CBS Competitiveness Day 2014

TON Panel Session

Strategy, benefits, and risks in “transformational” global sourcing

An analytical framework for firms’

engagement in global sourcing

Peter D. Ørberg Jensen Department of Strategic Management

and Globalization

1 Copyright Peter D. Ørberg Jensen, 2014

Contents of presentation

1. When does global sourcing become transformational?

2. What are the risk-return tradeoffs of transformational sourcing?

3. Some first empirical evidence from firms

Source: Presentation based on PDØ Jensen & B Petersen (2013), “Global Sourcing of Services: Risk, Process, and Collaborative Architecture”; Global Strategy Journal, Vol. 3(1).

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… but first, let’s define “global sourcing”…

… and we take a broad definition:

“The process by which companies undertake some activities at offshore locations instead of in their countries of origin” (Kenney, Massini & Murtha, 2006, 2009)

… in order to investigate a central question in global sourcing strategy and operations:

When firms engage in the global sourcing of advanced business activities, how may they reap the benefits, and avoid the risks, in global sourcing?

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1. When does global sourcing become transformational?

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EXPLORATION

SPECIALIZATION REVEALING Transformational global sourcing

EXPLOITATION

REPLICATION

Conventional global sourcing

CONCEALING

Transformational vs conventional global sourcing - A three continuum triangle

Continuum # 1: Replication Specialization

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EXPLORATION

SPECIALIZATION REVEALINGStrategic global sourcing

EXPLOITATION

REPLICATION

Conventional global sourcing

CONCEALING

To what extent is the local operator assigned supply exclusivity?

REPLICATION Several providers (multi-sourcing) Multiple locations Dispersed value chain configuration Low degree of interdependence between activities Managerial control and transparency

SPECIALIZATION One provider One location Concentrated global value chain configuraion Benefits of critical mass Interdependence between activities in multiple locations Risk of global value chain disruption/break-down

Continuum # 2: Concealing Revealing

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EXPLORATION

SPECIALIZATION REVEALINGStrategic global sourcing

EXPLOITATION

REPLICATION

Conventional global sourcing

CONCEALING

To what extent is strategically important knowledge transferred to the local operator?

CONCEALING Knowledge stickiness due to:

Co-specialized local knowledge Contextualized in home firm/country Tacitness

Confidentiality concerns Safeguarding of knowledge assets

REVEALING Transferable knowledge Augmenting local service provider capabilities High human asset specificity Risk of knowledge slippage

Continuum # 3: Exploitation Exploration

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EXPLORATION

SPECIALIZATION REVEALINGStrategic global sourcing

EXPLOITATION

REPLICATION

Conventional global sourcing

CONCEALING

To what extent is the local operator authorized to innovate?

EXPLOITATION

EXPLORATION

Implementation Efficiency High control by client firm

Discovery Innovation Independent judgment in execution

2. What are the risk-return tradeoffs of transformational sourcing?

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Risk-Return Pay-offs of Global Sourcing

Transformational global sourcing

RETURN: AUGMENTED COMPARATIVE ADVANTAGE OF LOCAL OPERATOR RISK: SLIPPAGE OF STRATEGIC KNOWLEDGE. HOLD-UP

RETURN: ECONOMIES OF SPECIALIZATION RISK: SUPPLY UNCERTAINTY. INTERFACE PROBLEMS

RETURN: IMPROVED INNOVATION THROUGH LOCAL OPERATOR RISK: ”WHITE ELEPHANT” INNOVATION

3. Some first empirical evidence from firms

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Exploring the role of risk perception in global sourcing – Empirical findings

• B Faugli & P Hoxmark (2014) ”The role of risk in offshoring – Understanding the effects of managers’ risk perception and risk-reducing measures in offshoring relationships”. MSc Thesis, Copenhagen Business School – Survey sample: 76 firms in the Norwegian IT industry (response rate 24%)

– Questions / constructs based on Jensen & Petersen (2013)

• PDØ Jensen, T Pedersen & B Petersen (2013) ”Do expectations match reality when firms consider the risks of offshoring? A comparison of risk assessment by firms with and without offshoring experience”; in T. Pedersen et al (eds.) The Offshoring Challenge, Springer Publishing: London – Survey sample: Firm data from Scandinavian firms (Offshoring Research

Network, ORN)

– Questions on risks included in the ORN surveys

Risk perception and global sourcing – Some empirical evidence

FINDINGS SOURCE

LOCATION: Firms that have chosen a nearshore location will perceive global sourcing as less risky than firms that offshore to farshore location

Faugli & Hoxmark, 2014

GOVERNANCE & CONTROL: Firms that have chosen a ”captive” (in-house) offshoring model are to a greater extent engaged in transformational global sourcing compared with firms that have chosen an outsourcing or JV model

Faugli & Hoxmark, 2014 Jensen & Petersen, 2013

EXPERIENCE: Firms that have not yet offshored any activities (but are considering this) perceive offshoring as more risky than firms that already have gained experience in the field

Faugli & Hoxmark, 2014

RISK FOCUS: Firms that have not yet offshored any activities (but are considering this) mainly consider external risks, whereas firms that already have gained experience in the field mainly consider internal, operational risks

Jensen, Pedersen & Petersen, 2013