Bata Shoes Ltd Case study
Bata Shoes Ltd Case study
how has Bata interacted with foreign political systems
Following the First world War the Austro-Hungarian empire was fragmented into Austria, Czechoslovakia, Hungary, Romania and Yugoslavia. During this period the Czechoslovakian state was conceived as a parliamentary democracy, with the constitution of 1920 giving the central government a high degree of control over local government. Czechoslovakia, in particular, saw rapid economic growth during the 1920 brought about by foreign investment and advances in manufacturing technology. The country proved particularly tempting for foreign investors such as the British, French, Belgian and Dutch due to low labour costs and readily available natural resources.
Only in the shoe industry the foreign capital played no important role. Thanks to a monopoly position of Bata Works Czechoslovakia held the first place among the world’s leading shoe exporters in 1930’s after overtaking Great Britain and the USA. In 1938 interference by Hitler resulted in the old Slovak and Ruthenian demands for autonomy finally been granted. Czechoslovakia was deprived of one third of its territory containing some of its most important industrial centres and most fertile farm-land, leaving the country economically crippled.
Following this Bata realised his business did not have good future prospects if it were to remain in Czechoslovakia. He sought to continue operations and preserve the business by moving to Canada as the country was viewed as a safer operating environment, both economically and politically.
Bata move to Canada, along with one hundred of his staff and families, would see the company and its workers having to adapt to operations in a different political system to Czechoslovakia, the first of many adaptations they would have to make as the company expanded across the globe.
The relocation in Canada was a big change for Bata, as the government there gives significant political power to the provinces which each have their own trade barriers. This is a big contrast to Czechoslovakia, where the central government has great power over the provinces. However, Canada was seen as very politically and economically stable in comparison to Czechoslovakia despite the political differences mentioned above.
With operations in over 60 countries across the world, Bata Limited runs as a decentralised operation in order to allow its managers to adjust operating procedures to local environments. However tight control of Bata’s core philosophies and strategies are in place, even though these may be different from that of the country the operation is in and the managers and workers employed there. This could potentially cause problems if pursued too rigorously. However, the text states that Bata does interact with foreign political systems with Thomas G.
Bata travelling extensively to check on quality control and to ensure good relations with the governments of the countries in which Bata operates. This interaction is particularly important as I feel Bata offers a number of key benefits to many of the countries it chooses to invest in such as increased economic stability due to their labour intensive operations and policy of purchasing materials locally.
The countries Bata operates in vary in the amount of political and economic freedom they offer to their citizens and companies operating there. The case states that Bata does not won 100 percent of the factories it has in some countries. It appears that Bata prefer to own 100 percent of their factories, but are willing to compromise if the political situation requires. This includes taking minority ownership, or in some cases providing licensing, consulting and technical assistance where it does not have an equity interest in a country. Bata seem to work this policy well as they have the flexibility to cope with these different operating environments. I believe this is a sensible policy as it allows Bata intrusion into markets that may become freer and more prosperous in the future.
Bata serves its markets by producing in each market all it will sell there. It will buy raw materials locally and achieves economies of scale due to its processes being very labour intensive. One may suggest that the lack of exports would make Bata a less attractive prospect for the host countries as little outside money is feeding into the economy. However, since operations are labour intensive there will be a great benefit from the job opportunities created. The main issue that causes problems to arise in some countries is if raw materials are imported into the countries in question rather than being brought locally. In such cases the case states that Bata “must adjust to local laws and requirements for operation”. However, by normally buying raw materials within the countries Bata operates in it appears to work well with the governments concerned.
The main driving force behind Bata choosing not to export goods is the security that operating domestically brings, such as the avoidance of problems associated with exporting like if an importing country were to restrict trade. Bata obviously feels that stability is of key importance to its strategy, particularly in many of the less economically developed areas in which it operates. In these countries there are not the laws to protect workers rights and safeguard income in times of unemployment, so if a factory were to close the effect would be very hard hitting to the workers and would potentially ruin Bata’s political relations permanently.
Bata operates in countries with varying degrees of freedom. Tom Bata Snr. prefers to operate in democratic countries as these offer the chance to discuss issues, whereas totalitarian regimes do not. However, Bata have still operated under some Totalitarian regimes such as South Africa, Chile and Uganda.
In Uganda Bata has had its operations nationalised and de-nationalised twice while operating under a violent and repressive regime that saw the expulsion of many skilled foreigners. Bata took the view that people would still need jobs and shoes whatever political system they were living under, a similar view that has been expressed recently by many people talking about Iraq. Therefore operations would continue. Bata benefited as the way it operated fitted in with the Ugandan governments policy of becoming more self sufficient, rather than relying on imports. This is because Bata obtained its raw materials from with the country and offered the stability of selling in their home market. Bata also helped the government with a second policy that aimed to promote links between agriculture and industry, with the raw materials coming from rural areas. The continued presence of Bata in Uganda, despite the expulsion of many foreign workers, reinforces its faith in local workforce, which in turn helped build trust.
By fitting in with these policies Bata was able to operate in Uganda while many other companies were forced to leave, and benefit from a 98% share of the shoe market. Bata followed a similar model in Chile where Pinochet ruled the country for a period of time while the company operated there. Again Bata saw no need to leave to country as it viewed its investment there to be long term, in which time various political systems would come and go, but people would always need jobs and shoes. Many of the benefits offered by Bata to Uganda were also of benefit to the Chilean government and people.
The regimes in both Uganda and Penochet Chile both suffered from poor human rights records. Bata was therefore put under some pressure to withdraw from these countries by various parties including governments and international organisations. However, Bata was always able to argue that it had been in the countries far longer than the regimes in place and had seen many come and go. Its simple reason for being there was the fact that people needed shoes, and it was in a good position of providing this basic need.
South Africa caused far greater problems for Bata. Here the same type of extreme regime was seen as in countries such Uganda and Chile. The difference for Bata was that South Africa attracted far more public attention across the globe. The Canadian government took a very negative view of Canadian countries having interests in South Africa. Maybe more importantly public opinion and knowledge about the regime in South Africa were to have a big effect on the company. Bata possibly realised that if it continued to operate in South Africa it would risk alienating itself from its consumers in countries such as Canada and the US and set itself up for ridicule by the large number of international organisations opposed to apartheid.
In this situation it was important for Bata to interact with the various political systems involved to withdraw operations from South Africa while causing minimum disruption. It sold its holding in South Africa in 1986. It did not identify the buyer or the sales price, and it denied that apartheid was the reason for its pulling out, citing that all factors had been taken into account with respect to its investment. Bata ensured that the Bata name and trademark could not be used by the buyer and that the jobs of the workers in its plants would be preserved.
Why they now operate in Czech Rep, but not Slovakia.
Czechoslovakia has being subject to turbulent time in the period following World War II. With the advent of communist rule countries were often formed from different ethnic groups held together by totalitarian rule, as was the case here. The break-up of the communist bloc in 1989 resulted in the disintegration of countries such as Czechoslovakia, that would be split into two independent nations; The Czech Republic and Slovakia.
The fact that both of these countries are now free from communist rule does not necessarily mean that they are free. Freedom House is an organisation that monitors the political rights and civil liberties of countries around the world and rank them to the degree that freedom exists. Below is a summary of the assessment they give to the Czech republic and Slovakia.
Since 1972, Freedom House has published an annual assessment of state state of freedom by assigning each country and territory the status of “Free,” “Partly Free,” or “Not Free” by averaging their political rights and civil liberties ratings. Countries whose combined averages for political rights and for civil liberties fall between 1.0 and 2.5 are designated “free”; between 3.0 and 5.5. artly free? and between 5.5 and 7.0 ot free.?
As we can see from the chart above, both countries are now considered politically free. However, economically Slovakia still lags behind the Czech Republic. It has being politically free for less time and lacks consistency in the freedom scores it achieves, suggesting that the political system may be subject to some instability. Bata express concern relating to Slovakia not being economically free in the case. As The Czech Republic is clearly further along in its progress to economic freedom than is Slovakia, Bata is likely to face considerably less government intervention in its business. Private property ownership and protection, property rights, and economic competition are likely to be more common in the Czech Republic making the operating environment more stable.
In Slovakia, Bata is likely to face greater political risks. There is likely to be more political instability in Slovakia, usually an indicator that there is also a lack of economic freedom. It also appears from the case that Slovakia may not have a very positive attitude toward foreign investment, despite Bata roots in the region.
Bata would benefit from investment in both the Czech republic and Slovakia. From a nostalgic point of view, Bata will be able to return to the home country. Bata will also gain access to large facilities and a huge market in Eastern Europe and the former Soviet Union.
The Czech Republic and Slovakia would also benefit from Bata’s investment themselves. They would gain access to Bata global design, production, and marketing expertise. They will be able to design better, more fashionable, and more reasonably priced shoes. The Czech Republic and Slovakia might be able to get Bata to invest significant capital into the plant to get it up to world-class standards. Bata will create new jobs for Czech and Slovakian workers, especially as the processes are quite labour intensive. Bata also has a policy of buying raw materials locally, benefiting the host countries economy as a whole.
There are some disadvantages of investment for both parties too. Bata may be forced to pay compensation for its own plants if the company chooses to invest in Slovakia. There is also a slightly higher risk of political instability and economic restrictions in the country. There are also disadvantages for the countries involved. Bata may actually have better production processes than are currently employed in the Czech Republic and Slovakia. Therefore they may actually require less workers than are currently employed in the factories so workers would be made unemployed. Bata do not export goods so do not bring as much foreign capital into the country as maybe would be expected by a company of their size.
Bata reentered the Czech Republic and not Slovakia because the two countries have very different economic environments. The Czech Republic is moving more quickly than Slovakia toward a free market system. Slovakia are also in dispute with Bata regarding the ownership of the companies former factories in the country. The Slovak government appear disinterested in helping to solve the problem by implementing new laws to make it very difficult for companies in the same situation as Bata to regain their former property without either reaching agreement with the new owners or by taking expensive legal action. When looking at this evidence it looks advantageous for Bata not to seek to reinvest in Slovakia at present.
Explain the current situation and relate to probable causes mentioned above
The political environment can have a dramatic impact on the operations of a firm. For example managers in most western European countries may be accustomed to a stable political system and a relatively homogenous population. This is often not true in other countries. A political system integrates the parts of a society into a viable, functioning unit. Sometimes that is a very difficult task. A country political system influences how business is conducted domestically and internationally.
The basic political ideologies of a country are the body of ideas, theories and aims that constitute a socio-political program. The ultimate test of any political system in its ability to hold a society together despite pressures from different ideologies tending to split it apart. History, culture, language, religion, geography and political ideologies help define national borders.
Forms of government range from Democracy to Totalitarianism. Democracies usually have economic freedom and laws that safeguard individual and corporate rights and are often preferred by investors. The more developed democracies tend to have the following characteristics.
Freedom in the areas of political rights and civil liberties are particularly important in democracies. These are measured by the organisation Freedom House using a number of indicating factors, and the results compiled to rank countries according to their degree of freedom. In 1998, 88 of the worlds countries were “free” and 50 were “not free”. Free countries are high in both political rights and civil liberties, whereas those countries who deny their citizens basic political rights and civil liberties are not free. In addition 53 countries were partly free, with limited political rights and civil liberties, often in the context of corruption, weak rule of law, ethnic strife or civil war.
Despite the large proportion of countries claiming to operate democratic governments, many new democracies around the world are not yet stable with few political parties and corruption threatening the system’s survival. Examples include Indonesia and some countries from the former Soviet union. Businesses should be cautious when looking to invest in these areas.
In contrast to democracies, totalitarian regimes offer far less political and economic freedom. Forms of totalitarianism include fascism (Mussolini Italy), authoritarianism (Chile under Pinochet), and communism. Communists believe in the equal distribution of wealth, which entails total government ownership and control of resources.
Political systems have a great impact on management decisions. This includes political risk and government intervention in the economy.
Political risk occurs when there is a possibility that the political climate in a foreign country will change in such a way that the operations of international companies in that country will deteriorate. Types of political risk include government takeovers of property, operating restrictions, and agitation that damage the company performance. Such problems can be caused by changing opinions of political leadership, civil disorder, and changes in external relations (such as animosity between the home and host country governments.
We can see many examples of the above in the Bata case. The companies operations were taken over in Czechoslovakia with the advent of communist rule. They are subject to operating restrictions in several countries where they are not allowed to have 100 percent ownership of their plants. Animosity between the home Canadian government and the South African host government during the Apartheid era was a contributing factor that lead to Bata’s eventual withdrawal from South Africa. Civil disorder and strike action has affected the companies operations in several countries over the years.
Government intervention in the economy occurs because some governments adopt an ndividualistic paradigm?and keep intervention in the economy at a minimum. Others adopt a ommunitarian paradigm?wherein the government plays a larger role in the economy. They thrive on a respected, centralised bureaucracy with a stable political party or coalition in power.
If a U.S. firm moves from the United States (individualistic) to Germany, Japan, or South Korea (communitarian), it may have to develop new strategies for its relationships with government, suppliers, customers, and competitors. Bata show evidence of adapting to different environments as the case states that the company is “run as a decentralised operation in which its managers are free to adjust operating procedures to local environments”. This highlights how the company acknowledge the need to be flexible in order to fit in under varying restrictions depending where in the world they are.
Stable democracies are usually seen as the safest operating environment for businesses. In the Bata case Tom Bata Snr states that he prefers a democratic system “a democracy offers the potential to discuss and change proceedings, whereas under totalitarianism it is sometimes wisest to remain silent”. However, one must remember that not all democracies operate in the same way. For example the degree to which citizens are involved in the political process and the degree of centralised control.
In the case Bata relocate from Czechoslovakia to Canada. Here the provinces have significant political power at expense of the federal government. Many provinces have their own trade barriers. Companies often have difficulty determining how to operate in decentralised democratic systems because they face many different laws and regulations. For example different tax laws. For this reason one assumes that Bata carefully chose exactly which state it would relocate to when it moved to Canada.
?Kurian, George Thomas 1992. Encyclopedia of the Third World, fourth edition, volume III, Facts on File: New York, N.Y., pp. 2009-2011.
?Source: Byrnes, Rita M. (ed.) 1992. Uganda A Country Study, Library of Congress: Washington D.C. p. 123
?The history of Slovakia (1929 – 1938) From Wall Street Crash to Munich http://www.adc.sk/english/slovakia/index.htm
?Skilling H. G. ed.: Czechoslovakia 1918-88. MacMillan Academic and Professional LTD., 1991.
?J.D. Daniels and L.H. Radebaugh, International Business, Environment and Operations, 9th Edition – 2001, Prentice Hall. Ch 3
?D. Holt and K. Wiggington, International Business, Second Edition ?2002, Harcourt College Publishers, Ch 3
?Freedom House, http://www.freedomhouse.org/
?R. Griffin and M. Pustay, International Business, A managerial perspective, Third Edition ?2002, Prentice Hall