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Full Text
Keywords
Outsourcing, Strategy, Modelling
Abstract
This paper reviews the strategic benefits and problems relating to the outsourcing decision. These include issues of cost, quality, flexibility, strategic focus, leverage and diversification, the potential loss of critical skills and knowledge, and appropriation of final product value. The outsourcing decision is presented as one that will vary between firms within an industry through the differences in each organization's context. A model is developed, structuring the contextual factors: capability, cost, technology, supply and product market conditions, to enable a consideration of the outsourcing decision through a focus upon its implications for competitive advantage.
Introduction
While companies are faced with increasing opportunity to outsource activities there remains a need to develop guidelines for making the outsourcing decision. This article examines outsourcing as a strategic decision concerning near-core activities that presents both the opportunity to achieve significant benefits and also potential problems.
As part of a company's strategic development the outsourcing decision needs to consider a range of contextual factors, including conditions in the final product market, capability, cost, technology and supply market conditions. The article provides an examination of these factors and a normative model to structure the outsourcing decision, the model focuses upon the decision's implications for competitive advantage.
The use of outside supply
Vertical integration and the multidepartmental business may be seen as the result of a particular industrial context. Historically, in the absence of developed external markets, organizations, of necessity, sourced a wide range of upstream and downstream activities in-house (Chandler, 1962). Developments in the scope of external supply markets continue to challenge the strategy of vertical integration, allowing organizations to extend the use of outside supply beyond peripheral activities to include activities that at times have been regarded as part of the core activities of the organization. In principle any part of the value chain can be externally sourced (see Appendix 1), though for that to occur for a particular firm would imply that the company has no unique value-adding capabilities, and that its processes are available for replication by competitors and possibly by customers.
While outsourcing is a rapidly growing part of the industrial scene, surveys addressing the effects of outsourcing provide mixed conclusions. A report by Shreeveport Management Consultancy (1997) based...