Protecting Proprietary Product Technology

Proprietary product technology is unique to a firm. If it enables the firm to produce a product containing superior features, proprietary technology can give the firm a competitive advantage. The firm would not want competitors to get this technology. If the firm outsources the production of entire products or components containing proprietary technology, it runs the risk that those suppliers will expropriate the technology for their own use or that they will sell it to the firm’s competitors. Thus, to maintain control over its technology, the firm might prefer to make such products or component parts in-house.

Accumulating Dynamic Capabilities

Competitive advantage is not a static concept. The capability to effectively and efficiently produce goods and services is one that evolves over time. Firms can learn through their experience how to lower cost, design better products, increase product reliability, and so on. Their capabilities (skills), in other words, are dynamic; they are learned through experience (the term dynamic capabilities is used to describe skills that become more valuable over time through learning).28 Also, the experience learned producing one kind of product might create a capability that is then useful for producing another kind of product.

Dynamic Capabilities

Key skills (capabilities) of a corporation that evolve and become more valuable over time.

For example, in the late 1990s under the leadership of CEO Steven Jobs, Apple developed some very valuable design capabilities. Under Jobs’ direction, Apple hired talented industrial designers and gave them a major say in product development. Originally, these designers worked on Apple’s line of desktop and laptop computers. They produced computers that were differentiated by superior design elegance from those produced by its rivals. Through this process, over time the design team built up considerable capabilities in industrial design as applied to computing devices for consumers. Subsequently, Apple has been able to leverage these capabilities to produce a range of elegantly designed products that have been very successful, including the iPod, iPhone, and iPad.

Now imagine if in an effort to save costs, instead of hiring its own designers, Apple had outsourced design to an independent design firm (such firms do exist). If it had done so, Apple may never have acquired the capabilities that subsequently enabled it to design products like the iPhone and iPad. Instead, those capabilities would have resided in the design firm. Put differently, Apple would have missed out on the opportunity to establish a competitive advantage based on a capability in industrial design.

The Apple example points to one of the problems with outsourcing. Firms that outsource activities to gain a short-term cost advantage may miss out on the opportunity to subsequently build important capabilities in that activity. Critics claim that the rush by American firms to outsource activities during the 1990s and 2000s to low-cost foreign suppliers has had just this effect.29 Although each decision may have seemed reasonable in isolation when it was taken, the cumulative effect of outsourcing may be to pass up on the opportunity to develop capabilities in that activity—capabilities that might subsequently lead to a competitive advantage. When Amazon was deciding who should make the display screen for the Kindle, for example, it had to go to a Taiwanese firm. All American enterprises had exited the LCD industry in the 1990s and none now had the capability to make what Amazon required (see the opening case).

The key point here is that firms should be very careful about what they outsource. They should not outsource activities for a short-term cost saving if those activities are potentially important for the long-term competitive advantage of the enterprise. Some would argue that Boeing made this mistake when it outsourced the production of wings for its 787 jet aircraft. Although the decision may have seemed reasonable when judged from a pure cost perspective, Boeing is no longer accumulating capabilities in the design of a key component in large commercial jet aircraft, and this may hurt the company down the road.