18-07-2014, 09:59 AM
Global Sourcing and Indian Industries
Structure
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1 Introduction
In this unit, you will study about global sourcing and its impact on Indian industries. Global sourcing is a procurement strategy that is aimed at exploiting global efficiencies in production.
This unit discusses the evolution of globalisation in India and its impact on Indian business. It also discusses the prevailing competitive environment in India with respect to international business, challenges and threats faced by Indian business. Some proven strategy models have also been discussed for better understanding of international business operations in India.
Objectives:
After studying this unit, you should be able to:
• understand the importance of global sourcing.
• understand why India is an attractive destination for global sourcing
• understand the advantages & disadvantages of global sourcing
• interpret the competitive environment in India.
• explain the global sourcing challenges to Indian industry.
15.2 What is Global Sourcing?
Globalisation of the world economy under the WTO has opened abundant opportunities of cost cutting, gaining competitive advantage and saving time for industries worldwide. Indian industries have experienced such developments as India is a member of the WTO since its inception in 1995.
‘Global sourcing’ is described as ‘the practice of sourcing cost effective and best goods and services across geopolitical boundaries in order to cater to global markets’. Global sourcing strategy is aimed at exploiting ‘global efficiencie’ in all areas of manufacturing, trading and services to enable offering clients and customer the best possible product or service. Usually, efficiencies that prompt firms for global sourcing are low cost skilled labor, low cost raw material, proximity to key markets, time zone differences and other economic factors such as tax exemption and low trade tariffs.
15.3 Reasons for Global Sourcing
Global sourcing is one of the most controversial subjects as the benefits of outsourcing is not properly understood by both companies and politicians. In the current phase of global economic recession, politicians condemn outsourcing as it sends both money and work out of the country thus affecting employment and people’s income level. Even then, the global sourcing industry is on a growth run as there are sound business reasons in global sourcing. These reasons are explained as under:
15.3.1 Lower salary and wages
The foremost reasons for global sourcing has been the ‘financial incentive’ of outsourced operations to low cost labour destinations such as India, Philippines, Poland and Romania. Due to the different stages of economic development, labour cost of workers in any developed countries is far higher than their counterparts. The following table illustrate labour cost differentials among countries.
15.4 Advantages of Global Sourcing
As business operations diversified in the global production chain due to globalization, companies have to evaluate their choices, decisions and strategy for outsourcing different components at a cost effective level from all around the world. Outsourcing offers several advantages as different countries are endowed with different natural, physical and demographic resources. Multinationals spread their production to low cost, developing countries. Business operations are shifted to many country depending on the comparative and competitive advantage. Global sourcing has actually helped multinational enterprises to grow and save money. There are other advantages of global sourcing that go beyond financial benefits. Detailed below are some advantages that prompt companies to sources globally for cost, reliability and efficiency reasons.
15.4.1 Benefits of core competency
A large company offering products and services in many segments and industries need to constantly focus on delivering innovative products. Larger business organisation sometimes develop stagnancy due to their back office operations which may affect its core function or activities. Therefore, such companies usually outsource their non core activities to other companies.
Challenges faced by McDonalds in India
McDonalds is an MNC and is one of the largest fast food chains in the world. McDonalds began its operations in India in 1996. Initially, the McDonalds food outlets reported accumulated losses. To overcome this failure, McDonalds developed a business strategy in India which adapted
to the local culture in India, its localisation and pricing strategy. McDonalds famous dish is the beef-based hamburger. In India, most of the people do not eat beef and pork and some prefer vegetarian. McDonald’s customised its menu with more than 50 percent vegetarian products. It introduced an Indian version of burgers which are made from mutton and chicken. McDonalds also introduced its price strategy in India. It announced reduction in prices by 25 percent for its lunch and dinner menus. Today, McDonalds is a successful food chain and has more than 170 restaurants in India.
Discussion question
1. What challenges did McDonalds face in India?
Source: http://www.scribddoc/6464143/McDonalds-4Ps-Of- marketing