Discussion—Outsourcing: A Strategic Advantage? Outsourcing may provide tremendou

Question

Discussion—Outsourcing: A Strategic Advantage?

Outsourcing may provide tremendous advantages for firms. It may allow companies to specialize, reduce costs, and focus narrowly on the core competencies they deem strategic; however, companies also have to think about what they may lose both qualitatively and quantitatively. For example, when outsourcing, managers need to be certain that what they source from outside is not a key component of their value proposition.

A way to reduce those risks is to use an approach called vertical integration. The meaning of vertical integration is developing the ability to produce goods or services previously purchased or to actually buy a supplier or a distributor. It can take two forms: backward and forward. These forms relate to how the corporation moves in its supply chain to pursue the vertical integration. If the movement is towards the suppliers, it is called backward integration. Conversely, it is known as forward integration.

Based on your research, respond to the following:

What are the risks and benefits of the outsourcing approach?

What are the strategic advantages of outsourcing to vertically integrated firms?

By the due date assigned, post your response to the appropriate Discussion Area. Through the end of the module, review and comment on at least two peers’ responses.

Write your initial response in 300–500 words. Your response should be thorough and address all components of the discussion question in detail, include citations of all sources, where needed, according to the APA Style, and demonstrate accurate spelling, grammar, and punctuation

Do the following when responding to your peers:

Read your peers’ answers.

Provide substantive comments by

contributing new, relevant information from course readings, Web sites, or other sources;

building on the remarks or questions of others; or

sharing practical examples of key concepts from your professional or personal experiences

Respond to feedback on your posting and provide feedback to other students on their ideas.

Make sure your writing

is clear, concise, and organized;

demonstrates ethical scholarship in accurate representation and attribution of sources; and

displays accurate spelling, grammar, and punctuation.

Explanation / Answer

What are the risks and benefits of the outsourcing approach?

There can be many advantages of outsourcing. First, if the outsourcing partner is a specialist in the operation outsourced, then outsourcing can reduce a significant cost of the product/ service and can give rise to an effective cost-leadership generic strategy. Second, if the non-core activities are outsourced to the specialists, then there is a significant chance that the process quality improves resulting in a reduced error rate and enhanced differentiation of product. Finally, outsourcing provides the managers of the focal firm with the ability to focus only on the core business and on the competitive strategy rather than reiterating processes and systems which is not the part of its core business (Hill, Schilling & Jones, 2017).

Among the risks, the first and foremost is the risk of the holdup. Holdup refers to too much reliance on the specialist outsourcing partner. Due to this interdependence, the specialist's bargaining power may increase substantially in the future leading to an increase in its price. Second, outsourcing the crucial activities always leads to creating resources common to the entire industry. This means that the barriers to entry reduce and the competition enhances. Finally, through outsourcing, there is always a chance of losing critical and competitive information and the firm's learning opportunity may be forfeited (Hill, Schilling & Jones, 2017).

What are the strategic advantages of outsourcing to vertically integrated firms?

Vertical integration acts as a strategic tool to eliminate or reduce the risks arising from the outsourcing decisions. It can take the form of a forward integration (i.e. integrating with selling and distribution partners) or a backward integration (i.e. integrating with suppliers). On one side it takes the advantages of outsourcing in terms of reducing the cost of the value chain, enhancing the quality and differentiation of product/ service, and focusing on core business, on the other side, it protects the firm from the risk of losing competitive information, increasing disparity of bargaining power arising out of the specialization advantage of one partner, or losing barriers to entry and sharing knowledge with the entire industry (Hill, Schilling & Jones, 2017).

Reference

Hill, C., Schilling, M., & Jones, G. (2017). Strategic Management: Theory & Cases: An Integrated Approach (1st ed.). Boston: Cengage Learning.

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