The 30 Day MBA (50 page)

New Trade Theory

Paul Krugman, an economics Nobel Prize winner, pioneered an extension of Ricardo's work on comparative advantage generally know as New Trade Theory. Recognizing that economies of scale accrue mostly to big businesses he saw two important factors for firms to keep in mind when developing their international thinking:

1. Firms can use economies of scale to allow them to spread the benefit of low costs across more products while still lowering average costs. This widens consumer choice as the firm can extend the range of products on offer in international markets.
   
2. If the global market can only support a small number of firms, certain product categories may come to be dominated by those that get to market first.
   

New Trade Theory has been used by governments as the logic for supporting infant industries that might meet this later criteria; for example Denmark, with a high dependency on imported energy, targeted wind power as an industry to support. By 2000 the country's wind turbine firms had captured 60 per cent of a world market estimated at $3 billion a year.

Product life cycle model of international trade

Raymond Vernon, an American academic advanced his theory on the subject in an article entitled ‘International Investment and International Trade in the Product Life Cycle', published in the May 1966 edition of the
Quarterly Journal of Economics
. Borrowing from the marketing concept of the product life cycle (see
Chapter 4
) Vernon suggested that the internationalization process for new innovations followed a broadly predictable path, similar to that of the marketing take on the subject (see
Chapter 3
). He drew on the United States for his inspiration as up until that time most of the world's new products had been developed there. However, the principles hold good for other countries where innovation is strong. China produces 80,000 people a year with higher degrees in computer science or engineering; in India, 70,000 people are prime candidates for sources of new innovative industries – so much so that Microsoft's largest R & D centre outside of the United States is in Beijing and Cisco's second global headquarters is in Bangalore.

Vernon argued that most new products are made close to home and consumed largely in that market. The risks associated with anything new made this strategy prudent and in any event looking for low cost overseas manufacturing was unnecessary as initial demand was unlikely to be based on price factors. Initially during the introductory phase, demand would be largely confined to the home market, but later as costs came down, growth could be expected from exporting to meet demand in other advanced economies. At first such growth would not warrant those countries establishing their own production but as the product reaches maturity that situation could change. In the final stage in the life cycle, the decline, production in the country in which the innovative new product was created will decline as cheaper and equally reliable overseas sources come on stream. Though demand will continue to grow, supply will now be met in part by imports. So, according to Vernon, the path from innovator through to exporter and ultimately importer can be traced and to a lesser extent predicted.

The Samuelson critique

Not everyone agrees that globalization is universally a force for good. Paul A Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology published an article in
The Journal of Economic Perspectives
, a quarterly put out by the American Economic Association, in September 2004 examining situations where the gains from international free trade no longer outweigh the losses. He cites examples in relation to where call centres had been outsourced to India and the increasing trend due to advances in global communications through the use of the internet to move offshore other service jobs – medical diagnosis, accounting and software development for example – that were not traditionally internationally mobile. In such cases Samuelson concludes that wages for indigenous workers in the United States will be driven down to the point where gains from international trade are lost: ‘Being able to purchase groceries 20 per cent cheaper at Wal-Mart (due to international trade benefits) does not necessarily make up for trade losses.'

APPENDIX 2

Elective: Business Planning

P
reparing business plans is a task that MBAs are invariably expected to be able to carry out. It calls for the broad level of understanding of all aspects of the business – cash flow, profit margins, funding issues, marketing and selling, staffing and structures, production, operations, research and development, supply chain etc – that few others in the organization are likely to have. It is an opportunity for an MBA to broaden and deepen their relationships with all key executives as well as the board of directors. So often tedious and always time consuming, the task of preparing business plans should be welcomed as a career progression opportunity par excellence.

Business planning both as an elective and as an element of core subjects such as finance and strategy are on offer at Cranfield, UCLA Anderson and Wharton and pretty well everywhere else. At Wharton the subject is taught around a business plan competition (WBPC), a comprehensive, seven-month platform to help entrepreneurs and their teams launch their new business ideas. Structured around a number of entrepreneurship workshops, the teaching is delivered by entrepreneurship experts including Wharton entrepreneurship professors and Wharton graduates who have started their own businesses.

Entrepreneurship in practice

Business schools usually teach business planning using the ‘Action Learning' approach. This generally takes the form of having a handful of inspiring alumni entrepreneurs back to talk about how they got started. At Cranfield, the stars would include a couple of big hitters, Karan (now Lord) Billimoria of Cobra Beer fame, for example. Cass wheels out Stelios Haji-Iannou, founder of easyJet, and London Business School has Tony Wheeler who graduated in 1972 and together with his wife Maureen founded Lonely Planet Publications. Then they will invite a cross-section of those entrepreneurs who have interesting stories to tell, say about raising money, hiring and firing or selling up; or who are recent leavers that switched career paths from, say, big corporate lives to small business. At IMD, in Lausanne on Lake Geneva in Switzerland, the emphasis is on family businesses, and Warren Buffett, whose son looks set to take over at Berkshire Hathaway, is typical of the speakers there.

The spirit of the teaching is around preparing a business plan to be presented to a panel along the lines of the UK's
Dragons' Den
, or the United States'
Shark Tank
, often with similar outcomes in that the business gets
funding. It would be incorrect to suggest that droves of MBAs rush off to found ventures straight off, but perhaps three or four in a hundred do. Within a decade that will have risen to around 40 per cent according to research carried out for Top MBA (
www.topmba.com
).

Aside from getting funding and marks towards their MBA grade, the most successful business plans are usually entered into one of a number of business plan competitions. These offer prizes such as Nano Challenge (
www.nanochallenge.com
) offering two prizes of €300,000, promoted by Veneto Nanotech, the company managing the Italian Cluster for Nanotechnologies and PricewaterhouseCoopers. Usually more modest awards of cash, consulting and investment are on offer. Small Business Notes (
www.smallbusinessnotes.com/planning/competitions.html
) has a business plan directory with around 100 competitions around the world.

You don't have to be in a business school to enter most of these competitions, though you may find it hard to find out about them if you are not and you will almost certainly be up against a business school team. Oxford Saïd Business School (
www.sbs.ox.ac.uk
> Centres > Oxford Centre for Entrepreneurship and Innovation > Programmes > Community Outreach > Saïd Global Entrepreneur Challenge) will take entries from individuals, teams, new companies, existing companies creating spin-offs, students, scientists, academics and entrepreneurs. Regional, national and international participation is encouraged.

Structure of the business plan

The plan is in essence the route map from where the business is to where it wants to get and how it will go about getting to its destination – the roles and responsibilities of key players, the resources required in terms of money, people and materials and so forth. While there is much debate about exactly what should go into the business plan and how it should be laid out, there is no doubt that it is the essential tool for ensuring that a well-thought-out strategy is executed successfully too.

This is the suggested general layout for a business plan as used on the MBA programme at Cranfield and, from observation at international business plan competitions, seems to be fairly universal.

Executive summary

This is the most important part of the plan and will form the heart of any presentation to the board, shareholders or prospective investors. Written last, this should be punchy, short – ideally one page but never more than two – and should enthuse any reader. Its primary purpose is to excite and inspire an audience to want to read the rest of the business plan.

The executive summary should start with a succinct table showing past performance in key areas and future objectives. This will give readers a clear view of the business's capacity to perform as well as the scale of the task ahead (
Table A.2
).

TABLE A.2
  
Executive summary – history and projections

Then the executive summary should continue with sections covering the following areas:

• what the primary products/services are and why they are better or different from what is around now;
  
• which markets/customer groups will most need what you plan to offer and why;
  
• how close you are to being ready to sell your product/service and what if anything remains to be done;
  
• why your organization has the skills and expertise to execute this strategy and if new or additional people are required, who they are or how you will recruit them;
  
• financial projections showing in summary the sales, profit, margins and cash position over the next three to five years;
  
• how the business will operate, sketching out the key steps, from buying in any raw materials through to selling, delivering and getting paid;
  
• what physical resources – equipment, premises – the plan calls for.
  

The contents: putting flesh on the bones

Unlike the executive summary, which is structured to reveal the essence of your business proposition, the plan itself should follow a logical sequence such as this:

• Vision: A vision's purpose is to stretch the organization's reach beyond its grasp. Generally, few people concerned with the company can now see how the vision is to be achieved, but all concerned agree that it would be great if it could be. Once your vision becomes reality it may be time for a new challenge, or perhaps even a new business.
  
• Mission: A mission statement explains concisely what you do, who you do it for and why you are better or different from others operating in your market. It should be narrow enough to give focus yet leave enough room for growth. Above all, it should be believable to all concerned.
  
• Objectives: These are the big picture numbers such as market share, profit, return on investment that are to be achieved by successfully executing the chosen strategy.
  
• Marketing: This section provides information on the product/service on offer, customers and the size of the market, competitors, proposed pricing, promotion and selling method.
  
• Operations: This area covers any processes such as manufacture, assembly, purchasing, stock holding, delivery/fulfilment and website.
  
• Financial projections: Detailed information on sales and cash flow for the period of the plan, showing how much money is needed, for what, by when and what would be the most appropriate source of those funds: long- or short-term borrowings, equity, factoring or leasing finance, for example.
  
• Premises: What space and equipment will be needed and how your home will accommodate the business while staying within the law.
  
• People: What skills and experience you have on board that will help run this business and implement the chosen strategy; what other people you will need and where you will find them.
  
• Administrative matters: Do you have any IP (intellectual property) on your product or service; what insurance will you need; what changes if any will be needed to the accounting and control and record systems.
  
• Milestone timetable: This should show the key actions you have still to take to be ready to achieve major objectives and the date these will be completed.
  
• Appendices: Use these for any bulky information such as market studies, competitors' leaflets, customer endorsements, technical data, patents, CVs and the like that you refer to in your business plan.
  

All these topics are covered in this book and by using the index and table of contents you can find your way to them quickly.