T Pedersen

January 26, 2018 | Author: Anonymous | Category: Social Science, Sociology, Globalization
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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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