Strategy Analysis for Bluebird Toys PLC Regarding the Collapse of Communism in Eastern Europe
To: Mary Collis
From: Jaskaren k Dhaliwal
Title: Bluebird Toys Plc.
Date: 19/02/02
. Terms of reference
This report will focus on the following: -
* The major implications for businesses in Western Europe following the fall of the eastern European communist governments in 1989 and 1990.
* The key implications for the future strategy of Bluebird Toys of the changes currently taking place in Europe.
* A demographic, economic and cultural profile of a potential new East European entrant to the EU with an evaluation of the suitability of the selected country as a possible production location for Bluebird.
* Provide an evaluation of the possible advantages and disadvantages to Bluebird toys of EU enlargement.
2. Introduction
2.1 Prior to 1998-99 Eastern Europe was a satellite of the former Soviet Union. It was a dependant of on the former Soviet Union. The government was non democratic. There was a lot of influence by media how the state was controlled. Soviet military power was used to over come and rebel against the communist governments as in Hungary 1956 and Czechoslovakia 1968.
All assets were owned and controlled by state. People would have to work where the state ministries said also it would determine what would be produced. Any decisions that had to be made concerning resource allocation production, distribution pricing would state committees working towards five year make all national plans. Each sector of the economy had to meet targets set by government and each enterprise was expected to meet specified production targets. This would be measured mainly by the quantity produced rather than the quality.
There were four main spreads of economies across the central and Eastern Europe:
* 1917 Bolshevik revolutions
* 1920 command economic system had evolved following philosophy of Karl Marx.
* 1948-53 the economic system imitated across Eastern Europe after World War 2.
* The eastern states of Europe became part of the soviet trading block Comecon. (Council for mutual economic assistance.
These economies successful active for decades, this being a good advantage from quick development of industry until a slow down in economic growth, in 1970 & 80s so this meant taxes would have risen slightly at this stage, and a decrease in expenditure. Also these led to and increase in production costs and there was less existence in land, raw materials, and energy.
The collapse of the soviet system was due to: -
* The inefficient functioning of the state owned enterprises
Managerial incompetence and carelessness of workers. These enterprises received a large amount of financial aid from government. Prices were set and financed at unnaturally low rates.
* Lack of investment
* There was a lot of support on old manufacturing techniques. Compared to western standards the investment made to the new developing manufacturing sectors was small. Also low money spent on transport resulted in distribution problems creating rationing of food.
* Public uprising
* The soviet regime was based on two principles superiority and equality but public awareness was growing in central and Eastern Europe. There were low quality consumer goods distributed; there were images of western lifestyles on making its way around Eastern Europe. Lack of investment made into housing resulted in poor living conditions.
In 1989/90 Public arising grew against the Soviet Union. At this stage communist government could no longer rely on the help of Moscow to help them stay in power and no other alternative but to resign, and they were replaced by democratically elected government. The Soviet Union ended on the 31/12/91.
3. Transition economies
3.1 Transition is change from one state to another. In this case it is the transfer from a command economy to a market economy. The process of transition entails a range of actions taken by the countries major institutions: -
Market de-regulation
This is when the government takes off some of the controls and restrictions in markets to encourage free competition. For example the local bus market. Bus companies could select their own routes, timetables etc. Companies could advertise and compete for customers, e.g. by reducing prices.
Price liberalisation
This is when prices can be set at a more competitive rate, it is less restrictive.
Enterprise restructuring
Companies will have to build themselves up again.
Banking and sector reforms
There will be improvements in banking.
Developing legal framework for ...
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Market de-regulation
This is when the government takes off some of the controls and restrictions in markets to encourage free competition. For example the local bus market. Bus companies could select their own routes, timetables etc. Companies could advertise and compete for customers, e.g. by reducing prices.
Price liberalisation
This is when prices can be set at a more competitive rate, it is less restrictive.
Enterprise restructuring
Companies will have to build themselves up again.
Banking and sector reforms
There will be improvements in banking.
Developing legal framework for business opportunity
This is where new legislation is introduced for businesses.
Setting up a market economy also entails: policies to ensure economic macro stability, re orientation of international trade, developing external economic relations with western markets and institutions, basically its all about building a good economy and having good international trade between the western markets.
3.2 The Copenhagen criteria, June 1993 the Copenhagen European council established the right of the countries of the central and Eastern Europe to join the European union when they have gone through three criteria.
* Political: they would have to have stable institutions, to be democratic, to comply by certain legislation. Also human rights and have respect for any minorities.
* Economic: A functioning market economy. If it weren't functioning then there would be no point in joining EU. It wouldn't be able to import or export goods etc.
* In corporation of the community acquis: to stick to the political, economical and monetary aims of the European Union.
There are many advantages to Eastern Europe in joining the EU; one of these is regional development. The European regional development fund provides money to relieve unemployment and encourage development projects in these less prosperous parts of the EU.The retraining of workers in these areas may also be supported by the European Social Fund. Additional finance, at attractive interest rates, may be offered to firms setting up in these areas. Bluebird toys plc could benefit from this a lot they could get the same amount of output of its workforce and pay substantially less for it, because there is more demand for work.
The following are the ten Eastern European countries. Those have applied for EU membership.
Hungary
Poland
Romania
Slovakia
Latvia
Estonia
Lithuania
Bulgaria
Czech Republic
Slovenia
994
994
995
995
995
995
995
995
996
996
The countries of the region differ greatly in terms of:
* Ethnic grouping
* Historical identities
* Industrial structures
* Economies
* Income levels
* Political stability
4. The implications for western business of the changes taking place in central and Eastern Europe.
4.1 The Eastern Europe countries have on the whole a population size of 100 million. When the communist government was in charge. The region was characterised by shortages of both consumer and industrial goods, but now consumer markets for items like tobacco, televisions and household goods are growing fast.
There are also fresh new markets for companies facing markets that have too much competition in the west. Also companies functioning in, markets those are at their maturity stage. Such as soft drinks, chocolate, detergents, and some oligopoly markets, see it as a huge opportunity for who can achieve a brand name first.
Foreign firms look for to be in the region to supply the possible market growth, but there can be a down side it better to be in a market with high market growth rather than low market growth because in high market growth it is usually easier to meet growth objectives and these markets are said to be more profitable. On the other hand low market growth are more static and declining. According to the Czech national Bank "interest in these industries is linked to the still moderately low labour costs, possibility of increasing domestic sales and expanding capacity for exports and imports to third countries" (lecture notes slide five.)
According to the PLC theory of trade the production location for many products moves from one country to another depending on the stage in the products life cycle. (Raymond Vernon lecture notes slide 6) So if in one country a product were in its decline stage in the product lifecycle, then its introduced in another country, as a result in that country it would be in its introduction or growth stage.
4.2 Resources opportunites, overall resources are cheap in eastern and central Europe, assets are cheap. As result of privatisation production facilities and company assets, cheap raw materials mean low costs input for manufacturing firms like Bluebird toys Plc. So they would have to pay less to make products. Not only is material cost low but labour costs ate too in comparison to Western Europe.
Car manufacturers e.g. Fiat, BMW, and Ford have all quoted low labour costs as one of a number of reasons for setting new investments in central Europe. Companies concerned with the labour concentrated production costs in areas like textiles, clothing and consumer electronics have also looked to central & locating new investments in central Europe. This is a low export base for them.
The following are major factors that determine demand for a product in a particular country is: -
* Present income levels or PDI (personal disposable income)
* GDP per head figures (Gross domestic product)
* Population figures
* Estimates for growth in each
4.3 There can be certain obstacles in the way of foreign investment: such as a war in the country this could slow down any production output. Bureaucracy this could lead to bad communication, delays in permission to expand e.g. new buildings etc.also employing people could be difficult. Widespread environmental pollution. Also inflation could be problem unemployment are economic problems which have repercussions for a large number of individuals and organisations. When unemployment is high the population as a whole will spend less because it has less money to spend. Therefore this affects industries and organisations.
All countries do not meet EU standards on urban waste, drinking water, toxic substances released into seas and rivers. Agenda 2000 report of the European commission summed up that to meet the terms fully with EU environmental legislation-the total venture costs for central Europe would be 100-200.billion Euros.
4.3. Which countries would be are most attractive; the most successful countries are said to Czech republic, Hungary and Poland and along with Estonia, Slovenia because theses are likely to be the first to be considered for full EU membership. These countries have made good progression with privatisation and making investment laws less restrictive and have attracted FDI (foreign direct investment) and the economies of the countries above have created new business environments that are positive to FDI and this can be continued in the private sector development.
5. Implications for the future strategy of Bluebird Toys of the changes in central &Eastern Europe.
5.1 "A multinational is an enterprise that engages in foreign direct investment (FDI) and owns or controls value adding activities in more than one country" J. Dunning: Multinational Enterprises & the global Economy.
Dunning identified four types of multi-national firms according to their motives: -
* Resource seekers
Firms invest abroad to gain precise resources at a lower cost than can be obtained in the home country. For e.g. labour resources firms pay out less wages compared to Western Europe. Technological, capability/management, marketing expertise and organisational skills.
* Market Seekers
This is when firms invest in a certain country to supply goods or services to markets in these or neighbouring countries in order: to use new markets, increase product life cycles, minimise business & distribution costs, have a attendance in leading markets supplied by its competitors.
* Efficiency seekers
This is used to take advantage of the benefits of economies of scale, risk expansion, competence seekers tend to be knowledgeable firms producing benchmark products, such strategies boom in regionally incorporated markets. An example of effenciency FDI is unilever is one of the worlds biggest household product producers e.g. Persil, dove, Elizabeth Arden. It produces on a worldwide scale.
* Strategic asset or capability seekers.
These are companies that look to guard or to advance their competitive position by investing overseas.
For example: to make and alliance with one company to frustrate a competitor.
July 99 Wal- mart merged with asda for 6.7bn, the size of its buying power makes it the largest customer most of its suppliers have and therefore it can bargain the low prices
5.2 Key elements on Bluebird toys strategy, Bluebird relies on its ability to develop products quickly and recover cost early. It likes to focus on organic growth this is natural growth within the company, challenging directly and thoroughly for world markets and to continue seeking low cost manufacturing overseas.
These are some possible problems that may occur for any business entering overseas markets: - different cultures and research not carried out accordingly, Competition on a national level, set up costs if situated overseas, legal regulations, political risks and events.
5.3 Evaluations of market strategies, foreign markets may come across as if their big opportunities that companies cant miss, but they have very high levels of risk. Company's main options are exporting directly to customers overseas, Indirect exporting via third party e.g. export/import agent, licensing /franchising, joint ventures, E- commerce. Going into the overseas market increases any strategic control, which the organisation has over its foreign operations. But it opens it to greater risk where the market is relatively poor. For e.g. other countries have different cultures like Asia.
6. Factors affecting International Location
6.1 According to M.E. Porter there are four conditions for the successful development of an internationally competitive business demand, Factor endowment, related and supporting industries, Firm strategy, structure and rivalry.
Below is a diagram of Porters Diamond:
Firm strategy structure and rivalry
Factor conditions Demand conditions
Relating and supporting industries
Firm strategy and rivalry - factors like the rate of industry growth and the extent of the product differentiation will determine the level of competition amongst Bluebird toys plc and its competitors.
Factors conditions-this is inputs to the production process such as workforce, technology, capital resources etc.
Demand conditions -would be how much demanded and the quality of the product.
Firms will try to reduce competition to try to an acceptable level in a number of ways for example the firm may:
Move into other markets where competition is less intense. Attempts to reduce competition in this manner are limited by the government's and the EU's legislation to ensure competition in all markets.
6.2. Table showing economic factors of eastern European countries.
GDP Agriculture, Industry, Services
Real
GDP.
Household
Income Lowest,
Highest
Labour force
Service,
Industry
Unemployment
Rate
Export Manufacturing
Population
(Age group)
Czech Republic
A=5%
I=33.8%
S=61.2%
-1.5%
L=4.6%
H=23.5%
S=43.7%
I=33.1%
7%
M=40.51%
0,272,179
70%
(15-64)
Romania
A=19%
I=41%
S=40%
-7.3%
L=3.8%
H=20.2%
NA
9%
M=0%
22,411,121 68% (15-64)
Slovenia
Hungary
A=5%
I=35%
S=60%
A=3%
I=30.3%
S=66.7%
3.6%
5%
L=4%
H=24.5%
L=4.1%
H=24%
NA
S=65%
I=26.7%
7.1%
0.8%
M=31%
M=32.7%
,970,570
70%(15-64)
0,138,844
68% (15-64)
Extracted from www.geographic.org refer to appendix.
GDP Gross Domestic product is the total value of good sold in country within a year.
By looking at the table we can see that Hungary has the highest GDP rate this means that Hungary has a healthy economy, more people are spending therefore the Hungary's population must have more PDI personal disposable income. Although Slovenia has 0.5% household income more than Hungary. By at looking at Hungary's labour force it can said that there are more people in the service sector than in industry, but as there is a high unemployment rate. Bluebird toys plc could boost the percentage of labour industry and reduce the percentage of unemployment. Also the export manufacturing percentage would rise considerably. Hungary seems to be the best eastern European country Bluebird toys plc.
Political factors could be change in political leadership within a country and they could have a different view on foreign investment. Also civil disorder from economic conditions, human rights violations.
Economical factors-this will influence the consumer behaviour. At the moment Hungary's population is one of the countries where there is money spent on goods
.
* Real disposable incomes- available to consumers to spend on goods and services. Any change in incomes will affect the types of goods and services. Any change in incomes will affect the types of goods and services they buy.
* The relative price of substitutes products, where the purchase may be viewed as better value for money.
* The size of the population
* Consumer tastes, fashions, and habits
* Government measures influencing consumer behaviour.
Social factors- is population demographics, Income distribution, and levels of education, social trends, and degree of consumer awareness.
Legal factors- there is a lot of legislation involving international business some of theses are Health and safety, consumer protection, Employment practises, Environmental legislation, Patents &trademarks.
Technological Factors- there could be problems workforce getting to grips with new machinery, production methods, speed of technological transfer degree to which country is keeping up with new technological developments.
7. An Evaluation of the advantages & disadvantages for UK business of EU enlargement
* The combination of the central and Eastern European countries with the rest of Europe will encourage democracy and strength throughout the continent.
* It is said that larger European union will have more powerful say in world affairs.
* With its appearance as an important economic and power, the European Union is progressively more called upon to act as an intermediary and stabilising force in world contact.
* Enlargement in the east would lead to an increase of 30% in the population and an adding together of 100 million potential consumers within the single market.
* UK companies will benefit a great deal from access to the largest single market and investment in the world.
* Flexible labour markets are larger and diverse.
* Also increase in trade will speed up the economic development of the transition economic development of the transition states.
* Economic development will increase the purchasing of the new member states creating demand for EU goods and services.
*
