1. Global Marketing Management, 4e
Chapter 10
Global Sourcing Strategy
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

2. Copyright (c) 2007 John Wiley & Sons, Inc.
Chapter Overview
1. Extent and Complexity of Global Sourcing Strategy
2. Trends in Global Sourcing Strategy
3. Value Chain and Functional Interfaces
4. Procurement: Types of Sourcing Strategy
5. Long-Term Consequences of Global Sourcing
6. Outsourcing of Service Activities
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

3. Copyright (c) 2007 John Wiley & Sons, Inc.
Introduction
Global competition suggests a drastically shortened life cycle for most products, and it no longer permits companies a polycentric, country-by-country approach to international business.
What we are seeing today is a gradual “power shift” in sources of competitive advantage from proprietary technology to manufacturing and marketing competencies, and now to design capability.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

4. Copyright (c) 2007 John Wiley & Sons, Inc.
Introduction
Without established sourcing plans, distribution and service networks, it is extremely difficult to exploit both emerging technology and potential markets around the world simultaneously.
The increased pace of new product introduction and reduction in innovational lead time calls for more proactive management of locational and corporate resources on a global basis.
Global sourcing strategy requires a close coordination among R&D, manufacturing, and marketing activities across national borders.
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Copyright (c) 2007 John Wiley & Sons, Inc.

5. 1. Extent and Complexity of Global Sourcing Strategy
Marketing managers should understand and appreciate the important roles that product designers, engineers, production managers, and purchasing managers, among others, play in marketing decision making. Marketing decisions cannot be made in the absence of these people.
Multinational companies not only facilitate the flow of capital among various countries through direct investment abroad, but also contribute significantly to the world trade flow of goods and services.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

6. Extent and Complexity of Global Sourcing Strategy
Intra-firm trade is the primary factor leading to the total volume of international trade among the Triad region (i.e., the United States, European Union, and Japan) increasing more than tenfold to $735.0 billion in 2001.
An increasing segment of international trade of components and finished products is strongly influenced by multinational companies’ foreign production and sourcing investment activities.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

7. 2. Trends in Global Sourcing Strategy
Trend 1: The Decline of Exchange Rate Determinism of Sourcing
Trend 2: New Competitive Environment Caused by Excess Worldwide Capacity
Trend 3: Innovations in and Restructuring of International Trade Infrastructure
Trend 4: Enhanced Role of Purchasing Managers
Trend 5: Trend Toward Global Manufacturing
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

8. 2. Trends in Global Sourcing Strategy
Chapter 10
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9. 3. Value Chain and Functional Interfaces
The design of global sourcing strategy is based on the following:
Competitive advantage
Comparative advantage
The Value Chain is a useful concept that provides an assessment of the activities a company performs to design, manufacture, deliver, and support its products in the marketplace.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

10. 3. Value Chain and Functional Interfaces
Five steps are involved in developing a global sourcing strategy which include:
1. Identify the separable links in the company’s value chain.
2. In the context of those links, determine the location of the company’s competitive advantages (considering both economies of scale and scope).
3. Ascertain the level of transaction costs between the links in the value chain and select the lowest cost mode.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

11. 3. Value Chain and Functional Interfaces
4. Determine the comparative advantage of countries relative to each link in the value chain and to the relevant transaction costs.
5. Develop adequate flexibility in corporate decision making and organizational design so as to permit the company to respond to changes in both its comparative advantages and the comparative advantages of other countries.
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12. 3. Value Chain and Functional Interfaces
R&D/Manufacturing Interface
Manufacturing/Marketing Interface
Core Components Standardization
Product Design Families
Universal Products with all Features
Universal Product with Different Positioning
Marketing/R&D Interface
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13. 3. Value Chain and Functional Interfaces
Chapter 10
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14. 4. Procurement: Types of Sourcing Strategy
Intra-Firm Sourcing
Domestic-in-house Sourcing
Offshore Subsidiary Sourcing
Outsourcing
Domestic sourcing/purchase arrangement
Offshore sourcing
Hollow corporations (companies adopting a “designer role” in global competition; see Global Perspective 10-4)
Chapter 10
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15. 4. Procurement: Types of Sourcing Strategy
Chapter 10
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16. 5. Long-Term Consequences of Global Sourcing
Requires close coordination of R&D, manufacturing, and marketing activities, among others, on a global basis.
Ability and willingness of companies to integrate and streamline operations worldwide
Many MNCs with plants in various parts of the world are exploiting not only their own competitive advantages but also the locational advantages.
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

17. 5. Long-Term Consequences of Global Sourcing
Sustainable Versus Transitory Core Competence (long-term implications of offshore sourcing)
Strategic alliances and partnerships
Benefits of a virtual network
Dependence
Gradual loss of design and manufacturing abilities
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

18. 6. Outsourcing of Service Activities
In 2004, the U.S. was ranked the largest exporter and importer of services, providing $343.9 billion of services to the world and receiving $296.1 billion worth of services.
The technological revolution in data processing and telecommunications makes the global tradability of some services possible.
Intellectual Outsourcing
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.

19. 6. Outsourcing of Service Activities
Outsourcing of service activities may serve the following purposes:
(a). Reducing time to implement internal processes
(b). Sharing risk
(c). Improving customer service
(d). Improving access to expertise not available
in-house
(e). Reducing head-count
(f). Instilling a sense of competition
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Copyright (c) 2007 John Wiley & Sons, Inc.

20. 6. Outsourcing of Service Activities
Service companies provide two types of services:
Core Services (necessary outputs of an organization)
Supplementary Services (indispensable for execution of the core services)
Chapter 10
Copyright (c) 2007 John Wiley & Sons, Inc.