Protectionism - The Brazilian Automotive Industry

1. Introduction

The purpose of the paper is to explore the various tools of protectionism Brazil has induced in order to support and to protect its automotive industry. The paper outlines and explains intended and unintended results of a focused protectionism towards one defined industry, by using information and data available through the Trade Policy Review by the Secretariat of the WTO among other sources. In addition, personal observation and knowledge gained from dealing indirectly with the Brazilian automotive industry (as a provider of intermediate chemicals that are used by automotive coating suppliers in Brazil) has been used during multiple visits in the country.

2. Background Information

While prior to the 1990s, Brazil was known as one of the world’s most closed economies, the country has continued to liberalize and to enhance the transparency of its trade, especially after the economic recession in 2003. The economic reform resulted in a significant decline of trade barriers, streamline of import procedures, consolidate regulations, and fostered foreign direct investment on a broad scale. Moreover, privatization and a leading role in South America’s free trade organization MERCOSUR (Common Market of the Southern Cone) that also includes Argentina, Paraguay, Uruguay, Chile and Peru, are signs that Brazil takes the opening of its market seriously. The country has continued to seek low inflation rates, by using inflation targeting as its main monetary policy instrument (WTO/TPR, 13). Also, fiscal targets are set and fixed at 4.25% of GDP. Brazilian exports increased by more than 50% (in USD-terms) between 1999 and 2003 (WTO/TPR, 13); and they are expected to grow at a similar rate during the next three to five years. A trade surplus is reported every year since 2003, with the exception of 2008. But even the last recession was reported much shorter (approximately four to six months, dependent on the industry sector) in comparison with the U.S. and European Union (more than 18 months). Besides countries like South Korea, Hong Kong, Singapore, Taiwan, and Chile, Brazil can be named one of the so-called Newly Developed or Newly Industrialized countries. It “[…] exports everything from alcohol to carbon steel. Brazilian orange juice, poultry, soy beans, aircrafts and weapons (Brazil is the world’s sixth largest weapon producer) compete with U.S. products for foreign markets” (Cateora et al, 248).

While Brazil becomes more and more popular for additional foreign direct investments, it cannot be overlooked that the country heavily protects and continues to favor domestic industries, such as cashew nuts, leather, steel products, chemicals, and cement. At the same time, it remains an active user of the WTO’s anti-dumping measures. Besides the 48 anti-dumping measures that were already in force, the country initiated another 26 new cases in 2004, along with six countervai-ling measures and several technical regulations (WTO/TPR, 16). Brazil’s automotive industry was also heavily protected between 1999 and 2008. However, recent development shows a tendency towards a more flexible import- and export policy, which obviously results in increasing economic success for this particular industry.

3. Results of Protectionism regarding Brazilian’s Automotive Industry

3.1 Foreign Direct Investment

Brazil had a very restricted import policy with regard to its automotive industry. Foreign carmakers had to pay up to 45% on import duties prior to 2007. However, the automotive industry seems to remain the primary recipient of foreign direct investment. In order to circumvent the high import tariffs, as well as tariff quotas (the country allowed 140,300 vehicles with a capacity up to, and 24,700 vehicles with a capacity over 8,845kgs in 2004. Hence, Volkswagen, Ford and GM in particular started to produce locally. Volkswagen has invested more than 500 million USD in a project to produce its Passat and Golf models. The company also announced a $500 million USD deal to ship auto parts to China out of Brazil. GM has invested 600 million USD in a so-called “industrial complex” to produce on the spot (Cateora et al, 248). “Ford Motor Company was ahead of the curve when it opened a $1.9 billion USD plant in the northeastern part of the country in 2002. Toady, the state-of-the-art facility ensures nearly constant production with six shifts six days a week (Beasely, 1). Thus the high tariffs implemented forced foreign automotive producers to either pay the enormously high tariffs, to abandon the market completely, or – as in the case of the above carmakers – to produce locally. The local production was beneficial to both companies, since wages in Brazil are lower compared to the U.S. and Europe. In addition, Brazil has an abundance of well-trained and high skilled engineers. The huge market with a population of 198 million (CIA World Factbook) and the additional 200 million people as part of the MERCOSUR free trade zone offers a potential market for the industry and growth rates due to increasing demand on cars that can hardly be compared with other markets. Therefore, the motives of foreign direct investments regarding the automotive industry are obvious: expansion of potential markets, profit expectations based on lower cost of productions, and the availability of cheaper but high skilled labor.

3.2 Infant Industry Approach

By implementing the high import tariffs on foreign cars the country tried to protect its four main car producers, Troller, Marcopolo, Random, and Agrale. The argument holds that the Brazilian automotive industry is an infant industry and in order to perform in a sustainable manner, that industry needed to be protected from foreign importers and cheaper vehicles that would jeopardize the young and fragile industry. Between 1999 and 2008, the number of local motor vehicles produced expanded at an annual average of 8% (WTO/TPR, 134). The Brazilian car industry grew by 14% since 2006, and Troller proved to be the most successful brand so far. Its cars, especially the three highly successful models, Pantanal, T4, and RF Esporte, are sold all over Latin America and proved to be competitive in Africa as well (CIA World Factbook). The major export markets, however, remain Argentina (15.5% of Brazilian’s car exports) and Mexico (24.8% of Brazilian’s car exports), followed by China (12.4% of Brazilian’s car exports (WTO/TPR, 134). Employment in the automotive sector grew from 1999 to 2008 (unfortunately a percentage ratio or real numbers are missing – WTO/TPR) significantly, and the increasing export demand, especially regarding China, seems to promise further growth rates. The Brazilian car industry might not have developed the way it did without protecting the domestic new developing car industry. For a period of time, domestic prices were indeed higher than in comparable other countries, such as Chile or Argentina. But the example of Brazil shows higher prices for locally produced products do not have to remain high for an infinite amount of time. Due to high import duties for foreign carmakers, Brazilian customers bought significantly fewer foreign cars, while the domestic industry – besides locally produced German and American cars – was able to gain ground in the domestic and international market place. Within the MERCOSUR region, tariffs on car imports have been reduced from 40% down to zero (WTO/TPR, 134). The tariff on foreign imported cars, even though reduced as well, still remains high in comparison with other developed and newly developed countries. Based on the size of the engine, import-tariffs between 8% and 25% remain in place for the time being (WTO/TPR, 134), but as per the government will be subject to review in a period of time.

3.3 Specificity – Ethanol

The production of motor vehicles that are able to run on hydrous ethanol has received and still is receiving significant support from the government. While the local production of ethanol-using cars was relatively small in 2002, domestic production and sales has increased since 2002. More than 80% of domestic car sales are represented in either 100 percent ethanol-fueled cars, or cars that are able to use a combination of ethanol and gasoline. The Brazilian government states that the introduction of cars that run either partially or totally on ethanol was done “to lower emission of polluting gases” (WTO/TPR, 141). While this argument holds true, two additional reasons need to be mentioned in order to explain this rather unusual move. First, Brazil has an abundant source of sugar cane. Refined sugar and alcohol (ethanol) are derived co-products from the sugar cane production. Even though Brazil has vast oilfields off shore, mainly in the Northern part near Rio de Janeiro, it still has to import oil from other countries, since many Brazilian oilfields are not yet explored. Moreover, it will take at least a decade to exploit the newly discovered oilfields (Roedder et al, BASF study). By using ethanol as a substitution alternative to gasoline, Brazil became less dependent on oil-imports. Second, in addition to tariffs and quotas upon carmakers from abroad, local auto producers had a clear competitive advantage, since hybrid engines, even though available, were not produced in large volumes in developed countries (EU and USA) - and in addition, where not foreseen to be exported in the mid 2000s. While the big car producers caught up fast with regard to hybrid engines, the Brazilian automotive industry had sufficient time to gain a significant market share through the production of flex fuel vehicles in 2003 (WTO/TPR, 141). Despite the current boom and the increasing usage of the so-called flex-engines, environmentalists are concerned with the increasing production of sugar cane. “Yet the ethanol boom has also brought the prospect of distortions that may not be as easy to resolve. The expansion of sugar production has come largely at the expense of pasture land, leading to worries that the grazing of cattle […] could be shifted to the Amazon, encouraging greater deforestation” (Rohter, 2). While the Interministerial Council for Sugar and Alcohol denies the potential danger regarding additional deforestation on behalf of sugar cane, the demand for the product has increased, and prices have gone up. The statement of the CEO of Ford do Brazil supports the assumption that ethanol, and therefore sugarcane will become even more attractive. "The rate at which this technology [of flex-engine] has been adopted is remarkable, the fastest I have ever seen in the motor sector, faster even than the airbag, automatic transmission or electric windows" (Rohter, 1).

4. Conclusion

The so-called industrialization argument seems to hold true. The Brazilian car industry might not have developed the way it did without protecting the domestic new developing car industry. For a period of time, domestic prices were indeed higher than in comparable other countries, such as Chile or Argentina. But the example of Brazil shows higher prices for locally produced products do not have to remain high for an infinite amount of time. Due to high import duties for foreign carmakers, Brazilian customers bought significantly fewer foreign cars and helped – most likely unwillingly – to support the local car industry. However, Brazil became a world player regarding the automotive industry, and exports more than 200,000 cars annually. The result is a significantly higher GDP compared to the 1990s, and the local automotive industry is a large contributor to the growth and increasing wealth of the country. At the same time, Brazilian consumers were deprived of imported cars for almost a decade. The two options were to either pay a tremendous import tariff – which was only possible for a wealthy minority – or to buy a locally produced automobile. Nevertheless, multinational carmakers adjusted quickly and instead of exporting cars to Brazil they produced locally – also to the benefit of the Brazilian population with regard to employment and higher remuneration. The factor endowment of sugar cane, skilled labor, trade liberalization and a government that is fostering democracy more than Brazil’s previous administrations in combination with - at the beginning - heavy protectionism made Brazil’s economic development possible during the last five years. It seems the country sees not only export opportunities for its automotive industries, but also slowly but surely reduces import quotas and import tariffs.

References:

• Beasely, Stephanie. May 23, 2008. Brazil’s auto industry cruises as economy booms. Reuters. http://www.reuters.com/asset/print?aid=USN23173283

• Cateora, Philip R., Marcy C. Gilly and John I. Graham. 2009. International Marketing, 14^th ed. New York, New York: McGraw-Hill Irwin. Print.

• CIA World Factbook. Oct. 19, 2009. Brazil. http://www.cia.gov/library.com.

• Roedder, Ludger, Filipe Fuenfgeld, Nelson Borba. 2006. Ronaldinho Study – Oil Field Application in Brazil and MERCOSUR. BASF. Print

• Rohter, Larry. Apr. 10, 2006. With BIG Boost From Sugar Cane, Brazil Is Satisfying Its Fuel Needs. The New York Times. nytimes.com. http://www.nytimes.com/2006/04/10/world/americas/10brazil.html?_r=2&pagewanted=print

• World Trade Organization, Nov. 1, 2004. Trade Policy Review. Brazil. WT/TPR/S/140. Print.

Home Headquarters versus Host Company Offices

1. Introduction

The worldwide approach to foreign markets forces Multinational Enterprises (MNE) to produce and market their products in more than one country, through foreign direct investments (FDI). By opening so-called host country offices and production facilities in foreign countries (host countries), MNEs usually have their headquarters located in the home country, the country where the business was started - sometimes decades or centuries ago. For example Nestle, the world’s largest food company, has its headquarters in Vevey, Switzerland, the home country where the company originally was founded, but operates globally through a large network of host company offices – and plants – in multiple host countries all over the world. MNEs often face challenges in host countries, such as lack of political stabilization, currency risks, legal requirements, and human resources issues. This paper will focus on human resources management with regard to the home country of a MNE, and its host country offices. The challenges and obstacles will be explained and analyzed.

2. Discussion and Analysis

2.1 Designing of the Work Force

The first obstacle a MNE has to overcome is the decision about its work force design in a host company office. It has to be defined how many people are needed, what their characteristics should be, and what salaries will be paid. The most difficult decision is usually the design of the sales force. Sales representatives are the most necessary factor when it comes to a successful marketing of a company’s products. “The sales person is a company’s most direct tie to the customer; in the eye of most customers, the salesperson is the company” (Cateora et al, 502). At the same time, management in the home country needs to understand what the requirements and expectations of potential employees are, if people need to be hired. Many German companies do not understand what the interpretations of defined titles in the U.S. are. A German manufacturer of food cutting machines could not find a sales executive for more than two years. The company asked the recruiter to hire a sales manager, even though the recruiting company tried to explain that for this particular job the title Vice President Sales would be much more appropriate. After two years the recruiter finally gave up.

Many MNEs try to hire as many local employees as possible. “[…] The picture is clearly biased in favor of the locals because they transcend both culture and legal barriers” (Cateora et al, 505). At the same time, the mindset of locally hired personnel may not be in line with the host country office/headquarters, since the host country culture, the specific business acumen and customs can differ significantly. Employees in the U.S. usually only take a thirty-minute lunch break, while French and Spanish employees consider a two-hour lunch break absolutely normal – including the consumption of alcohol. Another issue is the misunderstanding of hints, suggestions, and comments by local nationals of how to do business, how to approach a potential customer, and how to deal with executives of a potential customer company. The mindset in the host-country office might not be open enough to see business opportunities, while employing different business acumen. It is not sufficient to visit a potential customer in Brazil only once, since a true business relationship is almost considered a friendship, whereas in the U.S. business is solely profit oriented and usually based on the “time is money” approach. “The main disadvantage of hiring local nationals is the tendency of headquarter personnel to ignore their advice.” (Cateora et al, 506).

If a company opens a new host country office, one usually finds a mix of local nationals, also called host country nationals (HCNs), expatriates, and third-country nationals. The tendency of hiring third-country nationals, employees from foreign countries who work for a foreign company in a third country, is increasing. These employees are considered “truly global executives” (Cateora et al, 507), since they usually have vast international experience and an understanding of foreign cultures. For example Burrough’s Corporation hired six third-country nationals for six host country offices in Europe and South America, and was apparently very successful by doing so.

Expatriates, also known as parent-country nationals (PCNs), are employees who are citizens of the nation in which the parent company is headquartered (Ball et al, 543; Daniels et al, 778). The advantage of expatriates is the knowledge of the parent company, its product lines and communication systems, and the usually received technical training, besides the already proven dependability. The disadvantages of expatriates are the enormous costs associated with the move to a host country, the salary and expenses, but also cultural, legal, and language barriers. The chemical company BASF has reduced its staff of expatriates significantly over the last three years – for cost reasons and the obviously increasing legal hurdles to receive working permits and visa for the PCNs. Another issue is the high failure rate of expatriates who are not willing or not capable of dealing with a foreign environment that is hardly known and certainly challenging at times. The failure rate of BASF-expatriates in Asia is the highest by far, since many have to face a culture that is totally different from the European (German) one.

2.2 Host-country restrictions

Many host countries do not necessarily welcome foreign direct investments, and the associated intrusion of foreign workers in the host country. France has restrictions about how many expatriates can be employed by a company, based on the size and the amount that will be invested. But even if a company follows the legal rules implemented by the country, it might face severe resistance. After having bought the French company Ricale, the German packaging provider Bericap intended to send a German sales manager to Paris in order to manage the sales force in its new Paris office. Not only did the French staff refuse to work with the expatriate, but the French union also protested, even though there were no legal grounds for doing so. Bericap finally hired a local national. The fear of foreign corporate domination, local unemployment and other issues, such as the fear of losing national identity, force nations to restrict the number of non-nationals allowed to work in the host country (Cateora et al, 508). Also, the U.S. has imposed restrictions, especially after September 11, 2001. Meanwhile, granted work visas are limited, and the possibilities to extend a work visa multiple times are low.

2.3 Culture

As already briefly discussed in 2.1, the understanding and interpreting of culture plays a major role when it comes to host country offices. The identification of Geert Hofstede’s four cultural dimensions that differentiate countries, are very helpful tools for MNEs. Employees of individualistic societies, such as the U.S., have to overcome major hurdles and issues to understand employees in a host country like Japan – and vice versa -where the collectivistic society is embedded in the culture. High versus low power distance plays a larger role in South American countries, even though these barriers seem to shift slowly but surely. One reason is certainly the influence of MNEs, operating in these countries. Masculine versus feminine, and weak versus strong uncertainty avoidance (Kotler et al, 610) are the two additional factors identified by Hofstede that have to be kept in mind when working in a host country, and leading a host country office.

3. Conclusion

Besides the knowledge of foreign markets, the way these markets operate, and the competitive landscape, it is of utmost necessity for a MNE to understand the local workforce in the host country. A ‘healthy mix” of expatriates and local nationals in the host-country office is recommended. In order to overcome unnecessary barriers, such as miscommunication, misinterpretation of rules, behavior and attitudes, both the home country office/headquarters, and the host country office have to find a common working ground in order to be successful in the long run. In order to establish this common ground, the executive management has to implement a policy that fosters cooperation and communication, by establishing a sensitive and sophisticated human resource management. Highly successful MNEs base their success on a distinguished human resource management that is embedded in a company’s strategy, and is understood as a major pillar of a company mission.

References:

• Ball, Donald E, Wendell H. McCulloch Jr., J. Michael Geringer, Michael S. Minor, Jeanne M. McNett. International Business: The Challenge of Global Competition. 11^th ed. New York, New York: McGraw-Hill Irwin, 2008. Print.

• Cateora, Philip R., Marcy C. Gilly and John I. Graham. International Marketing, 14^th ed. New York, New York: McGraw-Hill Irwin, 2009. Print.

• Daniels, John D., Lee H. Radebaugh, and Daniel P. Sullivan. International Business: Environments and Operations. 12th ed. Upper Saddle River, New Jersey: Pearson Education, Inc., 2009. Print.

• Kotler, Philip, Keller, Kevin Lane Keller. Marketing Management.13^th ed. Upper Saddle River, New Jersey: Pearson Education, Inc., 2009. Print.

Global Integration versus Local Responsiveness

Internationally operating companies have to face two major challenges on how to configure and coordinate their value chain in the most efficient and most profitable way: global integration and local responsiveness (Daniels et al, 428). On the one hand, the growing globalization in the business world requires companies to adapt to global strategies, which emphasize product standardization and globally functioning infrastructures (customer service, supply chain management, communication). On the other hand, consumer preference and host-government policies forces companies to tailor their operations and/or adapt to local market requirements (Daniels et al, 430). It is and will remain a huge balancing act for all international companies to manage the gap of this apparent conundrum.

However, distinctions have to be made when it comes to specific industries. The Integration Responsiveness (IR) Grid (Daniels et al, 431) illustrates for instance that bulk chemicals require high standardization and central control regarding global integration, whereas local responsiveness is of minor necessity. BASF, the German based and estimated biggest chemical company in the world, operates 330 production sites around the globe. Since most of its produced chemicals are considered commodities, the focus of the company’s global production is efficiency and economies of scale. “ The more a plant produces, the lower the fixed costs per ton of product (economies of scale). This is why BASF operates such cost-efficient large-scale facilities in all regions.” (BASF Website). Their so-called Verbund-System, the German translation of a combination of plants that interact on a global basis by consistently informing about best practices, makes use of integrated production processes to manufacture as inexpensively and as efficiently as possible. Hence, local responsiveness plays a minor role, but cannot be disregarded completely. Environmental requirements and production processes, especially concerning member states of the European Community (specific filters for steam that occurs during cracking processes, handling and transportation of residues and waste streams) forces the company to act indeed on host-government policies.

Nestle Waters, the world’s largest food company, owns about a third of the global bottled water market, with seven regional water brands only in the U.S. (Nestle Website). In addition, Nestle owns various imported brands, such as Perrier. The company’s strategic marketing approach is to act and react locally, by serving specific customer groups in designated geographical areas, based on its acquired local water springs. (Poland Spring - Northeast, Deer Park - Mid-Atlantic, Ice-Mountain – Midwest, Ozarka – South, Arrowhead – West, Zephyrills – Florida) (Huser, 84). So far, Nestle seems to be successful. The company was able to gain a strong position in the market based on local consumer loyalty to its regional brands. At the same time, marketing communication seems rather difficult, since the company cannot easily reach all its bottled water consumers with an efficient “one message for all”-approach, as done for instance by Coca-Cola and PepsiCo. It has to adapt to regionally based brands. A unique advertisement, usually measured as per person reached nationwide, does not apply for Nestle’s strategy and forces the company to pay “ […] a substantial up-charge to reach the consumers in its different regional markets.” (Huser, 84). In addition, plastic packaging providers, such as Graham Packaging (plastic bottle blow molder) and BERICAP (plastic closure supplier) have to follow Nestle’s segmented marketing approach, by designing specific bottles and closures for the various geographical regions. The global integration idea regarding production processes and economies of scale – as described above for the chemical industry – falls short. A Poland Spring bottle looks differently than an Arrowhead bottle, and the closures are of different sizes (Nestle Website). Therefore, also suppliers and other stakeholders have to adapt to local responsiveness, and moreover, to additional requirements such as designs, smaller production lots and rather complicated distribution networks.

Nevertheless, globally operating Multinational Entities seem to be successful for the most part, by gaining sufficient profit through a functioning value chain that is integrated globally, and by adapting successfully to local requirements at the same time - as the example of Zara shows (Daniels et al, 405-409). Efficiency seems to be one of the core secrets to be successful. Flexibility and fast deliveries are certainly two other variables in order to gain profit, market share, and finally to be sustainable on a global scale.

Reference:

BASF Website, Oct. 11, 2009. www.basf.com/group/corporate/en/about-basf/worldwide/index

BERICAP Website, Oct. 11, 2009. www.bericap.com/index.php?pg=menu_160

Daniels, John D., Lee H. Radebaugh, and Daniel P. Sullivan. International Business: Environments and Operations. 12th ed. Upper Saddle River, New Jersey: Pearson Education, Inc., 2009. Print.

Graham Packaging Website, Oct. 11, 2009. www.grahampackaging.com/markets/food-beverage.asp

Huser, E. Ann. Marketing Concepts. Fairleigh Dickinson University, Madison, NJ, 2009. Print

Nestle Website, Oct. 11, 2009. www.nestle.com/Brands/BottledWater/BottledWaterListing.htm

Looking Inside for Competitive Advantage

Jay B. Barney – Looking Inside for Competitive Advantage
Academy of Management Executive, 1995, Vol. 9, No. 4

Summary
A competitive advantage is shaped by both environmental threats and opportunities, and internal strengths and weaknesses. The author Jay B. Barney indirectly states that valuable tools are available to analyze external forces, but there seems to be a lack of valuable tools to analyze internal threats and opportunities – in the article referred to as “internal attributes” or “resources and capabilities” that are built on a company’s financial, physical, human, and organizational assets. In order to overcome this gap, which the traditional SWOT analysis leaves out, Barney suggests focusing on:
1. The question of value – Is the organization able to consistently add value?
2. Rareness – Resources and capabilities must be rare in order to guarantee a competitive advantage and/or a unique selling proposition.
3. Imitability – Companies who enter the market might have a cost disadvantage by imitating e.g. production, design, distribution channels.
4. Organizations – A culture that fosters competitive potential towards competitive advantage

Evaluation
By reading the article only once, the reader could wrongly assume that the SWOT analysis solely focuses on the external environment, while neglecting the internal environment at the same time. Organizations usually use the SWOT analysis to evaluate both external and internal threats and opportunities.
The author mentions various examples of how organizations were and are able to react in the market place. In order to be successful in adding sustainable value, he suggests to reward risk taking and creativity. Some organizations do not foster risk taking at all, and creativity falls short. But there are still successful entities in the marketplace, and consistently able to add value – for other reasons (monopoly, backward-integrated feedstock, etc.).
When he talks about rareness as a means for an organization to position itself, he does not mention the possible downsides of decentralizations (see AT&T e.g.), and the possible time frame necessary to not only prepare and educate the people involved, but also to implement what can be considered a cultural change in the organization.
Regarding Imitability, Jay Barney does not mention that entire industry segments, mainly in Asia, exists and operate successfully, simply because they only produce and offer me-too products. In addition, a company that is able to simply copy a product successfully without spending millions of dollars on research and development has a clear cost advantage, and not – as he describes it – “firms [have] a cost disadvantage in imitating another’s resources and capabilities”.
Last but not least, Mr. Barney mentions organizations as such that need to focus on the competitive potential of its internal attributes. His examples are valuable, but he does not mention leadership as a powerful part of an organization that basically can create this competitive potential. Sam Walton (Wal-Mart) and Michael O’Leary (Ryanair) are only two excellent examples as leaders as well as entrepreneurs.

How to write a really Great Business Plan

William A. Sahlman (1997) - How to write a really Great Business Plan
Harvard Business Review, July – August 1997, pp. 98-108

Summary
In his essay, William A. Sahlman states that too much time is wasted on number crunching, and figures, such as capital, time, predicted revenues and profits regarding business plans for new ventures. Since accurate numbers related to a business plan are difficult to predict anyway, he suggests to focus on a framework that is based on four critical factors: people, opportunity, context, and possibilities.
Sahlman considers most entrepreneurs as wide-eyed optimists, who naively believe in their ideas, but who fail to ask “the right questions” related to the above framework. When it comes to the first factor – people, it should clearly be determined in a business plan who the people are who start the venture, what their experience and their knowledge is regarding the product or service, moreover production processes, the market itself, the competition, the customers etc. Questions to ask: What do these people know? Whom do they know? How well are they themselves known in the market place?
The second factor, opportunity, should explain the profile of the business, its economics, the expected success, but also what could possibly hinder that success (vulnerabilities). The necessary questions focus both on the market (Is the market large enough, or rapidly growing, or both?) and on the industry (Is the industry and its structure indeed sufficiently attractive?)
The context defines the macroeconomics, or – in other words – the external factors that cannot be controlled by the entrepreneur, such as demographic trends, a possible inflation, regulatory environment, government rules, etc. However, the question remains how the entrepreneur reacts when this context inevitably changes.
The last factor, the possibilities regarding risk and reward, determines the scenario of what can possibly go right and wrong, and how to respond to it. What magnitude of reward can be expected, and when can the reward be expected?

Evaluation
William Sahlman is obviously a person who is very familiar with new ventures and the countless business plans that go in line with start up companies. His view is based on observation and experience that lead to above conclusion. His valuable insight and knowledge can help and support new ventures that have to present a business plan sooner or later. But his framework is not a scientific model that can be discussed on a scholarly level, since it lacks representative observation and results.
Similarly, Peter Drucker offers seven sources as “diagnostic disciplines” in his book “Innovation and Entrepreneurship” (1985) that need to be considered not only when starting a new venture, but also when writing a business plan. Drucker describes the first four as internal sources, including industry and market structure (see Sahlman’s “Opportunity factor” above). The so-called outside factors include macroeconomic issues, such as demographics and changes in perception of the customers (see Sahlman’s “Context-factor”).
Gundy and Kickul (see “Entrepreneurship Strategy”, pp. 63-64) offer a similar approach for strategic assessments of new ventures, by also focusing on four factors: people, available resources, knowledge and information that are possessed, and the idea’s ability to generate revenue.
While Sahlman considers people and their skills the most necessary factor, other potential investors might consider the financial outlook, or marketing strategies and sales programs the most necessary issues when it comes to evaluate a business plan. The framework he suggests seems to be very helpful, but remains a subjective tool that might fall short when generalizing all ventures and all potential investors.

Owner-Managers and the Practice of Strategic Management

Adrian Woods, Paul Joyce – Owner-Managers and the Practice of Strategic Management
International Small Business Journal, Vol. 21 (2), pp. 181-194

Summary
Based on Mintzberg’s organizational studies of entrepreneurship (1979), where he argues that small business owners use personal and arbitrary forms of control to conduct their business rather than strategic management (anti-planning theory), Woods and Joyce researched whether Mintzberg’s theory still holds true, or whether small businesses have adopted both the language and practice of strategic analysis and planning.

Assumptions:
Planning in general is positively linked to growth.
Managers who use strategic planning will achieve optimal development regarding their ventures.
The knowledge of strategic tools suggested by theories and theoretical frameworks will lead managers to value the results of applying these tools.
The access to this knowledge is possible through business school programs, management consultants, business books etc.
Managers may use the tool to make judgments and apply these judgments to decision making processes.
Decision making processes lead to feedback loops.
The use of tools can lead to better management strategies.
The benefits may result in improved business performance.

Research:
Five hundred and thirteen small business firms were selected at random and interviewed by asking among other questions, if the interviewees had heard about/were familiar with strategic tools, such as cost benefit analysis, scenario planning, SWOT analysis etc.

Results:
Owner-managers do not have as much access to strategic tools as other managers, and as a result do not use as many.
If owner-managers had access to these tools, they would value them and use them as much as other managers.
If tools are used, the strategic planning will improve.
Business performance will improve.
By using the tools, the more critical the users become of their ability in the specific area the tools apply to.
The knowledge about tools increases, as well as the richness of the strategic language being used and the quality of their plans.
If the application of tools available lead to beneficial results (outcomes), the tools will be used. If they are considered not useful, the tools will not be used.

Evaluation
Peters and Waterman in their revolutionary book “In Search of Excellence” (1982) describe the typical entrepreneur in a similar way as Mintzberg did in his study only three years earlier: Intuition and gut-feeling in combination with the right business sense and sufficient self-confidence (self-efficacy) will lead to successful small business ventures, if the market and the consumers will adapt and accept a new and/or innovative product/service. Woods and Joyce are taking this theory a step further, by acknowledging that times have changed, and that more access to above management tools are possible. The overall result is that small businesses are led in a much more professional way than some 20 plus years ago, but that tools are only used if they make perfect sense. There will always be owner-managers who do not appreciate management tools for whatever reason. Nevertheless, the trend seems to be that these individuals are smart enough to at least hire managers who already had access and possess applicable knowledge, and who are able to help run a small business through strategic planning and with the help of strategic analysis. The business world has changed significantly during the last two decades. Therefore Mintzberg’s study, conducted in 1979, became a still valuable but also a rather antiquated research these days. Frederick Taylor’s assumption based on observation and personal experience about scientific management a century ago cannot hold ground to Vroom’s Time-Driven Decision Tree (1998) these days, but one should not neglect Taylor and his revolutionary ideas either. The same goes for Mintzberg.