Managing hazards of the make-buy decision in the face of radical technological change

Published date13 August 2018
Pages1345-1364
Date13 August 2018
DOIhttps://doi.org/10.1108/IMDS-12-2016-0542
AuthorWoo-Yong Park
Managing hazards of the
make-buy decision in the face
of radical technological change
Woo-Yong Park
Department of Industrial and Systems Engineering,
Hong Kong Polytechnic University, Hong Kong
Abstract
Purpose The purpose of this paper is to consider the management of hazards arising from the make-buy
choice in the face of radical technological change. This sourcing choice can lead to distinctive exchange and
hierarchical hazards. This studys main interest is in investigating the research question How can firms
reduce those distinctive exchange and hierarchical hazards arising from the make-buy sourcing strategy
when dealing with radical technological change?
Design/methodology/approach The author develops hypotheses that the in-house retention of
outsourced component knowledge will likely reduce exchange hazards arising from the buy strategy choice.
And prior exploratory technological experience will likely reduce hierarchical hazards arising from the
make strategy choice. The author explores the US mountain bicycle industry from 1980 to 1992 to test
the developed hypotheses. For endogeneity arising from the make-buy sourcing decision, the author uses
Heckmans two-stage switching regression model.
Findings The major findings are that the in-house retention of outsourced component knowledge and prior
exploratory technological experience is distinctive moderating factors improving performance of a buy
strategy and a make strategy, respectively.
Originality/value Since the extant literature tends to focus on which of the two sourcing strategies
provides the greatest performance advantages in the face of radical technological change, there is a strong
implication to suggest that if a firm performs poorly with one sourcing decision, the firm should switch to an
alternative one. Different from the expositions of the literature, this study elevates the understanding
regarding how firms can improve the performance of their current sourcing orientation rather than whether
they should switch from one sourcing strategy to another.
Keywords Exchange hazards, Hierarchical hazards, Make or buy sourcing decision,
Prior exploratory technological experience, Radical technological change,
Retention of outsourced component knowledge
Paper type Research paper
Introduction
There has been growing interest in the relationship between radical technological change
and the make-buy component sourcing decision and its impact on performance in the
technology management literature (Grant, 1996; Kogut and Zander, 1992; Monteverde, 1995;
Nickerson and Zenger, 2004; Powell et al., 1996; Spencer, 2003). To facilitate a better
understanding of the subsequent theoretical arguments presented in this paper and the
relevant literature, we provide the following illustration. Consider as the unit of analysis a
product that is comprised of two components: C1 and C2. Two separate firms, A and B,
produce this product. The product then faces a radical technological change in the market
that significantly alters components C1 and C2 and the linkages between them. To address
this new change, both firms A and B make C1 internally. However, while firm B employs
a make strategy(i.e. makes C2 internally) and firm A employs a buy strategy(i.e. buys
C2 through an arms-length market transaction).
Given this simple model, much of the technology management literature focuses on
investigating which sourcing strategy provides greater performance advantages in the face
of a radical technological change (Nickerson and Zenger, 2004; Williamson, 1985; Wolter and
Veloso, 2008). Some scholars argue for a make strategy over a buy strategy (Grant, 1996;
Industrial Management & Data
Systems
Vol. 118 No. 7, 2018
pp. 1345-1364
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-12-2016-0542
Received 18 December 2016
Revised 28 March 2017
Accepted 19 April 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1345
Managing
hazards of
the make-buy
decision
Monteverde, 1995; Nickerson and Zenger, 2004; Park and Ro, 2013) while others argue for a
buy strategy over a make strategy (Abecassis-Moedas and Benghozi, 2012; Balakrishnan
and Wernerfelt, 1986; Harrigan, 1984; Powell et al., 1996; Spencer, 2003).
Given the conflicting arguments and findings regarding the performance benefits of
the make-buy sourcing decision, another stream of the technology management literature
investigates why firms find it difficult to switch to a new sourcing strategy, even if the
new strategy provides greater performance advantages (than the current sourcing
strategy) in the face of radical technological change (Amburgey and Miner, 1992;
Haleblian et al., 2006; Zollo et al., 2002). This literary streams main arguments are that
once a firm selects a particular sourcing strategy, the firms personnel, resources, and
routines will mature and develop and eventually become established around the selected
strategy. Thus, once a firm chooses a specific sourcing strategy, it becomes difficult for
the firm to switch to a new one (Amburgey and Miner, 1992; Zollo et al., 2002). And, due to
heterogeneous organizational capabilities, different firms will make different sourcing
decisions even when addressing the same technological change (Kapoor, 2013; Nickerson
and Silverman, 2003). Given the high irreversibility of the sourcing decision, RQ1 is a very
valuable one not only on account of its potential theoretical contribution to the literature,
but also due to its potential contribution to managerial practice. Namely, this study
investigates the different moderating factors that can improve the performance of firms
whether they utilize a make strategy or a buy strategy.
There are some studies that attempt to provide moderating factors for the make-buy
sourcing decision in the context of technological change, but much of this research is
focused on long-term relationships existing between a firm and its supplier (Gulati, 1995;
Hoetker, 2005). Since the research regarding moderating factors is still under-explored, this
study considers two important moderating factorsthe in-house retention of knowledge
concerning outsourced components and prior exploratory technological experience.
Regarding the in-house retention of knowledge concerning outsourced components, the
illustration provided in the Introduction serves as a reference. Some firms in pursuing a buy
strategy focus on in-sourcing component C1 and outsourcing component C2, yielding both
the design and production of C2 to an external supplier. Contrastingly, some firms that
choose to outsource component C2, still retain in-house knowledge concerning C2.
This contrasting situation is referred to as the in-house retention of knowledge concerning
outsourced components. This in-house retention of outsourced component knowledge
leads to heterogeneous capabilities in later integrating components C1 and C2, ultimately
leading to performance heterogeneity.
Concerning prior exploratory technological experience, some firms may possess greater
levels of previous experience dealing with, or creating, radical innovations. When a radical
innovation hits the market, some firms may have already had prior technological experience
with radical innovations; other firms may not have such experience. Those firms with prior
experience dealing with radical innovations are likely to have more effective capabilities in
integrating and reconfiguring C1 and C2 for the new radical innovation.
Given the existence of the unique advantages (or disadvantages) between the make vs
buy strategy choice, this studys overarching arguments are, first, that the retention of
outsourced component knowledge is likely to compensate for the weakness of a buy
strategy in dealing with radical technological changes, thereby improving the performance
of firms selecting a buy strategy. Second, prior exploratory technological experience may
compensate for the weakness of both a make strategy and a buy strategy. However, it is
more likely to compensate for the weakness of a make strategy than a buy strategy,
resulting in a more likely performance improvement of the make strategy than the buy
strategy. The combination of the first and second arguments prompts us to conclude that
the in-house retention of outsourced component knowledge and prior exploratory
1346
IMDS
118,7

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