The Importance Of Strategic Orientation Business Essay


Organizations adopt offshoring for several reasons. Offshoring has traditionally been treated as a cost-saving approach (Bartell, 1998; Cooke, Shen, & McBride, 2005; Farrell, 2005) to perform business activity at offshore locations at lower cost through market and/or arms-length transactions, thereby reducing transaction costs (Coase, 1937) and production costs. In particular, scholars have applied transaction cost economics to explain outsourcing and offshoring strategies (Farrell, 2005; Grote and Täube, 2007; Bock, 2008; Stratman, 2008; Ellram, et al., 2008 and Vivek, et al., 2008) by lower overseas labor costs, as well as compliance and management costs related to these overseas activities (Coase, 1937; Williamson, 1975).

More recently, additional theories have been used as a basis for justifying offshoring including the resource-based view (Barney, 1991; Penrose, 1959; Vivek, et al., 2008). According to the resource-based view theory, organizations use offshoring as a strategy to combine the comparative advantages of geographic locations with their own resources and competencies to maximize their competitive advantage (Mudambi and Venzin, 2010), and to get access to new resources (Holcomb & Hitt, 2007) and realize organization growth (Lewin & Peeters, 2006) through the relocation of activities abroad. Therefore, it is important to further discuss the attributes of offshoring strategies and assess their impact on firm performance. Important questions are in what way the strategy can contribute to firm performance.

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To meet the aim of this research a conceptual model was developed to investigate the relationship between the degree of offshoring and performance and the influence of offshoring strategies on firm performance (see Figure 1), which is both supported theoretically and empirically.

In order to leverage global cost differentials, enhance efficiency and drive growth, companies are increasingly turning to offshoring. There is evidence that offshoring contributes positively to market value (Alexander and Young, 1996) and firm performance (Gilley & Rasheed, 2000). From a measurement perspective, a review of the literature identified a number of individual measures of the degree of offshoring. To achieve a more comprehensive multi-item coverage this paper defines the degree of offshoring in terms of the number of jobs offshored, the number of functions offshored and the number of offshoring implementations (Gupta et al. 2010; Jabbour 2010; Srivastava et al. 2008 and Rai & Patnayakuni 1996).

Possible positive performance effects of offshoring are thought either to occur through labor cost advantages (Bunyaratavej, et al., 2007; Erber & Sayed-Ahmed, 2005; Farrell, 2005), increased access to resources (Couto, et al., 2006), and organization growth by enabling volume expansion (Chandler, 1962).However, empirical evidence from several authors have either reported negative offshoring performance effects (Fifarek, Veloso, & Davidson, 2008) or non-significant performance effects (Bhalla, Sodhi, & Son, 2008; Gilley & Rasheed, 2000). Although there are theoretical assumptions that offshoring increases an organisation's chances of survival (Coucke & Sleuwaegen, 2008), the equivocal results with regard to the performance effects of offshoring warrant taking a more detailed look in order to determine whether the benefits are either real or illusory.

There are two significant disadvantages of previous empirical studies on the influence of offshoring. First, previous research studies in offshoring and outsourcing literature do not provide information about the quantitative scope of offshoring and outsourcing (Jabbour, 2010; Doh et al., 2009; Srivastava et al., 2008; Jensen, Kirkegaard and Laugesen, 2006; Levy, 2005). They merely provide a yes/no measure of whether or not offshoring or outsourcing has occurred in the individual organization (Jensen, Kirkegaard and Laugesen, 2006).Second, they focused only on short-term measures and on a single aspect of performance. In this study, we suggest that it takes some time for the positive effects of offshoring to emerge. Therefore, specific attention needs to be paid to the long-term performance effects of offshoring (e.g. Novak & Stern, 2008) and to expand the range of items used to actually measure performance(e.g., Murray, Kotabe, and Wildt 1995). That is, previous studies on offshoring examined mainly the financial performance measures such profitability and sales performance over a short period of time (Bhalla, et al., 2008). Therefore, this research examines the quantitative scope and the long-term impact of offshoring on firm performance using multi-dimensional measures of performance, including: (1) five years net operating income, (2) five years sales growth rate, (3) five years shareholder's value growth rate. Hence, the level of financial performance of a firm is hypothesized to be positively associated with its degree of offshoring:

In this study, three different offshoring motives are analyzed including cost reduction, competitive advantage and growth strategies.

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Offshoring is quite often used as a cost reduction strategy (Jensen & Pedersen, 2012; Contractor et al., 2010; Maskell et al. 2007; Cooke, Shen, & McBride, 2005; Bartell, 1998) .Organizations may be able to reduce the total costs of labor and transaction costs below the operating level in their home country. This could be achieved through either offshore outsourcing (i.e. non-captive third party such as a mobile phone call center or the offshoring software design) or captive offshoring (i.e. establishment of offshore subsidiary of the focal organization). One should be careful, however, when assessing the merits of an offshoring arrangement to take into account the "invisible costs" like communication related costs (Stringfellow, et al., 2008) or set-up costs (Ellram, et al., 2008) when offshoring activities.

Following Coase's (1937) argument, transaction costs economics provides the first rationale for offshoring ( Roza et al. , 2011; Stratman, 2008; Farell 2005), offshore outsourcing (Ellram et al., 2008). According to transaction costs analysis, because the costs of transacting across the market may be prohibitive in some instances, such activities are best performed in-house within a vertically integrated organizational structure (Williamson, 1975). The consequence of transaction costs analysis is that certain activities that are less efficiently performed within the vertical organization can be transacted out. As noted by Malone, Yates, and Benjamin (1987) in the area of information technology, the steady decline in the unit costs of coordinating across the market favors a market organization, as compared to a hierarchy. Thus, cheap labor afforded by offshore locations, as well as the steadily declining costs of communication and coordination, favor offshoring as an economically viable alternative (Maskell et al. 2007; Maye & Salomon, 2006).

A study by the Offshoring Research Network, a joint venture between the Duke University CIBER and Archstone Consulting, found that 97% of the 104 small and large U.S. organizations surveyed designated cost reduction as the reason for offshoring (Levin & Peeters, 2006a). Kakabadse and Kakabadse (2000) show that lower transaction costs motivate organizations to develop a value chain using partners rather than engaging in internal production.

We now turn to the relationship between offshoring as a cost reduction strategy and firm performance. While offshoring as a cost reduction approach provides significant advantages, there are also risks associated with this approach, which might reverse the benefits gained. As offshoring increases, transaction costs are likely to increase due to hidden costs related to communication, set-up, and control, which might partly offset savings (Jensen & Pedersen, 2012; Stratman, 2008). Transaction costs may also increase due to the uncertainty involved in the relocation of activities (Jensen & Pedersen, 2012; Roza et al., 2011; Coase, 1937; Williamson, 1975).

There are other advantages, which can accrue from offshoring as organizations exploit their organization specific ownership advantages. For example, organizations can achieve economies of scope and technological and organizational expertise, by geographically relocating activities (Doh, 2005; Dunning, 1980). These ownership advantages are transferred offshore to decrease cost levels and increase performance by profiting from relatively lower wages and low capital costs (i.e. location advantage) (Dunning, 1980). In the past, these cost advantages were used to stay competitive in comparison to local suppliers at foreign locations. However, nowadays "offshoring is undertaken to compete against imparts originating from low wage countries" (Coucke & Sleuwaegen, 2008:1262).

Further, a cost reduction strategy, a traditional rationale for outsourcing, is short-term, as most competitors are able to copy the strategy. Moreover, Kern, Willcocks, and Van Heck (2002) suggest that implementing offshoring with a focus merely on cost savings could attract suppliers who may not work towards the organisation's objectives, or may attract suppliers who are themselves concerned with reducing their costs in order to meet their own low bids. As a result, the success and effectiveness of offshore operations would suffer leading to negative influence on total firm performance. Dess et al. (1995) and Bettis et al. (1992) discussed information technology (IT) outsourcing as a strategic decision and suggested that cost reduction alone is not sufficient, and will not enhance shareholder returns in the long term. If this also relates to offshoring transactions, shareholders may not view offshoring positively if the offshoring decision is predicated on the cost savings aspect alone.

Cost reduction, a traditional rationale for outsourcing and offshoring, is a short-term strategy, as most competitors copy the strategy. Resource-based scholars explain outsourcing and offshoring as resulting from the organization focusing on its core competencies and externalizing non-core activities (Quinn and Hilmer, 1994; Farrell, 2004, 2005; Holcomb and Hitt, 2007). This perspective follows the resource-based argument that organizations should concentrate their limited resources and effort on activities and processes that create competence advantages (Barney, 1991). Offshoring holds significant strategic benefits apart from cost reductions (Bartell, 1998, Cooke et al., 2005, Corbett, 1996, Insinga and Werle, 2000, Kakabadse and Kakabadse, 2005, Leavy, 2004, Maltz and Sauter, 1995and Quinn and Hilmer, 1994).

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The resource-based view (Barney, 1991; Penrose, 1959; Vivek, et al., 2008) explains the second rationale of offshoring. From the resource-based view, the availability of highly qualified personnel and resource capabilities at offshore locations drives offshoring (Lewin & Peeters, 2006). Knowledge-seeking and efficiency-seeking are the two most important reasons for international sourcing in information-intensive industries (Roza et al., 2011; Nachum & Zaheer, 2005). The resources (personnel and technologies) organization pursue through offshoring enable organizations to go beyond performing existing activities in a cheaper way to performing them in a more efficient way. In this view, offshoring is a strategy to search at distanced locations (e.g. Lewin & Peeters, 2006; Westhead, Wright, & Ucbasaran, 2001) for the resources needed by an organization to maintain and improve its competitive position. That will relatively lead to better long-term competitive positioning (Quélin and Duhamel, 2003 and Quinn and Hilmer, 1994) and long-term performance (Dou & Sarkis, 2010). Therefore, we assume that executing offshoring as a competitive strategy influences the relationship between the degree of offshoring and firm performance in the long-term.

In addition, to the first two theoretical explanations for offshoring strategies: cost-reduction and the efficiency-enhancement (Jensen & Pedersen, 2012; Contractor et al., 2010; Mudambi 2008; McCann and Mudambi 2005; Monczka et al., 2005; Irving et al., 2003), there is a recent growth rational for offshoring. Duo & Sarkis (2010), Lewin, Massini & Peeters (2009), Hutzschenreuter et al.,(2007), Lewin & Couto (2007) and Lewin & Peeters, (2006) argue that organizations offshore as a part of their growth strategy in order to become global, to improve their efficiency of business processes, to increase the speed to market as well as to accommodate to the growth in volume of transactions. Indeed, services providers are often becoming less satisfied with their low-cost provider position and attempt to move up the value chain by redesigning their products and service offerings (Jensen & Pedersen, 2012; Dossani and Kenney, 2007).

Entrepreneurship theories of growth (Schumpeter, 1934; Baumol, 1993; Fiet, 2001; Phan, 2004) provide a third explanation for moving beyond cost-reduction to the growth strategic choice (Baden-Fuller & Stopford, 1994; Mosakowski, 2002). Entrepreneurship is about identifying new opportunities and developing the resources needed to pursue these opportunities (Arthurs & Busenitz, 2006). Geographic expansion is one strategy for organizations to grow (Barringer & Greening, 1998), which might be realized through an offshoring strategy. In line with Roza et, al. (2011) and McDougall & Oviatt, (2000) and Oviatt & McDougall, (2005b) we argue that entrepreneurship growth theories provide another dimension of offshoring strategies. Therefore, we assume that executing offshoring as a growth strategy influence the relationship between the degree of offshoring and firm performance in the long-term.