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Determining the feasibility of foreign ventures
F. T. HANER
Determining the Feasibility of Foreign Ventures
~rofit opportunities outside the United States are luring large and small companies into international business ventures. Even in isolated cases where an individual can make on-the-spot decisions without the usual corporate approvals, it is necessary to develop a reliable estimate of the profits that can be earned from the proposed capital commitment.
r
There are two basic problems in preparing an adequate feasibility report. The first is Mr. Haner has been director of international development for the American Cement Corporation. This fall he will be an associate professor at the Universitfj of Southern California.
PALL, I966
designing and staffing the study; the second is carrying it out. This article will discuss these problems primarily in terms of the less developed foreign countries although many of the ideas are applicable to the more mature economies.
DESIGNING AND STAFFING CONTENT OF STUDY
An international project is different from domestic investments because factors outside the specific business venture assume much greater significance in judging the profit potential. In the United States, one would normally investigate the difference in
35
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36
tax and labor laws between affected states, but would have no cause to seriously consider a local war, the possibility that a coup d'etat might strip away the protection of constitutional rights, or that nationalism might lead to laws that would discriminate against residents of one state. The extremes of extraproject conditions will vary from country to country, and careful judgments must be made on the emphasis each of these environmental factors will receive relative to time and cost. The pro forma financial statements of a foreign business may indicate an extremely profitable venture, and yet it may be unattractive due to facts not directly related to operations. The complex question of what will happen to business profits in future years when they are earned in a distant country, taxed by a foreign government, divided with local partners, converted to dollars, and remitted across at least two borders, requires a knack for understanding different cultures. Some of the principal areas to evaluate are: Politics-Stability; swings to right or left; alignments with competition and/or potential partners; effect on approvals and/or special incentives; relations with neighboring countries and the United States. Currency-Stability of exchange rate; degree of freedom to convert local currency to foreign exchange; elements in national accounts such as trade balance affecting outlook for currency; value of currency in free markets and possible losses from exchange; trend in amount circulating and availability for capital and/or customer payment of invoices. Taxes-History of rates and type; special levies on foreigners; possibility of crediting local taxes against U.S. taxes; taxes on conversion to foreign exchange; import or expert tariff problems and/or protection; special incentives and changes in the project to be eligible; corporate structure to minimize exposure. General Conditions-Impact of payoffs on morale, profits, and company ethics; attitude
toward Americans; weather and danger factors and their effect on personnel recruitment and compensation; ease of overseas communications, especially telephone; business environment, such as adherence to contracts or decision by tradition rather than logic. It is not proper to have business operations evaluated by one group of analysts and the business environment by another group unless there is an unusual problemfor example, the market is an integral part of the economy, the economy is significantly dependent on the currency and political situation, and so on. It is critical that forecasts allow for developments in these extraproject areas of the study. The company must be confident that the aftertax profits predicted in the final report are accurateneither overly conservative, because of overlooked opportunities in the design of the investment or compounding safety factors applied to each component as a result of uncertainty, nor overly optimistic due to misjudging the environment. The usual components of a feasibility study (marketing, technical, and financial analyses) are not meant to be passed over in examining the environment. They must be synthesized into an estimate of the profits after taxes. Also, since the detailed information in the study is rarely read by executive management or the board of directors, a concise summary and conclusions section at the beginning is an essential part of the study manager's plan. LEVEL OF ACClII',ACY Surprisingly often, no one in the company actually attempts to set a goal for reliability. The question, "What will be necessary to make a competent decision?" must be answered. For example, will it be adequate to know whether the price of materials will be $12 plus or minus 10 per cent per ton or exactly $11.98 per ton. It is common to uncover 50 per cent of
BUSINESS HORIZONS
FEASIBILITY OF FOREIGN VENTURES
the applicable information by reading various publications and spending a few days in the foreign country. The next 30 per cent will require considerably more effort, especially ff technical innovations are involved. The company needs to allow two weeks of preparation in the United States and about a month of field work in the foreign country to have a reasonably reliable estimate of the potential. (This is the expected factgathering time for a feasibilffy study team analyzing a $3 million to $20 million investment. A $200 million steel plant or petrochemical complex might require three to four times this effort, whereas field work on a $1 million project could be completed in tess time.) This would include development of only raw information to be analyzed upon return to the United States, although some on-the-spot sorting is essential in order to fill voids before departure. The remaining 20 per cent of information occasionally contains elements, especially in extraproject areas, which could completely change the company's evaluation of the investment. While this risk is greater for some industries than others, the problem can be serious, and ferreting out risks of this type should be a major consideration in designing the study. It takes extended periods of close relationships with the likely partner, lawyers, accountants, government officials, and others to obtain an accurate feel of the investment.
', i'-7 ,(--'-';-i]"i;, :i !- t / 17\ t 7 /-/\7;t
F A L L , 1966
The intangible information that reaches beyond financial statements and market projections is usually the last portion of knowledge to flow into the study. The degree of real cooperation to be expected, true feelings toward Americans, and ether pieces of the subjective puzzle generally portray the long-range profit possibilities better than the financial projections. In addition, information from tangible factors reaches beyond the 80 per cent accuracy level. Gathering technical data-such as adequate samples of deposits, chemical analyses, accurate capital costs for constrtlct/on of harbors, soft tests, and so forth-requires time and money. A detailed cost estimate of a factory building based on an analysis of each component is much more reliable (and costly) than one based on rules of thumb adjusted for local conditions. It is critical that the engineer, market analyst, and others know what management expects in order to prevent a disproportionate use of time. The most useful method of defining the level of accuracy is the preparation of a detailed job description for each function assigned to the project. Descriptive terms, such as "exact determination" or "best judgment," must be used rather than designating only areas of responsibility. Also, mention should be made of extraproject factors and
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the need for coordination between team members when responsibilities overlap. The team could consist of one person plus international or local consultants, three to six people concentrating on various aspects or combinations. A reservoir of information accumulates within the company when employees are used rather than consultants. On the other hand, local knowledge and inside sources of information that are available to consultants can add substantially to the validity of results. Often a consultant is used to back up a company man or provide a second source of opinion on subjective matters, such as market forecasts. Job descriptions should specify the amount of detail expected by the company and assign responsibility for (1) technical data (and appropriate subcategories ); (2) financial, legal, and tax matters, including subtleties in the corporate structure; (3) marketing; and (4) accounting (ff existing companies are involved, auditing assistance is usually necessary). The team manager should also have a job description that delineates his authority and miscellaneous responsibilities. Whenever consultants are used, it is important to have a detailed proposal that carefully outlines the assignment, the timing, and the cost. A thorough investigation of the organization's or individual's competence is worth the effort and should include talking to references and determining previous performance. Qualified personnel should do the work, not subordinates or trainees. American businessmen have too often contracted for consulting assistance in foreign countries and left gaping loopholes for shortcuts in level of effort and quality of personnel. Impulsive commitments of this type can be just as disastrous to the project as concessions in later negotiations. Upon completing a detailed evaluation of the content of the study, an experienced manager will be able to estimate the total cost of the final report. The first attempt often leads to a reappraisal when expenses are weighed against the magnitude of the
investment and the degree of accuracy the international division thinks is necessary, the detail normally required for approval by executive management and the beard of directors, and the volume of data necessary to satisfy financing sources and government agencies. PERSONNEL
The general content of the study and the degree of detail needed for a competent decision have been decided; the next step is the selection of personnel. Let's disregard the corporate politics of someone receiving an assignment in Rio de Janeiro, Athens, or Hong Kong. Whether the location is a Brazilian jungle during the hottest season or the work involves an extended absence from one's family, the job will most likely be considered a plum by many employees. If an international division exists and is large enough to support an experienced management group, it will probably not be necessary to borrow experts from the corporate staff or other operating divisions. Some combination of market analysts, geologists, engineers, and others is already assigned to the development department (new projects) on a permanent basis or is available from international operations. They would have conducted studies in various parts of the world, and know how to work as a team. Without question, the experience gained from having worked on a team would make them extraordinarily productive; the seemingly unimportant piece of inforlnation obtained by the market analyst becomes the missing link to the engineer, and so on. American companies do not usually have international organizations that can support a staff of full-time experts. Such a venture might be the company's first. Even in a moderate-sized company, the international manager may need to "borrow" people from various divisions of the firm. Technical competence and a mature manner should be prime selection factors. Once the list is narrowed and a select group of candidates
BUSINESS :HORIZONS
FEASIBILITY OF FOREIGN VENTURES
remains, a variety of factors indicating satisfactory performance in a foreign country should be considered. To pinpoint the individual with an "international mentality" is a diffeult task, but some characteristics are typical. He adapts to new surroundings and retains self-control. Determination and resourcefulness seem natural. Somehow, he stays healthy and spends much less time on his back in a hotel room. He adapts to uncomfortable situations and immediately begins to look for solutions to problems as they arise. He does not always enjoy local food but does not offend by making a major issue of his eating habits. The ugliness of poverty is as disagreeable to him as to others but does not affect his evaluation of the potential of the project or the stature of local people. The experiences of a feasibility study team abroad intensify the differences in personalities and break down the facade that people maintain in the office. In a recent study in South America, a company geologist not only obtained the assigned information, but also uncovered valuable raw material deposits that competitors were trying to conceal. The financial analyst, however, could not even obtain reports already written despite verbal promises from the South American company to the team manager to release the information. This contrasting performance in a foreign country illustrates the trial and error that is necessary to successfully select personnel for feasibility studies. Both individuals had graduate degrees, had an apparent understanding of their assignment, had traveled abroad, and had foreign language capabilities. Yet, one performed in a superior fashion; the other actually jeopardized the project. The truly strong employees are never readily available. Only through adjustments and sacrifices in other areas of the company's business is it possible for the company to send its best team. If it is a project with a tow priority rating, it is probably not worth the effort; however, ff it is an important
FALL, 1966
multimfllion dollar investment, it is foolish not to use the individuals in whom one has confidence.
IMPLEMENTATION PREPARATION FOR W O R K ABROAD
The study has been designed, and the people have been selected. The actual research and analysis is ready to begin. At this stage a couple of weeks of preparation can greatly increase output of company personnel while abroad. Otherwise, each person wastes time chasing irrelevant information. Some of the problems of adjustment can be easily overcome. Visual aids showing the topography, climate, and geography of the country help to set the stage. If it is possible to rent documentary movies on the country, the exposure will bring out problems confronting the economy and government, steps being taken to overcome the difficulties, and, most important, characteristics of the people. Effciency has been greatly increased by providing maps of the cities involved and the location of ministries, the U.S. embassy, and offces of key contacts, such as legal and accounting firms. The confidence and emotional stability normally resulting from a person's knowing where he is and where he is going have real benefits in the reliability of his performance. A few minutes spent reviewing this type of detail before arrival are usually very productive. A predeparture summary of available information prepared by each member of the feasibility study team is another tool a manager can use to be sure his experts are developing all the published information in each field. It is also a means of determining whether the individual has a feel for his assignment and will perform well in the foreign country. Publications such as those of Business International, Am, the Commerce and State Departments, and less obvious sources, such as U.S. Navy charts of the country's coastline or another U.S. corn-
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pany's appraisal of the country, give the team manager a forecast of performance abroad. Team members who have had experience in the particular country, or even the continent, should attempt to develop a broad contact list that provides independent sources of information. The standard approach of contacting banks, accounting firms, lawyers, equipment suppliers, the embassy, ministries, and industry sources is an essential part of the process. However, only through secondary sources on nearly all information can serious mistakes be avoided. Two other steps should be taken to assist the personnel. First, medical preparedness will significantly reduce lost time; shots and a portable pharmacy containing pep-up pills, sleeping pills, dysentery pills, aspirin, and so on are an absolute necessity. A healthy person will make better judgments and have a positive effect on the morale of others. Second, language classes will assist the team members in restaurants, taxis, and hotels. They should not attempt to negotiate or receive complex information unless they know the language thoroughly, but they can assist themselves and favorably impress the people with whom they are dealing. A well-organized, efficient team of people representing a company impresses potential partners, the foreign government, and others involved in the investment, and can lead to cash savings and added profits through improved negotiating leverage, greater cooperation, accelerated approvals, better communication, and reduced exposure to payoff situations. Although these benefits are intangible and the money earned is difficult to trace, the results are found in successful investments. FIELD WORK TECHNIQUES
A feasibility study team composed of experienced international experts is just as likely to be confronted with problems in a foreign country as any other group. However, their effectiveness is greater because they pool
resources to resolve problems rapidly with little emotional impact on the individuals. Their behavior is more professional, and petty jealousies over areas of responsibility are fewer. The inexperienced team is almost always part tourist and part professional; effectiveHess is lost in maneuvering for opportunities to tour the pleasant parts of the country and politicking for a "real chance to prove myself." If a team manager can successfully motivate talented experts in a variety of fields to work together, he will achieve maximum validity on the over-all study-and a near miracle. Results of a team effort will be above average regardless of individual shortcomings of some members.
Orientation Time is money, and when it is not used properly, it is equity capital permanently lost. Yet, once in the foreign country, it is wise not to start immediately on intense field work. An orientation period of three to four days, ideally Thursday to Sunday, more than pays for itself. On Monday the chances are greatly increased for company personnel to be eager for work and confident to cope with changing situations. There are several reasons for an orientation period abroad. First, a time change of several hours is normally involved. A sudden switch of as much as twelve hours has an immense impact on a person's physical stamina and mental alertness; he will not function properly for at least thirty-six hours. Second, a complete change of environment for a sensitive personality can cause a subtle emotional effect. A person reliable in his own environment may not adjust quickly to the new circumstances. If pushed, experience shows that he produces a superficial appraisal of apparent facts, rather than the penetrating analysis expected by management. A few extra days of becoming accustomed to the country and its people can swing the pendulum toward a stable, confident personality. Third, the time can be used to form a team out of a group of individuals. Mutual problems in the hotel, on BUSINESS HORIZONS
F E A S I B I L I T Y OF FOREIGN VENTVIqES
shopping trips, camaraderie in restaurants, and so on begin the process of learning about each other's capabilities and shortcomings. During the orientation period, the team manager will normally make a few contacts to cheek for new information on the project and possible changes in strategy due to modifications in the structure of the investment. Reporting on these developments serves as a basis for reviewing individual and team objectives. This step is important because the expert's interpretation of his job changes slightly when he is in the country. Data Gathering It is necessary for each team member to completely fill his daily calendar with contacts. Because his stay is short, he must make every hour count to assure reliable conclusions. With the contact list prepared in the United States as a starting point, a person should develop at least two more contacts from each discussion he undertakes. Fortunately, the team member is better able to judge which contacts will be most valuable as the possibilities increase. One of the most extraordinary revelations to inexperienced personnel conducting a study abroad is the volume of misinformation collected. A small portion of this misinformation is deliberately planted by those opposing the project, but most is acquired by accepting opinion and rumors as fact. Moreover, when asked a question, a foreign contact frequently supplies an answer, right or wrong, to avoid being regarded as uninformed in his field. Therefore, it is advisable to have at /east two reliable sources for critical components of a study. For example, a local consultant should prepare an independent analysis of the market and forecast the supply-demand situation even though a competent company man is doing the same job. Comparison of the two usually leads to reliable compromise judgments, When speaking of subeategories of information, such as prices or freight rates, the analyst ideally would have at least half a dozen quotes on the same figures. It is wise never to assume that published
FALL, 1966
information is authoritative. Even data issued by the foreign government are perhaps particularly subject to question because they may be fabricated for propaganda or some other purpose. Printed estimates can be used for an order of magnitude, but skepticism is necessary when it comes to "official statistics." Perhaps the budget will not allow the development of information from fragments, but the authors should be interviewed and their method of compiling data checked. Some "Do's and Don't's" Visiting Americans conducting feasibility studies are in a fishbowl. Enough has been said on behavior; the other side of the coin is caution on information disclosed by team members. The team manager should establish the reasons for questioning local people, and they should tie together with the reasons given by the market analyst and the engineer. If it is a sensitive situation involving anxious competitors, or others seeking the same investment opportunity, the need for coordination is greatly increased. A time should be established for all members to get together and discuss their activities each day. An intense schedule of interviews and local trips tends to work against this type of meeting:Extra effort should be extended to be sure that information is exchanged on a regular basis. Certain individuals have a natural reluctance to strike out on their own away from the conveniences of metropolitan centers. Excuses vary, but behind them is a fear of unknown places and the absence of anyone nearby who speaks English. A false impression of the country and its people can be gained in the capital cities of the world; a major step forward is made when team members take side trips to more backward areas. Most individuals assigned to a feasibility study will take written notes at each meeting. A few procrastinate and summarize impressions and data at the close of the day or on an irregular basis, and an occasional person takes only mental notes. Regardless of how brilliant the individual is, it is impor-
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tant to keep a daily record of events. This can be done on dictating machines, tape recorders, or by hand, but it must be done. A team manager is not doing his job if he allows any individual to go more than two days without compiling thorough notes. It is amazing to note the difference in opinions, evaluations, and impressions written in the early stages of the field work and those noted in the final days. The comparison sometimes tells an important story. A complete contact list with phone numbers, cable addresses, and alternative persons must be completed before departure. All information required for the final report is rarely developed by the team while in the foreign country. It saves time and effort for each individual to have a quick reference on whom to contact to fill voids.
interviews others on the same subject. The team manager must be sensitive to potential problems of this type and act early to restore good relations. Thoroughness must not be devoid of diplomacy. A conscious part of the team's effort in the last few days before departure should be a review of contacts and an appraisal of their current attitudes toward the company. If diplomacy can restore a friendly attitude, the effort should be made. As the pieces of the study fall together, or as later negotiations evolve, the friends of today often become the enemies of tomorrow-and the reverse. The old adage about burning bridges is particularly applicable because only through time and exposure will the company get a completely accurate picture of the proper allies to have in the project.
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Diplomacy Feasibility study teams face the conflict between passively accepting information volunteered and counterquestioning too aggressively to separate fact from opinion. A source might easily feel that his reliability is being questioned when the team
COMPLETING THE REPORT
Some people have a natural talent for classifying things according to importance; they understand the objectives and seem to continually sort information into the proper order. These people can be dismissed from the "worry list," and will require a minimum amount of supervision during write-up and presentation. The opposite type of individual seems to be enmeshed in a web of detail, each fact seemingly as important as the next. Ironically, he is usually the person who complains of not having enough data. Each minute piece of the $10 size puzzle must be in place before he can see the picture. This person is usually an accountant, a financial analyst, or an attorney, but marketing and technical personnel have their share of detail men.
Draft Report An important first step is to prepare a draft report immediately upon return from the foreign country. It is a concise summary report that gives an early indication of whether the proposition has possibilities or not. The analysis necessary to reduce a fifty to one hundred page report on BUSINESS HORIZONS
F E A S I B I L I T Y OF F OREI GN V E N T U R E S
the market, on raw materials, and so forth to three pages generally forces all of the team members to separate the pertinent facts from the less important information. Assuming that the investment meets criteria set for a project in a certain country, the team manager must prepare a detailed outline of (1) the categories of information to be included in the final report; (2) the order in which it will be presented; (3) graphics to be used, such as pictures, maps, charts, and graphs; (4) material to. be separated from the text and placed in appendixes; and (5) estimated number of pages for each portion of the report. A time schedule with specific dates is an integral part of the outline, starting with the first draft and continuing through the publication of the final report. This will take some interplay between the team manager and his experts, but the outline is necessary to clarify what will be required from personnel.
Communicatior~ Each individual on the team must recognize that his trip abroad gives him a more thorough understanding of the investment details and profit potential than his boss and the rest of management may have. Consequently, it is not absurd to gear the report to someone as unacquainted with the subject as a visitor from another planet. A terribly difficult task evolves from the need to simplify conclusions and avoid insulting the intelligence of the astute reader. Astonishingly often, recipients of the study outside the international division do not know where the country is located, what the people look like, what language they speak, or what their source of livelihood is. A minority of the people reading the report are already convinced that a revolution is imminent, that unparalleled inflation is around the comer, that any private investment will be nationalized, and that foreign businessmen are conniving, thieving rascals who do not approach the integrity and honesty of our business leaders. The team manager, regardless of evangelistic temptations, must write
FALL, 1966
off this type of person and direct the report toward those with only a mild degree of prejudice. The team will be accused of having lost its objectivity during the trip, and being biased either for or against the project. If politics prevail within the company-and they generally d o - t h e team manager must be a cross between Lyndon Johnson, Cary Grant, and General Westmoreland to sell his ideas. Leadership qualities will also be required to circumvent secondary reactions of disappointment or resentment among team members; the facts they uncovered could be significantly different from domestic experience, and their professional competency could be questioned, or they may realize that the rest of the company does not share their enthusiasm or pessimism.
Timing The final report should be prepared in the shortest possible time after the team's return to the United States. Accuracy suffers and enthusiasm wanes in team personnel and executive management unless project momentum can be maintained through continuous work. If the investment is extremely profitable, problems from lack of attention are few and far between; however, most are not that profitable. In setting schedules, it is necessary to allow for contingencies such as the failure of the consultant to meet his deadlines, but only under rare circumstances should team members be allowed to delay reproduction of the final draft. To prevent such delays, and to maintain discipline and rapport throughout the study, the individual must report to the team manager until the assignment is completed. The best incentive for a consultant to meet his deadline is to interject penalty clauses in his contract for failure to perform. Depending on the timing, each day or week should mean a significant subtraction fi'om his fee.
Negative Reaction A recommended program can be turned down by management or the board of directors after prepara-
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44
tion of the report. Frequently, it is obvious during the field work or upon completion of the summary report that return on equity is insufficient or that some other factor makes it a poor bet. Since the company has a major investment in the information developed on the trip, a report should be prepared covering all the irfformation ineluded in the team's notes. It is not necessary to consider presentation, but it is important to organize the study so that facts can be understood two to three years later. If a company has applied for an investment survey grant from AID, it must prepare a feasibility study report to obtain reimbursement under the contract. This program of the U.S. government was created to induce private enterprise to investigate investment possibilities in other parts of the world. If a company does not go ahead after conducting the field work, the contract calls for 50 per cent reimbursement of expenses, including the salary of the team upon receipt of a competent report.
are carefully defined and a detailed plan of action is actually followed. In addition to this type of thoroughness, subtle touches can greatly increase accuracy, and experience in the application can minimize mistakes and improve quality. Sophistication in conducting feasibility studies leads to results that penetrate well into the final 20 per cent of accuracy for costs in the normal 80 per cent range. In analyzing major investments, the manager of the study should have had exposure to varied foreign economies. If no one in the company has had international experience, it is probable that the 80 per cent accuracy goal will not be achieved and that the company may pay more, due to inexperience. Many American companies are new at making foreign investments; in these cases, they should seek sophisticated help.
IN s v ~ v , the checkpoints an experienced international manager would cover in conducting a feasibility study abroad are (1) the objectives, (2) scope and budget, (3) selection of personnel, (4) proper preparation, (5) techniques to be used while in the country, and (6) approach to preparing the report and selling its conclusions. Success is much more likely when fundamentals under each category
BUSINESS H O R I Z O N S
Determining the Feasibility of Foreign Ventures
~rofit opportunities outside the United States are luring large and small companies into international business ventures. Even in isolated cases where an individual can make on-the-spot decisions without the usual corporate approvals, it is necessary to develop a reliable estimate of the profits that can be earned from the proposed capital commitment.
r
There are two basic problems in preparing an adequate feasibility report. The first is Mr. Haner has been director of international development for the American Cement Corporation. This fall he will be an associate professor at the Universitfj of Southern California.
PALL, I966
designing and staffing the study; the second is carrying it out. This article will discuss these problems primarily in terms of the less developed foreign countries although many of the ideas are applicable to the more mature economies.
DESIGNING AND STAFFING CONTENT OF STUDY
An international project is different from domestic investments because factors outside the specific business venture assume much greater significance in judging the profit potential. In the United States, one would normally investigate the difference in
35
F. T. I'-IANEI~
36
tax and labor laws between affected states, but would have no cause to seriously consider a local war, the possibility that a coup d'etat might strip away the protection of constitutional rights, or that nationalism might lead to laws that would discriminate against residents of one state. The extremes of extraproject conditions will vary from country to country, and careful judgments must be made on the emphasis each of these environmental factors will receive relative to time and cost. The pro forma financial statements of a foreign business may indicate an extremely profitable venture, and yet it may be unattractive due to facts not directly related to operations. The complex question of what will happen to business profits in future years when they are earned in a distant country, taxed by a foreign government, divided with local partners, converted to dollars, and remitted across at least two borders, requires a knack for understanding different cultures. Some of the principal areas to evaluate are: Politics-Stability; swings to right or left; alignments with competition and/or potential partners; effect on approvals and/or special incentives; relations with neighboring countries and the United States. Currency-Stability of exchange rate; degree of freedom to convert local currency to foreign exchange; elements in national accounts such as trade balance affecting outlook for currency; value of currency in free markets and possible losses from exchange; trend in amount circulating and availability for capital and/or customer payment of invoices. Taxes-History of rates and type; special levies on foreigners; possibility of crediting local taxes against U.S. taxes; taxes on conversion to foreign exchange; import or expert tariff problems and/or protection; special incentives and changes in the project to be eligible; corporate structure to minimize exposure. General Conditions-Impact of payoffs on morale, profits, and company ethics; attitude
toward Americans; weather and danger factors and their effect on personnel recruitment and compensation; ease of overseas communications, especially telephone; business environment, such as adherence to contracts or decision by tradition rather than logic. It is not proper to have business operations evaluated by one group of analysts and the business environment by another group unless there is an unusual problemfor example, the market is an integral part of the economy, the economy is significantly dependent on the currency and political situation, and so on. It is critical that forecasts allow for developments in these extraproject areas of the study. The company must be confident that the aftertax profits predicted in the final report are accurateneither overly conservative, because of overlooked opportunities in the design of the investment or compounding safety factors applied to each component as a result of uncertainty, nor overly optimistic due to misjudging the environment. The usual components of a feasibility study (marketing, technical, and financial analyses) are not meant to be passed over in examining the environment. They must be synthesized into an estimate of the profits after taxes. Also, since the detailed information in the study is rarely read by executive management or the board of directors, a concise summary and conclusions section at the beginning is an essential part of the study manager's plan. LEVEL OF ACClII',ACY Surprisingly often, no one in the company actually attempts to set a goal for reliability. The question, "What will be necessary to make a competent decision?" must be answered. For example, will it be adequate to know whether the price of materials will be $12 plus or minus 10 per cent per ton or exactly $11.98 per ton. It is common to uncover 50 per cent of
BUSINESS HORIZONS
FEASIBILITY OF FOREIGN VENTURES
the applicable information by reading various publications and spending a few days in the foreign country. The next 30 per cent will require considerably more effort, especially ff technical innovations are involved. The company needs to allow two weeks of preparation in the United States and about a month of field work in the foreign country to have a reasonably reliable estimate of the potential. (This is the expected factgathering time for a feasibilffy study team analyzing a $3 million to $20 million investment. A $200 million steel plant or petrochemical complex might require three to four times this effort, whereas field work on a $1 million project could be completed in tess time.) This would include development of only raw information to be analyzed upon return to the United States, although some on-the-spot sorting is essential in order to fill voids before departure. The remaining 20 per cent of information occasionally contains elements, especially in extraproject areas, which could completely change the company's evaluation of the investment. While this risk is greater for some industries than others, the problem can be serious, and ferreting out risks of this type should be a major consideration in designing the study. It takes extended periods of close relationships with the likely partner, lawyers, accountants, government officials, and others to obtain an accurate feel of the investment.
', i'-7 ,(--'-';-i]"i;, :i !- t / 17\ t 7 /-/\7;t
F A L L , 1966
The intangible information that reaches beyond financial statements and market projections is usually the last portion of knowledge to flow into the study. The degree of real cooperation to be expected, true feelings toward Americans, and ether pieces of the subjective puzzle generally portray the long-range profit possibilities better than the financial projections. In addition, information from tangible factors reaches beyond the 80 per cent accuracy level. Gathering technical data-such as adequate samples of deposits, chemical analyses, accurate capital costs for constrtlct/on of harbors, soft tests, and so forth-requires time and money. A detailed cost estimate of a factory building based on an analysis of each component is much more reliable (and costly) than one based on rules of thumb adjusted for local conditions. It is critical that the engineer, market analyst, and others know what management expects in order to prevent a disproportionate use of time. The most useful method of defining the level of accuracy is the preparation of a detailed job description for each function assigned to the project. Descriptive terms, such as "exact determination" or "best judgment," must be used rather than designating only areas of responsibility. Also, mention should be made of extraproject factors and
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the need for coordination between team members when responsibilities overlap. The team could consist of one person plus international or local consultants, three to six people concentrating on various aspects or combinations. A reservoir of information accumulates within the company when employees are used rather than consultants. On the other hand, local knowledge and inside sources of information that are available to consultants can add substantially to the validity of results. Often a consultant is used to back up a company man or provide a second source of opinion on subjective matters, such as market forecasts. Job descriptions should specify the amount of detail expected by the company and assign responsibility for (1) technical data (and appropriate subcategories ); (2) financial, legal, and tax matters, including subtleties in the corporate structure; (3) marketing; and (4) accounting (ff existing companies are involved, auditing assistance is usually necessary). The team manager should also have a job description that delineates his authority and miscellaneous responsibilities. Whenever consultants are used, it is important to have a detailed proposal that carefully outlines the assignment, the timing, and the cost. A thorough investigation of the organization's or individual's competence is worth the effort and should include talking to references and determining previous performance. Qualified personnel should do the work, not subordinates or trainees. American businessmen have too often contracted for consulting assistance in foreign countries and left gaping loopholes for shortcuts in level of effort and quality of personnel. Impulsive commitments of this type can be just as disastrous to the project as concessions in later negotiations. Upon completing a detailed evaluation of the content of the study, an experienced manager will be able to estimate the total cost of the final report. The first attempt often leads to a reappraisal when expenses are weighed against the magnitude of the
investment and the degree of accuracy the international division thinks is necessary, the detail normally required for approval by executive management and the beard of directors, and the volume of data necessary to satisfy financing sources and government agencies. PERSONNEL
The general content of the study and the degree of detail needed for a competent decision have been decided; the next step is the selection of personnel. Let's disregard the corporate politics of someone receiving an assignment in Rio de Janeiro, Athens, or Hong Kong. Whether the location is a Brazilian jungle during the hottest season or the work involves an extended absence from one's family, the job will most likely be considered a plum by many employees. If an international division exists and is large enough to support an experienced management group, it will probably not be necessary to borrow experts from the corporate staff or other operating divisions. Some combination of market analysts, geologists, engineers, and others is already assigned to the development department (new projects) on a permanent basis or is available from international operations. They would have conducted studies in various parts of the world, and know how to work as a team. Without question, the experience gained from having worked on a team would make them extraordinarily productive; the seemingly unimportant piece of inforlnation obtained by the market analyst becomes the missing link to the engineer, and so on. American companies do not usually have international organizations that can support a staff of full-time experts. Such a venture might be the company's first. Even in a moderate-sized company, the international manager may need to "borrow" people from various divisions of the firm. Technical competence and a mature manner should be prime selection factors. Once the list is narrowed and a select group of candidates
BUSINESS :HORIZONS
FEASIBILITY OF FOREIGN VENTURES
remains, a variety of factors indicating satisfactory performance in a foreign country should be considered. To pinpoint the individual with an "international mentality" is a diffeult task, but some characteristics are typical. He adapts to new surroundings and retains self-control. Determination and resourcefulness seem natural. Somehow, he stays healthy and spends much less time on his back in a hotel room. He adapts to uncomfortable situations and immediately begins to look for solutions to problems as they arise. He does not always enjoy local food but does not offend by making a major issue of his eating habits. The ugliness of poverty is as disagreeable to him as to others but does not affect his evaluation of the potential of the project or the stature of local people. The experiences of a feasibility study team abroad intensify the differences in personalities and break down the facade that people maintain in the office. In a recent study in South America, a company geologist not only obtained the assigned information, but also uncovered valuable raw material deposits that competitors were trying to conceal. The financial analyst, however, could not even obtain reports already written despite verbal promises from the South American company to the team manager to release the information. This contrasting performance in a foreign country illustrates the trial and error that is necessary to successfully select personnel for feasibility studies. Both individuals had graduate degrees, had an apparent understanding of their assignment, had traveled abroad, and had foreign language capabilities. Yet, one performed in a superior fashion; the other actually jeopardized the project. The truly strong employees are never readily available. Only through adjustments and sacrifices in other areas of the company's business is it possible for the company to send its best team. If it is a project with a tow priority rating, it is probably not worth the effort; however, ff it is an important
FALL, 1966
multimfllion dollar investment, it is foolish not to use the individuals in whom one has confidence.
IMPLEMENTATION PREPARATION FOR W O R K ABROAD
The study has been designed, and the people have been selected. The actual research and analysis is ready to begin. At this stage a couple of weeks of preparation can greatly increase output of company personnel while abroad. Otherwise, each person wastes time chasing irrelevant information. Some of the problems of adjustment can be easily overcome. Visual aids showing the topography, climate, and geography of the country help to set the stage. If it is possible to rent documentary movies on the country, the exposure will bring out problems confronting the economy and government, steps being taken to overcome the difficulties, and, most important, characteristics of the people. Effciency has been greatly increased by providing maps of the cities involved and the location of ministries, the U.S. embassy, and offces of key contacts, such as legal and accounting firms. The confidence and emotional stability normally resulting from a person's knowing where he is and where he is going have real benefits in the reliability of his performance. A few minutes spent reviewing this type of detail before arrival are usually very productive. A predeparture summary of available information prepared by each member of the feasibility study team is another tool a manager can use to be sure his experts are developing all the published information in each field. It is also a means of determining whether the individual has a feel for his assignment and will perform well in the foreign country. Publications such as those of Business International, Am, the Commerce and State Departments, and less obvious sources, such as U.S. Navy charts of the country's coastline or another U.S. corn-
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pany's appraisal of the country, give the team manager a forecast of performance abroad. Team members who have had experience in the particular country, or even the continent, should attempt to develop a broad contact list that provides independent sources of information. The standard approach of contacting banks, accounting firms, lawyers, equipment suppliers, the embassy, ministries, and industry sources is an essential part of the process. However, only through secondary sources on nearly all information can serious mistakes be avoided. Two other steps should be taken to assist the personnel. First, medical preparedness will significantly reduce lost time; shots and a portable pharmacy containing pep-up pills, sleeping pills, dysentery pills, aspirin, and so on are an absolute necessity. A healthy person will make better judgments and have a positive effect on the morale of others. Second, language classes will assist the team members in restaurants, taxis, and hotels. They should not attempt to negotiate or receive complex information unless they know the language thoroughly, but they can assist themselves and favorably impress the people with whom they are dealing. A well-organized, efficient team of people representing a company impresses potential partners, the foreign government, and others involved in the investment, and can lead to cash savings and added profits through improved negotiating leverage, greater cooperation, accelerated approvals, better communication, and reduced exposure to payoff situations. Although these benefits are intangible and the money earned is difficult to trace, the results are found in successful investments. FIELD WORK TECHNIQUES
A feasibility study team composed of experienced international experts is just as likely to be confronted with problems in a foreign country as any other group. However, their effectiveness is greater because they pool
resources to resolve problems rapidly with little emotional impact on the individuals. Their behavior is more professional, and petty jealousies over areas of responsibility are fewer. The inexperienced team is almost always part tourist and part professional; effectiveHess is lost in maneuvering for opportunities to tour the pleasant parts of the country and politicking for a "real chance to prove myself." If a team manager can successfully motivate talented experts in a variety of fields to work together, he will achieve maximum validity on the over-all study-and a near miracle. Results of a team effort will be above average regardless of individual shortcomings of some members.
Orientation Time is money, and when it is not used properly, it is equity capital permanently lost. Yet, once in the foreign country, it is wise not to start immediately on intense field work. An orientation period of three to four days, ideally Thursday to Sunday, more than pays for itself. On Monday the chances are greatly increased for company personnel to be eager for work and confident to cope with changing situations. There are several reasons for an orientation period abroad. First, a time change of several hours is normally involved. A sudden switch of as much as twelve hours has an immense impact on a person's physical stamina and mental alertness; he will not function properly for at least thirty-six hours. Second, a complete change of environment for a sensitive personality can cause a subtle emotional effect. A person reliable in his own environment may not adjust quickly to the new circumstances. If pushed, experience shows that he produces a superficial appraisal of apparent facts, rather than the penetrating analysis expected by management. A few extra days of becoming accustomed to the country and its people can swing the pendulum toward a stable, confident personality. Third, the time can be used to form a team out of a group of individuals. Mutual problems in the hotel, on BUSINESS HORIZONS
F E A S I B I L I T Y OF FOREIGN VENTVIqES
shopping trips, camaraderie in restaurants, and so on begin the process of learning about each other's capabilities and shortcomings. During the orientation period, the team manager will normally make a few contacts to cheek for new information on the project and possible changes in strategy due to modifications in the structure of the investment. Reporting on these developments serves as a basis for reviewing individual and team objectives. This step is important because the expert's interpretation of his job changes slightly when he is in the country. Data Gathering It is necessary for each team member to completely fill his daily calendar with contacts. Because his stay is short, he must make every hour count to assure reliable conclusions. With the contact list prepared in the United States as a starting point, a person should develop at least two more contacts from each discussion he undertakes. Fortunately, the team member is better able to judge which contacts will be most valuable as the possibilities increase. One of the most extraordinary revelations to inexperienced personnel conducting a study abroad is the volume of misinformation collected. A small portion of this misinformation is deliberately planted by those opposing the project, but most is acquired by accepting opinion and rumors as fact. Moreover, when asked a question, a foreign contact frequently supplies an answer, right or wrong, to avoid being regarded as uninformed in his field. Therefore, it is advisable to have at /east two reliable sources for critical components of a study. For example, a local consultant should prepare an independent analysis of the market and forecast the supply-demand situation even though a competent company man is doing the same job. Comparison of the two usually leads to reliable compromise judgments, When speaking of subeategories of information, such as prices or freight rates, the analyst ideally would have at least half a dozen quotes on the same figures. It is wise never to assume that published
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information is authoritative. Even data issued by the foreign government are perhaps particularly subject to question because they may be fabricated for propaganda or some other purpose. Printed estimates can be used for an order of magnitude, but skepticism is necessary when it comes to "official statistics." Perhaps the budget will not allow the development of information from fragments, but the authors should be interviewed and their method of compiling data checked. Some "Do's and Don't's" Visiting Americans conducting feasibility studies are in a fishbowl. Enough has been said on behavior; the other side of the coin is caution on information disclosed by team members. The team manager should establish the reasons for questioning local people, and they should tie together with the reasons given by the market analyst and the engineer. If it is a sensitive situation involving anxious competitors, or others seeking the same investment opportunity, the need for coordination is greatly increased. A time should be established for all members to get together and discuss their activities each day. An intense schedule of interviews and local trips tends to work against this type of meeting:Extra effort should be extended to be sure that information is exchanged on a regular basis. Certain individuals have a natural reluctance to strike out on their own away from the conveniences of metropolitan centers. Excuses vary, but behind them is a fear of unknown places and the absence of anyone nearby who speaks English. A false impression of the country and its people can be gained in the capital cities of the world; a major step forward is made when team members take side trips to more backward areas. Most individuals assigned to a feasibility study will take written notes at each meeting. A few procrastinate and summarize impressions and data at the close of the day or on an irregular basis, and an occasional person takes only mental notes. Regardless of how brilliant the individual is, it is impor-
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tant to keep a daily record of events. This can be done on dictating machines, tape recorders, or by hand, but it must be done. A team manager is not doing his job if he allows any individual to go more than two days without compiling thorough notes. It is amazing to note the difference in opinions, evaluations, and impressions written in the early stages of the field work and those noted in the final days. The comparison sometimes tells an important story. A complete contact list with phone numbers, cable addresses, and alternative persons must be completed before departure. All information required for the final report is rarely developed by the team while in the foreign country. It saves time and effort for each individual to have a quick reference on whom to contact to fill voids.
interviews others on the same subject. The team manager must be sensitive to potential problems of this type and act early to restore good relations. Thoroughness must not be devoid of diplomacy. A conscious part of the team's effort in the last few days before departure should be a review of contacts and an appraisal of their current attitudes toward the company. If diplomacy can restore a friendly attitude, the effort should be made. As the pieces of the study fall together, or as later negotiations evolve, the friends of today often become the enemies of tomorrow-and the reverse. The old adage about burning bridges is particularly applicable because only through time and exposure will the company get a completely accurate picture of the proper allies to have in the project.
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Diplomacy Feasibility study teams face the conflict between passively accepting information volunteered and counterquestioning too aggressively to separate fact from opinion. A source might easily feel that his reliability is being questioned when the team
COMPLETING THE REPORT
Some people have a natural talent for classifying things according to importance; they understand the objectives and seem to continually sort information into the proper order. These people can be dismissed from the "worry list," and will require a minimum amount of supervision during write-up and presentation. The opposite type of individual seems to be enmeshed in a web of detail, each fact seemingly as important as the next. Ironically, he is usually the person who complains of not having enough data. Each minute piece of the $10 size puzzle must be in place before he can see the picture. This person is usually an accountant, a financial analyst, or an attorney, but marketing and technical personnel have their share of detail men.
Draft Report An important first step is to prepare a draft report immediately upon return from the foreign country. It is a concise summary report that gives an early indication of whether the proposition has possibilities or not. The analysis necessary to reduce a fifty to one hundred page report on BUSINESS HORIZONS
F E A S I B I L I T Y OF F OREI GN V E N T U R E S
the market, on raw materials, and so forth to three pages generally forces all of the team members to separate the pertinent facts from the less important information. Assuming that the investment meets criteria set for a project in a certain country, the team manager must prepare a detailed outline of (1) the categories of information to be included in the final report; (2) the order in which it will be presented; (3) graphics to be used, such as pictures, maps, charts, and graphs; (4) material to. be separated from the text and placed in appendixes; and (5) estimated number of pages for each portion of the report. A time schedule with specific dates is an integral part of the outline, starting with the first draft and continuing through the publication of the final report. This will take some interplay between the team manager and his experts, but the outline is necessary to clarify what will be required from personnel.
Communicatior~ Each individual on the team must recognize that his trip abroad gives him a more thorough understanding of the investment details and profit potential than his boss and the rest of management may have. Consequently, it is not absurd to gear the report to someone as unacquainted with the subject as a visitor from another planet. A terribly difficult task evolves from the need to simplify conclusions and avoid insulting the intelligence of the astute reader. Astonishingly often, recipients of the study outside the international division do not know where the country is located, what the people look like, what language they speak, or what their source of livelihood is. A minority of the people reading the report are already convinced that a revolution is imminent, that unparalleled inflation is around the comer, that any private investment will be nationalized, and that foreign businessmen are conniving, thieving rascals who do not approach the integrity and honesty of our business leaders. The team manager, regardless of evangelistic temptations, must write
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off this type of person and direct the report toward those with only a mild degree of prejudice. The team will be accused of having lost its objectivity during the trip, and being biased either for or against the project. If politics prevail within the company-and they generally d o - t h e team manager must be a cross between Lyndon Johnson, Cary Grant, and General Westmoreland to sell his ideas. Leadership qualities will also be required to circumvent secondary reactions of disappointment or resentment among team members; the facts they uncovered could be significantly different from domestic experience, and their professional competency could be questioned, or they may realize that the rest of the company does not share their enthusiasm or pessimism.
Timing The final report should be prepared in the shortest possible time after the team's return to the United States. Accuracy suffers and enthusiasm wanes in team personnel and executive management unless project momentum can be maintained through continuous work. If the investment is extremely profitable, problems from lack of attention are few and far between; however, most are not that profitable. In setting schedules, it is necessary to allow for contingencies such as the failure of the consultant to meet his deadlines, but only under rare circumstances should team members be allowed to delay reproduction of the final draft. To prevent such delays, and to maintain discipline and rapport throughout the study, the individual must report to the team manager until the assignment is completed. The best incentive for a consultant to meet his deadline is to interject penalty clauses in his contract for failure to perform. Depending on the timing, each day or week should mean a significant subtraction fi'om his fee.
Negative Reaction A recommended program can be turned down by management or the board of directors after prepara-
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tion of the report. Frequently, it is obvious during the field work or upon completion of the summary report that return on equity is insufficient or that some other factor makes it a poor bet. Since the company has a major investment in the information developed on the trip, a report should be prepared covering all the irfformation ineluded in the team's notes. It is not necessary to consider presentation, but it is important to organize the study so that facts can be understood two to three years later. If a company has applied for an investment survey grant from AID, it must prepare a feasibility study report to obtain reimbursement under the contract. This program of the U.S. government was created to induce private enterprise to investigate investment possibilities in other parts of the world. If a company does not go ahead after conducting the field work, the contract calls for 50 per cent reimbursement of expenses, including the salary of the team upon receipt of a competent report.
are carefully defined and a detailed plan of action is actually followed. In addition to this type of thoroughness, subtle touches can greatly increase accuracy, and experience in the application can minimize mistakes and improve quality. Sophistication in conducting feasibility studies leads to results that penetrate well into the final 20 per cent of accuracy for costs in the normal 80 per cent range. In analyzing major investments, the manager of the study should have had exposure to varied foreign economies. If no one in the company has had international experience, it is probable that the 80 per cent accuracy goal will not be achieved and that the company may pay more, due to inexperience. Many American companies are new at making foreign investments; in these cases, they should seek sophisticated help.
IN s v ~ v , the checkpoints an experienced international manager would cover in conducting a feasibility study abroad are (1) the objectives, (2) scope and budget, (3) selection of personnel, (4) proper preparation, (5) techniques to be used while in the country, and (6) approach to preparing the report and selling its conclusions. Success is much more likely when fundamentals under each category
BUSINESS H O R I Z O N S