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Outsourcing and Offshoring as a business strategy in global competition

Outsourcing and Offshoring as a business strategy in global competition. Prof. Dr. N. Koubek Chair of Business Administration Schumpeter School Bergische Universität Wuppertal,Germany. St. Petersburg – Summer School April 3rd, 2009. Terminological delineation and characteristics.

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Outsourcing and Offshoring as a business strategy in global competition

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  1. Outsourcing and Offshoring as a businessstrategy in global competition Prof. Dr. N. Koubek Chair of Business Administration Schumpeter School Bergische Universität Wuppertal,Germany St. Petersburg – Summer School April 3rd, 2009

  2. Terminological delineation and characteristics. Causes for and extent of Outsourcing and Offshoring. Strategies for Offshoring. The effects of Offshoring. On the classic Triad model On Eastern Europe Conclusion. Case Study Example: Automotive Industry. Overview Koubek

  3. 1. Terminological delineation (1/2) Basics to understand Outsourcing: Outsourcing = „outside“, „resource“, „using“ Origin is the „make or buy“-problem In a narrower sense the transfer of work to an external company In broader sense the transfer to an affiliated company, a spin-off, or a profit center Koubek

  4. „Outsourcing is the strategic use of outside resources to perform activities that are usually handled by internal staff and resources“ (Elmuti 2003, S. 33) „Outsourcing can be defined as turning over all or part of an organizational activity to an outside vendor“ (Barthélemy 2003, S. 87) „Outsourcing can be viewed as a form of predetermined external provision with another enterprise for the delivery of goods and/or services that would previously have been offered in-house“ (Kakabadse/Kakabadse 2000, S. 670) 1. Terminologicaldelineation (2/2) Koubek

  5. The activity must have been performed by the company itself before having been outsourced. The activity has to be outsourced to an external provider. Activities may be of physical or non-physical (e.g. services) nature. Outsourcing increases division of labour and leads to specialisation. Outsourcing should be long-term and following strategical considerations. 1. Typical characteristics Koubek

  6. Offshoring is a special form of Outsourcing. Offshoring can be defined as international Outsourcing: „It is the crossing of borders that distinguishes it [offshoring] from outsourcing in general“ (Kirkegaard 2005, S. 3) Often used in a narrower sense than international Outsourcing; often related to relocation to low-wage countries; but equation is critical (example : Singapore). Nearshoring: A special kind of Offshoring; term is used when there is only a minor distance to the Offshore-region. 1. Characteristicsdistinguishing Outsourcing from Offshoring Koubek

  7. Quite recent is the development towards international Service-Outsourcing: 1. The Evolution towards Offshoring Strategies Koubek

  8. External forces: Intensive competitive pressure, particularly increased by globalisation. Large degree of digitalisation in many departments. Internal forces: Driven by the need to Reduce costs. Spread risks. Access external know-how. Create flexible organisational structures. Focus on core competencies. 2. Causes for Outsourcing Koubek

  9. 2. Extent of Outsourcing and Offshoring It is difficult to make a clear statement due to missing statistics. But: Trends based on approximation prove an increase in outsourcing and offshoring activities: Expenditures for outsourcing worldwide have been US-$ 3,7 bn. in 2001; The global outsourcing market continues to grow at a steady pace, with a growth rate of 8.1 percent in 2008.. Worldwide volume of offshoring in 2003 approx. US-$ 10-50 bn.; 2008: roughly US-$ 70 bn, with India‘s share of approx. 45% Koubek

  10. From national to international outsourcing. National External provision Outsourcing Offshore- Outsourcing International Inhouse Captive- Offshoring 3. Strategiesfor Offshoring (1/5) Koubek Quelle: (Weinert 2005).

  11. Reasons for increasing international outsourcing: 1.) Differences in factor costs such as in the factor „labour“ 3. Strategiesfor Offshoring (2/5) International comparison of labour costs of software engineers (€/hour) Koubek Quelle: DB Research 2004, S. 6.

  12. 2.) Increasing legal security through international agreements. 3.) Often very high level of education in offshoring countries. 4.) Governmental subsidies and other benefits. 5.) Global interlinking of information highways and digitalisation of corporate activities. 3. Strategiesfor Offshoring (3/5) Reasons for increasing international outsourcing (continued): Koubek

  13. 3. Strategies for Offshoring (4/5) Onshore Outsourcing Offshore Outsourcing Outsourcing Internal provision Captive Offshoring Spin-Off National International Koubek Source: Schaaf (2004), S. 3.

  14. 3. Strategies for Offshoring (5/5) Captive offshoring-strategy is preferred by enterprises in the german-speaking area (random-sample of 570 enterprises) 2/3 of the worldwide volume of offshoring is captive offshoring. Captive offshoring is usually combined with direct investments in the target country. Source: Schaaf / Weber (2005), S. 11. Koubek

  15. 4. Triad-Concept by Ohmae Globalization creates companies which have strong competitive positions in the triad regions USA, West Europe, Japan Homogenity of demand, extensive power and potential knowledge in all triad regions Automization and IT in triad companies lead to settlements, cooperations and integration strategies New design of company functions according to the triad criteria Model for simultaneous market entry Europe Northern America South-East-Asia 1 – 2 years Koubek Source: Perlitz, S. 145

  16. 4. Triad-Concept Orientation on cost leadership by penetration, whereas the differentiation strategy is less important Convergency in triad regions (products for the world market) Orientation on large companies, whereby innovations in small and medium sized companies are underestimated Dynamics of various world regions (e.g. Eastern Europe) are neglected Reference model: Japanese company strategies for American and European high-tech consumer goods markets Evaluation: Koubek

  17. 4. The effects of Offshoring on the classic triad model • Nearshoring-regions expand the Triad Model • Each of the three classic Triad regions has got a typical nearshoring-region. Koubek

  18. 4.The effects of Offshoring on Eastern Europe (1/3) • Eastern Europe increases its attractivity as Offshoring- and Nearshoring-Region • The Czech Republic is in the Top5 of the most attractive Offshoring-Locations • Reasons: • Level of education • Lower costs than in Western Europe • Regional and cultural proximity • Political Stability • Economic performance Koubek Source: AT Kearney (2004), S. 2.

  19. 4.The effects of Offshoring on Eastern Europe (2/3) • Eastern Europe is increasingly attractive for Captive Offshoring (esp. as subsidaries). • Eastern Europe benefits from the relocation of production in Western and Central Europe. Koubek

  20. 4.The effects of Offshoring on Eastern Europe (3/3) • Eastern Europe benefits likewise from the relocation of several services to: • External providers (Offshore Outsourcing), for example the placing of orders for developement and programming in the software sector. • Subsidaries (Captive Offshoring), for example the DHL- Computer Center in the Czech Republic, SAP has got a Shared Service Center in Prague Koubek

  21. 5. Conclusion Outsourcing und Offshoring intensify globalisation Motors of Offshoring are international companies and booming economies in Eastern Europe Eastern Europe is becoming an improtant Nearshoring-Region for estern european and international enterprises The proximity to the european market is an advantage of location against Asia; this partially compensates a higher level of costs Koubek

  22. Automotive Industry in Russia 6. Case Study Example Koubek

  23. 2.250 enterprises with german shareholding (1.173) Among these were 1.350 Russian-German Joint Ventures (775) and … …800 subsidaries with 100%-ownership (544) General Economic DataGerman – Russian Cooperations in 2004 (2001) Koubek Source: www.russische-botschaft.de ( 2004); Valiullin/ Valiullina (2006) (for 2001).

  24. Automotive Production Locations in Russia (2006) Koubek

  25. Previous engagement as exporter to Russia was rather moderate: -> Market share of 4% in the 1st term of 2007 (20.000 of 500.000) Since 2006: Installation of an assembly plant in Kaluga It is planned to become a ful-fledged automobile-plant and to increase the market share to 10% within 5 years . Intended production of 115.000 automobiles per year. Vision: Export from Russland to other countries. Automotive IndustryExample: Volkswagen Group Koubek Source: FAZ, Nr. 154, 06.07.2007; www.bfai.de (12.07.2007).

  26. Automotive Supplier Production Locations in Russia (2006) Koubek

  27. As an important strategical industrial sector it currently is in a crucial phase of development and change as there was no independent automotive industry sector during the Soviet regime. Securing of local share of supply by partners abroad. (Regulation No. 166 , 29.03.2005) Further impulsion for investments by means of regulation No. 566 , 21.11.2006. Clustering of suppliers for manufacturers with regional focus on the European part of Russia. Example: Cooperation of ZF with Karmas In the following three years the production will be about 75.000 gears per year and there will be about 200 Mio. Euro of total revenue. Automotive SuppliersExample: ZF Friedrichshafen AG Koubek Source: FAZ, Nr. 163, 17.07.2007; Ostausschussinformationen(2007)

  28. Quinn, James B./Hilmer, Frederick G. (1994): Strategic Outsourcing. In: Sloan Management Review, Summer, 1994, S. 43-55. Kakabadse, Nada/Kakabadse, Andrew (2000): Critical review – outsourcing: A paradigm shift. In: The Journal of Management Development, Vol. 19, No. 8, 2000, S. 670-728. Booz Allen Hamilton (2001): Profits or Perils? The Bottom Line on Outsourcing. Booz Allen Hamilton, ORT, 2001. Power, Mark J. / Desouza, Kevin C. / Bonifazi, Carlo (2006):The Outsourcing Handbook - How to Implement a Successful Outsourcing Process Craumer, Martha (2007): How to think strategically about outsourcing In: Executing strategy for business results, Boston, Mass.: Harvard Business School Pr. Weinert, Stephan (2007):Offshore Service Centres of Multinational Companies. Hamburg. Literature Examples Koubek

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