Offshoring
and Globalization of the
Value Chain
Torben Pedersen
Professor
Center for Strategic Management and Globalization
Copenhagen Business School
Agenda
• Definitons
• Theories
– Porter’s value chain
– Modularization
• Case: Ecco – different offshoring strategies
• Highlights from an international survey
• Danish data on offshoring of advanced activities
• Case: Coloplast – Managerial and organizational
challenges in offshoring
Sourcing (onshore-nearshore-offshore)
.
Location 
Home country
(onshore)
Foreign
country
(offshore)
Operator 
Nearshore
Contractual
Partner
(Onshore)
outsourcing
Offshore
outsourcing
(outsourcing)
Ourselves
(insourcing)
Captive
offshoring
(FDI)
Offshoring – Global trends
What is driving the offshoring?
• New information and communication
technology makes it easier to codify and
standardize activities
• New technology makes it possible to
disconnect and disaggregate activities
– e.g. e-business, e-learning, library services
• New important markets like China and
India is opening up and claiming their
role in the world economy
Porter: A value chain approach
A change from dispersed to concentrated
configuration strategies in which global
sourcing plays a vital role
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
Inbound
logistics
Operations
Outbound
Logistics
Marketing
and sales
Service
A dispersed value chain configuration
with low interaffiliate coordination
UK
USA
Japan
Marketing & Sales
A concentrated value chain configuration
with high inter-affiliate coordination.
UK
Mgt
Ireland
USA
Logistics
R&D
Manufacturing
IT
India
M&S
Marketing & Sales
China
What is driving the offshoring?
• New information and communication
technology makes it easier to codify and
standardize activities
• New technology makes it possible to
disconnect and disaggregate activities
– e.g. e-business, e-learning, library services
• New important markets like China and
India is opening up and claiming their
role in the world economy
Porter’s global value chain framework
Coordination of
value chain activities
High
Oprening of new markets
Lower coordination (I&CT) and transportation costs
Low
New codification and standardization technology
Dispersed
Concentrated
Configuration of
value chain activities
Take aways
- Offshoring
- Enabled by modularization/standardization
- Benefits: Location-specific advantages
- Comes at a cost: Increased coordination
problem
The starting point
Value Chain
Input
Process
Output
Fine-slicing of the value chain
Value Chain
Input
Process
Output
Location and organization
Choice of location and organization ?
Value Chain
Input
Process
Output
Danish textile-companies
outsourcing/offshoring
Concepts
OPT
CMT
SOD
Outward Processing Traffic
(1985-1990)
Cut, Make and Trim
(1990-1995)
Sourcing from own Design
(1995-2000)
Design
Logistics
Denmark
Denmark
Denmark
Denmark
Outsourcing
Denmark
Outsourcing
Denmark
Procurement
Denmark
Outsourcing
Denmark
Eastern Europe
Processing
Outsourcing
Denmark
Southern Europe
Eastern Europe
Cutting
Outsourcing
Denmark
Eastern Europe
Asia
Sewing
Packaging
Quality control
Branding
Southern Europe
Eastern Europe
Asia
Southern Europe
Eastern Europe
Asia
Denmark
Southern Europe
Asia
Denmark
Denmark
Denmark
Fine-slicing of the activity:
Smiley of the value chain..
Value
added
Branding and marketing
Design
Logistics
Quality Control
Packaging
Procurement
Sewing
Processing
Cutting
Value chain
Input
Processing
Output
Smiley of the value chain..
Value
added
Denmark
Design
Branding and marketing
Logistics
Quality Control
Packaging
Procurement
Sewing
Processing
Cutting
Value chain
Input
Processing
Output
What is new about offshoring?
• Disaggregation of the value chain and re-location of
some of these more disaggregated activities
• Sourcing motives are becoming more prominent than
market seeking motives
• In particularly, China and India (1/3 of world
population) are becoming active on the global scene
• Empirically:
– The amount of offshoring has increased dramatically
– The character of offshoring has changed to include service
and knowledge activities
ECCO A/S –
Optimizing Global Value Chain Economics
The history of ECCO
• 1963 foundation of ECCO in Denmark
• ECCO over time aims to produce most comfortable and modern
footwear for work and leisure, focus on quality and comfort
• 2004 => 90% of production exported, mainly to US, Germany and
Japan
1963

Denmark
(Foundation
of ECCO)
1984

Portugal
1991

Indonesia
1993

Thailand
1998

Slovakia
2005

CHINA
Global Lifestyle Casual Footwear Brand Sales (in US$ million)
Rank
1
Company
Clarks
2
ECCO
3
Rockport
4
Geox
5
Birkenstock
6
Bass
7
Catterpillar
8
Doc Martens
Others
Total
2002
1,399
29,2%
502
10,5%
385
8,0%
208
4,3%
270
5,6%
275
5,7%
209
4,4%
295
6,2%
1,252
26,1%
$4,795
2003
1,534
29,6%
590
11,4%
361
7,0%
329
6,3%
300
5,8%
285
5,5%
210
4,0%
195
3,8%
1,383
26,7%
$5,187
% change
9,6%
17,5%
6,2%
58,2%
11,1%
3,6%
0,5%
-34,0%
8,2%
Composition of employees in ECCO by geography
10000
8000
6000
4000
2000
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Employees in Denmark
Employees outside Denmark
Production of shoes (in pairs) 2000-2004
4.500.000
4.000.000
3.500.000
3.000.000
2.500.000
2.000.000
1.500.000
1.000.000
500.000
0
2000
2001
2002
2003
2004
Shoes produced in Denmark
Shoes produced in Portugal
Shoes produced in Indonesia
Shoes produced in Thailand
Shoes produced in Slovakia
Location of ECCO’s value chain activities
Value
added
Design and development
Branding and Marketing
Denmark
Distribution
Production process
USA and Denmark
High-tech shoe production
Most complicated shoes
Production of uppers
Portugal
Slovakia and Thailand
Thailand, China and Indonesia
Value chain
Input
Processing
Output
Home
country
Internationa Outsourcing Own production
(% of all shoes) facilities (i.e.
l sales
remaining % of shoes
USA
40 %
90 %
Puerto Rico
Dominican Rep
UK
?
99 %
(UK)
Ecco
Denmark
90 %
20 %
Portugal, Slovakia,
Indonesia, China,
Thailand
Geox
Italy
45 %
?
Timberland
Clarks
Slovakia
Romania
No one strategy fits all!
2006 Offshoring Research
Network Survey Demographics
Duke University / Booz Allen Hamilton 2006 Offshoring Survey Demographics
Percentage of Forbes companies in US sample
Forbes 100
Small (Not
Ranked by
Forbes)
20%
30%
14%
Forbes 250
12%
11%
Forbes >1000
13%
Forbes 500
Forbes 1000
Source: Duke University/Booz Allen Offshoring Research Network 2006
Survey
 537 firms surveyed in US, UK,
Germany, Netherlands and Spain.
Excludes third party service providers
– 55% currently offshoring
– 18% considering offshoring
– 27% not considering offshoring
– 1498 offshore functional
implementations
 Major industries represented: Financial
Services, Manufacturing, Telecom,
Technology, Consumer, Media,
Energy, Aerospace & Defense,
Automotive
 Functions Offshored: Includes IT,
Customer Service, Business
Processes, Engineering, Marketing,
R&D, Product Development and
Design
IT remains the most highly offshored function.
The next offshoring frontier, however, is
globalizing product and process innovation
Cumulative Percentage of Firms Initiating Offshoring by
Function
50%
Cumulative Percentage of
Firms Initiating Offshoring
45%
40%
35%
IT
Product Development (R&D, Engineering, Product Design)
30%
25%
20%
Admin. Business Processes (F&A, HR etc.)
Call Center / Help Desk
Procurement
15%
10%
5%
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
Access to qualified personnel and improving
speed to market are growing faster as
offshoring drivers than cost reduction
Growth Rate of Offshoring Drivers Over Time
% of Responses Rating Driver as
“Very Important” and “Important”
90
Cost Reduction
80
70
Access to Qualified
Personnel
60
Competitive Pressure
Business Process Redesign
50
Increased Speed
to Market
40
30
20
Access to New Markets
10
0
2004
2005
Survey Year
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
2006
Managerial and organizational risks are
growing while risks associated with external
factors are declining.
Perceived Risks of Offshoring 2004 - 2006
% of Firms Citing Risk as
“Very Important” or “Important”
60%
Operational Challenges
55%
Lack of Acceptance by Internal Clients
50%
Loss of Managerial Control
45%
Lack of Acceptance by Customers
40%
35%
30%
Cultural Differences
25%
Political Backlash
20%
Political Instability
15%
10%
2004
2005
Survey Year
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
2006
Offshoring of R&D leads to job growth onshore,
while offshoring of back office functions is
associates with job losses onshore
Average # of Employees Offshore vs. Average # of Jobs Eliminated Onshore
40
150
140
128
120
30
97
100
79
80
20
60
35
40
28
20
13
0
* On average, offshoring led to job creation
Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey
&D
*R
De
si g
n
od
uc
t
Pr
Ma
rke
tin
g
/S
a le
s
g
En
gi n
ee
rin
en
ter
Ca
ll C
IT
Fin
an
ce
/A
-40
0
cc
ou
nti
ng
-20
10
-10
Average # of jobs eliminated
onshore per implementation
Average # employees offshore
per implementation
160
Danish data on offshoring
of more advanced activities
Activities offshored
(Representative survey of Danish firms, all sectors, Fall 2004)
Share of firms
Activities
2004
Expected 2007
Production
90 %
92 %
Logistics &
purchasing
17 %
28 %
R&D
11 %
23 %
Adm.
9%
16 %
Sales & marketing
6%
11 %
The Wind-turbine company Vestas’
disaggregation of the value chain in R&D
”In Novo Nordisk 90 percent of our
research and development is svead and
only 10 percent are really creative”
Lars Guldbæk Karlsen, Vice-president of R&D
Novo Nordisk
Disaggregating activities
Less
advanced tasks
R&D:
More
advanced tasks
Test, patenting
New inventions, design
Production:
Volume production
Individual prototype
or niche production
Marketing:
Canvas and tele sales
Advertisement, branding
IT:
Service operations
Programming, architecture
Administration:
Bookkeeping & payroll
Management
Data
• Survey: Total population of firms in Eastern
Denmark with 10+ employees ( = 3.600 firms)
• 1.504 firms responded (response rate 42%)
– 1.158 firms (77%): no offshoring
– 346 (23%) firms have offshored activities
• identified type of offshored activities and rated
tasks whether less or more advanced tasks
(Likert-scale, 1-5)
• 113 firms (8%) have offshored more advanced
tasks
Heckman-model on
1.504 Danish firms
Whether to
offshore
Share of knowledge workers
+
Knowledge seeking
Number of offshored tasks
Capital investment
-
Developed countries
Captive offshoring
Firm size
Multinational company
Financial performance
Seeking cost advantages
Market-seeking motive
+***
+***
-
How advanced are the
offshored activities
+**
+**
+**
+
+
+
-**
+
Take-aways
• The offshoring of more advanced tasks is conducted
by experienced and knowledge-intensive firms
seeking knowledge and talent abroad
• Not more common with captive offshoring to
deleloped countries.
• Offshoring is best analyzed on a more disagrregated
level and we need to know more about
interdependencies and complementaries etc.
between the different tasks
Strategies for control
Disaggregation af banking activities
Brands
Smiley..
Creative
innovative
White collar
jobs
Blue collar jobs
Marketing
Branding
R&D
Design
Manufacturing
Input
High-cost
countries
Low-cost
countries
Markets
VALUE CHAIN
Education and payment of engineers
New engineers educated
per year
Annual income in $ US
USA
59,536
75,000
(New York)
India
82,107
6,000
(Mumbai)
China
219,563
12,100
(Shanghai)
Russia
82,409
3,400
(Moscow)
Japan
104,478
71,500
(Tokyo)