International Strategies for EMAAR - Case Study Example

International Strategic Plan Course Title University Year Student Instructor EXECUTIVE SUMMARY The world today is a global village. Business firms and organizations move into foreign countries to do business. EMAAR is a UAE based real estate and development company that intends to do business in Switzerland. In keeping with her business level strategy of international expansion and diversification, EMAAR plans the acquisition of PSP Swiss Property AG (PSP) which is a Switzerland based real estate and development firm. In an investment costing $25 billion, EMAAR intends to replicate the home success story into Switzerland’s real estate industry by taking on the tough competition in the market on the strength of her strong international brand name and value added growth strategy. His report gives an analysis of the country profiles of both the UAE and Switzerland including their geographical locations, economic and socio-political situations and implication for business. The company profiles, product and financial positions of both EMAAR and PSP are evaluated too. The report then discusses the entry strategy and steps that EMAAR intends to take in her new international project operations including competition strategy Human Resources planning and compliance issues. Table of Contents Page Cover page ……………………………………………………………………………….1 Executive Summary ……………………………………………………………………...2 Introduction ……………………………………………………………………………...4 UAE Country Profile …………………………………………………………………….5 Profile of Foreign Country-Switzerland …………………………………………………6 Economic Situation ………………………………………………………………………8 Political and Legal Situation ……………………………………………………………..9 Cultural and Social Situation …………………………………………………………….10 Financial analysis of EMAAR (UAE Firm) ……………………………………………..12 Financial Position of PSP Swiss Property AG (PSP) - (Foreign Country Firm) ………...13 Market Entry Strategy ……………………………………………………………………16 Marketing Situation ………………………………………………………………………16 Competitor Analysis ……………………………………………………………...16 Competitive Advantage …………………………………………………………..17 Product Situation …………………………………………………………………17 Pricing situation …………………………………………………………………..20 Distribution situation ……………………………………………………………..20 Promotion Situation ………………………………………………………………21 Operations & Human Resources Management …………………………………...21 Conclusion and Recommendations ……………………………………………………….22 References …………………………………………………………………………………23 Introduction: Globalization has opened up the world economy for investment by companies into nations other than their home countries. EMAAR is a real estate and development company from the United Arab Emirates but has taken advantage of the global market to expand her operations across borders. This is in line with her business level strategy of expansion and diversification in which EMAAR expands her operations geographically through ventures, acquisitions and holdings while at the same time undertaking business segmentation and diversification at the local front, (EMAAR, 2013). This report outlines the cost and steps which EMAAR will take to acquire PSP Swiss Property AG (PSP) in Switzerland. It includes an overview of the country profiles of the UAE and Switzerland, the financial positions of both EMAAR and PSP, the product situation, the marketing conditions and the competition situation for the new international business. Profile of the UAE Figure 1 The United Arab Emirates (UAE) is geographically located on the Arabian Peninsula, 457 Kilometers West and South of Saudi Arabia and 410 Kilometers North and East of Oman as can be seen in Figure 1. The UAE borders the Persian Gulf and the Gulf of Oman with a 1318 Kilometers coastline, together with a 12 nautical miles sea territory. The United Arab Emirates became independent on 2nd Dec 1971 and currently has a population of over 5.4 million. The UAE is characterized by a hot and dry climate with July and August being the hottest months. With no permanent rivers, the UAE relies on Al Liwa Oasis and the Al Buraymi Oasis in the Abu Dhabi desert area for water supply. The water and Electricity sector in the UAE is mostly privatized either partially or totally and supervised by the Abu Dhabi Water and Electricity Authority (ADWEA). The UAE has road transport as her main mode of transportation hence has well developed roads. The country also has maritime trade as her main economic mainstay hence has a developed port facility. However, the UAE has 6 international airports and a total of 37 airports. UAE is doing well in the communications arena having invested heavily in the Dubai Internet City which is a regional e-commerce center, (Ibp, Inc, 2013). The UAE has oil and gas forming the economy’s backbone. He UAE economy has been growing impressively since independence. The recent 2013 statistics indicate that the UAE economy has her GDP a $258.8 billion representing a 4.9% growth and a compound annual growth of 2.8% in the last 5 years. According to these statistics, the country’s unemployment rate, inflation rate and FDI inflow stand at 12.9%, 0.9% and $7.7 billion respectively. The exchange rate of the UAE has remained relatively stable at 3.673 Emirati dirhams (AED) per US dollar. The UAE improved by 1.8 points to score 71.1 in the 2013 economic freedom index and was ranked the 28th freest economy globally. He UAE has shown a general improvement in openness to trade with significant improvements in government spending, regulatory efficiency, business and monetary freedom, rule of law, and reduction in corruption levels. The UAE has a modest trade-weighted tariff rate of 3.7%. However, most investment opportunities in the UAE require that at least 51% UAE national ownership, (QNB Group, 2013). Profile of Foreign Country-Switzerland Switzerland is a country in Central Europe. It is mountainous and landlocked. Switzerland is bordered by Australia to the East, France to the North and West, Italy to the South and Germany to the Northeast as can be seen in Figure 2. Switzerland had her neutrality guaranteed by the Congress of Vienna in 1915 soon after Napoleon’s final defeat. His neutrality is still alive to date. Switzerland later modified the 1848 constitution in the year 1874 to put in place federal responsibility for defense among other issues thus doing away with the confederation. In other words, this saw the introduction of Switzerland’s direct democracy by popular referendum, (Breiding & ‎Schwarz, 2013). Switzerland has a population of over 7.8 million people. The country has a temperate climate that tends to change depending on altitude, (OECD Factbook, 2013). Figure 2 And Generally, Switzerland has a diversified modern economy. Switzerland had 81 as her 2013 economic cantonal freedom score and ranked 5th freest economy in the World. In the Europe region, Switzerland ranked 1st out of 43 European countries, (Heritage, 2013). Switzerland embraces high levels of openness to trade. This has made the economy of Switzerland one of the most competitive and dynamic globally. The economy is characterized by strong prosperous institutions alongside strong property rights protection framework. The exchange rate of Switzerland is about 0.9374 Swiss francs (CHF) per US dollar. There have been great improvements in Switzerland’s public sector operational efficiency characterized by sound fiscal and monetary policy freedom from corruption, (GCR, 2013). The Swiss economy is characterized by burdensome taxation at levels compared to federal level. In 2013, the income tax rate at the top federal level was estimated at 11.5% with 41.5% being the combined tax rate. On the other hand, 8.5% was the federal corporate tax rate with a high of 24% as the joint rate. It was estimated that the government expenditure was at 34.7% of GDP representing an estimated tax burden of 29.8% of the total domestic income, (Heritage, 2013). Switzerland is known to have one of the finest transportation networks globally with well developed road, rail and airport infrastructure. Similarly, the country has invested heavily in developing communication facilities including IT-intensive infrastructure. Switzerland however has only about 15% of her energy requirements produced locally from the hydropower and biomass renewable sources. Switzerland therefore, imports about 85% of her energy as nuclear power generated mainly from fossil fuels, (OECD Factbook, 2013). Economic Situation Switzerland is generally a high income economy. According to recent 2013 economic statistics, the country has a GDP (PPP) of $339.9 billion representing a 1.9% growth and a 1.7% compound annual growth for the last 5 years. Switzerland’s percapita was estimated to be $43,370. According to these statistics, the country’s unemployment rate, inflation rate (CPI), and FDI inflow is 4.2%, 0.2% and -196.5 million respectively. As mentioned earlier, Switzerland has a diversified modern economy. Switzerland had 81 as her 2013 economic freedom score and ranked 5th freest economy in the World. In the Europe region, Switzerland ranked 1st out of 43 European countries. Switzerland embraces high levels of openness to trade. This has made the economy of Switzerland one of the most competitive and dynamic globally. The economy is characterized by strong prosperous institutions alongside strong property rights protection framework, (Heritage, 2013). Political and Legal Situation The political structure of Switzerland is such that there is a federal government structure organized into three levels of government including the confederation, the cantons and the communes. The three levels are the equivalent of the federal government, the state government, and the local government respectively. What this means is that power is constitutionally decentralize or shared among the three levels of government such that each region is able to manage its internal affairs without direct interference from central government (the confederation level for this case). The legal system in Switzerland is modeled along civil law. This system provides for review of legislative acts by the judiciary provided that such acts are not federal decrees that are by nature mandatory. There are three arms of government in Switzerland comprising of the Executive, the Legislature and the judiciary. Switzerland has had a stable political landscape for a long time. The main political parties are four including; the Swiss People’s Party which is the strongest in the Country, the Christian Democratic Party, the Radical Party, and the Social Democratic Party, (Breiding & ‎Schwarz, 2013). Labor relations in Switzerland have for a long time remained stable. Most conflicts are usually resolved amicably such that employers resolve wage claims through arbitration and Unions do not resort to strikes as a means to settle grievances. Trade Unions in Switzerland are financed by their members but employees are free to choose whether or not to join a trade union. Trade unions have the Swiss Federation of Trade Unions as their umbrella body with 16 member trade unions being the largest followed the Travail Suisse that is umbrella for 13 member organizations. Switzerland extends the system of direct democracy to the trade unions making them to have direct contribution to matters of policy making, (Oesch, 2010). The stability of the Swiss trade union system will provide amble business environment for EMAAR to operate as a foreign investor company. In Switzerland, banks and financial markets are regulated by an independent federal regulatory authority known as the Swiss Financial Market Supervisory Authority (FINMA). However, there is also the Swiss National Bank whose role is to supervise payments and security settlement operations alongside the monitoring of compliance with rules governing liquidity. It is important to mention that Switzerland is not a member of either the European Union or the European Economic Union hence is not bound by European legislation. The level of competence and sophistication of the banking sector in Switzerland has gained a global reputation with the Swiss private banking topping global ranking, (KPMG, 2011). Such a sound and friendly banking environment is favorable for EMAAR’s real estate business to perform in Switzerland. Furthermore, there are no extreme levels of corruption in Switzerland. Switzerland was among the few countries ranked in 2013 by Transparency International to have had the lowest perceived levels of corruption, (Transparency International, 2013). Cultural and Social Situation The UAE social life is mainly shaped by Islamic culture because 96% of the UAE population is Islamic. Perhaps an important aspect to note is that their houses are built in courtyard style to reflect the Islamic perspective which aims at giving privacy to the family. In the UAE, Muslims are discouraged from being converted to other religious outfits. But members of other religions are allowed and encouraged to change to Islam. Other social cultural practice to note in the UAE include; the fact that the person on the right need be allowed to be the first to enter the door; and that declining to drink coffee is considered rude since coffee usually symbolizes hospitality. Such details are necessary for those in business including EMAAR to have their employees understand because it goes a long way to determine whether a business deal will be successful or not. On the other hand, the UAE culture strongly shapes the corporate social responsibility unlike in other countries such as Switzerland because in the UAE, Islamic teachings form the basis upon which cultural traditions including community embeddedness, philanthropy and business ethics are built. The emphasis for these teachings is simply that of collectivism in community activity and generous giving towards collective welfare. This is beneficial to the business activities too, (Ibp, Inc, 2013). Unlike the UAE where Islam is the main religion, Switzerland has Christianity as the major religion with Roman Catholic having the highest percentage followed by Protestant churches. However, other religious outfits including Islam, Hinduism, Buddhism, Judaism and Orthodox Christianity also exist in Switzerland, (Breiding & ‎Schwarz, 2013). The fact that EMAAR wants to invest in Switzerland makes this information important for the firm especially considering the differences between social cultures in the UAE that is defined along Islam to the social culture in Switzerland where Christianity is the predominant outfit. As mentioned earlier on, Switzerland embraces the policy of neutrality. This opened up Switzerland as safe harbor to the world population in times of war. It is therefore common to find many Germany, Italian and French artists in Switzerland. Consequently, Switzerland’s is a rich convergence of cultures modeled along music, literature, art and sculpture among other entertainment elements. But more important to consider is fact that Switzerland defines her culture in terms of “unity and not uniformity”. The Swiss have maintained their identity regardless of the cultural diversity. The Swiss are generally a hard working people although they have strong family attachments, strict adherence to traditions, and special interest for travel and leisure too. Analysts have observed that the watching Television is one of the peoples’ favorite pastimes in Switzerland, (Sommaruga, 2011). The social and cultural situation for Switzerland does not pose any threat for EMAAR real estate investments as long as EMAAR does not engage in any activity against the tradition of the community in which they operate. Financial Situation: Financial analysis of EMAAR (UAE Firm) EMAAR has exhibited a stable performance in terms of profitability during tough market conditions. EMAAR’s Net operating profit for instance was AED 2.32 billion in the year 2009, AED 3.03 billion in the year 2010 and AED 2.06 billion in 2011. The firm’s revenues in 2009 amounted to AED 8.41 billion, AED 12.15 billion in 2010 and AED 8.11 billion in 2011. As at 31 December 2011, EMAAR’s total Assets were valued at AED 60.05 billion. However, the firm’s consolidated group debt amounted to AED 11.17 billion in 2010 and AED 11.12 billion in 2011. This was attributed to fact that funding of International RE development expansion was conducted through local borrowings. Thus EMAAR’s Net debt stood at AED 6.13 billion in 2010 and AED 7.81 billion in 2011. 1 US Dollar is equivalent to 3.673 Emirati dirhams (AED), (EMAAR, 2010 & EMAAR, 2011). As at 30th September 2013, EMAAR’s financial position showed an upward performance trend compared to the 30th September 2012 position. Revenue was AED 5.57 billion in 2012 and AED 7.57 billion in 2013. In the same period, EMAAR’s Net operating profit increased from AED 1.61 billion to AED 1.81 billion while total comprehensive income rose from AED 1.44 billion to AED 1.54 billion. The total Equity value also increased from AED 32.82 billion to AED 33.75 billion while cash and cash equivalents amounted to AED 1.67 billion in September 2012 and AED 3.31 billion as at 30th September 2013, (EMAAR, 2012 & EMAAR, 2013). Financial Position of PSP Swiss Property AG (PSP) - (Foreign Country Firm) PSP Swiss Property is an established real estate and development company in Switzerland having properties in various major cities and towns including; Lausanne Geneva, Zurich, Basel, and Bern. PSP owns 191 office and commercial properties in Switzerland. With her head office in Zug Switzerland, PSP has 7 development sites and 86 employees. PSP Swiss Property in Switzerland has continued to have successful business in the recent past despite the tough business environment resulting from the global financial crisis and Eurozone recession. For instance, PSP recorded a net income of CHF 149 million in the year 2011 and CHF 161.6 million in 2012 (excluding net changes to fair values). 1 US Dollar is equivalent to 0.9374 Swiss francs (CHF). The increase in net income prompted an increase in cash payment per share from CHF 3.00 in 2011 to CHF 3.20 in 2012. In the same period, PSP had a comfortable financing position with an equity base of CHF 3.699 billion, equity ratio of 58.2%, CHF 500 million as unused committed credit lines and 28.5% as the ratio of debt to total assets, (PSP Swiss Property AG, 2013). Figures 3 and 4 below show the annual income statement statistics and estimates for PSP while Figures 5 and 6 show PSP’s financial ratio statistics. Income Statement Evolution Figure 3 Source: http://www.4-traders.com/PSP-SWISS-PROPERTY-AG-131096/financials/ Annual Income Statement Data Actuals in M CHF Estimates in M CHF Fiscal Period December 2010 2011 2012 2013 2014 2015 Sales 263 271 273 290 279 279 Operating income (EBITDA) 223 233 239 245 234 238 Operating profit (EBIT) 258 235 298 269 243 238 Pre-Tax Profit (EBT) 353 516 468 328 265 281 Net income 281 404 369 273 216 209 EPS ( CHF) 6,62 9,40 8,21 5,52 4,48 4,30 Dividend per Share ( CHF) 2,80 3,00 3,20 3,28 3,33 3,36 Yield 3,76% 4,03% 4,30% 4,40% 4,47% 4,52% Announcement Date 02/25/2011 06:35am 02/28/2012 06:59am 03/01/2013 11:16am - - - Figure 4 Source: http://www.4-traders.com/PSP-SWISS-PROPERTY-AG-131096/financials/ Price Earnings Ratio Figure 5 Source: http://www.4-traders.com/PSP-SWISS-PROPERTY-AG-131096/financials/ EPS & Dividend Figure 6 Source: http://www.4-traders.com/PSP-SWISS-PROPERTY-AG-131096/financials/ EMAAR will spend a total of $25 billion in this project to cover the cost of acquisition and related expenses. The expected rate of return will be 15% per annum for the first 5 years. EMAAR intends to expand the operations of the new firm which will effectively take on the new name of EMAAR-PSP and turn around her growth path to a more stable and progressive trend than ever before. Market Entry Strategy EMAAR’s market entry strategy in Switzerland will be consistent with the company’s international expansion strategy that targets to use acquisitions, ventures and holdings to strengthen EMAAR’s global presence, (Metcalfe &Mimouni, 2011). In this specific case, EMAAR’s market entry strategy will be acquisition of the PSP Swiss Property AG (PSP) which is a Switzerland based real estate company. This acquisition strategy is informed by fact that PSP is already an established company in Switzerland having properties in various major cities and towns. PSP handles real estate business in three different operational categories including; real estate investment, real estate management and holding. The operations mode of PSP is actually compatible with the EMAAR’s international expansion strategy. The first category deals with real estate business and is made up of all company properties. The second category comprises real estate portfolio management activities and services while the third category involves traditional corporate functions such as human resources, legal affairs, finance, information technology investor and public relations, (PSP Swiss Property AG, 2013). Marketing Situation Competitor Analysis The real estate market in Switzerland is quite competitive and has many players. The success for any firm in the industry depends largely upon the competitive strategy and distinctive capabilities of the firm. PSP faces tough competition from bigger direct rivals including; Acron Hel Vetia AG (AHGN), Agruna AG (AGRN), Allreal Holding AG (ALLN), Angel & Volkers, and Athris Holdings (ATRN). These are top listed companies doing real estate operations and development business in Switzerland and other countries. PSP also faces indirect competition from companies dealing with real estate management services in Switzerland including BFW Liegenschaften AG, Buergerhaus Bern AG (BGHB) and Casainvest Rheintal AG (CASRAD) among others, (Bloomberg Markets, 2013). Competitive Advantage Together with EMAAR’s strong brand name in the Industry, the new international business provides an opportunity for consumers in Switzerland’s real estate market to sample greater variety and experience of prestigious property and projects at affordable price. EMAAR brings to Switzerland the successful business model that has been used in Dubai UAE which targets to leverage EMAAR’s execution of design capabilities and competencies to deliver greater value to her clients, (Taib Research, 2008). Product Situation EMAAR’s main product is real estate development and property management. However, EMAAR also has other non-real estate products including; education, retail services, healthcare, hospitality and financial services. These will be combined with PSP’s products and re-designed to add value that meets customer expectations. Below are photos of some of the PSP properties and their locations in Switzerland. Freie Strasse 38, Basel Source: PSP 2012 Annual Report Laupenstrasse 18/18a, Bern Source: PSP 2012 Annual Report Rue de la Corraterie 24 – 26, Geneva Source: PSP 2012 Annual Report Avenue de Beauregard 1, Fribourg Source: PSP 2012 Annual Report Property Portrait Hardturmstrasse 169 – 175, Zurich Source: PSP 2012 Annual Report Pricing Situation Property pricing will be flexible and will depend on the prevailing economic conditions of demand and supply, nature and value of property as well as the nature of competition response to EMAAR’s strategy. Distribution Situation EMAAR products are basically in the real estate development and property management hence the products are already available and accessible in the various locations in which the firm will be operating. But EMAAR will invest in expansion activities in line with the firm’s diversification and business segmentation strategy. Promotion Situation Real estate business has no specific profile of customers. However, in most cases, the clients are in the working class or even individual people or groups in business. The international business in Switzerland will be promoted through advertising campaign programs using billboards together with Television and radio commercials. Radio stations to be used will include; Swissgroove, Radio Swiss Classic 106.9 FM, and World Radio Switzerland. Television stations to be used include; Leman Bleu, SRF- Zwei, and Swisscom TV. EMAAR will set aside $1.5 billion to cater for promotional expenses in the first 2 years. Budget specifics will depend on the market rates in a particular period, (SRG & SSR, 2013). Operations EMAAR will retain all the employees currently working with PSP in various capacities and offices. This means that daily business activity will go on as before until further expansions and diversification activities are implemented after the first business year. Human Resource Management There will be no additional employees in the first 1 year. All the employees currently at PSP will be retained in order to enable a smooth transition. However, EMAAR will re-train most of them to handle the business in a more streamlined manner as to reflect the competencies needed to take the company to the desired professional level. Conclusion and Recommendations The world today is a global village. It is therefore common to find business firms expand their businesses across borders. Consistent with her international expansion strategy, EMAAR, a UAE based real estate company intends to acquire PSP Swiss Property AG in Switzerland. The cost of the acquisition including operational and promotion expenses is $25 billion. Switzerland provides a more attractive and stable business environment for EMAAR compared to the home country UAE hence EMAAR has high performance expectations despite the tough competition. In order to enable a smooth transition, EMAAR will retain all the 86 employs currently working with PSP but retrain them to make them more competent to handle the transformed business. It is however crucial that EMAAR understands the legal and regulatory provisions in Switzerland in order to minimize or avoid running into project execution risks which would lead to time loss or project cancelations altogether. References Bloomberg Markets, 2013. 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