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Wednesday May 14, 2008
Introduction
In spite of the confusing nature of NGOs, the theorists who study them seem to be inclined to assess this exacting form of political practice in terms of democratic theory. They try to establish how much NGOs contribute to participatory democracy. There seem to be a more or less equal numbers of enthusiasts and sceptics. In the mid-nineties some were quite excited. But since then the contradictions which are unmistakably clear in the practice of NGOs have led most authors to adopt a position that is midway between the extremes. A number of practical studies have now been carried out on the work of NGOs, their success and failure, the results of their actions and their political significance. Some authors approach NGOs from an entirely different angle. They go past these issues or even turn the questions around, so that the key question becomes: What does the NGO phenomenon mean for our understanding of the state, government and democracy? The key concepts are those of the state, democracy and civil society. But before we approach this subject more closely it would be wise to look at some recent studies in this field.
The equivocal nature of NGOs
In the beginning many people waited with great expectation to see what would become of NGOs. They thought that NGOs would form a new stage in the development of social movements. And they expected NGOs to follow the labour movement and the new social movements as a form of citizen participation. NGOs were also expected to represent the interests of consumers and the environment at the global level. All these expectations were realistic to some extent, e.g. in so far as some NGOs and their members came from within new social movements. But, when looked at objectively and in social terms, this is true of very few NGOs. The new social movements covered a wide spectrum of political and, above all, social issues: environment, energy policy, transport, peace, gender relations. Socialist, anti-capitalist and anti-imperialist goals were associated with the first great wave of protest in the late sixties and early seventies. But these goals were relegated to the sidelines in the second wave of protest in the late seventies and early eighties. The global environment and support for liberation movements in the countries of the South were significant issues for only a small proportion of activists, political organisations, publishers, journals and alternative enterprises engaged in fair trade.
NGOs have developed in a similar way to green parties. In the case of the latter, political activists have turned professional by engaging in party politics and going into parliament. In a small sector of the social movements, especially in the environmental field, movement activists have turned professional by founding NGOs. These two political strands became tied together towards the end of the eighties and at the beginning of the nineties as a result of the debate about sustainable development and by the UN Conference on Environment and Development in Rio de Janeiro in 1992. In these two fields (environment and international solidarity), unlike in others, NGOs succeeded in gaining recognition from intergovernmental organisations and national governments. Individual organs of state and some foundations gave direct financial support to NGOs and/or supported them indirectly by means of tax exemptions and cooption in political discussion processes. The active involvement of NGOs and the recognition of them by the state won them respect and public support, so that they could depend on a substantial level of donations from the public. A few well-organised NGOs have broad-based networks and often operate internationally. These include only a few older organisations such as Amnesty International and rather more organisations like Greenpeace. The images and expectations that people have of NGOs are based on these organisations.
Only a very small proportion of the NGOs that now exist around the globe can take part in international conferences and try to influence the decision-making process. They represent particular interests and groups of people without having been elected and mandated by them. The participation of a particular NGO in conferences is most often made possible by close contact with governments, a particular state or individual politicians, i.e. personal acquaintance or membership of a particular network. The” sovereign people” often do not know that they are being represented. This gives rise to the well known paradox of representation: that the representative is appointed first and then defines those whom he/she represents. It may well be the case that NGOs act in the best interests of the people whom they represent, but it may also be the case that they usurp their position and make people’s decisions for them. People who are affected by decisions have to accept that decisions will be made” in their name”. People who are supposedly represented by NGOs cannot effectively object to the activities of those NGOs - even when they know that the NGOs are representing interests that have nothing to do with the people affected by a particular decision. This is because the representative concerned can always claim to be speaking on behalf of some other individuals, groups or interests. In this way, it is possible for whole tracts of land to be turned into nature museums against the will of the population, whilst elsewhere the process of urbanisation goes on uninhibited. NGOs might force people to adopt a particular idea of sustainable consumption. Alternatively, they might claim to follow a policy of sustainability whilst at the same time being involved in the marketing of particular resources and discrediting people who object as particularistic. In addition, in the end it is this paradox of representation that enables the state to assert its own legitimacy over and above that of NGOs as the real representative of the interests of the people. This is even easier for the state when it points out that all interest groups are able to take part in the political process.
Finally, we can point to yet another aspect of the problem that can be observed during international negotiations. Northern NGOs tend to come into conflict with each other over negotiating strategies. If they make radical demands, they run the risk of being ignored by political or economic decision-makers. If they are too cooperative, this may create the impression that they are too weak, lack power in negotiations or have spoilt their chances, because many activists feel that they are no longer represented. Research has confirmed the hypothesis that in the limited field in which NGOs have the ear of international institutions, intergovernmental bodies and governments or are contracted to undertake particular projects; these NGOs may be used in various ways to supplement the activities of the state. NGOs possess specialised, scientific or local knowledge. They belong to broad networks and have many contacts. They are trusted and respected by people at the grassroots. They often have more scope for effective action than corrupt state bureaucracies. And they can perform work relatively cheaply, which would be far more costly if undertaken by state institutions or which state institutions are barely in a position to undertake because they lack the relevant powers.
(Demirovic 2000).
There is a significant difference between the NGOs in the countries of the South and those in the North. NGOs based in Japan, the USA or Europe have access to information, money, technology and political contacts. They share the same cultural and political background as the official decision-makers (Wahl 1997). This gives rise to an imbalance that has many disadvantages. Amongst NGOs in the North, there are often paternalistic attitudes towards the South. NGO representatives from the South find themselves in a dependent role, with the fatal consequence that they are either constantly complaining about the lack of solidarity from the North and therefore make themselves unpopular or they allow themselves to be co-opted and lose touch with their own political and social grassroots. In the latter case, they become divorced from their local context and simply act as mediators between local groups and NGOs in the South and the donor institutions in the countries of the North. Working for an NGO becomes a well-paid job, which no longer bears much relationship to the original reason for becoming active or to the real situation of the country concerned. Moreover, such jobs have to be made permanent in the interests of the members of the NGO. NGOs appear alongside state institutions and take on the tasks of the state. They have to compete for financial resources and for contracts for project implementation. The NGOs of the North, in order to safeguard their own standing as advocates, avoid being too critical of their own societies, although this is where they should be bringing about fundamental change in order to solve the key problems of the South. In order to justify their continued existence, they have to maintain the image of the South as being in need of support.
The picture of NGOs, which is portrayed in the media and some academic literature, is characterised by a very selective treatment of issues, organisations and projects. Several factors enable Greenpeace to gain attention: Dramatic actions, negotiating skill and expertise, international presence and forward-looking technological developments (e.g. CFC-free refrigerators) have all helped Greenpeace to win widespread public confidence. On the other hand, there are tens of thousands of NGOs spread throughout many regions of the world which are concerned with a wide variety of issues and vary considerably as regards political orientation, but they are almost totally ignored. Given the great diversity of NGOs, one might ask whether there is any sense in trying to analyse this phenomenon in general terms. It seems to me that this is only possible, if NGOs are regarded as a particular kind of political body - like political parties (Jäger 1983, Hirsch 1999), i.e. as a social entity that is formed in a particular conflict of social actors and then in turn strongly influences or even determines their behaviour.
The subject matter that we have addressed here from the point of view of democracy theory can also be addressed with similar results from the point of view of state theory. As far as many grassroots groups or groups within a movement are concerned, it does not make any difference to them whether or not they are regarded as NGOs. In the seventies many of them would have been regarded as being part of social movements. When they take on the form of an NGO, they have a different significance within society and are no longer movement organisations (Klein 1997). They are recognised by the state and are given official status. They are given tax privileges. They can apply for grants or win contracts. They have formal access to the government, parliamentary bodies, national and international organisations and decision-making bodies and can develop informal contacts with individuals in the state administration and in political parties or foundations which have an influence on the political process.
It is this development in particular which leads us to regard NGOs as democratic actors in a pluralist neo-corporatist context. This goes against the conventional narrow definition of democracy as the political process whereby the electorate chooses between competing parties on the basis of their programmes and candidates. From this point of view, neo-corporatist tripartite negotiations between government, trade unions and companies are a challenge to the government’s decision-making powers and can therefore be regarded as a weakening of democracy. Similarly, social movements may be dismissed as a form of mob rule or as an irrational expression of the special interests of a small minority. If we take this analysis to its logical conclusion, NGOs are not to be regarded as democratic actors, because they are suspected of weakening the authority of the state and the state’s monopoly of power both in terms of making decisions which are collectively binding and in terms of physical force.
It is not least the pressure of social movements and their demands for greater democratic participation which have led to a change in the official and constitutional definition of democracy and in the understanding of democracy from the point of view of political scientists and journalists. As a consequence, not only associations such as trade unions but also social movements and NGOs are valued as actors in the democratic process. A distinction is made between four forms of advocacy and participation in decision-making:
a) Administrative: interaction between representatives of the state administration and interest groups in the drafting of legislation, the implementation of government policy, the awarding of public contracts and the monitoring of social problems;
b) Territorial: the prerogative of political parties;
c) Functional: carried out by associations of workers, employers, craftspeople, doctors, farmers, teachers, etc.;
d) Experts, citizens’ initiatives, lobbyists: These form a large new category of actors in the field of advocacy which is regarded as a part of civil society. In this whole realm between the private sphere and the state a multitude of organisations and associations promote interests which are not their own private interests but rather have to do with public affairs. Actions are intended to have an impact in public life. Fairness and abstention from violence are key aspects of the normative self-understanding of the many diverse, competing actors within civil society. They are characterised by the use of public argument, whereas the administrative and functional forms of advocacy are characterised mainly by negotiation (Klein 1997). Where negotiations are concerned, the actors have a certain amount of power: They can threaten to boycott negotiations or to leave the negotiating table and thus render the actions of the state less effective. Where the use of argument and persuasion is required, the actors have to accept the consequences of being bound by their own arguments, if their arguments are to carry weight (Saretzki 1995). Habermas distinguishes between influence and power. The actors within civil society can win public support for their arguments and bully the political system which consists of bureaucracy, parliament and government. But they have no direct power to determine the decisions which are made (Habermas 1992).
This observation, that civil society does not wield any power but can exert influence through public argument, implies a questionable value judgement. It is implied that - because their actions are backed by logical argument - organisations of civil society, in our case NGOs, are internally democratic and do not pursue the vested interests of a particular group - unlike trade unions, which promote the interests of particular groups and are judged to be hierarchical and bureaucratic. As we have already shown, neither of these assumptions is true. NGOs are not necessarily democratically organised and do indeed often pursue the special interests of particular groups. This supposed contrast between NGOs and trade unions is also unsatisfactory from a normative point of view. When NGOs engage in advocacy on behalf of rainforest or indigenous peoples, this is not in any way morally superior to the demands of trade unions for jobs for the millions of unemployed, the payment of sickness benefit, educational opportunities or training subsidies. The question is also raised as to whether the interests of particular groups do not actually have a relatively high normative value. The widespread rhetoric of public welfare can be used, on the other hand, to justify massive job losses on the basis of a policy of sustainable employment or to reject refugees as simply “economic” refugees. A normative preference for argument rather than negotiation logically leads to a policy of giving preference to NGOs over and above trade unions and other associations. People tend to forget that trade unions have NGO status on the international stage. And NGOs are often active where trade unions have been seriously weakened by government policy or the power of large companies.
NGOs can be regarded as a phenomenon which indicates that associations and political parties are in crisis. The function of associations and political parties as decision-making or representative bodies is in any case minimal as a result of low levels of participation in elections. And in the leading capitalist states they have fallen into disrepute (Hirsch 1999). Finally, NGOs can operate where the state apparatus is in crisis and the functions of the state are taken over by society. In this case, NGOs are not intermediary bodies, because there is no state or government to relate to. The judicial model of the relationship between the state and NGOs is problematic because it is constructed on the assumption that civil society is always focused on the national government as the centre of political decision-making (Demirovic 2000). In reality, the networking and coordination of NGOs at the international level cannot be overlooked. Given a neo-pluralist concept of civil society, this is interpreted as the mobilisation of international public opinion and as a contribution to the democratisation of global society. But this does not fit the concept of NGOs as advocates and intermediaries between private interests and the state. This contradiction can only be overcome by regarding international civil society simply as an extension of this form of advocacy into every nation state throughout the world (Habermas 1992). It is significant that many NGOs participate in international and transnational political processes, political processes which themselves become arenas of conflict, not least because of the participation of NGOs. NGOs have therefore played an innovative role in the development of a new form of political action.
There are at least three lines of argument which indicate that the model of civil society as a form of intermediary is too simple. Firstly, the implicit assumption that civil society is oriented towards the nation state as a stable focus for political activity is unrealistic. It implies that the opinions of a great many individuals, when they are expressed in public debate, are all directed towards the top of the socio-political pyramid. There are, however, debates on a horizontal level around particular subjects, organisations, policies or broader issues. And the processes of civil society do not only operate from the bottom upwards as if it were only a forum in which social movements represent group interests and organise protest. Civil society also provides a forum in which state actors can maintain the status quo or rather manage the way in which the status quo is allowed to change. There is a general disregard of the fact that civil society - taken as a whole - is a unity of opposites which includes two kinds of actors: those which exert the power of the state and those which are opposed to state hegemony and which advocate alternatives to the conventional capitalist model of the regulation and reproduction of society.
Secondly, no account is taken of the internal logic of civil society. It is reduced to a purely political phenomenon. The cultural - and in a formal sense private - aspects of civil society are disregarded. Music societies, art galleries, learned societies, churches, pubs, cafés, clubs, street names, publishers, intellectuals: These are all part of civil society. Civil society is the space in which social and political consensus is built. Political activities are of secondary importance in the midst of such a wide variety of cultural activities.
Thirdly, the state is neither a unitary entity nor the top of a pyramid. A centralist judicial model of political power which sees the state as a hierarchy does not fit the facts. And it clearly has no validity when one takes into account the transformation of the state which is taking place through denationalisation, privatisation, internationalisation of the state, and adaptation of the machinery of government for the purpose of global governance instead of government of the nation state (Jessop 1999; Hirsch 1999). The state is, as we shall see, a force field of strategic forces, in which NGOs are present as one kind of actor. NGOs not only extend the field to include additional interests. They also contribute to the transformation of the state. It is therefore not possible to separate state and society. NGOs turn the state into part of society in such a way that they internalise - or reproduce within themselves - the separation of civil society and the state. The problem with many theories of civil society is that - on the basis of certain normative assumptions - they advocate a formal separation of judicial state power from civil society, so that they become blind to the crisis of the state and the tendency of politics to become a socio-cultural phenomenon.
NGOs and the Globalisation of the state
According to the concept - developed by Poulantzas - of the capitalist state as a social structure, the bourgeois state does not stand over and above society. We have to change our concept of government by the state accordingly. In the first place the state influences structures, establishes the equality of all persons before the law as citizens and unites the people as a nation which it then represents. As the state transforms class conflict into a multitude of conflicts between particular social interests, it condenses these conflicts within its own apparatus. This process of condensation in turn constitutes the state. The conflicts amongst the ruling classes and between the ruling classes and subordinate classes take on a political form and are fought out within the state apparatus. All the parties to a conflict, whether it is between the employer and the employees within a firm or between a company and the local population, have an interest in pursuing the conflict within the state apparatus. The employers favour this, because they are otherwise too weak on their own. The workers prefer it, because any success that they might have in a conflict with their employer is immediately threatened by competition from other workers or by the strength of other companies somewhere else. The state becomes the terrain on which groups within society sort out their differences. So long as the separation of the state and the economy is reproduced in such conflicts, the ruling classes will always have the upper hand, because the state is the structure within which they coordinate and combine their common interests.
In order to extrapolate Poulantzas’ ideas to shed light on NGOs, we have to take his thought further in two directions. Firstly, we have to make clear from the start that the concept of the state as a material condensation of the relationship of power within society is not to be restricted to the nation state. In the seventies Poulantzas already argued, quite rightly, against the view that the internationalisation of capital would inevitably lead to a supranationalisation of the state. This view is still widespread today, though, because of globalisation. Poulantzas criticizes in particular the apparent assumption that there is an in-built contradiction between economic structures and processes (the internationalisation of production, the dynamic nature of
the capitalist system of production) and an out-dated overall framework (the nation state) (Poulantzas 1975, p. 71). Poulantzas’ key argument is based on the assertion that the capitalist system of production does not control society from outside but rather reproduces itself within the social structures of society. These social structures form the space in which processes that are not concurrent sort themselves out and lead to a particular constellation of social forces and class struggles (Poulantzas 1975, p. 45). This reproduction of the capitalist system of production in and through social structures has historically taken on the form of an imperialist hierarchy in which individual centres have imposed their rule using their own various means of oppression and exploitation. Poulantzas perceived the actual existence of this imperialist hierarchy or chain of command at the beginning of the seventies in two dividing lines: firstly, a line between the metropolitan centres and the oppressed societies, and secondly, a line between the metropolitan centres themselves. According to Poulantzas’ interpretation, the economic relationship between the USA and Europe is reproduced in the form of dependency within European societies. This leads to the emergence of a new form of capital, the inner bourgeoisie, which is distinguished from the national bourgeoisie by the fact that it represents the interests of multinational companies. But, unlike the comprador bourgeoisie, it does not simply act as the executive arm of company headquarters, but rather adapts itself to the local (i.e. national) situation as regards production and wealth creation and therefore comes into conflict with head office. Since the metropolitan states reproduce the interests of ruling capital, it is clear that they are dependent.
In spite of the linking up of systems of production, the state still primarily takes on the form of the nation state, according to Poulantzas, because the class conflicts of national society are condensed within it (Cox 1998). The conclusion - so far as democracy theory is concerned - is obvious. The subordinate classes and groups are really only able to influence political decision-making processes and to force compromises within the framework of the nation state. The institutions which make democratic control and voluntary assent to binding agreements possible and which have only been established as a result of hard-won compromises, exist only within the nation state (Hirsch 1999, Jessop 1999). When political decision-making shifts into a supranational arena, one of the conclusions which we can draw is that we should fight for a return of policy-making to the national arena.
Nevertheless, the view that the bourgeois state can only exist in the form of the nation state does not seem to hold water. Over the course of history the bourgeois state has at times taken on the form of a multinational or colonial empire. Strictly speaking, it was not until the period of decolonisation after the Second World War that nation states became the norm, i.e. at a time when state management of the economy, democracy and territory all followed the same boundaries and American power and influence, especially over European countries and Japan, encouraged the development of a centralised, autonomous welfare state. We should tackle this question systematically using Poulantzas’ concepts, because this enables us to observe the development of an internationalised state as a constellation of social forces, in which NGOs play a significant part. If we define the state as a strategic force field and the material condensation of the relation of social forces, this does not mean that this material condensation can only take on a national form, already pre-defined. If that were the case, then the state would not also be reproduced as a form of government. But the state would nevertheless have power as a form of government, because it had been predetermined structurally that social forces and power can only become condensed in this particular form. The reason for this seems to be Poulantzas’ supposition that the state is always characterised by being constituted by a nation. But it is Poulantzas’ own dynamic and relational concept of the state which suggests that the state should be regarded as a strategic force field, as an extensive network of reproductive mechanisms, through which social power flows. From this point of view, the national dimensions of the state are important, but only as strategic elements of the state which may increase or decrease in importance depending on the economic situation and the constellation of political forces. In other words, there are many indications that, whilst nation states are far from becoming insignificant, let alone redundant, they are being reconstituted. This is happening in parallel with global, transnational profit maximisation and accumulation of capital. Linked with this is the formation of a transnational sub-class of the bourgeoisie and transnational categories of labour (both highly qualified and unqualified, both legal and illegal migrants) (Hirsch 1999). Existing balances of power become unstable as a result.
Nation states not only reproduce dependent relationships within themselves; they also become a part of the internationalised state - along with individual institutions and political processes. The internationalised state does not take the form of an independent autonomous institution. It is a reproductive system which is supported both by parts of the nation state and by international organisations, such as the UN and its agencies, NATO, OECD, WTO, the World Bank, the IMF and the EU, etc. The apparatus of the nation state and individual parts of it are linked up at various levels with supra-state institutions to form a network. And together with these supra-state institutions the apparatus of the nation state reproduces itself as state at a higher level. The way in which relations of power are materially condensed now differs, of course, from that during the era of the Keynesian welfare state.
In the seventies Poulantzas was able to observe that a political crisis and the crisis of the welfare state caused political decision-making processes to be transferred out of parliament and government into the administrative apparatus. This then became the organisational focus and the seat of political power and was politicised in the process. This led to a permeation of the administrative apparatus by diverse interests. Various factions secured a position within the apparatus. And numerous competing networks spread out over it. The shift of political power into informal channels and arcane political processes within the administration causes the masses to be excluded from the democratic process. Poulantzas calls this process “authoritarian statism”. It is not an extraordinary kind of state - as in the case of fascism or military dictatorship, but can instead be characterised as the “new ‘democratic’ form of the bourgeois republic” in the phase of transition from fordism to post-fordism (Poulantzas 1975, p.191). Poulantzas nevertheless remains too closely bound in his thinking to the model of a closed political administration and does not take account of the web of administration that is spreading itself out across the globe. “The growing horizontal differentiation of international institutions and hence of the national ministries, sections and units concerned indicates that civil servants are involved right across the board in dealing with international problems. Contact with colleagues in other states and with international organisations in order to share information and opinions has become an accepted part of the daily routine.” (Wessels 2000, p. 427.) Associations and NGOs are also involved in this business of cooperative management through an international network operating at several levels. This management process is not simply restricted to large international conferences. It also includes a multitude of daily interactions and routines of an administrative nature. With their knowledge and the political pressure which they exert, associations and NGOs contribute to the “increasing complexity of inter-state problem solving processes” (Wessels 2000, pp. 371.) But this cannot be described as a process of corporatist negotiation, because the NGOs do not speak on behalf of members who can be mobilised. And it is similarly impossible to make unambiguous agreements which are generally applicable and binding on governments and state administrations as well as corporate actors. On the whole it is just a question of information exchange and consultation. But even this is sufficient to alter the relationship between state and society, because the international organisations and administrative bodies become politicised as a result of maintaining contacts with journalists, political parties, interest groups and representatives of NGOs. The mechanisms of governance - consultation, agreement, participation - develop along the lines of a loose geometric system which links local, regional, national and supranational decision-makers with each other and with social groups according to how much power they have and the matters with which they are concerned.
In this situation NGOs exert a democratising influence in two ways: Firstly, they ensure the transparency of political processes, constellations of power, stalling tactics, ignorance and incompetence; Secondly, they work to improve decision-making processes. NGOs contribute step by step to the transformation of the political landscape and to the development of international networks of state administrations. In my view, neither democracy nor our concepts of democracy should be limited to national, regional and local levels, because this fails to take sufficient account of new patterns of reproduction of state power within a network of reconstituted administrative bodies. Some enthusiastic supporters of globalisation believe that we will eventually find ourselves living as world citizens in a global democracy. But this is not going to happen. What is already happening is that the strategy of the powerful states, which is to shift political processes into the arcane world of international organisations, administrative bodies and networks, is causing NGOs to be forced into the role of social interest groups. Whilst submitting to this process, NGOs can sometimes exert a democratising influence without necessarily being democratically constituted themselves. It is the new pattern of hegemony itself which creates these new possibilities for action by NGOs (Cox 1998, p. 80).
Poulantzas’ analysis follows Althusser’s break-down to a large extent. Althusser concerns himself with the many aspects of social life which he sees organised within the various parts of an ideological state apparatus. These organs of the ideological state, each with their own particular methods of subjugation, facilitate the allocation of individuals to various social structures and thus determine what functions they perform. But there is a key problem with this form of government. In political theory, following Weber, it is somewhat one-sidedly referred to as the problem of legitimacy. This term is inadequate, because”legitimacy” is associated with justice and morality and consequently with rational justification of the state. In addition, according to Weber the state exists as a bureaucratic institution. Round about the time when Weber was writing Gramsci invented the concept of civil society in order to draw attention to a more fundamental phenomenon. Within civil society a consensus is built which forms the basis for justification of rule by the state. People put their faith in legal regulations and moral standards which match their everyday beliefs, ideas and activities. This consensus is a one-sided imposition because it is created by the ruling classes imposing their way of life and their way of organising work on a great many other social groups. They demonstrate their ability to organise the production process and to manage the life of society and thus win trust and recognition for their good leadership. This form of hegemony succeeds in creating a commonly held worldview, in which the social contradictions are understood and dealt with as differences in interests. The way people look at things is transformed: Instead of multifarious opposing forces there is a more or less harmonious world which is only interpreted in different ways. It is within civil society that this transformation of social contradictions into unity with diversity takes place. Civil society, according to Gramsci, is an extension of the state which provides the leadership of the state with a firm and lasting basis in cultural traditions and customs. These traditions and customs are a form of rationalisation and a way of overcoming day-to-day economic ups and downs and short term interests on the level of moral and political goals. The state is reproduced in civil society as a coercive apparatus. Gramsci also refers to this as “political society” (società politica). (Gramsci 1971)
In Gramsci’s view civil society is made up of parties or factions, each of which tries to develop a collective purpose. Parties in this broad sense are organisations which determine the broad direction of politics, train the people who are to realise the goals and develop the image of these people. They also train the mass of the population and reconcile a multitude of particular interests through internal discussion. In Gramsci’s view, parties are “schools of state life” (Gramsci 1971, p. 921). As organisations within civil society parties are part of the extended state, which permeates a multifaceted society from schools and education to street names, publishing and newspapers, reorganises society into parties, forms collectives and thus reproduces the state. Seen from this point of view, NGOs - like the social movements of earlier years - are a result of the reform of the development of interest groups and collectives. They not only represent particular interests; they also contribute to their formation; they train people in a new political role; and they create a new relationship between the state in the narrow sense (government, parliament, administration) and the population.
Hegemony and civil society cannot be adequately defined simply in the context of the nation state and relations between states. In the course of the development of capitalism since the middle of the 19th century several forms of world order, each of them actually a form of hegemony, can be identified (Cox 1998, pp. 80). And globalisation is not based on direct subjugation and exploitation by a powerful state. It is much more a question of spheres of influence as forms of hegemony which are based on common interests.
In recent years a process has taken place in which hegemony has been established and parties (in the broad sense) have been created. Characteristic of this process is the existence of powerful international institutions, committees and think tanks which - although they don’t think of themselves as belonging to civil society - seek to promote the development of a civil society in which NGOs are to have a privileged role. It is not just a question as to whether or not there are NGOs which are politically active in international institutions. It is of considerable political significance that the activities of NGOs have been encouraged, taken up and developed by representatives of parties, governments and international institutions. This is intended to promote a strategy of reorganisation, a new pattern of reproduction of the national state apparatus and its integration into the international state. NGOs are seen as catalysts and building blocks in this process and are used accordingly.
In the first place, people are being trained within NGOs for a new political role in civil society as globalised intellectuals (Habermas 1992). With their particular skills and abilities these people can contribute to the development of a consensus in which the astronaut’s view, i.e. the spaceship earth model, supersedes all other views (Demirovic 2000).
And secondly, NGOs contribute to the construction of the internationalised state by helping to build up the internationalised imperialist state network. They also go beyond simply acting as consultants by supplying international decision-making processes with proper permanent channels for the forming of opinions. This is happening primarily in the politically”soft” areas of development, environment and human rights and to a lesser extent in the fields of security and economics. This is a warning to us to be careful in our observations, but it does not disprove our argument, because in these “soft” areas, as in the case of intellectual property rights, strategically important decisions are often being made in relation to new ways of accumulating wealth (Habermas 1992). And the process of extension and reproduction of the international state is by no means complete. Both these factors, the recruitment of intellectuals by NGOs and the development of new processes for the forming of opinions, are an indication of the dynamic nature of the self-transformation of the state, a process which is promoted by initiatives of civil society and taken up by political society. So far as NGOs are concerned, this means that there is a growth of political hegemony even within their sphere of action. Whilst some NGOs become privileged actors which have the ear of companies, international institutions and governments, others can try to build up public opinion and help to build social movements. The development of a new kind of NGO has therefore given rise to a new conflict within civil society in relation to the question of hegemony.
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Klein, A. 1997. The NGO as a component of Civil society and carrier of participation and democratic social development. In eds. E. Altvater,, et al., p.315-339.
Poulantzas, N. 1975. “Classes and Capitalism”. University of Berlin. Berlin.
Saretzki, T. 1995. “Arguing” and “Bargaining”: Self connection by public discourses. In Power of the public - Public of power, OD. G. Goehler. Baden-Baden.
Wahl, P. 1997. Myth and reality more internationally Civil society. The perspectives of global cross-linking of Non-government organizations. In eds. E. Altvater et al., p.293-314.
Wessels, W. 2000. The opening of the state. Models and Reality of transnational administrative practice 1960-1995. Opladen.
Posted by admin | Under Business, Computers
Thursday May 1, 2008
Executive Summary
Dell Computer Corporation was established in 1984 and today ranks among the world’s largest computer systems companies. Dell pioneered the concepts of selling personal computer systems directly to customers; offering build-to-order computer systems; and providing direct, toll-free technical support and next-day, on-site service. The company designs and customizes products and services to end-user requirements, and offers an extensive selection of peripherals and software.
Dell’s complete range of high-performance computer systems include: Dell Dimension and OptiPlex desktop computers, Latitude notebook computers, and PowerEdge network servers. The company’s products and services are sold in more than 140 countries and territories to customers extending from major corporations, government agencies and medical and educational institutions to small businesses and individuals. The company employs approximately 11,000 people. Headquarters are located in Round Rock, Texas, with manufacturing facilities in Austin, Texas; Limerick, Ireland; and Penang, Malaysia.
History
At age 13 Michael Dell was already a successful businessman. From his parents’ home in Houston, Dell ran a mail-order stamp-trading business that, within a few months, grossed over $2,000. At 16 he sold subscriptions to the “Houston Post,” and at 17 Dell bought his first BMW. When he enrolled at the University of Texas in 1983, he was thoroughly bitten by the business bug.
Dell started college as a pre-med student, but found time to establish a business selling random-access memory (RAM) chips and disk drives for IBM PCs. Dell bought his products at cost from IBM dealers, who, at the time, were required to order from IBM large monthly quotas of PCs, which frequently exceeded demand. Dell resold his stock through newspapers (and later through national computer magazines) at 10-15% below retail.
By April 1984 Dell’s dorm room computer components business was grossing about $80,000 a month — enough to persuade him to drop out of college. At about that time he started making and selling his own IBM clones under the brand name PC’s Limited. Dell sold his machines directly to end-users rather than through retail computer outlets, as most manufacturers did. By eliminating the retail markup, Dell could sell his PCs at about 40% of the price of an IBM.
The company was plagued by management changes during the mid-1980s. Renamed Dell Computer, it added international sales offices in 1987. A year later it started selling to government agencies and added a sales-force to serve larger customers. That year Dell went public in a $34.2 million offering.
Dell tripped in 1990, reporting a 64% drop in profits. Sales were growing, but so were costs, mostly because of Dell’s efforts to design a PC using proprietary components and RISC chips. Also, the company’s warehouses were oversupplied. Within a year Dell turned itself around by cutting inventories and coming out with eight new products.
Dell entered the retail arena by letting Soft Warehouse Superstores (now CompUSA) in 1990 and office supply chain Staples in 1991 sell its PCs at mail-order prices. Also in 1991 Dell opened a plant in Limerick, Ireland.
In 1992 Xerox agreed to sell Dell machines in 19 Latin American countries. That year Dell sold a new line of PCs through Price Club (now Price/Costco). Dell opened subsidiaries in Japan and Austria in 1993 and began selling PCs through Best Buy stores in 16 US states.
The computer maker abandoned retail stores in 1994 to refocus on its mail-order origins. The company took a $40 million charge to retool its troubled notebook computer line and later that year released its Latitude notebook to general acclaim. The company also introduced a line of servers.
In 1995 the firm offered Pentium-based notebooks, and hastened the interest in its desktops by cutting prices and releasing a dual-processor PC. The following year Dell ramped up its efforts in the Asian computer market with new mail-order service in Hong Kong, Japan, and Singapore; a new Asia/Pacific Customer Center in Malaysia; and direct-sales operations in South Korea and Taiwan.
In 1997 Dell and Toronto-based Newcourt Credit Group formed Dell Financial Services, a joint venture that will provide financing for Dell customers. That year Dell also announced plans to enter the market for engineering, analysis, and design computers called workstations. Dell built up its consumer business in 1997 by separating that operation from its small-business unit and beginning a leasing program for individuals.
Current Situation (1997)
Computer Industry and Market Prediction
It is hard to believe that another year has gone by in an industry that used to live by Moore’s law. Moore’s law states that technology doubles every 18 months. While that maxim still works, at least when it comes to semiconductors, it doesn’t accurately depict the greater changes the computer industry is going through at this time. The Internet seems to speed ahead in 1997, while the market is expanding in leaps and bounds. Last year at this time, market researchers predicted that we would see at least a 12% growth in PC sales. However, thanks to high demand in sub-$1000 PC’s this Christmas, It is likely to see unit sales for 1997 at 20% or higher. Of course, with lower priced PC’s gobbling up as much as 40% of retail, revenues may actually be down for this same time period.
At the beginning of the year, many thought that the New Computer (NC) was going to start taking off. At best, it is finding a niche in corporate offices where repetitive tasks are essential to productivity. The beginning of the year also saw many predict that information appliances would gain ground, and while Web TV and smart phones have debuted, they have not made any real impact in a market aimed at mainstream consumers.
Many also started out 1997 thinking that Microsoft just might have met their match from the Larry Ellison, Scott McNealey and the Java crowd, but as we head into 1998, Microsoft looks more in control of the market then ever. Indeed, Windows 98 upgrades should bring them great profits in 1998 and Windows NT 5.0 is on track to become a sturdy OS in all phases of corporate computing. With the introduction of two new mainstream user platforms for Windows CE in 1998, Microsoft could end up owning the standards for the consumer market as well.
The only predictions from the beginning of 1997 that has been accurate were the ones dealing with Apple Computer. While very few predicted that Steve Jobs would end up running the company, most market researchers did say that Apple would continue to lose ground in 1997. In fact, they have actually lost as much as 3% of their market share this year alone as Apple confused their developers and turned their backs on cloning partners.
1997 also saw the Internet become an important draw for consumers. Although the sub-$1000 price point got their attention, the Internet has become the reason they are going out and buying these low-cost PCs in such large numbers. The lure of the Internet as a tool for school age kids and its role as an information source for even mom and dad has finally turned the tide for many families that had resisted buying a PC up to now. 1997 will also be remembered as the year that the Justice Department put the heat on Microsoft and tried to rein them in a bit. They are currently being challenged over their monopolistic practices, and this fight over the inclusion of Internet Explorer 4.0 in current versions of Windows will continue to keep them under the scrutiny of government officials as well as the industry at large. So, with 1997 clearly behind us, what is in store for 1998?
The first prediction is that Intel will get the low-cost religion in a big way. While they have already made moves in this direction, Intel competitors such as National Semiconductor/Cyrix and AMD will force them even lower when it comes to semiconductor pricing for consumers. In fact, many analysts predict that by next Christmas, we will be talking about fully loaded PC’s with a 200 MHz processor and 16 Megs of DRAM and at least a 12X CD ROM drive with a street price of around $500, without monitor. Add the monitor and a 2 gig hard drive and we are still talking about a complete system for about $750-$800. According to the Computer-World, the magazines for IS professional, Customers will be able to get the system above and a 600 dpi color inkjet printer all for around $900-$1000 by next Christmas’98.
The second prediction is that there will be a move to make CD-RW the next floppy. Although the DVD RAM camp will try and make this the re-writable standard, the backward compatibility of CD-RW and then DVD RW that comes out of the HP camp is more likely to get the lion’s share of at least the business mindset by the end of 1998. 1998 will also bring the introduction of something that will be called the Auto PC. At last fall’s Comdex, IBM took the lead and showed a network PC embedded into the dashboard of a sport utility vehicle. However, Microsoft and others will start touting their own version of an Auto PC with Internet connections and by this time next year we will even see some autos with a PC based Internet architecture built right into to some luxury vehicles.
Analysts expect to see the fight for the digital living room between PC and consumer electronics vendors heat up significantly. Microsoft and their Web TV Plus will lead the charge, while NCI and their Internet TV concept will also gain some ground. Indeed, at the end of 1997, Scientific Atlanta chose the NCI software for their digital set-top box and it would not surprise me if their main competitor, General Instruments, decides to go the way of Windows CE.
At the same time, digital media reference designs from AMD/Cirrus Logic and National Semiconductor / Cyrix will catch the attention of mainstream PC vendors who are also lusting after the digital living room. This design includes 3D surround sound stereo, DVD ROM, 32 Megs of DRAM, a 1.6 gig hard drive and MPEG video in a single box that connects to the TV. While it does not deliver enhanced TV like Web TV does, it would give the user quite a powerful system for the living room that could be used for various purposes.
Another interesting trend for 1998 will be the purchase of sub-$1000 PC’s as dedicated Internet access devices in upscale homes. We are starting to see people who normally use the PC in the den for productivity look for a second PC that could be dedicated for Web surfing and email. The reason for this is that they do not want their productivity PC to catch any possible virus or infections from Internet and Web data transfers. Dedicating a PC for this type of Web access guarantees that their important PC has no conflicts and protects their work from outside influences.
Another thing that 1998 will bring will be the introduction of a Web based phone into the home. Cidco, Sanyo, Brother and others will take aim at the kitchen by providing an all-in-one device that can make voice calls, do email and use the Web as a telephone directory.
As for industry growth, most market researchers still see a strong US market, with about an 18% increase in 1998. Europe will also be around 18-20% but Asia should see a slow down due to their current economic problems. Growth there may be only about 10% in 1998.
With 1997 behind us and the market moving at lightning speed, the outlook for the PC industry does look pretty good. While there could be some hiccups, 1998 seems to be on track to be a banner year with some exciting new products paving the way for PC technology to gain more ground in both the office and the home.
Inside Dell Computer, Inc.
It’s amazing to see how this small company does grow bigger in Texas. Austin area-based Dell is the world’s leading direct seller of computers, with international sales accounting for an ever-growing portion of revenue. Dell makes its own line of desktop PCs, notebook computers, and servers. More than 90% of them are sold to businesses and government entities. It also markets a variety of compatible peripherals and software from other manufacturers.
With the industry standard Wintel platform (Microsoft Windows operating system and Intel microprocessor) as its foundation, Dell beats the competition by offering custom-built products directly to computer users. Customers can order by phone or over the World Wide Web, where the company is selling as much as $6 million worth of computers daily and expects to be processing half of its transactions by the year 2000.
Dell’s built-to-order boxes mean lower inventories, so the company can offer the latest technologies. Lower inventories also translate to lower costs and, therefore, higher margins for the company. Looking to apply its winning strategy in a new theater, Dell introduced its first line of workstations, based on the Windows NT operating system. Founder and Chairman Michael Dell, who despite his youth is the longest-tenured CEO at any major US computer firm, own 16% of the company. (#190 in FORTUNE 500 & #226 in Hoover’s 500)
Officer and Employees (Source: Hoover Online)
Chairman and CEO: Michael S. Dell, age 32, $1,993,371 pay
VC: Morton L. Topfer, age 60, $1,575,898 pay
VC: Kevin B. Rollins, age 44, $828,150 pay (prior to promotion)
SVP and CFO: Thomas J. Meredith, age 46, $928,779 pay
SVP; General Manager, Europe: Martyn R. Ratcliffe, age 35, $990,908 pay
SVP Desktop and Workstation Business: G. Carl Everett Jr., age 47
SVP Law and Administration: Thomas B. Green, age 42
SVP, Server Group: Michael D. Lambert, age 50
SVP Relationship Group: Joe Marengi
SVP, Desktop Business Unit: D. Scott Mercer, age 46
President, Europe, Middle East, and Africa: Jan Gesmar-Larsen, age 37
VP; General Manager, Japan: Hiroshi Fukino, age 55
VP and Chief Information Officer: Jerome N. Gregoire, age 45
VP; General Manager, Asia/Pacific: Phillip E. Kelly, age 39
VP; General Manager, Preferred Accounts Division: John Kinnaird
VP World Procurement: John K. Medica, age 38
VP Human Resources: Julie A. Sackett, age 53
VP Finance and Corporate Controller: James M. Schneider, age 44
VP and Treasurer: Alex C. Smith, age 37
VP Value-Added Services: Bill Waas, age 49
Auditors: Price Waterhouse LLP
1997 Employees: 10,350
1-Yr. Employee Growth: 23.2%
Location and Market (Source: Hoover Online)
Headquarters: One Dell Way, Round Rock, TX 78682-2244Phone: 512-338-4400Fax: 512-728-3653
Web Site: http://www.dell.com
Dell sells its products in more than 140 countries. The company has manufacturing facilities in Ireland, Malaysia, and the US.
1997 Sales
$ Mil. % of total
Americas 5,279 68
Europe 2,004 26
Asia/Pacific 476 6
Total 7,759 100
Product and Operation (Source: Hoover Online)
1997 Sales % of total Desktop systems 78
Notebooks 18
Servers 4
Total 100
Selected Products:
Computer peripherals
Desktop computers (Dimension, OptiPlex)
Notebook computers (Inspiron, Latitude)
Servers & workstations (PowerEdge, WorkStation)
Service and support
Software
Competitors (Source: Hoover Online)
Acer
Apple Computer
Canon
Compaq*
Digital Equipment
Fujitsu
Gateway 2000*
Hewlett-Packard IBM*
Machines Bull
Matsushita
Micro Warehouse
Micron Technology
NCR
Oki Electric
Packard Bell
Philips Electronics Tandy
Toshiba
Unisys
Siemens
Sony
Sun Microsystems
Sharp
Hyundai
Hitachi
* Note: The big-bold-italic-red printings are the main competitors for Dell.
Financials (Source: Hoover Online)
Ticker symbol: DELL 1998 Revenue ($ mil.): 1998 Net Income ($ mil.):
Exchange: NASDAQ 12,327.0 944.0
Fiscal year-end: January
1-Yr. Revenue Growth: 1-Yr. Net Income Growth
58.9% 82.2%
Dell Computer Corporation
NASDAQ: DELL Fiscal Year-End: January
Data Definitions
Market Data | Comparison Data | Detailed Annual Financials | Detailed Quarterly Financials | Historical Financials & Employees | Real-time SEC Filings | Investor Resources
Year Revenue
($ mil.) Net
Income
($ mil.) Income
as %
of sales Stock Price ($) P/E Per Share ($) Empts.
FY
High FY
Low FY
Close High Low Earns. Div. Book
Value
1997 7,759 518 6.7% 18.09 3.34 16.53 27 5 0.68 0 1.16 10,350
1996 5,296 272 5.1% 6.17 2.47 3.42 18 7 0.34 0 1.30 8,400
1995 3,475 149 4.3% 2.98 1.20 2.66 15 6 0.20 0 1.03 6,400
1994 2,873 (36) — 3.07 0.87 1.38 — — (0.07) 0 0.78 5,980
1993 2,014 102 5.0% 3.12 0.94 2.89 18 6 0.17 0 0.63 4,650
1992 890 51 5.7% 1.51 0.84 1.33 17 9 0.09 0 0.48 2,970
1991 546 27 5.0% 0.97 0.19 0.94 16 3 0.06 0 0.24 2,050
1990 389 5 1.3% 0.40 0.19 0.19 20 10 0.02 0 0.18 1,500
1989 258 14 5.6% 0.53 0.32 0.40 13 8 0.04 0 0.17 1,175
1988 159 9 5.9% — — — — — 0.06 0 0.07 –
1997 Year-End Financials
Debt ratio: 2.2%
Return on equity: 64.3%
Cash ($ mil.): 115
Current ratio: 1.66
Long-term debt ($ mil.): 18
Shares Outstanding: 692
Dividend yield: –
Dividend payout: –
Market value ($ mil.): 11,442
Main Competitor’s financial comparison
Company Ranking for: (Source: CorpTech, Technology Company Information)
Company Employment Growth in 1997 Growth projected for 1998 Annual Sales Revenue Sales per Employee
Dell 18 of 3,011 123 of 2,777 N/A 12 of 2,966 178 of 2,952
Compaq 14 of 3,011 N/A N/A 4 of 2,966 108 of 2,952
IBM 1 of 3,011 738 of 2,777 N/A 1 of 2,966 422 of 2,952
Gateway 2000 25 of 3,011 802 of 2,777 N/A 17 of 2,966 158 of 2,952
Description and Financial Review for: (Source: Hoover Online)
1. Compaq Computer Corp
Compaq Computer, Corp. leads the PC market and still isn’t satisfied. The Houston-based company is logging experience in handheld systems and other new fields in efforts to become the top global computer company. Compaq is the world’s leading PC maker with about 10% of the global market, and it’s churning out more new products than ever before (PCs account for about half of sales). Other Compaq products include servers that run distributed networks of computers, consumer systems, and communication tools.
Compaq’s planned purchase of Digital Equipment Corp. and its purchase of struggling Tandem increase its depth in the high-end hardware market. (The deal for Digital, the biggest acquisition in the history of bits and bytes, would create the world’s second-largest computer firm, behind IBM.) Compaq also acquired modem maker MicroCom to boost its remote-access business.
The firm’s latest products emphasize diversity, such as clustered, high-end PC servers that link several systems’ resources, and machines that compete with low-end UNIX systems. The expansion has its price — an entry into the home information appliance market, its PC theater developed with Thomson S.A., was killed after less than a year due to bad reception in the marketplace. What the company lacks in analysts’ eyes is competitive delivery and network service. The majority of Compaq’s revenues come from sales to corporate customers, but it also markets products to home users, governments, schools, and students. (#60 in FORTUNE 500 & #41 in Hoover’s 500). Source: Hoover Online
Compaq Computer Corporation
NYSE: CPQ Fiscal Year-End: December
Data Definitions
Year Revenue
($ mil.) Net
Income
($ mil.) Income
as %
of sales Stock Price ($) P/E Per Share ($) Empts.
FY
High FY
Low FY
Close High Low Earns. Div. Book
Value
1997 24,584 1,855 7.5% 39.78 14.20 28.25 33 12 1.19 0 6.21 32,656
1996 18,109 1,313 7.3% 17.43 7.18 14.88 20 8 0.87 0 4.49 18,900
1995 14,755 789 5.3% 11.35 6.23 9.60 19 10 0.60 0 3.45 17,055
1994 10,866 867 8.0% 8.43 4.83 7.90 12 7 0.68 0 2.90 14,372
1993 7,191 462 6.4% 5.05 2.78 4.92 505 278 0.01 0 2.10 10,541
1992 4,100 213 5.2% 3.32 1.48 3.25 20 9 0.17 0 1.67 11,300
1991 3,271 131 4.0% 4.95 1.47 1.76 50 15 0.10 0 1.53 11,600
1990 3,599 455 12.6% 4.52 2.36 3.75 13 7 0.34 0 1.44 11,400
1989 2,876 333 11.6% 3.75 1.97 2.65 14 8 0.26 0 0.99 9,500
1988 2,066 255 12.4% 2.19 1.40 1.99 10 7 0.21 0 0.70 6,900
1997 Year-End Financials
Debt ratio: 0
Return on equity: 19.7%
Cash ($ mil.): 6,418
Current ratio: 2.31
Long-term debt ($ mil.): 0
Shares Outstanding: 1,519
Dividend yield: –
Dividend payout: –
Market value ($ mil.): 42,912
2. IBM (International Business Machine Corp.)
IBM’s safety net turned out to be a web — the World Wide Web. Armonk, New York-based International Business Machines is the world’s top provider of computer hardware, software, and services. Not long ago the bottom had dropped out on sales of IBM’s mainstay mainframe and midrange computers. But with airlines, insurance companies, and banks relying on mainframes for their vast databases, and with the booming Internet business demanding big servers, business has been on an upswing.
Software and service revenues are also strong. Notes software from IBM’s Lotus Development subsidiary has more than nine million users worldwide. And services, once a freebie for big customers, now account for one-fifth of IBM’s sales.
Big Blue’s shedding of its longtime image as the quintessential button-down establishment was engineered by CEO Louis Gerstner, who became head of the ailing firm in 1993. Gerstner cut the workforce, shook up entrenched management, resuscitated the mainframe, and refocused the company on selling systems and support services.
Gerstner is betting IBM’s future on the networked world. The company is making every piece of hardware network-ready and has released the industry’s first network appliance, the IBM Network Station. Software units, Lotus and Tivoli (systems management software), focus on products for corporate intranets and new Web technologies. Acquisitions are also expanding IBM’s Web presence; for example, it recently purchased a majority stake in NetObjects, which makes Web site development software. (#6 in FORTUNE 500 & #6 in Hoover’s 500). Source: Hoover Online.
International Business Machines Corporation
NYSE: IBM Fiscal Year-End: December
Data Definitions
Year Revenue
($ mil.) Net
Income
($ mil.) Income
as %
of sales Stock Price ($) P/E Per Share ($) Empts.
FY
High FY
Low FY
Close High Low Earns. Div. Book
Value
1996 75,947 5,429 7.1% 83.00 41.56 75.75 17 8 5.01 0.65 21.04 240,615
1995 71,940 4,178 5.8% 57.31 35.13 45.69 16 10 3.53 0.50 20.24 225,347
1994 64,052 3,021 4.7% 38.19 25.69 36.75 15 10 2.51 0.50 19.00 219,839
1993 62,716 (8,101) — 29.94 20.31 28.25 — — (7.11) 0.79 16.04 256,207
1992 64,523 (4,965) — 50.19 24.38 25.19 — — (4.35) 2.42 24.17 301,542
1991 64,792 (2,827) — 69.88 41.75 44.50 — — (2.48) 2.42 32.40 344,396
1990 69,018 6,020 8.7% 61.56 47.25 56.50 12 9 5.26 2.42 37.48 373,816
1989 62,710 3,758 6.0% 65.44 46.69 47.06 20 14 3.24 2.37 33.50 383,220
1988 59,681 5,491 9.2% 64.75 52.13 60.94 14 11 4.64 2.20 33.36 387,112
1987 54,217 5,258 9.7% 87.94 50.00 57.75 20 11 4.36 2.20 32.04 389,348
1996 Year-End Financials
Debt ratio: 31.3%
Return on equity: 25.4%
Cash ($ mil.): 7,687
Current ratio: 1.20
Long-term debt ($ mil.): 9,872
Shares Outstanding: 1,016
Dividend yield: 0.9%
Dividend payout: 13.0%
Market value ($ mil.): 76,959
3. Gateway 2000, Inc
Gateway 2000 is one of the leading direct marketers of personal computers in the world. The company develops markets and manufactures and supports a broad line of big screen PC/TVs, desktops and portable PCs used by businesses, individuals, families, government agencies and educational institutions.
Gateway 2000 thrives in the fast paced environment of the PC industry, one of the most competitive businesses in history. Gateway 2000 wants corporate America to see spots. The North Sioux City, South Dakota-based maker of IBM-compatible PCs is the US’s #2 direct marketer of computers (behind global leader Dell). Known for packaging its PCs in boxes spotted like Holstein cows and then shipping them straight to consumers, Gateway is now targeting big businesses as the recipients of more of its systems.
European operations are based in Dublin, Ireland. Active European markets now include the United Kingdom, Ireland, France, Germany, Belgium, Luxembourg, Switzerland, Austria, Sweden and the Netherlands. Along the Pacific Rim, the company has sales and support operations in Japan and Australia, and manufacturing in Malaysia.
Gateway has expanded its revenues more than 35% annually by offering products directly to computer users ordering by phone or Web site instead of through resellers, a tactic that cuts costs by avoiding profit markups. It also lets the company get the latest technology to market faster:
Gateway was among the first PC makers to add color monitors, Pentium microprocessors, and CD-ROM drives as standard features. To correct its traditionally weak corporate standing (the majority of its business clients are small and medium-sized companies), Gateway has doubled the sales and service staff and worked to become more global itself (expanding Pacific Rim sales, among other things). The initial products in the new business line include the first NetPCs, stripped-down computers that cost under $1,000 (without a monitor).
Pony tailed chairman and founder Ted Waitt and his brother Norm own 46% and 9% of Gateway, respectively. (#284 in FORTUNE 500 & #288 in Hoover’s 500). Source: Hoover Online.
Gateway 2000, Inc.
NYSE: GTW Fiscal Year-End: December
Data Definitions
Year Revenue
($ mil.) Net
Income
($ mil.) Income
as %
of sales Stock Price ($) P/E Per Share ($) Empts.
FY
High FY
Low FY
Close High Low Earns. Div. Book
Value
1996 5,035 251 5.0% 33.13 9.00 26.78 21 6 1.61 0 5.31 9,700
1995 3,676 173 4.7% 18.75 8.00 12.25 17 7 1.10 0 3.73 9,300
1994 2,701 96 3.6% 12.38 4.63 10.81 20 8 0.61 0 2.60 5,442
1993 1,732 151 8.7% 10.75 8.38 9.81 15 12 0.71 0 1.94 2,832
1992 1,107 106 9.6% — — — — — — — — 1,369
1991 627 39 6.2% — — — — — — — — 657
1990 276 17 6.2% — — — — — — — — 303
1989 71 4 5.6% — — — — — — — — 150
1988 12 0 2.7% — — — — — — — — 40
1987 2 — — — — — — — — — — 11
1996 Year-End Financials
Debt ratio: 0.9%
Return on equity: 30.7%
Cash ($ mil.): 516
Current ratio: 1.65
Long-term debt ($ mil.): 7
Shares Outstanding: 154
Dividend yield: –
Dividend payout: –
Market value ($ mil.): 4,111
Key Issues
SWOT Analysis
Strengths
* High performance and Low price
* Direct marketing
* High sensitivity of the customer needs (because it sells direct and has direct contact with its customers)
* Custom Configured product
* Catalog/mail out database of customer
* Its commitment to sold relative high quality, relative low price products that are custom configured
* Have the best customer satisfaction in the industry: warranty packages, installation, maintenance, repair services, and user support
* Service Innovation & Recognition
* Value added service
* The second largest PC manufacture in the U.S. market and the third largest PC in the world, rank at 190 position in the Fortune 500
* Efficient distribution channel keep the production cost low
* A substantial cost advantage coming from the reseller’s markup, the costs and risks associated with carrying large inventories of finished goods.
* High growth (look at the competitor comparison)
* Service and Support as the ultimate competitive weapons in this maturing industry / customer satisfaction strategy. (Source: “Making the right choices for the new customers”)
* Outsource the unnecessary component and the component that doesn’t give big added value
* Keep its product open to the change or upgrade and adjustable or doesn’t need change on the software application/ system. (open architecture)
Weaknesses
* Not have much indirect distribution / Under-distribution
* Stock Keeping Unit / Inventory
* Not have so many product lines (2 for desktop, 2 for laptop/notebook and 2 for workstation)
* Lacked of / neglected laptop computers / Notebook, which is the hottest bit of the PC market
* Lack of diversifying distribution channel (too much focus on the direct channel)
* Its stock control and product forecasting systems could not keep up with its growth
* Dependent too much on the Wintel architecture. Dell Computer is the only manufacture that uses no other brand processor except Intel and the only manufacture who offers an operating system from Microsoft for all of its broad range of product.
* Not have so many resources in the computer networking, system and network integrators, which are combination of software, hardware, and peripherals. This market is more likely safer compare to the PCs and promising much higher profit margin. (This market has boomed by 20% every year).
* Unclear segmentation target customer
* Negative effect of direct marketing strategy. Because of this strategy, Dell lost the opportunity to gain the first buyer customer.
* Not have so much Financial Resources for developing its own project development. Ex: build its own monitor or build its own modem.
Opportunities
* Fastest Growing market in the Notebook segment
* International Growth opportunity; Japan (Dell is the ninth largest local vendor in Japan), Korea, Europe, Asia, Africa
* To be the most leading computer industry in terms of efficiency, profit margin, return on equity (ROE) and innovation
* PC’s is a huge market (Every person buys approximately 3 PCs every 10 years, The U.S. statistics)
* Huge opportunities to enter the derivation of the PC market, such as software, printer, scanner, and peripherals.
* Develops and markets its own operating systems that built based on the order of its customer
Threats
* Wintel Architecture
* Currency Exchange (36% revenues from international sales)
* Government Regulation, such as Recycling, EPA
* Because of its main customer is large company, it means they have a buying power and this could squeeze its profit margin
* Gateway 2000 is the closest competitor which has the same strategy (direct marketing, cut mark up cost, custom build computer and target the same segment customer; such as middle size and big corporation customers). In addition, Dell has to face head to head competition with Gateway 2000 in the same country; because both of them have the plants in the same country: Ireland & Malaysia.
* Short product life cycle of the semiconductor from 5 years to 3 months (Rapid technology cycles).
* Operating in one of the most competitive business in the history.
* Product Transitions.
* Production Forecasts / high degree of uncertainty demand.
* Technology standards and Key licenses.
* System Implementation (the risk of implement the new system).
* Credit Risk
* Year 2000 Compliance
Objectives
1. The most efficient and effective company in the computer industry
Dell is best known for establishing a direct distribution system. The traditional distribution system, indirect distribution system was very inefficient, because the reseller stores charge a 25-30 per cent mark-up for a computer. Beside that most salespeople do not know much about computers they sell.
2. Provide the best customer satisfaction in the computer industry
Satisfying customer involves meeting their specific needs, which makes segmentation and customization necessities.
3. The most profitable company in the computer industry that produce high ROE, ROI and profit margin
So far Dell has lead the great financial performance in the computer industry. This competitive strength is gained from the combination of its strategies above; the most efficient and effective company and provide the best customer satisfaction in the computer industry.
Marketing Strategy
1. Focus on high margin customers: Large Customer, such as large companies, Government and Education and Midsize companies and Small Business.
2. Stay on direct marketing and not rely on traditional retailing
3. Outsourcing the PC’s component to the independent manufactures and outsourcing the after sales service, then integrate and treat them as if they are inside the company (this will be explain in the next section).
Action Plans
Target Markets
From the data “Customer Group” (Dell Computer Corporation: Formulation Strategy), most of Dell Computer sales comes from Major corporate, Government, and Education Accounts. This data could support the strategy choice to focus chiefly on corporate customers while de-emphasizing consumers. In turn, Dell should allocate a substantial portion of its marketing resources to reaching customers through conventional retail distribution.
In order to make the segmentation success, Dell Computer should make it as clear as possible. Here is the example that we got from the article “The Power of Virtual Integration: an Interview with Dell Computer’s Michael Dell”.
Segmentation lets Dell Computer tailor its program to meet the customer’ needs. Moreover, Segmentation allows Dell Computer closer to its customer and it allows Dell to understand their needs in a really deep and real time way. This closeness gives the company access to information that is absolutely critical to its strategy. In addition, it also helps the company to forecast what the customers are going to need and when. And good forecasts are the key to keeping the cost down.
Target Segments
Dell’s direct marketing strategy made Dell PCs more interesting for novice /advance computer buyers (not first time buyer). Dell use World Wide Web to market its products, instead of 800 number and catalog / mail. Dell’s research profiled its typical customers as knowledgeable about computers, up to date on new systems, and specific about the product they want. These kinds of customers do not need or want the hand holding assistance provided at retail outlets.
Internal Operations
To accommodate its customer profile, Dell developed flexible manufacturing techniques. These techniques enable the company to build a customer’s computer virtually to order (custom build PCs through World Wide Web, instead of mail and catalog or telephone). Using different components for each order in Dell customs configured computers to meet customers’ specifications.
Instead of developing FMS, Dell also built a virtual integration between several strategies including customer focus, supplier partnerships, and mass-customization, just in time manufacturing. The virtual strategy itself means a technique how to combine that piece of strategies in the highly innovative way: technology is enabling coordination across company’s boundaries to achieve new levels of efficiency and productivity, as well as extraordinary returns to investors. In a simple way, it means Dell basically stitch together a business with partners that are treated as if they are inside the company.
Virtual integration harnesses the economic benefits of 2 very different business models. It offers the advantages of a tightly coordinated supply chain that have traditionally come through vertical integration. At the same time, it benefits from the focus and specialization that drive virtual corporations. Virtual integration as Michael Dell envisions it, has the potential to achieve both coordination and focus. (Source: “The power of Virtual Integration:”, Harvard Business Review, March-April 1998).
Beside that Dell marketing department are finding that data base strategies help them to better serve its customers. In dealing with large number of customers, it is difficult for marketers to serve them adequately. But, with a data-base strategy, they can gather insights and better understanding their customers’ expectations. In fact, Dell Computer Corp. has identified at least US $ 100 million in revenue opportunities within existing accounts by using a relationship data base strategy when it started in 1994.
To gather data for the project, Dell used a telemarketing procedure that could keep customers on the line long enough to give a lot of information. The ultimate goal was a 27-minute conversation (Direct contact and gather information). And the resulting data base includes planned purchased, Dell’s projected share of those purchases, and the timing of purchases so Dell could determine how often to call customers.
Cost Control
In order to gain high profit margin, the cost should be kept in line. Dell has already implemented this by carrying fewer inventories (35 days’ worth versus 110 days for Compaq Computer Corporation). Such flexibility allows Dell to uses its mail order expertise to introduce new and more expensive models faster that it could through the longer manufacturer to distributor to retail channel. Moreover, by reducing operating costs (Dell’s is 5.4 % of revenues versus 13 percent for Compaq) and by eliminating the middleman markup, there are more opportunities for marketing and sales to undercut the major brands after tapping other strategy options. Look at the chart below:
1. The dominant model in the personal computer industry - a value chain with arms-length transactions from one layer to the nest
2. Dell’s direct model eliminates the time and cost of third part distribution
3. Virtual Integration works even faster by blurring the traditional boundaries and roles in the value chain
Channel Innovation
Dell marketers recognize that getting comfortable with their current direct channel approach could limit expansion, especially in global markets that lack the sophisticated communications and delivery systems of North America. So by experimenting with the new distribution channels, managers at Dell continue to investigate new distribution concepts such as interactive mall and marketing via Internet.
According to the InfoWorld (Tebbe, Mark), Dell Computer Corporation shows that Web-based business is not just a dream. In fact, the company now sells more than US $ 1 million worth of computing equipment per day via the Internet. This revenue is growing by 20 percent each month. Dell has quickly created a sales channel that should deliver more than $400 million this calendar year.
Controls
Performance Metrics. These metrics are financial measurement, such as balance sheet and the Profit & Loss of the company. These tools are used to manage operations.
From the balance sheet we may track:
- How many days of inventory turnover; Higher means better.
- Account Receivables and Payables.
The real time performance measures in the P&L. We may split P&L by segments, by product and by country.
Feedbacks are being collected from four sources. Feedbacks come from the customers, from suppliers, and one from employees and the others from information system. The key to manage this work is how to release the information flows in the way that enhances the speed, either directly or indirectly.
Platinum Council and Team account. These teams are formed to serve large account customers only such as Boeing, MCI, etc.
BIBLIOGRAPHY
“Channeling their energies”; by Paley, Norton; Sales and Marketing Management magazines.
“THE POWER OF VIRTUAL INTEGRATION: AN INTERVIEW WITH DELL COMPUTER’S MICHAEL DELL”; by Magretta, Joan; Harvard Business Review edition March-April 1998.
“Dell shows that Web-based business isn’t just a dream”; by Tebbe, Mark; Infoworld.
“Dell hopes to up channel business by going after regional resellers”; by Zarley, Craig; Computer Reseller.
“Dell Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM
“Compaq Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM
“IBM Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM
“Gateway 2000 Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM
“Making the right choices for the new consumer”; by Dell, Michael S; Managing Service Quality.
“1997 Warp-Up and 1998 Predictions”; by Creative Consumer Marketing
“Service sells”; by Dell, Michael S; Executive Excellence magazines.
http://www.dell.com
http://www.compaq.com
http://www.ibm.com
http://www.gateway.com
http://www.hp.com
Posted by admin | Under Business, Computers
Thursday May 1, 2008
INTRODUCTIONIn 2001, Dell Computer became the world’s largest personal computer vendor, continuing togain market share and post profits in an industry struggling with slumping sales and billions ofdollars in losses. Dell sells 90% of its PCs directly to the final customer, largely bypassing thereseller channel that accounts for most of the world’s PC sales. This direct customer relationshipis the key to Dell’s business model, and provides distinct advantages over the indirect salesmodel. Dell’s direct relationship with the customer allows it to tailor its offerings to customerneeds, offer add-on products and services, and use the Internet to offer a variety of customerservices. In addition, Dell’s PCs are built to customers’ specifications upon receipt of an order,giving Dell additional advantages over indirect PC vendors who must try to forecast demand andship products based on those forecasts. Dell’s direct sales and build-to-order model has achievedsuperior performance in the PC industry in terms of inventory turnover, reduced overhead, cashconversion, and return on investment (Kraemer, et al., 2000).
Dell’s business model is simple in concept, but very complex in execution. Building PCs toorder means that Dell must have parts and components on hand to build a wide array of possibleconfigurations with little advance notice. In order to fill orders quickly, Dell must have excellentmanufacturing and logistics capabilities supported by information systems that enable it tosubstitute information for inventory.
The demands of Dell’s model have led it to adopt a new organizational structure referred to as avirtual company or value web (Figure 1). It is marked by a focus on a few key strategicactivities, and extensive outsourcing of non-strategic activities. Dell works closely with externalpartners to produce its PC products and to offer its customers an array of additional products andservices that add value and allow Dell to capture a larger share of the customer’s IT spending.
To manufacture its products, Dell coordinates a global production network that spans theAmericas, Europe and Asia, combining in-house final assembly with heavy reliance on outsidesuppliers and contract manufacturers. Manufacturing of printed circuit board assemblies(PCBAs), subassemblies (box builds), and some final products (mainly notebook PCs) is handledby contract manufacturers or original design manufacturers such as SCI, Solectron, Celestica,Hon Hai, Quanta and Arima. Like other PC makers, Dell relies on outside suppliers forcomponents and peripherals such as disk drives, CD-ROM drives, semiconductors, add-on cards,monitors, keyboards, mice and speakers. Its PCs can be bundled with standard software such asMicrosoft Office or with specialized software requested by corporate customers.
Dell relies on outside partners for services such as system integration, installation, on-site repairsand consulting. Partners include Wang, Unisys, IBM and BancTec. It also works with resellerswho support Dell hardware and receive referral fees for recommending Dell to customers.
3FIGURE 1. Dell’s Value Web ModelDell Custome rSystemintegratorsLogisticscompaniesCMs/OEMsComponentsuppliersThird partyHW and SWsuppliers DistributorsRepair andsupportcompaniesPhysical flows, including products and servicesInformation flowsAs Dell has moved beyond its home market in the U.S., it has had to adapt its business activitiesand organizational structure to the different markets in which it operates. In effect, Dell has hadto create similar but distinct value webs in each of the major regions, and to further customize itsmarketing and service functions for individual countries. The process of globalization hasshaped Dell’s own structure, but Dell’s success has conversely helped to reshape the globalstructure of the PC industry.
This paper looks at how Dell organizes its activities globally, regionally and within regions, andwhat factors determine its location decisions. The focus is on the PC manufacturing value chainincluding procurement, manufacturing, distribution and the logistics involved throughout thevalue chain. This includes Dell’s own assembly operations and the location of its suppliers inresponse to Dell’s decisions. We will also briefly discuss the organization and location ofmarketing, sales and service functions as they relate to Dell’s overall global organization.
GLOBAL ORGANIZATIONDell is a global company operating in 34 countries in three world regions, with about 35,000employees and $30 billion in sales. Dell is organized along geographic lines into the Americas,Asia-Pacific and Japan, and Europe/Middle East/Africa (EMEA). Corporate headquarters is inRound Rock, Texas, which is also the regional headquarters for Dell Americas. Each of theregions has its own regional headquarters and its own assembly plants and supply network.
Regional headquarters include Bracknell, U.K. for EMEA, Hong Kong for Asia-Pacific andKawasaki for Japan (Table 1).
4Dell’s business activities are organized in each region around different customer segments.
These vary somewhat, but generally include: (1) relationship (large corporate) customers; (2)home and small business (sometimes called transaction customers); and (3) public sector(government and educational) customers.
Product development is largely centralized in the U.S., and the same base products are soldworldwide. These products are customized for different regional and country markets withappropriate power supplies, keyboards, software and documentation. Other functions such as ITand e-commerce applications usually originate in the U.S., and then are adopted with necessarymodifications in the other regions. Manufacturing processes are always being upgraded, and thenewest plant is usually the most advanced wherever it is located. Improvements developed fornew plants are implemented in existing plants as much as possible.
Table 1Dell’s Worldwide Locations, With Employment and Sales, End of 2000Country City Employees Sales(FY2000)HQ ManufacturingWORLDWIDE 40,000 $25.3BTHE AMERICAS 27,200 $17.9BUnited StatesRound Rock and Austin TX 20,800 World and Americas YesNashville, TN area 2712 YesBrazil Eldorado do Sul 200 YesCanada n.a.
Chile n.a.
MexicoASIA-PACIFIC 3,200 $1.8BHong Kong (PRC) 25 A/PAustralia n.a.
China 330Xiamen 200 YesIndia Bangalore n.a.
MalaysiaPenang 1600 YesNew Zealand n.a.
Singapore 130Taiwan n.a.
Japan Kawasaki 700 JapanSouth Korean.a.
EUROPE, MIDDLEEAST AND AFRICA9,000 $5.6BUnited KingdomBracknell 500 EMEAIreland Limerick 3,400 YesBray 600• Dell has subsidiaries in 16 other EMEA countries, not listed here.
• Source: Dell web site and various news reports5LOCATION OF MANUFACTURINGWhile Dell does not manufacture its own components or subassemblies, it does handle finalassembly for nearly all of its desktop PCs and servers. Notebook PCs are manufactured byTaiwanese manufacturers Quanta and Compal. In some cases the notebook PCs are shippedcomplete to the final customer. However, Dell is increasingly ordering base units from itssuppliers and doing final configuration of notebooks in order to offer more configuration optionsto customers.
Dell organizes manufacturing by region, operating one or more assembly plants to serve itsmajor markets. Plants in the Austin, Texas and Nashville, Tennessee areas serve North America;Eldorado do Sul, Brazil serves Brazil and South America; Penang, Malaysia serves the Asia-Pacific region; Xiamen, China serves China and Japan; and Limerick, Ireland serves Europe, theMiddle East and Africa (Table 1).
Dell began manufacturing its own brand of PCs in Round Rock, Texas in 1985. It subsequentlyexpanded to new production sites outside the United States as follows (from Dell’s web site):1990: Opens manufacturing plant in Ireland1996: Opens manufacturing plant in Malaysia1998: Opens manufacturing plant in China1999: Opens manufacturing plants in Tennessee and BrazilIn addition, Dell has greatly expanded its production capacity in the Austin/Round Rock areaover the years, and now operates four facilities there. These plants produce the full line of Dellhardware products. Until the Tennessee plant opened, they supplied the entire North Americanmarket. Similarly, Dell has expanded its production capacity in Limerick, Ireland and nowoperates two plants there.
Employment worldwide is closely correlated with sales (Table 2). The Americas account for72% of Dell’s revenues and 68% of employment; EMEA has 20% of sales and 22% ofemployment; Asia-Pacific equals 8% of sales and 10% of employment. The only slight surpriseis the lack of bias toward the home country, even with the presence of corporate functions inTexas. An explanation could be that the large size and homogeneity of the U.S. market allowDell to achieve economies of scale in its production sites, call centers and other operations, andthus have a higher revenue per employee than other markets.11 We heard this explanation several times in interviews with Dell people in the EMEA region. They pointed out thatDell EMEA deals with 13 different languages, 18 different currencies, and 18 different tax rates whereas Dell NorthAmerica deals has only 3 different languages, currencies, and tax rates.
6TABLE 2Sales and Employment by Region (End of 2001)Americas EMEA Asia-PacificSales (last 4 quarters) $22.2B $6.6B $3B% of total sales 70 21 9Employment 21,600 8,250 4550% of total employment 63 24 13Revenue/employee $1,027,000 $800,000 $659,000Source: Dell web siteDELL’S LOCATION DECISIONSDell’s decisions about where to locate are driven by the need to minimize costs while extendingthe build-to-order, direct sales model around the world. Given the need to have production andsupport capabilities in the major markets, Dell selects specific locations based on a combinationof factors including labor costs, transportation and information infrastructure, market access,proximity to markets and government incentives. The role of these factors can be seen bylooking at particular locations of Dell facilities.
The AmericasTexasDell’s original headquarters was in Austin, Texas, where Michael Dell founded the company in1984. In 1994, Dell was offered a package of incentives from the neighboring city of RoundRock that Austin did not even try to meet. After collecting the usual 2% tax on Dell sales, thecity rebates 31% of those tax collections to Dell for 60 years; property tax abatement of 100%for 5 years; 75% for 5 years; 50% for 50 years (Schnurman, 2000). Dell moved its headquartersto Round Rock, built other facilities there, and eventually had over 12,000 workers in the formerbedroom community.
Dell maintains manufacturing facilities in Austin, including its high-volume Metric 12 plant thatassembles an estimated 4 million PCs per year. Overall, Dell has about half of its 36,000employees in central Texas, owing to incentives, a relatively low-cost workforce (compared toother U.S. locations), and a tendency to expand existing capacity rather than look elsewhere asthe company grew.
TennesseeDell opened its first North American manufacturing facility outside of Texas in 1999, inNashville, Tennessee. Nashville was chosen for very generous state and local tax incentives,good transport infrastructure, good labor supply and location central to East Coast markets.
Tax and other incentives from the state of Tennessee included:Infrastructure assistance (road improvements and utilities to service the facility totaling about$12 million7Job training assistance for Dell employees, which could range from $12 million to $20million over five years based on the employment projects of the companyJobs tax credits of $2,000 per employeeThe local Nashville government offered even more lucrative incentives, including:The gift of 100 acres of airport-area property valued at $6.5 million, and the leasing ofanother 600 acres for 40 years at fair marketAbatement of all property taxes on the facilities for 40 years$8 million in infrastructure improvements (beyond the state’s $12 million), and $1.5 milliontoward demolition of old buildings on the site (Locker, 1999)Dell now has two manufacturing facilities in Tennessee: one in Lebanon making consumerdesktop PCs and one in Nashville making consumer notebook PCs. It also has a sales andsupport call center in Nashville.
BrazilIn 1999, Dell began manufacturing at a facility in Eldorado do Sul, Brazil. The decision wasmotivated by the need for production to supply the South American market. Locating in Brazilenabled Dell to avoid tariffs that can nearly double the price of an imported $1,000 PC,according to Dell. Our own research (Dedrick et al., 2001) shows that tariffs on PCs can reachabout 30% of the price, so perhaps Dell is also including transportation or other costs into thisestimate. In any case, Brazil is by far the largest market in South America, and it would beimpossible to compete there with such a price disadvantage. Also, PCs produced in Brazil canbe exported without tariff to other Mercosur countries, which include Argentina, Uruguay andParaguay.
The specific choice of Rio Grande do Sul state was somewhat surprising, as most of Brazil’scomputer industry and supplier base is located near Sao Paulo. However, there were reportedlyfinancial concessions offered by the state government, and the southern state is centrally locatedto supply the other Mercosur countries. Michael Dell said in a statement that the region is a”phenomenal opportunity” for Dell. “Rio Grande do Sul is an excellent base of operationsbecause of its sophisticated labor force, its economic incentives to attract technologymanufacturingcompanies to the region and its strategic location as an export hub to other SouthAmerican countries,” (Mahoney, 1999).
Europe/Middle East/Africa (EMEA)Dell’s EMEA headquarters are in Bracknell, United Kingdom. It also operates a sales andsupport call center there for consumer and small business (transaction) customers in Europe.
Dell opened an assembly plant in Limerick, Ireland in 1990 to serve the European market, andsubsequently opened a second plant and administrative center there as well. It also operates asales and customer support center in Bray, Ireland to support larger corporate and otherinstitutional (relationship) customers. Dell located in Limerick initially because of the low costand high quality of labor. Today labor costs are much higher, but the work force is still highly8skilled and non-union. Dell has received good cooperation from technical schools anduniversities in the area to develop the skills Dell needs. Now 50% of the people working forDell in Limerick have at least a bachelor’s degree.
Another advantage of Ireland is its low corporate tax rates. In addition, Ireland is part of theEuropean Community, so products made in Ireland can be shipped to Europe without paying thevalue-added tax. Also, because Ireland is now adopting the Euro, Ireland will have currencystability with the rest of Europe, eliminating the exchange rate risk within Europe. This is amajor factor in Dell’s decisions to expand production in Limerick (Loughran, 2000).
Another factor was the tax incentives and other support offered by the Irish DevelopmentAgency. The agency helped Dell find land, set up its facilities, and assisted with job training.
More recently support has been provided in the form of per capita grants for each Dell employee(Kennedy, 2000a). Finally, Ireland is attractive due to the presence of suppliers such as Intel andMicrosoft, the presence of contract manufacturers such as SCI, and the quality of its freight andtransportation infrastructure (Kiely, 2000).
In addition to Ireland and the U.K., Dell operates subsidiaries in 16 other countries aroundEMEA, mostly for sales and local technical support. It also operates five logistics hubs wherePC units are brought together with monitors, peripherals and other add-ons for distribution to endcustomers. Furthermore, these hubs also provide repair services.
Asia-PacificDell opened its first manufacturing center in the Asia-Pacific region in 1996 in Penang Malaysia.
Malaysia was chosen for its central location in the region, proximity to suppliers, reasonablewage rates and attractive incentives. When Dell built its factory in Penang, it received a five-yeartax holiday. High-tech companies investing in Malaysia are entitled to five years without havingto pay the country’s 30% corporate income tax. Projects that the government thinks will have asignificant impact on the economy can qualify for strategic-project status, which provides for a10-year tax exemption, so Dell began working to get a better deal according to Phil Kelly, Dell’spresident for Asia-Pacific operations at the time (Arnold, 1997). Evidently, Dell got what it waslooking for. In 2000, the company announced it would more than double its capacity in Penangby opening a new facility that will produce notebook PCs for the Asia-Pacific and U.S. markets.
In 1998, Dell opened a new manufacturing facility in Xiamen, China. The plant is directlyacross the straits from Taiwan, and is home to a number of Taiwanese computer and componentsmakers. This provided Dell with a base of suppliers and other support services. Having a plantin China was necessary to sell in the main land China market. With China’s tariffs and taxes,importing is not a viable strategy, and if Dell hopes to sell to government agencies and stateenterprises, it needs to have production in China. In 2001, Dell announced it would beginproducing desktop PCs for the Japanese market in Xiamen, shifting production from Penang.
General Location FactorsLooking across the regions and sites, the following are the major factors affecting Dell locationdecisions. As was suggested by each of the vignettes above, no one of these factors is sufficient9by itself to determine a location decision. Rather they seem to operate in a nested hierarchy withmarket considerations first, followed by labor and infrastructure, and then by governmentincentives.
Market access: Texas is central to all of the U.S; Tennessee to the East Coast. Malaysia iscentral to the huge Asia-Pacific region. Ireland is offshore but close to the big markets of theUK, Germany, and France. Also, as part of the European Union (EU), Ireland providestariff-free access to EU markets. Brazil and China plants are set up for market access and toget around tariffs and taxes that would make PC prices uncompetitive if imported.
Labor costs and quality: Texas and Tennessee are cheaper than Silicon Valley. Malaysia ischeaper than Singapore (although more expensive than Thailand or Indonesia). Ireland isstill cheaper than most other EU countries (although more expensive than Portugal orGreece). Eastern Europe is cheaper than Ireland and more centrally located within Europeand, as a result, many of Dell’s contract manufacturers and suppliers are locating there andcreating speculation that Dell will follow (Kennedy, 2000b). The quality of labor is high ineach of these locations as well. Besides having well-educated workers, engineers andtechnicians, each location has little or no labor union activity.
Transportation and telecommunications infrastructure: Logistics is a bigger cost thanmanufacturing labor according to Michael Dell, so transport infrastructure is very important.
The Tennessee locations, for instance, are in close proximity to major highways and to amajor Federal Express distribution center. Telecommunications bandwidth, cost, and qualityare also factors, especially for call centers and data centers.
Government incentives: Major incentives were offered by Round Rock to get headquartersand call center operations. Dell also received valuable incentives in Tennessee. Apparentlyfinancial incentives were offered in Brazil by the state government, and also in Malaysia inthe form of tax holidays. It is unclear what was offered in Xiamen, China, but it is commonfor local governments to offer incentives in China. Ireland’s low corporate tax rate was amajor incentive, but Dell also received support in finding land, building facilities and trainingemployees; today it received per capita grants for each employee.
Industry clusters: Dell generally avoids existing industry clusters, preferring to locateproduction where labor markets are not as tight. For instance, it avoided industry clusters inSao Paulo (Brazil) and Shenzhen (China). Its locations in Penang and Ireland were decidedbefore those locations had developed into IT industry clusters. Most of Dell’s operations donot rely on access to research universities and high concentrations of specialized engineeringtalent, so it can avoid the higher costs associated with such locations. It also does not need tobe very close to suppliers’ manufacturing facilities; rather it requires that suppliers simplyship to supply hubs close to Dell’s assembly plants.
SOURCINGUnlike other PC makers, Dell has avoided outsourcing final assembly of its products. Itoutsources subassemblies, such as motherboards and bare-bones PCs, and outsources nearlycomplete assembly of notebook PCs, doing only limited final configuration in its own assemblyplants. Also, in 2001, Dell outsourced production of a standard, non-configurable PC called theSmartStep to Taiwan’s Mitac, which is manufacturing the product in its plants in China(Commercial Times, 2001). But in general, Dell prefers to keep control over the key final10assembly and configuration processes for the bulk of its products. One reason is a concern thatby outsourcing its manufacturing completely, Dell might be creating its own competitors, as U.S.
television makers did when they outsourced to Japanese suppliers. Also, unlike some of itsmajor competitors (IBM, HP, Compaq), Dell’s main business is PCs, and it feels it cannot affordto give up its capabilities in PC production (Louise O’Brien, 2001).
A network of suppliers and contract manufacturers supports each production facility. Sourcingdecisions are made by worldwide procurement and product development in Austin with inputfrom the regions. Most sourcing is global, which means that Dell sources major components forall locations from their headquarters. This allows Dell to consolidate its buying power and getbetter terms from suppliers.
While sourcing of materials for PCs (major components and systems) is done centrally, sourcingof consumables is local (box and shipping material, printing of keyboards, printing of manuals,etc.). The majority of sourcing is from low cost suppliers in Asia, but some sourcing is fromlocal producers. For example, monitors for the EMEA region are purchased from Sony,Samsung and Acer, and shipped by sea from Asia, but monitors are also purchased locally fromPhillips and Nokia. This might be due to product specifications, need for backup supply or price.
For major components, Dell looks for suppliers with global capabilities such as Intel, SCI, IBM,Samsung, Toshiba, Sony and Seagate. For each major component, it usually works with only afew suppliers, e.g., with Seagate, Maxtor, Western Digital and IBM for disk drives. Localsuppliers in each region provide other parts.
Suppliers are required to maintain inventory near or in Dell plants to support Dell’s build-toorderproduction. They can produce elsewhere and ship to supply hubs, or they can set upproduction nearby. For EMEA and the Americas, Asian suppliers increasingly do both. In someplants, components are actually kept in trucks backed up to shipping docks, and are pulled off asneeded. Suppliers are required to maintain ownership of that inventory until it is actually pulledoff the truck and onto the assembly line (Intel is the exception; its market power allows it to setits own terms, which require PC makers to take ownership as soon as the product leaves Intel’sfacilities).
Impacts of Dell’s Location on Supplier/Partner LocationWith so many different suppliers and partners involved, the location decisions of thesecompanies naturally vary by company and location. Many parts and components aremanufactured in Asia and shipped to distribution centers near Dell facilities. This is usually thecase for hard disk drives, floppy drives, power supplies, CD-ROM drives, cables and connectors,and many add-on cards such as modems, sound cards and video cards. On the other hand, alarger share of motherboard production is located regionally. For instance, Solectron and SCIsupply Dell’s U.S. plants from their plants in Guadalajara, Mexico, and from plants in the U.S.
In Europe, Dell’s Ireland plants are supplied from Asia and from local plants. Many of Dell’ssuppliers came to Ireland at Dell’s insistence. After opening the first Limerick plant, Dell gave11Irish suppliers eight months to show they could meet Dell’s demands. When local supplierscould not do so, Dell brought in outside suppliers (Kennedy, 2000a). The outsiders bought someIrish companies, consolidated others, and took over much of the supply industry. The companiesthat came in were global companies that were already serving the PC industry. They included,for example: Fullerton — a Scottish company from Glenrothes that does work for Dell and forIBM in Raleigh, NC; Lightening Beech — a U.S. company that supplies sheet metal; Trend Tec–a company that does metal and plastics in the U.S. and serves Dell and Compaq; and APW,which bought two Irish companies and does chassis, plastics, and metal. In addition, contractmanufacturers already in the UK or Ireland supply Dell: Jabil supplies Dell with PCBAs fromScotland, SMS from Wales, and SCI from Fermoy, Ireland (Kennedy, 2000a). One Irishsupplier, Keytech, did make the grade. Keytech is located in Shannon near Dell’s Limerickplants, and made cases, chassis and subassemblies (Kennedy, 2000a,b).2For the Ireland plant, the breakdown of supplies by region is as follows:Asia 65%Europe 25%US 10%For some specific components and peripherals, the locations are as follows:Monitors Europe and Asia (Phillips, Nokia, Samsung, Sony, Acer)PCBs Asia, Scotland, and Eastern Europe (SCI, Celestica)Drives Asia, mainly Singapore (Seagate, Maxtor, Western Digital)Printers Europe (Barcelona)Box builds Asia and Eastern Europe (Hon Hai/Foxteq)Chassis Asia and Ireland (Hon Hai/Foxteq)SCI (now owned by Sanmina) makes 90% of the motherboards used by Dell in Cork. However,a new deal with Hon Hai to supply motherboards globally may change that. Three differentsuppliers provide the chassis. The suppliers’ truck, located on the inbound side of the plant, isthe local warehouse, and the suppliers’ people deliver chassis to the production cells as needed.
Overall, not much actual manufacturing is located very close to Dell’s plants, except inMalaysia, and much of that was already there. But more components are produced regionally assuppliers and CMs organize their own production regionally. For instance, PCB assembly andbox builds are done in Mexico and Europe as well as in Asia to supply much of Dell’s demand inthe U.S. and EMEA. It is hard to attribute any of this to Dell alone, as Compaq, Apple andGateway are all in either Ireland or Scotland and in either Malaysia or Singapore, so CMs cansupply multiple PC customers from one location. Dell’s BTO model clearly does not requirehigher value components to move closer, nor do very low value components such as powersupplies and keyboards need to move closer. It’s the mid-level components such as box builds,motherboards and other PCB assemblies that seem to be moving closer to Dell’s assemblyplants. This is particularly the case for large, bulky items such as box builds (nearly completesystems) that would be expensive to ship by air to meet volatility in demand, and at the same2 While Key Tech was successful in surviving the initial shakeout, it is no longer a supplier to Dell. Key Techindicated that it stopped bidding on Dell procurements because Dell kept driving down prices. Key Tech hasfocused on building higher value-added storage products that better fit its cost structure.
12time are too expensive to risk holding in inventory. Although light in weight, motherboards tendto be assembled locally because the build-to-order model does not allow sufficient time for themto be assembled in Asia and then shipped. However, baseboards for PCB assemblies aremanufactured in Asia and shipped in by air.
DELL’S OTHER OPERATIONSDell’s other operations tend to follow the location of its production facilities, but they do notfollow in a simple pattern, as each operation seems to have its own organizational logic andlocation considerations. This is illustrated by looking at a few of Dell’s other operations:logistics, call centers, marketing and sales and data centers.
LogisticsDell’s organization of logistics in EMEA provides a good illustration of the general logic forlogistics. All of Dell’s inbound logistics for material needed in assembly of PCs are handled bysuppliers who must have supply hubs or production facilities located within 30-minutes’ traveltime of the Limerick plants. Third parties operate some hubs for a number of suppliers.
On the outbound side, Dell has five distribution hubs in EMEA to take advantage of locationclose to major markets, transportation networks and logistics expertise. These distribution hubsare as follows in EMEA:Limerick for Ireland, Eastern Europe, Middle East and Africa (except South Africa);Liverpool for UK;Tillberg, Netherlands for middle Europe;Gottenberg, Sweden for Nordic countries; andJohannesburg for South AfricaA different logistics partner operates each hub. Similar outbound staging areas and arrangementswith logistics partners exist in the Americas and Asia-Pacific.
Call CentersDell makes extensive use of call centers, both for sales and for technical support. Dell generallyorganizes its call centers around its major customer segments with different call centers forrelationship and transaction customers. It tends to locate call centers regionally to optimizetelecommunications and language considerations, but customers may at different times be routedto call centers in different locations. Regional call centers are located as shown below. TheEMEA call centers illustrate the complexity within any one region.
U.S.: Round Rock and Nashville. A new call center is planned in Fort Worth, Texas.
EMEA: Limerick, Ireland; Bracknell and Bray, U.K. Relationship customers are handledthrough Bracknell, whereas HSB customers are handled through regional centers inMontpelier, France for France, Spain, Italy and the southern countries; Amsterdam for themiddle and central countries; Copenhagen for the Nordic countries; and Bray, Ireland for theUK, Ireland and other English speaking countries. The Limerick call center specializes in13higher-level technical issues, and also operates as a backup call center whentelecommunication problems occur or call volume is exceptionally high.
Asia-Pacific: Bangalore, India.
Marketing, Sales and SupportDell’s marketing function is directed from global and regional headquarters with specialmessages targeted for the different country markets. However, the sales, service and supportfunctions are located in the individual countries because these activities must be close to endcustomers. To compete for large contracts from corporate and public sector customers, Dell’sdirect sales force must be on the ground in each country in order to be aware of salesopportunities, interact with procurement personnel and negotiate through the competitive biddingprocess. Moreover, since many Dell contracts are large and Dell hopes to expand its businesswith every customer, the account executives assigned to each large customer must be within easyreach. Similarly, although telephone technical support is centralized in regional call centers,field service and support require location close to the customer. As a result, Dell has sales andservice offices in 34 countries around the world, usually in a large urban area and with multipleoffices in some countries.
IT and Data CentersA network of data centers supports Dell’s sales, manufacturing, logistics and other operations.
The data centers are regionalized and have their own development as well as operations staffs.
Global applications such as online sales tools, order management, and supply chain managementgenerally are developed or first implemented in Austin. The regional data centers are thenresponsible for transferring these applications and adapting them to the local markets. Datacenters are as follows:Americas IT and data center is in Austin/Round RockThe EMEA data center, located in Bracknell, England, is the Internet hub for Europe,including intranets, extranets and Internet. It was located there despite the fact that Limerickis Dell’s production hub because Ireland did not have adequate telecommunications facilitiesfor these functions whereas England did. There are also major data centers in Limerickserving the two production facilities and an administrative center, which includes finance,administration, tech support, customer service, and Dell online.
Asia-Pacific data center and IT operations are in Singapore, which has the besttelecommunications infrastructure in the region.
Dell’s Service PartnersRather than do everything itself, Dell has made extensive use of business partners to help serveits customers, especially as it has moved into producing servers and targeting the small andmedium business market. Three functions - systems integration, service and repair, andconsulting - all have to be located very close to the customer, as they involve direct contact withthe customer. Dell partners with companies that can deliver these services globally - or at leastregionally.
14System integration: Dell partners for procurements with integrators like Electronic DataSystems (EDS) who will install Dell servers and link them up with end user devices.
Service and repair: Dell also partners with firms like IBM, Unisys, Wang and Banctec forfield service and repair. While 90% of service incidents are handled by telephone in Dell’scall centers, about 10% involve field calls, which Dell has outsourced to these partners.
Their field service units are tied to Dell electronically, and get the orders for field servicewithin an hour or two of a call coming in to Dell.
Consulting: Dell partners with Arthur Andersen and Gen 3 in the U.S. to provide consultingservices to companies that seek to emulate Dell’s success with the direct model and InternetbasedIT.
Reaction to Market Slowdown in 2001Like all PC makers, Dell’s sales were affected by the decline in PC demand that started in late2000 and continued throughout 2001. Dell was the only PC maker to show any growth in salesin 2001, as it made major gains in market share, but it still saw much slower growth than the 30-50% annual gains it was used to. It also saw its margins reduced by the price war that itlaunched to gain market share.
In order to cut costs, Dell laid off about 5,000 workers, mostly in the Austin, Texas area. Theseincluded cuts in headquarters staff and some other functions. Smaller cuts of a few hundredemployees were made in Tennessee. About 600 workers were laid off in Europe. Theconcentration of layoffs in the U.S. appears to be due to the focus on cutting corporate staff morethan a shift of production or other activities away from the U.S.
CONCLUSIONSAlthough Dell only entered the PC business in 1985, it has become a global company with globalproduction networks spanning the three major world regions: Americas, EMEA and Asia-Pacific. These networks, which are complex and multi-level, are able to take advantage ofcapabilities that serve the entire PC industry. In many cases, the capabilities were first createdby with the introduction of the IBM PC when IBM sourced parts and components globally inorder to break into the PC market fast (Dedrick and Kraemer, 1998). The networks weresubsequently expanded and enriched by both traditional computer makers such as IBM, Hewlett-Packard and DEC, and by newer PC companies such as Compaq, Gateway and Acer.
Broadly speaking, market potential is the driving force behind Dell’s general location decisions,while costs and capabilities are the driving forces behind the specific location of Dell’s activities.
In other words, Dell targets markets that appear receptive to its business model. To serve thosemarkets, Dell sources from locations that have the production capabilities and cost structure itneeds to be competitive in the targeted markets.
The markets in which Dell operates vary by global region and by countries within these regions,and so Dell has organized its operations by region and by country. Headquarters offices,assembly production and call centers are centralized within each region (although not all in thesame country), whereas sales, service and support are decentralized to individual countries.
15Supply/logistics hubs are organized by sub-regions covering several countries. The choice ofspecific sites for production within a region is discussed below.
Dell’s location decisions are not based upon any single factor, but rather upon an array of factors.
The best way to understand how these factors come into play is to view them as multi-tiered.
The first tier involves market considerations. These include the character and potential growthof prospective markets and country requirements for market access. For example, when Dellwent into Europe, it went into the English speaking markets of Ireland, UK, and Sweden, whichwere similar to the U.S. in language and business culture, before venturing into the large Germanand French speaking markets. Likewise in Asia-Pacific, Dell concentrated on English-speakingmarkets such as Australia, Singapore and Malaysia first, followed by Japan, the second largestPC market in the world. Having built a regional infrastructure, it later entered China to gainaccess to its rapidly growing and potentially very large market.
Once a decision has been made to enter a market, then second tier considerations of labor andinfrastructure come into play when deciding where to locate production activities. These areused to narrow location choices to several countries. The primary consideration with regard tolabor is cost or wages, but skill levels, quality and availability also enter into decisions.
Theoretically, the ultimate factor should be cost relative to productivity, and it appears that this isthe case, as Dell has located facilities in places with a combination of low (but not the absolutelowest) cost and high quality workers. Infrastructure considerations include transportation,logistics expertise and telecommunications quality and cost.
At the third tier, factors such as government incentives come into play and affect the choice ofone country, state, or even city, over another. Such incentives usually include land, facilities,export processing flexibility, and/or employee per capita grants.
Dell has a major impact on its supplier location decisions in three ways. First, Dell requires thatsuppliers locate material within a specified delivery time from its assembly plants. Asiansuppliers (and U.S. suppliers producing in Asia, such as disk drive makers) maintain supply hubsnear Dell assembly plants worldwide, where material is pulled as it is needed for production.
Second, Dell requires that its suppliers continually reduce the price they are charging Dell; inexchange it agrees to reward these suppliers with larger orders and longer-term contracts. Thisrequirement causes suppliers to continually seek lower wage production sites in order to meetprice pressure from Dell (and other PC makers as well). Third, Dell requires that suppliers haveadequate inventory to supply the needs of its direct, build-to-order production model. Demand ishighly volatile, and consequently suppliers cannot meet Dell’s fluctuating demand totally fromAsia. Material must be produced regionally, so suppliers and contract manufacturers must alsoorganize regionally. Thus, within the EMEA region, some Asian suppliers have built localmanufacturing capability, initially close to production hubs in Ireland, Scotland and Wales butincreasingly in lower cost sites in Eastern Europe.
Both the American CMs and Asian suppliers are moving to lower cost production sites: EasternEurope for EMEA, Mexico for the Americas, and China for the Asia-Pacific region. It is saidthat they are often moving at the insistence of the computer makers. It is unclear whether Dellwill follow its suppliers to low cost production sites or outsource final assembly to its contract16manufacturers. Dell has already gone to China, mainly for market access, but is now producinga line of non-configurable PCs in China for sale in other markets (including the U.S.).
Dell makes extensive use of outsourcing, but claims it will never outsource the final assembly ofconfigure-to-order products. Dell insiders argue that execution of the build-to-order model isstrategic to the company; therefore, final assembly/configuration for different markets andcustomers will not be outsourced. “Dell doesn’t want to pass on the secrets of the direct modelto subcontractors. Dell is bringing in more of the box with more stuff in it from suppliers, butkeeps control of the complex and proprietary parts of the process. Dell’s model is very good andvery unique in the industry. The focus is on execution. There will always be boxes needed inthe market. Dell doesn’t have to move away from making boxes. It simply needs to keepfocused on quality, price, and delivery” (Corkery, 2000). They further argue that Dell plants aremajor showcases that help sell large corporate customers on Dell as their supplier (Freake, 2000).
They leave open the question of whether they will eventually move to lower cost sites for finalassembly.
In summary, the organization of Dell’s production network is changing. Whereas the networkwas previously located mainly in Asia, today it is increasingly being regionalized in order tobetter target markets with the direct model and to respond to rapid changes in markets. Theseregional production networks involve a combination of Asian suppliers and U.S. contractmanufacturers. Regional suppliers are also playing a role. Sales and employment across worldregions are generally in line with one another, with the Americas showing somewhat greaterproductivity. More than two-thirds of Dell’s employees are in the Americas, and mainly theUnited States, where Dell continues to expand its operations through new plants and call centers.
Dell maintains control over its value network by a new model of organization–the virtualorganization–wherein Dell’s ownership of the customer relationship gives it the power andleverage to coordinate the entire network.
REFERENCESArnold, Wayne. 1997. Two major PC firms stand to save big in Malaysia. The Asian Wall StreetJournal, 21 January: 6Corkery, Sean. 2000. Interview with Sean Corkery, General Manager, EMF3, Limerick Ireland,November.
Commercial Times. Taiwan’s Mitac Wins Desktop PC Orders from Dell. October 31.
Dedrick, Jason and Kraemer, Kenneth L. 1998. Asia’s Computer Challenge: Threat orOpportunity for the United States and the World? New York: Oxford University Press.
Dedrick, Jason, Kraemer, Kenneth L, Palacios, Juan J, Tigre, Paulo Bastos. 2001. Economicliberalization and the computer industry: Comparing outcomes in Brazil and Mexico.
World Development, 29(7):1199-1214.
Freake, Reginald. 2000. Interviews with Reginald Freake, Industry Relations, Dell Computer.
Limerick, November.
Kennedy, Tom. 2000a. Interview with Tom Kennedy, Enterprise Ireland, October.
Kennedy, Tom. 2000b. Interview with Tom Kennedy, Enterprise Ireland, November.
Kiely, Stephen. 2000. Interview with Stephen Kiely, Dell Computer Ireland. December.
17Kraemer, Kenneth L., Dedrick, Jason and Yamashiro, Sandra. 2000. Dell Computer: Refiningand extending the business model with IT. The Information Society, 16(1):5-21.
Locker, Richard. 1999. Nashville wins Dell Computer with hefty incentives, thousands of jobspromised. The Commercial Appeal, 7 May: A1.
Loughran, Declan. 2000. Interview with Declan Loughran, Manager, Logistics IT Development,Dell Computer, Limerick, Ireland, October.
Mahoney, Jerry. 1999. Dell Computer to open factory in Brazil today, KRTBN Knight-RidderTribune Business News: Austin American-Statesman – Texas, 3 November.
O’Brien, Louise. 2001. Interview with Louise O’Brien, Dell Computer, April.
Posted by admin | Under Accounting, Business
Thursday May 1, 2008
Greenwich School of ManagementExecutive MBAModule: Accounting and Financing For ManagersTutor:“A Report Evaluating Financial Information Pertaining to West Kent NHS Health & Social Care Trust’s 2004/5 Accounts”Student Name: Graham BlackmanStudent No: HSK008PESubmission date: 9th March 2006Word Count: 4,83962%ContentsPage No.
1.Introduction32.Background Information on Trust and Author33.Purpose of Accounting Standards44.Statement of the Chief Executives and Directors65.Statement of Internal Control 86.Independent Auditors report97.Income and Expenditure Account 78.The Balance Sheet 169.Cash Flow Statement2110.Who Will Be Reading the Accounts?25AppendicesA.Pro Forma Statement on Internal Control27B.Notes 3 and 4, Income from Activities29C.Note 5.1, Operating Expenses 30D.Notes 8 and 9, Disposal of Fixed Assets & Interest Payable 31E.Note 10, Intangible Fixed Assets32F.Note 11.1, Tangible Fixed Assets33G.Notes 12 & 13, Current Assets34H.Note 15, Creditors35I.Note 22, Public Capital Dividend36J.Note 17, Reserves37K.Note 18.1, Operating Activities Cash Supplies38Tables1.Income and Expenditure Statement122.Balance Sheet173.Cash Flow Statement22Boxes1.Deprecation Rates For Tangible Assets12References391.IntroductionThe following report is an evaluation of financial information produced at the end of the 2004/5 financial year for West Kent NHS and Social Care Trust. The author shall initially give brief background information on himself and his organisation followed by an overview of the purpose of accounts and the bodies and panels affecting accounting. A review of the information submitted in the reports by the chief executive and directors, together with a review of the statement of internal control and the independent auditors report will then be presented. After which the report will discuss the three main areas of the accounts. Firstly the income and expenditure accounts, secondly, the balance sheet for the organisation, and thirdly, the cash flow statement, analysing each element in turn. Finally the author will then discuss 3 stakeholders who may wish to gain information from the accounts.
2.Background2.1I currently practice as a ward manager within an Assessment and Intervention Service for individuals who have a learning disability and a concomitant mental health or forensic need.
2.2The service is part of West Kent NHS Health and Social Care Trust, (West Kent), which is an integrated health and social care trust that specialises in the provision of mental health services to the people of West Kent. The Trust operates through four clinical areas and from approximately 150 sites.
3.Purpose of Accounting Standards3.1Inconsistency between company accounts prompted the accountancy profession to introduce standardised procedures known as Accounting Standards (Black 2002). Today, Accounting Standards are known as Financial Reporting Standards or (FRSs). Standards issued by previous bodies were known as Statements of Standard Accounting Practice or (SSAPs). These are still in use and are in constant review by the Accounting Standards Board (ASB), some have been withdrawn and others superseded by FRSs.
3.2According to (Black 2002) it is a legal requirement that the financial reports provide a ‘true and fair view’ of the transactions made by the company during the course of a year. Accounting Standards outline the specific procedures required to produce consistent and functional reports. Their purpose is also to improve the quality and the usefulness of the financial statements. The following bodies were set up in response to the Dearing Report (Blake 1987) and replace the original Accounting Standards Committee (ASC).
3.3The Financial Reporting Council (FRC),The FRC provides a general policy function and oversees the accounting standard setting, giving guidance and support to the Accounting Standards Board in developing financial information in the correct manner and advising on broad policy issues. The FRC has two operational bodies-the Accounting Standards Board (ASB) and the Financial Reporting Review Panel (FRRP).
3.4The Accounting Standards Board (ASB), From its outset in 1990, the ASB has been responsible for issuing accounting standards, recognised under the Companies Act 1985. The aims of the ASB are to provide a lawful framework for financial accounts through the setting of standards, the focus being to work on the concept of principles rather than detailed rules. The ASB have developed a “Statement of Principals for Financial Reporting” in order to define specific and consistent accounting standards.
3.5The Financial Reporting Review Panel (FRRP), The FRRP is an independent body which investigates discrepancies or deviations from the accounting requirements of the Companies Act 1985, which requires the company to give an explanation of a deviation and the reason why. If a failure is identified, (Blake 1987), the panel try to come to an agreement to revise the documentation. This pertains only to large Companies, where the panel will ask the Company concerned to explain and give the reasons why. If the panel does not accept its explanation, (Black 2002) then it has the power to apply for a court order and the company must then issue amended reports which must then reflect a true and fair view. This is all at the personal expense of the director(s) of the company and could potentially be quite harmful.
3.6The Urgent Issues Task Force (UITF), a sub- committee of the ASB who bring issues to light that may not be covered by an Accounting Standard, eg. It may be a new issue or may not be relevant or applicable. Its role is also to identify where a contentious issue has arisen over an accounting standard. Its aim is to assist the ASB, (Black 2002) in the formulation and continuity of appropriate standards and correct reporting procedures. The ASB gives the UITF, (Black 2002) ultimate responsibility to reach an agreement on a particular issue and will generally not challenge the outcome.
3.7ASB Recognised Bodies, These are committees who work with specific industries and sectors, reviewing Statements of Recommended Practices (SORPs). SORPs are guidelines that are relevant to a particular industry and although are not accounting standards in their own right, they work on the basis of best practice.
3.8International Accounting Standards Committee (IASC), Set up in 1973 the IASC’s purpose was to give unanimity to Accounting procedures worldwide. There are 70 member countries. One problem that has been encountered is that due to differing economic systems, (Black 2002) there is no generally agreed framework in which to concur the objectives of financial reporting.
4.Statement of the Chief Executives and Directors Responsibilities4.1The Secretary of State has directed that the Chief Executive should be the Accountable Officer to the Trust. The relevant responsibilities of Accountable Officers, including their responsibility for the propriety and regularity of the public finances for which they are answerable, and for the keeping of proper records, are set out in the Accountable Officers’ Memorandum issued by the Department of Health (2003a).
4.2The National Health Service (NHS) Act of 1977 requires the Directors to prepare accounts for each financial year that gives a true and fair view of the state of affairs of the Trust and of the profit or loss for that period. In preparing those accounts, the Directors are required to:•select suitable accounting policies and apply them consistently;•make judgements and estimates that are reasonable and prudent;•state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and•prepare the accounts on the going concern basis unless it is inappropriate to presume that the group will continue in business.
4.3The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Trust and to enable them to ensure that the accounts comply with the direction from the secretary of state as set put in the NHS Act 1977. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
5.Statement of Internal Control5.1Accounting Officers are required to make an annual statement – the “Statement on Internal Control” (SIC) – this should be in accordance with the guidance given by the Department of Health (DoH) (2003, 2005) using the pro forma suggested by Her Majesties Treasury (2005) (see appendix A). The pro forma requires a high-level summary of the ways in which staff are trained to manage risk and of how risk has been identified, evaluated and controlled. It also requires a confirmation that the effectiveness of the system of internal control has been reviewed and that the results of the effectiveness review have been discussed by the Accounting Officer with the board, the Audit Committee (and the risk committee if one exists in the body) (DoH 2003). In addition, disclosure is required in relation to any “significant internal control issues”. West Kent in their statement on internal control set out the main areas in accordance with the above guidance which include;5.2Scope of responsibility, The Chief Executive (CE) of the trust identifies that he is personably responsible for maintaining a sound system of internal control5.3The purpose of the system of internal control, In the statement the CE discusses risk, and states that his purpose is to minimize but not eradicate risk. He goes on to state that these risks would be evaluated so they may be managed efficiently, effectively and economically.
5.4Capacity to handle risk, A very short statement stating that the CE has responsibility for risk management within the trust. Although he also mentions where information pertaining to guidance and local policy is available there is no statement regarding the trusts actual capacity to handle risk5.5The Risk and control framework, In this statement the CE discusses how risk is managed within this trust and identifies that there are several gaps within some clinical areas. He also highlights the fact that the trust have a counter fraud policy and counter fraud specialists employed within the organisation that seek out and investigate fraudulent activity5.6Review of effectiveness, Here the CE explains that the trust has improved the risk management structure, although does not mention if this has been effective. Indeed he mentions that further steps have been taken to address weaknesses, the CE does not give any information concerning the actual weaknesses or how they will be addressed. The trust has achieved level 1 of the clinical negligence scheme for trusts (CNST), although doesn’t mention that this is the lowest level.
6.Independent Auditors report6.1An auditor’s report states that the financial statements that were audited for a specific period of time are the responsibility of the company’s management. It will also state that the responsibility of the chartered accountant is to express an opinion on those financial statements based upon his or her audit (Dyson 2004)6.2Her Majesty’s revenues and Customs (no date) inform us that, an independent audit is conducted in accordance with generally accepted auditing standards (UKGAAP). Those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation (Atrill & Mclaney, 2001)6.3The auditor must include a statement that he or she believes that the audit provides a reasonable basis for his opinion. If the audit cannot provide a reasonable basis for an unqualified opinion, the auditor must explain the reasons and qualify his or her opinion (Dyson 2004)6.4The Auditor does not comment on the effectiveness of the organisation’s corporate governance, risk management or internal control procedures (Davis & Pain, 2002).
6.5The independent auditors for the trust (PricewaterhouseCoopers) concluded that the financial statements gave a true and fair account to the state of affairs, it did remark on the fact they it could not comment on risk management within the trust and made reference to the 1998 audit commission act and the SIC (2003), issued by the Department of Health. It did not, however mention the updated 2005 SIC or the Auditing Practices Board (2006) International Standards on Auditing.
7.Income and Expenditure Account7.1An income and expenditure account is an official annual financial document published by a public company, or in this case West Kent, showing income (earnings), expenses, and retained surplus or deficit (net profit). Retained surplus or deficit is determined from this financial report by subtracting total expenses from total income (revenue). The Income (profit) and Expense (loss) statement and the balance sheet are the two major financial reports that every public company publishes (Dyson 2004). The difference between this statement and the balance sheet deals with the periods of time that each one represents. The income (profit) and expenditure (loss) statement shows transactions over a given period of time (usually quarterly or annually), whereas the balance sheet gives a snapshot of holdings on a specific date. (Davis and Pain 2002).
7.2West Kent’s Income and expenditure accounts have seven elements to then (see Table 1) 5 of which have notes. Although one could argue that NHS Trusts “sell” their services to Primary Care Trusts (PCT), and Strategic health Authorities (SHA) etc, the first line of the statement is still referred to as income from activities, as opposed to earnings.
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED31 March 20052004/052003/04NOTE£000£000Income from activities3100,70290,563Other operating income47,5819,312Operating expenses5-7(104,379)(96,681)OPERATING SURPLUS (DEFICIT)3,9043,194Cost of fundamental reorganisation/restructuring00Profit (loss) on disposal of fixed assets85(20)SURPLUS (DEFICIT) BEFORE INTEREST3,9093,174Interest receivable 114109Interest payable9(13)(15)Other finance costs - unwinding of discount(111)0Other finance costs - change in discount rate on provisions00SURPLUS (DEFICIT) FOR THE FINANCIAL YEAR3,8993,268Public Dividend Capital dividends payable(3,871)(3,244)RETAINED SURPLUS (DEFICIT) FOR THE YEAR2824The notes on pages 6 to 42 form part of these accounts.All income and expenditure is derived from continuing operations.
Table 17.3Notes 3 and 4 (see appendix B) gives the reader an indication as to where income has been generated. Income from the PCT is by far the greater contribution with 2004/5 income exceeding the previous years by more than 10%.
7.4The Department of Health’s contribution has increased nearly 7 fold, possibly due to the agenda for change intiative.
7.5Within other operating income it should be noted the monies allocated for education training and research, £2,187,000. The only recorded expense identified with the accounts is £600,000 for training (see note 5, operating expenses, appendix C). There is no explanation to where or if the other, substantial, monies have been spent.
7.6Operating expense reflects the increase in income (approx. 10%) with the greater increase in staffing costs, again probably the cost of agenda for change. Staffing costs are considered a semi-variable cost which consists of both fixed and variable elements (Atrill & Mclaney 2001). One of the reasons for this is could be that, although the labour costs remain the same, occasionally staff may be get paid for doing overtime.
7.7There are two other types of costs that appear on the operating expenses. Fixed costs are costs that constantly remain the same. An example of a fixed cost is rent; even if the premise isn’t being used the rent would still have to be paid. West Kent identifies this as premises (see note 5.1 appendix C). Variable costs are costs that change depending on how much of the resource is being used. An example of this would be electricity bills, telephone bills as well as raw materials; each of these costs will change depending on the usage (Atrill & Mclaney 2001). West Kent entitles these supplies and services.
7.8Operating surplus or deficit is made up from the difference between the income (£100,702,000) and the operating expenses (104,379,000) namely £3,904,000.
7.9It interesting to see a zero value attached to the cost of fundamental reorganization/restructuring, should costs for agenda for change fit under this heading?7.10The profit or loss from the disposal of fixed or fixed tangible assets is noted next. These could be the sale of buildings (surplus), this is demonstrated in this years accounts. Or the early depreciation of a piece or machinery etc, which is indicated in last years accounts (see note 8 appendix D).
7.11The aforementioned items in 7.8 & 7.9 are then added to the operating surplus to achieve the surplus or deficit before interest.
7.12Before we achieve a balance for the financial year intereste is added/subtracted. Because West Kent had a surplus of £3,909,000 the interest receivable amounts to £114,000 in interest for the year 2004/5 a similar amount to the year before. The interest payable again is comparable to last year and is for the leasing of goods. It should be highlighted that the mount indicated in the notes (see note 9 appendix D) has been given in black and not bracketed I.E. indicating a surplus, but the amount indicated in the account statement is in red and bracketed I.E. rightfully a deficit. The accounts department within West Kent explained that this was because that this was “interest payable” only in note 9 so it may appear in black.
7.13A major difference between the 2004/5 accounts and the 2003/4 accounts is the unwinding discount payment. Unwinding discount refers to the future provision of pensions. This takes into consideration the net present value, which Langley & Harden (1994), Atrill & Mclaney (2001) & Davis & Pain (2002) describe as the future stream of benefits and costs converted into equivalent values today. This is done by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. In other words West Kent needs to predict the value of the pound in the future and put this amount aside now. Previously (2003/4) the percentage of growth was estimated at 3.5% in 2004/5 this percentage has decreased to 2.2% requiring West Kent to allocate £111,000 more than in previous years. This may be reflected in the increased income from the Department of Health (see note 3 appendix B).
7.14Before the final figure (retained surplus) on the income and expenditure account is reached the trust have to deduct the Public Dividend Capital Payable dividend (PDCD). PDCD is calculated by the Government in the form of a percentage (currently 3.5%) applied to the monies received in income by the trust (DoH 2005a). The Public Dividend Capital (PDC) is likened to an equity stake rather than a loan that has to be compensated by dividend rather than fixed or variable interest (Her Majesties Treasury 2005).
7.15West Kent has shown a retained surplus (or profit) of £28,000 for the year 2004/5. Although this was £4000 more than the previous year it did have approximately an £8000 increase in its income and raised £5000 from the sale of properties as opposed to the £20,000 loss made in this area in the previous year. However West Kent did have to finance the increased pension cost of £111,000 this year and not last.
8.The Balance Sheet8.1Dyson (2004) suggests that a balance sheet is a quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities and net worth. West Kent’s balance sheet (see table 2) consists of the following;8.2Fixed assets refer to intangible and tangible assets as well as investments (Dyson 2004). West Kent has no current investments.
BALANCE SHEET AS AT31 March 200531 March 200531 March 2004NOTE£000£000FIXED ASSETSIntangible assets1014985Tangible assets11128,935103,120Investments14.100129,084103,205CURRENT ASSETSStocks and work in progress12304219Debtors1311,55011,669Cash at bank and in hand18.330529612,15912,184CREDITORS: Amounts falling due within one year15(12,217)(12,256) NET CURRENT (LIABILITIES)(58)(72) TOTAL ASSETS LESS CURRENT LIABILITIES129,026103,133CREDITORS: Amounts falling due after more than one year15(100)(114)PROVISIONS FOR LIABILITIES AND CHARGES16(2,653)(3,401) TOTAL ASSETS EMPLOYED126,27399,618FINANCED BY:TAXPAYERS’ EQUITYPublic dividend capital2286,99078,803Revaluation reserve1738,05419,293Donated asset reserve171,1551,153Government grant reserve1700Other reserves178181Income and expenditure reserve17(7)288TOTAL TAXPAYERS EQUITY126,27399,618Table 28.3Intangible Assets are non-physical assets such as copyrights, franchises and patents (Dyson 2004). To estimate their value is very difficult because they are intangible. Often there is no ready market for them. All of West Kent’s intangible assets software licenses (see note 10 appendix e). The trust has amoritsed the cost of this licenses, at a cost of £14000 per year8.4Atrill & Mclaney (2001), tell us that tangible assets are divided into three categories. Property, plant, and equipment include furniture, computers, and so on. In order to keep track of all the assets from this category each company usually uses subcategories for a particular item or items of similar nature. Land is classified as a separate category for one major reason: land is not a subject to depreciation or depletion. Land is considered to have an infinite life. Although land can suffer impairment, as in West Kent’s note on tangible land assets (see note 11.1 appendix f) showing a £9000 impairment. An Impairment loss results from a short term change in price that is considered to be recoverable in the longer term (Blake 2002)Box 1 – Deprecation Rates For Tangible AssetsPlant and Machinery5- 15 yearsTransport Equipment7 yearsInformation Technology5-8 YearsFurniture and fitting7 – 10 Years8.5 The process of expense recognition for property, plant, and equipment is called depreciation (Dyson 2004). Depreciation is the process of allocating the original purchase price of a fixed asset over the course of its useful life. It appears in the balance sheet as a deduction from the original value of the fixed assets (Atrill & Mclaney 2001).
8.6West Kent depreciates its equipment etc at a standard rate set by NHS guidelines (see box 1). Two issues that may be highlighted from these rates 1. West Kent is predominantly a mental health and learning disabilities servicing trust and as such tends to have patients and clients that display aggressive and violent behaviors, which, in turn will inevitably lead to more that the average use of furniture and fittings. 2. Is 5 – 8 years is too long a period in an ever-changing IT world?8.7Fixed assets are very important to a company because they represent long-term liquid investments that a company expects will help it generate profits Davis & Pain 2002).
8.8Current assets (see notes 12 & 13, appendix G) are assets that a company has at its disposal that can be easily converted into cash within one operating cycle. An operating cycle is the time that it takes to sell a product and collect cash from the sale (Langley & Harden 1994). West Kent’s current assets are made from Stocks and work in progress, which are raw materials and consumables, and Debtors, with an allowance of £156,000 for unpaid debt and cash8.9West Kent’s creditors are separated into two categories the first, falling before the total assets less current liabilities, are the amounts that are owed that fall due within one year .These are liabilities that are owed in the short-term (Dyson 2004), and consist of loans, overdrafts, tax and social security costs and other creditors (see note 15 appendix H). The second category, falling after the total assets less current liabilities, are the creditors that are due to be paid after one year. These liabilities are owed in the long term (Dyson 2004), West Kent only currently has £100,000 owed to long term creditors. It is interesting to note that a loan of £608,000 was taken for the implementation for agenda for change although this is only half as much as the previous year.
8.10Provisions for liabilities and charges are amounts levied against the surplus so to provide for any expected liability or loss or claim (Davis & Pain 2002). West Kent predicts £2,653,000 of expense in this area, mainly made up from pensions and legal claims. This also includes the unwinding discount highlighted in paragraph 7.13.
8.11Taxpayer’s Equity is a misleading title according to Her Majesties Treasury (2005a), who would like the title change as it implies that these are funds that are available for the taxpayer to distribute. Taxpayer’s equity, also called capital, is any debt owed to the Trust. In West Kent’s case their annual PDC is considered a debt which has had more than a 50% increase on last years increase (see note 22, appendix I). Other reserves contribute to the financing of the balance sheet, (see note 17 appendix J) including the £28,000 retained surplus for 2004/5 as mentioned in paragraph 7.15.
8.12The total taxpayer’s equity should always, as in West Kent’s sheet equal the total assets employed I.E. a “balanced sheet” (Tracy & Barrow 2001).
9.Cash Flow Statement9.1Davis & Pain (2002) inform us that a cash flow statement (see table 3) is a financial report that shows incoming and outgoing money during a particular period. The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills (Dyson 2004).
9.2Two different ways exist to present information on a statement of cash flow. The predominant way of presenting information is the indirect method (Atrill & Mclaney 2001). The indirect method provides information about the company’s cash flow by focusing on changes in the non-cash operating accounts on a balance sheet. This type of presentation takes the net income and then adjusts changes from non-cash accounts to derive the cash flow statement. The direct method of cash flow presentation uses the direct change in cash accounts to determine the flow of the cash (Atrill & Mclaney 2001).
9.3Direct method presentation starts with cash received from customers and then takes expenses from that amount to determine the net cash provided by operational activities (Marshall et al, 2004). In addition to these differences, the presentation of operational activities on the statements is different. When a company uses a direct method, a separate section for reconciling net income along with net cash from operational activities is necessary. In the indirect form of the cash flow statement, the reconciliation is part of the operational activities section (Marshall et al, 2004).
9.4The separate reconciliation section in the direct method creates another area to the cash flow statement and essentially creates more information that the user must analyze to determine the net cash from operational activities. The reconciliation is a replica of the non-cash operating account activities used in the indirect form.
9.5The indirect form of the cash flow statement, while not directly focusing on cash transactions, presents a clear and accurate representation of the cash transactions of the company (Marshall eat al 2004).
9.6The indirect method is preferable over the direct method because of its simplicity and straightforwardness. Instead of having two separate sections devoted to operational activities, the indirect method has the one section and provides the same answer for net cash from operational activities as the direct method would (Dyson 2004). West Kent uses the indirect method in their cash flow statement.
Table 3CASH FLOW STATEMENT FOR THE YEAR ENDED 31 March 20052004/052003/04NOTE£000£000OPERATING ACTIVITIESNet cash inflow/(outflow) from operating activities18.14,6054,694RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:Interest received114109Interest paid0(2)Interest element of finance leases(13)(13)Net cash inflow/(outflow) from returns on investments and servicing of finance10194CAPITAL EXPENDITURE(Payments) to acquire tangible fixed assets(10,984)(6,449)Receipts from sale of tangible fixed assets2,0501,187(Payments) to acquire intangible assets(65)(9)Receipts from sale of intangible assets00(Payments to acquire)/receipts from sale of fixed asset investments00Net cash inflow/(outflow) from capital expenditure(8,999)(5,271)DIVIDENDS PAID(3,871)(3,244) Net cash inflow/(outflow) before management of liquid resources and financing(8,164)(3,727)MANAGEMENT OF LIQUID RESOURCES(Purchase) of current asset investments00Sale of current asset investments00Net cash inflow/(outflow) from management of liquid resources00 Net cash inflow/(outflow) before financing(8,164)(3,727)FINANCINGPublic dividend capital received8,1873,349Public dividend capital repaid (not previously accrued)00Public dividend capital repaid (accrued in prior period)00Loans received00Loans repaid00Other capital receipts00Capital element of finance lease rental payments(14)(14)Cash transferred (to)/from other NHS bodies00Net cash inflow/(outflow) from financing8,1733,335Increase/(decrease) in cash9(392)9.7Cash provided by operating activities (see note 18.1 appendix K) equals net income (or in West Kent’s figures the operating surplus, see paragraph 7.15) plus depreciation, amortization (£2,210,000), and the write-down of intangible assets (£31,000), minus the gain on sale of a subsidiary and deferred taxes (£859,000) and decreased creditors (£ 689,000) minus the change in current assets (£85,000), and plus the change in current liabilities (£112,000) (Davis & Pain 2002).
9.8Returns on investments and servicing of finance relates to interest received on the operating surplus for 2004/5, (see table 1 income and expenditure), the monies paid for leasing equipment (see note 9 appendix D).
9.9Capital expenditure relates to the amount used during a particular period to acquire or improve long term assets such as property, plant, equipment or long term licenses (Langley & harden 1994). It appears West Kent has paid £10,984,000 for tangible assets I.E. land and dwelling and recoup £2,050,000 on the sale of the same. They have also paid £65,000 for intangible assets mainly software licenses (which will amortise over a 5-8 year period).
9.10Dividends paid concerns the PDC for 2004/5 (see paragraph 7.14 & 8.11). Liquid resources are resources that can be readily turned into cash (Dyson 2004), West Kent has no such assets9.11The financing of the cash flow statement comes from the increased PDC (see note 22 appendix I) for 2004/5 minus the capital element of finance lease rental payments, which, in West Kent’s case relates to software licenses (see note 10 appendix E).
10.Who Will Be Looking at the Accounts?The general term used for these people are stakeholders, but who exactly are these people? The people who read these accounts depend upon which accounts are being read. For example people who read the accounts of a health service, like West Kent, will be looking for different indicators of success as compared with people who would read Vodafone’s accounts. Three stakeholders that may be interested in these accounts might be:Managers, the Board of Directors and Employees Managers and the board of directors of West Kent will read the accounts to make judgements on how well they and their staff have performed. This is why employees, managers and directors are stakeholders because if the organisation has performed worse than expected then changes are likely to take place in the effort to improve and this could involve, restructuring, job losses, promotions, demotions, pay cuts or rises. Employees may require information on the ability of theTrust to meet wage demands and avoid redundancies, especially in the current enviroment (Jones & Hall, 2006)The Inland Revenue and the government will be keen to judge their performance to ensure that they are paying all dues owed e.g. taxes etc. The government itself would take an active interest in the financial reports of West Kent and would be keen to monitor their business actions. West Kent is a major source of employment and should it perform poorly and make staff cuts, this would leave the government with unemployment problems. The Department of Health obviously has an invested interested to ensure financial policies and the “bigger” budget are adhered toClient, patients and society, Clients and patients may require information relating to the financial position, capabilities of the trust in terms of its position in regard to, technology, supply chain management and other capabilities so that they can be reassured that the Trust will support them with uninterrupted supply of services. Society or the community in which the Trust operates, would require information regarding the trust’s ability to manage capicity of services whilst be prudent with monies e.g ensuring that the community is not effected by “post code lotteries” and that it’s business and processes to comply with environmental requirements in terms of waste disposal etc. as well as its contribution or potential contribution to the community.
Appendix A - Pro forma Statement on Internal ControlThe wording which is not in italic script in this pro forma Statement of Internal Control (SIC) should be replicated in every SIC, the words in italic script being amended as appropriate to the body in question. Bold script indicates a rubric which should be fulfilled in a way appropriate to the actual processes in place in the body to which the SIC relates.
Scope of responsibility1. As Accounting Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of [Department Yellow's] policies, aims and objectives, whilst safeguarding the public funds and departmental assets for which I am personally responsible, in accordance with the responsibilities assigned to me in Government Accounting .
(Accounting Officers should add to this paragraph to provide an explanation of the accountability arrangements surrounding their role. In particular, they should comment on:a.processes in place by which they work with/involve ministers on managing risk;b.inter-relationship of department/executive agency/NDPB ).
The purpose of the system of internal control2. The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of departmental policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically. The system of internal control has been in place in [Department Yellow] for the year ended 31 March [200X] and up to the date of approval of the annual report and accounts, and accords with Treasury guidance.
Capacity to handle risk3. [Describe the key ways in which:a.leadership is given to the risk management process;b.staff are trained or equipped to manage risk in a way appropriate to their authority and duties. Include comment on guidance provided to them and ways in which you seek to learn from good practice.]The risk and control frameworkAppendix A Continued4. [Describe the key elements of the risk management strategy, including the way in which risk (or change in risk) is identified, evaluated, and controlled. Include mention of how risk appetites are determined.3][Describe key ways in which risk management is embedded in the activity of the organisation.](This section should only be inserted by those bodies to which it is relevant:[Describe the key elements of the way in which public stakeholders are involved in managing risks which impact on them.])Review of effectiveness5.As Accounting Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review of the effectiveness of the system of internal control is informed by the work of the internal auditors and the executive managers within the department who have responsibility for the development and maintenance of the internal control framework, and comments made by the external auditors in their management letter and other reports. I have been advised on the implications of the result of my review of the effectiveness of the system of internal control by the board, the Audit Committee [and risk committee, if appropriate] and a plan to address weaknesses and ensure continuous improvement of the system is in place.
6.[Describe the process that has been applied in maintaining and reviewing the effectiveness of the system of internal control, including some comment on the role of:a.the boardb.the Audit Committeec.if relevant, the risk committee/risk managers/risk improvement managerd.internal audite.other explicit review/assurance mechanisms.
Include an outline of the actions taken, or proposed to deal with any significant internal control issues, if applicable.]Appendix B – Notes 3 and 4 – Income from Activities3. Income from Activities2004/052003/04£000£000Strategic Health Authorities4264NHS Trusts23266Primary Care Trusts91,08785,061Foundation Trusts0Local Authorities8,5294,963Department of Health66291NHS Other0Non NHS:- Private Patients00- Overseas patients (non-reciprocal)00- Road Traffic Act00- Other150318 100,70290,5634. Other Operating Income2004/052003/04£000£000Patient transport services00Education, training and research2,1871,921Charitable and other contributions to expenditure00Transfers from donated asset reserve 1919Transfers from government grant reserve00Non-patient care services to other bodies3,7435,027Other income*1,6322,345 7,5819,312The main areas of other income are: Rent £267kLease car contributions £177kSale of non -capital; equipment £110kStaff secondments £187kFee income £137 kAppendix C - Note 5.1 – Operating Expenses5. Operating Expenses5.1 Operating expenses comprise:2004/052003/04£000£000Services from other NHS Trusts3,3803,475Services from other NHS bodies840Services from Foundation Trusts0Purchase of healthcare from non NHS bodies2,2443,154Directors’ costs1,059932Staff costs75,76768,048Supplies and services - clinical5,4945,239Supplies and services - general1,3441,587Establishment3,1393,540Transport823720Premises5,9786,319Bad debts100Depreciation and amortisation2,2101,955Fixed asset impairments and reversals310Audit fees174143Other auditor’s remuneration120Clinical negligence12664Other2,5041,505 104,37996,681The main areas of other operating expenses are :Training courses £600kRecharges for home support £384kProfessional fees £348kSubstance misuse £293kPrivate placements £120kClients’ expenses and allowances £95kPatients travel and expenses £79kAppendix D - Notes 8 & 9 - Disposal of Fixed Assets & Interest Payable8. Profit/(Loss) on Disposal of Fixed AssetsProfit/loss on the disposal of fixed assets is made up as follows:2004/052003/04£000£000Profit on disposal of fixed asset investments00Loss on disposal of fixed asset investments00Profit on disposal of intangible fixed assets00Loss on disposal of intangible fixed assets00Profit on disposal of land and buildings90Loss on disposal of land and buildings0(10)Profits on disposal of plant and equipment00Loss on disposal of plant and equipment(4)(10) 5(20)The most significant disposal relates to Woodside which was sold for £1.555 million9. Interest Payable2003/04£000£000Finance leases1313Other02 1315 Appendix E – Note 10 – Intangible Fixed Assets10. Intangible Fixed AssetsSoftware TotalLicences £000£000Gross cost at 1 April 2004294294Indexation 00Impairments 00Reclassifications7878Other revaluation 00Additions purchased 6363Additions donated00Additions government granted 00Disposals (14) (14)Gross cost at 31 March 2005 421421Amortisation at 1 April 2004209209Indexation 00Impairments 00Reversal of impairments00Reclassifications00Other revaluation 00Provided during the year 7777Disposals (14) (14)Amortisation at 31 March 2004 272272Net book value- Purchased at 1 April 2004 8585- Donated at 1 April 200400- Government granted at 1 April 200400- Total at 1 April 20048585- Purchased at 31 March 2005149149- Donated at 31 March 200500- Government granted at 31 March 200500- Total at 31 March 200514914911.1 Tangible fixed assets at the balance sheet date comprise the following elements:Land Buildings excluding dwellingsDwellings Assets under construction and payments on account* Plant and Machinery Transport Equipment Information Technology Furniture & fittings Total£000 £000 £000 £000 £000 £000 £000 £000 £000Cost or valuation at 1 April 200439,18859,6611262,6015231,4262,3801,593107,498Additions purchased 1001,31909,788101472452511,634Additions donated 000000000Additions government granted 000000000Impairments 000000000Reclassifications402,4290(2,571) 00024*(78)Indexation 2,8354,706101931131347,820Other in year revaluation 173391600000228Disposals (1,392) (569) (60) 00(150) 00(2,171)National Revaluation Exercise8,2372,145840000010,466At 31 March 2005 49,18169,73017610,0115441,4542,6251,676135,397Depreciation at 1 April 2004 0004139711,8231,1714,378Provided during the year 01,694334972041012,133Impairments 92200000031Reversal of Impairments 000000000Reclassifications00000000Indexation 0008212655Other in year revaluation 00000Disposals 0000(135) 00(135)Depreciation at 31 March 200591,716304559542,0271,2986,462Net book value - Purchased at 1 April 200438,67059,0351262,601110446557422101,967- Donated at 1 April 20045186260009001,153- Government Granted at 1 April 2004000000000Total at 31 March 2004 39,18859,6611262,601110455557422103,120- Purchased at 31 March 200548,70267,33517310,01189494598378127,780- Donated at 31 March 20054706790006001,155- Government Granted at 31 March 2005000000000Total at 31 March 200549,17268,01417310,01189500598378128,935*The reclassification of £78K from AUC to Intangible Assets relates to the EROS supply system which came into use in 2004/05.
Appendix F – Note 11.1 - Tangible Fixed AssetAppendix G – Notes 12 & 13 - Current Assets12. Stocks and Work in Progress31 March 200531 March 2004£000£000Raw materials and consumables304219Work-in-progress00Finished goods00TOTAL 30421913. Debtors31 March 200531 March 2004£000£000Amounts falling due within one year:NHS debtors3,4501,811Provision for irrecoverable debts(156)(147)Other prepayments and accrued income1,351785Other debtors3,1765,216Sub Total7,8217,665Amounts falling due after more than one year:NHS debtors1,9302,118Provision for irrecoverable debts00Other prepayments and accrued income1,7921,882Other debtors74Sub Total3,7294,004TOTAL11,55011,669Appendix H – Note 15 - Creditors15. Creditors15.1 Creditors at the balance sheet date are made up of:31 March 200531 March 2004£000£000Amounts falling due within one year:Bank overdrafts00NHS creditors3,6482,330Non - NHS trade creditors - revenue - other2672,706Non - NHS trade creditors - capital00Tax and social security costs1,6751,457Obligations under finance leases and hire purchase contracts1414Other creditors1,079649Capital Accruals1,690Accruals and deferred income3,8445,100Sub Total12,21712,256Amounts falling due after more than one year:Long - term loans00Obligations under finance leases and hire purchase contracts100114NHS creditors00Other00Sub Total100114 TOTAL12,31712,370 Other creditors include;-£900k outstanding pensions contributions at 31 March 2005 (31 March 2004 £525k).
NHS creditors include;-£39k to Pension Agency re early retirements(31 March 2004 £56k).
Other Creditors:- £608k for Agenda for Change (31 March 2004 £1132K)Appendix I – Note 22 - PDC22. Movement in Public Dividend Capital2004/052003/04£000£000Public Dividend Capital as at 1 April 200478,80375,454New Public Dividend Capital received (including transfers from dissolved NHS Trusts)8,1873,349Public Dividend Capital repaid in year 00Public Dividend Capital repayable (creditor)00Public Dividend Capital written off00Public Dividend Capital transferred to Foundation Trust0Other movements in Public Dividend Capital in year00Public Dividend Capital as at 31 March 200586,99078,803Appendix J – Note 17 - Reserves17. Movements on ReservesMovements on reserves in the year comprised the following:Revaluation ReserveDonated Asset ReserveGovernment Grant ReserveOther ReservesIncome and Expenditure ReserveTotal£000£000£000£000£000£000At 1 April 2004 as previously stated19,2931,153081288288Prior Period Adjustments000000At 1 April 2004 as restated19,2931,15308128820,815Transfer from the income and expenditure account2828Fixed asset impairments0000Surplus on other revaluations/indexation of fixed assets18,43821018,459Transfer of realised profits (losses) to the Income and Expenditure reserve73800(738)0Receipt of donated/government granted assets000Transfers to the Income and Expenditure Account for depreciation, impairment, and disposal of donated/government granted assets(19)0(19)Other transfers between reserves(415)0004150Other movements on reserves [specify]00Reserves eliminated on dissolution000000 At 31 March 200538,0541,155081(7)39,283Appendix K – Mote 18.1 – Operating Activities Cash Supply18. 1 Reconciliation of operating surplus to net cash flow from operating activities:2004/052003/04£000£000Total operating surplus (deficit)3,9043,194Depreciation and amortisation charge2,2101,955Fixed asset impairments and reversals310Transfer from donated asset reserve(19)(19)Transfer from the government grant reserve00(Increase)/decrease in stocks(85)(19)(Increase)/decrease in debtors1122,942Increase/(decrease) in creditors (689)(3,315)Increase/(decrease) in provisions (859)(44) Net cash inflow/(outflow) from operating activities before restructuring costs4,6054,694Payments in respect of fundamental reorganisation/restructuring00Net cash inflow from operating activities4,6054,69418.2 Reconciliation of net cash flow to movement in net debt2004/052003/04£000£000Increase/(decrease) in cash in the period9(392)Cash inflow from new debt00Cash outflow from debt repaid and finance lease capital payments1414Cash (inflow)/outflow from (decrease)/increase in liquid resources00Change in net debt resulting from cashflows23(378)Non - cash changes in debt00Net debt at 1 April 2004168546Net debt at 31 March 2005191168ReferencesAtrill P & Mclaney E, (2001) Accounting and Finance for non specialists Prentice Hall LondonBlack.J. (1997) Accounting Standards 6th ed Pitman, LondonBlake,G (2002)Accounting and Financial Reporting Standards. 8th ed. Pearson Education Ltd, EssexDavis T & Pain B, (2002) Business Accounting and Financing McGraw Hill publishing LondonDepartment of Health (2003) Statement of Internal Control 2002/2003 HMSO, LondonDepartment of Health (2003a) Corporate Governance Framework Manual for Primary Care Trusts Hmso London http://www.dh.gov.uk/assetRoot/04/08/27/23/04082723.PDF accessed on 27/02/06Department of Health (2005) Statement of Internal Control 2004/2005: Disclosures HMSO, LondonDepartment of Health (2005a) PDC financing for NHS foundation Trusts HMSO London http://www.dh.gov.uk/assetRoot/04/11/51/30/04115130.pdf access on 22/02/06Dyson J R (2004) Accounting for Non-Accounting Students 6th ed Prentice hall LondonHer Majesties Treasury (2005) The Government Accounting 2000 manual The Stationary Office http://www.government-accounting.gov.uk/current/frames.htm accessed on 16/02/06Her Majesties Treasury (2005a) Financial Reporting Advisory Board Paper Exposure Draft: Statement of Principles for Financial Reporting – Proposed interpretation for Public Benefit Entities. General Consultation HMSO London http://www.hm-treasury.gov.uk/media/53B/ED/FRAB_(76)_06A_Exposure_Draft_Statement_of_Principles_for_Financial_Reporting_-Proposed_Interpretation_for_Public_Benefit_Entities_-_General_Consultation.pdf accessed on 01/03/06Her majesty’s Revenues and Customs (no date) International Accounting Standards – The UK tax implications Crown copyrighthttp://www.hmrc.gov.uk/practitioners/int_accounting.htm#1 accessed on 28/02/06References ContinuedJones G & Hall C (2006) “Wards closed and staff cut as NHS cash crisis bites” The Telegraph 9th March http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/03/09/nhs09.xml&sSheet=/news/2006/03/09/ixnewstop.html accessed on 09/03/06Langley F P & Harden G S (1994) Introduction to Accounting for Business Studies (sixth ED) Butterworth LondonMarshall, D., McManus, W., and Viele, D. (2004). Accounting: What the numbers mean 6th ed. New York: McGraw-Hill.
The Audit Commission Act (1998) HMSO LondonThe Auditing Practices Board (2006) International Standards on Auditing FRCPublishing Londonhttp://www.frc.org.uk/images/uploaded/documents/ISA%20230%20Web%20optimised.pdf accessed on 21/02/06The Companies Act (1985) HMSO LondonThe National Health Service (NHS) Act (1977) HMSO LondonTracy J A & Barrow B (2001) Understanding Business Accounting for Dummies John Wiley & Sons LTD West Sussex
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Thursday May 1, 2008
Introduction
The person, who created the Cadbury business, is John Cadbury in 1824. The business started as a shop in a fashionable place in Birmingham. It sold things such as tea and coffee, mustard and a new sideline - cocoa and drinking chocolate, which John Cadbury prepared himself using a mortar and pestle. In 1847 the Cadbury business became a partnership. This is because John Cadbury took his brother, which also made it a family business. The business was now known as The Cadbury Brothers. A factory in Birmingham was rented, to produce their products. In 1854 the company received its first Royal Warrant as ‘manufacturers of cocoa and chocolate to Queen Victoria’. In 1856 John Cadbury’s son Richard joined the company, followed in 1861 Richard and George became the second Cadbury brothers to run the business when their father retired due to failing health.
The first Cadbury factory was built in the country; it was built in the green fields of Kings Norton, outside the city of Birmingham, between 1899.
This place was named “Bournville”, which was named by George Cadbury where he built the factory. This took place because George Cadbury had an image, with a saying,
“If the country is a good place to live in, why not work in it?”
So he took his workers to live and work in (the country) Bournville. Further on the years Cadbury invited new recipes, so new chocolate were been created, for instance in 1915 Cadbury’s Milk Tray, in 1920, Cadbury’s Flake, in 1938 Roses were created.
In 1969 Cadbury and Schweppes that is a beverage business merged together as a business. This business grew worldwide over centuries, it manufactured, marketed and distributed products in over 200 countries and new chocolates and drinks were been created. While confectionery and soft drinks remained the core of the business, the group also expanded into related food categories such as hot beverages and biscuits and also into health and hygiene
The main activities of Cadbury after it merged with Schweppes are to produces confectionery such as crunchie, twirl, roses, mini egg, whole nut, Cadbury’s Milk Tray and beverages such as Dr Pepper and Seven up. Cadbury and Schweppes have 180 brands.
Now these days Cadbury and Schweppes the business is functional it is owned by many shareholders (some of whom are members of staff). The company employs around 38,000 people worldwide but in Britain 12,000 employees. The company owns 7,500 vehicles that are used for the business (delivery) in Britain. In Britain there are 17 Cadbury and Schweppes sites.
Ownership
Cadbury is a public limited company. It has the opportunity to become larger than the other forms of private business organisation. It is allowed to raise capital through the medium of the Stock Exchange, which quotes their share prices, and this creates a fullness of financial possibilities. The initials “PLC” (or plc) appear after the name of the public limited company. Only two people are needed to form a public limited company and there is no stated maximum of shareholders. In Cadbury’s case it is owned by many shareowners, some of whom are members of staff.
Cadburys business advantage is:
*Shareholders have limited liability, so it means that the shareowners lose what they put in the business and they receive annual dividends.
*It is easier to raise finance from banks, because Cadbury has many assets, which means banks are insured their money back or Cadbury’s assets instead of the money.
*Since it has many assets, it is possible to operate on large scale, which means more production and promotion for the product. This leads to Cadbury’s objective to grow the business and also to operate in a wide range of markets. This leads Cadbury to have a high income, which is a success to Cadburys objective, which is to maximise profits.
*Suppliers feel more confident about trading with legally established bodies
*There are tax advantages associated with giving shares to employees
The disadvantages are:
*Since Cadbury is a plc, its affairs are public; e.g., accounts and annual returns must be audited. This gives opportunities to competitors to get information about Cadbury. For example if Cadbury makes a loss, investors (competitors) will know about it and use it to their advantage.
*It’s a complicated business. Cadbury is a large business it has many different departments for different jobs, all these departments have to work together. Information passes between departments can be confusing.
*Cadbury has many assets, which contain many capitals, which are very costly to use.
*Since Cadbury is a large business, formatting and running, its costs can be expensive
*Since Cadbury is a plc, Heavy penalties are imposed if “rules” are broken.
Objectives
Public limited companies like Cadbury will have objectives such as:
Maximise profit
To be the number one product in a given market
To maximise sales
To grow
To operate in a wide range of markets
To give satisfaction to customers
Have a good reputation
To provide the freedom for workers to express them selves and suggest ideas to help the business
Achieve best possible financial return on capital
Boost or maintain share market values
These objectives will ensure Cadburys success as a business. From the statistics I have, it shows that Cadbury is a very successful business.
Statistics from 1994 to 1998.
The statistics from the financial overview show the finance has just been increasing positively.
They have satisfied shareholders because their share increased by 6%.
There has been a boost in the share market value, earning 37.2 pence from 1994 and 39.4 pence in 1998, which was a 6 % increase with in four years.
Cadbury has been having an increase in profit from 1994 to 1998. From 1994 to 1998 the profit has increased from £575 million to £609 million, an increase of 6 %.
These are recent statistics (1999-2000) for Cadbury and Schweppes, which still show that Cadbury and Schweppes is an ongoing successful business.
19992000% Charge
£ Million£ Million
Sales4,3014,575+6
Underlying * operating profits 747841+13
Underlying * profits before tax686792+15
Underlying * ESP22.5p25.8p+15
Free cash flow292401+37
Dividends per share10p10.5+5
These figures show:
Cash flow of 401 million pounds
Dividends going up 0.05 an increase by 5% in one year
Relating back to the objectives Cadbury increased sales by 6%. Which gave them a profit increase of 15%
Cadbury is successful because it has promoted itself with the underground. I say this because over 10 million people use the underground and when they do they would find the Cadbury catering machine. This is an example.
Cadburys goes Down the Tube…
Chocolate maker Cadbury have now began its contract with London Underground to dispense a range of products through state of the art vending machines at Tube stations in the capital.
A Cadbury spokesman said: “We are absolutely delighted to have won what is the biggest vending contract in the UK.”
London Underground’s business development manager, Simon Williams, added: “By entering into partnership with Cadbury we can be sure that the excellent opportunities to develop the vending business will be fully exploited and that the Underground will benefit from increased revenue at no investment cost.”
Functional areas
Every public limited company has organisational functions these are the main activities of the following areas at Cadbury, which allow it to exist and become a successful business. This diagram shows the system of the business.
The factors of production
Land: buildings (site where the business is located)
Labour: Mangers, workers (any jobs roles that need to be filled)
Capital: equipment, machinery needed
Enterprise: the willingness to take risks to earn a profit
The factors of production at Cadbury are (as shown below in table):
LandLabourCapitalEnterprise
*Cadbury world
*Cadbury factory
(200 around the country)*Managing director
*Directorate
*Executive manger
*Senior manger
*Line manger
*Clerical support assistance*Machinery for production
*Till
*Calculators
*Computers
*Furniture
*Fixtures and fittings*Work hard
*Energy- physical
*Enthusiasm,
*motivation, commitment
Finance
The finance department is in charge of and deals with money. The Finance department keeps records of all financial documents this involves reporting and recording expenses spent and profit made, asset value and cash flow (money that goes in and out of the business). Since Cadbury is a limited company the finance department must, each year, file with Register of Companies a set of audited accounts. These will include a director’s report, auditor’s report, profit and loss account, balance sheet, source and application of funds and an explanation of these accounts. It is also necessary to file an annual return giving details of the directors, shareholders and other information required by law. All this information will be kept on file at Companies House and is opened to inspection by members public. This is a diagram of how financial information can be fed to those who require it, such as information for record keeping and decision making purposes.
This department is in charge of giving budgets to other departments (by doing this it makes sure that the business reaches break even and no less in really bad circumstances). This is also, so that the other departments keep to their main objective and responsibilities and do not waste money. Managers see these targets and compare them with other past targets to find how successful the business is. The targets help the finance department to make plans for the future that will help the business to achieve its objectives. For an example the finance department gives research and development, a budget of £50,000. The research and development department will use this money within one financial year and not over drawing (not taking more money). But under circumstances if research and development department required more money to develop a new chocolate, the finance department will analyse research and development’s plans for producing a new chocolate and if they think it will be successful finance will give the money needed. Through this the departments would have achieved their objectives (e.g. making a profit, good reputation, achieve best possible financial return on capital). They way that Cadbury deals with exchanging of money is by SAP, which is an electronic payment system. For example if Tesco purchases a quantity of chocolate from Cadbury. Cadbury can bill Tesco straight away. This process is time efficient and is a straightforward process.
Production
The production department produces the products; any activities associated with production are wealth creation. A simple example of wealth creation would be the production of a chocolate bar. The difference between all of the costs of the production and the price of the finished chocolate represents the wealth that has been created. The contribution of all those involved in its development have added value to this process and helped to create that wealth.
In production there has to be an input, which is transformed to an output. The transformation is taken through by processes, these add value to the output such as materials and Labour so that the finished product can meet customer needs. The output could either be a service or a product (in Cadbury’s case). The business will need to have a system to ensure that the production process and the product itself are of constant high quality production. For example Cadbury reduces the amount of food wasted:
The example of Curly Wurly
An example of this is, while Cadbury was producing Curly Wurly (the chocolate bar). A great amount of waste was created. When the chocolate Curly Wurly was cut to size there were little pieces of chocolate that were cut off and thrown away (waste). A member of staff (floor manager) that was cleaning the waste of the product (the little left over of Curly Wurly that were cut off), went to the production department and told them that these little pieces of chocolate that are wasted could be used as another brand of chocolate. This chocolate (waste of Curly Wurly) was then further known as Squiggles.
Primary, secondary and tertiary production,
1.help to add a bit more value to something the customers benefits from
2.improves the welfare of our society
3.Provides us with the standard of living to which we have become accustomed.
For example:
1.Primary production, is the earliest stage in the production and is concerned with extracting raw materials e.g. Cocoa
2.Secondary production is the second part of production process. It involves process that transforms raw materials from the primary stage into finished product.
3.Tertiary production is the productivity activity of the service sector of the economy.
The production department in Cadbury is concerned with the following issues:
Costs of production
The condition of the means of production (machinery, etc.)
Keeping production going
Health and safety
Keeping employees motivated
Keeping up to date with technology
Satisfying the requirements of customers
Maximising the use of plant
Minimising the waste of materials
When Cadbury produces a chocolate it produces it in a Flow Production, which is a continuos process of parts passing on from one stage to another until completion. Units of production are worked on in each operation and then passed straight on to the next work stage. In order to make the production line work smoothly, Cadbury insures each operation must be of equal length and there should no movements or leakages from the line. E.g. hold ups to work in process. Because there is a continual demand for chocolate this process (flow production) is successful.
This is diagram shows a flow of production:
Stage 1stage 2stage 3
Machine A’smachine B’sMachine C’s/people
Before production takes place, a brief is done, to find out what to produce? Then it is backed up by primary and secondary research. Then Marketing department basically takes place, “what product should be produced, for what price, where to locate it, “place” and how to promote it”, (Read Marketing). This will help Cadbury to achieve their objective to give satisfaction to customers through selling them a certain product for certain price, will also help them operate in a wide range of markets and Help Cadbury to be noticed through Promotion.
The system that Cadbury produces its products is
(Refer to page 26 and onwards for more specific production.)
Human resources
Human resource is concerned with the whole range of activities to do with looking after the people that work within an organisation and those with whom the organisation comes into contact. In Cadbury, staff members are one of a business’s most expensive and valuable assets. Human resource department plans the manpower needs of the business, recruits not just the people who work but for their qualifications, talent and well motivated; it is also responsible for Health and safety, training of staff and making staff record. Cadbury would use human resources because it is a very big organisation. Human resources would help them meet their objective of developing staff skills. By giving staff subsidised training, staff for Cadbury will be able to improve their skill like gain a degree (mature student) Cadbury does this all and employees the right people for a smooth running of the organisation.
Administration
Cadbury does not really have a main administration department. Each department has its own administration. Each department is responsible for its inputs of information, processing information and out put of information; does its own filing, photocopying, correspondence, mail and telephone calls.
Marketing
The charted institute of marketing defines marketing as:
“The management process responsible for identifying anticipating and satisfying customer requirements profitably.”
The marketing department is responsible for,
Carrying out MARKET RESEARCH
Developing the right MARKET MIX
Businesses (Cadbury) carrying out market research to identify customers needs. This can be done by,
Primary research: asking customers ( new research)
Secondary research: using existing information
The marketing department is also responsible for developing the businesses,
Marketing Mix. This means that they must get the right:
PRODUCTS-what features does the product have that make it suitable for the target market? Cadbury adds its logo to the package, and adds a certain quality to the chocolate that the other competitors don’t (recipe) sometimes, this brings satisfaction to the customers.
PRICE- should the products be priced higher or lower than those of competitors? In local areas, most corner shops sell Cadbury chocolate at the same price as competitor e.g. Cadbury whole nut costs 35 pence, while a Mars bar and Galaxy bar cost 35 pence as well.
PLACE- where will customers want to buy the products? Cadbury sells its products to shops (business) that deal with beverages and confectionery e.g. corners shops, super stores (Iceland, Sainsbury, Kwick Save, Tesco, Asda, Safeway), petrol station etc. these business are usually visited by customers on a daily bases.
PROMOTION- where should the products be advertised, to suit the needs of the business’s target market? Cadbury advertises its products on television, Internet, billposter, in beverages and confectionery business by hanging posters.
This would help Cadbury to achieve ones of its objectives, which is “to be the Number one product in a given market”. By achieving this objective it would lead them to achieve the other objective, such as “maximising profit etc. (refer to objective on page 4).
Research and development
The research and development department is the department that researches new products and develops the old products. To remain successful, business must constantly work to create new and better products and processes.
Research-this involves carrying out investigation to come up with new idea, e.g. by carrying out brainstorming, examining competitors products or carrying out research in laboratory.
Development- this involves turning the findings of the research into useful products or processes.
If Cadbury had a mishap with a chocolate, the research and development department would try to correct the mishap. The research and development department must work closely with the marketing and production departments in particular this is because marketing and production are the beginning and end of producing a product.
As you can see from the table above this is the life cycle of the product while being produced.
The input would be from the Marketing department.
The process would be from the production department
The output would be the product or waste
Therefore because there is a mishap from the output, this has to be due to a fault in the input (The marketing department) or the process (the production department)
Management Style
Cadbury who initiate a quality improvement process must incorporate several basic principles into their management style:
A firm commitment to and support for quality
A concern for the satisfaction of staff and users of health services
A focus on problem solving to improve quality
Respect for staff and their abilities
A willingness to collect and use data to determine the nature and size of problems and to improve processes
Cadbury has more than one management style. This is so it has the best management. This is in terms of efficiency, training, and knowledge and to focus more on the loyalty of the workers in Cadbury. Cadbury has three management styles, which are:
Autocratic: is the decision-making, made by an individual or a group, without the help or advice of other members of staff.
Democratic management: This is when all members of staff work together as a team. They listen to each other’s inputs of ideas and suggestions. Then as a team they reach a decision. This management style is good for Cadbury because it motivates workers; with having power and decision making and through this it allows them to be involved in the business. For example refer to the Curly Wurly (Refer to the production section, page 8).
Consultative management: This is when all the ideas are received and then analysed. If ideas are found to be achievable and successful by the senior group, then it is taken forward. Since Cadbury is a flat structure, mangers working find that they can consult the level or layers of the organisation before making the decision. However power is still centralised by senior groups, who are at the top of the tall hierarchy (structure). (Refer to Curly Wurly example; Decision was given by a floor manager to senior group, the idea was analysed, they found it efficient and successful so the idea was taken forward).
Paternalistic management: It treats all its employees as a family. It makes them feel that they belong to a big family. It provides it employees; with their needs e.g. free health care, sport activities, and social club. In order for Cadbury to make its employees as part of the business (family) it advises them to have a share of the company.
Cadbury uses all these management style in order to achieve the best of its business (workers, Equipment). Autocratic is used in Cadbury by the managing director (refer to the organisational structure). It uses democratic to motivate the workers to perform good quality work. Through motivating the staff members (workers), this makes them feel valued and part of the organisation. Members of staff work willingly.
Cadburys Management by objectives
Management by objectives is a process of management that emphasises the role of leadership and communications in the organisation and control of the business. It is a method of managing managers rather than the workforce at large. This is how Cadbury is managed.
There are three basic elements in Management that Cadbury uses by objectives:
The identification of agreed goals by a manager an a subordinate
The definition of the subordinate’s responsibilities in terms of agreed results
The use of agreed goals and responsibilities to control the progress of the business
Advantages of Cadburys Management by objectives
1.People work better when they have a clear understanding of what they are expected to achieve and how their activities will contribute to the overall objectives of the business.
2.The process of deciding on objectives and responsibilities improves communication between manager and subordinate. By improving feedback it helps with future decision making.
3.It improves training by making managers aware of their own needs and the training needs of subordinates.
4.It provides opportunities for growth and development.
5.By setting identifiable, short-term targets it increase an individual’s sense of achievement and provides opportunities for recognition
Disadvantages of Cadburys Management by objectives
1.The assessment of objectives can appear judgmental and threatening if senior management lack the necessary interpersonal communication skills.
2.When unrealistic objectives are set the resulting failures can be demotivating
3.Management of all levels must be convinced of the value of the exercise otherwise it will become a meaningless routine
In Cadburys case, members of staff are the building blocks of organisations (Cadbury). They can be organised into working groups and given structures to operate within, but unless they have the motivation to work within those structures they will, either consciously or unconsciously, adapt to their own needs. It has been pointed out that business exists for, by and because of people (staff members). A person is more complex than the most sophisticated techniques and technology employed in the business world. Therefore Cadbury has to insure that its members of staff are motivated to work to their maximum ability, have a clear understanding of what they are expected to achieve and how their activities will contribute to the overall objectives of the business (refer to advantages of Cadbury management by objectives). Cadburys management style helps it to achieve its basic principles into their management style (refer to management style)
Culture
Cadbury is a mixture of Cultures such as:
Role culture is doing a job that is very important to the organisation, it is having power over a group (refer to the organisational structure which indicates that Cadbury has role culture because it has many management directors that have power over many groups). This job is an internal job of the organisation it is controlled by having procedures and rules that member of staff should not break or they will lose their position in the organisation. Relating this to Cadbury, marketing directors, who are in charge of market research for new product such as a chocolate, this information (research) has to be confidential.
Power culture is a business being dominated by an individual. The Management director dominates Cadbury, (refer to the organisational structure)
Task culture focus on getting the job done. Groups or teams within this cultural are not fixed but are made up of individuals brought together to achieve a specific task. Cadburys production department has a task culture. It works as a team to package the chocolate. Packaging the chocolates is done as a team. A member of the production team packages the chocolate in foiled rapping, and then the chocolate is passed by machinery to another member of the production team who packages the foil chocolate in boxes. These boxes are then stacked in many counties on a machine. These stacks are the rapped with cellophane, so boxes don’t fall off. Finally these stacks are taken by another member of the production team using machinery to the storage.
Person culture places the emphasis on the individual rather than the organisation and its objectives. For example if any member of staff has any suggestions for improvement, their suggestions are taken to account and if successful they will be used (refer to the Curly Wurly example on page 8).
Cadbury’s Culture arises from the traditions, beliefs and values of the Quaker family. This is how Cadbury adopted the paternalistic management. It includes religious beliefs, attitudes towards alcohol, the food we eat and the importance we attach to family life. The Quaker’s cultural values are very strong and can impose important constraints on the business activity. For example, Cadbury finds, it would be unwise to try to sell products that are seen to insult religions or people, and it would be foolish to try to make people adopt working practices that are disapproved of by the cultural grouping (Quaker). The reason why Cadbury is successful is because it makes best use of its opportunities, which therefore allows decision making understood.
Organisational structure
This is Cadbury’s brief organisational structure.
This is a diagram of the downward flow of communication in line organisation.
Organisational structure
Cadburys type of organisational structure is between hierarchical and flat structure.
Flat structure does not have many layers, which means information is sent quickly; with less complication or misunderstanding; therefore it produces the correct result. Due to having a Flat structure communication is easier {clear information, understanding} between each layer, therefore when decisions are made, they will be specific to advice/order instructions.
Hierarchical structure is based on distinct chain of commands from Managing director to Clerical Support assistants (according to Cadbury). Decisions are made at the top and pass down. Such organisational are usually based on clearly defined procedures and roles.
Cadbury organisation is based on more democratic. Decisions are made as a result of a consultation process involving various members of the organisation (Cadbury). Ideas would be discussed and thought through collectively.
Within Cadbury organisation we can find a Democratic structure, Because Cadbury tends to be found in situation were it is felt to be important for all members of the organisation to understand what they are doing, were decisions require individual initiative, and where member of staff need to work as a team
How management style, Culture and Organisational structure interrelate
Management style, culture and organisational structure interrelate together in Cadbury because they all work together to help the business to achieve its objectives; in order to lead a successful business.
Cadbury has strategies for the organisation, continually to motivate members of staff to support this process, and market change within the organisation.
Management style, culture and organisational structure interrelate together in Cadbury because they all work together to:
Develop Strategies: Cadbury’s good management involves long-term or sometimes strategic planning. Without members of staff (employees) at Cadbury having a clear idea of Cadburys goals, employees don’t know where the Cadbury is going, or the best means to achieve the goals. An institution needs to define where it’s going (the vision), why it’s going there (the mission), and how to get there (the strategies). It will then be easier to use this process to work cohesively towards organisational goals. Tools in this section for helping you develop a coherent strategy for your organisation include the affinity technique, force field analysis, SWOT analysis, and strategic analysis. Due to this employees at Cadbury would feel they are part of the organisation.
Marketing Change: Quality improvement is about continued readiness to make changes towards improvement. However, every change of attitude or practice implies advantages and disadvantages. For people to accept a change, the advantages always have to be greater than the disadvantages. To promote the idea of change, you need to market its advantages. Tools in this section that will help you market change include developing a marketing plan, stakeholder analysis, and negotiation techniques. An example of making changes towards improvement, is when Cadbury creates a new chocolate bar; for instance the chocolate bar, Fuse. It was the highest selling chocolate in the year 1996. People accepted the chocolate because it was different, which means that Cadbury filled a gap in the market. It also reached the consumer via promotion strategies. Every promotion had a meaning, for example the bill board promotion for fuse used a motto that was confusing. That’s what Cadbury were trying to do confuse the consumers, so that they repeatingly, think of the motto to try understand it and what this is doing is reminding the consumers of the chocolate Fuse.
Motivating People: Motivating people to perform to the best of their capabilities and in the best interests of the organisation are a huge task. Important elements that Cadbury uses in motivating their includes leadership, clear organisational and individual goals, rewards based on performance of staff, and participatory supervision. Cadbury helps to motivate their staff also by including developing a supervision visit plan, effective meeting management, and techniques for solving conflicts.
Ict and Communication
Communication- involves sending a message between a “sender” and a “receiver”.
The communication channel is the route by which a message is sent between the sender and the receiver. The communication channel can involve a range of communication media. A communication medium is the written, oral or technological method used to communicate a message. For example a manager wishes to notify an employees of a pay rise:
Types of communication:
Communication can be
Internal or external
Formal or informal
Downward, upwards or horizontal
Ristricted or open
The type of communication that Cadbury uses are e-mail,fax,telephone, mobile communication(text messges),laser,vidoe confrencing (allows the business to have virtual meetings), confrence calls,file trasfer,
Websiteinternet
Intranet (internal communication)
The advantages of Ict upon communication internal and external communication at Cadbury are:
Fast (compared to other methods such as writing a letter)
Can be more accurate (easier to correct errors)
Allows people to use the information quickly and efficient
Can get access to a wide range of information easily
Easy and cheap to store information
Can access information where ever you are in the world (and can communicate with people where ever they are)
Often cheap to access
Quality of information can be better
Disadvantages:
Messages can be misunderstood
Can take time to clarify misunderstanding
Chance that messages can be sent to the wrong people
People can be unfamiliar with the system
Employees may need training (costly)
Employees may feel de-motivated/ stressed by new technology
Messages can be held up due to technical problems
Lack of visual communication can hinder the quality of communication
Employees can suffer from information over load
Ways to avoid some of these disadvantages are by
Training staff
Use face to face communication (maybe through the performance management system)
Make sure employees feel they can get to see their manager
Have technical support
Help employees, by satisfying their social needs e.g. through social club
Make sure employees are only given training that will be useful.
ICT affected Cadbury’s workplace international as a company because it has made communication much simpler and easier; Jobs that took a lot of time, effort and money are a lot simpler now with technology, like the Internet.
Cadbury uses ict as a mean of external communication, when it wants to cummunicate between the organistion and the outside world. Cadbury has a public image and this conveys a message which affects everyone who has dealings with it e.g. cutomers, shareholders, suppliers, compitetors, government, communities, international agencies, enviromental groups. Cadbury being able to provide a positive image through external communication creates a better external environment. Successful manipulation of public relations convinces others that Cadbury is worth dealing with ,buying its products (and might provide it with a considerable strategic and competitive advantage). Cadbury has open information for example it has a website that gives members of the public formal (none sensetivte ) information about the business.
On Cadbury’s website you are able to find information on cadbury. The information are set out in topics then isues for example one topic is Cadbury today it has market information,information it has for schools and third party links which give you more information that you might need. It also has topics such as cadbury’s learning Zone , this is where you learn about cadbury and now more aboout its history, your able to contact them asking them any questions relating with cadbury.
Cadbury uses ict as a mean of internal communication, when it wants to communicate between members of the organistaion. The reason why cadbury uses internal communication is to transfer information or intiate some action. Cadbury uses a software package called Lotus smart suite internally, this software package is like a personal organiser that allows the majority of staff to book in all important dates and information. Using this lotus program makes arrangement of meeting simpler and easier, to see if other members of staff are free. Cadbury as an internal business can uses this program to find out any information worldwide, for example if a member of staff that works for Cadbury in Britain wants to find information about another member of staff that works for Cadbury somewhere else in the world, they can.
In cadbury internal communication may flow:
Downward- from higher to lower levels. Say for example the managing director wanted to speak to Clerical support assistance to change the style of work.
Upwards- from lower to higher levels. E.g. Clerical support assistance gives suggestions to senior manger. (Refer to the incident of the Curly Wurly and squiggles).
Horizontal-between people and department ate the same level
Multi directionally- in all directions (quality circle).
They also use internal communication so that they can communicate restricted information that is sensitive to Cadbury (the business) for example regarding a new chocolate bar that Cadbury is creating. This is so that member of the public and competitors are restricted to the informal information.
The production process
Production involves converting inputs in outputs using a production system. This is a table showing how Cadbury uses the production system.
In detail this is what Cadbury does to produce chocolates.
When the sacks of beans reach the chocolate factories, they are sampled to confirm their quality. They are then removed from the sacks and stored in large silos under carefully controlled conditions of temperature and humidity.
The inside of a chocolate factories such as Cadbury, they are quite an extraordinary sight. The beans are moved and processed using very large industrial machines.
The first step in processing is cleaning. The beans are brushed, vacuumed and filtered to remove all extraneous materials. Some types of beans are roasted first and then cracked open to extract the cocoa particles (commonly called nibs). Others are cracked open first and then roasted. The roasting continues until the water content is reduced to less than three percent.
The nibs are then ground. The grinding process produces enough heat to cause the fatty portion of the nibs to liquefy. The liquid part is called cocoa butter; the dry part is cocoa powder. Actually, during this part of the process, the powder is coated by the butter to form a pasty mixture called chocolate liquor. The word “liquor” is just chocolate manufacturers’ jargon; there is no alcohol at all in this liquor. This mixture is then pumped through heated pipes to heated holding tanks before it is further processed.
The next step is to separate the powder from the butter. This is done in huge heated hydraulic presses. By controlling the temperature, hydraulic pressure and duration of the process, the desired amount of fat is squeezed out. The remaining cocoa (still containing some fat) is extracted in the form of hard round disks about two inches thick and resembling the wheels of a railroad train.
The liquid cocoa butter is filtered to purify it and is then allowed to cool into yellowish blocks. Some of it will be blended back into the chocolate later to achieve the desired texture and taste.
The solid chocolate is then ground up and treated with an alkali to neutralise the acidity. The processed chocolate is then again ground up, this time into a finer powder.
At this point, various ingredients are added, depending on the type of chocolate desired. These include:
Unsweetened or baking chocolate made from the chocolate liquor that is allowed to cool.
Increasing amounts of sugar are added depending on whether the end product is to be extra-bittersweet, bittersweet or semisweet. Some cocoa butter is also added back into the chocolate at this stage, depending on the flavour and texture desired. Small amounts of vanilla are added to enhance flavour.
These different types of chocolate can be made into milk chocolate by adding varying amounts of milk solids or powder.
White chocolate is produced by adding milk solids or powder to the pure cocoa butter.
Lecithin (an extract from soybeans) is usually added in very small quantities to make the chocolate uniform and pliable.
Sometimes finely ground roasted hazelnuts and/or almonds are added to produce a form of chocolate called gianduia.
The next step is conching. This is a stirring and kneading process performed with large mechanical devices in large vats - up to several feet in diameter. Depending on the outcome desired, this process might go on for several hours or as many as five days. Obviously, the longer it goes on, the more expensive the process. As you might expect, the less expensive products are more likely to have a shorter conching period. At appropriate times in the process, additional cocoa butter may be added to the mix to control the texture, the melting temperature and the taste of the chocolate. One of the main effects of the kneading action is to reduce the size of the crystals embedded in the chocolate. Short conching period’s result in chocolate with crystals which, although small, are still noticeable if you pay attention to the feel of the chocolate on your tongue. The longer the conching, the less likely you are to notice that slightly rough feel. The finest chocolates feel totally smooth on the tongue.
When the conching is completed, the molten chocolate is cooled down slowly to prevent re-crystallisation. Sometimes the chocolate’s temperature is elevated for a short period of time and then cooled further to minimise the reformation of crystals. This process is called tempering. Finally, the chocolate is poured into large moulds and cooled until it becomes solid. The most carefully conched and tempered chocolates with the highest cocoa butter content are usually selected to be used as the coverings (referred to in the industry as couverture) for high quality chocolate candies.
Depending on how the chocolate is to be used, further processing is performed in a variety of ways.
This is a diagram to illustrate main process in Cadbury s chain of production. The diagram illustrates pictures of the production with an explanation describing it.
The raw materials are transported to the mixers. By means of a computerised weighing installation the different recipes are composed. The main raw materials are sugar, cocoa powder and cocoa butter, cream. After a specified mixing time the dough is transported to the extruding department.
Extruding the chocolate
When the dough leaves the mixers, it is transported to the extruding department. A whole battery of extruders alters the dough to long strings of chocolate. The chocolate has to be cooled down
Into the cooling tunnel
After the extrusion of the chocolate dough, there are two things that need to be, cooling the strings of chocolate and breaking them into little pieces.
In the cooling tunnel the product is cooled down. During the transportation of the cooled strings, the strings are broken into smaller pieces. The chocolate is still rather dim. It needs to become shiny and attractive, which is done during the glazing of the.
The chocolate is then packaged
Expedition
When the product is packed, it is time to distribute the products to the place where at the time our clients want them to be. Transportation and warehousing of a natural product like chocolate are done under specified conditions. These conditions can be found on the level of this site concerning the different ranges of products.
These are requirements that Cadbury use:
1. Temperature
The most ideal temperature to store and transport is between 18ºC and 22ºC.
2. Handling
Although the packaging is designed for regular transport, careful handling must be used to prevent the occurrence of damage.
3. Humidity
The ideal humidity to store and transport is less than 65%. Do not store in areas with a high humidity. In any case try to prevent direct contact of water with the cardboard packaging and our products. Do not expose to wet environments.
4. Sunlight
Over-exposure of chocolate products to sunlight is fatal for the quality. Do not expose cartons to direct sunlight.
5. Storage conditions
Dust
Though the cartons are sealed, exposure to dust and other contaminates is possible. This is why Cadbury try to avoid storage of any cartons in dusty conditions.
Cadbury adds value to chocolate products, in three procedures:
1.Producing a physical change
2.Creating a service
3.Meeting the requirements of customers
After each procedure the value of the output product increases than what the inputs where. So every step that is taken to produce the chocolate (product) adds value to it from its original value.
Producing a psychical change
In order to produce a psychical change, there four components (that Cadbury) take in account:
Land: which is the place or site where Cadbury will operate the business
(Finance, Production, Human resources, Marketing, Administration and Research and Development)
Labour: are the members of staff (human actions either by hand or brain)
which help to operate the business as an overall
Capital: is the machinery, tools, equipment, buildings, transport.
Enterprise: is the risk taking Enthusiasm, motivation, and commitment of
introducing the chocolate (product) in the market. It’s the innovation, provided by the entrepreneur (manager).
Refer to the diagram that illustrates main process in Cadbury, page 27-29 every step there adds value to the chocolate (product).
Creating a service
Value is added by creating a service. What I mean by this is that the service and effort put in production, the precision and expense of capital and the amount training needed for Cadbury staff to produce these efforts add value.
Meeting the requirements of customers
The features of the chocolate (product) that are important to customers and satisfy them are:
*The product identity which is the Cadbury
*Quality Product performance and reliability- produces good quality chocolate
*aesthetic- the appearance of the chocolate (product)
*Price- the chocolate price is within the price ranges of competitors and sometimes its cheaper for example the Cadbury dairy milk is 30 pence in normal retail stores while galaxy the chocolate bar is 35 pence
Quality
Quality refers to features of a product that allow it to meet customer’s expectations. A product is often refereed to as a good quality if it is “fit for purpose”.
To ensure good quality, Cadbury requires:
Quality raw materials
Quality production process
Quality design
Through these stages Cadbury adds value.
Cadbury uses many processes to achieve quality. It uses quality assurance, control and total quality management to make sure that its quality standards are met. All of these quality processes tie in together.
Quality assurance places great emphasis upon the seller to deliver goods of appropriate quality, so that the receiving organisation is saved the time and trouble resulting from defects.
Quality control is inspecting or testing the quality of the product at various points in the manufacture of a product or delivery of service.
Total quality management is a method of establishing production faults through a philosophy of continuos improvements in every process of planing, production and service.
In order for Cadbury to achieve quality assurance, it must achieve:
Product perfection, It does this by taking samples from various batches of chocolate and analyses them, to find out if they meet quality standards. If they do not, the whole batch is brought back and not sold, it is further on analysed, in order to find the fault.
Process quality, it does these by regularly checking that all the production processes (machines) are working efficiently.
In this stage Cadbury uses quality control by inspecting or testing the quality of the product at various points in the manufacture of a product or delivery of service.
Human resource quality, Cadbury insures that it trains all of its staff to be aware of quality issues and to work towards quality improvements, (to give any suggestions for improvement, e.g. Curly Wurly example)
Consumer satisfaction, Cadbury does this by get results from primary and secondary research. Before releasing a new chocolate to the market, Cadbury further on analyses its chocolate by getting numerical members of the public to set a process called testing, which is putting these members of the public in a room to eat the new chocolate. Then specialists analyse the members of the public’s reaction to the chocolate and also the members of the public fill in a form, analysing the chocolate. Then these information’s gathered are apart to sum a result, if the new chocolate will satisfy the consumers.
Cadbury using quality assurance and control covers the total management quality. Total, as involving everyone (members of staff) and all activities in Cadbury. Quality, as in meeting customers requirements. Management, as in quality is always managed continuously.
Every step that Cadbury takes for quality adds value top the product. If Cadbury never used any of these quality processes faults in the product will occur and will give the company a bad reputation.
Benchmarking involves Cadbury to carry out research to discover the best methods of production and adopting them.
There are five main steps involved in the benchmarking process:
1.Identify the aspect of the production that are most important
2.Choose a business that is really good at it
3.Carry out research in to their practices
4.Work out how their practices can be used in Cadbury
5.Implement them
Cadbury manages to improve quality by benchmarking. Cadburys benchmarked walkers for the packaging. Cadbury used to package there chocolate in two layers, foil then paper. Now they package it in air tight foil packing. This is an advantage because it keeps the chocolate fresh, protects it dust and it keeps the flavour for a longer period of time. Plus using only one layer it is more money efficient and it means they are environmentally friendly because they don’t use paper for packaging only cardboard boxes which the use to transport the products to customers (stores).
Quality circle is a group of employees who met together regularly to identify quality problems and come up with solutions.
Quality circle is workers who are involved in carrying day to day jobs. In Cadburys case, in chocolate manufacturing, employees working on the production line could be members of a quality circle
What I would suggest the key to improving quality in Cadbury is to improve processes that define, produce and support products.
All people work in processes.
People
Get processes “in control”
Work with other employees and managers to identify process problems and eliminate them
Managers and/or Supervisors Work on Processes
Provide training and tool resources
Measure and review process performance (metrics)
Improve process performance with the help of those who use the process
The effects that that’s these strategies will have on processes must be managed and improved! This involves:
Defining the process
Measuring process performance (metrics)
Reviewing process performance
Identifying process shortcomings
Analysing process problems
Making a process change
Measuring the effects of the process change
Communicating both ways between supervisor and user
TQM Compared to ISO 9001
ISO 9000 is a Quality System Management Standard. TQM is a philosophy of perpetual improvement. The ISO Quality Standard sets in place a system to deploy policy and verifiable objectives. An ISO implementation is a basis for a Total Quality Management implementation. Where there is an ISO system, about 75 percent of the steps are in place for TQM. The requirements for TQM can be considered ISO plus. Another aspect relating to the ISO Standard is that the proposed changes for the next revision (1999) will contain customer satisfaction and measurement requirements. In short, implementing TQM is being proactive concerning quality rather than reactive.
