Credit crunch and Canada growth

For the nowadays economic environment, there are many companies and events still are impacted by the financial recession in 2008 in Europe and North America. The main reason behind to the financial recession is the credit crunch or credit crisis. At the start of the recession, it is started as the French bank BNP which sharp increasing in the cost of credit on August of 2007 and the world recognize how important for that issued would be impacted. In the next 2 years, there are many of banks or financial institutions were collapsed, it included the major bank of Lehman Brothers, and there are hundreds of Bank was influenced by the credit crunch, such as Lloyds TSB. It is like the domino effect, one bank was injured and other banks will be impacted by that.

The credit crunch can be identified as the lack of availability of credit to consumers and business from traditional financial institutions. It will be leading the banks or financial institutions to bankruptcy protection, collapsing, restructuring investment and making large amount of losses. Additionally, the root reason for credit crunch is that banks have set the low interest rate which encourages consumers spending more confidently rather than borrowing. In developed economic countries, the interest rate became the lowest rate in long term history. The other reason to cause credit crisis is opening the international saving in emerging economic such as China and Japan, and it makes the domestic capital liquid to the other countries but the return was low. Thirdly, the impact caused by the 9.11 events of American recession in 2011.   

In order to reduce the damage from the credit crunch, investors might sell their subprime mortgage such as securities. In general, predatory mortgage lending would be occurred in the subprime market. The subprime market is used for judging the capacity of repayment for organizations, and it will give the rate of level for organization to banks to make decision, such as AAA, AA+ to D level. Additionally, it shows that the AAA to BBB- rate of level of organization is possible to accept to investment and the BB+ to D of rating company is suggested to reject.  

The credit crunch is also will impact the GDP of country and the profitability of company generally negative. There are five methods for management team to survive in the financial recession:

1.      Understand and maximize the current cash position

2.      Identify and aggressively minimize operational risk

3.      Scenario planning

4.      Review and prepare for divestitures

5.      Maintain confidence of key stakeholders

According to the Wall Street Journal, there are 17% of Canada’s mid-sized companies had disappeared from 2006 to 2010, and the manufacturing industry was suffered more pain which half of mid-sized companies vanished at that time. The reasons for this disaster are not only become of the recession and global credit crunch, but also the rise of China and steep dollar. The rise of China had improved the level of competition for the Canada companies especially in the manufacturing industry. Moreover, the steep dollars impact the Canada dollar drop in the unsteadily.

BDC Chief Economist Pierre Cleroux point out Canada is possible to follow the Germany’s Mittelstand firms which have achieved the success under economic crisis. However, according their weight which 16% of all jobs, 12% of Canada’s gross domestic product and 17% of the value of exports, Canada is hardly to achieve success like Germany. Additionally, it is hardly to many find skilled workers to deal with the stronger competition. However, it is more possibly to grow their economy by invest more in productivity.   

Strategic Hotels & Resorts, A new vision for their development

Contemporary business environment requires companies who want to compete for a higher market share to have a strategic management skill. This is always related to the companies' management decision making, which must be in line with the principle of maximisation of shareholder wealth. While sometimes we must realise that companies may lack the competitive power due to the shortage of innovation and technology, good ability of resource allocation and certain degree of brand name. In this case, strategic decisions such as mergers and acquisitions can be a powerful weapon for companies to conquer such problems. Even though sometimes this kind of activity may also be accompanied by a set of risks arising from the conflict of culture, misguided strategies and improper bidding fee, companies still can acquire what they need through this decisions.

Strategic Hotels & Resorts Inc. is the one only focusing on the upper-upscale and luxury lodging market. Their acquisition of Essex House located in New York mainly stems from the corporate strategy. However, we cannot judge the purpose of such activity through the surface. First, I think the the choice of Essex is because the location of Essex can be a landmark in Manhattan. The hotel was previously owned by Dubai Investment Group and they chose to pay the bidding fee amounting to $362.30 million. As they are the real estate investment trust (RETI) who have the business over America, Mexico and the Europe, the combination of Essex will definitely enhance the competitive power of their further development. The bidding fee was contracted as several payments and the first payment would be dealt at$190.00 million financing from the bank of America. While I personally think this behaviour is improper as the loan will be signal as the poor operations of Strategic Hotels. We cannot deny that companies paying the transaction out of their current asset side can be good news for investors as they are operating under a very robust cash base, meaning their investment will not be damaged if the companies are facing severe credit issues as they have a good command of liquidity. While on the other hand, if we change another view of this issue, holding the huge amounts of cash sometimes does not mean companies are creating shareholder value because they do not realise the usage of gearing. Certain liability can be a useful tool for managers to maximise the shareholder wealth, to certain extent, it is like to mix the equity and debt in their capital structure.

Since the financing decision has been reviewed, we need to look if there is any potential risks which may become the obstacles for the future of companies. The very first thing should be the cultural issues. Due to the cultural conflict, companies may have to be faced with the problem to achieve goal congruence. This is the biggest barrier for managers to maximise the shareholder wealth. While in this case, we can see both parties are both aiming at the luxury lodging market, they will have little possibility to pursue self-interest. Furthermore, as they are in the same sector(industry), they are following the same codes and principles, which is more convenient for the parent company to control the acquired. Then, since they both in the investment trust originally, the combination will just enhance the communication between internal divisions. So the second problem of misguided strategy can also be avoided in this case.

While actually, in the real business world, we must recognise that there are more than these three forms of conflicts which may lead the companies taking mergers and acquisitions to failure. Such risks are like the exchange rate fluctuation for multinational acquisition, the change in economic of scales and regulated restrictions. These external factors sometimes also must be taken into considerations before the M&A activity is carried out.

Starbucks,why they succeed in FDI

With the rapid growth of vehement business competition, companies have to consider more strategies to create the firm value on the premise of the risks minimisation. Foreign Direct Investment could be seen as a useful tool to strengthen the companies' competitive power. They could gain more reputation through expanding their business. The benefits such as gaining certain market share and know how, more cash inflow through FDI could be brought through this activity. However, sometimes problems such as the conflicted corporate structure and limited access to local markets will be the obstacles for them to face.

I would say the FDI strategy of Starbucks is brilliant. Actually it is because their know how is hard to transfer and their products, which are mainly coffee, are hard to meet the local customer's requirements. So in this case, their core competitive power will not be lost in FDI activity. They employ the local staff being another advantage for their strategy. This is because many FDI will fail at last because they can not localise their products, which then cannot win the local markets. Hence, the high cost of such investment eventually will damage the value of their shareholders. But the hardest problem for them is to gain the license. This challenge for them is easier than other companies like McDonald's, who may conflict with local religion.

The main purpose that Starbucks decide to expand their business across the world is to win the market on the premise of ensuring quality. They are not like Sony, who focus on the diversification and lead to the strategic failure in the end. But the other challenges for them are tax management, currency fluctuation management. Such macro environment will inevitably impact on the shareholder value. Without proper management, their wealth will just fade away by the effect of currency and tax. That is also what most companies' are worried about. I think if Starbucks want to create more value for their shareholders, they can employ the total quality management, that is suitable for their company.

At last, I want to say foreign direct investment is the way to expand business and discover more opportunities. But the when deciding their strategies, managers must be fully aware if the merits are over drawbacks or disadvantages are over benefits. The only principle is to maximise the shareholder wealth. Starbucks is the typical example of success.