Lecture 6 - International sourcing and production Flashcards
Ferdows (1997) (Making the most out of factories) –> RQ: How can a factory located outside of a company’s home country be used as competitive weapon not only in the market it directly serves but also in every market served by the company?
Home country senior managers’ thinking is vital:
Option 1: The factories are sources of efficient, low cost production
Option 2: The factories are highly productive, innovative, achieve low cost, and provide exemplary services to customers throughout the world
What are 3 factors changing the roles of foreign factories?
- Increased importance of co-location manufacturing and R&D
- Increased capital intensity of manufacturing
- Declining tariff barriers
What are 6 possible roles of foreign manufacturing plants and what are they characterized by?
Outpost:
- Weak level of distinct FSAs held by the plant
- Strategic purpose: access to knowledge and skills
Leader:
- Strong level of distinct FSAs
- Strategic purpose: access to knowledge and skills
Server:
- Weak level of distinct FSAs
- Strategic purpose: proximity to market
Contributor:
- Strong level of distinct FSAs
- Strategic purpose: proximity to market
Offshore:
- Weak level of distinct FSAs
- Strategic purpose: access to low cost production
Source:
- Strong level of distinct FSAs
- Strategic purpose: access to low cost production
Explain an offshore manufacturing plant (factory)
The purpose is simply to access low-cost production factors as an implementor on the input side. The plant’s manufacturing output, typically predetermined by senior management in the home country, is then exported. This factory typically does not develop new FSAs and receives minimum autonomy
Explain a source manufacturing plant (factory)
The primary purpose is to gain access to low-cost production factors on the input side, similar to an offshore factory. However, it also receives resources to engage in resource recombination and to develop FSAs that will turn into a ‘best practice’ plant in the MNEs network for the assigned product range. It therefore has more autonomy in terms of logistics, product customization, redesign etc. The MNE sets source factories in locations with good infrastructure and a skilled workforce. This type of factory may be a strategic leader on the input side of the value chain, but nonetheless has a narrow charter.
Explain a server manufacturing plant (factory)
The primary purpose is to manufacture goods and to supply a predefined, proximate national or regional output market. Market imperfections such as trade barriers, logistics costs and foreign exchange exposure usually explain the establishment of such factories in specific host countries. A server factory may engage in some FSA development, but it ultimately has a narrow charter with relatively little autonomy or specialized capabilities.
Explain a contributor manufacturing plant (factory)
Oriented primarily towards the host country or host region output market, similar to a server factory, but it commands stronger capabilities than a server factory. More at the upstream end of the value chain, it is responsible for resource recombination in the form of process improvements, new product development, customizations, etc.
Explain an outpost manufacturing plant (factory)
Similar to the “Black Hole” type subsidiaries, the primary purpose of this factory is to gather valuable information from advanced host country clusters, mainly on the input side. On the actual manufacturing site, this role is usually combined with that of an offshore (input market driven) or server (output market driven) factory.
Explain a leader/lead manufacturing plant (factory)
This type is the most important one in terms of resource recombination and new FSA development. It accesses valuable inputs from the local cluster where it is embedded and plays a key role in localized manufacturing innovation. It is also closely connected with both the key players on the input side (such as resource labs) and the end users on the output side.
How can subsidiaries be upgraded, and is this necessary?
Upgrade is a must for subsidiaries. When having a weak level of distinct FSAs, it should upgrade to having strong levels of FSAs.
This involves resource recombination which spreads over 3 stages:
1. Enhancing internal performance
2. Accessing & developing external resources
3. Developing new knowledge that can benefit the overall network
Explain key differences between the factory/manufacturing plant types
- Leader-, contributor-, and source factories have NLB FSA development in the host country (as opposed to outpost, server, and offshore factories). These NLB FSAs can be transferred back to the home country.
- Lead factories have substantial NLB FSA development
- Lead, contributor, and source factories have more LB FSAs (larger area in figure) as opposed to outpost, server, and offshore factories
A complementary perspective on Ferdows (1997) Making the most out of factories is from Kedia & Mukherjee (2009): Understanding offshoring: A research framework based on disintegration, location and externalization advantages. What lacks in Ferdows analysis?
Ferdows does not discuss the changing nature of production:
- Outsourcing
- Increased use of long-term, relational contracting with external suppliers
What is outsourcing? (Kedia & Mukherjee)
Finding the optimal level of control over the firm’s activities
What is offshoring? (Kedia & Mukherjee)
Transnational relocation or dispersion of activities
What types of drivers are there for firms to offshore their activities?
- Macro-environmental drivers
- Changes in the internalization advantages (influenced by 1)
- Changes in the global resource market (influenced by 1)
- Changes in firm strategy leading to disintegration and externalization of value chain activities (influenced by 2 and 3)
