Outsourcing and long-term competitive advantage in Taiwan electronics manufacturing industry: A resource-based view

This study examines manufacturer and non-manufacturer firm’s long-term competitive advantage from both a theoretical and practical perspective. Research questions include: 1. Does outsourcing still play the major role now and the future? 2. How can outsourcing win both the short-term and long-term competitive advantage? The potential problems of outsourcing practices are not only simply to gain a low labor wage but also more complex in tangible and intangible means. Theoretical basis of this study are including Transaction Cost Economics, Resource-based Theory, Strategic Perspectives and Institutional Theory. Some relevant approaches of contracting, joint ventures, alliance and absorptive capacity have been discussed. Whereas the dilemma between outsourcing and self-made in many firms thus, I proposed a conceptual model of outsourcing from a manufacturing firm point of view and an outsourcing model from a resource-based view to emphasize an organization’s absorbability during the sourcing processes. Furthermore, a flexible organization structure is proposed to lead selfadvancement and maximize resources efficiency. Information disclosing during the outsourcing practices will not be negative to company because of the firm's real competence is accumulated by all resources not individual skill or knowledge disclosing. Data collection of this study uses qualitative and quantitative data analysis research hypotheses through detailed questionnaires which include 279 Taiwan manufactures with a certain percentage of high level leaders of R&D, marketing, project managers, purchasing, and outsourcing leaders. A broad level of product inputs included 31% component, 41% semi-manufactured good and 26% finished product companies. Various industry types include General Manufactures, Components, Technology, Semiconductor, Computer, Communication and Information Industry. Detailed discussion results have been made that and include the following 1. When the task is tactical and not prepared internally, outsourcing would be more effective than completing the task internally. 2. Outsourcing would be more effective when closer interactions between organization and partners occurs. 3. Outsourcing is positive to increase organization's profits, lowing costs and business opportunities. 4 Outsourcing is still playing the major role now and for the future. 5. Outsourcing is positive to increase both company’s and partner's internal knowledge and know-how through proper technical information disclosing.i ABSTRACT Title of Dissertation: OUTSOURCING AND LONG-TERM COMPETITIVE ADVANTAGE IN TAIWAN ELECTRONICS MANUFACTURING INDUSTRY: A RESOURCE-BASED VIEW Ming-Huei, Chang, Doctor of Management,2009 Dissertation Directed By: Ph.D. , Dermod Wood This study examines manufacturer and non-manufacturer firm’s long-term competitive advantage from both a theoretical and practical perspective. Research questions include: 1. Does ii outsourcing still play the major role now and the future? 2. How can outsourcing win both the short-term and long-term competitive advantage? The potential problems of outsourcing practices are not only simply to gain a low labor wage but also more complex in tangible and intangible means. Theoretical basis of this study are including Transaction Cost Economics, Resource-based Theory, Strategic Perspectives and Institutional Theory. Some relevant approaches of contracting, joint ventures, alliance and absorptive capacity have been discussed. Whereas the dilemma between outsourcing and self-made in many firms thus, I proposed a conceptual model of outsourcing from a manufacturing firm point of view and an outsourcing model from a resource-based view to emphasize an organization’s absorbability during the sourcing processes. Furthermore, a flexible organization structure is proposed to lead self-advancement and maximize resources efficiency. Information disclosing during the outsourcing practices will not be negative to company because of the firm's real competence is accumulated by all resources not individual skill or knowledge disclosing. Data collection of this study uses qualitative and quantitative data analysis research hypotheses through detailed questionnaires which include 279 Taiwan manufactures with a certain percentage of high level leaders of R&D, marketing, project managers, purchasing, and outsourcing leaders. A broad level of product inputs included 31% component, 41% semi-manufactured good and 26% finished product companies. Various industry types include General Manufactures, Components, Technology, Semiconductor, Computer, Communication and Information Industry. Detailed discussion results have been made that and include the following 1. When the task is tactical and not prepared internally, outsourcing would be more effective than completing the task internally. 2. Outsourcing would be more effective when closer interactions between organization and partners occurs. 3. Outsourcing is positive to increase organization's profits, lowing costs and business iii opportunities. 4 Outsourcing is still playing the major role now and for the future. 5. Outsourcing is positive to increase both company’s and partner's internal knowledge and know-how through proper technical information disclosing. iv OUTSOURCING AND LONG-TERM COMPETITIVE ADVANTAGE IN TAIWAN ELECTRONICS MANUFACTURING INDUSTRY: A RESOURCE-BASED VIEW By Ming-Huei, Chang Dissertation submitted to the Faculty of the Graduate School of the University of Maryland University College, in partial fulfillment of the requirements for the degree of [Doctor of Management] [2009] Advisory Committee: [Your Dissertation Director], Chair [Committee Member 2] [Committee Member 3] [Committee Member 4] [Committee Member 5] v © Copyright by [Ming-Huei, Chang] [2009] vi Table of Contents List of Tables ................................................................................................................................ ix List of Figures ................................................................................................................................ x List of Abbreviations .................................................................................................................... xii Chapter 1: Introduction and Research Problem.............................................................................. 1 Purpose of This Study................................................................................................................. 1 Current Economic Environment ................................................................................................. 1 Research Questions..................................................................................................................... 1 The Potential Problem................................................................................................................. 2 The Possible Solution and Data Collection ................................................................................ 2 A Resource-Based View............................................................................................................. 3 Learning from Outsourcing......................................................................................................... 3 Theoretical Base.......................................................................................................................... 4 Chapter 2: Literature Review.......................................................................................................... 5 Outsourcing and Resources......................................................................................................... 5 Outsourcing and Alliance ..................................................................................................... 10 Outsourcing and Joint Venture ............................................................................................. 10 Outsourcing and Absorptive Capacity.................................................................................. 11 Transaction Cost Economics..................................................................................................... 12 TCE and Contracting ............................................................................................................ 14 Resource-Based Theory............................................................................................................ 16 Strategic Perspectives ............................................................................................................... 21 Institutional Theory:.................................................................................................................. 23 vii Contract Imperfect .................................................................................................................... 25 Chapter 3: Conceptual Framework and Research Method ........................................................... 29 Conceptual Model..................................................................................................................... 29 Conceptual Model of Success Outsourcing .......................................................................... 29 Organization Structure of an Outsourced-Based Manufacturing Firm................................. 31 Reinforce Causal Loops by Using an Outsourcing Approach.............................................. 32 Spiral Causal Loop of Self-made Approach for Non-Core Business Activity ..................... 34 The Outsourcing Model vs. a Firm’s Long-Term Competence............................................ 35 Outsourcing and Knowledge Generation.............................................................................. 39 Firm’s Knowledge and Competence..................................................................................... 40 Research Method ...................................................................................................................... 42 Hypotheses........................................................................................................................... 42 Reserach Methodology ............................................................................................................. 56 Research Scope ..................................................................................................................... 56 Product Range Researched ................................................................................................... 57 Companies Capital Size Researched..................................................................................... 58 Industry type Researched...................................................................................................... 59 Chapter 4: Discussion, Results and Conclusions.......................................................................... 61 H1. When the task needs specific resources that are not prepared internally, outsourcing would be more effective than completing the task internally .............................................................. 62 H2. Outsourcing would be more effective when there were more close interaction between organization and partners.......................................................................................................... 66 Importance of Outsourcing Components and Component Technology ............................... 67 viii H3. Outsourcing is positive to increase organization's profits, lowing cost and business opportunities ............................................................................................................................. 71 H4. Outsourcing is positive to increase organization performance, lowing investment risk and shorten time to market .............................................................................................................. 78 H5. Outsourcing is positive to increase a company's resources ............................................... 85 H6. Outsourcing is still playing the major role now and in the future...................................... 88 Positive Inference Factors of Outsourcing to Company’s Core Competence ...................... 91 Negative Inference Factors of Outsourcing to a Company’s Core Competence .................. 93 H.7 Outsourcing is positive to increase both a company’s and partner's internal knowledge and know-how through proper technical information disclosing .................................................... 95 Important of Core Technology of The Product Design, Manufacture Skill and Knowledge Disclosing ............................................................................................................................. 96 Knowledge Transfer and Disclosure to Succeed Mass Production Need............................. 99 Others findings:...................................................................................................................... 103 Chapter 5: Recommendations and Future Work........................................................................ 106 Recommendations.................................................................................................................. 107 Future Work........................................................................................................................... 111 Appendices................................................................................................................................. 113 Survey Instrument Design....................................................................................................... 113 References.................................................................................................................................. 126 ix List of Tables Table 4 The Summary of survey results to each hypotheses 61 Table 4.1 Decision factors for In-House made and Outsource 63 Table 4.2 The degree of important factors influencing firm’s outsourcing activities 69 Table 4.3 Degree of important of the factors influencing firm’s outsourcing decision 71 Table 4.4 The positive influence of outsourcing to firm’s business opportunity 74 Table 4.5 The negative influence of outsourcing to firm's business opportunity 75 Table 4.6 Percentage of firm's outsourcing 77 Table 4.7 The positive influence of outsourcing to company's competitiveness 78 Table 4.8 The negative influence of outsourcing to company's competitiveness 79 Table 4.9 Importance of In-House manufacturing in year 2007 81 Table 4.10 The positive influence of outsourcing to your company's resources 83 Table 4.11 The negative influence of outsourcing to company’s resources 84 Table 4.12 Importance of outsourcing manufacturing in year 2007 88 Table 4.13 The positive influence of outsourcing to your company's core competence 90 Table 4.14 The negative influence of outsourcing to company's core compete 92 Table 4.15 Degree technology, knowledge and skill vs. firm's competitive 96 Table 4.16 The positive influence of outsourcing to your company's internal knowledge and Know-How 99 Table 4.17 The negative influence of outsourcing to your company's internal knowledge and Know-How 100 x Table 4.18 The factors influencing firm's outsourcing decision 103 List of Figures Figure 3.1 The concept model of success outsourcing 29 Figure 3.2 Organization structure of an outsourcing based manufacturing firm 31 Figure 3.3 Reinforce causal loop diagrams from outsourcing perspective 33 Figure 3.4 Spiral causal loop of self-made approach from non-core business activity viewpoint 34 Figure 3.5 An outsourcing model vs. manufacturing firm’s long-term competence 36 Figure 3.6 Knowledge generation process from a routine-based view 39 Figure 3.7 Firm’s knowledge and competence 41 Figure 3.8 Top Talent challenges 50 Figure 3.9 Percentage of participant’s job function 57 Figure 3.10 Category of outsourced input 58 Figure 3.11 Company’s capital size of participants 59 Figure 3.12 Various industries type of participants 60 Figure 4.1 Decision factors of In-House made and outsourced 64 Figure 4.2 Outsourcing vs. In-House Made when skill not available internally 64 Figure 4.3 Outsource vs. In- house when skill is uniquely internally 65 Figure 4.4 The degree of important factors influencing firm’s outsourcing activities 68 Figure 4.5 Major Factors of Firm’s Outsourcing Decision Making 71 Figure 4.6 Outsourcing vs. Positive of Company’s Business Opportunity 73 Figure 4.7 Outsourcing vs. Negative to Company’s Business Opportunity 75 xi Figure 4.8 Revenue Contributed by Outsourcing Activities 77 Figure 4.9 Outsourcing vs. Positive of Company’s Competitiveness 79 Figure 4.10 Outsourcing vs. Negative to Company’s Competitiveness 80 Figure 4.11 In-House Manufacturing in 2007 81 Figure 4.12 Outsourcing vs. Positive of Company’s Resources 84 Figure 4.13 Outsourcing vs. Negative to Company’s Resources 85 Figure 4.14 The Comparison of Year 2007 to 2006 Outsourcing 87 Figure 4.15 Outsourcing Statuses in Year 2007 88 Figure 4.16 Positive Factors of Outsourcing 91 Figure 4.17 Negative Factors of Outsourcing 93 Figure 4.18 Degree of Important to Company’s Competitiveness 97 Figure 4.19 Outsourcing vs. Positive of Internal Knowledge 100 Figure 4.20 Outsourcing vs. Negative of Internal Knowledge 101 Figure 4.21 Outsourcing Factors of Decision Making 102 xii List of Abbreviations AVL Approved Vendor List BOM Bill of Material CM Contract Manufacturing EMS Electronic Manufacturing Services FDI Foreign Direct Investment ICT Information and Communication Technology MNE Multinational Enterprise ODM Original Design Manufacturer OEM Original Equipment Manufacture OLI Ownership/Location/Internalisation RBV Resource-based View ROI Return on Investment SOP Standard Operation Procedure TEC Transaction Cost Economics WTO World Trade Organization 1 Chapter 1: Introduction and Research Problem Purpose of This Study This study examines manufacturer and non-manufacturer firm’s long-term competitive advantage in Taiwan’s electronic manufacturing industry through proper outsourcing activities and information disclosing between outsourcing partners from both theoretical and practical perspectives. Thus, by utilizing outsourcing to gain cost effectiveness is not adequate to the firm's long-term benefits, but continuously learning from external resources through proper technology and information disclosing. Current Economic Environment From current economic recession started from quarter four of 2008, many mid or large sized companies were affected by the bad financial situation and caused short-term financial losses through higher operation costs and investment. These companies cannot bear during the changing and uncertain environment when compared to their ordinary operation costs in the past. It is especially very visible in the current bad economic depression that many companies encountered an economic crisis, their financial report changed from positive to negative on its profits; essentially, it is caused by low income and gross profit which can not cover total expense. Research Questions The research questions include 1. Is outsourcing still playing a major role now and in the future? 2. How can outsourcing win both short-term and long-term competitive advantage? This 2 study will prove outsourcing is an inevitability and growing trend of current globalization environment today and in the future. Many articles discuss protecting a product’s property, technical or marketing information to reduce the risk during the outsourcing processes. However, this study will test if the proper product technical information disclosure will succeed and lead the firm to gain newer knowledge and technological skills between both outsourced partners and customers through outsourcing practices and further ensure and sustain a firm’s long-term competitiveness even in an economic depressed environment. The Potential Problem The potential problems such as outsourcing practices are not just simply to gain a low labor wage as before, it is more complex in the tangibility of physical products and also intangible processes and knowledge that are transferred to fulfill various tasks in every industry. How to establish an outsourcing model with better knowledge absorbability capability than a partners’ did during the outsourcing processes is vital to an organization's long-term competitive advantage, especially in today's economic depressed environment. The Possible Solution and Data Collection This study uses a possible solution for data collection that was applied for both qualitative and quantitative data analysis research hypotheses method in my dissertation. Other data will employ institutional, Internet research data together with related theories from the literature review, detailed questionnaires and recommendations have also been investigated and proposed. 3 A Resource-Based View From the resource-based viewpoint that total resource costs should be less than its total value generated from those resources, the resources are including company owned fixed assets of equipment, facilities, and inventory However, those will become low efficiency or high cost during an economic environmental change. Thus, a company’s long term combativeness advantage should rely on a minimum of resource cost and maximum resource value. New knowledge generated from outsourcing practices through proper information disclosing and interaction with partners will be the best way to ensure a firm's long-term competitive advantage. Learning from Outsourcing Learning from outsourcing practices to generate and keep up-to-date knowledge into new company’s know-how that gains not only short-term finan