international-business-case-study

Internationalproduction,outsourcingandlogisticsLocationstrategy:concentrationanddecentralizationTherearetwobasicstrategiesforlocatingproductionfacilities:concentratingtheminacentralizedlocationandservingtheworldmarketfromthere,ordecentralizingtheminvariousregionalornationallocationsthatareclosetomajormarkets.Theappropriatestrategicchoiceisdeterminedbythevariouscountry-specific,technological,andproductfactors.Concentrationofproductionmakesmostsensewhen:Differencesbetweencountriesinfactorcosts,politicaleconomy,andculturehaveasubstantialimpactonthecostsofmanufacturinginvariouscounties.Tradebarriersarelow.Externalitiesarisingfromtheconcentrationoflikeenterprisesfavorcertainlocations.Importantexchangeratesareexpectedtoremainrelativelystable.Theproductiontechnologyhashighfixedcostsandhighminimumefficientscalerelativetoglobaldemand.Theproduct’svalue-to-weightratioishigh.Theproductservesuniversalneeds.Alternatively,decentralizationofproductionisappropriatewhen:Differencesbetweencountriesinfactorcosts,politicaleconomy,andculturedonothaveasubstantialimpactonthecostsofmanufacturinginvariouscountries.Tradebarriersarehigh.Locationexternalitiesarenotimportant.Volatilityinimportantexchangeratesisexpected.Theproductiontechnologyhaslowfixedcostsandlowminimumefficientscale,andflexiblemanufacturingtechnologyisnotavailable.Theproduct’svalue-to-weightratioislow.Theproductdoesnotserveuniversalneeds.Manufacturingin-houseandoutsourcingTheAdvantagesofmake:Loweringcost:itmaypayafirmtocontinuemanufacturingaproductorcomponentpartin-houseifthefirmismoreefficientatthatproductionactivitythananyotherenterprise.Facilitatingspecializedinvestments:Whensubstantialinvestmentsinspecializedassetsarerequiredtomanufactureacomponent,thefirmwillprefertomakethecomponentinternallyratherthancontractitouttoasupplier.ProtectingProprietaryProductTechnology:Proprietaryproducttechnologyisuniquetoafirm.Ifitenablesthefirmstoproduceaproductcontainingsuperiorfeatures,proprietarytechnologycangivethefirmcompetitiveadvantage.Thefirmwouldnotwantcompetitorstogetthistechnology.Ifthefirmoutsourcestheproductionofentireproductsorcomponentscontainingproprietarytechnology,itrunstheriskthatthosesupplierswillexpropriatethetechnologyfortheirownuseorthattheywillsellittothefirm’scompetitors.Thus,tomaintaincontroloveritstechnology,thefirmmightprefertomakesuchproductsorcomponentspartin-house.Improvingscheduling:Anotherargumentforproducingallorpartofaproductin-houseisthatproductioncostsavingsresultbecauseitmakesplanning,coordination,andschedulingofadjacentprocesseasier.TheAdvantagesofbuy:Buyingcomponentparts,oranentireproduct,formindependentsupplierscangivethefirmgreaterflexibility,canhelpdrivedownthefirm’scoststructure,andmayhelpthefirmcaptureordersfrominternationalcustomers.StrategicFlexibility:Thegreatadvantageofbuyingcomponentparts,orevenanentireproduct,fromindependentsuppliersisthatthefirmcanmaintainitsflexibility,switchingorderbetweensuppliersascircumstancesdictate.Thisisparticularlyimportantinternationally,wherechangesinexchangeratesandtradebarrierscanaltertheattractivenessofsupplysources.Sourcingproductsfromindependentsupplierscanalsobeadvantageswhentheoptimallocationformanufacturingaproductisbesetbypoliticalrisks.Undersuchcircumstances,foreigndirectinvestmenttoestablishacomponentmanufacturingoperationinthatcountrywouldexposethefirmtopoliticalrisks.Thefirmcanavoidmanyoftheserisksbybuyingfromanindependentsupplierinthatcountry,therebymaintainingtheflexibilitytoswitchsourcingtoanothercountryifawar,revolution,orotherpoliticalchangealtersthatcountry’sattractivenessasasupplysource.However,maintainingstrategicflexibilityhasitsdownside.Ifasupplierperceivesthefirmwillchangesuppliersinresponsetochangesinexchangerates,tradebarriers,orgeneralpoliticalcircumstances,thatsuppliermaynotbewillingtomakeinvestmentsinspecializedplantsandequipmentthatwouldultimatelybenefitthefirm.Lowercosts:First,thegreaterthenumberofsubunitsinanorganization,themoreproblemscoordinatingandcontrollingthoseunites.Second,thefirmthatverticallyintegratesintocomponentpartmanufacturemayfindthatbecauseitsinternalsuppliershaveacaptivecustomerinthefirm,theylackanincentivetoreducecost.Third,verticallyintegratedfirmshavetodetermineappropriatepricesforgoodstransferredtosubunitswithinthefirm.Thisisachallengeinanyfirm,butitisevenmorecomplexininternationalbusiness.Differenttaxregimes,exchangeratemovements,andheadquarters’ignoranceaboutlocalconditionsallincreasethecomplexityoftransferpricingdecision.Thefirmthatbuysitscomponentsfromindependentsupplierscanavoidalltheseproblemsandtheassociatedcosts.Offsets:Anotherreasonforoutsourcingsomemanufacturingtoindependentsuppliersbasedinothercountriesisthatitmayhelpthefirmcapturemoreordersfromthatcountry.GlobalizationComponentsofglobalization:globalizationofmarkets,globalizationofproductionTheglobalizationofmarketsreferstothemergingofhistoricallydistinctandseparatenationalmarketsintoonehugeglobalmarketplace.Fallingbarrierstocross-bordertradehavemadeiteasiertosellinternationa