Heat pumps expansion from United Kingdom to Poland

 
Heat pumps expansion from United Kingdom to Poland
Angela Medzela

                                                                                     Final Project, AP
                                                                                      FINI0912, UCN

                                                                                 ‘Financial Management’

                                                                                   Aalborg, 26.05.2014

Heat pumps
expansion from
United Kingdom to
Poland
What is the profitability for UK FM Group Ltd, entering in the Polish Market
for heat pumps?

Report analysing profitability of expansion of heat pumps from medium sized, privately
held company from UK to emanating with potential Polish Market.

Image from http://geogteacher.wordpress.com/2014/03/18/revising-eu-poland-and-uk-
case-study/

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 Number of key strokes in the project: 74,559
Heat pumps expansion from United Kingdom to Poland
TABLE OF CONTENTS
Introduction............................................................................................................................- 2 -
Motivation..............................................................................................................................- 4 -
Problem statement ................................................................................................................- 4 -
Methodology ..........................................................................................................................- 5 -
Brief description of the company ...........................................................................................- 8 -
Internal analysis .....................................................................................................................- 9 -
      VISION ...............................................................................................................................- 9 -
      PRODUCT MIX OF RENEWABLE TECHNOLOGY LTD DEPARTMENT ....................................................- 9 -
      PRODUCT LIFE CYCLE ......................................................................................................... - 11 -
      VALUE CHAIN ................................................................................................................... - 12 -
SWOT and Polish investment environment......................................................................... - 15 -
      SWOT FOR UK FM GROUP LTD. ........................................................................................ - 15 -
      INVESTING IN POLAND ....................................................................................................... - 16 -
External analysis ................................................................................................................. - 18 -
      PEST ............................................................................................................................. - 19 -
      PORTER’S 5 FORCES........................................................................................................... - 20 -
      SUPPLY CHAIN .................................................................................................................. - 21 -
      MARKET OVERVIEW ........................................................................................................... - 22 -
      MARKET STRUCTURE ......................................................................................................... - 23 -
      MARKET TRENDS............................................................................................................... - 23 -
      CUSTOMER’S BUYING BEHAVIOUR ........................................................................................ - 24 -
Cultural differences ............................................................................................................. - 25 -
Investment proposal ........................................................................................................... - 28 -
Conclusion ........................................................................................................................... - 39 -
Appendixes .......................................................................................................................... - 41 -
Bibliography ........................................................................................................................ - 43 -

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Heat pumps expansion from United Kingdom to Poland
Introduction

Being more environmentally friendly is becoming an economic trend. There are many
organizations, which are protecting nature and encouraging people to join them to make
changes in people’s behaviour and together protect the planet. Mostly they are non-
government organizations like e.g. WWF (World Wide Fund for Nature) or Greenpeace, but
there are also government ones, like Danish Ministry of Climate and Energy in Denmark.

Increased conscious about environment is also influenced by new restrictions and laws,
which are made, among others, by European Union to force people to act wisely and
responsibly towards our planet. ‘Protection of the environment and sustainable
development are policy areas of the European Union where numerous initiatives were
developed in the last 40 years. These initiatives resulted in a large amount of legislations,
policy papers and judgments by the European Court of Justice (ECJ)’1.

The more man is changing the Earth, the more problems start to occur. In present moment,
situation is becoming more serious with time, but unfortunately a lot of people still do not
see it and do not believe that small changes in human behaviour can make big impact on
our environment and do not understand how important it is. People explore planet more
and more, wasting non-renewable resources to heat up houses, use cars and in this way
humans produce gases, which influence atmosphere. The results are, among others,
opening and growth of ozone depletion and ice melting, what leads to increase in sea level,
what causes flooding islands and other areas.

Through thousands of years human kind explored big part of available resources. Therefore
one of the most essential things to do right now is to explore new sources of energy to be
able to function after resources will be explored.

People who understand the vitality of it are often joining groups, in order to influence
others with bigger impact and catch attention of people on things that should matter for all
of us. There are plenty of ways man can contribute to positive changes on planet.

One way to contribute to it is to act sustainably. Don’t waste paper, use less plastic bags and
cups, turn off the light, water, recycle, etc. These are easy, cheap, known for all ways to
help nature that every each of us should implement in everyday life.

Other way is to use more ecological and environmentally friendly ways of e.g. heating our
houses, using eco – friendly parts while building and using alternative energy sources. This
can be done by, for example, solar collectors or heat pumps.

1
    Citation from: http://www.asser.nl/default.aspx?site_id=7

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Heat pumps expansion from United Kingdom to Poland
Heat pumps are a very interesting product. They are not only able to heat up our
apartments, but also to ventilate them and cool them down.2 This is why they are accurate
as much during the winter as during the summer. What is more, they do it in very
environmentally friendly and pocket friendly way. For example, ‘the most common type of
heat pump is the air-source heat pump, which transfers heat between your house and the
outside air. If you heat with electricity, a heat pump can trim the amount of electricity you
use for heating by as much as 30% to 40%. High-efficiency heat pumps also dehumidify
better than standard central air conditioners, resulting in less energy usage and more
cooling comfort in summer months.’3

In this way we care not only about nature, but also our households’ budgets. This may be
one of the reasons why recently the number of sales of heat pumps, among others on Polish
market, is increasing and is expected to grow even more in the future.

Poland is a country, which huge potential from human power to growth in many different
areas. After the time, when communism had been replaced with democracy, Poland started
slow recovery process and slowly but surely is becoming one of the more important
countries in Europe. Currently Poland is considered one of the most interesting countries to
expand to4, what should be treated as invitation to invest there.
Recently there is much information that suggests expansion from United Kingdom to
Poland, and it is advised especially for small business. Possibilities and opportunities are
waiting for foreigners; heat pumps sales are increasing and if we would add to it high level
of communication between Poland and UK we would see that this idea has a lot of
advantages.

UK FM Group Ltd. is medium- sized, private limited company, which has been till now
offering their products on UK market. They were founded in 2005 and since then they
became one of the leaders in providing mechanical services in United Kingdom5.

One of the products they provide is heat pump. They offer heat pumps in two types: ground
and air. On their website6 we can find benefits for both of them and also check which one
will suit us best.

2
  http://energy.gov/energysaver/articles/heat-pump-systems
3
  http://energy.gov/energysaver/articles/heat-pump-systems
4
  http://www.startupoverseas.co.uk/expanding-a-business-in-poland
5
 https://www.linkedin.com/company/2439838?trk=tyah&trkInfo=tarId%3A1399014427051%2Ctas%3AUKFM
%20%2Cidx%3A1-1-1
6
  http://www.ukfmrt.com/domestic/domestic/about/

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Heat pumps expansion from United Kingdom to Poland
Motivation

For some people topic of heat pumps and expansion for another market may seem boring
or at least not as interesting as exotic type of coffee or tea expansion or other thrilling
uncommon product. However I find it very intriguing, mostly because of the rapid increase
in sales of this product. The reasons might be different, but this is interesting why suddenly
item, which is still one of the most expensive ones and is available only for people with
income higher than average had gained such popularity and sales of it are predicted to
constantly increase.

What is even more surprising is the fact that Poland is not a pioneer in environmental issues
in Europe and though since 1989 many things changed, Poland is still country with high air
pollution, what is followed by acid rain and destruction of forests.7Additionally, Poland is
country with increasing, but still low income per household, especially when compared with
Western Europe countries. This raises even more questions how it is possible that sales are
so quickly going up.

To find out if this potential may be used with advantages for both company, supplier, and
for the customers abroad I will prepare this report, in which I will try to come up with some
answers, among others, is expansion for heat pump Polish market profitable for foreign
company.

                                    Problem statement

According to ‘The Guardian’8 Poland is very interesting country to invest also for smaller,
British companies. Among many reasons why to do it, there is mentioned increase in wealth
of Poles. Connecting this information with increase in pro – green behaviours, awareness
about environment, EU restrictions and higher from year to year number of people
implementing environmentally friendly products, it seems logic to expand market of heat
pumps to Poland.

However, expansion on other territory always has to be preceded by detail analyses, in
order to eliminate risk of failure, which also entails losing significant amounts of money. This
is why I will prepare internal and external analyses, to determine if expansion of UK FM

7
    http://www.indexmundi.com/poland/environment_current_issues.html
8
    http://www.theguardian.com/small-business-network/2014/mar/27/british-businesses-exporting-to-poland

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Heat pumps expansion from United Kingdom to Poland
Group Ltd. in three years period into polish market will be able to bring some profit for the
company.

In this case the problem statement would be:

   What is the profitability for UK FM Group Ltd, entering in the Polish Market for heat
                                         pumps?

As the topic is very broad and can consist of broad analysis I will only focus on internal
analysis of the company and external analysis of the environment only with key
competitors. I will focus on data needed to prepare the business plan. Everything beyond it
will not be included here in this report. I will not focus on how it can help decrease
operational costs, improve marketing, etc. I will solely focus on matter of profitability of this
investment – is it profitable investment to expand into polish market. To narrow it even
more, I will focus particularly on Renewable Energy brand of the company, and even more –
only on heat pumps, so the report will not include other departments or products. This will
allow making this report concrete and focused.

                                     Methodology

Throughout this project, I will describe and analyse the present situation of UK FM Group
Ltd., and determine its strengths and weaknesses. Based on a weakness, I will analyse a
series of models and financial projections to determine what the profitability of this
expansion is. Afterwards, I will propose how to fund the project and analyse how profitable
it will be.

To begin, I will give a description of the present situation. I will do this to show how UK FM
operates and what current state is, what products they offer, the organizational structure,
and the history of the company so far. It will help in better understanding of the company.

After the company description, I will conduct a situational analysis of ICC through external
and internal analyses. In the external analysis, I will include: PEST analysis, Porters-5-forces
analysis, supply chain, market structure, competitive position, and strategy, & customers
buying behaviour. A PEST analysis is used to find out the external factors that can affect the
company, and give an overall picture surrounding the company through political, economic,
socio-cultural and technological factors. Porters-5-forces is used to determine the level of
competition in the heat pumps industry, through 5 key external forces: threat of entry,
bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and the

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Heat pumps expansion from United Kingdom to Poland
industry rivalry. The supply chain analysis is used to state and examine the group of
economic agents that contribute directly to the determining of a final product; it shows the
operation sequence from raw materials to production to the consumer. The market
structure is used to show the overall structure of the heat pumps industry and the type of
competition we are dealing with. The competitive position distinguishes between four
distinct positions on the market: market leader, market challenger, market follower, and
market niche companies. This links to the competitive strategy of the company, which is
related to their competitive position; each competitive position is linked to specific
competitive strategies for that placement. I will also analyse the customers buying
behaviour to see is there need and what the trends among polish customers are.

Internal analysis will consist of: Product Life Cycle, value chain analysis, and Porters generic
strategies. The Boston model is used to evaluate the strategic position of the business brand
and understand which companies are worth investing in. In the PLC curve, we determine the
maturity phase of the different brands to decide what strategies each brand should
implement to improve. A value chain analysis is used to analyse internal activities and to
recognize which activities are valuable, and to determine the primary and support activities
of the company. Porter’s generic strategy distinguishes between cost leadership strategy,
differentiation strategy, and focus strategy to optimize competitive advantage for the
company. After completing both analyses I will prepare also SWOT analysis, which involves
both internal and external factors. It is used to identify the strengths and weaknesses that
are relevant in meeting opportunities and threats in particular situation.

After the analysis, I will prepare investment proposal and first few years after
implementation, which will allow determining what the profitability of this expansion is.

The summary with answer for problem statement will close the report.

Here is the flow of the report presented in a chart (on the next page):

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Heat pumps expansion from United Kingdom to Poland
FIGURE 1, FLOW OF THE REPORT

                                 Brief description of the company

                                         Internal analysis

         Vision, Product mix, Product Life cycle, Value chain, Porter's Generic Strategies

                            SWOT and Polish investment environment

                        SWOT for UK FM Group Ltd., Investing in Poland

                                         External analysis

    PEST, Porter's 5 Forces, Supply Chain, Market overview, Market structure, Market trends,
     Customer's buying behaviour, Cultural differences, Poland in & dimensions of culture,

                                       Investment Proposal

    Investment proposal, Financial analysis(Depreciation, Profit and Loss, Cash Flow, Balance
                                   Sheet, Profitability Ratios)

                                           Conclusion

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Heat pumps expansion from United Kingdom to Poland
Brief description of the company

UK FM Group Company is on the market already 9 years, which is relatively long time. It has
been settled to provide services like commercial heating, ventilation, air conditioning and
renewables. It is company that consists of separate firms, which were merged and now are
working under one brand name – UK FM Group. It has started in 2005 with four companies:
Coolair Services Ltd., G8 Environmental Solutions Ltd., D&D Heating & Electrical Services and
Thermotech Engineering Services (Scotland) Ltd. Together they were growing and
strengthening their position on UK market.

In 2010 UK FM Group noticed demand for renewables technologies and higher interest in
acting sustainably. Therefore they established another department: UK FM Renewable
Technologies Ltd. This is department on which I will focus the most, because it provides air
and ground heat pumps to clients. They do provide their products and services not only to
private clients (which are called domestic), but also to commercial customers. This means
that they work with two customers: business to consumer (B2C) and business to business
(B2B).

The structure of management in the company is following9:

Table 1, Management structure in UK FM Group Ltd.

                                         Board of Directors

                                         Managing director

                                                                          Sales team Health
Operations directors          Admin Manager            Finance manager
                                                                              and safety

Operations manager               Admin team             Finance team

          Regional service Co-ordinators

                     Engineers

Currently UK FM Group Ltd. is employing between 51 and 200 employees10. Company is
focusing more on qualified workers than on empty number of non-qualified people.

9
    http://www.ukfmgroup.com/index.php/the-ukfm-team
10
     https://www.linkedin.com/company/ukfm-group-ltd

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Heat pumps expansion from United Kingdom to Poland
Year 2012 has been worse for the overall financial situation than previous years, what was
caused by crisis in Europe.11 Even though the number of sales has been increased, costs
were much higher, what leaded to smaller profit for the year. However, the numbers were
still satisfying, because they were on plus.

Table 2, Current (2012) numbers of UK FM Group Ltd.

                                      2012                           2011
Turnover                              10,570,360£                    9,688,954£
Gross Profit                          2,308,006£                     2,981,098£
Operational profit                    507,653£                       1,265,684£
Profit for the year                   322,536£                       993,905£

                                     Internal analysis

Internal analysis is giving a better understanding of the company, their abilities and
limitations, values, etc. We can make assumptions on what steps should be taken next and
in which direction company should go. It is also good way of reviewing company’s present
situation, looking where company is at the current moment, if the goals (and maybe
milestones) are achieved, or if company is heading towards completely different direction.

Internal analysis part will include vision of the company, product mix, product life cycle,
value chain and porter’s generic strategies.

VISION

Vision of the Renewable Technology Ltd. department was to become ‘the UK’s leading
supplier and installer of micro renewable technologies.’12 They achieved their goal, at least
partly, because currently they are one of the leaders in whole United Kingdom.

PRODUCT MIX OF RENEWABLE TECHNOLOGY LTD DEPARTMENT

         Solar Photovoltaic
         Solar Thermal
         Air Source Heat Pumps
         LED Lighting
         Ground Source Heat Pumps
         Biomass Wood Boiler

11
     Annual report 2012
12
     http://www.ukfmrt.com/domestic/domestic/about/

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   Gas Boiler

From all these products, two will be main focus in this report, air and ground source heat
pumps. I will focus on these two, because of the Polish market demand on especially these
products. As mentioned before, Poland noted rapid increase in sales of heat pumps, both air
and ground, and therefore I would like to focus on its, as there is visible potential and big
chance of success with these products.

Air pumps ‘Heat is absorbed from the air which forms as a fluid. The fluid is then passed
          to a compressor to increase the temperature. Once the temperature has been
          increased the heat is transferred to the heating and hot water in your house.
          As the air source heat pumps heat is extracted from the air it is constantly
          being naturally renewed. Heats pumps do use a small amount of electricity to
          run but will keep on extracting heat even when it is as cold as -15°C.’13
 Ground ‘Water and antifreeze are sent round a ground loop underground. The heat in
 pumps    the ground is absorbed into the fluid and then passed to a heat exchanger
          which in turn passes the heat to the pump. This method works well as the
          area underground stays at a constant temperature providing heat even when
          the ground looks frozen.’14

Benefits are the same for both types of pumps– they will reduce emissions of CO2 and bills,
while at the same time they will heat and ventilate apartments/houses without dwellers
worrying for the resources. 15 The difference is that air pumps are easier to install, and
ground pumps are more efficient.

Heat pumps are not equally efficient everywhere. There are some indicators and conditions
that have to be met, in order to make the most out of these renewable technologies. In
order to make it easier for customers, UK FM Group includes in their service advising, also
about what type of heat pump can customer install if can install any. 16 17

13
   Quote from website. Product description: http://www.ukfmrt.com/domestic/domestic/products/air-source-
heat-pumps/
14
   Quote from: http://www.ukfmrt.com/domestic/domestic/products/ground-source-heat-pumps/
15
   Data from official site. http://www.ukfmrt.com
16
   http://www.savewithsrp.com/advice/heatpump.aspx
17
   http://www.enviko.com/technology/heat-pumps/ground-source-heat-pumps-2

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PRODUCT LIFE CYCLE18

   Product Life Cycle model consists of four main stages: introduction, growth, maturity and
   decline phase. Introduction is phase where product is newly launched on the market and
   number of people who are buying it is small, as well as number of competitors. Next phase
   is when product has more and more followers and competition is growing. Maturity is when
   product has stable position on the market and decline phase is when product is not as
   tempting and/or useful anymore and is slowly replaced by other product till the point it will
   not be produced anymore.

   Arrow points a place on the Product Life Cycle curve, in which phase we can find heat
   pumps from UK FM Renewable Energy Group. This department is relatively young (4 years)
   and therefore its products are in the growth stage. We can observe it also in Annual Report,
   Profit and Loss statement, when we analyse, e.g. number of sales. Other characteristics are

Figure 2, Product Life Cycle with placement of UK FM Group Ltd.

   focus on gaining market shares, targeting moderate customers, which are willing to be with
   trends and got products that are already widely available on the, but still are not owned by
   everyone. Number of competitors is still increasing, mostly because of the huge potential of
   this market.

   Product Life Cycle is useful tool to analyse in which directions company should go and helps
   predict the future. In this case we can establish few facts. First, the potential of the market
   18
        http://indrajitdas89837.blogspot.dk/2013/10/product-life-cycle-of-tzinga.html

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is really big, so it should be used. Second, number of competitors is still increasing; however
                       the competition is not focused on price wars yet, but on quality and service differences.
                       Third, business focus should be on getting market shares and establishing better position.

                       VALUE CHAIN

                       Value chain is a tool, which company can use to optimize processes and deliver greater
                       value for the customers, what should help increase sales and with this – profits. 19 It is built
                       from two parts: primary and additional (supporting) activities.
                     Figure 3, Value chain
                       20

                            Organizational system
Support activities

                            Human resource management
                            Technology development
                            Procurement

                                                                                                                                    Strategic objective
                            Marketing

                                 Inbound        Operations         Outbound           Sales           Service
                                 logistics                          logistic

                                                             Primary activities

                       ‘Primary activities relate directly to the physical creation, sale, maintenance and support of
                       a product or service. They consist of the following:

                       Inbound logistics – These are all the processes related to receiving, storing, and distributing
                       inputs internally. Your supplier relationships are a key factor in creating value here.

                       Operations – These are the transformation activities that change inputs into outputs that
                       are sold to customers. Here, your operational systems create value.

                       Outbound logistics – These activities deliver your product or service to your customer. These
                       are things like collection, storage, and distribution systems, and they may be internal or
                       external to your organization.
                       19
                         http://www.mindtools.com/pages/article/newTMC_10.htm
                       20
                         Service logo - http://www.barnabeservice.com; sales logo - http://www.powerthechange.com/sales-skills/;
                       inbound logistic - http://www.training-classes.com/publications/00/12/1206_inbound_logistics.php; outbound
                       logistics - http://doodleslide.com/porters-value-chain-analysis-powerpoint-templates/; operations -
                       http://www.clker.com/clipart-operations-banner-logo.html

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Marketing and sales – These are the processes you use to persuade clients to purchase from
you instead of your competitors. The benefits you offer, and how well you communicate
them, are sources of value here.

Service – These are the activities related to maintaining the value of your product or service
to your customers, once it's been purchased.’21

Value chain can be also analysed in three steps: activity analysis, value analysis and
evaluation stage22.

UK FM offers not only the product itself, but also service, which brings big value and is what
differentiate them from other companies. Besides heat pumps, they offer service,
installation, on-going maintenance and supply23. They rely on theirs qualified workers,
which are able to provide valuable services to customers.

Analysing products and services that UK FM is providing to their customers, there is one
factor that makes it all possible – qualified workers. Without them, firm will not be able to
provide good services, help with installation, maintenance, advices and others. Therefore
the human resources management should be on the highest level. Workers should feel
appreciated and always have opportunity to develop.

Technology development is what drives all businesses nowadays. This is a way to get ahead
of others and not get out of a track. It must be controlled and updated all the time.
Organizational systems make is easier to run operations and manage company and
processes. They had to be optimized from time to time, and adjusted with any changes that
company is making.

Procurement and marketing are areas which you always can improve and adjust, and there
is no one, ideal way to do it. It has many variables and depends on the target group, timing
and much more. It is changing constantly and it is important to always be with or even
ahead of trends.

PORTER’S GENERIC STRATEGIES24

In business there are many jokes about how client can choose the product and there are
three possibilities: cheap and good but slow, fast and good but expensive, cheap and fast
but inferior.25The lesson behind this is that we cannot get everything at once. We cannot
provide cheap, very good quality and original product at the same time. This is why we have

21
   Quotation: http://www.mindtools.com/pages/article/newSTR_66.htm
22
   http://www.mindtools.com/pages/article/newTMC_10.htm
23
   Data taken from official website
24
   http://www.learnmarketing.net/generic.htm
25
   http://www.sixside.com/fast_good_cheap.asp

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to choose one specialty and focus on it, to compete with other firms. Model, which helps us
to define it, is called Porter’s generic strategies.

We have three main areas to choose. Company can either do cost leadership – which is
providing very cheap prices compared with competitors and no differentiation (like e.g.
Ikea). Differentiation is going for original, not mass products, with prices little bit higher. The
third is cost focus and is usually involving niche market, but not necessarily. Usually when
company is following cost focus strategy is choosing niche market and focusing on low
prices within. Fourth option is differentiation focus. This strategy is based on differentiated
products in niche markets (usually). Sometimes, company does choose all of these four and
then is placed in grey area, which on this chart is called ‘stuck in the middle’. That means
that company has no advantage over competitors, which is the worst scenario for company.

   Figure 4, Porter's Generic strategic model

Offered by UK FM Group Ltd. products and services are indicating their strategy is
differentiation. They do not offer the lowest prices in the country or on the market in
general, but, on the other hand, they are not the most expensive ones either. Products they
offer are similar to other products offered on the market, but what differentiates them is
the service and additional features they provide. They do have many features in their
service, like installation, maintenance, guarantee, etc. and moreover they do have highly
skilled workers, engineers, on every position, and this is huge advantage over competitors.

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Additionally, they offer some kind of financial help – they got proposal of wide range of
‘energy efficiency finance schemes through a variety of funding partners’.26 This gives even
higher value to value proposition they have for customers, because beside core product and
service they also make it easier for buyers to purchase the product in financial terms.

              SWOT and Polish investment environment

This section is placed between internal and external analysis, because it will include some
models that entail both types. Moreover, I will place here some facts about Polish
investment environment, e.g. how easy is to open business in Poland, and is it worth to
invest there, what is the advantage with other countries.

SWOT FOR UK FM GROUP LTD.

SWOT analysis is presented to give an overview of the company’s situation. Acknowledging
the strengths shows what firm is good at, opportunities show where to go next, weaknesses
give chance to improve ratings and threats let us prepare, or at least realise things we
should be aware of and watch out for. SWOT is model used for both internal and external
analyses and this is why it is placed in section between two mentioned ones.

Table 3, SWOT for UK FM Group Ltd.

                     Strengths                                              Weaknesses

        Environmentally friendly solutions                   Financial situation of some of
        Energy saving products                                departments28
        Money saving products                                Lack of international presence
        Very good quality                                    Marketing and advertisement
        Customer oriented
        Great service
        Qualified workers
        Few departments
        Growth of the company27
        One of the leaders in UK

26
   http://www.ukfmrt.com/domestic/domestic/about/
27
   number of employees increased from 91 to 188 in just one year; based on numbers from Annual report
2012;
28
   In 2012, Renewable technology department faced the loss of approximately 136 000 £. Also overall profits
dropped in 2012; based on Annual report 2012.

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Opportunities                                                Threats

          International markets                                  Many competitors
          New eco trends                                         Price wars
          Improved advertising                                   Change in trends
          Creating stronger and more                             Economic situation changes
           recognizable brand                                     New technologies – new ways of
                                                                   heating

UK FM Group Ltd. has very good position. Is one of the leading providers in UK, has wide
range of products, amazing service and qualified workers. However, there are some
weaknesses, like lack of presence on international markets. Eliminating this particular
weakness will be also using opportunity of expansion on different territories. In this way, UK
FM will be able to create stronger and more recognizable brand, what will bring more
benefits for them.

One of the possible markets is Poland. There are lot of information and statistics, which
indicate that Poland is one of the best choices as place for investment and expansion.

‘Given the recent increase in energy costs and the impact on household budgets and
consumer spending, it is not surprising that most Polish households have been looking for
ways to cut their energy use. In a recent survey conducted by optimalenergy.pl, 82% of
respondents in the south of the country said they regularly try to control their energy
consumption and 98% of those said they have seen the results on reduced bills. In the north
of the country, 78% of respondents said they try to save energy, and 67% of those said they
believe they can lower their bills through their own energy-saving efforts. In central regions,
82% of respondents said they make efforts to save energy.’29

INVESTING IN POLAND

On the graph it is visible, that Poland is very good country to invest. In the Global
Competitiveness Index Score ranking from 2013 (which is created by World Economic
Forum), out of 148 countries Poland held very high 42nd position. That indicates the
conditions to open new business/ new department in this Eastern European country are
more than good.

Poland: Global Competitiveness Index Score 201330

29
     Quote from Euromonitor International, Consumer Lifestyles in Poland, 2014
30
     Figure from Euromonitor International, Business Environment Poland, 2014

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Figure 5, Competitiveness Level of Poland according to Euromonitor

    Poland is good place to invest because of many reasons. First is that it has lots of labour
    force. In Poland live nearly 40 millions of people. Out of this number 1.8 million of people
    are studying. What is more, every 10th student in Europe is Polish. Out of 1.8 million
    students, majority learns two or more languages. That shows how educated Polish nation is.

    One of the economic reasons may be that in Poland unemployment is relatively high (even
    14% on January 201431), what means there is a lot of well-educated people that seek jobs.
    Additionally, the salaries grow slower than work force productivity, and therefore salaries
    are lower compared to most of the Western European countries. This is great opportunity
    for foreign investors. Moreover, every 2nd new opened job in Europe after crisis (2012) is
    opened in Poland.

    Investors can also find stability in Poland. Both economic and political. It was visible also
    during the crisis in 2012, when Poland was only country in European Union that was not in
    recession, but, even better, had positive growth.32

    Additionally, Poland is European leader in home appliances, electronics and automotive.33

    One more very important highlight about Poland is that according to United Nations Poland
    holds 6th place for the most attractive location in the world and is 21st world’s largest
    economy.34 These information are the best advertisement for Poland, and with these two
    rankings there should be no doubt that Poland is really one of the best places to expand to.

    31
       http://www.tradingeconomics.com/poland/unemployment-rate
    32
       Graph and text from: http://www.edufeedr.net/pg/edufeedr/view_post/34/296659
    33
       https://www.youtube.com/watch?v=BBbtig6-kFQ
    34
       http://www.santanderbreakthrough.co.uk/advice/distribution/exporting-poland

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Figure 6, Opening business in Poland factors. Appendix nr1

In figure number 6 there are listed few of the features of opening business in Poland. At the
very top of the table we can see that in another ranking from 2014, out of 189 countries,
Poland was rated 45th in terms of how easy is to make business there. That is another
classification in which Poland shows its potential.

Next listed thing is how many days it takes to start a business and number of procedures it
takes to make it. In Poland you can open business in 30 days with 4 proceedings.

When business wants to (or requires) place build from the scratch, then it should be taken
under consideration, that number of days it take to get construction permit in Poland is 161
days and number of proceedings is 16.

Another listed characteristic is number of hours that manufacturer workers spend daily at
work, which is usually 8 and the number of annual pay days for worker who has been over 1
year in a company is 20 days.

Here comes tax data. Total tax rate is 41.6% of income, labour tax is 26% and the VAT is
23%. What is important to know, corporate tax (CIT – corporate income tax) in Poland is
19% compared to 24% in UK.35

Time to export things takes 17 days, and to import to Poland takes 14 days. Costs of
importing are slightly lower than exporting (1025 for import and 1050 for export in US
dollars per container).

Last figure on the list is how much, in a scale from 0-10, country is protecting theirs
investors. Poland got a high score 6, which shows that investors are in good position and are
protected.

                                         External analysis

External analysis is prepared in order to analyse the environment of the business and the
country. It can be done domestically, for United Kingdom, or externally, for country to which
business wants to expand. In this report I will focus on foreign environment, due to fact that
it is more useful and logic to have an overview of market, to which company wants to move
in to.

External analysis consists of PEST analysis, Porter’s 5 forces, supply chain, market overview
and customer buying behaviour.

35
     Data found in document: ’Taxation trends in European Union’ 2013.

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PEST

PEST is model which analyses features of four main areas of environment. These areas are
Politics, Economics, Social, and Technology. Each of these four blocks covers different
subjects. For example Politics includes laws and restrictions, what type of country it is:
monarchist, democratic, etc. Economics sums up the current economic situation like
unemployment, currency, imports, exports, labour costs, financial situation, growth of the
country, etc. Social factors are presenting trends among customers, facts about society and
culture. Technology covers all discoveries, level of usage of new technologies, predictions
about using them, etc.

PEST model normally is focused on one country, and if there is need to analyse two, it’s
done separately. In my report I compare some of the facts about Poland with UK, so reader
got, at least, little overview of the differences between these lands.

Table 4, PEST analysis of UK and Poland

Political                      Both countries are in EU, so there will be no political problems.
                               Laws are common for both counties, due to EU membership, so
                                there are no (or only minor) differences, what will make
                                processes easy.
                               Poland is stable country in terms of politics.

Economic                       Higher labour costs in UK than in PL
                               Demand for energy saving products is growing, especially on
                                heat pumps (both)
                               Financial situation of Poles is getting better
                               Poland is one of the fastest growing EU countries in past few
                                years( in terms of economy)
                               In the next few years Poland may take EURO as currency.
                                ‘More than 90% of Poland’s electricity requirements comes
                                from coal-fired power stations but the government wants to cut
                                this to less than 60% by 2030. Rising demand for power will be
                                met by nuclear facilities and renewable sources.’36
                               Unemployment in UK is lower than in Poland.

Social                         Polish society is getting more focused on acting sustainably and
                                being ‘green’ and ecological.
                               Poles are expected to spend more money in 201437
                               Every 10th student in Europe is polish.
                               Majority of students in Poland learns two or more languages.

36
     Passport: Poland Country Profile; pdf
37
     Passport: Poland Country Profile; pdf

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Technology
                                Poland is slowly heading towards new, renewable technologies
                                Poland is European leader in home appliances, electronics and
                                 automotive.
                                ‘The EU and Poland are working together to develop a solar-
                                 energy network’38

PEST is little sum up of things that were mentioned before in this reports. Reader can mark
once again that Poland is stable country, also in EU like UK, economically stable with
increase in income of Poles and lower labour costs than in United Kingdom, but higher
unemployment. Social features present highly educated nation with a lot of potential, and
technologies reveal that Poland is heading towards new technologies and is willing not only
to wait for them, but to explore them together with EU.

PORTER’S 5 FORCES

This model is great tool for analysing power of external factors, like suppliers, buyers, and
new competitors. There are signs that this view is rapidly changing, however, as the power
of customer service as a potential means of differentiation is increasingly recognized. In
more and more markets the power if the brand has declined and customers are more willing
to accept substitutes.’39

                                                 1. Threat of
                                                  substitute
                                                   product

                                               Competitive            2. Threat of
                               4. Bargain
                                                                          new
                               power of          rivaly                 entrants
                               suppliers

                                                  3. Bargain
                                                   power of
                                                  customers

38
     Passport: Poland country Pulse; pdf
39
     ‘Logistics and supply chain management’ Martin Christopher; Third edition

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Threat of substitute product exists in every business and branch. Here substitute products
can be used till now sources of heating. However, they are more expensive, and are not
environmentally friendly, so the value proposition is completely different in this example.
We cannot eliminate the risk of substitution completely, because ‘the old’ product has been
for a long time and many people is still using it due to habits, fear of new technologies or
prejudices. Though, I would still risk statement that there is no substitution with the value
proposition air and ground heat pumps have.

Threat of new entrants is medium. Barriers are medium. As barrier we can count specific
knowledge in engineering field, time to open the business, which in this case is not short,
because of obtaining all approvals for selling specific appliances and certificates, money to
invest into it, where it has to be considered that these products are quite expensive. So
barriers exist, but are not impossible to overcome, what can indicate e.g. increasing number
of competitors on heat pump market. Answer will be that there is medium threat of new
entrants, but only in monopoly situation there is, almost, no threat. In any other business
there is medium or high threat of new competitors, which in natural things on market.

Bargain power of customers. Buyers can’t drive prices easily. Not at present time at least.
Their price sensitivity is small, because people who invest into new solution are usually
people who care more about other factors than price. New technologies cost always more
than old, not ecological solutions. Therefore currently the buyers do not have big power,
however, if the competition and number of buyers will increase significantly, the business
can move into price wars, what will cause bigger power of customers. Now it is not the case,
so the power of customers is small.

Bargain power of suppliers. In this case there is no bargain power of suppliers, because
there are a lot of suppliers of these materials and the number will probably increase.
Additionally it will be easy to change from one supplier to another at no costs, therefore
power does not exists, or even if, is very, very small.

To sum up, the competitive rivalry is on medium level. In conclusion the UK FM Group LTD.
is in good position to enter the market.

SUPPLY CHAIN

This is commonly known, simple supply chain. It consists of suppliers, purchasing raw
materials, production, quality inspection, delivery and end consumer.

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Suppliers      Purchasing
                                                       Quality            Delivery of
                         raw         Production                   Sales                 Customer
                                                     inspection            products
                       materials

First company contacts suppliers, and purchases raw materials. Sometimes companies by
ready product, to which they add some kind of value. Normally, however, firm will buy raw
materials to create product themselves. After purchase and delivery of materials goes
production process followed by quality inspection. This is very important steep, because
here we can spot defective units and eliminate them, so they will not be sold to customers,
what, if happen in big quantity, will make clients unpleased, lower company’s good image
and may even cause losing some of the customers. Additionally, it gives company a chance
to improve their production processes. Next steps are sales and delivery of products to mid-
seller or straight to consumer. Now product reached end of the supply chain.

Supply chain is not only going into one direction. The process is influenced very much by
end chain, which is in this case customer. When company gets feedback from clients, it is
wise to use it, by implementing changes in order to improve. Therefore the feedback from
customer will go all the way backwards to the supplier, if there is a need for it.

There are many variations of supply chains. Here is supply chain model, which main goal is
to help companies to develop supply chains models.

Figure 7, supply chain model with 3 pillars. Appendix nr2

In this model (appendix number 2) we can distinguish three pillars, which are operational,
transactional and organizational supply chain. All three of them have got a goal, and
depending on needs, company can focus on one of them, or if it is really necessary,
implement all of them. Model can be found in appendixes.

MARKET OVERVIEW

Market overview will be analysis of Polish market, which will include market structure,
market trends. Market position will not be used, because lack of presence UK FM Group Ltd
on polish market.

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MARKET STRUCTURE40

Table 5, Market structure

Comparing Market types
                                                                          Another
      Type of        Number of          Kind of         Barriers to
                                                                          name for      Special traits
      market         Producers        competition         entry
                                                                           Firms
     Monopoly                                            No entry
                         One              None                           Price-setter   Only one firm
                                                         possible
                                                                                          Firms can
                                       Primarily
                                                          Medium                         collude and
     Oligopoly          A few          non-price                             N/A
                                                          barriers                        behave as
                                      competition
                                                                                         monopolist
                                       Non-price
                                                                                            Product
Monopolistic                          competition;
                        Many                           Low barriers      Price-maker    differentiation
competition                              price
                                                                                        and branding
                                      competition
                                                                                          Perfectly
  Prefect                                Price
                    A great many                        No barriers      Price-taker       elastic
competition                           competition
                                                                                          demand

At this moment, market structure of heat pumps is closest to oligopoly. There are not so
many providers, number of people, who want to buy it, is somewhat high and still growing,
but not too high, the entry barriers exist. One of the most important barriers is highly
educated group of workers. The competition is not based on price wars, due to the fact, that
every, even small change in price of one of the suppliers will have immediate influence on
all the others and therefore no company will make changes in prices before considering it
and consulting with others.

What characterize UK FM Group Ltd is existence of some medium barriers, number of
competitors is high, but compared to, for example, number of competitors in fashion
industry the number of competitors for heat pump market is relatively small, price wars are
not implemented yet, number of customers is growing, and workers are highly skilled and
educated.

MARKET TRENDS

In recent years polish heat pumps sales noted very high increases. In 2012 the growth was
as high as 20% and the number of heat pumps was equal 12 650 units sold. Actually growth
40
     Figure from: http://mrshearingeconomics.weebly.com/market-structures.html

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since year 2006 is impressive. From 2006 Polish heat pumps market grew almost five times
in just 4 years.

Sales of heat pumps in Poland in years 2006-201041

             Figure 8, Sales of heat pumps in Poland 2006-2010

What is more, predictions show that till year 2016 number of sold heat pumps should reach
16000 per year. It is trend, which will continue on going, because of change in Polish mind-
set. They finally start to see benefits of air and ground heat pumps and this shift is visible in
number of sold products. 42

CUSTOMER’S BUYING BEHAVIOUR

Customers in all sectors have got their own favourite time in the year, when they do specific
shopping. In case of heat pumps it is October and November. 43

Customers pay attention to price, very close to quality, but are very open minded, when it
comes to source of the product, what means they do not mind if product is domestic or
foreign.44 Clients at the current moment are more focused on quality than price. However
we cannot forget that price is also very relevant for them, and it will be more and more,
along with growth of the heat pump market and increased number of competitors.

Polish consumers do not have preferences about the origin of the product, what is good
news for companies from abroad.

41
   Figure from presentation about ‘Polish market of Heat pumps’ from Międzynarodowe Targi Instalacyjne -
INSTALACJE 2010, Poznań 26 - 29 IV 2010.
42
   http://www.worldpumps.com/view/34479/polish-heat-pump-market-upsurge/
43
   http://www.worldpumps.com/view/34479/polish-heat-pump-market-upsurge/
44
   http://export.gov/Poland/doingbusinessinpoland/index.asp

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Cultural differences45

Cultural differences are also very important aspect to analyse. Knowledge about them gives
advantage for the company, because it allows adjusting strategy to these conditions and
some unwritten rules.

Normally to do this will be used model presented by Geert Hofstede. However I will use
expanded, more detailed model identified and presented by Fons Trompenaars and Charles
Hampden-Turner. This model is called seven dimensions.

Model differentiates fourteen features in seven dimensions. In every dimension there are
two features, but country can only by classified with one. It means that country is described
in seven dimensions by seven features. Country have got to choose universalism versus
particularism, individualism versus collectivism, specific versus diffuse, neutral versus
emotional, achievement versus ascription, sequential time versus synchronous time,
internal direction versus outer direction.

Universalism versus particularism is choosing between the law and the relationships. In
universal country, everything is happening along with rules and is solely based on them.
There are no exceptions from them and everyone has to follow them. In particular one,
rules are not that important as human relations, so things are solved differently, depending
on situation. Circumstances can change, so do solutions to situations.

Individualism versus collectivism. In individualistic country people can live in a way they
think is the best, do not have to think about others. It is not required from them in any way
other than morale. Citizens are responsible for themselves. In collective country, there is
group responsibility. People are not as free in making own choices and mistakes as in
individualistic land.

Specific versus diffuse. In specific country citizens focus on professional site of work, and not
on building relations with co-workers. Work life is more important than any relationships. In
diffuse land people pay equal attention to relationships and work in professional life. They
spend social time with colleges and are in deeper relations than purely work ones.

Neutral versus emotional. Neutral means people are not bringing any emotions or feelings
to business. If it is negotiation or making business deal everything is calm and neutral. In
emotional countries people express feelings and emotions at work, during negotiations and
business deals. Workers show when they are angry, happy, sad, excited, joyful,
disappointed.

45
  Theoretic part of this section has been done with use of two sources:
http://www.mindtools.com/pages/article/seven-dimensions.htm and ‘Seven Dimensions of Culture’ pdf.

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Achievement versus ascription. Countries where people judge others by their
accomplishments and work are achievement countries. There people are not discriminated
because of the social status or other independent on person factors. On the other side we
can find countries where people judge by place of birth, status, gender, connections. It is
very hard to change the image, when one got a label, even if accomplishments are very
impressive.

Sequential time versus synchronous time. Countries which are very focused on order,
planning, clean schedules, punctuality, and selectivity of tasks done at once are sequential.
These countries are very concentrated on order. Synchronous countries are very flexible,
adjustable, multitasking and handling few projects at once is common thing, but also see
how valid is to be punctual.

Internal versus outer direction. When people know, or think they know that they are
capable of influencing environment and are able to make changes in it, when are open to
show there is a conflict and to talk about it, and are in charge of their experience, these
people are following internal direction. When people are not changing environment,
because they think they cannot and are dependent on it, are afraid to cause open conflicts
and usually hide them, and are unsecure and need to be guided, these people follow outer
direction.

POLAND IN SEVEN DIMENSIONS OF CULTURE46

Poland is country similar to United Kingdom, but also very different. They had different
histories, UK did not have to face communism as Poland did, and they got different realities
and cultures. But even though, there are many similarities between them.

Poland is universal country, because they follow rules more than relationships. However it is
not uncommon to use connections to overcome some obstacles.

Poland is also very individualistic. People focus on themselves and not on common good and
wealth. It is very hard to gain attention of other people in matters that are important,
especially if they require some sacrifices, even small as time and presence. Polish people
think how to make it better for them and are very jealous, too.

This country is also specific. Normally people have their own groups of friends and with
them spending time after work, not with co-workers and work relations are not developed
very much. However from time to time Poles are having social time with colleges from work
and it is also fine.

46
  Chosen types were based on
http://knowmecct.oncampus.de/loop/Development_of_Trompenaars'_cultural_dimensions, and own
knowledge

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Poland is neutral. Polish people will not express their feeling about work towards managers
and people who are up on the leader positions. They will express them to family, friends and
even co-workers, but not to people who actually can have an impact on it.

Poland is trying to make shift from achievement to ascription focus, but is still more
ascription than achievement country. Mainly because of many prejudges. It matters from
which site of Poland you are, where you were going to school, what was your parents and
your social status, etc. In the business world it is however more and more visible, that
people care more about achievement and abilities than origin. Background, on the other
hand will be factor that will always count.

At work Polish people are more strict than flexible. Punctuality, planning and executing
planned tasks is more important than flexibility. There is no place for creativity.47 Tasks are
given and it is required to fulfil them. This is why Poland is sequential.

Poland is internal, but I would say it is both. Many people believe that they got influence on
environment and on their own experience. Nonetheless they do not change it, even if they
are not satisfied, because they think that they do not have other choice. So on the one hand
they think they do have impact on what is happening around, but on the other they do not
use it as often as they would like to or as they should.

To visualise it, in table will be shown Poland’s and UK’s 7 dimensions.

Table 6, Comparison of cultural characteristics of Poland and UK

                        Poland                                                        UK
                      Universal                                                  Universal
                    Individualistic                                            Individualistic
                       Specific                                                   Specific
                       Neutral                                                    Neutral
                      Ascription                                               Achievement
                      Sequential                                                 Synchronic
                   Internal/External                                              Internal

To sum up, cultural differences are not very big. Anyway it is very useful and important to
know them, in order to be able to run profitable business smoothly.

47
  Of course it is very general. In jobs that require creativity and innovation it is not the case. Here, however, I
will focus on jobs like shopping assistant, accountant, and company worker.

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