Prospects for an Australian Manufacturing Company of Investing in Advanced Manufacturing Technology - Assignment Example

Question 1 The basic purpose of this report is to evaluate the prospects for an Australian manufacturing company of investing in advanced manufacturing technology. For this purpose, the researcher will apply the transaction cost theory to determine whether any such investment is optimally feasible or not. Before any empirical studies are conducted, it is best that the researcher first try and understand the system the basis of transaction cost theory. Now, in any organization it takes a large pool of individuals and work groups who have to work together as well as take initiative on their own decree in order to ascertain the fulfillment of all the goals of a company. Therefore, transaction cost economics implies that managerial control structures can be viewed for better understanding as the answer to the many problems firms face with regards to controlling, adaptability, incentives management and enforcement which crop up due to the contraction and management of these offerings. There are two major instigators of these problems: Behavioural traits of the people who are attached to the project The type of activities that the organization wishes to undertake, and the requirements from the members of the organization by the organization with regards to these said activities. First, the researcher will look at the behavioral aspects of this issue. Now, with regards to the behavioral characteristics of human being, transaction cost economics allows the presence and controlling interest of factors of bounded rationality and opportunism. The basic interpretation of the term Bounded rationality is in reference to the bordered cerebral and computational ability of the human beings in general. (Hodgson, 1998) On the other hand, the concept of opportunism is defined quite acutely as the self-interest seeking and maximization directives of every person but done with a lot of craft and astuteness. (Maki, 2000) Due to the negative connotation that is attached to opportunism, most these self-interest maximization activities are well though out actions prepared in a bid to misinform and hoodwink all the other participants of this action. The type of the activities that take place and the requirements of these activities on the part of the participants of these activities are demarcated separately based on their respective grades in three separate areas of judgment: Ambiguity; or what can also be identifies as the level of risk and uncertainty that any firm has to face with regards to decision based on random variables in the present date. The level of investment specificity; the level of use of alternative investment opportunities that can be entertained as an assistance mechanism to the main investment that is being made which would lead to a large amount of opportunity cost losses. The level and subsequent strength of asymmetric information a priori to the actual unfolding of the event that is going to take place or the capability of the evaluation mechanism that has been put in place to demarcate the real level of quality of the real delivered appointment. (Marginson, 1999) Now, these factors, in the presence of human behavioural concepts that have already been described above i.e. bounded rationality and opportunism, these features are considered to be most probably correlated to the easily differentiable problems of organizational control that must be brought to the attention of the scholars and general masses alike. Now managerial control structures are the basic mechanism that has been the major choice of problem solving mechanism for most type of organizations around the world. These prescriptions are available in a completely overpowering range of alternatives. However inside this overpowering range, only a certain type of standard methods of control can be identified and easily distinguished: Managerial control from an arm’s length: This has the inherent trait of control over the outcome that is to take place in the future. These said controls have the inherent ability to control the final result of the proposed activity and these controls are either standard derivatives of the market or conditions of the contract that was signed between any two parties with regards to this activity that was determined even before the activity had taken place. Mechanical control: The control over the administrative aspects of any organization which are determined by the concept of behavioural commoditization or organizational performance levels that the organization sets out to achieve at the start of the activity. Investigative control that is determined by the congregating understandings those collect and then expand during this entire ordeal of the activity. Limit control: considered by many to be very narrow-minded at the very crux of this issue that this issue that puts emphasis on those actions that can be easily avoided. (Otley, 2001) These archaic structures of control are very different than those which are applied in problem solving techniques. Due to this, these people have been typecast as individuals who have the ability to perform under certain conditions and in certain circumstances whereas some areas of governance are simply said not to fall under their jurisdiction. Finally, these structures also have different levels of cost and hence have been considered to be an empirically observed alignment of an activity and the control structure of such activities is explained by delineating the relative efficiency properties of the match. (Pratten, 1997) Therefore, after analyzing the transaction cost theory, we come to the evaluation that investment in any technological advancement can never be really determined optimally because of the concepts of bounded rationality and opportunism. So, any evaluation of investment decisions in heavy machinery have to be done on a cost benefit analysis which have to be done under the bounds of human bounded rationality and the possible presence of touch point opportunism i.e. opportunism on the part of the person who is directly handling the activities which in this case happens to be the large investment decision. Also, the governance structures of the organization is most important in determining whether the investment is directed in the right direction and towards the final outcome that the firm aims to achieve at the time of the initial investment. (Speckle, 2002) Now, after looking explicitly at the transaction cost theory, we can see that investment on the part of the Australian company is contingent upon the result of a cost/benefit analysis that has to be conducted vis-à-vis the holistic view of the company. On a personal account, with a burgeoning Chinese economy, consistently room for improvement and growth and manufacturing technology being the most likely avenue for expansion, this investment seems a very prudent and pragmatic step towards expansion. Question 2 The purpose of this briefing is to understand the implications for any company of adopting different modes of entry into the Chinese market. The basis of the argument will be established on the concept of ‘internationalization’; the researcher will try to discover the difficulties in internationalization, which in turn would apply to the empirical case of the Australian company as well. First, the researcher has to describe the basis of their respective argument. Now, at any point in time and under any circumstances, a resource can be beneficial, harmful or neutral. (Anand et al, 2002) Now, any resource is considered to be beneficial when it becomes a point of advantage for a firm over its competitors, thus enabling revenue creation (Calhoun, 2002). In order to maintain this advantage, the resource must have a high intrinsic value, must not be common and should have no close substitutes at all. Normally, there are only a few resources in a firm that act as a source of competitive advantage. In corroboration to this, a resource is considered harmful if it moves the firm away fro its advantages and diminishes the ability of revenue generation in the firm. Interior inflexibilities of a firm are an example of disadvantageous resources and these disadvantageous resources are created in a very small amount of time. Third, a resource is considered neutral when it is neither advantageous nor disadvantageous to the firm; however, they are of immense importance in the running of the firm. (Chao, 2001) Now, resources can be allocated into to two sets: Firm specific resources Common pool of resources Resources can only be considered firm specific if only the central firm is able to use them whereas common pool of resources are those resources which are available for use to any number of firm. Many consider them to be the inputs in the process of production. (Eden et al, 2001) These two basic concepts which have been described above form the basis of the development of six theoretically different classes of problems in the process of internationalization. Now, the first concept defined by the researcher i.e. relationship to advantage gives rise to three sets of problems: Decrease in comparative advantage of resources when they are relocated into a new country The new generation of disadvantages in the instance of transfer of resources into a new country. Paucity of neutral resources in the instance of firms lacking in neutral resources which are essential for operations in the new country. The second concept of asset specificity leads to the breakdown of each of the problems that have been mentioned above into two separate categories i.e. whether the problems are related to a single firm or a general pool of firms who perform in the same in industry. Now, the researcher will look at each of the problem in more detail and try to understand whether the problem is due to internationalization or not. Loss of an advantage: Any benefit that resources provide to an organization is relative to the organization’s competitors and industry of existence. Now, the environment in a new country will naturally be different from the firm’s country of origin largely due to differences in the natural features i.e. topography or weather conditions, or in the features of its people or organizations working in the country i.e. type of government, industry, common religion, national language, general level of wealth and most importantly culture. When the competition and the consumer base is different across different countries, then a resource which brought comparative advantage to a firm in one country might in turn not be so beneficial, in fact become harmful to that firm’s operations in another country. This loss can be specific to firm or a set of firms in the same industry. Creation of a disadvantage: Previously, the researcher has determined that relocation to a new country might render any resource of a firm unable to provide the same comparative advantage to the firm as it was before, however, there are also instances whereby based on the same set of reasons as the ones demarcated in the precious discussion, a resource might not just stop providing benefit but in fact become harmful for a firm when it is moved to a new location. This loss again can be specific to firm or a set of firms in the same industry. Paucity of neutral resources: Till now, the researcher has only shed light upon those cases where the researcher can experience changes in the effects of resources from a transfer from the country of origin to the country of relocation will take place. However, due to the difference in countries, some resources cannot be relocated to the new country for use in the production process. (Khanna et al, 2005) New resources which were not used in the previous production processes might have to be employed in the new location of production. Now, the paucity of these said resources will have a dampening effect on the operations of the international country with regards to the competing firms already present in the area since assortment of these resources will create expenses which will not be incurred by the competitors. Now, the researcher can determine two sets of problems that can occur due to a paucity of these neutral resources. The first set is met when a firm is in need of a greater allocation of resources over the ones that it already has in its portfolio, in a bid to expand the scale of operations in dissimilar trading circumstances and within the streamlines of dissimilar organizations. The second set of problems is usually related to the entry of a not just a single but a group of similar type of firms entering into a new country whereby the potential customers in the new market for these firms and the firms themselves are afflicted by a dearth of neutral resources that are essential in order to make use of the products provided by these new set of creators. (Cuervo et al, 2007) China and Australia are not exactly similar when it comes to societal cultures and norms. In addition, Chinese manufacturing practices are also dissimilar to those that take place in Australia, therefore, there is more chance that internationalization might lead to a loss of comparative advantage in the view of the researcher rather than augment any production factors. Therefore, the prudent decision would be to hold off this plan of entry for some period of time till factors of production are ascertained which are similar to both modes of production. Bibliography 1 1. Hodgson, G.M. (1998). Competence and contract in the theory of the firm. Journal of Economic Behavior and Organization, 35: 179-201. 2. Mäki, U. (2000). Theoretical isolation and explanatory progress: Transaction Cost Economics and the dynamics of dispute. Unpublished working paper. 3. Marginson, D.E.W. (1999). Beyond the budgetary control system: towards a two-tiered process of management control. Management Accounting Research, 10: 203-230. 4. Otley, D. (2001). Extending the boundaries of management accounting research: developing systems for performance management. British Accounting Review, 33: 243-261. 5. Pratten, S. (1997). The nature of transaction cost economics. Journal of Economic Issues, XXXI: 781-803. 6. Spekle, Robert (2002) “ Towards a transaction cost theory of management control” Rotterdam School of Management Bibliography: 2 1. Anand, J., and Delios, A. (2002). “Absolute and relative resources as determinants of international acquisitions.” Strategic Management Journal, 23: 119-134. 2. Calhoun, M. A. (2002). “Unpacking liability of foreignness: Identifying culturally driven external and internal sources of liability for the foreign subsidiary.” Journal of International Management 8: 301-321. 3. Chao, P. (2001). “The moderating effects of country of assembly, country of parts, and country of design on hybrid product evaluations.” Journal of Advertising, 30: 67-81. 4. Eden, L., Miller, S. (2001). “Opening the black box: Multinationals and the cost of doing business abroad.” Academy of Management Proceedings, 2001: C1-6. 5. Khanna, T., Palepu, K.G., and Sinha, J. (2005). “Strategies that fit emerging markets.” Harvard Business Review, 83(6): 63-76. 6. Cuervo-Cazurra, A., Maloney, M., and Manrakhan, S, (2007) “Causes of the difficulties in internationalization.” Journal of International Business Studies, 38 (5): 709-725. Read More