GLOBAL BUSINESS

Global business

Global business

Question 1:

The use of global sourcing has been the driving force behind the development and expansion of the global economy. Including suppliers from around the world in the bidding process for large contracts reduces prices and increases competition. The creation of this type of infrastructure allows firms to create subsidiary offices in locations around the world. There are three main industries that are ideal for global souring: manufacturing, skilled services and telephone call centers.

In terms of business strategy it is beneficial for any business entity to outsource the functions that do not compromise its comparative advantage. With this start, we must evaluate other factors that should be considered when deciding the degree of outsourcing and the functions that will be outsourced(Engardio 2006).

On the other hand, a firm's competitive advantage is not in that firm's yield but in their competencies (Hoetch, 2006). Some examples of competitive advantage are grasp and skills, administration routines and processes that are difficult to duplicate. When outsourcing, risks of losing core competencies are high especially in technology based industries.

One element that outsourcing evaluation matrix are missing is the importance of the industry “clockspeed” when deciding whether to outsource or not. The industry clockspeed is the "velocity of change in the external business environment that sets the pace of a firm's internal operations" (Perrons, 2005). Outsourcing requires usually long-term relationships with suppliers. In a fast moving industry, long-term relationships are more beneficial than in medium paced industries (Perrons, 2005). It is in fact proven that different vertical integration strategies will be appropriate if the industry is fast or slow changing. The industry characteristics per se will be a trigger to outsource(Norwood 2006).

Slower clockspeed industries, such as the automobile, allow assembling companies to get most of the profit. Although the electronic systems in cars have evolved quite significantly, customers still care more about the brand of the car (i.e.Toyota) than the brand of the radio or the lights. This gives automobile brands time to make choices without pressure (Overby 2007).

Most outsourcing strategies are motivated by cost reduction. The theory behind this concept is called the transactional cost theory that differentiates between production costs, that are the ones incurred in actually manufacturing the product and the transaction costs that are considered coordination costs. Outsourcing, therefore, reduces production costs because all costs become variable and increases transaction costs because vendors need to be managed and monitored.

Risk in inherent to all business decisions and strategies and although we try to eliminate risk by human nature, the best bet is to plan ahead and prepare contingency scenarios that provide security and less vulnerability to the firm in future situations. Almost all the previous factors that influence the decision of outsourcing combined represent a measurement of the risk that the strategy represents to the firm. In a study of two multinational firms, the main risk factor found was knowledge (Dhar, 2006). To relinquish key information of the company's core business is to increase the probability that the ...