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

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  • 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
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  • Do both companies benefit?
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  • Globalizing the value chain - Core Competence, Outsourcing, Cooperative Strategies

    1. 1. GLOBALIZING THE VALUE CHAIN INFRASTRUCTURE CORE COMPETENCIES, OUTSOURCING AND COOPERATIVE STRATEGIES Prof. Sameer Mathur, Ph.D.
    2. 2. Sameer Mathur BuddingMarkets.com Indian Institute of Management, Lucknow Marketing Professor 2013 – Marketing Professor 2009 – 2013 Ph.D. and M.S. (Marketing) 2003 – 2009
    3. 3. Agenda Core Competencies Outsourcing • Advantages, Risks • Knowledge-Based Outsourcing • Locating Value-Added Activities Cooperative Strategies
    4. 4. Globalizing the Value Chain Infrastructure Overview 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
    5. 5. Core Competencies • 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
    6. 6. Core Competencies – Examples • 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
    7. 7. Core Competencies – Development • 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
    8. 8. To Outsource or not to Outsource • 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
    9. 9. Outsourcing vs. Offshoring Outsourcing • Same country, different company Offshoring • Different country, different company
    10. 10. Outsourcing vs. Offshoring 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 *Globalization has increased the number of outsourcing and offshoring projects
    11. 11. Factors in Making Offshoring Decisions – Dramatic wage-cost difference – Quality and reliability of: • Labor • Environment • Infrastructure – Political stability – Economic and Legal frameworks – Quality and reliability in the outsourced service
    12. 12. Advantages of Outsourcing 1. Lower Costs 2. Greater Flexibility 3. Enhanced Expertise 4. Greater Discipline 5. Focus on Core Activities
    13. 13. 1. Lower Costs – Lowers different types of costs • (ex. labor, raw materials) – Benefits – greater scale, efficiency – Drawbacks – lower quality, reliability
    14. 14. 2. Greater Flexibility – 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
    15. 15. 3. Enhanced Expertise – 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
    16. 16. 4. Greater Discipline – 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
    17. 17. 5. Focus on Core Activities – 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
    18. 18. Advantages of Outsourcing (RECAP) 1. Lower Costs 2. Greater Flexibility 3. Enhanced Expertise 4. Greater Discipline 5. Focus on Core Activities
    19. 19. Risks associated with Outsourcing 1. Loss of Control 2. Loss of Innovation 3. Loss of Trust 4. Transaction Costs
    20. 20. 1. Loss of Control – Quality of product/service may suffer – Production schedules may be disrupted – Contractual disagreements may develop – Monitoring performance and productivity can be challenging
    21. 21. 1. Loss of Control (cont’d) ◦ 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
    22. 22. 2. Loss of Innovation – When certain support services (IT, software development) are outsourced, innovation is impaired – Focus is on production not on innovation • Innovation is stalled
    23. 23. 3. Loss of Organizational Trust – Gap in the employer-employee relationship – Workers displaced into an outsourced organization feel conflicted as to who their “real” boss is
    24. 24. 4. Higher Transaction Costs – 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
    25. 25. 4. Higher Transaction Costs (cont’d) • Indirect costs: – Tax consequences – Ability to repatriate profits – Currency exchange – Political risk
    26. 26. Risks associated with Outsourcing (RECAP) 1. Loss of Control 2. Loss of Innovation 3. Loss of Trust 4. Transaction Costs
    27. 27. Knowledge-Based Outsourcing • 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.
    28. 28. Aim of Knowledge Based Outsourcing Creating collaborative management models that share responsibilities, risks, rewards, enabling both sides to reach their objectives
    29. 29. Drivers of Knowledge Based Outsourcing – Cost imperatives – Shortages of talent in home markets – Growing availability of skills in nations such as India, China and Russia
    30. 30. Outcomes 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
    31. 31. Outsourcing of R&D in the Pharma Industry • 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!)
    32. 32. Nokia’s Global Brain Trust • 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.
    33. 33. 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.
    34. 34. Locating Value Added Activities Drivers for Manufacturing Relocation: 1. Search for Growth 2. Reduction of Costs 3. Innovation
    35. 35. 1. Search for Growth – 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
    36. 36. Example 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.
    37. 37. Cost Reduction – Reduction in raw material costs – Other cost drivers of relocation include: • Government incentives • Regional interest rates • Wages • Trade agreements
    38. 38. 3. Innovation • Suppliers in emerging markets need to acquire technology and R&D skills. – Gain the innovation ability for companies to compete as global suppliers.
    39. 39. Locating Value Added Activities (RECAP) Drivers for Manufacturing Relocation: 1. Search for Growth 2. Reduction of Costs 3. Innovation
    40. 40. Nestlé Adapts to Halal • 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.
    41. 41. 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
    42. 42. Nestlé Adapts its Business Model • 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)
    43. 43. Cooperative Strategies • Cooperative strategies are the complement of outsourcing • Globalization is an important factor in the rise of cooperative ventures 1. Joint Ventures 2. Strategic Alliances
    44. 44. 1. Joint Venture (JV) • 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
    45. 45. 2. Boston Consulting Group’s Four Groups of Alliances 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
    46. 46. Examples of Strategic 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)
    47. 47. 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).
    48. 48. Key Drivers for Coop Strategies 1. Risk Sharing 2. Funding Limitations 3. Market Access 4. Technology Access 5. Other Factors
    49. 49. 1. Risk Sharing – 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.
    50. 50. 2. Funding Limitations – 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
    51. 51. 3. Market Access – Cooperative strategies can help fill the gap of: • Prerequisite knowledge • Infrastructure • Critical relationships necessary for the distribution of new products to new customers.
    52. 52. 4. Technology 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.
    53. 53. 5. Other Factors – Lack of particular management skills – Lack of inability to add value in-house – Lack of acquisition opportunities of size, geographical or ownership constraints
    54. 54. Air France/KLM Group and Delta Airlines • 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
    55. 55. Air France/KLM Group and Delta Airlines OUTCOMES: Customers benefit from: more choices, frequencies, convenient flight schedules, competitive fares, and harmonized services 200 flights and approximately 50,000 seats DAILY!
    56. 56. GE Money and Columbia Bank 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
    57. 57. 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
    58. 58. Summary (1/3) • 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.
    59. 59. Summary (2/3)  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.
    60. 60. Summary (3/3)  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.
    61. 61. References and Further Reading 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>.
    62. 62. Summary Core Competencies Outsourcing • Advantages, Risks • Knowledge-Based Outsourcing • Locating Value-Added Activities Cooperative Strategies
    63. 63. Recommended Reading
    64. 64. Over 1 Million views from more than 100 countries Prof. Sameer Mathur Top 1% most viewed Over 250 presentations on Marketing www.BuddingMarkets.com

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