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1) Describe the environmental Kuznets curve. How does it potentially apply to Latin America?

2) How could the reduction of trade barriers increase the level of pollution in the world? Has this happened in the case of NAFTA?

3) Describe the potential changes in climate in Latin America in the twenty-first century. How will these affect economic growth?

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Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico,€ Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,” The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,” Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

Starbucks Value Chain From Bean to Cup to You.

The steaming cup of coffee placed in a customer’s hand at any Starbucks store location starts as coffee beans (berries) plucked from fields of coffee plants. From harvest to storage to roasting to retail to cup. Starbucks understands the important role each value chain participant plays.

Starbucks offers a selection of coffees from around the world, and its coffee buyers personally travel to the coffee ­growing regions of Latin America, Africa/Arabia, and Asia/Pacific to select and purchase the highest­ quality Arabica beans. Once the beans arrive at any one of its five roasting facilities (in Washington, Pennsylvania, Nevada, South Carolina, or Amsterdam), Starbucks’ master professional roasters do their “magic” in creating the company’s rich signature roast coffees. There are many potential challenges in “transforming” the raw material into the quality product and experience that customers expect at Starbucks - weather, shipping and logistics, technology, political instability, and so forth. All could potentially affect the company. Although those operations management challenges are significant, the most challenging issue facing Starbucks today is balancing its vision of the uniquely Starbucks’ coffee experience with the realities of selling a $4 latte in today’s world. Starbucks products have become an unaffordable luxury for many. As revenues and profits declined during the economic downturn, CEO Howard Schultz realized that “the company needed to change almost everything about how it operates.” Although it built its business as “the anti­- fast ­food joint,” the recession and growing competition forced Starbucks to become more streamlined. Under one new initiative put into effect at its U.S. stores, employee time wasters such as bending over to scoop coffee from below the counter, idly standing by waiting for expired coffee to drain, or dawdling at the pastry case were discouraged. Instead, employees were to keep busy doing something, such as helping customers or cleaning. At one of the first stores to implement the “lean” techniques, the store manager looked for ways for her employees to be more efficient with simple things like keeping items in the same place, moving drink toppings closer to where drinks are handed to customers, and altering the order of assembly. After two months under the new methods, her store experienced a 10 percent increase in transactions.

Another thing that Schultz did that was quite unprecedented was to close every one of its stores for three hours on one Tuesday evening to train ALL of their some 135,000 baristas (a barista is a person who prepares and serves espresso based coffee drinks. During that training, baristas were reminded that they played an important role in creating not only a fabulous product but a fabulous customer experience. Despite warnings that closing the stores would be a public relations nightmare and a financial mistake, the decision seemed to be a sound one. In the weeks following the retraining, quality scores for the company’s beverages went up and stayed there.

1. Would you describe production/operations technology in Starbucks retail stores as unit, mass, or process? Explain your choice. (Hint: You may need to review this material found in Chapter 6.) How does its production/operations technology approach affect the way products are produced?

2. What uncertainties does Starbucks face in its value chain? Can Starbucks manage those uncertainties? If so, how? If not, why not?

3. Go to the company’s Web site at www.starbucks.com and find the information on the company’s environmental activities from bean to cup. Select one of the steps in the chain (or your professor may assign one). Describe what environmental actions it’s taking. How might these affect the way Starbucks “produces” its products?

4. Research the concept of lean organizations. What benefits does “lean” offer? How might a business like Starbucks further utilize the concepts of being lean?

5. What lessons could other organizations learn from Starbucks’ actions?

Using Wal-Mart as example, describe where on the best practice frontier Wal-Mart would lie and why.

See example below and write on Wal-Mart

PepsiCo- Diversify

Top of Form

PepsiCo, Inc. is a global food and beverage leader with net revenues of more than $5 billion and a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales. It engages in the manufacture, marketing, distribution, and sale of beverages, foods, and snacks. It operates through the following segments: Frito-Lay North America; Quaker Foods North America; North America Beverages; Latin America; Europe Sub-Saharan Africa; and Asia, Middle East, and North Africa. The Frito-Lay North America segment markets, distributes, and sells snack foods under the Lay’s, Doritos, Cheetos, Tostitos, Fritos, Ruffles, and Santitas brands.

The best practice frontier represents the efficient use of resources regardless of what a firm’s strategy may be. At PepsiCo, it is integrating sustainability into its business strategy, leaving a positive imprint on society and the environment. PepsiCo calls this Performance with Purpose. It focuses on three pillars of sustainability: Human, Environmental, and Talent. These elements give PepsiCo a competitive advantage. PepsiCo is working to improve the nutritional profile of its products and offer a wider selection of nutritious foods and beverages in response to growing consumer demand. It also works to clearly label what is in its products. It is striving to reduce its impact on the environment by conserving energy and water and reducing packaging volume. It creates a safe, healthy, diverse, and inclusive workplace that reflects the global communities in which the company operates. PepsiCo’s strategy displays Porter’s five forces accounting for a company’s success.

PepsiCo’s water stewardship is amazing. It conserved nearly 16 billion liters of water through the application of water-saving equipment and technologies, creative recycling and re-use, and by deploying a water management system throughout its manufacturing facilities. PepsiCo reduced water and energy related costs by more than $45 million in 2011. PepsiCo is one of the largest agricultural companies and many of its products depend on agricultural raw materials. It globally grows or sources several million tons of fruits and vegetables: 4 million tons of potatoes for its Lays brand; 3 million tons of oranges and other fruits and vegetables for Tropicana, Naked Juice and SoBe brands, and 600,000 tons of oats for Quaker. PepsiCo is working with suppliers — especially farmers — to help them manage and reduce their energy and water use and emissions. As it continues to expand in markets and regions, sustainable agriculture will continue to play an important role in its business model. Hence, PepsiCo’s three pillars of sustainability give it “market power” with respect to customers and suppliers.

In addition, as one of North America’s largest fleet operators, PepsiCo utilizes all-electric and hybrid trucks, and uses alternative fuels to increase efficiency and cut emissions. Overall, PepsiCo’s expertise, size, and engagement with stakeholders around the world position it to make a meaningful difference in some of today’s most pressing issues, creating efficiencies and positive changes in areas where the company works. Moreover, it effectively manages the interrelationship between agriculture, climate change, energy, and water in seeking long-term businesses growth.

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