Outsourcing: a Corporate Competitiveness Strategy - Essay Example

Managing Change Executive Summary Organizational changes are a response to changes in the global environment, in order to stay competitive. In the case of Norse Skag, the Company has responded to changes in the global environment by transforming itself from a regional Company with its operations restricted to Europe into a global organization that is now the third largest producer of newsprint in the world. This process of change has been through decentralizing of operations by creating a network of autonomous units and by bringing about changes in the internal processes and HR policies within the firm. This research paper analysis the changes that have occurred in the Norse Skag Company from the perspective of organizational design, on the basis of the nine parameters that have been identified by Graetz et al (2002). The organizational changes in Norse Skag are divided into those that deal with structural realignments or changes, changes to the internal processes which include the acquisition of new IT technologies and the introduction of improved HR policies, as well as the boundaries changes that have taken place, whereby the company has outsourced/sold off some of its subsidiary activities in order to focus more effectively on its target area of newsprint production. In an intensely competitive global economy, these changes have been helping the Company to continue to retain a competitive advantage in the global marketplace. Introduction: The Norse Skag Company started off as a local company producing newsprint in the Norweigan area, however it has now diversified into 15 countries in 5 continents. While it was originally a producer of a variety of forest products, it has now streamlined its operations so that 95% of its revenue is accrued from the production of paper on a global scale (www.report.huginonline.com). During this process of transformation, the Company has undergone several changes, wherein old and established practices have needed to be revamped in order to give way to new ideas and practices. In response to the financial pressures that have been created by globalization, the Company has undergone a transformation in organizational design. Graetz et al (2002:1158-166) identify a structures-processes-boundaries framework to explain the dimensions of organizational design. Within this framework, nine parameters are identified as follows: Structures: (a) delayering (b) decentralizing and (c) project based forms of organization Processes: (a) new investments in IT (b) organizational communication capabilities and (c) participative HR practices Boundaries: (a) downscoping activities of the firm to focus on core activities (b) outsourcing and (c) through inter-organizational alliances and networks. This framework is applied below in the case of the Norse Skag Company. Structures: In his article on building new organizations, Senge (1990) points out that in an increasingly dynamic, interdependent and unpredictable world, it is vital that an organization is a learning organization if it is to survive and maintain a competitive advantage. A learning organization is one where two kinds of learning take place – generative learning which is about creating, as well as adaptive learning, which is about coping. There is a creative tension created in a learning organization, created between an organization’s strategic vision of where it wants to be as opposed to where it is currently. This was the position with Norse Skog in 1990, when it was a Norwegian Company, which was the third largest newsprint producer in Europe. However, its strategic vision for the future included wide scale global expansion and its strategy actively pushed the Company into the accomplishment of this goal. The Company decided to go global, because the paper business is a global one while trade is local or regional. The increasing costs of newsprint which was 500-600 US dollars per tonne, as well as the 50-70$ per tonne in intercontinental freight was one of the major reasons in pursuing the global strategy.(www.reports.huginonline.com:16). This organization has functioned as a learning organization through transfer of knowledge that has become possible by expanding into the global arena. It has been able to utilize the availability of knowledge and best practices in the form of customer relations from Australasia, introducing efficiency in operations through its units and alliances in Asia and Europe, knowledge transfers in environment from Europe and health and safety from Asia and South America.(www.reports.huginonline.com:16). As a part of its global strategy, the Company has therefore engaged in decentralizing and delayering operations by breaking up the organizational structure into regional, autonomous units that are loosely organized, as follows: (source: www.reports.huginonline.com:17) Hence, it may be noted that the regional areas function more or less autonomously with high levels of networking among all units. Other constituent units in Asia as well as other global regions comprise small groups of corporate staff and global councils, while other units are those which are only partly owned by Norse Skog, with governance being carried out through their Boards. Actual physical meetings between the various units are organized about 4 to 5 times in a year while communication and networking takes place through phone as well as video meetings and regional review meetings. This re-organization and decentralization of activities by Norse Skog appears to be a good move because traditional bureaucratic controls that seek to control activity from the top are unlikely to be successful, and the methods of humanistic control and symbiotic /culture control are likely to be more effective. (Linstead et al, 2004) Organizational structure therefore needs to be revamped by a manipulation of the culture within an organization and through distribution of power among employees so that their motivation is heightened and decision making tends to conform to the goals of the organization (Linstead, Follop and Lilley, 2004: 211). This is a policy that has been followed by Norse Skag in its globalization activity, with the locus of control shifting from the Norwegian office to a loose networked system of control where power and decision making authority are shared among the various autonomous units. As a result of such shifts in structures, the Company has been able to achieve efficiency in operations and has been able to plan improvements in the scope of its activities. It has achieved increased synergies in operations from its merger/acquisition with other companies such as Walsum and Parenco, from 45 to 80 million dollars, thereby producing tangible financial benefits for the Company. (www.report.huginonline.com) Processes: Norske Skog was initially operating on the basis of legacy logic control technology and vintage analog control systems of the 1980s.(Rockwell Automation). Due to the drifts in the analog component settings and lack of diagnostic information, the winders were subject to frequent blow ups, with each instance of repair of the break and rethreading taking 20 minutes each time. In some instances it also necessitated a shutdown which was a costly exercise since it resulted in a loss of $8.4 thousand per hour and therefore there was an urgent need to introduce more stability into the drive system. In order to respond to the problems that were created by the mechanical architecture of the winders which needed to be changed, the Company converted the winder from analog to digital control. A new flexible control architecture system was introduced named Control Logix, allowing for multiple I/O, networks and functions of control to be integrated into one single system. By using two of these Control Logix units, the existing legacy system was converted into an integrated system using the ControlNet – the peer to peer communications network, whereby the first unit was responsible for drive control while the second was responsible for hydraulic and logic control. Through the introduction of the new system and effective automation of the function of the winders, the maintenance costs of the winder have been reduced and breakdowns and shutdowns of the plat are avoided, which has resulted in huge savings of $2.8 million.(Rockwell Automation). Moreover, an additional benefit that has been achieved through the introduction of the new system is the improvement in winder speed from 2300 mph to 2500 mph, thereby allowing for usage of the machines to their full capacity. In terms of processes, the Norske Skog Company, whose activities are mainly centered around the needs of its Boyer Mill, has introduced significant improvements in the HR processes. The Company employs about 430 workers and one of the core business activities of the Boyer Mill is the integration of a comprehensive health and safety system into the daily, overall running of the mill.(Workcover). The Company has been making necessary changes required to stay up to date with the requirements of the Occupational Health and Safety (Commonwealth Employment) Act 1991, of which Section 16(1) requires an employer to “take all reasonably practicable steps to protect the health and safety at work” of its employees. During the late 1990s, the Company implemented a comprehensive Occupational Health and Safety program, which has been devised after consultation with and with participation not only from workers at the mill but also the OHS Council, leaders as well as stakeholders (Workcover). This program is intended and designed such that it is continuously receptive to suggestion and feedback, so that it can be improved on a continuous basis. The major achievements of this program have been as follows: (a) the creation of a proactive, safe and healthy work culture (b) a decrease of lost time injuries to zero during 2002-2003 (c) significant amounts of reduction in workers compensation premiums.(Workcover). Moreover, the excellence in this program and the high degree of safety and protection to workers through the provision of a safe workplace has been recognized by the National Safety Council of Australia for three consecutive years through five star accreditation and Gold Awards. Boundaries: As pointed out by Schilling et al (2001), in a globally competitive environment, vertical hierarchical organizations have been replaced by permeable, interconnected non hierarchical entities. The locus of production is no longer restricted to the boundaries of a single firm but has shifted to the network of relationships between several parties that add their contribution to the production function. This may be accomplished through downsizing operations, outsourcing some of the work and focusing on core activities of the firm, as well as through entering into strategic alliances and partnerships. In the case of Norse Skog, the Company has entered into a number of such alliances over the globe. In its operations in different countries such as Australasia, Europe and South America, the parent Company does not retain a tight control over the operations, but allows them to function as autonomous units, while in other areas it has entered into joint ventures. For example, in the case of Asia, the Company has entered into a partnership in order to form a totally new Company that is named the Pan Asia Paper Company. This Company is owned 50% by Norse Skag and 50% by an Asian Company named Abitibi. This company is the largest producer of newsprint among all of the divisions and autonomous units and its markets its products to countries in the Asian regions.(www.reports.huginonline.com:10). Similarly in Canada, the Company has only a 30% ownership in the Norse Skag Canada Company which owns four large mills within Canada. The Company has also undergone restructuring, through the sale of its non core assets such as pulp, forests and shipping to other independent entities. It also plans to disinvest its hydropower assets (www,report.huginonline.com). This conforms to one of the developments in management theory, which is the belief that most firms have only a few “core competencies” where they possess exceptional skills and abilities, therefore in order to sustain a competitive advantage in an increasingly cut throat global economy, it is better to hire firms with their own core competencies to perform other tasks that are required as a part of organizational activity.(Prahalad and Hamel, 1990). According to Sharp (1997) outsourcing occurs when a firm turns over to outside suppliers, those activities that are outside the range of its own core competencies. Deavers (1997) states: “Outsourcing is used to describe many different kinds of corporate action: all sub-contracting relations between firms, all foreign production by US firms, hiring of workers in non traditional jobs……” The motivation for outsourcing is often in terms of saved costs. Many organizations that have resorted to outsourcing report significant savings in terms of operational and capital costs. (Hendry 1995; Utley 1993). It may be noted that by outsourcing or contracting/selling out those of its activities that are not within the scope of its core competencies which are newsprint production, the Company has been able to achieve better economies of scale. Conclusion: On the basis of the above, it may thus be concluded that the Company has been able to achieve economies of scale and greater efficiency in its operations by being receptive to change and adapting organizational design parameters in order to accommodate those changes. Such changes have been made in response to changing global conditions, including rising costs of newsprint and increased levels of competition in the global marketplace. As a result of such structural and procedural changes that have been introduced, the Company has been able to actually expand its operations in the global marketplace. Through a diversification in activities and by sale/outsourcing of several of its activities, on the basis of the organizational design parameters that have been identified above, the Company has been able to successfully ride the waves of globalization as a learning organization that has been able to change itself successfully to adapt to new conditions. References: * Deavers, K, 1997. “Outsourcing: a corporate competitiveness strategy, not a search for low wages.” Journal of Labor research, XVIII(4):503-19 * Forest Industry Seminar: Nordea Securities” [online] Retrieved September 18, 2007 from: http://reports.huginonline.com/863535/104838.pdf * Linstead, Fulop and Lilley (2004): “Management and Organization: a critical approach.” Macmillan * Prahalad, C.K. and Hamel, G. (1990). “The core competence of the Corporation” Harvard Business Review (May-June):79-91 * Sharpe, M, 1997. “Outsourcing, organizational competitiveness and work.” Journal of Labor Research, XVIII(4):535-49 * Rimmer, M., Lawrence, A., and Smith, A. 2006, Managing Organisational Change, (2nd edn) John Wiley, Brisbane * Rockwell Automation Case Study. “Rockwell Automation’s Drives upgrade ‘on the run’ at an Australian Paper Mill saves U.S. $2.8 million in installation costs.” [online] retrieved September 18, 2007 from: http://www.rockwellautomation.com.au/applications/css_artilce.nsf/ed2bc58bb19e5bbb86256a7d005c7358/b7588b3f5fb2c06286256d7a0069f374?OpenDocument * Schilling, Melissa A and Steensma, Kevin H, 2001. “The use of modular organizational forms: An industry level analysis.” Academy of Management Journal, 44(6): 1149-69 * Senge, Peter M, 1990. “The Leader’s New Work: Building Learning Organizations” Sloan Management Review, 32(1): 7 -23 * Workcover, Tasmania. “Category 3: Best Workplace Health and Safety Management Program” [online] retrieved September 17, 2007 from: http://www.workcover.tas.gov.au/resource/wps2003cat3g.htm * Uttley, M. 1993. Contracting out and market testing in the UK defence sector: theory, evidence and issues”, Public Money and Management, January-March:55-60 Read More