Single-industry companies, having abandoned integration, concentrate their activities on very narrow segments of the value chain, and the rest of the activities are transferred to independent external suppliers, in other words, transfer functions to outsourcing. Here it is very important to decide which links of the value chain to leave within the company, and which – to transfer to counterparties.
Disintegration and outsourcing involve the refusal to independently perform a number of functions by transferring goods and services to suppliers and other partners. Outsourcing some of the company’s functions is strategically feasible if:
independent partners will perform them better and cheaper. Many computer manufacturers, for example, abandoned the final assembly, transferring this work to counterparties, which gave them significant savings on the purchase of components and the organization of the assembly process. Cisco has outsourced almost all of the production and assembly of routers and switching equipment to a partner company that owns 37 factories coordinated via the Internet; this type of activity is not competitively significant and its transfer in outsourcing threatens the key competence, capabilities and know-how of the company. Outsourcing of equipment maintenance, data processing, accounting and a number of administrative support functions to companies specializing in this activity is widespread; this reduces the risk associated with changes in technology and/or purchasing preferences; this increases organizational flexibility and efficiency of decision-making, reduces the time of development and introduction of new products to the market, reduces coordination costs; this allows the company to focus on the core business.
You can master or retain key activities and avoid the disadvantages of vertical integration by choosing a strategy of long-term partnership agreements with key suppliers and thus gaining access to their competencies. Previously, many companies tried not to work with suppliers too closely and concluded with them, mainly short-term contracts. Although companies worked with suppliers for a long time, the latter feared that cooperation might cease at any time; usually, the determining factor in the conclusion of the contract was the price, and the companies tried to obtain the most favorable terms of delivery in exchange for long-term cooperation. The threat of moving to another supplier was a serious weapon, and in order for it to act stronger, companies instead of long-term contracts practiced concluding short-term contracts with numerous suppliers, creating fierce competition among the latter. Today, there is an almost ubiquitous abandonment of this strategy in favor of long-term alliances and partnership agreements with a few high-performing suppliers. Short-term contracts, concluded solely because of the profitability of the price, are replaced by long-term partnerships.
Dell Computer, thanks to the partnership with suppliers and the organization of deliveries just in time, contains a stock of parts only for seven days, abandoned the maintenance of warehouses and offers computers with new components within a week after the start of deliveries of the latter. Cisco has worked so closely with its suppliers that they ship Cisco hardware directly to Cisco customers without any involvement of Cisco employees. This costs the company annually 500-800 million dollars. cheaper than the acquisition of own enterprises [27 p.104]. Hewlett-Packard, IBM and other companies sold some of their factories to suppliers and entered into contracts for the purchase of products from these plants. Starbucks buys coffee beans from independent suppliers and believes that this is more profitable than integrating “backwards” [15 p.167].
Outsourcing the functions of one or more links in the value chain to external partners has a number of strategic advantages [45 pp.9–21]:
allows you to get components or services of higher quality and / or cheaper; improves the company’s innovative capabilities through interaction and partnership with world-class suppliers with great intellectual potential and rich innovative experience; provides greater flexibility of the company in the event of a sudden change in the market situation or consumer preferences: it is easier and cheaper to find new suppliers with the necessary capabilities and resources than to rebuild the internal activities of the company, eliminating some capacities and resources and creating new ones; accelerates the acquisition of resources and skills; allows you to focus on those operations that are effectively carried out by the company, and those that are strategically expedient to keep under its control.
At the same time, the company risks taking too many activities out of its limits and losing some of its own resources and opportunities. In such cases, the company will lose the activities that for a long time ensured its success in the market. Cisco, for example, oversees and protects its unique manufacturing expertise by developing new manufacturing methods that contractors working with it are required to use. Thus, Cisco, on the one hand, is constantly improving production, and on the other hand, it keeps the source codes and design of its products secret. In addition, Cisco uses the Internet to monitor the production operations of its contractors around the clock, wherever they are, and immediately takes action when problems arise.
Offensive strategies to maintain a competitive advantage. Defensive strategies to protect competitive advantage