Since the 1990s, offshoring –the movement of firm activities to foreign countries– has emerged as an important strategy implemented by companies to support their competitive advantage. Manufacturing and services have been offshored in search of low costs and/or access to local markets. However, the benefits of offshoring have often proven elusive and the conditions that create the benefits of offshoring (real or perceived) in different countries have changed; thus, patterns of offshoring have also changed with companies often chasing the intended benefits of this strategy by moving activities from country to country. After decades of offshoring of both production and services, some companies have started to relocate their offshore activities either back to home countries or to other offshore locations.

Behavioral theorists agree that organizations embrace strategic and operational change by introducing new products, entering new markets, engaging in mergers and acquisitions, and increasing R&D investments when they observe declining performance relative to their selected goals (Audia and Greve 2006; Chrisman and Patel 2012).

Why do companies re-evaluate offshoring decisions?

There are many reasons for companies to re-evaluate offshoring decisions to consider relocation. Companies are increasingly recognizing that the hidden costs, risks, and strategic impact are often larger than expected and that performance does not always align with original aspiration levels. Behavioral theorists agree that organizations embrace strategic and operational change when they observe declining performance relative to their selected goals. Along the same lines, performance feedback research suggests that managers’ tendencies to change their strategy are affected by the discrepancy between current performance and aspiration level. Specifically, when managers interpret performance as being unsuccessful or in need of improvement, they start a search process for possible alternative solutions.

Organizational change literature has focused only on “online” search!

We aim to improve our understanding of the processes by which companies re-evaluate their offshoring decisions. While previous research has made good progress in understanding the determinants of organizational change, it has largely focused on “online search”, i.e. on the relationship between performance feedback and observed organizational change. In fact, alternatives come from trials and errors in which organizations first select an alternative that is local where the problem occurs and only later will sequentially broaden the scope of their search to consider more distant alternatives if a local solution is not found.

Our contribution: “offline” search, “positive” and “negative” discrepancy, and location-specific bias

Unlike previous research, we focus on a specific and critical type of search that is “offline”. In other words, we analyze companies when they examine several alternative solutions simultaneously against each other and against inaction before implementation. Specifically, when re-evaluating the offshored initiative based on performance feedback, companies may consider alternatives that are local, i.e., increasing the commitment in the host country of the focal initiative, or distant, i.e., re-locating in a third country (that could include their home country).

Additionally, as managers make choices regarding the structure of activities with respect to their location (at home or abroad) that do not always reflect performance shortfalls, we consider organizational search triggers both from performance below an organizational goal (i.e., negative discrepancies) and above it (i.e., positive discrepancies). We argue that the former triggers problemistic search that leads the company to re-evaluate offshoring and to consider alternatives that are far from the focal initiative and that can take place either in a new host or in the home country; instead, positive discrepancies trigger an institutionalized search, that is an increase of the commitment towards the current strategy in the present host country. We also claim that the likelihood of the re-evaluation process increases with the size of performance discrepancy and it is also moderated by a location-specific bias, i.e., it is attenuated or strengthened when the host country is perceived as strategic for the focal firm.

Negative discrepancies trigger distant solutions, positive discrepancies favor local solutions, but location-specific cognitive bias does play a moderating role

We ran an empirical analysis on 441 offshoring initiatives undertaken between 1964 and 2009, and their parent companies’ intentions following market performance assessment. Our econometric findings confirmed that negative and positive performance discrepancies matter in triggering the process of search in distant and local contexts, respectively, and there is an interaction with the location-specific anchor bias that mitigates the effect of negative discrepancy while amplifying the impact of the positive one.

Why our results are relevant for the management, organization and international business literatures

Taken together, our research responds directly to some recent calls for research in management and organization literatures on the influence of assessments of firm performance on the processes through which goals are formed and become manifest in organizations. Indeed, these literatures have emphasized the need to understand what factors affect firms’ decision to pursue a specific set of goals, and our research addresses the ways in which performance discrepancies (not only negative, but also positive) influence offline (instead of online) search and the mechanism for generating alternatives and for choosing among them. Our results contribute also to the current literature on reshoring where the focus has been mainly centered on the relative changes in terms of labor costs (e.g., China versus Vietnam) and on the firm’s performance – especially more recently after the Covid-related economic disruption – without, however, adopting a managerial and behavioral perspective based on the discrepancy between performance and aspiration levels and on cognitive biases.

Actionable takeaways: don’t wait for negative discrepancies to overcome organizational inertia, and prevent the “threat-rigidity trap” in case of strong location-specific anchor bias

We believe our findings suggest some managerial implications. Firms should not wait for a negative discrepancy to overcome the organizational inertia and to introduce organizational changes as result of a problemistic search approach. Indeed, decision makers should consider the possibility to introduce organizational changes also in case of performance above expectations as result of an opportunity-search approach, i.e., by exploring new opportunities. However, firms should also be aware of the risk of a “threat-rigidity trap” in case of a negative discrepancy, meaning that they should elaborate a protocol and define ex-ante the strategic priorities in order to react quickly in case of a trade-off arising from negative performance discrepancy and strong location-specific anchor bias.

Do you want to know more?

In our paper, titled “Re-evaluating the offshoring decision: A behavioral approach to the role of performance discrepancy”, published in the Journal of Management Studies, you can not only understand more in depth the dynamics underlying the offline versus online search and the problemistic versus institutionalized approach of negative and positive discrepancies, respectively, but you can also explore a rich set of additional evidences such as how positive discrepancies can trigger also a slack search approach, the difference between absolute and relative performance in offline organizational changes, the moderating role of past- and path-dependence, and whether performances discrepancies alternative to market (such as efficiency-seeking and knowledge-seeking) can trigger an offline search. Finally, we also connect our findings to the contingent geo-political situation stemming from the Covid-19 pandemics and the Russia-Ukraine war as well as from the associated trends towards global value chains reconfigurations and regionalization.