Foreign Investment Business
1. With reference to the Merrill Lynch (ML) case study, provide one example which clearly illustrates a link between topics or concepts drawn from at least two pre-requisite modules.
In the past 20 years have a marked increase in both the flow and stock of Foreign Direct Investment (FDI) in the world economy (Hill 2005). However, there is an unfavorable business environment for Merrill Lynch (ML) FDI in Far East, due to the regional conflicts and trade barriers (excessive tariff and trade sanction). Political retaliation and instability are the major causes for the unstable business environment.
Therefore, ML invested substantial financial resources in building up its first mover advantage for future before other global competitors. ML’s acquisition plan is directly link between the Strategic Management (SM) and International Business (IB). Because in SM, it discussing about the advantages and disadvantages of acquisitions and in IB, it discuss about the Pros and Cons and reason for failure of acquisition and in IB.
For the multinational firm, acquiring a firm from another country might include other strategic benefits besides profit, such as improving geographical coverage or strengthening the firm’s position in important countries (Cullen and Parboteeah 2005). Originally as by Cullen and Parboteeah, ML also wanted to strengthen its firm’s position by making diversification in many companies all over the world. But merger and acquisition is the difficult in merging two different organizations with different national cultures and ways of doing things (Boddy 2004).
ML began its expansion by acquiring Smith New court and Mercury Asset Management (UK) and Midland Walwyn (Canada). However, in 1980, ML entered the Japan market. At first, they faced cultural and language barriers and also the strict regulations of the country made ML failure. Further more, in early 1990s; ML saw the collapse of communism and the opening of Polish market as an opportunity. In IB, it points out while ML was seeking to enter Polish market; it was confronting a circumstance where there were existences of well-established enterprises and where other global competitors were also interested in establishing a presence (Hill and Jones 2004).
As in SM, it defines about the entry advantage. Therefore, ML took advantage of this opportunity and entered Japanese market again through acquiring Yamachi, the country’s oldest and fourth-largest brokerage who already got bankrupt in 1997 (Hill 2004). This is because a green-field venture may be too slow to establish a great presence in the market and acquisition has solved this issue with a less risky way (Scarborough and Zimmerer 2003).
Moreover, Merger and Acquisitions provides a speedy access to other propriety assets when compared with the Greenfield investments starting business from the scratch (Cullen and Parboteeah 2005). In the SM it explains benefits by ML’s cooperation with the Yamachi had helped both parties in term of complementation in skills, assets, and culture adaptation, but ML was having a marketing and management blunder in Japan (Hill and Jones 2004).
A slow organizational change is likely to result in less uncertainty and resistance, thus ML pursued a strategy of evolution rather than revolution on previous Yamaichi’s human resource and operation by retaining the top management and carefully customizing the product line to adapt local opportunities.
The acquisition was also induced by the existence of parenting opportunity and advantage as ML can increase the efficiency of the company by transferring capital, technology, and management skills (Collis and Montgomery, 2005). Besides the benefits of acquisition there also have some drawbacks like lack of cultural knowledge about a country would cause a multinational firm face failure (Hill 2005). Therefore, ML put heavy efforts on its marketing and cultural background in trying to enhance its market share on the expenses of other market players, but still there is an intense rivalry in Polish market.
2. Does it make sense for ML to focus its growth efforts on Japanese markets?
First, in order to enter one country, one business firm must take into account of local legislation, cultural and religious practices (Hill 2003). Although ML faced many risks such as economical and cultural risks at the beginning but it makes sense for the ML to focus it growth efforts on Japanese markets at last. This is supported by the statement that the first movers are often makes mistakes while in the entry into other business (Rob 2006).
At the start ML faced Economic risk such as Japanese Government put rules and regulations for the foreign outsiders company to enter Japan. Hence ML couldn’t enter at that time and also Japan prohibited the bond selling by foreigners. Afterwards, ML tried the second attempt and sees the strength of Japanese market and it started learning about the big market. Furthermore, the people had invested money in the mutual funds only 3%, so ML wants to cover the remaining 97% of the people population in the Japanese market by its products and services.
This shows that people in Japanese are more conservative in the money matters. Besides that, the personal savings of people were 1,200 trillion yen ($8.63 trillion), in these most of the people were invested their money in the banking industry where they can get very low – interest money in return (Morse 1998). Thus, ML observes the market of Japanese is very big and money flow in the country is very high. This overflow source of global money into yen is largely due to increasing demand for Asian securities, especially Japanese stocks, at the expense of U.S. assets (CNNmoney 1999).
When Comparing with saturated investment markets in other countries, Japan’s market looks untapped. There is huge capital up to $1 trillion in the post offices as deposits only. Facing the almost-zero interest rates by the Bank of Japan policy, depositors start to think about to move out their money from post offices and lots of local and foreign financial institutions begin the contest to capture the market.
This makes an open way for the ML to make the people invest in their business. On the top of that, Japan's die-hard recession also is gradually forcing the hands of the Japanese Government to enforce structural reforms needed to save the declining economy, including the clean-up of massive problem loans at major domestic banks, and this is opening up new business opportunities for foreign financial firms like ML. But unfortunately it is hard to believe that other foreign brokerages have entirely lost their interest in Japan, where the bulk of some 1,400 trillion yen in personal financial assets is salted away in pathetically low-yielding bank deposits (Takahashi 2002).
3. What is the company’s strategy with regard to business development on the Japanese market? Does the strategy make sense? From an organizational perspective, what is required for this strategy to work effectively?
Company’s strategy with regard to business development on the Japanese market:
ML employs several market entry strategies, such as strategic alliances, acquisition and FDI, to enter Asian markets. It is particularly having a Prospector strategy in need of first-mover advantage to the business development in Japanese markets (Daft 2004). At the initial stage, ML concentrates its business practices only on the western nations.
As the income level and the economy rising in Asian market especially in the Japan, ML moves out from the niches and adapts to the market transition by diversifying its products and services categories according to the market conditions exist in the Japan. ML products and services are selling stocks, bonds and investment funds world-wide.
Besides, ML’s strategic intent has been to enter Japanese markets earlier than its competitors. Thus, it invested substantial resources to build up its early mover and commanding market position in Asian market and by being the first to enter a new market, the business gains an advantage over its actual and potential rivals.
Reason for the strategy:
At first, there was an increasing domestic rivalry for the retail environment in many Western nations, while the balance of power was shifting away toward nationwide (Hill 2003). As a result of this, many western nations wanted to come to eastern side nations to cover the business market in the Asian Market. When compare to other country in the western nations, Asia has attained growth rates have been triple of those of United States for a decade.
Besides that, the devastation of World War II, East Asian countries such as Japan recovered to become the world's second largest economy - an economic superpower despite its heavy dependency on imported raw materials to support the development of a competitive, export-oriented economy (Ryan 2000). However, this huge recovery of Japan attracted many western nations to concentrate more on the Japanese market. So there was an increasing rivalry in the western nations in all types of business fields.
Moreover, ML enters the rising markets before the competitors in order to build up its early mover advantage which may enable them to obtain a super normal profit in later stage (Datar 2004). Hence ML comes to Japan in order to gain the first mover advantage and makes an entry barrier for the new competitors.
Because Pohl (2002), already stated that the existing relationships in a country create a certain lock-in effect and it further makes difficult for newcomers to enter the market. And also by the acquisition of Yamachi, ML makes a speedy move in to the market and obtains new skills and experiences of exiting employees. Overall, it makes sense for the ML moving into Japan as a First mover.
Requirement of the Strategy from Organization Perspective:
No advantage lasts forever, and the wise business knows that it is much harder to keep an advantage than it is to get it in the first place (Pearson 2006). ML requires more competencies and resources in order to sustain their first mover advantages. In order to get the first mover advantages of being first must be combined with resources such as money, people and knowledge – to enable the advantage to be maintained and enlarged upon (Hill 2003).
ML has clearly signaled its commitment to the Japanese market by its First entry. On the other hand, the first entry will make it easier for ML to attract clients and gives potential clients reason to believe that ML will remain in the market for the long run. Building such a distribution system from scratch would be both very difficult and expensive.
Although, the First mover strategy creates a way for the other competitors but the scale of entry may also give other foreign institutions considering entry into Japan’s market pause for thought, since now they will have to compete not only against Japan’s native institutions, but also against an aggressive and successful U.S. institution.
On the negative side, the first move may wake up Japan’s financial institutions and extract a vigorous competitive response from them. Moreover, by committing itself heavily to Japan, ML may have fewer resources available to support expansion in other desirable markets. In other words, Merrill’s commitment to Japan limits its strategic flexibility.
Therefore, ML has to improve its core competencies and its strength than its foreign competitors as well as the local financial institutions in the Japan. The unique advantage ML had, knowledge of foreign investment products, was of little use given regulations restricting foreign investments. ML has to know how to customize the products and services for the Japanese market.
In addition to, ML also need to develop trust among the Japanese people because they possess long term relationship with a well bonded trust and loyalty. Furthermore, ML must identify and acquire potential local businesses and has the capabilities to add value to them. To make all diversification projects create synergy and align with shareholders’ interest, ML needs effective governance mechanisms (Collis and Montgomery, 2005).
4. Through your own research on ML, identify appropriate performance indicators. Once you have gathered relevant data on these, undertake a performance analysis of the company over the last 5 years. What does the analysis tell you about the moves or otherwise of the strategy adopted by ML?
ML – Japan Performance
In fig.1.1, as we can see the net revenues in the year 2000 was made a peak performance from the year starting 1998 in Japan. This is also proved in the Graph 2.1, that the whole ML performance had been increased in the year 2000 and well gradually weakened in the following year 2001 and 2002 (ML 2002). But it had a weak market condition as well as the September 911 attack made an impact on the year 2001.
The strong performance of ML Japan reflected in the year 1999 shows nearly it reached maximum success. There was an increase in the client assets about $10 billion from the year 1998 to 1999 (ML 1998). Further, the Net revenues in the Japan region in 2001 were declined 32% from 2000 to $1.0 billion, reflecting it faced a bad performance (ML 2001).
In the earning and loss part, ML Japan faced an upward curve as well as the downward curve and the upward curve in the figure represents losses made. ML Japan in the year it had made a little loss $230 million and further in the year 1999 it made a little profit $219 million (ML 1999). At the start up they made losses and during the progress year they also made profit in the year 2000 (ML 2000). In the year 2001, ML Japan had retrenched most of the business firms in Japan and also cut down nearly all branches.
Overall Revenues and the Net Earnings of ML
Further, when we look at the ML Revenues and the net earning means there is a vast difference between the two graphs. The performance of ML is little bit gradually decreasing as well as increasing. For ex: in graph 1.1-from the year 1998 to 2002 the revenues is reached the maximum level at 2000, but it attained at the decrease stage in the year 2001 and 2002.
The revenues in 2000 were $44,872 billion and the Net earnings were $3,784 billion. From the graph, in the year (2001) the revenues as well as net earning had declined because of the September 11 Terrorist attack in the New York Stock exchange. Although it was happened in US, it affected all the country nations stocks such as Japan, UK and Canada (ML 2001).
Finally, ML moves into the Japan made a sensible answer because it already analyzed the market conditions and the worth about the Japanese people cash savings. During the first start up in Japan, it faced many failures in the year 2001 but at the end of the year 2002 and in further years the performance of the business growth going well.
5. How would you describe Merrill Lynch’s strategy posture at the corporate level, is it pursuing a global strategy, a multidomestic strategy, an international strategy or a transnational strategy?
Merrill Lynch, posture at a corporate level, is pursuing an International Strategy. ML makes global competitive moves in all over the countries with the help of resources from the Head Quarters (HQ) and the value they get from the subsidiaries. ML Company makes a certain changes in their products according to the local adaptation of the specific countries. ML used an international strategy as it tried to create value by transferring its products and services to the market in Japan where local competitors lack of those products and services offered by them (Hill 2003).
Reasons for this Strategy:
When company using International strategy, with the help of their rare valuable resources and skills they create value where local competitors does not have those skills (Hill 2005). ML also pursuing this strategy to generate the core – competencies where the other competitors require of those specific competencies skills. In Japan ML following International Strategy because the company has a little local adaptation and low pressure for cost production. Besides that, ML using the same marketing strategy that they are using in the United States with a little changes in the marketing techniques as they are very much concern about the global product and services (Cullen 2002).
During the ML earlier try with international strategy, it has failed due to the high pressure for the local responsiveness in the Japanese market as the Government set a group of regulations. More over, ML used the same strategy during the second time they entered the Japanese market Japan opened the way and let ML to sell the foreign bonds as they were in recession and also the financial units are at weakest stage (Morse 1998). Further, the company using this strategy because ML wants a greater control with a better standard of business.
For an example: ML did not want to make any joint venture or alliance with the other company during they entered in Japan, although they got a chance of having alliance with the Local Chinese bank - Sanwa. The ML head quarters Team considered that this alliance would make them to have less control in their business in the future. Since the ML wants a complete control under them, they don’t want to make any Joint – Venture with any company. Through this, ML only focuses on company control strategy rather than selecting strategies such as Transnational and Multi-domestic strategies where the control is decentralized.
Further more, low cost strategy such as global strategy for the ML was not a difficulty part as they are doing business in the financial products and services. As a result, according to Thompson and Strickland, (2004) it is proved that the Company pursuing the international strategy wants to have the better control in the organization (Centralized).
6. Does this overall strategic posture make sense given the markets and countries that ML participated in? Why?
From the products and services based from the home country – United States, it develops its business through out the world by a strong interdependency connection between all over the countries. The ML Company can able to follow both the local responsiveness and also low cost by using its International Strategy. Moreover, the products and the services providing by the ML are all Product focus and it’s not a market focus (Hill 2005).
On the top of that, ML head quarters from the US transfer its core competencies to its subsidiaries and then its makes sure that every things goes well. It provides the parenting advantages and also the parenting opportunities to every of its units. ML - US provides a varieties of products not only inside but also through all over the world by its subsidiaries (ML 2001). By having a global product ML has developed strong innovative routes with the global customers.
For example: a customer can also use their products like Japanese bonds, UK bonds and Canadians bonds. Besides that with a single brand, ML investment group with the help of international division expertise its rebrand its products with a little localization. Merrill Lynch’s founder role can improve the performance or reflection of its businesses outside its home market through its valuable brand name. As by (Cullen and Parboteeah 2005) where unique parenting characteristics of Merrill Lynch’s brand reputation will lead to value creation.
However, as Merrill Lynch centralize their product development functions in its home market and attempt to duplicate it in foreign markets, some local customization of marketing strategies (Hill 2005). But there is an important exemption to this strategy is when the core skills or competencies of the ML are embedded in process and culture, in which case the firm needs to pay close attention to transferring those process and culture from the corporate center to country subsidiaries (Cullen and Parboteeah 2005).
7. Is Merrill Lynch’s management structure and philosophy aligned with its overall strategic posture?
Merrill Lynch maintains centralized control over its core competency as it creates values through transferring it from home to foreign market which is aligned with its international strategy (Hill 2005).
Besides that, ML systematized its businesses distribution into product division of Global Private Client, Global Markets & Investment Banking Group and Merrill Lynch Investment Managers with its international operations or division constructed geographically around the world (ML 2002). The international division in the head quarters looks after all the operations doing by the following countries such as the UK, Canada and Japan and this countries act as sub-units of the main head quarters – US (Cullen and Parboteeah 2005).
Originally, ML US head quarters typically maintains the centralized control over the source of the firm’s core competencies and all the other operations decisions are decentralized by the subsidiary in each country. The decentralized decisions are allowed in the different countries because every country differs in the culture.
Moreover, this type of centralized control of ML makes interdependency between the businesses operating in different countries and in it became sensible ambiguity. In other hand, when in the part of US culture, it’s individualistic shows in the business also as they are more responsible for the company operations in many countries (Turnbull and Moustakatos 1996).
Also a company’s structure must follow the strategic objectives for the development of relationships (Hill 2003). Merrill Lynch realigned its organizational structure late in 1990 with the aim of achieving the closest possible management focus on serving key client needs.
And also in ML, their management structure is equally aligned with the other things such as the Central strategy group, global research sharing and Global investment committee. The group structure reflects the firm’s major areas of client focus, with Private Client, Asset Management, and Insurance serving individual clients, and investment Banking, Debt Markets and Equity Markets serving corporate, institutional and corporate clients.
A major objective of the realignment was to simplify the management structure, speed decision making and enhance top management’s ability to set direction, manage key client relationships, allocate resources, and assure co-ordination among interrelated business (Turnbull and Moustakatos 1996).
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