Managing Global Offshoring Strategies - A Case Approach

203 Pages·2006·2.846 MB·English

by  Pyndt, Jacob, Pedersen, Torben

Jacob Pyndt & Torben Pedersen
Managing Global Offshoring
Strategies
– A Case Approach
Copenhagen Business School Press
Managing Global Offshoring Strategies – A Case Approach
© Copenhagen Business School Press
Printed in Denmark by Narayana Press, Gylling
Cover design by Morten Højmark
1. edition 2006
e-ISBN 978-87-630-9974-5
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Preface
This book addresses the challenges associated with managing global
offshoring strategies. Offshoring and offshore outsourcing are hardly
new phenomena. What is new is that information technology creates
new opportunities for geographically dispersed business activities and
enables the fragmentation of the value chain for “traditional”
production and service companies. The pace of offshoring is likely to
gain further momentum. Our intention in this book is to “put a face” on
some Danish companies as they contemplate and engage in offshoring
projects.
When selecting the cases, we chose a diverse set that exemplifies
the complicated range of challenges that companies face when they
migrate products or services. All of the cases were developed on the
basis of in-depth field research and close collaboration with the
respective company managers. In this regard, we want to express our
gratitude to all of the case companies. Without their cooperation and
open communication, this book would have been unrealizable. In
addition, we are grateful to Tina Pedersen who has done an excellent
job editing the grammar and language usage.
The book targets bachelor, master and MBA students taking courses
on global strategy. It can be used in conjunction with a set of readings
and articles on global strategy issues. Although the book is meant to
serve as teaching material, we hope that business professionals also
find inspiration and interesting insights applicable to their own
organizations as they search for global offshoring opportunities.
Copenhagen, September 2005
Jacob Pyndt Torben Pedersen
7
Table of Contents
CHAPTER 1...........................................................................................9
Managing Offshoring – An Introduction...............................................9
Setting the Scene – Some Definitions..........................................11
Companies – Central Engines of Globalization...........................17
Analytical Insight - The Value Chain..........................................21
The Decision to Offshore – What, Where and How?..................23
CHAPTER 2.........................................................................................31
ECCO A/S – Optimizing Global Value Chain Economics..................31
Introducing ECCO.......................................................................32
Integrating ECCO’s Value Chain................................................36
Production Technology................................................................40
Internationalization and Production Sites....................................41
The Competitive Landscape.........................................................43
Suggested Literature....................................................................47
CHAPTER 3.........................................................................................57
GN ReSound – The Challenges of Amalgamation..............................57
Introduction..................................................................................58
Industry Structure.........................................................................61
Price Segments and Brand Portfolio............................................66
Location of Production.................................................................67
Consolidating Research and Development Sites.........................70
Suggested Literature....................................................................72
CHAPTER 4.........................................................................................85
Coloplast A/S – From Plowed Field to Efficient Plant........................85
History..........................................................................................87
Strategy 2008...............................................................................88
Offshoring to Tatabanya, Hungary..............................................90
Next Stop: China..........................................................................96
Suggested Literature....................................................................97
CHAPTER 5.......................................................................................105
Danfoss A/S - Global Manufacturing Footprint................................105
Introduction to Danfoss..............................................................106
Challenges Ahead – Changing Production Philosophy.............112
Establishing a Global Production Network................................115
Suggested Literature..................................................................117
5
CHAPTER 6.......................................................................................129
Danisco A/S - Optimizing Global Innovation Processes...................129
Introduction................................................................................130
Danisco Innovation Group.........................................................133
IT and Knowledge Exchange.....................................................136
Genencor International...............................................................138
Rhodia........................................................................................140
Suggested Literature..................................................................142
CHAPTER 7.......................................................................................147
MAN B&W Diesel - Managing Licensees in a Globalized World...147
Introduction to MAN B&W Diesel A/S....................................148
Hyundai Heavy Industries (HHI)...............................................155
Intellectual Property Rights Protection in China.......................158
Suggested Literature..................................................................160
CHAPTER 8.......................................................................................171
Ribe Maskinfabrik A/S
- Developing New Business Areas.....................................................171
Early Internationalization Efforts...............................................172
The Establishment of Rimadan
– Structuring Outsourcing Operations.......................................174
Entering China...........................................................................176
Suggested Literature..................................................................178
CHAPTER 9.......................................................................................183
GPV Group A/S – New Supplier Opportunities................................183
History and Introduction............................................................184
Suggested Literature..................................................................190
CHAPTER 10.....................................................................................195
Conclusions........................................................................................195
References..........................................................................................207
6
CHAPTER 1
Managing Offshoring
– An Introduction
Companies in Europe and the US face an essential reshaping of their
economic landscape. Attracted by burgeoning markets, cost
advantages and access to local talent pools and capabilities, companies
are increasingly moving processes and services from high cost
countries (HCC) to low cost countries (LCC). While the transfer of
manufacturing and services to LCCs is not an entirely new
phenomenon, the pace of the migration has accelerated and the scope
amplified. Dazzled by attractive opportunities to restructure costs, the
question that many companies consider today is not whether to engage
in offshoring, but rather when and how they should design the best
possible set-up to capture global advantages. Comparing the wage gap
between Indian engineers earning USD 6,000 per year and Danish
engineers earning USD 63,500 a year makes such considerations
understandable (Union Bank of Switzerland 2003). However,
offshoring is no panacea and while offshoring results in 20 to 40%
savings on costs for some companies, for others the risks involved will
decisively outweigh potential gains. The need to protect intellectual
property rights and/or to co-locate with key customers both comprise
reasons to stay in higher cost locations. The key point is that
companies should take a proactive stance when analyzing the potential
of globalizing operations. Companies must find the best location for
each activity after considering variables like links to other activities,
the strategic impact of offshoring and business environment risks.
Two important changes that enable companies to capture the
opportunities offered by globalization are often referred to as political
deregulation and technological developments. Over the past thirty
years, product and financial markets have been liberalized, which has
given rise to regional trade agreements like the EU, NAFTA, ASEAN
and Mercosur. In addition, WTO works to eliminate the remaining
obstacles and to secure mutually open, transparent, and non-
discriminating markets for goods, services, capital and technology.
Technological development, on the other hand, has resulted in
plummeting communication and transportation costs, which has
stimulated product exports and offshoring. While some services, such
9
Managing Global Offshoring Strategies – A Case Approach
as personal care and restaurant visits, still require close links between
production and consumption, technological change has enabled the
physical decoupling of some services and business activities. These
include bookkeeping, payroll, software programming, call centers, and
testing of medical products. Moreover, the advancements in
technology now allow international companies to communicate
through video-conferences, mobile phones and email. Coordination
between different company units and interaction with customers and
suppliers has become less complicated, more efficient and more
reliable.
A third, often-overlooked change that has influenced the buoyancy
of offshoring is the manager’s mindset. In comparison to twenty years
ago, today’s managers appear more internationally equipped and less
fearful of the unfamiliar. This development is hardly surprising
considering the number of international MBA’s offered. Moreover,
managers of tomorrow go on exchange as never before. Copenhagen
Business School (CBS) serves as a case in point. Every year, CBS
receives approximately 1,000 exchange students from about 280
partner universities and sends out a slightly smaller number of CBS
students. In 2000, CBS only exchanged approximately 600 students
each way through 260 exchange agreements. Indisputably, such
international aspirations leave their marks on business students’ mental
maps and expand the room for strategic maneuvering.
While political deregulation and technological progress are critical
catalysts to expanding and enhancing cross-border transactions and
networks, companies and clients need to translate these opportunities
into practical solutions. Companies enjoy a unique possibility to link
various cross border markets through their subsidiaries, clients,
cooperative relationships and competitors. Given their involvement in
trade, FDI and capital movements, companies are the primary
constituents of globalization. No other organizations operate on
foreign terrain to the same extent as MNCs. Hence, MNCs’ strategies
and their courses of action are pivotal objects to study in order to better
understand the forces of globalization. In fact, one motivation behind
this book is to focus on operational aspects of business strategy in
relation to globalization. Rather than treating companies as uniform
items, this book explores the idiosyncrasies and dig a little deeper into
the management dynamics and challenges characterizing the case
companies. A disaggregated view of business processes and functions
is necessary, as there is no “one size fits all” strategy when responding
to the pressures of globalization.
This book is organized as follows. This introductory chapter offers
an overview of the main issues involved in offshoring. In addition to
10
Managing Offshoring – An Introduction
defining key terms, we discuss the motives, benefits and pitfalls of
companies’ globalization strategies. Moreover, we examine the trade-
offs involved in the three main offshoring challenges: What to
offshore? Where to go? What kind of operational mode? This
discussion may act as a practical guide to how companies may analyze
these issues. We then introduce eight cases in the following chapters
that demonstrate the multiplicity of globalization strategies. The
closing chapter puts forward our reflections, including a call for
considering aspects other than costs. Moreover, the chapter underpins
the importance of applying a disaggregated perspective, and stresses
the need to adopt a balanced approach in order to circumvent the haze
that tends to surround offshoring. Offshoring is one strategic option
among many. Globalization expands the range of strategic possibilities
for companies – yet careful analysis is needed to balance the mix of
variables central to the firm in question.
Setting the Scene – Some Definitions
The terms outsourcing and offshoring are regularly used in public
debates and academic research, but they are often weakly defined. In
the following paragraphs, we discuss various definitions and examine
the characteristics of these phenomena. Table 1.1 depicts various terms
and their characteristics.
Externalized
Internalized
(external suppliers)
(activities performed in-house)
Outsourcing
At home Company performs the activities Suppliers in home
(Denmark) at home country
Foreign countries Suppliers in foreign
Offshoring Own subsidiary in foreign country countries
Offshore Outsourcing
Table 1.1 Definitions
As opposed to internalized activities in MNCs, outsourcing denotes the
activities where companies let an external and independent supplier
perform the task in question. Outsourcing is, therefore, the use of
external resources to undertake activities that were traditionally
performed in-house. Examples include services from suppliers, the use
11
Managing Global Offshoring Strategies – A Case Approach
of external consultants, the purchase of IT services or the contracting
out of cafeteria facilities.
This line of thinking can hardly be recognized as a new
phenomenon. Few companies are capable of performing all tasks
internally which has led companies to analyze the advantages and
pitfalls inherent in make or buy decisions. Traditionally, companies
have outsourced activities such as cleaning, cafeteria management,
security and maintenance. Previously, this process was called
“contracting out”, the “use of sub-suppliers” or “business re-
engineering”. In essence, outsourcing is about defining the boundaries
of the firm and defining aspects that, from a business perspective,
make sense to obtain from other companies.
While early experiences with outsourcing related to more remote
activities, today’s outsourcing often entails a reorganization of the
company around its core competences and working with external
partners that typically perform activities less critical to the firm,
including IT-services, purchasing, testing, patenting, semi-
manufacturing products and book-keeping. These outsourcing
arrangements are typically more strategic than the more traditional use
of suppliers.
A second distinction in terms of these definitions involves whether
the activity is performed in the home country or in foreign locations. In
this regard, LCCs have been the center of attention. Offshoring refers
to activities in foreign locations. These activities may be performed in-
house (offshoring) or by sub-suppliers (offshore outsourcing). In
recent years, offshoring and offshore outsourcing have been subject to
vigorous debates in the business media. Some examples of offshore
outsourcing can be seen in the Danish consulting engineering
companies, Cowi and Rambøll, which have outsourced the drawing of
digital, graphical maps to an external supplier in India, and in the
Scandinavian airline, SAS, which outsourced its ticketing to Indian
companies. These examples do not fundamentally deviate from the
process the textile industry went through in the 1980s, when sewing
operations were offshored and outsourced to Poland or Asia, or the
metal and machinery industry’s use of suppliers throughout Central
and Eastern Europe. Essentially, the same dynamics are in play in
today’s offshoring and outsourcing activities. Traditionally, production
was mainly outsourced or offshored to LCCs. Today, offshoring
arrangements increasingly involve services. The German Consultancy,
Roland Berger, conducted a comprehensive study of the offshoring
strategies for services within Europe’s largest companies. While
lagging behind the United States, offshoring in services is gaining
momentum in Europe. Offshoring is seen as an effective strategy for
12
Managing Offshoring – An Introduction
reducing costs and improving competitiveness, as 80% of companies
with experience in offshoring are satisfied with the results. Savings
oscillate between 20 and 40%, and the most popular offshoring
destinations were Eastern Europe and India (UNCTAD 2004).
Despite similarities between the forces driving the globalization of
manufacturing and services, there are some notable differences, mostly
related to the speed and scope of the phenomenon. Given the
aforementioned technological developments, trade barriers within IT-
enabled services have been eliminated. In addition, the offshoring of
services requires fewer resources, space and equipment than the
offshoring of manufacturing facilities. Potential candidates for
offshoring of services are not attached to specific industries, but can be
found across companies in all sectors. Finally, whereas the offshoring
of manufacturing usually affects blue-collar workers, the offshoring of
services tend to involve white-collar employees (UNCTAD 2004).
Offshoring Benefits
Even the harshest critics of globalization find it hard to dispute the
economic benefits created by offshoring. Offshoring is not a zero sum
game in which one party gains at the expense of the other. Both the
company that offshores and the recipient country may realize
substantial gains. Offshoring is essentially a shift in production in
response to comparative advantage. Companies that offshore can
reduce costs, thereby enhancing their competitiveness and enabling a
shift to more productive, higher value activities. In addition, foreign
suppliers may import products and services as new business is
generated at the offshoring location. Finally, in some instances,
offshoring companies repatriate profits. For the recipient countries, the
benefits relate to an increase in the employment rate, the use of local
suppliers and the reinvestment of eventual profits. When the amount of
labor in gainful employment increases, the government of the recipient
country sees a corresponding improvement in the tax base. In addition,
local companies often use some of the export revenue to purchase
more sophisticated products from industrialized countries. While these
arguments all support offshoring, the critical question is how to
measure or quantify the gains. On the basis of a study conducted by
McKinsey Global Institute (MGI), the Danish think tank “Fremtidens
Vækst” calculated the potential value created by offshoring. As
indicated in table 1.2, savings in labor costs in Danish companies
comprise the largest share of value creation in the society.
13