international business case study

International production, outsourcing and logisticsLocation strategy: concentration and decentralizationThere are two basic strategies for locating production facilities: concentrating them in a centralized location and serving the world market from there, or decentralizing them in various regional or national locations that are close to major markets. The appropriate strategic choice is determined by the various country-specific, technological, and product factors.Concentration of production makes most sense when:●Differences between countries in factor costs, political economy, and culture havea substantial impact on the costs of manufacturing in various counties.●Trade barriers are low.●Externalities arising from the concentration of like enterprises favor certainlocations.●Important exchange rates are expected to remain relatively stable.●The production technology has high fixed costs and high minimum efficient scalerelative to global demand.●The product’s value-to-weight ratio is high.●The product serves universal needs.Alternatively, decentralization of production is appropriate when:●Differences between countries in factor costs, political economy, and culture donot have a substantial impact on the costs of manufacturing in various countries.●Trade barriers are high.●Location externalities are not important.●V olatility in important exchange rates is expected.●The production technology has low fixed costs and low minimum efficient scale,and flexible manufacturing technology is not available.●The product’s value-to-weight ratio is low.●The product does not serve universal needs.Manufacturing in-house and outsourcingThe Advantages of make:Lowering cost: it may pay a firm to continue manufacturing a product or component part in-house if the firm is more efficient at that production activity than any other enterprise.Facilitating specialized investments: When substantial investments in specialized assets are required to manufacture a component, the firm will prefer to make the component internally rather than contract it out to a supplier.Protecting Proprietary Product Technology: Proprietary product technology is unique to a firm. If it enables the firms to produce a product containing superior features, proprietary technology can give the firm competitive advantage. The firm would not want competitors to get this technology. If the firm outsources the production of entire products or components containing proprietary technology, it runs the risk that those suppliers will expropriate the technology for their own use or that they will sell it tothe firm’s competitors. Thus, to maintain control over its technology, the firm might prefer to make such products or components part in-house.Improving scheduling: Another argument for producing all or part of a product in-house is that production cost savings result because it makes planning, coordination, and scheduling of adjacent process easier.The Advantages of buy:Buying component parts, or an entire product, form independent suppliers can give the firm greater flexibility, can help drive down the firm’s cost structure, and may help the firm capture orders from international customers.Strategic Flexibility: The great advantage of buying component parts, or even an entire product, from independent suppliers is that the firm can maintain its flexibility, switching order between suppliers as circumstances dictate. This is particularly important internationally, where changes in exchange rates and trade barriers can alter the attractiveness of supply sources. Sourcing products from independent suppliers can also be advantages when the optimal location for manufacturing a product is beset by political risks. Under such circumstances, foreign direct investment to establish a component manufacturing operation in that country would expose the firm to political risks. The firm can avoid many of these risks by buying from an independent supplier in that country, thereby maintaining the flexibility to switch sourcing to another country if a war, revolution, or other political change alters that country’s attractiveness as a supply source. However, maintaining strategic flexibility has its downside. If a supplier perceives the firm will change suppliers in response to changes in exchange rates, trade barriers, or general political circumstances, that supplier may not be willing to make investments in specialized plants and equipment that would ultimately benefit the firm.Lower costs: First, the greater the number of subunits in an organization, the more problems coordinating and controlling those unites. Second, the firm that vertically integrates into component part manufacture may find that because its internal suppliers have a captive customer in the firm, they lack an incentive to reduce cost. Third, vertically integrated firms have to determine appropriate prices for goods transferred to subunits within the firm. This is a challenge in any firm, but it is even more complex in international business. Different tax regimes, exchange rate movements, and headquarters’ignorance about local conditions all increase the complexity of transfer pricing decision. The firm that buys its components from independent suppliers can avoid all these problems and the associated costs. Offsets: Another reason for outsourcing some manufacturing to independent suppliers based in other countries is that it may help the firm capture more orders from that country.GlobalizationComponents of globalization: globalization of markets, globalization of productionThe globalization of markets refers to the merging of historically distinct and separatenational markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.The globalization of production refers to the sourcing of goods and services form locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.Drivers of globalizationTwo macro factors seem to underlie the trend toward greater globalization. The first is the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II. The second factor is technological change, particularly the dramatic developments in recent years in communication, information processing and transportation technologies.Declining trade and investment barriers: During the 1920s and 30s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment. In addition to reducing trade barriers, many countries have also been progressively removing restrictions to foreign direct investment (FDI). Such trends have been driving both the globalization of markets and the globalization of production. The lowering of barriers to international trade enables firms to view the world, rather than a single country, as their market. The lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity.The role of Technological change: the lowering of trade barriers made globalization of markets and production a theoretical possibility. Technological change has made it a tangible reality. Since the end of World War II, the world has seen major advances in communication, information processing, and transportation technology, including the explosive emergence of the internet and World Wide Web. Telecommunications is creating a global audience. Transportation is creating a global village.Strategy of international businessBenefits from international expansionExpanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises. Firms that operate internationally are able to:Expand the market for their domestic product offerings by selling those products in international markets.Realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively.Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the cost of value creation.Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations.Competitive pressures facing firms: cost reduction and local responsiveness Firms that compete in the global marketplace typically face two types of competitive pressures that affect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprises. They face pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a firm. Responding to pressures for cost reductions requires that a firm try to minimize its unit costs. But responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies. Because differentiation across countries can involve significant duplication and a lack of product standardization, it may raise costs.Strategic options for firmsFirms typically choose among four main strategic postures when competing internationally. There can be characterized as a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy. The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness.Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies; that is, their strategic goal is to pursue a low –cost strategy on a global scale. The production, marketing, and R&D activities of firms pursuing a global standardization strategy are concentrated in a few favorable locations. Firms pursuing a global standardization strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs. Instead, they prefer to market a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They also tend to use their cost advantage to support aggressive pricing in world markets.A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets. Localization is most appropriate when there aresubstantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense. By customizing the product offering to local demands, the firm increases the values of that product in the local market. On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption.In essence, firms that pursue a transnational strategy are try to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations. As attractive as this may sound in theory, the strategy is not an easy one to pursue since it place conflicting demands on the company. Differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs.Many of these enterprises have pursued an international strategy, taking products first produced for their domestic market and selling them internationally with only minimal local customization. The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are not confronted with pressures to reduce their cost structure.Entry strategy for FDIMajor entry modes:Exporting: Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market. Exporting has two distinct advantages.Turnkey projects: firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handled the key to a plant that is ready for full operation—hence, the term turnkey. Licensing: A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty free from the licensee.Franchising is similar to licensing, although franchising tends to involve longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insist that the franchisee agree to abide by strict rules as to how it does business. The franchiser will also often assist the franchisee to run the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment whichamounts to some percentage of the franchisee’s revenues.A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Joint ventures have a number of advantages. In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways. The firm either can set up a new operation in that country, often referred to as Greenfield venture, or it can acquire an established firm in that host nation and use that firm to promote its products.Pros and Cons of acquisition and green-field venturesAcquisitions have three major points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market. Second, in many cases firms make acquisitions to preempt their competitors. The need for preemption is particularly great in markets that are rapidly globalizing, such as telecommunications. Third, managers may believe acquisitions to be less risky than Greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. In contrast, the revenue and profit stream that a green field venture might generate is uncertain because it does not exist. Acquisitions fail for several reasons. First, the acquiring firms often overpay for the assets of the acquired firm. The price of the target firm can get bid up if more than one firm is interested in its purchase, as is often the case. In addition, the management of the acquiring firm is often too optimistic about the value that can be created via an acquisition and is thus willing to pay a significant premium over a target firm’s market capitalization. Second, many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firm. Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. Finally, many acquisitions fail due to inadequate preacqusition screening.The big advantage of establishing a green field venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit. Similarly, it is much easier to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit. Set against this significant advantage are the disadvantages of establishing a Greenfield venture. Greenfield ventures are slower to establish. They are also risky. As with any new venture, a degree of uncertainty is associated with future revenue and profit prospects.International HRMStaffing policyResearch has identified three types of staffing policies in international business: the ethnocentric approach, the polycentric approach, and the geocentric approach. An ethnocentric staffing policy is one in which all key management positions are filled by parent-country nationals. Firms pursue an ethnocentric staffing policy for three reasons. First, the firm may believe the host country lacks qualified individuals to fill senior management positions. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Third, if the firm is trying to create value by transferring core competencies to a foreign operation, it may believe that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. However, first, an ethnocentric staffing policy limits advancement opportunities for host-country nationals. Second, an ethnocentric policy can lead to cultural myopia, the firm’s failure to understand host-country cultural differences that require different approaches to marketing and management. The adaptation of expatriate managers can take a long time, during which they may make major mistakes.A polycentric staffing policy recruits host-country nationals to manage subsidiaries while parent-country nationals occupy key positions at corporate headquarters. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host-country managers are unlikely to make the mistakes arising from cultural is understandings to which expatriate mangers are vulnerable.A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation.The geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. This policy has a number of advantages. First, it enables the firm to make the best use of its human resources. Second, and perhaps more important, a geocentric policy enables the firm to build a cadre of international executives who feel at home working in a number of cultures. However, many counties want foreign subsidiaries to employee their citizens. Causes of failureInability to cope with larger overseas responsibilitiesDifficulties with new environmentPersonal or emotional problemsLack of technical competenceInability of spouse to adjustPerformance appraisalSeveral things can reduce bias in the performance appraisal process. First, most expatriates appear to believe more weight should be given to an on-site management’s appraisal than to an off-site manager’s appraisal. In practice, home country managers often write performance evaluations after receiving input from on-site managers. When this is the case, most experts recommend that a former expatiate who served in the same location should be involved I the appraisal to help reduce bias. When the policy is for foreign on-site managers to performance evaluations, home-office managers should be consulted before an on-site manager completes a formal termination evaluation. This gives the home-office manager the opportunityto balance what could be very hostile evolution based on a cultural misunderstanding. Management Know-How and Competitive advantageThe competitive advantage of many service firms is based on management know-how. For such firms, the risk of losing control over the management skills to franchisees or joint-venture partners is not that great. These firms’valuable asset is their brand name, and brand names are generally well protected by international laws pertaining to trademarks. Given this, many of the issues arising in the case of technological know-how are of less concern here. As a result, many service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions. The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint venture is often politically more acceptable and brings a degree of local knowledge to the subsidiary.。