Operations Management Managing International Operations

Operations Management: Managing International Operations

One of the modes of business today is international operation. The reasons for entering international markets may come to an organization because of many reasons; some are a reaction to the situations in the domestic market like competitive pressures, over production, declining domestic sales, fully filled up domestic markets, excess capacity of production in the domestic market, etc. even when a foreign competitor enters a market, it may provide the force for a domestic producer to enter other markets as it may not be able to sell its production in the domestic market. (Czinkota; Ronkainen; Moffett, 1996) This intention may even be sparked off by an unsolicited order from a foreign country.

Most of the time however, the companies try to get extra profit by tapping international markets. This is not an easy exercise, and many inexperienced companies often fail. Companies, which have a proprietary technology often, feel that if they go abroad they will be able to run it the same way as they are running it at home, and earn more profits. Once the decision has been made to enter a foreign market, there may be two methods of entering the market: through non-direct foreign investment or through direct foreign investment. We are here going to concentrate on entering foreign markets through direct investment.

Direct foreign investment may take on different forms. The first consideration in this is that there will be a capital flow from the company to the country where it is going to set up its unit. This will naturally make it a long-term association, and the company must take a conscious decision on this investment aspect. In this approach to direct investment, the investment itself can be divided in two parts: direct investment or portfolio investment. In the direct investment, this means that the control of a foreign company has to be purchased. This may be an existing company or a company that is about to start. Normally the investment in an existing company will start as a portfolio investment. This will help in the judgment as to whether the foreign company is worth purchasing or not. Then further involvement may be sought. If the foreign investment or manufacture is coming up in this manner, then it is only a modification exercise for the entire facilities. The modification will take place depending on the buyer company's own culture, and practices.

In other cases, the foreign operations will be established either as Greenfield operations or from an operation where an international company has purchased the company. In some cases of these companies this may even involve the government or government controlled agencies. In cases where the foreign company involves a joint ownership there are advantages of a lower risk than in totally owned companies, and may be advisable in some cases where the Government has a strong control over industry and development. This will however change the type of management required to a partnership type of management. The most important factor in any type of a successful international roll out will be the own competence of the international company. Normally most experts feel that managers who have international experience are the best (Burgel; Murray, 2000).

This will help the newly established company to take off very fast, as the managers will have the necessary experience to do it. This is always an essential requirement for international operations. The experienced manager will be able to tell the international company about the operational requirements in the new country. There are always a set of laws in any country, and these vary a lot. So, the experienced manager already knows about these laws and can help in the implementation from the first day. The manager will also have an existing set of contacts and potential partners for distribution, maybe sales, advertising, etc. This will always help a new company. (Holmlund; Kock, 1998)

Let us now come down to the direct operational aspects of the new unit in the foreign country. Here the operational manager has to work in the same professional manner that he has to work in any other country. The basic rules about management do not change. In a foreign country what changes are the people that he has to deal with. Like in any other area of life, business is also dependant on culture. People in all fields of activity - especially in productivity and operations will differ. The culture of the home country will not apply in the foreign country. The managers may have a lot of experience in their own country and have probably been brought over only to give the new unit a good start. In the new country they should first try to judge the national culture of the new workplace.

These differences may arise because of differences in language, religion, value systems, customs and education. These are the most important of all aspects. In business situations culture has been defined as "an integrated system of learned behavior patterns that are characteristic of the members of any given society" (Czinkota; Ronkainen; Moffett, 1996). This will influence the day-to-day operations in the factory. The most important thing to do get an awareness of this factor is to visit all the regions within which the company operates and get a first hand experience of the culture. Some models have been developed on this. One of them states that international business activity has to be seen as an innovation within the organization and that this will produce changes within the organization - both in the home country as well as in the foreign country. (Sheth; Sethi, 1977)

This change will be determined by three main factors - dominant cultural lifestyles of individuals in the organizations, change agents and strategic opinion leaders of all types and the communication of innovation. These will be influenced by the effort made by the management in trying to be close to the employees, the assurances of the future of the organization as seen by the employees, the quality of the individual leadership provided by the top management of the new organization, and the masculinity shown. The last point is because most people still tend to follow men as leaders and not women. We shall come back to this point of the importance of human relations at the end of this essay.

The next point to be considered is the forecasting of the results to be achieved by the foreign organization. This depends a lot on how the new organization has come into being.

If it is an old organization, which has been bought over by the foreign company, it is clear that previous production results will provide a good indication as to what will be a realistic forecast. This factor will also improve due to the new technology brought in by the international organization. The point to consider here again is the necessary motivation of the employees. Often bad units are sold by existing managements. Here there may be a problem with machines or men. This can be decided by sending experts from the international organization and corrective action. Sometimes, it may be necessary to get rid of some people. To achieve this no long-term employment contracts should be given to the workers in the foreign organization.

It may be even required to pay off the previous existing staff by paying off their long-term dues, and recruiting them fresh in the new organization. This will normally help retain productivity. If it a newly set up Greenfield activity, then the point to be remembered is that the workers are not experienced and will take time to pick up productivity to the levels that are achieved in the home country. For this purpose, a reasonable training time should be provided. It is better however to take on staff fresh from schools and colleges rather than old hands. The old hands will always carry their own baggage of previous work practices which may not be suitable for the international organization. (Schroeder, 1993)

Next we get into the area of goods and services of the foreign organization. This will primarily depend on the reason why the international company has set up the foreign company. As discussed earlier, it may be to exploit the new market with their own products. In that case, the lines to be transferred to the foreign company will depend on the suitability and technological level achieved by the foreign country. This is under the assumption that the produced goods will be consumed in the foreign country. But, in today's world this is no longer true. Many goods are produced in a foreign country by an international company to be sold in a third country. This is often enough because of the wage levels, price levels, and people availability levels.

Many industries have shifted from Japan to Taiwan and then onto Malaysia or Indonesia. One example that readily comes to mind in this regard is Panasonic. Even services are following a similar trend with the American credit card industry, medical transcription industry, etc. shifting rapidly to the third world. This is also causing a whole lot of people to get upset with the management of these industries. One of the famous ones in this regard is the Nike Shoes. One should be careful not to collect a bad reputation as they have done for use of child labor (Azam, 1999). Certainly no international organization would like to get that sort of a reputation for the goods and services of their foreign outfit.

The next question to be dealt with is quality control. Needless to say, quality is the hallmark of an organization and it cannot be sacrificed under any circumstances. Ultimately, the organization is identified with its product, and no organization should follow a short-term strategy of lasting out in the back of beyond with an inferior product if they are getting kicked out of the home country because they cannot keep up with their competitors. It is better to get out that product line and concentrate on other products, and if necessary to even sell out your own factory to your competitors who may be able to run it better. An organization is like a human being- it is born, grows, develops and unfortunately, it also dies. It may be possible however that you may have products which you cannot produce in the home country due to cost constraints. In that case you take the production abroad as already discussed earlier. Bit, your product carries your name and image, and it must carry your quality. After all what are brand names built on?

The next question is what capacity should the foreign unit have? This will primarily depend on the objective the foreign unit has been set up with. If it an old unit taken over, then it will have a predetermined capacity. It may be advisable to first stabilize production before increasing production. Naturally the important question here is the staffing in the old unit. This may have been too high. A lot of the owner's relatives may have been working in the old company. The new owner will obviously have to get rid of them first. This is easier said than done - and, may cause a lot of headache. It is better to get it over with before setting up the new pattern. For a new unit, or a stable unit, it is useful to import the same machines and production processes that one has in the international company. Then the production levels have to be gradually pushed up, in the manner discussed earlier. Again the importance of the personnel policy and the knowledge of the culture in the foreign country come up.

Next is the question for the location of the foreign unit. Here we have to naturally assume that the new unit will be a Greenfield unit. The location for any unit in any country is based on certain factors like the ports for importing raw material if needed or for exports if the finished product has to be exported. The importance of the distance from ports will depend on the proportion of this transport cost to the price of the finished product. In some cases this may make it necessary to locate it at the port city itself. These costs are well-known to the international company and it should not be difficult for them to decide on this. Another important question is the climate and the requirement for a suitable climate for production of the product if it is required. Again, the international company knows this fully well and should be able to easily judge this.

The only question that the international company cannot naturally know is the socio-political factors that may be associated with the decision. In some countries, different regions have different work ethics and people in certain regions may be better potential employees than people in some other regions. The other aspect is the chance of the new project surviving the political battles within the foreign country. We all know the importance of Godfathers and Godmothers and they are present at important ceremonies of the child. As I have said, the new unit also is a child and must have the Godfather. Otherwise, the enemies of the unit within the country, meaning people whose financial interests have been hurt, or are likely to be hurt by the new unit (competitors) will try their best to kill the child. For this purpose, one must select a good Godfather. Employment is required in every region of the world by the politicians - it helps him to get reelected. So, every politician will want a new unit in his own territory. The international company must decide on whom to please. Ultimately, this may be the difference between success and failure.

Another question is the layout strategy for the new plant. For an old plant, there is little by the way of layout that you can do unless it is really badly designed. For this, the layout of the original plant is most important. Normally all plants have a layout. Even the international company will be having a layout for their home plant. This would have given rise to some praises and some brickbats. The new plant can be set up in such a manner that the praises are increased and brickbats reduced. This is essentially a plant layout decision to be taken by the technical experts. It is however important that the international staff can cover the plant easily and oversee all the important functions. They may require a lot of this initially. Otherwise, a group within the factory may spring up who would like to think of themselves as interpreters of management decisions. This is a dangerous situation to have. In the beginning of the association, the workers will tend to trust their own countrymen more than the "foreigners." Over a period of time, the international staff will build up the faith, but in the beginning they should be very visible and approachable.

Last we come to the question of human resources and job design. This is probably the most important part of an international operation. The behaviors of people in different countries vary with regard to the same job. To understand this aspect, studies have been made on different clusters of countries with similar sets of beliefs and values or culture. In management terms, culture has been defined as the collective mental programming of the people. (Hofstede, 1984) This definition arises from the fact that people within a particular country have similar education and life experience. The important factors in this work culture is said to be dependent on four variables. The first of these variables is the readiness of the individual to accept differences in the allocation of power to individuals, or the acceptance of authority of another person. We can also see this in the society and not only in companies.

The second of these variables we have already mentioned in passing - this is the question of uncertainty avoidance. This is the limit of the faith people in a society or group will have in situations which they are uncertain about. This will be always the feeling about a new company. They will feel that they do not know enough about the international group to be able to trust it. The other two parts are mostly psychological: individualism vs. collectivism and male values vs. female qualities. Many societies or even groups of people in countries have high group relations. This is when traditionally they have been associated with groups of people for their livelihood. Examples of people who would be very concerned with groups would be sailors. Normally they are very dependent on each other. Other groups like say prospectors mostly work alone.

Certain countries have people following certain occupations for generations, especially countries with a high agricultural population. The masculinity femininity differences are mostly individual but also to a certain extent cultural like the differences between the English speaking people and the Latinos. Any international business must recognize these traits within the foreign country and mange this difference with the culture of the home country of the international company. This also suggests that in some countries the setting up of a foreign owned international company is more likely to stir up competition form within the foreign country. This aspect also has to be carefully looked into.

It is surely obvious that a domestic company only employs nationals of its own country, whereas an international company may have three categories of personnel. The first will be from the "home" country of the international company. A second set may be from the "foreign" or host country. A third set may be drafted to work from a third country that is neither the home country nor the host country. An example would be a German working in Switzerland for an American company. Normally this is true of only managers. The workers would normally be natives of the host country. The home country or third country managers may be due to the lack of confidence in the host country managers by the international company managers or the sheer lack of adequately qualified staff in the host country. Together with this, the other difference is the distance of the managers from their headquarters.