International Business Strategy 301REN Global Sourcing International Business Strategy 301REN Unit: 9 Knowledgecast: 1

Module Learning Outcomes Integrate and apply strategic approaches to practical situations in various types of organisations Assess current developments in the organisational environment and alternative responses related to strategy Resolve management problems in the area of strategic management by evaluating alternative outcomes

Global Sourcing Is the procurement of products or services from suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country. Also called global procurement or global purchasing, global sourcing amounts to importing -- an inbound flow. It is an entry strategy that involves a contractual relationship between the buyer (the focal firm) and a foreign supplier. It involves subcontracting the performance of specific manufacturing or services tasks to the firm's own subsidiaries or independent suppliers.

Drivers of Global Sourcing Technological advances (e.g. internet) Access to information and growing connectivity Entrepreneurship & economic transformation in emerging markets Declining communication and transportation costs 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.

Global Sourcing: Shopping the World Nike, Reebok and Adidas as brand owners and marketers, not as manufacturers because they contract out nearly all of their athletic shoe production to foreign suppliers. Apple Computer sources some 70% of its production abroad while focusing its internal resources on improving its operating system and other software platforms. Dell Inc. relies extensively on a global manufacturing network, composed largely of independent suppliers. This allows these companies to optimally utilize their limited capital resources and focus on their core competences.

Sourcing for the Dell Inspiron Notebook

Two Key Decisions Regarding Global Sourcing Decision 1: Outsource or not Decide whether each value-adding activity should be conducted in-house or by an independent supplier. Known as the ‘make or buy’ decision. 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 that they want to control. Decision 2: Where in the world should value-adding activities be located? Firms configure their value-chain activities in specific countries to cut costs, reduce transit time, access favorable factors of production, and access competitive advantages. 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 external, independent supplier. In business, this is traditionally known as the make or buy decision. Firms usually internalize those value-chain activities they consider part of their core competencies, those that require the use of proprietary knowledge and trade secrets they want to control. Decision 2: Where in the world should value-adding activities be located? Instead of concentrating value-adding activities in their home country, many firms configure them across the world to save money, reduce delivery time, access factors of production, or extract maximum advantages relative to competitors. External suppliers are typically located in countries characterized by low-cost labor, competent production processes, and specific knowledge about relevant engineering and development activities.

The Nature of Outsourcing and Global Sourcing

Global Sourcing from Subsidiaries Versus Independent Suppliers In global sourcing, the focal firm has two major choices. It can source from: (1) Independent suppliers, or (2) Company-owned subsidiaries and affiliates. Global sourcing from independent suppliers involves outsourcing production to a third-party provider abroad. Captive sourcing is sourcing from the firm’s own production facilities located abroad. Production is carried out at a foreign facility that the focal firm fully or partly owns through direct investment. Many companies have the option of using either company-owned suppliers or independent suppliers when considering sourcing options. If the company chooses to use its own subsidiaries, this is called “captive sourcing.”

Business Process Outsourcing (BPO) Outsourcing of business functions, such as accounting, human resource functions, IT services, and customer service, to independent suppliers BPO includes: Back-office activities, including internal, upstream business functions such as payroll and billing Front-office activities, including down-stream, customer-related services such as marketing or technical support Business Process Outsourcing (BPO) is when a company contracts with an independent company to supply activities for the company, such as payroll or technical support.

Contract Manufacturing and Offshoring Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications; e.g., Nike, Ikea Offshoring A natural extension of global sourcing, it refers to the relocation of a business process or entire manufacturing facility to a foreign country. MNEs shift production of goods or processes to foreign countries to enhance their competitive advantages. Common in the service sector, including banking, software writing, legal services, and customer service activities. Offshoring is common in the service sector, including banking, software code writing, legal services, and customer-service activities. Large legal hubs have emerged in India, which provide services such as drafting contracts and patent applications, conducting research and negotiations, and performing paralegal work, all on behalf of Western clients. In each of the business functions—human resources, accounting, finance, marketing, and customer service—certain tasks are considered routine and discrete. Examples of functions successfully offshored to foreign providers include billing and credit card processing in finance, creating customer databases and recording sales transactions in marketing, and payroll maintenance and benefits administration in human resources. Example Large legal hubs have emerged in India, which provide services such as drafting contracts and patent applications. Because lawyers in North America and Europe can cost $300 an hour or more, Indian firms can cut legal bills by 75 percent.

Scope of Global Sourcing Many jobs in the services sector cannot be separated from their place of consumption, such as retailing. Other services are consumed locally, such as those provided by doctors, lawyers, and accountants. The firm’s reputation can be harmed by having jobs performed abroad. Labor union contracts often restrict global sourcing. Easily outsourced jobs tend to be in industries: —That benefit from efficiency and low cost —That have uniform processes and customer needs —In the service sector that are labor intensive —Whose outputs are easily transmitted via the Internet Not all business activities or processes lend themselves to global sourcing. Many jobs in the service sector cannot be separated from their place of consumption. People normally do not travel abroad to see a banker, doctor, dentist, or accountant. By 2008, fewer than 5 percent of jobs in the United States that require substantial customer interaction (such as in retailing) had been transferred to low-wage economies. Jobs most conducive to being sourced abroad tend to be in industries characterized by: ■ Large-scale manufacturing whose primary competitive advantage is efficiency and low cost ■ High labor intensity in product and service production, such as garment manufacturing and call centers

Benefits of Global Sourcing Cost efficiency, due to lower wages abroad, leading to improved profitability Ability to achieve strategic goals Faster corporate growth Access to qualified personnel Improved productivity and service, especially when a task is outsourced to a firm specialized in that task Business process redesign Increased speed to market Access to new markets Technological flexibility Improved agility by shedding unnecessary overhead Cost efficiency is the traditional rationale for sourcing abroad. The firm takes advantage of the large wage gap between advanced economies and emerging markets. Global sourcing can also improve a firm’s ability to achieve strategic goals. The strategic view of global sourcing—called transformational outsourcing—suggests that just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwise-unaffordable development projects. Global sourcing allows the firm to free expensive analysts, engineers, and managers from routine tasks to spend more time researching, innovating, managing, and generally undertaking high-value-adding activities that contribute more productively to increasing company performance.

Risks in Global Sourcing Lower-than-expected cost savings Environmental factors, such as exchange rate fluctuations, trade barriers, and labor strikes Weak legal environment, which can affect protection of intellectual property Inadequate or low-skilled workers Overreliance on suppliers Risk of creating competitors Erosion of morale and commitment among home- country employees due to outsourcing jobs However, there are risks associated with global sourcing. Establishing an outsourcing facility can be surprisingly expensive, due to the need to upgrade poor infrastructure or locate it in a large city to attract sufficient skilled labor. Other risks include environmental factors, such as currency fluctuations, tariffs, and other trade barriers. Inadequate legal systems, inadequate or low-skilled workers, the risk of creating competitors, and the erosion of morale and commitment among home-country employees are additional risks that managers should consider.

Strategies for Minimizing Risk 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. Get employees on board. Poorly planned sourcing projects create unnecessary tension with existing employees. Choose carefully between a captive operation and a contract with outside suppliers. Strategies to minimize risk include going offshore for the right reasons. The best rationale is strategic. Cost cutting is the main reason, but it is often a distraction from more beneficial, long-term goals, such as enhancing the quality of offerings, improving overall productivity, and freeing up knowledge workers and other core resources that can be redeployed to improve long-term performance. Another important strategy is to get employees on board. Global sourcing can invite opposition from employees and other organizational stakeholders. Disaffected middle managers may undermine projects and other goals that offshoring seeks to achieve. Also, choose carefully between a captive operation and contracting with outside suppliers.

Strategies for Minimizing Risk (cont.) Choose suppliers carefully. There are many options. A sourcing broker can help. Invest in supplier development and collaboration. Proactively safeguard interests, such as key assets and the firm’s reputation. Safeguard interests in terms of maintaining the firm’s reputation, building a stake for the supplier, keeping open options for finding alternate partners if needed, and withholding key intellectual property. Additional ways to minimize risk include choosing suppliers carefully. Finding and managing foreign suppliers is complex. Suppliers may engage in opportunistic behavior or act in bad faith. Also, invest in supplier development and collaboration. When a business function is delegated to a supplier, the parties need to exchange information, transfer knowledge, troubleshoot, coordinate, and monitor. Finally, the focal firm should take specific actions to safeguard its interests in the supplier relationship. If conflicts are unresolved by negotiations, one option is to acquire full or partial ownership of the supplier.

Major Sources for Components of the Boeing 787 Boeing’s new 787 Dreamliner is a fuel-saving, medium-sized passenger aircraft that uses carbon composite for the fuselage instead of aluminum. It is lightweight and has spacious interiors and higher cabin pressure than other models, which provide a more comfortable journey. However, the most remarkable aspect of the Dreamliner is the extent of outsourcing used to create it. Boeing is responsible for manufacturing only about 10 percent of the jet’s value—the tail fin and final assembly. Some forty suppliers worldwide contribute the remaining 90 percent. The global dispersion of manufacturing responsibility has allowed Boeing to transform itself into a systems integrator and to focus on its core capabilities—design, marketing, and branding.

Knowledgecast Summary Integrate and apply strategic approaches to practical situations in various types of organisations Assess current developments in the organisational environment and alternative responses related to strategy Resolve management problems in the area of strategic management by evaluating alternative outcomes MAXIMUM THREE LEARNING OUTCOMES TO REVIEW: ONE REVIEW SUB BULLET PER LEARNING OUTCOME

Seminar Lessons of global sourcing Useful Video on Outsourcing (Benefits, costs, risk and impact of technology) http://www.youtube.com/watch?v=npJGgQunCLg http://www.youtube.com/watch?v=syicHUMj6fc http://www.youtube.com/watch?v=JrP4Xe7zceg

Group Activity End of Module Assessment – Evaluating Internationalization Strategy (Management Brief) (Unit 10) Preparation – Preparing the Final Draft This session will provide you with the opportunity to discuss your final draft with your module tutor and ensure all your questions are answered as you finalize your submission. Although this is an independent piece of work giving and receiving feedback from your peers is an essential skill, which will be of great value in the workplace. Be prepared to provide constructive feedback on other’s work and receive feedback which can inform your progress.