B207A Big ideas in organizations

1. B207ABig ideas in organizations Shaping Business Opportunities I

2. Block2 Session 3: International operations

3. The internationalisation of operations The internationalisation of supply chains is one of the latest and fast growing trends in business. When you purchase a product you may not be aware of how far it has travelled to reach you. In the first activity of this session, you will explore this issue when you examine the journey for one such product: tennis balls. Session 3: International operations

4. Activity 3.1: How far does a tennis ball travel when it is made? • One of the world’s most famous tennis tournaments, the Wimbledon Championships, occurs in London each July. This event could not happen without the carefully manufactured, bright yellow tennis balls provided for each match. A total of 54,000 tennis balls are needed because they are replaced several times per match as they become too worn after six or seven games. • The manufacturer Slazenger used to make the balls in a factory in Barnsley in northern England. In 2002 Slazenger decided to move the manufacture offshore to a facility in Bataan in the Philippines. This drastically changed the geographic spread of the supply chain and increased the distance the components travel before they reach Wimbledon. The raw and part-process materials travel through 11 countries. The table below shows a breakdown of the components and their journey. Session 3: International operations

5. Activity 3.1: How far does a tennis ball travel when it is made? Session 3: International operations

6. Activity 3.1: How far does a tennis ball travel when it is made? • One of the most striking journeys is that of the wool used to make the felt that covers the outside of the ball. The wool comes from sheep in New Zealand and travels to Stroud, UK for processing into the brightly dyed felt. This felt is then shipped most of the way back again, to Bataan, ready for processing. Session 3: International operations

7. Activity 3.1: How far does a tennis ball travel when it is made? Session 3: International operations

8. Activity 3.1: How far does a tennis ball travel when it is made? Session 3: International operations

9. How far does a tennis ball travel when it is made • As you can see in Figure 3.1, the total journey distance is over 50,000 miles (80,000 km). • The long journey taken by the wool, from New Zealand to Bataan via the UK, is quite typical of supply chains that put raw materials through specialist processes. • There is only limited control sometimes of where a raw material can be sourced from and where it needs to be processed. • It is also worth noting that the tennis ball has at least ten separate ingredients or components, none of which is sourced locally to the factory in Bataan. • The absence of local sourcing can become an issue of Corporate Social Responsibility for many companies. Session 3: International operations

10. 3.2 Implication of internationalization • In theory, internationalisation should lead to better sourcing, advantages through locations being near to customers, improvements through better supply networks and exposure to international competition that encourages innovation and improvement. • In Block 1 you learned about the operations input–process–output model. You can use the model to highlight many of the challenges created by internationalisation for operations management. Figure 3.2 shows how the inputs, processes and outputs are potentially impacted by internationalisation (Barnes, 2008). Session 3: International operations

11. 3.2 Implications of internationalization: Figure 3.2: Impact of internationalisation on input–process–output model Session 3: International operations

12. 3.3 Why become a global operation? • Go to reading 3: Does Michael Dell know? • Answer the following questions: • Why did Dell move their call centre abroad? • How has this move impacted on customer service? Session 3: International operations

13. 3.4 Offshoring and re-shoring • While banks and other services move more towards internationally-based call centers, manufacturing operations have also increased the scale and extent of their own international supply chains and operations. Moncza and Trent (1991) identify a set pattern for manufacturing networks to be developed over time in four stages: • Domestic Sourcing. • Reactive international sourcing • Proactive international sourcing. • Global sourcing network Session 3: International operations

14. 3.4 Offshoring and re-shoring Domestic sourcing – When companies start up they often tend to source locally, where possible, for ease of control and lack of complexity. There is no active sourcing from offshore suppliers and any goods made abroad are often purchased indirectly through intermediaries to reduce the risks and administration. Reactive international sourcing – In some instances there may be a lack of domestic supply of raw materials or components, forcing some international purchasing. In some cases there may be issues with domestic suppliers’ performance, creating the motivation to source globally. Session 3: International operations

15. 3.4 Offshoring and re-shoring Proactive international sourcing – More sophisticated purchasing practices help develop a wider supply chain where better prices and quality can be found. There is now much more awareness of the opportunities for price reduction from buying overseas and proactive sourcing occurs more commonly than in the past. Global sourcing networks – Companies can develop collaborative supply networks where each element of the supply chain works towards a common goal to supply a market. (This will be discussed in the next session.) In these cases manufacturers and suppliers work together to establish an entire supply chain outside of the home country. Session 3: International operations

16. 3.4 Offshoring and re-shoring • Case study 2: LEGO outsource and re-integrate their manufacturing • Answer the following: • What factors were overlooked by Hornby and LEGO? • What effort was involved in the outsourcing and offshoring by both Hornby and LEGO? • What general lessons can be learned? Session 3: International operations

17. General lessons learned from the LEGO case The following learning points can be taken from the case studies: • understand the root cause of the problem: is internationalisation the solution? • understand how offshoring changes all aspects of performance including quality, speed and flexibility, in addition to unit cost • some cost benefits may be transient as offshore costs may increase in the future through factors such as economic expansion • always be clear about the total costs of moving production to other parties and/or overseas • anticipate the disruption offshoring may create • assess potential suppliers across many dimensions of performance • be clear about risks • understand how difficult it may be to reverse decisions. Session 3: International operations

18. 3.5 International operations strategies Home country operations with exports The traditional approach is to have a large domestic operation that exports product overseas in the fully produced form. In services, the delivery is achieved using staff based at the domestic operation, e.g. via phone or email. Session 3: International operations

19. 3.5 International operations strategies Multi Domestic Operation: Sometimes companies will set up separate, self-contained operations in each country where they work. This may be due to extreme differences in market characteristics or for practical reasons such as language problems. A downside is that many support functions have to be duplicated. There may also be other scale economy losses. Session 3: International operations

20. 3.5 International operations strategies Regional operations: To achieve a balance between local specialisation and economies of scale, many organisations have operations in each region, e.g. North America, Australaia, etc. This sometimes offers a good balance between the ability to serve local markets and the logistics costs of transporting goods. Session 3: International operations

21. 3.5 International operations strategies Global coordinated operations: A truly international operation may have facilities in many countries and operate in most regions. However, there is a lot of transfer of goods and services across country or regional boundaries. Companies will export their products and services when local demand is lower but overseas demand is higher than the nearest facility can cope with by itself. In some cases each facility will specialise with what they produce and there will be transfer of goods continually into every market. Session 3: International operations

22. Facility location • Once a company has a general idea about how it is going to grow a network, managers will need to make location decisions about new sites. These decisions address two questions: 1. Which country would be the best to locate in to serve a particular region? 2. Which part of that country would provide the best location to meet requirements? Session 3: International operations

23. 3.6 International services Service operations probably have a slightly different set of challenges when developing operations abroad. Large multi-site services would find it easier if they can replicate the same type of service outlet worldwide – in Block 1 you saw how Aldi and Lidl have standard designs for their shops to maximise efficiency. However, it is not always possible to standardise services globally. In the next activity, you will explore the different local requirements for supermarkets operating in a global context. • Activity 3.8: Supermarkets adapt internationally Session 3: International operations

24. Summary This session has emphasised that: • Globalisation has created extended international supply chains where goods and information travel considerable distances. • Moving some processes internationally can change how the operation is managed: ◦Supply networks can become more complex. ◦ Processes often have to adapt to different conditions. ◦ Products and services may have to be adapted to meet different customer needs in different countries – forcing some operations to increase the variety of what they offer or reduce standardisation. ◦ Service operations have to be culturally aware of different customer needs during direct customer interaction. • Operations can have specific roles based around local markets and other factors such as local productivity or managerial capabilities. • Offshoring can be used to achieve significant benefits in terms of cost and flexibility, but many companies have decided to re-shore when the expected advantages do not materialise. • The advantages of offshoring can be more transient than first thought due to increases in local labour and land costs. Session 3: International operations

25. Block 2- Reading 2 Competing in a global trade environment

26. Introduction • This reading will describe some of the main features of the global trade environment and will introduce you to some theories and/or models for understanding the dynamics of competition existing within it. • Understanding the main features of the global trade environment and the dynamics of competition is critical for all businesses, for example to appreciate threats and opportunities coming from the external business environment. • Moreover, even business organisations that are based in only one country are affected by global trends – for example, many domestic organisations may suffer from increases on international oil and/or gas prices. Reading 2: Competing in a global trade environment

27. Understanding the global trade environment • The global economy originated essentially from an increase in worldwide flows of labour, goods, money, services and information. • In contemporary society, the global economy has some features which distinguish it from previous times: for example, the rapid development of: • information and communications technologies (ICT) and • social networks is producing a greater interconnectedness. Reading 2: Competing in a global trade environment

28. Understanding the global trade environment • One manifestation of the global economy is clearly international trade: this is why this reading refers to the global trade environment. • Examples of events occurring in the global trade environment include Colombia selling coffee and Russia selling gas worldwide. • The global economy has also created institutions to govern international trade, for example the World Trade Organization (WTO) Reading 2: Competing in a global trade environment

29. Competition and trade among countries • Theory of absolute comparative advantage: if a country can supply a good at a cheaper price than other countries, it is better that the latter buy the good from the country able to supply it at a cheaper price. • Theory of relative comparative advantage: This theory is based on the assumption that a country will tend to specialise in the production of the good in which it has a relative comparative advantage. • Why do countries have a comparative advantage in some goods and/or services rather than in others? • And, why do some countries provide an economic context that enables organisationsto grow and perform better and faster? Reading 2: Competing in a global trade environment

30. The diamond model (Porter, 1990) Reading 2: Competing in a global trade environment

31. The diamond model (Porter, 1990) • According to Porter, all the countries are characterised by ‘differences in national values, culture, economic structures, institutions, and histories[that] all contribute to competitive success’. • Porter highlighted that the competitiveness of a country depends not only on the availability and quality of factor conditions but also on: • the demand conditions in the country for that specific industry • the strategies, structure and rivalry of firms within the industry • the quality of related and supporting industries and infrastructures. Reading 2: Competing in a global trade environment

32. The diamond model (Porter, 1990) • The competitive advantage of nations, and more specifically of some specific industries operating in some specific nations. For example: • Silicon Valley in the USA for high-tech industry, • the clock industry in Switzerland, • the automobile industry in Germany and • the fashion industry in Italy), • These can be better interpreted as the outcome of the interlinked effects of the four factors presented in Porter’s diamond model. Reading 2: Competing in a global trade environment

33. Competition among business organizations • Competition is not only occurring among countries. Business organisations also need to carefully identify their competitors and the nature of the competition existing in the global trade environment. • Meeting customer needs and expectations is indeed not enough if competitors can do it better. • Five forces model Reading 2: Competing in a global trade environment

34. Five forces model (Porter) Reading 2: Competing in a global trade environment

35. Five forces model (Porter) • Direct industry competitors – they are firms that offer the same type of product in the market. • Suppliers – those firms from which a business organisationpurchases all the materials (e.g. raw materials and semi-finished products) needed to carry out the production process and/or to offer the services that it provides to customers. • Buyers – the customers of the business organisation. • Potential entrants – the concurrent organisations that may want to enter the market in which the business organisation operates. • Substitute goods and/or services – the goods and/or services that in a different way can meet the same customer needs served by a given business organisation. Reading 2: Competing in a global trade environment

36. Five forces model (Porter) • The analysis of these five forces allows business organisations to get a picture of their competitive position in the market. Of course, each of these forces may act differently depending on the sector and/or industry taken for the analysis. Reading 2: Competing in a global trade environment

37. Five forces model (Porter)- Suppliers • The role of suppliers is to evaluate the mutual relations of power between a business organisation and its suppliers. • Some elements are considered like brand reputation, geographical coverage, product/service quality of the suppliers and the management of the bidding processes. • Analyzing the bargaining power of suppliers means considering issues such as their pricing power, the existence or not of agreements among suppliers in order to control the market, their size, the existence or not of substitutes of the products offered by suppliers. Reading 2: Competing in a global trade environment

38. Five forces model (Porter)-Industry competitors • The analysis of the ‘industry competitors’ can concern many different aspects, for example the market shares of different firms that can inform us about the degree of concentration of the industry considered. • Market shares can be measured in terms of the percentage of the total revenues of a firm against the total revenues of all the firms operating in a specific industry. Reading 2: Competing in a global trade environment

39. Five forces model (Porter)- Bargaining power of buyers • For example, if a given business organisation has only one big customer, its • economic performance will be very much related to the choices and performances of this one big customer. This situation is likely to be more risky than a situation where the customer base is more widespread.. Reading 2: Competing in a global trade environment

40. Five forces model (Porter)- new entrants • If, in a given industry, there are business organisations obtaining good profits, then it is likely that there will be space for other business organisationsto enter the market and make profits. • If you want to operate in industries like telecommunication or automotive , you may need high capital requirements: the higher the need for initial investment, the lower the number of potential competitors who can afford it. Reading 2: Competing in a global trade environment

41. Five forces model (Porter)-substitutes • By substitutes we mean goods and/or services that might address in a different way the same customer as the products offered by a given business organisation. • For example, • air and rail travel are example of substitutes – here the diffusion of low-cost airlines in the past decade impacted on both traditional airline firms and the rail industry. • The impact of the development of Skype on the traditional telephony industry. Reading 2: Competing in a global trade environment