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© 2017, American Marketing Association

Journal of International Marketing
PrePrint, Unedited
All rights reserved. Cannot be reprinted without the express
permission of the American Marketing Association.

A Dynamic Process of Building Global Supply Chain Competence

by New Ventures: The Case of Uniqlo

Tetsuya Usui
Professor of International Business and Marketing
College of Law
Nihon University
3-2-1 Misaki-cho, Chiyoda-ku, Tokyo 101-8301
Japan

Masaaki Kotabe*
The Washburn Chair Professor of International Business and Marketing
Temple University
The Fox School of Business
1801 Liacouras Walk
559 Alter Hall (006-14)
Philadelphia, PA 19462
U.S.A.
mkotabe@temple.edu

Janet Y. Murray
E. Desmond Lee Professor for Developing Women Leaders and
Entrepreneurs in International Business
Professor of Marketing
College of Business Administration
University of Missouri-St. Louis
St. Louis, MO 63211
U.S.A.

* Corresponding Author

Accepted for Publication in the Journal of International Marketing

March 2, 2017
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A Dynamic Process of Building Global Supply Chain Competence

by New Ventures: The Case of Uniqlo

Abstract

In today’s volatile global marketplace, firms should pursue flexible asset distribution and

high-quality and low-cost manufacturing operations simultaneously. Previous studies

examined the relationships between supplier management-related variables and market

performance with cross-sectional data; however, little guidance is available for how newly

internationalizing ventures build a global supply chain network from scratch. To understand

this dynamic process, we examine Uniqlo’s successful supply chain development in China,

using longitudinal contextual data. Our findings show that Uniqlo went through discrete

dynamic stages in its supply chain development efforts. First, Uniqlo, being a small firm in

the initial stage, developed relational governance with its suppliers by exercising dynamic

economic power concentration over time. Second, it began to provide technical support to

help its suppliers’ competence building to gain their cooperative behaviors. Third, Uniqlo

enforced compulsory non-exclusivity arrangements with suppliers to achieve flexibility by

not just having Uniqlo as the primary customer. This provides relational flexibility through

both relational governance and partner flexibility for the principal firm in the global supply

chain development.

Keywords

Global market, Dynamic process, Supply chain, China, Relational flexibility,

Internationalization, and Japanese management.

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In today’s hypercompetitive markets, many firms have to reduce costs and improve product

quality simultaneously when responding to global market uncertainty. Thus, how to develop a

new supply chain system that can achieve both high-quality production and low-cost

operations by partnering with local suppliers in emerging economies is of utmost importance.

Today, supply chain management is considered a part of customer value creating process that

delivers the proposed value to customers in the global market (Hult 2011). Customer

perceived product quality and lower price as a part of operational performance in marketing

leads to organizational performance, as measured by sales revenue and profit, which then

contributes to marketing resource building for a firm in the long run (Katsikeas et al. 2016).

To achieve flexible operations by managing global supply chains, the first question

that we need to ask is how a newly internationalizing firm builds its global supply chain from

scratch. Previous studies have examined relationships between supplier management-related

variables and market performance with cross-sectional data (Jean, Sinkovics, and Kim 2010;

Murray 2001; Wowak et al. 2013). However, as few studies have examined the dynamic

process of global supply chain development, little guidance is available as to how small firms

could develop global scale economies over time as they expand internationally. This issue is

especially pressing in an early stage of internationalizing firms, as they lack not only the

initial large-scale production capability but also the bargaining power to deal with established

local suppliers in emerging economies.

In fact, a silent revolution has been taking place in global supply chain management

strategy used by newly internationalizing Japanese firms such as Daiso (a high-quality dollar

store chain), Muji (a household and consumer goods retailer), and Uniqlo (a casual apparel

designer, manufacturer and retailer) in the last two decades. Although these firms are not as

widely known as Toyota and Sony, they have fundamentally changed the way they manage
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their supply chain in emerging economies (from materials procurement to manufacturing to

marketing). Historically, Japanese manufacturers had built their competitive advantages by

investing in both their own and selected Japanese suppliers’ manufacturing facilities (known

as keiretsu relationship) to produce and market standardized products with advanced

technologies, often by using different market positioning strategies in the global marketplace

during the 1980s-1990s (Kotabe 1990; 1998). Although those Japanese firms had once

succeeded by utilizing existing Japanese partners in a typical Japanese keiretsu relationship,

large investments in fixed assets incurred by maintaining tight keiretsu relationships turned

out to be a major financial burden in a rapidly changing global market environment in the

1990s-2000s.

To avoid supply chain inflexibility, newly internationalizing Japanese firms began to

develop and maintain flexible relationships with local suppliers in emerging economies, but

they still faced serious institutional gaps without having enough international experience or

economic power to exercise vis-à-vis their local suppliers. Previous research, using survey

data and collected from foreign principal firms and local suppliers, has focused mainly on

testing the effectiveness of joint investments (e.g., accumulated relationship-specific

technologies) through relational ties between partners (Zhou and Poppo 2010; Zhou and Xu

2012). However, it has not explored how newly internationalizing firms, such as Daiso, Muji,

and Uniqlo, develop a flexible supply chain network while maintaining high relational

governance with partner suppliers from scratch.

By employing a qualitative longitudinal case study method (Eisenhardt and Graebner

2007), we examine the successful history of Fast Retailing Co. Ltd., a Japanese apparel firm

that operates under the Uniqlo brand name (Uniqlo thereafter), with its new supply chain

network in China. Uniqlo was a small buyer in the 1980s when it started to deal with its first
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supplier in China. In the last two decades, however, this venture has become one of the most

successful apparel firms in the world by building a world-class global supply chain network

in a relatively short period (CBS News June 3, 2010; Economist 2010). Our study promises to

advance the literature by providing an in-depth understanding of the dynamic process of

supply chain network development.

THEORETICAL BACKGROUND

Relational Governance in Supply Chain Network

Relational governance requires a tight long-term partnership between the principal firm and

its selected suppliers to gain cooperative behavior from its partners. The theoretical

foundation for relational governance is built on the classical debate between Williamson’s

(1985) transaction cost analysis (TCA) and Barney’s (1999) resource-based view (RBV).

TCA and RBV have served as the standard theoretical lenses in explaining the extent of

insourcing/outsourcing activities. In essence, TCA predicts that the higher the asset

specificity (assets specifically committed to such relational activities with limited alternative

use), transaction frequency, and transaction uncertainty, the higher the ownership/hierarchical

strategy (i.e., insourcing strategy) firms tend to employ. On the other hand, the RBV focuses

on how firms build their competitive advantage through creating and acquiring their

resources and capabilities within interfirm relationships.

From the RBV perspective, close relationships with partners and relationship-specific

investments are necessary conditions for developing the competence within interfirm

boundaries (Dwyer, Schurr, and Oh 1987; Heide and John 1992). A strong relational

exchange between firms builds more favorable conditions for joint competence and reduces

transaction costs. As a result, firms are likely to make relationship-specific investments in the

long-term to maintain a high level of relational governance within the supply chain network
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(Dyer 1996; Kotabe, Martin, and Domoto 2003; Takeishi 2001).

For supply chain developments in emerging economies, these practices could be

equally applied, as social relationships have an important role when the principal firm and its

suppliers are from different legal and social environments. It is because lower legal

enforceability and higher global demand uncertainty cause difficulties for foreign firms’ local

business developments (Hilmersson and Jansson 2012). Zhou and Xu (2012) also suggest that

where legal institutions are weak, detailed contracts are ineffective in reducing partner

opportunism in contractually specified areas. These studies have provided evidence that,

relational governance through social exchanges and norm sharing provides a proxy for legal

institutions to ensure contract execution.

To elicit collaborative behavior from suppliers for developing interfirm competence

through relational ties, the principal firm needs to maintain some degree of power over them.

The concept of power in buyer-seller relationships in marketing channel was examined

extensively in the 1970s-80s (Gaski 1984; Hunt and Nevin 1974; Lusch 1976). Gaski (1984)

defined power as the ability to cause someone to do something he or she would not have done

otherwise. Power is also recognized as an important factor in supply chain development and

its integration (Benton and Maloni 2005; Maloni and Benton 2000).

Based on this classical argument, Maloni and Benton (2000) classified power into two

broad categories: mediated and non-mediated power. Mediated power, in the forms of reward

and coercive power, represents the competitive and negative uses of power. In supplier

management, reward power is characterized as financial incentives and direct benefits

provided by the principal firm to its partners (e.g., increased business or shared benefits from

cost reductions) while coercive power is based on the principal firm’s legal, legitimate, and

punishment rights over partners (e.g., decreased business or dictated cost). While coercive
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power tends to increase conflicts and reduce satisfaction of partners, reward power does the

opposite. With mediated power, in the forms of reward and coercive power, the principal firm

decides whether, when, and how to use its power to influence the supplier’s behavior.

Non-mediated power, in the form of expert, referent, and legitimate power, is more

relational and positive in orientation. Expert power exists when the principal firm holds

information or production expertise that is valued by partner firms. Referent power implies

that one firm desires identification with another for recognition by association (e.g., being the

primary supplier of established global manufacturers). Legitimate power, which includes

both its inherent and legal forms, infers that the target believes in the right of the source to

wield influence. Non-mediated power occurs as a natural part of buyer-seller business

transactions and does not necessitate intention from the source, so the suppliers decide

whether and how much they will be influenced by the principal firm. In fact, the principal

firm may not even be aware that non-mediated power exists (Benton and Maloni 2005).

Previous studies have revealed the relationship between mediated and non-mediated

power and supplier chain performance (Benton and Maloni 2005; Maloni and Benton 2000).

However, in an early stage of internationalization, the principal firm does not have any non-

mediated power to gain cooperative behavior from local suppliers and rewarding power to

exercise, when compared to well-known large established competitors. Therefore, it is

imperative to examine the dynamic process of how the principal firm gradually accumulates

its own mediated and non-mediated power to exercise in emerging economies.

Partnering Flexibility

Over the past few decades, outsourcing strategy has become a widely used means for firms to

improve their market performance. Outsourcing helps lower a firm’s breakeven point and

improve its return on investment. As a result, many firms have increased their outsourcing
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activities. Although firms may be able to improve their market performance through

increased outsourcing, this is only true up to a point, beyond which market performance

could actually decrease (Kotabe and Mol 2009; Kotabe, Mol, and Ketkar 2008; Kotabe et al.

2012). On one hand, by pursuing low cost efficiency via outsourcing in supply chain

operations, a principal firm may lose its competence in the quality of manufacturing and

other capabilities (Kotabe, Mol, and Ketkar 2008) as well as facing serious opportunistic

behaviors from partners at upstream activities (Heide 1994; Williamson 1985). On the other

hand, to develop high-quality manufacturing capabilities by utilizing relational governance, a

principal firm may alternatively choose to form long-term relationships with specific partners

and make a series of relationship-specific investments to develop manufacturing and logistics

capabilities jointly with its partners (Dyer 1997; Krause, Handfield, and Tyler 2007; Takeishi

2001). Such a tightly knit collaborative strategy through relational governance may result in

high customer perceived quality and value for the products that a firm offers (Katsikeas et al.

2016). However, the downside of this strategy is an inflexible relationship that may still raise

a system-wide fixed investment, resulting in a higher breakeven point, thus becoming

vulnerable to fluctuating sales and technological changes, as experienced by Japanese

manufacturers in the 1990s.

Although building social capital in a collaborative venture through relational

governance positively affects buyer performance, it may reduce the buyer’s ability to be

objective in making effective decisions and increase the supplier’s opportunistic behavior

(Lin 2002). As a result, the principal firm needs to develop ways to bring partnering

flexibility into their supply chain network to maintain market efficiency in the system

(Richardson 1993). Combining these arguments above, partnering flexibility is defined as

achieving high flexibility in selecting and switching to the right partners interchangeably in
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accordance with market uncertainty and changes in partners’ behaviors or competences.

Partnering flexibility in supply chain management brings three benefits to the

principal firm: 1) providing strategic alternatives for future decision making, 2) avoiding

partners’ opportunistic behaviors, and 3) receiving higher supplier performance through

competition among substitutable suppliers. A firm can achieve competitive advantages by

creating strategic flexibility by having strategic options to compete (Sanchez 1995).

Partnering with a single supplier may cause serious inflexibility between the principal firm

and its supplier in that it limits the possible future options for both firms.

Avoiding partners’ opportunistic behavior is the second benefit of having partnering

flexibility. Based on TCA, market governance provides the most partnering flexibility. Since

a one-time spot transaction will not result in a repeatable and long-term relationship, it is

easier to avoid partners’ opportunistic behaviors. A firm that employs market governance

takes advantage of the opportunities to deal with new contractors who may have innovative

technologies or better conditions for the principal firm, while the transaction costs (e.g.,

partner search, information seeking, monitoring, and contractual performance enforcement

costs) are relatively higher. This discrete exchange relationship provides the firm the

flexibility to pursue transactions with several different partners concurrently and/or over time

for a given component (Joshi and Stump 1999; Williamson 1985). In extending the TCA to

include repeated transaction relationships, studies have examined an intermediate structure

for relational governance (Dyer 1996; Williamson 1991). However, the principal firm needs

to develop ways to avoid its partners’ opportunistic behaviors that are caused by locked-in

relationships with a particular partner supplier. Thus, having multiple substitute suppliers

may help the principal firm avoid opportunistic behaviors by relying on a single supplier.

Another benefit of partnering flexibility comes from cost-efficient operations by

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maintaining competitive tensions among suppliers in the network (Wu and Choi 2005).

Recent studies have focused not only on the benefits of cooperative relationships, but also on

competitive relationships between a principal firm and its suppliers. When the relationship

becomes too stable and too long, it may lead to inertia and lower supplier performance

(Poppo, Zhou, and Zenger 2008; Wilhelm 2011). Although the extant literature has discussed

these benefits conceptually and has stressed the importance of matching the flexibility of

buyers and suppliers on supply chain performance, no empirical studies have been conducted

on this topic (Avittathur and Swamidass 2007). Our study fills this void by examining

partnering flexibility in supply chain networks.

Relational Flexibility: Simultaneous Achievement of Both Relational Governance and

Partnering Flexibility

Our literature review shows that a supply chain network in emerging economies is more

efficient when the principal firm achieves the multiple goals of pursuing higher partnering

flexibility, interfirm manufacturing competence, and higher operational outcomes

(Richardson 1993; Sanchez 1995; Wilhelm 2011). However, the extant literature does not

provide guidance on how to achieve these multiple goals simultaneously. In an attempt to

maintain partnering flexibility, a principal firm may discourage its suppliers to be cooperative

since they may not be willing to invest in the joint relationship without guaranteed exclusive

and continuous transactions. These suppliers may even refuse to conduct social exchanges

with a newly internationalizing firm in the initial stage. Even when a newly internationalizing

firm generates the power to switch to substitute suppliers and threatens to use that power, its

suppliers would be aware of the its opportunistic behavior and would not be willing to

become its primary partners. Without having a chance to develop social ties with its

suppliers, the principal firm may face serious opportunistic behaviors from its suppliers from
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the beginning, and may be unable to develop interfirm competence over time. Which comes

first, partnering flexibility or interfirm relationship building through relational governance?

This seems to be a chicken or an egg issue.

Interestingly, Uniqlo has historically developed a supply chain network by

maintaining both a high level of interfirm competence development and partnering flexibility

with its Chinese suppliers in the last two decades (e.g., CBS News June 3, 2010). We call this

practice relational flexibility. Relational flexibility is defined as the ideal condition in which

the principal firm maintains both a high level of interfirm competence development based on

relational governance and partnering flexibility with its suppliers. With relational flexibility,

partner suppliers are willing to invest in long-term relation-specific assets with the principal

firm, and respond to changes (Johnson 1999), in that they are willing to renegotiate the

arrangement as unforeseen events take place (Heide 1994).

This relational flexibility-based supply chain network not only helps the principal

firm achieve higher flexibility in its transactions, but also helps maintain a market-based

supply chain system that promotes more competition among multiple suppliers. In this

arrangement, the selected and potential suppliers are expected to compete against one another

to achieve even higher performance for the supply chain network (Park et al. 2010; Wilhelm

2011). However, a TCA-based logic still predicts that a dilemma may arise when the

principal firm simultaneously pursues both interfirm competence development and partnering

flexibility in the supply chain. RBV also predicts that interfirm competence development

through long-term relation-specific investments is accumulated only when relational

governance has been maintained, and not with flexible partner switching. An appropriate

research question that needs to be asked is how a newly internationalizing firm dynamically

achieves those multiple goals simultaneously in its supply chain development over time.
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Thus, the purpose of this paper is to demonstrate the dynamic process of how newly

internationalizing firms can design and manage relational flexibility-based supply chain

network from scratch in emerging economies for global competitiveness over time.

RESEARCH METHOD

Method and Sample Selection

Although the extant literature focused mainly on exploring the extent to which firms manage

a governance structure with their partners, little is known about how a principal firm

dynamically designs and manages relational flexibility within its supply chain network that

contributes to its sustainable global competitive advantages (Skarmeas, Zeriti, and Baltas

2016). While Dong, Tse, and Hung (2010) examined the moderating effect of relationship

stages on the governance fit-channel outcome relationship, they measured relationship stages

(new vs. mature) as discrete using a dummy variable, without investigating how firms

manage the relationship with their suppliers over a long period of time. Our study focuses on

Uniqlo’s success by examining its dynamic supply chain network development using

relational flexibility-based partnering with multiple local suppliers in China.

For our in-depth case study, we chose a historical content analysis of news articles,

internal documents, books, other published reports, and personal interviews with company

executives and industry analysts as primary data. It is a method probably best suited for

analyzing the dynamic supplier relationship developments that a survey research could not

address (Chandy and Tellis 2000; Golder and Tellis 1993). It focuses on the information when

the principal firm first conducted transactions with its partner suppliers, and on how they

maintained their relationships in each moment. The information is based on records written as

news articles, books and annual reports, which complement the interview-based information

(Yin 1984). The sources of the primary and secondary data collected for this study are
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provided in the Appendix.

For our study, the unit of analysis is the long-term dynamic relationships between the

principal firm and its multiple local suppliers (Wu and Choi 2005). We examine the history of

Uniqlo’s supply chain network development in China as a case, and how it selected its

partner suppliers and developed relationships with them to build strong relational competitive

advantages over time. There are two main reasons why we chose Uniqlo for our case study.

First, Uniqlo is known as one of the most successful apparel firms in the world in the last two

decades, so this is considered as an extreme case. Uniqlo’s rapid growth had started since its

first store opening in Hiroshima, Japan in 1984. In November 2015, the number of Uniqlo

stores located outside Japan (960) exceeded the number of its domestic stores (846) for the

first time. According to the company’s website, in August 2016, having surpassed GAP in

annual sales, Fast Retailing Co. Ltd. that runs Uniqlo has grown to become the third largest

apparel firm in the world, after Inditex’s ZARA and H&M, with annual global sales of

$17.31 billion. Furthermore, mass media tout its successful outsourcing-based supply chain

control as the best in practice (e.g., CBS News June 3, 2010).

Second, Uniqlo’s business model and operations are classified as SPA (Specialty

Store Retailer of Private Label Apparel) because it sells all in-house designed items in its

own stores. SPA originally meant that its activities are fully integrated from product design,

manufacturing through sales, including material procurement, product design, production,

distribution, inventory management, to final sales. Despite this definition, Uniqlo is known as

one without owning manufacturing facilities in-house. Among consumers, Uniqlo has been

recognized as a higher quality manufacturer that offers the lowest price in the market (Shirai

2014), and its good marketing performance is attributed to its supply chain management

effectiveness and efficiency. Although all the items that it sells at its own stores are designed
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in-house, all production activities are outsourced mainly to independent Chinese suppliers.

Uniqlo seems to enjoy higher flexibility without having fixed assets tied up in production

facilities and achieve high-quality and low-cost production simultaneously (CBS News June

3, 2010). The high performance of Uniqlo’s business model is interesting in and of itself, and

is therefore worthy of a serious investigation to explore our research question.

Data Collection

We used multiple sources of evidence in our study to examine the dynamic process of supply

chain development in a robust manner (Yin 1984, 2008). The most important advantage of

using multiple sources of evidence is the development of converging lines of inquiry(Yin

2008). Therefore, we collected secondary data including news articles, books, a series of

annual reports, and personal interviews not only from Uniqlo’s officials but also from its

competitors and suppliers. To collect and analyze data in a more systematic way, we applied

the following four criteria in evaluating and accepting information (Chandy and Tellis 2000;

Gold and Tellis 1993):

1. Competence: The informant is able to report correct information.

2. Confirmation: At least two sources (articles, books and interviews etc.) cite the same

fact.

3. Neutrality: The sources have no overt interest to bias their reports.

4. Reliability: The sources are well respected or have a history of good reporting.

First, our secondary data consisted of published articles related to Uniqlo’s supply chain

development. Initially, we obtained 3,234 articles from twelve magazines and newspapers

from the Nikkei, Nikkei BP, Asahi, Yomiuri, and Mainichi News databases with the keywords

containing “Uniqlo, China, and production or manufacturing.” All collected articles were

published during the period January 1, 1990 - November 30, 2014. Once we had read through
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all the articles, we focused on 317 articles that were the most relevant to our study. We also

utilized the company’s annual reports from 2006 to 2015 published on its corporate website

and eight books on Uniqlo’s business success and problems, including three books written by

Uniqlo’s CEO, Tadashi Yanai. Second, we obtained primary data from interviews with five

senior managers in manufacturing of Japanese apparel firms that are considered as Uniqlo’s

competitors and two managers who have been involved in business transactions with one of

Uniqlo’s main suppliers in China. For triangulation purposes, we also interviewed eight

Uniqlo officials: one manager from the international division, five store managers in the

Southeast Asia region (we consider this as one interview, as we conducted a group interview

with these five managers simultaneously during their training program at the head office in

Tokyo), and two store managers in Tokyo separately. Those store managers were asked to

speak about Uniqlo’s marketing practices in connection with Uniqlo’s supply chain

management. In total, we had eleven interviews that lasted one to three hours each. We have

also conducted interviews with five store staff members in Tokyo, but we did not consider

those store staff members as Uniqlo’s corporate officials.

DATA ANALYSIS AND RESEARCH PROPOSITIONS

Case Data

Fast Retailing Co Ltd. was established in 1984 in Yamaguchi Prefecture in Japan by Tadashi

Yanai, the current CEO, who is well known for having started Japan’s No. 1 casual clothing

stores ‘Uniqlo’. At the beginning, Uniqlo started as an independent apparel retail store that

procured almost all items from various textile manufacturers and sold them in its own stores.

It gradually began to design its own products and contracted manufacturing to independent

suppliers in China. During late 1980s and early 1990s, Uniqlo asked Japanese general trading

firms, such as Marubeni, Mitsubishi Shoji, and Sojitsu, to find appropriate Chinese suppliers
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and control manufacturing operations as intermediaries. Because Uniqlo needed to learn how

to procure apparel products from China at a relatively low cost, its first order was placed to

an intermediary to avoid transaction costs that might have arisen from direct transactions with

unknown suppliers. Mr. Yanai recollected that his first order to a Chinese supplier was about

1,500 units (Asahi Newspaper, November 28, 2006). The order size was so small that the

supplier refused to deal with Uniqlo. As most of the leading suppliers in China were already

supplying to major Western apparel firms, it was initially extremely difficult for Uniqlo to

deal with them on equal terms. In 1994, in its 10th year of establishment, Uniqlo’s sales

reached ¥40 billion (approximately US$480 million) with 118 stores located throughout the

western part of Japan, while in the same year, GAP, a U.S.-based casual clothing retailer,

already had annual sales of US$3.7 billion with 1,260 stores around the world. Uniqlo was

still a much smaller client for suppliers in China (Li 1997, p. 143). At that time, Uniqlo, with

trading companies as intermediaries, had transactions with over 100 suppliers in China.

In 1994, Uniqlo launched two major long-term strategic initiatives: accelerating the

opening of more domestic stores and developing direct transactions with independent

Chinese suppliers by reducing the assistance from Japanese trading companies. By expanding

its outlets in the eastern region of Japan, Uniqlo decided to open at least 50 stores every year,

and this initial expansion plan was achieved in the following 10 years (with 655 stores by

2004). To supply high-quality and low-cost items to the growing number of stores, supply

chain reforms became a strategic imperative for Uniqlo by increasing the volume of direct

transactions with Chinese suppliers. In 1998, the firm established two production

management offices in China, one in Shanghai and the other in Shenzhen, and attempted to

select only 40 primary partners out of its 120 suppliers to develop closer relationships with

the smaller number of partners (Nikkei Business, December 21-28, 1998). Uniqlo found it
 17

necessary to place a large amount of orders to the selected suppliers to receive favorable

terms from them. Yoshihiro Kunii, chief operating officer of the production division,

officially announced that the company would order some tens of thousands to hundreds of

thousands of units for each stockkeeping unit (SKU) to one supplier to gain its cooperation

because Uniqlo was still a smaller-sized client than many Western apparel firms, such as

GAP and H&M. By 2012 the average order size per SKU per factory reached 8.75 million

units with a sales volume in billions of yen on an annual basis. To make even larger orders for

every SKU, Uniqlo minimized the number of variations for each SKU sold in its stores.

According to Mr. Kunii, although the number of SKUs increased from 200 in late 1990s to

400 in 2012, it was only about 10 to 30% of the number of SKUs usually carried by its

competitors, such as GAP and H&M (Kawashima 2008, p. 66; Tsukiizumi 2012, p. 78).

In June 1998, Uniqlo installed an advanced information system in its supply chain

network, which connected factories, stores and head office online to achieve even more

efficient inventory control and accurate production planning. In addition, the company started

sending technical engineers from Japan to its suppliers’ manufacturing sites every week to

help improve their operational capabilities. From 1998 to 2000, Uniqlo’s sales more than

doubled, exceeding ¥220 billion (approximately US$2.4 billion). When the sales volume

doubled and the number of suppliers was reduced by about 70% from 120 to 40, the total

transaction volume for each supplier increased dramatically during this period. By exercising

this economic reward power, Uniqlo was able to maintain favorable relationships with its

selected suppliers over time. By year 2000, its 40 selected suppliers had developed and

improved their manufacturing capabilities by utilizing technical assistance from Uniqlo

(Nikkei Business January 17, 2000). They had made a series of relationship-specific

investments to develop manufacturing lines that were jointly designed to be functionally

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effective only with Uniqlo. In our interview, one executive from Uniqlo’s competitor

mentioned the following, which was also confirmed in other sources (Nikkei Sangyo October

31, 2001; Yamashita 2010, p. 191):

Some of these primary suppliers discarded weaving machines that they had installed,
and replaced almost all of them with machines to meet Uniqlo’s specific
requirements. Afterwards, some of them were able to respond to flexible
manufacturing operations that required carrying semi-finished goods to postpone final
production based on demand changes.

From 2000 to 2001, Uniqlo’s sales almost doubled again, reaching ¥400 billion

(US$4.8 billion) with 433 stores. To meet with this rapid expansion, Uniqlo selected another

25 suppliers as new partners in China in 2001, with the total number of partner suppliers

reaching 65 firms with 80 factory locations (Nikkei Newspaper, February 22, 2001). By

providing even more effective technical support to these suppliers, Uniqlo organized a new

professional engineering team, called Takumi (which means “artisan” in Japanese), in April,

2000. According to the company’s 2011 annual report, the Takumi team, made up of mostly

retired veteran personnel with over 30 years’ experience in areas such as cutting, sewing,

dyeing, and IT-based production process management in Japan's textile industry, played a

central role in providing technical support to partner factories. These Takumi professionals

had a diverse range of backgrounds and skills, with each playing a major role in supporting

Uniqlo’s product quality. One industry official pointed out the following, which was also

confirmed in another source (Nikkei Business, June 1, 2009):

Uniqlo’s Takumi professionals visited their suppliers two to three times a week to
provide on-site technical support. On the other hand, technical support staffs from
Western apparel firms, such as GAP, Nike, and H&M, usually visited sites only once a
month, and in some cases just once or twice a year.

In the case of GAP, although the company sent over 200 staff members to its

suppliers’ factories in over 40 countries, they were only quality inspectors (Li 1997) who

were not assigned to help suppliers’ capabilities building. In the case of H&M, the company
 19

has transactions with more than 10 times as many suppliers in many different parts of the

world as Uniqlo, with 70 partners mainly in China. According to H&M’s website, it states

that H&M does not own any factories; instead, clothes and other products are commissioned

from around 700 independent suppliers, primarily in Asia and Europe.

At Uniqlo, Takumi’s support included both manufacturing skill improvements and

operation management development. As the manufacturing skills that Takumi needed to teach

Chinese workers involved tacit knowledge, frequent site visits and joint problem solving

were necessary in order to transfer all the skills to local workers effectively. For example, in

the dyeing process, it was very difficult to keep the exact same color by using different

caldrons, because the temperature and humidity of each site significantly affected the color of

the finished products. Therefore, by learning from Takumi’s tacit knowledge of dyeing, which

was complex and uncodifiable, these suppliers had improved their skills in achieving the

same finished colors that satisfied Uniqlo’s quality standards (Matsushita 2010, p. 130).

Takumi also helped improve the whole production process from procurement of raw

materials (e.g., original yarn) to final inspection. To achieve total production performance

including higher quality, lower cost, and quick responses simultaneously, the pursuit of the

higher operational efficiency at each manufacturing process within the total production

system was needed, but the improvement of each process alone did not offer a critical

solution. The Takumi team made continual efforts to improve each production process and

achieve total operational efficiency of the production system as a whole to achieve just-in-

time operations and quick responses to orders (Kawashima 2008).

In 2000, Uniqlo produced a total of 300 million units with 200 SKUs (with an average

production per SKU being 1.5 million units), and 90% of these items were manufactured in

China (Nikkei Business August 1, 2005). With Takumi’s support, its suppliers have
 20

continuously improved their operational capabilities to build their own business scale and

resource base faster. An industry executive in our interviews testified the following, which

was reconfirmed by two other executives in our interviews and in other sources (Asahi

Newspaper January 26, 2008; Tsukiizumi 2012, p. 84):

Uniqlo’s suppliers whom we dealt with had drastically improved their level of
production efficiency and quality of finished goods with the Takumi support program.
These improvements provided suppliers opportunities to expand their production
capacities and better reputation in the industry, so that they could easily find new
clients from developed countries and in China.

In 2002, Uniqlo’s sales failed to increase as much as the company had expected. In

fact, its annual sales volume remained at the same level as in the previous year; therefore, the

company decided to reduce the number of partner suppliers from 65 to 40 (Nikkei Marketing

Journal August 29, 2002). Because Uniqlo did not have ownership-based control over its

suppliers, this temporary restructuring was relatively easy to execute in a short time period.

However, the suppliers who had lost their business with Uniqlo complained against Uniqlo’s

decision. At that point, Uniqlo realized that its suppliers’ excessive dependency on itself

could lead to higher risks in the industry when it terminated its relationship-specific

transactions with particular suppliers. In fact, this sudden cutoff could be considered as

Uniqlo’s opportunistic behavior over its partner suppliers. Uniqlo came to realize the need to

maintain high partnering flexibility not only for itself, but also for its partner suppliers to

avoid serious conflicts between them. In response, Uniqlo required the 40 remaining partner

suppliers to achieve even more flexible manufacturing capabilities to respond to fluctuating

demand conditions by achieving even higher-quality and lower-cost operations. Takumi

professionals, now having increased to over 40 members by 2012, visited as many factory

sites to improve Uniqlo’s partners’ manufacturing capabilities as possible (Kawashima 2008,

p. 85; Nikkei Newspaper February 22, 2001). Uniqlo also upgraded its supply chain
 21

information system to enable itself to manage all operational stages from material

procurement to sales data in its stores more efficiently and more accurately.

The major challenge for apparel retailers and manufacturers in recent years has been

on how they can respond accurately to the vagaries of demand conditions. The lead time for

apparel products is usually relatively long because there are many manufacturing processes

from material procurement to final inspections. Although most firms must rely largely on

their demand forecast to plan for an appropriate amount of production and meet with

unexpected demand changes, Uniqlo has developed flexible manufacturing operations that

are able to postpone part of the manufacturing process until more accurate demand and actual

sales data have been collected from its own stores. The development of just-in-time

operations at Uniqlo is largely attributed to revamping its total supply chain information

system with its partner suppliers. For example, in 2002, Uniqlo’s annual sales dropped 6.8%

from the previous year because of a serious decline in demand for fleece products that had

been one of the company’s best-selling products. Although Uniqlo had anticipated the

demand decline in advance, it still resulted in a large amount of inventory mainly because the

sales databases in its stores and headquarters and the production database at its suppliers’

production sites were not connected online (Nikkei Information Strategy March, 2002, p.

128). Since internal strategic information is both sensitive and proprietary to the firm, high

environmental uncertainty inhibits the sharing of such internal strategic information due to a

lack of sufficient safeguards to protect the information.

However, a balanced interdependence between partner firms and transaction-specific

investments can attenuate the adverse effects of environmental uncertainty on strategic

information sharing (Frazier et al. 2009). Due to the existence of a balanced interdependence

between Uniqlo and its partner suppliers and transaction-specific investments, in 2002 Uniqlo
 22

and its partner suppliers decided to install the advanced enterprise resource planning (ERP)

system supported by Accenture and NEC to share real time data on both the demand and

supply sides by July 2003 (Nikkei Computer Nov. 4, 2002, p. 11). As a result, by mid-2000s

the manufacturing capabilities, including cutting, sewing, dyeing, and inspection, of Chinese

partner suppliers had improved dramatically. Uniqlo had been supporting its partner

suppliers’ dynamic growth by offering a large amount of orders and technical assistance and

had succeeded in strengthening the transactions with them in China. These excellent suppliers

considered Uniqlo as their main customer to cooperate with for the long haul.

Escaping from a two-year doldrums, the anticipated sales growth came back on track,

and Uniqlo had achieved approximately a 20% yearly sales growth rate from 2004 to 2010.

Based on our interviews with Uniqlo’s officials in international operations and store

managers, the company has refined and reconstructed strategies in three major areas of its

business model during this period. The first area was customer communication. Owing to its

mass selling of fleece in 1998, Uniqlo gained a somewhat negative brand reputation as a

company that sold cheap products. Consequently, the company embarked on a large-scale

promotion to dispel this negative brand image. Uniqlo allocated 5% of its total sales for

nation-wide TV commercial films featuring famous Japanese personalities and Hollywood

stars, such as Orlando Bloom and Charlize Theron, in order to change the company’s brand

image from a price leader to a high-quality developer of innovative products. In terms of

store development, Uniqlo has closed some stores and integrated some existing stores to

create large “flagship stores” since 2004. These flagship stores were located conveniently in

metropolitan areas, and their interiors were conceived by artists with radical designs. Uniqlo

believed that renovating its stores would help improve its brand image by providing

sophisticated customer’s experience.

 23

Second, to improve its capability in developing high-quality products, the company

focused on developing and procuring high functional materials as well as achieving one of

the lowest market prices simultaneously. For instance, in 2004, Uniqlo sold cashmere

sweaters made of white cashmere from Inner Mongolia, which was priced low for regular

cashmere products but of high quality. Sales of these sweaters reached 10 million units,

accounting for approximately 30 percent of all cashmere products sold in Japan during the

period from 2004 to 2005. In the same year, Uniqlo launched its HEATTECH line, which

features highly functional and comfortable inner wear. Uniqlo developed HEATTECH in

collaboration with Toray Industries, a leading chemical and fiber manufacturer in Japan. The

HEATTECH fabric is a light-weight fabric that is able to generate and sustain heat, making it

ideal for colder temperatures. The HEATTECH line has generated significant sales since its

launch in 2004. The HEATTECH items, sold at about ¥1,500 (about $14) a piece, are some of

the company’s most popular high-quality, low-priced items. During the 2011 Fall/Winter

season, 100 million HEATTECH items (including socks, inner wear, and jeans) were sold

worldwide. Some of the new materials or products Uniqlo has developed include “skinny

jeans” made of elastic material, “ultra-light down” made of light weight and heat-retaining

down feather, and “AIRism,” a line of inner wear made of ultra-fine fabric that quickly wicks

away perspiration. These new materials and products were developed in partnership with

Japanese chemical and fiber manufacturing companies such as Toray and Asahi-Kasei.

In summary, Uniqlo evolved from merely a company that manufactures high-quality,

low-priced products to one that also develops innovative, high-functioning materials. These

innovative products with newly developed functioning materials have placed Uniqlo in a

highly differentiated position in the market. However, as manufacturing those products

became much more complex, the company needed to achieve and maintain even higher
 24

standards of production technologies and skills at its partners’ production sites in China

(Tsukiizumi 2012, p.82). A Uniqlo manager in international operations recalled the following

in our interview:

We have made a strategic transformation throughout our business operations, so that

we can respond more quickly and accurately to global market turbulence. From
product development, production to sales in stores, all these activities on the value
chain had been redesigned to work as an integrated system. Without maintaining an
integrated global supply chain system with Chinese partners, we could not have
accomplished the growth that we experienced during this period.

During this growth period, Uniqlo pursued to maximize benefits from global

economies of scale in production and marketing. The partners who had benefitted from these

opportunities became the most efficient producers on a large scale in a competitive Chinese

market. Some of Uniqlo’s partner suppliers produced more than 2 million T-shirts monthly at

one site with 3,500 employees. To respond to Uniqlo’s large-scale mass production orders,

the partner suppliers needed to maintain a large-scale employment. However, it was not easy

for its Chinese partners to do so, due to the increasing average salary rates for their workers

in the textile manufacturing industry and employees’ career preference for other

manufacturing industries, such as electronics and automobiles. For example, in 2010 the

average monthly wage in China’s textile manufacturing industry was US$240-$360,

compared to $40 in Bangladesh (Nikkei Business July 5, 2010). To maintain low-cost and

high-quality production for Uniqlo, it became necessary for the partner suppliers to expand

their production capacity by opening up new facilities in rural areas in inland China or in

other Southeast Asian countries where the average wage rates were lower than those in

China’s coastal regions. For example, one major supplier opened its own production facility

in Bangladesh in order to respond to Uniqlo’s large volume orders with even lower

production cost requirement.

Dynamic Stages of Supply Chain Development: Research Propositions

 25

Our literature review and longitudinal content analysis provide the background for the

development of research propositions. According to Uniqlo’s history of supply chain network

development, we found that the newly internationalizing firm has gone through three

dynamic stages of supply chain development over time to become one of the largest apparel

MNEs in the world today.

The First Stage: Dynamic Reward Power Concentration. The first stage of the supply chain

development is dynamic reward power concentration. According to Uniqlo’s experience and

previous studies on power, we expect that the more economic power the principal firm

exercises by rewarding partners with large volume orders, the more cooperative its partners

will become in their behavior toward the principal firm. However, a newly internationalizing

firm, such as Uniqlo, tends to have limited capability to place large-scale orders and could

not offer any non-mediated power (i.e., expert and referent power), to its partner because of

its relatively small size in terms of total sales volume and financial assets. In fact, in an

earlier stage in 1990s, Uniqlo did not have enough economic rewarding power to exercise,

when compared to much larger Western competitors. It is important to note that Uniqlo has

gradually increased the order size to each partner by reducing both the number of suppliers

and the number of variations of SKUs sold in its stores. We call this practice dynamic reward

power concentration. When the suppliers responded to Uniqlo’s orders and requirements

appropriately, they gained a reward that promised higher transaction volumes in the next

order cycle. When world-class Western apparel companies, such as Nike, Adidas, and GAP,

outsource their manufacturing activities to independent firms in China, Uniqlo also needs to

order a high volume to gain cooperative behavior from its Chinese suppliers in pursuing

quality control and cost minimization. These independent suppliers tend to put more effort

into large volume orders because they can expect continual and worldwide sales volumes
 26

only from world-class apparel companies, not from relatively smaller-sized and extremely

quality-oriented Japanese apparel firms such as Uniqlo. This expectation on economic reward

or a large transaction volume, promised by the principal firm, would serve as a source of

control in its supply chain network (Dyer 1997).

When it is a relatively small-sized buyer among other clients, local suppliers hardly

expect that the principal firm will soon gain an ability to generate and exercise power (such

as reward, expert, and referent power) that will attract enough interests. Therefore, a newly

internationalizing firm needs to provide economic reward that promises higher transaction

volumes in the next order cycle by bestowing economic power concentration onto a limited

number of specific potential partners in order for it to enjoy their cooperative behaviors.

Based on the above arguments, we suggest the following research proposition:

Proposition 1: In the initial entry stage, a dynamic reward power concentration

exercised by a newly internationalizing firm (the principal firm) toward selected local
suppliers has a positive effect on gaining its suppliers’ cooperative behavior between
the principal firm and its suppliers.

The Second Stage: Suppliers’ Competence Development. The second stage of the dynamic

process is suppliers’ competence development. To seek cooperative behavior from partner

suppliers without ownership-based control, the principal firm exerts expert and referent

power by providing special knowledge and expertise to help its partner suppliers with their

own competence development and continuous growth (Gaski 1984, 1986; Gaski and Nevin

1985; Krause, Handfield, and Tyler 2007). Such an action could further increase the trust and

respect received from its suppliers (Gaski 1986; Krause, Handfield, and Tyler 2007).

Improvements in primary suppliers’ competence result in higher product quality with lower

cost operations in order to gain global competitiveness for the principal firm.

Sending experts from the principal firm to partner suppliers, such as Takumi
 27

professionals from Uniqlo, is critical in gaining non-mediated power and helps develop

partner suppliers’ technical competence (Frazier 1983; Frazier and Summers 1984).

Technological support is a source of power based on the identification of the principal firm

with its suppliers where identification means a feeling of oneness or a desire for such an

identity (Hunt and Nevin 1974, p. 187). The non-coercive power, such as the power to

provide economic rewards or special skills to suppliers, reduces conflicts and gains partners’

satisfaction (Maloni and Benton 2000). The principal firm can have (non-mediated) power

without using it (Frazier 1983), but the reward should be granted continuously and

perceivably to ensure that the partner suppliers’ cooperative behavior would stay positive

toward the principal firm (Carter and Rogers 2008).

The technological support provides not only expert power but also connections with

economic reward power that we discussed earlier. We found from our data that exercised

economic power also contributes largely to suppliers’ competence generation because they

have more opportunities to learn and improve both their manufacturing skills and total

operational efficiency by fulfilling repeated orders in large quantities from the principal firm.

A manager of a trading company who was in charge of the transactions between Uniqlo and

one of its major partner suppliers pointed out and was confirmed by other sources (Nikkei

Business Jane 1, 2009; Nikkei Marketing Journal January 16, 2009) that:

Being Uniqlo’s partner provided Chinese suppliers with a high level of reputation in
the industry. These recognized suppliers could easily find and start transactions with
new clients from advanced nations and at home because without any doubt, these
clients would consider these suppliers as one of the best skilled factories in China.

A perception of high competence in overseas business partners reduces anxiety and

uncertainty in transactions with them, thereby promoting collaborations and maintaining

relational governance in supply chain network (Chua, Morris, and Ingram 2009). In the case

of Uniqlo’s supply chain network developments, Uniqlo has continued to provide larger
 28

transaction volumes when its partners effectively respond to Uniqlo’s requirements. Its

suppliers have understood well that the increase in transaction volumes from the principal

firm has contributed significantly to their own business growth over time. Based on the above

arguments, we suggest the following research propositions.

Proposition 2a: In the second stage, a dynamic reward power concentration initially
exercised by the principal firm has a positive effect on its suppliers’ competence
development.

Proposition 2b: Suppliers’ cooperative behavior based on a dynamic reward power

concentration bestowed by the principal firm in the initial stage has a positive effect
on its suppliers’ competence development.

Proposition 2c: Suppliers’ competence development through both economic and

technological reward powers provided by the principal firm has a positive effect on
relational governance enhancement between the principal firm and its suppliers.

The Third Stage: Relational Flexibility Development. In the third stage of global supply chain

development, the principal firm builds an ideal condition to gain benefits from high levels of

relational governance and partnering flexibility in emerging economies. To maintain a higher

level of partnering flexibility, Uniqlo required its partner suppliers not to exceed 50% of their

total sales derived solely from Uniqlo by enforcing compulsory non-exclusivity arrangements

with its suppliers. The suppliers had to generate more than 50% of their sales from other

clients, so that Uniqlo could find it relatively easier to switch its transactions from one

partner to another or to other new suppliers interchangeably, without having its suppliers

overly dependent on itself. For partner suppliers, to comply with Uniqlo’s compulsory non-

exclusivity arrangements and to hedge against the risks of over reliance on Uniqlo, it is

imperative to possess high flexibility in their customer selection so that they can grow

independently while minimizing their own risks.

The skills and investments made by primary suppliers with Uniqlo are generally

characterized as being so highly transaction-specific that it would not worry about losing its
 29

competitive advantages over manufacturing technologies, even if they were leaked to its

competitors by its primary suppliers. Two executives from different Uniqlo’s competitors in

our interviews and other sources (Nikki Business August 1, 2005; Nikkei Business June 1,

2009; Tsukiizumi 2012, p. 82) independently confirmed that:

The manufacturing skills and technologies that Uniqlo and its suppliers had jointly
developed were so highly integrated across almost all major manufacturing steps,
from dyeing and cutting to sewing and final product packaging that the technologies
tended to become relationship-specific. The transfer of a whole set of integrated
production process to a supplier represented Uniqlo’s transaction policy with partner
suppliers. Western apparel firms usually transfer to their suppliers only some part of
the manufacturing process such as cutting and sewing. One supplier who newly
joined Uniqlo’s supply chain replaced all spinning machines that it had just renewed
a few years ago to meet with Uniqlo’s specific requirements. Uniqlo’s distinctive
manufacturing technologies had produced one of the highest quality products in the
industry. Its suppliers’ own technologies had been maintained to function only under
its manufacturing operations. As a result, its technologies were not easy to transfer to
other competitors as a perfect piece.

In supply chain transactions, Uniqlo has always attempted to rely on two or three

different substitutable suppliers in order to avoid excessive dependency on any particular

suppliers, although they are highly competitive and capable in the market. In 2012 the total

number of partner suppliers was about 70, and around 10 to 20% of its partners had been

replaced in the last 5 to 10 years (Tsukiizumi 2012, p. 83). Uniqlo forced the current

(primary) and potential partner suppliers to compete against one another to encourage them to

build their own competence rapidly. The larger volume orders these suppliers received from

Uniqlo, the more opportunities they could have to learn advanced production technologies

from Uniqlo and improve their operational activities together. And only the suppliers that had

gained these learning opportunities were continuously promised to become leading suppliers

and had the largest production capacities in the industry. As mentioned earlier, these

recognized suppliers could easily find and start business transactions with other new clients

from advanced nations and at home. Even for the suppliers who had lost their business with
 30

Uniqlo found it easy to seek new business opportunities because their status as current or

former Uniqlo’s suppliers guaranteed the highest reputation in the industry. One executive

from Uniqlo’s supplier control operation mentioned in our interview that:

Because Uniqlo’s quality and cost qualifications for partner suppliers were much
higher than the industry standard, the certification as Uniqlo’s qualified suppliers
had brought the brand name effect in the industry. Global apparel firms gave high
marks to past business experience with Uniqlo when they tried to find new skillful
suppliers on a global basis.

Along with Uniqlo’s supply chain development activities, its 70 Chinese suppliers

have come to understand that partnering with Uniqlo is one of the best ways for them to build

their own business rapidly with relatively low-risk involvements. With Uniqlo’s compulsory

non-exclusivity arrangements with its suppliers, these partner suppliers can reduce their

reliance on Uniqlo, which subsequently minimizes their own financial risks caused by

Uniqlo’s unexpected sluggish sales. Relying on a single source of business always brings

about higher risks. By intentionally providing different sources of business opportunities to

partner suppliers, Uniqlo has been perceived as the most reliable and dependable client to

deal with, based on the relational governance structure it has developed in the second stage of

supply chain network development. Our case data subsequently show that when the principal

firm demands compulsory non-exclusivity arrangements with its partner suppliers, it is able

to build an ideal condition to gain benefits from relational flexibility-based supply chain

network. Based on the above arguments, we suggest the following research proposition.

Proposition 3a: In the third stage, relational governance that the principal firm
developed in the second stage has a positive effect on partnering flexibility in its
supply chain network.

Proposition 3b: In the third stage, the principal firm’s compulsory non-exclusivity
arrangements with its suppliers have a positive effect on partnering flexibility in its
supply chain network

Proposition 3c: Relational governance and partnering flexibility have a positive

interactive effect on relational flexibility.
 31

The three-stage dynamic process of relational flexibility development in supply chain

network for a newly internationalizing firm is represented in Figure 1.

_______________________

Insert Figure 1 about here

_______________________

DISCUSSION AND IMPLICATIONS

By using longitudinal contextual data analysis on Uniqlo, our study aims to reveal the

dynamic mechanism on how a newly internationalizing firm designs and manages relational

governance forms with partnering flexibility in its new supply chain networks in emerging

economies to achieve world-class competitive advantages. Although economies of scale serve

as a competitive advantage (e.g., internalization strategy) in markets that require heavy

investment in fixed assets, even globally integrated firms have to deal with uncontrollable

factors such as global market uncertainty.

In the case of Uniqlo and other Japanese firms, they have faced environmental

changes that included a global financial crisis in 2008, a major earthquake and nuclear

accident in eastern Japan in 2011, and serious political conflicts between China and Japan in

2012, among others. During this period, the demand for Japanese products as a whole has

decreased dramatically. When a recent global recession resulted in lower sales, such high

breakeven points proved to be disastrous to many Japanese MNEs’ bottom-line. In addition,

in recent years, competitors from emerging economies have begun to challenge MNEs from

advanced nations by producing and distributing lower-priced products with affordable quality

to the global market. While it is critical to pursue future global scale of production for newly

internationalizing firms, it is risky to possess large fixed assets in an uncertain global

marketplace. In response, new Japanese firms have begun to transform their tight supply
 32

chain network into a more flexible and lower-cost operating system by outsourcing their

manufacturing activities to local suppliers in emerging economies. As discussed earlier, an

exclusive relational governance form may not achieve enough flexibility, such that the

company can respond efficiently and effectively to uncertain demand changes and

institutional differences. Sudden and rapid changes in market environments in emerging

economies and global market have contributed to the difficulties.

To develop and continuously improve its production capabilities in interfirm settings,

the principal firm needs to maintain its suppliers’ cooperative behavior and bring partnering

flexibility into the relationships. In order to pursue these multiple goals, the principal firm

needs to develop strategy for designing and managing the appropriate level of relational

flexibility in their global supply chain network. By combining our literature review and

longitudinal case data, we proposed a dynamic stage model for global supply chain

development.

In the first stage (i.e., an early stage of an initial entry), because the principal firm is

unable to exercise enough power toward local suppliers, dynamic reward power

concentration onto a limited number of selected suppliers can be a key leading to its

suppliers’ cooperative behavior. A newly internationalizing firm with no reputation in the

local market needs to compete against large established competitors to build close

relationships with potential high-performing suppliers. Although previous studies have

discussed extensively the significance of a principal firm’s power over its suppliers, our

findings reveal how a small firm without initial power comes to generate its own power over

time by introducing the concept of dynamic reward power concentration as exercised by

Uniqlo.

The second stage focuses on suppliers’ competence development to enhance relational

 33

governance with its partners through cognitive and affective trust building. In this stage, the

principal firm needs to maintain its suppliers’ positive cooperative attitude and to pursue

higher-quality interfirm competence development for an efficient supply chain. Interestingly,

Uniqlo was an apparel manufacturer without owning in-house production facilities, so it has

not accumulated advanced manufacturing technologies in-house before. In order to generate

technological reward or expert power, the newly formed Takumi team, made up of veteran

personnel trained and seasoned in Japan's textile industry, played a central role in providing

technical support to partner suppliers’ factories. Mediated power, including such rewards, is

better for avoiding conflicts and generating satisfaction with partners. By receiving both

economic and technological rewards continuously, the partners’ attitude toward the principal

firm would stay positive and cooperative. It is important to note that in Uniqlo’s case,

suppliers’ cooperative behavior, based on a dynamic reward power concentration bestowed

by the principal firm in the initial stage, has a positive effect on suppliers’ competence

development with the principal firm. With Takumi’s support, Uniqlo’s suppliers have

continuously improved their operational capabilities and gained high reputation in the

industry. From these observations, we found that suppliers’ competence development is

strongly supported by the principal firm’s continuous effort in offering both economic and

technological rewards to maintain an effective relational governance condition with its

suppliers over time.

In the third stage, the principal firm is able to build a relational flexibility-based

supply chain network. In our study, we found that developing partnering flexibility and

exerting competitive pressure on partner suppliers contributes to Uniqlo’s successful global

supply chain management. Uniqlo attempts to avoid excessive dependency on any particular

suppliers to maintain flexibility in transactions. The competition among current and potential
 34

partner suppliers seems to contribute to suppliers’ competence development on a competitive

basis. In fulfilling Uniqlo’s compulsory non-exclusivity arrangements with its partner

suppliers, these suppliers serve Uniqlo as the primary customer and other secondary

customers concurrently, thus helping them grow their own business volume independently

while minimizing their risks of relying on a lion’s share of business coming from Uniqlo.

Therefore, even when Uniqlo terminated a transaction with a partner supplier, it could easily

find new clients from developed countries and in China. In this final stage, Uniqlo is able to

enjoy an ideal condition by gaining benefits from relational flexibility, which is based on high

relational governance and partnering flexibility simultaneously. It is important to note that the

principal firm can avoid opportunistic behavior from its suppliers by offering partnering

flexibility only when it has initially developed and maintained high relational governance

with its primary suppliers in advance. This efficient global supply chain network allows a

principal firm to reduce costs and achieve high product quality with quick responses to global

market uncertainty simultaneously.

Theoretical Implications

Our research offers theoretical implications on global supply chain network development and

management of newly internationalizing firms. First, while previous studies mainly provide

guidance to established firms, our study demonstrates the sequence of steps to global supply

chain network development by a newly internationalizing firm. Based on our case data, we

propose a dynamic process of global supply chain network development built on power

generation, relational ties enhancing, and partnering flexibility. Although previous studies

have provided guidance on the factors (e.g., relational governance, interfirm competence, and

partner switching with suppliers) that affect market performance, they have not examined

such factors in a dynamic process. In the first stage, our findings reveal how a small firm
 35

without initial power generates its own power over time by exercising dynamic reward power

concentration. We also found that suppliers’ cooperative behavior gained from the principal

firm’s dynamic reward power concentration in the initial stage has a positive effect on

suppliers’ competence development with the principal firm in the second stage, and it leads to

relational governance maintenance. In the third stage, a principal firm can maintain

partnering flexibility without having serious opportunistic behaviors from its suppliers

because it has already developed a high level of relational governance with its primary

suppliers in advance, and this sequence of strategic steps help develop a relational flexibility-

based supply chain network. Unlike previous studies, our study provides the insightful

guidance on how newly internationalizing firms could develop a world-class effective supply

chain network from scratch.

The second theoretical implication is that while the extant literature on relational

governance development has focused on the intimacy or frequent transaction relationships

between the principal firm and its suppliers to achieve high-quality operations (e.g., Dyer

1997; Takeishi 2001), our study inductively reveals that relational flexibility between the

principal firm and its partners may contribute to both high-quality operational standard and

partnering flexibility to effectively respond to dynamic market turbulence. We propose a

modified TCA prediction to reflect the relational governance strategy with partnering

flexibility. The traditional TCA argument suggests that in interfirm transactions, high asset

specificity increases transaction costs because of the opportunistic behavior of partners (Dyer

1997; Williamson 1985, 1991). While the RBV focuses on how firms enhance and sustain

their competitive advantage through creating their resources within interfirm relationships

(i.e., relational governance), TCA views specialized investments as putting firms at greater

risks for a “hold-up” or “lock-in” in their transactions, especially in emerging economies

 36

where serious institutional differences exist. However, our study highlights the mechanism by

which a principal firm can avoid or reduce suppliers’ opportunistic behaviors and to develop

partnering flexibility with multiple suppliers, so that it can enjoy an ideal condition by

gaining benefits from relational flexibility, which is simultaneously based on high-level

relational governance and partnering flexibility. In possessing economic reward and

technological expert power in the first and second stages of the dynamic process, the

principal firm may maintain better conditions for both interfirm and suppliers’ competence

development, and lower the risk of partners’ opportunistic behavior with relatively high

switching flexibility from one partner to another.

One potentially negative consequence of relational flexibility is partners’

opportunistic behavior because too much competitive pressure on them may still result in

coercive power exercised by the principal firm, causing serious conflicts between the two

parties. The degree of pressure on partner suppliers has to be perceived as fair, as Samaha,

Palmatier, and Dant (2011) found that perceived unfairness strengthens the negative effects of

channel member conflict and opportunism on channel member cooperation and flexibility.

Our study found that with relational flexibility, the principal firm could avoid these negative

responses by enforcing compulsory non-exclusivity arrangements with its partner suppliers,

which help these suppliers minimize their risks by serving both primary and secondary

customers concurrently. When interfirm competence is so specific to the transactions with

Uniqlo that the manufacturing technologies may not be effectively applicable to its

competitors, it could encourage its partner suppliers to find new clients to reduce their risk

from relying too much on their business with Uniqlo. When suppliers can reduce the risk

arising from relying on one major client by adding new different clients, they can pursue their

own growth paths based on the high reputation in the industry by being one of Uniqlo’s
 37

primary suppliers. This achieves both high levels of partnering flexibility and relational

governance development conditions for the principal firm in the supply chain network, to

which we refer as relational flexibility.

Managerial Implications

For international marketing and supply chain managers, our propositions aim to help them

improve the efficiency of their daily operations and the effectiveness of their long-term

strategic decision-making to achieve higher market performance in the global market.

Because a newly internationalizing firm tends to have insufficient international business

experience with limited in-house resources, the detailed guidelines for each stage of the

expansion path would help less experienced managers from small firms in many ways. We

provide three major implications for these managers.

First, the main objective for newly internationalizing firms in the first stage is to

obtain and maintain a certain level of suppliers’ cooperative behaviors. The practice of

dynamic reward power concentration provides newly internationalizing firms with a good

starting point for further expansion without having to incur a large amount of investment in

advance. Uniqlo’s first strategic decision was to gradually increase the order size to each

partner by reducing both the number of suppliers and the variations of SKUs sold in its stores

to gain reward power. The selected suppliers could gain reward by being promised higher

transaction volumes in the next order cycle from Uniqlo if they qualified as its cooperative

partner suppliers. To gain cooperative behavior from suppliers, managers from newly

internationalizing firms need to concentrate on fewer numbers of selected suppliers and

promise them that economic rewards would continue as long as suppliers can meet the

principal firm’s expectation in its ongoing transactions. In the initial stage, our findings show

that the economic reward provided to potential partner suppliers is a key for success.
 38

Second, we provide a clear guidance to small firms with limited in-house

technological skills on how to build technological reward and referent power that they can

subsequently exercise on partner suppliers. To develop relational governance structure with

partner suppliers, managers from newly internationalizing firms can maintain its advanced

technological skills by hiring retired professionals and help partners’ competence

developments without making large investments. In early years, Uniqlo was a principal firm

without owning in-house production facilities, so it had not accumulated advanced

manufacturing technologies before. In order to build technological reward or expert power,

the newly formed Takumi team played a central role in providing technical support to partner

suppliers’ factories. This practice largely contributes to both interfirm and suppliers’

competence developments, and further creates better conditions for relational governance

development for relatively small principal firms. By having shared goals and joint learning or

improvement process in manufacturing capabilities provided by the principal firm, its

suppliers tend to form a feeling of oneness with their principal firm. It is important to note

that because most Takumi professionals were retired veterans who were re-hired by Uniqlo

with performance-based salary, the principal firm does not need to make a large investment in

the second stage of global supply chain development to accumulate in-house technological

skills.

Third, our findings provide managers with clear long-term guidelines on how to

design relational flexibility-based supply chain network that can be achieved by developing

and maintaining interfirm competence through relational ties and partnering flexibility

between a principal firm and its multiple suppliers over time. Our dynamic model

demonstrates a sequence of steps that highlight the development of an effective global supply

chain network in emerging economies for managers. Our findings strongly suggest to
 39

managers that relational governance must be developed before offering a partner flexibility

arrangement to partner suppliers. Although partner flexibility provides the principal firm

more flexible asset distributions to respond to uncertain global market conditions effectively,

it may still face serious opportunistic behaviors from its partner suppliers, unless it retains

high-level relational governance in its supply chain network. Managers need to understand

that, once the principal firm has developed strong relational ties with its partner suppliers and

suppliers’ competence by exercising both economic reward and expert powers, enforcing

compulsory non-exclusivity arrangements with its suppliers contributes to minimizing

opportunistic behaviors from its partner suppliers. Therefore, it is imperative for partner

suppliers to possess a high level of flexibility in their customer selection, so that they can

grow independently while minimizing their own risk of becoming too dependent on the

principal firm. In Uniqlo’s case, partner suppliers are allowed to pursue their own growth

paths based on their good reputation in the industry by being one of Uniqlo’s primary

suppliers. By following these dynamic steps, managers from newly internationalizing firms

are able to develop a relational flexibility-based global supply chain network in the long term.

LIMITATIONS AND FUTURE RESEARCH DIRECTIONS

Global supply chain systems need to achieve both high-quality production standards and low-

cost operations by partnering with local suppliers in emerging economies to achieve global

competitiveness. Thus, global supply chain network development and management continue

to receive much attention from international marketing research and practice. As our study

aims to develop initial propositions on the dynamic process of global supply chain network, it

is not without limitations.

Because our study is based on an in-depth analysis of a single case, our research

findings may not be generalizable. First, it is necessary to continue this line of research with
 40

multiple longitudinal case studies and a survey with a much larger sample to further confirm

our research propositions. In addition, as we only examined the textile industry in our study,

further research should be conducted to see whether the findings can be applicable to more

complex and high-tech industries, such as the consumer electronics and computer industry

where many factoryless manufacturers thrive, including Apple, Dyson, Qualcomm, and

AMD. By conducting further longitudinal case studies in high-tech industries as well as other

industries, we may find some industry- and product-specific contingency factors that could

either require modification of, or enhance the robustness of, our core research propositions.

Second, once our propositions have been confirmed by multiple longitudinal case

studies in different industries, the next step would be to conduct quantitative research to test

the developed hypotheses with large-size data to confirm the generalizability of our research

findings (Eisenhardt and Graebner 2007). As our study examined a long-term phenomenon

within inter-organizational settings, paired sampling method should be applied for data

collection in a survey research. For example, data should be collected from different

informants, including current and former officials from the principal firm and officials from

different partner suppliers to ascertain the inter-rater reliability of the data set. The

implementation of further investigations promises to provide useful managerial guidance to

global supply chain network development.

 41

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Figure 1: Dynamic Stages of Relational Flexibility Development for New Ventures

 47

Appendix: The Sources of Data Used in the Study

1. Primary data (Interviews)

2. Secondary data