How Market Competition Determines International Division Model A Case Study of Apple Boeing and In.docx
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How Market Competition Determines International Division Model A Case Study of Apple Boeing and In.docx
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HowMarketCompetitionDeterminesInternationalDivisionModelACaseStudyofAppleBoeingandIn
HowMarketCompetitionDeterminesInternationalDivisionModelACaseStudyofApple,BoeingandIn
href="#"> Abstract: Thispaperproposesandexaminesfourbasicorganizationalmodesofproductionfragmentation1inmanufacturingindustriesbasedonthreecasestudies.Ourstudyshowsthatmanufacturingenterprisesweightechnologyandcostagainsttheintensityofmarketcompetitionintheirchoiceofmodeandthecorrespondingextentofproductionfragmentation.Inindustrieswherecompetitionislessintense,enterprisesprioritizetechnologyconcernandareinclinedtochooseaninternallyintegratedorganizationalmode,characterizedbyindependentinvestmentinbuildingtheirownmanufacturingplants.Inindustrieswherecompetitionismoreintense,enterprisesprioritizecostconcernandareinclinedtoadoptanoutsourcing-basedorganizationalmode,characterizedbymaximizingtheusageofthird-partyfacilities.Insum,moreintensecompetitionpromptsenterprisestoseekefficiencybyrelyingonabroaderrangeofmanufacturinglocations,suppliers,andpartnersand,thus,toadoptmoreopenorganizationalmodes.Wearguethatadeeperunderstandingofhowenterprisesselectorganizationalmodes,combinedwithstrategicpolicyaimedatpromotingopennessinmanufacturingindustries,willenhancetheroleofChina’sindustriesintheglobalproductionchain. Keywords: productionfragmentation,manufacturingindustries,Apple,Boeing,Intel Productionfragmentationhastransformedthemanufacturingprocessfromacentral,vertically-integratedprocessbasedinasinglelocationtoanetworkofprocessesscatteredacrosstheglobe.ProductionfragmentationhasenabledR&D,manufacturing,marketing,andotherstagesofproductiontobecarriedoutprofessionallyindifferentcountriesandregions;this,inturn,hashadanincreasinglyprofoundimpactonpopularorganizationalmodeswithinthemanufacturingindustryandwhatprocessestakeplacedomesticallyvs.internationally.Inrecentyears,muchresearchhasfocusedontheriseanddevelopmentofproductionfragmentation.Jones(2005)andBonham(2007)bothemphasizedthecloserelationshipbetweenproductionfragmentationandcomparativeadvantage.Thetheoryofcomparativeadvantagehastraditionallyexaminedtradeatthenationallevelandisapplicableprimarilytothetradeoffinalproductsratherthanthatofmanufacturingcomponentsandotherintermediateproducts.Applyingthetheorytothetradeofintermediateproductsandproductionfragmentation,however,isalsovaluable. Ifthemanufacturingprocessofaproductcanbedivided,eachcountryandregionwouldachievemaximumprofitsbyspecializinginthemanufactureandexportofintermediateproducts,likecomponents,thatofferthelargestcomparativeadvantage.Thistheorythenallowsustoexplainhowmultinationalenterprisesdistributevariousstagesofthemanufacturingprocesstodifferentcountriesandregionstogaintheserespectivecomparativeadvantages.Italsoexplainshowdomesticenterpriseswillseektoenhancethecompetitivenessoftheirfinalproductsthroughoverseasoutsourcingofintermediateproducts. Hanson(2005)andDesai(2009)proposedthatthepossibilitiesforandtheprocessofproductionfragmentationdependsonavailabletechnologies.Inotherwords,enterpriseswillnotresorttoproductionfragmentationunlesstechnologymakesitpossibletodivideproductioninsuchawaythatitreducesthecostperunit.Onlyforproductsforwhichdivisionofthemanufacturingprocessistechnicallyfeasiblewilltheproductionofcomponentsandthefinalassemblytoindependententerprisesindifferentcountriesandregions. Whiletheaboveresearchoffersanexplanationoftheoriginsanddevelopmentofproductionfragmentationonanationalandregionallevel,itfailstoexamineproductionfragmentationfromanindustrialorcorporateperspective.Thoughsomeresearchhasnotedtheimpactoftechnologyonboththeformationofproductionfragmentationandtheextenttowhichitoccursinvariousindustries,westilllackacomprehensiveanalysisofhowmanufacturingenterprisesweighthetwinfactorsoftechnologyandcostagainsttheintensityofcompetitioninthemarketplace.Thus,asitcurrentlystands,theresearchlackssufficientexplanationofthedifferencesinthemodeandextentofproductionfragmentationandoutsourcingamongdifferentindustries. Adoptingamethodologythatcombinescasestudieswiththeoreticalanalysis,thispaperrevealsanothercrucialinfluence: namely,intensityofmarketcompetition,whichaffectsmanufacturers'choiceoforganizationalmode.Exploringproductionfragmentationatthecorporateandindustriallevel,thispaperexamineshowenterprisesadoptbothproductionfragmentationandoutsourcinginresponsetointensityofcompetition.Onekeyconclusionofthispaperisthatascompetitionintensifies,enterprisesfinditincreasinglydifficulttoremaincompetitivebymeansoftechnologicalsuperiorityaloneandbegintoshowapreferenceformorefragmentedorganizationalmodes,suchasexpandedoutsourcingtohelpreducecosts. I.Productionfragmentationandorganizationalmodesinthemanufacturingindustry Aspreviouslystated,productionfragmentationreferstotheactivityofenterprisesdividingthepreviouslyunifiedprocessofproductR&D,manufacturing,andmarketingintoseveralrelativelyindependentprocessesthatarecarriedoutindifferentcountriesand/orregions.Firmsconsidermanyvariableswhenchoosingmanufacturinglocations,includingtheconsumptionstructureandpriceofresourcesintheproductionprocess,andproductioncoordination,qualitycontrol,andtransportationconditionsinvariouslocations.Thisenablesproductmanufacturingtobedividedintomoredetailedandspecializedstages.Asoneorganizationalmodeinthemanufacturingindustry,productionfragmentationreducesproductioncostintwoways. First,whenthepriceofresourcesisfixed,productionfragmentationcanreducetheconsumptionofsaidresourcesthroughmorespecializedmanufacturingprocesses.Likewise,becauseresourcesareunevenlydistributedamongdifferentcountriesandregions,firmscantakeadvantageofabundantresourcesinoneareatocarryoutatleastonestageofthemanufacturingprocessatalowercostbytransferringsomeprocessestocountriesandregionswithlowermanufacturingcosts.Underconditionsofproductionfragmentation,manufacturingenterpriseschoosebasicorganizationalmodesforproductionprocessesthroughoutsourcing.Firmsmustdecidenotonlyonwhethertoengageinforeignprocurementandtowhatextentbutalsowhetherandtowhatextenttooutsource. Takingintoaccountthedifferentdecisionsmadeinregardtothesetwoissues,therearetheoreticallyfourbasicformsthatorganizationalmodesinthemanufacturingindustrycantake(Figure1).Inthefirstmode,theenterpriserefusestooutsourceandinstead,builditsownmanufacturingfacilitiessuchasplantswithinthecountryandconfinesallstagesofproduction? Cincludingproductdesign,R&D,andmanufacturingwithinthecompany.Inthesecondmode,theenterpriserefusestooutsource,butbuildsitsownmanufacturingfacilities,suchasplants,bothinsideandwithoutthecountry,asneeded.Inthethirdmode,theenterpriseoptstooutsourcewithinthecountry,usuallybyauthorizingdomesticthird-partymanufacturerstoparticipateinactivitiesincludingproductdesign,R&D,andmanufacturing.Inthismode,however,thereisnodirectdivisionoftheproductionprocesstoorcollaborationbetweentheenterpriseanditsforeigncounterparts.Inthefourthmode,theenterpriseresortsopttooutsourcebothinsideandoutsidethecountryandcollaborateswiththird-partymanufacturersabroad. Ofthesefourmodes,thefirstmosteffectivelypreventsafirm'sintellectualpropertyfromspreadingtoenterprisesabroad,thusmaintainingthefirm'stechnologicalmonopoly.Yet,thismodeisleasteffectiveintakingadvantageoflow-costproductiveresourcesandreducingcosts,giventheoptiontoworkatthelowestlevelofspecializedcollaboration.Thesecondmodeisalsoeffectiveinpreventingthefirm'sIPfromleakingouttocompetitorsandinmaintainingitstechnologicalmonopoly.Italsotakesadvantageoflow-costproductiveresourcesandreducingcosts.Itis,however,ineffectiveinenhancingspecializedcollaboration. Thethirdmodeiseffectiveinpreventingtechnologiesfromleakingoutonlywithinacertainrange;however,itisusefulforoptimizingthecombinationofproductiveresourceswithinthecountry,aswellasenhancingspecializedcollaboration.Thefourthmodeisineffectiveinpreventingandkeepinganenterprise'stechnologiesfromleakingoutbutismosteffectiveintakingadvantageoflow-costproductiveresourcesandenhancingspecializedcollaboration. Inpractice,thedifferencesamongtheabovefourorganizationalmodesisnotclear-cut.AnenterprisemayadoptdifferentmodesatdifferentstagesofR&D,designing,andmanufacture,aswellasduringassembly,testing,andmarketingofproducts'accessoriesandsubsystems.Withdeepeningproductionfragmentationandglobalization,firmsthatadoptthefirstandthethirdmodesexclusivelyarerare;thesecondandthefourthmodes,instead,aregainingincreasingpopularity. Intherestofthispaper,readerswillseethatalthoughtheU.S.companiesApple,Boeing,andIntelhaveadoptedthefirstmodeinproductdesign,R&D,andmarketing,outsourcinghasbecomepresentonawiderandde
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