Factors Influence the Distribution of Profits - Assignment Example

What factors influence the distribution of profits from innovation? Explain the difference in value capture between iPods and book PCs. Answer The world has become a global village because of rapid technological advancements and creation of telecommunication networks. The competition has been increasing among organisations; therefore, today they have greater emphasis on innovation, research and development, differentiation and branding. Nevertheless, the innovation enables companies to develop new want-satisfying products or improve existing products, which later leads to differentiation. In this way, the business enterprises could maximise their profits by using an innovation – centred approach. It should be noted that there are certain factors that influence the profits from innovation. The first factor is presence of many strong innovators and competitors (such as HP, Dell and Toshiba in computer industry; similarly the presence of GM, Ford, Chrysler, BMW, Honda and Toyota in global automobile industry) may lead to division among many companies. The second major factor is the relatively greater bargaining power of some suppliers, which may also lead to distribution of profits because these raw material providers may demand higher prices / amounts for supplying essential inputs for production. In other words, the innovations by suppliers, retailers and distributors, Intellectual property owners and complementary asset (accessories) providers within a value chain system result in profit distribution among these above mentioned parties. The third major factor is the ‘industry standards’ set by top companies and market players. In explanation, the quality maintenance, number of product features, reliability and authenticity of products offered by leading companies actually become the standards / thresholds that influence the profits from innovation (Dedrick et al, 2009). It is worthwhile to mention the fact that Dedrick et al (2009) developed a new approach so that they could calculate and analyse the differences in value capturing and the impact on profit margins. Indeed, the authors used the teardown data obtained for two different products: first was Apple’s iPod and the second was notebooks / laptops models offered by Hewlett Packard (HP) and Lenovo. The main reason behind choice of these two products was that they are manufactured and assembled in many nations across the globe including USA, Japan, China, Taiwan, South Korea and other countries. First of all, the researcher would like to highlight that these computing and mobile products are made up of several large / small components developed by many organisations worldwide. However, only most essential components were selected to calculate value capturing. The method for calculation of Value Capture included three main steps: – Break down cost of components – To estimate gross margin for each component in percent. – Multiply cost by margin to get value captured by firm (Dedrick et al, 2009) The major differences in value capture between iPods and notebook PCs were that Apple enjoyed the greatest value followed by Hewlett Packard, while Lenovo was ranked third after calculations and findings. Also, the suppliers of all major inputs, raw materials and inputs also had enjoyed high value capturing but it was lesser than Apple and HP. In addition, the software developers such as Microsoft and Intel also capped significant share because they provide ‘information packages’ for products offered by Apple, HP and Lenovo. Apart from this, the calculations also revealed that these international companies had normal gross profit margins on their respective products; however, Apple was advantaged because of relatively higher gross and net margins in comparison to HP. But, suppliers of important components such as chipboards had been enjoying abnormal gains because of high bargaining power. To what extent is it a problem for developing countries if they only concentrate on the lower part of value chains? Answer It is worthwhile to mention that value chain system provides opportunity to every manufacturer, supplier, distributor and retailer to add value at each stage and generate profits from sales. However, the sales of former become the costs of the latter in a value chain and the end-user or customer actually pays the total price plus value addition on a particular product. Developing countries usually have lower wage rates due to high supply of skilled, semi-skilled and unskilled labour. Hence, global organisations may find many suppliers and contract manufacturers that could concentrate on low-value parts. For instance, it should be emphasised that lower parts of value chain although result in some profits for associated personnel, yet they do not benefit developing countries because the suppliers fail to generate excessive foreign currency and inflow of capital resources even though they produce and / or supply goods and services in relatively larger quantities (Dedrick et al, 2009). . What advantages do large food retailers have in extending value chains to other countries? Why might they not always be successful in doing so? Answer It is worthwhile to mention that resources are scarce and depleting rapidly because of increase in population size followed by surge in needs and derived demand. In addition, a country may have certain resources in significant quantities, yet may lack other necessary inputs required by business organisations for production / manufacturing of want-satisfying products. Global food retailers such as Wal-Mart (US based), Tesco (UK based), Metro AG (Germany), Kroger, Costco and Aldi (USA) etc. could also receive various advantages if they extend value chains to other countries. The first advantage is maintaining cost leadership in this extremely competitive industry in which small and large sellers compete with each other on prices and quality to entice maximum potential customers toward their stores. Indeed, the extending of value chain will help speeding up production and supply side because food retailers could benefit from efficient productive operations of foreign contract manufacturers (CMs) or innovations original design manufacturers (ODMs). As a result, the food retailers may reduce their total costs (warehousing, production, operational and administrative) for products (actually manufactured through a blend of in-house and outsourced functions) and could offer to consumers at affordable prices. The existing market share could be retained or increased because of competitive advantage over rivals. In this way, not only the retailers will efficiently utilise their existing resources but also maximise gross and net profit margins (Coe & Hess, 2005). The second advantage is that food retailers would not have to invest or waste tangible (capital and human) and intangible (time factor) resources in operations in which they do not have glib expertise, proficiency and specialisation unlike foreign outsourcing services providers. Rather, the strategic management could allocate and utilise these resources for research & development followed by creation of new premium quality value-added products. The food retailers would then be able to launch new products in the marketplace; thereby extending their product portfolio. For instance, this will not only increase variety and choice for consumers but also enhance goodwill / reputation among value chain members, business partners and associated stakeholders. In fact, the sales revenue may rise, while leading to surge in profitability and maximisation of shareholders’ wealth. Another advantage to retailers is that they may facilitate with novel ideas of foreign value chain members because of diverse backgrounds and experiences. Nonetheless, the ideas then result to creation of new products that may surely increase financial / monetary gains (Coe & Hess, 2005). It should also be pointed out that extending value chains to other countries does not always remain successful and food retailers may fail if they do not have strong knowledge and awareness about culture, societal norms, values, taboos, consumer attitudes, behaviours, desires, tastes, preferences, life styles / living standards, mind sets of people and other factors etc. In addition, the operations may also fail if the interested food retailers lack sufficient know-how of economic (infrastructure, workforce quality, transportation, resources, exchange rates, rules and regulations, environmental laws, traditional supply and distributor channel networks), political (strengths of civil institutions, structure, major candidates and policy-makers, pressure groups, unrest, uncertainty, human resources etc.), technological (use of Information systems, state-of-the-art plants, automated assembly lines etc.), legal and environmental (defined anti-pollution laws and regulations) factors. Indeed, a good example that should be discussed is of Wal-Mart stores, which entered in Germany after acquisition of more than 90 retail stores with positive aspirations, yet failed to gain consumer acceptance, recognition and popularity. For instance, the actual mistake made by strategic planners of Wal-Mart stores was that they only analysed economic, political, legal, technological and environmental factors; however, their neglecting of socio-cultural factors (such as use of German language, preferring domestic tastes and preferences etc.) led to severe debacle and losses worth over $1 billion. Nevertheless, if a food retailer is extending value chain to other countries, it should focus on using adaptation and localisation strategies because, without these, it is nearly impossible to compete with existing companies and to create market for foreign products in a new destination. In conclusion, expansion of value chain does become beneficial for food stores, in terms of enhancement in efficiency, effectiveness and performance, if it is conducted in a rational manner. Otherwise, the ignorance of even small factors may bring severe losses and result in absolute failure of new operations (Christopherson, 2007). References Dedrick, J., Kraemer, K.L. and Linden, G. (2009) ‘Who profits from innovation in global value chains?: a study of iPod and notebook PCs, Industrial and Corporate Change, Vol. 19, No.1: 81-116. Coe, N. and Hess, M. (2005) ‘The internationalization of retailing: implications for supply network restructuring in East Asia’, Journal of Economic Geography, Vol.5: 449-473. Christopherson, S. (2007) ‘Barriers to ‘US style’ lean retailing: the case of Wal-Mart’s failure in Germany’, Journal of Economic Geography, Vol.7: 451-469. Read More