scf case studies

MINISTRY OF EDUCATION AND SCIENCE OF THE RUSSIAN

FEDERATION

PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS

INTERNATIONAL BUSINESS SCHOOL

STRATEGIES IN CORPORATE FINANCE

CASE STUDIES

Moscow 2011

STRATEGIES IN CORPORATE FINANCE – CASE STUDIES

2 Introduction. Anastasiya Volokhova “Kapuchinoff” IBS PLEKHANOV 2011

EDITOR: ROBIN JOYCE

COMPILED BY: PAUL STREKHA

Copyright Notice The copyright of the material contained in this publication belongs to Plekhanov University, Moscow, Russia and material may be used free of charge for any non-commercial purpose, if attributed to Plekhanov University. Where sources have been noted in the text, the copyright of those parts of the text belong to those sources.


Introduction.Anastasiya Volokhova “Kapuchinoff” 3 IBS PLEKHANOV 2011

CONTENTS

INTRODUCTION ............................................................................................................. 4

SECTION 1. SMALL AND MEDIUM ENTREPRISES ............................................... 7

Anastasiya Volokhova “Kapuchinoff” ....................................................... 7 Alexander Sarukhanyan “Investment Fund” ............................................ 23 Pavel Tolpeev “IKEA” ............................................................................. 38 Vladimir Serousov “Gourmet Food Store” ............................................... 60

SECTION 2. NATIONAL ENTERPRISES .................................................................. 79

Margarita Balasanyan “Sberbank”............................................................ 79 Ekaterina Cuellar “Colinversiones S.A. E.P.S” ........................................ 91 Victoria Karelova “ABS Bank” .............................................................. 108 Dauren Toktamysov “Plan of development for Sugar Company” ......... 127

SECTION 3. INTERNATIONAL GROUP ................................................................ 144

Darima Dordzhieva “CE Bank” .............................................................. 144 Denis Gaitanov “Girsberger GmbH” ...................................................... 156 Ekaterina Gonastareva “Onegin Luxury Store” ..................................... 172 Elena Plakhova “Shtokman Development AG” ..................................... 191 Ekaterina Vashurina, Irina Koroleva “Starbucks” .................................. 206

SECTION 4. GLOBAL PLAYER ................................................................................ 232

Maria Kinarova “British American Tobacco” ........................................ 232 Ekaterina Gurieva “General Electric”..................................................... 252 Ali Israilov “IBM” .................................................................................. 273 Sofia Petrova “Apple Inc” ...................................................................... 292 Pavel Strekha “Canon” ........................................................................... 312 Rano Usmanova “Nestle” ....................................................................... 329

ABOUT THE AUTHORS ............................................................................................. 349

ABOUT IBS PLEKHANOV ......................................................................................... 360

CONTENTS



INTRODUCTION

Introduction from Dean of IBS-Plekhanov

Dear Colleague,

Thank you for choosing to read Strategies in

Corporate Finance – Case Studies. I recommend this

publication for the variety of case studies covering a wide

range of businesses in Russia, Europe, Asia, North and

South America.

We have presented them in four parts:

1. Small, medium enterprise

2. National enterprise

3. International group

4. Global player

I am pleased that we are presenting such a wide range of

businessesindicating that strategic planning is relevant to all sizes of business, not

just to the major players.

Each paper is approximately 15 pages in length and considers planning with

a five-year horizon. The selection comprises start-ups, young businesses, mature

groups and there is even a bank which is a composite picture of existing Russian

banks. Many of the corporations will be known to you, whilst others will be

new.The primary use of this material is to provide bases for discussion of corporate

planning. Some provide proposed radical routes forward, one providing three

alternatives, whilst others suggest that ‘more of the same excellent management’ of

the corporation will suffice. There is plenty of scope for your alternative

proposals.The styles and approaches vary substantially, which also yields teaching

points. Some made extensive use of published sources, whilst others developed

most of the paper themselves. We asked our students to maximize analysis while

NADEZHDA.VASILIYEVNA PONOMAREVA, DEAN OF

IBS-PLEKHANOV

INTRODUCTION


Introduction.Anastasiya Volokhova “Kapuchinoff” 5 IBS PLEKHANOV 2011

minimizing financial data, so that they would stretch themselves in considering the

strategic issues and opportunities.

These papers were written by our first intake of students to our Master of

Economics in English course, three months after starting the course. They wrote

them in English, despite English being their second or third language. Students

have to pass Cambridge University Business examinations as part of this course.

We have limited editing to the minimum. Biographies appear at the end of the

publication, as does information about the International Business School.

I hope that you will find them interesting and of value to your students.Your

comments will be very welcome.

Sincerely,

Nadezhda Vasilievna Ponomareva

Dean, IBS-Plekhanov

INTRODUCTION



Introduction from Course Supervisor

Dear Colleague,

These papers were written by students as their

examination for their course on Strategies in Corporate

Finance. The task was to write a strategy for the organization

in which they work, worked, or would like to work. “The

strategy is a view over the next 5 years and

what improvements you would recommend. The structure

should reflect:

• the economic environment as it will relate to your business (or one in

which you would like to work) over the next 5 years

• impact of competition

• strategy of your business and how it will be supported financially.”

Sincerely,

Liliya Sergeevna Babynina

LILIYA SERGEEVNA BABYNINA, COURSE

SUPERVISOR

INTRODUCTION


Section 1. Small and Medium Entreprises.Anastasiya Volokhova “Kapuchinoff” 7

IBS PLEKHANOV 2011

SECTION 1. SMALL AND MEDIUM ENTREPRISES

ANASTASIYA VOLOKHOVA “KAPUCHINOFF”

Introduction

Café “Kapuchinoff” is a 90 seat fine-dining café

located on the south of Moscow near the

Kolomenskaya metro station on the way to

Kolomenskoye Park . It is focused on European menu

with a touch of Italian influence.

The menu of the café is not greatly diversified.

There are some kinds of pasta, salads, appetizers, main

dishes and desserts. Speaking about beverages, there is

quite a wide range of different sorts of coffee and tea

and also some alcohol cocktails.

The café has many brand-loyal customers, due to the fact, that it is the only

place with good interior and homelike atmosphere located near the Kolomenskoe

metro station and some neighboring stations. Moreover, due to the fact that it is

located on the way to the Kolomenskoe Park Parkthat is one of the best parks in

Moscow, there are a lot of people visiting this café on their way to and from the

park. The café is open 7 days a week. The working hours are from 10 am till 12

pm. The park is closed at 11 pm. So visitors can have some drinks and meals after

a long walk in the park. Actually the café closesat about 1 am, due to the fact, that

many customers do not want to leave the homelike atmosphere, even after the

closing time.

It is a warm and friendly place with excellent food. A place where you

always know you will get the best of everything:comfortable furnishings and decor

ANASTASIYA VOLOKHOVA


8 Section 1. Small and Medium Entreprises. Anastasiya Volokhova “Kapuchinoff”

IBS PLEKHANOV 2011

with soothing warm tones. It is the perfect place to stop in for a bite to eat, for a

drink or for a small business meeting. It also has some special tables for children

and atthe weekend there some professionally-trained people who are

happy to entertain children during the time their parents are having a meal.

Prices in the café are a bit higher in a comparison with other cafes in the

area, but the level of service and quality of food is also a lot higher.It is the strategy

of Kapuchinoff to give a perception of higher value than its competitors, through

its food, service and entertainment.

The cafe is fine dining in a cozy atmosphere:warm colors, fresh flowers, soft

music, candles and amazing artwork from some of the area’s most notable new

artists. This contributes to a sense of community and gives new artists a chance to

show their work for a diverse clientele. There are also some special additions to the

menu depending on the season. For example: a lot of iced drinks and ice-cream in

summer and different times of special hot drinks in winter. During the busy

summer months, you can also sit outside on the patio and you will be offered a

special summer menu, featuring lighter fare, exotic drinks, as well as non-alcoholic

offerings. The patio and garden setting will be a fun and casual atmosphere for the

summer crowd.

The service is relaxed, very friendly and correct. The staff is perfectly

trained, motivated, encouragedand very friendly. Moreover the café has a special

offer to the visitors, who want to take coffee to go. It offers a 30% discount on all

sorts of coffee to go.

It is an interesting fact that, in the guest book, many clients noticed that there

is no bakery products offered and it will be great to take some bakery products to

go with coffee, to make a walk in the park more pleasant. The best way to catch

the interest of a regular, loyal customer and visitors is to offer a broad variety of



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bakery. To do this, it is most logical to bake buns and rolls in its own bake house to

make it fresh and delicious all the time.

Mission

Café “Kapuchinoff” is now mostly focused on regular clients and those who

aregoing to sit in the café, having a meal. Now it aims to focus on visitors who

aregoing to take some food and beverages to go. In other words: to extend the

target audience. It is sensitive to the often over-looked population of allergy

sufferers and caters to their needs for healthy, delicious baked goods. It seeks a fair

and responsible profit, enough to keep the company financially healthy for the long

term and to fairly compensate owners for their money and risk.

Company Summary

The company has existed6 years and it did not have any problems with

indebtedness. In order to start up the business 6 years ago,aloan of 7 000 000 rub

for two years was taken fromSberbank. Thus, the company has good credit history.

The rest was provided from their own capital.

After the first 4 years of operation, a decision to expand the business was

made. The company rented larger premises in the neighborhood, thus the café

became two times bigger. The kitchen was expanded twice two. Another loan of

2 000 000 rub was taken from the Sberbank for one year. The managerial team is

ready to expand and is open to the developments.

Company Ownership

Café “Kapuchinoff” is managed by two partners. These partners represent

sales and management and finance and administration areas, respectively. The

partners provide funding from their own savings, which cover start-up expenses of

the bakery and provide a financial cushion for the first months of operation. A one

year loan from Sberbank will cover the rest of the required financing.

Financial position



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The turnover of the company in the year 2010 was 32 468 000 rub that is

19% higher comparedto the year of 2009. Nowadays, the company has strong

market position and has no debts. The net profit in the year 2010 was 7 244 000

rub. The capacity of premises the company is renting now is enough to build a

bakery inside it.

Start up of the bakery

For the equipment for the bakery, repair, provision and other spending

1 600 000 rub is needed as the initial investment. 1 000 000 rub will be provided

through the own funds, another 600 000 rub will be taken as a loan fromSberbank

with a12% interest rate annually for the next 2 years. That means that 644 000 rub

are to be payed to Sberbank in 2 years.

These costs include:

Equipment

Repair

Bakery ingredients

Advertising brochures

Insurance

Qualified personnel

Bakery accessories, i.e. paper bags, cartons, etc.

The company plans to continue building a strong market position in the area,

due to the partners' industry experience and mild competitive climate in the area.

Once the bakery becomes established and the cash flow is steady, 2 persons

will be hired: one professional baker and anassistant baker.

Products of bakery

The Bakery will provide not only normal donuts, breads, muffins, cakes and

pastries, but also non-gluten baked goods and pastries to diet-conscious and wheat-

allergic consumers.



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Example of goods:

-Spelt breads, muffins and pastries

-Spelt flour is the most common wheat-alternative flour as it has the same

characteristics as wheat which provides similar taste, consistency and behaviors

creating goods that are just as good as any wheat baked good.

-Donuts with the wide range of tastes

-Yeast-free breads

Many people have an allergy to yeast, or have been warned by their doctors

not to eat it. We provide a line of yeast-free breads.

Market Analysis Summary

“Kapuchinoff” focuses on the middle- and upper-income markets. These

market segments consume the majority of products it offers.

Market Segmentation

What is very important in the present day world, is that our target market

includes people who are health conscious and/or have common food allergies. This

is a niche market since most bakeries do not cater to these needs, with the

exception of high-fiber diets. So thanks to this, the new segment of customers is to

be attracted.

This market Segment includes The Allergy Group and The Diet Group.

The Allergy Group

According to Health Magazine, one out of five people suffer from a

common food allergy, however many bakeries do not cater to their needs.

The Diet Group

Many people, especially young people are sick of traditional diets. The

bakery will have special kinds of muffins with low fat. That should be pretty

popular among students and people who are interested in diets and their health.



IBS PLEKHANOV 2011

Moreover, for health reasons, many people are warned off certain foods by

their doctors because of high cholesterol and blood pressure. Currently the main

killer in the Russia is heart disease, according the Russian Heart Association.

Many Russians aged 50+ are going on special diets to prevent heart disease.

Target Market Segment Strategy

The dominant target market is a regular stream of local residents. Personal

and expedient customer service, at a competitive price, is key to maintaining the

local market share of this target market.

Tourists

Tourist traffic comprises approximately 15% of the revenues due to the fact,

that Kolomenskoe Park is pretty popular among them. Due to the fact, that most

tourists are from Europe where some food and beverages to go are very popular, it

is expected that the number of tourists consuming bakery to go will be increased to

25%. The revenue will increase by 10% correspondingly. The high visibility and

competitive products and service are critical to capture this segment of the market.

A special banner will be made as a part of marketing strategy to attract new

customers and tourists especially. Some special banners will be made in English

for tourists. The menu in English already exists.

Service Business Analysis

The retail coffee and bakery industry in the Russia has recently experienced

rapid growth. The cool marine climate in Moscow stimulates consumption of hot

beverages throughout the year. Coffee drinkers in the Northwest are finicky about

the quality of beverages offered at the numerous coffee bars across the region and,

what is very important, more and more people prefer to drink coffee with some

bakery. It is very urgent nowadays, as many people quit smoking and now they

substitute bakery to cigarettes. Despite low competition in the immediate area,

“Kapuchinoff” will position itself not only as a place where customers can enjoy a



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cup of delicious coffee with a fresh pastry in a relaxing environment. But it is also

a place where you can take some bakery to go to the park, or even buy some

delicious bakery to take home.

Competition

Competition in the local area is somewhat sparse and does not provide

nearly the level of product quality and customer service that

doesKapuchinoff. Local customers are looking for a high-quality product in a

relaxing atmosphere. They desire a unique, classy experience.

Leading competitors purchase and roast high quality, whole-bean coffees

and, along with Italian-style espresso beverages, cold-blended beverages, a variety

of pastries and confections, coffee-related accessories and equipment, and a line of

premium teas. Theysell these items primarily through company-operated retail

stores. In addition to sales through company-operated retail stores, leading

competitors sell coffee and tea products through other channels of distribution

(specialty operations).

Larger chains vary their product mix depending upon the size of each store

and its location. Larger stores carry a broad selection of whole-bean coffees in

various sizes and types of packaging, as well as an assortment of coffee- and

espresso-making equipment and accessories such as coffee grinders, coffee

makers, espresso machines, coffee filters, storage containers, travel tumblers and

mugs. Smaller stores and kiosks typically sell a full line of coffee beverages, a

more limited selection of whole-bean coffees, and a few accessories such as travel

tumblers and logo mugs. During fiscal year 2010, industry retail sales mix by

product type was approximately 73% beverages, 14% food items, eight percent

whole-bean coffees, and five percent coffee-making equipment and accessories.

Technologically- savvy competitors make fresh coffee and coffee-related products

conveniently available via mail order and online. Additionally, mail-order



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catalogs offering coffees, certain food items, and select coffee-making equipment

and accessories, have been made available by a few larger competitors. Websites

offering online stores that allow customers to browse for and purchase coffee,

gifts, and other items via the Internet have become more commonplace as well.

But in the area near Kolomenskaya metro station no comparablecompetitors

are located.

There is a Sushi restaurant “Chast Shushi” in the area that is located in

anoffice building and cannot be considered to be a real competitor due to

absolutely different specialization.

There is also a Georgian restaurant with a rather specific atmosphere. This

place is oriented only tolocal customers, that is the Caucasian community. Also,

the prices there are 2 times higher than in Kapuchinoff as it is a restaurant. In other

words, it is not the direct competitor.

Another café is located right near “Kapuchinoff” and can be considered to

be a competitor. But the quality of food there is rather low and the decoration is

not of such a high level. Prices are low too, as the target audience is people with

low income, that is not our target. So this place cannot be considered to be a real

competitor.

Strategy and Implementation Summary

The strategy focuses on serving a niche of the bakery market with quality

goods. Kapuchinoff is determined to become a part of the community - an

establishment that becomes as much of the community as a church or local grocery

store. To achieve these goals, the following will be provided:

• Friendly, neighborhood-feel atmosphere, as it is now

• Quality baked goods for everyone to enjoy at a fair price

• Special diet menus in relation to the advice of local healthcare

providers



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The main emphasis of the strategy is not cost minimization. It is expansion

and getting a new target audience due to this expansion. Firstly, the new target of

people interested in their health and people seeking interesting food for diets.

Secondly, focusing on tourists. Later, getting and serving new customers, living in

remote districts through delivery service. Finally, increasing turnover through the

bigger range of products to be offered in the future.

It should be mentioned that the economical situation in the country is very

hospitable and favorable for the business expansion, as the time of crisis is already

in the past and now the economy is recovering. The situation with unemployment

is improving and people have a possibility to spend a part of their income on their

entertainment instead of saving money in the fear of future possible problems.

Marketing strategy

First three years:

First of all, as it was mentioned, some special banners in English will be

placed in order to attract tourists. There will be also advertising blotters that will be

given to people near the metro station Kolomenskaya and also in Kolomenskoye

Park.

A special discount of 10% will be given to pensioners and students. There

will be also some discounts that a person can get while buying bakery for asum

bigger than 1000 rub.

Moreover, special discount cards for existing customers will be provided.

Firstly a person will get a 5% discount. To get this card, they would have to fill the

form with some personal information. There will be an accumulative system,

meaning that the more a person spends in the café, the sooner he/she will get

bigger discount.

In three years time, after the loan to Sberbank is repaid, the break-even point

will be about to be achieved and the profit from operation of the Café itself and the



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bakery achieved, it is planned to put an advertisement to the website “Vkontakte”

that is considered to be the most popular one in Russia nowadays. It should be

taken into consideration that the advertisement there is very expensive, but it is still

worth it. That advertisement will emphasize not only the high quality food, bakery

and beverages the café offers, but also describe the advantages of walks in

Kolomenskaya Park. It will be donedue to the fact, that competition in Moscow is

very severe. The main advantage Kapuchinoff has is that there are no real

competitors in the area. But if Moscow itself is considered,the situation is

absolutely different. So if some customers will be attracted to walk in the park, that

is really beautiful and great they will surely enjoy the walk greatly. Then they will

surely visit café Kapuchinoff, thanks to which they visited the park.

Simultaneously with placing an advertisement in “Vkontakte”, some emails

with special offers will be sent to existing customers. The main aim of these offers

will be to attract as many new customers as possible. For example: “Bring 5

friends with you and get two free slices of apple cake! “

Year four and year five:

In three years time, after the loan to Sberbank is repaid, the break-even point

will be about to be achieved, the profit from operation of the Café itself and the

bakery will be achieved and an advertisement to the website “Vkontakte” will be in

place, the delivery service is to be provided.

It is expected, that many brand-loyal customers will appear in three years’

time. Many of them may possibly live quite far away from the Kolomenskaya

metro station. Thus, to buy some bakery or other products that “Kapuchinoff”

offers they would have to visit café itself, which is very problematic. The solution

of this problem will be delivery service.

The delivery itself will be free of charge, but the minimum sum of the order

will be set. This sum is planned to be 1000 rub. Moreover, each client will get a



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special muffin for free, with the taste he/she will choose. This small present will

help to get more brand-loyal customers.

Speaking about costs, two cars will be bought to deliver food in the

neighborhood. These will be Russian cars called “Zhiguli”, costing 120 000 rub

each. Four persons for delivery service will be hired with a salary of about 25 000

each. They will have flexible working hours, but not less than 30 hours a week.

Thus, the delivery service will cost the company 340 000 rub. It should be

mentioned that 240 000 rub can be considered to be an initial investment, as cars

are the fixed assets of the company and the depreciation period is rather long,

about 7 years. 100 000 – the salary to hired workers- is a fixed cost that will be to

be paid every month.

340 000 rub is not a big amount of money. So the delivery service can be

started even after the bakery will be opened. The thing is that delivery service is to

be introduced only after a large-scale advertising campaign. Emails to existing

customers and the advertisement in “Vkontakte” will bring the company many new

clients, as “Vkontakte” is the mostly visited website in Russia nowadays and

internet itself is the most popular nonverbal way of communication. Only if this

investment is successfulwill additional profit be made.

It should be mentioned that the scenario of further development is positive.

There is no guarantee that advertising campaign will bring expected results, thus

this scenario is to be implemented only if no great changes in the country,

economy, industry and consumer preferences occur.

Sales Forecast

The sales forecast assumes the following changes:

Bread sales in the summer months will be slightly higher, since more people

will be going to have walks in Kolomenskoye Park.



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Bread and pastry sales will be higher in November and December because of

the food-oriented holidays.

Coffee sales will be higher in winter months and, for summer months, sales

of sodas and iced beverages will increase, as willthe bakery with fruits and ice-

cream.

Sales Strategy

The strategy focuses on building a customer base by providing good

customer experience. With the addition of the coffee bar and lunch menu in early

spring, it is expected to have customers who make the bakery their one-stop

destination for breakfast or lunch. In the summer, the outdoor patio will be opened,

more and more customers will make the bakery a destination for their lunches

more often, since the atmosphere will be so pleasing.

It is planned to work closely with local doctors and elder people’s care

homes to bring in customers with health problems.

Competitive Edge

The competitive edge is the quality of goods. Only organic flours of the

highest quality that create incredible non-gluten goods, that cannotbe matched

practically anywhere else in the city, are used. The other bakeries in the city focus

on wheat goods and sometimes, as an afterthought, use alternative flours.

Financial Plan

Important Assumptions

In the fiscal year the turnover was about 90 000 rub monthly. The smallest

revenuerunning the business was in November due to the weather conditions. The

turnover was just 35 000 rub. The most profitable month was May, when the

turnover was 125 000 rub and the revenue from the bakery will be about 38 000 a

month.



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In the first three years, the annual turnover of the bakery will be about the

same with the tendency to grow. It will be approximately:

The first year: 422 000 rub

Second year: 464 000 rub

Third year: 498 000 rub

Fourth year (after the advertising campaign): 584 000 rub

This sum is expected taking into consideration, that one month will be

needed for the bakery start-up.

Pessimistic view

In the first few months, sales will be rather small. In the next months, they

will increase, but still slightly. The turnover will be:

The first year: 242 000 rub.

Second year: 286 000 rub.


Fourth year (after the planned advertising campaign): 378 000 rub

Fifth year: 422 000 rub

Optimistic view:

In the first few months, sales will be great, as all brand loyal customer will

appreciate the novelty. Moreover,existing customers will get notification to their

emails. In the subsequent periods the turnover will be increased greatly. The

turnover will be:

The first year: 432 000 rub.

Second year: 512 000 rub.


It should be mentioned that it is still very possible that the optimistic

scenario is the one that will be closest to reality. But there is still the risk



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whetherthe level of profit that can be achievedin the case of normal process of

business development.

Break-even Analysis

The Break-Even Analysis includes running costs of production. These are

fairly low since all of our goods are manufactured at a low cost to us. The costs are

about 11% of the price. Here are the items included in the average percent variable

cost:

• Manufacturing ingredients, i.e. flour, sugar, yeast and butter.

• Payroll

• Utilities

• Advertising

The Break-Even Analysis:

Gross Profit

Costs(rub) Turnover (rub) GrossProfit (rub) 1st year 46 420 422 000 375 580 2nd year 51 040 464 000 412 960 3rd year 53 680 488 000 434 320 4th year 73 240 684 000 619 760 Total: 215 380 1 958 000 1 842 620

The initial investment is 1 600 000 rub. Taking into account the table above,

it can be concluded that the break-even point is achieved in the third quarter of the

fourth year. After that moment the bakery will have revenue of about 55 000

thousands monthly.

Pessimistic view:

Break-even point will be achieved only in the beginning of the 6th year. That

is not acceptable as this business strategy covers the period of 5 years. Moreover 5

years is too long a period of time for such investment to be worth making, as some

other options of business development can be found.



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Optimistic view:

Break-even point will be achieved only in the very beginning of the 4th year.

This scenario is mostly desirable, but the possibility of it to become real is rather

small, unfortunately.

Conclusion

The impactof the world financial crisis can be truly considered to be

extremely hard for the companies operating in all industries all over the world. In

the year 2010, the economy of Russia began to recover and this recovery gives an

opportunity for business development and expansion.

Café “Kapuchinoff” has beenoperating in the market for 6 years and has a

strong market position. Due to its fortunate location, it has real chances to get the

new target audience and thus increase profit. In the menu of the café, a client can

find some kinds of pasta, salads, appetizers, main dishes and desserts, also many

beverages, but unfortunately no bakery products. The best solution to this omission

is to build its own bakery. The initial investment is 1 600 000 rub, but due to the

fact that part of the money is financed through the loan, an additional 44 000 rub of

interest are to be paid during two years period. The expected pay-back period is 3

years and 9 months. There are still some risks connected with such kind of

expansion. The pay-back period can be up to 6 years in the pessimistic view. But

still the increase in the turnover will be up to 800 000 rub a year after the pay-back

period, that is additional 260 000 rub of net profit. So the risk is worth taking.

Considering the target audience, firstly there are people interested in their

health and figure, as there will be special bakery of low fat. Also pensioners and

students, as there will be special discounts for them. In addition there are a lot of

tourists who are interested in visiting historical Kolomenskoe Park and who are in

the habit of buying some coffee and bakery to go.



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In three years time, after the loan to Sberbank is repaid, and the break-even

point isabout to be achieved, it is planned to put an advertisement to the website

“Vkontakte” that is considered to be the most popular one in Russia nowadays.

After that moment the new stream of clients is expected. Moreover,existing clients

will get special offers to their emails of taking more friends with them to get some

special discounts. Simultaneously with this marketing campaign, the delivery

service will be started to make it possible for clients living quite far away from

Kolomenskoe to order their favorite food from their favorite place.

It should be mentioned, that the atmosphere in the Café is really very

homelike and kind of magical. Many clients wrote about that in the guest book.

This fact reassures and lifts hopes and spirits.


Section 1. Small and Medium Entreprises.Alexander Sarukhanyan “Investment Fund” 23

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ALEXANDER SARUKHANYAN “INVESTMENT FUND”

Introduction

In this work I want to describe the functioning

of myown investment fund. The activities of this fund

will be considered in the long term: a term of5 years.

This paper will set out the structureand forms of

organization and management of the fund, considered

strategies and methods of portfolio management.

Description of the investment fund and its

activities

First of all, I want to give the wording to what

we intend to do in the future - the creation and development of a

investment fund.

An investment fund is the mechanism by which individuals providemoney,

or assets, to professional managers to manage. Aggregating the fundsof thousands

of investors and then managing the combinationas a single portfolio, in which each

investor has a share, proportional to his investments. This gives the following

advantages:

• small, private investors have neither the time nor the knowledge of

procedures for the selection of shares and the stock market, but they

want to have the same benefits of investing in stocks and bonds, and

large professional investors.

• portfolio management recognized the fact that diversification reduces

risk, but small investors cannot achieve this in a cost-effective way

because of the high costs of operations with small numbers of shares.

ALEXANDER SARUKHANYAN


24 Section 1. Small and Medium Entreprises. Alexander Sarukhanyan “Investment Fund”

IBS PLEKHANOV 2011

• managing a large number of small investments as one big portfolio

can achieve economies of scale of operations, from which the investor

can benefit in the form of lower management fee.

As investment funds in virtually all countries are subject to legislation and

regulation aimed at protecting the interests of small investors, investors can be

largely confident that the fund will properly manage their assets and protect them.

The main financial instrumentsthat exist in the securities market, are stocks, bonds,

futures, stocks, bonds.Much more attention should be given by using these

instruments. Competent management is needed to properly analyze the state of the

market. To do this, it requiresthefollowing:

Financial analysis.

There are two main reasons to explain the usefulness of financial analysis.

The first is the need to define some characteristics of the securities. The second - in

an effort to identify to the investor a mispriced paper.

According to modern portfolio theory, a financial analyst seeks to estimate

the potential exposure securitiesas well as possible risks detailed in this paper

because these numerical data are needed to determine the risk of the portfolio

(measured by standard deviation). The analyst may try to estimate the rate of

dividend yield of securities in the following year to determine the feasibility of

theirinclusion in the portfolio, for which the rate of dividend yield is an important

characteristic. Careful analysis of such issues as the company's dividend policy and

the likely influx of investors in the future, can provide better forecasts than the

simple extrapolation of last year's rate of dividend yield.

In many cases, you need to know about the sources of risk and profitability

of a security. If, for example, the portfolio is formed for athe clientengaged in the

oil business, then the investor may want to minimize the risk of changes in

portfolio returns due to changes in oil prices. The fact is that if oil prices fall, the



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portfoliois likely to fall as are theearnings of the investor from the oil business. If

the portfolio is affected by fluctuations in oil prices (that is, if it includes a

significant portion of oil stocks), then its market value drops, further weakening

the financial position of the investor.

To detect falsely- priced securities, there are commonly used methods of

fundamental analysis. In essence, these processes involve a search and discovery of

those situations where a financial analyst estimates of future earnings and

dividends of the company:

1. substantially different from conventional wisdom;

2. convince the analyst that they are more accurate than conventional

estimates;

3. havenot yet been reflected in the market rate of securities firms.

In fundamental analysis, there are two different approaches to the

identification of incorrectly priced securities. The first approach attempts to define

the appropriate internal, or true, value of the securities. After that, the intrinsic

value is compared with the current market rate of securities. If the market rate is

much higher than the intrinsic value, then we say that the paper is overrated. If the

market rate is substantially less than the intrinsic value, then we say that the paper

is underestimated.

To successfully manage the investment fund, we must meet the following

conditions:

• Identification of incorrect priced securities

• Income above the average.

• Application of financial analysis and analysis of market efficiency.

• The necessary qualifications of staff.

• Correct evaluation of investment schemes.

• Reduction of incorrect risk assessment.



IBS PLEKHANOV 2011

• Avoiding underestimation of transaction costs.

• Eliminate incorrect estimates of the dividends.

• Eliminate incorrect fit.

• Comparison with efficient systems.

• Application of technical analysis.

• Strategies for the moving average and the line break market.

• Analysis of the lower limit.

• Charts. Moving averages. Indicators of relative strength. The opposite

view.

• Use of fundamental analysis.

• Prediction from the top - down and bottom-up.

• Probabilistic forecasting.

• Econometric models.

Analysis of financial statements.

It is best to analyze the performance of funds over a period of 36 months.

This will help to understand how effective is the basisfor a longer period.

Assume that already as a competent novice investor, we have developed an

investment strategy, with a risk you are willing to bear. The question arises: how to

independently assess the effectiveness of various investment funds? This will help

the performance of the fund.

Profitability. Earnings in the past.

Yield shows what income the securityhas providedover a certain period in

the past. Yield is calculated as the increase in share value as a percentage of its

value at the beginning of the period (eg over three years). For the evaluation of

funds, it is best to take long periods of measurement of the fund: 3 years and

above. This shows how the fund managers have performed overa longer time and it

is hoped that they will continue to run a well- managed fund.



IBS PLEKHANOV 2011

Volatility. Risk

In the bowels of the internet I came across the following sentence by an

unknown author, "If you do not pay attention to the risk, itwill pay attention to

you." A volatility index allows you to pay attention to risk and rate it. Volatility is

measured by the movement of asset prices, or more simply, the scale fluctuations

in the price of securities. It shows how much risk thereis in investing in the asset

and determines what type of securityitis (conservative, moderate, aggressive).

The value of volatility after the crisis of 2008 for various types of

instruments can be roughly defined as follows:

• Conservative - 10%

• Moderate - 15-20%

• Aggressive 20 or above

A more widely-used measure of volatility is the standard deviation. Standard

deviationsare expressed as a percentage, as well as absolute profitability. It is

calculated based on the profitability of the fund over a given period. The standard

deviation allows us to estimate the boundaries of profitability, which can show the

fund’s potential.

How can weuse rates of return and standard deviation?

With these figures, we can calculate the lower and upper limits of the

possible annual yield. The lower boundary of return = average yield for a certain

period - (standard deviation over the same period * 2). The upper limit of yield =

mean yield (over a certain period) + (the standard deviation for the same period *

2). Lower boundary with a minus sign - means a loss that we could incur, upper

limit - this is our best possible income from the fund.

We can analyze the volatility of the fund, using the chart of a fund for some

period of time. In the Russian practice for the analysis of the funds are most

commonly used factors:



IBS PLEKHANOV 2011

• Beta

• Alpha

• Sharp

Beta coefficient. Risk and market

The Beta coefficient shows how much the fund's performance depends on

the movements of the market (the standard, to compare with the performanceof the

fund). It is important that it is the correct comparison of the fund with the

correctindex. Since equity funds should be compared with an index of stocks, bond

funds - with an index of bonds, and mixed can often be compared with the

composite index (includes part of the index stocks and some bonds). The Russian

stock market the benchmark for stock funds is the index of the MICEX and RTS,

for bond funds - RUX-Cbonds, for mixed funds - a composite index 50:50.

What is the beta coefficient of performance?

Beta = 1 means that the fund followed the ups and downs of the market

precisely, in a 1:1 ratio. This is especially important when choosing an index fund.

Beta <1, eg 0.3 means that any market movement reflected in the yield of

the fund only in part, in our example - 30% (in the direction of the market).

Beta> 1 means that the value of a share fell more than the market or index

during the fall, but the growth was stronger than the market or index during its

growth. Typically, the fund's risk is below market risk (beta <1), because reduction

ofinvestment risks isone of the main goals of this kind of investment. For example:

beta> 1 can mean, for example, that in the mixed fund there are more shares than

the average for similar funds - it was more risk thanthe market for this segment,

although smaller than the market risk in a segment of the shares. For standard-risk

segment, we should usesuch an index which closely correlates precisely with

mixed funds.



IBS PLEKHANOV 2011

Beta <0 indicates that the fund market was moving in the opposite

direction. For example, when beta = -0.2, and fall (rise) of the market by 5%, the

fund was up (down) by 1% (5 * (-20%)).

Coefficient Alpha. The art of management.

Coefficient alpha is closely related to the beta coefficient. If the Beta of the

market assesses the impact on the profitability of the fund, the Alpha shows how

much of this profitability has been created not by the growth of the market.

A positive value of coefficient alpha fund means that its average yield is

superior to the return on the benchmark portfolio. Conclusion - management was

effective. Negative value, on the contrary, shows that the average portfolio yield

was lower than the yield of the reference portfolio, and management

wasineffective. For example, if Beta = 1 ("head to head" withan index fund), the

Alpha is equal to 0.4 means that the fund beat the index by 0,4%. With the Beta

0.5 Alpha 0.4 says that the fund rate of return was equal to half the yield of the

index plus 0.4%.

Sharpe ratio. Yield / Risk

The Sharpe ratio records the of return and risk for the selected fund. In fact,

the value of the Sharpe ratio reflects how effectively management is managing the

fund. The higher the score, the better the fund is managed in terms of combinations

of risk and return. The lower the ratio, the lower the return on investment justifies

the risk.Anegative value of the Sharpe ratio indicates that investment in risk free

instruments (a U.S. government bond) would bring more revenue than investment

in the Fund. In Russia, the risk-free instruments areconsidered short term deposit

given to the Savings Bank (Sberbank).

To date, government securities are not riskless.

In practice, you can use the Sharpe ratio.For example, consider two funds.

(A and B) The fund A Sharpe ratio - 0.4234. Fund B - 0.4124. . This means that



IBS PLEKHANOV 2011

the fund and the investor for the assumed additional risk can get a bigger return

from A than fromfund B. Hence, from the standpoint of the investor fund A is

moreinteresting than Fund B. Thus, the analysis of the above parameters allows us

to answer the following questions:

• What was the fund's performance in the past?

• What are the risks you assume by investing in this fund?

• How does the fund behave in relation to the market - faster than it in

growth or slower than the market when it is falling?

• Did it Show a better yield on the fund compared with the market

index?

• Whether investing in the fund more profitable than investing in a risk-

free instrument, such as government bonds or deposit in a safe bank?

Types of investment strategies. Choice of Investment Strategy

Depending on investment objectives, the type of control, the nature of the

economic situation and many other factors can identify a large number of diverse

strategies.

Strategy is an efficient owner. The main income is derived from the

economic activity of enterprises. There is also a speculative strategy of merger or

acquisition. The main goalof this strategy is to acquire a controlling stake for

access to scarce types of products (services), financial resources, or to obtain a

profitable disposal of real estate and other economic and legalrights.

Portfolio investment strategy selection is largely determined by the type of

management. There are usually 2 types of control: passive and active.

Passive management is characteristic of the conservative and moderately-

aggressive investors. The main targets ofpassive management are the protection of

investments against inflation and a guaranteed income with minimal risk and low



IBS PLEKHANOV 2011

management costs. This type of management involves creating well-diversified

portfolio of securities, for which we can accurately calculate the profitability, risk

and liquidity. Active management involves careful monitoring of the market, rapid

acquisition of financial instruments that meet the investment objectives, as well as

rapid changes in the structure of the portfolio. The main feature of the active type

of control is to try to beat the market and investors should earn a yield that exceeds

the average.

Examples of portfolio strategies.

The most common strategy for passive management when investing in

corporate shares is the strategy of "buy-and-hold." It should be borne in mind that

the effectiveness of this strategy depends largely on the level of undervaluation of

shares and the selected time period. It is obvious that in the bear market phase,

almost any other strategy would be benefit in comparison with the strategy of

"buy-and-hold." The highest security and profitability by using the strategy "buy-

and-hold" is achieved in long-term investment.

Another kind of strategy for passive management strategy favors the index

fund. It is based on the fact that the portfolio should reflect the motion of a selected

stock market index, which characterizes the state of the securities market (or its

most important segments). Types of securities and their percentage are selectedin

the same manner as when calculating the index. The main objective of the investor

is duplicatingthemarket structure in its portfolio,with a periodic adjustment aftersix

months or a year. Management reviews the deviations of the portfolio structure

withthe index structure.

When using this strategy, real income, usually provided at the timing of

investments is not generated in less than one year. The main income is generated

by the growth of the market value of the most undervalued stocks.



IBS PLEKHANOV 2011

Auction strategies used in the acquisition of shares at the time of a

privatization process.A variety of these strategies are determined by the auctions.

This is considered to be aparticularly successful strategy when used in the earliest

stages of privatization. Aproper selection of securities purchased at auctions stocks

can provide returns of hundreds or thousands of percent per annum. The final

auction price, in most cases is significantly lower than the market price. Thus, the

main advantage of this strategy is that one can buy shares fairly cheaply of a little-

known companies that are not yet in demand in the market. Risks specific to this

strategy arethat, as a result of excessive demand for more "juicy" bits of

government property, auction prices may be too high. Another danger is that an

investor will not be able to buy shares due to high market demand, and will have

invested their funds for six to eight weeks for no return. Expectations of investors

associated with an increase in market value in the struggle for control over the

enterprise, cannot be justified if one of the participants in the auction will buy a

controlling stake. Finally, there is always a possibility that, for whatever reasons,

timing of auctions will be delayed indefinitely or their results will be declared

invalid.

Arbitrage strategies actively were used at the initial stage of privatization

(sale vouchers in the 1990’s in Russia), and also today. It is the use of the fact that

the same asset can have different prices in two different, including geographically

distant, markets.

“Strategy vacuum cleaner” is a strategy used by the largest investment

companies, which enable (mostly foreign) investors to bulk buying of shares.

Optimization strategy is based on building economic and mathematical

models of the portfolio.

Ranking strategy is that the formation and updating of the portfolio

securities is based on the result of the construction of the rating table. The strategy



IBS PLEKHANOV 2011

of "flexible response" is whenthe professional party to give market signals,

demonstrating the interest of large foreign, or domestic, investors in the shares of

an issuer.Investors use their financialcapabilities in order to beat the competition

and then advance to massive buying of small investors.

The strategy of "market timing" suggests that investors are trying to make

their own forecast of the market and use it for a profit

Depending on the timing of the return of invested capital, portfolio managers

can provide a strategy of short, medium and long-term investments, as well as

combinations thereof. For the domestic market for corporate stocks as short-term

investments,the generally-accepted period is of several hours up to 3-6 months.

Medium-term investment suggests the possibility of return on investment in 6-12

months, and long-term - one year or more. Short-term investment strategy can be

described as a strategy for catching short-term fluctuations. " It comes from the

fact that stock prices are subject to frequent fluctuations, which are not always

adequate to effect real change in the affairs of public companies.” Consequently, in

the market there are always securities for which are quoted toohigh or too low

prices. Some stock market participants are trying to take advantage of such short-

lived situations and to "fix" short-term profits.

A variation of this strategy is the strategy of "scalping," which is most often

used in stock trading.

Portfolio Management can be based on a short-term strategy based on the

use of even small fluctuations, so that profit maximization is possible at very high

speeds. Accordingly, in selecting securities, the portfolio manager should be aware

that significant volumes of transactions should not have a significant impact on the

change in their quotations. The main dangers of this strategy are associated with

risk of default transactions, errors in predicting the movement of the security’s

priceas well as the impossibility of a quick withdrawal of funds tied up by a



IBS PLEKHANOV 2011

particularly large gamble. The risk of using a strategy based on short-term

fluctuations, particularly is high when a sale of securities made without cover

(short sale – selling shares that are not owned by the portfolio manager).

How to start.

So, we are readyto start investment activities. For starters, we need to

determine what organizational form is our business. Assume that the form of our

organization is either a private investment fund, or a hedge fund. It will be created

by investing money of a certain number of individuals. In this case, the amount of

share capital must comply with the statutory authorized capital for such

institutions.

After resolving all legal issues, we should elect the leader. It may be the

person, whoinvested thelargest sum, ie having a large share of the total, orhas the

best professional experience. Next, elect the board of directors, ie, participants of

the enterprise, with ownershipof a certain minimum amount of total investment in

the fund.

Now, we decide the strategy, which will be followed by the fund.

Activities of a Fund in the short term.

Short-term strategy - from one hour to one day. This is a potentially highly

profitable strategy for experienced traders. It is used by professional players who

are already well aware of the market. The positive point here is that in using this

strategy to work, you are not putting yourself at risk of unexpected communication

and changes in prices at a time when you were not in the market. Positions are

closed at the end of each day. Negative aspects - high indirect costs (commissions,

spreads, communication services, etc.), greater risk of adverse short-term

fluctuations in price; requires constant concentration, and control over the entire

working day.



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Very short-range strategy - the most attractive for beginners and rapidly

leads them to a total collapse. Tempted by short-term fluctuations of a few points,

the trader begins to "catch points". Sometimes if successfully managed, he earns

20-40 points.

In this period should be considered such an activity fund, as trade in the

market FOREX. The main instruments for very short-range activities will be

scalping and shorting. Activities of a Fund in the long run.

It can be considered a long-term, for the period of 2 years or more, value for

money. The investments can be as securities (stocks, bonds, forwards and futures)

and investment in major projects (such as construction, real estate, or the

development of high-tech products). Given the latest trend in the market, the fund

mightinvest in gold.

Gold prices (the market quotations of gold) area very important economic

indicator. The price of gold has long been the benchmark for funds. The price of

gold continues to maintain the status indicator of inflation and risk appetite.

Quotes of gold may be useful for investors to make decisions about buying

gold assets. Operational quotes of gold will also be useful in trading on the Forex

market. History Centerbuys gold from any broker, and provides access to trading

in gold. In addition, gold prices are published on the website of the Central Bank

(Bank of Russia).

On the commodity exchanges, futures are traded for gold. Often, the futures

price of gold is gold price today in a general sense. Quotes of gold may reflect both

the beginning of growth and decline in world stock markets. Often, the dynamics

of the gold price is negatively correlated with the stock markets.

Given that the price of gold has grownrapidly in the last 5 years, we can,

with some confidence, predict its future growth and, therefore, may invest in gold.

Naturally, only for the long term.



IBS PLEKHANOV 2011

Ditto for the securities (mostly related to the stock), as mentioned above can

be applied to the strategy "buy-and-hold." In the long run, it should have a positive

result. If you judge them by common attributes, such as capital investment, the

degree of acceptable risk, and some others, it is proposed to allocate five possible

strategies for long-term investment:

1) development of an aggressive (active) growth;

2) moderate growth;

3) improvement at the same level of growth;

4) deterrence of recession and the development of new products;

A"safe" long-term strategy can be considered an investmentin the economy

as a whole. The mechanism is as follows: we create a portfolio of stocks of large

companies according to percentage of their weighted presence in the market. The

idea is that this strategy is not aimed at maximizing profits and minimizing risks

and losses in the event of adverse market conditions.

For example, if the economy grows as a whole, but some of the companies

in which we invested, fall, it would havevirtually no impact on our profitability.

Exiting the game.

Whatever our ideal-designed plans, estimates, strategies - there is always the

risk of "losing." This may include, for example, -liquidation of the Fund. Upon

liquidation of the fund we must repay the fund liabilities to investors in relation to

the size of their investments. The same applies to dividends.

Conclusion.

Analyzing the above, we can conclude that the investment fund - a high-risk

venture, requires good management, complex calculations and intelligent market

analysis. For its successful functioning, it is necessary to consider all possible



IBS PLEKHANOV 2011

factors to consider all scenarios, not excluding the most disadvantaged. The main

disadvantage of the investment fund may include:

• High risks (including risks of loss)

• High dependence of the fund on the economic situation in the market

But the risks can be justified if the fund receives income from its activities.

Often, with proper management, investment fund can achievea large enough profit

that can multiply the share capital of the fund, which will contribute to more

investment, and hence greater profits in the future. Success can never be assured

when acquiring an asset, as there are many risks involved such as the

unpredictability of the future market, opinion and outlooks. Given that property is

only one of the opportunities for investment on the market and that different

investments appeal to different investors, the comparison of asset with asset is

essential, but the comparison of that asset against other forms of investment is also

just as important.


38 Section 1. Small and Medium Entreprises. Pavel Tolpeev “IKEA” IBS PLEKHANOV 2011

PAVEL TOLPEEV “IKEA”

Introduction.

The goal of this work is to analyze the

performance of IKEA group, find the reasons of

success and develop a strategy for further growth. To

achieve thesegoals lots of data was processed, and

result is below. This work consist of 4 main parts, they

are: Part 1 – explanations of IKEA success, Part 2-

Structure, group facts and performance in Fiscal Year

2010, Part 3 – Five forces model, PEST-G analysis,

SWOT analysis, Part 4 – New strategy and

conclusion.

Part 1 about IKEA success is given in order to understand what is attractive

in IKEA for customers, what arethe strong points, that should not be loosened, but

strengthened.

Part 2 shows Group structure to provide understanding of group cash flows

and find how management is realized. Group facts and performance subparts show

the entire company performance in numbers.

Part 3 – Different comprehensive analysis that help to develop a strategy,

find threats, opportunities and find new development directions.

Part 4 – is a summation of entire work, suggestion of new strategy and

conclusion.

Overview.

IKEA is the world’s largest international home products retailer, which was

established in 1943 by Ingvar Kamprad in Sweden, who is of great influence

today. Most of its stores can be found in Europe, the United States, Canada, Asia

and Australia, so it is a globally-acknowledged home furnishings retail chain.

PAVEL TOLPEEV


Section 1. Small and Medium Entreprises.Pavel Tolpeev “IKEA” 39 IBS PLEKHANOV 2011

IKEA is only responsible for the design and development of the products, the

manufacture issubcontracted. The company is well-known for its strong cult brand

which is based on IKEA’s fundamental values of offering affordable, but still

contemporary-designed, products for everyone. Besides this, the company is also

committed to environmental protection; therefore it created the so-called IKEA

GreenTech in 2008 to commercialize green technologies for sale in the stores in

the next few years.

Although IKEA dominates the market of home furnishing, mainly

because of the fact that it was the first inexpensive Scandinavian-designed

furniture seller, it has to face more competition than ever. The main competitors

are Pier 1 Imports and Target in the U.S. and Kmart which has been collaborating

with Martha Stewart on its own furniture line. In addition to this, an IKEA-like

chain called Fly become very popular in France, while in Japan Nitori Co. has a

lock on low-cost furniture. All of these competitors try to cut costs and employ

well-know designers who offer the customers something new and beautiful, but

also affordable.

Reasons of success

IKEA became successful with a relatively standardized product and

product line, the Scandinavian style furniture, in a business with strong cultural

influence. Ingvar Kamprad, the founder of IKEA, realized the demand

forminimalist traditional Scandinavian design furniture at anaffordable price.

Customers would like to have contemporary design in their home, but they could

not afford it. After then came Kamprad and sold IKEA products all over the world,

and IKEA became the world’s largest home furnishings retailer chain. The main

success factor of IKEA is its low prices, wide variety and listening to customers.

Design

The products are contemporary, well-designed, simple, self-assemble,

practical, environmentally-friendly, and last but not least, affordable. These are the



main characteristics of IKEA’s products which first come into customers’ mind.

IKEA sells a wide range of products from kitchen accessories to garden tools,

everything you need to create a nice home. Young couples filled with energy and

joy of life try to furnish their first common home with new, up-to-date, stylish

furniture, but usually they cannot afford expensive pieces. That is when IKEA

comes and helps their dreams come true. Of course, not only young married

couples are in the target group, rather all of the “young people of all ages” belong

there. Quality is also very important for the company and the customers, as well;

therefore they use good and cheap materials, like fir and plastic. They also pay

attention to make transportation easier by offering their products in flat-packaging.

On the other hand, IKEA does not forget about those who need delivery services,

so it cooperates with car rental companies to offer vans and small trucks at

reasonable rates. At home, everyone can assemble their own furniture with only

the use of an Allen wrench, however, sometimes it is still not an easy task, but

IKEA tries to help with detailed descriptions.

Price

An important factor in connection with products is price. IKEA takes every

opportunity to cut the prices. They cooperate with manufacturers who can produce

their products on low price, but keep them qualitative. Their network of 1,300

suppliers in 53 countries showsthat they have regard for finding the right

manufacturer for the right product. Therefore, they choose companies near raw

materials and with advanced technology. In addition to this, designers have to

consult with the manufacturers before creating something new to find the most

efficient way of production at low costs, but of course preserving simple, IKEA-

style, moreover they can only use inexpensive technology for new products. The

company’s pricing strategy is mostly based on rivals, which is expressed by a

manager of IKEA who said that after taking the prices of the competition, they

slash them in half creating competitive advantage in pricing. The simple nature of



Swedish design itself is also a cost-cutting factor. The products are standardized

which means that mass production and economies of scale influences the price, as

well. Besides these, IKEA employs only local people and often students, because

they provide cheaper labor which is good for the company and advantageous for

the country, too. Almost in every country the simple, contemporary design

comparing with low prices made IKEA successful, except for in Japan where

customers wanted materials of high quality and not low price. However, nowadays

IKEA is getting stronger in Japan without making serious changes in its

functioning, and it is still among the best in home furnishing concerning operating

margins.

Standardization

The stores have the same appearancein every country, blue-and yellow-

painted, huge and flat. It consists of 3 or 4 parts: the showroom, the warehouse-

style selling part, a restaurant and a babysitting place (crèche). Every part has its

own advantage. In the showroom you can have new ideas of how to furnish your

home, and maybe you will fall in love with things you never thought you might

need, that place is also a good promotion part. They guide you through every

showroom, and if you follow the arrows, you will not miss anything. After that,

you go to the warehouse where wide aisles are constructed to let you inspect the

products without holding up traffic. After all, if you are tired and hungry, you can

have lunch or just grab a hot dog, or drink a coffee, at the restaurant. If you have a

baby and do not want to drag along with you all day, you can live the junior with a

qualified babysitter. IKEA has 159 or nowadays more outlets in 30 countries. It

has three regions: Europe, North America and Asia-Pacific. The stores are outside

the city limits of major metropolitan areas, and they are easily accessible. The

delivery is mainly the customers’ job, but delivery companies are cooperating with

IKEA, and offer their services if needed, thus there are no, or cheap, delivery costs.



Promotion

IKEA uses a great number of promotion tools. It has commercials on TV,

radio and on the internet, as well, so it uses ATL marketing tools. These ads are

often about sales and low price. The well-known IKEA catalogue is another part of

the promotion. It offers solutions, inspiration and low-priced products in which the

prices are valid for a 12 month period. This catalogue also shows how the IKEA

product range helps to create a better everyday life for everyone. Although the

IKEA catalogue is extensive, it shows just a part of the range that the IKEA stores

offer, and the price of each product. It also contains details on how to get to the

nearest IKEA store and its opening hours. IKEA usually tries to entice the

customers with seasonal sales and by ‘buy 2 get 3’ etc. actions, which are often

successful. The website is very customer friendly, easy to use, where the customers

can find information about new actions, prices and the actual catalogue, as well. It

also offers an additional service where the customers have the possibility to

compile their dream furniture.

Market environment.

IKEA gained high market share in all over the world, but in some countries

it had to deal with new challenges. For instance, in North America IKEA was not

successful first. The standardized products and simplicity did not satisfy the

customers’ needs. They needed to listen to customers in details and made some

adaptations. IKEA has redesigned about a fifth of its product range in that area,

because Americans needed more colorful and ‘happy’ products, and they had a

need for bigger glasses, as well. IKEA listened carefully and the mission began to

move in a more advantageous way. But we should mention that this adaptation has

not meant the destroying of its original formula; however, they had to change not

just the product but also the way of selling. Mainly, because Americans hate

standing in lines:that is why store layouts have been changed to accommodate new



cash registers. It can be argued that minor adaptations do not amount to a defeat of

their original approach.

The main target customers of IKEA can be described on the whole as

’the young people of all ages’ which covers a great layer of the society who have

roughly similar features and lifestyles all over the world. They are always

mentioned like this, inasmuch as the most conspicuous attribute of them is not their

ages, but their youthful taste referring to modernity. They are breaking with the

traditional way of home furnishing, and looking for a more streamlined and

contemporary design which in a lot cases are not affordable for everyday people.

Therefore, IKEA made it possible for those people who are keen on value and

quality to have an access to trendy design for less money. Nevertheless we know

that quality usually means more costs, hence IKEA’s prices do not include delivery

(however it offers this service on payment) and assembling in order to be able to

maintain the low prices. In turn, the customers are willing to contribute to the

process; moreover they enjoy this do-it-yourself work. In addition to this, the

easily variable units of the furniture give them also the freedom to use their

imagination and be creative. Because of these facts, they are usually called as

’prosumers’, who are not just customers, but also producers. In the aspect of use,

they favor simplicity and practical solutions, which are important features of this

Scandinavian style represented by IKEA, as well. And if it all would not be

enough, IKEA was able to provide a new, unique dimension of shopping by

offering additional facilities in the stores, such as IKEA restaurant, babysitting

areas and so on. These customers expect more from shopping than just a

transaction, they need a kind of entertainment and the feeling of belonging, as well,

so that is why IKEA is more than a furniture retailer. However, there are also a few

regional differences that IKEA should take into consideration for being able to

satisfy the claims of the customers. As long as it remains adaptable to the local

markets, it can still preserve the IKEA concept worldwide.



This raises the question of whetherIKEA is capable to succeed everywhere it

cares to establish itself? Almostevery home furnishings retailer istrying to sell their

designed products at low prices to remain competitive.Nonetheless, the concept of

IKEA still hasa power of distinction in the market. It was laid down by Ingvar

Kamprad who established the company with the purpose of providing better life

for everyone. Henceforth, it determined the strategy of the company which put an

emphasis on making practical and contemporary design affordable, besides

keeping the costs at a low level. Furthermore, the name of IKEA has been

interwoven with a kind of lifestyle and experience of shopping which is almost

impossible to imitate for the competitors. IKEA was successful in creating an

emotional attachment in the people to the company, by which it became a global

cult brand, and appeared as more than a furniture merchant. The environmentally

sensitive nature of the company also contributes to enhance this feeling towards

IKEA even more, which not only aiming at protecting the planet, but also

economizing money through flat-packaging, and by recycling used materials into

ready-to-use furniture. Nevertheless, the regional differences mean a kind of

difficulty in the preservation of IKEA’s position, because people of different

cultures perceive good value and low prices in differentways, however, the

company should insure the same kind of quality and perception of brand in every

countries. Consequently, IKEA has to make slight modifications at local markets

in order to gain success globally, whilst it should keep the core founding values

alive without departing considerably from the original IKEA concept. If IKEA can

still cope with these challenges, it will succeed in preserving its dominant role in

home furnishing.

Conclusion to the reasons of success

In conclusion, the key factor of IKEA’s global success can be found mainly

in its approach towards the customers, because according to the company everyone

should have the same possibilities to furnish their dream homes as they want. By



the obsession of cost-cutting and its dedication to home, IKEA was able to make

an access for the people to live a better life at lower prices, and make them feel like

they belong to a family. If IKEA can retain these competitive advantages globally,

and preserves its capability to adapt to the regional markets besides keeping its

original values, as well, it will subsist for a long period on the market of home

furnishing.

Structure

The groups of companies that form IKEA are all controlled by INGKA

Holding B.V., a Dutch corporation, which in turn is controlled by a tax-exempt,

not-for-profit Dutch foundation. The intellectual property of IKEA is controlled by

a series of obscure corporations that can be traced to the Netherlands Antilles and

to the Interogo Foundation in Liechtenstein.

INGKA Holding B.V. owns the industrial group Swedwood, which sources

the manufacturing of IKEA furniture, the sales companies that run IKEA stores, as

well as purchasing and supply functions, and IKEA of Sweden, which is

responsible for the design and development of products in the IKEA range.

INGKA Holding B.V. is wholly owned by Stichting INGKA Foundation, which is

a non-profit foundation registered in Leiden, Netherlands. The logistics center

Europe is located in Dortmund, Germany and Asian Logistic center is located in

Singapore.

Inter IKEA Systems B.V. in Delft, also in the Netherlands, owns the IKEA

concept and trademark, and there is a franchising agreement with every IKEA store

in the world. The IKEA Group is the biggest franchisee of Inter IKEA Systems

B.V. Inter IKEA Systems B.V. is not owned by INGKA Holding B.V., but by Inter

IKEA Holding S.A. registered in Luxembourg, which in turn is controlled by the



Interogo Foundation in Liechtenstein. Ingvar Kamprad has confirmed that this

foundation is controlled by him and his family.

The company which was originated in Småland, Sweden, distributes its

products through its retail outlets. As of October 2010, the chain has 313 stores in

38 countries, most of them in Europe, North America, Asia and Australia. The

IKEA Group itself owns 276 stores in 25 countries and the other 37 stores are

owned and run by franchisees outside the IKEA Group in 16 countries/territories.

2006 saw the opening of 16 new stores. A total of at least 15 openings or

relocations are planned for 2010. On February 17, 2011, IKEA announced it is

plans for a wind farm in Dalarna County, Sweden, furthering the furniture giant's

goal of running on 100 percent renewable energy.

Consolidated income statement

Sept1-Aug31



Consolidated balance sheet Assets:

August 31

Consolidated balance sheet – Equity and liabilities



Sales and profit trends:

This bar diagram shows the

sales of IKEA for a decade from

2000 to 2010.

The IKEA group figures are

based on the IKEA fiscal year. Sales

for the IKEA Group for the financial

year 2010 were up by 7.7% to a total

of 23.1 billion Euros.

Gross margin improved to 46.1% from 44.6% in FY09.

Turnover for IKEA Food was 1.1 billion EURO.

Group Facts

THE IKEA GROUP

The IKEA Group had operations in 41 countries – 29 Trading Service

Offices in 25 countries and 27 Distribution Centers and 11 Customer Distribution

Centers in 16 countries.

INDUSTRIAL GROUPS

Swedwood, an industrial supplier within the IKEA Group, had 15,500 co-

workers and 41 production units in 9 countries. Swedspan, an industrial supplier

within the IKEA Group, had 500 co-workers and 5 production units in 5 countries.

SUPPLIERS IN FY10

IKEA had 1,074 suppliers in 55 countries.

PRODUCTS IN THE RANGE

The IKEA range consisted of approximately 9,500 products.



IKEA GROUP STORE VISITORS IN FY10

Last year 626 million customers visited an IKEA store, gaining inspiration

from their displays which show IKEA products in actual room settings. An idea

which has increased the sales by a manifold, instead of advertising their goods

individually IKEA introduced a new way of displaying or advertising their

products

VISITS TO IKEA WEBSITES IN FY10

IKEA websites had 712 million visits.

PRINTED CATALOGUES, LANGUAGES & EDITIONS

The IKEA catalogue was printed in more than 197 million copies in 29

languages and 61 editions.

CO-WORKERS PER FUNCTION

Purchasing, distribution, wholesale, range & other: 14,500

Retail: 96,500

Swedwood: 15,500

Swedspan: 500

CO-WORKERS PER REGION

Asia & Australia: 8,000

North America: 15,500

Europe: 103,500

Sales:

The pie diagram given above

shows the volume of sales

individually in different continents.

It is quite evident from the diagram

that the sales are pretty high in Europe as most of its business is concentrated in

this area. We can even see that 15% of its total sales are from USA wherein IKEA



has started its business in the year 2010 and within a year its sales in USA indicate

the efficiency of its marketing policies and strategies.

Top five sales countries:

1. Germany 15%,

2. USA 10%,

3. France 9%,

4. UK 7%

5. Sweden 6%.

Purchases by region:

IKEA has 29 trading service offices

in 25 countries. This allows them to be

close to their suppliers - about 1,074 in 55

countries - so as to monitor production, test

new ideas, negotiate prices and check

quality while keeping an eye on social and working conditions.

The pie diagram given above shows the purchases that have been made for

the year 2010.

Top five purchasing countries:

1. China 21%,

2. Poland 17%,

3. Italy 8%,

4. Sweden 6%

5. Germany 6%.

Distribution and transportation:

IKEA has its presence in 16 countries with 11 distribution centers and 27

customer distribution centers. Using flat packs, transporting goods where possible

by rail and sea, and utilizing fuel-saving techniques makes them cost-effective and

environmentally friendly. This is where it gains extra points over its competitors.



Flat pack technique which was introduced by IKEA brought a lot of changes in

furniture transportation, making it easier and comfortable to the customer as well

as the manufacturer. This is the technique that enabledIKEA to spread its roots in

different countries.

Five forces model

This model is helpful in assessing the level or intensity of competition in

specific areas. We are using this model in order to assess the following:

Threat of new entrants:

In this section, we’ll see how easy or difficult it is for the competitors of

IKEA to compete.

• Weak barriers of entry, though IKEA has a strong brand image.

• Distribution channels are not that easy to access, as IKEA has a variety

of distributors for different materials.

• Economies of scale – IKEA purchases raw materials on a bulk scale at

cheaper rates, so low cost of production.

Therefore, there is hardly any threat of new entrants.

Power of suppliers:

• As there are a number of suppliers in the market like DFS, John Lewis,

Argos and other small furniture suppliers; customers have got a wide range of

options so, IKEA has a possible threat in this field.

Power of buyers:

This field shows the buying and bargaining power of consumers and it

shows the options available to them.

• The position of buyers is strong as there are a number of suppliers

available.

• They have a number of cheaper alternatives.

• As the stores of IKEA are outside the towns, they opt for something

which is within the reach.



Threat of substitutes:

• Most of the furniture cannot be easily substituted, as the products

offered by IKEA are unique in design, style, comfort, price and quality.

• As most of their designs are patented it is difficult for other

manufacturers to copy it.

• As IKEA puts in constant innovation into their products it is difficult for

any other competitor to offer anything better than theirs.

• They produce goods on a bulk basis so the cost offered to customer is

within the reach of everyone.

Rivalry among competitors:

• Rivalry among competitors is strong as there are bigger players in the

market like Argos, John Lewis, etc and the range of goods, price and quality that

they offer is quite similar.

PEST-G Analysis

Before making a strategic planning for marketing, every strategic planner

has to make a PEST-G analysis in order to make a long lasting successful strategy.

Political Factors:

• As per GATT treaty, general trading between continents might be

difficult.

• EEA formation would help to boost the business within the European

Union, but not with UK.

• So keeping this in mind, the strategies have to be flexible.

• As IKEA trades in different countries, the political scene is different

everywhere, so it cannot be a one-size-fits-all strategy.

• The countries in which they have their presence are mostly developed,

so they need to have a clear picture about the transportation and shipping taxation

between the countries.



Economical Factors:

• Due to rises in inflation, interest rates would increase. As IKEA plans to

open more stores, their borrowing rate might increase.

• They need to open stores in areas where the percentage of

unemployment is more and hourly pay rate is less, or else they would end up

paying more wages.

• They have their presence in different countries so they need to import

and export goods very often, so the exchange rate might also vary.

Socio-Cultural Factors:

• In USA, Christianity is the dominant religion so goods preferred by

Americans might vary when compared to the goods liked by Chinese.

• In Europe, there are many single parents whereas in Europe or Asia the

situation is different so the choice of furniture or household items would differ.

• In Japan, the older people outnumber the youth, so the furniture should

be of their choice.

Technological Factors:

• The recently introduced EDI, or electronic data transfer, has made the

communication between departments much easier and simpler.

• The new way of introducing goods online by arranging them in a well-

designed room-like environment has increased the volume of sales, as this creates a

sense of need in the minds of a customer.

Geophysical Factors:

• In the recent years, it has become important for every company to

decrease their carbon foot print. IKEA has recently taken a step further by joining

hands with WWF in preserving forests and addressing climate change.

• It is even working hand in hand with WHO in order provide quality food

and health alongside good education.



• It is protecting and maintaining 18,500 hectares of forest land in

Malaysia.

SWOT Analysis:

SWOT analysis helps to identify the key internal and external factors that

are important to achieving the objective. These come from within the company's

unique value chain. SWOT analysis groups key pieces of information into two

main categories:

Internal factors – The strengths and weaknesses internal to the organization.

External factors – The opportunities and threats presented by the external

environment to the organization.

Strengths:

• IKEA’s motto is low cost and high quality, and this reputation has made it the

market leader.

• The differentiation strategy that it applies is very unique, wherein rich or poor

can buythe same product within their budget (value added).

• It is up to the customer to choose how he wants his product to look like

(customized fitting options).

• At IKEA nothing goes waste, as their innovation team is constantly working

to turn the leftovers into something useful.

• Presentation of their furniture in room-like settings makes it easier for

customer to choose what they need without any hassle.

• Their flat pack way of manufacturing their goods makes it easier to transport

them.

• They have their stores in almost all 30 countries. Every country has its own

unique tastes and culture, IKEA has adopted itself in each and every country

so as to fit into.



• They are not just a furniture shop they offer different facilities like coffee,

restaurant, play area for children and transportation in order to make their

customers shopping experience hassle free, enjoyable and memorable.

• They have plans in the near future to open road-side stores wherein they plan

to sell plants, gardening materials, candles, etc so as to reach more people.

• They are working hand-in-hand with lot many environmental organizations,

which shows their determination to bring about an environmental change, this

is an added advantage that it has over its competitors.

• Strong internationally-known brand built upon a unique mission: to ‘offer a

wide range of home furnishing items of good design and function at prices so

low that the majority of people can afford to buy them…’

• Unique business model with no direct competition – the self-service and

cash-and-carry concepts, the catalogs, the use of explanatory tickets

(distinctive core competency)

• Big parking space consistent with the new shopping habits rather than a

downtown location

• Price structure offering value for both innovative, contemporary and

functional products; facilitated by anti-waste culture and ‘organization-wide

obsession with cost control’ (core competency)

• Central control of product range, design, pricing and unique facility layout

globally; the standardized ‘IKEA concept’

• Established culture, unique management philosophy, comparatively flat

organization: ‘bypassing formal structures’; there is no security behind status,

which prompts management to perform; easy to expand and grow

• Creativity is fostered by trial-and-error culture

• Strong long-term relationships with suppliers



• Unique facilities that ensure maximum consumer exposure to product line and

also offer a family experience rather than just shopping

Weaknesses:

• Homogeneous senior management group – efficient but not consistent with the

different cultures worldwide

• Hard to maintain product standards with such a global reach; insufficient room

for creativity on the individual store level

• Overreliance on one target market segment of young low- and middle-income

families, which is shrinking

• Undeveloped E-commerce, goes away from their unique business model

• Privately-owned, hence capital is restricted

• Overreliance on the European market

• Most of its stores are situated on outskirts which make it difficult for new

customers to know about it.

• It operates in a highly competitive environment with competitors like Argos,

MFI, John Lewis, etc wherein it needs to constantly adopt and change but it

just sticks to its “only furniture” stance, unlike others, which makes it a bit

difficult for IKEA.

• The goods that it offers are mostly available in all other stores as well, at times

at cheaper price.

• It is known as the cheap producer but it cannot stand up to its name in Asian

countries like China.

• It does not offer after sales and services, except for warranties.

Opportunities:

• Opening of new high street stores (unlike being on the outskirts)

wherein, they get to introduce themselves to new customers.



• There are opportunities for them to merge with oriental businesses to

open up more stores in the EAST.

• Forming alliances with existing retailers in the home market would

make it easier for them to reach broader customer base.

• Absorbing new technologies would make its work more optimized

giving it more time to concentrate on customer’s issues.

Threats:

• As it is a western company, they need to put in a lot of effort to

understand eastern culture and tradition and to innovate new furniture to suit the

oriental mind set. So there are chances of it being targeted by eastern retailers for

going wrong, or making a mistake anywhere.

• As it operates in different countries, wherein political scenario is subject

to constant change. So IKEA needs to make changes to its approach in order to

please people in power.

• IKEA puts in a lot of effort and money in innovation so its cost of

manufacturing ishigh compared to high street stores which easily copy their goods

and offer them at a lower price.

Strategy:

IKEA’s market position is strong enough. The percentage of customer base

that it has and its global presence makes it the only provider of low cost and high

quality household furniture. The economies of scale that it has achieved are

possible only through careful planning and implementation of successful long term

strategies. The flat pack, cost, quality, transportation, assembling of furniture as

per individual’s budget and taste made it the leader and that is what differentiates it

from its competitors.



• Achieve overall low-cost leadership in the industry

The emphasis on efficiency at all levels within the organisation is the central

idea to a cost leadership strategy .Costs need to be monitored at all levels to ensure

that they gain benefit from economies of scale. A low-cost leadership strategy will

only work if the products produced are cheaper compared to its competitors.

• Concentrate on products that are differentiated.

A differentiation strategy requires the organisation to offer something which

is unique and valued by the customers.The value added by differentiation results in

the ability to charge a higher price. This is to cope with added costs

of differentiation, leading to higher profit margins. The risk involved with this

strategy is that the consumers may perceive the product as a value added product.

Focus on serving a few market segments in cost or differentiation

The focus strategy is a combination of the strategies. It focuses on cost

leadership and product differentiation in a market segment, or a niche.

IKEA follows a combination strategy which is a combination of both the

aforesaid strategies that is where it differs from its competitors. At IKEA, the

customer is given the utmost priority, it is the customer who has to make a choice

of raw materials as per their budget and, based on that, the product is made. This is

how it meets low-cost leadership and product differentiation as well.

Conclusion:

After having a thorough look at IKEA’s development throughout the decade

it is evident that it emerged as a global winner. In order to be successful in the

future, it has to adopt new innovative ideas and technology to overcome the

competition and produce low cost and high quality goods. Emergence of Ilva, a

Danish furniture manufacturer, on the centre stage in Europe is a threat that IKEA

has to face in the future. So it needs to retain its loyal customers at all terms and

also make sure that it increases its customer base.



As it plans to open up new high street stores there is a possibility that it

might reach a wider customer taste. This way it can know and understand the tastes

of more people and strategies new plans to meet the standards. Introduction of new

goods under its roof will make it a “whole package of home designing goods”

provider.

The way it projects itself by paying attention to the issues of environment is

what makes it a winner. This, if taken further, would make IKEA an environment-

friendly organization, giving it an edge over its competitors. Due to increases in

global warming and issues of environment like deforestation, extinction of species,

etc. the concern of people towards these has increased, and if a company gives

priority to these issues then there is more possibility for it to make a greater impact

on customers’ morals and people in general to bring about a change.

References:

1. WWW.IKEA.COM (Internet) Home page 2. http://www.scribd.com/doc/6153182/ikeamarketing 3. http://dspace.hh.se/dspace/bitstream/2082/1211/1/Dissertation.pdf 4. http://www.ikea.com/hu/hu/ 5. http://hbr.harvardbusiness.org/2006/12/strategies-to-fight-low-cost-

rivals/ar/1


60 Section 1. Small and Medium Entreprises. Vladimir Serousov “Gourmet Food Store”

IBS PLEKHANOV 2011

VLADIMIR SEROUSOV “GOURMET FOOD STORE”

Introduction

The aim of this report is to present the short

business strategy of the company OOO XXX for

future period from 2011 – 2016. The company

XXX is a part of the ZZZ Group. XXX has been

providing customers with the finest quality fresh

and frozen food products. The XXX primarily

deals with wholesalers in the public area and in low

volume deals directly with retail companies. The

company plans to increase the production turnover,

minimize costs and develop the operation activity of

the company using different ways. The main aim is to increase the sales directly to

the public in Rostov region, and to try to sign new contracts with other wholesalers

in other regions. In an expanded market, the company will bring its commitment of

quality, freshness and reasonable prices to the public. By purchasing in large

quantities, company XXX is able to pass the savings on to its clients. Currently,

company XXX supplies over 12 grocery shops, 5 giant wholesales and several

restaurants. That is a 25% increase, because of new contracts with 12 grocery

shops, over last 3 months. Despite increase in 25% of sales, company XXX is

planning to expand its operation by opening new gourmet food store. Holding

company ZZZ’s funding and internally-generated cash flow will financemost of

the expansion plan.

Executive Summary

A new grocery shop will be under the name of one of the brands of XXX

company. All products of company XXX will be distributed in this shop. The shop

VLADIMIR SEROUSOV


Section 1. Small and Medium Entreprises.Vladimir Serousov “Gourmet Food Store” 61

IBS PLEKHANOV 2011

is a new business located in center of Rostov-on-Don, on the first floor of a

building, where an area of 670 sq meters belongsto the holding company ZZZ.

The store is an upscale international grocery and delicatessen with a distinct

menu that includes authentic, hard-to-find ingredients from around the country and

the world. The facility will include a sixteen-person capacity eating area,

deli/kitchen with counter and check out area, grocery area, and a small rest coffee

bar.

The mission of shop of company XXX is to provide Rostov’s residents and

visitors with a combination of quality, authentic, hard-to-find, grocery items and

prepared foods, with good service and a pleasant atmosphere with the warm feel of

an Old-World outdoor market. Our store motto is, "eat and enjoy."

The deli will serve sandwiches, salads, and picnic lunches, hot and cold

dishes that will be produced by company XXX. Gift items will complement the

international theme of the store and include a limited selection of kitchen wares,

cookbooks, picnic items, and original hand-sewn items. Gift baskets and all other

products will also be available in the store and over the internet, but products of

company XXX will be sold only under special conditions. All the recipes used in

the deli will highlight the grocery items sold in the market.

The gourmet and specialty foods market is booming across the

country. Consumers are looking for quality food coupled with a quality shopping

experience. Many large cities have entire sections dedicated to ethnic foods and

culture.

New populations are starved for the fine ingredients they were able to

purchase in big cities and are looking for a rural solution to this problem. Rostov's

residents and many visitors have expressed the desire for a local gourmet food

store.

By making alliances with local farmers and restaurants as well as



IBS PLEKHANOV 2011

international distributors, Shop of company XXX will give customers a

combination of "shopping local" and wide gourmet selection previously

unavailable in this highly-visited rural area. For residents, Shop XXX offers a

more convenient and appealing option than ordering online or lugging fancy

groceries back from infrequent trips to the nearest cities (several hours away),

especially in winter.

Shop XXX’s projects net profits will be increasing over the first three years

and helpingto increase the sales of company XXX. The increasing profitability is

partly based on expectations that wide seasonal differences in sales levels in the

first year will moderate as we strengthen our local clientele base. These forecasts

are based on the recent performance of similar cross-market upscale stores in

Rostov-on-Don, and general trends in the gourmet food stores industry.

Mission

The mission of Shop XXX is to provide Rostov’s residents and visitors with

an upscale grocery store, products of company XXX, and delicatessen specializing

in a combination of quality, authentic, hard-to-find, grocery items from around the



IBS PLEKHANOV 2011

world.

Goals and Objectives

Shop XXX has the following goals and objectives:

• Obtain necessary funding ($24,000 personal internal investments and

$100,000 investments from the holding company ZZZ).

• Create a service-based company that exceeds customers' expectations,

and increases the number of repeat clients serviced by at least 20%

per year, through superior performance and word-of-mouth referrals.

• Become an established community destination with a

customer satisfaction rate of 90% by the end of the first year.

• Achieve cash flow self-sufficiency by the end of the first year.

• Sales of $461,900 in the first year, with sales increasing to

$484,735 in the second year and $508,000 in the third year.

• Provide an income for the founders by the end of the second year with

income growth possibilities.

• Repay debt tothe holding companyby the end of the 4th year.

• Provide new customers with new and have already existed goods of

company XXX, and increase the demand of goods.

Keys to Success

The keys to success for shop XXX include:

Reputation: Every customer visiting our store will want to return and will



IBS PLEKHANOV 2011

recommend shop XXX to their friends and family. Word of mouth

marketing will be a powerful ally for this business.

Superior Customer Service: Knowledgeable, friendly service will be of the

utmost importance.

Location: an easily accessible location for customer convenience, including

walk-by and drive-by traffic. (future - provide comfortable parking).

Product/Environment: Offer a variety of high quality foods with domestic and

international themes, sold at a fair price in a clean, authentic, comfortable

environment. Serious draft of goods, and new foreign goods, with is rarein

the Russian market. New interest of consumers. Special line of fresh, goods

of company XXX, under new brand, sold only in this shop XXX.

Convenience: Customers of the shop XXX will know that they can buywhat

they need at our market for a fair price. This will reduce their need to travel

for desired items or order them online.

Marketing plan: Unique service in shop business, special free seminars of master

chef 1 time a month, professional degustation of goods. Shop XXX will

have its own discount system. Weekend free tea for waiting people in coffee

bar.

Company Summary

Start-up Summary

Start-up costs and initial financing are shown in the following table. The

company XXX (founder of the shop) will get an internal holding loan in the

amount of $100,000 to supplement company XXX investment in covering costs.

The estimated start-up costs may be lower than projected here if the company

XXX is able to purchase used equipment and do the renovation workinternally.

Company XXX plans a three month start-up period. Expenses are broken



IBS PLEKHANOV 2011

down as follows:

Insurance - $300/month

Rent (Car, sales floor space) - $2,500/month (tax minimization)

Initial Loan Repayment - $1,000/month (tax minimization)

Utilities - $1,000/month

Salaries: 2 managers - $2,000/month each

Long-term Assets:

2 Refrigeration Units

3 Display Cabinets

4 Kitchen Equipment

5 Illuminating equipment of front elevation

Short-term Assets:

- Tables and Chairs



IBS PLEKHANOV 2011

Start-up Requirements Start-up Expenses Legal $500 Books/Accounting $600 Marketing/Website $5,000 Licenses/Permits $1,000 Delivery/Transportation $1,500 Insurance $900 Rent $7,500 Loan Payment $3,000 Utilities $3,000 Deposits $500 Expensed Equipment $5,000 Building Renovations $20,000 Salaries $12,000 Payroll Taxes $1,800 Other $1,000 Total Start-up Expenses $63,300 Start-up Assets Cash Required $15,700 Start-up Inventory $20,000 Other Current Assets $5,000 Long-term Assets $20,000 Total Assets $60,700 Total Requirements $124,000

Start-up Funding Start-up Expenses to Fund $63,300 Start-up Assets to Fund $60,700 Total Funding Required $124,000 Assets Non-cash Assets from Start-up $45,000 Cash Requirements from Start-up $15,700



IBS PLEKHANOV 2011

Additional Cash Raised $0 Cash Balance on Starting Date $15,700 Total Assets $60,700 Liabilities and Capital Liabilities Current Borrowing $0 Long-term Liabilities $100,000 Accounts Payable (Outstanding Bills) $0 Other Current Liabilities (interest-free) $0 Total Liabilities $100,000 Capital Planned Investment Andy and Cathy $12,000 Rosie and Kenny $12,000 Other $0 Additional Investment Requirement $0 Total Planned Investment $24,000 Loss at Start-up (Start-up Expenses) ($63,300) Total Capital ($39,300) Total Capital and Liabilities $60,700 Total Funding $124,000

Company Ownership

Shop XXX is a Limited Liability Company owned and operated by the

Company XXX. The name of the shop XXX will be patented under the name of

one of the brands of company XXX. At the same time company XXX is owned by

international offshore holding. Shop XXX will have more advantages and will be

operated by its own special financial system because of the existence of offshore



IBS PLEKHANOV 2011

company.

Products and Services

Shop XXX offers the following products and services:

Groceries

Shop XXX will offer high-quality groceries from Italy, the Mediterranean,

Mexico, Asia, Europe (especially Germany and Austria), Australia, and the United

States. Groceries will include items that represent the best-known and desired

foods from these areas. Items will include, but will not be limited to: sauces, oils,

spices, spreads, peppers, cheese, meats, pasta, rice, canned goods, drinks,

chocolates, and hard-to-find desserts and candies. A selection of fresh meals

(made by company XXX) will be available for home cooking (just warm it), and

will include homemade Kazak food, French and Italian cuisine with more than 25

numbers of dishes. Company XXX will provide their own frozen food and fresh

meat and chicken.

Gifts

Gift items will complement the Russian and international theme of the

store and include a limited selection of kitchen wares, cookbooks, handmade

sweets made by company XXX, alcohol drinks, special selections of tea coffee and

other goods from the store. Gift baskets will also be available in the store and

over the internet. Professional employees will package gift baskets and the supply

of gifts baskets will be increased before holidays.

Delicatessen

Shop XXX will offer unique cuisine with an international flair. The deli will

offer a limited menu for breakfast, lunch, and dinner. The rotating menu

will feature sandwiches, soups, salads, drinks, and desserts. All menu items will be

prepared fresh each morning and displayed for easy pick-up. Company XXX will

offer business (picnic) lunches and frozen meals as well as cheese, meats, and



IBS PLEKHANOV 2011

Russian ethnic deli dishes by weight.

The breakfast menu will include items such as quiche, scones, and biscotti,

and the lunch/dinner menu will consist of sandwiches, salads, homemade breads,

frozen meals, and daily specials.

In Shop XXX, there will be served high quality coffee, tea, juice, and soda

from around the world throughout the day.

Business (picnic) lunches will be made available to visitors, specially

packed to be carried into the numerous national parks and outdoor venues

surrounding Rostov. All business lunches could be delivered directly to the offices.

Competitive Comparison

Rostov-on-Don is not a typical rural community, in that it has more than 37

different nationalities and everyday new visitors arrive from Caucasus Mountains.

Rostov-on-Don is the city and the administrative center of Rostov region and the

Southern Federal District of Russia, the informal name is “Gates of Caucasus”,

located on the Don River, just 46 km from the Sea of Azov. The population of

Rostov-on-Don is 1,068,267.

The competition facing Shop XXX includes all the grocery stores,and mega

markets, coffee shops, and some of the eating establishments in Rostov-on-

Don. There are 12 chain grocery stores including mega markets in Rostov-on-Don.

Assorted, Empire products,Magnet,Crossroads,Pyaterochka,Apex,

Solar Circle, Village, Auchan, Okay, Metro Cash & Carry, Carousel, all

shops carry many healthy food choices and some ethnic choices, but do not have

an expanded ethnic food selection. The Village Market carries health food but does

not have an expanded ethnic food selection either. The main competitor is (shop)

Tixiy Don, but it is old fashioned and quality of the service and goods reduces

everyday. Overthree years this shopdid not make any innovations and hardly

changed the variety of goods from the opening. Most of the goods, which are

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http://en.wikipedia.org/wiki/Russia�

http://en.wikipedia.org/wiki/Don_River_(Russia)�

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IBS PLEKHANOV 2011

supplied in this shop, are domestic production.

The mix of gourmet products and high-quality services, combined

with pleasant atmosphere, will help company compete with the existing small

businesses. As for the larger grocery store chains, company XXX will compete by

providing a more intimate and educational shopping experience with quality

products they do not carry.

Market Analysis Summary

Main target markets are:

• People who live and work in Rostov-on-Don, who are looking for quality

ingredients needed to prepare their favorite international cuisine.

• Surrounding businesses looking for a tasty meal for their customers and

staff.

• Families looking for quality, affordable, home cooked meals to take home

and prepare for their families with ease.

• People looking for a comfortable environment in which to enjoy a cup of

coffee, read a book, or just shop.

• People looking for high quality, unique gifts and kitchen supplies.

Each market segment consists of people who either live, work, or vacation in

the Rostov-on-Don. Each market will be seeking an establishment that will meet

their desire for authentic, healthy food, quality service, and a pleasant atmosphere.

Market Segmentation

The total potential market in units is shown in the following table.

There areapproximately 1175 businesses in Rostov-on-Don that could

potentially be our customers. The company used 20% as a starting point with 5%

growth per year.



IBS PLEKHANOV 2011

There are 1, 048, 124 residents in Rostov-on-Don, according to the 2002

census, with 2% projected growth over the next 6 years. Residents of Rostov-on-

Don are the main customers.

From 1999-2003, an average of 32,578 people visited the city annually.

Projected growth was not included, because it used as an average number, and it is

believed that the number of visitswill remain similar over the next five years.

Market Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Potential Customers

Growth CAGR

Local Businesses 10% 35 39 43 47 52 10.40

% Residents 6% 188485 199794 211781 224487 237956 4.7% Visitors 0% 3000 3000 3000 3000 3000 0.00% Total 0.06% 191520 191531 191645 191759 191874 0.03%

Target Market Segment Strategy

The last ten years have seen an increase in Moscow explorations of foreign

and gourmet foods. Whether this can be attributed to celebrity chefs, arrivalsfrom

foreign countries, new health diets, or the increasing accessibility of once-obscure

ingredients, it seems that gourmet and adventurous palates are here to stay.

In Moscow this trend has been developing over5 years, and now it is starting

to reach other regions. In Rostov-on-Don, residents often use travel to larger cities

as occasions to stock up on luxury and gourmet items not available locally.

However, they prefer to shop locally whenever possible, and would welcome a

store that offers this combination.

Rostov is growing city, allowing for increased business opportunities

without diminishing the provincial-town feel. Natural attractions of the shop are in

no danger of becoming dated or otherwise less accessible, and so company expects



IBS PLEKHANOV 2011

continued market growth for the foreseeable future.

Ambitious marketing programs towards different target market segments

will utilize different publications and media, but all will emphasize our good value,

high quality, unique and varied selections, and great service.

Market Needs

Rostov-on-Don and Rostov region are in need of a quality international

market that sells items that are currently only available in Moscow, over the

internet, or even abroad. Many residents tell stories of traveling to large cities with

empty luggage so that they can fill their suitcase with speciality food they cannot

find in Rostov-on-Don. The residents of Rostov-on-Don are dedicated to

protecting its "provincialtown" feel and make a point to shop locally whenever

possible. The residents of Rostov-on-Don and its surrounding communities would

be thrilled to be able to shop for the food they want at home.

Closest cities to Rostov-on-Don are rural and industrial small cities like

Shachty, Tagonrog, Bataisk, Novocherkask. Rostov-on-Don is the capital of

Rostov region and center of south. People from close by cities arrive inRostov like

to go to the place where they could relax and find something new.

Local and visiting customers desire high quality, healthy food that will

appeal to their aesthetics. In addition, they desire a pleasant shopping and dining

experience that allows them to learn about and purchase the grocery items they

want in a comfortable, friendly, hassle-free environment. Customers will also

enjoy the delicious home cooked take-home meals available to them when they do

not have time to prepare quality meals at home.

Strategy and Implementation Summary

Strategy of the company XXX will exploit our advantages over the

competition (location, convenience, and high quality) with carefully-tracked

milestones for growth.



IBS PLEKHANOV 2011

Marketing

Initial marketing efforts for opening will be geared towards generating name

recognition and making a clear distinction between XXX and other local

competitors.

This brand name has been seen by customers in the food market and proved

itself as a good quality brand. Follow-up marketing programs will encourage

repeat visits and assist customers in the understanding, appreciation, and

preparation of our products.

Sales and Pricing

Company XXX will gear prices towards its competitors in the nearest cities

and online, with a small "convenience" increase for offering them locally. This will

offset its distribution costs. Local discounts, daily specials, and new products will

satisfy customers they are getting a good value, while keeping them intrigued.

Emphasis on consistently good service, from special orders to recipe help, will

make new customers repeat customers.

Competitive Edge

• Location is critical to success. The shopwill located on Main Street, or just

off Main Street, so shop XXX can take advantage of walk-by and drive-by

traffic. The shop also needs adequate parking to make shopping at store

convenient for drivers.

• Convenience. Rostov-on-Don residents and visitors are willing to pay a little

bit more for good food and the convenience of being able to get what they

want without having to travel out of town, or order over the internet.

Customers will purchase its food because it is authentic and delicious.

• High quality. Focusing on high quality international food will draw

customers from the competition, as well as create a local market that has not

existed before in Rostov-on-Don. If the prices are reasonable and the food is



IBS PLEKHANOV 2011

good, shop will have growth through repeat business.

Marketing Strategy

Marketing strategy consists of promotional actions including advertisements

in local newspapers, the yellow pages, and at local businesses, postcards & flyers

sent through the mail, and promotional coffee mugs given to local customers that

can be filled and refilled at a discount. Company XXX also plans on supporting

the community radio station in exchange for mentioning shop XXX as an

underwriter; giving free product samples to our customers; and offering cooking

classes and recipes that introduce customers to our products. The first step is to

have aconference with numerous numbers of journalists and use tree big billboards

at the beginning and at end of main street and at the entrance of the city.

Sales Strategy

Shop XXX’s most important sales strategy is developing an environment

towhich customers will return time-after-time because our market provides

knowledgeable, friendly staff, quality products, and a comfortable atmosphere that

fills their needs.

When customers visit store XXX, they will know they are entering a clean

facility with the best service in the industry. Pricing strategy will focus on

providing high quality, hard-to-find international products and services at a fair

price. Because the closest competition is far away, company XXX will be able to

charge a little more for some products, but must be careful not to price items too

high (or customers will continue to stock up on specialty foods when they visit

large cities or will buy over the internet).

Company XXX will make use of local discounts, daily specials, and new

products to keep customers interested and to help them feel they are getting a good

value. Shop XXX intends to listen to its customers and collect their feedback

through surveys and friendly conversation, in order to determine areas where we



IBS PLEKHANOV 2011

can expand and/or improve. Company XXX wants Shop XXX to become a

staple in the local community, as well as a "must stop shop" to vacationers visiting

Rostov-on-Don.

Sales Forecast

The following assumptions, table and chart illustrate conservative sales

forecast.

Assumptions:

The average item sold in the market will cost $4.50

$20.00/average sale x 40 people/day x # of days in January, February,

November, and December (slow season).

$30.00/average sale x 75 people/day x # of days in each month from March-

October (busy season).



IBS PLEKHANOV 2011

Web Plan Summary

Shop XXX’s website is intended to be an enjoyable virtual shopping

experience for its customers. The website will be simple, elegant, and well

designed. It is important that website is kept current and provides a format in

which customers can easily preview gift baskets and other groceries.

Website Marketing Strategy

Shop XXX’s website will grow in popularity as shop XXX will inform its

customers about it. Company XXX will let customers know about its gift basket

service and online shopping options whenever it seems appropriate. Web address

will be displayed in the store and printed on promotional materials, including

advertisements, bags, and mugs.

Development Requirements

A company will be hired to design initial web site and will require access to

the template so that our staff can make additions or changes to it at will.

Management Summary

Shop XXX is a small shop business. Two of the managers from the

Company XXX will be the managers for the store and will work at the same time



IBS PLEKHANOV 2011

in the shop and in company XXX.They will get extra salary, until it is

determined to hire additional staff. The other two managers will maintain outside

jobs, help out when needed in the store, and do the administrative tasks.

• Manager: Deli Manager

Manages deli

Works with Merchandise Manager

Hires staff

Order deli items

• Manager (from the company XXX): Merchandise Manager

Makes merchandise decisions

Works with Deli Manager

Orders Merchandise

Runsmarketing/promotions

• Manager: Bookkeeper/Administrator

Keeps books

Pays taxes

Computes and distributespayroll

Helps with store operations when necessary

• Manager (from the company XXX) Web Master/Support

Manages website

Helps with store operations when necessary

Personnel Plan

The personnel plan is illustrated in the table below:

Personnel Plan Year 1 Year 2 Year 3 Managers (2) $48,000 $48,000 $52,000 Clerks (1-2) $25,600 $25,600 $25,600



IBS PLEKHANOV 2011

Accounting/Books (1) $2,400 $5,000 $5,000 Cooks/Kitchen (1) $10,240 $10,240 $10,240 Other $0 $0 $0 Total People 4 6 6 Total Payroll $86,240 $88,840 $92,840

Exit Strategy

The owner of Shop XXX will exit this endeavor after they have created

a flourishing business that could be sold for a substantial profit and/or as a

franchise that could serve to different communities across the country. If the first

shop XXXis successful, company XXX to open the same shops in other cities of

Russia. It means that supply and demand of products XXX will be increased. In

the future, Company XXX has big opportunities not only in the production of

goods but to create a new chain of shops.

In the event the proposed plan is not successful the company XXX will

implement necessary measures to exit the business endeavor with minimal damage

to holding company ZZZ and themselves. All equipment and merchandise will be

sold to cover any outstanding debts. Any remaining debt will be paid by the

owners in the form of monthly payments until all debts are paid in full.

The success of the business will be monitored monthly in the first year and

quarterly in subsequent years. The owner is aware that it usually takes new

businesses three years to start turning a profit and that the business could operate at

a loss during that time. The owner will keep this in mind when evaluating the state

of the business, and make adjustments when possible to keep the business running

with a positive cash flow.

Acceptable loss has been determined; if the business exceeds this amount

and is unable to compensate company XXX, and owner will begin the process of

closing the business and paying back debt.


Section 2. National enterprises.Margarita Balasanyan “Sberbank” 79 IBS PLEKHANOV 2011

SECTION 2. NATIONAL ENTERPRISES

MARGARITA BALASANYAN “SBERBANK”

Introduction

Sberbank today is the largest credit institution

in Russia and CIS, accounting for 27% of the

aggregate Russian banking assets and 26% of banking

capital. According to The Banker magazine, as of 1

July 2010, Sberbank was ranked 43th in the world in

terms of Tier 1 capital1

Established in 1841, Sberbank has grown into a

universal commercial bank with diversified

businesses. Sberbank is the biggest taker of deposits in

the country and the key lender to the national

economy. As of 1 June 2010, Sberbank accounted for

48% of retail deposits, 33% of consumer loans and 30% of corporate loans in

Russia.

.

Sberbank has the largest countrywide branch network with 18 regional head

offices and more than 19,100 retail outlets with about 245,600 employees.

Elsewhere, Sberbank operates subsidiary banks in Kazakhstan and Ukraine (and is

contemplating operations in Belarus) and targets 5% share of these markets. Under

the new strategy, the Bank plans to build a foothold in China & India and generate

about 5% of net income outside Russia by 2014.

As of 16 April 2010, CBR (Bank of Russia – “Central Bank”) owned 60.3%

of Sberbank’s ordinary shares and 57.6% of its total share capital, being

1http://www.sbrf.ru/- the official web-site of Sberbank

MARGARITA BALASANYAN

http://www.sbrf.ru/-�


80 Section 2. National enterprises. Margarita Balasanyan “Sberbank” IBS PLEKHANOV 2011

Sberbank’s controlling shareholder. The remaining shares are held by more than

263,000 institutional and private investors. Non-resident ownership of about 32%

suggests Sberbank’s shares are a compelling investment.

Sberbank’s solid business reputation is confirmed by its international

ratings: “BBB” long term issuer default rating from Fitch Ratings and a long-term

foreign currency deposit rating of “Baa1” from Moody’s Investors Service. The

Bank has the highest national scale rating of AAA.ru.

That is why it is very important for this bank to pay particularattention

tostrategy planning, on setting right goals, on the valuation of advantages and

disadvantages, and on the making objective decisions.

Banking sector in Russia till 2015

For creation a corporate plan for this bank, first of all we have to consider

the banking sector in Russian, its real situation now and some forecasts over the

next several years. There are a lot of views on this issue.We have to consider the

basic points.

Different views on this issue

On the official web-site of Central Bank of the Russian Federation is

mentioned that “at the next stage (2009-2015), the Russian Government and Bank

of Russia will attach priority to effectively positioning the Russian banking sector

ininternational financial markets”.1

On the web-site

www.euroruss-business.com there is a report about

Finance Minister Kudrin’s opinion on this issue. The report includes that “Kudrin

said in November 2009 that he was prepared to introduce a bill in twelve months

obliging banks to raise their minimal capital to 1 billion rubles within five years.

The minister said the ministry would come up with the proposal to raise

bank capital requirements only after the world financial sector was stabilized.

1 http://www.cbr.ru/eng/today/history/central_bank.asp

http://www.euroruss-business.com/�



Under current law, the minimum capital requirement for Russian banks is 90

million rubles ($3 million) from 2010, rising to 180 million rubles ($6 million)

from 2012.

Russia, which receives a large part of its revenue from oil exports, was hit

hard by the global financial crisis, prompting the government to take urgent

measures to save the banking sector from collapse, extending direct and

subordinated loans to major banks, most of them held in private hands.

Central Bank First Deputy Chairman Alexei Ulyukayev said in March that

while a second wave of economic crisis was unlikely in Russia, the country was

braced for a long period of recovery after the global financial meltdown”.1

There is forecast of banking sector development in Russia till 2015,which

has been worked out by expert RA together with Russia association of banks. The

report about it includes following “The project has been initiated by the

community of bankers and experts, striving to use their potential for the benefit of

the country. Our goal is to present the document for discussion to the Parliament,

the RF Central Bank, the RF Government and the Public Chamber, – said Anatoly

Aksakov, president of the regional banks' Association, member of the National

banking council, deputy of the State Duma. – The paradox of the current situation

is that pretty often market laws, concepts and strategies are prepared by the state

officials without discussing it with the market participants".

The current strategy of the banking sector development was prepared

in2008. Its tasks have beenpartly implemented:credit of the real sector and

consumers showed increased volumes. But, according to common opinion of

economists, the banking sector in Russia is still undercapitalized and not

sufficiently competitive. New more ambitious and brave tasks demand new

1http://euroruss-business.com/en/newss/dayli-news/russia-s-bank-capital-requirements-could-be-raised-

from-2015-kudrin.html - MOSCOW, November 25 (RIA Novosti)

http://euroruss-business.com/en/newss/dayli-news/russia-s-bank-capital-requirements-could-be-raised-from-2015-kudrin.html�




approaches and ideas, aimed at surpassing inertia of development and achieving a

new ascending trajectory.

According to Pavel Samiev, Expert RA director of department of financial

institutions' ratings, the strategy should consider the issue of comprehensive

modernization of the Russian financial market in different areas. It would be wrong

for banks to distinguish between markets of capitals, securities and insurance. All

sectors of the domestic financial market are to be developed in a comprehensive

and parallel way. The main tasks for the new stage of the banking sector

development should be as follows:

Steady growth of the Russian financial market and its dramatic and speedy

development;

Determination of "points of growth", related to involvement of material

assets into financial turnover in order to multiply capacities of the national

financial system;

Development of a mechanism for the state support and encouragement of the

banking and financial sector;

Development of regulatory base and institutional environment;

Increased access to banking services;

Increased financial literacy of the population.

Association Russia and Expert RA invite heads of banks and specialists,

managers of insurance companies, pension funds and professional participants of

the stock market, and other financial institutions, representatives of the state

agencies, experts and analysts to participate in preparation of the large-scale

document, meant to play an important role in the development of the Russian

financial system.”1

1 http://www.raexpert.org/releases/2008/Feb15/



Strategy of banking sector development for RF till 2015

The Ministry of Finance of Russia has published the project of Strategy of

banking sector development of the Russian Federation for the period till 2015.A

result offull implementationwould bethat the bank system in all basic aspects

should correspond to international standards. The aspects such as the activity

organization, quality of banking management, thecondition of the competitive

environment, accounting and the reporting, discipline in the market, and bank

supervision.

Tothe government of the Russian Federation and Bank of Russia the

document puts four primary goals on change of model of banking sector

development. The ministry and a regulator are charged with solvingthe whole

complex range of tasks.

Firstofall,

creationoftheconditionsprovidingdevelopmentofcompetitioninallsegmentsoffinanci

almarket, includingthroughdevelopmentofalready-availableformsofanon-

bankfinancialintermediation.

Secondly, creation of the infrastructure meeting modern requirements,

including, within the limits of work of the government and the Central Bank of the

Russian Federation, creation of the International financial center in Moscow.

Thisis to be made on the basis of use of the advanced banking technologies,

development of system of bureau of credit stories, system of registration of

pledges, a payment and settlement infrastructure, institute of the central

counterpart and other infrastructural conditions and institutes.

Thirdly, the Ministry of Finance suggests implementing measures on

improvement of quality of corporate management and risk management of the

credit organizations. Fourthly, the department considers it necessary to improve

bank regulation and bank supervision, first of all by development in them of a

substantial move to full compliance with international standards.



"Tasks on transition to intensive model of development of bank sector will

demand essential change of conditions of its functioning, and transition can lead to

change of its structure, - says the document. - a main objective of development of

the Russian bank sector on medium-term prospect is an essential increase of level

and quality of the banking services given to the organizations and the population,

increasing the provision of its system stability".

Sberbank today

Today Sberbank is an absolute leader in the Russian banking sector.

Sberbankis several times larger than its immediate competitors measured by its

marketposition, assets, capital, financial results and scale of infrastructure.

Thescale and stability of the Bank are particularly visible during periods

ofinstability in financial markets.

The competitive advantages and weakness for today

The success of Sberbank in recent years has been driven by four

majorcompetitive advantages1

• An extensive customer base in all customer segments (corporate and

retail,

:

• large and small customers) across all regions;

• Scale and scope, in terms of financial indicators (available amounts

and

• duration, access to funds, international ratings, investment capacity),

as

• well as the scope and quality of the Bank’s actual infrastructure

(including

• a unique retail and corporate distribution network).

• Brand and reputation, largely based on the solid trust earned among

1http://www.sbrf.ru/- the official web-site of Sberbank




• customers of all groups.

• Employees and a proven track record. Numerous and experienced

staff

• in all regions, substantial managerial expertise within one of the

largest

• companies of the world; systems and processes capable of generally

handling tasks unique in scope and complexity.

For all that, there are some serious drawbacks in the way the Bankoperates today.

Overcoming these will be critical to realizing Sberbank’sdevelopment potential:

Inefficient utilization of Sberbank’s two foremost competitive advantages:

its distribution network and customer base. This is caused by insufficient customer

relationship management and immature sales and service systems and

skills.Ittranslates in a low rate of cross selling, low profitability in product sales

and low customer reach.

Another factor is poor service quality in terms of decision-making time,

process and procedure complexity, communication and bank-to-client interaction

levels, as well as general convenience and functionality of the branches. In the

customers’ opinion, the Bank is behind its main competitors in terms of service

level.

Extremely low productivity. In this regard, the Bank is seriously lagging

behind not only the banks in mature markets (some with an established presence in

Russia) but emerging market banks as well. The main reasons lie in unwieldy and

overcomplicated business processes, poor specialisation and division of labour;

lack of unified business processes across the Bank, making it impossible to

capitalise on economies of scale and implement modern information technologies.

There is a low level of automation and too much manual labour. Operations

andsupport functions are decentralised. As a result, many bank systems



andprocesses are poorly scalable and growing business volumes do not leadto

efficiency growth.

• Insufficiently effective and costly risk management systems

• Corporate culture weaknesses, primarily meaning excessive

bureaucracy,

• insufficient responsibility for end results and the quality of

customerservice, a weak drive and aspiration for improvement and

development.

Sberbank’s position in Russian market and position of its competitors.

Russian banking sector assets of RUB 30,607 bn were divided among 979

banks. The concentration of assets in the top 10 banks is high (62.3%), meanwhile

there is a very long tail of smaller banks. The biggest bank is Sberbank (27%), the

second one is VTB (12,4%) and the third is Gazprombank (6,5%). In retail

deposits it has 48,1% of the market, in retail lending 32,6%, in corporate accounts

17,5%, in corporate lending 29,8%.1

There were some facts showing its position in market;

Sberbank is the largest bank in Russia and CIS in terms of assets;

Sberbank is the largest and oldest player in the Russian banking sector with

169years of history;

Sberbank’s banking network consists of 18 Regional Head Offices, which

have about 19,000 branches and 22,907 ATMs;

Coverage across all regions of Russia. Spanning 9 time zones;

Nationwide brand recognition;

300 million individual accounts in a 142 million population country;

Sberbank’s public & private ownership exemplifies a proper balance

between sustainability and profitability

1 http://www.sbrf.ru/common/_en/img/uploaded/ir/docs/Presentation_for_Investors_2010_09en.pdf



To show more clearly a position of the Sberbank in the market in

comparison with other banks, I have made a schedule:

Name of the bank Sberbank VTB Gazprombank Russian Agricultural Bank

Bank of Moscow

Corporate lending (rub bn)

4,011 1,632 898 620 519

Retail lending (rub bn)

1,216 366 86 75 71

1-day overdue corporate loan (%in corporate loan book)

6,8 7,1 2,9 4,9 1,7

1-day overdue corporate loan (%in retail loan book)

3,6 4,6 5,3 1,4 15,1

Corporate accounts (rub bn)

1,616 1,101 1,271 237 209

Retail deposits (rub bn)

4,144 534 253 - 175

International borrowings (% in total liabilities and equity)

2,4 12,4 6,3 39,2 21,4

Strategy planning

On the official web-site of Sberbank there is a strategy planning, where they

mention: “Given Sberbank’s current competitive market position and potential for

development combined with the structurally attractive features of the Russian

banking sector, make possible a growth dynamic far above the market if Sberbank

chooses a “modernization” scenario. Specifically, there are great opportunities for

building up competitive strengths both in the retail and corporate sector through

greater depth of customer relationships and enhanced customer reach. Sberbank



also has great opportunities for raising efficiency and building up competitive

advantages through economies of scale. This would help the Bank to build a long-

term competitive position in the domestic market and to start transforming from a

large domestic financial institution into a leading bank internationally.”

In their strategy plan they mention that:

The key elements of the Strategy include:

Development of a client-oriented model to service individual and corporate

clients of the Bank.

Technological upgrade of the Bank and processes industrialization.

Radical increase of the Bank’s operational efficiency, based on up-to-date

technologies, management and overall optimization through bank-wide

implementation of Sberbank Production System/BPS based on Lean/Toyota

Production System.

Development of international operations, primarily in the CIS countries.

Sberbank’s goals and aspirations by the year 2014



The implementation of the Development Strategy shall result in

consolidation of Sberbank’s competitive positions in all market segments,

improving its performance indicators and reinforcing its position of a leading

financial institution in the Central and Eastern Europe and one of the top banks of

the world”1

Conclusion

Summing up all this work, I can say, that I partly agree with strategy of

Sberbank, but of course I need more experience for further analytical work. That is

why I try to analyze and give comments ontheir planning in the role of customer,

and partly in the role of investor. On my opinion, I can give following

recommendations:

Retail banking– they should increase the quality of service. Still, in a lot of

offices,personnel are so unskilled,that is why usually there are queues and in

consequence of that there are a lot of nervous and unhappy customers;

Also, I can recommend paying more attention to international markets, but

not Europe and other developed countries, because in comparison with the service

of the banks there, Sberbank has a lot of operations to improve (I will recommend

Ukraine, Kazakhstan or may be Armenia, Azerbaijan).

I also can recommend Sberbank to make modernizations, to invest a great

sum of money on this, because as we can see in my first part of work, banking

sector would be developed, and Ministry of Finance of Russia with Strategy of

banking sector development till 2015 would try to realize that the bank system on

all basic aspects should correspond to international standards. It means that

Sberbank as the biggest bank in Russia has to correspond to international standards

as well. We can see that Sberbank has a lot of operationstoimproving before

meeting the standards.

1 http://www.sbrf.ru/en/about/strategy/



If the bank undertakesthese recommendations, the quality will increase, so

will increase the number of customers

So, from there we can cover our expenses.

References

1. http://www.sbrf.ru/- the official web-site of Sberbank

2. http://www.cbr.ru/eng/today/history/central_bank.asp

3. http://euroruss-business.com/en/newss/dayli-news/russia-s-bank-

capital-requirements-could-be-raised-from-2015-kudrin.html -

MOSCOW, November 25 (RIA Novosti)

4. http://www.raexpert.org/releases/2008/Feb15/


http://www.cbr.ru/eng/today/history/central_bank.asp�




Section 2. National enterprises.Ekaterina Cuellar“Colinversiones S.A. E.P.S” 91

IBS PLEKHANOV 2011

EKATERINA CUELLAR“COLINVERSIONES S.A. E.P.S”

Introduction

First of all, I want to start by specifying the

company in which I want to work in the future. This

company is located in Bogota, Colombia. It may sound

strange, but actually, I have lived almost my whole life in

Bogota and I plan to do it in the future as well. The

company is called “Colinversiones S.A. E.P.S”.

Historical Review

The Colombian company of tobacco SA -

Coltabaco SA started its business of manufacturing and

marketing of cigarettes in 1919 and years later began to develop parallel activities

tending to participate in the

capital market and establishment of other companies. In this way, the company had

developed two activities simultaneously: industrial and investing, until

October 2001.

In the extraordinary shareholders assembly on June 2001, by unanimity of

this body was taken, the decision of splitting the company by

separating the industrial and investment activities, in order to give origin to

the Colombian Company of Investments SA on October 8, 2001. In this way,

Coltabaco transfer 70% of its capital to the new company: Colinversiones.

When the capital of Coltabaco was divided, each one of the shareholders

(6.589) of this companyreceived, in proportion of one to one, shares of the

Colinversiones company, so that those who were shareholders of Coltabaco

continued being shareholders of Colinversiones in equal proportion and number.

EKATERINA CUELLAR


92 Section 2. National enterprises. Ekaterina Cuellar“Colinversiones S.A. E.P.S”

IBS PLEKHANOV 2011

The managing of the relationships with shareholders and the services of the

Presidency, for both companies, was in charge of Coltabaco until 2005, when the

control of the company was soldto the tobacco company Philip Morris.

Between 2005 and 2006,there

was a Colinversiones capitalization through the issuance of shares worth

$300,000 million (subscribed: above 99%). Additionally, the company exchanged

shares of Conavi for shares of Suramericana (South American Investment). The

company also bought 9,7% of the Colombian Stock Exchange and expanded its

participation in the hotel sector with the acquisition of the “Pereira Hotel”.

2007 was a period of great significance for Colinversiones. With the purpose

of having a complete transformation, the company established a new strategy. This

strategy was the result of different studies and works made with national

consultants and foreign investment bankers in order to

identify the sector that would become the new focus of investment. Finally, the

company decided to focus on the generation of energy.

In order to pursuethe strategy, the company, on 3 December 2007, acquired

one of the energy-generating plants (Termoflores S.A E.S.P) located in the city of

Barranquilla. Then in 2008, a year of significant progress, the company continued

with the development of the strategy and acquired two power plants and an

electricity generation project. On December 2009, Colinversiones, through its

subsidiary Colener S.A.S., acquired 47,3% of the Pacific Power Company S.A.

(EPSA), through a takeover bid. EPSA is the fifth largest electricity generating

plant of the country. At the end of 2009, Colinversiones became a Public Service

Company (in spanish Empresa de Servicios Publicos, E.S.P).

Colinversiones ranks fourth in the electricity generating market of the

country. Currently, the company has two thermal power plants (Termoflores and

Merilectrica), a micro-hydro plant (Riopiedras), and a hydraulic project under



IBS PLEKHANOV 2011

construction (Hidromontanitas), which has involved a USD 55 million investment.

Additionally, another project will expand the capacity of the Termoflores plant

(Flores IV), in which the company is investing USD 188 million. Also, the

company owns 50,01% of EPSA, one of the main energy generating companies of

the southwest of the country.

Future Projects

The company continues making progress in strengthening its strategic focus,

energy, by advancing significantly in the expansion of the energy-generating

capacity projects and by working in the consolidation of negotiations related with

the energy sector. For this, currently the company is working in the construction of

oneplant - Flores IV -expected to operate at the beginning of 2011, and

anotherplant - Hidromontanitas -whose commissioning is scheduled for

the second half of 2011. These two projects are expected to increase the capacity of

the company by 31%.

In the annual report published by the company at the end of 2009, only the

two projects mentioned above are part of the future projects. There are no projects

related with the hotel sector or with the identification of a new focus of investment.

Corporate Structure

From the annual report of Colinversiones S.A E.S.P 2009



IBS PLEKHANOV 2011

The corporate structure of the company is divided by three bodies. The first

one: Plantas, refers to the energy-generating plants that the company owns:

Merilectrica, Riopiedras and Hidromontanitas. The second body refers to a firm

own by the company that also can be classified as an energy-generating plant:

Termoflores. Finally, the subsidiary of the company through which the company

acquired part of EPSA as mentioned above.

Business Structure

The next chart shows the business structure of the company. Basically, the

company has two main businesses: energy and investments. The energy sector

hasbeen described in the chart above. The investments of the company can be

divided in four sections. Colinversiones S.A E.P.S owns 2,19% of Suramericana

(South American Investment); two companies related with hotels: 95,41% of

“Hotel Pereira” and 88,82% of “Promotora de Hoteles Medellin S.A”; two firms

related with industrial security: “Arseg” and “Pass”; and finally, other investments

like real estate.

From the annual report of Colinversiones S.A E.S.P 2009



IBS PLEKHANOV 2011

Proposals

Colinversiones S.A E.P.S at the end of 2009 had 87% of their assets invested

on the energy sector. According to the annual report, which the company published

on 2008 for their shareholders, the efforts would be directed to achieve a strategic

transformation. The company disclosedits intention of focusing on the energy

sector and transforming the earlier strategy of being a holding company with a

diversified portfolio. Because of this, the company has invested simultaneously in

the energy sector, which has been funded by disinvestment operations and the

pursuit of additional funding.

The pie chart above shows us the progress of the company achieving its

proposed transformation. The orange portion of the graph represents the assets

invested in the energy sector, there have been growing significantly. While on

2007 they represent almost 1% of the assets, on 2009 they represent almost 87% of

total assets.

The future strategy of the company, as the directors have announced, is to

continue with the current strategy, which means that the company is interested in

expanding the capacity of their energy-generating plants through the expansion



IBS PLEKHANOV 2011

projects in execution. The funds necessary to complete these projects come from

disinvestment operations and borrowing.

According to the consolidated financial statements, the capital of the

company increased from 2008 to 2009 by 22,99%. The net profit per share also

increased; however, it is not possible to establish a specific growth rate because

there is no enough information available.

In a country like Colombia a diversified portfolio is always a good option.

Therefore, despite the fact that the company has been presenting good financial

results, it is not possible to grow without limits if there are no more projects at the

date despite the ones already mention. There are different possibilities that the

company may take into account in order to sustain the rhythm of growth. I want to

propose three different strategies that may have a good result for the company in

the future.

Acquisitions

The first strategy that I want to propose for the company for the next five

years is not to different to the one implemented already. The company can

continue expanding its capacity in order to supply the energy demanded by

different consumers. The capacity can be expanded not only by finishing the

projects of Flores IV and Hidromontanitas, but also by increasing its participation

in EPSA. The complete acquisition of EPSA in the next five years is not a reality,

due to financial and legal limitations; however, Colinversiones S.A E.S.P can

increase its participation in EPSA finance by disinvestment operations. The

company can sell part of its participation in the finance and insurance sector in

order to have at least 52% of EPSA with the aim of having more control over the

decisions of this company. Increasingthe participation in EPSA can only be done

in almost one to two years because of the expenses the company is having right

now by investing in currentsprojects. Two of the energy-generating plants of



IBS PLEKHANOV 2011

Colinversiones S.A E.S.P can expand their capacity and that it will be necessary in

three to four years. Therefore, the company will need new funds to invest in this

expansion. Due to the good results the company has been presenting sincealmost

its creation, the investment banks are willing to finance new projects, if the

company needs it.

According to the estimations of 2009, the demand for energy in the country

will increase significantly due to weather conditions forecasted for the next years.

Additionally, required exports to Ecuador and Venezuela would increase also.

Then, if the demand for energy is expected to increase in the following years, the

company can be sure about selling its production and of the growing demand not

only by local consumers, but also external ones.

The last acquisition of Colinversiones S.A E.S.P, EPSA, since its inception,

through a privatization process that is a model for

the country, brings benefits to the region like no other company in Colombia. It

also delivers profits not only for its strategic partners, but also for others

collaborators partners and natural and legal persons. Investment over its 15 year

history has helped improve the infrastructure and energy coverage of

the Valley, positioning it as the largest department electrified of the

country, besides offering an excellent service and generate jobs and wealth for

the region.

According to the article of Goedhart, Koller, and Wessels (2010) there is no

magic formula to make acquisitions successful. However, the authors affirm that

their experience suggest that in the most successful deals, well-articulated value

creation ideas going on had take place. Additionally, they mention “the strategic

rationale for an acquisition that creates value typically conforms to at least one of

the following five archetypes: improving the performance of the target company,

removing excess capacity from an industry, creating market access for products,



IBS PLEKHANOV 2011

acquiring skills or technologies more quickly or at lower cost than they could be

built in-house, and picking winners early and helping them develop their

businesses”.

Although, Colinversiones S.A E.S.P cannot acquire completely EPSA in the

following five years because of the required amount of investment, not capable to

be achieved by the company in the next years, owning more than 51% of EPSA

and increase the influence on that company, will bring successful results.

Colinversiones S.A E.S.P can add value to EPSA according to the archetypes

mentioned above.

The performance of EPSA can be improved. This fact is not subjective; it

was already affirmed by the directors of EPSA at a meeting had with the directors

of Colinversiones when they presented mutually results of 2009. The directors of

EPSA commented that the management and production process of Colinversiones

were admirable since 2007 on the energy sector, and that if Colinversiones would

manage EPSA, probably the results of the lattercompany would be better.

The acquisition will stimulate a decrease on the marginal costs of EPSA.

The management of Colinversiones has been successful at the moment and it has

been recognized because of the reduction of costs. Some analysts have affirmed

that is one of the reasons of the good results presented by the company on the last

years. Colinversiones will be interested on the good performance of EPSA and will

apply toit strategies already known by the directors in order to increase the utility

generated by EPSA.

Colinversiones and EPSA do not lead the energy market of the country as

other companies do. There are bigger companies in charge of generatingmost of

the energy consumed by the population. However, the rhythms of grow of both

companies have been well recognized, and the competitors are afraid if a merger

occurs. Nonetheless, analysts suggested for both companies not to merge, but



IBS PLEKHANOV 2011

instead, create mutual added value. EPSA is a company with a larger experience;

although, investors think that Colinversiones in a few years will present better

results than EPSA.That is why I suggest an acquisition or, in other words, an

increase in the ownershipof EPSA by Colinversiones.

As a result of the acquisition by Colinversiones S.A E.S.P

of 47, 32% of EPSA on 2009, on 2010 due to unexpected weather conditions not

only in the country but in the world in general, operating revenues of

Colinversiones decreased by 65%. However, net income or profit was boosted by

the dividends generated by EPSA and the increase on the generation of energy of

the Termoflores energy-generating plant.

In 2011 and the beginning of 2012 Colinversiones cannot increase its

participation of EPSA due mainly to financial limitations. The company at the

moment is interested in finishing the projects in progress in order to operate more

effectively in the market and recover its investmentin the medium term. At the

beginning of 2012, Colinversiones can start analyze the possibility of increasing its

participation in EPSA.

If Colinversiones S.A E.S.P decides to apply this strategy it will be

necessary to make an official public announcement informing the rest of the

shareholders about its intentions. Probably the shareholders will agreed with the

proposal because, in genera,l the population recognizes the faster growth rate of

the company.

EPSA at the moment has five ongoing expansion projects that will

increase its own capacity by about 26%, which is planned to be developed over the

next five years. Therefore, the management of Colinversiones S.A E.S.P will have

to be involved on these projects over the comingyears.

Increasingthe participation in EPSA obviously cannot be the unique strategy

recommended to Colinversiones to be appliedover the next five years. It will be



IBS PLEKHANOV 2011

necessary to search for new opportunities in the market in order to become year by

year closer to leading the energy sector of the country. The competence is high;

there are two other companies in the energy market that cover over 50% and it is

difficult to compete with them separately.

Increase Investments in the Hotel Sector

In the portfolio owned by Colinversiones S.A. E.S.P since 2001, the year of

its creation, there were always investments on the hotel sector. In 2009 the

company owned 95,41% of Hotel Pereira and 88,82% of “Promotora de Hoteles

Medellin S.A”.In total the company on 2009 was the principal owner of three

hotels in Colombia. In 2010, there were neither acquisitionsnor disinvestments of

the company in the hotel sector. Although, a month ago the company expressedits

intention of selling part of its participation in this sector, the proposals received

have not been accepted.

The first strategy I proposed for the company mainly focuses on the energy

sector leaving other sectors behind. However, according to my point of view it is

important and profitable to maintain a diversified portfolio. Then, I think the

company may sell part of the hotels it owns; however, it should keep and conserve

the majority of the participations.

Tourism in Colombia will grow steadily over the next decade, and in a few

years this tropical country, which has allthe natural charm and a

host of possibilities for travelers from around the world, will

begin to rebound as one of the main destinations in Latin America. Americans are

returning and in the first quarter of this year represented around 22% of the

visitors. The effort that has been made to change Colombia's image abroad has

begun to pay off.

The hotel industry is characterized by its constant evolution and because in it

there is room for improvisation. The smallest detail can mean the loss



IBS PLEKHANOV 2011

of customers who will gladly be taken up by the competition. Thus,

infrastructure, location, services, health and safety, among others,

are concepts to consider in developing new proposals to meet the

demand of increasingly demanding customers and competition better prepared.

The importance attached to leisure and business tourism in the country has led

to the incursion of new foreign players to the hotel sector in

Colombia and has identified measures to modernize the existing ones in many

aspects, affirmed Carlos Montes, journalist of one of the main news papers of the

country.

The fact that there are foreign players interested in entering in the hotel

market of Colombia can be seen as a good signal of good growthopportunities in

this sector. As mentioned above, the number of travelers that will visit Colombia in

the next years is expected to increase. Therefore, selling completely the hotels own

by Colinversiones S.A E.S.P for me is not a good option in this moment. The

investment in the hotel sector should be the same for the five next years. Owning

three recognized hotels of the country provides the company with a diversified

portfolio that has been recognized over recent years.

According to the annual report presented to the shareholders on 2009 by

Colinversiones S.A E.S.P, the renovations of the main buildings were concluded at

the end of the year. Additionally, the directors affirmed that the renovations are

on par with the best in the industry and the three hotels provide an

excellent platform for competitiveness.

Unfortunately, there is no information available about the net profit

generated by each one of the hotels over the last years. Only the shareholders and

agents involved with the company have access to this information. However,

information about the assets, liabilities and capital of both subordinated companies

is available, but minimal changes are observed, so conclusions cannot be draw up.



IBS PLEKHANOV 2011

Numerical information cannot be shown in order to estimate if it will be

profitable or not to maintain investments on the hotel sector; however, the

expectations of the country related with the hotel sector are very optimistic. If the

company conserves for the next five years the hotels it owns it is possible to

increase the profits due to an expected increase in the demand for this service.

The consolidatedfinancial statements showed the profitability of the hotels

in the last few years, so it is not strange to think about a possible increase in profits

derived from the hotel sector if one, the demand possibly will increase, and two,

the hotels are supplying currently the services the consumers are demanding.

The strategy I proposed of not selling a significant participation of

subordinated companies involved on the hotel sector obviously cannot be the main

and unique strategy of the company for the next five years; although, I want to

highlight the preference of the local companies of having a diversified portfolio in

order to avoid high levels of risk. Colinversiones S.A E.S.P has been recognized as

one of the most successful companies of the country since 2002, the portfolio it

owns has also been recognized as a riskless one, so, I am afraid that if the company

decided to invest all its assets on the energy sector the levels of risk will increase.

Therefore, why not conserve the investments on the hotel sector with the aim of

maintain low levels of risk, while the companies increase profits.

Identify a New Sector that Will Become the New Focus of Investment

The third strategy I want to propose for the company is completely different

from the two previous ones. According to the historical review of the company, in

2007 local consultants and foreign investment bankers identified what would

become the focus of investment of the company. This is how the company started

to invest on the energy sector since 2007 with successful results to the date.

Although, the company has considered that a significant focus only on the energy

sector leaving other types of investments behind, it is also possible to start



IBS PLEKHANOV 2011

considering the possibility of identify a new focus of investment in three years

from now. According to local analysts, the mining sector, of the country,

presentsfastergrowth rates.

During the last years, the mining sector has become one of the most

dynamic in the Colombian economy, evidenced by the behavior that has its gross

domestic product - GDP, which on 2005 registered a growth of 4,28%, as a result

of the global market trends, because of an increase in the demand

for such commodities. It is estimated that Mining Colombia GDP ranks fifth in

Latin America.

Revenues for the country from exports related with the mining sector

amounted almost 4.302 million dollars, growing

by 29.6%, representing 20.30% of total exports in 2005.

Additionally, in the last years foreign investment flows mainly focused on

mining not only on foreign markets, but also in Latin America, and Colombia has

not been the exception. Foreign investment flows were on 2003 about US$627

million, on 2004 US$ 1.246 million and on 2005 US$ 2.165 million,

which means an average growth of 86.17%.

According to the Minister of Mining and Energy,this year the country will

be producing 82 million tons of coal and will export 90 percent. An increased

demand and reserves for almost one hundred years, suggest further mining

development in the next years. Moreover, the Minister considers that in mining the

country has a significant potential and still has considerable natural resources to

offer the world.

“Colombia is sitting on reserves of coal," said the head of the portfolio of

Mines in a forum on the mining and energy sector. "Having half of thermal coal

reserves in Latin America makes us a true power mining," he said. He argues that

even Brazil, which covers a substantial portion of the Americas, has less carbon



IBS PLEKHANOV 2011

than Colombia, with 7.062 million tons of measured coal reserves and 17.000

million potential coal reserves.

Currently investorsin the sector include such companies

asDrummond (USA), BHP Billiton (Australia,UK), Anglo American Coal (UK),Gl

encore

(Switzerland), Xstrata (Switzerland), Cemex(Mexico), among others. Companies

like AngloGold Ashanti, one of the largest producers of gold with an investment

budget of US$ 8 million, also develop mining exploration works as

Greystar Resources, with an investment budget close to US$ 14 million.

Theexpectations ofinvestment in the sector are

very favorable, given the large mining geological potential available in the

country and its diverse environments of formation with the

presence of coal, precious metals (gold, silver and platinum), ferro-

nickel, emeralds, iron, copper and salt, among the most recognized ones, in

addition to other products such as ornamental stone,

clay, phosphate rock, metal concentrates of copper, molybdenum, zinc,

manganese, among others, which although are less visible explored,

represent economic interests.

There are potential opportunities in the mining sector. The Colombian

government is working together with companies interested in this sector with the

aim of develop it in the following years. Colinveriones S.A E.S.P has been

working really close with the government over the last years due to the fact that it

is a public service company. The energy and mining sector have been always

considered as part of another more general sector: that is why there is a ministry

focus concretely on both sectors. Therefore, Colinveriones S.A E.S.P has

knowledge about the working process of the mining sector.



IBS PLEKHANOV 2011

What I want to suggest is the possibility of considering another sector on

which to focus future investments. Instead of focusing only on the energy sector,

the company can finish the projects currently in progress and then try to enter in

the mining sector. Obviously this strategy will be completely different to the one

being implemented by the company at the moment and the one proposed in the

first part; however, it is a good option to consider another potential sector. The

results of this decision can be the same or even better than the ones basedon the

energy sector.

The company at the moment has not discussed future projects different from

the ones already in execution. The press communicator announced at the end of

2009 that the company was studying new opportunities of the market and that in

the second half of 2010 they would disclose the new strategies they would follow.

However, at this moment the company has not said anything new about its medium

term goals that differ from the ones announced on 2009 (related with extending the

capacity of its energy-generating plants). The fact that the company has not

disclosed new projects may suggest,that the directors are not interested in

extending the capacity of their energy-generating plants in the following years.

Therefore, finding a new sector in which to direct their investments will be

attractive.

Colinversiones S.A E.S.P already has an influence on the energy

sector.Investingin the mining sector will add power to the company, without

mentioning the benefits of diversified the portfolio it owns. Although, there are

risks linked with the mining sector,the company does not haveto focus only on

this. The performance of the sector wouldsatisfythe expectations of the directors. If

there are foreign investors willing to invest in this sector it is because they have

already the security of having recovered their investments and receive an

additional benefit.



IBS PLEKHANOV 2011

During the coming years, the company cannot direct its investments to the

mining sector until it recovers part of the investment it directed to the projects in

execution at the moment. Almost ten months ago, the company sold part of its

participation inColombiana Kimberly Colpapel, South

American Investment Group and Colombia’s Stock Exchange. The income

received from these operations was directed to the projects Flores IV and

Hidromontanitas, and the company announced the credit granted by Bancolombia

Bank to finish the projects mention above. Thismeans that the company at the

moment is not capable of invest on the mining sector. However, the results of the

third quarter of 2010 showed a net profit of almost USD$ 11,8m and according to

the results forecasted for 2011 the profit will not be less than the previous year.

At the end of 2011 and the beginning of 2012, when the company will be

able to evaluate the results of its latestinvestments, it will be possible to analyze

more details on the possibility of invest in the mining sector. Obviously the

company cannot leave behind the energy sector and the rest of the

subsidiarycompanies.

The company may consider the possibility of orientate its investments to the

production of natural gas on 2012 and 2013. During the last years,

natural gas has seen higher growth worldwide. In 2005, it was the third most

important source of energy, with about a quarter of the energy consumed in the

world. Between 2000 and 2005, the consumption of natural gas grew at an

average annual rate of 2.8%, exceeding the average annual growth rate of the last

ten years. In Colombia the natural gas service is provided to about three million,

seven hundred thousand users and it is believed that

this figure will continue to rise. In addition, three thousand miles of pipelines were

build and twenty six gas distribution companies were formed in the



IBS PLEKHANOV 2011

last two decades, which confirms once again the rise not only in the number

of users but in the figures related to consumption and therefore demand.

References

1. Botero L. (2008) “Turismo / Colombia en la Buena Hora” (Tourism / Colombia in the Good Time) Find 10-Jan-2011 on: http://blog.guiasenior.com/archives/2008/06/turismo-colombia-en-la-buena-hora.html

2. Colinversiones Homepage. Find 9-Jan-2011 on: http://www.colinversiones.net/

3. Colinversiones Annual and Quarterly Informs. Find 9-Jan-2011 on: http://www.colinversiones.net/downloads.php?id_menu=4&id_menuderecho=6&id_submenu=0&id_texto=0

4. Díaz M. (2010) “El turismo de Colombia está en alza” (Colombia's tourism is booming). Find 10-Jan-2011 on: http://www.infosurhoy.com/cocoon/saii/xhtml/es/features/saii/features/economy/2010/02/09/feature-03

5. EPSA Homepage. Find 9-Jan-2011 on: http://www.epsa.com.co/ 6. Goedhart M; Koller T. & Wessels D. (2010) Five Types of Successful

Acquisitions. At: https://www.mckinseyquarterly.com/Corporate_Finance/M_A/The_five_types_of_successful_acquisitions_2635

7. Ministry of Mines and Energy (2005). Resolution No.181783 30 december of 2005

8. Ministry of Mines and Energy (2005). Resolution No.180507 30 april of 2009

9. Proexport (2009) “Evolución Turismo 2002-2008” (Tourism Trends 2002-2008). Find 10-Jan-2011 on: http://www.proexport.com.co/vbecontent/library/documents/DocNewsNo10136DocumentNo8302.pdf

10. UPME (2001) Plan Nacional de Desarrollo Minero 2002-2006. (National Mining Development Plan)

11. UPME (2006) Plan Nacional de Desarrollo Minero 2007-2010. Gestión publica para propiciar la actividad minera.(National Mining Development Plan. Public management to promote mining) 12. UPME (2006) Colombia País Minero. Plan Nacional para el Desarrollo Minero. Visión al año 2019. (Colombia Mining Country. National Mining Development Plan. Vision for 2019)

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108 Section 2. National enterprises. Victoria Karelova “ABS Bank” IBS PLEKHANOV 2011

VICTORIA KARELOVA “ABS BANK”

Introduction

The aim of this coursework is produce long–term

strategies for the organization that can be implemented in

the course of 5 years (2010-2015). I have chosen a

commercial bank – a type of financial intermediary that

provides checking accounts, savings accounts, and

money market accounts and that accepts time deposits.1

Commercial banking is also known as business banking.

Banks are mainly concerned with making and receiving

payments as well as supplying short-term loans to

individuals. They “accept deposits and channel those deposits into lending

activities, either directly or through capital markets. A bank connects customers

with capital deficits to customers with capital surpluses”.2

The strategic plan presupposes an important change in the strategic direction

of the organization with strong importance on the aspects of leadership, process,

and learning-and-growth perspectives as key prerequisites to deliver the financial

objectives of revenue growth, cost reduction and sustainable profitability.

Attention has been taken to design business strategies that will be synchronized

with the structure, the mission and vision of the bank. When developing the

strategy plan, the future forecasts of the macroeconomic situation, banking sector

and global trends are taken into consideration. The plan, in essence, is not only a

theoretical essay but also a proactive working document of the virtual bank. In

1Sullivan, A., Sheffrin S. (2003). Economics: k. Upper Saddle River, New Jersey: Pearson Prentice Hall.

pp. 511. 2 http://en.wikipedia.org/wiki/Bank

VICTORIA KARELOVA


Section 2. National enterprises.Victoria Karelova “ABS Bank” 109 IBS PLEKHANOV 2011

further description of the bank’s development strategy, the name ABS Bank will

be given to the organization.

Materials of periodicals, notes from lectures, books in the field of corporate

finance and economy, government organization/consulting company reports,

internet searches, and foreign and Russian sources are used in this work.

Overview

ABS Bank profile

ABS Bank is a Russian bank, has retail and corporate businesses. It offers

the full range of retail banking services, all-inclusive support to its corporate

customers and is currently one of the largest credit banking institutions.

The Bank has a regional network:

present in 250 out of 1099 cities throughout the country1

located in different Russian regions while providing services to customers

using its 11 000 retail offices spread all over the country, and 7 regional head-

offices.

;

The organization is a member of Visa International and MasterCard

International payment systems.

ABS Bank shares have not been publicly traded on the Russian stock

exchanges MICEX2or RTS3

Macroeconomic situation in Russia

.

The Ministry of Economic Development of the Russian Federation forecast

report (Table1) shows that the Gross Domestic Product (GDP) growth rate will

increase to 4.5% (index -104,5) in 2013. Economic dynamics and an increase

throughout the forecast period will be determined by the domestic demand. In real

terms, in 2010 it will increase by 6.8% (index 106,8) and in 2012-2013 increase

1 http://www.gks.ru/dbscripts/cbsd/dbinet.cgi?pl=2407002 2Moscow Interbank Currency Exchange - one of the largest universal stock exchanges in the Russian

Federation and East Europe. There are approximately 239 Russian companies listed. http://www.micex.com/ 3 The Russian Trading Systemhttp://www.rts.ru/en/



5,2-5,8% (indexes 105,2-105,8) per year. In general, industrial production growth

over the four-year period is estimated at 121.9% compared to 2009. Main changes

are expected in industries that suffered in the 2009 crisis e.g. mechanical

engineering, construction, and general manufacturing. Industrial production will

recover faster than investment. In 2011 it is expected that industrial production will

overtake levels seen in 2008 (pre-crisis) and even higher industrial production

numbers for 2013.

Table 1. Key indicators of Russian economy development up to 2013*

Indicators name

Unit dimensions 2008 2009

Forecast (compare on preceding year)

growth in 2013 compare with 2009,% 2010 2011

2012 2013

GDP Growth, % % 105,2 92,1 104,0 104,2

103,9 104,5 117,6

Domestic demand % 109,1 85,9 106,8 106,2

105,2 105,8 126,2

Industrial production index % 100,6 90,7

107,6 103,9

103,8 104,9 121,9

Investments % 109,9 83,8 102,5 110,0

103,5 107,4 125,3

Retail % 113,5 95,1 105,2 105,0

105,6 106,0 123,6

Profit from all activities bln. rub. 3984 5270 6660 7100

7926 9115 173,0

* Indicator's value are extracted from the forecast of socio-economic development of the Russian Federation in 2011 and the planned period 2012 and 2013 by Ministry of Economic Development of Russian Federation (www.economy.gov.ru)

The Russian economic situation shows stable growth in the planned periods.

This fact will have a positive influence on the financial system in the Russian

Federation. In accordance with the increasing profits from all activities (173,0 %)

the situation with "bad loans" (loans where repayments are not being made as

originally agreed between the borrower and the lender, and which may never be

http://www.economy.gov.ru/wps/wcm/connect/economylib4/mer/activity/sections/macro/prognoz/doc20100923_07�





repaid1

Russian banking sector

) should stabilize. In both short-term and long-term prospects, the Russian

economy will develop under the innovative socially-focused scenario according to

Russian policy makers. Generally, the perspective sectors for investment will be

retail, and sectors of investment demand like high-technology, medium high-

technology sectors and construction.

The Russian financial market will continue to be one of the most rapidly-

growing and attractive world markets considering different development scenarios

and the instability in global finance.

According to Sberbank’s analytical data center2

a) Growth and considerable size. Depending on the scenario the average

annual growth of the sector till 2014 is forecast to be between 18 and 24%.

Banking assets will reach from 70 to 80% of Gross Domestic Product by 2014,

which evidences a potential for further growth and is lower when comparing to

similar countries. As a result, in terms of net revenue

, the Russian market will be

characterized by:

3

b) Good operating profitability. Russia, according to the ROE

by 2014 the Russian market

is expected to be approximately as large as the Indian market, several times greater

than some of the other large fast growing markets e.g. Turkey, and will reach about

one third of the Chinese market. 4 / cost of

capital5

1Longman Business English Dictionary

ratio is comparable with the most attractive developed markets and

exceeds practically all of the large fast-emerging markets. It is expected that

despite a certain margin contraction across the main product lines, the Russian

2http://www.sbrf.ru/moscow/ru/analytics/cmei/ 3The amount of money available after subtracting from gross revenues such costs and expenses 4Return on Equity - ratio serves as the basis for investors' assessment of the business 5Cost of capitalis the return required to satisfy the provider of a particular type of capital to be used in the

business.



banking sector will still continue to be attractive in this regard till 2014 and

beyond.

c) A tendency towards consolidation of the banking sector. Today the

banking sector is characterized by a low concentration of assets: the five biggest

banks account for about 40% of overall assets. This is far less than in countries

with a more developed financial sector. A large number of medium and small

players in total control 30 to 40 % of the market for some of the banking products.

Inevitable consolidation will open up opportunities for the larger market players,

and increase competition, both of which will benefit the sector. The economic

crisis is likely to accelerate the pace and scale of consolidation. Mr Mikhail

Sukhov, a member of the board of the Central Bank of Russia pointed out “In

2011 M&As will continue at the same pace, and by the scale and the portion of

assets involved the scope of M&A transactions could be even wider". Since early

2010, 18 Russian banks have already merged with 12 banks, with this process

exceeding 6% of the banking assets.1

The trends and their determining factors detailed above, imply that the

Russian financial market will remain attractive not only till 2015, but also in the

subsequent 5 to 10 year period. They will contribute greatly to ABS bank's

significant potential for development domestically.

He also specified that the only difficulty on

the road of consolidation is the legal provision that prohibits joint stock companies

from takingover limited liability companies. But this prohibition does not prevent

takeover opportunities. It just results in a potential delay of three to four months.

A lot of Russian debt is short‐term and foreign‐held. Current falling Russian

interest rates at 8.25% will go someway to ease the Russian corporate debt weight

as mentioned in DT Global's consulting report2

1

. Many issuers see an opportunity to

strengthen their balance sheets by taking on more equity and reducing their debt.

http://www.banki.ru/news/engnews/?id=2385672 2http://www.dt-globalbusinessconsulting.com/DT_Russia_Paper_April_2010.pdf

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Also the liquidity is improving in the banking sector, but credit activities

remained very weak during 2010 and net credit to the private sector increased

slightly in April-August 20101. But most of this increase is due to new credits to

enterprises, while net credits to households remained limited. With real policy rates

now in negative territory, the observed marginal recovery in credits suggests

supply constraints in the banking sector. Banks have been keeping wide spreads

between the refinancing rates and effective lending rates. This suggests that most

banks still perceive credit risks of potential borrowers as very high, especially

households. Given the slow economic recovery and low profitability, prevailing

interest rates on new loans for firms and households remain high and effective

rates for consumer loans may vary from 18 to 40 percent2

It is worth pointing out that competition has risen in Russia during the crisis

and will remain strong in the coming years. This is a global trend. Western

companies are competing more aggressively against western counterparts as

everyone looks for new niches. Newcomers from Western Europe, often smaller

players, are looking around in the CEE and CIS markets for new opportunities.

. The recovery in credits

depends, among others, on the strengthening of bank balance sheets and increases

in borrower profitability.

The strategy globally and in Russia will be twofold: premium‐priced

products where western companies are in their comfort zone, but then developing

more affordable products for the rising middle class and the lower‐lower middle

class. These factors are involved in developing the strategies for ABS Bank.

1World Bank “Growth with moderation and uncertainty” Russian Economic Report №23 November, 2010 2Ibid



ABS Bank Mission, Vision and strategies Vision

By 2015, the bank will engage in lending activities and become one of the

biggest takers of deposits. It will be selling and offering affordable products to

retail customers. It expects to increase the number of retail offices up to 12 500 in

300 cities. The target indicators for 2015 are listed in appendix A.

Mission

To grow existing business, whilst building the platform to be the preferred

financial solutions provider and leading bank in the Russian Federation, satisfying

the expectations of customers and shareholders, providing a full range of cost

efficient and high quality services through the optimization of information

technology and efficient branch network.

Goals

ABS bank will make its position stronger in the Russian banking sector and

perform, financially and operationally, as a top Russian financial institution by

implementing its development strategy. The Bank sets goals in three major points:

1. Increase of profit more than three times and decrease of operating costs /

net operating income ratio by five percentage points by 2015: this will help to

reach at least 20% ROE (Appendix A).

2. Strengthen competitive positions in the key banking sectors (retail and

corporate loans and deposits).

3. Acquire the best customer service skills in Russia; become the leader in

service quality; refresh risk management systems, develop and implement quality

management systems that comply with international standards; An IT platform

which is capable of copingwith the requirements and scale of the business;

professional and motivated staff and customer loyalty.



Reaching the above goals will translate into higher market capitalisation and

further progress on the way to be the leading financial institutions of the Russian

Federation.

SWOT Analysis

SWOT review of the ABS bank will help to identify possible strategies.

Strengths & Weaknesses are internal to the business and Opportunities & Threats

are external.

Internal External Strengths - Vast customer base in all customer segments (corporate and retail, large and small customers) across all regions; - Scale and scope, in terms of financial indicators (available amounts and duration, access to funds, international ratings, investment capacity), as well as the scope and quality of the Bank’s actual infrastructure (including retail and corporate distribution network). - Brand and reputation, largely based on the solid trust earned among customers of all groups. - Numerous and experienced staff in all regions

Opportunities - Building up competitive strength both in retail and corporate sector - Raise efficiency and strengthening competitive advantages through economies of scale - Improve the quality of customer service and products range, - Make a solid base for sustainable development and avoid major risks - Build a long-term competitive position in the domestic market and transform to leading Russian bank - List shares on a public exchange

Weaknesses - Inefficient utilization of distribution network and customer base. - Poor service quality in terms of decision-making time, process and procedure complexity, communication and bank-to-client interaction levels, as well as general convenience and functionality of the branches. - Extremely low productivity. - Not-effective and costly risk management systems. - Corporate culture weaknesses

Threats - The macroeconomic situation- competition in the Russian financial sector. - A long-term downward trend in product margins on the Russian market, stemming from a systemic shortage of funding in the banking sector and competitive dynamics in some of the banking product segments (major corporate lending, car loans). - The risk of cost/income ratio decline,



The below points are designed to resolve shortcomings identified in the

above table. The solutions will be to:

• Build on the business's key strengths using retail and corporate

development approach

• Resolve its internal weaknesses through operations’ improvement

approach

• Fully exploit ABS Bank external opportunities by means of : IPO

and/or M&A approach

• Avoid major external threats by applying risk management strategy.

Above mentioned approaches for the ABS Bank are described in the

development direction chapter.

Development directions

In order to increase profit and develop further retail and corporate segment it

is necessary to follow the organization’s growth strategy, customer attraction

strategy and examine quality improvement service methods. Thus it is required to

decrease the influence of the weakness factors presented in SWOT analysis, which

prevent bank expansion. The mechanisms presented in the operations’

improvement strategy allow reaching set targets. In the same way, for leveling the

risks of the ABS bank current activity, it is essential to advance risk management.

Organization’s growth strategy.

This strategy has two possible variants: organic growth and growth through

Mergers or Acquisitions. Organic growth represents the true growth for the core of

the company. It is a good indicator of how well management has used its internal

resources to expand profits. Organic growth also identifies whether managers have

used their skills to improve the business.1

1http://www.investopedia.com/terms/o/organicgrowth.asp

Organic growth in a large number of

cases has the advantages of leaning against a team of managers’ developed



experience recognized by shareholders, and on the knowledge of the market and

style of business dealing.

Nevertheless, the possibilities for organic growth have limits. For example,

the new markets can appear inaccessible because of technological imperfections,

impossible exit methods for the international market, uncertainty of a trade mark, a

lack of understanding of the new markets. Besides, internal resources can appear

insufficiently quickly to react to new possibilities or problems. Therefore, maybe

the wise decision would be to merge or absorb, in order to acquire the necessary

knowledge, technology and market share. At the expense of acquisition, it is

possible to gain fast access to new markets, and to expand a range of production

goods and given services, enabling the company to reach the size when the

economy of scale becomes essential to business.

An acquisition is when you buy another business and end up controlling it.

A merger is when you integrate your business with another and share control of the

combined businesses with the other owner(s). There are many good reasons for

growing your business through an acquisition or merger.1

Obtain qualified skillful staff, with knowledge of the industry or sector,

acquireother business intelligence. For instance, a business with good management

and process systems will be useful to a buyer who wants to improve their own. The

chosen business will have systems that complement your own and that will help to

run a larger business.

These include the

following:

Accessing funds or valuable assets for new development. For example,

better production or distribution facilities are often less expensive to buy than to

build. It is wise to look for target businesses that are only marginally profitable and

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have large unused capacity and which can be bought at a small premium to net

asset value1

It can be less expensive to buy an existing business than expanding

internally if the business is underperforming. For example, if there is struggle with

regional or national growth.

.

Buildinga wider customer base and increase the market share. The targeted

business could have distribution channels and systems which may be used for own

offers.

Diversification of the products, services and long-term prospects of the

business. A target business may be able to offer products or services which you

can sell through your own distribution channels.

Reducing the costs and overheads through shared marketing budgets,

increased purchasing power and lower costs.

Reducing competition. Buying up new intellectual property, products or

services may be cheaper than developing them.

On the other hand, an acquisition could become expensive if there is a battle

of bidding where other parties are equally determined to buy the business. If you

cannot agree on terms who will run the business or how long the owner will

remain.

Disadvantages of M&A are listed below: diseconomies of scale if business

becomes too large, which leads to higher unit costs; clashes of culture between

different types of businesses can occur, reducing the effectiveness of the

integration; may need to make some workers redundant, especially at management

levels – this may have an effect on motivation; may be a conflict of objectives

1 The value of each share. The total value of a company's assets less the total value of its liabilities is its net

asset value (NAV). For valuation purposes it is common to divide net assets by the number of shares in issue to give the net assets per share



between different businesses, meaning decisions are more difficult to make and

causing disruption in the running of the business; antitrust implications.

Considering advantages and disadvantages of both described variants ABS

Bank plan will be: Organic growth with possible mergers with stock-brokers or

insurance companies for cross-selling purposes and retail offices expansion by

2015.

In order to facilitate such growth, capital shall need to be raised. There are

currently several solutions available to ABS Bank, several of which rely on the

capital markets. Solutions presented are as follows:

a) IPO or Initial Public Offerings (IPOs) when a company (called the issuer)

issues common stock or shares to the public for the first time.

b) Debt issuance – when company raises funds by borrowing money from

bondholders. The company borrowing the money (issuing the debt) agrees to pay

the lender (the bondholder) a set interest rate over an agreed period. This payment,

which is usually made quarterly or monthly, is often called the coupon. At the end

of the period, the borrower pays back the lender in full. The main drawback is the

larger financial leverage than when going public.

IPO disappeared off the screen in 2009 as they did globally, but they are

coming back, as mentioned in GT-global consulting report.1

1) Reduce debt;

According to the same

source, Russian companies are turning towards IPO in order to:

2) Finance growth;

3) Add to their reputation (less so than in past);

4) List their assets in order to get an objective assessment of what they are

worth: a benchmark with reality.

1http://www.dt-globalbusinessconsulting.com/DT_Russia_Paper_April_2010.pdf




Therefore, the plan for 2011-2013 year will be to prepare for the IPO and to

list the stock on the MICEX and RTS in 2015.

Customer attraction strategy

This strategy is based on using the current advantages of the bank, such as a

well-known brand and a large retail network. Implementation of the strategy will

allow ABS bank to reach its following objectives:

- Ability toobtain the servicesof bankclientsin differentregions of the

RussianFederation.

- Simplificationof procedures for obtainingcredit

- Reduced time for decision making

- Improved customer service and customer satisfaction

- Distribution channels development (percentage of transactions handled by

remote channels)

The strategy can be realized by using below methods:

Having a service quality monitoring system based on feedback from

customers, sales, service performance results and IT data to motivate and

incentives respective staff categories.

Development of the measures aimed at strengthening the bank's competitive

advantage by improving the policy of granting loans to individuals. This market

segment has not currently regained pre-crisis levels and loan growth is a priority

for the bank

Building systematic sales skills within all of the Bank’s service channels and

building ‘industrial’ skills to manage customer relationships and increasing cross-

sales as part of a targeted campaign. ABS Bank plans to implement this on a stage

by stage basis. Eventually, the Bank will be in a position to provide each customer

with a personalised offer in a targeted and integrated manner through a variety of

channels, and to administer thousands of marketing campaigns for customer micro-

segments.



Introducing products for specific customer groups and special offers for

young customers; a broader range of services from all main ABS Banks’ branches;

a special service format for pensioners.

Development of pricing policies for corporate clients, taking into account

the special credit conditions for promising sectors of the economy. This policy will

allow the bank to focus on developing industrial enterprises, which will provide

greater revenues for scale projects for which credit is made.

Operations’ improvement strategy

Strategy based on leveling the main weaknesses of the bank, implementation

of a Quality Management System, and streamline its IT infrastructure and systems.

As identified in SWOT analysis, the drawbacks below:

- Poor service quality in terms of decision-making time, process and

procedure complexity, communication and bank-to-client interaction levels, as

well as general convenience and functionality of the branches. Bank is behind its

main competitors in terms of service level.

- Extremely low productivity. In this regard, the Bank is seriously lagging

behind not only the banks in mature markets (some with an established presence in

Russia) but emerging market banks as well. The main reasons lie in unwieldy and

overcomplicated business processes, poor specialisation and division of labour; a

lack of unified business processes across the Bank, making it impossible to

capitalise on economies of scale and implement modern information technologies.

There is a low level of automation and too much bureaucracy. Operations and

support functions are decentralised. As a result, many bank systems and processes

are poorly scalable and expanding business volumes are hampering efficiency.

- Corporate culture weaknesses, primarily meaning excessive bureaucracy,

insufficient responsibility for end results and the quality of customer service.

Therefore this strategy implementation will allow:

- cost reduction due unify of business processes and organization structure;



- revenue growth due increasing customer satisfaction

- quality growth;

- process automation;

- unified business processes;

- optimal organization structure;

Implementation of Quality Management System (QMS) will enable

the ABS Bank to achieve the goals and objectives and strategy. It provides

consistency and satisfaction in terms of methods, materials, equipment, etc, and

interacts with all activities of the organization, beginning with the identification of

customer requirements and ending with their satisfaction, at every transaction

interface1

A good QMS will set direction and meet customers’ expectations, improve

process control, reduce wastage, lower costs, increase market share, facilitate

training, involve staff, raise morale. A fully documented QMS will ensure that two

important requirements are met. The first is customers’ requirements - confidence

in the ability of the organisation to deliver the desired product and service

consistently meeting their needs and expectations. And the second is the

organisation’s requirements – both internally and externally, and at an optimum

cost with efficient use of the available resources – materials, human, technology

and information. These requirements can only be truly met if objective evidence is

provided, in the form of information and data, to support the system activities,

from the ultimate supplier to the ultimate customer.

.

The changes in the Bank’s IT environment will need to support its ambitious

business objectives and its organisational strategy. This will require new up-to-date

mechanisms and a totally different level of management information. The IT

capability will need to become a source of competitive advantage for the Bank.

1http://www.businessballs.com/dtiresources/quality_management_systems_QMS.pdf

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The Bank is aiming to gradually unify its software and data storage systems and to

create a single information space that meets all reliability, availability and other

operating requirements. The solution will be to follow a centralised approach

wherever possible. To improve the efficiency of capital expenses and change over

to uniform IT standards ABS Bank would need to consolidate existing, regionally

distributed data centers into two data centers: main and standby by 2014.

ABS Bank human resource policy is guided by the philosophy of skill

development as the major instrument for enhancing productivity. It has set its

objective to improve the Bank’s productivity and efficiency through proper

development and effective utilization of human resource. It is also oriented

towards downsizing/rightsizing of the average number of assistant level staff and

narrowing in offices (levels of jobs) down the existing non-proportional gap

between the officer level and assistant level staff in the long run. Implement the

right man at the right job, by placing them in the appropriate jobs.

However, recruiting and retaining quality manpower, upholding the morale

of the staff, devising an appropriate succession plan, and maximizing staff

productivity still remains a challenge. The goal is to develop and manage human

resource for attaining the objectives of the Bank through possible activities listed

in (appendix B).

By 2015 the ABS Bank plans to take the average headcount down to 90,000

(as stated in Headcount section - Appendix A) which implies an annual reduction

by approx 3-5% while the volume of operations should grow annually.

Risk management strategy

It is impossible to attain commercial objectives without an overall upgrade

of the risk management system of the Bank. The most significant changes will be

seen in retail and corporate credit risk management, as well as interest rate,

liquidity, operational and market risk.



Risk management will be improved to make credit products more attractive

for all customer categories, through simpler procedures, shorter time for decision

making, enhanced predictability, reduced requirements for collateral and other

security (primarily, in retail business), finer differentiation of rates and terms

depending on the customer risk level (primarily, in corporate business). The key

objective in risk management is to set the stage for a more aggressive commercial

policy based on improved transparency of decision making in the credit risk sector,

a higher role and broader powers of its risk management department which ABS

Bank will regard as a partner and constructive counterweight to the business units.

To prevent internal and external fraud and corruption in extending / receiving

loans, ABS Bank will introduce changes to the credit risk processes in 2010

(Appendix C).

Conclusion

The strategies of ABS Bank are aimed at developing its potential and

building on the unique opportunities provided by the Russian market. Its year by

year implementation offers a prospect to create a great company that will be

stronger in 5 years, which both its employees and the entire country can be proud

of.

Active usage and development of the basic competitive advantages of the

bank, leveling major factors, which have had a negative impact on its current

activity, and measures which are directed on the business diversification for the

purpose of increasing its competitive advantages, have all been proposed in the

strategic program of ABS Bank development.

Consequently, given actions will allow the Bank to take the next step on its

way of transformation into one of the leading banks of the Russian Federation, and

to introduce innovative financial products, expanding its retail network, raising

client satisfaction levels, improving cost management efficiency, and to increase

the financial stability of the bank and shareholders’ prosperity.



References

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2. Sullivan, A., Sheffrin S. Economics. Principles in Acton, Pearson Prentice Hall, 2003.

3. Sherman, E. Financial and Accounting for non financial managers, AMA American Management association, 2000.

4. http://www.stplan.ru/ 5. http://www.planware.org/gstrategies.htm 6. http://www.planware.org/strategicplan.htm# 7. Sberbank of the Russian Federation http://www.sbrf.ru 8. Russia Federation Federal Statistics Service http://www.gks.ru/ 9. http://www.micex.com/ 10. http://www.rts.ru/en/ 11. http://www.rbc.ru/ 12. http://www.banki.ru/news/engnews/?id=2385672 13. http://cebviews.com/ 14. World Bank “Growth with moderation and uncertainty” Russian

Economic Report №23 November, 2010 http://www.worldbank.org/russia

15. http://www.investopedia.com/ 16. http://www.businesslink.gov.uk/ Business advice for business 17. http://www.mckinseyquarterly.com/newsletters/topten/2010_Q4.htm 18. “Have you tested your strategy lately?” Article by Chris Bradley,

Martin Hirt, and Sven Smit, January 2011) http://www.mckinseyquarterly.com/Have_you_tested_your_strategy_lately_2711

19. Department of Trade and Industry report http://www.businessballs.com/dtiresources/quality_management_systems_QMS.pdf

20. The Russian Business Outlook 2010-14 report by Dr. Daniel Thorniley President, DT‐Global Business Consulting, April 2010.

21. http://www.dt-globalbusinessconsulting.com/DT_Russia_Paper_April_2010.pdf

22. The Moscow Times Newspaper Article by Maxim Rakhita: “Leverage Buyouts as Driver of the Russian M&A Market”. dated 20 April 2010.

23. The forecast of socio-economic development of the Russian Federation in 2011 and the planned period 2012 and 2013 by Ministry of Economic Development of Russian Federation dated 23 September 2010.

http://www.stplan.ru/�

http://www.planware.org/gstrategies.htm�

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http://www.worldbank.org/russia�

http://www.investopedia.com/�

http://www.businesslink.gov.uk/�

http://www.mckinseyquarterly.com/newsletters/topten/2010_Q4.htm�

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http://www.mckinseyquarterly.com/Have_you_tested_your_strategy_lately_2711�







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Section 2. National enterprises.Dauren Toktamysov “Plan of development for Sugar Company” 127

IBS PLEKHANOV 2011

DAUREN TOKTAMYSOV “PLAN OF DEVELOPMENT FOR SUGAR

COMPANY”

Introduction of the company

One Russian company (a key player among

trading companies of oil products in Russia) decided

to diversify its activity and established sugar

department. Sugar was chosen due to clear price

structure and increasing interest to food markets. There

are five stages of development

• Trading operation with white sugar

• Importing raw sugar, refining it in sugar

plants and selling it

• Investing in sugar beet production, refining it in sugar plants and

selling it

• Purchasing a sugar plant

• Creating an agricultural holding company.

This work provides ideas and descriptions of how to build this business from

zero.

Profile of the Russian sugar industry

According to the ICAR, the capacity of the Russian sugar

industry in 2010 will be about$ 5.2 billion (wholesale prices from the warehouse of

the plant), including imported whitesugar $ 0.3 billion

DAUREN TOKTAMYSOV


128 Section 2. National enterprises. Dauren Toktamysov “Plan of development for Sugar Company”

IBS PLEKHANOV 2011

In 1999-2010 with the protection from imports rapidly growing, production

of beet sugar is primarily due to productivity growth, as well as increasing the

acreage of sugar beets.

Exports of white sugar from Russia is carried out, mainly in the form of

tolling raw sugar more often in the Krasnodar Territory in the CIS countries,



IBS PLEKHANOV 2011

Mongolia and Afghanistan, and before 1998 its volume was small. In 1999, in the

year of peak delivery of raw sugar to Russia, against the background of extremely

low world, and especially the Russian, prices was afavorable situation for the

supply of sugar in the countries of Central Asia and Transcaucasia. In November

2006, after a 6-year break, sugar exports again increased significantly, in 2007,

itpassed for 300 thousand tons. After a pause, in October 2007 - November 2008,

exports of sugar tolling is growing again. Unique competitive advantages of

Russian sugar refineries, especially in the Southern Federal District, in the macro-

region CIS (the cost of logistics, energy and other resources) that form the

potential tolling of exports more than 0.5 million tons per year. To unlock this

potential requires state support, primarily from the Customs and Russian Railways,

as well as raw storage capacity expansion in the Black Sea ports and factories.

Thenumber of sugar factories in Russia in 1991 was96. Of them,still

workingin 2009 were77, including two plants processing only raw sugar. The 75

beet sugar factories and 48 factories have capacity for more than 30 000 tons of

sugar, including 16 which have developed capacity for more than 60 000 tons of

sugar. For comparison - in Ukraine in 2009, there were only 56 sugar plants of the

192 ratings in 1991.

The number of operating sugar plants in 2009

Actual production capacity of existing plants only processingsugar beet in

2007 amounted to 257 thousand tons per day (4.5% in 2006). Russian can handle

up to 32 million tons of sugar beet and produce up to 4,1 million tons of beet

sugar. In Russia, existing power plants can process up to 8.8 million tons of raw



IBS PLEKHANOV 2011

sugar. The Russian sugar industry can meet the demand for sugar for all CIS

countries combined.



IBS PLEKHANOV 2011

In September 2007, Russia resolved a problem with Guatemalan raw

sugar, but until February2010, Russian companies have not taken advantage

of diversification of sources of raw sugar.

The main features of the market

Production and consumption of sugar is seasonal. Beet sugar is

mainly produced in September-November; raw sugar - in March and July. The

peak of consumption usually occurs in July.



IBS PLEKHANOV 2011

The customs regime of sugar production in Russia

The industry has a fairly complex system of regulation of imports. In

the 2001-03 system applied with the use of licensing, quotas,

seasonal and regular duties on raw and white sugar.

Since 2004, the government has introduced "flexible" import duty on raw

sugar (the higher the exchange price, the lower the fee and vice versa), and



IBS PLEKHANOV 2011

prohibitive import duties on white sugar at a rate of $ 340 a ton (except CIS

countries with a regime of free trade in sugar).

Following various changes (sometimes annually) in May 2009, the

government increased the lower level of duty on raw sugar from $ 140 to $ 165.

Since January 2010, the sugar industry has failed to adjust the scale of

flexible fees for the first time since 2003 and is already in the Customs Union of

Belarus, Kazakhstan and Russia. The range of inversely-related duties and world

sugar prices is shifted from 4.5 - 9.0 12 - 18 c / af. At prices lower than 18 c / af (as

is likely in the summer of 2010) import duty increases. As a compromise, there is a

proposal for a mechanism for consumers' raw sugar to be taxed less from May to

July. In respect of Belarusian sugar:

-.- From April 2007, there operates a self-restraint quota in the supply of

sugar to Russia of 180 thousand tons in 2007, 100 thousand tons in 2008 and 150

thousand tons per year from 2009

The situation with the "sleeping giant" - Ukraine is temporarily closed. In

accordance with the CIS inter-state agreements, only from January 2013 shall beet

sugar originating in Ukraine not be subject to import duties.

In summary, the fluctuating import duties are another factor that must be

taken into account by sugar importers.

Detailed History and prospects of state regulation of sugar imports in

Russia.

Key market participants

Recognized industry leaders are companies Prodimeks, Rusagro, Dominant,

Razguliay, Sucden, Cargill, and Maine and controlling of at least 70% of the

market for the past few years.



IBS PLEKHANOV 2011

Wholesale prices for sugar in Russia are highly volatile, which is traditional

for commodity markets in the world.


.Dauren Toktamysov “Plan of development for Sugar Company” 135 IBS PLEKHANOV 2011

Trading operation with white sugar

The idea is to buy a large amount of sugar, deliver it to final consumer and

sell it in small amounts. This simple approach can work anytime, but in bear and

bull markets it is useful to have different strategies.

• Procedure

• Signing a contract with supplier

• Organizing sugar storages in different regions

• Transporting white sugar to customers

• Selling white sugar

The cash cycle is 1 month. Finance is available for this business. The

leverage (borrowings) can be up to 50% offull amount.The break-even volume is

1 000 tonnes per month or 30 mln rubles per month.

Strategy for the bear market trend

The idea is to keep stocks at low level and fix price with supplier later or at

the same time as with customer.

Strategy for the bull market trend

The idea is to have high level of stocks, buy sugar in advance and sell it

later.


136 . Dauren Toktamysov “Plan of development for Sugar Company” IBS PLEKHANOV 2011

Arbitrage

Arbitrage is the practice of taking advantage of a price difference between

two or more markets: striking a combination of matching deals that capitalize upon

the imbalance, the profit being the difference between the market prices. When

prices fluctuate we can have arbitrage profit due to different prices in regions.

Importing raw sugar, refining it in sugar plants and selling it

• Procedure

• Signing a contract with supplier and fixing the price on basis of CIF

port in Russia

• Customs and payment of duties

• Transporting raw sugar to sugar plants

• Refining raw sugar



• The cash cycle is 5 months. It is possible to finance this business with

debt. The leverage can be up to 70% offull amount.

• The break-even volume is 3 000 ton per operation or 90 mln rubles

per operation.

• It is also possible to use currency SWAP in order to minimize

currency risks.

• Currency SWAP

A currency swap is a foreign-exchange agreement between two parties to

exchange amounts of currency(namely the principal and/or interest payments) of

a loan in one currency for the equivalent net present value in another currency.

Currency swaps are over-the-counter derivatives, and are closely related

to interest rate swaps. However, unlike interest rate swaps, currency swaps can

involve the exchange of the principal.



There are three different ways in which currency swaps can exchange loans:

The most simple currency swap structure is to exchange the principal only

with the counterparty, at a rate agreed now, at some specified point in the future.

Such an agreement performs a function equivalent to a forward contract or futures.

The cost of finding a counterparty (either directly or through an intermediary), and

drawing up an agreement with them, makes swaps more expensive than alternative

derivatives (and thus rarely used) as a method to fix shorter term forward exchange

rates. However for the longer term future, commonly up to 10 years,

where spreads are wider for alternative derivatives, principal-only currency swaps

are often used as a cost-effective way to fix forward rates. This type of currency

swap is also known as an FX-swap.

Another currency swap structure is to combine the exchange of loan

principal, as above, with an interest rate swap. In such a swap, interest cash

flows are not netted before they are paid to the counterparty (as they would be in

a vanilla interest rate swap) because they are denominated in different currencies.

As each party effectively borrows on the other's behalf, this type of swap is also

known as a back-to-back loan.

Last, but certainly not least important, is to swap only interest payment cash

flows on loans of the same size and term. Again, as this is a currency swap, the

exchanged cash flows are in different denominations and so are not netted. An

example of such a swap is the exchange of fixed-rate US Dollar interest payments

for floating-rate interest payments in Euro. This type of swap is also known as a

cross-currency interest rate swap, or cross-currency swap.Currency swaps have

two main uses:

To secure cheaper debt (by borrowing at the best available rate regardless of

currency and then swapping for debt in desired currency using a back-to-back-

loan).

To hedge against (reduce exposure to) exchange rate fluctuations.



Hedging an agricultural commodity price

As it was mention before, sugar prices are highly volatile. In order to

minimize risks,it is useful to use hedging mechanisms to reduce risks.

A typical hedger might be a commercial trader or farmer. The market values

of sugar and other agricultural products fluctuate constantly as supply and

demand for them varies, with occasional large moves in either direction. Based on

current prices and forecast levels at harvest time, we might decide that buying

sugar is a good idea, but the forecast prices are only that — forecasts. Once we

bought sugar or started to plant, we are committed to it for an entire period of time.

If the actual price of sugar rises greatly between planting and harvest, we stand to

make a lot of unexpected money, but if the actual price drops by harvest time, we

could be ruined.

If a trader or farmer sells a number of sugar futures contracts equivalent to

his capacity to sell or crop size at planting time, he effectively locks in the price

of sugar at that time: the contract is an agreement to deliver a certain number of

tons of sugar to a specified place on a certain date in the future for a certain fixed

price. The trader or farmer has hedged his exposure to sugar prices; he no longer

cares whether the current price rises or falls, because he is guaranteed a price by

the contract. He no longer needs to worry about being ruined by a low sugar price

at harvest time, but he also gives up the chance at making extra money from a high

sugar price at harvest times.

We can use futures and options for this type of hedging.

Futures and options

A futures contract is a standardized contract between two parties to buy or

sell a specified asset (eg.sugar, oranges, oil, gold) of standardized quantity and

quality at a specified future date at a price agreed today. The contracts are traded

on a futures exchange. Futures contracts are not "direct" securities like stocks,

bonds, rights or warrants. They are still securities, however, though they are a type



of derivative contract. The party agreeing to buy the underlying asset in the future

assumes a long position, and the party agreeing to sell the asset in the future

assumes a short position.

The price is determined by the instantaneous equilibrium between the forces

of supply and demand among competing buy and sell orders on the exchange at the

time of the purchase or sale of the contract.

An option is a derivative financial instrument that establishes a contract

between two parties concerning the buying or selling of an asset at a reference

price during a specified time frame. During this time frame, the buyer of the option

gains the right, but not the obligation, to engage in some specific transaction on the

asset, while the seller incurs the obligation to fulfill the transaction if so requested

by the buyer. The price of an option derives from the value of an underlying asset

(commonly a stock, a bond, a currency or a futures contract) plus a premium based

on the time remaining until the expiration of the option. Other types of options

exist, and options can in principle be created for any type of valuable asset.

An option which conveys the right to buy something is called a call; an

option which conveys the right to sell is called a put. The price specified at which

the underlying may be traded is called the strike price or exercise price. The

process of activating an option and thereby trading the underlying at the agreed-

upon price is referred to as exercising it. Most options have an expiration date. If

the option is not exercised by the expiration date, it becomes void and worthless.

In return for granting the option, called writing the option, the originator of

the option collects a payment, the premium, from the buyer. The writer of an

option must make good on delivering (or receiving) the underlying asset or its cash

equivalent, if the option is exercised.



Investing in sugar beet production, refining it in sugar plants and selling it

Procedure

• Signing a contract with farmer about financing and fixing percentage

of future harvest

• Signing a contract with sugar plant and fixing the formula of white

sugar from sugar beet

• Refining sugar beet



The cash cycle is 8-10 months. It is possible to finance this business. The

leverage can be up to 50% of thefull amount.

The break-even volume is 1 000 ton per operation or 30 mln rubles per

operation.

It is also possible to hedge those operations the same way as hedging raw

sugar.

Purchasing a sugar plant

Procedure:

• Research to find suitable sugar plants (possible factors for taking into

account: location, refining raw sugar per day, refining sugar beet per

day, condition of a plant, distance from railways and main roads, etc.)

• Due diligence

• Signing a loan agreement with bank

• Signing a purchase contract with seller of plant

• Making sure that a plant has enough resourses to refine

• Developing a sugar beet zone around a plant

• Further development using mergers and acquisitions deals.



The cash cycle is 10 months for operating activity and 7 years for capital

expenditures. It is possible to finance this business. The leverage can be up to 70%

of thefull amount of capital expenditures and up to 80% of theoperating activity.

Mergers and Acquisitions

The phrase mergers and acquisitions (abbreviated M&A) refers to the

aspect of corporate strategy, corporate finance and management dealing with the

buying, selling and combining of different companies that can aid, finance, or help

a growing company in a given industry grow rapidly without having to create

another business entity.

An acquisition is the purchase of one company by another company.

Consolidation is when two companies combine together to form a new company

altogether. An acquisition may be private or public, depending on whether the

acquiree or merging company is or isnot listed in public markets. An acquisition

may be friendly or hostile.

Whether a purchase is perceived as a friendly or hostile depends on how it is

communicated to and received by the target company's board of directors,

employees and shareholders. It is quite normal for M&A deal communications to

take place in a so called 'confidentiality bubble' whereby information flows are

restricted due to confidentiality agreements (Harwood, 2005). In the case of a

friendly transaction, the companies cooperate in negotiations; in the case of a

hostile deal, the takeover target is unwilling to be bought, or the target's board has

no prior knowledge of the offer. Hostile acquisitions can, and often do, turn

friendly at the end, as the acquiror secures the endorsement of the transaction from

the board of the acquiree company. This usually requires an improvement in the

terms of the offer. Acquisition usually refers to a purchase of a smaller firm by a

larger one. Sometimes, however, a smaller firm will acquire management control

of a larger or longer established company and keep its name for the combined

entity. This is known as a reverse takeover. Another type of acquisition is reverse



merger, a deal that enables a private company to becomepublicly listed in a short

time period. A reverse merger occurs when a private company that has strong

prospects and is eager to raise financing buys a publicly listed shell company,

usually one with no business and limited assets. Achieving acquisition success has

proven to be very difficult, while various studies have shown that 50% of

acquisitions were unsuccessful. The acquisition process is very complex, with

many dimensions influencing its outcome.

Creating an agricultural holding company

Procedure:

• Buying land plots around a plant

• Hiring agronomists

• Starting to produce crop, including sugar beet

• Building beet and grain storages

• Looking for possible acquisition and merges.

The cash cycle is 10 months for operating activity and 7 years for capital

expenditures. It is possible to finance this business. The leverage can be up to 50%

of thefull amount of capital expenditures and up to 80% ofoperating activity.

Conclusion

Food commodities are very attractive place for investment. Our planet faces

a constantly increasing population and demand for products, including sugar,

constantly rises.

In this work the plan of development for Sugar Company is presented. This

plan includes 5 stages:

Trading operation with white sugar

Importing raw sugar, refining it in sugar plants and selling it

Investing in sugar beet production, refining it in sugar plants and selling it

Purchasing a sugar plant

Creating an agricultural holding company.



This plan includes such financial instruments as

• Hedging

• Financial leverage

• Arbitrage

• Currency SWAP’s

• Mergers and acquisitions

The company can follow the plan in order to have differentiated strategy for

development. It means that the company will have maximum capitalization, be

attractive for potential investors and have full cycle production process.

Entering into very competitive market

What factors could lead to success in a very competitive market?

First of all, management team should have clear understanding of the

market, market trends, and have business connection. Secondly, it is essential to

use seasonal fluctuations, in other words, buy more products in low price in time of

harvest in autumnand sell it in spring and summer at high price. Thirdly, a full

cycle process is more profitable, therefore initial strategy should be buying product

from farmers in large volume and selling to direct customers in small quantities.

References

http://en.wikipedia.org/wiki/Main_Page https://www.theice.com/homepage.jhtml http://www.ikar.ru/ http://www.isco-i.ru/ http://sugarinfo.ru/nuke/index.php http://www.sugartech.com/ http://sugarinds.blogspot.com/ http://www.sugaronline.com/ http://www.bartens.com/

http://en.wikipedia.org/wiki/Main_Page�

https://www.theice.com/homepage.jhtml�

http://www.ikar.ru/�

http://www.isco-i.ru/�

http://sugarinfo.ru/nuke/index.php�

http://www.sugartech.com/�

http://sugarinds.blogspot.com/�

http://www.sugaronline.com/�

http://www.bartens.com/�


144 Section 3. International Group. Darima Dordzhieva “CE Bank” IBS PLEKHANOV 2011

SECTION 3. INTERNATIONAL GROUP

DARIMA DORDZHIEVA “CE BANK”

Russian banking sector overview

Generally the Russian banking servicesmarket is

marked by the characteristics that are described below.

Outlook for the development of the Russian economy in

next 5 years is quite positive. The Ministry of Finance of

Russian Federation estimates that the RussianGDP will have

the following dynamics during next several years:3,4% GDP

growth in 2011;4,2% GDP growth in 2012.

It is expected that Russia will also experience steady per

capita income growth in the nextyears. The major objectives of

the Russian monetary policy for a three-yearperiod will be:to minimize a negative

impact of the world financial crisis on the Russian economy;to reduce theinflation

rate to 5-7% in 2012.

These decisive steps will have a positive effect on the development of the

Russian bankingsector. Still, there will be certain examples of economic instability

in Russia due to anumber of factors (an actual occurrence of deferred corporate

defaults, a significant rate ofunemployment, a relatively high volume of problem

loans, etc.).

The next characteristic is a significant growth potential of the Russian

economy. The banking system is the coreof the Russian financial system. The

Russian banking system accumulates a major part ofassets held by the Russian

DARIMA DORDZHIEVA


Section 3. International Group.Darima Dordzhieva “CE Bank” 145 IBS PLEKHANOV 2011

financial community. The total assets of the Russian bankingindustry constitute

about 70 % of the Russian GDP.

The third characteristic is a high concentration level of the Russian banking

services market. The five top banks possessnearly 48% of the total assets of the

Russian banking system, an increase of 5,6% for the lasttwo years. During the next

five years the concentration level will increase due to overalleconomic instability,

bankruptcy of medium-sized and small Russian banks and numerousM&A

transactions in the Russian banking services industry. Furthermore, the Central

Bank ofRussia has a plan to reduce the number of credit institutions doing business

in Russia.

Furthermore, regional banking services markets are marked by an

intensifiedcompetition due tofurther expansion of foreign banks and Russian

government-managed and private bankinginstitutions. Banking institutions

enhance quality of service and introduce new bankingproducts and services.

The alternative investment instruments will become more attractive among

the falling rates onbank deposits in a medium-range perspective. Investments in

securities and real estate willseriously compete with bank deposits.

Since the above-mentioned trends seem to have a long-term nature, the

Russian banking marketwill remain attractive in a long-range perspective. At the

same time, a more intensecompetition is expected from alternative credit

institutions and investment instruments.

Company background

Credit Europe Bank Ltd. (former Finansbank Russia Ltd.) was established in

the Russian Federation as a closed joint stock company and was granted its general

banking license in 1997. The principal activities of the Bank are deposit taking and

customer accounts maintenance, lending and issuing guarantees, cash and

settlement operations and operations with securities and foreign exchange. The

activities of the Bank are regulated by the Central Bank of the Russian Federation



(the “CBR”). The Bank has 106 locations (including 73 branches, 15 in-store

branches, 4 regional sales offices and 14 representative offices) (2008 – 112

locations (including 85 branches, 19 in-store branches, 5 regional sales offices and

3 representative offices)), from which it conducts business throughout the Russian

Federation. The average number of persons employed by the Bank was 2,869

(2008 – 4,359).

Credit Europe Bank (Russia) is included into top-50 of the biggest Russian

banks in terms of assets size and in top-25 for the volume of issued loans (as of

January, 2010).

The Bank’s ultimate parent company is FIBA Holding A.S., a Turkish joint

stock company, which is ultimately controlled by a single individual, Mr. Husnu

Ozyegin.

The Bank has three segments, as described below, which are the Group’s strategic

business units. The strategic business units offer different products and services,

and are separated because they require different technology and marketing

strategies. The following summary describes the operations in each of the

segments:

• Commercial banking – includes corporate and SME banking operations which

include deposit taking and commercial lending, settlements and cash operations.

Commercial banking services also include trade finance.

• Retail banking – includes retail banking operations which include deposit taking

and commercial lending, settlements and cash operations.

• Treasury (investment banking and financial markets) – includes corporate

finance, operations in foreign exchange, debt and equity capital markets,

brokerage, securities trading.

Strategy

Macroeconomic situation caused by the global economic and financial crisis,

increases therisks associated with overcoming unfavorable trends in the domestic



economy. The poor financial condition of enterprises and actual occurrence of

deferred corporate defaults will increase bad debts on business and consumer

loans. In this connection, it is critical to improve some functional areas, such as

risk management, borrower selection techniques and debt collection procedures.

There exists intensified competition for personal deposits from other

banking institutions.The banks also struggle for attraction of first-class borrowers

to safeguard their loan transactions.To win new clients, Bank should expand the

size and scope of their banking business through:

- a further expansion of their customer base;

- an active acquisition of banks which have a well-diversified branch

network.

It is of great importance to increase a technological and innovative potential

of the Bank in order:

- to enhance an overall quality of banking products and services;

- to meet every financial want and need of customers in the best possible

way.

Although big banks possess a number of competitive advantages as they

have relatively cheap resources and can use so-called economies of scale,

competition among them is very high. In thissituation, Bank must seek:

- to launch unique banking products and services;

- to develop its non-price competitive advantages;

- to improve its product pricing policy;

On the other hand, Bank can improve management process in order to

optimize expenses and to ensure a reasonable application of resources from an

economic point of view.

Bank can strengthen its position and efficiently struggle with various

challenges set by the market by means of:



- developing new technological solutions;

- launching unique products;

- upgrading service level;

- enhancing management system.

All these developments will enable Bank:

- to achieve a greater mobility;

- to be more flexible in adjusting to the wants and needs of customers;

- to reinforce its leadership in the marketplace;

Strategic management system

Bank needs to enhance strategic management system in order to increase the

efficiency of overall management process. The efficient strategic management

system will help the Bank reach its strategic development targets and ensure a

systematic approach to the development of its business and organizational

processes based on the following parameters:

-business environmental conditions;

-market requirements;

-a business potential of the Bank;

-a level of acceptable risks.

The process of strategic management of the Bank will be coordinated by

thenewly-created Board of the Bank. The process of implementation of the

strategic developmentprogram and realization of major development aims by

business area and development stage will be regularly monitored. The

responsibilities for the implementation of strategic development program will be

distributed amongst different structural units of the Bank, based on their business

profile.

The strategic development program of the Bank will be realized through

efficient usage andcoordination of various management practices (a financial



planning system, a staff motivationsystem, a project priority system, a regional

development system, etc.).

Risk management system

The development of an organizational and informational-methodological

system for implementation of risk reduction and neutralization procedures will

enable the Bank to achieve its strategic goals and to improve its corporate culture

in the area of risk management.Credit risk management system will be updated and

enhanced in many respects. A uniformmethodological base will be created to link

credit risk management tasks with financial management tasks and business

development tasks. The credit risk management process willbe improved within a

general framework of the Bank’s business development strategy.

The Bank will enhance our credit risk management system in the following

way:

- to improve a procedure of assigning internal credit ratings to borrowers by

branch andbusiness segments;

- to optimize lending process by creating new credit scoring software

products and creditscore products for small business (microcredits);

- to improve the existing system of resolving problem loans based on

economic efficiency andexperience in dealing with problem loan situations;

- to improve a day-to-day credit risk management by optimizing some

specific businessprocesses technically known as a primary underwriting, loan

extension and loan monitoring;to create a specialized debt collection service;

- to improve risk minimization system by optimizing credit limits by each

lending segmentand other key parameters.

The development of an automated credit risk management system is an

important integral part ofstrategic risk management program. It will enable the

Bank:



- to ensure an efficient day-to-day monitoring of credit risks through a

standardized analysisof borrowers by market segment, capacity and collateral;

- to increase the efficiency of lending process by optimizing workout costs

when dealing with problem loans;

- to develop stress testing techniques in order to optimize the Bank’s

lending process.

Expansion through M&A and Regional development

The Bank already has tangible presence in many big cities and regions.

However, those branches are not developed enough. They provide few services to

customers, usually only one strategic business unit (segment). So, the Bank should

widen its range of services for regional sales (beforehand, analysis should be made

whether any particular business unit would bring gain for the Bank). In existing

offices the absence of ATMs and cashiers is also a vital problem. Within the next 2

years all branches should be equipped either with ATMs or Cashiers.

Besides, the Bank can focus and ensure its strong presence:

1) in already presented cities: 1 office for 50 thousand inhabitants.

2) in the cities with the population exceeding 500 thousand inhabitants and

with high level of socio-economic development:

- capital of republic, oblast or region: 1 office for 50 thousand inhabitants

- Othercitieswith highlevels ofindustrialandsocio-economic development -

1officefor100 thousandinhabitants.

The priority in opening new branches is given to the cities where bank has

already “anchor” clients (e.g. clients with head office in Moscow and branches in

regions) and or in a case of investment projects which are financed by the Bank in

that particular region.

The aim of opening our own branches is to attract more clients. The setup

and opening of a branch should be realized by certain common standards.

IT strategy



The main aim of the IT strategy is to provide complete information when it

is necessary in order to support current or new business processes and operations,

to maintain existing and new competitive advantages of the bank, to be in

compliance with global banking automation standards, providing high reliability

and security of business.

As an example, the Bank can start an initiative to replace individual

software solutions by a new core banking system based on SAP for Banking

solutions. The SAP implementation will be able to underpin the bank’s strategy to

push for a high degree of industrialization and standardization of processes. The

bank can also achieve greater flexibility in its IT infrastructure, building on

standardized, modular SAP software functions within a service-oriented

architecture (SOA). Using SAP software, Bank will aim to boost efficiency and

profitability as well as to accelerate time to market in rolling out new products and

services to even better serve the bank’s clients. This new core banking system

could comprise of partner data, payments, account management and savings

applications.

The SAP for Banking solution portfolio provides banking-specific

(transactional banking, CRM, finance and risk management) and banking-relevant

(human resources management, procurement) services and solutions created on a

single SOA-enabled business process platform with integrated business insight.

Solutions are delivered in areas such as Analytical Banking (Integrated Finance &

Risk, Compliance), Transactional Banking for retail and wholesale banks (Loans,

Deposits, Payments, Collaterals, Leasing, and Covered Bonds), Business Support

(Procurement, Human Capital Management), Customer Relationship Management

and Business Intelligence. SAP for Banking provides an integrated set of tools and

automated processes to manage every aspect of the front- and back-office banking

environment – from high-volume transactional banking processes and customer



relationship management to financial accounting, cost controlling and profitability

and risk analysis. SAP for Banking helps companies expertly manage transactions

and relationships across the entire enterprise to quickly identify and exploit market

opportunities and easily tailor new products to the specific needs of individual

customers.

Outsourcing

Business Process Outsourcinginvolves the transmission to a third party

ofindividualbusinessprocessesthat are notcoretothe company. Amongst them are

human resource management,accounting,marketing, advertisingand logistics.

BPO is an extremely dynamic developing process with the greatest growth

in finance and accounting. Study of six hundred firms in 1997 by the American

Management Association showed that every fifth of the surveyed companies

outsources at least part of the financial and accounting operations, and the rest

four-fifths of firms - some administrative functions.

In our case, the Bank can partly outsource HR management. Although it has

its own well-organized department, for a future rapid growth the Bank needs more

resource powers to employ new staff. As a financial institution, the Bank can deal

with the financial and accounting operations itself.

As we plan to start implementing SAP Banking, it would be useful to

outsource IT services. There is a range of companies on the Russian market that

specialize on this kind of software.

Marketing

The Bank needs to create an efficient marketing system in order to

strengthen its existing competitive advantages and to create new competitive

advantages. We want to address a widespectrum of marketing matters. In

particular, we will take steps:

- to develop market positioning strategy;



- to undertakemarketing studies in order to become aware of consumer

preferences;

- to fix a price policy and a product policy of Bank.

The implementation of the Bank’s marketing strategy will be coordinated by

the MarketingCommittee. The main duties of the Committee in question will

include:

- an introduction of a strategic marketing function and an operational

marketing function atall organizational levels of the Bank;

- an implementation of a client-centric approach at all organizational levels

of the Bank.

The foundations of marketing system will include:

- a uniform methodology for creation of new products/services;

- a marketing expertise of the existing and new products/services;

- a comprehensive analysis of the competitive environment;

- an introduction of uniform specifications of quality for various customer

segments.

Product lines will be based on the following criteria:

- product profitability;

- product sophistication (e.g. the use of modern banking technologies such

as remote bankingtechnologies and Internet banking technologies);

- demand availability for a particular banking product from key customer

groups. We will workhard both to develop unique service packages for each

customer segment and to launchcross-selling technologies. We want to speed up

the introduction of new banking productsfor our customers.

The Bank will launch a customer satisfaction system. Additionally:

- to launch a special client loyalty program in order to build up long-term

relationship with customers;



- to improve direct sale, advertising, marketing and PR functions in order to

ensure efficientadvancement of products and services in the marketplace.

Staff

The Bank will continue to build up its relationships with staff members

based on trust and mutualrespect. To attain strategic goals, it is needed:

- to motivate all staff members to actively participate in the implementation

of the Bank’sdevelopment strategy;

- to motivate all staff members to enhance their educational background and

professionalproficiency for the new tasks required;

- to improve the overall staff management system.

The professional development of staff members is effected in line with the

staff managementstrategy employed by the Bank. The integral components of the

strategy in question include:

- a skills enhancement and corporate training system;

- a career progression system;

- a human resources management system.

The Bank can implement a new salary system providing new principles for

establishing the salary of the employee and the calculation of the bonus fund:

- to motivate all staff members to become part of the Bank’s overall team;

- to assess performance of each individual staff member and to properly

reward each staffmember based on his/her contribution to the growth of our Bank.

Introduction of a grade system and the establishment of salaries, taking into

account the value ofeach position for the Bank and the required qualification level

will ensure alignment of employees'salaries to the functional. The application of a

bonus system based on key performance indicators (KPI) and management by

objectives will enable the Bank:



- to increase overall labor productivity of each individual member of staff

and each structuralunit of the Bank;

- to establish a direct correspondence between the amount of a bonus

remuneration andperformance of each staff member.

The introduction of a staff motivation system will allow to identify the

expertise, skills andpersonal talents of each staff member and to unite the synergies

of individual members of staffwithin a framework of the Bank’s strategic

development program.

Conclusion

In an environment characterized by an intense competition and increasing

market uncertaintythe Bank needs to adapt its business strategy to the changing

market conditions in a swift andefficient way. The Bank’s strategic development

program can be realized through:

- an introduction of a client-centric business model;

- a development of new technologies;

- expansion.

References

1. http://www.crediteurope.ru/ru/bank/ 2. http://www.sap.com/industries/banking/index.epx 3. http://www.minfin.ru/ru/ 4. http://www.pwc.com/en_GX/gx/operations-consulting-

services/pdf/outsourcingcomesofage.pdf

http://www.crediteurope.ru/ru/bank/�

http://www.sap.com/industries/banking/index.epx�

http://www.minfin.ru/ru/�

http://www.pwc.com/en_GX/gx/operations-consulting-services/pdf/outsourcingcomesofage.pdf�

http://www.pwc.com/en_GX/gx/operations-consulting-services/pdf/outsourcingcomesofage.pdf�


156 Section 3. International Group. Denis Gaitanov “Girsberger GmbH” IBS PLEKHANOV 2011

DENIS GAITANOV “GIRSBERGER GMBH”

Introduction

Financial planning is a crucial aspect of any

for-profit organization wherever it operates or

willing to start operating. In line with marketing or

new product launch for instance, financial strategy

plays a big role in future company development.

Poor management of which can lead a company to

bankruptcy, while well managed, it can give some

key competitive advantages in market place and

increase profits.

The importance of financial planning is a relatively young concept; the

necessity in financial planning has been realized for the past 15 years by the

majority of companies’ managers and directors; however the introduction of short-

term financial plans does not lead to desired goals. Despite the efforts while

making plans on financial cash flows and budgets, it is still a problem to solve the

maximization of company’s value.

For this particular paper, a company Girsberger GmbH was chosen.

Girsberger GmbH is well known in Europe office furniture manufacturer and seller

(for full company description see Chapter 2). One of the reasons for such company

choice and industry choice was that I (the author) enjoyed a placement in this

particular company during my university education. Therefore, while developing a

financial plan, I am able in fact to invent something that can be actually

implemented in real business environment, due to the fact that I am familiar with

company organizational structure, internal business processes and have some

knowledge about company present situation and history.

DENIS GAITANOV


Section 3. International Group.Denis Gaitanov “Girsberger GmbH” 157 IBS PLEKHANOV 2011

The aim of this work is to make an approximately five year financial plan

and describe in details its key aspects. The subject of the work is the international

company Girsberger GmbH.

Company profile

Girsberger GmbH is a company with long history and strong values,

createdabout 120 years ago. Originally from Switzerland, Girsberger GmbH

operates now almost all over the Europe and supplies its production to other

continents. The core products of the company are chairs. However nowadays, due

to business diversification, it has 2 distinct product portfolios. One is office

seating, which ismainly produced in German branch. The second one is the so-

called “Home Collection”, which includes various design solutions and furniture

for households. And of course it has a great number of chairs for home usage.

“Home Collection” is produced mainly in the Swiss branch.

After being on the market for 120 years, nowadays Girsberger GmbH has

about 400 employees worldwide and a turnover of 100 million euro in year 2008,

which makes it one of biggest employers in Endingen, Germany. Having

production sites in such countries as Germany, Switzerland, Turkey and USA,

Girsberger produces very high quality products which are able to compete with

much bigger international competitors.

“Girsberger’s creative and technical mastery goes hand in hand with the latest

production methods. We work with creativity, passion, and diligence — from the

original design to the development of high-quality materials, to installation. Our

careful attention to minute detail and an overarching quest for the highest quality

delivers an uncommon excellence. Take a close look.”1

1 http://www.girsberger.com/en/company/



This says better than everything, that company dedication to, first of all,

quality, design and innovative technology, is what makes it strong competitor, and

allows competing on international basis.

Girsberger GmbH nowadays has branches and showrooms in such countries

as: Switzerland, Germany, Austria, France, Spain, Holland, Great Britain, Turkey

and USA.

Five year financial planning – main points.

The current situation of Girsberger GmbH is that it is very well known and

highly respected for its quality and service office furniture manufacturer. It

supplies its products all over the European Union and some selected countries all

over the world. It has a well managed manufacturing process with excellent,

proven by time, quality control and service.

I believe that its expansion into Russian market can be very successful in a

long-term perspective. Russian office furniture market is very big, with high

potential, however, has its peculiarities, which are not present in other European

countries. Another argument for this is that the price of an office chair in Russia is

about 150 us dollars, and office chairs and furniture of higher price levelsare

presented very poorly. As the result market segment for highly-priced office

furniture suffers a lack of healthy competition.

Besides, while expanding to Russian market, manufacturing expansion also

would be very beneficial in this case. If we compare salaries in Germany and

Russian Federation, it is clearly seen that in Russia workers get much less. For

instance, the average salary in year 2010 was around 20 000 rubbles1. That is

approximately 500 euro. Where in Germany average salary varies form 2 000 to 3

000 euro (for instance, a sales person gets around 2 700 euro per month2

1 http://ssp.karelia.ru/content/srednyaya-zarabotnaya-plata-po-rossii

).

2 http://www.jobs.westeastcafe.eu/average-monthly-net-salary-Germany.html



The difference is noticeable. It is generally known that German quality is

higher than quality of Russian goods, however well introduced quality control

would allow to manufacture goods of the same quality, but with much lower

manufacturing costs (mainly due to the wage difference).

Why expand into the Russian market?

First of all it is important to know that the Furniture market in Russian

Federation, as well as the notion “Office” itself, is relatively young. As the result

almost all of the Russian manufacturers of office furniture are relatively young

companies, especially if compared to their German, Italian or other European

competitors.

The beginning of this market segment could be dated the beginning of 90’s.

That is the point in time when manufacturers from such countries as Germany,

Italy, Scandinavian countries etc entered the market and trends shifted from gray

and brown office colors to more modern and up-to-date. It is important to say that

before the beginning of 90’sall office furniture was of a brown color and did not

have any outstanding features.

Nowadays, of course, the situation is completely different from what it was

and the office spaces are furnished pretty much like European for instance, due to

the fact that all the technology and trends came from there.

This report is aimed to explain the currents situation of the market and give

an idea what happened and what most likely will occur in office furniture segment.

Plus, it gives information about biggest Russian market players and some foreign

manufacturers, mostly from Germany.



Market analysis

As already mentioned before, Russian office furniture market is young and

the major players have been in the market for about 15-20 years. The visible

tendencies in the office furniture have appeared only recently and experts do say

that they copy the western market, from which technology and design came.

The Russian manufacturers occupy the lower segment of the market. They

produce cheap furniture, which is not good in a long-term perspective, because it

often breaks and needs to be replaced. Despite the fact that their quality is getting

better, they are still not able to compete with foreign manufacturers in the business

and executive sectors, which have more experience there.

It is believed that the office furniture market in Russia has different

segments.However there is no common classification accepted:different experts

suggest different ones. Some think that the market is divided in 3 basic parts:

economy, business and first class. Speaking about furniture for employees, here the

price goes up to 300$, the second costs not more than 700$ and the third one 700$

or higher. Another suggests that the market is divided into operational furniture1

The Russian office furniture market can be divided in three major segments,

according to pricing. The first and the biggest one is so called “cheap” furniture. It

accounts about 75% of the whole market share, and filled primarily by Russian,

Turkish and Polish manufacturers.

300-700 EUR, which is commonly aimed for the regular employees and

manufactured by Russian companies. Secondly it is operational furniture for higher

ranked employees 700-2000 EUR, usually supplied by Italy. And finally, elite

furniture (2000 – 6000 EUR) supplied by USA, Italy, England and Germany.

The second is the medium segment. It is filled mostlyby Russian and

European manufacturers and accounts from 10 to 15% of the market. According to

1 Operational furniture – office furniture for ordinary employees



experts, the number of companies operating in this segment is small and is about

20. The main suppliers for this segment are from Russia, Italy, Germany and

Scandinavian countries.

Finally, the third segment consists of company who offer only expensive

office space solutions. It is relatively very small and accounts not more than 10

companies and is especially concentrated in Moscow and St. Petersburg.

Market in numbers

The Russian furniture market is believed to be one of the most non

transparent markets in the economy. Approximately 5 years ago, there was

absolutely no exact information about the market, no research nor statistical

data.Even these days, there are some gray areas experts cannot agree on.

The share of office furniture in the furniture market is about 20%. The

volume of the office furniture market in 2006 was about 1 – 1.1 bln $. However

not all experts agree on that and claim that already in year 2004 it was about 1 bln

$, and therefore in 2006 it was about 1.2 – 1.3 bln $. Some even say that in 2006

this number was around 1.5 bln $ comprising 25% of the total furniture market.

The fact that the numbers are inexact and there are a lot of opinions is due to non

transparency of the market.

In 2005 office furniture market grew for about 13%,

In the following graph the growth between years 2003 and 2007 can be seen:

Graph 1:



According to the assessment of “Express-review” the growth of office

furniture production in Russia has a tendency to decrease. For instance in 2004 the

production increased almost by 24% in actual prices, by the end of the 2007 the

increase was only 16%.

Graph 2: depicts the growth of Russian overall furniture market between

2001 and 2007

A steady growth of Russian furniture market can be clearly observed on this

graph.

Graph 3: depicts the % of office furniture market in the overall Russian

furniture market



Almost all domestic office furniture does not leave the country, only 3-4%

goes for export; however this number has a tendency for a relatively slow growth.

On the other side, it has to be mentioned that the import share of office furniture

has been decreasing recently. Fromabout 60%, it has decreased and by the end of

2009 totalled just40%.

The major segment in office furniture market is so called “operational

furniture”, which is used by ordinary employees; by the end of 2007 its share

compiled 32%. An interesting fact is observed, that operative furniture is being

forced out by furniture for executives and senior managers, which market share by

the end of 2009 has already totalled in 28%.

The biggest consumers of office furniture in Russia are private companies

and government organizations.

Target market

Speaking about the target market, the big centralization of office furniture

exists:half of the whole office furniture consumed in country is sold in Central

Federal District, where around 42% is consumed by Moscow. It is explained by the

simple fact that Moscow is the capital, one of the biggest cities in Russia and its

financial capital, which means huge concentration of domestic and foreign offices

and headquarters of various companies and financial institutions. Of course it

makes it a perfect entry point into Russian market with further possibilities of

expansion. The cities following Moscow in this aspect are St. Petersburg and other

which have 1 mln or more inhabitants.



Graph 4: depicts the share of different Federal regions in consumption of office

furniture

Competition

There is no clear opinion whetherit is more beneficial to sell your goods

through authorized dealers or directly. There area number of firms with successful

b2b approach, however the biggest manufacturers prefer to invest and develop

their own network. The development of selling networks and building offices, both

in Moscow and regions, requires huge investments, which is why a lot of

manufacturers, especially the smaller ones, prefer direct sales. The Russian office

furniture market could be divided into 2 parts, one is Moscow and Moscow region

and the second is the rest of the country. Where both parts account for

approximately 50% of the whole office furniture market. The Moscow market is

dominated by the big players, where other regions of Russian federation are

usually dominated by the local manufacturers.

There a number of main players, however I would like to mention some of

them:

1) “Felix”

Let us start with probably the biggest player in this market – “Felix”

(“Феликс”).



“Felix” was founded in 1991; it specializes not only in office furniture, but

home and hotel furnishing. It is the biggest manufacturer and supplier of office

furniture and has the biggest selling network in Russia and in CIS1

2) “Unitex”

– around 65

selling offices in all over the Russia. According to researches it has around 50% of

Moscow market.

Company “Unitex” (“Юнитекс”) has a market share of 12%. Unitex has

been on the Russian market for more than 17 years, producing all kind of furniture

for offices and selling not only their own production but also reselling goods of

foreign colleagues.

For the moment, Unitex owns11 sales offices, however it also has a huge

number of authorized resellers.

3) “KRAFT”

Another big player on the Russian furniture market, worth mentioning, is

KRAFT. Having its own production plant, it is also a reseller of products of

companies from Italy, Germany and Spain. It also should be said that KRAFT is an

authorized representative of König + Neurath, and it has the only 1 showroom of

K+N, situated in Moscow. Together with K+N, Kraft offers also complex office

solutions.

Strategic advantages and disadvantages

The main points that prove Russian market as very perspective for

expansion are:

1) It is very young. The market is full of domestic competitors, however

they are maximum 15 to 20 years old, and therefore they lack experience and

technology, which its western competitors do possess. Girsberger GmbH, with its

more than 100 years history, obviously has competitive advantage over domestic

1 CIS - the Commonwealth of Independent States



competition in experience, manufacturing technology, quality control and other

important aspects related to office furniture industry.

2) The sector of elite office furniture is poorly presented in target market,

and competition is presented only by few players, the majority of which are not

domestic manufacturers. Therefore, unlike in highly competitive European Union,

this segment of Russian market offers relatively easy entrance and lack of

competition.

3) Russian federation is the biggest country in the world, but Moscow itself

accounts for almost half the consumption of office furniture of the whole country.

Such consumption centralization makes logistics easier and it is easier for the

company to focus on particular city rather than on the whole country.

4) Big market potential. Office furniture market is constantly growing, the

number of offices, particularly in Moscow, continues to grow and is expected to

grow in the foreseeable future.

With all these great advantages, some specific disadvantages come along:

High risks. Investing in Russia is still associated with risk. While the

political situation is stable, there are still a lot of issues concerned with opening a

new business and running a business. Utility costs are high. To start a new business

or a subsidiary may cost a lot of money, and one of the aspects that is not presented

in Europe are so called “extra” expenses.

Registration and preparing all the necessary documents sometimes can take

too long.

Penetration strategy, 1-3 years

This expansion strategy is planned for the first three years of five year

corporate strategy

I. Coming to Russian market for the first time, even with a great business

plan, is always a risk. Therefore my suggestion is to use a joint venture.



A joint venture should be created with a domestic manufacturer who

specializes in low or medium quality office furniture, which is not a direct

competitor.

By doing so, the company minimizes risks, and has such advantages as:

1) Access to new market and distribution networks. It has a ready full access

to new market and to distribution network. This cuts a lot of costs, such as logistics

and research and development.

2) Increased capacity. Possibly Girsberger can use its Russian partner’s

capacity. This aspect is more a long-term advantage. Since the quality of goods is

expected to be different from that of the Russian partner, new equipment is

expected to be installed.

3) Sharing of risks and costs with a partner. Generally, according to joint

venture agreements, partners share all risks and losses. As the result, in case of

failure, it minimizes losses at least by half, which is very beneficial for foreign

investor when investing in country with a relatively risky business environment.

4) Access to greater resources, including specialized staff, technology and

finance. Faster and greater access to resources, especially human resources. This

aspect deals cultural differences. For example, language can be a great obstacle

when a foreign company comes to new market (for instance, the Russian language

is difficult). Domestic partners help to deal with such obstacles as language, the

Russian business environment, bureaucracy, organizational issues etc.

5) Low costs. Investors, in case of joint venture, invest much less than if

they went alone to a new market. This is due to low costs in developing network,

sales system, advertising etc

II. Secondly, after finding the appropriate partner, it is necessary to open a

showroom. Preferably in Moscow city, to not only use partner’s network but also

start its own marketing campaign. Plus, it can start participating in various Russian

fairs and exhibitions.



3-5 year strategy.

In case of successful fulfillment of first free year penetration strategy, a

second phase of the plan is advised.

The main idea of second part of the plan is to start building its own

manufacturing plant.

As already mentioned above, if the first part of the plan succeeds, Girsberger

will have experience in Russian market and resources for expansion. Building a

plant in central part of Russian federation cuts logistics costs for delivering to

Russia and allows for delivering goods in surrounding countries, such as Ukraine,

Belorussia, Latvia, Finland, Kazakhstan etc.

The second factor favouring manufacturing in Russia is wages. Average

wages in Russia are much lower than in Germany or any other country where

Girsberger operates.

Graph 5: depicts the difference in wages between German and Russian

workers

It has to be mentioned that while domestic workers are hired for

manufacturing, several German experts are needed for quality control inspection.

This way manufacturing costs can be decreased significantly and quality

maintained at high level.

Germany

Russia

Основной

Основной

Основной

Основной

Основной

Основной

Основной

1 2

Comparison of average wages (euros)



Location of the plant is determined by the major target region. Since the

target Russian region is the city of Moscow, the plant is supposed to be built

somewhere in the Moscow region or in a region that is close to Moscow.

Finance wise, unfortunately there is no exact numbers on how much would

it cost to built up a plant. Its price depends on many factors such

Location. The closer to Moscow city, the higher the price is.

Plant power. This is one of the most important aspects in price, because

utilities are very expensive not only to use but also to buildup the

infrastructure for them.

Based on average figures, building a plant near Moscow can cost about 90

mln dollars. Since it is a big sum of money, I advise to use gearing. That is to

finance part of the construction by taking bank loan. The amount of loan is

recommended to be about 40%-50% of the whole sum. This will allow using tax

shield, therefore lowering tax base of the company.

Payback of the project’s second part is expected to be around 10 years after

finishing construction.

To sum up construction of plant gives:

1) Low logistic costs

2) Possibility for new markets access

3) Lower manufacturing costs

Last, but not the least, is the exchange rate of Euro to Rouble. If we look at

historic exchange rates, the Rouble has been constantly weakening against Euro,

which is obviously beneficial for a German investor.



Graph 6: depicts historic exchange rates euro to rubble for the last 6

months.

Conclusion

Girsberger GmbH is a German company with an excellent history,

experience and reputation. It has very good position in Europe. It is time for further

expansion. The Russian office furniture market is a very good choice for that.

The first part of plan consists of creating joint venture with domestic partner

and winning market share in the first three years. After successful completion of

first part, the second part suggests starting building its own manufacturing plant in

Moscow region.

There are a number of reasons for going to Russia:

1) Young, inexperienced market. Western companies with long histories

have advantage over domestic producers, who are not older than 20 years.

2) Poor competition in elite office furniture segment, presented by few

companies. Take the lead and gain bigger market share before its western

competitors arrive.

3) Big market potential and high centralization of consumption. Therefore,

no high logistic costs.

4) Low manufacturing wages, compared to European.

This corporate plan describes strategy, which in the long-term perspective

(more than 5 year period) would allow expanding further in Russia or going to

surrounding countries’ markets.



I believe this paper gives a clear view on how the company should develop

in the following five years and enter a risky, but potentially highly- profitable,

market.

References

1. www.girsberger.com 2. www.gks.ru 3. www.jobs.westeastcafe.eu 4. www.ssp.karelia.ru 5. www.yandex.ru


172 Section 3. International Group. Ekaterina Gonastareva “Onegin Luxury Store”

IBS PLEKHANOV 2011

EKATERINA GONASTAREVA “ONEGIN LUXURY STORE”

Company Description

The Kido Company was established in Moscow

1995 by Natalia Ciplenko, and in this company there

are investors which only take part in investing money

rather than having management roles. Other investors

participate in managing the company, in order to take

the main decision over the menu.

This company is mainly a restaurant which sells the

good and products goods all over Saint-Petersburg.

After fifteen years of constant growth and commercial success, the goals and

overall strategy of the company was totally revised at the 12th shareholders’

meeting.

The major decision, adopted on the 12th meeting, is to explore totally a new market

- in July 2011 we are planning to open “Onegin Luxury Store”, which we expect

will possess the biggest market share among the up-market product stores.

Thanks to our past, now we have firm trade contacts with many product suppliers.

Accordingly, “O.L.S.” will always have an advantage in terms of supplying

products, products’ prices and guarantee of high quality.

Also, the management of the company consists only of professionals in each field.

Please see more details in chapter “Organization”.

Strategic Focus and Plan

Mission/Vision

The mission of “Onegin Luxury Store” is to provide prospective and current

Saint-Petersburg consumers with an upscale variety store, gift shop, and

EKATERINA GONASTAREVA


Section 3. International Group.Ekaterina Gonastareva “Onegin Luxury Store” 173

IBS PLEKHANOV 2011

delicatessen specializing in a combination of quality, authentic, hard-to-find

grocery items from around the world.

Goals

Create a company that exceeds customers' expectations, and increases the

number of repeat clients serviced by at least 20% per year, through superior

performance and promotion/word-of-mouth referrals.

Achieve substantial brand image and high level of brand loyalty for “Onegin

Luxury Store” – because these factors constitute the “key to success” for any

upmarket sector consumer oriented companies

Become an established community destination with a customer satisfaction

rate of 90% by the end of the first year.

Achieve cash flow self-sufficiency by the end of the first year.

Sales of $461,900 in the first year, with sales increasing to $484,735 in the

second year and $508,000in the third year.

Provide an income for the founders by the end of the second year, with

income growth possibilities.

Core Competency and Sustainable Competitive Advantage

Reputation: Every customer visiting our store will want to return and will

recommend us to their friends and family. Word of mouth marketing will be

a powerful ally for our business.

Superior Customer Service: Knowledgeable, friendly service will be of the

utmost importance.

Location: Provide an easily accessible location for customer convenience,

including walk-by and drive-by traffic.

Product/Environment: Offer a variety of high quality foods with domestic



IBS PLEKHANOV 2011

and international themes, sold at a fair price in a clean, authentic,

comfortable environment.

Convenience: Our customers will know that they can get what they need at

our market for a fair price. This will reduce their need to travel to get desired

items or order them online.

Situational Analysis

This situation analysis starts with a snapshot of current environment in which “Onegin Luxury Store” will have to perform. After this overview, the more detailed analyses are provided: industry analysis, competitors’ analysis, company and consumers’ analysis. Internal Factors

Strength Weakness Management Experienced managers’ team

due to 10-year past work background

Costs on re-orienting and re-arranging goals, because of transforming the company into consumer-oriented one

Offerings Unique high-quality service Upmarket orientation involves relatively high importance (therefore costs) on achieving consumer loyalty and brand awareness

Finance Stable and high growth of revenues on condition of achieving consumer awareness

Long pay-back period (3 years)

Marketing Distribution through stable and growing market of Moscow

Limited number of markets due to target customers concentrated in major cities (Moscow, Saint-Petersburg)

Manufacturing Vast number of stable time-proved relations with suppliers due to company’s retailing background



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Personnel High qualified personnel

trained on special two-week courses provided by Fortnum&Mason specialists

Extra costs on personnel training

External Factors Opportunities Threats Consumer/Social Upscale market; growing

because overall growth of households with slightly larger incomes

Premium price narrows down the market size

Competitive No substantial market-leading competitors;High costs prevent new rivals from entering the market

Two major competitors having their loyal customers (“Globus Gourmet” “Super Siva”)

Technological Technological breakthroughs allow to increase quality of service facilities – automatic parking devices, comfortable-to-use food carts, etc.

Economic Constant growth of the market because of an overall tendency of incomes growth in Russia

Unstable Russian economy – risk of economic crisis

Regulatory Possible problems with corrupt state organizations

Amongst the internal factors, the most favourable are:

-experienced management team which have worked in the “Kido” for fifteen

years, knowing all the peculiarities of business in Russia;

-vast number of firm trade relations with national and (mostly) foreign food

suppliers – it allows to use old time-proved contacts in order to organize

stable and quality goods supply for “Onegin Luxury Store”

Externally, favourable factors (opportunities) for “Onegin Luxury Store” are growth of people’s incomes (particularly, the increase of households with an income of more than 2000$ per one family member) and the unsatisfied market



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outlet of premium-class variety stores. Amongst the unfavourable factors – are:

(external) Instability of Russian economy (For example, any substantial

economic crisis involves the sharp reduction of our customers)

Costs on achieving consumer awareness, brand loyalty

Industry Analysis

Recently the new trend appeared in Russian market – the segment of premium-

class variety stores and gourmet boutiques.

The main reasons for this tendency are:

Overall trend of growing incomes of customers and the increase of number of

households with higher incomes (more than $3000 per one family member)

Increase of the level of consumers’ culture – more and more customers are

willing to pay more for higher-quality service

Popularization of healthy lifestyle in Russian society – a growing amount of

health-aware people

Generally, the niche of premium-class variety stores in Russia (Particularly,

Saint-Petersburg) could be characterized as few.

The industry is at the developing stage, showing neither market-leaders nor unique

industry standards – each significant competitor introduces its own standards, none

of them has achieved substantial level of consumer awareness and brand-loyalty.

Competitor Analysis

History of upmarket variety stores in Russia: The first upmarket store appeared in

Russia is “Kalinka Stokmann” as a Soviet-Finnish project in 1989 at Moscow State

General Store (ГУМ, Государственный Универсальный Магазин).

Until the year 1997, it was the only major store of premium-class. In 1997,

“Kalinka Stokmann” scaled down its orientation to the “quality, but not upmarket”



IBS PLEKHANOV 2011

and today it cannot be a direct rival to “Onegin Luxury Store”.

After the end of the year 1997, the market of premium-class stores in Russia

started to develop – the major competitive companies opened from 1997 to 2005

(Azbuka Vkusa, Sed’moy Continent – Five Stars, Globus Gourmet and others)

Classification and the most competitive firms at the market

Currently at Moscow market operate a number of upmarket food stores that

could be classified as:

Gourmet Boutiques (Hediard, Fauchon, Globus Gourmet)

Premium-class variety stores (Azbuka Vkusa, Kalinka Stokmann, Sed'moy

Kontinent – 5 Stars)

“Trials of Strength” (Perekrestok at Rublevo-Uspenskoe Highway,

Ramstor at Novinsky boulevard)

Others (“Alye Parusa” store, etc.)

Gourmet Boutiques and Premium-class variety stores.

The real rivalry menaces for “Onegin Luxury Store” are gourmet boutiques and

premium-class variety stores. The main differences of gourmet boutiques and

premium-class variety stores are:

The assortment of a gourmet boutique is smaller than of a premium-class store,

although the ratio of luxury and exclusive products of a gourmet boutique is

relatively higherSelling space of a premium-class store could be up to twice

larger than of a gourmet-boutique

Average bill sum of a gourmet boutique could be up to three times larger

than of a premium-class variety store



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Gourmet Boutique Premium-class

Variety Store Онегин

Assortment of goods

30-100 units 200-500 units 300-500 units

Selling Space 70-200 m2 300-900m2 Онегин Жуковка – 650

m2; Онегин-Новый Арбат –

350m2 Average sum that customer pays per one visit (average

bill sum)

$100 $30-50 $70 (Estimated)

Representatives Globus Gourmet*, Fauchon, Hediard

Azbuka Vkusa, Kalinka

Stokmann, Sed’moy

Kontinent – Five Stars

-

*sometimes is classified as premium-class variety store

Amongst the above mentioned firms the most competitive are Globus

Gourmet and Azbuka Vkusa – both having a market-share of 20% approximately.

The inability of “Trials of Strength” and other premium-like stores to be

substantial rivals to “Onegin Luxury Store”

“Trials of Strength” are the attempt of current variety store chains to enter a

higher-income market, building their stores

For the upmarket stores one crucial criterion of success is the precise positioning in

the market.

It is very important for such enterprises to have a brand, uniquely understandable

by consumers; such companies must have a “face”, i.e. – brand personality.

That is why such stores as “Alye Parusa”, “Ostrov”, “Yozhik Store” (Гастроном



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Ёжик), Perekrestok at Rublevo-Uspenskoe Highway could not be a real rivalry

menace for “Онегин Luxury Store” – they do not have a unique and precise

marketing strategy, some of them having different formats within one chain of

stores.

Thus, such stores and chains do not expose a substantial market-share.

Company analysis – core customers.

The best architectures will be engaged in setting up the main building.

Finally, the high society will provide the public with beneficial positioning of

“O.L.S.” (special promotion activities will be used for it) and simultaneously high

society will be our core customers.

That is why we can predict very fast growth of brand image and revenues, what in

our opinion plays an essential role in achieving the lead positions.

Consumer Analysis

Our product is specific and intended for a very narrow category of people in

Saint-Petersburg. So when we generated an idea of the store we had in our mind a

person like this: a very successful man in his 30-55 years or his wife, who lives

somewhere in prestigious districts of Saint-Petersburg (PrimorskoeHighway or in

the center of Saint-Petersburg), who has about two-three expensive cars, private

driver, and big country house.

Additionally, this man or woman follows all fashion trends, takes care of their

health, and does not want to be an ordinary consumer like in “Ashan” supermarket.

This person often takes part in the meetings of high society, may be famous and

wants to receive the best quality ever.

On the other hand,this can be a not very public person, who does not want to be

discussed; we like to call these people “snobs”. Unfortunately, there is no unique

psychological portrait can be here. But our potential customers inevitably have



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minimum one common thing – substantially high level of income (more than

$2000 per one family member).

Market-product Focus

In this chapter marketing and product objectives, which were set for Onegin

™ for the 5 year period, will be described. Additionally, here we would like to

introduce target markets for our boutique, points of difference of our products and

service and positioning of Onegin ™.

Market-product objectives.

The marketing objective is the total and the most efficient using of the

potential of brand and simultaneously setting up the basis for getting the maximum

possible profit. The following above points will provide you with the information

about main objectives, divided into 4 directions:

The existing markets. The growth of market will be guaranteed by enlarging

the amount of potential customers as a result of the high rate of economic growth

of Russian Federation as a whole. It means that more people will have the level of

income not less than 2.000$, which potentially makes them our future customers.

Also, the volume of product sold is expected to increase due to success of

promotional activities, which will be very specific and focussed and which will

serve to attract the high-income customers. It is necessary to mention that not

many new customers will appear (it can be harmful for the brand), but our future

loyal customers will buy more products predominantly in Onegin™. Because of

points mentioned before, our boutique will have an opportunity to become a non-

formal monopolist in the sphere of up-market product boutiques. This will lead to

the long-term profitability and building a “strong” brand.

The new markets – After five years of existing Onegin ™ boutique in Saint-

Petersburg, Primorskoe, we are planning to run a new store in Moscow, Barvikha.

We find this city very prospective, because it is said to be a cultural capital of



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Russia, so according to this and to marketing research we expect to meet many

people fond of best quality products and highest level of service, who are ready to

pay much in order to purchase the best.

New products. Taking into consideration our past links with many suppliers of

food products and very high rates of technology growth, we expect to enlarge our

product line with more and more modern products. It means that the quality of our

goods will be at the highest level, which makes it possible to establish rather high

but reasonable prices for them. Actions of introducing the new products will help

with two things: increasing the volume of sales and attracting attention to our store

with further strengthening the brand.

Overcome rivals. It is very important objective because the market of gastronome

boutiques in Moscow nowadays does not have “the head”, like for example the

IBM® has in the computer market in USA. So that is why it is very important to

make consumers buy only in our store. The promotional activities are to help it. If

Onegin™ will become fashionable, so the success and the high volume of sales is

guaranteed.

Target markets.

The primary market for “Onegin Luxury Store” are households with

substantially high level of income (more than $2000 per one family member)

living mostly in prestigious districts of Moscow.

Points of difference.

“Onegin Luxury Store” will introduce to its potential customers the

following features, which they could hardly find in any other stores:

Product features:



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60% of the highest quality product will be imported from Holland, France,

England and many others European countries, which are known for their

sophisticated tastes in food. These goods will be like wine, cigars, milk,

drinks, ingredients for food, candies… The necessity of introducing the

imported goods appeared after several marketing research exercises,

which stated that many Russian people do not like the quality of domestic

products. Additionally, our company has many connections with

exclusive suppliers from all over the world, which helps to reduce cost

and always provide our store with products on time.

20% of products will be made by our head-cooks from Switzerland, Italy,

Japan and Russia. These goods are Italian pizza, rolls, traditional Russian

food and many other exclusive dishes.

20% of goods will be from domestic producers. It will be the goods for

everyday use like fruits, vegetables, some other dishes

Origin of goods in “Onegin Luxury Store”

Service features

The car of every our client will be washed, parked and guarded carefully by

our staff.

The most important feature is buying goods for the client. For example

our customer will sit in Onegin™ café, enjoying the time with friends,

while our staff will do his shopping for him. The only thing the buyer

will have to do is to provide the stuff with the list of necessary goods.

Every customer, who has our special card will be able to buy everything

on credit. The terms of paying are 1 week.

Every customer will have an opportunity to test no more than one sample



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of product for free, excluding the unique and very expensive ones.

Every customer will obtain the quantity discount, depending on amount

of goods he/she purchases.

Every customer will have an opportunity to ask for extra security or

consulting service.

Every customer will have a right for free delivery service (limit is 30 km

from RAR (КАД)).

Many other features like taxi, phone, wireless connection in café etc.

It is guaranteed that no one our customer will waste his time in a queue.

If any problems with the quality of the product appear, we guarantee to

compensate it with similar product or pay money back.

Positioning

Every client in our shop will be obligated to open a card on his name (for

family or relatives) with initial installment of 100.000 rubles. It is done to restrict

the amount of people for positioning the brand as an up-market one. The

advertisements could be only seen in very reputable and fashionable magazines

like Esquire, GQ and etc. The mass media will be actively used in positioning

Onegin™ as an exclusive, very expensive boutique: not for everybody.

Marketing Program

The four marketing mix elements of the “Onegin Luxury Store” are detailed

below.

Product Strategy.

(food, drinks, alcohol, etc.)

Products sold by our company are only upmarket products of high quality brought

from abroad, especially rare products.

Product quality



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Special brand control. Providing 100% guarantee for all products sold in our

shop. Any product can be returned within 2 days providing it has our signature on

a package or consumer has the check. When it is our fault, the consumer gets a

substitution and a small gift from us (any product at the price not more than 300

hundred rubles). Food can be bought already cooked (in the restaurant).

Special packaging

The sign of our shop on each package will inform people that it was bought in

our shop. Free, specially-designed bags will also come with our brand icon.

(Variety of colors, especially bright, sizes, and shape of bags, material – paper)

Onegin Luxury Store offers the following products and services:

Groceries

We will offer high quality groceries from Italy, France, Holland, the

Mediterranean, Asia, Europe, Australia, and the United States. Groceries will

include items that represent the best-known and desired foods from these areas.

Items will include, but will not be limited to: sauces, oils, spices, spreads, peppers,

cheese, meats, pasta, rice, canned goods, drinks, chocolates, and hard-to-find

desserts and candies. A selection of frozen meals (made in the store) will be

available for home cooking, and will include items such as homemade Italian

meatballs & sausage, pizza, and "holiday" tamales.

Souvenirs

Souvenirs will complement the import orientation of the store and include a

limited selection of kitchen wares, cookbooks, picnic items, and original sewn

items and jewelry. Gift baskets will also be available in the store and over the

internet.



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Delicatessen

Another important feature of Onegin Luxury Store is the availability of 5*

restaurant, where any customer can relax and have a dinner.

Onegin Luxury Store restaurant will offer unique cuisine with an international

flair. The deli will offer a limited menu for breakfast, lunch, and dinner. The

rotating menu will feature sandwiches, soups, salads, drinks, and desserts. All

menu items will be prepared fresh each morning and displayed for easy pick-up.

We will offer picnic lunches and frozen meals as well as cheese, meats, and ethnic

deli salads by the pound.

The breakfast menu will include items such as quiche, scones, and biscotti, and the

lunch/dinner menu will consist of sandwiches, salads, homemade breads, frozen

meals, and daily specials.

We will serve high quality coffee, tea, juice, and soda from around the world

throughout the day.

Picnic lunches will be made available to visitors, specially packed to be carried

into the numerous national parks and outdoor venues surrounding areas around the

stores.

A special feature of our store will be booking goods for our customers. Customer

can book any product sold in our store and all the work of gathering goods will be

done by our employees.

Product types available

The starting menu will include items such as:

Quiche - Made with fresh ingredients and cheese featured in the market

Fresh Bread - Crusty Italian, wheat, and pumpernickel

Scones/Muffins/Biscotti - International recipes

Coffee, Tea, and Juice - From around the world



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Roast Beef - With sharp provolone cheese, red onion, lettuce, & tomato on dark

rye bread

Corned Beef/Pastrami - With Wisconsin swiss cheese, red onion, shredded

red cabbage and Russian dressing on rye bread

Turkey - With sharp Wisconsin cheddar cheese, lettuce & tomato on French

bread

Smoked Turkey - With Havarti cheese, avocado, sprouts, cucumber, lettuce

& tomato on multi grain bread

The Boonero - Daily Special

The Day After Thanksgiving - Turkey, herb stuffing, lettuce & cranberries

on a potato bread roll

The O'Connor - Turkey, Genoa salami, bacon, sharp Wisconsin cheddar

cheese, lettuce & tomato on Italian bread

The BLT - Bacon, sharp provolone cheese, lettuce & tomato on Italian bread

Veggie Deluxe - Avocado, cucumber, sprouts, lettuce, tomato, red onion &

sharp Wisconsin cheddar cheese served on multi grain bread

Italian Veggie Deluxe - Marinated Italian vegetables, artichoke hearts,

olives, red onion, & fresh mozzarella cheese on Italian bread

Tomato with Fresh Mozzarella & Basil - On focaccia bread

Bruschetta - Topped with ripe tomatoes, fresh basil, olives, & grated Italian

cheese)

Fresh Gazpacho - Ripe tomatoes, sweet white onions, jicama, cilantro, fresh

jalapenos, and lime juice chopped and mixed for a truly refreshing taste.

Eggplant Chickpea Pesto - A delicious combination of baba ganoush and

hummus served with pita wedges

Seven Layer Bean Dip - Refried black beans, tomatoes, corn, onion, mixed

fresh, cilantro, and authentic mexican cheese. Served with sour cream, your



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choice of hot sauce, and corn chips for dipping

Organic Soups - Made fresh

Chili - Homemade using only the best ingredients

Chips - A wide variety of speciality flavors

Giardiniera is always available as a side dish to add a little spice to your

sandwich.

Salads:

Caesar Salad - Homemade dressing with bacon, croutons, and imported

parmesan cheese.

Greek Salad - Light airy and zesty Rotelo pasta tossed with tomatoes,

spinach, cucumbers, red onion, feta cheese, and Greek olives.

Italian Salad - Ripe tomatoes, cucumbers, fresh basil, and balsamic vinegar

mixed to perfection.

Tomato, Basil, & Fresh Mozzarella Salad - Tossed in a light olive oil and

balsamic vinegar dressing.

Fresh Herb Salad - Spring greens mixed with dill, cilantro, basil and Italian

parsley for a delightfully fresh taste.

Pasta Salad of the Day - Always fresh and tasty.

Drinks/Ice:

Juice - High quality flavors from around the world

Soft Drinks - All natural

Coffee - International & organic choices

Tea - High quality flavors from around the world

Frozen Dinners:

Onegin Luxury Store will carry a variety of hard-to-find frozen food items.

Many of our frozen meals will be prepared at Onegin Luxury Store and



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follow recipes that highlight items we sell in the grocery and deli.

Onegin Luxury Pizza (Brand unique)

Meatballs & Sausage with Marinara Sauce

Stuffed Shells

Manicotti

Baked Ziti

Chicken Parmesan

Italian Beef

Holiday Tamales

Ready to Bake Bagles

Ice Cream/Deserts

Price strategy

General pricing policy

We provide consumers with high quality upmarket goods, so prices are at

premium-high level. We propose the best products only of well known brands.

Every kopek spent in our shop would be paid for quality and variety of goods –

this is our policy. Price of our products is much higher (by about 2 times for

everyday products(such as bread) and by 3 or more times on exotic products)

than average prices in the market as rely on loyalty of customers and their

“snob appeal”.

Price approach.

Selecting an approximate price level, the Prestige pricing approach will be

used. It involves setting a high price so that status-conscious consumers will be

attracted to the products and buy it.

Promotion Strategy

First attempts



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For the opening of the market there will be made a great party. Only guests with

flyers will be allowed. Flyers will be sent to representatives of the elite, especially

politics and celebrities. To attract them special gifts and unique performance will

be held.

Other advertising campaigns:

-ads through TV(Ort channel, NTV, Russia, fashion TV)

-sponsorship of fashion shows

-permission of celebrities to advertise our shop

-giant bill-boards on places of interest(center of Moscow, Rublevo-Uspenskoe

Highway)

-ads in magazines (Vogue, GQ, Esquire, Men’s Health, Playboy)

-by means of air-balloons. A huge image of our company and slogan will be on

the balloon. The balloon will travel especially above center of Saint-Petersburg and

regions around market.

Place(distribution) strategy.

suppliers

According to our previous specification in supplying goods to markets, such as

ours, we will be suppliers for ourselves. This will allow us to save a lot of

money.The saved money will be put into development of shop.

The stores would be opened in Saint-Petersburg:

Onegin Luxury Store Primorskoe

Place: Saint-Petersburg Oblast; Sales Area (Shopping Space +

Restaurant Area): 650m2



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Onegin Luxury Store Nevskyi (will opened after one year on condition of the

success of the plan)

Place: Saint-Petersburg, Nevskyi Prospekt;

Sales Area (Shopping Space + Restaurant Area): 350m2

Financial projections

Here are the financial projections for “Onegin Luxury Store” as follows:

One Sales Unit: we assume one visit of a customer to the shop will generate as

estimated average bill of $70 (1900 rur)

The estimated pay-back period of “Onegin Luxury Store” is 3 years.

The complex analysis shows that achieving a break-even number of customers per

day (Sales) will be achieved in the second year of operation (2012).

Substantial sales will be achieved at the end of 2013 – we will enjoy approximately

40 customers a day at one store enabling us to gain substantial profit (estimated

9,74 mln rur)

Organization Structure

Four chief executive officers report to the president. The next level consists

of full-time employees; fourthly, comes the level of personnel who have passed the

special 3-weeks training course.

It is necessary to state that that top marketing manager (James Brown, Jr.) was

headhunted from Procte&Gamble Europe, and the finance and audit director from”

Sberbank RF” .

As “Onegin Luxury Store” is subsidiary of “BKS”, some management positions

would be switched from the core company (“BKS”) to the subsidiary (“Onegin

Luxury Store”).


Section 3. International Group.Elena Plakhova “Shtokman Development AG” 191

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ELENA PLAKHOVA “SHTOKMAN DEVELOPMENT AG”

Introduction This paper is devoted to the corporate strategy

of Shtokman Development AG which is an

international company involved in gas, gas

condensate and liquid natural gas production,

created in order to develop the Shtokman gas field.

The first part of the paper illustrates the

company profile and the details of the project the

company will be implementing, business

environment in which it operates and the main

competitors the company has to face. Further in the paper, the SWOT analysis for

the company is being conducted where the main strengths and weaknesses of

Shtokman Development AG are being highlighted, as well as the potential

opportunities and factors that threaten the financial stability of the company.

Moreover, the main opportunities and strategies for the following years are

being analyzed and atthe end of the paper the corresponding conclusions about the

appropriate corporate strategy for the subsequent years are being made.

Company profile

Shtokman Development AG is a joint venture by three major world

companies: OAO Gazprom (Russia), Total S.A. (France), and Statoil ASA

(Norway). The company was founded to implement the First Phase of the

Shtokman gas condensate field located in the Russian sector of the Barents Sea.

The shares in the Company are currently held by the following shareholders:

ELENA PLAKHOVA


192 Section 3. International Group. Elena Plakhova “Shtokman Development AG”

IBS PLEKHANOV 2011

• OAO Gazprom which holds 51% of the share capital of the Company;

• Total Shtokman B.V. which holds 25% of the share capital of the

Company;

• Statoil Holding Netherlands B.V. which holds 24% of the share

capital of the Company.

Gazprom is one of the world’s largest energy companies. Its major business

lines are geological exploration, production, transportation, storage, processing and

marketing of hydrocarbons as well as generation and marketing of heat and electric

power. Gazprom’s share in the global and Russian gas production is nearly 20%

and nearly 85%, respectively. It exports gas to 32 countries within and beyond the

FSU, and continues reinforcing its positions on conventional international markets.

Gazprom Neft Shelf (a 100 % subsidiary of Gazprom) holds a license to explore

and produce gas and condensate in the Shtokman Field and is a sole customer for

the design and construction of the field infrastructure, including a production

complex, a pipeline network and a Liquid Natural Gas plant.

The second shareholder is the French company Total. Its activities in more

than 130 countries cover the entire operation cycle from production to sales of

refined products to end users. Total is also involved in the transportation and

storage of natural gas, as well as in electricity generation at combined-cycle gas —



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fired power plants and use of renewable energy sources. Total is active in the

marketing and sales of natural gas, electricity, liquid natural gas and coal.

As already mentioned above, the third shareholder of Shtokman

Development AG is Statoil ASA. The company is the leading operator on the

Norwegian continental shelf (NCS) and has operations in 40 countries. After 30

years of developing and producing oil and gas on the NCS, Statoil holds

competence and experience especially applicable for deep waters in harsh

conditions like the Arctic.

Shtokman Development AG was founded on February 21, 2008 for the

design, financing, construction, and operation of Phase 1 facilities for the

Shtokman gas condensate field that involves offshore installations, pipeline to

shore and the onshore processing plants both for liquid natural gas (LNG) and

piped gas. The company will own the Phase 1 infrastructure for 25 years after the

field is commissioned. Gas produced under the project will be marketed by OAO

Gazprom. The company is headquartered in Zug, Switzerland, but also has offices

opened in Paris, Moscow, Murmansk, and the village of Teriberka in Murmansk

Oblast.

As the Shtokman project operating company, Shtokman Development AG

will bear all the financial and engineering risks associated with the natural gas

recovery and LNG production.

Business environment and competition

In order to identify the environment in which the company operates it is

important to describe the whole project in more detail. The Shtokman field was

identified in 1981 based on offshore geophysical surveys performed by

Sevmorneftegeofizika specialists on board the research vessel «Professor

Shtokman», which gave its name to the field. Geological study of the field was

launched at that time too. In 1985, the structure was mature enough for evaluation



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through drilling. In 1988 the first exploration well was drilled with design depth

4500 meters. That drilling was completed in July 27, 1988 at 3153 meters. Well

testing resulted in the discovery of two formations of free gas and gas condensate,

and the State reserves balance as of 01.01.1989 was added by more than 2.4 trillion

cubic meters of free gas of industrial grades. It is located in the central part of the

shelf zone in the Russian sector of the Barents Sea.

Currently the project development program encompasses the entire cycle of

field development, from research to processing and transportation, and consists of

three phases. The First Phase of field development will provide an annual

production of 23.7 billion cu.m. of natural gas per year.

Known reserves of natural gas in the SGCF are today among the largest in

the world. The geological reserves of the field are 3.9 trillion cubic meters of gas

and around 56 million tonnes of gas condensate.

The detailed characteristics of the field are of significant importance because

they determine the future development strategy of the company.

Basic field characteristics are the following:

— Field discovered in 1988



IBS PLEKHANOV 2011

— Located 550 km from shore

— Initial geological reserves estimated at 3.9 trillion cu.m. of gas and 56

million tonnes of gas condensate

— Sea depth is 340 m

— Wave height is up to 27 m

— Annual temperature range from —50ºC to +33ºC

— Presence of icebergs weighing up to 4 million tones1

Since its incorporation in February 2008, Shtokman Development AG has

completed a broad scope of preparatory works for Phase 1 development of the

Shtokman gas and condensate field.

An integrated base project has been developed for the entire value chain

from drilling through the transfer to the license holder of the final product (pipeline

gas, LNG and condensate) ready for delivery to the target markets. Currently the

detailed engineering surveys and studies are complete, design engineering

documentation is being developed according to both international and Russian

standards.

The project can be divided into two zones – offshore and onshore.

The basic offshore facilities will include:

• Subsea production system

• System of flowlines and flexible risers to feed the gas condensate

wellstream to the production vessel

• Self-propelled floating production unit (FPU) that can be rapidly

uncoupled and moved out of the path of icebergs

• Trunk pipeline for LNG production at the onshore facilities and pipeline

gas deliveries

The basic onshore facilities will include the following: 1 www.shtokman.ru



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• Product intake facilities

• Treatment plant for export pipeline gas

• Liquid natural gas plant with capacity of 7.5 million tonnes per year

• Liquid natural gas storage tanks

• Marine terminal for condensate and liquid natural gas export

• Power station, housing village, support vessels and tugs, heliport, etc.

It has been officially confirmed that the project is technically feasible and

provides a high reliability and operational readiness.

The target sales markets for Shtokman Development AG are Europe for

natural gas and North America for liquid natural gas. The project is unique and is

the first of its type in Russia. However, in order to identify the main competitors it

is necessary to observe the sales markets of Shtokman Development AG and to

point out other companies that supply natural or liquid natural gas to the same

target areas.

One of the major competitors for Shtokman Development AG is Norway

that has several leading companies operating in the same sector, but which have

competitive advantages, such as the valuable experience of working on shelf and

creation of unique platforms on shelf, application of high technologies and the

existence of infrastructure that can be rapidly developed while in Russia the

infrastructure near Murmansk is not developed enough not to be of great concern

for the company.

Furthermore, Norway is increasing its supplies of natural gas to Europe and

currently its market share is almost 20%. Norway is the second largest gas supplier

to Europe after Russia. Also according to several market analysts, in the long term

Norway may become the leading supplier of natural gas, while Russia is also

willing to maintain and even to increase its market share.



IBS PLEKHANOV 2011

The other market challenge that Shtokman Development AG has to face is

the current decrease of natural gas prices. The quick drop in international prices

ofnatural gas has become a serious challenge for both Norway and Russia.

Gazprom has lost a serious part of its share in the European gas market to

alternative suppliers. According to a survey from the Rossiiskaya Gazeta, the

company in 2009 sold less gas to all of its client countries with the exception of

Poland and the UK.

Furthermore, pressure is now increasing on export monopolist Gazprom to

change delivery agreements. The Russian gas is more expensive than competing

gas from Norway. According to Rossiiskaya Gazeta, Gazprom fully understands

the graveness of the situation and is “intensively looking for alternative and

mutually favorable alternatives”.

In addition, Gazprom is stepping up its focus on alternative markets. The

countries in Southeast Asia are increasingly seen as potential buyers of the Russian

gas and the company’s Eastern Programme outlines major deliveries to China.

The lower prices and the rapid shifts in the gas market might also influence

both Norway’s and Russia’s plans for new field development. As Shtokman

Development’s major shareholder is Gazprom, it falls under the category of

projects with uncertain future. As already stated above, the project has

unprecedented technological challenges and includes huge investments. With the

current uncertainties in the gas market, the project could face new postponements.

The Final Investment Decision for the Startup Facilities and the First Phase

of the Development will be made in March 2011.

In accordance with Gazprom’s gas balance, the first pipeline gas will be

delivered in 2016. Meanwhile, the first liquid natural gas is expected to be

launched in 2017.



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SWOT analysis

№ Strengths Weaknesses Opportunities Threats 1.

Competitiveness Geographical position

New era in the development of the Arctic shelf

The project is unique

2. Financial risks from consortium are lower

Conflict of interests is possible

Implementation of innovative technologies

Costs are too high

3. International experience

Organizational structure lobbying is possible

Creation of a new LT resource base

New risks may arise

4. Experience in gas sector New projects

Environmentally sensitive ecosystem

5. Shareholders possess new technologies

6. Existing sales markets

7. Diversification of export products and routs for exporting products

Strengths

The main strengths of the Shtokman Development AG arise from the fact

that the company is a consortium of three leading energy companies – Gazprom,

Statoil and Total. As a result, the company has a strong financial basis and a big

field for further investments. Moreover, the shareholders of the company have their

own developments and technologies that can be further implemented in Shtokman

Development Company. Total, Gazprom and Statoil have huge international

experience in operating in oil and gas sector which will be essential for the

implementation of this project. They also have their reliable sales market, suppliers



IBS PLEKHANOV 2011

and clients which arealso important. Furthermore, the Company diversifies its

routes for exporting hydrocarbon products to global markets and diversifies the

products themselves as it will export not only natural gas, but liquid natural gas as

well.

Weaknesses

The Shtokman production field is located in the central part of the shelf zone

in the Russian sector of the Barents Sea where the climate is rather severe and the

annual temperature ranges from –50 C to +33 C, the wave height in the production

area is up to 27 m and the sea depth is 320-340 meters. All these factors result in

higher costs of construction. Moreover, the weaknesses of Shtokman Development

AG result from the adverse sides of a consortium. These are the possibilities of

conflicts of interests due to the different cultures and different traditional ways of

business organization. This is why it is possible that shareholders will be lobbying

their organizational structures in the company and also they may be lobbying their

own people on major positions in the company.

Opportunities

The project is strategically important as it may open the new era in industrial

development of the Arctic shelf. Also, the company may be further implementing

new technologies such as the creation of a production platform based on a floating

production unit (FPU) type vessel. This type of vessel can be rapidly uncoupled

and moved in the event of impending collision with an iceberg, can maneuver in

ice, and can halt production, move out of the path of the oncoming ice, then return,

hook up again, and continue production. It will be the first time that this

technology has ever been used in Russia. The operational effectiveness of the

company will result in the creation of a new long-term resource base. Moreover, in

the future the company may perform other similar projects as it possesses the



IBS PLEKHANOV 2011

know-how technologies, the established team and the experience required for

extraction and production of natural and liquid natural gas.

Threats

As it has already been mentioned before, Shtokman field is one of the largest

natural gas fields in the world. Located on the shelf of the Barents Sea almost 600

kilometers from land at a depth of 340 meters, it is unique in terms of scale and

complexity of development. No project of this level has ever been undertaken in

Russia before. Being a big opportunity, it is also a major threat for the company.

As the project is unique, there are practically no benchmarks and too many

innovations to be implemented. As the unknown and not-a-typical project is being

implemented, many unpredictable dangerous factors and risks may occur that may

be hard to deal with. For example, the construction of a production platform based

on a floating production unit (FPU) type vessel may appear to be far more

complicated that it seemed to. Consequently, the costs of the project may increase

beyond the predicted level. This is what has actually happened. Currently new

investments are required to meet the quality standards of the production field and

to undertakefurther research. This is why in March 2011, the Board of Directors

will make the final investment decision about the future of Shtokman Development

AG. Finally, as for any company operating in oil and gas sector, there are many

environmental issues that are to be managed which leads to further costs.

However, due to the scale and complexity of the Shtokman project, the

company has made enhanced commitments to conserve the environment and

minimize any potential negative impact on the vulnerable and unique ecosystem of

the Barents Sea and its coastal lands. Two assessments of the impact by the

company's operations were conducted during 2007-2010:

• An environmental impact assessment (OVOS) according to Russian

standards



IBS PLEKHANOV 2011

• An environmental, social, and health impact assessment (ESHIA)

according to international standards. The company regularly holds public hearings

and consultations with regional environmental and public organizations. The

meetings are attended by major stakeholders of the project, including

environmental organizations in Murmansk Oblast and members of the indigenous

minorities of the North.

Moreover, on September 24, Shtokman Development AG and the World

Wildlife Fund (WWF) signed an agreement of intent that provides for bilateral

consultations, working meetings, and exchange of information on the

implementation of environmental protection measures and projects.

According to Igor Chesten, Director of WWF-Russia, it was the first time

that this sort of agreement had ever been signed in Russia at such an early stage of

project implementation.

Further development opportunities

Shtokman Development AG has many opportunities for future effective

operation. The project is also significant for the whole country. It will set up a

benchmark for future Arctic shelf development. Shtokman will contribute to long-

term energy security on the local, European and international markets supplying

sizable portion of gas to meet growing demand for energy. In times of market

competition, it is really important. Diversification of the export products and

export routes to the global market will make supplies more flexible and reliable.

The gas produced under the Shtokman project has been identified as the resource

base for Nord Stream pipeline deliveries to Western Europe and the production of

Russian LNG that will subsequently be sold on international markets.

Moreover, the Arctic region may contain over a quarter of still undiscovered

world hydrocarbons reserves. Shtokman project starts the age of industrial Arctic

exploration.



IBS PLEKHANOV 2011

With the geological reserves estimated at 3.9 trillion cubic meters of gas and

around 56 million tones of gas condensate Shtokman gas and condensate field is

inside top-10 gas fields worldwide. It equals to 1.3 years world’s gas consumption

today and will ensure long-term gas supplies to the targeted markets.

Additionally, it will bridge up knowledge and expertise transfer in offshore

development to the Russian industry and will maintain their production capacity

during the worldwide economic recession.

Shtokman Development AG’s other objective should be to extend the role

of Russian companies in the project and to give invaluable experience of the

offshore development through the consortiums with leading foreign oil and gas

companies. Participation of Russian companies in the First Phase should become

the launching pad for their participation in subsequent phases.

Russian involvement in the Shtokman project means involvement of Russian

R&D institutes, industrial enterprises and contactors, use of Russian materials,

equipment and spare parts, utilizations of Russian human resources. It also means

that goods and services are manufactured on the territory of the Russian

Federation.

In accordance with Partnership Agreement of Shtokman Development AG,

shareholders during contractor selection preference shall be given to Russian

companies, provided they demonstrate a competitiveness, sufficient experience of

performing similar works, financial stability and competitive prices, quality and

schedule for the required works satisfying overall requirements of Shtokman

Development AG and the project in general.

Moreover, for efficient development of the mineral resources of the Russian

continental shelf it is reasonable to rely on international experience as well as the

leading Russian technologies and know-how. As it has already been stated before,

in the core of the project lies international partnership between the largest Russian



IBS PLEKHANOV 2011

gas concern JSC Gazprom and two world leaders in the oil and gas industry —

Total and Statoil.

So it can be concluded that the key strategic factors that lead to success of

the company are the following: International cooperation, Experience and

Innovations.

Involving the Russian companies into the project as subcontractors will

enablelearning and obtaining of experience of international cooperation and best

oil and gas business practices. They willreceive unique expertise and master

advanced methods. Moreover, international cooperation will create conditions for

the development of new skills, transfer and implementation of modern

technologies and know-how, it will increase competitiveness of Russian

enterprises for participation in international tenders and work on the international

arena.

It should be noted that with the development of the Arctic oil and gas

continental shelf of the Barents Sea the economy of the North-Western region of

Russia will be boosted, and these are specifically the Murmansk and Arkhangelsk

regions in the first instance. This will affect the adjoining sectors of economy,

allow the use of local human resources, local supply chain and transport

infrastructure. The Shtokman project will give opportunities for revival and

development of local enterprises and whole industries and create conditions for

transfer of cutting edge technologies to Russia.

Taking into account all the above-mentioned peculiarities of Shtokman

project, the strategy of the company for the subsequent years should cover the

following aspects:

• More specialists should be hired in the opened branches in Moscow,

Murmansk and Teriberka in Murmansk region.



IBS PLEKHANOV 2011

• Long-term cooperation with the Russian industry should be built and

developed for the further phases of the project. The core elements

should be the use of expertise, scientific achievements and overall

potential of the Russian Federation in the oil and gas industry, the

development of local companies of the North-Western region of

Russia, creation of incentives for international cooperation, creation of

preconditions for transfer of technologies and know-how, in particular

in the area of subsea technologies for continental shelf projects and

the LNG technology.

• In order to attract Russian companies as services suppliers, Shtokman

Development AG should conducts various information events and

initiatives. These are to be held within large oil and gas assemblies

and fora, industrial exhibitions and also events hosted by oil and gas

supplier associations.

• Whenever necessary, Shtokman Development AG should attract

external consultants. This is due to the fact that the schedule for

current tasks is rather tight and most of the emerging issues require

specialized experience in the particular narrow area.

• As it has turned out that for the project implementation the company

needs more investment, the financial plan for the future years should

be adopted and approved. The financial plan should contain several

scenarios of the project development that take into account all the

possible risks and losses resulting from these risks.

Conclusion

To conclude, Shtokman Development AG is a company that implements a

project of strategic importance. The corporate strategy of the company should

involve international cooperation, experience, innovations and a thoroughly-



IBS PLEKHANOV 2011

planned scenario analysis of the company’s financial plan for the subsequent years

that should be based on the amount of investments that will be distributed within

the project. That is of particular importance because currently the company

experiences some financial difficulties and requires additional investments from its

shareholders. Moreover, Shtokman Development AG should assist and support the

development of international cooperation within the project framework and the

establishment of joint ventures and consortiums between Russian and international

companies.

The success of the company in the future will determine the development

and exploration of the whole Arctic shelf that will bring benefitsnot only to its

shareholders, but also to the whole Russian Federation.

References

1. Shtokman Project Presentation 1st June 2010 World Trade Center 2. Organizational regulations of Shtokman Development AG 3. Shtokman review 4. www.shtokman.ru 5. www.gazprom.com 6. www.energybulletin.net 7. www.bbc.co.uk 8. www.barentsobserver.com 9. www.worldenergy.org 10. www.total.com 11. www.statoil.com


206 Section 3. International Group. Ekaterina Vashurina, Irina Koroleva “Starbucks”

IBS PLEKHANOV 2011

EKATERINA VASHURINA, IRINA KOROLEVA “STARBUCKS”

Starbucks is the premier roaster and retailer of

specialty coffee in the world. Starbucks Corporation was

formed in 1985 and its common stock trades on the

NASDAQ Global Select Market (“NASDAQ”) under the

symbol “SBUX.” Starbucks (together with its

subsidiaries, “Starbucks” or the “Company”) purchases

and roasts high-quality whole bean coffees and sells

them, along with fresh, rich-brewed coffees, Italian-style

espresso beverages, cold blended beverages, a variety of

complementary food items, a selection of premium teas,

and beverage-related accessories and equipment, primarily through Company-

operated retail stores. Starbucks also sells coffee and tea products and licenses its

trademark through other channels such as licensed retail stores and, through certain

of its licensees and equity investees, Starbucks produces and sells a variety of

ready-to-drink beverages. All channels outside the Company-operated retail stores

are collectively known as specialty operations.

Starbucks has three reportable operating

segments, and each segment provided the indicated

percentage of total net revenues for fiscal year ended

September 27, 2009 (“fiscal 2009”): United States

(“US”) (73%), International (19%) and Global

Consumer Products Group (“CPG”) (8%). In the

fourth fiscal quarter of 2009, the Company changed

the composition of its reportable segments. The US

foodservice business, which was previously reported

EKATERINA VASHURINA

IRINA KOROLEVA


Section 3. International Group.Ekaterina Vashurina, Irina Koroleva “Starbucks” 207

IBS PLEKHANOV 2011

in the US segment, is now reported in the CPG segment, as a result of internal

management realignments within the US and CPG businesses. Segment

information for all prior periods presented has been revised to reflect this change.

The US and International segments both include Company-operated retail

stores and certain components of specialty operations. Specialty operations within

the US include licensed retail stores and other initiatives related to the Company’s

core business. International specialty operations primarily consist of retail store

licensing operations in nearly 40 countries and foodservice accounts in Canada and

the United Kingdom (“UK”). The International segment’s largest markets, based

on number of Company-operated and licensed retail stores, are Canada, Japan and

the UK. The CPG segment includes packaged coffee and tea, and other branded

products sold worldwide through channels such as grocery stores, warehouse clubs

and convenience stores, and US foodservice accounts. CPG operates a significant

portion of its business through licensing arrangements and joint ventures with large

consumer products business partners. This operating model leverages the business

partners’ existing infrastructures and as a result, the CPG segment reflects

relatively lower revenues, a modest cost structure, and a resulting higher operating

margin, compared to the Company’s other two reporting segments, which consist

primarily of retail stores.

Fiscal 2009 was a challenging year for Starbucks. The Company was

confronted with extraordinary economic and operating challenges in addition to

facing an increasingly competitive landscape. Although the global economy has

shown some signs of improvement recently, management recognizes the difficult

economic situation that many consumers are still facing and does not expect that to

significantly change over the course of fiscal 2010. This challenging economic

environment has strained consumer discretionary spending in the US and

internationally, which in turn has impacted Company revenues, comparable store



IBS PLEKHANOV 2011

sales, operating income and operating margins. Starbucks responded to this

difficult environment with a more disciplined focus on operations and the

introduction of initiatives to permanently improve the Company’s cost structure.

The result is an underlying business model that is less reliant on high revenue

growth to drive profitability, and that still preserves the fundamental strengths and

values of the Starbucks brand. The primary initiatives in this strategy include

rationalizing the global Company- operated store portfolio, right-sizing the non-

retail support organization, and reducing the Company’s cost structure, while

renewing the focus on service excellence in the stores and delivering relevant

innovation.

The following graph depicts the Company’s total return to shareholders from

October 3, 2004 through September 27, 2009, relative to the performance of the

Standard & Poor’s 500 Index, the NASDAQ Composite Index, and the Standard &

Poor’s 500 Consumer Discretionary Sector, a peer group that includes Starbucks.

All indices shown in the graph have been reset to a base of 100 as of October 3,

2004, and assume an investment of $100 on that date and the reinvestment of

dividends paid since that date. Starbucks has never paid a dividend on its common

stock. The stock price performance shown in the graph is not necessarily indicative

of future price performance.



IBS PLEKHANOV 2011

Financial Highlights

• Consolidated operating income was $562 million for fiscal 2009 compared

to $504 million in fiscal 2008, and operating margin improved to 5.7% compared

to 4.9% in fiscal 2008. Cost reduction initiatives and related operational efficiency

efforts contributed significantly to the margin improvement, offset in part by

higher restructuring charges incurred in fiscal 2009 compared to fiscal 2008 as

Starbucks continued its work to rationalize its global store portfolio and support

organization.



IBS PLEKHANOV 2011

• EPS for fiscal 2009 was $0.52, compared to EPS of $0.43 reportedin fiscal

2008.Restructuring chargesimpacted EPS by approximately $0.28 per share in

fiscal 2009 and restructuring and other transformation costs impacted EPS by

approximately $0.28 in fiscal 2008.

• Cash flow from operations was $1.4 billion in fiscal 2009 compared to

$1.3 billion in fiscal 2008, while capital expenditures declined to $446 million in

fiscal 2009 from $985 million in fiscal 2008. Available operating cash flow during

fiscal 2009 was primarily used to reduce short-term borrowings to a zero balance

in fiscal 2009, down from $713 million at the beginning of the fiscal year.

• The Company realized approximately $580 million in reductions to its cost

structure in fiscal 2009, with the initiatives focused on store closures, headcount

reductions, in-store efficiencies and supply chain improvements.

Company-operated retail revenues decreased from fiscal 2008, primarily

attributable to a 6% decline in comparable store sales, comprised of a 4% decline



IBS PLEKHANOV 2011

in transactions and a 2% decline in the average value per transaction. Foreign

currency translation also contributed to the decline with the effects of a stronger

US dollar relative to the British pound and Canadian dollar. The weakness in

consolidated comparable-store sales was driven by the US segment, with a

comparable-store sales decline of 6% for the year. The International segment

experienced a 2% decline in comparable-store sales.

The Company derived 16% of total net revenues from channels outside the

Company-operated retail stores, collectively known as specialty operations. The

decrease in Foodservice and other revenue was primarily due to the softness in the

hospitality industry.

Cost of sales including occupancy costs decreased as a percentage of

revenues primarily due to the implementation of in-store operational efficiencies

designed to reduce product waste, and due to lower dairy costs in the US, partially

offset by higher coffee costs.

Store operating expenses as a percentage of Company-operated retail

revenues decreased primarily due to reduced headcount and spending in the

regional support organization as a result of Starbucks restructuring efforts, and the

effect of initiatives to improve store labor efficiencies.

Restructuring charges include lease exit and related costs associated with the

actions to rationalize the Company’s global store portfolio and reduce the global

cost structure. Operating margin expansion was primarily due to the improved

labor efficiency and reduced product waste in Company-operated stores, partially

offset by increased restructuring charges.

Starbucks actions to rationalize its global store portfolio have included the

planned closure of nearly 1,000 Company-operated stores globally. At the end of

fiscal 2009, nearly all of the approximately 800 US Company- operated stores, 61

stores in Australia and 41 Company-operated stores in other International markets



IBS PLEKHANOV 2011

had been closed. The remaining International store closures are expected to be

completed by the end of fiscal 2010.

Initiatives targeting reductions in the Company’s cost structure in fiscal

2009 proceeded as planned, with full-year costs of $580 million removed from the

Company’s cost structure. These targeted cost reductions and associated

operational efficiency efforts, along with a more profitable Company-operated

store base, have moved Starbucks toward a more sustainable business model, while

preserving the fundamental strengths and values of the brand. The operational

efficiency efforts are primarily focused on store level execution and include

improved staffing models and better management of waste in coffee, dairy and

food.

Starbucks actions to improve the customer experience have resulted in a

more focused effort toward in-store offerings, and simplifying the demands on

store partners (employees), while concurrently raising already-high standards for

beverage and food offerings, customer service and the overall in-store experience.

The effects of these efforts have already been seen in the Company’s improved

customer satisfaction scores.

Starbucks has a renewed focus on relevant product innovation and the

disciplined expansion and leveraging of its existing products and sales channels.

For example, Starbucks VIATM Ready Brew coffee was launched in fiscal2009

and is designed to capture a significant share of both the $21 billion global instant

coffee category and the single-serve market. The Company intends to drive sales

within the retail store base and CPG channels, both in the US and internationally.

The Company continues to maintain a solid financial foundation, with no

short term debt outstanding at the end of fiscal 2009 and with cash and liquid

investments totaling more than $650 million. This solid financial position and

continued strong cash flow generation have provided Starbucks with the financial



IBS PLEKHANOV 2011

flexibility to implement its restructuring efforts as well as make ongoing

investments in its core business.

The Company’s retail goal is to become the leading retailer and brand of

coffee in each of its target markets by selling the finest quality coffee and related

products, and by providing each customer a unique Starbucks Experience. The

Starbucks Experience is built upon superior customer service as well as clean and

well-maintained Company-operated retail stores that reflect the personalities of the

communities in which they operate, thereby building a high degree of customer

loyalty.

Starbucks disciplined strategy for expanding its global retail business is to

increase its market share by selectively opening additional stores in existing

markets, opening stores in new markets, and increasing sales in existing stores, to

support its long term strategic objectives. Store growth in specific existing markets

will vary due to many factors, including the maturity of the market.

Starbucks financial condition and results of operations are sensitive to, and

may be adversely affected by, a number of factors, many of which are largely

outside the Company’s control.

The Company’s operating results have been in the past and will continue to

be subject to a number of factors, many of which are largely outside the

Company’s control. Any one or more of the factors set forth below could adversely

impact Starbucks business, financial condition and/or results of operations:

• lower customer traffic or average value per transaction, which negatively

impacts comparable store sales,net revenues, operating income, operating margins

and earnings per share, due to:

• the impact of initiatives by competitors and increased competition

generally;



IBS PLEKHANOV 2011

• customers trading down to lower priced products within Starbucks, and/or

shifting to competitors with lower priced products;

• lack of customer acceptance of new products or price increases necessary

to cover costs of new products and/or higher input costs;

• unfavorable general economic conditions in the markets in which

Starbucks operates that adversely affect consumer spending;

• declines in general consumer demand for specialty coffee products; or

• adverse impacts resulting from negative publicity regarding the Company’s

business practices or the health effects of consuming its products;

• cost increases that are either wholly or partially beyond the Company’s

control, such as: • commodity costs for commodities that can only be partially

hedged, such as fluid milk, and to a lesserextent, high quality arabica coffee (See

also the discussion under “Product Supply” in Item 1); • labor costs such as

increased health care costs, general market wage levels and workers’ compensation

insurance costs;

• litigation against Starbucks, particularly class action litigation;

• construction costs associated with new store openings; or

• information technology costs and other logistical resources necessary to

maintain and support the global growth of the Company’s business;

• delays in store openings for reasons beyond the Company’s control, or a

lack of desirable real estate locations available for lease at reasonable rates, either

of which could keep the Company from meeting annual store opening targets and,

in turn, negatively impact net revenues, operating income and earnings per share;

• any material interruption in the Company’s supply chain beyond its

control, such as material interruption of roasted coffee supply due to the casualty

loss of any of the Company’s roasting plants or the failures of third-party suppliers,

or interruptions in service by common carriers that ship goods within the



IBS PLEKHANOV 2011

Company’s distribution channels, or trade restrictions, such as increased tariffs or

quotas, embargoes or customs restrictions; and

• the impact on Starbucks business of factors such as labor discord, war,

terrorism (including incidents targeting Starbucks), political instability in certain

markets and natural disasters.

• The Company may not be successful in implementing important strategic

initiatives, which may have a material adverse impact on its business and financial

results.

There is no assurance that the Company will be able to implement important

strategic initiatives in accordance with its expectations, which may result in a

material adverse impact on the Company’s business and financial results. These

strategic initiatives are designed to drive long-term shareholder value and improve

Starbucks results of operations, and include:

• ongoing initiatives to improve the current state of the business by

refocusing on the customer experience in the stores, new products and store design

elements, and new training and tools for the Company’s store partners to help them

give customers a superior experience;

• balancing disciplined global store growth while meeting target store-level

unit economics in a given market;

• executing a multi-channel advertising and marketing campaign to

effectively communicate the Company’s message directly to Starbucks consumers

and partners; and

• focusing on relevant innovation and profitable growth platforms, such as

the recent introduction of Starbucks soluble coffee, VIA.

• Economic conditions in the US and certain International markets could

adversely affect the Company’s business and financial results.



IBS PLEKHANOV 2011

As a retailer that is dependent upon consumer discretionary spending, the

Company’s results of operations are sensitive to changes in macro-economic

conditions. Starbucks customers may have less money for discretionary purchases

as a result of job losses, foreclosures, bankruptcies, reduced access to credit and

falling home prices. Any resulting decreases in customer traffic or average value

per transaction will negatively impact the Company’s financial performance as

reduced revenues result in sales de-leveraging which creates downward pressure

on margins. There is also a risk that if negative economic conditions persist for a

long period of time, consumers may make long-lasting changes to their

discretionary purchasing behavior, including less frequent discretionary purchases

on a more permanent basis.

• Failure to meet market expectations for Starbucks financial performance

will likely adversely affect the market price and volatility of Starbucks stock.

The Company’s failure to meet market expectations going forward,

particularly with respect to operating margins, earnings per share, comparable store

sales, and net revenues, will likely result in a decline and/or increased volatility in

the market price of Starbucks stock.

• Starbucks is highly dependent on the financial performance of its US

operating segment.

The Company’s financial performance is highly dependent on its US

operating segment, which comprised approximately three-quarters of consolidated

total net revenues in fiscal 2009. The Company continued to experience negative

traffic in its US stores in fiscal 2009, which adversely affected the operating results

of the US segment and the Company as a whole. Although the US segment’s

operating results improved in fiscal 2009 compared to fiscal 2008 due to the

Company’s restructuring efforts, if improvements in its financial performance do



IBS PLEKHANOV 2011

not continue, the Company’s business and financial results will continue to be

adversely affected.

• Starbucks is increasingly dependent on the success of its International

operating segment in order to achieve its growth targets.

The Company’s future growth increasingly depends on the growth and

sustained profitability of its International operating segment. Some or all of the

Company’s International market business units (“MBUs”), which Starbucks

generally defines by the countries or regions in which they operate, may not be

successful in their operations or in achieving expected growth, which ultimately

requires achieving consistent, stable net revenues and earnings. The performance

of the International operating segment may be adversely affected by economic

downturns in one or more of the Company’s large MBUs. Additionally, some

factors that will be critical to the success of International MBUs are different than

those affecting the Company’s US stores and licensees. Tastes naturally vary by

region, and consumers in new international markets into which Starbucks and its

licensees expand may not embrace Starbucks products to the same extent as

consumers in the Company’s existing markets. Occupancy costs and store

operating expenses are also sometimes higher internationally than in the US due to

higher rents for prime store locations or costs of compliance with country-specific

regulatory requirements. Because many of the Company’s International operations

are in an early phase of development, operating expenses as a percentage of related

revenues are often higher compared to US operations. The Company’s

International operations are also subject to additional inherent risks of conducting

business abroad, such as:

• foreign currency exchange rate fluctuations;

• changes or uncertainties in economic, legal, regulatory, social and political

conditions in the Company’s markets;



IBS PLEKHANOV 2011

• interpretation and application of laws and regulations;

• restrictive actions of foreign or US governmental authorities affecting trade

and foreign investment, including protective measures such as export and customs

duties and tariffs and restrictions on the level of foreign ownership;

• import or other business licensing requirements; • the enforceability of

intellectual property and contract rights; • limitations on the repatriation of funds

and foreign currency exchange restrictions; • in developing economies, the growth

rate in the portion of the population achieving targeted levels of disposable income

may not be as fast as the Company forecasts;

• difficulty in staffing, developing and managing foreign operations,

including ensuring the consistency of product quality and service, due to distance,

language and cultural differences; and

• local laws that make it more expensive and complex to negotiate with,

retain or terminate employees.

Moreover, many of the foregoing risks are particularly acute in developing

countries, which are important to the Company’s long-term growth prospects.

• Starbucks International operating segment is highly dependent on the

financial performance of its Canada, Japan and UK market.

Starbucks Canada, Japan and UK markets account for a significant portion

of the net revenues and profit contribution of the Company’s International

operating segment. Any significant decline in the financial performance of one of

these key markets may have a material adverse impact on the results of operations

of the entire International operating segment, if not partially or fully offset by

positive financial performance from the other two major markets.

• Starbucks faces intense competition in the specialty coffee market, which

could lead to reduced profitability.



IBS PLEKHANOV 2011

A description of the general competitive conditions in which Starbucks

operates appears under “Competition” in Item 1. In the US, the continued focus by

one or more large competitors in the quick-service restaurant sector on selling

high-quality specialty coffee beverages at a low cost has attracted Starbucks

customers and could, if the numbers become large enough, adversely affect the

Company’s sales and results of operations. Similarly, continued competition from

well-established competitors in international markets could hinder growth and

adversely affect the Company’s sales and results of operations in those markets.

The Company faces increased competition from larger well-known competitors

which have greater resources. Increasing competition from the US packaged coffee

and tea and ready-to-drink coffee beverage markets could adversely affect the

profitability of the CPG segment and the Company’s results of operations. Given

its premium brand, Starbucks may be impacted more severely than its competitors

by customers trading down to lower-priced coffee beverages and related products.

• A regional or global health pandemic could severely affect Starbucks

business.

A health pandemic is a disease outbreak that spreads rapidly and widely by

infection and affects many individuals in an area or population at the same time. If

a regional or global health pandemic were to occur, depending upon its duration

and severity, the Company’s business could be severely affected. Starbucks has

positioned itself as a third place between home and work where people can gather

together for human connection. Customers might avoid public gathering places in

the event of a health pandemic, and local, regional or national governments might

limit or ban public gatherings to halt or delay the spread of disease. A regional or

global health pandemic might also adversely impact the Company’s business by

disrupting or delaying production and delivery of materials and products in its

supply chain and by causing staffing shortages in its stores. The impact of a health



IBS PLEKHANOV 2011

pandemic on Starbucks might be disproportionately greater than on other

companies that depend less on the gathering of people together for the sale, use or

license of their products and services.

• The Company’s success depends substantially on the value of the

Starbucks brand.

Starbucks believes it has built an excellent reputation globally for the quality

of its products, for delivery of a consistently positive consumer experience and for

its corporate social responsibility programs. The Starbucks brand has been highly

rated in several global brand value studies. To be successful in the future,

particularly outside of US, where the Starbucks brand is less well-known,

management believes it must preserve, grow and leverage the value of the

Starbucks brand across its sales channels. Brand value is based in part on consumer

perceptions as to a variety of subjective qualities. Even isolated business incidents

that erode consumer trust, particularly if the incidents receive considerable

publicity or result in litigation, can significantly reduce brand value. Consumer

demand for the Company’s products and its brand equity could diminish

significantly if Starbucks fails to preserve the quality of its products, is perceived

to act in an unethical or socially irresponsible manner or fails to deliver a

consistently positive consumer experience in each of its markets.

• The Company’s business depends in large part on the success of its

business partners and suppliers, and the Company’s brand and reputation may be

harmed by actions taken by third parties that are outside of the Company’s control.

The Company’s business strategy, including its plans for new stores,

foodservice, branded products and other initiatives, relies significantly on a variety

of licensee and partnership relationships, particularly in its International markets.

Licensees are often authorized to use the Starbucks logo and provide Starbucks-

branded beverages, food and other products directly to customers. The Company



IBS PLEKHANOV 2011

provides training and support to, and monitors the operations of, these business

partners, but the product quality and service they deliver to Starbucks customers

may be diminished by any number of factors beyond the Company’s control,

including financial pressures. Management believes customers expect the same

quality of products and service from the Company’s licensees as they do from

Starbucks and the Company strives to ensure customers have the same experience

whether they visit a Company- operated or licensed store. Any shortcoming of a

Starbucks business partner, particularly an issue affecting the quality of the service

experience or the safety of beverages or food, may be attributed by customers to

Starbucks, thus damaging the Company’s reputation and brand value and

potentially affecting the results of operations.

The Company’s products and in particular, its coffee and tea products, are

sourced from a wide variety of domestic and international vendors. The Company

relies on international vendors to provide high quality product that comply with

applicable laws. The Company’s ability to find qualified vendors who meet our

standards and supply products in a timely and efficient manner is a significant

challenge, especially with respect to goods sourced from outside the US. These

issues could negatively impact the Company’s business and profitability.

• The loss of key personnel or difficulties recruiting and retaining qualified

personnel could jeopardize the Company’s ability to meet its financial targets.

The Company’s success depends substantially on the contributions and

abilities of key executives and other employees, and on its ability to recruit and

retain high quality employees to work in and manage Starbucks stores. Starbucks

must continue to recruit, retain and motivate management and other employees

sufficient to maintain its current business and support its projected growth. A loss

of key employees or a significant shortage of high quality store employees could

jeopardize the Company’s ability to meet its financial targets.



IBS PLEKHANOV 2011

• Effectively managing the Company’s growth is challenging.

Effectively managing growth can be challenging, particularly as Starbucks

expands into new markets internationally, where it must balance the need for

flexibility and a degree of autonomy for local management against the need for

consistency with the Company’s goals, philosophy and standards. Growth can

make it increasingly difficult to ensure a consistent supply of high quality raw

materials, to locate and hire sufficient numbers of key employees to meet the

Company’s financial targets, to maintain an effective system of internal controls

for a globally dispersed enterprise and to train employees worldwide to deliver a

consistently high quality product and customer experience.

• Adverse public or medical opinions about the health effects of consuming

the Company’s products, as well as reports of incidents involving food-borne

illnesses or food tampering, whether or not accurate, could harm its business.

Some Starbucks products contain caffeine, dairy products, sugar and other

active compounds, the health effects of which are the subject of increasing public

scrutiny, including the suggestion that excessive consumption of caffeine, dairy

products, sugar and other active compounds can lead to a variety of adverse health

effects. There has also been greater public awareness that sedentary lifestyles,

combined with excessive consumption of high-calorie foods, have led to a rapidly

rising rate of obesity. Particularly in the US, there is increasing consumer

awareness of health risks, including obesity, due in part to increasing publicity and

attention from health organizations, as well as increased consumer litigation based

on alleged adverse health impacts of consumption of various food products. While

Starbucks has a variety of healthier choice beverage and food items, including

items that are low in caffeine and calories, an unfavorable report on the health

effects of caffeine or other compounds present in the Company’s products, or

negative publicity or litigation arising from other health risks such as obesity,



IBS PLEKHANOV 2011

could significantly reduce the demand for the Company’s beverages and food

products.

Similarly, instances or reports, whether true or not, of unclean water supply,

food-borne illnesses and food tampering have in the past severely injured the

reputations of companies in the food processing, grocery and quick- service

restaurant sectors and could in the future affect the Company as well. Any report

linking Starbucks to the use of unclean water, food-borne illnesses or food

tampering could damage its brand value, immediately and severely hurt sales of its

beverages and food products, and possibly lead to product liability claims. Clean

water is critical to the preparation of specialty coffee beverages. The Company’s

ability to ensure a clean water supply to its stores is limited, particularly in some

International locations. If customers become ill from food-borne illnesses, the

Company could also be forced to temporarily close some stores. In addition,

instances of food-borne illnesses or food tampering, even those occurring solely at

the restaurants or stores of competitors, could, by resulting in negative publicity

about the foodservice industry, adversely affect Starbucks sales on a regional or

global basis. A decrease in customer traffic as a result of these health concerns or

negative publicity, or as a result of a temporary closure of any of the Company’s

stores, could materially harm the Company’s business and results of operations.

• Deterioration in operating performance could lead to increased leverage,

which may harm the Company’s financial condition and results of operations.

Any reduction in cash flow relative to the level of the Company’s financial

obligations would result in an increase in leverage. Any increase in leverage could

lead to deterioration in Starbucks credit ratings, which could limit the availability

of additional financing and increase its cost of obtaining financing. In addition, an

increase in leverage could raise the likelihood of a financial covenant breach which



IBS PLEKHANOV 2011

in turn could limit the Company’s access to existing funding under its credit

facility.

The Company’s ability to satisfy its operating lease obligations and make

payments of principal and interest on its indebtedness depends on its future

performance. Should the Company experience deterioration in operating

performance, it will have less cash flow available to meet these obligations. In

addition, if such deterioration were to lead to the closure of underperforming

stores, the Company would need to fund the costs of terminating store leases. If

Starbucks is unable to generate sufficient cash flow from operations in the future to

satisfy these financial obligations, it may be required to, among other things:

• seek additional financing in the debt or equity markets; • refinance or

restructure all or a portion of its indebtedness; • sell selected assets; or • reduce or

delay planned capital or operating expenditures.

Such measures might not be sufficient to enable Starbucks to satisfy its

financial obligations. In addition, any such financing, refinancing or sale of assets

might not be available on economically favorable terms.

• Starbucks relies heavily on information technology in its operations, and

any material failure, inadequacy, interruption or security failure of that technology

could harm the Company’s ability to effectively operate its business.

Starbucks relies heavily on information technology systems across its

operations, including for management of its supply chain, point-of-sale processing

in its stores, and various other processes and transactions. The Company’s ability

to effectively manage its business and coordinate the production, distribution and

sale of its products depends significantly on the reliability and capacity of these

systems. The failure of these systems to operate effectively, problems with

transitioning to upgraded or replacement systems, or a breach in security of these

systems could cause delays in product sales and reduced efficiency of the



IBS PLEKHANOV 2011

Company’s operations, and significant capital investments could be required to

remediate the problem.

• Failure of the Company to comply with applicable laws and regulations

could harm its business and financial results.

Starbucks policies and procedures are designed to comply with all applicable

laws and regulations, including those imposed by the SEC, NASDAQ, and foreign

countries, as well as applicable labor laws. Additional legal and regulatory

requirements, together with the fact that foreign laws occasionally conflict with

domestic laws, increase the complexity of the regulatory environment in which the

Company operates and the related cost of compliance. Failure to comply with the

various laws and regulations may result in damage to Starbucks reputation, civil

and criminal liability, fines and penalties, increased cost of regulatory compliance

and restatements of the Company’s financial statements.

For fiscal 2010, the Company expects revenues to grow in the low-to-mid

single digits compared to fiscal 2009, driven by modestly positive comparable

store sales, a 53rd fiscal week, and approximately 100 planned net new stores in

the US and approximately 200 net new stores in International markets. Both the

US and International net new additions are expected to be primarily licensed

stores.

Given these revenue expectations, combined with the Company’s reduced

cost structure, in-store operating efficiencies, and lower restructuring charges,

Starbucks currently expects significant improvement in its consolidated operating

margin in fiscal 2010. Operating cash flow for fiscal 2010 is currently expected to

reach approximately $1.4 billion and capital expenditures are expected to range

from $500 million to $550 million.

Starbucks has three reportable operating segments: US, International and

CPG. The US and International segments both include Company-operated retail



IBS PLEKHANOV 2011

stores and licensed retail stores. Licensed stores frequently have a higher operating

margin than Company-operated stores. Under the licensed model, Starbucks

receives a reduced share of the total store revenues, but this is more than offset by

the reduction in its share of costs as these are primarily borne by the licensee. The

International segment has a higher relative share of licensed stores versus

Company-operated compared to the US segment; however, the US segment has

been operating significantly longer than the International segment and has

developed deeper awareness of, and attachment to, the Starbucks brand and stores

among its customer base. As a result, the more mature US segment has

significantly more stores, and higher total revenues than the International segment.

Average sales per store are also higher in the US due to various factors including

length of time in market and local income levels. Further, certain market costs,

particularly occupancy costs, are lower in the US segment compared to the average

for the International segment, which comprises a more diverse group of operations.

As a result of the relative strength of the brand in the US segment, the number of

stores, the higher unit volumes, and the lower market costs, the US segment,

despite its higher relative percentage of Company-operated stores, has a higher

operating margin, excluding restructuring costs, than the less-developed

International segment.

The Company’s International store base continues to expand and Starbucks

has been focusing on achieving sustainable growth from established international

markets while at the same time investing in emerging markets, such as China,

Brazil and Russia. The Company’s newer international markets require a more

extensive support organization, relative to the current levels of revenue and

operating income.

The CPG segment includes packaged coffee and tea, and other branded

products operations worldwide, and the US foodservice business. For the packaged



IBS PLEKHANOV 2011

coffee and tea and branded products, Starbucks operates primarily through

licensing arrangements and joint ventures with large consumer products business

partners, most significantly with Kraft for distribution of packaged coffees and

teas, and The North American Coffee Partnership with the Pepsi-Cola Company

for manufacturing and distribution of ready-to-drink beverages. This operating

model allows the CPG segment to leverage the business partners’ existing

infrastructures and to extend the Starbucks brand in an efficient way. Most of the

customer revenues from the packaged coffee and ready-to-drink products are

recognized as revenues by the licensed or joint venture business partner, not by the

CPG segment. Royalties and payments from our licensing agreements are recorded

under licensing revenue, and the proportionate share of the results of the

Company’s joint ventures are included, on a net basis, in Income from equity

investees on the consolidated statements of earnings. The US foodservice business

sells coffee and other related products to institutional foodservice companies with

the majority of its sales through national broadline distribution networks. The CPG

segment reflects relatively lower revenues, a modest cost structure, and a resulting

higher operating margin, compared to the Company’s other two reporting

segments, which consist primarily of retail stores.

Expenses pertaining to corporate administrative functions that support the

operating segments but are not specifically attributable to or managed by any

segment are not included in the reported financial results of the operating

segments. These unallocated corporate expenses include certain general and

administrative expenses, related depreciation and amortization expenses, corporate

restructuring charges and amounts included in Net interest income and other and

Interest expense on the consolidated statements of earnings.



IBS PLEKHANOV 2011

Starbucks (SBUX.O) is planning aggressive growth again in Japan after

having shored up its profit margins and is eyeing a partner to enter the Indian

market, the head of the world's largest coffee retailer said.

The launch will coincide with a new focus on growth in Japan, where

decisions over the past few years to slow the pace of store expansion, review its

cost structure and raise prices have firmed up profit margins following a slide into

the red in 2003.

Japan's instant coffee market was worth about $2.3 billion in 2009, roughly

the same size as the fresh coffee market, according to Euromonitor. By

comparison, the U.S. instant market came to about $640 million, against $7.6

billion for fresh coffee.

Nestle is by far the biggest player in Japan with nearly two-thirds of the

market through the Nescafe and Excella brands. Another one-fourth is covered by

AGF, a joint venture between Kraft and Japanese food firm Ajinomoto (2802.T).

Starbucks will sell a box of three Via sticks for 300 yen, or 100 yen per cup.

A box of twelve sticks will sell for 1,000 yen. It comes in two flavors -- Colombia

and Italian roast.

That will make it considerably more expensive than rival offerings on

shelves in Japan, where a Nescafe box of 15 sticks of ready-mix for cafe au lait

sells for just under 300 yen.

Starbucks Coffee Company announced two important milestones as part of

its long-term commitment to environmental stewardship. The company has entered

into the construction phase of the U.S. Green Building Council’s (USGBC) LEED

Volume Certification pilot program, which will enable the company to reduce the

environmental impact of its stores on a global scale with significant cost and time

efficiencies; and Starbucks has also begun implementing its LED lighting

conversion program, the result of an alliance with GE Consumer & Industrial to



IBS PLEKHANOV 2011

develop a solution that will help reduce energy consumption as well as utility and

maintenance costs at Starbucks stores around the world.

The USGBC is working with Starbucks and other Volume Certification pilot

contributors to develop resources that will help integrate the adoption of LEED

into the standard design, construction, and operations practices of participating

organizations. Over the next six months, Starbucks will build or renovate a

minimum of 10 pilot stores in six different bioregions around the world. Once the

pilot stores’ environmental strategies are audited and approved, they can be

replicated elsewhere. This capability will allow Starbucks to reach its goal of

achieving LEED certification for all new company-owned stores worldwide

beginning in late 2010.

In fiscal 2009, we unveiled a bold and innovative store design approach,

with new concepts in Seattle, Paris and London—all enthusiastically received. All

newly constructed company-operated stores worldwide will be LEED®-certified

beginning this calendar year, moving us closer to our goal of significantly reducing

our environmental footprint. This initiative, coupled with locally relevant store

designs and renovations, is helping us form deep and long-lasting connections with

customers in their own neighborhoods.

With our progress over the past two years, we are now in a position to take

advantage of the global opportunity for Starbucks. Improvements in the U.S.

business will allow us to pursue disciplined new store growth internationally.

While Starbucks now operates in more than 50 countries (we added Portugal,

Bulgaria and Poland in fiscal 2009), we are still in the early stages of international

growth. We expect future growth for Starbucks to come from deeper expansion in

markets where we already have a strong presence, such as the UK, Canada and

Japan. Our progress in China continues, and we believe it will one day be the

largest market for Starbucks outside the U.S.



IBS PLEKHANOV 2011

As part of our international strategy, we will also seize opportunities to

move beyond our retail stores. Extending our profitable global consumer products

group allows us to reach more customers in more places, and we plan to grow this

business at an accelerated pace around the world. We see significant runway for

CPG to grow, and we will be poised to capture that opportunity with an evolution

of our distribution structure and with an increasing variety of offerings in the

grocery channel.

Our future lies in our ability to innovate, to be forward-thinking and nimble.

In fiscal 2009, we wrote a new playbook for just that with the launch of Starbucks

VIATM Ready Brew. We have been extremely excited to see our customers in

North America embrace this 100 percent natural roasted soluble coffee that

maintains the high standards of quality and taste of freshly brewed Starbucks®

coffee. This is a substantial new global growth platform within our core business,

representing the first significant innovation in more than 50 years in the $21 billion

global instant coffee category. Starbucks VIATM also gives customers an easy and

affordable single-serve option at home and on-the-go. We look forward to

extending the product internationally—both in our stores and in grocery

channels—in fiscal 2010.

Another growth vehicle will be Seattle’s Best Coffee. Our research tells us

we can aggressively position SBC with new customers, and we plan to create

compelling franchising and distribution opportunities in 2010. We have ambitious

goals for the brand and look forward to making some big moves in the coming

months.

The Company’s objective is to maintain Starbucks standing as one of the

most recognized and respected brands in the world. To achieve this goal, the

Company plans to continue disciplined global expansion of its retail and licensed

store base, to introduce relevant new products in all its channels, and to selectively



IBS PLEKHANOV 2011

develop new channels of distribution. The Company’s Global Responsibility

strategy and commitments related to coffee and the communities it does business

in, as well as its focus on being an employer of choice, are also key complements

to its business strategies.

References

1. http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome

2. http://beginnersinvest.about.com/cs/newinvestors/a/021103a.htm

3. http://www.investment2011.com/index.php/tag/starbucks/

4. http://www.evancarmichael.com/Other/612/Starbucks-Strategy.html

5. http://www.gaebler.com/Howard-Schultz-and-Starbucks.htm

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome�

http://beginnersinvest.about.com/cs/newinvestors/a/021103a.htm�

http://www.investment2011.com/index.php/tag/starbucks/�

http://www.evancarmichael.com/Other/612/Starbucks-Strategy.html�

http://wwwgaebler.com/Howard-Schultz-and-Starbucks.htm�


232 Section 4. Global player. IBS PLEKHANOV 2011

SECTION 4. GLOBAL PLAYER

MARIA KINAROVA “BRITISH AMERICAN TOBACCO”

Introduction

This research has been conducted with an aim

to develop a business plan for British

American Tobacco Company. The work contains the

descriptive view of tobacco industry in general and a

five year forecast of the economic environment

changes in the market where the company operates.

The business plan contains SWOT analyses

identifying the main opportunities and difficulties

that British American Tobacco may experience

within a 5 year period and projections of company’s

results. One of the chapters in this work is devoted to recommendations and

proposals of business ideas which can help the company to overcome negative

business changes in the industry and to develop a strong strategic plan of further

business development.

Today, British American Tobacco represents the world’s second largest

tobacco group by global market share, with its brands sold in more than 180

markets. Possessing more than 250 brands in its portfolio, due to statistics,

BAT makes the cigarette chosen by one in eight of the world’s one billion

adult smokers. For more than 100 years the company has been developing its

global presence across the world. Founded in 1902, by 1912 it had become one of

the world’s top dozen companies by market capitalization. Currently, 50 cigarette

MARIA KINAROVA


Section 4. Global player.Maria Kinarova “British American Tobacco” 233 IBS PLEKHANOV 2011

factories in 41 countries are run by BAT and more than 60 000 people are

employed by it worldwide. BAT's global cigarette brands include Dunhill, Kent,

Lucky Strike, and Pall Mall -- just four in a portfolio of about 300. 1

Brief overview and projections of BAT’s financial situation

British American Tobacco is currently valued at $80 billion USD. In 2009, it

generated £ 2.9 billion ($4.8 billion USD) in profits after taxes. The company

reported 907 billion sticks in cigarette volume sold worldwide, down by 1% from

2008. According to tobacco market analysts at Euromonitor International, BAT

held a 12.7% retail volume market share in cigarettes worldwide in 2009 and a

20.7% volume share of the global market (excluding China).2

In 2009, BAT’s best performing region was the Africa and Middle East

region. BAT reported £724 million ($1.17 billion USD) in operational profits, a

41% increase from 2008. Cigarette volume in the region increased by 11% to 127

billion sticks in 2009.

3

Given the Group’s history of growth in profit from operations, its high and stable

cash conversion rate from profit into cash, the access to the £1.75 billion, revolving

credit facility which is used only as a back stop and the spread of banks providing

the facilities, BAT represents a company with a stable access to the debt capital

markets. This, together with the maturity profile of debt, spread over a long period

with only limited redemptions scheduled for 2010, provides confidence that the

Group has sufficient working capital for the foreseeable future. After reviewing the

Group’s results in the previous periods it can be concluded that the company has

adequate resources to continue stable operating during the next 5 years. As at 31

1http://www.bat.com/ 2 Euromonitor International. British American Tobacco in Tobacco. Euromonitor

International; 2010 July 2010. 3 British American Tobacco. British American Tobacco Annual Report 2009. 2009.


234 Section 4. Global player. Maria Kinarova “British American Tobacco” IBS PLEKHANOV 2011

December 2009, the ratings from Moody’s and S&P were Baa1/BBB+ with a

stable outlook (end 2008: Baa1/BBB+). The strength of the ratings has

underpinned the debt issuance during 2008 and 2009 and, despite the impact of

fluctuations in financial markets, BAT can be confident of its ability to access the

debt capital markets.1

Vision and Mission

Vision:

To become a leader on the global tobacco market in order to create value for

shareholders and to satisfy clients’ needs in the best way.

Mission:

To develop sustainable and responsible business across the globe and to

become a market winning organization, satisfying customers’ needs and providing

them with innovative products of best quality.

Tobacco industry: General Overview

The tobacco industry is one of the most profitable industries in the world.

The global cigarette business alone is valued at $559.9 billion USD.The tobacco

industry generally refers to the companies involved in the manufacture of

cigarettes, cigars, snuff, chewing and pipe tobacco. The international tobacco

market is dominated by five major transnational tobacco companies (TTC): China

National Tobacco Company (CNTC), Philip Morris International (PMI), British

American Tobacco (BAT), Japan Tobacco International (JTI) and Imperial

Tobacco, all of which focus on selling their lethal products in markets around the

world. In most, countries these companies either have long established dominance,

or have purchased the major domestic producer or producers, often a former state 1 British American Tobacco. British American Tobacco Annual Report 2009. 2009.

http://en.wikipedia.org/wiki/Cigarette�

http://en.wikipedia.org/wiki/Cigar�

http://en.wikipedia.org/wiki/Snuff�

http://en.wikipedia.org/wiki/Smoking_pipe_%28tobacco%29�



monopoly. The United States has one other substantial independent firm, Lorillard.

India has its own major player, ITC Limited. There are a small number of

surviving state monopolies, and some small independent firms.

The biggest market is China where some 350 million smokers consume

around 2,200 billion cigarettes a year, or some 41 per cent of the global total.

Though, the industry in China is state-owned. Outside of China, the four largest

stock market listed international tobacco companies compete and account for

around 46 per cent of the global market. Due to BAT, the estimates of market

shares for 2009 were: Phillip Morris International- 16%; British American

Tobacco – 13%; Japan Tobacco – 11%; Imperial Tobacco – 6%1

Tobacco industry in Russia

Russia is the world’s third largest tobacco market by volume. Russia’s

tobacco market is unique in that all four of the major transnational tobacco

companies (TTCs) operate in the country, with all of the big manufacturers

investing in facilities, brands, marketing and distribution. Since 2001, local

ownership market shares have decreased dramatically from 42% of the market in

2001 to 7% in 2009. Also, more than in other tobacco markets, there is huge

diversity in cigarette brands across the country. This is due in part to the presence

of and competition between the TTCs and also due to the complicated distribution,

retailing and marketing of tobacco products in Russia. 2

1 http://www.britishamericantobacco.com/

Retail volume sales have

2 Euromonitor International [database on the Internet]. Cigarettes: Russia. Euromonitor International. c 2010 [cited 2010 June 2].

http://en.wikipedia.org/wiki/Lorillard�

http://en.wikipedia.org/wiki/ITC_Limited�



increased by over 30% (31.6%) in the last ten years from 290 billion sticks in 1999

to 382 billion sticks in 2009.1

Tobacco industry: Current situation and future forecasts

In general, 2009 was a difficult time for all fast moving consumer goods.

Economic instability in the world influenced a reduction of tobacco consumption

and a preference change to cheaper cigarettes. Total market volume declined by

around 2 per cent in BAT’s key markets, with consumer down-trading moving

some of this volume into illicit trade. The illicit trade in tobacco goods – smuggled

or tax-evaded by any other means – is, in effect, one of BAT’s major global

competitors, representing up to 12 per cent of world consumption. That is a black

market estimated at up to 660 billion cigarettes a year, making governments around

the world lose up to 30 billion a year in avoided tobacco taxes.2

Judging by the scale of black market development, the illicit trade will

continue to be a strong drain on the industry during the following 5 years,

attracting customers by cheaper prices and stealing returns from the tobacco

companies. Still, the government is expected to concentrate forces on struggling

against the ‘menace’ of smoking and reducing the black market power.

Economic impact

Today most commentators are forecasting improving economic conditions,

though it will definitely take time for economies to strengthen. The unemployment

rate is still rather high, especially in the developed countries that negatively

influence the consumption power, as a result, some level of adverse consumer

response in these markets should be expected during the next five years3

1 Euromonitor International [database on the Internet]. Cigarettes: Russia.

Euromonitor International. c 2010 [cited 2010 June 2].

.

Therefore, a lot of clients may continue to prefer lower-class cigarettes at lower

2 http://www.britishamericantobacco.com/ 3 http://www.imf.org/external/pubs/ft/survey/so/2010/NEW090210A.htm



prices. On the other hand, some developing markets have been less affected by the

global recession and are likely to see a measure of economic recovery which is a

favorable condition for British American Tobacco, as nearly two-thirds of BAT

revenue comes from developing markets, giving it an advantage in comparison to

the competitors. This aspect will be more precisely studied in the following

chapter.

Due to forecasts, in some of those developing countries that has been less

effected by financial crisis and where the living standards are improving yearly the

consumer preferences may move to more expensive tobacco brands.

BAT’s recent acquisitions of tobacco companies Bentoel in Indonesia and

Scandinavian Tobacco in Denmark are expected to strengthen BAT’s access to the

emerging Indonesian and Eastern European markets even more and provide a

platform for future growth. The 2008 Tekel acquisition in Turkey increased BAT’s

market share fivefold to 34%.

Despite the overall downturn of tobacco market during the crisis, due to

BAT’s large investments in marketing programs and innovations, the overall

volume share in key markets was virtually unchanged during the time of financial

instability and will have a positive influence on operating activities during the

following 5 years as well.

Governmental regulations

Analyzing the tobacco market, governmental regulations should be

especially highlighted among the negative environmental changes. Regulation of

the industry continues to increase, including official governmental programs,

graphic health warnings on packs with description of the diseases provoked by

smoking, tougher restrictions on smoking in public places, ban on tobacco

advertising and some bans on shops displaying tobacco products at the point of

sale.



John Dalli, member of European Commission, announced his main tasks for

future and said that, in his view, ideal would be turning European Union to a non-

smoking zone, which certainly seems to be impossible but represents a signal of

further smoking restrictions and toughening of anti-smoking regulations. 1 In

Russia a new anti-smoking policy for 2010-2015 was adopted by the government

which includes increase of excise duties up to 30- 40 % for cigarettes with filters

and up to 70 % for cigarettes without filters2, leading them to the average

European price level. Besides it, the new policy is also aimed to stimulate increase

of taxes on the tobacco producer’s level on all tobacco products and to establish a

ban on any kind of tax-free or duty-free tobacco sales. 3The Ukraine government

who already increased the excise duties in 2009 is also discussing the further

possible growth of taxes in the following years.4The current situation in Germany,

with its budget deficit, stimulates the discussions in the Ministry of Finance

concerning the necessity to increase taxes on tobacco products in order to improve

the economic situation, on the one hand and, on the other hand, to continue

struggling against smoking. According to plans of federal government, due to tax

raise in 2011 the budget will rise by 200 mln EUR and in 2014 it may increase by

800 mln EUR. Therefore, due to some projections, the prices on tobacco in

Germany may increase by 40%. 5

Sharply rising taxes in markets where tobacco prices are already rather high

today prove the fact that consumers will continue to switch to cheaper brands or

contraband, therefore this trend is likely to remain during the coming years.

1 http://www.pravo.ru/interpravo/news/view/39853/ 2 http://infox.ru/business/consumer/2009/12/14/nik.phtml 3 http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=105331 4 http://www.rosbalt.ru/2010/06/24/748070.html 5 http://www.euromag.ru/germany/4561.html



Demographic situation

Generally speaking, the below-mentioned trends indicate that individual

smokers will consume fewer cigarettes each and smaller percentages of

populations will smoke due to price increases and various anti-smoking policies.

However, due to demographic statistics the number of adults in the world over the

age of 20 is forecast to grow by around 11 per cent over the next ten years. As a

result, it can be concluded that global annual sales will be broadly unchanged in a

decade’s time. In general, world consumption forecasts also suggest that the world

market is likely to remain fairly stable during the coming 10 years. In fact, taking

into account industry and economic projections described below and stability in

financial results shown by BAT last year and in the previous periods, it can be said

that no negative changes will take place during the coming 5 years in the

company’s business.



SWOT Analysis

Strength - Firm Presence in

Emerging Markets - Strong and well

diversified brand portfolio

- Marketing and innovations

- Sustainability

Weaknesses - Foreign exchange rate

exposure - Controversy of tobacco

business - Resource allocation - Marketing for low class

cigarettes

Opportunities

- Increase of share market

- New mergers and acquisitions

- Products and services expansion

- Leadership in innovations

Threats - Illicit trade - Excise and tax - Foreign exchange rate

exposures - Managements of cost

base - Wrongly valued

acquisition opportunities

Strength

Firm Presence in Emerging Markets

Nicandro Durante, BAT’s Chief Operating Officer, recently highlighted

BAT’s strength against its competitors in emerging markets. He described BAT as

having the “best exposure to developing markets” of all publicly-traded

transnational tobacco companies (TTC) which gives the company an advantage

because emerging markets are “likely to be more resilient than developed

markets”.

In fact, BAT appears to be better positioned to profit from emerging markets

than, for example, a global market leader and at the same time the main competitor

Philipp Morris International (PMI). In 2009, 77% of the BAT’s total volume and

60% of its total profits were attributed to gains in developing markets compared to



68% and 48% of PMI’s total volume and profits accordingly.1 Key developing

markets targeted by BAT include such countries as Egypt, Russia, and Eastern

Europe.2

In Latin America, BAT currently dominates the market and has held

approximately 55% of the cigarette market since 2003. Important markets in the

region include Brazil (86% market share), Chile (98%),Venezuela (90%), Peru

(76%) and Costa Rica (66%). BAT has dominated the African cigarette market

since the early 20th century. Over 90% of cigarette sales in Ghana, Malawi,

Nigeria, Sierra Leone, Zambia, Kenya, Mauritius, South Africa, Uganda and

Zimbabwe are attributable to BAT. The strong positions in the developing markets

open doors for further expansion during the following year and show prospects of

increased profit.

BAT’s exposure to developing markets

Source: Nicandro Durante, BAT’s Chief Operating Officer3

Strong and well diversified brand portfolio

1http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO7VNH87/$F

ILE/medMD7VWMDP.pdf?openelement. 2 Euromonitor International. British American Tobacco in Tobacco. Euromonitor

International; 2010 July 2010. 3http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO7VNH87/$F

ILE/medMD7VWMDP.pdf?openelement.



Another important point that British American Tobacco possesses is a strong

brand portfolio with a balance of products across price segments and geographies

that has allowed the company to deliver a consistent growth year on year, whatever

the trading conditions and consumer preferences were. With its strong brand

portfolio and an overall brand mix that is balanced between various cigarette

classes - premium, mid-price and low-price- at the same time combined with its

wide geographic spread, BAT continues to be very well placed to build strong

consumer loyalty and deliver sustainable growth.

Marketing and innovations in GDBs (Global Drive Brands): Through the years BAT has invested in various marketing programs and

development of innovations. That was one of the key factors helping the company

to keep overall volume share in the markets virtually unchanged during the

financial crisis proving that investments were made in right directions and the

programs work effectively. During the crisis BAT’s Global Drive Brands –

Dunhill, Kent, Lucky Strike and Pall Mall grew by 4 per cent in volume and gained

a big market share.1

Sustainability

What is also important, BAT has developed strong relations

with its retail partners and created joint marketing programs with them, resulting in

acknowledgement of BAT as a partner of choice. This stimulates deeper

integration with the retailers and improvement of business process. Therefore,

BAT’s well developed marketing and innovativeness represent another strength

which will help the company during the next 5 years.

In 2009, BAT, for the eighth year running, appeared to be the only tobacco

company included in the Dow Jones Sustainability World Index. This index tracks

the economic, environmental and social performance of leading companies based

on how well they integrate sustainability into their businesses. This factor seems to

1 http://www.bat.com/



be especially important nowadays because consumers pay more and more attention

to corporate responsibility and sustainability of companies and give preferences to

the leaders. This helps BAT to create a successful brand image of a responsible

company and in fact attract more clients by it.

Weaknesses

Foreign exchange rate exposure

The fact that BAT represents a great multinational company, operating in

most of world markets is certainly related to success and large profit margins. On

the other hand, it also has a negative side related to exposure to foreign exchange

rates fluctuations. Operating in more than 180 markets and having factories in 41

countries means that BAT has a lot of receipts and payments in currencies other

than sterling- the reporting currency of the company. This all represents the

possibility of cash flow losses and increase in costs connected to sudden exchange

rate movements.

Controversy of tobacco business

In fact, business which BAT involved in is rather controversial and sensitive

due to the proven fact that smoking damages health and even kills. Therefore,

tobacco producers are always carrying double risk of getting involved into various

law suits and judicial settlements. These issues are strongly connected to

company’s brand name which can be easily damaged. Especially nowadays, at the

time of world struggling against smoking the industry where BAT operates cannot

be called stable and people’s attitude to is oftennot positive. This weakness is

strongly related to possible financial losses. Any sign of corporate irresponsibility,

any kind of unfavorable outcome, or settlement of pending or future litigation can

cause a both a brand damage and material impact on consolidated results of

operations, cash flows and financial position.



Resource allocation and business integration

Due to the fact that BAT is a multinational company operating in more than

180 world markets, it becomes difficult for the company to take advantage of its

scale. In fact, it can be concluded that BAT lacks global integration and

standardization of its business processes which increases overall cost level and

adversely influence efficiency of performing. At the same time BAT’s resource

allocation is also imperfect, and that is also recognized by the company itself,

meaning that BAT does not decrease the production costs and ineffectively serves

the markets.

Marketing for low class cigarettes

As it has been mentioned before in the industry forecast, in the developing

countries, less affected by crisis, the preference choice may change to more

premium brands, what cannot be said about the developed countries. BAT’s

marketing is focused mainly on Global Drive Brands – Dunhill, Kent, Lucky Strike

and Pall Mall which represent premium and middle class segment. Still, BAT’s

low-class segment stays in shadow and marketing for Alliance, Viceroy and Ява

remains underdeveloped. Therefore, customers switching from Pall Mall to

cheaper cigarettes do not choose, for example Alliance or Ява, but go to

competitors. This influences a customer loyalty loss and decrease in sales. At the

same time, Philipp Morris and JTI increased their investments in low-class

cigarettes marketing and were rather successful in promoting Bond Street, LD and

Peter I during the crisis. 1

Opportunities

Increase of share market

During the recession BAT continued to invest in marketing programs

especially in the segment of premium cigarettes. As a result, the overall volume

share in key markets remained stable despite overall economic instability and 1 http://www.rbcdaily.ru/2010/02/26/market/461050



Global Drive Brands (GDBs) have grown by a combined 4 per cent in volume,

gaining a market share, helped by continued organic volume growth. Due to

success of premium brands and in case of more intensive investments in low class

cigarettes and development of a good marketing campaign for them as well, BAT

has all chances to increase the market share during 2011-2016. Besides, BAT

chose a right innovation-driven strategy which can also help the company to

conquer the market.

New mergers and acquisitions

Historically, BAT has been greatly involved in mergers and acquisitions,

most of which appeared to be rather successful and contributed to BAT’s global

development and achievement of the leading positions. For example, for 2009,

revenue growth was enhanced by the full year benefits of the acquisitions of the

cigarette and snuffbusinesses of Skandinavisk Tobakskompagni (ST) and the

purchase of the cigarette assets of Tekel, the Turkish state tobacco company that

also gave the company a stronger position in the cigarette market and opened doors

for ‘kretek’ segment.1

Therefore, continuous growth strategy through M&A

represents future opportunity for BAT.

Products and services expansion

BAT has proved to be rather creative and innovative in their product

strategies. It has gained the customers’ loyalty by the constant review of the

clients’ needs and preferences. At the time of sudden preference changes, such as

moves to cheaper cigarettes in the developed countries and a possible switch to

higher quality cigarettes in the developing regions should stimulate BAT to think

about expansion of the product lines and range of services in accordance with the

customers’ needs. 1British American Tobacco Annual Report and Accounts 2009



Leadership in innovations

Through itshistory, BAT proved to be an innovative company with large

investments in research and development which amounted to £ 112 mln in 2009.

Its large Group R&D Centre is based in the UK, and has laboratories in

Southampton and Cambridge. BAT seeks to develop innovative technologies and

new products to reduce the harm caused by tobacco use. The company invests

heavily in scientific research and is committed to engaging with the external

scientific community. Its approach to tobacco harm reduction is to pursue the

research, development and test-marketing of innovative tobacco products,

including smokeless, that will be acceptable to consumers and be recognized by the

scientific and public health communities and regulators as posing reduced risks to

health.1

Threats

Taking into account the strong innovative base which has been developed

through years, BAT has a good opportunity to win the leadership in innovations in

case it continues its large investments in R&D.

Illicit trade

A sudden and disproportionate excise increase combined with ineffective

governmental regulations -lack of law enforcement and weak border controls may

cause a strengthening of illicit trade in the future. Customers will turn to widely

available low-priced forgery goods. If this happens, it may cause an erosion of

brand equity; it may also be followed by an insufficiency of investment in trade

marketing and distribution and, as a result, lower sales volumes and reduced

profits.

1http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52ANF5?opendoc

ument&SKN=1



Excise and tax As it has been forecast before, there is a high probability of toughening of

smoking regulations. Governments in many countries are going to raise excise and

taxes on tobacco products within context of national health policies and as a means

of revenueraising. This may cause rejection of the Group’s legal tax-paid products

by clients for cheaper goods from illicit sources. As a result, it will have an impact

on sales volume and alteration of sales mix.

Foreign exchange rate exposures BAT’s cash flows and earning are exposed to foreign exchange rate

fluctuation and its movements against sterling-the Group’s reporting currency. The

company has a lot of receipts and payments in non-domestic currencies due to

multinational business which increases exposure to currency changes. Therefore, it

may cause volatility in reported results and cost of operation with a negative

impact on average financial performance.

Management of cost base High inflation of key production commodities (leaf, wood, pulp, energy),

wage inflation, insufficiency of resources stimulated by the difficult

macroeconomic conditions may cause increase in product costs, salary costs with a

negative impact on cash flow.1

Wrongly-valued acquisition opportunities

These macroeconomic changes may lead to

inability to manage cost savings meaning lower profits and reduced funds for

investment in long-term growth. All these may also stimulate reduction of

shareholder’s confidence.

BAT has always been interested and highly involved in mergers and

acquisitions which has become a part of company’s history. Though most of the

1British American Tobacco Annual Report and Accounts 2009



recent acquisitions were considered successful, there always exists a risk of lack of

market intelligence, overvaluation of the assets or understatement of the liabilities.

These risks mean a loss of great opportunity, loss of volume, market share and

profit and, of course, damage to corporate reputation.

Business proposals

Better business integration and resource allocation.

Due to the fact that BAT is a multinational company operating in more than

180 world markets, much attention should be paid to business integration into one

global enterprise that will allow the company to take better advantage of its scale.

Greater integration across the whole supply chain will help to reduce costs,

increase speed to market and improve effectiveness and efficiency of work.

Standardization of business processes and simplification of the portfolio should be

further developed as a cost reducing mechanism making integration easier to

implement and develop.

Smarter resource allocation can be vitally important for BAT as well,

especially at the time of overall economic recession which decrease the sales and

increase of tobacco restriction through taxes and extra duties which influence the

cost rises. Starting from year 2000, the Group has reduced the number of cigarette

factories from 83 to 50 as the first step of resource reallocation. Factories in Latvia,

and Italy were replaced by acquired plants in Indonesia and Turkey with lower

costs of production and more convenient geographical position. Vranje factory in

Serbia was rationalized and currently the consultation process is commenced for

downsizing the factory in Pagewood, Australia. This strategy should come to the

first line, it should be further developed and implemented during 2011-2016,

aiming to relocate the production to the less costly regions where new factories

will be able to serve larger number of markets.



Mergers and Acquisitions

In order to fulfill the vision and to achieve leadership of the global tobacco

industry, BAT can increase the volume and value share of the market by means of

mergers and acquisitions. Acquisitions have always played a large part in

company’s growth strategy. For example, Tekel and Skandinavisk

Tobakskompagni (ST), both acquired in mid-2008, are being successfully

integrated into the Group, contributing to overall growth in volumes. During 2009

BAT acquired Bentoel in Indonesia, giving the company a stronger position in the

fourth largest cigarette market in the world and enabling it to enter the distinctive

‘kretek’ segment.

Considering acquisitions, BAT can be recommended to keep this possibility

in mind and to conduct the necessary research and analyses, but in a long run

perspective. In the view of the following 5 years, the company should, first of all,

fully integrate the already acquired plants and companies in order to take a better

advantage of the increase in volume and total share. While analyzing, future

acquirers should first of all work out a specific, well-articulated value creation

ideas. Due to McKinsey advice, the strategic rationale for an acquisition that

creates value typically conforms to at least one of the following five archetypes:

improving the performance of the target company, removing excess capacity from

an industry, creating market access for products, acquiring skills or technologies

more quickly or at lower cost than they could be built in-house, and picking

winners early and helping them develop their businesses. 1

Promotion of low class cigarettes

As it has been mentioned before in the chapter describing the strength of

British American Tobacco, the company has made large contributions in marketing

campaigns and innovation development for its key success brands- Dunhill, Kent, 1http://www.mckinseyquarterly.com/Corporate_Finance/M_A/The_five_types_of_s

uccessful_acquisitions_2635



Lucky Strike and Pall Mall. Therefore, these premium class cigarettes have gained

popularity and won a market share. The same cannot be said about the low class

brands which lack a good promotion program. Taking the example of competitors’

performance during the recession, JTI operated successfully due to a wise

promotion of cheaper cigarettes to which customers switched during crisis- for

example, LD and “Peter I” , due to Forbes magazine, joint the rating of 50 leading

brands judging by sales turnover on Russian market. Philip Morris also

successfully promoted its Bond Street high sales of which compensated the

decrease of Marlboro and Parliament purchases.1

BAT’s low price products like Alliance, Viceroy and Ява are not highly in

demand by consumers. The fact that they do not represent BAT’s Global Drive

Brands, mistakably, results in underpaid attention and insufficient contribution to

their promotion. Therefore, a lot of BAT’s customers forced by economic

conditions to change their preference to cheaper cigarettes, do not simply consume

Alliance instead of Pall Mall or Kent but switch to competitors’ products.

2

Therefore, in order to maintain the customer base and sales volume and

develop the clients’ loyalty, in the following 5 years BAT is recommended to

increase its contributions in marketing programs for low class cigarettes which will

continue to be in demand especially in developed countries. This campaign may be

easily financed through internal sources: in 2009 the company generated profit of

$4.8 billion USD and due to economic and market projections, BAT will not

experience large negative changes in sales and profit in the following 5 years.

1 http://www.rbcdaily.ru/2010/02/26/market/461050 2 http://www.rbcdaily.ru/2010/02/26/market/461050



References

1. http://www.bat.com/ 2. http://www.batrussia.ru/ 3. British American Tobacco Annual Report and Accounts 2009 4. Euromonitor International. British American Tobacco in Tobacco.

Euromonitor International; 2010 July 2010. 5. British American Tobacco. British American Tobacco Annual Report 2009.

2009. 6. Euromonitor International [database on the Internet]. Cigarettes: Russia.

Euromonitor International. c 2010 [cited 2010 June 2]. 7. http://www.pravo.ru/interpravo/news/view/39853/ 8. http://infox.ru/business/consumer/2009/12/14/nik.phtml 9. http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=105331 10. http://www.imf.org/external/pubs/ft/survey/so/2010/NEW090210A.htm 11. http://www.rosbalt.ru/2010/06/24/748070.html 12. 1http://www.euromag.ru/germany/4561.html 13. http://www.rbcdaily.ru/2010/02/26/market/461050 14. http://www.mckinseyquarterly.com/Corporate_Finance/M_A/The_five_type

s_of_successful_acquisitions_2635

http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=105331�

http://www.rbcdaily.ru/2010/02/26/market/461050�


252 Section 4. Global player. Ekaterina Gurieva “General Electric” IBS PLEKHANOV 2011

EKATERINA GURIEVA “GENERAL ELECTRIC”

Introduction

Strategy formulation is vital to the well-being

of a company or organization. Corporate strategy is

supposed to be the means by which an organization

achieves and sustains success. In this work, the strategy

of General Electric is considered for the next 5 years.

The goal of this work is to consider the economic

environment in which General Electric operates

nowadays, to determine its position in this economic environment, to create the

strategy of the company over the next 5 years and to understand how this strategy

will be supported financially. The paper is structured as follows. The first section

deals with the short overview of the General Electric company, the main accent of

this part is made on the current situation of the company. The second section is

devoted to the economic environment in which General Electric operates

today.The main tendencies of economic development are outlined for today and for

the next 5 years. The third part of this work provides the strategy of GE for the

next 5 years. This part is based on the personal opinion of the author and the

opinions of professionals. Afterwards, the results of the work are combined in the

conclusions and recommendations are made.

The company General Electric has been chosen for analysis as the author

of this work is currently an employee of General Electric and has personal interest

in this company.

The methodological basis of this work is conduction of desk research and

personal ideas. The desk research included the analysis of the ideas of domestic

EKATERINA GURIEVA


Section 4. Global player.Ekaterina Gurieva “General Electric” 253 IBS PLEKHANOV 2011

and foreign experts, the personal ideas are based on the personal experience of the

author of working at GE.

General Electric today

The General Electric Company, or GE, is an

Americanmultinationalconglomerate corporation incorporated in the State of New

York. The Company operates through five segments: Energy Infrastructure,

Technology Infrastructure, NBC Universal (NBCU), Capital Finance and

Consumer & Industrial. Through these businesses, GE participates in a wide

variety of markets including the generation, transmission and distribution of

electricity (e.g. nuclear, gas and solar), lighting, industrial automation, medical

imaging equipment, motors, railway locomotives, aircraftjet engines, and aviation

services. GE is also one of the US's pre-eminent financial services providers. GE

Capital, comprising commercial finance, commercial aircraft leasing, real estate,

and energy financial services, is its largest segment. GE Capital is the largest

revenue driver, including GE Commercial Finance, GE Money, and GE Consumer

Finance. GE's diversification provides the company with a degree of protection

against poor performance in any business segment. Additionally, GE's size enables

it to buy and sell companies at opportune times, taking advantage of favorable

market conditions.

GE traces its beginnings to Thomas A. Edison, who established Edison

Electric Light Company in 1878. In 1892, a merger of Edison General Electric

Company and Thomson-Houston Electric Company created General Electric

Company. GE is the only company listed in the Dow Jones Industrial Index today

that was also included in the original index in 18961

Jeffrey Immelt

.

is the current chairman of the board and chief executive

officer of GE. He was selected by GE's Board of Directors in 2000 to replace John

1 www.wikipedia.com

http://en.wikipedia.org/wiki/United_States�

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http://en.wikipedia.org/wiki/Conglomerate_(company)�

http://en.wikipedia.org/wiki/GE_Technology_Infrastructure�

http://en.wikipedia.org/wiki/NBC_Universal�

http://en.wikipedia.org/wiki/Electricity�

http://en.wikipedia.org/wiki/Nuclear_reactor_technology�

http://en.wikipedia.org/wiki/Lighting�

http://en.wikipedia.org/wiki/Automation�

http://en.wikipedia.org/wiki/Medical_imaging�

http://en.wikipedia.org/wiki/Medical_imaging�

http://en.wikipedia.org/wiki/Electric_motor�

http://en.wikipedia.org/wiki/Locomotive�

http://en.wikipedia.org/wiki/Aircraft�

http://en.wikipedia.org/wiki/Aircraft�

http://en.wikipedia.org/wiki/Aviation�

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Francis Welch Jr. (Jack Welch) following his retirement. His tenure as the

Chairman and CEO started at a time of crisis — he took over the role on

September 7, 2001 four days before the terrorist attacks on the United States,

which killed two employees and cost GE's insurance business $600 million — as

well as having a direct effect on the company's Aircraft Engines sector.

Over the last years, GE has received several awards honoring them for

their accomplishments, values and reputation:

- in 2010, GE ranked №1 in healthcare and №19 overall on Fast Company's

list of the world's top 50 most innovative companies.

- in 2010, GE was named in Ethisphere's list of the world's most ethical

companies.

- in 2010, GE was named in Business Week's list of the world's 25 most

inventive companies.

- in 2010, GE ranked among Fortune magazine's listing of the Most Admired

Companies in the World for its 5th consecutive year1

- recognized as a "sustainability leader" by Dow Jones, GE is included in the

2009 North American and World indexes of the Dow Jones Sustainability Index

(DJSI) for the sixth consecutive year.

.

- in 2009, Fortune ranked GE among its list of the world's top companies for

leaders.

Nowadays GE has the fourth most recognized brand in the world, worth

almost $48 billion.

In 2010, Forbes ranked GE as the world's second largest company (after

JP Morgan Chase), based on a formula that compared the total sales, profits, assets,

and market value of several multinational companies. GE operates in more than

100 countries and employs about 300,000 people worldwide.

1 www.ge.com

http://en.wikipedia.org/wiki/Jack_Welch�

http://en.wikipedia.org/wiki/Forbes�

http://en.wikipedia.org/wiki/JP_Morgan_Chase�



Economic environment

Looking at the current business environment, we can suppose that the

world is not going to become stable and predictable in the nearfuture. Thus,

successful business players need to have a corporate culture and strategic process

that is flexible and can adapt quickly. The following tendencies can be observed in

the next 1-5 years:

- An increasingly interdependent global economy wracked by excess

manufacturing capacity and the resulting price pressure. This is why

unemployment remains stubborn and margin growth is tough to achieve. GE

should invest in innovation and build new revenue streams from their

current capabilities.

- A new economic order of global competitiveness and growth. Competition

from places like China and India has evolved beyond low-cost

manufacturing labour to include highly-competitive engineering graduates

who earn less than production workers in the developed world. GE should

think globally, but understand local consequences. Only competitive

companies can serve investors, employees and stakeholders during this

dramatic phase of globalization.

- A move to consolidate distribution channels, which creates value for

consumers but makes it difficult for manufacturers to maintain margins. GE

should have strong direct sales forces, low costs and value propositions that

tie their own profitability to their customers’.

- An opportunity to build growth platforms based on unstoppable

demographics. GE should sustain long-term growth by betting on high-

growth markets to which they can bring unique technical and management

capabilities.



- A more volatile and uncertain world. The underlying insecurity created 2008

financial crisis will not end soon. GE should keep the confidence of

customers, investors and employees by maintaining financial and cultural

strength.

- ‘Decoupling’ of economies showing that economic engines of growth are

emerging around the world. China and resource-rich countries have

remained strong through the 2008 financial crisis. Additionally, many

countries (outside of China and India) have the ability to drive growth over

the next 5 to 10 years. GE should use the opportunities offered by emerging

countries.

- Moving to the era of activist government. The intersection between

government and big business is very strong nowadays. Companies are going

to be good at understanding regulations and the subsequent government

impact.

- Strong competition. GE competes against a number of other companies, but

most of them are more specialized, focusing in one industry. GE's

operations, on the other hand, are spread across many different industries,

limiting its exposure to competition from any one company. Of GE'

competitors, Siemens AG (SI) is the most significant. Siemens operates in a

number of different industries, many of which it shares with GE. In fact,

NBC Universal is the only of GE's six divisions that Siemens does not

directly compete with. Despite GE's size advantage, however, Siemens is

still a very large company in its own right, and it is the only company that

effectively competes against GE in nearly all of its main industries1

.

1www.reuters.com

http://www.wikinvest.com/wiki/Siemens_AG_(SI)�



Figure 1. GE vs Siemens

2009 GE vs. Siemens

income data

Revenue (mm)

Net Income (mm)

Profit Margin

5 Yr. Avg.

Profit Margin

Revenue per

employee

Net income

per employee

GE $156,783 $11,025 7.29% 11.17% $522,610 $38,113

Siemens €76,651 €2,292 3.66% 3.92% $244,662 $8,958

Industry average - - 1.34% 4.22% -

Apart from Siemens, GE competitors are also Philips, Honeywell, United

Technology Corporation, 3 M Company (Tier 1 GE competitors) and Bank of

America, JPMorgan Chase, News Corporation, Viacom, The Walt Disney

Company (Tier 2 GE competitors).

Anyway, GE has very strong position in the industry, but it should

always keep close eyes at its main competitors.

In this environment, GE can outperform by executing its strategic

imperatives: sustain strong business model; strengthen portfolio; drive growth

initiatives.

The economic environment and the responses of GE to it can presented in

the form of the table:

http://www.wikinvest.com/wiki/Siemens�



Figure 2.GE in economic environment

Macro themes Multi-speed world Government intersection Customer productivity More volatility Reputation counts

Reset (2008-2009)

- protect GE Capital - preserve cash - competitive organization

Renewal (2010)

- simplify portfolio - accumulate cash - invest in growth

Growth (2011+) - strong capital franchise - industrial innovation - financial flexibility

GE well positioned for current environment

GE strategy over the next 5 years

The main strategy that has been implemented in GE for the last 6 years

and that in my opinion should be preserved for the future development is the

strategy of growth. ‘Keep your company safe but keep building the future’ – these

are the words of the CEO of GE Jeffrey Immelt which show the top priorities of

GE growth strategy. Of course, as the business environment is constantly changing

and cannot be predicted, the growth strategy should constantly be adjusted to the

changing environment, but that does not mean putting growth on the back burner.

The GE growth strategy has proved to work and to be effective. For

instance, after 9/11, when commercial aviation was a disaster, GE plowed ahead.

Already a force in jet engines and aircraft leasing, GE continued to invest in new

products and customer relationships. The result: its market share grew.

http://en.wikipedia.org/wiki/Jeffrey_Immelt�



The key growth drivers for GE in the next 5 years can be determined as

follows:

1) Lead in technology seeking competitive cost advantage in everything,

launch great new products

2) Grow services that achieve customer productivity

3) Build leadership in the key emerging markets

4) Expand the core of the company through infrastructure adjacencies

5) Run a very good and disciplined and valuable specialty finance business

6) Solve problems for customers & society

7) Develop leaders

Leadership in technology and innovation

Technology and innovation are at the heart of GE’s initiatives. Technical

leadership produces high-margin products, wins competitive battles and creates

new markets. GE has about 2,000 researchers in its Global Research Centers linked

to market and customer needs and in constant dialogue with GE businesses.

The main long-term 5-years goal in this area is to implement the reverse

innovation model in all businesses of GE. This approach is the opposite of the

glocalization (global/local) approach that GE has employed for decades. With

glocalization, GE developed products in the USA and then distributed them

worldwide, with some adaptations to local conditions. Glocalization has been

powerful strategy, because when GE globalized in the last 30 years, they took their

products mostly into Europe and Japan. Glocalization model worked because

customer base in Europe and Japan is similar to USA. That is why the product

from the USA could be taken and adapted to Europe and Japan. What happened in

last 5 years, in countries like China and India emerging middle class appeared,

which is fundamentally different as a customer base compared to the USA. For

example, per capita income in India is 200$ while it is 50000$ in the USA. That is

why it became not possible to pick and adapt business model from the USA to



China and India. Glocalization has been very successful strategy for GE because

largely because of glocalization, GE’s revenues outside the United States soared

from $4.8 billion, or 19% of total revenues, in 1980, to $97 billion, or more than

half of the total, in 2009. But if reverse innovation model could be implemented in

heavily populated places like China and India, the growth would be 2-3 times

more. Of course, it is impossible to replace glocalization model with reverse

innovation model totally for the next 5 years. The two models need not just

coexist, but cooperate. The glocalization can be adapted for rich customers and in

rich regions of poor countries whereas reverse innovation should be implemented

in poor countries and in poor regions.

In 4 years, the implementation of the reverse innovation model should be in

process. On the first stage the local production should be implemented in emerging

markets (China, India, Russia). Once products have proven themselves in

emerging markets, they must be taken global, which may involve pioneering

radically new applications, establishing lower price points, and even using the

innovations to cannibalize higher-margin products in rich countries.

Reverse innovation is not a quick process and it requires thorough

preparation. It also brings big cultural changes which should be put as the central

part of the strategy. In 3 years, Indians, Chinese should be also present in the top

management of the company which will help to make cultural integration. Reverse

innovation is only possible when almost all the people and resources dedicated to

reverse innovation efforts are based and managed in the local market. The strategic

goal of GE in area of innovations in 3 years is also to develop these local growth

teams, whose work will be based on 3 principles: local resources (product

development, marketing, distribution, selling etc); connection to global technology

(GE Worldclass global technology center in the US); experimental approach

(uncertain outcome), resolving unknowns.



The short-term 1-2years goal of GE is to increase innovation investment,

adding $1 billion in 2011. Innovation investment is planned to be doubled in 2011

in comparison to previous years.

Figure 3. R&D investment ($ billion)

The main strategic goals for 2011 and 2012 are also to gain profitable

share through execution, innovation & more NPI; execute difficult technologies

better than competition; lower costs and higher margin. The main accent of

innovation is planned to be made in Aviation, Energy and Healthcare businesses.

In the Energy business a “tremendous diversity of technology,” a team of 15,000

engineers, lots of patents and “a big spend” means that GE will expect $3 billion to

$4 billion in orders over two years. In next 2 years new large-frame gas turbines,

more distributed energy, more service products will be launched. In Aviation, there

will be launches in the GEnx engine, the LEAP-X, which will go into the narrow-

body, new avionics products. In Healthcare, new segments with extremity MRs

and portable ultrasound products, new products in digital pathology, a growing

lineup of Brivo low-cost products for emerging markets are planned. At the same

time, the local production should start being implemented in all GE businesses in

emerging markets.

Growing services that increase customer productivity

Technical leadership has created a massive installed base of more than

100,000 long-lived GE jet engines, power turbines, locomotives and medical

00,5

11,5

22,5

33,5

44,5

5

History 2010 2011



devices for which GE can provide high-margin services for decades. In 2010, GE

services revenues grew to $34 billion, up 29%.

But services only work if they make the customers more profitable. In the

energy market, GE has built an asset optimization business to improve customers’

energy efficiency, uptime and environmental performance. In Healthcare, more

than 8,000 of GE installed products have broadband connections. This technology

is used to upgrade and repair the products remotely and proactively, creating more

uptime and revenue for the customers.

The main long-term 4-5-years goal of GE in the area of services is to

double the revenue from it, improve the quality of provided services, expand

margins through improved analytics & diagnostics. The great potential can be seen

in growing software and solutions. The revenues from it are estimated to increase

to $4 billion in 2015 from $0,4 billion in 2010.

GE is the major software player today, 14th largest by revenue. Its 1-3-

years goals are to invest in technology and analytics (HCIT, Qualibria, Smart Grid,

Movement planner are of great potential). The predictive analysis being now up to

25% is planned to be increased to more than 90%; the analysis cycle should be

decreased from 3 months to 2 weeks; the number of online users is planned to be

increased dramatically from hundreds to millions which will lead to substantial

revenue growth.

Building leadership in key emerging markets

GE makes more than half of its revenues outside of the USA. Five or 10

years ago, the incredible demise of the ASEAN region was predicted, as a giant

China and India basically stepped on the region and made it essentially irrelevant

vis-a-vis development. Through investment in the emerging markets, GE has

gained almost $5 billion for the last 5 years ($ 30 billion up to2010). But GE will

not stop despite the success it hasachieved; it will continue its investment in

emerging markets.



The long-term 4-5-years goal is to build leadership in emerging markets.

These markets include not only China and India, but also such resources-rich

countries as Russia, Australia, Latin America, Africa, Canada. The 5-years goal is

to increase the revenue from resources-rich countries by 10% (to $ 20 billion) and

to increase the revenue from emerging markets (China, India, ASEAN by 10% (to

$ 30 billion). The way to do it is to use company-country approach which includes

building key customer capabilities, establishing regional partnerships, increasing

M&A activity, investing in local products, leading market innovation, investing in

manufacturing and service.

At the same time many other countries (outside of China and India) have

the ability to growth over the next 5 years. For example, the projects in Malaysia

and Vietnam have done well, the projects in Indonesia seem to be perspective in

the long-run 4-5-years perspective.

The short-term (1-3-years) strategic goals of GE are connected with

China and India markets. Economies in emerging markets are “doing very well”

now and developed countries are “slowly improving.” China’s economy is

estimated to grow 9 percent and India’s 6.4 percent in 2011. That compares with

growth of 1.7 percent in Japan, 1.5 percent in the U.S. and 0.3 percent in the euro

region. Thus, GE plan is to double revenue from India to $6 billion in the next

three to four years. GE expects to expand its business in India mainly in energy,

transportation and aviation which will create new jobs.

Concerning China, GE expects sales in China to double in the next four

to five years. GE views China not only as a market, but also as a center of

excellence in technology and manufacturing that can benefit all of its products

around the world. Jeffrey Immelt signed an agreement with the Chinese

government to spend up to $50 million in China over the next five years

developing more environmentally friendly technologies. GE, which has nearly

13,000 employees in China will expand cooperation in the development of



advanced experimental technologies for sustainable economic growth with the

Chinese Cabinet’s National Development. GE will also provide management and

leadership training for up to 2,500 Chinese managers and government officials

over the next five years. The main accent in China is made on the coal gasification

and other energy-related fields, water-filtration technology, solar, wind and other

renewable power sources; winning in Healthcare through accelerating localization;

gaining market share in the Aviation as it considered to be the China future market

and biggest aviation market in the world; making partnerships with state-owned

enterprises in rail industry, transmission and distribution1

In Russia, GE has some good opportunities. Russia is going to reframe

and reinvest in itselectricity grid. It is the least efficient electricity grid in the

world. Here GE sees opportunities.

.

Australia is a boomtown for GE now in terms of all the oil, gas and

energy.

Brazil is extremely exciting country with good future long-term

perspectives, but in the next 5 years it is not considered as the core market for GE.

Expanding the core of the company

The overall long-term 4-5-year strategy of GE is to focus on its

healthcare, engine, energy, and other core manufacturing businesses instead of its

service-oriented businesses like GE Capital and NBC Universal. This strategy

originates from the times of the 2008 Financial Crisis, which has had a sizable

effect on GE, since the company generated half of its profits from GE Capital

Services (GECS), the company's financing arm.

GE Capital originally worked with the GE units that make consumer

products such as refrigerators and dishwashers. Eventually, it gained enough scale

and expertise to offer finance services for GE's more sophisticated industrial

1 www.newstimes.com

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http://www.wikinvest.com/wiki/2008_Financial_Crisis�



products, including power plants and jet engines. Now financial services account

for 46 percent of GE's revenue. As the company suffered a lot from Financial

Crisis, the following goal is to be achieved in the next 5 years: the company must

rely more on making physical products and less on financial engineering.

Technology-based manufacturing of all sorts has to be a central part of

reinvigorating the economy as in the long-run it has higher profit margins and

returns on capital than the financial sector. In the short-run (1-3 years) more than

4000 jobs will be created in manufacturing, production and research in GE. The

payroll should be increased, the 2-year goal is to increase the payroll for

employees of manufacturing sector twice to 450 by 2012. Still, the profits from GE

Capital are planned to increase in the short-run. But before that, it still has many

hurdles to clear next year, including resolving GE Capital's exposure to bad

commercial real estate loans. The lending arm has a large portfolio of bad loans in

commercial real estate, including office buildings that need to be cleared.

One more step of GE in concentrating more on its core activities and

diminishing the role of other activities is the NBC deal. On December 4, 2009,

General Electric agreed to give Comcast majority ownership in NBC Universal,

the oldest television network in the US. In the deal, Comcast merged its cable

networks and some of its web assets with NBC into a joint venture, paying GE

$16.5 billion for a 51% stake in NBC Universal. GE CEO Jeffrey Immelt said the

deal generated about $8 billion in cash to his company at closing. With the sale of

NBC, GE gained not only an immediate healthy boost in cash of $8-$9 billion but

also continued in its strategy of focusing on its core industrial businesses.

The strategy of GE in the next 5 years also includes mergers and

acquisitions activity, but the main goal is to make the company less dependent on

them. $ 6 billion are planned to be spent on M&A activity in 2011, and the main

accent should be made on the prosperous companies. When they become worse in

their segment and stop bringing competitive advantage to GE, the company should

http://www.wikinvest.com/wiki/Comcast�

http://www.wikinvest.com/wiki/NBC_Universal�



finish collaboration with them. According to the preliminary estimations, over the

next 5 years GE plans to spend about $ 30 billion on acquisitions.

Looking at the core businesses of GE, following conclusion can be made

for next 5 years: the transportation and healthcare sectors would see good growth,

and energy and aviation would see flattish growth.

Energy sector is planned to experience growth till 2015. The following

tendencies are expected:

- oil: a good new product pipeline, new gas turbines and distributed energy,

strong M&A pipeline in the energy business

- wind and thermal energy: down in 2011, pricing is planned to be tougher

next year

- offshore wind: it is very likely that GE will havea 25 percent market share

by 2015. Twenty-five percent market share will give about $3 billion in

revenue

- solar: five percent share in this business is $2 billion or $3 billion by 2015.

GE plans to give its solar business a charge in two years with the

introduction of panels with the same solar cell material used by industry cost

leader First Solar. In 2011, the energy giant expects to produce solar panels

made with cadmium telluride, a thin-film solar cell material, said Michael

Idelchik, vice president of advanced technologies at GE Global Research

Healthcare sector is also planned to experience recovery in next 5 years

because of the following tendencies:

- there is more certainty in the market, the growth markets are fantastic

- GE is counting on European markets

- strong positioning in adjacencies such as molecular diagnostics and imaging,

CT dose reduction, healthcare IT

Aviation sector is also planned to go positive till 2012 as it is a really good

market with lots of new airframes and new planes being discussed.



Transportation sector will also experience recovery till 2015 due to

following reasons:

- a big snap-back year in 2011 with an improved North American market

- heavying up R&D and transportation between now and 2010

In Appliances sector big investments in lighting are planned to be done.

The development and success of this sector depend to high extent on the home

market. If it gets better, the appliance market will also get better1

Solve problems for customers and society

.

In September 2003, Jeff Immelt challenged the business leaders at GE to

come up with "Imagination Breakthroughs," innovative new projects that would

serve as the centerpiece of GE's organic growth initiative. These changes are being

driven through the business units, focusing on GE Transportation as it launches a

series of groundbreaking, green products--from the Evolution Locomotive to the

Hybrid Locomotive. The growth process transforms the culture within GE

Transportation, leading to a redefinition of the marketing role, the implementation

of a "growth leader" profile and new decision-making processes to encourage

innovation and risk. Finally, growth presents a critical decision point, as

Transportation executives must decide whether or not to support the high-risk

Hybrid Locomotive project.

The 2 main GE strategic imagination projects are ‘ecomagination’ and

‘healthymagination’.

GE's Ecomagination is currently invested in emerging clean tech

industries, such as wind turbines and efficient engines for airplanes and

locomotives. In the next few years, the company plans to invest particularly in the

development of low-carbon products. $10 billion does seem like a lot, although in

2009, the company sold more than $18 billion worth of its Ecomagination

1 www.smartplanet.com



products, a revenue that it expects to double by 2015.

GE is hoping to make production of those products greener, as well: it has already

cut greenhouse gas emissions by 22% since 2004, and reduced water use by 30%

since 2006. The company is aiming at to halve its energy use and reduce

greenhouse gases by another 25% by 2015.

GE’s Healthymagination is a business strategy that will offer dramatic new

investments toward achieving sustainable health, while helping GE grow. It is all

part of GE’s dedication to solving the world's biggest problems.

By 2015, the goal of GE is to:

- significantly reduce the cost of precedures and processes where possible

with GE technology and services

- increase people's access to services, technologies and health education, touching

at least 100 million lives in a new way every year

- greatly improve quality of care for patients by partnering with physicians and

other stakeholders to focus on innovation that simplify and refine healthcare

procedures and accelerate standards of care

To reach these goals, the short-term goals are refocusing of efforts, from

research to product development, services, consumer capabilities, and partnerships

and use of all tools, technology, and expertise, from GE Healthcare to GE Capital,

NBC Universal, GE Water, GE Global Research, and the GE Foundation. 80 new

products are planned to be introduced in the frame of healthymagination program

till 2012.

One more strategic initiative of GE till 2015 is the purchase of 25000

electrocars, 12000 of them are planned to be purchased from Chevrolet Volt of

General Motors. In the next 3 years, GE could spend in this segment around $ 500

million. The short-term goal of GE is to buy 12000 Chevrolet Volt in 2011 and

later the cars of other producers will be bought.

Developing leaders



According to the words of Jeffrey Immelt, ‘We have always believed that

building strong leaders is a strategic imperative. When times are easy, leadership

can be taken for granted. When the world is turbulent, you appreciate great

people’.1

People have always been the greatest GE asset. People desiring to make

world better with new ideas and technologies are admired and welcomed by GE.

Worldwide, about $ 1 billion is invested every year on training and education

programs. Education is pervasive at all levels of organization – over the course of

15 years, GE’s 191 most-senior executives spent at least 12 months in training and

professional development. Different programs for leaders development exist such

as Entry-Level Leadership Program, Experienced Leadership Program. The

Crotonville Leadership Development Center created by J.Welch attracts the

world’s brightest and most influential minds, serves as a powerful organizational

force and commissions each of the employees with an important reminder: to never

stop learning.

These words determine the GE strategy in this area for the coming 5

years.

Thus, the strategy of GE concerning people in the next 5 years remains:

to never stop learning and to develop leaders who will successfully lead the

company to success. The financial goal for 5-years perspective is to increase

annual investment in people to $ 1,5 billion. Asian, European, Abu Dhabi, African

Learning Centers are planned to be developed whereas the Learning Center in

Russia, China, India are to be opened. The short-term goals are winning again the

rewards ‘Best company for leaders’ and ‘Best rotational leadership programs’;

development of GE’s rich system of human resource policies and practices.

The financial sources to finance the strategic goals of GE that have been

described above are earnings from investment in emerging markets (increasing

1 www.ge.com



sales in China, India); earnings from keeping GE Capital at 30-40% of total

operating earnings of the company; earnings from divestment of NBC ($ 8 billion);

earnings from concentrating on core activities; earnings from infrastructure

acquisitions (Dresser, Clarient, Wellstream).

The tendencies in the operating earnings for 2011 can be summarized in

the form of the table:

Figure 4. 2011 operating framework

Strong business segment profit growth, partially offset by NBCU dilution

Conclusions

This work has proved that strategy is essential for any business as it

outlines the main directions of its future development.

The main aim of this paper was to create the 5-year strategy for the

company based on its position in the industry and on the main tendencies in

Operating earnings Industrial

GE Capital

Corporate

Total operating

earnings

CFOA

Total revenues

2010 Flat

++

Flat/-

++

$ 14-15B

2011 +

++ -

++

$ 12-13B

0-5%

Drivers + healthcare, Transportation, M&A services - wind, higher R&D expend. + higher margins, lower losses, real estate firming NBCU dilution (-); less restructuring (+), pension (flat) + continued working capital improvements - lower progress payments + industrial; acquisitions NBCU equity inv-t in Corporate



economic environment. The work has been done for the company General Electric.

The first chapter provided a short overview of the company, the second chapter

was devoted to the description of current economic environment and its

perspectives over the next 5 years. In the third chapter the 5-year strategy was

presented for GE.

In the example of General Electric, we could see that strategy creation is not

an easy and quick process which requires time, a lot of preliminary work, good

knowledge of industry the company is operating in, the company’s position in this

industry, the company’ strengths and weaknesses, the company’s main goals and

values.

The core idea which lies behind GE strategy can be expressed in the

words of the CEO of the company Jeffrey Immelt: “When you’re GE, you don’t

have to do it in a day. You can do it in a decade and still have a lot of customers

that want to buy your stuff. Right? And so, we do that.1

References

”

1. Arnott, Sarah (March 26, 2010). "GE to build £99m UK wind turbine plant"

2. Fairly, Peter. The Greening of GEIEEE Spectrum, July 2005 3. Goldman, Davis; Pepitone, Julianne (December 3, 2009). "GE,

Comcast announce joint NBC deal" 4. Murphy, Dennis. GE completes Enron Wind acquisition; Launches

GE Wind EnergyDesert Sky Wind Farm, 10 May 2002 5. VentureBeat, Camille Ricketts. "GE Pumps 10B More Into Green

Technology R&D." June 24, 2010 6. http://www.ge.com 7. http://www.smartplanet.com 8. http://www.ft.com 9. http://www.reuters.com 10. http://www.ge.com 11. http://www.forbes.com 12. http://www.newstimes.com 13. http://www.wikipedia.com

1 www.smartplanet.com

http://www.independent.co.uk/news/business/news/ge-to-build-16399m-uk-wind-turbine-plant-1928159.html�

http://www.independent.co.uk/news/business/news/ge-to-build-16399m-uk-wind-turbine-plant-1928159.html�

http://spectrum.ieee.org/energy/environment/the-greening-of-ge�

http://spectrum.ieee.org/energy/environment/the-greening-of-ge�

http://money.cnn.com/2009/12/03/news/companies/comcast_nbc/index.htm�

http://money.cnn.com/2009/12/03/news/companies/comcast_nbc/index.htm�

http://www.desertskywind.com/news05022002.htm�

http://www.desertskywind.com/news05022002.htm�

http://green.venturebeat.com/2010/06/24/ge-pumps-10b-more-into-green-technology-rd/�

http://green.venturebeat.com/2010/06/24/ge-pumps-10b-more-into-green-technology-rd/�



14. http://www.ssrn.com 15. GE Annual Report 2009 16. GE Fact Sheet


Section 4. Global player.Ali Israilov “IBM” 273 IBS PLEKHANOV 2011

ALI ISRAILOV “IBM”

Corporate Culture and Identity

A number of dominant organizations have

failed in their respective industries due to many

reasons such as lack of productivity, poor strategic

planning, missed market opportunities, unsuitable

acquisitions, obsolete product portfolios,

underfunded research and development, etc. But

‘rarely is a company’s failure attributed to its

failed culture and just as rarely is a successful

company’s culture credited for its achievements’

(Want, 2007, pg.6).

Corporate culture ‘contributes directly to a company’s ability – or inability –

to effectively manage radically changing business conditions’ and is the only

reliable resource to deal with a dynamically changing business environment (Want,

2007, pgs.3-4). Want (2007) also mentions that when ‘companies are not able to

change their cultures, they cannot expect to be successful in responding to

radically changing business conditions in the marketplace. They will fail’.

‘Training Top 100’ magazine ranks companies that support corporate values

and enhance the work environment of employees. IBM had been ranked no. 1 in

reviews of 500 submissions (ManageSmarter, 2004), but principles can quickly

become empty slogans. ‘…like muscles that turn soft and weak if they’re not

exercised regularly’ (Rodgers et al., 1986). Therefore, it is necessary to continue

investigating if the values and principles that are so highly regarded by outside

observers are still effectively achieved in the workplace with the student section of

the workforce.

Internships, Work placements and Temporary Work

ALI ISRAILOV


274 Section 4. Global player. Ali Israilov “IBM” IBS PLEKHANOV 2011

There has been rapid emphasis put on internships in recent times among

students and employers alike with regards to its popularity and perceived

importance (Oldman and Hamadeh, 2003). Increasingly, organizations are turning

to their own internships to find permanent employees with employment directors

frequently describing their programs as ‘cost effective “bull pens” or

“probationary periods” because such programs are low risk means to assess the

merits of a potential employee’ (Oldman and Hamadeh, 2003). The same can be

said of the interns because they also use the experience to decide on the suitability

of the company, job role and/or industry they will eventually work in.

In this regard, IBM is no different than any other company hoping to find

appropriate future employees. The twelve month IBM Industrial Trainee (IT)

scheme is the largest student hire scheme with an estimated community of 500

hires per annum. The long-term aim is to provide future graduates with interesting

roles to keep IBM at the forefront of their minds. The work-placement scheme

within IBM hires students for various fields within technical and business areas,

including marketing, sales, IT, consulting and HR, to finance, research and

development, as well as manufacturing and supply chain logistics (ibm.com,

Industrial Trainees, 2009).

Forming an important link between learning and earning, work-placements

allow students to develop key competencies (refer to Appendix [C.1] IBM Key

Competencies), implement their own ideas and identify and/or confirm career

aspirations. The most useful element is the insight it provides into the workplace

culture, and the opportunities it offers in terms of discovering how well individuals

are able to integrate into different environments.

Subsequently, IBM consistently ranks in the ‘Top 10’ among students for

the following:

BusinessWeek: Ranked 4th “Best Place to Launch a Career.” (US)



BusinessWeek: Ranked 9th “Best Internship Program.” (US)

Universum: Ranked 4th “Best Engineer Program.” (India)

(ibm.com, Industrial Trainees, 2009)

Figure 1 IBM Corporate Structure

BUSINESS UNITS SECTORS MARKET CHANNELS GEO'S

IBM Global Financing Communication DIRECT

Americas

Integrated Operations Distribution Face‐to‐Face

Software Group Financial Services Teleweb

Asia Pacific

Sales & Distribution Industrial ibm.com

Systems & Technology Group

Public

Northeast IOT

Global Business Services INDIRECT

IBM Research Small & Medium

Businesses

Business Partners Southwest

IOT

Global Technology Services Alliances

COMMUNICATIONS, LEGAL, IT, HUMAN RESOURCES, FINANCE MARKETING, STRATEGY, SALES OPERATIONS

Source: Internal IBM Diagram, Induction Booklet

IBM’s History

IBM (International Business Machines Corporation) also known as ‘Big

Blue’ is an IT company providing software, hardware and consulting services in

over 170 countries and one of the few IT companies that has a history dating back



to the 19th century (Euromonitor International, Software & Services Industry

Profile – World, 2008). The company officially adopted its current name IBM in

1924 ‘due to the growth and extension of activities making the old name of the

company too limited’ (formerly known as the Computer Tabulating-Recording

Company, ibm.com, IBM History 1920s).

It was initially thought in the computer industry in the 1960s that selling

software would not be a profitable trade - it was either provided free of charge by

the computer manufacturers or written specifically for each computer installation.

There were a number of entrepreneurs who thought otherwise and several years

later the concept of charging for software products was given legitimacy by IBM’s

unbundling in June 1969 (Johnson, 1998). Grad (2002) reaffirms this by stating

that ‘many people believe that one pivotal event in the growth of the business

software products market was IBM's decision, in 1969, to price its software and

services separately from its hardware’. The companies founded by these software

pioneers grew to become enterprises worth hundreds of millions of dollars and

were the prototypes for the thousands of software companies that came after them

(Johnson, 1998).

Demise and Recovery

The early 1990s were turbulent times for the company with many observers

commenting that it was ‘a dinosaur’, ‘a wreck’ and ‘an implosion’ (Mills, 1996).

The recovery of the organisation, however, was predicted by other commentators

so long as the excessive bureaucracy and costs were eliminated. The appointment

of Lou Gerstner as CEO in 1993-2002 achieved this and growth had returned to all

the segments of the organisation. The underlying cause of the decline was the

failure to strategically plan with regards to its technological expansions, customer

commitments and influx of employees with poor job security. Through rigorous

management restructuring, ‘the company was able to commit to its promises both

to customers and employees’ (Mills, 1996).



As a result of the reformation period that transpired during the early 1990s,

the IBM brand today is ranked 2nd in the world in terms of its brand value

(Interbrand.com, Best Global Brands 2008) with Coca Cola positioned at the top of

the table and Microsoft in 3rd (Best Global Brands 2008). The subsequent rise of

the brand has led to an extensive product portfolio that provides a generous range

of products & services for all aspects of business needs from software applications

dealing with communication and collaboration capabilities to business consulting

services (IBM Company Segments & Capabilities).

Financial Analysis

The majority of the market share is not attributed to any one company as

even top performing corporations such as IBM and Microsoft control only 5.3%

and 3.3% respectively, while 88.80% is controlled by others (Global Software &

Services Industry, Market Share, 2008).

IBM generates revenues through five business divisions: GTS – Global

Technology Services (36.9%), STG – Systems and Technology Group (21.8%),

Software (20.4%), GBS – Global Business Services (18.4%) and Global Financing

(2.5%).

IBM recorded revenues of $98,786 million during the fiscal year ended

December 2007, an increase of 8.1% over 2006. The growth in 2007 revenues was

due to strong performance from GTS, GBS, and software business driven by key

middleware products. Strategic acquisitions and continued growth in emerging

markets – Brazil, Russia, India and China, also contributed to the increased

revenues. Operating profit was $14,474 million during fiscal year 2007, an

increase of 12.8% over 2006 with net profit at $10,418 million in fiscal year 2007,

an increase of 9.8% over 2006 (Butler Group, IBM Company Profile, 2008)

Corporate Values

The basic beliefs of Tom Watson, IBM’s founder, guided the company

through nearly a century of change – providing guideposts for multiple



reinventions that turned a small company into one of the pillars of global

commerce. He implemented a series of effective business tactics through a focus

on customer service and instilling company pride and loyalty in every worker.

Based on the two cultures that are inherently present within organisations, IBM

would be the best example of the more liberal company whereby ‘ideas come

ultimately from individuals...people are responsible, motivated and capable of

governing themselves’ (Handy, 1993, pg. 182).

By 2003, ‘IBMers’ came together by tens of thousands in a worldwide, 72-

hour on-line discussion on what, at its core, IBM propagates. Thousands of

comments posted by ‘IBMers’ over the course of the so called ‘ValueJams’ were

analysed and distilled into three values:

Dedication to every client’s success.

Innovation that matters – for our company and for the world.

Trust and personal responsibility in all relationships.

The values of ‘IBMers’ shape what choices they make on behalf of the

company. Having a shared set of values helps to make decisions and, in the

process, makes the company unique in terms of uplifting its employees and

providing value to its clients and other stakeholders.

In summary, the IT industry is an extremely dynamic and evolving sector in

which IBM had held some dominance until its slow decline within the late 1980s

and early 1990s. Its subsequent revival through Lou Gerstner has now made it the

2nd most valued brand in the world with highly regarded values towards its clients,

innovative practices and trust.

Diversification (New Products/New Market)

Diversification is aggressive growth strategy. The major reason for this issue

is because on the one hand products are not tested in the certain markets, on the

other hand there are no solid guarantees that markets themselves are profitable.

However IBM’s success and reputation derives from the consistent innovative



ideas which differentiate them from their competitors in the market. In order to

expand itself, IBM offering wide range of brand products to its customers. IBM is

considered as the international company, as the result new potential markets are

various markets all over the world. Set as the medium-sized business at first, the

company has diversified and establishes its offices in the countries like: France,

Germany, Hungary, Indonesia Italy and Jordan. The Russian Federation, after its

independence in 1991, has been characterized as potentially new market with

variety of opportunities. Today IBM has expanded and set up several offices

insuch financially-beneficial cities as Moscow, Petersburg, Tomsk, etc.. One of

the most innovate ideas (besides selling electronic products) was supporting local

middle and small sized businesses, by providing a full package of software as well

as hardware products.

Market Development (Existing Products/New Market)

IBM’s major and effective strategic approach which has been successfully

performed over decades is discovering new markets and supplying them with the

existing products. Firstly, IBM’s strategy involves exporting products. This has

the undisputed advantage of identifying the abilities of the product. If the market

has sufficient sales rates, then it is considered as the potential for the investment.

Secondly, after establishing itself in the market, IBM’s tactics involves searching

for the most attractive demand on behalf of electronic shops, computer clubs,

offices, etc. This is all known as discovering major distribution channels and

benefiting to the maximum from it. IBM is one of the most professional groups

which can easily adjust itself to all rules and regulations of the market. The

company has been very successful by expanding itself all over the world. The

company uses most convenient styles of cooperating by using local language

where necessary. This tactics breaks language barriers and helps to work in the

mutually-beneficial exchange process between local customers and IBM. (IBM’s



outlets, warehouses and even web-sites are constructed for the convenience of the

local consumers). For such countries as Mexico and Spain, all information is

provided in Spanish. Malaysia, Kuwait, Ireland,Hong Kong aretransactedin

English. Poland and Japan are negotiated in Polish and Japanese respectively.

Product Development (New Products/Existing Market)

The general and well-established strategy successfully obtained by

IBM;innovation of ideas and transforming those ideas into products and services

then furnishing those goods into the market. Thisis what the company is famous

for. Rather than discovering new potential markets and spending time and money

over sophisticated research, the company regularly uses New Products/Existing

Market strategy. This motivates IBM for more ideas, to set and reach objectives.

Operating in the same market encourages for new ideas, and determination of

objectives. IBM does possess those ideas and offers a wide range of variety of

products and services on the regular basis.

IBM Security Services

IBM Security Services has the absolute and undisputed leading position in

the market. IBM Security Services possess knowledge, experience, skills,

professionalism, capabilities, and highly efficient working personnel to furnish

customer with the best security ever. IBM constructseffective security bases to

decrease costs, develop services, and manage risk in the non-stop moving business

environment, searching for the best track of cost-positive change and by

strengthening and bringing security on the higher level:

• Searching and identifying the most dangerous threats

• Decreasing the costs for brand new security versions



• Searching and solving the threats of continuous situations with non-

observance

• Decreasing the costs of the effective and efficient control

IBM’s professional services:

Integrated communications services Connect technology (including computers, laptops, desktops, etc) into one worlds networking system

IT strategy and design opportunity Develops manufacturing of IT to implement integration between IT

strategy and business major objectives

Business sustainable services Sustain web operations safely, immoderately defines major threats and uses

the most efficient ways to protect them

IBM & ADM (Advanced customer management)

IBM’s ADM offers efficient distributional channels directed towards split

customer groups through well-established furnishing channels. Increasing revenue

is the major objective for any business to expand. By the help of IBM’s ACM

solution, the company researches and discovers customers UVP (unique value

proposition), most profitable customer groups and the collaboration and integration

strategy applied towards those groups. Those services derive from the long-term

work experience and represent the strategy that is IBM has built during decades:

Profit growth plan

Customer entrapping plan

Customer brainstorming strategy

Market brainstorming strategy

Efficient sales rate

Identification of new sales objectives

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Development and improvement of sales quality

Searching for the right personnel

Likethe most ambitious and successful companies, the IBM always looking

for young enthusiastic, perspective, responsible team-working apprentices who

under IBM’s control and training, would grow into professionals in different areas.

This is part of so-called long-term plan. This is the strategic approach which was

set up and improved on the regular basis from the moment company started its

journey in the world of business. The service is distinguished from others by its

specific way of choosing right person as well as settling him on the right place.

The approach consists of list of services which were verified and justified as the

beneficial ones:

Organizational and Structural Approach

Professional training analyses

Leadership identification and evaluation

Personnel development

Exclusive employees training

Self control, self confidence, team-working analyses

IBM’s corporate strategies

IBM’s corporate strategies – searching and discovering most essential

business strategies.. Those strategies consist of apply to front office services as:

Selling

Order entry

Customer service

Purchasing



Production

Control

IT

Payroll

HR

And back office services: :

Manufacturing

Warehousing

Distribution

Transportation

processes

The profitable strategies derive from appropriate strategic processes. IBM

improves itself by using those approaches in order to generate higher revenue and

receive more profit:

Major process identification

Quality/efficiency/effectiveness Process

Verification/justification Process

Determination Process

Evaluation Process

By using the strategic process approaches the company progressed

considerably in different operational, technological, distributional manufacturing

processes. Those processes also include:

Qualitative and quantitative manufacturing

Plant and factory establishment



Warehouse constructions and spaciousness

Technological development and

usage

IBM’s products and services

IBM’s products and service strategy– offering technologically advanced,

qualitative, well-designed, highly productive, useful and price-beneficial products

and services. Promoting and representing those products to the public in general is

an important strategy in which the company directs high financial investments in

order to receive recognition. The IBM is aware that with less contribution towards

the development of products and services, there is always the chance customer loss

in the market due to high competitions. IBM effectively controls this situation by

using and implementing its own policy:

STRATEGIES IN CORPORATE FINANCE – CASE STUDIES.

Section 4. Global player.Ali Israilov “IBM” 285

IBS PLEKHANOV 2011

Product innovation

Product construction

Product portfolio planning

Service portfolio planning

Product / service revenue expansion

New product/service development

IBM’s Expansion and development plan

IBM’s Expansion and Development plan- the brainstormed plan for the

efficient profit plan policy that provides most appropriate ways to expand the

business, increase the total revenue and establish its brand recognition in the

market. When IBM’s Expansion and Development plan is fully set, the

companystarts implementing it by using its professional service tools such as:

Aims, Objectives, Policy, Evaluation

Competition strategy

Strategy support

Implementation management acknowledgment

Competitive strategic approach ( SWAT, PESTLE)

Demand and supply research

Developing mergers and acquisition planning


286 Section 4. Global player. Ali Israilov “IBM”

IBS PLEKHANOV 2011

IBM’s moral ethics

IBM’s moral ethics – establishing list of rules and regulations which will go

alone together with beliefs, values, traditions, and customs to inspire the team,

strengthen the relationship in the organization, to set such environment in which

every member will work in the mutually beneficial exchange process within IBM.

IBM’s moral ethics systems integrate each person in one team to collaborate

evaluate and develop one common opinion which will be adoptedinto decision

making process. As the leader in technological goods and services around the

world, IBM has set effective time management to identify and implement major

aspects of ethical behavior:

Equal treatment policy

Traditional, Cultural, Religion acknowledgement

Responsibility, Understanding Policy

Personnel’s values believes

IBM’ SWOT Analyses

Strength

IBM is one of the most recognized organizations in the world. Over

decades it has established itself in all major countries. The company

demonstrates outstanding performance in the market, leaving all

competitors behind. IBM has invested enormous amount of finance,

assets and time which in the result turned into incredible revenues.



IBS PLEKHANOV 2011

The company has the ability to continuously observe the market and

identify what new products do customers need.

IBM consists of one of the most professional, skilful, loyal determined

personnel.

The company concentrates not only on the revenue rates but also the

efficiency and effectivenessof the product

Customer satisfaction and delight is the priority for IBM

Wide range of products and services

Innovation in the technological production

Ethics values and customers are highly considered

Advertising strategies, professional level of promotion

Free access to information through books, journal, internet

Weaknesses:

The company has various factories, manufactoring centres andoffices all

over the world. This might negatively affect in the way that there is a

chance for the lack of control over the different branches.

IBM’s products can be the victim of the so-alled black market. (Same

products with the same label are supplied in the market, but with poor

quality).

Generally technological competition is growing over the world’s biggest

markets, as the result lack of innovations might have negative effect on

the sales revenue.

Opportunities:

The technological business is rapidly growing. This gives extremely incredible opportunities to develop and expand



IBS PLEKHANOV 2011

Threats:

The expansion of the technological market may drive IBM tohigher

investments which might result in losses

The dramatic change in the development of the technology itself may

be difficult to control and follow up

Possibility of new markets with wide range technological goods and services

PESTEL Analysis

Political factors:

IBM is operating all over the world. Every country has its own taxation

rates, higher in Western Europe and lower in Eastern, whereas in some Asian

countries taxation is considered extremely low. Nowadays, the company tries to

apply to those countries with lower taxation systems. This will give the company

freedom to concentrate on the right price and equally compete with major outlets.

Socio-cultural factors:

The Internet is one of the most common tools nowadays, neutral towards

age, gender, race, status, authority or social position. For such companies like

IBM, the proportion of internet expansion will only lead to increase in total

revenue sales.

Technological factors:

A recent survey identified that there over 7 million Internet hosts in2010,

with over900 Internet Service Providers in 2005. This market has all necessary

tools for continuous rapid expansion.

Environmentalfactor:

IBM is the leader for innovative products designed and has developed

special technological systems for NASA specifically made to observe the planet

and its environmental changes. This support toward astronaut development

dramatically increases popularity and recognition of the public.



IBS PLEKHANOV 2011

Legal:

IBM is mainly concerned with environmental conditions and the usage of materials

(chemicals) in producing hardware and most efficient approaches to avoid those

pollutions.

Conclusion

Taking all facts, figures, processes and strategies into consideration, it is

clear, that IBM is the absolute leader in the technological production all over the

globe. The company has various branches in most significant markets. The

company with the incredible determination possesses all major tools to succeed in

the market: professional personal, customer recognition, well established brand,

continuous innovations in technology, appropriate prices. Furthermore, the

company uses different strategies to enter and control the market from the moment

it starts operating in it. IBM has outstanding investment policy, that always turns

into the dramatically high revenues. The IBM as the company is considered itself

as the part of political, social, economical, technological processes.

IBM is the company that was builtfrom loyal, determined, responsible and

highly-professional personnel. The company has free access to informational

resources that saves time of the customer. The variety of products and services is

the major part of IBM’s strategy. Discounts, special deliveries, qualitative

technological products of all kind are available to a customer on the regular basis.

Taking this knowledge into final conclusion, it is clear that for next 5 years

IBM will not just survive in the worlds market, but will strengthen its leadership

position, brand recognition, loyalty and expand to ahigher level.

References

1. Aaltio-Marjosola, I. and Mills, A. J. 2002. Gender, Identity and the Culture of Organizations. Routledge

2. Albert, S. and Whetten, D. 1985. Organizational Identity in J. M. T. Balmer and S. A. Greyser Editions, Revealing the Corporation: Perspectives on Identity,



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Image, Reputation, Corporate Branding and Corporate-level Marketing. 1st Edition. London: Routledge, 77 – 105.

3. Anthony, P. 1994. Managing Culture. Open University Press. 4. Bjerke, B. 1999. Business Leadership and Culture: National Management Styles

in the Global Economy. Edward Elgar 5. Balmer, J. M. T. And Greyser, S. A. 2003. Managing the Multiple Identities of the

Corporation in J. M. T. Balmer and S. A. Greyser Editions, Revealing the Corporation: Perspectives on Identity, Image, Reputation, Corporate Branding and Corporate-level Marketing. 1st Edition. London: Routledge, 15 – 29.

6. Carroll, P. 1994. Big Blues: The Unmaking of IBM. London: Orion Books 7. Creswell, J. W. 2003. Research Design: Qualitative, Quantitative, and Mixed

Method Approaches. 2nd Edition. SAGE

8. Daft, R.L. 1986. Organization Theory and Design. New York: West Publishing 9. Dornbusch, S. M. and Scott, W. R. 1975. Evaluation and Exercise of Control

Applied to Diverse Organizations. San Francisco: Jossey-Bass Inc

10. Fairholm, G. W. 1994. Leadership and the Culture of Trust. Greenwood Publishing Group

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Organizations Make the Most of Their Human Assets. AMACOM Div American Mgmt Assn

12. Foddy, W. 1994. Constructing Questions for Interviews and Questionnaires: Theory and Practice in Social Research. Cambridge University Press

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15. Gibbs, J. P. 1981. Norms, Deviance, and Social Control: Conceptual Matters. New York: Elsevier

16. Green, M. E. 1997. Internship Success: Real-world, Step-by-step Advice on Getting the Most Out of Internships. McGraw-Hill Professional

17. Handy, C. 1993. Understanding Organizations. 4th Edition. London: Penguin Group.

18. Huczynski, A. and Buchanan, D. 2001. Organizational Behaviour – An Introductory Text. 4th Edition. Harlow: Prentice Hall

19. Kanter, R. M. 1983. The Change Masters: Corporate Entrepreneurs at Work. London: George Allen & Unwin

20. Kotter, J. and Heskett, J. 1992. Corporate Culture and Performance. New York: Macmillan Inc.

21. Martin, J. 1992. Cultures in Organizations: Three Perspectives. New York: Oxford

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Reputation. New York: Routledge 24. Moingeon, B. 2002. Corporate and Organizational Identities: Integrating

Strategy, Marketing, Communication and Organizational Perspectives. Routledge



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25. Oldman, M. and Hamadeh, S. 2003. The Best 109 Internships. 9th Edition. The Princeton Review

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Boston: Houghton-Mifflin Company


292 Section 4. Global player. Sofia Petrova “Apple Inc”

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SOFIA PETROVA “APPLE INC”

Introduction

The purpose of this report is to review a corporate

strategy of Apple, Inc, at the present time and during the

following five years. The review takes into consideration

the economic environment of the IT industry as a whole at

present and in the future, including recent and upcoming

trends analysis; Apple's competitors position and

influence on the company and on the IT; and

recommendations on Apple's strategy and sources of

financing during approximately the next 5 years.

Apple Inc. is an American multinational corporation that designs and

manufactures consumer electronics, computer software, and commercial servers.

The company's best-known hardware products include Macintosh computers, the

iPod, the iPhone and the iPad. Apple software includes the Mac OS X operating

system; the iTunes media browser; the iLife suite of multimedia and creativity

software; the iWork suite of productivity software; Aperture, a professional

photography package; Final Cut Studio, a suite of professional audio and film-

industry software products; and Logic Studio, a suite of audio tools. As of January

2010, the company operates 284 retail stores in ten countries, and an online store

where hardware and software products are sold.

Established in Cupertino, California on April 1, 1976 and incorporated

January 3, 1977, the company was called Apple Computer, Inc. for its first 30

years, but dropped the word "Computer" on January 9, 2007 to reflect the

company's ongoing expansion into the consumer electronics market in addition to

its traditional focus on personal computers. As of September 25, 2010, Apple had

46,600 full time employees and 2,800 temporary full time employees worldwide

SOFIA PETROVA


Section 4. Global player.Sofia Petrova “Apple Inc” 293

IBS PLEKHANOV 2011

and had worldwide annual sales of $65.23 billion. For reasons as various as its

philosophy of comprehensive aesthetic design to its distinctive advertising

campaigns, Apple has established a unique reputation in the consumer electronics

industry. This includes a customer base that is devoted to the company and its

brand, particularly in the United States. Fortune magazine named Apple the most

admired company in the United States in 2008 and in the world in 2009.1

In order to fulfill the report task, such sources of information as the

company's annual report, official website, other internet sources, as well as the

internet press releases of online magazines have been used. Information from the

above-mentioned sources have been carefully analyzed, processed and presented

here. Also, an overview of IT industry was made to make it possible to analyse and

predict the current and future strategies of Apple, Inc.

IT-industry overview

Information technology, and the hardware and software associated with the

IT industry, are an integral part of nearly every major global industry.

The information technology (IT) industry has become one of the most robust

industries in the world. IT, more than any other industry or economic facet, has an

increased productivity, particularly in the developed world, and therefore is a key

driver of global economic growth. Economies of scale and insatiable demand from

both consumers and enterprises characterize this rapidly growing sector.

Information technology is a huge industry not only in itself, but also as the

source of dramatic changes in different business practices in other sectors. The

term IT covers a variety of related disciplines and areas, from semiconductor

design and production (also covered in the profile of the electronics sector),

through hardware manufacture (mainframes, servers, PCs, and mobile devices), to

software, data storage, backup and retrieval, networking, and, of course, the

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IBS PLEKHANOV 2011

internet.1

The top five global companies providing IT services and solutions are

International Business Machines Corp., HP Enterprise Business, Fujitsu Ltd., Rdz

Sweden and Hewlett-Packard International, according to Hoovers.

Unlike other common industries, the IT industry is knowledge-based.

Moreover, the IT industry helps many other sectors in the growth process of the

economy including the services and manufacturing sectors.

According to the Economist Intelligence Unit (EIU), relatively few countries

possess all the factors necessary to support a thriving information technology (IT)

sector, but the United States, Japan, South Korea and the United Kingdom provide

the strongest environments for IT competitiveness.2

Each of the major sub-areas in IT can be divided into its component parts, in

turn. Somewhat off the main track of IT at present, but still very interesting and

related to both increases in processor power, and to work in simulation and

artificial intelligence, is the field of robotics.

The impact of crisis

All these trends have enabled the IT industry to continue to generate a strong

demand among businesses and individuals for the next generation of servers, PCs,

and laptops. However, in the period of crises, companies of all sizes generally

postpone upgrading their IT, or implementing major IT projects that are not

already in hand. Such a global downturn of the industry had quite a big impact on

revenues of many companies in the sector worldwide.

According to Gartner, the world's leading information technology research

and advisory company, worldwide server shipments and revenues saw double-digit

1http://www.qfinance.com/sector-profiles/information-technology- "Information Technology

Industry". QFinance, the ultimate finanal resourse 2http://itvoir.com/portal/boxx/knowledgebase.asp?iid=274&cat=3- "World's IT industry competitive

index : US, Japan, South Korea, UK and Australia top the charts.". Itvoir.com

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IBS PLEKHANOV 2011

declines in the fourth quarter of 20081

Gartner said that the fall in shipments and revenue was reported across all

regions apart from Japan, which managed a 4.7% revenue increase. Europe, the

Middle East, and Africa (EMEA) suffered the worst decline, with revenues falling

by 20.6%. Even the emerging regions of Latin America and Asia-Pacific suffered,

with declines of 12.5% and 14.8%, respectively. North America server revenue

declined by 14.6%.

. Compared with the same quarter in 2007,

shipment numbers declined by 11.7% while revenue dropped by 15.1%.

2

The scale of the IT server sector as an industry can be seen from the fact that

IBM, the market leader, ended 2008 with revenues of US$4 billion from server

shipments, with almost exactly one- third of the global market. However, IBM saw

revenues decline by 17.4% as a result of the downturn. Hewlett-Packard was next,

with revenues of just under US$4 billion and with a 30% market share.3

When the crises came to the end, the situation on the IT market became

better. According to analyst firm Forrester Research, the U.S. IT market was

projected to grow by 8.1 percent in 2010. Forrester projected that total spending on

U.S. information and communications technology would reach $758 billion in

2010.

Thus, the

figures in server shipments for 2008 represent the situation of the IT market in the

period of crises quite clearly.

4

Recent and future trends of IT

The recession has changed IT priorities. Software-as-a-service and other

cloud options, for example, are suddenly more alluring. The downturn has made

many companies focus more strongly on how they use their assets, how they make 1 http://www.gartner.com/it/page.jsp?id=905914- "Gartner Says Worldwide Server Shipments and

Revenue Experience Double-Digit Declines in Fourth Quarter of 2008". Gertner Newsroom 2 Ibid. 3 Ibid.

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IBS PLEKHANOV 2011

investments, and whether or not it makes sense to put a lot of capital into their own

IT and their own data centers. As for the IT companies, their resourses still remain

tight, and sometimes make it rather difficult to keep up with and execute all the

changes in their core infrastructure. Still, compared to 2008, the economy is

recovering from the crisis and the access to capital funds has become a little easier.

In 2010, it became clear to anyone following the industry that applications

of Apple and Android are changing the way people use the Internet and the way

businesses structure profit and marketing models. New gadgets and services - such

as iPad, micro-blogging and Twitter-clone sites in China - continue to change

people's lives. New technologies, including cloud computing and Internet of

Things, have developed rapidly thanks to government support. For the first time, a

China-developed super computer ranks No. 1 in the world in terms of calculation

ability.

As for 2011, many research firms, e.g. McKinsey, predict cloud computing

to be a critical driving force in the industry. The others include mobility, analytics,

IT democratisation, IT abstraction and convergence.1 The research firm IDC

predicts the technologies will merge into a new mainstream platform for IT

industry and those industries will serve. According to IDC, the platform transition

will be stimulated by another solid year upturn in IT spending. The research firm

expects that next year, the global IT spending to U.S. $ 1600 billion, an increase of

5.7 percent compared to 2010.2

In 2011 the cost of public IT cloud services will grow to more than five

times the rate of the IT industry, an increase of 30 percent from 2010. Transfer

app-able, non-PC mobile devices is expected to more than PCs during the next 18

months. IDC predicts that about 25 billion mobile users’ apps will be downloaded 1http://www.netqin.com/en/security/newsinfo_3628_3.html- "APAC IT market predictions for 2011".

NetQin, technology pioneer 2http://indianews99.com/news/business-news/idc-predicts-new-mainstream-platform-for-it-industry-in-

2011/- "IDC predicts new mainstream platform for IT industry in 2011". India News

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IBS PLEKHANOV 2011

in 2011 and says over time, it is still new software ecosystems fundamentally

restructure channels for digital content and services to consumers.1

Taking into consideration all the above mentioned information, it can be concluded

that further development of the IT sector as a whole, and of all the firms operating

in this sector, will mostly depend on such trends as mobility, compactness and

intelligence of all the devices and services, andof course cloud computing and

nanotechnology. Thus, the strategy of Apple, Inc. and its financial position will

depend on its ability to keep up (or even implement) all those trends, and to

compete successfully with other companies in IT segment.

Apple, Inc. overview

This chapter contains an overview of Apple, Inc, and includes information

on its current financial position, performance and competition. All this information

must be included and analysed in order to get a full image of the company's

position and to be able to draw some conclusions and proposals concerning its

future strategies and perspectives.

In order to get a full image of Apple, Inc. at the moment, including its

financial position, its annual report should be used. This report is called "Form 10-

K" and can be downloaded from the official website of the company. It represents

such data as the company’sbasic information, business description, risk analysing,

competitors analysing, etc. The data is valid for the fiscal year ended September

25, 2010.

Apple Inc. and its wholly-owned subsidiaries designs, manufactures and

markets a range of personal computers, mobile communication and media devices,

and portable digital music players, and sells a variety of related software, services,

peripherals, networking solutions, and third-party digital content and applications.

The company's products and services include Macintosh ("Mac") computers,

iPhone, iPad, iPod, Apple TV, Xserve, a portfolio of consumer and professional

1 Ibid.



IBS PLEKHANOV 2011

software applications, the Mac OS X and iOS operating systems, third-party digital

content and applications through the iTunes Store, and a variety of accessory,

service and support offerings. Apple, Inc. sells its products worldwide through its

retail stores, online stores, and direct sales force and third-party cellular network

carriers, wholesalers, retailers, and value-added resellers. In addition, the company

sells a variety of third-party Mac, iPhone, iPad and iPod compatible products,

including application software, printers, storage devices, speakers, headphones,

and various other accessories and peripherals, through its online and retail stores.

The company sells to consumer, small and mid-sized business ("SMB"), education,

enterprise, government and creative markets.1

Apple is committed to bringing the best user experience to its customers

through its innovative hardware, software, peripherals, services, and Internet

offerings. Its business strategy leverages its unique ability to design and develop its

own operating systems, hardware, application software, and services to provide its

customers new products and solutions with superior ease-of-use, seamless

integration, and innovative industrial design. Apple believes that continual

investment in research and development is critical to the development and

enhancement of innovative products and technologies.2

Financial position

The financial position of Apple is quite strong, and has been for a long time.

Even in the period the crisis, the company managed to finish 2008 with a revenue

of $7.9 billion and net quarterly profit of $1.14 billion, or $1.26 per diluted share.

And this is more than it was in the same quarter of 2007, when Apple's revenue

was $6.22 billion and net quarterly profit of $904 million, or $1.01 per diluted

share, as the company's annual reports state.3

1https://www.apple.com/investor/- Apple's "Form 10-K" 2 Ibid. 3

http://www.apple.com/pr/library/2008/10/21results.html- "Apple Reports Fourth Quarter Results 2008", Apple.com

https://www.apple.com/investor/�

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IBS PLEKHANOV 2011

As for 2010, on October 18 Apple announced that the company revenue was

a record and reached $20.34 billion and net quarterly profit of $4.31 billion, or

$4.64 per diluted share. These results compare to revenue of $12.21 billion and net

quarterly profit of $2.53 billion, or $2.77 per diluted share, in the year-ago quarter

(2009). Gross margin was 36.9 percent compared to 41.8 percent in the year-ago

quarter. International sales accounted for 57 percent of the quarter's revenue.

Apple sold 3.89 million Macs during the quarter, a 27 percent unit increase

over the same quarter a year-ago, as well as 14.1 million iPhones in the quarter (91

percent unit growth over the year-ago quarter). Sales of iPad are also rocketing.

The Company sold 4.19 million iPads during the quarter (taking into consideration

the fact that the gadget was introduced this year). As for ipod, its sales deceased a

bit, and were 9.05 million iPods during the last quarter of 2010, representing an 11

percent unit decline from the year-ago quarter. Peter Oppenheimer, Apple's CFO is

quite pleased with such results, and states that the company has generated almost

$5.7 billion in cash flow from operations during the quarter. He expects to achieve

a revenue of about $23 billion in the first fiscal quarter of 2011.1

2.3. Performance and Competition

Apple is confronted by aggressive competition in all areas of its business.

The markets for its products and services are characterized by frequent product

introductions and rapid technological advances that have substantially increased

the capabilities and use of personal computers, mobile communication and media

devices, and other digital electronic devices. The financial position of Apple thus

can be rather affected by the behavior of its competitors, such as price cuts,

lowered product margins, etc. The principal competitive factors include price,

product features, relative price/ performance, product quality and reliability, design

innovation, availability of software and peripherals, marketing and distribution

1

http://www.apple.com/pr/library/2010/10/18results.html- "Apple Reports Fourth Quarter Results 2010", Apple.com




IBS PLEKHANOV 2011

capability, service and support, and corporate reputation, as it is stated in the

annual report of Apple, Inc.1

Due to the wide range of products and services that Apple supplies, its

competitors differ from segment to segment. From the point of view of the author

of this report, the most important competitors of Apple at the moment are:

In the computer segment, both hardware and software, it is surely Microsoft, Inc.

with its PCs and Windows. Microsoft has been an Apple competitor from the very

moment of these companies’ foundation, and remains a keyone today.

-In the software segment only, it is mostly Microsoft (Windows) and, recently,

Google (with its new Chrome OS and Android)

In the hardware segment only, these are many other producers of laptops, tablets,

etc, such as HP, Toshiba, Acer, Asus and others.

-In the segment of mobile phones, these are such brands as Nokia, LG, Samsung,

Phillips, Motorola and many other firms.

-In the segment of services, such companies as Amazon have appeared to be

rather dangerous competitors.

-Finally, numerous producers of mp3 players (such as iRiver or Explay) should not

be forgotten either.

Some of these examples will be considered in detail below.

Apple has launched three major new product lines since 2001: the iPod

(October, 2001); the iPhone (July, 2007); and the iPad (April, 2010). The

company's stock has increased by 3,000 percent since the launch of iPod, 125

percent since the launch of iPhone, and 20 percent since the launch of iPad.2

1

This

is illustrated in appendixes. (see App.1)

https://www.apple.com/investor/- Apple's "Form 10-K" 2 http://www.investmentmoats.com/stock-market-commentary/business/apples-a-case-study-

of-great-segmentation-strategy/- "Apple's a case study of great segmentation strategy". Investment Moats - Stock Market Investing

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http://www.investmentmoats.com/stock-market-commentary/business/apples-a-case-study-of-great-segmentation-strategy/�

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IBS PLEKHANOV 2011

Despite the 2009 recession, Apple made significant alterations to its

products and also the company decided to change its strategy in 2010 to compete

with Google, Microsoft and other companies.

According to the data from the research companies, in the first half of 2010,

Apple sold 17 million mobile handsets compared with 400 million handsets sold

by Nokia, Samsung and LG. Yet it pulled in 39% of the industry's profit during

that period, more than the 32% earned by the world's three largest handset makers

combined.1

This situation indicates rather clearly that although the company does

not have the biggest market share compared to other companies, its influence on

the whole industry is rather strong (see Graph 1 and Graph 2).

Graph 1. Share of industry profits Jan. to June Graph 2. Mobile handsets sold Jan. to June 2010. 2010. Source: Canaccord Genuity and IDC Source: Canaccord Genuity and IDC

All the above mentioned companies outsold Apple in raw units in a ration of 23.5 to 1, but

combined they are garnering only 82 percent of Apple's profit level. A marvelous, successful result

of a true market-leader. This can be explained byApple's ability to monetize its

innovative products through selling high-margin consumer products that drive

strong earnings results and growth trends for Apple shareholders.

The situation in thePC market is even better. Apple's share of the U.S. personal

computer market grew more than 13% to reach a modern day high of 10.4% for the

third quarter of 2010, leaving it just 17,000 units of becoming the nation's third

largest PC vendor.2

1 http://tech.fortune.cnn.com/2010/09/21/pie-chart-apples-outrageous-share-of-the-mobile-

industrys-profits/- "Apple's outrageous share of the mobile industry's profits". CNN news 2http://www.appleinsider.com/print/10/10/13/apples_share_of_u_s_pc_market_cracks_the_10_barrier.htm

l- "Apple's share of U.S. PC market cracks the 10% barrier". Apple Insider

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http://tech.fortune.cnn.com/2010/09/21/pie-chart-apples-outrageous-share-of-the-mobile-industrys-profits/�

http://www.appleinsider.com/print/10/10/13/apples_share_of_u_s_pc_market_cracks_the_10_barrier.html�




IBS PLEKHANOV 2011

According to statistics released by market research firm Gartner, Apple has

sold 1,831,664 Macs in the United States alone for the three-month period ending

September. That is up sharply from the 1,611,000 units the company shipped

domestically during the same period last year, which netted it a 9.3% share of the

market (see the graph below). Company 3Q10 Shipments 3Q10 Market Share (%) 3Q09 Shipments 3Q09 Market Share (%) Growth (%) HP 4,459,473 25.3 4,372,231 25.4 2.0 Dell 4,188,688 23.8 4,447,478 25.8 -5.8 Acer 1,848,511 10.5 2,338,816 13.6 -21.0 Apple 1,831,664 10.4 1,611,000 9.3 13.7 Toshiba 1,629,100 9.3 1,427,000 8.3 14.2 Others 3,650,807 20.7 3,036,573 17.6 20.2 Total 17,608,242 100.0 17,233,099 100.0 2.2

Graph 3. Preliminary U.S. PC Vendor Unit Shipment Estimates for 3Q10 (Thousands of Units) . Source: Gartner

Overall, Apple ranked fourth on the firm's list of top U.S. PC vendors,

falling just 17,000 units shy of Acer, which saw shipments decline 21 percent to

1,848,511 units. Apple's iPad sales are not factored into Gartner's totals (and if

they were, the situation would be completely different).

However, it is interesting to notice that a rival of Gartner - a market research

company called IDC - stated that Apple ranked number 3 with its Mac sales: Company 3Q10 Shipments 3Q10 Market Share (%) 3009 Shipments 3Q09 Market Share (%) Growth (%) HP 4,591 24.3% 4,469 24.6% 2.7% Dell 4,352 23.1% 4,578 25.2% -4.9% Apple 1,999 10.6% 1,611 8.9% 24.1% Acer Group 1,949 10.3% 1,946 10.7% 0.1% Toshiba 1,592 8.4% 1,426 7.8% 11.6% Others 4,387 23.3% 4,151 22.8% 5.7% Total 18,181 100.0 /o 3.8 /o

Graph 4. Preliminary U.S. PC Vendor Unit Shipment Estimates for 3Q10 (Thousands of Units) . Source: IDC

IDC notices that the influence of Apple on the PC market continues to grow.

As for the global market, the first 6 companies were HP, Acer, Dell, Lenovo,

Asus and Toshiba , according to Gartner.

This can be explained by a comparatively higher price of Macs outside the

US markets, which makes Apple computers not so popular among users with

middle-to- low income customers, especially in Asia.



IBS PLEKHANOV 2011

However, it is also interesting to mention that Apple owned a 90% market

share for premium PC priced 1000$ and more in the US, as of 1 February 2010,

according to NPD. This means that 9 out of 10 dollars spent on a computer of a

premium kind was spent on a Mac.1

As for iPad, this device bit all the records ever since its launch. According to

a report by Morgan Stanley analyst Katy Huberty, the iPad is on track to become

the world's most popular mobile device, within just 3 months of its launch. Morgan

Stanley projects sales of 16 million units in the first year alone. With over 3.3

million iPads sold in less than 3 months, that is an argument hard to refute.2

According the report by YuDu Media, in the latest quarter (April to June), the iPad

generated $2.17 billion in revenues, representing almost 14% of Apple's total

income for the period. For the first time ever, just after the iPad launched in April,

netbook sales growth declined with figures dropping by 13% (compared to a 25%

growth the previous month).3

Another analytical company - Strategy Analytics - states in its report that

iPad provided 95% of the world's tablets market sales. "The tablet has started", as

they say, and other tablets based on Android, Windows, MeeGo ! webOS will try

to securea bigger market share soon.4

To sum up, Apple has rather strong competition in all segments of its

production. Although the company does not take the first places in quantity

measures, it still manages to have quite a big influence on the whole market, and

surely has the most loyal consumers in its segment, who tend to stick to Apple

products from the moment they try it. In order to stay successful in the future,

1 http://www.betanews.com/joewilcox/article/Nine-out-of-10-premiumpriced-PCs-sold-

at-US-retail-is-a-Mac/ 1265047893 - "Nine out of 10 premium-priced PCs sold at US retail is a Mac".

Betanews 2 http://www.slideshare.net/yudu/the-apple-ipad-trends-and-statistics- "The Apple iPad trends and

statistics", YuDu Media report 3 Ibid. 4 http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=5863- "Global

Tablet Vendor Market Share: Q3 2010". Strategy Analytics

http://www.betanews.com/joewilcox/article/Nine-out-of-10-premiumpriced-PCs-sold-at-US-retail-is-a-Mac/�

http://www.betanews.com/joewilcox/article/Nine-out-of-10-premiumpriced-PCs-sold-at-US-retail-is-a-Mac/�

http://www.slideshare.net/yudu/the-apple-ipad-trends-and-statistics�

http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=5863�



IBS PLEKHANOV 2011

Apple should pay attention both to its current competitors and to new potential

ones, as well as develop its unique corporate strategy further. The strategy itself,

together with its future perspectives and some investment ideas, will be considered

in detail in the next chapter.

Corporate strategy and recommendations

This chapter contains an overview of the current Apple strategy and

recommendations on its further development in the next five years, together with

some investment ideas.

Strategy

From the point of view of the author of this report, the best advice for Apple

to stay successful and increase its market share, concerning its strategy, is the

following: go on with the current strategy, as it is. The Apple company is a true

phenomena from strategic point of view. And the cornerstone of this strategy is

innovation and quality. Apple has the most loyal consumers ever. When people

sleep outside of stores just to be one of the first to buy an iPhone, their fanatical

brand loyalty becomes obvious. This brand success is not a result of dumb luck; it

is a part of a well-thought-out plan to deliver strong products and to create a so-

called "Apple culture". The things to create such a culture can be all combined into

a short list:

A Store Just for Apple: A problem which made it difficult for Apple to set its

very different products apart from the rest of the computing crowd has historically

troubled Apple. A solution to this was the creation of its own store. By creating a

store strictly devoted to Apple products, the company has not only eliminated this

problem but has made an excellent customer-loyalty move. Apple stores are a

friendly place where customers are encouraged to play with and explore the

technology that the company offers, as well as hang out with each other. By

creating this space, Apple encourages current and new customers to get excited

about what it has to offer.



IBS PLEKHANOV 2011

In the next five years, it is for sure that the company will not give up its

personal stores, and this tendency will still exist. Which will, in turn, keep this

"Apple culture" alive, and Apple products - always unique and "different". Just like

in one of the company's well-known commercials - "be different". Should Apple

ever try to make its products like all other products in a computer store

it will lose its image, and its customers.

Complete Solutions: Apple's products complementeach other. For the

average user, most Mac programs are produced by Apple. A user of iPod can

download all the music via iTunes. A user of iPhone can download software via

AppStore. A user of iPad gets the Times subscription together with the gadget.

Apple has control over the entire user process, from hardware to software,

strengthens customer loyalty.

As for the nearest future, this tendency will remain, and even develop. As

cloud computing becomes more and more popular, Apple should pay special

attention to its cloud-like services, and keep an eye on its rivals in this segment.

Software is just asimportant as hardware for Apple.

Varied Products: Many consumers may not be ready to buy an Apple

computer, but they're willing to purchase gadgets like the iPod or iPhone. By

selling products with lower entry costs, it creates an opportunity for new users to

be introduced to Apple. If these users enjoy their gadgets, they are more likely to

consider buying an Apple computer in the future.

In the future, Apple will continue to introduce more and more gadgets and

fill as many markets segments as possible. The same was with introduction of its

iPod nano, which became quite a popular device among all the other mp3-players.

Apple should continue creating products for all needs of consumers. So that in five

years, a consumer can watch TV, listen to music, use its laptop or PC, phone, read

and so on using gadgets of the same producer, which are perfectly fit to interface

with each other and work as a single network. Actually, all the above- mentioned



IBS PLEKHANOV 2011

can already be done, but the company has a lot of space to increase quality and

other small details in this chain.

Education Sales: By selling its products to schools and universities, Apple

turns classrooms into showrooms and attracts its new potential customers from

school-desk. If students go through school using Apple products, they are very

likely to use them at home. By creating this early exposure, Apple captures

customers before they even know that they are customers.

In the next five years, the company should increase its share in education

segment. Perhaps the next step would be an office-segment penetration, where

Windows is leading at the moment. Though, it is rather unlikely to see such a shift

in the following five years.

Consistency: All of Apple's products have the same basic architecture.

Because of this consistency, customers who already own Apple products have a

good idea of what they will be getting before they make a purchase. They know

that it will be easy to adapt to new hardware, and this makes them more open to

making a repeat purchase. The same tendency will continue to exist in the future,

obviously.

Attractiveness: This point concerns marketing and package design. From

packaging to user interface, Apple makes its products accessible and attractive.

Bright colors, a smiling icon and slick- looking hardware remind customers every

time they use Apple products that what Apple offers is appealing. Actually,

marketing has always been one of the main driving forces for Apple. And the

company will continue to make the same with no doubt in the future, in order to

support its unique image.

Competition

In the following years Apple should pay special attention to its competitors.

Apart from already existing competition in face of Microsoft or HP, there is still



IBS PLEKHANOV 2011

another threat for Apple, which is not so obvious now, but may become such in the

nearest future, as technology will continue to change. This competition is coming

from Amazon, Google, Real Networks, and to some degree, Sony, because of their

strong investment in content. Also, according to the current tendencies of the IT

market, services will be developing even more than tangible products market.

Apple's successful position results not only from its operating system, applications

environment, and user interface, but also from Apple's direct role in providing

content for the user: music, movies, and applications for mobile devices, such as

iTunes or AppStore, as it has already been mentioned before.

Google is a big Apple's competitor, too. Its Chrome browser is actually a

Web-based OS which can work with cloud-based assets in a single-user

environment. And of course, Android, Google's OS and apps for smartphones, is

quickly evolving into a product that could challenge the iPhone. If the content

players are smart, they will find ways to make sure their content goes into the

Google ecosystem as well as into Apple's. This makes Google an adversary that

Apple has to watch very closely in the following five years.

As it can be seen, the question of competition will be one of the most

important in the next five years for Apple. In order to remain as successful and

stable as it is now, Apple should continue investing into its Research &

Development, and continue trying to set new tendencies on the market, rather than

following them.

Financing

Of course, the question of finance is one of the most important for

companies. It is quite a well-known fact that technology and companies are a

major source of innovation now, and it is easier for them to attract more capital

compared to other kinds of companies.

As we know, capital structure of any capital is a ration of its debt to equity.

Thus, logically, there are two main ways to raise finance for a company - either by



IBS PLEKHANOV 2011

increasing its debt (such as taking a loan or credit, or issuing bonds) or by

increasing its equity (by means of issuing shares, mostly).

Apple, Inc. uses both of these sources in its activity at the moment. If we

look at the consolidated balance sheet of the company as of September 25, 2010,

we can see that the company has $27,392 mln of liabilities, and $47,791 mln of

shareholders equity (see App. 2). It has always been such a tendency that Apple's

leverage has been quite low, which makes the company more stable and more

attractive for investors.

A big part of all Apple's activities and business is financed by its revenues.

The revenues of the company consist mostly of net sales, which come from the

sale of hardware, software, digital content and applications, peripherals, and

service and support contracts. As the services market will continue developing in

the future, Apple will also have to increase the share of services sales. At the

moment the sales of its software and services generate about 4% of its total sales.

Also, Apple's liquidity is quite high. The company has $41,678 mln of current

assets compared to $20,722 mln of current liabilities. The company can raise its

funds by means of its cash and cash equivalents, which include money market

funds, US Treasury securities, certificates of deposit, commercial papers and

corporate securities, as well as municipal securities.

Speaking about the next 4-5 years, it is quite likely that Apple will continue

maintaining a similar strategy for being financed, for its capital structure control

and being liquid. The main source of capital will still be shareholders’ equity, just

as now. The company can continue issuing new shares and attract investors' capital

for the following next years. Its shares have been rising steadily during the last

several years, and Apple remains to be an admirable target for potential

shareholders, which its revenues continuing to grow and set new records. Thus, in

opinion of the author, there will not be serious problems concerning financing the

company in the next years.



IBS PLEKHANOV 2011

Conclusion

This paper covered the performance of Apple, Inc. concerning its general

performance overview, its position in the market, its role among competitors and

the overall influence of IT industry on the company. The conclusion from this

report is that Apple, Inc. is on the right track now, having a stable and growing

market positions in different segments of IT-market, and making rocketing profits

in the period of crisis.

IT organizations today can no longer rely on the marketing strategies of the

past years for growth and survival. Remarkable changes in the global environment

such as technological innovation, rapid diffusion of products and social

responsibility are affecting the nature of threats and opportunities, as well as the

competitive advantage in international markets. Also, Apple is a good example of

being a model for other IT-companies in the sphere of innovation.

There is more pressure than ever on IT companies nowadays in terms of

appropriate marketing strategies for global expansion. Advertising, sales

management, product development, pricing and distribution play an ever more

important role for staying in the market now. To succeed, IT companies must

continually evolve, develop, adapt and respond to the changing realities of the

global marketplace. Corporate strategy plays a leading role in this question, and

Apple has managed to make its strategy unique and almost perfect.

Not only does Apple follow all the trends of the modern IT-market, such as

cloud computing and so on, but also sets new trends itself, making other

competitors follow, as it already happened with iPad. Looking at the company's

business, the prognosis is great: Macs are selling incredibly well even during

period of recession in economy, the iPad continues to inspire the competition, and

the iPhone will continue to rake in profits. If Apple, Inc. will stick to its main

principal of "quality and image over quantity" in the future - no doubt, that it will



IBS PLEKHANOV 2011

remain a desirable target for investors not only in the next five years, but much

longer.

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PCs-sold-at-US- retail-is-a-Mac/1265047893 - "Nine out of 10 premium-priced PCs sold at US retail is a Mac". Betanews

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312 Section 4. Global player. Pavel Strekha “Canon”

IBS PLEKHANOV 2011

PAVEL STREKHA “CANON”

Introduction

Strategic planning is generally the cornerstone of

every common-interest community.Without strategic

planning, the community will never know where it is

going – muchless know if it ever arrivedthere. An

important concept of strategic planning is an

understanding that in order for the community to

flourish, everyone needs to work to ensure the

community’s goals are met. Strategic planning is

utterly important nowadays since it enables one to

“stimulate thinking to make better use of the

company’s resources, assign responsibility and

schedule work, coordinate and unify efforts, facilitate control and evaluation of the

association’s activities (accountability), creates awareness of obstacles to

overcome, identify opportunities, avoid the trap of linear thinking and facilitate

progressive advancement of the company’s goals1

This paper serves the purpose of development of such skills through

elaboration of approximate goals of company development for a 3-5 year horizon

and a plan for achievement of those goals, in other words, through creation of a

strategy. In this report, Canon Inc. was taken as a sample for analysis and strategy

creation since it presents to be a large scale corporation with rather large number of

factors influencing its performance, but at the same time possessing a large number

”.All these factors render the

skills of strategic thinking essential for everyone who has a will to succeed in

modern fierce competitive environment.

1“Roadmap to the Future, The Importance of Long-Range Planning” by Bernard Steiner,A Common

Ground, January/February 1986.

PAVEL STREKHA


Section 4. Global player.Pavel Strekha “Canon” 313

IBS PLEKHANOV 2011

of opportunities to withstand such pressure, this way, combining into a

challenging, interesting and useful work in a sense of strategy elaboration.

The structure of the paper includes three chapters providing overviews of

internal and external environment and elaborating provisions for creation of a

strategy in chapter 1-3 respectively. The first chapter covers company profile and

philosophy as well as financial highlights, the second – market analysis and

outlook for 2011, the third chapter finally sets strategic goals and directions. The

paper is summarized with a conclusion and list of used sources.

Overview of internal environment

Company Profile

Canon develops, manufactures and markets a growing lineup of copying

machines, printers, cameras, optical and other products that meet a diverse range of

customer needs. The Canon brand is well recognized and trusted throughout the

world by the individuals, families, offices and industries that use Canon products.

In 1996, Canon launched its Excellent Global Corporation Plan with the aim of

becoming a corporation worthy of admiration and respects the world over. To this

end, the Company is promoting “cross-media imaging”—wherein a high level of

collaboration is realized among input and output devices—and the solutions

business—through which it not only develops and markets hardware and software

but also proposes ways for users to optimize convenience1

The company’s operating activities are distributed among the three Business

units (BU), such as Office, Consumer and Industry and Others. Each BU operates

within a specific array of products, so as to provide decent focus of company

resources and differentiation. This is in detail described by table 1.

.

1http://www.canon.com/aboutus/

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Table 1. Main Activities of Canon Group

Office Business Unit

Office Network Digital Multifunction Devices (MFDs), Color Network Digital MFDs, Personal-use Network Digital MFDs, Office Copying Machines, Full-color Copying Machines, Personal-use Copying Machines, Laser Printers, Large Format Inkjet Printers

Consumer Business Unit

Digital SLR Cameras, Compact Digital Cameras, Interchangeable Lenses, Digital Video Cameras, Inkjet Multifunction Printers, Single Function Inkjet Printers, Image Scanners, Broadcast-use Television Lenses

Industry and Others

Business Unit

Semiconductor Production Equipment, Mirror Projection Mask Aligners for LCD Panels, Medical Image Recording Equipment, Magnetic Heads, Micromotors Computers, Handy Terminals, Document Scanners, Calculators

Corporate Philosophy

The corporate philosophy of Canon is “kyosei1. A concise defi nition of this

word would be “Living and working together for the common good,” but Canon’s

definition is broader: “All people, regardless of race, religion or culture,

harmoniously living and working together into the future.” Unfortunately, the

presence of imbalances in the world in such areas as trade, income levels and the

environment hinders the achievement of kyosei.Addressing these imbalances is an

ongoing mission, and Canon is doing its part by actively pursuing kyosei. True

global companies must foster good relations, not only with their customers and the

communities in which they operate, but also with nations and the environment.

Theymust also bear the responsibility for the impact of their activities on society.

For this reason, Canon’s goal is to contribute to global prosperity and people’s

well-being, which will lead to continuing growth and bringthe world closer to

achieving kyosei2

”.

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Financial Highlights

During the year 2010, cash flows from operating activities totaled

¥744.4billion (U.S.$9,190 million), an increase of ¥133.2 billion (U.S.$1,644

million) from the previous year, mainly due to the significant increase of profit.

Although investments, such as for the acquisition of shares of Oce N.V., increased

substantially, purchases of fixed assets decreased, which led to a year-on-year

decrease in cash flows from investing activities of ¥28.1 billion (U.S.$347 million)

to ¥342.1 billion (U.S.$4,223 million). Accordingly, free cash flows totaled ¥402.3

billion (U.S.$4,967 million), an increase of ¥161.3 billion (U.S.$1,991 million)

from the corresponding previous year (see table 2).

Table 2. Consolidated results of Canon Inc. and forecast1

Year ended

December 31, 2010

Year ended December 31, 2009

Change (%)

Year ended December 31,

2010

Year ending December 31, 2011 (forecast)

Change (%)

Net sales ¥ 3,706,901 ¥ 3,209,201 + 15.5 $ 45,764,210 ¥ 4,100,000 + 10.6 Operating profit

387,552 217,055 + 78.6 4,784,593 470,000 + 21.3

Income before income taxes

392,863 219,355 + 79.1 4,850,160 470,000 + 19.6

Net income attributable to Canon Inc.

¥ 246,603 ¥ 131,647 + 8.3 $ 3,044,481 ¥ 310,000 + 25.7

Cash flows from financing activities recorded an outlay of ¥279.9billion

(U.S.$3,456 million), mainly arising from the dividend payout of ¥136.1billion

(U.S.$1,680 million) and repurchases of treasury stock. Consequently, cash and

cash equivalents increased by ¥45.5 billion (U.S.$562 million) to ¥840.6 billion

(U.S.$10,378 million) from the end of the previous year despite foreign currency

translation adjustments stemming from the strong yen.

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Non-consolidated net sales totaled ¥2,317.0 billion (U.S.$28,605 million), a

year-on-year increase of 14.4%, ordinary profit increased by 92.6% to ¥274.7

billion (U.S.$3,391 million), and net income increased by 88.8% to ¥152.5 billion

(U.S.$1,883 million). The broader overview is provided by table 3.

Table 3. Non-consolidated results of Canon Inc1

.


2010


2009

Change (%)


2010 Net sales ¥ 2,317,043 ¥ 2,025,546 + 14.4 $ 28,605,47

Operating profit 240,365 97,777 + 145.8 2,967,469 Ordinary profit 274,742 142,684 + 92.6 3,391,877 Net income ¥ 152,498 ¥ 80,778 + 88.8 $ 1,882,691 Net income per share:

- Basic ¥ 123.50 ¥ 65.44 + 88.7 $ 1.52 - Diluted 123.49 65.43 + 88.7 1.52

Dividend per share 120.00 110.00 + 9.1 1.48

Analysis of External Environment

Market Analysis

Looking at the global economy in 2010, economic conditions continued to

improve broadly throughout the world, led by the economic growth of such

emerging markets as China and India. In the United States, despite the

unemployment rate remaining at a relatively high level and other concerns,

economic conditions continued to recover gradually thanks in part to economic

measures by the government. As for Europe, in spite of lingering financial and

employment concerns along with the emergence of financial crises in some

countries, the region overall managed to realize a recovery. China, which quickly

recovered its growth pace through major economic stimulus measures, and the rest

of Asia, along with other emerging nations, continued to achieve economic

expansion. Also,in Japan, although signs began to appear indicating a turnaround, 1http://www.canon.com/ir/finance/highlight.html#id04




IBS PLEKHANOV 2011

the recovery came to a standstill at the end of 2010 due to prolonged deflation and

other factors.

As for the markets in which Canon operates amid these conditions, within

the office equipment market, demand for network digital multifunction devices

(MFDs) recovered, mainly for color models, while laser printers also realized a

steady rebound compared with the previous year. As for the consumer products

market, demand for digital single-lens reflex (SLR) cameras maintained healthy

growth across global markets. As for compact digital cameras, although sales were

sluggish in developed countries, demand in emerging markets grew favorably

resulting in a slight increase overall. With regard to inkjet printers, demand

continued on a track to recovery. In the industry and others market, demand for

semiconductor lithography equipment and liquid crystal display (LCD) lithography

equipment grew steadily, owing to improved investment by semiconductor device

and LCD panel manufacturers. Sales by geographic areas are depicted by the

following exhibit (Exhibit 1)

Exhibit 1. Sales by geographic areas

Looking at Canon's performance by business sector, within the Office

Business Unit, sales volume of both color and monochrome network digital MFDs



IBS PLEKHANOV 2011

increased, boosted by the recovery in demand for office equipment along with the

introduction of new imageRUNNER ADVANCE-series products (see Exhibit 2).

Exhibit 2. Sales by Business Unit1

Laser printers, which suffered sluggish sales in the previous year, recorded a

substantial increase in sales volume. Consequently, despite the effects of the strong

appreciation of the yen, the sales for the segment totaled ¥1,987.3 billion

(U.S.$24,534 million), growing 20.8% year on year. Operating profit increased by

27.9% to ¥293.3 billion (U.S.$3,621 million) for the year, mainly as a result of

expanded sales and the rise in the gross profit ratio.

Within the Consumer Business Unit, sales volumes increased significantly

for such digital SLR cameras as EOS Digital Rebel T1i (EOS 500D) and the new

EOS Digital Rebel T2i (EOS 550D) the competitively priced models, along with

the EOS 5D Mark II, EOS 7D and the new EOS 60D advanced-amateur models.

1http://www.canon.com/ir/finance/highlight.html#id04




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As for compact digital cameras, the Company launched five new ELPH (IXUS)-

series models and seven new PowerShot-series models, boosting sales volumes

particularly in emerging markets (see Exhibit 3).

Exhibit 3. Camera Sector Profitability1

With respect to inkjet printers, sales volume increased from the year-ago

level, fueled by healthy sales growth, particularly in Asia. As a result, despite the

strong yen, sales for the segment rose 6.9% year on year to ¥1,391.3 billion

(U.S.$17,177 million), while operating profit increased by 29.7% to ¥238.1 billion

(U.S.$2,939 million) , largely reflecting increased sales and gross profit ratio.

In the Industry and Others Business Unit, in addition to an appreciable increase in

sales volume of LCD lithography equipment and a rebound in sales volume of

semiconductor lithography, semiconductor-related independent business sales by

Group subsidiaries also grew, resulting in an increase in sales for the segment of

20.9% to ¥433.0 billion (U.S.$5,345 million) for the year. The operating loss

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IBS PLEKHANOV 2011

totaled ¥9.8 billion (U.S.$121 million) for the year, despite a turnaround of ¥66.1

billion (U.S.$816 million), made possible through increased sales and an improved

gross profit ratio.

Outlook for 2011

As for the outlook in 2011, emerging nations such as China and India are

expected to maintain healthy expansion. Developed countries, by comparison,

while expected to be headed toward modest recovery, will face uncertainty

regarding future prospects due to such factors as employment problems in the

United States, financial concerns in European countries, and continued domestic

(Japanese) deflation.

In the businesses in which Canon is involved, within the office equipment

market, demand for such products as network digital MFDs and laser printers is

projected to achieve solid growth amid increasingly intense competition. With

respect to the consumer products market, demand for digital SLR cameras,

compact digital cameras and inkjet printers is expected to expand, although

competition is also expected to become more severe. In the industry and others

market, while demand for semiconductor and LCD lithography equipment will

likely increase steadily, uncertainty remains regarding the future.

With regard to currency exchange rates for the next year, on which Canon's

performance outlook is based, despite the uncertainty over such factors as future

interest rate policies for major countries and the speed and degree realized by the

economic recovery, Canon anticipates exchange rates for the period of ¥85 to the

U.S. dollar and ¥110 to the euro, representing appreciations of approximately ¥2

against the U.S. dollar, and approximately ¥5 against the euro compared with the

previous year (see table 4).

Table 4. 2011 Projections

Average Exchange Rate FY11 FY10 Yen-1USD 85.00 yen 87.40 yen



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Yen-1EURO 110.00 yen 114.97 yen Impact of Exchange Rate Movement (FY11 impact given a one yen change) Net sales Operating profit USD 19.4 billion yen 10.1 billion yen EURO 10.4 billion yen 5.8 billion yen

Upon taking into consideration these foreign exchange rate assumptions and

current economic forecasts, Canon projects full-year consolidated net sales in 2011

of ¥4,100.0 billion (U.S.$50,617 million), a year-on-year increase of 10.6%;

operating profit of ¥470.0 billion (U.S.$5,802 million), a year-on-year increase of

21.3%; income before income taxes of ¥470.0 billion (U.S.$5,802 million), a year-

on-year increase of 19.6%; and net income attributable to Canon Inc. of ¥310.0

billion (U.S.$3,827 million), a year-on-year increase of 25.7% (see table 5).

Table 5. Impact of the exchange rate change projected for 2011 (bln. yen)

Sales Op. Profit FY 2010 Actual 3,706.9 387.6 Foreign exchange impact [net sales, cost of sales, expenses]

-102.5 -52.9

Sales volume impact Office +281.5 Consumer +265.5 Industry and Others +48.6 Total +595.6 +263.8 Others -100.0 -128.5 Total Change +393.1 +82.4 FY 2011 Projection 4,100.0 470.0

Change in Exchange Rate•1 USD: 87.40 to 85.00 yen; 1 EURO: 114.97 to 110.00 yen

Strategic Provisions of Development of Canon Inc. on 3-5 year Horizon

Strategic Goals

Under the corporate philosophy of kyosei – living and working together for

the common good – Canon's basic strategic targets should be oriented towards

contributing to the prosperity and well-being of the world while endeavoring to



IBS PLEKHANOV 2011

become a truly excellent global corporation targeting continued growth and

development.

In 2009, however, due to the global recession triggered by the collapse of

Lehman Brothers, the company was forced to temporarily shift strategic direction

from expansion to establishing a "muscular" business constitution and enhancing

corporate strength to agilely respond to changes in the business environment. After

working to further expense reductions, capital-investment efficiencies and the

establishment of advanced supply-chain management enabling inventory

reduction, in 2010, Canon realized a quick recovery in performance, employing a

new growth strategy, capitalizing on the turnaround to post results that outpaced

the speed of the economic recovery.

Stemming from the market analysis it becomes apparent that the global

economy's engine of growth has largely shifted from developed countries to

emerging countries, which is expected to lead to volatility in the business

environment. Canon should take advantage of these dramatic changes and tackle

the challenge of achieving sound growth through timely transformations tailored to

the changes of the times.

Thus, taking the current circumstances concerning the internal and external

environments into account the Company should be, in particular, focusing on the

following four important goals.

1) Establishing a world-leading global optimized production system

2) Comprehensively reinforcing global sales capabilities

3) Building the foundations of an environmentally advanced corporation

4) Imparting a corporate culture, and cultivating human resources

befitting a truly excellent global company

Directions for Achieving The Strategic Goals

The path for achievement of the above-mentioned strategic goals is

generally required to take into account the business challenges represented by the



IBS PLEKHANOV 2011

development trends of the markets Canon is operating in so as to be coherent and

efficient.

It may be stated that the situation with the global economy, despite the risk

of a slowdown due to the ongoing credit crisis and high unemployment, is

expected to continue towards gradual recovery. In Europe, while concerns remain

regarding an economic slump due to financial instability, the economy is likely to

make steady progress towards recovery.

In Asia, the overall trend toward economic recovery is expected to continue,

fueled by such factors as continued strong economic expansion in such countries as

China and India. The pattern of emerging markets, such as China and India,

leading the global economy is likely to become increasingly prominent over the

near future.

As for Japan, while the economy will likely continue to realize a gradual

economic rebound against the backdrop of a global economic recovery, it is also

expected that the current trend of economic deflation continues for the time being

due to weak domestic consumption.

Taking the above-mentioned trends into account and having set a task of

achieving the above-mentioned goals, the company should aim at transforming

into a different company in terms of scale and business operations, further

strengthening imaging-related businesses and working to expand business domains

by cultivating such areas as medical and industrial equipment into new business

pillars. At the same time, as a manufacturer, Canon should make efforts to

significantly transform itself in keeping with the changing times through the

reinforcement of such basic functions as research and development, production,

and sales and marketing. Specifically, it should strive to change to a situation

where products developed in each region are sold globally, accelerating transition

to a three regional headquarters management system, which includes R&D centers



IBS PLEKHANOV 2011

in Japan, the U.S. and Europe soliciting the world's great minds and innovative

power.

Targeting this kind of change and transformation, the company should also

make active use of M&As. For this, it is suggested to set up a special organization

in charge of further promoting M&As.

Additionally, the company should pursue thorough cost reductions to further

lower the cost of sales ratio. In this regard, it is sensible to accelerate activities to

establish an optimized global production system, enhancing roadmap of reform for

the ideal production system from a comprehensive viewpoint taking into account

such aspects as logistics, procurement, labor and country risks. In addition to

accelerating new product development through computer simulation and thorough

cost reductions, Canon should also promote the further automation of production

and the in-house production of manufacturing equipment. Establishing a highly

efficient and advanced manufacturing business model, promoting "man-machine

cells" will also allow further productivity improvements.

Next, the company should work to reinforce its global sales capabilities. In

order to further improve the performance in Asia, where an increasing proportion

of group sales each year is generated, in addition to further strengthening the sales

organization in China, Canon should also further our reach into the markets of

Southeast Asia and India

At the same time, the company should work to solidify its foundation as a

leading environmental company that aims for both growth and environmental

conservation, by further raising the environmental performance of its products and

reducing the impact of all corporate activities on the environment.

Furthermore, with the understanding that product quality represents the

lifeblood of a manufacturer, the company should also make further efforts towards

the commitment to "quality first".



IBS PLEKHANOV 2011

In order to realize further advancements for the Canon Group and for it to

become a truly excellent global corporation that continues to thrive and prosper, it

should strive to foster global human resources that can exercise their abilities

around the world.

Strategy Summary

In order to summarize the strategy, it is sensible to link the goals set for the

given horizon with the directions for their achievement stemming from the analysis

of internal and external environment. This way, it is possible to construct a mind

map of an array of measures clustered by the goals these measures are pursuing.

Exhibit 4 illustrates the idea.

By achieving the abovementioned goals, the company may reach the level of

net sales of more than ¥5 trillion, an operating profit ratio of more than 20%, a net

income ratio of more than 10%, and a shareholders' equity ratio of more than 75%

by 2015 judging by the current performance.

Exhibit 4. Strategic mind map



IBS PLEKHANOV 2011

Conclusion

Analyzing the external environment of the company it can be concluded that

the company overcame global economic crisis and is now heading toward

recovery. Canon related markets remained strong and the exchange rate

environment became more challenging. This way, the company managed to

increase volumes and expanded market share, through lineup enhancement and

expanded sales and absorbed yen's appreciation to post 15.5% net sales growth,

1.8-times increase in operating profit and 1.9-times increase in net income,

realizing cost savings through improved productivity.

Taking in account the situation with internal and external environments of

the company a set of goals and measures for their achievement was formed,

representing a corporate 5-year strategy:

• Establishing a world-leading global optimized production system;

o Three regional headquarters management system (Japan, U.S.,

Europe);

o Expand business pillars;

o Strengthening imaging-related businesses;

• Comprehensively reinforcing global sales capabilities;

o Make active use of M&As;

o Cost reductions to further lower the cost of sales ratio;

o Promote the further automation of production and the in-house

production of manufacturing equipment;

o Reach into the markets of Southeast Asia and India;

• Building the foundations of an environmentally advanced

corporation;

o Raise the environmental performance of its products;

o Reducing the impact of all corporate activities on the

environment;



IBS PLEKHANOV 2011

o Make further efforts towards the commitment to "quality first";

• Imparting a corporate culture, and cultivating human

resourcesbefitting a truly excellent global company;

o Foster global human resources that can exercise their abilities

around the world.

In particular, implementation of such strategy comprises advancement and

strengthening of the global Three Regional Headquarters management system;

developing unique technologies and products in Japan, the U.S. and Europe, and

build a structure for mutual importing and exporting (also acting as a natural

hedge against foreign exchange risk); strengthen core proprietary technologies and

acquire "unique technologies" in areas such as biotech and medical that Canon

currently does not have through M&A.

As for the geographic regions, in Japan, the company should continue to

build a structure that allows us to make high-added value, superior quality products

through advances in production technologies. In the U.S., where competent

technicians from around the world gather, Canon should have research facilities

that exceed those in Japan. In Europe, leverage Oce's high-speed printer product

development capabilities and expand sales globally. Globally, the company should

optimize regional production through further advancement of production

technologies.

After implementing the above-mentioned measures, the company has a

potential to become the leader in development, manufacturing and marketing a

growing lineup of copying machines, printers, cameras, optical and other products

References

1. Bernard Steiner “Roadmap to the Future, The Importance of Long-Range Planning”. A Common Ground, January/February 1986 – 453 p.

2. Brealey Richard A, Myers Stewart C, Franklin Allen. Principles of Corporate Finance, McGraw Hill 2008 – 1077p.

3. http://economictrends.blogspot.com/

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IBS PLEKHANOV 2011

4. http://www.canon.com 5. http://www.doingbusiness.org/ 6. http://www.rbc.com/economics/market/index.html 7. http://www.statistics.gov.uk/statbase/product.asp?vlnk=308 8. Ross Stephen A., Westerfield Randolph W., Jaffe Jeffrey “Corporate

Finance”

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Section 4. Global player.Rano Usmanova “Nestle” 329

IBS PLEKHANOV 2011

RANO USMANOVA “NESTLE”

Introduction

Nestlé is the world's leading Nutrition, Health and

Wellness company. Itsmission of "Good Food, Good

Life" is to provide consumers with the best tasting, most

nutritious choices in a wide range of food and beverage

categories and eating occasions, from morning to night.

The Company was founded in 1866 by Henri

Nestlé in Vevey, Switzerland, where the company’s

headquarters are still located today. Itemploys around

280 000 people and hasfactories or operations in almost

every country in the world. Nestlé sales for 2009 were CHF 108 bn.

The key factor which drove the early history of the enterprise that would

become the Nestlé Company was Henri Nestlé's search for a healthy, economical

alternative to breastfeeding for mothers who could not feed their infants at the

breast.

In the mid-1860s Nestlé, a trained pharmacist, began experimenting with

various combinations of cow's milk, wheat flour and sugar in an attempt to develop

an alternative source of infant nutrition for mothers who were unable to breast

feed. His ultimate goal was to help combat the problem of infant mortality due to

malnutrition.

He called the new product Farine Lactee Henri Nestlé. Nestlé's first

customer was a premature infant who could tolerate neither his mother's milk nor

any of the conventional substitutes, and had been given up for lost by local

physicians. People quickly recognized the value of the new product, after Nestlé's

new formula saved the child's life and within a few years, Farine Lactee Nestlé was

being marketed in much of Europe.

RANO USMANOVA


330 Section 4. Global player. Rano Usmanova “Nestle”

IBS PLEKHANOV 2011

Henri Nestlé also showed early understanding of the power of branding. He

had adopted his own coat of arms as a trademark; in his German dialect, Nestlé

means 'little nest'.

Meanwhile, the Anglo-Swiss Condensed Milk Company, founded in 1866

by Americans Charles and George Page, broadened its product line in the mid-

1870s to include cheese and infant formulas. The Nestlé Company, which had been

purchased from Henri Nestlé by Jules Monnerat in 1874, responded by launching a

condensed milk product of its own. The two companies remained fierce

competitors until their merger in 1905.

Some other important firsts occurred during those years. In 1875 Vevey

resident Daniel Peter figured out how to combine milk and cocoa powder to create

milk chocolate. Peter, a friend and neighbor of Henri Nestlé, started a company

that quickly became the world's leading maker of chocolate and later merged with

Nestlé. In 1882 Swiss miller Julius Maggi created a food product utilizing legumes

that was quick to prepare and easy to digest.

His instant pea and bean soups helped launch Maggi & Company. By the

turn of the century, his company was producing not only powdered soups, but also

bouillon cubes, and sauces and flavorings.

The year 2003 started well with the acquisition of Mövenpick Ice Cream,

enhancing Nestlé's position as one of the world market leaders in the super

premium category.

In 2006, Jenny Craig and Uncle Toby's were added to the Nestlé portfolio

and 2007 saw Novartis Medical Nutrition, Gerber and Henniez join the Company.

Nestlé entered into a strategic alliance with the Belgian chocolatier Pierre

Marcolini at the end of that year. In 2008, Nestlé began a process of selling Alcon

by divesting 24.8% to Novartis.



IBS PLEKHANOV 2011

In 2009, Nestlé opened the Chocolate Centre of Excellence in Broc, Switzerland,

with Pierre Marcolini one of the master chocolatiers.

Nestlé describes itself as a food, nutrition, health, and wellness company.

Recently they created Nestlé Nutrition, a global business organization designed to

strengthen the focus on their core nutrition business. They believe strengthening

their leadership in this market is the key element of their corporate strategy. This

market is characterized as one in which the consumer’s primary motivation for a

purchase is the claims made by the product based on nutritional content.

In order to reinforce their competitive advantage in this area, Nestlé created

Nestlé Nutrition as an autonomous global business unit within the organization,

and charged it with the operational and profit and loss responsibility for the -

business of Infant Nutrition, HealthCare Nutrition, and Performance Nutrition.

This unit aims to deliver superior business performance by offering consumers

trusted, science based nutrition products and services.

The Corporate Wellness Unit was designed to integrate nutritional value-

added in their food and beverage businesses. This unit will drive the nutrition,

health and wellness organization across all their food and beverage businesses. It

encompasses a major communication effort, both internally and externally, and

strives to closely align Nestlé’s scientific and R&D expertise with consumer

benefits. This unit is responsible for coordinating horizontal, cross-business

projects that address current customer concerns as well as anticipating future

consumer trends.

Nestle: Corporate strategy

At the beginning of this century, Nestlé made the strategic decision to

transform itself from a successful, technology-driven food and beverages company

into an R&D- and marketing-driven Nutrition, Health and Wellness Group.



IBS PLEKHANOV 2011

Turning this strategic vision into reality requires a re-orientation of Nestlé’s

R&D efforts towards life science and an open collaboration environment that

constantly delivers bigger, bolder and better innovations.

Although they have more than 4500 people in Nestlé Food and Beverages

R&D, they cannot achieve their ambitions simply by working internally. They

increasingly operate in an Open Innovation mode to enhance their own internal

R&D capability by tapping into external resources.

To do this, they have built up a network of some 300 external research

institutions, allowing them to work regularly with scientists and technologists in

universities, research establishments and private industry all over the world. These

partnerships are mutually beneficial. They benefit from identifying new

opportunities and integrating them into their business. Their partners benefit from

access to our specialist knowledge and our tradition of best-in-class technology.

Open Innovation also opens the door to greater innovation cooperation

between companies affiliated with Nestlé. Joint research by Nestlé and L’Oreal is

leading to totally innovative Nutrition, Health and Wellness products in the form

of beauty nutritional supplements. Theyexpect similar breakthroughs from

collaboration with Galderma, one of the world’s leaders in dermatology.

R&D’s role is one of creating bridges not only outside the Company but also

across the Company. That way they are building a wide base from which to drive

their Nutrition, Health and Wellness transformation and further business growth.

Open Innovation to the outside is the way forward. But Nestlé’s success is –

and always will be – decided inside the Company. They continue to listen to their

consumers and anticipate their future needs. They are proactive and aim for fewer

and bigger breakthrough innovations. For their Nutrition, Health and Wellness

products, this means establishing innovative pipelines beyond the next five years.

Today, they already think more like a life science company, with different projects



IBS PLEKHANOV 2011

in different phases at any given time… some in development or conceptualization,

some in clinical or consumer trials, and others in their launch phase.

For Nestlé to achieve all of this, R&D takes on even more importance. It

forms the scientific base and creates the proprietary technology platforms in order

to be leader in Nutrition, Health and Wellness.

Research & Development at Nestlé

R&D is one of Nestlé’s strengths. It always has been. They constantly

leverage their scale to new and more challenging heights. Innovation is the first

pillar of their corporate strategy with Nutrition, Health and Wellness a core value.

Being faster and closer to the consumer through R&D considerably

strengthens Nestlé’s leadership in Nutrition, Health and Wellness, where the body

of world knowledge grows continuously. Insights like subtle biochemical makers,

make the science of nutrition the prime mover in health maintenance and disease

prevention. More and more consumers, in developed and developing countries

alike, want to benefit from products and personal solutions through foods and

beverages that contribute to their health and wellness.

To intensify their excellence in the consumer-food relationship, R&D works

more and more in an “open innovation” mode. They actively involve scientific and

technical expertise from many external sources. Nestlé R&D’s role includes the

knowledge management needed in the multidisciplinary sciences and technologies

that form the basis of innovation in Food, Nutrition, Health and Wellness.

Their “innovating the future” leadership strategy is based on:

• Continuous improvement in consumer insights and their translation to

innovative products built on superior science and technology;

• Harnessing the vast expertise in their unmatchable research and

development network;

• Working closely with leading universities and outside partners on cutting-

edge science and technology;



IBS PLEKHANOV 2011

• Recruitment of open-minded and passionate innovators who can bridge

science, technology and business needs;

• Bigger pioneering innovations that hit the “innovation sweet-spot” – where

best-in-class science and technology combine to deliver precisely targeted

Nutrition, Health and Wellness benefits that lead to significant business success.

For Nestlé safety and quality are non-negotiable. R&D plays a key role in

ensuring the best in products and processes. The further Nestlé moves along the

road towards the Nutrition, Health and Wellness Company, the more this role

becomes important.

Nestlé’s unique Food and Beverages Research & Development structure

Nestlé’s vision for the future is to occupy centre stage as the World’s Food,

Nutrition, Health and Wellness Company through Good Food, Good Life. Nestlé

products embody clear and relevant consumer benefits.

Nestlé R&D generates the innovative science and technology needed to

build nutritional and health benefits into products offering Nestlé’s legendary

sensory excellence. It thus plays a key strategic role in realizing the Nestlé vision,

helping to assure the Group’s sustained growth.

Nestlé acts on the principle of “think global – act local”. R&D is structured

accordingly. Global product and process development is vertically integrated into

all Nestlé core businesses and pushed out locally to the markets through some 500

factories in 100 countries worldwide.

Throughout Nestlé, 265 000 people make a valuable contribution by their

links across all sectors. At the local level, Nestlé interacts daily with over one

billion consumers.

The R&D structure offers the flexibility to use this huge source of local

ideas, bring them back and develop them for global implementation. This adds the

power of broad-based consumer insight to the power of innovation. Together, these



IBS PLEKHANOV 2011

global and local approaches give them the capacity for rapid response in an ever-

faster changing global socio-economic environment.

For strategic alignment, R&D interfaces with the Strategic Business Units

(SBUs). The SBUs all coordinate strategies within the individual Nestlé business

categories. This includes investment, competitive analysis, key performance

indicators, quality & strategic brand standards and

portfolio management.

Powerful Research & Development: Nestlé’s strong commitment

The Nestlé long tradition of technological excellence is now combined with

superiority in Nutrition, Health and Wellness. The Group is becoming ever more

R&D intensive.

In 2006, Nestlé has invested CHF 1.73 billion in R&D and over CHF 1.5

billion in Venture Capital. This increase in investment is reinforcing Nestlé R&D’s

world-class reputation in science and technology:

• They are accelerating Nestlé’s transformation to Nutrition, Health and

Wellness with the enhanced controls and product tests this implies;

• They are intensifying science-driven Food and Nutrition R&D, which

brings added value to Nestlé by expanding their knowledge base;

• They are building Nestlé’s food and beverages systems, by combining

product technology and dispensing machine technology, e.g. the single portion

beverages, Nespresso and Nescafé Dolce Gusto.

Nestlé attracts the best scientists and engineers from top-level universities

who want to work and partner with us:

• Three Nestlé University Chairs in Nutrition are now active. Two chairs are

at the EPFL (EcolePolytechnique Fédérale de Lausanne),Switzerland, for research

on the linkbetween nutrition and the brain,including the development of

cognitivefunction in childhood and Alzheimer’s



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Disease. One chair is at the University of Mexico City, Mexico, for research on

Nutrigenomics, to investigate how individual genes may influence individual

nutritional needs;

• Annual Nestlé International Nutrition Symposia

These are organized in the Nestlé Research Center. Nobel Prize winners and

other leading experts in nutrition and health worldwide debate issues of human

health and physiology, and

publish their conclusions in the scientific press. These discussions open new

directions in Nestlé research on Nutrition, Health and Wellness;

• The Nestlé Nutrition Council (NNC)

First created in 1978, the NNC consists of external and independent

advisors on human nutrition. It provides a vital input for Nestlé in nutrition and

food safety policies, general nutrition guidance and scouting for future innovations.

Nestlé makes targeted acquisitions of nutrition-based businesses that bring

new skills and know-how enhancing the Nestlé R&D knowledge-base:

• Jenny Craig in the US for personalized weight management solutions;

• Uncle Toby’s in Australia for adult nutrition snacks.

These continuously improve Nestlé R&D structure and capabilities to ensure

efficiency in innovation.

Research & Development and the Keys to the Future

The higher Nestlé aims, the more science and technology they need, and the

more precise they have to be in their manufacturing processes. They must ensure

the highest levels of product consistency, quality and safety. This means the R&D

role goes far beyond its traditional task of innovation and assumes a much greater

scope in technology transfer. They must provide the necessary knowledge at all

levels from the management to the process-line.

R&D must place ever greater emphasis on Good Manufacturing Practice

procedures in safety, quality and hygiene. Providing Nutrition, Health and



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Wellness, means consistently meeting tighter tolerances and more stringent

regulations. This “moves the goalposts” in food manufacturing ever closer to the

approach of a life science company.

Within this framework, Nestlé R&D has three important tasks:

•Quality by design

Building all aspects of quality into new products and processes right from

the start of any project. Including everything from the raw materials through to the

packaging and the quality of the product at the time of consumption. It means

putting in all process controls in the factory to ensure that strict tolerances are met

to deliver high quality products.

Nestlé R&D develops many new analytical methods needed to fill the ever-

growing demand for product testing from international and national safety

authorities. Some of these relate directly to Nutrition, Health and Wellness claims

for Nestlé products that offer the competitive edge. Others

are non-competitive and touch the whole food industry. In such cases, Nestlé

works with food trade organizations and government laboratories to find solutions.

Many methods developed by Nestlé R&D become international standards;

•Product and Process Mastership – knowing everything down to the last

detail about Nestlé products and processes

R&D provides continuous training internally and out in the factories on the

technical and analytical procedures associated with every product.

To ensure high performing Nestlé factories, R&D expert teams have

provided best practices and helped in their implementation. Everybody in the

supply chain is responsible for guaranteeing Nestlé quality – scientists,

technologists, engineers, supervisors and line operators;

• Source of scientific and operational human resources

The further Nestlé moves to Nutrition, Health and Wellness, the more

people with a scientific background are needed throughout the Group.



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Over the past decade, more and more people from R&D have added

business skills to their scientific and technological background and continued their

careers in the Nestlé businesses, markets and factories. This combination of skills,

added to their knowledge of Nestlé, cements R&D – Business interactions,

bringing dynamism and efficiency into the

innovation process.

The goal is to aggregate all Nestlé’s skills and expertise in the drive towards

an ever-more personalized nutrition:an approach that further strengthens the

Group’s relationship with eachindividual consumer.

International Strategy

Nestlé is a global organization. Knowing this, it is not surprising that

international strategy is at the heart of their competitive focus. Nestlé’s competitive

strategies are associated mainly with foreign direct investment in dairy and other

food businesses. Nestlé aims to balance sales between low-risk-but-low-growth

countries of the developed world and high-risk-and-potentially-high-growth

markets of Africa and Latin America. Nestlé recognizes the profitability

possibilities in these high-risk countries, but pledges not to take unnecessary risks

for the sake of growth. This process of hedging keeps growth steady and

shareholders happy.

When operating in a developed market, Nestlé strives to grow and gain

economies of scale through foreign direct investment in big companies. Recently,

Nestlé licensed the LC1 brand to Müller (a large German dairy producer) in

Germany and Austria. In the developing markets, Nestlé grows by manipulating

ingredients or processing technology for local conditions, and employ the

appropriate brand. For example, in many European countries most chilled dairy

products contain sometimes two to three times the fat content of American Nestlé

products and are released under the Sveltesse brand name.



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Another strategy that has been successful for Nestlé involves striking

strategic partnerships with other large companies. In the early 1990s, Nestlé

entered into an alliance with Coca Cola in ready-to-drink teas and coffees in order

to benefit from Coca Cola’s worldwide bottling system and expertise in prepared

beverages.

European and American food markets are seen by Nestlé to be flat and

fiercely competitive. Therefore, Nestlé is setting its sights on new markets and new

business for growth.

In Asia, Nestlé’s strategy has been to acquire local companies in order to

form a group of autonomous regional managers who know more about the culture

of the local markets than Americans or Europeans. Nestlé’s strong cash flow and

comfortable debt-equity ratio leave it with ample muscle for takeovers. Recently,

Nestlé acquired Indofood, Indonesia’s largest noodle producer. Their focus will be

primarily on expanding sales in the Indonesian market, and in time will look to

export Indonesian food products to other countries.

Nestlé has employed a wide-area strategy for Asia that involves producing

different products in each country to supply the region with a given product from

one country. For example, Nestlé produces soy milk in Indonesia, coffee creamers

in Thailand, soybean flour in Singapore, candy in Malaysia, and cereal in the

Philippines, all for regional distribution.

It is vital to any firm that its marketing objectives are compatible with the

overall corporate objectives. In selecting corporate objectives and strategy, a firm

might wish to refer to the Boston Matrix, Ansoff's Matrix or use a simple SWOT

analysis to establish where the company is and in which direction it wishes to

head. For example, a company planning to consolidate its position within a

national market might set very different objectives for the marketing of its products

to a company wishing to expand into international markets. This in turn would

affect the marketing tactics each company might employ.



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Confusion can often arise when attempting to reconcile marketing and

corporate objectives. It could be argued that the success of any firm depends on its

ability to satisfy a consumer need at a profit. This is- the essence of marketing - so

it could also be said that marketing and corporate objectives are the same thing.

However, this would imply that marketing is more important than the other

functional areas, when clearly they are all inter-dependent. Ultimately, any

corporate strategy must both reflect and dictate to each of the different functional

areas of the firm. Nevertheless, the information provided by the marketing

department will be central to any corporate strategy formulation. This will include

sales and market share, analysis of the competition, sales and profit forecasts for

the future and analysis of changing consumer attitudes.

Nestlé's corporate objective is to be the world's largest and best branded

food manufacturer, whilst ensuring that the Nestlé name is synonymous with

products of the highest quality. In recent years, the company has pursued a policy

of expansion and diversification through acquisition and divestment to achieve a

more balanced structure to the business.

Global brand names can achieve substantial production and purchasing

economies of scale and, as world travel increases, so does the importance of

instantly recognizable products. With a product portfolio which includes eight of

the thirty top selling confectionery brands, such as Quality Street, Aero, Smarties,

Polo and Rowntree's Fruit Pastilles, Milky Bar and After Eight, it is extremely

important that the marketing objectives for each product line are fully compatible

with the overall objectives of the company as a whole. Like any group of

individuals, each product has its own character, strengths and weaknesses and

consequently, the marketing objectives of each product need to be specifically

tailored.

Nestlé 's Growth Strategy and Business Development

1.) Does it make sense for Nestlé to focus its growth on emerging markets?



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As it can be derived from the text, Nestlé generates operates worldwide with

a focus on European markets, which make up 70 percent of its sales. These

markets are in the mature state of life cycle of that industry and additionally

demographic changes such as the stagnation of population growth rates make it

very hard companies like Nestlé to generate higher profits through higher sales. As

a matter of fact the western economies are actually facing a downturn in output and

growth, thus influencing the consumption patterns of customers, especially in the

retail business. Consumer are becoming more price aware and tend to spend less

while demanding at the same time for customization, product differentiation and

specialization. Another trend is the shift away from branded food and beverages

towards cheap non-branded foods and beverages. Nevertheless, the introduction of

non-brand own labeled products such as Food Lion offers only makes sense in a

large scale in order to achieve economies of scale. As a result of increasing non-

brand cheap products offered by rivals, Nestlé find itself in an even more

embattled market and needs to develop a new strategy either away from branding

or towards a higher degree of international market penetration. Since Nestlé stands

for high quality and has distinctive competencies in producing higher quality food,

it would not make sense to change the strategic group, because it would most

likely becomestuck in the middle. The right strategy is to expand into new markets

such as Asia, Eastern Europe and South America. Logically, in these markets the

consumer behavior, macroeconomic environment and cultural habits are different

in contrast to western economies. Most of these markets are in a growth cycle and

this clearly generates an opportunity because they are emerging markets and

“untouched”. China, for instance,had 700 million people in2010 who have nearly

the same income levels as Spain. While income levels in these emerging markets

will increase, people will gain a higher purchasing power with unsatisfied

demands. Serving thesedemands is the right opportunity for Nestlé to penetrate

new markets, build up market share while at the same time using its profits to



IBS PLEKHANOV 2011

defend its old markets in the western economies through low prices. Concluding, I

am strongly convinced that expanding into new markets is necessary for Nestlé if it

wants to stay a global player in the 21st century.

2.) What is the company’s strategy with regard to business development in

emerging markets? Does it make sense?

Nestlé follows the first mover advantage strategy which means that the

company enters in an early stage the emerging markets, in order to establish a

network there before competitors, such as Unilever, do so. The first step they make

is to establish a substantial position by selling basic products such as infant

formula and condensed milk to the customer, with the goal to build up

commending positions in each niche. In order to save the costly process of

establishing a brand name, Nestlé simply purchases local brand names which the

consumer is accustomed to. This helps the company to overcome cultural barriers

and customer resentments to foreign brands. After these niches of basic food

supply are filled,Nestlé moves on into the more upscale segments such as

chocolate, soft drinks and the like. Their strategy is to establish a basis and then

expand into more niches as demand rises. Connected to the rising demand is the

rising income level as the population can afford to spend more money on food

products. Nestlé provides about 8500 brand names, but only 750 of them are

registered in more than one country and only 80 are registered in more than ten

countries. This is due to the fact that Nestlé’s strategy is based on a broad range of

local brand names which are not entitled as “Nestlé”. The company uses that

approach in order to the convenient fact that the consumer is easier to reached

because he is accustomed to this brand name and they think they know what they

are buying. Consequently, marketing is easier and less costly because a reputation,

a distribution channel and customer loyalty already exists for that product with that

brand name. As a result Nestle can focus its distinctive competencies on product

improvement and technological aspects such as process innovation.



IBS PLEKHANOV 2011

Concluding, the key to their success is customization rather than exaggerated

globalization. This strategy makes sense as the business success of the company

proofs. An example is Nestlé’s success in the Chinese milk powder market. There

was hardly any infrastructure, nor transportations systems in 1987 when the

company entered the market. Nevertheless, Nestlé increased the output of

powdered milk from 300 tons in 1990 to 10,000 tons in 1994. This refers to an

increase in output of 790% per year. These figures show the success of their

strategy, as well as their flexibility, the steady learning processes and the

monitoring of the environment. In combination all these factors make up a

successful and sense full strategy.

3.) From an organizational perspective, what is required for this strategy to

work effectively?

As a matter of fact a good strategy is not the only necessary prerequisite for

operating successfully in foreign markets. In markets of transitory nations, or even

less developed nations, there could be a risk in terms of political instability

harming the political economy such as the security of property

rights.Macroeconomic and cultural uncertainties are as well an issue. To a certain

extent environmental changes occur with the notion of endangering the basic

strategy. In order to avoid these influences and to counter react on these, a

company needs the ability of gaining a steady learning process which needs

ultimately to be implemented with a cross-functional attitude among all functional

levels. Flexibility is another distinctive competency a company must be able to

achieve to react as quickly as possible to changing environments. As a

consequence, the company must implement mechanisms allowing it to respond to

changes in local demand, cultural barriers and political fluctuation. Ethnocentric

behavior must be avoided in any circumstances in order to approach the market in

the appropriated way. A company must also learn to consider decisions under the



IBS PLEKHANOV 2011

long-run perspective, because markets can be conquered within in short period, but

the successful implementation of a strategy needs more time than that.

Entering a new market requires some serious calculations. The company

must estimate the perspectives it has in that new market with regards to threats and

opportunities formulating the profile of that country. Basedon this profile, the

company is able to figure out the strategical approach. One important part of the

strategy must be the cultural awareness, which means a company should employ

locals in order to lower cultural barriers and resentments established by the

foreigner. Hence, this results in a better insight and handling of local demand

conditions and knowledge about the customer. In order to guarantee flexibility, the

functional level units must have their own responsibility and must have freedom in

decision making, which allows a quick response towards market fluctuations. To

relate these statements to this case,Nestlé’s business process in Nigeria gives a

good example. An entirely new marketing approach, distribution channel and

network had to be set up due to changing demands, lacking infrastructure and a

lack of security. Nestlé managed these threats successfully by understanding the

culture and the being aware of the lack of essentials.

4.) How would you describe Nestlé’s strategic posture at the corporate level?

The ability to react and act on environmental changes is a crucial part of

Nestlé’s strategy. Consequently, all subsidiaries have their freedom in decision

making regarding strategy issues. This allows them act independently from

headquarters. Hence, it responds quicker to the local environment, conditions and

demands with the result of a more efficient approach to local distribution,

employees, advertising, products and marketing. To support this approach Nestlé’s

established its “expatriate army” which is a group of about 700 managers who

have a lot of experience in undertakingmanagement activities in foreign countries.

These managers are highly educated and trained in order to enable them a



IBS PLEKHANOV 2011

worldwide field of operations. Employee training is not the only distinctive

competency Nestlé was able to establish.

As mentioned earlier, Nestlé has a sophisticated R&D department. A steady

stream of new inventions and product improvements allows Nestlé to keep up its

competitive edge. Supporting this globally aware approach the company is

organized into seven worldwide strategic business units which are called “SBUs”.

These units formulate the high level strategic decisions on a worldwide basis,

while each of these SBUs focuses on a specific segment: chocolate, infant food,

cereals, coffee etc.Engaging in the overall strategy development, such as

acquisition and market entry strategy, these SBUs form an important part of the

company’s decision making and operating process.

Acquisition contributes about 2/3 to Nestlé’s growth rate, hence this

emphasizes the importance of this functional part of the company.

Additionally,Nestlé established a structure of regional organization which divides

the world into 5 major geographical zones: North America, South America, Asia,

Europe and Asia. These organizations are assisting the SBUs and have the

responsibility for developing strategies within their region.

5.) Does this overall strategic posture make sense given the markets and

countries that Nestle participates in? Why?

This overall strategic posture makes sense which is proved by Nestlé’s

successful worldwide expansion, the steady growth rate and the continuously

generated profits. Nestlé’s approach of expanding into emerging markets clearly is

highly functional throughout the organizational structure (support of R&D, SBU,

regional zones) and the corporate level strategy. One of the main reasons for this

successful expanding into new markets is due to flexible responds to

environmental changes and the ability to obtaining a steady learning process.

These two factors make up a large contribution to Nestlé’s operating performance,

which is as well manifested in the credo of having “customization rather than



IBS PLEKHANOV 2011

globalization”. Through this attitude the company was able to create a functional

and operational synergy among the corporate level strategy, the organizational

structure and the general strategy set up. Despite of recessional tendencies and

high market fluctuations in the western economies, Nestlé was able to grow

continuously into new market segment through skilful market penetration. Clearly,

this extraordinary performance was only enabled through its strategy of avoiding

an ethnocentric approach, building up customer ties through local employees and

managing the distribution channel by an entirely unique approach.

The company will continue to generate profits and increase market share

when it keeps up its strategy, but has to be aware that macroeconomic, social or

cultural aspects have to be taken into account while pursuing the strategy.

Especially in the new emerging markets this strategy awareness makes a lot of

sense, because western economies are pretty much standardized in regards to

cultural or social economic aspects while Asian or South American markets are

characterized by different means.

Nestlé was already able to emerge into markets such as Africa and the

Middle East where long lasting formal and informal trade barriers were established

by local government. Lesser-developed countries tend to raise trade barriers

justifying it with the infant industry protection argument. Nevertheless, food is

needed all over the world and with the product range and the distinctive

competencies the company possesses a decent platform is given to keep up that

strategy. Finally, the approach makes sense from that point of view, that these

transitory and less developed economies have a high growth potential over the next

two decades. China, Southeast Asia, South America and Mexico will be the future

markets on this planet with a growing population and growing income level. If

Nestlé would not take the opportunity of moving into these markets with these

incredible potentials, the company will lose its competitive edge and will lose its

position as a global player. Hence, I strongly recommend it to pursue this.



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Conclusion

Working for the consumer of today and for the world of tomorrow

Key success factors for today and the future are to keep the consumer firmly

at the centre of Nestlé’s innovations and strengthening the partnership with firms

businesses and markets.

In this partnership, the Strategic Business Units and Nestlé businesses are

the strategic drivers, R&D supported by the Application Groups are the providers

and innovators, and the markets and factories are the implementers.

Consumers want health and wellness from their foods. They want fun, freshness

and flavor. But they also want a feeling of wellbeing. In providing this, Nestlé

R&D must know as much aboutconsumers as about food. How do different

nutrients and food components interact within the body to exercise their beneficial

effects? Can we enhance these effects? And how much does individuality affect

interactions?

At a societal level it also means a better understanding of broader human

needs. For example, how can nutrition delivered by excellence in foods and

beverages limit the upward spiral of health costs by enhancing health and

wellbeing.

R&D must look to the future. Company need clear roadmaps and strong

pipelines for today and tomorrow. But to really stay on top, Nestlé has to think

beyond a time horizon of two to five years, and look ten to fifteen years ahead.

How will new sciences like nutrigenomics influence

society and our individual life? What opportunities will the new sciences give

Nestlé? Will they open the way to personalized nutrition? Nestlé need to be

involved early, act at the right momentand steer the course successfully.

A final word for the force that drives Nestlé – their consumers. They always

put the consumer at the centre. They define consumer needs and transform these



IBS PLEKHANOV 2011

into products that deliver appropriate consumer benefits. The guarantee from

Nestlé R&D is reproducible high quality products every day, everywhere at the

right cost. These are firms R&D messages for today and the future.


About the authors.Rano Usmanova “Nestle” 349

IBS PLEKHANOV 2011

ABOUT THE AUTHORS

ANASTASIYA VOLOKHOVA Born:

• Moscow, Russia

Education:

• Plekhanov Academy of Economics (bachelor degree)

• University of Northern Iowa - fall semester 2008

• Plekhanov Academy of Economics (master degree)2010- 2012

Occupation:

ZAO "Triton Import" -Financial Manager : 2010 - till now (February 2011)

ALEXANDER SARUKHANYAN Born:

• Tashkent, Uzbekistan

Education:

• Plekhanov Russian University of Economics Bachelor Degree inE economics. Speciality: finance & credit.

Occupation:

• Forward Ltd. - Analyst

ABOUT THE AUTHORS


350 About the authors. Rano Usmanova “Nestle”

IBS PLEKHANOV 2011

PAVEL TOLPEEV Born:

• Moscow, Russia

Education:

• Plekhanov Russian University of Economics, Faculty: International Business school. Speciality: finance & credit.

• Haagse Hogeschool - HHS '09(Netherlands) Faculty: Academie voor European Studies & Communication Management

• Plekhanov Academy of Economics (master degree)2010- 1012

VLADIMIR SEROUSOV Born:

• Rostov, Russia

Education: • Plekhanov Russian University of

Economics, “International Business School” faculty - Bachelor degree, specialization “Economics”

ABOUT THE AUTHORS



IBS PLEKHANOV 2011

MARGARITA BALASANYAN Born:

• Erevan,Armenia


Economics, - Bachelor degree in Economics, specialization “Finance”

• Plekhanov Russian University of Economics, “International Business School” faculty, Master Degree

Occupation: • Deloitte Touche Tohmatsu Limited -

Auditor.

EKATERINA CUELLAR Born:

• Pavlodar, Kazakhstan

Education:

• Economics Degree - “Los Andes University” - Bogota, Colombia

Occupation:

• Academic Assistant (Aug 2009 – Dec 2009) - “Los Andes University” - Bogota, Colombia

• Board Member (Feb 2009 – Jun 2009) – Cavar Transportes SA – Bogota, Colombia

ABOUT THE AUTHORS



IBS PLEKHANOV 2011

VICTORIA KARELOVA

Born:

• Moscow

Education:

• University of Huddersfield – West Yorkshire,England

• BA (Hons) International Hotel & Catering Mangement

• College of Tourism & Hotel Management - Nicosia,Cyprus

• IATA/UFTA Advanced Diploma (International Travel Consultant)

• Higher Diploma in Travel & Tourism Administration

• Calderdale College, Halifax, England Occupation:

• Team Assistant - The Royal Bank of Scotland, Moscow

DAUREN TOKTAMYSOV Born:

• Moscow

Education:

• Moscow State University – Mechanics and Engineering


Occupation:

• TCubed and Partners – Executive

Director

ABOUT THE AUTHORS



IBS PLEKHANOV 2011

DARIMA DORDZHIEVA Born:

• Elista, Russia

Education

• Plekhanov Russian University of Economics, “International Business School” faculty - Honored Bachelor degree, specialization “Economics”


Occupation:

• Deloitte&Touche (Audit department)

DENIS GAITANOV Born:

• Fryazino, Moscow Region, Russia

Education:

• Plekhanov Russian University of Economics, “International Business School” faculty - Bachelor degree, specialization “Economics”

• Hanse University of Applied Science - Bachelor degree, specialization “”


ABOUT THE AUTHORS



IBS PLEKHANOV 2011

EKATERINA GONASTAREVA Born:

• Saint-Petersburg , Russia

Education:

• Plekhanov Russian University of Economics, “International Business School” faculty - Bachelor degree, specialization “Economics”

ALENA PLAKHOVA Born:

• Moscow

Education:


• Economic University of Vienna (WU Wien), International Finance - Certificate


Occupation:

• JSC “Audit Consulting Group “Business Systems Development”, Moscow, expert

ABOUT THE AUTHORS



IBS PLEKHANOV 2011

EKATERINA VASHURINA Born:

• Moscow, Russia

Education:

• Moscow State University, RussiaBachelor Degree inForeign Languages

• Kaplan International Colleges. London • MA corporate finance , Plekhanov

University, Moscow, Russia • Master Degree in Corporate Finance ,

Plekhanov University, Moscow, Russia

IRINA KOROLEVA Born:

• Podolsk, Russia


Economics - Bachelor degree, specialization “Economics”

• Master Degree in Corporate Finance , Plekhanov University, Moscow, Russia

ABOUT THE AUTHORS



IBS PLEKHANOV 2011

MARIA KINAROVA Born:

• Moscow, Russia

Education:


• Hogeschool Utrecht, Netherlands – Bachelor degree in “International Business Management”


Occupation:

• Clifford Chance CIS Limited Moscow,

Russia - Working capital assistant

EKATERINA GURIEVA Born:

• Tambov, Russia

Education:


• Fachhochschule Würzburg-Schweinfurt, Würzburg, Germany – Bachelor Degree in Business Administration


ABOUT THE AUTHORS



IBS PLEKHANOV 2011

ALI ISRAILOV Born:

• Taraz, Kazakhstan

Education:

• Regent College, Cambridge, England- “Business and Management School” Pre-bachelor Degree

• Brunel University, West London, England “Business and Management School” Honored Bachelor Degree


SOFIA PETROVA Born:

• Schelkovo, Moscow Region, Russia

Education:


• Fachhochschule Würzburg-Schweinfurt, Würzburg, Germany – Bachelor Degree in Business Administration


ABOUT THE AUTHORS



IBS PLEKHANOV 2011

PAVEL STREKHA Born:

• Kursk, Russia


Economics, “International Business School” faculty - Honored Bachelor degree, specialization “Economics”

• Hogeschool van Arnhem en Nijmegen, Netherlands – Bachelor degree in “International Business Management”


Occupation:

• LLC “Technologies of Strategic Management”, Moscow – Analyst

Rano Usmanova

Born:

• Almaty , Kazakhstan

Education:

• Plekhanov Russian University of Economics, - Bachelor degree, specialization “Finance”


ABOUT THE AUTHORS



IBS PLEKHANOV 2011

DMITRIY EPIFANOV Tutor of English Language

• Deputy Dean of IBS-Plekhanov

ROBIN JOYCE Lecturer - Strategies in Corporate Finance

• Professor of the Chair of International Banking and Finance, Finance University under the Government of the Russian Federation

• Honorary Professor of the Siberian Academy of Finance and Banking

ABOUT THE AUTHORS


360 About IBS Plekhanov. Rano Usmanova “Nestle”

IBS PLEKHANOV 2011

ABOUT IBS PLEKHANOV

International Business School (IBS-Plekhanov) is:

• State Diploma of the Russian Plekhanov Academy of Economics plus

International certificate or Diploma of one of the foreign schools-

partners within “Double Degree” program and online second

Bachelor Degree from an American Ellis College of New York

Institute of Technology (NYIT)

• About fifty partner schools in Europe and North America (see the

“Partners” section)

• Fully compatible study programs of the Academy and partner schools

(see the “Programs” section)

• All disciplines are taught in English

• Students study two more languages choosing from German, French,

Spanish, Dutch, Swedish, and Italian

• One semester studies abroad with one of the foreign schools-partners

(see the “Partners” section)

• One semester placement with an international company in Russia or

abroad

The following programmes of higher professional education with a further

award of a degree are realized at IBS-Plekhanov:

• Bachelor in "Economics" and "Management";

• Master in "Economics" (specialization "International Corporate

Finance")

• Master of business administration in "Finance" and "Strategic

Management" (in Russian)

ABOUT IBS PLEKHANOV

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About IBS Plekhanov.Rano Usmanova “Nestle” 361

IBS PLEKHANOV 2011

Within the frameworks of the bachelor programme of higher professional

education, which has the International Accreditation by the European Council for

Business Education (ECBE), students are trained for two specializations:

• Marketing

• Finance and credit

Employment Advantages

Combination of traditional fundamental Russian and applied West European

education

Fluent knowledge of three languages

Computer literacy

Work experience with an international company

Skills in spheres of

1. Professional communication

2. Presentations

3. Business correspondence

4. Recruitment interviews

In 2008, 2009, and 2010 International Business School (IBS-Plekhanov)

took the has been awarded with 3 Palms considering its International influence

Copyright Notice The copyright of the material contained in this publication belongs to Plekhanov University, Moscow, Russia and material may be used free of charge for any non-commercial purpose, if attributed to Plekhanov University. Where sources have been noted in the text, the copyright of those parts of the text belong to those sources.

ABOUT IBS PLEKHANOV

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http://www.ecbe.eu/�

http://www.eduniversal-ranking.com/business-school-university-ranking-in-russia-nw---central.html�

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