Business Essays - Czech Republic Business

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Czech Republic Business

The following report, starting with an overview of the Czech Republic, will analyze the benefits multi-national companies have brought to Operations Management or Strategy of the companies visited in the Czech Republic. It will further look at the control that the Czech arms of these multinational companies wield over their product and operations strategies. The report also aims to find how successful these companies have been with regards to Value Innovation. Finally the report will assess the relationship between the culture of these international companies and that of the Czech Republic. Relevant theories and arguments are used through the length of the paper to support the views of the author.

Economy in Transition: An Overview

Post Liberalisation, during the hay days of communism all means of production in Czechoslovakia were nationalized. The state took over all industrial activities, turning large firms into monopolistic organizations. State adopted Centralized planning, discouraging entrepreneurship and concentrated only at satisfying production goals with no concern for market requirements.

Forceful urbanization and industrialization took place, and as the economy became dependent on that of the Soviet Union the focus turned to military supplies. As the role of business was to primarily fulfil the central plan, production rarely met demand, quality declined and work ethic hit an all time low, as did entrepreneurial spirit (Dana, 2000).

With the weakening of Soviet Union, the communist regime was overthrown in 1989. Following the ‘Velvet Divorce’ and separating from the Slovak Republic in 1993, the “new” and more prosperous Czech Republic has been aggressively transforming the society from a centralized state to a democracy and a free market economy. Liberalisation and opening of markets to multinational firms in the following years, coupled with strategic economic reform, the country has been able to achieve steady and stable growth.

King et al, (1999) opine that out of the emerging European countries, the Czech Republic is probably the most economically and politically stable country which enjoys low national debt, a balanced budget, strong foreign currency reserves, relatively low inflation and very low unemployment. By joining the European Union in May 2004, the Czech Republic adopted the common trade policy (CTP), which exists on the European level within the EU, as binding. By doing so, the country formally waived its right to pursue an independent trade policy toward third countries. The country also plans to adopt the Euro by 2010. The current GDP is at 6.5% a considerable growth from 1.9% in 2002.

Past reforms, the accession to the EU and expanding capacity in the automobile industry have driven these gains. Trade performance is good with double-digit growth in exports in recent years. A government deficit of around 3% of GDP reflects strong growth and new budgetary rules (Euromonitor, 2008). This primarily has been possible due to the liberalization policies and the opening of market to multi national companies.

Multi-national intervention and benefits to the Czech Republic.

King et al, (1999) opine that it is only since the Velvet Revolution of 1989 that “western style” quality management philosophy and practice have begun to make significant in-roads into the Czech way of doing business. After the Czech Republic’s accession to the EU, foreign companies, in line with general expectations, showed great interest in business cooperation with their Czech counterparts.

The fall of barriers to trade (tariffs, quotas and other restrictions) and a solid business climate in the Czech Republic guaranteed by the authority of the EU has led to a sharp growth of foreign trade between the Czech Republic and the EU (CNB, 2008).

There has been a major influx of foreign direct investment since investors appreciate that the Czech Republic has a highly qualified labour force, a long tradition of industrial production, developed infrastructure, relatively low production costs (in regard to wages in particular), and a suitable position in the centre of Europe – ideal for optimum product distribution (CzechInvest, 2008).

These factor conditions along with low barriers of entry and a level playing field provide the country with a competitive advantage over other developing, erstwhile eastern bloc countries (Porter, 1990). As the market was just opening to investors, the MNCs enjoyed high bargaining power, little or no competition and sops in the form of tax waivers,

As many multinational giants like Volkswagen, SAB Miller, Siemens, Philips etc started investing in the conducive economic atmosphere of Czech Republic, they also brought in their best practices and implemented the same. They were instrumental in introducing quality concepts, lean and efficient production, automation and better work ethics to a workforce which was used to the lax mass production system of the communist era.

Smaller Czech manufacturing industries where also benefited as they turned into suppliers, adopting strategies like Just In Time (JIT), lean supply chain management, for the multinational firms. Increased exports and higher FDI’s has thus helped the country reduce its trade deficit, strengthen its economy, and at the same time reduce unemployment.

Product, Operational and Strategic Control.

The Czech government had initiated the take over of Skoda by Volkswagen to transform Skoda, a company previously characterized by socialist structures, into a customer oriented, learning organization and, thus, to “best-in-class” level (Guttman, 1995).

This was a strategic move for Volkswagen as well, as the move would give them an opportunity to integrate a car manufacturer with hundred years of experience and add a fourth brand to the VW group. With the take over of Skoda by Volkswagen, it introduced JIT techniques, lean production, integrated business systems and also the culture.

Its quite arguable that Volkswagen followed a planned/deliberate dimension of strategy so as to ensure that the manufacturing strategy was in line with the business objective of the firm (Barnes, 2002). Though plant operations and management were controlled by Skoda, Volkswagen holds full control of the product manufacturing process and design. This enabled value addition and major design changes to dated designs of Skoda.

The trade-off of autonomy for better production capabilities seems to have paid off for Skoda as these factors have helped the company become a respected brand and have helped them gain sustainable competitive advantage in the region (Silveira and Slack, 2001). They are the biggest exporter out of Czech Republic, accounting for 7.7% of total exports. Their profit margins have grown by 60% from 2004 to 2006 (Skoda Group, 2006).

In the case of Pilsner Urquell, owned by the South African beer giant SAB Miller, control is completely vested in the parent company, though Pilsner has control over the product every other is taken by SAB. Technology and know how transfer has helped them increase their production many folds.

Pilsner might have discretion to function and promote its product in its home market but for the rest of the world SAB Miller takes all the decisions with regards to its marketing strategy. The distribution of Pilsner is also controlled by SAB Miller given very little autonomy to them for having any say in the matter. SAB Miller, in its portfolio refers to Pilsner Urquell as its flagship brand and this reflects the company’s importance (Prazdroj, 2007).

Value Innovation in Czech MNCs:

According to Kim and Mauborgne (2004) ‘Blue Ocean’ strategy is about making the competition redundant by creating new and innovative market for its products, while keeping costs low and simultaneously driving value up for buyers. In the case of Pilsner Urquell, there wasn’t much evidence of SABmiller generating a blue ocean strategy. The reason could have been the fact that Pilsner is a market leader in the Czech Republic and holds considerable clout in the world beer market as well.

Johnson and Scholes (2006) argue that the parental developer seeks to employ its own competence to add value to its business unit. Volkswagen has been successful in this regard in changing the customer’s perception of Skoda, through it’s innovate manufacturing, design and process strategy. But apart from that, there was no evidence of any value innovation in this case as well. Hence one could argue that Volkswagen has in fact followed the conventional logic and has leveraged its existing assets and capabilities (Kim and Mauborgne, 1997).

But a home grown, fully Czech owned multinational, ZVVZ a.s, had utilized its strategic strength as an industry equipment manufacturer, to create new, innovative market for itself by focusing on creating equipments to reduce environmental pollution. A highly differentiated cost leader, it provides complete cost effective solutions for its customers, while letting go off its existing industry-equipment clientele. They thus have been able to create, yet uncontested, market space for itself in the Czech Republic and Eastern Bloc countries. This was the only company which related, in essence, to Kim and Mauborgne’s (2004) idea of Blue Ocean strategy and value innovation.

Culture: International companies and Czech Republic.

Hofstede states that Culture is more often a source of conflict than of synergy and that Cultural differences are a nuisance at best and often a disaster (Hosfstede, 2008). Though there were no major evidence of cultural conflict between South African SABmiller and Pilsner, both cultures exhibit a medium power distance. The SAB culture makes it a proud owner of the Pilsner brand which has deep roots and more than considerable pride in the Czech tradition.

This might quite be an area of concern and conflict, but due to similarities and common objectives, focus can be maintained. However they have been able to develop an awareness and appreciation of cultural differences and encourages adaptation of organizational behaviour, products and cultures in their key markets (Rugman and Collison, 2006).

Following Kolman et al’s, (2002) research on the cross cultural difference in central Europe one could argue that there are similarities and synergy between the German company Volkswagen and its Czech counterpart Skoda. Germany has lower power distance and Czech Republic has medium power distance, but it was noted that the achievement orientation is high Its also important to note that both countries were historically linked and this helps in better understanding.

To conclude the author is of the opinion that the advent of Multinational companies in the Czech Republic has definitely paid huge dividends to both parties involved. These companies have been able to bridge cultural differences, and bring in technological, business and economic revolution to Czech Republic. The growing strength of the Czech Economy is indicative of this dynamic change.

The companies have benefited from early mover advantage into this opening market, and also have been able to shape their competitive advantage on the basis of the abundant resources in the country. But it is also important to note that, as often in the case of internationalization, there have been a lot of local businesses that had to close shop. However following Adam Smith’s theory of free markets, this is indeed a windfall season for Czech consumers.

References:

Barnes, D. (2002) The Manufacturing strategy formation process in small and medium sized enterprises, Journal of Small Business and Enterprise Development [online]. 9(2), pp130-149, [cited on 28th April 2008]. Accessed via Emerald.

CNB (2008) Czech National Bank. [online]. Accessed via: < http://www.cnb.cz/en/>. [cited on 7th May 2008].

CzechInvest (2008), Economic and Business [online] Accessed via <http://www.czechinvest.org/

en>, [cited 25th April 2008].

Dana, L.P. (2000) The hare and tortoise of former Czechoslovakia: Reform and Enterprise in Czech and Slovak Republic, European Business Review [online]. 12(6), pp.337-343, [cited on 28th April, 2008]. Accessed via Emerald.

Euromonitor, (2008) Czech Republic Report, GMID-Global Market Information Database. [online]. Available at <http://athens.portal.euromonitor.com/portal/server.pt?control=SetComm

unity&CommunityID=206&PageID=719&cached=false&space=CommunityPage>.

Gutmann, B. (1995). Tandem training-the Volkswagen –Skoda approach to know-how transfer [online]. 19(4), pp.21-24. [cited on 26th April 2008]. Accessed via Emerald.

Hosfstede, G. (2008) Geert-Hofstede Cultural Dimensions [online]. Accessed via: http://www.geert-hofstede.com/> . [cited on 11th May 2008].

Johnson, G and Scholes, K. (2006) Exploring Corporate Strategy, 7th ed., Essex: Prentice Hall.

Kim, C.W. and Mauborgne, R. (1997) Value Innovation: The Strategic Logic of High Growth, Harvard Business Review [online]. pp 172-180, [cited on 27th April 2008]. Accessed via Ebscohost.

Kim, C.W., and Mauborgne, R. (2004) Blue Ocean Strategy, Harvard Business Review [online]. pp 76-84, [cited on 27th April 2008]. Accessed via Ebscohost.

King, R., Gildea, M., Edgeman, L.R., Mansfeld, G., and Macurova, P. (1999) A Window on Quality Improvement in then Czech Republic, The TQM Magazine [online]. 11(1), pp. 8-11, [cited on 6th May 2008]. Accessed via Emerald.

Kolman, L. Noorderhaven, N.G., Hofstede, G. and Dienes, E. (2002) Cross Cultural Differences in Central Europe. Journal Of Managerial Psychology [online]. 18(1), pp.76-88, [cited on 4th May 2008]. Accessed via Emerald.

Porter, M.E. (1990). Competitive Advantage of Nations. Harvard Business Review [online]. pp73-93. [cited on 23rd April 2008]. Accessed via Emerald.

Prazdroj (2007) Company Fact Sheet [online]. [cited on 28th April 2008]. Available at : <www.prazdroj.cz>

Rugman, A.M., and Collison, S (2006) International Business. 4th ed., Essex: Prentice Hall.

Silveira, G.D., and Slack, N. (2001) Exploring the trade-off concept, International Journal of Operations and Production Management [online]. 21(7), pp 949-964, [cited on 4th May 2008]. Accessed via Emerald.

Skoda Group. (2006) Annual Report 2006 [online]. [cited on 27th April 2008]. Available at: http://www.skoda.cz/

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