Academic journal article Academy of Entrepreneurship Journal

Insourcing or Outsourcing: The Entrepreneurship Approach

Academic journal article Academy of Entrepreneurship Journal

Insourcing or Outsourcing: The Entrepreneurship Approach

Article excerpt

INTRODUCTION

The purpose of this essay is to theorize the influence of entrepreneurship in the determination of proper sourcing methods. There are various approaches to explain vertical boundaries such as Transaction Cost Economics (TCE), the Real Option approach (RO), and the Resource-Based View (RBV). Vertical boundaries refer to whether a firm makes parts for its products, services in house, or purchases parts from the market. However, these approaches provide limited understanding of sourcing since the role of managers, especially entrepreneurial managers, is often neglected in sourcing decisions, even though entrepreneurial managers' subjectivity involves in making decisions.

TCE, RO and RBV approaches focus on the advantages or disadvantages of different sourcing methods. TCE and RO emphasize the costs from each souring method regarding the uncertainty of the market. One difference between TCE and RO is how they see managers responding to market uncertainty. In TCE, uncertainty is a factor to be controlled. Uncertainty incurs opportunistic behavior and various transaction costs. Therefore, the determinant of a proper sourcing method is whether the sourcing method efficiently controls the sources of uncertainty to minimize transaction costs and the risk of opportunism (Williamson, 1985). In RO, uncertainty is a factor to be avoided. That is to say, the value of flexibility in decisionmaking, which enables decision-makers to defer their decision in an uncertain market, determines the proper sourcing method. Therefore, the proper sourcing method enables managers to respond properly and promptly to changes in the market (Burns & Stalker, 1968; Harrigan, 1985a, b; Leifer & Huber, 1977; Porter, 1980). Recently, the RBV has also been applied in sourcing research. This approach focuses on the contribution of resources to a firm's competitiveness and, therefore, is useful to explain which resources have to be insourced in order to stay competitive. Since the firms are in competition and their goal is, in general, to make abnormal market rents, the determinant of which sourcing method to use is based on whether resources contribute to the sustainability of the firm's competitiveness.

Neither TCE, RO, nor RBV theory adequately accounts for the different effects that individual managers have on sourcing. Entrepreneurship is applicable to each theory in that it explains various managerial roles with the answer of a question; what does entrepreneurship theory add to our understanding of sourcing decisions? The answer is because of the similar situations that managers and entrepreneurs face when making sourcing decisions. Baron (1998) mentioned that, "By the nature of their activities, entrepreneurs often find themselves in situations that are new, unpredictable, complex and are likely to produce information overload in many different ways". Even though a sourcing decision is related to the production of a firm's current products or services, sourcing plans for production in an uncertain future market. Therefore, decision makers have to predict future market status and choose the best courses of action based on their expectations. Since decision makers are in a situation where, "new, unpredictable, complex and likely to produce information overload[s] in many different ways," entrepreneurship explains how managers are able to make proper sourcing decisions.

Entrepreneurship enhances the understanding of sourcing in three ways. First, entrepreneurship explains the relationship between subjective uncertainty and the flexibility or the opportunism. RO and TCE focus on what Knight calls "risk," which is objective and measurable rather than uncertain, and is inherently subjective and not quantifiable (Knight, 1921). However, decision is made with uncertainty, rather than risk. If the uncertainty is subjective, the required flexibility or the risk of opportunistic behavior is different for each entrepreneurial manager. …

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