Imagine a company that doesn’t produce the goods it sells and doesn’t install the goods it sells. Pretty easy right. Companies like this are everywhere. So you might be wondering: why do people put up with these middlemen when they need or want goods or services The simplest way to answer this question is that capitalism is awesome! You might then ask: doesn’t the final consumer pay a higher price? This is sometimes the case but not always. In fact, great things happen when a company master a single task, or a core competency.
I work in sales and marketing, for my day job. The imagined picture above is exactly how my boss’s company operates, thus the initial inspiration for this post. So why would the producers need my boss’s company? Why would the installers need my boss’s company? What does a measly middleman have to offer?
When my bosses founded their company, they did so because they had the ability to sell. They were expert closers. So they established relationships to fill in the manufacturing and operations gaps they needed to fill. As a result, the producers could better get their product in the market place, and the installers could have more projects, thus more money in their pockets. The producers get to focus on making the best product. The middleman can focus on marketing and sales. Lastly, installers can focus on installing. The three entities all increase their revenues by working together. In economics, this is called specialization of labor, and it leads to a greater yield of goods.
Several industry giants all take part in outsourcing various tasks. Verizon outsources sales to various companies. Pilgrim’s Pride outsources chicken growing. Raising chickens is the most expensive and riskiest part of the production process. So chicken giants happily outsource the endeavor to farmers. Several firms outsource entire departments. HR, accounting, marketing/sales, and recruiting are all subject to being outsourced in order for businesses to reduce cost and focus their skills. Outsourcing allows a company not to become bloated.
Final thoughts for entrepreneurs
Entrepreneurs when constructing their business models need to identify their core competency. What can they do better than anybody else from raw materials to customer? If you can do everything, good for you, but there’s a problem. That problem is scalability. How do you grow? How do you increase revenues while increasing profitability? Outsourcing provides a means of growth, and for the growing new business, often times, depending on the industry, the entrepreneur will need help with production or sales. In conclusion, don’t assume you can do it all. Focus on the task that makes your business truly special.