ISDS 4160
Ross Lafont
Assignment 3
Disrupting Global Competition
In today’s world, we are extremely lucky with the way we can conduct business. Increased technology has led this planet to heights we thought we would never reach. Communication throughout the world is now as easy as pie. Not only do we have the telephone, but we also have email, scan, fax, and wire. All of these communication ways are cheap and it is China, not the United States that knows how to take advantage of this though low labor costs. This is why we do business in China these days. Globalization is the reason why we can outsource to China with great success.
China operates better than the United States. A main reason of this is that they have a clear-cut division between ownership and management. In some United States companies, there is confusion that exists right here. Management and ownership also share the same goals in China. Management and ownership are both doing their own individual job to create a marginal profit, we definitely could learn from the Chinese on how to do this.
Another man reason is that Chinese companies have not been outer-performing in the world markets as much in recent years. This is occurring because China’s marketplace has been changing. The government in China is very powerful. Many people see this as a bad thing in the United States, but in business perspective it is a good thing. The Chinese government can take control of an economic problem with its high intelligent individuals to offset something like a market crash.
Globalization is the reason there are so many opportunities in China. Knowledge, technology, mobile factors of production, and the ability to move all of these around interchangeable and efficiently has changed the marketplace and the world infinitely. For instance, it’s now possible to move everything around for Howard Weil to transfer its energy investment over the phone. This also can be done over the computer very easily. Business can be transferred from New Orleans to Shanghai if Howard Weil wanted to. This is the area where China makes a big profit margin because China knows how to utilize technology and communication with low costs to create a high return on investment.
One thing that is an issue in China it the exchange of knowledge, China is still trying to beat competitors in this aspect and take full control of the market.
The book lays out a blueprint with how business improves with globalization. The example highlighted in the book is about Pearl River Piano and how the first hire in the upgrade process was a U.S. expat. The main thing is that as the world becomes globalized, there needs to be an understanding that everyone does business differently. Even though that everyone in the world now can do business together, there still is a significant difference with how business if being done all around the world. If one can understand how business is done in a different part of the world, and that one can demonstrate how to do business in a different part of the world, they can be very successful. Most companies are not lucky enough to have an individual who knows how business operates in different part of the world. It is a very rare advantage to have since most people have only lived in country their entire life. Most companies hire people from other parts of the world to gain this advantage. How does that affect Howard Weil energy and oil investments? It means we must hire people in the countries in which we are trying to expand. But more importantly, it means we must hire those that not only have the legal expertise but also understand how business works in other countries. For instance, if Howard Weil is an emerging industry in Dubai but Dubai’s government is not like that of the United Sates, in the aspect of intervening to get a company running, we would have to hire someone from Dubai that understand how to do business there. Selecting the right country in this process is very vital. Dubai would be a lot harder to start a business in than China. This is just an example expressing how important it is to hire people from the sourcing country in order to be successful in the foreign market
Cost Innovation
If foreign companies other than China had a better marginal profit, than they would not be outsourcing as much. China’s marginal profit is actually the reason countries, like the United States, are outsourcing. China keeps its products quality the same or even better, while at the same time decreasing labor costs and productivity. This keeps China’s economy superior to everyone else’s. China adds value while decreasing cost. This creates a big profit and return on investment. Cost innovation comes into play here. Cost innovation means just as the term describes itself – how to be innovative within a cost structure, keep costs down, and keep marginal product the same. What if a country if able to provide high quality and the most supreme technology to the world market? This can only be done in countries like China, where they have learned that decreasing costs to run their business. China’s average income per person is lower than most other countries. This may seem bad to some people, but this is why China is so efficient. It’s relatively easy to look at from a supply/demand point of view. The vast amount of people in China also plays a role in this. There are not as many jobs available because there are so many people in China, which is the reason for wages being down relative to other countries.
The main aspect to draw from this is how effective cheap labor cost is. According to the book, China can hire one engineer to the United States hiring 5 engineers. This means that research will be cheaper. Howard Weil should definitely look at this because even though they are an investment company, they still need to hire engineers. Howard Weil hires engineers to do research analyst about how energy and oil wells are performing. Not only does this mean cheaper labor price but this also means cheaper product cost. This is key with research and development. While there are some advantages to hiring United States engineers, Howard Weil will have a mix of United States and Chinese engineers to do the data analyst. Howard Weil will like to hire more Chinese engineers to keep the labor costs down to create a greater profit margin.

The book also goes into a variety of low costs, which is “different product lines at different product low prices.” It is very difficult in the United States to keep product lines in control. China emphasizes flexibility, which is what us at Howard Weil will adopt from China. Innovation is what spurs flexibility. The book supports this with the battery example. Nickel in a battery will die out in one country, as a Chinese company will buy out all of those batteries and then lower all prices in Nickel powered batteries. It is so simple, yet so smart. This is how Chinese show their flexibility along with innovation, which is what the United States needs to be better at.
Cost innovation can be acquired in a vast amount of different ways; however, the main way is to get profit margins up while limiting costs, specifically labor costs. This will then strive flexibility and innovation
Loose Bricks
The main point of this chapter talks about how to “redefine, reevaluate, and eventually react to your left flank.” Every business around the world is and will always be certain to some risks. It is very important to realize that risk your business is exposed to and try your best to minimize that risk and continue to work on creating a profit. Howard Weil is good at minimizing risks, since they are an investment company. Investment companies know all about risk. Even though Howard Weil is successful at limiting risk, many new risks will arise when the try to outsource to China. These risks could be potentially greater. There are two segments of the domestic firm that can be attacked by the Chinese firm – first, there is cost innovation that another similar company like Howard Weil could provide and therefore Howard Weil would not be able to turn a profit. The second segment is the ability to take control over other markets, where there has not been much competition. Howard Weil will be entering a different market and they must realize the other businesses in that market.
The other risk to worry about is “mindset and geographic prowess.” Lots of the Western countries demand lower prices compared to the United States. Similarly, China used to. China is able to take control of these markets with its customer service. China offers other companies its services at a good price compared to other Western Companies. These markets accept China’s prices.
The book also goes into how important customization is. Customization is vital for all businesses. Companies have to respond to individuals wanting customization of products being offered. If companies were to deny a request from an individual, this will hurt that company greatly in the long run. Actually, a deadweight demand loss results from this. Because a deadweight demand loss may result, a person will accept the customized product and be at risk of getting a low quality product. This may also result in a loss of brand loyalty. A customer may not accept the product at all. What happens is that the customer will not want to keep buying this certain product? Customization needs to happen in business to care for the customer’s needs and wants. This will help the customer be loyal to your brand. This will also help you minimize any potential deadweight loss.
The Chinese do not target “poor customers.” No one in the west actually focuses on the poor as being a target customer. This is interesting because there are many companies in the United States that will use the poor to their advantage when trying to sell a product. The main difference here is the amount of poor people in each country. Some of the countries have a higher percentage of poor people compared to other countries. This shifts whom you want to market your product to.
The Weak Link
Chinese companies have many different limitations. Not al of these limitations may be government related. According to the book, the management at the top of the chain in Chinese companies may cause some limitations. A lot of the companies in China are the new companies that are just starting out. Their main problem is cost innovation.
There are two issues that come with cost innovation. The first issue is the geographic location of the company. Different places have different population sizes. Since China is so big compared to other countries, it is very hard to break away from the pack with cost innovation. The main companies that are able to really stand out are the companies that have established themselves for over fifty years. This is why these young companies struggle so much. Any cost innovation that a young company comes up with, it is likely that the idea has already been thought of or may even already be established by an older, preexisting company
Supply is the other issue that cost innovation has to deal with. This should have been obvious because it is supply and demand that drives an economy. Like explained in the previous paragraph, it is hard for a new company to establish itself because there have been preexisting g companies established for a great amount of time already. As China’s population and economy grows, so does demand by customers. This demand is growing faster in China than it is anywhere else in the world. China’s businesses are having to supply at this increasing rate of demand. This is not an easy thing to do. Howard Weil is limited in what investment options it can offer. Before I say that, Howard Weil is limited to offering investment products. Howard Weil may want to consider offering investment options in addition to its oil and energy options. Howard Weil should look to offering investment options in different technology advancements.

Your Response
Since China is having a growing economy at a rapid rate, there cannot be companies reacting too late. Howard Weil will have to adopt China’s strategy of offering a variety of products to keep up with the increasing demand. The different investment options should come at a low price since Howard Weil will just be starting out. In my opinion, I always think it is better to start out a company by offering a low price comparable to competitors. We must still realize China’s characteristics in how business is conducted. Their needs to be the perfect team assembled for this expansion to work. There needs to be a mix of Chinese and American employees. The employees need to be loyal to one another and work together.
Conclusion
Howard Weil must fully understand how China operated with cost innovation. Low labor costs are they key. This will create cost innovation and flexibility. Once those two traits are established with Howard Weil, and then they can really start to see the success it plans on seeing with this expansion. Howard Weil will still have to understand the new risks associated with expanding into a new market, especially a big market like China. The risks must be minimized at all costs.