Globalizing the value chain - Core Competence, Outsourcing, Cooperative Strategies

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  • http://blogalize.typepad.com/.a/6a0120a626531c970b0162fc422dbb970d-320wi
  • The first two dimensions will be talked about in this presentation (green), and the last point (orange) is discussed in the next presentation.
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  • http://www.amexinc.com/slideshow/data/images/banner2.jpgCAN YOU CLAIRFY THE DIFFERENCE BETWEEN OUTSOURCING AND OFFSHORING WITH EXAMPLES? ADD A SLIDE OR TWO IF NECESSARY.
  • http://bridge-outsourcing.com/wp-content/uploads/2010/09/offshoring-project-management.jpgSome of the above factors should be met before making an offshoring decision. These are factors found in another country.
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  • http://news.cnet.com/i/bto/20090416/Nokia5800XpressMusic_9_lowres.jpgPart of knowledge-based outsourcing: The organization of the future will be more globally distributed= Nokia
  • http://thecellphonejunkie.files.wordpress.com/2010/05/nokia-logo.jpgLARA: FIX THE FORMATING OF THIS SLIDE
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  • This example is specific to the driver :”search for growth”http://picsd.infocera.com/4cf5f712c8822tata%20logo.jpghttp://stiripeblog.files.wordpress.com/2010/07/chery_higgo3.jpghttp://www.defenceweb.co.za/images/stories/LOGOS/LOGOS_NEW/chery_logo_5.jpghttp://www.iloveindia.com/cars/pics/tata.jpg
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  • Do both companies benefit?
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Globalizing the value chain  - Core Competence, Outsourcing, Cooperative Strategies Globalizing the value chain - Core Competence, Outsourcing, Cooperative Strategies Presentation Transcript

  • GLOBALIZING THE VALUE CHAIN INFRASTRUCTURE CORE COMPETENCIES, OUTSOURCING AND COOPERATIVE STRATEGIES Prof. Sameer Mathur, Ph.D.
  • Sameer Mathur BuddingMarkets.com Marketing Professor 2009 – 2013 Ph.D. and M.S. (Marketing) 2003 – 2009 Marketing Professor 2013 – Indian Institute of Management, Lucknow
  • Core Competencies Outsourcing • Advantages, Risks • Knowledge-Based Outsourcing • Locating Value-Added Activities Cooperative Strategies Agenda
  • 1. Deciding which activities to perform in-house vs. outsource and to whom and where 2. Developing the right partnerships to support a company’s globalization efforts 3. Implementing a supply chain management model for integrating activities into a cost-effective and value- creating network Overview Globalizing the Value Chain Infrastructure
  • • Definition: Unique capabilities that allow a company to build a competitive advantage • Three tests for identifying core competencies (source: Hamel and Prahalad) – 1. Provide access to a broad array of markets – 2. Help differentiate core products and services – 3. Hard to imitate Core Competencies
  • • Honda- use of small engine technology in motorcycles, jet skis, and lawn mowers • Procter & Gamble- marketing prowess • Canon- optics, imaging, and microprocessor controls • Dell- High manufacturing and distribution quality - reliable products at competitive prices Core Competencies – Examples
  • • The development of core competencies should focus on: – Long-term platforms capable of adapting to new market circumstances – Unique sources of leverage in the value chain – Elements that are important to customers in the long-run – Key skills and knowledge, not products Core Competencies – Development
  • • Every functional or value-adding activity is a candidate for outsourcing • DO NOT OUTSOURCE CORE COMPETENCY: – Operationally excellent companies do not outsource activities critical to the efficacy of their supply chain – Customer-intimate business model outsourcing customer-service-intimate functions – Product leadership companies outsourcing their capacity to innovate To Outsource or not to Outsource
  • Outsourcing • Same country, different company Offshoring • Different country, different company Outsourcing vs. Offshoring
  • *Globalization has increased the number of outsourcing and offshoring projects Outsourcing • Largely about scale and the ability to provide services at a more competitive cost • Ex: when a company hires some expert or professionals to complete a certain task Offshoring • Primarily driven by the dramatic wage-cost differentials that exists between developed and developing countries • Ex. Company can outsource its work outside the country Outsourcing vs. Offshoring
  • – Dramatic wage-cost difference – Quality and reliability of: • Labor • Environment • Infrastructure – Political stability – Economic and Legal frameworks – Quality and reliability in the outsourced service Factors in Making Offshoring Decisions
  • 1. Lower Costs 2. Greater Flexibility 3. Enhanced Expertise 4. Greater Discipline 5. Focus on Core Activities Advantages of Outsourcing
  • – Lowers different types of costs • (ex. labor, raw materials) – Benefits – greater scale, efficiency – Drawbacks – lower quality, reliability 1. Lower Costs
  • – Adjust the scale and scope of production at low cost – Adjust to demand more easily – Allows companies to expand and contract in accordance with business needs 2. Greater Flexibility
  • – Gain access to technology or other intellectual property advantage that a firm cannot access by itself • This technology may improve operational reliability, productivity, efficiency or long-term total costs and production 3. Enhanced Expertise
  • – Separation of specialized provider and the client (purchaser) can assist with transparency and accountability • Identifying true costs and benefits of certain activities – Competition among providers creates: • Choice for purchasers • Encourages the adoption of innovative work practices 4. Greater Discipline
  • – Frees up internal resources allowing company to concentrate on activities at which it has core competency – Allows other specialized provider to supply supportive goods and services 5. Focus on Core Activities
  • 1. Lower Costs 2. Greater Flexibility 3. Enhanced Expertise 4. Greater Discipline 5. Focus on Core Activities Advantages of Outsourcing (RECAP)
  • 1. Loss of Control 2. Loss of Innovation 3. Loss of Trust 4. Transaction Costs Risks associated with Outsourcing
  • – Quality of product/service may suffer – Production schedules may be disrupted – Contractual disagreements may develop – Monitoring performance and productivity can be challenging 1. Loss of Control
  • ◦ Difficulty in coordination and communication with offshore vendors and outsourcing firm ◦ Inability to engage in face-to-face discussions ◦ Cultural or language-related differences ◦ Important customer implications 1. Loss of Control (cont’d)
  • – When certain support services (IT, software development) are outsourced, innovation is impaired – Focus is on production not on innovation • Innovation is stalled 2. Loss of Innovation
  • – Gap in the employer-employee relationship – Workers displaced into an outsourced organization feel conflicted as to who their “real” boss is 3. Loss of Organizational Trust
  • – Cost of “outsourcing risk”: • Looking for the right conditions: – Nature and location of the demand for product – Industry rivalry – Supporting industries in new location – Costs in logistics – Costs in quality assurance 4. Higher Transaction Costs
  • • Indirect costs: – Tax consequences – Ability to repatriate profits – Currency exchange – Political risk 4. Higher Transaction Costs (cont’d)
  • 1. Loss of Control 2. Loss of Innovation 3. Loss of Trust 4. Transaction Costs Risks associated with Outsourcing (RECAP)
  • • PAST: Outsourced activities included manufacturing, back- office functions, IT, customer support • PRESENT: Focus is shifting to more knowledge intensive areas such as product development, R&D, engineering, and analytical services. Knowledge-Based Outsourcing
  • Creating collaborative management models that share responsibilities, risks, rewards, enabling both sides to reach their objectives Aim of Knowledge Based Outsourcing
  • – Cost imperatives – Shortages of talent in home markets – Growing availability of skills in nations such as India, China and Russia Drivers of Knowledge Based Outsourcing
  • – Managers will seek out talent wherever it is located • The organization of the future will be more globally distributed – Companies transforming into more agile, flexible entities Outcomes of Knowledge Based Outsourcing
  • • Eli Lilly outsources a substantial portion of its R&D to India and China. • Pfizer tests drugs in Russia; AstraZeneca conducts clinical trials in China WHY? • To cut development costs and speed development!  (Development costs: $1.1 billion per drug!) Outsourcing of R&D in the Pharma Industry
  • • Nokia’s Open Innovation Model – Team up with leading international universities in search of the next great communication technology ideas. – Use the Internet to harvest new ideas • The Nokia Beta Labs website allows testers to provide feedback on new and potential applications. Nokia’s Global Brain Trust
  • • Venture Capital Investment: – Aim: expansion into markets outside Nokia’s traditional European markets. – Outcome: Nokia Growth Partners (offices in China, India…) manages $350 million for direct investments. Nokia’s Global Brain Trust
  • 1. Search for Growth 2. Reduction of Costs 3. Innovation Drivers for Manufacturing Relocation: Locating Value Added Activities
  • – Emerging economies have higher growth rates than mature economies due to: • the arrival of large-scale capital investment in low-wage and low-cost economies – Companies want to capture market share in the fastest growing markets 1. Search for Growth
  • China’s Chery Auto and India’s Tata Motors represent emerging local automakers that are capturing new markets with low cost and often innovative products. Example
  • – Reduction in raw material costs – Other cost drivers of relocation include: • Government incentives • Regional interest rates • Wages • Trade agreements Cost Reduction
  • • Suppliers in emerging markets need to acquire technology and R&D skills. – Gain the innovation ability for companies to compete as global suppliers. 3. Innovation
  • 1. Search for Growth 2. Reduction of Costs 3. Innovation Drivers for Manufacturing Relocation: Locating Value Added Activities (RECAP)
  • • What is Halal? – Halal foods are foods that are permitted under Islamic dietary guidelines • With a market share of only 2% of the global food industry, Nestlé had ample room for growth. Nestlé Adapts to Halal
  • • NEW target segment = the Halal segment – Looked particularly promising: • Worth $150 billion • Muslims forming about 25% of world’s population • Muslims have higher per capita income growth Nestlé Adapts to Halal
  • • To capitalize on the favorable opportunities, Nestlé made changes to its business model: – New global committees (Malaysian operations) – Working with Muslim governments – Collaborations and product development – Retail networking • (supermarkets) Nestlé Adapts its Business Model
  • • Cooperative strategies are the complement of outsourcing • Globalization is an important factor in the rise of cooperative ventures 1. Joint Ventures 2. Strategic Alliances Cooperative Strategies
  • • Firms merging into one entity to further their objectives • Both firms exercise control over the new entity by sharing profits, revenues, and costs – Sony Corporation and Ericsson merged to establish Sony Ericsson Mobile (joint venture) – Aera Energy is a joint venture between Exxon and Royal Dutch Shell 1. Joint Venture (JV)
  • Expertise Alliance -Brings together noncompeting firms to share expertise and specific capabilities Ex. Outsourcing of Information Technology -Most favored by the stock market New Business Alliance -Partnerships focused on entering a new business or market Ex. Companies partner when venturing into new parts of the world, like China -Most Common > 50% Alliances Cooperative Alliance -Joint efforts by competing firms, formed to attain critical mass or economies of scale Ex. Combined purchasing arrangements Merger and Acquisition Alliance -Focuses on near-complete integration -Obstacles: legal regulatory constraints; unfavorable stock market conditions -Least favored 2. Boston Consulting Group’s Four Groups of Alliances
  • • Intel forming an alliance with Microsoft: Intel providing expertise for Microsoft. (Expertise Alliance) • Outsourcing: when a company outsources taxes, call centers, or payroll to a specialized company. (Expertise Alliance) • A US food company forming an alliance with Nestle. (Cooperative Alliance) Examples of Strategic Alliances
  • • News Corp Inc acquired MySpace; Microsoft acquired Skype (M&A). • Costa Coffee entered the Chinese market with the Yueda Group based in Jiangsu Province in China (New Business Alliance). Examples of Strategic Alliances
  • 1. Risk Sharing 2. Funding Limitations 3. Market Access 4. Technology Access 5. Other Factors Key Drivers for Coop Strategies
  • – Most companies cannot afford to participate in all product markets of strategic interest. – Risk is the determining factor of whether a corporation enters a global market or invests in new technology. 1. Risk Sharing
  • – Globalization and intensified technology prevent companies from dominating most value-creating activities – To compete globally, companies must incur: • Immense fixed costs • Higher level of risk 2. Funding Limitations
  • – Cooperative strategies can help fill the gap of: • Prerequisite knowledge • Infrastructure • Critical relationships necessary for the distribution of new products to new customers. 3. Market Access
  • – Products rely on technologies that few companies can afford – Very difficult for corporation to garner the technological advantage. • Partnering with technologically compatible companies to achieve the prerequisite level of excellence is vital to remain at the forefront. 4. Technology Access
  • – Lack of particular management skills – Lack of inability to add value in-house – Lack of acquisition opportunities of size, geographical or ownership constraints 5. Other Factors
  • • Long-term joint venture whereby partners jointly operate their transatlantic business. • Equal sharing between the Air France KLM Group and Delta of: – Revenues and costs of their transatlantic-route network – Coordination of operations – Governance of the joint venture Air France/KLM Group and Delta Airlines
  • Customers benefit from: more choices, frequencies, convenient flight schedules, competitive fares, and harmonized services 200 flights and approximately 50,000 seats DAILY! OUTCOMES: Air France/KLM Group and Delta Airlines
  • GE Money = the consumer lending unit of General Electric Company Acquisition of 39.3% stake in Red Multibanca Colpatria Colombia is an important growth market for GE as they continue to expand their business in Latin America GE Money and Columbia Bank
  • OUTCOMES: Banco Colpatria can expand its product offerings Deliver enhanced consumer credit products to the growing Columbian financial service market GE Money and Columbia Bank
  • • Globalizing a company's value creation infrastructure has Three primary dimensions. – 1. Deciding which activities to perform in-house vs. outsource and to whom and where. – 2. Developing the right partnerships to support a company’s globalization efforts. – 2. Implementing a suitable supply chain management model for integrating them into a cost-effective, seamless value- creating network. Summary (1/3)
  •  Core competencies represent unique capabilities that allow a company to build a competitive advantage.  Outsourcing and offshoring of component manufacturing and support services can offer strategic and financial ADVANTAGES; however RISKS are involved as well.  Growth, cutting costs and innovation are critical drivers of manufacturing relocation.  Formulating cooperative strategies is the complement of outsourcing. Summary (2/3)
  •  Risk sharing, funding limitations, and the desire to gain market share and technology access attract executives to cooperative strategies.  Four groups of alliances: expertise alliances, new business alliances, cooperative alliances, and merger and acquisition alliances. Summary (3/3)
  • Book: De, Kluyver Cornelis A. "Chapter Eight: Globalizing the Value Chain Infrastructure." Fundamentals of Global Strategy: A Business Model Approach. New York, NY: Business Expert, 2010. Print. Online: China Business–Philippines. Web. 06 Jan. 2012. <http://chinabusinessphilippines.com/index.php?option=com_content>. "Offshoring - Outsourcing to Extreme." About Management - Business Management - People Management - and More. Web. 12 Feb. 2012. <http://management.about.com/cs/people/a/offshoring104.htm>. "Difference between Outsourcing, Offshoring & Insourcing." Infor Community - Toolbox for IT. Web. 12 Feb. 2012. <http://infor.ittoolbox.com/documents/difference-between-outsourcing- offshoring-insourcing-10510>. References and Further Reading
  • Core Competencies Outsourcing • Advantages, Risks • Knowledge-Based Outsourcing • Locating Value-Added Activities Cooperative Strategies Summary
  • Recommended Reading
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