Transcript Timothy J. Sturgeon: Modular production network: a new American model

Timothy J. Sturgeon:
Modular production network: a new American model
of industrial organization
In: Industrial and Corporate Change, Volume 11, Number 3, p. 451-496.
Supporting Authors: Melissa Schilling and Kevin Steensma:
The use of modular organizational forms: an industry-level analysis
In: Academy of Management Journal. Dec 2001, Vol. 44. Iss. 6, p. 1149-1178.
Opposing Author: Anthony Daboub:
Strategic alliances, network organizations, and ethical responsibility
In: S.A.M. Advanced Management Journal. Autumn 2002. Vol. 67, Iss.4, p. 40-50.
Vivian Hermann
IR 720
Summary
• Market volatility and intensified international competition
has lead to the development of a new model of industrial
organization, the modular production network.
• Lead firms focus on ‚core’ competence areas that are
perceived as being essential to the formation of
competitive advantages, especially product innovation,
marketing and other activities related to brand
development, while non-core functions, in particular
manufacturing, are shifted out-of-house to global turnkey suppliers to reduce costs.
Question 1:
Is deverticalization an effective solution for firms to withstand
global competition?
T. Sturgeon:
M. Schilling and K. Steensma:
Yes.
Firms that outsource a large share of
their manufacturing no longer have to
carry the financial, administrative and
technical burdens of fixed capital for
production, allowing them to focus on
product innovation.
Product innovation […] has been
freed from the shackles of large-scale
investment in fixed capital for
manufacturing of those products.
Yes.
Technological revolution and
increasing globalization have radically
transformed the competitive
landscape. For firms to survive, they
must build dynamic core
competencies and develop their
human capital and manufacturing
technologies in a way that enables
strategic flexibility. One way that firms
become more flexible is by making
greater use of […] outsourcing.
( pg. 465f)
Question 2:
Can global competitive pressure bolster the rise of a common
organizational model in industry structure?
T. Sturgeon:
Schilling and Steensma:
Yes.
[…] globalization means that there
are fewer ‘isolates’ in the world
economic system. […] it is clear that
the modular production network
model has put up a great deal of
pressure on competing network
emanating from Europe and Japan.
(…) over time, national production
systems could well co-evolve to
become more compatible and
interlinked with one another further
increasing global economic
integration as global-scale production
system overlap.
(p.490)
Yes.
(…) in highly competitive industries,
as soon as one or a few
organizations attain an organizational
form that is more consistent with the
demands of the environment, other
firms may have to follow suit in order
to survive.
Question 3:
Is there a risk to firms to lose global market share by outsourcing
competences to suppliers?
T. Sturgeon:
Schilling and Steensma:
Yes.
As suppliers gain in financial strength,
technical and operational
competence, and geographic reach,
the possibility arises for suppliers to
take further step of developing their
own end-products in competition with
their customers. […] outsourcing of
broad swath of activities formerly
performed in-house raises the
possibility that brand-name firms will
lose process expertise […] and may
turn out to be critical to ongoing
success in product development.
Yes.
Reliance on contract manufacturing
may cause a firm to forfeit important
learning opportunities, outing it at a
disadvantage in the long run. By not
investing in his own manufacturing,
a firm might not develop
competencies related to its products
that enable the development of
future products.
(p 488f.)
Question 4:
Is there a risk to firms to lose global market share by outsourcing
competences to suppliers?
T. Sturgeon
Yes.
As suppliers gain in financial
strength, technical and operational
competence, and geographic reach,
the possibility arises for suppliers to
take further step of developing their
own end-products in competition with
their customers. […] outsourcing of
broad swath of activities formerly
performed in-house raises the
possibility that brand-name firms will
lose process expertise […] and may
turn out to be critical to ongoing
success in product development.
Since 1984, Erak Clothing, a Turkish
contractor, has manufactured jeans
as a full-package producer for
international brands, such as Calvin
Klein, Guess, and Esprit. Following
the creation of its own brand, Mavi
Jeans, in 1991, the firm has been
transforming itself into an original
brand-name manufacturer and
retailer. Mavi Jeans are now sold
worldwide at more than 3,000 sales
points, including Nordstrom, Macy's,
and Bloomingdale's department
stores, and five directly owned and
operated flagship stores in
Vancouver, New York, Frankfurt,
Berlin, and Montreal.
Source: N. Tokatli & Ö.Kizilgün: Upgrading in the Global
Industry. In: Economic Geography. Jul 2004. Vol. 80. pg.
221.
Question 5:
Does competition in the global economy foster the devaluation of
manufacturing in industrialized economies?
T. Sturgeon:
Yes.
US […] firms have generally placed manufacturing in a low position on the
hierarchy of corporate esteem. U.S. brand-name electronics have been
closing internal manufacturing operations which are often seen […] as
draining resources away from more crucial innovation and sales activities.
(p. 462)
Indeed, an increasing number of lead firms have little or no internal
manufacturing capacity at all.
(p.475)
Question 5 cont.:
Does competition in the global economy foster the devaluation of
manufacturing in industrialized economies?
Manufacturing workers in selected countries,
in thousand
20000
18000
16000
14000
USA
12000
Germany
10000
UK
8000
Mexico
6000
Indonesia
4000
2000
0
Y 1995
Y 2000
Source: International Labour Organization
Y 2003
Question 6:
Does the rise of the modular production network model leads to
heavily increased outsourcing?
T. Sturgeon:
Yes.
[…] turn-key suppliers and lead firm co-evolve in a recursive cycle of
outsourcing and increasing supply-base capability and scale, which makes
the prospects for additional outsourcing more attractive.
(pg.455)
Question 6 cont.:
Does the rise of the modular production network model leads to
heavily increased outsourcing?
Growth in Outsourcing
$US in billion
1400
1200
Electronic equipment
cost of goods sold
1000
800
$864
600
400
$594
200
0
Electronic
manufacturing service
market
$283
$90
1998
2003
Source: Dataquest 1999, Technology Forecasters Inc. 1997, Selectron 2001.
Question 7:
Does outsourcing to contract manufacturer leads to an all-around
positive social and economic outcome?
T. Sturgeon:
A. Daboub:
Yes.
[…] the emergence of large, globally
operating contract manufacturers
facilitates the build-up of external
economies of scale.
No
[…] the specialization of firms in
single areas of competence has
resulted in fragmentation of the value
chain and of ethical and legal
responsibility. Many cases exemplify
the ethical gaps that can occur
because of the decentralized control
in network organizations.
(p 477)
[…] the economies of scale and
speed that build up in modular
production networks surpass those of
any single firm because they reside
externally and can effectively be
shared the industry as a whole.
(p. 471)
Question 8:
Are social features such as trust and reputation unessential
factors in vertically disintegrated production processes?
T. Sturgeon:
A. Daboub:
Yes.
Trust, reputation and long-term
relationships are not the only way to
buoy external economies. As
industries grow, open and de facto
standards tend to emerge,
codification increases and the
capabilities of the supply-base
deepens. These characteristics of
industrial development make it
possible for assets to become less
specific over time, allowing
outsourcing relationships to be
maintained without intensely
relational or hierarchical character.
No.
[There is] a positive relationship
between reputation and the outcomes of
alliances. Good reputation reduces the
problems of transaction costs, agency
relationships, and team production.
When relationships are long term,
interpersonal relationships of friendship
and trust can create a stable culture that
sustains interorganizational relationships
and guides their activities. To the extent
that this culture coordinates the activities
of partners in a harmonious way, it
contributes to organizational efficiency
and is, therefore, a strategic asset.
(p.480)
Question 9:
Do global networks and partnerships between suppliers,
distributors and competitors create exclusively economic
opportunities for involving parties?
T. Sturgeon:
A. Daboub:
Yes.
External economies allow for the
development of trust, industry- and
locality-wide sharing of production
capacity, greater opportunities for
learning and technology transfer
within the system, and a superior
ability to reconfigure the functional
elements of production according
to rapidly changing output
requirements and the rise of new
Markets.
No.
In addition to creating economic
opportunities, strategic alliances
also create challenges and threats.
[…] profits must be split […] local
laws could diminish flexibility and
cooperation can create competitive
foreign firms.
[…] the learning opportunities may
not be symmetrical, i.e., one firm
may learn more than the other. For
this reason, strategic alliance can be
considered an arena of competition
or even a learning battlefield.
(pg. 453)
Question 10:
Does outsourcing to contract manufacturer leads to an over-all
positive social and economic outcome?
T. Sturgeon:
Yes.
[…] the emergence of large, globally operating contract manufacturers
facilitates the build-up of external economies of scale.
(pg. 477)
[…] the economies of scale and speed that build up in modular
production networks surpass those of any single firm because they
reside externally and can effectively be shared the industry as a whole.
(pg. 471)
Question 10 cont.:
Does outsourcing to contract manufacturer leads to an allaround positive social and economic outcome?
No.
Source: www.businessweek.com
 Rough estimates suggest that the U.S. has lost 400,000 to 500,000
information technology-processing jobs to outsourcing over the last few
years.
Source: Richard Locke: The Promise and Peril of Globalization: The Case of Nike. MIT IPC Working Paper 02-008.
 The Ernst and Young audit, commissioned by Nike, reported serious health
and safety problems at the Tae Kwang Vina plant, Nike’s Korean
subcontractors. Toulene concentrations were said to exceed between 6 and
177 times acceptable standards in certain sections of the plant.
 In June 1996, Life magazine published an article on child labor in Pakistan,
which included a photo of a 12 year old boy stitching a Nike soccer ball.
 Profit of Nike was shrinking.
Question 11:
Is the modular production network becoming a major
institutionalized model for industry structure?
T. Sturgeon:
Yes.
[…] the modular production network yields better economic performance in the
context of globalization than more spatially and socially embedded network
models. (pg. 451)
The performance advantages of modular network are […] geographic flexibility
[which] creates greater access to a variety of place-specific factors and
markets. An important result of geographic flexibility is the system’s easy
reach into areas with lower factor costs. (pg. 488)
Question 11 cont.:
Is the modular production network becoming a major
institutionalized model in industry structure?
No. Source: J. Humphrey & O. Memedovic: The Global Automotive Value Chain. UNIDO 2003.
Assembly plant investment in emerging markets by automakers.
X=early 1990; X = late 1990s.
Country
GM
Ford
VW
Mexico
X
X
X
XX
Argentina
X
X
X
X
XX
X
X
X
XX
X
XXX
X
X
X
X
X
X
X
X
X
X
Brazil
DC
Fiat
Renault
Malaysia
Thailand
X
Indonesia
X
X
Czech
Poland
PSA
Toyota
Nissan
Honda
X
X
X
X
X
X
X
X
X
XX
X
XX
Hungary
X
India
X
X
X
X
China
X
X
X
X
X
X
X
X
X
Question 12:
Does competition increases between firms in the modular
production network?
T. Sturgeon:
Yes.
Barriers to new entrants are lowered
because competition can tap the
same set of supplier and therefore
gain access to leading-edge, globalscale production capacity used by
established firms.
(p.466)
No
Source: Entrepreneur. May 1, 2004.
According to Heidi Neck, an author of
the 2002 "Global Entrepreneurship
Monitor (GEM)," a study funded by
the Ewing Marion Kaufmann
Foundation, the number of Americans
planning to start new businesses
decreased.
A report released by Challenger, Gray &
Christmas Inc. showed that the percentage
of jobless managers who said they were
starting new businesses dropped to an
average of 6.8 percent in 2003.
Compare that to the 1991-92 recession,
when roughly 15 percent of jobless
managers started companies of their own.
Thank You!