Transcript THE GLOBALIZATION OF OPERATIONS: FACTS AND CAUSES

The Globalization of
Operations: Facts
and Causes
Sources: Dornier et al., GOL, 1998
Flaherty, GOM, 1996
Introduction
Definitions
Multinational Firm
Majority ownership in either foreign sales
organization/Dstn networks of prodn plants
Active in more than one country
May have a borderless global culture and tailor
production and markets to local needs
Global Firm
Coordinated production, sales, distribution and
administrative networks
Domestic Firm
All others
Globalization Models
Product Life Cycle Model
Uppsala Model (Psychic Distance)
Monopolistic Advantage Theory
Oligopolistic Reaction (Risk Reduction)
Network Theory
Introduction
Increase in Globalization
1/5 of o/p of U.S. firms produced abroad
1/4 of all imports/exports are between foreign
affiliates of parent U.S. companies
By early 1990s, U.S. multinationals accounted for
53% of all firms and 89% of worldwide sales of all
companies
Why?
Global reach important to firm‘s survival (50% more
likely to survive)
More profitable and faster growth
Causes Of Globalization
MARKET DRIVERS
MANUFACTURING
COST
DRIVERS
PROCESS
GLOBALIZATION
POTENTIAL
POLITICAL AND
ECONOMIC DRIVERS
TECHNOLOGY
DRIVERS
Changes In Global Markets
Increased foreign competition
Growth in foreign demand
Shorter product lives, more
customization, faster response
Presence in state-of-the-art markets
Changes In Global Markets
Increased Foreign Competition
Facts
• Import penetration of American market
• Increase in foreign owned capacity
Implications
• Compete against world class competition
• Even small firms have global concerns
Changes In Global Markets
Growth in Foreign Demand
Facts
• Shift in relative size of U.S. Market
– 1965: 40% of world GDP
– 1987: 30% of world GDP
• Increasing portion of future sales abroad
Implications
• Global presence helps smooth demand
fluctuations
• Global presence as a competitive threat
Changes In Global Markets
Shorter product lives, more customization,
faster response
Examples
• Short product lives
– DRAM chips: 3-4 years
– Automobiles: less than 4 years
Implications
• Product life cycle approach to int‘l prodn not valid
• Simultaneous product development in all markets
• Local presence needed for customization and fast
response
Changes In Global Markets
Presence in state-of-the-art market for
maintaining technological edge
Examples of state of the art markets
• Japan: semiconductor process equipment,
consumer electronics, machine tools
• Germany: machine tools
• U.S.: Aerospace, computers, software
Prodn facilities in state of the art markets
serve as
• Market sensors
• Learning laboratories
Global Dissemination Of Technology
Global location for access to critical components
(supplier involvement)
Examples
• Canon (engines for fax machines and laser printers)
• Fanuc (machine tool controllers)
Global location for access to process technology
Examples
• U.S. Semiconductor manufacturers in Japan
(photolithography technology)
• IBM & Xerox in Japan (video technology)
Global Dissemination Of Technology
Technology driven joint ventures
Examples
• Autos (GM-Toyota, Chrysler-Mitsubishi, FordMazda)
Global location of R&D facilities
Design of customized products
Access to high-quality, low-cost engineering talent.
Changes In Cost Priorities
Moving away from offshore strategies driven by low
labor cost mentality
Diminishing importance of direct labor cost
“Island hopping” syndrome
New competitive priorities drive global location
Access to markets
Timely delivery
Access to skilled workers
Quality
Availability of suppliers
Changes In Cost Priorities
Importance of capital costs and government
subsidies in certain industries
Government subsidies (examples: Ireland, U.S.)
• Interest rate subsidies
• Tax holidays
• Cost sharing on plant and equipment
Increasing capital intensity of production facilities
Examples
• Semiconductor plants
1986: 50m$-100m$;
1994: 250m$-400m$ (R&D over 1B$)
Changes In Cost Priorities
Manufacturers share costs and risks
Examples
• Texas Instruments and Hitachi
• Motorola and Toshiba
• IBM and Siemens
share production facilities for 16 MB DRAM chips
Need for increased capacity utilization leads to
pursuit of global markets
Political and Macroeconomic Factors
Significant exchange rate fluctuations
force development of facilities in local
markets
Development of regional free trade
groups force companies to rethink
regional production strategies
Examples
• European community
• U.S.-Canada-Mexico (NAFTA)
Political and Macroeconomic Factors
GATT deterred tariff increases or additions and
opened new markets
The imposing of non-tariff barriers favors
globalization of production strategies
Voluntary export restraints (U.S. - Japan: autos)
Trigger price mechanisms (U.S. semiconductor and
steel industry)
Local content requirement (European auto and
semiconductor industry)
Technical standards and health regulations
Government procurement policies
Outlook
Integration of extended international
activities into a coordinated global
system
Restructuring the operations network
(duplicated processes etc.)
Global expansion of small and medium
sized firms