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AS 91381 (3.3) Apply business knowledge to address a complex problem in a given global business context. PART D – CONFLICTS ARISING FROM CHANGE.
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AS 91381 (3.3)Apply business knowledge to address a complex problem in a given global business context PART D – CONFLICTS ARISING FROM CHANGE
Businesses today have to operate in rapidly changing markets and conditions. They must be constantly aware of, and be prepared to respond to, changes in a number of areas. We can use the PESTEL model to identify the many changes that can affect businesses.
Political ~ policies, initiatives, government spending, tax • Economic ~ stage of business cycle, employment, growth, inflation, exchange rates, confidence • Social ~ market and demographic trends, fashion • Technology ~ developments, breakdowns • Ethical ~ changes in social conscience, publicity • Legal ~ employment laws, consumer laws, intellectual property protection
The effects of Change Change affects businesses in a number of ways. • Quality becomes more important due to increase in consumer awareness and competition. • Product life cycles could become shorter so businesses must constantly be looking to develop new and profitable products or services. • R&D will be essential in industries where rapid change is occurring.
The role of market research is likely to increase. Research and forecasting techniques should help a firm to predict more accurately future scenarios. • Retraining will be increasingly necessary. • It may be necessary to have a more flexible workforce that can be changed quickly to meet the needs of the business.
The organisational culture must be responsive to change. • Businesses must be aware of competitors’ actions and be prepared to react to them. • Businesses will need to budget to regularly update software and hardware. • Changes in production methods. Some businesses will react by outsourcing their production to low-cost countries. Others will change the technology they use to reduce production costs.
Outsourcing Instead of a manufacturer producing a good or service using employees they directly employ, they can sub-contract the work to another (independent) firm, usually one located in a low-cost country. The manufacturer then buys the goods and sells it under their own brand. Outsourcing is common in the clothing industry. In the service sector, banks or directory services often outsource their call centres or ‘help desks’.
Benefits to the Producer of Outsourcing • The most common reason for outsourcing is to reduce costs by taking advantage of lower wage rates in the overseas country. • Reduction in fixed costs ~ the work is sub-contracted to overseas firms that have already invested in the plant and equipment necessary to perform the work. • It may be possible to sell of the production facilities that are no longer required, resulting in a positive cash flow.
Problems associated with Outsourcing • There are likely to be redundancies as permanent workers are laid off. This will involve a significant one-off redundancy payment. It could also incur worker and union backlash. The firm’s reputation is likely to be damaged if workers question the ethics of laying off local employees in order to employ people in an overseas country for less money.
Public and employee relations ~ a decision to “move jobs” from NZ to the low-wage economy is a sensitive one. Handled poorly, the damage to public and employee goodwill can be significant. • Risks to intellectual property ~ the legal protections for business information, processes and brands are not as strong in many countries as they are in NZ. A risk of offshoring is that intellectual property (know-how, trade secrets) is lost to a competitor. • Outsourcing exposes the NZ-based producer to effects of fluctuating exchange rates.
Re-location of Manufacturing(Off-shoring) There are always risks involved when entering into an agreement with an offshore manufacturer. Some of the key risks to a business include:
Losing some control over the manufacture of products. Certain aspects of the offshore manufacturer's business will be impossible to control, which can result in failure to meet business objectives. Acts or omissions by the manufacturer can reflect badly on the brand and ethics of the business.
The relationship between the business and the offshore manufacturer may deteriorate to the point where the business wants to exit the relationship. This risk can be minimised by including dispute resolution and exit provisions in the manufacturing agreement. • Unauthorised use of the business's intellectual property (IP). This is particularly relevant if the business relies heavily on product design to remain competitive. A full IP clause should be included in the manufacturing agreement.
Changes in foreign currency exchange rates. The business will need to decide how best to allow for exchange rate fluctuations that may negatively affect the business. There are several options, including hedging. A professional finance specialist should be consulted.
INDUSTRIAL INERTIA Once established, a business will often decide to stay in its original location even if other factors suggest a new location would be beneficial. The term for this is industrial inertia. Over a long period of time, a location or region that has become associated with a particular industry develops specialist skills and experience. The pool of potential recruits is likely to contain many people with relevant training and experience. Specialist suppliers are likely to be nearby.
Another reason is the cost and disruption that can arise from relocation. A decision to relocate involves potentially significant costs including: • Recruiting and training staff in the new location • Duplicated property costs – e.g. remaining periods on the original lease plus upfront payments on a new lease • Costs of physical transfer – moving production equipment, transferring stocks, etc.
A third reason is a more intangible and qualitative reason – simply the desire to “stay put where the business has established its roots”. A business owner might respond to a question about why the business is located where it is, might say, “because it is near where I live”. Asked 15 years later why the business is still there, the answer could be “because we’ve always been here”!
