Landis Lund employees objectives are fulfilled across the workforce, for those that are here just to get paid, providing they complete what is asked of them, they are OK. If you want to better yourself and the company, training is available where appropriate (workers in the machine shop do not get funding for IT courses and accounts staff don't get trained on the fork lift truck).
1.3.3 Stakeholder analysis of Overseas Sales agents
Agents play a pivotal role in the customer relations process. They are mainly used in countries where English is not the primary language. We have long standing partnerships with many agents in different countries. This has allowed the agent to become very familiar with Landis Lund machines so explaining the specifications to a potential customer is easier.
The objective of a Landis Lund overseas sales agent is to get paid for a service he provides. The service he provides is to be a link between the customer and Landis Lund. The agent is tasked with chasing the customer for outstanding items and to act as mediator in any dispute. We let the agent front any contact with the customer, this is to allow then to communicate effectively what we are trying to achieve.
Our philosophy is to use one agent per country within the EU. We have agents in France, Germany, Spain and Italy. The same agent can be used in different countries, Polack for example are our German agents as well as our Swedish agents.
As well acting in a sales capacity, some agents also work as service engineers. The agents come to Landis Lund for their service engineering training. This liaison allows the agent full cycle involvement; From the quotation and sale of the machine, through machine build and acceptance and then installation.
As agents are on commission it is in their interest for Landis Lund to be successful, it also allows a more aggressive form of sales within the agents country.
Unfortunately due to this commission (usually 3%), then this is obviously a loss in profits for Landis Lund. But for this 3% they do provide an excellent service, a service that we would find very hard to replace with our long established agents. Not only do they have tacit knowledge of our products, but the customer relation’s skills they have maybe hard to instil in a Landis Lund employee. While it has been suggested that we try and phase out agents in favour of training up our service engineers to speak another language, the risk in a loss of customer relations is too high to take.
Our recent penetration into China has reversed our agent’s philosophy. We are trying to use as many agents as we can to spread ourselves further and hopefully increase awareness of Landis Lund’s products.
Agents objectives are achieved through our continued business with them, the support they receive from us.
Chapter 2
Economic Systems
2.1 Types of Economic Systems
At each end of the economic spectrum you have pure capitalism and socialism. Pure capitalism is only an economic theory and doesn’t actually exist in real life.
2.1.1 Capitalism
Also known as Free Market, in this market money is king, both to the consumer and to the supplier. Private investment and entrepreneurs are the norm. Companies sell products at the price they want, to who they want. The same goes for the consumer, they are free to spend their money on what they want.
In capitalist societies there is little or no barriers to entry, anybody with an idea and some capital can start up a business. This is a huge benefit to consumers as the fierce competition between suppliers, forces down prices and increases quality.
In a free market there is no involvement from the government, the State does not interfere in how businesses are run and regulated.
The individual or the company does their own planning, they are free to set their own agendas, create strategies and make plans that are tailored to suit their needs.
Capitalism forces many different levels of personal wealth as companies and consumers are free to buy and sell at any price. Nearly every product has examples at either end of the price scale, from houses and cars, to clothes and electrical items.
In fact, if you’ve got the money, you can buy virtually anything you want. An excellent example of this is using the auction website eBay, where everything and anything is for sale. A quick search shows that I could purchase a $24,000 grinding machine!
Although capitalism promotes growth, competition and efficiency, there is also a downside. Companies and industries that are out to make a quick gain can end up making huge losses. In the search for profit, resources can quickly become scare, forcing the closure of factories and companies.
These closures can have a knock on effect on the local economy, businesses that were created to compliment these large industries may also have to close. Unemployment quickly gathers pace throughout the region. Outside investment ceases, businesses that were there due to high population relocate. No-one can afford to move house, and no-one wants to buy a house in these areas. Social standards can drop and crime levels increase.
The closest pure capitalist economy is considered to be America where people are able to buy and sell almost anything, resulting in wealth for some and poverty for others. This can be seen in the state of California, where the so called “Silicon Valley”, if treated as a separate economic market would be the worlds fifth largest, where as in the slums of Compton deaths by firearms are one of the highest in the world.
2.1.2 Socialism
Where as Capitalism promotes business to be profit orientated, Socialism shares the wealth. The government runs socialist economies. It is they who decide what is to be made, who is to make it and with what. (Also known as Planned Economies).
Every citizen works for the country, there is no unemployment as there is always something to be done. The exclusive way in which the government controls the economy can cause great inefficiencies. It is perceived that the government are experts in business and therefore have the ability to make fundamental economic decisions. It is because of this central planning that socialist governments only produce a limited range of goods, goods whose production are easily managed. The businesses are usually entered around agriculture, raw materials and mass production of basic, low quality products. As there is little or no imports, if the product cannot be made from materials within the country, it isn’t usually made.
While pure capitalism is only a hypothetical economy, there are a number of socialist countries. Large, highly populated countries such as China and Russia, with an abundance of labour and materials are good examples.
Although many westerners see socialism as an oppression or inefficient way to run an economy, it removes boom and bust cycles, the decomposition of social values in areas in areas of high unemployment and the corruption that can be created due to people’s obsession with money.
This isn’t to say that socialist countries are free from corruption; usually there is a strong black market in these countries for western products, such as Levi jeans. Black markets begin because the State controls the price of products, if they set the price artificially high, then the demand of getting these products at a cheaper value in created. The inefficiency of the import/export market of socialism also creates black markets for products as the government will not import goods that can be manufactured in its own country.
2.1.3 Mixed economy
An economic system isn’t either capitalist or socialist. For non-socialist economies the economic system is said to be mixed.
The mixture comes about by companies being free to run their businesses how they see fit, but the government provides the rules and regulations within which they operate. The government usually controls the businesses that are seen to be for the people; the trains, water, electricity, refuse collection. For the U.K many of these people business were privatised under the Thatcher government, the privatisation was a process in which the government palmed off decaying infrastructures that needed heavy
investment, allowing them to become more efficient through business savvy people running operations as opposed to politicians and also to generate extra funds for the government.
Workers in mixed economies also contribute to the countries welfare by paying taxes through their wages and purchases. It is in the government’s interest to create an economic system that allows businesses to flourish and keep people in jobs. The more workers, the more tax is paid through wages and the more disposable income citizens have, spending more and contributing more taxes, and the more workers there are, the less the government have to give back in the form of benefits.
The UK is an example of a mixed economy.
It is within this mixed economy that Landis Lund operate. We also benefit from having the “capitalist” funding from our US parent company, as well as making inroads into socialist economies such as China.
Chapter 3
Market Structures
3.1 Types of markets
In every market there are buyers and sellers, causing competition. It’s this competition that allows for changes in price and subsequent changes in supply and demand. Virtually every product have an alternative or a substitute, so if one supplier raises their prices, then the consumer can choose a cheaper alternative. In markets where there are many sellers and buyers, the supplier and consumer can both influence price.
Situations can arise where there is no competition and no substitutes, in this case the producer can control the price, thus removing the ability for consumers to influence price.
The types of markets are:
- Monopolies
- Duopolies
- Oligopolies
- Perfect Competition
3.1.1 Monopolies
A monopoly occurs when there is only one seller/producer of the product. That is, the unique company is the industry. Entry into such a market is restrictive due to high barriers to entry. These barriers may be political, social, economic or technological. States can create monopolies in industries they wish to control, such as water and electricity. Other entry barriers into a monopolistic market can be through the exclusive rights of the countries natural resource, such as the government of Saudi Arabia and oil fields.
From a consumers point of view monopolies are usually feared, consumers know that if they become dependant on the product, the supplier can start to increase prices and the consumer may not be able to find an alternative.
Microsoft is the most famous of suppliers that have been embroiled in monopolistic practises. Their operating system accounts for around 90% of the worlds PC’s. For home users this may not pose that much of an inconvenience as they do not need to upgrade that often. Business users however face a bigger dilemma, Microsoft introduce newer versions of operating systems (that they charge for) that are designed to increase business efficiency and productivity, but these extra features are not always needed, so it would seem feasible not to upgrade. But Microsoft then explain that support for the older operating system will cease in the next couple of years, forcing the business into either an upgrade or an alternative. It is through this approach that Microsoft has made more millionaires than any other company.
In between Monopoly and Perfect Competition there is Imperfect Competition (also referred to as Monopolistic Competition). Duopoly and Oligopoly are two types of Imperfect Competition.
3.1.2 Duopoly
Duopoly’s are monopolies split in two, where there are only two producers in the industry. An example is the global aircraft market where the two dominant firms are Airbus and Boeing.
3.1.3 Oligopolies
In an oligopoly market there are only a few companies within the industry, it is these few companies who dictate price, causing high barriers to entry.
The products of an oligopoly market are usually identical (petrol), and so companies have to compete for market share. The market share is heavily dependant on price, so when company X lowers their price, company Y will usually follow suit. This lowering of price can force smaller sellers out of the market as large firms can afford to take a temporary fall in profits. Due to businesses becoming even more customer centric, suppliers that cannot compete on price may offer additional services (such as supermarkets packing the goods and taking them to your car.
Oligopolies can also create cartels (again petrol), where the few companies that are in control of the industry set prices between themselves, prices that are not a fair reflection on the products value. The UK government try to prevent such collusion as it is against the consumer’s interest.
3.1.4 Perfect competition
At the other end of the market structure scale from monopoly is perfect competition. Perfect competition is analogised by having many sellers and buyers, and therefore many alternatives. In a perfectly competitive market there are very few barriers to entry and prices are subject to demand and supply. Producers in perfect competition are restricted by the market price and have no leverage. If company X increases his prices, consumers will simply switch to company Y.
The market continuum
Perfectly Competitive Market Oligopoly Duopoly Monopoly
Source: AVCE Business handouts / Competitive Business Environment
3.2 Market characteristics
The characteristics of any market can be made clearer when categorised with the following:
- Entry barriers
- Exit barriers
- Number and types of sellers
- Product differentiation
- Number and types of buyers
3.2.1 Entry barriers
Entry barriers are the factors that determine the number of competitors within an industry. Entry barriers are an advantage for those already in the industry while a disadvantage for those trying to get in. They are used to keep any potential competitors at arms length while maximising profit.
Entry barriers can be:
High capital investment – huge sums of money may be needed for location, equipment, materials and labour just to enter some markets. While at the low cost end of the market business start-ups are commonplace, the amount
of new businesses at the expensive end such airlines and oil tankers is very limited.
High differentiation – in order to make an impact in the market, new and innovative products most be launched. A new twist on the mundane is needed in order to gain immediate market share, Dyson with its bag less vacuum cleaner is a classic example.
Intense rivalry – although we have mentioned high capital investment, entrants into new markets can find themselves in the middle of a price war that their business plan had not budgeted for. Large companies can afford to keep prices low for extended periods in order for the smaller companies to go bust.
Patents – in some markets it is just not possible to enter and stay in the race. The company that owns the patents will need paying for their use, generating more profit for them so that they can invest more in R&D. This way they can always stay one step ahead of the competition.
Access to distribution – while you maybe able to produce the goods, how well equipped are you at distributing them? Although sole traders may have their own shops, if you want to expand, then relationships with larger suppliers and distributors is needed to raise your profile.
3.2.2 Exit barriers
Exit barriers are factors that determine how difficult it will be for a company to leave the industry. Many firms will run up debts in order to continue trading, rather than accepting any losses they are facing and leave the market.
Exit barriers can be:
High capital investment – for companies that have invested heavily it can be a problem to recuperate these costs when no longer making a profit. National industries that are losing out to cheaper imports will find it hard to sell equipment within the same country, as others will also be facing financial hardship.
Long term contracts – when the company is going well and orders are being fulfilled it is easy to enter into long term contracts to enable better planning and budgeting. But these long-term contracts still need to be fulfilled even in times of recession and financial woe. Can you really afford to leave and suffer the contractual consequences?
Government regulations – with the well being of the planet high on the political agenda, there are strict laws on how equipment can be destroyed and what materials will decompose easily. Also there is the employee legislation, just because you are not making as much profit as you would like, you are not allowed to sack everyone and try again somewhere else. Such actions can prevent you being in charge of a company again.
Entry and exit barriers determine industry competition and profitability, and can be summarised as:
Diagram on next page
Source: www.mgmtguru.com
3.2.3 Number and types of sellers
As mentioned earlier, different markets have a different number of sellers. In a monopoly there is only one, in a duopoly there is two, oligopolies have many sellers but only a few major players, whilst within a perfect competition market there are many sellers with no clear one having market dominance.
3.2.4 Product differentiation
The ability to make a product appear different from the rest in its class. The subtleties needed to gain a competitive advantage and make the consumers choose your product over your competitors. This can be achieved through marketing and reputation. Companies such as Coca-Cola and MacDonald’s spend nearly have their budget on advertising to ensure they get maximum exposure to create the illusion that their product is the best.
3.2.5 Numbers and types of buyers
Determines the consumer power within the market. Some industries have very few buyers and some are only there to satisfy one buyer and their livelihood is dependant on that main industry, while other industries can have many buyers of the product but individually they have little influence.
3.3 Landis Lund market environment and characteristics
Landis Lund’s market share can be split into cam and crankshaft environments. Although a very competitive market, the market can be seen to be a more an oligopoly market due to its few competitors (excluding North America, where sister company Landis Gardner operates):
Source: Landis Lund
The greatest competition is coming in the aggressive form of Japanese companies NTC and Toyoda. The European manufacturers have also been trying to acquire US market share but the recent strengthening of the Euro against the Dollar is restricting this.
Barriers to entry: to gain entry into the machine tool industry then a great deal of capital investment is necessary. Most of the companies have been machine tool manufacturers for decades and diversified into the cam and crankshaft market, while other competitors have been bankrolled by larger companies.
Although the investment of capital equipment is high, this can be overcome by outsourcing operations and just assembling the machines once all parts are available, but for this it is more important to invest in the intelligence and technology needed to produce these complex pieces of machinery.
Number and types of sellers: as you can see from the above table, there are
only a handful of sellers for each market, but with the acceleration of competition from emerging Chinese companies this is going to increase significantly in the next few years.
Product differentiation: Landis Lund is at the high end of the product market in terms of both complexity and price (see below). Our weaknesses come from a high cost labour force and failure to make inroads into the cheap labour sources.
Landis Lund is worried that soon the Asian market will move along the complexity scale but will remain lower on price.
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Source: Landis Lund
Number and types of buyers: the number of customers is falling but this is due to the buying out of automotive companies by the likes of Daimler Chrysler and Ford. Our Tier2 customer base is increasing as these same automotive companies look to outsourcing.
Source: Landis Grinding Systems
Chapter 4
Market Forces
4.1 What are market forces?
Market forces are the relationship between the demanders and the suppliers.
The main focus of market forces is price. The price at which the demanders are willing to pay the suppliers for a product or service.
Other market forces can include legislation, political influences, recessions and changes in customer and competitor strategies.
4.2 Impact on Landis Lund
The emphasis on price has hit Landis Lund very hard in recent times. Previously our product was distinguishable due to the premium price we charged because of our superior technology. This premium is no longer seen as acceptable to the majority of customers who are opting for low-bid suppliers. As all areas of manufacturing are persistently trying to reduce costs, it has become apparent that our market leading cycle times are no longer a major selling point. Car manufacturers are willing to sacrifice assembly time over cost. Our competitors seem to be able to produce acceptable machines at lower costs than ourselves, although their machines may not be as good technically the total package they are offering in temrs of price and product is losing Landis Lund business.
4.3 Response to market forces
The strength of the Sterling against both the Euro and Dollar does not help encourage exports of machine tools from the UK.
Increased defence spending would encourage investment both in manufacturing and machine tools. Such an increase looks unlikely. The lack of growth and return in the machine tool sector, with continuing losses being forecast, many manufacturers are now re-evaluating their business position.
Often the sale of real estate offers a greater return than continuing to manufacture, potentially persuading many to close.
The lack of investment is causing a decline in training, resulting in a skill shortage.
The UK has an exceptionally good reputation for it’s engineering and in particular machine tools, this is a good base from which to recover and promote itself into the next decade.
The response Landis Lund has made to the change in market forces has been to:
- Establish a presence in China
- Sell to Tier 2 suppliers
- Conform to EU legislation
4.3.1 Establish a presence in China
As more and more companies are outsourcing their manufacturing to China to take advantage of their low labour rates, Landis Lund is trying increase its customer base there and may have to diversify its usual cam/crank shaft bias of machine tools.
Traditionally the machine tool sector is not classed as a high payer, but with the UK in 2002 having the 8th highest hourly labour cost in Europe at $16.1, wage costs do not help its case. It is twice that of Koreas at $8.1 the most worrying is China’s at $0.5
Source: Oxford Economic Forecasting
With the major players in the car manufacturing taking advantage of the low labour costs that China provides, Landis Lund, under partnership of its parent company UNOVA, has established a presence in China.
This has been achieved by setting up a corporate office in Beijing. UNOVA has had its Far East employees to be relocated here.
In the European markets we use one agent per country. Agent relationships have been established a long time, allowing the agent to gain a thorough understanding of our machine tools and allowing them to forge a healthy relationship with our customers.
Our approach to agents in the Chinese market is completely different. To allow greater market penetration initially we are using as many agents as we can. The use of local agents is better than trying to source a translator when trying to explain complex machine tool processes and equipment. Local agents also know the local customs and practises that people from outside China may not know.
China doesn’t have as stringent build standards as Europe, but still expects leading edge technology.
We perceive that the bias towards technology, rather than cosmetic appearance, will allow us to reduce costs through using standard paint colours and mixtures, as well as only producing English versions of documentation.
We should be able to take greater advantages through economies of scale when buying components in. Customers have a bias towards using components from suppliers in their own country. Some even go further and state which suppliers we have to use in their country, even if we can show that suppliers in their country can produce alternatives.
To maintain flexibility we have not yet started to pursue avenues of manufacturing in China. Continuous investment in the Landis Lund facility over the last 50 years has enabled it to have one of the world’s most efficient and superbly equipped machine shops, unfortunately these are being operated by an expensive work force.
4.3.2 Sell to Tier 2 suppliers
Landis Lund is experiencing a trend for its customers to use Tier 2 suppliers:
Source: Adapted From Brown, S. Strategic Operations Management.
The term ‘tier’ was coined by observers of the Japanese industrial structure to describe the ‘Tier1’ suppliers to the main Automotive companies. Tier levels are built downwards from the top, with the top being the Producer / Automotive companies.
Tier 2 suppliers can generate economies of scale, thus reducing component costs. Such outsourcing also reduces the car manufacturers asset base and any further need for capital expenditure.
When producing low volume of engines, (usually for high performance vehicles), it is significantly cheaper for car manufacturers to by in components, then to create a whole assembly line. The average production for an engine line is 500,000 units, whilst low volume is considered to be around 20,000.
Car manufacturers are also striving to create common engines throughout their product range, so they too can take full advantage of economies of scale. To go even further, authorities in the automotive industry envisage a time when there is only one producer of engines.
Landis Lund is taking the same approach with Tier 2 suppliers has it is doing with Chinese customers and adopting a standard product philosophy. As Tier 2 suppliers will be producing fewer components than car manufacturers, our product can be smaller, as shafts will be loaded manually rather than using a robotic loader. Manual loading machines are not as complex either, reducing time spent by our software developers integrating the loader with our machines.
A shift in Sales techniques has also been introduced. While previously Landis Lund sat back and waited for the orders to come to them, we are now aggressively pursuing what Tier 2 suppliers are emerging. We are benefiting from our strong relationships with car manufacturers who are more than willing to supply us with information, giving them piece of mind that the shafts they will receive from a Tier 2 supplier will be ground on a Landis Lund machine.
We have also had an enquiry of a leasing option on our machines. We have never had this request before so we are investigating avenues on which our machines could be “recycled”, although we are not very optimistic.
4.3.3 Conform to EU legislation
EU directive 98/37/EC has been introduced to…
“ensure that any machinery sold within the EU will not, when operated in the correct conditions, pose a risk to health and safety”.
As Landis Lund machines a large and complex, many components are purchased items. Each of the purchased items also has to conform to the 98/37/EC directive. Landis Lund had to start buying components from within the EU, not only did Landis Lund incur the exchange rate charges for non-sterling purchases, but time and money had to be spent proving the new products out in the Research & Development department. Also many of the new components were different shapes and sizes, so machines had to be re-designed.
To add to the re-engineering costs due to new components being used, the tightening up of safety rules meant extra checks (sample form enclosed) and safety equipment had to be added. Features such as fire extinguishers, more emergency stops and lifting equipment.
Landis Lund also have to foot the expense of translations costs, every piece of equipment complicated enough to have a manual, has to be translated into the mother tongue for the country of installation. Even though should a break down occur, it will be an English literate Landis Lund service engineer fixing the problem.
Again to comply with 98/37/EC, further additional tests had to be performed. All machines had to pass electromagnetic compatibility (EMC) tests to ensure that our machines would not disrupt any other electronic equipment, special cables had to be purchased that were screened to prevent any electromagnetic leakage.
The cost of complying with the 98/37/EC directive has been high, but in the long run worth it. It wasn’t practical to design and build one set of machines for the EU and a set for non-EU countries, so all machines are built to the same EU compliant standard. This enables Landis Lund to prove the quality of our machines the world over.
Chapter 5
Competitive advantage
5.1 Competitive advantage – The Theory
“The success of companies can be simplified as an ability to react to the changes in the business environment and the skills to utilise available resources. This so-called competitive advantage is therefore in principle based on the capacity of industry to innovate and upgrade their production” (Porter 1990).
5.2 Competitive disadvantage
There have been two major influences in Landis Lund’s recent loss of market share:
- Exchange rates
- Technology
5.2.1 Exchange rates
With customers setting up plants in low cost labour countries such as China and Eastern Europe, obviously Landis Lund has to export its product.
With the continuing strength of the sterling against the dollar and euro discouraging exports, Landis Lund has to find ways of reducing costs, so the customer cannot use the exchange rate loss as a threat not to do business.
Also, as the UK is reluctant to join the Euro, many companies are unwilling to risk the potential volatility of the sterling exchange rates when assessing investment within the UK machine tool sector.
5.2.2 Technology
It was Landis Lund’s technological superiority that used to give the company its competitive advantage. But what we were pioneering in the early eighties is now available to all our competitors.
Our technology enabled us to produce cycle times that no other competitor could match. Unfortunately you can only reduce cycle times so far, enabling our competitors to catch up and to eat into our market share.
As machine tools are using PC based architecture to control their machines, this is also readily and cheaply available to our competitors.
5.3 Product differentiation
Whilst we are losing more and more orders due to low bid, the management within Landis Lund still believes that investment in new technologies is what will win back our market share and differentiate our product. This strategy will enable Landis Lund to succeed due to innovation and quality, rather than price.
Source: Adapted from M.E. Porter, Competitive Strategy
5.4 Steps to gain competitive advantage
If we are to differentiate through innovation, but still lose orders due to low bid, we have to ensure that we exceed our customers technological expectations.
5.4.1 Technological advantage
As the Landis brand is synonymous with quality and leading edge technology, many suppliers are eager to become involved, even more so since we acquired Cranfield, who has strong links with the Cranfield University that they used to be affiliated to, (there premises is still on the campus).
Our affiliation with Cranfield allows us to be a first mover, to exploit technology at premium pricing thus increasing the barriers to entry.
We have always enjoyed a healthy relationship with our suppliers, some who we regard as trading partners. These are suppliers who are also at the forefront of technology and want to test their products on our machines.
Our main trading suppliers are:
- Siemens – Controls
- Winter - Grinding Wheel
- Marposs - Gauging
- Indramat - Motors
Through our partnerships we have been making in-roads into supplying a standard machine but with different tooling. This allows a Landis Lund
machine to replace another process machine during the process of shaft manufacture.
On average there are 20 stages in the shaft manufacturing process, through the new tooling options that are now available, we can eliminate a milling machine through our rough grinding machine, and eliminate the need for polishing a shaft through our ability to produce a higher surface finish.
5.4.2 Proven quality advantage
To prove our on-going commitment to producing quality products, not only is Landis Lund accredited to ISO9001:2000, but we are a also Ford preferred supplier with Q1 status (Q1 is Fords highest supplier rating), and we have also been accepted for the QS9000 Tooling and Equipment standard that Daimler Chrysler, Volkswagen and Fiat are all pushing.
5.4.3 Cost reductions
Even though we are still pushing our product to be technologically superior, it is imperative that costs are reduced so we do not price ourselves completely out of the market.
In the last two years we have had to reduce headcount by eighty; fifty employees two years ago, and thirty employees in April this year. The main reason for the downsizing was down to 2 main factors.
When we acquired Cranfield, we were about to start mass producing very high precision grinding machines for the silicon wafer edge industry in the Far East, unfortunately the Far East suffered a major economic crash, and resulted in the withdrawal of many orders and subsequent investment from these companies.
The manufacturing industry also hit a recession a couple of years ago, and even though sign of improvement are visible, investment is still very slow.
We have started to outsource major items in low labour countries. The biggest cost savings is from using a Polish steelworks to produce the bed castings.
Internal investment on equipment such as the latest CAD and CAM software allows higher productivity and efficiency from our engineers.
There is also a huge adoption of automation across the business system. As every manager has been tasked with ways to make cost reductions, the duplication of data entry is being eliminated. The reliance seems to be the manager asking his subordinates to suggest improvements, but those whose jobs are to be automated are in fear of their job becoming redundant.
Chapter 6
Roles of the State
6.1 Government Policy 1
It is vital to understand that through taxes the government receives funding. So it is in the government’s interest to have profitable UK companies that employ as many people as possible.
This ethos of successful economies can be achieved through:
- Sustainable growth
- Low inflation
- Falling unemployment or full employment
- Balance of payment equilibrium
- Controlled government borrowing
6.1.1 Sustainable growth
The government has to create an environment that will allow businesses to grow. Companies don’t want to be shackled by legislation and regulation. It is up to the government to ensure that they don’t introduce laws that will stifle innovation, growth and profitability. They need to ensure expansion is easy, the more profitable a company is, the more funding the government receives.
6.1.2 Low inflation
Inflation controls the amount products are worth. High inflation is when the supply for money is increasing faster than the countries productive output, low inflation is when the supply for money is lower that the countries productive output.
Therefore low inflation encourages consumer spending, resulting in the demand for more goods, which in turn increases productivity. Resulting in more jobs and more funding to the government.
6.1.3 Falling unemployment or full employment
As mentioned earlier, the government receives funding through workers via tax and national insurance. The more jobs it can create, the more funding it will receive. The fewer people that are unemployed means the government doesn’t have to pay out as much in benefits.
6.1.4 Balance of payment equilibrium
This is the relationship between imports and exports and is broken down into current capital and accounts.
Currents accounts apply to the imports and export of goods and services, transfers of capital by tourists, and foreign governments using the pound as a presence within the UK. A current account greater than zero means that the UK is exporting more than it imports, and vice versa for a current account less than zero.
Capital accounts apply to capital transactions, these are sales of property, buildings, stocks and bonds.
The deficit in either account is balanced by the surplus in the other, the net of the two accounts is called the balance or payment.
6.1.5 Controlled government borrowing
The more the government borrows, the more it has to pay back, with interest. If the government runs up huge debts it will have to increase taxes in order to pay off these debts. The increase in taxes would result in less disposable income, meaning less consumer spending, resulting in less demand for products, lower productivity and higher job losses.
If the government can manage to balance its loan payments through consumer spending and successful businesses, then we all benefit.
6.2 Government policy 2
Another way of looking at how the government can effect businesses is through:
Demand side:
- Fiscal policy
- Monetary policy
Supply side:
- Industrial policy
- Social welfare
6.2.1 Fiscal policy
Fiscal policy is the use of government spending and taxation policies to influence the economy. When the economy is in a recession the government needs to encourage spending, when the public is overspending and incurring large personal debts then it needs to curb spending.
Increased spending can be created through lowering taxes so giving the public more disposable income, increasing benefits to allow more disposable income and promoting public well-being with investments in public services such as health and education.
6.2.2 Monetary policy
The quickest and easiest ways to control spending is via interest rates. As the majority of homeowners are paying mortgages, the higher the interest rate, the higher the monthly mortgage payments, so lowering the amount of disposable income to the homeowner, and vice versa for lowering interest rates. Interest rates are now out of government control and are set by the Bank Of England. Also if interest rates are high then people will see a better return on investment on the interest on their savings, another reason not to spend money.
6.2.3 Industrial Policy
The government has to create an environment that is kind to business, to encourage enterprise. Not only will this benefit UK citizens, but will encourage investment from overseas, creating more jobs.
The government has introduced a plethora of initiatives to encourage business growth. Funding is available from the Dti for business start-ups, regional regeneration programmes try and promote business growth for areas with high unemployment and companies are allowed tax breaks on their R&D budget.
Legislation is there to protect both the consumer and the supplier. Consumers have rights when returning faulty goods, giving them confidence to buy the goods, knowing they can return them should a problem arise. There are also industry watchdogs (OfWat for water, OfTel for telephones), these are agencies set up to monitor that the industry is providing value for money and not charging customers too high a price, the watchdogs also monitor price fixing between competitors.
On the supplier side there is a competition policy that doesn’t allow companies to own more than 25% of market share (seen recently with the Morrison take over of Safeway, when 52 shops had to be sold off so Morrison’s would not become too large). This competition policy is there to encourage competition, giving consumers better value, as businesses have to improve quality and reduce prices.
6.2.4 Social Policy
The industrial policy goes hand in hand with the social policy, to improve social behaviour an affluent society needs to be maintained, a society where people work to earn a living and can spend their money as they see fit. An industry such as the mining industry has been hit very hard with the closure of many pits, resulting in high unemployment and creating social problems as money and jobs become scarce. The government can help create jobs by giving tax reductions to companies who setup businesses in these areas.
6.3 Types of governments and their economic influence.
In the UK, the political spectrum usually is described along left-right lines. This traditional political spectrum is defined along an axis with Conservatism, theocracy, or Fascism ("the right") on one end, and Socialism or Communism ("the left") on the other.
There are various different opinions about what is actually being measured along this axis:
- Whether the state should prioritize equality (left) or hierarchy (right).
- Whether the government's involvement with the economy should be interventionist (left) or laissez-faire (right).
- Whether their opinion on human nature is broadly optimistic (left) or pessimistic (right).
- Support for the economic interests of the poor (left) or the rich (right).
- Fair outcomes (left) versus fair processes (right).
- Whether one embraces change (left) or prefers rigorous justification for change (right). This was proposed by Eric Hoffer.
- Whether human nature and society is malleable (left) or fixed (right). This was proposed by Thomas Sowell.
6.4 How does the State influence Landis Lund
The feeling within Landis Lund is that the government is neglecting us. It appears that the government is pushing the “soft” industries such as services and IT, rather than the “hard” industries of manufacturing. As areas such as Poland, China and Russia can provide cheaper labour, the government know that UK companies will not be able to compete and don’t see the point of flogging a dead horse!
This sway towards a “service” philosophy may be what the manufacturing industry is to become. The technical expertise and knowledge that the UK has in abundance can be married to partners in cheap labour countries. Instead of being involved in the full cycle of design, manufacture and sales and service, companies such as Landis Lund will just provide the design and sales and service.
Also the strength of the pound against the euro and dollar is not helping exports as buyers are unwilling to enter into long term contracts with the possibility of exchange rate fluctuations.
Landis Lund is a member of MTA (Manufacturing Technologies Association), the aim of this organisation is promote the UK machine tool industry worldwide and provide a kind of yellow pages of machine tools for overseas investors. The MTA is also involved with lobbying MP’s to ensure the survival of UK machine tool manufacturers.
Even though the UK government seems to be neglecting manufacturing due to it not being a popular choice due to high labour costs, it has introduced incentives such as tax breaks on R&D to help maintain the UK as major players in manufacturing innovation.
The UK government has created an excellent environment in which businesses can flourish; interest rates are low, inflation is low, consumers are spending with confidence. People are more aware of the consequences of starting up and running a business, plus with the Enron scandal controls of larger companies is getting tighter, so the risk of large companies suddenly going bust (and the subsequent job losses) will drop.
Bibliography
AVCE Business handouts / Competitive Business Environment
www.mgmtguru.com
Landis Lund
Landis Grinding Systems
Oxford Economic Forecasting
Brown, S. Strategic Operations Management
M.E. Porter, Competitive Strategy
www.ebay.com
Manufacturing Technologies Association
www.dti.gov.uk
http://europa.eu.int/index_en.htm
