The Wal-Mart model: is it sustainable?
1 December 2005
Wal-Mart has just been the subject of a week of events in the US run by a campaign group concerned about Wal-Mart’s corporate citizenship and its treatment of employees. Now new research from the Centre for Business Research at Cambridge University contrasts the company’s business practices unfavourably with another large retailer – IKEA – and warns of the impact of “discount prices based on low living standards” on both domestic and global production systems.
Wal-Mart’s “single-minded pursuit of the bottom line”, or IKEA’s “low cost, but not at the expense of product quality, social or environmental responsibility” – which variety of capitalism is sustainable in the long run? And whose business practices are better for these retailers’ host communities, employees and suppliers, and ultimately the companies themselves?
These questions are posed in a study just published by the Centre for Business Research at Cambridge University. In a working paper entitled ‘The Export of National Varieties of Capitalism: the Cases of Wal-Mart and Ikea’, four researchers interested in corporate governance compare the business practices of Wal-Mart – the world’s largest retailer and America’s largest private employer – and IKEA, the world’s largest retailer of home furnishing products.
They contrast the approach of Wal-Mart, which they say “uses its market power to squeeze suppliers in order to minimise cost and price, with adverse effects on the socio-economic conditions in localities in which they trade”, with that of IKEA. “IKEA’s power is used in a constructive way, to work with suppliers in order to help them deliver low prices without compromising product quality or social and environmental standards,” says the report.
Co-authors Suzanne J. Konzelmann, Frank Wilkinson, Charles Craypo and Rabih Aridi add: “In so doing, IKEA exports the high quality of customer/supplier and employee relationships expected of Swedish companies to its third world suppliers and its retail outlet employees and customers, to the mutual benefit of these stakeholder groups, host localities and IKEA itself.”
Rock bottom prices
Comparing IKEA to Wal-Mart, the researchers say that in the USA, “Wal-Mart has managed to maintain its competitive cost advantage mainly by forcing or persuading private and public stakeholders to pay part of its cost of doing business: workers through low wages and benefits, suppliers through rock bottom wholesale prices, communities through direct and indirect operating subsidies and the nation’s productive system as a whole through forced offshore manufacturing.”
The findings make compelling reading for those interested both in such companies’ impact on our domestic economy, and for their impact on the fortunes of other countries. And their publication is highly timely. Currently the retail giant, which owns Asda in the UK, is the subject of a hostile documentary “Wal-Mart, the High Cost of Low Price”. This was shown at many cinemas across the USA during November, as part of a week of protests organised by the campaign group Wal-Mart Watch. (This group was set up by the Service Employees’ International Union to ‘challenge the world’s largest retailer to become a better employer, neighbor, and corporate citizen’.)
And last week, Wal-Mart stores in Massachusetts were the subject of fresh controversy after Massachusetts Attorney General Tom Reilly told Wal-Mart officials they had to close their Massachusetts stores on Thanksgiving, after receiving complaints that the retailer intended to stay open.
The CBR report is interested not just in the domestic, but in the wider, impact of these two retailers’ business practices, including their relationships with suppliers and what these are doing to global production systems.
Though most of IKEA’s production takes place in lower-cost countries such as China and Poland, it nonetheless expects suppliers to conform to certain criteria regarding their legal, employment, social and environmental responsibilities. These include not using child labour and providing safe working environments.
One formerly state-owned furniture factory in Nehoiu, Romania, was bought by a supplier with the help of a loan from IKEA, which worked with him in partnership to bring the factory up to standards. (Prior to this investment, says the report, “the factory had no ventilation system or air filters and the resulting working conditions were so poor, workers had to leave the windows open even the depth of winter.”)
The supplier, Nicholas Boros, says that IKEA’s code of conduct is tough to comply with, but despite this, IKEA’s standards have led to better conditions for local employees and the environment, and that business sales have increased five-fold.
The researchers contrast this with Wal-Mart’s relationships with its suppliers, reporting that Wal-Mart’s global supply chain “is another source of cost-saving for the company, with devastating effects on the trade balances of third world countries whose export sectors are vulnerable to Wal-Mart’s supply chain relations.”
They cite as one example Mexico, where “Wal-Mart Mexico’s growing reliance on the company’s global supply chain rather than Mexican suppliers increased its ratio of import to total vendor purchases from 20 per cent in 1997 to more than 55 per cent by 2002; and Wal-Mart is now the leading contributor to Mexico’s perennial trade deficit.”
The researchers conclude, “As evident in these cases, corporate concentration in retailing has directly affected the trade fortunes of third world countries. Whereas the Wal-Mart case illustrates the potential costs of a market-based, ‘low road’ approach to global sourcing, the IKEA case demonstrates the potential benefits of an organisation-oriented, ‘high road’ strategy to long-term system performance for the corporate, national and global productive systems of which it forms a part.”
How universities can support industrial innovation
23 November 2005
CBR research will be highlighted at an international conference on Local Innovation Systems taking place in Massachusetts, USA next month.
The event will focus on how regions can create and sustain environments capable of attracting and nurturing innovative industries and participating effectively in global production networks.
The First International Conference on Local Innovation Systems takes place on 13 December 2005. It will include presentations from university-based economic development leaders, showing how universities can support industrial innovation in both high-growth, and less favoured, regions.
And it will feature a notable speaker in Esko Aho, former Prime Minister of Finland – the country recently ranked as the world’s most competitive economy – who will be talking about that country’s approach to science- and technology- based industrial development.
Other speakers will include Professor Richard Lester, Director of MIT’s Industrial Performance Center; and Dr Andy Cosh and Professor Alan Hughes, Director of the Centre for Business Research, University of Cambridge.
They will be talking about new findings from the Cambridge-MIT Institute-sponsored ‘International Innovation Benchmarking’ study. This is surveying 4,000 US- and UK- based firms, and his presentation will focus on their interactions with local and national universities, and how innovative they are as a result.
The conference takes place in Cambridge, Massachusetts, at the Royal Sonesta Hotel. It is hosted by the Industrial Performance Center at MIT (the Massachusetts Institute of Technology).
A highlight of the event will be the presentation and discussion of new findings from MIT’s Local Innovation Systems project. This multi-partner research is investigating cases of actual and attempted industrial transformation in more than 23 different locations across Europe, the United States and Asia, with case studies ranging from the electronics industry in Kyoto and Taipei, to the opto-electronics industries in central Scotland and Rochester, New York; and from the motor sports industry in North Carolina to the medical instruments industry in Oulu, Finland.
The project’s partners – who include the CBR – and a distinguished group of practitioners will discuss the significance of this research for local and regional efforts to achieve innovation-driven growth, paying particular attention to the roles of educational and research institutions in this process.
The conference is aimed at economic development strategists and practitioners from forward-looking economic regions; research, technology transfer, and economic development managers from universities and other public research institutions; and corporate leaders seeking insight into how their competitive performance is influenced by the characteristics of the local and regional economies in which they operate.
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CBR project leader promoted to professor
29 September 2005
Congratulations go to Christel Lane, leader of a CBR project on the way UK and overseas firms are responding to globalisation. She has just been promoted to Professor.
Dr Lane, formerly a Reader in Cambridge University’s Faculty of Social and Political Sciences, takes up her new post as Professor there on 1 October. Christel’s area of research in the Faculty includes studies of the changing position of the professions in Britain and Germany; globalisation strategy and organisational change; and the emergence of the ‘knowledge economy’.
At the CBR, she leads a project, funded by the Cambridge-MIT Institute, on “The Globalising Behaviour of UK Firms in a Comparative Context”. This project is studying British firms’ responses to globalisation, compared with those of a similar set of firms in the United States, Germany and, through a research collaboration with Doshisha University, Kyoto, Japan. The research is focusing on three industries pharmaceuticals/biotechnology; textiles and clothing; and book publishing.
The objective of the research is to contribute to a better understanding of how to improve British performance, given the strong pressures on firms operating in a global environment to break with old patterns of governance, organisation and scope, and location.
Together with her project colleagues, Dr Jocelyn Probert and Dr Simon Learmount, Christel organised a workshop at the University of Cambridge on 14-15 April 2005, entitled “Organisational Configurations and Locational Choices of Firms: Responses to Globalisation in Different Industry & Institutional Environments”.
The project is due to end next month, and a full report on the project’s findings will be published shortly.
CBR members elected to British Academy
1 August 2005
Two long-standing members of the Centre for Business Research have just been elected Fellows of the British Academy.
Professor Simon Deakin, who has run the CBR’s programme of research on corporate governance since its inception in 1994, and economic geographer Professor Ron Martin, who has conducted and published a considerable amount of work through the CBR, were both elected Fellows of the British Academy at its delayed 103rd Annual General Meeting last Friday, 29 July.
The AGM had originally been scheduled for Thursday 7 July, but plans for the event were disrupted by the terrorist bombings in the capital, and it had to be reconvened.
The British Academy is the national academy for the humanities and social sciences and is the counterpart to the Royal Society (which exists to serve the natural sciences). Its aims include giving recognition to excellence; promoting and supporting advanced research and promoting public understanding of research and scholarship.
Simon Deakin is acting Director of the Centre for Business Research, where he leads a programme of study into corporate governance, and Robert Monks Professor of Corporate Governance at Cambridge Judge Business School. He is also Yorke Professorial Research Fellow in the Faculty of Law at Cambridge. At the CBR, he is currently leading two new research projects on ‘Law, Finance and Development’ and ‘Reflexive Governance in the Public Interest’.
Ron Martin is Professor of Economic Geography at Cambridge. A Professorial Fellow of St Catharine’s College, and a fellow of the Cambridge-MIT Institute, he is a previous holder of the British Academy’s “Thank-Offering to Britain” Senior Research Fellowship. He is also an Academician of the Academy of Social Scences, and was selected by the American Economics Association in 2003 as one of the world’s most cited economists.
He has published a number of CBR Working Papers on issues ranging from regional development and regional divergence (CBR Working Papers 44 and 179, to the reassessment of the value of policies that promote business clusters (CBR Working Paper 244), and the role of venture capital and finance markets in regional economic development. His current research projects include the theoretical and empirical analysis of the competitiveness of British cities for the ODPM, and the competitive performance of European regions for the European Commission. He is also involved in the establishment of a European-wide research network on evolutionary approaches to regional growth and development.
The Fellowships to Simon Deakin and Ron Martin add to a growing list of awards and appointments made in recognition of the contribution of CBR members to the advancement of the social sciences. Co-founder of the CBR Dr David Keeble, was awarded a highly prestigious prize, the Royal Geographical Society’s Patron’s Medal 2002, for “advancing knowledge in economics and industrial geography”. And in 2004, CBR Director Professor Alan Hughes was appointed by the Prime Minister to the Council for Science and Technology.
Simon Deakin said:
I am deeply honoured to have been elected to a Fellowship of the British Academy, and delighted that the Academy has also recognised Ron Martin’s outstanding contribution. Recent awards to CBR researchers are the fruit of our interdisciplinary approach and collegiate working method.
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Responding to changes and shocks
30 June 2005
Business cycles are a fact of economic life and they can have a significant impact on new technology sectors where the risks are high and product development takes time. But research funded by the Economic and Social Research Council shows that not all sectors respond in the same way.
The project, conducted by Michael Kitson and Dr David Primost at the Centre for Business Research, revealed a range of competency in handling economic changes and the use of a variety of coping strategies. Researchers worked closely with firms in the biotechnology and aerospace sectors in the UK and observed how they handled economic changes and shocks over three years (2002-2004). This was a period of slow economic growth, but with substantial falls in the valuation of technology-based firms. It also saw major geopolitical developments and events, including the aftermath of 9/11.
“Our aim was to find out how changes in the macroeconomy, and the inevitable shocks that occur, influence managerial behaviour and corporate strategy. We focused on two high-tech sectors and examined how such behaviours and actions affect competitiveness and long-term growth,” said Michael Kitson. “We believe our findings are relevant to mangers and policy makers as different sectors, responded differently; so generalities need to be avoided.”
CBR wins ‘Productivity Gap’ research grant
20 June 2005
A £500,000 research grant has been awarded to the CBR, and three other institutions, to study whether improving management practices could help close the UK’s Productivity Gap.
The grant was awarded last month by the Engineering and Physical Sciences Research Council (EPSRC)and the Advanced Institute of Management Research (AIM). It follows a competitive ‘Ideas Factory’ last January, which brought together 20 academic experts from a diverse range of backgrounds to explore issues to do with productivity and performance. It was hoped that the four days of discussion between the historians, computer scientists, biologists, psychologists and economists taking part in the ‘Ideas Factory’ would generate some new and potential insightful research avenues.
And they have. It has just been announced that following the ‘Ideas Factory’, five projects are being funded. They include a project on The Role of Management Practices in Closing the Productivity Gap that involves staff at the CBR. The work on this project will be conducted by CBR Research Fellow, Dr Xiaolan Fu, and three colleagues. Xiaolan will be working with Nottingham computer scientist, Dr Uwe Aickelin; Dr Giuliana Battisti from Aston Business School; and Professor Chris Clegg, from Sheffield University’s Institute of Work Psychology.
“The ‘Ideas Factory’ was very stimulating because it was so multi-disciplinary, and the experts there came from such diverse backgrounds,” says Dr Fu. “One day, we had to list our queries on a piece of paper pinned to the wall, and it was necessary to define and unify our terms. The phrase ‘total factor productivity’, for example, is well known and understood by economists, but means nothing to biologists.”
She adds, “I think it will be very interesting, and probably quite challenging, to carry out this work with colleagues who will be able to offer such different perspectives.”
This project, which starts in October 2005, will examine some of the key reasons for the relatively poor productivity of selected parts of the UK service sector, compared to the USA. The researchers will be trying to model the reasons for this productivity shortfall by incorporating variables from different levels of analysis – including national, sector, firm, and workgroup variables. The project focuses in particular on the role of management practices in the productivity gap. For example, is it the case that US-owned retail outlets operating in the UK are more productive than UK-owned outlets here because the US companies implement and use appropriate management practices more effectively?
Responding to globalisation
2 June 2005
“The evolution of global-scale industrial organisation affects not only the fortunes of firms and the structure of industries, but also how and why countries advance – or fail to advance – in the global economy.”
With these words, Dr Tim Sturgeon from MIT’s Industrial Performance Center began his keynote address to a workshop on “Responses to Globalisation” at the University of Cambridge in April 2005. The event was focusing on the “organisational configurations and locational choices of firms”, looking at the factors behind firms’ decisions about which capabilities they keep in-house, which they outsource and where they locate decentralised activities.
Understanding this is vital for businesses, says Dr Sturgeon. If they know about “the different ways in which global production and distribution systems are integrated” it gives them a chance to enhance their position in global markets.
The workshop was organised by Christel Lane, Simon Learmount and Jocelyn Probert, who are all working on the Cambridge-MIT Institute-funded project on ‘The Globalising Behaviour of UK Firms’. With their MIT colleague Suzanne Berger, and collaborators in Japan, they are studying the pharmaceuticals, book publishing and clothing industries in the UK, the US, Germany and Japan. They aim to garner insights from this international comparison that could help UK firms to become more competitive.
The event saw researchers from three continents and different disciplines sharing their findings on the organisational configurations of the global value chain. How and why do firms create geographically widely dispersed value chains? What factors – legal barriers, shareholder pressure, increasing competition – influence them? What relationships are they looking to build with their external suppliers?
Upgrading value chains
And how ready are suppliers to work for them? Dr Sturgeon pointed out that upgrading global value chains demands that suppliers and distributors be able to absorb, and cope with, highly complex transaction information and production specifications. This inevitably excludes some suppliers in the developing world.
But even in highly developed economies, with high levels of competency, the global value chain exerts great pressures on all firms involved. Drs Lane and Probert discussed their study of major US pharmaceutical firms – one part of their CMI project – and revealed some of their findings on the reconfiguring of relationships in this industry.
More than in other countries, US pharmaceutical firms have fragmented their research and development (R&D) activity. They maintain in-house research laboratories and are increasingly licensing new technologies or drug compounds from biotech firms: one senior R&D executive they interviewed estimated that payments to external companies had risen by 29 per cent over the last five years.
But it is not cheap: industry statistics show the average value of deals with external firms doubled between 1988 and 2000 from $7 million to over $14 million. Nor is it easy. The major pharmaceutical firms, fuelled by shareholder pressure to keep their product pipelines replenished, are all chasing new drugs from external sources to supplement dwindling in-house R&D productivity. Intense competition for promising drug candidates means they have to move fast to secure drug compounds at a much earlier stage of development.
As a result, relationships are changing within parts of the industry’s value chain, the researchers found. While competition amongst the big pharmaceutical firms has diminished their bargaining power, at the same time some biotech firms have strengthened their management teams and boards by recruiting experienced staff from larger firms. So the always precarious balance of power seems to have shifted in recent years in favour of the biotech firms. In response to this shift, as Drs Lane and Probert told the workshop, “Large pharmaceutical firms have begun to initiate new forms of relationship, which involve tying promising new biotech firms to themselves more closely.”
Talking global, staying local
This sounds promising for UK and European biotech firms, looking for alliances with large pharmaceutical firms to help them fund the development of new drugs, and new technologies. But the researchers found that despite a professed desire to be global, in practice many US pharmaceutical firms primarily establish US R&D partnerships, based both on a thriving national biotech sector and the knowledge that other businesses are willing to relocate to the US.
So the researchers warn, “There is perhaps not a pressing need for US firms to organise their research activities globally, whereas European and Japanese firms find themselves almost forced to establish research activity in the US in order to participate in, and embed themselves into, the country’s dynamic biotechnology environment.”
The law of the labour market
12 May 2005
A new book by CBR researchers was launched at a seminar at the Policy Studies Institute in London this week.
The Law of the Labour Market: Industrialisation, Employment and Legal Evolution was recently published by Oxford University Press. It looks at the cyclical nature of employment stability, and the effects of employment on the relationships between employers and their staff.
“It is often claimed that the traditional ‘job for life’ is becoming a thing of the past thanks to globalisation, new technology and the decline of large industrial enterprises,” says co-author Simon Deakin, acting director of the Centre for Business Research. “What is less often realised is that it is part of a cyclical process, and that the decline of stable employment has been experienced before, only for it to revive when economic conditions changed again.”
He adds, “The turn of the 20th century was just such a period, and there have been others. When a long-term historical view is taken, the modern employment relationship can be seen to be a functional part of a market economy, albeit one which rests on a particular compromise between free labour markets and the protective aims of the welfare state.
That compromise is now under threat. However, this book argues that it must be renewed from the point of view of both equity and efficiency, and suggests ways in which this process is already beginning to take place through changes in employment law and practice.”
The book was launched at a lunchtime seminar on Wednesday 18 May at the Policy Studies Institute in London. Authors Professors Deakin and Frank Wilkinson, a long-time CBR associate and Visiting Professor at Birkbeck College, University of London, gave presentations about their book, which gives an illuminating analysis of the current renewal of labour market institutions against a backdrop of increasing technological and institutional change. It also challenges established ideas on the legal transitions accompanying industrialisation. Discusing their work was Professor Hugh Collins, Professor of English Law at the LSE.
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Absorbing the shocks
5 May 2005
What effect are the ups and downs of the UK economy having on the growth and success of the UK’s technology-intensive businesses?
Michael Kitson, a long-term associate of the CBR, has been looking for the answer. Since early 2002, he and his colleague David Primost have been studying firms’ reactions to ‘macroeconomic shocks’ – such as changes in tax, employment and inflation rates – by regularly interviewing 14 biotechnology firms and seven aerospace businesses, to see whether the slowdown in economic growth has influenced their development.
Their purpose was to consider how changes in the macro-economy influenced managerial behaviour and corporate strategy, and how this might affect competitiveness and long-term growth. Was the development and commercialisation of technology being influenced by short-term economic fluctuations?
Their conclusion is a resounding ‘yes’. Firms in the study have changed considerably in response to a variety of shocks, though those changes differ according to sector.
Stock market falls
As well as the major geopolitical shock of the terrorist attack on 9/11 and its aftermath, both industries had to contend with depressed equity markets. This hit the value of technology stocks particularly hard: some biotech firms in the survey found themselves valued at less than the value of their cash assets. Both industries also saw falls in output and employment: aerospace exports and jobs, for example, both fell by 20 per cent during 2002.
How did firms react? In the aerospace industry, Kitson and Primost found managers focused on responding to declining share prices and fluctuations in exchange rates. In biotech, however, firms were most concerned by the fall in equity markets, as this reduced the number of prospective exit routes for their investors, the venture capital funds (VCs). This made the VCs more risk-averse, and worsened an already significant ‘funding gap’ for UK biotech firms. “This may have permanent impacts on the commercial exploitation of such technologies,” say the researchers.
While aerospace firms also saw their shares fall, their major ‘shock’ was exchange rates; sterling appreciated by 27 per cent against the dollar, a significant change in an industry where most products are priced in dollars.
But aerospace is a fairly mature sector, and researchers found firms responding with moves to try and insure themselves against the fluctation of business cycles generally, rather than to this downturn in particular.
Some aerospace firms responded by developing a portfolio of activities, with the aim of selling into a wide range of markets with differently phased business cycles. Others focused on minimising the impact of exchange rates by moving to match revenues and costs in the same currency: one company with half its sales in the US moved half its production to the US. Such strategies suggest that diversification may have insulated aerospace business from the impact of variable economic cycles.
But the cyclical nature of downturns proved a significant problem in the biotech industry, a sector dominated by small firms many of which have yet to bring products to market. Here, researchers found that firms without large cash reserves and revenue streams were trying either to generate more revenue – for example, by acquiring other businesses – or to reduce their cash burn. But for biotech businesses, cost-cutting options are limited: the only real way to cut the cost of clinical trials of a new drug, for example, is to terminate the trial.
While the firms were trying to generate cash and cut costs, the investors’ behaviour was also changing. VC firms shifted investment to businesses with later stage technologies that were closer to market: these they perceived to be lower risk, and to offer greater potential for an eventual exit. And the private biotech firms responded by dropping their earlier stage technologies to concentrate on later stage products nearer to revenue. As the researchers report, “The decrease in appetite for risk in the markets has skewed the technology value further from early stage towards later stage.”
Kitson and Primost conclude that in biotech, the cyclical nature of funding shortfalls is proving a threat to the future development of technology.
One strategy to tackle this, they suggest, is the employment by businesses of specialists with knowledge of finance and marketing to help them bridge the funding gap.
How firms respond to globalisation – workshop hears latest thinking
14 April 2005
A recent workshop at the University of Cambridge brought together speakers from around the world to discuss the way businesses are responding to globalisation.
At the event on 14 April 2005, contributors from Europe, Germany, the USA and Japan were talking about the way firms in the clothing, book publishing and pharmaceutical industries are changing their structure, organisation and behaviour to compete in a global market place.
The workshop was entitled: “Organisational Configurations and Locational Choices of Firms: Responses to Globalisation in Different Industry & Institutional Environments”.
The event arose from the project on ‘The Globalising Behaviour of UK Firms in a Comparative Context’, which is being led by Christel Lane and Simon Learmount at the Centre for Business Research; and Suzanne Berger at the Industrial Performance Center at the Massachusetts Institute of Technology (MIT). The project is funded by the Cambridge-MIT Institute.
The objective of the study is to contribute to a better understanding of how to improve the performance of British productive activities, given the strong pressures on firms operating in a global environment to break with old patterns of governance, organisation and scope, and location. Researchers are interviewing firms, and analysing their responses to these pressures, in order to identify patterns of best practice associated with improved outcomes across multiple dimensions of performance.
The aim of the April workshop was to allow the researchers to share their ideas, and hear the latest research from others in this field, to inform their thinking.
Speakers were talking about the impact on the clothing and textile industry of outsourcing manufacturing; on the pharmaceutical industry of shifting the balance between conducting research and development in-house, or using external sources of knowledge; and organisational change in book publishing firms.