Term 2 Project: What Price Coffee?

1)   Why might coffee businesses be described as multinational companies?

A multinational company (MNC) is a business organization that operates in two or more countries. The rise of MNC’s and the growing importance of international trade have intensified globalization. Coffee businesses may be described as multinational companies because they operate in more than one country in the sense that they are farmed in one country and then exported to many others. For example, the production of coffee beans usually takes place in developing countries such as Uganda, Guatemala, Vietnam, and Columbia and then it is exported to more developed countries at higher prices and then sold at even higher prices to the public. Since the coffee industry is an oligopoly with only 5 firms dominating it, they are price setters for the rest of the world; they’re decisions affect the whole world, especially the developing countries where the coffee bean production takes place.

 

2)   Explain reasons why multinational companies in the coffee business operate on a global basis.

Multinational companies in the coffee business operate on a global basis to get the highest or maximum profit they can obtain by producing and processing in developing countries where land and labor is cheaper and then exporting them to different parts of the world and selling them at a higher price. MNC’s in the coffee business operate on a global scale also to widen their customer base as international brand recognition can increase their profits by a considerable amount. By catering for a larger customer base, they are also likely to benefit from economies of scale. By expanding overseas, there are external economies of scale to be exploited. MNCs may want to locate overseas so that they can benefit from the host country’s infrastructure. It may also have better quantity and quality of land in terms of the amount of space and/or the cost of land. The business may also benefit from cheaper production costs, like inexpensive labor. “The production of coffee beans take place mainly in developing countries” this is mainly due to the fact that the costs are cheaper than other places. There may also be financial incentives from the host country’s government, which helps to reduce costs of production while still allowing the business to expand. Also, by producing in a particular country, a firm can usually avoid protectionist policies like tariffs, quotas, or unfair trade practices that a country may impose. The companies produce in countries that have trade liberalization so they have relatively low protectionist policies. This will be an advantage to the coffee businesses as the reduction of such barriers will give them an opportunity to import coffee beans. Multinational companies are also able to spread risks; if one region falls into a recession, it wouldn’t affect them as much as they would have spread their income from many different places. A good example of how a multinational company became very successful because of the reasons mentioned previously is Nestle as it “has a 57 per cent global share of the solube (instant) coffee business.”

 

3)   Examine the factors which have affected the globalization of this market.

Globalization is the growing interdependence and integration of the world’s economies. Many factors affected the globalization of the coffee market. One is the liberalization of international trade, which is the removal of global trade barriers. For example, this came to Vietnam in the 1990’s and it had allowed them to easily export their coffee production to other businesses and has encouraged more trade in imports and exports. Another factor that affected the globalization of the coffee industry is technological progress. It has reduced the cost of information interchange, communication, and transportation. This could be because of the deregulation of business activity. For example, they now have more efficient and less costly means of transportation of their goods such as airplanes, buses, trucks, trains with quicker routes. This allows the business to send out and distribute their goods more efficiently and in a cheaper method. This would consequently cause them to have a larger customer vase since they would be able to serve more people, places, and regions and therefore receive higher profits. For example, Nestle advertised and promoted their products as the “commercial equivalent of Luther’s spiritual meditation”, they were able to do that because of the technological progress that went on and that caused people to become more aware of it. Also, because of the growth in cultural awareness and recognition, consumers around the world have similar tastes so that is beneficial for the companies as they wouldn’t have to produce many different products for each region.

 

4)   Analyze the effects of globalization on multinational coffee businesses.

Globalization has many effects on multinational coffee businesses. One of the major ones is competition; it considerably increases the level of competition among rivals. For example, in this specific case study, there are five competitors: Kraft, Nestle, Proctor & Gamble, Sara Lee, and Tchibo. They are the only businesses that are distributing their coffee products to places all around the world so that makes them very competitive. They are the ones dominating the industry as it is an oligopoly. Competition between companies requires a firm to find unique strategies in promoting, introducing their coffee, and having reasonable competitive prices.

Meeting the expectations and needs of their customers is another effect of globalization on multinational coffee businesses as it increasingly becomes more demanding and they have to meet them in order to have a competitive advantage.

Another effect that globalization has on multinational coffee businesses is that they are able to build a global presence and are likely to enjoy benefits from economies of scale. They also have a greater choice of location for their production facilities. In this case study, it says that, “the production of coffee beans takes place mainly in developing countries such as Uganda, Guatemala, Vietnam, and Columbia” because of the relatively low cost of labor and rent.

Mergers, acquisitions, and joint ventures allow businesses to grow at a faster pace than if they were to grow organically. With globalization, they have more choice in their expansion plans. Nestle is one of the biggest coffee selling companies and this could possibly be due to the mergers it has undertaken.

Multinational coffee businesses can also benefit from the increased customer base that globalization allows. Because of globalization, coffee is demanded almost everywhere in the world and in every café or restaurant. Because of this, coffee can be considered an essential product where people will demand it no matter where. Since coffee is segmented globally, it increases the chances of a greater customer base even more.

 

5)   Evaluate the impact of the global coffee business on coffee farmers in developing countries.

Global coffee businesses have a huge impact on coffee farmers in developing countries. However, this impact is mostly negative because only five companies control the rest of the developing countries where they produce in. Their decisions on the cost can affect millions of people. For example, Figure 109.4 shows a typical farmer’s income compared with the final selling price to customers. The farmer only receives 10 pence for one kilogram of coffee beans while the multinational companies then continue to sell the same amount for 19 pounds. There is a huge difference between the two prices and that shows the unfair treatment of the farmers that provide the basis for these multinational businesses; without them, these businesses wouldn’t even exist. Because of their low incomes, the farmers struggle in their daily lives as they can’t provide food or basic healthcare for their families. In John Kafuluzisik’s case, he says that he only received 200 Ugandan shillings a kilo for his coffee this year while the price of a cup of coffee in London is 5,000 Ugandan shillings. Because of his very low income, he can’t afford medicine for his sick children. Global coffee businesses are taking advantage of these coffee farmers. There are 25 million coffee farmers around the world which shows that there is high competition between them; if they don’t accept these very low incomes then they won’t be getting any income at all because the coffee businesses will just go to other farmers that accept their terms for supply. This causes the farmers to have a very low standard of living as they can’t afford the basic necessities for their everyday lives. Another impact the global coffee business has on coffee farmers in developing countries is their social responsibility. These multinational companies are exploiting the coffee farmers in order to expand and become more successful and have a wider customer base. As there are only five major global coffee companies in the world, only a few men decide the fate of 25 million farmers in developing countries as they determine the price of coffee. These multinationals are so powerful that they control the farmers’ standard of living by choosing to give them very low incomes and exploiting their efforts. 

Skoda Auto

a) Identify two internal stakeholder groups suggested in the case study. 

• Employees 
• Shareholders 

b) Explain one conflict that exists between the different stakeholders in the case study. 

One conflict that exists between the different shareholders is that the employees are not satisfied with their pay and benefits therefore they went on strike. This consequently cost the company a large amount of money ($2.9 million) per day, effecting the shareholders. 

c) Discuss how the conflict outlined in your answer above could be minimized. 

The amount of money that the company is losing per day is much greater than if they would give their employees a raise. Therefore, it is better for them to keep their employees happy in order to be successful as that directly relates to their level of success. With unsatisfied employees, they are going to have to spend more money hiring and training others and that could be very costly. Therefore, the conflicts they have could be minimized if they give their employees a raise and keep them satisfied. 

Ethical Objectives and Corporate Social Responsibility (CSR)

1)   Define:

a)    Ethics: moral principles that guide decision- making and strategy.

b)   Morals: what is considered to be right or wrong, from society’s point of view.

c)    Corporate Social Responsibility: businesses that act morally towards their stakeholders, such as their employees and the local community.

d)   Social Auditing: a way to ensure that socially responsible objectives are being implemented.

 

2)   Give three examples of unethical business behavior.

-       Financial dishonesty: a business mismanages its finances, such as deliberate misrepresentation of its financial accounts. There may also be moral issues, such as extravagant business expenses reimbursed to the directors of a company.

-       Exploitation Of The Workforce: Employers may mistreat staff, such as through deliberate neglect of employee welfare issues.

-       Exploitation of Suppliers: Large businesses are able to take advantage of suppliers, forcing them to cut prices.

-       Exploitation of Consumers: Firms may knowingly sell products that harm the welfare of people or society. Large firms with few competitors may charge excessive prices.

 

3)   What are the advantages for businesses who behave ethically? Disadvantages?

 

Advantages Of Ethical Behavior:

-       Improved Corporate Image. Acting in an ethical way can help enhance the image and reputation of a business.

-       Increased Customer Loyalty.

-       Cost Cutting. May benefit from lower litigation costs – costs associated with legal action taken against a business.

-       Improved staff motivation.

-       Improved Staff Morale.

 

Disadvantages Of Ethical Behavior: -

-       Compliance Costs. This refers to the potentially high costs of acting ethically. Using recycled materials can actually be more costly than simply replacing them.

-       Lower Profits. If the compliance costs cannot be passed onto the consumer in the form of higher prices, then it is likely that profitability will fall. An ethical dilemma for a business exists when ethical decision-making involves adopting less profitable course of action.

-       Stakeholder Conflict. 

 

4)   How does CSR help a business compete?

Reputation can give a business a competitive edge. Some businesses donate some of their post-tax profits to charity due to their desire to act in a socially responsible way, or to the fear of a negative corporate image due to non-compliance. Being socially responsible can help to improve the reputation of a business, but compliance costs are likely to result in higher costs for the firm. Employees must also be convinced that CSR is in their best interest in order for them to help the organization meet its ethical objectives.

 

5)   Why is a social audit undertaken by business?

A social audit is undertaken by a business to show their stakeholders that the business is being socially responsible. A social audit proves if the business is using renewable and sustainable resources; using reputable and socially responsible suppliers; creating systems that cater for the well-being of employees; establishing an ethical code of conduct, and creating methods to monitor management and employee commitment to CSR policies. 

Franchises Case Study

1)   To what extent is a franchise opportunity a true reflection of what it is like to set up and run a business?

            Setting up a business can be very similar to setting up a franchise however; there are a few differences that the entrepreneur has to take into consideration before making a decision. A franchise is a form of business ownership whereby a person or business buys a license to trade using another firm’s name, logo, brands, and trademarks. In return for this benefit, the franchisee pays a license fee to the franchisor. The franchisor, however, provides the marketing plan, training, and the products in order to ensure that their reputation is not hindered. In an individual business, the entrepreneur has to come up with everything and provide the all of the money for the start up costs. Similarly, the franchisee has to pay for the outlet itself but the risks of failing are way smaller. Therefore, setting up a franchise can be very different from setting up an individual business however; the daily running of them are similar since the franchisee controls and organizes the franchise as they see best in order for them to earn the highest profit attainable, a goal shared by individual businesses as well.

 

 

2)   Use the Forbes site and the Business of Baseball site to do some research on the financial position of the different baseball franchises in the United States and Canada. Using the data, suggest which teams are the most vulnerable to seeing their franchise sold to a rival bidder such as Portland, Oregon.

A team that is the most vulnerable to seeing their franchise sold off to a rival bidder is a team like the “Tampa Bay Devil Rays” as they are not doing well in their games since they rank number thirty in the top thirty teams of the league. However, they have an operating income of $27.2 million annually, the third highest amount in the league, indicating that they are doing extremely well financially. Consequently, they are more likely to be sold off to a rival bidder as the team would earn them more income and the fact that the team isn’t doing very well in their games can benefit the bidder through things like sponsorship, reputation build up, and other such things.

 

 

3)   Imagine a situation where the English Soccer Premier League became the franchisor as in the case of MLB Inc. How might the Premier League seek to use this position to expand the growth of the ‘brand’? What implications would this scenario have for clubs in the League and outside it (i.e. those in the championship)?

If the English soccer Premier League became the franchisor, it could easily use this position to expand the growth of the ‘brand’ by introducing new teams from around the world. This global awareness and international presence would benefit the franchise, as it would enhance their reputation and help them earn more profit, since the franchisees would have to pay an initial fee and a royalty payment. This would consequently give them the benefit of economies of scale. 

Case Study: Mergers and Acquisitions

1)   Choose one example of a recent acquisition that has taken place or which is planned.

In November 2005, the London- based brewer Fuller, Smith and Turner bought Gales brewery, a formerly family-run brewers based in Hampshire, in the south of England. The acquisition of Gales by Fuller sparked concerns that the Gales brewery in Hampshire would close down. Fuller’s stated that they intended to continue brewing Gales beers and that the range of beers Gales owned complemented Fuller’s product portfolio.

 

2)   Try to identify which of the reasons given above is relevant to the case that you are looking at. What evidence is there to support your choice?

There are many reasons for the acquisition of Gales by Fuller. One reason for that is capacity. Capacity is relevant to this specific case study because Fuller acquired another business (Gales), increasing their capital assets, and that enabled it to increase its capacity relatively quickly as their profits sky-rocketed by a third in only 6 months.

Economies of scale is another reason for this acquisition. Economies of scale are the advantages of large-scale production that result in lower cost per unit produced. This is relevant to this specific case study because Fuller’s changed its scale of production. It acquired Gales therefore increasing its scale of operations; it now has more labor, plant, and equipment. It increased its factors of production. By doing this, they hoped to boost its profit margins or enable it to compete with its rivals more effectively.

Another reason for this acquisition is plugging a gap in the market. Fullers felt that its product portfolio is not sufficient enough to cater for different customer needs in its market so it acquired Gales because their range of beers complemented Fullers’ product portfolio. This is because Fullers’ range tends to be focused on winter sales whereas Gales’ range is more appropriate for the summer. Fuller’s profit was up by nearly a third to £10.9 million in only six months; a spokesperson at Fuller’s said that that was mainly due to the fact that Gales’ range of beers complemented those of Fuller’s.

 

3)   Of the reasons you have identified, which do you think is the most significant reason for the acquisition and why?

The most significant reason for the acquisition is plugging a gap in its market. This is because the acquisition enhanced Fuller’s product portfolio by providing beer for different times of the year, both in the summer and the winter. This increased its revenue by almost 30% in only six months because they were able to sell their products all year round rather than just in the winter like they were doing before the acquisition. A spokesperson at Fuller’s said that the increase in profits was mainly due to the fact that Gales’ range of beers complemented those of Fuller’s. This indicates that plugging the gap in the market is the most significant reason for the acquisition.

 

4)   Discuss the extent of the impact on the different stakeholders of the business that you have selected.

The effect of the acquisition on Gales by Fuller’s on the employees of Gales is very serious because since the Gales brewery in Horndean, Hampshire was closed down and the production was transferred to Fuller’s brewery in Chiswick in West London, 21 people lost their jobs. Also, if the firm becomes too big, then there are likely to be poorer working relationships as the senior management are more likely to become detached with those lower down in the hierarchy; thereby making them feel alienated or out of touch. This can negatively affect communication flows and the morale staff.

This also impacted the local community as 150 years of brewing tradition in Horndean, Hampshire disappeared when Fuller’s acquired Gales and closed it down.

The acquisition will also affect the customers because the closure of the brewery and the move to Chiswick will affect the taste of the beer, the price, how widespread the Gales’ beers will be, and how easy will it be to access them.

The acquisition will impact the shareholders as well as it will be very beneficial to them. Since the acquisition, Fuller’s profits increased greatly therefore this is great news for the shareholders as that means that they will get their dividends from the shares they invested in.

The acquisition can also impact the management in a negative way because if the business becomes too big, then the management may lack control and coordination and that is likely to increase and cause problems for the management. The increased amount of bureaucracy will likely slow down decision-making, and add to the costs of the business. Bureaucracy can also make communication more difficult. This can also lead to an internal diseconomy of scale.

The acquisition of Gales by Fuller is not going to have a huge impact on the government, regulatory bodies, and suppliers.