How to Outsource and What Parameters Should We Consider While Outsourcing

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MAKE VERSUS BUY

Strategic
By assessing the relative costs and risks of making or buying, companies can leverage their skills and resources for increased profitability James Brian Quinn • Frederick G Hilmer

T

approaches, when properly combined, allow managers to leverage their companies’ skills and resources well beyond levels available with other strategies: WO NEW STRATEGIC

• Concentrate the firm’s own resources on a set of “core competencies” where it can achieve definable preeminence and provide unique value for customers.1 • Strategically outsource other activities – including many traditionally considered integral to any company – for which the firm has neither a critical strategic need nor special capabilities.2 The benefits of successfully combining the two approaches are significant. Managers leverage their company’s resources in four ways. First, they maximize returns on internal resources by concentrating investments and energies on what the enterprise does best. Second, well-developed core competencies provide formidable barriers against present and future competitors that seek to expand into the company’s areas of interest, thus facilitating and protecting the strategic advantages of market share. Third, perhaps the greatest leverage of all is the full utilization of external suppliers’ investments, innovations, and specialized professional capabilities that

James Brian Quinn is Buchanan Professor of Management at the Amos Tuck School of Business Administration, Dartmouth College. Frederick G. Hilmer is Dean of the Australian Graduate School of Management, University of New South Wales. This article is reprinted by permission of the publisher from the Sloan Management Review, Summer 1994. Copyright © 1994 Sloan Management Review Association. All rights reserved. 1

For notes, see page 70.

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THE McKINSEY QUARTERLY 1995 NUMBER 1

outsourcing
would be prohibitively expensive or even impossible to duplicate internally. Fourth, in rapidly changing marketplaces and technological situations, this joint strategy decreases risks, shortens cycle times, lowers investments, and creates better responsiveness to customer needs. Two examples from our studies of Australian and US companies illustrate our point: • Nike, Inc. is the largest supplier of athletic shoes in the world. Yet it outsources 100 percent of its shoe production and manufactures only key technical components of its Nike Air system. Athletic footwear is technology- and fashion-intensive, requiring high flexibility at both the production and marketing levels. Nike creates maximum value by concentrating on preproduction (research and development) and postproduction activities (marketing, distribution, and sales), linked together by perhaps the best marketing information system in the industry. Using a carefully developed, on-site “expatriate” program to coordinate its foreign-based suppliers, Nike even outsourced the advertising component of its marketing program to Wieden & Kennedy, whose creative eƒforts drove Nike to the top of the product recognition scale. Nike grew at a compounded 20 percent growth rate and earned a 31 percent ROE for its shareholders through most of the past decade. • Knowing it could not be the best at making chips, boxes, monitors, cables, keyboards, and the like for its explosively successful Apple II, Apple Computer outsourced 70 percent of its manufacturing costs and components. Instead of building internal bureaucracies where it had no unique skills, Apple outsourced critical items like design (to Frogdesign), printers (to Tokyo Electric), and even key elements of marketing (to Regis McKenna, which achieved a “$100 million image” for Apple when it had only a few employees and about $1 million to spend).

Reprinted from the Sloan Management Review

THE McKINSEY QUARTERLY 1995 NUMBER 1

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STRATEGIC OUTSOURCING

Apple focused its internal resources on its own Apple DOS (disk operating system) and the...
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