Global Strategic Management
Nike & Reebok: Core competencies, make versus
buy, designing and managing the global supply
chain
Professor Jeff Dyer
Global Strategic Management
1
Nike & Reebok: Summary of Key Ideas
• A firm’s supply chain management strategy, including
what and where to outsource, is often key to competitive
success.
• Nike’s core competencies are marketing (e.g., creating a
brand name, including managing relationships with
athletes) and shoe design.
• Nike/Reebok design their global value chain to take
advantage of country comparative advantages and to
maximize flexibility to adjust to changing market
conditions/country advantages. At the extreme, Nike
could potentially save as much as $23 billion in labor
costs by choosing Indonesia vs. Germany as a mfg.
location for all it’s shoes (assumes identical labor
productivity and production methods).
Professor Jeff Dyer
Global Strategic Management
2
Nike & Reebok: Summary of Key Ideas
• When firms choose to outsource, they need to
determine whether to treat outside firms as
partners or as arms-length subcontractors.
– The greater the inter-company interdependence
and value of coordination (and the less
environmental factors [e.g., exchange rates,
wages, etc.] change the relative costs and
performance of suppliers), the more it makes
sense to partner.
– The more the company values flexibility (due to
changes in suppliers costs, technology, etc.,
the more it makes sense to use arms-length
relationships
Professor Jeff Dyer
Global Strategic Management
3
STRATEGIC GLOBAL SOURCING
(Building a global network of capabilities)
Growth
Mature
Innovation
Industrialized
Countries
PCMCIA
Unit
(Japan: $17.50/hr)
Newly
Industrialized
Countries
Notebook (P.C)
(Singapore: $3.25/hr)
Emerging
Economies
Adaptor
(India: $.50/hr)
COMPAQ’S
NOTEBOOK
COMPUTER
Professor Jeff Dyer
Global Strategic Management
4
Vertical Integration
Who Let
“INTEL INSIDE”?
Professor Jeff Dyer
Global Strategic Management
5
Theories of Vertical Integration (Efficiency)
•
Vertical Integration as a means for reducing transaction costs and
improving coordination.
– When investments in specialized assets are high (e.g., oil refinery and
pipeline)
•
Vertical Integration as a means to gain control over important
inputs/markets
– Avoid foreclosure to inputs or markets (e.g., Alcoa integrates back into
bauxite to secure scarce and critical raw material for aluminum)
– Guarantee input quality (e.g., McDonalds growing potatoes in Russia)
•
Vertical Integration as a means to control/acquire information
– Protect proprietary information/technology (Bose makes most critical
inputs for its audio equipment)
– Acquire information on markets or technologies (e.g., GM integrating
into automotive components to gain knowledge regarding suppliers’
costs and technology that assists in bargaining).
Professor Jeff Dyer
Global Strategic Management
6
Theories of Vertical Integration (Non-Efficiency)
•
Vertically Integrate to exercise monopoly power
– Price discrimination (to allow firm to price discriminate in different
markets and avoid arbitrage).
– Create or increase the size of the barrier to entry in to a business
(capital market imperfections make it more costly to raise larger sums
of capital required for multi-stage entry; e.g., Coke & Pepsi)
– Squeeze non-integrated competitors (subsidize one stage of the value
chain with another to squeeze competitor margins; bundle/matrix price,
e.g., Microsoft Office vs. WordPerfect).
•
Vertical Integration as a “loophole” for regulatory action
– Tax avoidance (through transfer pricing and sales tax avoidance).
– Price controls/rate of regulation avoidance (integrate backwards into
non regulated industries and make higher profits in that industry).
Professor Jeff Dyer
Global Strategic Management
7
MODEL FOR MAKE VS. BUY
High
Component
Value
Low
Partner
(compare capabilities)
Make
- Seats
- Air conditioners
- Tires
- Engines
- Transmissions
Buy
Partner
(compare capabilities)
- Bolts
- Nuts
- Belts
- Filters
- Engine components
- Interior and exterior trim
products
Low
High
Asset Specificity
Professor Jeff Dyer
Global Strategic Management
8