Saturday, December 1, 2012

Sourcing capabilities

A look at General Electric’s strategy validates the idea that in today’s economic climate, businesses which do a few things but do them well tend to perform well. In case of GE, the five business units - Aviation, Capital, Energy, Healthcare and Home and Business solutions employ close to 300,000 people worldwide. The core strengths of these units vary from innovation, Customer connectivity and talent. From the 1980’s onwards, GE looked at partnerships and outsourcing as a long term strategy which allowed it to benefit from the organizational capabilities of external organizations. GE can definitely regarded as the pioneer of implementing a successful sourcing strategy at a large scale.

Dave Ulrich and Norm Smallwood in their HBR article ‘Capitalizing on Capabilities’ discuss at length about assessing and building the intangible strengths of an organization. With most markets changing rapidly in most geographies, it is extremely rare that businesses are able to build and maintain all of the organizational capabilities on their own. According to Ronan Mclvor's writing, sourcing decisions impact long-term capabilities of the organizations and  beyond just saving overhead costs. As in case of GE, the combined bundle of resources and assets can create a competitive advantage.

The matrix above illustrates the decision process for organizations a sourcing strategy. The idea is to retain and develop the the capabilities which hold strategic importance to the company and are important for the operational success. Organizations can however rely on alliances and partnerships for the capabilities that are are strategically important and not as important for operational success. The company can avoid investing resources by outsourcing capabilities and functions. Additionally, the cost advantage of outsourcing to  emerging countries been attractive for companies. However, with wages and costs rising in these off-shores , the cost advantage might be marginal. Could the recent move by GE to move back jobs to the US be the first signs of this trend? Will the political will to get jobs to on-shored mean effect the sourcing strategies of businesses?


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