Communications - July 2011

therefore, no-brand contract manufacturers turn to various modes of diversifying into related areas. Pou Chen Group went into the manufacturing of LCDs and later into retailing; Flextronics went into electronic repair.

A similar logic applies not only to manufacturing but also to services. In professional services, in particular, intangibles such as brand and reputation count for a lot in driving power in global supply chains. In management consulting, for example, the likes of McKinsey and Bain have outsourced business research, while in financial services, investment banks outsource and offshore financial research and analytics. With the disintegration in global supply chains, so-called knowledge process outsourcing (KPO) providers, such as Genpact and Evalue-serve, have been pursuing strategies in three steps. They consist of climbing up, scaling up, and broadening out.

First, just as CM evolved into ODM, KPO suppliers have “climbed up the value chain” by providing higher value-adding services. This may involve writing an entire research report on the basis of business research for a consulting client or on the basis of the analysis of a valuation model for an investment-banking client; the clients then put their own brand onto the report. Second, KPO suppliers have also scaled up their operations, investing heavily not only in IT infrastructure but also in process and quality improvements for their “information processing” factories. Third, some KPO suppliers have pursued a diversification strategy by bundling different professional services, for example by pulling together business, financial, and legal research under one roof.

Shifting the End Market Competing head-to-head with brand owners in established developed economy markets seems incredibly difficult in many cases. However, when the end market shifts from old to new emerging markets, this dynamic may change. For example, when cellphones are intended for purchase in China rather than in the U.S. or Europe brands matter less for the mass low-end market. This creates certain advantages for indigenous firms within global supply chains.

Companies pursue
similar strategies
in their attempt to
drive power in global
supply chains.

A decade of growth has made China by far the largest mobile phone handset market in the world, with over 800 million users in early 2011. Moreover, China has emerged as the largest exporter of mobile handsets. Initially, in the 2G market, foreign brands such as Nokia worked closely with chipset manufacturers (for example, Texas Instruments) to design handsets, which were in turn assembled by contract manufacturers such as Flextronics. In China, indigenous local firms’ initial point of entry was not in assembly/manufacturing, but in sales and marketing for the local market. By being closer to the ultimate market than foreign brands, these firms evolved into independent design houses (IDH), with better knowledge of Chinese consumers’ preferences in styling and the agility to respond quickly to the market. IDHs undertake the development of handsets from highly modularized components. Modular-ization was further enhanced in the transition to 3G multimedia phones for low-end markets, with Media Tek, a Tai-wan-based chip design firm, providing an integrated chipset module that incorporated multimedia functions such as music and video players. 5

Thus, when the end market shifts
to emerging markets, we observe a “re-
verse pattern” in the way foreign firms
and local firms interact to occupy dif-
ferent parts of the global supply chain.
Traditionally, consumers for products
made with global supply chains were
in high-income locations, and low-
income locations were for manufac-
turing. Also, local firms positioned
themselves in global supply chains by
doing assembly, leaving marketing to
brand-owning foreign firms. But when
emerging economies serve not only as
manufacturing locations but also as
huge consumer markets, local firms’
competitive advantage lies in sales
and marketing, tailoring products to
local markets using modular compo-
nents. Foreign firms may of course
respond by investing in sales and mar-
keting to meet the ultimate demand
for “good enough” products.

Conclusion

What the economist Joseph Schumpeter wrote a century ago is still relevant today: discontinuous change happens as a result of five things: the introduction of a new product or process, the opening of a new market or source of supply of intermediate goods, and a new organization design. 6 Economic global-ization, as typified by the rise of global supply chains, involves all the Schum-peterian forces. Although differences remain across sectors, companies pursue similar strategies in their attempt to drive power in global supply chains.

In particular, the final product manufacturer drives power typically by owning a brand, initiating innovation, and controlling the supply chain. However, value may migrate from the final product system manufacturer to component suppliers, if suppliers create significant value in their components and find horizontal markets to sell them. Beyond this, this column highlighted the role of two other significant entities that have come out to play the power game: the sizeable no-brand suppliers who climb up, scale up, and diversify and the indigenous emerging market operators that focus on local sales and marketing.

References

1. cusumano, M. Platforms and services: understanding the resurgence of apple. Commun. ACM 53, 10 (oct, 2010), 22–24.

2. Dedrick, J. et al. Who profits from innovation in global value chains? a study of the iPod and notebook Pcs. Industrial and Corporate Change 19, 1 (Jan. 2001), 81–116.

3. gawer, a., ed. Platforms, Markets, and Innovation, edward elgar, 2009.

4. helper, s. and sako, M. Managing innovation in supply chain: appreciating chandler in the twenty-first century. Industrial and Corporate Change 19, 2 (feb. 2010), 399–429.

5. kawakami, M. and sturgeon, t. The Dynamics of Local Learning in Global Value Chains: The Experiences from East Asia. Palgrave Macmillan, 2011.

6. schumpeter, J.a. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. galaxy Books, 1912/1934.