International Business and TradeGM0112, Global Sourcing (III)

The WHERE question:

The (re)location decision

Bent Petersen

Visiting Professor

1Global Sourcing - Fall 2010

Contents of today’s lecture

1. Modeling the location decision

2. A disaggregated and dynamic approach to localization

3. The “Smile curve”

4. Case example: The GPN of Dell computer

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The WHERE question

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Where to (re)locate underperforming, or under-developed), domestic value chain activities?

Literature streams/theory: Economic geography (including agglomeration economies), institutional theory, global SCM/logistics literature.

In the case of offshore outsourcing the WHERE question is closely related to the question of partner selection (“the WHO question”).

The choice of location and partner selection following an offshore outsourcing decision

(Graf & Mudambi, 2005)

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Modeling the offshore out-sourcing location decision (Graf & Mudambi, 2005)

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A value chain approach to location

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The location decision should be taken for individual value chain activities (‘tasks’) – not for the value chain as a whole.

As an example, the optimal location of manufacturing would usually differ from R&D location (unless co-location synergies are vital).

What about “top management”, logistics, etc.?

A dynamic approach to location Comparative advantages are proprietary to countries, not to

single firms, and they tend to dry out (Porter 1990). Therefore…

…either MNCs should re-locate their value chain activities persistently according to geographically changing comparative advantages (thereby becoming “footloose MNCs”), or

… MNCs should locate their value chain activities according to comparative advantages that over a period of time may transcend into competitive advantages, i.e. firm-specific advantages through competence creation.

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The “Smile curve”

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The smile curve of value creation (or rather, value appropriation?) conjectures a division of labor between developed market firms and firms from emerging market economies.

Developed market firms are concentrating on up- and down-stream high value-added activities and relocating /outsourcing low value-added activities to emerging economies firms.

Copyright restrictions may apply.

Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024

The smile of value creation (Mudambi, 2007)

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Value chain configuration in the Danish apparel industry: Three business models

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.

shoes: Location of employees

Composition of employees in ECCO by geography

0

2000

4000

6000

8000

10000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Employees in Denmark Employees outside Denmark

Type of activities carried out in Denmark and abroad

0102030405060

Carried out in Denmark primarily to servethe local market

Carried out in Denmark primarily to servethe company and all its markets

Carried out abroad primarily to serve thelocal market

Carried out abroad primarily to serve thecompany and all its markets

Evidence of value chain configuration of Danish MNCs

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Character of flows between company units in different countries

0102030405060

Mainly fromDenmark to

foreign countries

Fairly balanced Mainly fromforeign countries

to Denmark

Goods

Services

Knowledge

Money/Capital

Evidence of value chain configuration of Danish MNCs (cont’d)

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The smile curve in transition

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3 forces are eroding the traditional DoL pattern: The catch-up effect of emerging economies

firms. Standardization and commodization of high

added-value activities such as R&D. Move of entire ‘sunset’ industries to emerging

economies.

Copyright restrictions may apply.

Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024

The smile. Dynamic analysis

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The smile curve of Apple’s i-Phone

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Apple’s outsorcing pattern conforms to the “smile of value creation/appropriation”

The miles of value creation may be a nested one inside the other, like ‘Russian dolls’.

Please note that Mudambi (2008) uses “dispersed value chains” in a purely geographic sense, and not in relation to DoL.

Copyright restrictions may apply.

Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024

Value creation in the iPhone

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A world map of services offshoring

Source: McKinsey Global Institute, 200518Global Sourcing - Fall 2010

The global production network (GPN) of Dell Computer

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The GPN of Dell

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Dell’s nested hierarchy of location factors:1. Market access2. Labor costs and quality3. Transportation and telecommunication

infrastructure4. Government incentives5. Industry clusters (question of partner

selection).

The GPN of Dell (2)

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However, Dell’s nested hierarchy relates primarily to manufacturing (assembling activities)…

…and differs with value chain functions (such as sourcing, M&S, customer services) and subsumed activities (e.g. call centers servicing different customer groups).

Examples: European data center in Bracknell, UK (not in low-cost Ireland) due to better infrastructure. Sales offices very scattered.

The GPN of Dell (2)

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Two thirds of Dell’s employees are still employed in USA (2002).

Regional orientation. Extreme pressure on suppliers (e.g. demands of JIT,

annual price lowering). Core competencies of Dell: Assembling activities

are kept in-house. Sweden considered “English speaking market” (p.

15)!

Next lecture: The HOW question

How to organize global sourcing? What should be the ownership structure of activities (re-)

located abroad? Captive? Outsourced? JV? Theory/literature streams: Organizational economics (including

TCEs and agency theory), organizational learning literature.

End of lecture 6 October, 2010- Thank you for your attention!

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