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 / Spring 2009 / Issue 54(originally published by Booz & Company)


Recent Research

Offshoring 2.0

Title: A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Skills (Subscription or fee required.)
Author: Stephan Manning, Silvia Massini, and Arie Y. Lewin
The Academy of Management Perspectives, vol. 22, no. 3
Date Published:
August 2008

Policymakers and corporate executives are keenly watching the ways in which offshoring is evolving to affect the types of jobs handled by service providers around the world, as well as the talent pools that these companies are producing. In this study, the authors evaluate data and findings from the Offshoring Research Network (ORN) project run by the Duke University Center for International Business Education and Research, which since 2004 has been tracking the offshoring activities of more than 800 United States–based and Europe-based companies

Offshoring, which the authors define as the practice of companies sourcing and coordinating critical business functions with organizations outside their national boundaries, was initially used to tap into cheap labor forces for customer service or basic IT support. How­­ever, a growing shortage of science and engineering talent in developed economies combined with the rise of clusters of highly educated groups of engineers in emerging markets such as China and India has enticed Western companies to begin to offshore more critical tasks, such as product development. Networking hardware giant Cisco Systems Inc. went even further, forming its own “globalization center” in India to gain access to Indian engineering and management talent, which in turn allows Cisco to coordinate new product design and development worldwide so that its products are suitable for global markets.

The study notes that as companies start to offshore more of their operations, cost is no longer their primary concern: According to the ORN, “access to science and engineering talent” was named by respondents as the key driver in 70 percent of the projects tracked in 2006, a significant increase from survey results two years earlier. As this change has occurred, companies have faced new challenges, including how to recruit, train, and retain global talent and how to manage the high turnover associated with top-quality engineers.

The worldwide war for talent will grow even fiercer as emerging nations begin to compete in the global arena. To prepare, the authors of this paper argue, government policymakers in developed and de­veloping nations will need to implement programs designed to nurture engineering talent at home, and corporate executives will need to focus on the difficulties of building a presence in the global job market.

Bottom Line: Reducing labor costs is no longer the primary reason that companies turn to offshoring. In­stead, companies in both developed and developing economies are looking for ways to tap into pools of skilled workers, which will increase competition for the world’s best and most expensive workers.


Disruptive Innovation and Market Creation

Title: The Parenting Paradox: How Multibusiness Diversifiers Endorse Disruptive Technologies while Their Corporate Children Struggle (Subscription or fee required.)
Authors: Donald Lange, Steven Boivie, and Andrew D. Henderson
Publisher: The Academy of Management Journal, vol. 52, no. 1
Date Published: February 2009

Industries built on the back of a disruptive technology, defined as an innovation that spawns a new industry, often require assistance from established companies to legitimize the new technology in the eyes of consumers or potential partners. Take, for example, the solar power business: Several years ago when General Electric Company announced plans to double R&D spending on alternative energy sources, including improving electrical conversion technology and developing better systems for in­stalling solar panels on rooftops, GE helped legitimize the industry, which had been established pri­­mar­ily by unknown startups with cutting-edge ideas. Overnight, GE’s interest signaled that solar energy could be a viable concept. This catapulted the industry, and the small companies that founded it, to a new growth trajectory.

But although big-name companies may be important cheerleaders for disruptive new technologies, the subsidiary firms they create to pursue such technologies may prove to be ineffective competitors in the industries those innovations spawn. The authors took a close look at this trend by examining the formation of the personal computer industry in 1975 and its subsequent performance through 1994. When the personal computer was initially launched, IBM Corporation, a ma­jor player in mainframe computers, was slow to recognize the radical import of the smaller, less-powerful machines. This oversight enabled startups like Apple Computer Inc. and Commodore Business Machines Inc. to offer the first PCs. But it wasn’t until established, diversified companies like IBM, NCR, and Unisys began offering their own PCs years later that consumers started purchasing these machines in large numbers. The big firms would all eventually vacate the PC market, but their brand names and credibil­ity helped establish the fledgling sector, allowing Apple, Compaq, Dell, and others to thrive.

Larger, diversified companies struggle in new innovative markets primarily because they fail to let their subsidiaries be sufficiently en­trepreneurial, instead saddling them with the parent company’s culture and idiosyncrasies. In fact, the authors found that the older the parent firm, the more likely its subsidiary was to fail when pursuing a disruptive technology.

Bottom Line: Large corporations play a counterintuitive role in the adoption of disruptive technologies. They are often poor competitors, yet their presence and brand name help legitimize these technologies in the eyes of consumers and potential partners.

Author Profile:
Bridget Finn is the Web editor of strategy+business.
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