Off-shoring Business
Offshoring of production to another country has a myriad of strategic advantages. It supports operations which is one of the primary activities on the value chain. Operations refer to the activities that are concerned with the production of goods and services. In value chain, all activities carried out by the company should contribute to customerbuyer value. The final value created by a firm is gauged by the amount its buyers are eager to pay for the product. A firm will be profitable if the created value surpass the combined cost of performing the service or producing the required product. One way a firm can gain a higher competitive edge over its rivals is to offer comparable buyer value by performing its activities in a more efficient manner than its competitors (that is at a lower cost. Offshoring and outsourcing production which is one of the main activities of a manufacturing companies is one way of reducing cost of production enabling a company to offer its products at a lower than its competitors without having to compromise on the quality as the same standards are maintained during production in the low cost country (Maez, 2000).
It is worth to note that one of the main reason as to why the company wants to offshore its production process is to reduce on the cost of production particularly in regard with the cost of labor. It is important to understand that the main goal of business organizations is to attain maximum profits. The cost of labor in the United States is very high, in fact one of the highest globally. The minimum wage set by labor laws is quite high as compared to other countries particularly in Asia where the company is seeking to offshore. Cost saving is in fact the fundamental reason as to why companies outsource or offshore their processes (Maez, 2000). Companies usually offshore to countries where labor rates as well as employee benefits are lower when compared to those in the mother country. In the case of offshore outsourcing where the company contracts another company in a different country, the company does not incur costs of paying wage taxes of employees as it would if it was the one hiring. It also does not have to pay for employee leaves and suffer manufacturing problems of reduced labor while the employees are on their deserved rest. This is because in outsourcing, the outsourced company is the one responsible for its employees. Cost savings are also attained through taxes in whereby in most of the countries that are used for offshoring and outsourcing such as India and China, the taxes charged for running a business are much less than those charged in the US. Regulations rules in India and China are also not as strict as those of the US which increase the cost of production. Work rules are also less strict in the country the firm plans to offshore its production to. This will enable it to maximize on the productivity.
Outsourcingoffshoring also has manufacturing benefits. It enables one to choose a specialist for the process that needs to be done which increases the quality of the products (Ginsburg, Noorlander, 2008). Contracting specialists makes it possible for work to be done at a faster rate reducing the turnaround time which is critical in production. Outsourcing allows a company to manufacture goods of high precision if it did not have in house capacity of doing so (Ginsburg, Noorlander, 2008). It is also valuable when large volumes of precise apparatus are required for production. Outsourcing is also advantageous in cases where the required components are not critical and producing them in house is not viable. This allows differentiation which is one way of increasing a firms competitive advantage and increasing buyer value (Dunn, Kohlbeck, Magilke, 2009). Offshoring makes it possible for a company to concentrate on the core product and its quality.
Offshoring also enables a company to access advanced and superior technology that might not be available in its mother country (Ginsburg, Noorlander, 2008). It is well known that deployment of technology is one way of reducing the cost of production as well as encouraging innovation which is very critical in gaining a competitive edge within the market. This company seeks to offshore its production to one of the countries which are known for their technological prowess. Plant equipment is also cheaper in the countries that are used as offshoring destinations such as India or china (Costello, Kren, 2005). By offshoring production to one of these countries, the company will have saved on cost of plant equipment.
Offshoring allows a business to get new international business partners and networks which is very crucial for any business organization particularly one that seeks to be a multinational in future (Angeloni, 2002). Usually outsourcers want to be regarded as partners. As business partners, outsourcers will desire to keep the company running at its maximum potential. Through the partnership and the desire to see the company doing well, outsourcers are willing to introduce the company to other outsourcers who will assist it to achieve its goals.
Offshoring is also one way for a company to establish itself in a new market (Dunn, Kohlbeck, Magilke, 2009). By offshoring production to another country, the company will be able to introduce the products in that country as well which will go along way in helping increase sales hence the profit margins of the company.
Based on the discussed advantages of offshoringoutsourcing it can be argued that apart from improving operations which is one of the primary activities of value chain, offshoring also reduces rivalry between the existing competitors. This is because offshoring allows the company to differentiate and also produce the goods more efficiently than the competitors at a low cost (Dunn, Kohlbeck, Magilke, 2009). The buyers will be given a range of goods to select from and at a lower price. In the event the competitors are not in apposition to do this then competition is reduced. Offshoring also reduces the threats of new entrants into the industry. This is because offshoring allows the company to have access to cheaper raw materials, plant equipment and other important resources such as superior technology and qualified staff who are experts (Angeloni, 2002). These resources are scarce and very expensive in the United States. This discourages new entrants as it means that the cost of production in the US is very high and they may not be able to offer low prices for their products as the company intents to once it starts offshoring. Outsourcing involves the production of quality products cheaply. The company will be able to offer its products at lower process hence establish customer loyalty which hinders new entrants.
Country Analysis
The company might outsource it production either to India or China.
India
Population
India is has a population of over 1.2 billion people which makes it the worlds most populous country after china. A majority of the population are young people below the age of 60. The population is quite healthy and is increasing mainly due to advances in medicine (Tirthankar, 2000). The country has a high number of health care facilities as well as trained practitioners which are well distributed even in rural areas. Traditional medical practitioners also practice throughout the nation and are quite effective. Indias population is therefore generally healthy. The standard of living in the country is still low but steadily improving (Tirthankar, 2000).
Indias population is also quite educated. The country has 380 universities and more than 11, 200 institutions for higher learning that produce over 2.1 million graduates annually. This implies that India has a large pool of talented, skilled and motivated professionals giving companies plenty of options to choose from when recruiting workforce for their offshored businesses.
Politics
India has a democratic form of government and is argued to be the most populous democracy worldwide. The country has experienced political stability over the last many decades because of democracy. Indias political goals focus on liberalizing the nation and increasing its development (Tirthankar, 2000). India has realized the need for economic growth and the government seeks to provide quality services it the population so as to improve peoples quality of life. The government has made efforts to develop various infrastructures such as transport, communication, education, health as well as energy. It has been easy to get rid of bureaucracy but the country is making efforts so as to liberalize its economy.
Economics
Indias economy is among the worlds fastest growing economies with an approximated GDP growth rate of 5.8 p.a that has been experienced for the last of two decades. Service, agriculture, and industrial sectors are well developed in the country and account for 62, 17 and 20 respectively of the GDP (Tirthankar, 2000).
India however has a lower per capita income of about 1032. India is making efforts to reduce trade restrictions. Following a recommendation made the World Trade Organization, India removed restrictions on more than 700 import products and announced other measures that were intended to ease restrictions on trade in various sectors of the countrys economy so as to liberalize trade. The inflation rate of India has not been high over the last couple of years between 4 and 5.5 (Tirthankar, 2000). The countrys deficit is usually not high due to increased exports that surpass imports (Sankaran, 1994). India also has membership in several economic groups with other countries in the region. They include Comprehensive Economic Cooperation Agreement with Singapore, India-Nepal Trade Treaty, India-Sri-Lanka Free Trade Agreement and Trade Agreements with China, Bhutan, South Korea, Sri-Lanka, Bangladesh and Maldives. This increases the countrys access to market for its products.
Legal
Indias laws on trade are quite effective and have been tailored to favor foreign investment. There also are provisions for nationalizations among several other important processes. The country also participates in patents, trademarks and other intellectual properties. India is in fact argued to be the best country to outsource patent processes. The country has a trademark registry as well as attorneys. It has various laws that have enacted to deal with patents, trade marks and intellectual properties.
Technology
India has one of the best technology infrastructures in Asia. The service industry contributes the largest share to the countrys GDP and is based on technology. The government has focused on science and technology as well as research since 1947 and has established institutions, agencies, as well as departments which are concerned with the science and technology infrastructure (Sankaran, 1994). India also provides technological education for the workforce and has some of the best providers of technology solutions in the world.
China
Population
China is the most populous country worldwide with a population of about 103 billion people (Sang 2006). The one child policy that was introduced in 1979 has slowed down the countrys population. The number of younger people is not as large as that of India because of the one child policy and the lower fertility rate. The population is well educated though not in English and is healthy because of the investment the government has made in health care. Like India, traditional medicine is also practiced ion throughout China.
Chinas population is quite educated as primary and secondary education is compulsory. The government has expanded higher education and is focused on increasing the number of undergraduates as well as people holding doctoral degrees (Thurston, 1994). The country has over 100 universities and a literacy rate of 90 for males and 85 for females (Agelasto, Adamson, 1998). Just like India, China has a considerable large pool of skilled and motivated professionals that an offshoring company can chose from for employees.
Politics
China has a communist government that is also very authoritative. The government is restrictive in areas such as freedom of press, religion and assembly, the Internet and reproductive rights (Sang 2006). It is not as liberal and democratic as India. In spite of this, the country is stable and a majority of the population is satisfied with the way things are in their government as well as economy.
The government is characterized by a lot of bureaucracy but is committed to the growth of the countrys economy. China has been at the forefront in calling for free trade areas in the region. It has also tried to liberalize its economy and open it up for foreign trade and investment.
Economics
Chinas economy is rated third worldwide in terms of size afte5r the US and Japan. In 2009, the countrys GDP was 8.8 trillion based on purchasing power. It is one of fastest growing economies with a GDP growth rate of over 10 p.a. according to IMF, Chinas per capita income was 3, 180 in 2008. The countrys inflation rate has been quite low, at about 1.9 percent due to the increased trade activities in the country and the balance between exports and imports (Sang 2006).
Chinas economy is a market oriented economy that is characterized by private ownership of property. The manufacturing sector contributes most to the countrys GDP. China has established itself in the global market as a low cost manufacturer (Terrill, 2003). The energy sector is also well developed. The nations electrical distribution network was built in the late twentieth century implying that it is modern hence effective.
China is trade oriented, its deficit is not high as the country has tried to maintain them it within 3 percent. China does also have many trade restrictions (Sang 2006). Most of the laws restricting imports have been lifted and the country is in fact the second largest importer after the US worldwide.
Legal
The legal system in China is effective and just like Indias tailored to attract foreign investment. There are provisions for nationalization and work permits particularly for expatriates. Chinas law is also keen on patents and protection of intellectual rights. The country has laws such as The Patent Law which addresses design, invention and utility model patents, The Trade Mark Law which deals with registered trademarks, collective marks, service marks and certification marks, and The Copyright Law. Any company seeking to offshore its production I the country does not have to worry about the abuse of its intellectual properties ad trade marks.
Technology
China is doing well technology. The state is keen on availing technology and is argued have the second largest budget for research and development worldwide. The government emphasizes on creating public awareness on the importance of innovation and has even reformed financial as well as tax systems to enable cutting edge industries to grow. The country has more than 920 00 researchers, second to the USs 1.3m (Terrill, 2003). The country is also developing its energy (including renewable like wind, hydro and nuclear reactors), semiconductor and software industries.
Chinas communication and technology infrastructure are more developed than those of the US. China for example has largest number of cell phone users as well as the most broadband and internet users worldwide. According to research, china is very serious about technology education. Reports show that it produces over 700 000 engineers with the universities producing over 200, 000 computer science graduates every year (Terrill, 2003).
Final Decision
Production was chosen as the process to offshore. This is because the cost of production is very high in the United States. Cost of labor is high as the minimum wage set by the labor is higher in other countries. Taxes are also higher in the United States. The company also seeks to enter new markets and outsourcing is one of the best ways to do this. Offshoring production will also enable the company to benefit from superior technology that is in the country it is outsourcing to at a lower cost.
Offshoring production process supports operations which is one of the primary activities on the value chain. It will enable the company to produce its products more efficiently at a lower cost without compromising on the quality hence offer comparable buyer value which increases competitive advantage. High quality products that are offered at a lower price and differentiation could earn the company customer loyalty reducing rivalry in the industry. Offshoring also reduces threats of new entrants as they may not be able to as low prices as the ones the company will be offering once it starts offshoring.
Information on population, economy, political stability, availability of technology and the legal system is relevant for my country of choice. Information on population is important because production requires skilled labor that should be provided by healthy young people. The company does not want to spend so much on medical cover. Younger people will also serve the company for a longer time before they retire. A large population will also offer an extra market for the manufactured goods. The level of education determines how skilled and professional the workforce will be. A countrys political stability and goals is important as it determines how safe it is to invest in that particular country. Information on the economy is important as it will reveal the how the degree of the countrys development in service, manufacturingindustry and agriculture which is important for the production process. It also reveals how developed the government sector is in terms of infrastructure (transport and communication, education and health) which are critical to production (the process and the workforce). Information on technology and its infrastructure is important as production depends on technology n that the more advanced it is the better. Production also requires a workforce with technological education. Legal information is critical as the company would like to operate where patent and intellectual issues are considered serious and dealt with. The company would not want to have to have its trademark abused by substitutes and duplicates. It is also important to know the regulations concerning taxation and labor laws.
I would choose to offshore to India because of several reasons. Indias workforce is more frequent in English than the Chinese who have very low skills in English speaking. Communication is important and I would not want to risk any errors just because the employees do not understand what I am saying to them. I also would not like to have someone translating the instructions as errors can be made. Though China has a more developed technological and communication infrastructure, India has the best technology as well as better IT engineers. India also has a labor force that is more skilled and computer literate. Technology is crucial to production and when I have options, I would choose the superior option as it means more efficiency. This is why India is my choice.
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