international business and finance
rishabbiyani
WEEK6LECTURESLIDE.pptWeek 6
International Upstream Functions
- Section I. Knowledge accumulation
- Research at the national level
- Multinational R&D
- Section II. Global supply chain management
- Outsourcing
- Supplier relations
- Section III. Physical operations
- Industrial models
- Logistics and physical operations
Seeing value chain as a whole
Adaptation/standardisation dilemma plays out between upstream/downstream. ARBITRAGE!
Product/services should not only be analysed in their final form but as the result of inputs/ intermediary transformations
Section I.
First came the idea…
- Knowledge is a factor input in same way as labour / resources / capital
- Issues of ‘organizational learning’ – relevant to modes of internationalization
- Explosion of ‘knowledge economy’ since 1980s
- T2B Technology to business, i.e. Siemens has offices in Berkeley and Shanghai, keeping an eye on hi tech start ups to see if anything useful
Research at the national level
- Different actors in knowledge production:
Firms / Universities / Research centres / Government
- Interaction through national innovation system
- firms seeking ‘knowledge spillovers’
- organization of hi-tech clusters
- Variations in ‘research intensity’ / amount of R&D done by firms vs. other actors
Multinational R&D
- ‘Technological intensity’ = R&D as % of revenues: very high in certain sectors (pharma, IT, autos)
- MNEs can spend so much on R&D that they have insufficient capital for other uses (marketing) many international strategic alliances
- Problem of confidentiality of knowledge (is it a ‘public good’?) – hard to keep secrets during internationalisation
- R&D also subject to ‘push’ vs. ‘pull’ debate: location of efforts
cf. Siedschlag and Zhang (2015), “Firms with international activities more likely to invest in innovation [and] to be successful in terms of innovation output [with] higher labour productivity”
Similar issues with international design
- ‘Pushing’ a single design into world markets saves on engineering costs but can it sell?
- If markets ‘pull’ in different designs the goods will be adapted to demand but expensive to produce
- R&D/design effort might cost so much that MNE will be forced to sell good internationally from outset
- Question of autonomy of design unit
Section II.
Global Supply Chain Management
SCM = all operations involved in sourcing, producing,
transporting, assembling and finalising product / service
Global SCM – MNE buys/receives inputs from anywhere in world
First dividing line: does MNE source inputs from own unit located abroad (‘offshoring’) or from external supplier?
INTERNATIONAL OUTSOURCING
International outsourcing
- Should MNE focus on ‘core competencies’ and narrow the ‘boundaries of the firm’?
- Shrinking balance sheet raises flexibility, cuts fixed costs
- Take advantage of suppliers’ own competitive advantages
(economies of scale / specialization / technology)
- Modern telecoms help to integrate supply chains
- By outsourcing non-essential function, MNE freeing itself to concentrate on its strengths
Outsourcing problems
- ‘Prime contractor’ becomes dependent on suppliers / loses knowledge = problem if:
- adverse price movements
- opportunism by supplier (forward integration)
- poor quality supplies
- supplier has negative image (CSR like child labour)
- delivery uncertainty (lead times of long distance sourcing), esp. in ‘Just-in-Time’ production systems
- Can be mitigated:
-‘suppliers parks’
- RFID: real-time tracking/inventory management software
- Covisint
Environmental constraints on outsourcing
- By definition, outsourcing theory is based on minimal transaction costs
- Yet with rising fuel prices, logistics could become prohibitive
- If so, the proximity between the production function and the market would become an overriding KFS
- Conversely, Int. Bus. predicated on remote outsourcing loses its raison d’être
- Is the future of Int. Bus. to be FDI only, thus technology transfers and multidomestic MNEs?
Macro-trends international outsourcing
- 1980s/1990s: main driver of globalization was procurement of low-cost inputs / finished products from SE Asia, Mexico etc.
- Since 1990s: rise of BRICs, especially China / India
- China capable not only of cheap low value added production but increasingly sophisticated goods
- India major destination in outsourcing of services, including IT (also Philippines, Ukraine / Russia)
- Outsourcing now threatens OECD white collar workers as well
- 3D PRINTING!!
Other trends in international outsourcing (cont.)
- ‘In-sourcing’ – Regaining control over value chain
- ‘Multi-sourcing’ – getting suppliers to compete
- ‘Near-shoring’ – to reduce time-to-market
- Centralization of purchasing for all units worldwide – ‘bulk buying’ advantage.
REQUIRES TOP LOGISTICS TO SUCCEED
Integration SCM – logistics (i.e. Dell system)
Categorising supplier relationships
c.f. Harland et al 2004: dependent single product purchasers vs. multidivisional firms with varied procurement - licensing/ franchising arrangements vs. shortlists of preferred suppliers
Cultural models
short-term American: price squeeze when orders renewed
long-term Asian: collaborative planning (Japanese keiretsus)
‘Flagship firms’ (Rugman and D’Cruz 2000): compromise
attempt by Western MNEs to imitate Asian model without tolerance for poor performance. Network of dedicated suppliers located in clusters reliability, opportunism
cf. Gorodnichenko, Y. et al (2015), “Culture and global sourcing”
Basis for MNE choice of suppliers
COST – but also TECHNOLOGY
- Ability to share info (i.e. inputs’ location)
- ‘Concurrent engineering’ – parallel design
- Early collaboration at pre-production phase – esp. important in ‘fractal’ mode when SCM relates to delivery of modules (sub-systems)
Section III.
Physical operations
INDUSTRIAL MODELS
- Various models have constituted dominant paradigm at different times in history
- Fordism: mass production targeting standardization/efficiency
lower retail costs but product uniformity
- Sloanism: Fordist variant but differentiates via ‘postponement’ /
platform strategy. Shared generic invisible sub-
systems / surface changes late in production process
Fordist problem with inventory/quality Toyotaism
“Deferred differentiation”
- Standardise as far as possible (scale)
- Adapt as late as possible (scope)
i.e. AUTOMOBILE PLATFORM STRATEGIES
i.e. PRODUCTION IN CHINESE RESTAURANT
Toyotaism
- Japanese manufacturing dominance since 1970s
- Volume/flexibility can coincide as long as uncertainty about level and timing of flows is minimised
- Staff seeks ‘kaizen’ (continuous improvement) and ‘permanent reduction in costs’ (c.f. Boyer and Freyssenet 2002)
- Bottom-up focus on Total Quality Management (note Motorola’s ‘Six Sigmas’ approach – ISO’s role as standards agency)
- ‘Lean’ principles. Flows pulled by demand (‘kanban’), not plans
Other industrial models
- Volvoism: worker training / polyvalence to raises motivation / productivity. Opposite of Fordism: expensive but high quality
- Dellism: firm exists as a facilitator in a network of suppliers vendors (extreme case would be ‘hollow firm’ – Nike?). Reliant on logistics for rapid order processing/delivery.
MANUFACTURING vs. ASSEMBLY:
DIFFERENT PHYSICAL OPERATIONS
Scale production of generic items – few huge plants
Warehousing/assembling inputs – many medium-sized units
These and other upstream complexities…
- Patchy infrastructure in many BRICs
- ‘Focused factories’ / fragmented SCM approaches lead to rise in volumes of inventory shipments
- Complexities third party logistics specialists (3PLs)
- familiarity with platforms (i.e. export processing zones)
- transport mixing shipments for different firms = lower costs
DIFFERENT STRATEGIC ORGANIZATIONS ARE ASSOCIATED WITH DIFFERENT PHYSICAL REQUIREMENTS
…should not be viewed in isolation
- Dynamic tension between KFS upstream (efficiency/cost) and downstream (having a broad product portfolio)
- At MA level we study both ends together because those are the dividing lines in most international companies
WHICH IS WHY YOU HAVE AN INTERNATIONAL MARKETING MODULE!
Plant Location
a. Depends on MNE’s configuration
- Multidomestic – serving local market?
- Multiregional – intra-firm?
- Global – serving customers worldwide?
b. Depends on PLC (c.f., Vernon)
Exceptions can be made for centres of excellence exploiting local strengths whatever this is deemed to create advantage
c. Other factors
Proximity to big markets or strategic inputs; government attitudes, etc.
See following slide
Logistics
- Occur at all levels of supply chain
- within company
- between company/suppliers
- between company/customers
- 3PLs
- Pressure to perform: cost/reliability/speed
- Specialist knowledge
- Incoterms (FOB/CIF)
- Legalities (Bills of lading)
- Trade finance (L/Cs)
