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Man org session 11 interorganizational relationships_2nd august 2012

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Man org session 11 interorganizational relationships_2nd august 2012

  1. 1. MANAGING ORGANIZATIONS Session 11: Inter -Organizational Relationships Sourav MukherjiPGP 2012-14 Section C & E Associate Professor of Organization & StrategyTerm 1:June-September 2012 Indian Institute of Management Bangalore, India
  2. 2. 2Will Robert Lutz succeed in his dream of producing America’s first luxury racing car without creating an organization ? © S Mukherji
  3. 3. 3CUNNINGHAM MOTORS COMPANY: CASE FACTS • Dream of selling a super luxury car from the US, to compete with Ferrari and Aston Martin Price : US$ 250000 Target : 600 cars per year • Need to keep startup costs low: 20 employees • Extreme example of an organization that plans to outsource all activities of the value chain , from engineering, to final assembly to shipping • Internet based information systems to link all members in the value chain designers – chassis developer - part manufacturers – assemblers – fabricators – manufacturers • One of the partners, Briggs S Cunnigham III is the son of a racing legend SOME IMPLICATIONS • Cunnigham Motors does not intend to control either the material flow or the information flow - at any stage of the value creation process • Organization might derive some benefit (brand recall ) due to its association with son of a racing legend QUESTIONS BEFORE THE CLASS • Will Cunningham Motors succeed and Robert Lutz‟s dreams be realized ? • Will this model of “extreme outsourcing” succeed in the automobile industry ? © S Mukherji
  4. 4. CONDITIONS FOR OUTSOURCING 4Modularity and • Tasks which have clearly defined output parameters (e.g., engineering goods) arestandardization easier to outsource than tasks that are characterized by performance ambiguity of outputs (R&D , brand building). Self contained modules are easier to outsource, even if they are knowledge intensive – a characteristic of the overall architecture Drawing and • Market relationships are premised on contracts. There are costs associated with enforcing searching for the right set of partners, negotiating terms of contracts with them and contracts then being in a position for enforcing terms of the contracts, in case of breaches Possibility of • Overall system can suffer from shocks and collapse if buyers / suppliers behave opportunistically. This might happen due to opportunistic • uneven bargaining power behavior • asset specific investment • inadequate safeguards against information spillover Conditions of • Pure market contracts fail to anticipate complications of uncertainty and are often uncertainty difficult to implement under such conditions • Organizational hierarchies are often suitable to overcome the above problems Organizations get formed when markets fail © S Mukherji
  5. 5. 5A NEW WAVE IS SWEEPING ACROSS THE BUSINESS WORLD Bharti Televentures has outsourced its network management to Ericsson & IT management to IBM Kingfisher Airlines has outsourced its ground handling facilities to Indian Airlines Hindustan Levers have outsourced its human resource management to Accenture © S Mukherji
  6. 6. 6WHY IS EVERYBODY THINKING ABOUT OUTSOURCING ? Outsourcing leverages the benefits of specialization • Not about core versus non-core • Not only about cost reduction Outsourcing today is about value maximization • Enabled by widespread availability of information and information technology • Possible to separate the physical flow of resources from flow of information © S Mukherji
  7. 7. 7FOUR STRATEGIC REASONS FOR OUTSOURCING 1 Cost Minimization Accessing superior 2 competencies and privileged assets 3 Superior resource leverage 4 Risk diversification While these are collectively exhaustive, they are not mutually exclusive © S Mukherji
  8. 8. 8COST EFFICIENCY CAN ARISE FROM VARIOUS SOURCES Moving beyond arbitrage 1 Cost Minimization Manufacturers derive scale economies by demand aggregation Accessing superior Services derive better utilization by 2 demand aggregation competencies and privileged assets Specialization and greater scale enabling innovation and automation, which finally 3 Superior resource leads to greater efficiency leverage 4 Risk diversification Superior value at competitive prices Challenges of managing scale, variety and developing superior processes © S Mukherji
  9. 9. ACCESS RESOURCES THAT ARE DIFFICULT OR 9UNECONOMICAL TO BUILD Complementary assets take time to build. Such time cannot be afforded when time 1 Cost Minimization to market is critical - pharmaceutical distribution network Accessing superior Privileged assets are difficult to create 2 competencies and - airport ground handling facilities privileged assets Certain competencies are required only for a short duration. Owning them results 3 Superior resource in loss of flexibility leverage - strategy consulting 4 Risk diversification Many of these command a price premium rather than being available at low cost © S Mukherji
  10. 10. 10LEVERAGE RESOURCES TO MAXIMIZE VALUE ADDITION Review of activities within each function to determine which among them are 1 Cost Minimization - transaction intensive, non specific to organization, have scale economies Accessing superior - specific to organization 2 competencies and A specialized player might be in a better privileged assets position to do certain activities within the function. Therefore, ideal for outsourcing. 3 Superior resource leverage Organization resources are better leveraged to focus on activities which are specific to the organization 4 Risk diversification Not a matter of „core‟ versus „non-core‟ but determining where is it that the organization can add value © S Mukherji
  11. 11. 11PORTFOLIO OF CLIENTS TO MINIMIZE DEMAND VOLATILITY Outsourcer maintains a portfolio of clients whose demand profiles are uncorrelated 1 Cost Minimization with one another Transfer resources from one client project Accessing superior to another depending on demand 2 competencies and Possible only if skills are fungible privileged assets Application in people intensive service 3 Superior resource business leverage - critical driver of scale 4 Risk diversification Minimizes risks arising out of demand volatility that the client would not have been able to do on their own © S Mukherji
  12. 12. 12OUTSOURCING HAS ITS COSTS AND RISKS Application of transaction cost theory to build a decision framework Transaction specific investments create potential for opportunistic Strategic behaviour leading to an increase Other related risks in negotiated prices organizational costs Costs of searching, drawing, negotiating end enforcing contracts Transaction costs Costs get escalated when there Production is business uncertainty cost within Risks of knowledge spillover and organization divulgement of sensitive information, Production often tacit and complex in nature cost of market Disruptive effect of supply shocks on business, where contractual compensation might not be a sufficient safeguard © S Mukherji

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