Global Business 4th Edition by Mike Peng

Exercise 3

Ostnor's Offshoring and Reshoring
Klaus E. Meyer (China Europe International Business School)
Sweden's Ostnor searches for the best locations for its busittess.
In Mora, Sweden, a small town four hours north of Stockholm, there was a company named Ostnor making bathroom armatures and mixers for households and businesses (see Exhibit 1). Faced with German and Swiss competitors challenging Ostnor's market leadership in Sweden, Ostnor decided in 2003 to follow the trend of offshoring and outsourced its production to partners in China. However, business did not develop well: lead limes for new product introduction became longer, capital employed increased because of the need to hold more stock in the warehouses, and quality control consumed substantial resources. In short, the re-location of production to China turned into a nightmare.
In 2010, a new CEO, Claes Seldeby, came in and decided to turn back the time. The new vision was reshoring to bring back the business to its hometown of Mora. Moreover, the "made in Sweden" identity would become an increasingly valuable brand feature as consumers were skeptical of the reliability of products imported from the Far East. Swedish craftsmen from the local community were again to make the armatures using high technology and local inputs. Since these armatures were produced in modest volumes, the process required substantial skilled labor. Yet, this reshoring was not easy. Young people in the local area were looking for job opportunities, yet they needed to be trained-and manufacturing jobs were not so popular in the Internet generation. In response, Ostnor invited school classes to visit its factories for them to see the high tech nature of the work and to attract future apprentices. Another challenge was finding suppliers for manufactured components in the Nordic and East European area. Chinese suppliers were neither interested nor able to deliver the relatively small volumes to Sweden.
Ostnor managed two brands with very distinct design characteristics: Mora Armatura and F.M. Mattson. Both brands had their origins in the same family firm. But in the 1920s two brothers disagreed on how to manage the company and one of them left to set up his own business. The brothers' rivalry stimulated both of them to produce ever better products, and some 80 years later they were re-integrated. Yet, they had developed distinct organizational cultures and brand identities, which still occasionally led to tensions.
Ostnor emphasized innovation and introduced new product lines about every 18 months. Seldeby modernized the innovation process to stay in close touch with consumer preferences. For example, the R D team was almost all male when he arrived, yet in Sweden 82% of purchasing decisions on bathroom and kitchen equipment were made by women. So, he brought in new people, especially some women, into the R D team who would not only understand the technologies, but also the consumers.
In 2014, Ostnor acquired a Danish competitor, Damixa (see Exhibit 2). Together they became number one or two in all five Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden). Ostnor also had its own sales subsidiaries in Belgium, China, Germany, the Netherlands, and Singapore, and sold via distributors to Australia, the Baltic countries, Britain, France, and Russia.
By 2014, Ostnor faced three new challenges.
With the acquisition of Damixa, Ostnor now had three brands. The CEO proposed to position Mura Armatura at the top end, F.M. Mattson in the middle, and Damixa as an economy brand. This however raised operational challenges. First, employees at Damixa were not pleased to become the lower end brand compared to the Swedish brands. Second, if Ostnor wanted to develop a brand for the economy segment, then offshoring some parts of the operations again was on the agenda for discussion.
With the company's growth, Ostnor hit the limits of what could be achieved in the community of Mora. It was difficult to attract skilled workers to the area, and the board's need to travel internationally made the four -hour car journey (if there was no snow) from Mora to Stockholm Arlanda Airport rather cumbersome. Therefore, Ostnor decided to relocate its headquarters and some operations to Stockholm, and Seldeby and his family moved back to Stockholm after four years in Mora.
Ostnor took initiatives to enter the Chinese market, where its designs would only be able to serve a small niche market. Yet, a small niche in China can quickly outgrow total sales in the Nordic region because China's population is so big. Hence, Ostnor in 2013 established a sales office in Hong Kong and participated in trade shows in China to develop sales in the Greater China area. In fact, it had to investigate the necessary regulations and certifications, Chinese consumers design preferences, and decision making processes. Ostnor quickly learned that "hand made" was not a good way to advertise-in China a "machine made" product was supposed to be highly reliable. It also found that putting a Swedish flag on the packaging to emphasize "made in Sweden" helped creating a premium image.
The author thanks Mike Peng for helpful discussion. All views and errors are those of the author. © Klaus E. Meyer. Reprinted with permission. Discussion questions were added by M. Peng.
Sources: Based on the CEO's presentation and company documents.
Exihibit 1 Basic Data for 2013/2014

Exibit 2 Timeline

What motivated Ostnor's reshoring