Global Sourcing

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Session 10

• Global Sourcing
• Global Operations Management

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Using the Porter diamond helps us understand our
firms environments

• Is our firm part of a cluster of organizations
  with special skills?
• Do we provide support for firms that are part of
  a cluster?

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When our firms expand abroad, the diamond helps
us analyze

• Do we want ?
• specialized factor conditions
• demanding local customers
• related and supporting industries
• challenges from local firms
• strategy
• structure
• rivalry

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The Porter Diamond
Firm Strategy Structure, and Rivalry
chance
Factor Conditions
Demand Conditions
government
Related and Supporting Industries
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Strategy, Structure, Rivalry

• Interfirm networks
• Horizontal--main bank system
• Vertical--supply chain vs. distribution
• Keiretsu
• Chaebol
• Innovation, Research development

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Value-Added Chain

• Process by which technology is combined with
  material and labor inputs, and then processed
  inputs are assembled, marketed, and distributed.

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Comparative vs. Competitive Advantage

• Influences the decision of where to source and
  market
• Based on the lower cost of a factor (such as
  labor, materials,capital charges, etc.) in one
  country vs. another, favoring industries that use
  this factor intensively

• Influences the decision of what activities and
  technologies to invest in
• Stems from proprietary characteristics of a firm
  such as brand name, core competencies, and
  favors firms in which such resources are

inimitable
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The diamonds elements are among many issues in
location decisions

• You can rarely do everything that might be
  profitable
• You never have time to consider all alternatives
• Therefore, you may never truly optimize
• You have to make an educated guess about where to
  spend time collecting data

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Choosing new locations for market-oriented
investments

• Scan for alternatives
• Choose and weight variables
• Opportunities
• Market size
• Ease and compatibility
• Cost and resource availability in the country
• Collect and analyze data for variables
• Use tools to narrow alternatives and compare
  variables and

13-4
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Dangers of making decisions based on available
statistics

• Profit estimates are never reliable
• Even data about past profits tell only part of
  how good an investment is
• Some investments require vast amounts of
  management time
• manufacturing in low-wage location
• Others cannibalize profits from other units
• sales unit replaces exports

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Should you diversify or concentrate international
investments?

• Diversification strategy means entering many
  markets at once
• Concentration strategy means focusing on a few so
  you will do well there
• Note There are other uses of the terms
  diversification and concentration

13-6
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Key factors to consider

• Analyze growth rate and sales stability in each
  market
• Research expected lead time over competitors
• Estimate any spillover effects
• Measure degree of need for
• the product
• localization necessary to sell it in different
  countries

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Companies prefer countries that

• Are located nearby
• Share the same language
• Have market conditions like those in the home
  country
• Firms often eliminate proposals to enter
  countries unless they
• offer size, technology, and other factors
  familiar to company personnel
• allow an acceptable percentage of ownership
• permit sufficient profits to be easily remitted

13-9
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Sources of Information

• Individualized reports
• Specialized studies
• Service companies
• Government agencies
• International organizations and agencies
• Trade associations
• Information service companies
• Internet

13-12
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But what does your source really tell you?

• Many researchers and publishers arent reliable
• Definitions of terms vary from country to country
• An electrical engineer in one country may have
  completely different skills from in another
• Literacy may mean true literacy or just ability
  to write your own name
• Family income may mean something different

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Issues with Emerging Economies

• Foreign costs rise quickly due to wage pressures
  and exchange rates
• Extent of red tape and corruption
• Risk and uncertainty
• Obsolescence or inaccuracy of data

13-11
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Data Analysis
Table 13.2
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Making Final Country Decisions

• Make lengthy site visits
• Construct detailed estimates of costs and
  expenses
• Be skeptical!
• Decide whether to invest alone or with a partner
• For acquisitions, examine financial statements
  and other data in detail

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Allocating Among Existing Locations

• Reinvestment versus harvesting is a continuous
  choice
• Harvesting taking as much money out as possible
• Local managers will oppose
• Appraise effects of the operation on other
  locations as well as bottom-line performance

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Chapter Objectives

• Discuss strategies for sequencing penetration of
  countries and committing resources
• Explain clues from the environmental climate that
  helps managers limit geographic alternatives
• Examine major variables companies can consider
  when deciding whether and where to expand abroad
• Overview methods and problems of collecting and
  comparing information internationally
• Describe simplifying tools for determining global
  geographic strategy
• Introduce how managers make final investment,
  reinvestment, and divestment decisions

13-2
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Bus 187
Global Operations ManagementRecontextualization
Revisited
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Key problem uncertainty concerning whether a
firms products, resources, or capabilities will
continue to be available and be aligned in new
cultural environments.
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RECONTEXTUALIZATION
Evolution of meaning within new cultural
environments
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THE STUDY
Comparative field-based study of technology
transfer in two global industries, Ball-Bearings
and Paper Manufacturing in 7 countries US,
Japan, England, Germany, Brazil, China, France
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INTENDED SCOPE OF TRANSFERBALL-BEARING CULTURE

• Standard Operating Procedures
• maintenance
• quality
• Visual Control
• color-coated bins
• stack lights

• Key Processes
• heat treat
• grinding
• machining
• material handling
• flexible assembly

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RECONTEXTUALIZATION OF FIRM OFFERINGS
New Cultural Environment
Pre-existing Meaning
Firm Offerings
Resultant Meaning
Positive
Negative
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STANDARDIZATION

• NSK/JAPAN
• innumerable NES standards from Tokyo
• standards religiously followed
• strong discipline in workplace organization and
  cleanliness
• procedural consistency in operating and
  maintaining equipment
• tight scheduling of people around needs of
  production

• NSK/U.S.
• fewer standards
• difficulties in getting operators to follow
  standards
• ongoing housekeeping issues
• procedural consistency in operations but
  continuing difficulties in disciplined
  maintenance
• issues of seniority, team follow-through, and
  punctuality

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TECHNOLOGY CHARACTERISTICS

• System-Embeddedness
• degree to which technologies and processes rely
  on other organizational systems (Leonard-Barton
  1992, 1995 Tornatzky Fleisher 1990)
• AUTONOMOUS
• SYSTEM-EMBEDDED

• Knowledge-Base
• know-how associated with implementing and
  operating technology (Kogut Zander
  1992)
• TACIT subjective, taken-for-granted, socialized
  knowledge
• EXPLICIT objective, codified, rational

(Polanyi 1966 Nonaka Takeuchi
1995 Doz et al. 1996)
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KEY DIMENSIONS OF MODEL
Tacit Knowledge Base
System Embeddedness
Autonomous
Explicit Knowledge Base
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Model Relating Technology Characteristics to
Recontextualization
Tacit Knowledge Base
High Recontextualization
I
IV
SOCIAL PROCESSES
PRODUCTION TOOLS
System Embeddedness
Autonomous
II
III
SOPs SKILL SETS
PHYSICAL EQUIPMENT
Low Recontextualization
Explicit Knowledge Base
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Model Relating Technology Characteristics to
Recontextualization
Tacit Knowledge Base
SOCIAL PROCESSES
PRODUCTION TOOLS
High Recontextualization
Production Charts ??
I
IV
Visual Controls ??
MRP System ?
Flexible Assembly??
System Embeddedness
Autonomous
???Engineering Expertise
???Machine Operation Expertise
Heat treat ??
II
III
? Grinding (UA1-6)
??Maintenance Procedures
???Quality Procedures
??Machining
Low Recontextualization
??Automated Material Handling
??Workplace Organization
SOPs SKILL SETS
PHYSICAL EQUIPMENT
Explicit Knowledge Base
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TEAMS

• Traditional shopfloor teams
• no formal team structure
• Q-tips movement --gt failed
• topic given by supervisor
• volunteer own time
• NSK Japan
• han and line -- formal work groups
• special task forces to solve specific problems
• quality circles
• team work as a way of life
• Contemporary Self-Directed teams
• local learning -- negotiated structure w/ MOA
• Japan-led learning -- tacit --gt tacit

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Model Relating Technology Characteristics to
Recontextualization
Tacit Knowledge Base
SOCIAL PROCESSES
PRODUCTION TOOLS
High Recontextualization
Kaizen ??
Shopfloor teams ??
Shopfloor discipline ??
I
IV
Work Roles ??
??Labor Relations
???Q C Circles?
System Embeddedness
Autonomous
II
III
Low Recontextualization
SOPs SKILL SETS
PHYSICAL EQUIPMENT
Explicit Knowledge Base
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International Strategic Challenges

• Identify industry/competitive characteristics
• Identify strategic priorities for value-adding
  activities
• Global Efficiency?
• Multinational Flexibility?
• Learning and Innovation?
• Identify existing/required capabilities
• Decide where (location) and how (internally or
  externally, through alliances) to build
  capabilities

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Matching Strategy with Organization

• Key to a successful international strategy is
  that the firm creates operating flexibility to
  profit from uncertainty regarding exchange rates,
  government policy, and competitors moves
• To do this a firm must have managerial skills and
  organizational resources to respond to market and
  political fluctuations

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Operating Flexibility Arbitrage

• Production Shifting
• Respond to exchange rates
• Loss of economies of scale vs.excess capacity
• Firm must be able to capitalize of differences in
  variable costs across countries
• Tax Minimization and Financial Markets
• Transfer pricing
• adjusting intra-company mark-ups
• Multiple channels for income remittance
• Governments create arbitrage incentives
• Information Arbitrage
• Scanning world markets to match sellers buyers
• Intrafirm transfer of new product and process
  developments

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International Organizational Challenges

• Match organization to strategy by working on
• Structure (Anatomy)
• Systems/Process (Physiology)
• Information
• Integration
• Innovation
• Incentives
• Culture (Psychology)
• Develop people at HQ and subsidiaries with
  the right mindsets to achieve strategic
  goals