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Managing Global Offshoring Strategies - A Case Approach PDF

203 Pages·2006·2.846 MB·English
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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 Distribution: Scandinavia DBK, Mimersvej 4 DK-4600 Køge, Denmark Phone: +45 3269 7788, fax: +45 3269 7789 North America International Specialized Book Services 920 NE 58th Ave., Suite 300 Portland, OR 97213, USA Tel +1 800 944 6190 Fax +1 503 280 8832 Email: [email protected] Rest of the World Marston Book Services, P.O. Box 269 Abingdon, Oxfordshire, OX14 4YN, UK Phone: +44 (0) 1235 465500, fax: +44 (0) 1235 465655 E-mail: [email protected] All rights reserved. No part of this publication may be reproduced or used in any form or by any means - graphic, electronic or mechanical including photocopying, recording, taping or information storage or retrieval systems - without permission in writing from Copenhagen Business School Press at www.cbspress.dk 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

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