Sustaining innovation when outsourcing components in multi-technology, multi-component systems
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Harvard Business School, Boston, MA.
IBM Systems Networking Strategic Alliances,
PP: 2 - 16
Firms producing multi-technology, multi-component systems are increasingly outsourcing selected components to achieve both reduced cost and enhanced innovation benefits. Given typical inter-dependence between innovation at the system and component levels, an important challenge for the system firm is to align innovation trajectories, priorities and pacing between the system and component firms and sustain overall system-level innovation over the longer term. We present two longitudinal case studies, drawn from the IT industry, which provide contrasting examples of outsourcing strategies in terms of the number of suppliers per component and the inter-firm arrangements that a system firm put in place to align innovation. These cases help us to identify the range of outsourcing strategies that system firms could pursue and the factors which appear to influence which one is most appropriate.
Innovation; inter-firm organization; IT industry; multi-technology, multi-component systems; outsourcing decision; outsourcing strategy; supplier management
The past two decades have been characterised by a marked increase in outsourcing stimulated by the imperative of reducing costs or by the managerial maxim of specialising on distinctive capabilities (Gilley & Rasheed, 2000; Holcomb & Hitt, 2007; Mol, van Tulder & Beije, 2005; Prahalad & Hamel, 1990). While much outsourcing still concerns the provision of well-specified inputs be they physical products (e.g. components) or services (e.g. IT operations), it is increasingly being applied in contexts where there is continued technological change and where linking with external firms is believed to enhance innovation. (Chesbrough, 2003;Weeks & Feeny, 2008).
An important context for outsourcing where continued innovation is likely to be crucial is multi-technology, multi-component systems as their constituent ‘components' are prime candidates for external supply (Wolter & Veloso, 2008). These systems range from mass-produced goods such as automobiles (Dyer, 1996; Langlois & Robertson, 1998) up to so-called ‘complex systems' which are either one-offs or highly customised (Miller et al, 1995; Davies, 1997). There is evidence that the use of outsourcing is increasing over time (Brusoni et al, 2001; Helper, MacDuffie & Sabel, 2000). Managers of the firms who produce the overall systems - sometimes called assemblers or systems integrators but here termed ‘system firms' - face two decisions: (1) which components of the system should we outsource (and by implication which should we internalize) and (2) for those component where outsourcing appears advantageous, what kind of contractual and organizational arrangements with the supplier(s) should we utilise? These decisions are inter-related as more effective inter-organizational linkages will stimulate greater outsourcing.
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