3-4 Outsourcing Concerned with how components, finished goods, or services will be obtained, outsourcing is the purchase of a value-creating activity or a support function activity from an external supplier. Not-forprofit agencies as well as for-profit organizations actively engage in out- sourcing. Firms engaging in effective outsourcing increase their flexibility, mitigate risks, and reduce their capital investments.95 In multiple global industries, the trend toward out- sourcing continues at a rapid pace.96 Moreover, in some industries virtually all firms seek the value that can be captured through effective outsourcing. As with other strategic manage- ment process decisions, careful analysis is required before the firm decides to outsource.97 And if outsourcing is to be used, firms must recognize that only activities where they cannot create value or where they are at a substantial disadvantage compared to competitors should be outsourced. (Hitt) Finance Activities associated with effectively acquring and managing financial resources. Securing adequate financial capital, investing in organizational functions in ways that will support the firm’s efforts to produce and distribute its products in the short- and long-term, and managing relationships with those providing financial capital to the firm are specific examples of these activities. Human Resources Activities associated with managing the firm’s human capital. Selecting, training, retaining, and compensating human resources in ways that create a capability and hopefully a core competence are specific examples of these activities. Management Information Systems Activities taken to obtain and manage information and knowledge throughout the firm. Identifying and utilizing sophisticated technologies, determining optimal ways to collect and distribute knowledge, and linking relevant information and knowledge to organizational functions are activities associated with this support function. Outsourcing can be effective because few, if any, organizations possess the resources and capabilities required to achieve competitive superiority in all value chain activities and support functions. For example, research suggests that few companies can afford to develop internally all the technologies that might lead to competitive advantage.99 By nurturing a smaller number of capabilities, a firm increases the probability of developing core compe- tencies and achieving a competitive advantage because it does not become overextended. In addition, by outsourcing activities in which it lacks competence, the firm can fully con- centrate on those areas in which it can create value. Many times firms establish cooperative relationships with outsourcing partners as illustrated in Chapter 9 on cooperative strategy. The consequences of outsourcing cause additional concerns.100 For the most part, these concerns revolve around the potential loss in firms’ innovative ability and the loss of jobs within companies that decide to outsource some of their work activities to others. Thus, innovation and technological uncertainty are two important issues to consider when mak- ing outsourcing decisions. However, firms can also learn from outsource suppliers how to increase their own innovation capabilities.101 Companies must be aware of these issues and be prepared to fully consider the concerns about opportunities from outsourcing sug- gested by different stakeholders (e.g., employees). The opportunities and concerns may be especially significant when firms outsource activities or functions to a foreign supply source (often referred to as offshoring).102 Bangalore and Belfast are hotspots for technology outsourcing, competing with major operations in other nations such as China. Yet many firms, including Apple and General Electric, are mov- ing activities back to the United States or keeping them home instead of moving them to a foreign location.103 This is due in part to increasing wages in countries like China, but also because of abun- dant energy with low natural gas prices in the United States. 3-5 Competencies, strengths, Weaknesses, and strategic decisions By analyzing the internal organization, firms are able to identify their strengths and weak- nesses in resources, capabilities, and core competencies. For example, if a firm has weak capabilities or does not have core competencies in areas required to achieve a competitive advantage, it must acquire those resources and build the capabilities and competencies needed. Alternatively, the firm could decide to outsource a function or activity where it is weak in order to improve its ability to use its remaining resources to create value.104 In considering the results of examining the firm’s internal organization, managers should understand that having a significant quantity of resources is not the same as having the “right” resources. The “right” resources are those with the potential to be formed into core competencies as the foundation for creating value for customers and developing com- petitive advantages as a result of doing so. Interestingly, decision makers sometimes become more focused and productive when seeking to find the right resources when the firm’s total set of resources is constrained.105 Tools such as outsourcing help the firm focus on its core competencies as the source of its competitive advantages. However, evidence shows that the value-creating ability of core competencies should never be taken for granted. Moreover, the ability of a core competence to be a permanent competitive advantage can’t be assumed. The reason for these cautions is that all core competencies have the potential to become core rigidities.106 Typically, events occurring in the firm’s external environment create conditions through which core com- petencies can become core rigidities, generate inertia, and stifle innovation. “Often the flip side, the dark side, of core capabilities is revealed due to external events when new competi- tors figure out a better way to serve the firm’s customers, when new technologies emerge, or when political or social events shift the ground underneath.”107 Historically, Borders Group Inc. relied on its large storefronts that were conveniently located for customers to visit and browse through books and magazines in a pleasant atmo- sphere as sources of its competitive success. Over the past decade or so, though, digital technologies (part of the firm’s external environment) rapidly changed customers’ shopping patterns for reading materials. Amazon.com’s use of the Internet significantly changed the competitive landscape for Borders and similar competitors such as Barnes & Noble. It is possible that Borders’ core competencies of store locations and a desirable physical envi- ronment for customers became core rigidities for this firm, eventually leading to its filing of bankruptcy in early 2011 and subsequent liquidation.108 Managers studying the firm’s internal organization are responsible for making certain that core competencies do not become core rigidities. After studying its external environment to determine what it might choose to do (as explained in Chapter 2) and its internal organization to understand what it can do (as explained in this chapter), the firm has the information required to select a business-level strategy that it will use to compete against rivals. We describe different business-level strate- gies in the next chapter. Summary ■ In the current competitive landscape, the most effective orga- nizations recognize that strategic competitiveness and above- average returns result only when core competencies (identified by studying the firm’s internal organization) are matched with opportunities (determined by studying the firm’s external environment). ■ No competitive advantage lasts forever. Over time, rivals use their own unique resources, capabilities, and core compe- tencies to form different value-creating propositions that duplicate the focal firm’s ability to create value for customers. Because competitive advantages are not permanently sustain- able, firms must exploit their current advantages while simul- taneously using their resources and capabilities to form new advantages that can lead to future competitive success. ■ Effectively managing core competencies requires careful analy- sis of the firm’s resources (inputs to the production process) and capabilities (resources that have been purposely inte- grated to achieve a specific task or set of tasks). The knowledge the firm’s human capital possesses is among the most signifi- cant of an organization’s capabilities and ultimately provides the base for most competitive advantages. The firm must create an organizational culture that allows people to integrate their individual knowledge with that held by others so that, collectively, the firm has a significant amount of value-creating organizational knowledge. ■ Capabilities are a more likely source of core competence and subsequently of competitive advantages than are individual resources. How a firm nurtures and supports its capabilities (Hitt) so they can become core competencies is less visible to rivals, making efforts to understand and imitate the focal firm’s capa- bilities difficult. ■ Only when a capability is valuable, rare, costly to imitate, and nonsubstitutable is it a core competence and a source of com- petitive advantage. Over time, core competencies must be supported, but they cannot be allowed to become core rigidi- ties. Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. When this is no longer possible, the company shifts its attention to forming other capabilities that satisfy the four criteria of a sustainable competitive advantage. ■ Value chain analysis is used to identify and evaluate the com- petitive potential of resources and capabilities. By studying their skills relative to those associated with value chain activi- ties and support functions, firms can understand their cost structure and identify the activities through which they can create value. ■ When the firm cannot create value in either a value chain activity or a support function, outsourcing is considered. Used commonly in the global economy, outsourcing is the purchase of a value-creating activity from an external supplier. The firm should outsource only to companies possessing a competitive advantage in terms of the particular primary or support activ- ity under consideration. In addition, the firm must continu- ously verify that it is not outsourcing activities from which it could create value. (Hitt) Source: Michael A. Strategic Management: Concepts: Competitiveness and Globalization, 11th Edition. Cengage Learning, 20140101. VitalBook file. Michael A. Strategic Management: Concepts: Competitiveness and Globalization, 11th Edition. Cengage Learning, 20140101. VitalBook file. Copyright 201␣ Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Learn more about new dimensions in outsourcing. www.cengagebrain.com CHE-HITT11E-13-0403-003.indd 92 10/25/13 1:28 PM © Cengag (Hitt) Hitt, Michael A. Strategic Management: Concepts: Competitiveness and Globalization, 11th Edition. Cengage Learning, 20140101. VitalBook file. Hitt, Michael A. Strategic Management: Concepts: Competitiveness and Globalization, 11th Edition. Cengage Learning, 20140101. VitalBook file. Week 3 DQ 2 Pros and Cons of Outsourcing From Chapter 10, answer Discussion Question 1: What are some of the pros and cons of outsourcing? Why do you think many firms are experiencing an increase in their levels of outsourcing? Respond to at least two of your classmates’ postings. There are now a lot of firms that have chosen to use logistics outsourcing as an approach to restructure their store network operations in an endeavor to increase an aggressive advantage. We studied this week that outsourcing is a way in which the company will make a deal with third part logistics (3PL) for all or part of a conglomerations inventory network and have consistent rose in prevalence. Like any other types of business initiatives, there are advantages and disadvantages that must be assessed preceding its implementation. With regards to outsourcing, this is not an exemption. I will focus on some of the advantages and disadvantages with each. Pros The outsourcing business procedures being used may turn non-core capacities over to outside suppliers which will enable associations to influence their resources, spread dangers, and put more focus on problems which are significant to survival and future development. Outsourcing regularly builds a company's adaptability and access to state-of-the-art items and procedures. By outsourcing a particular non-core capacity, a business can maintain a strategic distance from headache connected with enrolling and hiring personnel for such non-core capacity. By using outsourcing, conglomerations will have the chance to conceivably dispose excessive infrastructure ventures and fixed price costs connected with the edifices and warehouses. Cons Conglomerations must have workers on staff that is conversant in getting functions, are have the ability to arrange contract updates and know how to viably operate existing contracts. If we make a comparison between insourcing and outsourcing, outsourcing limits a business’s capacity to make speedy inventory network changes or production adjustments. Suppliers might misquote their abilities. Organizations with outsource process must have a quality control capacity to guarantee consistence with stated contractual necessities. Most of the time, there are often costs connected with outsourced costs, a couple of which are: moving from insource to outsource expenses, travel and customs costs, and lastly lessened first hand perceivability of the methodology. (Bozarth, 2008) Why do you think many firms are experiencing an increase in their levels of outsourcing? In today’s world, where there is enormous competition in the worldwide environment, outsourcing is not just about the great savings on the costs; it is a strategic device to permit an association to put more concentration on their endeavors of leveraging their resources and center the conglomerations endeavors on the core competencies. Now, there are a lot of foundations which outsource different supply network capacities, it is now crucial for the remaining to acknowledge outsourcing as a way to continue being competitive and contend in today’s worldwide marketplace. Today’s outsourcing gives the company a device to expedite enhanced response times, improve new products quicker and help finish things they at one time wouldn't be able to do. References Bozarth, C.C. and Handfield, R.B. (2008). Introduction to operations and supply chain management (2nd ed.). Retrieved from: http://online.vitalsource.com/#/books/0558414710/content/id/ch09lev1sec4 Title: Student’s name: Instructor’s name: Date of submission: Subcontracting is a process where a prime contractor or project manager hires additional individuals outside the company to assist complete a project. Outsourcing is the process of transferring a business process e.g. a claim processing or an operational process manufacturing to another party. Offshoring refers to relocating or moving a business to a foreign country without considering whether the provider is external or related to the firm. Advantages of outsourcing are it saves costs; it can be cheaper to buy a good from another company than manufacturing it. By outsourcing noncore aspects such as health insurance time is found to focus on core aspects of the business. Leads to reduced labor costs and access to technology. Outsourcing has numerous disadvantages might be time-consuming, poses security threats if the company accesses confidential information of the other company and lack of communication between the company and those have outsourced to leading to delays in completion of tasks.(Stapf, 2002) Offshoring, on the other hand, is advantageous due to low and reduced costs involved if the work is supplied to a country with the large population of workers hence cheap labor. Another advantage is an opportunity to attain quality equipment and specialized. Disadvantages of offshoring are the loss of control over your business, security issues, cultural and social issues including the language barrier. It increases unemployment in the local region. (Olsen, 2006) Subcontracting provides advantages such as handling large projects that businesses could not handle on their own. Offer professional services and expertise. Subcontracting saves on costs. However, in the quality of work delivered, the work may not be delivered as the main contractor or company wants it. The subcontractors may not attain the delivery time or quality requirements. Technology has reduced transportation costs. Globalization implies the adverse changes all over the world, technology impacts offshoring, outsourcing and subcontracting of work since can be carried out across many countries and individuals. Communication has been improved through emails and phones you can communicate with personnel assigned your tasks. Technology has made it easier to outsource, offshore and subcontract, through the internet you can search and find qualified people or companies to outsource, subcontract or offshore your projects. (Olsen, 2006) A worker in the current global economy should never be sure of his or her job due to the current processes of employing outsiders to do tasks, which is cheaper and flexible. These processes outsourcing, offshoring and subcontracting lead to unemployment and loss of jobs by many employees, they have replaced what an employee within the company would have done. Unions for domestic workers can work with employers and create jobs through demolishing outsourcing of work and training the domestic employees to fit the standards needed by the companies. (Holley, Jennings & Wolters, 2012) References Holley, W. H., Jennings, K. M., & Wolters, R. S. (2012). The labor relations process (10th Ed.). Mason, OH: Southwestern Olsen, K. B. (2006). Productivity impacts of outsourcing and offshoring: A review. OECD Science, Technology and Industry Working Papers. Stapf, J. (2002). The advantages and disadvantages of outsourcing. Journal / American Water Works Association, 94(4), 66–68.
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