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Leveraging Offshoring: TheIdentification of New BusinessOpportunities in International SettingsFederica Angeli a b & Rosa Grimaldi ba India Institute, Maastricht University , Maastricht, TheNetherlandsb Department of Management , University of Bologna , Bologna,ItalyPublished online: 20 Aug 2010.

To cite this article: Federica Angeli & Rosa Grimaldi (2010) Leveraging Offshoring: TheIdentification of New Business Opportunities in International Settings, Industry and Innovation, 17:4,393-413, DOI: 10.1080/13662716.2010.496245

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Research Paper

Leveraging Offshoring: TheIdentification of New BusinessOpportunities in International

Settings

FEDERICA ANGELI* ** & ROSA GRIMALDI**

*India Institute, Maastricht University, Maastricht, The Netherlands, **Department of Management, University of

Bologna, Bologna, Italy

ABSTRACT This work aims to shed light on the process through which small and medium-sized

enterprises (SMEs) identify new business opportunities within their ongoing offshoring activities. Empirical

evidence is drawn on the case of think3, an Italian medium-sized software company that has been offshoring

its R&D activities to Bangalore, India, since the year 2000. In 2004, the company started a brand new “global”

business: from selling software solutions for computer-aided design, it began selling the engineering

capabilities to use its solutions, leveraging highly qualified Indian mechanical engineers. Our analysis

underlines three elements underpinning think3’s ability in envisaging a new profitable business opportunity.

These are its experiential knowledge of: (a) the markets, clients and competitors, (b) the offshore context, and

(c) the internationalization process as a software house, embodied in the ability to promote offshore cultural

integration and to align home and offshore operations. This study enables a better understanding of the factors

triggering the recognition of new business opportunities by SMEs, at the international level.

KEY WORDS: New opportunity identification, international entrepreneurship, offshoring of high-value activities,

experiential international knowledge, SMEs’ internationalization

Introduction

The offshoring of high-value activities to captive centres, external service providers or

alliance partners located in emerging countries is becoming an imperative for very many

companies willing to save costs and, at the same time, to access a pool of highly qualified

professionals (Agrawal et al., 2003; Dutta and Roy, 2005; Levy, 2005).

Offshoring is mainly pursued through the establishment of proprietary subsidiaries

(captive offshoring) or through the outsourcing to external providers (offshore outsourcing)

1366-2716 Print/1469-8390 Online/10/040393–21 q 2010 Taylor & Francis

DOI: 10.1080/13662716.2010.496245

CorrespondenceAddress:Federica Angeli, India Institute, Maastricht University, Minderbroedersberg 8, P. O. Box 616,

6200 MD, Maastricht, The Netherlands. Tel.: þ 31 (0)43 3883068. Email: federica.angeli@maastrichtuniversity.nl

Industry and Innovation,

Vol. 17, No. 4, 393–413, August 2010

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(Lewin and Peeters, 2006a; Doh et al., 2009). Overall the phenomenon involves both large

multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs).

The offshoring of intangibles represents an interesting setting to study companies’

growth processes in international contexts, and their evolution. While companies are

involved in their current offshoring activities, new business opportunities may arise for

further offshoring at the international level (Grimaldi et al., 2009). Emerging countries, which

are the target of offshoring initiatives, may open up new windows and offer new opportunities

for generating innovation and creating value on a global scale.

The internationalization process of large, established companies, has been broadly

addressed by the international business (IB) literature (e.g. Andersson et al., 2002;

Asmussen et al., 2009). More specifically, the IB literature has illustrated the evolutionary

growth processes of MNEs and their impact on the host countries, addressing both

economically developed and emerging settings (Feinberg and Majumdar, 2001; von

Zedtwitz, 2004). Yet, the IB literature has paid scant attention to how opportunities are

crafted by knowledge-based SMEs. We see in the offshoring of intangibles an interesting

setting to analyse this topic.

First, given the nature of offshoring, the exploitation of new business opportunities may

arise from (and be based on) the intangible nature of what is sourced (high value-added,

knowledge-based activities) and does not require the availability of investment in physical

resources, which may be too costly and beyond the interest of many knowledge-based

SMEs. Di Gregorio et al. (2009) highlight that offshoring is particularly appealing for SMEs

because it develops flexibility and it provides them with the possibility to concentrate on their

core competencies, to benefit from location-specific information without the need to invest in

expensive foreign direct investments (FDIs), and to leverage their experiential knowledge in

order to boost their expansion into foreign markets.

Second, there is evidence in the offshoring literature that the evolutionary and growth

processes for SMEs might significantly differ from those of large established companies

and therefore require a different perspective to be understood (Kenney et al., 2009).

Evolutionary processes at the international level of SMEs are often the outcome of

entrepreneurial initiatives that are not planned in advance (are not the result of deliberate

strategies), but arise through bottom-up approaches, and with the objective of exploiting

new opportunities. SMEs may act in a more entrepreneurial fashion, and are likely to be more

ready to react and adopt innovations that arise from offshoring partnerships (Di Gregorio

et al., 2009).

Overall, we find that the literature has paid scant attention to new business opportunity

recognition by SMEs within international settings (Johanson and Vahlne, 2006). In order to

fill this gap, in this paper we address the following research question:

Which are the factors affecting knowledge-based SMEs’ ability to identify new global business

opportunities within their ongoing offshoring initiatives?

We investigate our research question through a case study of an Italian medium-sized

software company, think3, which has been present in India, with two R&D labs, since 2000.

The case study approach is due to the paucity of empirical evidence and theoretical

reflection on the topic of new business opportunity recognition within ongoing

internationalization initiatives (Eisenhardt, 1989; Yin, 1994).

394 F. Angeli & R. Grimaldi

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The paper is organized as follows. In the next section the theoretical framework is

presented, with a review of the literature on the evolution of offshoring activities and

opportunity recognition in international settings. The description of the methods follows, and

then the case of think3 is illustrated. After presenting our empirical evidence, in the last

section we discuss the results of our study in the light of the literature addressed in the

theoretical part and we present concluding remarks.

Theoretical Framework

The Evolution of Offshoring Activities

Offshoring, or the relocation of jobs and production to a foreign country, typically refers to the

“migration of processes to India, the Philippines, Ireland, China and elsewhere to lower

costs without significantly sacrificing quality” (Venkatraman, 2004: 14). According to

Manning et al. (2008: 35), offshoring is the “process of sourcing any business task, process,

or function supporting domestic and global operations from abroad, in particular from lower-

cost emerging economies”. Offshoring is making its way up the value chain. Companies are

beginning to offshore high-value activities directly related to their core business, such as

research and development (R&D), engineering services and product design (Bardhan,

2006; Couto et al., 2006; Manning et al., 2008). Offshoring of high-value activities appears to

be driven not only by cost-saving needs, but also by a global sourcing-of-knowledge

rationale and is deemed to be a novel way to undertake internationalization (Maskell et al.,

2006).

While academic researchers and practitioners have attempted to describe the

characteristics of the phenomenon and have explored the antecedents and consequences

of offshoring (Agrawal et al., 2003; Dutta and Roy, 2005; Levy, 2005), less attention has

been devoted to the dynamics of next-generation offshoring (Manning et al., 2008).

More specifically, in the offshoring literature there are no contributions that have looked

at offshoring triggering further offshoring and at how new opportunities are identified in

international settings (Carmel and Agarwal, 2002; Lewin and Peeters, 2006a; Maskell et al.,

2006). New opportunities within ongoing offshoring initiatives are traced back to the

endorsement of tentative experiments that have turned out to be successful (Lewin and

Peeters, 2006b).

In a recent contribution, Manning et al. (2008) have highlighted the importance of

dynamic capabilities for the successful implementation of new business opportunities within

the evolutionary offshoring context. In the specific case of offshoring processes, companies

are concerned not with exploiting advantages built up at home, but with leveraging or gaining

access to dispersed skills, knowledge and resources, through their international operations.

They further tend to rely on international partnerships and joint ventures, which reduce the

high level of risk involved in their leveraged strategies, in combination with internationalized

operations to achieve the desired coordination of resources, activities and routines (Oviatt

and McDougall, 2005).

The identification of new opportunities in international settings (within ongoing

offshoring initiatives) is an important topic for knowledge-based companies. Firms focusing

on knowledge creation and exploitation as the source of advantage are more likely to

develop learning skills (Cohen and Levinthal, 1990; Yli-Renko et al., 2001) useful for

Leveraging Offshoring 395

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adaptation and successful growth in new environments than are firms that are more

dependent on tangible resources. Also, since knowledge, explicit knowledge in particular,

is a mobile resource, it provides a flexible platform for international expansion.

Offshoring of high-value activities may offer an interesting setting for studying

opportunity recognition. Emerging countries, which are often offshoring targets, are

currently in a turbulent fast-paced growth phase, which sets a fertile environment for the

development of new business opportunities. At the same time, they display very different

institutional, legal and cultural settings, which offshoring Western companies need to face,

and which may affect their opportunity recognition processes.

Opportunity Recognition in International Settings

Opportunity recognition. Shane and Venkataraman (2000) defined “entrepreneurial

opportunities” as situations in which new goods, services, raw materials and organizing

methods can be introduced and sold at a higher price than their cost of production.

According to Hills (1995), De Koning (1999) and Ardichvili et al. (2003), opportunity

recognition can be viewed as a result of three processes: (1) spotting market needs and/or

underemployed resources, (2) recognizing a fit between market needs and specified

resources, and (3) creating a new fit between separate needs and resources in the form of

business concepts.

Literature distinguishes two main perspectives for studying opportunity recognition:

opportunity identification (which is the perspective that we adhere to in this study)

and opportunity creation. According to the opportunity identification view (Shane and

Venkataraman, 2000), opportunities arise from individuals’ prior knowledge and experiences,

which create knowledge corridors driving opportunity identification (Venkataraman, 1997).

Individuals are in an alertness state through which they capture signals from their surrounding

environment and they combine them with their prior knowledge. A second approach is

represented by opportunity creation, in which the focus is on the creation of new opportunities,

rather than on their selection. It involves design (including the design of alternative goals),

not just choice.

Research on opportunity identification has suggested two broad categories of factors

that influence the probability that individuals will discover opportunities (Shane and

Venkataraman, 2000; Alvarez and Barney, 2008): (a) the possession of prior knowledge

necessary to identify the opportunity, and (b) the ability to identify new means–ends

relationships.

In relation to the former, Shane (2000) identifies prior knowledge of markets, of ways of

serving markets and of customer problems, as being important. He argues that general

business experience, industry experience, functional experience in marketing, product

development and management, and previous start-up experience all contribute information

and skills that increase the likelihood of opportunity identification. The endowment of

knowledge that people possess at the time they happen to identify an opportunity is also

affected by networks of relations (Grimaldi and Grandi, 2003). McGrath (1996) holds that

individuals with a large and well-functioning network are likely to have access to a large

number of promising “shadow options”.

As for the latter, Shane and Venkataraman (2000) hold that even if individuals are privy

to prior knowledge that facilitates the discovery of opportunities, they may fail to make such

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a discovery because of their inability to recognize new means–ends relationships. This

recognition involves envisaging the opportunity to redeploy resources away from present,

suboptimal configurations, to more promising opportunities (Kirzner, 1973). This same

recognition further involves seeing a way to redirect or recombine resources in order to

create and deliver value superior to that currently available. Shane and Venkataraman

(2000) argue that people vary in their abilities to combine existing concepts and information

into new ideas (new means–ends relationships) and that this ability is influenced by

cognitive properties.

The literature on opportunity recognition conceives the identification of new

opportunities both as original, new ideas, emerging from individual experience and

ultimately leading to the set up of new ventures, or as new concepts flourishing within the

ongoing activities of established companies, especially as a consequence of their exposure

to new knowledge at the international level (Zahra and George, 2002; Jones and Coviello,

2005; Styles and Seymour, 2006). For knowledge-based SMEs involved in offshoring

activities in foreign countries, opportunity identification might be tricky. The intertwining

of different factors, including knowledge of customers and their requirements (home

market, as well as host country market) is even more complex, because of the geographic

dispersion of competencies and resources, which need to be recombined to fit separate

market needs.

Opportunity recognition in the international business literature. A review of the

international business (IB) literature reveals that empirical studies in the area have given

scant attention to the process of opportunity recognition. The existing theory of

internationalization implicitly assumes that internationalization is preceded by opportunity

recognition but provides little explanation of this (Johanson and Vahlne, 2006). Despite this

importance, and growing calls for greater integration of the entrepreneurship and IB

literature, there are very few empirical studies that focus on the process of international

opportunity recognition.

Attention to this topic has been paid by the international entrepreneurship (IE) literature.

According to Zahra and George (2002: 261) international entrepreneurship is “the process of

creatively discovering and exploiting opportunities that lie outside a firm’s domestic markets

in the pursuit of competitive advantage”. As the authors note, the definition is based on the

literature that highlights opportunity recognition, discovery and exploitation as character-

istics of entrepreneurship. Styles and Seymour (2006) built upon the earlier work by Jones

and Coviello (2005) to define international entrepreneurship as the behavioural processes

associated with the creation and exchange of value through the identification and exploi-

tation of opportunities that cross national borders.

Some authors, in line with the contribution by Shane and Venkataraman (2000), have

illustrated the importance of prior knowledge and of the initial endowment of resources for

opportunities to be identified in the international domain. More specifically, Eriksson et al.

(1997) distinguish three types of experiential knowledge in an international business

context: experiential knowledge of clients, the market and the competitors (foreign business

knowledge), experiential knowledge of government, institutional frameworks, rules, norms

and values (foreign institutional knowledge), and experiential knowledge of the firm’s

capability resources to engage in international operations (internationalization knowledge).

An important aspect of experiential knowledge is that it provides the framework for

Leveraging Offshoring 397

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perceiving and formulating opportunities (Johanson and Vahlne, 1977). This implies that

experiential knowledge gives absorptive capacity (Cohen and Levinthal, 1990), which is the

ability to assimilate, evaluate and interpret new knowledge.

Chandra et al. (2009) show that international opportunity discovery requires favourable

conditions to exist within the firm, in terms of prior international and technical knowledge,

intellectual property and openness/access to information sources. Their results show that

the discovery process involves interpreting possible matches between pre-existing means

(resources, skills, new technologies) and new ends (international markets), in a problem-

solving process. All the firms in their study recognized international opportunities only within

their areas of expertise. The personal and business relations and networks in which a firm is

embedded play a critical role in determining how information and ideas move around, and

who can and does know what, and when.

A different, though related set of works that have addressed opportunity recognition in

international settings followed a proposal by Mathews and Zander (2007). They hold that the

features of internationalization by newly internationalizing firms are best captured in a

framework that is found at the intersection of entrepreneurial and internationalization

perspectives, which they propose as international entrepreneurial dynamics (IED). This

framework is important since the traditional IB literature is specifically focused on the

activities and advantages associated with the mature and well-established MNEs, and does

not help in addressing the entrepreneurial features of internationalization typical of very

many SMEs going international. IED is useful in explaining entrepreneurial processes that

stretch from the discovery of new business opportunities in an international context to

aspects of exploitation. Such processes include the redeployment of resources and the

ultimate engagement with international competitors that takes place before organizational

and industry maturity sets in (Mathews and Zander, 2007). This is to say that the IED of firms

encompasses the process of discovering opportunities and, additionally, of integrating and

adapting new business ideas into the ongoing international operations and into the

structures and networks of the global economy.

In both IE and IED, the recognition of opportunities in international settings is

considered as relevant. Yet, neither perspective has looked in detail at the process through

which new opportunities are identified. In the next section we will take a closer look at this

important issue.

Methods

Given the exploratory nature of our research questions, a case-based approach is most

suitable, since it allows for an in-depth analysis of the phenomenon under observation

(Eisenhardt, 1989; Yin, 1994; Lee, 1999). Such a choice is also a result of the paucity of

empirical evidence and theoretical reflection on the topic of new business generation within

ongoing internationalization initiatives (Eisenhardt, 1989; Yin, 1994). Indeed, case studies

allow the tracing of links between variables over time (Yin, 1994; Hoffmann, 2007) and

represent a widespread research methodology, especially when processes of change are

under observation (Doz, 1996; Arino and de la Torre, 1998; Koza and Lewin, 1999; De Rond

and Bouchikhi, 2004).

We observe, with considerable in-depth detail, the case of an Italian software company,

think3, which has been offshoring its R&D activities to Bangalore since 2000. The case of

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this company is of particular interest to our research questions for several reasons. Over the

past 30 years, think3 has succeeded in developing software solutions for computer-aided

design, and specifically a proprietary CAD (computer-aided design) product, spotting and

then leveraging the increasing demand for software support to design activities within the

rich local cluster of manufacturing companies. think3 stands out in the Italian scene as one

of the very few Italian software product companies. The starting up of think3’s Indian

operations in 2000, in the early days of India’s rise to global IT prominence, underlines the

innovative and strongly entrepreneurial mindset of the firm. Moving from this experience, we

describe how a brand new business opportunity, labelled as the TDF (The Design Factory),

was identified.

Our case study is not aimed at theory building. Rather, our goal is to gain deeper insight

into a success story and to link it to extant theory, by offering an original perspective on

internationalization through offshoring. The choice of a single case is intended to give depth

to the study (Langfield-Smith and Greenwood, 1998) and to isolate better the links between

the theory and the empirical dynamics (Adler et al., 1999). We collected data through open

interviews with the top management—the Head of think3 Engineering Services (TDF) in

Bologna (Italy), Massimo Signani, and the Head of Engineering Services (TDF) in Bangalore

(India), Anupam Ashtana. Moreover, we held interviews with think3’s human resources

manager, their IT manager, two project managers and eight operators, both in Italy and in

the R&D laboratory in Bangalore, India. Each interview lasted two hours on average, and at

least two researchers attended each meeting. Respondents were asked to describe their

experience with the think3 R&D lab first, to highlight the challenges they faced during the

very initial phase of the Indian operations, and their evolution over time. Then, respondents

were asked to recall the process that led to the recognition of the opportunity that formed the

basis of the TDF business. Massimo Signani and two operators have been key informants

on this phase, because of their deep involvement throughout the whole process from

conception and launch of the new business. Finally, our key informants were asked to

highlight their experience with TDF, with special attention to its relationship to think3 as a

software house, from both a strategic and an organizational point of view. We used semi-

structured interviews and left room for open comments. While some degree of extrapolation

from the story-telling of the key informant has been necessary to isolate the elements crucial

to the opportunity recognition process, it is fair to acknowledge that two of our respondents

had been salient in recognizing the new opportunity, as they were directly involved in the

process.

In order to triangulate our data and to corroborate further our findings by sourcing

empirical evidence from heterogeneous data sources, we examined numerous documents,

such as balance sheets, quality manuals, meeting excerpts, internal memos and consul-

tants’ reports. Moreover, we collected approximately 150 online press releases involving

think3, spanning the period 2000–2007.

In the following section, before looking at the factors that were likely to affect the

identification of the new TDF opportunity, we provide information about the company and its

initial offshoring experience in India. We then present the TDF business model with the

intent to illustrate: (a) that the TDF opportunity was eventually implemented, and (b) how the

TDF opportunity links with the current business. We do not go into the details of the process

leading to the implementation of this business model, since our focus is on opportunity

identification.

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The Case of think3

Company Overview

think3 was established in Bologna, Italy, in 1979 by two young engineers and a professor

from the University of Bologna, who recognized a business opportunity from matching the

increasing demand for computer-aided mechanical design with their competencies in the

field of digital graphic simulation.

think3 provides small–medium manufacturing companies with a unique set of software

solutions, which includes an integrated product development environment for 2D and 3D

CAD (computer-aided design), PDM (product data management), PLM (product life cycle

management) and surface and solid modelling. In 1997, the firm decided to go international,

for two basic reasons: to expand the market beyond Italy’s borders and to trigger the

continuous technological upgrading by co-localizing with worldwide technology leaders in

Silicon Valley. Hence, the headquarters moved to Santa Clara, California. The US relocation

did not foster the expected US market growth. US customers appeared to be very much

locked-in with local software leaders, and the establishment of a strong market presence

turned out to be difficult. Nowadays, the core centres of think3’s R&D activities are spread

across Italy, France and India. Even though think3 has a commercial presence nearly all

over the world, the more crucial market areas are Italy, Germany, Japan and, with increasing

importance, India.

The Experience in India (2000)

The experience in India started in 2000, when think3 decided to offshore part of its R&D

activities to Bangalore, through the establishment of a local proprietary centre. At that time

the company was mainly looking to access: (a) skilled local personnel to develop its software

solutions at low cost; (b) new markets.

The company faced various problems while opening the new captive centre in India,

including difficulties preparing all the bureaucratic documentation needed to start up a new

activity, obtain visas, acquire the appropriate facilities, rent the buildings for the new offices,

etc. It took approximately four years to overcome these initial difficulties and to learn how to

deal smoothly with the local domain. This resulted in a very modest growth over the first

three years, which improved significantly only at the end of the fourth year, when some key

organizational changes were implemented to meet the local culture and expectations.

More specifically, the initial organizational structure tended to replicate the Italian

model, exporting to India the same incentive scheme and leadership style that had been

successful in Italy. The offshoring strategy was based on the delocalization of repetitive,

low knowledge-intensive activities of software development (e.g. debugging activities).

Following a drop in employees from 25 in 2000 to 9 in 2004, the management realized that

something was wrong with the model they had been implementing.

On the organizational dimension, the management had to acknowledge the

unsuitability of a “flat” organizational structure, traditionally deployed in a Western context

in order to promote innovation and creativity in the IT sector. Within the Indian context,

however, people appear to derive important stimuli from a well-defined hierarchical

structure. To find incentives towards hard work and towards increasing productivity levels,

Indian engineers require hierarchical roles, where vertical relations are clear, and where the

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who-reports-to-whom framework is sharply defined. Considering cultural differences

between Italy and India, Rama, an Indian TDF team leader, observes:

[ . . . ] There is a working cultural difference in Italy, there’s a fear of competition. Definitely such

issues are there which are clearly visible. But at the end the fittest is the one who survives, if you

work on, work better things, definitely we should be able to win, that’s what the technique is. We

have to work—work harder, work smarter, work better, that is the reason with which we are going.

If that is there, definitely there will not be any issues . . . (Rama, TDF team leader)

On the technical dimension, the management figured out that the steady delocalization

of the least creative and challenging part of software development failed to motivate the

ambitious and eager-to-learn Indian engineers. In order to find incentives in day-to-day

work, a visible evolution in the understanding of the final product was needed.

Several changes were put in place to address these problems. First, in 2004 the

Bangalore centre was placed under Indian management, which changed the organizational

form towards a more hierarchical structure in order to comply with what the Indian engineers

sought from their experience with think3. Renewing the local management was an important

turning point for think3, since it enabled the company to be much more effective and to grow

significantly, along with a deeper understanding of Indians’ professional needs. The Indian

management set up a performance-based award system, institutionalizing awards such as

the “employee of the month”, or group activities like the “think3 day” to enhance team

building. It increased the number of professional layers and defined the career paths and

the job positions more sharply. These elements suited the way Indian employees seek

individual visibility, reputation-related recognition and collective acknowledgment of

hierarchical role. Today, think3 India is considered as an:

[ . . . ] Indian company. We have tried to keep a certain value system, a certain culture, which was

Indian. Our HR policies, how we treat individuals, are very related to what is being done in India

. . . (Ram, Managing Director, think3 India)

Secondly, the activities “offshored” to Bangalore became increasingly knowledge-

intensive, following a well-defined evolutionary path. From the initial offshoring of software

debugging or simple conversion activities, the Indians started an active participation in

the design and development of the software (CAD) system, gaining responsibility for

increasingly wide segments of code. As Rama puts it:

[ . . . ] See, initially when we started, we did not take total responsibility for any part of the product.

We were small teams here working under the direct supervision of a team in Italy or the US, so we

were really a joint team, so directions if not on a daily basis at least on a weekly basis would come

from the team sitting outside the country and that was very logical because we were a new team,

we had to understand the product, we had to understand how the product was set up. There were

20 years of technology and experience sitting in people outside the country. So, all that had to get

slowly transferred. So, initially it made a lot of sense that the teams in India were just working

under the supervision of teams outside. Over a period of time, as knowledge got transferred,

as the engineers in India got more experienced, understood how our product was structured,

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we then started taking the responsibility for certain specific functionalities or certain modules of

the product . . . (Ram, Managing Director think3 India)

Today, after nine years, the R&D centre in Bangalore counts about 180 employees and

constitutes 40 per cent of think3’s global R&D. According to the Italian management of

think3, the bases for this incredible growth rate have been the major roles played by the

initial will and then by the ability to integrate with the local culture (to understand it, to

appreciate and to learn the positive aspects).

A Brand New Business: The Design Factory (2004)

Four years after the initial establishment in India, the company decided to enter a brand new

business. By the end of 2005, think3 started providing its Western customers with

mechanical engineering services, leveraging the outsourcing formula through the

competencies of Indian mechanical engineers. The brand new business is called The

Design Factory (TDF); a design factory (DF) is typically organized as a group of mechanical

engineers who work exclusively on an engineering project for a customer in Europe. People

within TDF are completely devoted to that project and are located in the think3 site in

Bangalore. TDF’s customers tend to reconfirm the collaboration with the designer/s, and are

thus willing to establish a medium to long-term relationship.

As Anupam (TDF Head) describes it:

[ . . . ] TDF is an acronym, which is coined as The Design Factory as we call it. We have a good

customer base because of our organization, particularly in Europe especially with focus on Italy, we

have a large, good marketing and sales team which knows the customer base there. The idea is that

we can position services from India with the India advantage story, to these customers, and then we

can transfer this work back to India. The focus was to avoid working on short-term projects and

to work on long-term projects; hence, most of the projects or the customer assignments or

engagements run typically for more than one year, that’s the kind of engagement model. The

concept is more like an extended design team for them in India, so the value chain creation is

something, which is driven by the customer . . . (Anupam, TDF Engineering Services Head)

The very first input to TDF’s business formula comes from Western companies’

requirements, from the definition of the resources that they are willing to invest and their

time constraints. On this basis, think3 is able to select, through the local Indian network,

the Indian engineers who, potentially, can best fit the clients’ requirements.

Video conferences are used to introduce the Indian engineers to the European clients,

who, together with think3, make the final decision about the staff to hire. Drawing on its local

network, in the recruitment phase think3 can provide its clients with up to 10 CVs of potential

candidates, from which to pick the most suitable people. After this first selection, Indian

candidates visit the client for a period ranging from two to six months, during which they

become familiar with the project(s) on which they are intended to work, before going back to

India, where they will be working on a stable basis. Once the choice has been made, think3

hires permanently the Indian employee(s), who are then allocated full time on the European

client project until completed. TDF thus acts as a broker between the Western European firm

and the Indian engineers accomplishing the outsourced task.

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The outsourcing formula offered by TDF is crafted to the specific needs of

manufacturing SMEs, since it embeds the solutions to several problems (like the important

initial investment to set up proprietary local infrastructures and/or the lack of knowledge

about local cultures, institutions and key players, as well as governmental regulations).

Beyond the direct success of TDF as a separate new business, additional fruitful

synergies between TDF and think3’s main business as a software house need to be pointed

out. Though sharing the same spaces, the two organizations are very well distinguished, first

by the profile of the employees: software engineers and developers (in the case of think3);

and mechanical engineers and designers (in the TDF case). They can be seen as sequential

in the software value chain:

[ . . . ] The think3 software guys develop the product, the TDF guys use the product. So one

group are the developers, the other group are the designers . . . (Ram, Managing Director, think3

India)

TDF is considered as a proper external customer:

[ . . . ] The TDF guys are treated as a customer, so if there’s an issue which they’re facing working

with thinkdesign they would go through the customer care process . . . (Ram, Managing Director,

think3 India)

Figure 1 illustrates the strategic role that TDF has within think3 corporate strategy. TDF

adds to the overall organization at two different levels. The developers working for think3

India, software engineers, provide the customers with the design tool (software solutions for

engineering), while the designers working for TDF, also located in India, provide the same

customer base with the design expertise. Thus, on the inter-organizational, customer-

related level, TDF sets up a new diversified business, which completes and enriches the

offer of the CAD design product. At the same time, on the intra-organizational level, TDF is

located downstream in the software product value chain. The organizational and physical

vicinity of the two teams fosters the possibility of exchanging bi-directional feedback: the

TDFDesigners

THINK3 INDIADevelopers

DesignExpertise

DesignTool

CUSTOMERS

Figure 1. TDF within think3 corporate strategy

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designerscan improve their knowledge about the tool by learning directly from the developers;

the developers can benefit from direct feedback about problems in the usage of the software.

The TDF model has been successfully implemented and has been growing dramatically

over time. In 2007, TDF counted 110 Indian mechanical engineers dedicated to 53

customers, 80 per cent of which are Italian manufacturing SMEs. This business constitutes

10 per cent of the company’s overall turnover, though its share of turnover is growing at a

double-digit pace.

Determinants of Opportunity Recognition

According to the management of think3 Italy, the development of TDF has been triggered by

the identification of an opportunity, which was correlated to think3’s mainstream business

as a software house, and which could further enhance it. think3 came to envisage and

conceptualize the new opportunity by matching the availability of mechanical engineers in

the offshore context with the increasing demand coming from manufacturing SMEs in the

Western countries.

The evidence that we provide in this section shows that, in line with the theory that

we illustrated above (Eriksson et al., 1997), the identification of the new business

opportunity and the conception of a successful formula have leveraged three main factors:

(1) experiential knowledge of the market, clients and competitors (foreign business

knowledge); (2) experiential knowledge of the offshore context (foreign institutional

knowledge); (3) experiential knowledge about internationalization (international knowledge).

Experiential Knowledge of the Market, Clients and Competitors

think3 has served European manufacturing SMEs for over 30 years, “enabling more than

11,000 companies over time to achieve unmatched results in terms of product

innovativeness and rapid time to market by optimizing their product development process”

(Silvano Joly, Worldwide Marketing Vice-President, think3). think3 offers 3D CAD and PLM

software solutions for industrial design in a variety of segments, such as automotive, bottling

machinery, furniture, household appliances, medical devices and packaging machinery, all

specifically targeted to SMEs.

Over the years, think3 has accumulated technological and system integration

knowledge to understand companies’ requirements. The company has leveraged the

unrivalled possibility of acquiring knowledge relating to the way its product was being used

by client companies and of absorbing architectural and functional information about the

products being developed by users of its CAD software. Furthermore, the implementation of

PLM software solutions within the customers’ organizational context has provided think3

with a difficult-to-imitate knowledge of how typical Italian SMEs organize their own internal

processes. All these factors contributed to the recognition of the new business opportunity.

Massimo Signani underlines:

[ . . . ] Over the years, we have come to develop deep knowledge about our clients, European

SMEs. By crafting our product on their engineering activities, through an ongoing process of

refinement, we came to develop a very close knowledge of their internal processes and of the

competencies and skills they need to optimize the use of our product. This was a sort of inspiration

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to us for the TDF. Hadn’t we had such a knowledge we would have probably never come up with

the new idea . . . (Massimo Signani, Vice-President and Head of Engineering Services, think3)

Working in direct contact with over 11,000 manufacturing SMEs for over 30 years,

think3 has witnessed the birth and fast development of these companies’ outsourcing—and

specifically offshore outsourcing—needs. As Joe Costello pointed out in 2005:

[ . . . ] Based on my company’s quarter of a century of experience in providing product design and

development services to small and mid-sized manufacturing and design firms, it has become clear

that outsourcing, rather than a major competitive threat, is instead a major source of competitive

strength [ . . . ]. Focusing the discussion of outsourcing primarily on large corporations misses the

point. While offshore outsourcing may bolster the bottom lines of the largest corporations, it is

becoming a strategic necessity for many of the 229,000 companies in the mid-market in America . . .

(Joe Costello, Chairman and CEO, think3—in interview conducted by Lawrence Kren (2005))

The knowledge of the clients and the proximity to their needs has secured a preferential

channel for think3 to spot the opportunity and to craft a business model able to tackle the

opportunity.

Additionally, the identification of the TDF business formula has leveraged the

knowledge of potential competitors. Potential competitors in the home country are

engineering bureaus, EBs (of which about 4,000 exist, over all of Italy), with a long tradition

and expertise in the local environment and of innovation dynamics of SMEs. Nevertheless,

EBs are small organizations, with a limited supply potential as compared to TDF, which can

hire virtually any number of Indian engineers to satisfy home demand. Moreover, within EBs

a few professionals handle many projects at a time, whereas in the TDF model the customer

firm is provided with a team of exclusively dedicated engineers. This triggers a final outcome

of higher quality, which leverages a deeper and more trustful relationship between

customers and engineers. Beyond EBs, our respondents also pointed out that traditional

software houses, such as think3, can play an intermediary role and can set up a solution like

TDF’s. However, traditional software houses are mainly US multinationals, with neither the

experience nor the reputation with European SMEs. Likewise, branded Indian outsourcing

companies, such as Infosys or Infotech, offer high-quality and reliable engineering services,

but lack any commercial or technical expertise with European SMEs’ internal manufacturing

processes. On the other hand, the web-based Indian outsourcing companies offer extremely

cheap services but lack reliability. The knowledge of TDF’s potential competitive scenario

allowed think3 to conceive a business formula able to ensure sustainability and competitive

advantage over time.

As Massimo Signani pinpoints:

[ . . . ] The knowledge of our customers helped us to define the competitors and to understand the

competitive scenario at large. This has been crucial for the conception of TDF, to identify what to do

and how to do it; moreover, competitive analysis strengthened our belief in the sustainability of our

business formula . . . (Massimo Signani, Vice-President and Head of Engineering Services, think3)

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Experiential Knowledge of the Offshore Context

In 2004, think3 was settled in Bangalore, with established operations, a workforce of 100

engineers and a successful Indian management. A network of local Indian commercial

partners (value-added resellers—VARs) was starting the commercial penetration of think3’s

software solutions all over India. Partnerships with universities and educational institutions

were further enhancing think3’s embeddedness in the local domain. Through “thinkstart”,

think3’s educational programme, the company was increasingly partnering with schools and

universities to train the next generation of product design and development professionals

in the use of think3’s innovative industrial design technology. Through its operations, its

network of VARs and its educational programme, think3 grew aware that India could offer

highly skilled mechanical engineers able to satisfy the growing demand for offshore

outsourcing engineering coming from Western manufacturing SMEs. Drawing on its

consolidated and widespread local Indian network, think3 could easily access local

institutions and universities. Moreover, its local Indian management was committed to local

recruitment and benefited from preferential access to possible sources of competencies

(trained and specialized engineers).

The offshore network also allowed think3 to gain deep insight into the system of values,

lifestyle, religious and ethnic peculiarities, institutional framework and social fabric of the

Indian context in Bangalore. This knowledge has been crucial in the recognition of the new

business ideas. Leveraging this, the management realized that a solution like TDF could be

most appealing to Indian mechanical engineers, as it combined the prestige of working for a

MNE the challenge of a highly technology-intensive job in mechanical engineering, the

possibility to learn from projects in several different business domains and the ease of

remaining in India with the prospect of travel to Europe for short periods.

As Massimo Signani highlights:

[ . . . ] It is important to underline that the embeddedness in the Indian context is among the

elements that have led to the conception of TDF and to the consolidation of ideas around

its feasibility and sustainability. Our experience in Bangalore has produced a fine-grained

knowledge about the Indian environment there, in terms of institutions, governmental

bureaucracy but also cultural norms, system of values, education system, everyday Indian

lifestyle according to religious and ethnic differences. This rich knowledge has strengthened our

confidence that TDF could be possible and very profitable . . . (Massimo Signani, Vice-President

and Head of Engineering Services, think3)

Experiential Knowledge about Internationalization

The experiential knowledge deriving from previous internationalization experience of think3

provided a strong input to the opportunity recognition and to the conception of the new TDF

business model. The knowledge acquired through the trial-and-error process that led think3

to establish a successful R&D lab in Bangalore has become the core value of TDF’s formula.

This experiential knowledge is embodied into two main elements: (1) the ability to promote

offshore cultural integration and (2) the ability to align home and offshore operations.

Ability to promote offshore cultural integration. The key turning point of the strategy

implemented by think3 during its internationalization process has been the promotion of a

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much deeper cultural integration, achieved through the switch to an Indian management for

the Indian R&D lab, which we described in a previous section. This allowed think3 to cope

with potentially dangerous cultural clashes. In particular, Indian management’s perspective

enabled the firm to gain precious insight into the peculiar Indian system of values, and to

understand the Indian need for a sharp definition of hierarchy, for a careful and visible

system of performance evaluation, and for a rapid professional growth in terms of roles and

responsibilities. By coupling these with the international exposure, reputation and cutting-

edge technology, think3 could provide Indian engineers with the proper incentives system

and a suitable cultural environment.

The cultural integration achieved by think3 in the offshore context, prior to identifying the

new TDF opportunity, witnesses the formation at the organizational level of the capability to

understand the local context in a broad sense, and to adapt to it rapidly. This capability does

not appear to be situation-specific and can be considered as a precious element of

experiential knowledge about internationalization:

[ . . . ] By becoming embedded in the Indian context, we developed new knowledge about the

crucial mechanisms and factors enabling the understanding of—and the adaptation to—any local

foreign environment, such as the need to evolve with the local context, to understand the

institutional environment, to evaluate the local norms and systems of values. This has been a

lesson, which has helped us to develop a mindset about how to approach internationalization

and benefit from the opportunities it offers . . . (Massimo Signani, Vice-President and Head of

Engineering Services, think3)

Indeed, the effort towards cultural integration enhanced the embeddedness in the local

context already established through the network of relationships and was an important

element for opportunity recognition. In order to achieve a successful offshoring, the

“Indianization of the product”, as Massimo Signani puts it (IlSole24Ore, 2007), is crucial for

TDF. India retains cultural and environmental differences that not only must not be overlooked

for a successful offshoring but also need to be leveraged. As an example, Signani considers

the differences in raw materials and manufacturing processes, which, through an

experienced usage and understanding, allows the same component to be produced faster

and cheaper. With TDF’s offer package, the customers purchase the Indian design

capabilities and the appropriate interface to make them profitable, with the local knowledge,

the cultural filters and the appropriate professional incentives already set up and optimized.

Ability to align home and offshore operations. Along with the strong effort to promote local

embeddedness and Indianization of the operations and of the product, think3 has been

constantly engaged in the alignment between home and offshore operations. Western

employees have been encouraged to get to know their Indian counterpart through frequent

visits to Indian operations, and face-to-face meetings with the Indian employees at the

Western sites. The integration between Western and Indian engineers is further enhanced

by enriched communication channels, which encompass instant messaging, videoconfer-

ence, phone and browser-based video for peer-to-peer communication.

This environment favoured the technical tuning between home and offshore operations.

think3’s trial-and-error approach, developed as a software house during its early

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internationalization, brought the company to recognize the importance of promoting an

evolution of the level of complexity of outsourced tasks, from simple to more broad and

complex projects. The progressive evolution of offshored tasks and the constant alignment

between home-based knowledge and offshore knowledge have become a best practice

within think3’s software house, since it engenders a mutually reinforcing virtuous cycle: Indian

mechanical engineers have the chance to learn and increase their own technical knowledge,

while Western engineers have the time to build trust towards Indian capabilities. On the one

hand, Indians are more and more challenged and motivated by daily work, which minimizes

the risk of resignation and attrition; on the other hand, Westerners can rely on cheaper, skilled

resources with a longer term perspective, which benefits the quality and rate of innovation.

This ability to integrate and progressively align home and offshore operations can be

considered an important piece of experiential knowledge of the internationalization

experience, which, like the ability to promote cultural integration, is not context-specific but

constitutes a new ability at organization level. As Signani puts it:

[ . . . ] The alignment of home and offshore operations has been critical in the internationalization

process of think3. We understood that we not only had to consider the local needs and to pursue

cultural embeddedness in the Indian context, but also to let the home organization co-evolve and

pace the change. Our experience with the R&D lab in Bangalore has taught us the importance of

the constant tuning between home and abroad . . . (Massimo Signani, Vice-President and Head

of Engineering Services, think3)

Through the constant tuning of technical skills, the enhanced communication

techniques and the face-to-face meetings, think3 has developed a particular sensitivity

and scanning attitude toward the evolution of Indian technical competencies over

time. This has played an essential role in successfully envisaging the new opportunity and, at

the operational level, in subsequently recruiting the mechanical engineers for TDF’s service.

Discussion and Conclusions

With our study, we advance a preliminary contribution that lies at the intersection of different

streams of works, including the literatures on the offshoring of intangibles, on the

internationalization processes and on opportunity recognition. Provided that the

contributions on opportunity recognition are individual-based, our focus on a small

entrepreneurial firm, and on SMEs more generally, is instrumental. Given the small size of

these companies we expect some degree of overlap between organizational dimensions

and individual-level ones, which is relevant for a study that looks at opportunity recognition

processes.

Hence, our preliminary evidence provides a theoretical and empirical contribution to the

literature on opportunity recognition in international settings. As we mentioned, both the

international entrepreneurship (IE) and the international entrepreneurial dynamics (IED)

literature acknowledges the relevance of opportunity recognition in international settings.

Yet, neither perspective has looked in detail at the process through which new opportunities

are identified. Our evidence seems to suggest that opportunity identification is the outcome

of a bottom-up process, which, rather than being planned in detail in advance, involves

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interpreting possible matches between pre-existing means (resources, skills, new

technologies) and new ends (international markets), in a problem-solving process.

There is consensus that prior knowledge is relevant for opportunity identification

(Shane, 2000). In line with previous studies (Eriksson et al., 1997; Johanson and Vahlne,

2006), our findings support the idea that three types of prior knowledge have constituted the

trigger to opportunity identification in think3: foreign business knowledge (knowledge of

clients, markets and competitors), foreign institutional knowledge (knowledge of the offshore

context, including country legislation, culture and local characteristics) and internationaliza-

tion knowledge.

After analysing our preliminary evidence, we feel comfortable in saying that the three

processes of experiential knowledge accumulation are likely to have played an important

role in the opportunity recognition process. With regard to internationalization knowledge, in

line with the contribution by Eriksson et al. (1997), our evidence suggests that accumulated

experiential internationalization knowledge may have exerted a positive influence on the

further internationalization of think3. Such internationalization knowledge is embodied in the

firm-specific capabilities to become integrated into the offshore cultural context and to align

the home and offshore operations. The local activities of the firm in an emerging market

economy are nonetheless likely to create opportunities for spillovers. The extent to which

firms and locations can benefit from the entrepreneurial value proposition that they create

depends on the extent to which the key creative and knowledge assets are embedded within

the organizational and geographical boundaries, and therefore resistant to imitation by rivals

in competing locations (Mudambi, 2008).

The ability to integrate into the offshore cultural environment can be expressed in terms

of sensitivity towards the local requirements, alertness to the clues coming from the

surrounding environment, openness towards the new foreign offshore context, and

willingness to adapt and embed rapidly into it. Such an ability to embed into a new foreign

context is not specific to TDF, but it is an ability that think3 has developed in its previous

internationalization experience. It turned out to be relevant for the identification of the brand

new TDF business opportunity, for envisaging new means–ends relationships. This ability

consists in obtaining intuition about new potential recombinations of resources (home and

local ones) to best address specific market needs.

Similarly, the internationalization experience of think3 as a software house has

underlined the importance of a constant alignment between the home and offshore

operations. Along with pursuing a strong cultural embeddedness in the foreign context and

promoting adaptation, the company had simultaneously to foster the co-evolution between

the knowledge at home and the knowledge content of the offshored tasks. This factor is of

particular relevance when considering offshoring of knowledge-intensive activities such as

R&D, where the interdependence between tasks is high (Kumar et al., 2009) and the

constant alignment of home and offshore operations is crucial. Moving from the specific

internationalization case, the need to align home and offshore operations has been

elaborated upon and has become a firm-specific ability, which in our view was crucial for

envisaging the new TDF opportunity.

This work also contributes to a recent stream of works in the offshoring literature. We

bring evidence on firms’ offshoring processes and on the factors that trigger their evolution

over time. The shift from selling design software, to selling the expertise to use the design

software represents an example of “further R&D offshoring”, which started within a

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company’s ongoing offshoring activities. Therefore, as well as providing access to skilled

resources at low costs, offshoring processes might offer concrete new insights for strategic

business evolution and therefore affect companies’ growth in the short as well as in the long

run. More generally offshoring is making its way up the value chain. Offshoring of high-value

activities appears to be driven not only by cost-saving needs, but also by a global sourcing-

of-knowledge rationale, and is deemed to be a novel way to undertake internationalization

(Maskell et al., 2006).

Our findings also advance the knowledge accumulated by recent studies on the

dynamic perspective of next-generation offshoring (Manning et al., 2008), emphasizing the

importance of becoming embedded into the local context, learning from international past

experience and dynamically adapting to rapidly changing offshoring environments and

opportunities. In line with these studies we show how the successful generation of global

innovation might require offshoring companies to be able to redeploy, integrate, build, and

reconfigure internal and external competencies to address rapidly changing environments

(Manning et al., 2008).

Taken together, these considerations pave the way for future research on opportunity

recognition in international settings. In particular, we invite researchers to develop theoretically,

and investigate empirically, a comprehensive framework that underlines the different types of

antecedents of opportunity recognition at international level and the relationships between

them. The extant literature agrees that the international experience of entrepreneurial

companies influences their international outlook and the evolution of firms’ internationalization.

Yet, more is to be discovered about the various dimensions of international experiential

knowledge, how it may be linked to the concept of global vision, and how it coincides with typical

ways of discovering and connecting geographically dispersed skills, knowledge, resources and

customers (Zahra, 2005; Mathewsand Zander,2007), intonew businessopportunities forsmall

and medium-sized companies.

Limitations and Future Research Directions

The main limitation of this study relates to the generalizability of our results, particularly

because of the use of one single case. Literature supporting single case usage highlights the

fruitful fine-grained detail that can be achieved through the deep investigation of one single

company (Langfield-Smith and Greenwood, 1998; Adler et al., 1999). On this line, we tried to

guarantee richness of data by making use of multiple heterogeneous data sources (open

interviews, archives, press releases). Meanwhile, we gave strong emphasis to the point of

view of the people mostly involved in the phase of opportunity recognition, which is

recognized to be predominantly an individual process, and thus requires deep, fine-grained

data on the individual perceptions.

An additional characteristic of this study affecting generalizability relates to the specific

context. We studied the process of opportunity identification by SMEs in international

settings. The study of opportunity recognition at firm level instead of individual level has

been possible because of the small size of the firm, and because of the bottom-up nature of

the process. These two elements entail significant differences between the phenomenon

under observation and the dynamics of opportunity recognition occurring within MNEs.

Thus, caution should be used in generalizing our results to other contexts, and especially

to MNEs.

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Also we know that firms may have an important role in creating the conditions leading

and fostering their employees to discover new opportunities. Krueger (2000) highlights

the importance for organizations to develop a “supportive” cognitive infrastructure. The

cognitive infrastructure should enhance perceptions in organization members that

opportunity seeking is personally and socially desirable, and that members are personally

and collectively competent to pursue new opportunities. Such a cognitive infrastructure

would provide the empowerment needed to promote opportunity seeking and eventually

opportunity development. We thus believe it is important for future research to address the

characteristics of the context in which individuals are settled at the time they happen

to discover new opportunities, and the role that organizations may have in triggering such

processes.

Overall, this paper sheds light on the evolution of international activities of SMEs within

their ongoing offshoring activities. We still believe that further research should be devoted to

addressing more generally growth and evolution dynamics of SMEs at the international

level. These dynamics differ from those of large established companies and need to be

addressed through a different lens, with greater focus on the trial-and-error, informal,

bottom-up processes that drive them, with the objective of understanding which factors

come into play during these processes and are relevant for their success.

Acknowledgements

The authors owe special thanks to Elisa Mattarelli, for the in-depth interviews she ran in

India. The authors also express their appreciation to think3 and to all respondents who

participated in this study and to Dr Paul G. Ellis for the editorial assistance.

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