Pura Healthcare – An Overview of Medical Tourism in Costa Rica and the Impact of the Affordable Care Act

Author: Nicholas Jaros

Abstract

This paper begins by defining what medical tourism is and how expansive the industry has become due to all of the benefits, especially that of cost savings, that it provides to healthcare recipients. This is exemplified through a successful medical tourism story of two individuals receiving insurance reimbursement due to their decision to go abroad for medical care and the associated cost savings. The paper will then move into an explanation of the Affordable Care Act in the United States and why uninsured citizens may choose to travel to Costa Rica in comparison to staying in the United States or traveling to other countries for medical care. The paper concludes with an in depth look at how the Affordable Care Act is going to affect the future of health tourism from the United States to Costa Rica by drawing parallels to other healthcare systems and looking at the details of the affordable care act such as procedures that may not be covered.

What is medical tourism?

A 2013 article from Pitts and Battiste of ABC News tells the story of two North Carolina work colleagues’ travel experience to Costa Rica; however neither of them were going for the purpose of surfing or deep sea fishing. Joy Guion was going to receive a weight loss procedure and Gary Harwell went for a knee replacement from the private hospital Clinica Biblica. Both Guion and Harwell were going to Costa Rica for their procedures, would stay in a four-star hotel, have a personal driver and concierge, and not pay a dime for the medical or travel expenses. As an additional benefit, they would receive a bonus check from their employer when they returned due to the cost savings in insurance from deciding to go abroad. Guion and Harwell had the option to receive their procedures in the United States but would have had to pay large co pays due to the price differential. In the end, HSM, the company Guion and Harwell work for, saved money, the recipients saved money, and the Costa Rican economy benefited from the dollars spent within their borders (Pitts & Battiste, 2013).

While medical and tourism are two words that may not be commonly associated with one another, there is a large and growing industry for individuals traveling across borders to receive medical procedures. Medicine typically implies something viewed as un-pleasurable, and tourism has a perception of the opposite. However these two words together create something in the range of a USD 24-40 billion market based on approximately eight million patients worldwide spending anywhere from USD 3,000-5,000 per visit (Medical Tourism Statistics & Facts, 2014).  Popular destinations for medical tourism include India, Brazil, Singapore, Mexico, Thailand, and Costa Rica.

Affordable Care Act Coverage

With the number of nonelderly uninsured Americans over 47 million during 2012 not having access to affordable plans to cover the needed and sometimes desired procedures, it is clear why many are looking across borders to receive medical attention (Key Facts, 2013). Even though over 7 million have signed up for the Affordable Care Act (ACA) which is providing them access to affordable health care insurance they may have not had before, dental insurance, one of the most sought after procedures in Costa Rica, will for the most part still not be covered by the Affordable Care Act (Epstein & Kenen, 2014). And only about 57 percent of the U.S population has dental coverage according to Delta Dental leaving a large population looking to save some money on their dental care (n.d).

Why Costa Rica?

Individuals seek medical care abroad for many reasons. Generally the most popular reason is that of significant cost savings. For example, the cost of a knee replacement in the United States is in the USD 45,000-60,000 range whereas in Costa Rica the price range is USD 11,700-12,500 (Companion Global Healthcare, Inc., n.d.). While one would think that clearly they will receive better treatment and have better doctors with the hefty price tag in the United States, this is not necessarily true. The World Health Organization has ranked Costa Rica as one of the top three healthcare systems in Latin American, ranking consistently higher than that of the United States and Canada. The life expectancy in Costa Rica is 78.7 years, also higher than that of the United States (Costa Rica, n.d.). Costa Rica only holds two hospitals that are JCI certified, however there exist many more hospitals and dental clinics that hold high accolades in client care (JCI-Accredited Organizations, n.d). JCI stands for the Joint Commission International and is the international arm of the same organization that accredits hospitals in the United States. Holding this accreditation signifies that a health clinic is up to at least the same standards as health clinics in the United States in terms of the quality of patient care.

Costa Rica, recognizing the opportunity to not only show the world its high quality health care, but to display its national parks with spectacular views and volcanoes all encompassed in a tropical climate has invested in the industry. Costa Rican government declared the national interest of the activities and initiatives related to medical tourism. “Also, it launched the “Council for the International Promotion of Costa Rica Medicine” as the first official private instance of promotion and regulation of health tourism industry of the country.”(Turismo Medico, n.d.).

Impact on Costa Rican economy

According to an article found in The Tico Times, a Costa Rica based journal, in 2010 medical tourism generated about USD 288 million and in 2014 the country is expected to generate USD 800 million and attract 100,000 visitors to the country (Norman, C., 2012). Edgar Salazar, manager of Nova Dental Advanced Dental Center mentioned that in 2012, 95 percent of Nova’s patients were foreigners with a vast majority coming from the United States or Canada and he believes that that the market of travelers coming to Costa Rica for medical procedures is only going to grow. Nova Dental Advanced Dental Center is a full service dental clinic located in San Jose, the capital of Costa Rica. They offer services including transportation to and from recovery facilities and hotels (Cosmetic Dentistry, n.d.). Salazar also believed that within the next seven years that the medical tourism industry will soon overtake in size the eco-tourism, and adventure travelers in Costa Rica. With tourism as a whole generating more than USD 1.7 billion per year in Costa Rica with 80 percent of that consisting of eco-tourism, medical tourism has a long way to go before reaching that mark (About Costa Rica, n.d.). Total contribution of travel and tourism to GDP in Costa Rica was 12.1 percent of GDP in 2013 and is forecasted to reach 13.7 percent of GDP by 2024. Travel Tourism also generated 95,500 jobs or 4.6 percent of total employment and is expected to reach 7.2 percent in 2014 (Turner, R., n.d.). With these numbers, medical tourism has accounted for about 17 percent of the tourism industry but is expected to grow at a rapid pace (Tourism Statistical, n.d.). Rapid growth in a new area of tourism to Costa Rica will be stimulating for an already successful tourism economy.

Will the ACA slow medical tourism to Costa Rica?

According to the Canadian Institute for Health Information, roughly 46,000 Canadians in 2011 and 42,000 in 2012 left the country to seek medical treatment. This is likely due to the fact that Canada, has a monopolistic government-run healthcare system that does not give individuals access to health care that they demand in a timely manner unless it is considered an emergency operation. For example, Canadians will wait on average 26 weeks for a hip and knee replacement and more than 16 weeks for cataract surgery (Canadians Still, n.d.). This is because the demand for healthcare in Canada far outstretches its capacity. According to obamacarefacts.com, in the United States, “Doctors and hospitals will be moved to a system where they are rewarded for providing quality care, instead of being rewarded for quantity” (Obamacare, n.d.). While this has only positive intentions, I believe we may also see wait times for medical care specialist appointments begin to increase in the United States, similar to that of Canada.

In a 2013 survey conducted by Merritt Hawkins, only 45.7 percent of physicians in the 15 markets over five specialties were accepting Medicaid as a form of payment with the highest acceptance rate being in Massachusetts with a 73 percent acceptance rate (Miller, P., n.d.). The low acceptance is explained by the fact that physicians are only paid a fraction for serving Medicaid patients, about 59 percent of the amount that Medicare pays for primary services. With a low acceptance rate and the addition of millions of citizens under Medicaid coverage, a shortage of physicians is easy to predict. Authors of the ACA foresaw this shortage and as of January 2014 included a provision and incentive for physicians to accept new patients. The provision raises the Medicaid fees paid to doctors in primary care to the same level of Medicare with the Federal government chipping in the difference. This led to an average 73 percent increase in Medicaid fees paid to doctors, the largest increase in Medicaid history. However the provision is set for only two years and after that states no longer have to pay the increased Medicaid rate leaving many physicians wary to accept new patients. Reid Blackwelder, a Tennessee family practitioner and incoming president of the American Academy of Family Physicians said, “If I choose to increase the number of Medicaid patients, and two years down the road that payment drops back to two-thirds, all of a sudden I’m going to have an awful lot of trouble keeping my doors open.” (Ollove, M., 2013). Being that many doctors do not see the pay from Medicare necessarily generous, I believe most will be reluctant to accept Medicaid patients in the next two years due the possibility that they may have a new book of patients in which they are receiving smaller fees in comparison to others on better health care coverage plans.

Boston Massachusetts with the highest Medicaid acceptance rates consequently has the hospitals with the highest average wait times among the 15 markets surveyed. As displayed in Figure 1, when performing a regression and correlation analysis between the cities surveyed we see a moderate to weak strength correlation between Medicaid acceptance rate and average time wait. However, the simple regression analysis found in Table 1 suggests that the data points are not significant and therefore should not be used. While the statistical analysis suggests the data is too weak to draw conclusions, it is noteworthy that Massachusetts, the state in which the ACA was modeled after sees the highest average wait times. Therefore I predict that as other doctors and hospitals begin to accept Medicaid as a form of payment, we will see a rise in wait times to see physicians which may lead to patients looking elsewhere for affordable care.

Another signal pointing toward a continued rise in medical tourism is the variety of procedures not covered under ACA health plans. Procedures such as cosmetic surgery, plastic surgery, in-vitro fertilization, and dentistry are all not covered under ACA plans leaving people to search for the more affordable options than what is offered within their own borders. With its proximity to the United States in comparison to other medial tourism countries such as Thailand and Singapore, Costa Rica will be a viable option for those looking to receive procedures at a lower cost than domestic procedures.

Conclusion

Medical tourism is a rapidly growing industry that allows individuals to travel across borders in order to receive a health care procedure which usually leads to considerable cost savings. This industry’s success and continued growth has come into question as the healthcare system in the United States is going through a major overhaul leading to more individuals with affordable insurance coverage. For those who are still uncovered after the implementation of the ACA, don’t want to wait to see a specialist, or simply want to save some money and see a new country, Costa Rica makes a practical option. Not only is Costa Rica a tropical country in close proximity to the United States, the country boasts a prestigious healthcare system with some of the area’s finest doctors. Costa Rica already has a large and distinguished tourism industry and some experts have expectations that medical tourism will overtake ecotourism in size, the current largest tourism style in Costa Rica. After reviewing the details of the ACA and drawing comparisons to unsuccessful characteristics of other healthcare systems, such as that of Canada, there is no evidence that shows the ACA will slow the pace of medical tourism growth.

I predict that more health insurance companies will begin to cover procedures across borders. The cost savings from a procedure in Costa Rica are significant for an employer providing insurance as well as the insurance company. The pressure to expand coverage will likely come from employers and their employees seeking substitutes to the well known high co pays and premiums. As insurance companies expand coverage into international markets, we will see prices drop for both the consumers and insurance providers which will force U.S. health care organizations to become competitive to survive. If a healthcare plan only covered up to 60 percent of costs in the US, such as the case with an ACA bronze metal implant, then a knee replacement in Costa Rica would cost the recipient roughly USD 4,800 out of pocket. Whereas 10 percent out of pocket expenses, such as the case for an ACA platinum metal implant, for a knee replacement in the U.S would be as high as $6,000 with the recipient paying higher premiums to have the higher coverage. Knowing this, heading to a country such as Costa Rica where the quality of patient care is as high if not better, and the prices are much more competitive seems to make sense for those looking for an arbitrage opportunity. Having the procedure when you want the procedure and having the opportunity to navigate a new culture and country are just the extra perks of the industry.

References

About Costa Rica. (n.d.). Embajada de Costa Rica en Washington DC. Retrieved April 29, 2014, from http://www.costarica-embassy.org/?q=node/19

America’s Oral Health – The Role of Dental Benefits. (n.d.). Delta Dental. Retrieved April 29, 2014, from http://www.deltadental.com/AmericaOralHealthRoleDentalBenefits.pdf

Canadians still waiting too long for health care. (n.d.). Newfoundland Labrador Canada. Retrieved April 29, 2014, from http://www.gov.nl.ca/HaveYouHeard/wta.pdf

Companion Global Healthcare, Inc. (n.d.). Why Medical Tourism? Retrieved April 29, 2014, from http://www.companionglobalhealthcare.com/patients/whymedicaltourism.aspx

Cosmetic Dentistry & Dental Implants “Nova Dental Clinic Costa Rica. (n.d.). NovaDentalCR. Retrieved April 29, 2014, from http://www.novadentalcr.com/

Costa Rica. (n.d.). Patients Beyond Borders. Retrieved April 29, 2014, from

http://www.patientsbeyondborders.com/costa-rica

Dental Insurance. (n.d.). ObamaCare Facts. Retrieved April 29, 2014, from http://obamacarefacts.com/dental-insurance/dental-insurance.php

Epstein, J., & Kenen, J. (2014, March 28). Obamacare enrollments: White House says 6 million signed up for coverage. POLITICO. Retrieved April 29, 2014, from http://www.politico.com/story/2014/03/obamacare-enrollment-6-million-105111.html

JCI-Accredited Organizations. (n.d.). Joint Commission International. Retrieved April 29, 2014, from http://www.jointcommissioninternational.org/about-jci/jci-accredited-organizations/?c=CR)

Key Facts about the Uninsured Population. (2013, September 26). Kaiser Family Foundation. Retrieved April 30, 2014, from http://kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

Medical Tourism Statistics & Facts. (2014, April 7). Patients Beyond Borders. Retrieved April 29, 2014, from http://www.patientsbeyondborders.com/medical-tourism-statistics-facts

Miller, P. (n.d.). Physician Appointment Wait Times and Medicaid and Medicare Acceptance Rates. Merrit Hawkins. Retrieved April 29, 2014, from http://www.merritthawkins.com/uploadedFiles/MerrittHawkings/Surveys/mha2014waitsurvPDF.pdf

Norman, C. (2012, March 26). Medical tourism businesses expect growth. The Tico Times. Retrieved April 29, 2014, from http://www.ticotimes.net/2012/04/27/medical-tourism-businesses-expect-growth

ObamaCare: Pros and Cons of ObamaCare. (n.d.). ObamaCare Facts. Retrieved April 28, 2014, from http://obamacarefacts.com/obamacare-pros-and-cons.php

Ollove, M. (2013, February 14). KHN: Kaiser Health News. Medicaid Expansion Puts Spotlight On Access To Primary Care. Retrieved April 29, 2014, from http://www.kaiserhealthnews.org/stories/2013/february/14/medicaid-primary-care-doctor-payment.aspx

Pitts, B., & Battiste, N. (2013, September 30). As More Americans Have Surgeries Overseas, US Companies Consider ‘Medical Tourism’ a Health Care Option.ABC News. Retrieved May 2, 2014, from http://abcnews.go.com/Health/americans-surgeries-overseas-us-companies-medical-tourism-health/story?id=20423011

Tourism Statistical Yearly Report 2011. (n.d.). Visit Costa Rica. Retrieved April 29, 2014, from http://www.visitcostarica.com/ict/pdf/anuario/Statistical_Yearly_Report_2011.pdf

Turismo Medico. (n.d.). Promed Resources. Retrieved April 29, 2014, from http://promedresources.org/turismo-medico

Turner, R. (n.d.). Travel & Tourism Economic Impact 2014 – Costa Rica. World Travel and Tourism Council. Retrieved April 29, 2014, from http://www.wttc.org/site_media/uploads/downloads/costa_rica2014.pdf

 

APA formatting by BibMe.org.


 

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AirAsia’s Application of the ‘Thirty-Six Stratagems’

Author: Wong Wei Mei

Abstract

Based on the ‘36 Stratagems’ (三十六计) – a compilation of strategies from the China Warring States Era, this paper analyzes the transfer of military strategies into the corporate setting of AirAsia. The ‘36 Stratagems’ offers new perspectives about how to form creative strategies in today’s dynamic business landscape with similar characteristics to ancient Chinese warfare, particularly the aviation industry surrounding AirAsia in South-East Asia. The article illuminates the different ways AirAsia utilized one of the stratagems during the global economic crisis in 2008 and how the low-cost carrier adapted the stratagem to the business model and market conditions.

Strategy: ‘The 36 Stratagems’

Introduction

Corporate Strategy is defined as a long-term plan of action designed to achieve a certain goal for the whole organization (Stimpson and Farquharson, 2010). The ’36 Stratagems’ though unconventional, is the perfect guide to executing unique and aggressive corporate strategies. The ’36 Stratagems’ is an ageless compilation of Chinese strategies from hundreds of years of experience. The ’36 Stratagems’ is a unique collection of lessons, proverbs and aphorisms that captures the fundamentals of Chinese strategies (Sengar, 2006). In the West, Sun Tzu’s ‘Art of War’ is more popular compared to the ’36 Stratagems.’ It is a complete playbook compiled from more than twenty generations and yet it is as short as only one hundred and thirty-eight Chinese characters. It is compact and can be interpreted creatively to fit into any business landscape (Krippendorff, 2003).

Sun Tzu’s Art of War is a military text more focused on the philosophy and set of rules surrounding military organization battlefield tactics. It was the work of only one man while many created the ‘36 Stratagems’. In fact, they are stories passed down from generation to generation, refined to a point where only the bare fundamentals remain. The ’36 Stratagems’ is usually applied subtly in politics and diplomacy, it also targets psychological warfare (Verstappen, 1999).

Brief History

The ’36 Stratagems’is hugely influenced by a turbulent time in China’s history known as the China Warring States Era (403-221 BC). This period of time was characterized by war and taking over territories. The seven states: Qin, Han, Wei, Zhao, Qi, Chu and Yan dominated the smaller separate states as all of them battled each other to surge to power. The Seven Warring States and the smaller states engaged in brilliantly planned battles, shifting alliances and political manipulation (Krippendorff, 2003). Brilliant scholars and generals have used geographical, political and most importantly psychological warfare to achieve their numerous goals. The various states fielded massive armies of infantry, cavalry, and chariots. Complex logistical systems maintained by efficient government bureaucracies were needed to supply, train, and control such large forces. The size of the armies ranged from tens of thousands to several hundred thousand men. (Ebrey et al, 2006). Consequently, the leaders and scholars of this period work under extreme circumstances to come up with workable strategies and for the western readers, these strategies show ageless representation of the mechanics of human nature under severely stressful situations. Many of the proverbs in the ’36 Stratagems’ stemmed from events occurring in this era (Verstappen, 1999).

Content’s Overview

There are 6 strategies in the book and each of the 6 strategies is comprised of 6 stratagems. They are: Stratagems when in a superior position; Stratagems for confrontation; Stratagems for attack; Stratagems for confused situations; Stratagems for gaining ground; and Stratagems for desperate situations (Sengar, 2006). There is an afterword that is incomplete. Generally, the first three strategies are used when facing more advantageous situations while the last three is usually executed in a more disadvantageous environment. Classical Chinese is characterized by briefness. Every proverb in the strategy has a short and concise explanation attached to it. Battle scenarios and folklore usually accompany the strategies to further explain the source and history behind it. This also gives a better understanding as to how to execute them.

While at first glance, the ’36 Stratagems’ looks like it is primarily used for military purposes. But in reality, the ’36 Stratagems’ has been used as an aggressive and comprehensive bible for the business world. In fact, many global companies like Nintendo, British Airways, Epson etc (Krippendorff, 2003) have been utilizing the ’36 Stratagems,’ some unknowingly. The ’36 Stratagems’ contains strategies that are very different from the more direct business strategies developed in the West and requires a little bit of creativity in execution. It offers and expands options where other strategies limit you to stringent concepts (Krippendorff & Rivera, 2004). Even if one is not comfortable with using the ’36 Stratagems,’ we still have to be aware of such stratagems in case rival businesses use it against us.

AirAsia Overview

Low-cost Carriers

The aviation industry has been rapidly changing for the past 15 years. Flying has been revolutionized and it has been established as a staple method of travelling long distances over a short amount of time. A spike in emergence of low cost, no-frill carrier accompanied this development. The low-cost carrier runs on a very different business model compared to the mainstream air-carrier businesses. It is increasingly imperative for air-carrier businesses to distinguish themselves in their markets pools. Deyes’ (2008) research revealed that a significant 30 percent of passengers and customers pick an airline based on pricing.

A common feature of low-cost carriers is they avoid providing hub-and-spoke networks and usually offer point-to point services (Tretheway, 2004). Their price structure also greatly differentiates them from conventional airlines. Low-cost carriers mostly start by offering services at the lowest cost possible while providing only basic services. Their low fares and services can be reflected by Porter’s generic business strategy to set low-cost carriers apart (Hooper, 2004).  Minimal services to customer help low-cost carriers reduce costs dramatically.

AirAsia Introduction

AirAsia is a highly successful low-cost airline in South East Asia. Initially, AirAsia was a sister airliner to the national carrier Malaysian Airlines (MAS). Both of them were government-owned. The Malaysian government was more focused on Malaysian Airlines and this affected the performance of AirAsia. At the time, AirAsia did not fare well (Shari, 2003) and was having difficulty retaining profits even though AirAsia flew domestic routes not covered by Malaysian Airlines.

Dato’ Tony Fernandes wanted to run a low-cost carrier in South-East Asia. He arranged for a meeting with Conor McCarthy, Ryanair’s former operations director (Conor McCarthy later became Dato’ Tony Fernandes adviser). Both of them developed a plan for a low-cost airline based in South-East Asia (Grant, 2010). Fernandes registered a company in Malaysia called TuneAir in May 2001. Fernandes wanted government support and arranged for a meeting with Prime Minister Mahathir Mohammad. Fernandes wanted to get an official endorsement from the prime minister to be operating in the aviation industry but Prime Minister Mahathir Mohammad suggested that Fernandes acquire AirAsia, which was then a shell of a company with a massive debt of USD $37 million instead of issuing a new license (Economist, 2009). Pesek (2003) and Ranawana (2001) stipulated that the Prime Minister used this meeting as an opportunity to offload this struggling government-owned airline, an ongoing attempt for the past two years.

Fernandes agreed and they drew up an agreement. For a token sum of MYR 1, AirAsia was bought by TuneAir (Prystay, 2001). AirAsia was in a lot of debt so Fernandes remodeled it into a short-haul low-cost carrier.  Today, AirAsia is the single largest low-cost carrier in Asia. This award winning airline now flies both domestic and international routes and has plans to continue expanding their routes and the company itself.

Stratagem: Seize the Opportunity to Lead the Sheep Away ()

Polarity阴阳and Wu Wei ()

Polarity.  The Stratagem ‘Seize the Opportunity to Lead the Sheep Away’ stems from two very important ideas, one of them is polarity. In Taoist teachings, there is no concept of good or bad but merely two sides of the same coin. This correlates with a strong advocation of Yin and Yang, otherwise known as polarity. Chinese philosophy places a lot of emphasis on polarity (Miller, 2003; Watts, 1999). Contrary to the Eastern belief, the West has cultivated an environment that encourages us to pursue the good without the bad that we have to overcome our competitors instead of maintaining the harmony between adversaries, to turn in a profit without making losses. Giving leeway reflects weakness, letting other companies survive is a sign of cowardice.

Ironically, all these Western lessons are far from the scenarios in reality. While running a business, there are bound to be profits, as there are losses. There will always be competitors and there will almost be inevitably ups and downs. To actively seek for only the good seems folly. Understanding and utilizing Polarity can benefit businesses in striving to strike a balance, this can be more beneficial for a company compared to completely destroying your competitors. This way, a business can learn from another company. At the same time, this scenario motivates employees and prevents the entry of more competitors. The classic case example is of the ongoing war between Coca-Cola and Pepsi (Krippendorff & Rivera, 2004).

When companies accept the complexity of their situation, they will have a better control of the environment. The environment can include market, consumers, competitors etc. With such understanding, companies can gain more clarity and form more interdependent plans. New strategic possibilities often surface as a result of such clarity.

2500 years ago, Lao Tzu introduced Taoism. He advocated the study of the pattern of nature such as markings of shells, patterns of running water in order to understand and better influence our environment. Once one identifies a system’s pattern, it will be easier to manipulate the system. Successful companies such as Microsoft, Virgin and Sony have implemented polarity as part of their corporate strategy and this is because they have a holistic understanding of their surrounding and have a firm belief that both yin and yang have to coexist (Jaeger, 2012).

Wu Wei (Go with the grain).  Wu Wei is very closely related to polarity and many of the concepts involved intertwine. Lao Tzu introduced the concept of Wu Wei. A very easy way to look at this is the common phrase, ‘Going with the flow’.  In the West, people tend to look at things in a more rigid, orderly manner. Most scenarios already come with a supposedly tried and tested measure to handle them and those that act against this system are considered reckless and bound for failure. In Taoism, the Chinese believe that learning the pattern of nature means being able to manipulate the pattern while going with the flow of matters. Forcing an action against the situation requires too much effort. Thus, we should strive to exert our influence efficiently with minimal effort, molding it after the flow of events. Sun Tzu from the Art of War believed that a proficient fighter does not only win, but is skilled at winning with ease (Krippendorff, 2003).

Seize the Opportunity to Lead the Sheep Away ()

This is the 12th stratagem of the ‘36 stratagems’. It is the stratagem for confrontation. This stratagem is derived from two general concepts-Polarity and Wu Wei (Go with the grain). This stratagem came from an old Chinese folk tale about a bereft traveler that wandered and came upon a flock of sheep. The shepherd was distracted so the traveler used this opportunity to snatch a sheep. He then strutted away so calmly that the shepherd did not notice the loss of one of his sheep until it was too late. This stratagem fundamentally means to take advantage of opportunities no matter how negligible to attain profit (Verstappen, 1999). There is no definite definition to the stratagem and it is largely up to interpretation. It is important for a business to focus on current goals while keeping a keen eye out for any threats or opportunities, as these are the times to take full advantage of them.

Opportunities are often only available for a limited amount of time, so flexibility is key. This way, one can immerse and utilize the possibilities at any moment’s notice. The best time to move in and act is when your enemy or competitor fail to react or retreat. Most companies retreat due to structural reasons or a lack of keenness to the situation around them. A good businessman will be able to dive in when others pull out. It is also important to create opportunities or value especially undetected by an unsuspecting or unlikely competitor. In ancient times, a good general often wait for enemies to make a mistake. The general also observes weather and geometrical standing as well; treating all of these as opportunities while others may dismiss or cower from them.

Being attentive and understanding of one’s surrounding as mentioned in the explanation of polarity help us to take even small opportunities and small gains. This is because small opportunities and gains often lead to a long-term and more solid return. Actively searching and seizing opportunities is a basic requirement for the continuum of a successful company. As such, many established businesses like Microsoft or Home Depot follow this strategy. A good example is when Home Depot unsuspecting to contractors swooped in to encourage consumers to do their own home renovation and projects instead of hiring independent contractors (Kim & Mauborgne, 1999). This was because contractors had a hard time viewing a parts supplier as a direct competitor and Home Depot did not hesitate to take this opportunity to lure customers away from professional contractors.

Application for ‘Seize the Opportunity to Lead the Sheep Away’ () on AirAsia

Low-cost carriers are having trouble to sustain themselves. This is largely due to the decrease in profit margins, regulated markets, increase in fuel price, economic condition, difficulty in establishing unique business image and bankruptcy (Hardy, 2009). Despite that, AirAsia, a low-cost airline based in Malaysia (Alloway, 2008) grew steadily while combatting the above factors. When fuel prices soar, most airlines clamored to cut back on flights, employees and purchases. During the global economic downturn in 2008, several budget carrier struggled during the worst of the downturn and an estimated of two dozen airlines worldwide have declared bankruptcy. Despite the industry slump, AirAsia increased flights, added routes, and boosted capital investments.

AirAsia increased efforts during the global economic downturn as AirAsia’s fellow competitors shrank back and cut down on flight routes. As the stratagem of ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊) implies, AirAsia seized the opportunity of further promoting itself while others cowered in face of the economic crisis. AirAsia gave way a million free seats and increased advertising. While others are wary of AirAsia’s seemingly reckless move, AirAsia planned to fill up the vacuum left in the industry and use this as an opportunity to poach customers from other airlines. The decrease in flights from fellow competitors meant a huge amount of passengers were scrambling for alternate flights.  One huge untapped market in the budget aviation industry is the business travelers or travelers previously flying on conventional airlines. AirAsia responded by increasing flights and flight routes. In light of the struggling economy, many travelers do not hesitate to switch down to AirAsia. Some might see this as a short-term plan but in reality, AirAsia used this opportunity to casually lead regular customers from other network carriers to AirAsia. This plan was executed without much resistance as other airlines had failed to cater to their existing customers due to their company’s rigid policy of dealing with the economic crisis. The free seats giveaways and increase in flights might make a slight dent on AirAsia in terms of losses, but in exchange they tapped onto a market that they could not before – the conventional flight regular customers. This encouraged and convinced many conventional flight regular customers after trying out AirAsia to continue frequenting AirAsia even after the economy improved. While other airlines are struggling to keep their companies alive, AirAsia took an aggressive move and captured more market share, causing AirAsia’s competitors to struggle to catch up and regain their losses even after the economy improved.

The travelling industry took a big setback but to everyone’s disbelieve, AirAsia increased advertising. AirAsia was attentive to the opportunity that was presented, an opportunity that was oblivious to AirAsia’s competitors. The marketing and advertisement cost which were cheaper in light of the global economic downturn were fully utilised by AirAsia while others pulled out, this in turn brought more attention to AirAsia and helped AirAsia stood out among fellow competitors. Another example is when AirAsia utilized the cheaper advertising cost to exchange for more brand recognition, taking the chance to monopolize when others hid was during the SARS outbreak in 2003. During the SARS scare, AirAsia tripled spending on advertising while other airlines cut back (Economist, 2009). In fact, there was a surge of 400 percent growth in passenger volume compared to the corresponding period the year before. The increase in marketing ensured that people remember AirAsia, building a brand following. Branding is a vital source of competitive advantage and shows the authentic value a company represents (Fombrun, 1996) and AirAsia used the economic slump to build its brand into a stronger one, and strong brands will help with higher long-term and short-term results for AirAsia This became a crucial goal of AirAsia’s management (Keller, 2002). AirAsia’s pursuit of branding during a time where the industry took a back seat magnified AirAsia’s ability to set the company apart from the rest. It reflected the strengths of AirAsia glaringly, especially when AirAsia showed commitment beyond the task of moving a passenger from one point to another. AirAsia exploited the competitors’ lapses and seized the advantages to the company’s side. The negligence of the competitor was turned into a benefit to AirAsia. Thus, AirAsia managed to innovate and improve based on the dire situation to stay relevant to the market at 2008. A good example was the sponsorship of the English Premier League Referees. Despite the decrease in business in the industry, AirAsia experienced a spike in passengers. In the long run, this builds consumer loyalty. In this case, it is clear how AirAsia used the stratagem wisely and made the most out of the economic crisis.

Usually, convincing consumers to switch brands is an expensive feat but in a situation where almost all of AirAsia’s competitors pulled out and focused on sustaining operations and reducing loss, AirAsia did not follow the incumbents and did the opposite. With the increase of marketing, increase of availability and the attractive low fare, many frequent travelers tried or switched to AirAsia, building trust that even in a global economic downturn, AirAsia is still reliable. Reliability in flight industry is very important and can distinguish a company from the others. Trust of a brand by consumer is hard to obtain and is very valuable. Many businesses don’t recognize the value of the trust of a consumer simply because there is no number attached to it, but consumers’ trust benefit a company in the long run. A good review or word of mouth is more convincing than a commercial. It is vital to retain existing customers but it is equally important to attract new customers (Westcott, 2005). With trust, AirAsia built a pool of loyal followers that attract more and more passengers to switch to AirAsia till today, all of these without any aggressive response or comeback from AirAsia’s struggling competitors.

AirAsia also took this opportunity to showcase the volatility and aggressiveness of the aviation industry. This prevented others from entering the market, preventing further competition (Global Travel Industry News, 2008). AirAsia also bought 25 of the A330-300 aircraft from Airbus. Airbus delivered three A330-300 in 2009, they also fast-forwarded an aircraft scheduled to be bought in 2011. As fuel prices rise, other airline companies opted to lease planes or use existing planes of an older model. Aviation companies like UK-Canadian carrier Zoom and Hong Kong-based Oasis (Oprea, 2010) declared bankruptcy mainly because they were still using old planes. Being a low-cost airline, maintaining a low cost of operations is imperative. Using the new ordered planes will not only reduce fuel consumption but also reduce maintenance and personnel costs (Ringbeck & Franke, 2003). The bulk aircraft order also resulted in lower capital costs (Vidović, Štimac & Vince, 2013). In short, AirAsia strongly utilized the stratagem ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊) and came out strong during and after the global economic crisis.

Conclusion

The ’36 Stratagems’ is used by successful businesses all around us. Most of them did not even realize they were utilizing the ’36 Stratagems.’ This is because the ‘36 Stratagems’ are the fundamental basics when it comes to strategies. Up to interpretation, they could be used in the most basic manner or even a more complex version of them. AirAsia is one of the companies that had successfully executed the ’36 Stratagems.’ Other than using ‘Seize the Opportunity to Lead the Sheep Away’ (顺手牵羊), AirAsia also used ‘Exchange a Brick for a Jade’ (抛砖引玉), ‘Befriend the Distant Enemy to Attack One Nearby’ (远交近攻) and ‘Feign Madness But Keep Your Balance’ (假痴不颠).  AirAsia is able to achieve success over competitors despite being a relatively young aviation company due to AirAsia’s ability to utilize the surrounding situation to benefit it. AirAsia will continue to thrive as long as the company continues to believe in conquering the market and competitors with strategic implementation of the ‘36 Stratagems.’

References

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Ebrey, Walthall, Palais. (2006). Pre-Modern East Asia: A Cultural, Social, and Political History. Boston: Houghton-Mifflin Company.

Economist. (2009). Cheap but not nasty. Economist, Vol. 390.

Fombrun. (1996). Reputation: Realising Value from the Corporate Image. Boston: Harvard Business School Press.

Franke. (2004). Competition Between Network Carriers and Low Cost Carriers—retreat battle or breakthrough to a new level of efficiency? Journal of Air Transport Management.

 

Global Travel Industry News. (2008). Budget airline AirAsia can stay profitable even if oil hits $200 a barrel, CEO says. Retrieved 25 Dec 2013 from: http://www.eturbonews.com/3109/budget-airline-airasia-can-stay-profitable-ev

Grant. (2010). Contemporary Strategy Analysis: Text and Cases. John Wiley & Sons Ltd.

Hooper. (2004). The Competitive Positioning of Southeast Asia’s New and Evolving Airlines, Paper No. 54, presented at the Air Transport Research Society Conference, Istanbul, 1–3 July.

Jaeger. (2012). A Geomedical Approach to Chinese Medicine: The Origin of the Yin-Yang Symbol, Recent Advances in Theories and Practice of Chinese Medicine, Prof. Haixue Kuang (Ed.).

Keller. (2002). Strategic Brand Management (2nd ed.). New Jersey: Pearson Education.

Kim, Mauborgne. (1999). Creating New Market Space. Harvard Business Review, Jan-Feb 1999.

Krippendorff. (2003). The Art of the Advantage: 36 Strategies to Seize the Competitive Edge. TEXERE, Thompson.

Krippendorff, Rivera. (2004). Building creative strategies with patterns. Harvard Business Review.

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Oprea. (2010). The Effects of Global Economic Crisis on the Air Transport of Passengers in Europe and in Romania. GeoJournal of Tourism and Geosites.

Pesek. (2003). The Richard Branson of Asia Shakes Things Up. The Manila Times, July 9, 2003.

Prystay. (2001). Tune Air Founder Goes Against the Odds To Establish a Low-Cost Asian Airline. Wall Street Journal, Dec 10, 2001.

Ranawana. (2001). No Fear Of Flying. AsiaWeek, Nov 30, 2001.

Ringbeck, Franke. (2003). Flight for Survival: a new business model for the airline industry. Strategy + Business.

 

Sengar. (2006). The ’36 Stratagems’ for Business: Achieve Your Objectives Through Hidden and Unconventional Strategies and Tactics. Cyan Communications.

Shari. (2003). A Discount Carrier Spreads its Wings; AirAsia is Going International, and Rivals are Scrambling. Business Week, i3847 Sept 1, 2003.

 

Stimpson, Farquharson (2010). Cambridge International AS and A Level Business Studies: Second Edition. Cambridge University Press.

 

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Vidović, Štimac, Vince. (2013). Development of Business Models of Low-Cost Airlines. International Journal for Traffic and Transport Engineering.

 

The Sustainable Advantage

Author: Carl Thylen

Introduction

A new age is dawning within the world of business and many companies still fail to recognize the true meaning and importance of its defining concept: environmental sustainability. Experts from The Harvard Business Review have indicated that sustainability is the “key driver of innovation” within today’s business world (Hudson and Rogers 3). Experts make the distinction that smart companies recognize it as the newest innovational frontier (Nidumolu, Prahalad, and Rangaswami 4). They also show that it is one of the most important new challenges that face businesses today and will require commitment from companies at every level (Hudson and Rogers 3). Companies who have devoted their attention and investments wholeheartedly to this new frontier have conclusively and substantially lowered input costs, increased revenues, enhanced competitive advantage, and created entirely new avenues of business (Nidumolu, Prahalad, and Rangaswami 3).  Companies should not focus on environmental sustainability as a concept that is separate from their economic bottom line. Instead companies must recognize that environmentally sustainable business is simply one of the most effective ways to reduce input costs, enhance profitability and create tremendous competitive advantage. Therefore, top management must voluntarily implement initiatives that aim to make their company more sustainable in order to harness the tremendous potential that environmental sustainability has for enhancing their economic bottom line.

Defining the Role of Environmental Sustainability in today’s Business World

The director of the Center for Business and the Environment at Yale University, Daniel Esty, has classified environmental sustainability as the new megatrend within today’s business world. He defines a megatrend as “incipient societal and economic shifts such as globalization, the rise of the information society, and the move from hierarchical organizations to networks” (Lubin and Esty 2). Now, they suggest that environmental sustainability is on par with globalization and the information age is an exaggeration; however, Esty along with his co-author Dr. David Lubin, formerly of Harvard University, explain themselves in the following manner:

          Over the past 10 years, environmental issues have steadily           encroached on businesses’ capacity to create value for           customers, shareholders, and other stakeholders.           Globalized workforces and supply chains have created           environmental pressures and attendant business liabilities…           “Externalities” such as carbon dioxide emissions and water           use are fast becoming material—meaning that investors           consider them central to a firm’s performance and           stakeholders expect companies to share information about           them. (3)

This quote clearly demonstrates that environmental sustainability is becoming a major factor within the business world and certainly has the potential to become as paradigm-altering as globalization. However, the two most important factors described above that are directly related to the profitability of a business are negative externalities, such as carbon dioxide emissions, and their effect on how investors and other stakeholders view businesses. The negative externalities mentioned above can serve as indicators of how seriously and accurately companies have embraced and understood environmental sustainability. Poor waste management and a significant negative impact on the surrounding environment are indicators that a company has not taken environmental sustainability to heart, and failing to do so is not only harming the surrounding environment, but is also harming its own ability to stay competitive in today’s business environment. Additionally, negative externalities affecting the environment are becoming a major concern for investors and informed customers alike. Needless to say, enhancing and maintaining investor and consumer confidence needs to be of the utmost importance to any company.

As shown above, environmental sustainability has rooted itself as a fundamental issue within today’s business world. The question of whether companies address it in the correct manner still remains to be answered. According to a survey conducted by MIT in 2011, to which 3,000 executives from the commercial sector spanning 114 different countries responded, 70% of companies have placed sustainability on their management agendas (Haanaes et al. 3). However, the survey indicates that on average, sustainability is ranked only eighth in importance (Haanaes et al. 3). This indicates that while companies are recognizing that sustainability is important, they are still vastly underestimating it. The survey also indicates that two thirds of executives recognize that sustainability is necessary to “being competitive in today’s market place” (Haanaes et al. 3). On the other hand, less than one third of companies say that their sustainability initiatives contribute to their profitability (Haanaes et al. 4). This indicates that while a good amount of companies are aware that sustainability can also mean profitability, far less have realized how they can utilize environmentally sustainable tactics effectively enough or on a large enough scale to enhance their profitability. As the data indicates, this is likely due to sustainability not being viewed as a top priority and is being neglected by concerns related to their economic bottom line. This indicates a significant problem in the way companies view sustainability. Companies should not focus on environmental sustainability as a concept that is separate from their economic bottom line as it is just as much of an economic concern if implemented correctly. In accordance with the arguments presented in this research paper, the smart and correct way that companies should define sustainability is: a strategic aspect by which there are both short-term and long-term ways to make money through reduced input costs as well as both simple and more complicated methods of implementation that also lead to reduced input costs as well as other economic gains in the form of increased revenues. Poorly informed companies, conversely, only reluctantly accept it as a necessary concession made to aspects that aren’t directly related to its business goals as they are defined today, and treats the relationship between environmental sustainability and the economic bottom line as largely zero-sum. The latter view is incorrect, and the next section of this research paper will provide tactics and strategies for implementing sustainability that will demonstrate that the former view is superior.

Suggestions and Strategies for Implementation

The simplest and most readily available method of achieving sustainability within virtually any company is best introduced by the following facts referenced by Dr. David Bechtold, a professor of strategic management and sustainability at the University of Tampa, during an interview conducted by the author. Studies have shown that for any given product, 98% of the materials used to produce it are thrown away (Bechtold). Furthermore, 96% of the inputs (be they energy or material) used to make a product end up as waste (Janine Benyus). While this may seem like a depressing scenario to any businessperson, one should realize the tremendous opportunity for savings should any percentage of these inputs be recaptured and reused (Bechtold). The reason why savings within the production process itself are so very valuable comes down to the mathematical nature of savings (Bechtold). Since these savings are bottom line, very little, if anything, gets detracted from it before it gets added to a company’s net income. Demonstrably, savings of 1 dollar in your production process is equivalent to a 20 dollar sale, since the average sale has various operating and tax expenses associated with it (Bechtold). Research has also found that savings such as these are easily achieved through rudimentary “housekeeping measures” such as monitoring air conditioning and equipment energy expenditures or even measures as simple as turning off the lights in unoccupied facilities (Bansal and Roth 724). These types of savings are best exemplified by the endeavors of Ray Anderson, former CEO of the carpet tile company Interface Flor and an environmental visionary of sorts, whose innovations are readily accessible to anyone and are definitely achievable by those willing to try. Through taking a closer look at the expenses generated throughout his company’s manufacturing processes, he was able to identify and eliminate more obvious forms of wasteful practices and ultimately drove 450 million dollars of savings annually directly to Interface Flor’s bottom line (Bechtold). These bottom-line savings were hugely valuable for the company since they were equivalent to roughly 8 billion dollars of sales revenue which would normally have taken Interface Flor 5 years to generate (Bechtold).

Businesses have to redesign their business model around the notion that when they sell products that will serve as long term assets for the purchaser, they are not selling the actual product, but the service that product provides. How this relates to sustainability will soon become apparent. The best way to go about this is to provide long term assets through leasing. While this is done for a myriad of products, the concept is to extend leasing services to products that are not typically leased. This is best exemplified by Ray Anderson’s business model for Interface Flor, where he leases carpet to his customers. Typically, when full-room carpeting is replaced, the whole preexisting carpet is removed and disposed of, even if the only parts of the carpets that are worn out are the areas that are exposed to activity. Interface Flor, on the other hand, replaces only the worn out segments of carpet at the request of the customer. In return, the customer pays a monthly fee to Interface Flor in the form of a leasing agreement, instead of just paying a one-time fee for the carpet and its installation. This is very appealing to the customer first and foremost because the monthly fees are much lower and manageable in comparison to the substantial lump-sum charged by other companies. Additionally, the customer never has to worry about their carpet appearing worn-out as it is continuously renewed. Both these aspects have given Interface Flor a significant competitive advantage, as customers are far more interested in leasing carpet in the aforementioned fashion than they are in the old way of investing in carpeting (Bechtold).  However, the most important aspect that makes this type of business plan sustainable is that Interface Flor is now willingly and directly responsible for dealing with their used and discarded products. This opens up tremendous opportunity for savings, as the company itself has now recaptured all potential waste generated by their expended product and can now recycle and reuse a significant percentage of their original inputs (Hawken 64). In this way, Interface Flor has created a largely closed production cycle, where their original inputs are recaptured and reused in the production of new products and have in this way reduced their dependence on outside vendors for materials. Ultimately, this concept of leasing long-term assets and focusing on providing a service rather than a product, has allowed the company to repurpose its waste resulting in massive bottom-line savings. In addition, this process has also indirectly benefited the environment seeing as waste has been recaptured and has now become a resource instead of discarded dead weight that pollutes the environment (Hawken 64). By making the company directly responsible for its own discarded products, waste management is no longer a responsibility on the part of the customers or society, who have little economic incentive to responsibly or efficiently dispose of their waste. Additionally, the entire concept of waste management becomes obsolete, as discarded products are not waste to a company that can reuse materials (Hawken 64). In this way, companies can positively affect the environment by focusing entirely on their own economic bottom line.

While many of these arguments are viable for larger companies, they may not be for smaller companies that don’t have the resources to invest in research and development. Concerns such as these can be properly addressed through taking into account the fundamental concept of trickle-down economics. Whilst this concept deals strictly with investments in their monetary form, it applies just as readily to knowledge capital. The large firms have the money and ability to invest in researching sustainable production methods and materials, and have the incentive to do so since they, as industry leaders, set larger goals when it comes to remaining competitive in the big-leagues and thereby need to strive for innovation in the largest sense possible. The investments of the major players will in turn “trickle down” to the small business arena, as large corporations have a significant business incentive to sell their innovatory ideas and technologies as is demonstrated in the following example.

In the days before lead was banned as an anti-corrosive agent used in the manufacturing of various electronic devices, Hewlett Packard developed a new anti-corrosive agent that replaced lead before it was banned, and then sold this concept to a variety of vendors (Nidumolu, Prahalad, and Rangaswami 4). HP profited considerably from this venture, not only because they were able to continue manufacturing without the use of lead, but also because their distribution of knowledge to a variety of vendors led to increased competition, which drove down the price of the new anti-corrosive agent thereby reducing HP’s input costs significantly (Nidumolu, Prahalad, and Rangaswami 4). This is a prime example of how the distribution of knowledge capital obtained by an industry leader not only led to a significant profit for the developers when this knowledge capital was initially sold, but also of how it reduced input costs on a long-term basis for an entire industry. Additionally it shows how a single industry leader can bring about massive change within its industry through investment in sustainable business practices.

Not only can industry leaders actively bring about more sustainable business through direct research investments, but they can also indirectly do so by setting sustainability requirements for their vendors to follow. As industry leaders comprise the most significant contracts for their vendors, there’s plenty of incentive for these vendors to comply. While a harsher approach would be to respond to non-compliance with these requirements by declining to enter into further contracts with the offending parties, there are more relationship-fostering approaches to be considered. The most straightforward example of such an approach would be to offer more lucrative contracts to vendors who best meet the assigned requirements. Such a method would lead to healthy competition among vendors, and the market would root out the inefficient and ineffective alternatives. Increased competition also leads to decreased costs on the part of the consumer (meaning the requirement-setting company as well as other companies within the same sector), which would further serve to prove the viability and lucrativeness of this methodology. Industry leaders such as Walmart, Unilever, and Staples have already issued requirements to their vendors (Nidumolu, Prahalad, and Rangaswami 5). Unilever has taken a stricter approach to these requirements by announcing that it will only buy from sustainable vendors and sources by 2015 (Nidumolu, Prahalad, and Rangaswami 5). Staples has taken a more competition friendly approach, as they have announced that they will prioritize business with sustainable vendors, and implement a phased approach where change is achieved through a gradual process of co-operation with their vendors (Staples). Walmart has taken a similar approach, stating that by 2017 it will buy 70% of its products from vendors practicing environmentally sustainable business (Walmart).

Misconceptions and Misrepresentations of Environmental Sustainability

How the business world views sustainability is the fundamental determinant of whether companies will be able to implement it successfully enough to enjoy the significant monetary value that it is so very capable of adding to a company’s economic bottom line. As there are a plethora of misconceptions and misguided arguments regarding sustainability out there, it becomes important to address these misconceptions in order to alleviate some of the confusion surrounding this topic.

The concept of environmental sustainability has been linked to what has become known as the triple bottom line (or TBL). The concept of the TBL stipulates that the goals of businesses are no longer as single-minded as to focus only on financial responsibilities, but instead are equally focused on social and environmental responsibilities (Hudson and Rogers 4). This concept, while both noble and arguably prudent, creates much confusion within the business world and prevents many from realizing that environmental responsibility should not only be viewed as an additional concern that businesses now have to worry about. By presenting environmental sustainability as a responsibility (and a rather heavy one at that), it causes businesses to only meet the minimum requirements set by the regulatory environment (Bansal and Roth 7). This is only natural, seeing as no business advantages are readily observed when sustainability is introduced as entirely separate from the economic bottom line. Instead sustainability should be viewed as an opportunity that greatly aids a business’ efforts in achieving the goals of the original economic bottom line. Terms such as environmental profitability should replace terms like environmental responsibility and environmental protection in order to more effectively reflect the profit-building potential of such practices. The terminology and definitions used to introduce environmental sustainability are imperative in combating the vast misconceptions attributed to sustainability in today’s business world. Introducing a concept poorly leads to the proverbial “poisoning of the well” concept, which is a very likely cause of the widespread confusion surrounding sustainability.

As mentioned earlier in this section, many misconceptions cloud the perceptions of companies and prevent them from realizing the true nature of sustainability and the opportunities it creates. As a result, a multitude of companies are intent on believing that becoming eco-friendly will have the opposite effect on their profitability, and believe that it will dampen their ability to remain competitive (Nidumolu, Prahalad, and Rangaswami 3). In fact, most CEOs in Europe and the United States recognize environmental sustainability only as a corporate social responsibility completely separate from other fundamental objectives of a business, and thereby fail to recognize its concrete applicability to the realms of cutting costs, enhancing competitiveness, and enhancing the overall profitability of a business (Nidumolu, Prahalad, and Rangaswami 3). They voice concerns such as a supposed lack in immediate financial benefits, customer’s unwillingness to pay a price premium for green products during a recession, increased investment costs for new equipment and production processes among many other concerns; concerns that according to researchers Nimolu, Prahalad, and Rangaswami are entirely unfounded. They write that after a long-term study of 30 large corporations, environmental sustainability proved to be a “mother lode of organizational and technological innovations that yielded both bottom-line and top-line returns” (Nidumolu, Prahalad, and Rangaswami 3). They continue to reaffirm the fact that environmentally sustainable business practices help to lower costs through reducing inputs and increase revenues through the creation of better products (Nidumolu, Prahalad, and Rangaswami 3).

Furthermore, many misconceptions are focused on the ability of companies to reuse and recycle waste in a profitable manner which is the determining factor of whether or not a company is able to create a closed production cycle. Many argue that certain industries simply can’t recycle their waste profitably, and that investment costs drastically outweigh potential savings. These critics of “green” or sustainable production methods often point out that the “ecology/economy trade-off” is often too steep within certain industrial sectors, and that recapturing and repurposing waste would prove very costly indeed (Hudson and Rogers 5). However, a study conducted within the industrial chemical sector, where the aforementioned trade-offs are viewed to be particularly steep and waste is supposedly too cumbersome (not to mention highly toxic) to recapture and recycle, found that sustainable production methods based on various methods of reducing waste emissions and recapturing various chemical by-products during the production process increased chemical yields (Porter and van der Linde 103). The study surveyed 29 chemical plants and looked into their efforts to offset waste generation (Hudson and Rogers 5). It found that of the 181 different waste reduction and recapturing processes “only one resulted in a net cost increase” (Hudson and Rogers 5). In fact, for the 27 processes that had sufficient accompanying financial data to allow for savings calculations, for every dollar invested in the sustainable production processes the return in the form of savings was 3.49 dollars (Hudson and Rogers 5). In other words, companies more than tripled their money spent on investments.

Additional criticism of investments in sustainable production methods centers on the notion that these investments are very long-term and companies won’t see returns quickly enough to be able to justify them to shareholders (CSR Pays). However, continuing with the study on the industrial chemical sector introduced in the previous paragraph, it is clear that even in a sector viewed as largely incompatible with sustainable production methods that yield profits, returns can be seen far sooner than expected. Of the 38 above-mentioned sustainability initiatives that provided detailed data on payback periods, two thirds covered their initial investment costs in six months or less (Hudson and Rogers 5). Thus, it stands to reason that had any of these initiatives been implemented near the beginning of the corresponding fiscal year, share-holders would have seen returns above and beyond the initial investments by the end of the fiscal year.

Conclusion

Environmental sustainability is a concept which is responsible for a major shift in the way businesses approach and interact with the environment. This change in approach is defined by smart and well-informed businesses as an economic concern that will greatly benefit their economic bottom line and is no way a separate concern that is detrimental to their economic bottom line. As such, environmental sustainability has been appropriately referred to as the new innovational frontier within the world of business and has been linked to an enormous potential for enhancing competitive advantage. Therefore, businesses that do not approach it with the correct mindset will lose out on a great deal of this competitive advantage and will quickly fall behind those companies that are well-informed and pro-active. Top management of companies that hope to harness the great potential for economic gain that environmental sustainability promises need to institute voluntary business initiatives that continuously strive to make their companies more competitive through deep introspection and persistent innovation. Companies that pursue the goal of environmental sustainability in the aforementioned manner can significantly reduce their input costs, increase their revenues, create largely closed production cycles, expand into new markets and drive massive economic gain to their bottom lines. Thus, the evidence presented in this research paper strongly suggests that companies simply cannot afford to undervalue and deprioritize environmental sustainability any longer.

References

Bansal, Pratima, and Kendall Roth. “Why Companies Go Green: A Model of Ecological Responsiveness.” The Academy of Management Journal 43.4 (2000): 717-736. JSTOR. Web. 21 Feb. 2013.

Bechtold, David. Personal Interview. Apr. 19 2013.

Haanaes, Knut et al. “Sustainability Nears a Tipping Point.” MIT Sloan Management Review 53.2 (2012): 69-74. International Society of Sustainability Professionals. Web. 20 Apr. 2013.

Hawken, Paul. The Ecology of Commerce: A Declaration of Sustainability. New York: HarperBusiness, 2010. Print.

Hudson, Barclay, and Katarina Rogers. “The Triple Bottom Line: The Synergies Of Transformative Perceptions And Practices For Sustainability.” OD Practitioner 43.4 (2011): 3-9. Academic Search Complete. Web. 31 Mar. 2013.

”Janine Benyus: Biomimicry in Action.” TED Talks. Dir. Michael Glass. Prof. Janine Benyus. TED.com. TED Conferences, LLC, 1 Aug. 2009. Web. 30 Apr. 2013.

Lubin, David, and Daniel C. Esty. “The Sustainability Imperative.” HBR.org. Harvard Business Publishing, 1 May 2010. Web. 14 Apr. 2013.

Nidumolu, Ram, C.K. Prahalad, and M.R. Rangaswami. “Why Sustainability is Now the Key Driver of Innovation.” HBR.org. Harvard Business Publishing, 1 Sep. 2009. Web. 14 Apr. 2013.

Porter, Michael E., and Claas van der Linde. “Toward a New Concept of the Environment-Competitiveness Relationship.” The Journal of Economic Perspectives 9.4 (1995): 97-118. JSTOR. Web. 21 Apr. 2013.

Richmond, Lisa. “CSR Pays When You Bake it in or Ignore it Completely.” NBS.net. Western University, 18 Jan. 2013. Web. 14 Apr. 2013.

“Staples Inc. Sustainable Paper Procurement Policy.” Staples, 2010. PDF.

“Walmart Announces New Commitments to Drive Sustainability Deeper into the Company’s Global Supply Chain.” Walmart.com. Wal-Mart Stores, Inc., 25 Oct. 2012. Web. 14 Apr. 2013.

 

 

 

 

 

 

Aliserra Air & Landing – Maintenance and Repair

Author: Elisabeth Sanchez

Executive Summary

Aliserra Air & Landing, LLC will be established at the beginning of 2015 in order to fill a specific need for a maintenance, repair, and overhaul station certified to repair landing gear in Santiago, Chile. The aviation industry in South America has experienced exceptional growth in the last decade, and is currently the third fastest growing region in the world. Industry experts expect the region to continue to grow for at least the next two decades making this the opportune time for a company such as Aliserra Air & Landing to establish firm roots in the market and exploit the prime conditions. The company will be located in a 10,000 square meter hanger facility on the grounds of the Comodoro Arturo Merino Benitez International Airport in Santiago, Chile.

To read more – Click here

Is Latin America Competitive Enough for the Commercial Satellite Services Industry?

Author: Elan Keene

Abstract

As a result of slowed growth in developed countries, such as Europe and North America, commercial satellite service providers are seeking opportunities in developing regions such as Asia and Latin America. This paper seeks to examine the competitiveness of Latin America for commercial satellite service multinationals to expand their business and create competitive advantage for their respective corporations in the region.

When assessing foreign direct investment opportunities, many organizations look to five distinct factors: Gross Domestic Product (GDP), Employment Indicators, Consumer Price Index (CPI), Central Bank Minutes, and Purchasing Manager’s Index (PMI) for both manufacturing & services. This paper will evaluate these five statistics to gather a rounded view of region’s economic standing. Following the economic statistics evaluation, this paper will also identify specific countries that offer the most opportunity in the region. Their respective competitiveness as it pertains to government policies, infrastructure, and service demand will be explored.

Economic Environment

GDP

Between 2008 and 2012, Latin America experienced a steady growth in GDP.[1] During the past few years, growth has slowed; GDP growth projection for 2014 is expected to be around 2.3%. At the current rate, the region will experience a slight decline in growth compared to the 2.6% increase in GDP that was estimated for 2013.[2] However, while many emerging markets have been volatile during this period, Latin America as an aggregate has consistently provided a positive return on investment, and the region’s GDP is expected to rise to 3.0% in 2015 due to a stronger global demand and key structural reforms that some countries are implementing. Currently GDP per capita is $9,499 compared to the North American GDP per capita at approximately $50,000[3].

keene1

(GDP chart courtesy Economic Commission for Latin America and the Caribbean)

Employment Indicators

According to the Economic Commission for Latin America and the Caribbean (ECLAC), unemployment is the lowest it has been in the region for the last twenty years.[4] However, the recent drops in unemployment have not coincided with an expansion in jobs, although the proportion of wage employment did increase.[5]

 

Many South Europeans are immigrating to Latin America, a role reversal from just a few years ago. The emigrants are typically “young single people aged between 25 and 35, with a high level of education and professional objectives.”[6]

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(Unemployment chart courtesy Economic Commission for Latin America and the Caribbean)

 

Consumer Price Index

The CPI for Latin America and the Caribbean region (LAC) has remained within a 1% differential within the past five years, between 5.7% and 6.7%.[7] The relatively low and steady CPI correlates with the increasing foreign direct investment (FDI) in the region. The FDI has increased from 68.8 million to 149.4 million during this time.

Recently, regional inflation expectations have risen. Inflation is projected as a regional average to close 2014 at 10.7%. At this forecast rate, inflation will close the year in double-digits for the first time since 2002. For 2015, forecasters also raised their inflation projections from March’s 8.5% to 9.3%.”[8]

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(CPI table for LAC Courtesy Economic Commission for Latin America and the Caribbean)

Inter-American Development Bank Minutes

The 2014 Latin American and Caribbean Macroeconomic Report released by the Inter-American Development Bank (IADB) states that with the anticipated recovery of the global economy, assuming monetary normalization runs nominally, LAC growth rates will stabilize to normal rates. These forthcoming rates are predicted to be insufficient to meet social demand in the region and accompany low productivity that will not provide enough growth to advance or maintain relative income levels.[9]

Current high levels of credit bring enhanced opportunities, while the region remains under-banked. Standard & Poor’s financial organization expects 2014 to show stronger growth in the region amid the financial market volatility. Even with capital inflows falling and the normalization of monetary policy by the Federal Reserve, Latin American regional retail, branded consumer products, media, and telecom sectors will still benefit from the current economic situation.[10]

PMI

Manufacturing production expanded approximately 2% in Latin America in 2013. The Manufacturers Alliance for Productivity and Innovation (MAPI) predicts a faster and slightly larger manufacturing growth in 2014. The expansion is expected to top at 3.1 %.

Specific industries either drive or slow down the manufacturing growth. While automotive manufacturing led growth in 2013 and continues to lead in 2014, Medical supplies manufacturing finds itself in the new last place, falling to a negative growth percentage. Communication equipment, although slowed significantly, finds itself still growing in the upcoming year.

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(PMI table for Latin America, courtesy The Manufacturers Alliance for Productivity and Innovation)

 

Some of the more prominent countries in Latin America, such as Mexico and Brazil have seen a stagnation and decline of PMI services over the past year.[11] However, these and similar countries are rebounding and staying near 50%.[12]

 

Country Competitiveness

In Latin America, the average composite Global Competitive Index is approximately 4, with Chile ranking at 34 and leading the regional numbers with a score of 4.61. Mexico, Brazil and Panama, follow closely with respective scores of, 4.34, 4.33 and 4.5. The lowest scores in the region belonged to Venezuela, Paraguay, Honduras and Argentina with respective scores of 3.35, 3.61, 3.7, and 3.76. [13]

Latin America is expected to outpace advanced economies in projected growth for 2014. However, due to low levels of productivity, the Global Competitiveness Report suggests that a series of reforms need to be put in place along with “significant and sustained” investments to support recent rapid growth.

Brazil

According to the World Economic Forum, Brazil comes in at 56th place on the GCI scale this year, falling seven places from last year’s ranking. Macroeconomic indicator deterioration, fiscal policy uncertainty and concerns over corruption have contributed to the drop. In early 2014, Standard & Poor’s downgraded Brazil’s long-term credit rating of BBB to BBB- as a reflection of the previously mentioned issues. As of 2013, Brazil’s corruption perception index rank was 72 out of 177, and as of 2012, the population count was 198.7 million.

Mexico

Mexico is ranked 55th overall, according to the World Economic Forum; two down from its spot last year. The country continues to experience a stable macroeconomic environment, a sound financial system, an internal market that continues to allow for economies of scale, good transport infrastructure, and a number of sophisticated businesses that have expanded within the market. Moreover, reforms to fight corruption, increase competition and grow the domestic education and the labor supply are underway. As of 2013, Mexico’s corruption perception index rank was 107 out of 177, and as of 2012, the population count was 120.8 million.

Chile

Chile remains the most competitive country in Latin America, ranking 34th, one position down from last year. Traditional strengths such as: low levels of corruption, an efficient government, along with macroeconomic stability and stable financial institutions have allowed for its market to thrive.[14] As of 2013, Chile’s corruption perception index rank was 22 out of 177, only three positions behind the United States. As of 2012, the population count was 17.46 million.

The Chilean government also publicizes programs that are in place to grant subsidies to companies willing to offer their services in the farther rural areas of the country, which are hard to access through methods such as fiber infrastructure.

Panama

Panama has sharply increased in rankings over the past three years. It currently holds steady at the 40th position. It is the most competitive country in Central America and the second in Latin America, following closely behind Chile. [15]This is in part because the country has actively been focused on making itself more accessible to foreign investors. Panama hosts one of the best port and airport networks in the region and with an influx of foreign multinational corporations setting up operations in the country, its financial markets and technological adoption are thriving. As of 2013, Panama’s corruption perception index rank was 102 out of 177, and as of 2012, the population count was 3.8 million.

 

Opportunities

The highest demand in Latin America is for video and broadband, with OTT and IPTV seeing the fastest growth. OTT and IPTV are not typically satellite based technologies.

SmartLNB and SAT>IP are two technology market disrupters that allow satellite operators to enter the OTT and IPTV market within their own ecosystem.

Partnering with established companies in the area, such as DirecTV, or acquiring smaller ones creates an easier access to market. In Chile, the Swedish Space Corporation (SSC) is ground equipment operator and a key to joint ventures as they own most of the gateway ground stations in the country and can easily access the content providers; companies can also go through the government for ground station access.

Invest in HTS (high throughput satellites) Expanding services to the lesser served markets in rural areas of Chile will help saturate the brand outside of highly populated areas. Although a new business model may have to be implemented to scale to this market or a cheaper service may have to be created, the subsidies that the Chilean government continues to offer for underprivileged area growth will help fund the expansion. Courting the Chilean government and content providers with cost-effective and innovative technology will trigger brand saturation and increased sales

 

Conclusion on Most Competitive Location

Latin America’s landscape for FDI is still ripe for investing. The steady growth in GDP, the low GDP per capita and relatively low CPI are all indicators of a substantial investment opportunity. Some countries stand out more than others for FDI. Considering Chile’s rank in competitiveness and the corruption index, it takes lead as an investment location for multinationals. Even though it has less than 10% of the population of Brazil, Chile’s stable market means an investor will have less to worry about when it comes to fiscal reforms as they pertain to foreign multinational companies.

Chile offers a stable operating environment and is one of the most advanced telecommunications markets in Latin America, with a strong demand for new technologies.[16] Chile has one of the highest Internet penetration rates in Latin America and is only expected to grow.  Despite an earthquake in early 2010, the telecoms sector is performing better than other sectors of the Chilean economy; more-positive government policies are encouraging investment in communication services and infrastructure. [17]

Macroeconomic stability and growing integration with international capital markets has earned Chile an A+ credit rating, the highest in Latin America. Chile remains one of the most stable and prosperous developing nations and consistently ranks high on international indices relating to economic freedom, transparency and competitiveness.[18]

As of 2012, the population count in Chile was 17.46 million. By 2050 the population is expected to reach approximately 20.2 million people.  About 85% of the country’s population lives in urban areas.[19] Chile is the seventh most populated country in Latin America.

Though the market is not as large as Brazil, Chile has the same percentage of middle class as Brazil, though it is slightly less than Mexico.  Brazil has high taxes, increasing prospect of regulations that will put pressure on large market share holders and currently insufficient infrastructure for its country’s needs.[20]

The Chilean government has many subsidies for the telecommunications industry, one being for expansion into more rural areas. By using these subsidiaries, the satellite services companies can work in low-income markets and still make a profit. One example is a satellite hub that allows villagers to use one central location for broadband services, making it cost-effective for the village.

Establishing wireless backhaul and trucking with mobile service providers, allows for increased opportunity in the market. Working with fiber providers to provide services to hard to reach areas may make cost-effective sense to the consumer and the government.

 

Summation

Chile is a prime market for commercial satellite service providers to focus on. Partnering with local content providers will help the commercial satellite service providers stay ahead of the market and keep their existence crucial for commercial use in television and broadband.  In addition, by expanding reach to the lower class market in a upside down pyramid business model, providers can use the profits to create more jobs in Chile and expand the middle class, their main customer base.

References

Business Monitor International, Latin America Investment Opportunities in Telecommunications: Risk/Reward Analysis, 2014

http://www.businessmonitor.com/sites/default/files/whitepaper/Latin%20America%20Telecommunications.pdf

 

Economic Commission for Latin America and the Caribbean, Regional Economic Profile

http://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/Portada.asp?idioma=i

 

FocusEconomics, Latin America – Economic Outlook, April 2014

http://www.focus-economics.com/en/economy/region-outlook/Latin_America

 

IBTimes, United Nations Reports Falling Unemployment In Latin America, November 2013

http://www.ibtimes.com/united-nations-reports-falling-unemployment-latin-america-1450748

 

Index Mundi, North America – GDP per capita

http://www.indexmundi.com/facts/north-america/gdp-per-capita

 

Inter-American Development Bank, 2014 Latin American and Caribbean Macroeconomic Report: Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?

http://publications.iadb.org/bitstream/handle/11319/6417/Global%20Recovery%20and%20Monetary%20Normalization%3a%20Escaping%20a%20Chronicle%20Foretold%3f.pdf;jsessionid=FF844A896337BA5525BD3B362ED2AC75?sequence=1

 

Itaú BBA, Scenario Review – Mexico, April 2014

https://www.itau.com.br/itaubba-en/economic-analysis/publications/scenario-review-mexico/emerging-signs-of-recovery

 

The Portugal News, Crisis reversing migration between Europe and South America, November 2012

http://www.theportugalnews.com/news/crisis-reversing-migration-between-europe-and-south-america/26956

 

PWC, Communications Review: Exploring telecom markets in Latin America, Volume 16, No.2, 2011

https://www.pwc.com/en_GX/gx/communications/pdf/communications-review-latin-america-vol16-no2.pdf

 

Reuters, Brazil Services Recover in February as costs spike –PMI, March 2014

http://www.reuters.com/article/2014/03/05/brazil-economy-services-idUSS8N0M100220140305

 

Standard & Poor’s, Credit Conditions: Growth in Latin America Expected to Pick up In 2014 Amid Continuing Financial Market Volatility, December 2013

http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245361728398

 

US Commercial Service, Doing Business in Chile: 2012 Commercial Guide for US Companies, 2012

http://export.gov/chile/static/CCG%20Chile%202012_Latest_eg_cl_050006.pdf

 

Wikipedia, Demographics of Chile,

http://en.wikipedia.org/wiki/Demographics_of_Chile

 

World Economic Forum, The Global Competitiveness Report, 2013-2014

http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf