International Business and Trade
GM0112, Global Sourcing (II)
Global sourcing strategies
- The WHAT question
Professor Bent Petersen
Visiting Professor
Global Sourcing - Fall 2010
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Contents of today’s lecture
1. What drives global sourcing?
2. Global sourcing choices and strategies:
The WHAT question…
…decomposed into
a) Cognitive factors
b) Economic/strategic factors
c) Motivational factors
- the ‘comfort zone’ of managers
Global Sourcing - Fall 2010
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What Drives Firms’ Global Sourcing?
1. Improved transportation technology
(e.g. containerization)
2. Advances of I&CT (digitization!)
3. Market integration (emerging markets, WTO,
lower trade barriers and lifted FDI restrictions)
4. Improved market institutions, such as:
 Enforcement of IPR (e.g. TRIPS, WTO)
 Industry standards
 Certification, accreditation (e.g. ISO 9001; SEI/CMM)
Global Sourcing - Fall 2010
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Coordination of
value chain activities
Porter’s (1986) global value chain framework
High
Shrinking factor cost differentials
Lower coordination (I&CT) and transportation costs
Low
Market Integration
Dispersed
Concentrated
Global Sourcing - Fall 2010
Configuration of
value chain activities
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Resource commitment
to foreign sales effort
(The Establishment Chain phenomenon)
Equity
(FDI)
Contractual
(outsourcing)
Value chain specialization
(Global sourcing)
High (concentrated configuration
/ extensive coordination)
Arm’s length
(procurement)
Low (dispersed configuration
/ sparse coordination)
Local
Regional
Global Sourcing - Fall 2010
Global
Geographical expansion
of sales
(The Psychic Distance
phenomenon)
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Re-Configuring the Value Chain
MNCs are in the process of a dual transformation
of their value chains:
1. A surge from dispersed to concentrated
configuration strategies in which global
sourcing plays a vital role.
2. A surge in direction of a more fragmented (or
‘fine-sliced’) and modularized value chain in
which offshore outsourcing plays a prominent
role.
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Typical US MNC re-configuration pattern
0. Point Zero: Dispersed, un-coordinated TNC units.
1. Establishment of (regional) Shared Services
Centers  Consolidation in terms of scale
economies and transparent cost structures
(establishment of ‘pinch points’).
2. Fragmentation and modularization of value chain
activities.
3. Decision about location (on/near/off-shore?) and
ownership (captive/JV/outsourced?).
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MNC example: American Express
 1990s: 46 sites carrying out travel related services.
– Process duplication and inconsistencies
– Lack of customer focus
– Inflexible, legacy applications
 1993: 3 regional shared services centers in Phoenix
USA, Brighton UK, Gurgaon India.
 2000s: The Indian captive center provides services
to Amex units outside Asia, thereby becoming a
global sourcing center.
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Global sourcing choices and
strategies:
The WHAT question
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The WHAT question
 What should be done “at home” at what abroad?
 What should be done for local use (i.e. dispersed value
chain activities) and what for global use (i.e.
concentrated value chain activities)?
 Reformulation: Which production factors/inputs
(labor, human and physical capital, raw materials,
intermediary products, etc.) should be sourced at
home, which abroad? Which for local/global use?
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Decomposing the WHAT question
1. Cognitive factors: What global sourcing
opportunities are envisaged in the first place? HQ
heuristics. Global mindset. Perceived risks.
2. Economic/strategic factors: What global sourcing is
economic feasible? Exploitation of global factor cost
differentials. Efficiency in MNC coordination,
economizing on information costs.
3. Motivational factors: What global sourcing is
‘political feasible’ in the organization? Does global
sourcing conflict with its ‘comfort zone’?
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Cognitive factors
 Global sourcing as a learning process (like the
‘Uppsala model’). Bounded rationality, cognitive
limitations.
 “Went for cost, stayed for quality (Dossani & Kenney,
2003).
 Overconfidence of inexperienced MNCs
 See also Maskell et al. (2007) about offshore
outsourcing learning processes: The scope of
offshored activities is broadened with experience.
Global Sourcing - Fall 2010
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Broadening the scope of Business Process
Outsourcing
Examples of back-office activities that – through
digitization – are being outsourced to Indian firms
(i.e. offshore BPO):
 IT
 Finance & Accounting
 Debt collection
 Payroll administration
 HR operations
 R&D processes
Global Sourcing - Fall 2010
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Outsourcing segments
Discretion-Based Problemsolving (TDO)
.
Knowledge-based Processing (KPO)
Rules-Based Processing (BPO)
Basic Transactions
(Project outsourcing)
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‘Drifting’ into global sourcing
Is global sourcing a result of a deliberate or
emergent strategy?
Global sourcing implies a re-orientation of
managerial mindset from etnocentrism to
geocentrism.
In any case global sourcing is more than
supply chain management… SCM is just the
”tip of the iceberg”:
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ETNOCENTRISM
SC mgt
Corporate language
KM (codification)
HR Mgt
Performance mgt
Risk mgt
Time zone mgt
GEOCENTRISM
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Economic/strategic factors
 Cost savings are still driving global sourcing…
 …but “access to qualified labor” is quickly gaining
importance (No 2 factor in services). “Race for talent”
 Global sourcing of “Product development” is gaining
importance – in particular among SMEs!
 Knowledge transfer costs, including costs of
standardization and codification, seem to be
underestimated by (Danish) MNCs.
Global Sourcing - Fall 2010
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Production cost savings versus extra transaction
and transportation costs
Benefits
Extra costs
Percentage
100
100
75
20-25
5-10
5
10-15
70
5
10
5
50
50
25
0
Production
costs in
high costs
countries
Labor Deprecia Materials,
-tion
components
and tooling
Scale.
LCC
Logistics
Other
Duties
manufaccosts (e.g. management
turing costs transportation)
costs
Global Sourcing - Fall 2010
Landed cost
from LCC
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Economic factors related to knowledge
transfer
 Standardization of operational procedures
 Codification of operational procedures
 Communication skills (e.g. language
proficiency, corporate I&CT infrastructure)
Global Sourcing - Fall 2010
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Coloplast on standardization
“At that time we had three different divisions
[in Denmark], and they had their own
systems of everything: their own way of
documenting things, their own way of
analyzing things, and – as an example their own clean room instructions.”
(Project Director, Coloplast China)
Global Sourcing - Fall 2010
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Coloplast on codification
“In the beginning the Danish organization
had the task to prepare the documentation
around the equipment and the know-how transfer meaning operation, training…”
(Local Quality and Business Improvement Manager of
Hungarian operations)
Global Sourcing - Fall 2010
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On codification & language
“A lot of the knowledge is sitting in the head of the
operators. They know what they are doing so they
do not have to write down. So we have to take the
knowledge from the operators, put it down on
paper and translate it into English.”
(Transfer Manager, Global Operations Unit)
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Motivational factors
 Comfort zone of managers: Global sourcing has to
unfold within the ‘comfort zone’ of the decisionmakers (the management). How much ‘control loss’ is
acceptable? What is political feasible? Can managers
leverage on global sourcing while still keeping in
control?
 Comfort zones of other stakeholders: When engaging
in global sourcing managers have to consider the
interests of various stakeholders : home country
employees, labor unions, NGOs, politicians, and the
‘public opinion’ (CSR!!) in general.
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Increasing
dependency/irreversibility
Typical IT outsourcing stages
Total Development Outsourcing
Knowledge Process Outsourcing
Business Process Outsourcing
Project outsourcing
Potential loss of HQ control – Need for comfort zone extension
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The ‘comfort zone’ of the sourcing firm
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The comfort zone and inter-dependency
 THEORETICAL FOUNDATION: Resource-based view (Barney e.g. 1991),
Competence-based theory (Prahalad & Hamel, 1990)
 Degree of inter-task interdependence is a key determinant of inter-site
interaction and communications (Thompson, 1967; Van de Ven, 1976)
Independence
• Resources can be purchased in
factor markets
• Substitutable resources
• Reliance on long-linked technology
Interdependence
• Reliance on intensive technology
• Hand-offs (Kumar et al, 2009)
exist and fitting/integration
needed at both ends
• Valuable, rare and in-imitable
resources
Comfort zone extension:
Managerial instruments to mitigate high coordination cost: e.g. modularization,
transfer of personnel, standardization of routines (e.g. through ERP systems)
The comfort zone in relation to irreversibility


THEORETICAL FOUNDATION: Industrial economics including
transaction cost economics (Baumol & Willig, 1981; Williamson, 1975)
Strategy is essentially about irreversible decisions (Ghemawhat, 1991)
Reversible
investment
• Resources are mobile
• Low relocation costs
• Low switching costs
• General purpose technology
Irreversible
investment
• Transfer stickiness
• High degree of specialization
• High asset specificity
• Sunk investment
Comfort zone extension:
Managerial instruments to mitigate high investment risk: e.g. real options (Kogut &
Kulatilaka, 1994), bonding efforts (Jensen & Meckling, 1976)
Comfort zone and discretionary judgment
allocated to the local operator
 THEORETICAL FOUNDATION: Organizational Learning, Dynamic Capabilities
 Exploration and exploitation complement each other, there must be a balance
between the two (March, 1991)
Exploitation
•Implementation
•Efficiency
•High control by home firm
Exploration
•Discovery
•Innovation
•Independent judgment in
execution
Managerial instruments to mitigate loss of formal control: e.g. socialization,
(O’Donnell, 2000), boundary spanners (e.g. expats), transfer of personnel (Edström &
Galbraith, 1977; Grant et al, 2002)
Coloplast on HQs’ comfort zone (resistance)
“You will understand; when you take a decision of
transferring a certain amount of production out of
Denmark to somewhere else, you also transfer
power. They used to be responsible for a big area,
a lot of machines and a lot of employees - and
suddenly, you can see that this is going to
diminish.”
(Former Manager of Coloplast’s Hungarian
operations)
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Coloplast on HQ resistance (cont’d)
“There was an unspoken resistance towards the
transfer of production equipment. It was not so
much a resistance that was embedded in the Danish
blue collar workers or the technicians taking part in
the transfer [to Hungary]. In my experience, it was
the resistance that was in the head of the leaders
and managers responsible for production in
Denmark”
(Manager of Coloplast’s Hungarian operations)
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Coloplast on job security
“The main success factor in our offshoring
processes was the job-offering guarantee that
we gave to the Danish workers all along. I
think that had we not done that, people
would not have worked with us.”
(Director, Wound Care)
Global Sourcing - Fall 2010
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