Review Summary & Update - Assignment Example

Assessment 1: Report on Chapter Review Summary & Update with Integrating Case Analysis, and Presentation Name Course Instructor Date Summary and Review The chapter looks at how MNEs can take advantage of their subsidiary plants in the overseas markets. Ferdows seeks to answer the question: How can an MNE’s subsidiaries be leveraged as a competitive weapon in the markets they directly and indirectly serve? The answers appear to be contingent on the mentality of the executive managers of the home country. For instance, the executive managers perceive their factories as the ultimate source of efficiency, and low-cost productivity. They, therefore, tend to be reluctant to apportion their factories adequate resources. Additionally, when they have high expectations of better performance in their foreign-based factories, they tend to demand customer service and innovation. In turn, they allot more resources to their factories in expectation of higher returns. Ferdows further notes that a majority of successful manufacturing MNE perceive their foreign-based factories to be the sources of FSA rather than just their capacity to save costs through traditional offshoring plants. Besides the conventional business motives like trade and tariff concessions, capital, cheap labour, subsidies, as well as minimised costs of logistics, the MNEs need to take advantage of their foreign factories, such as being nearer to the suppliers and customers, in order to attract proficient employees and to promote excellence in the entire company. Ferdows also discusses three fundamental changes within the global business scenario that influence the decision to assign roles to the foreign factories. The three include declined international trade tariffs during the last 20th century, increased technological sophistication of modern factories, and shortened timeframe for moving from development to actual manufacturing. This is consistent with the notion that a firm’s successful penetration in the international markets calls for more than just a need to transfer non-location-based knowledge from the home to the host country; the firm's subsidiary has to learn to create its own location-based advantages in the country it operates in. According to Kusluvan (2013), when making decision on whether to invest overseas, the executive management must initially decide whether the company has a sustainable competitive advantage that allows it to compete efficiently in its home market. Rugman (2013) also suggests that the competitive advantage has to be transferable, company-specific, as well as sufficiently powerful to give returns to the company amid political risks, foreign exchange risks, and increased agency costs. Further, Ferdows identifies six roles assigned to the foreign manufacturing plants by basing on two fundamental factors. The first is the plant's strategic purpose, such as being close to the market, being able to access cost-efficient production and ability to access knowledge or competent human resources. The second is the degree of distinctive FSAs the plants holds. Further, Ferdows specifies six roles assigned to the foreign-based manufacturing companies. The first role is offshore factory, whose main role is accessing cost-efficient factors of production. Its manufacturing output is decided by the executive managers in the home country. However, it does not create new FSA, as it enjoys limited autonomy. The second role is server factory, whose main objective is to manufacture products and to supply a defined nearby regional or national market. It has to contend with costs of logistics and trade barriers in the host country. It may take part in developing FSA although it generally has a constrained charter that has limited autonomy. The third role is outpost factory, which is intended to collect vital information from a developed host country cluster. Its role is also mixed with that of an input market-driven plant. The fourth role is the source factory, which seeks to acquire access to cost-efficient factors of production. It also seeks to acquire resources for reintegration and to create FSAs that can transform into 'best-practice' factories within a network of MNE. It has autonomy rooted in freedom to customise products and logistics. The MNE can create source factories in places with advanced infrastructure and competent human resource. The fifth role is contributor factory, which is orientated towards the region output or host country market. It takes charge of reintegrating resources through process improvement, development of products or customising products. The sixth role is lead factory, which also takes part in reintegration of resources and development of new FSA. It serves to acquire vital input from the local cluster, where it is entrenched, and serves an important function in localizing innovations. In all, MNE need to upgrade their outpost, server, and offshore plants to provide them with the capacity to create FSAs -- such as the lead, source and contributor factories. The upgrading calls for significant financial, time and resource commitment. The upgrading should take three stages: improvement of internal performance, accessing, and development of external resources and development of innovative knowledge. However, Ferdows warns against four obstacles that hinder upgrading the foreign-based plants. These include fear of depending on foreign operations for vital skills, transforming foreign-based factories as cash cows, changing production relative to fluctuation of exchange rates and being enticed by government engineered location-based advantages to move plants to new locations. Chapter update Sun et al. (2012) observe that as a company advances from operating strictly in the domestic to operating overseas as an multinational enterprise, it has to take account of its competitive advantages, the places it seeks to situate its plant, the level of control it aspires to gain over its foreign operations, and lastly the amount of monetary capital to seeks to invest in its overseas operation. Ferdows had clearly attempted to explain how each of these four factors affects the operation of foreign-based manufacturing plants. Indeed, Ferdows was of the opinion that when a company has inadequate competitive advantage to compete sufficiently in the home market, it is not likely to gain adequate advantages to compete successfully in a foreign market. Harrison (2013), however, explains that the reason for this is since the competitive advantage has to be significantly transferable and influential to allow the firm to prevail over the location-based barriers in the foreign market. This is consistent with Sutherland’s (2010) idea that the foreign operations need to be situated in places where market imperfections allow the firm to leverage its competitive advantages to an extent that it earns better returns above the cost of risks or capital. According to Peng (2012), MNEs endeavour to exploit the market imperfections in the host markets for chapter factors of production, as well as financial resources. This reflects what Ferdows attempted to explain that once MNEs have entered the foreign market, they attain a better position to identify and take advantage of market opportunities compared to the purely domestic firms. In another study, Wu et al. (2013) identify the strategic motives for MNEs to establish an operation abroad as the need to satisfy local demand instead of just the home market; the desire to acquire cheaper raw materials; the need to gain production efficiency in countries with low-cost factors of production; the need to acquire managerial expertise or advanced technology; and lastly the need to create new operations in nations with friendly policies. These factors can better be explained using the theories of MNEs, which Kusluvan (2013) explains three key questions: what motivates local firms to go abroad; what facilitates them to operate abroad; and why MNEs pursue varied forms of investments. Ferdows clearly used these factors. For instance, Ferdows explains that apart from trade tariff and tariff concessions, capital, cheap labour, subsidies, as well as minimised costs of logistics, the MNEs should also consider being nearer to the suppliers and customers, in order to attract proficient employees and to promote excellence in the entire company. Indeed, the Location Theory suggests two frameworks. The first is the supply-oriented location theory, which asserts that production occurs where the costs of production factors are lowest (Kusluvan 2013). Ferdows had noted that a majority of successful manufacturing MNE situate their foreign-based factories in locations with the capacity to save costs through traditional offshoring plants. On the other hand, the demand-oriented location theory explains that a firm’s location is controlled by the location of its market. The theory applies to the roles Ferdows assigned to the foreign manufacturing plants by basing on two fundamental factors, which is being close to the market, being able to access cost-efficient production and ability to access knowledge or competent human resources. Based on this review, it is clear that MNEs that have fruitfully invested abroad enjoy varied competitive advantages, such as the economies of scale; better financial capacity; the level of competition in the home markets; more advanced technology; managerial expertise; and lastly, differentiated products. Case analysis 1. How did Flextronics classify its plans before mid-1990s? What was the drawback for such a classification? Flextronics had plans to expand internationally in 1980, particularly in Asia and parts of the United States. Hence, it set up a plant in 1981 in Singapore. However, it faced a major drawback; the Silicon Valley downturn during the early 1990s cut the demand for the company's services. This led the firm to shut its US operations, after new owners shifted the company's formal home to Singapore. 2. Define the strategic roles of the following plants: Chennai industrial park Chennai was established to gain monopolistic advantages in places with previously non-existent competition. This is in spite of the fact that other industrial parks faced internal competition. Others like Chennai Industrial park did not face the competition, as it was intended to be the company's only industrial plant in India. The strategy is consistent with Sutherland’s (2010) idea that the foreign operations need to be situated in places where market imperfections allow the firm to leverage its competitive advantages to the extent that it earns better returns above the cost of risks or capital Guadalajara industrial park in Mexico The Guadalajara Park was intended to get closer to ready customers. The park faced already established competition and was built to target the European and North American market by being strategically close to the market. Doumen indstrial park in China The Doumen Park was targeted at taking advantage of the close proximity of the large supplier network in China. The low labour cost, advanced technological capabilities, as well as the strong supplier base made Doumen industrial park highly competitive. Other international operations The new strategy for acquisition, such as that of acquiring Instrumentation Engineering (IE) was to gain technological competence in high-cost nations. The IE had reputation for proficiency in technological designs and productions. 3. Why Flextronics had manufacturing activities in high-cost regions Flextronics had manufacturing activities in high-cost regions. This is because the high cost regions -- like the US, Germany, as well as Sweden where there is a high cost of labour and small supplier network -- have higher engineering capabilities and ready customer base. Flextronics still has to operate in high-cost regions in order to take advantage of the large number of customers in these regions. Flextronics' management also knew that by operating in the high-cost regions, they would be able to take advantage of the advanced technological capabilities and skilled labour in these regions. The high-cost regions were particularly well fit to manufacture valued-added products that advanced and technically complex skills and processes. 4. Changes in the Singapore operations The company consolidated its production facilities in Singapore to reduce cost of production, by closing a number of duplicate plants. The manufacturing plants operating in Singapore were closed down, while the Singapore operation was altered into a competency centre for design development. Changes the Doumen industrial park China The Doumen industrial park diversified its operations. It shifted from manufacturing simple phone charges to advanced miniature printed boards, as well as to Xbox by taking advantage of the cheap labour, cheap raw materials and large supplier base in China. Expectations to the Chennai industrial park in India Chennai industrial park was expected to take advantage of the first-mover advantage or monopolistic advantages in order to maximise profits and the firm’s growth. Due to the market imperfections in terms of notable knowledge, the company wanted to create an internalized external market to maximize profits, where it creates a market where it initially did not exist. This is based on the internationalisation theory of MNEs. 5. An update on the strategic role of Flextronics plants Flextronics’ operations strategy has been targeted at customer satisfaction through quality products and highly differential products in the face of stiff competition in the electronics market. The company’s operations strategy is intended to clear trade-offs resulting from the need to operate at low-cost, respond to changing customer demand and to provide product flexibility. The company has selected to attain this through location strategy, where it sets up industrial parks in relatively low cost countries that must be as nearly as possible to the customers’ sites. Overall, Flextronics MNE needs to upgrade their outpost, server, and offshore plants to provide them with the capacity to create FSAs -- such as the lead, source and contributor factories. The upgrading calls for significant financial, time and resource commitment. The upgrading should take three stages: improvement of internal performance, accessing, and development of external resources and development of innovative knowledge. References Harrison, A 2013, Business Environment in a Global Context, OUP Oxford, Oxford Kusluvan, S 2013, "A review of theories of multinational enterprises," Cilt vol13, pp.163-180 Peng, M 2012, "The global strategy of emerging multinationals from China," Global Strategy Journal vol 2, pp.97-107 Rugman, A 2013, New Theories of the Multinational Enterprise (RLE International Business), Routledge, New York Sun, S, Peng, M, Ren, B & Yan, D 2012, "A comparative ownership advantage framework for cross-border M&As: The rise of Chinese and Indian MNEs," Journal of World Business vol 47, pp.4–16 Sutherland, D 2010, "An Investigation Of Ofdi Strategies In China’s Private Businesses: ‘Round-Tripping’ Or ‘Onwardjourneying’?" Discussion Paper 65, viewed 7 March 2016, Wu, H, Chen, J & Liu, Y 2013, "The impact of OFDI on firm innovation in an emerging country," International Journal Technology Management vol 1 no 1, pp.1-18 Read More