Reasons behind job outsourcing towards Asian countries
In recent days the United States of America has been facing the problem of excessive out sourcing of jobs that is leading to job loss for the existing employees and potential employees within the country (Schniederjans, Schniederjans & Schniederjans, 2015). The country has been already facing the problem of job crunch after the financial crisis during recession. Job crunch is one of the political issues of the country and the new administration in the United States of America led by the President Donald Trump came into power by promising retention of jobs within the United States and reduction of outsourcing in such excessive numbers. It can be therefore understood that the country is dealing with the problem of lesser number of job openings than there are eligible number of candidates for those jobs.
The main reason behind the outsourcing of jobs, which mainly happen towards the Asian countries like India and China is because of the presence of the large talent pool in these countries but at a far lesser payment. In the USA the companies have to pay the individual employees a staggering amount of monthly payment, because the remuneration rates at the USA market is much higher (Jackson, 2013). However the same jobs are performed by the Indian and Chinese employees at a far lesser cost. Therefore it is natural that the labour intensive jobs are outsourced by the big companies to these regions to get their work done in a far lesser price. Apple Inc. is one of the largest companies in the country. It can be stated that Apple Inc which is one of the largest companies in the globe in its field of technological gadgets is also one of the largest employers and revenue generators in the United States. However Apple has outsourced all its manufacturing activities at China. The manufacturing and Assembling of its various parts are done in China and the administrative works are performed in the United States. Apple officially stated “further actions to improve the flexibility and efficiency of its manufacturing operations by moving final assembly of certain products to original equipment manufacturers.”
In the case of Schwinn “At its peak, Schwinn had more than 2000 U.S. employees, produced hundreds of thousands of bicycles in five factories, and held 20 percent of the market”, therefore it is very evident that there must have been some strategic mistake that led to the closure of the companies US operations. The fact is the company increased its dependency on the Chinese market both in terms of selling and manufacturing. This has been done in order to reduce the cost of the products, however which led to the loss of a huge portion of the employees. This is one of the reason why the company started losing hold on the USA market. Soon the company changed its focus towards the Chinese market leaving the USA market and this diversification of the attention towards new regions has resulted in a situation where the company initiated its end on the USA market. This mistake has been repeated by many small and large companies, the primary reason of such a loss in the US market is over dependency on other regions for production and changing of focus to new markets.The global strategy of outsourcing employed by a large number of companies around the globe to decrease cost of production is applied by the company in order to leverage the production of goods and keep the cost of the individual units of products as les as possible. Many of the Information and Technology related companies are also outsourcing their jobs to India. China, Brazil and other countries in other to maintain a sustainable business scenario.
Case study of Apple Inc and Schwinn
There are various theories that can be used in order to understand the phenomenon of outsourcing. The most used theory of outsourcing is Transaction Cost Economics (Ketokivi & Mahoney, 2016). This theory is having the best tools in order to catalyse the decision making process in outsourcing. The model by its characteristic features allow the changes to be implemented at two levels of both decision making and relationship management (Wacker, Yang & Sheu, 2016). “Transactional Cost Economics” is the process of understanding the transactional value of the outsourcing process and what is the level of profit gained for outsourcing the job in a particular region, and whether it would be more profitable for the company if the same was outsourced in another country or region (Lacity & Khan, 2016).
Another theory in this regard is the “Core Competency Theory”, this theory is used by many management experts worldwide to understand the process and supplement the decision making process (Drucker, 2017). This theory is actually sourced from the “Theory of Resources”. This theory has been described by researchers as “collective knowledge of an organisation, especially with regard to the ways of combining different productive skills and the integration methods of various different technologies” (Mihailidis & Thevenin, 2013).
Another theory that describes and explains the process of outsourcing is the “Relational Theory” in which explanations are given about how the companies may maintain a distinct “competitive advantage” over other organisations, by keeping the cost low and the production high (Fast, 2013). This theory has different phases such as “transition, relationship management and reconsideration.” This theory therefore engages in investigating all the processes and stages of outsourcing.
There are various other theories and models that is used to understand, study and put to application, the theory of the strategy of outsourcing.
In this particular case study the strategy of outsourcing is applied and the theory that can be utilise to explain the case study is “Transactional Cost Economics”. The company has judged the level of transactional benefit and leverage that it will gain by establishing the company’s production process in China. The company decided that the Chinese market is also ideal for selling the products. Therefore the strategy of expansion is also used by the company in order to increase its revenue and sales. The company at one hand uses the strategy of outsourcing and on the other hand uses the strategy of expansion. Expansion, outsourcing and merger is some of the important practices that are used and utilised by businesses world over in order to increase “brand value” and revenue. Most of the multinational companies are engaged in expanding their businesses world over and outsourcing the labour intensive jobs in order to gain “competitive advantage”.
Theories of outsourcing: Transaction Cost Economics, Core Competency Theory, Relational Theory
International Flavours and Fragrances is already established in the market, and this can be understood by the fact that the company supplies its goods to leading MNC’s (Multi National Companies) and brands like “Pepsi, Procter & Gamble, Estee Lauder and Unilever”. All these brands are highly established in their fields and they give a lot of importance to goodwill therefore the companies mentioned would buy products from only very reputed company. In this case International Flavours and Fragrances is having the opportunity to brandish these reputed brands as its customer base which in itself is a competitive advantage for the company. The official statement of the company about the range of products and the innovations included in the process is as follows “That passion for exploration drives our people to co-create unique scents, tastes, and tactile experiences. We never forget that we contribute to products that touch and enhance the lives of millions around the world at the fundamental level of sensation and emotion. Our new Diversity & Inclusion program recognizes and accelerates our journey to full inclusiveness and inspires us to lead transformational change from within. Every day is an opportunity to make a difference. For more than 129 years, we’ve been pioneers of the senses – and we never stop looking to the future. We create sense-sparking offerings in 13 subcategories, ranging from perfume, fragrance ingredients, and cosmetic actives to dairy, beverages, sweet, and savoury flavours — co-creating 46,000 products annually. We’re built on collective imagination, chemistry, consumer insights, and food technology – and the drive to push boundaries. Our mission: to deliver innovative “firsts”, year after year” (Iff.com., 2018). Therefore the company strategically positions itself in a situation where the customers perceive the products as innovatively produced taking care of the consumer needs in the best standards and quality. “Collective imagination, chemistry, consumer insights, and food technology” all these keywords emphasize the fact that the company uses innovation (collective imagination), technology (chemistry, food technology) and people’s feedback (consumer insights) to design their products and maintain the quality of the products.
The competitors of the company include “Givaudan, Danisco, and Firmenich.” All these companies are large companies that are engaged in similar business activities. All these companies including International Flavours and Fragrances supplies their products to the other big companies and not directly to the consumers. Therefore the consumer base for all these suppliers are limited. These companies engage in fierce competition in order to ensure that their products are chosen and therefore they engage in luring the consumer brands with best quality products in lowest price.
Strategy of International Flavours and Fragrances: Outsourcing and Expansion
The further strategies that can be followed by the company in order to win customer trust is establishing itself as a leading supplier to big brands by internet branding and social media engagement. The company may be engaged in greater CSR (Corporate Social Responsibility) activities so that the company gains better goodwill. This will make the company a familiar name in the field resulting in brand awareness and customer faith. In order to establish its hold with the consumer companies it may emerge as the biggest brand in the above method ways and in addition offer best quality products.
Marketing communication is the process in which various communication devices and tools in order to brand and project itself as one of the best brands in its segment. The communication tools include the traditional mediums such as the newspaper, television and hoardings, and new mediums such as the digital media, social sites and the internet. PR (Public Relations) is also a communication tool that can be used by the company in order to enhance its image. The company that is discussed in this case study deals with supplying of products to other companies that sell these products to consumers. Hence the company in question has to target and focus on other businesses rather than focusing on target consumers. Therefore the traditional TV or newspaper advertisement would not work for this company. International Flavours and Fragrances needs to focus its communications on the consumer brands. However on the other hand today’s customers are educated about their rights and they engage in researching about the products they buy. If International Flavours and Fragrances’ image is harmed in the international market, and they do not enjoy ordinary consumer’s faith, the ordinary consumers will stop buying from the companies who source their product from International Flavours and Fragrances, this will lead those consumer companies to change their supplier. Therefore it is imperative for International Flavours and Fragrances to communicate with the end customers and maintain a positive image.
As International Flavours and Fragrances is not a consumer brand and it is not selling its products directly to the consumers the company cannot engage in direct advertisement targeted at the customers. Also it cannot directly advertise about the companies to which it supplies products. Rather the company has the scope to engage in indirect marketing to leverage its own brand image by using the internet and social media where there is a possibility of direct engagement with the customers. When the company will engage directly with the consumers automatically it will enjoy better brand awareness. One of the best methods of increasing goodwill of the company is to engage in CSR activities. The company in the official website states “We have proactively addressed climate change and are currently working towards a science-based GHG target. We also support climate-related initiatives, such as the RE100 renewable energy initiative and the climate change agreement at the UN Climate Change Conference (COP21) in Paris, and were awarded a place on the CDP Climate “A” List for the third year in a row, placing us in the top 4 percent of companies participating in CDP’s program” (Iff.com., 2018). This will make the educated consumer more loyal and believer to the brand. Climate change is one of the most debated issue I recent times and all the countries unitedly are engaging in deferring climate change, therefore any company which is actively investing and thinking fro that cause will automatically enjoy people’s faith.
International Flavours and Fragrances is a company with diversified products including eatables, drinkables, and daily use products. Therefore all ages, all genders, all nationalities and all kinds of people are included in its target customer. The company must engage in a holistic business communication program to engage consumers from all age groups and communities.
References:
Drucker, P. F. (2017). The Theory of the Business (Harvard Business Review Classics). Harvard Business Press.
Fast, I. (2013). Selving: A relational theory of self organization. Routledge.
Iff.com. (2018). Pioneering sensorial experiences that move the world. Retrieved from https://www.iff.com/en
Iff.com. (2018). Sustainability Accomplishments. Retrieved from https://www.iff.com/en/sustain
Jackson, J. K. (2013). Outsourcing and insourcing jobs in the US economy: Evidence based on foreign investment data.
Ketokivi, M., & Mahoney, J. T. (2016). Transaction cost economics as a constructive stakeholder theory. Academy of Management Learning & Education, 15(1), 123-138.
Lacity, M. C., & Khan, S. A. (2016). Transaction cost economics on trial again. The Journal of Strategic Information Systems, 25(1), 49-56.
Mihailidis, P., & Thevenin, B. (2013). Media literacy as a core competency for engaged citizenship in participatory democracy. American Behavioral Scientist, 57(11), 1611-1622.
Möller, K. (2013). Theory map of business marketing: Relationships and networks perspectives. Industrial Marketing Management, 42(3), 324-335.
Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context. Routledge.
Wacker, J. G., Yang, C., & Sheu, C. (2016). A transaction cost economics model for estimating performance effectiveness of relational and contractual governance: theory and statistical results. International Journal of Operations & Production Management, 36(11), 1551-1575.
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