In our post, You Can Realize a Competitive Advantage Through Outsourcing, we discussed how product development can and does provide a competitive advantage.
The main point said competitive advantage is derived when a firm’s proficiencies are organized into a well-defined set of core competencies. This allows businesses to adapt to marketplace opportunities.
Core competencies are the collective acumen in the organization; they are skill and knowledge sets, not products or functions. They must be flexible, long-term platforms for success. They are usually small in number—three to five—and exist at unique sources of leverage in the value chain. They are positioned where the company can dominate competition and they are carved in the organization’s structure.
In the future, managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible, forcing them to rethink the concept of the corporation itself.
Product Development Outsourcing
Product development outsourcing is a valuable a tool that allows organizations to focus on their core competencies. The relationship between developing core competencies and outsourcing is critical.
As organizations outsource product development activities that are non-core, it frees management time and resources to focus on the activities that are core. With the benefit of additional management time and resources the core competencies are reinforced and improved, keeping the organization focused on where it adds the most value to the customer.
It’s a simple and compelling argument: product development outsourcing not only facilitates the development of core competencies, it enables it.
Proving the Detractors Wrong and Going the Extra Mile
Opponents often argued product development outsourcing would gut the business, cause positions to be removed, or create an uncontrollable environment.
None of these fears have come to fruition.
Instead, outsourcing continues to effect great innovation because highly qualified outside providers can execute non-core product development efforts. The strategic benefits to outsourcing are extensive. Greater value, higher service levels, lower costs, innovation, and business partnerships that encouraged new thinking and introduced new ideas all are a result of the new, tight business relationships that product development outsourcing fosters.
Further, the advances that product development providers introduce continue to swell.
Armed with a core competency of innovation and motivated by a desire to expand their relationships, product development providers continue to conceive new opportunities to deliver greater value. Through well-conceived outsourcing relationships, providers are increasingly recommending changes and accomplishing improvements internal managers had not envisioned nor thought to recommend. Developers offer a fresh perspective, contributing improvements gathered from a wealth of clients and applying wisdom from the wide-ranging experience.
Core competencies are a vital way to think about a corporation’s path to success. A simple test for identifying whether an activity is or is not a core competency is to ask the following questions.
1. Does the activity create or defend a unique competitive advantage for your firm?
2. Is doing this activity internally the most cost-effective means?
3. If starting your company today, would you build this capability internally?
4. Would other companies hire you to do this activity for them?
5. Will the company’s future leaders come from the area of this capability?
6. Does the activity DIRECTLY contribute to business growth or expansion?
The answer to each of these questions should be “YES” if the activity is to be considered a core competency. If the answer to any of the questions is “NO,” a re-examination of corporate philosophies and outsourcing possibilities may be in order.