POST-CONFERENCE PUBLICATION
Paper Submission
5th International Conference on Competence-based Management
Helsinki, June 10-14, 2000
Helsinki University of Technology, Espoo, Finland
JÖRG FREILING*
A Resource- and Competence-based Perspective on Co-Location:
The Case of Insourcing
Revised Version
April 19th, 2002
*
Prof. Dr. Jörg Freiling, University of Bremen, Faculty of Business & Economics, Chair of SME
Management, Start-up Business & Entrepreneurship, D-28334 Bremen, Germany, Phone: ++49 421
218 96 45, Fax: ++49 421 218 8203, email: freiling@uni-bremen.de.
1
A Resource- and Competence-based Perspective on Co-Location:
The Case of Insourcing
Abstract
Despite several contributions in the last decade, the field of customer/supplier
cooperation is still slightly under-researched. In practice, there are several new modes of
inter-firm coordination which provide substantial improvements of both effectiveness
and efficiency. One example among others is spatial supplier integration: suppliers erect
plants at the customer’s site in order to improve collaboration. This case of close
customer/supplier cooperation is termed as insourcing and belongs to the upcoming colocation arrangements in practice.
One intention of the paper is to point out what insourcing is about. By the help of two
case studies, one in the automotive component industry and one in the software
industry, insourcing projects in practice are described and analyzed with regard to the
experiences of the supplier. With the bilateral and the network coordination two
different modes of insourcing could be identified.
The findings of the case studies need to be analyzed in theoretical terms. Especially the
resource- and competence-based perspective appears to be appropriate in order to
explain the major difficulties and challenges of insourcing projects on the one hand. On
the other hand, the competence-based view is useful in order to explain the key factors
of the success of insourcing projects. The findings suggest that there are especially two
different motives why firms make use of insourcing arrangements: First, the customer
faces the problem of substantial resource gaps. Second, insourcing can be basic in order
to found an effective learning partnership by resource pooling. The performance of
insourcing arrangements largely depends on the absorptive capacities of the partners,
the interconnectedness of assets, the asset mass efficiencies to be achieved, and the use
of tacit knowledge.
2
The Problem
Many firms are not satisfied with their degree of vertical integration and therefore try to
make use of outsourcing in order to increase efficiency and/or effectiveness. Having
outsourced several activities, the firms are often still dissatisfied because of the new
outsourcing solution. At first glance, there seems to be a dilemma-like situation. By a
more in-depth analysis we can conclude that there is a wide range of possible
outsourcing arrangements (i.e., Arnold 2000, p. 25) and it is usually hard to find an
approach matching firm-specific requirements. In many cases outsourcing is practiced
in a too unspecific way with the result that the products delivered by the supplier do not
respond to customer’s needs. Even practitioners call for more sophisticated approaches
of outsourcing, using the full range of options bilateral coordination offers. With regard
to the outsourcing debate we can summarize that one particular field of coordination
appears to be slightly under-researched (apart from i.e. Willcocks/Lacity 1998;
Grover/Teng/Cheon 1998): the range of coordination types very close to hierarchy but
still resting on bilateral coordination. In business practice, several examples can be
found where one special kind of such bilateral arrangements seems to be up-and-coming
– co-location. Co-location means the durable unification of supplier’s and customer’s
facilities in – at least – one of three following ways (see fig. 1):



The supplier erects value adding facilities at the customer’s site. In case of close
collaboration of component suppliers and OEM’s in developing new product
concepts, such a co-location can be observed sometimes.
The two parties decide to erect facilities at a completely new site. Again, we find
those arrangements in the automotive component industry, especially when
suppliers and OEM’s build up new R&D laboratories.
The customer integrates himself at the site of the supplier. This case is the most
relevant one in business practice and should, therefore, be examined more
closely.
3
supplier's site
neutral site
customer
customer's site
supplier
supplier
supplier
customer
customer
"insourcing"
supplier expected to erect a
factory within the factory at
the customer's site ("in-plant")
Fig. 1: Modes of Co-Location Overview
Obviously, co-location – as a specific kind of outsourcing very close to hierarchy –
makes sense in case of high degrees of vertical coordination which can be found in
business-to-business markets and if there are considerable resource gaps to be closed by
vertical partnerships. In a certain way co-location can be useful in oder to achieve
substantial advantages of bilateral coordination by avoiding some of the most important
drawbacks of traditional outsourcing arrangements. Co-location should be analyzed by
taking a closer look at projects in practice. The paper proposes that especially the
resource-/competence-based view is basic in order to understand the critical factors
lying behind success and failure of such arrangements. In order to start an analysis of
the idea and the effects of co-location, it seems to be necessary to focus upon one of
three specific modes of co-location in order to avoid overloading this study. Therefore,
as mentioned above, this paper deals with the phenomenon of local supplier integration
at the customer’s site, called “insourcing”.
The Outsourcing and Insourcing Debate
Outsourcing has been one of the main topics of purchasing management during the
1980’s and 1990’s (e.g. Ford/Farmer 1986; Quinn 1992; Welch/Nayak 1992;
Venkatesan 1992; Lacity/Hirschheim 1993; Stuckey/White 1993; Quinn/Hilmer 1994;
Greco 1997). However, not all of the outsourcing arrangements which have been
4
established recently were completely satisfying (e.g. Bettis et al. 1992;
Clark/Zmud/McCray 1998). Especially from the customer’s point of view there have
been some important drawbacks with regard to managing the new customer/supplier
interfaces. Beside some important benefits by making use of external sources, for
example pointed out by Welch/Nayak (1992, p. 23) and Clark/Zmud/McCray (1998, pp.
64-69), the customer’s main problems usually are the following: purchasing products
with a lack of customization, losing important know-how, eroding firm-specific
capabilities, increased costs, and becoming dependent on the supplier.
In the face of these facts, more and more customers are looking for new ways of interfirm cooperation avoiding the disadvantages of outsourcing arrangements as well as
benefiting from the strengths of the suppliers. Such new modes should help to avoid too
dangerous states of dependence on key suppliers. Moreover, the arrangements should
cause synergies by a close supplier/customer collaboration. Such a cooperation can even
be useful in order to develop key resources, capabilities, and competences of the
partners. Following the ‘insourcing concept’ is one important way to respond to the
challenges outlined above. With regard to insourcing there are some important aspects
to be addressed in this paper:
- Where do we find co-location in the way of insourcing and how do the
arrangements look like?
- What are the results of such insourcing projects in practice?
-
How can the results be explained in theoretical terms, especially in terms of the
competence-based perspective?
Basics of the Insourcing Concept
Insourcing – as an acronym for “inside resource using” – is an ambiguous term which
needs clarification. Insourcing can mean nothing else but turning a “buy” into a “make”
situation. This process is a matter of traditional ways of vertical integration or reintegration, respectively, well-known from literature. Another interpretation of
insourcing describes the process of a local supplier integration (“in-plants”, “factory
within a factory”). In this case, a supplier is expected to move – at least with parts of his
facilities – permanently to the customer's site in order to improve coordination between
the partners due to the short distance. As only the second understanding of insourcing is
consistent with co-location, this paper will only deal with:
insourcing as durable local supplier integration on the customer’s site.
Insourcing arrangements can be described more precisely by the following four
elements:
5




The insourcing subject is the institution integrating one or more suppliers.
Especially original equipment manufacturers (OEM’s) sometimes act as insourcing
subjects.
The insourcing object is the performance to be provided by the spatially integrated
suppliers. Arnold (2000, p. 24) points out that the objects can also be defined in
terms of the underlying processes to be performed.
The insourcing partners are the suppliers erecting a resource network at the
customer’s site.
The insourcing design is the specific mode of cooperation which needs to be
implemented by customer/supplier negotiation.
With regard to the insourcing design a distinction between part-time supplier
integration and supplier integration of the durable kind is necessary. In business-tobusiness settings, local supplier integration often takes place in case of project
coordination, for instance in plant construction as well as in operation concepts based
upon license/cross-license or leasing agreements. This kind of supplier integration
usually does not belong to co-location as it is meant in this paper unless no permanent
integration takes place. In contrast, we can find some “open-end arrangements”
especially in the automotive and the software industry (Arnold/Scheuing 1997,
Willcocks/Lacity 1998, Freiling/Sieger 1999, Arnold 2000). Moreover, there are some
very specific situations where an insourcing takes place in case of “build-operate-own”
arrangements between customer and supplier in the plant engineering and mechanical
engineering industry (Backhaus 1999). The first two industries are subject to a closer
analysis. As there are only a few quite complex examples of this close
customer/supplier cooperation, the case study method appears to be adequate to gain
empirical insights.
Insourcing Arrangements: Empirical Observations
The intention of the empirical work was to identify industries where insourcing
arrangements are established in order to find better compromises between “in house”
production and traditional ways of outsourcing. Moreover, the different ways of
making local supplier integration work should be analyzed. Therefore, it is to be
stressed that the intention of the study was not to deliver a representative impression
about insourcing in different industries. This could be subject to ongoing research. As a
starting point, a few well-fitting pilot cases should be selected in order to understand
ways how insourcing can be implemented. Data was collected from several depth and
telephone interviews, based upon explorative, non-standardized surveys in order to
facilitate an extensive collection of information and opinions. One question was about
focusing upon a single industry or to look for case studies from different ones. In the
6
last couple of years there were some new insourcing projects in the automotive industry
which could be subject to the case study analysis. However, similar arrangements can
be found in case of outsourcing IT and logistics. As a first step, it appeared to be useful
to gather insights from different industries in order to get an impression about the
different ways how this kind of co-location can be implemented. Industry-specific
research could be an important step, even if a more representative state-of-the-art is
necessary. Therefore, two prominent case studies were selected: the first one is the
Micro Compact Car MCC GmbH, producing the ‘smart’ in Hambach, France; the
second is about Oracle Switzerland in Bottmingen, Switzerland.
Case Study 1: MCC’s ’smartville’ – the “industrial park” approach
Beside the fact, that there are some more examples of insourcing arrangements in the
automotive industry (Woodruff et al. 1996, Freiling/Sieger 1999), the cooperation
between MCC, a Daimler-Chrysler subsidiary, and five component manufacturers
seems to be the most delicate example of co-location. MCC established a so-called
„industrial park“ (`smartville`) in Hambach, basing upon the co-location approach cited
above. The component suppliers and MCC work together closely in order to improve
the concept of the city car “smart” and to manage production. The industrial park
represents an innovation in a threefold way:
-
The ‘smart’ itself is an innovation in the new segment of micro cars (product
innovation). MCC is actually facing substantial buyer resistance and missed all the
sales targets.
-
-
MCC implemented a process innovation by making use of a sophisticated concept
of modularization. The architecture of the car consists of a few highly integrated
modules and systems.
MCC’s co-location represents an organizational innovation, too, because MCC
developed a completely new design of cooperation between the OEM on the one
hand side and the part supplying component manufacturers as the so-called ‘system
partners’ on the other. MCC worked out life-cycle contracts with every partner,
following a single source approach, and gave the whole responsibility for specific
modules to the particular first-tier supplier. MCC’s role in the project was about
acting as a central coordinator (“hub firm”) in order to define production standards,
to improve process flows, to foster product development, and to facilitate the
coordination in order to establish an efficient insourcing network. Less than 25% of
the value adding activities were performed by MCC itself.
The insourcing partners were facing substantial problems by implementing the
industrial park. The basic problems can be summarized as follows:
7
-
It was difficult to match the high quality standards of MCC.
-
All the component manufacturers were depending on second-tier suppliers. Having
erected the facilities at MCC’s site, they had to make close adaptations because of
the fact that MCC expected the system partners to be highly flexible with regard to
the delivery of components/modules.
-
Close adaptations were necessary between every single system partner and MCC
and, furthermore, between the system partners themselves. The reason why all
those adaptations were necessary was that MCC determined the assembly process
and the location of every system partner exactly (see fig. 2) in order to guarantee an
efficient process of value creation. Especially, such an approach enables MCC
producing cars in round about four hours time.
-
The whole approach is only workable in case of all the partners working together in
an atmosphere of mutual trust. MCC makes use of target pricing and therefore
needs detailed information about the cost structures of all partners. However, not all
the suppliers were ready for such an open atmosphere.
Brakes
Front axles
Front module
Assembly
Drivetrain
Cover-Parts
Assembly
Interior/
Exterior
Meeting Point
Drive module
Assembly Cockpit
Tridion-Frame
Painting
Doors
Quality Control,
Ignition of the
completed
vehicle's engine
Delivery
Production
Preparation
Center
tasks to be
performed by MCC
tasks to be
performed by MCC's
system partners
Fig. 2: MCC’s Insourcing Approach (Pfaffmann 1998, p. 22)
With regard to recent developments, the insourcing partners got most of the initial
problems fixed:
8
-
MCC was in the intended position of a network coordinator after all. That means
that MCC was in touch with recent important developments in the automotive
component industry especially by permanently contacting the system partners. Of
course, MCC is not in the position to accumulate component-specific know-how in
a comparable way as in case of a “make” decision. Nevertheless, MCC is well
informed about important trends in the supply sector.
-
Moreover, MCC is in an excellent position in order to establish a degree of product
specificity matching internal requirements. The areas of the system partners can be
“co-managed” by MCC: MCC is able to define frame-giving specifications without
undermining the autonomy of the system partners who are free to choose their
individual response.
-
By such an industrial park a state of close interdependence emerges. However, it is
a state of dependence without significant power asymmetries. All the parties of the
industrial park make substantial investments, the payoff depends on working
together closely. Therefore it is one feature of this kind of insourcing that the
different parties are striving for synergies by inter-firm collaboration.
Consequently, the interviewed managers argued that the success largely depends on
learning one partner from the other.
Case Study 2: Oracle’s modular contract approach
The question arises if insourcing arrangements could be interesting for firms in the
software industry. Software firms are working in rather dynamic market settings. In
many situations, the business is technology-driven and most of the customers are not
aware of the various opportunities new software solutions are offering. Moreover, there
are many customers in business markets demanding specific software applications as
well as lots of services around the software. With regard to the fast-developing
opportunities of using software and the permanently changing market situation,
customers often perceive substantial risks in software buying decisions. It is possible to
state that the search and experience qualities in software purchasing are decreasing
while credence qualities (Nelson 1970; Darbi/Karni 1973) are increasing in such a way
that the business turns into “credence transactions” from customer’s point of view.
Hence, it is not astonishing at all that very many firms try to outsource their
departments of information systems and to cooperate with reliable software firms.
Some firms of the software industry were quite alert in the past and recognized their
outstanding business opportunities. More and more customers need full service
offerings and therefore they decided to provide more sophisticated software solutions,
9
even moving towards co-location. However, the insourcing projects differ substantially
from those in the automotive industry (Freiling/Sieger 1999). Oracle Switzerland is one
example among others.
There are some key accounts of Oracle demanding specific software applications in
order to turn traditional process management into a computer aided one or to manage
computer aided processes in a better way. Among other suppliers, Oracle realized that
in some cases only a close collaboration at the customer’s site could be an adequate
response in order to find out what the customer-specific software solution is looking
like and how it can be improved. Therefore, software engineers were sent out to the
customer in order to acquire customer-specific know-how. Basically, in order to match
customer requirements, it is very important to know exactly how the processes of the
customer work and what kind of problems the staff of the customer realizes. Especially
the workflows and routines of the customer need to be put into consideration when
customer-specific IT solutions of the comprehensive kind are to be developed. Without
a precise understanding of customer’s requirements, the software engineers are not able
to make adequate decisions. Therefore, quite often implemented solutions need to be
reconsidered because of non-conformance to certain internal process requirements of
the customer. In other words, the personnel has to get to know customer’s processes
almost as well as customer’s staff itself. The general task turns from software
engineering to business process consulting in a certain way.
It suggests itself that local supplier integration could be a useful means in order to
arrange closeness to the customer and customer satisfaction. Furthermore, permanent or
quasi-permanent presence of a team at the customer’s site is a basic supposition in order
to strengthen customer ties by providing software-related services. Customers report
that there are certain problems by using software almost all the time. In most of the
cases the problems are extremely urgent because important procedures do not work
anymore. When a quick response by the software provider is needed, supplier’s task
force usually faces serious problems because the engineers are not fully aware of the
customer’s specific hardware/software configuration. Usually, it takes precious time to
analyze the specific situation. Such problems can be avoided by making use of
insourcing arrangements. Members of the staff of the software supplier are assigned to
the key account and quite often they spent predominant parts of their working time at
the customer’s site. Their job is about providing the following software-related services:
software consulting, process consulting, implementation, education of customer’s staff,
troubleshooting, and maintenance.
Oracle decided to establish a modular system of “support service offerings”. Different
contract modules according to fig. 3 enable Oracle to match standard requirements of
10
non-key customers on the one hand and highly specific requirements of key accounts on
the other hand more precisely. Insourcing solutions are part of Oracle’s support service
offerings, promoted under the slogan “a dedicated Oracle support center at your site”
and combined in way indicated in fig. 3.
Oracle Switzerland
extent of the service
package
Oracle Bronze
Oracle Silver
Oracle Gold
Expert
Online
extent of service package,
degree of proximity
Expert
Packages
Expert
Onsite
Expert
Satellite
Oracle's insourcing
philosophy: "... a
dedicated full-service
support center at your
site"
Fig. 3: Oracle’s Modular Contract Approach
Core element of Oracle’s insourcing is a support account management where one or
more service people are working at the customer’s site with the only task to manage key
account’s software-related problems and needs. This support account management is
subject of service contracts between Oracle and some very special key customers. As
Oracle reports, the service people are predominantly utilized with their jobs because
usually the staff of the customer realizes several different problems which will not be
articulated in case of conventional troubleshoot visits by the software provider. In case
of permanent presence, usually an atmosphere of trust in the Oracle staff emerges. This
is useful to the customer-specific team of Oracle engineers because on this way they are
able to gain a deeper understanding of customer’s problems and to several opportunities
of product and service improvements, possibly deepening the relationship.
However, this close and trustful cooperation does not only cause increasing customer
loyalty but is very useful, indeed, when Oracle is trying to gather information about
competitors. Customers are willing to give information about Oracle’s position in the
11
market compared with the relevant competitors. Another exciting opportunity of Oracle
as insourcing partner is the chance to manage so-called “business migration” projects.
Those business migrations represent the switch of a customer from one software
supplier to another. In case of those switches, Oracle is able to analyze the former
software solution and to install a completely new one. As a result, Oracle gets to know
very much about the ways competitors implement customer-specific software
applications. All those aspects clearly indicate that insourcing in this way can be an
instrument to achieve competitive advantage. However, Oracle recognized that this
ambitious way of insourcing is only appropriate in case of ‘real’ key accounts.
General remarks
Although small in number, the findings of the two case studies reveal that there is no
general way of insourcing to be practiced. This impression is supported by other
investigations in literature (i.e., Willcocks/Lacity 1998; Grover/Teng/Cheon 1998). It
would be interesting to analyze more insourcing arrangements in practice in order to
find out the most important features underlying the several co-locations in different
industries.
With regard to the two case studies cited above, we can distinguish between bilateral
agreements between one supplier and one customer (Oracle) and network-like
arrangements (MCC). Especially the extent and the kind of customer’s procurement
problems are determinants of the customer’s decision to select a well-fitting approach.
In case of substantial resource gaps, it is more likely that a network of suppliers will fill
these gaps in an adequate way. Therefore, this dimension of an insourcing typology as
indicated in fig. 4, can be theoretically founded by making use of the resource-based
view1. Moreover, a distinction is possible with regard to the way of cooperation. On the
one hand, the cooperation can be organized in a way of resource pooling without
substantial knowledge transfer processes between the insourcing partners. On the other
hand the accumulation of knowledge and competence building can be the central reason
why customer(s) and supplier(s) cooperate. Again, this gives rise to the impression that
especially the resource- and competence-based approach can be an appropriate
theoretical background for a closer analysis.
1
Founded especially by Penrose 1959, Teece 1982 & 1984, Rumelt 1984, and Wernerfelt 1984, there
were very many follow-up publications making significant contributions to theory development, such
as Barney 1986 & 1991, Grant 1991 & 1995, Dierickx/Cool 1989, Amit/Schoemaker 1993, Peteraf
1993, Hamel 1994, Sanchez/Heene/Thomas 1996, Sanchez/Heene 1997.
12
gap-closing
arrangements
learning-oriented
arrangements
Oracle's approach
insourcing dyad
insourcing network
MCC's industrial
park
Figure 4: A Resource-based Typology of Insourcing Arrangements
The Resource- and Competence Perspective as a Theoretical Background
When aspects of vertical coordination are to be addressed in theoretical terms, very
often researchers favor the transaction-cost approach (TCA) developed by Coase (1937)
and Williamson (1985). However, the TCA is an approach with some major
deficiencies, as many researchers pointed out (i.e. Blois 1990; Sydow 1992). Especially
the problem of inconsistencies in argumentation, the simple-mindedness, and the
limited ability to analyze evolutionary aspects lead to the conclusion that theoretical
alternatives should be put into consideration. The resource-and competence-based view
represents a promising alternative in order to address some of the most important
aspects of insourcing.
The resource- and competence-based approach puts forward the question how
sustaining competitive advantage can be achieved. The relevant basics can be
summarized as follows (Barney 1986 & 1991, Dierickx/Cool 1989, Grant 1991,
Amit/Schoemaker 1993, Peteraf 1993, Sanchez/Heene/Thomas 1996):
- Uncertainty in economic decision-making and incomplete markets cause
asymmetries concerning the dispersion of information and knowledge between
economic actors as well as long-lasting differences between firms with regard to
firm-specific resource endowments.
13
-
-
-
Every firm follows an individual path of development. Especially, making economic
decisions leads to irreversibilities and commitment to a specific organizational path
(Ghemawat 1991; Ghemawat/Sol 1998).
Therefore, firms appear heterogeneously in the marketplace caused by specific
resources and competences. Many authors promote the notion that especially
intangible resources are the drivers of heterogeneity (i.e. Hall 1992). Without trying
to proof that, firm-specific capabilities and competences are usually dominant
variables when sustaining competitive advantage of particular firms in the market
process is to be explained (i.e. Hamel/Prahalad 1994). According to
Sanchez/Heene/Thomas (1996, p. 7-8), capabilities can be understood as “repeatable
patterns of action in the use of assets to create, produce and/or offer products to a
market”, whereas competences reflect the “ability to sustain the coordinated
deployment of assets in a way that helps a firm achieve its goals”.
A path-dependent analysis of the development of firms does not only facilitate the
explanation of the heterogeneity of organizations and phenomena of organizational
commitment. Moreover, the accumulation of idiosyncratic knowledge and the use of
this knowledge in the market process helps to create new market-relevant
knowledge and to foster competence building. This is basic in order to perform
activities in a way providing superior benefit to the market and to achieve
competitive advantage. Competitive advantages resting upon unique resources and
especially competences are hard to tackle by competitors, as there are usually forces
protecting imitation and sometimes even substitution of critical resources and
competences. In literature, those forces are termed as “isolating mechanisms”
(Rumelt 1984). Those mechanisms – described in more detail in literature (i.e.
Lippman/Rumelt 1982; Rumelt 1984; Dierickx/Cool 1989, Teece/Pisano/Shuen
1990, Barney 1991, Mahoney/Pandian 1992; Sanchez/Heene 1996;
Eriksen/Mikkelsen 1996; Oliver 1997) – are especially tacit knowledge,
interconnectedness/social complexity, asset mass efficiencies, time compression
diseconomies, and causal ambiguity.
The existence of asymmetrical resource endowments between firms is a basic reason
why firms are engaged in inter-firm collaboration. Sanchez, Heene, and Thomas (1996,
p. 7) use the term “firm-addressable resources” in order to stress that there are important
assets outside the firm “which a firm does not own or tightly control, but which it can
arrange to access and use from time to time”. Those firm-addressable resources and
capabilities are maybe the basic reason why firms make use of co-location and
especially of insourcing arrangements, indeed. Insourcing helps to achieve that the
acquisition firm-addressable resources will be fostered in a more goal-directed way.
Inter-firm cooperation in general does not guarantee that the external assets of the
partner firm can be used in the way the firm wants to. In case of insourcing as local
14
supplier integration the situation turns. Some assets of the supplier will be dedicated to
the customer for a longer period time, usually well-matching customer requirements.
According to the Sanchez/Heene/Thomas (1996, p. 7) distinction between firm-specific
resources (“those which a firm owns or tightly controls”) and firm-addressable
resources, co-location leads to the following situation: The site specificity of the
resources usually has no consequences with regard to ownership. However,
arrangements such as insourcing cause a state of more or less tight control. Especially
the MCC case study clearly demonstrated the considerable opportunities of MCC to
make use of the resources of the five system partners. Although there is no state of
perfect control of partner’s resources, a substantial amount of control is given.
Therefore, co-location causes an interesting intermediate state between firm-addressable
resources and firm-specific ones for a long time: the state of firm-addressable resources
turning to de-facto firm-specific resources. This situation appears due to the state of
“de-facto vertical integration”, described by Monteverde/Teece (1982) and Teece
(1982) in another theoretical context, and helps to explain why it is possible for firms to
make use of outsourcing payoffs while avoiding its pitfalls when insourcing takes place.
With regard to co-location and especially insourcing in a resource- and competencebased context, according to the insourcing typology mentioned above there are two
main reasons why such a close cooperation makes sense:
- The insourcing project is gap-oriented: The gap, caused by missing or
-
underdeveloped resources of the customer, needs to be closed by the help of
suppliers. On the one hand side, insourcing arrangements emerge with only one
supplier working at the customer’s site in case of very specific gaps. On the other
one, there is a network of suppliers collaborating according to customer’s
requirements in ways such as the industrial park highlighted above. The pooling of
resources is the key to partnership success. However, the partners are working more
or less independently, as there is a close division of labor with only a limited
number of tasks to be performed jointly.
The insourcing is learning-oriented: It is not enough to pool supplier’s and
customer’s resources at the customer’s site. Moreover, it is an explicit goal of the
collaboration that the partners should learn one from another. The foundation of
partnership-specific knowledge is maybe the most crucial part in order to further
competence building.
In both cases there is one particular question to be answered: How far do the resources
of the insourcing partners fit together? This problem of asset complementarity in an
inter-firm context needs to be considered carefully because closing resource gaps as
well as realizing learning advantages can only be achieved if a resource fit is given.
However, in business practice usually there are no perfect fits. Partner-specific
15
adaptations respond to this problem. These adaptation processes help to accumulate
partner-specific knowledge. Nevertheless, not in every situation partner-specific
adaptations lead to the expected results and sometimes they fail. Moreover, adaptations
are costly. This stresses the need of a careful assessment of partner firms with regard to
their resource endowment before insourcing takes place (see fig. 5).
Concerning MCC’s industrial park such a careful selection took place. MCC had the
chance to make use of the considerable purchasing experience of Mercedes-Benz.
Furthermore, MCC negotiated with several eligible suppliers intensively in order to
select their system partners. Oracle’s customers managed the situation similarly.
Summing up the examples of insourcing as resource pooling, it appears that the way the
suppliers specify their resources is one crucial factor of customer’s considerations to
make use of spatial integration. If there are critical tasks of the customer to be
performed where the own resource endowment is not strong enough and if there are
well-fitting partner firms outside, insourcing as a resource gap-closing arrangement
becomes a promising opportunity.
Fig. 5: Resource- and Competence-based Determinants of Insourcing Success
Whereas the resource-based view is an adequate reference point in order to analyze
insourcing in terms of resource pooling, the learning partnerships need a more focused
theoretical background. The competence perspective appears to be appropriate because
16
organizational learning can be used in order to foster competence building activities as
major goal of these partnerships. Competence building can be defined according to
Sanchez/Heene/Thomas (1996, p. 8) as “(...) any process by which a firm achieves
qualitative changes in its existing stocks of assets and capabilities, including new
abilities to coordinate and deploy new or existing assets and capabilities in ways that
help the firm achieve its goals. Competence building creates, in effect, new options for
future action for the firm in pursuing its goals”.
Learning partnerships are founded especially in order to create synergies. The
cooperation, again, is based upon pooling resources being different in kind but
compatible. However, one decisive difference is that especially competence building by
interorganizational learning becomes the main underlying target of learning
partnerships. That means that the principle of a more or less strict way of partitioning
work, well-known from gap-closing insourcing arrangements, will be substituted by a
close collaboration represented by mutual exchange of knowledge between the
participating firms. The knowledge management is centered around the two basic tasks:
accumulation and integration of knowledge, both closely intertwined.
The insourcing partners try to share their specific knowledge relevant to the insourcing
arrangement. Sharing knowledge between organizations can be understood as a basic
supposition in order to develop distinctive competences in competition (Leonard-Barton
1995, Pierick/Beije 1996). Leonard-Barton (1995) points out that competence buildingoriented activities of knowledge creation base upon (1) shared problem-solving, (2)
implementing and integrating new technologies and methodologies, (3) constant formal
and informal experimenting, and (4) pulling in expertise from outside. The Oracle case
study clearly indicates that supplier’s technological skills and capabilities need to be
combined with customer know-how to manage internal processes. Only if such
knowledge integration takes place, it appears to be possible to make use of the various
opportunities of IT systems.
With regard to knowledge accumulation, the insourcing partners together are able to
absorb a higher level of knowledge than all for their own. In this context, the notion of
“absorptive capacity”, put forward by Cohen/Levinthal (1990), is useful in order to
explain advantages of insourcing (see fig. 5). Absorptive capacity means the “(...)
ability of a firm to recognize the value of new, external information, assimilate it, and
apply it to commercial ends” (Cohen/Levinthal 1990, p. 128). Obviously, a local
supplier integration is able to expand this capacity, as the case studies reveal. Whereas
Oracle already tries to exploit the enhanced absorptive capacity, MCC’s industrial park
could profit from this potential, especially if the corresponding firms make the decision
to collaborate more closely with regard to special topics.
17
The question is still open how insourcing-related knowledge is to be managed in order
to foster competence building. One important suggestion is made by Nonaka (1994),
promoting four different kinds of knowledge conversion according to the
epistemological and ontological dimension of knowledge: socialization, combination,
externalization, and internalization. Indeed, there are certain requirements to be satisfied
when competitive advantage based upon competences should be achieved. As
Krogh/Roos (1992) point out, knowledge is only useful to the emergence of core
competences if it is on the one hand not bound to a single person (subjective
knowledge) and on the other hand not generalized in a way that almost can get access to
(objective knowledge). Transforming knowledge in a way that a limited number of
persons shares it, seems to be the most promising way to foster competence building
because competitors are confronted with serious problems by trying to acquire it. The
organizational knowledge is group-specific and not depending on a single person who
could be hired away. This makes acquisition almost impossible. The case studies reveal
that insourcing fosters the emergence of group-specific knowledge as usually only parts
of supplier’s and customer’s staff work together closely.
Beside this ontological aspect, knowledge management has to put epistemological
matters into consideration. Especially, there is an on-going debate in literature (see
Sanchez 1997, pp. 163-174) whether knowledge should be explicit or tacit in the face of
the threat of imitation by competitors. The case studies reveal that the development of
organizational and especially interorganizational routines (Nelson/Winter 1982) plays a
key role when insourcing success is to be explained. The MCC case study indicates that
without the abilities of the partners to interact and to make resource adaptations work,
the value-adding activities were performed in a more or less poor way. Similarly, the
Oracle case study reveals that the Oracle staff needs to be integrated into the specific
processes of the customer in order to recognize what the IT-related problems are about.
Moreover, the customer’s personnel has to get in touch with Oracle’s support team to be
informed about the various opportunities IT systems are offering. Hence, the emergence
of interorganizational routines appears to be basic in order to explain success and failure
of insourcing arrangements: The more the partners are able to develop such routines and
to embed specific knowledge, the more increases of efficiency respectively
effectiveness can be observed.
Furthermore, beside these facets of knowledge management, the insourcing partners
have to make use of the other isolating mechanisms when competence building should
be fostered and substantial contributions to the success of insourcing arrangements
should be made. According to fig. 5 and the case studies the following isolating
mechanisms are to be mentioned:
18
Interconnectedness/social complexity: Of course, it is usually impossible for
competitors to get a complete impression about rival’s resource endowment and its
development over time because of the complexity of resource ties in resource networks
(Dierickx/Cool 1989; Reed/DeFillippi 1990; Eriksen/Mikkelsen 1996). With regard to
interorganizational resource networks, there are even more substantial problems of
complexity. Especially in case of an organizational network such as the MCC industrial
park, it is very hard for “outsiders” to find out concrete ways of imitation and
substitution. The complexity of resource networks underlying the (inter)organizational
competences helps to safeguard the state of distinctive competences in competition, too.
Asset mass efficiencies (i.e. Dierickx/Cool 1989; Markides/Williamson 1994): As
mentioned above, every kind of insourcing as local supplier integration is based upon
the pooling of resources. Such pooling usually makes sure that critical gaps in
customer’s resource endowment can be closed. Having done so, the coordination will be
much more effective. The asset mass is growing and especially in learning partnerships
the complementarity of pooled resources sometimes safeguards critical mass effects
(Dierickx/Cool 1989). Supplier and customer personnel work together hand in hand and
cause such an impulse. Especially the Oracle case study revealed that after some
adaptations between Oracle and its customers, the collaboration was gaining
effectiveness due to the fact that important knowledge could be transferred between the
partners – especially because of the insourcing partnership. Moreover, the emergence of
interorganizational routines appeared to be basic in order to explain such efficiencies of
asset mass.
All in all the following conclusions can be drawn:
- In order to explain success (and failure) of co-location arrangements, it appears to be
useful to analyze the isolating mechanisms of the resource-based view. The more
the firms are able to make them work, the more likely we can observe success such
as achieving sustainable competitive advantage as an important measure of
insourcing performance. However, measuring insourcing success in terms of
-
sustaining competitive advantage appears to be problematic as the measurability of
this criterion is restricted. Therefore, we have to look out for other measures, such as
indicators of product or total quality, the impact on market share or market
penetration or similar aspects. This is to be put into consideration in on-going
research in order to proof strengths and weaknesses of insourcing more closely.
Moreover, it is not only necessary to analyze single isolating mechanisms but even
the (dynamic) interplay among the mechanisms, as indicated in fig. 5. However, it is
sometimes very hard to recognize how the mechanisms are intertwined. Very much
more empirical work is necessary in order to operationalize the isolating
19
mechanisms and to measure the impact of specific isolating mechanisms on
performance.
-
If the customer has a competence to manage supplier networks (see
Gemünden/Ritter 1998) in a goal-oriented way, he is able to enhance the potential of
insourcing arrangements - although there is no empirical evidence of network
superiority. However, the discussion of co-location indicates (again) the necessity to
gain further insights in developing competences of managing organizational
networks.
Co-Location and Recent Developments in Management
Obviously, a growing number of firms considers to make use of co-location. However,
the question arises whether insourcing is in a certain way contradictory to several recent
developments in strategic management in general and interorganizational coordination
in particular, as it promotes
- centralization instead of decentralization,
- hierarchy-like coordination instead of the usual forms of “co-ordination by cooperation” (Richardson 1972), and
- fixed agreements instead of loose forms of virtuality.
Despite the fact that empirical evidence is still low, the answer seems to be that
insourcing – as shown in the study – is predominantly in tune with recent developments
in management theory and practice. First, co-location as durable spatial integration of
supplier(s) and customer(s) is usually not a “stand-alone concept” at all. It is
accompanied by other forms of coordination as many of the observed suppliers perform
only parts of their task on the customer’s site. Moreover, many of such preferred (firsttier) suppliers make use of special supplier networks of second- and third-tier suppliers
by their own. By analyzing all the activities of the supplying network from the
customer’s point of view, there is no doubt that co-location can only be a corrective of
an over-emphasized decentralized coordination. It appears to be a useful instrument in
order to establish an appropriate balance between centralization and decentralization.
Moreover, it stresses the importance of making strategic decisions concerning this
critical topic of centralized versus decentralized buying (Woodside/Samuel 1981; Ford
1990; Matthyssens/Faes 1996).
Second, co-location demonstrates some limitations of virtual organizations. Obviously,
there are some aspects of coordination which cannot be managed “virtually” because i.e.
close personal interaction is necessary. However, much of the Miles and Snow vision
came true. They stated:
20
“Thus, we expect the 21st century firm to be a temporary organization,
brought together by an entrepreneur with the aid of brokers and maintained
by a network of contractual ties.” (Miles/Snow 1984, p. 26-27)
Nevertheless, the case studies from the automotive and software industry clearly
indicate that even virtual coordination needs to be accompanied by durable, maybe even
non-virtual arrangements. In this sense, co-location can represent something like a
missing link. Understood in this sense, co-location again is not contradicting
contemporary developments in management.
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