Developing Category Strategies Will Become Broader and More Complex

This second of the eight strategy areas critical to future success focuses on category strategy development.

In the decade ahead, companies will think differently about category strategies. The purpose of a category strategy is to maximize value by leveraging external resources and capabilities. In the future, changes in business models, degree of outsourcing, industry structures, technologies, customer demands, environmental regulations, and other factors will change both how value is defined and how external resources can help deliver it.

“Until the mid-1990s, many companies took a conservative approach to category strategy development by buying the same components, products, and services that they had always bought from the same markets and suppliers. The supply management function was charged primarily with securing the ‘best’ price and ensuring supply.

In addition, companies traditionally bought goods and services from the same markets and suppliers. Today, companies are taking the next step by looking globally for new suppliers, and defining strategies for new categories. For example, when considering to outsource business processes and activities to reduce costs, new categories like contract manufacturing, facilities management, and logistics are established.”

Companies are going even further by seeking suppliers with discrete capabilities that can add new types of value, and they are leveraging untapped competencies and knowledge already in the supply base for an existing category. “For example, a food The breadth and scope of category strategies will also increase. Supply base reduction and global sourcing, especially from emerging markets, will continue to play an important role. However, in the next decade, strategies will increasingly focus on total cost and value creation related to supply and supplier contributions through product/service design and complexity reduction, supplier improvement initiatives, design for supply chain effectiveness, and enhanced collaboration between suppliers to improve performance and achieve sustainability. Category strategy time horizons will be expanded to three to five years.

Strategy Formulation and Selection

“A supply network focus (versus an individual supplier focus) for category strategy development will be increasingly applied. Supply networks, many of which will be in competition with other networks, will require that leading companies develop strategies that leverage the capabilities of all suppliers that make up specific supply networks supporting end-customer demand for goods and services. Category strategies in the fastchanging future that align, link, and achieve collaborative efforts by companies throughout the supply network will strongly influence future success.”8

Outsourcing of Non–Core Competencies

A focus on core competencies and capabilities has influenced the strategic planning process and category strategy development at most firms, and will continue to do so in the decade ahead. There will always be debate about which activities or operations should be performed internally and which should be outsourced. Because purchasing deals extensively with external sources, it becomes involved with the insourcing/outsourcing process. The trend toward outsourcing should continue, although firms have to be careful about being too aggressive with their outsourcing strategy or relying on outsourcing partners that do not fulfill their performance promises. In addition, some firms are reexamining their outsourcing strategy and beginning to produce goods and services internally. There are a number of reasons, however, why the emphasis on outsourcing will continue:

• As mentioned earlier, the pressure to reduce costs is severe and will only increase.
• Cost-reduction pressures are forcing organizations to use their productive resources more efficiently. As a result, executive management will increasingly rely on insourcing/outsourcing decisions to provide a way to effectively manage costs.
• Firms are continuing to become more highly specialized in product and process technology. Increased specialization implies focused investment in a process or technology, which contributes to greater cost differentials among firms.
• Firms will increasingly focus more on what they excel at while outsourcing areas of nonexpertise. Some organizations are formally defining their core competencies to help guide the insourcing/outsourcing effort. This has affected decisions concerning what businesses a firm should engage in.
• The need for responsiveness in the marketplace is increasingly affecting insourcing/outsourcing decisions. Shorter cycle times, for example, encourage greater outsourcing with less vertical integration. The time to develop a production capability or capacity may exceed the window available to enter a new market.
• Wall Street recognizes and rewards firms that achieve higher return on investment. Because insourcing usually requires an assumption of fixed assets (and increased human capital), financial pressures are causing managers to closely examine sourcing decisions. Avoidance of increased fixed costs is motivating many firms to rely on external rather than internal assets.
• Improved computer simulation tools and forecasting software enable firms to perform insourcing /outsourcing comparisons with greater precision. These tools allow the user to perform sensitivity (what-if) analysis that permits comparisons of different sourcing possibilities.
• Globalization and finding lower-cost sources in emerging countries continue to promote outsourcing.

Concluding Observations

Category strategies are required to define the supply base (internal and external), sourcing allocations, contracting approaches, supplier development, product/service designs, and physical supply chain considerations and are developed from the bottom up by category teams to meet business objectives and customer requirements. These strategies do and will go far beyond volume aggregation or a unit price reduction focus. In the future, value elements will strongly influence category strategies, the development of which will become an increasingly important part of the company strategy. More effective teams with improved personnel and truly global, cross-functional representation will be required. Category strategies will become more complex and require both internal functional and executive engagement across enterprises. Category strategies will be more agile because they will have to be reconfigured quickly as conditions change. Strategy development will include approaches to influence supply markets and supply networks. Category strategies will increasingly aim to block competition, and early warning or predictive approaches will be used as part of an improved approach to risk within the strategies.