Outsourcing Strategy Importance As Competitive Advantage Commerce Essay


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Outsourcing is a decision of making or buying some of the services or products, that a firm need to make under the company's current situation and performance (Leimeister.2010). In addition, according to Mclvor (2005) this decision is the most important strategic decision that has effect on the total operation of the business, as the wrong decision in this field might cause problem and chaos for the business. Consequently, as a manager, the several important actions should be taken before making decision about outsourcing. The actions are:

Questioning whether outsourcing an activity is a right decision for a company in order to meet its goals.

Evaluating value of the activity to competitive advantage.

Considering the potential of supplier to offer the activity.

Studying the potential of employee's conflict and the impact of this business plan on staff's morale.

Based on Linder (2004), outsourcing is not the only strategy that managers have to set up to reach the business objectives; it is one of the firm's overall business strategies which need to move parallel with it. Outsourcing plan might leads to radical changes on the organization's performance Mclvor (2010) believes that there are two main factors such as; the increasing growth of globalisation and technological improvements, that have made organisations to transfer some of their activities to a third party, which can be performed inside or outside their countries. Moreover, he agrees that the service organisation face more difficulties and complexity of outsourcing than manufacturing companies, as service firms are in direct contact with clients.

Apart from the type of business and procedures, there are wise reasons for outsourcing which are reducing the cost of operations; at the same time, spotlight on core capabilities, and gaining knowledge of suppliers' innovative ideas (Evolutionary economics. 2009). Langfield- Smith, Smith and Stringer (2000) add to other reason and advantages of transferring services to providers, which are "access to specialised skills, improved time-to-market".

Access to specialised skills: the supplier might have the higher level of skills and technologies that an organisation does not have ability to supply in-house.

Time-to-market: this strategy might minimise the time between providing services and offering to the market, as there are larger number of providers who are working at the same time on entity activities. This advantage of outsourcing is vital factor to improve the competitive advantage for a company as it operating in the rapid changing business market.

Strengthening core competencies: allows companies to concentrate and improve their resources and abilities in order to compete with rivals. Author agrees that improving core abilities on a certain areas which other competitors do not have resources and knowledge of them could bring them competitive advantage.

Cost saving: as providers have the skill and capability of doing required services or products better than the outsourcing firm, they are likely to supply at cheaper cost.

By evaluating these reasons and advantages of outsourcing, managers need to decide which activities to outsource and what must keep in-house. Clearly, the core competence of any firm must keep in-house as they are special,and make the firm different from its rivals. After identifying the core competences, there are other non-core activities which could outsource. However, at this point the complexity of distinguishing between core and none core would become debatable by managers, as there is no clear and certain idea of changes in market and technology in future, therefore those current interior activities of a business might become noncore in the future(Evolutionary economics. 2009).

There is a complex link between business' performance and outsourcing. Some argue that there is no specific relationship between outsourcing and its result on the business performance; whereas some studies declare a constructive connection. For instance, base on the report that is extracted from McIvor (2005), there were approximately 5% of companies that benefited from outsourcing (Evolutionary economics. 2009).

The all types firms such as private and public are increasingly applying outsourcing strategy for the reason of developing their competitiveness. According to Gervais and Barrar (2006), the area of outsourcing varies from company to company. Some organisations transfer broad range of the main production activities, whereas others are resourcing their value-chain activity such as IT and R&D. Despite of what a firm opt to outsource, they have to consider the advantages and advantages of applying this business strategy.

In early 1990s, when there was a huge recession in USA economy, the business strategy of outsourcing became essential and helpful approach for companies, which let them to make more efficient from their business activities in order to improve their competitive stage within the global and local market (Corbett. 2004). Author believes that in the time of recession in any country, transferring some of business activities to the outside of country; where perhaps

the labour cost for instance is cheaper, is more effective changes in the business strategy, and will help the company to cut the cost of its operations. However, Crowther and Green (2004) argue that cost reduction was the fundamental and short-term aim of outsourcing, which clearly help the firms to regain their competitive advantage. Nevertheless, organisations are likely to run the outsourcing activities in-house, when they become profitable again out of economic downturn.

Based on a Deloitte survey, around 70% of organisations outsource with the purpose of cost cut, whereas the rest of companies apply this strategic plan for the reason of achieve competitive advantage. Therefore companies are aiming to apply outsourcing as a tactically approach rather than strategically (Ireland, Hoskisson and Hitt. 2008). The examples of companies which are involved in broad outsourcing are; IBM, Boeing and Sun.

Boeing is outsourcing around 70% of all component of its new aircraft, and the company is expanding its outsourcing strategy by forming outsourcing teams which have duties of collecting the suppliers' representative form from different part of the world and discovering possible suppliers (Haftl and Lawrence. 2007). Author believes that a Boeing aircraft company has its main concern to finding innovative and proper airplane suppliers in such a difficult market, therefore in return the company would effected and benefited by applying outsourcing strategy on the business' continuing performance, and most importantly satisfying their customers with the services they offer better that their rivals.

On the other hand, Ireland, Hoskisson and Hitt (2008) argue that the strategic decision of outsourcing for Boeing is not without risk. When Boeing decided to transfer design of the 787's wing to three Asian companies that were based in Japan; Fuji, Mitsubishi and Kawasaki, there was a threat that these companies could access to the main competencies of Boeing such as wing technology and innovative lightweight materials. Therefore, this risk may change these partners position to new rivals for Boeing. Additionally, Boeing has faced other strategic challenges of outsourcing that is timing issue of 14 months delay of launching 787 due to complexity of 787 projects. Thus, strategic decision of outsourcing is not without difficulties and complexities, yet it is more likely to lead to competitive advantage rather than tactical outsourcing decisions.

In the past, the internal operations of organizations were counted as the only source of competitive advantage; whereas, today outsourcing is the one of vital and new sources (CGEIT review manual. 2010). Based on the viewpoint of Mclvor (2005), outsourcing contributes to competitive advantage for a company by engaging it's minor activities such as; outsourcing it's security in the aim of improving the level of support function's performance as well as more essential ones.

How managers plan for future under uncertainty

We are living in a world which is surrounded with systems such as healthcare, government and organizational life. Every organisation has the certain goals and every part of its operations is working toward achieving its objectives (Anderson and Johnson, 1997). These systems are varying from simple one to disorder. Simple systems tend to remain the same or change slightly over the time; for instance, the air conditioning system. On the other hand, complex system including the large number of interconnected parts and variables which have nonlinear connection and feedback loops (Bennet, D and Bennet, A.2004). on the other hand, chaos in a none-linear incident which can be define as an extreme complexity.

In business world, there is extent of uncertainty about the final result, therefore planning for future become difficult for manager. Executives should have the ability of facing with changes in a positive way and have in their mind nothing is predictable as there are so many internal and external variables which effect on business. According to Malloch and Porter-OGrady (2008) "successful strategies, especially in the long-term, do not result from fixing an organizational intention and mobilising it; they emerge from complex and continuing interactions between people". Wu (2020) think in order to identify the variables managers need to understand the concept of dynamic system which is trying to classifying the cause- effect link between variable in the system. There are two main approaches toward dynamic systems: linear system dynamic and non-linear system dynamics.

As the range of outsourcing of vital business activities increase, the procedure of selecting potential supplier and managing the transfer operations and asset to suppliers might become more complex to apply (Barrar and Gervice.2006). There is dynamic uncertainty within the complex system that makes it difficult for managers to take 'make or buy' decision under such uncertainty (Watson and Brown, 1978). Also, the managers need to consider their strategic outsourcing decision in terms of sustainability, feasibility, acceptability and economically.

For a European company's manager who wants to outsource services, there are some instability and uncertainty in the business environment, which need to be considered, in order to improve the business' overall performance for the future. In general, when managers take decision on the base of what they plan, the uncertainty factor of complexity might be ignored.

Besides of fixed approach to strategy, there is a theory that managers could predict future by

utilising some of the analytic tools in order to select the accurate and comprehensible strategic decision for a business. However underestimating the future has its own pro and risk such as; if executives do not be able to find an approach that is suitable under traditional investigation, they are likely to base their decisions on gut distinct. Rodenberg (2008) explains the model of "strategy under uncertainty", (Courtney, Kirkland and Viguerie. 2000). There are three different strategic situations: shaper, adapter and reserve.

Shaper: it has the role of leadership by creating demands and standards for clients. In simple words, the managers of the firms are creating the future by bringing new ideas to the market which in return would reduce the uncertainty of the future. Author believes that this position provides managers with a power of controlling the future to some extent, however for being shaper, the business need to have innovative strategies and apply it to the business and the services that they are offering to the end-users. Apple is the good example in particular with its new device Ipad, as by introducing innovative ideas and products attempt to create the new needs for customers rather than following their current needs.

Adapter: this is the decision of managers to be adapter and flexible. In this situation, the success depends on the rapid realizing and capturing the chances in the present market.

Author supposes that In the case of outsourcing services, a manager could apply this "strategy under uncertainty" by being mainly adapter to discover the current needs and demands. In other words; firstly, a European based company need to measure the disadvantages of outsourcing services such as culture and language issues along with its benefit. Therefore if there is more advantage and disadvantages, they have the opportunity of outsourcing services after they realize the market needs, and win in the market among their competitors by being one step ahead them.

Therefore, the strategy under uncertainty is an excellent approach for investigation on the future progresses in advanced technologies; for instance, in the period of decade, from 2010 to 2020, there would be broad acceptance for the innovative technologies such as, smart robots and quantum computing.

Furthermore, Anderson and Johnson (1997) explain that the managers need to be innovative to work under uncertainty and unpredictably. These innovative managers utilize the advantage of the system thinking as one of the approaches to problem solving within the complex business environment. Moreover, Wright and Meadows (2008) agree that system thinking approach gives more choices to managers to discover the root reason of problems.

Also system thinking has more stressed on the connection between elements rather than elements themselves (www.pegasuscom.com). According to Anderson and Johnson (1997), system thinking approach helps managers to:

Realize the real structure of the organization.

Identify the important samples of behaviour over time.

Concentrate on difficulties with superior insight.

Predict the postponements and outcomes of their decision.

Diminish the factors of risk.

Information technology outsourcing and its complexities

In order to stay profitable, organisations have to be adaptive to changes within the complex business environment. Change could happen, for instance; when a company decide to apply new technologies or outsource part of its services or products. Cohen, Fink, Gadon and Willits (1995), define "organisational change that is involves moving from the known to unknown, from relative certainty to relative uncertainty, from familiar to the unfamiliar". European and American companies are largely interested in IT outsourcing, in particular, to outside of their countries and even continents. Despite of, those successful firms such as IBM, there are some companies which faced failures due to changes that outsourcing might cause all over the company. Therefore, managers need to completely understand the nature of changes and accept that as a part that might affect of their decision making, so that by managing changes effectively could overcome their system's complexity (Ramanathan. 2008).

Complexity theory is an assumption that attempt to explain that planned and complex systems come out of chaotic systems. Recently, this theory became helpful to realize organisational change. Based on this assumption, as systems complexity raise over time, then it cause more changes and makes system understanding complicated,: therefore, accepting the environmental changes becomes more complex. Complexity theory indicates that organisations are complex adoptive systems with the non-linear relationship between components. There are four main factors that shape the character of complex adoptive systems, they are:

Self-organisation: the route that the several relations of many individual agents in the complex adoptive systems result in example of order.

Emergence: unlike self organisation, it refers to assets of the entire system which is not own by individual agents. And also as emergence arises of contacts between several diverse agents therefore, the result from any changes cannot be predicted.

Feedback: there are two types of feedbacks. Negative feedback (reinforcing) is intending to increase change; whereas, positive feedback (balancing) is aiming to stabilize the system by decreasing the change.

Sensitivity to initial conditions: all the routines and activities before change happens become initial conditions.

Base on Jacques (2006), there are two major fields of services outsourcing: information technology outsourcing (ITO) and business process outsourcing (BPO). The strategy of Outsourcing can offer the better flexibility for a company, in particular for the type of services which have rapid changes in terms of technology. This approach allows a company to transfer the weight of threat and ambiguity on to vendors and suppliers. In order to discuss deeper the complexity and chaos in the companies that are willing to outsource their services, the author selects the information technology which is the one of the services that organisations are outsourcing.

This part is aiming to describe that how a typical European based company gain benefit of outsourcing its information technology to partners, in particular Asian IT suppliers, and further discusses the difficulties of adopting this strategy by using the complexity theory and problem solving methodologies. Sammut-bonnici and Wensley (2002) in Ramanathan (2009), consider that "complexity theory seeks to explain how complex, organised systems emerge out of chaotic systems". The heart of complexity assumption is that the complex systems are adoptive. As a result of complexity theory, firms are complex adaptive systems with nonlinear relationship between its parts. McElroy (2000) emphasizes on realizing this theory as it has a great effect on business performance. To discuss the managing complexity in an outsourcing firm the areas such as below need to be consider:

The role of group and individual: author thinks that if too much people involves .........

Organisations become increasingly interested at IT outsourcing as their business strategic plan (Ramanathan.2009). In addition, Sparrow (2003) note that Information technology became an essential competitive advantage, as managers became more aware of the result of their investment in IT and how it improved their organisations' performance. According to Felton (2008), organisations consider the demand of market and customers for highly developed technologies, as they are highly market driven and could guess what the market demand are in coming future.

Moreover, Information Technology Outsourcing (ITO) could be a complex process in terms of relationship between partners. Also, it engages IT assets and employees as well as transferring the responsibility of executives from buyer to suppliers (Felton. 2008). John (2009) says that the main current problem of outsourcing is how to manage the seller and the maintaining IT employees that China and India are the most favourite places for it outsourcing, particularly India has been selected for service activity outsourcing (Williams. 2010). There are advantages and disadvantages for sides, buyers and sellers. John (2006) uses the example of Aviva PLC's UK. Operation firms that have cut their operations cost by transferring nearly 500 IT jobs to outsource services companies in India.

On the other side of the trade, western companies who are interested to shift their IT to cheap labour destinations such as India, might face challenges such as failure in managerial control. This issue arise, since it is not easy and practical to monitor the supplier's day-to- day operation, therefore it might lead to extra time and cost for any unsatisfactory that might appear in the services that outsourcer firm has asked for. Author considers that there is no certain vision about how is the final service, then there is a risk of visions become illusions. To overcome this difficulty and reduce the risk of poor quality of final service, outsourcing organisation has two options: 1) locating its own quality assurance group on the vendor's facilities. 2) Employing a self-regulating specialist to control the activities of seller (three major outsourcing challenges. 2010).

In the specific case of India, the other issue appears for an outsourcing company as a result of cultural differences. Therefore, its is essential for a typical European firm; which is deciding to offshore its information technology service to a IT supplier firm in India, to have a knowledge about the county's culture, as well as the multiple management culture within the firm. Author indicate that understanding the cultural changes and differences is a mutual

Method, as the provider needs to be aware of the buyer' culture, consequently it could add appropriate value and quality to the services to meet the customers need (Kobayashi-Hillary. 2004).

Author thinks that as the decision making to outsourcing is complex and might lead to chaos if there is not sufficient knowledge about the suppliers for instance the labour cost in the partner's country and other areas such as hidden costs. Therefore both macro (external) and micro (internal) environment of a partner in which it operates should be considered and evaluated by managers before taking decision. Moreover, as any other business strategy there should be deep consideration on the areas: sustainability, Feasibility, acceptability and economically. Based on Worthington and Britton (2009), as manager one of the essential steps that need to be taken by a typical European based firm toward ITO is to assess IT suppliers' environment in terms of cultural differences, legal and political barriers. In this case, one of the managerial problems solving methodologies is a practical tool in order to analyse the challenges of ITO in macro level such as Political, Economic, Socio-cultural, Technological, Environmental, and Legal

PESTEL analyse:

In 1989, Eastern Kodak Company was one of the first companies which employed employees outside of the company to do part of their business such as operating its information processing system. The main factors that motivate the executives to outsource their IT section are:

There is a need for new skills in order to feed the requirements of internet technologies explosion.

Adopting new technology changes and running business earlier that rivals.

High costs of in-house software development

From the complexity point of view, the first and important step in managing complexity is to find complexity. Next is to decide how to behave toward complexity, there are two ways: first is to utilize it as a competitive advantage, or to reduce it and its following concealed costs. If there is not clear understanding by manager about complexity of the company's day-to-day operations, they would not be able to apply the new and innovative idea into the business (Mariotti. 2008).


Outsourcing is not restricted to the minor activities of a business, and companies could transfer their none- core activities in a large scale. Outsourcing strategy has significant impact on the business performance as it is considered as competitive advantage. Companies in all over the world, in particular; USA and European country are increasingly applying this approach as a business strategy as it enables them to have rapid access to advanced technology and benefit the advantage of low labour cost in some area such as India. However decision making about outsourcing; both services and products, are full of uncertainty and managers need to be trained to know how to plan and manage their business to achieve its goals when complexity and chaos appear.

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