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Outsourcing and the Industrial Clusters; The Core Competencies Perspective

Outsourcing and the Industrial Clusters; The Core Competencies Perspective

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Interdisciplinary Journal of Research in Business

Vol. 1, Issue. 10, (pp.86- 94) November, 2011

Outsourcing and the industrial clusters; The core competencies Perspective
Dr Nour-Mohammad Yaghoubi*
Islamic Azad University, Zahedan Branch, Iran

Mohammad moradi
Master of public administration, Zahedan, Iran

Negar Tajmohammadi
Islamic Azad University Zahedan Branch ,Iran, Department Of Industry Engineering , Systems Management and Productivity Email: yaghoobinor@yahoo.com

ABSTRACT Under economic globalization, the success of a country′ s economy depends largely on the degree to which it participates in global production networks. This prompts countries to accelerate industrial restructuring and upgrading. It should be also noted that organizations can no longer achieve competitive advantage in the process of production or delivery of goods because of the fast changes occurring in the areas of technology and production of goods. Organizations, therefore, should only rely on their core competencies and assign their non-core competencies to other organizations. Co-operation between organizations in order to increase competitive advantage and concentration on organizations’ core competencies can lead to the formation of industrial clusters, which considerably appeals to industrial and economic analyzers nowadays. This study, which is the outcome of the researcher’s field work in Khorasan Iran Khodro Company, reiterates the fact that if organizations rely solely on their core competencies in the process of production and delivery of goods, they can finally produce goods which have the competencies of several organizations (industrial clusters) and can compete with each other globally. This study explicates a model upon which organizations can base the formation of a specialized industrial cluster in which all the members have their own core competencies in the process of production. Keywords: Outsourcing, non-core competencies, Small and Medium Sized Enterprises. Industrial cluster INTRODUCTION With increasing competitive pressures and progressing globalization, firms have to reduce their costs and build new opportunities via optimized using of internal and external resources. Internalization forces firms to bind resources to a course of action, which may restrict flexibility and be hard to retreat. Also, internalization may be required to more effectively production. The difficulty of these decisions has worsened in recent years stimulated by raised competitive pressures, the acceleration of technological change, and the distribution of knowledge across various organizations and geographic markets (Mahmoodzadeh and Jalalinia and Nekui Yazdi, 2009), therefore, organizations are to rely on their core competencies and outsource their non-core competencies. Today’s economic climate is dominated by inter-firms networks, which have become powerful instruments for building economic capacity for regions to compete in the global market place. Industry clusters are recognized as playing a significant role both in regional economic development and in improvements to quality of life (George, 2006). The increasing competition and globalization of industries, markets, and technologies have raised the demand for outside-in innovation and acquisition of technology through integrated innovation cluster. Companies need to develop cluster competence in order to link their organization to other players in the market to allow interactions beyond organizational boundaries. The formation of clusters of innovation is a useful concept to transform both tangible and intangible knowledge into embodied and disembodied technical change (Chi Sun and Linand Hashing Tzeng 2009). Clusters are defined as selected sets of multiple autonomous organizations, which interact directly or indirectly, based on one or more alliance agreements between them. The aim of clusters is to gain a competitive advantage for the individual rganizations involved and occasionally for the cluster as a whole as well. Cluster competence enables a company to establish and use relationships with other organization (Chi Sun et al, 2009). On the other hands, Clustering of firms is likely to facilitate efficient and effective collaboration and the leveraging of different resources and competences possessed by each firm. As the sum of the components is of greater value


2006:2). 2011 than each individual company or institution. (pp. industrial clusters can enhance competitiveness by increasing the productivity of constituent firms. As well. Hence. It refers to situations in which parties work closely together to achieve mutual goals. Whether or not to outsource is the decision of whether to make or buy. 2010). As Porter mentions in The Competitive Advantage of Nations (1990). p. to define outsourcing we must first be clear on the meaning of ‘sourcing’. clusters create synergies. Outsourcing is a form of predetermined external provision with another enterprise for the delivery of goods and/or services that could previously have been offered in-house (Rajabzadeh et al. Two very distinct approaches to observe competitiveness can be identified: the ex-ante and expost measures of competitiveness (Altena and Heijman. and. If the organization chooses to buy. A Porter (1998) point out that competitiveness is achieved in three ways: increasing organization Productivity. Outsourcing Rapid changes in the business environment require senior management to adopt strategies that focus on both current success and to invest in those activities that will promote a competitive advantage for future success. it is engaging in outsourcing ((John Power and Kevin Clyde Desouza and Carlo Bonifazi. Industrial clusters affect competitiveness in several ways. gain complementary resources or knowledge. and innovation (Hsian Niu. which is based on a theoretical approach. 1. the traditional industrial system has often focused on promoting science and technological policies. Competitive advantage is a commonly used phrase. stimulating new organizational institutional growth (Porter. THE RESEARCH METHODOLOGY This study. which has been shown to enhance profitability. at an agreed but probably qualified price’ (Heywood. 1-2. who hold BA and above. 2007). responsibilities and decision rights to someone else. 10. Organizations are continuously faced with the decision of whether to expend resources to create an asset.94) November. to an external supplier or service provider who offers a defined service for a specified period of time. Khorasan Branch. Yi and Zhang and Huang. Compared with traditional hierarchical systems. The promises of economic development through competitiveness appeals to everyone. On the other hand. the differentiation that evolves within firms in the cluster is likely to increase variety. Cooperation in this study therefore is defined as the joint striving of firms in interdependent relationships towards individual and mutual goals with the desire to achieve benefits which would not be obtainable without the two parties working together. take part. Cooperation is a Pareto improvement process through mutual forbearance and commitment in the allocation and exploitation of resources so that all or at least one of the parties are better off and none is worse off than it would be otherwise(Lou and Liu. learning. product or service internally or to buy it from an external party. 2001:25). First.Interdisciplinary Journal of Research in Business Vol. 2010). Outsourcing is the act of transferring the work to an external party. the cluster between industries and other research institutions can reduce innovation costs. Outsourcing activities or services to external organizations is not a new phenomenon. competitive advantage lies at the 87 . the transferring of an internal business function or functions. One widely recommended technique for improving one’s competitive position is “outsourcing”. driving the direction and pace of innovation. investigates the proposed indices found among similar studies. Cluster members are encouraged to specialize in technology. Finally. 2009). increasing the competitive adjective Competitiveness is a much sought after concept among policy practitioners and academic researchers alike. 2008). plus any associated assets. 1-1. Organizations have always had to take decisions about what they make and what they buy (Delmotte. These system models have typically believed in the science push effect in radical industrial process. Sourcing refers to the act of transferring work. and resources and thereby develop unique capabilities that can lead to profitability. 2008). According to ANDERSON/NARUS (1990. receive financial funds. but the exact content is very hard to pinpoint. it makes use of a survey in which 9 managers and 35 authorities of Iran Khodro Company.86. Issue. 2009). Outsourcing is made up of two words – ‘out’ and ‘sourcing’. 1998). a model will be proposed. and advance competitive positions (Chi Sun et al. 45) cooperation is defined as “similar or complementary coordinated Actions taken by firms in interdependent relationships to achieve mutual outcomes or singular outcomes with expected reciprocation over time”. Many managers view outsourcing as the only way to keep a business competitive into the twenty-first century (Bolat and Yılmaz. information. Moreover. resource. 1. Increasing Cooperation Cooperation has been widely discussed in the literature on customer supplier relationships.

88 . (pp. universities. and Tai Huang. like lower cost. and Mei Tung. N and Smith. the term “cluster” will rather be used for a more extensive perspective with respect to the term “industrial districts. suppliers. assembling products and training employees. which cannot be attained by the small firms individually (¨Ozkanli and Akdeve 2009). companies are extending the application of their knowledge through technology transfer. Issue. 2007. a particular cluster shares four critical characteristics:  proximity – as they need to share the same common resources and to allow Positive spillovers. According to Porter (1998). However. A firm’s competitive advantage can derive from numerous sources. Since then. There is no precise definition for clusters and almost all of the existing definitions are based on the description of clusters. According to him. the cluster concept relates to the achievement of increased efficiency through extensive external division of labor within the networks of specialized firms (¨Ozkanli and Akdeve 2009). p 197) defines clusters as “geographic concentrations of interconnected companies. whilst a cluster is not necessarily an industrial district. and provides distinct capabilities and competitive advantage. small firms require the benefit arising from the effects of network interaction. technology is an integral part of their organizational knowledge. To best make use of this resource. Clusters are defined as the intersection of territorial and industrial units. thus creating a sustained competitive advantage. both clusters and industrial districts generate external economies. Achieving competitiveness requires companies to perform discrete activities such as processing orders. these strong industrial linkages are indicating the existence of an industrial cluster. firms in related industries. several decades of vigorous expansion and prosperity have caused many firms to lose sight of competitive advantage in their scramble for growth and pursuit of diversification.. regional concentration and competitiveness of small firms became important topics of discussion on how to develop the competitive ability of small firms. Porter (1998. 1. 2004). The literature cluster and industrial district are frequently used interchangeably. In order to overcome difficulties resulting from economies of scale. 10. Industrial Clusters and small and medium sized firms Studies on industrial clustering date back to Alfred Marshall’s contribution on localization economies (Principles of Economics. However.  active interactions between the firms inside the cluster. According to Ketels (2004). calling on customers. 2009).  linkages – their activities need to share a common goal. cluster growth depends on two kinds of interactions: those which are industry-specific (intra-industry interactions) and those which are region-specific (inter-industry interactions).  critical mass – only a significant number of participants has a major impact on The companies’ performance ( Ketels C. the existence of specialized suppliers and the possibility of external spill-over (the rapid transfer of know-how and ideas inside the cluster). 2. Walter Isard (1960) expanded this concept using the export-oriented industries and its linkages to other industries in the region.g. During the last decades. standards agencies. Hence.94) November. In this context. sectors and territories are the two central dimensions for the evolution of clusters. 1920). Today competitive advantage is crucially important to a firm. many academics have been discussing on the importance of regional industrial Agglomeration in relation with the major transformations that have been taking place globally in the economic development and structure of nations. To most manufacturers. 2006).Interdisciplinary Journal of Research in Business Vol. More precisely. and trade associations) in particular fields that compete but also co-operate(Carroll and Reid. Porter 1998). small firms operating under network interaction within industrial clusters would have greater competitive ability. whereby large firms enjoy economies of scale and scope. also pointed out that firms in developing countries with limited R&D resources achieve sustainable competitive advantage through technology transfer(Huang Lin.” Isaksen (2001) explains that every industrial district is a cluster. superior services or products. The following definitions are the most acceptable ones among the researchers and practitioners. and associated institutions (e. 2011 heart of firm performance in competitive markets.86. cities and regions (George. “a cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field linked by commonalities and complementarities ( Moosavi and Noorizadegan . Actually. He identifies three conditions for setting an industrial cluster: the existence of a pool of adequate labor. service providers. 2006).

They are as follows: Government Structure of firm and Rivalry Factor conditions Demand Conditio ns Related and Supporting Industries Culture Figure1: Porter's Diamond. Clusters are composed of diverse groups. to stimulate early demand for advanced products. Clusters consist not only of large firms. membership. Large firms continue to grow and internationalize. Factors influencing the industrial clusters Whether a nation achieves international success in a particular industry is determined by four broad attributes of that nation which promote or impede the creation of competitive advantage (Porter 1990). but the preponderance of job creation has been in smaller firms for the last several decades. These are as follows: (1) Factor conditions: the nation’s position in factors of production such as skilled labor. GOVERNMENT SUPPORT The role of government in the Diamond Model of Porter is to act as a catalyst and challenger. employment. training institutions. (2) Firm strategy. education) that are internationally competitive. It is worth noting that two other factors have been introduced in the later studies. Government has an important role in assembling information about cluster composition. 2-1. which are linked in a specific value chain. Source: Houghton and Thorburn (2004. including primary. physical resources and technologies. infrastructure. 1. organized and managed as well as the nature of domestic rivalry.86. to focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations (Chi Sun et al. Issue. and (4) Demand conditions: the nature (from a qualitative and/or quantitative point of view) of home demand for the industry’s products or services (Gugler and Brunner. an industrial cluster can be defined as a strong and stable network of companies and institutions competing and co-operating with each other. related secondary. and government agencies. 10. research centers. p11). (pp. 2007). 2011 Clusters are a group of industries whose linkages mutually reinforce and enhance their competitive advantage. (3) Related and supporting industries: the presence or absence in the nation of supplier industries and related industries and institutions (research. and performance. not just large ones (Porter.Interdisciplinary Journal of Research in Business Vol.94) November. Such information will allow public policies and public investments to be better 89 . but have proliferated the opportunities for small and medium sized firms to fill important needs and niches in the cluster. it is to encourage – or even push – companies to raise their aspirations and move to higher levels of competitive performance. Government must encourage companies to raise their performance. 2009). structure and rivalry: the conditions in the nation governing how companies are created. Increasingly small and medium-size firms compete internationally. necessary to successfully compete in a given industry. 2007). and supporting industries. Regarding the given definitions. universities.

This will make public policy more relevant and effective. Therefore. and intense competition. integrated organization whose assets consisted of both intangible property and the management. organizations while competing for domineering over the global market realized that they lack dynamism required for competitiveness. Clusters with an innovative culture will increase the lifeexpectancy and productivity of the infrastructure and business capital which they host and the productivity and prosperity of their community (Porter. The dominant model of industry at the time of the World War II was a large. the evolution of the market. the need for satisfying the growing needs of customers. Cluster information will also increase the efficiency of private sector investment and foster new business formation to capitalize on cluster presence and capabilities (Porter. (pp. the need for responding to the changes of the market and coping with the difficulty of predicting the market and other changes would mean that organizations should rely on their core SME Outsourcing the non-core competencies of Increasing the competitive adjective SME Emphasis on the core competencies of organizations 90 . The Research Analytical Model The industrial clusters Increasing Cooperation SME Competitive organizations SME Outsourcing the activities which can not be performed with the core competencies of organizations Increasing the collective efficiency and The division of specialized labor Fig. 1.Interdisciplinary Journal of Research in Business Vol. Later on.94) November. the technological changes.86. businesses were for a long time static and predictable because of the economic globalization. based on the cluster composition in each location. 2011 aligned with business needs. in 1970s. CULTURE Innovation is an outcome of an innovative culture. On the other hand. 1998). organizations have attempted to achieve a higher competitive advantage in order to increase their profitability and market share. 2007). and that they have an inflationary and lax management. 2009). which controlled all its activities by itself. 2 :( The Conceptual Model) Industrial development of the country Since the advent of the industrial revolution. Issue. Hall (1976) argued that cultures vary greatly in the processing of information and patterns of communication (Chi Sun et al. 10.

Therefore. (pp. motivation.  observable and measurable against well-accepted standards. Outsourcing the non-core activities of organizations to other organizations and delivery of high-quality goods and services lead to the higher co-operation between organizations. Many of the constraints facing SME1s are related to SMEs isolation rather than their limited size. the ability to care for oneself. Boyatzis (1982. Thus. Clustering and closer cooperation among SMEs can. purchasing. Porter (1998) points out the rivalry as an explanation for the success of the clusters. have some or all of these characteristics:  cluster of knowledge. therefore. skills and abilities associated with specific occupations. then. outsourcing which is an important management concept leads to the concentration on and higher efficiency of the core activities of organizations. but also is becoming one of major competitive weapons for individual firm (Li and Xiong and Park and Liu and MA Shihua and Cho. CORE COMPETENCIES Competencies are factors contributing to high levels of individual performance. and therefore.  associated with effective and/or superior performance. For instance. values and interests. In vocational counseling. This results in the formation of ties between organizations and industries and finally in the formation of industrial clusters. Only the most special skills. the key feature of this type of SME grouping is cluster dynamics which lead to SMEs growth. beliefs. be they on the job or in life in general. The current use of the term can be traced back to McClelland (1973) who saw competencies as components of performance associated with important life outcomes and as an alternative to the traditional trait and intelligence approaches to predicting human performance. organizations can increase their competitive advantage in the process of performing their activities and excel their rivals. Competencies used in this way refer to broad psychological or behavioral attributes that are related to successful outcomes.Interdisciplinary Journal of Research in Business Vol.94) November. and technology management. 2011 competencies. the term describes the broad areas of knowledge. and form affiliated companies which can compete with each other globally With the development of new organizational paradigm and globalization. The term “competencies” has multiple definitions that reflect the varied history of the concept. etc. This leads to outsourcing some areas which can be improved by other organizations. Reve (1990) talks in terms of core skills and complementary skills. Therefore. the competitive mechanism leads to the formation of clusters whose member companies are united around the pivot of their core competencies. which aim to realize the global management in spite of their rivals. More integration leads to the overall specialization of the cluster and increases its dynamics and competitiveness (Moosavi and Noorizadegan. 2009). 2003). Issue. the core skills. industrial cluster not only is main source of national competition from a state perspective. In the figure 2. 2006). testing. p 21) defined competency as “an underlying characteristic of a person which results in superior and/or effective performance in a job”. 91 . SMEs in a cluster could benefit from the cluster’s advertisement impact and the possibility of meeting the requirements of large-scale orders through networking. and to outsourcing the activities which can not be performed with a competitive ability to other capable organizations. More specialization increases/intensifies the need for cooperation and horizontal integration between partners offers new business opportunities within the cluster. 2009). 1999). 10. organizational effectiveness (Armstrong. As companies spin-off and compete with each other to expand their production capabilities.86. Small and Medium Sized Enterprises. and  Can be improved via training and development (Chan. cluster members benefit from collective actions such as joint marketing.  linked to future strategic directions. Competencies. abilities. or the ability to function in the activities of daily living. This definition is widely cited in the literature. Cluster-based economical policies are nowadays considered as an essential component of SME2s development in many countries. Cooperation among firms in clusters has been viewed and deeply studied as a powerful determinant of the competitive advantage of clusters and of the individual firms in such clusters (Boari et al. 1. New 1 . skills. In a totally competitive market in a specific area and industry. Moreover. be a solution. only those organizations can survive which can increase their co-operation with other organizations and maintain and develop their competitive advantage over their rivals in spite of market fluctuations. Reve is of the opinion that a company’s skills profile tends to change over time. technological variation occurs within the cluster.  relate to a major part of the job. must be retained in-house. competency is used in clinical psychology and law to denote legal standards of mental capacity. which are all factors that lead to achieving economies of scale. although a group of 37 unman resource professionals and industrial and organizational psychologists could not agree on a common definition. training. facilities.

and local institutions. and even research and development. to structures involving the outsourcing of many activities and functions to outside entities. and the like. Finally. peripheral. – Opportunities to access market information more expeditiously. important.” They argue that core competence is communication.  To gain competitive advantage. For example. 2011 industries possess a high proportion of core skills. most organizations have competencies in the areas of accounting or financial management. Outsourcing takes place not only to other firms but to non-business entities such as technical schools. training. Finally. they do not help differentiate the organization from the others in the marketplace. if it is a core competency as with Dell Computers. Outsourcing includes not only traditional parts production. in which they perform most activities internally. support services. managing IT systems.94) November. 2000). First. In comparison to the core competencies. we can consider the advantages of clustering as follows: – Collective efficiency (creating synergy). – Ability to obtain specialized inputs and technical support more easily and cost effectively. affect the future of the organization and through this the products and service offerings. such as cheap labor. it becomes more important to locate within a strong cluster to access benefits that are difficult for outsiders to tap (Porter. but also contract manufacturing. As firms depend more on outside firms. Arch and Dubelaar and Bradmore . which may. Over time. Issue. every organization has in place non-core competencies. as firms move away from vertical integration. raw materials.86. The strategic core must be continuously redefined (Branders and Lilliecreutz. These capabilities help keep the business afloat by aiding the completion of daily operations. organizations can no longer focus on all their processes of production and delivery of goods because of the ever-intensifying competitiveness in the global scene. they are core competencies and should remain within a company and should not be outsourced (Ulli. Clusters also gain in importance as firms migrate from vertically integrated structures. not less so. and outsource other processes for which they do not have any competitive advantage to suppliers who have competencies. (pp. Non-core competencies differ from core competencies in two important respects. university research institutions. this means that the advantages of clusters are more important in global competition.Interdisciplinary Journal of Research in Business Vol. and are cumulative. and a deep commitment to working across organizational boundaries. CONCLUSIONS To illustrate this fact. and Brege1997). However. they do not directly impact the organization’s products and services. Prahalad and Hamel (1990) contend that “core competencies are the collective learning in the organizations. 10. and industry association programs. resources and know how for the product must be unique over time. 2009). Without these. then. as was discussed earlier in this paper. will directly affect the delivery of products and services (John Power et al 2006. involvement. a supply chain management competency. or generic technology. a company progresses along the experience curve and more and Moe parts of its production can be handled within strategic alliances or on the market. 92 . The concept of core competence has been developed to support more efficient identification and utilization of an organization's strength. industrial restructuring has given rise to outsourcing of activities (Gupta and Woodside. They differentiate between the company and its competitors. not less. also called auxiliary. in turn. but instead they should focus only on the processes for which they have core competencies (and for which have competitive advantage over their rivals). Globalization neutralizes many sources of competitive advantage that can be sourced or accessed by any firm from a distance.  Only if these resources are usable for multiple purposes. It must be possible to protect it against imitation by competitors over time. support services. 1. Falling barriers to trade and investment have exposed more and more locations to competition. Second. Paradoxically. 2007). The financial management competency of an organization will directly impact how an organization spends its cash reserves and handles its other financial assets. the organization would not be able to conduct its daily operations. support or operational capabilities. The assumption is that core competencies change more slowly over time than products and markets. 43). to conclude. especially how to coordinate Diverse production skills and integrate multiple streams of technologies. allowing strong clusters to grow stronger while ineffective locations lose position. In fact core competencies combine three elements:  In the eyes of the customers their characteristics must be relevant. So a competitive advantage must be sustainable. In comparison. globalization has made clusters more.

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