Before making an outsourcing decision, one of the most important analyses you need to conduct is determining your core competencies, i.e. what your company does well. Guiding principles say that you should retain the activities that are your organizations core competencies and outsource ALL the rest. You or your organization might not want to outsource ALL the rest, but you do need to identify where your strengths lie, since you don’t want core activities that directly affect your value proposition, cost advantage or product/service differentiation, to operate outside of your control.
What are your company’s core competencies?
“Core competencies include those things that your company does better than anyone else. I don’t mean the stuff printed in the annual report or the marketing brochures; I’m asking what, after a whole lot of self-examination, your company really does. For example, Nike figured out that its strengths are branding and marketing. Consequently Nike doesn’t manufacture a single thing. In fact, Nike is completely outsourced, except for branding and management departments. Not bad for a $4 billion company” (Ed Ashley, 2008).
Value Chain Analysis
Harvard Professor, Michael Porter, first introduced the value chain concept in his 1985 bookCompetitive Advantage, as a generic model made up of a sequence of activities found to be common to a wide range of organizations. Porter identified primary and support activities as shown in the following diagram:
*The goal of both the Primary and Support activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting with a profit margin.
To determine your company’s strengths/core competencies, start by identifying the primary and secondary activities through which your company creates value. Together, this chain of activities makes up your company’s value chain.
Your value chain is the whole sequence of value added activities that are important to customers when buying your products and services. Look beyond service features or product design when determining all customer decision-making criteria. If you’re in the apple juice business, for example, the apples, soil and growing methods are good candidates for your value chain. Buying boxes, packaging the crates, and picking the apples probably aren’t part of your value chain.
To determine your organization’s core competencies follow these steps:
- Step 1: Brainstorm your business. Identify and make a list of all the activities related to creating, selling, delivering, and servicing your products and services.
- Step 2: Identify core activities by removing administrative activities and any other overhead activities that don’t add value, create a cost advantage, or differentiate you from your competitors.
- Step 3: For each core activity left, break it down into its logical parts and remove activities that don’t add value or create a cost advantage.
- Step 4: If you can, break those logical parts down further, into elemental tasks and again remove activities that do not add value or create a cost advantage.
- Step 5: After you sufficiently break down the activities related to your products and services into their elemental tasks, compare yours to those of you competitors and remove activities that do not differentiate you from your competition.
- Step 6: After you identify all those activities that do add value, decide what to do with the ones left over
Outsourcing Value Chain Activities
A thorough value chain analysis can illuminate your business operations to facilitate outsourcing decisions. Your firm may specialize in one or more of the value chain activities and decide to outsource those activities that are not core to your value proposition.
Consider the following when selecting activities to outsource:
- Can the activity be performed less costly and/or better by suppliers?
- What is the risk of performing the activity in-house? If the activity relies on fast-changing technology or the product is sold in a fast-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.
- Would outsourcing result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc?
*Works Cited – Ed Ashley. (2008). Outsourcing for Dummies. Hoboken, New Jersey: Wiley Publishing, Inc.
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