Relocation for Growth

Grayhat Inc. Expanding to Germany

Prepared for

Mr. Stephen P. Jones
CEO of Grayhat Inc.
Oklahoma City, Oklahoma, 73145

Prepared by

Grayhat Inc
San Antonio, TX 78245

October 04, 2013
Grayhat Inc.
1247 Industrial Drive
San Antonio, TX 78245

October 04, 2013

Mr. Steven P. Jones, CEO
Grayhat Inc.
10782 Skyline View Rd
Oklahoma City, OK 73150

Dear Mr. Jones:

In this document you will find the report you requested in August. I have provided the necessary information and made recommendations on a plan of action to expand Grayhat Inc. network security, software manufacturing, and distribution into Germany.

My analysis of expansion into Germany covered several critical areas that will help you decide whether or not Grayhat Inc. should expand and build a manufacturing and distribution plant in Germany. To assist us in making that decision, I looked at the government, economy, culture, and competition. Germany is a technologically advanced country which has a stable economy. My research has led me to recommend expansion into Germany. I strongly believe that Grayhat Inc. can be profitable in the long term and become a successful business in Germany.

Grayhat Inc. used several resources in forming my analysis. The Central Intelligence Agency's World Factbook, World Bank Group, and The Economist Newspaper were all helpful in answering my research questions.

Thank you for allowing me to conduct research into Germany. If you have any questions or concerns about the research or recommendation, please contact me (210-548-2886, graymr@grayhat.net) and I will be happy to answer any questions regarding possible expansion into Germany. I would be happy to conduct any further research on this project or any other projects that Grayhat Inc. is considering. I look forward to building my relationship with you in the future.

Sincerely,

//Signed//

Michael Gray
Grayhat Resource Manager

Relocation for Growth

Grayhat Inc. Expanding to Germany

Executive Summary

To continue growth and remain competitive on a global scale, Grayhat Inc. should expand its business and operations into Germany. The country is a technologically advanced nation and would be a very strong base location for Grayhat's expansion. Software security competitors of Grayhat Inc. in Germany are doing well. Since Grayhat Inc. can compete with them in the United States, I am confident that Grayhat can remain competitive with them in Germany's foreign market.

The research I have accomplished for this project indicates that our expansion will be profitable, primarily because Germany's economy is growing and it's government supports new business expansion. The workforce in Germany is large, and finding educated employee's to help set up and run the facility will not be difficult. In addition, the regulations and business structure are similar to the United States, which will provide an easy transition into this European country.

To ensure a successful expansion, Grayhat Inc. recommends the following:

1. Grayhat Inc. should establish its headquarters for manufacturing and distribution in Berlin.
Purchase a building for a location to begin manufacturing the security software.
Educate Grayhat employee's about German culture and business practices, before they begin working directly with Germans, to avoid being disrespectful.
Explore hiring Germans; the available workforce pool.
Ensure the name Grayhat Inc. does not refer to anything derogatory when translated into German. If it does, then change the name to provide better marketing.
Market and sell the product in Berlin.

2. After one year Grayhat should determine the acceptance and profitability of the expansion.
Conduct a customer satisfaction survey with individuals who purchased and used the security software suite in Berlin to determine the acceptance of the product.
Compare and contrast first-year sales with a competitor's similar product.

3. If the security software is competitive and profitable, Grayhat Inc. should expand its product line into other large cities in Germany.
To gain an edge on the competition, look at creating a marketing strategy that will offer Grayhat Inc. security software a discount in cities in which we expand.
Explore integrating other Grayhat Inc. services and products into Germany. These products and services could also be manufactured and distributed in Berlin.
Relocation for Growth 1

Introduction

Grayhat Inc. wants to expand operations globally. CEO of Grayhat Inc. has contacted me to perform an analysis for expanding into Germany. I have researched Germany to determine if Grayhat Inc. will be successful in expanding into this new foreign market.

Purpose and Scope
Grayhat Inc. is a successful business in the United States and has had continual growth over the last ten years. With their competitors beginning to venture into foreign markets to gain more of a global foothold, Grayhat Inc. is looking to expand its operations into the international market as well. The purpose of my research is to decide whether or not Grayhat Inc. should expand its business into Germany.

This report will cover several topics about Germany including their government, economy, culture, technology market competition, and possible locations. My research will not include any on-site research in Germany. I am also not dealing directly with the German people.

Assumptions
I am assuming the the technological state of Germany will remain consistent, such as remaining free from any natural disasters or an economical crash. I also assume that the process of expansion into Germany is the same with Grayhat Inc. as it has been with other American companies. Another assumption that I am making is that Grayhat Inc. has a good name brand and is competitive in the United States with Norton, MacAfee, Zone Alarm and other software security companies.

Methods
The information in my report comes from online magazines, newspapers, journals, and reference books. I found several useful references, but the best information I obtained came from the Central Intelligence Agency's World Factbook, World Bank Group, and The Economist Newspaper. These resources have given me a lot of useful information on which I have based my recommendation.

Limitations
The information in the report was limited to what I obtained from the online resources. I was not able to travel to Germany to conduct any on-site research. I was also limited by the language barrier that exists between the United States and Germany. There are also other limitations which include not being experienced with Germany's culture and not having input from Germans on the expansion of companies into their country.

Definitions
There are a few terms that I use throughout the report that I would like to explain beforehand. An abbreviation that I use is GDP, which stands for gross domestic product. Another term used is the abbreviation TTIP, which stands for the Transatlantic Trade and Investment Partnership between the German Government and the United States.

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Criteria
I have established criteria that needs to be favorable before I give a positive recommendation about Germany. The criteria include the government, economy, culture, and market competition. I have weighted my criteria by the following percentages:

Government = 20%
Economy = 20%
German culture = 20%
Market Possibilities and competitor's = 40%

I will examine each separately and give each item a favorable or not favorable recommendation. Market competition is weighted the heaviest and must be favorable or somewhat favorable for me to give a positive recommendation. Market competition can be given a favorable, non favorable, or somewhat favorable recommendation based on various external factors in the marketplace. I need a minimum of a 70% total to give a positive recommendation overall.

Government

Germany is recognized as a parliamentary republic by the rest of the world. A parliamentary republic is a system of democratic governance where the executive branch is held accountable to the legislature parliament. Both branches are interconnected and the head of state is different than the head of the government. The legislative power is vested in the Bundestag. The Bundestag is the constitutional and legislative body in Germany. Germany has a multiparty system consisting of the CDU (Christian Democratic Union and the SDP (Social Democratic Party of Germany. The German judiciary system is independent of the executive and legislature. The German constitution emphasizes protection of individual liberty supporting and promoting human rights and civil rights. The government also divides powers between the federal and state levels and between the legislative, executive and judicial branches of government. In this section, I will discuss government control, business regulations, taxes, and free trade with Germany.

Government Control
In 2009, CDU re-elected Angela Merkel as chancellor of Germany. The CDU controls most of the seats in the Bundestag. The CDU is a Christian democracy. It is considered conservative on cultural, social, and moral issues. They are a big advocate in a social marketplace favoring union bargaining and social insurance. The CDU also believes that finance should be dominated by banks and not the stock market. They also believe in close relationships between banks and companies. There should be a balance between share holders and managers. CDU believes that employees should have a higher loyalty standard. Employees should also be better educated.

Businesses Regulations
Germany ranks 20th on the ease of doing business index (World Bank Group, 2012). This index measures the regulations that a government imposes on businesses and how easy it is to start and run a business in a given country. Factors this index measures include: the ease of starting a business, doing taxes, and enforcing contracts. In comparison, the United States is ranked fourth on this list (World Bank Group, 2012). While there are more regulations on business in Germany, they are still near the

Relocation for Growth 3

top of the list. The relatively low rating on regulation could be due in part to the CDU controlling the government. There are a few general regulations that Grayhat Inc. should know before going into Germany. For more specific business regulations, Grayhat Inc. may need to do further research before expanding.

Germany's full-time employees work over 42 hours per week (Guardian News, 2013). However, Germany has just recently passed legislation to limit working hours for employee's, to ensure that they do not get burned out (The Telegraph, 2013).

The German Government has also been known to have strong import restrictions placed on companies (Export.gov, 2013). As a result, companies have been forced to gather resources from Germany instead of importing them. This approach has helped Germany grow its GDP and other economic health measures. It has also influenced the German consumer's view of foreign products.

Grayhat Inc. may need to be concerned about these regulations when expanding operations into Germany. In general, regulations on business in Germany are similar to those of the United States because of the closeness in government structures. While the CDU is in control of the major branch of government, they would be likely to shoot down any attempts at strict business regulations. The result is that future regulations on business in Germany will remain low.

Taxes
Germany has few different tax rates that we have to be concerned about. First, according to Heritage.org, the federal corporate tax rate is 15.8%. It’s 15 percent plus a 5.5 percent solidarity tax. Trade taxes could have a top rate to 36.3 percent. Other taxes we may need to be concerned about include a value-added tax (VAT) and a capital gains tax. The overall tax burden for us equals 36.3 percent of Gross Domestic Product.

Free Trade
In June 2013, Germany and the United States announced the launch date for negotiations on a free trade agreement. Chancellor Merkel and US President Obama met and expressed their commitment to the effort (Germany.info, 2013). Both leaders agree that the trade agreement could help the US and European economies grow. President Obama pointed out that Germany is the United States largest trading partnership within the European Union. The highlights of the agreement are an immediate reduction of tariffs and duty-free trade on all goods exchanged between the US and EU. All tariffs will be eliminated between the nations. There would be access between the US and EU service sectors, allowing for faster international deliveries between the US and EU. (Office of the U.S. Trade Representative, 2013).

Summary
I believe that Germany's politics favor Grayhat Inc. expanding into the country. The CSU allows for a favorable government for all businesses. Germany has low regulations by the government, and has lower tax rates. The restrictions on importing goods and future employee working hours are factors that need to be researched more by Grayhat Inc. if we decide to expand operations. These factors allow me to give the government criterion a favorable rating.

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Economy

According to CIA.org website, "the German economy - the fifth largest economy in the world in PPP terms and Europe's largest - is a leading exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labor force.” With Germany being one of Europe’s largest economic producers, this would benefit our company greatly. The CIA.org website also stated, “Stimulus and stabilization efforts initiated in 2008 and 2009 and tax cuts introduced in Chancellor Angela MERKEL's second term increased Germany's total budget deficit - including federal, state, and municipal - to 4.1% in 2010, but slower spending and higher tax revenues reduced the deficit to 0.8% in 2011. In 2012 Germany reached a budget surplus of 0.1%.” Gross Domestic Product statistics have been rising each year, but it has slowed down quite a bit. In 2010, growth was at 4%; then in 2011 it fell to 3.1% and in 2012, it fell to .7%. The world economy seems to be steadily falling and due to investor uncertainty, I believe that it’s a direct correlation of reduced German exports. It looks like Germany’s government is trying to get a handle on the situation. Economic growth with GDP, and currency will be addressed in this section.

Economic Growth
According to Heritage.org, “Germany has 1.1% 5-year compound annual growth, unemployment rate of 5.5%, inflation rate of 2.5% and a Gross Domestic Product rate of $3.1 trillion.” The Heritage website scored Germany well, giving it a world rank of 19. It takes into consideration, the rule of law, limited government, open markets and regulatory efficiency. Economic growth is key for stability for any new and existing company. This is a positive for us with our consideration for our company’s new growth location. See GDP Growth chart below.

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Currency
Germany's currency is called the Euro. According to xe.com, the exchange rate as of October 1, 2013 was 1 EUR to 1.36 American dollar. Although the exchange rate is higher, I do not believe that it will effect our marketplace.

Summary
With all these economical factors, I believe that the economy is strong enough to support expansion.
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Germany has been one of the world's strongest economic markets and is a major player in today's global economy. All resources and statistics of the economy lead me to give a favorable rating to the economy of Germany.

German Business Culture and Society

For Grayhat Inc. to be successful in Germany, they need to understand its people and culture. Unlike the United States with its numerous cultures, Germany is primarily made up of Germans. To conduct business in Germany we must understand there culture and society and look at their planning and structure, Current Etiquette, Relationship, and Communications

Planning and Structured
After researching this topic, I have found that the German business professionals like to be masters of planning. They are forward thinking people and like to know what they will be doing at a specific time of the day. Germans believe that maintaining clear lines of demarcation between people, places, and things is the surest way to lead a structured and ordered life.

Work and personal lives are rigidly divided. They believe that once the work day has ended, they are expected to leave the office. If you remain after normal business hours it indicates that the work day had not been properly planned. This will be one of the things that our company will need look at. We will have to be very organized and timely with our business operations.

Germans take great pride in their homes. They are kept very clean and neat at all times with their belongings in their appointed locations. Germans communicate very formally outside of the home, but inside of the home, communications are very informal. I found that only close friends and relatives are invited to their homes. This will also apply to our business operations. We will have to insure that our work environment stays tidy and neat. It’s very important that not only the outside of the workplace is clean, but also the inside of the workplace. Professional communications will have to be encouraged and enforced with our workforce. This will insure that our German workers will not be insulted.

Current Etiquette

First, let’s look into meeting etiquette with verbal and non-verbal communications. When we are working with the German people, a quick and firm handshake is the traditional greeting. It there is a group of people, we will need to shake hands with everyone individually to include children. Gift giving is important if we get invited over to a German home. It’s customary to bring chocolates or flowers. We have to make sure that if flowers are given, they are not red roses, carnations, lilies or chrysanthemums. These flowers symbolize, love, mourning, or are used at funerals. I found that if we bring over wine, it cannot be a German wine because we are inferring that the hostess will not serve a good quality wine.

There may be situations when we need to go out to dinner with German business partners. We will need to arrive on-time and not early. This will indicate to them proper planning. After a dinner meeting we will need to send a handwritten thank you letter the following day, thanking the hostess for their hospitality. More proper verbal and non-verbal communication at a German business dinner could include remaining standing until we are invited to sit down at a table. We have to wait to eat until the
Relocation for Growth 6

hostess starts eating first. The hostess has to put the dinner napkin in his/her lap first before we follow suit. We may not put our elbows on the table. If our dinner has a salad, we should not cut the lettuce with a knife. Our German host will give the first toast, but we will be required to return the toast later in the meal. It will be imperative that we do not insult any German business associates at important business dinner meetings, tthus it will be important to follow the guidelines above.

In regards to German meetings, there are a number of things that will be important to insure we are sending the right message either verbally or non-verbally. When we schedule German Business meetings, we will need to make sure they are scheduled at least 1 to 2 weeks ahead of time. If we are sending a letter to a German business associate, we will need to make sure that they are addressed to the person in charge of that functional area. The letter must have the person’s name and their proper business title. I found that it’s extremely rude to cancel a meeting at the last minute and could possibly jeopardize our business relationship. We will have to make sure if there are business meeting time changes that we will give an advanced warning with plenty of time for notification. We will need to have an initial meeting to get to know one another. This will be used to determine our trustworthiness. Our meetings will need to have a strict agenda with starting and ending times maintained. Eye contact is extremely important and it’s imperative that we keep eye contact when speaking to German business partners. I have discovered that sometimes at the end of a meeting, German business professionals may knock there knuckles on a tabletop to signal their approval. When we enter into a German business meeting, we will need to enter into the room in a specific order. Our eldest or highest ranking person in our organization will enter the room first.

Relationship and Communications
German business professionals are very interested in academic credentials and the amount of time a company is in business. We will need to put together a company biography with our company’s general business information and a listing of personnel with academic achievements. I have found that German business professionals do not have an open door policy and if we need to ask questions, we can’t just barge into their office. We have to knock and wait to be invited in. I have found that Germans can be direct to the point of being blunt. German business professionals expect a great deal of written communication in order to back up decisions and to maintain a record of decisions and discussions. Established protocols are very critical and important to build and maintain business relationships. We have to make sure that we do not make promises that sound too good or show any major displays of emotion.

Summary
Although the culture of Germany can be vastly different from that of the United States, Grayhat Inc. can overcome these differences. I recommend that additional education in German culture and business practices be given to any Grayhat employee who would be directly doing business with them to prevent any disrespect. Understanding proper cultural considerations for doing business internationally is extremely important. We could deter our German business partners if we don’t follow their customs and courtesies. I find the culture favorable for expanding into Germany.

Market Possibilities and Competitors

Security software iz one of the newest products to emerge in the last few years and is growing in

Relocation for Growth 7

popularity. Computer security software is marketed and used all over the world. According to (pcmag.com, 2013) Bit-defender, Nortan AV, and Webroot are the 3 most popular computer security software suites. This will create a tough foreign market for Grayhat to enter. However, since Grayhat Inc. is competing with these companies and their products in the United States, a successful integration of Grayhat is definitely possible. In this section, I will cover information on the competition and integration of Grayhat's security suite.

Competition
Since Grayhat Inc. has decided what specifications their security software suite will have, they should understand what the competition offers with their security software packages. Currently, according to PC magazine, Bitdefender Internet Security and Norton Internet Security are the leading competition for Grayhat Inc. Both competitors offer in their software packages offer: Anti-virus, Firewall, Anti-spam, Anti-spyware, Anti-phishing, Root-kit Protection, Detects Key-loggers, Detects Trojans, Browser Hijackers Detection, IM/Chat Protection, and Social Network Protection. Both competitors also offer customer support which includes operating system support for multiple versions of Microsoft Windows according to (Internet Security Suite Review.com, 2013).

Integration
One way Grayhat Inc. could improve how the German people receive them, and possibly cut the cost on their security software suite, is to partner with a German company to more readily manufacture their product. Some of these companies are G Data, Ableton, 30 Digits, Magix, and Steinberg. These companies deal in software manufacturing and distribution. One major way that our company will stand alone in the software security marketplace will be its integration into platforms other than Windows. Grayhat Inc. security software is fully compatible with most Linux and Unix operating systems to include Red hat, CentOS, Ubuntu, Debian, Solaris, etc. Many software companies do not use Linux and Unix business platforms.

Summary
The main competitors of Grayhat Inc. in Germany are Bit-defender and Nortan AV, and Webroot. These competitors will provide a major hurdle for Grayhat's security suite, however we have another market of focus other than the typical Microsoft Windows user. This could give Grayhat an edge on the marketplace. Because of these factors, I have determined that this criteria is somewhat favorable for expansion. Since customer needs are not predictable and the majority of the computer market is run on a Microsoft Windows platform, I cannot give a full favorable recommendation for expansion into Germany.

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Conclusions and Recommendations

All of the research that I have accomplished supports the decision to expand our operations into Germany. The government, economy, and culture criteria all received favorable recommendations for a total of 65%. Market possibilities and competition received support for an extra 20%. Altogether Germany has earned 85% based on our criteria.

Therefore, I believe that Grayhat Inc. could expand into Germany and be profitable. Our security software suite is a high-quality product, and it will be easily integrated into this technologically advanced country. In conclusion, I recommend that Grayhat Inc. should expand into Germany.

To ensure a successful expansion, Grayhat Inc. recommends the following:

1. Grayhat Inc. should establish its headquarters for manufacturing and distribution in Berlin.
Purchase a building for a location to begin manufacturing the security software.
Educate Grayhat employee's about German culture and business practices, before they begin working directly with Germans, to avoid being disrespectful.
Explore hiring Germans; the available workforce pool.
Ensure the name Grayhat Inc. does not refer to anything derogatory when translated into German. If it does, then change the name to provide better marketing.
Market and sell the product in Berlin.

2. After one year Grayhat should determine the acceptance and profitability of the expansion.
Conduct a customer satisfaction survey with individuals who purchased and used the security software suite in Berlin to determine the acceptance of the product.
Compare and contrast first-year sales with a competitor's similar product.

3. If the security software is competitive and profitable, Grayhat Inc. should expand its product line into other large cities in Germany.
To gain an edge on the competition, look at creating a marketing strategy that will offer Grayhat Inc. security software a discount in cities in which we expand.
Explore integrating other Grayhat Inc. services and products into Germany. These products and services could also be manufactured and distributed in Berlin.

Relocation for Growth 9

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.

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"Ease of Doing Business in Germany." Doing Business in Germany - World Bank Group. The World Bank, n.d. Web. 24 Aug. 2013. .

"When Nettles Aren't Grasped." The Economist. The Economist Newspaper, 03 Aug. 2006. Web. 25 Aug. 2013. .

"Understanding German Business Culture." Understanding German Business Culture. N.p., 15 June 2011. Web. 30 Aug. 2013. .

“Germany - Language, Culture, Customs and Business Etiquette." GERMANY - LANGUAGE, CULTURE, CUSTOMS AND BUSINESS ETIQUETTE. N.p., n.d. Web. 30 Aug. 2013. .

"Germany - Culture, Customs & Etiquette." Germany - Culture, Customs & Etiquette. N.p., n.d. Web. 30 Aug. 2013. .

When Nettles Aren't Grasped. The Economist. The Economist Newspaper, 03 Aug. 2006. Web. 25 Aug. 2013, from http://www.economist.com/node/.

Germany - Culture, Customs & Etiquette. Germany - Culture, Customs & Etiquette. N.p., n.d. Web. 30 Aug. 2013, from http://www.culturecrossing.net/basics_business_student.php?id=79.

German Marketing & Sales Solutions. German Marketing & Sales Solutions. N.p., n.d. Web. 06 Sept. 2013, from http://www.hannoverimpuls.com/_english/relocation/assistance/gems.php.

Doing Business in Germany. Doing Business in Germany. Export.gov, 01 Aug. 2013. Web. 08 Sept. 2013, from http://export.gov/germany/marketresearchongermany/countrycommercialguide/doingbusinessingermany/index.asp.

Germany’s Working Poor Put Merkel on the Defensive. Irish Times. N.p., 07 Sept. 2013. Web. 06 Sept. 2013, from http://www.irishtimes.com/business/sectors/technology/germany-s-working-poor-put-merkel-on-the-defensive-1.1518896.

"Germany GDP Growth Rate." TRADING ECONOMICS. N.p., n.d. Web. 07 Sept. 2013. .
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"Internet Security Suites Software Review." 2013. 02 Oct. 2013 .

"The Best Antivirus for 2013." PCMAG. 03 Oct. 2013 .

"The World's Favorite Currency Site." XE Currency Converter. 04 Oct. 2013 .

"Final Report of the U.S.-EU High Level Working Group on Jobs and Growth." Office of the United States Trade Representative. 05 Oct. 2013 .

"Trade Regulations and Standards." CCG 2011 Trade Regulations & Standards. 06 Oct. 2013 .

"German Missions in the United States - Transatlantic Trade Agreement." German Missions in the United States - Transatlantic Trade Agreement. 03 Oct. 2013 .

The Telegraph. Telegraph Media Group. 02 Oct. 2013 .