Setting up business in another country is a centuries old practice as well. Acquisition of a business or company in another country (through purchase rather than invasion), on the other hand, is a relatively new observable fact within the past 150 years. And major cross-border acquisition activity didn't begin until after World War II, just a half century ago. Through the middle eighties, this international growth was attained mainly by exporting, setting up shop, licensing, or acquiring local companies. Although these forms of international commerce persist to expand rapidly, they face main obstacles.
In less than three decades, international business has been malformed from mainly exporting to global sourcing and production, global marketing and distribution, and even global research and product development. Simply a decade ago, Lucent Technologies, the former manufacturing arm of AT&T, had just a few thousand employees outer the United States. Today, that number is over thirty thousand (Bonache, J. and Brewster, C. 2001). Internal sourcing of components between companies linked by ownership or alliance symbolizes the fastest growing segment of international trade.
Companies now view the world not simply as a market, but also as a source of low-cost and high-quality suppliers. Toy companies and clothing manufacturers have set up shop in Asia to manufacture goods that are sold in the United States and Europe. India has become an outsourcing capital for the computer software industry. The largest part of the trade shortfall between the United States and Japan (over half the total 1997 trade deficit of $60 billion) is in automotive parts shipped from Japan to U. S. and Japanese auto plants in the United States (Ando, K. 2004).
The key point is that the nature of international business has changed. The management undertaking is fundamentally diverse and far more composite than it was only twenty years ago. As Didier Pineau-Valencienne, CEO of the global electrical and electronic Schneider Group based in Paris, stated to me at one of our Booz Allen advisory board meetings, "We need to know the best practices not simply of our thirty plants across the world, but of every plant anywhere that does somewhat similar to ours so that we can keep abreast of competition and at least have a chance to be a leader.
Innovation that can change my business can come from any industry in any country at any time. There are great opportunities in this new global economy, but it is packed with great risks as well. " (Dani Rodrik, 1997) “Downsizing, which refers to reducing the number of employees to further cut operating expenses, is fuelling the increased use of outsourcing. AT&T and IBM each reduced their staffs by more than 40,000 over a recent three-year period. With fewer employees to hold greater workloads, the need to outsource is further increased.
Indications are that the use of outsourcing will continue to increase. Globally, the outsourcing market is probable to exceed $120 billion by the year 2010”. (Bernard, A. B. and Jensen, J. B. 2003) Numerous companies, however, have not reduced costs to the extent that they hoped when they first turned to outsourcing. As an effect, the anticipated increase to profit levels has not been realized. A recent study has shown that, although gains in productivity of up to 40 percent had been projected by corporations, improvement in various cases has been less than 10 percent.
This is because the decisions to outsource are being based primarily on lower direct costs. Not enough deliberation is being given to the source’s performance in other criteria that can cause indirect costs to increase. Although goods and services might be provided by external sources at lower prices, their performance in the criteria of quality, delivery, customer service, and product advancements might be weak. Poor performance by sources in any or all of these criterions will result in the company incurring indirect costs that will more than counteract the reduced direct costs.
By applying the concept of the Strategic Business Unit, or SBU, to each source of key corporate functions, and viewing each as a Strategic Business Source, the overall performance of internal and external sources can be simply determined and compared. With the overall performance measured for the many available sources of corporate functions, the decision to select the optimal source can be easily made. Under the SBU concept, related product lines are organized into separate profit centres. With this organizational approach, the company’s ability to produce profitable product lines is better.
This is because, within the focused SBU structure, all five of the performance criteria that fuel competitiveness are more easily monitored and improved. By similarly viewing the sources for goods and services as Strategic Business Sources, and evaluating their overall performance in all of the important criteria beyond just costs, the most favourable source (whether an internal department or an external supplier) can be easily selected. However, if a company chooses to outsource the manufacturing of a part used in its products based solely on an external supplier’s price being lower than internal production costs.
The supplier’s performance in other criterion can result in the true cost being greater. For example, if the supplier of the outsourced parts delivers poor-quality products, the outsourcing company will incur expense by either having to rework the items to correct the troubles or delay production until the supplier offers acceptable replacement parts. Also, if the supplier delivers the parts late, the company may have to setback completion and delivery of the end products to the customer base, impacting cash flow and sales revenues.