The Importance of Flexibility Within the Global Factory
Global factory structures offer a number of benefits to participant firms, particularly to the lead or focal firm. They enable the firm to specialise to undertake itself those tasks where it has clear advantage and to outsource more peripheral activities. Such specialisation should result in a more efficient utilisation of resources and enhanced opportunities to capture scale and experience advantages. In part, such specialisation should contribute towards a second benefit, lower costs of production and distribution. However, cost savings may also occur through the allocation of activities to optimal locations with access to lower-cost inputs. The global factory may also enjoy flexibility benefits over more conventionally organised rivals. We define flexibility within a global factory system to mean the ability to effectively reallocate resources and restructure processes in response to uncertainty. This raises the interesting question of why flexibility is of importance to the global factory system.
The answer lies in the reality of contemporary globalisation. The growth in globalisation has undoubtedly increased business opportunities in opening up new markets and production locations. But it has also increased interdependency and competition. This, in turn, has increased volatility. Volatility has increased within the three major market groups—financial, product, and labour. Financial and product markets have experienced growing interdependency and, financial markets at least, are highly global with shocks rapidly spreading through contagion effects. Product markets are also characterised by mounting levels of global independency bringing increased competition, new sources of competition, shorter product life cycles, and immense pressure to reduce costs. While labour markets are characterised by lower levels of global interdependency, their volatility levels have also increased. This has occurred through cross-border flows of labour (legal migration in the case of integrated regions such as the European Union [EU]), illegal migration (resulting from significant unrest in areas such as the Middle East) and the transfer of work overseas through offshore sourcing.
Higher levels of volatility are now characteristic of a wide range of tradable products and services and are apparent on both the demand and supply sides of international business activities (Buckley & Casson, 1998). On the demand side, product standardisation enhances consumer choice reducing buyer loyalty. Sellers seek to reduce such volatility through continuing innovation, branding, and the extension of brands to signal life style, as well as various lock in mechanisms such as loyalty schemes. Supply side volatility results from rapid innovation, shorter product life cycles and the need to achieve economies of scale and cost minimisation. Producers have access to a far wider range of potential suppliers as the worldwide market for market transactions (Liesch, Buckley, Simonin, & Knight, 2012) has both widened and deepened. Accessing factors in overseas locations has been facilitated by the adoption of more open market regimes as trade and investment restrictions have been relaxed (Sauvant, 2016). At the same time, technological innovations in transport and communications have facilitated the management of externally sourced transactions (Hummels, 2007; World Bank, 2009).
There have been a number of changes in the international business environment that have contributed to growing volatility. One has been the rise of significant new competitor nations, most notably, some of the major emerging economies that have added to global competition and locational choice, marking an end to the ‘Golden Age of Western Capitalism’ when global production was dominated by a smaller number of enduring nations (Marglin & Schor, 1992). Some of the growth of emerging economies has been at the expense of traditional industrial powers including the USA and parts of Europe (Baldwin, 2013). Second, a number of governments seeking to improve national competitiveness have initiated policies, including liberalisation, deregulation, privatisation, and enhanced labour flexibility, that have added to global volatility through growing market interdependency. Changes in political and social attitudes towards economic power and domination have been reflected in increased internal competition within large international businesses, which have added to operational uncertainty and volatility. In the face of significant volatility, international businesses seek flexibility which contributes to resilience, the ability to absorb and adapt to shock events.
Volatility also affects structural decisions of the firm. If markets are growing strongly, sunk investments in supply or distribution facilities can be offset against rising sales volumes. Similarly, investments are unlikely to be reversed. For these reasons, the firm may be happy to internalise such activities, undertaking them under shared ownership. However, market volatility emphasises the need to seek lowest costs and increases the likelihood that some markets may need to be abandoned. In such a scenario, externalisation, pushing some of the risk onto partner organisations, both upstream (supplying inputs and products) and downstream (distribution and sales), may be the preferred option. For these reasons, volatility, the pursuit of flexibility, and growing externalisation, are all interrelated.