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Frame of Reference — Key Trends for Firm-level Analysis of Globalization

Increased outsourcing Computerization of product design Computerization of process technology Formalization and segmentation of work tasks (services offshoring) Increasing market volatility and industry clock-speed (Fine) Increasing geographic scope of production systems

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Frame of Reference — Key Trends for Firm-level Analysis of Globalization

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  1. Increased outsourcing Computerization of product design Computerization of process technology Formalization and segmentation of work tasks (services offshoring) Increasing market volatility and industry clock-speed (Fine) Increasing geographic scope of production systems Better integration of geographically dispersed production systems The rise of a new, global-scale supply-base The global value chains framework is an overarching rubric that can help to tie these trends together New features are global suppliers, global buyers, and value chain modularity, which eases coordination between the two. Frame of Reference — Key Trends for Firm-level Analysis of Globalization

  2. From Vertical Integration to Value Chain Modularity A) Vertical Integration Market Channel Traditional Manufacturing Firm Prototype fab. Product strategy Dist. Product R&D Parts purchasing Sales Reps. End User Process R&D Admin. Manufacturing Marketing System Int. Functional design Testing Retail Form design Packaging Firm boundary B) Value Chain Modularity Lead Firms (Brands and Retailers) Full Package Supplier Market Channel Process R&D Product strategy Dist. Design for mfg. Product R&D Sales Reps. End User Parts purchasing Functional design Marketing Admin. Admin. Marketing System Int. Manufacturing Form design Retail Testing Prototype fab. Packaging Codifiable transfer of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link. What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.

  3. Modular product designs (e.g., the PC) Modular value chain linkages (the hand-off) Modular value chains (internal) Modular value chains (external) Only modularity in external value chains leads to capacity pooling and external economies of scale Modular product designs make value chain modularity easier, but only one break point is needed — full product design modularity is not required Elements of Modularity

  4. Codification of complex information eases the hand-off at the inter-firm link—information technology and widely recognized standards are key. Highly competent suppliers with multiple locations and customers An adequate number of suppliers to allow lead firms to switch Generic capacity Allows lead firms to add and subtract capacity on short notice Allows large suppliers to substitute locations Benefits for lead firms: lower costs and risk Risks for lead firms: IP leakage, creation of competitors, attenuated learning by manufacturing, forecasting and inventory distortions, de-codification with technological change, ceding of value to suppliers Elements of Value Chain Modularity

  5. Performance Benefits of Modular Production Networks Information Technology Suppliers Provide Base Processes Preconditions Standards Generic Capacity Capacity Codified Network Linkages Network Characteristics Attenuated Interdependence Open Character of Network Lower Barriers to Network Entry and Exit Greater Organizational Flexibility Greater Geographic Flexibility Product/Customer Flexibility Network Performance Lower Factor Costs Higher Capacity Utilization Lower Total Cost and Risk

  6. Lead firms with captive supply bases End users Competition Lead firm A Lead firm B Value Chain Co-evolution First tier Second tier Materials Supply base A Supply base B Supply Chain

  7. Lead firms with shared, modular suppliers Co-evolution (including competition) Lead firm A Lead firm” n” Co-evolution (including competition) Shared supply base Codifiable transfer of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link. What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.

  8. Value chain modularity with supplier consolidation Co-evolution (including competition) Lead firm A Lead firm” n” Co-evolution (including competition) Global suppliers Global Supplier Examples: Electronics contract manufacturing: Flextronics, Solectron, Sanmina-SCI, Celestica, Jabil, Hon Hai, Quanta, Compal Auto parts: Magna, Delphi, Visteon, Bosch, Denso, Yazaki, Lear, Johnson Controls, TRW, Continental Call Center Servvices: Accenture, SNT Group, Atento, Convergys, SR Teleperformance, Wipro BPO, Bertelsmann Clinical Trials and Contract Medical Research: Quintiles, Covance, IMS Health, Parexel IT Services and Enterprise Computing: IBM, Accenture, PriceWaterhouseCoopers, McKinsey, Cognizant

  9. Revenue Growth at the Top Five Electronics Contract Manufacturers, 1994 through 2001, $M Note: All Celestica revenues in 1994 were from IBM. Sources: Company annual and quarterly reports; Electronic Business Top 100 Contract Manufacturers, 2003.

  10. Top Five EMS Contract ManufacturersRevenues, Employment, and Facilities, and Location, 1999 and 2002; Compound Annual Growth Rate 1999-2002; and Top Five Share of Top 100, 2002 Source: Electronic Business Top 100 Contract Manufacturers, 2000 and 2003. Notes: Flextronics facility figures are for 2000; growth rates have been adjusted accordingly. Solectron facility figures are for 2001; growth rates have been adjusted accordingly.

  11. Product Mix for the Largest Five EMS Contract Manufacturers, 2001

  12. The new global supply-base; Celestica’s global footprint 1997 2001

  13. Global suppliers offer “total geographic flexibility” in a shared global supply-base; coordination is internalized Regional production systems are nested within global production systems

  14. Upgrading at an Electronics Contract Manufacturing Plant in Guadalajara, Mexico, February, 2001 – July, 2004 (Jabil Circuit) Source: Luhnow, David. “As Jobs Move East, Plants in Mexico Retool to Compete.” Wall Street Journal.com. March 5, 2004.

  15. Rapid order fulfillment for “lean retailing” Last minute customization for pull-through ordering Medium technology products and processes that require moderate degree of design/prodcution co-location Product categories that require in-region production (autos, medical, military and security-related) Pass through production location as newer products shift from US to China Competition is with developed country plants, not with China Regional integration needs to move beyond trade, to the integration of production, innovation, and security regimes The Role of “Proximate Production Platforms” (Mexico, East Europe) in GVCs

  16. Based on a paper by: Gary Gereffi, Duke University John Humphrey, IDS Timothy Sturgeon, MIT Published in: Review of International Political Economy, 12(1) 2005 Summary of approach with related literature can be found at the Global Value Chains Initiative website: www.globalvaluechains.org The governance of global value chains: an analytic framework

  17. 1. Transaction Costs Economics Key concept: Asset specificity Academic field: Institutional economics 2. Production Network Theory Key concepts: Trust, reputation, repeat transactions, social networks, geographic proximity, power Academic fields: Economic sociology, economic geography 3. Complementary Competencies Key concepts: Resource view of the firm, learning, core competence, co-evolution (buyer-supplier and industry) Academic fields: Strategic management, operations management, evolutionary economics Theoretical Underpinnings(starting point: industrial organization)

  18. Five GVC Governance Types Low High Network org. forms

  19. Some Dynamics in Global Value Chain Governance  increasing complexity of transactions (harder to codify transactions; effective decrease in supplier competence)  decreasing complexity of transactions (easier to codify transactions; effective increase in supplier competence)  better codification of transactions (open or de facto standards, computerization)  de-codification of transactions (technological change, new products, new processes)  increasing supplier competence (decreased complexity, better codification, learning)  decreasing supplier competence.(increased complexity, new technologies, new entrants)

  20. Supplier Upgrading (and Downgrading) in Global Value Chains • More customers • Product upgrading • Inter-sectoral upgrading • Base process focus Few customers Few capabilities CAPTIVE MODULAR De-codification and reduced competence through technological change, new requirements, and new competitors RELATIONAL FULL PACKAGE SUPPLIER • More capabilities • Process upgrading • Functional upgrading • Functional bundling Many customers Many capabilities

  21. GVC Governance TypesLinks to Policy

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