International Operations

How Multiple International Environments Impact Productivity and Location Decisions

Harm-Jan Steenhuis, Lawrence Roland

• Publisher: Business Expert Press
• Year: 2014
• Print ISBN:
  9781606495780
• eBook ISBN:
  9781606495797
• Topic: Business
• Subtopic: Project Management
• Index: Business

The Hispanic–Latino community is large, expanding, and an important contributor to the U.S. economy. Numbering over 50 million, Hispanic–Latinos currently represent about 16% of the population. Hispanic–Latinos engage in a diversity of jobs that help keep the American economic engine running. The practice of entrepreneurship has been on the rise with over 2.3  million businesses in the United States categorized as Hispanic owned, generating over $345 billion in sales. This book examines the entrepreneurial mindset of Hispanic–Latinos in the United States. With limited literature on the subject, the authors created a pioneering book that captures the viewpoints of real-life Hispanic–Latino entrepreneurs. Using a 15-item questionnaire, the authors obtained information on entrepreneurial intent, goals, and business strategies utilized. This book highlights real world business experiences, including challenges relating to entrepreneurial pursuits, and the importance of hardwork, discipline, and a positive mindset in the success of an enterprise.

CHAPTER 1

Introduction

It was some 30 years ago, in the early 1980s, and French car manufacturer Renault had international ambitions, particularly toward the large U.S. market. By 1983, Renault had purchased a controlling stake in American Motors Corporation (AMC) and jointly the first product, the Renault Alliance, was produced. Despite some initial success overall sales were disappointing. By 1987, Renault gave up on the United States and sold its stake in AMC to Chrysler. This American adventure is estimated as having cost Renault $750 million.

In 1996, in a completely different industry, the British Telecom (BT) Group saw potential in the, geographically close, Dutch market. Initially, it formed a 50/50 joint venture with the Nederlandse Spoorwegen (Dutch railway company). In 2001, MmO2 was formed with BT having 100 percent ownership. Over the years, roughly $1.4 billion was invested but results remained disappointing. In 2003, MmO2 sold its Dutch arm for $17 million, a staggering loss on the investments made.

In 1998 in yet another industry, AMP, an Australian financial services group, was entering the competitive British market through its acquisition of the Henderson Group. Less than five years later, after poor performance of its UK business, AMP demerged its UK operations. It accepted taking a $947 million write-off in the process.

A similar story, this time in the health supplements industry, started in 1999 when Dutch food group Numico purchased U.S.-based GNC for $1.8 billion. Numico was Europe’s largest maker of baby formula and GNC the largest U.S. retailer of vitamins. Numico’s adventure with GNC in the United States was short-lived; it sold GNC in 2003 to Apollo Management for $750 million, that is, a little over 40 percent of the original purchase price.

Regardless of the industry, companies may experience these situations. The examples discussed are in developed nations but it is not limited to that. China provides a range of additional examples. With a population of 1.3 billion consumers, China appears very attractive. But things do not always work out as several companies have discovered. U.S.-based Best Buy entered the Chinese market in 2006; five years later, after a lack of success, it closed all of its branded stores in China. Similarly, U.S.-based Home Depot entered China in 2006 and it also closed its stores in 2012 after conceding that it had misread the Chinese market.

Despite the often glamorous headlines of international expansions in good times, there is also a much darker side to doing international business. Many optimistic international market entries are followed several years later by disillusionment, a divestment, or a loss. Some of this has to do with customer preferences as provided in the earlier examples. But similar stories also appear when manufacturers have made operations location decisions related to the cost of production and outsourcing to cheap labor countries.

An example is Dell’s experience in India. In the early 2000s, Dell decided to outsource its customer service call center to India. Wages in India are significantly lower than in the United States and many people in India speak English. In late 2003, after many corporate customer complaints about the service level, Dell moved its corporate customer support back to the United States. U.S.-based Handful, producer of bras, provides another example. Handful decided early in 2013 to relocate its manufacturing from Guangzhou, China, to Salem, Oregon, in the United States. Part of the motive for this relocation was the expectation that the company may gain appeal from customers as they weigh the value of low-priced clothing against the factory conditions that produce them.

The phenomena of moving manufacturing back from low-labor cost countries is known as reshoring or onshoring and many examples exist from recent years. In 2009, General Electric decided to move production of some water heaters back from China to Louisville, Kentucky. Increasing costs in China with lower labor costs in the United States due to a new labor contract were part of the reasons. Furthermore, the cost and complexities of inventory, the lead times, and the shipping cost were additional factors that favored a U.S. location. Caterpillar provides another example of a company that, when deciding on the location for a new hydraulic excavator plant in 2010, chose Victoria, Texas, in the United States for its location. Several excavator models were already produced in Japan and exported to the United States and this production was also moved to the new Victoria plant. Studies show that more than half of the foreign direct investments in foreign production operations are divested within 10 years of the initial investment (Benito 1997).

The purpose of this book is to gain insight into the broad range of variables that affect international operations and location decisions. International operations are defined as situations where a company operates outside its domestic location.

Of particular interest is the productivity of the international operations. This is because cost is often an important part of doing business internationally and cost is intricately linked to productivity. Productivity can be defined as the relationship between output and input that is achieved, that is, the real output and input (Veld 1992).

In mathematical form, this can be rewritten so that it becomes possible to relate it to the norm, for example, what is expected or planned:

where a comparison of the real inputs that were used with the planned usage relates to the efficiency of a process and the comparison of the achieved outputs with the planned outputs relates to effectiveness of a process. Therefore, the preceding can be rewritten to show how productivity relates to effectiveness as well as efficiency.

Productivityreal = Productivitynorm × Efficiencyreal × Effectivenessreal

Thus, productivity is a function of the usage of inputs and the outputs that are achieved. In other words, the achieved productivity is based on the norm (or planned) productivity multiplied with the efficiency of the operations and the effectiveness of the operations. The effectiveness can be viewed as achieving the desired output, that is, doing the right thing, whereas efficiency can be viewed as the means necessary to achieve it or the use of inputs, that is, doing things right. When operating internationally, productivity is affected and this is through effectiveness changes or efficiency changes. Two examples from advertising in Arab countries illustrate effectiveness. First, Samarin, which is a Swedish remedy for upset stomachs, ran a campaign showing basically three pictures. In the left picture a man looked sick, in the middle picture the man was taking the Samarin, and in the right picture the man was smiling (Symons 2005, 66). Similarly, a laundry detergent company’s advertisement showed a picture with soiled clothes on the left, its box of soap in the middle, and clean clothes on the right (Ricks 1995, 53). Both of these campaigns are not effective in Arab countries as they read from right to left, thus essentially changing the message of the advertisement. The earlier mentioned example of Caterpillar moving production from Japan back to the United States illustrates efficiency as the same output is generated (the machines are still produced, and still sold in the U.S. market), but the cost of doing so has been reduced by producing them closer to the market in which they are sold. Thus, efficiency has improved due to less resources being used.

International operations can take many forms such as exporting to international markets, but it also includes sourcing from international locations, or having a factory in an international location. International operations are a rather complex topic for a variety of reasons. One reason is that optimizing a domestic company is already complicated enough and when international locations are included in the equation, it makes it much more complex. Another reason is that there is not just one way that a company can have international involvement. Further complicating the matter is that apart from the many different ways that a company can have international operations, there may be (a combination of) different underlying motives for the internationalization such as gaining access to low labor cost (a cost motive), gaining access to an international market (market access motive), or using local technological resources (skills and knowledge access motive). Figure 1.1 provides a snapshot of some of the main ways and possible motives to have international operations.

Figure 1.1 Some types of international operations and motives

International operations are in one form or another part of different discipline areas. For example, from a country perspective there is public policy that deals mainly with economic and technological development and also economic geography that deals mainly with studying the geography or location and the spatial organization of economic activities such as related to clusters and the competitiveness of nations or locations. Together, these two areas deal with industrial policy and with the strategy of a country toward (manufacturing) industries. These areas are relevant for businesses because they provide insight into the attractiveness of locations. On the company side, some relevant academic areas are operations management, which is mainly concerned with how companies operate, and international management, which is mainly concerned with internationalization processes and, for example, trade. Together these two areas are relevant for businesses because they deal with a company’s international and location strategy.

These different discipline areas are incorporated in the discussion in this book. Typical books on this topic start with discussing strategy, then tactics, and end with operations. In this book, a different approach is followed. The strategic elements can only be understood at the end because strategic decisions can only realistically be made once an in-depth understanding of the overall context is achieved. Figure 1.2 illustrates how this book is set up. It starts with a discussion of culture in Chapter 2 because culture influences many things. This is followed by a discussion of why countries may want to attract businesses. This relates to economic and technological development. Countries are frequently interested in companies because companies offer an opportunity for countries to improve their situation. From a more company-oriented perspective, Chapter 4 focuses on what countries have to offer. This may include customers, that is, markets, an opportunity to access lower factor cost, or the ability to access a skilled and knowledgeable workforce. The notion that countries are frequently interested in attracting companies to improve their position is an important realization because it reveals that the country has weaknesses. Companies should be aware of these weaknesses before getting involved and Chapter 4 provides advice on where to find this information so that companies can make a reasonable assessment of the situation. Chapter 5 assumes that international operations are a good option and then goes a step further to discuss how companies go about becoming internationally involved. There are many different ways that companies can get involved in international operations, but not all of them are equally productive. Chapters 6 and 7 deal with the next step in international operations, that is, working within an international operations network. In Chapter 6, the focus is on international operations practices and the configuration of the network, that is, the factories, where they are located, their role within the network, and so on. In Chapter 7, the focus is on the coordination of the international operations network, that is, issues of management ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface
• Chapter 1: Introduction
• Chapter 2: National Culture
• Chapter 3: Country Development and Attracting Business
• Chapter 4: Advantages of Location
• Chapter 5: Internationalization
• Chapter 6: International Practices and Operations Networks
• Chapter 7: Transferring Operations
• Chapter 8: Conclusion
• References
• Index
• Ad page
• Backcover