CH-ZWA645-005jsmGB
Vertical Scope
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
j-oldroyd@northwestern.edu
801-422-7888
650 TNRB
Stock Performance
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Ads
Nike, Adidas, and Reebok New Balance
http://www.nike.com/yellow/
Reebok
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MJ
Jordan 60 million pairs 17 years.
New Jordan’s $200
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Which would you prefer? Athletic shoes built around the belief that
the marketing prowess of an NBA superstar can sell anything? Or
athletic shoes built around the belief that better fit and technology
mean better performance?
We prefer the latter; that's why we adhere to a unique "Endorsed By
No One™" philosophy. Instead of paying celebrities to tell you how
great our products are, we invest in research, design, and domestic
manufacturing and let our products speak for themselves. By
adhering to this philosophy, we are able to celebrate the true stars:
every day athletes who choose New Balance footwear and apparel
because they fit and because they perform.
Over the past decade, New Balance has grown
substantially. Worldwide sales have increased from $210
million in 1991 to $1.16 billion in 2001.
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Nike & Reebok: Class Summary
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.
Labor Issues
NEW YORK, April 25 2002 /U.S. Newswire/ -In a new report issued today on Nike's Asian manufacturing practices, a coalition of
labor, student, and human rights groups demonstrates that while Nike has stated
that they have improved their labor practices, the truth is that sweatshop factories
still produce Nike goods.
The report makes it clear that Nike is making China the country of choice for its
global sweatshop strategy, recently having moved 40 percent of its contracting work
there. It has also become evident that exploitation of Chinese workers is clearly a
profitable business proposition for the company. In fact, the average Nike worker
appears to be worse off than typical Chinese apparel workers (based on Nike and
DOL numbers).
It is estimated that Nike workers in China receive at most $1.50 for every pair of
Nike shoes, which retail typically for $80-$120.
The cost of taking the “high ground” with
regard to social issues is typically very low;
collaborative efforts with competitors may be
an appropriate way to address social issues
(e.g., industry association).
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Continued
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 change
the relative performance of suppliers), the more it makes
sense to partner.
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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).
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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 multistage 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).
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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
MODEL FOR MAKE VS. BUY
Partner
(compare capabilities)
Make
Chrysler
High
Component
Value
Buy
Partner
(compare capabilities)
GE
Nike
Low
Low
High
Asset Specificity
Why Integrate?
Efficiency
Lower TC
Non-Efficiency
GE
Efficiency
Control
Non-Efficiency
Inputs
Nike
Efficiency
Non-Efficiency
Control / TC
Debeer’s
Monopoly
Efficiency
Power
Non-Efficiency
Chrysler
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STRATEGIC SUPPLIER SEGMENTATION
Creating partnerships takes considerable
time and resources on the part of both
parties
Not all purchased products offer the
potential to lower systems costs, offer
new technologies, or speed products to
market
The optimal strategy may require different
approaches with different types/ groups
of suppliers/customers
Conditions Under Which Each Model Is
More Likely to Be Effective
Arms-Length Model
• Low volumes of exchange (buy low
percentage of supplier’s output)
• One time or infrequent purchases
• Low degree of supplier buyer
interdependence (sequential); low
ability to affect each other’s costs
• Stand alone inputs (no or few
interaction effects with other inputs)
• During a recession (when suppliers
have excess capacity) or when supplier
advantages rapidly change
• Short-term cost reduction is the goal
Partnership Model
• High volumes of exchange
• High degree of supplier-buyer
interdependence (reciprocal); high
ability to affect each other’s costs
• Multiple interaction effects with
other inputs
• During an expansion (when inputs
are scarce); when supplier relative
capabilities/costs are stable.
• Long-term value creation is the goal
(speed-to-market, quality, new
technology)
Differences in Supply Chain
Management Practices
Arms-Length Model
• Single functional interface (i.e., sales to
purchasing)
• Frequent price benchmarking
• Minimal assistance
• Low investment in interfirm knowledge sharing routines
• Supplier performance easily contracted
for ex ante
• Contractual safeguards are sufficient
Partnership Model
• Multiple functional interfaces (i.e., sales
to sales, mfg. to mfg.)
• Capabilities benchmarking
• Substantial assistance
• Investments in interfirm knowlege sharing routines
• Supplier performance on non-contractible
issues is key (I.e., innovation, quality,
responsiveness)
• Trust is critical for optimal
performance
Vertical Integration
Who Let
“INTEL INSIDE”?
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