Causal and exploratory associations between manufacturing outsourcing and innovation performance in the UK furniture industry Jeff Readman A thesis submitted in partial fulfilment of the requirements of the University of Brighton for the degree of Doctor of Philosophy February 2014 The University of Brighton Abstract While the cost advantages associated with outsourcing are accepted, the impact that outsourcing may have on innovation performance is ambiguous. One perspective suggests that firms outsourcing low value-adding activities will achieve higher innovation performance (that is, better designed or more technologically advanced products or more substantive process improvements) than firms that perform these activities in-house. Another view holds that firms that outsource high value-adding activities may have lower innovation performance than those firms that perform these activities in-house. While these two positions are not contradictory, neither are they complimentary. Moreover, superior innovation performance can be achieved through the effective use of innovation, or dynamic, capabilities. The relationships between outsourcing and innovation performance in the UK furniture manufacturing industry are investigated in this study. A mixed-methods approach is employed, which includes three case studies and a survey of 66 manufacturers. Industry analysis and case interviews document the critical value added activities in the industry and contribute to the formulation of a questionnaire. Non-parametric statistical techniques are applied to test the survey results. This study contributes to the discourse by showing that innovation performance is affected by outsourcing decisions. Outsourcing peripheral activities has no impact on innovation. However, performing core activities has a positive impact on innovation. The findings support the previous documented relationship between capabilities and product and process innovation by revealing enablers, which are particular to the furniture industry. Interestingly, there is a strong correlation between customer-focus strategies and innovation performance. Furniture manufacturers are attuned to customer design preferences through critical buyer channels. Other key findings highlight the association between firm size and innovation and the importance of innovation capabilities for medium size firms. The rational for investigating one industry is conducive to interrogate organisations performing similar business activities. The findings are relevant not only to the UK furniture industry but also to other traditional manufacturing industries, which demonstrate similar innovation performance and outsourcing patterns. 2 Table of Contents List of Tables 9 List of Figures 13 Chapter 1. Introduction 16 1.1 The contributions of this study 20 Chapter 2. Literature Review 21 2 Outsourcing and the boundary of the firm 23 2.1 Production outsourcing 24 2.1.1 Value added activities, functions and value chains 25 2.2 Strategic outsourcing 26 2.3 Outsourcing literature survey 28 3 Transaction costs and outsourcing 32 3.1 Determinants of transaction costs 33 3.2 Governing structures 35 3.3 Critique of transaction costs: agency 37 4 Resource-based view and outsourcing 39 4.1 Resources and capabilities 39 4.2 Dynamic capabilities 41 4.3 Critique of the resourced-based view 42 5 Resource-based and transaction cost model of outsourcing 44 6 Outsourcing and innovation performance 45 6.1 Innovation performance 47 6.2 Outsourcing and innovation literature survey 48 6.2.1 Outsourcing and innovation literature: research methods 54 7 Research questions 55 Chapter 3. Setting the Hypotheses 58 8 Associations between outsourcing and innovation performance 58 9 Dynamic capabilities and innovation 61 10 Alternative explanations to account for variances in innovation performance 65 10.1 Firm size, innovation performance and outsourcing 66 3 10.2 Customer-focus strategies and innovation performance 66 10.3 Agency and innovation performance 67 11 Summary of the research hypotheses 68 Chapter 4. Research Methodology and Mixed Research Methods 69 12 Social organisational theory 69 12.1 Post-positivism research 71 13 Research strategy 73 13.1 Empirical theory building 73 13.2 Testing cause and effect 73 13.3 Sequential mixed research methods approach 75 13.4 Ethical considerations 77 14 Research Method l – qualitative interviews and secondary data collections 78 14.1 Informed industry experts 78 14.1.1 Expert Group interview 78 14.1.2 Expert interview 79 14.2 Case company interviews 80 15 Research Method ll – quantitative survey 82 15.1 Survey protocol 82 15.1.1 Pre-test and piloting 82 15.1.2 Survey sample 83 15.1.3 Data collection 84 15.1.4 Survey response rate 84 15.2 Findings and analysis 85 15.2.1 Missing values and cases 86 15.3 Questions to assess organisation type of and respondent 86 16 Questions and variables used for hypotheses testing 87 16.1 Questions and variables for Hypothesis 1 (H1) 87 16.1.1 Variable 1: In-house and outsoaring of core and peripheral activities 87 16.1.2 Variable 2: Innovation performance 90 16.2 Questions and variables for Hypothesis 2 (H2) 91 16.2.1 Variable 3: Innovation capabilities 91 4 16.3 Questions and variables for Hypothesis 3 (H3) 92 16.3.1 Variable 4: Firm size 93 16.3.2 Variable 5: Buyer preferences 93 16.3.3 Variable 6: Buyer types 94 16.4 Variable summary 95 17 Other survey questions 96 17.1 Market location 96 17.2 Product and service markets 96 17.3 Rivalry and new entrants 97 18 Limitations to the research 97 18.1 Measurements and indicators 97 18.2 Research time lag 98 Chapter 5. Research Method l - Mapping the Furniture Value Chain 100 19 Background - the UK furniture market and industry 100 19.1 UK household furniture market 102 19.2 UK office furniture market 103 19.3 UK furniture manufactures 103 20 Activities in the furniture value chain 104 20.1 Supply inputs - solid wood and wood panels 105 20.2 Logistics and inward distribution 107 20.3 Product design 108 20.4 Immediate furniture production 109 20.4.1 Pre-production 109 20.4.2 Parts production and assembly 109 20.5 Outbound distribution, marketing, sales and after-services 110 21 Product markets and buyers 110 22 Innovation in furniture manufacturing 112 22.1 Product innovation (design) 112 22.2 Process innovation 113 23 Outsourcing and innovation in the furniture industry - case studies 115 23.1 Company A – design and parts production outsourcing 115 23.2 Company B – parts production outsourcing 117 5 23.3 Company C - parts production and assembly outsourcing 118 24 Cluster of production activities – exploratory research proposition 122 25 Summary of Research Method 1 findings 123 Chapter 6. Research Method ll– Descriptive Statistics 125 26 Variables and descriptive results for Hypothesis 1 (H1) 125 26.1 Variable 1: Core or peripheral activity outsourcing 125 26.1.1 Core and peripheral activities 125 26.1.2 Performing activities in-house or outsource 127 26.1.3 Descriptive results of Variable 1 130 26.2 Variables 1a, 1b and 1c: Outsourcing intensity 131 26.3 Variable 2a: Innovative active 133 26.4 Variable 2b: Successful innovators 133 26.5 Variable 2c: Innovativeness performance 133 26.5.1 Product innovativeness 133 26.5.2 Process innovativeness 134 27 Variables and descriptive results for Hypothesis 2 (H2) 135 27.1 Variable 3a: Practices supporting product innovation 135 27.2 Variable 3b: Practices supporting process innovation 136 28 Variables and descriptive results for Hypothesis 3 (H3) 137 28.1 Variable 4: Firm Size (H3a) 137 28.2 Variable 5: Buyer preferences (H3b) 139 28.3 Variable 6: Buyer types (H3c) 140 29 Variables for the exploratory research proposition (RPe) 142 30 Profiles of respondents 143 30.1 Status of the organisation 143 30.2 Informed self-assessment 143 30.3 Market location 144 30.4 Products and services 145 30.5 Rivalry in 2004-2005 147 30.6 New entrants 148 31 Issues arising from the first-level results 148 31.1 Outsourcing profile 148 6 31.2 Innovation profile 148 31.3 Market performance 149 Chapter 7. Research Method ll - Test Results 152 32 Hypothesis 1 (H1) test results: outsourcing and innovation performance 152 32.1 Test results for H1a 152 32.2 Test results for H1b: 155 32.2.1 Outsourcing intensity of core activities and innovation performance 156 32.2.2 Outsourcing of specific core activities and innovation performance 158 33 Hypothesis 2 (H2) test results: outsourcing, innovation performance and innovation capabilities 165 33.1 Test results for H2a 166 33.2 Test results for H2b 169 33.3 Test results for H2c 171 33.3.1 Outsourcing intensity of core activities and innovation capabilities 171 33.3.2 Outsourcing of specific core activities and innovation capabilities 173 34 Hypothesis 3 (H3) test results: alternative explanations for innovation performance 175 34.1 Test results for H3a 175 34.2 Test results for H3b 179 34.3 Test results for H3c 185 35 Test results for the exploratory research proposition (RPe) 186 36 Summary of the test findings 190 Chapter 8. Theoretical Contributions and Management Implications 192 37 Outsourcing and innovation in the UK furniture industry 194 37.1 Outsourcing peripheral activities in the UK furniture industry 194 37.2 Outsourcing core activities in the UK furniture industry 195 37.3 Local production networks versus global production networks 197 37.4 Design and the extended boundary of the firm 200 7 38 Capabilities supporting innovation in the UK furniture industry 202 38.1 Successful product innovators 202 38.2 Successful process innovators 205 38.3 Innovation capabilities and outsourcing 206 39 Customer-focus strategies and innovation 207 39.1 Buyer channels and signals 208 39.2 Responsive innovation 209 40 Firm size and innovation in the UK furniture industry 211 41 Contributions to the outsourcing discourse 214 42 Further gaps in the knowledge base 215 42.1 Management practices in outsourcing 215 42.2 Enablers and inhibitors to innovation 216 42.3 Theory building by extending the research methodology across industries, sectors and countries 216 43 Conclusion - decision-making and unintended outcomes 216 References 219 Appendix 1.