USC Marshall School of Business

Voigt • GSBA 539

Corporate & Creating

Sustainable
Global Strategy Advantages

Module 6 Strategy, Supply Chains, &

Corporate Advantage
Introductory Discussion
Case: Uniqlo: A Supply Chain going
Global
Takeaways
 “good” Strategic Sight(s)

• Insight
• Foresight
• Cross-sight
A “tool” is only as
good as the
craftsperson
using it!!!
The same with strategy
frameworks… garbage in
garbage out
Don’t forget the Kernel of
Strategy

(Simplified) Diagnosis (opportunities or

challenges)
Guiding Policy (what to do, not to do,
deal with trade-offs)
Coherent Action (everything must
complement everything)
Three Dimensions of
Corporate Strategy

Business Diversification
Vertical Integration
Geographic/global Expansion
Ross Perot to GM Management

“You don’t
need to own a
dairy to buy
milk.”
Ownership Test & Corporate
Advantage

Determines

STRATE STRUCTURE
GY
Constrains

Creating sustainable advantages within a

firm’s supply chain
 Boundaries of the Firm
Strategic Decisions for
Advantage
Four key
conditions that
make decisions
strategic:
•Opportunism
•Asset-specificity
(small numbers
bargaining)
•Frequency
•Uncertainty FIRM
FI MARKET

MAKE BUY
 MORE THAN MAKE OR BUY
Intermediate Forms of Organization: A Continuum
of Governance Arrangements

Using market Using “firms” but with

mechanisms but with market incentives
careful firm control

SPOT RANGE OF INTERMEDIATE

INTERNAL
FORMS
MARKET HIERARCHY
(3rd party at (full integration
arms-length) LONG-TERM
CONTRACTS
STRATEGIC
ALLIANCES
JOINT
VENTURES
QUASI-
VERTICAL
INTEGRATION
(PARTIAL
OWNERSHIP)

Intermediate relationships may combine

the benefits of both market transactions
and internalization
 Ownership Test: Organizational
Economics Logic

Transaction Administrative
Costs Costs

Total cost of Total cost of Cost of

Cost of
externalizing Product/Service
internalizin Product/Service
from 3rd Party g Produced
Internally

Transaction Costs
Administrative
Transactions cost Costs
economic logic:
Cost of Cost of
Compare the
Product/Service Product/Service
relative costs of
from 3rd Party Produced
externalizing versus
Internally
internalizing
 Flow Chart for Organizational
Boundaries/ Vertical Integration
Decisions
MARKET CONTRACT
YES

Intermediate Arrangement
Market,
Entrepreneuri
al Incentives
Agency Costs

Source of NO Potential NO STRATEGIC

COMPETITIVE Opportunism CHOICE/
ADVANTAGE, “HOLD-UP”
IP, CORE TRANSACTION TRADEOFF
COMPETENCIE COSTS
S Organizational
Coordination &
Authority
Bureaucracy

YES YES YES

ORGANIZATIONAL ARRANGEMENT/CONTROL
NOT Either/Or… Relative
Efficiency of
Using Markets

BENEFITS
•Strong profit incentives align
interest
•“Invisible Hand” of the
market provides lower costs
(automatically)
•Real price information
•Multiple rivals produce
aligned behavior and
decentralized decisions
•Flexibility to switch relatively
quickly and cheaply
•(Lower) investment costs
TRANSACTION
COSTS
•Search costs
•Contracting costs & quality
assurance costs
•Ex-post dispute resolution costs
•Switching costs/ lock-in costs
•Ex-post bi-lateral bargaining
imbalances
•Market failures problems
NOT Either/Or… Relative
Efficiency of
Using Firms (Vertical
Integration)
BENEFITS
•Direct control
•Increased flexibility and
coordination – start, stop,
change
•Combining adjacent
operations
•Proprietary control / reduces
“leakage”
•Internal sharing of
proprietary information
VERTICAL
INTEGRATION-
ADMINISTRATIVE
COSTS
•Increased fixed investment
•Costs of change ( Organizational
Inertia)
•Differences in scale of operations
•Strategically different businesses
•Dealing with external uncertainty
•Reduced flexibility
•Dulled Incentives & agency problems
•Costs of internal administrative
hierarchies
•Cost of actively monitoring external
developments at all stages of supply
chains
 Complementing contracts with
relationships
Aligning Incentives with Performance
Measures to overcome opportunism

LOW MODERATE HIGH

Measurement Measurement Measurement
Ambiguity Ambiguity Ambiguity

Can’t measure in
Count Individual short-run/can’t separate
Outcomes/Output Monitor Behavior
individual contribution

• Set Objective • Task Description • Emphasize

Targets/Goals • Monitor input/ long-term
• Piece-rate behavior • Share profits
• Bonuses • Subjective • Build trust
• Contracts performance • Rewards tied to
reviews firm performance
 Uniqlo: A Supply Chain Going
Global
1. What is fast fashion and how does it differ from other
Taco Stand approaches in the clothing industry?
Question  2.What is unique about Uniqlo’s strategy in the clothing
Problem business? How is their value proposition different from
other industry competitors?
 3.How is Uniqlo similar and/or different to Inditex and
H&M?
 4.Uniqlo’s supply chain has proved effective in the Asia
Pacific region, but could the same model be scaled
worldwide? Are the low growth rates experienced in the
US and Europe are result of its current supply chain?
 5.What are Uniqlo’s competitive advantages? Does Uniqlo
have any global advantages? If any, what are they?
 6.What is Uniqlo’s global strategy? Is it more similar to
McDonald’s or to Bimbo?
 7.What role will e-commerce play in Uniqlo going forward
 Structure follows Strategy
Ownership Decision?

ZARA UNIQLO H&M

 Structure follows Strategy
Ownership Decision?

3rd Party Suppliers

Vertically Integrated Relational Suppliers Market Contracts

ZARA UNIQLO H&M

 Decomposing ZARA

STRATEGY TRADE-OFFS OWNERSHIP

 Decomposing ZARA

STRATEGY TRADE-OFFS OWNERSHIP

•“Fast” fashion follower
•Clothing is “perishable”
•Clients must shop every 4-6
weeks
•In season design changes
•Trialing & Adapting
•Direct control of production &
supply chains
•Small batches, make a little,
make more
•Premium prices; avoid mark-
downs
•Competitive quality
•Low Inventory
•Pull from the market into
production
•Speed to market matters
 Decomposing ZARA
STRATEGY
•“Fast” fashion follower
•Clothing is “perishable”
•Clients must shop every 4-6
weeks
•In season design changes
•Trialing & Adapting
•Direct control of production &
supply chains
•Small batches, make a little,
make more
•Premium prices; avoid mark-
downs
•Competitive quality
•Low Inventory
•Pull from the market into
production
•Speed to market matters
TRADE-OFFS
•Ok to stock out
•Not first is OK; copying
quickly
•Losing a customer/sale
•Higher costs of operation
•Being reactive and
following
•Must avoid “leakage” of IP
OWNERSHIP
• Complete responsive
control
• Customized work with
frequent stops & starts
• Highly responsive
coordinated supply
chain
• Outsource only the low
skilled, generic, low
value-added activities
• Contracting costs
would be prohibitive
– can’t write and
enforce 3rd party
contracts
 Decomposing H&M

STRATEGY TRADE-OFFS OWNERSHIP

 Decomposing H&M

STRATEGY TRADE-OFFS OWNERSHIP

•Fast fashion leaders – set
the fashion trend
•“Five” fashion seasons
•Anticipate/lead fashion
buying behavior
•Longer planning times
•Margins are earned by
lowering costs
•Outsourced manufacturing
to low cost producers
(arbitrage)
•Fashion pulls in customers
•A few “hits” (pay for the
losses of many “misses”
•Longer shelf-life (per
season)
 Decomposing H&M
STRATEGY
•Fast fashion leaders – set
the fashion trend
•Five fashion seasons
•Anticipate fashion buying
behavior
•Longer planning times
•Margins are earned by
lowering costs
•Outsourced manufacturing
to low cost producers
(arbitrage)
•Fashion pulls in customers
•A few “hits” (pay for the
losses of many “misses”
•Longer shelf-life (per
season)
TRADE-OFFS
•Lots of misses OK, with a
few big hits
•Lots of sales (aggregation)
•Over stocks & out of
stocks
•Lower costs > quality
•Hit the market at the
beginning of the season
•“Not quite” as fast fashion
•Assume fashion will be
copied
OWNERSHIP
• Use market arms-
length contracts
• No proprietary
expertise shared
• 700 manufacturers and
60 pattern suppliers for
same products to
reduce opportunism
• Low cost arbitrage
important
• No value placed in
long-term relationship
 Decomposing UNIQLO

STRATEGY TRADE-OFFS OWNERSHIP

 Decomposing UNIQLO

STRATEGY TRADE-OFFS OWNERSHIP

•Basic fashion – always in
style
•“Very slow” fast fashion;
some things are always “in”
style
•No “hot” products
•Emphasis on technology
•High quality at low costs
matter
•Competitive/low costs
matter
•Proprietary technology is
core advantage
 Decomposing UNIQLO
STRATEGY
•Basic fashion – always in
style
•“Very slow” fast fashion;
some things are always “in”
style
•No “hot” products
•Emphasis on technology
•High quality at low costs
matter
•Proprietary technology is
core advantage
TRADE-OFFS OWNERSHIP
•Not cutting edge fashion; • Relational contracting
no new fashion • Long-term relationship;
“excitement” importance of trust
•Short-term opportunism • Only 40 suppliers; ensure
problems supplier profitability
•Protecting technology is • Transparent; share best
more important than being available technology in
return for control of
“in fashion”
technology
• Takumi teams “manage”
supplier firms
• Capturing the benefits of
being vertically
integrated but without
the costs
• But it is hard to scale,
quickly
Takeaways
Before mine, what are yours?

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 Takeaways
Boundary-setting is crucial to strategy

2 Logics for Transaction cost economics

Boundaries and Core Competence (there are others, too)

Even when there aren’t lots of numbers to analyze,

Qualitative you can still do careful, methodical analysis that
Analysis sharpens your decision and argues your case
Counts
Don’t get suckered into the all-or nothing trap
—instead, be willing to look at the next level of
Outsourcing detail as we did in this case to see if there are
good or
differences between functions that make
bad?
outsourcing work in some cases where it might not
in others
 Decomposing TRADITIONAL
FASHION

STRATEGY TRADE-OFFS OWNERSHIP

•Leading the industry with
fashion trends
•Long lead times; big bets
•Competitive prices
•Margins are earned by
lowering costs
•Outsourced manufacturing
to low cost producers
(arbitrage)
•Brand power matters; pull in
customers
•A few big “hits” (pay for the
losses of many “misses”)
 Decomposing TRADITIONAL
FASHION

STRATEGY TRADE-OFFS OWNERSHIP

•Leading the industry with •Lots of misses OK, with a • Use market arms-
fashion trends few big hits length contracts
•Long lead times; big bets •Lots of sales (aggregation) • No proprietary
•Competitive prices •No long-term relationships expertise shared
•Margins are earned by •Assume fashion will be • Use many suppliers for
lowering costs copied same products to
•Outsourced manufacturing •Hit the market at the reduce opportunism
to low cost producers beginning of the season • One “game” contract
(arbitrage) •Advertising to draw in relationships
•Brand power matters; pull customers
in customers
•A few “hits” (pay for the
losses of many “misses”