RDB, Case Study Analysis

ROYAL DANISH BEARINGSIB CASE STUDY MAY 2013

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KEY BUSINESS CONCEPTS:

Multinational Company

Secondary Sector

Market Size

Growth

Paragraph 1* What is a MNC? A company which has production and /or marketing operations in two or more countries. * Why do firms want to go multinational? - Increase market base, expand brand name and image- Move closer to suppliers and/or customers, to decrease

transportation costs- To hurdle government restrictions such as tariffs, taxes, import

regulations- To benefit from economies of scale, to spread risks

* Problems encountered by MNC’s:

- Legal, Social-Cultural, Infrastructure, Competition

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* Effects of MNC’s on host countries:

- Creation employment

- Offer a wider range of products (goods and services)

- Payment of taxes and transfer of skills and technology

- Exploit natural resources, damage to the environment

- Kill small local businesses

- Expose society to a lifestyle (brands, products) it cannot afford

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* Define “secondary sector”.

The secondary sector of the economy is also known as the manufacturing sector which converts raw materials into finished goods.

* What is meant by “market size”?

Market size refers to the total number of existing and potential customers of a given market.

Factors which determine market size: demographic characteristics, economic conditions - purchasing power, culture, customs and traditions, substitute goods

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* Factors which contributed to the expansion of the market size of the ball-bearing industry in the 20th century:

- Continued growth of the output of mechanical devices such as vehicles, airplanes, wheel suspension, space shuttles, and more.

RELATE TO INTERNAL AND EXTERNAL ECONOMIES OF SCALE

Paragraph 2KEY BUSINESS CONCEPTS:

Business-2-Business market

Internal / Organic Growth

Economies of Scale – Internal and External

Location Decision

Paragraph 2B2B market refers to the firm catering to the needs of other businesses, it operates in the “industrial market”.

Advantages for RDB: focuses on a niche specialized market, produces high quality products, can be familiarized with the specific needs of their customers, be highly profitable

Disadvantages for RDB: smaller market base, attracts competition,

Define Organic/Internal Growth: Growth from within in which the firm uses its own resources to increase its size.

Advantages of Internal Growth for RDB: maintain ownership structure

Disadvantages for RDB: saved cash is used and is not available for other purposes, it may take longer than external growth

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Economies of Scale is the advantage of growth in which the average cost of production per unit decreases as the firm increases its scale of operations.

Types of Economies of Scale enjoyed by RDB:

Internal: Purchasing, Technical, Labor, Managerial, Financial, Marketing

External: Improvements in the Industry: increase in the labor pool, transportation and communication networks

Paragraph 2Factors which influenced the location decision of RDB:

Proximity to market

Availability and quality of labor

Personal preference of the shareholders (Denmark and neighboring countries)

Effects of the firm’s decisions on its Stakeholders:

Society – creation of thousands of jobs, support for company towns

Shareholders – national and regional pride

Employees – generations of families working for the firm

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Product Positioning Map

Competition Analysis

Michael Porter’s Generic Strategies

Paragraph 3PRICE

QUALITY

RDB

UAB

FIB

Paragraph 3Michael Porter’s Generic Strategies to build Competitive Advantage:

Cost Leadership: aim to be the low-price leader, FIB

Differentiation: focus on high quality, RDB

Focus: Cost or Quality

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Competition – Competitive Environment

Strengths of RDB: well-established reputation for high quality and high market share, strong brand image

Threats: entry of Japanese competition due to low labor costs

Market Share = the sales of the firm as a percentage of the total sales of the market in which it participates.

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Market Share = (Sales of the firm ÷ Total Sales of the Market) x 100

Market Leader is the firm with the highest market share

Benefits of being the Market Leader:

• Can set Price

• Brand loyalty

• Demand is price inelastic

• Prestige and image

Japan in the 1970’s- Economy was developing

- Increasing wages

- Moved to JIT production

- More flexible, able to respond quickly to customer needs

- USP and competitive advantage

- Met ISO standards

- Exported to different trading blocs

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Just-in-Time Production

Unique Selling Point

Competitive Advantage

International Quality Standards

Regional Trading Blocs

Paragraph 5Unique Selling Point – the characteristic of a brand or firm which makes it different from its competitors.

Competitive Advantage – the advantage that a firm has to generate higher sales and margins over its competitors

“what are firm possesses that enables it to beat its competition”

RDB’s USP – quality, well-established reputation

Japanese brands’ USP – flexibility and quick response time

Paragraph 5Define JIT Production. A type of stock control management in which stocks arrive / are manufactured only as they are needed.

Advantages of JIT: flexibility, saves on storage expenses, does not tie up liquidity (cash), stocks are new, firm can respond to changes in technology,

Disadvantages: high risk of stock-out and being unable to meet unexpected surges in demand resulting in unsatisfied customers, unable to fully benefit from economies of scale, requires close coordination and communication of employees

Explain how JIT production contributes to a firm’s USP and competitive advantage.

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International Quality Standards – ISO

- Strength of a firm, enhances brand image and prestige

- Quality assurance techniques

Regional Trading Blocs – a group of countries who devise and implement common trading policies and regulations (tariffs and non-tariff regulations)

Paragraph 5Benchmarking (HL only)

-The process of identifying the best practice in an industry in relation to products, processes and operations. It is the standards laid down by the best businesses in the industry which others want to emulate.

-Benefits: serves as a guide instead of simple guesswork; looks at customer’s perceptions making it more effective to meet needs and wants; can help lower production costs and improve competitiveness.

-Limitations: collection of information can be time consuming and costly; can be seen as “copying” and being “second best”; implementation and results of findings need time and finances.

Paragraph 5Kaizen (HL only)

-The Japanese term for continuous improvement and which is an integral part of total quality culture and assurance. Employees are organized into small groups and their role is to identify changes and improvements to be made, they identify problems and propose solutions.

Benefits: Focus is on creating high quality, eliminates waste, motivates employees

Limitations: Kaizen groups do not have decision-making power, they can only propose solutions and make suggestions.

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Define Total Quality Management – a philosophy which embeds quality in every step of the production process.

Advantages for RDB: assures high quality performance and efficiency, reduces wastage, motivates employees, enhances brand image and loyalty

Disadvantages for RDB: requires highly trained employees which is expensive, process is time-consuming and can demotivate/frustrate employees in the beginning, bureaucratic and filled with paper-work and documentation


Leadership and Motivation

Tall Organizational Structure

Empowerment

Total Quality Management

Benchmarking (HL only)

Kaizen (HL only)

Paragraph 6Characteristics of a tall structure: long chain of command, many levels in the hierarchy, narrow span of control

Advantages: smaller teams are easier to control and employees are more motivated because of the close relationship with the manager, communication within the team is more effective, higher degree of delegation of authority and decision-making, tends towards “decentralization”

Disadvantages: more expensive as there are more management positions, far psychological distance between the top and bottom may result in demotivation and communication between levels may take time and may be distorted.

Relate to MOTIVATION Theory – Maslow, Herzberg, Mayo (HL)


Profitability – the ability to generate profits, Sales>Costs

Brand Loyalty – the repetitive purchase and preference of customers of a brand over time therefore reducing the risk of transferring to a competing brand.

Gross Profit Margin - the percentage of profit generated after discounting direct costs from total sales.

Net Profit Margin – the percentage of profit generated after discounting direct costs and overhead expenses from total sales thereby measuring the profitability of the entire sales effort of the firm.

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Ways to increase Gross Profit:

- Implement marketing techniques to increase Sales

- Change pricing policy taking into consideration elasticity of demand.

- Reduce direct costs

Ways to increase Net Profit:

- Reduce overhead expenses

Paragraph 7Weakness of RDB

- High pollution levels, unethical business practice

- Valdemar ignored the problem

- Declining GPM and NPM

Threats for RDB

- Pressure groups are demanding action from RDB


Private Limited Company

Paternalistic and Autocratic Leadership styles

Collective Bargaining Agreements

Motivation Theory

Paragraph 8What is a private limited company? An incorporated business organization whose shares are owned by friends, family and known associates who enjoy limited liability.

Advantages of a Private Limited Company: the firm has its own legal identity separate from its shareholders, enjoy continuity, shareholders have limited liability, firm can raise capital by issuing shares to known associates, friends and family

Disadvantages of a Private Limited Company: process of incorporation is costly and time-consuming, financial documents must be published, shares cannot be sold in the stock market thereby limiting the amount of capital it can raise.

Paragraph 8Paternalistic Leadership Style – leadership style in which the leader looks after the welfare of his subordinates similar to a father-child relationship

Advantages: close relationship between manager-subordinate, highly-motivating, results in job security, creates a “family culture”, employees are loyal

Disadvantages: may lose focus and control, creates dependence instead of autonomy at work,

RELATE TO MOTIVATION THEORY

Paragraph 8Characteristics of an autocratic leader: makes all the decisions, simply gives orders and expects full obedience, ignores opinions and ideas of subordinates, does not delegate authority and responsibility, assumes all of the responsibilities

Autocratic Leadership is best used when/during: a crisis/emergency situation, when decisions have to be made quickly, when the workforce is low-skilled or demotivated, in a tall organization structure in which control has to be maintained.

Major setback created by Autocratic Leadership: employees are demotivated

Valdemar applied autocratic leadership when the workers collective bargaining agreements were being negotiated. WHY?

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Risk Profile – Valdemar was risk-averse.

Decision-Making Process – Valdemar consulted with experts, “Delphi Technique” (HL)

Contingency Plans (HL) -

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Job Production – method which produces one unique output made to the specifications of the customer.

Adv: high quality, can charge a premium price, specialized, unique products, high customer satisfaction, wide product range and assortment

Disadv: does not enjoy economies of scale, requires expensive specialized labor, long working capital cycle, specialized machines and tools are kept idle,

Batch Production – method which produces several varieties of the same (or similar) product in “batches”; a batch must first be finished before starting another “batch”.

Advantages: several varieties are produced, can enjoy economies of scale, can produce large quantities of similar products

Disadvantages: results in idle time in between “batches” when machines are being re-configured, requires storage space for raw materials and finished goods,

Flow Production – a type of mass production in which a large quantity of identical outputs is produced using a continuous process, usually 24 hours.

Advantages: large quantity output, maximizes economies of scale, uses specialized but unskilled cheap labor, lower costs of production

Disadvantages: large set-up costs, inflexible to changes in technology, requires storage for raw materials and finished goods, ties up liquidity

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SWOT Factors – Anna Holstein

Ethical Business Practices – “Green” Manufacturing

Advantages: enhance brand image, motivate employees, create a USP for the firm, avoids problems with government and pressure groups

Disadvantages: costly to implement, high expenses in the short-run, may distract firm from its objectives, needs training and development

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Scientific Decision-Making – decision making process which are based on objective quantifiable facts and evidences rather than opinions and ideas. Adv: reduces risk of failure, easier to justify. Disadvantages: takes time to collect evidence, degree of inflexibility

External Environment and Trends – Opportunities and Threats for RDB

Relocation – moving to a different location closer to RDB’s customers, involves high costs, affects “location inertia”, results in the lose of customers, redundancy,

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Working Capital: the capital available for the daily running of the firm.

Working Capital = Current Assets – Current Liabilities

WC Cycle – generation and use of Cash (Cash-Production Costs-Sales)

“Shorter cycle” – CASH is generated quickly without losing the value of Stocks.

** Moving closer to customers (Brazil, India, China) will reduce response time and improve logistics therefore improving the working capital cycle. Why?

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KEY BUSINESS CONCEPTS

Workforce Planning

Customer Profile

Corporate Social Responsibility

Carbon Footprint

Innovation and Research & Development

Paragraph 13Workforce Planning – the management process of predicting and identifying the quantity and quality of employees needed to achieve the firm’s objectives.

Recruitment – Selection – Training and Development – Motivation – Appraisal – Termination of Employment/Redundancy

Explain the importance for RDB of having a workforce with a better cultural understanding of its customers.

Paragraph 13Innovation refers to the development of new products and/or new uses to a an existing product.

Carbon Footprint:

Research and Development: the first stage in the product life cycle, involves high costs and spending, a good R&D strategy is a strength of a firm

To what extent is Innovation important for RDB?


Vision – the ideal position the firm wants to achieve in the far future.

** Vision – Mission – Aim – Strategic Objectives – Operational Objectives

Downsizing – reduction in the size of the firm by eliminating job positions.

Offshoring – moving operations to a foreign country “off shore” to move closer to the market, reduce production costs, hurdle import regulations

Redundancy – terminating the employment contract of an employee due to the elimination of the job position itself.

Paragraph 14Recruitment – the process of attracting the most suitable candidates to an available job position.

Internal – senior managers will be offered key positions in new factories

Advantages: familiarity with the RDB and its culture, quicker to fill positions, motivates managers

Disadvantages: maintains “dead wood” ideas, can create conflict and intrigue among managers

External – RDB will relocate and recruit employees in the host country.

Advantages: knowledge of and familiarity with the culture and laws of the host country, create goodwill with the local community, lower labor costs

Disadvantages: need to be trained and will take time to adapt to the firm’s culture,


Marketing – the process of identifying, satisfying and anticipating the customer’s needs and wants

Objectives – S-M-A-R-T goals which a firm aims to achieve

Advertising and Promotion: a function of Marketing to inform, persuade and remind customers.

Brand Awareness – the knowledge of the brand by its market base.

Primary and Secondary Market Research

Direct Selling – “Promotion” and “Place”, a distribution channel and BTL promotion technique. Frequently used in B2B Marketing.

Paragraph 15Market Research – the systematic collection of the market’s ideas, opinion

and behaviour.

Primary Market Research – research data which did not previously exist and which are collected from first-hand sources. Examples: interviews, survey, observation, experiments

Advantages: current/ new data, relevant to the context of the research, kept confidential

Disadvantages: costly and time-consuming, highly depends on the skill of the researcher, sample size may be too small and will lead to a flawed conclusion,

Secondary Research Data – research data which exists and had been collected for another purpose. Examples: past company documents, government statistics, industry information, competition’s documents

Advantages: cheaper and faster to collect, huge range of sources available, provides insights to a whole industry.

Disadvantages: out-of-date, data may be incomplete and/or irrelevant as it was collected for another purpose, the format have to be adjusted, it is not confidential


Strategy – the plan to achieve the firm’s objectives, medium-to-short term activities

Sources and Uses of Finance

Use is for Capital Expenditure, long term

Sources must match the Use.

Public Limited Company

Paragraph 16Internal Source of Finance to raise 50%: sale of assets

Advantages: does not change the ownership structure of the firm

Disadvantages: limited amounts, make take time to sell the asset

External Source of Finance: issue shares, company to “go public”

Public Limited Company – a limited liability company which trades its shares in the stock market.

Advantages: large amount can be raised quickly

Disadvantages: dilutes the ownership of the Holstein family, legal paperwork is costly and time-consuming, subject to strict controls of the government, competition can buy ownership into the company.


Public-Private Partnerships (HL only)

Motivation – “social contract” with the workforce

Scale of Operation – size of the operation

Stakeholders, Internal and External

Relocation – moving its operations to a new location

Conflict and Resolution (HL only)

Paragraphs 18 and 19KEY BUSINESS CONCEPTS:

Stakeholders – any and all persons and groups who are affected directly or indirectly by a firm’s decision. Internal and External.

Cell Production (HL only)

Strategic and Tactical/Operational Objectives

Motivation – Workforce Planning

Strategic Alliance

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Commission – a type of financial motivation in which the employee earns a percentage of total sales generated.

Advantages: motivates the employee to sell more resulting in the increase in Sales and Profits of the firm

Disadvantages: employee may lose focus and sacrifice quality of service as they aim to simply close the sale to earn commision, may result in competition and conflict among employees which may lead to demotivation, does not promote teamwork as employees become “individualistic” in attitude and behavior.

Paragraphs 18 and 19ORGANIZATIONAL OBJECTIVES

Objectives must be SMART

Specific – Measureable – Agree Upon – Realistic – Time Bound

Strategic Objectives are medium to long term goals set by senior managers and board of directors for the whole organization often involving the use of many resources and are difficult to change or revise once they are established. The organization’s over-all strategic objectives contribute to the realization of the Mission-Vision of the organization.

Tactical/Operational Objectives are specific short term goals which are set by senior managers for each department thereby involving fewer resources and are often easier to change or revise. The tactical objectives of each department contribute to achieving the strategic objectives of the whole organization.


Strategic Alliance – a form of external growth in which two or more firms cooperate and share resources to achieve mutual benefits while maintaining its operations independent. (different from a JV as in a SA, the firms do not set up a new company together)

Advantages: gain synergy, share of expertise and resources, improves the chances of success, improves customer satisfaction and brand loyalty, expand brand awareness, benefit from economies of scale

Disadvantages: creates dependency, sharing of information reduces confidentiality, culture clash,

Paragraphs 20 and 21KEY BUSINESS CONCEPTS:

Source of Finance – External

“Green” – production processes which protects the environment.

CSR

Ethics – the obligation to behave in a manner which is moral and beneficial for your stakeholders.

First-Mover Advantage is the edge a firm earns by entering a particular market or industry ahead of its competitors.


Globalization is the growing integration and interdependence of the world’s societies, economies and political systems

Opportunities presented by Globalization:

- Increased customer base, enhanced brand recognition

- Improved and cheaper transportation and communication networks

- Rise of global brands, rise of a “common culture”

- Increased occurrences of external growth (Mergers & Acquisitions, Joint Ventures, Franchises, Strategic Alliances)


Challenges presented by Globalization

- Fiercer competition, faster innovation of products

- Higher demands from the consumer

- Culture clashes and Legal complications

RDB, Case Study Analysis

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