CHAPTER 15
MANAGING INTERNATIONAL OPERATIONS
LEARNING OBJECTIVES:
15.1 Describe the elements to consider when formulating production strategies.
15.2 Outline the issues to consider when acquiring physical resources.
15.3 Identify the key production matters that concern managers.
15.4 Explain the potential ways to finance business operations.
CHAPTER OUTLINE:
Introduction
Production Strategy
Capacity Planning
Facilities Location Planning
Location Economies
Centralization versus Decentralization
Process Planning
Standardization versus Adaptation
Facilities Layout Planning
Acquiring Physical Resources
Make-or-Buy Decision
Reasons to Make
Lower Costs
Greater Control
Reasons to Buy
Lower Risk
Greater Flexibility
Market Power
Barriers to Buying
Raw Materials
Fixed Assets
Key Production Concerns
Quality Improvement Efforts
Total Quality Management
ISO 9000
Shipping and Inventory Costs
Reinvestment versus Divestment
Financing Business Operations
Borrowing
Issuing Equity
Issuing American Depository Receipts
Advantages of ADRs
Venture Capital
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Emerging Stock Markets
Internal Funding
Internal Equity, Debt, and Fees
Revenue from Operations
Capital Structure
A Final Word
A comprehensive set of specially designed PowerPoint slides is available for use
with Chapter 15. These slides and the lecture outline below form a completely integrated
package that simplifies the teaching of this chapter’s material.
Lecture Outline
I. INTRODUCTION
Essential to success in international markets are production strategies, including
the decision to centralize or decentralize production and standardize or adapt
production to national markets.
II. PRODUCTION STRATEGY
Careful planning of production helps companies cut costs to become low-cost
leaders and to design new products or product features necessary for a
differentiation strategy.
A. Capacity Planning
1. Assessing a company’s ability to produce enough output to satisfy
market demand.
2. If capacity now used is greater than the expected market demand,
facilities to expand production or whether additional facilities are
needed to expand capacity.
5. Capacity planning is also extremely important for service
companies.
B. Facilities Location Planning
1. Selecting a location for production facilities.
2. Key environmental factors in planning include the cost and
availability of labor and management, raw materials, component
parts, and energy. Other factors include political stability, the
extent of regulation and bureaucracy, economic development, and
the local culture, including beliefs about work and important
traditions.
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3. Reducing production costs through lower wages is often essential
to keep products at competitive prices, especially when labor
accounts for a large portion of total production. Lower wages must
be balanced against worker productivity, which is lower in
developing and emerging nations.
4. Service companies must locate near their customers and consider
larger inventories in target markets—adding to storage and
insurance costs.
7. Shipping costs are greater when production is conducted far from
target markets. Transportation costs are a driving force behind the
globalization of the steel and potentially other industries.
8. Location economies
a. Economic benefits derived from locating production
activities in optimal locations.
b. Companies undertake business activities in a location or
obtain products and services from companies located there.
c. The key fact is that each production activity generates
more value in a particular location than could be
generated elsewhere. The productivity of a location is
heavily influenced by labor and capital.
9. Centralization versus decentralization
a. Centralized production refers to the concentration of
production facilities in one location. Decentralized
production spreads facilities over several locations and
could mean one facility for each business environment.
their markets to respond to changes in buyer preferences.
They choose locations with the lowest combined
production and transportation costs.
e. Firms must balance the cost of getting inputs into
production and getting products to market.
f. Companies with differentiated products find decentralized
production the better option; locating separate facilities
near different markets, they remain close to customers and
respond to buyer preferences.
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g. When R&D and manufacturing must cooperate for
differentiation, they tend to be located in the same place,
although today technology allows for separate locations.
C. Process Planning
1. Deciding the process a company will use to create its product.
4. Availability and cost of labor in the local market is crucial to
process planning; if labor in the host country is cheap, a company
opts for less technology and more labor-intensive methods in
production.
5. Standardization versus adaptation
a. Production processes must be standardized or adapted for
different markets.
economies of scale and increases per-unit production costs.
R&D costs are higher for products with special product
designs, styles, and features.
D. Facilities Layout Planning
1. Deciding the spatial arrangement of production processes within
production facilities.
2. Facility layout depends on the type of production process, which
depends on a company’s business-level strategy.
III. ACQUIRING PHYSICAL RESOURCES
International companies must acquire physical resources to begin operations.
They must decide whether to make or buy the components for production
processes. What will be the sources of any required raw materials? Will the
company acquire facilities and production equipment or build its own?
A. Make-or-Buy Decision
Deciding whether to make a component or buy it from another company.
1. Reasons to make
Vertical integration is the process by which a company extends its
control over additional stages of production—either inputs or
outputs. When a company makes a product, it engages in
“upstream” activities: Production activities that precede current
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a. Lower costs
i. The company decides to make the products rather
than buy them in order to reduce total costs.
ii. Companies use in-house production when it costs
less than buying on the open market.
iii. Small companies are less likely to make rather than
buy, except if the company possesses technology or
another competitive advantage.
b. Greater control
i. Making rather than buying can give managers
greater control over raw materials, product design,
and the production process itself—all of which are
important factors in product quality.
themselves.
iv. Companies also make rather than buy when buying
requires providing key technology.
2. Reasons to buy
a. Outsourcing is the practice of buying from another
company a good or service that is not central to a
company’s competitive advantage. Outsourcing results
from continuous specialization and technological
advancement.
manufacturing, and a new and interesting type of
outsourcing seems to be increasingly popular. The online
forum called InnoCentive, which connects companies and
institutions seeking solutions to difficult problems using a
global network of more than 145,000 creative thinkers.
e. Lower risk
i. Social unrest or open conflict can threaten physical
facilities, equipment, and employee safety.
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iii. Eliminates the need to purchase expensive
insurance coverage needed in an unstable country.
But does not completely shield the buyer from
disruptions; political instability can cause delays in
receiving needed parts.
f. Greater flexibility
i. Making in-house products that require huge
investment in equipment and buildings often
reduces flexibility.
ii. Companies that buy products from one or more
outside suppliers retain or gain flexibility. Added
flexibility is key in a change of attitude toward
outsourcing.
v. Companies maintain operational flexibility by not
investing in production facilities; it can then alter its
product line very quickly.
vi. A company has financial flexibility if its capital is
not locked up in plants and equipment; it uses
excess capital to pursue opportunities.
g. Market power
i. Companies can gain power in their relationships
with suppliers by becoming important customers.
ii. Sometimes a supplier becomes a hostage to one
dictating quality improvements, forcing cost
reductions, and making special modifications.
h. Barriers to buying
i. Companies sometimes face obstacles when
purchasing products from international suppliers.
ii. The government of the buyer’s country may impose
import tariffs to improve the balance of trade.
iii. The services provided by intermediaries increase
the cost of buying abroad.
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B. Raw Materials
1. The twin issues of quality and quantity drive many decisions about
raw material acquisition.
2. Some industries and companies rely almost exclusively on the
quantity of locally available raw materials.
3. Raw material quality has a huge influence on the quality of a
company’s end product.
C. Fixed Assets
1. Fixed assets are company assets such as production facilities,
inventory warehouses, retail outlets, and production and office
equipment.
4. Local infrastructure must support proposed on-site business
operations.
IV. KEY PRODUCTION CONCERNS
How manufacturing operation companies maximize quality and minimize
shipping and inventory costs, and important reinvestment-versus-divestment
decisions.
A. Quality Improvement Efforts
1. Companies strive toward quality improvement for two reasons:
costs and customer value.
and the buyer is part of service quality.
5. Activities conducted prior to service delivery are also important.
6. Total quality management
a. Emphasis on continuous quality improvement to meet or
exceed customer expectations. It places responsibility on
each individual to focus on the quality of output.
b. By continuously improving quality, a company
differentiates itself from rivals and attracts loyal customers.
7. ISO 9000
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a. The International Standards Organization (ISO) 9000 is an
the quality of their products.
B. Shipping and Inventory Costs
1. Shipping costs can have a dramatic effect on the cost of getting
materials and components to the location of production facilities.
2. Shipping costs are affected by a nation’s business environment,
and inputs to production arrive exactly as needed. Although the
technique was originally developed for the automobile industry in
Japan, it has quickly spread throughout manufacturing operations
worldwide.
4. JIT drastically reduces the costs of large inventories and reduces
wasteful expenses because defective materials and components are
spotted quickly during production.
C. Reinvestment versus Divestment
1. Managers need to decide whether to invest further in operations
abroad or to reduce or divest international operations.
2. Companies continue investing in markets requiring long payback
periods if the outlook is good.
altogether.
6. Companies invest in operations offering the best return on
investment; this means reducing investments or divesting
operations in profitable markets to invest in more profitable
opportunities elsewhere.
V. FINANCING BUSINESS OPERATIONS
Companies need financial resources to pay for operating expenses and investment
projects. They must buy raw materials and component products for manufacturing
and assembly activities. They need capital for expanding production capacity or
entering new geographic markets and financing to pay for training and
development, to compensate workers and managers, and to advertise.
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A. Borrowing
1. International companies (like domestic companies) try to get the
are forced to seek international sources of capital.
4. A back-to-back loan is a loan in which a parent company deposits
money with a host-country bank, which then lends it to a
subsidiary located in the host country. (See Figure 15.1)
B. Issuing Equity
The international equity market (See Chapter 9) consists of all stocks
bought and sold outside the home country of the issuing company. This
helps firms to access investors with funds unavailable domestically. Yet
getting shares listed on another country’s stock exchange can be a
complex process. Complying with all the rules and regulations governing
a stock exchange costs time and money.
1. Issuing American Depository Receipts
a. To maximize international exposure, non-U.S. companies
list themselves on U.S. stock exchanges. A non-U.S.
company can list shares in the United States by issuing
American Depository Receipts (ADRs)—certificates that
trade in the United States and represent a specific number
Also, companies offer ADRs in the United States to appeal
to mutual funds because U.S. investment laws limit the
amount that a mutual fund can invest in companies not
registered on U.S. exchanges.
2. Venture capital
a. Venture capital is financing obtained from investors who
believe that the borrower will experience rapid growth and
receive equity (part ownership) in return.
b. Venture capitalists invest in new risky ventures because
they can generate large returns on investment.
c. The venture capital industry has become global.
3. Emerging stock markets
a. Companies in countries with emerging stock markets face
two problems. First, emerging stock markets are often
volatile.
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i. Investments can be either hot money—money that
can be quickly withdrawn in a crisis—or patient
money—investment in factories, equipment, and
land that cannot be withdrawn easily.
b. Second is the issue of poor market regulation.
i. Large local companies can wield influence over
their domestic stock markets; if domestic
shareholders dominate such exchanges,
international investors may hesitate to enter.
ii. The problem lies in regulation that favors insiders
over international investors.
C. Internal Funding
Ongoing business activities and new investments can also be financed
internally with funds supplied by the parent company or its international
subsidiaries.
1. Internal equity, debt, and fees
a. Time is needed for new subsidiaries to become financially
independent; so, parent companies finance operations.
2. Revenue from operations (See Figure 15.2)
a. Revenue is earned from the sale of goods and services; this
source of capital is the lifeblood of international companies
and their subsidiaries.
b. For long-term success, a company must generate sufficient
revenue to sustain day-to-day operations; outside financing
is required only to expand operations or to survive lean
periods.
c. A transfer price is the price charged for a good or service
transferred between a company and a subsidiary.
Companies set subsidiaries’ transfer prices high or low
according to their own goals (e.g., to minimize taxes in a
high taxation country).
D. Capital Structure
1. A company’s capital structure is the mix of equity, debt, and
internally generated funds that it uses to finance its activities.
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2. Firms try to strike the right balance among financing methods in
order to minimize the cost of capital and risk.
3. Debt requires periodic interest payments to creditors such as banks
and bondholders. If the company defaults on interest payments,
creditors can sue the company or force it into bankruptcy;
preferred stock equity holders can force bankruptcy because of
default.
of local versus international financing, access to international
financial markets, and currency exchange controls.
7. Choice of capital structure for subsidiaries is highly complex.
VI. A FINAL WORD
Whether an international company’s production activity involves manufacturing a
product or providing a service, it must acquire many resources before beginning
operations. It needs to resolve such issues as where it will get raw materials or
components, how much production capacity it needs, whether to construct or buy
new facilities, the size of service centers, and where it will get financing. The
answers to these questions are complex and interrelated.
Quick Study 1
1. Q: Assessing a firm’s ability to produce enough output to satisfy demand is called
what? A: Capacity planning is the process of assessing a company’s ability to produce
2. Q: Location economies can arise from the optimal execution of what?
3. Q: What typically determines the process that a firm uses to create its product?
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A: Process planning is deciding the process that a company will use to create its
Quick Study 2
1. Q: Vertical integration is the process by which a company extends its control over
what? A: Vertical integration is the extension of company activities into stages of
2. Q: Why might a company make a product in-house rather than buy it?
3. Q: Why might a firm buy a product rather than make it in-house?
A: Outsourcing is the practice of buying from another company a good or service
that is not central to a company’s competitive advantage. One reason why a
company may buy rather than make a product is to lower risk. Political risk is
quite high in certain markets. Sometimes the government of an intensely
nationalistic nation might decide to expropriate or nationalize industries without
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factory adds value to the otherwise vacant land. The state might allow the
business to pay a reduced property tax rate for the first few years the factory is
open, which then would lower their tax liability while other operating costs run
unusually high. With the factory expecting to employ 1,500 people, the state will
also experience an increase in sales tax revenue because of the increase in
business activity. All of which, will lead to reduction in the levels of
unemployment.
15-7 Would you feel comfortable defending your advice if it were to become public?
Explain.
A: A similar scenario actually occurred in Alabama when Mercedes signed a deal
to open its new state-of-the-art manufacturing facility. Taxpayer money often
fosters economic development packages in large and small communities
Teaming Up
Financing Project. Suppose you and several classmates are a team assembled by the
chief financial officer of a consumer-goods company based in Mexico. Your company
wishes to expand internationally but lacks the necessary financial capital. Your team’s
task is to research the options.
15-8 What financing options do you think are available to your company?
`
15-9 Considering the prevailing situation in the Mexican and international capital
markets, why is each option feasible?
15-10 Why are certain options off limits, given prevailing market conditions?
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Practicing International Management Case
Toyota’s Strategy for Production Efficiency
15-13 Q: Chrysler engineers helped Toyota develop its Sienna minivan. In return,
Toyota provided input on automobile production techniques to Chrysler. Why do
you think Chrysler was willing to share its minivan know-how with a key
competitor?
15-14 Q: Considering financial, marketing, and human resource management issues,
what other benefits do you think Toyota obtains from its production system?