Sourcing practices and innovation: Evidence from the auto industry on the sourcing relationship as a dynamic capability
Michael R Weeks
Department of Management, Sykes College of Business, University of Tampa, Tampa FL, United States of America
PP: 304 - 326
Abstract
This research uses the dynamic capabilities (DC) framework to analyze innovation efforts in the auto industry to understand the linkages between sourcing relationships and innovation. The DC framework provides a look at several capabilities within the relationships that facilitate innovation processes such as robust bi-directional information flows and learning processes centered on the relationships. To examine the innovation processes, the author conducted fourteen interviews and examined a variety of secondary source materials for a comparative analysis of three case studies.
The research supports the view that sourcing relationships are dynamic capabilities which enable firms to develop resource synergies from the internal and external environment. Viewing these relationships as dynamic capabilities leads to the conclusion that investing in relational resources can contribute to competitive advantage for the firm.
Keywords
innovation, sourcing, outsourcing, dynamic capability, auto industry, inter-organizational relationship
Article Text
The auto industry is a global economic force which has tremendous impact on the fortunes of many national economies (Fine & Raff 2001). While many consider the original equipment manufacturers (OEMs) such as Toyota, Ford, and General Motors (GM) to be the makers of the cars with their nameplates on them; in fact, since the mid-1990s outside suppliers have accounted for 70% of manufacturing costs and 50% of engineering costs at some of these companies (Takeishi 2001). This trend toward the use of external suppliers increased significantly in the late 1980s (Helper, MacDuffie et al. 2000), and more recent data indicate that some firms are approaching 80% of manufacturing costs in their operations from outside suppliers (Anonymous 2005).
Given the extensive use of external suppliers in the industry, it seems necessary to understand the phenomena surrounding these boundary-spanning sourcing relationships if one hopes to understand the performance of firms in the industry. For example, can OEMs successfully create differentiated and innovative new products when many of the sources of production reside outside the traditional boundaries of the firm? Even if firms can innovate, do external sourcing relationships help or hinder the innovation process?
Fortunately, as firms in the auto industry have moved to more external sourcing relationships, developments in the theory of the firm have provided additional tools for analysis of these trends. For example, the resource-based view (RBV) posits that an organization's decisions about its growth (and subsequent boundary issues) are heavily influenced by the resources available to the firm (Wernerfelt 1984; Barney 1986b; Barney 1996). Refinements and extensions of the RBV led to the development of the dynamic capabilities (DC) framework in 1997 (Teece, Pisano et al. 1997). This framework examines how firms assemble, configure, and apply resources to strategic problems. The elements of the DC theory have been clarified and extended several times since the initial presentation of the concepts (Eisenhardt & Martin 2000; Teece 2007).
The traditional framework for analysis in the auto industry has been transaction cost economics (TCE) (eg. Coase 2000; Klein 2000). While helpful in understanding some issues, TCE illuminates other issues less effectively. For example, a TCE framework would place importance on cost minimization, bounded rationality, and opportunism (see Williamson (1985; 1996) for more on these concepts), while a dynamic capabilities framework would bring issues such as innovation and knowledge transfer to the forefront.
To address issues surrounding innovation and sourcing relationships in the auto industry, this paper presents the findings from a comparative case study analysis. The project examined the nature of innovation in the auto industry using the dynamic capabilities framework, in light of the fact that auto firms and their suppliers operate with complex multi-firm governance mechanisms. As the case studies demonstrate, there is a range of governance structures present in the industry's 'institutional matrix' from market to hierarchy which may have a bearing on innovation outcomes (Williamson 1996). Moreover, these structures may include formal or informal constraints on the relationships (North 1990).
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