Paulo Roberto Gião y Moacir de Miranda Oliveira Junior
With the presented concepts, tendencies and theories, we think there is a gap or an opportunity to present a new interpretation for the value chain for OO purposes, considering also that some of the RBV approaches are not enough clear to classify and identify exactly what can or cannot be outsourced, considering missing of knowledge, information, capabilities, etc. From now on we are going to refer to these characteristics and attributes as potentialities. This interpretation considers two main aspects. The first one is related to value chains and consider that there are potentialities at the interfaces among activities. The degree, quality and quantity depend on each firm and must be handle carefully especially in OO processes. The second is related to potentialities and consider the difficult to precise the meaning and the importance of potentialities for a firm, they are spread through the firm but, at least the main part of each one is concentrated in an activity responsible for that. It does not means that potentialities cannot stay in routines, communication and linkages among the value chain activities but that there are VC activities responsible for the content and the handling for these interaction processes.
Porter (1991) described a firm as a collection of discrete, but interrelated economic activities and the basic unit of competitive advantage is the discrete activity. 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 potentialities lie in these interfaces? In these cases, how can one avoid them and block this knowledge transfer in the case of outsourcing? However a complement to value chain can be done if we consider the VC as a discrete set of activities (10, 100, or even 1,000 activities) but that each activity has a continuous approach and not discrete to correctly represent the “system of interdependent activities” and with “interrelated economic activities”. In other words, the presented framework shows the value chain as a discrete set of continuous activities. This small complement may represent a different value chain interpretation and can be comprehensive with available potentialities among activities reported by many presented authors. Also a discrete number of activities is necessary to keep the firm manageable and continuous activities mean that a main part of an potentiality can be confined in an activity but not all.
So, thinking this way, each activity could be more realistic represented by a Gaussian distribution curve. This curve has some especial characteristics very helpful not to understand that there are potentialities flowing through activities and the management needs to handle with that, especially if some outsourcing / offshore outsourcing are under firm’s ideas and also with this increase peace of these processes. The first point is related to the accuracy of potentialities that can be present in an activity. For this purpose, the statistical common accuracy (related to standard deviation), normally 5% in management studies, representing that 95% of the activity is contained in the defined activity but 5% is overlapping with adjacent activities. The second is that the normal distribution never touches the horizontal axis or, in this management interpretation, no activity or sub activity can be 100% confined in its boundaries unless considering that those boundaries could be infinite! From this point of view, a value chain could be seen as presented in figure 1, with some superposition among activities. This figure can represent the best case where the potentialities are really confined in the main part of activities and only a small quantity (maybe only the necessary) is shared with the remaining activities of the value chain.
Adapted from Porter (1985)
Figure 1 – An interpretation for a value chain
Each activity share X% of its potentialities with the next ones (not for the activities at the extremes of the value chain) and has contact with Y% of the neighbor activities. With this approach it is possible to understand and visualize the difficult to keep potentialities in certain activities and also in the firm boundaries. However, the situation can be even worse. Why in some industries or firms the superposition of activities could not be as presented in figure 2?
Figure 2 – Example of a value chain with overlapping activities
This representation seems to be more coherent with practical observations and shows that areas overlap to some extent. The previous questions about the boundaries between marketing and sales areas and research and development areas can be remembered. Porter (1985, p. 46), for instance, split the Marketing & Sales activities in Marketing management, Advertising, Sales force administration, Sales force operations, Technical literature and Promotion sub activities. Could these areas be represented as in figure 3?
Adapted from Porter (1985)
Figure 3 – Possible interactions and overlapping of Marketing & Sales areas
Of course, this is a complicating factor, when it comes to identifying potentialities and the sharing of non-core activities for outsourcing purposes. It is important to remember that each link of the VC is comprised of sub-activities that also have tenuous borders and that the outsourcing process can reach them too. In this case, the amount of potentialities under exposition to other activities is even more and again, thinking in an accelerated outsourcing process, the amount of potentialities released to environment or to a contracted company can put capabilities and the competitive advantage in danger.
When considering possible overlapping between areas, much higher amount of potentialities is shared among the activities. It is impossible in a value chain like this way the marketing management sub activity not share information even with promotion sub activity. And a value chain like this one can to raise doubts if the value needs to be a sequential or a serial chain of activities.
Another example can also be found in large telecommunications firms where the technical area has a large structure and the overlapping is also present (Figure 4). Planning area is responsible for the overall understanding of the telecommunication network with numbering plans, dimensioning routes among other issues. After receiving a request from planning area, the Design area will remain the plan in first tangible way, studying physical paths, possible spare equipments, etc. After that, engineering area will analyze the project and probably will prepare a request for proposal (RFP) if a completely new switching system is necessary or try to expand available equipments to support the new condition prepared by planning area. Contracted a solution by Engineering area, the Test area is now responsible for test the solution integrated in the nowadays network. Routes will be tested based on routing, numbering plan and signaling objectives. After this phase, with the main tests approved, the new equipment is released to Operations area to be definitively integrated to the network.
Figure 4 – Example of interactions in a technical area
This example shows that a technical area can be split in several others and two main principles must be kept in mind. The first one is that instead the superposition of areas, the responsibility of each one is not part of the shared potentialities and, based on functional principles, each one can execute its own tasks in a multi-task teams work. Second, there is no way to avoid the share of potentialities among the areas. This potentiality sharing is made through informal and formal processes sometimes based on conversations among involved engineers and sometimes based on documents when more “radical” changes, modifications or clarifications are necessary to be done.
The meaning of the above examples is significant. The interdependence among activities is not only related to “official” activities, products, or services but also and mainly related to potentialities exchange. When it happens in an intra-firm approach it seems to be a good way to share knowledge and also to avoid leaving potentialities in only a specific area or to an individual. But what can happen when there are outsourced activities or sub activities in a value chain?
The outsourcing process of activities or services involves the identification of some activities that must remain under the organization’s control and others that can be outsourced. Based on the concepts available in the literature, the identification of the potentialities of the organization and the evaluation of the value chain can be conducted in a sequential, reverse or parallel manner, but it is important that this process involve these principles.
By identifying its potentialities, what is essential for its operations, and what is responsible for its competitive advantage, the organization can evaluate where these activities are located in the value chain, what it is necessary to protect and what can be outsourced, in order to concentrate better on the core business and on performance. Depending on the type of activity, this outsourcing will be driven by cost reduction, access to new technologies or the quest for better quality from specialized organizations. Following the pace of the globalization process, the search of these companies / partners should be conducted anywhere in the world, especially in emerging economies such as China, India, Brazil, and Russia, among others.
An interdependence network was created among many value chains from different companies and different cultures in different countries. Fine et al. (2002) said that this process [outsourcing] can represent a choice for a firm to become less or more dependent for supply and knowledge purposes. In the last stage, the organization can verify if its forecasts, the results of the outsourcing process and the overall performance of the organization were correct. In a continuous process, all involved areas, such as production, operations, marketing, product quality, customer satisfaction and even customer care, will evaluate the situation and will continue to search for improvements in the process, so that, in some cases, the outsourcing process may even be reversed.
From the point of view of the outsourcing company, the procedures presented above seem to be reasonable and the results will confirm whether the decision taken was good. Contracting companies start to evaluate the emerging countries’ companies based on signed contracts and whether schedules and quality conform to requirements and specifications. These interfaces are monitored with the aid of these criteria and probably none or few strategic analyses are conducted regarding what is really being passed on by the organization and other contracting companies to emerging countries’ companies, how the learning process is progressing, and what are the strategic aims. The point of view of the emerging companies can be different from that of the contracting companies. Their invoicing is important for their survival and they are complete organizations with a structure, a culture, skills, people, desires and strategies; of course, they aspire too much more than merely to serve contracting companies.
The next scenarios use the presented new interpretation for value chain and based on the unclear definition of some potentialities in some offshore outsourcing examples. To develop them, we are considering only the best case interactions between activities and the concentration of a potentiality in a specific activity. In other words, we are considering that only a minimum amount of potentialities are presented at boundaries activities and the main part of them are confined in an activity. Even considering this best case, some unexpected considerations can be reached.
Some suppliers may not want (or really don’t have conditions) to change, move or acquire other links (activities) in the value chain but others have their own ambitions and want to learn and evolve their services and products to become leaders in what they do or even to become competitors of precious contracting firms. In this context, the absorptive capacity (Cohen & Levinthal, 1990) can be very useful not only from the point of view of contracting firms’ competitive advantage but also from the perspective of contracted firms that wants to learn more and more.
In scenario 1 (figure 5), a single or several companies in a same industry can outsource a same activity of the value chain to a same outsourced company. After the identification of their non-core activities in their value chains and outsource to a same company in any country through the world. In Figure 6, companies from A to N have decided to outsource the determined link to an outsourced company.
Certainly the chosen company has its own potentialities to receive the in requests from those outsourcing companies. However, after receiving so many tasks and activities with different requirements and specifications it will be necessary to interact with contracting companies for a better understanding of them. In this natural and necessary process formal or informal information will be bidirectional communicated among companies. Contracted company can provide new information about new tendencies, materials and the state-of-art technologies for a better product production.
Figure 5 – Scenario 1 - Single or multiple sources of a same activity in a same industry
Otherwise the contracting company will be asked why some specifications need to be so tight or why so high levels of quality or if the design can be a little different because some constrictions in battery or keyboard compartments. When all these natural interactions happens, fragments from the others links of the value chain are being clarified and new knowledge is being acquired or captured for the contracted company.
Improving its productive process the company can understand, learn and incorporate new potentialities to its portfolio, produces products or service in world scale and quality and maybe one day develop its own brands. In addition, developing also these new competencies can propose new solutions, improvements and products to actual contracting companies and even conquering new clients. While the contacts are done based on in predefined specifications, the contracted company will do the best efforts to comply them and even surpass contract quality, specifications and services (maybe in other links of the value chain) and in this case some bonus or new prices will be negotiated. In case if the contracted company does not have interest in these new improvements, the contracted one can try to find new clients and increase its portfolio. Doing that, the contracting company has the option to keep the contract as how it was signed or incorporate the innovations or improvements developed by contracted company in their products. There will be always a risk if the contracting company did not accept the innovations because the contracted company can sell them to other companies. And, of course, new values can be aggregated to the original contract or sold to another companies.
To show that this situation is common in the market, an example is presented. The Taiwanese company TPV Techonology Limited a specialized company in TV and computer monitors has in its portfolio clients as Dell, HP, Compaq and LG. Even an outsourced company for these worldwide brands, TPV has its own monitor brand AOC on of the leader in international market (TPV Technology Limited, 2009).
Providing basically the same kind of service to several companies with different requirements and specifications (quality, performance, design, size, etc.) the emerging companies learn and as a necessity have to improve their processes, production lines e also their R&D (if available) to assist their clients. These companies doing that, they are learning and producing world quality products and services, producing their own innovations, acquiring their own patents and challenging other international competitors.
A solid document with precise specifications and requirements can help to avoid the informal transfer of knowledge; however, it can be an inhibitor to innovation process coming from contracted companies. Good ideas can come from these specialized companies while they are in contact with new materials, technologies, manufacturing processes, etc. According to Quinn (2000), external sources are the dominant innovators in corporate services.
In the second scenario, one or more companies in a same industry can desire to outsource different non-core activities (figure 6) and can choose the same outsourced company. Of course, the desires of each outsourcing company are unknown from the others.
In a situation like this, the outsourced company has access to different activities from different links of a same value chain and thought its learning process can rebuild the missing links of the value chain. The work of the emerging country company is not easy considering that the outsourcing companies are outsourcing only non-core activities. How can be possible to rebuild a value chain if only non-core activities were passed to emerging company? However, there are multiple sources of activities and none of them knows exactly what the other ones are outsourcing! What a company considers non-core activity can be a core activity in another company! The emerging company receiving what which one considerer non-core activities can be receiving important parts of core activities from one of the sources. If it happens, the outsourced company can try to build its own value chain!
Figure 6 – Scenario 2 - Single or multiple sources of several activities in a same industry
An interesting example of multiple sources relayed to a single emerging company is illustrated by the Indian company TCS – Tata Consultancy Services. TCS is one of the largest services outsourcing companies in the world and provides services to many companies in many economic sectors. For instance, TCS has clients in finance, insurance, telecommunications, transports, energy and medical sciences. Its telecommunications portfolio includes clients from different links in the value chain, such as BT, Ericsson, Motorola, Swisscom, TataTeleservices and Verizon. From equipment manufacturers such as Ericsson and Motorola to full-service providers such as Verizon and BT, the volume and range of activities to which TCS has had access, thanks to its individually outsourced services and their importance for its global learning process, are enormous. Depending on the kind of service provided to each telecommunication company, even the fact that BT operates a GSM technology network and Tata Teleservices a CDMA technology network can provide important information and knowledge for TCS which, neither BT nor Tata Teleservices might have done individually.
Finally, as a third scenario, various companies in distinct economic sectors can outsource activities for a same outsourced company (Figure 7). The chosen emerging company can have its competencies related to several products and service in several different areas. A basic competence can be the base for many industries for example: motherboards for computers and cell phones, monitors to computers and TV sets and even a contact center.
Receiving activities from distinct sources with any kind of similarity among them, the emerging company will refine its own existent potentialities and processes and it will have access to the understanding of different requirements from different industries. And as in previous case, what is core or non-core potentiality from one company in one sector can be non-core or core in another one and vice-versa. Receiving “non-core potentialities” from different sectors the emerging company can build not only a single value chain but maybe several!
Figure 7 – Scenario 3 - Multiple sources of several activities in different industries
With its own potentialities and having access to new and different sources of knowledge, competencies and markets, nothing can hamper that in some moment the company should refine its own value chain and develop new value chains even for more value added products and services. The previous case of TCS applied to all economic sectors can provide a good example of what can happens and how the learning process can be boosted. As an example, we can mention Asustek, a Taiwanese company that developed expertise in motherboard manufacturing during the 1990s and that was hired by Sony, HP, Canon and Epson as an OEM provider. It also has its own brand: ASUS. In 1996, 92% of the company’s revenue came from motherboard sales (National Security Corporation, 1999). By the late 1990s, the company began to diversify its products portfolio.
By 2007, a noticeable change in its revenues from manufactured products had materialized. Its portfolio was now comprised of motherboards, notebooks, 3G cell phones, PDAs and even LCD TVs (Yuanta Research Center, 2007). Asustek sold 5.5 million laptops in 2006, had a partnership with Lamborghini in design, and some of its models were very competitive in terms capacity, performance, weight and design.
The Asustek case illustrates the company’s learning process over its 20-year existence. The company knew how to learn from the outsourcing enterprises. Based on its initial competency in motherboards, it came to understand new business, value chains, technologies, requirements, specifications and competencies, and developed several new value chains in different economic sectors. These types of acquisition and development of new and complementary potentialities are a reality and show that the outsourcing process is an opportunity for outsourced companies to appear, learn and to grow. This learning process is an important element and one whose impact upon the globalization process should be studied and understood. Therefore, based on value chain fragmentation and on potentialities fluidic entities, the first research proposition can be clarified and presented this way. In addition, Hansen & Birkinshaw (2007) presented an interesting example about the German Siemens that since 1999 has a small unit (15 people) located in Silicon Valley (USA) for scouting new technologies, ideas and tendencies. This activity involves relationships with scientists, doctoral students, and venture centers, as also attending any kind of scientific event in that important region. The idea is very good and why not can be done also by firms that mainly work as outsourced companies emerging countries? It is a very rich source of information and knowledge for firms for any country.
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Vol. 32 (1) 2011
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