Introduction to regional economic intergration
When the European Economic Community (EEC) was first organized in 1957, U.S. multinational enterprises (MNEs) had to change their method of servicing European markets. The large size of the U.S. market had allowed these firms to achieve economies of scale so that they could export to European countries. After the EEC was established and tariff barriers were erected to protect domestic industries, foreign firms were forced to invest in EEC countries or lose their markets. U.S. MNEs were accustomed to large-scale organizations and had the financial and managerial resources to handle the expansion.
One such example is the Ford Motor Company. Ford first began operating in Europe through its British subsidiary in 1913 and its German subsidiary in 1926. During the next several decades, however, Ford's European operations were separate operating subsidiaries reporting to Ford but not coordinating their policies in any meaningful way. This occurred for two reasons: Individual countries had: (1) different preferences and (2) unique tariff and nontariff barriers to trade. In its 1960 Annual Report, Ford management noted that:
The historical patterns of trade and commerce among nations are undergoing significant changes. Trade groupings, such as the European Economic Community and the European Free Trade Association, are being established. Similar groupings are being considered in Latin America and by some of the African countries. Further changes in trade patterns have been brought about in a number of countries by government regulations that make it advantageous to manufacture locally.
The Company and its subsidiaries are responding to these trends, which bear promise of increasing competition for world automobile markets, by exploring opportunities to strengthen and to expand their international operations.
As a result of the changing environment, Ford executives realized that they could begin considering Europe as one common market rather than a collection of individual markets. Shortly after the establishment of the EEC, Ford changed
its management structure to include the European operations under one umbrella organization in order to exploit the economies of scale that were beginning to develop in the EEC. As noted in Map 11.1, the two large manufacturing centers in Great Britain and West Germany (eventually to be expanded to three with Spain) were to remain central to the new strategy, but they were no longer considered separate, independent operating companies. Ford decided it was best to obliterate national boundaries, even though it would be challenging because of nationalistic tendencies on the part of country management. As was noted by the West German managing director,
The pooling of the two companies cut the engineering bill in half for each company, provided economies of scale, with double the volume in terms of
purchase—commonization of purchase, common components—and provided the financial resources for a good product program at a really good price that we could still make money on.
Ford initially began developing and selling European cars rather than engineering separate cars in each market, a strategy that resulted in the Escort, Capri, and Fiesta models among others. Not only did Ford design and assemble similar automobiles throughout Europe, but it also designed common components to be used in Ford cars. To show the importance of market size in developing this plan, one Ford executive commented: "Neither
the British nor the German company could have come up with the Capri separately, tooled it separately. Only with the whole volume of Europe in prospect did the Capri become a viable product development program."
As Ford continued its European expansion, it explored the possibility of having its European unit merge with Fiat in order to allow Ford's strength in northern Europe to combine with Fiat's strength in southern Europe. However, both sides were so strong and so convinced of the need for control that the proposed merger never occurred. Ford needed control to guarantee that the timing of its global strategy, which was developed in the United States, could be maintained. Fiat, on the other hand, was controlled by the Agnelli family in Italy, and loss of control to a foreign company, especially one from a country not a member of the EEC, would have been explosive politically. In addition, Fiat's management could not accept a role subordinate to Ford's management. Clearly, mergers are never easy, but cross-border mergers can often introduce unique problems.
In the late 1980s, a relatively cohesive Europe continued to be an important force in Ford's strategy. Donald E. Petersen, Chairman of Ford, was determined to globalize the company. Part of his strategy involved centralizing the development of a specific car or component wherever in the world Ford has the greatest expertise. Ford of Europe's comparative advantage with respect to the rest of the company is in the small-car market. The European company is responsible for developing a common suspension and undercarriage for compact cars that will be built and sold in the United States as well as in Europe. The growing sophistication of Ford in Europe has resulted largely from the harmonization and growth of the European Community.
No automaker other than GM is more European than Ford, even though Fiat controls Italy, Peugeot and Renault control France, and Volkswagen controls Germany. Ford of Europe has 22 plants throughout Europe and sales offices in each country in order to help tailor marketing and design strategies to local tastes. Thus Ford is poised to take advantage of increasing harmonization that is taking place in Europe.
INTRODUCTION
During the Depression of the 1930s, the world plunged into a period of isolation, trade protection, and economic chaos. Then in the mid- to late-1940s, countries felt that greater cooperation was needed to help them emerge from the wreckage of World War II. The spirit of cooperation was designed to promote economic growth and stability. This chapter discusses some of the important forms of such cooperation, such as regional economic integration and commodity agreements. The focus is on regional efforts because they tend to be more effective than global efforts. This is because global efforts tend to involve too many countries with too many divergent points of view. A major exception to this idea is the universal reaction of the U.N. to the Iraqi invasion of Kuwait. Regional groups can more easily focus on common problems. The establishment of these agreements is an important source of influence on MNEs, as Ford learned in the opening case. The agreements define the size of the market and the rules under which the firm must operate. Firms in the initial stages of expansion abroad need to be aware of the regional groups that encompass target countries. As firms proceed along the scale of multi-nationalism, they find that their organizational structure and operating strategies must conform to and take advantage of regional integration. As noted in the opening case, Ford altered its European organization soon after the formation of the EEC. This chapter explains how these regional groups affect structure and strategy.
One such example is the Ford Motor Company. Ford first began operating in Europe through its British subsidiary in 1913 and its German subsidiary in 1926. During the next several decades, however, Ford's European operations were separate operating subsidiaries reporting to Ford but not coordinating their policies in any meaningful way. This occurred for two reasons: Individual countries had: (1) different preferences and (2) unique tariff and nontariff barriers to trade. In its 1960 Annual Report, Ford management noted that:
The historical patterns of trade and commerce among nations are undergoing significant changes. Trade groupings, such as the European Economic Community and the European Free Trade Association, are being established. Similar groupings are being considered in Latin America and by some of the African countries. Further changes in trade patterns have been brought about in a number of countries by government regulations that make it advantageous to manufacture locally.
The Company and its subsidiaries are responding to these trends, which bear promise of increasing competition for world automobile markets, by exploring opportunities to strengthen and to expand their international operations.
As a result of the changing environment, Ford executives realized that they could begin considering Europe as one common market rather than a collection of individual markets. Shortly after the establishment of the EEC, Ford changed
its management structure to include the European operations under one umbrella organization in order to exploit the economies of scale that were beginning to develop in the EEC. As noted in Map 11.1, the two large manufacturing centers in Great Britain and West Germany (eventually to be expanded to three with Spain) were to remain central to the new strategy, but they were no longer considered separate, independent operating companies. Ford decided it was best to obliterate national boundaries, even though it would be challenging because of nationalistic tendencies on the part of country management. As was noted by the West German managing director,
The pooling of the two companies cut the engineering bill in half for each company, provided economies of scale, with double the volume in terms of
purchase—commonization of purchase, common components—and provided the financial resources for a good product program at a really good price that we could still make money on.
Ford initially began developing and selling European cars rather than engineering separate cars in each market, a strategy that resulted in the Escort, Capri, and Fiesta models among others. Not only did Ford design and assemble similar automobiles throughout Europe, but it also designed common components to be used in Ford cars. To show the importance of market size in developing this plan, one Ford executive commented: "Neither
the British nor the German company could have come up with the Capri separately, tooled it separately. Only with the whole volume of Europe in prospect did the Capri become a viable product development program."
As Ford continued its European expansion, it explored the possibility of having its European unit merge with Fiat in order to allow Ford's strength in northern Europe to combine with Fiat's strength in southern Europe. However, both sides were so strong and so convinced of the need for control that the proposed merger never occurred. Ford needed control to guarantee that the timing of its global strategy, which was developed in the United States, could be maintained. Fiat, on the other hand, was controlled by the Agnelli family in Italy, and loss of control to a foreign company, especially one from a country not a member of the EEC, would have been explosive politically. In addition, Fiat's management could not accept a role subordinate to Ford's management. Clearly, mergers are never easy, but cross-border mergers can often introduce unique problems.
In the late 1980s, a relatively cohesive Europe continued to be an important force in Ford's strategy. Donald E. Petersen, Chairman of Ford, was determined to globalize the company. Part of his strategy involved centralizing the development of a specific car or component wherever in the world Ford has the greatest expertise. Ford of Europe's comparative advantage with respect to the rest of the company is in the small-car market. The European company is responsible for developing a common suspension and undercarriage for compact cars that will be built and sold in the United States as well as in Europe. The growing sophistication of Ford in Europe has resulted largely from the harmonization and growth of the European Community.
No automaker other than GM is more European than Ford, even though Fiat controls Italy, Peugeot and Renault control France, and Volkswagen controls Germany. Ford of Europe has 22 plants throughout Europe and sales offices in each country in order to help tailor marketing and design strategies to local tastes. Thus Ford is poised to take advantage of increasing harmonization that is taking place in Europe.
INTRODUCTION
During the Depression of the 1930s, the world plunged into a period of isolation, trade protection, and economic chaos. Then in the mid- to late-1940s, countries felt that greater cooperation was needed to help them emerge from the wreckage of World War II. The spirit of cooperation was designed to promote economic growth and stability. This chapter discusses some of the important forms of such cooperation, such as regional economic integration and commodity agreements. The focus is on regional efforts because they tend to be more effective than global efforts. This is because global efforts tend to involve too many countries with too many divergent points of view. A major exception to this idea is the universal reaction of the U.N. to the Iraqi invasion of Kuwait. Regional groups can more easily focus on common problems. The establishment of these agreements is an important source of influence on MNEs, as Ford learned in the opening case. The agreements define the size of the market and the rules under which the firm must operate. Firms in the initial stages of expansion abroad need to be aware of the regional groups that encompass target countries. As firms proceed along the scale of multi-nationalism, they find that their organizational structure and operating strategies must conform to and take advantage of regional integration. As noted in the opening case, Ford altered its European organization soon after the formation of the EEC. This chapter explains how these regional groups affect structure and strategy.
Comments
Post a Comment