Global Strategic Management

Nike & Reebok: Core competencies, make versus buy, designing and managing the global supply chain

Professor Jeff Dyer Global Strategic Management

Nike & Reebok: Summary of Key Ideas

A firms supply chain management strategy, including what and where to outsource, is often key to competitive success. Nikes core competencies are marketing (e.g., creating a brand name, including managing relationships with athletes) and shoe design. Nike/Reebok design their global value chain to take advantage of country comparative advantages and to maximize flexibility to adjust to changing market conditions/country advantages. At the extreme, Nike could potentially save as much as $23 billion in labor costs by choosing Indonesia vs. Germany as a mfg. location for all its shoes (assumes identical labor productivity and production methods).
Professor Jeff Dyer Global Strategic Management

Nike & Reebok: Summary of Key Ideas

When firms choose to outsource, they need to determine whether to treat outside firms as partners or as arms-length subcontractors. The greater the inter-company interdependence and value of coordination (and the less environmental factors [e.g., exchange rates, wages, etc.] change the relative costs and performance of suppliers), the more it makes sense to partner. The more the company values flexibility (due to changes in suppliers costs, technology, etc., the more it makes sense to use arms-length relationships Professor Jeff Dyer
Global Strategic Management
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STRATEGIC GLOBAL SOURCING (Building a global network of capabilities)

Mature

Growth

Innovation

Industrialized Countries
PCMCIA Unit (Japan: $17.50/hr)

Newly Industrialized Countries Notebook (P.C) (Singapore: $3.25/hr)

Emerging Economies
Adaptor (India: $.50/hr)

COMPAQS NOTEBOOK COMPUTER

Professor Jeff Dyer Global Strategic Management
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Vertical Integration

Who Let INTEL INSIDE?

Professor Jeff Dyer Global Strategic Management

Theories of Vertical Integration (Efficiency)

Vertical Integration as a means for reducing transaction costs and improving coordination.
When investments in specialized assets are high (e.g., oil refinery and pipeline)

Vertical Integration as a means to gain control over important inputs/markets

Avoid foreclosure to inputs or markets (e.g., Alcoa integrates back into bauxite to secure scarce and critical raw material for aluminum) Guarantee input quality (e.g., McDonalds growing potatoes in Russia)

Vertical Integration as a means to control/acquire information

Protect proprietary information/technology (Bose makes most critical inputs for its audio equipment) Acquire information on markets or technologies (e.g., GM integrating into automotive components to gain knowledge regarding suppliers costs and technology that assists in bargaining).

Professor Jeff Dyer Global Strategic Management

Theories of Vertical Integration (Non-Efficiency)

Vertically Integrate to exercise monopoly power
Price discrimination (to allow firm to price discriminate in different markets and avoid arbitrage). Create or increase the size of the barrier to entry in to a business (capital market imperfections make it more costly to raise larger sums of capital required for multi-stage entry; e.g., Coke & Pepsi) Squeeze non-integrated competitors (subsidize one stage of the value chain with another to squeeze competitor margins; bundle/matrix price, e.g., Microsoft Office vs. WordPerfect).

Vertical Integration as a loophole for regulatory action

Tax avoidance (through transfer pricing and sales tax avoidance). Price controls/rate of regulation avoidance (integrate backwards into non regulated industries and make higher profits in that industry).

Professor Jeff Dyer Global Strategic Management

MODEL FOR MAKE VS. BUY

Partner (compare capabilities) High Component Value - Seats - Air conditioners - Tires Make - Engines - Transmissions

Buy
- Bolts - Nuts - Belts - Filters

Partner (compare capabilities)

- Engine components - Interior and exterior trim products

Low

Low Asset Specificity

High
Professor Jeff Dyer Global Strategic Management
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