The Corporate Firm in a Changing World Economy (RLE International Business)

Case Studies in the Geography of Enterprise

Marc de Smidt, Egbert Wever, Marc de Smidt, Egbert Wever

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135126100
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Internationale Wirtschaft

This book examines the economic environment and phenomena of multinational business with reference to case studies of major multinational companies, including IBM, Philips, Nissan and Volvo. It assesses how the major theories explaining the response of companies to changes are borne out by the experience of individual firms.

Chapter one

Firms

Strategy and changmg environments

Marc de Smidt and Egbert Wever

Introduction

Firms constantly face new challenges. Here are five examples of such new challenges found recently in the newspapers.

• • President Van der Klugt would like to have the entire range of Philips products produced on the deck of a supertanker. This tanker should then stop off in different countries according to the advantages of moving exchange rates. Philips could then rid itself of one of its biggest worries, extreme fluctuations in exchange rates, which influence sales and profits in unpredictable ways.
• • Two companies, Honda and the American Motor Corporation, which have plants located close to each other, are nevertheless very different in kind. Honda produces high quality cars efficiently, its working conditions are first rate, the company is expanding all the time, and is now even exporting cars to Japan. Sales of the AMC Jeep are not at all bad, but the plant and machinery are out of date, corporate culture has had its day, the motivation of the employees is low and still declining, and the management has threatened to close the plant if the unions are not prepared to make concessions.
• • 'What you can sell on the USA market is changing too fast,' president Hahn said as an explanation for VW's decision to close the plant in New Stanton, Pennsylvania. However, Japanese competitors have succeeded in strengthening their position in this turbulent market, using imported as well as locally produced cars. The Golf, which is a great success in Europe, is considered to be a dull car by the Americans. On the other hand, the Chevrolet is not appreciated so much by the Europeans. But the Japanese sell their Corollas in America as well as in Europe.
• • In the opinion of Kazuma Tateishi, founder and president of Omron Tateishi Electronics (international) firms are forced to allow middle management more freedom and responsibility, in order to be able to react quickly to changing market conditions. The best way to realize flexibility would be to decentralize the organization, to promote employees on the basis of merit, and to invest in basic research. To avoid the danger of a growing bureaucracy Tateishi decided to create semi-autonomous div­ isions within the Omron organization, that could handle their own affairs themselves.
• • 'After years of relying on cheap manufacturing bases in distant East Asia - with at least three months between order and delivery - clothing manufacturers are beginning to bring production back home. Even companies from traditionally low-wage countries in the Far East are moving their production to the US to escape rising costs and US import quotas, and to get closer to their customers.' 'Two years ago every item sold by Perry Ellis' ladies wear section was imported from contractors in Hong Kong, Taiwan and other distant locations. Today 40 per cent of the line is made domestically.'

(International Business Week 7 November 1988).

There are some common elements in the statements given above. All refer to growing international competition and to (new) strategies which the firms involved are pursuing or would like to pursue in order to face this competition and to perform well financially. In this respect it makes no difference if attempts to strengthen competitiveness are based on utilizing locational advant­ ages (Philips), a more productive corporate culture (Honda), a more open eye for market trends (Japanese car producers), intra­ preneurship (Omron) or subcontracting and co-makership. This book deals with the growth strategy of individual firms such as Daewoo, Goodman Fielder Wattie, and ccFriesland.

A differentiation can be made between the five examples given. Some have a strong firm-internal character (Omron), others can primarily be seen as a reaction to external changes in the environ­ ment of the firm (Philips). However, often there is an interplay between internal and external changes. Changes in the external environment of the firm, for example a growing international competition, frequently have consequences for the way firms are internally structured.

Back to basics

One of the fascinating tendencies in the world economy today is growing international competition. In Western Europe people involved in business are extremely aware of this tendency as firms, governments, and even universities prepare for a united Europe, planned to arrive in 1992. The growing internationalization of competition is taking place because of the wish to make profit of scale economies, to decrease transport and communications costs, and because of more uniform consumer preferences (motor cars, microwaves, videos, hi-fi installations, etc.). Market power be­ comes the all-decisive element in this competition. However, posi­ tions can easily be lost because of the whimsical behaviour of consumers and the shortening product life cycles. Firms therefore strive for strong positions in a restricted number of markets.

The result is a tendency for firms to withdraw from sectors in which they have not been successful, sectors which they do not consider to be 'basic', and sectors in which they do not see prospects, either because of a lack of well-known brand names, or because of an inferior quality of the product, or the lack of effective selling outlets, etc. This tendency is known as 'back to basics' or even 'stick to the knitting'. Two examples: Mobil Oil decided in 1988 to sell its retail trade company Montgomery Ward, even though this company realized a profit of $US130m. the year before. For the same reason AKZO in 1988 decided to sell its consumer goods division which was doing well. For other examples see the contributions about ccFriesland (Chapter 6) and MacMillan Bloedel (Chapter 7).

Firms withdrawing from certain activities try to sell these activities to other firms or to the existing management (manage­ ment buy-out). At the same time they try to strengthen their own position by buying specific (for them 'core') activities from other firms, by taking them over, by mergers or by joint ventures. The outcome of this process of buying and selling is a diminished number of product-market combinations (PMCs) in an individual firm. However, the firm will have realized a stronger market position, the efficiency of the organization is improved and, by the reduced number of PMCs, there will also be less uncertainty. It is really a process of the restructuring of individual firms in the struggle for global competition.

'Back to basics' means that the strategy of extreme diversification is 'out' nowadays (Wissema 1987). This strategy was popular in the 1960s, after a long period of economic growth. It was connected with a strong belief in risk-minimizing effects and in synergetic effects leading to real conglomerates (Ansoff 1965, 1968). This was the period of the manager. It was assumed to be possible to manage even big conglomerates with hardly any knowledge of the activities themselves. This turned out to be wrong. The expected synergetic effects hardly existed in reality. Moreover, the transaction costs within the conglomerates turned out to be much higher than expected. In the 'back to basics' era the period of the manager has been replaced by the period of the entrepreneur. The back to basics strategy includes decentralization (the Omron case) as firms have to react flexibly, because of the heavy turbulence in the present economic environment (Chapman and Walker 1987). Divisions and subsidiary companies gain more autonomy in order to react quickly to changes in this environment (see the contribution about IBM in Chapter 2). They are increasingly concentrated on activities which strengthen their market position and on the possibilities of operat­ ing in these markets with flexibility. Therefore leasing, even of buildings, has become popular. For the same reason the internal structure of the whole organization gets a 'simple form, lean staff structure. Mars realizes a $US7 mrd sales with a headquarters of no more than thirty staff. Philips wants to reduce the number of employees at the head office in Eindhoven by one-third. Concepts like intrapreneurship, co-makership, and subcontractors also fit into such a strategy of flexibility.

The hollow corporation

There are other tendencies related to the internationalization or globalization trend. 'Regional' markets are disappearing fast, the world is becoming a 'global village' (Levitt 1983). As a consequence, competition has changed and there is now a difference between the 'multinational', operating in many countries but mostly with national strategies and the new 'global' company, operating with one, world-wide strategy. This strategy is one in which competitors are fought whenever and wherever this is found to be necessary. In such a global strategy the manager of the operations in a specific country can be ordered to oppose a competitor (even when this implies making a loss) only to prevent this competitor using the extra profits in this country for competing with the organization elsewhere (Prahalad and Doz 1988). The change from 'multi­ national' to 'global' often coincides with a change from area management to product management, as competition within spatially bounded markets is increasingly replaced by competition for one product all over the world. This, of course, does not imply that a situation cannot exist in which local autonomy and local strategies coincide with global capability and interconnectivity as the contribution by Kelly and Keeble in Chapter 2 illustrates.

The change from area to product management has spatial consequences. Management in general will look for the best and cheapest components. When organized on an area base it may be oriented more to 'regional' suppliers compared with a product­ based organization. In that case management will look for suppliers irrespective of their location. This may have its impact on interna­ tional trade flows. One example: in 1985 Philips UK had a fairly balanced internal trade with Philips establishments outside the UK. In 1986 sales volumes had nearly doubled compared to stable volumes of production. The input of Philips' components and products had increased much more than had exports. The resulting intra-company imbalance of trade is a sign of a change from a 'local for local' production base to a more 'global' division of labour within product divisions of a major corporate firm (de Smidt and Vander Voorn 1989).

Until recently the globalization of the world economy has been related much more to markets than to production. 'Globalisation was reflected in the much faster growth of trade in manufacturing goods than in production' (Dicken 1986:43). In the battle for markets brand names, patents, corporate images etc. are much more effective instruments than production capacity or production costs (see also the contribution by Barnes et al. in Chapter 7). For many firms 'back to basics' means back to the marketing of those products in which they have firm-specific advantages. They even ask themselves: should we make the products ourselves or should we buy most of the components and maybe even the product itself? It turns out that making the components themselves nowadays is no longer attractive. It is nearly impossible to keep up with techno­ logical progress, mostly there are no economies of scale and in the high turbulence of all markets, only specialists can operate efficiently. It has resulted in a withdrawal from vertical integration (Scott 1986). Two examples are: the largest publisher in the Netherlands (Elsevier) which has nearly completely withdrawn from printing and the Berkel company, European market leader in scales, which decided to stop the production of all components. They would even prefer to buy (high-quality) scales and sell them with their own brand name. They realized that their strength was in the brand name and the marketing organization.

The last tendency can lead to the hollow corporation as physical production becomes more and more a matter of secondary import­ ance. A hollow corporation is only involved with the final assembly, and sometimes even this is done by a subcontractor. Such a corporation has to be valuated primarily according to its goodwill, its know-how, its organizational qualities, its marketing capacities, its patents, etc. and not according to its assets, stocks, and claims. Two examples of this are: when Nestle and Cadbury were fighting for Rowntree Mcintosh, they were certainly not fighting for the production facilities. They were fighting for Kitkat and other brand names. And when Douwe Egberts, a Dutch coffee firm belonging to the Sara Lee concern, bought the consumer division of AKZO in 1988 (considered by AKZO to be a non-core activity), it paid Jess than 300m. Dutch guilders for the plants but 960m. guilders for the goodwill, in particular for a number of well known brand names.

Subcontracting

The tendencies of 'back to basics' and 'hollowization' imply subcon­ tracting. But subcontracting at the same time emphasizes the importance of efficient logistic systems. Profit equals profit margins times sales. When competition is on a world scale, profit margins will be minimal. By penetrating more markets and by going global, sales can be increased and, as a consequence, profits too. Neverthe­ less profit margins have to be optimized by reducing costs. One of the possibilities is by reducing all kinds of stocks. Two options exist: vertical integration and vertical disintegration. Although the popularity of the vertical integration strategy is diminishing, it has certainly not disappeared. However, reducing stocks within a big organization by using more efficient logistic systems implies risks. This became clear when in 1988 there was a strike in UK Ford plants. A couple of weeks later plants in Belgium (Genk) and West Germany (Saarlois, Cologne) had to be closed temporarily because of a lack of vital components.

Vertical disintegration or subcontracting should reduce costs, but should not conflict with the preferences of the customers. Reduc­ tion of stocks is therefore only possible when the firm itself and its suppliers operate efficient logistic systems. If the large firm considers these logistics to be a non-basic activity it can try to find a specialized subcontractor for it. The Japanese company, Fuji, having a large production plant in the Netherlands, has lent out its whole internal logistics to a specialized Dutch company. Apart from this it will be clear that the firm should have suppliers of components who can deliver quickly, who are reliable in their deliveries, who always deliver consistently high-quality products, preferably with zero-defects, and who are financially healthy (to guarantee continuity). Here there are risks. To minimize these risks there is a tendency to reduce the number of subcont...