Literature reviewDefinitions of Outsourcing
Outsourcing is a term that has risen in popularity across hundreds of different industries over the past two decades. A number of businesses are reliant on outsourcing for offering products and services to their clients. The list of organizations that employ outsourcing is rather extensive and ranges from banks, supermarkets, fashion houses, to technology based multinational corporations. We are residing in an era of outsourcing; an ever increasing number of firms are subcontracting processes like research and development, product design and assembly, marketing and distribution to after sales service. (Grossman & Helpman, 1993).
According to Heywood "outsourcing is the transferring of an internal business function or functions, plus any associated assets, to an external supplier or service provider who offers a defined service for a specified period of time, at an agreed but probably qualified price" (Heywood, 2001, pg 27). The above definition by Heywood conveys a message similar to McIvor's one "outsourcing involves the sourcing of goods and services previously produced internally within the sourcing organisation from external suppliers" (McIvor, 2005, pg 7).
Heywood also states that an external supplier is a specialist who has the capability to add more value to the outsourced product or service than the outsourcing firm can attempt to achieve through in-house efforts. Outsourcing is quite often used in conjunction with other terms for instance; it is quite often related to the term 'vertical integration' which is similar to the outsourcing process because it refers to the decision to of either to carry out the production process internally or to outsource it from external suppliers. Additionally, the term 'make or buy' is often used in the outsourcing context, which deals with the issue of either manufacturing a component internally or sourcing it from an external vendor. (Arnold, 2000).
Although the concept outsourcing has been around for decades, it gained momentum during the 90's when managers started realizing that in order to stay competitive in the market they needed to transfer non-core functions to external specialists. During the initial years, the cost saving aspect was the most important reason companies chose to outsource, but these days a wide range of benefits act as the driving factor for outsourcing. Therefore, the decision to outsource is not a sole purchasing or financial decision, but often it is based on major strategic issues implying enormous organisational changes. It is rather difficult to decide which operations to outsource, but the general rule of thumb is to keep the core competency operations in-house whilst outsourcing the rest. Thus, the decision whether resorting to outsourcing is appropriate for a company is complex and involves various components. The most common route to outsourcing is with functions that are not strategically important for the company, and if this method succeeds, more of the core functions can end up being outsourced. The decision to outsource begins with an evaluation of the organisational capabilities, the importance of these activities as a competitive advantage, the capability of suppliers to provide the required processes, the risks in the supply market, possibility of resistance in the present workforce and its effect on employee morale. After a concrete decision is made, the process moves on to the supplier selection, contract negotiation and management of the relationship to ensure the success of outsourcing. (Bragg, 2006)
Another definition of outsourcing by Dominguez states that "outsourcing is the practice of hiring functional experts to handle business units that are outside of your firm's core business. It is also a method of staff augmentation without adding to the head count." (Dominguez, 2006, pg 5). In simple terms outsourcing is subcontracting a process, where product design or manufacturing is handed over to a third-party company. The decision to outsource is often in order to reduce cost or make better use of time and energy costs, thus redirecting the competencies of a particular business to a better use, or to making more efficient use of land, labour, capital, (information) technology and resources. Rapidly changing and increasingly complex business issues are affecting organizations and on the manner they conduct their business. The rapid advancement of technologies, the increased complexities of business operations and the need for constant growth have forced companies to evaluate their strategies and focus on their core capabilities and strength. (Greaver, 1999) Outsourcing provides the following benefits to an organization:
- Helps reduce and control operating costs
- Reduces labour costs
- Helps balance competitive pressure
- Helps improve the company focused area of business
- Helps achieve cost savings
- Helps achieve revenue goals by allowing work to be done round the clock
- Provides access to world-class capabilities
- Improves upon time to market
- Allows development of schedules not possible with internal staff
- Avoids historic problems with projects that have been difficult to manage because of company limitations
- Allows the company to scale up for a project without increasing the number of permanent staff
- Create a global market for their product or service
- Increase efficiency
- Put more focus on core business
- Allows redirection of internal resources for other purposes
- Allows the company to be more customer focused
- Take advantage of potential tax incentives in different country or region
These bullet points are discussed in more elaborate details in the upcoming pages.
(Dominguez, 2006, pg 8-9)
According to the Encyclopaedia of Business and Finance, outsourcing is an option that can be used for internal management tasks. It's an arrangement whereby an organization contracts with another one to perform tasks or functions traditionally carried out by internal staff. The main focus of the action is on cost efficiency and cost-effectiveness when deciding to outsource. The decision making process involves internal analysis and evaluation, assessment and vendor selection, and finally implementation and management strategy. The process of internal analysis involves examining the factors that call for the need to outsource and also the proper implementation of the strategy. The top ranking management of a firm are responsible for making these decisions ranging from assessing their needs and selecting a suitable vendor. In order to find a suitable and qualified vendor, the firms focus their outsourcing related research on organizations that have successfully outsourced the same functions. Implementation and management allow for the formation of a relationship and its evolution between the outsourcer and the client. The strategy involves the methods used to monitor and evaluate performance, communicate issues, resolve conflicts, and help the organization to successfully employ and utilize outsourcing. (Kaliski,, 2001, pg 674-677)Advantages of outsourcing
Outsourcing offer many advantages to firms that choose to outsourcing as an alternative to in-house production. In a survey of Current and Potential Outsourcing End Users by the Outsourcing Institute revealed some important reasons as to why organizations chose to outsource. Some of them are outlined below:
- Improved levels of efficiency: To improve efficiency, a company must aim for dramatic improvements in critical measures of performance such as cost, quality, and speed. Sometimes, the need to increase efficiency can directly conflict with the need to invest in the business's primary area of focus. Outsourcing secondary functions to a specialist allows the organization to realize the benefits of maximising efficiency. (Kaliski,, 2001, pg 675)
- Easy access to experts and specialists: In order to remain competitive organizations must able to come up with innovations. Outsourcing provides a company with access to a world leading expertise, which may not be available internally in many organizations. Experts and specialists firms make extensive investments in technology, procedures, and people and they gain extensive experience by working with multiple clients facing similar obstacles. Thus a company can utilize the supplier's innovation, specialist capabilities and as a result can enhance their own performance without making huge investments. (Ibid, pg 675)
- Reallocation of company resources for other purposes: Almost every firm has a finite number of resources available to it. Outsourcing allows a company to focus its available resources towards it core competencies, whilst diverting the non-core activities to external contractors. The derived benefit is that specialist suppliers can achieve higher levels of performance in certain activities in comparison to the outsourcing company carrying out the task in-house. The improved level of performance may not be totally based on reduced costs but also on the higher level of service quality provided by the external supplier. (Ibid, pg 676)
- Reduction of unnecessary capital expenditures: In most cases the top level management of a firm has to decide on investing capital funds. There is usually a certain amount of competition going on between the different departments within an organization. Therefore in this case it becomes hard to justify secondary capital investments when primary departments compete for the same money. In these scenarios outsourcing can help reduce or eliminate the need to invest capital funds into secondary business activities, allowing outside contractors to perform these functions. (Ibid)
- Reduced operating costs: Organizations that carry out all the operations from research and development to marketing and deployment tend to incur very high expenses, and these are in turn passed onto the consumer. Outsourcing the secondary activities to specialized third party contractors can turn out to be much less expensive in the long run. By avoiding investing in capital and additional employees, the firms are able to make a significant amount of savings and pass these benefits onto the final customer. (Ibid)
- Reduced risk: All investments made by organization carry risks imposed by the environment; these include markets conditions, competition, the local government regulations, financial conditions, technologies etc. Any of these might change drastically and affects the normal functioning of an organization. (Ibid)
- Access to resources that are not available internally: Outsourcing allows a company to have access to new technologies or other resources that it lacks internally. It is a good alternative to setting up new divisions or factories and employing new work force in order expand the product or service portfolio of an organization. (Ibid)
- Improved control over difficult and complex functions: Outsourcing allows a company to tackle complex, difficult to manage, or out of control operations by allowing external third providers to deal with them; which they would be unable to carry out internally. (Ibid)
- Asset infusion: Outsourcing sometimes involves the transfer of assets from the customer to the provider. Company assets, and licenses used in the internal operations that have value and are transferred to the supplier. Certain assets sold to the supplier reveal a win-win approach between outsourcer and client. (Ibid)
- Improved company morale and focus: Outsourcing lets a company focus on its primary business by having operational functions assumed by an outside expert. In turn, the employees will have increase motivation and morale, since their jobs will be less routine and more meaningful. (Ibid)
- More flexibility: In accordance to the rapidly changing technology, reduced time-to-market and more sophisticated and aware consumers, it is becoming more complicated to control and manage all activities that create competitive advantage internally within an organization. Outsourcing can enhance an organisation's flexibility, especially when their trade is involved in the field of developing new and innovative technologies or fashionable merchandise (i.e. clothing, footwear etc), and since specialist suppliers can provide innovative new technologies or products outsourcing can prove to be a smart strategy. (Ibid)
A Survey of Current and Potential Outsourcing End Users were able to identify some of the leading factors in successful outsourcing. They were as follows:
- Effective and meaningful open communication between the groups involved.
- Top level management support and involvement.
- Choosing the correct vendor.
- Continuous management of the relationships.
- Clear and precise company goals and objectives.
- Availability of external resources
- Contractual agreement.
- Justification of financial involvements.
(Kaliski, 2001 pg 674-677)Disadvantages of Outsourcing
Although outsourcing has many advantages, it like many other things in life has its share of disadvantages, and in some cases the advantages ca turn out to be a disadvantage depending on the problems of the organization involved. In order to get the most out of outsourcing good management practices are necessary. Some of the adverse effects of outsourcing are described below.
- Supplier change: Many organisations resort to outsourcing in order to decrease their operating costs; but there are times when this goal cannot be achieved; moreover the costs may even increase due to underestimating the factors involved in the process of outsourcing. Many a times the future costs of managing the process are neglected. To ensure continual successful outsourcing, management resources and time must be invested to follow up and maintain good the relationship with the suppliers. A number of risks are inherent to the process of outsourcing. Situations can arise where the conditions of the supplier may change in the future, like failure, loss of confidential information and substantial job loss linked to outsourcing functions. One of the key reasons for outsourcing manufacturing is to take advantage of the current low-wage rates in certain emerging countries of the world, notably China, Taiwan etc. This practice can lead to certain problems and risks since those markets are located in an altogether different region compared to where the final products would be delivered to the end consumer. Also different suppliers at different locations assemble the products, instead of a single one, this in turn raises some issues as the firms may not be aware of each other's process plan and thus end up making an error in the process which can eventually lead to customer complaints. (McIvor, 2005)
- Market changes: The present day markets are changing rapidly, especially in the information technology area. It is becoming increasingly difficult to predict what the core and peripheral competencies in a company will be in a few years. It should be noted that even if it a certain activity may not seem important for a firm's competitive advantage, there might be implicit or tacit interdependencies with core competencies; as result it is essential to coordinate and integrate the activities within the organization to prevent future mishaps. Another factor that requires consideration is the location of vendor. For example outsourcing towards China will continue to rise, but its economic condition is changing and the labour costs are rising. Although it is still offers an economic edge that may not be the case in the upcoming future. (McIvor, 2005)
- Access to other competitors: When resorting to outsourcing, an organization depends on the supplier to expand their capabilities and technological know-how. Other competitors outsourcing from the same firm may gain the similar advantages thus losing their uniqueness. (Bryce, 1998)
- No benefit from a drop in cost of work outsourced: In some industries when long term contractual agreement comes to an end, a drop in the cost of outsourcing work does not necessarily guarantee a lowering of the cost to perform the task internally. (Ibid)
- Problems occurring in the aftermath of downsizing: Morale becomes a concern in the aftermath of some outsourcing deals. Employees have to take up more responsibilities for less pay and struggle with problems such as meeting schedules, budget and quality specifications. (McIvor, 2005)(Griffin & Ebert, 1999)
- Outsourcing impeding the work of the organization: On rare occasions, organizations experience production delays caused by problems occurring in the outsourcing company. (McIvor, 2005)
- Managing long term relations: Many factors related to outsourcing tend to produce less than perfect relationship between the involved companies. These are:
- pricing and service levels
- difference between the cultures of the buyer and the supplier
- the absence of flexibility in long-term contracts which sometimes leads to dissatisfaction
- the involved parties failing to make the most out of the relationship at the expense of one another
- absence of oversight in part of the management team
- underestimating the value of time and attention required to manage the relationship or transferring the management responsibilities to the vendor.
In order to fully understand the process it is important to understand the types and trends of outsourcing practices that are widely practiced. A look into several literatures on outsourcing reveals that outsourcing can be generally categorised into following three basic types.
- Selective outsourcing
- Transitional outsourcing
- Total outsourcing
- Offshore outsourcing
- Value-added outsourcing
- Equity holdings
- Multiple suppliers
- Application services providers (ASP)
- Business process outsourcing (BPO)
- Shared services
Selective outsourcing or partial outsourcing refers to the outsourcing of some of the operations of an organization. Under such arrangement the production process is considered as a range of activities, some of which are owned and managed in-house, and while others are outsourced. The studies and surveys conducted by Kern and Willcocks indicates that selective outsourcing is the most common used method and has proven itself as generally successful. A large number of companies like Dell, Compaq use this type of outsourcing. (Kern, et al, 2002)
Transitional outsourcing is the practice of temporarily outsourcing before making a major transition to a new technology or production technique. It is generally used by companies when migrating from legacy systems to client/server applications. For example, Sun Microsystems's three year US$27 million dollar contract with Computer Sciences Corporation was one of the notable cases of transitional outsourcing, where Sun's staff built client/server systems while CSC ran Sun's legacy systems. (Ibid)
Total outsourcing indicates the situation where almost of all the necessary operations of an (in practice about 90 percent) organization becomes the responsibility of an external vendor. The some or all of internal department of the organization are either downsized dramatically or cease to exist. In some circumstances transfer arrangements are made for some of the internal staffs to be transferred over as employees of the vendor. Total outsourcing contracts are primarily fixed-price exchange based and long term deals. (Barnatt, 1996)
According to Kern and Willcocks "total outsourcing emerges as a distinctly high risk practice." Also their observations indicate that new types of outsourcing practices and developments are emerging and are being adopted. The following list is not extensive, but it tries to provide an outline of the emerging practices and developments. (Kern, et al, 2002)
Offshore outsourcing is mainly focused on taking advantage of the technical expertise and lower labour costs in the emerging countries such as India, Ireland, Israel, China, Russia and Mexico. The main driving force behind offshore outsourcing is the attractive and beneficial low workforce wages which result in significant cost savings. However, there are also some drawbacks such as communication and coordination problems, and lack of strict quality control, time scheduling etc. (Farell, 2006)
In this criterion, the client and vendor combine their strengths in order to add more value to its products and services. Since each partner shares the revenue generated from external sales, the partnership is not based on exchange, but they rather form an alliance where risks and rewards are shared. To successfully utilize value-added outsourcing, the partners need to add value by offering products/services that are demanded by target customers. An example of value-added outsourcing is the alliance between Kodak and IBM which formed Technology Service Solutions with the aim to provide multi-vendor PC maintenance and support services in the manufacturing industry. (Willcocks & Lacity, 2001)
In simplified terms equity holdings is act of partners taking ownership in each other's companies. One notable example is the 1996 Perot Systems-Swiss Bank deal where Swiss Bank Corporation (Swiss Bank) in Basel, Switzerland, signed a 25-years outsourcing deal with Perot Systems. According to the partners agreed to sell client/server solutions to the banking industry. The bank had an option to acquire up to 25 percent share in Perot Systems while Perot Systems took shares in the software company owned by the bank, named Systor AG. (Kern & Willcocks, 2001)
Co-sourcing is the procedure where a task is performed by both the internal department of a firm and also by an external contractor. A notable example of co-sourcing would be the scenario when an audit is being conducted on an organization by both its internal auditing department and an external auditing firm. Co-sourcing is widely used by software companies where both internal developer team and external contractors contribute towards developing products. (Kehal & Singh, 2006)
This approach establishes the concept of hiring specialised firms to carry out specific tasks. Multi sourcing reduces the risk of single supplier dependency. However, since a number of suppliers are involved, this process requires additional time and resources. Co-ordinating and managing the vendors is the crucial for successfully utilizing multi-sourcing. (Monczka, et al 2008)
A spin-off is created when a separate company is created from one or more departments of an organization, which in turn function like a separate vendor. Spin off companies can focus more on marketing thus delivering good customer service at competitive prices. In reality however, spin-offs are not always successful as the original firm since they are too much dependent on the former/parent company for business, and sometimes have face difficulties in getting new clients. (Tbke, 2004)
Application service providers are vendors who provide access to centrally managed applications distributed over the Internet and other networks in return for payments. Firms such as Oracle, SAP, Microsoft and many others offer remotely hosted software that can be applied across a complete organization. (Kern & Willcocks, 2001)
Business process outsourcing is a process where the non-core or less important operations are carried out by external contractors. (Lacity & Willcocks, 2001) It has become one of the fastest growing segments of the outsourcing market. BPO is heavily reliant on collaboration because it links the BPO client's skills, technology base and processes with the BPO provider's distinctive offerings, therefore, strengthening capabilities along the value chain. (Keen 2002) For example, in early 2000, BP decided to outsource some of its operations to Exult, a California based firm. BP transferred the human resource and IT operations to them, and focusing on administrative decisions. (Kern & Willcocks, 2001)
Many companies choose to cancel outsourcing contracts and decide to carry out the operations internally again. This action can be referred to as backsourcing or insourcing. (Kern & Willcocks 2001) For example, Amazon UK in 2005 decided to backsource its support operations from India to Ireland, due to customer complaints about poor service quality. Backsourcing mainly occurs due to changing requirements or in Amazon's case from the realization that some operations are better to be carried out internally.
As the name clearly explains, shared services refer to the act of sharing services amongst the different departments of a single or multiple organizations. As a result the funds and resources required for the services are provided for by the service receivers thus, turning the service providing department into an internal service provider. The main concept is the sharing of services amongst departments or organizations. (National Audit Office, 2007)
In order to understand the strategic impact of outsourcing it is necessary to analyse and identify the company's business strategy, which is conducted by analysing the resources, capabilities and competitive advantages.
- Business Strategy
- Perceived Customer Values
- Competitive Advantage
- Resources and Capabilities
Grant stated that the business strategy determines how the firm is going to deploy its resources within its environment to satisfy its long-term goals, and how to organise itself to implement that strategy. Simply put an organization's business strategy is the plan that combines their major goals, policies and activities. A properly developed strategy will allow an organisation's resources and core competencies to be utilized to their full extent. Therefore the key objective of a business strategy is to determine the manner in which a form should utilize its resources and set its organisational structures and management operations to reach its long-term goals. (Grant, 2008)
The strategy model has two main branches; the analysis of the firm and its external environment. An analysis of its own structure allows a firm to define its goals and values, resources and capabilities, and finally structure and systems. Since organizations generally have complex structures, dividing it into those three parts make it easy to analyze. The external environment of an organization consists of the external factors that affect the firm's performance and management decisions; this analysis consists of the competitors, customers and supplier observation. These components play an important role in defining the business strategy of an organisation. This research is focused on outsourcing therefore it would not be possible to analyse each and every component of the company strategy; only the sections that influence the outsourcing decision like, perceived customer value, resources and capabilities and competitive advantage will be analysed.
The perceived customer value is a buyer's perception of the change between the quality and benefits that he will get from the product in return for to the sacrifice of paying the price for the product. Additionally, the concept of perceived customer value can be connected to either to a single purchase of a product or service, or to the relationship between a supplier and a customer. (Drucker, 2007)
Competitive advantage is gained when a company manages to offer more value to its customers in comparison to its competitors. There are several ways in which a company can gain a competitive advantage. It can choose to offer its products at a lower price level, which in turn can be achieved through lower production and distribution costs; this is generally termed as a cost advantage. When a company tries to gain a cost advantage, it tends to increase organizational efficiency in order to lower its costs. Another example of competitive advantage is the differentiation advantage, and this is achieved when customers perceive a positive difference in a company's products in comparison to its competitors. (Kaleka, 2002) The differentiation advantage can be divided into product and service advantages. The product advantage represents the customers' perception of the value of the innovation and quality of the product. In order to gain that advantage, a company has to innovate and bring about improvements across its value chain. (Grant, 2008) The customers' awareness about an organization's service responsiveness and quality can be termed as service advantage. In the present day business environment where competition is very intense, an organization should try to gain both of these competitive advantages. In the end gaining both these competitive advantages ultimately depends on an organization's resources and capabilities. (Kaleka, 2002) The sustainability of these advantages is in turn determined by the durability of the resources and capabilities of a company and the transferability and imitability of these resources by other companies. (Grant, 2008)
The strategy takes care of matching an organization's resources and capabilities to the opportunities arise because of changes in the external environment. This in turn makes it essential to analyse the resources and capabilities available within a company. These days, the resources and capabilities of an organization are indispensable on a strategic basis because the external industrial environment is rather unstable, and possessing a certain competitive advantage can prove to be a source of profitability. Therefore a company's potential for gaining a competitive advantage is based on the assessment of its resources and capabilities. (Grant, 2008) Barney states that resources and capabilities of an organization are valuable if they allow it to utilize the opportunities and deal with the threats that are present in its business environment. An organization must have a proper management control system and a clearly defined structure if it wants to use its resources and capabilities properly. A resource is not productive on its own; the organization's capabilities play the role of driving factors for using the resources at its disposal. Therefore, it is necessary to look into the organisational capabilities. (Barney, 1991) The following two sections provide brief overviews of resources and capabilities.
Resources: The company assets that serve as the vital and functional elements of the different organisational processes can be termed as resources. (Kaleka, 2002) Resources can be classified into three categories tangible, intangible and human resources. The financial means and the physical assets can be considered as the tangible resources. These are also the easiest to spot amongst all the other resources. When they are analysed the goal is to determine the value these create for an organization and not just to calculate the value of a company's assets. The technology, reputation and organizational culture can be considered as the intangible resources. In case of certain firms these resources can prove to be more valuable than tangible resources. For example, the brand image of an organization has the potential to create confidence amongst consumers. (Grant, 2008) A classic example would be Sony Corporation of Japan, this company has got both the tangible and intangible resources, these have made it one of the most recognised and trusted brands throughout the world.
The expertise, effort and loyalty offered by the employees can be considered as the human resources of an organization. Companies are always trying to improve their human resources by enhancing the motivation, qualification, learning abilities and attitudes towards their organisational culture.
Capabilities: According to Grant, organisational capability is a company's ability to utilize its resources for a favourable final output. It is necessary for a group of resources to work in co-ordination in order to perform a task. Since resources alone on their own are not productive, the company must possess some capabilities to make the resources work to their benefit. The core capabilities form the basis for an organization's competitive advantage and they also play a significant role in defining its strategy and performance. These competencies the enhance customer value by improving the efficiency with which those values are delivered. They also provide a basis for going into new markets. (Grant, 2008)
The core competencies can be usually divided into three elements. From the customers point of view the characteristics of a company differentiates it from the rest of its rivals. The technology, resources and the technical know-how for the company's products must be unique and therefore must be protected from being copied by its competitors. Also the resources must be flexible enough to be used for other processes. (Drejer, 2002)
The company in focus of this research, Endeavour technologies, is a new comer in the information technology industry and doesn't have the necessary industrial manufacturing facilities required to go for top to bottom manufacturing of personal computer hardware, and taking into consideration the fact that Bangladesh lacks a well developed industrial infrastructure, outsourcing is the ideal means for this company to get into the business without investing heavily on equipments and skilled workers. Most of the key components used in its systems are outsourced. The company uses a combination of the ideas and theories that have been described so far. The strategy of the company is to gain the market leader position and do so by the means of manufacturing high quality laptop computer. In order to reach their goal the organization's business strategy is to design and assemble computer without making big investments into advanced manufacturing equipment or the personnel required to utilise them. A look into their resources and capabilities shows that the company has adequate resources and capabilities to realize its business strategy. The firm has many prominent competitive advantages and has gained some notable advantages by reverting to outsourcing. They are:
- Improved levels of efficiency: The company business involves assembling within a rather short period of time. Outsourcing provides it with a ready stock of the required high quality components that allow it to quickly finish its products and deliver them to its clients.
- Easy access to specialists and resources: Endeavours requires advanced and precision made electronic components for its products. Outsourcing allows it to tap into the expertise and manufacturing abilities of specialized firms without making any large investments in capital.
- Reduced risk: Since the company has not invested heavily into capital, it therefore has fewer risks to consider.
- Reallocation of precious resources: Outsourcing the key components allows the firms personnel to focus more on designing and fine tuning final assemblies, thus in turn providing better customer service.
Endeavour Technologies uses a multiple number of outsourcing techniques like selective outsourcing and offshoring. The company sources each individual component from a different suppler. For example it imports its mainboards from Foxconn of Taiwan, and display units or LCDs from Samsung and LG of Korean. Therefore it is in practice combining selective out sourcing and offshoring, by getting the components from different companies located in offshore countries. A detailed account of its strategies, resources and capabilities are provided in chapter 4.