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What are his major arguments? (i) Julian Birkinshaw, Associate Professor of Strategic and International Management at London Business School, identifies four basic models of global company structure, while highlighting the advantages & disadvantages of global business structures, he poses the following arguments 1- The International Division: Normally the division does not make anything itself, it is simply responsible for international sales. This arrangement tends to be found in medium-sized companies with limited international sales. The Global Product Division: As per Birkinshaw, this has been a favored structure among large global companies such as BP, Siemens and 3M. 2- The Area Division: Here the country (e.g. Germany) or regional (e.g. Europe) manager who is responsible for the different product offerings within her/his geographical area.
3- The Global Matrix this type of structure tends to come into and go out of fashion. Ford, for example, adopted a matrix structure in the later 1990s, while a number of other global companies were either streamlining or dismantling theirs (e.g. Shell, BP, IBM).
Q2 In your opinion what are likely to be the key factors determining how a global company will organise itself?
(ii) Global organizations tend to change their approach over time according to changing circumstances, fads, the perceived needs of the senior executives or the predispositions of powerful individuals. This observation applies to universities and traditional businesses.
Case 2 Q1 If a company is considering switching production to a country where wage costs are lower, what other factors will it need to take into account before doing so?
1.- Research has shown that the overall number one reason and motive for switching production to other countries is to reduce costs. In markets with limits in product differentiation price competition is more important, as well as being able to offer almost identical products at lower price. This has typically been the case with consumer products. A number of studies have also identified quality and availability as critical aspects Switching production to a lower wage country appears to be a good strategy for firms seeking to control its costs. An organisation would need to compare the labour cost per unit produced
compared to the existing location, also it is important to see if the workers are productive at the new location. Firms would face problems such as training costs, distribution costs and even more taxes. There are both positive and negative aspects included in Global sourcing. It can lead to improved competitive advantage through lower costs and better geographical availability. The risks comprise that firms could get into problems with transportations, technology, confidential information leaking out, and that the cost reductions may not be as great as expected. Further, firms may meet problems as transportation problems, technological and capacity weaknesses in production, and lack of management systems. Additionally, features such as languages barriers, customs and trade regulations are some of the factors that a firm would need to consider before moving its production to another country. The transportation and logistics networks are perhaps not as reliable as in the home country, which may cause unexpected delays. For firms moving their production to another country, it is important to be aware of how their business relationships and networks could be affected too. There might be ethical problems, such as the way the workers are treated, in some countries workers are exploited and not paid well.
Q2 Will increased environmental standards imposed by government on businesses inevitably result in higher business costs? 2. For some businesses, increased environmental standards seem to be an opportunity instead of a threat, as Porter argues that the government creates barriers, because it restricts competition through the granting of monopolies and regulations. Industries such as utilities are considered natural monopolies because it has been more efficient to have one electric company provide power to a locality than to permit many electronic companies to compete in a local market. Additionally, firms that face high environmental compliance costs may lose market share to those located in less regulated jurisdictions. New opportunities arise for firms to externalize their pollution by using less-regulated suppliers. In other words, those parts of the commodity chain that generate most pollution can be located in developing countries where environmental regulation is less stringent. All the hypotheses referred to so far are essentially pessimistic in that they assume that there is a conflict between stricter environmental regulation and competitiveness. The Porter hypothesis claims that, on the contrary, environmental regulation can, and often does, lead to economic benefits and hence to increased competitiveness. If that were generally the case, then the concerns raised above would be quite unfounded.
Case 3 Q1 : How would you account for the difference in perspective between firms who often complain of government over-interference in business matters and ministers who claim that they have the interests of business at heart when taking decisions?
One such survey by the European Commission - as reported by Andrew Osborn in the Guardian on 20 November 2001 that the United Kingdom was perceived as the most difficult and complicated country to do business with in the whole of Europe, owing to its bureaucratic procedures and its tendency to rigidly enforce business regulations. On the other hand Ministers, in contrast, stress that they have helped to create an environment conducive to entrepreneurial
activity through the different policy initiatives and through a supportive legal and fiscal regime. Another study by KPMG on Competitive alternatives of costs in various cities in the G7 countries, Austria and the Netherlands indicated that Britain is the second cheapest place in which to do business in the nine industrial countries. The survey, which looked at a range of business costs especially labour costs and taxation -, placed the UK second behind Canada world-wide and in first place within Europe. The country’s strong showing largely reflected its competitive labour costs, with manufacturing costs estimated to be 12.5 per cent lower than in Germany and 20 per cent lower than many other countries in continental Europe. Hence the survey data provides UK more competitive advantage in terms of business matters & forward inward investment
Q2 : To what extent do you think that relative costs are the critical factor in determining inward investment decisions?
Relative costs are likely to be the critical factor in inward investment decisions, due to the potential for increased profit due to low wages. Inward investment is the injection of money from an external source into a region, in order to purchase capital goods for a branch of a corporation to locate or develop its presence in the region. Some places do however attract inward investment due to their relative remoteness, for example a company wanting to recruit personnel with relatively common skills might deliberately relocate to an area where wage rates are relatively low, a factor that could arise because of the absence of similar jobs or localised underemployment. Some international investors might seek to take advantage of relatively lax regulation through investing abroad. Another aspect of inward investment is financial inward investment activity, which rather than focusing on attracting "offshoot" operations of overseas companies, focuses on encouraging global focused overseas venture capitalist and hedge-fund investment into companies in a country or region. Some economic development agencies, governments or local authorities are occasionally accused of concentrating on attracting inward investment to such an extent that they neglect to nurture home-grown small businesses or entrepreneurs with exciting ideas. As with much marketing effort, a balance is often required to maximise economic progress that is socially and environmentally appropriate. Foreign sources, such as transnational corporations or multinational corporations invest money by introducing new industrial sites to an area, in order to produce more of their product, sometimes in response to changes noticed in that area, such as a growing population or enhanced transport network. Inward investment creates jobs in an area and brings wealth into the economy.
Case 4 Q1 Can you suggest any reasons why the European Commission was willing to grant the block exemption in the first place, given that it ran counter to its proposals for a Single Market? Within the EU, the European Commission for Competition is responsible for creating a competitive environment to the benefit of the end consumers. One of the tools they can apply is to create industry specific Block Exemption Regulations (BER), exempting the industry from the general competition rules. This gives companies greater clarity on their flexibility to make agreements between each other, without needing a specific approval from the European Commission. One such important BER, is the one for the industry. Ever since the first BER for the automotive industry was drafted in 1985, every new version has seen shifts towards greater liberalization in the automotive industry with the aim to increase competition and consequently decrease market prices paid by the end customer. For the European Commission for Competition this ambition remained and resulted in two major evolutions with respect to the distribution of new vehicles (distribution industry) on the one hand, and the distribution of spare parts and the provision of repair and maintenance services (aftermarket industry) on the other hand. Until now both the distribution and aftermarket industry were incorporated in one single BER for the automotive industry, as the European Commission deemed it necessary to exempt the automotive industry from the general competition framework. These exemptions have always been justified by the large car manufacturers and their suppliers because of the exceptional investments that were required to meet ever increasing norms in domains such as safety and ecological investments. This was in contrast to the independent market players, such as independent parts suppliers and independent repairers, who argued that this provided an unfair advantage and blocked them from being competitive.
Q2 Why might the new reforms make cars cheaper for European consumers? After a transition period, the distribution industry will need to abide by the general rules for vertical agreements. The Commission realized that some of the rules imposed in 2002 were not effective and had no benefit for the end consumer.
Most seem to agree that competition rules provide new possibilities for dealers, repairers and manufacturers, but can also temper the rate of the industry evolutions. On some occasions companies change their policies in anticipation of regulation changes, as was the case for the reduction of cross boarder price differences by manufacturers to reduce the threat of cross boarder sales. On other occasions, selective criteria put extra financial burdens on dealers limiting their investment capabilities.
Manufacturers would not be required to supply cars to supermarkets and other new retailers Since October 2005 dealers have been free to set up secondary sales outlets in other areas of the EU, as well as their own countries. This is expected to strengthen competition
between dealers across the Single Market to the advantage of consumers (e.g. greater choice and reduced prices). What seems however certain is that changing customer preferences will continue to dictate how the car distribution and the aftermarket industries will evolve in the future.
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