What is the most likely benefit of operating a company facility in a foreign country?

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Many companies are not tapping the full potential of their foreign factories. They establish and manage their foreign plants to benefit only from tariff and trade concessions, cheap labor, capital subsidies, and reduced logistics costs. Therefore, they assign a limited range of work, responsibilities, and resources to those factories.

But there are companies that expect much more from their foreign factories and, as a result, get much more out of them. They use them not only to gain access to the usual incentives but also to get closer to their customers and suppliers, to attract skilled and talented employees, and to create centers of expertise for the entire company. These factories perform functions beyond mere production—functions such as after-sales service and product engineering. For example, Hewlett-Packard Company’s factory in Guadalajara, Mexico, not only assembles computers but also designs computer memory boards. 3M’s operations in Bangalore, India, manufacture software and write that software, as well. In Singapore, workers have designed and manufactured two popular pagers for Motorola. And Alcatel Bell’s factories in Shanghai are two of the most innovative plants in its worldwide manufacturing network.

3M’s operations in Bangalore, India, manufacture software and write it as well.

The difference between the two approaches lies in the way managers have answered a seemingly simple, but fundamental, question: How can a factory located outside a company’s home country be used as a competitive weapon not only in the markets that it directly serves but also in every market served by the company? I have found in the research I have conducted over the past five years that if managers do not consider manufacturing to be a source of competitive advantage, they are likely to establish foreign factories with a narrow strategic scope; they then provide those factories with limited resources. In contrast, if managers regard manufacturing as a major source of competitive advantage, they generally expect their foreign factories to be highly productive and innovative, to achieve low costs, and to provide exemplary service to customers throughout the world.1

Expecting More from Foreign Factories

It is difficult if not impossible to prove quantitatively how much any factor, let alone an attitude or approach, is responsible for a company’s overall success. Nevertheless, after decades of studying and working with multinationals, I am convinced that the companies that treat their foreign plants as a source of competitive advantage are rewarded in the form of higher market share and greater profits. Moreover, I believe that because of increasing global competition, the gap between the companies that treat their foreign plants as a source of competitive advantage and those that do not is widening. Indeed, managers with a limited view of what a foreign factory can or should achieve are falling out of step with three current realities of global business.

First, declining tariffs are reducing the importance of establishing foreign factories as a means of overcoming trade barriers. Tariffs have declined worldwide from an average of 40% in 1940 to 7% in 1990. Trade pacts—GATT, the European Union, NAFTA, Mercosur, and others—are accelerating that reduction. GATT has recently propelled governments from Indonesia to Argentina to issue their first multiyear schedules for reducing tariffs.

This trend is making life difficult for factories that have owed their existence to tariff barriers. For example, faced with declining tariffs in Australia, Nissan closed its plant in Clayton, Victoria, in 1992. In addition, tariff cuts in many South American and Asian countries figured prominently in Procter & Gamble’s decision to close many of the 30 plants it has shut since 1993 as part of its Strengthening Global Effectiveness program.

Second, the increasing sophistication of manufacturing and product development and the growing importance of having world-class suppliers are causing more multinationals to place less emphasis on low wages when they are choosing foreign manufacturing sites. According to the latest data compiled by the United Nations Conference on Trade and Development, in 1994 ten industrialized countries—the United States, the United Kingdom, France, Germany, Spain, Canada, Australia, Holland, Belgium, and Italy—received half of the world’s foreign direct investments and accounted for two-thirds of the world’s accumulated stock of foreign direct investments. The largest recipient was the United States: by 1994, foreign multinationals had more than $500 billion invested in the United States, up from $80 billion in 1980. That cumulative investment nearly equaled the total amount that multinationals had invested in the world’s 154 developing countries. Britain, with $214 billion, was the second-largest recipient, followed by France and Germany.

None of these recipients offers cheap wages, materials, or capital costs. Clearly, leading manufacturers recognize that low wages, grants, and subsidies do not necessarily mean low total costs. Indeed, the low wages available in many countries, after adjusting for productivity, lose their attraction. For example, although manufacturing wages in India and the Philippines are much lower than those in the United States, their average manufacturing labor cost is higher after adjustments are made for productivity.

When superior manufacturers do establish plants in developing countries, they take care to locate their factories in the areas that have the most advanced infrastructure and workers’ skills rather than in the areas that offer merely the lowest wages. For example, 3M chose Bangalore as a manufacturing site. Land is more expensive and wages are higher there than in many other places in India; but Bangalore offers the advantages of skilled labor and suppliers, as well as sophisticated competitors. Similarly, Xerox chose to produce copiers and toner in Shanghai, and Motorola located its pager-manufacturing facility in the port city of Tianjin. Shanghai and Tianjin are two of China’s higher-cost cities. Companies like Xerox and Motorola accept the additional cost of locating their factories in these places. To achieve a higher level of productivity than other companies commonly achieve, they plan to run their plants with more sophisticated production processes.

Third, the pressure to transfer ideas from development to production ever more quickly and efficiently is pushing companies to forge a close working relationship between those two functions. Many companies are concentrating production and development in the same organizational and geographical unit. This trend marks a departure from the conventional wisdom, which holds that the role of the foreign plant is to produce what has been designed and developed at corporate headquarters. Managers who adopt this view believe that because the resources needed to design and develop products are expensive, dividing them into small fragments and spreading them across multiple locations is not economical.

Superior manufacturers, however, have resolved this dilemma by turning their factories into specialists. For example, a company that makes printers might structure its manufacturing network so that one site develops and manufactures integrated circuit boards, a second power supplies, and a third toner and cartridges. Each of these units becomes the custodian of specialized development and manufacturing knowledge for the entire company.

Why spread these specialized units around the globe? Why not keep them in one location or close to one another? Why not keep them in the home country? Because a company would miss opportunities to collect and digest the expertise that other regions have to offer. A ceramics producer operating a factory in New York’s “Ceramic Valley,” the area around Corning where many companies in the ceramics industry are located, is bound to learn more about the latest advances in technology than a producer that operates elsewhere. For similar reasons, a manufacturer of medical instruments is likely to benefit from having a factory in Minnesota’s “Medical Lane” near the Mayo Clinic; a maker of watches or watch components from having a factory in the area of Switzerland and France around Jura; and a textile machinery producer from having a factory in northern Italy.

Defining the Six Strategic Roles

Because each foreign factory inevitably has its own unique history and challenges, articulating its strategic role can be difficult. Classifying the different roles can help reduce this complexity. Start by answering two basic questions about each factory: What is the primary strategic reason for the factory’s location? and What is the scope of its current activities? Based on the answers to these questions, managers can use a framework I developed to categorize plants and to determine how to expand their roles. (See the sidebar “Charting the Strategic Roles of Foreign Factories.”)

Offshore Factory

An offshore factory is established to produce specific items at a low cost—items that are then exported either for further work or for sale. Investments in technical and managerial resources are kept at the minimum required for production. Little development or engineering occurs at the site. Local managers rarely choose key suppliers or negotiate prices. Accounting and finance staffs primarily provide data to managers in the home country. Outbound logistics are simple and beyond the control of the plant’s management.

Source Factory

The primary purpose for establishing a source factory is low-cost production, but its strategic role is broader than that of an offshore factory. Its managers have greater authority over procurement (including the selection of suppliers), production planning, process changes, outbound logistics, and product-customization and redesign decisions. A source factory has the same ability to produce a product or a part as the best factory in the company’s global network. Source factories tend to be located in places where production costs are relatively low, infrastructure is relatively developed, and a skilled workforce is available.

Server Factory

A server factory supplies specific national or regional markets. It typically provides a way to overcome tariff barriers and to reduce taxes, logistics costs, or exposure to foreign-exchange fluctuations. Although it has relatively more autonomy than an offshore plant to make minor modifications in products and production methods to fit local conditions, its authority and competence in this area are very limited.

Contributor Factory

A contributor factory also serves a specific national or regional market, but its responsibilities extend to product and process engineering as well as to the development and choice of suppliers. A contributor factory competes with the company’s home plants to be the testing ground for new process technologies, computer systems, and products. It has its own development, engineering, and production capabilities. A contributor factory also has authority over procurement decisions and participates in the choice of key suppliers for the company.

Outpost Factory

An outpost factory’s primary role is to collect information. Such a factory is placed in an area where advanced suppliers, competitors, research laboratories, or customers are located. Because every factory obviously must make products and have markets to serve, virtually all outpost factories have a secondary strategic role—as a server or an offshore, for example.

Lead Factory

A lead factory creates new processes, products, and technologies for the entire company. This type of factory taps into local skills and technological resources not only to collect data for headquarters but also to transform the knowledge that it gathers into useful products and processes. Its managers have a decisive voice in the choice of key suppliers and often participate in joint development work with suppliers. Many of its employees stay in direct contact with end customers, machinery suppliers, research laboratories, and other centers of knowledge; they also initiate innovations frequently.

According to this framework, foreign factories can fall into any of six categories. An offshore factory is established to gain access to low wages or other factors integral to low-cost production. Its responsibilities are limited to the low-cost production of specific items that are then exported either for further work or for sale. Such a factory is not expected to be innovative; its managers follow the instructions, methods, and plans handed down to them; and they rely on others to provide the expertise in new processes, products, and technologies. A source factory also is established to gain access to low-cost production; but unlike an offshore factory, it has the resources and the expertise to develop and produce a part or a product for the company’s global markets. A server factory is a production site that supplies specific national or regional markets. A contributor factory both serves a local market and assumes responsibility for product customization, process improvements, product modifications, or product development. An outpost factory is established primarily to gain access to the knowledge or skills that the company needs. Finally, a lead factory has the ability and knowledge to innovate and create new processes, products, and technologies for the company.

A source factory develops and produces a part or a product for a company’s global markets.

Some factories combine two or more of these roles. For instance, a factory may be a server for a specific region and an offshore site for the production of certain components. Indeed, any type of factory may have a secondary strategic role—such as providing an operational hedge against currency risks, acting as an alternate source of supply for a critical component, or preempting competitors in a national or regional market. Nevertheless, this simple framework is helpful in articulating the strategic contributions of most foreign factories.

Determining the Strategic Role

After assessing each factory’s current role, the next step is to determine the future role that the company’s leaders would like each to play. Sometimes internal events drive the decision to change a factory’s role. For example, a merger adds new factories to the network; the product mix changes; or other factories in the company’s global network become bigger or smaller.

At other times, external events drive the need for change. For example, as the details of the 1992 European Union were unfolding in the late 1980s, manufacturers that had plants scattered across many European countries were forced to question why they needed so many server factories; and those that had plants in only a few countries were forced to ask how they were going to supply new markets or cope with new competitors in their existing markets. Today Mercosur and NAFTA are raising similar questions for manufacturers in South America and North America.

More subtle external factors also may create the need for change. Increasing wages, declining tariffs, and a growing local market may prompt a company to turn an offshore factory into a server. For example, European and U.S. electronics manufacturers turned some offshore factories in Malaysia into servers after increases in Malaysian wages had reduced their production cost advantage and growing local demand had provided an alternative to the European and North American markets. In contrast, the rising productivity, product quality, and dependability of a factory in China, combined with low wages and government incentives to export, may prompt a company to turn a server factory originally built to supply the Chinese market into an offshore factory for supplying low-cost components to other markets.

A company’s business strategy should determine the decision to change a factory’s strategic role. I devised a strategic matrix to help managers visualize such changes. (See the exhibit “The Roles of Foreign Factories: A Strategic Matrix.”) In order to increase manufacturing’s strategic contribution, a company generally must upgrade the role of its foreign factories, moving them up the matrix. Alternatively, it may choose to keep a given factory in its current role, to move it horizontally across the matrix (from source to contributor, for example), to move it down the matrix, or, if it is already at the bottom of the matrix, to close or divest it. Different moves present different challenges.

The Roles of Foreign Factories: A Strategic Matrix

In the easiest case, a factory is in a low position—an offshore, an outpost, or a server—and remains there. Almost every foreign factory starts in the lower part of the matrix. And some companies, for sound reasons, keep many of their factories in those positions. Coca-Cola Company, for example, has many bottling plants that are servers and are likely to remain in that role. Because of high transportation costs, Coca-Cola will always need hundreds of bottling plants around the world, each of which serves a relatively small geographic market. These plants receive concentrated Coke syrup and, following specific methods and adhering to strict standards, add water and other ingredients to make the final product. Even minor adjustments in the formula to adapt the product to local tastes require approval from regional or corporate headquarters. Of course, a plant kept in a limited strategic role may still have to improve its performance. Indeed, good manufacturers are relentless in their quest for improving the quality, cost efficiency, dependability, and flexibility of all their production operations no matter their strategic scope.

Moving a plant horizontally across the matrix usually requires a substantial overhaul of its organization, control systems, and equipment. A major European pharmaceuticals company discovered just that when it decided to change the role of a plant in Turkey. The factory had been operating as a server. The company, however, decided in the early 1990s that it wanted the plant to operate as an offshore as well and produce some drugs for export. It quickly became clear that the factory needed new equipment to meet the packaging and labeling requirements of different European countries. Its fairly rudimentary outbound logistics system had to be redesigned completely; its cost accounting methods had to be changed to conform to the methods used in the rest of the company; and new channels of communication with sales offices in other countries had to be developed, which required improving the staff’s foreign language skills.

Upgrading the Strategic Role

Moving a plant up the matrix means giving it a broader, upgraded strategic role in the company’s network of factories. Superior manufacturers have a larger portion of their global factories in the higher source, contributor, and lead positions than average manufacturers do. The challenges involved in upgrading a plant are substantial. But the rewards are substantial, too. Indeed, it often takes years and a tremendous investment of resources for factories to ascend to these positions; but these plants ultimately provide their companies with a formidable strategic advantage. (See the exhibit “Paths to Higher Strategic Roles.”)

Paths to Higher Strategic Roles

Consider Hewlett-Packard’s successful plant in Singapore, which was established in 1970 as an offshore plant. It took about a decade and the investment of substantial resources for the factory to become a source plant for calculators and keyboards, and another decade for it to assume a lead position for keyboards and inkjet printers. (See the sidebar “How Hewlett-Packard Upgraded the Strategic Role of Its Factory in Singapore.”)

The story of Hewlett-Packard’s factory in Singapore illustrates many of the critical managerial decisions involved in upgrading a factory’s strategic role. The factory was built in 1970 to produce simple labor-intensive components at a low cost. It is now one of HP’s global centers for the design, development, and manufacture of a number of critical products and components, including keyboards and inkjet printers.

The Initial Decision: Valuing the Intangibles. HP’s first important decision was selecting a site for the factory. Even though HP was looking for a location that would make low-cost production possible, it chose Singapore over cheaper Asian locations because the city offered several intangible, long-term benefits: a better-educated workforce that spoke English, a more stable government, and a more developed infrastructure. One of HP’s managers’ basic beliefs was that factories should be able to operate in the same place for a very long time. (HP has never closed any of its factories worldwide.) The ability of each factory to attract and keep qualified people, they felt, was the key to keeping the factories vital.

HP negotiated hard with Singaporian officials for the best deals on taxes, tariffs, and other subsidies. But those deals were tactical matters and not the basic reason for choosing Singapore as the plant’s site.

Early Years: Becoming a Better Offshore Plant. During its early years, the plant succeeded because wages, taxes, and employed capital were relatively low in Singapore. But neither HP’s corporate leaders nor its local managers were content to depend solely on those advantages. From the start, the factory embarked on a quality-improvement program and gradually reduced waste and improved efficiency.

In 1973, HP transferred the manufacture of the HP-35, a simple calculator, from a factory in the United States to the Singapore plant in order to reduce production costs. It was the first complete product entrusted to the plant. The plant managed to cut the cost of the calculator substantially, which prompted HP to transfer other items to it. Each subsequent success triggered the transfer of ever more sophisticated products and components. By the late 1970s, the factory was producing many items, including keyboards, solid-state displays, and integrated circuits. (All these items, however, were still designed, developed, and initially produced in the United States.) By generating quick paybacks, the plant induced HP to make new investments in it and, as a result, kept raising its profile within the company.

From Offshore to Source. The quest to reduce costs and improve production quality had inevitably directed managers in Singapore to pay more attention to improving the design of products to make them easier and less expensive to manufacture. A case in point is the HP41C, a sophisticated hand-held calculator. HP transferred the manufacture of this calculator to Singapore because the plant could produce it at a lower cost. Managers in Singapore set out to reduce its costs by half—an ambitious goal that could be achieved only by redesigning the product. The redesign involved reducing the number of integrated circuit boards in the product from two to one, but the Singapore staff lacked the necessary expertise. Because both local managers and corporate managers were convinced that developing this expertise could aid the factory’s cost-reduction efforts in general, they agreed to send 20 of the plant’s engineers to the United States for a year to learn how to design application-specific integrated circuits for the product—an expertise they then brought back to Singapore.

The results were phenomenal. The plant slashed the production cost of the HP41C by 50% and, using the knowledge it had acquired, reduced the production costs of other models substantially. In 1983, HP shifted the entire production of the line of calculators to Singapore. In addition, HP’s executives, impressed by the plant’s prowess in redesigning products and processes, decided to shift some development and engineering work to Singapore.

HP also transferred a senior U.S. manager with extensive experience in the company’s manufacturing and R&D organizations to Singapore that year. He started a small R&D group with three engineers. By the time he returned to the United States in 1986, the group had grown to 35 people, and its workload had increased significantly as it proved its worth.

Consider the group’s success in improving the production of keyboards. The engineers investigated several new production processes that offered the possibility of reducing costs substantially while improving quality. One such technology was a new “dye sublimation” process that would allow the factory to imprint letters on 120 key caps in one step. The R&D group’s success with this and other technologies helped convince top-level managers to give it a bigger challenge: the design of HP’s next generation of keyboards. In 1986, after the plant had successfully designed and produced the new keyboard, HP gave it sole responsibility for developing and supplying all HP keyboards. The Singapore plant also increased its cost advantage by developing a pool of Asian suppliers. In general, Asian suppliers offered lower prices than their U.S. counterparts. More important, they worked closely with the plant to deliver parts just-in-time, to improve quality, and to share development expenses.

Because of the plant’s accomplishments, HP transferred the job of manufacturing the all-important thermal inkjet printer, the Thinkjet, to Singapore in 1984—a mere four months after the printer, HP’s first inkjet product, had been introduced in the United States. Reducing the line’s production cost was strategically critical, and HP executives had faith that the Singapore plant could do it. It did not disappoint them. The factory slashed the printer’s production cost by 30% in a few months: one-third of the reduction was the result of efficient production, low wages, and low taxes; one-third was the result of improving the product’s design; and the final third was the result of switching to Asian suppliers.

By the mid-1980s, the plant had assumed a much broader strategic role in HP’s global network of factories. In addition to continuing to offer low wages, low taxes, and efficient production, it could redesign and develop products, conduct joint development with suppliers, and distribute its products globally. The Singapore plant was no longer merely an offshore. It had turned into a source.

From Source to Lead. As the strategic role of the plant broadened, local managers continued to initiate new projects and HP’s top management assigned more global responsibilities to the plant. Progress was not always smooth. For example, in 1989, an ambitious attempt to develop and produce a low-cost inkjet printer jointly with HP’s Vancouver division failed. It was a major setback, but local managers quickly rebounded by successfully proposing that the plant be given the job of modifying for the Japanese market a new DeskJet printer just introduced in the United States. The project would signal the first time the Singapore operation would have full responsibility for a business: the redesign, production, distribution, and marketing of a product in a new market.

Despite the factory’s demonstrated capabilities, this was a risky proposition. Any problems or stumbles could tarnish HP’s reputation in a critical market. The project also was risky for managers in Singapore. The stakes were high, and the work involved new activities and a long-term commitment of resources. (It was clear that the first model would have to be followed quickly by other new models.) The plant would have to develop expertise in new functions and a fast-changing technology.

The first product, introduced in 1991, was not well received in Japan. But instead of retreating, the managers in Singapore suggested that they redesign another recently introduced inkjet printer, the DeskJet 505. This product was a success, and the plant has since continued to develop new, and generally smaller, inkjet printers for the Japanese and other markets. In the process, it has acquired considerable expertise in producing smaller inkjet printers and is now a lead plant. It is HP’s global center for the design, development, and manufacture of portable printers for markets worldwide.1

1. The information in this insert is based on my work with the Hewlett-Packard Company and on the Harvard Business School case study, “Hewlett-Packard: Singapore” (HBS case no. 694-035).

Even though factories may start at different positions on the matrix, the managerial approaches to upgrading their strategic roles have several imperatives in common.

Focus on the intangible benefits.

Each company has its unique reasons for manufacturing outside its home country. (See the exhibit “Why Manufacture Abroad?”) Some benefits—such as a reduction in labor, capital, and logistics costs—are tangible and easy to measure; others—such as learning from foreign research centers, customers, and suppliers—are intangible and difficult to measure.

Why Manufacture Abroad?

How a company treats the intangible benefits says a great deal about the role of manufacturing in its corporate strategy. If manufacturing plays a negligible strategic role, the tangible benefits usually dominate the decision to manufacture abroad. As a company upgrades the strategic role of its manufacturing operations, however, it stresses the intangibles more.

Consider Lego, the Danish toy maker. Many U.S. toy makers have moved their factories from Japan to Taiwan to Singapore to Thailand and now to China, attracted by the marginal cost advantages in those countries. In contrast, Lego has continued to produce most of its toys and molds in Denmark, Germany, Switzerland, and the United States. Why hasn’t Lego moved its production to low-cost countries? The answer lies in the way it treats the intangible benefits of location. Lego depends on its factories to develop unique capabilities in injection molding and mold design and to advance the company’s knowledge of plastic materials. Highly industrialized countries that offer skilled technicians, sophisticated suppliers, research centers, and universities allow Lego to accomplish those ends more easily.

It is hard to argue against opting for immediate, tangible benefits by promising probable, intangible benefits in the future. But more attention to the intangibles can launch a factory on a path to expanding the scope of its capabilities.

Cultivate competencies.

At HP, managers of the Singapore factory knew that the company’s leaders expected them to expand the factory’s competencies and to upgrade its strategic role. Similar expectations made it possible for the managers of NCR’s factory in Dundee, Scotland, and Sony’s factory in Bridgend, Wales, to upgrade their strategic roles. The NCR plant started in the 1960s as a server for a variety of products, such as mainframe computers and cash registers. Like many other traditional foreign plants, it stayed in the server position for years. But in the early 1980s, it embarked on a new path that moved it into a contributor position for automated teller machines by the mid-1980s and into a lead position for ATMs by the early 1990s. (See the sidebar “From Server to Lead: NCR in Dundee, Scotland.”) The Sony plant in Bridgend started in 1974 as a server, supplying television sets and components to Europe. By the mid-1980s, it had expanded its role to contributor; and it continues to become a still stronger and more effective contributor. (See the sidebar “From Server to Contributor: Sony in Bridgend, Wales.”)

Established in the 1960s to serve Western Europe, NCR’s factory in Dundee, Scotland, had by the early 1990s turned itself into a world-class manufacturer of automated teller machines. Since then, the factory has helped the company maintain its number one position in the worldwide ATM market.

At the end of the 1970s, the factory seemed doomed. NCR’s plants in the Dundee area had plummeted from six, with a combined workforce of 6,000, to one, with a workforce of 700. The remaining factory, which made such products as mainframe computers and cash registers, was vertically integrated and unfocused.

Then in the early 1980s, like many beleaguered multinationals, NCR restructured itself along business units. The company’s leaders challenged its plants to become world-class manufacturers. The mandate was clear: help create businesses that are competitive on a worldwide scale or face closure. Dundee aimed to become number one in the self-service banking-transaction business.

Dundee’s managers established two priorities: upgrade manufacturing performance and speed up the product-development cycle. By the mid-1980s, both initiatives were in full swing. To improve manufacturing performance, the factory launched total quality management, just-in-time procurement and production, cell production, and a variety of other continuous-improvement programs. It also started to develop closer relationships with local suppliers. To speed up product development, it built up a strong R&D department. (By 1990, 250 of its 1,400 employees were in R&D.) The factory also created a special competence in developing new products and ramping up their production quickly. By 1985, Dundee had become more efficient and had expanded its strategic role. Once a mediocre server, the plant had transformed itself into an effective contributor. It was a second source for the development and production of ATMs not only for the European market but also for markets worldwide.

Throughout the last years of the 1980s, Dundee continued its push to improve its manufacturing and product-development capabilities. Self-financing its growth, it established closer links to end customers (it visited bankers and had them visit Dundee); local educational establishments (it funded a department of mechatronics, or mechanical and electronic engineering, at the University of Dundee, for example); and suppliers (80% of supplies came from local sources). By 1990, Dundee had become NCR’s lead plant for ATMs, with primary responsibility for developing and manufacturing the products that the billion-dollar business needed. The plant continued to play this role after AT&T’s acquisition of NCR in the early 1990s, and it promises to be one of the pillars of the newly independent company that AT&T spun off in 1996.

Sony built a new factory in Bridgend, Wales, in 1973. Pursuing a strategy that its chairman, Akio Morita, called “global localization” (that is, thinking globally when making local decisions), Sony had given the plant a charter to produce television sets and components for the European market. Bridgend started as a server plant, buying many subassemblies from Sony in Japan. At that time, critics assumed it was one of the so-called screwdriver assembly factories that Japanese manufacturers were establishing in foreign countries to overcome trade barriers. But the plant would prove that it was much more than a limited assembly plant.

In the plant’s early years, quality was a concern. So the plant embarked on a program of improvement that would lead eventually to a zero-defect campaign. By the early 1980s, the plant had invested in quality-management and education programs and had installed the most up-to-date production processes and systems, including just-in-time manufacturing supported by manufacturing resource planning (MRP II). Bridgend also stepped up its efforts to reduce its dependence on Sony Japan by producing more parts itself and purchasing more from European suppliers. In 1986, it extended its zero-defect program to suppliers. Close cooperation with its 140 suppliers enabled the factory to institute a “no incoming inspection” policy for their parts in 1989. By then, European-made parts comprised nearly 90% of the content of its products; the mechanical parts the factory used came from the United Kingdom—primarily from Wales.

The Bridgend factory also worked on customizing product design for the European market. In 1984, as part of an effort to strengthen its design capability, it introduced four common platforms for 80 different models of television sets. Sony also set up a local engineering-and-development facility in the same year. Within three years, local people comprised all the full-time staff.

By 1988, 185 engineers were working in the plant—a large number, considering that the site employed a total of 1,500 people. The engineers worked on design and development projects for six months and then produced the new designs in the next six months—a cycle that meshed with the cycle of television sales. In the first, quiet part of the year, the engineers and many other employees focused on developing and learning how to manufacture new models. By the time the sales cycle started to climb to its November peak, the entire staff—including the engineers—began focusing on production. While the factory was ramping up production, engineers learned valuable lessons about designing products so that they could be manufactured more easily and inexpensively, and with fewer defects. Engineers then could put those lessons into practice when they developed new models.

Since 1988, the plant has designed and developed most of the products it has produced. Today it exports more than three-quarters of the 200 models it produces. It continues to be a strong and valuable contributor plant in Sony’s global network.

A factory’s long journey up the matrix requires the development of a variety of competencies that are acquired in three stages.

Stage 1: Improving the Inside

Many companies demand continuous improvement in their factories’ performance. The ways in which factories can enhance their performance include improving the plant’s physical layout, machinery, work design, and production quality; providing employee training and education; instituting innovative work processes, such as cells and self-managed teams; and adopting computer-assisted manufacturing and just-in-time production processes.

If a factory is not improving internally as fast as it should, then its strategic role will probably be downgraded. An offshore, outpost, or server in such a position is not likely to survive in the long run. In contrast, improved production efficiency and quality usually permit a plant to take on bigger assignments; and managers of high-performing factories naturally want to expand their influence beyond their factories’ walls.

Stage 2: Developing External Resources

Moving up the matrix from offshore, outpost, or server roles to either source or contributor roles requires developing additional competencies. While HP’s factory in Singapore was improving the management of its workforce, equipment, and production techniques, it also started to pay more attention to the way it worked with parties outside the factory. HP’s success in reducing costs, particularly in the late 1970s and early 1980s, hinged on overhauling its group of suppliers located in and outside Singapore and on requiring them to deliver on a just-in-time basis. The NCR factory in Dundee increased its locally supplied items from 50% in the mid-1980s to 80% in the late 1980s; and the Sony factory in Bridgend started out importing many components from suppliers in Japan but gradually developed its own supplier base in Europe.

The managers of those plants also realized that achieving ongoing cost reductions would require changes in product design. For example, Sony’s Bridgend factory designed and developed four common platforms for the various television systems used in Europe. NCR’s Dundee plant redesigned major sections of the teller machines it built to make them easier to manufacture. And HP’s Singapore factory reduced the number of components in its calculators by redesigning the product, including its application-specific integrated circuits.

To tackle these challenges, the factories had to expand their internal and their external capabilities. In order to develop direct lines of communication to R&D centers inside their companies, as well as ties to vendors of new technologies outside their companies, they had to add development engineers and technicians to their staffs. They also had to develop logistics skills so that they could take and fulfill orders from retailers, distributors, and, in some cases, end customers located in several different countries. They had to develop the capacity to answer customers’ inquiries, to receive orders in several languages and from incompatible computer systems, to arrange international shipments, and to handle an expanded number of models and parts.

Stage 3: Taking on a Global Mandate

Moving into a lead position requires competencies that go beyond those needed for a company’s current production operations; it requires the ability to generate new knowledge for the company’s future manufacturing activities. To become a lead factory, the HP plant not only had to develop the ability to design and manufacture inkjet printers but also had to transform itself into a global center of knowledge about the printers for the entire company. Similarly, the NCR plant had to go beyond merely being an efficient producer of ATMs; it also had to learn how to develop and manufacture the next generation of the devices and transform itself into the custodian of that expertise for the company.

Instead of focusing primarily on pruning overhead costs, these factories focused on growth. They created and refined new products and processes that had a broad impact on their companies’ competitiveness. To that end, managers at these factories constantly sought to expand their pool of skilled employees. They continuously added such people as process and development engineers, sales and lab technicians, computer experts, logistics managers, human resource professionals, quality managers, and cost accountants. The atmosphere inside the factories was dynamic, engaging, and challenging—precisely the conditions that attract highly qualified individuals.

Because it entails a substantial investment of time and resources, as well as changes in a factory’s culture and management style, the decision to upgrade a factory to a lead position should not be made lightly. It demands a serious commitment by both corporate and plant management.

Create a robust network.

Plant closures, major shifts of production from one country to another, and buying and selling plants are all expensive. Such factors lead to instability in a company’s global network of plants and make it difficult for the average foreign plant to develop the competencies it needs to upgrade its strategic role. How can a company avoid such instability? Superior manufacturers do it by creating robust networks.

A robust network is one that can cope with changes in the competitive environment without resorting to extreme measures. For example, as currencies fluctuate, a company with a less robust network would shift production among its factories rapidly and dramatically in order to keep its production costs down. A company in which manufacturing plays a negligible strategic role expects little from a factory beyond, say, low-cost production and, as a result, invests little in the plant. In contrast, a superior manufacturer invests more in its factory and expects more benefits from the factory’s smooth operation; typically, the factory is better at coping with adverse competitive conditions. As a result, the savings from switching production are smaller for the superior manufacturer, and the benefits from not switching are greater. In short, such manufacturers are far less trigger-happy than manufacturers with less robust networks.

A robust network by definition contains many factories in upgraded strategic roles (sources, contributors, and leads). The more robust the network, the more secure the network. Security is a necessary condition for cultivating the development of a site’s competencies, which in turn allows the factory to expand its strategic role and its ability to deal with adverse conditions. And the cycle continues.

Nurturing Growth Abroad

What are the guidelines for a company that wishes to get more from its foreign factories? To start, review periodically the strategic role of each plant in the global network. As part of this assessment, construct a map of the existing network and the current roles of each factory, and compare it with a map of the desired network based on the company’s evolving business strategy. Such a comparison is likely to reveal gaps in the network (for example, which factory will supply the planned expansion into the East Asian market) and scenarios for changes in the roles of existing factories.

More important than these periodic checkups is what one does between them. The most critical task is to increase the capacity of foreign factories to absorb and create knowledge. Technicians, engineers, designers, as well as experts in such areas as procurement, logistics, and quality help a foreign factory accomplish that task. It is no coincidence that superior manufacturers distribute more of their technical resources around the globe.

Maintaining a critical mass of precious resources in one location while at the same time avoiding a duplication of work within the network can present managers with a dilemma. The solution lies in specialization. Whenever feasible, a foreign factory’s ultimate mission should include developing a world-class specialty. It is not always necessary to specify the exact nature of the specialty for each factory; specifying a tentative direction or area of growth is often sufficient. Top-level managers should draw up broad guidelines, give factories a chance to expand their capabilities, and ensure that there is no major duplication of work within the network. For their part, each plant’s managers should focus on cultivating the appropriate site competence—whether that means managing internal operations more efficiently or building external resources or taking on a global mandate.

Of course, it’s the responsibility of the company’s leaders to make sure that each foreign plant has managers with the appropriate skills. While the factory is playing one of the lower strategic roles and management is focused on improving the operations inside the factory, a specialist from headquarters is the most suitable plant manager. But when the factory’s role is being upgraded and the focus shifts to the management of suppliers, customers, and others outside the factory, then someone with a more general management background who is familiar with local conditions is more appropriate. An upgraded server or a contributor plant needs a manager with superior local knowledge, including proficiency in the local language; a source plant needs a manager with the technical expertise required to optimize the plant’s performance; and a lead plant needs a manager who not only has a deep technical background and is familiar with the local conditions but also knows the company intimately. A careful plan for the recruitment, development, and assignment of managers to foreign factories must always accompany the plans for upgrading the role of manufacturing.

Nurturing the growth of foreign plants demands a commitment sustained over many years, especially on the part of corporate management. There are many obstacles and temptations along the way. First, many managers fear relying on a foreign factory for a critical skill, and they impose a ceiling on how far a foreign factory can develop. Second, the tradition of treating a foreign factory as a cost center can turn it into a cash cow and deprive it of the investment it needs to elevate itself. Superior manufacturers know that the journey of improvement is taken step by step, and every new step requires more resources. Third, the urge to shift production in direct response to fluctuations in the value of foreign currencies is often hard to resist and creates instability for a foreign plant’s management. Fourth, alluring government incentives that attempt to convince companies to locate their plants far from centers of technology, sophisticated markets, or advanced suppliers can be difficult to ignore.

A foreign plant’s journey of improvement is taken step by step, and every new step requires more resources.

Overcoming such obstacles is difficult during ordinary times; and during a period of downsizing, the task is daunting. Far from headquarters, managers of foreign factories often feel particularly vulnerable when the company engages in aggressive outsourcing and other cost-cutting campaigns. Valuable momentum built over several years can easily be destroyed by a wrong signal from the top.

The real mastery of superior manufacturers is their ability to overcome these obstacles and maintain an environment conducive to growth. They nurture such an environment because it is profitable. Not every one of their foreign factories has to become a lead. But they stack the deck in a way that gives their plants a fighting chance to move in that direction. Superior manufacturers are convinced that a foreign factory can be a potent strategic asset.

1. My research includes a four-year study of the role of foreign factories owned by ten large multinational manufacturing companies: Apple, Digital Equipment, Electrolux, Ford, Hewlett-Packard, Hydro Aluminum, IBM, Olivetti, Philips, and Sony. My observations and conclusions also are based on my work as a consultant to 12 large multinational manufacturing companies and on data from several surveys that I helped conduct. Those surveys included a questionnaire about the configuration of the global manufacturing networks of companies in the pharmaceuticals, food-processing, and paper-machinery industries. They also included the Global Manufacturing Futures Surveys, a series of biannual surveys of the management practices of some 600 large manufacturers in North America, Europe, and Japan that Boston University, INSEAD, and Waseda University have been conducting since 1982.

A version of this article appeared in the March–April 1997 issue of Harvard Business Review.

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