China Opportunities

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China Opportunities Challengesfor Small to
Medium Businesses

• The Story of
• Two Successes and
• A Failure

William Paterson University October 13, 2004 Roy
McCall
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China Opportunities Challengesfor Small to
Medium Businesses

• IT United (ituc.com)
• Shiyao Investment (shiyaoinvestment.com)
• FarmChina (FarmChina.com)

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China Opportunities Challengesfor Small to
Medium Businesses
China In Out
U.S. Out In
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China Opportunities Challengesfor Small to
Medium Businesses
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China Opportunities Challengesfor Small to
Medium Businesses

• Separating
• the Big Biz and
• the Small to Medium Biz Models

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China Opportunities Challengesfor Small to
Medium Businesses
Profitability Productivity
Leverage
NI X Sales X Assets Sales Assets Equity

• Balance Sheet
• Things of Value What we Owe
• Assets Liabilities
• What we Own
• Stockholders
• Equity

• Income Statement
• Sales
• - Cost of Goods Sold
• Gross Margin
• - Operating Expenses
• Operating Margin
• - Interest
• - Taxes
• Net Income

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China Opportunities Challengesfor Small to
Medium Businesses Liquidity Management
Definitions Operating Cycle Inventory
Cycle Receivables Cycle Cash Conversion Cycle
Inventory Cycle Receivables Cycle - Payables
Cycle
Payables Cycle Receivables Inventory
Cycle (-days) Cycle (days) (days)
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China Opportunities Challengesfor Small to
Medium Businesses

• The Small to Medium Biz Models

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China Opportunities Challengesfor Small to
Medium Businesses
Value Axis H Market Power Axis
H
Price L L Cost to Serve
SourceHBS
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China Opportunities Challengesfor Small to
Medium Businesses
dream
birth Natural movement through commodity
magnet death
needy customers
knowledgeable customers
Price L L H Cost to Serve
SourceHBS
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China Opportunities Challengesfor Small to
Medium Businesses
value added strategy process innovation

• Value
• problem solving
• customer needs

Demand side strategy
Supply side strategy
Price L L H Cost to Serve
market focus strategy
SourceHBS
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China Opportunities Challengesfor Small to
Medium Businesses
Purpose/Vision Product Market Market /Mission/Bel
iefs Development Development Penetration
Profits Inception Growth Maturity
Decline? Introduction Innovation Innovation
Sunk Costs (Major) (Minor)
Projected Earnings Value Tangible Assets
Intangible Assets Dividends IPO exit
value Liquidation Value
Valuation Approaches
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China Opportunities Challengesfor Small to
Medium Businesses
Purpose/Vision Product Market Market /Mission/Bel
iefs Development Development Penetration
Profits Inception Growth Maturity
Decline? Introduction Innovation Innovation
Sunk Costs (Major) (Minor)
Projected Earnings Tangible Assets
Intangible Assets Dividends IPO exit
value Liquidation Value
Creditors
Valuation Approaches
Raiders
Corporate Builders
Shareholders
Venture Capitalists
Courts
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China Opportunities Challengesfor Small to
Medium Businesses
Strategic Direction
Maturity
Introduction
Decline
Growth
Purpose/Vision Product Market Market
/Mission/Beliefs Development Development Penetrat
ion Innovators 3 Early Adopters 14 Majority
68 Laggards 15 Buyers High
Income Widening Group, Affluent Mass Market
Sophisticated Inertia requires
persuasion Repeat buying
buyers Poor quality product Uneven
quality Brand loyalty Overall Strategy Best
period to Practical to change Bad time to
Cost control key increase market
share price/ image differentiation increase
market share Marketing key Cost control is
key(marketing) Risk High risk Growth reduces
risk Cyclical risk Competition Few firms Many
competitors Price competition Exits Mergers
bankruptcies Shakeout Fewer Good
acquisition climate Poor acquisition
climate Competitors Margins High prices High
prices Falling prices Low prices High
margins High profits Lower margins margins
Low profits Recession reistant Lower profits
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China Opportunities Challengesfor Small to
Medium Businesses

• Post Mortem

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China Opportunities Challengesfor Small to
Medium Businesses
New Products High risk High
return Present Markets New Markets Low
risk Low return Present Products
funding
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China Opportunities Challengesfor Small to
Medium Businesses
New Products Product Entrepreneurship
Development Diversification Present
Markets New Markets Market Market Pen
etration Development Present Products
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China Opportunities Challengesfor Small to
Medium Businesses
New Products Product Entrepreneurship
Development Diversification Present
Markets New Markets Market Market Pene
tration Development Present Products
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China Opportunities Challengesfor Small to
Medium Businesses
Product Market Market
Decline Development Development Penetration
Marketing Very high advertising High
advertising Differentiation a)cut back
marketing costs but less as of
sales b)revive Inform Persuade Compete c)t
erminate Once basic model Expanding line Full
product line Best
sellers Informative promotion Persuasive
promotion Competitive promotion Inform
promo RD Changing design Less rapid product
change Manufacturing Overcapacity Undercapacity
Optimum capacity Overcapacity Short
production runs Shift to mass production
Mass pdn High production
costs Long stable pdn runs High skilled
labor Low skilled labor Distribution Volume
channels Efficient channels Selective
channels Expanding number of outlets
Decreasing outlests Foreign Trade Some
exports Significant exports Falling exports
No exports Few imports Significan
t imports Sig. imports
Value Chain
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China Opportunities Challengesfor Small to
Medium Businesses Production Engineering View
Revenues
Profit
0
Breakeven Time
Fixed Costs Variable Costs
Fixed Investment Costs
Investigation
Breakeven After Release (Manufacturing-Sales) Op
erations and Postsale Service
Time to Market (Product Design
Development) Innovations
Time
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China Opportunities Challengesfor Small to
Medium Businesses Marketing View
Reposition the product or business
Revenues
Superficial Breakeven Point
Profit
0
Fixed Costs Variable Costs
Sell the business Sell the assets
Fixed Investment Costs
Time
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China Opportunities Challengesfor Small to
Medium Businesses Finance View/Contribution
Positive NPV Realistic? Stress Test
Real Breakeven Superficial Breakeven Point
Revenues (nominal)
Profit (nominal)
0
Fixed Costs Variable Costs (nominal)
Fixed Investment Costs (nominal)
Positive NPV Invest? Note Showstoppers
Time
Negative NPV Avoid the Investment
Earnings/Loss (time weighted)
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China Opportunities Challengesfor Small to
Medium Businesses

• Lessons

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China Opportunities Challengesfor Small to
Medium Businesses

• Entering China with a Business Plan
• The People most important
• The Opportunity
• The Context
• Risk and Reward

Source Sahlman, HBR How to Write a Great
Business Plan,
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China Opportunities Challengesfor Small to
Medium Businesses

• Entering China with a Business Plan
• The People
• Founders are from where? Education? Work
  Experience Where? Accomplishments either
  professional or personal? Reputation? Skills,
  knowledge and ability? Realism? Team balance?
  Prepared to recruit for gaps? Contingency plan
  for adversity? Courage to make hard decisions?
  Committed? Motivated?

Source Sahlman, HBR How to Write a Great
Business Plan,
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China Opportunities Challengesfor Small to
Medium Businesses

• Entering China with a Business Plan
• The Opportunity (understanding marketing)
• Customers and customer decision-making
  preferences for this product or service?
  Persuasively advantanged product or service?
  Competitively priced, with value? Able to address
  different customer segments? Cost of acquiring
  an advertising sponsor (customer)? Cost of
  production? Cost of support? Cost of customer
  retention?

Source Sahlman, HBR How to Write a Great
Business Plan,
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China Opportunities Challengesfor Small to
Medium Businesses

• Entering China with a Business Plan
• The Context
• Macroeconomic environment, business cycle,
  inflation, exchange rates, interest rates
• What if economic growth turns down or shifts to
  other areas outside of the product or service?

Source Sahlman, HBR How to Write a Great
Business Plan,
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China Opportunities Challengesfor Small to
Medium Businesses

• Entering China with a Business Plan
• Risk and Reward
• Even entrepreneurs want to avoid risk if possible.

Source Sahlman, HBR How to Write a Great
Business Plan,
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China Opportunities Challengesfor Small to
Medium Businesses
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China Opportunities Challengesfor Small to
Medium Businesses
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China Opportunities Challengesfor Small to
Medium Businesses

• Action Plan

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China Opportunities Challengesfor Small to
Medium Businesses Start with Good Reconnaissance

• US BJ Embassy DoC Foreign Commercial Service
• www.AmCham-China.org.cn
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