Fisher College MITs Logan Management and Digital Divide Data Essay

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09-075 August 25, 2009 What’s Driving Porsche? Rebecca Henderson, Cate Reavis There are some customers who love the idea that an engineer working on their project in the afternoon was the same guy working on a 911 motor in the morning. —Managing Director, Porsche Engineering Group 1 We were working with Volkswagen on the next generation of the Cayenne (which shared its structure with the VW Touareg and Audi Q7) and I wanted a clear connection to safeguard Porsche’s interests. We could not do this alone. —Porsche CEO Wendelin Wiedeking, on decision to acquire VW 2 In early March 2008, Porsche’s supervisory board, which included the chairman of the Volkswagen Group, Ferdinand Piëch, agreed to raise its holding in Volkswagen from 31% to 50% giving it a majority stake. Porsche’s takeover of VW was seen by many as a wise move for the small, independent car company that, unlike rival brands Jaquar, Ferrari, Lamborghini, and Lotus, had managed to avoid being gobbled up by the auto industry’s behomoths the likes of General Motors, Chrylser and Ford. There was, however, a key strategic question about Porsche’s acquisition of VW that was not receiving a lot of press: Would the long-term stability of Porsche’s engineering and design prowess be at risk by bringing VW “in-house”? 1 Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002. 2 Ray Hutton, “Porsche Set to Take the Wheel at VW,” The Sunday Times, October 14, 2007. This case was prepared from published sources by Cate Reavis under the supervision of Professor Rebecca M. Henderson. Professor Henderson is the Eastman Kodak Leaders for Manufacturing Professor of Management. This case is based on research conducted by Julien Heider, Jody Muehlegger and Konrad Haunit (MIT Sloan MBAs, Class of 2008). Copyright © 2009, Rebecca M. Henderson. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis Engineering and design were considered the hallmarks of Porsche’s competitive advantage, and rather than keeping its R&D under tight wraps, Porsche shared its R&D team of 2,300 engineers with outside companies, and had built a lucrative engineering services business based on this model. Through its 100% wholly-owned customer engineering development company, the Porche Engineering Group (PEG), Porsche made its wide-ranging expertise in the development and production of vehicles available to clients from a variety of industries. PEG was considered Porsche’s “secret weapon, enabling it to employ more engineers than if it worked alone, giving it an edge in product development.” 3 Porsche’s small size and market niche made it easier for other auto manufacturers to trust that Porsche would not use the technology knowledge attained through its engineering services division to compete head-to-head. Bringing the R&D functions of the two firms too close together could potentially weaken Porsche engineers’ sense of belonging and demotivate them. While Porsche was a company that thrived on healthy profit margins, VW’s business model was all about volume. Furthermore, if Porsche engineering was too closely associated with the entire VW portfolio, the company could lose its ability to sell external engineering to other OEMs concerned that Porsche would be sharing strategies and innovations with VW. The question facing Porsche’s senior leadership was how to ensure that the integration of VW did not negatively effect Porsche’s outside engineering business. Porsche Porsche was founded in 1931 by Ferdinand Porsche, along with his son and son-in-law, Anton Piëch, father of VW Chairman Ferdinand Piëch. Known in its early days as the Porsche Engineering Office, Porsche did not start off as an automaker, but rather a firm that sold design and engineering services to other carmakers. In 1934, Adolf Hitler commissioned Porsche to make a “people’s car” or “volkswagen.” The forerunner to the VW Beetle, the VW Type 60 hit the roads in the mid-1930s, and in 1938 the first plant dedicated to the manufacturing of the VW was opened. It wasn’t until 1948, three years after the end of World War II, that Porsche produced its first branded sports car. Within two years, the Porsche 356 series rolled off the production lines. 4 By 2007, Porsche was the world’s most profitable automaker on a per unit basis, 5 a feat that was especially impressive considering it produced just over 100,000 automobiles annually. The company’s recorded average revenue per car of €62,568 ($91,974) dwarfed that of Mercedes’s €40,445 ($59,454), BMW’s €34,766 ($51,106) and was nearly 2.5 times Audi’s €27,500 ($40,425). 6 In an industry where scale was usually considered a prerequisite for reducing production costs, the company’s operating margins of nearly 20%, double those of Toyota, 7 made Porsche an exception to the rule. In 2007, Porsche’s income topped $9.4 billion on revenue of $10 billion. (See Exhibit 1 for 3 Bret Orekson, “Engineering Is Porsche’s Secret Weapon,” Automotive News, January 15, 2001. 4 Adler, Dennis, Porsche: The Road from Zuffenhausen, 2003, p. 76. 5 Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007. 6 €1 = US$1.47 (December 31, 2007) 7 Gail Edmondson, “Pedal to the Metal,” BusinessWeek, September 3, 2007. AUGUST 25, 2009 2 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis select financials of Porsche and the top automakers.) Ironically, over 60% of Porsche’s pre-tax earnings came from trading derivatives. All of the options trading Porsche was involved in pertained to its stake in VW. Porsche used the options to hedge against the likelihood that VW’s shares would rise after its interest was made public. 8 Porsche was renowned for the quality of its products. For three consecutive years (2006-2008), Porsche was the top ranking brand in J.D. Power and Associates “Initial Quality Study” (IQS). The study ranked brands by the fewest problems per 100 vehicles. Porsche spent about 12% of revenue on R&D compared to an industry average of 4% to 6%. (See Figure 1.) Approximately 19% of Porsche employees worked in its R&D facility compared to 6.6% at Volkswagen. R&D Expenditure as % of Revenue for Select Auto Makers (2007) 300,000 14 250,000 12 8 150,000 6 100,000 % 10 200,000 Revenue % on R&D 4 Porsche Fiat Group Automobiles Nissan Honda 0 Ford (automotive) 0 VW 2 GM (automotive) 50,000 Toyota US$ Millions Figure 1 Source: Annual Reports. Turnaround Porsche hit a speed bump in the early 1990s when production processes described as “fat and wasteful” 9 and a weak U.S. economy sent orders plummeting. Between 1986 and 1993 Porsche’s sales had fallen from more than 50,000 units to 14,000 units. 10 The company was teetering on the verge of bankruptcy, and there were whispers about a possible takeover. 8 Richard Milne, “Share Options Put Porsche on a Faster Path to Profit,” Financial Times, November 12, 2007. 9 Tom Mudd, “Back in High Gear,” Industry Week, February 21, 2000. 10 Ibid. AUGUST 25, 2009 3 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis Newly named Porsche CEO Wendelin Wiedeking orchestrated a turnaround focused on building new core competencies in lean manufacturing and synchronized engineering. In the past, Porsche’s celebration of craftwork encouraged individuals to work on their own processes rather than collaborating with the entire production line. But this soon became a significant handicap for the company. Engineers were tempted to ignore the need for cross-department cooperation on Porsche’s own car designs while making handsome profits for Porsche on outside sales of engineering services. 11 As one industry observer put it, “Porsche didn’t have a full-fledged, adult-rated simultaneous engineering process in place. It was still struggling to completely shed the rigid, sequential system upon which it had relied for decades.” 12 Wiedeking introduced lean manufacturing and the team concepts and processes followed by industry giants Toyota, Nissan and BMW. Part of the turnaround included the decision to extend Porsche’s product line beyond the sports car niche it had dominated for many decades. As Wiedeking explained, “Our strategy is to go beyond the one-dimensional product range we have had so far.” 13 As Figure 2 shows, Porsche’s production and sales doubled in just six years as did its revenue through organic growth. Figure 2 Porsche Sales, Production and Revenue Results (1999-2008) 8,000.0 120,000 7,000.0 100,000 Units 80,000 5,000.0 4,000.0 60,000 3,000.0 Eur million 6,000.0 Production Sales Revenue 40,000 2,000.0 20,000 1,000.0 2008 2007 2006 2005 2004 2003 2002 2001 2000 0.0 1999 0 Source: Porsche Annual Report. In 2003 Porsche introduced the Cayenne, an SUV which was entering into a crowded field of competitors inhabited by Acura, Audi, BMW, Mercedes, Land Rover, Volkswagen, Volvo, Lexus, and Infiniti. The year the Cayenne was introduced, Porsche’s vehicle production shot up from 50,000 11 Womack, James and Daniel Jones, Lean Thinking: Banish Waste and Create Wealth in your Corporation, 1996, p. 192. 12 Christopher Jensen and Don Sherman, “The Porsche Process,” Automotive Industries, November 1, 1997. 13 Brandon Mitchener, “Rebounding Porsche Seeks to Shift More Output Abroad,” The Wall Street Journal Europe, December 6, 1995. AUGUST 25, 2009 4 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis to 75,000 units a year. 14 The Cayenne, produced in collaboration with VW at VW’s factory in Slovakia and which shared the same frame and doors as VW’s Touareg, was derided by many as a “corruption of the brand.” 15 In fact the day after Porsche unveiled the first Cayenne prototype, the company’s share price fell more than 4%. 16 Porsche CEO Wiedeking was aware of the risk the company was taking in being so closely associated with a mass production carmaker that produced a cheaper SUV. 17 It was a risk he believed would pay off down the road. Porsche’s first foray outside of its sports car market was not an immediate hit. The early version of the Cayenne was plagued with quality problems earning it the least reliable rating from Consumer Reports magazine. In its efforts to correct problems with the Cayenne, the company went through a cultural alignment of sorts. As one industry observer noted, “Sports car engineers didn’t quite understand the demands of the many female buyers who ended up making the Cayenne their daily runabout.” 18 One of those demands was having the capability to unlock the Cayenne from a much further distance. Porsche key fobs were originally designed to unlock sports cars at a very close distance. Porsche went to work to fix this defect and other more serious problems, and by 2006 the Cayenne occupied the No. 1 spot in the IQS which measured buyer satisfaction in the first 90 days of ownership. 19 In 2005, Porsche announced that it would be making another move outside its sports car niche. In partnership with VW, Porsche would produce a luxury sedan called the Panamera (named after a Mexican long-distance car race 20 ) which would compete against models produced by Mercedes, Aston Martin, and Audi. The Panamera was being built in a low-cost part of East Germany and was scheduled to launch in 2010. 21 Despite the significant changes to the company’s product line, Porsche’s outside engineering business, PEG, remained focused on selling services based on Porsche’s strength in engineering. Outside Engineering at Porsche Providing outside engineering services for carmakers had always been an important part of Porsche’s business model. While clients owned the research that Porsche conducted on their behalf, Porsche reserved the right to use the research if the client chose not to, with the understanding that it would 14 Bret Okeson, “Engineering is Porsche’s Secret Weapon,” Automotive News, January 15, 2001. 15 Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007. 16 Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002. 17 Jeffrey Fear and Carin-Isabel Knoop, “Dr. INg. H.c. F. Porsche AG (A): True to Brand?” HBS Case No. 9-706-018, Harvard Business School Publishing, 2006. 18 Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007. 19 Ibid. 20 Stephen Power, “The Family Porsche,” The Wall Street Journal, July 28, 2005. 21 Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007. AUGUST 25, 2009 5 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis not be sold to anyone else. Porsche could test or develop ideas that the company would not have been able to fund on its own. 22 For several decades VW had been Porsche’s main client. In 1949, Porsche and VW signed an agreement under which Porsche was forbidden to design a car for any other company with an engine between 1.0 and 1.3 liters through 1974. 23 The formality of this agreement, however, was in dispute with others characterizing the contract as a “loose agreement” between Ferdinand Porsche and VW’s chairman in which about 40% of Porsche’s development capacity belonged to VW over a certain number of years. 24 By the 1980s Porsche was working with a variety of carmakers as well as motorcycle producer Harley Davidson. In 1991, the company founded Porsche Engineering Services Inc. based outside of Detroit, Michigan to serve the growing engineering demands of the North American market. As a wholly-owned subsidiary of Porsche AG, PES was able to work with a wide array of carmakers. As the CEO of PES explained, “We’re not a competitor to automakers, due to the limited number of vehicles we produce. But we try to convince them that two OEMs working together, rather than one OEM and supporters, makes a difference. We understand the fundamentals of automaking.” 25 In 2001, PES became the North American arm of the Porsche Engineering Group. With 400 employees, PEG was based out of Porsche’s R&D center in Weissach, a town of 7,000, 23 kilometers from Porsche’s sales, marketing and production activities. PEG engineers had direct access to Porsche’s entire engineering team of 2,300 which was also based at Weissach. To reassure clients that their projects would remain confidential, Porsche required all visitors to sign a confidentiality agreement, making them liable if any secrets learned at the Weissach complex were revealed. 26 In addition, the company not only kept the names of its clients confidential, but it also disguised the vehicles tested on its private racing track. PEG worked with virtually every auto maker in the world, with the exception of those that produced luxury sports cars, and was also involved in projects involving elevators, forklifts, earthmovers, and artificial knees. 27 While revenues of PEG were not disclosed in Porsche’s annual report, one source indicated it accounted for 3% of turnover. 28 Of significant help to PEG engineers was a pool of nearly 600 graduate student interns who worked alongside Porsche’s staff engineers. A budget of $30 million was allocated to finance paid internships for the students as well as university or institute-based research studies conducted exclusively for 22 Jeff Daniels, Porsche: The Engineering Story, (Somerset, UK: Haynes, 2007), p. 129-131. 23 Randy Leffingwell, Porsche 911: Perfection by Design,” (Osceola, WI: Motorbooks, 2007), p. 68. 24 Ibid. 25 Gary Kobe and Lindsay Brooke, “How’s Outside Engineering,” Automotive Industries, September 1, 1994. 26 Bret Okeson, “Engineering Is Porsche’s Secret Weapon,” Automotive News, January 15, 2001. 27 Ibid. 28 Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002. AUGUST 25, 2009 6 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis Porsche. Porsche offered its top interns (typically about 10%) full time jobs, and those students who did not get a job offer became part of an alumni network that would be called on to provide advice on research and technology. A student intern cost 15% of what a full-time employee would cost. 29 Competitors and Market The outsourcing of engineering services for carmakers was a growing industry. Some of the big players for the automotive industry included Italy’s Stola and U.K.-based Hawtal Whiting and the two U.S. automotive engineering companies MSX International Inc. and Modern Engineering Inc., each of which posted revenues between $100 and $500 million. Lotus Engineering was the only carmaker with whom Porsche competed for outsourced engineering business. These firms had seen their share of hard times. In the economic downturns of the early 1990s and 2000s, a lot of outsourced activities were brought in-house again. But by the mid-2000s, many of these firms had their sights set on the U.S. auto industry where demand for outsourced engineering was growing in spades due to production challenges and increased market segmentation. Between 1995 and 2005, the number of new car models produced by U.S. automakers grew 50% while the annual sales per model dropped from 100,000 to 75,000 units. 30 As a CEO of a U.S.-based outside engineering firm opined: “Outside engineering is a permanent change in the way business is done. There’s no manufacturing business that needs to be vertically integrated anymore. It just costs too much.” 31 The CEO of PES echoed this sentiment in 2005: “We’re following our customers’ changes. The (automakers) have so many niche vehicles, it really compounds their resources. The downsizing and reduction of engineering means there are gaps in some engineering programs. There are opportunities for companies like us to provide that support.” 32 As one industry observer noted, globalization was forcing many automakers to make the difficult decision of “entrust[ing] core engineering services, and even the complete end-to-end design and development of a vehicle, to firms with the experience, expertise and sheer innovative talent to help create better products, faster and at lower cost. 33 Despite the up-tick in demand in the U.S. market, PEG sold PES to automotive supplier Magna International in 2006 for an undisclosed sum. In commenting on the transaction, a Porsche executive simply stated, “In the future, we will center all development activities for external customers in our development centre in Weissach for efficiency reasons.” 34 29 Sigvald Harryson and Peter Lorange, “Bringing the College Inside,” Harvard Business Review, December 2005. 30 Terry Kosdrosky, “Switching Gears Pays Off,” Crain’s Detroit Business, October 10, 2005. 31 Stuart F. Brown, “New Products From Rented Brains,” Fortune, September 4, 2000. 32 Terry Kosdrosky, “Switching Gears Pays Off,” Crain’s Detroit Business, October 10, 2005. 33 Warren Harris, “Engineering Services Outsourcing,” PR Newswire, January 13, 2009. 34 “Magna Buys Porsche’s North American Engineering Services Unit,” Austria Today, August 10, 2006. AUGUST 25, 2009 7 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis VW Takeover Porsche made its first move towards VW in 2005 when it acquired a 20% stake igniting a rumor that its eventual takeover of VW was not an “if” but a “when.” After all, it was no secret that VW was an important partner and supplier to Porsche. In March 2007, Porsche upped its stake to 31% by paying €5 billion ($6.6 billion), 35 an investment that was worth €16-17 billion ($23.4 billion) 36 by October of that same year. 37 On the surface, it appeared as if Porsche and Volkswagen had little, if anything, in common. With 12,000 employees, Porsche was a small independent player in the auto industry focused on the performance sports car market. It typically sold about 100,000 cars a year at prices that ranged from $50,000 to more than $150,000. Historically, it had had few if any direct competitors. Other high-end sports car manufacturers like Ferrari, Maserati and Lamborghini never had the production numbers to threaten Porsche’s sales. Companies like Mercedes Benz, BMW and Audi each produced more than 10 times the number Porsche did but for a wide range of vehicles outside the sports car market. The Volkswagen Group sold more than 6 million cars a year. With 2007 revenue topping $160 billion (Figure 3) and 340,000 employees, it was the world’s fourth largest carmaker (based on units sold) with a portfolio of eight brands that included Audi, Bentley, Lamborghini, and truck manufacturer Scania, with prices ranging from $18,000 to $250,000. It wasn’t until the late 1990s that VW began moving up-market purchasing Rolls-Royce, and Italian sports carmakers Lamborghini and Bugatti all in one year. 38 Figure 3 Revenue and Net Income for Select Automakers, 2007 (US$ millions) 300,000 US$ Millions 250,000 200,000 150,000 100,000 50,000 0 -50,000 Revenue Net Income Toyota GM (automotive) VW Ford (automotive) Honda Nissan Fiat Group Automobiles Porsche 262,394 180,000 160,285 154,400 121,200 108,242 39,433 10,060 17,146 -39 6,030 -5 6,060 4,823 1,181 9,400 Source: Annual Reports. 35 €1 = US$1.32 (March 1, 2007) 36 €1 = US$1.42 (October 1, 2007) 37 Ray Hutton, “Porsche Set to Take the Wheel at VW,” The Sunday Times, October 14, 2007. 38 Jon Ashworth, “Porsche’s New Empire,” The Business, March 31, 2007. AUGUST 25, 2009 8 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis Despite their differences, VW and Porsche’s histories were intimately intertwined. It was Ferdinand Porsche’s engineering company that, in the 1930s, designed the first Volkswagen which later became known as the VW Beetle. A few years later, the first Porsche debuted with some of the same components used on the VW Beetle. More recently, Porsche and VW had built cars that shared platforms and components. In addition to sharing research and development, the two companies’ leadership shared familial bonds. Legendary German-Austrian engineer Ferdinand Karl Piëch, the grandson of Ferdinand Porsche, was the chairman of Volkswagen’s supervisory board and the Porsche and Piëch families together owned 50% of Porsche’s shares and 100% of its voting stock. 39 Their alliance based on old family relationships allowed both companies to develop technology jointly without concern for confidentiality. The ability to scale and create synergies across a number of areas were two driving forces that led Porsche to secure its partnership with VW. As Wiedeking explained, electronics was one area of particular interest: “Electronics account for 30% to 35% of our development costs. Spreading this investment over 2 million cars instead of Porsche’s 100,000 will make a big difference and the components will be cheaper.” 40 Furthermore, the capital intensity of R&D and required fixed assets in new technologies would be increasing, making it increasingly difficult for a premium-only OEM to survive unless operating in the context of a larger OEM. Forming closer ties with VW would also enable Porsche to benefit from VW’s more fuel efficient technologies at a time when new emissions regulations would come into effect. On a more macro level, by acquiring VW, Porsche was helping protect itself from the ups and downs of the auto sector. As one industry observer wrote, “A huge mainstream global car company like VW was in a better position to weather any marketplace vagaries than a luxury brand like Porsche.” 41 While Porsche looked at the VW takeover as a way to leverage synergies, Porsche and VW would exist as two separate companies that would sit under a new holding company called Porsche SE. (See Exhibit 2.) A Repeat of Daimler-Chrysler? While many in the industry believed that Porsche’s acquisition of VW was a wise move, others expressed concern that VW would prove to be a distraction for Porsche, particularly at time when the company was about to enter another new car market with its luxury sedan the Panamera. As one industry observer wrote, “As we’ve seen at Daimler-Chrysler, when cultural issues are in play, the products can suffer and when the products suffer, so does everything else at a car company.” 42 39 Michael Connolly, “Porsche Tightens Grip on VW,” The Wall Street Journal, November 15, 2006. 40 Ray Hutton, “Porsche Set to Take the Wheel at VW,” The Sunday Times, October 14, 2007. 41 Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007. 42 Mark Landler, “Porsche and VW: One Happy Family?” The New York Times, December 23, 2007. AUGUST 25, 2009 9 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis However, Wiedeking was adamant that the Porsche brand and culture would remain well protected: “Believe me, if you mix the Porsche guys with the Audi guys and VW guys you will have trouble. Each is proud to belong to his own company. My Porsche people are very proud of what they have achieved. They don’t want to build a bastard in the future. They want to build a Porsche.” 43 But whether keeping Porsche and VW as separate operations under a Porsche holding company would adequately protect the engineering and design talents that Porsche was known for was not certain. And whether the carmakers that PEG had provided services to in the past would rethink their relationship with Porsche now that it would be producing a number of competing car models was also not certain. What was certain was that Porsche was no longer a small, nimble, carmaker focused solely on the luxury sports car market. With VW now under its wing, Porsche would soon be everywhere. 43 Ray Hutton, “Porsche Set to Take the Wheel at VW,” The Sunday Times, October 14, 2007. AUGUST 25, 2009 10 WHAT’S DRIVING PORSCHE? Rebecca Henderson and Cate Reavis Exhibit 1 Selected Financials for Carmakers, 2007 (revenue and net income in US$ millions) Toyota Revenue Net Income % on R&D unit sales # employees 262,394 17,146 3.6 8,900,000 GM (automotive) 180,000 -39 4.5 9,286,000 299,394 266,000 VW 160,285 6,030 4.2 6,191,618 Ford (automotive) 154,400 -5 4.9 6,553,000 329,305 246,000 Honda Nissan 121,200 6,060 4.9 3,652,000 108,242 4,823 4.8 3,700,000 Fiat Group Automobiles 39,433 1,181 2.8 2,233,800 179,000 180,535 50,542 Porsche 10,060 9,400 11.8 98,652 12,202 Source: Annual Reports. Exhibit 2 Porsche SE Porsche SE Porsche AG (100%) Porsche Consulting (100%) Porsche Engineering (100%) Volkswagen Porsche Design (65%) VW (100%) Skoda (100%) Bentley (100%) Audi (99.14%) Seat (100%) Lamborghini (100%) Source: Porsche Annual Report. AUGUST 25, 2009 11 09-095 September 15, 2009 Digital Divide Data Anju Mathew, Grete Rød, Jaime Villalobos, David Yates As Digital Divide Data (DDD) entered its ninth year of operations, its leadership had ample reason to be pleased with the company’s progress. Since its inception in 2001 as a small IT outsourcing company with a dozen employees in Cambodia, DDD had grown into an internationally recognized, nonprofit social enterprise. A 2008 recipient of the prestigious Skoll award for social entrepreneurship, DDD and its staff of 500 served clients in the United States and Western Europe from two offices in Cambodia and one in Laos. Its annual operating revenues hovered around US$2 million, and it had trained and provided scholarships to over 1,300 disadvantaged youth. DDD’s social mission was to help economically disadvantaged young adults, some of whom were physically disabled. DDD trained and employed young Cambodians and Laotians in IT outsourcing, with the goal that they would graduate from DDD and continue to earn competitive wages for themselves and their families. DDD recruited recent high school graduates whose prospects for jobs and post-secondary education were limited, due to lack of resources or disability. The company provided its recruits with computer training as well as English classes required for DDD’s work— data entry and digitization—and gave scholarships to all recruits to study for a business- or technology-related degree at a local university. After three to four years working at DDD, the operator (as an entry-level employee was known) would then complete his or her university degree and graduate from DDD. Graduates either were promoted within DDD, or left to join other organizations that valued their professional experience and technical skills. Satisfied with the apparent success of the company’s business model and operations, DDD’s U.S.based leadership wondered how it could rapidly scale up DDD’s social impact globally. DDD relied on a small U.S.-based management team, supplemented by expatriate volunteers and short-term assignees on the ground in Cambodia and Laos. Growing the number of paid U.S. staff to manage This case was prepared by Anju Mathew, Grete Rød, Jaime Villalobos, and David Yates (MIT Sloan School of Management, MBA Class of 2009) under the supervision of lecturer M. Jonathan Lehrich. Copyright © 2009, Massachusetts Institute of Technology. This work is licensed under the Creative Commons AttributionNoncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates expansion plans was not very feasible given financial constraints. DDD was therefore eager to design an expansion strategy that could provide the same level of employment opportunities and social programs, but would require less infrastructure, resources, and financing than was typically necessary when starting new sites from scratch. But whichever growth strategy they selected—whether it be organic growth, partnerships, joint ventures, or social franchising—DDD’s leadership team knew that more was at stake than mere global scale. The right strategy would determine the future: break even, break down, or break through. DDD History and Background Canadian-born Jeremy Hockenstein, DDD’s CEO and a co-founder, had visited Cambodia in November 2000 on vacation from his job as a McKinsey consultant in the United States. He was struck by the level of poverty in the country, and the lack of opportunities for young people to build careers and provide for their families, even though Cambodians seemed to value education and sought ways to empower themselves. Hockenstein concluded that Western demand for IT outsourcing services could be satisfied by Cambodian workers, given the right resources and training. Upon his return to the United States, Hockenstein, a graduate of the MIT Sloan School of Management, looked for advice and, ideally, participation from his network of friends and colleagues. On a return trip to Cambodia in February 2001, he and four others visited Phnom Penh and investigated sustainable ways of providing employment and education to the disadvantaged youth in Cambodia’s capital. They decided to create an IT outsourcing business that would provide data entry and digitization services. This would result in young people trained in technology and English, and the prospect of future gainful employment based on their DDD work experience. In mid-2001, DDD’s first office opened in Phnom Penh with 20 operators and a contract: to digitize the back catalogue of Harvard University’s Harvard Crimson undergraduate newspaper. During the first few years, DDD’s revenue came from a number of U.S. contracts for data entry and digitization that were sourced by the company’s U.S. management team. There was little specialization and standardization of workflows and processes between projects. Employees worked either a morning or afternoon shift, so that they could spend the other part of the day attending their university classes. Towards the end of 2003, DDD decided to open two new offices outside of Phnom Penh in order to reach disadvantaged youth who were unable to move to the capital city to further their education. The first was in Battambang, Cambodia’s second largest city of nearly one million people, located roughly 180 miles northwest of Phnom Penh. The Battambang office was opened by two Cambodian managers from Phnom Penh who had started with DDD as operators. They successfully implemented DDD’s training and employment practices and recruited the first group of trainee operators. Later that year DDD also opened an office in Vientiane, Laos. Creating these new sites allowed DDD to differentiate each office’s services, as well as to seek local work to bolster the offices’ revenue. September 15, 2009 2 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates At the start of 2009, DDD was breaking even on its operating expenses. It had secured several large multi-year contracts from U.S. and European clients, such as Reader’s Digest and Content Conversion Specialists, and had entered the domestic market with a contract to provide services to Mobitel, the national cellular telephone provider of Cambodia. (See Exhibit 1.) Yet as the number of clients grew, so did the number of employees. To maintain its swelling social programs, training, and operator scholarships, as well as its fundraising and expansion planning, DDD continued to rely on donations and sponsorships. Not only did DDD depend on a dedicated U.S.-based sales staff to develop Western business contracts, but the company also relied on expatriate project management expertise. Initiatives were underway to standardize project management and operations processes among the three sites. In addition, steps were being taken to ensure that the training curriculum was standardized yet specific to the services each office provided. In 2008 DDD began a partnership with the Centre for Information Systems Training (CIST) in Phnom Penh. CIST, a French NGO, provided two-year IT training scholarships to disadvantaged Cambodian youth, and helped them find jobs in the local IT market after graduation. CIST agreed to select and train cohorts of DDD operators for three to six months, with the cost shared between the two organizations. In early 2009 the first group of 50 CIST-trained DDD recruits was preparing for full-time employment with DDD. Plans were in place to continue and expand the partnership to train more incoming operators. Cambodia and Laos Operations Two of DDD’s three offices were in the Kingdom of Cambodia. Located in Southeast Asia, Cambodia shared borders with Thailand, Laos and Vietnam. With a population of 15 million, of which 80% lived rural areas, Cambodia was one of the poorest countries in the region. GDP per capita in 2007 was US$1,600 (PPP); over one-third of Cambodians lived on less than $.50 a day. 1 Cambodia’s poverty had been at crisis or near-crisis levels since the days of Pol Pot’s Khmer Rouge regime (1975-1979). An extremist political group, the Khmer Rouge’s goal was to create an agrarian society and extinguish the educated classes. Under Pol Pot’s four year reign, Cambodians endured harsh living conditions, torture, political persecution and genocide. It was estimated that two million Cambodians, approximately 20% of the total population, particularly the well-educated, were killed. By the late 2000s, three decades after an entire generation was lost in the genocide and a mere decade since a 1997 coup brought an end to years of civil war and foreign occupation, Cambodia, particularly Phnom Penh, appeared to be embracing the future. Japanese- and Korean-made cars darted around the capital, new hotels and houses were being built, and Internet cafés were filled with 1 Geoffrey Cain, “Cambodia: Cambodia’s New Intellectuals,” Far Eastern Economic Review, November 7, 2008. September 15, 2009 3 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates eager youth using mobile phones to participate in the country’s growing fascination with blogging. 2 Prior to the global economic crisis of 2008, the Cambodian economy had been growing at doubledigit rates, boosted by booming industrial and services sectors that reduced the country’s historic reliance on the agricultural sector; the garment industry alone accounted for 80% of export earnings and employed 3 million people. 3 Between 2004 and 2006, foreign direct investment skyrocketed from $340 million to $2.6 billion. 4 Despite its progress, the country still had a long way to go before a thriving business sector was up and running. The country ranked 136 out of 178 countries on the United Nation’s Human Development Index, well behind Malaysia, Thailand and Vietnam. (Exhibit 2 provides select human development indices for Cambodia and neighboring countries.) Even though it had a fairly high literacy rate of 76%, Cambodia suffered from a high drop-out rate between primary and secondary schools with only 24% enrolled in high school (Exhibit 3). In its “Ease of Doing Business” survey, 5 the World Bank ranked Cambodia 145 out of 183 nations, whereas Thailand was ranked 12, Malaysia 23, and Laos 167. Contributing to the Cambodia’s poor performance on the “Ease of Doing Business” survey was its shortage of experienced managers. Cambodia’s recent economic growth had exacerbated the scarcity, as new businesses continuously entered the country. 6 The existing managerial rank therefore commanded a premium price in the marketplace, especially in Phnom Penh. For DDD the situation posed a number of human resource management challenges. The company’s limited financial resources made it hard to compete for and attract local management talent. DDD often found that it had to rely on the appeal of the company’s social mission to recruit trained professionals. The company also faced difficulties retaining internally-trained managers and high-performing operators. Cambodia’s IT sector was growing rapidly, and the experienced people could go elsewhere and earn a higher salary than what DDD could offer. As it grew, therefore, DDD faced a human resources challenge in both Cambodia and Laos: skilled managers were hard to find, and expensive because they were in such demand. To fit well with DDD, an individual moreover needed to not only meet the role’s technical requirements, but also be passionate about DDD’s social mission. DDD’s Battambang office faced additional challenges. Battambang was signficantly less developed than Phnom Penh. The majority of roads were unpaved and only a handful had street names. Outside of the rainy season, the road from Battambang to Phnom Penh took anywhere from three to five hours; during the rainy season the only accessible bridges were often wiped out. Moreover Battambang’s electricity supply was unreliable, broadband connections were limited and very 2 Geoffrey Cain, “Cambodia: Cambodia’s New Intellectuals,” Far Eastern Economic Review, November 7, 2008. 3 Andrew Ross, “Cambodia Slowly Rising Again from Khmer Rouge Killing Fields,” The San Francisco Chronicle, December 9, 2007. 4 Erika Kinetz, “Private Equity Digs for Treasure in Cambodia,” The New York Times, May 31, 2008. 5 Rankings based on the following criteria: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. 6 Economic Intelligence Unit, “Country Profile: Cambodia” (2008). September 15, 2009 4 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates expensive, and T1 connections, where available, cost several thousand U.S. dollars per month. As a result, DDD could not assign certain types of profitable work to Battambang as it could not ensure that Battambang would be able to successfully send the finished product electronically to the client on time. The DDD Battambang office also reported very limited private-sector support—no local firms provided computer equipment or even basic office supplies such as desks, chairs, or printer paper. The poor infrastructure made it difficult for DDD to transfer skills from the Phnom Penh office, as its managerial staff were reluctant to relocate to Battambang. Meanwhile, most of northern Cambodia’s educated workforce tended to move to Phnom Penh rather than stay in the regions, so recruiting talented operators and managers locally was a constant challenge. The Battambang office had had to implement proficiency and intelligence testing to ensure that the quality of the recruits was up to standard. On the other hand, once the Battambang employees were recruited, DDD had no trouble with retention, since it was one of the only IT service operators in the region. Both the Battambang and Phnom Penh offices struggled with the realities of the Cambodian educational system. DDD’s leaders had found that because Cambodian education tended to be lecture-based, rarely interactive, and under-resourced, it was not uncommon for students to take several semesters of computer classes without ever seeing or touching an actual computer. Furthermore, the quality of education varied. Generally speaking, the quality of the education system in the northern areas of Cambodia, including Battambang, was not as good as in Phnom Penh. Recruiting outstanding high school graduates, therefore, had been more challenging for DDD’s Battambang office. In Laos DDD had faced similar problems and more, particularly when seeking local clients and local employees. Laos was significantly less developed than Cambodia; there was not much local demand for DDD’s services. Instead DDD used its NGO network and related private companies to capture sales. Moreover, Laotian businesses were only convinced that DDD could deliver on its promises after DDD had demonstrated that its European and other Western contracts were successful. Operational Challenges On the business side, DDD had to compete with other much larger IT providers, including Aptara, SPI Technolgies and Apex Data Services, to win international contracts. (See Exhibit 4 for competitor profiles.) Due to its small size, partnerships were very important to DDD. When it lacked capacity, DDD outsourced to a number of smaller IT outsourcing firms. DDD leveraged these partnerships to learn about new digitization processes that it could build on to win future work. Although DDD’s social component gave it an edge when the bidding for jobs was close, its grassroots origins made its operations complicated to scale. DDD’s three offices lacked a standardized system for project management, and the operational processes were not documented. This made it difficult to establish best practices across the organization, which in turn might be reducing its potential September 15, 2009 5 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates profitability. In mid-2008, the company began to address these issues, mainly by recruiting Western expatriate volunteers to work with the current management. Recruitment and Training Training new recruits was a critical component of DDD’s model. The company trained new staff for about six months before they started as operators on client projects. In order to help as many people as possible and maximize the company’s social impact, an operator could only stay with DDD for four years before he or she graduated. Fewer than 10% of employees then continued with DDD in management roles; the rest moved on to other local firms, usually into higher-paying positions. Through DDD’s internally developed training curriculum, recruits learned basic skills such as typing and how to operate a computer, as well as business-specific skills such as business etiquette, teamwork, and email writing. In addition, trainees received one hour of English instruction every day. In the last part of the training program, trainees were expected to learn the basic tools and software that they would use in the course of their work. This portion of the curriculum, therefore, was customized to reflect each site’s product and service offerings. The curriculum was mostly in Khmer, the Cambodian language, and had not been translated into English. Because the recruitment and training practices in Phnom Penh differed from those of Battambang and Laos, DDD had very little documentation or company-wide guidelines on recruitment. For example, in Phnom Penh the recruitment and training was outsourced to CIST, but in Battambang it was done in-house. Capacity and Contract Allocation One of the most pressing challenges and considerations for future growth pertained to how work was allocated among DDD’s three offices. The three offices were largely specialized. The Laos office primarily performed xml tagging services, Battambang academic data entry and survey work, and Phnom Penh digitization of print publications. Although DDD had signed up some local clients, such as Mobitel, all three offices still relied on international contracts generated by the U.S.-based sales team for the vast majority of their revenue. DDD’s executive team was also concerned about capacity imbalances among the three offices. For example, the Battambang office had too little workflow to continuously occupy all operators, yet the Phnom Penh office had too much, and was constrained by the lack of personnel and physical space. Retraining the operators and project managers in Battambang to take on some of the work from the Phnom Penh office was not considered a viable option as it would require considerable financial and human resources. September 15, 2009 6 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates DDD’s Goals for Growth In 2008 DDD’s board of directors set two parallel goals: grow its existing operations to 1500 people, while exploring ways for the company to expand globally. The board believed that DDD had overcome its main operational challenges and had a proven business model that could be deployed internationally. While the main objective was to help more people in farther reaches of the world, expansion would also add capacity and enable DDD to take on larger contracts in the publishing market. The company’s founders emphasized that while they remained committed to further growth in Cambodia, both the country and the company had come far since DDD started training its first operators in 2001. The time had come to take DDD’s mission, business model and ability to make a social impact to another level, and possibly another continent. While DDD’s senior management and board of directors were fully committed to the expansion strategy, they weren’t sure which path to pursue or how best to proceed. In the past DDD’s expansion efforts had been challenged by local particularities such as labor shortages, lack of basic business infrastructure, and variation in labor pool skill-sets. DDD’s management was therefore eager to make sure future expansion took place in locations that had been thoroughly vetted and were well understood by the expansion team. Senior management had already conducted exploratory talks with potential partners in India, China and Vietnam, but they didn’t know whether partnership was the best approach to expansion. Moreover, no matter where or how DDD expanded, one thing was clear: expansion meant that more people would be needed to support a larger organization. Management was keen to keep control over the size of its U.S. staff in order to minimize costs, potentially further straining local resources. Growth Options Nonetheless, a cohesive strategy would help DDD transform itself into a premier mission-oriented global IT services enterprise. In addition, developing a single coherent global strategy and business model was critical for securing fundraising and donor support. Through conversations with senior management, partners, and donors, DDD’s board of directors had identified four potential strategies for expansion: organic growth, partnership with a local entrepreneur with an existing business, social franchising, and partnership with an international NGO or outsourcing firm. Organic Growth A greenfield growth model would deviate little from DDD’s previous strategy of expansion into Northern Cambodia and Laos. Such a strategy could be initiated immediately, as DDD would not have to go through the process of vetting and negotiating with potential partners. DDD would also be in complete control of the strategy and management of a new DDD office. Yet DDD’s leaders recognized that organic growth would put a severe strain on the company’s managerial resources. DDD would have to evaluate and enter a new market where they had limited knowledge of or experience with the local culture, government, business practices, and infrastructure September 15, 2009 7 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates limitations. Without a local partner, DDD would have to lay out significant capital up front in order to develop sites and establish a local management team. It also wouldn’t be easy to attract local revenue sources, a crucial factor in making new offices less dependent on DDD’s U.S.-based fundraising and sales teams. Partnership or Joint Venture with a Local Entrepreneur DDD was therefore considering partnering with a local entrepreneur, whether already in the IT outsourcing business or not. Although selecting the right partner and negotiating the terms of an agreement was likely to be time-consuming, a partnership would give DDD access to a committed local partner with detailed knowledge of the local labor pool, legal requirements, and business practices. Selecting a local partner would also facilitate rapid expansion, since such a partner might already have a business, a labor force, and the required physical facilities. In India, for example, DDD already had a longstanding partnership with an Indian entrepreneur to whom DDD subcontracted work when it was at full capacity. This Indian entrepreneur also provided business and operational mentorship to DDD because he felt strongly about the company’s social mission. On the other hand it wasn’t clear exactly what value proposition DD would be offering to a local entrepreneur who already had a business in IT outsourcing. The local partner would have to adhere to DDD’s model of recruiting, training, and graduating disadvantaged youth, and would have to commit resources to social programs such as healthcare and continued education. DDD might also have difficulty finding a partner whose business fit within either the scope of DDD’s current product offerings or the spectrum of services offered to clients in the industries targeted by DDD. Alternatively, the partnership model might require DDD’s sales team to pursue contracts and develop competence and contacts in a whole new area of product offerings. Regardless of the structure specifics, in a partnership model DDD would have to develop processes for incentivizing the partner to follow DDD’s standards for recruitment, social programs, and most importantly quality control. Ensuring compliance and resolving potential conflicts could be a problem in emerging economies with weak legal systems. Social Franchising DDD’s board was intrigued by the concept of social franchising. Social franchising was a somewhat undefined, yet fashionable, buzzword that had the potential to excite donors and help raise the capital required to fund a global expansion. Social franchising required the development of a “business in a box” concept: a standardized set of manuals and procedures for recruitment, training, project management, and daily operations. DDD would help franchisees establish their business and also provide ongoing support. The franchisee selection process would take time, but contract negotiations and legal arrangements would, in theory, be streamlined as franchisees would sign on to a standardized DDD “franchise package.” Capital, from both DDD and the franchisee entrepreneur, would also be required to launch a franchise unit. DDD’s management felt it was imperative that franchisees be incentivized to develop September 15, 2009 8 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates local revenue sources, rather than rely on DDD’s U.S.-based sales and fundraising teams. In an ideal franchise agreement, capital would be repatriated to DDD over time through revenue sharing. Although a franchise model would require significant upfront work in order to document best practices and prepare a “business in a box” package, the standardized nature of the franchise model meant that given sufficient start-up capital, DDD could achieve global scale relatively quickly. On the downside, there were concerns about how the potential franchisees would be selected and how DDD would manage competition among the different franchises given the global nature of digitization services. In a traditional franchise model, revenues were locally sourced and franchisees were given territorial rights that precluded other units from seeking revenue in a particular geographic area. In DDD’s case, a contract sourced in the United States could theoretically be assigned to any capable DDD site around the globe. Determining where work would be allocated could prove challenging in the more loosely controlled structure of a franchise network. Partnership with an International Organization Meanwhile DDD’s senior management had been approached by a large international nonprofit interested in bringing DDD’s model to the countries in which it worked, through a partnership with DDD. In order to potentially benefit from DDD’s IT outsourcing expertise and brand, the NGO would provide the capital and human resources required for a fast-paced expansion. Since the partner had the capacity to provide the new DDD/partner office with a revenue source, this model of expansion could be pursued without putting significant additional pressure on DDD’s sales organization, though the precise division of sales was unclear. DDD’s board was also considering a different approach: finding a large international IT outsourcing firm interested in establishing a “social enterprise” subsidiary. Since such a partner would already know the business, DDD could potentially tie more seamlessly into its operations and sales force, not to mention learn best practices from a global IT outsourcing giant. On the other hand, such a partnership might also threaten one of the selling points that appealed to U.S.-based corporate clients, namely DDD’s identity as an independent social enterprise that provided high impact in the countries where it operated. Next Steps DDD’s leadership team was now at a critical juncture in the company’s life cycle. Its mission of providing sustainable sources of employment and education to disadvantaged youth was already validated by nine years of successful operations. Looking towards the future, the decision to expand was motivated by DDD leadership’s desire to lift more people out of poverty and to empower disadvantaged youth through market-driven, world-class IT services. Selecting the right business model for expansion was the first step towards the development and implementation of an expansion strategy. The risks of failure, however, were considerable. If DDD September 15, 2009 9 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates opened new sites without the necessary infrastructure in place to support the expansion, then the company’s product quality and carefully built brand name, among donors and clients, might suffer irreparable damage. Although it was not clear which growth strategy the company would choose, DDD’s leadership team knew that potential donors would only support a strategy that was compelling and achievable. At stake was the future of the company and all who benefited from DDD. Study Questions 1. What has made DDD successful so far? 2. What are its constraints? 3. Which strategy or strategies should DDD pursue? September 15, 2009 10 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates Exhibit 1 Sample Clients of Digital Divide Data Bookshare.org Brown University Harvard Business School Ingenta, a division of Publishing Technology InStedd Jewish Telegraphic Agency Kaplan Test Prep King's College London Mobitel New York Daily News The Reader's Digest Association Tufts University Perseus Project UNICEF University of Arizona URC (University Research Co., LLC) World Vision Yale University Source: Digital Divide Data. Exhibit 2 Human Development Indices for Cambodia and Select Countries Malaysia Thailand Vietnam Indonesia India Laos Cambodia Myanmar East Timor HDI Rank GDP US$ billions GDP Per Capita (ppp US$) Population (millions), 2005 Population Urban (% of total) 63 81 114 109 132 133 136 135 158 130.3 176.6 52.6 287.2 805.7 2.9 6.2 NA 0.3 12,536 7,613 2,363 3,455 2,489 1,980 1,619 881 668 25.7 63.0 85.0 226.1 1,134.4 5.7 14.0 48.0 1.1 67.3 32.3 26.4 48.1 28.7 20.6 19.7 30.6 26.5 Source: United National Human Development Indices (http://hdr.undp.org/en/statistics/). September 15, 2009 11 DIGITAL DIVIDE DATA Anju Mathew, Grete Rød, Jaime Villalobos, David Yates Exhibit 3 Education and Internet Statistics for Cambodia and Select Countries Adult Literacy Rate (15+, %) 92 94 90 91 65 73 76 90 50 Malaysia Thailand Vietnam Indonesia India Laos Cambodia Myanmar East Timor Combined Primary, Secondary, Tertiary Enrolment Rate (%) 72 78 62 68 61 60 59 56 63 Secondary Enrolment Rate (%) 76 64 69 58 NA 38 24 37 NA Internet Subscribers* (per 100 people) 19.33 NA 6.09 1.39 1.09 0.09 0.12 0.01 0.98 Internet Users (per 100 people) 62.6 18.0 23.9 13.2 7.0 2.1 .51 .09 .16 * pertains to the number of dial-up, leased line and fixed broadband Internet subscribers. Source: International Telecommunication Union (http://www.itu.int/ITU-D/icteye/). Exhibit 4 International IT Outsourcing Services Providers Company Description Aptara, Inc • Founded in 1988. • Headquartered in Virginia. Formerly known as TechBooks. • Offices: U.S., U.K., Australia and India. • Production facilities: New Delhi and Pune, India. • 3700 employees (2008). • Services: Content capture, digitization and distribution. • Clients: financial institutions, government, agencies, universities and libraries. SPI Technologies Apex Data Services • Founded in 1980. • Revenues of approximately $44m in 2007. • Headquartered in the Philippines. • An operating subsidiary of ePDLT, a large Philippines-based communications company. • Headquartered in Virginia. • 3,200 employees (2008). • Production facilities: India. • Services: document management and conversion, imaging, indexing, original content creation, professional editorial services, copy-editing, cross-referencing, and semantic-tagging. • Clients: construction and engineering, finance, healthcare, legal, publishing, universities, and libraries. Sources: Company websites. September 15, 2009 12 Using APA style, prepare a 500-word synthesis paper following these recommendations: 1. Select a focal point based on the two case studies we have read this semester (Case Study #1 and 2) 2. Build your argument based on these two sources, integrating their material with your commentary 3. Avoid plagiarism by properly paraphrasing, using direct quotations, and using in-text citations 4. Include the major components of an academic paper, including an introduction (with a thesis statement), a body (with topic sentence), and a conclusion. Paragraphs should be coherent and demonstrate unity. 5. Edit, drawing from feedback from previous assignments and strategies discussed in class. Keep up the outstanding efforts! Synthesis Assignment In one to two pages, select one focal point (or main idea) from Case Study #1 and Case Study #2 from this quarter and build your discussion based on the material from these sources. (Remember to use paraphrasing and direct quotes). Paragraph #1 – Introduction: ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ___________________________________________________________________ Paragraph #2 & #3 – Discussion from cases: ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ Conclusion: ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________
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Synthesis Assignment- Outline
I.

Paragraph #1 – Introduction:
A. In the contemporary world, it is critical for organizations to ensure that
they have effective strategies that can help them achieve success and
become competitive in the market.
B. Porsche and Digital Directive Data (DDD) have proven that their
strategies are effective in achievement of their objectives and goals.
C. Both companies have also faced major constraints as they try to
implement their new strategies.

II. Paragraph #2 & #3 – Discussion from cases:
A. In 2008, Porsche acquired a majority stake of 50% from Volkswagen.
B. The main driving forces that made Porsche to secure partnership with
Volkswagen was the company’s ability to create and secure synergies in
different areas.
C. Establishment of closer ties with Volkswagen would also help Porsche
gain benefits such as more fuel-efficient technologies from the company.
D. Acquisition of Volkswagen would also protect Porsche from the ups and
downs of the auto industry.
E. However, Porsche had to face a major constrain of design prowess and
long-term stability of th...


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