Solution Manual For Business in Context, 8th Edition by David NeedleJane Burns Chapter 1-14

Solution Manual For Business in Context, 8th Edition by David NeedleJane Burns Chapter 1-14

BUSINESS IN CONTEXT, 8th EDITION – TEACHING MANUAL CHAPTER ONE THE CONCEPT OF BUSINESS IN CONTEXT

This chapter explains the ‘Business in Context’ model that is used throughout the book. All four contexts are identified; environmental, organizational, strategic and functional, referred to as ‘activities level’ context. In addition, two theoretical framework outlines are offered; systems and contingency. Both frameworks have been used to develop the ‘Business in Context’ model.

The model can be used to analyze individual firms and entire industrial or business sectors. A useful exercise for students is to nominate a particular sector, firm or organization known to them (it could be their college, university or their department) and get them to develop an analysis using the ‘Business in Context’ model.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

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1.

The five environmental variables, five organizational variables and five business activities have been identified in the model. By necessity, these represent broad categories. What are the possible elements that might be considered under the various headings used in our model of business?

Environmental context Economy (The natural environment and its impact on the economy could be considered here or under a separate heading, in addition to the five elements identified in the book. This could be a useful starting point to get students to think about the utility of the model.)

• Level of activity • Economic structure • Economic change • International finance and currency exchange • Nature of labour markets • Competitive structures • Globalization • Multinationals The state • Political ideology • Political change • Government economic policy • Legislation • Level of intervention and types of intervention • Nature and role of bureaucracy • Interest groups • Supranational organizations and globalization Technology • Product and process technology • Changing use of technology in organizations • Information technology • Digital and social media technology • Scale and nature of technological change • Technology and the global economy • E‐Commerce • Impact on organization structure • Impact on labour markets and jobs Labour • Behaviour of labour markets • Composition of the labour force For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• • •

Changing nature of jobs and the labour force Role of trade unions Alternative forms of employee representation

Culture and institutions • National differences • Sub‐national and sub‐cultural differences • Globalization, convergence and culture • Business practices and management styles in different cultures • Impact of culture on business success • Transfer of ideas and practices across cultures • Non‐cultural bases of national differences, such as the nature of government, legislation, education system, financial systems, stock markets, etc.

Organizational context Goals • Types of goals • Mission statements • Goals and strategy, goals and operations • Goal conflict • Goals and performance • Business ethics Ownership • Ownership and control • The notion of agency • Types of ownership • Ownership and performance • Public versus private ownership Structure • Types of structure • Influences on structure • The link between strategy and structure • Structure and performance • The flexible firm Size • • • •

Issues related to large versus small firms Size and structure Size and business performance The small firms sector and its role in the economy

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Organizational culture • Influences on culture • Types of culture • Influences on performance • Issues of cultural change • Limitations as a management control device Business activities Innovation • Invention • Research and development • Design • Entrepreneurship Operations • Converting inputs (information, materials, finance, technology, people, etc.) into products and services • Production • Delivery • Supply chain management Marketing • Market research • Product design • Creating different products for specific markets • Promotion and advertising • Pricing • Distribution and methods of reaching the customer • The transformation in marketing resulting from digital and social media technologies Human resource management • Creating a staff profile to meet the strategic needs of the firm • Recruiting, selecting, training and rewarding staff • Retaining staff • How people are rewarded and motivated • Employment relations • The role of human relations in achieving strategic goals Finance and accounting • Raising funds (Financial accounting) • Managing income and expenditure (Management accounting) • Financial reporting For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

2. Take in turn an industry, an organization and a specific issue, and analyze each using the Business in Context model.

There is no specific answer to this ‐ students should make sure they cover the various elements of the model ‐ environmental, organizational, strategic and activities.

A variety of sources may be used: • Industry survey in such as the Financial Times, Wall Street Journal or The Economist.

• Case study of a particular firm taken from a case study text.

• Journal, magazine and newspaper articles (these can sometimes be found on the Internet).

• Company reports.

• Internet search (apart from the more critical newspaper articles from such as the Financial Times or The Guardian, information here can be somewhat bland or written as public relations for the firm in question ‐ students should be warned to use this with caution).

• Using a library database.

3. What is the value of the systems and contingency approaches to an understanding of business?

The value of both approaches includes: • Identification of the various factors which influence business processes and outcomes.

• Recognition that businesses operate within a complex set of influences.

• Awareness of how changes in the environment affect business.

• Awareness of how business outcomes may be changed through the manipulation of input and process variables.

• Understanding how business activities interact.

Moreover, contingency theory adds the notion that organizations must adapt to prevailing environmental conditions in order to be successful.

It should be recognized that both approaches have their critics. The main criticisms relate to the deterministic nature of both systems and the contingency approaches and that business actions can influence the environment as well as being influenced by it. Both systems and contingency approaches are discussed briefly on pp. 6–8.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER TWO GLOBALIZATION

This chapter examines a number of different topics: • Definitions of globalization; its causes and drivers.

• The development of globalization, particularly trends since the beginning of the 20th century.

• Economic, political and cultural aspects of globalization.

• Different perspectives on globalization, including the movement towards deglobalization.

• The development of the multinational firm and different types of structural arrangement in the global economy.

In doing this, a number of topics closely associated with globalization are covered.

These topics are linked and include: • Global markets, global factories and global supply chains.

• Off‐shoring and outsourcing.

• The multinational and transnational organizations and explanations for their growth.

• Alliances and joint ventures.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

In what ways does globalization have an impact on either (a) your firm or a firm with which you are familiar, or, (b) your college?

The answers are likely to be specific to certain firm or college, but they should cover the cross-border movement of goods, services, people, ideas, etc., alliances with firms or colleges in other countries. There should be some focus on how this has changed over the last ten years and the impact this has had on the daily experience of employees/students. A firm might have cross‐border supplies, markets, production arrangements, joint ventures, staff mobility and so on. A college may have cross‐border flows of students, staff, have alliances with other colleges, plus there may be ways in which globalization has influenced the curriculum.

2.

Outline the main arguments put forward by the globalists, the anti‐globalization lobby, and the sceptics. Which view do you support and why?

The main arguments are all presented on pp. 46–49 and summarized in Table 2.5, p. 46. Students must be able to cite specific examples and evidence to support their position.

3.

Examine the key drivers of globalization. Which are the most influential?

The key drivers are classified in the text as factors external to the organization, such as political change and technological change, and factors internal to the organization, such as cost and the desire to grow. These points are presented in detail in pp. 19–21.

All the points mentioned are important and it should be acknowledged that many are interrelated. However, authors disagree on which is the most important.

Bartlett and Ghoshal (1995) cite political change as the most significant driver, including the liberalization of China and the former USSR and Eastern bloc countries. Castells (1996) cites the developments in information and communications technology. Yip (2003) highlights market change.

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These different reasons have probably been more important at different times.

In the early days, the spread of rational knowledge plus market expansion with developments in capitalism were important. In the late 20th century, key changes have certainly included the opening of markets as a result of political change, technological innovations, especially ICT, the influence of the multinationals and the development of international regulations. However, in more recent years, cost has been a major driver, causing firms to seek low cost solutions, such as offshore outsourcing in lower wage market economies.

4.

Assess the contribution of developments in ICT to the growth of globalization.

ICT has had a significant influence on the exchange of ideas, the spread of information and in enabling workers in different countries to collaborate on the same project without leaving their work stations. Examples include the use of the internet, the computer linked world economy and the internationalization of shares, and how workers in different countries can work together via email, telephone, video conferencing, and linked computer systems. A key factor here has been the networking of the global economy. ICT supports the coordination and control of the global factory, the global supply chain and both offshoring and offshore outsourcing in general. ICT has been especially important during the COVID-19 pandemic. Key arguments are presented on pp. 19, 22–27 and 50–51.

5.

To what extent can you argue the case that large corporations have become as powerful as nation states?

There have been several tables published (refer to for example Table 2.2, p. 30 with related arguments on pp. 29–31). The tables demonstrate that the sales value of some companies is greater than the GDP of many nation states. Critics consider such developments to be dangerous and undemocratic since companies are answerable only to their most powerful shareholders and ownership patterns may be spread across several countries.

Counter arguments suggest that sales value and GDP cannot be compared in this way and that nation states wield considerably more influence through their ability to collect taxes, make laws and go to war.

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6.

Contrast the main features of a transnational corporation with those of a multinational.

In some ways this is a potentially misleading question. It uses Bartlett and Ghoshal's distinction between international, multinational, global and transnational companies. Others feel that all the above are types of multinational and that Bartlett and Ghoshal's definition of a multinational is better called a multi‐domestic company.

On that basis the main differences between a multi‐domestic and a transnational are that the former emphasizes meeting local needs via local production, whilst the transnational does this and focuses on the creation of global efficiencies as well. The transnational mixes centralization and decentralization and tries to create a cross‐border mentality around a corporate identity.

Refer to the text pp. 33–34 for more detail.

7.

Why have joint ventures emerged as a major organizational form in a global economy? What are the main criteria for the success of a joint venture?

Reasons for joint ventures (refer to pp. 36–37): ‐ Survival in the face of competition. ‐ For market growth and new market entry. ‐ To assist in technology transfer. ‐ To access specific core competencies in the partner firm. ‐ To achieve synergy. ‐ Cost reduction. ‐ Reduce risk. ‐ Increase control of the supply chain. ‐ Gain competitive advantage through accessing the partner's local knowledge.

Success criteria (refer to p. 41): ‐ Select the right partner. ‐ Strategic fit. ‐ Respect for each other's capabilities. ‐ Systems, cultural and personal compatibility. ‐ Commitment by both parties. ‐ Agree the formula for control of the joint venture and what to do in the case of a dispute. ‐ Agree on the criteria for performance measurement.

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8.

What are the main features and key strategic rationale for a global production system? Identify such a system in both the manufacturing and service industries.

A global production system includes the fine-slicing of operations into a number of different components, creating the global factory (pp. 22–26) and the global value chain (pp. 26–27). This involves linked and integrated operations in several countries with networked systems of operation and information; the use of labour as a global resource; the creation of cross‐border teams and management and the development of new organization forms e.g. joint ventures, offshore production companies and contract outsourcing.

The key features are set out in five points at the top of p. 24. The global factory and global supply chain have been made possible by the application of technology to enable the same quality products to be made in different locations, through the process of codification. There have also been developments in ICT to enable global coordination and control; access to lower cost labour; the development of cheaper shipping (via containerization) and lower cost airfares.

The key strategic rationales include: ‐ Cost reduction – this is probably the main reason. ‐ Using specific core competencies around the world. ‐ Exchange of ideas and the creation of new ones. ‐ Technology transfer.

A good example from manufacturing would include the automobile industry and companies such as Ford and Daimler Benz or computers as with Dell. From the service industry, examples could include insurance (e.g. AXA), accounting (PwC) and retail and distribution (Amazon).

9.

Has de-globalization been taking place in the first quarter of the 21st century?

Globalization has been affected by key political changes that have occurred in the first quarter of the 21st century, although their origins lie in the post-war 20th century. The changes (refer to p. 50) include: - A threat to liberal democracies in Europe and the USA. - The rise of China as a dominant world power.

- Increased border controls.

- The break-up of regional alliances.

- The weakening of international organizations such as the WTO and World Bank.

The result has been a less connected world than predicted. A key question is For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

the extent to which this is a temporary shift, similar to what occurred in the first part of the 20th century (refer to p. 18), or something that will be more longlasting.

Students could also consider whether new forms of globalization are emerging and discuss issues such as the growing concern over climate change, the increasing power of large digital technology companies and the growth of cybercrime.

10.

What has been the impact of the COVID-19 pandemic from 2020 onwards on globalization?

Key arguments are outlined in pp. 50–51. The pandemic has had a significant impact on the global movement of trade, capital, information, and especially, people. The impact is continuing with large variations between countries (for example events in China in late 2022). Therefore, students should be encouraged to seek up-to-date information.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 2.1 FROM JEEP TO MERCEDES 1.

What were the main reasons for the joint venture between AMC/Chrysler and BAIC, formerly the Beijing Auto Works? What benefits were gained by both parties?

The main advantages for Daimler Chrysler: • Low risk entry into a market of high potential growth. At the start of this project, a joint venture was the only way a foreign firm could enter the Chinese market. While that had to change as a condition of China’s membership of the WTO, it remains a requirement of the automobile industry that no foreign company can own more than 50% of an automobile firm in China.

• The sale of jeep kits and spares to the joint venture company as well as a share of the profit from the sale of jeeps.

• Investment was underwritten by the Chinese government.

• Daimler Chrysler could increase their stake as the company grew (and they did from 31%-50%).

• No competition for 4-wheel drive cars when they entered the market.

• Access to new regional export markets.

• Protection of the brand and limit to technology transfer as well as extending the product life cycle by allowing BJC to manufacture an old model only.

The main advantages for Beijing Auto (and by implication the regional and national economies): • Access to Western technology and systems and management know-how.

• Access to a global brand.

• A route to greater efficiency and profitability.

• Obtain political kudos within China.

• Gain access to export markets.

• Bring in hard currency.

• Create jobs.

• Technology and know-how transfer to local the supply chain.

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2.

What were the early problems and issues encountered by this joint venture?

The analysis here uses in part Medcof’s model of the 4Cs – capability, compatibility, commitment and control: • Strategic fit: the two partners had different goals - the US saw low risk market entry as the primary goal, whereas China wanted technology and know-how transfer. These can complement each other but only until such a time that one of the partners has achieved their aims and/or want more.

• Capability: a major issue was the ability of the Chinese staff and supply chain to meet US productivity requirements and quality specifications.

• Compatibility: a number of issues are important here, including accounting systems incompatibility and difficulties related to cultural differences and attitudes, e.g. sending younger staff is a common management development strategy for US multinationals. Young talented managers tend to be more flexible and less encumbered by family ties. However, Confucian values equate age with wisdom. This means that younger people have less to teach the Chinese.

• Commitment: the Chinese questioned the US commitment when they sent only younger staff and were unable to communicate in Mandarin. The extent of US commitment is also illustrated by their desire to limit technology transfer.

• Control: issues here include the arrangement for the ownership of the joint venture and the influence of Chinese national and local politics. A key area of tension is what happens when the parties fail to agree – how such disputes are resolved.

• When Daimler stepped in, Beijing Jeep faced a number of dilemmas. These included: - Fall off in sales and productivity.

- Dated plant, technology and models in need of considerable investment.

- Increased competition for 4-wheel drive vehicles in the Chinese market.

- Overstaffing.

- BJC had lost its premier position in the market.

- Significant lack of investment by its predecessor partner.

3.

Assess the dilemma facing Daimler‐Chrysler in 1998. Was the company justified in its decision to invest?

Dilemmas facing Chrysler in 1998 included: ‐ Dated plant, technology and models in need of considerable investment. ‐ Increased competition for four‐wheel drive vehicles in the Chinese market. ‐ Overstaffing ‐ Beijing Jeep had lost its premier position in the market.

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There is evidence to suggest that the decision was justified: - A wider model range in the Jeep, the introduction of the latest models and the introduction of saloon cars gave the company a stronger base for market growth.

- The company was back in profit by 2003.

- The company had successfully expanded beyond the Beijing market.

- New plants incorporating the latest technology were built.

- Investment laid down the foundations for the focus on Mercedes vehicles following the demerger from Chrysler.

- Daimler Benz went from strength to strength. By 2020 China had become their largest market (refer to Table 2.3, p. 40).

- A new R&D centre was opened in China in 2021.

- China was seen as a prime market for the expansion of electric cars given the problem faced with urban pollution.

4. Assess the motives of Daimler Benz since 2001.

• 2001 was a watershed. There had been no investment for several years.

Competition had increased in this market sector with competitors offering newer models and hence better technology. Sales and revenues dropped, as did productivity. Daimler-Benz was also having difficulty with Chrysler in the UK and their financial position was much worse than the Germans had predicted. There were a series of plant closures and redundancies in the USA. • Faced with a decision to cut and run in China or invest, Daimler-Benz chose to invest. Between 2001 and 2006, two new plants were built, one focusing on the Jeep with the introduction of a bigger range of models, all of which were now identical to those sold in the USA. Mercedes cars were also introduced as well as the Chrysler saloon. Daimler-Benz also extended distribution throughout China and introduced financing for vehicle purchase (before then a system almost unknown in China).

• The period from 2006 was one of significant change. Chrysler was sold.

Jeep production was halted, and Daimler-Benz became the only partner with a 50% share. China was made the regional HQ for Daimler Benz and production expanded into other Mercedes models. R&D was stepped up.

China became Daimler-Benz’s largest country market with further investment in R&D and electric powered vehicles (refer to Q3 above).

An interesting question is whether Daimler Benz’s strategy was incremental as they gained more knowledge of the Chinese operation and learnt more about the very weak financial position of Chrysler, or whether there was a plan from the For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

start to dump Chrysler in China and use the existing joint venture as a bridge-head to launch the ultimately more profitable Mercedes range. There is no correct answer to this. Elements of both positions can probably be supported.

CASE 2.2 MULTINATIONALS AND CORPORATE TAX 1.

What variations exist in both the rate of corporate tax and the amount of corporate tax paid in different countries? What reasons can you give for these variations?

The variations are as follows: • The absolute rate varies globally from 0% to 55% with a global average of 23.85%. Significant variations occur even in the EU, from 9% to 35% with an average of 20.97%.

• In most countries, the rate will vary according to the level of profit.

• In most countries, rates can be negotiated with the tax authorities so that the rate paid is lower than the official rate.

The reasons for the variation include the following: • Rates of all forms of tax are set to raise whatever revenues a country requires to fund public services. The needs of each country will vary.

• Lower tax corporate tax rates tend to be set to attract inward investment, especially for those countries wishing to expand a low resource base and create jobs.

• Higher rates tend to be found in larger, more developed markets. They have less need for tax incentives since the size of the market is a sufficient draw for inward investment.

• A related and interesting question is what benefit derives to those countries or areas (Guernsey, Jersey and the Isle of Man are part of the UK and until 2019 part of the EU) charging 0% corporate tax. For the most part, they are small islands with low populations and may not require the level of employment that a large inward investment could bring. These tax havens attract nominal HQs of large multinationals with few employees. There is clearly benefit from other tax revenues that having nominal HQs could bring such as property tax (The Bahamas, for example, has rates of property tax that are the highest in the world).

• Negotiated rates are a function of the needs of the country (as in the case of job creation) and of the multinationals concerned (primarily to minimize tax payments). In some cases, discounts are available for those companies with large profits.

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2.

What strategies do multinationals use to minimize tax payments? To what extent are such strategies legal and to what extent are they ethical?

Strategies include the following: • Set up operations or at least a presence in low tax areas.

• Negotiate the rate with the tax authorities and the government.

• Create shell companies in low tax countries or where a low rate has been negotiated to channel revenues from a number of different areas, as Apple did in Ireland with revenues earned across the EU. • Establish high value activities such as R&D, design and marketing in a particular country or countries and transfer revenues as costs.

• Switch location if tax rates increase, as with Apple’s proposed move to Jersey.

• US companies, who must pay taxes to the US Government for revenues gained in other countries, make use of the loophole in the US tax laws to hold potential tax revenues overseas.

Are such strategies legal? On the surface they are, except: • It is possible to manipulate costs attributed to some high value activities such as R&D, design, etc.

• In the EU, favouring some companies over others by allowing them to negotiate lower tax rates is contrary to EU competition policy and hence illegal under EU law.

Are such strategies ethical? A number of possible arguments could be used, including: • By not paying the full amount of taxes multinationals are depriving countries of tax revenue and therefore depriving the community of revenue that could be used for health care and education. This could also mean that higher rates of income tax are charged.

• It is unfair to those firms who are unable to do deals and who therefore pay tax at higher rates. This may mean that foreign multinationals get a better deal than local firms.

• Is it ethical that the profit from earnings derived from sales in one country can be transferred to another for tax purposes?

• Is the loophole for tax avoidance used by USA firms overseas fair to US firms who only operate in the USA? • The case also raises the issue of the power of the multinational over that of the nation state.

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3.

Why is the EU pursuing unpaid taxes from multinational companies and why have they not been successful?

Both tax deals and tax avoidance strategies are in contravention of EU Regulations on competition and the EU’s competition policy. The key point is that tax deals struck with some and not all is a form of unfair competition.

They have not been successful because: a) It is very difficult to change practices that have operated for many years.

Any move to harmonize tax rates and tax practices globally challenges the sovereignty of nation states to manage their own affairs. In any case the needs of each country in terms of tax revenue will vary. b) Countries may benefit from large multinationals moving into their territory bring with them jobs and various forms of tax revenues. Even low rates of tax negotiated between governments and MNEs can be significant, e.g.

Apple in Ireland was the largest corporate taxpayer. c) The ruling of the EU General Court in favour of Apple has set a precedent for other companies to follow.

4.

Assess the strengths and weaknesses of the OECD tax scheme for MNES to operate from 2023.

The OECD has pushed for corporate tax reforms for many years. Following the lead given by US President Biden, the OECD proposed that: - Companies will be taxed in countries in which they operate and will not be able to shift revenues and profits to tax havens.

- There will be a minimum rate of 15%.

The strengths of their proposal are: - It establishes a level playing field for all countries.

- It addresses the inequities of the current system.

- It has the backing of the major economies and 136 countries in all.

The possible weaknesses of the proposal are: - Amendments to the current tax laws will have to be passed in each individual country’s legislative process. This could be messy and time consuming.

- Policing mechanisms will need to be formed and accepted.

- There may be opposition from those countries whose current rates are less than 15%.

- The case of Apple in the EU Court system does not bode well for a smooth ride.

- 2023 may be a very optimistic start date.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER THREE THE ENVIRONMENT OF BUSINESS: THE ECONOMY AND THE STATE

In this chapter, we cover a number of themes and issues. We begin with a general look at a range of models that have been used to analyze the relationship between business and the environment in which it operates. The review of the economy examines: • How economies are measured and compared. Throughout the early part of the chapter there are several tables which offer country comparisons of GDP and economic growth.

• The changing pattern of economic power. This looks at the continuing strength of the US economy and compares this with the post‐war growth in Japan and the more current interest in the BRICs phenomenon, especially China. Within this section, we present a detailed review of the developments and potential problems with the Chinese economy.

• Issues of economic change. The focus here is on liberalization and transitional economies. We introduce the concept of economic systems by looking at change in Anglo‐Saxon economies and transitional economies. (More on Anglo‐ Saxon economies can be found in Chapter 5).

• How business impacts on the economy and vice versa.

The review of the operation of the state examines: • The role of the state and issues of state intervention, especially how intervention varies in different economic systems.

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• •

How business representatives can influence government policy.

Economic and political integration with a focus on the WTO and EU.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

In what ways can a business influence its immediate economic environment through its R&D, production, marketing and human resource strategies?

Rather than finding the answer directly from the text, this question introduces key business activities and invites students to explore what such activities involve and how they might have a wider influence. Students may wish to refer to the introduction to business activities in Chapter 1 or even skim through the individual chapters on each of these topics to learn more about what they entail.

R&D: If the firm is a market leader then it will see R&D as a central strategy in achieving competitive advantage. If the firm is a ‘follower’ as opposed to being ‘first to the market’ with a new development, then the products developed by local competitors may determine R&D strategies, based on copying or following the lead set by competitors. The development of new products may influence local market behaviour, as well as determining the strategies of firms in the local supply chain.

Production/operations: Given that operations is a central function in most operations, operations costs will have a significant bearing on the competitive standing of the firm, not only locally, but nationally and internationally as well.

The size and technology of the operations function will have an impact on local labour markets in terms of employment and skills patterns. In manufacturing, strategies used, such as just‐in‐time will have an impact on local suppliers. The size of the firm will also have an impact on the bargaining power it has over local suppliers.

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Marketing: Local markets will be influenced via product, pricing, promotion and distribution strategies. These may influence the competitive standing of the firm with respect to both its customers and other firms. Equally, the firm may have to respond to the marketing strategies of other firms.

Human Resource Management: As an employer, the firm will have an impact on local labour markets via numbers employed, types of training, pay and conditions of work. Elements such as pay and training may be used as recruitment strategies. Whether the firm recognizes trade unions may also impact recruitment patterns. HR strategies can be used to gain competitive advantage in terms of recruitment of talented staff. In practice, however, firms in a particular area may reach agreement on levels of pay.

2.

Using the illustrations of a) a mass producer of cars, b) a university, and c) a small accountancy practice, examine how a firm interacts with its environment at a local, national and international level. a) Mass producer of cars: At a local level, the company would interact in a number of ways. Most of the labour force would be recruited from the local area and, as one of the largest local employers, there would be a significant impact on local housing and local retail businesses. The company may use local suppliers and given the impact of such a major firm in the area, there will be links with local government.

At a national level, such a firm would have an impact on GDP and levels of employment. As such, the firm’s policies would interest the national government since any change would have an impact on key economic indicators. It is almost certain that the company would be viewed as a national flagship. Inevitably, there would be a network of suppliers on a national scale and the firm would be subject to both local and national regulations.

At the international level, any large-scale car manufacturer will have experienced changes linked to globalization. The majority of car firms must operate globally to survive, although this has placed car firms in an increasingly competitive environment. Such changes will include global sourcing and the increasing importance of seeking new markets, the increasing trend towards mergers and joint ventures and the movement of finance to gain maximum advantage from cheaper tax locations. A further change involves the dissemination of ideas and practices. Lean production with its origins in Japan is now used by nearly all major manufacturers while product innovations are copied to maintain competitive position. The changes that have taken place at the international level have, in many cases, meant that major firms have become more independent of national influences.

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b) A University: At a local level, the university may recruit a large proportion of l o c a l students. This is an increasing trend in the UK and is commonplace in such countries as Germany. A large number of students will have an impact on the local economy via the housing rentals market, as consumers in local shops and as part‐ time workers. Certain types of businesses such as bookshops and cafes may be attracted to the area. There may well be links with local businesses in terms of research and consultancy. Through such businesses operating at national and international levels the context may be widened. The university will recruit most of its non‐academic staff from local labour markets.

At a national level, the university will be subject to controls of relevant government departments. In the UK this relates to some of its finance and the level of student fees. In most countries, universities are subject to government accreditation and varying degrees of quality control. A proportion of students and academic staff will be recruited nationally and active researchers will interact with grant awarding bodies. Universities within a country compete for quality staff, students and research funding.

At the international level, the university may seek to recruit students from outside its home country or even franchise its courses overseas. In such cases, universities often compete globally for students. In the UK, students from overseas pay higher fees and form an important source of revenue for the university. Most universities see their role as part of an international community of knowledge exchange and development. Academic staff often collaborate with international colleagues on research projects. Some universities see the maintenance of a high status international reputation as a primary goal. Changes in the international environment, as with the withdrawal of the UK from the EU, will have an impact on student recruitment, student fees, collaborative international research and its funding. c) A small accountancy practice: The practice will almost certainly derive most of its clients from the local region. The majority, if not all, of its staff are likely to come

from the local labour market. The firm may use local suppliers for office equipment.

Professional staff may be active, such as the local chambers of commerce, and will probably have many links with the local business community.

The practice may use national suppliers for equipment and may recruit nationally for professional staff, particularly if the firm is expanding. The practice will undoubtedly be subject to national laws dealing with issues such as taxation and be subject to the regulations of national professional bodies of accounting. The firm may represent some of its local clients nationally if they have operations outside the local region.

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It would be rare for such a firm to operate internationally unless they worked in a highly specialized field or had expanded significantly. They may however advise local clients on matters such as tax liability in export markets and they may liaise with larger accounting firms where necessary on behalf of local clients.

3.

What are the uses and limitations of a model such as PEST? An introduction to PEST and a critique of the model can be found on pp. 62–63.

Some key points are: • The model is widely used and does ensure focus on appropriate political, economic, social and technological aspects as well as being applicable to individual organizations, sub‐units of those organizations and entire industrial sectors.

• There are limitations – it tends to place influences and issues in compartments and it looks at a situation at one point in time. Issues may be linked and a longitudinal approach may be more suitable in some analyses.

• Such models can be used deterministically and do not acknowledge that the environment can be influenced by the activities of organizations, etc.

4.

What conclusions do you draw from Tables 3.1 (p. 65), 3.2 (p. 66), 3.5 and 3.6 (p.

70), which draw comparisons between some emerging economies and the established economies of the G6? What are the limitations of such data?

The tables refer to the top 30 countries measured by GDP and the PPP per capita of selected countries as well as the findings of the Goldman Sachs BRICs report and its accompanying predictions. The tables show: • In terms of the global economy, the combined GDP of the two largest economies (USA and China) is greater than the combined GDP of the next 24 countries in the table. These include Japan, Germany, France and the UK, as well as the BRIC economies of India, Brazil and Russia.

• Table 3.2 shows a huge disparity when comparing the relative purchasing power per head of population. Whilst China has the second largest economy in the world (and predicted soon to be the largest), the purchasing power of its population is lower than many countries, including Russia.

• The Goldman Sachs data shows that the GDP growth of the G6 will be relatively stable, whereas growth rates for Brazil, Russia, India and China will be substantially larger. If anything, later data (refer to Table 3.7, p. 71) shows that growth rates have been underestimated.

• Table 3.5 predicts that the GDP of China will exceed that of all G6 countries except the USA by 2020 and will exceed that of the USA by 2050. India’s For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

•

GDP is predicted to exceed all but the USA by 2040, and that of Russia and Brazil will exceed all but the USA and Japan by 2040 as well.

Whilst predicted GDP growth for the BRICs countries is large, Table 3.6 shows that the impact on GDP per capita is less marked, even by 2050, with the traditional G6 countries generally remaining in a stronger position.

This is even more marked by looking at purchasing power parity in Table 3.2.

The key limitation is that identifying future trends is highly speculative, particularly given the time frame of the prediction. Much can happen both economically and politically to influence predictions, e.g. the banking crisis of 2008 and the debt problems of many nations, including Greece and Spain, in 2010.

However, there is some evidence to suggest that Goldman Sachs has underestimated the growth of the Chinese economy. Their predicted GDP for China for 2010 was $US 2,998 billion, yet the World Bank view (refer to Table 3.8, p. 73) is that China had well exceeded that prediction. You are also referred to Table 3.7, p. 71. This demonstrates how the initial Goldman Sachs prediction underestimated growth of the BRIC economies.

For an overview on changing geopolitics, refer to p. 67, and for the BRIC economies, refer to pp. 69–72.

5.

Using Table 3.1 (p. 65) as a starting point, obtain up‐to‐date GDP figures from the UNCTAD or the World Bank websites. What changes have occurred and what conclusions do you draw?

Answers to this question will depend entirely on the data found. Possible factors to consider are: ‐ Relative growth rates. ‐ The emergence of any rising stars. ‐ Which economies are falling back. ‐ How the BRICs countries are performing and how this matches predictions.

6.

What do you understand by the term ‘liberalization’? Why do you think the global economy has moved in a liberal direction in the past 30 years?

Liberalization is the process of shifting from state control of the economy to a free market. Some authors also define liberalization in terms of a shift towards democracy. We can distinguish between economic liberalization (that has occurred in China) and political liberalization (that has not). Liberalization is invariably linked with privatization. It is a particular phenomenon of the late 20th century and has affected many countries in major ways, including China and the former Soviet Union.

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Liberalization has also expanded in so-called liberal economies such as the UK, Germany and Canada. Here it has taken the form of market deregulation and the privatization of former state companies. The term liberalization refers to the processes and the outcomes that can vary, as between China, where the state still plays a major role, and the Czech Republic, whose move from state control to a free market led to full membership of the EU. Refer to pp. 84–85 for a general overview and pp. 73–74 for the liberalization process in China.

The global economy has embraced liberalization for a number of reasons, including: • Globalization with increased competition and the growth of global markets and global supply chains.

• Political change in state-controlled economies, e.g. the collapse of the Soviet Union and the democratization of the former Soviet bloc.

• The desire for economic growth based on trade and technology transfer e.g. China.

• The influence of supranational organizations such as the WTO and EU. Reference to this also occurs in Chapter 2, which focuses on globalization. In particular, refer to pp. 16–17, which explores liberalization as an important component of globalization, and pp. 19–20, which discusses key external drivers.

7.

Identify the main differences between Anglo‐Saxon, social market and Asian models of capitalism. Which would be the most appropriate model for a country like China to follow?

The main characteristics of the three systems are presented on pages 85–86.

More detailed information can also be found in Chapter 5, pp. 173–176. Hall and Soskice (2001) draw a distinction between ‘liberal market economies’ (Anglo‐Saxon) with ‘coordinated market economies’ (social market and Asian).

The major sources of difference are: ‐ the role of shareholders versus other stakeholders. ‐ individualism versus collectivism. ‐ the role of the state. ‐ the stability/volatility of the stock market. ‐ the responsibility for social welfare. ‐ the nature of management and their rewards. ‐ the influence of trade unions. ‐ how each responds to a recession.

Politically and, in part, economically, China is state-controlled. Both geographically and culturally, it has much in common with its Asian neighbours.

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The Asian capitalist system is a free market system, but accepts the importance of state intervention as necessary. The Asian system as operated in many parts of SE Asia emphasizes networks in business as in family life, being influenced by Confucian values that include duty, harmony and perseverance, placing importance on education and long‐term thinking. In most respects, we might conclude that China is compatible with the Asian system. However, evidence suggests a leaning towards the Anglo‐Saxon approach, with an increasingly active stock market and the increased emphasis on private capital. This has been influenced by the liberalization of the Chinese economy and the growth of the private sector (refer to Table 3.9, p. 74). In part, this may also be influenced by the high proportion of US firms active in Chinese joint ventures.

Further observations on the Chinese model may be found in Chapter 5, pp. 176– 177.

8.

What are the problems and issues facing transitional economies from the p erspective of the nation state and individual firms and their employees?

Not all problems and issues apply to all countries. There is variation between and within countries and regions,. e.g. China versus Central and Eastern Europe.

Central, SE Europe and Baltic States (CSB) contrast with Commonwealth of Independent States (CIS). Transitional economies are dealt with briefly on p. 87.

For a more detailed answer, students should be encouraged to seek their own information with guidance from tutors.

In many cases, the problems faced by countries, firms and people overlap and may be summarized as follows: • Transition causes recession – comparable to the Great Depression.

• Continued protection via state monopolies and barriers to FDI. • Limitations on political freedoms and civil rights.

• Increase in poverty. In Europe and CIS % below poverty line: 1988 – 4%, 1998 – 20%.

• Increased inequalities. Large gaps between rich and poor.

• Increase in crime rates, e.g. +300% in Czech Republic 1989‐2003.

• Increase in unemployment, e.g. Poland – 6% in 1990 to 20% 2003.

• Foreign competition driving out local firms.

• Problems linked to organization culture, employee attitude and management skills.

• Poor strategic fit between firms and the needs of the economy.

• Continued political agenda.

• Overprotected state-owned enterprises.

• Changed power base in society.

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Changing values and behaviour – resulting in feelings of insecurity.

Unemployment.

Stress.

Getting skilled workers in new industries.

Inexperienced managers.

Older managers with fixed attitudes rooted in state control and lack of decision‐making power.

• Motivation of staff.

• • • • • •

9.

In what ways does the state assist and constrain business?

The state can act as a facilitator in a number of different ways: • As a consumer through the procurement of goods and services.

• Through demand management to influence and control the direction of economic growth.

• Through grants and concessions to industries and individual firms.

• Through enabling legislation e.g. patent law to protect inventions.

• Through training programmes to address skills shortages.

• Through import controls to protect home suppliers.

• Through marketing and advisory services to enable firms to enter into or increase export activity.

The state can act as a constraint by: • Legal regulations, which increase costs for individual firms e.g. pollution controls, minimum wage legislation.

• Economic policies which increase costs, e.g. increase in the levels of corporation tax, or make it more difficult to export, e.g. changes in currency exchange rates.

• Entering into regional or global agreements, e.g. EU or WTO, which remove certain advantages for local firms, e.g. as with a protected home market.

It should be acknowledged in the above that what may be a constraint for some firms can be an opportunity for others. For example, a change in government policy to liberalize trade may be viewed as a constraint by local firms but a benefit for those firms from other countries now presented with new market opportunities.

10.

Using the three illustrations of a) a mass producer of cars, b) a university, and c) a small accountancy practice, examine how the management of each of them can attempt to influence state policy and the directions this influence might take.

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Mass producer of cars Influence on sector issues may be wielded through the appropriate employers’ association. In the UK these play a less significant role than in some other countries, such as Germany. In the UK, the size and position of such a firm in the local and national economy will mean that there will almost certainly be direct contact with the state’s representatives from the local Member of Parliament through to ministerial level, with members of the relevant state departments dealing with issues such as trade and employment. Less formal mechanisms of influence arise out of interaction with government ministers and officials in committee work, meetings and in social situations.

Issues of concern to the manufacturing company are likely to include import tariffs, foreign exchange, interest rates, economic policy in general, trade union and employment legislation. Given that the firm is likely to be multinational with interests in other countries, the state will be keen to preserve local levels of output and jobs.

A University Influence on sector issues may be wielded through appropriate representative bodies such as the Committee of Vice‐chancellors and Principals or, in some cases, the trade unions for academic and support staff. Direct representative will be made to the relevant government agencies, such as the Higher Education Funding Council, and the Minister for Education may be lobbied directly or via local members of parliament. The University’s governing body may include politically influential figures. The University may wish to influence local government officials and agencies on matters such as land and buildings. As with the car producer above, less formal mechanisms of interaction exist.

Issues of concern will include funding of the university and associated policies, the role of government agencies in matters such as quality assurance and research funding and policies on student numbers, student fees and student recruitment.

Small Accountancy Practice The size of such a concern will limit the amount of influence its members can exert.

Professional accounting bodies can exert influence at national level, but it is more likely that the significant influence is wielded by the major accounting firms.

However, partners of such a practice may be influential in local networks and could have an interest in a range of local political issues.

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11.

Do the problems faced by the WTO and EU mean that global and regional organizations will have less influence in the future?

Issues related to the WTO can be found on pp. 96–97, while those involving the EU are on pp. 97–104.

The problems faced are well documented. Whether the WTO or the EU will have less influence in the future is a matter of opinion.

The problems faced by the WTO include: - There is little evidence that it has achieved its aim of creating a level playing field and encouraging trade and economic development, particularly in less affluent countries. Many developing nations believe WTO rules favour the developed economies of the world.

- The reality is continued protectionism operated by many countries with tariffs and restricted imports. A key element in the growth of the Japanese economy lay in their resistance to imports and the high tariffs on imports they did allow.

- The WTO has been criticized for its weak stance on social and environmental issues, especially by the climate change and the anti-globalization lobbies.

- The evidence from the Uruguay and Doha rounds of talks involving member states is that decision-making is at best bureaucratic and lengthy and at worst ineffective as agreements cannot be reached and countries refuse to comply.

- Countries have circumnavigated the WTO and established their own bi-lateral or multi-lateral trade agreements, as between the USA and Japan on car imports to the USA. - There has been conflict between several of the member states, notably between the USA and China.

However, WTO claim responsibility for a massive increase in world trade since 1945 and its role as a driver for MNE and joint venture activity. WTO agreements cover 90% of world trade and China became full members in 2001. Nations have joined because they see a benefit in membership.

There are counter arguments. The growth of the global economy itself with the establishment of global factories and global supply chains have broken down borders between countries superseding role of the WTO in encouraging trade.

The inability of the WTO to help member states reach agreement and its own inability to police consistently and effectively those countries, especially the more powerful nations, which ignore its policies does not bode well for its future.

The problems faced by the EU include: - Not all members have embraced EU policies and proposals. There are strong differences of opinion among members regarding agricultural policy, monetary union, the refugee crisis and immigration.

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-

The UK has been a dissident over the years on several policies, leading to the UK leaving the EU in 2020. A key issue for many in the UK was the maintenance of sovereignty.

Several members are unhappy with the alleged dominance of Germany and France.

As the membership grew to 28 countries in 2013, there were criticisms that the large variations in the size and economic status of members made centralized policy-making unworkable.

There are large variations in income and levels of unemployment, especially youth unemployment.

With so many members and procedures, decision-making has become cumbersome.

High costs are involved in maintaining EU institutions and instruments.

The EU was unable to stem the outcomes of the financial crisis of 2008 and huge loans had to be made to some member states.

In recent years, Hungary and Poland have elected governments whose illiberal policies have violated many EU principals.

The EU maintains that its principles of the free movement of goods, finance and people have increased competition and demand and at the same time improved living standards in member states. There are signs of growing instability, with the exit of the UK, political change in Poland and Hungary, a shift to the right in Italian politics and growing dissatisfaction in several member countries. However, the influence on founder members such as France and Germany in maintaining a strong EU is great and, unlike the WTO, the EU has mechanisms to support its policies.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 3.1 HUAWEI: INTERNATIONAL POLITICS AND BUSINESS 1. What are the potential advantages and disadvantages of the UK using Huawei to advance its 5G capabilities?

Advantages • Huawei is a well-established telecoms company operating in 170 countries. The company has both experience and a well-documented track record.

• Huawei is at the forefront of telecoms innovation. It is the 3rd largest investor in R&D overall and the world’s largest R&D investor in telecoms.

• The company has supplied British Telecomm since 1993 and continues to provide effective solutions to problems in the UK telecoms network, especially in the establishment of an effective 5G network in a timely and cost-effective manner.

Disadvantages • Huawei’s provision of devices that lie at the heart of the UK telecoms network are a potential security threat to the UK. It gives Huawei the potential capability to monitor telecoms traffic within the UK and between the UK and other countries, including those of its government agencies and security organizations.

• Given the stance taken by the USA, relations, including trade relations with the USA, may be compromised. Following the UK’s withdrawal from the EU, any negative impact on UK/US trade could be economically damaging.

However, the threat may recede following the replacement of the Trump administration that was at the centre of a trade war with China.

The potential disadvantages of the UK not using Huawei • Failure to follow through the original contract between the UK and Huawei could lead to a potential trade war with China.

• There could be three-year delay on the roll out of 5G, with a real problem for those living in rural areas. The cost of this delay is estimated at £2 billion.

• Any 5G delay puts the UK behind major European competitors such as France, Germany and the Scandinavian countries.

• It presents a major setback for the mobile phone network providers.

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2. What evidence is there that Huawei is effectively an instrument of the Chinese government? Does it matter?

The ownership of Huawei is unclear. The official Huawei position is that it is a private independent company owned 1% by its founder Ren Zhengfei and 99% by a ‘trade union committee’. However, although various studies have been carried out, there is little hard evidence about the operation or membership of the trade union committee, nor is there hard evidence to prove that Huawei is in fact a state-owned company. We are left with assumption of state-ownership based on the former role of Ren Zhengfei as a former Deputy Head of the People’s Liberation Army and the strong views of certain national governments, especially the USA. The USA government has claimed that Huawei is a state-owned enterprise and that it can use its telecoms equipment as surveillance devices in foreign countries.

Consequently, the USA has restricted the use of Huawei equipment by US companies and banned the sale of US parts to Huawei. It has further imposed pressure on other countries to follow suit, including the UK. In 2020, the UK responded, following a report from GCHQ, by banning the use of Huawei equipment in the sensitive parts of its network.

All such claims that Huawei is a state-owned enterprise have been strongly denied

by Huawei, and by senior Huawei managers who are not Chinese. Some countries like Germany, France, Ireland, and Sweden have not bowed to US pressure and are happy to use Huawei technologies. Would a major multinational company, the most successful in its field, which has presented clear benefits for many countries allow itself to be used as a front for the spying activities of the Chinese government?

Over the years, state-owned companies of many countries have provided goods and services to other countries, including telecommunication companies from Germany and Japan without the attended concerns that currently affect Huawei.

Does it matter?

Yes, if Huawei’s intention is to use its position as a leading telecoms network provider and its equipment to breach the security networks of foreign powers and for spying purposes.

However, little hard evidence has been published and we are left with the assumptions of the US government and the actions of the UK Government in response to the findings of the National Cyber and Security Centre at GCHQ.

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3. What does the case tell us about the impact of geopolitics on business?

Geopolitics has always been a factor in the operation of foreign trade and in the operation of MNEs in other countries.

The American War of Independence against the British which began in 1775 was fueled by a reaction (the Boston Tea Party) to new trade laws passed by the British government. In the mid-19th century, Britain exported opium poppies to China to avoid a trade deficit. This led to widespread opium addiction with economic and social disruption. The Chinese retaliated by destroying British-owned opium warehouses in Canton. This led to two wars in which the British were successful and gained territory, trade concessions and financial compensation. In 1973, the US government created conditions to overthrow the Allende government of Chile, in part to protect American business interests comprising a large MNE presence in Chile. In addition, the history of international trade has been littered with numerous trade wars involving tariff increase to limit imports followed by retaliation by the exporting countries.

The Huawei case is inextricably linked to the rise of China as a significant economic and political power to rival the USA. This in turn fuels the rhetoric and makes the collection of hard evidence difficult.

CASE 3.2 BUSINESS AND MANAGEMENT IN SINGAPORE 1.

Identify the role of the state in the economic growth of Singapore The role of the state in economic growth may be summarized as follows: • Strong and effectively a single party state providing political stability for over 50 years.

• A clear economic strategy involving: job creation, housing provision, incorporation of trade unions, investment in education, the attraction of successful foreign businesses and a focus on high‐tech firms.

• A central role played by the Economic Development Board in economic strategy and attracting overseas investment.

• Substantial investment in both education, training and housing.

• A pro‐business outlook and pragmatism in offering incentives to MNC investors.

• Strong social control acting as an incentive for both investment and the attraction of expatriate workers.

• Developing a regional role with outward investment.

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2.

What other factors have influenced economic growth?

There are a number of interrelated factors, which include: • Geographical position in the region offering advantages as a hub for both shipping and air travel.

• Influence from successful multinational companies attracted by a strong economy.

• Cultural factors, including many positive Asian values such as collectivism, loyalty to the state, a sense of duty, a commitment both to savings and to education.

• Hardworking population.

3.

To what extent are the strategies followed by Singapore a key to the economic growth of other nations?

• • • • •

Strong state.

Successful attraction of FDI. Targeted investment.

Creation of an attractive environment for inward FDI. Aspirations as a regional leader. The nearby countries have been the recipients of most of Singapore’s outward FDI.

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BUSINESS IN CONTEXT, 8th EDITION – TEACHING MANUAL CHAPTER FOUR THE ENVIRONMENT OF BUSINESS: TECHNOLOGY AND LABOUR

In this chapter, we look at the changing nature of technology and the changing nature of labour in modern business.

The review of technology begins with an attempt to define the concept and identify technological change as a key strategy and as both a determinant and an instrument of management choice. Key changes addressed include product, process materials and transport technologies, as well as the significant changes associated with information and communications technology and digital technologies and applications in e-commerce, ebusiness and artificial intelligence. Through this we examine the expansion of the digital economy.

The overlap between technology and labour is explored by focusing on the impact of technological change on job numbers and job content, covering the more recent debates and findings associated with automation. A key point is that changes in the labour market are not always the product of technology change and some of the most significant changes are due to economic and social change. Labour itself is explored by examining trends in the labour market and employment by focusing on unemployment, flexibility, working hours, flexibility and the growth of the ‘gig’ economy. The impact on jobs and the changing nature of work are examined with relevance to the COVID-19 pandemic. There is a brief examination of the impact of globalization on the labour market and migration trends in the EU. The chapter closes with a review of changes that have taken place in terms of trade union membership and the role of trade unions.

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Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1. To what extent is technology a determinant or a product of management innovation and choice?

There are some forms of technological change that create industry standards in terms of product and/or process. In electrical and electronic goods, the shift from valves to transistors to microchips was one such change. In manufacturing technology, the development of mass production systems based on conveyor belt assembly lines was another. In such cases, these changes determine what firms must do to compete and survive in their market.

However, we tend to overestimate the deterministic nature of technology. New products and new processes are the creation of entrepreneurs like Dyson (carpet cleaners) and Ford (assembly line technology). Although Dyson has created an alternative to the vacuum cleaner, many other companies are still working on refinements to the traditional vacuum cleaner design. Ford and the designers of lean production systems (Toyodo and Ohno) set industry standards, but there are still manufacturing firms today that use alternative methods. All technological change is a product of innovation and its acceptance by individual firms is a matter of choice.

2. In what ways can technology be used to gain competitive advantage?

The key factors here are set out on pp. 114–115. They include: • Widened the scope or changed the nature of the business.

• Reduced costs.

• Created new products and process.

• Offer a source of core competence.

• Produce increased speed of operation or delivery and increased flexibility in responding to market demand.

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• • • • 3.

The potential for improved customer service.

Create new markets and cheaper products.

Improve the coordination and control of work.

Facilitate more effective structures.

Identify the various types of change that are likely to occur from the introduction of business systems based around ICT. What opportunities and threats exist for management and the workforce? What problems will be created and how may they be overcome?

A review of pp. 116–123 is a starting point, but students are encouraged to think of what these changes mean for the way business is conducted.

The major changes include: • Accessibility to information globally.

• Dramatic increase in the volume and speed of information flow.

• Transformation of process technology in both manufacturing and service industries.

• Development of new products and services.

• New ways of carrying out business transactions, e.g. e‐commerce, ebusiness and the application of digital technologies.

• Removal of geographical constraints on business location, e.g. call centres.

• The creation of more volatile global financial markets.

• The ability of members of firms to work together in real time in different countries.

Opportunities include: • Potential for expansion of markets.

• Ease of entry for new businesses in some markets.

• New ways of reaching markets.

• Improved productivity.

• Improved responsiveness to market demands.

• Improved quality.

• Cost reduction.

• Improved management control.

• For employees – new job opportunities and the opportunity to learn new skills.

Threats include: • Increased levels of competition.

• Job losses especially amongst the unskilled, but also amongst some management.

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• Problems associated with change including employment relations issues.

• High cost of certain types of new technology.

Problems may be overcome by: • Improving levels of knowledge and understanding of technology, markets and competitor behaviour.

• Training.

• Investment.

• Employee consultation.

4.

Assess the opportunities and constraints associated with e‐commerce and e‐ business for a) the firm and b) customers.

Opportunities: a) For businesses ‐ access to wider markets, including global markets. ‐ reduced transaction costs. ‐ reduced time to customer. ‐ improvements in stock control. b) For consumers ‐ more choice and information for consumers. ‐ ease of shopping for consumers.

Constraints: a) For businesses ‐ high entry costs. b) For both ‐ access to the internet is not global and varies from country to country. ‐ some consumers may be reluctant to make purchases over the internet and are concerned with privacy, security and fraud issues. However, the growth in the number of internet users worldwide would indicate that this is changing. ‐ speed of access to the internet is improving through broadband systems, albeit not for everyone.

As with the previous question, while many of the points are covered in pp.

118–123, students must think of implications and impacts.

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5.

Examine Tables 4.1 and 4.2. What conclusions do you draw?

Table 4.1 This table focuses on the top ten countries creating most value from Business-toBusiness (B2B) and Business-to-Consumer (B2C) forms of e-commerce in 2018.

This was the latest data available before publication, but data for the following period may have been distorted by the effect of the COVID-19 pandemic on such transactions.

The table reveals: • The use of both forms of e-commerce is dominated by USA, Japan and China. This reflects the investment and control of digital technologies and the digital economy, especially in the USA and China.

• As a total of e-commerce transactions, the value of B2B far exceeds that of B2C, 82.9% to 17.1%. This may be a surprise to many who associate ecommerce with their own experience of B2C involvement. It does however reflect globalization and the growth of the global factory and global supply chain.

• The table reflects four key variables: - Investment in digital technologies – dominated by the USA and China.

- Population size – where China and the USA rank 1st and 3rd respectively.

South Korea is the outlier here, ranking 28th.

- Size of the economy – where the USA, China and Japan are respectively 1, 2 and 3.

- The organization of manufacturing - both Japan and South Korea have strong manufacturing sectors based on large numbers of subcontractors coordinated by digital technologies. While not in the same league as the USA and China, both countries have large investments in digital technology.

• Unlike all other countries, where B2B dominates, the majority of transactions in China are B2C. Behind Amazon, China has the four largest digital sales platforms in the world measured by revenue (refer to Table 4.4). By contrast, the use of digital technologies in dealings between organizations lags behind other major economies.

Table 4.2 The table shows variation in the use of the internet in 2021. The numbers using the internet vary between countries, but more telling is the data on internet penetration (internet use as a percentage of population).

The table shows that China and India have the highest number of internet users, but this represents the size of their relative populations rather than penetration, which is 68.5% for China and 54.2% for India. This still represents far more users in For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

both countries than the USA. Countries like the USA, Japan, Germany, France, the UK and S. Korea have both high use and high penetration. The BRICs countries, Brazil, Russia, India, China and South Africa (not represented in this table), have relatively low rates of penetration compared to the G6 countries.

Two additional points need making: • The data has implications for globalization and the ability to network in the global economy. The data supports the views of both the anti‐ globalists and the globalization sceptics, who state that globalization is a phenomenon confined to richer countries.

• The position changes rapidly. For example, the number of internet users as a proportion of the population in China doubled to 38% in just over two years up to 2011 and, although the rise became slower to 54% in 2017 and 68% in 2021, it is still significant. India shows a more dramatic increase from 10% in 2011 to 34% in 2017 and then 54% in 2021 and has the second largest number of users to China.

Tutors are encouraged to get students to obtain up‐to‐date figures from the same or similar websites and compare their data with Table 4.2 and explain the changes.

6.

Using Table 4.5, what conclusions do you draw from the impact of changing technology on job numbers and job content?

The table examines a period of significant change in the UK labour market. The change in several occupations has been dramatic. While the table relates only to job numbers, the accompanying text refers also to job content. The largest growth has taken place in the health and care industries, in jobs relating to IT, in entertainment (which incorporates bar and restaurant work) and in professional services, especially finance. Job losses have occurred largely in manufacturing, mining, textiles, printing and aspects of work in the railways.

Some of these changes are clearly linked to technology change, such as the growth of computer and software jobs and the decline in the numbers employed in printing (refer to the News International case in this chapter) and in rail signal work (resulting from automated systems). However, many of the changes can be attributed to causes other than technology. The growth of employment in the care industry is linked to demographic and social change with an ageing population living longer. The increase in the number of assistants in education and in hospitals has resulted from policy change in those sectors and a redefinition of the job descriptions of professional staff. Several of the changes represent economic changes, such as a shift to service industries from manufacturing. As well as this, many changes are a result of political decisions, as in the case of the closure of the For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

majority of coal mines. Undoubtedly, changes are also a product of globalization, particularly in the offshoring of jobs in manufacturing.

In general, we may conclude that the evidence on job numbers is mixed: ‐ Evidence of job losses in manufacturing. ‐ Evidence in the creation of new skills and hence new job opportunities. ‐ New technology reducing cost, price and hence increasing demand calling for more labour. ‐ Globalization has meant job locations have shifted creating gains in some areas and losses in others. ‐ In general, it is difficult to isolate the impact due to the presence of so many variables.

In general, the evidence on job content is mixed: ‐ There is an ongoing debate about the Braverman hypothesis of technological and organizational deskilling. ‐ The reality is evidence of both deskilling and upskilling and a polarization of jobs.

Many of these issues are discussed in detail on pp. 127–132.

7.

Examine the major employment trends in the global labour market over the last 20 years. What have been the major drivers of change?

Changes in the labour market include: • Continuing job losses in the primary sector and increasing job losses in manufacturing.

• Job gains in the tertiary sector and in the knowledge economy.

• Job changes linked to technological change.

• Increase in the use of part‐time and contract labour.

• Rise of long‐term unemployment.

• Increase in female employment.

• Importance of education and training as a prerequisite for labour market entry and career progression.

• Polarization in the labour market ‐ highly skilled, educated worker versus unrewarding jobs and unemployment.

Drivers of change include globalization, technological innovation, cost, economic change, political policies and widening access to education.

The impact on the global labour market has been less than predicted in terms of For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

labour flows. However, migrant workers can have a significant impact on developing economies by sending money home. Probably the biggest impact has been in the migration of jobs to cheaper labour economies. This started in manufacturing, but it has spread to the service industry and to newer industries, such as call centres.

These issues are discussed in more detail on pp. 133–137 and pp. 142–143.

8.

What are the benefits and problems associated with the ‘gig’ economy?

In any discussion of the ‘gig’ economy, the first problem is one of definition. The term generally applies to those who are self-employed yet work for others and have no contracted hours of employment. The term has been applied to highly varied forms of employment; on-call employees, agency workers, freelance workers, and even those who derive income from rental properties. These issues and the benefits and problems are presented on pp. 139–141.

Benefits • For the government, it creates jobs and lowers the unemployment rate.

It is also suggested that it is associated with productivity increases and with the stimulation of demand.

• For the consumer, it offers products tailored to their specific needs, e.g.

Uber cabs and food delivery to their home.

• For organizations, it enables them to reduce costs by replacing full-time employees with casual labour, while still retaining control.

• For workers, it offers autonomy, flexibility and, for some, an improved work-like balance.

Problems Most of the focus here is on the ‘gig’ workers themselves in that: • They have no guaranteed income, meaning they are denied access to credit.

• They have no legal rights of employment.

• They have limited access to the social welfare system.

• The work places demands on them that conflict with family life and leisure time.

• They receive no training and career enhancement opportunities.

In addition, governments lose tax income and contributions from employers. Organizations may suffer productivity losses and damaged reputation as trained full-time employees are replaced by casual labour.

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However, the problems that seem to be the most discussed tend to focus on those workers who have no control over the work they do. Some types of ‘gig’ worker, such as many freelance journalists, choose to be freelance to allow them to control their working lives.

9.

What major changes in technology usage and methods of working have been created by the COVID-19 pandemic? Which of these changes will survive the end of the pandemic?

These issues and associated questions can be found on pp. 143–145. However, as COVID-19 was still in evidence at the end of 2022, students may be able to obtain more up-to-date information for an answer to the second question.

Technology usage • Increased use of digital technologies for all aspects of work.

• Increase in the use of virtual meetings using platforms such as Zoom and Teams.

• Increase in email activity.

• Increase in online shopping.

Methods of working • Working from home became the norm wherever this was applicable, as with financial institutions and many kinds of service work.

• More frequent use of meetings and emails.

• For homeworkers the working day was extended by up to 10% on average, although there was mixed evidence on productivity and worker satisfaction.

• Homeworking created problems for many workers. These included the availability of working space at home, the conflicting demands of work and home and videoconference fatigue. In addition, it meant that many missed the opportunities to socialize with work colleagues during the working day.

Other issues related to working practices • There was an increase in resignations. Some saw the opportunity to take retirement or simply preferred to avoid the commute to work. Many overseas workers returned home, although Brexit was an additional influence here.

• Workers leaving organizations for whatever reason created a shortage of labour, leading, in some cases, to a ‘battle for labour’.

• Some sectors were affected more by the pandemic than others, with work stopping altogether. Airlines, tourism, hospitality and the entertainment and cultural industries were especially affected.

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Will the changes continue?

As the impact of the pandemic lessens and economies begin to recover, and people return to work then previous working arrangements will return for many, especially in those areas that were effectively shut down by the pandemic.

However certain changes will remain. These include: • There is evidence that the practice of virtual meetings will carry on. They are seen as convenient and often take less time than face-to-face meetings.

• Similarly, there is evidence that homeworking will continue for greater numbers than before the pandemic. In many companies, hybrid systems of working are being developed in which time is split between office work and homeworking.

• As more people become accustomed to online shopping, this too will be a factor for many, leading to a further decline of high street shopping.

However, many of the changes associated with the pandemic are not new but have built on and, in some cases, accelerated trends that have been present for some time.

10.

Starting with Tables 4.14 and 4.15 assess the changes that have occurred in trade union membership since the 1990s. What lies behind the data?

Table 4.14 shows trade union density in selected OECD countries over a 54-year period since 1965. Trade union density is the proportion of workers who are members of a trade union and enables us to compare different countries. Table 4.15 draws the comparison between union membership in public and private sectors over a 27-year period since 1993. Some reasons behind the data are set out on pp. 147–148.

Table 4.14 reveals: • A significant decline in TU density in most countries, with over a 50% fall in membership in many.

• Since the 1990s, the decline has been greatest in Australia (58% decline in membership), Germany 45%, UK (31%), Japan (30%) and the USA (28%).

• The decline is notable in Germany, given the historic state support for trade unions and their role in a major instrument of co-determination. The decline in the USA is on a traditionally low union membership.

• Membership has been more stable in some countries, notably Sweden, Italy, and S. Korea, although S. Korea has a fairly low density. Sweden, a country with a historically high level of trade union membership, has experienced a membership fall of 22% since the 1990s.

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A number of factors lie behind the changes. These include: • A weakening of trade union influence in determining pay and conditions and a subsequent decline in collective bargaining.

• Clear variations between the types of business, e.g. older versus newer industries and public versus private sectors.

• The underlying issues are historical, economic, political and cultural and include: - Structural changes in the economy with the decline in most countries of traditional industries, which formed the stronghold of union membership in most countries.

- A move from collectivism to individualism in many countries.

- The influence of overseas firms in the private sector, especially those from the USA and Japan. Such firms tend to be less tolerant of unions.

- Unions appear to be less attractive to new forms of labour in industries such as digital technology and new types of job market entrant.

- Changing political ideology and government policies and laws, e.g. especially since 1979 in the UK. - Globalization and the influence of foreign multinationals and joint ventures.

- The growth of non-union companies, where the discouragement of union membership is a strategic goal.

- The growth of new forms of temporary labour and variations of the ‘gig’ economy.

Table 4.15 reveals that in the UK: • Public sector union membership is higher than that in the private sector.

• Decline in the private sector from 1993‐2020 has been 55%, while in the public sector it is 21%.

• Underlying causes include:  The same factors for the private sector as listed in the discussion of Table 4.14 above.  A switch in the private sector from industry to services, which historically has a lower TU membership.  In the public sector, a traditional stronghold of union membership, there has been a decline due in part to the reduction in public services and in part to an introduction of private sector firms carrying out public sector contracts. However, there remains accommodation of trade unions in the public sector, especially in local government, health and education.

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Case study questions and answers General As with most case studies there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 4.1 EBAY 1.

What technological and social changes can be identified in this case?

• •

• • • 2.

Key developments in ICT and the expansion in ownership of and access to personal computers.

The increased use of computers to carry out household tasks and check information. The development of buying online and the development of systems such as Paypal to facilitate this.

The preference for recycling unwanted goods. eBay as the extension of the car boot sale, a popular phenomenon since the 1980s.

Some make broader claims, seeing eBay as the democratization of the marketplace.

What is the basis of eBay’s success and continued growth?

• • • • •

•

The company’s success was based on all three of Porter’s sources of competitive advantage – its method of selling was innovative and lowcost and much of the initial business involved niche products.

A low-cost operation in terms of infrastructure, staff, equipment etc.

Low marketing costs and almost negligible distribution costs.

Recruitment of experienced senior managers with proven track records.

Simple operating systems that are easy for sellers and buyers to use.

Clear operating rules.

Recognition that the company needed to change with the market as the original operation declined in its use. The company expanded the market by product type and extended the original concept to allow items to be sold by established businesses.

Expansion of overseas markets by careful acquisition.

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3.

What problems and issues may pose a threat to eBay? • •

•

• • • 4.

Slow-down of the core auction business.

Costs associated with innovations and acquisitions whose subsequent performance were well below expectation or that better systems were available, e.g. Skype, Paypal, eBay Express.

In some of these cases, the company could be accused of overexpansion.

Competition from other companies. Porter’s position on competitive advantage can also be used to analyze the changing fortunes of eBay. As business grew, it became less niche and a significant number of copiers entered the market.

Ebay was no longer innovative, and its low-cost methods were replicated by others. The market itself changed as online sales became commonplace for all kinds of goods and companies such as Amazon came to dominate the market.

Bad publicity related to lawsuits and about the switch in emphasis from individual auctions to offering a platform for larger companies.

Publicized cases of fraudulent behavior in which buyers falsely claim non-delivery of goods.

Increased occurrence of computer hacking.

What conclusions do you draw from Tables 4.3 and 4.4 and what do they tell you about eBay’s operations and market position?

Table 4.3 reveals that net revenues and profit levels have not grown over several years. However, they have been maintained at a similar level at a time of intense competition in the online sales market, with strong competition from the USA and China. The surge in revenues and profit in 2020 is due entirely to the impact of the COVID-19 pandemic on shopping behaviour. The forecast for eBay is that the pattern of the previous years will return in 2023.

Table 4.4 shows that the online sales platform business is dominated by Amazon, whose revenues and market capitalization both exceed the combined sums of those reported by its major global competitors.

Over the years, eBay has attempted to move away from its origins as an auction site and diversify into various forms of online selling of a wide variety of consumer goods. However, its acquisition policies and its launch of companies such as eBay Express, with its ambition of challenging Amazon, have been costly failures. Many believe that instead of trying to For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

compete with Amazon, eBay should capitalize on its position as the world’s largest auction site, providing a platform for sellers and buyers to interact.

In other words, it should return to the origins that made it a successful and fast-growing company.

CASE 4.2 NEWS INTERNATIONAL AND WAPPING 1.

Identify and assess the relative importance of the factors that led News International to move to Wapping.

There are a number of interrelated factors: ‐ The cramped facilities in Fleet Street and the availability of land in Wapping. ‐ The need to increase the size and scope of the newspapers. ‐ The need to introduce new technology. ‐ The need to make a break with traditional styles of management and industrial relations. ‐ Increased competition. ‐ The need to reduce costs, especially labour costs through overstaffing. ‐ A supportive political climate.

All the above factors are significant and probably no one factor stands out.

However, some see the link between profitability, new technology, reduced labour costs and changing the nature of management‐union relations as key.

2.

What does the case tell us about the introduction of new technology in a traditional industry? To what extent is the case typical?

A number of factors emerge. ‐ New technology was essential to the competitiveness of the newspaper industry. ‐ The introduction of new technology is related to other factors, such as management attitude, the strength of trade union opposition, the style of the owners, the way it is introduced, etc. ‐ The advantages of a greenfield site in establishing technology change and other forms of change.

The case is probably NOT typical. ‐ Union and management attitudes were different in the Fleet Street newspaper industry than in other industries. ‐ The change occurred alongside a radical change in the political and legal climate.

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‐ Trade union strength was probably greater in this case than elsewhere.

- News International was part of a large global firm, News Corporation which meant that any disruption could be cross-subsidized by revenues from elsewhere. ‐ The entrepreneurial style of Murdoch may also be a factor.

3.

Many who lost their jobs at Wapping remain resentful of their treatment at the hands of News International. Have they a case? Do you believe that the management of News International behaved ethically?

Any answer here will depend on the values of class members. The clear debate is between what is ‘good for the business and profits at any price’ versus ‘the need to preserve jobs at any price’. There are many possible variations along this continuum. An important consideration is the extent to which the Wapping dispute was in part deliberately created by senior management (especially Murdoch) to bring about the changes they required for the continued profitability of the business, i.e. they wished to shed all those associated with the previous regime in Fleet Street. If this is the case, then there are ethical questions to be raised.

This question can form the basis of a lively class debate.

A number of probable interpretations emerge from a management perspective: • Prior to Wapping, management in the newspaper industry were in a relatively weak position. The job control exerted by trade unions drove up costs and they feared confrontation as this would damage sales in a highly competitive business.

• However, the News International management clearly saw that the introduction of new technology and the move to a Greenfield site were essential to the competitiveness of their firm.

• Management took advantage of a radical change in the political and legal climate.

• Management knew that they would face strong opposition from the unions and probably used the move to Wapping as a deliberate attempt to break with the past and break the hold of unions on job control.

• They were aided in this by the global nature of Murdoch’s business. This meant that they could cross-subsidize the loss of newspaper production in the UK by profits from other operations. Other UK newspaper owners did not have this luxury and hence avoided such a confrontation.

• The influence and entrepreneurial style of Murdoch was a clear factor in the dispute.

From a trade union perspective:

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•

• •

4.

Unions in the Fleet Street newspaper industry had enjoyed significant advantages. Traditionally, unions had control over recruitment and staffing levels and members enjoyed higher rates of pay than union colleagues elsewhere in the industry, and indeed in other industries. Any change which threatened this status quo would inevitably be met with strong opposition.

The two unions involved were supported by others in the trade union movement as well as political groups, all of which almost certainly saw this dispute as a symbol of opposition to the Thatcher government.

The union opposition held out for a considerable time but was defeated ultimately by a number of factors: - The financial strength of the Murdoch empire to withstand such a dispute.

- The exhaustion of trade union cash reserves.

- The dwindling support of union members not directly involved, some of whom came to view Fleet Street workers as overly privileged within the industry.

- The involvement of the EETPU who saw the dispute as an opportunity to benefit their members, thereby weakening the position of the unions involved in the dispute.

- Changes that were taking place in the provincial newspaper industry.

- Government reform of laws governing trade union conduct, which weakened significantly their power to act.

- Political support for Murdoch from senior members of the government.

- The direct intervention of the courts (a relatively new phenomenon).

What conclusions do you draw from the case about industrial relations in the UK in the 1980s and beyond?

The case coincided with a radical shift in the nature of industrial relations in the UK. The changes include: • The weakening of trade unions and the start of the decline in union membership.

• The introduction of laws to curb the power of trade unions.

• The willingness of the company to use the courts and the willingness of the courts to impose fines on trade unions.

• The disenfranchisement of trade unions from any influence in UK politics.

• The strengthening of the management position.

This radical shift was the product of a political shift to the right that was not just in the UK under Thatcher but in the USA with Reagan and in Germany with Kohl. The Murdoch press was a big supporter of Thatcher and allegedly Murdoch had a good For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

personal relationship with the PM. The UK press has always influenced voting in general elections (in 1997 the Murdoch press switched parties and supported Blair).

However, the key to this case is the global nature of Murdoch’s business. He may not have liked a ten-month strike and loss of revenues, but News International’s contribution to Newscorp’s revenue stream was low and Murdoch could easily ride out the strike. By comparison, most of the other newspaper owners had no global empire to fall back on. This is why Murdoch took a tough line and was determined to introduce the technology. One could argue that the stance by News International deliberately inflamed the situation. They wished to rid themselves of the Fleet Street workforce for good as it would have been almost impossible to achieve the corporate goals by accepting old practices.

The case is ostensibly about employee resistance to technological change. It is also about politics, the changing nature of union power and above all the market, financial and social power of the global corporation.

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BUSINESS IN CONTEXT, 8th EDITION – TEACHING MANUAL CHAPTER FIVE CULTURAL AND INSTITUTIONAL FRAMEWORKS

In this chapter, we explore the convergence‐diversity debate by examining the basis of and evidence for convergence and the basis of and evidence for diversity based both on culture and institutional arrangements in a particular country.

The chapter explores the major theories and explanations, examines the implications for management behaviour and offers a critique of each of the major approaches.

The authors also start to explore the implications of societal and geographic diversity and its implications for the organization and its management. The emergence of a Chinese model is considered.

The chapter ends with a look at Japan and attempts to chart the rise and decline of the Japanese economy using convergence, cultural and institutional diversity as explanations.

The conclusion of the examination of Japan and the Wal‐Mart cases is that a number of explanations can be used together.

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Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter.

It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them.

In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

What do you understand by the concept of convergence? What is the link between convergence and globalization?

Convergence is where societies are coming together and sharing ideas, practices and aspects of their culture. Convergence in business is happening in terms of technology, strategies, products, structure and perhaps ways of thinking about business. Globalization, with its emphasis on global markets, global products and global networks of organizations, has led some to conclude that the world is converging. The earliest advocates of convergence believed it was largely due to the diffusion of productive technology. This not only meant that societies used the same technology to make things but that this required similar skills and similar standards of education. Others have seen an important role played by economic convergence with developing nations catching up and convergence based on best practice disseminated via multinationals. All these cases imply that the same business ideas and practices can be used in different societies.

There are various views on the link between convergence and globalization. Some see clear links between technological convergence, economic convergence and the growth of multinationals as contributors to convergence. As the influence of globalization has grown, convergence has probably been accelerated. Levitt spoke about the global market and the convergence of tastes globally. Many manufactured goods are made through the assembly of components made in factories around the world (the concepts of the global factory and global supply chain). This implies a convergence of technology and working methods. There has been a convergence of some cultural values, notably individualism, replacing collectivism and universalism (business based on rules and contracts rather than on relationships).

However, although we can see many examples of convergence in the global economy, there are also many examples of diversity based on economic, cultural, political and institutional differences. There is also the deeper philosophical question – convergence on what?

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2.

What do you understand by the concept of culture? Identify the various forms of cultural difference that you can see in your own environment.

An understanding of culture should include the following: • Learned behaviour.

• Belongs to a group and differentiates them from other groups.

• Comprises values, beliefs and norms (it is a useful exercise to get students to define these terms).

• Influences practices, processes, institutions and artifacts.

• Passed on to the next generation (family members, group members, workers, etc.).

• Slow to change.

In identifying the various forms of cultural difference, students should give their own examples to go with the six levels defined on p. 163.

3.

To what extent are our perceptions of culture governed by our own background and upbringing?

Our perceptions of culture are driven by our lived experience. The authors hope that this question gives the scope for a wide-ranging discussion of how we are influenced at every level from birth and our experiences.

4.

How useful is the concept of culture in explaining how businesses operate in different countries? To what extent can business ideas and management techniques developed in one cultural setting be transferred to another?

Cultural differences can be used to explain variations in business practices across the world. For example, research has indicated that cultural differences account for: • The speed and thoroughness of the decision-making process.

• The importance of status.

• Methods of motivation and reward.

• Strategic objectives, e.g. long term versus short term.

• Styles of managing people.

• Styles of negotiation (and any number of other examples).

Using culture to explain differences in practice and behaviour should be viewed with caution. See the limitations of using culture as a variable and individual critiques linked to each ‘theory’. For example, refer to the critique of Hofstede on pp. 166–67.

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Business ideas and management techniques may be more easily transferred between countries that share similar cultures, e.g. the USA and the UK, Germany and Austria, Japan and South Korea, but even here there may be subtle cultural differences that inhibit effective transfer. It may not be culture that is the inhibiting factor but differences in economic, legal and political systems.

5.

Assess the contribution of Geert Hofstede to our understanding of business.

Hofstede carried out highly influential research on the impact of cultural differences on business practice and behaviour. This influence has made him a highly cited author in business literature. His influence is greatest in the discussion of national differences, but he has been influential in organizational culture as well. His methodology has been repeated and his variables have been used extensively in other research. He offers a framework for understanding differences in business practice that are due to culture and therefore offers a basis for training the international manager and for assessing the likely success of joint ventures. His work has been criticized due to the following reasons: • Its methodology ‐ his survey questions occasionally overlap and his major work was carried out in one firm ‐ IBM (although this is also a methodological strength in that many variables other than culture were constant).

• His work was carried out by Western researchers and is therefore biased towards Western perspectives (although his Asian studies go some way to refute this).

• Major work was carried out 1967–73 and is therefore dated as cultures and other variables change.

• There are limitations on basing findings on one company.

A full discussion of the limitations is offered on pp. 166–67. Hofstede, however, maintains that his work is evolving and his model has been extended in line with the findings of the ‘World Values Survey’ (refer to pp. 169–70). Despite the many criticisms, his work remains influential.

6.

Based on the data in Table 5.2, what are the implications for joint venture activity between three firms from the UK, China and Japan, respectively?

• •

There is considerable variation between countries on many of the five variables, particularly power distance, individualism‐collectivism and masculinity‐femininity.

There are some similarities. The UK and China have similar scores on uncertainty avoidance, indicating that both UK and Chinese participants will be more comfortable with ambiguous situations than their Japanese For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• •

7.

counterparts. Both the Chinese and Japanese are more long‐term oriented than the UK staff, suggesting potential problems with strategic priorities.

If we base our conclusions on these cultural dimensions alone then we may predict significant difficulties in establishing a successful joint venture.

However, the data must always be viewed with caution for the reasons given in the answer to Question 4 and the limitations of cultural data generally. In addition, there may be other variables which are more significant than culture in affecting the outcomes.

What do you understand by the ‘institutional’ and ‘business systems’ approaches and how can such concepts explain differences between business policies and practice in different countries?

‘Institutional’ and ‘business systems’ approaches emerged at the end of the 1990s to explain differences in political and economic systems. The approaches focus on institutions and groups as actors in a particular economic and political system and the relationship between them. The institutions and actors include banks, firms, employees, customers, suppliers and broader concepts, such as the education system and the workings of the stock market. These approaches are often used as an alternative explanation to that of culture, yet culture can be an important influence in, for example, explaining variations in stock market behaviour or employer‐employee relationships in different countries. The key issue lies in the relationship between actors a source of variation. Thus, traditionally suppliers have had a very different relationship with firms in Japan than in the UK or USA and banks appear more supportive of business in Germany and Japan than in the UK. Based on variations in these relationships, researchers have identified country clusters. For example, Whitley (2000) identifies six types of business system and Hall and Soskice (2001) differentiate between liberal market economies, typified

by UK and USA and coordinated market economies, typified by Germany and Japan. The key differences that emerge relate to the degree of integration between the various actors and institutions and it is this that leads to differences in business behaviour and practices.

8.

What are the arguments for and against the convergence on the Anglo‐Saxon system by countries such as Germany and Japan?

These are presented on pp. 178–79. In essence, the argument is that Germany and Japan (coordinated market economies) are moving closer to the Anglo‐Saxon business system typified by free markets, more active stock markets and greater For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

freedom for managers in making decisions, greater competition, more flexibility and more short‐termism.

The evidence for this shift in Germany and Japan is based on fairly recent changes as a result of globalization. The changes are increased prioritization of the shareholder, the reduced influence of banks, less worker protection, more short‐ term strategies and the adoption of more competitive US practices in HR. However, evidence persists that Germany and Japan still represent more coordinated market economies than found in the USA or the UK. This conclusion is based on evidence pointing to a greater involvement by banks, more employee involvement, greater cooperation and commitment and, especially in Germany, a more detailed regulatory framework.

9.

How can convergence and diversity be used to explain the development of, and specific problems associated with, the Japanese economy?

These arguments can be found on pp. 179–83 and may be summarized as follows.

The argument based on convergence: • Japan’s late industrial start but rapid industrial growth was based on their copying many features of successful economies in the 19th century – namely the UK, the USA and Germany.

• This was turned around in the 1980s as firms, particularly in the UK and the US, copied Japanese management methods.

• The decline of the Japanese economy in the 1990s has been attributed to the adoption of Anglo‐Saxon approaches to investment in the search for ‘easy’ profits, an approach that was found wanting as the ‘bubble’ economy burst.

The argument based on culture: • Based on Hofstede, the Japanese have moderately high scores on power distance, very high scores on uncertainty avoidance, fairly high scores on collectivism, very high masculinity scores and high scores on long‐term orientation. Culturally, this sets them apart from the UK and the USA and even Germany on some dimensions.

• A key role is ascribed to duty, honour and loyalties as positive influences in economic growth.

• Apart from the general problems of using culture as an explanatory variable, there are difficulties in ascribing economic growth or decline to culture. Since culture represents fairly deep‐seated core values that persist over time, can the same values explain both growth and decline?

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The argument based on institutions: • The rapid growth of the Japanese economy, particularly after the Second World War, has been ascribed to the supportive role of the state and the banking system, the close relationship between firms and their suppliers and the stability of the labour market.

• However, during the Japanese slump which began in the early 1990s, the state has been criticized for over‐regulation and over‐protection; and banks have been accused of reckless lending and questionable behaviour. The slump has caused firm closures and redundancies which have destabilized the labour market and weakened the loyalty ties between employees and their firms.

CASE STUDY QUESTIONS AND ANSWERS General As with most case studies there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 5.1 WAL‐MART IN GERMANY 1.

To what extent can the failure of Wal‐Mart in Germany be attributed to differences in cultural values between Germany and the USA? Points can include: • Wal‐Mart has a strong corporate culture, focusing on staff commitment and customer service.

• US culture is more individualistic and has a marginally higher power distance.

Germany has a higher uncertainty avoidance measure.

• There is a lack of experience in senior management of dealing with other cultures. Do they lack adaptability and languages skills? Certainly, Wal‐ Mart struggles in some of its overseas locations when Carrefour seems to do much better.

• Different attitudes of US versus German staff over issues such as expenses and hotel accommodation.

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•

• •

2.

Key issue of public versus private space. Americans have a much larger area of public space, whereas Germans have much less so and tend to be more private. This explains a number of things – why German customers resented intrusion by Wal‐Mart staff as baggers and greeters and why German employees resented attempts by the company to control aspects of their lives.

There was a perception by German customers that baggers and greeters were adding to cost and therefore Wal‐Mart were not giving value for money.

Is the assumption by Wal‐Mart that if it works in the USA it works anywhere cultural imperialism or naivety?

To what extent can the failure be attributed to the institutional and regulatory framework in Germany?

Points can include: • Anglo‐Saxon versus social market system – US firms are less accustomed to working under a highly regulated framework.

• Acquisition strategy as entry into market is the only real way possible because of government restrictions.

• German zoning regulations favoured smaller stores, contrary to Wal‐ Mart policy.

• Strength of German TU and other forms of representation were not appreciated by Wal‐Mart.

• Similarly, the important role played by employers associations in Germany were not appreciated by Wal-Mart.

• The company failed to comply with German regulations for the disclosure of information, especially financial information, despite this being a standard requirement in most countries. It is clear that Wal-Mart were willing to pay the fines for this transgression rather than make competitors, customers, suppliers and other stakeholders aware they were losing money.

• German law deemed it illegal for the company to control what employees did in terms of their private relationships (link to public versus private space).

• Loss leaders (a key Wal‐Mart marketing strategy) is illegal in Germany to protect the smaller retailer.

• Germany placed a limit on opening hours (24/7 another key Wal‐Mart strategy) to protect the smaller retailer and employees.

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3.

What other factors might have contributed to the failure of Wal‐Mart in the German market?

• In the USA, Wal‐Mart wielded significant market power. This may explain their perceived arrogance in overseas markets and their lack of effective planning for overseas operations.

• Wal‐Mart’s entry into Germany coincided with a recession.

• Small market share in Germany meant no power over suppliers and hence over price as in USA. • Competition in Germany is very strong regarding the same basis that Wal‐ Mart liked to employ – low price, diverse product range and own brands.

• Market entry on the basis of acquisition did not work since they bought into two stores with poor reputation and had only 1.1% of the market.

• No control over the land (for expansion) and inherited poor layouts (with cost of change).

• Poor choice of CEOs. • Bad publicity for the company during its time in Germany – this was not helped by court cases and clashes with the government (at a time of anti‐ American feeling in Germany over Iraq invasion).

• Overall, the German operation was dogged by a series of poor decisions by Wal‐Mart managers. The German market was attractive in terms of size, importance in Europe and in spending power, but Wal-Mart might have been better advised NOT to enter the market given that their only means of entry was to purchase stores with a small market share.

4.

How would you assess the chances of Wal-Mart in the Chinese market?

Despite having a presence in the Chinese market for over 30 years, Wal-Mart have failed to extend their operations to any great extent. Their oligopolistic business model, whilst suited to their US based operations, is ill-suited to the Chinese market. Many of the reasons for the relative lack of success are similar to those in Germany: • Weak local partnerships and alliances • Lack of strength on procurement relationships • Limited store location choices • Poor logistics infrastructure • Inability to match growth of larger Chinese competitors • Competing demands of standardization and localization not successfully met Chinese business culture is highly dependent on the notion of guanxi where social and family connections are considered the basis of strong business For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

relationships. This in part explains the weak relationships with partners and suppliers.

Relations between the US administration and the Chinese government are also relatively weak, with the Chinese government tightening the regulatory environment with respect to foreign investment.

In terms of drawing a conclusion, one could favour other factors. There are many successful US firms operating in Germany which seem to have little problem working with different cultural and institutional frameworks. So why could WalMart not cope? It has to be connected to a combination of bad planning, poor decision-making and probably arrogance based on the power they wield over competitors and suppliers in the USA. Their market share and the nature of the competition in Germany meant they were unable to operate as they did in the USA.

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BUSINESS IN CONTEXT, 8th EDITION – TEACHING MANUAL CHAPTER SIX ORGANIZATIONAL ASPECTS OF BUSINESS

In this chapter, we focus on a number of organizational topics and issues. Five have been selected, namely goals, structures, size, ownership and organizational culture.

In our discussion of goals, we examine the link between goals and strategy, how they are developed and explore the potential of goal conflict and the mechanism used to deal with it.

In structure, we review the choice open to managers and examine the key factors that influence those choices. In particular, we introduce the work of Alfred Chandler and the link between strategy and structure, as well as the contribution of structural change to the growth of the multinational. We examine the various structural forms and more recent trends before questioning the link between structure and performance.

Under ownership, we identify the different kinds of firm according to variations in ownership. Two key issues are discussed; the separation of ownership and control and the links to the ‘agency problem’ and issues related to the public sector and to privatization.

Size is viewed briefly in a number of different ways, but the major element of this section is a review of the nature and contribution of the small firms sector.

In the final section, we distinguish between organizational (a product of the interaction of several variables such as size, strategy, market, history, technology, For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

etc.) and corporate culture (a culture created, often by owners or senior managers to achieve specific strategic ends). We explore the relationship between such cultures and organizational performance.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

How are goals formed and what are the major difficulties encountered in goal formulation and implementation?

Goals are the product of interest groups and coalitions within organizations.

The process will be influenced by external factors such as economics, markets and competitors, and internal factors such as the financial position of the organization. The ability of an interest group to influence goals will depend on the power they have within the organization, based on position in the hierarchy, skills possessed and legitimacy in the eyes of other stakeholders.

Because of the link between goal implementation and power, the stated goals of any organization are generally the product of the dominant coalition.

However, since organizations comprise a number of different interest groups, it is common for the stakeholders to conflict over goals. Such conflict may be settled by negotiation and bargaining or by controls exerted by the dominant coalition to ensure minimum compliance.

2.

What are the major causes of goal conflict and how might they be resolved?

Most organizations comprise different interest groups and coalitions. These groups have different objectives and different perspectives on the direction the organization should follow. Classic studies of goal conflict reveal differences between shareholders and managers, between different functional groups. In multinational firms, conflict may also arise as a result of cultural differences.

Such conflict is usually resolved by: • Bargaining and negotiation.

• Acceptance of the goals of top management as an implied element in the For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• •

3.

employment contract.

Controls set up by top management – technological and financial controls and systems of reward and punishment.

Attempt by some managers to allow different groups to achieve their goals within the framework of corporate objectives.

Assess the relative importance of the various strategic, organizational and environmental factors which influence organizational structures.

There are many factors which influence structure. These are identified in detail on pp. 200–206. They include history, technology, size, changes in the firm's environment, strategy, national and corporate culture and the behaviour of interest groups. Whilst influential writers such as Chandler argue that strategy is the major influence and that structure should always follow strategy, this is not always the case and some managers use structural change to create new strategic directions.

4.

Why did firms adopt multi‐divisional structures? What advantages do they have over functional structures?

The move to multi‐divisional structures was first noted amongst US multinationals in the 1920s and 1930s. The acknowledged study on this change is undoubtedly that of Chandler (1962). He found that the move to a multi‐divisional structure was the increase in complexity of operations. This was brought about by a number of different factors for different companies, e.g. for Standard Oil, it was a response to legal restrictions on expansion; for GM, it was the growth of product diversity; for DuPont, it was the necessity to find new product markets; and for Sears, it was the change in society that led them to switch from mail order to department stores.

In each of these cases, the result was the creation of several divisions, each as a profit centre based around products, geography or both. According to Chandler (1962), the change was a result of changing strategy motivated by a crisis. Chandler did not regard the new structures as a perfect solution but they had the advantage over functional structures by offering increased coordination and control in an increasingly complex operating environment.

More information can be found on pp. 200–206.

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5.

Assess the advantages and disadvantages to both management and employees of flexible forms of organization.

Through various forms of flexibility (refer to the list on pp. 212–214), management will seek to reduce costs (a flexible work force is usually a smaller work force) and enable the firm to respond effectively to market changes and customer needs. For employees, flexibility may offer opportunities for skills development and higher wages. Some forms of flexibility, especially temporal, can enable employees to fit work around their other demands, e.g. for those employees with responsibility for children.

Research suggests that most employers see flexibility as a cost‐cutting exercise. For management, the major disadvantage could be that part‐time and contract workers are less committed to the organization. Most of the disadvantages fall on employees. Legge (1998) calls flexibility, "gift wrapping of employee degradation". The various issues for employees include: • Less security via part‐time and contract work.

• Job losses.

• Intensification of work via multiskilling.

• Need to work unsociable hours.

• Exclusion – part‐time and contract workers have more difficulty obtaining mortgages, car insurance, etc.

6.

How significant is the separation of ownership and control to the way businesses operate? Is the agency problem an issue today?

The separation of ownership and control was an issued raised by Berle and Means (1932) following a study of the most profitable non‐banking companies in the US. They found that the largest and richest of these were controlled by professional managers and not owners. They saw this as a potential problem and an issue that challenged a fundamental principle of US law that stated that owners of property were entitled to do with it as they wished. Berle and Means (1932) argued that this was rarely a problem because managers were professionals and act responsibly. However, there may be a problem when owners wish to determine the goals of the firm and decide how the business is to operate. This will be particularly apparent in sole traders, partnerships and family firms.

The separation of ownership and control became an issue with the formation of joint stock companies. The assumption was that this placed control in the hands of professional managers, whilst shareholders were largely passive.

Two factors complicate this position: • Some shareholders are very active in trying to control the company. This is particularly true of large institutional shareholders. In general, there has been a recent upsurge in shareholder involvement in UK firms, in most cases as a protest against pay awards given to top managers.

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•

Many managers own shares and their fortunes are tied to those of the company.

However, the issue became live following the publication of an article by Jensen and Meckling (1976). This pointed to the conflict of interests between principles (owners) and their agents (managers) and the costs incurred by principles placing controls upon agents. Recent shareholder protests at the remuneration packages of senior managers, which effectively reduces the pot out of which share dividend is paid, and the banking crisis of 2008 have suggested that the agency issue is alive today. The banking crisis was attributed to the greed of senior managers, the risky decisions they took and the lack of control over them.

7.

Examine the advantages and the prime beneficiaries of privatization. To what extent will privatization solve the problem of managing public sector organizations?

Many advantages of privatization have been cited. These include: • Privatization increases competition, which increases the drive for efficiency and productivity and results in quality improvement, price reduction, better customer care, growth and profit. The prime beneficiaries here are the firm and its shareholders, the customers and society at large via an improved economy. Presumably, employees also benefit through being associated with a successful company.

• Firms will be more responsive to changes in the market and to global changes generally. The prime beneficiary here will be the firm and its shareholders.

• Managers and other employees will be able to receive incentives.

• Newly privatized firms will have more freedom to raise revenue and invest.

• The state will benefit via income from share flotation and a reduction in public sector borrowing.

The problems of the public sector being addressed include: • A need for clearer goals.

• A removal of financial constraints.

• A removal of excessive intervention and an increase in the speed and autonomy of decision‐making.

The evidence of privatization in achieving these aims and in producing benefits to the various prime beneficiaries is mixed. In general, where privatization has created private monopolies from public monopolies the benefits are less clear than where privatization has been accompanied by market liberalization.

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8.

To what extent and in what ways are small firms economically relevant today?

The benefits of small firms are discussed on pp. 233–34. This sets out the main arguments. In general, arguments for the economic relevance of small firms can be found in the advantages they bring to the owners, in their contribution to economic growth and job creation and in their service to consumers. Not all research is positive about these contributions and some researchers believe big business to be more relevant to economic development.

9.

What influences the type of culture found in an organization?

In this text we distinguish between organizational and corporate culture (refer to pp. 235–236).

Organizational culture is a descriptive and analytical perspective that identifies the variables that influence the culture of the firm. The variable includes history, size, technology, product market, structure, strategy, type of employees, management style and so on.

Corporate culture represents those aspects of culture that are the deliberate attempt by the owners or top management to create a specific culture and/or to change the culture of the organization.

10.

What is the relationship between the type of corporate culture envisaged by Deal and Kennedy and by Peters and Waterman and company performance in terms of profitability and job satisfaction? Can the internal culture of an organization act as a buffer against environmental influences?

The idea of a deliberately created corporate culture is that it will have a positive effect on performance. This can be an integral part of the development of the firm from its earliest days, e.g. Apple and Google, a part of a strategic change, e.g. British Airways, or a vague hope by management that attempting to change the culture will change the fortunes of the company.

There is some evidence to support this view but there is also a large number of critical articles which question the feasibility and desirability of using corporate culture to produce desired strategic change. A summary of these articles is offered on pp. 239–241.

Many studies suggest that the influence of culture is overstated and therefore the firm cannot be isolated from its environment. Issues of product market, For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

competition and economic change have been shown to be more significant than culture, rendering the firm powerless against major changes. Conversely, some would argue that a strong culture that creates commitment and loyalty can act as an important buffer against changes that may threaten the organization’s survival.

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CASE STUDY QUESTIONS AND ANSWERS General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 6.1 ZSL – LONDON ZOO 1.

Identify the various interest groups at ZSL London Zoo and the nature and origins of goal conflict between them.

The various interest groups included: • The members of the Zoological Society of London.

• The management of the zoo.

• The researchers employed by the zoo.

• The animal keepers employed by the zoo.

• Animal welfare groups.

• The general public, particularly London residents.

• Students may also highlight the interest of groups concerned with tourism in London as the zoo represents a major attraction.

The various groups were not homogeneous and splits occurred within most of the groups. The major difference related to the objectives of the zoo, which could be summarized in terms of commercial gain and entertainment versus scientific research.

2.

To what extent are the financial problems of ZSL London Zoo since the early 1990s a product or a cause of goal conflict? What other factors were at work?

It is difficult to isolate the various problems. Financial problems inevitably create conflict over scarce resources, which may be hidden or less relevant in times of plenty. The conflict may have contributed to the financial problems, but more significance is likely to be given to the falling attendance, the opposition from animal welfare groups, the inappropriate environment for keeping some of the larger animals and specific factors which had an impact on attendance, such as the foot and mouth epidemic.

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3.

What strategies may be most suited to ZSL London Zoo over the next ten years?

What should be the main goal of the zoo and what issues of goal conflict may arise?

This is a highly speculative question and students should be encouraged to be imaginative. Some factors are significant: • A differential strategy is emerging between London and Whipsnade ‐ the latter for housing a greater variety of animals, including larger species.

• London needs to develop its own distinctive strategy and build upon its inherent advantages – the large number of tourists who visit London, its central position in a large city and its proximity of major research universities.

• Possibilities may include a focus on conservation, linking with television and capitalizing on the popularity of wildlife programmes, linking with schools and colleges, research partnerships with universities, hiring the buildings for other events, e.g. corporate entertainment, etc.

4.

How might the conflicting goals of ZSL be impacted by the COVID-19 pandemic?

Students may reflect on: • The COVID-19 pandemic meant that visitor revenues dried up and, despite government promises of support, funding has become a critical issue.

• This lack of funding has meant that goal interests for all groups have been compromised, as there is little investment in commercial, entertainment and scientific resources. The zoo itself may have therefore reduced in value for prospective visitors.

• ZSL has had to make decisions regarding which aspects of the zoo to prioritize, meaning that not all visitors are likely to be satisfied.

• The impact on conservation and research activities due to funding shortfalls.

• Potential travel and contact restrictions on research staff.

CASE 6.2 NETWORK RAIL 1.

What rationale can you give for the privatization of British Rail? What parallels are there with the proposed creation of Great British Railways?

• • •

Belief in the inefficiencies of the public sector.

As part of a political agenda ‐ a series of pro‐privatization governments and as a political act immediately before an election.

Since the 8th Edition of Business in Context went to press, the government has abandoned the Transport Bill which would have paved the way for the creation of Great British Railways in 2024.

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2.

What, in your view, were the key factors that created the problems in Railtrack and Network Rail?

Answers may include: • Under‐priced shares and a subsequent lack of income for share flotation.

• High levels of investment needed that were beyond a newly privatized company.

• Too much money given as share dividend, thereby reducing money available for investment.

• Bad PR and the cost of rail crashes.

• Poor service provision.

• Lack of technical expertise among key staff.

• Inadequate regulation of a newly privatized company.

• A lack of logic in the fundamental organization of the railways, i.e. a separation of the ownership and control of the track from that of the trains. Whether or not Great British Railways goes ahead, these problems will persist.

3.

In what ways will Great British Railways differ from Network Rail? What similar problems does it face?

Yet another change of name does not change the fact that those who own and control the track do not own and control the trains. This model of separation was used effectively in the gas industry to separate responsibility for the pipeline and the connection to the users. Whilst it works well in the gas industry, many consider it wrong for the railways.

Political expediency and dogma continue to create a stable and workable model for the railway system in the UK. However, the creation of Network Rail as a company limited by guarantee does mean that all profits are reinvested and in many ways the company is operated more like a nationalized industry. Since the original case was written, much of the maintenance work has been taken back in house with a subsequent increase in the numbers employed. Great British Railways as successor hopes for a closer and more productive relationship with the government!

4.

What does the case tell us about the privatization of industries such as the railways?

The case probably raises more questions than answers: • Privatization, and indeed nationalization, is as much a political decision as an economic one.

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•

•

• •

Should essential services such as transport and utilities be placed in the hands of private companies? Can issues of national security (at many levels) be called into question if those private companies are non-UK based?

However much of the above types of privatization were EU policy and, while attracting criticism, the privatization of bus routes, gas, electricity and water have not created the extent of problems as rail in the UK. It is still not fully clear what effect Brexit may have had on this. Certainly, Brexit has not solved any of the problems intended on the UK railway system.

A key problem with the railways was the lack of planning as the privatization was rushed through parliament. Some have challenged the separation of responsibility between track and rail services.

When it goes wrong, the taxpayer foots the bill to maintain essential services. The financial problems have a knock‐on effect on other companies and employment levels, notably the construction industry.

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BUSINESS IN CONTEXT, 8th EDITION – TEACHING MANUAL CHAPTER SEVEN MANAGEMENT AND LEADERSHIP

This chapter explores the link between management and leadership and the reasons for the current emphasis on leadership.

We define management and explore the manager’s right to manage. We then present a number of classic models of management and challenge these by presenting a range of studies that have attempted to establish the management role.

After defining leadership, we examine the key differences between management and leadership and explore a number of well‐known leadership theories. In doing so, we draw a comparison between transactional and transformational models.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

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1.

Consider the roles of the chief executive of a global corporation, the canteen manager at a manufacturing plant and a university head of department. To what extent can these three be called managers? What roles and activities do they have in common and how do they differ?

The examples illustrate the diversity of management in terms of level and sector.

They can all be said to be managers because: • They all control staff and are responsible for them.

• They are responsible for certain activities and make decisions.

• They will all be involved in aspects of planning and coordination.

• They must all be concerned with what happens internally within their organizations and with what happens externally.

There are several differences, including: • The number of staff they are responsible for will vary – the CEO will have many staff whilst the other two will have much fewer employees. The staff will also differ in their skills and background.

• The CEO is likely to be involved in decisions affecting the whole organization, while the canteen manager and the university head will be more localized, although the university head may well participate in organization wide strategy.

• The CEO will be more strategic and will not be concerned with operational issues, whilst the other two will be more concerned with operational issues.

• The aspects of the external environment that concern them will differ. The CEO will be concerned with global competition in the sector, while the canteen manager will be concerned with issues such as changing food prices in the local market.

2.

Why should we do what managers tell us to do? What kinds of power do the three examples in Question 1 possess?

The manager's right to manage rests on a number of factors: • Ownership and/or control of capital assets.

• A legal obligation towards shareholders and employers.

• Position power, reward power, charisma power, political power and information power.

• Management tends to be accepted by employees as part of a wider social value and is rarely challenged.

Different types of power are defined on p. 249.

• Position power – possessed by all three.

• Reward power – the CEO would probably have more scope and freedom For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• • •

3.

to act in this regard.

Charisma power – this could be possessed by all three and would depend on the style and personality of the manager.

Political power – again, this is a possibility for all three, although it is more likely to be used by the CEO and in the university. The canteen manager may have limited scope to obtain and use political power.

Expertise power – possessed by all three. However, the university head may be challenged by colleagues with more knowledge and experience in some academic fields. In a large organization the CEO may lack specific technical knowledge about aspects of the job, although the CEO probably has greater access to information.

Critically examine the various models of managers. Which do you consider the most relevant and why?

The various models are discussed on pp. 251–56. All the models can be criticized (refer to pp. 255–56). Many of the models are products of their time, particularly scientific management and human relations. Elements of all models are present in modern management. In a current competitive and fast changing environment, open systems and responsive management would appear to fit.

4.

Why do managers seek gurus and follow fashions in management practice?

There may be a number of reasons for this: • A particular idea appeals to a CEO and is introduced within the organization, e.g. the learning organization concept at Ford.

• The ideas tend to be presented in a 'no nonsense' approach, which appeals to busy executives.

• The ideas are packaged in books that are promoted in a range of bookstores, especially at airports, which capture the business traveller market.

• The fads and fashions offer the manager a solution. Such off‐the‐shelf approaches may appeal to managers who have little time to reflect and develop their own solutions.

Despite the skepticism, especially among academics, the list of such books selling the latest fad appears to be endless.

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5.

What conclusions do you draw from the studies on the work managers do?

Contrast the findings with Fayol's principles of management in Table 7.1. Do such studies invalidate much of management theory?

• • •

•

6.

The conclusions are listed on pp. 267–74.

We may conclude that managers can play a number of different roles and that effective management teams may comprise people playing a mixture of these roles.

Whilst managers rarely conform in their behaviour to the models of management outlined on pp. 254–57, many of the activities identified by Fayol are carried out by most managers. Most managers would subscribe to the principles of unity of command and direction; most organizations display tensions between centralization and decentralization as they also claim team spirit and equal treatment for all.

The studies do not invalidate much of management theory, rather they enrich it. Watson's attempt to link classical theories of management with more modern approaches is relevant here.

To what extent is leadership different from management?

Leadership differs from management in the following ways: • Leadership is part of management. It is what managers do to be effective.

• Managers are appointed to a position, whereas leaders are more situation specific.

• Management activities tend to be routine, whereas leadership is needed in problem or changing situations.

Table 7.3 on p. 261 offers further insights into the difference between management and leadership.

7.

Why is leadership such a focus of concern amongst management professional bodies and with governments?

Publications from both the UK government and professional bodies in recent years have elevated leadership as the key management skill. The need to inspire people as individuals and in groups to higher levels of performance and to bring about change is important because of a number of factors, including: • Increasing competition • Continuous change • More demanding employees • More demanding customers For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• •

8.

Flatter organizations The importance of corporate values.

Critically assess the various theories of leadership. Which do you find most relevant and why?

We identify a number of leadership theories (refer to pp. 262–72). Most of the theories tend to focus on the internal behaviour of individuals and groups and few consider contextual factors relating to the organization and the environment.

Many of the earlier theories are fairly simplistic, although trait theory has been rediscovered by recent publications, such as the work on emotional intelligence and in the literature on competencies. The latter emphasizes leadership skills that can be taught.

Many studies are based around the identification of leadership styles and unsurprisingly conclude that most employees favour a democratic over an autocratic approach, whilst acknowledging that an autocratic approach is sometimes necessary to get the job done. Style theory extends into the situational and contingency theories, reinforcing the view that many of the theories are related. The more complex theories offer frameworks to the practising manager and conclude that there are no magic formulae. The transactional‐ transformational model has achieved recent popularity, but ultimately tends to describe traits of effective leaders, with a particular focus on charismatic leadership and a reminder that trait theory may still be relevant.

The second part of the question calls for the students to express their own opinion, giving them a chance to demonstrate their understanding of a particular theory and to present a particular case. However, they should recognize that the evidence linking these various theories to organization performance or even to employee motivation is generally weak.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 7.1 IS MUTTI ALWAYS RIGHT? 1.

Can the national level responses to the COVID-19 pandemic all be attributed to the gender or relative ‘femininity’ of the leadership?

The research shows some early evidence that there is a relationship between femaleled countries and a more effective response to the pandemic. There may however be other factors at play, such as attitude to risk and form of government. The factors pointed to by Garikipati and Kambhampati (2020) may have been important in determining levels of deaths as a result of the pandemic, although other arguments might point to the relative success levels of countries that took an autocratic rather than democratic stance.

Countries that implemented an effective track and trace response early in the pandemic may also have been effective in holding death levels down.

Students may wish to discuss the extent to which state intervention is appropriate.

The extent to which a population may tolerate intervention will vary.

2. Are different leadership attributes needed at times of stress?

Eagly and Johnson’s (1990) and Garikipati and Kambhampati’s (2020) research work certainly indicate that this may be the case in as far as the COVID-19 pandemic was concerned. We should be cautious however about generalizations. Stress within and threat to the business may come from a multitude of sources.

3. Was Jacinta Ardern right to lock down New Zealand so early and firmly?

The early and rigorous lockdown of New Zealand helped avoid excess deaths. However, given the global nature of the virus, the lockdown merely delayed its arrival. It certainly gave the government of New Zealand the time for effective vaccines to be developed and deployed.

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4. Open Discussion Question – What might national governments do to learn from the experience of the pandemic (if it has indeed now passed)? Might differences in leadership style contribute to any post pandemic learning and preparation?

Students may discuss: • The significance of a closer relationship between national government leaders and scientific researchers and health services.

• The importance of a plan that is clarified and adhered to by all members of the nation.

• A leader who is inspiring and encouraging to the nation is more effective in a crisis than one who exhibits primarily self-interest.

• Typically more ‘feminine’ traits, such as empathy and caution, are valuable in a successful government.

It could be noted that in the aftermath of the pandemic the leaders mentioned have all been replaced, both male and female alike. Students may also mention that after the departure of Boris Johnson in the UK, his brief replacement with Liz Truss did not end well; Ms Truss did not fit the model of an empathetic leader.

CASE 7.2 EXECUTIVE PAY IN THE UK – A REVIEW OF CURRENT ISSUES 1.

If leaders are to inspire and innovate and are in short supply, should the salaries of top executives reflect this? What arguments can you give in terms of management and leadership roles and functions to support the claim that senior executives should be well rewarded?

Studies show that effective leaders are in short supply and that high salaries and generous remuneration packages are needed to attract the best talent from international companies (especially those operating out of the USA) and to prevent home grown talent from being 'poached' by rival companies.

However: • The question assumes that existing leaders are effective and should be rewarded accordingly, when this is not proven.

• Many of the high salaries and other benefits, including generous leaving packages, are paid when the company has performed badly.

• The statement ignores training and development, which may be a better route to effectiveness than salary.

The main arguments put forward about top executives are that they: • Make important decisions about the future of the business that entail high levels of risk. However, questions should be asked about whom bears the For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

consequence of that risk.

• Need to be innovative and inspirational – qualities in short supply and therefore commanding a high price (although evidence which can actually measure inspiration and innovation and their impact on performance are thin on the ground).

• Have considerable responsibility for shareholders, employees and customers.

• Operate in a particularly high‐pressure environment and should be compensated accordingly.

• Possess skills and knowledge essential to the future of the firm (although evidence for this is mixed).

2.

To what extent is it fair that the price of shares should be used as an argument in the determination of executive pay? Examine the issue of executive pay from the perspective of agency theory.

Share price may well be an element that informs the level of executive pay to the extent to which share price can reflect company performance. However, the share price may reflect other factors, including the trading behaviour of national and international stock markets. There may also be a risk if salary were directly linked to share price that executives would take action and make decisions to inflate the share price in the short‐term, yet damage the long‐term prospects of the company.

It is this second point that places the issue within the ‘agency question’. This is based on the work of Jensen and Meckling (1976), who identified the ‘agency problem’ as managers acting as agents will behave in their own self‐interest and not in the best interest of owners. Linking executive pay to the share price, or indeed, rewarding executives with shares, is a mechanism to reduce the negative outcomes of the agency problem and is clearly an agency cost. In general, pay, pensions and bonuses are both an agency problem and a solution. The key problem has been executives setting their own salary and pension levels with no reference to the performance of the company. This is clear evidence in some organizations of managers (i.e. agents) acting in their own best interests and not in the interests of shareholders and other stakeholders. However, pay and incentives can also be used by shareholders to reward managers for keeping share prices high and offering generous dividends.

All this assumes that such a problem exists. Some would argue that there is no conflict of interests between managers and owners, and Berle and Means (1932) stressed the professional orientation of managers and the assumption that they would act in the best interests of the firm. To some extent, this has been challenged by some interpretations placed upon the behaviour of senior bank For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

executives in 2008–9 (refer to Question 3).

3.

How much do you attribute the banking crisis of 2008‐9 to executive pay? Do you agree with the statements of Lerner and Hutton quoted in the case?

The banking crisis in 2008‐9 was caused by banks making high risk loans which were not paid back (highlighted by excessive sub‐prime mortgage lending in the USA). This threatened bank reserves, caused a dramatic fall in the share price of major banks and undermined confidence in the banking system. In many countries, banks were rescued by substantial financial inputs from governments – up to 60% in some cases in the UK. The media focused on the large rises in executive pay and related benefits such as pensions in a relatively short time, as highlighted by cases such as Sir Fred Goodwin at RBS. The image of overpaid executives typified the banking crisis and greed was identified as a major cause. It was not the only cause. Others included: • Lack of understanding of complex financial instruments and consequently lack of control.

• Too much risk‐taking behaviour. This was linked to reward systems which seemed to offer reward for risk rather than the performance of the bank.

• A pervading culture of risk and reward.

The assessment of the quotes by Lerner and Hutton depends on the perspective taken. This could be used as a basis of classroom debate. Issues that can be raised include: • If some banks moved quickly back into profit then, it could be argued, those responsible for that should be rewarded.

• However, others would claim that since the banking system had been supported by governments and hence the taxpayer, executives have a moral duty to curb salaries.

• In addition, the return to a high reward culture could be viewed as bad PR.

4.

What conclusions do you draw about the 2014 EU law on bonuses for the banking community and the UK response? Why has the banking community been singled out?

The EU law is an attempt to restrict bonus payments in banking to the equivalent of the annual salary or exceptionally twice the annual salary. It applies to all banks from EU countries and their operations both within and outside the EU. It also applies to all foreign banks in EU countries. Some UK banks have objected to this and have already taken steps to get around this measure by raising current For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

salaries. Opponents to the EU law claim it will hand over global banking to non-EU countries like Switzerland and the USA and reduce EU banks to also-rans. It is also claimed that it will divert talent away from the EU banking system. Also – why just banks – why not other sectors?

The banking community has been singled out for the high profile it has been given in the press to salaries and bonuses paid to bank executives. This has probably turned public opinion against banks and their senior managers. Government intervention to prevent the collapse of the banking system in many countries has also been highlighted, which the press has also used to fuel public opinion.

Recent (2022) ideologically driven announcements by the UK Government first announcing the ending of restrictions, then reversing the decision, highlight the difficulties. The ending of restrictions was seen by many commentators as insensitive to the mood of the nation at a time of high inflation where wages are not keeping pace and the most unfortunate are struggling with fuel and food costs.

5.

Has the tide turned with respect to executive pay, or has it merely stalled?

Answers may vary widely; students should discuss openly.

An opinion could include that unless governments legislate, senior managers will continue to demand and award themselves large payments. The argument against this is that ‘talent’ will merely move elsewhere. The relatively recent attempts by government to rein in bankers’ bonuses failed. Perhaps it is human nature for those with the power to do so to demand more.

As an additional activity, students may want to reflect on the possible implications of Brexit.

It is particularly interesting to reflect on Brexit with respect to skills shortages and the ability of the UK to attract talent and workers with key skills from overseas. Much UK press and media attention has focused on shortages of key staff in multiple areas of the economy, from lorry drivers and agricultural workers to doctors and nurses.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER EIGHT STRATEGY

This chapter takes a fairly traditional view of strategy. We distinguish between business strategy and corporate strategy before exploring how managers can take a number of different approaches.

We explore the environmental context of strategy by looking at models which examine both the general environment and the immediate competitive environment, at the same time outlining the limitations in the use of such models.

The organizational context of strategy examines how strategy interacts with the various organizational elements of the ‘business in context’ model. In turn, we examine issues related to resource analysis in general and introduce core competences, value chain analysis and portfolio analysis. In this edition, much more detail is provided regarding the resourcebased view, with a case study on Southwest Airlines being especially written to illustrate this.

In the section on strategic options, we offer a brief coverage of key approaches to both business and corporate level strategies and cover diversification strategies as well as joint ventures, mergers and acquisitions.

Strategic choice is seen as a mixture of rational analysis, values of key decision‐makers and political processes within organizations.

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Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1. Examine the role of the scientific method in the process of strategy formulation. Is there a place for subjectivity and creativity?

Rational scientific approaches to strategy formulation are the basis of most strategic theory and many commonly used techniques such as SWOT analysis. The approaches offer a useful (if often simplistic) starting point for strategy formulation since they should be based on evidence.

However, the contexts within which firms operate are often complex and dynamic and accurate information is not always available. Furthermore, the information available to one firm is also accessible by competitors. Competitive edge may therefore be the product of more creative and subjective processes. This is also a reason given by people such as Barney (1991) for establishing a set of resource competences that add value and are difficult to copy.

There is also the danger that the individuals conducting such analyses are too close emotionally to the organization to be able to dispassionately assess the situation.

Models such as SWOT appear to offer a simple tool but are often challenging to use effectively.

2. What is the purpose of strategy and how might a particular strategy be evaluated?

Strategy has many purposes, including its role in: • Formulating objectives.

• Management control, e.g. setting budgets and targets.

• Assisting in the allocation of resources.

• Preparing management for key decisions.

• Coordinating and integrating the organization.

• Driving cultural change.

• Developing managers.

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Strategy may be evaluated by observing the success or otherwise of the organization or by identifying whether key objectives have been met. However, there are two issues to consider here: • Links between strategy and performance may be difficult to measure and assess given the impact of a large number of variables.

• Achieving objectives may not be sufficient to ensure the survival of the firm if the objectives were inappropriate to begin with.

Note to Questions 3 and 4: The examples offered in Questions 3 and 4 are fairly generalized categories and tutors may wish to specify actual firms in locations known to the students, e.g. instead of a university it could be their university or college, the bank and retail store could be named, etc. As a consequence of the broad nature of this and the following question, the answers are likely to be varied but equally valid.

The guide answers to Q uestions 3 and 4 are therefore indicative and not intended to cover every aspect.

3. Identify the major environmental opportunities and threats faced by a city centre restaurant, a large retail store, a high street bank, a university and a firm manufacturing television sets.

Opportunities City centre restaurant • • • • • •

Good sized customer base Situated near other restaurants and forms of entertainment Good lunch trade from business Availability of skilled staff Availability of specialist suppliers Attraction of media coverage

Threats • • • • • • •

Competition from other restaurants May have to reduce prices to compete High cost of rent, rates, staff, etc.

Vulnerable to economic change and reduction in spending power City centre seen as unsafe at night Entertainment and shopping centres relocate out of the centre Loss of key staff such as the head chef

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Retail store • Higher sales volume by offering a variety of goods • Possibility of impulse buys can create higher turnover • Market position ‐ a Harrods or an Ikea • Investment and increased reputation by becoming part of national/global chain • Reorganize around 'designer goods' High street bank branch • Easy access via central location • Pool of potential customers • Sell premises to a pub or restaurant chain and consolidate • Move into telephone and internet banking • Expand business more into financial advice and loans University • Expansion of student numbers • Introduction of higher student fees • Develop reputation in a number of subjects • Develop new areas of study to replace less popular subjects • Form alliances with local schools and colleges • Sell accommodation for conferences and during vacations Television Set manufacturer • Development of new product ranges, e.g. to optimize 5G • Diversification into Smart devices manufacture and development of home environment controllers • Market position ‐ expensive high profit niche product, e.g. Sony or low-margin mass market

• • • • • •

• • •

• •

• • • •

Insufficiently specialized to attract high spending customers Rise of internet-based shopping Costs of holding too wide a range of stock Staffing costs, high rents Takeover by a larger competitor Closure forced by a future COVID-19 type event

Intense competition from internet banking services and building societies Hostile takeover from a rival bank Cost of running a city/town centre site.

Competition from other universities Introduction of higher student fees (a threat or opportunity depending on perspective taken) Reduction in government funding High cost of maintaining estates Availability of good quality staff in key areas Overstaffing in less popular subject areas

• Saturated market • Competition from lower wage economies • Competitors haveleading edge technology

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4. Using Porter’s five‐forces model, identify the specific competitive forces operating in the five situations defined in the previous question.

All five types of organization operate in highly competitive markets where competitive rivalry is a key feature and organizations jockey for position in the marketplace.

Restaurant

Retail store

Threat of potential entrants Fairly high due to low startup costs. Depends on whether low price or upscale restaurant.

Low with high start‐up costs.

Threat of substitution From takeaway food outlets.

Competition from other forms of entertainment and interest in home cooking.

From specialist shops and mail order companies.

Bargaining power of buyers Generally high because of large competition.

Bargaining power of suppliers Depends on how specialist suppliers are and presence of other sources.

Depends on the nature of the product and the competition.

The attraction of a store is convenience – a wide range of goods can be bought in one location, in which case their bargaining power is lower.

Reasonably high. The size of a store usually means they can obtain supplies at attractive prices, especially where the store is part of a chain.

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Bank

Very low due to high cost of reserves required and establishing a network.

Alternative forms of banking – internet, building society, overseas banking and a range of investment and loan companies.

Fairly high due to the level of competition.

However the cost of switching (complexities of transfer rather than financial) is perceived to be high.

Depends on the service and product.

However, banks are part of a chain and have a reasonably strong purchasing position.

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University

Depends on the nature of the operation, but can be relatively low.

However, there are always colleges upgrading their work, private colleges offering courses validated by other universities.

Distance learning programmes, online courses, company universities, etc.

TV manufacturer

Fairly low due to saturated market and high set‐up costs.

Cheaper imports from lower cost countries.

Depends on the status of the university and the specialist subject area to be studied.

Most universities have a reasonably strong purchasing position as most are large organizations buying large amounts of consumables and equipment.

Possibility of obtaining discounts on such items as software as an educational user.

High due to Low due to large number competitive of models nature of the available and market. Rises stores willing to with more discount. specialist products, e.g. plasma screens.

5. In what ways can management use resource analysis and portfolio analysis to guide strategy? What are the major strengths and weaknesses of the models for portfolio analysis identified in this chapter?

Resource analysis informs the manager about what is feasible given the resources at his or her disposal and how they are used. The analysis is helpful in assessing the viability of a proposed strategy, but also in assessing the ability of the organization to respond to change. A more proactive review of resource analysis is offered by Barney (1991) (refer to pp. 300–303). The ‘Resource-based View’ sees resources that are a source of competitive advantage on the basis of their value, rarity, inimitability (cannot be copied) and non-substitutability. It is therefore how resources are developed and used that give a firm its competitive edge.

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Portfolio analysis enables managers to assess the attractiveness of their business and their products, decide on the most appropriate product mix and assist in future investment decisions (refer to pp. 307–10).

The strengths of the various models include: • Their contribution to planning future product market strategy.

• Posing important questions about future investment and divestment strategies.

The weaknesses include: • The rather broad nature of the categories used for analysis (although the range can be extended as with the General Electric model – refer to Figure 8.3).

• The subjectivity of assessment.

6. Assess the usefulness of core competences and the value chain in analyzing resources and developing strategy.

Core competencies are considered by many to give the firm its competitive edge. It is particularly important in that instead of focusing on the market (which can be done by the competition as well), a core competence establishes advantage through resources and the way they are used. The more distinctive these are to an organization then the more difficult they are to copy. A resource analysis will determine what core competencies, if any, an organization possesses. Once identified, they can be built upon as a source of strategic direction. There is a strong overlap here to the resource-based view of the firm (refer to Question 5 and pp. 301–3). Alternatively, management may decide that core competencies must be brought in. This could be the focus of acquisition or joint venture strategy.

The value chain looks at the way resources are organized and combined to give value added. The key aspect of the value chain is the linkage between the various resources. In successful businesses, the various activities should build up a cumulative value added for the customer. The analysis can focus attention on the need to improve existing resources and activities and the linkages between them (refer to pp. 296–98). However, in some cases, a more radical approach is needed.

The value chain is also an essential component of the global factory.

7. Make a critical analysis of the different approaches to diversification.

Diversification comprises a number of strategies that will increase the product portfolio and/or markets of a company. Related diversification, especially through backward and forward integration, gives management increasing control over the supply chain. Horizontal diversification enables management to build on existing knowledge and expertise and achieve both economies of scale and scope. Unrelated For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

diversification enables management to spread risks and exploit opportunities across a range of products and markets.

In both cases of unrelated and related diversification there are new problems of communication and control as well as a possible duplication of resources. Where the businesses are highly diverse there is the additional problem that the senior management may not understand the new business. This is a reason why many diversified expansions fail, which led Peters and Waterman to urge managers to 'stick to the knitting'.

8. Identify the opportunities and threats associated with a merger.

The opportunities associated with a merger include: • Cost reduction via economies of scale.

• Access to new products and new markets.

• Access to new technologies and/or core competencies.

• Synergy creating business expansion and an increase in profits.

• Defense against competition.

• Increased career opportunities for managers and other staff.

The threats associated with a merger include: • Poor strategic fit.

• Difficulties a nd high costs associated with merging operating systems and organizational/corporate cultures.

• Turmoil of change allows competitors to take customers away.

• Loss of control by some managers of key activities.

• Job losses.

9. What strategic approaches, styles and options would best fit your college or your firm for the 21st century? What problems do you foresee with these approaches, styles and options?

The answer here would depend specifically on the nature of the organization chosen. Students should consider: • Rational scientific versus, creative, behavioural and political approaches to strategy formulation.

• The types of analytical tools to be used ‐ SWOT, five forces, portfolio analysis, value chain, etc.

• Diversification (and which type) versus consolidation, etc.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion would generate some additional, different (and equally valid) ideas to those expressed below.

CASE 8.1 SOUTHWEST AIRLINES 1.

What are Southwest Airlines’ resource-based advantages and core competences?

There would appear to be several:

• • •

•

• •

Supplier relationships. Boeing as aircraft supplier. CSR focus on other suppliers, favouring small firms run by women, ethnic minorities and companies with ethical credentials, etc.

Technology focus. Using mainly Boeing 737 means lower cost maintenance and simplified staff training. Emphasis on buying new aircraft based on their fuel efficiency.

Cost focus and more flying hours. Developed systems for cleaning, baggage handling, etc. to ensure a turnaround time of around 18 minutes, when competitors take 45 minutes. No hub and spoke route systems – only point-to-point eliminates problems associated with baggage transfer and flight delays. Most flights are less than 500 miles. All of these factors mean that Southwest has more planes in the air at any time and can therefore make more flights and carry more paying passengers. The use of smaller airports has the advantages of lower landing costs and faster throughput of passengers, given that fewer flights are competing for resources.

Manage customer expectations. Southwest promotes itself as a no-frills airline, yet they offer passengers free tea, coffee, soft drinks and snacks. On many internal flights in the USA these are items passengers must pay for. The company exceeds expectations and consequently has fewer passenger complaints.

Relatively lean management structure. The management focus is on the welcoming culture of the airline, with its aim to keep spirits high. Humour and friendliness play an important role in Southwest’s ideology.

HR issues. Some good indicators of the effectiveness of HR policies and practices – low labour turnover (2%), no strikes and no lay-offs, above average pay, employee involvement, interest in performance evaluation and training. This needs to be viewed in the context of 83% trade union membership in a country where TU membership is very low and a sector that is largely affected by disputes and strikes causing massive disruptions to passengers.

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2.

Which of the resource-based advantages and core competences have made the greatest contribution to the airline’s success?

• • •

•

3.

It is clear that the management of resources at Southwest adds value. But are they rare, inimitable and non-substitutable?

It is difficult to find any other method of moving passengers that could be substituted for low cost air travel. Southwest itself substituted for bus and car travel.

Many of the resource-based advantages above can be copied. But can they be copied successfully? Given that Southwest’s success is rare in the industry then the conclusion is that they are able to achieve things that their competitors cannot. I would argue that much of the advantage derives from creating employee commitment, a distinct corporate culture and establishing high levels of motivation and organization learning.

There could also be non-RBV explanations – their developments of new passenger markets meant that they were not competing directly with other airlines.

The company’s culture has been described as ‘goofy’. To what extent do you agree?

This will depend entirely on the student’s perceptions. Clearly there are certain outward and visible aspects of the corporate culture that may not appeal to all employees and customers, actual or potential. These would include the use of the word ‘luv’ to describe aspects of its policy and operations, novelty boarding passes, prizes for passengers with most holes in their socks and defining exceptional employees as ‘heroes of the heart’.

However, set alongside this is the evidence of: • A highly successful company in terms of growth and profits.

• High levels of customer and employee satisfaction.

• Systems of frequent communication with all employees.

• Very low labour turnover.

• An absence of conflict, untypical of the industry and with a very high rate of trade union membership.

• A corporate culture that seems to be favoured by employees.

4.

What additional complexities are presented by the decision to fly international routes?

These include: • A need to increase and upgrade the fleet of aircraft as well as some IT systems.

• Southwest may have less control of the operating systems at overseas airports than it does with smaller domestic airports. This could affect operating efficiencies and punctuality.

• Overseas route expansion may mean the company has to introduce a hub and spoke system to maximize capacity. This will create additional need for passenger and baggage transfer.

• The use of overseas airports may mean an increase in landing fee costs.

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•

5.

Expansion by acquisition means that operating procedures and corporate culture need to be harmonized.

What are the key opportunities and threats facing Southwest Airlines?

Opportunities include: • The ability to build upon the success of the airline and expand operations using the existing model.

• The overseas operations have only just begun – there are opportunities to expand this.

• Consistent profitability and a healthy share price puts Southwest in a good position to consider further acquisitions.

• Some budget airlines like Ryanair (an airline that modelled itself on Southwest) have introduced business class service. Is this a strategy option for Southwest? Would it be a threat to their policy of same service for all?

Threats include: • Expanding the overseas market operations may be difficult due to the complexities outlined in the answer to Question 4.

• The airline business is highly competitive, with many airlines losing money and a number of examples of high-profile failures, e.g. Pan Am, TWA. • Expansion through acquisition may not be able to achieve the same operating efficiencies. This may damage the brand image.

• Linked to the above, a major difficulty with all acquisitions is the harmonization of corporate cultures. The distinctive nature of Southwest’s corporate culture is a major core competence which may not be easily replicated in an acquired organization.

• The rising costs of airport landing fees if the airline expands into major hubs like La Guardia and through overseas expansion uses international airports in other countries.

• The rising cost of fuel (although there has been a reduction in oil prices in 2015 – but this may be a temporary abatement).

However: • It would seem that the international expansion is being managed in line with the company’s core values – incremental change in the introduction of longer flights but with a strategy of serving only near foreign destinations.

• Individual aspects of their strategy can be copied but Southwest’s success appears to be based on a unique bundling of resource-based strategies, especially those related to human resources. The company may therefore be able to maintain its competitive advantage.

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CASE 8.2 SOUTH AFRICAN BREWERIES/SABMILLER 1.

To what extent do changes in the strategies of SAB, SABMiller and Anheuser-Busch InBev reflect changing economic and political changes?

Economic and political changes are related. A number of points emerge: • The initial growth of the company was associated with the growth of gold mining in South Africa.

• When South Africa joined the British Commonwealth, it facilitated market expansion to nearby Commonwealth countries such as Rhodesia.

• The restriction imposed on trade by the First World War led to strategies of vertical integration – to secure essential ingredients and materials.

• The introduction of apartheid, the break from the Commonwealth and the exclusion from the UN may well lead to the conclusion that trade and opportunities would be restricted and SAB would focus internally. The fact that today SAB derives 42% of its turnover from overseas operations may be a reflection of the economic and political problems. However, this period saw much external activity involving acquisition and diversification, including acquisitions outside South Africa, including one in the USA, and starting joint ventures with Pepsi and then Coca Cola.

• It is interesting to note that although apartheid was introduced in 1948 and, particularly from the late 1960s on, there was considerable opposition and protest in many parts of the world, UN trade sanctions were not introduced until 1985 and were effectively stopped in 1990 with a change of regime.

• The Mandela regime undoubtedly made South Africa more attractive for investment and as a trading partner.

• The changes in emerging and transitional economies around the world gave SAB opportunities for global expansion.

• Increasing pressure from some governments to reduce harmful alcohol consumption levels.

2.

Is the acquisition of Miller a good move for SAB? The acquisition obtained a global brand in the world’s largest economy. In terms of acquisition strategy, it was a move away from emerging and transitional markets. The acquisition made SABMILLER the second largest brewer in the world by volume (and for a time was indeed the world’s largest producer until the acquisition of Anheuser Busch by InBev).

However, by taking over Miller, SAB also took over Miller’s significant debt. Miller was losing market share in the USA and it had acquired a reputation as a badly managed company. SAB recognized that changes were necessary and despite the problems it was probably the best acquisition available at the time.

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3.

Is it healthy for one company to be so dominant in a market?

This depends entirely on who is answering the question, multiple perspectives will be apparent: • Management and shareholders will positively view a strong strategic position and healthy levels of profitability alike. It may however leave the organization vulnerable to government intervention where such dominance may be seen as a single company being too powerful in a single market.

• Dominance of this sort ensures considerable power in the supply chain; this may not be healthy for suppliers.

• Such dominance may hamper the ability of smaller competitors.

4.

How would you characterize the strategic shift described in the case? Where does it sit in terms of the various models discussed?

The primary shifts discussed are the recognition of the wealth and power of the data resources of the company and the pressure to encourage the reduction of alcohol consumption.

Diversification – Here the major shifts have been in terms of anticipating the future of a ‘brewing’ business. By exploring the wider opportunities of brewing yeast-based foods, they are not only looking at new markets but also de-focusing from alcohol production as the core offering. In the longer term, this may make them less vulnerable to criticism. It does however require investment in new skills and infrastructure, although the company does have the power and economic reserves to move at scale and speed in this area.

Data Value – Recognition of the inherent value of the data resources of the business is important when combined with the growth in the availability and use of AI to predict and refine purchasing patterns and offers on an individualized basis. Here the challenges may be the lack of core competences and the need to recruit and retain the specialist staff required.

Home delivery – This is a reflection of changes in consumer purchasing behaviours in the wider world. It risks alienating aspects of the supply chain and also requires significant investment in the logistics infrastructure to manage such activity at scale. Students may wish to consider the question of ‘make or buy’ here. If the home delivery service is to operate at scale a partnership or a buyout of a home delivery specialist may be indicated. The use of Ocado, initially by Waitrose and now by Marks and Spencer is a UK-based example of this.

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As an additional question:

What are the main issues before 1990 and after 1990?

Before 1990, the main issues were related to Apartheid and the sanctions imposed by overseas governments. A number of key issues can be identified: • A limited market.

• Limited market for beer due to prohibition for the black population and high taxes.

• Rationalization of operations.

• Expansion by acquisition of local competition.

• Expansion into ‘friendly’ African states.

• Related diversification into food, wine, spirits, hotels and casinos.

• Unrelated diversification into furniture and clothing.

• Despite sanctions entered US market by the purchase of Rolling Rock.

The strategies post-1990 followed the release of Mandela, the end of apartheid, the creation of a new political regime and the acceptance of South Africa by other countries. Key issues were: • Market control of South Africa.

• Invitations to enter African countries such as Tanzania and Zambia.

• Acquisitions in transitional economies such as Hungary, Poland and the Czech Republic.

• Use of the London Stock Exchange to access new finance.

Note: an alternative way at looking at the changes would be to get students to look at some generic strategies illustrated in the case and the rationale behind them, e.g. horizontal and vertical integration, diversification and acquisition.

However, we must be careful in the conclusions we draw since the data deals only with revenues and profit. Other information is vital before a complete analysis can be made, e.g. variations in cost levels in the various regions.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER NINE BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY

Business ethics is defined as being concerned with moral issues and individual choices of right and wrong in the conduct of business affairs. Corporate social responsibility focuses on ethical issues by defining those groups to whom the company and its representatives are responsible. It is generally acknowledged that ethics and CSR go beyond legal responsibility.

The chapter examines different ethical concerns and approaches to ethics and looks at how these have changed over time. Key stakeholders are identified and the chapter discusses the difficulties associated with the stakeholder approach.

A key section of the chapter examines the reasons why organizations should be ethical and socially responsible and offers moral, business and strategic arguments, as well as offering a critique for most of these arguments. The chapter closes with a review of mechanisms for ethical and responsible business behaviour.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

What do you understand by the concepts of business ethics and corporate social responsibility? To what extent can we distinguish between the two concepts?

There is considerable overlap between the two concepts and some authors use the terms interchangeably. However, this text uses a widely held convention that business ethics is a broad concept and is concerned with making choices about right and wrong courses of action in a business context. Corporate social responsibility, however, focuses more on the relationship between the firm and its stakeholders and the firm and its environment.

2.

In an organization known to you (company, college etc.), identify the various stakeholders and what corporate social responsibility means in the case of each stakeholder group.

The stakeholders and the responsibility towards them will vary, dependent upon the type of organization selected, e.g. private sector manufacturing versus public sector health and social care. The stakeholders below are an example of the type of stakeholder and the issues of CSR that may be selected. There may of course be more stakeholders and issues identified than listed here.

• • • •

3.

Shareholder – information about key strategic directions, financial information and a fair dividend based on genuine company performance.

Employee – fair, dignified, equitable and consistent treatment in all aspects of employment.

Suppliers – information about changes that may affect them, loyalty and a fair price in exchange for timely and good quality supplies.

Customers – good quality products and services at a fair price, rewards for customer loyalty.

What issues emerge when an organization attempts to be socially responsible to a number of different stakeholders?

Many decisions made in business will affect different stakeholders in different ways. If a chain restaurant closes its operation and sheds jobs in one part of a city it may help save jobs in another, as well as offering regular customers an For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

alternative. Large dividends paid to shareholders may mean less money to invest in new developments, which may affect the performance of the firm in the long term.

The key issue here is the conflict that is created when the organization attempts to meet the needs of all its stakeholders. Decisions need to be made about which group gets priority. Even here the decision is difficult in that there may be conflicting expectations within stakeholder groups. Managers may resist stakeholder representation in the business since that may encroach on their decision‐making. Stakeholder representation also costs in terms of providing information and requiring mechanisms for adequate representation. Stakeholder satisfaction and representation becomes much more complex in global firms.

4.

To what extent do you agree with the view that ‘the business of business is business' and that social responsibility is best handled by other means?

Such a view tends to be put forward by the more zealous supporters of the free market, who are usually found in individualistic Anglo‐Saxon cultures. In general, the argument is that business should concern itself with wealth creation, which will be to the benefit of all. Behaviour that is not in the best interests of the majority is controlled by law. Supporters of this view, like Friedman, argue that a business in any society will in any case reflect the ethical values of that society.

Furthermore, he argues that keeping customers happy and having good relations with suppliers are necessary to maximize shareholder wealth, which should always be the primary objective.

Opponents of this argument could cite accidents, damage to the environment, disappearing pension funds, the exploitation of child labour and high prices charged by monopolies as good reasons for imposing controls on businesses to safeguard the interests of a wider group of stakeholders.

5.

What arguments can you put forward to support the view that socially responsible business is successful business? Support your arguments with evidence and illustrations.

A number of arguments and illustrations are presented on pp. 332–34. This section also offers a critique of the various approaches. The key arguments for ethical business are that it can: • Attract higher profits.

• Avoid bad publicity and attract good publicity.

• Avoid fines and damages awarded by courts.

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• • •

Attract other 'ethical' firms as suppliers and buyers.

Attract customers, investors and employees.

Act as a source of competitive advantage.

However, the evidence supporting the effectiveness of ethical business is weak as it can cost and many managers face countervailing pressures.

6.

How does the strategic case for ethical business differ from the traditional business case?

The traditional business case offers a number of reasons why businesses should behave ethically. These reasons attempt to demonstrate that behaving ethically is profitable, that it attracts ethically minded employees, customers and investors, that it gains favour and potential cooperation of governments and that it is essential to secure business as a supplier with some companies. More negative reasons involve the cost of lawsuits and damages and the cost of attracting bad publicity (refer to pp. 329–30).

The strategic argument (refer to pp. 343–44) is championed by such as Porter and Kramer (2006, 2011). Whereas the traditional business argument offers a rather blanket coverage, the strategic argument suggests that social benefits (i.e. the benefits derived from ethical business) will only happen if it is in the firm’s interest to invest in this direction. However, Porter and Kramer (2006, 2011) offer evidence where ethical business is a source of core competence, citing Toyota’s hybrid car, Credit Agricole’s lending policy, Nestlé’s and Vodafone’s work in Africa and General electric’s ‘Ecomagination’ range of products.

Both approaches fall within the criticism of Friedman’s argument (1970). He argues that the motivation is not ethics but that certain types of behaviour are being used to gain competitive advantage and make profit. (This could form the basis of a good classroom debate).

7.

What are the pros and cons of whistleblowing?

Whistleblowing is the term used for any reporting of unethical behaviour within business organizations, governments, hospitals, universities, etc. In several organizations it has been institutionalized and whistleblowing hotlines exist for employees to use.

One of the main advantages of offering employees a means of reporting unethical behaviour without fear of reprisal is that behaviour and issues that may have remained hidden for years are brought into the open. In addition, a potentially For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

dangerous or illegal practice can be identified and dealt with. Having an internal mechanism may also prevent potentially damaging information from getting to the wider public.

The potential disadvantages are that whistleblowing may be used to air personal grievances against the company and that some whistleblowers prefer to use more public channels of communication such as the press, TV and radio. In this case, even where unethical behaviour cannot be proven, the PR damage may be considerable.

8.

What specific issues in business ethics emerge as a result of globalization?

•

• •

9.

Different cultures have different values. Bribery/gift giving and receiving as a way of doing business may be more acceptable in some societies than others. Wages and conditions that would be viewed as exploitative in some societies may be the norm in others. The absence of absolute values makes decision‐making and practices more complex for firms operating globally.

There is a fine line between exploiting these variations in the best interests of profit versus in the best interests of employees, customers, suppliers and society in general.

Organizations, such as the WTO and ILO, have attempted to develop global standards for trade and employment respectively. There has also been the growth of organizations like Fair Trade that ensures that all the goods it markets are produced ethically and the workers receive a fair wage.

Re-examine the Great British Railways case in Chapter 6 and the Executive Pay case in Chapter 7. What aspects of business ethics and corporate social responsibility are involved?

For Railtrack/Network Rail, the key issues include: • Whether public transport should be run for profit by private companies – the privatization debate.

• Safety to the general public as a result of under‐investment in a newly privatized company and the persistence of such problems over time.

• The elevation of shareholders and senior management as prime beneficiaries via dividend and large pay rises.

• The lack of effective regulation of stakeholder interests by a government organization set up to do just that.

For the case of Executive Pay, the key issues include: • The fairness to other employees of one group receiving a disproportionately high salary.

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•

The objection in some companies by groups of influential shareholders that large pay rises and exit bonuses are paid to executives even where the performance of the company is poor.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 9.1 Recklessness, Hubris and Greed – The Carillion Collapse 1.

‘Recklessness, Hubris and Greed’, which, in your opinion, is worst?

This question is intended to provoke debate, students may refer to the following areas of concern: • The agency problem.

• Issues of regulation and oversight, in particular the roles of the regulator and the accounting firms.

• Weak procurement practices within government.

• Poor corporate governance.

2.

How does the Carillion case illustrate the issues raised by this chapter?

There are a number of illustrations of unethical behaviour. These include: • Accounting procedures were used to inflate earnings and hide bad debts.

These were not visible on the balance sheet and hence not available to shareholders, potential investors, banks and customers.

• Some senior managers have been accused of fraud. At the time of writing it is not known whether individuals will face criminal charges.

• Large bonuses were paid to some key staff to ensure loyalty at a time when the company was nearing bankruptcy.

• Increasing levels of dividend payment continued to be made in spite the difficulties faced by the company.

• A number of checks and balances were missing – auditing by KPMG was a prime example.

• A senior management culture had evolved which viewed pension contributions as a ‘waste of money’.

• Government, who were happy to be associated with a successful company such as Carillion, did not investigate too closely and despite the company being in trouble continued to award contracts.

• There was inadequate management control at all levels, partly as a result of a For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

corporate culture that encouraged risk and aggressive behaviour and partly due to the complexity of the market.

In general, there was a widespread failure of effective corporate governance.

3.

How far can the government realistically go to prevent another Carillion?

There are a few issues to be considered, many of which are impacted by the political climate and appetite for regulatory change. In short, there is no simple answer to this question.

4.

Consider the role of Deloitte and KPMG in the case, were they too cosy with Carillion management?

Again, this is a matter for debate and students views may vary. Nonetheless, a number of steps could have been taken: • Greater controls by governments of the auditing process and restrictions on auditing and consulting by the same firm. Frank Fields view that ‘government urgently needs to come to parliament with radical reforms to our creaking system of corporate accountability’ is not aided by the focus on Brexit.

• Improved government scrutiny of published accounts and regulations preventing firms from 'hiding' bad debts out of the main accounts.

• Improved management control within organizations, especially of those making investment decisions.

• Internal mechanisms to ensure corporate social responsibility ‐ codes of practice, ethics departments, whistleblowing opportunities, etc.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER TEN INNOVATION

This chapter deals with a number of issues related to innovation. Innovation is contrasted with invention, and a number of related concepts such as R&D are discussed, including a section on entrepreneurship. An attempt is made to offer a typology of innovation based on scope and purpose. The chapter identifies expenditure on innovation by looking at published data from companies in the UK and globally.

The link between innovation and economic growth is explored as is the role of the state.

In both cases, a number of difficulties are raised, firstly related to measuring impact and secondly associated with the problems of state involvement. The discussion on the state leads into an examination of national differences in innovation linked to institutional frameworks and culture and explores the concept of ‘national systems of innovation’.

We explore innovation and its relationship to organization size and structure. The chapter closes with a comparison of innovation strategies and the barriers to effective strategy implementation.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1.

What do you understand by the concept of organization and management innovation? Are such innovations as important as scientific and technological innovations?

This is dealt with on pp. 365–366. Organization and management innovation is a broad category and, according to Hamel (2006), is a ‘marked departure from traditional management principles, processes and practices or a departure from customary organization forms that significantly alter the way management is performed’. Good examples of this type of innovation would be the Toyota production system (lean production), the move from functional to multidivisional structures by multinational firms and the development of accounting techniques such as double entry bookkeeping or the use of net present value to evaluate investments. In the text, we include marketing and business model innovations as organization and management innovations, although some would regard them as a separate category, in particular business model innovation.

In terms of the examples given above, the impact of organization and management innovations is every bit as important as product and process innovations. A DTI survey (DTI, 2006) revealed that whereas only 30% of organizations claimed product or process innovations, 61% claimed innovations involving strategy, structure or management practices. However, a pharmaceutical company such as Pfizer or AstroZeneca would undoubtedly point to the benefits derived from product innovation. In reality, such comparisons are difficult to measure and may be interlinked, e.g. lean production involves some process innovations. Some researchers claim that business and management innovation and change is a prerequisite of technological product and process innovations.

2.

What are the relative advantages and disadvantages for a firm pursuing radical/discontinuous innovations versus incremental innovations?

Refer to pp. 367–369 for a discussion about the scope of innovation.

The advantages for a firm pursuing radical/discontinuous innovation: • Technical leadership and possibly the opportunity to set the industry standard.

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• Market leadership supported by patents, although this could be equally true for incremental innovations.

The disadvantages relate to risk and cost. Major breakthroughs do not happen that often. The deliberate pursuit of such a strategy can mean many false leads and many projects that come to nothing. However, it is a strategy pursued by some pharmaceutical companies and is the cause of the high spend to sales ratio (refer to Table 10.4, p. 370).

By comparison, incremental innovations start from a known point and are therefore less risky and almost certainly less costly. They can still result in market leadership and even, in some cases, technical leadership. The majority of innovations are incremental and such a strategy can be very rewarding, as with Japanese camera companies. However, given that incremental innovations start from a known point, there is a greater chance that others are working in the same direction and such innovation may be more competitive.

In reality, a firm that produces a radical/discontinuous innovation will also pursue incremental innovations. The two types of innovation can be related. A major breakthrough innovation occurs at the beginning of a product or process life cycle to be followed by a succession of incremental innovations to maintain competitive edge.

3. Examine Tables 10.4 to 10.6 (pp. 370 –1) relating to expenditure on R&D. What conclusions do you draw?

Table 10.4 (p. 370) This table relates to R&D expenditure and R&D density (R&D spend as a proportion of revenue) of companies globally in 2020.

• •

•

The list of the top 12 spenders on R&D is dominated by US firms, taking 8 of the top 12 rankings.

Up to 2015, the top spenders were invariably from those companies developing and making computers, mobile phones, pharmaceuticals and automobiles. By 2017 and continuing into 2020, the top two spenders were Amazon and Alphabet (the parent company of Google) in the areas of retailing and information, respectively. This represents a major change in R&D expenditure, which is also reflected in China with Alibaba, which has the second highest R&D expenditure behind Huawei.

Although automotive industries are only represented in the top 12 by VW, firms such as Ford, General Motors, Toyota, Nissan and Daimler Benz feature in the top 30 as relatively high spenders. Table 10.6 (p. 371) shows the automotive industry as the third largest R&D spender of all sectors. This reflects the highly competitive For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

•

•

nature of that sector and the need to find ways of increasing sales or even maintaining market share in saturated and even declining markets.

The table also shows R&D density plotting the relationship between R&D expenditure and sales. Traditionally low intensity R&D has been associated with the automobile sector. In 2020, auto firms are joined by Apple and Samsung, reflecting high volume sales and a large number of different product lines. High density R&D is still associated with the pharmaceutical industry, reflecting high levels of basic research involving both risk and long lead times as well as more rigorous government controls. An interesting outlier in the high-density table is Facebook.

There is some evidence of sector specialization by country. Spending in the auto sector is dominated by the USA, Germany and Japan. The pharmaceutical industry is split between Europe and the USA with no representative from outside these regions, while the USA dominates in the IT and related technologies sector. The USA leads the way in the new sectors represented by Amazon and Alphabet.

Table 10.5 (p. 370) • This table looks at R&D spend by country in 2019. Globally, R&D spend has always been dominated by relatively few countries. For many years, the top five countries has been the USA, Germany, Japan, France and the UK, with US firms contributing around 40% of global expenditure.

• The existing order has been challenged predominantly by China but also in part

by South Korea, which has the highest spend as a proportion of both GDP and per capita. This pattern is also seen in Taiwan.

• Chinese and US firms account for around 75% of the global expenditure. The major difference between these two countries is that historically R&D in China has been dominated by large state-owned companies while the USA is represented entirely by private firms. Huawei has emerged as a major global player in R&D. Its status as a private company is a matter of some debate (refer to Case 3.1 in Chapter 3).

Table 10.6 (p. 371) The table looks at global R&D spending by sector as a proportion of the total in 2018.

• 76% of all expenditure is in computing, electronics, technology hardware (computers, mobile phones and electronics), pharmaceuticals and healthcare, automobiles and software and the internet.

• As mentioned in the comments relating to Table 10.4 (p. 370), expenditure in some countries favour some sectors over others.

• Expenditure in the consumer sector is only 2.9%. Given that Amazon has the largest R&D expenditure of any company, it probably reflects the dominance of Amazon in this sector.

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4. Assess the relationship between innovation and economic growth. Which criteria would you use to show such a relationship?

This question is dealt with on pp. 378–381. There have been many attempts to link innovation to economic growth. An early and influential theory saw innovation as a prime mover for growth in periodic cycles of economic growth and decline.

However, there are a number of difficulties in showing a correlation between economic growth and innovation, either at national or firm level. For example, expenditure on R&D is no guarantee of growth, and innovation may be one amongst several factors, such as marketing, that contribute to product success. The long wave theory has also been severely challenged.

Criteria that may be used include: • Investment in R&D • The rate of new product development • Patent activity and its links to export behaviour However, all criteria have their drawbacks (refer to the difficulties of providing evidence on pp. 380–381).

5. Examine the ways through which the state can subsidize, encourage and protect innovation in private firms. Why should the state get involved, and what difficulties arise with such involvement?

State involvement in innovation can come via: • Procurement • Subsidies to firms or sectors (somewhat restricted by EU law) • Education and training provision • The patent and licensing laws • Restrictive and enabling laws • Import controls The state's involvement is a function of: • The importance of innovation to economic growth • The high level and risky nature of investment in R&D • Political and strategic reasons The main difficulties include: • Funding can dry up.

• Government employees lack the technical expertise to make effective funding decisions.

• It can lead to excessive intervention.

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• •

State involvement is often bureaucratic and can slow the process.

There are conflict and ethical issues.

All the above issues are discussed on pp. 382–384.

6. What is a national system of innovation and how significant are such systems in determining differences between nations?

Refer to pp. 384–388.

National systems are made up of actors and institutions and the interaction between them. The nature and forms of interaction vary in different countries, leading to different outcomes in terms of innovation. Key roles are played by managers, firms, banks, universities, etc. Key influences are the nature of the economy, the facilitation of knowledge flows and cultural differences.

An example of contrasting national systems is provided by Table 10.11 (p. 387). This suggests that national differences are significant. This is reinforced by Porter (1990), who identified such differences as a source of national competitive advantage. However, it is difficult to show precise and measurable links between such national differences on one hand and R&D expenditure, innovation and economic growth on the other.

7. Examine Tables 10.8 (p. 379) and 10.9 (p. 380) relating to patents. What conclusions do you draw?

The specific issues relating to patents feature on pp. 379–380 and p. 383.

Comparisons between patents and expenditure on R&D can be made by viewing the tables on p. 370.

Table 10.8 • The table shows a continuing dominance of US firms over all the periods listed in the table, with 11 companies in the top 20 for 2020. This reflects both the size of the US economy and the expenditure on R&D of US firms (refer to Table 10.5, p. 370). It is expected that firms will register patents in their own country, but Table 10.9 (p. 380) reveals that both the US and Japan register a good proportion of patents overseas as well.

• The tables are also dominated by computing, electronics and technology hardware companies. There are no pharmaceutical or chemical companies, although the former are some of the highest spenders on R&D (refer to Table 10.4, p. 370). The absence of pharmaceutical firms is linked to the nature of research in that industry. The research and development of a drug is both For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• •

•

•

expensive and it is some time before the end-product is patentable. The nature of drugs research means that much of the effort is inevitably wasted as many products never reaches the market. By contrast, computing, electronics, and technology hardware companies deal with many smaller incremental innovations that yield a higher number of patents.

Only two automotive companies, Toyota and Ford, feature in the list, perhaps reflecting developments in hybrid and electric vehicles.

Japanese companies account for 16 top 20 positions in the three years cited in the table, again reflecting the size of its economy and the importance Japanese firm place on innovation. We do however note that the number of Japanese firms have declined since 2013.

Smaller countries like S. Korea and Taiwan feature throughout the period since 2013 and Samsung registers the second highest number of patents in each of the three years.

Two significant developments since 2017 are the emergence of Chinese firms and of Amazon and Alphabet (Google). Huawei is the first Chinese company to appear and was joined in 2020 by BOE. China has emerged as a heavy spender in R&D and Amazon reflects an emphasis shift towards online retailing and the service sector in general, while Alphabet signifies the growing importance of software services.

Table 10.9 • The table reveals a stark contrast between the USA and Japan on one hand and the USA and China on the other. In 2020, 54% of the total patents registered by USA companies were in the USA and 46% were in other countries. Japan registered marginally more patents overseas than at home (50.4% overseas and 49.6% home).

China registered 90.25% of its patents at home and only 9.75% overseas. The rapid growth of the Chinese economy has clearly focused on the internal market. However, as Chinese companies grow in influence, as Huawei has done, then it is expected that overseas patent filings will rise.

• Japan represents an interesting example of patent strategy. The continued presence of the Japanese may be linked to patent strategy. The Japanese are assiduous at filing patents and will attempt to break innovations down into a number of different patents (in line with their incremental approach to innovation). This may explain the large number of patents filed and granted by the Japanese, but it is only a partial explanation. During the 1980s, Japanese firms saw innovation as the key to market growth both home and overseas.

8. In what ways can innovation create social value?

The introduction to this chapter (p.360) stresses the importance of innovation for the long-term economic growth of a country, thus improving the lives of its population. The UK Department of Trade and Industry (now replaced by The Department for Business, Energy and Industrial Strategy) in one of its publications For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

(DTI 2006) claimed the contribution of innovation to society by meeting important social needs listed as: • improved healthcare • improved education • a better environment • improved transport systems.

A more recent approach has stressed the role of innovation in the creation of social value rather than the traditional emphasis on profit, market share and competitive advantage (refer to p. 362). McCloskey (2016) goes further believing that the history of innovation is primarily the application of new ideas to improve living standards.

Much coverage has been given to those groups that have come together to focus on climate change or the eradication of poverty. Emphasis has been placed on sustainability through new forms of energy, in building design and products such as electric vehicles.

Case studies such as the Grameen Bank in Bangladesh show that the creation of social value is not incompatible with business goals of growth and profit. This was a theme taken up by Porter and Kramer (2006, 2011), who cite several examples of organizations that have shown that what is good for businesses can also be good for society.

9. What contribution can the size of the firm make to innovative activity?

The studies of the influence of a firm's size on innovation have produced mixed results (refer to pp. 389–390).

• • • • • •

Large firms dominate in terms of R&D expenditure. They have more to invest, they can obtain external funds and can underwrite higher risk projects. They can produce high volumes to recoup the investment.

Small firms spend more on R&D as a proportion of sales and employ proportionally more R&D staff.

Small firms contribute to more than 20% of innovations – more than their share of investment.

The relative influence of small and large firms varies with the sector.

Pharmaceuticals favour the large firm, instrumentation the smaller.

Small firms often have to align themselves to large firms to capitalize on an innovation.

The relative importance of small and large firms can vary over the history of the innovation and development of a product.

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10. Identify the major problems associated with the existence of a special function responsible for the initiation of new business ideas, such as an R&D department.

What structural devices would you employ to reduce these problems?

The major problems are a result of the differences between mechanistic and organic approaches and cultures, with the R&D function typically adopting the organic approach. The differences are set out in Table 10.12 (p. 391) and structural issues in general are discussed on pp. 390–393. Key issues relate to the differences in: • the nature of work • inward versus outward orientation • management style • organization culture • attitudes to work.

Structural and related remedies can include: • Obtaining agreement to a central strategy that highlights innovation and reinforcing this at every opportunity.

• Establishing structures, such as committees, to improve the flow of communication (although these may increase the bureaucracy).

• Establishing a matrix or project team structure in which R&D is integrated within other functions (although this may cause complications of control and may not be appropriate for certain types of R&D, e.g. that require large laboratories or expensive equipment).

11. Assess the innovation strategy alternatives for a manufacturer of consumer electrical goods, a major computer firm, a package holiday company and a university.

In all cases there is a choice between being 'first to the market' or a 'follower'. The relative advantages of each are identified on pp. 391–393. However, the key aim of this question is to enable students to think how innovation can be applied to different types of organization and industry.

Specific factors that could be considered include: For the consumer electrical goods manufacturer: • Invest in the development of new technologies, e.g. Dyson vacuum cleaners, Apple.

• Build upon existing technologies, e.g. Philips.

• Focus on top‐end markets and/or style, e.g. Bang and Olufsen.

• Focus less on innovation and more on the creation of a mass market by pricing strategy, e.g. LG. For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

For the major computer firm: • Invest heavily in R&D to maintain market leadership, e.g. IBM, Microsoft.

• Incorporate or establish a joint venture with a smaller firm with innovative products.

• Develop software systems that become industry standard, e.g. IBM, Microsoft.

• Develop innovative marketing strategies, e.g. Dell direct selling.

For the package holiday company: • Pioneer exotic locations, e.g. Hayes and Jarvis.

• Specialize in niche markets, e.g. self-catering, up‐market, adventure holidays, age-range holidays, etc.

• Expand into air travel, e.g. Thomson, Thomas Cook.

For the university: • Develop new subject areas, e.g. computer games software development, creative industries management.

• Develop new forms of delivery, e.g. distance learning, online courses for both full‐time and distance learners.

• Develop online library access.

• Develop new student support mechanisms.

12. Assess the relative advantages and disadvantages of being a first mover and those of being a follower.

The advantages for each are listed on pp. 394–396.

Advantages for a first mover • Technical leadership offering core competence.

• Monopoly position through patents.

• First pick and potential control of limited resources.

• Set industry standard.

• Opportunity to control the market and establish a loyal customer base.

• Can establish a household name.

Disadvantage of first mover • Need to invest in R&D facilities and staff.

• Strategy is potentially long term and hence carries risk.

• Investment at risk as effective copiers come into the market. This is particularly the case if the first mover is weak in terms of low cost manufacture and effective marketing.

Advantages for a follower For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

• • • • •

Cheaper as no development costs.

Can operate at low cost and offer a low selling price.

Fewer risks and costs.

Can learn from and avoid mistakes of first movers.

Market established – customers, retailers, etc. Have knowledge of the product and service facilities and complementary products established.

Disadvantages for a follower • In the same position as many competitors.

• More difficult to achieve a lead in the market.

There are also alternative strategies related to collaboration, protectionism and enhancing the capacity of the whole organization to innovate. These are discussed on pp. 396–399.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 10.1 DEVELOPING A VACCINE DURING A PANDEMIC 1.

What does this case tell us about the innovation of pharmaceutical products?

•

• •

• •

•

2.

For most pharmaceutical products, the process of development is long and costly and involves basic laboratory research, pre-clinical trials (usually with animals) and several clinical trials with different groups, often internationally. This process can take from 10 to 15 years.

In most countries, the process is laid down and policed by national bodies, often in collaboration with the World Health Organization (WHO).

The time frame and control processes mean that developing effective drugs is an expensive business and explains why the process tends to be concentrated among a group of large pharmaceutical companies operating in a highly competitive market.

The process involves close collaboration between university research institutes and the pharmaceutical companies.

With a pandemic like COVID-19, the development of the drug became a global quest for a solution involving collaboration within and between nations, e.g. China sent samples of COVID DNA to the Oxford laboratories to kickstart their development process.

The rapid development of drugs for a global pandemic means that effort is diverted from other projects to find a quick, effective solution. This will inevitably delay research and development of drugs for other conditions.

If vaccines usually take 10-15 years to be developed, how and why was the COVID-19 vaccine developed in just under one year?

The norm is a lengthy process that follows an internationally agreed set of procedures to ensure the safety of any new drug. The motivation to reduce the length of this procedure for the pandemic was due to the movement of For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

people both within and between countries meaning that the virus was spreading rapidly. It became clear that the COVID-19 virus was deadly and many lives were at risk. A drug to prevent this rapid spread became a priority for many countries. The development process was shortened due to several factors: • Research to develop drugs to combat coronaviruses was already progressing in many countries, following the SARS outbreak several years earlier.

• The processes for the development of pharmaceuticals were usually sequential involving both bureaucracy and time. The process was sped up by a relaxation of bureaucracy and the doubling up of several processes involved in the testing of the drug. In general, government agencies were supportive and granted authority to use the vaccine much faster than was the norm. In AstraZeneca’s case, testing in different countries was run in parallel and discussions between the laboratories and the company were already at an advanced stage.

• Competition between major pharmaceutical companies in different countries may also have been a factor.

3.

What factors caused problems with the distribution and administration of the AstraZeneca vaccine? What does this tell us about the innovation process?

Several factors were involved: • AstraZeneca encountered manufacturing problems in Belgium, with the effect of slowing down the supply chain to other EU countries.

• Part of the problem was the relationship between the EU and the UK. Both parties were in the middle of tense negotiations relating to the UK’s decision to leave the EU. • In several EU countries, including France, Germany, Italy, Austria and Bulgaria, doubts were raised about the effectiveness of the AstraZeneca vaccine on different grounds. For example, the effectiveness of the vaccine for over 65’s was questioned and there was an alleged problem that the vaccine would cause blood clots for younger age groups. The risk of the latter occurrence was less than 1 in a 100,000 cases, an acceptable risk in most cases of new drugs. Although the countries that had questioned the drug issued statements supporting the use of the vaccine, public opinion remained skeptical.

4.

What conclusions do you draw from the WHO data on the administration of the COVID-19 vaccine globally?

This relates mainly to Table 10.7 (p. 373). Across the world, there were wide For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

variations in the numbers that were being vaccinated. Rates were high in the UAE, China, the UK, Spain and in much of the developed world. The vaccination rates were very low in less developed countries, with many African countries showing much lower rates.

Yet global vaccination was the key to preventing the spread of the disease and reducing the number of deaths. An attendant problem for those developing the vaccine was that like most coronaviruses, COVID-19 was developing different mutations.

5.

Should patents be suspended for vaccines in a time of pandemic?

This has been an ongoing debate for several years. The cost of development and, for some drugs, the cost of ingredients are both high. This prices some drugs out of the reach of poorer countries. The debate was widely broadcast during the HIV/AIDS pandemic, which affected African countries more than most.

Patents grant monopolies to those companies that have developed the product to enable them to recover the development costs, while at the same time making public the full details of any new development. This process of disclosure is considered an important step in others being able to improve future forms of the product in question.

The argument against the pharmaceutical companies is that they use patents to create exclusivity in the production of new drugs and this enables them to sell at a high price and boost profits.

The pharmaceutical companies argue that without control of the patent system, there would be no control over the development and manufacturing process and how the drug is used. They argue further that the patent system enables them to license their products to other producers. They can then sell such products as generic drugs at a more competitive price, while at the same time regulating the manufacturing process.

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CASE 10.2: THE NEW KAROLINSKA HOSPITAL STOCKHOLM 1. Identify the different kinds of innovation that have been achieved in the Karolinska Hospital.

The old Karolinska Hospital and the Karolinska Institutet have had a long-standing reputation for research and clinical innovation. For example, they have led the way in transplant surgery in Sweden and have become a world leader in medical research, knowledge creation and dissemination via publications and in the training of medical practitioners.

The new Karolinska Hospital is innovative in different ways. Refer to the types of innovation including design and knowledge pp. 364–367.

• Product innovation was a key feature in the planning, design and construction of the hospital, e.g. the use of light and natural materials, how patient rooms were constructed and fitted out.

• Process innovation was apparent in the way patients were treated with a focus on individual rather than centralized treatment and the linkages of the various stages of patient care. Medical staff treated patients in their own room or in distributed facilities rather than using centralized X-ray facilities and clinics.

• Organization and management innovation lay at the heart of the ‘patient journey’. Previously, different functions were brought together as a coherent process.

• Social innovations were apparent in both building and facilities design and patient care. Attention was paid to the needs of patients’ families through the introduction of guest beds. Sustainability was a key requirement in the planning and execution of energy provision and recycling.

• The development and dissemination of knowledge including tacit knowledge is the role of the Karolinska Institutet.

2. How is the mission statement reflected in the design of the hospital?

The mission statement is presented below in italics together with how it is reflected in both the design and planned operations of the hospital.

The patient always comes first. All in-patients have their own room with ensuite facilities and a guest bed. Most rooms have extensive views so that patients still feel part of the outside world.

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We deliver safe and high-quality care. Medical care is based on state-of-the-art research, knowledge, and training. Patients are placed in a ‘health care journey’ that integrates triage, testing, diagnosis, treatment and aftercare. In many hospitals, each of these stages is carried out by separate departments, often managed differently.

We are accessible, efficient, and give our patients personalized care. Medical staff come to patients in their rooms rather than patients seeing medical staff in centralized clinics. Facilities such as X-ray and scanning machines are distributed throughout the hospital.

We are a model in research, development, and publication. This places research, knowledge, learning and dissemination at the heart of everything the hospital does and is the primary responsibility of the Karolinska Institutet.

3. How is Karolinska different to other hospitals?

Difference is claimed in several ways: • In planning the new hospital, the Karolinska Hospital researched and integrated the best forms of healthcare as practised in leading hospitals around the world.

• Decentralized patient care versus the norm of centralized care.

• Because of the working systems and hospital layout, medical staff spend more time with each patient, leading to improvements in treatment and care.

• The hospital has a close relationship with a world-leading research and training institute.

However, any new hospital, given the resources will also be able to copy best practices and learn from the mistakes of others. The Karolinska may act as a model for others to follow.

4. What conclusions can you draw from the financial problems the hospital experienced in 2019/20?

The answer here can only be based on speculation rather than evidence: • The proposed cuts in medical and administrative staff to balance the budget represent 7% of all staff. This may be carried out by natural wastage but there may be: - An impact on staff morale and motivation.

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-

•

An impact on workloads thus affecting the Karolinska model of patient care.

The budget deficit may lead to the need for other savings, for example on equipment which may also affect patient care.

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BUSINESS IN CONTEXT EDITION 8 – TEACHING MANUAL CHAPTER ELEVEN OPERATIONS

In this chapter, we identify operations as a central function in both manufacturing and service industries with important links to other functional areas. The objectives of operations are quality, dependability, speed, flexibility and cost.

The operations function is best viewed as a system (refer to Figure 11.1 on p. 407). A central theme is that of satisfying customers while at the same time operating efficiently.

This can create dilemmas (refer to Figure 11.2 on p. 410). The chapter details the main activities of operating systems and presents them as a solution to this basic dilemma. Key elements are identified as the design of operations systems and planning and control. Key issues discussed include product design, capacity planning, location, scheduling and quality control.

A key current issue in operations management relates to the workings of the global factory and global supply chain and the problems of working in a global economy where geopolitics, cybercrime and environmental threats offer potential threats to effective supply chain management.

The chapter also deals with one of the major changes that have impacted upon operations management; these are a set of ideas and techniques referred to as lean production.

While these ideas began in manufacturing, they have extended into retailing and services.

Links are drawn between lean production and a series of issues in supply chain management, as well as clear links between operating systems and organization structure.

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Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1. Examine the similarities and differences to be found in the operations systems of manufacturing and non‐manufacturing organizations. How do the operations priorities differ in a firm producing television sets for a mass market compared to those of a large regional hospital?

Both manufacturing and non‐manufacturing organizations produce goods and services to customers. They are both concerned with an efficient conversion ration of inputs to outputs, which will involve the careful planning of their activities, the selection and training of appropriate staff, the choice of equipment and so on.

One major difference between the two types of organization is that a manufacturing firm can make goods to stock, but a service organization cannot. However, any consideration of such differences is a broad distinction since there are many differences within each sector. The main differences are set out on pp. 408–409.

• Manufactured goods can be stored and transported.

• In service organizations the customer is often an active participant in the process, making the process less predictable.

• In non‐manufacturing outputs are more difficult to control.

• In non‐manufacturing quality is judged not only on output but on the mode of delivery.

Some differences in operations priorities between a manufacturer of TV sets for the mass market and a regional hospital are:

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TV sets Demand can be forecast, planned and controlled.

Hospital Some demand can be forecast, planned and controlled, e.g. standard operations such as hip replacement. Other t y p e s o f demand cannot, e.g. accident and emergency.

Quality is paramount since mistakes mean loss of life and potential lawsuits. Volume of patient throughput has become more of Can make to stock to act as a buffer.

Stock creation not an option.

Keeping costs low is important but Costs are fixed by health authorities and increased volume can create economies of budgets cannot be exceeded. Increased scale. volume does not create economies of scale since each patient must be treated as an individual case. Little or no flexibility to increase income.

End customers are remote and rarely seen. Patients as customers are part of the process Capacity may be adjusted by overtime or Often working at full capacity. There is outsourcing. some outsourcing of services to other hospitals and, in some cases, the outsourcing of operations to other EU countries but this is limited.

Volume and quality are key criteria.

2. Design a systems model for a manufacturing firm, a retail organization and a hospital. Show both the types of transformations that are taking place and the other systems with which the firm interacts. What are the main activities and relationships?

A template for the model is given in Figure 11.1 on p. 407. This model is essentially one of a manufacturing organization and could be used for the manufacturer. The exercise is predominantly set to see whether students can adapt this model to a retailer and a university. The suggestions below give a flavour of the expected answer and only list a few inputs and outputs, etc.

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Manufacturer Inputs – raw materials, parts, labour, finance, information, plant and equipment.

Processes – purchasing, manufacturing, sales, support such as accounting, HR. Outputs – goods, services, profits, customer satisfaction, information.

Transformation – of raw materials, information processing.

Retailer Inputs – finished goods for sale, labour, finance, information, plant and equipment (counter displays).

Processes – purchasing, sales via direct interaction with customers, support such as accounting, HR. Outputs – sale of goods, services, profits, customer satisfaction, information.

Hospital Inputs – patients, labour (doctors, nurses, technicians), finance, information, plant and equipment (wards, operating theatres, treatment rooms, labs).

Processes – in‐patient and out‐patient care, diagnosis, treatment, research, support such as catering, accounting, HR. Outputs – cured patients, advance in medical knowledge, patient satisfaction, income, information.

Transformation – patient processing, information processing.

Transformation – change of ownership of goods, customer processing, information processing.

Interaction with – suppliers, Interaction with – suppliers, Interaction with – wholesalers, retailers, other other retailers, local hospitals, state health manufacturers, local communities. service and other communities. government agencies, universities, local communities, national government.

3. Define the objectives of a firm manufacturing television sets, a hospital and a fast- f ood restaurant in terms of quality, dependability, speed, flexibility and cost.

The objectives of quality, dependability, speed, flexibility and cost are covered on p. 406 and pp. 437–439.

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TV manufacturer

Hospital

Fast food outlet

Quality

Highest quality for the price.

Highest quality at all times (but constrained by funding).

Dependability

Of supply to retailers and of functionality perceived by customers.

Important to meet production and delivery targets but dependent on demand.

Patient trust is paramount.

Highest quality in terms of hygiene and for price.

Generally, customers are not seeking a highquality dining experience.

Of speed of delivery and perceived good value for money.

Speed

Flexibility

Important to adjust to fluctuations in demand.

Cost

Generally, the lower the better but related to margins.

Less important, except in the treatment of critical cases and in the throughput of patients to meet government targets.

More important in some areas than others e.g. accident and emergency, X‐ ray.

Less important than other considerations but all activities are constrained by a tight budget.

Very important. A time target will be set for each transaction.

Should operate at low cost yet be able to cover peak periods efficiently.

Must be low due to low margins.

4. What strategies can be employed to solve the conflicting objectives of operating efficiency and customer satisfaction?

Refer to pp. 409–410 for the conflicting objectives and pp. 412–420 for potential solutions.

The main dilemma is between high expectations of customers (which usually means high cost) and the need to keep operating costs as low as possible. There are two main strategies. The first is using planning, organizing and controlling For use with Needle, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

techniques to ensure that operations meet customer demand in the most cost‐effective way possible. Examples of this include: • Scheduling work to maximize production runs and to provide additional stock for peak periods.

• Developing planning models using techniques such as operations research.

• Achieving flexibility via overtime, outsourcing and stock management.

The second strategy involves managing customer expectations. Examples of this include: • Persuading customers to pay more for a higher level of service or offering cut price deals for customers to accept goods that do not quite meet their specifications.

• Keeping customers informed and explaining why they may have to wait for certain goods and services.

In general, an effective manager has regular communication with suppliers, customers and other firms involved in the operations process. This is known as boundary management.

5. What types of impact can product design have on the operations process? How does it affect the key objectives of quality, dependability, speed, flexibility and cost?

Product design features on pp. 412–413 and the key objectives on pp. 437–439.

Product design has an impact on all aspects of the operations process. It affects the styling and function of the product and the degree of standardization possible in the production of goods and services. There is therefore a significant impact on costs and price and all other key operations objectives.

Quality – design will determine the specification of the product. Although the aim is to provide quality goods and services, customers will frequently grade products according to their perceived value and will often differentiate between higher and lower 'quality' goods. This is an aspect of styling and function.

Dependability – this is a feature of the product function, which is an essential part of design.

Speed – products can be designed to enhance the speed of operation as in fast food outlets.

Flexibility – products that are made up of modular components that can be grouped in a variety of combinations can increase flexibility as with modular degree courses or products in a sandwich bar.

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Cost – product standardization can reduce costs whilst the use of expensive components and highly individual styling will increase cost.

6. Assess the effect of globalization on operations management.

Globalization has influenced operations, particularly in manufacturing, in several ways, such as: • Products can now be designed to respond to local market needs.

• Product design can be achieved by virtual teams operating in locations around the world.

• Global operations can be integrated to achieve maximum cost effectiveness.

Cheap labour may be used in one location and more expensive knowledge workers in another. Having a number of locations of operation offers greater flexibility. Over‐capacity in one location can be solved by transfering operations to another location.

• Economies of scale may be possible in supply and distribution.

• Markets may be expanded with a subsequent need for expansion of operations activities.

7. Identify the operational aspects that influence scheduling in a restaurant, at an airport and for a major national daily newspaper. What strategies and techniques would you employ to solve scheduling problems in these three situations?

Scheduling features on pp. 417–419.

Restaurant Scheduling will depend upon the size of the restaurant, the capacity of the kitchen and the ability of the chefs and waiting staff to serve customers at the same time. It will also involve food ordering and the capacity to serve everyone with their menu choice. A key task of any restaurant is to serve a table of customers all at the same time with different meals that may take different times to prepare and cook. In addition, customers should not be kept waiting too long for their meals.

Techniques that can be used include planning food ordering on the basis of past experience, sufficient refrigeration for storage, pre‐preparation of as many items as possible, space out demand by an effective booking system, use part‐time staff for periods of peak demand.

Airport Scheduling will depend on having the various operating systems cope with passengers when they want to fly and the times at which planes take off and land.

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There will be peaks and troughs during the day and at different times of the year. A key aspect is the coordination of the various activities – ground crew, baggage handling, airline catering services, aircraft cleaning services, immigration and so on.

There may need to be flexibility to cope with the effects of bad weather and other causes of delay or cancellation.

Scheduling is helped significantly by having timetables fixed as much as a year in advance and a controlled ticketing system which means that the number of passengers is largely known ahead of time. Liaison is essential with the various airlines using the airport and their need for ancillary services. Staffing can be scheduled to cope with periods of high demand. Some airports attempt to increase utilization of capacity by offering airlines deals to set up new routes or to advertise specific benefits to customers, e.g. fast track for business fares, speed of check‐in, etc.

National Daily Newspaper This must be produced to a tight deadline every day for six days per week throughout the year. The same facilities may be used to produce a Sunday newspaper as well and could be sub‐contracted for use by local newspapers.

There is little or no flexibility. Both journalists and production staff must meet a fixed deadline for every edition.

Some flexibility may be created by the early printing of supplements, reviews and other sections which do not deal with current news as this can be planned. The sales pattern of newspapers is well established, which aids scheduling. Marginal oversupply to cater for increases in demand is usually not costly. Increased flexibility has been achieved through automation, which means that an important breaking news story can be accommodated in a particular edition even when printing has started. In fact, the various editions are broken into a number of separate print runs, which facilitate this.

8. Why is supply chain management an important aspect of manufacturing industry?

To what extent have techniques imported from Japan assisted this process?

Refer to pp. 428–433.

Supply chain management links all aspects of the production process, (supply, internal operations and distribution) and is therefore central to the effectiveness of a manufacturing company. Supply chain management takes a holistic view of the movement of materials, components and information and attempts to create value‐ added at each stage of the chain. The management of the supply chain has a great impact on costs, and hence profits, as well as ensuring that goods reach the customer at the quality, price and time they are required.

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The key technique, developed in Japan and imported by manufacturers around the world, is just‐in‐time (JIT). An important element of JIT is the close relationship built up between manufacturer and supplier. Instead of firms playing off one supplier against another, the Japanese manufacturers have established a small number of major dedicated suppliers, in which it is not unusual for the manufacturer to have part ownership. This example has been followed by many Western companies (refer to Case 11.1 examining the Spanish company Zara). The advantages of the JIT system include: • The improvement in quality of materials and components at every stage of the process.

• The smoothing out of the production flow and the need for high inventory levels.

• Prevents delays and over‐production.

• Creates teamwork.

• High volume contract with dedicated suppliers.

• Flexibility assisted by automated systems.

• Overall cost reduction.

9. To what extent can the techniques associated with JIT and lean production be applied to a department store, a hospital and a university or college?

JIT features on pp. 432–433 and lean production is discussed on pp. 440–443.

Department store • With a known customer market, the store can anticipate demand and bring in goods on an anticipated demand-pull basis.

• Most department stores have cut down on stock. Some goods, such as more expensive or larger furniture items, will only be brought in with a definite customer order.

• Most department stores have an automated stock reordering process linked to the sales tills. When an item is purchased, information is stored on computer giving instant stock control knowledge and, in most cases, automatically reordering replacement items for the store.

• Most stores have cut down on large numbers of specialized staff and operate a smaller number of specialists supported by part‐time or temporary staff.

Hospital • For standard procedures, most hospitals operate a patient pull-through procedure. Patients awaiting surgery are only called into a hospital when there is a bed available.

• There is a faster throughput of patients in most hospitals with emphasis being shifted to outpatient and home care.

• Many hospital layouts have been reorganized to minimize distances between key departments, such as accident and emergency and X‐ray.

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University • Modular programmes have been introduced to reduce the number of duplicated courses across different departments with a subsequent reduction in resources.

• Timetables are constructed to achieve maximum scheduling flexibility.

• In student support centres, a faster flow‐through of students has been achieved by anticipating problems. Common student problems have been categorized and advance solutions are often available to students in information packs.

• Larger numbers of students are catered for via televised lectures or online programmes.

• Most universities have increased the numbers of students, whilst reducing the numbers of academic and support staff.

For an overview of these issues, refer to pp. 430–432 and pp. 438–441.

10. Examine the links between total quality management (TQM) and corporate culture.

TQM is covered on pp. 422–423.

In Chapter 6, corporate culture was defined as a deliberate attempt by top management to shape the culture of the organization to achieve certain strategic ends. In this respect it has much in common with TQM, as follows: • They are both top‐down philosophies.

• They share many core values – concern for quality, trust, teamwork.

• All members of staff are covered.

• A key element of both is the active involvement of staff and their acceptance of the core values are essential for effectiveness.

• Both assume high levels of trust.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 11.1: ZARA

Answers supplied by Francisco Puig (University of Valencia, Spain) and Miguel GonzálezLoureiro (University of Vigo, Spain) Learning outcomes: students should become familiar with the overall meaning of operations management as a system and its relationships with other functional areas. The tutor may initiate the case by reminding them the concept of the industrial value chain.

For more advanced students, a particular linkage to bear in mind is the tie of both corporate and competitive strategies and the implications for the operations management system. In this case, the business is global and the firm is a multinational, following a global strategy and an ongoing expansion strategy globally. Therefore, the usual issues around managing international business can be applied (the competitive environment, the need for thinking ‘glo-cally’, i.e. thinking globally while acting locally, cultural differences among countries in the fashion industry, etc.)

1. Under the principle of fast-fashion and lowering the time to market, analyze what processes of the value chain you would recommend outsourcing and why.

Firstly, the tutor should emphasize that students should discuss and identify the different processes of the global value chain that are operating here. After that, students should discuss whether a process can be outsourced or developed internally.

The critical issue here is not cost but the relationship of time to market-cost.

Therefore, students should create their own rule for deciding what and how value is created in Zara.

Zara follows a global push strategy: it tries to promote quick sales of whatever is sold in each store (which can vary from store to store even in the same country) while shortening the availability of clothing in stores. This way, buyers have pressure to buy that clothing today because it is quite possible that it will be no longer available.

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Students should think of how clothing is made from the very beginning of raw material (e.g. spinning mills), design and, of course, distribution and the logistics implicit in manufacturing globally.

It is worth reflecting on whether there any intellectual property that firms want to keep under control, such as the design and pattern of the clothing, as well as the communication with stores. There is a possible trade-off between cost-saving outsource and keeping this control.

2. Assess the impact of the ICT on the global efficiency of Zara’s supply chain. Identify positive and negative implications for logistics-related HR. Which management issues emerged from the large number of relationships with suppliers? How has Zara tried to manage them? What is the role of policies and norms in managing and controlling the supply chain?

The development of ICT in recent decades has helped outsource to distant locations from the headquarters. However, students need to realize that there are upstream and downstream activities from Zara’s viewpoint. Zara is a vertically integrated multinational, which is present virtually worldwide.

Students should examine the implications of replicating a single supply chain for each location where Zara operates. Examining the key activities of human resource management will help understand the complexity (selection, recruitment, retention, training, motivation, etc.). The critical concerns relate with control issues, which has meant that Zara has had to develop an auditing system of its own.

In terms of the management of suppliers, there is a key role played by the national clusters. Zara tries to centralize some of the relationships with suppliers by selfregulation. The national cluster is responsible for ensuring that every local manufacturer complies with the norms set by Zara. It is clear that Zara has the bargaining power to control the process.

On the other hand, ICT has helped develop the just-in-time philosophy across the whole supply chain. Zara knows what is sold in every store so it knows what should be manufactured. This has helped in controlling the inventory of ongoing products and decreased the number of days from design to selling the clothing in the store.

Nevertheless, it has made Zara ICT-dependent, which has implications for selecting suppliers at any new location. Suppliers must evolve as Zara updates its systems.

In summary, complexity may summarize all of this, while quality control, assurance and improvement are key in the response.

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3. Why does Zara insist that 50 per cent of manufacturing must be carried out by local suppliers? What implications does this have for their logistics operations?

Multinationals and the impact of the global economy are in the limelight. The carbon footprint and the health and safety issues of clothing is increasingly becoming a concern for customers. This means that multinationals are encouraged to control this.

A stakeholder’s approach may be fruitful for this point. 50 per cent of manufacturing carried out by local suppliers is a good start but it does not eliminate conflicts between environmental NGOs and local suppliers in countries such as India, Pakistan, Turkey or Morocco.

At this point, the tutor may have a discussion with students by splitting the classroom into two groups. One group should adopt the viewpoint of environmental NGOs, who may demand more than only 50 per cent, while the second group should adopt the perspective of the current local suppliers in those countries, who want to retain as much production as possible. This represents the conflict.

It seems that 50 per cent is not the optimum, but the best solution to keep every stakeholder happy. The selection of new suppliers at every location may lead to a solution that is not cost-efficient. A better solution could be that the 50 per cent of local suppliers were related with complimentary supplies such as energy, telecommunications, logistics and the like. Despite this, the customer will receive the message that ‘50 per cent of our suppliers are local’.

4. A key issue for logistics in global organizations is the balance between having universal HR policies and the need for adaptation to local factors. What factors will affect the mix?

A PESTEL or PESTLE analysis combined with the internal value chain, both used in SWOT analysis may be useful here. The PESTEL analysis classifies the global environment in political, legal, economic, socio-cultural, technological and natural environmental factors.

The internal factors relate with the different parts of the internal value chain: strategy, supply chain, manufacturing, marketing, distribution, finance and the like.

Students may then go on to analyse the impact of that diversity of factors on how a global multinational like Zara develops its HR policies. In particular, the question is aimed at thinking of the activities of operations management and how local factors affect the function of HRM. For use with Needle, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

There is the possible existence of a trade-off between the need for universal policies (i.e. fairness) versus the need for adapting the policies to the local context (e.g. should the salary and compensation of an expatriate in Argentina be different to that of an expatriate in India? What about the host-country nationals employed in the same position with different salaries and compensations?). Furthermore, training should be different depending on the local context and the position.

Examples of this are the case of Arab countries and Muslims: they must have allowances for prayer times and the supervisor should be aware of this.

Consequently, culture training should be an aspect of the ‘global manager’ mindset that any middle manager must have in this type of multinational.

5.

Identify non-related businesses where Zara’s logistics model could be extrapolated.

Would it be necessary to make relevant changes? If so, which one(s)?

In this case, the tutor may emphasize the principle of ‘fast time-to-market’ in order to find examples. The ICT industry may be an example. Another line of thinking is the customization of consumer goods, in which case exclusiveness and short time of delivery are critical.

Overall, both fast time-to-market and customization are the key guidelines for this question. Whatever the responses the students suggest, the tutor should emphasize the need for scaling the business model globally in order to achieve a competitive edge in the today’s business landscape.

Examples of this can be found in global multinationals such as Apple, Samsung, or even in the key competitors challenging Zara, such as H&M or Primark, both of whom have developed their own business model.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER TWELVE MARKETING

This chapter discusses different orientations to marketing, placing them in an historical context, before examining the key elements of segmentation, targeting and positioning (STP), the interaction between them and the contribution made by market research. We go on to discuss a number of issues related to branding such as the rationale, its relationship to globalization and summarizing the points made by critics of branding.

The 4Ps, product, price, promotion and place, are discussed in some detail, both in relation to STP and branding and as ingredients of marketing strategy. As such, discussion of the 4Ps occurs both as elements of marketing and as marketing strategy, which closes the chapter. More recent emphasis on customer service and its link with buyer behaviour is introduced.

The key change that has taken place in marketing is the use of digital marketing and the use of social media. These have made marketing much more focused and, in the case of social media, have broadened consumer involvement in the process.

Aspects of the environmental context of the ‘Business in Context’ model and the interaction with marketing are presented, a section that raises key issues of state intervention, consumerism and cultural differences.

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Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context and also draw on their current understanding of the world around them.

We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1. Assess Drucker’s claim that marketing is not a specialized activity since it encompasses all the activities of the firm.

Drucker's argument is that one of the primary objectives of any organization is the satisfaction of the needs of its clients or customers, e.g. the purchasers of manufactured goods, the recipients of a haircut, the patients in a hospital, the students in a university and so on. Organizations satisfy the needs of many stakeholders, but most have a primary function.

The customer sees the end product – the TV set, the haircut, the patient care and the lecture, for example. How these are presented and perceived and how the organization presents itself to its customers is marketing. All the activities of the firm are geared towards this end result. In manufacturing, the design of goods, the way they are made, their distribution and pricing involve all aspects of business ‐ innovation, operations, HRM and accounting, as well as marketing as a specialized function. Getting the product to market and giving customer satisfaction involve all activities in the organization. This is the essence of Drucker's position.

Arguments that may be used against Drucker include that marketing clearly is a specialized activity in many firms and that organizations also seek to fulfill other objectives, e.g. the furtherance of knowledge in a university, increasing shareholder value, employee satisfaction, etc. However, the extent to which these points devalue Drucker is debatable.

2. How far and in what industries are the orientations to marketing relevant today?

The orientations to marketing are discussed on pp. 448–49.

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Product orientation – There are some products that sell well with minimum promotion, largely because of their reputation and word of mouth. Some hotels and restaurants fall into this category, as do some universities. Some companies cut back on promotion as part of a cost‐cutting exercise, based on a belief in the inherent quality of their product. However, in a highly competitive market this strategy failed. Even organizations which apparently do not promote themselves, like a toprated restaurant, will attract entries in guides and receive press coverage, all of which serve to promote the restaurant. Most top quality brands, e.g. Mercedes, Cartier, etc. see the need for continuous promotion despite their perceived quality and market position.

Selling orientation – The growth of direct marketing and telephone sales would suggest that this orientation is alive and well. Double‐glazing companies and road assistance organizations approach customers in busy supermarkets; some holiday companies try to attract customers with special offers of 'free' holidays or attempt to sell time share apartments using highly pressurized tactics. Similar tactics are also used by mobile phone companies.

Marketing orientation – Deregulation and increased competition means that organizations have to research their market and develop goods and services that people want to buy. This often means regular communication with customers. This is a fairly common approach in business to business marketing, but most firms would also claim that the satisfaction of customer needs is paramount. However, we can see that in some companies a more aggressive selling approach is used and in others shareholders come before customers in the satisfaction of their needs.

Relationship marketing – There are a number of devices used by companies to build relationships. These include loyalty cards, the use of customer feedback, using discounts and inviting customers to special events, such as a car showroom that invites existing customers to the launch of a new model or a restaurant inviting regular customers to a wine tasting. A university attempts to build continuing relationships via alumni associations.

Societal marketing – Many firms in their marketing have become more socially responsible (refer to p. 450 for examples from retailing). Aspects include reusable packaging, organic produce in supermarkets or an office supplies firm providing a means of disposing spent laser printer ink cartridges in an environmentally friendly way. In some firms this is a sales gimmick more than a serious commitment to ecology, whilst others see it as an important strategy to capture an increasingly demanding customer base.

Social media marketing – This involves the use of vehicles such as Facebook and Twitter. Firms that use these tend to offer a different slant to their more traditional marketing, usually with greater informality and humour. The marketing can be more For use with Needle, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

personalized and offers more opportunity for the customer or potential customer to interact by adding their opinions that other potential customers can view. In some ways this shifts the emphasis from the firm to the customer.

3. For what reasons do governments engage in marketing? Does this raise any ethical problems?

Most governments spend an increasing sum on promotion and advertising and engage in marketing in a number of different ways: • To promote themselves to gain re‐election.

• To keep the public informed of particular events, e.g. COVID-19, the foot and mouth crisis in the UK; health issues such as the Ebola epidemic in West Africa.

• To promote specific objectives, e.g. training, no smoking, COVID-19 vaccination programmes, cost of living support.

• To regulate advertising and other forms of promotion, e.g. banning misleading adverts, banning adverts on smoking. The first of these examples is intended to protect the public, the second to promote government policy.

There may be number of ethical problems, including: • The use of persuasive communications to achieve political ends.

• Where the state controls the media and its content.

• The state telling us what to do and restricting the freedom of the individual.

• Money spent on state advertising is money that cannot be spent on other things such as health and education, which may be socially more desirable.

4. What type of market research information would you need in the following situations: a holiday company offering a new resort location; a manufacturer developing a new vacuum cleaner; a restaurant owner planning a more expensive menu?

The following is a selection of type of information each would need: Holiday company • Knowledge of the resort and how best to promote it.

• Knowledge of changing social trends.

• Current numbers and market segments using the resort.

• Knowledge of what existing customers seek from a holiday.

• The offerings of other holiday companies in this resort.

• Any current travel restrictions or requirements, e.g. Vaccination status, COVID-19 tests.

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Vacuum cleaner manufacturer • What other models are already available in terms of type, price and where they are sold?

• What are the respective sales figures for the above?

• What are consumers current perceptions of your brand and current product line?

• What do consumers want from a vacuum cleaner and how might their expectations be changing?

• What new technologies are emerging?

Restaurant • What are customers perceptions of the current menu and its pricing?

• How would existing customers react to a new menu?

• What prices do people pay in other restaurants in the area?

• Can the restaurant deliver value for money at the higher price?

• What sort of new customer needs to be targeted and how?

• How are you impacted by trends such as the move to ordering for home delivery via services such as Deliveroo or UberEats?

5. What factors would you consider to determine the price of the following: a new high‐ performance sports car; a new breakfast cereal; an MBA at an internationally known business school?

All the factors determining price will be involved in the pricing decision of all three commodities. A review of those factors can be found on pp. 470–71. Some factors may be more significant than others in each case. For example: A new high‐performance sports car Depending on the brand, price may not be a key element here. Ferraris and similar marques sell at high prices to niche markets whose consumers are willing to pay for exclusivity. A high-performance car from a mass producer may still be able to command a high price but it would be considerably lower than for a luxury marque.

In both cases, development costs are likely to be high and the price must reflect this.

In the more mass market competition will be an important factor. This market is sensitive to economic conditions and a downturn will reduce the bonuses of high earners to whom such a product might appeal. Regulations relating to emissions and end of life disposal costs may also have to be factored in.

A new breakfast cereal This is a new product entering a highly competitive market, which must compete for supermarket shelf space with popular brands, including supermarket own brands.

This may indicate market entry at a low initial price to build up volume sales. A large existing producer will be able to use its market position to launch the brand and will For use with Needle, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

be able to price relative to its other offerings. With economic downturn consumers may well opt for cheaper brands and own labels.

An MBA at an internationally known business school The price would depend on the international rating of the business school, its perception in the market place and the goals of its management. A highly- rated business school can charge premium prices and attract good quality students on the basis that they will be attractive to blue chip firms and their starting and future salaries will be ample reward for a high investment in the course. Less well- rated schools will need to measure themselves more carefully against the competition. This is a largely saturated market and business schools must be careful to price appropriately.

6. Why does market segmentation occur and what are its advantages and disadvantages for management and the consumer?

Refer to pp. 456–57. Segmentation attempts to maximize the marketing effort and the needs of consumers by targeting products at specific markets, where sales are likely to occur.

Advantages to management: • Greater penetration through tailoring and aiming products at specific markets.

• Greater knowledge of the market for specific products to achieve more sales.

• Greater knowledge of the market to develop more products for a particular group.

• Targeting means a more efficient use of resources not only in sales and promotion but in operations as well.

• Products could be tested in one segment and, if successful, be marketed in other segments.

• Having different products appeal to different segments could increase overall sales and spread the risk.

Disadvantages to management • Too much segmentation leads to an increase in costs associated with development, production, promotion and administrative costs.

• Focus on one segment may cause other marketing opportunities to be missed.

• Focusing on an inappropriate segment can be a problem strategy.

Advantages to consumers • Products are designed for a particular group, whose needs have been thoroughly researched. Consumers get what they specifically want.

• Segmentation can satisfy both the mass market and the specialist buyer.

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Disadvantages to consumers • If the market niche is particularly small then the price is likely to rise.

• There could be too much fragmentation and consumers are faced with confusing choices.

7. Assess the contributions of branding to the marketing process and to the success of the business.

Refer to pp. 459–64.

Branding has become increasingly important as a means of differentiation and attraction for a number of reasons.

• The speed of technology transfer means that distinctive technology is less frequently able to be used as a source of competitive advantage. The brand takes its place.

• Brands give products appeal in a stagnant market.

• Brands can extend product ranges and hence sales opportunities.

• Brands can give a firm more exposure and shelf space in retailers.

• Brands can be developed as a status symbol to capture market share.

• Brands can add significantly to the value of a company.

• Brand loyalty means repeat purchases and organization survival.

However branding has been criticized. Refer to p. 464 for a summary of criticisms.

8. Assess the contribution of the selection of appropriate distribution channels to effective marketing strategy.

•

• • • •

Selecting the most appropriate distribution channel can increase sales, e.g. some types of product require more personal selling whilst others can be sold impersonally via the internet. In general, choosing the right channel makes goods accessible to the market.

The use of intermediaries can be cost effective and reduce the price of the goods, e.g. newspapers.

The channel is an important source of knowledge about the buyer and hence important in market research.

The distribution channel can add value to the product by offering additional services to the customer, e.g. after sales service.

New developments in distribution such as direct marketing and e‐commerce have widened the market for some companies.

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9. To what extent can marketing activities change the environment in which the firm operates?

Marketing is a deliberate attempt to shape consumer behaviour and the market environment. This has an impact on a number of areas: • • • • •

Expenditure on advertising and other promotions is an attempt to change consumer spending patterns with a corresponding influence on the economy.

Through their control of the market, monopolies control the nature of products, prices, promotion and forms of distribution to the consumer.

Organizations will attempt to influence the state to protect their product or services, e.g. internet behemoths such as Facebook, Amazon and Google resisting moves to regulate their activities.

Leaders in product design, promotion and sales attract copiers and change the nature of the market, e.g. DVDs replacing videos, CDs replacing vinyl. Streaming and cloud based services replacing all of these.

Marketing changes aspiration levels, attitudes, values and even has an impact on national cultures.

10. What are the essential ingredients of an effective marketing strategy for fast-moving consumer goods (e.g. toothpaste), a luxury yacht and for a firm of professional accountants?

Fast moving consumer goods ‐ toothpaste The main aims of a marketing strategy would be to retain market share of existing buyers and encourage brand switching to increase market share. A variety of methods can be used. Many will be used in combination, e.g. advertising campaign linked to price reduction, etc.

• Reduce prices to set up price competition.

• TV advertising campaign.

• Change the packaging for greater attraction, but not so to confuse existing buyers.

• Use special promotions, e.g. 'buy one, get one free' or 'three for the price of two'.

However, in such promotions the whole cost is usually carried by the manufacturer and not the retailer.

Luxury yacht Such goods are usually sought goods by a niche market willing to pay high prices for quality products. The main marketing strategies could include: • Expensive, glossy advertising in specialist magazines. Promotion of the product and a lifestyle.

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• • •

Create expensive-looking product and design features.

Promotion at key trade fairs, e.g. London Boat Show.

Location is less important as the customer will seek out the product. However, a promotion package is usually important ‐ transporting potential customers to test the yacht, lunch and drinks on board, etc.

Accountants Most firms will offer similar services, although some firms will specialize. Promotion is usually controlled by the profession and prices tend to be set at recommended professional rates although they tend to vary with the size and reputation of the firm.

• Use of a brochure or web site to project an image to attract new clients.

• Word of mouth and personal recommendations are important so client care is paramount.

• Some sectors may be price sensitive, e.g. small firms sector and pricing policy may have to reflect this.

• A central city location may be important for prestige and image, but the firm could offer the client flexibility by offering to see the client on their premises.

• Offer clients additional services, e.g. published guidelines of the government budget and its implications for clients (accounting firms can now subscribe to a service that will do this for them).

• Promotion via sponsor of local concerts or sporting events.

11. Assess the problems and opportunities presented by developments in digital and social media marketing.

Refer to pp. 485–87.

The opportunities and problems may be different for the firm and its customers.

The opportunities for both digital and social media marketing have been created by cheaper technology that has widened access and use of communication technologies.

They have also been facilitated by faster internet connections and, in the case of social media such as Facebook and Twitter, a social change in the way people communicate.

The opportunities presented by digital marketing include: • Specific groups can be targeted by email.

• Pop-up ads can be used on web sites that relate to the content of the website. For example, a hotel group can place a pop-up ad on a holiday resort website.

• Search engine marketing can enhance the visibility of a product when searches are made online For use with Needle, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

But

• •

Although groups can be targeted, much advertising done digitally is wasted.

Pop-up ads are seen by many as an intrusion and deleted immediately.

The opportunities presented by social media marketing include: • There has been a dramatic increase in people using social media in the last 10 years.

• Social media facilitates discussion between customers on their experiences. This can reinforce the appeal of products and widen exposure to many more people.

• Increased use of social media analytics to target specific groups.

But • • •

Companies have no control over the message.

Bad experiences are just as likely to be passed on as good ones (perhaps more so). There are examples of bad experiences being posted and going viral, which can be very damaging to the company.

There is no way of establishing whether either positive or good posts about a product are genuine. They could have been made by the manufacturer of the product or provider of the service if positive or by a rival company or disgruntled employee if negative.

12. What is the difference between targeting and positioning?

Refer to pp. 456–57.

Targeting involves identifying appropriate market segments for the organizations products and services and developing a marketing mix that meets the requirements of the segment in terms of product design, price, promotion and distribution.

Positioning involves placing the product in a segment so that it meets customer expectations in terms of what the product has to offer, its price, how it is promoted, etc. A product that has status appeal can be underpriced or poorly promoted and thus be ignored by its target market. Equally, a product that is intended to have mass appeal could be over‐priced and promoted as too exclusive. For example, a university that is in the top ten of various league tables may be able to charge significantly higher prices for a postgraduate course than a much lower ranked university. However, the students going to the high- ranked university will have certain expectations about the nature of the product which, if not met, will produce dissatisfaction.

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CASE STUDY QUESTIONS AND ANSWERS General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 12.1 ABERCROMBIE & FITCH 1.

Has the Abercrombie & Fitch of the early part of the 20th century anything in common with the modern company?

The short answer to this is ‘yes’, although there are differences. The initial company and the modern company both use branding based on exclusivity, although the basis of that exclusivity is different in both cases. The original store was located in the high value district of Madison Avenue in New York City. Modern A&F stores tend to be located in more expensive shopping locations in major cities, e.g. 5th Avenue in New York and Mayfair in London.

The original store sold expensive sporting and casual wear to top-end clients that included US presidents, UK royals, Hollywood stars and famous explorers. The attempt to broaden the appeal of the store ultimately led to its bankruptcy. The modern store also focuses on expensive produce, but rather than selling distinctly upmarket goods to upmarket clients, it sells more eclectic casual clothing but targets an elitist group that A&F define as ‘aspirational, youthful and cool’. Students may also wish to reflect on the trend towards online rather than physical retail channels.

Although it is not specifically mentioned in the case for the original store, both the original A&F and the modern A&F (at least until recently) did not discount their goods nor engage in sales promotions.

2.

How would you define the brand image of Abercrombie & Fitch today? Why do you think this brand was successful in the past?

Students in the group may wear A&F clothing and may have visited their stores. An interesting exercise would be to get them to list their impressions of the brand based on their experiences and use this as a starting point for the discussion. Do they perceive that there is an A&F look that is different to clothing sold in other stores?

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It may be argued that Abercrombie & Fitch sell the kind of clothing that can be bought in many other stores at, in some cases, much lower prices. The brand is based less on the product (although many goods display a highly visible company logo), but is based on an image presented by the promotional photography and the environment created in each store. This environment makes use of lighting, music, fragrance and the presence of sales staff selected for their physical appearance and their attractiveness in A&F clothing; all gearing towards making shopping in a A&F store an exciting experience. Their target market is made up of young, thin people who consider themselves ‘cool’ and who are from families with a high disposable income.

Judging from the sales and profit figures and the expansion of stores the brand has clearly been successful. In recent years, there has been a fall in revenues, but is this due to brand failure fuelled by bad publicity (refer to Question 3) or is it a function of the financial climate a worsening economy in many countries and rising unemployment among the target market?

3.

To what extent were criticisms of the brand justified? Is the segmentation described in the case acceptable today?

As with the answer to Question 2, this will rely on the opinion and experiences of the students. One way of approaching this question will be to get the students to debate the pros and cons.

There have been many criticisms of the brand Abercrombie & Fitch. These include: • Discriminating against people on the basis of size.

• Discriminating against certain ethnic groups and the disabled in terms of recruitment and job placement. The same kind of accusation could be made in relation to discrimination against people whose physical appearance does not match the ‘A&F look’.

• The values of the CEO have come for heavy criticism. Refer to the quote he made to Salon.com on p. 466.

• The behaviour of the CEO came in for criticism. Refer to the comments of the pilot of A&F private jet and the CEO’s hiring of his partner as a personal assistant.

• The company has drawn significant criticism from feminists about the sizing policy, about the suggestive promotional photography (which they claim demeans women or relegates them to a ‘secondary’ position), about the inappropriate clothing for children and sexist T-shirt slogans.

Perhaps as a consequence of falling revenues, changes have been made on both sizing policy and promotional policy.

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As an extension, students may wish to discuss misogyny in some aspects of this case. There has been considerable media coverage of the case of the so-called social media influencer Andrew Tate recently.

4.

Have the changes introduced by Horowitz come too late?

Perhaps. The past decade has seen hundreds of store closures, especially where the focus was on the children’s ranges. The company has focused its efforts on moving to a more mature (18–25) look. The structural and positioning changes have brought improved results and the company is reported to have weathered the challenges of the COVID-19 pandemic well. However, the change of positioning has brought them into more direct competition with mainstream players in the market. They will need to be clearer about what and where their points of differentiation lie. Inflation and the global economy are key challenges at present, both of which lie outside of the company’s control.

CASE 12.2 MOONPIG: MAKING PEOPLE’S DAYS BRILLIANT! 1.

What advantages do online sales of greetings cards offer to the customer?

• Convenience – no visit to a shop is needed and access is easy.

• 27/7 availability of the service.

• Expedited delivery for last-minute cards.

• A variety of products are offered at various prices.

• Fast delivery.

• Cards can be sent long distance and internationally.

2.

What are the disadvantages to the customer in this market?

• The telephone offers some contact with the flower shop, etc., whereas the internet offers no interaction with a salesperson.

• How can the buyer ensure that the card is delivered as instructed?

• Minimum charges, handling and postage charges make this a more expensive option than buying from a shop.

• May be perceived as less personal than a hand-written card.

3.

What further growth potential do you see in this market?

• This is essentially about understanding the core product offered by Moonpig, a fully user-customized greeting or gift which is delivered by post. Therefore, any product which is amenable to some form of customization and is physically delivered may be worth exploring.

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Moonpig have already expanded into delivering supplementary gifts, chocolates and flowers.

4.

What potential threats do you see to the Moonpig business model?

In terms of internet sales, for firms it is an opportunity to reach a wider market and to market both itself as a firm and its products at a relatively low cost. For customers, researching products, buying and re-ordering are made much easier.

However, for the firm, costs of setting up the systems can be expensive and there may be problems persuading some customers to use the internet to make purchases. There is a fear that it may not reach all the intended market. Problems for consumers include a fear about the security of credit card and other financial transactions. There are some purchases where consumers may want to see, feel and touch the goods before buying.

CASE 12.3 DISNEYLAND PARIS 1.

What are the marketing issues displayed by this case?

Market research • Disney carried out significant market research before deciding on Paris.

Subsequent market research was carried out on customer preferences.

Product • Disneyland Paris was built on the strength of the Disney brand and the Disney theme park brand.

• The product was updated and modified to fit the local culture.

• The product was extended via the hotel and restaurant business.

• Service delivery was seen as important as the product itself and a key element was the interaction between service providers and customers.

• While there has been investment in upgrading existing attractions, no new attraction has been added since 2006. This has been given as one reason for the decline in revenues.

Promotion • The company used various promotion devices to attract visitors, especially in non‐peak periods.

Price • Price cuts played a major role in boosting attendance.

• Price comparisons between Paris and the USA. Location • A near-Paris location with good road and transport links was considered an important part of the product offering.

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2.

What were the reasons for Disney opening in the Paris area? Were these reasons justified?

• • • • • •

The concept had worked outside the USA in Tokyo. Europe was considered an easier market to enter.

Disney films are popular in Europe, as are US Disney theme parks to European visitors.

The location was near a major city, attractive in itself as a tourist destination.

The resort had good transport links to a large potential population.

There was French government support.

Market research supported Paris as the location.

Were the reasons justified? Clearly, evidence existed to support the choice of Paris. The lack of attendance and other factors caused financial problems, but there is no way of knowing whether similar or even worse figures would have resulted elsewhere. The company claimed that the attendance and revenue figures were not dissimilar to US start‐ups. The real question perhaps is whether the concept is right for Europe?

3.

What initial problems did Disneyland Paris face and how were they tackled?

The initial problems included: Local reaction • Local bureaucracy and planning application problems.

• Opposition by local business people and residents.

Customer reaction • Low attendance and adverse reaction to the product.

• Complaints about high prices.

• Safety questions following an accident on one of the rides.

Cultural issues • Criticism from the French intelligentsia.

• The concept and its presentation did not fit French culture.

Economic factors • Recession in Europe hit visitor numbers.

• High value of the French franc pushed prices even higher.

Lack of revenue • Lack of income means lack of investment.

• Staff redundancies.

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The company tackled the problems by: • Financial restructuring to cope with the debts.

• Changing the name to strengthen the Paris brand connection.

• Price cuts and promotions.

However, it was the top attraction in France, drew visitors to Paris and Paris hotels and local businesses benefited.

4.

What marketing strategies could the company use to move out of its ongoing financial problems? Are there any non‐marketing strategies that would help?

Marketing strategies could include: • Further market research to discover what the customers and potential customers want.

• Changing the product to cater more for European and French taste, e.g. more emphasis on the cinema.

• Make further price cuts and promotional offers.

• Further promotion to attract the corporate and conference market, currently under‐represented.

Non‐marketing strategies could include • A business process re‐engineering exercise to seek cost reductions.

• Sponsorship with a major firm (although Disney would probably resist this).

• Sell off some of the land and/or form a joint venture with another company offering a complementary attraction.

5.

What reasons can you give for the company continuing to make losses after operating for over 30 years?

There is no obvious answer to this question and it provides an opportunity to speculate. It is almost certainly not one cause but a combination of several causes. A number of possible explanations, some more speculative than others, include (the list is not exhaustive): • The theme park celebrates a US phenomenon in essentially a US way. Is this culturally specific and not European enough? (However, many of the visitors were from the US and it has not stopped US TV programmes and movies being popular in France and elsewhere in Europe).

• The revenue forecasts were over‐optimistic.

• Such a venture has very high start‐up costs. The pay‐back time can be long.

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Specific financial problems were faced early on. Some of these were ongoing and the venture never had time to recover.

•

•

• • • • •

The park acquired a poor reputation on a number of different issues – high prices, lacking cultural value, not offering what the public wanted, etc.

The financial health has been cyclical – crisis followed by recovery followed by crisis. The most recent problems have been caused by a significant drop in US visitors and anti-American feeling in France over the Iraq war.

Current revenues are diverted to cover earlier losses.

There have been no new attractions since 2006.

In recent years there have been incidents of staff unrest.

Travel restrictions as a result of the COVID-19 pandemic.

High levels of inflation across western Europe impacting discretional spend.

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER THIRTEEN HUMAN RESOURCE MANAGEMENT

This chapter explores how human resource management has grown out of personnel management and charts the changes that have taken place over the last 40 years. The key changes include a stronger focus on business values and an integrated strategic approach based on improving staff commitment to improve performance.

The chapter reviews four main areas; employee resourcing, employee development, pay and performance and employment relations, and looks at recent developments in each of these areas.

The chapter argues that HR, more than most functions, is influenced by the economic, political and cultural environments in which it operates. The chapter closes with a discussion of HR strategy and the challenges faced by practitioners in demonstrating effectiveness.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

1. What is HRM and what is its contribution to the organization? What does Ulrich mean by ‘HR as a business partner’?

Refer to pp. 510–515.

HRM deals with all those activities formerly ascribed to personnel management such as recruitment, selection, training, reward and employee relations, but integrates them within the strategy of the organization. It sees business values as an overriding consideration. The contribution to the organization may be summed up

by Figure 13.1 on p. 512. This is based upon a set of assumptions that state that the application of the core ideas of HRM will lead to a changed culture that stresses cooperation, commitment, business awareness, continuous improvement, quality and flexibility. This in turn will lead to an improved performance. Increasing emphasis is being placed on commitment in terms of the strength of the employee’s identity with and involvement in the organization.

Ulrich developed an influential model of HR as ‘three legs of a stool’ (Ulrich, 1997).

The three legs comprise: • Providing a centralized set of administrative services for the organization, e.g. staff records, information on HR issues.

• Providing expert skills and advice on HR issues.

• As a business partner with an input into the strategy of the organization and in so doing influence the HR priorities for the organization.

The notion of ‘business partner’ offers HR specialists a more influential role in the organization, that of developing the strategic direction for the whole organization. This represents a shift in emphasis and responsibility from the traditional role of the personnel manager, where the primary concern was for the staffing and management of employees. The business partner concept is an attempt to see employment issues as being of equal concern as operations, finance and marketing.

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2. Is there a case for the elimination of human resource specialists, so that the function can be performed by all managers?

This question relates to how HRM operates in practice and is covered in the text on pp. 515–516.

The case for: • The profession’s own definition argues that it is a function to be performed by all managers.

• All managers would want to, and do, get involved in selection and appraisal and would want to determine the training priorities for staff in their department.

• Many firms are not large enough to have a specialist HR function.

However: • Employment law and related 'good practice' as espoused in the UK by ACAS and the DTI alongside similar changes in other countries have both made the function complex and expert advice is needed on many aspects of employment.

• A well-considered and integrated HR strategy can add value to the company.

• It is necessary to consider the role of the internal specialist versus the outsourced consultant.

3. Why should managers be concerned with issues of equality and diversity?

Refer to pp. 521–522. There are links here with business ethics and the rationale for this (refer to Chapter 9).

The rationale for a concern for equality and diversity involves all activities of HRM, employee resourcing, employee development, pay and performance and employee relations. It is concerned with issues of age, gender, race and ethnicity, disability, etc.

The rationale includes: • A moral argument – all employees should be treated equally.

• A legal and financial argument – discrimination can lead to court appearances and fines.

• A business argument – such as making best use of resources, the use of diverse staff to produce different ideas and widen market opportunities and the motivation of employees.

Despite the concern, there is evidence that indicates that discrimination is still a feature of many organizations.

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4. How would you set about developing a training programme for: a) a newly appointed operations manager; b) a legal secretary in a busy law practice; and c) a university lecturer?

Refer to pp. 523–526.

A similar procedure is followed for all three cases: • Firstly, there needs to be an analysis of training and development needs. What skills does the employee possess already? What training have they had to date?

What do the employees identify as their training and development needs? What are the needs of the job?

• Based on this analysis, a training and development plan needs to be drawn up which considers the needs of the job and organization, the wishes of the individual and the budget available.

• In all cases, induction is important to acquaint new recruits with the procedures and culture of the organization.

• Students should also consider the relative importance of career management in all three cases (refer to p. 525 for an explanation of career management).

Specific considerations might include: Operations manager: to some extent the training requirements may depend on the technological complexity of the products and processes used. In a technologically complex environment there needs to be some provision for ensuring that key staff are aware of relevant developments in their field, which may involve attendance to specialist courses and conferences. This may mean the manager should obtain further qualifications. Other training will relate to the general management role and include training on skills such as selection interviewing, grievance handling and performance management.

Legal secretary: a busy law practice will need someone who can ‘hit the ground running’. Key skills should be identified for the recruitment and selection process and be a prerequisite for appointment. Key training needs will usually revolve around changes in procedures such as the introduction of new software to manage cases or new legal requirements for the presentation of information. If the firm is large then there may be a requirement for some secretarial staff to undertake supervisory or management roles, for which training is needed. There are cases where legal secretaries have changed roles within law firms as paralegals and in some cases trained as solicitors. However, the latter is rare and consideration is needed as to whether career management is priority here.

University lecturer: training and development may be required in a number of areas.

In first job appointments some training will be required in teaching techniques and in dealing with students. In research intensive universities there could be some training in how to research a n d publish and there will certainly be some For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

development opportunities through attendance at subject specific conferences. For senior staff there may be specific training on how to undertake staff appraisal and in preparation for management roles.

5. What factors determine pay and which, if any, are more significant than others?

The main factors are set out on pp. 526–530. They include: • Notions of equity.

• The labour market – supply and demand issues; what other firms pay.

• Economic changes – recession, inflation, etc.

• The nature of the job and comparison with other jobs in the organization.

• Strategy and goals of the organization.

• Technology, particularly the impact of technology change on skills.

• Impact of collective bargaining (if it operates in the organization) and government policy.

The influences tend to work together. The significance of the factors will vary between companies and over time. Notions of equity are fairly basic as they influence employee motivation and commitment.

6. What are the main difficulties with effective performance management?

The main difficulties are identified on pp. 530–532. They include: • Performance management attempts to achieve a number of objectives.

Some of these, such as performance evaluation and employee development, can be in conflict.

• Some may contend that it is controlling employees rather than improving performance.

• It is sometimes difficult to measure performance as with many managerial roles.

• Problems of subjectivity.

• Time‐consuming.

• Not taken seriously or considered difficult by some managers.

• A negative evaluation can demotivate employees.

7. How are HR policies and practices influenced by cultural differences?

Refer to pp. 540–542. Aspects of variation in HR policies and practices in the global firm are also to be found on pp. 537–538. Especially relevant here is the recent research on centralization versus localization.

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We can find specific HR practices that reflect cultural differences. For example, Aycan (2005) argues that in relationship-based culture as found in Asia, more emphasis is given to inter‐personal skills, age and status and this affects selection and promotion policies, for example.

However, the reality is that culture is bound up with a number of other influences, including political, economic, legal and social. We may conclude that HR more than most other functions is embedded in this framework of influences in which it may be difficult to separate out the specific influence of culture. Research tends to support the ‘best fit’ approach – that HR policies and practices work best if they reflect the culture and institutional framework of the country within which they operate. For example, Anglo‐Saxon countries have policies that reflect high job mobility and labour flexibility; social market countries have a more detailed regulatory framework covering employment issues and often place more emphasis on employee involvement; Asian firms tend to emphasize welfare and corporate culture issues.

However, there is also evidence of a convergence of policies and practices created by the operation of MNCs, particularly American MNCs who have a more centralized approach to HR policies and practices than MNCs from other countries. The EU has attempted to influence uniform policies in some areas of HR. This has happened with the Working Time Directive, which attempts to influence the maximum number of hours worked, and the Works Council Directive to influence participation and involvement.

The reality is that variations still exist across EU member countries, which may be a product of cultural differences.

8. What are the factors in an HR strategy for a) a small, expanding computer software firm, b) a medium‐sized firm manufacturing electrical components for the car industry and c) a new university? What key issues emerge in each case?

HR strategies are discussed on pp. 544–547. Students will also need to think about the changing economy and changing markets and the impact these have HR strategies.

Computer software firm The work requires staff with specialist skills. The sector is highly competitive but, in recent years in most countries, the market has been volatile.

• The key issue is probably the attraction and retention of key skills in a buoyant labour market.

• There will be a temptation to offer relatively high salaries to attract skilled people, but these can be a burden to the firm if the sector moves into recession.

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• •

As a small firm, there may be little capacity for extensive training and development, although this should be considered.

As a small firm the owners are likely to be hands on. This can create a positive culture. It also may mean that aspects of HR work are neglected.

Electrical components for the car industry The car industry in most parts of the world (especially the USA, Japan and Europe) is stagnant and cyclical. Suppliers, through the introduction of JIT systems, usually enjoy a close relationship with manufacturers. The industry is highly competitive and therefore cost-conscious.

• Given the need to provide a dependable supply, the retention and commitment of core staff is important, as is training to ensure high levels of skill, quality of the product and the efficiency of operation.

• Cost-consciousness can also mean a combination of downsizing, delayering and a flexible approach to the recruitment and use of labour.

New University In the UK, there has been significant growth in student numbers in the last three decades, although the increase has slowed down and the market for students has become competitive on a global scale. Many new universities have been created from the polytechnic and college sectors and, in many, staff do not possess the research profiles as staff in the more established university sector. A key issue here is the strategic direction the university wishes to take ‐ to compete with the established sector or develop an approach based more on teaching than research. This will affect the recruitment, selection, development and job design policies. If a research orientation were selected, then the implications for HR would be a focus on the recruitment of young, qualified staff with research potential and the introduction of incentive systems for research. This would be accompanied by early retirement and redundancy programmes for older staff, who do not fit the research profile.

9.

What is the resource-based view (RBV) as applied to HRM and to high performance work systems (HPWS)? In what ways can they enhance the performance of organizations?

The resource–based view as applied to HRM is covered on pp. 546–547 and is also discussed more generally in Chapter 8. High performance work systems feature in HPWS are featured on pp. 547–548.

The essence of the resource-based view is that organizations can achieve competitive advantage by developing resources that are valuable, rare and difficult to copy. These can be enhanced by developing a culture that fosters organizational learning and working relationships built around trust and delivering commitment and collaboration.

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People are a key resource in any organization and therefore an important vehicle for the achievement of competitive advantage. This can be achieved when the organization: • Invests in the creation and development of skills that are specific to the organization and are less transferable.

• Creates a stock of talent that can change as the business and the business environment changes.

• Creates teams that work in a way that is difficult to copy.

High performance work systems are generally viewed as a superior alternative to employment relationships based on control. Instead, the focus is on commitment and involvement. In order to be effective, a HPWS should incorporate most of the following as a bundle of coherent policies and practices: • Job security • Careful recruitment and selection • Delegation of decision-making • Self-managed work teams • Good rewards linked to performance • Development and training focused on the needs of the organization • Sharing of information and general involvement.

Some have suggested that not all employees can fit into the HPWS category and that HR needs to devise different policies and practices for different groups. This is a similar view to those expressed about the ‘flexible firm’ and was the essence of an influential article by Lepak and Snell (1999).

Research has shown that for HPWS to work, employees must have the required skills, motivation and opportunity. The main difficulty is that performance is subject to many different variables both within the organization and external to it. It is therefore difficult to identify which bundle of practices work best in any given situation. There are other problems in demonstrating effectiveness – refer to the answer to Question 10.

10. What are the problems involved in demonstrating the effectiveness of HRM strategies?

The issue of effectiveness is dealt with on pp. 548–549.

A number of studies have been carried out in the USA and in the UK (e.g. Huselid, 1995 and Patterson et al., 1998) which attempt to demonstrate that HR policies and practices are effective.

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However, other studies, notably by Guest et al. (2000, 2003), are less optimistic and identify a number of difficulties, such as links between HR policies and some measures of performance but not others and a general lack of recognition of HR by executive managers.

The complexities include: • The support of HR by senior staff.

• HR practices are carried out by other managers and therefore it is difficult to establish a direct link with performance.

• This direct link is difficult anyway because so many factors other than HR policy can influence outcomes.

• There has been an overemphasis on financial measures when other factors such as employee wellbeing could be equally valid.

• Sophisticated HR practices tend to be practised by successful organizations and so could be a result rather than a cause of performance.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 13.1: RANA PLAZA: MULTINATIONALS IN THE SPOTLIGHT 1. Who or what was responsible for the collapse of the Rana Plaza Building?

What is known about Rana Plaza would appear to point to many different causes that led ultimately to the collapse of the building and the deaths of 1,132 and injuries to 2,500. Some issues include: • Should a building such as Rana Plaza be planned and constructed on a site that was a known landfill and contained sources of water? Should surveyors and architects have raised doubts over the location?

• Those who decided to build three additional floors without planning permission have a major responsibility. The extension was clearly low-cost, the design was unsound and the materials used in construction were either low quality or not fit for purpose.

• The owners and managers of the garment factories on the upper floors made the decision to carry on working when cracks were seen on the lower floors and those floors were evacuated.

• The large number of deaths and injuries was almost certainly due to large numbers working in over-crowded conditions and thus working practices were unsafe.

• The high incidence of fires and accidents in Bangladesh factories means that government at national and local level carry some responsibility for lack of effective controls both over building practices and health and safety of workers.

• MNEs themselves carry some responsibility for operating a supply chain system to support the fast fashion business model that puts pressure on suppliers for low prices and fast turnaround.

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2. What specific responsibility do foreign multinationals have for safe working practices and socially responsible employment practices, particularly pay, among their suppliers in less developed economies? What are the main obstacles?

Much has been written in recent years about the ethical supply chain, the underlying principles of which include: • Suppliers pay wage levels that are not exploitative and at the very least meet minimum wage levels in the country where the operation takes place.

• Health and safety levels in suppliers’ premises are comparable to the MNEs home bases.

• Those working for suppliers have contracts that protect the rights of individual workers in terms of working hours, holidays, representation in the case of grievances, etc.

The assumption behind the concept of the ethical supply chain is that MNEs will only deal with those suppliers that meet certain standards. The theory is sound and some MNEs subscribe to the concept of ethics supply and see this as an important part of their brand image.

There are however obstacles that include: • The difficulty that MNEs have of controlling local practices, particularly at a distance.

• The cost involved in setting up even minimum level standards.

• Competition among MNEs themselves and among local suppliers that drive down costs and wages of those working for suppliers.

• The greed of those who own and control local suppliers.

• Lack of effective control at government levels.

• Local corruption.

Yet, following the disaster, some but not all the MNEs who benefitted from the work of Rana Plaza clothing companies and their employees took immediate steps to provide medical aid to the injured and compensation to the families of those killed. They also participated in the Accord and the Alliance, the two organizations that made some, if not wholly, effective attempts to improve working conditions in the fast fashion business.

3. What does the case tell us about contract outsourcing in the global economy? What role can HR play and what are the difficulties HR faces?

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•

• •

Supply chains can be highly fragmented and are difficult to measure and control even with the best of intentions. While MNEs may be able to establish principles in the operation of tier one suppliers, further down the supply chain it becomes more difficult.

There is evidence of corruption of local officials and owners of suppliers have a vested interest in keeping prices low to secure contracts and wages low to maintain profit levels.

There may be little commitment to change from those MNEs whose business model depends on low price and fast, round-the-clock delivery, as is the case with fast fashion.

HR in the MNE could play an important role in setting standards for pay, health and safety, hours of work and other contractual issues to ensure fair treatment of supply chain employees. The power of HR to influence such practices among suppliers is weak. Further, they may have little influence over senior management in their own organization who may wish to turn a blind eye to practices overseas to maintain market share and profit levels.

4. What conclusions do you draw from the establishment and subsequent action of the Bangladesh Accord and Alliance?

The Rana Plaza disaster called for radical measures of improved control and legislation to ensure that such incidents would never happen again. However, the proposed changes and remedies came not from the government but from the MNEs whose supply chains were the most affected. However, that two organizations were set up implies a split among MNEs regarding intention and policy.

The Accord on Fire and Building Safety was led by H&M and Inditex (Zara) from Europe and Abercrombie and Fitch and PVH from the USA. They proposed a 5-year programme of safety audits and investment in worker rights and participation. 29 US companies refused to sign and join the Accord, including Walmart, GAP and Target. Instead, an alternative group was formed, the Alliance for Bangladeshi Worker Safety. The measures proposed by the Alliance were not as far reaching as the Accord and members seemed more concerned for doing something to protect their brand image more than the garment and other workers of Bangladesh.

There were positive changes that emerged from the work of the Accord and Alliance with improvements in working conditions, particularly safety. However, the response from government was weak and little appeared to be done to pass legislation to create safer workplaces nor tackle corruption.

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CASE 13.2: BRITISH AIRWAYS 1.

What aspects of HR are exhibited in this case?

Most aspects of HR are exhibited in this case: Employee resourcing is a key issue. BA has high staff costs. Therefore, flexibility of staffing levels in response to changing economic or financial circumstances becomes a key strategy. This was illustrated by the company decision to recruit crew on different conditions to those of existing employees. The new crew are paid a much lower basic salary and operate under less generous working conditions and expense allowances.

Employee development is a key issue. The early part of the case focuses on a culture change initiative based around a series of training programmes and meetings. This was a large investment by the company both in terms of the cost of the programme and staff time. The new crew also needed extensive training in a short period before they could operate on flights.

Pay and performance are key issues in the case. The culture change and training initiative followed the company’s poor performance when benchmarked against competitor airlines. Pay levels are an ongoing issue in a company that faces severe financial constraints. For many years, the retirement age for pilots was 55 and the pension payments were generous compared to other companies. As a consequence, BA, along with other companies with final salary pension schemes, has accumulated a huge pension fund deficit and, again as with other companies, has closed the scheme to new employees. The changing pay structures for new crew also reflects the financial constraints of the airline business in general and BA in particular.

Employment relations is a key issue. Historically, the company has been heavily unionized at all levels and types of employment. In the last few years, there have been a number of well‐publicized disputes and strikes. The strike of cabin crew, which began in 2010, highlighted many of the current problems – the need to reduce staffing levels, the erosion of staff benefits, the threat of replacing staff with cheaper employees, the pension fund deficit and so on. A key aspect here is the change in employment relations from the emphasis of involvement, development and commitment of the 1980s culture to the adversarial relations between management and unions that typified the 2010 dispute. The creation of a new lower cost crew with less attractive working conditions was an attempt to reduce costs but has created further employment relations problems and resulted in strike action.

BA is like many other organizations where HR policies and issues are driven by financial constraints and increased competition.

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2.

What were the major factors which led British Airways to introduce 'putting people first' and related programmes? How do we know that such initiatives were successful? What other factors might we need to consider?

The key factors included: • Financial losses in 1980s.

• Overstaffing.

• More efficient competition in a highly competitive business.

• Poor public image.

• Number of industrial disputes.

• Bureaucratic structures with complex decision‐making and an outdated management style.

• Privatization has put more emphasis on commercial viability resulting in jobs cuts, route cuts, changes in structure and hierarchy and highlighting the need for culture change.

• High levels of trade union membership and a history of poor industrial relations.

• The particular model of culture change had worked in SAS.

Measures of success cited by BA included: • Turning losses into large profit.

• Good feedback from customers.

• Positive feedback and involvement of employees.

• Awards for customer service.

• Positive image portrayed in the press.

Other factors to consider?

As with all culture change and training programmes, there is a problem of linking cause and effect because of all the other variables that can change the business position and image of the company. Other factors could well have been involved, such as price changes, marketing, cost‐cutting exercises including delayering and downsizing, using more efficient business systems or more efficient aircraft.

However, a key measure of any change strategy is its sustainability ‐ the problems of the 1990s and beyond show that this intervention enjoyed a short‐term success only.

3.

To what do you attribute the causes of problems experienced by BA since 1990?

The company faced a number of problems in the 1990s and beyond. These included increased competition, the launch of low‐cost airlines on short‐haul routes, falling demand (due partly to the aftermath of 9/11), the difficulties of finding a suitable US partner, strikes involving cabin crew and worsening staff relations generally. There has also been the impact of 9/11, two Gulf wars, SARS, the global banking crisis and For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

rising fuel costs. As well as these issues, BA has a special problem linked to its pension fund deficit.

It is clear that the culture change strategy employed successfully in the 1980s was not built upon or sustained. This was not helped by changes in BA top management and those at the forefront of the change initiative, like Colin Marshall, were no longer at the helm.

The causes are several – higher costs, increased competition, economic changes, deregulation, fluctuating demand, etc. A contributory factor has undoubtedly been policies and strategies adopted by the airline towards its own staff.

Relationships between staff and senior management have not been good. The training and culture change programme presented in the case is a good example of an initiative that is not followed through. For culture change to be successful it must not be seen as a one‐off event.

However, the strategies employed have been almost entirely based on cutting costs by reducing staffing levels and cutting routes. The creation of the new crew teams at lower rates of pay and less beneficial terms and conditions stored up problems that surfaced as yet another series of strikes. For any HR strategy to be effective it must therefore overcome a climate of low trust, adversarial employment relations and problems of both internal staff conflicts and low motivation.

4.

Compare and contrast the culture change initiatives of the early 1980s with company HR strategies from the 1990s onwards.

The culture change of the 1980s could be defined as: • High levels of involvement focusing on changing behaviour towards customers with emphasis on customer care.

• High levels of participation and high visibility of top management.

• Training of most staff at all levels, including management.

• The programme could be described as inclusive, involving and comprehensive.

• The culture change had the desired effect but there was no planned follow-up and thought was only given to a repeat exercise when problems re-occurred.

Emphasis since 2000: • Almost total emphasis on cost reduction via staff cuts, pay freezes, restructuring of the pension scheme and the introduction of new crews.

• The approach to change has been confrontational, with threats to remove important privileges such as staff travel and the introduction of a parallel crew with new conditions.

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•

5.

Some evidence that the new structures, policies and practices are divisive and that labour turnover and dissatisfaction among new crew members is growing.

Examine the strike action taken by the new crews in 2017, the pilots’ strike of 2019 and the union response to cuts during the COVID-19 pandemic. Compare the positions taken by unions and management and assess the relative merits of their cases.

The New Crews strike 2017 During 2017, the group known as the ‘new crew’ went on strike for 85 days during that year. The creation of a ‘new crew’ with pay and conditions of the existing cabin crews was a clear strategy to reduce staff costs by ensuring that all new recruits were hired on revised terms of lower salaries, reduced levels of expense allowance, a reduction in stop-over time and reduced pension provision. BA were not the first airline to do this – some US airlines have been doing this for years, but in many of these schemes there is a provision for new staff to move to the terms and conditions of the established crew once they have proven their worth to the company. This is not the case with BA. The strike was not successful and during this period BA announced an end to the final salary pension scheme for all staff.

The Pilot Strike 2019 During 2019, 4,000 pilots went on strike for the first time in the history of the company. The pilots complained that successive cuts has made their job more difficult and they saw the cuts against rising profit levels of the wider group IAG. Junior pilots were angry that the company now made them pay for their own pilot training forcing many into significant debt.

BA’s view was that pilots were well paid. However, the pilots accepted a deal of a 12% increase over a three-year period. The significant disruption to operations as a result of the strike created problems between the BA CEO Cruz and the IAG CEO Willie Walsh.

COVID-19 The pandemic represented a huge blow to all airlines as international and national travel were severely restricted.

Management decided that the only way to survive was through the imposition of job cuts and pay cuts across the board. This was to be in addition to staff furloughed as part of the government scheme. They proposed a reduction of one third of all cabin crew and supply staff, 270 pilots and a reduction in pay for all those remaining.

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This was not unique to BA. Other airlines, including Virgin and easyJet, announced similar measures. However, in BA the cuts were fiercely criticized by Unite, the union representing cabin crew and other employees.

In 2020, over 30% of shareholders refused to back the award of a bonus to the IAG CEO Walsh, which would have brought his salary to £3.2 million. Walsh left his job.

In terms of the relative merits of the union position and the management position in respect of these conflicts and the pandemic, it is largely a matter of opinion. This could form the basis of an interesting classroom debate. Each of the three situations could bring out differences of opinion. For example, for the introduction of a new crew with different terms and conditions: • What is the impact on an organization having two types of staff employed on different terms doing the same job?

• Does this challenge notions of equity, e.g. equal pay for equal work?

• Is the company storing up employment relations problems?

• Does the evidence of labour turnover, comparative pay rates and dissatisfaction imply that the company at the very least needs to rethink the pay and conditions gap between the two groups?

• Had management little option to keep the airline running in the face of huge losses?

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BUSINESS IN CONTEXT 8th EDITION – TEACHING MANUAL CHAPTER FOURTEEN FINANCE AND ACCOUNTING

In this chapter, we examine accounting and finance as a series of interrelated activities under the headings of financial accounting (the raising of funds), management accounting (the managing and control of funds, costs and revenues) and financial reporting (the accountability to stakeholders for funds, costs and revenues). The chapter focuses on issues and techniques within these broad headings and also looks at accounting issues presented by the globalization of business.

Discussion questions and answers Below you will find suggested answers to the discussion questions set at the end of every chapter. It must be stressed that these answers offer guidance only and are not intended as ‘model’ answers. It is important that students think for themselves and many of the questions require them to apply the knowledge they have gained from the book to a specific context. We recognize that such contexts may vary for different groups of students. It is more important that students think of the issues in the industry, business or even national context that is most relevant to them. In some cases, a specific answer cannot be given but, where this happens, suggestions are offered for tackling the question.

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1.

What is the value of the professional accountant to business?

The value of the professional accountant to business could include: • Their ability to assist managers in analyzing financial information relating to their own firm and that of others. This is useful in the development of appropriate strategies in all areas of the firm's activities. They can also assist in the planning of joint ventures and proposed acquisitions.

• The knowledge and skills of a professional accountant can assist in the minimization of tax liability and in the preparation of tax returns.

• An accountant's skill is useful in the preparation of financial information required by law. In the case of public companies, it is a legal requirement that accounts are audited by a professional accountant.

• A professional accountant operating outside the firm may offer useful advice as a consultant. However, the impartiality of professional accountants in this role and that of auditors has been challenged.

• Many managers trained as professional accountants. This is thought to be an advantage in decision-making based on financial analysis, although there is the criticism that accountants are cautious by nature as a result of professional training.

2.

Why is the internal funding of business so popular in the UK and the USA? Refer to pp. 557–561. Internal funding seems to be popular in most countries for the reasons given below, but it represents 90% of funding in the UK and the USA compared with only 70% in Germany and Japan. The main reasons are because: • Involving banks and shareholders can weaken management's control of the business, especially in the case of large institutional shareholders.

• Bank borrowing, especially in the UK, can be expensive, although this can fluctuate with changes in interest rates.

• Raising money by share issue is often a one‐off event unless some shares are held back by the original owners or a rights issue is created. The need for investment finance is ongoing. Internal funding by using part of the profits for re-investment is preferred by most managers.

3.

What would be the most appropriate methods the following organizations could use to raise revenue to fund new activities: a very small firm just making a mark in the office supplies market; a university; a multinational car manufacturer?

There are no hard and fast rules for raising additional funding as sources can vary over time and with the nature of the project.

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Small firm in office supplies • The assumption is that the business is privately owned. In this case, a share issue would be a way of raising a relatively large amount of capital.

This would depend on the perceived success and value of the company and on the willingness of the owners to release control.

• Overdraft facilities may be available for small projects and bank loans for larger ones, although interest rate levels may be a factor.

• Internal funding, especially from family sources, may be the only route for some small firms.

In the case of all small firms, raising finance for new initiatives is difficult since they are in a relatively weak position and cash flow is an ever‐present problem.

Small firms can often operate with large ongoing debts ‐ overdrafts and factoring may be more easily available routes outside internal funding.

University There will be differences here between a state funded university (as most are in the UK) and a private university. However, state funding in the UK has been cut back and universities have been encouraged to cover the costs of teaching by charging increasingly higher fees, although the level they can charge is capped by the government for undergraduate courses. There may also be differences between an old‐established university and a newer one, as older established universities may have a stronger tradition of obtaining research funds and attracting donations.

State-funded universities have a requirement (in the UK at least) that they cannot run into debt. This does not eliminate bank and other forms of borrowing but that like any good business, such borrowing must be covered within existing annual budgets. A state university has a number of different ways of raising additional funds: • Funds could be obtained for special projects from the government. This is likely to be a highly competitive process.

• Entrepreneurial activity – consulting projects for business, overseas developments, etc.

• Grants from research agencies, which is again highly competitive.

• Donations from alumni and other sources.

• Raise fees. In the UK, while undergraduate fees are governmentcontrolled, there is more flexibility for fees on postgraduate courses, although this may have an adverse effect on recruitment.

With the exception of government support, all the above apply to private universities as well. Even some government funded research grants are available for bidding from the private sector in most countries.

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Multinational car manufacturer This is a mature company with international operations.

• Revenue could be raised by a rights share issue, although this is relatively rare.

• Bank borrowing may be relatively easy since the company will have some standing in the global business community. The firm's presence in a number of different countries may well enable it to shop around the international banking firms for the best deal.

• A probable source of funding is from its own profits, i.e. internal. There may be two types of conflict here ‐ firstly over the prioritization of projects and secondly between re‐investment and share dividend.

• The company may obtain funding from some governments for specific developments in their country.

4.

What specific contributions can the management accountant make to strategic decision‐making? What limitations can be placed on the value of this contribution?

Refer to pp. 561–566.

Financial and accounting information is an essential part of the development and evaluation of strategic options. Once a strategic initiative has been put in place then accounting information plays an important role in control.

All aspects of management accounting assist with the two processes of planning and control. These are budgeting, costing, investment appraisal, cash flow management and general advice on management decisions.

Limitations include: • The accounting specialist normally operates in an advisory capacity only and decisions are made by other managers.

• Whilst such information is key to strategic decision‐making, strategic decisions are also the product of organization politics.

• Most information in organizations, including much accounting information, is imperfect.

• A traditional accounting position is one of caution, when a more entrepreneurial approach may be needed.

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5.

Identify the different needs of the users of accounting information. To what extent can current methods of financial reporting hope to satisfy them all?

Refer to pp. 567–575.

Users of accounting information include: • The state • Investors • Employees • Creditors • Competitors • Customers The main source of accounting information will be the published accounts.

These are a legal requirement for all registered companies. In this sense, the needs of the state are paramount and many of the other users obtain their information from this source. The major problem is that the needs of the various groups will differ as to the detail required on various aspects. In this case, supplementary information can be provided as required. However, an issue here is one of disclosure and placing sensitive information in the public domain, which could be used against the company by, for example, competitors.

Financial reporting plays a key role in effective corporate governance.

6.

What are the specific finance and accounting problems and priorities for small as opposed to large companies?

Refer to p. 583.

Small and large firms differ in their ability to raise capital, in the complexity of their accounting procedures and aspects of control and in the complexity of their financial reporting.

In small firms especially: • The accounting function is often performed externally by someone without the detailed knowledge of how the business operates.

• Small firms have a bigger problem in raising finance.

• Small firms tend to have greater concerns about cash flows.

• Complying with legal requirements for financial reporting can be particularly costly for a small firm.

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7.

What are the advantages and disadvantages to various interested parties associated with cost allocation and transfer pricing activities in global firms?

Refer to pp. 584–585.

In terms of cost allocation, the key issue is the development of a method that is agreed and felt fair by all parts of the organization. In reality, this is often a source of tension. Managers in successful departments may feel aggrieved that they are subsidizing less successful departments.

In terms of transfer pricing, most activity takes place between main and subsidiary organizations of a transnational corporation. The transfer pricing mechanisms are set up to obtain maximum advantage to the company from such international operations. The transfer price mechanism may be manipulated to limit tax payments in those countries with high rates of taxation. Similarly, materials and parts may be sold to subsidiaries at high prices and finished goods bought at low prices. In these cases, the disadvantage is to a particular country deprived of revenue or tax income. On the other hand, a special low price may be arranged to assist in the development of new subsidiary businesses in another country. In this case, the benefits are both to the transnational and to the country concerned.

8.

Identify the behavioural and political nature of management accounting. What problems does this cause and how might they be minimized?

Behavioural and political issues arise due to the nature of management accounting, especially in areas of budgeting, cost allocation and investment appraisal. The reasons for this include: • Much of budgeting activity involves making decision‐making about scarce resources or setting targets for individuals or departments. Many of these decisions are likely to be contended by interested parties.

• Investment appraisal is not an exact science and individual preferences by interest groups may carry as much weight as accounting information.

• Both budgeting and cost allocation can create perceived winners and losers within the same organization.

• Not all decisions can be based on accurate data.

• Financial information tends to be a summary position and open to interpretation.

The problems this can cause include inter‐personal or inter‐departmental conflict, the manipulation of data to present individuals or departments in the best possible light and a focus on short‐term decisions and simple measurable outcomes. A further problem may occur if managers perceive accounting For use with Needle/Burns, Business in Context 8th edition (9781473786707) © 2023 Cengage Learning EMEA

information to be scientific and base decisions solely on the basis of this limited information.

Such problems can be limited by managers being made aware through training of the uses and limitations of financial information, through the creation by top management of a climate of trust and through effective communication, participation and involvement.

Page 586 gives a brief introduction to the limitations of accounting methods and information.

9.

What is the relationship between financial reporting and corporate governance?

Refer to pp. 575–578 and p. 582.

Corporate governance is a series of checks and balances that ensure that organizations are accountable to their stakeholders. In this way, it is related to corporate social responsibility (refer to Chapter 9).

Accounting information as presented in the balance sheet, profit and loss account and in other reports plays a vital role. Such reports generally must undergo some independent auditing process and they are also available for stakeholders to read and analyze. However, some have questioned the impartiality and accuracy of the audit report and also the completeness or even accuracy of accounting information as presented in reports.

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Case study questions and answers General As with most case studies, there are no definitive answers and the indicative answers below are only a guide. This is especially true where students are asked for an opinion or are asked to speculate. We would hope that class discussion will generate some additional, different (and equally valid) ideas to those expressed below.

CASE 14.1: THE FAILURE OF RBS 1. What were the causes of the failure of RBS during and following the banking crisis of 2007–8?

The banking crisis of 2007–8 (some have identified the crisis of continuing into 2009) affected the global banking and financial services sectors. Its causes have been attributed to: • Sub-prime lending – a term given to lending with easy conditions to lowincome borrowers. Governments, especially the USA and UK, encouraged both home ownership and an increase in house building. When large numbers were unable to cover their mortgage debts, those lending, including banks, incurred losses.

• The crisis followed deregulation of financial services in the UK, which encouraged higher levels of risk-taking accompanied by a lack of effective regulation from state agencies.

• Deregulation also saw a rapid growth of new products such as derivatives and new practices such as off-balance sheet accounting which enabled banks and others to hide losses from regulators.

Specifically for RBS: • There were poor management decisions and a lack of control over staff, who were at the same time encouraged to take bigger risks than previously.

• In the process of becoming the largest bank in Europe and the largest in the world by capitalization, RBS entered into a series of high-cost acquisitions.

• The acquisition of ABN AMRO, in partnership with Santander, stretched the finances and assets of RBS. Although initial profits were good following the acquisition, the long-term effects of risky decision-making and poor acquisition strategy was made much worse by the global banking crisis, leaving RBS with large losses in credit trading. The company made losses in each of 11 years after 2007 with weak and declining assets. They only recovered by the intervention of the UK government.

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• •

A government-initiated report accused RBS of insufficient due diligence in the purchase of ABN AMRO and underlying deficiencies in the company culture, management control and governance.

The government were critical of its own regulatory body, the Financial Standards Authority (FSA), for allowing RBS to get away with so much. They disbanded the FSA in 2013, replacing it with the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). They had already established the Financial Reporting Council (FRC), one of whose primary responsibilities was corporate governance. Could we conclude that the failure of RBS was also the failure of state regulation on banks?

2. What were the specific failures of corporate governance?

Many of the arguments raised in the answer to Question 1 are also valid here.

Internal failures • Management culture and strategies that encouraged and rewarded expansion at any cost.

• The acquisition of ABN AMRO in terms of cost, the lack of due diligence and timing (just before the global crisis).

• The lack of accounting data to the UK government and the concern over the inadequate evidence of a lack of fraud and money laundering and RBS’s use of off-balance sheet accounting.

External failures • The UK government clearly had a lack of trust in its own regulatory bodies, especially the FSA. They were critical of the FSA’s lack of investigation and their soft approach to major company like RBS in general.

• This in turn has led to significant changes in the regulation of financial services and a much greater emphasis has subsequently been placed on corporate governance.

3. The FRC has established guidelines for effective corporate governance (summarized in this chapter). How effective would these have been in preventing the failure of RBS? There are views that external involvement in corporate government is needed because: • The market has failed to regulate business.

• Many transactions and decisions are far from transparent.

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•

Many business activities are complex and difficult to understand, so that expert regulators are needed.

There are also several positive features of good governance: • It can contribute to confidence in companies and is thus important for investors, customers, employees and governments.

• It can contribute to economic efficiency and growth, wealth creation and employee satisfaction.

• It is compatible with concepts such as corporate social responsibility (CSR) and good corporate citizenship.

The FRC offer detailed recommendations for the establishment of procedures and instruments of effective governance. These involve: • The role, composition, selection, training and conduct of boards of directors.

• The production of clear, complete and understandable financial reports.

• Auditing processes that are effective and transparent.

• The control of risk via accounting and auditing information.

• Fair remuneration policies, especially those of senior management.

• The need to create a dialogue with shareholders.

Any analysis leaves many questions unanswered: • Can the long-term sustainable growth of the business and the needs of all internal and external stakeholders be satisfied? Are the different needs compatible?

• How do recommendations from bodies like the FRC work in practice? Who determines the key goals? What powers do external regulatory bodies have?

There is some evidence of a movement towards more effective internal governance, e.g. in the large number of CSR reports published by companies and more cases of fraud are exposed and prosecuted in the courts. There are however many cases of wrongdoing that remain hidden for many years and key issues persist, such as executive pay and pensions that are not linked to either organizational or individual performance. _

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