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GE $200M "ecomagination" Competition 9.30.10 Deadline

Do you have ideas for the improvement of our current power grid? GE is challenging businesses, innovators, entrepreneurs and students to share their ideas on how to build the next-generation power grid. 

In cooperation with Emerald Technology Ventures, Foundation Capital, KPCB and Rockport Capital, GE is offering a total of $200 Million to the best ideas. GE is looking for submissions in three general categories: 
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The GE Ecomagination Challenge gives entrants the opportunity to develop a business relationship with GE giving them access to GE's valuable networks/connections and up to $200 million in capital to help turn ideas into reality.


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Taiwan Green Industry Expo Showcases New Eco-Friendly Innovations 10.25-28.10






Taiwan Aggressively Promotes Green Industry Innovations at Government-Sponsored Expo in Taipei
To participate in the US-to-Taiwan Trade Mission, please contact us today!
events [at] intlcouncil [dot]org

EXPO PRODUCTS  
Wind Energy, Fuel Cell, LED lighting, Solar Power, Biomass Energy, Fuel Saving Vehicle, Electrical Vehicle, Energy Saving Tech &  Products, “Energy Saving Label” Products, Recycling, Pollution Prevention Equipment & Material, Green Building & Green Building-Materials, Organic Products, Water Resource Services, Water Treatment & Recycle, Water Materials & Instruments, Water Conservation Services, Water Conservancy Project, Water Related Products, Water Saving Device / Accessories.

Milan Film Festival Winner "Picture Me" Opens 9.17.10

Opening Night: Sept. 17, 2010 (Friday) RSVP  BUY TICKETS

6:00 PM - Pre-Film Meet-and-Greet @ Angelika Theater Cafe 
7:30 PM - Picture Me film starts
following the 7:30 show - Q&A with Co-Directors Ole Schell and Sara Ziff 
 
Angelika Theater BUY TICKETS
18 West Houston St. @ Mercer St.
NEW YORK CITY, NY 10012  (212-995-2000)
Cast Includes
Sarah Ziff, Gilles Bensimon, Karl Lagerfeld, Nicole Miller and more
Awards
Milan International Film Festival 2009 Audience Award
Ex-model Sarah Ziff turns the cameras on the world of high fashion modeling in the award-winning documentary PICTURE ME. Ziff co-directs with filmmaker Ole Schell in this expose featuring personal accounts from her decade-long career and in-depth interviews with photographers, designers and aspiring models, providing a voice to those often seen but not heard.  
RSVP   
Review by The Observer 
CASE STUDIES

JP Morgan, Chase, and M&A


INTRODUCTION

The recent merger between JP Morgan and Chase has strengthened both firms and increased its competitiveness in the global financial services industry, and in the M&A space. JPMC’s global competitive position within its industry will be analyzed through applying Porter’s framework. Strategic foci will be reviewed on increasing JPMC’s competitiveness in the M&A business, with an emphasis on Asia.

JP Morgan and Chase Manhattan are two of the largest power houses in the financial services industry. JP Morgan was known for its quality and reliability in investment banking, asset management, and operating services. Founded in 1854 by Junius Morgan, by 2000, the company reported a net income of $1.170 billion in 2000. Chase Manhattan is the third largest bank in the United States and known for its retail banking capabilities in the corporate and consumer market. Its revenue for the year 2000 were reported as $1.09 billion reflecting a drop of over 20% for the previous year.

Chase Manhattan believed it necessary to enter the investment banking sector in order to remain viable as a company and continue its growth worldwide. The weakest links in Chase Manhattan’s product line are its attempts to enter the investment banking market and its market share in Asia.

In 2000, the financial services sector experienced an array of mergers and acquisitions (M&As) including consolidation moves by Credit Suisse, Citigroup, and Swiss Bank. These corporations were expanding their product lines, customer base, and core capabilities by merging or acquiring companies who were capable of adding new core competencies to the existing corporation. Chase Manhattan realized early on that in order to survive and prosper, it had to increase its reach into Asia and develop a foothold in the investment banking sector. JP Morgan was the company of choice.

JP Morgan was strong in Japanese government bonds and asset management, while Chase offered retail and institutional stockbroking in the Pacific Rim. In Australia, JP Morgan offered project financing and securitisation. Chase Manhattan was a strong player in fixed income capital markets, syndicated loans, and an entry-level player in investment banking through its purchase of Ord Minnett. As a combined entity, JP Morgan Chase Co. (JPMC) offered a multitude of product lines to consumers and corporations ranging from credit cards, project financing, bonds, stockbroking, and insurance.

In December 2000, JP Morgan and Chase Manhattan merged in a deal reportedly worth $35 billion, one of the largest mergers in the history of financial institutions. After the merger, JPMC is acknowledged as a giant in the financial services industry with almost all product lines ranked in the top 10 worldwide. The power of JPMC is especially evident in M&A on an international level. JPMC is ranked first in M&As in Latin America and Asia by various observers (see Appendices). In Asia, JPMC commanded a reported $55 billion share in 2000.

JPMC M&A INDUSTRY POSITIONING

THE INDUSTRY

The deal between Chase and JP Morgan is part of a series of consolidations in the financial services industry. Credit Suisse Group's acquiring of Donaldson, Lufkin and Jenrette for $13.4 billion, Citigroup Inc. acquiring Associate First Capital Corp for approximately $31 billion in stock, and Swiss bank acquiring the Paine Webber Group Inc. for approximately $11 billion, were part of the larger trend in consolidation within the financial services industry.

The industry was also being faced with the emergence and growth of Internet – related brokerages such as the e-Trade Group, Ameritrade, Datek and Suretrade. These new competitors are offering innovative services more conveniently at a cheaper cost, winning away cost conscious consumers from individuals, Wall Street, and storefront businesses.
With the current environment of industry consolidation, the rapid ascent of “universal banks”, and the effects of Internet competition, JP Morgan could not remain independently competitive on the global stage for long.

The global financial industry is dominated by American brands such as Citibank, Merrill Lynch, JPMorgan Chase (JPMC), Goldman Sachs, and Bank of America. Despite a decline in the world’s economy, the financial services sector made a strong showing in Fortune’s 2002 Global 500 Ranking.

JPMC INDUSTRY POSITION

JPMC today, one month shy of its two year anniversary, holds an overall 54th place in the Global 500 with $50.4 billion in revenues. Recent accounting scandals from Enron and Worldcom, and looming SEC issues have not kept JPMC from holding onto 5th place within the banking sector. The top four global banks are Deutsche Bank, Credit Suisse, BNP Paribas, and Bank of America with $66.8, $64.2, $55, and $52.6 billion in revenues, respectively. JPMC did so well navigating its own post-merger operations that it won International Financing Magazine’s 2001 “Bank of the Year” award. Maintaining its inherited leads in its various business lines is JPMC’s challenge.

In the consumer arena, JPMC is one of the nation's top mortgage lenders, automobile loan writers, and credit card issuers. The company's investment banking operations (including JP Morgan H&Q) boast expertise in M&A consulting, risk management, and debt and securities underwriting. Its asset management business includes the prestigious JP Morgan Private Bank, institutional investment manager JP Morgan Fleming, and a 45% stake in mutual fund company American Century.

JPMC ranks first in arranging syndicated loans for corporations, first in derivatives and fourth in bond underwriting. It also boasts the world's second-largest private bank as well as the fourth-biggest asset management franchise.

JPMC is a formidable player in the M&A business, offering large clients with complex banking needs a “one-stop shop”. The 1999 repeal of the Glass-Steagall Act opened the doors for lending and cash-management services - the purviews of commercial banks - to exist under the same roof as stock and bond underwriting, the realm of investment banks and brokerage houses. As a result, Citibank paired up with brokerage firm Salomon Smith Barney to form Citigroup (the largest financial institution in the U.S.). Chase Manhattan Bank nabbed tony investment bank J.P. Morgan. Overseas, global marriages yielded UBS Warburg, Credit Suisse First Boston, and Deutsche Bank. These are the Goliath “universal banks”, which offer all products and services to everyone - individuals, small businesses, non-profits, middle markets, Fortune 1000 companies. Euromoney ranks JPMC #1 in mergers and acquisitions for many international markets. In the U.S. for 1Q – 3Q 2002, JPMC is ranked sixth, one step down from fifth last year in the same period (see Appendices).

The merger of JP Morgan and Chase created the second largest bank holding company in the country. In the United States, the merged group ranked behind Citigroup, with approximately $800 billion in assets, and Bank of America, with $680 billion in assets. Michael E. Porter’s Five-Forces model makes it possible to analyze the merger and determine the position of JPMC within its industry by examining the industry itself, its competitors, threat of substitutes and entry barriers.

The banking industry is highly competitive but also very attractive because of the high return on investments. The industry, which is mature, rewards those companies that have a fast learning curve as well as a brand name and image portraying stability and reliability. JPMC has all of the characteristics mentioned above and therefore should be able to maintain its position in the industry. Both companies have large economies of scale, a prestigious name, a large asset base and extensive geographic coverage.

The market position of JPMC eases its learning curve by providing the company with leverage in its sector, allowing it to compete aggressively and solidify its foothold in core markets. Barriers to entry are high, and as industry consolidation of “universal banks” continue, smaller players will be pushed out or limited to small niches. The product offerings of the “universal banks” are marketed locally, and JPMC should also continue this effort assertively. The aggressive nature of the banking sector allows consumers to choose between products; their buying power is increased as more savings are passed on to them. Consumers are able to determine their investment portfolio by using Internet brokerage companies and are no longer willing to pay large sums to traditional brokerage houses. A reduction in brokerage house investments from the private consumer lowers JPMC’s earnings while simultaneously increasing the consumer’s bargaining power.

As stated by Strickland & Thompson, “Mergers are an adaptive response by an organization to changes in its environment. It enables the organization to offer a more robust response to match environmental complexity.” The merger of Chase and JP Morgan created an organization where the sum is greater than the parts.

JPMC IN ASIA

 In order to understand the importance of the merger and its effect on M&As in Asia, it is important to analyze the industry and its components. Michael E. Porter’s Five-Forces model allows for the analysis of the industry by focusing on five key aspects: intensity of rivalry, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers.

The intensity of rivalry brings an important aspect for JPMC, product differentiation. In order to be truly competitive and gain market share, JPMC has to be able to differentiate its product line from its competitors. The threat of new entrants is limited since the financial services industry is a mature industry and start-up costs are prohibitive. There are a multitude of available substitutes in the financial services industry and JPMC must focus on building its client base while maintaining reliable, stable service. With the advent of Internet-based financial services corporations and do-it-yourself investment sites, customers have found a new base to wield their bargaining power. Suppliers have limited bargaining powers with JPMC since it contributes heavily to the overall quality of the industry, is forward integrated, and holds a substantial amount of assets.

Applying Porter’s Five-Forces model to M&A in Asia, the picture is not much different. JPMC holds a substantial market share with almost a quarter of all deals being financed by JPMC. The competition is Asia is as ferocious as in the United States. New entrants into the Asian M&A market would have to compete with an established brand name, a large customer base, and a history of success. Government regulations are also reducing the possibility of new entrants and securing JPMC’s hold on its market share.

The threat of substitutes in Asian M&A dealings is still the biggest problem. Consumers and corporations can take their pick of any number of successful and famous corporations. Again, in order to succeed JPMC has to differentiate its product line and build on its core competencies in retail and investment banking. The bargaining power of buyers remains the same while suppliers are dealing with a corporation of immense wealth and power.

In 2001 JPMC was named the top M&A adviser in Asia by Thompson Financial Securities Data (TFSD). JPMC was responsible for providing advice regarding financial deals in Asia totaling $55 billion dollars in 2000. The firm also provided advice regarding already closed deals which had a value of $58 billion dollars. Throughout 2001 JPMC concluded 60 M&A transactions, which was double the amount of the leading competitor, CSFB. This clearly shows the ability of JPMC regarding M&A operations. However, it should be noted that JPMC (mainly Chase at the time) had to invest millions of dollars during the creation of its M&A franchise. With the profits reaped thus far, the investment seems to have been a wise decision for the firm.

THE MERGER – JPMC HISTORY, INDUSTRY BACKGROUND

JPMC HISTORY

In 1854, Junius Morgan created one of Wall Street's most prestigious firms by taking over the London-based merchant-banking firm he had set up with his US business partner George Peabody. JP Morgan developed a prestigious brand image reflecting excellence in the financial market.

Chase was created combining the Manhattan Co., Chase National bank and Chemical bank. Its main strength is in retail banking including corporate and consumer banking. Aside from its retail banking operations, Chase’s brand name in investment banking did not reflect its capabilities. Previous attempts by the company to expand its investment banking operations had failed, and Chase believed the solution to this problem could be found in a major acquisition. A major acquisition or merger would allow Chase to strengthen its position and growth in capital markets, investment banking and all financial services businesses.
JP Morgan’s second quarter results for the year 2000 showed a net income of $1.170 billion against a net income of $1.104 billion for the previous quarter. Chase Manhattan, the third largest US bank in terms of assets, had reported net earnings of $1.09 billion by the end of second quarter of this year, down 21.6 per cent compared to the previous corresponding quarter.

THE MERGER OF JP MORGAN AND CHASE MANHATTAN

The merged company will have assets of approximately $660 billion and stockholders' equity of more than $36 billion. On a pro-forma basis, JPMC in 1999 had a net income of approximately $7.5 billion and revenues of approximately $31 billion. The merger agreement provided that 3.7 shares of Chase common stock were exchanged for each share of JP Morgan common stock. Each series of preferred stock of JP Morgan were exchanged for a similar series of preferred Chase stock. The transaction was accounted for as a pooling of interests and was tax-free to JP Morgan and Chase stockholders. The merger resulted in synergies of approximately $1.9 billion (pre-tax) and cost savings of approximately $1.5 billion (pre-tax). It also yielded incremental net revenues of approximately $400 million (pre-tax).
Entering the asset management market is associated with high costs and many analysts believe this will make it difficult for Chase to meet its market expectations. According to Chris Isidore (9/13/00) of www.cnnmoney.com “Chase paid top dollars and this is going to create substantial strains on Chase…there is tremendous execution risk going forward. I think its going to be very difficult cultural fit.”

The merger of Chase Manhattan Corporation and JP Morgan & Co. gave consumers premier brand names and core capabilities that will tremendously influence the product offerings of the industry and allow JPMC to continue being a global leader in the financial services industry. The merger was anticipated to position the company for growth and increased profitability. According to the CEO of Chase, “The growth will come from being able to offer Morgan’s broader range of products to Chase’s much larger client base.”

The wholesale business of JP Morgan encompasses investment banking (including strategic advisory, equity and debt capital raising, credit, and global trading and market-making activities), operating services, wealth management, institutional asset management and private equity. The retail business of Chase consists of credit cards, regional consumer banking in the New York region and Texas, mortgage banking, diversified consumer lending, insurance and middle-market banking.

The merger, according to the CEO of JP Morgan, Mr. Warner: -
- “Is a breakthrough for the companies and will position the new firm as a global powerhouse. With a formidable client franchise and a potent array of capabilities to address the full spectrum of clients' needs.”
- "This transaction combines the most comprehensive group of clients with extensive financial and intellectual capital. We will have the capability to meet our clients' needs anywhere in the world with trusted advice and integrated execution.”
- “Our new firm will have leadership positions across a broad array of businesses in growth markets. Expense savings will also result as we combine duplicate functions.” (www.egolia.com)

According to Hax and Majluf (1996) strategy is “an attempt to achieve a long-term, sustainable advantage in each of its businesses by responding appropriately to the opportunities and threats in the firm’s environment, and the strengths and weaknesses of the organization.” They further stated that strategy does not happen but is made by managerial actions and decisions when opening up new opportunities for sustained profitability in all of the businesses of the firm. For the J.P Morgan and Chase merger to produce the desired outcome, both companies must be in a better position than they were before. Consumers must be willing to place their trust in one entity and believe that they will increase their return on investments through JPMC's know-how. The company should use the opportunity to leverage their powerful brand name. They should be able to coordinate their strategic activities across countries. Finally, they should be able to achieve economies of scale and benefits from their combined experience curve.

INTERNATIONAL IMPACT OF THE MERGER

Chase Manhattan Corp. boosted its Asian investment banking business with its $35 billion acquisition of JP Morgan. In Hong Kong, Chase shifted its focus in money management from retail banking to investment banking by purchasing Robert Fleming’s’ Ord Minnett, an Australian investment bank. JP Morgan was strong in Japanese government bonds and asset management, while Chase's focus was on corporate banking. JP Morgan, with a firm foothold in global investment banking, had made its Asian headquarters in Tokyo, Japan.

The top three bookrunners of Asian equity deals in the first quarter of 2000 were Goldman Sachs, BNP Peregrine and China International Capital Corp, according to Thomson Financial. In 1999 in Asia, excluding Japanese mergers and acquisition advisory, Goldman Sachs, Morgan Stanley Dean Witter and Merrill Lynch & Co. Inc. took top honors, capturing 54.6% of the total deals valued at $34.9 billion. Thompson Financial indicated that JP Morgan was number five and Fleming’s number eight. Further, the purchase boosted its profile in retail and institutional stockbroking in Australia. JP Morgan Australia Pty has an established role in project finance and securitisation, while Chase is a player in fixed income capital markets, ranks as number three in high-grade corporate debt for international and Australian issues, and is also number three in syndicated loans.

From an international perspective, the merger was a strategic fit. The challenge lies in Chase and J. P. Morgan’s ability to assimilate the operations of both companies and merge two distinct organizational cultures will be of the essence to their survival. In order for cost savings to occur, duplication and overlapping of services must be eliminated. The resources of both banks need to be streamlined to produce stronger competitive capabilities in the international market. On a worldwide basis, in the year-to-date rankings for 2000, Goldman Sachs, Morgan Stanley and Merrill Lynch & Co Inc grabbed the top three spots for M&A adviser rankings, with Chase number nine and JP Morgan taking tenth place. In Japan it was perceived that the combined strengths of both companies would lift the standings of Chase and Morgan in the league tables.

Chase should be able to aggressively expand its international coverage and increase its customer base with the help of JP Morgan’s name in the international market. Both companies should be able to achieve synergies and deliver to the consumer a total package.
According to Bartlett and Ghoshal (2000) “The challenge of Global efficiency and competitiveness requires management to capture the various scale and scope economies available. As well as capitalizing on the competitive advantages inherent in its worldwide market positioning.”

CONCLUSION
AREAS OF SUCCESS

JPMC is currently one of the world’s premier investment banking firms and offers their clients multiple options for asset management. There are multiple areas of success that have lead to the success of JPMC as a commercial and investment bank. These areas include:

(a) Risk Management
JPMC is a premier financial institution and the largest provider of derivative solutions in the world. The experience of its financial managers and the financial structure of JPMC has allowed for the firm to better protect investors against volatility.

(b) Capital Raising
JPMC can quickly meet and exceed the needs of equity, debt, or private clients. This is accomplished by combining distribution capability and origination strength. After the merger JPMC became the world’s largest debt brokerage center due to its financial strengths in loan syndications and fixed income originations.

(c) Strategic Advisory
JPMC offers its clients tailored advice in several market sectors including reorganizations, M&As, and divestitures. Developing the right approach for its customers is an intricate process requiring the help of a management team. It begins by carefully screening its potential clients, evaluating the transaction, and finally executing the client-based strategy. This approach allows JPMC not only to understand the market sector of its clients but allows for the building of a customer specific strategic outlook.

JPMC also has an extensive amount of research coverage which involves over 3,000 companies worldwide. JPMC’s focus is upon the establishment of long-term client relationships rather than single profitable transactions. Its client loyalty rests with its ability to find solutions for the most complex financial challenges.

STRATEGIC FOCI

The M&A operation of JPMC is a significant achievement since the M&A market in Asia has a value of nearly $200 billion. Richard Kelly, head of JPMC’s M&A operations in Asia, stated that JPMC will once again be placed at the top of the M&A market. The main reason for JPMC’s advances in the M&A market in Asia is a shift in its focus regarding the M&A market as a necessity for overall success. The tactic that JPMC implements regarding M&A is quite simple. The firm locates countries in Asia that have created monopoly industries, resulting in a surplus of licensees and the need to merge with other companies to remain competitive. JPMC takes advantage of this by offering their M&A services as a solution. The target markets are currently the power and transportation sectors of the Asian economies. Another market that JPMC is considering targeting lies with companies that are adjusting to the concept of free trade and need financial direction. Whatever markets JPMC decides to target, it is almost certain that their expertise in the field will be the model example.

An example of a successful M&A operation in the Asia/Pacific region can be seen with the company BHP/Billition in Australia. This M&A transaction was the largest ever conducted in Australia and involved $35 billion dollars. When BHP and Billiton merged they created the world’s largest diversified mining company. JP Morgan had originally been the corporate broker and financial advisor to Billition since 1997. Since the creation of JPMC, the firm decided that it would be in the best interest of Billiton to merge with BHP resulting in higher revenues and a more efficient corporation. After the merger was completed BHP/Billition has indeed become more efficient and has experienced an extreme growth in revenue. JPMC believes that the main influences regarding expected 2003 M&A Australian operations will be international economic conditions and possible media regulation changes. Another factor JPMC takes into consideration is the continued attractiveness of the country due to the weak Australian dollar and the necessity for corporations to increase in scale, not to mention the current changes regarding the Australian Competition and Consumer Commission (ACCC) regulations. JPMC continues to advise the corporation regarding several other department acquisitions and currently holds lead management positions in its debt and equity financing divisions. This is just one example of how the opportunities in Asia will help maintain the competitive advantage of JPMC in Asia. After all, the firm itself is the example of how a merger can be successful and lead to increased future success.

In 2001, JPMC reported a net income of $1,694 million or .80 per share including merger and restructuring costs. When compared with the 2000 results of $5,727 million dollars or $2.86 dollars per share, the losses can be clearly recognized. These figures show that the economic conditions of 2001 negatively affected activity but did not present a significant threat to the M&A department. The absence of a significant threat to the M&A operations is due to an increase in opportunities for the combined entity’s equities business in Asia. During 2000, JP Morgan had ranked seventh in the Asian equity league tables according to figures supplied by Capital Data Equityware. With a 2.81% market share, it led 13 deals and raised a total of $1.196 billion. Since JP Morgan originally did not have much of an equity presence in Asia, the merger had allowed for the firm to penetrate this market. JP Morgan had originally tried to enter the Asian equity market in the past, but abandoned the tactic after it proved to be too challenging. Shortly before the merger, JP Morgan was attempting to correct this mistake by establishing a new platform from Japan. Since the merger, this process has become a strategic priority and JPMC is already advancing within the Asian equity market.

The $35 billion dollar merger of Chase Manhattan Corporation and JP Morgan is one of the financial industries largest deals presenting JPMC with new challenges. Within the financial industry, a larger firm usually is better if it has a solid foundation. M&A is only as valuable as the capacity and products that the firm has to offer its clients. The merger of JPMC has indeed created a formidable firm within the global financial industry but this is only due to the excellent management staff that conducted this operation. Chase voiced concerns that the combination of two different corporate cultures may cause difficulties after the merger. During the integration process, special attention was paid to making a successful transition without draining knowledge from experienced managers. Chase also had to increase its status in the profitable equity underwriting business and provide substantial evidence for the valuation it placed on JP Morgan. However, in the case of Chase and J.P. Morgan success depended on whether the executives could maintain the best people within each firm. With the success of Chase regarding past mergers, they were very selective and managed to retain the necessary people thus far to keep the firm moving forward. As the adjustment process continues, the overlap in the merger continues to create challenges, but the firm is overcoming the obstacles as they appear.

Despite the many challenges that JPMC faces after the merger, they are making a forceful effort to maintain their competitive edge. The firm is aggressively cutting expenses and has increased their goal regarding merger-related costs from $2.0 billion to $3.8 billion. Results showed that by the end of 2001, JPMC was holding 75% of their expected savings. However, overall results for 2001 were extremely disappointing. The negative results were not only attributed to the costs incurred by the merger, but also to the dramatic decline in the stock market and a global recession. Other negative factors contributing to its poor results were reduced volumes in M&A and initial public offerings (IPOs). All of these factors combined took an especially heavy toll on the investment banking and asset management businesses. Despite all of the negative factors, JPMC managed to perform better than most of its competitors. The firm’s cash operating return on equity was 10% in 2001, but when JPMC Partners were not included in the total, the return was actually 15%.

As the firm advances from one of its most difficult credit cycles there is a very forceful effort being made to minimize losses and improve overall operations. The management teams are cutting costs through employee reductions to improve operating revenues, while still addressing issues of merging the two organizations’ cultures. Most of the cuts were on the Chase side. Restructuring the private equity business to increase diversification and decrease risk exposure allows JPMC to invest significant capital with its clients. This allows JPMC to increase its revenue benefiting both the firm and its clients.

Middle markets restructuring and consolidation efforts should continue to strengthen JPMC’s position in the sector. Third quarter of this year, middle markets posted earnings of $91 million, a 26% jump over profits of $72 million in the same period a year ago.
Other areas of strategic focus include product differentiation. JPMC is competing with a number of players who are aggressively increasing their market share by offering products which compete directly with JPMC products. Clients, particularly Fortune 500 which are most likely to engage in M&A, are increasingly seeking the one-stop shop services of universal banks. For JPMC to remain competitive as it adjusts to its internal reorganizations, it must continue to innovate.

One of the M&A related services which can further drive revenues is the not-so-new practice of “tying”. Illegal for over three decades, universal banks can now utilize this marketing technique to win and retain business. In short, lenders “tie” their loan offers to deals in capital markets business. The fees from consulting are substantial, and by-and-large Fortune 500 client appreciate the one-stop shop packaged solution. What JPMC needs to watch more carefully is its role in counseling and producing creative lending, as seen in the Enron and Worldcom cases, which are closely related to each other.

From an international perspective, JPMC is demonstrating that the merger has only made the firm stronger. Since almost half of the firm’s revenue and income from wholesale banking comes from outside the United States, the international market is essential to the success of the firm. Once the restructuring process has been completed JPMC can employ its full vision and strategy for the international financial markets. With a global-local approach, JPMC can gain market share where it already clearly has a strong presence - Asia, Europe, and Latin America (see Appendices). As a universal bank, JPMC can aggressively pursue its new role as a full-service, integrated financial services provider to individuals of all types, governments, corporations, and other institutions on a global basis. Already strong as separate entities, united as JPMC with the power of both brands behind it, JPMC can maintain its competitive advantage and remain a leader on the global financial industry stage.


APPENDIX I

Euromoney 2002 Awards JPMorganChase Best M&A House

There weren't any huge M&A deals in the past year, but JP Morgan advised on some highly complex ones...in Brazil, JPMorgan advised mining giant CVRD on two simultaneous M&A transactions... It's that sort of complex transactions that can take well over a year and also involves large-scale foreign exchange hedging, in which JP Morgan excels.
Best M&A House in Latin America
Best M&A House in Chile
Best M&A House in Costa Rica
Best M&A House in Mexico
Best M&A House in Indonesia
Best M&A House in Taiwan
Best M&A House in Thailand
Best M&A House in Greece

APPENDIX B

Top 20 Advisers of US M&A Deals
First 9 months 2002
Provided by Dealogic, www.euromoney.com.

Rank Adviser US$ m Deals Jan-Sep 2001 Rank
1 Goldman Sachs 140,853 92 1
2 Lazard 80,667 56 16
3 Bear Stearns 76,813 34 11
4 Salomon Smith Barney 70,974 79 6
5 Credit Suisse First Boston 64,752 162 2
6 JP Morgan 57,763 95 5
7 Morgan Stanley 57,490 89 4
8 Merrill Lynch 48,866 68 3
9 Lehman Brothers 44,774 71 9
10 Deutsche Bank 31,143 58 7
11 UBS Warburg 27,664 50 8
12 Bank of America 20,185 51 14
13 Stephens 15,279 8 17
14 Dresdner Kleinwort Wasserstein 11,277 24 12
15 Houlihan Lokey Howard & Zukin 7,784 102 19
16 Rothschild 5,848 37 13
17 CIBC World Markets 5,431 6 20
18 Greenhill 5,160 15 15
19 Rhone Group 4,953 2 -
20 ING Barings 4,843 8 -

Criteria: excludes withdrawn deals and buyback programs, includes assumption of debt;
based on full amount credit, announced deals Jan 1 – Sep 30 with US target or acquiror nationality


APPENDIX III
SAMPLING OF GLOBAL M&A INVESTMENT BANKS

BNP Paribas
Specialized international banking group with a European base that focuses on expanding markets, emphasizing technological innovation, creativity, worldwide presence and distribution.

Brown Brothers Harriman
Based in New York and provides private equity capital to private and closely-held public companies with business values between $20 million and $1 billion.

CIBC World Markets
Investment banking and private client arm of the Canadian Imperial Bank of Commerce (CIBC) offering a full range of integrated credit and capital markets products, securities, brokerage and asset management services to corporate, government, institutions.

Deutsche Bank - GCI
Global Investment Banking Division provides a full range of financial and strategic advisory services to corporations, financial institutions and governments worldwide.

Dresdner Kleinwort Benson
Investment banking division of the Dresdner Bank Group of Europe. Dresdner Kleinwort Benson consists of four business lines: Global Corporate Finance, Global Equities, Global Finance and Global Markets.

ING Barings
ING Barings is the corporate and investment banking arm of ING Group, providing an extensive range of financial products and services to corporate and institutional clients around the world through a network of 89 offices in 49 countries.

JP Morgan Fleming
Asset management division of JP Morgan Chase that offers individual and institutional clients investment products consistent with their goals.

Lazard
A global firm with a long history in the traditional financial centers of New York, London, and Paris and offices in over fifteen countries.

Nomura International
The investment banking operations of Nomura International plc, the European subsidiary of the Nomura Securities Co., Ltd., are focused to meeting the needs of investors and issuers across Europe.

RBC Dominion Securities Inc
RBC Dominion Securities, a business unit of Royal Bank Financial Group, is Canada's leading corporate and investment bank.

SG Hambros
A division of the Société Générale Group, providing investment banking services.



REFERENCES
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Arnold C. Hax & Nicolas S. Majluf. (1996). The strategy concept and process. Upper Saddle River, NJ: Prentice Hall.

Arthur A. Thompson & A.J. Strickland. (2001). Strategic management concept and cases. New York, NY: McGraw-Hill Irwin.

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Caterpillar vs. Komatsu: Four Decades of Global Competition

Caterpillar: Market Dominator of Construction & Mining Equipment, Machinery

For more than 75 years, Caterpillar Inc. has been building the world's infrastructure, and in partnership with Caterpillar dealers, has allowed for positive and sustainable change on every continent. A Fortune 100 company, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is a technology leader in construction, transportation, mining, forestry, energy, logistics, electronics, financing and electric power generation.

In the first half of 2002, Caterpillar posted profit of $280 million or 81 cents per share, the total of sales and revenues of $9.70 billion. More than half of all sales were to customers outside of the United States, maintaining Caterpillar's status of an international business and leading U.S. exporter. Caterpillar products and components are manufactured in 50 U.S. facilities and in 65 other locations in 23 countries around the globe.

During the year 2001 Caterpillar invested almost $700 million in research and technological development. This allowed for the employees of Caterpillar to receive over 2,800 patents since 1996.


History - Caterpillar

Caterpillar Inc. was founded in 1925 when the Holt Manufacturing Co. and the C. L. Best Tractor Co. merged to form Caterpillar Tractor Co. Caterpillar aimed to be the leader in providing the best value in machines, engines and support services for customers dedicated to building the world's infrastructure, and developing and transporting its resources.

Fifteen years later in 1940, the Caterpillar product line now included motor graders, blade graders, elevating graders, tractors and electrical generating sets. With the outbreak of World War 2, Caterpillar track-type tractors, motor graders, generators sets, and a special engine for the M4 tank were bought in great quantities by the U.S. in its war effort.

In 1981, Caterpillar Financial Services Corp. was formed to offer equipment financing options to customers worldwide. This positive step in expansion has allowed for Caterpillar to become a major competitor in the international business world. A profile has been listed below to further explain the impact Caterpillar Financial Services has made regarding expansion of the corporation.

Profile - Caterpillar Financial Services

Based in Nashville, Tenn., Caterpillar Financial Services Corporation is the financial arm of the Fortune 500 company, Caterpillar Inc. It offers a wide range of financing alternatives for the complete line of Caterpillar equipment, solar gas turbines, products equipped with Cat components, fork lift trucks manufactured by Mitsubishi Caterpillar Forklift of America, Inc., and related products sold through Cat dealers. Caterpillar Financial Services also extends loans to customers and dealers around the world. Serving customers around the globe with offices and subsidiaries located throughout the Americas, Australia, Europe, and Asia, Caterpillar Financial offers competitive rates and customized financing options to meet customers' financial needs.

Major Achievements - Caterpillar Financial

Caterpillar Financial continued its growth in 2001 with record revenues of $1.62 billion. The increase of $177 million compared with 2000 was primarily related to a larger portfolio and increased gains on sales of receivables. Profit after tax was a record $212 million, an increase of $53 million from last year. The increase in profit resulted primarily from the larger portfolio.

Caterpillar Financial has also managed to penetrate multiple international markets throughout the world, creating an international dealer network. This process of internationalization continues to grow at an ever increasing pace and has allowed for Caterpillar to maintain the strategic international business status that it have today.
Caterpillar dealerships have continued successfully to work with Caterpillar Financial services around the world, serving customers where they work and live. Caterpillars Financial Services global locations include Korea, Malaysia, Philippines, Singapore, Thailand, Japan, Australia, Belgium, Czech Republic, Denmark, France, Germany (including Austria, Hungary, and Switzerland), Ireland, Italy, Netherlands, Norway, Poland, Portugal, Spain, Sweden, United Kingdom, Brazil, Chile, Mexico, two offices in Canada, and four regional offices within the United States.

In countries where Caterpillar does not yet have a physical presence, they provide financing through their Global Accounts Division.

History – Caterpillar: Other divisions

 Five years after the war, in 1950, Caterpillar Tractor Co. Ltd. in Great Britain is established, This is the first of many overseas operations created to help manage foreign exchange shortages, tariffs, import controls and better serve customers around the world. This expansion of Caterpillar into Europe allowed for Caterpillar to take its products and services into the international market.

The company next decided to create a separate sales and marketing division just for engine customers. Since the creation of the Engine Division, Caterpillar Inc has become a major player within the diesel engine market and now generates 25% of the total sales of Caterpillar Inc.
After Caterpillar had penetrated the market within the UK, the company next decided to attempt to enter the Japanese market.

Komatsu

The main competitors that Caterpillar faced within the Japanese market were Komatsu and Mitsubishi. The company of Komatsu was especially dangerous to Caterpillar due to the fact that it was the second largest EME company worldwide. Due to this danger Caterpillar decided to penetrate the Japanese market through a joint venture with Mitsubishi. The result of this was that Caterpillar and Mitsubishi Heavy Industries Ltd. formed one of the first joint ventures in Japan to include partial U.S. ownership. Caterpillar Mitsubishi Ltd. started production in 1965, has been renamed Shin Caterpillar Mitsubishi Ltd., and is now the No. 2 maker of construction and mining equipment in Japan.

Komatsu now understood the competition it faced but still held a 60% market share within Japan. With the threat of the Caterpillar/Mitsubishi venture taking place Komatsu decided to attempt a revitalization of the company. Since Komatsu mainly exported whole machines, the company soon realized that needed to also expand into other markets and set up assembly plans in places like Brazil and Mexico.

The management staff in Komatsu began to establish business relationships with multiple countries, primarily focusing on third world countries and the communist states that existed during that time. Komatsu lacked and effective dealer network, which forced the company to rely on nonexclusive dealerships. This ultimately led to Komatsu receiving smaller contracts than Caterpillar. Caterpillar's global dealer network provided a key competitive edge - customers deal with people they know and trust. This is due to the fact that almost all dealerships are independent and locally owned. Many have relationships with their customers that span at least two generations. Caterpillar dealers serve equipment, service and financing needs for customers in more than 200 countries. The rental services are also offered at more than 1,200 outlets worldwide.

Sources of success – Komatsu

 Komatsu has been a leader in innovative quality-control initiatives ever since President Yashinari Kawai decided to leverage MITI’s opening of the EME industry in 1963, and fight back in the face of the Caterpillar/Mitsubishi joint venture. He set 2 goals: acquire the best advanced technology from overseas, and Total Quality Control (TQC) systems.

New licensing arrangements were set with International Harvester, Bucyrus-Erie, and Cummins Engine. Within 3 years of launching TQC initiatives, Komatsu was awarded the Deming Prize for quality control in 1964, the same year of Project A’s launch.
Project A aimed to upgrade the quality of the small-medium-sized bulldozers, Komatsu’s primary product. In 1965-1970, despite the Caterpillar/Mitsubishi JV, Komatsu was able to increase market share to 65% through Project A.

In 1972, Komatsu launched Project B, focusing on exports and R&D of the large bulldozer, the main export, and was successful. As with Project A, ugrading of quality and reliability were key. The ratio of exports to total sales grew from 20% (1973) to 41% (1974) to 55% (1975).
By 1976, Komatsu held 60% of the Japanese market, Mitsubishi/Caterpillar, 30%. A cost reduction plan, V-10 Campaign, was initiated, as well as new product development programs.
Between 1976-1982, the end of the Kawai era, Komatsu made a significant decision to be freed of its licensing arrangements, and to broaden its product line to grow its dealers distribution system to better compete against Cat. 1981 saw Komatsu’s 60th anniversary, and the launch of EPOCHS. This project focused upon meeting market specification needs, without weakening its cost positions. R&D, individual plants, integrated and concentrated production systems, were all strengthened. In 1981, Komatsu was awarded the Japan Quality Control Prize, a globally supreme quality-control honor.

Performance – Komatsu (1980’s)

In 1982, after 18 years of incredible growth, Ryoichi Kawai handed leadership to Shoji Nogawa. The performance of Komatsu deteriorated so quickly because the company continued to focus on traditional policies, such as it’s reliance on highly efficient centralized international production facilities. This problem became much worse as external pressures increased: falling demand, worldwide price wars, a rapidly appreciating yen, and heightened trade frictions throughout the industry. Komatsu also faced antidumping suits. In 1985 the situation reached a climatic point when the yen suddenly surged from a dramatic decline.

Mr. Nogawa was very slow in implementing his short and medium term recovery plans, including raising prices abroad, expanding overseas parts procurement, and cutting production costs. Mr. Nogawa also rejected a proposal by American distributors to move additional production overseas until is was too late, by this time the yen had increased even further. Ultimately, Chairman Kawai decided to replace Mr.Nogawa with Masao Tanaka in June 1987.

Executive Performance – Komatsu: Tanaka, Katada

Both Tanaka and Katada managed to manage an increasingly difficult situation similar to the one that plagued Nogawa. Tanaka was defensive in his decisions, hedging against the high-yen environment, and managed to pursue internationalization much more than Nogawa; including establishing individual bases of operations that acted independently regarding sales, manufacturing and finance. These bases would be responsible for the three core markets of Komatsu: Japan, Europe, and USA.

Katada created a more innovative approach with the company and focused towards the constant improvement of products and services. He also developed programs that focused more on challenging many of the companies traditional organizational process and wanted every concept completely understand by all employees before it is implemented.

Katada also created the “three G” slogan that would forever change Komatsu, this means “Growth , Global, and Group-wide”. This process eventually paved the way for improvements in the company in key areas such as management/employee relations and development. This also allowed for increased global operations and productivity.

Environmental forces, industry changes - Komatsu vis-à-vis Cat responses?

 The U.S. recession woes of the early 1980’s were shared by Europe and Latin America, and Africa, and the Middle East felt the ripple effects. Worldwide, the EME industry faced overcapacity and low demand. For Cat, the world market leader, East Asia remained as a possibility for growth.

Ryochi Kawai did very well in an environment of great industry challenges. Fighting back in the face of the Mitsubishi/Cat JV, he emphasized Komatsu’s original goals towards overseas markets and consumer satisfaction, and added vertical integration (raw materials through finished product delivery) and pervasive Total Quality Control practices. The spirit of Komatsu was to seek out the root causes of issues, and always strive for innovation and future growth. A long history of good labor relations, many quality-control programs which won premier awards, R&D innovation, profitability, overseas distribution channels growth, and dominant local market share all attest to Kawai’s excellent leadership. Perhaps Kawai could have cultivated more choices in grooming successors, in addition to Shoji Nogawa, with profiles distinct from his.

Lee Morgan’s strategy sought diversification through being involved in many sectors of the economy, instead of acquiring competitors for proliferation of products in many different lines. Japanese inventory control systems were admired by Lee. He also emphasized the subordination of personal wishes to the good of the company. A very difficult challenge was Lee’s handling of the UAW strike, which ended with some concessions on the part of Cat to UAW, but left behind a wake of dissatisfaction amongst Cat’s union workers. Perhaps Lee might have considered more inclusive ownership programs for the employees, instead of the 204-day standoff which finally ended in May 1983, one of the longest in U.S. corporate history.

Vision, strategy – Komatsu: Katada

Tetsuya Katada took on the mantle of President in 1989 and did not inherit an easy situation, with sales at levels of 7 years prior, and half the profits. Komatsu’s stagnation was in great contrast to Japan’s GNP growth of 43%. Worldwide demand was up-and-down, with changing demands for lighter equipment. Katada needed a strategy for this declining sector, and recognized the need for shifting away from construction equipment and catching up to Cat.
Katada moved away from the inherited culture, which he called bureaucratic, and instilled a spirit of challenging enterprise. He pointed out that the international environment had become by this time a global economy, requiring more international harmony. His own approach was inclusive and encouraged free discussion.

He pushed for regionalizing production even during Tanaka’s tenure, reducing their yen exposure. He formed a 50% JV with U.S. Dresser, which was controversial because some didn’t see Dresser as a valuable addition with a neglected product line, low quality and plants.
Katada’s new vision was to radically depart from Komatsu’s traditional strategic maxims and management directives: centralized production, total control over product development, whole ownership of subsidiaries, and Japanese style management worldwide.

His new strategy was called the Three G’s: Growth, Global, Groupwide. The long-term strategic plan, Project G, was launched, with a focus on growth, by developing sales, and overseas production facilities, and expansion into electronics, robotics, and plastics.
His vision was, in short, to reinvent Komatsu as a total technology enterprise, a globally integrated high-tech organization that integrates hardware and software as systems, with 50% of sales in nonconstruction business.

Komatsu grew through this period until 1992, when overseas sales fell 10.6%, and domestic sales fell 13.5%. The worldwide 1992 recession seemed the culprit, in addition to Komatsu’s reliance on JV’s and acquisition of local competition.

Product quality, efficiency, and strategic focus can easily be lost in this period of reinvention, but Katada is determined and has a strong game plan. Long-term globalization focus and localization efforts have a high chance of succeeding in the global economy. Katada will be playing a difficult balancing game of maintaining home (Tokyo) control as the rest of Komatsu grows to meet his vision.

Taiwanese PC OEM Analyses

Examining the vertical of Taiwan's PC (personal computer) OEMs (original equipment manufacturers) through the lenses of:
I. Porter's Five-Forces Model
II. External Factors Environmental Scan


I. PORTER'S FIVE FORCES MODEL


INTENSITY OF RIVALRY AMONG INDUSTRY COMPETITORS
  • High concentration of similar competitors all located in Taiwan.
  • All supply the same large, mainly American clients.
  • Same relocations of factories in particular regions of China.
  • Low switching costs for buyers.
  • Channel conflict of selling to main buyers, who also sell to public market competitors want to sell more into.
THREAT OF NEW ENTRANTS/ BARRIERS TO ENTRY

  • Economies of scale established by approx. a dozen players.
  • Not much product differentiation – poor or nonexistent branding (white labeling).
  • Capital intensive requirements.
  • Very high level engineering and machine requirements.
THREAT OF SUBSTITUTES

  • High availability of similar, very high-quality substitutes.
  • Buyer’s switching costs low.
  • High price competitiveness – buyer’s market.
BARGAINING POWER OF BUYERS

  • Limited number of main buyers such as IBM, HP, Apple, Gateway, Compaq, Dell.
  • Many substitute providers.
  • Low evidence of buyer loyalty.
BARGAINING POWER OF SUPPLIERS
  • Many substitute providers.
  • Similar high-quality competitors.
  • Industry important to country.
II. ENVIRONMENTAL SCAN AT THE BUSINESS LEVEL BASED ON EXTERNAL FACTORS

MARKET FACTORS

  • Downward trend in market demand.
  • Downward drop in PC pricing.
  • Low upgrade rates – what customers have now is sufficient for performing most desktop functions.
  • Too many competitors in the space selling to the same brand names like IBM, Dell, Gateway, HP, etc.
  • End customers perceive little differentiation between Dell and Gateway, for ex.
COMPETITIVE FACTORS
  • Existing competitors have excess capacity.
  • Profit margins have plummeted.
  • Some developing economy opportunities.
ECONOMIC, GOVERNMENT FACTORS

  • Current government unknowledgeable and ineffective in technology policy development.
  • Investing in agriculture to meet special interest group demands.
  • Poor management of stock market.
  • Administration continuing efforts to develop relationships with other developing nations, and sell bulk quantities of Taiwanese companies’ own brands.
TECHNOLOGICAL FACTORS
  • Few new technological/engineering innovations.
SOCIAL FACTORS
  • General market feeling of "What to do now?"
Analysis of PC OEMs in Taiwan

The personal computer manufacturing industry in Taiwan, Republic of China, is in deep trouble. Product leadership positions are occupied by Acer, Gigabyte, and Microtek, with innumerable me-too players, in the manufacture of chips, motherboards/mainboards, monitors, personal computers of all types, and all peripherals, including printers and scanners. Many OEMs built tremendously beautiful, high-tech production facilities complete with the most innovative production lines, best R&D departments staffed by scientists and engineers. This debt is not being paid back by the projected sales claimed by buyers such as household PC names like Dell, Gateway, IBM, HP.

The industry itself is crowded with very competent players, many of whom have moved their production lines to mainland China in order to survive. There has been a shakeout, and some consolidation, where main motherboard manufacturers acquire the OEMs of other PC-related parts.

I believe these players may have an opportunity to expand into other markets - such as Brazil, Chile, and certain countries in the Caribbean (Dominican Republic). The US market is saturated, and the branding problems are too large. China is also a strong possibility for promotional inroads as many OEMs have already invested there. The government needs to invest more aggressively in branding initiatives highlighting the technical capabilities of its PC market. Certain market leaders should be cultivated – Acer, Gigabyte, and Microtek in particular should receive some government support to gain more international market share. A high level international PR/branding/advertising firm should also be considered to leverage the strengths of this industry along with announcing the strong support of the government. There needs to be product and company differentiation – branding is key. Debt considerations/allowances could be made by the banks with the support of the government.

The Fast Food Industry: Kentucky Fried Chicken


The Fast Food Industry: Kentucky Fried Chicken


The fast-food industry is a multi-billion dollar global industry, and one of the largest in the world, with multiple and diverse players. Most of the strongest brands are American, and despite short-term ups-and-downs, the greater expansion pace doesn’t show signs of abating.

The hottest regions are the emerging economies (such as China), being fought over by competitors such as Kentucky Fried Chicken, Wendy’s, Pizza Hut, and of course McDonald’s, which leads the industry in sales, profitability, number of retail stores and overall brand recognition. Most of these competitors are highly vertically-integrated franchises with very strong integrated operations and strategic planning systems.

In many countries these establishments are perceived as quintessentially representative of “American culture”, and this is both a boon and a danger for fast-food outlets. The attraction of American culture is a strong lure, and good for business; but today special interest groups such as Greenpeace, PETA, Muslim fundamentalists and other protectionists are increasingly active in boycotting and otherwise damaging outlets’ businesses.

Kentucky Fried Chicken (Japan) Limited (KFC-J) was started as a joint venture (JV) in early 1970 between JV initiator Mitsubishi, who wanted to develop domestic demand for its poultry operation, and Kentucky Fried Chicken (KFC). Harland (Colonel) Sanders had franchised in 1956 a fried chicken recipe that was so successful, he sold some 700 franchises in 9 years. KFC was bought by John Y. Brown and Jack Massey for $2 million from the 74-yr. old founder in 1964, and in the next 5 yrs. KFC revenue grew from $7 million to $200 million. In 1970 KFC was building 1,000 stores a year in the U.S. However, the rapid growth caused a big problem: management turnover, and by the late-1970’s the U.S. economy slipping into a recession caused the stock to fall from $58 to $18. The management exodus continued.

Compounding matters, a fast food industry shakeout began, and franchisees suffered under the lack of higher management support and guidance, the recession, and strong competition. Low morale affected customer service and product quality, and management was too preoccupied with its own internal disagreements to pay much attention to international operations. In mid-1971 Brown and Massey sold KFC in a stock swap to Heublein, Inc., a packaged goods company with well-branded franchises such as Smirnoff Vodka.

KFC’s small international staff was folded into Heublein’s international group, which struggled to control the independently-minded foreign subsidiaries. Meanwhile, KFC-J under Loy Weston and Shin Ohkawara went ahead with their own development plans, including menu adjustments; and thinking of KFC-J as a fashion business, focusing marketing on upscale young couples and children, which helped KFC-J to thrive. By the end of 1972, 14 new stores mainly in Tokyo opened, and in 1973 50 more were added. 1974 was slated to be KFC-J’s first profitable year, but the oil crisis hit Japan, and losses began, causing refinancing and store expansion slowdown.

In 1975, Michael Miles was appointed VP-Int’l Operations for Heublein, and strategic planning was his credo. He focused his attention on KFC’s international operations, and implemented a strong strategic planning system, which took about 2 years for subsidiaries to gradually adopt. KFC-J, however, was resistant and adopted what it could to Japanese practices, and went along with the new system reluctantly. In 1976, KFC-J made its first profit, 14 million yen, a modest amount.

In the early 1980’s KFC headquarters reorganized under pressures of domestic operations doing poorly, which was significant as it accounted for 2/3 of KFC’s global sales. Churches and other aggressive new competitors appeared. Miles focused upon a “back-to-basics program” of quality, service, and cleanliness systems (QSC); and by 1979 profits rebounded, bringing KFC closer to McDonald’s profit levels.

Miles hired a professional manager, Bob Hiatt, to duplicate the systems with the international subsidiaries, with the pitch that “better strategic plans meant better bottom-line results” and the operational aim of achieving consistency and control worldwide. KFC-J again resisted, citing Mitsubishi’s practices, and preferring short-term losses for long-term gains. However, Hiatt and other senior managers insisted on reports (store-level efficiency targets, QSC ratings, trends) and operations control systems to improve strategy, financial systems, and database management systems. Performance bonuses were also implemented to help with management performance and retention.

As international operations slowly improved, giving KFC strong sales growth and profitability, R.J. Reynolds (RJR) acquired the company in October 1982 as part of its diversifying away from tobacco products. KFC then came under the control of Richard Mayer, who also held strong convictions about the values of strategic planning. Although KFC-J was KFC’s largest, fastest-growing, and highest-potential international subsidiary, by late 1983, KFC-J was opening its 400th store, by on a per-capita basis this represented less than 25% the level of penetration in the U.S.

The entry barriers to the fast-food industry are relatively high if there is only one outlet – the savings increase exponentially when the number of outlets increase, and product quality and supply is controlled. For KFC-J, supply was easier through it’s powerful Joint Venture partner, Mitsubishi, which provided poultry and other supplies. Additionally, as it had in early 1970’s, Mitsubishi was also a funding source. So, a new fast-food entrant has better chances of surviving if it has a parent or partner or some other funding source with which it can set up strong strategic planning and operations systems, particularly in Japan.

Market conditions are another consideration, as burger-type of chains are dominated by McDonald’s, Burger King, and Wendy’s. For KFC, Popeye’s is its biggest challenger. The nature of the fast-food industry is about price, convenience, taste, and environment. Brand comfort is certainly a consideration, but locale and price dominate. Chains which can physically dominate good locations and have alternative menus such as “Dollar Menus” or foods preferred by local tastes do best. Buyers can easily switch if competitors are physically located closely to each other, so quality control is an additional concern. It is more profitable to retain an existing customer than to acquire a new one.

KFC’s management of its international operations has improved dramatically over the last 3 decades. Implementing strategic planning and operational controls is critical, and although more entrepreneurial spirits consider the reporting and other controls stifling, in a organization the size of KFC’s, controls are imperative. Consistency of product, including its environment, are key to brand recognition and drawing traffic. Good management knowledge of outlets’ activities is invaluable to decision-making, including how much of what kind of support to provide. McDonald’s “owns” its suppliers in the sense that its control over product quality is total and huge in dollars. For KFC-J, having Mitsubishi as a solid, agreed upon JV partner could not be a better fit in solidifying against Porter’s concerns of Supplier and Substitutes control, Buyer control, and resistance to New Entrants.

The nature of the Japanese market was also condusive to KFC-J’s success, as the involvement of the Japanese government is critical to success in Japan. Other competitors seeking entry to Japan would need a similarly strongly positioned partner the caliber of Mitsubishi or some other sogo sosha.

Dick Mayer should consider carefully where to move Loy Weston. Weston has been with KFC-J for a long time, and despite his success in Japan, in the 4 years since he’d taken on the VP-North Pacific position, progress had been slow. Shin Ohkawara was doing fine running KFC-J, but Korea, Taiwan, Thailand, and Hong Kong needed not just an entrepreneurial spirit, but also a strong strategic mind with an taste for detail. Mayer should examine the reasons why KFC-J was successful, and determine how much both Weston and Ohkawara actually contributed. Perhaps in actuality he might have ridden on Ohkawara’s strengths, or Mitsubishi’s strengths, or lucky market conditions, or some combination. If he really did have a workable system, at least some parts of it should be transferable to success in Korea, Taiwan, Thailand, and Hong Kong (KTTHK).

Assuming that KFC-International is still regionally based, Mayer at HQ could:
- have KFC-HQ create another position to put Weston in,
- OR put him back as KFC-J head,
- and in either case promote Ohkawara to VP-North Pacific.

Before that, Mayer could first give Weston stricter performance achievables within a reasonable timeframe, as determined by market studies. In the meantime, Mayer could have Ohkawara evaluated to see if he might have a greater chance at making KTTHK successful. It’s important to retain experienced management, and Mayer should figure out a politically expedient plan to retain both men, being particularly gentle with Weston. Weston, having been a white man heading up a large American enterprise in Japan for a long time and advancing in age, may be delicate to handle.

KFC-J, with its Mitsubishi partner, is strongly positioned in Japan, and growth can continue. Any new entrants should be watched for, but more attention should be paid to KTTHK.

KTTHK are different markets, but all are economic tigers with market segments which KFC would appeal to more from a brand perspective (fashion) than a price perspective (fast food isn’t always the cheapest source of food in overseas markets). Certain people in these markets might potentially resent a Japanese head (Ohkawara) of an American chain coming into the market, given the countries’ histories with Japan, so from a political standpoint having Mayer continue for a year or two longer might be better from a PR standpoint. Also, as he’s been with KFC for so long with a good track record, despite his shortcomings he’s still a valuable manager to retain. Mayer might find more politically comfortable ways to communicate the need for KTTHK to show results, perhaps spend some time personally with Weston in these countries and developing a strategic plan in tandem so that Weston feels he is involved with the new plan. Having management’s buy-in in critical to the successful implementation of a strategy.

Additionally, significant location scouting is important for Seoul, Taipei/Kaoshung, Bangkok, and HK Island/Kowloon, as fast-food’s primary marketing (product, price, PLACE, promotion) need is a high traffic, fashionable shopping area with lots of young buyers. Maybe Mayer could go on a few location scouts with Weston. All four of these urban markets have a rich supply of new repeat customers, in addition to tourist dollars. Location is key to KFC’s expansion in these areas, with specific studies to students’ and young office/retail workers’ traffic patterns. Appealing to their tastes is less important than location in a “hot” area, as these markets are all intent on emulating “American” culture.

I’d like to see KFC and all other fast food establishments make nutritional information available to customers. In the years that I and my family have traveled in these Asian countries, we have seen a shockingly obvious, rapid deterioration of young peoples’ health (overweight, acne). Taiwan and Hong Kong are particularly education-oriented, so one generally finds these establishments filled with students who munch on fast food while studying their copious homework. Business profitability is good, responsible business and profitability is better.
Microsoft + China = Relative Ethics? 
An application of Prof. Hofstede's Individualism Index















The Chinese government successfully influenced Gates' ethics regarding Microsoft expansion in China. How to look at Gates' culturally relativist business ethics?

Bill Gates wanted Microsoft to be the dominant operating system of the world: his philosophy and mission was and is to have Microsoft products in every computer, and help businesses and individuals realize their full potential (self-actualization) through the medium of technology. He has achieved his vision in no small part because of both his personal ethics, as well as the business ethics of the American individualist market system which fosters and rewards his type of behavior.

The direct power or indirect influence of Gates' business style and ethics upon other business leaders globally is immense. Microsoft's global market domination and Gates' resultant position as one of the wealthiest men in the world gives, to many observers, validation of his business ethics. His actions navigating the Chinese government's restrictions upon Microsoft's Internet Explorer were closely watched, and considered by other business leaders as an example set to follow in China.

In order to gain market share in China, Gates agreed to the Chinese government's demand that Microsoft's Internet Explorer and MSN Spaces (blog site) help it limit free speech, blocking words such as "freedom", "democracy" and "demonstration", "human rights" and "Taiwan independence", changing his business ethics from a strongly individualistic approach.
National wealth is likely to cause individualism (Professor Geert Hofstede, http://www.geert-hofstede.com) and Gates’ public speeches and investments in China demonstrate his belief is similar - that China’s speech restrictions and other human rights violations will “improve towards” Western standards as a result of increased individual and societal wealth. If their theses are accepted, the question then becomes, has Gates made an ethical business decision? Gates shifted from the American core belief in “absolute freedom of speech” to a “modified censorship” closer to China’s collectivist culture, primarily to achieve the business objective of tapping into the second largest, soon to be largest, population of Internet users in the world.

Gates suggested that the world is flattening and becoming a level playing field. (http://news.bbc.co.uk/2/hi/business/4660244.stm) Was he right in negotiating with the Communist government, acquiescing to their demands, putting a higher value on Chinese rather than his own American cultural mores? The highly individualistic, self-actualizing American cultural values are diametrically opposed to collectivist Chinese values of community over self-actualization. In American business ethics, the right of the corporation to freely compete in a market to fulfill its raison d’etre – growing shareholder value – is held paramount. Did Gate’s decision fall within the business ethic parameters of an American company? Did his decision fall within American social ethic parameters of free speech and human rights? Did he behave ethically at all from the American perspective?

American Cultural Beliefs and Values in Business and Society

Bill Gates is one of the wealthiest individuals in the world from the wealthiest country in the world, leading one of wealthiest MNCs (Multi-National Corporations) in the world; trying to dominate the software market of the largest, fastest growing, and one of the few remaining communist societies, in the world.

Hofstede describes American cultural beliefs and values as one dominated by individualism, and explores how this contributes to American business executives’ decision-making. Microsoft, like all companies entering into China, had to temper its proto-typical American business expectations and processes, proceeding distinctly differently from how it gained market-share in the US and Europe. Gates had to invest substantially extra time, effort as well as dollars into building a long-term relationship with the Chinese Communist government, in the hopes of future profitability. China’s rapidly developing socio-economic environment from a purely communist to its current “Communist Market Socialism” is volatile, where ever-shifting Communist policy developments demanded Gates’ close attention to the China market to protect Microsoft’s interests in piracy prevention, intellectual property protection, and fair market access.

Microsoft, established in 1975, still holds to its original mantra as reflected in its 2006 annual report, “At Microsoft, we work to help people and businesses throughout the world realize their full potential.” Some of its main values are: integrity, passion for customers and technology, always looking for ways to improve the products that they produce, making the best quality products and being accountable to investors, employees and customers. Gates had the vision of insisting IBM package Microsoft products with their personal computers while allowing him to maintain rights over the software – allowing him to corner the hardware market led by IBM. Over time, Gates evolved his philosophy of market dominance from not allowing any type of software mingling to seeing ways of making patches that would fix current problems and potential problems. This in turn enabled Microsoft to allow access and being more user-friendly with other companies’ products, while still maintaining proprietary rights of its software.

Hofstede generally describes Americans as “individualists” who feel this is at the core of each person’s success. Freedom, risk, self and corporate improvement, are ideals for an individualist. This translates into people being able to make their own decisions on a day-to-day basis. The saying, “The early bird gets the worm,” or “Keeping one step a head of the Joneses,” are illustrative of individualists’ competitive qualities. Hofstede also discusses Americans have a low avoidance index which translates into fewer rules, greater risk takers, and allows for difference in thinking, beliefs and values. These dimensions are what drive businesses like Microsoft to move into new economies and seize opportunities.

Microsoft needed to enter the Chinese market for three reasons. First, the prevention of China’s rampant pirating and copying software/hardware. Second, access to China’s enormous market. Third, decreasing operating/ production costs by basing research and development centers in China. Microsoft’s entry into China was initially small due to the Communist government’s limitations. Communist governments in particular tend to be protectionist of its nascent industries; as China is of its Information Communications Technology (ICT) industry. The Chinese Communist Party (CCP), in typical collectivist/ patriarchical fashion, seeks to set and control all technology standards (instead of letting the market and users make the standardization decisions.)

In order to negotiate China market entrance, Microsoft has to operate under the supervision of the Chinese government. It has also had to invest hundreds of millions of dollars in Research and Development (R&D) centers all over China, in conjunction with CCP agency-mandated joint ventures.

The Degree Of CCP Dominance In China’s Economy – A Collectivist Phenomenon

This degree of state dominance in market mechanisms was a great compromise conceded by American company Microsoft and its prototypically driven American CEO, Gates, who are accustomed by both culture and practice to exerting their individual will upon the markets.
In terms of Hofstede’s Individualism Index (IDV), China’s government dominates the operations of its economy to perhaps the greatest degree relative to almost all other countries. On the continuum of Individualist to Collectivist, China’s Communist government ranks up to the 61st least Individualist, out of 74 countries studied. Hofstede finds that the more Collectivist the culture of a people, the less they tend to seek self-actualization, preferring to maintain an “acquiescence” to authoritative leadership for the sake of “group harmony” and respect for others in the form of solidarity with the community. China, as a rapidly developing economy, is still one of the poorest nations in the world, with over one fifth of the world’s population under the patriarchic care of the Communist government. Hofstede notes that there is strong correlation between gross domestic product and the individualism of a culture.

The Collectivist phenomenon emphasizes the importance of the group, the strength of the group in demanding loyalty or acquiescence of individual desires to the good of the whole. Chinese culture is dominated by Confucian ethics, which dictates adherence to a strict hierarchical model of history, age, social position, gender, intellectual learning, loyalty to the state, filial piety to ancestors, all ascribing a citizen’s position in society.

This Chinese socio-cultural phenomenon translates into a high Power Distance Index (PDI) score, which reinforces the need for (or the ease in existence of) a strong “patriarchical” government. Although the Communist State’s manifesto is one of equality in all societal organizational forms, in reality it is the Chinese Collectivist phenomenon which permeates and forms all Chinese societal organization.

This translates, at the State’s policy development level, into one of “father-knows-best,” including the determination of economic operations, control over all aspects of its unique “social market,” and dictates based upon a “moral” authority over its people. Despite what “the people” may desire in their market choices, they are confined within the choices dictated by the State.

One of these choices is in the selection of software systems which are the nervous and circulatory system of every economy. China’s government has not permitted the market’s hand to make the choices for businesses and government agencies. Rather, it has created its own standards: for example, in mobile transmissions, it created its own unique CDMA standard, requiring all carriers and hardware manufacturers to ascribe to its technology regardless of costs, and applying loyalist propaganda, fines, and blacklists to define company and citizen’s choices. In software, to avoid use of Microsoft’s “overpriced,” monopolistic products, it has dictated use of competitor Red Hat’s Linux-based products (known as freeware or open source software, which costs significantly less than Microsoft’s products.)

Bill Gates, in negotiating with the Chinese government to make its market more open to Microsoft, had to concede investing significant dollars in building research & development centers in China’s major tier one and tier two cities. In this choice, he is trading off short-term market “loss-leaders” in hopes of long-term market gains. For a long-range decision-making framework such as the Communist Chinese government’s model, it gains in having R&D centers built for free, its “children” (citizens) gaining valuable experience and exposure to intellectual property for free, and extra time to make other market-protecting moves for its economy.

National Wealth Is More Likely Than Not To Cause Individualism?

Bill Gates’ view is held by many American IT firms: Speech restrictions in China are likely to relax given the enormous wealth being created across China; wealth will lead to individualism (rather than increased individualism will lead to increased wealth).

Hofstede hypothesized that the increase in individualism was explained by the increase in national wealth, and showed a statistical relationship between individualism and national wealth; where the arrow of causality pointed from wealth to individualism: countries became more individualist after they increased in wealth, not wealthier by becoming more individualist first. He saw the causation as increasing wealth leading to increased individualism rather than increasing individualism leading to increased wealth. Hofstede posits, we need to fight poverty if we want to promote human rights/individualism, rather than promote individualism/human rights as a way of fighting poverty.

Low Individualism (IDV) ranking in China

According to Hofstede’s cultural dimensions, the Chinese rank lower than any other Asian country in the Individualism (IDV) ranking, at 20 compared to an average of 24. This is attributed in large part to the high level of emphasis on a Collectivist society by the CCP. (Hofstede, 2005) The low Individualism ranking is manifest in Chinese people valuing membership in a close and committed “group,” be that a family, extended family, or extended relationships, more than self-expression or self-actualization. Loyalty in a collectivist culture is paramount. The society fosters strong relationships where everyone takes responsibility for fellow members of their group.

From Confucian to Communist rule

Cultural values are relatively stable, but can change over the course of generations from contact with other cultures. China provides an example of changing cultural values resulting from internal political change. The CCP founded the People’s Republic of China in 1949 and brought political change greatly affecting traditional religious and Confucian values. After nearly 60 years of transferring from Confucianism to Communism, Chinese society enters the global economic stage, suddenly bombarded with diversified foreign cultures and expectations of multinational corporations who bring foreign direct investment (FDI); contributing to the continuing evolution of Chinese cultural values. Gates and other MNC leaders think the CCP should follow the “American’s way” to create national wealth. The CCP fears loss of control over the Chinese people if individualism is permitted to grow; but it also needs FDI to support the growth of China. In negotiations, it takes the position that China’s market is self-sustaining, and if the MNC wants access, it must adapt to the CCP’s demands.
Is the formula of “Free speech = high individualism = national wealth” proveable?

From Hofstede’s perspective, it is seen that high individualism and the associated rights such as free speech are not causes of national wealth. However, they are still key factors to attracting FDI which leads to the development of national wealth and GDP per capita.
Foreign direct investors, like Microsoft, must balance their expectations of the CCP, which has other concerns aside from free speech. For example, China’s rapid movement from an agrarian nation to one of multiple huge urban manufacturing centers has created a migrant peasant population, hundreds of millions large, seeking work in the cities. The CCP must control media coverage and advertising of factories opening or hiring, because migrant peasants would descend upon factories, becoming mobs demanding employment. The CCP must also protect the interests of the minority urban population whose affluence has attracted the resentment of the huge rural population; private property owners fear another radical populist social revolution. On this giant landmass of 1.3 billion disparate subcultures of people, the social justification for political authoritarianism is deeply entrenched.

Free Speech Rights vs Rights to Development: Cultural Relativism?

As more companies expand into “closed” market economies, the position they take on censorship, human rights, and other politically charged areas is increasingly complex. Microsoft grappled with the issue of what is held close to the hearts of Americans: freedom of speech and lack of censorship. The CCP on the other spectrum, holds close to their hearts the need for censorship, and has many government regulatory offices to keep the Chinese public closed from politically charged information. The overarching question is: which approach is more ethical, or is this actually a case of cultural relativism?

For some groups, Microsoft has violated an ethical value held close to highly individualistic Western societies: that of restricting freedom; whether freedom of speech, access to information, or political choices. Microsoft recently addressed U.S. Congress regarding its deal “acquiescing” to the CCP. In his speech, Krumholtz indicated that “Microsoft believes that issues of Internet content and customer security go to the heart of our values as a company” (Microsoft Congressional Testimony, 2006). Krumholtz also stated, “...A difficult judgment of risks and benefits of these powerful technologies [exist], not just in China, but in a wide range of societies where cultural and political values may clash with [American] standards of openness and free expression” (Microsoft Congressional Testimony, 2006). It is seen as a violation of what America stands for, as well as contradicting the United Nations Agreements on Human Rights.

Hofstede’s research revealed that there is a relationship between economic growth and a shift toward individualism. Having said this, Cetron and Davis (2006) indicate in their article, “The Dragon versus the Tiger: China and India Reshape the Global Economy,” that China’s economic growth is one of the fastest growing economies, despite being communist (India’s government is a democracy. They point out, Western hackers are working on developing software to counter the censorship filters, and suggest, “…The outside world may break through the Great Firewall of China sooner than Beijing would like". The introduction of the internet and the technology which runs this medium makes it difficult for censoring at all levels which is perhaps where the Chinese Government feels that if companies like Microsoft, Google and others sign off on their policies to limit search power, blogging, access to “politically charged” information, etc that they will be able to control. In “Despite Web Crackdown, Prevailing Winds are Free,” Guo Liang observes, “The internet is open technology, based on packet switching and open systems, and is totally different from traditional media, like radio or TV or newspaper." The article goes on to say this is a censors’ nightmare as it is not possible to monitor all the possibilities. Therefore, Microsoft’s agreeing to the CCP’s demands isn’t as limiting as it would appear.

The use of this form of technology has great potential to provide the much loved ideal of freedom of speech in the Westerners perspective. It also gives some security to those using this medium of “protection” from being found out by the Chinese regulatory agents. In a culture which ranks high on the uncertainty avoidance scale, this would suggest that the risk of searching and blogging would be low and a greater willingness for Chinese citizen’s use of these tools.

Krumholtz’ Congressional Testimony (2006) indicates, this type of technology is creating a more open and transparent approach. Krumholtz quoting from Bill Gates, “You may be able to take a very visible Web site and say that something shouldn’t be there, but if there is a desire by the population to know something, it is going to get out.”

Ethical Relativism

The ethical relativism perspective to this question accepts that both the American cultural approach and the CCP cultural approach are correct in their own ways. It is hard to suggest that one is of greater importance then the other. Does this then suggest it is cultural relativism? By Lund’s (1998) definition, “This [cultural relativism] means that every culture has an equal right to be different, distinct and unique”; and in her article “Development and Rights,” she clarifies that a synergy between universalism and cultural relativism, is the ideal to be sought – neither approach is absolutist.

Where do we go from here? Alder’s approach looks at ethical decision-making process in stages: problem recognition, information search, construction of alternatives, choice, and implementation. Microsoft and Gates may have gone through a similar process, leading to their decision to acquiesce to the CCP. We may infer some of this from the Congressional Testimony presented by Krumholtz.

The first question focused on describing American cultural briefs & values, they mainly revolved around the individualist culture. Maslow explained that there were five needs that had to be satisfied. They are physiological, safety, self-actualization and esteem. The essential one of the needs is self-actualization. This is used by Americans much more so than in foreign countries like China.

The second question focused on the degree of government control over economic forces. Per Hofstede, China rates the highest of Asian cultures on the collectivist side, where the people are not likely to seek self-actualization since it is a lesser priority. China is becoming an economic power but still is one of the poorest countries of the world, and until per capita GDP increases for more of the poor in China, its culture and government will continue to be strongly collectivist, forcing American companies to make concessions in order to gain market growth in China

The third question considered whether individualism leads to wealth or wealth leads to individualism, and which is “better” or “more ethical.” It is considered here that cultural relativism is the best approach for American firms in China,

The fourth question focused on ethical issues between free speech rights of the individual versus development rights of the community. This review is concluding that Gates’ negotiations with China were more expedient in achieving all objectives: by extending his short-term view to a long-term view corresponding with the Chinese culture’s long-term view, acceding his more prototypical American business culture values of speed and market dominance, as well as the American sociocultural emphasis upon free speech human rights and high individualism; Gates was able to achieve market entre and cooperation with the CCP’s many agencies. This review also concludes that Gates’ negotiations with China will lead to greater access to information (despite current censorship levied by the CCP), contributing to increased wealth of the Chinese people (more information leads to more self-actualization and perhaps increased entrepreneurship), and drive movement towards increased individualism and associated human rights (by Western cultural ideals) such as free speech.
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