This article is an excerpt from the Shortform book guide to "How Will You Measure Your Life?" by Clayton M. Christensen. Shortform has the world's best summaries and analyses of books you should be reading.
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What are company capabilities? How can you use capabilities in business? How do you know when to outsource?
Company capabilities are the resources, processes, and priorities of a business. This article looks at specific examples of capabilities, whether you should outsource, and some real-life examples of capabilities in businesses.
Find out more about company capabilities.
Understanding Company Capabilities
Before outsourcing anything, companies need to fully understand their capabilities, especially which capabilities are critical to the company’s future. Capabilities in business derive from three factors:
1) Resources: These capabilities include people, technology, equipment, brands, designs, information, money, and relationships with suppliers, distributors, and customers. Resources are usually visible and measurable. Employees create value for companies when they convert resources into products and services.
2) Processes: These are the ways employees communicate, coordinate, and make decisions.
Unlike resources, processes don’t appear on a balance sheet. But while less visible, processes facilitate the use of resources to solve problems. Processes include:
- The methods or systems by which products are developed and produced.
- Methods of market research, budgeting, employee development, compensation, resource allocation, and so on.
Strong processes work regardless of who performs them (employees doing them are more or less interchangeable).
3) Priorities: This may be the most important of the three factors determining company capabilities. Priorities guide a company’s decisions, including what the company invests in and chooses not to invest in. Leaders need to communicate clear company priorities so employees make decisions aligned with the company’s priorities and strategy.
Deciding When to Outsource
In applying the theory of company capabilities to determine when outsourcing makes sense, a company must do two things:
1) Understand that your suppliers’ capabilities can and will change; to get a sense of how they might change, watch what your suppliers are striving or aspiring to do in the future.
2) Understand what capabilities your company will need to succeed in the future. Always keep these capabilities in-house; otherwise, you’re giving away your future.
Understanding the value of company capabilities differentiates a good CEO from a poor one. Here are two examples of outsourcing gone awry:
- Dell: Dell was a highly successful U.S. computer manufacturer in the 1990s. It saved money, for which it was applauded by Wall Street, by outsourcing the manufacture of components to the Taiwanese company Asus. It started with circuits, then motherboards, then continued until Asus was putting together Dell computers in their entirety. Once Dell had outsourced all its major capabilities to Asus, the Taiwanese company used what it learned to launch its own computer brand.
- U.S. semiconductor manufacturing: American companies outsourced basic semiconductor assembly to Taiwanese and Chinese suppliers, while retaining control of more complicated and profitable aspects like design. However, Asian suppliers kept moving upmarket, increasing their capability to make complex products. Today, U.S. companies outsource sophisticated products and components to Asian companies because U.S. facilities can no longer make them.
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