Ib2 Grpb L5 Determinents Of Inter-firm Sourcing And Market Performance - Roy Teh
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DETERMINANTS OF INTRA-FIRM SOURCING AND MARKET PERFORMANCE Maasaki Kotabe & Janet Y.Murray By: Roy Teh
Introduction
Earlier studies have shown that internal sourcing of major components has a direct bearing on multinational firm's market performance. The following components strongly affects the degree if internal sourcing:
Process innovation Asset specificity Management’s attitude Nationality Availability of substitute
Product Related Variables: Firm Related Variables: Product Innovation Process innovation Asset Specificity
Nationality Management’s Attitude
Global Competitive Strategy Internal Sourcing of Major Components
Performance Strategic Financial
Industry Related Variables: Switching Cost Number if Suppliers Number of Substitute
Hypothesis Development
Kotabe et al found that global intra sourcing of major components influences the product’s market performance. Major components are defined as intermediate products that could not be sourced in newly industrialised countries without technical support from the principal firm and reflect its proprietary technology Proprietary technology is a concept which involves product and process innovation
Determinants of Internal Sourcing Criterias Leroy
(1976) found that strategic product decision depends on product, firm and industry characteristics. Following his findings, this study investigates product-, firm-, and industry related variables as determinants of internal sourcing of major components.
Product Related Variable – Product Innovation
By internalizing highly proprietary technologies, firms can
keep major components in their corporate system. reap the full economic rent of its technologies rather than receiving less by relying on market mechanisms (imperfect).
The higher the technology content of a product, the more likely is a firm to source internally. Also, with increasingly shorter product life cycle, outsourcing major components is a sure way to leak product related trade secrets to competitors (Bermingham, 1991). Product innovation tends to be reflected in those major components procured internally Hypothesis 1a – product innovations is positively related to extend of internal sourcing of major components
Product Related Variable – Process Innovation
Process innovation consist of an alternative way of gaining and maintaining competitive advantage. It involves a great deal on intangible know-how (eg. JIT, TQM, CAD/CAM) across a wide spectrum of value added chain (Porter, 1986). Such know-hows are generally hard to codify and imitated (Kogut & Zander, 1993). A high level of manufacturing process capabilities equally provides a long term competitive advantage over competitors.
Hypothesis 1b – process innovations is negatively related to extend of internal sourcing of major components
Product Related Variable – Asset Specificity
Major or crucial components almost always require deployment of specialised assets It is necessary for a firm to choose between “make or buy” decision for these components. Asset Specificity refers investment made with idiosyncratic (nonmarketable) assets. It is expected that when asset specificity is relatively high, firms would rely on internal sourcing to control its quality and availablility.
Hypothesis 2 – Asset Specificity is positively related to the extend of internal sourcing for major components
Firm Related Variable – Management Attitude Within
a firm, strategy chosen to fulfill a business objective is partly dependent on management's attitude. Management attempts to decide on the extend of internal sourcing only if its perceived benefits exceeds expected cost (Geringer, 1991). Hypothesis 3 – Managements favoring intra sourcing is positively related to the extend of internal sourcing of major components
Firm Related Variable – National Differences in Sourcing Behavior
Nationality of multinational firm plays an important role in their strategic decisions. Davidson (1989) suggested that “there exists a strong corelation between the nationality of a corporation and its operating strategy”. Graham & Krugman (1989) observed a high level of import propensity for Japanese firms in US compared to European firms. This attribute may be due to:
Japanese FDI are newer and less mature in US compared to European firms Japanese firms are more reluctant to use US made components from independent suppliers due to their unsatisfactory quality (Fortune, 1986).
As these firms become more experienced in the foreign market, they tend to source more from local independent suppliers.
Hypothesis 4 – Japanese multinational firms emphasizes more internal sourcing of major components than European firms.
Industry Related Variable – Switching Cost If
switching costs are high, the sourcing form’s ability to have price concessions or request for additional components during emergencies will be restricted. Internal sourcing will eliminate the costly dependence on independent suppliers. Hypothesis 5a – Switching Cost is positively related to extend of internal sourcing for major components.
Industry Related Variable – No. of Suppliers & No. of Substitutes
No. of Suppliers determines dictates the availability of supply sources. No. of Substitutes allows flexibility for firms to turn to suppliers from other industry for its needs.
Hypothesis 5b – # of supplier is negatively related to extend of internal sourcing for major components. Hypothesis 5c - # of substitute is negatively related to extend of internal sourcing for major components.
Industry Related Variable – Internal Sourcing & Market Performance
Internationalization theory underscores the importance of sourcing internally to protect monopolistic advantage in know-how. Core competency argument emphasizes the strategic imperative of focusing on the production of major components that provide competitive advantage over rivals. Internal sourcing of major components for the manufacture of a product can help fulfill the strategic aspect of market performance (market share, sales growth rate) by securing consumers’ goodwill and confidence (Casson, 1982, Prahalad & Hamel, 1990). However, use of internal sourcing may not positively contribute to financial performance (return on sales, return on investment) due to high investment on R&D, manufacturing & distribution channel.
Hypothesis 6a – product’s strategic mkt performance positively related to extend of internal sourcing for major components. Hypothesis 6b – product’s financial mkt performance negatively related to extend of internal sourcing for major components.
Conclusion Product
and firm related variables generally have more significant influence on internal sourcing then industry related variables. Internal sourcing is a micro level decision, therefore more apt to be influenced by controllable factors in the firm’s internal environment. Because of strategic importance of major components, internal sourcing is mostly influenced by strategic (process innovation & asset specificity) rather than cost (switching cost & no. of suppliers) factors.
Introduction
Earlier studies have shown that internal sourcing of major components has a direct bearing on multinational firm's market performance. The following components strongly affects the degree if internal sourcing:
Process innovation Asset specificity Management’s attitude Nationality Availability of substitute
Product Related Variables: Firm Related Variables: Product Innovation Process innovation Asset Specificity
Nationality Management’s Attitude
Global Competitive Strategy Internal Sourcing of Major Components
Performance Strategic Financial
Industry Related Variables: Switching Cost Number if Suppliers Number of Substitute
Hypothesis Development
Kotabe et al found that global intra sourcing of major components influences the product’s market performance. Major components are defined as intermediate products that could not be sourced in newly industrialised countries without technical support from the principal firm and reflect its proprietary technology Proprietary technology is a concept which involves product and process innovation
Determinants of Internal Sourcing Criterias Leroy
(1976) found that strategic product decision depends on product, firm and industry characteristics. Following his findings, this study investigates product-, firm-, and industry related variables as determinants of internal sourcing of major components.
Product Related Variable – Product Innovation
By internalizing highly proprietary technologies, firms can
keep major components in their corporate system. reap the full economic rent of its technologies rather than receiving less by relying on market mechanisms (imperfect).
The higher the technology content of a product, the more likely is a firm to source internally. Also, with increasingly shorter product life cycle, outsourcing major components is a sure way to leak product related trade secrets to competitors (Bermingham, 1991). Product innovation tends to be reflected in those major components procured internally Hypothesis 1a – product innovations is positively related to extend of internal sourcing of major components
Product Related Variable – Process Innovation
Process innovation consist of an alternative way of gaining and maintaining competitive advantage. It involves a great deal on intangible know-how (eg. JIT, TQM, CAD/CAM) across a wide spectrum of value added chain (Porter, 1986). Such know-hows are generally hard to codify and imitated (Kogut & Zander, 1993). A high level of manufacturing process capabilities equally provides a long term competitive advantage over competitors.
Hypothesis 1b – process innovations is negatively related to extend of internal sourcing of major components
Product Related Variable – Asset Specificity
Major or crucial components almost always require deployment of specialised assets It is necessary for a firm to choose between “make or buy” decision for these components. Asset Specificity refers investment made with idiosyncratic (nonmarketable) assets. It is expected that when asset specificity is relatively high, firms would rely on internal sourcing to control its quality and availablility.
Hypothesis 2 – Asset Specificity is positively related to the extend of internal sourcing for major components
Firm Related Variable – Management Attitude Within
a firm, strategy chosen to fulfill a business objective is partly dependent on management's attitude. Management attempts to decide on the extend of internal sourcing only if its perceived benefits exceeds expected cost (Geringer, 1991). Hypothesis 3 – Managements favoring intra sourcing is positively related to the extend of internal sourcing of major components
Firm Related Variable – National Differences in Sourcing Behavior
Nationality of multinational firm plays an important role in their strategic decisions. Davidson (1989) suggested that “there exists a strong corelation between the nationality of a corporation and its operating strategy”. Graham & Krugman (1989) observed a high level of import propensity for Japanese firms in US compared to European firms. This attribute may be due to:
Japanese FDI are newer and less mature in US compared to European firms Japanese firms are more reluctant to use US made components from independent suppliers due to their unsatisfactory quality (Fortune, 1986).
As these firms become more experienced in the foreign market, they tend to source more from local independent suppliers.
Hypothesis 4 – Japanese multinational firms emphasizes more internal sourcing of major components than European firms.
Industry Related Variable – Switching Cost If
switching costs are high, the sourcing form’s ability to have price concessions or request for additional components during emergencies will be restricted. Internal sourcing will eliminate the costly dependence on independent suppliers. Hypothesis 5a – Switching Cost is positively related to extend of internal sourcing for major components.
Industry Related Variable – No. of Suppliers & No. of Substitutes
No. of Suppliers determines dictates the availability of supply sources. No. of Substitutes allows flexibility for firms to turn to suppliers from other industry for its needs.
Hypothesis 5b – # of supplier is negatively related to extend of internal sourcing for major components. Hypothesis 5c - # of substitute is negatively related to extend of internal sourcing for major components.
Industry Related Variable – Internal Sourcing & Market Performance
Internationalization theory underscores the importance of sourcing internally to protect monopolistic advantage in know-how. Core competency argument emphasizes the strategic imperative of focusing on the production of major components that provide competitive advantage over rivals. Internal sourcing of major components for the manufacture of a product can help fulfill the strategic aspect of market performance (market share, sales growth rate) by securing consumers’ goodwill and confidence (Casson, 1982, Prahalad & Hamel, 1990). However, use of internal sourcing may not positively contribute to financial performance (return on sales, return on investment) due to high investment on R&D, manufacturing & distribution channel.
Hypothesis 6a – product’s strategic mkt performance positively related to extend of internal sourcing for major components. Hypothesis 6b – product’s financial mkt performance negatively related to extend of internal sourcing for major components.
Conclusion Product
and firm related variables generally have more significant influence on internal sourcing then industry related variables. Internal sourcing is a micro level decision, therefore more apt to be influenced by controllable factors in the firm’s internal environment. Because of strategic importance of major components, internal sourcing is mostly influenced by strategic (process innovation & asset specificity) rather than cost (switching cost & no. of suppliers) factors.
