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Students Zone - Answers to End of Chapter Questions
CHAPTER 1 THE CHANGING NATURE OF INTERNATIONAL BUSINESS
1, If the CR5 concentration ratio in the UK supermarket sector is the same in 2005 as it was in 1995, does this mean that there has been no change in market power?
Answer
The CR5 ratio measures the proportion of a market controlled by the top five organisations. It does not tell us how the proportion of the market held by each of the top five firms has changed or whether there is a new entrant into the market. For example suppose in 1995 the following supermarkets possess these particular proportions of the UK market:
Tesco – 20%
Sainsbury – 18%
ASDA – 18%
Morrisons – 10%
Waitrose – 6%
These are the top five firms and the CR5 ratio is 72%
In 2005 the same supermarkets are still the market leader but their percentage of the market is as follows:
Tesco – 28%
Sainsbury – 18%
ASDA – 16%
Morrisons – 8%
Waitrose – 2%
Once again the CR5 ratio is 72% but in 2005 the increased market dominance of Tesco's is hidden within the ratio as is the declining share of Waitrose. Other methods of market concentration therefore need to be considered alongside of the CR5 ratio.
It is also important to note that the supermarkets have moved into a variety of markets such as household goods, finance, gardening etc and it is becoming more difficult to discern the proportions that they hold of these markets within any C5 ratio. Because of the competition rules supermarkets are seeking to expand more into these non-food areas and into markets outside of the UK.
2. Why do companies such as the Halifax Bank prefer to grow by merger rather than by internal growth?
Answer
The banking sector like other sectors of the UK economy is subject to UK and European competition rules. As such, it may be difficult to grow the banking business in the UK and if the Halifax bank wishes to become a major player in international banking it may be forced to grow outside of the UK and perhaps outside of Europe. It is possible for the Halifax Bank to set up branches in other countries but brand recognition may be a problem. Furthermore, it is often the case that people in other countries like to deal with their own country's banks. Therefore the better option for Halifax may be to merger and takeover other banks in other countries whilst retaining these other countries bank names.
One other factor to note in the banking system in the UK is that banks may have difficulty in growing banking customer numbers. Most people have bank accounts and what banks may see is the churning of customers from one bank to another. What Halifax may need to do is grow the area of banking services that it offers. This might include insurance, mortgages and the like. Instead of growing these businesses internally a simpler way may be to purchase existing organisations in these areas and get control of a sector of the market through an established player in that market.
3. Internet groups AOL and MSN have been in talks regarding cooperation in their search and advertising network business (Financial Times, 2005). Why is this popular route to organisational growth?
Answer
The reasons why MSN and AOL were in talks to improve their levels of cooperation may be manifold. Two large organisations may perceive that the costs of gaining market share from their rival are too large to justify the expenditure. Yet both know the value in being larger organisations. MSN may realise that any action it takes to grow at the expense of MSN will be responded to by MSN, therefore some form of mutual cooperation would benefit both organisations. Such cooperative arrangements, however, can also break down in the future. Cooperation may also occur because of the high cost of developing further growth in the search and advertising business, thereby reducing costs to both organisations. It is also possible that the two companies are in slightly different areas of the market and cooperation could result in synergistic outcomes for both of the organisations. A further factor may be the size of any rival in the market. Two firms may seek to cooperate when there is a larger rival in the market place. Cooperation may occur also because of a downturn in demand for advertising business over the internet. Here it may be better to cooperate and survive rather than to try and go alone and then go into decline. Finally, cooperation may be forced on some organisations if there are rapid changes in technology which result in them having outmoded ways of doing things.
4. Why did some companies, such as IBM, seek to reduce their size during the 1990s? What are the problems with this strategy?
Answer
First we need to consider what is meant by size. Is this measured in terms of turnover, profits or employment? Companies like IBM are extremely large in a variety of computing markets. What they are likely to have recognised is that the growth of some of their computer markets was beginning to decline. Moreover, the level of competition in these markets has been growing not only from western PC manufacturers but from highly price competitive manufactures within South East Asia and China. It may also be possible that the cache of owning an IBM machine (as depicted as the "Rolls-Royce" of PCs) has been lost. Therefore IBM sold its PC business in the early part of this decade and concentrated on areas where its core competencies lay and where its can add the most value to the IBM business. Hence it concentrates more on computer solutions to problems and main frame business.
5. Using the case studies in this chapter, consider the ways in which organisations have strategically reduced in size.
Answer
The chapter has referred to a wide variety of organisations and their reasons for changes in size. The use of divestment to raise extra revenue for expansion elsewhere in the organisation can be seen through British Aerospace's sale of the Rover group to BMW and the sale of Falconbridge by Trellborg. Falling profitability was the reason for Siemens and Vattenfall selling their interests in a Chinese power station, whilst BAT divested itself of a number of businesses to avoid being the subject of an acquisition.
Sometimes organisations are forced to sell parts of their business by the competition authorities after they acquire another firm or firms (see Terra Firma). The chapter also reveals that changing the size of the organisation can come about through the need to restructure the company, seeking to refocus the organisation on its core competencies, a desire to improve capital flow because of a inappropriate previous company expansion, to satisfy the demand from shareholders for greater profit, and through the sale of a family business particularly where there is no member of the family willing to take on the whole of the business.
6. List the sectors where Europe has a large presence in the world market. Consider why Europe appears to have an advantage in these sectors compared with the United States and Japan.
Answer
Sectors where Europe is stronger than US/Japan together are banking and insurance. It is stronger than US and Japan separately in chemicals, food and utilities (but this is a small sample and the advantage is not as big as in finance). Reason for strength in finance area: history (UK and Switzerland), government policy, clustering (e.g. London – The City and Zurich), openness to trade
7. Similarly look at where Japan and the United States dominate, and consider why they appear to have an advantage in these sectors.
Answer
US dominates in telecommunications, pharmaceuticals, general merchandize – the latter would certainly be due to high domestic demand allowing economies of scale. This would also play a part in the other two areas but so would government policy. Japan – the main sector is motor vehicles and this would be due to government policy, technological advancement (linked to policy), innovation in products and processes and reputation.
8 Bearing in mind your answers to (1) and (2) above, consider the sectors where the NICs are likely to make the biggest impact on the world market and why.
Answer
NICS
- Government policy – see its role in S.Korea and shipbuilding – plus the car industry in Malaysia
- History – see in Hong Kong as financial sector flourishes
- Strong home demand – China obviously will have this as incomes grow.
- Technology – openness to FDI and technology brought with it is seen in many NICS (e.g. car industry) and in China.
Other End of Chapter Questions >>
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