CASE STUDY: 1
ZHUHAI OF SHANGHAI
“I’m not sure whether they understand that a firm cannot he a bundle of discreet businesses. Most of the senior Chinese executives I talk to arc convinced that they can make anything . . . absolutely anything that will make money. After so many years of command economy, managers are oblivious to the concept of market ……they aren’t keen to get into bilateral trading even when it makes sense. They would rather pursue different ventures totally unrelated to each other,” said a financial analyst of an American brokerage firm located in Shanghai.
Mr. Dong Hong is the president of Zhuhai To Zi Company (Zuhai) which was founded in 1980 as a construction company. Before joining the company in 1989, Hong was a high ranking army officer in the People’s Republic of China. As president of Zhuhai, he attended an executive management programme at Harvard Business School. Although Hong enjoyed the programme, he came back with some reservations about the relevance of what he learned. One of his oft-repeated summation of the programme was: “I have problem with the terms like core competency and synergy. At this point in time, there are ample opportunities in China to make good return in any business. You don’t mean to say that we simply stick to the knitting and pass these opportunities to others? China is a virgin land, you need to understand that.”
HISTORY OF SGL
Zhuhai has received a favorable media splash in China upon its taking a controlling interest of Shanghai Gue Za Liao Company (SGL), a poly-crystal manufacturer. SGL was founded in 1969. At that time, it was the largest manufacturer of poly-crystal in China employing 900 people. It received quality awards for six consecutive years. In 1992, SGL was authorized by the Shanghai Municipal Government to become a joint stock company. In less than 15 days, it sold RMB ¥(yen) 1.1 million worth of stock at RMB ¥22.00 per stock (¥10 par value) to the public and to the employees of the firm. The registered capital was RMB ¥33.799 after the fund raising. The Government owned RMB ¥18.799 million worth of stock. The stock was floated through the Shanghai Securities Exchange Centre. In 1993, the market price per stock was RMB ¥l8.79, with a price of RMB ¥7.85 at its lowest point. By being a listed company, SGL cased its cash flow problems but the rate of return was getting depressingly low and its market share went down from 51 per cent in 1970 to 36 per cent in 1993.
MANUFACTURING TECHNOLOGY OF POLY-CRYSTAL
Poly-crystal is a crystalline specimen which contains many small individual crystals. There are different methods of making this product. The most common and widely used method is called Chemical Vapour Disposition or CVP. In this process, the material to be crystallised is vaporised in a chamber and then condensed on a substrate to form crystals. Silicon crystals are mostly used in semiconductor (i.e., computer chips) and solar power applications for their unique properties and inexpensive raw materials (mainly sand). Though it is not a labour-intensive process, it requires rather sophisticated technical skills.
The electronic industry in the developed countries produces its own crystals. IBM, RCA, Motorola, and Texas Instruments are the major producers of crystals in the U.S. Application of semiconductors and use of photovoltaic cells will continue to rise, and with it the demand for poly-crystal is expected to increase.
OPERATIONAL EFFICIENCY OF SGL
Since China started allowing imports, SGL’s market share had shrunk for a combination of reasons. First was the slow rate of growth of Chinese electronic industry where poly-crystal is mostly used. Second was that imports had been consistently of high quality which SGL could not match due to lack of skilled labour and obsolete technology. Third was the ever-increasing costs of power and raw materials contributing much to increasing cost per unit of production.
Pricewise, SGL could not compete with the major importers from the U.S., Russia, Ukraine, and Germany inspite of the fact that the labour rate in China is about one-third of the U.S. and Germany. In 1994, SQL sold 34 tons of polycrystal where the total domestic demand was estimated to be about 105 tons.
In an attempt to diversify the company, the board of directors decided to get into the taxi business as the city experienced a surge in the tourist market. As of 1994, Shanghai had about 35,000 taxis. A taxi owner typically receives V300 per day per taxi irrespective of the driver’s earnings. The driver makes on an average about V150 to 200 each day but he is responsible for buying gas and paying for repairs of any mechanical defects. In addition, he has to pay the police for any traffic violation.
The time SGL entered this market, the Chinese banks eased their lending process allowing many of the existing drivers to buy their own taxis with easy repayment schedules. This had the salutary effect, for SQL, of not finding enough “qualified” drivers without lowering the owner’s usual income of 300 per day. Managing this line of business was becoming a headache. SGL asked several of its managers to move into the taxi-sector. Some of them flatly refused and a few accepted the assignment grudgingly. SQL, though doing poorly both in crystal and taxi business, did not lay-off employees or reduce their benefits.
SGL’s top management thought that the company had gone as far as possible with its restructuring efforts and decided to be taken over either by a foreign or a domestic firm. It also tried in vain to form alliances. In April 1994, the Government decided to sell its RMB Vl2 million worth of stock of SGL to Zhuhai To Zi company, making it the largest stock holder holding 35.5 per cent of the entire stock. Immediately after the takeover, Zhuhai asked SGL to produce quartz glass for a particular Japanese company. The outsourcing attempt by this Japanese firm to SQL lasted about a year as it was not satisfied with the variance in quality and delivery schedule. With the available technology of SGL, Zhuhai decided to get into manufacturing electric energy meters for state-owned facilities. These state-owned operations had been the major customer base for SGL’ s poly-crystal. Working with the similar customer base, SGL started to make money with its energy meters. The two business segments, real estate and the energy meters, contributed much of Zhuhai’s net return of 15 per cent, providing an overall liquidity ratio of 2.7 per cent and a quick ratio of 1.94. The financial position of Zhuhai is provided in the Table 1.below
|FINANCIAL STATEMENTS OF ZHUHAI
|(in thousands Chinese yen)
|Year ending December 31
|Revenue from major business
|Cost & expense
|Income from secondary business
|Income before income taxes
|(in thousands Chinese yen)
|Cash & equivalents
|Total current Assets
|Property, Plant and Equipement (Net)
|Project in progress
|Liabilities and Shareholders Equity:
|Income tax payable
|Current portion of long-term debt
|Total current Liab.
RESTRUCTURING OF ZHUHAI
The president of Zhuhai restructured the company making each division a separate strategic business unit (SBU). The revised organisation structure is provided below.
Note that the positions immediately below the unit vice presidents and under them there were a cadre of personnel doing various jobs as directed by their bosses. Mr. Hong made it clear to all SBU vice presidents (VPs) that decisions regarding product development, pricing, procurement and human resource management would be taken by the president himself in consultation with the board of directors. Mr. Hong stated in a recent meeting that the VPs were responsible for making at least 20 per cent rate of return for their units. “Lower than 20 per cent will mean either demotion or transfer for that particular VP”, he said. “We have started making short cuts, saving money in every possible way…. but I’m not sure whether any strategic business unit can function without strategy. Just a promise of fixed rate of return at the end of the year? Is that all in the name of strategy?”, asked the vice president of an SBU.
1) Discuss the typicalities of Chinese Industrial system vis-à-vis the Western/global Industrial system.
2) Where does the Chinese system fault?
3) Is over production and mis-match in marketing leads to poor prices of Chinese products in the International market?
4) If you are offered, views as a top consultant, what would you like to suggest the Chinese Government and industry. Give your reasons.
TOYOTA COMES TO GEORGETOWN
Mrs. Friers, in her early sixties, of Georgetown’s new Wal-Mart store cannot be anything but polite when she discusses Toyota. In a low voice to my companion, the doctor at the local Scott County General Hospital, Friers said, “You know Doe, Toyota did not offer that job to my daughter.” “I am sorry to hear that,” the Doctor commented casually. “Are you all glad that Toyota came to town?” I asked Mrs. Friers, somewhat to fill the void. “Yes and no … we were all excited when they first announced it . . . it kind of sank in now, I guess.”
Toyota’s labour practices was the hot topic at the local drug store too. A middle aged man, who had worked in an iron foundry for 31 years, commented, “In Toyota you have to earn every penny . . . there is never a slag . . . never the time to say hello.” His youngest son, Dwayne, is currently employed in the Toyota plant. He is extremely pleased that the company has abandoned the practice of workout in the morning. A skeptical Baptist
preacher asked, “what the heck have we got because of Toyota? Most of their people come from Indiana and Ohio. I hear some of them even commute from Arkansas.”
TOYOTA COMES TO GEORGETOWN
Georgetown, about 25 miles south of Lexington, Kentucky is the Scott County’s heartland. The county’s population is 25,000 out of which 22,000 are white. Over 53 per cent of the household income is between $15,000 to $49,999 per year. It has 93.7 males for every 100 females. About 43 per cent of the population are between the ages of 18 to 44 years.
It was a puzzle to many residents as to why Toyota selected this sleepy town for their new venture. Some of them argued that the then Governor of the State, Martha Lay Collins, charmed the Japanese so much that they lost their way and their heads too. Some others contended that the State made huge tax concessions to the company and wrote blank checks. The local paper cashed in by printing all possible undocumented stories about Toyota.
However the present Mayor of Georgetown denied charges of any underhanded deal. He rationalized the process of selection thus: Toyota selected this location mainly to take advantage of the transportation network of 1-75 (North and South) and 1-64 (East and West). He added, “the topography of the land here is very similar to the land around the Toyota City in Japan. I assume the company was also attracted because of nonunion focus in this State.”
The original plant location was about three miles outside the Georgetown city limit. The office of the Mayor made it clear to the Toyota people that since the city was the closest municipality it would end up providing most of the infrastructural services to the plant but without any return from Toyota. Why should the taxpayers of Georgetown accept this liability without any tax revenue coming from the company?
The company’s vice-president had asked the Mayor to attend a series of breakfast meeting with him and other officials to sort out this and other related problems. The Mayor described the outcome of these meetings thus: “We were aware that this was a huge economic development opportunity but was also conscious of the fact that the town people should not be shortchanged in any shape or manner.” In April 1987, Toyota confirmed the setting up of the plant in Georgetown.
In May 1988, the first Kentucky Camry was introduced at a plantwide celebration. And in the same year, Camry received the J.D. Power Gold Plant Quality Award. In November 1988, Toyota announced plans to double the plant size and production at the Georgetown plant. In September 1991, Toyota unveiled a major model redesign for the year 1992. In January 1992, Toyota announced plans to expand Powertrain Plant to add V-6 productions. By March, the production of Camry Wagon began. In September 1994, the Georgetown plant began production of the Avalon, a new large sedan aimed at the North American market.
In 1988, Toyota was able to produce about 200,000 Camry Sedans of which 20 per cent were exported. In 1995, it doubled the production to 400,000 with the hope of exporting 20 per cent to Taiwan, Europe and Japan.
With this tremendous pace of change, the company demanded from its workforce nothing short of total dedication. The pace became such that the workers started using “Kaizen”, “Kieretsu”, “Kanban” and few other similar Japanese phrases even in dealing with their own family members. In 1995, the employees were told that since the sales had declined by 2.5 per cent, the process had to he streamlined, using fewer model variations and increasing white-collar productivity. An assembly line worker said, “Gosh, how could any more speed be achieved without killing each other . . . but this is Toyota. Find a way to do it . . . or a way out.”
THE GAINS AND THE BARGAINS
Toyota’s direct employment in the U.S., as of December 1993 was 16,674. including the 1438 Toyota/Lexus dealers, the company employs over 90,000 people in the U.S. In Georgetown alone, it employs 6000 people representing all 120 counties of the State of Kentucky. What Kentucky gained from Toyota is a question that ninny people ask. For instance, the company was provided with an incentive package of $325 million. Out of this amount, $68 million was paid for job training, and $40 million went to building roads and sewers. Toyota operates under the Free Trade Zone which provides tariff exemption of $14 million a year. The company was allowed to import parts and machinery without paying any additional tariffs. The State paid $167.6 million interest costs for its warehousing distribution.
The balance sheet predicts that the Camry plant could generate $673.4 million in state tax revenue including individual and sales taxes. Further, due to Toyota’s plant expansion there will be a whole host of satellite industries around the area with vast potential for job opportunities. Estimates suggest that the Camry plant and its suppliers based in the State have already created 22,000 jobs in Kentucky.
OTHER STATES FOLLOW LEAD
The State of Tennessee, in order to bring in Nissan, convinced the Federal Government to approve $5 milliona- year tax break on plant expansion (production expanded from 250,000 to 450,000), and allowed it to operate under the Free Trade Zone as Kentucky did for Toyota. The State of South Carolina in its effort to get BMW also had to provide $5 million in state income tax credits and an additional $3 million for employee training. The State wl1 set the BMW’s property taxes at the same rate for 5 years at a time and extend the Zone on Greenville-Spartan airport. This venture estimates 10,000 additional jobs in the region including about 2,000 at the BMW location itself. According to his estimate, the State will benefit by $28 million a year in taxes.
The latest in this league of getting large employers is the State of Alabama. Mercedes Benz has accepted we location to manufacture under the following conditions: the State will provide $92 million for site development, $77 million for infrastructure, $60 million for job training, and $8.6 million for sales and tax concessions on equipment. The State also made a good faith commitment to buy from the company, 2,500 vehicles at an estimated price of $75 million. Mercedes will employ 1,500 people and it expects a mushrooming of industries around the plant site.
TOYOTA TRIES TO BE A GOOD CITIZEN
From the day of inception. Toyota officials insisted that the company should be a part of the community. For instance, it cited the following contributions: $1 million for the citizens of Scott County to build a community centre, $15 million over a 20 year period to the County school system; $141,000 to develop a child care centre; $500,000 for the development of a Thoroughbred Park; $25,000 and $30,000 to the Lexington’s Children’s Museum and Philharmonic respectively. The city of Georgetown receives one per cent of the payroll tax and an additional percentage of the net profit of sales. The city’s general fund budget went up to $6.7 million in 1992 from a mere $2.2 million in earlier years. This allowed the city to extend its police force and add a fire station. Fire insurance rating for the city went sown from class 6 to class 4, resulting in savings of about $500,000 a year in insurance costs for the homeowners.
Although Toyota has never agreed to give preferential treatment in employing Kentuckians or people from Georgetown, the mix at the shop floor level suggests that over 80 per cent of them are not residents of the county. At the managerial level, the Japanese are in charge of production control,’ purchasing, finance, engineering, and quality control functions. The president is also a Japanese national. The U.S. personnel occupy the positions of senior vice-president, human resources, public affairs, and vehicle assembly production. A majority of managerial and supervisory staff live in Lexington and Louisville (Kentucky), and Cincinnati (Ohio).
GEORGETOWN ON THE MAP
Has Toyota not been the single most important factor to bring prominence to this area? The existence of two interstate highways 1-64 and 1-75 was what had attracted Toyota to Georgetown. Yet these two highways contributed negatively by moving people away, towards bigger cities like Lexington, Kentucky and Cincinnati, Ohio.
Lexington and Cincinnati, for example, have better schools, shopping centres, cultural activities, and have legal liquor sales. The Director of Georgetown-Scott County Planning Commission notes, “the originally anticipated large increase in population has not occurred . . . and is not anticipated to rise substantially beyond the normal growth for a community of our size.” The Director agreed that traffic had dramatically increased since Toyota’s arrival and this was much to the annoyance of the local people. But on the plus side, he claims, the local schools have benefited from the company’s contributions.
To Mrs. Friers and many others, the presence of Toyota has added to their frustration. They are angry and dismayed since the plant has changed their way of life. They feel that the way life was in Georgetown will never to be back, and they do not know how to fill the void they now experience. One of them aptly summarized the feeling of others thus: “we now see lots of new faces, and we don’t know where they come from, where they arc going. But they seem to leave us at night to guard this divided city—that’s the new city where Toyota is . . Japanese money, fancy cars, fast foods. The other city is where we folks are—still chewing our deep-fried catfish and spoon bread while recalling the long list of small mom and pop shops which used to be on the main street that are now being sucked up by the winds of the Wal-Marts and the Krogers of the new world. Do we have to destroy the yesteryears to get to the year 2000? There used to be a word called co-existen de. I guess, we don’t care what it means any more!”
1. What is the difference between American production policy and Japanese production policy?
2. Where the Japanese Excel?
3. In quality control of Toyota what do you observe?
4. Can Japanese, be really leader in auto production and marketing, all over the world? Justify your moves.
HOW TO WIN AT WESTINGHOUSE
Westinghouse founded the Westinghouse Electric Company in 1886, over 100 years ago. From the beginning, the hallmark of the company was one of entrepreneurship and creativity. By inventing a new for transmitting electric current over long distances, the firm penetrated the fledgling electric industry. Its aptitude for technological innovation led the firm into the development and creation of diverse products, from household appliances to watches to nuclear power equipment. The firm also demonstrated creative diversity, branching into such endeavours as radio station operations, softdrink bottling, and low income housing Today, the Westinghouse Corporation is organized into six operational groups broadcasting, commercial, electronics systems, energy and utility systems, financial services, and industries.
As Westinghouse grew and began its expansion into foreign markets, it became apparent that the firm’s organisational structures and communication systems would have to be modernized to provide the flexibility demanded by overseas operations. Rigid procedures and red tape had to be eliminated, and ways had to be developed, by which key employees around the world could communicate with each other rapidly, so that their giant company could adequately react to changing conditions around the world.
To meet this communication support challenge, Westinghouse established a change-responsive high-tech communication network to support its far-flung operations. A new commuter system allows employees at all levels of the corporation to communicate through decentralized support networks. Westinghouse employees from different divisions and different departments can link-up in order to share information around the world.
The new support system, called the Westinghouse Information Network (WIN), links more than 600 Westinghouse facilities, providing both voice and data transmissions as well as an electronic mail system. Westinghouse employees can link WIN to their homes or to their lap-tops when travelling. WIN offers videoconferencing, which reduces or eliminates the need for costly and time-consuming travel to meetings. WIN also contains an advanced negotiation system, called EDGE, which supports sales personnel during complex sales negotiations.
Every working day, over 90000 Westinghouse employees utilize the WIN system, which provides the flexible on-line support that Westinghouse needs to expand its global enterprises. (16).
1. Describe the ways in which international business has an impact on your life.
2. Pick an Indian corporation with which you are familiar and analyse the reasons why it might be motivated to expand its internationalism.
3. What sorts of adjustments might McDonald’s have to make in its operations in India?
4. What do you believe India must do to improve its international competitiveness?
5. How do you perceive your managerial career will have an impact by the phenomenon of international business?
DOING BUSINESS WITH THE EAST—MOTOROLA STYLE
When Motorola decided to do business with the East, it was done in a big way. Motorola has penetrated virtually every niche in Asia’s booming telecommunication and semiconductor markets. It’s Asian strategy has already accounted for 13 new factories in nine countries. Its dynamic growth in Asia is exemplified by Tam Chung Ding, President of Motorola’s Asia-Pacific semiconductor division. His office is located in Motorola’s now $400 million Silicon Harbour complex with a grand view of the Hong Kong harbour. Motorola leans heavily on Turns instincts and his aggressive leadership style. Tam’s division is one of the most profitable and fastest-growing of Motorola’s far-flung industrial empire. In 1990, Motorola’s chip sales in non-Japan Asia rose by 20 per cent to $528 million, making it the world’s third largest chip producer. Motorola is also Asia’s top supplier of top-of-the-line walkie-talkies and digital cordless telephones.
The East is critical for Motorola, as Asian sales—outside Japan—total more than $1 billion per year— almost 10 per cent of Motorola’s total sales. Motorola has long recognised the potential of Asia. It began dabbling in Asian business in the early 1960s, when it established sales agencies in Tokyo and Hong Kong. A decade ago, Motorola split up its Asian semiconductor headquarters in Tokyo, locating the office for its non-Japan Asian business to Hong Kong under the charge of Mr. Tam.
For years, Motorola had complained about Japanese trade barriers to no avail. Then in 1987, it formed an alliance with Toshiba. The two formed a successful chip-manufacturing joint venture, with Toshiba providing essential marketing services. In 1990, Toshiba executive Isamu Kuru joined Motorola after serving Toshiba for 28 years. Mr. Kuru provides the necessary insight and understanding necessary to guide the Motorola’s Japanese operations.
Other notable Motorola successes have been recorded in India, Australia, Singapore, China, and South Korea. However, the latter two ventures have been serious challenges. In June of 1992, Motorola broke ground for a new $120 million semiconductor plant in Tianjin, a Chinese port city near Beijing. It will be the first U.S. semiconductor plant in China. In addition to making semiconductors, the new plant will produce telephone pagers, mobile telephones, and electronic equipment for automobiles. Many observers believe that such an investment, coming so soon after the Tiananmen Square disaster, is far too risky. Motorola is willing to take that risk, believing that China holds the key to future competitiveness in Asia. Hovever, to test those Chinese waters, while the new plant was just starting construction, Motorola opened a make-shift plant—also in Tianjin—to build the first of its paging devices. Originally, Motorola assumed that the local demand for pagers would be so small that it would have to export a large share of production. However, the plant now produces 10,000 units each week, and the entire output is sold in China, with each pager selling for $200. Experts indicate that the Chinese demand for pagers has risen from 1 million in 1991 to 4 million in 1993. With the make-shift plant performing well, the new plant scheduled to begin production by the end of 1993, and a second new plant planned for the near future, Motorola’s competitive position in China seems to be on a sound footing.
Motorola had more serious difficulties with its “Motorola Korea”, Limited venture, especially with respect to labour problems. At first, the well-educated, hard-working Korean workforce seemed to be ideal for Motorola’s needs. However, in the late 1980s, Korean labour became disenchanted with long working hours, low pay, and poor working conditions. Noting the growing riches of the Chaebols, the working class wanted a greater piece of the economic pie. Thousands of Korean workers took to the streets in massive demonstrations, demanding economic reforms and the right to form labour unions.
Motorola’s first taste of trouble co” when 34 of its more than 3,800 Korean workers petitioned the Korean government for the right to organise a union. Motorola has held a long-standing policy against the unionization of its workers and refused to negotiate the matter with its employees. Some of them latter barricaded themselves in the factory cafeteria and threatened to stay there until their union demands were met. In response, Motorola closed the factory for a week in an effort to provide a cooling-off period. However, when the factory reopened, violence immediately broke out at the factory gates, and Motorola had to evacuate the facility. In the following weeks, violence continued, a union organiser was arrested, and public sentiment moved to the side of the ernployee. Before the matter was resolved, Motorola lost an estimated $2 million in property damage and lost product. The settlement also required Motorola to improve working conditions and to improve wages for its employees Despite this setback, the Motorola operations in Korea are still growing in keeping with the firm’s commitment to Asian development. Despite the nagging problems of unionisation, a shortage of engineers and technicians continuing trade barriers, and dealing with a divergence of local customs, Motorola continues to press Asian development strategy—without harm to its domestic reputation. A 1995 Fortune Corporate Reputation survey ranked Motorola the fourth most admired corporation in the U.S. (up from sixth in 1994) and the most admired firm in the electronics and electrical equipment industry (for the second year in a row).
1. Describe some recent changes in your life or in your community that reflects the world’s shift from the West to the East.
2. What factors would you suggest are behind the shift from the West to the East?
3. Did Japanese management style evolve from the Japanese culture, or did Japanese culture evolve from Japanese management style?
4. Describe the business-government ties that result in Japanese trade barriers.
5. Which of the Four Tigers of Asia do you believe has the greatest potential for long-term economic growth? Why?
6. What must China do to realise the magnitude of economic success earned by the Japanese?
7. Outside of Singapore, which of the other ASEAN nations holds potential for economic success? Why?
WINNING WITH BUREAUCRACY AT MCDONALD’S
McDonalds Corporation, the fast-food hamburger giant, has experienced immense success around the world. The secret to its growth and profits is based on product consistency and uniformity. The product and the service is the same the world over. This tight consistency is achieved through bureaucratic control. Rules and regulations are the byword at McDonald’s. Every task is done in the same way in every store. To enforce the standardisation of operations, McDonald’s has a well-defined organisational hierarchy. Field service managers and inspectors visit each store regularly to assure compliance with standard operation procedures. Each store has a well-defined division of labour. Analysts have broken down every job into its smallest steps and have then automated the entire process to further assure that individual workers won’t get creative about what fixings should go on a Big Mac. Assistant managers are assigned to cover each shift and crew leaders are responsible for certain time periods, such as breakfast or lunch. Each employee knows exactly what to do. Trainers are assigned to teach each new worker precisely how to perform their asigned tasks. Trainees soon learn that, at McDonald’s, standards are more important to the maintenance of operational effectiveness.
Management at McDonald’s has created effective mechanisms for work coordination, such as a detailed organisation structure and provisions for standardised services by corporate staff members in such areas as advertising, public relations, and operations. Area field consultants visit each store on a regular basis to be ertain that every franchise conforms to all of McDonald’s rules and regulations.
Since McDonald’s operates in a relatively stable environment, employing basic technology that has remained quite constant for the past fifteen years, the bureaucratic, mechanistic node of operation is ideal. At McDonald’s, the adherence to the bureaucratic process is not seen as a negative concept, but a posh one that spells continued consumer satisfaction and continued business success. Proof that bureaucracy works for McDonald’s is found in 1993 year-end financial numbers: (1) revenues were up over the preceding year by 6 per cent to $7.3 billion; (2) net profit was up 13.7 per cent to $1.0 billion; and (3) total return on equity rose to 21 per cent.
1. Discuss the advantages and disadvantages of the various forms of departmentalization?
2. What are the strengths and weaknesses of a bureaucratic organisation?
3. How does downsizing make firms more competitive in the global arena?
4. Compare and contrast bureaucratic control with clan control. Which is better?
5. Discuss the strengths and weaknesses of budgeting?
6. How can a manager make control systems more effective?
POLITICAL RISK ASSESSMENT AND EURO DISNEY
For several years, the Walt Disney Co. considered a variety of locations for its Euro Disneyland venture. Finally, after careful study and an intensive political risk assessment, the firm decided to enter the European entertainment park competition with a new 5,000 acre Disney theme park facility to be constructed just 20 miles from Paris at the French village of Marne-la-Vallee. The $4.4 billion venture opened on April 12, 1992 amid an array of both positive and negative situations that may not have been adequately analysed during the political risk assessment process. Euro Disney faced a number of sticky political issues stemming from the French Socialist movement, as a number of French labour unions complained that workers were not treated fairly by the American firm. The resultant work slow-downs and cost overruns caused Disney to sub-contract remaining work to 37 French contractors so that they would share accountability for future cost problems. The labour unions reacted by threatening to create a “surprise” for the opening day—one that never surfaced. Part of the political and social unrest over the Disney venture resulted from what the local press referred to as “cultural imperialism”, the view of French intellectuals that the whole Disneyland concept is repugnant to the French culture. The truth is that the French are not fond of Americans, in the first place; and they are less fond of Mickey Mouse, who is perceived as a rude and cocky example of uncultured Americana. The whole American-Disney theme is viewed in Paris as a ‘Cultural Chernobyl”, a foul denigration of the superior French culture. When Disney’s CEO, Michaei Eisner, visited Paris to launch the new Euro Disney stock offering, French Socialists greeted him with tomato paste and eggs along with signs that reel, Mickey go home”, Despite the social resistance to the Disney venture in France, the French government decided to back the venture primarily because of a lingering depression that would be helped by the 30,000 French jobs that were part of the Euro Disney package. Thus, the potential of economic gain led the French qovernment to contribute $960 million in low-interest loans, a high-speed rail line and two freeway exits to the perk, cheap land, and a tax break on ticket sales.
Despite record crowds that flocked to its opening, Euro Disney has experienced a number of social and political problems. First of all, French unions are backing litigation on the part of employees who are outraged by the company’s strict dress code, its ban on facial hair and elaborate hairdos, and its rule against smoking while on duty. The smoking ban is resulting in the greatest labour agitation, as smoking is considered “God given French right” European consumers at the park also complain that cigarettes are not sold anywhere on park property. To counter the anti-American feelings, Disney has tried to shift the park focus to European themes, with many of the park attractions based on beloved European creations such as Italy’s Pinocchio, England’s Peter Pan, France’s Cinderella, and Germany’s Grimm brothers. With this European Favor, Disney hopes to capitalise on the bordcrless market created by Europe 1992 and make Euro Disney the financial success that it was designed to be. The firm also intends to recruit employees from all over Europe to mitigate the “French only” language barrier and put all new employees through an intensive customer service training programme. Furthermore, Disney will try to create a new, more positive local image for the park by renaming it “Disneyland Paris”. Finally, Euro Disney is giving its offerings some more pizazz with a new and scarier $120 million version of its Space Mountain ride while slashing ticket prices by 20 per cent.
The failure of Euro Disney to achieve anticipated success may be part of an international trend away from theme parks. In 1994, 77 per cent of Disney’s profits came from theme parks. By 1989, only 64 per cent of Disney’s overall profits were generated by theme parks; and by 1994, theme parks accounted for just 35 per cent of Disney’s overall profits. That is a 55 per cent drop over one decade. For Disney, theme park profit declines were more than offset by a 430 per cent increase in film profits. Because of the downturn in theme park profit. Disney has pushed to new horizons with the surprising purchase of the American Broadcast Company (ABC) for $19 billion. The deal makes Disney the largest entertainment company in the world and it the ability to compete in TV programming, cable, and various other new enterprises around the globe.
1. Describe the major conflicts that arise between the host country and the MNC.
2. Discuss the major conflicts that arise between the home country and the MNC.
3. What role does ideology play in the manifestation of political risk?
4. Evaluate both the good and bad features of international law as it impacts international business.
5. Speculate the main reasons behind the various forms of host country intervention?
6. Give recent examples of international situations in which MNCs have been at severe risk due to host Country Instability?
7. Review the various forms of protection from political risk that are available to MNCs?