An Evolutionary Stage Model of Outsourcing and Competence Destruction: A Triad Comparison of the Consumer Electronics Industry

By Kotabe, Masaaki; Mol, Michael J. et al. | Management International Review, January 2008 | Go to article overview
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An Evolutionary Stage Model of Outsourcing and Competence Destruction: A Triad Comparison of the Consumer Electronics Industry


Kotabe, Masaaki, Mol, Michael J., Ketkar, Sonia, Management International Review


Abstract and Key Results

* Outsourcing has gained much prominence in managerial practice and academic discussions in the last two decades or so. Yet, we still do not understand the full implications of outsourcing strategy for corporate performance. No general explanation has so far been provided for how outsourcing could lead to deterioration in a firm's competence base. We longitudinally analyze three cases of major consumer electronics manufacturers, Emerson Radio from the U.S., Japan's Sony and Philips from the Netherlands to understand the dynamic process related to their sourcing strategies.

* We develop an evolutionary stage model that relates outsourcing to competence development inside the firm and shows that a vicious cycle may emerge. The evolutionary stage model helps managers understand for which activities and under which conditions outsourcing across borders is not a viable option.

* Results suggest that each of these firms had faced a loss of manufacturing competitiveness in its home country, to which it responded by offshoring and then outsourcing production. When a loss of competences occurred, some outsourcing decisions were reversed.

Key Words

Outsourcing * Offshoring * Global Sourcing * Stage Theory * Competencies * Evolutionary Theory * Consumer Electronics

Introduction

Offshoring and outsourcing remain high on managerial agendas, although the type of sourcing that grabs most headlines and managerial attention tends to change fairly rapidly. In the late 1980s and early 1990s global sourcing of components and products was seen as a key trend among manufacturing firms. The mid-1990s saw corporations farm out information technology activities on a large scale. Currently major trends are business process outsourcing to countries like India and South Africa and the continuing shift of manufacturing activities to China. The latter types of offshoring and outsourcing are not only highly contentious politically but also pose managerial dilemmas. (1)

Until quite recently it was generally accepted that outsourcing, and especially outsourcing across borders, was primarily implemented to cut costs in order to maintain competitiveness. An argument commonly used by decision-makers and academic writers alike is that outsourcing, the reliance on external suppliers for the delivery of components and entire products, leads to an increased focus on remaining activities (Quinn 1999). By keeping in-house a more limited number of activities, managers can devote more attention to maintaining a world-class level in those activities. Because (foreign) suppliers likewise target their efforts, it is possible to obtain specialized help from outside suppliers with much lower production costs, so the argument goes. Of course, these lower production costs are at least partly offset by higher transaction costs, because of the difficulties associated with sourcing across borders (Mol/van Tulder/Beije 2005). This comparative cost approach is relatively well understood and has been widely implemented by practitioners, although firms often fail to take into account the true total costs of ownership in make-or-buy and offshoring decisions, as we demonstrate in this paper. The disadvantage of this approach is that it is relatively static.

In recent years a second argument has therefore been added to sway managers toward outsourcing. Outsourcing can be a means of accessing supplier competences that would otherwise remain inaccessible, or it can even serve as the gateway to the creation of competences that reside in the relationship between the firm and its supplier (Dyer/Singh 1998). Toyota, for instance, has been able to distill a competitive edge from long-term and intimate relations with suppliers like Nippondenso. Thus one might argue that the effects of outsourcing on the acquisition of competences have now come to the fore in managerial practice and academic literature.

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