Strategic Management: Formulation and Implementation

Production Sharing

In the late 1970s Peter Drucker introduced a new concept of international business and trade. He labeled this concept production sharing and described it as:

... the newest world economic trend. Although production sharing is neither "export" nor "import" in the traditional sense, this is how it still shown in our trade figures and treated in economic and political discussions. Yet it is actually economic integration by stages of the productive process.

Production sharing is different from the traditional idea of international trade. It is a transnational business integration -a new relationship made possible by technological and business forces. Drucker describes the whole process as follows:

Men's shoes sold in the United States usually start out as the hide on the American cow. As a rule the hide is not tanned, however, in the United States, but shipped to a place like Brazil for tanning -highly labor- intensive work.

The leather is then shipped - perhaps through the intermediary of a Japanese trading company - to the Caribbean. Part of it may be worked up into uppers in the British Virgin Islands, part into soles in Haiti. And then uppers and soles are shipped to islands Barbados or Jamaica, the products of which have access to Britain, to the European Common Market, and to Puerto Rico, where they are worked up into shoes that enter the United States under the American tariff umbrella.

Surely these are truly transnational shoes. The hide, though it's the largest single-cost element, still constitutes no more than one quarter of the manufacturer's cost of the shoe.

By labor content these are "imported shoes." By skill content they are "American-made." Raising the cow, which is capital- intensive, heavily automated, and requires the greatest skill and advanced management, is done in a developed country, which has the skill, the knowledge and the equipment.

The management of the entire process, the design of the shoes, their quality control and their marketing are also done entirely in developed countries where the manpower and the skills needed for these tasks are available.

Another example of production-sharing is the hand- held electronic calculator. It many carry the nameplate of a Japanese company -but this the only thing on it that is "Made in Japan." The electronic chips came from the United States.

They were assembled in Singapore, in Malaya, in Indonesia, perhaps in Nigeria. The steel for housing many be the product of an Indian steel mill. And then, in some free-port zone in Kobe or Yokohama, the label "Made in Japan" was put on. The calculator is the sold over the world -the bulk, of course, in developed countries. The design, the quality control, and the marketing of the calculator were handled by a Japanese company located in a highly developed country.

The stages of production that require high technology, tight quality control, high capital investment -that is the design and manufacture of the chips -were also handled in a developed country, the United States. But the labor-intensive work was done in developing countries.

Production sharing offers both the developed and developing countries of the world a chance to share their resources and strengths for their mutual benefit.