Analysis of Tarde-Offs between Responsiveness to Local Markets and Economies of Scale - Coursework Example

Lecturer: presented: Introduction Globalization of trade has increased competition in the world economy. However, it is advantageous in that it has led to the opening up of foreign markets for companies to establish. It has encouraged them to engage in outsourcing and off-shoring in a bid to expand their market share in the global economy. The two practices have proved to be beneficial to companies especially in the improvement of their competitiveness and technological advancement. Most companies have been expanding beyond national borders for various reasons in the recent past. This has exposed managers to foreign cultures as well as procurement of raw materials and sale of goods beyond national boundaries. It has also created foreign competition. Location of Product Facilities There are several considerations which companies make before selection of the making the decision for location of production facilities. Mostly, cost reduction is seen as the major aspect of marketing that businesses strive to achieve. Establishing in a country where cheap labor and raw materials are available is one way through which companies especially in the developed countries such as the United States and Japan have minimized their production costs. Software firms from the United States have taken advantage of less developed countries for programming services where the cost of labor is cheaper. Mumbai has been found by many multinationals to provide a huge labor force which is experienced and hardworking. It is readily available especially for automotive companies. Multinationals such as General Motors, Fiat, Tata, Volkswagen and many others have established here to take advantage of the labor pool (David, & McGrew, Andrew 2000 pp 98-101). Policies regarding taxation are also useful in determining where a firm will set up its offshore facilities. Mostly, these will be set up where corporate tax rates are low such as in Puerto Rico which has made many foreign investors to establish in the area. Coca-Cola Company has taken advantage of this and has established 17 bottling plants in the country in collaboration with the Corporate Citizenship Company of the United Kingdom (The Coca-Cola Company 2003). Dubai is also another location which many multinationals find suitable for their subsidiaries due to its tax free policy for foreign investors. More than 800 multinationals have established their subsidiaries, with General Motors and American Banks taking the lead (David, & McGrew, Andrew 2000 p. 26). Multinationals also chose to locate their facilities in countries which offer incentives. Governments of the developing countries usually offer subsidies to foreign companies which wish to invest. South Korea is one of the countries which offer subsidies for foreign investors in a bid to attract more capital in the economy which is recovering from financial crisis. This has influenced the decision for location of production facilities in the country. American Standard Korea Inc, British American Tobacco Korea Limited, Bank of Tokyo-Mitsubishi UFJ Ltd and more than 100 other companies have invested in the country due to the incentives that the government offers. On the other hand, the government policy in a country with a high market potential for the finished product may influence the location of production facilities if foreign products are not allowed in the market without a subsidiary unit in the country for example china which has a high market potential. The availability of learning opportunities from other industries is also influential in decisions regarding location. Companies wishing to develop in technology will tend to locate their subsidiaries in areas with technological advancement and transfer in order to facilitate their access to technological information from the local industries (Wilson M S, Gilligan C, 2005 pp.76-84). Competition is another force which influences location. In order to counter the abilities of a competitor, an industry can establish its facilities in a foreign country where the rival company is well established, weakening its dominance in the market. Outsourcing and off-shoring are significant in protecting companies from fluctuations in the market. They enhance the company’s proceeds on assets. Research and development is also improved, as well as widening a company’s technological expertise which improves production. Outsourcing benefits companies through economies of scale which enable it to reduce the cost of production. This is because external firms tend to produce at a lower cost compared to a firm establishing an extra production unit in its system. A company shares the risks associated with the production process through subcontracting. More over, it helps the need to hire extra staff since the external company employs its own staff and it also helps in improving the skills of a company’s staffs through sharing of technology. However, outsourcing has several disadvantages in that the external company has to keep its interests in focus first. Off-is beneficial in the sense that the company is able to exploit new opportunities, as well as avoid unnecessary competition in the local market (David, & McGrew, Andrew 2000 p. 67-71). Location of production facilities is also influenced by the long term plans of multinationals. They tend to establish the facilities in countries where they are capable of producing more competitively than in their home country. The production costs in these locations are usually lower. They continue with the local production but on a lower volume. In many cases, the local market for the goods is usually higher than the foreign markets, and therefore they produce abroad and sell locally. This mainly arises in cases where the raw materials, low tax and cheap labor are available, such as the many Multinationals from the United States that operate at the tax free United States Mexico border. For example Pulsar Group, that is amongst the principal transgenic seed corporation (Zachary Fang 2005 pp. 99-141). Ethnocentricity influences the choice of location in the sense that a multinational company may be unacceptable by the local cultures. For example most of the multinationals which have an American origin rarely chose to establish in certain countries especially the Islamic states. Polycentricism is also a major factor since due to issues regarding availability of labor and other social amenities. Polycentric Urban Regions are mainly chosen since they present an opportunity to trade with other companies. Significant services are also available such as banking as well as good transport infrastructure which can assist in distribution cost reduction. The geographical location of a firm matters in terms of proximity to essential services. Companies usually make a choice of their location depending on the most important components in their production process (David, & McGrew, Andrew 2000 pp. 41-52). They may choose to locate their facilities close to the source of raw materials, or near to the market. All these factors which are considered by companies in selecting where to locate their facilities indicate the need to reduce production costs and satisfy the customers, who should be the main focus in the production and distribution process. The Supply Chain In order to ensure customer satisfaction, international companies develop an effective supply chain which ensures that the products are delivered conveniently to satisfy consumers’ demands. It is ensures that goods are delivered to the customers in the right time at the desired place. It is significant since the movement of the product from the manufacturer to the consumer determines the availability of the product. In order for a business to be profitable, it has to ensure the efficient supply of its commodities to consumers. The channels of distribution are significant in ensuring that the customers get the commodity at the desired place at the right time. In order to satisfy consumers’ desires about place, the producer can make use of intermediaries such as; wholesalers, sales agents, distributors as well as the internet (Wilson M S, Gilligan C, 2005 pp.56-64). Companies should ensure that the logistic specialist have the desired integrity required to design an effective supply chain. They should be in a capacity to develop a customized strategy for the supply and distribution of the products. It is essential to choose a means of transportation that is efficient and reliable. Coordination in the supply chain is also an important factor to pay attention to. The companies are supposed to establish the necessary contacts in order to ensure that there are no shortages in the market. In order to do this, most of the companies engage intermediaries who play a major role in the distribution of the goods. These intermediaries include wholesalers and retail outlets. The help in bringing goods close to the customers who may not be able to reach the production area. The effectiveness of communication is usually enhanced since the number of contacts which the management has to deal with is reduced. This implies that one wholesaler can receive information from several retailers, who in turn receive information from the final consumers. Several wholesalers convey the information to the company thereby enhancing the communication process (Wilson M. S, Gilligan C. 2005 pp. 54-63). The same supply chain is used while delivering products to the consumers, whereby the company delivers the products to a few wholesalers or dealers in various regions of the country, who in turn sell the products to the consumers. On the other hand, the products can reach the final consumer through retail outlets established in various parts of the country. For example Toyota’s subsidiaries usually have several retail outlets in major towns of the host countries. There is a benefit of diminishing returns when these intermediaries are engaged in the supply chain. The cost of contacting the consumer can be higher than the cost of contacting one wholesaler, who foregoes the cost of contacting the retailer, for the information to reach the final consumer. The cost of distribution is also reduced as well as the necessity of bargaining time and again when the supply chain becomes homogeneous (Wilson M. S, Gilligan C. 2005 pp. 74-82). The supply chain can also be customized in order to suit the customers’ desires. This can be useful in cases where customers need certain products from a company for a short period of time in different locations. The supply chain can no longer be homogeneous since there is no regular distribution processes. It requires a considerable amount of flexibility in order to satisfy the customers’ demands. Customization of the supply chain is mainly suited for the companies which deal with perishable products which are required by the consumers at specific times when they finish their stocks. The consumers of most of these are restaurants which have to make daily orders. Others include products which are used on certain occasions such as garments and flowers. These can not be offered on a standardized supply. In case a company is using a retail outlet, there is need to ensure that the right quantities of goods are available by constantly adding more stock (Zachary Fang 2001 pp. 99-141). Conclusion Companies expanding to begin producing in foreign countries are usually faced by various challenges. The management should be composed of people who are properly informed in regard to global production. They should also be capable of familiarizing with a diversity of cultures while on the other hand they should have the integrity to assess and develop the desired assimilation of the local market responsiveness. They should be capable of developing a supply chain which satisfies the customers’ needs. Bibliography 1. David, & McGrew, Andrew 2000. Globalization/Anti-globalization, (2nd edition), Polity, Cambridge University Press. 2. Fang Z. 2005. Supply Chain. Business Research. Vol. 11 No. 1, July, pp. 99-141. 3. The Coca-Cola Company 2003. “Company Performance”, Annual Report, Coca-Cola Company Inc. 4. Wilson M. S, Gilligan C. 2005. Strategic Marketing Management, CIM/Elsevier. Read More