Outsourcing is a growing phenomenon in the industry

Symptom: Some of the competitors are outsourcing their components or some of their operational functions.

Implications for the market:

  • A company's cost structure depends, in part, on the approach it takes to providing the product and on the rates it pays for its basic inputs of purchases and value added. Outsourcing is an example of a different approach to the basic functions involved in providing the product. Changes in either approach or rates can have a large effect on a competitor's cost structure.

  • These changes, however, can be quickly copied. The changes are so visible, and their impact on costs is so large, that competitors who are able to copy the changes do so quickly. Those who cannot are at a disadvantage because they will have lower–often substantially lower–returns.

  • Another way to lower costs is through improved productivity of company resources. This can be the result of:

    • Relatively high volume. High volume competitors can spread their fixed costs, primarily SG&A, over more units.

    • Rapid growth. Competitors who grow quickly–usually in excess of 10 percent growth in units per year — cannot physically add capacity as fast as they sell units. Since cost growth lags unit growth, cost per unit declines.

    • Focus. Competitors with a strong cost focus do not expend resources on anything that does not provide a direct benefit to their specifically chosen customers.

  • Productivity improvements are difficult to duplicate. High volume and rapid growth require winning customers more quickly than competitors or winning more customers, which is not easily done. Focus is the most difficult to achieve because it requires a keen understanding of customers' costs as well as an iron-fisted resolve not to add anything that customers do not value.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:


Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"
    Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position

  • "Costs: The Last Consideration"
    As margins fall and profitability slides, the obvious first response is to cut cost. Knowing why that may be the wrong choice requires an understanding of the difference between effective cost control in hostile and non-hostile markets.

  • "Cutting The Right Cost"
    When markets turn hostile, managers turn to cost cutting. Reducing cost seems like the most direct route to improving profitability. Often, though, efforts to control costs make the situation worse.

  • "What We Do Know Can Hurt Us"
    A little knowledge is a dangerous thing. For the business leader, the very abundance of knowledge poses a danger.