Wednesday, May 6, 2020
Competitive Strategy Offshoring and Outsourcing
Question: Discuss about the Competitive Strategy for Offshoring and Outsourcing. Answer: Introduction: In the recent years, the relations across the borders have progressed substantially. The rate at which the countries are integrating is phenomenal. It is possible due to a number of factors and changes in communication, transportation, and technology advancements. The business organizations are also not untouched by the phenomenon of the globalization. The big companies are trying to expand their customer base across different nations. The manufacturing of the product is taking place at an entirely different location from the marketplace. Due to the immense development in the technology, the raw materials, finances and other resources are moving swiftly across different countries (Parker, 2005). Along with it, the local culture and customs is also getting adopted by different nations. In the present scenario, it has become challenging for the organizations to survive without expanding their operations in the overseas market. The cutthroat competition among different companies has als o made it mandatory for the organizations to expand their operations and reduce their dependence their dependence on a single market. However, there are several challenges associated with expanding the operations globally due to the lack of knowledge of the local culture and businesses in that country. The companies often have difficulty to obtain the right amount of knowledge to make informed decisions (Ali and Kaynak, 2012). In this essence, Ghemawat proposed AAA framework that states that the organization can expand their operations overseas through adopting one of the various approaches. In this framework, the three AAAs stands for adaptation, aggregation and arbitrage. In the aggregation strategies, the economies of scale are achieved by standardizing the regional and the global operations. The adaptation strategies are focused on modifying the organizations processes and the offerings to meet the local market needs and arbitrage strategies are designed to exploit the differences in different countries, for instance outsourcing products from countries with low labor costs. According to this framework, the choice of the international expansion strategy is dependent upon the business type. Moreover, the businesses can also select more than one strategy according to the situation. Adaptation The adaptation strategies are focused on adapting the business model of an organization according to the local culture and situations that it better suits the local market preferences. It is commonly used strategy and most of the organization adopts it to penetrate in the local markets. When a business organization modifies the business model according to the local culture and the market demands, it results in easy approval by the consumers (Contractor, Kundu and Hsu, 2003). The adaptation strategy encompasses five characteristics, namely, variation, focus, externalization and innovation. In the variation strategy, the business organizations create modifies their products or the services offered. For example, in the food and beverage industry, the companies modify their food products to suit the local taste. Along with it, they also change the business model according to the local legislations, policies and adapt their profit expectations according to the local markets. Several compa nies in the IT industry also adapt their business models and IT infrastructure to suit the privacy laws of the foreign countries. The focus strategy is based on emphasizing on particular products, or the stages of value chain to minimize the impact of different culture and geographical location. In the externalization strategy, the companies expand into different countries by developing strategic alliances or franchising. Several technology based companies are using strategic alliance to enter into new markets and reduce the impact of culture in their operations. In the design strategy, the companies design their business model to include flexibility combat supply chain differences (Rugman Verbeke, 2004). In the recent years, the IT (Information Technology) industry has observed phenomenal growth. IBM is considered as one of the oldest and most successful IT business organization in the world. It has adopted the market expansion strategy of adaption. The company has established an independent center in each country that manages, performs and controls all the business activities in those geographical locations. These independent entities have well-adapted to the local culture (Hoffmann, 2011). In innovation strategy, the companies create new products according to the local culture. In the food and the beverages industry, the companies are also trying to extend into the foreign markets by following one of two strategies. For example, Coke has utilized the strategy of adaptation to establish itself in the foreign markets of India and China. Like most multinational companies, Coke entered to skim the wealthier customers who were willing to pay higher prices for their product. In order to penetrate the market and expand its customer base, coke made a major repositioning strategy. The company lowered its prices, and margins, reduced their costs in the distribution and production. In addition to it, the company also reduced the profit margins per unit. It increased the availability of the products in the rural areas. The companies using adaptation have country-centered organization culture. In order to enter into the foreign markets, the companies are required to adapt their local culture for easy integration. In the adaptation strategy, the companies create competitive advantage by creating relevance to the local culture and exploiting economy of scale (Ghemawat, 2013). Furthermore, the companies prefer globalization in the countries wherein the local culture is similar to the foreign countries. It is done in order to reduce the impact of cultural and economic distance. Similarly, when McDonalds entered in Japan, it introduced several dishes which suited the local taste. For instance, it introduced Teriyaki burger which used the local favorite the seaweed powder (Betros, 2014; Tihanyi, et al. 2015). Similarly, when entering in other countries, the company adapts its menu and dishes according to the local taste. Aggregation The aggregation strategies are focused on creating efficiency in the business operations and the economy of scale by integrating operations across the boundaries. In aggregation, generally, the value proposition is created in assembly, production or the development processes. The companies establish a competitive advantage by purchasing raw materials and manufacturing where the relative costs of the raw materials labor is low. The primary aim of the aggregation strategies is to exploit the differences between different countries rather than adapting to them. The aggregation strategies aim towards complete standardization but do not attain it as will contradict the adaptation approaches. Therefore, in this approach, the companies identify economies of scale and scope without profits without sacrificing the local responsiveness (Kluyver, 2010). As discussed above, IBM has used adaptation strategy for global expansion; however, recently, when IBM observed that adaptation into the local culture is hindering the global expansion opportunities, it aggregated the operations in different countries to increase the economy of scale. The operations were shifted to the places where the operation costs were less and other functions were reduced to the places where the costs were low. In this way, the company enhanced its economy of scale. Geographical differences is not the only approach to obtain economies of scale in the aggregation strategies, the cultural, administrative, geographic and economic (CAGE) factors are also crucial in the aggregation strategies. Several organizations achieve globalization through aggregation strategies. In this strategy, the most challenging aspect is to create both profitability and competitive advantage. The companies in the IT industry focusing on research and development commonly uses aggregation strategy for expanding their operations. In this strategy, the IT companies deliver economies of scale by standardizing the product offering and segregating the production and the development processes. The companies pursue globalization if their primary objective is to create cross-border groupings such as between the business structure, production units or global accounts. The vertical organizations or the organizations that deals with creating a balance between the supply and the demand often use this strategy. In aggregation strategies, the companies create coordination with the supply chain managers, local managers, and regional leaders for establishing economy of scale (Gooderham, Gooderham and Grgaard, 2013). TCS has used aggregation strategy to achieve economy of scale. It has built three centers, global software development centers with highly skilled staff and in-depth knowledge. Several regional centers are also developed in Brazil and Hungary to address the cultural and the language challenges. Along with it, the near shore centers are also developed in the countries where the major clients exist to increase the customer comfort and relations. Excessive control is required in the production process for standardization of the production. The arbitrage is also common strategy in cross-border investments and manufacturing of specialized products. Arbitrage The third generic strategy to achieve globalization is the arbitrage strategy. In the arbitrage strategy, the companies exploit the differences in different geographical locations instead of adapting and bridging them. It refers to the classic global strategy of buying in one market and selling in another (Mudambi Venzin, 2010). In the present context, the offshoring and the outsourcing processes are also considered as a part of the arbitrage strategy. The offshoring process in the IT industry is the most common example of arbitrage. In this strategy, the companies create economies of scale by creating differentiation with the customers, improved relations with suppliers and the local authorities, and minimizing the risk associated with the supply chain and creating and sharing knowledge. The CAGE framework is useful in this strategy since it is focused on exploiting the difference between different countries. It is often observed, that companies get favorable results on the basis o f the origin of the organization. For example, the association with France is favorable to the success in the international markets in perfumes, wines and fashion industry (Spirig, 2011). The legal and the political differences between the countries can also create opportunities for administrative arbitrage. The companies often use it to reduce their local tax liabilities. An example in the IT industry is the Indian IT company Tata Consultancy Services which has adopted the strategy of arbitrage to expand its operation globally. In this strategy, it has started exporting the IT software services to the countries with high labor costs such as the USA and European countries. However, it has also adopted the strategy of aggregation along with the arbitrage strategy. The geographical arbitrage refers to the reduced cost in the transportation and communication. With the technological advancements, the shipping costs have reduced substantially. Moreover, the companies are also sending doc uments and information electronically to other geographical location for cheaper costs. An example is the hospitals in the USA that sends X-Rays and medical documents in India for cheap interpretation. In the economic arbitrage, the companies exploit the labor costs. It is very popular in labor intensive (garments companies). The call centers in India, factories in China and development of retail shops in Western Europe is considered a part of the arbitrage strategy (Morschett, Schramm-Klein and Zentes, 2015). Therefore, it can be stated that in arbitration strategy, the competitive advantage is achieved through internationalization specialization. The companies establish separate units at different geographical locations to exploit the differences. In such organizations, the coordination is achieved through vertical coordination at different functional department. Conclusion The business leaders use one or two strategies in the AAA framework to expand their operations globally. All the strategies are beneficial in some aspects and can prove to be lucrative. However, among all these strategies, there are several challenges and tensions. Therefore, it is important that the business leaders select the expansion strategy according to their business. It can be concluded that in the present era of globalization, it is important for the companies to follow one or more globalization strategy to establish market at foreign countries. The business organizations expand their operations in different countries due to one of more intent; however, the fundamental is to achieve economies of scale through expansion. Ghemawat has proposed AAA framework that encompasses the strategies used by different companies for expanding their operations globally. The AAA framework stands for adaptation, aggregation and arbitrage strategies. In the adaptation strategy, the companies t ry to adapt themselves to the local culture. The modification can be in terms of the product of the service offerings or business model. For instance, IBM has used the adaptation strategy to create self-governing business entities in different countries which work independently with alignment to the local culture. Similarly, Coke has also adapted the product offering according to the characteristics of the local markets. While entering the foreign markets of India and China, the primary aim of the company was to skim the affluent class who were already familiar with the product. However, it expanded its market by reducing the cost and increasing availability. In the aggregation strategy, the company tries to bridge the gaps and differences resulting due to different geographical locations. In the arbitrage strategy, the companies exploit the gap and differences arising from different culture or geographical locations. It can be recommended that a business organization should select the global expansion strategy according to the firm type or the industry wherein it operates. The companies working in labor-intensive companies should adopt the strategy of arbitrage. The companies which are focusing on developing target markets in different countries should focus on adaptation strategies. 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