Global Business Environment

LO2
Determine the strategic
complexities associated with
operating in a global environment
 LEARNING OUTCOMES
Global strategic complexities:
• The impacts of international trade law.
• The economics of globalisation and the
environmental impacts of globalisation in
the context of the challenges they pose for
risk and diversification strategies.
• The complexities of the international supply
chain management.
 Supply Chain Management
The supply chain – the network that links together the different
aspects of the value chain, coordinating materials, information,
and funds from the initial raw material supplier to the ultimate
customer.

Supply chain management – the design, operation, and

improvement of systems that create and deliver the firm’s
primary products and services.
Used effectively, it can:
 Reduce costs / Increase revenue
 Value-adding
 Competitive Advantage
 Historical Developments
• The need for large-scale changes
• Re-engineering
• Downsizing driven by cost reduction
programs
• Widespread attention to the Japanese
practice of management
• Globalization
 Historical Developments
Specialization Era: Outsourcing manufacturing & distribution
In the 1990s, industries began to focus on “core
competencies” and adopted a specialization model.
Companies abandoned vertical integration, sold off non-core
operations, and outsourced those functions to other
companies. This changed management requirements by
extending the supply chain well beyond company walls and
distributing management across specialized supply chain
partnerships.
 Case Study – John Deere

Supply Chain Cost Reduction Challenges:

• Diverse product range – heavy machinery for
the consumer market and industrial
equipment, which is made to order.
• Retail activity is extremely seasonal, with the
majority of sales occurring between March
and July.
 Case Study – John Deere
The Path to Cost Reduction:
• Supply chain network-redesign program – resulting
in the commissioning of intermediate “merge
centers” and optimization of cross-dock terminal
locations.
• Consolidated shipments and using break-bulk
terminals during the seasonal peak.
• Increased its use of third-party logistics providers
and effectively created a network that could be
optimized tactically at any given point in time.
 Case Study – John Deere

Supply Chain Cost Management Results:

Achievements included an inventory decrease
of $1 billion, a significant reduction in customer
delivery lead times (from ten days to five or
less) and annual transportation cost savings of
around 5%.
 Case Study – Intel
Supply Chain Cost Reduction Challenges:
• Intel had to reduce the supply chain costs for
the Atom chip, but had only one area of
leverage – Inventory.
• Inventory had been kept very high to support
a nine-week order cycle. The only way Intel
could find to make supply chain cost
reductions was to bring this cycle time down
and therefore reduce inventory.
 Case Study – Intel
The Path to Cost Reduction:
• Innovative supply chain strategy for the semiconductor industry: make to
order. The company began with a pilot operation using a manufacturer in
Malaysia. Through a process of iteration, they gradually sought out and
eliminated supply chain inefficiencies to reduce order cycle time
incrementally.
• Further improvement initiatives included:
– Cutting the chip assembly test window from a five-day schedule, to a bi-
weekly, 2-day-long process.
– Introducing a formal S&OP planning process.
– Moving to a vendor-managed inventory model.
 Case Study – Intel
Supply Chain Cost Management Results:
Through its incremental approach to cycle time
improvement, Intel eventually drove the order
cycle time for the Atom chip down from nine
weeks to just two. As a result, the company
achieved a supply chain cost reduction of more
than $4 per unit for the $20 Atom chip—a far
more palatable rate than the original figure of
$5.50.
 Case Study – Intel

Competitor challenges – TSMC:

Dominant semiconductor manufacturer.
Current scarcity of sophisticated chips into
electronics and automobiles products.
Over reliance and dependence on a few chip
manufacturers.

What about the US / China?

 Factors in Supply Chain
Strategies

• Compatibility – the degree of consistency between the

foreign investment decision and the company’s competitive
strategy.
• Manufacturing Configuration – requires the company to
consider whether to centralize manufacturing in one country,
establish regional operations, or set up multidomestic
production.
• Coordination – involves integrating activities into a unified
system.
• Control – involves measuring performance so the company
can respond appropriately to changing conditions.
 Supplier Networks

Sourcing – the process of obtaining a supply of inputs

(raw materials and parts) for production.
Global sourcing – the process of materials
management (which includes sourcing), inventory
management, and transportation between suppliers,
manufacturers and customers.
 Global Sourcing

Outsourcing – when a company externalizes a

function or process to another business.

Contract Manufacturing – when the entire

manufacturing process is being handled by
another firm.
Why Outsource?
 Why Outsource?

The growing importance of technology:

• Cloud computing
• Cybersecurity
• Robotic Processing Automation (RPA) / AI
Organizations are looking for the next major
technology catalyst to power their business
transformation efforts.
 Outsource – Cloud

Most companies today claim to be investing in

cloud computing.
• Around 90% see using the cloud as one of their
primary enablers in their outsourcing journey.
However, a lack of knowledge in terms of
solutions or operating models are major
barriers to realizing the full benefits of the
cloud, particularly around increasing scalability,
improving speed to market, and reducing costs.
Outsource – Cybersecurity
Outsource – Cybersecurity
 Outsource – RPA
Robotic Processing Automation (RPA) continues to be
a major driving force in outsourcing solutions.
• Over 75% are actively considering or pursuing RPA in
their sourcing arrangements.
• Adoption of RPA would continue to grow, with
companies implementing automation solutions
through third party providers, Centers of Excellence
(CoEs), or a combination of the two.
Organizations need to overcome technology
limitations and improve management awareness.
Outsource – RPA
 Automation/AI

1) Has your company invested in any form of

automation or AI?
If not, is this something your company is
considering?
2) What will be the future impact of automation on
the manufacturing sector in Vietnam?
3) Can automation/AI be a solution to declining
birthrates around the world in the coming
decades?
 Outsourcing
Consequences

Jobs: Gain vs. Loss (USA)

• About 300,000 jobs get outsourced out of the U.S. each year.
• 3.7 million in the U.S. have lost their jobs to China since 2001.
• 86% of Americans blamed outsourcing for exacerbating the Covid-19 crisis.

Other Examples:
 Vodafone – will be laying off 1,700 service center employees in Romania, India,
and Egypt, affecting about 8% of that workforce as they implement new
automation solutions.
 In the Czech BPO segment, software robots are now doing the full-time work of
an estimated 4,000 employees, representing 4% of the total BPO labor force.
These lost jobs have been partially offset by the 1,200 new full-time Czech
employees who work on programming and implementing automation systems.
Where to Outsource?
Case Study:

Strategy:
Our vision is simple but bold – we aspire to create the supply chain of the
future to help our customers navigate the digital economy and to make life
better for one billion people in the supply chain.

We are facing an era of exponential change. The convergence of

technologies has changed the way consumers and businesses interact. Our
strategy is focused on speed, innovation and digitalization of the supply
chain whilst putting purpose at the core of what we do.
Case Study:

Supply chain of the future:

Supply chain management is undergoing massive change driven by
disruptive technologies in the retail industry.

Coming up with innovative

services and solutions
through scale allowing to
act as a catalyst for change
to supply chain partners
around the world.
Case Study:

Cheng (2001) – International Production

Fragmentation Trade Theory
 Producers in different countries are allocated
a specialized slice or segment of the value
chain of the global production. Allocations are
determined based on "technical feasibility"
and the ability to keep the lowest final price
possible for each product.
Case Study:

John Hagel III (2015) – “Pull platform”

Connects participants with the capabilities of others and make them
available to their customers in ways that create significant value for platform
participants and customers.

Pull platforms are:

• Scalable and instead of becoming unwieldy with greater numbers of
participants, they become only more capable and valuable.
• Important owing to two factors:
1) Digitization
2) Globalization
 Why Global Sourcing?

• To reduce costs through cheaper labor, laxer work

rules, and low land and facilities costs.
• To improve quality.
• To increase exposure to worldwide technology.
• To improve the delivery-of-supplies process.
 Why Global Sourcing?

• To strengthen reliability of supply – supplementing

domestic suppliers with foreign ones.
• To gain access to materials that are only available
abroad.
• To establish presence in a foreign market.
• To satisfy offset requirements.
• To react to competitors’ offshore sourcing practices.
 Global Sourcing

Vertical Integration – when a company owns

the entire supplier network, or at least a
significant part of it.
Industrial Clusters – occur when buyers and
suppliers locate close to each other to facilitate
doing business.
Keiretsu – Japanese group of independent
companies that work together to manage the
flow of goods.
 Industrial Clusters
Industrial Clusters:
• Build production networks and value chains
• Develop supporting industry
• Improve the capacity and the competitiveness of enterprises
Cluster development can create potential positive externalities:
• Technology and knowledge spillover effects
• Sophisticated labor allocation
• Access to capital
• Cluster brand building
• Stronger stakeholder networks
Cluster development can also have negative effects:
• “Lock-in effects” – inhibiting competition
• Rely on existing technologies – hindering innovation
 Keiretsu
Keiretsu – a Japanese
business structure comprised
of a network of different
companies, including banks,
manufacturers, distributors,
and supply chain partners.
Mitsui & Co.
• Sumitomo Mitsui Banking
Corporation
• Sapporo Breweries
• Toray Industries
• Mitsui Chemicals
• Isetan Mitsukoshi Holdings
• Sumitomo Mitsui Trust Holdings
• Mitsui Engineering & Shipbuilding
• Mitsui O.S.K. Lines
• Mitsui Fudosan
 Foreign Trade Zones

Foreign trade zones (FTZs) – areas in which domestic

and imported merchandise can be stored, inspected,
and manufactured free from formal customs
procedures until the goods leave the zones
• General purpose
• Subzones
 Make or Buy Decision

The make-or-buy decision

Which production activities should take place
in-house and which should be subcontracted to
outside independent companies either
domestic or foreign?
Supply Chain
Investments
Hoa Phat Group acquires Australia's Roper
Valley iron ore mine: 320 million tons of
reserves with mining capacity of four million
tons per year.
 Supplier Relations

Firms that outsource must decide:

• How to work with suppliers
– Close arrangement
• Trust
– Arms-length
 Supplier Relations

Original Equipment Manufacturer (OEM) – a company

that produces parts and equipment that may be marketed
by another manufacturer.
Original Design Manufacturer (ODM) – a company that
designs and manufactures a product, as specified, that is
eventually rebranded by another firm for sale
 Case Study – VSmart
Exists the manufacturing of smartphones:
• Over dependence on outsourced components.
• Fierce competitions in the low-priced segment.

Vietnamese smartphone brands mostly chose Original Design

Manufacturing (ODM) as their business model by selecting
already-existing product designs from factories in other
countries
(mostly China), and selling it under
their own brand name.
 Purchasing Function

Four phases of purchasing:

1) Domestic purchasing only
2) Foreign buying based on need
3) Foreign buying as part of a procurement strategy
4) Integration of global procurement strategy
 Information Technology
Electronic Data Interchange – links suppliers,
manufacturers, customers, and intermediaries.
Enterprise Resource Planning/Material Requirements
Planning – links information flows from different parts
of a business and from different geographic areas.
Radio Frequency ID (RFID) – labels products with an
electronic tag, which stores and transmits information
regarding the product’s origin, destination, and
quantity.
E-Commerce – joins together suppliers with
companies and companies with customers.
 Quality

Quality
• Meeting or exceeding customer expectations.
• Involves careful design of a product or service and
ensuring that the organization’s systems can
consistently produce the design.
 Quality

Zero defects – no flaws of any kind.

Acceptable quality level (AQL) – a few

unacceptable products would be dealt with
through repair facilities and service warranties.
 W. Edwards Deming
Quality Management

Deming advocated for:

1) Better design of products to improve service.
2) Higher level of uniform product quality.
3) Improvement of product testing in the workplace
and in research centers.
4) Greater sales through side markets (global).
Deming’s 14 Points
 Deming’s 14 Points
• Create constancy of purpose toward
improvement of product and service.
• Adopt the new philosophy.
• Cease dependence on inspection to
achieve quality.
• Move towards a single supplier for
any one item, on a long-term
relationship of loyalty and trust.
• Improve constantly and forever.
• Institute training on the job.
• Institute leadership.
• Drive out fear.
• Break down barriers between
departments.
• Eliminate slogans, exhortations, and
targets for the work force asking for
zero defects and new levels of
productivity.
• Eliminate management by objectives.
• Remove barriers to pride of
workmanship.
• Institute education and self-
improvement.
• The transformation is everybody's
job.
 W. Edwards Deming
Quality Management

"Massive training is required to instill the

courage to break with tradition. Every
activity and every job is a part of the
process.”
 Total Quality Management
Total Quality Management (TQM) – consists of
organization-wide efforts to “install and make
permanent climate where employees
continuously improve their ability to provide on
demand products and services that customers
will find of particular value.”
• A process that stresses three principles:
1) Customer satisfaction
2) Continuous improvement
3) Employee involvement
 Six Sigma
Six Sigma – seeks to improve the quality of the
output of a process by identifying and removing
the causes of defects and minimizing impact
variability in manufacturing and business
processes.
 It uses a set of quality management methods,
mainly empirical, statistical methods, and
creates a special infrastructure of people
within the organization who are experts in
these methods.
 Quality Standards

Levels of quality standards:

• International Organizations for Standardization (ISO
9000)
• Industry specific
• Company specific
 Inventory Management

Lean manufacturing – a productive system whose

focus is on optimizing processes through the
philosophy of continual improvement.
Just-in-time (JIT) inventory management – focuses on
reducing inefficiency and unproductive time in the
production process to improve continuously the
process and the quality of the product or service.
 Black Swan Events
Nassim Nicholas Taleb (2007) outlined three defining
attributes of a black swan event:
1) Have the potential to exhibit drastic, wide-reaching
consequences.
2) Have a nature of unpredictability.
3) Typically be accompanied by “hindsight bias”
meaning that once the event has passed, many
individuals tend to rationalize that the event was
actually predictable (due only to the fact that they
are now aware of what the outcomes from the said
event are).
 Vinamilk – financials

2nd Quarter 2020 Revenue:

• Increase of 6.1% year-on-year
• Increase of 9.5% quarter-on-quarter
2nd Quarter 2020 Domestic Sales & Exports
• Increase of 12% year-on-year
• Increase of 26% percent quarter-on quarter
Profit increase of 3%
2020 Targets:
Revenue of VND59.6 trillion ($2.57 billion)
Earnings after tax of about VND10.69 trillion
 Vinamilk – “Tripod” Strategy

Success in navigating the impact of Covid-19:

I. Proactively source high-quality raw materials
II. Investing in production technology
III. Maintaining a strong domestic foundation
 White Swan?
Is Covid-19 a Black Swan event?
According to Taleb, a global pandemic is explicitly
presented as a White Swan: something that would
eventually take place with great certainty.
• Such acute pandemic is unavoidable, the result of the
structure of the modern world; and its economic
consequences would be compounded because of the
increased connectivity and overoptimization.
– As a matter of fact, the government of Singapore, whom we
advised in the past, was prepared for such an eventuality
with a precise plan since as early as 2010.
 Global Strategies
 International Strategy: uses exports and licenses to
penetrate the global area
 Multidomestic Strategy: uses decentralized authority with
substantial autonomy at each business
 Global Strategy: Uses a high degree of centralization, with
headquarters coordinating to seek standardization and
learning between plants
 Transnational Strategy: Exploits economies of scale and
learning, as well as pressure for responsiveness, by
recognizing that core competencies reside everywhere in
the organization
 China’s Supply Chain Dominance
China’s dominance of global manufacturing rests on a triad of commercial
capabilities that emerged as by products of the country’s industrialization.
Developed expertise in:
• Port construction and operation
• Container shipping & logistics
• Electronic networks.
 This enabled China to offer foreign companies the convenience of one-
stop shopping – low-cost production and reliable global distribution.

China’s port and logistics network enables:

• Cyber-surveillance efforts
• Increases Chinese financial leverage
• Provides China with a round-the-clock presence in the global maritime
domain that threatens to limit U.S. naval access to the growing roster
of commercial ports under Chinese control.
 What About Vietnam?
Substituting or complementing?
Countries like Vietnam, Taiwan, or India today will have a
difficult time substituting for China. They may only be able to
complement China.
• Important Fact: Companies invested into China not only for
its manufacturing prowess but also for its massive
consumer market and its behemoth state-owned
companies that had an insatiable appetite for Western
industrial equipment and products.
• Vietnam unfortunately, will never have such demand.
• Vietnam can serve as a secondary hub, a place for testing
and manufacturing prototypes, supplying niche products,
R&D centers.