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 plantsActive in more than one countryMay have a borderless global culture and tailor production and markets to local needs

Global FirmCoordinated production, sales, distribution and administrative networks

Domestic FirmAll others

Globalization Models

Product Life Cycle ModelUppsala Model (Psychic Distance)Monopolistic Advantage TheoryOligopolistic Reaction (Risk Reduction)Network Theory

Introduction

Increase in Globalization1/5 of o/p of U.S. firms produced abroad

1/4 of all imports/exports are between foreign affiliates of parent U.S. companiesBy 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 PROCESS TECHNOLOGY

DRIVERS GLOBALIZATION DRIVERS

POTENTIAL

POLITICAL AND

ECONOMIC 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 venturesExamples• Autos (GM-Toyota, Chrysler-Mitsubishi,

Ford-Mazda)

Global location of R&D facilitiesDesign of customized productsAccess 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 marketsTimely deliveryAccess to skilled workersQualityAvailability 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 facilitiesExamples• Semiconductor plants

1986: 50m$-100m$;1994: 250m$-400m$ (R&D over 1B$)

Changes In Cost Priorities

Manufacturers share costs and risksExamples• 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 regulationsGovernment 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