Academic journal article Academy of Strategic Management Journal

A Framework for Strategic Sourcing

Academic journal article Academy of Strategic Management Journal

A Framework for Strategic Sourcing

Article excerpt

ABSTRACT

Outsourcing has been a significant industry trend over the past decade. However, some scholars have stressed that companies may have gone too far by outsourcing core, as well as non-core capabilities. Using a survey of large U.S. corporations this study provides insights into strategic sourcing, identifies the types of functions being outsourced, and develops a framework for better understanding the boundaries of sourcing decisions.

INTRODUCTION

One of the most widely discussed trends in business schools has been the issue of outsourcing. In a highly competitive environment, where product life cycles move at "clockspeed", outsourcing has been touted as the enabling factor that provides companies with needed speed and flexibility [4]. Management guru Tom Peters has been quoted as saying, "Do what you do best and outsource the rest." Similarly, articles abound describing success stories of outsourcing relationships. The view of the virtual corporation where core competencies are protected and enhanced, non-core competencies are outsourced externally, and corporate knowledge centers interact seamlessly is often presented as the ideal. In contrast, companies that continue to focus on cost cutting and competitiveness of existing business units and products are frequently viewed as old relics lacking agility and strategic vision.

However, some management scholars stress that companies may have gone too far by outsourcing core as well as non-core functions. In doing so they may have undermined, albeit unknowingly, the long-term competitiveness of their companies. This argument underscores the importance of protecting and enhancing core competencies as the ultimate source of a company's long-term competitiveness. Advocates of this view stress the importance of competency building as part of a firm's strategy to maintain market leadership. Cost based strategies, in contrast, stress price competitiveness but overlook the importance of developing capabilities to enhance product functionality and customer value as the source of long-term competitiveness.

In this study we evaluate the current status of outsourcing among large U.S. corporations. Specifically, we explore the types of functions and competencies firms' outsource and their implications for sustaining world class leadership. To this end, we conducted a survey of 116 large U.S. corporations and performed case studies of select firms. The firms analyzed had annual sales in excess of $4.5 billion and include Cisco Systems, Digex, Grainger Industrial Supply, Modus Media, and ATT Solutions. Considering our findings, we provide a framework for better understanding the boundaries of sourcing decisions.

STRATEGIC SOURCING

Since the 1990's a major shift in managerial practice has been the focus on strategic planning, identifying core competencies, and outsourcing competencies perceived as non-core. For example, the January 2000 issue of Business Week reported a revival in the popularity of corporate strategic planning among U.S. corporate leaders [2]. Companies such as Sears, Hewlett-Packard, Earle, Procter & Gamble, and EDS were presented as model case studies of the new emphasis on corporate strategic planning. Allegedly, a key focus of the strategic planning process has been on firms identifying their "core and non-core competencies."

Scholarly studies report similar findings on the trend toward outsourcing non-core activities in favor of placing greater emphasis on value creating, or core competencies. The core competencies of a firm consist of its assets, knowledge base, technology, and intellectual property that set the company's capabilities apart from that of other companies, allowing the company to sustain a long-term competitive advantage over its rivals [1]. Non-core business activities are activities that only indirectly support the core value creating activities of the firm. According to some management theorists an important goal of corporate strategy is to create a lean, flexible organization by protecting or augmenting core competencies and outsourcing non-core capabilities. …

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