Outsourcing and Competitive Advantage- Valutrics

Outsourcing is becoming more common in all areas of business. The
point at which a company starts to outsource its distinctive capability
is the point at which it can conceivably start its demise.
To return to our earlier example, BMW. The match between its
distinctive capability in engineering and the market opportunities that
it identified – translated into a major competitive advantage.
Now the BMW brand says the product stands for engineering
excellence, prestige, an upmarket, sporting image. This distinctive
capability is the fit of the whole strategy encompassing design, quality
control, marketing, sales, service and maintaining a high trade-in price
for used cars. Its original distinctive capability, engineering production,
is now transportable. BMW has opened a new manufacturing facility
in South Carolina to produce the X5 SUV, and there is no perceivable
damage to the brand image.
BMW is now considering outsourcing the development and entire
assembly of its latest SUV, the X3, to Magna International. It could lead
to Magna’s Steyr subsidiary in Austria assembling up to 60,000 vehicles
a year.
This project involves using Steyr’s research and development capa-
bility as well as their production capacity. BMW also says it will consider
further collaboration with other carmakers as it expands. BMW is now
no longer dependent on its production engineering for its distinctive
capability.
With its strong branding BMW is able to outsource what have been
considered key core competences of all automakers, R&D and manu-
facturing, without undue risk providing it maintains control of the
quality of the vehicle. This has to include the driving characteristics,
performance and quality of manufacture. Its strength now is in under-
standing the market niches where its brand gives it a strong competitive
advantage, and being able to style and specify a concept that will appeal
to that market. The vehicle development and production can be handed
to another company, albeit under the close supervision of BMW’s own
staff.
Because BMW have minimized the risk of outsourcing this strategy
makes sense, and gives the company tremendous strength to flex its
production provided it has structured the right type of contract.
In contrast both Ericsson and Alcatel have outsourced the manu-
facture of their mobile telephone handsets. Whilst design and function-
ality is important in marketing handsets, price also has an important
78 The strategic business planning framework
role. Control of costs is important, and by outsourcing this function both
companies lose control of a key competitive weapon, one that might
one day be a factor in the overall distinctive capability.
In contrast Nokia, the world’s leader in mobile handsets with an
estimated 35 per cent market share, outsources only 10 per cent of its
production for this product and says its volume enables it to strike more
competitive deals with suppliers and telecommunication providers,
which in turn affords it wider profit margins. Interestingly, Nokia
outsources 60 per cent of its networks infrastructure business, recently
announcing a deal to transfer two more factories and 1,250 employees
to SCI Systems.
Cisco Systems, Apple Computers, Motorola, Lucent Technologies and
Ericsson amongst many others outsource to Flextronics, Solectron,
Celestica and SCI Systems. These global companies, and others, manu-
facture some of the biggest brands in the world. In many cases it must
make sense. However, there is also a herd instinct in business, another
fad, and outsourcing amongst electronics manufacturers is flavor of the
month. Not though, to our knowledge, with Dell, which uses its
manufacturing strategically to create competitive advantage.
There is perhaps a lesson here. With high margin/high volume items,
where price is not the main issue, be it BMW or networking equipment,
outsourcing can make a lot of sense. With low margin/high volume
items it appears to make the most sense, in the short term, but in the
medium term a potential competitive advantage is being given away, a
certain type of knowledge is inevitably lost, and the strategic options
for the companies will be narrower in the future.