Read the case Logitech below and answer the following questions: 1. Analyse and

Question

Read the case Logitech below and answer the following questions:

1. Analyse and explain the configuration of Logitech’s global value chain? Configuration Why this configuration?

2. To what extent can the different trade theories in the prescribed book explain Logitech’s configuration of its global value chain? Analyse the relevance of each theory. Theory to what extent can the theory explain Logitech’s configuration of its global value chain?

3. Which of the theories, in your opinion, give the best explanation of Logitech’s global value chain? Clarify and discuss your choices.

Logitech

Best known as one of the world’s largest producers of computer mice, Logitech is in many ways the epitome of the modern global corporation. Founded in 1981 in Apples, Switzerland, by two Italians and a Swiss, the company now generates annual sales of over $1.5 billion, most from products such as mice, keyboards, and low-cost video cams that cost under $100. Logitech made its name as a technological innovator in the highly competitive business of personal computer peripherals. It was the first company to introduce a mouse that used infrared tracking, rather than a tracking ball, and the first to introduce wireless mice and keyboards. Logitech is differentiated from competitors by its continuing innovation, high brand recognition, and strong retail presence. Less obvious to consumers, but equally important, has been the way the company has configured its global value chain to lower production costs while maintaining the value of those assets that lead to differentiation. Nowadays Logitech still undertakes basic R&D work (primary software programming) in Switzerland, where it has 200 employees. Indeed, the company is still legally Swiss, but the corporate headquarters are in Fremont, California, close to many of America’s high-technology enterprises, where it has 450 employees. Some R&D work (again, primarily software programming) is also carried out in Fremont. Most significantly though, Fremont is the headquarters for the company’s global marketing, finance, and logistics operations. The ergonomic design of Logitech’s products – their look and feel – is done in Ireland by an outside design firm. Most of Logitech’s products are manufactured in Asia. Logitech’s expansion into Asian manufacturing began in the late 1980s when it opened a factory in Taiwan. At the time, most of its mice were produced in the United States. Logitech was trying to win two of the most prestigious OEM customers – Apple Computer and IBM. Both bought their mice from Alps, a large Japanese firm that supplied Microsoft. To attract discerning customers like Apple, Logitech not only needed the capacity to produce at high volume and low cost, it also had to offer a better designed product. The solution – manufacture in Taiwan. Cost was a factor in the decision, but it was not as significant as might be expected, since direct labour accounted for only 7 percent of the cost of Logitech’s mouse. Taiwan offered a welldeveloped supply base for parts, qualified people, and a rapidly expanding local computer industry. As an inducement to fledging innovator, Taiwan provided space in its science-based Industrial Park in Hsinchu for the modest fee of $200,000. Assessing the opportunity as a deal that was too good to pass up, Logitech signed the lease. Shortly afterward, Logitech won the OEM contract with Apple. The Taiwanese factory was soon out-producing Logitech’s U.S. facility. After the Apple contract, the Taiwan plant also started service Logitech’s other OEM business, and the plant’s total capacity increased to 10 million mice per year. By the late 1990s, Logitech needed more production capacity. This time it turned to China. A wide variety of the company’s retail products are now made there. For example, one of Logitech’s biggest sellers, a wireless infrared mouse called Wanda, is assembled in Suzhou, China, in a factory that Logitech owns. The factory employs 4,000 people, mostly young women such as Wang Yan, an 18-year-old employee from the impoverished rural province of Anhui. She is paid $75 a month to sit all day at a conveyor belt plugging three tiny bits of metal into circuit boards, which she does about 2,000 times each day. The mouse Wang Yan helps assemble sells to American consumers for about $40. Of this, Logitech takes about $8, which is used to fund R&D, marketing, and corporate overhead. What remains after that is the profit attributable to Logitech’s shareholders. Distributors and retailers around the world take a further $15. Another $14 goes to the suppliers who make Wanda’s parts. For example, a Motorola plant in Malaysia makes the mouse’s chips and another American company, Agilent Technologies, supplies the optical sensors from a plant in the Philippines. That leaves just $3 for the Chines factory, which is used to cover wages, power, transport and other overhead costs. Logitech is not alone in exploiting China to manufacture products. According to China’s Ministry of Commerce, foreign companies account for three-quarters of China’s high-tech exports. China’s top 10 exporters include American companies with Chinese operations, such as Motorola and Seagate technologies, a maker of disk drives for computers. Intel now produces some 50 million chips a year in China, the majority of which end up in computers and other goods that are exported to other parts of Asia or back to the United States Yet Intel’s plant in Shanghai doesn’t really make chips; it tests and assembles chips from silicon wafer made in Intel plants abroad, mostly in the United States. China adds less than 5 percent of the value. Intel’s U.S. operations generate the bulk of the value and profits

Explanation / Answer

Q-1) Logitech's supply chain has a truly global footprint. It has taken advantage of outsourcing manufacturing to other countries at its best. After its inception in Switzerland the company has moved its marketing, finance and logistics operations to Fremont California, the design of the products is done in Ireland, and the products are manufactured in Asia. Thus it has moved the core operations of its value chain to a country where the cost of manufacturing is low. The support functions like marketing and finance are close to the corporate headquarters where it can retain control and carry out proper management of these functions. The move to manufacture in Taiwan is not only to lower costs but capture the local market, where it can make and sell in the local market considerably reducing the logistics cost. The trade environment in Taiwan of encouraging entrepreneurship presented an opportunity to the Company and it bags an OEM contract with Apple. When it gets the next opportunity for expansion it looks to China where it has discovered a pool of talented labour. For its wireless infrared mouse Wanda the assembling of parts is done by young women who comprise of the work force. But it also obtains other parts from Malaysia and Phillipines again a good example of its business acumen.

Logitech has adopted the strategy of differentiation from its competitors by innovation, strong retail presence and high brand recognition. It is able to achieve this by the configuration of the supply chain where the support operations are held close to the headquarters where proper management of assets is possible and the primary operations are moved offshore where costs are lower and the place of manufacturing also becomes the place where it can exploit its retail presence. This forward expansion gives it the opportunity of scales.

Q-2) The different trade theories that have a bearing on the configuration of Logitech's global value chain are

a) Absolute Trade Theory

b) Comparative Advantage Trade Theory

c) New Trade Theory

A) Absolute trade theory: Some countries have the absolute advantage over other countries in production of particular goods relative to each other. In Logitech's case the company is manufacturing parts of its mouse in China which has an absolute advantage of cheap labor. In Taiwan the company finds an entrepreneur environment, cheap labour and an growing market for its products and it carries out assembly of some parts in Taiwan.

b) Comparative advantage trade theory: Under free trade an agent can produce more of and consume less of a good over which they have a comparative advantage. Here we see China has an comparative advantage of cheap labour and it produces more of Logitech mouse which are mostly sold to US customers. On the other hand Logitech knows its specialistaion and retains its marketing, finance and logistics operations in US while moving the manufacturing activities offshore.

c) New Trade Theory: According to this theory there can be very substantial economies of scale and network effect that can occur in key industries. If one country specialises in a particular industry it gains economies of scale and other network benefits from its specialisation. The theory also gives importance to geographic location and first mover advantage. Logitech gets the first mover advantage in Taiwan and takes advantage of the country's supply base of parts, qualified talent and a growing local customer base. This move gives it an edge over its competitor Alps and Logitech is able to mark its presence in Taiwan.

3) The Comparative Advantage Theory best explains Logitech's Global Value Chain. As seen we see that all operations of Logitech are carried out in different countries. Each of these countries specialises in a specific area. The basic R & D work of the company is carried out in Switzerland known for its presicion engineering and then the company headquarters is in California where it can take the advantage of programming skills and emerging IT technologies of Silicon Valley.

The design of the products is done in Ireland and the manufacturing is done in Taiwan where it gets space in an industrial hub and gets the advantage of talented labour and a growing market. It can also make and sell at the same place.

The manufacturing in China gives the company advantage of cheap labour. The operations of the Company in China provide employment to the locals and the company in turn is able to expand its manufacturing operation and earn economies of scale.

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