Outsourcing and Industrial Decline Richard A. Bettis Stephen P. Bradley Gary Hamel Published: February 1992

1. Outsourcing and Industrial DeclineRichard A. BettisStephen P. BradleyGary HamelPublished: February 1992 By: Kent Copeland Eric Hamilton Chase Luft Adam Stone

2. Part 1: Introduction

3. Article Discussion • Outsourcing • Improper use • Proper use • “hollowing out” companies • Murray Weidenbaum • Resurgence of Manufacturing • Malcolm Bride Quality Award

4. Rise of Japan

5. Effect on American Electronics

6. Not Only in Electronics • American Automobiles • Overall American domestic brand share decreases • Vehicle Production • Chrysler • Ford • General Motors

7. Computer Power • Power Where We Don’t Realize It • Japan’s control • Foreign influence • Desktop to Laptop • Systems to Screens • Examples • Sharp is a Leader

8. General Ideas • Important & Significant • 3 General Conclusions to be Discussed • Poor Approach = Flushing Spiral • 4 Questionable Assumptions • Competitive position • Brand Share & Manufacturing Share • Design vs. Manufacturing • Market & Manufacturing • Proper Outsourcing Understanding & Management

9. Part 2: The Process of Decline

10. The Process of Decline

11. The Process of Decline • Starts with an “underperforming” business unit. • Financial control systems call attention to cost and profit measures that are below company average. • Executives feel pressure to “do something” in order to justify stock value • Imports may be hurting some industries

12. A Bias to Outsource • Seek to reduce costs instead of increase revenue through advertising. • Comparative analysis shows American firms are at a disadvantage compared to Asian firms • Further business expenditures considered too risky in an already poor business unit. • Asian suppliers exceed American buyers expectations

13. The Increasing Spiral of Sourcing • “Successful” outsourcing leads other divisions to consider “improving” their financial performance through outsourcing • Firms find it difficult to perform activities such as process engineering and product design • Allow suppliers to take control of design process and acquire unique skills

14. The Increasing Spiral of Sourcing • Outsourced products cause a reallocation of overhead to non-outsourced products • This degrades non-outsourced products cost performance and makes them vulnerable to outsourcing • Supplier firm experiences expansion of investment and economies of scale • Outsourcing firm loses core technological capabilities

15. Diffusion Throughout the Industry • One firms successful outsourcing gains imply losses for others in the industry. • Other firms decide to outsource in order to remain competitive. • Eventually, entire industries outsource their manufacturing to suppliers.

16. Failure to Assess Dependency and Intentions • American firms believe Asian firms are dependent on them • Asian suppliers view relationship as opportunity to about product and process technology. • Asian suppliers learn about Western market • Western and Asian firms lack the bonds and relationship history to be mutually supportive

17. Part 3: The Logic of Decline

18. Assumptions about the dynamics of competition • Strategy primarily involves competitive position in the market place • Brand share is defensible without manufacturing share • Design and manufacturing are separate • Market knowledge is separable from manufacturing • Each is partially correct under certain circumstances • Often at odds with the realities of competition today • Theses assumptions result in a strategic logic that encourages firms to surrender their competitive advantage

19. 1. Strategy primarily involves competitive position in the marketplace • Current market position is only a very partial measure of competitiveness • Current strength in the market place alone is a very incomplete and potentially very misleading indicator of strategic health • Outsourcing directed by a single-minded view of competition in market position terms can result in the surrender of investment in manufacturing and development

20. Establishing and Maintaining Strategic Health • Continuous maintenance and enhancement of skills and competencies relative to competitors in the core technology • These skills and competencies are cumulative and can multiply over time • Often tacit in nature – they cannot be adequately expressed, they must be experienced or taught by an expert • Often the result of a lengthy process of experiential learning

21. 2. Brand share is defensible without manufacturing share • Many managers believe that brand name and distribution are the critical sources of competitive advantage • They believe that manufacturing is not nearly as crucial to competitive success • “Own markets, not factories”

22. 3. Design and manufacturing are separable • Many managers believe that by retaining product design in-house they could protect the core technology and hence a major source of competitive advantage. • Separate responsibilities results in poor coordination of design and manufacturing, added to lead times, slowed skill and competence accumulation. • Cross-Functional teams increase coordination and reduce lead times - meaning a better product quicker • Can increase pressure to outsource design and further strengthen the sourcing tradeoff • Effective coordination involves interaction between the outsourcing and supplier firms – will involve some uncensored and informal knowledge transfer

23. 4. Market knowledge and manufacturing are separable • Many managers assume that market knowledge can be kept away from a supplier firm to make entry for them as a competitor difficult • Market data is inevitably embodied in the product itself in varying degrees • Consumer information is available at a cost through surveys • As the product and market conditions change, the manufacturing requirement will change and this information must be passed to the outsource firm in a timely fashion so that proper adjustments can be made

24. Part 4: Moving Toward a Strategic View of Sourcing

25. Critical Errors in Outsourcing • Failure to view outsourcing strategically • View as a defensive, operational measure • Incremental and financial approach • Reduce costs, improve returns, or increase brand share • Emphasis of financial analysis of direct costs, overhead, working capital, and returns

26. Important Factors to Outsourcing • View in strategic and offensive terms vs. defensive technique to fix problems • Cannot fix a strategically sick business • Logical alternative to conserve resources for a healthy business when not related to core technologies • Important component of strategy in a healthy business involving core competencies with proper safeguards

27. Sourcing, Important Part of Strategy • Necessary to ensure a true strategic review of any outsourcing decision • Strategy focuses only on current competitive position, not the ability to develop/sustain future competitive advantages • Outsourcing decisions strategically implies in-depth understanding of core competences used to build future competitive advantage • Should focus on areas far removed from core competences. The closer they are, the more risk • Decisions treated as components of overall strategy, not as incremental decisions • Normal strategy, measured in strategic/financial terms

28. Reading Supplier Intentions • Outsourcing program, understand strategic intentions of potential supplier firms (what they get out of relationship) • Utilizing excess capacity, long-term strategic relationship, acquiring technology/market info, increasing economies of scale in manufacturing • Supplier in relationship to learn = financially attractive deal/accommodating • Most dangerous suppliers appear most attractive on surface during early phases of relationship

29. Outsourcing to Concentrate Investment • Keys to sustaining competitive advantages • Focusing corporate resources to develop/enhance core competences more effectively than competition • Outsourcing savings from components, subassemblies, & products distant from core competences can be used to subsidize competence development • Western firms tend to outsource difficult technologies and keep well understood technologies • GM outsources production of Corvette engine to Mercury Marine • Managers see manufacturing as yearly problem area

30. Learning from Outsourcing • Recognizing potential learning by a supplier, & potential learning from a supplier • Western firms accept risks of outsourcing in return for improved market performance/ignore potential benefits of learning • Exception: GM’s joint venture in small cars with Toyota, NUMMI

31. Knowing When to Change or Stop • Initial/on-going evaluation of own intentions, supplier intentions, & evolution of technology • Outsourcing firm needs to continue to invest in skills and competences that are located in close proximity to the firm’s core competences • Evaluation of technology – technologies that once seemed peripheral to core competence may suddenly become central • As technology evolves, periodically reevaluate the changing mix of technologies that are key to firm’s future success • Outsourcing is a tool of management that can be used properly or abused