Introduction
This paper considers a point that “Outsourcing or external purchasing provides greater risk on corporate independence and out-of-control conditions.” In the process, it will discuss problems on outsourcing strategies (focusing on differentiation and competitive advantage consequences) in an in-depth manner to give value to the preceding statement. Then, evaluation will be made if these problems are really unavoidable and if outsourcing can redeem its beneficial impact to firms. Lastly, the role of marketers will be discussed on how they can help in establishing corporate individuality behind outsourcing trend, if not, outsourcing prerequisite alongside successful, efficient and growing business organizations.
The problems in purchasing and outsourcing
Loose of competitive differentiation. For a firm, product/ service differentiation is crucial in intensifying its revenue-generating capabilities. This is because differentiation strategy seeks to be different from the firm’s competitors on as many product/ service feature as possible (1980). In this manner, the focal point of the strategy, which is to provide goods/ services that are perceived by customers in different ways that are important to them, can be attained. However, commissioning external suppliers would result to competitors having the same inputs (from raw material suppliers), having the same machines (from production suppliers), having the same technology (from software-providers) and even having the same strategy (from consultants). If not identified by firms before formally running the value chain, customers might see personal value, however, not on a single firm, but on almost all the industry players. Thus, their bargaining power and choices increase to the detriment of differentiation strategy (2001).
In the past, Bavarian Motor Works or more popularly known as BMW tried to emphasize cost leadership strategy rather than differentiation to reduce designing costs and increase productivity leading to higher revenues (2003). This made the management buy a technology that transformed the formerly manual crash-testing into machine-operated procedure. Although efficiency is enhanced, the differentiation of such technique (a previously unique internal process of BMW) from the auto-industry was easily copied by its competitors through contracting with identical vendors which literally devalue BMW’s design. The error was later identified in undermining a complex intangible resource (the interactions among design engineers of BMW) in the purchase decision. The pursuit of automation, subsequently the purchase, omitted such occurrence.
Since a firm does not have limitless competencies and even some competitive advantages are short-lived (1993), differentiation is a process that involves product customization that undermines economies of scale particularly in production. In doing so, it can be able to extend the life of its competitive advantage or survive competition from a niche of selected customers who value their produced. However, when revenues rather growth is emphasized, mass production will take-over the corporate approach which goes for efficiency with a large customer base waiting to buy a low-priced produced. Henry Ford manufacturing is an example (2001). Since value-creation is non-existent within the approach, the firm would tend to externalize the value chain that can lead to more cost-efficiencies due to downsizing, down scoping and short-lived supplier contracts. Eventually, creating core competency, internal improvement and building a learning curve will be overtaken by outsourced entities (outsourced technology, purchased trademark/ patent, shared plant, etc.)
In the contrary, the example of BMW shows that the value that can derive from cost leadership strategy is minimal, non-growth, unshielded to leakage/ imitation and machine-oriented. Unfortunately, external purchase and outsourcing coincides with cost leadership. When a firm buys an organizational asset/ knowledge from a supplier, the change is very drastic. In addition, departmental adjustments (technical, relational and behavioral levels) would likely be minimal except possibly in the technical side. This is contrary to internalization (a firm internally produces the asset/ knowledge) where organizational members (possibly the entire stakeholders) are involved in the product/ process development that makes the change periodic and adjustments longer. In this view, outsourcing strategy makes a firm and its units an outsider of the new potential value-creating asset. In effect, the former differentiation of their produced from competition is unable to be implemented not only because competitors have resorted to the same supplier but also the new technology/ asset/ knowledge might not conform with the current corporate culture, structure, controls and strategy.
Loose of competitive advantage. Of course, a firm or specifically BMW will not be able to differentiate itself from competition without competitive advantage in this case the unique relationship of its design engineers. And so, competitive advantage is the basket of value-creating possibilities for a firm where differentiation, cost leadership, the combination of two, and other corporate and international strategies are derivable. The importance of having a competitive advantage evolves within a rationale that a strategy encompassing it and the resulting benefits would be found by competitors hard to duplicate or costly to imitate (2001). This gives rise to sustainability of a strategy and future benefits. This is also the reason why trademarks and patents are being paid and secured by their founders/ developers making these legal entities. In the contrary, purchasing some value chain activities from external suppliers may as well attain their legal right against imitation and unauthorized use for the corporate clients but with sub-optimal results.
On the verge in the popularity of offshore labor outsourcing in the shoe industry, New Balance deviated from the beliefs of some biggest names that follow the trend like Nike and Reebok (2003). This is despite low cost structures (cheap labor) and comparative advantages are present in foreign countries like China. However, resisting the cost-effective promises of outsourcing offshore made New Balance to retain its competitive advantage in design and quality control including location advantages to high-end markets. In doing so, while producing shoes is still cheaper for offshore outsourcing (.30 compared to New Balance United States operation of .00), New Balance domestic manufacturing is more efficient (24 minutes per shoe compared to three hours per shoe in offshore outsourcing). The firm succeeded as it focused in upgrading low-skill jobs in the line.
Again, it is obvious how sustainable and growing firms undermine revenues (through external purchase) in favor of retaining competitive advantage. In doing so, they maintain their independence as well as total control of their destiny. In an opposite view, revenue-maximizing but non-growth firms would not bother to scan its internal and external environment in favor of one-time resource acquisition. In addition, the outsourcing attitude would also separate them to the idea in investing in research and development. In effect, the rationale behind competitive advantage (hard to duplicate and costly to imitate) would be short-lived as a firm exposes it to competitors. The latter can simply buy the offshore product/ service or pirate the former suppliers into a closed deal. This is why New Balance came out to be more efficient and more in-control of quality because it internalized its competitive advantage and further improved its effectiveness.
Competitive advantage must be enhanced and developed internally in order for the firm to enjoy revenue-generation in a sustainable manner. BWM was able to implement differentiation strategy because it had a competitive advantage in communication among its design engineers. On the other hand, New Balance has competitive advantage in production efficiency and quality control that resulted to faster production and quality produced. However, when firms desire to hold an instant revenue-generation capability without undergoing expensive R&D, internal and external audit or leadership change due to risk of insolvency and plummeting market share, they opt to outsource to short cut the process and gain instantly (2001). The point is that sustainability is undermined in favor of opposing business or market demise. In the contrary, the business who implemented such tactic would confuse the solution to a problem (outsourcing technique) to a sustainable value-creating corporate strategy. In doing so, it thought it had already bring down its cards on the table but erred that it merely resolved a short-term issue. At this juncture, outsourcing/ purchasing externally can be said to be a short-term solution possibly to continue business or confuse competitors behind a real strategy but creating/ maintaining/ developing competitive advantage is for growth and long-term goals.
Are these tendencies unavoidable?
It depends in which time horizon the diminution tendency would occur. In the short-run, outsourcing practices can aid differentiation strategy and competitive advantage for faster realization of success at minimal cost. For example, a firm can outsource or even pirate a manager from a close competitor by offering attractive salary and benefits for the purpose of formulating product development to increase market share and drive the competitor out of business. The act encompasses competitive advantage (the internal knowledge in competitor’s SWOT, culture, PEST and other vulnerabilities) in which the firm can pull-out ideas of differentiation or imitation to create/ steal value-creating areas. By doing so, the firm is able to save time-constraint and costly research, audits, testing, etc. It has able to get what it wants and gain benefits instantly by outsourcing. No training, legal documents and other barriers on its way. The diminution tendency is insignificant (differentiation and competitive advantage are enforced) at this point while the managers of the firm are relieved and relax.
However, in the long long-run, diminution tendencies start to appear. The competitor would wonder the drastic aggressiveness of the firm and later found out the insider leakage. It can resort to litigation against the firm, announced its unethical practices in a national television and claim damages including stoppage of programs/ strategies emanated from the insider leakage. Eventually, the firm’s operation can be withheld as investigation goes and banning of products/ services would be likely. Just imagine how much it would loose financially and how long it can be able to maintain its business focus alongside a tarnished reputation in the industry. The differentiation and competitive advantage would not only be reduced but can even result to a negative net. The firm would loose its face and customer/ supplier acceptance and opt to dissolve.
It also depends on the nature of the externally purchased resource/ asset. When a firm externally purchases a general resource like building, land, equipments and machinery, the diminution tendency would not necessarily ensue because these resources are too essential for any business that make them ineffective source of value. They do not have significant differentiation and competitive advantage, and so, there will be nothing to be reduced on the part of the firm. They are mere physical assets. On the other hand, purchasing the rights to use existing patents and trademarks can provide instant access to the acquirer on new capabilities, markets, opportunities and revenues. This is also true on overtaking a target, buying high-tech plants or outsourcing software-developers. However, particularly on cases of open deals where the seller tends to maximize his welfare, the diminution tendency goes along the instantly acquired competitive advantage and differentiation. At the purchase point, the rule of time horizon applies.
Therefore, diminution tendencies of differentiation and competitive advantage from external purchase can be avoided when a firm initially studies its consequences. In doing this, its analysis can use the four criteria for sustainable advantages wherein the resources-bound-to-purchase should be valuable, rare, costly to imitate and non-substitutable. If its value chain fails to support the internal development of such resources, it should decide the time horizon in which it intends to derive value from purchased resources. This will play a vital role in avoiding reduction of competencies because the firm is aware when to accept or reject this occurrence with a benchmark as a reference. For a financially-troubled firm, it can temporarily form customer/ supplier alliance in order to protect the advantages of the outsourced resources. By the time it reaches its financial footing, it can consider internalization if the revenue-generation capability of the purchased but imitable resources are very significant for its growth and competitiveness.
Marketers towards corporate individuality
Ø They should be able to identify customer needs and wants. This is relatively less burdensome when applied to B2B markets for the purpose of creating products/ services that are truly valuable to customers.
Ø They should be able to pinpoint key competitor activities. This would necessitate some kind of ethical spying but obvious activities may suffice for the purpose of minimizing the risk of competitive rivalry/ retaliation and maximizing the value of competitive advantage. Also, this will give rise to differentiation strategy.
Ø They should be able to recognize competitive advantages/ competitive bottlenecks. This requires departmental participation due to marketer audit for the purpose of enhancing/ developing competitive advantages (ideally making them sustainable) and eliminating stagnant activities in the value chain.
According to (1991), this mind-set (market orientation) makes the firm a successful corporate strategic planner because every aspect of product/ market development is taken into consideration (Bernard 1993). Such activities can ultimately lead to corporate individuality because the firm is not merely producing products/ services according to a dynamic environment or resorting to outsourced resources. The firm, with the aid of marketers, could be able to segment a market (target = goal), differentiate against competition to create value (differentiation = strategy) and conduct self-evaluation for performance/ strategy appraisal (evaluation = continuous improvement). In doing so, it can focus in its operations not on mere acquisition as the latter can bend a goal, undermine strategy and limit growth in favor of short-term revenue-based returns.
Conclusion
Outsourcing is also a value-creating strategy if applied in the principle that “No firm is an island”. However, a land becomes a nation because it is able to live with itself across time. The same is true with children growing up and having their own lives and families apart from their parents. At the long run, firms should be able to internalize some value-creating activities and periodically slash dependencies from its backward and forward partners and alliances. Otherwise, it will be bombarded with loosing differentiation and competitive advantages and ultimately face demise as its business ran out of valuable resources that other businesses do not have or cannot access. In view of this, strategic planning (in which marketers play significant role) can aid the firm in building its own revenue-generation capabilities or construct temporary shield in times of outsourcing. Every now and then, previously purchased resources should be tested to internalization process. This will not only provide the platform for sustainable competitive advantage but more importantly provides firm independence (as of national sovereignty) and corporate individuality (as of personal maturity).
Appendix
Conceptual Model of the Outsourcing Problem Analysis
Credit:ivythesis.typepad.com
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