Effect of Outsourcing of Product Distribution on Organizational Image and Performance: Case Study Of Philip Morris International

Introduction

With globalization increasing, outsourcing is a strategic tool that has attracted increased attention in recent years. Several international businesses like Phillip Morris International, Boeing, etc select outsourcing as a tool of competitive advantage.

Outsourcing could sometimes be a complex method but improper strategy and implementation would produce strong barriers to efficient firm performance. Referencing the core competence theory, this paper will investigate the firm's outsourcing strategy style, operation model, and impact on the company's performance.

Outsourcing has been a world trend in business for many decades. Some managers even consider it a necessary remedy for the firms. If there are corporations, there has been outsourcing too.

Economists are nearly unanimous: Outsourcing is a sensible business strategy. It improves efficiency, cuts costs, quickens product development, and allows corporations to focus on their “core competencies.” Outsourcing has helped corporations cope with the damaging forces of globalization; that's, the intensification of competition and also the value and profit erosion related to it. For a few corporations, outsourcing has been the difference between staying in business and going out of business. But, like all business strategies, outsourcing has its own limitations and 'unintended consequences' that if not addressed, will flip it into a bad business strategy PMI and outsourcing PMI began operation in Nigeria in 2015 PMI first contracted out production to itx=c in 2017, then contracted out distribution to Alafia Distribution Limited in 2018. But Alafia distribution chain is performing less optimally compared to the job PML was doing.

In the deal, PML is saving on recurrent costs of distribution and supply while being able to focus more on key business processes. But in recent months due to the seeming inefficiency of Alafias distribution, PML tobacco products are saturating the market less, hence reducing the percentage of regular PMLtobacoo products that can get to their favorite brands. It has to be considered howalafias distribution methods are affecting the perception of the PML brand in the Nigerian sector. With some parties beginning to view PML like they should must local companies instead of an international business and assuming unsustainable practices would hurt their brand they should therefore take their business elsewhere.

Literature Review

2.1 Introduction

Outsourcing is common among both private and public organizations and is a major part of business strategy. Several organizations currently outsource a number of the functions they want to perform internally. Thanks to widespread outsourcing practices, it's become a key topic in business literature. Different reasons why outsourcing is initiated are known by researchers. In this chapter, the advantages, risks, and motives of outsourcing will be discussed.

2.2 Definition of Outsourcing

There are many definitions of outsourcing viewed from a different perspective. Outsourcing Institute defines outsourcing as „The strategic use of outside resources to perform activities traditionally handled by internal staff‟[1]. Hence outsourcing is not a synonym of procurement. Lonsdale and Cox define outsourcing as the process of transferring an existing business activity, including the relevant assets, to a third party[2].

Outsourcing also may be defined as the retention of responsibility for the delivery of services by an organization but devolution of the day-to-day performance of those services to an external organization, under a contract with agreed standards, costs, and conditions[3]. Generally speaking, outsourcing is an abbreviation for “outside resource using”[4], “the significant contribution by external vendors in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organization”[5], “the transfer of the production of goods or services that had been performed internally to an external party”[6], “Products supplied to the multinational firm by independent suppliers from around the world and the extent of components and finished products supplied to the firm by the independent supplier (7)

Hence, from the above discussion, we may say that outsourcing is a strategic system of achieving competitive advantage by using external resources in the form of transferring functions to an organization where it excels.

2.3 Outsourcing Features

outsourcing is often confused with subcontracting and service contracts. But there are a number of factors distinguishing outsourcing from service contracts and subcontracting. They include;

• The duration of the contract is long-term for outsourcing.
• Suppliers are autonomous to perform their tasks but the scenario is different for other cases.
• Responsibilities are transferred to the external organization in outsourcing
• Transfer of employees is possible for outsourcing.
• Very close long-term relationship with the supplier for outsourcing but the typical relationship in other cases.

2.4 Outsourcing Advantages

Lonsdale & Cox categorize five main reasons why companies outsource i.e.; focus resources on core activities, cost reduction, convert fixed costs to variables, benefit from supplier‟s investment and innovation, and improve time to market. [2]

Major reasons and benefits that change in-sourcing to outsourcing is listed below

1. to enhance company focus.
2. To access world-class capabilities.
3. To accelerate reengineering benefits.
4. To share and minimize risks.
5. To free resources for alternative functions.
6. To infuse money into the organization.
7. Enable capital funds to be saved.
8. to scale back and control operational costs.

2.4.1 Case#1: Rank Xerox

Rank Xerox develops and manufactures document processing tools. In 1994 the firm outsourced its facilities management (e.g. security, catering, clean-up, and gardening) to CBX Ltd so it could better focus on its core competencies. Rank Xerox and CBX created a 5 years agreement and facilities management transferred to CBX Ltd.

Outsourcing was an element of Rank Xerox's restructuring program, that aimed to change the company’s processes and service delivery. Rank Xerox then focused on improving its core competencies. This outsourcing strategy turned out to be successful. Rank Xerox got profit margins ranging from 5%to 62% depending on the activity. [9].

2.4.2 Case#2: Nike

Nike started as a small company that sold Japanese shoes to athletes. By the top of its 1st decade in 1972 sales has reached a lowly $2 million. Although the expansion was quite slow in the early years, the founders continued to experiment with new prototypes and performance styles. By the top of the first decade, Nike had already developed the core competencies in complete building and design, which was the premise for its forthcoming rise.

Nike set to focus totally on its core competencies and outsourced most of its production and much of its sales, distribution, and advertising. Nike created value by concentrating on that which was distinctive to them, like research and development. This strategy led to a very large, $700 million, growth of sales by the beginning of its second decade [10].

2.4.3 Case#3: Apple

When Apple developed Apple two, it decided to outsource 70 % of its processes and production. Apple knew that it couldn't be too efficient if they created everything themselves, for instance, chips, boxes, monitors, and keyboards. It decided to focus only on the crucial things that made Apple Computers loved.

Outsourcing enabled Apple to learn from its suppliers´ R&D and technical experience, to avoid wasteful investments, and additionally to stay versatile so as to adopt new technologies as they become available. [10]

2.5 Outsourcing: Risk

Usually, outsourcing turns out to be beneficial for international businesses but risks are related to it. In an ideal world, markets would operate effectively without any friction or transaction costs.

A vast majority of the authors agree that the most relevant risks of outsourcing are: loss of critical knowledge and competence and the risk of dependency.

So the risks of outsourcing are listed below:

1. Loss of core activities and significant data
2. Loss of strategic flexibility and originality
3. Reduction in in-house technique and experience
4. Lack of provider responsiveness
5. Loss of management over choices
6. Interruptions to provide
7. Poor quality of the offer
8. A fall in worker morale

2.5.1 Case#1: IBM

IBM is a famous example of outsourcing. When IBM launched its first PC in 1981, the company decided to outsource the production of all the major components. It purchased microprocessors from Intel and operating systems from Microsoft. At the time both Microsoft and Intel were small suppliers. The main reason to outsource was IBM´s willingness to beat its main rival Apple in time to market. At first IBM´s strategy was a success. By 1985, its market share had grown to 41 %. However, soon IBM was in the face of difficulties and its outsourcing decision set the destiny of the entire industry. IBM had developed PC architecture, but it could not prevent its suppliers to create IBM-compatible PC component markets. At first, its competitors had difficulties achieving compatibility, but eventually, compatibility was widespread. Other PC manufacturers could buy microprocessors from Intel and operating system from Microsoft.

Consequently, competitive PC markets had evolved. By 1995 IBM´s market share half fell to just 7,3 %. In summary, IBM gave a possibility for Microsoft and Intel to grow into one of the largest and most successful companies in the world. [11]

IBM is a notable example of outsourcing. once IBM launched its 1st PC in 1981, the firm set to outsource the assembly of all the major parts. It purchased microprocessors from Intel and in operating systems from Microsoft. At the time each Microsoft and Intel were little suppliers. the main reason to outsource was IBM´s disposition to beat its main rival Apple in time to market. initially, IBM´s strategy was successful. By 1985, its market share had fully grown to 41%. However, before long IBM was in the face of difficulties and its outsourcing call set the destiny of the whole business. IBM had developed a laptop design, however, it couldn't prevent its suppliers to create IBM-compatible PC part markets. At first, its competitors had difficulties attaining compatibility, however, eventually, compatibility was widespread. Other PC manufacturers could buy microprocessors from Intel and operating system from Microsoft.

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Consequently, competitive PC markets had evolved. By 1995 IBM´s market share 0.5 fell to only 7,3 %. In summary, IBM gave a chance for Microsoft and Intel to grow into the biggest and most flourishing corporations in the world.

2.5.2 Case#2: Schwinn

The case of bicycle manufacturer Schwinn is a well-known example of outsourcing risks. In 1981 Schwinn set to outsource its manufacture of bicycle frames to Taiwan supplier Gaint. After six years, Gaint was ready to introduce 1st factory-made carbon fiber bicycle frame. In 2001, Gaint developed a new resonance-free suspension. these days Gaint sells with success products under its own brand. Gaint absorbed crucial know-how and privileged technology from Schwinn. In summary, Schwinn outsourced activities simply to see Giant emerge as one of its toughest competitors.[12]

Case#3: GE

The case of GE illustrates how suppliers will acquire crucial learning opportunities. Its decision to outsource turned out to be fatal. in the early 1980s, GE outsourced the assembly of a number of its kitchen appliance models to Samsung. At the time Samsung was a little unknown company. However, GE became before long deeply dependent on Samsung. Samsung was ready to rescale its production and engineering to levels that might not otherwise be possible. As a result, Samsung became one of the biggest consumer appliance makers. [10]

3. Organisational Image

Since the early twentieth century, organizations such as Shell, Mercedes-Benz, and Michelin have harnessed the power of their visual brand identities to communicate their values to key audiences. But organizations communicate in more ways than through logos or visuals. Within this chapter, we explore the related elements of image, reputation, identity, and personality that make up the total communications of an organization.

Organizational image can be defined as the impression perceived by an individual of an organization at one moment in time. Organizational image can change from individual to individual and also throughout time.

How organizations influence their image

• advertising
• community relations
• corporate colors and designs
• direct marketing
• events
• financial communications
• lobbying
• media relations
• newsletters
• personal selling
• relationship marketing
• sales promotion
• sponsorship
• staff training
• staff uniforms.

Marketing and Outsourcing

Managing marketing performance prioritizes the optimum use of resources (financial and human) to current market requirements. Planning for today focuses on shaping up the business to meet the needs of today’s customers with excellence. Planning for today requires an organization that mirrors current business opportunities. Abell (1999). Organizations now strive to be lean and fast-moving.

Now organizations are outsourcing central functions to their business success, as well as routine activities where there is an advantage in doing. For example, pharmaceutical companies regularly outsource R&D to Contract Research Organizations (CROs). This market was worth $9.3 billion in 2001(Reuters Business Insight, 2002).

Initially, marketers survived the threat of outsourcing because they added intellectual expertise. Now, they need to add more ‘intellectual capital. It is critical that they understand the role of distribution, data integration, forecasting, and branding, and have strong customer communications. Marketers now need to use knowledge for competitive advantage. The core marketing knowledge exists throughout the developing nations, but currently, few understand the management of marketing performance.

4. Outsourcing & Organisational image

4.1 Introduction

Outsourcing is a common practice among organizations and is a major element in business strategy. The primary question is to choose appropriate activities for outsourcing which leads to a make-or-buy strategy. Make-or-buy decisions are normally considered as strategic decisions. However, there are many factors influencing the make-or-buy decisions such as quality, delivery performance, cost, flexibility, and innovation. A good decision on buy or make could be made through investigating the available resources. Many researchers analyzed make-or-buy decision-making based on a resource viewpoint where the decision is made by focusing on the firm's resources. In this chapter, I will discuss the influence of core competence thinking on outsourcing decisions or anything else.

4.4 A process for outsourcing Considering Core Competence

Many organizations have rushed into outsourcing and many of them regretted it. Sometimes those who advocate processes that take time and cost money before making a decision are ridiculed as being over-cautious.

Impact of Outsourcing on Company Performance: Study on a Local Public Limited Company in Bangladesh. Mike Fogg has cited six stage process for outsourcing [3]. A process for outsourcing must include the flowing steps.

Fig-4.9: Outsourcing Process

4.4.1 Strategic Analysis

The first step of the process identification of core competence. Hamel and Prahalad give three tests to see whether competencies are true core competencies[19]:

1. Relevance: Firstly, competence must give your customer something that strongly influences him or her to choose your product or service. If it does not, then it has no effect on your competitive position and is not a core competence.
2. The difficulty of Imitation: Secondly, the core competence should be difficult to imitate. This allows you to provide products that are better than those of your competition. And because you‟re continually working to improve these skills, means that you can sustain your competitive position.

• Strategic Analysis
• Selection of target Area
• Specification of requirement
• Implementation and Review
• Supplier selection
• Ongoing Relationship Management
• Impact of Outsourcing on Company Performance: Study on a Local Public Limited Company in Bangladesh.

1. 3. Breadth of Application: Thirdly, it should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth.

This gets to the heart of the organization and must involve key stakeholders.

4.4.2 Selection of target areas

Once the core areas are identified and ring-fenced, areas of the business which form a target for outsourcing must be identified. Again this must involve key stakeholders. For each target area, this process will involve[3]

• A supply positioning analysis, with particulars emphasis on the risk
• An assessment of the extent to which the problems in the target area can be corrected before outsourcing
• Understanding whether a better return on investment can be obtained from retaining in-house or outsourcers
• A clear understanding of the objectives of the outsourcing projects
• A clear plan of the project including stakeholder involvement and sign-off
• A clear statement of how and where this area interfaces with the core process
• Considering other options like internal SLAs, JVC
• Considering the financial, tax, and legal implications of all options against the status quo
• Communication to members of the organizations impacted by the process
• Developing a business case may be the vehicle that encompasses this information.

4.4.3 Specification of the Requirement

The specification is the statement of needs or what an organization actually wants. There should have a reflection of the current scenario. The specification must:[3]

• Be clear and unambiguous
• Include measurable performance criteria of the level of KPI

Impact of Outsourcing on Company Performance: Study on a Local Public Limited Company in Bangladesh.

• Recognize any remaining problems and highlight them
• Describe the relationship sought with the supplier
• Reflect issues like confidentiality and security
• Identify licensing issues and contract assignments necessary as part of the outsourcing contract
• Consider the terms and conditions of the contract

4.4.4 Supplier selection

Supplier selection must be rigorous and include a supplier appraisal, a tender process or alternative negotiation based upon the specification, due diligence concerning the supplier, and result in a business case that demonstrates clear benefits to the purchasing organization before the outsourcing projects go ahead. Factors that need to be considered are:[3]

1. A supplier preferencing and market management matrix analysis
2. Whether the market will be interested in this requirement
3. Sharing any outstanding problems with the potential supplier
4. Assessing the cultural fit between the two organizations
5. Sharing sufficient information with the supplier to enable them to make their best offers
6. A site survey by supplier and discussion with users
7. Selection criteria are not based only on price but also on other factors
8. Appropriate terms and conditions and the means of termination

4.4.5 Implementation and Review

Implementation of the contract may take a few months. Communication internally is vital, particularly to people impacted by the change, and joint working parties need to be established with suppliers to discuss:[3]

• Contract management processes, including meetings, reporting, and escalation process
• Handover planning

Impact of Outsourcing on Company Performance: Study on a Local Public Limited Company in Bangladesh.

• Changes in working practice
• Changes of procedures
• Status of the projects that will be live across the boundary of the outsourcing
• Linkages with other areas of the business and other suppliers

It is vital that communication channels remain open between the people managing the contract of both organizations. At the end of the process, it is essential for both organizations to review the process.

4.4.6 Ongoing relationship Management

The key to a successful ongoing relationship is the ability to alter them as the true extent and scope of the work required to emerge. To enable effective relationship management many firms operate with an alliance board and alliance team structure. Most firms with successful outsourcing relationships are better at managing relationships at three levels.

Impact of Outsourcing on Company Performance: Study on a Local Public Limited Company in Bangladesh.

There is a debate over the question of whether companies should use adversarial or partnership relationships. However, some guidance is provided by Leavy[28]. He points out that having the right mix of relationships seems to be the most successful strategy. However, the question remains what type of relationship should be used for each outsourced activity? Selecting the right relationship is a decision that depends on many factors like the company‟s competitive positioning, value proposition, flexibility needs, needs of control, supplier capabilities, the criticality of activity, asset specificity, and a number of available suppliers.

If outsourced activity is critical, a partnership relationship may be more advisable. On the other hand, for peripherals activities, adversarial relationships may be more appropriate. If the main motive for outsourcing is access to the supplier‟s technology, the partnership might be preferable. So the relationship depends on the context. One relationship style is not feasible for all cases of outsourcing.