Survival And Growth Of The Firm

Survival and Growth of the Firm

The trend towards globalization has greatly increased the need for

strong interorganizational relationships to ensure a firm's growth and

survival. As globalization has placed firms under ever greater

competitive stresses, companies are forced to become as efficient as

possible in all aspects of their business. One concept that has

gained popularity is that of core competency: those things that a firm

does especially well and that give it competitive advantage. When

firms stray from their core competencies, problems often result.

To allow companies to focus on their core competencies, outsourcing

has gained in popularity. First, outsourcing reduces the need for a

company to focus on an area that is not as critical to its success as

other areas are. Second, the firm may not be able to perform a

noncore function as effectively or as cheaply as a firm specializing

in that area. Third, the ability to identify which function should be

outsourced and to work with other companies to manage those functions

may in itself be a core competency or a source of competitive

advantage.

ADP is an example of one company that has flourished by building

strong interorganizational relationships with its customers. ADP

handles payroll processing for a large number of companies.

Historically, most companies handled payroll administration

themselves. A grocery retailer I worked for went as far as even

printing its own payroll checks. However, as the amount of regulation

associated with payroll administration has increased, and payrolls

have increased in complexity through the adoption of stock purchase

plans, 401(k)s, and cafeteria benefit plans, few companies have found

it cost effective to hire specialized staff to handle these

complications. Instead, firms have elected to form an

interorganizational relationship with ADP, which allows them to not

have to worry about staying abreast of the latest regulations and

administering complex payroll processes. In some cases, companies

have even gone as far as to having a third-party actually employ all

of their "employees," who are then legally contractors, and have the

third-party be completely responsible for all aspects of administering

their compensation and benefit plans.

ADP is an example of a success story for both itself and its

customers. An example of the dangers of not realizing when an

interorganizational relationship would be beneficial can be found in

another experience I had at the grocery retailer I worked for. The

company had developed its own mainframe-based purchasing system and

warehousing system in the 1970s, and continued to employ a significant

information technology staff to maintain the system in the early

1990s. After the grocery retailer had been through several mergers,

the warehousing system needed substantial changes in order to

accommodate the needs of a new warehouse that would serve the newly

acquired divisions. The company had the choice of purchasing an

appropriate warehousing system from a software company dedicated to

the development of such systems or making the needed enhancements to

its in-house developed system.

Because of a perceived need to keep the existing information

technology staff busy and concerns about the expense of purchasing a

warehousing system, the company elected to develop its own improved

warehouse management system. Unfortunately, as the enormous scope of

the task became apparent, the company did not revisit its decision and

instead hired more and more programmers to throw at the problem. At

the project's height, the company employed more programmers than it

did store managers.

Not surprisingly, the implementation of the new warehouse system was a

disaster. Merchandise could not be received into the warehouse

accurately, could not be found when it was needed, and was rarely

shipped accurately to the stores. More than six months were spent

resolving the problems with the warehouse system. In the end, it cost

the firm many times what would have cost to have purchased a warehouse

management system from a software company specializing in that field.

Furthermore, the warehouse system the grocery store wound up with was

much less functional than a third-party solution would have been, was

based on an obsolete technology, and was nearly impossible to

maintain.