Networked enterprise: A new business model for global sourcing

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Int. J. Production Economics 87 (2004) 267–280

Networked enterprise: A new business model for global sourcing Walter W.C. Chunga,*, Anthony Y.K. Yamb, Michael F.S. Chana a

Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hung Hom, Hong Kong, China b Hasbro Far East Ltd., Hong Kong, China

Abstract The challenge of global sourcing is to have a management in sourcing operations that is difficult to imitate by competitors. Global companies are now striving to develop a sourcing strategy to support a new business model that caters for operations in any parts of the world. This paper proposes that the development of a new business model in an established firm will depend on the extent to which a firm leverages the factor conditions and resolving conflicts. A framework is developed to describe the dynamics of business model. A case study on Hasbro Far East Inc is presented to show the development of an information hub as their new business model. The findings of the case study support the argument that factor conditions and conflicts play a key role in determining the success of transforming to a new business model. Thus, the transformational path to information hub is dependent on the extent to which these conditions are played out in the new arrangement. Future research should concentrate on development of collaborative process to align activities. r 2003 Elsevier B.V. All rights reserved. Keywords: Knowledge management; E-business; Supply chain; Outsource manufacturing; Information technology infrastructure; Inter-organizational network

1. Introduction 1.1. Manufacturing in the information age In today’s manufacturing environment, competition is marked by shorter product life cycles, increasing demand for product customization. Discrete manufacturers were under pressure from customers to move away from the traditional ‘‘make-to-stock’’ production model to ‘‘build*Corresponding author. Tel.: +852-2766-6611; fax: +8522362-5267. E-mail address: [email protected] (W.W.C. Chung).

to-demand’’ customer service model. This creates the need to leverage product information throughout the supply chain and greater visibility among the supply chain to ensure customization and rapid delivery of innovative products. Manufacturing enterprises must take a smarter, more objective-driven and process-wide approach to product design and manufacturing. Manufacturing enterprises will contract out more and more activities and retain core-performing activities which will result to a more dependency to a networked of suppliers. For global sourcing, this arrangement will lead to a de-centralized supply chain management and one without the necessities of incurring the cost of owning all the players.

0925-5273/$ - see front matter r 2003 Elsevier B.V. All rights reserved. doi:10.1016/S0925-5273(03)00222-6

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Successful cases are characterized by enterprises actively seeking unique ways to achieve such arrangement to create their own business model (Magretta, 1998a, b). 1.2. Strategy for global manufacturing Global sourcing will be transformed from one that purely performs the task of sourcing input to one that coordinates and manages the entire supply chain. They also need to design value chains to suit heterogeneous customer demand. This calls for a new transformation in the recurring buyer–seller relationship that exists between the sourcing company and the production network. We refer this as the new paradigm of networked enterprise. Traditional paradigm emphasizes the outsourcing of activities through strategic contracts to acquire operational efficiency or to enhance value-adding business capability by allowing the company to more effectively utilize its inputs (Porter, 1996). The strategic options need to consider the location of organization boundaries and the configuration of sourcing arrangement (Domberger, 1998). However, a survey carried out by Andersen Consulting found that strategic contracts need to be in place for as long as 10 years in order for the host enterprise to achieve sustainable competitive advantage (Coring, 1999). Such outsourcing model of managing activities may not be suitable to markets characterized by steep rates and costs of innovation. The new paradigm focuses on the unbundling of activities with multiple businesses, each with its own source of competitive advantage. Enterprises will need to link them up together for a new business model of which it is part. The competition will be among value chains and production networks rather than enterprise (Quinn, 1992; Agility Forum, 1997). This notion goes beyond the traditional model of activities outsourcing and requires higher order thinking about managing corporate activities. The implication of this is that the new paradigm asks for an alternative global sourcing strategy—one which move away from sourcing input to one that managing the production network structure.

The type of competence required to manage the supply chain in this new paradigm is significantly different. For example, it may require senior management to look at tier 2 suppliers or beyond, or examining the establishment of a common product platform (Chung et al., 2002), etc. Since competitors can acquire the same economic input from the region, competitive advantage in the new paradigm lies in taking control of business model and intelligently facilitate suppliers to link up together to fit in that model. 1.3. A win–win strategy For a global sourcing firm to gain competitive advantage from the business model the enterprise must learn new rules of engagement and unlearn previous assumptions and underlying models of behaviour; this form of learning is usually referred to as double loop learning in the organizational learning literature (Argyris and Schon, 1978). A common business conflict in purchasing occurs at the design–manufacturing interface. Manufacturing is an infrastructure business and design is an innovation business, both of them have conflicting business propositions (Hagel and Singer, 1999). When they are separated and distributed into different organizations, potential conflict will intensify, as the benefit of collaboration may not be evenly distributed. Thus, a win– win strategy approach is essential if diverse interests are to be aligned. The use of physical tools such as information technology (IT) is necessary to support the linkage among production network subsequent to alignment. There is a wide range of intangible and tangible benefits for exploration using IT supported business model (Libert et al., 2000). However, it can only be discovered through learning from both sides. The purpose of this paper is to explore this issue of networked enterprise as a business model for global sourcing. The authors seek to introduce a framework to describe production network as being the one that constantly drives to create a new business model. A case study is used to enhance the understanding of connecting enterprise with the production network.

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The paper is outlined as follows: Section 2 presents a discussion on the logic of a business model and the literature on economic network. Section 3 examines the benefits of linking up different enterprises using IT and introduces a conceptual framework highlighting the anticipated dynamics when connecting to the production network. Section 4 presents the case study of Hasbro Far East (HFE) in the light of previous discussion. Section 5 presents the discussion from the case study, followed by conclusion and further research in Section 6.

2. Literature review 2.1. The economic logic of a business model A business model answers the questions: Who is the customer? And what does the customer value? (Magretta, 2002). More importantly, a business model helps to answer the underlying economic logic that explains how we can deliver value to customers at an appropriate cost. A good business model becomes a standard for the next generation of entrepreneurs to beat. Creating a business model is synonymous to writing a new story involving working out a universal theme. All business models are variations of the generic value chain (Magretta, 2002). From the strategic viewpoint a business model can be thought of as a strategic fit among many activities. Porter (1998a) suggested that positions built on systems of activities are far more sustainable than those built on individual activity. Finding the best fit will yield a sustainable position in which the value delivered and the cost incurred makes much economic senses. From time to time, new activities are created and old ones are eliminated. The changing competitive landscape will erode the position, making the fit uneconomical and the business model will be disintegrated. Contemporary text suggests that business model is highly sensitive to the environment. A conceptual framework describing a set of elements of the business model is shown in Fig. 1. The macroframework describes that Internet plays a key role in facilitating business model.

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Business Model

Performance

Internet

Environment Fig. 1. A framework for operating a business model. Source: Afush and Tucci (2001).

The resource-based view suggests that a firm must maintain its own unique resource that is not easily imitated. In the business context, such resources as brand equity, organizational systems, relationships and network ties are the key components that to imitate them can be extremely expensive. 2.2. Economic network The notion of ‘‘network’’ is used to characterize any set of recurring ties (e.g. resource, friendship, information ties) among a set of nodes (e.g. individuals, groups, organizations, information systems and so on) (Fombrun, 1982). Recurring buyer–seller relations among a set of organizations in a market therefore qualify as a network phenomenon as do with the interactions among the members of a firm. The formation of economic networks as a field of organizational studies employed a number of different theories and approaches. These include industrial economics, organizational economics, industrial marketing and purchasing, organizational sociology, game theory, resources dependence theory, population ecology, institutional theory and social network approaches. Each strand of research has its own explanation about economic network and as the rationale underlying the formation of inter-organizational network (Ebers, 1997). Kumon states that the prevailing assumption about network formation is information exchange (Kumon, 1992) where he stated Networks are organized under the premise that information rights are legitimately established

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Table 1 Three economic institutions governing the allocation of resources among actors (Source: Ebers, 1997, p. 23)

Main co-ordination mechanism Information flows among actors

Market

Inter-organizational network

Firm

Bargaining and competition

Negotiation and concurrence

Authority and identification

Confined to terms of exchange (price, quantity, quality, delivery)

Higher degree of information sharing with regard to a wider spectrum of information

Higher degree of information sharing with regard to a wider spectrum of information

in some form or other at the same time partially restricted within them. The reason actors join a network is to share useful information/knowledge with other members, to achieve better mutual understanding; and to develop a firm base for mutual trust that may eventually lead to collaboration to achieve the actors’ individual as well as collective goals. It is often useful to view economic networks as an economic form and make comparative assessment with other forms namely, market and firm (Jarillo, 1988; Hennart, 1993). Table 1 shows the comparison. Industrial networks theory, network structures, and processes are assumed to emerge and develop around the matching of heterogeneous resources and heterogeneous customer needs (Hakansson and Johanson, 1993). And thus, the power of industrial network lies in its desire to capture change (Hakansson and Johanson, 1992). Firm, as an economic institution often focus on economy of scale or product homogeneity rather than heterogeneity. Easton and Rothschild (1987) uses the term adaptation to refer to organizational response for changes in technology or market. But against flexibility which is a much shorter term for an organization’s ability to response in handling routine heterogeneity. The advantage of negotiation over authority flourishes when there is heterogeneity of demand. The market structure is significantly different to the network type institution of exchange with a lower degree of information sharing and a lower range of spectrum of information being shared. Market structure lacks the information-sharing dimension, which is considered to be important. The co-ordination mechanism of the market is

based on bargaining power. By keeping networked business partners at the arms-length transaction, the buyer–seller relationship is managed through the market pricing system. Firm under the market exchange institutions neglects the inter-dependency and transmits changes by and large to their own suppliers.

3. Framework of a new business model in global sourcing In the near future, business model will be based on the greater connectivity within the supply chains. Product will be customized to the individual level. Fig. 2 shows a comparison of market economy and network economy models. It should be noted that outsourcing might not lead to connectivity as connectivity aims to capture benefits that arise from the organizing of the production network. The success of future business models will depend on two aspects. *

*

leveraging contextual factor conditions for changing opportunities; resolving conflicts through information sharing.

The uncertainty and unpredictability in firm’s environment cause heterogeneity of demand, especially in the ‘‘build-to-order’’ model. This condition is particularly salient in high-tech firm and there is a tendency for this industry to rely production network as a form of economic organizing. High technology-based companies flourish in networked arrangement in contrast to the traditional hierarchical organization (Saxenian, 1995). The contextual environment will play an important role in business and for managerial

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Market Economy Model Finished Products

Raw Materials and Components Brand Owner

Raw Component Intermediate Materials Manufacturer Assembler Supplier

Product Manufacturer

Distribution Retail Outlet Customer Buys and Shelves Product Shipping Stocked

Network Economy Model

Final Product Manufacturer

Unfinished Product

n tio ina on d r i t o Co orma Inf

Uncustomized Product Manufacturer

Finished Produc ts Customized Components

Custom Component Manufacturer

Warehousing and Shipping Brand Owner Shipping Coordinates the Details Supply Chain Finishing Details

Order Details

Order Relayed to Component Supplier

Customized Product

Customer

Places Order with Order Entry Customer Needs and Customer Service Centre

Fig. 2. A comparison between market and network economy model. Source: Reddy (2001).

implications, it would be better off to avoid high abstraction model that response to a faceless environment (Porter, 1998b). Heterogeneity of demand by far is the prevailing source of turbulence that an enterprise must respond to. There are other factors, such as technological, social and political factors that create uncertainty but their outcome are indiscriminately incorporated into customers want varying over time. Heterogeneity of demand can be associated with three major sources. The first source is the final or ultimate customer heterogeneity in demand. The second source comes from the structure behaviour of the economic system at the current time. The third source comes from the immediate downstream value chain customers (Easton and Araujo, 1997). Heterogeneity of demand played an important role in understanding production network organizing. It is the nature of production network to capture changes arising from the demand which gives its the edge over other kinds of institutional exchange in this environment. This is the major assumption underlying the prevailing framework of network organizing and business model. Another consideration of the business model is the physical distribution of design and manufac-

turing functions. As discussed earlier, design and manufacturing is inherently conflicting with each other and create transaction costs when they are distributed in different organizations (Hagel and Singer, 1999). Design and manufacturing functions have a high degree of information exchange in Bettis et al. (1992). Contractual agreement is often used to restrict information flowing away from partners; preventing them from collaborating with others. Such captive partners depend on one or a group of related customers for its business. The ability to switch partners at the design and manufacturing interface is low. Economies of scale of the manufacturing function is limited by that group of contracting customers and fixed cost can only be spread over a limited number of customers. In the contrary, a more merchant character of partners/suppliers emerges which is moving into the mainstream of production network (Sturgeon, 1999). It has also become the contemporary basis for high-tech manufacturer in the computer and peripheral sectors. Partners strive to limit interdependence and retain the ability to easily switch partners, allowing greater organizational flexibility. The flexibility will result in a more intensive

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capacity utilization resulted from industry-wide sharing. A more dynamic production network is formed with increased level of co-operative arrangement. Through co-operation, increased revenue comes from access to more better market access, or faster market entry; cost savings can be achieved through economies of scale and/or scope, economize on the governance costs of co-ordinating their activities (Hennart, 1991). This character of production system enables greater opportunities for learning and technology transfer and especially it can reconfigure elements of production according to changing output requirement and the rise of new market (Piore and Sabel, 1984). This leads to a lower barrier to entry and exist (Sturgeon, 1999) which would indirectly result in lower risk factor of investing in new business model. 3.1. Connecting the production network The complexity and intrigue mechanism involved in governing the production network implies that it cannot be created over night through intervene but instead its development process can be facilitated. Network is both stable and change; its dynamics is constantly shaping new business models. Nevertheless, senior management cannot change the organization overnight to facilitate a new business model. The motivation of developing business model is because of the ineffectiveness of the existing one. Obstacles exist in established organization to radical innovation in business. Organizations are designed for efficiency; changes and surprises are seen as negative and risky events. It is difficult to unlearn past wisdom of success, which has become irrelevant to the environment (Hamel and Prahalad, 1991). For this reason, the authors argue that new business model must be driven through the changing assumptions relevant to the fundamentals of the industry shift. Senior management will need to quickly recognize these changing assumptions and take action about it. In short, a chain of unlearning and learning takes place at the senior management level. Given today’s globalization context of production network, the authors contend that there are

two aspects of the environment that facilitate senior management to recognize the changing assumptions that are taking place. The first aspect is about the drivers for greater organizational response to changing environment. Four attributes has been identified, they are collaborative advantage, regional advantage, innovation capacity (knowledge resource) and competencies. As discussed previously, the heterogeneous demand may render existing organizations ineffective. New value propositions require radical innovation that cannot be delivered by established incumbents. Collaborative advantage implies that relationships, whether it is loosely defined or highly integrated can affect the performance of a team of enterprises; and thus competitive advantage is jointly created and shared among them (Dyer, 2000). Without collaboration with other business partners, advantage is limited to cost reduction through the market pricing system. Other performance aspects such as on time performance, timeto-market, quality becomes difficult to manage. The growth in product complexity demands these new value propositions. The source of the interorganizational competitive advantage comes from dedicated asset investment, knowledge sharing routes and inter-firm trust; all of which is built on the activities systems linked together for greater responsiveness. Regional advantage recognizes the advantage of collective enterprises operating in close geographical proximity (Saxenian, 1995). Regional advantage is about learning economies in which a sense of competition and community exists. While regional advantage is characterized as having a high start-ups and a high entrepreneurial spirit within the geographical proximity, it is the nature of blurring organizational boundaries that facilitates greater knowledge transfer and intensive interaction among the enterprises (Nohria and Eccles, 1992). The underlying principle is to learn together and to become individually specialized. The key for success is to recognize flexibility as the first priority than self-sufficiency so that the affiliated production network cans response to change as circumstances change. This means that overhead will be kept at a minimal and technological firms will rely heavily on the turnkey

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production network for manufacturing. Once production begins, relationship will evolve to different levels. This kind of relationship takes years to develop (Pauley, 1986) and the relationship is reinforced to become the norm at the regional scale. Regional network promote the development of their own technical infrastructure that allows an industrial systems that embrace flexibility, openness, and continuous innovation. Consideration must be taken by senior management to recognize such infrastructure, which represents greater responsiveness to markets in global economy. Innovation, be it production or service innovation, organizational or business system innovation, is a source of organizational responsiveness. An organization’s innovative capacity needs to consider information flow essential to innovation. With the globalization and advance in IT, senior management will need to monitor the information flowing in and out of the organization as they will directly affect the firm’s innovative capacity. Senior management must monitor the assumptions of how innovation is captured and as the underlying process of innovation becomes the key for incremental innovation, it is necessary to explore how this innovation can be channelled into real actual ideas for change. Senior management will also need to monitor activities and continuously improve them for operational effectiveness. The business is profitable if the value it creates exceeds the cost of producing such activities and continuous improvement of these activities lead to either lower costs or perform in a way that leads to differentiation; thereby can gain competitive advantage over other competitors (Porter, 1996). Specialized activities that cannot be developed in-house must be sourced externally. It is often easy to source from outside but how to undertake sourcing to improve operational efficiency or to enhance value-adding business capability is the key management concern. The assumptions of integration with in-house activities must be closely monitored for advantage in organizational responsiveness. The second aspect of the environment is about the co-operative architecture that helps to resolve the conflicts through information sharing. In the

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production network paradigm, particularly when design/manufacturing interface is separated, the flow of information intensified. While, co-operative architecture indirectly affects information sharing within informal network, formal information sharing can be better leveraged and utilized for competitive advantage. To date, it has been argued that there is not a defined method for forming informal network (Assimakopoulos and Macdonal, 2002). The attributes the co-operative architecture has been identified as extended enterprise collaboration and contract manufacturing. Both are essentially independent of each other. Extended enterprise collaborations are based on the firm’s orientation to the environment. Extended enterprise is defined as a set of firms within a value chain or production network that collaborate to produce a finished product (Dyer, 2000). Another definition for extended enterprise is that it is a loose partnership that is neither characterized as an arm’s length relationship nor a vertical integration (Dyer and Singh, 1998). The players within the value chain have created a set of collaboration processes that allow them to achieve virtual integration. It involves the seamless integration with its suppliers, customers and other partners that make up a networked fabric of communication and information exchange. The key to distinguish an extended enterprise from other form of industrial organizing is that it extends end-to-end, from a company’s customers all the way through to its component suppliers. The linkages along this chain are the critical pieces that give an extended enterprise its power, enabling real-time movement of communications and information to each participant in this extended enterprise (Browne and Zhang, 1999; O’Neill and Sackett, 1994; Szegheo and Petersen, 2000; Browne et al., 1998). An extended enterprise increases the connectivity between firms ultimately so as to improve the integration and the coordination of core competencies. Contract manufacturing is an emerging phenomenon with industry wide implications. Contract manufacturing refers to the recurring buyer– seller relationship at the design–manufacturing interface (Sturgeon, 1999). The relationship at

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Co-operative Architecture Environment

•Extended Enterprise Collaboration •Contract Manufacturing

Drivers •Collaborative Advantage •Regionalization Advantage •Innovation Productivity •Core-Competencies maintenance and development

IT infrastructure

New and evolving business model

Pressures for changing assumptions and value propositions

Fig. 3. A framework describing the dynamics of business model.

the design–manufacturing interface is inherently interaction intensive. Chan and Chung captures this assumption in the definition of contract manufacturing—a provider of goods and services working collaboratively with other providers of goods and services as networked business partners to satisfy market niches by exchanging information through an inter-organizational information system (Chan and Chung, 2002). For the purpose of this discussion, the authors adopt this definition. Contract manufacturing rides on the trend of vertical disintegration and the phenomenon that originates in the high-tech sector is now spread to other industries (Sturgeon, 2000; Royal, 1999). With globalization and the advanced of IT, activities can be efficiently coordinated and trade across national borders. Especially in geographical clusters, where there is a concentration of supply base, the host nation of the cluster can become a manufacturer for the world. Contract manufacturing is no longer about subcontracting but rather related to how the contract manufacturers take up more value added responsibility. This responsibility includes costing, purchasing, and logistics, which demand greater use of sophisticated information systems. The purpose of using these information systems are not only to coordinate activities but also to steer clear away from business that would damage the partnering relationship. There are examples of contract manufacturer who have clearly declared their strategic intent in the global business (Royal,

1999; Siekman, 2001). Thus, appropriate connection and information sharing among partners within the contract manufacturing operation is necessary. Fig. 3 shows the overall diagrammatic representation of the dynamics of business model. The environment is branched out into two major category that put pressures for changing assumptions and value propositions. The changing assumptions will create change to the existing IT infrastructure in order to facilitate new and evolving business model. Senior management should consider this framework as one that describes the dynamics of business model. It can be used to identify the control component within the organization to facilitate change management, conflict resolution and diverse interest accommodation with a mission for migrating to new business model.

4. Case study 4.1. Background of Hasbro Hasbro Ltd. is one of the world’s leading toy companies with many famous brand names in the world. It has annual sales of US$3.3 billion. Hasbro’s core business has the various functions including marketing, design and manufacturing of toys. The Hasbro group has little manufacturing facilities and relies on purchasing toys made

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4.2. The business model for Hasbro The product development function requires HFE on one side to constantly interact with Hasbro headquarter and on other side interact with the toy manufacturers. The linkages of HFE with its partners are shown in Fig. 4. HFE serves as an intermediary bridging Hasbro Sales & Marketing and the regional manufacturers. HFE is essentially operating in the design– manufacturing interface. The information flowing from marketing is processed and then pass

China Tier 2 Suppliers

Hong Kong

USA

Tier 1 Suppliers

HFE

Hasbro US

US Retail Distribution

produced from contract manufacturers. HFE is a purchasing office and it assumes the role of product development. Here product development is to execute Hasbro’s marketer’s ideas. HFE is responsible to carry out all activities from product concept to the shipping of product. Hong Kong invested manufacturers carry out the actual manufacturing of the toy product with factory located at the People’s Republic of China (PRC) across the border. In effect, HFE managed over 4000 of them for product manufacturing. The toy industry is a dynamic industry with a built-to-demand model. Each toy product is unique and the batch size is reducing ever. Toy industry rarely enjoy economies of scale because of the nature of toy industry and this highlights the importance of the product development function of turning paper concept into actual physical product. Globally, the high sale season for toys is during the Christmas vacation. Thus, product must ship to the warehouse and retail shop one month before the Christmas season—namely between mid-November and 24th December. A mishandling of the product development can cause toy business to lose potential market and thus, key driver for performance is responsiveness. There are key activities in the toy industry. They are design, components, assembly, logistics, marketing and services. The function of product develop is to coordinate the activities among design, components, assembly and logistics. HFE is responsible for such coordination in the form of project engineering and as the toy industry evolves, HFE will need to transform itself to better align with the environment.

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Managed process links Not Managed process links

Fig. 4. Representation of HFE with its links to partners.

onto the contract manufacturers as the product requirement. The entire process, from concept design to shipment takes an average of 60 weeks. However, the length of time is also dependent on the nature of the product such technology content, complexity, etc. Over the years, the complexity of the product increases because of customer requirement, safety regulations and technological content, etc., the amount of information flowing in and out of HFE increases, thereby creating a burden on staff and other partners. Moreover, product life cycle is reducing, putting pressure for shorter product development time. The complexity is attributed to the Hasbro business model. It is a totally demand driven model. The desire model of course is to have the entire supply chain to respond to the customer requirement almost instantly. The supply will have to integrate together, or to collapse at will to provide the necessary responsiveness to the changing market. As a result, HFE must transform itself to become a more effective centre in project engineering. HFE reviews its current activities and seek operational improvement to create value to the Hasbro group. 4.3. Shortcomings with existing business model The managed process link of HFE is extended to contract manufacturers and Hasbro US.

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Marketing

Assembly Logistics Services

Design Components

•Market Research and Hasbro forecasting

Worldwide

•Idea generation and inhouse •Product Distribution design design

•From port to warehouse and retail channels

•Pricing based on competitive analysis

HFE

Contract Manufacturers

•Product engineering •Resource and costing; BOM planning development •High value components are negotiated •Critical parts are sourced; ordered in advance

•Handle customer enquiry •Promotion and advertising •Customer Relationship Management

•Shipment to world-wide market in containers

•Labour Intensive •Build to order include with safety test

Fig. 5. The arrangement of activities for HFE.

Information is passed serially within the process link from market research to product development and then to shipment. The activities carried out are shown in Fig. 5. At a management review meeting, HFE senior management identifies HFE as a model of project management that processes information. Information are flowing in from the designers and flowing out to the contract manufacturers. Information is also feedback to the designer and marketer to reflect any problem within the product development process. The shift in business changing environment, particularly the shortening product life cycle is putting pressure on this model. This means that in order to retain the edge; HFE must theoretically have an ever-increasing information processing capacity. Senior management has agreed that this kind of project engineering model is no longer adequate to the environment. The shortcomings of this model are reflected in the followings: *

Product category does not match with the capability and the technology of the outsourcing manufacturers. There is no mechanism that prevents the wrong manufacturer being selected for the supply. This creates a host of problems: a longer lead-time in development, wastage of

*

*

the resources, high defective rate. All these lead to a higher product cost. Vendor relationship is limited to the ‘‘arms length’’ buyer and seller relationship. Such relationship is no longer preferred because Hasbro Group Sales & Marketing want to have better control over the product supply chain in a business environment that is highly dependent on heterogeneous demand and input. The lack of good mutual understanding between manufacturers and HFE becomes an impediment for each to anticipate change, resulting a rise in non-value activities that negatively affect performance on lead-time for both design and manufacturing. The current business model does not facilitate the development of a more lasting relationship at the lower-end of the supply chain for competitive advantage. It is noted that no advantage can be gained from the relationship with manufacturers that have input sourced from PRC and these input do not represent a unique resource. When other competitors also can source that resource, HFE loses that advantage.

After the meeting, HFE is pushing ahead for a break through in its business model for gaining

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competitive advantage in the market place. The existing project-engineering model must be transformed from one that is responsible for processing information to one that is responsible for handling knowledge. 4.4. The new business model The senior management concluded that appropriate IT infrastructure is needed to support HFE to become a knowledge management centre. The infrastructure will also need to extend beyond HFE organizational boundary into other enterprises located in the supply chain system such as contract manufacturers, OEMs, component suppliers and the marketers in the US. HFE will strike for greater connectivity with its partners. HFE senior management has assessed the current situation and the potential impact of the new arrangement with partners. The new arrangement aims to serve the strategic purpose of HFE of becoming a knowledge management centre—one that handles knowledge by aggregating diverse sources of information and redistribute them in a meaningful manner. The improvement gained in the product development process is to create value for the entire system. However, securing the value will inevitably create conflicts among connecting parties which are to be included in the risk assessment of the type of transformation. There are substantial risks involved in sharing information. Three types of stakeholders are represented by supplying partners (i.e. manufacturers and suppliers), HFE and Hasbro marketers in the US. In the new model, all of them are required to share information to each other instantaneously. To proceed, HFE management is required to negotiate with other parties in order to secure collaboration at the process linkages. HFE leverages its brand name and their mature product line to secure cooperation from manufacturers and suppliers. The motivation for the supplying partners to collaborate is the volume of orders that they can receive so that they do not risk idling their capacity. In the case of dynamic environment HFE can allocate orders to assure that a certain manufacturing capacity of supplying partners are to be absorbed.

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HFE also offer value to Hasbro US in the new collaboration. Market forecast and sales performance data are to be shared with the manufacturers so that they can prepare for market changes through stock replenishment. This enhances the planning of resources and capacity, which eventually lead to order consolidation at HFE. This allows HFE to become a major purchasing office in worldwide offices. In short, this sort of arrangement can remove the Bull Whip effect that exists in the traditional supply chain. This is done by greater transparency of information across the entire supply chain. To support this arrangement a new IT infrastructure is necessary which is discussed in Section 4.5. 4.5. IT infrastructure HFE has employed tools to form their basic IT infrastructure. They are: e-connected; livelink; Windchill and SAP. The e-connect delivers a collaborative e-business platform designed to connect business partners. It enables secure, selfservice business transactions via the Internet. The e-connect handle orders with partners with seamless integration to HFE system. Livelink is a project management system that provides enterprise information resources to the users. The major feature of Livelink is its ability to synchronize information to prevent the use of inaccurate and outdated information that is imperative to a product company. It is a content management system that connects different parties together. Other features include approval management, repository management, personalization and publishing. Livelink is used by HFE to connect with marketer in US and the world. Windchill is a tool that facilitates the codevelopment of product from idea screening to shipment. This tool allows engineering change to the product during development process. It allows interaction between designer, engineers and manufacturers to come together on-line to make product changes. SAP is a resource-planning tool commonly known as enterprise resource planning. Even though HFE does not posses any manufacturing function, its purpose is to aggregate individual

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forecasting together to plan for capacity. This enables the efficient use of suppliers to cut cost and waste.

LOGISTIC PARTNERS

STAKEHOLDERS •e-Logistic

5. Discussion: Networked enterprise as a business model •e-SCM

In addition to securing partnership collaboration, HFE must also need to develop into a centre of excellence. HFE senior management anticipate that collaboration from partnership allows them to capture following advantage: *

*

*

*

The new arrangement will allows HFE greater integration with partners—both suppliers and marketers. Trust will be accumulated develop as a result of future transactions. Knowledge sharing routine is also established to allow for fusion of knowledge from a diverse source. Using the new infrastructure to leverage hidden assets that are of intangible in nature, thereby creating synergetic benefits. The new arrangement changes the rules of engagement among manufacturers and HFE, which represents a new kind of advantage over other competitive sourcing companies. Greater opportunities to expand and exploit the innovative capacity of knowledge workers. Staff can concentrate on innovative activities rather than on non-value adding ones. The greater connectivity new arrangement will ensure the core competencies of the company for today do not become core rigidities of tomorrow. Established agile relationship that are both synergetic and for long term, allowing each other to anticipate changes in environment to pre-emptively eradicate the relational barriers between Hasbro and manufacturing partners.

The information hub of HFE has significantly changed the existing structure of the supply chain. The collective set of enterprises has become networked together and to some certain extend the industry structure has also evolved. The change of industry structure has implied that there is a change of competitive advantage. More importantly, the Hasbro group engaging in global

•HFE project Management HFE INFORMATION HUB •e-CRM

OUTSOURCING MANUFACTURER

CUSTOMERS

Fig. 6. Networked enterprise for global sourcing strategy.

sourcing has now a new source of differentiation from the economies of production network. This represents a unique type of resource that cannot be easily obtained from other competitions. The development of the HFE hub changes the rule of competition. Today’s business environment is characterized as value chain competition. The use of information hub is to coordinate value chain together seamlessly and cost effectively. HFE has experienced a drop of 24% product development time when the HFE hub is deployed. Development of information hub at HFE is something for other industry to replicate. While the actual content of the hub is company specific, the concept can be replicated for other industries in which the ‘‘Build-to-order’’ is the dominant form of production operation. The information hub in Fig. 6 represents an alternative form to control activities in a distributed and connected operation beside market pricing and vertical integration. Despite that IT is the most recognizable form of transformation, the ultimate challenge lies in the organization change with political implications. Such model with such scale and scope implies that this is something for others to beat in global sourcing.

6. Conclusion and future research This paper offered a business model of networked enterprise for global sourcing. For established incumbent company, forming a new business model of operation with radically change

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is not practically feasible. To them, the success of future business models depend on the extent of the two pre-conditions to transformation. The first aspect is to leverage the contextual factor conditions for the changing opportunities, the second aspect is to resolve conflicts through information sharing. A business model is enabled by an IT infrastructure of which the operating assumptions is directly determined by extend of the two conditions—the drivers for greater organizational response to the changing environment and the cooperative architecture for information sharing. A framework is presented to describe the dynamics of business model. A new business model becomes a standard for next generation of entrepreneurs to beat. Using the case of Hasbro as an example, the concept of information hub becomes a powerful business model of networked enterprise. The results are encouraging in reinforcing the position of HFE for global sourcing strategy. The findings of this case support the argument that successful transformation is both dependent on the extend of success in leveraging factor conditions and resolving conflicts. This provides further insights in the formation of inter-organization network. As suggested by other researchers in this area, the difficulties are reflected by the lack of method to guide the formation of informal network (Assimakopoulos and Macdonal, 2002). Future research should concentrate on studying the use of modelling and design tools for the purpose of aligning activity through a collaborative process in order to attain new inter-organizational business arrangement. In particular, when factor conditions and inherent conflicts play a significant role in determine the structure activity system, any changes to the system must be facilitated with a collaborative process.

Acknowledgements The authors acknowledge the support offered by Central Grant of The Hong Kong Polytechnic University under Project Number: GV-581.

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