The trend towards globalization has greatly increased the need for
strong interorganizational relationships to ensure a firm's growth and
survival. As globalization has placed firms under ever greater
competitive stresses, companies are forced to become as efficient as
possible in all aspects of their business. One concept that has
gained popularity is that of core competency: those things that a firm
does especially well and that give it competitive advantage. When
firms stray from their core competencies, problems often result.
To allow companies to focus on their core competencies, outsourcing
has gained in popularity. First, outsourcing reduces the need for a
company to focus on an area that is not as critical to its success as
other areas are. Second, the firm may not be able to perform a
noncore function as effectively or as cheaply as a firm specializing
in that area. Third, the ability to identify which function should be
outsourced and to work with other companies to manage those functions
may in itself be a core competency or a source of competitive
advantage.
ADP is an example of one company that has flourished by building
strong interorganizational relationships with its customers. ADP
handles payroll processing for a large number of companies.
Historically, most companies handled payroll administration
themselves. A grocery retailer I worked for went as far as even
printing its own payroll checks. However, as the amount of regulation
associated with payroll administration has increased, and payrolls
have increased in complexity through the adoption of stock purchase
plans, 401(k)s, and cafeteria benefit plans, few companies have found
it cost effective to hire specialized staff to handle these
complications. Instead, firms have elected to form an
interorganizational relationship with ADP, which allows them to not
have to worry about staying abreast of the latest regulations and
administering complex payroll processes. In some cases, companies
have even gone as far as to having a third-party actually employ all
of their "employees," who are then legally contractors, and have the
third-party be completely responsible for all aspects of administering
their compensation and benefit plans.
ADP is an example of a success story for both itself and its
customers. An example of the dangers of not realizing when an
interorganizational relationship would be beneficial can be found in
another experience I had at the grocery retailer I worked for. The
company had developed its own mainframe-based purchasing system and
warehousing system in the 1970s, and continued to employ a significant
information technology staff to maintain the system in the early
1990s. After the grocery retailer had been through several mergers,
the warehousing system needed substantial changes in order to
accommodate the needs of a new warehouse that would serve the newly
acquired divisions. The company had the choice of purchasing an
appropriate warehousing system from a software company dedicated to
the development of such systems or making the needed enhancements to
its in-house developed system.
Because of a perceived need to keep the existing information
technology staff busy and concerns about the expense of purchasing a
warehousing system, the company elected to develop its own improved
warehouse management system. Unfortunately, as the enormous scope of
the task became apparent, the company did not revisit its decision and
instead hired more and more programmers to throw at the problem. At
the project's height, the company employed more programmers than it
did store managers.
Not surprisingly, the implementation of the new warehouse system was a
disaster. Merchandise could not be received into the warehouse
accurately, could not be found when it was needed, and was rarely
shipped accurately to the stores. More than six months were spent
resolving the problems with the warehouse system. In the end, it cost
the firm many times what would have cost to have purchased a warehouse
management system from a software company specializing in that field.
Furthermore, the warehouse system the grocery store wound up with was
much less functional than a third-party solution would have been, was
based on an obsolete technology, and was nearly impossible to
maintain.
In this case, because the grocery retailer lost sight of its core
competence in grocery sales and believed it was capable of doing a
better job of developing software than a specialized software company,
a considerable sum of money was lost and many customers were dissuaded
from shopping in the firm's stores because of merchandise being out of
stock. Companies who realize that software development is usually
difficult and requires substantial experience and special skills
almost always benefit by electing to form an interorganizational
relationship and purchase a software product appropriate to their
needs than trying to develop one themselves.
Another area where interorganizational relationships have been of
great importance is in supply-chain management. Just-in-time
inventories, which are beneficial by reducing a firm's investment in
inventory and by exposing problems in manufacturing and distribution
processes, are only possible when a firm is closely coordinating its
activities with those of its customers and suppliers. In the grocery
business, Vendor Managed Inventory is a popular trend. By allowing
its vendors to manage its inventories, the retailer typically winds up
with less inventory and does not have to pay its own personnel to
place orders and monitor inventory levels. Concurrently, the vendor
gains advantage by being intimately aware of its customers' status and
plans so that it can manufacture and distribute as efficiently as
possible. However, this relationship cannot be effective unless there
is considerable information shared regarding the rate of sales, on
hand inventories, and planned promotional activities. By engaging in
an interorganizational partnership in this area, though, both parties
achieve significant benefits that can provide a competitive advantage
over those who are not similarly sharing information and cooperating.
Finally, coopetition is another form of interorganizational
partnership that has emerged as an important trend. Coopetition
occurs when firms simultaneously cooperate and compete. Two companies
who engage in coopetition are Epson and Dell. Dell is particularly
eager to hurt Hewlett-Packard's competitive position in personal
computers and servers by attacking HP's sales of printers. To do
this, Dell not only does not sell Hewlett-Packard printers, but it
also sells printers by Epson and Dell-branded printers. Although Dell
competes with Epson for printer sales, Epson opts to sell its printers
through Dell because Dell sells a tremendous volume of products and
provides Epson with exposure to a large number of potential customers.
Meanwhile, Dell sells Epson products despite selling competitive
products because Dell would rather sell an Epson printer if that is
what the customer wants and collect a portion of the sale, along with
preventing HP from selling a printer, rather than losing the sale
entirely if the customers not satisfied with what Dell offers.
Because Epson does not compete with Dell in personal computers, the
relationship is largely beneficial despite having some competitive
aspects.
Because of the increased competition brought about by the
fast-changing global business environment, firms must seek to be
efficient in all aspects of their operations. In many cases, forming
partnerships with other companies and even competitors can improve a
firm's chances of success and growth. Through outsourcing, supply
chain management initiatives, and coopetition, companies can ensure
they are prepared to face the challenges of globalization.
Sincerely,
Wonko |
