The decision behind outsourcing New Product Development

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Ebba Öhlin

The decision behind outsourcing New Product Development

An exploratory case study in the context of technical products

Industrial Management Degree Project

30hp

Term: Spring 2020

Supervisor: Alexandre Sukhov

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Acknowledgement

This paper represents the master’s thesis of my Master Science in Industrial Engineering and Management with the technical profile of Mechanical Engineering during the spring term of 2020.

First and foremost, I would like to express my gratitude to my supervisor, Alexandre Sukhov, for the continuous support, constructive criticism and overall commitment. I would also like to thank my second supervisor Bo Rundh, together with my fellow students in the opposition group, for their guidance and useful critics of this thesis work.

I would like to express a special thanks to my supervisor at the company, Johanna Pihl, for all her help, feedback and kindness during this spring. I would also like to thank the company for having me work with them whilst writing my master thesis. They have been a great support throughout, and I am very grateful for the opportunity to have worked with them. Extra big thankfulness to the interview participants. This work would not have been possible without your kind participation.

Lastly, I would like to thank my family and friends for supporting me during this process.

Thank you.

Karlstad, June 2020

_________________

Ebba Öhlin

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Abstract

In todays increased globalized business world and with a firms’ ongoing need for higher quality and lower costs, outsourcing is a popular strategy for companies to use. This thesis intends to study outsourcing in the context of new product development (NPD). The aim of this research is to contribute to the field of operations management. This is achieved by improving the understanding of decision-making during outsourcing NPD by investigating what factors affect the outsourcing decision. This will be fulfilled by addressing the research question What affect the choice between make or buy in outsourcing New Product Development?

By conducting an exploratory single case study and performing semi-structured interviews, the factors that influence decision-making in outsourcing of NPD could be generated. The findings show that competence, time, service, costs, strategy, and ability to collaborate with supplier were important factors that influenced the decision. The factors were analyzed and compared with transaction cost economics and resource-based views, which are theoretical perspectives commonly used to understand the firm’s strategical decisions. The factors from the findings were also used to conduct a cost model and a decision model. This can help a firm’s decision-making and increase the understanding of how the decision in outsourcing of NPD is made.

The results lend support to the argument that outsourcing decisions are complex. With different factors creating different influences, and all of them need to be considered in order to achieve a comprehensive understanding of the decision. The findings also suggest that no theoretical perspective can alone completely explain the decision of outsourcing NPD, they need to be integrated with another demand-oriented perspective. A recommendation for further research should be to investigate how the cost model and decision model could be implemented in practical situations and in different contexts.

Key words

Outsourcing, make-or-buy, decision-making, model, factors, NPD

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Sammanfattning

I dagens globala affärsvärld och företags konstanta strävande efter högre kvalité och lägre kostnader, så är utkontraktering en populär strategi att använda.

Denna avhandling avser att studera utkontraktering i samband med ny produktutveckling (PU). Syftet med forskningen är att bidra till området för verksamhetsstyrning genom att förbättra förståelsen i beslutsfattande för utkontraktering av ny produktutveckling genom att undersöka vilka faktorer som påverkar beslutet av att utkontraktera. För att uppfylla detta ska forskningsfrågan Vad påverkar valet mellan att köpa eller göra i utkontraktering av ny produktutveckling? besvaras.

Genom att genomföra en explorativ fallstudie och utföra semistrukturerade intervjuer så kan de påverkande faktorerna bakom utkontraktering av PU genereras. Resultatet visade att kompetens, tid, service, kostnad, strategi och förmågan att samarbeta med leverantör är viktiga faktorer att ta hänsyn till vid beslutet. Faktorerna analyserades och jämfördes med transaktionskostnad- och resursbaserad teori som är vanliga teoretiska teorier att applicera för att förstå ett företags strategiska beslut. De framtagna faktorerna användes också gör att konstruera en kostnad- och beslutsmodell som kan användas som stöd och hjälp för företags beslutsfattande och öka förståelsen för hur beslutet av att utkontraktera PU görs.

Resultatet ger stöd till tidigare forskning som menar på att beslutet av att utkontraktera är komplext vilket innebär att flera faktorer påverkar beslutet och alla faktorer behöver bli betraktade för att kunna få en heltäckande förståelse för beslutet. Resultatet visade också på att ingen av de teoretiska perspektiven kan ensamt förklara beslutet av att utkontraktera PU, utan de behöver bli integrerade med ett annat perspektiv för att fullt kunna förklara beslutet. En rekommendation till framtida forskning kan vara att undersöka praktisk tillämpning av kostnadsmodellen och beslutsmodellen och hur de kan användas i andra kontext.

Nyckelord

Utkontraktering, göra eller köpa, beslutsfattande, modell, faktorer, PU

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Abbreviations

NPD - New Product Development TCE - Transaction cost economic RBV – Resource-based view DC – Dynamic capabilities

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List of Figures

Figure 1: A simplified NPD Process. ... 13

Figure 2: Organizational structure and collected data. ... 27

Figure 3a: Data structure from data analysis. ... 31

Figure 3b: Data structure from data analysis………...32

Figure 4: Graphs to illustrate the alternatives of make versus buy NPD. ... 42

Figure 5: Decision model for outsourcing NPD. ... 48

List of Tables

Table 1: Theoretical framework for theoretical perspectives used in outsourcing decisions. ... 23

Table 2: Sampled participants for interviews. ... 27

Table 3: Description of each parameter used in the cost model. ... 39

Table 4: Costs and motivation for each parameter in case example. ... 41

Table 5: Result from cost calculations in case example. ... 42

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1. Introduction

This chapter is aimed to put the thesis in the context it occurs and describe why this study is important and relevant for business economics. The chapter starts with an introduction to the background of the study with a description of the focus of the study, previous research within the same field, and what previous research has failed to do. It is then followed by a presentation of the purpose and research question. It ends with a description of delimitations, key contributions and a presentation of the disposition of the paper.

1.1. Background

In today’s constantly changing business world with increasing globalization, there is a continuous search for firms’ higher quality and lower costs. Companies strive to come up with new products to stay competitive on the market. There are many different strategies in developing new products that firms can adopt.

One popular strategy which many companies use is outsourcing. Rundquist and Halila (2010) quantitative research on close to 500 medium-sized firms showed that more than a third of the companies used outsourcing activities in their new product development process. Outsourcing is a global phenomenon which implies procuring or buying products and/or services that are produced by external parties that have previously been produced in-house (Lacity and Hirschheim 1993). Gunasekaran & Irani (2009) mean that outsourcing has become a key strategic component for companies in order to meet the increasing needs of customers in terms of flexibility, responsiveness and cost.

This develops a cost-effective global supply chain (Gunasekaran & Irani 2009).

Outsourcing can bring benefits, but it can also create new challenges. The benefits gained from outsourcing are financial savings, an increased ability to focus on core business, access to technology and specialized expertise, quality improvements and increased speed (Kremic et al. 2006; Belcourt 2006). The risks with outsourcing are knowledge drain, decreased motivation from personnel, higher costs and increased dependency from external organizations (Rundquist 2007). One of the challenges with outsourcing is to understand how decisions in the context are made. If the decision is made with incomplete understanding, the firms might lose both expected benefits and a better plan that could be developed internally.

Decision-making in outsourcing hinges on a make-or-buy philosophy (Crowther & Green 2004). The nature of the transactions, and the resource configuration of the firm, affect the decision of whether a firm should buy or

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10 make goods and/or services internally (Al-Shalabi et al. 2008). Different decision models and well-established theories have been developed and applied to understand these kinds of situations, e.g. transaction cost economic and resource-based view theory (e.g. Williamson 2008; Barney 1991). However, outsourcing decisions are complex, and where complexity in this context means that several different dimensions interplay with each other (Bennet & Bennet 2008). Meanwhile, the existing studies have not taken in this complexity, McIvor (2009) means that neither transaction cost economics nor resource-based views alone can completely explain the complexities of outsourcing decisions.

Outsourcing of production has been deployed and researched for decades, the outsourcing of activities in the new product development process is a new phenomenon and offers a lot of potential research gaps (Rundquist & Halila 2010). Cantone et al. (2018) discovered research gaps related to the decision- making process. Cantone et al. (2018) came to the conclusion that the understanding of what factors that affect the outsourcing of new product development (NPD) activities, has not yet been fully addressed. McIvor (2009) also claimed research gaps in decision-making. This meant that more research on the understanding of how organizations make outsourcing decisions are needed. Only a few studies address the outsourcing of services or knowledge- intensive activities such as new product development (e.g. Rundquist 2008;

Rundquist & Halilia 2010; Soriano-Meier et al. 2012; Al-Shalabi et al. 2007;

Stanko & Calantone 2010: Rundquist 2007).

Therefore this study aims to contribute to the field of operations management.

This is achieved by improving the understanding of decision-making during the outsourcing of new product development by identifying and investigating what factors that affect the choice of make or buy new product development.

1.2. Research Question

What is clear from previous research is that there is a need to investigate what influences decision-making when it comes to outsourcing of NPD activities further. The research question is based on this gap detected in previous research RQ: What affect the choice between make or buy in outsourcing New Product Development?

By addressing this research question, and this study will contribute to the research field of decision-making in outsourcing NPD processes. By filling the context gap it will raise an understanding of affecting factors in make-or-buy situations. Also, by providing an increased understanding of these decisions, it

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11 is easier for managers in technologic companies to develop well-founded strategies when developing new products. Well-founded strategies will make it easier for managers to achieve the expected benefits from outsourcing.

1.3. Key contributions

By addressing the research question, and exploring the overall aim, this thesis makes the following contributions. Firstly, it contributes to practical research with the purpose of understanding decision-making during the outsourcing of NPD. This provides a clearer basis for researchers to study outsourcing decisions. Second, the thesis aims to identify the factors that are critical when managers consider outsourcing in the NPD process. The identified factors can be used for managers to develop outsourcing strategies. Finally, the theoretical contribution is increased understanding of how the theoretical perspectives transaction cost economics (TCE) and resource-based view (RBV) influence outsourcing decisions. The theoretical contributions will also include a cost model and a decision model, that can support the make-or-buy decision of NPD.

1.4. Disposition

This paper is developed over six chapters. The first chapter covers the introduction and a presentation of the research question which is formed of the discovered research gap. The second chapter covers a theoretical framework that consists of different theories which aim is to explain, understand and support the study. The theories consist of both economic and organizational theories, the phenomena of outsourcing and ending with supplier collaboration which is a cornerstone in outsourcing of NPD activities. The third chapter consists of a description and motivation to selected methods used in this research and presents the trustworthiness of this study. The fourth chapter consists of an analysis chapter where the collected data will be analyzed, and in the fifth chapter, the founded data will be compared to the perspectives presented in chapter two. The last chapter draws conclusions and restrictions for future research.

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2. Theory

This chapter aims to describe the current research within the field and a description of the previous research. It will present relevant theoretical perspectives that are used to understand the problematization of the study.

2.1. New Product Development

With firms’ increased need for new products, NPD is regarded as a key factor in today’s competitive environment due to three reasons: the increasing international competition, the fragmenting and demanding markets and the diverse and changing technologies (Bigliardi et al. 2010). NPD is a strategic organizational capability that encompasses a set of transformation skills organized by a process that begins by responding to a market opportunity and a set of technological proposals (Eisenhardt & Martin 2000; Hashiba & Paiva 2016). This section will define new product, explain the NPD process and present previous research in the field of outsourcing of NPD.

There is existing various definitions and explanations of the boundaries about

‘new product’. For this context, ‘new product’ is categorized into improvements and revisions to existing products (Booz et al. 1968). These products offer improved performance and a greater perceived value for both customers and businesses (Gurbuz 2018; Cooper 2001). The products of this category make up 26 percent of new product launches (Cooper 2001).

New product development is the complete process consisting of the activities carried out by businesses when developing and launching new products (Bhuiyan 2011). The launch of a new product requires the use of the firm’s resources related to the NPD process, including operational and organizational resources (Hashiba & Paiva 2016). Figure 1 visualizes the complete NPD process in a simplified way. In reality, it is more an iterative process. The figure is aimed to show what needs to occur in order to build a viable technical product.

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Figure 1: A simplified NPD Process.

To make the NPD process effective, it should be a cooperation between the manufacturing, engineering, research and development, marketing finance and purchasing departments (Gurbuz 2018). The cross-functional cooperation should have the ability to acquire external knowledge (Hashiba & Paiva 2016), and since outsourcing is about utilizing external resources, this is a prerequisite for being able to have an effective NPD process. Next section will describe outsourcing of NPD activities.

2.1.1.Outsourcing of new product development activities

Outsourcing is a common strategy in today’s daily-changing business world for staying competitive on the market and can be used for an entire NPD process.

Previous research mentions that the motive force to outsourcing as financial benefits, has now shifted to more strategic motive (Lundeberg & Sällström 2016; Kakabadse & Kakabadse 2000). Espino-Rodriguez and Padrón-Robaina (2006) proposed an integrated definition of outsourcing as

“a strategic decision that entails the external contracting of determined non- strategic activities or business processes necessary for the manufacture of goods or the provision of services by means of agreements or contracts with higher capability firms to undertake those activities or business processes, with the aim of improving competitive advantage.” (Espino-Rodriguez and Padrón-Robaina 2006, p.52)

Rundquist (2007) integrated the definition of outsourcing by integrating NPD in the definition: “all or the innovative part of the NPD process is purchased externally according to a contract with organizational units separate from the outsourcing firm”

(Rundquist 2007, p.23)

The interest of outsourcing NPD is growing among firms. Meanwhile outsourcing of production has been deployed and researched for decades, the outsourcing of activities in the new product development process is quite a new

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14 phenomenon (Rundquist & Halila 2010). Only a few studies address the outsourcing of services or knowledge-intensive activities such as new product development. In Rundquist and Halilas (2010) research, the most important reasons for outsourcing NPD activities were first, to get external knowledge that the firm did not have in-house and second, greater effectiveness in the manufacturing phase. Another research indicated that knowledge had a lower priority, and the NPD practices focused more on production cost and manufacturability (Al-Shalabi et al. 2007). A third research suggested a result that is a mix of previous mentioned factors, where the most prominent factors behind the decision were cost savings, increased flexibility, technology transfer, and increased focus on core business to faster product development (Soriano- Meier et al. 2012). There is no doubt that outsourcing NPD is an increased strategy for firms to obtain. In Al-Shalabi et al. (2007) research, the result showed that 71% of firms outsource some parts of their NPD process.

Outsourcing of NPD implies collaboration with external parties. Next section will describe collaborations with supplier.

2.1.2.Supplier collaboration

An individual firm’s ability to work effectively with other firms is classified as a firm-specific capability (Dyer & Singh 1998). Much often, outsourcing is a long- term relationship as the costs for changing supplier are high (Embleton &

Wright 1998). This increases the importance of evaluating and selecting the right supplier from start (Embleton & Wright 1998).

Firms that can manage supplier collaborations gains competitive advantage (Handfield et al. 1999). New product development projects that involves suppliers will achieve significantly improved results, comparing to projects where there is no supplier collaboration (Handfield et al. 1999). A critical success factor in supplier collaboration projects is the level of knowledge regarding the supplier’s capabilities (Handfield et al. 1999). The findings are supported by Petersen et al. (2003), as they mean that the highest level of benefits will be achieved when suppliers are a part of the new product development team. Also, as Handfield et al. (1999) stated, it is critical that the supplier has the right knowledge and only trusted suppliers with a relative level of experience and capability as well as their relative level of expertise with a given technology in NPD (Petersen et al. 2003). Petersen et al. (2003) suggest that supplier involvement in new product development project seems more important when the firm does not have a high level of internal expertise in the area. Even if

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15 previous studies indicates the importance of collaborate with suppliers, Smets et al. (2011) mean that the benefits will come after some time. They established that in terms of outsourcing design and engineering activities, things often get worse before getting better in terms of cycle time, development costs and design quality (Smets et al. 2011). Their findings suggest that the investments informal controls are needed at the beginning of the outsourcing relationship, this is to improve collaboration quality and increase project performance.

A critical factor in supplier collaboration is trust. Gren and Willamo (2010) meant that having trust towards the supplier will reduce the transaction costs.

The trust arises through continuity and good communication (Gren & Willamo 2010). Rundquist (2008) findings also suggested that trust and “good-enough competence” are more important than having access to world-class competence when a firm considers outsourcing of NPD.

The following sections will describe organizational and economic theoretical perspectives that are commonly used to understand the phenomena of outsourcing. The relevant theories are chosen because they are the most recurrent theories from previous research within the same field.

2.2. Transaction cost economics

Transaction cost theory by Williamson (1985), is probably known as the most classical theoretical approach to a make or buy decision-making. There are two kinds of cost that are identified in transaction cost theory, production costs, and transaction costs. The production cost refers to the direct costs that come from the creation of the product or service, which include labor and infrastructure costs (Williamson 1985). The transaction costs contain the cost of selecting suppliers, negotiating prices, signing contracts, controlling performance and the potential for opportunism from suppliers (Williamson 1981).

According to Williamson (1981), transactions occur when a good or service is transferred across a technologically separable interface. Williamson (1981) means that with a well-working interface, these transfers occur smoothly with not so much friction (in economic terms transaction costs). The transaction costs will decrease if the parties to the exchange operate harmoniously and increase if there are frequent misunderstandings and conflicts that can lead to delays or breakdowns (Williamson 1981). Some transactions are simpler and easier to mediate, and others are much more difficult and require more attention (Williamson 1981). Further, Williamson (1979) means that there are three critical

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16 dimensions for characterizing transactions, which are 1) uncertainty, 2) the frequency with which transactions repeats, and 3) asset specificity, which is the most critical dimension. The frequency symbols how often a transaction is made, uncertainty is dependent on the long-term relationships which are more uncertain, and lack of trust leads to uncertainty (Williamson 1979). The asset specificity describes how unique the component is for a company’s needs.

Highly specific assets will increase the switching costs and the suppliers often act opportunistically (Sillanpää 2015). Williamson (1981) named four different asset specificities: dedicated assets (specialized investment), physical asset specificity (technology advantages), human asset specificity (know-how advantages) and site-specificity (resource immobility).

The crucial decision for investment is dependent on what degree transaction- specific expenses incurred (Williamson 1979). Outsourcing can lead to lower costs for producing the activity because there are no investments for utilities and staff. On the hand, the transaction costs can increase due to costs of negotiation, supervising and legal disagreement. McIvor (2009) names several factors involving transaction costs. The main factors for bringing transaction costs out at market depend on bounded rationality, opportunism, small numbers bargaining and information impactedness. Bounded rationality is a behavior assumption that implies cognitive limitations of the human mind which increases the complexity of understanding possible decisions.

Opportunism is also behavior assumption which means that decision-makers acting with guile and out of self-interest. This can create uncertainty in dealings and mistrust between parties (McIvor 2009). Small numbers bargaining refers to the mark to which the buyer has alternative sources of suppliers to meet its requirements. Finally, information impactedness refers to the asymmetric information between the buyer and supplier, which means that one of the parties may have more knowledge than the other (McIvor 2009).

In the TCE approach, outsourcing NPD activities is seen as appropriate when the costs of cumulative development, production and transaction innovation, are less than the cost of doing the same work in-house (Cantone et al. 2018).

Cantone et al. (2018) also suggested outsourcing, as it carries little risk in relation to innovation activities towards the external suppliers (poor quality, time lags to market, knowledge spill-over and opportunistic behavior).

Adapting external innovations has disadvantages as well, which are related to the problems of trade technology and transaction costs (Vanhaverbeke et al.

2008). Transaction cost theory has been criticized for it emphasized behavior

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17 regarding transaction behavior only, while ignoring other relevant opportunities and advantages such as value creation brought by external cooperation (Yan 2000).

In sum, transaction cost economics is one of the most classical tools to evaluate make-or-buy situations. It suggests outsourcing when it lowers the transaction costs in the projects. Transaction costs are impacted on three critical degrees:

frequency, uncertainty and asset specificity. However, criticism against TCE means that trade cost against advantages from cooperation makes no sense. In the next section, a complementary theory to TCE is analyzed and described.

2.3. Resource-based view

Resource-based view is the most influential framework for understanding strategic management (Barney et al. 2001). Resource-based theory is built on the assumption that strategic resources are heterogeneously distributed across firms at that the differences are steady over time (Barney 1991). The framework is founded by Edith Penrose, 1959 and later developed to the resource-based theory by Wernerfelt (1984), Barney (1991) and Grant (1991). Barney (1991) define the resource-based framework as

“firms obtain sustained competitive advantages by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralizing external treats and avoiding internal weaknesses” (Barney 1991, p.99).

Barney (1991) defined three concepts that are central in the RBV; firm resources, competitive advantage and sustained competitive advantage. A resource is defined by anything that could be thought of as a strength or weakness of a given firm (Wernerfelt 1984). Barney (1991) divided the firm resources into three possible categories: human capital resources, physical capital resources and organizational capital resources. A resource can both be tangible and intangible assets, for example brand names, in-house knowledge of technology, employment of skilled personnel, trade contracts, capital, etc.

(Wernerfelt 1984).

Peteraf and Barney (2003) mean that a firm has competitive advantage if it is able to create more economic value than the marginal competitor in its product market. A firm has sustained competitive advantage under the same condition as mentioned for competitive advantage. This adds together the criteria that other firms are unable to duplicate the benefits of this strategy (Barney 1991).

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18 According to Barney (1991), four criteria’s must be attributed to the resources in order to supply sustained competitive advantage, i) the resource must be valuable to the firm, ii) the resource must be unique among a firm’s current and potential competitors, iii) the resource must be imperfectly imitable and iii) the resource can’t be substituted with another resource by competing firms.

According to Barney (1991), these resources are strategic resources.

The basis of RBV is that competitive advantage comes from internal assets, these assets are valuable in the firm and hard to imitate. However, the resource- based theory is not limited to internal aspects. For example, Grant (1991) means that outsourcing should be considered when needed resources and capabilities are not available in-house. In the option of outsourcing, the resource-based theory can be used as a strategic decision to fill the resource gap between the firm’s NPD resources and the desired NPD resources (Rundquist 2008). In the option of outsourcing, the gap can be filled with buying external knowledge, which implies outsourcing of NPD, or investing in internal personnel or resources (Rundquist 2008). Results from previous research has shown a connection to resource-based theory (e.g. Rundquist 2008; Rundquist & Halila 2010). McIvor (2009) means that the organization theory can’t fully explain the complexity of decision-making.

Priem and Butler (2001) criticized RBV by meaning that different resource configurations can generate the same value for firms, and thus would not be a competitive advantage. They also stated limitations in the theory regarding managerial and contextual implications and a limited focus on capabilities.

Priem and Butler (2001) also criticized the single-use of RBV, which meant that it should be complementary and integrated with another demand-oriented perspective.

2.3.1.Knowledge as a resource

Knowledge is one of the most significant strategic resources of the firm because it is usually the most difficult to imitate and requires integration across a wide field of capabilities (Spencer 1996; Grant 1996). Spencer (1996) means that there are two types of knowledge within the firm: explicit knowledge and tacit knowledge. Explicit knowledge means knowing about facts and theories by communication (Grant 1996). Tacit knowledge implies knowing how and is revealed through application and acquired through practice (Grant 1996). The tacit knowledge transfer between people is slow, costly and uncertain. Tacit knowledge is the knowledge that gives firms a strategic competitive advantage

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19 because they are extremely difficult for competitors to imitate (Liao et al. 2008).

Tacit knowledge needs to be experienced and cannot be entirely articulated and therefore it is hard to transfer (Liao et al. 2008).

2.3.2.Dynamic capabilities as a resource

Dynamic capabilities are a type of resource and are included in Barney’s (1991) definition of resources. In the field of strategic management, the fundamental question is how firms achieve and sustain competitive advantage. Teece et al.

(1997) confronted this question by developing the approach of dynamic capabilities. A definition of dynamic capabilities according to Teece et al. (1997) is “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997, p.516). This means to understand how firms are created, organized, and grow; how they innovate and complete; and how managers manage (Teece 2017). The term ‘dynamic’ directs to the capacity to renew competences to be able to achieve in accordance with the changing business environment. It is hard to determine future competition and markets. The technological change rate is rapid and the need of innovate responses are required when the business environment constantly changes (Teece et al. 1997). The ‘capabilities’ emphasize the required internal and external organizational skills, resources and functional competence that match the changing environment (Teece et al. 1997).

According to Teece et al. (1997), there are two types of capabilities: ordinary and dynamic capabilities. The ordinary capabilities have relatively low strategic value and are, to a great extent, operational (Teece 2017). Even if they may not provide competitive differentiation at the firm level, they are economically important at an overall level. Teece (2017) means that because ordinary capabilities do not have a significant strategic value, they could often be outsourced to expert suppliers. The dynamical capabilities are more strategic assets and cannot be bought, instead they need to be built through a process of investment in discovery, knowledge generation and learning (Teece 2017).

Strong dynamic capabilities support high performance on new product development. Verwaal et al. (2009) suggests that dynamic capabilities are an important explanation of resource value in outsourcing decisions. The study also indicated that a lack of balance in resource and transaction attributes reduces the potential for value creation through knowledge exchange and learning in outsourcing relationships. Eisenhardt and Martin (2000) mean that dynamic capabilities are a set of specific and identifiable processes such as

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20 product development and strategic decision making. They argue that these specific processes create value for firms within dynamic markets by manipulating resources into new value-creating strategies. Another dynamic capability for organizations is sustainability. The changing environment has made organizations find ways to make sustainability a dynamic capability, integrated with strategies and business models (Bartocci Liboni Amui et al.

2016). Bartocci Liboni Amui et al. (2016) mean that sustainability needs to be a part of the strategy and needs to be dynamic to become a competitive factor.

In sum, resource-based view is the most influential framework for understanding strategic management. It could be complemented by integrating knowledge and dynamic capabilities as resources in the theory to be able to return insights beyond RBV. The theory means that firms obtain sustained competitive advantage by exploiting internal resources and strengths that are valuable to the firm and hard to imitate. Even if a firm’s competitive advantages arise from internal assets, outsourcing in RBV could be used to complete the necessary resources and capabilities that do not exist in-house but are needed for the NPD process.

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21 2.4. Theoretical framework

The theoretical framework is formed to gain an overall understanding to the complexity of outsourcing decisions of NPD. The framework is built on above literature and describes how each part can be linked together to create a theoretical framework.

In order to understand the complexity when outsourcing decisions of NPD, it is important to break down this phenomenon into several key components that are expressed as concepts. The concept of NPD describes the new product development process and defining new product in the context. NPD could be performed in-house, or, using external parties to develop new products. This can result in outsourcing of NPD. Outsourcing is a concept where the decision to outsource essentially consists of an organizations strategic decision. This decision is between making or buying a technical product (Crowther & Green 2004). When an organization chooses to buy NPD, it requires a collaboration with suppliers which is the last concept in the theoretical framework. All of these concepts can be described by principles in the theoretical perspectives TCE and RBV. TCE and RBV are used as they are the most common theoretical perspectives to explain outsourcing decisions.

The main units of analysis describe what units within the business that explains outsourcing as strategy in each of the theoretical perspectives. TCE is the matching perspective when outsourcing projects is seen as appropriate when the costs of cumulative development, production and transaction innovation, are less than the cost of doing the same work in-house (Cantone et al. 2018).

This should increase the likelihood that managers will outsource the project.

Transaction is the unit that is analysed (Cantone et al. 2018). RBV analyses resources and capabilities as units as it is the dominant theory in projects where needed resources and capabilities are not available in-house. This should increase the likelihood that managers will outsource the project (Rundquist 2008).

Transaction cost economics define two kinds of costs: transaction costs and production costs. These are expressed as principles in the theoretical framework (Williamson 1985). The main principles in RBV are strategic resources, assets, competence (knowledge and skills), ordinary and dynamic capabilities (Barney 1991). In RBV, knowledge and dynamic capabilities is included as resources to get an additional understanding to the theoretical perspective. The need for new products requires the use of the firm’s resources related to the NPD process,

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22 and therefore resources is a principle of RBV in NPD (Hashiba & Paiva 2016).

It is also a strategic organizational capability which require skills to organize a process that begins with a market opportunity and a set of technological proposals (Eisenhardt & Martin 2010; Hashiba & Paiva 2016). The principles of NPD in TCE mean that a firm will consider outsourcing NPD if it will lower the net transaction costs. If the firm chose to outsource NPD, it will require collaboration with supplier. The concept of supplier collaboration can be connected to TCE since external cooperation implies transaction costs according to the theory. Supplier collaboration is connected to RBV because suppliers are considered as a type of resource. This gives firm a competitive advantage by combining resources in unique and hard-to-imitate ways (Dyer &

Singh 1998).

The complexity of outsourcing decisions is affected by human behaviour and are called behavioural assumptions. In TCE, transaction costs can increase and be affected by human behaviour: limited rationality and opportunism (Williamson 1985). Bounded rationality is a behavior assumption that implies cognitive limitations of the human mind which increases the complexity of understanding possible decisions. Opportunism is also behavior assumption which means that decision-makers acting with guile and out of self-interest (Williamson 1985). In RBV, Espino-Rodríguez & Padrón-Robaina (2006) mean that human behavior will be affected by limited rationality. This means that the firm does not master everything, it will do what is determined by its organizational routines.

These concepts, perspectives and resources are together aimed to support and explain the research study. Each concept principles in TCE and RBV are presented in Table 1. Key references refer to previous research in outsourcing of NPD where results are explained and supported by each theory.

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Table 1: Theoretical framework for theoretical perspectives used in outsourcing decisions.

TCE RBV

Unit of analysis

Transaction costs: cost of selecting suppliers, negotiating prices, signing contracts, controlling performance and the potential for opportunism from suppliers

Resource and capabilities

Behavioral assumptions

Bounded rationality implies cognitive limitations of the human mind which increase the complexity of understanding possible decisions and opportunism means that decision-makers acting out of self-interest. Bounded

rationality and opportunism are the main factors that bring transaction costs out at the market.

Limited rationality (the firm doesn’t manage everything: it will do what is determined by its organizational routines)

Principles of

outsourcing

Production costs Transaction costs

Strategic resources Assets

Capabilities: dynamic and ordinary

Competence: knowledge &

skills Principles of

supplier collaboration

External cooperation implies transaction costs

Suppliers are a resource

Principles of NPD

A firm will consider outsource NPD if it will lower the net transaction costs.

It is a strategic organizational capability and

requires the use of the firm’s resources

Key references

Al-Shalabi et al. (2007), Soriano- Meyer et al. (2012)

Rundquist & Halila (2010), Soriano et al. (2012), Liao et al.

(2008), Al-Shalabi et al. (2007),

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24

3. Method

This chapter aims to describe how this study is performed and why different methodologies are used. It starts with a short description of the problematization and aim of the study and what is to be achieved and why because it controls what methodologies are relevant for the study. The chapter describes and motivates the research design, case and methodologies chosen. It ends with a presentation of ethics and the trustworthiness of the study.

3.1. Research design

The aim of this study is to investigate what factors are critical in decision-making when it comes to outsourcing of NPD. This aim will be fulfilled by answering the research question, “What affect the choice between make or buy in outsourcing New Product Development?”

To be able to answer the research question, a qualitative research design is conducted. Since there exists previous research on outsourcing decisions, and this study aims to get a deeper understanding and new perspectives on the phenomena, this is possible by doing qualitative research. Qualitative studies can be used to gain new perspectives on issues where much is already known (Gray 2017). Qualitative research makes the researcher gain a deep and described overview of the context under the study which often involves interacting with the everyday lives of individuals, groups and organizations (Gray 2017).

The research question aims to uncover the relationship between a phenomena (outsourcing) and in the context where it occurs (new product development), which makes case study a suitable research method for this case. For this study, an exploratory single case study is conducted. In the situation where deep and detailed data need to be gathered to be able to understand the complexity of make-or-buy situations, case study makes it possible to achieve this by combining a wide variety of data collection methods such as interviews, archives, participant observation, etc. (Gray 2017).

In addition to the theoretical perspectives, a cost analysis was included to illustrate the financial aspect to provide an additional understanding of the problem. By taking the financial perspectives into account, it will allow for a better understanding of the case and for make or buy situations.

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25 3.2. Case selection

For this study, one case was selected. The case was selected because it fulfilled the qualifications, i.e. a technology company that is considering if they should make or buy the development work for a few of their products. It is a Finnish technology company that is a global leader in development and supplier of technology, automation and service within the pulp, paper and energy industries.

The company has some experience of outsourcing NPD but has now reached a stage where they are considering outsourcing of NPD more and more. The company is used to collect data about what factors affect the choice of outsourcing NPD versus keeping it in-house, and why previous outsourcing projects where accomplished. A case study is a suitable research methodology for this research because it provides intensive analyses and descriptions of a single unit or system (Hancock & Algozzine 2006).

3.3. Data collection

In order to collect reliable data to fulfill the aim of the research, two different methods were used. The data collection has been done through a document study and interviews.

3.3.1.Semi-structured interviews

One tool for data collection was semi-structured interviews. Interviews are recommended for exploratory research, where the researcher wants to examine experiences, opinions, attitudes, values and processes (Gray 2017), which is the desire in this case and therefore the method was chosen. Semi-structured interviews allow the researcher to develop and dig for a deeper description of the interviewee’s answers by asking them to clarify what they said (Gray 2017).

This is possible due to the ability to change questions depending on what directions the interview takes (Gray 2017). The responses were documented by recording the interview.

The purpose of the interviews was to gather insight that helped the researcher to understand how the decisions between make or buy, in outsourcing new product development was made. An interview guide was designed before the interviews were conducted which was aimed as a guideline with questions that the interviewer wanted to cover. The interview guide was developed from the research aim, research question and from theory. Depending on the direction the interview and the answers received, the interviewer could change or erase some questions from the guide. The interview guide could be adapted

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26 depending on the knowledge of the participants. The interview guide is presented in Appendix 1.

The interview guide was tested on another student and checked with the

supervisor before the interviews were carried out.

3.3.2.Unobtrusive measures

Unobtrusive measures in forms of business and organizational documents were used to obtain data from customer orders and project plans. The documents regarding customer orders served as supporting documentation for the cost analysis. The project plan served as supporting documentation for the empirical background in the case study that was used to understand the specific case situation which was useful when the interview guide was developed.

3.3.3.Sampling strategy

The sampling strategy was done with a purposive approach. It is a suitable strategy in qualitative research when particular people are chosen on the basis they can provide with important information (Gray 2017). The participants were selected from different departments and occupations in order to receive a wide range of perspectives from the company. The participants were selected with the belief that they had the most reliable input when it comes to outsourcing and new product development. They were chosen by both looking at the firm’s organizational map and also asking the personnel at the company if they knew anyone with knowledge in the area that were appropriate to interview. The participants were contacted through email with information about the purpose of the interview, asking if they would like to participant by offering a meeting time and place. The request was sent out to 8 personnel. Eight participants were the goal to achieve. According to Guest et al. (2006), 6-12 interviews are enough to achieve a desired research objective. One of them rejected the proposal because they did not think they had the right knowledge to help. Seven interviews were considered to be sufficient according to Guest et al. (2006). The participants are listed in Table 2, with a presentation of occupation, department, how the interviews were performed, together with the date and the length of the interview.

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Table 2: Sampled participants for interviews.

Interview nr.

Department Occupation Perform Date Length

1. Product

Management

Manager Physical

meeting

9/3-20 00:56:02

2. Product

Management

Development engineer

Physical meeting

11/3-20 00:52:23

3. Technology Director Physical

meeting

19/3-20 00:27:02

4. Product

Management

Product Manager

Skype meeting

24/3-20 1:03:29

5. Production

Purchase

Supplier Quality Manager

Skype meeting

31/3-20 00:49:09

6. Technology Concept

Manager

Skype meeting

8/4-20 00:35:02

7. Production

Purchase

Production Procurement Manager

Skype meeting

8/4-20 00:30:23

In order to create an understanding of what data has been collected from which participant and department, Figure 2 present organizational structure and a description of data collected from each department.

Figure 2: Organizational structure and collected data.

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28 3.4. Data analysis

3.4.1.Interviews

The recorded interviews were transcribed by hand word-for-word. This was a time-consuming method, but it developed an early stage familiarization with the data (Gray 2017) and ensured that everything that was said during the interviews was noted. The transcription was done immediately after the interview was completed, in this way the researcher had the conversation fresh in their mind.

In order to analyze and build an understanding of the transcribed data, the Gioia analysis approach was employed. Gioia approach is a systematic approach to new concept development and grounded theory (Gioia et al. 2012). The systematic approach enables researchers to see the rigor of the concept development and theory building within an organization study (Gioia et al.

2012). It is a suitable method when the research includes several data collection methods but the big part of the data collection is semi-structured interviews (Gioia et al. 2012), which make it suitable for this thesis.

3.4.2.Unobtrusive measures & Cost analysis

The unobtrusive measures were used to analyze business records. They were used as a basis for making assumptions in the cost calculation. The sales document could provide information about sales amounts and prices.

Documents can provide a rich source of information and Hancock and Algozzine (2006) suggest using existing documents in addition to using interviews in order to gather information related to the research question. By analyzing the documents, the cost model could assume reasonable values to get an authentic result. Since the theory indicates that costs are an important factor when considering outsourcing of NPD (e.g. Al-Shalabi et al. 2007), the cost analysis was included in order to achieve a comprehensive understanding of the decision-making situation.

3.5. Ethical considerations

This study has considered the ethical perspectives through five different principles that Bryman & Bell (2013) suggest. The principles include requirements for information, concurrence, confidentiality, utilization and false pretense. The requirement of information has been fulfilled by giving the participants of the interview information about the aim of the study and the purpose of doing it. The participants were told that the interviews were part of

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29 a master thesis study whose aim is to investigate the decision-making situation of make-or-buy in the outsourcing of NPD. The participants were informed that no personal information or the company’s name will be mentioned in the thesis which fulfills the confidentiality requirement. In the email invitation, the researcher clearly stated that the interview was optional, and by approval of the participant, the interview was recorded. Before starting the interview, the participants were also informed that they had the right to not answer any question if they didn’t want to and that they had the right to leave the interview at any time. This fulfilled the concurrence requirement. The fact that the researcher had no personal gain or use of the data, expect for the purpose of the research, strengthened the utilization requirement. By providing only true information, the false pretense was also fulfilled.

3.6. Trustworthiness

The trustworthiness of the thesis is addressed by evaluating the transferability, dependability, confirmability and credibility of the study (Bryman & Bell 2013).

The credibility is created by selecting purposive sampling from different levels and departments of the organization. The purposive sampling makes it possible to achieve data from different data sources, which is described by triangulation and increase credibility in business research (Bryman & Bell 2013).

Triangulation can also be fulfilled by using more than one theoretical perspective (Bryman & Bell 2013) which this study does. The participants also had the opportunity to look at the transcription from the interviews to make sure that the researcher had used the actual data from the interviews.

The transferability is fulfilled by giving the case a detailed description. This enables those who seek to transfer the findings to their own site, can judge the transferability (Nowell et al. 2017).

Dependability is strengthened by having supervisors and colleagues auditing the thesis. This ensures a complete review of all phases in the research process.

Confirmability is achieved by both using multiple methods of collecting data.

The data collection has been well documented by recordings that improve confirmability. Confirmability is also established by motivate choices of theoretical, methodological and analytical choices. Also, the fact that the researcher has no personal gain from the study will strengthen confirmability.

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30 3.7. Delimitations

This study comes with limitations. Firstly, the generalization of the findings are limited since this is a single case study. Second, the sampling of the interviews was limited since not all of the personnel in the case firm had relevant knowledge for this research. Thirdly, the first interviews could be conducted face-to-face but due to the COVID-19 situation, the final interviews were conducted through skype which is important to consider when analyzing the interviews. However, there is still enough done to maintain the trustworthiness of the study.

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4. Findings

This chapter will present the findings from the data collection.

The analysis of the interview data resulted in 105 units of analysis in form of quotes from the transcribed interviews. These were then reduced to 25 first- order codes and 10 second-order codes. The data structure from the data analysis is shown in Figure 3a and 3b.

Figure 3a: Data structure from data analysis.

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Figure 4b: Data structure from data analysis.

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33 4.1. Competence

Competence was viewed as a resource by the interviewees. It included the knowledge that the employees possess which is relevant to the NPD process and skills of performing relevant activities: "If we want to maintain the development we need to have the right competence to do it, otherwise we should outsource it”

– Interviewee 2

And:

"It is a combination of knowledge and resource. Everything really. Because having a knowledge that does not increase the value of our product, why should we have it? Have a resource that does not contribute to increased value of the product, why should we have it? It is better if we could move a resource from an area we don’t need and where we don’t have 100% right competence, to some area we need and where we have 100% competence.” – Interviewee 1 The findings also suggested the challenge of identifying which competence are needed to stay in-house and what knowledge and skills, that don’t have a strategic value, and could be outsourced: “…how to define what we need to know, I think that can be challenging.” – Interviewee 3

And:

“It is very important that we identify our ‘must-knows’. Identify the core competence that we must have remain in-house. I don't think we need to have all the skills in-house. However, there are parts that we should keep in-house. It is important to set up a strategy around it and consider what areas we need to have in-house and which ones we do not need to have.” – Interviewee 5

In addition it showed that a driving force to outsource it was to get access to external competence that the company does not have in-house: “…getting someone who is an expert at doing it instead.” – Interviewee 7

4.2. Time

Time is identified by the respondents as a resource and is an important factor to consider both regarding the time needed to develop products in order to improve them, and important to release time for more valuable work. "On the other side, we get more time to focus on the important knowledge and competence which make it easier to transfer what really is important" –Interviewee 2

And: “…then it can be critical that you are drawing on it for 8-10 weeks first and then leave it to subcontractor, the time is critical.”– Interviewee 1

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34 4.3. Ability to collaborate with supplier

One important factor to consider when evaluating outsourcing decisions was to find and collaborate with supplier which are identified as a resource by the participants. It included important features to consider when finding a potential supplier.

"For outsourcing in general, finding a supplier who knows what it is about, who has the right skills and equipment to manufacture and who delivers the best quality available at the agreed time and at a very competitive price" – Interviewee 7

Despite relevant qualities, it is also important to transfer tacit knowledge to the supplier since it is critical for the supplier to understand in what environments the products operate:

“But they do not know our environment the same way. It's really our dusty environment that we have. It is quite extreme in dust and paper debris. If the supplier does not understand, it can be problematic.” – Interviewee 4

4.4. Service

Service is seen as a resource by the interviewees because it is valuable for the firm to be customized, flexible and provide service to its customers. These are all important factors to consider when a firm considers outsourcing of NPD. It was identified as a challenge to provide good service towards their customers when outsourcing knowledge: “it can be a challenge how we ensure how we can still provide good service to our customers on those components” – Interviewee 3

Another code identified in service was that it could be expensive and a challenge to provide service due to quality issues when the firm did not longer have competence in-house:

"But if you, on the other hand, have quality deficiencies that you have to have the skills to correct, then it quickly becomes more expensive. What itself is one of the big problems is that you make sure quality issues ." – Interviewee 1

4.5. Costs

Costs were identified as an affecting factor by the interviewees. The empirical findings showed that the firm wanted to achieve more cost-efficient products by outsourcing the product development to a supplier: “…be able to drive the development and cost-effectiveness of the product” – Interviewee 4

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35 Cost-efficient products were also identified from:

“It may be that you unlock your own competence on things for which you are not sufficiently competent and do not get a good enough product even though the costs are the same.” - Interviewee 1

Costs were also identified from the cost of doing the development work in- house, since their own competences are expensive, compared to a potential supplier: "...our hours are quite expensive so when we do development work it is quite expensive. I think suppliers can often make it cheaper." – Interviewee 2

4.6. Strategy

Strategy was identified under three different categories by the participants:

outsourcing, in-house and cost-savings. Strategy describes organizational activities and utilizing and allocating the firms resources within the organizational environment to meet the present objectives. Outsourcing strategies consist of codes relating to organizational activities whose present objective is outsourcing. The first order codes identified by the interviewees were that the firm could focus on core business and have a more efficient product development:

“We don’t have time to develop and improve everything, we need to focus on developing the core business. This means that there are many of our products that won’t be developed, and if we don’t keep develop them, they won’t be better and better with time. But if we outsource something to a company that has this product as their core business then they will continue to improve the product so we get a better and better product which we don't get if we keep have it in-house. I see that as a very important thing. “ – Interviewee 3

Also outsourcing strategies relate to defining what areas are most profitable for the organization: “and I don't think it's profitable to do that work either. It makes sense to get rid of some of that work.“ – Interviewee 2

Strategy also implied increased competitive advantage and the need for a clear strategy for NPD:

"Just for a single product we don't have the same strategy for everyone, but we think through what we want with this product. How do we want it to work and then choose we strategy based on that. I think that is very important. " – Interviewee 3

In-house strategies imply activities that motivate the choice of having the development in-house. In this code, the need for keeping control and the risk

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36 of building dependence to supplier was important to consider when outsourcing NPD:

“First and foremost, it is that we still have cost control. That you do not become dependent on someone you work with and then you feel that for a period the cost goes up and you have no control over it” – Interviewee 1

Cost savings strategy relates to the objective of cost: “The opportunities with outsourcing are mainly to find more cost-effective solutions, in some cases better technical solutions as well.” – Interviewee 6

4.7. Tensions between different perspectives

This code is included to show the complexity of different logics to compete in what the company is thinking about. Even if cost-savings were identified from the respondents to be a main factor to outsource NPD, the findings also showed that profit and value is more important than costs: “…these components should be in a machine but they do not really increase the value. It should just work. And then maybe that's not our area I think” – Interviewee 1

And: “We have an economic perspective in this, what is it profitable for us to be best at?” – Interviewee 5

Tensions are also shown by value-creating in developing internal resources instead of using outsourcing. This implies that it is more valuable for the firm to develop in-house than using outsourcing which indicates a tension between different strategies. This value comes from a long-time business model where all development work has been in-house even if sometimes it has not been cost- efficient or the product has not been better:

"Often, we want to do everything on our own. The problem for companies many times is that they see their own labor as free compared to, for example, if you are going to buy the development from another company.” – Interviewee 1

4.8. Sustainability

A code that wasn’t as prominent in the data analysis was sustainability. It was expressed in the form of social sustainability. It was identified by the interviewees both by sustainability requirements against suppliers that the supplier need to fulfill in order to be a relevant supplier:

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37 “…and hopefully some sustainability requirements and social requirements that need to be meet in order to be a relevant supplier.” – Interviewee 2

And by disadvantages of outsourcing NPD which were reduced job opportunities. “We might not need as much personnel anymore.” – Interviewee 2 Economic sustainability could also be related to cost-efficient strategy but since costs are an important factor to take into account when a firm consider outsourcing NPD, it is identified as an own code.

The decision behind outsourcing New Product Development

Ebba Öhlin