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International Business Strategy, Management


Title: International Business Strategy, Management & the New Realities Author: Dave Paradi Last modified by: Gary Knight Created Date: 9/6/2007 9:57:38 AM – PowerPoint PPT presentation

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Title: International Business Strategy, Management

International BusinessStrategy, Management the
New RealitiesbyCavusgil, Knight Riesenberger
  • Chapter 16
  • Global Sourcing

Global Sourcing Shopping the World
  • Along with competitors Reebok and Adidas, Nike
    contracts out nearly all of its athletic shoe
    production to foreign suppliers. These firms are
    best described as brand owners and marketers, not
    as manufacturers.
  • Apple Computer sources some 70 of its production
    abroad while focusing its internal resources on
    improving its operating system and other software
    platforms. This approach allows Apple to use its
    resources optimally and focus on its core
  • Boeing and Airbus rely extensively on global
    manufacturing networks, composed largely of
    independent suppliers.

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Global Sourcing
  • Global sourcing the procurement of products or
    services from suppliers located abroad for
    consumption in the home country or in a third
  • Also called global outsourcing, global
    procurement or global purchasing it amounts to
  • Involves a contractual relationship between the
    buyer and the foreign supplier, in which the
    performance of a specific value-chain activity is
    subcontracted to the firm's own subsidiary or to
    an independent supplier.

Drivers of Global Sourcing
  • Technological advances, including instant
    Internet connectivity and broadband availability
  • Declining communication and transportation costs
  • Widespread access to vast information including
    growing connectivity between suppliers and the
    customers that they serve and
  • Entrepreneurship and rapid economic
    transformation in emerging markets.

Decision 1 Outsource or Not?
  • Managers must decide between internalization and
    externalization -- whether each value-adding
    activity should be conducted in-house or by an
    independent supplier.
  • Known as the make or buy decision Should we
    conduct a particular value-chain activity
    ourselves, or should we source it from an outside
  • Firms usually internalize those value-chain
    activities they consider a part of their core
    competence, or which involve the use of
    proprietary knowledge and trade secrets they want
    to control.

Business Process Outsourcing (BPO)
  • The outsourcing of business functions to
    independent suppliers such as accounting,
    payroll, and human resource functions, IT
    services, customer service, and technical
  • BPO includes
  • Back-office activities, which includes internal,
    upstream business functions such as payroll and
    billing, and
  • Front-office activities, which includes
    downstream, customer-related services such as
    marketing or technical support.

Decision 2 Where in the World Should
Value-Adding Activities Be Located?
  • Configuration of value-adding activity The
    pattern or geographic arrangement of locations
    where the firm carries out value-chain
  • Instead of concentrating value-adding activities
    in the home country, many firms configure these
    activities across the world to save money, reduce
    delivery time, access factors of production, and
    extract maximal advantages relative to
  • This helps explain the migration of traditional
    industries from Europe, Japan, and the U.S. to
    emerging markets in Asia, Latin America, and
    Eastern Europe.

An Example of Worldwide Configuration of Value
  • The German automaker BMW employs 70,000 factory
    personnel at 23 sites in 13 countries to
    manufacture its vehicles.
  • Workers at the Munich plant build the BMW 3
    Series and supply engines and body components to
    other BMW factories abroad.
  • In the United States, BMW has a plant in South
    Carolina, which makes over 500 vehicles daily for
    the world market.
  • In NE China, BMW makes cars in a joint venture
    with Brilliance China Automotive Holdings Ltd.
  • In India, BMW has a manufacturing presence to
    serve the needs of the rapidly growing South Asia
  • BMW must configure sourcing at the best
    locations worldwide, in order to minimize costs
    (e.g., by producing in China), access skilled
    personnel (by producing in Germany), remain close
    to key markets (by producing in China, India and
    the United States).

Contract Manufacturing Global Sourcing from
Independent Suppliers
  • An arrangement in which the focal firm contracts
  • with an independent supplier to manufacture
  • products according to well-defined
  • Nike is a leading example.
  • Examples
  • Patheon, a leading contract manufacturers in the
    pharmaceutical industry, provides drug
    development and manufacturing for pharmaceutical
    and biotechnology firms worldwide. Patheon
    operates 11 factories in North America and
    Europe, producing over-the-counter drugs and
    several of the world's top-selling prescription
    drugs for most of the world's largest
    pharmaceutical firms.
  • Benetton employs contract manufacturers to
    produce clothing.
  • IKEA uses contract manufacturers to produce

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Magnitude of Global Sourcing
  • In 2005, India alone booked 22 billion worth of
    business in answering customer phone calls,
    managing computer networks, processing invoices,
    and writing custom software for MNEs from around
    the world.
  • Global sourcing has created more than 1.3 million
    jobs during the past decade for India.
  • Meanwhile, between 2000 and 2004, some 100,000
    service jobs were outsourced each year from the
    United States to other countries.
  • In 2006, IT and business-process outsourcing
    exceeded 150 billion worldwide.

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Benefits of Global Sourcing
  • Cost efficiency
  • Improved productivity
  • Technological flexibility
  • Improved agility to redesign company activities
  • Access to skilled personnel
  • Increased speed to market
  • Access to new markets

Challenges of Global Sourcing
  • Vulnerability to exchange rate fluctuations
  • Partner selection, qualification, and monitoring
  • Complexity of managing a worldwide network of
    partners and a global supply chain
  • Limited influence over suppliers manufacturing
  • Vulnerability to opportunistic behavior by
  • Limited ability to safeguard intellectual assets

Global Supply Chain Management
  • Global supply chain the firms integrated
    network of sourcing, production, and
    distribution, organized on a world scale, and
    located in countries where competitive advantage
    can be maximized.
  • Sourcing from numerous suppliers scattered around
    the world requires efficient supply-chain
  • Third party logistics providers (3PLs) as well as
    independent logistics service providers such as
    FedEx, TNT, and UPS are useful facilitators.

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Features of Global Supply Chain Management
  • Costs associated with physically delivering a
    product to an export market may account for as
    much as 40 of total cost.
  • Experienced firms use information and
    communications technologies (ICTs) to streamline
    operations, reducing costs and increasing
    distribution efficiency.
  • Logistics involves physically moving goods
    through the supply chain. Incorporates
    information, transportation, inventory,
    warehousing, materials handling and similar
    activities associated with the delivery of raw
    materials, parts, components, and finished

Transportation Modes
  • International logistics typically involves
    multiple transportation modes.
  • Land transportation is handled via highways and
  • Ocean transportation is handled via large
    container ships.
  • Air transportation involves commercial or cargo
  • Ocean and air transport are common in
    international business because of long shipping
    distances. Ocean transport is the most common
    and cheapest transportation mode.
  • Ocean transport was revolutionized by the
    development of 20- and 40-foot shipping

Risks in Global Sourcing
  • 1. Less-than-expected cost savings. Conflicts
    and problems arise from various sources.
  • 2. Environmental factors. Examples include
    exchange rate fluctuations, trade barriers,
    macroeconomic events, high energy costs, labor
  • 3. Weak legal environment. Can affect protection
    of intellectual property, eroding key strategic
  • 4. Risk of creating competitors
  • 5. Inadequate or low-skilled workers
  • 6. Erosion of morale and commitment among
    home-country employees due to outsourcing jobs

Strategies for Minimizing Risk
  • 1. Go offshore for the right reasons. The best
    rationale is
  • strategic, such as enhancing the quality of
    offerings, improving
  • productivity, and freeing up core resources.
  • 2. Get employees on board. Poorly planned
    sourcing projects
  • creates unnecessary tension with existing
  • 3. Choose carefully between a captive operation
    and a
  • contract with outside specialists. Strike the
    right balance
  • between what to make, and what to buy.
  • 4. Choose countries and suppliers carefully.
    There are many
  • options to choose from A sourcing broker can
  • 5. Invest in supplier development and
  • 6. Proactively safeguard interests, such as key
    assets and the
  • firms reputation

Potential Harm and Ethical Issues
  • Global sourcing can lead to three major problems
    in the home country
  • Job losses
  • Reduced national competitiveness
  • Declining living standards
  • MNEs may be ineffective or indifferent about
  • protecting the environment
  • promoting human rights
  • labor practices and working conditions abroad

Public Policy Towards Global Sourcing
  • It is impractical to adopt a unilateral policy
    against global sourcing.
  • Rather, it is usually better to mitigate the harm
    that global sourcing can cause.
  • Offshoring is a process of creative destruction.
    It creates new advantages and opportunities,
    while eliminating certain types of jobs and
    adversely impacting particular economic sectors
    and segments of the economy.

Helpful Public Policy Initiatives
  • Guiding employment towards higher value-added
  • (e.g., by stimulating innovation)
  • Keep the cost of doing business low (e.g., via
    appropriate economic and fiscal policies,
    encouraging innovation, keeping cost of capital
  • Ensure a strong educational system, including
    technical schools and well-funded universities
    that supply engineers, scientists, and knowledge
  • Maximize worker flexibility to help those who
    lose jobs find other positions.