The Strategic Management of Outsourcing in the UK Ceramics Industry
Marilyn Carroll
Fang Lee Cooke
John Hassard
Mick Marchington
WORKING PAPER NO 17
ESRC FUTURE OF WORK PROGRAMME
ISSN 1469-1531 December 2001
Manchester School of Management
UMIST Manchester M60 1QD
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Introduction
British manufacturing has been regarded as the ‘ailing’ sector of the British economy
since the 1980s in the wake of intensifying global competition. Some manufacturing
firms have shrunk while others have disappeared, some are thriving but many are
struggling to survive in business. In certain sectors, such as footwear and textiles, there
has been a large-scale export of manufacturing activities over the last decade to other
countries, leaving the ceramic industry as probably the last ‘district’ of its kind in the UK
(Day et al., 2000). Nevertheless, ceramics has been hit harshly by the globalised market
and has faced severe competition from its counterparts in developing countries since the
1990s.
There have been heated debates among academics in recent years about how the industry
has responded to this adversarial business environment (e.g. Imrie, 1989, 1992; Rowley,
1992, 1994, 1996; Day et al., 2000; Warren et al., 2000). Discussions of what may be the
‘best’ way to preserve the UK ceramic manufacturing industry have also taken place at
high level among the key companies in the industry, as well as with the employers’
organisation, trade union and research and development organisation. This is a
particularly important issue for North Staffordshire, as the majority of suppliers and
manufacturers are located in and around a seven-mile radius of Stoke-on-Trent, an area
known as 'The Potteries'. It is a very important local issue as the employment of a large
proportion of Staffordshire’s workforce is directly and indirectly dependent on the future
of the industry. In order to survive and succeed, some ceramic firms have chosen to
downsize and outsource, targeting the mass market whilst others opted for merger and/or
developing a niche market, aided by product and production innovations.
At an
aggregate level, the ceramic industry has witnessed a dramatic decline in its workforce
and number of employers through merger, plant closure, technological change,
organisational restructuring and outsourcing. As an indication of the decline in the
workforce, membership of CATU, the Ceramics and Allied Trade Union, has decreased
2
from approximately 23,000 members to 15,000 over the last five years. Since union
density is nearly 100%, this is a pretty accurate proxy for job losses.
To date, there has been little research analysing the strategies ceramic firms are using to
respond to this more competitive business climate. More specifically, there are gaps in
our understanding of whether, and to what extent, ceramic firms in Stoke-on-Trent have
contributed to the ‘hollowing out’ of manufacturing in the UK through outward
investment to other parts of the world (Williams et al., 1990; Pike and Tomaney, 1998).
It is clear from the press that some firms have chosen to outsource core manufacturing to
other countries, but this has raised a number of objections, both from the trade union and
from other employers, as well as politicians in the area. Decisions by firms on whether or
not to outsource can only partially be explained by product market factors. There are
strong institutional forces at work, both within companies and in the wider local
economy, that constrain the use of outsourcing beyond North Staffordshire. In other
words, the traditional question, of why companies are outsourcing, can be turned on its
head: why are these firms so cautious about outsourcing? In order to analyse this in more
detail, we make use of a framework derived from the resource-based view of the firm and
the new institutionalist theory. The first part of this paper reviews briefly the literature on
outsourcing and RBV/institutional theory. We then move on to outline the research
methods employed, before providing data on three companies within their sector context.
Finally, we draw some (initial) conclusions.
The evidence for and against outsourcing
Within manufacturing, outsourcing has expanded rapidly to include many activities that
were once carried out in-house. Organisations are constantly reassessing what constitutes
the core and non-core aspects of their business and readjusting the way these activities
can be sourced, either in-house or externally. Specialist outsourcing firms have emerged
in response to this growing market. Due to globalised competitive pressures, outsourcing
has been used increasingly by firms in the UK so as to reduce their direct labour and
production costs. According to research on large companies in the recession period of
the early 1990s, ‘focus on core business’ was an action considered very important by
54% of the firms surveyed (Geroski and Gregg, 1997, p.74).
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Of course, the use of sub-contracting is nothing new for many firms in the traditional
areas of catering, cleaning, building maintenance, gardening and security. What is
unprecedented, however, is the rapid and wider spread of this long-standing practice
since the 1980s, expanding into other areas, many of which were once considered corefunctions by firms and carried out in-house. As Bosch et al. (2000, p.108) noted, ‘some
very radical decisions are being made to outsource apparently central core functions’.
Coombs and Battaglia (1998, p.5) view the so-called ‘global outsourcing market’ as big
business, and it has grown significantly in recent years. Managers have seen considerable
advantages from using external services in recent times.
Outsourcing is rather more extensive in the public sector than the private (Colling, 2000),
and in some cases this includes core activities such as housing benefit operations
(Marchington et al, 2001). However, there has been hardly any direct assessment of
outsourcing of core activities by manufacturing firms since Atkinson and Meager’s
(1986) study found that 70 per cent of the firms surveyed had increased their use of subcontracting arrangements since 1980. ‘Of these, 90 per cent had increased their use of
sub-contracted ancillary services, 51 per cent had increased their use of sub-contracting
in non-ancillary areas’ (op cit, p 28). Cully et al (1999, p 35) report that the vast majority
of establishments – 90% - now sub-contract one or more services, most typically in the
area of support services such as catering, cleaning and security. Ackroyd and Procter
(1998, p 171) suggest that this has extended from peripheral services to core operations,
with employers considering production operations as dispensable separate ‘segments’
that are regularly reviewed to assess whether or not they remain cost effective. Flexibility
is achieved partly by a much greater use of unskilled labour in-house, but also by a
willingness to use external sources of production.
In general, employers consider using outsourcing for a number of (overlapping) reasons.
Firstly, it allows them to concentrate resources on their ‘core’ business activities where
they have expertise and are likely to do best. Secondly, it enables firms to profit from the
rising comparative advantage of specialised service providers who may have expertise in
the areas concerned. These firms may be able to ‘achieve economies of scale, exert
monopsony buying power, achieve greater workforce flexibility, pay lower wages, etc.’
(NEDO, 1986, p.54), and therefore can accomplish the task at a cost lower than in-house.
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Thirdly, it provides firms with greater flexibility and productivity by using temporary
sub-contractors to cover fluctuating demands for labour (Cooke, 2001). This ‘just-intime’ deployment of human resources also brings other advantages of saving direct cost
(e.g. reducing headcount and overtime working) and indirect cost (e.g. cutting
administration and backup cost, saving recruitment and training costs, saving absence
cost, and reduced industrial relations problems). Fourthly, outsourcing creates
opportunities for firms to shift the burden of risk and uncertainty associated with the
business (Curson 1986, NEDO, 1986) to someone else. In addition, outsourcing enables
firms to keep future cost down by selecting the most competitive tender for renewing the
contract.
If the above reasons for outsourcing are predominantly concerned with cost reduction,
then the final reason listed here is focused more on capacity building associated with
organisational learning. It has been argued that outsourcing relationships can create
partnerships between contractors and clients that may facilitate learning and cross
fertilisation between the two firms (Rubery et al, 2002). Writers on organisational
learning (e.g. Araujo, 1998; Brown and Duguid, 1991; Boland and Tenkasi, 1995;
Pentland, 1995) have argued that learning should be seen as collective accomplishments
residing in heterogeneous networks of relationships between the social and material
world, which do not respect formal organisational boundaries. The importance of
networks and inter-organisational relationships (e.g. alliance, partnership) is also
recognised by writers from the strategic perspective. A network, according to Powell et
al. (1996, p.120), ‘serves as a locus of innovation because it provides timely access to
knowledge and resources that are otherwise unavailable, while also testing internal
expertise and learning capabilities’.
In spite of the increasing popularity of outsourcing, it is not without disadvantages. One
of the most serious of these is maintaining the continuity of skill supply. In many cases,
firms seek outsourcing to save training costs, assuming that someone else will carry out
the training to ensure the delivery of key skills. In light of the widely reported skill
shortages that are worsened by the adversarial training climate in Britain, outsourcing is
seen as a consequence of skill loss to the manufacturing industry where the stock of craft
skills takes a long time to build up.
Skill loss can have damaging effects on
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competitiveness. As Prahalad and Hamel (1990, p 84) so succinctly point out,
‘Outsourcing can provide a shortcut to a more competitive product, but it typically
contributes little to building the people-embodied skills that are needed to sustain product
leadership.’
Another major concern with outsourcing is loss of quality. A common worry for firms
that operate in the upper end of the product market is that outsourcing may lead to a
reduction in quality of product for various reasons. In the manufacturing setting, lower
standards of quality control, inferior technology and engineering/craft skills are often
cited as the major causes for the poor quality of products produced by contracting firms.
It is with this mixed bag of perceived benefits and disadvantages that firms have to make
their strategic decisions on whether or not to outsource.
Deciding whether or not to outsource: resource-based and institutional views
Industry and competitor analysis (e.g. Porter, 1980) and strategic decision-making (e.g.
Minzberg et al., 1976) are two major areas of strategy research. The former often focuses
on an economic perspective and is seen as dealing with decision outcomes, whereas the
latter, often studied from a behavioural perspective, is seen as dealing with decision
making. This area has benefited greatly from research traditions such as behavioural
decision theory and transaction cost economics. However, despite the crucial role of
strategic decisions and a growing body of literature, it is still widely recognised that our
knowledge of strategic decision-making processes is limited. Moreover, it is based
largely on normative or descriptive studies and on assumptions that remain untested (e.g.
Eisenhardt and Zbaracki, 1992; Pakadakis et al., 1998).
The resource-based view (RBV) of the firm has been a recent entrant into the literature
on strategy and is now widely accepted as a (if not the) dominant perspective in strategic
management (Hoskisson et al., 1999; Rouse and Daellenbach, 1999). The rising
popularity of RBV stems from its perceived complementarity to other approaches to
strategy and its potential to coalesce research streams concerning competitive advantage
to provide a rich and rigorous theory of the strategic firm (Conner, 1991; Mohoney and
Pandian, 1992). The notion of RBV was ‘rediscovered’ by Wernerfelt (1984) and
developed into a more meaningful concept by Barney (1991) who argued that
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organisations ‘obtain sustained competitive advantage by implementing strategies that
exploit their internal strengths, through responding to environmental opportunities, while
neutralising external threats and avoiding internal weaknesses’ (p.99).
The potential for sustained competitive advantage, Barney (1991) argues, requires four
specific attributes – value, rarity, inimitability, and a lack of substitutes. Value means that
the resource must be capable of making a difference to the organisation in the sense that
it adds value in some way. Rarity means that there must be a shortage of these particular
resources in the market to the extent that there are insufficient to go around all
organisations. Inimitability refers to the idea that it is very difficult, if not impossible, for
other employers to copy (imitate) these specific rare and valuable resources, even if there
were sufficient available in the market as a whole. Finally, these resources must not be
easily substitutable by other factors so that they are rendered obsolete or unnecessary. It
is the combination of these resources (human and non-human) that provides an
organisation with the opportunity to gain sustained competitive advantage.
A resource-based view proposes that resource selection and accumulation are a function
of both within-firm decision-making and external strategic factors. Within-firm
managerial choices are guided by an economic rationality and by motives of efficiency,
effectiveness and profitability (Conner, 1991). External influences are strategic industry
factors that impact on the firm, including buyer and supplier power, intensity of
competition, and industry and product market structure. These factors influence what
resources are selected, as well as how they are selected and deployed (Oliver, 1997).
Whilst RBV is very useful in helping us understand why differences exist between firms,
and consequently how certain organisations may be able to gain competitive advantage, it
has not looked beyond the properties of resources and resource markets to explain
enduring firm heterogeneity. In particular, it has not examined the social context within
which resource selection decisions are embedded (e.g. firm traditions, network ties,
regulatory pressures) and how this context might affect sustainable firm differences. Nor
has the resource-based view addressed the process of resource selection; that is, how
firms actually make, and fail to make, rational resource choices in pursuit of economic
rents.
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Oliver (1997) addresses this issue by advocating the combination of RBV with the new
institutionalism of organisation theory (DiMaggio and Powell, 1983, 1991). Oliver (1997,
p.701) sees firms as being influenced by powerful forces for difference and for similarity.
The former would include factors such as an orientation towards efficiency and deliberate
decision-making, whilst the latter, by contrast, would imply that decisions are deeply
embedded in specific norms and traditions. According to Oliver, an organisation’s
business strategy may be profoundly influenced by a complex institutional context of
resource decisions and not just by strategic factors such as the nature of the product
market. This institutional context includes decision-makers’ norms and values, corporate
history, organisational culture and politics, public and regulatory pressures and industrywide norms (Oliver, 1997). In other words, an organisation’s business strategy is shaped
by its social and economic context, and firms may be the captives of their own history as
well as that of their clients and the countries/communities within which they operate.
‘Yet it is the embeddedness of these institutionised competencies in history that also
increases their likelihood of being perpetuated without question’ (Oliver, 1997, p.702).
Other writers on strategic management (e.g. Brumagim, 1995; Brush and Artz, 1999)
have also made attempts to broaden the earlier approach to RBV from its emphasis on
economic rationality to incorporate other factors - such as human values, desires and
beliefs - as important determinants of strategic vision which are not sufficiently explained
by economic models. For example, Barney and Zajac (1994) pointed out that ‘most
strategic phenomena involve individuals in firms making decisions, taking actions, and
exercising leadership’ (p.6) and that decision making processes depends, at least in part,
on broader organisational phenomena, including the shared beliefs of individuals in a
firm. In addition, RBV has been criticised for its limited focus at organisational level and
therefore downplays the significance of institutional arrangements at national and
industry level beyond the workplace. As Boxall and Purcell (2002) note, some firms have
an immediate advantage in international competition because they are located in societies
that have much better educational and technical infrastructure than others.
Drawing from the integrative strength of both the resource-based view and institutional
theory, this paper offers an exploratory discussion of the factors that influence decisions
on whether or not to outsource fore manufacturing activities. In particular, in analysing
8
fieldwork evidence from a sample of U.K. ceramics firms, we will emphasise the nature
and role of sets of embedded institutional forces that lie at the heart of strategic decisionmaking in this ‘last’ industrial district (Day et al 2000).
Research Aims, Methodology and Institutional Context
The data on which the empirical part of the research investigation is based were collected
over a fifteen-month period from July 2000 to September 2001. The general aim of the
fieldwork was to gather data on new manufacturing and human resources strategies in
ceramics production, and in particular reasons for the adoption (or non-adoption) of
outsourcing and other inter-organisational contracting agreements. In order to assess the
nature of current strategic thinking in the industry we adopted a methodology congruent
with an institutional perspective. In so doing, contact was made not only with those
actors involved in direct strategic decision-making at the level of the firm, but also with
key actors from institutions in the wider business environment of the focal industry. It
was assumed that their activities were in various ways shaped by, or served to shape,
those of the manufacturing firms (see Lane and Bachmann, 1997). Accordingly, data was
collected from a range of managers and other employees at the level of the manufacturing
firms, as well as from institutions representing the trade union, the employers’
confederation, and research and development interests. In so doing the British Ceramic
Confederation (BCC), CATU, and the research and technology organization for the
industry (CERAM plc – formerly The British Pottery Research Association) were
contacted initially with a view to assisting in the design of the research process.
The aim of these discussions was to ascertain the main issues confronting the “future of
work” in the industry. The methodological process was indeed one in which a contextual
appreciation of structural and process changes within the industry – in terms of
organisational design and production, human resource and allied practices – was
investigated prior to those at the substantive firm level. As such, the method chosen for
this part of the research was a series of semi-structured interviews in which it was hoped
the interviewees would largely set the research agenda. This not only provided the
opportunity to find out more about the main factors influencing ceramics as a whole, of
which outsourcing was one, but also aim to generate a sample of firms that covered the
9
broad range of the industry. We had a series of discussions with the industry bodies, as
well as with five firms, in order to select a research design that would provide us with a
clearer picture of the industry. Ultimately, following analysis of the pilot interviews with
senior executives, a final research design was agreed in which in addition to our
contextual interviews, we would interview, in depth, employees from all levels of the
organisation at three of the five pilot companies. These interviews enabled us to derive a
sample that our respondents felt would give a fairly representative feel for the future of
work in the industry. Accordingly, we analyse outsourcing in greater depth at (a) a
hotelware producer, (b) a dedicated ‘aspirational’ china maker, and (c) a company that
dedicated much of its production to basic, low cost earthenware products. This provided
good coverage of the three main sectors of the tableware market. In this paper, these
focal case companies are given the pseudonyms Hotel China, Fine China and Domestic
China respectively.
In each of these three firms interviews were conducted with a range of senior and middle
managers plus several shopfloor workers. In the main these were roughly an hour in
duration, although some – particularly those with senior managers – were often far longer
(some as long as two and a half hours), whilst others, particularly with shopfloor workers,
were shorter (some as short as twenty minutes). As the aim was to examine, on the one
hand, decision-making strategies, and on the other the experience of new ways of
managing, a qualitative approach was deemed appropriate. The practice of developing a
semi-structured interview schedule was continued throughout the data collection process.
In every interview we were given permission to use a tape recorder. Subsequently the
tapes were transcribed verbatim. It is this tape-recorded material that forms the basis for
the case evidence summarised below. This case material relates to those parts of the
discussion that focused centrally on issues of outsourcing and contracting.
In the
discussion we extend the analysis to incorporate findings from other interviews
completed during the research period. In all, thirty-six interviews were undertaken.
Before we discuss findings from our interviews with the three focal companies, we
should point out that in terms of industrial context both the trade union and the
employers' association stress that outsourcing between companies in Stoke-on-Trent has
long been a feature of the industry. Neither sees this as detrimental because local
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production means that jobs and quality can be maintained.
However, outsourcing
overseas is a different matter. The trade union view is that this can damage local business
in the long-term by having a devaluing effect on the product, and that it exploits workers
in countries with low pay, low health and safety provision and poor working conditions:
I'm not against outsourcing if everybody had a global arrangement in regards
to terms and conditions of employment and a minimum wage and health and
safety provision. Then I think there'd be a lot of companies who'd say, 'okay,
if I have to comply with that then I may as well make it here' (Full-time
Official, CATU)
CATU has involved the local Euro MP in investigating the question of overseas
outsourcing and its effects on the local industry. The official union view is that ‘if
you are a reputable company in Stoke-on-Trent, the back-stamp should say where the
product is made…a lot of people want to know it’s a Stoke-on-Trent piece for all
sorts of reasons. We’re having discussions all the time with our political
representatives, local MPs and our local MEP to insist that takes place.’ However,
the union reluctantly accepts that some companies may have to outsource some
products in order to continue to survive and manufacture in Stoke-on-Trent and
acknowledges that there is little it can do, even though some UK jobs may be lost:
Is it better to lose a few to look after the many, or do you say we're not
going to accept this at any cost and we'll fight to keep production here? It's
a difficult dilemma (Full-time Official, CATU).
The BCC, representing the employers' interests, also believes that there is a
significant 'value-added' to the product derived from manufacturing in Stoke-onTrent. It is also important for Stoke-on-Trent to continue as a tourist area with
ceramics as a 'heritage' industry - its famous brand names attract visitors from all
over the world. However the Chairman of BCC believes that this can co-exist with a
certain amount of overseas outsourcing. As an example, one famous manufacturer
has outsourced a wide variety of its products, but continues to invest heavily in its
Stoke-on-Trent site and is a major tourist attraction.
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As a rule, however, it is important to recognise that the nature of the strategic
decision-making context has tended to be viewed in light of the significant socioeconomic forces that have long shaped and framed the culture of industrial behaviour
in the region. As a senior figure from the employers confederation explained to us:
There is an esprit de corps within this part of the world because the
industry's been based in this part of the world for centuries. You also
have to bear in mind that this is a legacy since much of the industry in
the not that distant past was owner-managed. We're probably talking 30
or 40 years which isn't a great deal of time and all the sons of the
pottery owners will have gone to the North Staffordshire Polytechnic
(as it then was). They'll all have gone to public school together in all
probability and they all got smashed together when they were at
university. They all drove sports cars and they all had a whale of a time.
But there is a social element to the owner-manager bit and the Potters'
Club is a focal point once they become owners themselves. So there's a
social aspect to it all. There's very much, stand together boys and we'll
be okay…So I don't know whether it's something to do with clay but
whether it's traditional industry, I don't know what it is but I've always
found in this particular industry a great deal of co-operation at one level
but they'll be scratching each others eyes out in another. But it does
work.
The Case Studies
TABLE ONE ABOUT HERE:
OUTSOURCING AT THE CASE STUDY COMPANIES
Hotel China
Hotel China manufactures hotelware, a very durable, vitreous product suitable for use in
all types of commercial or mass catering operations. It has sales and distribution
companies in Australia, the USA and Canada, sales companies in Europe and the Far East
and sales managers based in Africa and the Caribbean. Its manufacturing and warehouse
operations are on a single site in Stoke-on-Trent, employing 700 people. As a company it
sees itself as part of the hospitality industry as well as the pottery industry, and places
great emphasis on customer service and value for money derived from the long life of its
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product. In the context of the industry as a whole in North Staffordshire, Hotel China has
had a relatively short lifespan, having been formed in 1983 as a result of a management
buy out of the hotelware business of a large, well-known ceramics manufacturer. The
business has grown steadily and is now very profitable. The company philosophy,
enshrined in its mission statement, emphasises re-investment of profits in the business.
Hotel China owes its success partly to increase in demand for the product because of the
increased incidence of eating out but also, in the view of Hotel China managers, to the
approach of the company Chairman and sole shareholder. As the Sales and Marketing
Director said, he is ‘a very traditional English potter from a very traditional English
pottery manufacturing family.’ According to the Managing Director,
He is the sort of person for whom ownership means control, one hundred
percent. It is mine, I am proud of it. And he is immensely proud of this
business.
The extent and nature of the Chairman’s ‘hands-on’ control of the business is evidenced
by the fact that, according to the Managing Director, he tours the factory floor every day
in a boiler suit, and checks all sales emails and invoices. Indeed,
the business is microscopically managed … he knows where every penny
of his money is being spent, and if he knows that, he’s happy.
Hotel China has recently started outsourcing for the first time, on a trial basis, its range of
cookware to a specialist local manufacturer. The decision to outsource this range was
influenced by manufacturing constraints. The volumes produced are not high, but take up
a significant amount of firing capacity. The specialist firm takes Hotel China’s body,
produces it to biscuit stage and returns it to Hotel China for decoration. The Production
Director concedes that this first trial has not been entirely successful.
Problems have
included the logistics of getting the clay to the manufacturer, poor yields and high prices.
After the first batch it is hoped to renegotiate the price and supply a technical team from
Hotel China with the aim of reducing costs.
Apart from this recent exercise Hotel China has not outsourced any of its product, either
in the UK or overseas. This has not been so much an overall policy decision – ‘we can’t
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rule it out’ (Managing Director) – as a perception among managers that, at present, the
disadvantages, particularly of outsourcing overseas would outweigh the advantages. The
Managing Director stressed the importance of ‘hands-on’ control, and the proximity of
suppliers and back up support:
Whilst we can continue to manage here, in the centre of ceramic
excellence, where still the majority of our suppliers and supporters,
engineering support and the like, are based, we believe we can continue to
make the profits that we do.
Every five years Hotel China employs teams of outside consultants to advise the
business. One of the recommendations of the latest team of consultants was that it should
consider opening a factory in Mexico in order to be close to the key American market and
cut down on import duty. (Although this is not ‘outsourcing’ according to the strict
definition, industry managers in Stoke-on-Trent tend to use the term to encompass any
production
outside
a
company’s
Stoke-on-Trent
factory
or
factories).
The
recommendation was taken seriously, to the extent that the Production Director himself
travelled to Mexico to visit some ceramic companies. Conditions were described as
‘horrendous, absolutely horrendous’ and the view was that it would be impossible to
make the product to Hotel China’s standards there. Specific problems included the
unreliable supply of power and clean water for manufacture, the inferior quality of raw
materials and a very high turnover of staff, exacerbated by emigration across the border
to America. According to the Production Director, in order to start up such an operation
it would be necessary to take ‘the heart of the manufacturing team’ to Mexico, which
would have been detrimental to the Stoke-on-Trent business, and also to build up a new
customer service team there. The prudent philosophy of the Chairman and a perceived
clash of cultures were also seen as crucial elements in the decision not to proceed.
Commenting on another large ceramics manufacturer’s decision to operate a factory in
the Far East, the Production Director said that, although they ‘did it right’,
someone like us going over there, we’d be over there watching every
penny and wanting it paid back on the next day, and it just wouldn’t
happen because the cultures are totally different.
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Also of concern were security problems and political instability in some countries, and
ultimately the venture was seen as too risky:
Obviously by manufacturing overseas, or embarking on a strategy like
that, it involves a significant amount of risk, and if the shareholder doesn’t
want the risk, so be it. (Sales and Marketing Director).
The Hotel China case could be seen as providing evidence for the view expressed by
CATU that ‘successful companies don’t outsource’. Indeed its position in the profitable
hotelware sector of the ceramics industry, combined with prudent ‘housekeeping’ and the
streamlining of its UK production has meant that it has, so far, not needed to manufacture
or buy in from overseas.
Fine China
Fine China is a well-known manufacturer of domestic tableware in both earthenware and
bone china at the more expensive ‘aspirational’ end of the market. Founded in the
eighteenth century, it has a strong brand image encompassing several niches including
giftware, collectibles and limited editions. It concentrates on the more traditional designs
and regards its main customer base as the more affluent over 35s. One third of Fine
China’s volume is in one particular pattern, a seasonal range that is very popular in the
United States. There is a visitor centre on its manufacturing site in Stoke-on-Trent,
which is a major Potteries tourist attraction, and ten percent of Fine China’s sales
turnover is through the factory shop. The company employs 600 people, and is currently
profitable.
Fine China outsources some of its products to other UK manufacturers. These fall into
three categories. Firstly there are ceramics of a type that Fine China does not produce,
such as door furniture. These are outsourced to local firms that specialise in this type of
product. Secondly there are non-ceramic products such as napkins, tablemats and enamel
boxes which are Fine China branded, but produced for the company by other specialist
15
manufacturers.
Thirdly, Fine China outsources production to other UK ceramics
manufacturers when it has problems with manufacturing capacity, mainly for cups, mugs
and basic earthenware products.
Fine China does not source any ceramics tableware products from overseas for several
reasons. These include the difficulty of control ‘at arm’s length’. According to the
Production Director there are ‘very capable’ local firms that can produce blanks for
decorating by Fine China if necessary. This also gets over the problem of whether the
‘Made in England’ back stamp can be applied. The back stamp is very important for the
Fine China brand, especially in the export market where is seen as a sign of quality and
tradition:
You have to maintain ‘Englishness’ because that’s a large part of the
heritage that we all promote at this end of the market. So that means you
really can’t outsource, unless it’s an absolute last resort. (Managing
Director)
Other ceramics companies that have outsourced part of production overseas have faced
legal problems over this issue. In particular, two of Fine China’s main competitors have
either outsourced or manufactured overseas and their experience has been seen as less
than successful, not only because of the back stamp problem, but for other reasons such
as lower levels of output and efficiency. Having more stock in transit in containers,
possibly resulting in cash flow problems was another disadvantage mentioned by the
Production Director. Finally, and very importantly, there was concern about the quality
of products manufactured overseas that could damage the brand image. The Managing
Director’s strongly held beliefs on this issue are obviously well known throughout the
company as the following quotes reveal:
Our MD is so fussy over quality and the Fine China brand, the Fine China
product. It’s written right through him. (Planning and Distribution
Manager).
This place fortunately hasn’t outsourced, and the Managing Director, he’s
got Fine China written all the way through him and he doesn’t want
16
anybody else producing his product or anything like that. (Union
Representative).
Fine China has only ever sourced one type of non-core product from overseas. It allowed
its American company to buy in what were described as ‘tacky’ products such as glass
and china Christmas tree ornaments from the Far East, purely for the American market,
where they are apparently very popular. These items were marked ‘Fine China, Made in
Indonesia’ (or wherever). It is an indication of the importance of the traditional image of
quality and ‘Englishness’ that Fine China received several complaints from customers
who objected to Fine China’s products being made abroad.
Fine China is an example of a manufacturer which occupies specialist niches at the high
price, high quality end of the ceramics market.
As such, unlike some other
manufacturers, it has not faced competition from cheaper imports:
Our product profile hopefully is one which cannot be attacked quickly and
at a less cost or by a least cost producer. There is a differentiation in our
product. I think that is partly why we have seen our business stable.
(Planning and Distribution Manager).
Sales have remained steady, and Fine China has never considered outsourcing any of its
core products overseas. Indeed, issues of quality, tradition and the ‘Made in England’
back stamp are seen as so important to the Fine China brand image, that overseas
production would be seen as detrimental to the product.
Domestic China
Domestic China manufactures and supplies a wide range of products for the retail market,
including earthenware, stoneware, porcelain and bone china, covering all price
categories.
Its buyers range from DIY warehouses at one end of the market to
department stores at the other. In addition it has a successful hotelware business with the
largest share of the specialist UK market (although for the purposes of this study we have
concentrated mainly on the retail side of the business). The company has a strong family
17
involvement, dating back to 1926.
It operates five factories in Stoke-on-Trent,
employing approximately 1,200 people. Sixty percent of its products are exported.
Of our three main case study companies, Domestic China is the only one that has begun
to source tableware products from overseas, although company policy used to be not to
outsource abroad at all. The Directors’ view was that ‘it is the greatest evil ever spoken
in Stoke-on-Trent; never shall we tread this path’ (General Manager, Sourced Products).
During the 1990s, however, the strength of the pound badly affected Domestic China’s
export market, especially the European market.
In 1999, for the first time in the
company’s history, it made an overall loss despite the success of the hotelware side of the
business. The company responded by reducing the number of its UK sites and sourcing a
proportion of its products overseas, thereby becoming profitable again within two years.
The company plans to increase the proportion of outsourced products in the future. It did
£200,000 worth of sourced turnover in 1999, £3m worth last year, will do £7m this year,
and expects this to grow even further.
Factories overseas manufacture products to
Domestic China’s own designs, and manufacturing and quality teams from Domestic
China inspect and audit the overseas factories.
Outsourcing started with bone china ware from an Indian factory: ‘We managed to hook
onto an excellent supplier very early on in the process’ (General Manager, Sourced
Products). It then moved on to hand painted ware from China and now buys from other
Far Eastern countries including Sri Lanka, Thailand, Malaysia, Indonesia, also Eastern
Europe and South America -‘all the low wage countries around the world, basically’
(General Manager, Sourced Products). Several factors influence the choice of supplier.
Europe is preferred because of quicker turn around.
Secondly, depending on the
longevity of the product, the relationship with the supplier is important. Quality is the
next consideration, then price. Countries like India that have historical links with the UK
and similar legal systems are also said to be easy to deal with. There have been a few
problems with quality, necessitating changing suppliers, but generally quality is not an
issue.
Although the product manufactured in Stoke-on-Trent may be technically
18
superior, batches from overseas contain fewer mistakes because the low cost producing
countries have the time to spend on rigorous inspections:
The cheaper manufacturers around the world are obsessed with not
making mistakes on the stuff they send out … they can inspect the hell out
of the product. It is pretty cheap anyway so if they have to throw lots of
stuff away they are not too worried either, although it does concern them.
So they really take their time, and the pieces that go in the box are all
good.
The next step is to partly produce a product in Stoke-on-Trent and send it overseas for
finishing. We were told that this would not affect the ‘Made in England’ back stamp,
although the legal issues are complicated and controversial. To date Domestic China has
not gone into any joint ventures, and maintains the buyer/supplier relationship.
According to Domestic China managers, outsourcing abroad has brought many
advantages. The cheaper costs of overseas production allow Domestic China to compete,
particularly at the lower end of the market. It can still retain its ‘core competencies’, such
as automated mechanised printing, and under glaze print, allowing the overseas
companies to concentrate on the hand skills, lithography and hand painting that are in
short supply in the UK. Through outsourcing Domestic China has been able to expand its
product range to include stoneware, which it does not manufacture at all in the UK.
Outsourcing also gives greater scope for Domestic China’s designers to design products
requiring production techniques that Domestic China does not have. Buying in frees up
manufacturing capacity in Stoke-on-Trent that can be taken up by the successful
hotelware side of the business. Although the ‘Made in England’ back stamp is not
important at the cheaper end of the market, it is at the higher end, particularly for the
export market, so Domestic China can concentrate its UK manufacture on this type of
product.
On the other hand Domestic China can offer advantages to the overseas
manufacturers in terms of its expertise in design, marketing plus distribution channels.
Indeed, ‘the vast majority are happy to be subcontract manufacturers’ (General Manager,
Sourced Products). Transfer of knowledge in the form of manufacturing expertise takes
place so that the overseas company is able to manufacture to the required standards:
19
We have issued them with moulds and tools and so basically say, ‘Right,
you are going to make this for us. This is exactly how to do it’, and have
supported them all the way through it. At the same time, sold them some
machinery to help as well. (General Manager, Sourced Products)
However, this transfer of knowledge is on a ‘need to know’ basis to protect Domestic
China’s interests. As the Production Director remarked:
We give them as much as we want to give them for a given product. We
have certain core competencies within the UK that we are not going to
divulge.
Finally, although the product is made elsewhere, Domestic China’s buyers are still
dealing with a name that they know and trust.
To summarise, Domestic China has faced serious problems with the retail side of its
business in recent years. Although it manufactures a wide range of products covering all
price categories this has been problematical for two reasons. At the ‘top’ end of the
market it is difficult to compete because it does not have a strong brand image or wellknown name: ‘The problem for Domestic China is we haven’t got a top nick brand like
Fine China’ (Managing Director). At the lower ‘cut-throat’ end of the market retailers
are constantly exerting pressure to drive prices down.
This combined with cheap
overseas imports to force a number of Domestic China’s competitors out of business.
These factors, combined with the strength of the pound in the 1990s resulted in Domestic
China making a loss for the first time in its history. Although it was a difficult decision,
outsourcing overseas was one of the measures taken to make the company profitable
again. This has resulted in shifting the balance of its UK activities from manufacturing to
design, marketing and distribution. The managers at Domestic China were fully aware of
the implications of overseas outsourcing for ceramics manufacturing in North
Staffordshire, especially in terms of a further reduction in the number of manufacturers
and suppliers. The General Manager (Sourced Products) predicted
20
You are going to have one or two manufacturers left. Sad. I am caught up
in the middle of it, and causing it at the same time as having to do it,
because the margin we make on sourced product is big and fat and
healthy, and it supports [Domestic China’s] UK manufacturing.
Conclusions
According to Webster et al. (1997), outsourcing can be categorised into three categories:
‘capacity’, ‘specialised’ or ‘economic’ subcontracting. Capacity subcontracting tends to
be short-term and unstable, set up purely to meet unexpected or exceptional increases in
demand. Specialised sub-contractual relationships are formed when a longer-term
perspective is established with the client firm in order to access specialised expertise or
technology that is not available in-house. Economic subcontracting is established
primarily where cost benefits can be obtained by subcontracting work out. Our research
on the ceramics industry in Stoke-on-Trent suggests that outsourcing activities are limited
and largely take the form of capacity and/or economic subcontracting, rather than longterm specialised outsourcing. Interestingly, the senior managers with whom we spoke
tend to interpret the word ‘outsourcing’ in quite a different way from its conventional
meaning. That is, rather than viewing outsourcing as any sub-contract arrangement, work
undertaken by local firms is not regarded as outsourcing. It is only when this is contracted
out of the local area, and in particular overseas, that it can be treated as ‘real’
outsourcing.
For years, manufacturing activities have been undertaken by other firms in the area,
particularly when one of the major companies runs into problems with manufacturing
capacity or where there is a small run that needs to be produced. On these occasions,
other firms in the area, including Domestic China, act as suppliers of basic material that
is then either finished or sold on by the firm that is doing the contracting-out. The major
advantage of this appears to be that control can be maintained over production, or
capacity can be freed up so that other more lucrative or difficult work can be completed
in-house on time. Within the wider institutional framework, it also means that jobs are
retained within Stoke-on-Trent, and there is less potential damage to the local economy
than there would be if work had been transferred to an overseas factory. Both the BCC
and the CATU representatives with whom we spoke regarded this as quite traditional
21
behaviour. The HR Director at the BCC noted that ‘that’s been a feature of the industry
for a long time. They’ve always been in each other’s pockets in that sense.’ Whether this
is a ‘true’ product, in the sense that it is made at a particular company, is more of a moot
point according to the union, but with small orders the cost of setting up machinery
would probably make the job uncompetitive.
Overseas manufacturing is altogether a different matter. There is little doubt that, as
Domestic China has found, this is cheaper than continuing to source all orders in-house.
Not only are wage levels much lower, but it is likely that other working conditions – such
as health and safety, hours of work, and fringe benefits – are much worse. For a number
of the manufacturers, despite the attraction of lower production costs, this was not a route
that they intended to pursue because of major anxieties about the quality and reliability of
the production process and the finished product. There were also doubts about basic
supplies of energy and raw materials, as well as transportation costs and delays. Domestic
China felt that it had overcome these problems – with very positive financial benefits –
by ensuring that reliable and reputable suppliers were available in the Far East, Eastern
Europe and South America. Moreover, the company had implemented systematic and
extensive performance controls to ensure that standards were maintained. Ultimately,
however, it was the financial losses in the late 1990s that eventually stimulated the
company into outsourcing overseas, because prior to that the senior management had
been vehemently opposed to this strategy. The other case study companies had remained
financially sound and had therefore decided that there was no immediate pressure to relocate manufacturing facilities. Furthermore, the critical importance of the ‘made in
England’ backstamp in their product markets, as well as a strong commitment to the area
throughout the industry, provided a powerful restraint on any decision to outsource
production overseas.
Applying a modified RBV-institutional framework to this analysis enables us to analyse
outsourcing decisions in a more systematic manner. Questions of added value and
profitability can be seen in the context of the variable importance of several factors.
These include customer expectations about the backstamp, the value of retaining a
manufacturing presence in Stoke-on-Trent as a tourist attraction and as an extra source of
revenue from the company shop, and the opportunity to use manufacturing facilities for
22
other (more lucrative) jobs. For companies such as Fine China, and to a lesser extent
Hotel China, there is hardly any incentive to manufacture their core products beyond the
local area. Conversely, for Domestic China, there are much fewer reasons for retaining
basic manufacturing in the area, and the added value of overseas operations, albeit with
strong controls in place, offers a much-needed route to success and survival. ‘Rarity’
relates to the degree to which the manufacturers are prepared to trust other companies to
maintain consistent and reliable supplies of the right quality. All three of the case study
companies felt that some of their products could be made perfectly well by other local
employers. No doubt this was helped by the presence of a single union and employers’
organisation. Between them, they have a strong influence over levels of training for the
industry as a whole, as well as over wages and other terms and conditions of
employment. Nevertheless, the Chairman of CATU felt that:
‘companies will take different positions really depending on how well they're
doing. The trend I think is, if companies are doing badly because they're
vulnerable they out-source. If companies are doing well they don't out-source.’
The case study companies differed not just in terms of product range and market niche,
but also due to their long and varied histories in the area, and the highly central – and to
some extent, inimitable – role played by senior executives in day-to-day activities at their
organisations. The Chairman of Hotel China was renowned for his hands-on approach
and for the fact that he wore a boiler suit as he toured the factory each day, but also
continued to cast a detailed eye over the figures. The Managing Director of Fine China
was totally opposed to any outsourcing of core products overseas, and he too was heavily
involved in operational activities. Longstanding involvement in the management of
Domestic China and loyalty to the area meant that the controlling family there was
initially reluctant to outsource. However, when financial difficulties forced a re-think the
new policy was embraced wholeheartedly. As the Managing Director remarked 'you
have to forget all that crap about history. The area has to embrace the whole world.’ The
distinctiveness of each of these companies depends on the types of product market in
23
which they operate, on the importance of ‘local’ production as a sales device, and of
course on the views taken by senior managers about how best to maintain profitability.
In other words, despite the long and close regional ties that have bound the industry
together over many years, this is now being questioned as global competition and
tightened cost structures become ever more prominent. The power of institutional forces
is being weakened, or at least recast, as the leading firms in the industry explore the
opportunities available from outsourcing some of their core manufacturing overseas.
Indeed, the future for this type of work looks bleak if the ‘last industrial district’ starts to
potter around with outsourcing.
Note: The three-year research project associated with this paper is funded by the UK
Economic and Social Research Council.
The project is investigating 'changing
organisational forms and the reshaping of work'. It involves a number of in-depth case
studies of a variety of organisational forms, including franchises, employment agencies,
Private Finance Initiatives, partnerships, supply chain relationships and outsourcing.
Other members of the research team are: Jill Rubery, Hugh Willmott, Jill Earnshaw,
Damian Grimshaw, Irena Grugulis, Gail Hebson and Steven Vincent.
24
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28
Characteristics
Hotel China
Product market
Commercial
product
Fine China
and
standardised
Aspirational
product
specialist market niche
Domestic China
and
Retail,
market
lower
end
of
the
Lacks strong brand image
Profitability
Highly
organisation
Extent of outsourcing
Nature of outsourcing
Reasons for outsourcing
profitable
Profitable organisation
First ever loss in late
1990s, now profitable again
after outsourcing
Limited
Limited
Extensive after
totally opposed
Local firms only at present,
although the company checks
out overseas provision every
few years
Local firms principally
Local and overseas
Constraints on manufacturing
capacity
Constraints on manufacturing
capacity
Frees
up
manufacturing
capacity for other products
Non-core products considered
Lower costs
years
when
One non-core ‘tacky’ product
outsourced
Reliability of supply
Reasons for not outsourcing
Doubts
over
reliability
quality
and
Concerns
about
political
stability in other countries
Importance
of
‘made
England’ backstamp
in
Control
problems
overseas
and anxieties about stock in
transit
Importance
of
‘made
in
England’ backstamp for small
range of products
Selling potential of visitor
centre
Company culture
Hands-on Chairman
Fussy and totally dedicated
Managing Director
Considerable
involvement
family
Domestic
China
sometimes
undertakes sub-contract work
for other firms
Table One: Patterns of outsourcing at the case study companies
29