LOGITECH Best known as one of the world’s largest producers of computer mice, Lo
ID: 391848 • Letter: L
Question
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.
Slide 2: (This slide must have the following heading – for each configuration add a new row to the table) Configuration Why this configuration?
Slide 3: For each theory add a new row to the table. Theory To what extent can the theory explain Logitech’s configuration of its global value chain?
Slide 4: Which global business theories, in your opinion, give the best explanation of Logitech’s global value chain? Clarify and discuss your choices.
Explanation / Answer
Slide 2: (This slide must have the following heading – for each configuration add a new row to the table) Configuration Why this configuration?
The value chain involves a company’s conversion of raw materials into outputs that are usable in the end products by adding value to them. It is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. The value chain activities can be segregated into primary and secondary or support activity. The primary activities include manufacturing, inbound and outbound logistics, as well as sales and service. The secondary activities involve procurement, firm infrastructure, human resource management, and technology development. A global value chain is depicted by a company locating various activities of their work in separate countries that maximize the efficiency of the value chain. The global value chain enables a company to increase its competitiveness among other companies. The company gains access to global resources and skills. However, proper management is required as the dispersed activities of the global value chain can lead to success or even failure of the company. Logitech International S.A. is a Swiss provider of personal computer and mobile peripherals, with its headquarters in Lausanne, Switzerland and administrative headquarters in Newark, California. Although the company was founded in Switzerland, it has spread out its activities in various countries over the years. The headquarters is in California, manufacturing is done in Taiwan, and productions are done in China, with parts being supplied from Malaysia and USA. Logitech managed to increase its productions because of the globalization and was able to win prestigious clients like Apple and IBM. Each of their activities are spread out in different countries with consideration of low costs and high volume. Such kind of success can only be achieved through efficient operation management. Cheap but skillful labor in China has enabled the company to have more productions. Research and development is a key element to attaining global economies of scale. The company has kept the key element in their home country. The overseas investments are in countries with low wages and generally stable scenario. The globalization of the company has resulted in the company to being the world’s largest known producers of computer mouse of different kinds, both wired and wireless.
Slide 3: For each theory add a new row to the table. Theory To what extent can the theory explain Logitech’s configuration of its global value chain?
Different kinds of international trade theories tries to explain how and why countries involve themselves in international trade and the implications of the trade. The trading, benefit people or entities in different ways. There are factors that are used by businesses or companies to their interests. Due to the international market a company is able to manufacture and export products they can effectively produce and, import products effectively produced in other countries.
A list of different theories that have a bearing on the Logitech case are Comparative advantage theory, Absolute advantage theory, New trade theory, Porter’s Diamond theory and Heckscher-Ohlin theory. The relevance of these theories are explained in the following paragraphs.
In the 19th century David Ricardo an economist recognized that a nation may be good at producing all products but would be more efficient by specializing in one. The international trade has been revolutionized by technological advancements, connectivity, liberalization of trade and globalization. Differences in the opportunity costs of production explain the comparative advantage theory. The comparative advantage has seen countries specializing in production of goods that they are able to produce at low costs that increase productivity. The comparative advantage helps a country know what they can specialize in. The specialization can be on what they do best while outsourcing the rest of the activities so as to optimize their cost price to maximize their profit and invest on the right kind of product. Availability of low cost labor in a country can lead the country specializing in production of goods that require lower costs. A country with capital availability will specialize in activities requiring large amounts of finances. In the Logitech case the high productions in China at a low cost is a comparative advantage to the company. Hence, Logitech opened their production base in China to utilize the cheap labor of that particular country instead of in their own country, where labor costs are much higher and would lead to higher cost price of the mouse.
Absolute advantage in a country’s production applies when they are able to efficiently produce goods more than other countries. Therefore, absolute advantage refers to differences in productivity of countries. When a country requires less quantity input to make more production than some other country, they are considered to have an absolute advantage. The absolute advantage is based on a country or company being able to produce effectively at the same time using minimal resources. In the Logitech case, China availability of cheap labor is an example of an absolute advantage. The distribution of operations in different countries where each country is great at performance of a particular operation is an absolute advantage. The opening of a company in Taiwan takes advantage of the absolute theory. In Taiwan there is skilled labor, an expanding computer industry and provision of space in a science-based industrial park. The absolute advantage helps a company gain a competitive advantage over rival companies. The company is able to spend less while making profits because of the distribution of activities.
The new trade theory suggests that countries can benefit from trade with each other even when they do not have differences in resources and technology. This theory supports the first movers’ advantage. The theory highlights the importance of geographical location of a company. The location preference is close to customers and suppliers to help lower transportation costs. Large population areas make a good center for production of various goods. The new trade theory also focuses on the individual characteristics of a company. Therefore, the theory recognizes that there can be variations between organizations. This is relevant to the Logitech case because it was able to win prestigious customers like Apple who were buying their mice from the Alps, a Japanese firm. Therefore, Logitech was able to compete over the Alps firm by expanding in Taiwan, where they could produce more at lower costs.
The Heckscher-Ohlin theory suggests that a comparative advantage is because of national endowment factors. The factors include labor, land, or capital. Using this theory countries are able to produce goods whose production require their most abundant resources. The theory allows for trade to be influenced by factor endowment and not just differences in technology. International outsourcing in a country provides economical access to production technologies that are new. The outsourcing provides inputs that were previously not present. In the case of Logitech, China provides labor while a country like Taiwan has space in the industrial park and skilled personnel. The theory is relevant to the company as they have outsourced most of their activities to different countries. The outsourcing helps in creating a quality product at a low cost. Thus, combined with high productivity in a low wage country they are able to sell their product at a cost that is not at all expensive and hence attract more clients.
The Porter diamond theory looks into the factors that make some regions have certain industries. There are six factors in the theory that include, factor condition, public policy, home-country demand, competitiveness, supporting and related industries and chance. The factor condition explains why some regions may have particular industries. The factors such as natural and created endowments to some extent affect the activities in the region. The size and nature of product demand in a home country influence industry development. The demand also plays a major role in a company’s potential in seeking a global position. Related support industries help shape an organization because of presence of suppliers of a product. Public policy and chance are the last components of the model. Incentives, infrastructure, subsidies and protection are government policies that can nurture global industries. The chance component is influenced by entrepreneurial initiative, occurrence of scientific breakthrough as well as the luck factor. The organization in this case study is seen to consider these factors in distributing their activities to regions that do well in particular industries. Hence, they are able to stand out in the global market and acquire important clients, as they are able to provide good quality products at minimal cost.
Slide 4: Which global business theories, in your opinion, give the best explanation of Logitech’s global value chain? Clarify and discuss your choices.
Comparative and absolute advantage theories can be best used to explain how Logitech’s global operations are configured. The comparative theory says that a country benefits when involved in trade when there is absolute advantage where they produce all goods. A lot of their products are manufactured in China, where they employ a large population of people. Manufacturing done in China is cost effective because of a large population of people living in semi-urban areas. Therefore, the government would allow for foreign companies to help in the population earning of a livelihood. The mass manufacturing enables employment of many people. Specialized services such as sorting and packaging, quality control, simple manufacturing and processing, are carried out in China. The activities are possible because of the availability of cheap labor. Availability of the space in the industrial parks in Taiwan, solve the problem of acquiring land for the investors. High-value-added products can be found in the industrial environment. In Taiwan there are qualified people with an expanding computer industry. Launching of new products is done in Taiwan as well as operations management. Logitech takes advantage of the facilities in Taiwan to produce quality products. Employing skilled staff avoids the cost of training staff in their home country for productions. The industrial parks provide a strong demand base for parts of a computer. Therefore, the manufactured products are also consumed in the same place. The industrial parks also mean that the company will not need to start from scratch in a foreign country. Rather the company uses existing facilities to their advantage of making more productions. Basic research and development is done in Switzerland and California. Retaining some of the basic activities in Switzerland is an important strategy. The country is known for precision industry and have the right talent to develop the software used in mice. The company in California provides Logitech with an opportunity to interact with other companies. The research and development carried out in California has the advantage of emerging technologies because of the Silicon Valley. Porter’s diamond theory can also be used to explain Logitech’s global value chain. The factors in the theory apply to locations where the company plants are located. The availability of related and supporting industries in USA and Taiwan is an advantage to the company. The industries help the organization stay in touch with modern technology and new innovations.
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