor, the profitability is, is
there, all potential is resource related. What about if you're in mining, and you
want to make your millions that are lithium? Lithium is the new wonder, mineral
deposit that goes into batteries, but it's not available everywhere. So you're
gonna be forced to go to a new market to potentially pull that out, you're probably
selling it as a commodity on an international market, but you've got to go
somewhere else to get it. Efficiency seeking this example here is not just the
people have been crammed into their cubicles, but also it is an image perhaps leads
down the path to the understanding of outsourcing because when companies have
entered a new market, they've utilized that potential, they'll have also efficiency
seeking, moving all of your manufacturing, but potentially your distribution other
things into a new market doesn't always mean manufacturing is coming back to your
domestic it can be a manufacturing over there now and selling and doing customer
service, but also because I can see potential in the market, but also efficiency,
safety, often related to labor code, quality, the business environment, this
particular graph here is talking about government support for renewable energy, so
I make fantastic wind turbines, and I want to sell them overseas. I can see here
that Germany, Sweden, not strong support for renewable energy, okay, they're
increasing their renewable capacity per person. Canada, but that's somewhere
further away, probably leave that Belgium in there easily in there. Alright, so
this is a way that is linking to the quality, but related, again, to pistol, the
quality in terms of the political changes and therefore help legal, maybe even
social, we think about something like renewable energy. Another table here 4.15. So
I've used an example here, volt. This is the first digital bank in Australia that's
received their license. And if we think about, say, starting with consideration of
expectations, they have to consider what market penetration they're going to get in
Can hear depends a little bit on the the way you define the industry. If it's
defined as all banking, then their market penetration is against those four. That's
the way that should be defined. Then again, you can look at something like the
timing, they have first mover advantage for a digital bank. Yes, for overall, they
turned us behind Westpac and Commonwealth Bank of Australia, but digitalized, they
are coming in early, there will be no doubt other competitors. Also you think about
here with this table enablers? What's sort of resources are they going to need,
they're not going to have to have officers, they're going to try and offer better
to deposit rates, which at the moment are absolutely dismal due to the economic
crisis that we're in. So they might be looking at not so much synergies, but the
speed they can come in what level of control they need, you can see how we then
link that to the modes of entry to a new market.

Unknown Speaker 16:07

I think, think about volte. But do that analysis further in your own time, I want
to move on to the next bit. Two things, I like to crunch it down and make it as
simple as possible. Should you do it? And how will you do it? The size, the value
of the market? That obviously is critical growth and profitability Pestell plus a
Porter's Five Forces, that's how was why module to an external analysis is so
important, you must come to conclusions about those two is the value proposition
right? What you sell in your market now may not be as readily accepted in another
market, you got to be quite careful about the value proposition being favorable on
a favorable example millpowder So baby formula in China is a value proposition,
right? And so loosely, it nails it because there's been instances of issues with
Chinese formula, and just more so Chinese customers do not trust things made in
China. As ironic as that might be. They don't trust it they don't like and
especially around food related products, especially around products related to the
children. And so they want internationally made baby milk powder formula,
Unknown Speaker 17:32
so it is absolutely for Bellamy's,

Unknown Speaker 17:35

Fonterra and others the right value proposition. Do you have the resources for
things like distribution and service, you can say also research and development,
manufacturing, etc. Now, new market considerations, obsolescence and leap frogging
until about these two, because the terms aren't that common to us. So here's an
example. Why have I put up a battery? Well planned obsolescence, that means
companies plan that they want you to have to purchase a new version of the product,
the Apple battery, unless you unscrew it, or know what you're doing does not come
out of the phone. When your battery runs out with your iPhone, what they want you
to do is buy a new one. Yes, there's also a relationship to the latest camera, the
latest apps and whatnot. But as an example, one of the things that may frustrate
something with iPhones is that you can't change that battery. You also don't get an
SD slot card you can have extra memory software is the classic software is all
about lasting a certain period of time and then no longer working. It's how you
need to update. The example of XP is something that was a complete disaster. So
they would have planned obsolescence to be later on to what it ended up. That makes
sense. They had to make XP obsolete much faster and move the next thing. Now this
one is skipping a whole segment is examples in the study guide. A lot of Chinese
people did not have a landline. Okay, they had really no phone in their house. And
then they switched straight from that to a smartphone. So they skipped cordless
phones and upgrades and innovation that was slow but steady and they move straight
to a mobile phone so they skipped a whole segment they leave from prices is the
product value more elsewhere. Here's a table of how much it costs for your average
pair of Nike runners $187 in Iran down to number 21 os $96 So what do you charge
now you better be very sure that you can get a price that works for you terms of
margins and reinvestment in the new market that you want to go to, you would
absolutely want to understand what you'll be able to sell your product for in
another market. This last one substitution, but also specific to cultures and how
they write products. So this map here is, is a common map about the difference
between individualistic and collectivist cultures. If we see Australia, New Zealand
here, the US and parts of Europe are more individualistic. Other places are more
collectivist. What other parallels can we draw here? Well, higher socio economic
countries are more likely to be individualistic. We also know through lots of
research that individualistic cultures will be more price sensitive. But they are
also able and willing to pay a higher price. They have more influenced by brand,
but collectivist cultures are more brand loyal. So lots of research in this area
and papers that you can read.

Unknown Speaker 21:04

What is interesting is, again, if you're considering about where you're taking your
product, you have to think about all the different aspects and the way that you're
going to sell

Unknown Speaker 21:17

and market and distribute your product. And the relationship between that and the
culture. Cultures of those geographic areas. Gave the timing right. David Davis did
not get the timing right. Economic Impacts political changes. Two examples. Harvey
Norman, they went into Ireland just before the global financial crisis, having
normally in cause it, I think, to some extent, I don't know the inside details.
This was bad luck. It hurt them significantly. Perhaps. They also went in very
aggressive. Lots of commentators were saying this whole financial bubble, debt
bubble is going to blow up. And as we're saying, Hey, you're all overreacting,
we're on a great gravy train. This one, Slater and Gordon, they were a law firm,
they still aren't just their law firm, that became a public company. And they
decided to go to a new market, the UK and they acquired a company. And they thought
this was going to make them billions. At the same time, though, through what seems
to be combination of arrogance, ambition, and just not reading the external market
not doing their due diligence in the sense on their pistol, they did not seem to
see that the UK panel was considering legislative changes. And those changes were
going to directly affect the market. They're going after what this company did,
which is a term known as ambulance chasing, but they do personal injury and
accident cases class actions, and the UK Government was changing things to make it
harder to win those. So it wasn't that the revenue didn't come through. Well, it
didn't it was also the acquisition cost by pay was so.

Unknown Speaker 23:19

High Hi, that they couldn't deal with the debt they taken on. They really stuffed
it up. success success factors, we will link to this back into the Pluto systems
case, didn't we? location specific advantages? Strategic capabilities? Can I get a
competitive advantage in the market I'm

Unknown Speaker 23:37

going into. And also this one, which is a classic for

Unknown Speaker 23:41

organizations not to do very well is I must grow I must go to this new market. It's
not worth staying home. I've got 12% of the market here. And you can argue well,
why don't you get 20 to 22 cents that could be worth hundreds of millions of
dollars to you in your current market. There's different reasons for this sometimes
can be cynical assays linked to senior manager bonuses. Other times its
shareholders. So shareholders in a public company demand two things. Give me your
profits back your cash profits as a dividend or reinvest them in projects and make
my dividend next year better or the share price rise 20% Don't sit on loads of
cash. Right that's that's very much an Australian thing very careful there. It's a
companies in Japan quite different. They have high cash reserves. They're more
concerned. So but there is a tendency that companies must grow avoided interesting
and even in consulting how sometimes senior management will have made up their
mind.

Unknown Speaker 24:50

That step they must do this. This last bit here, this section, it's just about
information. I'm putting it in to get out

Unknown Speaker 24:57

there. And I'm sure you're going to read it I don't think you're going to get a
quiz question on it. I don't think you're going to get an AR Q on it. It says
things like you can go to the IMD World competitors yearbook, and the World Bank
and other places for information to help you decide about whether you should enter
new management. Now is an important bit to modes of entry. So a large supermarket
chain wants to go into Europe, they have some things in place, or they have some
resources that you should read now, give yourself a minute or two minutes and
answer the quiz question. Pause the video now and have a go. Okay, wholly owned you
operations.

Unknown Speaker 25:48

Why might it be that? Well, I have money, they have the ability, they want control,

Unknown Speaker 25:53

and they are not worried about going super fast. So that's why we can come to the
conclusion of Holyoake. Walmart is that example. They went to Germany. And it
didn't work. There were some different reasons for it. One of them was definitely
the culture clash, but that's the way they decided to go in. That's what I base
that question on. Number one on modes of entry, you are exporting amazing summer
sandals from recycled materials. That's your thing. And so if you're a website that
your sales aren't that good, the cost of acquisition which is very important thing
to know about this as an accountant, if you work in this type of company that's
relying on ecommerce cost of acquisition for new customers much highly anticipated.
That's hurting your bottom line. Certainly about a bank on it. So which one are you
likely to do? Poorly pause it now the guy okay, see, your direct selling body
internet, you should change the indirect selling lots of third party platforms,
something like an Amazon. Look at table 4.16 Further information so that you can
see the breakdown between direct and indirect selling and the explanations that you
own 66 petrol stations were all across who most of them have a small shop, dreams
chips, chocolate, you want to increase your revenue, but you don't have the money
to invest. So you approach somebody else alley with a proposal. They're going to
help you here's the information about how it's going to work for both parties in
terms of revenue, which one a To Do do you think you should use for mode of entry,
pause it and complete the quiz

Unknown Speaker 27:55

or our strategic alliance? I am giving commission on the petrol they are getting a
commission per item on what sold on the shop. But I want them to provide me some
capital to increase or grow the stores more do we need to form an entity to do this
not necessarily. They could send around their expertise, their third party store
builders to to help install that right in a sense subsidize it. So they're getting
back a cut per item because they want to see my 66 stations. So a lot more. What's
an example of this? That calls Express calls and shell game together? Quite a
clever strategy. Here there's fuel prices. I don't know to accident live in
Australia, but I think they're all much higher than they currently are. Yay. The
old prices crashed. Alright, next video that we've had for quite a while now
because students love writing about the not being sure the difference between a
joint venture and a strategic alliance joint venture is a type of strategic
alliance in a sense. But there are specific attributes that make them different.
Also, foreign direct investment, Greenfield or Brownfield. So with the Greenfield,
their IP resources that you don't want to transfer, think about intellectual
property, things where you don't want leakage you don't want another party to get
hold of it's very important to you have the capital, loss of capital because
there's more risk with this you are setting it up from scratch. That's what
Greenfield Ms. Brownfield is that the resources are there. So we can see this link
between this and acquisition. You want market penetration faster immediately. You
want to lower the risk of cash losses You acquire to merge. But even with
brownfield think about things like exit strategy and how much that will cost in two
classic examples, war words with masters and bands with homebase the values of
mergers and acquisitions, generally they don't work. Now, I have generalize, but
most of the research shows that many of the mergers and acquisitions don't deliver
all the synergies and all the things that they mentioned consultants promised,
connect challenge the million dollar fees to help. One of the reasons well, they
very overpriced, intangible assets, for sure one, sometimes failed corporate
governance. But sometimes these big companies have got strong corporate governance
structures before they come together. Systems Integration causes a lot of pain
doesn't always make it fail. This one is, I think, often overlooked. When we when
we look at these classic cases, and it's huge. Daimler, and Chrysler database and
Chrysler coming together like this Americans and Germans, AOL and Time Warner AOL
seen as seen as the arrogant upstarts. At the time this occurred in 2000, the
arrogant upstarts, because they were the biggest internet company. In the US, they
were the darling of the share market, Time Warner were older, established. And they
were seen as more conservative, in a sense, it wasn't merger, but it seemed to be
more AOL, AOL taking the reigns of Time Warner has 65,000,002,002, they had to
write down 99 billion, that is a staggering write down. And a lot of it had to do
with culture, the two cultures did not work together. So I do well, consolidation,
consolidation within the industry, shakeout stage, global reach, absolutely
vertical, or horizontal integration going up or down the value chain, getting into
it by purchasing others, as well as immediate diversification. So maybe entering
into a new market, or we want to diversify a new product into a new market, we can
buy them or merge with them, or perhaps defend position. Defending position will,
of course also relate to this. And things like the industry lifecycle when we come
out of maturity, and we head towards shakeout before horrible decline if it occurs.
Short term value is something that can sometimes drive it has benefits linked
through things like tax breaks,

Unknown Speaker 32:45

immediately can be online, so I don't mean online as on the web, but online running
immediate market penetration, potentially debt leverage game we're getting into
corporate finance here. But debt leverage can be a very good thing in terms of
gearing up your company in terms of the valuation of immediate savings, synergies
between systems coming together between unfortunate job losses in a lot of cases.
Unfortunately,

Unknown Speaker 33:18

a lot of it is also linked to short term incentives of senior managers. And there's
been an ongoing governance issue that I think

Unknown Speaker 33:27

business has been grappling with for many, many years with mergers and
acquisitions. And that is, the dollar signs light up in front of individuals and
board members who will potentially reap a lot of benefits from it. Although I'm
sure they still believe this is the best outcome for shareholders, table 4.17. Make
a note, link it to your index m&a guidelines, you can easily get a question on
that. Now, what the study guide doesn't have, hence, I did a few questions, there
is really a case for you to drill down and do modes of entry. I'm giving you one
now, you can decide to skip it or not. But I'm giving it to you because I know that
in previous exams on several occasions, there have been questions on this and
related to response. Potentially, it could be related to quiz questions, or could
be general MC cues. So we had some sort of general namesecure later short case. But
what happens if you get a longer one, so you need to give yourself time again, this
is a long webinar when you break it out. It's going is based on the GoGear case,
which is a much older case of CPAs. They make athletic compression apparel, you
need to read these three the information linked to the right tables in module four
is helping guide you to a potential answer for which mode of entry but to make it
even more laborious for you. I want you to write down some bullet points for all
other modes of entry mentioned. But you can put wholly owned and acquisition
together. Alright? So pause it, give yourself time, just jot down points, don't
write paragraphs, just chop down some points against each of the types of modes of
entry. And we'll come back and have a quick discussion

Unknown Speaker 35:28

Okay, exploit what's what I do now, it's allowed them to get their product into the
US relatively quickly, the IP risks are relatively low, but that I get the market
penetration. So they do it now you don't just roll it out, because they're doing it
now they got to do something different. But we go to those tables, they're not
going to get the fast growth that they want. The financial churns, generally lower
than other methods. It's going to be hard to justify that it's the one to go.
Licensing Greg low set up cost came into the night fairly quickly, but get high
penetration and exploit but not as high as other particular methods. They have
really limited control was the case, say, they want to say that the Board and
management wants to level some level of control technology leakages high, and in
the case says, well, they have to accept it, but they're quite concerned. But if we
look at licensing, it's really the most risky, a very high risk of IP leakage, it
just may be too much for the Board's risk appetite. And again, they might not get
the financial return. And you got to, you got to remember that that is going to be
a key target for for them to decide. Franchising in a hard won here, they're going
to set up stores for other people to run. They get some control of their brand, and
guess who run the stores in terms of who I let in as a franchisee. And it's got
lower costs than wholly owned operations, but the market penetration is probably
too, too low financial returns could be medium. The capital cost, though, it's got
to depends how the franchise relationship works do you sell at the stores? Do you
make the franchisee lease the stores and you just find some locations. So there's,
there's a few things here play that complexity in franchise, but really not
probably going to be the best one for them. Strategic Alliances bit of entries,
good upfront costs a bit larger than a JV or certainly wholly owned, and maybe a
bit lower than franchising should be. High market penetration is possible.
Technology leakage is still an issue, but it's lower than licensing and they might
be able to wear that. But they don't want to wear logistics risk alone, they're
looking to share risk. And that's one of the clues here to try and separate
strategic alliances and for joint ventures, I want more oversight of performance,
they want to understand what the partners doing,

Unknown Speaker 38:10

you could get that as strategic alliances you will more likely get is a greater
level of control. And that information if you've gone to the joint venture, it's
more formalized. And so that should allow you to to get that element for all right.
And finally, with wholly owned, control a brand that they want low IP leakage, but
the payout is great, the cost is just too high. Right? You just roll it out on the
cost and you can see the notes there. Alright, we now need to move on to the types
of counting issues you'll have a geographic expansion accounting issues in
geographic expansion, foreign exchange risks, really self explanatory sell in other
country, you got to receive revenue in that currency and you've got to exchange it.
So you can hedge against this, but you can only hedge so far, remember that you
can't use a lot of fuel. You can't hedge for any price. cuantas can't do that.
Certainly they hedge, but they would not get the price moves so much to a lower
area that we're still going to get some gains even though they might have hedged at
a much higher price. It's called far far further down, which is better for their
bottom line. So it can hurt you the other way before when prices were rising. It
was really hurt hurting them. I think it's about 30% of their costs is fuel. Right.
So three things to consider no physical presence in the new market or as a wholly
owned operations or have you got manufacturing or new product development occurring
somewhere else.

Unknown Speaker 39:59

Alright, so exporting money they're wholly owned money you're spending there as
well to exporting you're not really spending money in the market Hollywood's quite
different manufacturing NPj.

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