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Business Game case study on China - Junior Entreprise HEC - Michel de Marsano


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n mid-2010, President and Chief Executive Officer (CEO) of phase separation Solutions (PS2) needed to exploit the opportunities of a possible cooperation with other Chinese organizations on thermal phase separation technology (TPS). PS2 was a small company based in Saskatchewan Environmental Solutions who grew up under the direction of the president of the company to become a leader in North America for the treatment of soil, sludge and residues affected in various organic pollutants. Specializing in the cleaning of two streams of waste society with its TPS technology. The first is the remediation of contamination by persistent organic pollutants (POPs) such as polychlorinated biphenyls (PCBs) in soils. The second was recovering usable from industrial sludge generated in various industries such as the oil industry oil and gas.

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Business Game case study on China - Junior Entreprise HEC - Michel de Marsano

  1. 1. 1 Michel de Marsano, Jessica Staub, François Dubois, Dimitri Beslard PS2: The China Question Strategic analysis Business Game 2014 Junior Entreprise HEC
  2. 2. 2 Business Game 2014 Junior Entreprise HEC 1. Executive summary In early 2008 CEOs PS2 received a call from the State Environmental Protection Agency of Chine, showing interest in PS2’s TPS technology. Despite having a Competitive advantage through their innovating and patented technology, their core market –the Canadian- had already attained its momentum and is now slowing down very fast. Hopefully, by mid 2010 potential cooperative opportunities (JV) had emerged with two separated Chinese Organizations: NIES and Nahai. Each investments will require $3M and will let PS2 access to: - POPs potential growing market of $725M - 180’000 tons of oil sludge The main question actually faced by PS2’s top management is: How can PS2 benefit of the Chinese opportunity in order to maintain growth for the company? The recommendations resulting from the analysis are • Adapt their local strategy and expand to China  Enter the Chinese market now. • Improve and expand their organizational structure; take advantage of their resources and capabilities • Overcome potential cultural problems by associating with both local players, trough 50/50 Joint Ventures • Use emerging market opportunity to improve technology and business model
  3. 3. 3 Business Game 2014 Junior Entreprise HEC 2. Corporate Strategy Vision Resources and capabilities Industry Analysis Value Proposition Provide most efficient and convinient solutions to tackle environmental issues Becoming the world leading soil remediation company and oily sludge service provider, through geographical diversification (internationalisation) • High-tech (Patent on TPS technology) • Renowned as world class performance • Mobility and reliability • Business and international expertise • Experienced management team • Financial ressources • VRIS Refer to: - Porter 5 forces in N.America - Pestel analysis of China - Porter 5 forces in China  To know if PS2’s should enter the Chinese market, we need to analyze how PS2’s characteristics fits with the global situation .  We can see that PS2’s R&C give the necessary tools to support it’s ambition (vision). To know the fit with the market, we kneed to go through an industry analysis.
  4. 4. 4 Business Game 2014 Junior Entreprise HEC 3. Porter’s 5 forces POPs & Industrial Sludge in North A. Oligopole (intensive competition) PCB Expected future growth is bad (limited sustainable future revenues) Highly volatile revenues Similar cost structures (PS2 & BEV) Competition based on location (BEV Advantage) Ind. Sludge Emerging state (7-10% of 375K tons) Material for technology High entries barriers (high startup cost) Difficulty in sourcing Regulatory evaluation Environmental Certification LDR for industrial sludge (mid term vision) Patented technologies Canadian State, utilities and environmental service firms US firms Australian State (Olympics games) Incineration (Thermal Oxidation) BEV Cost advantage Suppliers Substitutes RivalryBarriers Customers  Conclusion: High entries barriers protects players involved in it. However as the future growth of the market is highly limited (market will reach its limits in 2 years), revenues are volatile and the industrial sludge depends too much on regulations evolution (slow process). It’s a tough industry to be in.  Recommendation: PS2 Should find a new market to expand its position and to fulfil its vision + + - - +-  To know PS2’s current situation, the current industry forces have to be analyzed.
  5. 5. 5 Business Game 2014 Junior Entreprise HEC 4. PESTEL analysis of China • Stable political environment • Strong will to tackle POPs issues • Measure in cleaning of environment • Environmental protection as a “basic state policy” • $3.00 bio investments in soil remediation Soil and oil sludge remediation Industry in China PoliticalP • Cultural differences • Public pressure to settle environmental problems Environment E • Need for innovation to support development • New increasing demand for hazardous waste management technologies • Developed highway and rail way network Social S • High regulation • Stockholm convention • WTO/FTA Technological T E Economic LLegal • Rapid economic development (8,9% in 2009) • POPs market size of at least $725 mio • Educated labor force available • Large stated country • Huge POPs issues • Huge oil sludge issues • Industry still polluting  Main factors: - Huge POPs issues (POPs market size of $725mio) - Measure in cleaning of environment - Implementation of the Stockholm Convention - Rapid economic development  As PS2 should expand from it’s initial market, a deep analysis of the new market should be done in order to know if PS2’s characteristics fit with the situation  The Chinese Market represents a huge opportunity for PS2
  6. 6. 6 Business Game 2014 Junior Entreprise HEC 5. Porter’s 5 forces POPs & Oil Sludge in China Industry @ early stage Market is increasing Actually rivalry is low intensive and players are more occupied to position than to fightMaterial for technology Lower price than N. America It won’t be a problem for PS2 to find suppliers in China and if it’s not the case, they still can import from Canada Patented technology Regulation policies FDI opportunities Low entry barriers due to market early stage and Government willingness to improve environmental issues Chinese Government Governmental organisations Private companies Customers have few high tech, don’t dispose of mobile device, and welcome PS2 on the Chinese market  high willingness to buy Shenyang Facility TDU Already existing waste mngt company Substitutes have lower advantages than PS2, but some are more cost competitive. Suppliers Substitutes Rivalry Barriers Customers + + + + +  Conclusion: Overall, the Chinese market for this industry is very attractive in 2009 and there is a window of opportunity to be taken before a market mutation. Plus, opportunities fit well with PS2’s vision and R&C.  Also, the current industry situation needs to be analyzed in order to know if this option is attractive for PS2.
  7. 7. 7 Business Game 2014 Junior Entreprise HEC 6. Should PS2 enters the Chinese Market? When? (question 1)  Con’s:  Risky associated with unknown market  Potential loss of focus on Canada  Emerging market danger  General Chinese’s economic factors  Scale of the company  Lack of transparency  Pro’s:  Huge POPs and oil Sludge Market opportunity  Implementation of the Stockholm convention  First mover advantage (emerging and fast growing market)  FCF available for both investments (free cash flow + EBITDA + WTM)  Technological advantage  Maximum exploitation of our competitive advantage (patent expiring in 2019)  Bad future prospects in Canada: need to expand  Regulation issues lowered with government's partnership  Need to expand market  Opportunity to learn and to improve technology  Conclusion:  PS2 should enter the Chinese market because of great opportunities that fit well with PS2’s vision and R&Cs..  Entering now would be the best option due to the first mover advantage, preserve growth despite the slowing down of the Canadian market and partnership opportunities.
  8. 8. 8 Business Game 2014 Junior Entreprise HEC 7. Strategic choices faced by PS2  Considering that PS2’s choice is to enter now in the Chinese market, the company has to face 2 choices in term of strategic entry:  JV with Nahai, a private company  Oil sludge Market  Location: Zhejiang province (huge potential)  Fixed facilities  Investment 3 mio  Excellent infrastructure  10’000 to 100’000 T potential  JV with NIES – State environmental Agency  Pop’s market  Location: Jiangsu province (huge potential)  Educated staff on site  50/50 JV  NIES as an agent for PS2’s TPS tech  Mobile unit built on site  Demonstration project for 3’000 T of soil  More project throughout China for the future  Investment of 3 mio  Allow early entrance Remediation of POP- Contamined Soil Oil Recovery from Oil Sludge  Both option seems attractive, we need to look further for a good decision making
  9. 9. 9 Business Game 2014 Junior Entreprise HEC 8. Strengths and weaknesses of strategic choices  Strengths : - Association with an existing company with excellent infrastructure and permits - Solid trust between the two CEO (may help to overcome the cultural differences) - Favorable location  Weaknesses: - more risky  Conclusion: Both options are great opportunities, that are quite secure thanks to the support, in both cases, of a local player. The first one is slightly safer, but we believe that being given the strenghts of the second, both should be pursued.  We recommend that both options be pursued.  Strenghts: - Government support - Experienced staff available - Free advertising campaign - First mover advantage - Huge potential market - Less risky - Provide solutions and consulting services  Weaknesses: - Imitation risk, stolen technology Remediation of POP- Contamined Soil Oil Recovery from Oil Sludge
  10. 10. 10 Business Game 2014 Junior Entreprise HEC 9. Recommendations  Both options are viable and very attractive. In addition, the Chinese government encourages our type of industry. Therefore, we choose to pursue both because our ressources and capabilities allow it.  The first option would be implemented in 2010. Moving fast allows us to beneficiate from the first mover advantage and to foster a partnership with the chinese government.  The second option would then be pursued in 2011, in order to smooth the costs and keep focus.  Since the chinese government encourages our type of industry,  We recommand that we create two joint ventures with our local partners (NIES and Nahai), with a 50/50% equity partnership. Indeed, since the size of our staff and organizational structure is still limited at this moment, so we shall use their support with staffing and cultural differences. The 50/50 partnership allows us not to lose control, and satisfy the chinese wish of keeping it also.