Designing Global Sourcing Strategy for Cost Savings and Innovation: A Configurational Approach.

Date01 Octubre 2020
AuthorLin, Nidthida

1 Introduction

Despite the critical role of global sourcing in revolutionizing how firms carry out their business process activities, we have observed mixed outcomes of success and failure in global sourcing activities. Various benefits including cost reduction (Ellram et al. 2008; Holcomb and Hitt 2007), access to global knowledge and skill (Lewin et al. 2009a; Lewin and Peeters 2006), increased innovation (Lewin et al. 2009a; Roza et al. 2011) and organizational flexibility (Massini et al. 2010) have driven firms to engage in global sourcing. However, many firms have come to realize that as their global sourcing portfolio becomes more complex they increasingly suffer from inefficiency in their global sourcing activities, which drives up the costs and leads to the failure to capture value expected from their global network of value chains (Barthelemy 2003; Dibbern et al. 2008; Jha et al. 2018; Larsen et al. 2012). The natural question that follows, yet remains unclear in the literature, is what is required for firms to organize their global sourcing activities successfully. This study aims to shed light on this important question.

Building on Kedia and Mukherjee's (2009) seminal work, Contractor, Kumar, Kundu and Pedersen (2010) provides us with a comprehensive understanding of the critical decisions underlying global sourcing strategy, involving an optimal degree of both disaggregation of value chain activities and dispersion of such activities geographically (i.e., location choice) and organizationally (i.e., governance choice). A decision on the degree of disaggregation is informed mostly by the traditional classification of core vs. non-core activities and the concept of modularity in business processes (Baldwin and Clark 1997, 2000; Sako 2006), while studies on the degree of global dispersion and location choices draw on the international business literature concerning a thorough consideration of managing across distance (i.e., physical, cultural, linguistic and institutional distance). Further, governance decisions--outsourcing versus captive--are mainly examined from the transaction cost economics lens (Gereffi et al. 2005; Hutzschenreuter et al. 2011a; Nieto and Rodriguez 2011). Although these theoretical lenses contribute significantly to our understanding of global sourcing, most research has focused mainly on a specific aspect of global sourcing and, hence, overlooked a holistic view of global sourcing management (see Mihalache and Mihalache 2020; Mukherjee and Kedia 2012; Thakur-Wernz and Bruyaka 2017). We propose here a need for global sourcing research to incorporate all three components--disaggregation, geographical dispersion, and organizational dispersion--of global sourcing configuration and take into account their joint effects on the global sourcing activities. This gap has left the search for an efficient global sourcing strategy fragmented and, hence, failed to yield the expected outcome.

To fill this gap and enhance our understanding of the global sourcing strategy, this study incorporates all three components of global sourcing strategy and examines the global sourcing configurations of business services leading to high performance both in terms of cost savings and innovation. More specifically, we take a configurational approach to explicate the complex relationships among disaggregation, geographical dispersion and organizational dispersion (i.e., governance mode) of firms' global sourcing portfolio and identify the combinations of these three components (i.e., global sourcing configurations) that lead to (1) high cost savings and (2) high innovation in global sourcing activities. In essence, we argue that high performing global sourcing configurations are driven not only by specific elements but also the alignment among these three components to ensure that they work synchronously toward the expected outcome.

Using the data on the business service offshoring projects of 235 firms across countries, we adopt the fuzzy set qualitative comparative analysis (fsQCA) to analyze global sourcing configurations--combinations of a degree of disaggregation, degree of geographical dispersion and governance mode--leading to high cost savings and innovation in global sourcing activities. The advantage of the configurational approach is that it allows us to disentangle complex interdepend-encies among variables leading to high cost savings and those leading to high innovation. The configurational approach also captures equifinality which overcomes the limitation of the single dominant net-effect explanation in the traditional regression by allowing different pathways (i.e., various combinations of three components of global sourcing configuration) to the same expected outcome (i.e., high performance). Further, fsQCA approach is based on set-theoretic relations, rather than the traditional correlations, which make it more appropriate for examining causal relations.

This study contributes to the global sourcing and offshoring literature in three ways. First, we extend research on global sourcing by employing a configurational approach to examine how a combination and interaction of degree of disaggregation, geographical dispersion and governance mode influence cost savings and innovation outcome of global sourcing activities. To our knowledge, we are among the first attempt to empirically examine all three components--disaggregation, geographical dispersion and governance structure--of global sourcing strategy and their effect on global sourcing performance in a single study (Albertoni et al. 2017 is the only study we know of that examines the effect of these three components but on reshoring decision). Table 1 summarizes examples of research examining disaggregation, geographical dispersion, governance structure or a combination of these components on the performance of global sourcing. Our findings suggest that high performing (both in terms of cost savings and innovation) global sourcing configurations are not driven solely by a single component but require the right combination of three components to deliver successful outcome. We also found that there is no single configuration that leads to both high cost savings and high innovation and that global sourcing configurations leading to high cost savings differ primarily from configurations leading high innovation outcome.

Second, we contribute to the international business literature by extending our understanding of the role of (both geographical and cultural) distance on the outcome of global sourcing. More specifically, while research has indicated the significant effect of distance in MNCs performance (Ambos and Ambos 2009; Hutzschen-reuter et al. 2014), our study suggests that the effect of distance is not discrete. Hence, it is important to consider also its effect in conjunction with other elements (i.e., degree of disaggregation and governance mode) of global sourcing configuration in order to accurately understand the role of distance on the performance outcome of global sourcing.

Finally, our study sheds light on the inconsistent research findings and ongoing debate on the role of governance mode on the success of global sourcing (e.g., Hutzschenreuter et al. 201 lb; Rodriguez and Nieto 2016; Roza et al. 2011). By considering the combined effect, rather than the net effect, of governance mode and other aspects of global sourcing configuration, we are able to provide a better explanation of how the level of control influences the outcome and performance of global value sourcing activities.

2 Theoretical Background

For a few decades, firms, especially in developed countries, have increasingly adopted the concept of global sourcing which allow them to slice up activities in their value chain (refer to Cohen and Mallik 1997 and Porter 1985 for the original discussion of global value chain) and globally distribute them to locations where they can be best sourced. Several terms, such as global value chain, offshoring, globally distributed activities, and global factory have been used to loosely refer to the phenomenon of global sourcing. Global sourcing describes the range of activities that firms carry out on a global scale to bring a product or service to end use (Gereffi et al. 2005). The crucial element in global sourcing is the efficient planning and coordination of globally distributed activities in order to reduce friction and transaction cost and, at the same time, to gain access to diverse sources of knowledge, skill, and talent available in various locations. Building on Kedia and Mukhejee's (2009) Disintegration-Location-Externalization (DLE) framework, Contractor et al. (2010) suggest that firms strategically determine the optimal combination of (1) disaggregation, (2) geographical dispersion and (3) organizational dispersion (i.e., governance mode) of their value chain activities in order to achieve the maximum global firm value. In this study, we draw on these three components of global sourcing configuration suggested by Contractor et al. (2010) to examine the optimal configurations of global sourcing activities. A decision on the disaggregation of activities is primarily informed by research attempting to classify value chain activities using various criteria including types of an activity (e.g., upstream, downstream), potential for competence creation (e.g., exploration vs. exploitation activity), and potential for being a source of competitive advantage (e.g., core vs. non-core activity). When making a dispersion decision, firms need to consider both the geographical and organizational aspect of their value chain dispersion (Contractor et al. 2010). Geographical dispersion, extensively discussed in the international business literature, involves a decision to source an activity from a location where there exists a skilled workforce to perform the activity at a competitive cost. Organizational dispersion or...

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