March 24, 2009
Category 11-15 summary
Reading 12: Outsourcing Strategies: Opportunities and Risks
Outsourcing has become very popular among developed countries in the last 20 years. In early years outsourcing was driven by the desire of lower costs, typically moving low-skilled, labor intensive, activities offshore to Southeast Asia and other low-cost locations. Now companies are aware of more strategies that outsourcing helps besides that of lower cost.
There are four main promising outsourcing strategies: focus, scale without mass, disruptive innovation, and strategic repositioning. The key to focus strategy is to know which of the main value drivers to concentrate on. Take Nike for example, they chose to focus on product leadership while Dell chose operational excellence and customer relationship management.
Another strategy is scaling without mass; this strategy allows the company to grow in market presence without a corresponding expansion in organizational size. This can help a company avoid premature internal growth. This was one of the primary benefits that Nike, opting initially for a focused strategy with extensive outsourcing, enjoyed from the outset. While Nike’s sales growth grew tenfold its staff grew half of that.
The strategy of disruptive innovation’s goal is to create a whole new segment at a price point well below the bottom of the current market and then dominate this segment as it grows. IKEA set out to “democratize” the marketplace by bringing quality new furniture within the reach of many, not just few, at a time when furniture was too expensive young people or first time furniture buyers.
Strategic Repositioning is one of the hardest strategies yet can be extremely profitable when used correctly. IBM took full advantage of this strategy deciding to focus on service of technology and tripling it’s sales within 10years. There are also risks to outsourcing: losing key skills and capabilities and of...