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As Sam and Todd have discussed the underlying cause for the need to relocate the manufacturing operations of Bochum to Romania was due to cost pressures; as a result of rising cost levels, declining prices and high competition; low-cost manufacturing had become a necessity . These pressures arise due to; y y y The predicted slowdown in growth from 2008 onwards (did the telecommunications industry predict the GFC?), The change in market expectations being increased demand for cheaper phone models (growing market for $10-25 phones), Emerging markets dominated sales revenue (China and India).
We know now that as a result of what I have discussed, Nokia s decision was to relocate its manufacturing plant in Bochum to Romania. This relocation was not uncommon within the manufacturing industry (Siemens, Volkswagen and Opel) nor to Nokia, who already had other manufacturing plants within Brazil, Mexico, India, South Korea and 2 in China. The movement was made feasible as apart from low wages, investors were lured there (CCE countries) by high productivity and simple taxes . Our team believes (along with most of Bochum) that Nokia failed in its decision to move to Romania, particularly due to; y y It s lack of transparency with regard to the companies decision making process, The company s inability to reach out to social partners within Germany, such as the employee unions, government and local politicians. This was common place when a business was struggling within Germany (cultural differences?), Lack of knowledge regarding the cultural differences which existed between Nokia s home country (Finland) and the German community of Bochum, Nokia s uncompromising stance on its decision to shut down the Bochum plant; (Nokia) would adopt the same strategy if such a situation arose again as the company stated that German business practices did not fit with Nokia s way of doing business , It s a cultural issue; we don t normally do it like that in Finland .
When analyzing the possible solutions to the problems faced by Nokia and its stakeholders, management should adopt a contingency perspective whereby they acknowledge that there is no single best way to solve a problem, and as such are open to more holistic approaches to solving these problems. Nokia presumably took a utilitarianism approach to their decision will it work and save us money? Rather than taking more of a moral idealism approach looking into the ethics and social side of such a decision.
Solutions 1. Reduce non-labour costs Over the medium-long term, Nokia could seek to reduce costs other than its costs attributed to labour. This could include reductions to; y Cost of goods sold (COGS) such as inventory inputs into the production process (variable cost), y Occupancy costs such as plant rent, and outgoings (fixed cost short-medium term), y Financing costs Nokia could look to refinance its debt to further reduce costs. The ability of this ultimately depends upon its capital structure and term of maturity. y Miscellaneous cost reductions such as refinancing leasing of equipment arrangements, communication expenses etc Nokia P&L
Sales Revenue Less COGS Gross Profit Less Expenses Salaries & Overheads Occupancy Costs Financing Costs Miscellaneous Costs $xxx $xxx $xxx $xxx $xxx Net Profit $xxx $xxx $xxx $xxx
The net effect of such a strategy can be evidenced in the following diagram which demonstrates a hypothetical scenario whereby C* depicts Nokia s new total cost of production (given x units are manufactured). This results from the fall of fixed costs from FC to FC* (achieved through the negotiation of occupancy and financing costs) and the fall in variable costs from VC to VC* (note that the gradient falls which is representative of lower COGS and miscellaneous expenses). Obviously any reduction to expenses provided ceteris paribus would equate to an increase in profitability measured as the firms Net Profit or through other metrics such as EBITDA etc The potential challenge which is accompanied with this suggested solution is that Nokia s CFO may have already exhausted this avenue whereby the company has reduced both fixed and variable costs as far as can be realistically achieved.
2. Freeze on wage and bonus remuneration In our current economic climate, an indefinite wage freeze could be another possible solution which looks to target employees within not only the Bochum plant, but across the company s other manufacturing hubs in Brazil, Mexico, India, South Korea and China. Wage freezes over the short-medium term would see labour costs as a percentage of revenue fall (again provided ceteris paribus) which again could only add to the profitability of not only the manufacturing plants, but the company as a whole. Rather than adopting an ethnocentric approach to policies and business decisions, Nokia perhaps should have taken on a corporate policy of ethical relativism adopting the local moral codes of conduct of the host country. Such measures of cost cutting have been implemented within Australia, as the Australian and New Zealand Banking Corporation recently announced a freeze on the wages of 900 staff members within the company. This too was followed by other financial institutions. When posed with the proposition of either (a) a freeze on wages, or (b) the loss of a job, I m sure the employees at the Bochum plant in particular would choose the former. There are a number of possible complications which could arise under this strategy including; y The employees working at Nokia s manufacturing plants could be remunerated at the respective minimum wages within their country of employment. Hence as is often the case as the minimum wage rises, Nokia would be obliged under law to pass on this rise to their employees. The employees of the Bochum plant may find wage freezes hard to swallow considering the plant contributed 134million in operating profit in 2007. Nokia could present the counter claim, that this contribution to net profit represented 1.9% of the company s total profit ( 7.2billion) despite the plant producing 6% of the company s total mobile phones.
3. Assignment of a team of global cultural managers Arguably at the end of the day it is Nokia s decision as to how they run their company whereby they are to be held solely responsible by all stakeholders when it comes to the business decisions they make on a daily basis. If the business leaders saw fit to close down production in Bochum, then so be it, and as such the company has been held responsible and has dealt with the backlash which has been thrown its way. Where the company ultimately failed was in its unrelenting stance as to how it conducted business outside of its home country. Both Germany and Finland could best be described as low context countries, hence this is one less barrier to the understanding of the cultural differences present between the two countries. Nokia failed to adapt to the social and cultural surroundings of the German and more specifically Bochum community. Here transparency in its decision making process was lacking. If Nokia had a local cultural manager from Germany it would have been highlighted that this lack of transparency would not be tolerated as companies, before announcing a closure, usually explained in public that there were problems and the company needed to make big cuts. After this the workforce, trade unions and local politicians were involved in considering possible solutions even if this still happens (the plant closure), this process adds to the legitimacy of the company s decision. It can say it exhausted all options . This lack of cultural understanding was even understood by the senior vice president of human resources; It s a cultural issue; we don t normally do it like that in Finland . So this begs the question if there were cultural factors which were identified and differed between the two nations, then why was there no attempt to understand the business environment of the host country? The team of cultural managers would not have to be permanent employees, but could be hired as short term contractors utilized when entering a host nation so that the company could obtain a greater understanding into the differing ways of carrying out business activities and decisions. Similarly they could be called upon, when decisions such as the closure of the plant in Bochum are needed, as the due diligence of such decisions are carried out. Concluding Note It is questionable whether the upper management of Nokia implemented a rational model for making decisions (see below). Nokia failed to identify all the problems associated with the decision to close down the Bochum plant (seemingly focusing solely on the reduction of labour costs). Similarly alternative solutions were never mentioned to the public, as it appears that there was no consultation with external stakeholders.
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