Paulo Roberto Gião* y Moacir de Miranda Oliveira Junior**
Recibido:05-04-2010 - Aprobado: 10-10-2010
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The offshoring business is booming and what was used by few US pioneers are now spreading through the world (Economist Intelligent Unit, 2006) and in the last two decades not only involving manufacturing products but also more intangible activities as services (from call centers to R&D activities). McCarthy & Anagnostou (2004) argued that during last 15-year period, the economic value, strategic importance and complexity of the outsourced function (when considering manufacturing organizations) has increased.
In this accelerated environment, firms need to handle with different, important and complex tendencies in management, trying to coordinate many outsourced firms spread through the world (Kedia & Mukherjee, 2009), understanding their value chains and defining what can and what cannot be outsourced. The first objective seems to be not allowing the share of significant information or knowledge to outsourced firms, through formal or informal ways. This may be a reason for some firms are missing their competences and some other appearing in international market (Bettis et. al., 1992).
The concepts of value chain (Porter, 1985) and resource-based view (Barney, 1991; Teece et al., 1997; Wernerfelt, 1984), in special the core competencies (Prahalad & Hamel, 1990), are frequently used when outsourcing process is studied and implemented in an organization. The possibility to understand internal activities, identify those really important, keep their home and outsource non-core activities seems a good idea with many purposes but especially for focus on the core business (Quinn, 1999).
So, based on these considerations, is the value chain (VC) perspective enough to define what can be outsourced to a third-party firm? Can the internal characteristics of a firm based on RBV research line help to clarify what exactly should be outsourced and what is really being outsourced? An extensive analysis of VC and RBV concepts and understandings is done and some gaps seem to exist in both areas not allowing a conclusive method for outsourcing / offshoring purposes without risks.
The main objectives of this paper are to explore these gaps, to propose a new interpretation for the value chain based on them, and present some scenarios showing that these gaps can be responsible for the appearance of new firms in the international market. This paper presents the following structure. First we contextualize the offshoring and outsourcing process, especially the case of offshore outsourcing (OO) when a firm from a country outsources a value chain activity to a firm in another country. Second, there is the definition for value chain (VC) and some developments after its introduction and as there are also many quotations about resource-based view (RBV) theory, we extend the interaction of VC with the RBV overview, in special with the core competencies (CC) understanding. With this theoretical framework, we present an overlapping (or dynamic) perspective of the value chain and its activities and why this approach can be helpful to understand the possible losing of knowledge from outsourcing firms and, the acquiring of knowledge from outsourced firms.
Offshoring is a reality and has an expressive pace since its appearance. Kedia & Mukherjee (2009) said that is not new and takes place all over the world industry leaders such as AT&T, Boeing, Citibank, General Electric, Morgan Stanley, Philips, Reebok, Sony, Swissair, Wal-Mart, etc. are using offshoring as a strategic tool.For the purpose of this work, we used the definition provided by Lewin, Massini & Peeters (2008) that offshoring refers to the process of sourcing and coordinating tasks and business functions across national borders, and with the contribution of Abramovsky, Griffith & Sako (2004), it is possible to clarify the cases for in sourcing, outsourcing and offshoring: inshore insource (II), offshore insource (OI), insource outsource (IO) and offshore outsource. So, for instance, offshoring can be done through affiliates or subsidiaries (OI) or third-party firms (OO).
Outsourcing can be done inshore (IO), inside the host country, or offshore (OO). For this paper, the main case under study is the one related to offshore outsourcing (OO), but also references to offshoring and outsourcing are done for clarification of important points. However, outsourcing process seems to have advantages and disadvantages. Bettis et al. (1992) associate outsourcing with the industrial decline of West firms. Presenting what the authors called the spiral of decline, because of pressure for improved returns, firms begin their outsourcing process as an incremental approach. An example to evidence this approach is in consumer electronics industries when, in that time, 1992, brands like Sony Toshiba, Panasonic, and Sharp substitute the Americans Zenith, RCA and Ampex.
Also, as presented by Chesbrough & Teece (1996), there are two different points of view and each party to joint development activity necessarily acts in its own self-interest. The example of IBM with the PC development can be useful to understand the interest and also the opportunity presented to each one. IBM used outside parties for hardware, software, and distribution, IBM greatly reduced its investment in bringing the PC to market. However, as the knowledge was disseminated and understood, manufacturers could purchase the same CPU from Intel and the same operating system from Microsoft, run the same application software and sell through the same distribution channels. Through this example it is possible to see that IBM had its competitive advantage eroded In short term, in a product that was developed by itself.
For Heimeriks et al. (2009), one path to develop alliance capabilities is simply by accumulating experience (‘learning by-doing’); also Griffith et al. (2009) argue that OO creates avenues for inter-firm learning and provides for global leverage. So, why only the contracting company can be beneficed in an outsourcing process? If the outsourcing company is having access to new technologies, and improving its time-to-market, becoming lean and with better financial results, what happen with outsourced companies? The contracted company also is having access to international trade laws and rules, international specifications, and, there is no completed contract, some subtleness and maybe tacit knowledge can be accessed to clarify specifications and requirements. They also are improving their internal processes, products and services until an international level and, in a specific moment, why not provide their own products, services and brands?
As contracting firms have their strategic objectives with the outsourcing process, the same thing happens with the outsourced firms. What are their intentions and are they learning with this process? The interdependence of firms is a reality and the knowledge is flowing in both directions. To handle with the offshore outsourcing process, some important research lines must be understood to help to comprehend the firm, identify what can be outsourced and what not. Based on that, next sections present value chain and resource-based view for clarifications purposes for an OO perspective.
Value chain (VC) is a good starting point for understanding an organization’s activities and what can be identified in essential and complementary functions. Porter (1985, 1991) states that the value chain is the set of activities required to produce and to ensure the availability of products for markets, adding that the VC has a discrete number of activities and that VC reflects the enterprise’s history and even its strategy. Porter himself (1985, p.48) voiced a sensible warning when he said that “the value chain is not a collection of independent activities but a system of interdependent activities.”
Since then, the concept continues to be used, clarified and helpful in many cases and lots of papers and citations were done related to this issue. For instance, Hansen & Birkinshaw (2007) applied in an innovation value chain, and Mudambi (2008) grouped the activities grouped into three categories: the upstream (input) end, the downstream (output or market) end and the middle, trying to identify where more value are created, but complement that maybe more important than the activities themselves (in a value chain) are the linkages between them.
Of course there are relevant information among the activities (otherwise it will not be a firm) but not as important as the activities. If it really happens, the solution could be shift the actual boundaries of VC to the interfaces having instead of Inbound logistics, operations and outbound logistics something like Inbound logistics – operations activity and operations – outbound logistics activity. There is also interfaces among these new activities and also important information among them. Fine et al. (2002) contribution is important in two aspects. The first when saying that the value chain was traditionally seen as a static view and second with the increase use of technologies and the increasing pace of markets, there is a necessity to continually disintegrate and reintegrate the value chain and keep the static approach can be an obsolete strategy.
In practice, a value chain cannot be understood as a chain of perfectly juxtaposed links. In reality, the links overlap and the boundaries are neither very clear nor well defined. This subdivision or even superposition of activities is important in an outsourcing process. For instance, who can define precisely the boundaries between the marketing and the sales areas? Or who can define precisely where exactly the Research and Development (R&D) and engineering departments of a great corporation begin? In this example, R&D encompasses creative work conducted systematically, with the objective of increasing the knowledge of man, culture and society, and of making use of this knowledge in new applications (UNCTAD, 2005). According to another point of view, R&D includes basic and applied research and its integration with the development area, its being difficult, in practice, to precisely distinguish one stage from the next (UNCTAD, 2005).
Moori & Zilber (2003), in a survey of 100 companies, found that there is a flow of activities between primary and support tasks and vice-versa, as a fluidic perspective. This shows that important information (core information) from an area is communicated or transferred to another and vice-versa. And what can happen if the areas are not within the same organization? This seems a natural statement and it is to be expected that some sort of interaction should exist among the various chain links, but is it possible that parts of core competencies lie in these interfaces? In these cases, how can one avoid them and block this knowledge transfer in the case of outsourcing?
These approaches show the importance of value chain in outsourcing process. Identifying the main activities and maybe outsourcing others based only in value chain can be helpful for a firm. However, some complications appear when there are information and knowledge at the boundaries of the activities and that they are interdependent, linked among them and also fluidic. The disintegration advantages stem from increased modularity in their structure and enhanced focus on their core capabilities. As each generic activity in the value chain can be subdivided into distinct sub activities (Kedia & Mukherjee, 2009).
Naturally, the VC is helpful for many applications but has limitations in regard to other interpretations. When it enables one to systematically visualize the activities of an organization, not necessarily dividing them into primary activities and support activities, it is possible to understand how a company works, on whom it depends, what it does, who are its clients and how its operations may be optimized. And also, because many of the quoted authors correlated value chain and outsourcing with core capabilities, crucial activities, some expressions and attributes of the resource-based view (RBV) theory. So, to clarify and to complement our relationship between value chain and outsourcing, the next section presented from a more general perspective relating many concepts and understandings based on resource-based View (RBV).
Organizational competencies became relevant during the 1980s and 1990s as an alternative in the strategy definition process, complementing the perspective of external environment analyses and company positioning within it (Insinga & Werle, 2000).This approach allows firms to identify its strengths and weaknesses to define their strategies and acquire competitive advantage.
The resource-based view of the firm (RBV) is an influential theoretical framework for understanding how competitive advantage within firms is achieved and how that advantage might be sustained over time and presented a list of authors in this research line (Eisenhardt & Martin, 2000). This perspective considers internal strengths and weaknesses as the starting point for an analysis of firms’ competitive strategy (Barney, 1991; Wernerfelt, 1984; Mol, 2007).
For Wernerfelt (1984), resources and products are two sides of the same coin. For this author, firm’s resources are defined as those assets (tangible and intangible) under responsibility of the firm. Examples of resources are: brand names, in-house knowledge of technology, employment of skilled personnel, trade contacts, machinery, efficient procedures and capital. Barney (1991) extends the understanding saying that the resources of the firm must be valuable, rare, inimitable and hard to substitute.
In 1982, Nelson & Winter argue that knowledge is part of the firm as a whole and that is not deductible to individual knowledge, competences and capabilities neither to various individuals, equipments and installations of the firm. Based on these arguments, they proposed that knowledge resides in organizational memory and that it is found in internal routines’ firms.
Questions like what makes a firm distinctive or unique, why customers buy from us, why we are profitable were presented by Amit & Schoemaker (1993). And the authors say that typical responses are related to know-how, design and engineering capability, among others. And the authors define resources as stocks of available factors that are owned or controlled by the firm and capabilities as refer to a firm's capacity to deploy resources, usually in combination, using organizational processes, to affect a desired end, and finally unify resources and capabilities as strategic assets.
Teece (1980, 1982) suggest that as resources are firm-specific, a way to handle with them is: identify the firm’s unique resources, for which markets apply them, and decides the applicability (internal or externally) of these resources. For Zander & Kogut (1995) the capabilities of a firm, or any organization, lie primarily in the organizing principles by which individual and functional expertise is structured, coordinated, and communicated.
Eisenhardt & Martin (2000) presets that recently, scholars have extended RBV to dynamic markets (Teece et al., 1997). The rationale is that RBV has not adequately explained how and why certain firms have competitive advantage in situations of rapid and unpredictable change. Indeed, Teece et al. (1997) refer to this ability to achieve new forms of competitive advantage as dynamic capabilities (DC) to emphasize two key aspects that were not the main focus of attention in previous strategy perspectives, and argue that dynamic refers to the responsiveness to business environment changes and capabilities to the use of internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment.
More recently, Teece (2007) presented new information and complements the DC approach. Dynamic capabilities enable business enterprises to create, deploy, and protect the intangible assets that support superior long- run business performance. The microfoundations of dynamic capabilities—the distinct skills, processes, procedures, organizational structures, decision rules, and disciplines—which undergird enterprise-level sensing, seizing, and reconfiguring capacities are difficult to develop and deploy and associated DC applications with an entrepreneurial management pace to catch and not miss opportunities. And at the end, the authors said that the presented framework is a beginning in strategic management theory in open economy with innovation, outsourcing, and offshoring.
Until here, we saw a diversity of terms and definitions for something very interesting and helpful for firms understand themselves culminating with the opportune relationship stated by Teece with outsourcing process, but some of them seem difficult to identify and handle in day-by-day operational environment of the firms. Some of the presented terms are comprehensible to identify for instance, brands of a firm, the ownership of an iron mining, the property of a technology or some concessions from governments to provide some services (electricity, wireless network, etc), but how to identify the skills, capabilities (dynamic or static), or in other words, more ethereal things? And how to protect or take even more advantages from them? Never forgetting that our perspective in this paper is to identify what can or cannot be outsourced in value chains with the increment of RBV understandings.
One of the most famous and quoted approach – core competences (CC) - was proposed by Prahalad & Hamel (1990), that stated that “in the long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products” and that “core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”. The characterization of core competencies is not a simple task and the authors try to clarify how to identify them. At least three criteria can be applied to identify core competencies in a company. (1) a core competency provides potential access to a wide variety of markets; (2) a core competency should make a significant contribution to the perceived customer benefits of the end product; and (3) a core competency should be difficult for competitors to imitate.
After that Hamel (2002: 77, 78) reaffirms that CC are what the firms knows. It encompasses skills and unique capabilities, and proposes some questions to identify CC: What do we have that is (a) unique, (b) valuable to customers, and (c) transferable to new opportunities? Also Hamel (2002: 78) differentiate CC from strategic assets that are things rather than know-how, brands, patents, infrastructure, proprietary standards, customer data and anything else that is both rare and valuable. Finally the author synthesize that both, CC and strategic assets, are part of strategic resources.
However, there seems to be no consensus regarding the applicability of the definition or of these criteria to identify the core competencies. Quinn (1999: p.11) added: “core competencies are not products or ‘those things we do relatively well’; they are those activities – usually intellectually-based service activities or systems – that the company performs better than any other enterprise”.
Unfortunately, the true nature of these core capabilities is usually obscured by the tendency of organizations to think about their strengths in product terms, rather than in terms of activities or services, and by each functional group’s need to see itself as the source of strategic strength (Quinn et al.; 1990). And if they represent collective learning plus “communication, involvement, and a deep commitment to working across organizational boundaries” (Prahalad & Hamel, 1990, p.82), they can be confused with other management concepts such as strategy, ideology and even organizational culture.
These misunderstandings of the definitions of core competencies are still at play to this day. Many authors have tried to clarify all this, but it is not easy. Drejer & Sorensen (2002) saw four central components in a competency: (hard) technology, employees, organizational structure and culture. From a different point of view, Heikkila & Cordon (2002) warn that “classifying an activity as non-core may lead to a serious oversimplification of the complexity for the real business situation”. For Onyeiwu (2003: 59) the thing is even more complex: “…the notion of core competencies has remained largely amorphous”. These different understandings and complements did not help our purposes even more when Hätönen & Eriksson (2009) argue that the rapid changes across industries have made core competences only temporary. This search and research for core competencies seems to be a good idea but when using more and more accurate lens, what was first found presents some holes and spaces among entities we are trying to define.
Returning to main purpose of this paper, the intention was to use some concepts of RBV to clarify what happens in the firms value chains and keep clear what exactly are being outsource (or can be outsourced) avoiding missing of knowledge, skills, resources, capabilities, etc., to outsourced firms. But the similarities and symbiotic meanings of the concepts cause more confusion than help our purposes. Maybe because this that some authors said that:
At its worst, the resource-based view is circular. Successful firms are successful because they have unique resources. They should nurture these resources to be successful.' But what is a unique resource? What makes it valuable? Why was a firm able to create or acquire it? Why does the original owner or current holder of the resource not bid the value away? What allows a resource to retain its value in the future? There is once again a chain of causality that this literature is just beginning to unravel (Porter, 1991: 108);
I do not attempt a sustained critique here but do pose two related concerns: obscure and often tautological of key terms; and failures of operationalization (Williamson, 1999: 1093).
These thoughts from different authors lead to inconclusive conclusions. Either CCs are almost everything or they are almost nothing. If they exist but there are other activities used to protect the CC, these complementary activities are a CC as well and they cannot be considered as filler activities. The trouble with these definitions (or attempts) seems clear given, their difficulty in answering a simple question: what is the core competence of the reader him (her) self?
And finally, even we could found some developments in RBV to help us in a better understand about what can be outsourced or not, how to handle with the following citation? Gottfredson et al. (2005) proposed a framework for capability sourcing according to which the first step is to identify the components of the business that represent the core of the core, and also Lislie (2003), suggested that even a core competency can be outsourced.
Vol. 32 (1) 2011
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