Two new strategic approaches, when properly combined, allow managers to leverage their companies’ skills and resources well beyond levels available with other strategies:
- 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 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 U.S. 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 efforts 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 so on for its explosively successful Apple II, Apple Computer outsourced 70 percent of its manufacturing costs and components.