Global Strategic Management

1. Global Strategic Management Nike & Reebok: Core competencies, make versus buy, designing and managing the global supply chain

2. Nike & Reebok: Summary of Key Ideas • 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. At the extreme, Nike could potentially save as much as $23 billion in labor costs by choosing Indonesia vs. Germany as a mfg. location for all it’s shoes (assumes identical labor productivity and production methods).

3. Nike & Reebok: Summary of Key Ideas • 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 [e.g., exchange rates, wages, etc.] change the relative costs and performance of suppliers), the more it makes sense to partner. • The more the company values flexibility (due to changes in suppliers costs, technology, etc., the more it makes sense to use arms-length relationships

4. STRATEGIC GLOBAL SOURCING(Building a global network of capabilities) Mature Growth Innovation Industrialized Countries Newly Industrialized Countries Emerging Economies Adaptor (India: $.50/hr) PCMCIA Unit (Japan: $17.50/hr) Notebook (P.C) (Singapore: $3.25/hr) COMPAQ’S NOTEBOOK COMPUTER

5. Vertical Integration Who Let “INTEL INSIDE”?

6. Theories of Vertical Integration (Efficiency) • Vertical Integration as a means for reducing transaction costsand 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).

7. 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 multi-stage 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).

8. MODEL FOR MAKE VS. BUY Partner (compare capabilities) Make - Seats - Air conditioners - Tires - Engines - Transmissions High Component Value Buy Partner (compare capabilities) - Bolts - Nuts - Belts - Filters - Engine components - Interior and exterior trim products Low Low High Asset Specificity