Lecture 4 Global Factory Model

Leeds University Business School
LUBS5267M
International Business Theory
Lecture 4: Global Factory Model
Dr. Surender Munjal

PhD, CA, CMA, M.Phil, M.Com, PGCERT, Fellow of the HEA
Lecturer in International Business and Strategy

Centre for International Business, University of Leeds (CIBUL)
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Announcement:
Video Assignment
Presentation topic
On April 25, 2014, Microsoft Corp. announced it has completed
the acquisition of Nokias Devices and Services business. The
acquisition has been approved by Nokias shareholders and by
governmental regulatory agencies around the world. The
completion of the acquisition marks the first step in bringing
these two organisations together as one team
Task
Using the advantages and costs of internalisation you are
required to analyse Microsofts strategy of acquiring Nokias
business

Announcement:
Video Assignment
Read instructions carefully
Guidelines
Upload video on YouTube
Set the access restriction to unlisted
Post web address and the script of your video to the VLE
Bad practice
Just theory
Just facts
Good practice
Analysis: blend theory with facts
Critical analysis: Limitations, additional points

Announcement:
Video Assignment
Guest Lecture
Focus on Microsoft Nokia Acquisition
Thursday the 20th Oct 2016
Check your time table for time and venue
Speaker Richard Sharp
worked at various top managerial positions, including Global VP in
Nokia
Opportunities for Q&As

Catch up
Leeds University Business School 6

Catch up
Production
Domestic Foreign
Direct Exporting Indirect Export Contractual mode Investment modes
Licensing,
Intl Rep, Foreign Buying House, Joint Venture,
Franchising,
Distributor Export Mngt. Agent Subsidiary, WOS
Strategic Alliance
Alternatives to FDI FDI

Externalisation Internalisation
Note: Exporting
Leeds is aBusiness
University non-contractual
School entry mode.
Catch up

Learning Objectives
This lectures discusses Globalisation and Multinational Enterprises
In particular the modern model of MNE Global Factory Model
Essential Readings:
Buckley, P. J. (2009). The impact of the global factory on economic development. Journal of World
Business, 44(2), 131-143. Access from
http://www.sciencedirect.com/science/article/pii/S1090951608000424
Buckley, P. J. 2016. The contribution of internalisation theory to international business: New realities and
unanswered questions. Journal of World Business, 51(1): 74-82. Access from
http://www.sciencedirect.com/science/article/pii/S1090951615000656
Supplementary Readings:
Buckley, P. J. (2011). International integration and coordination in the global factory. Management
International Review, 51(2), 269-283. Access from http://0-
search.proquest.com.wam.leeds.ac.uk/docview/863671634/140B079FA092E28E4E5/1?accountid=14664
Contractor, F. J., Kumar, V., Kundu, S. K., & Pedersen, T. (2010). Reconceptualizing the firm in a world of
outsourcing and offshoring: The organizational and geographical relocation of highvalue company
functions. Journal of Management Studies, 47(8), 1417-1433. Access from
https://datapro.fiu.edu/campusedge/files/articles/kundus3007.pdf

Overview
Globalisation and its meaning

Nike Video
Building Blocks: Components of the Global Factory
1. Assets and Core Competencies
2. Global/Local Contrasts : Demand/Market
3. Outsourcing/Offshoring : Supply/Production
4. Knowledge Management Dynamics
5. Network Configuration
The Global Factory
Summary/Conclusion

Globalisation and IB
Globalisation refers to growing economic dependence among countries
as reflected in the increasing cross-border flows of three types of
entities: goods and services, capital and know-how. Gupta and Govindarajan (2004, p.1)
and people!
Globalisation is essentially a process driven by economic forces (MNEs
being the main actor) that have caused an international configuration of
economic activities in the world economy.
the spatial reorganization of production and international trade
integration of financial markets
the segmentation of the manufacturing process into multiple partial
operations which combined with the development of cheap transportation
and communication networks
brought the increasing division of production into separate stages carried
out in different locations (Sideri, 1997, p. 38).

Internationalization of firms
Conflict of Markets
Conflict of
CAPITAL national
MARKET INTERNATIONAL
policies
(locational
policies)
Capital flows
GOODS & Integration,

REGIONAL REGIONAL REGIONAL
SERVICES Harmonization
MARKETS e.g., NAFTA and ASEAN and
protectionist
regional
Labour policies
Services
N N N N N N
A A A A A A National
T T T T T T
LABOUR I I I I I I employment
MARKETS
O O O O O O training and
N N N N N N
A A A A A A fiscal policies
L L L L L L

Source: Buckley, 2009, p.132
Nike Video

Global Factory
The global factory is a structure through which
MNEs integrate their global strategies, through a
combination, of innovation, distribution and
production of both goods and services(Buckley, 2009, p.131)
Global Factory exploits differences that remains in the
international integration of markets. Prof. Peter J Buckley
Many large multinational enterprises are already perfectly
placed to exploit these differences. (Buckley, 1996)
Global Factory makes key decision on Location and Ownership/Control

Where is an activity best located?
What is the best means of control of each activity in the system?

Building Blocks 1
Assets and Core Competencies

Assets of the Global Factory:
Core Competencies
Global Factory requires rethink of stock of investment
Focal firm decrease ownership of productive assets, i.e. production is
outsourced specialised firms/optimal location.
Focal firm invests in intangibles:
Knowledge intensive activities: R&D, technology
Brand Equity: Customer relations, Aftersales, Marketing
Management Skills
Next
Distribution networks: Hub and Spoke
Seminar
Case Study
Core competencies should be non-substituable, indispensible, and
non-replicable.

Building Blocks 2
Global/Local contrasts:
Demand/Market
17 17
Global and Local Markets
Global Factory exploits Global-Local contrast
Globalisation of Markets: Opportunity for growth!
Economies of scale
Standardisation
Global branding
Consumer are willing to switch to substitutes
Role of technology, e.g. E-commerce
Localisation of Markets: Another opportunity
Adaptation of product and promotion Who has higher
Economies of scope market share in mobile
Localisation (local / regional brands) phone market,
Consumer loyalty Samsung or Apple?

Building Blocks 3
Outsourcing and Offshoring:

Supply/Production

Outsourcing and Offshoring
Global Factory fine slice its activities and outsource low
value adding activities to low cost locations.
Outsourcing: is the market procurement of formerly in-house produced
goods and services from legally independent supplier firms. A make or
buy decision.
Co-sourcing: when a business function is performed by both internal
staff and external resources, such as consultants or outsourcing vendors,
with specialised knowledge of the business function.
Offshoring: performing or sourcing any part of organisational activities
at or from a location outside the companys home country.
Companies create captive centres offshore where the employees work for
them, or outsource offshore where the employees work for the outsourcing
provider.

Outsourcing and Offshoring
Remember: Activities are located at optimal locations

Source: Contractor et al., 2010
A typical offshore production
process
HOME COUNTRY FOREIGN COUNTRY
Inputs
EARLY STAGES
OF
PROCESSING Intermediate inputs
EARLY STAGES LOCAL

OF
PROCESSING
INPUTS
FINAL STAGES
Semi-finished goods
OF PROCESSING
AND MARKETING
Finished Goods
MARKETS
HOME AND FOREIGN COUNTRIES

Building Blocks 4
Knowledge Management
Dynamics

Knowledge Management:
Dynamics
Global Factory pays attention to knowledge management
Knowledge
Technological Know-how in production
E.g., Product related or process related
Market Knowledge or Market Intelligence
E.g., Consumer preferences
Dynamics
Generation Production related-
through R&D
Accumulation
Experience/Learning
Knowledge transfer Market related- through
HQ to subsidiary Market Research
Subsidiary to subsidiary

Information flows in a
multinational firm
PRIMARY SOURCE
Raw
material
New techniques
FIRST STAGE OF
PRODUCTION
Semi- Production
Processed experience
material
FINAL STAGE OF PRODUCTION R&D
Finished
Sales Basic
product
experience knowledge
MARKETING
Improved
Delivered
product
product
quality
CONSUMER
Notes: Successive stages of production are linked by flows of semi-process materials. Production and
marketing are linked by a flow of finished goods ready for distribution. Production and marketing on
the one hand are linked to R&D on the other hand by two-way flows of information and expertise.

Source: Buckley and Casson (1976)
Information flows in a
multinational firm

Source: Buckley (2009, p. 136)
Building Blocks 5
Network Configuration

Network Configuration
Global Factory creates, develops and exploits network
These networks can be internal or external
Internal Network
H.Q and Subsidiary
Subsidiary and subsidiary
External Network Supply
Firms partners with actors in the supply chain
Supply Chain is a network of facilities and distribution
options that performs the functions of procurement of Manufacturing
materials, transformation of these materials into
intermediate and finished products and distribution of
these finished products to customers.
Distribution
Network operates at all three levels: network of suppliers,
network of outsourcing partners, network of distributors.
Source: Douglas Brown and Scott Wilson (2005) The Black Book of
Leeds University Business School Outsourcing Hoboken, New Jersey, Wiley, p 348-352. 28
Hub and Spoke strategies
Focal firm uses Hub and Spoke strategies in market place. It employs
ownership and location strategies to gather local market knowledge.
Ownership strategies: to involve

local firms with marketing skills and
local market intelligence through
international joint ventures (IJVs)
Location strategies: to differentiate

the wholly owned hub (centrally
located) from the jointly owned
spokes (globally dispersed).
Hub and Spoke strategies:
in market
Note: Different location (countries) warrants different types of ownership strategies,

e.g., some countries do not allow 100% FDI. MNE uses IJV in such locations.

The Global Factory

Globally Distributed Operations
Parts Parts Parts
Supplier Supplier Supplier
Contract
Design Assembler
Engineering
Branding Outsourced
Marketing Parts Supplier
BRAND OWNER
Contract
Assembler
Warehousing,
Distribution
and
Design
Parts Adaptation
Engineering Contractor
Contractor Supplier
Parts
R&D Supplier
Contractor
Distributed Manufacturing Local market Adaptation
Core Functions

Globally Distributed Service Operations
Service
Hub
OGS
OGS
BRAND OWNER
Service
Hub OGS
Design
R&D
Outsourced goods supply
Outsourced goods supplier OGS

The Strategies or Characteristics
of the Global Factory
1. Ability to Fine-slicing: Core vs. non-core
2. Outsourcing and offshoring: ability to locate activities at most feasible
place.
Using contracts rather than ownership
You dont have to own a facility to control it
3. Flexibility: ability to reallocate resources quickly and smoothly in
response to change.
Response to: increasing volatility arising from globalisation; opposition to
monopoly including internal monopoly.
4. Resilience: making systems resilient to absorb shocks.
Firms can survive downturns, crises and panics.
5. Ability to control and coordinate whole supply chain: Production to sales

Value creation in the
Global Factory
Production Chain

Seminar -3: Nike
You watched the video

Read the paper case
Questions are on the
VLE

Summary
Globalisation affects the way MNEs are organised
Global Factory: A Morden day MNE
Core functions owned by MNE
Non-core functions are outsourced
Activities are best located to maximise the value/advantages
Ownership not important - Controls is important
Fine slicing, outsourcing and globally disbursed activities provides
flexibility and resilience but MNE should have core competencies
and ability to control and coordinate the network through effective
knowledge management.
A successful Global Factory generates smile!!!

Next Week!
The Eclectic Paradigm of Internationalisation

Lecture 4 Global Factory Model

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