Competitive Priorities and Outsourcing

Industry experts have previously identified cost savings as a leading driver of outsourcing decisions.42 Outsourcing supply chain activities often improves cost competitiveness because a firm can eliminate inefficient activities and refocus its resources toward reducing costs. Cost-related outsourcing drivers also include the selection of a partner that offers lower total, logistics, regulatory, and/or legal costs to perform an activity.

Firms that focus on flexibility when making outsourcing decisions are motivated to respond effectively to changing customer requirements.43 Changing requirements may take the form of demand fluctuations or changes in required product characteristics. Outsourcing drivers that support flexibility include a desire to increase process responsiveness and the ability to change production volumes and supply chain activities in response to changing market demands.44 Outsourcing an activity to multiple suppliers can improve a firm's preparedness to react to the uncertainty of the manufacturing environment. In addition, outsourcing may free internal resources and allow them to be allocated where needed throughout the firm for flexibility.

Firms that emphasize innovativeness when making outsourcing decisions focus on rapidly delivering products featuring new technologies and features. Outsourcing can improve innovativeness by allowing a firm access to skilled labor and specialized expertise not available in-house.45 Similarly, firms may consider outsourcing routine activities so that in-house employees with innovative skills and expertise not available to competitors can focus on value-adding activities. Additionally, outsourcing also may provide access to suppliers with new technologies.46

Outsourcing decisions with quality as the key priority should consider both the conformance and performance quality of products.4 7 The outsourcing of activities may be motivated by the availability of a supplier with superior expertise that can improve the conformance and/or performance of an activity for a firm. Conversely, a firm with superior in-house skills may be driven to insource an activity if this would give it a competitive advantage. Outsourcing may also allow firms to reassign employees to roles focused on quality improvement.

A focus on time when making outsourcing decisions implies that the firm is competing on the ability to perform activities more quickly or to attain better on-time performance than its competitors.48 To improve product delivery speed and the ability to develop and deliver products on time, a firm will be driven to choose sources that can conduct activities with shorter lead times than other potential sources.49 Similarly, a firm may choose a source that offers comparatively faster process capability and reduced cycle times.50 Firms also may be driven to outsource some activities so that internal resources can be reallocated to tasks related to reducing cycle, lead, and development times.

Alignment of Priorities, Activities, and Performance

Empirical research has confirmed that the degree of alignment, or fit, between a firm's competitive priorities and its operational activities is positively related to performance. For example, Devaraj, Hollingworth, and Schroeder found that the fit between manufacturing strategies and manufacturing objectives is positively related to plant performance,51 Tarigan found that agreement between general managers and manufacturing managers on the strategic priorities of their firm correlated positively with business performance,52 and da Silveira found that a lack of strategic alignment between a firm's product profile and its manufacturing configuration was related to lower market share.53 Throughout the literature, studies have also called for additional empirical research to investigate the role the alignment between a firm's manufacturing strategies and its operational actions on firm performance.54

Evaluating the impact of alignment in a manufacturing organization is complicated by the interdependencies that exist among the wide assortment of possible process configurations. Moreover, firms may adopt multidimensional strategies to achieve their goals.55 To understand the impact of outsourcing alignment on the performance levels of a business unit, we examined the relationship between performance and the interaction between the emphasis placed on a set of outsourcing drivers related to a single competitive priority and the emphasis given to that associated competitive priority. We surveyed 196 U.S. manufacturing firms that engaged in outsourcing, drawn from nine industry sectors. Over half of the firms reported annual sales greater than $1 billion and more than 1,000 employees. For the firms in the sample, there was a strong positive relationship between business performance and the alignment of outsourcing drivers and competitive priorities. Specifically, as the alignment between outsourcing decisions and the emphasis placed on the related competitive priorities increased across all five competitive priorities, firms typically experienced significantly higher levels of business performance. This result validates the proposition that alignment between corporate strategies and outsourcing strategies can significantly impact business performance.

To shed more light on the impact of alignment on performance, we also examined it with regard to each of the five competitive priorities individually. Overall, performance increases when the alignment between the emphasis placed on cost when making outsourcing decisions and the emphasis placed on cost as a competitive priority increases. For the firms investigated, the emphasis placed on cost varied significantly, with cost being the dominant competitive priority for some, whereas others placed little emphasis on low cost. Across the spectrum of firms, performance was most substantially (and negatively) impacted when firms that competed primarily along dimensions other than cost made outsourcing decisions that were driven primarily by a desire to lower costs. This is consistent with the cases in 2007 of tainted pet food and toys made with lead-based paint, two incidents that were widely publicized in the United States. These occurred when outsourcing decisions were made to reduce costs by firms that were actually competitively positioned along other di-mensions.56 These types of incidents not only harm the firms involved, but also contribute to the stigma and controversy often associated with outsourcing activities to certain regions of the world.57 In contrast, there was no substantial performance difference associated with misalignment between outsourcing drivers and competitive priority for firms that competed primarily on cost. This finding may be explained by a previous study that found that outsourcing arrangements entail a number of hidden costs that decrease the actual cost savings that firms experience.58 Potential cost reductions resulting from outsourcing may also be smaller for cost-focused firms than for noncost-focused firms, thereby magnifying the impact of hidden costs and decreasing the impact of outsourcing alignment.

Relationships between alignment and performance for the remaining competitive priorities also follow the general trend of improved performance in the presence of alignment. However, alignment has a greater impact on performance for firms that compete primarily on flexibility, innovativeness, and time. These findings are perhaps managerially more intuitive than those for the cost priority, suggesting as they do that firms competing on these three dimensions should make outsourcing decisions that are in alignment with their competitive priorities. Apple Computer, a firm known for its focus on innovation, has repeatedly found success by partnering with innovative suppliers to procure cutting-edge components for use in its products.59

The relationship between alignment and performance when quality is the primary competitive priority also demonstrates improved performance in the presence of alignment. Moreover, the impact of alignment on performance is nearly symmetric for firms that emphasize quality and those that do not. In other words, whereas firms for whom quality is a competitive priority exhibit better performance when they also emphasize quality when making outsourcing decisions, the performance of firms that are not focused on quality can suffer when their outsourcing decisions are driven by quality-related factors. This leads us to conclude that regardless of the emphasis firms place on quality as a competitive priority, they should consider if the emphasis they place on quality when making outsourcing decisions is consistent with the importance that they place on it as a competitive priority.

Managerial Implications of Outsourcing Alignment

The key managerial lesson from the discussion of outsourcing and competitive positioning is that when considering outsourcing, careful attention should be paid to the overall level of alignment between the emphasis a firm places on all five competitive priorities and the emphasis it places on corresponding drivers of the outsourcing decision. These findings highlight the importance of scrutinizing the alignment of outsourcing decisions across multiple dimensions rather than focusing on a single dimension. The recent emergence of India as a destination for outsourcing in the pharmaceutical industry provides an example of how outsourcing decisions are made in alignment across multiple competitive priorities.60 Although cost is important to pharmaceutical firms, quality and innovativeness are also critical, and perhaps more important, competitive factors for the industry. The attractiveness of Indian pharmaceutical manufacturers is due to their ability to deliver products that not only meet the required high quality and innovation standards of buying firms, but to do so at a lower cost than their European and North American counterparts. Hence, the alignment of the competitive priorities of the buying firms and what drives their outsourcing decisions creates synergy that leads to positive performance outcomes.

Anecdotally, the sheer number of horror stories related to outsourcing that have been publicized in the media indicates that firms are not consistently aligning their outsourcing decisions with their strategic business interests. Although, it is not clear if these failures are a result of firms not understanding their competitive priorities or simply ignoring them, a critical early step in the outsourcing process should be a thorough assessment of the firm's goals and competitive priorities. Only once a firm understands their competitive goals are they in a position to begin evaluating their fit with a potential outsourcing partner.

Taken together, our findings can be interpreted as demonstrating that the choice of whether or not to outsource an activity, particularly when an offshore partner is being considered, should be viewed as a strategic decision due to the significant potential impact the choice has on the organization and its shareholders. The need to carefully and strategically consider outsourcing decisions has become further magnified by the decrease over the past decade in the value associated with offshore outsourcing. Outsourcing programs are complicated and multifaceted endeavors that require the full attention of firms in order to maximize the likelihood of success.

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