Introduction to International Business

1. Introduction to International Business Discussion Section April 6, 2007 Sanny Liao

2. Review of Chapter 16 • What do the TQM, Six Sigma method and the ISO 9000 try to achieve? • Quality control • What factors should firms consider when deciding production locations? • Country factors (economic, political and cultural conditions, industry concentration, exchange rate, etc.) • Technological factors (fixed cost, minimum efficient scale, flexible manufacturing technology and mass customization) • Product factors (value to weight ratio, universality)

3. Review of Chapter 16 – Cont’d • What are the advantages of “make”: • Lower costs, facilitate specialized investments, protect proprietary technology, better coordination • “Buy”: • Input location flexibility, lower cost in some cases, benefit from trade agreements (e.g. offsets) • Between: strategic alliances with suppliers

4. Review of Chapter 16 – Cont’d • How to manage the global supply chain most efficiently and competitively? • Just-in-time inventory (JIT) • Internet and EDI systems

5. Case: Competitive Advantage at Dell Inc. • What are the advantages to Dell of having manufacturing sites located where they are? What are the potential disadvantages? • Dell’s manufacturing sites are in Brazil, China, Malaysia, Ireland, and the U.S. Advantages of these locations are that some of them are low cost (Brazil, China, Malaysia and, relatively, Ireland), they have educated work forces that are highly productive, and they are near large regional markets. Potential disadvantages: quality control, sensitivity to international shocks.

6. Case: Dell, cont’d 2. Why does Dell purchase most of the components that go into its PC from independent suppliers, as opposed to making more itself? Dell outsources because it enables Dell’s business model to be successful. Dell’s comparative advantage is in pricing, customization and rapid order fulfillment, all advantages gained through supply chain management and logistics. By outsourcing, Dell does not carry risks connected to inventory such as obsolescence, Dell can maintain flexibility in its manufacturing, and Dell has lower coordination costs than if it were vertically integrated, producing its own parts. Outsourcing allows Dell to focus on what it does best.

7. Case: Dell, cont’d 3. What are the consequences for Dell’s cost structure and profitability of replacing inventories with information? Since component cost account for 75% of revenues and the value of hardware depreciates extremely fast, by replacing inventory with information, Dell reduces its exposure to product depreciation. Dell further reduces its costs (hence profitability) by providing their key suppliers with a similar information system.

8. Case: Dell, cont’d 7. What are the potential risks associated with Dell’s global supply chain strategy? How can these risks be mitigated? • Transportation disruption, supplier problems, vulnerability to IT issues • Supplier problems are the most dangerous because they are not shared by competitors. They can be mitigated through vertical integration.

9. Global Production: Group Discussion • You are Apple, Maytag, Toyota, and Sony. How will you coordinate your production activities for the iPhone, the Maytag Neptune Washer, the Prius, and the Sony Playstation Portable? • Where should production be located and should they be concentrated or dispersed? • What should be the long-term strategic role of foreign production sites? Should the firm abandon a foreign site if factor costs change, or is there value to maintaining an operation at a given location even if economic conditions change? • Should the firm own foreign production or should production be outsourced? • How should a globally-dispersed supply chain be managed? • Should the firm manage the logistics or outsource their management?