Like its peers, Renault is betting heavily on the development of electric cars and other low- emission vehicles. But perhaps even more than its competitors, it has made the production of a new generation of clean, compact cars the cornerstone of its longer-term recovery strategy. Indeed, while it has been cutting back research and development and other spending in the face of the industry crisis, it has continued to invest in next generation green and, especially, electric cars.
This is forcing it to revise its approach and shift the emphasis on services. Electric cars will require an altogether different business model.
In short, their fixed costs are considerably higher than those of traditional vehicles while their running costs are significantly lower.
Then there is the additional problem of the batteries necessary to power these cars. They are expensive and will be leased by car companies from battery manufacturers.
Electric cars are thus expected to accelerate the trend in car sharing and other related services.
With such a high initial fixed cost it makes sense for individuals to pay an annual fee for use of an electric vehicle in a car-sharing scheme.
The development of electric cars is also expanding the range of partnerships and co- operation with companies that Mr Pelata admits Renault would never have entertained in the past. For example, the French group has been forging links with EDF, the French state- owned electricity utility, as part of its efforts to become the world’s leading manufacturer of zero-emission vehicles.
Daimler is doing the same. It is already working with Italy’s Enel state electricity group to provide electric car services in four Italian cities. Mr Pelata yesterday confirmed that Renault was in discussions with Daimler without disclosing precisely what projects. But it would not be a bad guess if it related to low emission cars or the German group’s plans to launch a four-door version of its Smart city vehicle.
Sustainable mobility has become the car industry’s latest buzz word. For the Renault executive this will provide the sector, and especially Renault, with the necessary ‘oxygen’
to emerge from the current crisis. That said, it still looks like a bold gamble.
Source: Financial Times, December 18, 2009 sustainable energy
systems
geo-engineering
© Noordhoff Uitgevers bv
fast-growing newcomers to the world market (the BRIC countries: Brazil, Russia, India and China), oil and gas are increasingly becoming the stakes in political showdowns. This will greatly increase calls for an alternative in the form of sustainable hydrogen-based energy. The increasing pollution of our environment and the changing of ecosystems will make this call even more urgent.
Hydrogen technology along with bio-fuels and the like are certain to be the new sources of sustainable energy in the future.
2.3.6 Market and industry factors
Market factors are influenced by the size and composition of the market. Measuring the size of the market is not always easy, however. It is important to have an idea of the market which will be targeted, and a useful starting point is the function of the product. The technological aspects of the product are of less importance.
… a car fulfills the function of transportation. This means that an automobile
manufacturer’s competitors are not only cars, but also products like trains, trams, planes and ships. However, as a description of the market this is too wide. Even the car market as a whole is too wide a definition – a Rolls-Royce is not in competition with a standard saloon car. After all certain segments of the market are determined by price, income of the buyer and optional extras, among other factors.
For example …
In determining the size of the market, demographic and economic factors are highly relevant.
Competition between existing companies within an industrial sector is influenced by four factors:
• The bargaining power of the supplier
• The bargaining power of buyers/clients
• The threat of substitute products
• The threat of new entrants
As demonstrated by the Internet, which provides consumers with ever increasing possibilities to determine for themselves what to get and when to get it, technical innovations can cause changes in the balance of power. New users are almost literally creating a world of their own and are using search machines, communities and on-line networks to determine what product they want to buy, where they want to buy it and sometimes even what they want to pay for it.
A new Internet generation is giving rise to an ‘empowered consumer’ via a variety of sites that are part of what has become known as Web 2.0. At least up until 2020, changes in the balance of power will largely determine marketing strategies, demand-driven communication and the demand-driving economy.
These factors together determine how much rivalry there is among existing firms in an industry (Porter, 1980/2008). The intensity of competition within an industry depends on factors, such as:
• The number and size of the competitors (in relative market share)
• The costs the client has to incur if switching suppliers
• The costs of withdrawal from an industry
Are there, for example, a few large giants or are there a large number of small organizations active in a specific market? What costs would be incurred if the organization ceased trading (redundancy payments, extra depreciation)? Does the leader-owner actually want this?
BRIC countries
hydrogen technology
demand-driven communication and economy
© Noordhoff Uitgevers bv
2.3.7 Political factors
Societal factors sometimes lead to legislative processes and new laws which usually involve a limitation of the freedom of the organization to implement plans in an unrevised form – for example, the location of a certain industry in a densely populated area. Governments also directly intervene in economic life – for example, by setting maximum and minimum prices, establishing working conditions or fixing minimum or maximum wage levels. In a number of countries, government influences economic life through forms of transfer payment/minimum wage support or by the commissioning of large infrastructure works via the public
expenditure budget.
Besides fiscal legislation, dividend and interest policy is important for trade and industry. The government may also design special tax arrangements such as stock options which make saving for example more attractive.
Jurisdictional developments also have an effect on organization. They may lead to substantial compensation claims being awarded.
There are also certain international bodies whose work influences the decisions within organizations – for example, the EU, the OECD, OPEC, the World Bank and the International Monetary Fund (IMF).
In recent years, there has been a noticeable decrease in the influence of national or local governments in a number of fields. One has only to look at the liberalization of
telecommunications, public transport and public utilities such as electricity, gas and water. This has led to rapid and extensive changes in the mutual relationships between companies. The pressure exerted by Brussels to make competition more transparent is a contributing factor whose importance should not be underestimated.
Switzerland has the best climate for entrepreneurs. The US has been relegated to second place, while Singapore occupies third place. The Netherlands do not score poorly by any means.
According to this research, government bodies operate effectively and use of technology (particularly the Internet) is high. Dutch harbours rate amongst the best in the world.
However, Dutch roads rate poorly both in terms of quality and serviceability. The Netherlands also score lower in terms of innovation, with company investment in research and
development – necessary for maintaining a knowledge economy, according to the researchers – being rated as only fair to average (1.7% GNP). Finland is investing the most in research and development – 2.4%. Belgium and Germany – countries which border on the Netherlands – score higher in terms of investment in R&D than the Netherlands.
government influences
liberalization
© Noordhoff Uitgevers bv
Country 2009 2008
Switzerland 1 2
U.S. 2 1
Singapore 3 5
Sweden 4 4
Denmark 5 3
Finland 6 6
Germany 7 7
Japan 8 9
Canada 9 10
Netherlands 10 8
Hong Kong 11 11
Taiwan 12 17
Britain 13 12
Norway 14 15
Australia 15 18
France 16 16
Austria 17 14
Belgium 18 19
South Korea 19 13
New Zealand 20 24
Source: Business Week, 2009
At the international level, the OECD (Organization for Economic Cooperation and
Development) is likely to call on the Netherlands to either increase its productivity or increase its hourly production rate. While the Netherlands is still scoring highly as far as competitive strength is concerned (as measured by the International Institute for Management
Development in Lausanne) a recent tendency towards decreased labor productivity has even been observed. The Netherlands is not benefiting sufficiently from information and communication technologies. Entrepreneurs have recently started listing safety and the suppression of criminality as being among the factors likely to influence their choice of location and how long they stay there.
2.4 Relevant trends in the environment
The main underlying trends in an organization’s environment which can lead to operational problems are outlined in Fig 2.3. These trends will make it necessary for adjustments to be made to an organization’s procedures.
Increasing competition, internationalization of markets and geo-political shifts
In a number of markets there is evidence of increasing competition.
Christopher Columbus said that ‘the world is smaller than the average human being assumes’
even before he discovered America, and this statement is still applicable today. The single European market, the GATT agreements, the increasing sophistication of communication technology and improvements in the transportation of people and products mean that companies can now operate and indeed compete on a truly international basis.
Table 2.2 Most Competitive Countries in 2009
OECD competitive strength
criminality
© Noordhoff Uitgevers bv Figure 2.3
Trends and developments in an organization’s environment
Increasing competition, internationalization
of markets and geo-political shifts
Increasing possibilities in the field of information
technology Turbulence
in demand
Employees are becoming more
mobile; more autonomous
Shorter product/
service life cycles, sustainability and in- creasing complexity
of technology
Mergers, outsourcing, offshoring and strategic alliances
The creation of a single European market has been an ongoing process that started with the Treaty of Rome in 1956 and has involved the breaking down of physical, psychological and cultural borders. While the removal of trade barriers has intensified competition and put margins under pressure, societies are getting to know each other better and are being
influenced by the other’s customs and habits. Similar patterns of consumption and methods of production have arisen, and these are enabling companies to sell their products all over the world. The internationalization of markets can be expected to accelerate and will be intensified when Japan, China and the Eastern European countries open up their markets to a greater extent and become more involved with Western economies.
Conversely, multinationals based in some of the so-called emerging markets are rapidly making their their presence felt: take Wuxi Pharma tech, for example, or Mahindra &
Mahindra. New companies in countries such as India and China may soon become powerful competitors, with Lenovo (that took over IBM’s PC business) and Tata Motors (now the owner of such companies as Jaguar and Range Rover) already setting the pace.
Shortage of essential raw materials is causing friction within global relationships
Large companies that receive government support are going to have to compete more intensively with each for access to these raw materials, perhaps by investing directly in areas that are rich in raw materials. Chinese companies are doing this already in African countries and in Australia. Unlike issues relating to the scarcity of water and energy, those relating to raw materials are only now starting to be discussed.
The availability of raw materials, including new types, will, of course, have a major effect on global geo-political relationships. The need for the ‘new’ rare earth metals is making economies such as the European economy dependent on imports from other parts of the world (see 2.3.4).
physical, psychological and cultural borders
internationalization of markets
Exhibit 2.1
rare earth metals
© Noordhoff Uitgevers bv
China produces more than 95% of the world’s supply of these crucial metals. The many applications of these raw materials in ICT, consumer electronics, ‘green’ technologies including environmentally friendly cars and sustainable energy provision has meant that the demand for these raw materials is growing exponentially.
In the longer term, Africa will also form an important source of supply and demand as well as becoming an investment destination.
Companies operating on a global basis do still encounter trade barriers and have to become efficient at coping with them. The following areas can expect to exhibit differences:
• Culture and language
• Tax and legislative procedures
• Banking systems
• Stock exchange regulations
• Exchange rate risks and foreign bill restrictions
• Social climate and regulations concerning industrial democracy and participation
• Environmental regulations
• Subsidy and government regulations which provide incentives Notwithstanding this, national rules and sentiment remain important.
Shorter life cycles of products/services, sustainability and increasing complexity of technology
New technologies are being developed at an ever-increasing pace, and as a result products are becoming obsolete more quickly. Organizations are being forced to develop their products further or to introduce new products at more regular intervals. This reduction in the product life cycle means that there is hardly time to earn back the often high production and development costs. Companies have to be alert and flexible in response to new technologies and market developments in order to stay ahead of their competitors.
A reduction in the product life cycle forces organizations to remove any remaining internal barriers between research and development as well as those between manufacturing and marketing, and to make the contributions and responsibilities of each as clear as possible to facilitate direct communication between these functions. Sometimes the formation of business units is a solution, since it can bring a functional specialist closer to the market (see also chapters 6 and 7).
Concern for the environment and for sustainable production has meant that companies are increasingly becoming aware of their environmental responsibility and this should aid in preventing pollution of the environment. Developing products that can contribute towards a more sustainable world will be of particular importance in the future. Entrepreneurial activities must be socially responsible. While sustainable growth may sound paradoxical,
‘green’ growth does actually provide many new opportunities (see also 2.4.3).
At the same time, the strong growth of so-called life-science economies means that we will spend increasingly on health and care. A bio-economy underlines the importance of linking the supply of products and services to health advances and to make this profitable.
Mergers, strategic alliances, outsourcing, offshoring and worldwide reorganizations
In order to finance the high costs of product development and worldwide operations, many organizations are tending to co-operate in alliances or even merge, outsource business activities, or offshore activities to lower (wage) cost countries. In the resultant large organizations there is then a movement towards decentralization as autonomous units encourage more appropriate decision making.
new products
reduction in the product life cycle
environmental responsibility
co-operate merge
© Noordhoff Uitgevers bv
Companies have a number of ‘shoring’ and ‘sourcing’ options open to them. It is important to have a broad-based and mixed shoring and sourcing (or outsourcing) model. It could include nearshoring (relocating activities to countries in close geographical proximity), inshoring (working with shared services), homeshoring (teleworking), backsourcing (bringing back activities that have been outsourced).
… automobile manufacturer Peugeot/Citroởn and India based steel producer Corus IJmuiden (part of Tata Steel) have worked together to develop new materials – in particular a substitute for steel – for the bodies of future cars. Suppliers and clients are working together in research and development activities without giving up their autonomy and independence.
For example …
An organization large enough to produce efficiently and to overcome any barriers to trade it encounters – for example by forming a strategic alliance or joint venture with a local entrepreneur – will occupy the most competitive position in an international market.
READY, STEADY, SPEND … BIG FIRMS ARE