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
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81–116.
3. gawer, a., ed. Platforms, Markets, and Innovation,
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4. helper, s. and sako, M. Managing innovation in supply
chain: appreciating chandler in the twenty-first
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5. kawakami, M. and sturgeon, t. The Dynamics of Local
Learning in Global Value Chains: The Experiences from
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Mari Sako ( mari.sako@sbs.ox.ac.uk) is Professor of
Management studies at saïd Business school, university
of oxford, u.k.
copyright held by author.