Offshoring and Globalization of the Value Chain

1. Offshoringand Globalization of the Value Chain Torben Pedersen Professor Center for Strategic Management and Globalization Copenhagen Business School

2. 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

3. Sourcing (onshore-nearshore-offshore) . Nearshore

4. Offshoring – Global trends

5. 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

6. 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 Outbound Logistics Operations Marketing and sales Service

7. A dispersed value chain configuration with low interaffiliate coordination

8. A concentrated value chain configuration with high inter-affiliate coordination.

9. 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

10. Porter’s global value chain framework Coordination of value chain activities High Global specialization Oprening of new markets Lower coordination (I&CT) and transportation costs Low New codification and standardization technology Configuration of value chain activities Concentrated Dispersed

11. Take aways • Offshoring • Enabled by modularization/standardization • Benefits: Location-specific advantages • Comes at a cost: Increased coordination problem

12. The starting point Value Chain Input Process Output

13. Fine-slicing of the value chain Value Chain Input Process Output

14. Location and organization Choice of location and organization ? Value Chain Input Process Output

15. Danish textile-companies outsourcing/offshoring

16. Value added Smiley of the value chain.. Branding and marketing Design Logistics Quality Control Packaging Procurement Sewing Processing Cutting Value chain Input Processing Output

17. Value added Smiley of the value chain.. Denmark Design Branding and marketing Logistics Quality Control Packaging Procurement Sewing Processing Cutting Value chain Input Processing Output

18. 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

19. ECCO A/S – Optimizing Global Value Chain Economics

20. 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 1984 1991 1993 1998 2005 • Indonesia • Thailand • Slovakia • CHINA • Denmark (Foundation of ECCO) • Portugal

24. Value added Design and development Branding and Marketing Denmark Distribution USA and Denmark Production process High-tech shoe production Portugal Most complicated shoes Slovakia and Thailand Production of uppers Thailand, China and Indonesia Value chain Input Processing Output Location of ECCO’s value chain activities

26. No one strategy fits all!

27. 2006 Offshoring Research Network Survey Demographics Duke University / Booz Allen Hamilton 2006 Offshoring Survey Demographics Percentage of Forbes companies in US sample • 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 Small (Not Ranked by Forbes) Forbes 250 Forbes >1000 Forbes 500 Forbes 1000 Source: Duke University/Booz Allen Offshoring Research Network 2006 Survey

28. 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 Cumulative Percentage of Firms Initiating Offshoring Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey

29. 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 Cost Reduction Access to Qualified Personnel Competitive Pressure Business Process Redesign % of Responses Rating Driver as “Very Important” and “Important” Increased Speed to Market Access to New Markets Survey Year Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey

30. 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 Loss of Managerial Control Lack of Acceptance by Customers % of Firms Citing Risk as “Very Important” or “Important” Cultural Differences Political Backlash Political Instability Survey Year Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey

31. 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 Average # employees offshore per implementation Average # of jobs eliminated onshore per implementation * On average, offshoring led to job creation Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey

32. Danish data on offshoring of more advanced activities

33. Activities offshored(Representative survey of Danish firms, all sectors, Fall 2004)

35. The Wind-turbine company Vestas’ disaggregation of the value chain in R&D

36. ”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

37. Disaggregating activities

38. 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

39. Heckman-model on 1.504 Danish firms

40. 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

41. Strategies for control

42. Disaggregation af banking activities Brands

43. Creative innovative Input Markets VALUE CHAIN Smiley.. Marketing Branding R&D Design High-cost countries White collar jobs Blue collar jobs Manufacturing Low-cost countries

44. Education and payment of engineers