INTERNATIONAL BUSINESS ENVIRONMENT

International Business Environment

International Business Environment

Introduction

Off-shoring and outsourcing of business and manufacturing processes have been vivid during the past ten years. The volumes have been staggering with annual growth being continuously at double-digit level (Corbett, 2004). The key driving force behind this trend has usually been focus on core competencies (Prahalad and Hamel, 1994) and access to low-cost labor (Farrell, 2004). Relocation of relatively trivial and simple business activities and operations has taken place throughout the history of manufacturing, but lately also knowledge-intensive and highly skilled operations have been off-shored to lower labor cost countries (Lacity et al., 2008; Ernst, 2002). The risks associated to outsourcing more complex tasks are not only related to the traditional cost overruns (Shi, 2007), but also to the possibility of loosing vital core competencies, even innovations (Hoecht and Trott, 2006). And these risks have been materializing, as 20 per cent of large companies that have outsources skilled operations have taken back off-shored work in the past years (Hayes, 2007).

Outsourcing takes place through a contractual agreement between the customer and one or several suppliers providing services or products the customer is currently producing internally (Elfring and Baven, 1994). Outsourcing is concerned with the logic behind make-or-buy decisions, which could be motivated by lower costs, or access to new processes and technologies, all of which affect time to market performance (Ülkü et al., 2005). Off-shoring, under the context of this paper, differs from this definition of outsourcing only in the fact that the suppliers are located in a significantly lower labor cost region than the customer. Reasons behind the outsourcing decision may be many, yet from the strategic point of view the dimensions for assessing outsourcing of a component or business process include the potential for competitive advantage and exposure to strategic vulnerability (Quinn and Hilmer, 1994). The higher the potential for competitive advantage with high degree of strategic vulnerability the more reasons there are to produce internally, and in the reverse case with low competitive advantage and vulnerability, the less control is needed and the more justified it is to outsource.

Despite the detailed tools to assess outsourcing alternatives, numerous, up to half of the organizations that have off-shored business processes have failed to meet the expected financial benefits (Aron and Singh, 2005). Problems are not only related to financial outcomes, but to employee dissatisfaction, customer complaints through defected products and bad service and lost competencies and intellectual property. Insinga and Werle (2000) warn also that, outsourcing may be attractive at the strategic management level, but serious pitfalls are often encountered when the strategy is pushed downward into operations. In practice, this means that outsourcing decisions once executed at the operational level can easily lead to dependencies that may create unforeseeable strategic vulnerabilities for the company. Also economic fluctuations affect the motivations for outsourcing and off-shoring, as Edgell et al. (2008) indicate that economic slowdown will direct companies towards cost-driven outsourcing, despite the fact that, over the long term, service-driven or value-driven deals ...