Question
Read the case Logitech below and answer the following question:
Question 1
To what extent can the different trade theories (Theory of absolute advantage, Theory of comparative advantage and Factor Proportions Theory) explain Logitech's configuration of its global value chain? Analyze the relevance of each Theory.
See Logitech's case below :
:
Logitech Best known as one of the world's largest producers of computer mice, Logitech is in many ways e 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, alose to many of America's high-technology enterprisesa 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 openeda 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 st, 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 well- developed 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
Explanation / Answer
The example of Logitech is one of the most amazing showcase of implementation of various economic theories into execution one of the most important factor for this exponential growth of company is the use of different theoretical concept for example they use theory of absolute advantage in making their devices equipped with cutting end technology by establishing their R&D in Switzerland, the ergonomics of the devices is taken care by Ireland, California having absolute advantage in marketing is used as a place to establish the headquarters and Asia with cheap labor is used for mass manufacturing the devices. Apart from it the theory of comparative advantage says that if the opportunity cost of producing one good is less than another than the company should go for producing that good which requires low opportunity cost. This principle is implemented when the company restrict themselves with certain computer peripherals and hence they have an advantage as their opportunity cost for those peripherals are less. The theory of factor proportions says that different countries have different set of labor and technologies and hence Logitech use te expertise of different countries and thus outsource their different modules of production to make their business more profitable.
