Most tangible Least tangible WHY MANUFACTURE ABROAD? (Ferdows) Reduce direct and indirect costs Reduce capital costs Reduce taxes Reduce logistics costs.

Most tangible

Least tangible

WHY MANUFACTURE ABROAD? (Ferdows)

Reduce direct and indirect costsReduce capital costsReduce taxesReduce logistics costsOvercome tariff barriersProvide better customer serviceSpread foreign exchange risksBuild alternative supply sourcesPreempt potential competitorsLearn from local suppliersLearn from foreign customersLearn from competitorsLearn from foreign research centersAttract talent globally

Types of Overseas Investments

•market-oriented production– where?– Notion of typical evolutionary

sequence

•Supply-oriented production

–natural resource industries

•cost-oriented production– a relatively recent category

– encouraged by developments in transportation and production technology

– increased attraction of other factors like labor

But, we need to remember

• differences in industry mix• differences in labor productivity• differences in labor militancy and

controllability may be as important as costs

Erica Schoenberger American transnational production in Western

Europein 1970s and 1980s(high tech products)

Alternative hypotheses

1. Cost-oriented production hypothesis

•Tariff barriers of 5-15%•but:

– production cost disadvantage of 17% or so

– transportation costs not significant

– product differentiation permits success despite tariff costs

2. Alternative hypothesis???

•Practical advantages of a local presence

• these are heightened as distinction between product and service gets blurred

Organizational Structures and Networks of

Relationship • Organizational structures as a

sequential process

Competitive Strategies

Locational needs and spatial patterns

• corporate and regional headquarters offices

• R & D facilities• production units

Alternateways of organizin

gproductio

n units

Ferdows’ thesis: Managing foreign plants according to

traditional criteria is no longer enough

• Declining tariffs reduce advantages of traditional market-oriented factories

• growing sophistication of products and importance of having world class suppliers reduces traditional cost-oriented factories

• pressure to get new products to market quickly requires closer links between product development and production

The emerging trend is:

Make foreign factories true sources of competitive

advantage. Custodians of specialized product

development and production for the entire company.

Sit

e C

omp

eten

ce

Strategic reason for site

Access to low

cost production

Access to skills

and knowledge

Proximity

to market

The Roles of Foreign Factories

Offshore

ContributorLeadSource

OutpostServer

Example: Hewlett-Packard’s Singapore factory

• 1970. Offshore factory. Simple low-cost components.

• Why Singapore???• Investment in quality improvement leads

to transfer of whole HP-35 calculator (1973)

• late 1970s. Makes keyboards, solid-state displays, integrated circuits all designed and first produced in U.S.

• 1983. Plant gains some product development and engineering functions

• 1986. R&D group of 35 people. Sole responsibility for developing and making all HP keyboards.

• Mid 1980s makes thermal inkjet printer within 4 months of intro. to American market.

• Mid 1990s. Lead plant for design, development and mfer. of HP’s portable printers.

Networks of external relationships

• Japanese keiretsu• overseas Chinese family business

network• international strategic alliance

– example of Nike