GLOBAL OPERATIONS

STRATEGY
CHAPTER OBJECTIVES
▪ To define key concepts in global operations strategy.
▪ To discuss international operations management and global
operations strategy.
▪ To present basic principles in global operations strategy.
▪ To discuss basic decisions in global operations strategy.
BASIC THEORIES
▪ Eclectic theory states that a firm goes global to achieve
advantages of ownership, location, and internalisation (OLI).
Also known as Dunning’s OLI Theory.
▪ Transaction cost theory (TCT) states that a firm goes global to
minimise transaction costs.
▪ The competitive advantage of nations (CAN) theory argues
that a firm in a particular industry goes global to build firm-
specific competitive advantages with different nations'
characteristics, cultures, and resources.
▪ The resource-based view (RBV) focuses on the rents from
scarce firm-specific resources.
▪ Competency theory focuses on achieving competencies as a
source of sustained competitive advantage.
ECLECTIC THEORY (DUNNING’S OLI FRAMEWORK)
▪ Dunning's OLI framework suggests that a firm should consider three key advantages
when deciding to invest overseas:
1.Ownership Advantages: These are firm-specific assets or capabilities that give the
firm a competitive edge over local firms. For example, a strong brand name,
proprietary technology, or superior management skills.
▪ Example: Apple's strong brand image and innovative products give it a competitive
advantage in global markets.
2.Location Advantages: These are specific advantages associated with a particular
location, such as low labour costs, abundant natural resources, or a favourable
regulatory environment.
▪ Example: Many multinational corporations have manufacturing facilities in countries with
low labour costs, such as China and Vietnam.
3.Internalization Advantages: These are advantages gained by internalizing operations
rather than outsourcing them. This can include control over quality, technology, and
distribution channels.
▪ Example: Many automobile manufacturers have their global supply chains to ensure
quality control and efficient logistics.
TRANSACTION COST THEORY (TCT)
▪ Transaction Cost Theory suggests that firms will choose to
internalize operations if the costs of coordinating and
controlling transactions within the firm are lower than the
costs of transacting with external parties.
▪ For example, a firm may choose to establish its manufacturing
facilities rather than outsourcing production to reduce
transaction costs associated with monitoring and enforcing
contracts with external suppliers.
▪ Key Transaction Costs:
• Search and Information Costs.
• Bargaining Costs.
• Monitoring Costs.
• Enforcement Costs.
COMPETITIVE ADVANTAGE OF NATIONS
(CAN) THEORY
▪ Porter's Diamond Model identifies four key factors that influence a nation's
competitive advantage:
1.Factor Conditions: A nation's endowment of factors of production, such as labour,
capital, and natural resources. (Resources: tangible and intangible)
2.Demand Conditions: The nature and sophistication of domestic demand.
(Consumer demands and market size and growth)
3.Related and Supporting Industries: The presence of related and supporting
industries that can provide inputs and services. (Cluster Effects)
4.Firm Strategy, Structure, and Rivalry: The nature of competition within a nation.
▪ For example, Japan's strong automotive industry can be attributed to its skilled
workforce, sophisticated suppliers, and intense domestic competition.
RESOURCE-BASED VIEW (RBV)
▪ The Resource-Based View emphasizes the importance of
firm-specific resources and capabilities in achieving a
competitive advantage. These resources can be tangible
(e.g., physical assets) or intangible (e.g., brand reputation,
knowledge).
▪ Example: Coca-Cola's strong brand reputation and global
distribution network are valuable resources that contribute
to its competitive advantage.
COMPETENCY THEORY
▪ Competency Theory focuses on the development
and deployment of core competencies. These are
the unique skills and abilities that enable a firm to
outperform its competitors.
▪ Example: Toyota's lean manufacturing system and
just-in-time inventory management are core
competencies that have contributed to its success.
GLOBAL COMPETENCY, RESOURCES AND PROCESSES
▪ Global competency: CAN, core competency, and real options theories can
guide competency-based global operations strategy. Core competency
theory provides direct guidelines for competency-based global operations
strategy.
▪ Global resources: Eclectic theory, RBV, CAN, and real options theories
influence resource-based global operations strategy. Based on international
trade theory, RBV, and TCT, the eclectic theory presents a multi-theoretical
approach to resource decisions, including location decisions. RBV provides
direct guidelines for resource-based global operations strategy.
▪ Global processes: CAN, TCT, core competency, network theory, real
options, and learning theories influence process-based global operations
strategy. According to CAN theory, a firm can optimise the global value
chain by utilizing the resource advantages of different nations to achieve a
competitive advantage in the global market.
GLOBAL OPERATIONS STRATEGY
▪ Global operations strategy can be introduced from three
perspectives:
1. Competency-based global operations strategy: In this view, managers
consider competency in global competition in terms of cost, time, quality, and
flexibility, among other competencies. Competency is often achieved through
competitive advantage based on countries’ comparative advantages in a
global environment.
2. Resource-based global operations strategy: Here, managers mainly
consider how to develop a bundle of real assets or resources. Typical
resource-based problems include capacity size problems, capacity
investment and expansion time problems, resource-type problems, and
resource location problems. Global capacity strategy is an important topic.
3. Process-based global operations strategy: Managers mainly configure the
global activity network or processes, including the supply process,
technology management process, demand and revenue management
process, and innovation processes. First, global sourcing, global supply chain,
and global purchasing are important business processes.
INTERNATIONAL OPERATIONS MANAGEMENT AND
GLOBAL OPERATIONS STRATEGY
▪ International operations management (IOM) is the set of activities of an international
organisation seeking to transform kinds of input (materials, labour, and so on) into final
goods and services. IOM is a well-established foundation of global operations strategy.
▪ In terms of topics, IOM includes strategy, location, capacity, flexibility, technology,
productivity, layout, forecasting, scheduling, aggregate planning, purchasing, distribution,
inventory, JIT (Just-In-Time), quality, reliability and maintenance, work measurement, service,
and project management.
▪ Regarding scope, IOM consists of three issues: mono-country/region study, cross-country/
region, and global studies.
▪ A global operations strategy emphasises an integrated approach across borders, including
integration across different borders and integration between operations strategy and other
functional strategies, including marketing, finance, human resource, technology
management, and information management strategies.
DRIVERS OF GLOBAL OPERATIONS STRATEGY
▪ Drivers for Global Manufacturing: The drivers of the global manufacturing
of a firm at an operational level are:
1. Market drivers such as increasing demand in emerging countries, changing market
structure and segmentation in developed countries, and growing global channels are
changing global manufacturing.
2. Cost drivers: As cost pressures increase, firms continue to move manufacturing activities
to access low-cost resources or reduce costs by reconfiguring global manufacturing
systems.
3. Competitive drivers: Manufacturing globalisation can be driven by new competitive
marketplaces, transferring from local competitors to global competitors, and strategically
competitive objectives.
4. Technology drivers: Manufacturing globalisation can be driven by access to
manufacturing technology, technology diffusion, technology sharing, global R&D
activities, and the advancement of logistics and communication technologies.
5. Government drivers include bilateral and regional free trade agreements, privatisation
of state-dominated economies, reduction of tariff barriers, creation of export processing
zones, and establishment of special economic zones.
6. Macroeconomic drivers such as the reduction in interest rates, fluctuation in exchange
rates, fluctuation in inflation rates, reduction in unemployment rates, and difference in tax
systems can influence global manufacturing.
DRIVERS OF GLOBAL OPERATIONS STRATEGY (CONTD.)
▪ Drivers for Global Service: The drivers of the global service of a firm
at an operational level are:
1. Global logistics networks can improve customer convenience and reduce costs
in service globalisation type 1 “movement of service”, type 2 “movement of
customers”, and type 4 “movement of both”.
2. Information technologies make information-intensive (such as financial
services, business services, health care, and education) or information-based
services feasible, while technological features enable globalisation to proceed at
low costs.
3. Service cost: These drivers are relevant to service outsourcing to seek low labour
costs or global service modes to seek low-cost service products.
4. Global economies of scale: When one country is not large enough to allow the
optimal scale of a firm, a firm may seek global economies of scale.
5. Global channels: Formulating global distribution channels helps services go
global.
6. Global customers: The tastes of some customers are globalised. Namely, they
are standardised and simplified by a certain global service. These global
customers further drive the globalisation of service.
DRIVERS OF GLOBAL OPERATIONS STRATEGY (CONTD.)

Source: Global Operations Strategy

(Yeming Gong)
DRIVERS OF GLOBAL OPERATIONS STRATEGY (CONTD.)
▪ Drivers for Sustainable Global Operations: The drivers of the
Sustainable Global Operations of a firm are:
1. Profit driven: Consumers or regulators will likely prefer products or
services provided by socially and environmentally friendly companies.
Consequently, these companies may earn a higher profit by selling higher
quantities at a higher price to offset any cost increase.
2. Planet driven: Business leaders are committed to ensuring sustainable
resources for future generations, especially because there is only “one
planet” with finite resources and rapidly growing consumption in
developed and developing countries.
3. People-driven: MNEs recognise that to succeed in emerging markets, they
need to alleviate poverty by creating businesses or jobs, educating the
poor to increase productivity, and developing new ways to use natural
resources sustainably.
BENEFITS OF GLOBAL OPERATIONS STRATEGY
▪ Benefits for operational globalisation for a firm are:
1. Growth: Operational globalisation can boost growth in two aspects. The
first one is by entering new markets for potential growth. The second is
increasing revenue, market size, and market share in existing markets.
2. Cost Reduction: By operational globalisation, a company can acquire
labour or raw material resources to gain cost competency, realise
economies of scale, realise economies of scope, and develop a broader
range of products and services to reduce total supply chain costs in
design, manufacturing, and distribution costs.
3. Knowledge Generation and Acquisition: With operational globalisation,
a firm can generate and acquire location-specific marketing knowledge
and general knowledge such as technologies and management expertise.
A firm can learn local knowledge from suppliers, customers, competitors,
foreign research centres, local professional talents, and knowledge
workers. A firm moving from emerging countries to developed countries
can learn advanced technologies and world-class management skills.
BENEFITS OF GLOBAL OPERATIONS STRATEGY (CONTD.)
4. Competitive Leverage: Operational globalisation provides competitive
leverage to attack rivals or defend positions. To attack or counterattack, a firm
can have more options regarding locations, technologies, human resources, and
business processes.
5. Customer Satisfaction: Operational globalisation improves customer satisfaction
in three ways:
▪ First, it can increase access to local customers. By understanding local demand, a
firm can improve customer satisfaction.
▪ Second, operational globalisation can reduce the distance to local customers and
improve customer satisfaction by shortening response time.
▪ Third, global availability by manufacturing globalisation and global
serviceability by service globalisation can improve the customer satisfaction of
global business travellers and tourists.
6. Social and Environmental Value Creation: A value-based global operations
strategy can benefit firms by improving reputation, morally appealing, enhancing
sustainability, providing global operating licenses, and inspiring innovations.
RISKS OF GLOBAL OPERATIONS
▪ Natural Risks such as earthquakes, volcanic eruptions, and
hurricanes can lead to social, economic, and environmental losses
and affect the infrastructure and structural decisions of a firm’s
operations strategy. The severity of these effects depends on the
types of natural risks, the social and economic situation of the
affected area, the area’s relevance to the global supply chain, and
the relief and restoration capacity of governments and NGOs.
▪ Economic risks refer to the possibility that an economic factor
negatively affects firm performance.
▪ The first risk of global operations is from foreign exchange risks, referring to
the risk that a business’s financial performance or strategic position would
be affected by fluctuations in the exchange rates between currencies.
▪ Second, macroeconomic fluctuations can influence global operations. For
example, launching a capital-intensive manufacturing project immediately
before or during a recession carries many economic risks.
▪ Third, economic policy uncertainties can lead to risks. A central bank may
unexpectedly raise interest rates, or the legislature may raise taxes, resulting
in economic risks that affect a global manufacturing project that needs
substantial investment.
RISKS OF GLOBAL OPERATIONS (CONTD.)
▪ Political risks refer to the probability of MNEs suffering
losses due to political forces and events. It includes two parts,
namely the uncertainties triggered by the actions of the
government or organisations in the host country and the
restrictions or sanctions on the outward investment made by
the home country.
▪ Social, Ethical, and Environmental risks: When operating
in new markets with different social and ethical backgrounds,
a firm will be exposed to larger social and ethical risks, which
it rarely meets in the domestic market. Outsourcing to another
country without direct manufacturing can lead to social,
ethical and environmental risks for a firm.