Setting up a new branch of a multinational manufacturing organization

Abstract:

The process of setting up a new branch of a multinational manufacturing organization in a country is existed before by the decision to identify the promising ideas of business and selecting entrepreneurship as a career upon a careful entrepreneurial opportunities examination. Ideas generation is not enough; the ideas of business must stand the searching study from techno-economic, legal and financial perspectives. That is, after the beginning of screening of the ideas it is not only important to consider the prima facie, but also an in-depth examination must be conducted of the chosen new branch before settling for the one where the owners would like to exert their money, energy and time Alkhafaji A F (2003). Organizations must prepare a plan for a business that will serve as a road map for effective venturing, whether they may require institutional funding or not. Setting up of new branch in another country is a very challenging task; and the owners are likely to handle several problems in their career. This report gives the factors that an organization whose core activity is manufacturing must consider before setting up a new plant in a country that it is not familiar with.

An Introduction to feasibility study:

As the name implies, a feasibility study is an analysis of the capability of an idea. A feasibility study is a preliminary study which was undertaken to document and determine the viability of a project. The study results are used to make the decision whether to proceed with the table or project. If it leads to a project that was being approved, it will begin before the original work of the proposed project and it will be used to ascertain the likelihood of the success of project. It is an analysis of possible solutions for a problem and recommendations for a good alternative. It, can decide whether a process of order must be carried out by a new system more efficiently than the previous system.

Feasibility studies can also be used in several ways but primarily it must focus on proposed ventures of business. Prospective investors with idea of business must conduct a feasibility study to determine the idea of viability before starting with the business development. A feasible venture of business is the one where the business will generate sufficient profits and flow of cash to hold the risks which will encounter and meets the founder’s goals and remain viable in the long-term. The venture can be a new beginning of a branch in another country where the purchase of occurring business will be an expansion of present operations of business or a new enterprise for the existing business.

Research Aims and Objectives:

This research intends to accomplish the following objectives:

Primary Objectives:

This research intends into mainly explore the factors that affect the establishment of new plant of a manufacturing industry in a foreign country.

Secondary Objectives:

• To understand the basic concepts of feasibility study and its application in research.
• To apply feasibility study in identifying the criterion required for establishing a new manufacturing plant in a new country.
• To identify the appropriate research design and data collection method for accomplishing the study
• To explore the challenges that a manufacturing organization would encounter in establishing a new plant in a foreign country
• To identify suitable strategies for successful implementation of the project.

Description of the Project:

The project involved in this study aima at determinine the criterion in setting up a new plant of a manufacturing MNC in an unfamiliar country. This research report intends to investigate the feasibility of a multi national manufacturing organisation setting up a new plant in a country in which it has not operated before. This report also outlines the research method to be followed in order to accomplish the task.

Pre-Feasibility Study

A pre-feasibility study may be conducted first to help sort out relevant alternatives. Before proceeding with a full-blown feasibility study, a resercher may want to do some pre-feasibility analysis. If the researcher finds out early-on that the proposed business idea is not feasible, it will save the researcher’s time and money. However, if the findings lead to proceed with the feasibility study, the researcher’s work may have resolved some basic issues. A pre-feasibility is an opportunity for a researcher to understand the issues of business development.

Identification and exploration of business scenarios

The next step is to identify the business scenario in which the company is going to operate. Novom M L (2007) says that for a multinational manufacturing organization or a company considering entry in to the international arena has a more specific set of strategic alternatives often varying by targeted country focuses on different ways to enter a foreign market. Managers need to consider how potential new markets may best be served by their company in light of the risks including: Exporting, licensing, franchising and contract manufacturing.

Export/Import:

The simplest way to get into a foreign market is perhaps by exporting products. Exports are the products and services produced in one country and sold in another. Usually business firms export their products to countries where greater demand and profits are found. However some firms export their products to other countries because their domestic demand is not large enough to sustain their operation. Industries such as chemicals, computers and aerospace depend heavily upon exports for sales and profits. The largest export category in the foreign countries is farm products, accounting for about 19% of exports. Exporting is a relatively lo9w risk way to begin international expansion or to test out an overseas market. Little investment is involved and fast withdrawal is relatively easy. Small firms seldom go beyond this stage and large firms use this avenue for many of their products. Because of their comparative lack of capital resources and marketing clout, exporting is the primary entry strategy used by small businesses to compete on an international level. A recent survey has reported that more than half of small to medium sized business anticipate growth in their export sales in the next few years.

An experience firm may want to handle its exporting functions by appointing a manager or establishing an export department. Alternatively an export management company may be retained to take over some or all exporting functions including dealing with host country regulations, tariffs, duties, documentations, letters of credit, currency conversion and so forth. Frequently it pays to hire a specialist for a given host country.

Imports are goods and services sold in one country that were produced in another country. In the foreign countries more services are exported than imported and more goods are imported than exported. The foreign countries are heavily dependent on imports of petroleum, toys and coffee. The difference is value between a country’s total exports and its total imports is called the balance of trade. When exports exceed imports a favorable balance of trade exists. When imports exceed exports this is an unfavorable balance of trade. The foreign countries have had an unfavorable balance of trade every year since 1971 except for 1973.

The ratio of one currency to another is called foreign exchange rate. This shows how much a unit of one currency is worth in terms of another. The supply and demand for a certain currency determined its value on foreign exchange markets. Fluctuating exchange rates add another element of risk to international businesses.

It is important to know that the higher the value of the foreign dollar against foreign currencies, the harder it is for international businesses to export goods and services. The weaker the value of the dollar against foreign currencies the easier it is for the exporters to sell goods and services on the international market. This is because much of the world trade is conducted in dollars which serves as a convenient measure of worth across the globe.

Licensing:

According to Cooke W N (2003) Licensing is an international context is defined as an agreement in which a licensor gives the right license to a foreign company to sell its products in return for royalty fees or other compensation. Through licensing a firm grants a foreign entity some type of intangible rights which could be the rights to a process, a patent, a program, a trademark, a copyright or expertise. In essence the license is buying the assets of another firm in the form of know how or Research and Design. The licensor can grant these rights exclusively to one licensee or nonexclusively to several licenses. Many MNC organizations license their products, overseas often under the names of local firms and products which can be seen around the world under various licensing agreements. Like exporting licensing is also a relatively low risk strategy because it requires little investment and it can be very useful option in countries where market entry by other means is constrained by regulations or profit repatriation restrictions.

Licensing is especially suitable for the mature phase of a products lifecycle, when competition is intense, margins decline and production is relatively standardized. It is also useful for firms with rapidly changing technologies for those with many diverse products lines and for small firms with few financial and managerial resources for direct investment abroad. A clear advantage of licensing is that it avoids the tariffs and quotas usually imposed on exports. The most common disadvantage is the licensor’s lack of control over the licensor’s activities and performance. Critical environmental factors to consider in licensing are whether sufficient patent and trademark protection is available in the host country, the track record and quality of the licensee, the risk that the license may develop its competence to become a direct competitor the licensee’s market territory and legal limits on the royalty rate structure in the host country.

Franchising:

Similar to licensing, franchising involves relatively little risk. The franchisor licenses its trademark, products and services and operating principles to the franchises for an initial fee and ongoing royalties. Franchises are well known in the domestic manufacturing organization. A critical consideration for the franchisor’s management is quality control which becomes more difficult with greater geographic dispersion.

Root F R (1992) says that Franchising can be an ideal strategy for manufacturing business because outlets require little investment in capital or human resources. Through franchising an entrepreneur can use the resources of franchises to expand most of today’s large franchises started out with this strategy. An entrepreneur can also use franchises to enter a new branch in foreign country. Higher costs in entry fees and royalties are offset by the lower risk of an established product, trademark and customer base as well as the benefit of the franchisor’s experience and techniques.

Contract manufacturing:

A common means of using cheaper labor oversees is contract manufacturing which involves contracting for the production of finished goods or component parts. These goods or components are then imported to the home country or to other countries for assemble or sale. Alternatively they may be sold in the host country. If managers can ensure the reliability and quality of the local contractor and work out adequate means of capital repatriation this strategy can be a desirable means of quick entry into a country with a low capital investment and none of the problems of local ownership.

Identification of degree of control over foreign environment:

The more a corporation can impact and influence the host country more easily it can pursue its own objectives. Large corporations have a greater effect on developing countries than smaller ones for several reasons:

Size:

The size of the MNC is the first thing to be considered before establishing a new plant in a foreign country. It has to be determined if the organizations’ size can support expansion of business financially, technically and practically.

Geographic diversification:

Heidi V (1985) says that large corporations are generally geographically diversified in their operations and are minimally dependent on any single location. This increases their bargaining power in their relationship with host countries. The power differential between two parties determined which will be most influential. The greater the MNC’s power the more likely it can affect the environment of the host country.

MNC’s Flexibility:

The MNC’s flexibility refers to its ability to adapt to changing environments. MNC’s have diversified in many ways which enable them to respond to any kind of threat or opportunity in the environment.

Support by International organizations:

According to Doze Y L (1986) MNC’s can obtain assistance from various international organizations that set regulations for multi-country business. Some of these international organizations are the United Nations (UN), the World Bank, the International Monetary Fund (IMF), and the International Organization for Standardization (ISO) as well as entities that enforce treaties of different countries and set exchange rates. The main purposes of the multinational organizations are to facilitate, encourage and provide security for the international exchange of products, services and money. Therefore these multinational organizations and their available resources must be considered and integrated in the strategic planning process of an MNC.

The World Bank is especially important and consists of the International Bank for Reconstruction and Development, the International Finance Corporation (IFC), and the International Development Association. The World Bank mainly supplies the less developed countries with loans and credit.

There is a type of MNC called a global company that centralizes its management and other decisions in the home country. These companies treat the world market as an integrated whole and focus on the need for global efficiency. Although these companies may have considerable global holding, management decisions with company-wide implications are made from headquarters in the home country. Other companies are going international by eliminating structural divisions that impose artificial geographical barriers. This type of MNC is often called a transnational or borderless organization and reflects a geocentric attitude. An international organization tends to describe large international businesses. However there are an increasingly large number of businesses called born global that choose to go global from inception. The manufacturing organizations commit resources upfront to doing businesses in more than one country and are likely to play an increasingly important role in international business.

Identifying the challenges that could be faced by an MNC:

As a firm expands globally having subsidiaries abroad is almost unavoidable. Unlike domestic ones, overseas subsidiaries are subjected to dual pressures from the need to adapt to the local environment and the need to maintain consistency within the organization. Beside this trade off, MNC’s have to face the problem of sending expatriate managers overseas to supervise the operations there.

Conflicts between MNC’s and the Local environment:

Tallman S B (2007) says that MNC’s operations in foreign countries often give rise to conflicts between the MNC and the host country with regard to business, developmental, environmental, health and safety protection issues. MNC’s have been frequently subject to charges of exploitation and colonization in third world countries. The sources of these conflicts are mainly the divergence of goals and the abuse of power both by MNC’s and the host countries. Organizational routines that differ across national cultures also contribute to the conflicts between MNC’s and host countries. To lessen the conflicts, role based routines must be painstakingly taught to workers. Unfortunately many MNC managers are often insulated from clearly seeing potential in understanding the cultures of nations too. Rather than imposing their will on company units overseas, leaders of MNC’s should give up the mind set and adapt to the different environments.

Co-ordination between Headquarters and Overseas Subsidiaries:

The second challenge facing the MNC is how to coordinate the relationship between headquarters and overseas subsidiaries. There are usually two different approaches to managing this relationship. Under the differentiated fit approach the greater the extent to which an MNC differentiates the format structure of its headquarters-subsidiary relationship to fit the contexts of its various subsidiaries, the better the performance of the organization as a whole. Under the shared values approach a high degree of shared values between the headquarters and subsidiaries also enhances the MNC’s performance. Although these two approaches are alternatives they are not mutually exclusive. In fact, MNC’s that are able to simultaneously implement the two approaches have the best performance.

Regarding human resource practices in a foreign environment, MNC’s often face decisions about whether to use expatriates or nationals in management positions. An expatriate is an employee that is assigned to work in a subsidiary abroad. Among the issues that must be considered are the appropriate length of time for an expatriate assignment, compensation and benefits for expatriate managers, recruitment for international positions and the reentry of transferred managers.

In general it is essential that subsidiaries have independent international experience, strength in upstream activities and broad based managerial expertise. It is also important that subsidiaries continually assess the competitive environment and subsidiary strengths and builds organizational and managerial skills.

Other Challenges:

Because different safety standards prevail in various countries, business firms should be very careful about the products they import form an unfamiliar foreign company. There is a risk that some new players in the international safety testing marketplace are looking at product certification as a commercial activity without due concern for a complete risk assessment.

Doing business overseas means that the foreign dollars must be converted to a foreign currency for investment and back to foreign dollars for profit repatriation. Due to fluctuating exchange rates, the amount of capital will change. The uncertainty resulting from the fluctuation of exchange rates is an exchange rate risk that can be hedged with financial derivatives such as features and forward contrasts. Interest rate swaps, options, etc.

Raw materials:

This process involves estimating the amount of raw materials that are needed, Investigating the present and future access and availability to raw materials and finally assessing the cost and quality of raw materials.

Other inputs:

The other inputs for this feasibility study include investigating the labor availability including skill level, wage rates, etc and assessing the capability to attract and access qualified personnel management.

Throughput Analysis:

According to Kurtz D L (2007) It refers to the operations/ production that must be performed on the inputs to add value. Usually, the received inputs must undergo a transformation process in many manufacturing stages. What would be the sequence, where to view the facility, what must be the quality control measures, what would be the layout, etc. are the issues that must be looked for throughput analysis.

Research Design:

The research design to be adopted for this study is exploratory research. Stebbins R A (2001) says that Exploratory Research is most commonly unstructured, informal research that is undertaken to gain background information about the general nature of the research problem. By unstructured means that the exploratory research does not have a predetermined set of procedures. Rather the nature of the research changes as the researcher gains information. It is informal in that there is no formal set of objectives, sample plan or questionnaire. Other than this research, research designs are used to test hypotheses or measure the reaction of one variable to a change in another variable. Exploratory research is very flexible in that it allows the researcher to investigate whatever sources he or she desires and to the extent he or she feels is necessary to gain a good feel for the problem at hand. Exploratory research is conducted when the researcher does not know much about the problem and needs additional information or desires new or more recent information.

This research is exploratory in nature since the researcher is unaware of the market conditions and other factors that influence the establishment of new manufacturing plant in a foreign country.

Research Approach:

There are two types of research approaches followed in scientific research. They are

Qualitative research:

According to Martin A (2000) Qualitative research is based on qualitative data and tends to follow the exploratory mode of the scientific method. Qualitative researchers maintain and tend to engage in systematic reflection on the conduct of the research. Qualitative research is relies on the collection of qualitative data. It is a form of social inquiry that focuses on the way people interpret and make sense of their experiences and the world which they live. A number of different approaches exist within the wider framework of this type of research but most of these have the same aim: to understand the social reality of individuals, groups and cultures. Researchers use qualitative research approaches to explore the behavior, perspectives and experiences of the people they study. The basis of qualitative research lies in the interpretive approach to social reality.

Quantitative Research:

Quantitative research is the research that relies on the collection of quantitative data. Quantitative researchers consider being the primary importance to state one’s hypotheses testing and theory testing. In quantitative research it is assumed that cognition and behavior are highly predictable and explainable. Quantitative research is explaining phenomena by collecting numerical data that are analyzed using mathematically based methods. Quantitative research is essentially about collecting numerical data to explain a particular phenomenon particular questions seem immediately suited to being answered using quantitative methods.

This research makes use of both quantitative and qualitative research approches to accomplish the feasibility study.

Type of Data:

There are two types of data involved in a research. They are primary and secondary data respectively

Primary Data:

The data which are collected for the first time and are original in nature is known as primary data. Such data re collected for the first time by an authorized institution or investigator. Primary data is the data that has been collected to address a specific problem. The primary data can be collected either through quantitative or qualitative research. The below figure shows the primary data:

Source: Emma (2003), Handbook of research methodology, New Age International Publishers, New Delhi

The methods of collecting primary data in a statistical investigation are as follows:

• Direct personal inquiry.
• Indirect oral enquiry.
• Information from local agents and correspondents.
• Mailed questionnaires.
• Questionnaires to be filled in by investigator.

Secondary Data:

The data which are not originally collected but rather obtained from publishes or unpublished resources are known as secondary data. Data are primary for the agency or institution collecting them whereas for the rest of the world are secondary.

Method of Data Collection:

The primary data for this study is mainly obtained from the company that is planning to expand. Data is collected from the top level management through questionnaires and interviews. Data regarding the company’s policies and procedures is to be collected in order to examine if the company would be feasible for establing a new manufacturing plant in an unfamiliar country. The secondary data is obtained through reports that speak about the organizations’ past performance in several nations.

Data Analysis and Interpretation:

Data analysis techniques vary in their ability to detect differences in the data. Statisticians refer to this as the “power of the statistical analysis.” There is also an interaction between the measurement sensitivity and the power of the data analysis technique. The power of the analysis technique increases as precision in measurement increases. The collected data is analyzed and interpreted using appropriate statistical tools depending upon the type of sampling undertaken in collecting the primary data.

Limitations of the study:

• This study is limited to manufacturing sector alone and is exclusive to only one organization.
• This study explores the feasibility of an organzination in establishing a new manufacturing plant with respect to only one country.