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8.7 Points to Remember
- Globalizing a company’s value creation infrastructure—from the sourcing of raw materials and components to manufacturing and R&D to distribution and customer service—has three primary dimensions: (a) deciding which activities to perform in house and which ones to outsource, to whom and where; (b) developing the right partnerships to support a company’s globalization efforts, and (c) implementing a suitable supply-chain management model for integrating them into a cost-effective, seamless, value-creating network.
- Core competencies represent unique capabilities that allow a company to build a competitive advantage. Experience shows that only a few companies have the resources to develop more than a handful of core competencies. Picking the right ones, therefore, is the key.
- Few companies, especially ones with a global presence, are self-sufficient in all the activities that make up their value chain. Growing global competitive pressures force companies to focus on those activities that they judge critical to their success and excel at—core capabilities in which they have a distinct competitive advantage—and that can be leveraged across geographies and lines of business. Which activities should be kept in house and which ones can effectively be outsourced depends on a host of factors, most prominently the nature of the company’s core strategy and dominant value discipline.
- Outsourcing and offshoring of component manufacturing and support services can offer compelling strategic and financial advantages including lower costs, greater flexibility, enhanced expertise, greater discipline, and the freedom to focus on core business activities.
- In the last 20 years, companies have outsourced many activities, including manufacturing, back-office functions, IT services, and customer support. Now the focus is shifting to more knowledge-intensive areas, such as product development, research and development, engineering, and analytical services.
- Outsourcing can have significant benefits but is not without risk. Some risks, such as potentially higher offshoring costs due to the eroding value of the U.S. dollar, can be anticipated and addressed through contracts by employing financial hedging strategies. Others, however, are harder to anticipate or deal with. Risks associated with outsourcing typically fall into four general categories: loss of control, loss of innovation, loss of organizational trust, and higher-than-expected transaction costs.
- The search for growth is a primary driver of manufacturing relocation. Others include cutting costs and innovation.
- Formulating cooperative strategies—joint ventures, strategic alliances, and other partnering arrangements—is the complement of outsourcing. For many corporations, cooperative strategies capture the benefits of internal development and acquisition while avoiding the drawbacks of both.
- The key drivers that attract executives to cooperative strategies include the need for risk sharing, the corporation’s funding limitations, and the desire to gain market and technology access.
- The Boston Consulting Group divides alliances into four groups on the basis of whether the participants are competitors or not and on the relative depth and breadth of the alliance itself: expertise alliances, new business alliances, cooperative alliances, and M&A-like alliances.
- BCG found that while new-business alliances compose a clear majority (over 50%), expertise-based alliances are most favored by the stock market, and M&A-like alliances are least favored. The latter is not surprising since such alliances are created in response to unfavorable regulatory or market conditions.