Competitive pressure has been increasing lately. Several factors explain that. And the globalization factor is the dominant one influencing it. In addition, advances in information technology also play an essential role.
Globalization has brought competition to a broader area. This is because it becomes easier for companies to attract customers or operate outside their home country. Thus, local companies do not only compete with domestic competitors. However, they also have to compete with foreign companies, either directly through direct investment or indirectly through imports.
In addition, globalization has also increased choices for consumers. It’s easier for them to shop for foreign products. Information technology and transportation advances have made it easier and cheaper to make purchases and deliveries. Thus, foreign products can be more available in the country. As a result, consumers have more bargaining power and incur lower switching costs.
The increased competition requires companies to improve competitiveness. They must offer superior products to be more successful in attracting consumer interest. For example, they develop higher-quality products through innovation by increasing the budget for research and development. Or, they offer a cheaper product – requiring them to lower their cost structure.
The drive to be more competitive forces companies to rethink how they do business and develop a competitive advantage. Among them is whether it is necessary to maintain existing activities to achieve more efficient and customer-responsive operations. This then gave rise to outsourcing, offshoring, and reshoring practices.
Outsourcing (or subcontracting) means transferring internal business activities to another company. It can be a good strategy for businesses looking to reduce costs, increase efficiency, and focus on their core competencies.
What is outsourced? Outsourcing is usually focused on support or non-core functions such as call centers. Other functions include things like IT support, customer service, or accounting. In other cases, for example, a manufacturer might outsource production to other countries with lower manufacturing costs and focus on customer service with higher added value.
These non-core functions are not strategic to the company’s competitiveness. In addition, the company may also not have the special skills to manage it effectively and efficiently. Thus, outsourcing it to a third party is a more viable option. By outsourcing non-core functions, businesses can free up resources. They can invest in critical areas and immediately impact their bottom line.
However, it is important to carefully weigh the associated risks and benefits before deciding. Factors such as communication barriers can affect outsourced services and, therefore, the quality and effectiveness of operations. In addition, outsourcing can hurt employee morale and job security.
Advantages of outsourcing
- Reducing costs through higher economies of scale by partners
- Obtain higher quality standards because partners have core competencies in outsourced services
- Allows businesses to concentrate on core functions
Disadvantages of outsourcing
- Quality control becomes more difficult because it is outside the company’s control
- Lowering employee morale, for example, due to redundancies, causing some jobs to be no longer needed
- Company reputation is damaged, and operations suffer if partners operate unethically or their business fails
Offshoring is similar to outsourcing but involves an overseas partner. In other words, companies outsource non-core activities to overseas companies, usually to countries with low minimum wages.
In a broad definition, the function may remain within the company. In other words, the company employs a subsidiary in another country to perform certain operations.
Offshoring can effectively reduce labor costs and gain access to specialized skills that may not be available domestically.
However, potential challenges, such as cultural differences and language barriers, come from abroad. In addition, the offshoring arrangement complies with all relevant laws and regulations.
Advantages of offshoring
- Reduce labor costs
- Access to special skills
- Gains from external factors such as exchange rate translation
- Opportunity to expand operations globally
- Improved flexibility and scalability
- Ability to focus on core business functions
- Access to a larger talent pool
- Opportunity to diversify business operations
Disadvantages of offshoring
- More difficult quality control
- Discrimination and unfair work practices by partners
- Communication barriers due to language, culture, and time zone differences
- More complex co-op arrangements
- Legal and regulatory compliance issues
- Risks related to international trade and politics
- Negative impact on employment opportunities in the country
Reshoring means bringing business activities outsourced to foreign companies back to the country of origin. In other words, it is the opposite of offshoring.
Reshoring is possible due to increased costs in foreign markets. Or the company is experiencing problems with the delivery of goods or services, thereby disrupting internal business processes.
In addition, the government may offer reshoring incentives to reduce domestic unemployment. Offshoring has reduced domestic job creation, creating high unemployment. Thus, the government might launch a reshoring program to encourage companies to bring back their overseas activities to be carried out domestically.
Advantages of reshoring
Improving control over quality. Companies have more control over operations. As a result, they can better ensure their products meet high-quality standards, enhancing their reputation and customer satisfaction.
Reducing pressure due to rising costs abroad. Increased overseas costs can make operations more expensive. Thus, the company may decide to bring it back domestically. Government incentives could be another motivating factor.
Creating jobs in the domestic market. Bringing jobs back into the domestic market can increase employment opportunities, which can positively impact the economy as a whole.
Reducing transportation costs. When companies produce goods overseas, they must ship them back to the domestic market, which can be expensive. Companies can reduce transportation costs and increase profits by making goods domestically.
Disadvantages of reshoring
More expensive operation. Bringing jobs back to the domestic market can be costly, as companies need to invest in new infrastructure, equipment, and employee training. This can lead to lower profits for companies and higher prices for consumers.
Lack of expertise. When companies have operated overseas for many years, they may have developed a deep understanding of overseas markets, culture, and local regulations. When returning to the domestic market, they may face challenges adapting to new conditions and regulations.
Shortage of skilled workers. For example, manufacturing jobs shifted abroad are low-skilled. Thus, when brought back into the country, there are more low-skilled job opportunities to be filled relative to the existing workforce. Finally, skilled workers are forced to fill it because there is no other choice.