Conference PaperPDF Available

Abstract

This paper provides novel empirical evidence that the establishment and development of in-house value-adding activities pays off for manufacturing companies in several economic respects. In contrast to common belief and management practices, extensive out-sourcing of manufacturing activities has a strong negative impact on a firm's profit and total factor productivity (TFP). Mere cost-efficiency comparisons seem to be insufficient for appropriate make or buy decisions. Neglected factors like sub-par product variant and delivery flexibility capabilities of far-shore suppliers or internally disturbed competence formation and value creation processes are in many cases overcompensating the supposed cost benefits of outsourcing.
1
The effects of in-house manufacturing and outsourcing
on companies’ profits and productivity
Steffen Kinkel (steffen.kinkel@hs-karlsruhe.de)
ILIN Institute for Learning and Innovation in Networks
Karlsruhe University of Applied Sciences
Angela Jäger
Fraunhofer Institute for Systems and Innovation Research ISI, Karlsruhe
Djerdj Horvath
Fraunhofer Institute for Systems and Innovation Research ISI, Karlsruhe
Bernhard Rieder
ILIN Institute for Learning and Innovation in Networks
Karlsruhe University of Applied Sciences
Abstract
This paper provides novel empirical evidence that the establishment and development of
in-house value-adding activities pays off for manufacturing companies in several eco-
nomic respects. In contrast to common belief and management practices, extensive out-
sourcing of manufacturing activities has a strong negative impact on a firm’s profit and
total factor productivity (TFP). Mere cost-efficiency comparisons seem to be insufficient
for appropriate make or buy decisions. Neglected factors like sub-par product variant and
delivery flexibility capabilities of far-shore suppliers or internally disturbed competence
formation and value creation processes are in many cases overcompensating the supposed
cost benefits of outsourcing.
Keywords: Make or buy, Outsourcing, Total factor productivity
Introduction
This paper presents an empirical investigation of in-house integration (make) versus out-
sourcing of manufacturing activities (buy) and its effects on profit and total factor produc-
tivity (TFP). Outsourcing of manufacturing processes, regarded by management as not
belonging to the “core business”, has become a common management practice over the
past decades (Broedner et al., 2009; Brennan et al., 2015). In particular, outsourcing of
production activities to low wage countries in Asia and Eastern Europe has become more
and more important in recent years (Kinkel et al., 2009; Kinkel, 2012).
Only a few studies have empirically investigated the impact of compnaies outsourcing
activities on their economic performance (Jiang et al., 2006). Moreover, those few are
2
based on relatively small databases with limited significance. This paper, in contrast, is
based on a large representative survey of the German manufacturing industry with de-
tailed data from 890 companies.
The academic literature draws a differentiated picture of diverse aspects to be taken
into account in make or buy decisions. However, management practices such as outsourc-
ing seem to be following a fad rather than being based on sound decision-making schemes
(Broedner et al., 2009). Outsourcing decisions are typically legitimated by simple pro-
duction cost comparisons, very often not taking dynamic and hidden transaction costs
seriously into account, let alone aspects of competence formation being affected by out-
sourcing decisions. In sharp contrast to these common practices, the few empirical studies
that exist draw a rather sceptical picture of outsourcing by arguing that it is often overdone
and thus impairs business performance due to insufficient decision making (Broedner et
al., 2009). Our data analysis reveals that outsourcing in the German manufacturing indus-
tries, contrary to common belief, strongly correlates negatively with total factor produc-
tivity (TFP) and profit levels of the respective companies.
The paper is organised as follows: Section 2 gives a brief overview on the relevant
theory and shapes research questions. Section 3 presents our data and the methodology
used. Section 4 presents our main findings. In section 5 we draw conclusions for enter-
prise strategies and future research.
Theoretical background and research questions
Research on sourcing and vertical (dis)integration is mainly based on two different ap-
proaches. First, transaction cost theory (Williamson, 1985) has its focus on market failure
and looks out for ways to reduce the risks and costs of opportunistic behaviour by inte-
grating economic activities under unified governance. The question whether an economic
activity should be vertically integrated or not depends on the specificity of the assets, the
frequency of interaction between firm and supplier, the amount of uncertainty and the
potential for opportunistic behaviour of the supplier. The basic assumption is that organ-
isations act with “bounded rationality” and that possible contingencies in transactions
cannot be foreseen. As a result, it can be costly to negotiate, monitor and enforce complete
contracts with possible co-operation partners. Asset specificity is involved if specific
long-term investments such as technology or knowledge and skills are required to realise
efficient transactions. Transaction cost theory assumes that the more valuable such spe-
cific investments are, the higher the uncertainty, the greater the frequency of interaction
and the higher the potential for opportunistic behaviour, the higher the transaction costs
will be. With higher transaction costs it will be more likely that activities will be vertically
integrated, since they can then be effectively controlled through unified governance.
Among the listed variables, a high asset specificity appears to be most critical for vertical
integration under unified in-house governance (Williamson, 1985). Conversely, if trans-
actions are characterized by low-asset specificity and low uncertainty, then suppliers are
able to expand their activities to higher volumes by supplying many different customers,
leading to economies of scale which make outsourcing more efficient (Argyres, 1996;
Broedner et al., 2009).
Second, the resource-based view of the firm (Penrose, 1995; Wernerfelt, 1984; Pra-
halad and Hamel, 1990) pays specific attention to the genesis and development of the
organisation’s internal resources and capabilities as a source of sustainable competitive
3
advantage. Resources in this context are in particular intangible assets such as organisa-
tional knowledge or competences to innovate and to flexibly react to market demands and
customer requirements. As the resource-based view is rooted in evolutionary economics
(Nelson and Winter, 1982; Kogut and Zander, 1992, 1996), it focuses not only on the
resources themselves, but also rather on the specific ways the organisation puts them to
effective use. Firms can develop organisational processes and routines that markets can-
not produce, enabling them to use resources and develop capabilities more efficiently and
effectively (Barney, 1991; Teece et al., 1997; Teece et al., 2002).
Resource and capability formation are strongly path-dependent, as the use of resources
and the development of capabilities are highly interwoven with the evolution of organi-
sational processes and routines, (Teece et al., 2002, p. 338f). Firms exist because they can
develop organisational schemes and principles for sharing and transferring knowledge of
individuals and groups within an organization, such as “shared coding schemes”, “values”
or “a shared language”, that markets cannot produce (Kogut and Zander, 1992). High-
performance organisations thus not only focus on the unique and barely imitable compe-
tences they have developed, but they also exploit the potentials of learning how to make
use of these resources in a specific and more effective way (Broedner et al., 2009; Grant,
1991).
Some empirical work on vertical manufacturing integration has tried to integrate the
two perspectives of transaction cost and resource-based view. As knowledge is often tacit
or uncoded, bound to individual skills or embedded in organisational routines and there-
fore difficult to transfer or to acquire, transaction costs will be important in this context,
too (e.g. Conner and Prahalad, 1996). Also in the case of make or buy decisions, transac-
tion costs and dynamic capabilities are fundamentally intertwined. According to Jaco-
bides and Winter (2005), capability differences are a necessary pre-condition for vertical
specialisation, while transaction cost reductions lead to specialisation only if capabilities
are heterogeneous along the value chain. In particular four mechanisms of capability and
transaction cost co-evolution shape vertical scope over time: (1) The selection process,
produced by capability differences; (2) transaction costs are endogenously changed by
firms that try to increase their profit and market share; (3) changes in vertical scope itself
affect the capability development process for improving operations over time; (4) changes
in the capability development process reshape the pool of qualified participants in the
industry, (Jacobides and Winter, 2005).
However, companies have finite resources and cannot always afford to have all man-
ufacturing technologies inhouse (Cánez et al., 2000). Nordigården et al. (2014) showed
that companies with an in-house-dominant strategy (make) use outsourcing to optimize
capacity utilization and to outsource less cost-efficient production, whereas companies
with an outsourcing-dominant strategy (buy) use in-house production to maintain com-
plementary competencies and to avoid lock-in risk.
Only very few studies empirically investigate the impact of in-house manufacturing
integration (make) or outsourcing (buy) on companies’ economic performance (Jiang et
al., 2006). Overall, research provides evidence that outsourcing can improve a firm’s cost-
efficiency. Among the most prominent advantages of outsourcing are cost reductions due
to diminished manufacturing costs, reduced investment and less fixed capital. However,
outsourcing can erode companies’ potential for organisational learning and development
of new technologies. Moreover, the cost savings associated with outsourcing may be
4
over-estimated, as transaction costs and the necessary overhead allocation can be signif-
icant (Gilley and Rasheed, 2000). However, one of the main gaps in the current literature
is the lack of objective metrics for outsourcing evaluation and the lack of research on the
relationship between outsourcing activities and firms’ value (Jiang and Qureshi, 2006).
Besides “anecdotal and conceptual evidence”, literature reveals no empirical evidence
that outsourcing will improve a firm’s productivity and profitability” (Jiang et al., 2006).
Against this background, we pose the following research questions:
RQ-1: What effects does the degree of in-house manufacturing have on companies’
profit situation?
RQ-2: What effect does the degree of in-house manufacturing have on companies’
TFP?
Methodology
For investigating RQ-1, a linear regression model of statistical cost structure data of the
German Federal Statistical Office is employed. It covers a total 247 observations, each
consisting of a of a combination of a NACE Rev. 2 three-digit sector classification of the
German manufacturing industry and a specific company size class by number of employ-
ees (Table-1). The dependent variable is profit (incl. basic rent) in % of gross production
value. In the first step, an analysis of the correlation coefficients of all independent vari-
ables (level of vertical integration (in-house manufacturing) in%, size classes, industrial
sectors) was performed. The results show a weak to moderate correlation. Thus, no re-
striction in the use of the variables is given. The main model of the linear regression (1c)
was supplemented with a variance inflation factor analysis (VIF) to verify multicolline-
arity. An average VIF value of 1.42 indicates that multicollinearity is very modest. The
main regression model is statistically significant and satisfactory (n=247, R2=0.285).
RQ-2 is analysed with a multivariate regression model of firm-level data from the Ger-
man Manufacturing Survey 2012, covering data of 1,594 companies from all manufactur-
ing industries. Table-2 shows the results for the regression model to explain the total fac-
tor productivity (TFP) of the surveyed companies, covering data from 890 companies that
have valid responses to all variables used in the model. The TFP was operationalized (at
firm level) as value added (sales minus intermediate inputs) divided by the sum of labour
cost and depreciation for machinery and equipment. The independent variable was loga-
rithmised to meet the linearity requirements of the regression estimation. The estimate is
satisfactory and statistically significant with an adjusted R2 of 0.137. Overall, 14 percent
of the variance of the total factor productivity of the surveyed companies are explained
by the model.
Findings
The main model of the linear regression (1c) with profit (incl. basic rent) in % of gross
production value as the dependent variable, integrates the control variables and the inde-
pendent variable in one model. The independent variable "level of vertical integration (in-
house manufacturing) in%" and the entire model are highly significant (Table-1). The R2
value of only 3.4 percent of model 1a shows that the dependent variable is described to a
very limited extent only by the control variables "size class" and "industrial sectors".
5
Compared to the reference sectors, the chemical sector shows a significantly positive re-
turn on gross production value. This sector shows an above-average value of profit (incl.
basic rent in % of gross production value) and at the same the relatively lowest ratio of
in-house manufacturing compared to the other reference sectors.
The regression analysis of statistical cost structure data shows a significant positive
impact of the level of vertical integration on the profitability of a company. The main
model of the linear regression (1c) shows, when controlled for size classes and industrial
sectors in parallel, that the level of vertical integration has a strong positive influence on
the profit level (incl. basic rent, in% of the gross production value) of the company. An
increase in a company’s in-house manufacturing depth by one percentage point is accom-
panied by a 0.2 percentage point increase in its profits.
Table-1: Linear regression model of the effects of the level in-house manufacturing
integration on company profit levels
The key finding of the multivariate firm-level regression model for the total factor produc-
tivity (TFP) of a company (Table-2) is the significantly positive effect of the level of
vertical in-house integration on TFP of firms in the manufacturing sector. It contributes
by far the most explanation power for the TFP variance (Δ R2 = 0.115) compared to the
other factors considered. This suggests clearly that own in-house manufacturing integra-
tion pays off for manufacturing companies. Companies that have a high level of vertical
integration in-house seem to be better able to shape their processes in a very efficient
manner and to continuously optimize them.
Also, the export ratio shows a positive effect on total factor productivity (Δ R2 =
0.011). This result suggests that export-oriented companies have to use their resources
especially productively to be able to compete in the competitive international markets.
They therefore continuously work to improve the effectiveness of the use of its resources,
which positively affects their TFP.
Model 1a
Control Variables
Model 1b
Independent
Variable
Model 1c
Full Model
in-house manufacturing
depth (in % of production
value)
0 .208*** (0 .544)
Size class
-0 .148 (-0 .050)
-0 .073 (-0 .024)
Sector
MA: 1 .607* (0 .120)
ET: 1 .341* (0 .130)
ME: 0 .344 (0 .036)
CH: 1 .378 (0 .090)
FB: -0 .385 (-0 .029)
MA: -0 .062 (-0 .005)
ET: -0 .271 (-0 .026)
ME: -0 .439 (-0 .045)
CH: 2 .038** (0 .134)
FB: 0 .258 (0 .019)
N
247
247
R2
0 .034
0 .285
Dependent variable: Profit (in % of of gross production value)
Non standardized coefficients; standardized coefficients in brackets
Significance levels: *** < 0.01; ** < 0.05; < * 0.1
6
Table-2: Multivariate regression model on companies’ total factor productivity (TFP)
However, the regression model shows no significant positive impact of the level of inputs
from foreign suppliers (global sourcing) on the TFP of a company. Contrary to frequently
expressed views, the use of and integration into global supply chains does not seem to be
related positively to the economic performance of a company.The cost reduction poten-
tials of global sourcing seem to be offset by higher spending on coordination and control
in order to ensure flexible reaction and delivery in the supply chain.
Also, the sector affiliation is an important factor influencing the total factor productiv-
ity. (Δ R2 = 0.031). The chemical industry with its above-average capital intensity and
below-average labour intensity shows an above-average productivity. The companies of
the food, beverages and tobacco industry are accordingly more productive than the other
sectors covered in the model.
As expected, the company size is another factor for explaining total factor productiv-
ity, however at a relatively low level (Δ R2 = 0.005). With increasing company size, the
relative labour input in the production processes of a company can be reduced, but the
capital intensity of production is usually growing, leading to a small overall effect.
Dependent variable: Ln. of total factor productivity. Model specification: linear regression.
Level of significance: *** p <0.001, ** p <0.05, * p <0.1, ns p > 0.1
Reference groups: (1) mechanical engineering (28), (2) products of medium complexity, (3) production of medium-sized batches,
(4) other federal states
7
Discussion and Conclusions
This paper provides novel empirical evidence that the establishment and development of
in-house value-adding activities pays off for manufacturing companies in several eco-
nomic respects. In contrast to common belief and management practices, extensive out-
sourcing of manufacturing activities has a strong negative impact on a firm’s profit and
total factor productivity (TFP). Mere cost-efficiency comparisons seem to be insufficient
for appropriate make or buy decisions. Neglected factors like sub-par product variant and
delivery flexibility capabilities of far-shore suppliers or internally disturbed competence
formation and value creation processes are in many cases overcompensating the supposed
cost benefits of outsourcing.
The results of the statistical analysis suggest a return to a higher in-house manufactur-
ing integration level and less focus on outsourcing. According to the official statistics in
the German manufacturing sector, the in-house manufacturing level, measured as a per-
centage of in-house gross value added at total production value, accounts on average for
about one-third. Over time, one can see a melting of the average in-house manufacturing
level from about 34 percent in 2000 to about 30 percent in 2008. After that, the vertical
integration level of the manufacturing sector has stabilized in Germany, and even devel-
oped moderately positive to almost 33 percent in 2014. This could be an indication that
the company increasingly understand their own production skills again as value-creating
ability, while up to the global financial and economic crisis in 2008/2009, in particular
services activities were awarded to provide a high potential for value contribution. With
the post-crisis recalling to perceive the sustainable value creation potentials of the manu-
facturing areas, companies appear to slightly remove from the by then continuing trend
of outsourcing of manufacturing activities. Maybe some companies have already realized
that their in-house value-adding activities can certainly make a positive contribution to
their productivity and profitability.
As expected, the value creation strategies of manufacturing companies are strongly
influenced by the size of the firm. Smaller companies have on average a higher in-house
manufacturing integration level than larger firms. Smaller companies act accordingly ra-
ther as production specialists, while larger companies seem to outsource a higher propor-
tion of value-adding processes to suppliers to make use of specialization advantages. At
the same time, smaller firms are sourcing significantly less inputs from foreign suppliers
than larger firms, both as a share of their overall inputs as well as a share of sales. Small
companies are thus more locally oriented and to a larger extent anchored in domestic
supply structures. Against this background, it is useful to use size class-specific categori-
zations for the value-adding typology of companies in the manufacturing sector.
Overall, the companies of the German manufacturing industry can be classified into
four company types regarding their vertical integration (make or buy) and local or global
sourcing strategy: "local sourcer", "global sourcer", "local maker" and "global maker"
(Figure-1). From this, a company type of a “local maker” emerges, which combines the
productivity advantages of integrated production with the flexibility advantages of local
sourcing. The two company types with a high level of in-house integration of value-add-
ing activities (make), the "local maker" and the "global maker", are able to generate an
above average total factor productivity (TFP). They also achieve significantly more often
returns on sales of more than 2 percent compared to companies that have a rather low
8
vertical integration level (types "local sourcer" and "global sourcer"). Furthermore, com-
panies of type 3 "local maker" employ an above average number of technicians and su-
pervisors as well as employees in production and assembly activities. This focus on
skilled labour seems necessary for a strategy that relies primarily on high vertical integra-
tion (make) and closed value chains, to be able to generate sustainable specialization ben-
efits. Therefore, "local maker", as well as the other company type with low global sourc-
ing levels ("local sourcer"), employ less unskilled workers than other companies. By con-
trast, companies with an above average level of global sourcing, "global sourcer" and
"global maker", employ an above average ratio of unskilled workers. The latter two com-
pany types appear to combine a higher ratio of simple, manual and scheduling activities
in their internal value creation processes with a higher ratio of low-cost standard parts
from foreign sources to improve their cost-based competitive position. This pattern is
significantly different from that of the "local maker" with its strategic focus on high ver-
tical integration, closed local value chains and skilled labour.
The results of the expert interviews reveal that some companies pursue a strategic ex-
pansion of their in-house manufacturing capacities in areas with high customization and
product variance requirements, sometimes coupled with insourcing activities. Such a stra-
tegic insourcing aims primarily at reducing the logistics and control costs when producing
a high number of product variants, up to individual product designs in batch size one.
According to the companies interviewed in this context, the main advantages of a high
in-house manufacturing integration level are:
Own possibilities for fast and flexible response to market changes: This includes for
example the cheap and rapid realization of short term project requests, also known as
"white elephants", that is hardly predictable and variably occurring large orders.
Reduced dependence on suppliers: Partly strategic dependencies on Asian suppliers,
especially with electronic components, are already existing, that these companies
want to limit by appropriate value creation and sourcing strategies.
Improved ways to offer customized solutions and implement them immediately in
close cooperation with the customer, which is a core ability of many small and me-
dium niche providers.
Advantages in the delivery time to the customer as a core competence and unique
selling point compared to companies that are more dependent on supplies of strategic
components.
Better quality through uncomplicated and independent safeguarding and manage-
ment which is a core ability to meet the high and crucial quality requirements in
some sectors.
Potential for eliminating non-value adding activities by consistent implementation of
lean principles in their own house: Potentials of value optimization can be realized in
particular by minimizing waste in the form of lead times, inventory and scrap in the
internal value streams. According to the interviewed lean experts, relevant improve-
ments are almost always possible even at companies that already have extensive
experience with lean principles.
Sometimes companies admit that outsourcing is at least partly used as a mechanism for
failing to solve internal problems and moving responsibility and risk out of the firm (Har-
land et el., 2005). In an earlier study, Harland et el. (2005) report similar motivations for
outsourcing like opting out from sluggish internal processes, existing cultures and taboos,
9
rather than fixing the internal problems. They also provide a collection of risks and dis-
advantages of outsourcing which are partly mirroring the advantages of in-house manu-
facturing integration listed above. In particular relevant in this context are (1) the failure
to identify core and non-core that may lead to outsourcing core, (2) difficulty in insourc-
ing to ensure more flexible hybrid options later, (3) lack of skills and competence to man-
age outsource relationships and to design appropriate service level agreements, in partic-
ular with foreign suppliers, resulting in (4) significantly increased costs in supplier rela-
tionship management. In this context, Nordigården et al. (2014) suggest that managers
should think twice before rushing to a “me too” outsourcing strategy in which in-house
capacities are completely closed. From a dynamic view it may be wise to rely on a mixed
strategy of flexible buy or make, particularly when foreign suppliers are involved or in-
ternal resources need to be maintained or developed to secure accurate responsiveness
over the long term.
References
Argyres, N. (1996), “Evidence on the role of firm capabilities in vertical integration de-
cisions”, Strategic Management Journal, Vol. 17, pp. 129-50.
Barney, J.B. (1991), “Firm resources and sustained competitive advantage”, Journal of
Management, Vol. 17, pp. 99-129.
Brennan, L.; Ferdows, K.; Godsell, J.; Golini, R.; Keegan, R.; Kinkel, S.; Srai, J.S.; Tay-
lor, M. (2015), "Manufacturing in the world: where next?", International Journal of
Operations & Production Management, Vol. 35 Iss 9, pp. 1253-1274.
Broedner, P., Kinkel, S., Lay, G. (2009), Productivity Effects of Outsourcing: New Ev-
idence on the Strategic Importance of Vertical Integration Decisions”, International
Journal of Operations & Production Management Vol. 29 No. 2, pp. 127-150.
Cánez, L.E., Platts, K.W., Probert, D.R. (2000) "Developing a framework for makeor
buy decisions", International Journal of Operations & Production Management,
Vol. 20 Iss 11, pp.1313-1330.
Conner, K. and Prahalad, C.K. (1996), “A resource-based theory of the firm: knowledge
versus opportunism”, Organization Science, Vol. 7, pp. 477-92.
Gilley, K.M., Rasheed, A. (2000), “Making more by doing less: an analysis of outsourc-
ing and its effects on firm performance”, Journal of Management, Vol. 26, pp. 763-
90.
Grant, R.M. (1991), “The resource-based theory of competitive advantage: implications
for strategy formulation”, California Management Review, Vol. 33, pp. 114-35.
Harland, C.; Knight, L.; Lamming, R.; Walker, H. (2005),"Outsourcing: assessing the
risks and benefits for organisations, sectors and nations", International Journal of
Operations & Production Management, Vol. 25 Iss 9, pp. 831-850
Jacobides, M.G. and Winter, S.G. (2005), “The co-evolution of capabilities and transac-
tion costs: explaining the institutional structure of production”, Strategic Manage-
ment Journal, Vol. 26, pp. 395-413.
Jiang, B., Frazier, G.V., Prater, P.L. (2006), “Outsourcing effects on firms’ operational
performance: an empirical study”, International Journal of Operations & Production
Management, Vol. 26 No. 12, pp. 1280-300.
Jiang, B.; Qureshi, A. (2006),"Research on outsourcing results: current literature and fu-
ture opportunities", Management Decision, Vol. 44 Iss 1, pp. 44-55
10
Kinkel, S. (2012), Trends in Production Relocation and Back-shoring Activities Chang-
ing Patterns in the Course of the Global Economic Crisis. International Journal of
Operations & Production Management, Vol. 32, No. 6, pp. 696-720.
Kinkel, S., Maloca, S. (2009), Drivers and antecedents of manufacturing offshoring and
backshoring A German perspective”, Journal of Purchasing and Supply Manage-
ment Vol. 15 No. 3, pp. 154-165.
Kogut, B. and Zander, U. (1992), “Knowledge of the firm, combinative capabilities, and
replication of technology”, Organization Science, Vol. 3, pp. 383-97.
Kogut, B. and Zander, U. (1996), “What firms do? Coordination, identity, and learning”,
Organization Science, Vol. 7, pp. 470-6.
Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change,
Harvard University Press, Cambridge MA.
Nordigården, D., Rehme, J., Brege, S., Chicks D., Walker, H. (2014) "Outsourcing deci-
sions the case of parallel production", International Journal of Operations & Pro-
duction Management, Vol. 34 Iss 8, pp.974-1002.
Penrose, E.T. (1995), The Theory of the Growth of the Firm, 3rd ed., Oxford University
Press, New York, NY (originally published 1959).
Prahalad, C.K., Hamel, G. (1990), “The core competence of the corporation”, Harvard
Business Review, May/June, pp. 79-91.
Teece, D.J., Pisano, G. and Shuen, A. (1997), “Dynamic capabilities and strategic man-
agement”, Strategic Management Journal, Vol. 18, pp. 509-33.
Teece, D.J., Pisano, G., Shuen, A. (2002), “Dynamic capabilities and strategic manage-
ment”, Dosi,G., Nelson,R.R. Winter,S.G. (Eds), The Nature and Dynamics of Or-
ganizational Capabilities, Oxford University Press, NY.
Wernerfelt, B. (1984), “A resource-based view of the firm”, Strategic Management Jour-
nal, Vol. 5, pp. 171-80.
Williamson, O.E. (1985), The Economic Institutions of Capitalism, Free Press, New
York, NY.
Article
Full-text available
Strategy has been defined as “the match an ovganization makes between its internal resources and skills … and the opportunities and risks created by its external environment.” 1 During the 1980s, the principal developments in strategy analysis focussed upon the link between strategy and the external environment. Prominent examples of this focus are Michael Porter's analysis of industry structure and competitive positioning and the empirical studies undertaken by the PIMS project. 2 By contrast, the link between strategy and the firm's resources and skills has suffered comparative neglect. Most research into the strategic implications of the firm's internal environment has been concerned with issues of strategy implementation and analysis of the organizational processes through which strategies emerge. 3
Article
Full-text available
Purpose – The past three decades have seen the transformation of manufacturing involving its global dispersion and fragmentation. However, a number of recent developments appear to suggest that manufacturing may be entering a new era of flux that will impact the configuration of production around the globe. The purpose of this paper is to address the major emerging themes that may shape this configuration and concludes that most of them are still in their initial stages and are not likely to create a radical shift in the next few years in how manufacturing is configured around the world. These themes were presented in a special session on “Manufacturing in the World – Where Next?” at the 2013 EurOMA Conference in Dublin, Ireland. Design/methodology/approach – The paper provides a series of perspectives on some key considerations pertaining to the future of manufacturing. An evaluation of their likely impact is offered and insights for the future of manufacturing are presented. Findings – The importance of a focus on the extended manufacturing network is established. The need for customer engagement and a forward looking approach that extends to the immediate customer and beyond emerges as a consistent feature across the different perspectives presented in the paper. There is both the potential and need for the adoption of innovative business models on the part of manufacturers. Originality/value – The paper presents in-depth perspectives from scholars in the field of manufacturing on the changing landscape of manufacturing. These perspectives culminate in a series of insights on the future of global manufacturing that inform future research agendas and help practitioners in formulating their manufacturing strategies.
Article
Full-text available
Purpose ‐ The purpose of this paper is to present an empirical investigation of recent trends and changes in companies' production relocation and backshoring behaviour against the background of the global economic crisis. Design/methodology/approach ‐ The empirical research is based on a large data set of 1,484 German manufacturing companies as part of the European Manufacturing Survey (EMS). The paper employs a structured set of probit analyses to identify the differences of production relocation and backshoring determinants before and within the crisis. Findings ‐ Against common belief the paper finds that not only the relocation of production to emerging countries, but also the backshoring of once offshored manufacturing capacities to the home base is a relevant phenomenon. Since the emergence of the global economic crisis, relocation activities declined significantly, whereas the level of backshoring activities has remained stable. Far-shore destinations in Asia gain in attractiveness over near-shore locations in Eastern Europe. Particularly export-intensive companies tended recently towards (re-)concentrating of their production capacities, trying to exploit the benefits of higher capacity utilisation and a superior relation of variable costs to fix costs at their existing locations. Research limitations/implications ‐ Although covering a significant range of industrial sectors in Germany, more empirical evidence is needed from other branches and countries. Looking forward it is proposed to systemically integrate scenarios on the future development of the most influential environmental factors in future research frameworks for global production decisions and value chains. Practical implications ‐ The findings strongly recommend a revision of established decision-making schemes for production relocations based on pure cost efficiency considerations. Decision-making should integrate qualitative environmental factors and dynamic considerations using scenario-based tools. Companies need to understand and prepare for dynamic developments at different locations which can strategically necessitate backshoring after a certain time. Originality/value ‐ The research considerably widens the empirical knowledge on recent trends in relocation activities and their inherent risks, which in a dynamic perspective are sometimes forcing backshoring activities.
Chapter
The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution path(s) it has adopted or inherited. The importance of path dependencies is amplified where conditions of increasing returns exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding internally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing internal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. © 2003 by World Scientific Publishing Co. Pte. Ltd. All rights reserved.
Article
Understanding sources of sustained competitive advantage has become a major area of research in strategic management. Building on the assumptions that strategic resources are heterogeneously distributed across firms and that these differences are stable over time, this article examines the link between firm resources and sustained competitive advantage. Four empirical indicators of the potential of firm resources to generate sustained competitive advantage-value, rareness, imitability, and substitutability are discussed. The model is applied by analyzing the potential of several firm resources for generating sustained competitive advantages. The article concludes by examining implications of this firm resource model of sustained competitive advantage for other business disciplines.
Article
Purpose – The purpose of this paper is to investigate an underexplored aspect of outsourcing involving a mixed strategy in which parallel production is continued in-house at the same time as outsourcing occurs. Design/methodology/approach – The study applied a multiple case study approach and drew on qualitative data collected through in-depth interviews with wood product manufacturing companies. Findings – The paper posits that there should be a variety of mixed strategies between the two governance forms of “make” or “buy.” In order to address how companies should consider the extent to which they outsource, the analysis was structured around two ends of a continuum: in-house dominance or outsourcing dominance. With an in-house-dominant strategy, outsourcing complements an organization's own production to optimize capacity utilization and outsource less cost-efficient production, or is used as a tool to learn how to outsource. With an outsourcing-dominant strategy, in-house production helps maintain complementary competencies and avoids lock-in risk. Research limitations/implications – This paper takes initial steps toward an exploration of different mixed strategies. Additional research is required to understand the costs of different mixed strategies compared with insourcing and outsourcing, and to study parallel production from a supplier viewpoint. Practical implications – This paper suggests that managers should think twice before rushing to a “me too” outsourcing strategy in which in-house capacities are completely closed. It is important to take a dynamic view of outsourcing that maintains a mixed strategy as an option, particularly in situations that involve an underdeveloped supplier market and/or as a way to develop resources over the long term. Originality/value – The concept of combining both “make” and “buy” is not new. However, little if any research has focussed explicitly on exploring the variety of different types of mixed strategies that exist on the continuum between insourcing and outsourcing.