Outsourcing Smes in Småland
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J ÖNKÖPING I NTERNATIONAL B USINESS S CHOOL JÖNKÖPING UNIVERSITY Characteristics of SME Outsourcing A Quantitative Study of Manufacturing SMEs in Småland Bachelor thesis within Business Administration, Marketing Authors: David Do 831220-3550 Caroline Svedberg 841012-6604 Jens Karlsson 830110-2433 Tutors: Jens Hultman Anna Jenkins Date: Jönköping June 2006 Acknowledgements Thanks to all the respondents that answered the questionnaires and provided us with valuable information ÖÖÖ Thanks to family and friends that have supported us ÖÖÖ Last but definitely not least, Thanks to Jens Hultman and Anna Jenkins for their guidance and help ÖÖÖ We also want to thank each other. It has been a long and exciting journey. Thank You All i Bachelor Thesis in Marketing Title: Characteristics of SME Outsourcing Authors: David Do Caroline Svedberg Jens Karlsson Tutor: Jens Hultman Anna Jenkins Date: 2006-06-01 Subject terms: Outsourcing, SME, manufacturing, quantitative study, survey, Småland Abstract In today’s society, the use of outsourcing is a way to compete. The larger firms are the ones that are mentioned in the newspapers when it comes to outsourcing and the small and medium-sized enterprises (SMEs) are forgotten. Nevertheless, the SMEs make up a majority of all businesses according to NUTEK (Verket för Näringslivsutveckling, 2006). A total of 99% of the firms in Sweden today have less than 50 employees. It is therefore important to also see how SMEs outsource. The purpose of this thesis is to investigate and identify characteristics of SME outsourcing. The focus is on Småland, a province in the south of Sweden. In the 20th century, Småland became famous for its high level of entrepreneurship and low unemployment rate. When it comes to the region of Jönköping, they have the highest share of companies with 5-49 employees. The investigation is a quantitative study in combination with a survey method. A questionnaire was sent out to 173 manufacturing SMEs. The questions were closed questions concerning what kind of functions, why and what the result were by outsourcing these functions. The questionnaire also included questions about how the companies choose partners, contracts and if they have encountered any drawbacks with their decisions. The result of this study is that there are characteristics of manufacturing SMEs that outsource. SMEs outsource functions mainly because of lack of competence, and not because of cost savings as proposed by theory. Nevertheless, companies experienced certain drawbacks about their outsourcing decision, such as lower quality, increased lead- times and costs. These are all results of loss of control. When it came to choosing a vendor, the relationship was the main reason even though reliability and price is important. When choosing contracts the SMEs also preferred short but not necessarily flexible contracts. ii Table of Contents 1 Outsourcing Today ....................................................................1 1.1 Why it is Important..................................................................................2 1.2 Finding Areas of Interest ........................................................................2 1.3 The Purpose of this Thesis.....................................................................3 1.4 Layout of Thesis .....................................................................................3 2 Frame of Reference ...................................................................4 2.1 Outsourcing Defined...............................................................................4 2.1.1 The Value Creation Process...................................................................4 2.1.2 Different Kinds of Outsourcing................................................................6 2.1.3 Reasons for Outsourcing........................................................................7 2.1.4 Results of Outsourcing ...........................................................................8 2.2 Small- and Medium-Sized Enterprises (SMEs) ......................................8 2.2.1 Does Size Matter?..................................................................................9 2.2.2 Manufacturing SMEs ............................................................................10 2.3 Overlaps between Outsourcing and SMEs...........................................10 3 Methodology.............................................................................13 3.1 Theory ..................................................................................................13 3.1.1 Quantitative and Qualitative Approaches .............................................13 3.1.2 The Deductive Approach ......................................................................13 3.1.3 Reliability ..............................................................................................14 3.1.4 Validity..................................................................................................15 3.2 The Procedures....................................................................................16 3.2.1 Småland ...............................................................................................16 3.2.2 Choosing the Sample ...........................................................................16 3.3 Descriptive Statistics ............................................................................17 3.4 The Survey Method ..............................................................................17 3.4.1 Constructing the Questionnaire ............................................................18 3.4.2 Calling the Companies and Sending out the Questionnaires ...............19 3.4.3 Data Analysis .......................................................................................20 3.4.4 Increasing Validity and Reliability .........................................................20 4 Analysis of Data .......................................................................22 4.1 Testing the Hypotheses........................................................................22 4.1.1 Forewords ............................................................................................22 4.1.2 IT Outsourcing......................................................................................22 4.1.3 The Main Reasons ...............................................................................24 4.1.3.1 Reject or Accept Hypotheses 1 and 2 ......................................................................... 25 4.1.4 The Shorter the Better ..........................................................................26 4.1.4.1 Reject or Accept Hypothesis 3..................................................................................... 29 4.1.5 Losing Control of Your Business ..........................................................29 4.1.5.1 Reject or accept Hypothesis 4 ..................................................................................... 31 5 Final Conclusions ....................................................................33 5.1 Discussion and Future Studies.............................................................34 References.....................................................................................35 iii Appendices....................................................................................37 A. Research methodology by Bryman & Bell (2003).................................37 B. Company List .......................................................................................39 C. Questionnaire .......................................................................................44 D. Questionnaire for Increased Validity.....................................................57 Table of Contents – Figures and Charts Table 1 - Official EU SME definitions adapted from Corbitt & Al-Qirim, 2004 .....9 Table 2 - Criteria for selected sample ...............................................................17 Table 3 - Summary of functions outsourced......................................................23 Table 4 - Main reasons for outsourcing.............................................................25 Table 5 - Vendor locations ................................................................................27 Table 6 - Contracts used for different functions.................................................27 Table 7 - Production and consulting services / vendor selection criteria ...........28 Table 8 - Results of outsourcing decisions........................................................30 Table 9 - Problems with outsourcing .................................................................31 Figure 1 - Overlaps between outsourcing and SME..........................................11 Figure 2 - The Deductive Approach ..................................................................14 Figure 3 - Respondents of total sample 221 .....................................................20 iv 1 Outsourcing Today The introduction will present the importance of outsourcing in our contemporary society. It will also outline why it is important to do research in this field regarding SMEs. In a world dominated by large corporations, smaller firms are often overlooked even though they vastly outnumber the previous. Four fields of interest will guide the work towards fulfilling the purpose. In our contemporary fast-moving business world, companies struggle hard to find ways to differentiate themselves. There is a constant pressure