Academic journal article Journal of Business Economics and Management

Fine Slicing of the Value Chain and Offshoring of Essential Activities: Empirical Evidence from European Multinationals

Academic journal article Journal of Business Economics and Management

Fine Slicing of the Value Chain and Offshoring of Essential Activities: Empirical Evidence from European Multinationals

Article excerpt

Introduction

Lured by cost savings, access to talented people and new knowledge, an increasing number of companies in a wide variety of industries, including manufacturing, information technology and services (Boardman et al. 2008) have begun to offshore a variety of activities. As competition intensifies and the pace of change accelerates, companies are considering possibilities to globally source products, knowledge and services. Increasingly, companies are finding that they cannot just rely on the existing configuration of their activities, which is typically focused on the home country. Rather, they must consider opportunities for global sourcing and offshoring. In this sense, offshoring has become an imperative for many companies (Lewin, Peeters 2006; Pyndt, Pedersen 2006; Dossani, Kenney 2003).

In order to be able to reconfigure activities and reap the benefits of offshoring, companies are organizing their value chain activities more efficiently. In particular, they are fine slicing the value chain in smaller but more coherent modules that can be separated from each other into space and time. The value chain can be reconfigured along a number of dimensions, especially in terms of the location and governance of each value chain activity (Asmussen et al. 2009; Asmussen et al. 2007). Companies must make decisions about which activities to offshore and how to govern those activities (i.e. whether to keep the activities within company boundaries or to contract them out to independent suppliers).

In relation to these decisions about how and which activities to offshore, it is often argued that companies should keep core activities in-house, and outsource non-core activities. However, several key questions remain unanswered: What are "core" activities and how can they be differentiated from "non-core" activities? Is this division truly dichotomous, i.e. companies only carry out core and non-core activities, or is there a continuum along which some activities are closer to or further away from core activities? As companies fine slice their value chains, they may offshore not only peripheral and non-core activities but also activities that are closer to the core (e.g. research, design and product development). In fact, high value-added activities (engineering, R&D or product design) as well as standardized IT and business processes are increasingly being offshored (Kedia, Mukherjee 2009; UNCTAD 2005). As Lampel and Bhalla argue, the "offshoring of high value added activities will be incorporated into the strategic repertoire of organizations in the 21st century" (2011:357).

In this paper, we argue that companies are redefining their core activities. In this process, some essential activities previously viewed as core activities are being detached from the core and made more offshorable. We also propose that while companies typically keep their distinctive core activities in house and close to headquarters, they are beginning to offshore essential activities that are close to core activities, i.e. activities that are critical to the company's competitive advantage. Companies can leverage on suppliers that have more specialized competences, and they can tap into knowledge and talent in other parts of the world through the offshoring of these essential activities.

We propose that essential activities will be offshored to own subsidiaries (captive offshoring), while the offshoring of non-core activities will often involve independent suppliers (offshore outsourcing). Furthermore, we argue that this differentiation between modes of offshoring will be even more pronounced in knowledge-intensive industries, where interfaces between the different activities are less standardized. The proposed hypotheses are tested on an unique dataset covering 263 companies from 15 different European countries. In total, the dataset covers 565 offshoring operations spanning five different value chain activities. …

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