Case three types of supply relationships, based
Case 3 The International Firm in a Global Economy ECCO A/S – Global Value Chain Management Question 1: 1. Relate the Ecco case to the conceptualization of the organization as a global factory. What similarities and dissimilarities with the global factory conceptualization do you see and what solutions may it present? Similarities: As ECCO had been very successful in the footwear industry by focusing on production technology and assuring quality by maintaining full control of the entire value chain, ECCO grew and faced increased international competition, various value chain activities.The global factory conceptualization need a fully integrated value chain to tied up significant capital and management attention in tanneries and production facilities, in this case, which could have been used to strengthen the branding and marketing of ECCO’s shoes.
A multinational corporation (MNC) configures its global value chain activities in order to exploit location-specific advantages and gain global scale and scope advantages. ECCO has a fully integrated value chain and this allows for a discussion of the pros and cons of such an approach.The globalization of production and trade have fueled the growth of industrial capabilities in a wide range of developing countries, and the vertical disintegration of transnational corporations, which are redefining their core competencies to focus on innovation and product strategy, marketing, and the highest value-added segments of manufacturing and services, while reducing their direct ownership over ‘non-core’ functions such as generic services and volume production.Together, these two shifts have laid the groundwork for a variety of network forms of governance situated between arm’s length markets and large vertically integrated corporations. An increasingly complex and dispersed global value chain configuration posed organizational and managerial challenges regarding coordination, communication and logistics.
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Dissimilarities: with the global factory conceptualization, contract anufacturing by Sturgeon (2002) and by Sturgeon and Lee (2001) contrasted three types of supply relationships, based on the degree of standardization of product and process: (1) the ‘commodity supplier’ that provides standard products through arm’s length market relationships, (2) the ‘captive supplier’ that makes non-standard products using machinery dedicated to the buyer’s needs, and, (3) the ‘turn-key supplier’ that produces customized products for buyers and uses flexible machinery to pool capacity for different customers.This analysis emphasized the complexity of information exchanged between firms and the degree of asset specificity in production equipment. Solutions: These considerations lead us to construct a theory of the global factory conceptualization based on three factors, and then the solutions which may present should focus on: A. The complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications; B.The extent to which this information and knowledge can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction; and C. The capabilities of actual and potential suppliers in relation to the requirements of the transaction. Question 2: 2.
What are the pros and cons for outsourcing versus in-house (off-shoring) production in a firm like Ecco? One of the reasons for choosing outsourcing is technological efficiency.For ECCO, the main forces driving ECCO’s internationalization have been i) establishment of a market presence, and ii) reduction of labor costs and increasing flexibility. When the outsourcer possesses advanced technology, the manufacturer can share more profit with the outsourcer even if it cannot monopolize profit. Nevertheless, outsourcing has disadvantages in that production activities become a black box for manufacturers.
If manufacturers are not aware of the technological information outsourcers possess, they are required to pay the outsourcers rent for the extra information.Therefore, manufacturers face a trade-off between gain from the efficient technology and loss from paying the information rent. When a firm decides on in-house production instead of outsourcing, although a manufacturer can obtain the entire profit, it loses the gain from the cost efficiency of outsourcing. When outsourcing is selected, although a manufacturer can acquire the gain from cost efficiency, it is required to share the gain with the outsourcer.
The objective of these establishments, apart from achieving labor cost savings, was to spread risk.Initially, the various production sites were capable of producing the same types of shoes, indicating an insignificant degree of specialization in the production units. However, in recent years ECCO had strived to narrow each unit and capitalize on its core competencies. We should consider this trade-off from ECCO case, between in-house production and outsourcing when faced with cost uncertainty and competition with a rival manufacturer in a differentiated goods market. When the management decides on selecting organizational forms, technological uncertainty on production activities often ensues.Thus, a manufacturer faces uncertainty when choosing between in-house production and outsourcing. Moreover, because almost all modern firms are in a competitive position, they have to choose organizational forms and take the strategic effect of its decision on other rival firms into consideration.
Outsourcing is a key aspect of modern industrial production, and it has sparked considerable interest in the economic literature. Thus, there is a huge bulk of existing literature on outsourcing under different market conditions. Grossman and Helpman (2005) present a framework based on which firms decide where to outsource in a general equilibrium model. In their model, outsourcing is related to relationship-specific investments governed by incomplete contracts. They clarify the determinants of the location of outsourcing.
?Grossman and Helpman (2004) compare in-house production and outsourcing within the context of a moral hazard wherein a firm is constrained by the nature of the offered contract to an outsourcer. They clarify the relationship between the productivity of the firm and the choice of organizational forms. Alyson (2006) examines the choice of in-house production and outsourcing by multinationals using a general equilibrium model by focusing on the varying availabilities of skilled labor among countries.
He clarifies that the relative amount of highly skilled labor in the country affects the choice between in-house production and outsourcing. ? Alvarez and Stenbacka (2007) find that an increase in market uncertainty leads to a higher proportion of partial outsourcing by applying a real options approach. Question 3: 3.How sustainable is Ecco’s international strategy in comparison with its competitors? Operating on a global scale, ECCO need a sustainability of corporate international strategy which would emphasis on core competencies and drivers of competitive advantage in a dynamic market. The sustainability of corporate international strategy should include international mindsets and good adaptability skills. ECCO have a different and unique international corporate level strategy, which is, ECCO is following an inside-out strategy, whereas all the competitors seem to follow an outside-in strategy.
For inside-out strategy could be show as following aspects. Firstly, ECCO’s production process could be divided into five strategic roles or phases: full-scale, benchmarking, ramp-up, prototype and laboratory production. The objectives of full-scale production were to uphold demand, quality and operational reliability, and still produce high volumes. Benchmarking production, on the other hand, strove to retain knowledge and competencies in terms of opportunities for improvements and production cost structure.Secondly, ECCO had given high priority to the continuous education and training of its employees. The company invested aggressively in vocational training, career development, developmental conversations and expatriation. Such changing strategic focus as well as the drivers and problems/cost associated, that make the competitive advantage from the inside out through organizational capability.
Thirdly, ECCO maintained focus on the entire value chain or from “cow to shoe” as the company liked to put it.Resource Control(RC), quality control(QC), speed control(SC) and technology Control(TC) , these four parts make the sustainable international strategy of ECCO. Organizational capability makes financial capability, strategic capability, technological capability and uniqueness inside out, and that make the way of a MNC international strategy. ? David Ulrich, capability: Organizational competing from the inside out. For any organization to compete successfully in today’s market, it must focus on building not only from the outside but from the inside as well.
Focusing on organizational capability will not only meet short-term financial requirements, but also build a solid foundation for the future. For any organization to compete successfully in today’s market, it must focus on building not only from the outside but from the inside as well. Question 4: 4. Relate the Ecco case to the concept of “modular production networks”. The ECCO’s case contract manufacturing to illustrate an emergent model of industrial organization, —the modular production network.
Lead firms in the modular production network concentrate on the creation, penetration, and defense of markets for end products—and increasingly the provision of services to go with them—while manufacturing capacity is shifted out-of-house to globally operating turn-key suppliers. The modular production network relies on codified inter-firm links and the generic manufacturing capacity residing in turn-key suppliers to reduce transaction costs, build large external economies of scale, and reduce risk for network actors.For ECCO’s case, it test the modular production network model against some of the key theoretical tools that have been developed to predict and explain industry structure: Joseph Schumpeter’s notion of innovation in the giant firm, Alfred Chandler’s ideas about economies of speed and the rise of the modern corporation, Oliver Williamson’s transaction cost framework, and a range of other production network models that appear in the literature.The ECCO’s case examines the financial, organizational and managerial challenges of maintaining a highly integrated global value chain and asks students to determine the appropriateness of this set-up in the context of an increasingly market-oriented industry.
Meanwhile, it is a good example to argue that the modular production network yields better economic performance in the context of globalization than more spatially and socially embedded network models.I view the emergence of the modular production network as part of a historical process of industrial transformation in which nationally-specific models of industrial organization co-evolve in intensifying rounds of competition, diffusion, and adaptation. Here is a simple conceptual map of the shift from the vertically-integrated organizational form of the modern corporation to the value chain modularity that characterizes the modular production network, which could be suitable for ECCO. From Vertical Integration to Value Chain Modularity: