In 2001 the McDonald's Corporation based in Chicago bought a 33% minority stake in Pret a Manger. Go to www.Pret.Com to gather some info on the company.

• Why do you think McDonald’s Corporation bought stakes in this particular player in the food industry? Could it help McDonald’s adapt its strategy in response to the local Indian environment? If so, how?

In 2001 American Hindus initiated a lawsuit against McDonald’s. Surf the Internet to learn about the reason for the lawsuit and answer the following question:

• Why do you think in the same year McDonald’s, in a change of its strategy, has embarked on buying stakes in such companies as Chipotle Mexican Grill, Donatos Pizza, Aroma coffee bars and Pret A Manger.

‘CASE-2’ POINT

A clash of corporate cultures

(1) The merger of Chrysler Corp. of the US and Daimler-Benz AG Germany in 1998 created DaimlerChrysler AG, the world’s third largest manufacturer of motor vehicles. The aim expressed at the time was to blend their two very different corporate cultures into a new ‘super culture’ which drew from both sides: Chrysler had a reputation as a lean and flexible company, leading the way in cost effectiveness, whereas Daimler was more structured and bureaucratic. In reality, the deal was a takeover of Chrysler by Daimler, rather than a merger of equals.

(2) The differences of culture became apparent almost immediately and turned out to be more difficult to overcome than had been anticipated:

• The official language became English, but the Americans found that their German colleagues were more comfortable in German, and often used German in private conversations, which they found unsettling. They also found that without German they could not integrate well at the social level.

• The German managers were formal in their manner and dress, always wearing ties, and addressing colleagues by title and last name, while Americans were accustomed to dressing more casually and addressing each other by first names.

• The American managers found the office environment very different in Stuttgart. Although the summers could be hot, there was no air conditioning, which they took for granted at home. Offices and hallways were a ‘smokers’ paradise’, which shocked the Americans, who were accustomed to a smoke-free environment. Photos of topless models, common in the German workplace, would amount to a sexual harassment issue in America. Americans found they were always expected to use the company canteen, which even served beer after five o’clock, for those who were working late.

(3) In the end, the incompatibility of management styles was recognized and German culture came to dominate. The key figures in the Chrysler management team had departed within 12 months, leaving Chrysler struggling to deal with a new management team, headed by a German former Mercedes executive, at a time when the competitive environment was particularly difficult. Under the chairmanship of Jurgen Schrempp, Daimler now views Chrysler as a stand-alone division, focusing wholly on the US market. Chrysler, meanwhile, has struggled to replace ageing models and risks losing out in its traditionally strong markets of light trucks and vans. Insiders attribute many of Chrysler’s troubles to the failure of the Germans to understand Chrysler culture.

►Question/Answer session:

1. How would you describe the culture clash at DaimlerChrysler?

2. To what extent has it been resolved successfully?

3. What steps should Daimler and Chrysler have taken to avoid frictions and successfully blend their two very different corporate cultures into a new ‘super culture’? Prepare a concise action plan.

4. To what extent does the need to manage cultural diversity differ in (1) a merger with another foreign company and/or (2) the acquisition of a foreign subsidiary?

‘GRAMMAR-1’ POINT

►The examples below are taken from ‘Case-2 Point’:

1. The official language became English, but the Americans found that their German colleagues were more comfortable in German, and often used German in private conversations, which they found unsettling.

2. German managers were formal in their manner and dress, always wearing ties, and addressing colleagues by title and last name, while Americans were accustomed to dressing more casually and addressing each other by first names.

3. Insiders attribute many of Chrysler’s troubles to the failure of the Germans to understand Chrysler culture.

►Translate the examples into Russian and explain:

1. Why is ‘the’ used before ‘Americans’ and ‘Germans’ in the first and third examples respectively, and why is it left out in the second one? What if there was ‘Chinese’ or ‘French’ instead of ‘Americans’ or ‘Germans’?

2. Is it correct to use ‘the’ before ‘German’ in the first example?

3. What is another way of expressing ‘were accustomed to’?

‘THEORY-4’ POINT

Michael Porter’s five-forces model

Michael Porter devised a model to explain the forces that determine the competitive intensity of an industry and thereby the profit potential for companies within the industry. He defines the industry as ‘the group of firms producing products that are close substitutes for each other’. The five competitive forces are depicted in the figure below.

• Potential entrants or the strength of barriers to entry - how easy is it for new rivals to enter the industry? New entrants offer an industry greater capacity and greater competition for market share, thus posing a threat to existing competitors. The extent of this threat depends on barriers to entry. If barriers are high, then the threat of new entrants is low. Sources of barriers to entry include:

• Economies of scale, whereby unit costs decline as the volume produced increases. New entrants may thus enter on a large scale or not at all. If they enter on a small scale, they face cost advantages.

• Product differentiation, which may be based on building brand identification over time, entailing substantial expenditure on advertising. New entrants, for example, in the soap powder market, which is dominated by a few strong brands such as Ariel and Persil are faced by the huge potential costs of advertising and promotions to gain market share.

• Capital requirements, whereby the necessity to make a huge capital investment deters new entrants. A new entrant in an industry which relies on high levels of expenditure on research and development (R&D), such as the pharmaceutical industry, will need a huge amount of capital to compete with the large companies.

• Access to distribution channels, whereby the new entrant may have difficulty finding willing distributors. For example, the maker of a new food product may struggle to persuade supermarkets to stock it.

• Industry competitors or the extent of rivalry among existing competitors – how competitive is the existing market? The intensity of rivalry may depend on several factors:

• Numerous or equally balanced competitors – where firms are numerous, companies tend not to keep a close eye on competitors’ moves, but where they are more equally balanced, each tracks others’ moves with a view to countering competitors’ strategies.

• Rate of industry growth – where an industry is growing rapidly, there is plenty of opportunity for firms to expand. Where an industry is growing slowly, on the other hand, competition centres on gaining market share.

• Product or service characteristics – if a product is so basic as to be essentially the same, regardless of supplier, then it resembles a commodity, and the buyer’s choice depends on price and services, there intense competition results.

• Level of fixed costs (fixed costs are those that are not related to the actual production and thus do not vary with the level of production) – where there are high fixed costs, there is pressure for companies to fill capacity, cutting prices in order at least to cover fixed costs. An example is the airline industry. Scheduled flights may fly at less than their capacity of passengers and airline companies may offer discounted fares through various outlets.

• High exit barriers – these are the ‘economic, strategic, and emotional factors’ that keep a company in an industry. It may have invested in particular assets, for example, which would be difficult to sell or convert to other users. Managers are inclined to carry on business so long as they are not making huge losses.

• Supplier power – the greater the power, the less control the organisation has on the supply of its inputs. A supplier is in a powerful position if (1) the supply industry is dominated by a few powerful companies such as the petrol industry; (2) there are few available substitutes for its product such as petrol.

• Buyer power – how much power do customers in the industry have to force down prices or bargain for higher quality? The buyers who are in the strongest position are those who (1) purchase a large proportion of the seller’s output; or (2) can change to alternative suppliers with ease, as the product is a standard one.

• Threat from substitutes – what alternative products and services are there and what is the extent of the threat they pose? Substitute products may appear to be different, but serve the same function. Substitutes in effect place a ceiling on the prices that companies in the industry can charge.

The stronger these forces, the greater threat they pose, and the more constrained a company is in its ability to raise prices and increase profits in the short term. However, in the long term, a company may respond to strong competitive forces with strategies designed to alter the strength of particular forces to its advantage.

►Question/Answer session:

1. Describe in short each of the five competitive forces by Michael Porter.

2. What sources of barriers to entry could you refer to?

3. What factors can influence the intensity of rivalry?

4. What buyers can be thought of as having a bargaining power?

5. What suppliers are considered to have a bargaining power?

6. How could a competitive force called ‘threat from substitutes’ work in case of such quite different substitutes as tea and coffee?

►Place the following points onto the five forces model (the first is done for you):

1. High rate of industry growth (industry competitors → plenty of opportunity for firms to expand)

2. Huge potential costs of advertising and promotions

3. Well-developed infrastructure

4. The supply industry is dominated by a few powerful companies such as the oil industry

5. High level of expenditure on R&D

6. Consumers in the area easily switch from one product to another

7. The necessity to make a huge capital investment

8. Wide range of related products on the market.

‘PUZZLE-1’ POINT

The market for on-line education

►Place the following eight points onto the five forces model:

1. Start up costs are very low.

2. Students have access to books, videos, and paper-based distance learning packs.

3. Companies, governments, and self funding students invest huge amounts in their education.

4. There are very few high quality web sites available.

5. Traditional colleges and universities are adapting their products for on-line learning.

6. Government legislation in the US and Europe encourages on-line learning.

7. The more innovative learning sites give lesson for free just for the love of it.

8. More people with access to the web every second.

‘THEORY-5’ POINT

Location

In order to survive and grow, a business must recognize and respond to the dimensions or influences presented in ‘Warm-up Point’. One of the most important factors is possibly the location since the position of a business affects its performance. Several points must be taken into account (see the figure below). The importance of each can vary according to the type, purpose and nature of the business.

►Let’s consider two different businesses. One is a big retailer, say Auchan or Wal-Mart; the other is a big car manufacturer, say Ford or BMW. Both are looking for a site for a new store and a production facility/factory respectively. Do the factors that they take into consideration differ? If so, in what respect? Consider the factors from the figure above.

‘BATTLE’ POINT

►Team up with your classmate and start to develop your arguments about the following statements:

1. You win by being cheaper. There are no other ways to gain competitive advantage.

2. The only task of corporate governance is to sustain shareholder value over time.

3. SWOT is the best and the most comprehensive tool for formulating business strategy over long term.

See ‘Battle Point’ in Unit 3 for instructions.

‘MAKE YOUR’ POINT

Virgin Boss launches space tourist aircraft

(1) British Business Tycoon Richard Branson has unveiled an aircraft aimed at sending tourists into space. The high-altitude jet, nicknamed Eve after Branson’s mother, will act as a mothership, releasing a second spacecraft into orbit.

(2) “The beauty of ‘Whiteknight One’ and ‘Whiteknight Two’ is that they can help change our relationship with space, achieving an era where accessibility becomes a commercial and scientific norm and not the exception,” he told reporters at the unveiling.

(3) More than 200 hundred people have already signed up for the maiden voyage, which is expected in 2010. Each have paid just under 130,000 Euros for the sub-orbital space trip.

►Analyze what sort of strategy Richard Branson holds behind this launch. What might his business intentions be?

‘WWW.2’ POINT

►Go to the corporate website of one of the following businesses:

• British Airways

• Marks and Spencer

• Vodafone

• Renault

and prepare a PowerPoint presentation keeping strictly to the guidelines below:

• What is their current market position?

• Who are their key target markets?

• Who is their main competition?

• What are the external factors that have impacted and will continue to impact on the business in the future?

• What image have they managed to cultivate? (It might be a bad image!)

• What key trends are going to affect the business in the coming years?

• Will the business still be in existence in ten years time? If so, in what form?

• Conduct PEST and SWOT analysis

Each of the above businesses has had their troubles and challenges and so would be interesting cases to study. These businesses are merely suggestions and you can choose one of your own, one that has also had its troubles and challenges recently.

‘SUMMARY’ POINT

►Translate the phrases below into Russian and make them stick in your mind:

1. a company truly global in scope

2. visualize business environment in terms of layers

3. influence organization and operations of a business

4. corporate governance

5. mechanisms for exercising ultimate control of the company

6. reap annual dividends from the company’s profits

7. corporate executives

8. the internal and external environment of the company/business

9. stakeholders

10. corporate strategy

11. assess the firm’s strategic profile

12. highlight a firm’s distinctive/core competencies (competitive advantage/edge)

13. gain/develop/maintain a huge competitive advantage/edge (distinctive/core competence)

14. monitor and evaluate forces which affect the organization over the long term

15. raise prices and increase profits in the short term

16. respond to strong/cut-throat competitive forces

17. competence mastery

18. consumer demand

19. remain stable

20. new entrants in the market

21. meet financial objectives

‘TRANSLATION-3’ POINT

►Translate into English using the expressions from ‘Summary’ Point:

(1) Сегодня, для того, чтобы выжить в среде бизнеса любая компания должна быть готова реагировать на жестокие конкурентные явления. Компания действительно глобальная по своим масштабам обязана отчетливо представить себе среду бизнеса с точки зрения ‘слоев’, которые могут влиять на организационную структуру и деятельность этой компании. Таким образом, корпоративная стратегия может рассматриваться как набор определенных действий, нацеленных на то, чтобы получить и сохранить огромное конкурентное преимущество в долгосрочном аспекте.

(2) Во-первых, надо оценить стратегический профиль компании с помощью специальных инструментов анализа, которые позволяют контролировать и оценивать явления, влияющие на организацию в долгосрочном аспекте. Во-вторых, необходимо найти и установить механизмы для осуществления эффективного контроля над организацией. Члены правления корпорации должны придавать особое значение ключевым компетенциям компании. Приступая к анализу ключевых компетенций, им необходимо понимать, что конкуренция между компаниями означает не только борьбу за долю рынка и рыночную власть, но и соревнование в мастерском владении ключевыми компетенциями.

‘CASE-3’ POINT

Back to 1970’s

(1) Iveco, the truck subsidiary of Fiat, based in Nanjing, is the largest Italian investor in China. The company, which has been in China since the 1970’s attributes its success to Sino-Italian cultural exchange. Iveco selected 400 Chinese engineers and other workers and trained them in Italy, where they learned Italian and gained on-site experience in Italian factories in the 1980’s. Neither the Chinese nor the Italians spoke much English, so Italian was the obvious language to use. The Iveco representative in China explains: ‘We have tried to give the Chinese the possibility to understand our industrial culture and the opportunity to live our social life.’ Importantly, there was $7 million in Italian government aid for the technical training of Chinese people on the exchange program. In 1986, he arranged for 32 Italians to come to Nanjing to teach basic Italian to 350 local mechanics and other staff.

(2) The Iveco project in Nanjing, which is a 50-50 partnership with its Chinese partner, was four years in the planning. Some foreign investors may feel that this is a long wait. But the Iveco representative explains: ‘Nobody can do business here with a short-term strategy’. When asked ‘How long?’ he replied emphatically, ‘Thirty years’. The message for international companies is to adapt our know-how to the local conditions. Iveco continues to develop new production facilities in China. Meanwhile, the number of Italians in Nanjing is shrinking, down to 8, in a workforce of 3,000. The reason is that the company is developing local managers.

Back to 2005

(1) In 2005 Iveco signed an agreement with the SAIC Motor Corporation, one of the leading Chinese car-makers and the Chongqing Heavy Vehicles Group, to establish a long-term partnership in China in the heavy truck and engine fields. Party Secretary and the Mayor of Chongqing, the highest authorities of the local Government, and the Vice Mayor of Shanghai, participated today in Chongqing in the activities related to the signing ceremony.

(2) The agreement envisages the acquisition of a 67% share in the capital of Chongqing Hongyan Automotive Co. Ltd, which is a subsidiary of the Chongqing Heavy Vehicle Group, on the part of a 50-50 financial joint venture to be set up by Iveco and SAIC Motor (SAIC Iveco Commercial Vehicle Investment Company Ltd.). The Chongqing Heavy Vehicle Group will control the remaining 33%.

(3) The industrial activities covered by the agreement include the manufacture and assembly of heavy commercial vehicles and diesel engines, with Iveco technology. “Extensive collaboration between Iveco, SAIC Motor and the Chongqing Heavy Vehicle Group,” said Paolo Monferino, Iveco Managing Director, “is a significant step forward in our global development strategy. The agreement bolsters Iveco’s position on the rapidly expanding Chinese market, where we have already been present for many years in the light commercial vehicle sector. We expect the agreement will enable us to create a solid base for the supply of products and services at competitive costs.”

►Question/Answer session:

1. How would you describe Iveco’s strategy in Nanjing and explain its advantages and disadvantages?

2. Piaggio, another Fiat subsidiary, which makes mopeds, did not go in for the exchange and training program. It employed 15 expensive expatriates in a 450-person plant in Guangdong. Compare Piaggio’s and Iveco’s strategy in terms of short- and long-term strategy. Is it indispensable for a company going global to be able to manage cultural diversity? If so, why?

3. What positive implications will the 2005 deal have from both Iveco’s and the SAIC Motor Corporation perspective?

‘GRAMMAR-2’ POINT

►The examples below are taken from ‘Case-3 Point’:

1. The company, which has been in China since the 1970’s attributes its success to Sino-Italian cultural exchange.

2. Iveco selected 400 Chinese engineers and other workers and trained them in Italy, where they learned Italian and gained on-site experience in Italian factories in the 1980’s.

3. Neither the Chinese nor the Italians spoke much English, so Italian was the obvious language to use.

4. We have tried to give the Chinese the possibility to understand our industrial culture and the opportunity to live our social life.

5. Importantly, there was $7 million in Italian government aid for the technical training of Chinese people on the exchange program.

►Translate the examples into Russian and explain:

1. Is it correct to leave out ‘the’ in front of ‘1970’s’ and ‘1980’s’ in the first and second examples?

2. Is it correct to leave out ‘the’ before ‘Chinese’ in the forth example and put it in front of ‘Chinese people’ in the fifth example?

3. Does ‘$7 million’ stand for ‘seven million dollar’ or ‘seven million dollars’? Is it correct to say ‘seven millions of people’ and ‘millions of people’?

4. What if we begin the third example like ‘neither my colleagues nor I’ and put the sentence in the Present Continuous? What will happen to this example?

►Translate into English using ‘Summary Point’ and ‘Grammar Points’:

1. Уже в начале 1970-х большинство глобальных по масштабам компаний стали уделять пристальное внимание вопросам эффективного корпоративного управления и выстраивать корпоративную стратегию с учетом внутренней и внешней среды, в которой функционирует данная компания.

2. Для того, чтобы успешно реагировать на жесткие конкурирующие силы на рынке продуктов повседневного спроса, 90% китайских компаний придают особое значение ключевым компетенциям, которые позволяют получить и сохранить огромное конкурентное преимущество.

3. Тысячи компаний для того, чтобы оставаться стабильными, все время котролируют и оценивают явления, влияющие на организацию в долгосрочной перспективе.

4. Существует много разнообразных способов оценки стратегического профиля компании, из которых одним из лучших является SWOT анализ.

5. По оценке авторитетного (надежного) источника, около (some) 80% дохода компании OPQ в текущем году является результатом возросшего потребительского спроса на «брэндовые» товары.

6. По результатам (итогам) опроса, проведенного японской ассоциацией предпринимательства (entrepreneurship), ни китайские, ни корейские предприниматели не считают механизмы осуществления единоличного (полного) контроля над компанией главным преимуществом успешного развития бизнеса.

7. Уже с начала 90-х гг. конкуренция стала нарастать в основном благодаря технологическим изменениям и глобализации рынка; одновременно компании начали испытывать значительное давление со стороны заинтересованных в организации сторон, предъявляющих ей свои требования.

‘TRANSLATION-4’ POINT

►Translate into English using the expressions in brackets:

(1) Второй по величине во Франции автопроизводитель (car maker/manufacturer) “Рено” объявил в четверг о введении в действие жесткого плана экономии (cost-cutting plan), предусматривающего, в частности, сокращение 5 тысяч рабочих мест на европейских предприятиях концерна, а также реорганизацию (restructure) ряда производств (manufacturing capacities). Это, в первую очередь, касается завода во французском Сандувилле, где выпускают модель “Лагуна”, спрос на которую оказался намного меньшим, чем ожидалось. Там вместо двух рабочих смен сохранят лишь одну, сократив число сотрудников (reduce its workforce) на тысячу.

(2) “Это мера равновесия (strike a balance) между ресурсами и результатами (results) компании. И лучше сделать это, когда вы только чувствуете, что ветер меняется (start to turn), потому что, когда грянет (arrive) буря, придется принимать более драматичные (bigger) решения, а мы хотим этого избежать”, – говорит глава компании Карлос Гон (Carlos Ghosn), который считает, что автомобильная промышленность стоит на пороге глобального спада (global turmoil).

(3) Одновременно с заявлением о сокращениях (job cuts), “Рено” обнародовал финансовый отчет за первое полугодие (post first-half operating profit of), в котором чистая прибыль компании составила 865 миллионов евро, что на 20% выше, чем в прошлом году (up 20% on last year). “Обычно нам говорили о трудностях или надвигающихся крупных опасностях, когда компания несла убытки (make a loss), – говорит представитель профсоюза. – А сегодня мы получаем огромную прибыль (make big profits) и нам говорят, что мы в затруднительном положении. Это сложно понять”. Итак, тенденция к сокращению спроса (demand for) на автомобили от Америки дошла до Западной Европы.

‘THE ECONOMIST-2’ POINT