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Business Strategy

050 322

Week 10


Michael Cooke




IC room 817

Class hours:

Friday 09:00

Class Location:

IC room 822

Term Project and Final Exams

Term Project

Choose a topic and a partner by 7

Advise 10
15 minute presentation form, papers accepted

Look at the business using the Five Forces framework

Suggest and support a strategy

Due 1 February

Final Examination

Tuesday February 19

at 9:00 in room 926

Paper dictionaries allowed

30% of course grade

Format will be similar to the mid
term format

May include material from the first half

1: Which company is most likely to invest a lot of money in a foreign country?

A) The company has limited funds

B) A wealthy company with many products and experience in similar markets

C) The company needs a high degree of flexibility

D) When the country is politically or economically volatile, such as Pakistan

2: SWOT is an acronym for

A) Sales, Wholesalers, Operations, Treasury

B) Strengths, Weaknesses, Opportunities, Threats

C) Selling, Winning, Overcoming, Talking

D) The well known multinational tax advisory firm Strong, Woodward, Oppenheimer, and Tannenbaum

: A First Mover develops products or enters markets before others. Which is true:

A) Global firms always introduce products in the home market before other countries

B) Firms with limited international experience are likely to invest a lot to enter a new market

C) Small firms tend to be early entrants

D) Firms look for favorable risk dimensions when considering market entry

: Successfully introducing change into an organization often involves

A) Getting ideas and support from new managers and employees in the organization

B) Surprising employees with new strategies

C) Teams of high priced consultants develop generic strategies for top management

D) Very little effort

: During the introductory phase of product life cycle, which of the following is true

Product volume is high

B) Cost per unit of product is high

C) Manufacturing is efficient

D) Product gross margins are high

: When is industry profit likely to be lowest?

) Product introduction phase

B) Product growth phase

C) In mature product markets

D) We do not make these generalizations


(1)With revenue and unit volume increasing in the mature phase of the PLC,

why would firms experience margin compression?

(2) Why would HP be concerned about staff turnover at computer factories

in China?

Which is a good definition of market segmentation

A) Consumer identification of products and services

B) Dividing a market into identifiable subsets of individuals to predict needs or buying habits

C) Relevance of product sub

D) Associations between international marketing structures

2: Why is matching of supply and demand essential?

A) Factories produce products at the right level

B) Avoid inventory issues, such as write

C) Enables service businesses to have the right capacity

D) Any of the above

: A key requirement for international segments is

) They should be easy to define and measure

They should have about half men and half women

C) They should have a mix of all age groups in the country

D) Any of the above

: If we believe money seeks highest risk adjusted return, which of the following is true with rising interest rates?

A) Price to earnings ratios will go up

B) Price to earnings ratios will go down

C) Investors will be indifferent

D) Stock prices tend to go up when interest rates rise

Segmentation is dividing a market into identifiable subsets
(segments) of customers to predict needs or buying habits.

Marketing programs are tailored to segments (potential buyers will have
similar responses)

For example, one shoe company will market to runners. Another shoe
company will market to construction workers . Runners and construction
workers and will respond to different advertisements

In general segments will have the following characteristics

1) Common needs within segment

2) Distinct (unique from other groups)

3) Similar responses to marketing

Segmentation is essential for matching supply with demand.

Matching supply and demand is essential for production efficiency
and inventory control.

Factories produce appropriate levels

Avoid inappropriate product inventory

Produce sufficient amount of each product, without overtime or contracting

Enables service businesses to have the right capacity (hotel rooms, airline

Internet has facilitated segmentation (some of it customer self


Variation in customer needs is the primary
motive for market segmentation.

Most companies will identify and target the
most attractive market segments that they can
effectively serve.

In global marketing, market segmentation
becomes especially critical because of wide
divergence in cross
border consumer needs and

Once management has chosen its target
segments, management needs to determine a
competitive positioning strategy for its


Country Screening (consideration of a market is based on initial screening criteria)

Global Market Research

Cluster countries across relevant characteristics

Focus research efforts on a representative sample

Market Entry Decisions

Product launches based on shared relevant characteristics across countries

Country differences on other dimensions can hinder success

Positioning Strategy (influencing customer perception of the product relative to

Where will marketing efforts have greatest impact?

Target market segments might change due to consumer preferences or population changes

How the products or service is positioned will follow the opportunity

Resource Allocation

Market share clusters (increase penetration)

Consumption clusters (developing the market)

Marketing Mix Policy

Countries in same segment might have similar mix strategy (design, pricing, promotion,

Similarities on one dimension might be offset by differences on another (such as price

Requirements for International Segments


Should be easy to define and measure

Values or lifestyles may be difficult to measure

Sufficient Size

Segments should be large enough to be worth pursuing

Small segments aggregated across countries might work


Segments should be easy to reach

Infrastructure differences across regions or countries

Stability of target market behavior and composition


segments have unique responses

Able to implement

the required marketing mix is
consistent with the company goals and competencies


International Market Segmentation Approaches

segments or aggregate segmentation

(Exhibits 7

Geographic single dimension or several dimensions

Marketing irrelevance of many country boundaries

Difficulty of determining which variables to use for geo

Disaggregate international consumer segmentation

Consumer segments defined by similarities along chosen

Consumer bases might be geographically disbursed


stage international segmentation

First aggregate countries (macro level) screens out countries

Second segment consumers within the country cluster (micro)

Market oriented and accessible

Copyright (c) 2009 John Wiley & Sons, Inc.


Exhibit 7
2: Nestlé’s Geographic
Segmentation of the Americas

Chapter 7

Copyright (c) 2009 John Wiley & Sons,


Information filtering (sensory filtering)

Occurs among even lowest organisms (react to heat, light.
Other aspects of environment ignored by primitive senses)

Highest life forms still limited in gathering and processing
information from environment

We learn to filter information irrelevant to a situation

Often the most highly educated among us filter most

We fail to see/hear or recall much of what is available to us

Under the right conditions (context) we might recall
what we otherwise would not

Our filtering and recall changes through life and with

Marketers try to determine which audiences might be
receptive to the product message, and how to enable

Distances between high SES among countries might
be less than between SESs within a country (life
circumstances and education factors)

International Segmentation Scenarios

Universal or global segments (go beyond boundaries)

Customers belonging to universal segments have common needs

Could be a universal niche (example: global elite, business travelers)

Common customer needs higher in some product categories (high
tech or travel

Regional segments

Differentiated versus undifferentiated strategies apply to global segments as well

Differentiated strategy tailors marketing to local market conditions

An undifferentiated strategy is often followed by some high
tech companies

uniform worldwide marketing, scale economies

Unique (diverse) segments

Substantial differences in cross country customer preferences

Localized marketing mix programs

Food products may have country specific segments

Degrees of segmentation often follow degrees of market development (emerging
markets usually have a simple consumer market structure

high price or low price

Regions within a country can be targeted, given differences in consumer tastes,
demographics, and income across regions in Thailand, the USA, or China.


Easy to measure

Fairly accurate and easy to obtain

The elderly are an often overlooked segment

Unique needs

Self perceptions (active, not old)

Global middle class family is highly sought

Definition is tricky

HH income figures ignore purchasing power differences

Vast differences between countries in how income is spent

Chinese spend less than 5% on rent, transport, health

US consumers spend 50%

Income distinctions ignore education and values

Demographic variables are a factor in country wealth

Working age population relative to non

China and Thailand will soon have shrinking % working age

Often overlooked implications of large % population = elderly

Socioeconomic Variables

Per Capita income

Issues in using per capita income as an indicator:

Transactions are valued in an international currency
(monetization of transactions)

Official exchange rates seldom reveal true buying power
within a country

Services are provided in
country using local currency

Goods not traded across borders (housing, etc)

Use Purchasing Power Parity to estimate buying power

Gray and Black Market sectors of the economy (cash or barter)

Income inequality

Gini index

Lower number means more income equality

Scandinavian countries have least inequality

Thailand, China, USA
relatively unequal (higher index)


Customer as Active Partner

Such as: Patients in control of medical issues, access to
information and other customers via internet (rather
than passive targets)

Encourage Active Dialogue of Equals

Mobilize Customer Communities, perhaps via internet

Manage Customer Diversity (of sophistication) with
most sophisticated as most active partners

creating Personalized Experiences

Beware of information overload

Determining Unmet Needs

Ethnographic Research

Directly observes customers in varying contexts

What and why customers do things

Deeper level of understanding of needs and motivations

Good at identifying breakthrough innovations

Typically customers think of current offerings

Henry Ford’s faster horses

Observations can lead to insights

Particularly useful in going beyond cultural boundaries

Can be used to improve existing products

Business insiders often can’t see past the existing
structure (HP executives said PCs were a commodity)


Strategy Implementation


Focus on

Margin compression (or expansion)

Leverage implications

P/E ratio

Value of a firm and intangible assets

Since this course has no prerequisites, students will not be
required to understand financial statements

Leverage is the use of borrowed money for an investment (ratio
of debt to equity is one measure)

Equity is owner capital

Debt is often a fixed commitment (interest must be paid)

Equity is a cushion (firm is under no obligation to repay)

Margin compression arises from increasing costs, decreasing
prices, or both

P/E ratio is a firm’s share price divided by earning per share

The value of a firm will often include ‘intangibles’ such as brand

As Volume Increases

Will Apple have Margin Compression?


Why would Apple’s Share Price Fall with Higher Sales?

Apple reports its earnings after the markets close on Wednesday Jan. 23.

Unit sales projected to increase about 48% from year prior

Share prices have been falling (30% last four months)

P/E 11 (below industry norms, and far below norms for a growth company)

Analysts say they will pay attention to the average selling price of iPhones to determine
whether the iPhone 5 is still the hot seller or whether cheaper models are making up a
majority of sales.

The trend might help determine whether Apple will introduce a new lower
end iPhone.

“The people buying their first smartphones now are lower
income households,” an analyst
said. “They don’t have enough money to have $650 to pay for a smartphone.” (New York
Times 14

Recall from our work with gross margins that profit falls if revenue falls and fixed costs
are a large portion of total cost

Cost of a basic iPhone 4 or 5 is $200 (iSupply estimate) with selling price $650.

Gross margin is $450/$650= 69%

Suppose selling price drops 30% ($200) and unit cost is constant

To sustain total gross profit from the iPhone, volume must increase 80%

Samsung has higher volume than Apple and lower market cap (lower gross margins)

In general,
margin compression
can come from

Competition forcing lower prices

When additional sales (and profit) can only be achieved by appealing to value segments

Cost of labor or material rise and prices can not be increased enough to offset cost

Internal production problems or delays arise

When research or selling, general and administrative expense (SG&A) costs go up without
gross profit increase

Use of Leverage

In banking

From the Financial Times:

“In the run
up to the global financial crisis a lot of banks did more and more lending without
raising any extra equity. They were able to "game" the system, as the Basel Committee says,
either by using off
sheet vehicles or through other ruses. In future, there will be global
limits on banks' leverage.”

High leverage magnified bank profit in good times (2003

Losses were amplified when margins were compressed by rising interest rates and increasing
defaults in 2007

In manufacturing

Reuters (15
13): “Dell in talks to go private, shares surge”

Dell Inc is in talks with private equity firms on a potential buyout. The Wall Street Journal said
TPG and Silver Lake could team up on an offer, possibly with other investors such as pension
funds and JPMorgan Chase & Co.

The first source told Reuters any potential deal could be structured as a management
led buyout
with Michael Dell at the helm (Dell owns 14% of the company

244 million shares)

The company has lost 40 percent of its value since last year's peak, and is trying to reinvent itself
as a seller of higher
margin services to corporations

an internal overhaul that might be
conducted away from public scrutiny.

Note that when management buys out a company’s shareholders, they have incentive to ‘talk
down’ company prospects (so share purchase comes cheap)

"The market value of Dell has come down so much that a buyout is plausible. They have about
$5 billion in net cash and also free cash flow generation that could sustain payments on debt
from a leveraged buyout," said an analyst at S&P Capital IQ

Dell’s bonds (current debt) also came under pressure over fears of a significant hike in leverage.

In general, leverage amplifies both gains and losses.

In a Leveraged Buyout the cost of servicing debt can become a burden when asset sales do not succeed as
planned or operations do not improve as assumed.

Firms that violate loan covenants may default. Debt payments are usually an obligation. Equity is a cushion.

P/E Ratio

Price refers to share price, earnings to total earnings divided by the number of
shares (EPS)

A company with $42BB earning and .94BB shares has $44 earnings per share

If share price is $500 the P/E is $500/$42=11.9

A forward P/E uses expected earnings

The earnings part of current P/E can be distorted by one time gains or losses

Companies thought to have earnings growth prospects have higher P/E ratios

Average P/E varies by industry

Computer peripherals average current P/E = 31.5

Apple’s P/E is 11.5

Lower than the average for their industry, implies investor doubt about earnings

Auto parts have P/E = 14 *

P/E ratios compete with interest rates (money seeks highest risk adjusted

Think of the inverse of P/E as the alternative to interest

Current average P/E in the USA is about 15, implying 6.7% return

Would an investor prefer risky 6.7% equity return or a lower interest rate?

P/E ratios tend to be higher in periods of low interest rates

Sustained short term interest rate increases can have devastating effects on
share prices (and business activity in general)

* http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html

Intangible Assets

An intangible asset is not physical

Intellectual property such as patents

Brand equity

Business methods

When a firm buys another, it will often pay more than the
underlying physical assets are worth

The difference between purchase price and net assets (excluding
intangibles) is goodwill

For some industries the ‘goodwill’ portion of purchase price can be
high (internet = 70%)

Goodwill should not be viewed as a bad thing

Under some circumstances goodwill must be written off, resulting in
loss to the firm (impairment charge) which affects EPS

Purchasers might assume synergies that do not happen

Adverse changes in the business environment

Change in strategic direction

According to Baruch Lev of NYU, overpriced shares used for stock
acquisitions may lead to substantial goodwill write

Note that physical assets such as inventory or factories can be written

Use of Debt Versus Equity

Our main contribution to the accounting literature is to trace
goodwill write
offs, a frequent and growing phenomenon, all the
way back to their root cause: the incentives of managers of
overvalued firms to acquire businesses, whether to exploit the
overpricing for shareholders’ benefit or to justify and prolong the
overpricing by maintaining the façade of
growth. (1)

Value of a firm is to some extent subjective. A buyer can assume
synergies that will not exist or will be far less than imagined. The
value of a brand or a sales force is likewise difficult to objectively
measure. A buyer with
‘easy money’ might lack motivation to
look at possible negatives.

Firms can fund investments with debt or equity or a combination
of both. Whether a firm uses debt or equity depends on the
relative cost of each and certain creditor imposed constraints on
the use of leverage. When share prices have high P/E, firms have
incentive to fund investment with shares as currency.

(1) http://people.stern.nyu.edu/blev/Documents/overpriced_shares_ill

Contingency Planning

Plan for unexpected events

Enables quick and appropriate response to events

Focus on high priority aspects of the business

Firms plan for disaster

Redundant IT (and off
site backup of data)

Value in having multiple sources

Another type of contingency planning involves scenario

What if the environment changes?

Value in granularity when planning

Able to isolate deviations from plan quickly

Corrective actions appropriate to the situation

Contingency plans involve both positive and negative

How to meet increased demand?

What if a key distributor decides to drop my product? (Pepsi)

Contingency Planning

Pepsi Thailand

ThaiBev acquired Thai bottler Serm Suk PCL for US$513 million in Sep 2011

Serm Suk was established in 1952. It had been exclusive distributor of Pepsi brands in
Thailand. Contracts between the two terminated in April 2011 after they failed to agree on
terms of a new contract.

Serm Suk launched its own cola beverage, est in Nov. 2012 and set a target of making
the brand the leader of Thailand's Bt30
billion cola segment within three years.

The company’s bottling and distribution contract with Pepsi
Cola expired in November 2012

Serm Suk expects est to achieve Bt8 billion in sales in the first 12 months.

"Our strong point is our distribution system," said the marketing/sales operation director

Serm Suk has five bottling plants and 48 branch offices throughout Thailand.

The company has 1,200 sales trucks and 150,000 coolers.

In October 2012 US based PepsiCo announced investment of US$600 million (Bt18.4
billion) in the Thai market over the next three years

The $600
million investment includes a $170
million bottling plant in Rayong, bought from
San Miguel in February 2012

The company appointed the global logistics firm DHL as logistics and warehousing partner for

As part of the huge investment, PepsiCo will make significant marketing investments in
Thailand. This will include new marketing and consumer
engagement campaigns related to
music and sport platforms.

Pepsi will end its conventional system of returnable glass bottles,

There is a declining market trend for returnable bottles,

These will be replaced with non
returnable bottles and cans, which are growth packaging

Full production of Pepsi
Cola non
returnable bottles and cans will be achieved by June next year.



Pulling Together Some Threads

Excerpts from http://www.nytimes.com/2013/01/30/opinion/friedman

The prefix ‘hyper’ means excessive.

According to Thomas Friedman

In the last decade the world went from connected to
connected in a way that impacts every job, industry and school.

In a world connected by digital technologies, people can compete, connect and collaborate
from anywhere (The “World is Flat” was published in 2004)

Virtually everyone everywhere has access to a hand
held computer, connected via the cloud
to infinite applications and storage, so they can work, invent, entertain, collaborate and learn
for less money than ever before.

Every boss now also has cheap, easy, and fast access to software, automation, robotics, labor
and brains anywhere in the world.

When the world gets this hyper
connected, the speed of change for every job and industry
becomes hyper

In the past, we could assume that an educational foundation would last your whole lifetime.
Now people have to learn throughout life.

Not surprisingly, incomes around the world converge, as bright people in poor countries get
access to the same information as educated people in the developed world.

We discussed the book “
Race Against the Machine
: How the Digital Revolution Is
Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment
and the Economy”

With the digital revolution people with more education start to earn much more than those
without it

Those with the capital to buy and use machines earn much more than those who can only
offer their labor

Superstars reach global markets and earn much more than those with slightly less talent

Which languages do people use to enter the globally connected world?

Amazon’s Warehouse in Germany

Michael Dalder/Reuters

Amazon and Apple again

After Amazon released quarterly results, the shares
immediately jumped nearly 10 percent in after
trading, about the same amount that Apple fell after
releasing its results a few days before.

What caught the eye of investors was that operating
margins as a percent of consolidated sales rose to 3.2
percent, from 2.7 percent a year ago.

“The carrot for Amazon investors is improvements to
margin over time,” an analyst said.

Apple, on the other hand, would need to build a cheap
iPhone to keep growing as fast as it has been, which
would slice into its margins.

Copyright © 2011 Pearson
Education, Inc.

Publishing as Prentice Hall

Ch 11

of International Operations

Gain new customers

Absorb excess capacity, reduce unit costs, and spread
economic risks

Allow firms to establish low
cost production facilities

Competition may be less

Reduced tariffs, lower taxes, and favorable political

Joint ventures can enable firms to learn new
technology, culture, and business practices

Economies of scale

Power and prestige in domestic markets may be
significantly enhanced

Copyright © 2011 Pearson Education, Inc.

Publishing as Prentice Hall

of International Operations

Foreign operations could be seized

Different and often little
understood social, cultural,
demographic, environmental, political, governmental,
legal, technological, economic, and competitive forces

Weakness of competitors overestimated

Different language, culture, and value systems

Understanding of regional organizations needed

Dealing with two or money systems

Global Challenges

and maintain exports to other

domestic markets against imported


Countries imposing tariffs, taxes,
and regulations on firms outside the country to
favor their own companies and people

FCPA prevents companies from making bribes to
government officials

Private party transactions are ok (CP paid a private
group in USA to not lodge a trade complaint)

Material facilitation fees to local officials are not ok
(See Wal

India has laws against lobbying (viewed as a form of

Mart’s FCPA Problem

Last November Wal
Mart said that its investigation into violations of a federal
bribery included Mexico , China, India and Brazil, among their most
important international markets.

More than half of Wal
Mart’s 10,524 stores are international. Mexico has 2,230
stores. Brazil has 534, China, 384.

Mart found evidence of potential violations of the Foreign Corrupt
Practices Act, beginning with bribery involving the opening of stores in

Mart sees the degree to which corruption may have infected its
international operations, and shows growing alarm within the company about
the problem.

In 2005, a former lawyer for Wal
Mart in Mexico spent hours telling company
investigators how Wal
Mart de Mexico’s leadership had managed a bribery
campaign to speed expansion. The lawyer said hundreds of bribes were paid for
construction permits and other licenses needed to open new stores.

Mart is changing as a result of investigations. Lawyers for each country
now report to the general counsel of Wal
Mart International . Before they
reported to the chief executives of that country

which could create conflicts
of interest if the chief executive was involved in corruption.

According to a lawyer, in these situations a company will report to government
agencies with “very detailed presentations about the results of the internal
investigation” in the hope of receiving lesser punishment from the agencies.


Copyright © 2011 Pearson Education, Inc.

Publishing as Prentice Hall

Changes in the Global Economy

Corporations are obtaining customers

Markets are shifting rapidly and
converging in tastes, trends, and prices

Innovative transport systems are
accelerating transfer of technology

Nature and location of production
systems are shifting

Criteria for Choosing the Mode of Entry

Entry with wholly owned subsidiaries (high control)

High R&D business

High brand equity business

The company has high foreign entry experience

Entry via partnerships

Risky country

Legal restrictions on foreign ownership of assets

The country is culturally and socially distant

The Changing Workforce in China

At a Pearl River area factory labor costs (wages plus benefits) per worker have been rising 30 percent or
more each year. Nationwide migrant worker wages are rising is 21 percent annually. The government has
mandated 13 percent annual minimum wage increases through 2015. This is about three times inflation.

Wages at the factory are rising fast because it is in an area that was slower to develop. Five years ago, the
factory paid $90 to
a month to new workers. Workers gave $13 to $40 of their monthly pay for six
months to their foreman for training. Now the factory offers new employees 2,500 renminbi a month,
, before overtime *. Six
person dorm rooms have been replaced with two
person apartments.
Workers no longer have to give part of their wages to the foreman.

Foremen now get an $8 to $16 bonus for each month that a new blue
collar employee stays on the job.

The factory struggles to find workers.

An outcome of China’s one
child policy is that many college graduates are only children with parents and
grandparents who continue to support them into adulthood. Those children do not want factory work.

A factory manager said: “Their parents, their grandparents give them money; they have six people to
support them. They say, Why do I need to work? I can stay home and get 2,000 renminbi a month, why
should I get on a bus every day to earn 2,500 a month?”

China’s vocational schools and training programs are unpopular. They are seen as dead
ends. They are also
seen as schools for people from peasant backgrounds. “The more educated people are, the less they want to
work in a factory.”

The number getting vocational training is about half that of students taking academic courses.

The combination of the one
child policy and rising rates of college education is starting to hit the core of
China’s factory work force: 18

to 21
olds not in college. Their numbers are on track to plunge by 29
percent from 2010 to 2020 even if enrollments in higher education hold steady.

“We have jobs and positions for which skilled workers cannot be found, and on the other hand, we have
talented people who cannot find jobs; technical and vocational education and training is the answer,” the
vice minister of education said at a conference last June.

* Note that in dollar terms wages have risen even faster than in renminbi due to exchange rates.


What Strategists are Thinking About*

China’s large pool of surplus rural labor has played a key role in maintaining low inflation
and supporting China’s growth model.

As agriculture surplus labor is exhausted, industrial wages rise faster, industrial profits
are squeezed, and investment falls.

Rebalancing China’s growth pattern would produce significant positive external
spillovers and potentially raise output in those countries within the supply chain (mainly
emerging Asia) and commodity exporters.

Demographics strongly suggest an imminent transition to a labor
shortage economy.
China will have a profound demographic shift within the next decade

The UN projects that growth of the working age (15

64) population will turn negative
around 2020.

This forecast potentially understates prospects of a labor shortage:

Industry employees are predominantly young.

The growth rate of the core 20
39 subpopulation, shrank to zero in 2010 and will decline faster than
the overall working age population.

After a long period of “demographic dividends,” the share of dependents (those aged 0

14 and > 64
years of age) was lowest in 2010 and will rise (see next slide)

agricultural productivity by raising mechanization could result in a sizable
release of rural workers that could partially offset labor shortfalls in urban

Scenario analysis shows that higher fertility through relaxation of the one
child policy
will delay depletion of excess labor (slightly). Financial reform will accelerate the
transition to a labor shortage economy, through wealth effects

Very low fertility rates still prevail, especially in the richest parts of the country. Shanghai
reported fertility of just 0.6 in 2010

probably the lowest level anywhere in the world.
According to the UN's population division, the nationwide fertility rate will continue to
decline, reaching 1.51 in 2015
20 (http://www.economist.com/node/21553056)

* From an IMF working paper.

Effects of The Shrinking Labor Pool*

Industry’s relocation
to the interior provinces

wages are lower and the large reserve of rural labor

has gathered pace since the global financial

Parallel developments, such as an uptick in labor
activism since the financial crisis is also consistent
with strengthened bargaining power that accompanies
a shrinking pool of labor.

* From an IMF working paper.

Other Points of View

China’s demographic challenge may not be the disaster people are
thinking about (A).

China’s industries are not very automated compared to developed

China’s capital efficiency is poor. (Where, for example, does all that steel
actually go? Think of the old Soviet Union’s steel and concrete


China’s capital efficiency rose to match Japan’s, China’s growth prospects
could theoretically remain high.

China invests a higher percentage of GDP, but invests less efficiently than
Japan, South Korea and Taiwan during their rapid expansions. (A)

In 2012 the working
age population in China decreased 3.45 million. It is
937.27 million according to the director of the National Bureau of
Statistics. (B)

The director said that China should work to boost labor productivity, as
well as improve people's education and adjust types of employment to
extend the dividend. (B)

An economist at the China Center for International Economic Exchanges
in Beijing says that the fading of China's demographic dividend has
required China to increase spending on education and culture to boost
the quality of the country's human resources, said (B)

FT.com 6 Feb 2013

B) http://news.xinhuanet.com/english/indepth/2013

Changing Dependency Ratios

Graph on the Left Includes Under 16 and Over 65


right side, and


FT.com 6 Feb 2013

An Article by Michael Lewis

In 2005 the investment bank Goldman Sachs changed the way it paid its

Before 2005 managers made assessed employees based not just on how much
business you’d brought in, but also on how good you were for the organization.
These two factors combined indicated your true economic value to the

After 2005 the system has become largely mathematical: employee bonuses
were a percentage of the amount of revenue the employee brought to the firm.

In some years, the bonus would be 5 percent of that revenue; in better years, it
would be 7 percent.

“The problem with the new system was that people would do anything they


to pump up the number next to their name.”

The incentives changed, the behavior followed.

According to Lewis: “Goldman now rewarded its people for advancing their
narrow interests at the expense of their customers, the wider society, and even
the firm's own long
term interests. “

“The change in incentives almost certainly can be traced back to Goldman's
decision, in the late 1990s, to go public. “

The firm ceased to be a partnership (with partners having unlimited personal
liability) and became a public corporation.

The people who ran it ceased to have a long
term interest in Goldman's
reputation and ceased to have a long
term exposure to its losses.


Patent Infringement and Innovation

Carnegie Mellon University said it was awarded $1.17 billion
by a federal jury in Pittsburgh last December in

Marvell Technology Group had used technology developed at
the university without a license.

The patents were developed by a professor and a former Ph.D.
student in the department of electrical and computer

Their work was supported by Carnegie’s Data Storage Systems
Center, a university research organization

CMU said Marvell had infringed on patents relating to
technology for increasing the accuracy of reading data
from high
speed magnetic disks used in hard drives.

The university said “Protection of the discoveries of our
faculty and students is very important to us.”


Thai Companies Invest Abroad

Thai companies are going where the money is. They're going to countries with
large natural resources and markets (A).

PTT Exploration & Production (PTT) has been expanding abroad aggressively.

In November 2010 it purchased 40 per cent of Statoil ASA's oil sands project in
Canada for $2.28 billion.

In August 2012, PTT made a $959
million offer to buy out a Singaporean coal
miner Sakari Resources

July 2012 PTT purchased UK
listed Cove Energy for $1.9 billion, with assets in

PTT has invested more than $6BB in Myanmar.

Charoen Pokphand Group in December purchased a 15.5
cent stake in
China's second largest insurance company from HSBC for $9.39 billion

With a market cap of about US$13.79 billion and over $864 million in profits
Siam Cement Group has been very actively investing in Indonesia. (A)

Thai Beverage, makers of Chang Beer made an $11BB bid for the Singapore
Fraser and Neave Ltd.

ThaiBev said the deal brings exposure to high
growth Southeast Asian markets
with attractive demographics and consumer
spending trends. (WSJ)

Fraser & Neave has a portfolio of soft
drink brands and properties in the region.

Central Retail Corp. spent

260 million, or about US$320 million, to acquire
the entire stake in La Rinascente in Milan in May last year. (WSJ)


Raslan The Star Kuala Lumpur January 4, 2013

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