1. Global Business Management (MGT380) Lecture #25

2. Global Marketing and Product Development & Global Production, Outsourcing and Logistics

3. Learning Objectives  Understand how do regulations influence pricing  Become familiar with the important influence that operations management can have on the competitive position of an international business.  Understand how country differences, manufacturing technology and product features all affect the choice of where to locate production operations.

4. Recap of the last lecture  The effectiveness of a firm's international communication can be jeopardized by 1. Cultural barriers - it can be difficult to communicate messages across cultures 2. Source and country of origin effects –  source effects occur when the receiver of the message evaluates the message on the basis of status or image of the sender. Can counter negative source effects by deemphasizing their foreign origins, Examples: French wines, Italian clothes, and German luxury cars  country of origin effects - the extent to which the place of manufacturing influences product evaluations anti- Japan wave in US in 1990’s Noise levels - the amount of other messages competing for a potential consumer’s attention

5.  Firms have to choose between two types of communication strategies 1. A push strategy emphasizes personnel selling 2. A pull strategy emphasizes mass media advertising  The choice between strategies depends on 1. Product type and consumer sophistication  a pull strategy works well for firms in consumer goods selling to a large market segment  a push strategy works well for industrial products 2. Channel length  a pull strategy works better with longer distribution channels 3. Media availability

6.  In general, a push strategy is better  for industrial products and/or complex new products  when distribution channels are short  when few print or electronic media are available  A pull strategy is better  for consumer goods products  when distribution channels are long  when sufficient print and electronic media are available to carry the marketing message  Price discrimination - occurs when firms charge consumers in different countries different prices for the same product

7. What Is Strategic Pricing?  Strategic pricing has three aspects 1. Predatory pricing - use profit gained in one market to support aggressive pricing designed to drive competitors out in another market  after competitors have left, the firm will raise prices and earn higher profits

8. What Is Strategic Pricing? 2. Multi-point pricing - a firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy in another market  managers should centrally monitor pricing decisions 3. Experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially  firms that are further along the experience curve have a cost advantage relative to firms further up the curve

9. How Do Regulations Influence Pricing?  A firm’s ability to set prices may be limited by 1. Antidumping regulations –  dumping occurs when a firm sells a product for a price that is less than the cost of producing it antidumping rules set a floor under export prices and limit a firm’s ability to pursue strategic pricing 2. Competition policy –  most industrialized nations have regulations designed to promote competition and restrict monopoly practices  can limit the prices that a firm can charge

10. How Should Firms Configure The Marketing Mix?  Standardization versus customization is not an all or nothing concept  most firms standardize some things and customize others  Firms should consider the costs and benefits of standardizing and customizing each element of the marketing mix

11. Why Is New Product Development Important?  Product innovation should be a strategic priority  today, competition is as much about technological innovation as anything else  The pace of technological change is faster than ever and product life cycles are often very short  new innovations can make existing products obsolete, but at the same time, open the door to a host of new opportunities  Firms need close links between R&D, marketing, and manufacturing

12. Where Should R&D Be Located?  New product ideas come from the interactions of scientific research, demand conditions, and competitive conditions  The rate of new product development is greater in countries where  more money is spent on basic and applied research and development  demand is strong  consumers are affluent  competition is intense

13. How Can R&D, Marketing, And Production Be Integrated?  Since new product development has a high failure rate, new product development efforts should involve close coordination between R&D, marketing, and production  Integration will ensure that  customer needs drive product development  new products are designed for ease of manufacture  development costs are kept in check  time to market is minimized

14. Why Are Cross-Functional Teams Important?  Cross-functional integration is facilitated by cross- functional product development teams  Effective cross functional teams should  be led by a heavyweight project manager with status in the organization  include members from all the critical functional areas  have members located together  establish clear goals  develop an effective conflict resolution process

15. How Can Firms Build Global R&D Capabilities?  To adequately commercialize new technologies, firms need to integrate R&D and marketing  To successfully commercialize new technologies, firms may need to develop different versions for different countries  so, a firm may need R&D centers in North America, Asia, and Europe that are closely linked by formal and informal integrating mechanisms with marketing operations in each country in their regions, and with the various manufacturing facilities

16. Global Production, Outsourcing and Logistics International firms must answer five interrelated questions: 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities, or is it better to outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

17. Strategy, Production, And Logistics Firms need to identify how production and logistics can be conducted internationally to:  lower the costs of value creation  add value by better serving customer needs Production and logistics are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs.  Production refers to activities involved in creating a product  Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers

18. Strategy, Production, And Logistics To lower costs, firms can:  disperse production to those locations where activities can be performed most efficiently  manage the global supply chain efficiently to better match supply and demand To improve quality, firms can:  eliminate defective products from the supply chain and the manufacturing process  Improved quality will also reduce costs

19.  These objectives are interrelated: increasing productivity because time is not wasted producing poor-quality products that cannot be sold, leading to a direct reduction in unit costs lowering rework and scrap costs associated with defective products reducing the warranty costs and time associated with fixing defective products

20. Strategy, Production, And Logistics  To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company  Six Sigma, a direct descendant of total quality management (TQM), has a goal of improving product quality  In the European Union, firms must meet the standards set forth by ISO 9000 before the firm is allowed access to the European marketplace

21.  The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Josephy Juran, and A. V. Feigenbaum.  Deming identified a number of steps that should be included in any TQM program: Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable Supervisors should work more with employees and provide them with the tools they need to do the job Management should create an environment in which employees will not fear reporting problems Work standards should not only be defined as numbers or quotas, but should include some notion of quality  Production process operating at Six Sigma are 99.99966 percent accurate. Only 3.4 defects per million units

22. Strategy, Production, And Logistics International companies have two other important production and logistics objectives:  production and logistics functions must be able to accommodate demands for local responsiveness  production and logistics must be able to respond quickly to shifts in customer demand

23.  Demands for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, distribution channels, and host-government demands.  Demands for local responsiveness create pressures to decentralize production activities to the major national or regional markets in which the firm does business or to implement flexible manufacturing processes that enable the firm to customize the product coming out of a factory according to the market in which it is to be sold.  In recent years, time-based competition has grown more important. When consumer demand is prone to large and unpredictable shifts, the firm that can adapt most quickly to these shifts will gain an advantage.

24. Where To Produce Three factors are important when making location decisions: 1. country factors 2. technological factors 3. product factors

25. Country Factors  Firms should locate manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity Country factors that can affect location decisions include:  the availability of skilled labor and supporting industries  formal and informal trade barriers  expectations about future exchange rate changes  transportation costs  regulations affecting FDI

27. Suggested Discussion Questions  1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics?  Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China.  2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy.  Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps.

28. Technological Factors  The type of technology a firm uses in its manufacturing can affect location decisions Three characteristics of a manufacturing technology are of interest: 1. the level of fixed costs 2. the minimum efficient scale 3. the flexibility of the technology

29. Technological Factors 1. The level of fixed costs:  If the fixed costs of setting up a manufacturing plant are high, it might make sense to serve the world market from a single location or from a few locations  When fixed costs are relatively low, multiple production plants may be possible  Producing in multiple locations allows firms to respond to local markets and reduces dependency on a single location

30. Technological Factors 2. The minimum efficient scale:  The larger the minimum efficient scale (the minimum efficient scale is defined as the lowest production point at which long-run total average costs are minimized) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense  A low minimum efficient scale allows the firm to respond to local market demands and hedge against currency risk by operating in multiple locations

31. Technological Factors 3. The flexibility of the technology:  flexible manufacturing technology or lean production lean production, often simply "lean", is a systematic method for the elimination of waste within a manufacturing process. Lean also takes into account waste created through overburden and waste created through unevenness in work loads. Essentially, lean is centered on making obvious what adds value by reducing everything else. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System (TPS). It covers a range of manufacturing technologies that are designed to:  reduce set up times for complex equipment  increase the utilization of individual machines through better scheduling  improve quality control at all stages of the manufacturing process

32. Technological Factors  Firms using flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output  Mass customization (Production of personalized or custom-tailored goods or services to meet consumers' diverse and changing needs at near mass production prices. Enabled by technologies such as computerization, internet, product modularization, and lean production, it portends the ultimate stage in market segmentation where every customer can have exactly what he or she wants) implies that a firm may be able to customize its product range to meet the demands of local markets yet still control costs  Flexible machine cells allow firms to increase efficiency by improving capacity utilization. It is is a manufacturing system in which there is some amount of flexibility that allows the system to react in case of changes, whether predicted or unpredicted. This flexibility is generally considered to fall into two categories, which both contain numerous subcategories.

34. Review question What allows firms to increase efficiency by improving capacity utilization and reducing work-in-progress? a) mass customization b) Six Sigma technology c) ISO 9000 d) flexible machine cells

35. Summary of the lecture  Strategic pricing has three aspects 1. Predatory pricing - use profit gained in one market to support aggressive pricing designed to drive competitors out in another market 2. Multi-point pricing - a firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy in another market 3. Experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially  A firm’s ability to set prices may be limited by Antidumping regulations –  Dumping and Competition policy  Why Is New Product Development Important? Product innovation should be a strategic priority today, competition is as much about technological innovation as anything else; The pace of technological change is faster than ever and product life cycles are often very short; new innovations can make existing products obsolete, but at the same time, open the door to a host of new opportunities; Firms need close links between R&D, marketing, and manufacturing

36.  The rate of new product development is greater in countries where  more money is spent on basic and applied research and development  demand is strong; consumers are affluent; competition is intense  Why Cross-functional team is important? Team integration is facilitated by cross-functional product development teams. Effective cross functional teams should (i) Be led by a heavyweight project manager with status in the organization ii) include members from all the critical functional areas iii)have members located together (iv) establish clear goals (v)develop an effective conflict resolution process  Building global capabilities: To adequately commercialize new technologies, firms need to integrate R&D and marketing. To successfully commercialize new technologies, firms may need to develop different versions for different countries

37. Strategy, Production, And Logistics: Firms need to identify how production and logistics can be conducted internationally to: lower the costs of value creation (ii) add value by better serving customer needs  Production refers to activities involved in creating a product  Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers To lower costs, firms can: disperse production to those locations where activities can be performed most efficiently(ii) manage the global supply chain efficiently to better match supply and demand To improve quality, firms can: (i) eliminate defective products from the supply chain and the manufacturing process (ii) Improved quality will also reduce costs  To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company- a part of total quality management (TQM). In the European Union, firms must meet the standards set forth by ISO 9000.