EduNinja

[Maximum number: 4]

FrioAire Appliances (FA)

FrioAire Appliances (FA) manufactures medium-priced and medium-quality refrigerators. It is a multinational public limited company. Its factory is located in a less economically developed country that has high unemployment, a tradition of autocratic leadership and labour costs lower than FA's home country. The factory is profitable, and FA pays consistently good dividends. Market growth for medium-priced and medium-quality refrigerators is limited.
As part of a strategic objective to increase productivity and to enter a fast-growing market for high-priced and high-quality refrigerators, F A is considering building a new factory in and relocating production to Germany. This would require closing the factory in the less economically developed country. The new factory will:
- use innovative technologies, including advanced robotics and 3D processes
- require fewer employees, but those it does require will need to have better skills and qualifications.
Germany has a highly skilled, qualified and productive workforce. The new factory would allow FA to reposition its products. However, FA would need to raise significant finance to build and equip the new factory.
FA's leadership style at the factory in the less economically developed country is autocratic. Members of FA's board wonder whether this style would be suitable for the new factory in Germany, where workers have more bargaining power because of their high skill level and the labour-friendly cultural traditions. In Germany, FA would have to follow more regulations regarding the environment, health and safety, and employee rights.
FA workers in the less economically developed country are very loyal to F A, which has continued operation through a civil war at significant cost to itself (for security). If FA were to close in the less economically developed country, the workers would not find such good jobs.

Explain one positive and one negative impact of FA on the developing country.

[Maximum number: 4]

Taxi-M (TM)

Taxi-M (TM) operates 2500 taxis in a developing country. All drivers are full-time employees and have a professional taxi license. Although not compulsory, TM regularly conducts safety inspections of the taxis. Though safe, most of TM's taxis are old and TM charges high prices. Many customers complain.
However, a multinational company, R E, with offices around the world, has started to offer a mobile application (app) called Best-Taxi (BT). Using their mobile phones, passengers can use B T to book and pay for a car journey. Any car owner can offer journeys through BT. For security reasons, the B T app registers passengers' and drivers' personal details.
TM's sales are falling and profits are down. A number of TM's drivers are becoming demotivated. Facing lower incomes, poor management and rumours of redundancies, many loyal drivers have left to offer taxi services using their own cars and the B T app. Some of these drivers are earning considerably higher wages than before.
The situation for TM appeared critical. However, local media have reported a higher rate of road accidents by B T drivers than licensed taxi drivers. Several of its drivers have assaulted and robbed customers. In response, TM's management decided to downsize and differentiate itself from B T by positioning its service as a high-price, high-quality traditional taxi service. TM will:
- sell older cars and lease new luxury cars
- develop a unique selling point/proposition (USP) emphasizing comfort and safety.
Customers can book taxis by telephone and by stopping them in the street. TM's target market will be business people, higher income families and passengers concerned about safety.

Explain one positive and one negative impact of the multinational company, R E, on the developing country.

Positive impacts on the developing country:
- TM has new competition;
consumers will have access to different taxi services, hence more choice at lower prices for the consumers.
- Tax revenue to the government of the developing country from profits made by R E taxi drivers.
- Working opportunities for drivers in the developing country will grow as any person with a car can download the BT app and begin his/her employment. Income will increase, standards of living will improve. Also, for drivers at TM there will be job creation and job security.
- In the future RE, with a possible increase in demand for the BT app may increase capital spending/infrastructure to manage operations. The developing country will benefit from an increase in economic activity.
- Technological transfer - the introduction of the BT app can be used in other industries to improve efficiency.

Negative impacts on the developing country:
- BTs competition is threatening TM's market position and even forcing it out of business.
- RE as a multinational company, is probably a powerful company, which makes TM's survival even more difficult.TM as a local business cannot compete and has started to experience a fall in sales and profit. TM might end up closing and this would lead to increased unemployment in the country which may result in the government intervening to ensure that the political fallout from such a move is minimized.
- RE takes advantage of a lack of compulsory regulation and BT drivers have a higher rate of road accidents as well as safety issues- assaults and robbery.
- Profits from RE could be repatriated to their home country. The financial benefits may be limited- this argument is not really applicable.
- Award [1] for theoretical possibility.
- Accept any other relevant positive/negative impact.

Mark as 2+2.

Award [1] for identifying or describing one positive/negative impact for TM and a further [1] for a development with respect to TM. Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.

For example:
- for an identification or a description of a positive / negative impact with or without application [1]
- for explanation of a positive / negative impact with no application [1]
- for explanation of a positive / negative impact and application [2].

[Maximum number: 6]

"Think locally, grow globally"
To avoid negatively affecting sales, McDonald's ${ }^{\circledR}$ senior managers in the United States (US) headquarters realized that they should not apply identical American standards worldwide. McDonald's ${ }^{\circledR}$ must now think locally to grow globally.
British-born Steve Easterbrook, head of McDonald's ${ }^{\circledR}$ in the United Kingdom (UK), understood the need for strategic change and prepared tactics with two objectives:
- to attract new and different customers
- to enhance the good value of products to appeal to customers during economic recession.
One of the first tactics in the UK was the introduction of "Little Tasters ${ }^{\text {® }}$ ", which offered new products, in small portions, at low prices. Steve understood that young mothers, when taking their children to McDonald's ${ }^{\text {® }}$ , would not buy meals for themselves because they felt the portions were too large. Other tactical changes, in response to customer demand, included the introduction of more chicken-based products for health-conscious customers. Moreover, an improved breakfast menu and better quality coffee attracted more price-conscious people on their way to work.
These adaptations to local conditions proved successful in the UK and beyond. McDonald's ${ }^{\circledR}$ UK had 13 million more customers in 2010 compared to 2009, resulting in an increase in market share (during the economic recession). In other host countries McDonald's ${ }^{\circledR}$ also successfully implemented its "think locally, grow globally" strategy. For example, it successfully launched products made from local produce and suited to local tastes such as the "Maharaja Mac ${ }^{\mathrm{TM}}$ " in India, the "McLobster ${ }^{\text {® }}$ " in Canada and the "Ebi Filet-O" (a shrimp burger) in Japan.
At the same time McDonald's ${ }^{\text {® }}$ launched a "global uniform initiative" to redecorate its restaurants with uniform appearance. McDonald's ${ }^{\text {® }}$ still tries to maintain the global recognition and the quality of its global brand. Local construction material and local labour are used, as well as different colours, comfortable armchairs and free Internet access. Other multinational food and drink companies, such as $K F C^{\text {® }}$ and Starbucks ${ }^{\text {® }}$ , are also using a similar strategy to the "think locally, grow globally" strategy used by McDonald's ${ }^{\mathbb{®}}$ .

Analyse the possible impacts of multinational companies like McDonald's ${ }^{\text {® }}$ on the host countries.

Although the question may seem rather theoretical, nevertheless, it is expected that candidates make some reference to McDonald's ${ }^{\circledR}$ as a multinational company (MNC) and use information from the stimulus material.

Some of the positive impacts may include the following:
- McDonald's ${ }^{\circledR}$ provides employment and training to its employees in its restaurants. The quality of the labour force can increase.
- McDonald's ${ }^{\circledR}$ improved the menu choice: healthier food, local food so customers do not have to rely only on local food providers. Hence more choice is provided for the citizens.
- Global competition clearly exists in this market. Competition between McDonald's ${ }^{\circledR}$ and other food and drink suppliers like $K F C^{\circledR}$ and Starbucks ${ }^{\circledR}$ can lead to reduced prices, an improvement in choice as well as improvements to the service to customers. Transfer of knowledge/ know-how (is done through franchising).
- It is mentioned in the stimulus material that McDonald's ${ }^{\circledR}$ (and other MNCs) source local construction material and local labour - more revenue in terms of expenditure and wages is injected into the economy. Wider economic benefits can be gained (the multiplier effect).
- McDonald's ${ }^{\circledR}$ tends to be profitable and is taxed by the host governments. Revenue is hence generated for host governments providing further positive consequences for the host economies.

However, being a dominating global company, one may argue that companies like McDonald's ${ }^{\circledR}$ encourage Western consumption of fast food around the world. Local competitors cannot compete with its resources/ expertise and have to close down especially now when these MNCs actually adapt to local taste - Maharaja Mac ${ }^{\text {TM }}$ , McLobster ${ }^{\circledR}$ etc. There is a danger that companies like McDonald's ${ }^{\circledR}$ actually monopolize a market rather than encourage healthy competition and choice. One may also argue that they destroy local ways of life. Local unemployment may increase if local businesses cannot compete. Due to some practices of transfer pricing and/or local government support, not much taxes on profit are paid to the host government.

To achieve the top markband candidates must give a balanced analysis of two positives and two negatives of the impacts of MNCs like McDonald's ${ }^{\circledR}$ on the host countries.

For one relevant positive impact and one relevant negative impact award up to a maximum of [3 marks].

If the response is a one-sided relevant approach with no balanced analysis, award a maximum of [4 marks].

Marks should be allocated according to the markbands on page 3.

IB Business Management HL 1.6 Multinational Companies Mncs Topic Practice

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IB Business Management HL 1.6 Multinational Companies Mncs Topic Practice

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