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International Current Business Practices
Final Project
Professor: Rodrigo Gallegos
Offshoring:
A relevant strategic decision?
Tom Guerlain Weckmann
Marin Leveillé Nizerolle
12/12/2016
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Summary
I. Presentation 4
a) What is it ?
b) Where does it come from ?
c) Why do firms offshore ?
d) Who welcome offshoring ?
II. Pros and cons of offshoring 9
a) Advantage of offshoring for the developed
countries
b) Pros of offshoring for the developing countries
c) Cons of offshoring
III. What will be the future of offshoring ? 14
a) Is backshoring the result of anti-shoring ?
b) Key issues determining the future success of
offshoring
c) Some hypothetical trend for the future of
offshoring
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Introduction
In our time of globalization, companies are less limited by national boundaries and
can exchange more easily with the rest of the world. In fact, exporting has become to
be a priority for companies and it is possible because the barriers to importation are
less important. These international trades have created many changes in the global
economy.
Indeed, the competition has passed from national to international and the number of
competitors has increased with it.
Due to these economic modifications, all enterprises are forced to adapt themselfs
and use new technics in order to be more competitive.
Since this period of proliferation, a new phenomenon has appeared. It is called the
war price. Every enterprises are trying to low their price in order to attract more
demand, so to sell in a bigger quantity.
This war price is certainly beneficial for consumers, but it is more and more difficult
for producers to reduce their price.
In fact, their is two possibilities in order to do it.
The first one is to low the profits, wich is the opposit of the most important goal of a
company. They can low their profits but in a short term in exchange for future more
important profits.
The second way to low the price is to reduce the costs.
To achieve this objective, a company has many strategic opportunities, and one of
them is Offshoring. Today, offshoring is considered as an important factor of
competitivity, flexibility and sensitivity to answer to the new economical challenges.
Everything is a good opportunity to make profit and offshoring is one of the most
effective, wich explain why it is such common for big enterprises.
This observation leads us to a significant question wich is: « Offshoring : A relevant
strategic decision ?
In order to answer to this question, we divided our work in three distincted parts. The
first one is the presentation of offshoring, the second one is the pros and cons of
offshoring, and the last one is the potential future for offshoring.
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I. Presentation
a) What is it ?
Offshoring is a technique used by many big companies since the trade liberalization.
This technique consists in lower operating expenses by basing a portion of the
company’s business in a different country.
For an enterprise, this method can entail moving product manufacturing, service
center or operations such as research and development to an other country.
Offshoring is usually done by industrialized countries to less developped countries
because they can extract benficial effect from it.
We can say that it is almost always used for lower costs of labor in the new location,
but more recently, offshoring also include access to qualified personnel abroad in
particular or technical professions and increasing speed market.
Offshoring is mostly seen as a negative thing that reduce the income of a country, but
what many people don’t know is that some government are also using offshoring for
example in terms of infrastructure but it is pretty rarer than for business.
The different types of offshoring:
➢ Production offshoring:
This type of offshoring is also called physical restructuring. It consist in relocate
the physical manufacturing process of a product to a lower cost detination.
Production offshoring is the more used type of offshoring because it is the
most efficient in term of reducing cost and it is quite difficult to offshore things
such as product design or research and development because it require high
skilled workers.
The north american free trade agreement has permit to expand this technique
because US has begin to offshore in Mexico and a little bit later to China.
➢ IT-enabled services offshoring
IT-enabled services are also called remote services. These information
technology services are covering the entire operations wich exploit
information technology in order to improve the efficiency of an organisation.
The key IT-enabled services are the call centers, electronic publishing, medical
transcription, data centers or portals…
The growth of this type of offshoring is due to the progress in communication
infrastructure follow by the telecommunication and internet expansion in the
late 1990’s.
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➢ Innovation offshoring
After a high tech company is done with the service offering and is starting to
realizing costs saving, she will start offshoring the innovation work to countries
like India, South Africa or China. In those countries they can still cut their costs
or even shorten the product life cycle.
Some of the countries that we mention before has higher skilled workers in
terms of technology, research and development. Hence, western firms often
establish some collaborative relation ships with technical universities in order
to change the programs in their advantages.
➢ Re-shoring
Re-shoring is also known as backshoring or inshoring. This concept is to bring
back what you have offshored onshore. In fact, more and more people are
paying attention to the problems of offshoring and are fighing against it. This
can create some pression against the big companies that are offshoring and
they can lose many costumers in their home market, so that is why some of
them are re-shoring.
b) Where does it come from ?
In order to explain what is offshoring, we have to study how it became so popular
and usefull for multinationals. The first step is the industrial revolution that begins in
the middle of the 19th century. This period is characterized by an intense
transformation of the industry in some devlopped countries and the use of new
techniques.
In fact, it has permited to create new business activities and an important economic
growth. This transformation in the economic organisation has been sucessful for
many countries and it has lead to a sustainable and irreversible production growth.
After this long period, in 1940, the influence of the industrial revolution has created a
new era and we call it globalization. The globalization is the process of international
integration arising from the interchange of products, ideas and other aspects of
culture. The major factors of globalization that generate further interdependence of
economic and cultural activities are the progess in terms of transportation
(countainer ships) and telecommunication infrastructure (telegraph).
After these two periods, thanks to the liberalization of markets, large international
companies were born. The aim of every companies is to make more profits and to
reduce costs. Ever since a company have been in an international perspective, they
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have been constantly looking for new ways to grow their profit. Hence in the 1960’s,
offshoring has been a result of nothing else but these innovative ideas that permit to
the trials and experiments of reducing costs by dissecting core and non core work.
What the firm really do is define the tasks that are not what they normaly do, but do
as requirement for their core business processes. This other work is given to an other
firm for whom it become the core business.
This offshoring process has caused a structural change in the world economy from an
industrial to a post industrial society. Later, the development of internet has been
participating actively for the offshoring. Indeed, many new categories of work such as
call centers or computer programming are being offshored.
This situation has been profitable for many countries that are offshoring but also for
countries that are receiving offshored work.
For example, before the 1990’s, Ireland was one of the poorest countries of the
European Union but with a relative low corporate tax rate. Hence some companies
from the united states has began to offshore software and electronic to Ireland ; wich
has created an high tech boom and permit to Ireland to become one of the richest
country of the European Union.
c) Why do firms offshore ?
We often confuse offshoring, outsoursing and offshore outsoursing. Contrarly to
offshoring, outsoursing refers to an organisation contracting work to a third party.
And offshore outsoursing is the process of hiring someone to do the work offshore.
What is really interesting is to understand why to offshore ?
The main interest for companies to offshore is to reduce their costs by contracting a
foreign company for whom the labor is pretty less expensive. In fact, producing in an
other country where the production costs are lower permit to save money and so to
increase the profit of the product.
An other important reason for companies to offshore, is to focus on core business
processes while delegating time consuming processes to external agences. We can
link this reason with the theory of absolute advantage of Ricardo but in a business
vision. This theory consists in focusing on what you are good to produce in front of
the competitors and to give the production of the other activities to an external
company.
The third important reason is quite different because it is not in order to low the
costs but to improve quality. In fact, for some specific product a company won’t be
able to produce in a good quality, so they will offshore this production to a more
specialized company. This is usually used for high technologies that are produced in a
better quality in some countries like China or Japan.
Nowadays, the competitivity is more and more intensive internationaly and
companies have to adapt themselfs in order to sell more in every country. This is one
of the reasons that can push a company to offshore his production and make more
profit in order to reinvest it.
The labor intensivity of some countries are pretty high because of their working
conditions or knowledge. Hence it is intersting to offshore in these countries that are
going to be more efficient, so that it will accelerate the production process.
We also know that innovation is the goal of every enterprise and for that you need
high skilled labor in order to work on research and development.
A high skilled labor for some specific activities is quite difficult to find, but there is still
some countries that has more qualified workers than others. So offshoring to these
countries can be beneficial. A part from these most important reasons of offshoring,
