1. Managing International Operations15
Managing International Operations
Welcome to Chapter 15, Managing International Operations.
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2. Chapter Objectives
Identify the elements that are important to consider when formulating production strategies
Identify key considerations when acquiring physical resources
Identify several production matters that are of special concern to managers
Describe the three potential sources of financing and the main financial instruments of each
In this chapter, you will learn how companies launch and manage international production.
You will also:
Understand how firms acquire the physical resources and products they need.
Explore aspects of the business environment that affect international production.
And examine potential sources of financing international activities.
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3. Toyota Produces, designs, and sells globally
Has solely- and jointly-owned facilities
Planning and financing are vital
Toyota Motor Corporation operates 50 production facilities in 26 countries and sells in more than 170 countries. It also designs its cars and performs research and development in 14 countries.
Most of Toyota’s production operations are wholly owned factories, but some are cooperative ventures. For example, Toyota’s joint venture with Peugeot-Citroën in the Czech Republic produces 300,000 cars a year.
Toyota undertakes a great deal of planning for production capacity, where to locate facilities, the technology used in production, and the layout of facilities. Toyota funds its operations with capital from Japan and abroad and with profits earned on vehicle sales.
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4. Production Strategy Essential to achieving objectives
Reflects overall firm strategy
Low-cost leadership
Focus
Differentiation
Essential to achieving objectives
Effective production strategies are essential for a company to achieve its overall strategy in international markets.
Careful planning of production helps companies cut costs to become low-cost leaders in their industry.
It can also help companies design new products or product features needed for a differentiation or focus strategy.
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5. Capacity Planning
Assessing a company’s ability to produce enough output to satisfy market demand
Work shifts
Labor laws
Facility capacity
Subcontracting
Capacity planning involves assessing a company’s ability to produce enough output to satisfy market demand. It often involves several issues:
If capacity now in use is greater than the expected market demand, production and work shifts may need to be reduced.
Countries have differing labor laws regulating the elimination of jobs, which means that a firm may need to give a long advance notice of layoffs and plant closings.
If demand is growing, managers must determine if present facilities can expand output or whether additional facilities are needed.
If operations are at full capacity and the firm cannot expand capacity quickly, it may need to consider subcontracting work to other producers.
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6. Facilities Location Planning
Selecting a location for production facilities
Resources,
conditions
Labor costs,
productivity
Facilities location planning involves selecting a location for production facilities.
Managers must explore the cost and availability of labor and management, raw materials, component parts, and energy, and the state of political stability, regulations, and economic growth.
If a location is chosen for its low labor costs, workers must be sufficiently productive.
Service companies must consider customers’ needs when locating facilities and are often forced to locate near to customers.
The greater the distance between production facilities and target markets, the higher are shipping costs and the more a firm is exposed to supply chain disruptions.
Service
customer needs
Factory to
market distance
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7. Location Economies Economic benefits derived from locating
production activities in optimal locations
Key:
Each production activity generates more value in a particular location than could be generated elsewhere
Location economies are the economic benefits derived from locating production activities in optimal locations.
In other words, each production activity generates more value in a particular location than could be generated elsewhere.
They arise from the right mix of elements in the business environment.
A firm can either locate activities there itself or obtain products and services from companies in the location.
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8. Centralized vs. Decentralized
Centralized production
Low-cost leadership
Global strategy
Transportation costs
Decentralized production
Differentiation / Focus
Multinational strategy
Buyer preferences
Centralized production refers to the concentration of production facilities in one location.
Centralized production with its accompanying economies of scale is well-suited to the low-cost leadership strategy. A company focusing on low costs does not differentiate its product and need not locate near markets. Yet, the company must consider the cost of transporting inputs into production and getting outputs to the market.
Decentralized production, on the other hand, spreads facilities over several locations and can even mean a separate facility for every business environment.
Decentralized production is well-suited to firms following differentiation and focus strategies. Locating facilities near markets helps them remain close to customers and respond to changing buyer preferences.
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9. Deciding the process that a company will use to create its product
Process Planning
Deciding the process that a company
will use to create its product
Low-cost leadership
Large scale
Efficiency
Differentiation / Focus
Skills
Flexibility
Process planning involves deciding the process a company will use to create its product.
Low-cost strategies require large-scale production to achieve economies of scale. The availability and cost of labor may be crucial to process planning. A low-cost leader may opt for less technology and more labor-intensive production methods if local labor is inexpensive.
Companies following differentiation strategies typically offer superior quality, added features, and so forth. These firms may employ skilled craftspeople to make highly specialized goods, or use flexible technologies that allow for rapid product changes as market conditions warrant.
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10. Standardized or Adapted
Low-cost leadership
Standardized
Large batches
Automated
Differentiation / Focus
Adapted
Higher cost
Small scale
Production processes will be standardized or adapted for different markets.
Low-cost leadership strategies typically dictate automated, standardized production in large batches. Large batches reduce per-unit production costs, which offsets the higher initial investment in automation. Costs are further reduced as employees repeat processes and become more proficient.
Differentiation may demand decentralized facilities to improve local responsiveness. These facilities tend to be small scale because they produce for a national or regional market. The lack of economies of scale increases per-unit production costs. Manufacturing and R&D costs may also be higher for products with special product designs, styles, and features.
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11. Facilities Layout Planning
Deciding the spatial arrangement of
production processes within facilities
Reflects business strategy
Geography may be a factor
Facilities layout planning involves deciding the spatial arrangement of production processes within facilities.
Facility layout depends on the type of production process which, in turn, depends on a company’s business-level strategy.
The geography of a location can also be a factor. If a host country has wide-open spaces and land is relatively inexpensive, a facility may be larger than a comparable facility in a smaller country where land is more expensive.
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12. Discussion Question
What is the concept of location economies and how important is it to facilities location planning?
What is the concept of location economies and how important is it to facilities location planning?
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13. Answer to Discussion Question
Location economies are the economic benefits derived from locating production activities in optimal locations. In other words, each production activity generates more value in a particular location than could be generated anywhere else. Location economies are essential to location planning because of their strategic importance for the long-term success of a firm’s operations.
Answer:
Location economies are the economic benefits derived from locating production activities in optimal locations. In other words, each production activity generates more value in a particular location than could be generated anywhere else. Location economies are essential to location planning because of their strategic importance for the long-term success of a firm’s operations.
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14. Intermediate components Facility availability
Make-or-Buy Decision
Questions:
Raw materials
Intermediate components
When acquiring physical resources for operations, companies must answer a variety of questions: Where will we source raw materials needed in production? Will the company acquire facilities or build new? Will we make the components needed in production or buy them from outside sources? And what is the cost of making versus buying? Whether to make or buy a component is called the “make-or-buy decision,” which we now explore in detail.
Facility availability
Cost considerations
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15. Decision to Make Vertical integration Reasons to make
Extend control over inputs (backward integration)
or outputs (forward integration)
Reasons to make
Lower cost
Greater control
Vertical integration occurs when a company extends its control over additional stages of production—either inputs or outputs. When a company decides to make a product it requires in production, it engages in “upstream” activities, or production activities that precede current business operations.
Reducing costs is the usual motive for making a product. This allows a company to internalize the profits it would have paid to a supplier. Small companies are more likely to buy unless they possess technology or another competitive advantage.
Making a product can give managers greater control over raw materials, product design, and the production process—all are important to product quality. A firm may also desire greater control if it is difficult to persuade a supplier to make special modifications to a product.
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16. competitive advantage
Decision to Buy
Outsourcing
Reasons to buy
Buying from another
company a good or
service that is not
central to a company’s
competitive advantage
Lower risk
Greater flexibility
Outsourcing is buying from another company a good or service that is not central to a company’s competitive advantage. It helps a company reduce its vertical integration and lessens the specialized skills and knowledge it needs.
A firm may buy a product to lessen risk exposure. Not having operations abroad eliminates the direct risk to a company’s physical facilities, equipment, and employees.
Also, outsourcing helps a business to retain flexibility. Buying from several suppliers or establishing production facilities in several countries lets a firm source from another location if instability erupts in one location. And if a company’s capital is not invested in plants and equipment, it retains financial flexibility to use excess capital to pursue new opportunities.
A firm also may outsource to increase its market power. Sometimes a supplier even becomes a sort of “hostage” to one customer when that buyer absorbs much of its output. Such a buyer can force quality improvements, cost reductions, and special product modifications.
Market power
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17. Materials and Assets Raw materials Fixed assets Quality Quantity
Quality and quantity drive many decisions about raw material acquisition. Some industries and companies must rely almost exclusively on locally available raw materials, such as beverage companies. In such cases, raw material quality has an enormous influence on final product quality.
Fixed assets include production facilities, inventory warehouses, retail outlets, and production and office equipment. Companies can acquire existing factories or build new facilities from the ground up, called a greenfield investment.
Fixed assets
Existing Facility
Greenfield
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18. Discussion Question
When a company extends control over additional stages of production, either inputs or outputs, it undertakes __________.
a. Outsourcing
b. Capacity planning
c. Vertical integration
When a company extends control over additional stages of production, either inputs or outputs, it undertakes __________.
a. Outsourcing
b. Capacity planning
c. Vertical integration
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19. Answer to Discussion Question
When a company extends control over additional stages of production, either inputs or outputs, it undertakes __________.
a. Outsourcing
b. Capacity planning
c. Vertical integration
The correct answer is c. Vertical integration
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20. Quality Improvement Total Quality ISO 9000 Management (TQM)
Continuous quality improvement
to meet or exceed customer
expectations through
quality-enhancing processes
Certification a firm gets when
it meets the highest quality
standards in its industry
Companies strive toward quality improvement to contain costs and increase value for customers. Quality keeps production costs low by reducing waste in outputs, the cost of retrieving defective products, and the cost of disposing of defective products. Combining a low-cost position with a high-quality product can give a firm a formidable competitive advantage.
Total quality management is an emphasis on continuous quality improvement to meet or exceed customer expectations. It places responsibility on each individual for the quality of output. Improving quality helps a firm differentiate itself from rivals and attract loyal customers.
The International Standards Organization (ISO) 9000 is an international certification that a firm receives when it meets the highest quality standards in its industry. A company must demonstrate the reliability and soundness of all of its business processes that affect the quality of its products.
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21. Other Production Issues
Importance of cost containment
Shipping
costs
Inventory
costs
Just-in-time
manufacturing
Shipping costs have a dramatic effect on the cost of getting materials and components to production facilities. A nation’s level of economic development and the condition of its seaports, airports, roads, and rail networks all impact shipping costs.
The high cost of storing large amounts of inventory entices companies to keep inventories low.
Just-in-time manufacturing keeps inventory to a minimum and sends inputs to production exactly when they are needed. It slashes inventory costs and spots defects early during production, rather than later in inventory.
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22. Decision to Reinvest or Divest
Promising outlook
Growing market
Highest return
Unprofitable outlook
Social unrest
From time to time, managers must decide whether to reinvest resources in operations abroad or to reduce or divest operations. The overriding factor is that companies seek the highest risk-adjusted returns on investments.
Companies reinvest despite lengthy payback periods if the long-term outlook is good, and reinvest when a market is experiencing rapid growth. Reinvesting in expanding markets is appealing because potential customers may not yet be loyal to any one brand.
Firms may scale back or divest operations abroad when profitability appears farther off than expected. They may also divest when disruptions appear in a host country’s political, social, or economic spheres.
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23. Discussion Question
What are some of the considerations that underlie the reinvest-versus-divest decision?
What are some of the considerations that underlie the reinvest-versus-divest decision?
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24. Answer to Discussion Question
A firm reinvests when it wishes to: (1) reinvest in a market with a long payback period, (2) maintain its market share and competitive position, (3) reinvest in a market growing rapidly, and (4) reduce its international competition.
A firm divests when it wishes to: (1) avoid a low return on investment, (2) avoid high country risk, and (3) invest in more profitable opportunities elsewhere.
Answer:
A firm reinvests when it wishes to: (1) reinvest in a market with a long payback period, (2) maintain its market share and competitive position, (3) reinvest in a market growing rapidly, and (4) reduce its international competition.
A firm divests when it wishes to: (1) avoid a low return on investment, (2) avoid high country risk, and (3) invest in more profitable opportunities elsewhere.
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25. Financing Business Operations
Financial resources needed to:
Pay operating expenses
Expand production capacity
Enter new geographic markets
Develop and reward employees
Invest in new projects
and so much more…
Among other reasons, firms need financial resources to:
Purchase raw materials and component parts for manufacturing and assembly activities.
Expand production capacity or enter new geographic markets.
Pay for training and development, compensate workers and managers, and advertise products.
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26. Borrowing Locally Difficulties: Exchange-rate risk
Currency inconvertibility
Restricted capital flows
Borrowing in a host country can be advantageous, especially when the value of the local currency has fallen against that of the home country. Still, companies are not always able to borrow funds locally but are forced to seek international sources of capital. Borrowing difficulties include:
Exchange-rate risk
Restrictions on currency convertibility
And restrictions on international capital flows.
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27. Back-to-Back Loan
A back-to-back loan is a loan in which a parent company deposits money with a host-country bank, which then lends to the parent’s subsidiary in the host country. This type of loan is useful when a subsidiary is new to the host country and has not yet built a reputation with local lenders.
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28. American Depository Receipts
Certificates traded in the U.S. that represent a specific number of shares in a non-U.S. company
No currency-conversion fees
No minimum purchase amounts
Attractive to U.S. mutual funds
Complying with the rules of listing shares on another country’s stock exchange costs time and money.
To maximize its international exposure, a non-U.S. company can list shares in the United States by issuing American Depository Receipts. These ADRs, as they are called, are certificates that trade in the United States and represent a specific number of shares in a non-U.S. company.
The advantages of ADRs are that buyers pay no currency-conversion fees, there are no minimum purchase requirements, and they carry no limit on the amount of money that a U.S.-based mutual fund can invest in firms not registered on U.S. exchanges.
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29. Culture Matters: Financing Business from Abroad
Business school international programs
Your country’s commerce department
Leverage your contacts
Industry events in other countries
Hire an intermediary to find capital
Exploit Facebook, Twitter, LinkedIn, etc…
Entrepreneurs who have found international sources of capital for their companies offer these tips:
Contact business schools with strong international programs to build contacts among academe and business alumni.
Consult your country’s commerce department and inquire about which markets might have a need for your product.
Leverage your contacts and consider asking a respected executive with global experience to mentor you.
Attend industry events in other countries, such as trade shows, to maximize your exposure.
Consider hiring an intermediary, such as a bank or venture capital firm, to help locate funding.
And exploit social media, including Facebook, Twitter, and LinkedIn to increase exposure and contacts.
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30. Emerging Stock Markets
Hot money
Liquid investments that
can be quickly withdrawn
Extreme
volatility
Patient money
Holdings of factories,
equipment, and land that
cannot be quickly withdrawn
Firms in countries with emerging stock markets face two problems.
First, emerging stock markets are often volatile and characterized by hot money that can be quickly withdrawn at the first signs of a crisis. This can spark large and sudden sell-offs of equity. Conversely, markets in industrialized nations tend to be characterized by patient money that cannot be as easily and quickly withdrawn.
Second, poor regulation in emerging markets can mean that large local companies wield a great deal of influence over a domestic stock market. Foreign investors may hesitate to enter such markets because the system and its regulations can favor insiders over foreign investors.
Poor
regulation
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31. Subsidiaries financed by
Internal Funding
Equity, debt,
and fees
Revenue from
operations
Subsidiaries financed by
parents who are later
rewarded financially
Money earned from
sales is the lifeblood
of every company
Companies can also finance ongoing activities and investments with internal funds.
A parent company may lend money to a subsidiary during its start-up phase and when it needs to fund new projects. Subsidiaries can obtain capital by issuing equity solely to the parent, which benefits from an appreciating share price.
Revenue earned from the sale of goods and services is the lifeblood of international companies and their subsidiaries. For long-term success, a company must eventually generate sufficient revenue to sustain day-to-day operations.
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32. Mix of equity, debt, and internal funds used to finance activities
Capital Structure
Mix of equity, debt, and internal funds used to finance activities
A company’s capital structure is the mix of equity, debt, and internally generated funds that it uses to finance its activities. Firms try to strike the right balance among financing methods in order to minimize the cost of capital and risk.
Companies prefer not to carry debt in relation to equity so much so that it increases the risk of insolvency. Yet, debt appeals to companies because interest payments on debt are often deductible from taxable earnings.
A firm’s capital structure also reflects national restrictions, including limits on international capital flows, the cost of host-country financing, access to global capital markets, and currency exchange controls.
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33. Discussion Question
A certificate that trades in the United States and represents a specific number of shares in a non-U.S. company is called a(n) __________.
A certificate that trades in the United States and represents a specific number of shares in a non-U.S. company is called a(n) __________.
a. Back-to-back loan
b. Foreign Capital Receipt
c. American Depository Receipt
a. Back-to-back loan
b. Foreign Capital Receipt
c. American Depository Receipt
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34. Answer to Discussion Question
A certificate that trades in the United States and represents a specific number of shares in a non-U.S. company is called a(n) __________.
The correct answer is c. American Depository Receipt
a. Back-to-back loan
b. Foreign Capital Receipt
c. American Depository Receipt
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35. Copyright © 2014 Pearson Education, Inc.
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