T Pedersen
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Offshoring and Globalization of the Value Chain Torben Pedersen Professor Center for Strategic Management and Globalization Copenhagen Business School
Agenda • Definitons • Theories – Porter’s value chain – Modularization • Case: Ecco – different offshoring strategies
• Highlights from an international survey • Danish data on offshoring of advanced activities
• Case: Coloplast – Managerial and organizational challenges in offshoring
Sourcing (onshore-nearshore-offshore) .
Location
Home country (onshore)
Operator
Foreign country (offshore)
Nearshore
Contractual Partner
(Onshore) outsourcing
Offshore outsourcing
(outsourcing)
Ourselves (insourcing)
Captive offshoring (FDI)
Offshoring – Global trends
What is driving the offshoring? • New information and communication technology makes it easier to codify and standardize activities • New technology makes it possible to disconnect and disaggregate activities – e.g. e-business, e-learning, library services
• New important markets like China and India is opening up and claiming their role in the world economy
Porter: A value chain approach A change from dispersed to concentrated configuration strategies in which global sourcing plays a vital role
Firm Infrastructure Human Resource Management Technology Development Procurement
Inbound logistics
Operations
Outbound Logistics
Marketing and sales
Service
A dispersed value chain configuration with low interaffiliate coordination
UK
USA
Japan
Marketing & Sales
A concentrated value chain configuration with high inter-affiliate coordination.
UK Mgt
Ireland
USA
Logistics R&D Manufacturing IT India M&S
Marketing & Sales
China
What is driving the offshoring? • New information and communication technology makes it easier to codify and standardize activities • New technology makes it possible to disconnect and disaggregate activities – e.g. e-business, e-learning, library services
• New important markets like China and India is opening up and claiming their role in the world economy
Porter’s global value chain framework Coordination of value chain activities
High
Oprening of new markets Lower coordination (I&CT) and transportation costs Low
New codification and standardization technology
Dispersed
Concentrated
Configuration of value chain activities
Take aways - Offshoring - Enabled by modularization/standardization - Benefits: Location-specific advantages - Comes at a cost: Increased coordination problem
The starting point
Value Chain
Input
Process
Output
Fine-slicing of the value chain
Value Chain
Input
Process
Output
Location and organization
Choice of location and organization ?
Value Chain
Input
Process
Output
Danish textile-companies outsourcing/offshoring Concepts OPT
CMT
SOD
Outward Processing Traffic (1985-1990)
Cut, Make and Trim (1990-1995)
Sourcing from own Design (1995-2000)
Design
Denmark
Denmark
Denmark
Logistics
Denmark
Outsourcing Denmark
Outsourcing Denmark
Procurement
Denmark
Outsourcing Denmark
Eastern Europe
Processing
Outsourcing Denmark
Southern Europe
Eastern Europe
Cutting
Outsourcing Denmark
Eastern Europe
Asia
Sewing
Southern Europe
Eastern Europe
Asia
Packaging Quality control Branding
Southern Europe
Eastern Europe
Asia
Denmark
Southern Europe
Asia
Denmark
Denmark
Denmark
Fine-slicing of the activity:
Smiley of the value chain.. Value added Branding and marketing
Design Logistics
Quality Control Packaging
Procurement
Sewing
Processing Cutting
Value chain
Input
Processing
Output
Smiley of the value chain.. Value added
Denmark Design
Branding and marketing
Logistics
Quality Control Packaging
Procurement
Sewing
Processing Cutting
Value chain
Input
Processing
Output
What is new about offshoring?
• Disaggregation of the value chain and re-location of some of these more disaggregated activities • Sourcing motives are becoming more prominent than market seeking motives • In particularly, China and India (1/3 of world population) are becoming active on the global scene • Empirically: – The amount of offshoring has increased dramatically – The character of offshoring has changed to include service and knowledge activities
ECCO A/S – Optimizing Global Value Chain Economics
The history of ECCO • 1963 foundation of ECCO in Denmark • ECCO over time aims to produce most comfortable and modern footwear for work and leisure, focus on quality and comfort • 2004 => 90% of production exported, mainly to US, Germany and Japan 1963
Denmark (Foundation of ECCO)
1984
Portugal
1991
Indonesia
1993
Thailand
1998
Slovakia
2005
CHINA
Global Lifestyle Casual Footwear Brand Sales (in US$ million) Rank 1
Company Clarks
2
ECCO
3
Rockport
4
Geox
5
Birkenstock
6
Bass
7
Catterpillar
8
Doc Martens Others Total
2002 1,399 29,2% 502 10,5% 385 8,0% 208 4,3% 270 5,6% 275 5,7% 209 4,4% 295 6,2% 1,252 26,1% $4,795
2003 1,534 29,6% 590 11,4% 361 7,0% 329 6,3% 300 5,8% 285 5,5% 210 4,0% 195 3,8% 1,383 26,7% $5,187
% change 9,6% 17,5% 6,2% 58,2% 11,1% 3,6% 0,5% -34,0%
8,2%
Composition of employees in ECCO by geography 10000 8000 6000 4000 2000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Employees in Denmark
Employees outside Denmark
Production of shoes (in pairs) 2000-2004 4.500.000 4.000.000 3.500.000 3.000.000 2.500.000 2.000.000 1.500.000 1.000.000 500.000 0 2000
2001
2002
2003
2004
Shoes produced in Denmark
Shoes produced in Portugal
Shoes produced in Indonesia
Shoes produced in Thailand
Shoes produced in Slovakia
Location of ECCO’s value chain activities
Value added
Design and development
Branding and Marketing
Denmark
Distribution Production process
USA and Denmark
High-tech shoe production Most complicated shoes
Production of uppers
Portugal
Slovakia and Thailand
Thailand, China and Indonesia
Value chain
Input
Processing
Output
Home country
Internationa Outsourcing Own production (% of all shoes) facilities (i.e. l sales remaining % of shoes
USA
40 %
90 %
Puerto Rico Dominican Rep
UK
?
99 %
(UK)
Ecco
Denmark
90 %
20 %
Portugal, Slovakia, Indonesia, China, Thailand
Geox
Italy
45 %
?
Timberland Clarks
Slovakia Romania
No one strategy fits all!
2006 Offshoring Research Network Survey Demographics Duke University / Booz Allen Hamilton 2006 Offshoring Survey Demographics Percentage of Forbes companies in US sample Forbes 100 Small (Not Ranked by Forbes)
20% 30%
14%
Forbes 250
12% 11%
Forbes >1000 13%
Forbes 500
Forbes 1000 Source: Duke University/Booz Allen Offshoring Research Network 2006 Survey
537 firms surveyed in US, UK, Germany, Netherlands and Spain. Excludes third party service providers – 55% currently offshoring – 18% considering offshoring – 27% not considering offshoring – 1498 offshore functional implementations Major industries represented: Financial Services, Manufacturing, Telecom, Technology, Consumer, Media, Energy, Aerospace & Defense, Automotive Functions Offshored: Includes IT, Customer Service, Business Processes, Engineering, Marketing, R&D, Product Development and Design
IT remains the most highly offshored function. The next offshoring frontier, however, is globalizing product and process innovation Cumulative Percentage of Firms Initiating Offshoring by Function
50%
Cumulative Percentage of Firms Initiating Offshoring
45% 40% 35%
IT Product Development (R&D, Engineering, Product Design)
30% 25% 20%
Admin. Business Processes (F&A, HR etc.) Call Center / Help Desk Procurement
15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
Access to qualified personnel and improving speed to market are growing faster as offshoring drivers than cost reduction Growth Rate of Offshoring Drivers Over Time
% of Responses Rating Driver as “Very Important” and “Important”
90 Cost Reduction
80 70
Access to Qualified Personnel
60
Competitive Pressure Business Process Redesign
50
Increased Speed to Market
40 30 20
Access to New Markets
10 0 2004
2005 Survey Year
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
2006
Managerial and organizational risks are growing while risks associated with external factors are declining. Perceived Risks of Offshoring 2004 - 2006
% of Firms Citing Risk as “Very Important” or “Important”
60% Operational Challenges
55%
Lack of Acceptance by Internal Clients
50%
Loss of Managerial Control
45% Lack of Acceptance by Customers
40% 35% 30%
Cultural Differences
25%
Political Backlash
20%
Political Instability
15% 10% 2004
2005 Survey Year
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
2006
Offshoring of R&D leads to job growth onshore, while offshoring of back office functions is associates with job losses onshore Average # of Employees Offshore vs. Average # of Jobs Eliminated Onshore 40
150
140
128
120
30 97
100
79
80
20
60
35
40
28
20
13
0
* On average, offshoring led to job creation
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
&D *R
De si g n Pr od uc t
Ma rke tin g
/S
a le s
g En gi n ee rin
en ter Ca ll C
IT
Fin an ce /A
-40
0
cc ou nti ng
-20
10
-10
Average # of jobs eliminated onshore per implementation
Average # employees offshore per implementation
160
Danish data on offshoring of more advanced activities
Activities offshored (Representative survey of Danish firms, all sectors, Fall 2004)
Share of firms
Activities
2004
Expected 2007
Production
90 %
92 %
Logistics & purchasing
17 %
28 %
R&D
11 %
23 %
Adm.
9%
16 %
Sales & marketing
6%
11 %
The Wind-turbine company Vestas’ disaggregation of the value chain in R&D
”In Novo Nordisk 90 percent of our research and development is svead and only 10 percent are really creative” Lars Guldbæk Karlsen, Vice-president of R&D Novo Nordisk
Disaggregating activities
Less advanced tasks R&D:
More advanced tasks
Test, patenting
New inventions, design
Production:
Volume production
Individual prototype or niche production
Marketing:
Canvas and tele sales
Advertisement, branding
IT:
Service operations
Programming, architecture
Administration:
Bookkeeping & payroll
Management
Data • Survey: Total population of firms in Eastern Denmark with 10+ employees ( = 3.600 firms) • 1.504 firms responded (response rate 42%) – 1.158 firms (77%): no offshoring – 346 (23%) firms have offshored activities • identified type of offshored activities and rated tasks whether less or more advanced tasks (Likert-scale, 1-5) • 113 firms (8%) have offshored more advanced tasks
Heckman-model on 1.504 Danish firms Whether to offshore Share of knowledge workers
+
Knowledge seeking Number of offshored tasks Capital investment
-
Developed countries Captive offshoring Firm size Multinational company Financial performance
Seeking cost advantages Market-seeking motive
+*** +*** -
How advanced are the offshored activities
+** +** +** + + +
-** +
Take-aways • The offshoring of more advanced tasks is conducted by experienced and knowledge-intensive firms seeking knowledge and talent abroad • Not more common with captive offshoring to deleloped countries. • Offshoring is best analyzed on a more disagrregated level and we need to know more about interdependencies and complementaries etc. between the different tasks
Strategies for control
Disaggregation af banking activities Brands
Smiley.. Creative innovative
White collar jobs
Blue collar jobs
Marketing Branding
R&D Design
Manufacturing
Input
High-cost countries
Low-cost countries
Markets
VALUE CHAIN
Education and payment of engineers
New engineers educated per year
Annual income in $ US
USA
59,536
75,000
(New York)
India
82,107
6,000
(Mumbai)
China
219,563
12,100 (Shanghai)
Russia
82,409
3,400
Japan
104,478
71,500
(Moscow) (Tokyo)
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