Page 297 - DMGT401Business Environment

Business Environment

Notes Designing in Global Environment

If managing product development processes was a challenge before, it is not getting any easier
as companies continue to adopt global design strategies. Global designing has cost benefits that
are very attractive to today's manufacturer, but it also adds new Product Lifecycle Management
(PLM) challenges and intensifies existing problem areas like that of protecting intellectual
property.

Production Location Selection

Jeffrey Immelt of GE Medical Systems (GEMS), pushed for acquisitions to build up scale because
for leading global competitors, an R&D-to-sales ratio of at least 8 percent represents a significant
source of scale economies. But he also implemented a production strategy that was intended to
arbitrage cost differences by concentrating manufacturing operations – and, ultimately, other
activities – wherever in the world they could be carried out most cost effectively. By 2001, GEMS
obtained 15 percent of its direct material purchases from, and had located 40 percent of its own
manufacturing activities in, low-cost countries.
Rationalised Production

Companies produce different components or different portions of their product line in different
parts of the world to take advantage of low labour costs, capital, and raw materials. This is
rationalised production. In a new, global world, rationalised production is easier. Now
organizations can outsource or can establish their own production units in those areas where it
is more economical.

Example: GE, for instance, used Mexico as a manufacture base for labour-intensive
operations. Today, Japanese are selling their cars made in America to the American consumers,
while Americans are selling American cars made in Japan. Not only this, British firms are
selling English cricket bats which are made in India. Asia manufactures sports shoes for almost
all the major shoe manufacturers.

Much of the production of motherboards for PCs is located in Taiwan. Japanese brands have less
than a 50% share of the US market for microwave ovens but over 70% of the manufacturing is
done by Japanese companies. After liberalisation in the economies of India and China, a great
shift in location is going on as more and more organizations are shifting their labour-intensive
operations to these locations.

Thailand, Vietnam, Indonesia, Malaysia, Philippines, Singapore and Brunei Darussalam are
small countries by themselves. But as they became members of ASEAN, the whole region
became attractive from a business point of view and more and more companies started
establishing their manufacturing units there to take the advantage of low cost and vast markets.
Today this region is one of the most active business hubs.

Vertical Integration: Vertical Integration is a company's control of the different stages in a value
chain of production – from raw material to production to final distribution of the product. As
international trade barriers are becoming less relevant organizations can combine resources
located in more than one country.

Example: Like Indian petroleum companies who have world class refining capacities
import petrol. But under the new system they are allowed to invest abroad and are acquiring oil
wells overseas to ensure regular supply of oil in future. Similarly, Shell acquired oil wells the
world over and has refineries across the globe.

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