Ecco a/S – Global Value Chain Management

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Case 3

The International Firm in a Global Economy

ECCO A/S – Global Value Chain Management

Question 1:
1. Relate the Ecco case to the conceptualization of the organization as a global factory. What similarities and dissimilarities with the global factory conceptualization do you see and what solutions may it present? Similarities: As ECCO had been very successful in the footwear industry by focusing on production technology and assuring quality by maintaining full control of the entire value chain, ECCO grew and faced increased international competition, various value chain activities. The global factory conceptualization need a fully integrated value chain to tied up significant capital and management attention in tanneries and production facilities, in this case, which could have been used to strengthen the branding and marketing of ECCO's shoes. A multinational corporation (MNC) configures its global value chain activities in order to exploit location-specific advantages and gain global scale and scope advantages. ECCO has a fully integrated value chain and this allows for a discussion of the pros and cons of such an approach. The globalization of production and trade have fueled the growth of industrial capabilities in a wide range of developing countries, and the vertical disintegration of transnational corporations, which are redefining their core competencies to focus on innovation and product strategy, marketing, and the highest value-added segments of manufacturing and services, while reducing their direct ownership over ‘non-core’ functions such as generic services and volume production. Together, these two shifts have laid the groundwork for a variety of network forms of governance situated between arm’s length markets and large vertically integrated corporations. An increasingly complex and dispersed global value chain configuration posed organizational and managerial challenges regarding coordination, communication and logistics.

Dissimilarities: with the global factory conceptualization, contract manufacturing by Sturgeon (2002) and by Sturgeon and Lee (2001) contrasted three types of supply relationships, based on the degree of standardization of product and process: (1) the ‘commodity supplier’ that provides standard products through arm’s length market relationships, (2) the ‘captive supplier’ that makes non-standard products using machinery dedicated to the buyer’s needs, and, (3) the ‘turn-key supplier’ that produces customized products for buyers and uses flexible machinery to pool capacity for different customers. This analysis emphasized the complexity of information exchanged between firms and the degree of asset specificity in production equipment.

These considerations lead us to construct a theory of the global factory conceptualization based on three factors, and then the solutions which may present should focus on: A. The complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications; B. The extent to which this information and knowledge can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction; and C. The capabilities of actual and potential suppliers in relation to the requirements of the transaction.

Question 2:
2. What are the pros and cons for outsourcing versus in-house (off-shoring) production in a firm like Ecco? One of the reasons for choosing outsourcing is technological efficiency. For ECCO, the main forces driving ECCO’s internationalization have been i) establishment of a market presence, and ii) reduction of labor costs and increasing flexibility.

When the outsourcer possesses advanced technology, the manufacturer can share more profit with the outsourcer even if it cannot monopolize profit. Nevertheless, outsourcing has disadvantages in that production activities...
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