offshore unit
Recognize local network as a source of knowledge; networking capabilities; collaboration with external parties
The offshore unit is lacking capabilities in order to perform the development tasks relocated to India. The employees need to develop or enhance their existing knowledge base and apply its knowledge to commercial ends, which requires critical thinking and judgement skills. This represented a significant departure from the unit’s initial role of handling standardized activities. The phase model (figure 2) shows a gradual progression from acquiring (explicit and tacit) knowledge to critically applying that knowledge to collaborating with the external network to further enhance the commercial application of the knowledge and utilizing the external network as a source of novel ideas. This gradual progression of capability development builds up to the offshore unit utilizing its external network.
Together, these steps represent a significant development of the pre-existing repertoire of capabilities, as well as the development of learning capabilities (Cohen and Levinthal, 1990) and integrative capabilities (Henderson and Clark, 1990; Kogut and Zander, 1992; Pisano, 1997). The offshore unit developed their learning capabilities, which “involve the development of the capacity to assimilate existing knowledge” (Cohen and Levinthal, 1990: 130). Through repeated actions, the offshore unit began to assimilate the tacit and explicit knowledge they received from the home unit in the form of documents, training sessions, mentoring etc. During this process, the employees at Biztek India did not need to produce any new knowledge or apply it to commercial ends; their application was limited to assimilation and understanding of existing knowledge developed in the home unit. These capabilities allow the employees to combine the knowledge they receive from the home unit and apply it creatively and lead to novel linkages and associations (Cohen and Levinthal, 1990). These capabilities represent the ability to acquire and assimilate knowledge, and eventually, recombine the knowledge. The Biztek India employees demonstrated their learning capabilities when they took over the responsibility of the two discontinued filters and developed them successfully. The capabilities to develop the filters were already present in Biztek Denmark; therefore, these capabilities were not new to the organization, though they were new to Biztek India. Prior to the relocation of R&D the Biztek India employees would have been limited in their expertise to develop two new filters.
In phase 3 the offshore unit engages with local customers and suppliers and develops a wireless controller that was new to the organization. Through collaboration with a supplier, Biztek India developed a controller and showed the ability to recognize a potentially
valuable idea, the commercial application of the idea and the recombination of internal and external sources of knowledge. The absorption of external sources of knowledge blended with firm specific technical competencies represents integrative capabilities (Henderson and Clark, 1990; Kogut and Zander, 1992; Pisano, 1997). Arguably integrative capabilities are more complex than learning capabilities as they require the recognition of valuable external knowledge in addition to assimilating them. This indicates capability development of increasing sophistication in Biztek India. From a critical standpoint it can be argued that Biztek India did not introduce novel knowledge within the organization, or create any path breaking innovations. However, they did begin to understand the process of R&D, and began to participate in the capability development necessary to minimally accomplish some development tasks. This is a deviation from their existing role, and the Indian unit needed to overcome their path dependence to perform any R&D related activities.
In order to facilitate the relocation of R&D to India, the home unit needed to strengthen its own offshoring capabilities related to coordination, communication and alignment with the offshore unit. Some of the home unit’s capabilities, such as coordination of relocated tasks, coordination of the increased demands associated with interdependence, and realignment and restructuring of the units are enhanced. This is consistent with Jensen et al.’s (2013) observation that the home unit also needs capabilities in order to effectively relocate activities.
In phases 2 and 3, organizational changes, such as realigning the product lines and creating a separate development unit, are accompanied by training and close interaction, which lead to capability development and tangible success in this process. Therefore, the undertaking of R&D also requires supporting structures within the organization. The organizational-design literature highlights the importance of the organizational changes that offshoring necessitates (Kumar et al., 2009; Larsen et al., 2013; Srikanth and Puranam, 2011). Biztek Denmark developed structural and interface management (Manning et al., 2012) capabilities. I define structural capabilities as the ability to realign the home unit and offshore unit based upon the task and coordination requirements. Restructuring within Biztek India and establishing a different department simplified the coordination, reduced complexity and allowed for faster decision making (Weiss, 2007). The decision to create a new R&D unit reflects the ability to address the changing role of Biztek India and to have a corresponding change in the organizational structure. Often, the offshoring literature assumes that the success or failure of
such ventures relies on the skill level available overseas or the governance mode in question (Lewin et al., 2009; Weigelt, 2009). I show that the skills available in the offshore location are not the only relevant factor – the supporting structures and actions that are closely related to coordination capabilities affect the success or failure of such ventures.
Offshoring complex tasks can result in the development of capabilities in the home unit purely as a consequence of the relocation, for example, Manning et al. (2012) examined how firms develop interface management capabilities in order to disintegrate, relocate and reintegrate tasks into larger workflows. This finding is consistent with Jensen’s (2009; 2012) findings that through the experience of offshoring, firms develop capabilities that improve their ability to offshore in terms of more transparent workflows, better documentation and technical capabilities. Biztek Denmark had no prior experience in relocating R&D; therefore, they gained the experience in successfully disintegrating and relocating tasks to Biztek India. Their prior experience in disintegration was limited to standardised tasks, which are much more reliant on explicit knowledge and therefore, easier to transfer. Similar to Manning et al.’s (2012) study on distributed R&D, Biztek Denmark gained the ability to specify and explicate R&D knowledge, consequently reducing the ambiguity surrounding these tasks. The relocation of R&D to an offshore unit leads to increased interdependencies (especially when compared to standardized activities). Therefore, the interface management capabilities developed by the home unit address the increased coordination demands arising from these interdependencies. The existing headquarter-subsidiary literature has primarily focused on the actions the subsidiary needs to take when upgrading roles (Andersson et al., 2007), therefore, an examination of the upgrade process identifying the capabilities developed by the home unit adds to this stream of literature. I find that in the offshoring context, both units need to develop their capabilities, even though the capabilities are different in nature, therefore, I propose:
Proposition 3: Capability development in the offshore unit is supported by capability