Specialization and Outsourcing

Twenty years ago, before time compression, BPR and e-business, companies consisted of a large number of different functions. These functions were not very clearly defined inside companies, and the interfaces between companies were also unclear. It often was as if companies had been organized in a slightly random fashion. Each company had also developed certain unique, competitive advantages based on its history and different factors in its environment.

One factor that gave rise to certain skills was demanding customers. Companies that worked with more demanding customers usually ended up with a more competitive set of skills in areas in demand by these customers than the companies that did not enjoy the benefit of demanding clients. It is widely accepted by businesspeople and scholars that the fact that Sweden, with only 9 million people, is the home country of two strong truck companies - Volvo and Scania - is due to the circumstances in the north of Sweden that have given rise to a market for trucks with better performance compared to competitors supplying to customers in less harsh environments. In this case the competition between two strong competitors in the same market has contributed to the success of both companies.

These businesses also grew up together with a number of other more or less related businesses. In the case of Volvo, the truck business, Volvo Car, Volvo Penta, which develops and markets boat engines, and Volvo Construction Equipment started out in the same company. Initially, all functions were also entangled in the same organization. All businesses were served by the same marketing department, purchasing, production and other functions.

In the 1950s and 1960s, following the lead of American giants such as GM and DuPont, large corporations all over the world started to disentangle their various businesses, departments and support functions. One of the first such trends was "divisionalization," which means that large companies with several different businesses started to organize them in different business units, called divisions. Each division was to a large extent a self-contained unit of its own, sometimes sharing some centralized functions with other divisions. The role model for this development was GM, which organized its divisions along the different brands of Chevrolet, Buick, Oldsmobile and Cadillac.

This process has continued to this day, interrupted now and then by the idea of diversification, which runs in the opposite direction, and most Western companies have gradually increased their focus on a small number of core competencies. The computerization within the organizations and between one company and its business partners has also brought with it the increasingly clear definition of interfaces between steps in a process inside a company and between business partners in a supply chain. In order to exchange data electronically between systems, the interfaces have to be made much clearer than in the case of communication between people. This is because computers never ask complementary questions, and communication simply breaks down if interfaces, messages and their interpretation are not well defined.

Increasingly, this development has brought with it the divestment of business units and functions, which are not seen by the company as core. This has given rise to a number of seemingly new businesses with a high level of specialization that work as, for example, third party logistics companies, computer service companies and security firms. To a large extent these functions were previously held by each large company itself. Through specialization and advantages of scale the services of these companies have become less expensive and they have also become available to many smaller companies that could, often, previously not afford to run these services on their own. Thus, the market for such specialized services has increased in size, specialized systems and other tools have been developed for these companies (which could not be justified when the scale of operations was small and limited to one single company) and the quality of services has improved.

This trend is usually called "outsourcing" and we have seen many new companies and industries arise from this. Outsourcing is a development toward a higher level of specialization both in the company that outsources a function and the company that offers the service. Many services with substantial volumes have now been outsourced by large firms. Noncore businesses have been divested, and interfaces internally in companies, and between business partners, have become defined and the web of interrelationships inside business has, to a large extent, become disentangled. This has also contributed to reduced cost and to the compression of time in business processes and supply chains. Now, specialized organisations with specialized tools cater to the specific needs of individuals and business customers all over the world.

From an initial situation of large-scale "chaos and disorder" we have now taken a number of giant leaps toward a relatively ordered and cost-effective situation on a global scale. It could be argued, however, that we have achieved cost-effectiveness on a global scale at the expense of pollution of the environment, climate change and resource depletion. With supply chains that require global transportation and ample and timely supply of oil and other energy sources, we now have to change to a more sustainable way of doing business. At the same time as the need for sustainable technologies, products, services and business practices is becoming overdue, we will start to face the exhaustion of the traditional competitive advantages of specialization, time compression and cost reduction. In many cases the opportunities to further increase specialization and reduce time and cost will be limited and the cost of making the next improvement will, at some point in the future, outweigh the benefits.

In order to find new areas for business development and future growth, we need to embrace sustainability as the third wave of business development, after strategic market dominance and operational efficiency. Energy transition, based on the drive for sustainability, represents a new area of business development and investments, and it also represents new opportunities for operational efficiency, as the initially relatively expensive sustainable technologies are made in larger volumes at reduced cost.

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Understanding Outsourcing

Understanding Outsourcing

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