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 Global Market Forces Technological Forces Global Cost Forces Political and Macroeconomic Forces

Causes Of Globalization MARKET DRIVERS MANUFACTURING COST PROCESSTECHNOLOGY 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 ventures Examples Autos (GM-Toyota, Chrysler-Mitsubishi, Ford- Mazda) 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 x1986: 50m$-100m$; x1994: 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