Post on 25-Dec-2015
Offshoringand Globalization of the
Value Chain
Torben Pedersen
Professor
Center for Strategic Management and Globalization
Copenhagen Business School
• 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
Agenda
Sourcing (onshore-nearshore-offshore)
.Location
Operator
Home country(onshore)
Foreign country(offshore)
ContractualPartner
(outsourcing)
(Onshore) outsourcing
Offshore outsourcing
Ourselves(insourcing)
Captive offshoring
(FDI)
Nearshore
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
Inbound logistics
OperationsOutbound Logistics
Marketing and sales
Service
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
A dispersed value chain configuration with low interaffiliate coordination
Marketing & Sales
USAUK
Japan
A concentrated value chain configuration with high inter-affiliate coordination.
China
Manufacturing
IT
India
Marketing & Sales
USA
R&D
Logistics
M&S
Ireland
UK
Mgt
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
Configuration of value chain activities
Coordination of value chain activities
Dispersed Concentrated
Low
High
Lower coordination (I&CT) and transportation costs
New codification and standardization technology
Porter’s global value chain framework
Oprening of new markets
Global specialization
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
Value Chain
Input Process Output
Choice of location and organization ?
Danish textile-companies outsourcing/offshoring
Concepts
Fine-slicing of the activity: OPTOutward Processing Traffic
(1985-1990)
CMTCut, Make and Trim
(1990-1995)
SODSourcing from own Design
(1995-2000)
Design Denmark Denmark Denmark
Logistics Denmark OutsourcingDenmark
OutsourcingDenmark
Procurement Denmark OutsourcingDenmark
Eastern Europe
Processing OutsourcingDenmark
Southern Europe Eastern Europe
Cutting OutsourcingDenmark
Eastern Europe Asia
Sewing Southern Europe Eastern Europe Asia
Packaging Southern Europe Eastern Europe Asia
Quality control Denmark Southern Europe Asia
Branding Denmark Denmark Denmark
Smiley of the value chain..
Input Output
Value Value addedadded
DesignDesign
Quality ControlQuality Control
CuttingCutting
Logistics Logistics
ProcurementProcurement
ProcessingProcessing SewingSewing
PackagingPackaging
Branding and marketingBranding and marketing
Processing
Value chain
Smiley of the value chain..
Input Output
Value Value addedadded
DesignDesign
Quality ControlQuality Control
CuttingCutting
Logistics Logistics
ProcurementProcurement
ProcessingProcessing SewingSewing
PackagingPackaging
Branding and marketingBranding and marketing
Processing
Value chain
Denmark
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
Denmark
(Foundation
of ECCO)
1963 1984 1991 1993 1998 2005
Portugal Indonesia Thailand Slovakia CHINA
Global Lifestyle Casual Footwear Brand Sales (in US$ million)
Rank Company 2002 2003 % change 1 Clarks 1,399 1,534 9,6% 29,2% 29,6% 2 ECCO 502 590 17,5% 10,5% 11,4% 3 Rockport 385 361 6,2% 8,0% 7,0% 4 Geox 208 329 58,2% 4,3% 6,3% 5 Birkenstock 270 300 11,1% 5,6% 5,8% 6 Bass 275 285 3,6% 5,7% 5,5% 7 Catterpillar 209 210 0,5% 4,4% 4,0% 8 Doc Martens 295 195 -34,0% 6,2% 3,8% Others 1,252 1,383 26,1% 26,7% Total $4,795 $5,187 8,2%
Composition of employees in ECCO by geography
0
2000
4000
6000
8000
10000
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
0500.000
1.000.0001.500.0002.000.0002.500.0003.000.0003.500.0004.000.0004.500.000
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
Input Output
ValueValueaddedadded
Design and developmentDesign and development
Production of uppersProduction of uppers
Production processProduction process
Most complicated shoesMost complicated shoes
High-tech shoe productionHigh-tech shoe production
Branding and MarketingBranding and Marketing
Processing
Value chain
Denmark
Slovakia and Thailand
Thailand, China and Indonesia
Portugal
DistributionDistributionUSA and Denmark
Location of ECCO’s value chain activities
Home country
International sales
Outsourcing (% of all shoes)
Own production facilities (i.e. remaining % of shoes
Timberland USA 40 % 90 % Puerto Rico
Dominican Rep
Clarks UK ? 99 % (UK)
Ecco Denmark 90 % 20 % Portugal, Slovakia, Indonesia, China, Thailand
Geox Italy 45 % ? Slovakia
Romania
No one strategy fits all!
2006 Offshoring Research Network Survey Demographics
Duke University / Booz Allen Hamilton 2006 Offshoring Survey Demographics
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
Forbes 100
Forbes 250
Forbes 500
Forbes 1000
Forbes >1000
Small (Not Ranked by Forbes)
Source: Duke University/Booz Allen Offshoring Research Network 2006 Survey
20%
13%
30%
11%
14%
12%
Percentage of Forbes companies in US sample
IT remains the most highly offshored function. The next offshoring frontier, however, is globalizing product and process innovation
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
IT
Product Development (R&D, Engineering, Product Design)
Admin. Business Processes (F&A, HR etc.)
Call Center / Help Desk
Procurement
Cu
mu
lati
ve
Pe
rce
nta
ge
of
Fir
ms
In
itia
tin
g O
ffs
ho
rin
g
Cumulative Percentage of Firms Initiating Offshoring by Function
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
0
10
20
30
40
50
60
70
80
90
2004 2005 2006
% o
f R
es
po
ns
es
Ra
tin
g D
riv
er
as
“V
ery
Im
po
rta
nt”
an
d “
Imp
ort
an
t”
Survey Year
Cost Reduction
Access to Qualified Personnel
Competitive Pressure
Increased Speed to Market
Access to New Markets
Growth Rate of Offshoring Drivers Over Time
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
Business Process Redesign
% o
f F
irm
s C
itin
g R
isk
as
“V
ery
Im
po
rta
nt”
or
“Im
po
rta
nt”
Survey Year
Managerial and organizational risks are growing while risks associated with external factors are declining.
Perceived Risks of Offshoring 2004 - 2006
Operational Challenges
Lack of Acceptance by Internal Clients
Political Backlash
Political Instability
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
2004 2005 2006
Loss of Managerial Control
Cultural Differences
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
Lack of Acceptance by Customers
Offshoring of R&D leads to job growth onshore, while offshoring of back office functions is associates with job losses onshore
* On average, offshoring led to job creation
150
79
97
128
28
13
35
-40
-20
0
20
40
60
80
100
120
140
160
-10
0
10
20
30
40
Ave
rag
e #
em
plo
yee
s o
ffsh
ore
p
er
imp
lem
en
tatio
nA
vera
ge
# o
f job
s elim
ina
ted
o
nsh
ore
pe
r imp
lem
en
tatio
n
Average # of Employees Offshore vs. Average # of Jobs Eliminated Onshore
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
Danish data on offshoring
of more advanced activities
Activities offshored (Representative survey of Danish firms, all sectors, Fall 2004)
Activities
Share of firms
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&DNovo Nordisk
Disaggregating activities
Less More advanced tasks advanced tasks
R&D: Test, patenting New inventions, design
Production: Volume production Individual prototype or niche production
Marketing: Canvas and tele sales Advertisemen t, 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
How advanced are the
offshored activities
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 +
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..
Input Markets
VALUE CHAINVALUE CHAIN
Creative Creative innovativeinnovative
R&DR&DDesignDesign
MarketingMarketingBrandingBranding
ManufacturingManufacturing
White collar jobs
Blue collar jobs
High-cost countries
Low-cost countries
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 (Moscow)
Japan 104,478 71,500 (Tokyo)