This paper analyzes the impact of production offshoring on firm viability using the Viable System Model (VSM), highlighting the dynamic adjustments firms must make in response to increased external complexity and uncertainty. It discusses the importance of balancing various forms of operational and environmental variety, as well as the need for effective coordination and decision-making in geographically dispersed organizations. The findings suggest that VSM is a valuable tool for understanding interdependencies and guiding practitioners in optimizing offshoring strategies.

2. PURPOSE –This paper analyses what happens in terms of the VSM when a firm
engages in production offshoring.
DESIGN/METHODOLOGY/APPROACH – Four propositions about the nature of
variety balance that production firms face, and what adjustments they make in the
original viable system, both in terms of the properties of one or more of the basic
subsystems and in the network of couplings between them.
FINDINGS – The paper shows the production offshoring organization as a dynamic
adaptive system in search of ways to cope effectively with external forces that
undermine its viability.
ORIGINALITY/VALUE – The VSM perspective, the paper provides opportunities to
systematically track the changes that occur in the production offshoring firm and
diagnose what they imply for the viability of the system as a whole.
ABSTRACT

3. The offshoring phenomenon presents huge challenges for firms that engage in it. It
comes with increased uncertainty and complexity as a result of changing
organizational and environmental contexts. At firm level, the geographical moving
some of a firm’s activities outside its home nation brings at least two challenges:
INTRODUCTION
1. In terms of “liability
of foreignness”, the
unfamiliarity with
environmental, eco and
cultural differences
2. The question of how
to manage an
increasing number of
delocalized, yet
interdependent entities

4. HOW “SUFFICIENT” ARE EXISTING
THEORIES FOR MODELLING THE
OFFSHORING ORGANIZATION?
TRANSACTION COST ECONOMIC –Transaction properties are the basis for control.
Here the focus is on ‘transaction’ with reliance on ‘differential capabilities’, whereas
‘constant change’ is ignored.
RESOURCE BASED VALUE – Resources add value to the organization. The theory
does not focus on the origin, internal or external, of the resource. Instead, it
evaluates the competitive advantage resource-based capabilities produce for the
organization.
OWNERSHIP LOCATION AND INTERNALIZATION – Most of the organizations do
offshoring for one of the three reasons i.e. ownership advantage, location advantage
and internalization advantage. The efficiency of a system depends on organization’s
goals and the reason for modeling.

5. THE VIABLE SYSTEM
MODEL – IN A NUTSHELL
The VSM is a systems framework developed by cybernetician Stafford Beer to explain
how organizations work as systems and how they maintain viability, i.e. the ability to
exist independently while cooperating with their environment.
The main idea is that through
the use of attenuators and
amplifiers, the environmental
variety (VE), the operational
variety (VO) and managerial
variety (VM) are in balance, or in
Beer’s words, they absorb each
other, i.e. VE=VO=VM.

6. THE VSM SYSTEMS
SYSTEM ONE – It provides the primary operation activities such as what an
organization does and it operate in local environment - a unique defined
environment for that system.
SYSTEM TWO – It direct coordinates with the system one. It deals with the planning
and information such as production and inventory replacement.
SYSTEM THREE – The middle management, defines a “resource bargain” with the
system one. 3*, it deals with specific problems in system one that need urgent
attention.
SYSTEM FOUR – It does long-range planning and helps design the next product or
service for the organization.
SYSTEM FIVE – It controls the rate of innovation, defines the organization’s values.

7. THE VSM SYSTEMS

8. RELEVANCE OR SUITABILITY OF VSM
FOR OFFSHORING RESEARCH
DEALING WITH THE COMPLEX GLOBAL CONTEXT. They refer to the challenge of effectively
capturing how firms simultaneously engage in exploration and exploitation.
CAPTURING LIABILITY OF FOREIGNNESS. Moving abroad may create a number of disadvantages
for the firm, discrimination or higher costs of travelling and coordination.
MNCS AS RECURSIVE NETWORKS RATHER THAN HIERARCHICAL PYRAMIDS. Recursion is crucial
to viability. It implements Ashby’s law by breaking the “whole” into loosely coupled parts.
TOWARDS MORE REALISTIC MODELS OF PRODUCTION OFFSHORING DECISION-MAKING.
Decision making is much more about finding stable, “good enough” solutions for loosely coupled
sub-problems.
EMBRACING INNOVATION AND ITS CONSEQUENCES OF NEW MARKETS. While new markets can
be seen as a form of “innovation” in exploration terms, managing the “innovation capability”,
especially in a dispersed operations setting, is a big challenge for many offshoring organizations.

9. THE OFFSHORING FIRM AS
A VIABLE SYSTEM
SPATIAL AND TEMPORAL
DIMENSIONS IN A VSM
DESCRIPTION OF A
FIRM.
OFFSHORING
COORDINATION OF
OPERATIONS IN A GLOBAL
NETWORK (SYSTEM 2).
OFFSHORING AND THE
OPERATIONAL LEVELS
(IMPLICATIONS FOR
SYSTEM 1).
OFFSHORING AND
ENVIRONMENTAL
INTELLIGENCE
(SYSTEM 4).
OFFSHORING AND
STRATEGY
(SYSTEM 5).
OFFSHORING AND
MANAGEMENT OF THE
OPERATIONS
(SYSTEM 3).
MAPPING THE
OFFSHORING PROCESS
OVER TIME USING THE
VSM.

10. A VSM MODEL OF
THE PRODUCTION
OFFSHORING FIRM
• The production offshoring firm, in a
VSM sense, is constructed and
deconstructed by resource
interactions among related systems
fixed in both the organization and its
environment.
• examined how the offshoring
strategy increases the amount of
external variety, especially at the
lower levels
DISCUSSION AND CONCLUSION
USING VSM TO LINK
TCE, RBV AND THE OLI
FRAMEWORK
• VSM as a conceptual tool for analyzing
production offshoring enables us to
combine and position TCE, RBV and
OLI frameworks as theories of
offshoring.
• Each deal with an important aspect of
variety engineering in the production
offshoring firm.
• OLI framework is the role of variety
such as that created by suppliers,
competitors, customers etc.

11. DISCUSSION AND CONCLUSION

12. FOR RESEARCHERS
• We conclude that the VSM is a useful and
promising tool to study interdependences
between processes, functions and resources
across geographically dispersed organizations, as
well as those organizations' responses to external
forces.
• VSM proved useful in our study of the production
offshoring firm; however, at the same time, we
realize that it can and should be broken down
into more specific types or categories of variety
relevant to the study of the offshoring firm
• Importance of transducers in this paper,
especially in the light of culture and language
related differences among plants in an offshoring
firm, future research should be aimed at more
precisely describing their functioning in practice.
IMPLICATIONS
FOR PRACTITIONERS
• First, we examined the role of variety and the
importance of balancing all forms of variety
throughout the organization to be "in sync” with
external variety.
• Second, we explored the couplings necessary
between the different subsystems for successful
offshoring.
• Therefore, for the production offshoring
organization, these decisions must be taken with
consideration of the effects on the other parts,
often newer operations or else the firm’s
competitive priorities become incongruent with
its internal capabilities..

13. THANK
YOU!