Author: Nikolay Veselinov Georgiev
Supervisor: Valerie Smeets
Associate Professor
Department of Economics
GLOBALIZATION AND
CORPORATE ORGANIZATION
IN INTERNATIONAL BUSINESS
Bachelor Thesis for Business Administration and International Management
Department of Economics
Aarhus School of Business
3 May 2011
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Table of Contents
Abstract ......................................................................................................................... 3
Introduction .................................................................................................................. 3
Chapter One .................................................................................................................. 4
Characterization, expression and dimension of globalization ................................. 4
1. Nature, chracterization, expression of globalization ....................................... 4
2. Dimension and development of globalization ................................................... 8
Chapter two Global supplies ...................................................................................... 9
1. Global supplies and outsourcing ............................................................................. 9
1.1. Nature of the global supplies and outsourcing ............................................. 9
1.2. Types of global supplies ................................................................................ 14
1.3. Restrictions on global supplies..................................................................... 17
1.4. Outsourcing as an alternative corporate decision ..................................... 18
2. Evolution of global supplies ............................................................................. 19
2.1. Evolution Stages: from global supplies of raw materials and materials to
offshoring of activities that create added value ................................................ 19
2.2. Volume of global supplies............................................................................. 20
3. Benefits and challenges for the company of global supplies ......................... 24
4. Realization of global supplies by managing the logistics chain .................... 27
5. Importance of global supplies for the national interests and corporate
citizenship............................................................................................................... 34
5.1. Potential damage to the economies as a result of global supplies ............ 34
5.2. Positive effects for the national economy .................................................... 36
5.3. National policy promoting global supplies ................................................. 37
Conclusion ................................................................................................................... 38
List of references ........................................................................................................ 39
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Abstract
Bachelor's thesis is dedicated to globalization and corporate organization in
international business. Emphasis is placed on corporate organization and main
challenges in implementing outsourcing and other new forms of co-operation in the
conditions of globalization. The aim is to identify economic and organizational and
managerial characteristics of international business operations. The intention is to
present a detailed descriptive-comparative analysis of global supplies, as less
studied form of international business.
The realistic and practically oriented approach to decisions on contemporary
issues in the international business practice contributes to the actuality of the topic.
Introduction
International business has different dimensions. On the one part, it is associated
with trade and investment activities of companies beyond national borders. On the
other part, it embodies the contemporary processes of internationalization and
globalization of business at micro and macro level. On the third part, it can be
considered as a combination of international business operations that continually
evolve and enrich their forms. There is an increase in the number of companies that
along with traditional ones perform much more complex international business
operations. The importance of global supplies increases, which include not only the
purchase of raw materials and materials, finished products and services from sources
around the world but also the transfer of activities (outsourcing) and various cooperating transactions. The picture of international business in the era of
globalization has been also complemented with large-scale investment projects,
accompanied by various forms of public private partnerships, mergers and
acquisitions, joint ventures and others. Companies are forced to change their
strategies, to adapt their organizational structures, their corporate culture and
leadership style, to reflect changes in the global business environment.
The presented scientific work is a descriptive-comparative analysis of
contemporary international business operations in international practice. Emphasis is
placed on global supplies, as less studied forms of international business.
The aim is to identify economic and organizational and managerial characteristics
of international business operations.
To achieve this goal, the following tasks are placed to be solved:
1. To clarify the theoretical foundations of globalization;
2. To highlight the nature of global supplies, as a form of international business;
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3. To analyze the prospects of new forms of inter-firm co-operation, as a modern
business practice.
Justification of the problem
In the bachelor’s thesis, the relation between globalization and corporate
organization in international business is analyzed.
Answer to the following question is sought:
What is the nature of global supplies and outsourcing, as less studied forms of
international business in the conditions of globalization?
The answer to this question will be presented through a descriptive-comparative
analysis of global supplies. An answer to the following questions is given:
1. What is global supplies and outsourcing?
2. What is the evolution of global supplies?
3. What are the challenges of global supplies for the company?
4. How the global supplies are realized through logistics chain management?
5. What is the importance of global supplies for the national interests?
Priority is the analysis of the relationship between global supplies and
outsourcing.
Emphasis is placed on the concepts of globalization, corporate organization and
especially on the global supplies, outsourcing and other forms of organization of
international business operations.
The author's idea is to present a more modern vision of the basic forms of
realization of the international market in the conditions of globalization.
Chapter One
Characterization, expression and dimension of globalization
1. Nature, chracterization, expression of globalization
Investigation and study of the issues and phenomena associated with the
development of world economy and the role and importance of regional economies
in the late twentieth century led to the formation of a new scientific field named
globalization. The latter has as its object of research the global economic, social,
environmental, demographic and cultural changes, as well as the international
resources and objectives of social development, aimed at maintaining the global
balance at national, regional and global level. The expansion of ties and the
relationship between individual countries, their integration and merge into large
regional groupings, as well as constantly improving transnational companies are the
major preconditions for change and restructuring of their industry as a whole or its
individual sectors and productions. It is no longer enough to report and consider the
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needs and values in their own country, but the needs of markets in the other countries
associated with it, the genesis of globalization (its appearance and development) and
its impact on national economies must be taken into consideration. The multiplier
effect of globalization is precisely in this penetrating and consideration of
dependencies.
The term "globalization" is widely accepted and used in all fields of social life.
There are many diverse opinions and views of various authors who in different
periods of time, various economic and political situations, and from different
positions studied globalization in order to obtain a more complete picture of its
characteristics. Reference books state that "globalization" comes from the French
word "global" that is translated as "universal", "whole”, and it does have as a basis
the Latin word" globus " - "globe". From this standpoint, globalization is defined as:
 Process of convergence and integration of economics, culture, political and
other activities and objectives of countries in the world, which is possible
thanks to modern means of communication, and in which the importance of
individual sovereign states is reduced, an economic domination of certain
countries is achieved.
 Cosmopolitism, viewing the whole world as a place to perform their
opportunities for work and life.
Many economists agree that the globalization is a typical formation of a global
economy of a new type, based on international division of labour,
internationalization of the business of individual countries, creating a global market
system with a single infrastructure. Broad and realistic significance of the term
"globalization" is given by Kenichi Ohmae. He stated that in the era of globalization,
all nations and key business processes are found to be subservient to the global
market economy; he developed the thesis that the world economy is determined by
the interdependence of the three centres "The Triad" - the USA, Japan and the
European Community. He confirmed the idea that economic nationalism of
individual countries becomes meaningless, as far as the so called “global companies”
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appear on the economic stage in the role of a strong actor. This is a new era in the
history of mankind when the "traditional nation-states lose their naturalness, become
insuited as business partners”2.
Different definitions of globalization that are very close to the current reality in
the world economy can be given.
These are the following:
• Globalisation is defined as opening borders for ideas, investment and capital
flows and movement of people and manufacturing processes worldwide3.
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• Globalization is creating a global (planetary) village that is equal to the village
of the Internet with an increasing population of "addicts" of informatics, who often
live in a virtual world and lose touch with reality4.
• Globalization is “shifting the spatial limits of human organization and activity
to the transcontinental or international frameworks of interaction and implementation
of power” 5.
• Globalization is a powerful force transforming the world, essential to the mass
evolution of the society and economy, to the change of the forms of management and
the entire world order6.
As a concept, referred to the economy, globalization is defined even as early as
1983 by Theodore Levitt in his article published in the journal "Harvard Business
Review”7. Even then, he determines the economic globalization as a merger of the
markets of individual products produced by the large multinational corporations.
Then the phenomenon of globalization was studied in numerous publications8.
According to some authors, it is primarily a growing interdependence between
individual national economies. Other authors highlight the increasing responsibility
of a wide range of countries on the national markets (industrialized countries,
developing counries, countries in transition). A third group of scientists see the
essence of globalization in the combination of two main processes:
 the involvement of an increasing number of people from around the world in
the transnational economy;
 the sharp exacerbation of international competition, its extension to the
whole world, the accelerated reduction of the terms of the competitive
advantages of special economic agents.
At the end of the nineties of the last century, views not only for integration and
opening of national economies but also for dominating of a few of them also appear.
For example, some authors define the globalization of modern economy as an
establishment of the dominating positions of "global players". Other investigators of
global processes do believe that the economic globalization is a process in which the
"complicated", according to them, international economic order is generated, and the
international competition operates within various institutional entities (World Trade
Organization, World Bank, regional unions, etc.). However, this combination of
hardly compatible bases forms a big part of the nature of globalization, as the easiest
penetration of the economies into one another legally (and in many cases illegally) or
the invasion of one another, is through the capital. In many cases, globalization of the
economy is identified with the intensification of the modern international division of
labour, dinamic growth of direct foreign investments and development of
international production, revolution in modern communications, undermining the
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national economic sovereignty as a result of the growing (and more embracing)
internationalization, etc.
According to P. Lamy "... In the modern world characterized by widespread
dissemination of the principles of market economy and revolution in
telecommunications, information technology and transport, globalization is seen as
an accelerated expansion of integrated markets (commercial and financial),
dominated by continuously merging multinational companies through strategic
mergers and acquisitions, aspiring to occupy leading and even dominating positions
in the world markets ... Globalization is actually the latest form of market capitalism,
the driving force of the new wave of technological innovations, of opening markets
for goods and services to competition and direct foreign investments, of the creation
of international money markets operating in real time worldwide, of a significant
increase in wealth in some countries and poverty in other countries, of the emergence
of industrial economies, of the progress in development of information technology
and biotechnology, of the somewhat unrecoverable deterioration of the
environment".9
The vast diversity of definitions and interpretations is due to the different
objectives of the investigators in the field in which they are used, the surrounding
environment, the degree of thoroughness and penetrating processes, attitudes towards
the influence on the behavior of the society, etc. There is an impression that there is
hardly a subject area in the economy where you cannot use the term "globalization"
and do not feel its influence. To a certain extent this is true because reality and recent
analyses of the development of world economy reveal increasingly penetrating and
blending of business processes in a “vertical position” – from the world economy to
the national economies, and in “horizontal position” - between national economies,
as well as between different industries. This shows that in its nature and content
globalization is the same, but it may be considered in various aspects and to be
interpreted ambiguously. Therefore, the special literature offers a variety of
definitions of globalization. They differ substantially or in detail from each other. For
that reason, in a variety of existing definitions of globalization, whenever using this
concept, its meaning should be clarified and precised primarily in terms of historical
period and subject area. It is they which determine the nature of the transnational
business environment in which the global processes are developed and which is
basically characterized by the following:
 construction of regional integration communities regardless of the national
borders;
 establishment of new economic organizational structures of the new
economics of knowledge;
 giving priority in the field of management and organization of the business
of innovation economics associated primarily with ideas, information and
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attitudes towards the knowledge and the new world of technologies that
govern the world of possessions, etc.;
 formation of new features for the competitiveness of national and regional
economies;
 international division of labour and a tendency towards convergence of the
level of life and prices, which is achieved by canalization of trade,
movement of capitals, information flows, migration and international
competition, etc.
It can be concluded that globalization is a constant process continuous in time,
which is a manifestation of a long trend in the development of society and it is aimed
at gradually homogenizing and universalisation of the world, creating a new world
order with a tendency for the removal of national borders and building a single
global market.
2. Dimension and development of globalization
Numerous studies and pretensions of different authors on the content (positive
and negative) and prospects of globalization, global processes and their results show
that the global world economy is a fact that in last months of the last year it is also
combined with the global economic crisis. Its dimensions are related to the behaviour
of the society, its culture and value orientation, condition and dynamics of the
environment and the surrounding business environment, the degree of economic
development of individual national economies, the political struggles and the trends
of their expansion.
The following can be used as measurers that illustrate the development and
invasion of globalization:
• the change in the money and capital markets;
• the international trade;
• the international division of labour;
• the development of transnational corporations (TNCs);
• the economic union as a special form of the common market;
• the free trade area as a form of international economic integration;
• the customs union as a new step forward in the development of international
economic integration;
• the commom market as a step in the development of regional economic
integration;
• the economic and monetary union;
• use of new forms of co-operation - outsourcing, offshoring, homesorcing, etc.
At the end of the 20th and early 21st century, the phenomenon of globalization
strengthened its position at a new quality level. What it signals is the ongoing radical
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transformation of the market. National markets are becoming parts of the World
Market.
The globalization provokes:
• restructuring of national economies;
• redefining the business activities;
• modifying and developimg of new management, respectively, marketing tools.
Subject to the international exchange are traditional and complex foreign trade
and foreign economic operations such as transactions for exports, imports,
compensation transactions, license agreements, franchise transactions, concession
agreements, etc.
Less known and respectively less studied forms of international business are
global supplies.
These are the subject of this analysis.
Chapter two
Global supplies
1. Global supplies and outsourcing
1.1. Nature of the global supplies and outsourcing
Searching for the best sources of goods and services is an ongoing task of
managers. In some cases, companies relocate all activities of the value chain abroad.
Nike Inc. along with its competitors in the field of sports shoes Reebok and Adidas,
assigns almost all of its production of sports shoes to foreign partners. These
companies today can be best described as owners of corporate brands and market
participants, providing their corporate brand for use under certain conditions, and not
as producers. Similarly, Apple Inc. assigns about 70% of its production abroad,
concentrating its internal resources on its operating system and other software
platforms. This approach allows Apple best to use its limited capital resources and to
focus on its main field of activity. Dell Inc. is another company that relies largely on
the global production network, consisting mainly of foreign companies.
Global supplies are supplies goods or services by independent suppliers or own
subsidiaries located abroad, for domestic consumption or consumption in a third
country. Known also as global supplying or global purchases, the global supplies
interpreted as the more familiar international business operation import mean
movement of inflow of goods and services. This is a method for entering a foreign
market, which implies contractual relations between a buyer and a foreign supplier.
Global supplies require concluding contracts with subcontractors (owned subsidiaries
or independent suppliers) to perform specific production tasks or services.
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Although the global supplies are an established international business practice
of the eighties of the twentieth century, it receives new impetus in the current stage
of globalization. Four factors underlie the growth of global supplies in recent years:
 The technical achievements, including the availability of Internet and new
digital technologies
 Reduction of communication and transport costs
 Easy access to vast amounts of information, including the growing relationship
between suppliers and customers they serve
 Global entrepreneurship and rapid economic transformation of the emerging
markets
Illustration 5.1. Supplies for the Dell Inspiron notebook
Battery from American
LCD display from a company
factory in Malaysia
in South Korea (Samsung or
(Motorola), a Japanese
LG Phillips LCD), Japanese
factory in Mexico or
(Toshiba or Sharp), or
Malaysia, or China (Sano),
Taiwanese
(Chi
Mei
or South Korean or
Optoelectronics,
Hamstar
Taiwanese factory (SDI or
Display, or AU Optronics)
Simplo)
Cooling fan from a factory
Keyboard from a Japanese
in Taiwan (CCI or Auras)
factory (Alps) or Taiwanese
factory (Sunrex or Darfon),
all in China
Modem from a Taiwanese
Intel microprocessor from
company
in
China
Intel's factory in China,
(Asustek or Liteon), or a
Malaysia, Philippines or
Chinese company in China
Costa Rica
(Foxconn)
Hard Disk Drive from a Motherboard from a Memory from a factory in
U.S. factory in Singapore Korean factory in China Japan (Elpida), South Korea
(Seagate),
Japanese (Samsung), Taiwanese (Samsung), Taiwan (Nanya)
company in Thailand factory
in
China or Germany (Infineon)
(Hitachi or Fujitsu), or (Quanta), or Taiwanese
Japanese factory in the factory
in
Taiwan
Philippines (Toshiba)
(Compal or Wistron)
10
SOURCE: Friedman, Thomas. The World is Flat, Farrar, Straus, & Giroux, New
York, 2005.
While at the beginning of their activities to attract external resources,
companies deliver commodities, in recent years, they increasingly sub-contract (to
subsidiaries and independent suppliers abroad) the execution of business processes
and other services. For example, companies-contractors like Softtek in Mexico help
U.S. banks to develop special software, to manage their IT systems, and to carry out
maintenance and servicing of commercial financial operations. Softtek has 3 500
employees, mainly engineers, as well as outsourcing businesses in Brazil, Colombia,
Peru and Venezuela. Argentina which is famous for the most educated workforce in
Latin America, aggressively promotes centers for software development. Low
salaries of software engineers (usually less than USD 12 000 per year) are the reason
companies such as Walt Disney, Peugeot and Repsol to order software development
and design of web pages in Argentina10.
In attracting external resources, managers face two key decisions: (1) what
activities of the value chain should be outsourced to external contractors; and (2)
where in the world to carry out these activities. Let us consider these two operational
decisions.
Solution 1: External contractor or not?
Managers must choose between internalization11 and externalization - whether
any activity of the value chain to be carried out within the organization or by an
external independent supplier. In business, it is traditionally called make or buy
decision: "Should we produce the product or carry out certain activities in the value
chain themselves, or to outsource them to an external contractor?" Companies
usually carry out within their system the activities that they consider part of their
core competencies, or activities which involve the use of proprietary property and
trade secrets, activities they want to control. For example, Canon uses its core
competencies in the precise mechanics, fine optics and microelectronics, to produce
some of the best cameras, printers and copiers in the world. Canon usually
internalizes these activities from its chain of value generation as a development
activity as it improves these competencies. Conversely, companies usually outsource
to external suppliers those goods or services which are ancillary to the main products
of a company, or when the supplier is specialized in offering specific products.
Outsourcing (outsource - in English - using external sources or means) is an
organizational and managerial decision to transfer certain business activities to
external contractors or parts of the business processes of the companies and
enterprises.
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Historically, outsourcing involves the acquisition of raw materials, parts and
components from independent suppliers. Later outsourcing includes receipt of
services12. Depending on whether this process takes place within a country or abroad,
there are the following types of outsourcing: offshore outsourcing (outsourcing
outside the country), nearsorcing and nearshoring (in geographic proximity to the
country that exports business activities) insorcing and inshoring (relocation of
oursourced activities back in the country), etc.
The most common form of outsourcing is offshoring, which is outsourcing of
business activities (manufacturing, services) of a company outside the boundaries of
a country. This can be done by establishing a subsidiary of a company, through
foreign investments, by acquiring a company in a relevant country, etc.
A typical company that transfers activities, outsources to external contractors
services such as accounting, preparation of payrolls and some functions of the human
resource departments, as well as tourism services, IT services, customer service and
technical support. This type of outsourcing is known as business process
outsourcing.
Companies enter into contracts with third party service providers to implement
specific business tasks, usually as a means of reducing the cost for carrying out the
tasks that are not part of the core business of the company or are important for
maintaining the competitive position of the company in the market. The business
process outsourcing can be divided into two categories: operations on processing of
documentation (back-office activities) that include internal, primary business
functions such as preparing payrolls and invoicing, and front-office activities that
include secondary services relating to customers, for example, marketing or technical
support.
Manufacturing outsourcing, in recent years, is playing an increasingly greater
role in the activities of several companies. In the manufacturing outsourcing, a
company gives part of the chain of production processes or the entire production
cycle to external companies. Furthermore, it is also possible an option of selling parts
of its divisions to other companies and a further interaction with them, now within
the outsourcing. According to studies of the American Management Association in
1997, more than half of industrial companies have made outsourcing of at least one
component of its manufacturing process.
Manufacturing outsourcing allows companies to: focus on development of new
products and services (which is important in the conditions of rapidly evolving
technologies), in seeking a guarantee for competitive advantages and to increase
production flexibility.
Today in Europe, North America, Japan and other developed economies, few
companies produce the whole product. In recent years, several areas are separated for
which is typical performing of outsourcing (offshoring) services:
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 Business services: cover a variety of back office processes, customer service
and technical support. Examples include making statements and indexing, entering
and processing data, electronic media, telemarketing, web design, etc.
 Professional services: accounting, auditing, taxation, architectural and
engineering services.
 Financial services: cover insurance and related services, as well as banking
and other financial services.
 Computer and related services: include installation of hardware, software
development, data processing, database maintenance, maintenance and repair of
office equipment (computers), etc.
 Internet services: Inernet supply (telecommunications services).
 Audio-visual and cultural services: cover the production of cinema and
video films and their distribution; projection of film strips; radio and television; radio
and television broadcasting; sound recording services, cultural, sporting and
recreational services.
 Educational Services: thanks to the new technologies, education can be
exported in electronic (audio and visual) format.
 Health services: include medical, dental, hospital, social and other services.
Solution 2: Where should activities that create added value be located?
For any activity that creates added value, managers may choose to leave it in
their home country or to locate it in a foreign country. Configuration of activities
creating added value is the geographical location of places where the company
carries out activities in the chain of value creation13. For example, to manage its
international network of package delivery, DHL opened offices in countries and
cities worldwide. It also created a modern center for tracking in Arizona (USA),
Malaysia and the Czech Republic. This configuration allows DHL employees to
track shipments worldwide, 24 hours a day. The management of DHL has chosen
these locations for setting up centers for tracking shipments as in the 24-hour time
zones each of them is about 8 hours from the other.
Instead of concentrating activities creating added value in their home country,
many companies set up these activities in the world to save money, to reduce
delivery time, to gain access to factors of production and maximize competitive
advantage. This explains the migration of industries from Europe, Japan and the
USA to the less developed markets in Asia, Latin America and Eastern Europe.
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Depending on the company and the industry, the management may decide to
concentrate certain activities that create added value only on one or a few locations,
and to disperse the others in many countries.
For example, the German car manufacturer Bayerische Motoren Werke AG
(BMW) has 70 000 employees in 23 sites in 13 countries for producing sedan, coupe
and cabriolet cars. Workers at the plant in Munich manufacture the BMW 3 series
and supply engines and key parts for the other BMW plants abroad. In the USA,
BMW has a plant in South Carolina which produces 500 cars a day for the world
market. In northeast China, BMW produces cars in joint venture with Brilliance
China Automotive Holdings Ltd. In India, BMW has the capacity to serve the needs
of the rapidly growing South Asian market. In recent years, however, the profits of
the BMW suffer a decline as a result of higher prices of raw materials such as
plastics and steel. The management should choose the best places for foreign
operations of BMW to reduce costs (for example, by producing in China), to gain
access to qualified staff (by producing in Germany), to remain close to key markets
(by producing in China, India and USA), and to succeed in an extremely competitive
sector of the automotive industry.
1.2. Types of global supplies
Global supplies from subsidiaries
A company can carry out supplies by independent suppliers, by its own
subsidiaries and affiliates, or by both. On the Illustration 5.2., boxes C and D present
scenarios of global supplies. Although the global supplies suggest supply from
abroad, in some cases a company can do supplies by its entirely own subsidiaries or
affiliates, jointly owned with another company (Box C). This is called
intercompany supplies, which means supplies from the company's own production
units located abroad. In this scenario, the production takes place in a foreign
enterprise that the company owns as a result of direct investment. For example,
Genpact (former Gecis Global) is an intercompany supplier of General Electric (GE).
With annual revenues of about 500 million US dollars and more than 19 000
employees worldwide, Genpact is one of the largest suppliers of services for
outsourcing of business processes. GE sold Genpact in 2005, and the supplier
became an independent company. Although it continues to work with GE, Genpact is
now free to seek other customers worldwide.
On the other hand, the company can supply semi-finished or finished products by
independent suppliers (Box D), an increasingly popular scenario. The company
assigns its production to foreign partners to take advantage of their oabilities. Global
supplies require from a company to find suitable suppliers to develop the necessary
organizational and technological capability, to redirect certain tasks and to
coordinate geographically dispersed network of activities.
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Illustration 5.2. Nature of outsourcing and global supply
The activity that creates
value remains in the
home country
The activity that creates
value is carried out
abroad (global supplies)
The activity that creates The activity that creates value is
value is internationalized
externalized (outsourced to external
suppliers)
А
B
Production is local, in the
Production is assigned to a third party
home country
supplier in the home country
C
D
Production is assigned to a
Production is assigned to a third party
foreign branch or affiliate
supplier abroad (manufacturing under
(intercompany supplies)
contract with, or global supplies from,
independent suppliers)
Cooperative transactions: Global supplies by independent suppliers
Typical relations between a company and its foreign contractors (Box D in
Illustration 5.2.) may take the form of a contract under which the company assigns
the production of goods by strictly defined specifications to an independent supplier.
The contract contains detailed explanations of the terms of the transaction. The
supplier-contractor is responsible for manufacturing and complying with the
specifications of the contracting company. After the goods are produced, the
contractor deliver them to the contracting party, which then supplies them to the
market, sells and distributes them. In short, the company "hires" the production
capacity of the foreign contractor.
Patheon is one of the leading global manufacturers in the pharmaceutical
industry. The company provides services in medicine development and manufacture
of pharmaceutical and biotech companies worldwide. Patheon manages 11
manufacturing plants in North America and Europe, producing medicines without a
prescription and some of the best-selling prescription medications for most of the 20
largest pharmaceutical companies in the world. Patheon realizes about half of its
sales in North America and the other half - in Europe. Benetton uses toll
manufacturers of clothing, and IKEA – for furniture manufacturing. Toll
manufacturing allows companies to enter the target markets quickly, especially when
the market is too small, to justify large local investments.
Probably few people have heard of Taiwan's company Hon Hai Precision
Industry Co., a leading toll manufacturer in the field of world electronics. Hon Hai
works as a subcontractor for well-known companies, producing iPods and iPhones
for Apple, PlayStations for Sony, computers and printers for Hewlett-Packard, and
many other goods. In 2007 Hon Hai sales exceeded 40 billion U.S. dollars. The
company has around 360,000 employees in its ten factories worldwide around the
world, from Malaysia to Mexico.
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One of the advantages of producing goods under a sub-contract is that the
company - for example, Apple, Hewlett-Packard and Sony - can concentrate on
design and marketing of the product, by transferring the production to an
independent subcontractor. It is preferable a subcontractor company to be located in
countries with cheap labour and to be able to offer economies of scale, extraordinary
production skills, specific knowledge in the field of engineering and the process of
development of the products it manufactures for its customers. Major drawback of
cooperative transactions is that the contracting company has a limited control over
the supplier. The lack of direct ownership implies a limited impact on production
processes of suppliers, potential vulnerability to dishonest actions of the supplier and
limited ability to protect intellectual property, especially the trademark.
Offshoring
Offshoring is a natural extension of global supplies. Offshoring is the
relocation of a business process or an entire production facility to a foreign country.
Large multinational companies are particularly active in the transfer of production
facilities or business processes to foreign countries to increase their competitive
advantages. The offshoring is especially popular in the service sector, including
banking, writing software and activities for customer service. For example, large law
companies that provide services such as drafting contracts and patent applications,
carrying out investigations and concluding contracts, and other legal services to
Western clients appear in India. At a price of 300 U.S. dollars or more per hour for a
lawyer in North America and Europe, Indian companies can reduce the bills for legal
services by 75%.
Companies usually relocate abroad certain activities or subgroup of enterprises,
part of the functional organizational structure. In each business function - human
resources management, accounting, finance, marketing and customer service –
certain tasks are routine and heterogeneous. These functions are candidates for
offshoring, insofar as their performance by independent suppliers does not threaten
or reduce the core competencies and strategic activities of а company. Examples of
successful redirection of activities to foreign suppliers are preparing invoices,
processing credit cards and stock analyses in the financial field, establishing a
customer database and processing trade transactions in marketing, preparation of
payrolls and administration of bonuses in human resource management.
India receives most of the redirected business services of the developed
economies. This sector in India grew by 50% annually in the early years of the 21st
century. The country became known as an important destination for offshoring due
to their large number of qualified personnel who work for 25% of the salaries of such
employees in Western Europe, which together with the global economic slowdown
since the early 21st century makes international companies to search ways to cut
costs. India, however, is not the only destination for assigning of such tasks.
Companies in the countries of former Eastern Europe perform ancillary services for
16
architectural and engineering companies from Western Europe and the USA.
Accountants from the Philippines perform ancillary services for major accountancy
firms. Accenture has centers for back-office operations and call centers in Costa
Rica. Many companies that provide IT support for customers in Germany and the
U.S.A are actually based in the Czech Republic, Romania and Bulgaria. Much of the
development activities of Boeing, Motorola and Nortel take place in Russia. South
Africa is а basе for centers for technical support and service of English, French and
German speaking users in Europe.
1.3. Restrictions on global supplies
Not all business activities or processes are subject to offshoring. Activities that
are most suitable for export abroad are in sectors with the following characteristics:
 Sectors with large-scale production, whose main competitive advantage is
efficiency and lower costs
 Sectors such as automotive industry with identical user needs and highly
standardized processes in manufacturing, and other activities in the chain of
value creation
 The service sector which is very labourious, for example, call centers and
legal assistance
 Activities based on information, whose functions can be easily transmitted
over the Internet, such as accounting, preparing invoices and payrolls
 Activities such as writing software, whose results can be easily encoded and
transmitted over the Internet or by telephone, for example, routine technical
support and customer service activities.
Unlike these activities, many activities in the service sector cannot be separated
from their place of consumption. This limits the types of services that compamies
can relocate abroad. Personal contact is vital at the exit of, in fact, all the value
creation chains. Other services are consumed on the spot. For example, people
usually do not travel abroad to visit a doctor, dentist or lawyer, or an accountant. And
for this reason, many activities in the services sector will never be exported abroad.
In 2005 only about 3% of the activities in the U.S., which require direct contact with
customers (for example, those in the retail trade sector) have been transferred in
economies with low labour costs. By 2008 less than 15% of all activities in the
service sector had been redirected from developed to developing economies.
Furthermore, many companies such as Harley-Davidson in the USA have their
reasons to leave their production there. Much of the added value of Harley-Davidson
is a local. Harley-Davidson simultaneously assembles its motorcycles and provides
itself with key components such as engines, transmissions, tanks, lights and brake
systems in the USA. Customers of Harley-Davidson look at the product as an
American icon and would not tolerate production abroad. Another factor is the
17
contracts with unions that restrict the ability of the management to transfer the main
production abroad without their consent.
1.4. Outsourcing as an alternative corporate decision
Illustration 5.3. explains the strategic importance of the two options facing the
companies: to carry out their own specific activities that create added value, to assign
them to external contractors, and to concentrate all activities in their home country,
or to disperse them around the world. The illustration describes a typical chain for
creating value, from the development activity and design to the customer service.
The first line indicates to what extent the management considers every activity that
creates added value as a strategic asset for the company. The second line shows
whether the activity can be internalized in the company or assigned to a foreign
supplier. The third line shows where the management usually establishes the activity.
These decisions largely depend on the strategic importance of the specific
activity for the company. For example, companies usually consider the development
activities and design of major importance for their competitive advantage. As a
result, they are more likely to internalize these functions and less inclined to assign
them to foreign suppliers.
Vice versa, the activities related to production, logistics and customer service
are assigned readily to external contractors and deconcentrate geographically. The
decision is also a function of the company's experience in international business and
the availability of suitable suppliers.
18
Illustration 5.3.
Typical opportunities for companies to select outsourcing
destination
Development
Marketing
Sales,
Production of Manufacturing
Customer
and
distribution
activities
components or assembly
service
branding and logistics
Design
Importance of this
activity for the
company as a
strategic asset
Likelihood to
internalize this
activity rather
than to outsource
it to an external
supplier
Geographical
configuration: a
general tendency
to locate the
activity in the
domestic market
or abroad
Very
important
Low
importance
Low to
medium
importance
Very
important
Medium
important
Medium
important
High
Low
Low to
medium
Low
Low to
medium
Low to
medium
It is usually
focused on
the
domestic
market
It is
usually
dispersed
on many
markets
Branding
is
concentra
ted on the
domestic
It is
It is usually market,
dispersed
focused on marketing
on
several
is
particular
markets
concentra
markets
ted or
dispersed
on
particular
markets
It is
dispersed
on
particular
markets,
except for
call
centers,
which are
often
concentrat
ed
2. Evolution of global supplies
2.1. Evolution Stages: from global supplies of raw materials and materials to
offshoring of activities that create added value
The first big wave of global supplies focused on the production of raw materials
and materials and started in the sixties of the 20th century with the relocation of
European and American production to countries with lower living standard as
Mexico and Spain. The first observers paid attention to the emergence of modular
and virtual corporations within the context of global supplies. Over the time,
managers began to understand that the tasks for the most functions and activities of
the chain of creating value are subject to externalization if this step helps to increase
efficiency, productivity, quality and the higher income.
19
The next wave of global supplies started in nineties of the 20th century with
offshoring where companies begin to export specific activities that create added
value in services sector in places like India and Eastern Europe. Besides IT services
(software, applications and technical support) and activities of customer support
(technical support, call centers), many other areas of service became part of the trend
towards offshoring. For example, in healthcare area, procedures such as computer
tomography and radiological diagnostics are performed abroad. Users also practise
the so-called medical tourism, which means that they travel to countries like India
and Thailand for medical services such as placing a bypass or cleansing of the
gastrointestinal tract.
Today, assigning a business process in the field of product development, human
resources management and financial-accounting services to subcontractors is
something ordinary. For example, Microsoft has invested billions in India to increase
its development activities and technical support operations there. Intel and Cisco
Systems also invested huge financial resources to expand their development
activities in India. JP Morgan, a large investment bank, has several thousand
employees in India, who from the implementation of simple back-office activities
such as data entry, come to the execution of transactions for structured financing and
derivatives trading - a very complex banking transactions. India reached a higher
stage in its development than other developing economies. She first became a centre
for development and support of software applications. Subsequently, Indian
companies and local affiliated enterprises of many international companies began to
offer cheap back-office services. India has recently developed its own strong
production base in the field of IT and other business processes with high added
value. Wipro, Infosys and Tata Consulatancy are among the most prominent
participants in the global supplies in the field of business services, software
development and call centers. While the headquarters of many companies are located
in the USA, much of their work is done in India or in other less developed markets.
2.2. Volume of global supplies
The amount of global supplies is significant. In 2005, only India registered a
business worth 22 billion US dollars in activities such as answering the telephone
calls of customers, management of large computer networks, processing invoices and
writing specialized software for international companies around the world. Global
supplies generated more than 1.3 million jobs in India over the past decade.
Meanwhile, in the period of 2000-2004, the USA exported about 100 000 jobs in the
field of services each year14. In 2006, the volume of outsourcing in the field of
information technology and business processes exceeded 150 billion US dollars
worldwide.
20
Countries that initiate and receive outsourcing
Obviously, China and India are key players in global supplies. The article below
clearly shows the constant rivalry between these two countries as they compete for а
world's leading destination in the global supplies. Nevertheless, many other countries
are also active participants. From the point of view of the countries-buyers, global
supplies are practised by companies worldwide. The U.S. companies lead the list
with almost two thirds of the total offshore service projects. U.S. companies transfer
activities abroad of less value than companies from other countries transfer activities
to the United States. This insorsing15 provides various relatively high-skilled jobs in
the USA in areas such as engineering, management consulting, banking and legal
services.
China: India's competitor in the global sourcing game16
In the service sector, India is perhaps the world's leading offshore destination.
India is a popular destination for software development and services for document
processing, such as telephone call centers and financial accounting services. India is
one of the world's leading centers in the IT industry, thanks to the emerging local
multinational companies such as Infosys and Wipro. Infosys is a competitor to
Microsoft as one of the global companies for software development.
Compared to India, however, the history of China as a supplier to the world is
longer. China is а center for numerous foreign companies. For example, the
American company Keurig produces coffee machines. Once the management of
Keurig finds that the price of 250 U.S. dollars for a coffee machine is too high due to
high production costs, the company exports the production to a partner in China.
Relocation of the production lets Keurig to start offering new models for 99 U.S.
dollars. As a result, Keurig repeatedly increases its sales.
China is trying to overtake India in outsourcing services, and the Chinese
government makes huge investments to improve the training of workers and the
quality of its universities. China has three major advantages. The country has a huge
amount of skilled and cheap workforce. It produces 350 000 graduate engineers
every year, almost four times more than those in the USA. Second, China has a huge
domestic market with a fast and sustainable economic growth. Third, the Chinese
government, which has long placed barriers to foreign companies, is increasingly
open to business. The Chinese government has developed a series of policies that
favour foreign companies producing in China.
Nevertheless, China still involves many risks. The country is weak concerning
the protection of intellectual property; it has a language and culture that foreign
companies find challenging, as well as insufficient quality infrastructure.
Communicating with the Chinese government is complicated because of the large
21
bureaucracy and fierce competition between its bodies. The resulting chaos makes it
difficult for Chinese entrepreneurs to create and manage companies.
Unlike China, India has a better protection of intellectual property, workforce
using English, and infrastructure which, though poor by the standards of developed
economy, is often better than that of China. India will likely remain a leader in global
outsourcing in the services sector for some time.
Source: Farell, Diana, Kaka, The Myth of China Ink., Economist, September3/2005
In Europe, 40% of the large companies reported that they had assigned the
performance of services in other countries. One of the largest European outsourcing
transactions lately is worth 7 billion US dollars and it is a 10-year contract for
management of 150,000 computers and network software for the British Ministry of
Defence, awarded to a consortium led by EDS, a company based in Texas. In the
Japanese IT sector, 23% of the companies have transferred activities abroad.
Illustration 5.4. shows the main players in global supplies divided into four
geographical areas. For example, the Cairo-based Xceed Contact Center handles
calls in Arabic and other European languages for Microsoft, General Motors, Oracle,
and Carrefour. Russia has focused on high-tech services such as programming. With
its high engineering culture, Russia has a large base of partly unemployed talents
who can be employed for about one fifth of the wages for such work in the USA.
Singapore and Dubai state that their reliable and developed legal systems give
them an advantage in carrying out secure and uninterrupted business services.
Philippines benefit from their longstanding cultural ties and knowledge of English to
attract contracts for call centers. Central and South American countries use their
knowledge of Spanish to attract contracts for call centers for the Hispanic market in
the USA.
22
Illustration 5.4. Key players in the global supplies by regions
Central and
Eastern Europe
Leading
countries
Prospective
parties
New local
suppliers
China and South
Asia
Latin America
and the
Caribbean
Czech Republic, India,
China, Chile,
Brazil,
Bulgaria,
Malaysia,
Mexico,
Costa
Slovakia, Poland, Philippines,
Rica, Argentina
Hungary
Singapore,
Thailand
Romania, Russia, Indonesia,
Jamaica, Panama,
Ukraine, Belarus
Vietnam,
Sri Nicaragua,
Lanka
Colombia
Luxoft (Russia), NCS (Singapore), Softtek (Mexico),
EPAM Systems Bluem, Neusoft Neoris (Mexico),
(Belarus), Softline Group,
Politec (Brazil),
(Ukraine),
BroadenGate
DBAccess
DataArt (Russia)
Systems (China)
(Venezuela)
Middle East and
Africa
Egypt,
Jordan,
UAE,
Ghana,
Tunisia, Dubai
South
Africa,
Israel,
Turkey,
Morocco
Xceed
(Egypt),
Ness
Technologies
(Israel),
Jeraisy
Group
(Saudi
Arabia)
Source: www.atkearney.com
Besides the low labour costs, other attractive features of offshoring are the
ability to increase productivity, to improve the service and gain access to higher
technical skills. Vietnam currently attracts a significant volume of offshore business.
Because Europe is the largest export market for Vietnam, the production allocated to
suppliers in that country doubled in the early 21st century, as modern operations at
affordable prices, skilled and inexpensive labour, and access to local sources
unencumbered by commercial constraints are offered there.
For 2007 Global Services Locations Index of A. T. Kearney17 is headed by
India, China, Malaysia, Thailand, Brazil, Indonesia, Chile, Philippines and Bulgaria.
The USA is the only developed economy which found a place in the top 21 of the
suitable destinations. To help the companies identify countries for outsourcing of
activities in the value chain, the index focuses on several criteria: financial structure
of the country (compensation costs, costs for infrastructure, taxes and normative
costs), availability and qualification of the workforce (gained experience and skills in
business process, availability of workforce, education and language, as well as
fluctuation of personnel), and the nature of the business environment (political and
economic environment in the country, physical infrastructure, cultural adaptability,
and protection of intellectual property).
23
3. Benefits and challenges for the company of global supplies
As with other international strategies for entering an international market, the
global supplies offer benefits and set challenges for a company. Illustration 6.5. gives
a brief overview of these advantages and disadvantages.
As for the challenges, companies must pay particular attention to the matters
referred to in Illustration 5.5. Many of these challenges arise if a company makes
supplies by independent suppliers overseas. The weak control inherent to global
supplies suggests that the activities of finding, researching, negotiating and
monitoring of a partner acquire special importance for the success of a company.
Another challenge is the sensitivity to adverse movements in exchange rates. The
potential cost reduction by global supplies could be compensated by weakening the
local currency. In this case, imports of goods from abroad cost more. For example, if
China allows its currency exchange rate to increase, then its exports will slow down,
since for customers it will become relatively more expensive to import from China.
Illustration 5.5. Benefits and challenges caused by global supplies
Benefits and challenges
caused by global supplies
Benefits
Profitability
 Improvement of net profitability
Strategic benefits
 Faster income growth
 Access to qualified personnel abroad
 Greater efficiency and better service
 Modernising of the business process
 Accelerated market entry
 Access to new markets
 Technological flexibility
 Increased mobility due to elimination of
unnecessary non-productive expenditure
Challenges
 Vulnerability to fluctuations in exchange rates
 Expenses for selection, inspection and
supervision of partner
 More difficult management of global network and
partners
 Complexity of managing the global supply chain
 Limited impact on the manufacturing processes
of the supplier
 Potential vulnerability to opportunistic behaviour
or unfair actions of suppliers
 Limited ability to protect intellectual assets
24
There are two major benefits of the global supplies for a company: profitability and
achievement of strategic objectives. Let us examine them in turn.
Profitability. Profitability is a traditional reason for supplies from abroad. A
company makes use of the "labour arbitrage" - the enormous difference in salaries
between the developed and less developed economies. One study showed that
companies expect to save an average of more than 40% of their basic costs as a result
of ofshoring operations18. Such savings occur mostly in development activities,
activities in designing a device and back-office operations such as accounting and
data processing. For example, a programmer in the USA with a degree in IT received
from a university and five years experience in programming in JAVA, can expect
income of over 60 000 US dollars a year, plus bonuses. In Bangalore payment is
about 6 000 US dollars, including bonuses. A doctor of economics - statistician in
India earns up to 40 000 US dollars a year, compared to 200 000 US dollars in the
USA. Most of the work performed by these Indian IT professionals can be
transmitted instantly over the Internet. This disparity in payment explains why
companies like IBM, HP, Accenture, Dell, HSBC, Citicorp and JP Morgan increased
their activities in India with 30 to 50% annually in the early 21st century.
Achievement of strategic objectives. Besides helping a company to save
money, the global supplies enable it to implement its long-term goals. This strategic
concept of global supplies - named transformational outsourcing - suggests that a
company can achieve increased profitability, productivity, quality and income much
more effectively, using maximum offshore opportunities. Global supplies can
provide ways to accelerate the innovation projects that otherwise could not be
realized, or to improve declining business. Companies use the global supplies to
liberate expensive analysts, engineers and sales personnel from routine tasks so that
they have more time for innovations and work with clients. Global supplies could
become a catalyst for the revision of outdated office operations and preparation for
new competitive battles.
The two reasons - profitability and achievement of strategic objectives are not
mutually exclusive. Whatever the initial motivation is, the company committed to
global supplies can expect many benefits, including:
 Growth of the company. Assigning varoius peripheral activities to external
suppliers, companies can focus their resources on carrying out more profitable
activities such as development activities or building relationships with
customers. For example, global supplies enable companies to hire more
engineers and researchers while maintaining permanent their costs for
development of a product as a percentage of the sales.
 Access to qualified personnel abroad. Countries like China, India, Philippines
and Ireland offer an abundance of educated engineers, managers and other
25






professionals. The ability for access a wider group of talented people,
wherever they are, helps companies achieve their goals. For example, Disney
awards most of its animation work in Japan because some of the best
animators in the world are located there.
Increased productivity and better service. Labour productivity and other
activities in the chain of value creation can be improved by assigning them to
suppliers who are specialized in these activities. For example, Penske Truck
Leasing increases its efficiency and improves customer service by assigning
dozens of business processes to suppliers in Mexico and India. Global supplies
enable companies to provide 24-hour customer service, especially those who
need round-the-clock support.
Modernising the business process. By reconfiguring their systems of value
creation or modernizing their business processes, companies can improve the
efficiency of their production and the use of resources. International
companies consider the offshoring as a catalyst for the revision of outdated
office operations.
Accelerated penetration in the market. Redirecting software development and
editorial work to India and the Philippines, the American-Dutch publishing
company Walters Kluwer was able to release more books and magazines and
publish them more quickly. Large pharmaceutical companies faster market
new medicines by assigning the clinical trials of medicines to foreign
suppliers.
Access to new markets. Companies can gain new markets and technologies in
other countries, which not only helps them to understand better the new
customers, but also facilitates their business there. Companies can use the
global supplies and serve countries that otherwise are closed due to
protectionism. For example, relocating the development activities in Russia,
the telecommunications company Nortel acquired an important key point of
the market that desperately needs automatic telephone stations and other
communications infrastructure.
Technological flexibility. Changing suppliers at a time when the new cheaper
technologies become available, the companies are no longer so associated with
certain technologies, as they would be if they produce the technology
themselves. The sourcing allows for greater organizational flexibility and
quicker response to evolving customer needs.
Better adaptability due to elimination of unnecessary non-productive
expenditure. Unencumbered by large bureaucracy and administrative costs, the
companies can more quickly respond to the opportunities and adapt to the
changes in the environment, for example, new competitors.
26
Together, these benefits give companies the opportunity to constantly update
their strategic concepts. For example, Genpact, Accenture and IBM Services employ
specialists who send teams to thoroughly analyze the organization of working
process of such departments as human resources, finance or IT. This helps
professionals to develop new IT platforms, to modernize all processes and administer
programmes, acting as a de facto subsidiary of their corporate customers. The
contractor then allocates the work to the personnel around the world from Asia to
Eastern Europe and in other locations.
Industries that are particularly benefiting from the global supplies are those in
labour-intensive sectors such as garments, footwear and furniture, those using
relatively standardized processes and technologies as the production of car parts and
machine tools, as well as those who produce and sell proven products with
predictable pattern of sales, for example, components for consumer electronics. For
example, processing of diamonds is a labour-intensive activity that uses standardized
processes, resulting in creating diamond rings and grinding equipment. Over the past
five centuries, processing of diamonds is concentrated in Antwerp, Belgium.
Recently, however, it is assigned to companies in India that do this job more costeffectively and offer other advantages. China also proved to be a major player in the
processing of diamonds.
4. Realization of global supplies by managing the logistics chain
The main reason why imports from distant markets are becoming a serious
business phenomenon today is the speed with which goods can physically move from
one part of the world to another. This efficiency is due to the advanced process and
strategies used in the movement of goods from one point - for example, from
manufacturer to intermediaries - to another - for example, from intermediaries to
customers.
The global logistics chain is named the integrated network of a company for
assignment, production and distribution, organized globally and located in countries
where you can gain the maximum competitive advantage. The management of the
global logistics chain includes upstream and downstream flows, consisting of
suppliers and customers respectively.
A logistics chain is a collection of activities and logistics experts. Skillful
management of a logistics chain serves to optimize the activities of the chain of value
creation. Imports from many suppliers scattered around the world would be neither
economically feasible nor realistic without an efficient logistics chain. Even as an
observer, one cannot help being impressed when he sees the vast variety of goods in
supermarkets or department stores, coming from dozens of different countries. The
speed with which these goods are delivered to end users is as much impressive.
27
Let us consider a striking example of how a global chain management makes
appropriate the global supplies and at the same time contributes to the
competitiveness of the company. Showing Boeing 787 Dreamliner jet in Everett,
Washington in July 2007, notes a new beginning for the creator of this plane. Several
features of the new machine is unique. This is an airliner of a middle class with less
fuel consumption, for the fuselage of which is used carbon plastic (instead of
aluminum). It is lightweight and has a spacious lounge, as well as a higher cabin
pressure than other models - for a more comfortable flight. But the most interesting
aspect of the Boeing 787 Dreamliner jet is the scope of supplies.
Boeing has created only 10% of the value added of this new aircraft – the tail
stabilizer and final assembly. About 40 suppliers from around the world participate in
the remaining 90% of the value. For example, the wings are manufactured in Japan,
the fuselage of carbon plastic is made in Italy, and the chassis of the plane is
manufactured in France. As shown in Illustration 5.6. components for the new 787
come from distant parts of the world. International distribution of responsibility for
the production allows Boeing to become a system integrator and to focus on its core
competencies - design, marketing and branding. Thus, Boeing reduces the risk of
delay of production. The company is no longer in the power of the weakest unit in
the chain, which is often one of Boeing’s own plants.
28
Illustration 5.6 Sources of supplies of components for the company Boeing for its
new aircraft 787
Kansas and Oklahoma Japan
Company: Mitsubishi Heavy Industries
(USA)
Company:
Spirit Part: tank on the wings
Aerosystems
Part: butt edge
Japan
Japan
Company: Kawasaki
Company: Fuji Heavy Industries
Heavy Industries
Part: central tank on the wings
Part: fixed rear edge
Australia
Kansas and Oklahoma (USA)
Company: Hawker
Company: Spirit Aerosystems
de Havilland
Part: Engine pylons
Part: removable rear
edges
Sweden
Company: Saab
Aerostructures
Part: Cargo hatches,
access hatches
Washington (USA),
Canada, Australia
Company:
Boeing
Fredrickson
Part:
vertical
stabilizer
Italy, Texas (USA)
Company:
Part:
Horizontal
stabilizer,
central
fuselage, tail part of
the fuselage
Japan
Company: Kawasaki
Heavy Industries
Part: Fuselage, niche
for the landing gear
France
Company: Latecoere
Part: Passenger Doors
Kansas and Oklahoma
(USA)
Company:
Spirit
Aerosystems
Part: Fore part of the
fuselage
France
Company:
MessierDowty
Part: Chassis
Washington (USA), Canada, Australia
Company: Boeing Winnipeg
Part: fairing
Охайо (САЩ)
Company: General
Electric
Part: engines
Korea
Company: Korean Airlines-Aerospace
Division
Part: ailerons
Великобритания
Company:
RollsRoyce
Part: Engines
Северна Каролина
(САЩ)
Company: Goodrich
Part: gondola of an
engine
SOURCE: Tatge M., “Global Gamble”, Forbes, April 17,2006.
29
Networks of logistic centers and providers of international courier services are
an integral part of international logistics chains. Many companies delegate activities
of the logistics chain to such independent service providers as DHL, FedEx, TNT
and UPS. Consulting companies that manage the logistics activities of other
companies are called third-party providers of logistic services (3PL)19. Using 3PL is
often the most ideal solution for international logistics, especially for companies that
produce small amounts or have insufficient resources and experience to create their
own logistic network.
A good example of how managing the global logistics chain evolved can be the
continued integration of the European Union. The removal of border control allows
managers of logistics chains to redraw the maps of their logistic activities in Europe.
Warehouse and distribution centers are consolidated and centralized. Intel has
reduced its transport costs by at least 7% by consolidating its costs for international
shipments in four transport companies. As a result, Intel significantly enhances the
performance of supplies in time and customer service from its 14 production centers.
The global logistics network consolidates supplies, production and distribution
in several strategic locations around the world so that the company be able to
concentrate these activities in countries where it could enhance its competitive
advantages. Illustration 5.7. shows the stages, functions and activities in the logistics
chain. It reveals how suppliers interact with the company that carries out
international business and how it in turn interacts with distributors and retailers. Each
stage in the global logistics chain includes functions and activities involving the
company in the supplies and distribution. When the company deals with many
products and demanding customers worldwide, the management of logistics chains
becomes more complicated.
Costs associated with the physical delivery of goods to the international market
could reach up to 40% of the total cost value. Skillful management of the logistics
chain reduces costs and increases quality of customer service. Experienced
companies optimally use information and communication technologies (ICT) which
streamlines the logistics chains, reducing costs and increasing efficiency of
distribution. For example, managers use a system for electronic data interchange
(EDI)20, which automatically transmits orders directly from customers to suppliers,
through a modern ICT platform. The British supermarket chain Tesco significantly
reduces its storage costs by using the EDI system to connect the commercial points
with the managers in supply management. The technology enables Tesco to track the
30
purchases to the nearest minute. Many canned foods that previously remained in
Tesco's stores for days or weeks, now are received directly from suppliers.
Software applications for management of logistics chains improve information
sharing and increase efficiency by helping the manufacturer and the company to
track their cargo and customs clearance. Many companies digitize key documents
such as invoices and customs declarations, which increases speed and reduces the
cost of processing orders and shipments. The Spanish company for retail Zara is a
good example of a company that uses EDI technology to optimize the management
of its logistics chain, the management of stocks and the response to consumer
demand. The company uses wireless PDA and ongoing communications with its
shops, to carry out ongoing market research. These technologies allow Zara to
become a leader in retail. As in the case of Zara, the best global logistics chains
consist of reliable, capable partners associated with automated real-time
communications. In an efficient global logistics chain, a company and its chain
partners must constantly keep in touch and exchange information, to meet the
demand of the market.
31
Illustration 5.7. Stages, functions and activities in the global logistics chain
Company that carries
Suppliers
out international
activities
Stage in a Supplies from the It imports raw materials;
domestic
market exports
goods
and
logistics
and from abroad
services
chain
Main
functions
Typical
activities
Intermediaries and/or
retailers
Distribution
to
customers
in the
domestic market or
foreign
customers
(export)
They provide raw It produces or assembles They distribute and
materials,
parts, components or finished sell
goods
and
components,
products, or creates services
supplies, as well as services.
business processes
and other services to
companies
They maintain stock It manages stocks, They manage stocks,
availability, process processes
orders, give or process orders,
order, transport
manufactures
or produce
services,
goods, provide
assembles
products, manage
physical
services
produces and provides distribution, provide
services, delivers goods warranty and afterto customers, retailers sales service
or intermediaries
Logistics and transport. Logistics is a marketing-oriented business of management
of the physical distribution of products and services. It includes management of
information, transport, stock, storage, materials, and similar activities related to the
supply of raw materials, parts, components and finished products. Managers strive to
reduce the costs for travel and storage by using "Just in Time" systems for planning
inventory. Internationally, logistics is a complex process because of the large
geographical distances, different legal and political environment, and often
unsuitable and expensive distribution infrastructure in the various countries. The
more diverse supply chain of the company is, the greater the cost of logistics is.
32
Competent management of logistics is essential. For example, over 40% of
imports in the USA is carried out through the ports of California in Los Angeles and
Long Beach. Although the two California ports handle more than 24 000 containers a
day, deficiencies in infrastructure and increased demand lead to long delays, which is
transformed into more time for transportation and higher costs for American
importers. Due to delays, Toys "Я" Us must add 10 days in its logistics chain, and
MGA Entertainment loses income of 40 million US dollars when it cannot deliver its
popular Bratz dolls to retailers on time21. Due to poor planning of the logistics chain,
video game accessories for Microsoft, Xbox 360 were sold out soon after their
release. Their shortage raised prices in the inofficial channels. In eBay, Xbox
accessories were sold for 1000 US dollars, compared to the official price of 400 US
dollars.
Types of transport. Types of transport involve combining several indicators.
Various factors should be considered when choosing a particular type of transport:
the transport time is the time to deliver the goods, the ability to anticipate is the
reliability of expected time of shipment compared to the actual time of shipment, and
the transport costs. For example, the ocean transport is much slower but much
cheaper than the air transport. The air transport is quick and extremely predictable,
but expensive. Considering its high price, the air transport is the preferred type of
transport in three common situations: for transportation of perishable goods such as
food and flowers, for transportation of goods with a high factor of value/weight, such
as jewelry and computers of "laptop" type, as well as for transportation of emergency
supplies, such as when a foreign customer urgently needs a missing component.
The use of air transport has increased significantly after the seventies of the
twentieth century, as the price of the air transport decreased. Air shipments represent
only about 1% of the total volume, but more than one third of the total value of
international supplies.
The innland transport is generally more expensive than the oceanic one, but
cheaper than the air one. Oceanic shipments from China to the United States, or from
East Asia to Europe, take four weeks including customs clearance. Although slow,
oceanic shipment costs are too low, often less than one percent of the total price of
the goods.
33
5. Importance of global supplies for the national interests and corporate
citizenship
Global supplies are discussion phenomenon in international business. Attitude
towards them is not unequivocal. The business community sees them as a way of
preserving or enhancing company competitiveness. Governments sometimes have a
negative attitude, considering the loss of jobs.
After the employees of IBM in Europe began a strike against the offshoring,
shareholders at the annual meeting of IBM insisted on adopting an anti-offshoring
decision. If the decision is adopted, it would restrict the capabilities of IBM to
manage the company, and it would jeopardize its results.
The general public is also critical about the offshoring. When the State of
Indiana awarded a contract worth 15 million US dollars for IT services to a supplier
who plans to use technicians from India for part of the work, the Indiana Senate
intervened and spoiled the transaction. Indiana is one of many public contracting
entities assigning services to foreign contractors, which aims to save money on taxes.
The state recently granted a concession management of the paid Indiana highway to
an Australian-Spanish corporation for 75 years for 3.8 billion US dollars.
Concerns about outsourcing and offshoring are nothing new. In the seventies
and eighties of the twentieth century, when manufacturing activities were assigned to
external contractors, the trade unions protested against “corporations-deserters”.
Fortunately, gloomy forecasts for job losses appear to be wrong as a result of the
economic growth and increasing employment in the nineties of the twentieth century.
In the USA, the share of activities assigned overseas each year is still below 0.1% of
the total employment in the country.
5.1. Potential damage to the economies as a result of global supplies
Concerns about the effects of globalization deserve serious attention. Critics of
globalization identify three major problems. Global supplies could lead to (1)
domestic job loss (2) reduction of national competitiveness, and (3) deterioration of
living standards. As regards the latter two problems, critics fear that the more
activities are carried out at a lower price with similar quality in other countries,
countries with high wages will eventually lose their national competitiveness.
Opponents fear that the knowledge and skills will leak to other countries, and lower
wages paid abroad for activities that were previously carried out in countries with
high wages will ultimately reduce earnings in the latter, and this will lead to a lower
living standard.
34
The greatest concern is caused by the job losses. For example, the number of
jobs in the legal sphere exported from the USA abroad exceeds 25 000 per year22.
According to some estimates, more than 400 000 jobs in the IT industry have been
exported from the USA abroad. One investigation states that by 2017 3.3 million jobs
in service sector - worth 136 billion US dollars - will be exported abroad. Critics
state that all this means an export of jobs. Apart from developed economies,
however, there is also loss of jobs in less developed economies. For example, textile
enterprises in El Salvador, Honduras, Indonesia, Morocco and Turkey are
restructured, as work in the textile industry is gradually moving to China, India and
Pakistan, where multinational clothing companies can operate more efficiently. Let
us consider the potentially devastating impact of a large-scale job loss on a small
community. Recently, Electrolux, one of the largest manufacturers of household
appliances in the world, closed its factory in Michigan and relocated its production to
Mexico. The company manufactured refrigerators in Greenville, Michigan, for nearly
40 years by providing 2700 jobs. From the perspective of the company, closing of the
plant has an economic sense. The largest ever factory for production of refrigerators
in the world now begins to show poor financial results and hires expensive
manpower. By opening a makiladora-type plant in Juarez, Mexico, Electrolux aims
at benefiting from lower wages and taking advantage of El Paso Free Trade Zone
across the border in Texas. The management is convinced that it is in the interest of
the company and strengthens its international competitiveness.
From the perspective of the local community, however, the decision has a
detrimental effect. How can so many jobs be recovered in such a small community?
What will happen to the social and economic environment of the city? To seek help
from the trade unions and the State of Michigan would be useless. The consent of
trade unions to lower wages and the tax concessions and subsidies from Michigan for
over 100 million US dollars were not sufficient for Electrolux to alter its intentions.
It also did not help that Electrolux is a foreign company based in Sweden. Local
residents understood that the company did not feel loyalty to their community. In
2007 the plant in Greenville was destroyed. The city hopes to redevelop the territory
for other purposes - for apartments overlooking the river, shops and a park. Most
former employees have started work in other places, mainly in service sector, even
for less pay.
Moreover, the loss of jobs is also reached when companies are increasing
imports of raw materials and finished goods from abroad. For example, Wal-Mart
imports about 70% of its goods from China. This has prompted some officials and
concerned citizens to form a protest group named Walmartwatch.com. The group
argues that millions of jobs in the USA were lost due to the fact that Wal-Mart buys
from foreign suppliers rather than from U.S. suppliers.
35
From the examples of Boeing 787 Dreamliner, it is clear that in the process of
its transformation from a manufacturer into a company for system integration, the
company closed about 38 000 jobs in the USA. It has been also criticized for
transmission of technologies to foreign partners.
These examples clearly show the contradiction of interests between the
international companies and the local communities. Proponents of globalization
argue that workers who lose their jobs due to offshoring can find new jobs. But it
may be too optimistic assertion. Redundant workers need much time to find new
jobs. According to estimates of experts, about a third of redundant workers in the
USA cannot find a suitable job within a year. Older workers are particularly
vulnerable.
For them it is harder to learn new skills necessary for the new positions. The
percentage of occupational rehabilitation is even lower in Europe where
unemployment rates are already high, and in Japan where occupational rehabilitation
plans are not so flexible. In Germany the share of workers who are not labour
readjusted within one year after losing their jobs is about 60%. In these
circumstances, globalization can increase the total unemployment rate, reduce the
overall level of income and cause damage to the national economy. Even workers
who find a new job may fail to reach the level of wages and work of their previous
positions.
Even workers who find a new job may fail to reach the level of wages and
employment of its previous positions.
5.2. Positive effects for the national economy
Supporters of global supplies draw attention to the benefits they provide to the
national economy. Supporters highlight the following main arguments. First, by
redirecting the value creation chains to the most profitable places, companies reduce
their production costs and improve their performance at the increasingly competitive
international market. For example, Roamware Inc., a company from the USA that
sells computer systems to providers of cell phones, saved thousands of dollars on a
project for creating an electronic database by hiring Pangea3, an Indian company, to
do the job instead of relying on the nearest supplier. By increasing the
competitiveness of individual companies, the national economy also strengthens.
Second, reducing costs and greater competitiveness enable companies to reduce
the prices for their customers. This benefits not just buyers, but also the companies
themselves that become more competitive in price terms and are experiencing greater
36
demand on the market, which in turn stimulates the creation of jobs, compensating
most of the jobs lost in outsourcing.
Third, using the most flexible labour market and the strong economic growth,
countries that export activities abroad can redirect their workforce to activities with
higher added value. This transformation increases the national productivity and
production efficiency. By concentrating resources into activities with higher added
value, companies create better jobs. The large software companies Microsoft and
Oracle both increased the outsourcing and their staffs for jobs with higher value23.
Finally, the decreasing wages could be compensated by lower prices of the goods
and services commissioned for production abroad. Therefore, global supplies
indirectly increase the consumer purchasing power and raise their standard of living.
For example, Wal-Mart has been heavily criticized for imports of most of its goods
from China. However, this enables Wal-Mart to sell their goods at low prices,
leading to higher living standards for the customers of Wal-Mart.
5.3. National policy promoting global supplies
The consequences of global supplies for the national economy and workers are
not yet fully known. A new comprehensive study on the USA claims that the official
statistics underestimates the impact of the offshoring on the national economy24.
Getting deeper in the statistics, the study found that the increase of imports, corrected
with inflation, is faster than the official figures show. The author concludes that
raising living standards in recent years is mainly due to the cheap imports, and to a
lesser extent, to the increase in the productivity at the domestic market. This implies
that real GDP (Gross Domestic Product) of the USA may be exaggerated.
Conversely, the benefits that U.S. consumers receive from the trade are actually
undervalued. The conclusion is that the standard of living in the USA depends on the
ability of foreign factories to increase productivity and reduce costs.
In short, these conclusions suggest that U.S. consumers can receive even more
benefits from imports than expected. From the perspective of the national policy, in
practice it is inappropriate to prohibit imports. A different approach is to reduce the
harm that imports may cause. The offshoring is a process of creative destruction, a
concept first introduced by the Austrian economist Joseph Schumpeter25. According
to this view, with the time the innovation activities of companies convert the mature
produce into obsolete one. For example, personal computers completely eliminate
the production of typewriters, DVD-players eliminate the production of videotapes,
etc. In the same way as offshoring leads to job losses and adverse consequences for
certain groups and economic sectors, it provides new opportunities and advantages
37
for both companies and consumers. The new industries created in the process of
creative destruction will create new jobs and innovations.
If the loss of some jobs is inevitable as a result of the offshoring, the
government policy will be more successful if directs the employment towards jobs
creating higher added value, by encouraging innovations, for example. Of course,
this requires more government intervention and would lead to positive results only in
a long term. The public sector can reduce the adverse effects of globalization. One of
the best ways is to keep the cost of doing business relatively low. Governments can
use economic and fiscal policy to stimulate the development of new technologies by
helping entrepreneurs to collect financial fruits of their work and to maintain the
value of the capital, required to finance the development activities, relatively low.
Another relevant policy is to create a strong education system with financially
secured universities that provide engineers, economists, scientists and other qualified
professionals, and to strengthen the partnership business - university. The strong
educational system provides the companies with skilled workers. When the
companies are restructured in the process of internationalization, the greater
flexibility of the workforce ensures that many of those who lost their jobs can be
employed again in other positions.
Conclusion
In modern forms of international business, complex ties and relations that
require an interdisciplinary approach interweave. The dynamic nature, rich content
and diverse nature of international business operations allow different perspectives
towards their research. Managers must have a good knowledge of their economic,
legal, management, intercultural and other aspects to successfully deal with the
challenges in the competitive struggle on the international market.
The effective implementation of international business operations contributes to
the internationalization of companies and enhancing their competitiveness. Most of
them are directed to offering their products and services in the global market by
seeking the opportunity to meet the specific requirements and needs of different
markets and at the same time achieving economy of scales of production. The global
supplies in the international business assist the companies to solve problems for their
development in the conditions of globalization, by increasing their production
flexibility, increasing customer satisfaction, improving the quality of products and
reducing production costs. Due to the rapid development of information technology,
these modern forms of international business are developing rapidly, and accoding to
many analysts, they are to be deployed on a larger scale, becoming one of the key
factors for competitiveness.
38
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1 Оmahe, K. The Borderless World: Power and Strategy in the Interlinked Economy, N. Y., 1990, p.240
2 Оmahe, K. The End of the Nation State. N. Y., 1995, p.256
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14 Friedman T., The World Is Flat, Farrar, Straus & Giroux, New York, 2005.
15 Insorcing - (backsourcing) - back attracting of production processes and functions in the outgoing
country (notes of the author).
16 Sourcing – (sourcing), i.e. global supplies, notes of the author.
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management - strategies for mergers, expansion, IT strategies and more. Analytical materials of the
company are aimed at industries such as media and communications, trade, financial institutions,
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18 Marsh P., Foreign Threat to Service Jobs “Overblown”, Financial Times, June 16/2005.
19 3PL or TPL – Third Party Logistic Provider
20 EDI – Electronic Data Interchange
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Executive Forum, September 2005.
22 Cameron D., Boeing: Manufacturing Enters a New Era, Financial Times, June 18/2007.
23 Bellman E., Koppel N., More US Legal Work Moves to India’s Low-Cost Lawyers, Wall Street
Journal, Sept.28/2005
41