CAR MANUFACTURER AT A CROSSROADS

Business studies Paper 3

9707/03 may/June 2009 Kiara frank

Section A

1) Eastern motors is a car manufacturer, this means that the will be many heavy
equipment and dangerous machinery so a legal control to be taken would be
health and safety. . In addition to basic safety rules, such as wearing
protective gear and refraining from engaging in risky behaviour, the main
issues relate to a reasonable balance between inconvenience, productivity
and safety. On the other hand this may be quite costly for the business
because they would have to purchase safety gear for the employees. Another
legal control in addition to internal issues, manufacturing companies face
liability once their products leave the factory. Product safety is governed by
legislation, and ethical concerns mean you should only ship products that
have been tested for safety. While knowingly shipping dangerous products is
illegal and unethical, the cars also may have unintended and harmful effects.
Going beyond legal requirements to thoroughly test all aspects of the use of
the cars will reduce exposure to possible law suits and fulfils your ethical
duties.

2) a) i) proportion of worker who left = number of workers leaving x 100

Number of workers employed

= 1000 x100
5500
= 18.2%

ii) Output of cars per worker = total output of cars

Number of workers employed
= 385000
5500
= 70

b) A human resource strategy / planning are a process that identifies current

and future human resources needs for an organization to achieve its goals.
North capes goal/objective is to become more competitive and they believe
that if they increase productivity and reduce wastage and absenteeism they
will be able to reach this objective. In order to solve these problems the North
Cape factory needs to look into the reasons as to why the productivity is low
and why there is lots of wastage and absenteeisms.

It was stated that the country that the North Cape factory is situated has few
legal controls over employee welfare. This could be a starting point for the HR
team; they can provide welfare facilities to keep the employees motivation
levels high. Employees welfare improves loyalty and morale of the
employees, it reduces labour turnover and absenteeism because they are well
kept in the factory with good working conditions. This will as well help to
improve the employee productivity as they will be more willing to do their
jobs, and there will be less absenteeisms. It was also said that the employees
perform less effectively; this could be due to the different motivational and
management strategies EM uses on this specific factory. They could use the
same strategies they use for the other factories and this could improve on the
efficiency and productivity levels.

Looking at appendix B it came to my attention that the North Cape factory

does not use team work. This is a strategy that the HR department can work
into the factory. Teamwork allows employees to take greater responsibility for
decision making and also allows team members to control more of the work
process. This can lead to improved morale as employees gain more authority
and ownership over the projects they are working on. The extra responsibility
can lead to a more rewarding work environment and lower turnover. Working
on a team also gives employees a greater sense of belonging and of
recognition, which helps them take more pride in their work, and their
company. The paying system does not work this sort of business because
piece rate is when an employee gets paid by the amount of units produced
and being a manufacturer, it is very unlikely for each individual to make a
whole car on their own. So switching to a different method of paying them
e.g. salaries is an HR strategy for the North Cape to take apon.

In appendix B is stated that the North Cape does not use quality circles.
Quality Circles can be described as a small group of employees of the same
work area, doing similar work that meets voluntarily and regularly to identify,
analyse and resolve work related problems. Quality Circles aims at building
people, developing them, arousing genuine interest and dedication to their
work to improve quality, productivity, cost reduction etc. This could be
implemented into the North Cape factory. It also came to my attention that
the North Cape factory only has 15% of their employees on fulltime
permanent contracts; this could be a reason as to why there is a high labour
turnover and absenteeisms in the factory. The employees dont feel secure in
the job, knowing that it is only flexi-time or part-time that they are working.
The HR department needs to work on employing more full time employees.
This could bring confidence to the employees and in the short run increase
the productivity and reduce wastage and absenteeisms.

3. Research and development spending can create innovative products and

increase profits although there are some disadvantages such as higher costs
that could end up decreasing your profits in the short term. While research
and development work can be instrumental in creating new products or
adding features to old products, the work that the department does is more
complex than simple innovation. R&D is connected to marketing, cost
management and other parts of business strategy. Market research is the
process of collecting, recording and analysing data about customers,
competitors and the market. This process can help the factory in creating the
 exact needs and wants of the customer as well as know what your
competitors are doing in order to improve on your product and make it better.

In appendix C it shows that EM is spending less than half on research and

development compared to its competitors. If the company had to increase
spending by at least $1.5bn it could bring its sales growth to the same level
of its competitors. Research and development is about innovation, about
offering consumers something they have never seen before. When R&D can
pull off such a product offering, the interest that consumers have can cause a
sharp leap in market participation and sales. It may even create an entirely
new market for the company. On the other hand Research and development
does not produce value directly in relation to how much funding the
department receives. It is unique in this property; the success of R&D
depends more on the practices, talents and innovations of the people working
there than on how much money the department receives. This means that a
company can actually spend less money on research and development than
many competitors but work to secure talented employees and proper goal
orientation and still produce good results. As shown in appendix C Western
Vehicles spend a lot of money on R&D ($4bn) but still has less sales growth
then Asiatic cars that only spend $2bn on R&D. Many times a market is
already embracing a trend, and the research and development department
can be used to make the business active in that trend and increase sales. For
example, in markets rapidly embracing green products, a company can use
research and development to make products out of natural ingredients,
recycled materials or biodegradable substances, allowing for the release of an
eco-friendly version of the product that increases sales. When R&D can catch
up with trends, the business is seen as adaptable and profitable.

Innovation requires that companies develop a deep understanding of

customer needs in order to be able to make products people want. The ability
to create products that serve genuine customer needs is the foundation for
successful innovation. In addition to making products people want, companies
also need to develop good business models to support those products. Their
work here is to figure out whether they can create and deliver customer value
in a manner that is sustainably profitable. A successful innovation process has
very little to do with the exact amounts of money we spend.

In conclusion, return on innovation investment depends on the effectiveness

of a companys innovation processes and organization, rather than the
magnitude of its R&D spends (Money doesnt buy results). A business also
needs to make good strategic choices, demonstrate operational excellence
and balance its R&D investment with investment in areas such as market
development and design for production.

4. a) i) gross profit margin = gross profit x 100

 Revenue

= 3600 x100
16350
= 22.02%

ii) Net profit margin = net profit x100

Revenue
= 1520 x100
16350
= 9.3%
b) A decline in sales due to falling prices can also cause a decline in gross profit
margin. You might lower your prices due to competition or to entice more
sales. But a decrease in the selling price that is not accompanied by a decline
in the cost of goods sold causes a decline in gross profit. New competitors or
increased rivalry from competitors also impact your gross profit margin. The
more attractive customer offerings become to the market, the more difficult it
is to get customers to pay desirable prices for your solutions. An indirect
result is that when your sales transactions decline, you reduce our purchases
from suppliers. In this scenario, you may not get the some economic
advantages of buying bulk lots from suppliers.

c) Improving the net margin through increasing revenue is generally the most
popular option. EM can increase sales income by raising the price of cars or
by selling more of them. However, businesses must be wary of alienating
customers with inflated prices. High prices may drive the customers away. As
EM grows, it is possible for the expenses to grow faster than the gross profits
from sales, cutting into the net profit margin. Running a business involves
satisfying customers and increasing sales numbers. Digging through the
expenses to find where reductions can be made seems more like hard work,
but it's essential for EM to increase your net profit margin. EM can better
understand their expenses if they calculate what portion of an increase in
your gross profit margin ends up in your net profit margin. EM can also
reinvent their products and industry. Unique products command higher prices
and greater profits. This requires that the leader of the company to become
genuinely passionate about discovering and developing new ideas,
innovations, and inventions for customers.

5) By setting up their own retail business Em could benefit a lot although there
will be some drawbacks and disadvantages to it as well. Setting up a retail
business means that EM will have full control over their marketing strategies
which will include how they sell, price and promote their product. They will
also have control over the employees that sell the product, and will have to
use suitable management styles to lead the retail business in order for it to
be successful.

The business in country Z will be EMs first retail business ever, so this means
that they are not well educated and trained to run their own retail business.
This could endanger the business if not constructed well and not managed
 well. The stock holding costs of cars can be very high and could pose a
financial threat to the business, and looking at the appendix a it shows how
the gross profit and net profit of Em is decreasing so the opening of a retail
business may add to this. Opening up a business does not only face stock
holding cost. It includes rental costs, salaries to employees as well as
promotional costs, which can all strain the businesses finances. EM will now
need a detailed knowledge of country Z so they know if its even worth
opening a retail business there. Before Em used to just manufacture their cars
and an independent agent used to sell them in their country and EM did not
need to know the market knowledge of the country. But now it is expected for
EM to know all of it. He needs to looks at the location and the market
segment. They will now be responsible for selling the cars to consumers.

Section B

6. Producing luxury and sports cars comes with many risk as well
as opportunities. So before making any big decisions em needs to
have deeper research in this project. In appendix C it is stated that
the world demand for luxury and sports cars increased by 9%. This
market data shows us that more people want these types of cars,
and by EM entering this market it may increase his sales growth by
a huge amount. Although on the other hand, producing these luxury
cars is very costly. They have special parts and need special
machines to manufacture them and higher skilled works to make
and test them after been made before issuing. This may be a heavy
burden for the company and they may struggle in the short run, and
this could lead to a future loss of the company.

Luxury and sport cars demand may have increased but it is to a

certain market that wants them. EM will need to find a suitable
market segment such as high income customers who are interested
in buying these cars. Em may look into opening a outlet in Dubai
because it is said to be one of the worlds countries that most of their
form of transport is by luxury and sports cars , even the police cars
are one of the fanciest cars e.g. Ferrari . Although such luxury cars
have been well advertised and have a strong customer base. Such
consumers are very weary of buying cars that they are not aware of
or cars that are not well known. This could be a problem for Em as
they would have spent so much money on productions and
promotion on these cars but it is only later when they will be bought,
so this will mean that they will make a loss in the short run. the
thing about selling sports and luxury cars as well is that they are not
a lot of the that are sold because people that suit this market
segment are very few already so not many will buy them. EM will
need to understand all the advantages and disadvantages to this
segment that he is wanting to enter.

Em wants to do this to increase his sales. Producing these cars

may be very time consuming and the companies sales may get
worse as they are producing these cars. There may be other ways in
which EM can raise sales. Maybe they could open more outlets or
produce smaller more affordable cars that can be sold to people
with lower incomes, or smaller cars that can be sold to teenagers. At
least this way, the company will be increasing sales and it wont be
as time consuming and costly. Been developed the market for them
may have fallen. And by the time the luxury cars would have
problem is that they lack variety so many this luxury cars could be a
good step for the company.

In conclusion my opinion is that EM should not producing luxury

and sports cars just yet, they should wait for they sales and profits
to increase by finding other ways to do so. And once they are stable
they can no introduce these cars and wont have to suffer the heavy
costs that come along with producing them.