These trading blocks differ in their degree of integration and effectiveness.
The EU is the only such block with an elected parliament and a common currency (for some of its members). The USA has a common currency between its individual states.
The ASEAN Free Trade Area has a total population of over 500 million, and a maximum tariff of 5 percent (The Economist, 2 March 2002).
The EU has resisted the scrapping of agricultural subsidies. However, Mercosur is focusing on market access. This renewed negotiations resulting from the failure of the WTO negotiations at Cancun, and waning enthusiasm for a Free Trade Area of the Americas. Argentina, a member of Mercosur, is desperate to expand exports in order to generate growth to overcome its current financial crisis. Mercosur appears to accept that it is pointless trying to change the EU's Common Agricultural Policy.
The Triad
Rather than a globalised world or a federalised world of trading blocks some commentators see economic activity as principally occurring in three main economic blocks: the USA, the EU and Japan. These do the biggest value of their trade with each other.
Triad theory rejects the idea that homogenous products can be developed and sold throughout the world.
Multinationals have to develop their products for the circumstances of each triad.
The Triad theory may be out of date. Japan was, in effect, in recession for 20 years from the mid 1980s whilst emerging markets, particularly those of China and India, but also Brazil, are likely to be some of the world's largest and fastest growing markets. They still have a long way to go before per capita incomes reach the level of the Triad countries. They may form the fourth and fifth trading blocks, or perhaps the triad will be superseded by their faster economic growth.
Summary and Self-test
Summary
Self-test
Answer the following questions.
1 PDB Motors Ltd is a major UK car manufacturer with plants in the UK and Europe. It is seeking to exploit both the buoyant North American and Brazilian markets for car sales.
Suggest two reasons why it would be a logical strategy for PDB Motors Ltd to build an assembly plant in Mexico.
2 Social and technological factors always need to be assessed when analysing the environment within which a business operates.
Give two examples of each of these factors which would be relevant to Busline Ltd, a UK operator of coach tours to Scarborough and Whitby.
Suggest how each of your factors may impact future demand.
3 Dunvegan Ltd
Dunvegan Ltd is a forestry company operating in the UK, mainly in Scotland. In addition to forests at various stages of maturity, the company also owns many hectares of undeveloped land.
So far Dunvegan Ltd's timber has consisted almost exclusively of spruce trees which produce
softwood used extensively in building work. Spruce sells for the equivalent of about CU200 per cubic metre. However, genetic engineering has produced a remarkable new tree which has the growth characteristics of spruce, but which produces hard wood with the appearance and qualities of mahogany. This species, the Maho spruce, should grow quite happily in Scotland and produce worthwhile crops after ten years, each Maho spruce tree producing about 2 cubic metres. Currently, mahogany sells for the equivalent of CU900 per cubic metre.
The company which developed the Maho spruce has ensured that the trees are sterile and has also successfully applied for world-wide patents on the genetic material. Seedlings are available only from that company at a cost of CU200 each.
Dunvegan Ltd is considering whether to invest in Maho spruce. Land already owned by the company would be used and the company's planting and drainage equipment would be assigned temporarily to the project. Because the seedlings are so expensive, relatively light planting would be used at 1,500 seedlings per hectare. Annual maintenance and security would be CU1,000/hectare for each of the ten years of the project. Dunvegan Ltd is considering planting 1,000 hectares with Maho spruce.
In the UK Dunvegan Ltd has three main competitors; mahogany is also imported from four countries in the tropics where it is a valuable export. Some of the wood is from managed plantations, but some is from natural forest. Recently the price of mahogany has been rising as supplies become short and plantations have to be renewed. Dunvegan Ltd's accountant has read an article in a recent edition of Lumber About, the monthly trade paper of the timber business, in which the economic effects of the Maho spruce were discussed. If around 3,000-4,000 hectares were planted in the UK, then the price of mahogany would be CU500 per cubic metre at the end of ten years. If around 2,000 hectares only were planted, then the price would be CU800 per cubic metre.
Requirement
From the viewpoint of an independent consultant, write a memorandum to the directors of Dunvegan Ltd on the proposed Maho spruce plantation.
Your memorandum should include an environmental analysis. (20 marks) Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved these objectives, please tick them off.
Answers to Self-test
1 Two reasons from the following:
This would allow PDB to take advantage of low labour costs in Mexico.
The location would be close to potential major markets, cutting transport costs and reducing lead time.
The NAFTA will avoid sales to the USA and Canada being subject to import restrictions.
It delivers sales growth prospects to a company facing a saturated European market.
2 Social factors
Two examples form the following:
Increasing car ownership (lower demand)
Higher proportion of older people in society (higher demand)
Cheap overseas packages available (lower demand).
Technological factors
Two examples from the following:
Development of high speed trains (lower demand)
More comfortable coaches being developed (higher demand)
Greater internet accessibility, creating more awareness of other travel options (lower demand).
3 Memorandum
To The Directors of Dunvegan Ltd From Independent Consultant
Date Today
Subject Proposed Maho spruce plantation The trading environment
The Maho spruce project is a ten-year project and it is important to try to predict how the trading environment may change by the time the timber is ready to harvest. However, the time scale
obviously makes any predictions unreliable. The environment can first be analysed under the headings Political, Economic, Social, Technological.
Political
Mahogany currently comes from four countries in the tropics. As it is a valuable export, these countries can be expected to be willing to sell mahogany irrespective of local political changes.
In the UK, however, there is growing concern about the deforestation of the tropics and suspicion about the source of many hardwoods. It is possible that the UK or EC will tighten import legislation.
Locally grown, renewable mahogany-substitute should be favoured in this ecologically-aware age.
Economic
Mahogany is principally used for building (window frames, etc) and furniture (veneers). Both of these industries are very sensitive to the health of the economy. It is difficult to predict the economic health of the country ten years hence and so the project will have considerable risk and uncertainty.
Social
If home-owning continues to grow, it is to be expected that demand for high quality materials will also grow. As mentioned under the political paragraph, using tropical hardwoods could become socially unacceptable and it would appear that the Maho spruce should provide a politically correct substitute.
However, some people may object to using genetically-engineered material.
Technological
Although Maho spruce has been patented, there is no reason why other manufacturers could not develop similar products. That would drive down the cost of seedlings (a major cost of the
undertaking) and hence the price that would eventually have to be achieved to make the investment pay.
Size of investment
The proposed investment is large, especially as there are many important factors which could change over the project's life: the project is high risk even if not using innovative technology. Risk could be reduced by planting over several years rather than 1,000 hectares at one time. In that way the economics of the investment could be monitored and decisions taken about each slice of investment.
Naturally, this approach would delay the maturity of some of the crop. There is a risk that this would reduce the final income (if mahogany prices were to fall) but prices could also rise (strong reaction against natural mahogany, economic upturn). Delaying planting could also reduce the initial price of seedlings as other bioengineering companies launch new products.
Summary
Insofar as environmental factors can be judged it would seem that Maho spruce should be a popular product. The main risk arises from technological advances which could produce similar cheaper timber.
However, the economics of the project are very dependent on the future price of Maho spruce timber, its substitutes and the reactions of rivals.
My advice is as follows:
(i) Attempt to get the suppliers of Maho spruce to regulate sales of the seedlings.
(ii) Consider spreading out the investment instead of committing so much expenditure in the first year.
Answers to Interactive questions
Answer to Interactive question 1
(a) External factors would include:
Rival accounting firms seeking to take clients themselves
Other professional practices which may direct work toward us
Regulations such as tax laws, accounting standards and audit standards
The labour market for post-qualified and qualified accountants
The general state of the economy and its effect on business
(b) These factors create opportunities and threats. New regulations create a need for professional advisers to provide guidance to clients. Competitors or a thriving labour market with higher pay create threats (incidentally notice how you changed your perspective on the last point because you would like to have the higher pay but you are calling it a threat for your firm). This illustrates how flawed the distinction between 'internal' and 'external' is when we discuss environmental analysis.
(c) This will depend on the managers psychological make-up. Some will see it as a tiresome bind that makes them have to keep changing things and also which makes it hard to plan or feel certain. Others will see it as invigorating.
A very interesting test of management is the extent to which they see themselves as powerless in the faces of environmental changes or whether they believe they can shape and respond to them.
(d) Again, this varies. Some will avoid making decisions which could be affected by environmental uncertainty, and will wait till it settles down (hence incrementalism). Some will simply ignore
environmental issues that cannot be proven. Perhaps a more balanced approach is to adopt strategies that would still deliver benefit under a number of environmental developments or perhaps have several courses of action running at the same time, with each one designed to take advantage of different environments. In another context, energy companies invest in several different technologies because they do not know how oil prices and environmental regulations will develop.
Answer to Interactive question 2
(a) Oil producers adapted scenario planning techniques from their original military applications (notably in planning for the aftermath of thermonuclear war) during the 1970s. This followed the oil price shock when the Arab states then at the centre of OPEC massively increased the price of oil and caused inflation and recession in industrialised Europe and North America. This decision was itself justified in part as a response to the perceived support of oil consuming Western countries for support of the occupation of Palestine and Egypt.
It was a response to the high turbulence (e.g. political shifts, vulnerability to economic factors etc.) and dynamism (e.g. speed of change of political landscape) in the oil industry. Furthermore the very long investment periods in the industry necessitated long-term strategic plans based on assumptions about the future.
(b) Possible scenarios would incorporate a combination of:
War in the oil producing countries of the Middle East
Aggressive energy politics by countries such as Russia and Venezuela, holders of large reserves of oil and gas
High energy demand from newly industrialising countries such as China and India
Increasing legislation in industrialised nations aimed at reducing use of carbon dioxide producing fuels
Development of new energy sources such as clean coal, biomass fuel, wave and wind, and re-emergence of nuclear power
Discovery of new oil or energy reserves
Answer to Interactive question 3
3 Environmental analysis
The factors in the surrounding environment obviously played a significant part in the state of the newspaper industry at that time. They were largely external and as such outside the control of the individual newspaper companies, resulting in a reactive approach by the companies to such factors.
(a) Political and economic
One the major factors that influenced the industry was the recession. The industry had and still has two main sources of income – revenue from individual sales coupled with revenue from advertising.
The tabloid newspapers were heavily reliant on advertising revenue (representing 80% of their income) whilst the broadsheets had a more even split. Both sources, however, suffered severely in the recession as disposable income fell. Redundancies, pay freezes, and low inflation all resulted in a decrease in the income of the individual. The individual therefore cut back on what he perceived to be non-essential items, which may include his newspaper. Alternatively he will search for a cheaper alternative – the tabloid or the free issue ('freebie').
Probably the broadsheets were relatively more influenced by government policies such as increased taxes, which were aimed directly at individuals, decreasing their disposable income and hence decreasing demand for the more expensive newspaper. This obviously resulted in the price drop for The Times. To some extent this price drop prevented broadsheet customers deserting to cheaper tabloids, and also hit very hard the higher priced broadsheets, such as The
Independent.
The decrease in the individual's net disposable income would have had a knock-on effect on the advertisers: if the target market had less disposable income than previously was the case, companies would be less willing to advertise in newspapers, as it may not have been cost-efficient.
The overall effect was a sharp fall in revenues for newspaper companies. In order to overcome this the newspapers attempted to increase volume by dropping sales price, hoping that the increased volume would compensate for the overall decrease in revenues.
(b) Social
At that time, the newspaper market was split into two distinct sections – the tabloids and the broadsheets. Historically those individuals with lower incomes tended to buy the tabloids and those with higher incomes tended to buy the broadsheets. Furthermore, the tabloids are intended to be sold to a more 'lower class' market than the broadsheets.
How the recession would have affected this is arguable. Some held that the 'higher class' image attached to the broadsheets would prevent a switch by such readers to the cheaper 'lower class' tabloid. However, the tabloid editors believed that this was not the case: people are money-driven and the broadsheet readers would be just as price-sensitive as those of the tabloids – hence a switch would be feasible.
General levels of literacy have declined and the public are less inclined to obtain their news from newspapers but instead rely on news bursts in the middle of radio and television programming.
(c) Technological
Changes in technology at that time had a considerable effect on the newspaper industry. Colour photographs, although not too recent an innovation, were considered by then to be the norm for
colour pictures, resulting in an uncompetitive stance. The technology required to upgrade the paper to colour printing was very expensive, necessitating an increase in the price of the paper at a time when a price war was emerging.
Since then the emergence of on-line services such as news websites and 24 hour-news
programming on digital TV have increased the competition to newspapers. As we live in an age where television is the focal point of many people's lives, the accessibility of news/sport and television information has rendered it less important for people to have a newspaper on a daily basis.
Newspaper companies have also encountered further costs due to increased technology in the typesetting area which is now centrally controlled and downloaded to regional areas where the printing is done. Once again, to compete on a national basis, this has involved major capital outlay for most companies, which has to be recouped by increased circulation, increased selling prices or increased efficiencies.
Given that newspapers are often bought to while away boredom on journeys to and from work etc the development of compact multimedia devices such as MP3 music and video players will reduce the casual purchase of newspapers.
(d) Ecological
Newspaper production and distribution has many ecological impacts. The raw material is timber and the manufacture of paper involves large amounts of water and bleaches. Print ink was solvent based originally. It is an industry that requires substantial logistics and so leaves a carbon
footprint.
Regulations affecting pollutants, the recycling of paper, and the carbon emissions from a business would impact sharply on the costs of the newspaper industry.
(e) Legal
During the recession, in order to boost sales, the tabloids in particular tended to search for more 'popular' stories such as the Royal family and scandals about prominent people. This, however, resulted in an increase in law suits, as a struggle emerged as to whether the private lives of prominent individuals were indeed 'private'. The current ruling is that anything that is in the public interest may be published. However, there remains a grey area as to what is in the 'public interest'.
This was then coupled with the manoeuvring by newspapers on the issue of publishing sensitive photographs. Some published in order to obtain a short-term boost to their circulation whereas others decided to publish their 'disgust at those seizing the opportunity' in the hope of a longer-term increase in circulation.
The legal issues surrounding the competitive nature of the industry also came to the fore, particularly as to whether the price cuts were an attempt at predatory pricing in order to force a competitor out of business.
Conclusion
The newspaper industry was in a particularly turbulent phase in the 1990s. This was mainly caused by the recession and the effect this had on disposable incomes. Moreover, with technology ever-improving since that time, television and radio have taken increasing shares of the media market away from newspapers.
Answer to Interactive question 4
Levitt cited examples such as Coca-Cola in his article. More recently, examples such as Starbucks, Mercedes Benz, Microsoft and Disney have been called global businesses.
In practice, these corporations offer subtly different products in different markets and their appeal is not global. For example, Coca-Cola has suffered badly from an anti-American sentiment and Disney has not been as successful in Europe as it had hoped.