Small Firm Entrepreneurial Outsourcing Traditional Problems, Patrick J Murphy

Description
Within this brief explanation in relation to small firm entrepreneurial outsourcing traditional problems, patrick j. murphy.

Small ?rm entrepreneurial
outsourcing: traditional problems,
nontraditional solutions
Patrick J. Murphy
Driehaus College of Business, DePaul University, Chicago, Illinois, USA
Zhaohui Wu
College of Business, Oregon State University, Corvallis, Oregon, USA, and
Harold Welsch, Daniel R. Heiser, Scott T. Young and Bin Jiang
Driehaus College of Business, DePaul University, Chicago, Illinois, USA
Abstract
Purpose – Pursuing objectives despite limited internal resources and leveraging external resources
despite non-ownership are familiar hallmarks of entrepreneurial ?rms. Although outsourcing is the
standard way for businesses to surmount these barriers, entrepreneurial ?rms often lack the resources
to purchase outsourcing arrangements. The purpose of this paper is to shed light on how
entrepreneurial ?rms can better procure and bene?t from outsourcing arrangements.
Design/methodology/approach – The paper examines six entrepreneurial ?rms in a Shanghai
business incubator as they undertook a variety of outsourcing arrangements. It utilizes an integrative
framework based on transaction cost theory, resource dependency theory, and the resource-based
view. It then cross-hatches those three theory bases with four outsourcing modes (full, partial, spinout,
inter-outsourcing) and case study methodology.
Findings – The paper’s ?ndings yield three novel propositions for strategic and ex ante
entrepreneurial ?rm outsourcing activities. The propositions pertain to the exchange of
non-traditional resources, vendor-buyer power differentials, and linkages between internal
operations and external resources.
Originality/value – Entrepreneurial ?rms stand to bene?t in particularly vital ways from
outsourcing arrangements. Yet, they are often severely constrained with respect to resources. Such
strong need combined with limited means is a peculiarly valuable setting but only a paucity of
research exists. The original study targets this important setting.
Keywords Business improvement, Innovation, Supplier or partner selection, Process design,
Contract negotiation, Process planning, Small enterprises, Entrepreneurialism, Outsourcing
Paper type Research paper
1. Introduction
Small ?rms usually do not control many of the resources necessary to run, maintain,
and grow their businesses. As a result, they often overcome internal inadequacies and
shortfalls with ad hoc ingenuities rather than well-de?ned processes, routines, formal
contracts, and bidding. In general, that is how entrepreneurial ?rms expand the limits
of their scarce resources (Gartner and Bellamy, 2008; Dewald et al., 2007).
In the entrepreneurship area in particular, the strategies associated with these
activities are known as bootstrapping, which is the most common way for small ?rms
to enable growth (Barringer and Ireland, 2006; Freear et al., 1995). Even the most
successful contemporary established ?rms had to bootstrap in their nascent stages
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1753-8297.htm
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Strategic Outsourcing: An
International Journal
Vol. 5 No. 3, 2012
pp. 248-275
qEmerald Group Publishing Limited
1753-8297
DOI 10.1108/17538291211291774
(Wadhwa and Ravindran, 2007; Magretta, 1998). Thus, it is a generally important part
of how ?rms grow. However, the strategies associated with bootstrapping can result in
tenuous buyer-supplier relationships. When those relationships and arrangements
involve contracts, as outsourcing arrangements do, bootstrapping can be disruptive
and even upsetting (Arbaugh, 2003).
Entrepreneurial ventures are famous indeed for the creative means by which they
bootstrap resources creatively to achieve performance. In principle, outsourcing
arrangements could provide better solutions for them to establish stable external
partnerships that enhance internal operations (Quinn, 1999). As the buyers become
smaller, it opens a gap in the conceptualization of how outsourcing works. In other
words, established theory on outsourcing holds that suppliers enter outsourcing
arrangements readily whereas outsourcing ?rms (i.e. buyers) have subtly defensive
postures (Elango, 2008). As such, buyers usually have potential suppliers bid for
outsourcing contracts. In turn, they select the supplier who best serves their needs at
the lowest price. These assumptions are common and practical for larger ?rms.
However, they are not valid for small entrepreneurial ?rms pursuing objectives via
limited internal resources.
Small ?rms have far fewer resources and absorptive capacities than larger ?rms.
Their scale of demand is small (Timmons and Spinelli, 2007). These characteristics
offer few incentives to outsourcing suppliers. It is a weak market position that works
against small ?rms when it comes to contracting with vendors. Further, the dynamism
of entrepreneurial ?rm operations can complicate outsourcing partnerships (Arbaugh,
2003; Hamel, 1999). As such, although entrepreneurial ?rms can bene?t from
outsourcing in principle, the traditional notion of small ?rms using outsourcing to
enhance operations is impractical. It is also under-researched because of the
nontraditional solutions involved (Elango, 2008; Alvarez and Barney, 2001).
In this paper, we address the gap in the current conceptualization of entrepreneurial
business outsourcing with tenets from transaction cost theory, resource dependency
theory, and the resource-based view. Our research question is, “How do small
entrepreneurial ?rms procure the outsourcing solutions large ?rms enjoy while lacking
the traditional resources required to purchase those solutions?” The nontraditional
solutions we review in this paper also entail a unique perspective on the problem:
whereas most outsourcing research utilizes post-outsourcing data, our study uses
pre-outsourcing data to consider why small businesses pursue speci?c outsourcing
arrangements from a strategic perspective.
2. Literature review
Business process outsourcing enhances ?rm performance because it helps ?rms
operate more ef?ciently through cost reduction and managerial focus on core
competencies (Gulbrandsen et al., 2009; McNally and Grif?n, 2004). The decision to
outsource a business process is different from other purchasing decisions. Gilley et al.
(2004) argue that outsourcing goes beyond what is germane to other resource
procurement activities because of its basic strategic bent. Indeed, outsourcing does
tend to accompany shifts in strategic posture. For instance, it entails substitution of
external purchases for internal activities. It can herald a discontinuation of internal
operations with the initiation of new procurements from outside suppliers.
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entrepreneurial
outsourcing
249
Theories exist to help explain these dynamics. Why do ?rms terminate in-house
operations in favor of outside services? To engage such questions about outsourcing,
transaction cost theory (TCT) is the most common theoretical foundation. Its
explanation entails inter-organizational endorsement as part of the outsourcing option.
It involves transactions with outsourcing providers via market mechanisms and the
decision to retain operations in-house via organizational control (Gulbrandsen et al.,
2009; Lacity and Hirschheim, 1993). TCT helps conceptualize ?rm outsourcing in terms
of speci?city of assets, uncertainty around strategic options, and the infrequency of the
arrangements (Williamson, 1975, 1981, 1985). According to TCT, in-house operations
that are more commoditized than others stand to bene?t from the market aspects of
outsourcing arrangements (McNally and Grif?n, 2004; Arnold, 2000). These processes
are associated with lower asset speci?city, less uncertainty, and higher frequency
(Gulbrandsen et al., 2009). By contrast, more specialized processes stand to bene?t from
hierarchical relationships and greater control of in-house operations (Aman et al., 2012;
Stratman, 2008; Grover and Malhotra, 2003; Stump and Heide, 1996).
Although TCT is the most common theoretic approach to outsourcing, the richness
of one single approach is not suf?cient for capturing all of the complex dynamics of
outsourcing arrangements (McIvor, 2009). For instance, TCT does not speci?cally
account for the power differentials germane to outsourcing transactions (Geref? et al.,
2005; Granovetter, 1985; Maitland et al., 1985). On these grounds, resource dependency
theory (RDT) adds value with assumptions about ?rms seeking to enhance their power
(Ulrich and Barney, 1984; Pfeffer and Salancik, 1978). Thus, ?rms that lack resources
must seek to establish relations with powerful ?rms before they can obtain the
resources they need. From this perspective, ?rms alter structures and strategies to
procure resources not generated internally. Such alterations vis-a` -vis other ?rms can
shift the power balance in the environment (Ulrich and Barney, 1984). As such, RDT
explains ?rm task environments in terms of resource concentration, ?rm muni?cence,
and interconnectedness (Pfeffer and Salancik, 1978). RDT is useful for examining
relations between a ?rm’s decision to outsource and its own capabilities to obtain
resources from the environment (Yuchtman and Seashore, 1967). The approach holds
that ?rms should align their strategy with robust processes and outsource the weaker
ones (Teng et al., 1995). Thus, the power balance derives from resource accessibility,
the number of potential suppliers, and costs of switching suppliers (Cheon et al., 1995).
A third theoretic foundation, the resource-based view (RBV), complements the TCT
and RDT by focusing on the accumulation of ?rm resources (Wernerfelt, 1984; Penrose,
1959). It holds that resources provide sustained competitive advantage when they are
valuable to the ?rm, rare among current and potential competitors, imperfectly
imitable, and nonsubstitutable in light of competing ?rm resources (Arnold, 2000;
Barney, 1991). Addressing constraints through outsourcing is a way to maintain
current resources and augments strategic affordances (Cheon et al., 1995; Grant, 1991).
In this sense, the RBV reveals that ?rm competitive advantage comes from possessing
dif?cult-to-replicate resources such as a good reputation, loyal customers, and
competent employees (Lovallo and Mendonca, 2007). Core competencies that offer
competitive advantage are central to ?rm performance and those with marginal
in?uence do not underlie sustainable competitive advantage, which makes them
suitable for outsourcing (McIvor, 2009; Arnold, 2000). In this way, the RBV pertains to
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strategic ?rm activities relative to competitors and, in particular, when such activities
should be put to internal versus external arrangement (McIvor, 2009).
2.1 Outsourcing modes
Outsourcing involves ceasing an internal business process and establishing a
contracting arrangement with an external ?rm for full or partial execution of that
process. It is a vital step in ?rm growth because it bears directly upon the operations of
a ?rm’s business. Outsourcing mode selection is rife with incidental complexities, such
as power differentials and negotiations (Geref? et al., 2005). For example, in the case of
handset production in the mobile telephone industry, Ericsson fully outsources all of its
production, whereas Nokia only outsources 15-20 percent and Motorola outsources
30-40 percent of theirs (Alvarez and Stenbacka, 2007; The Economist, 2002). Most
current outsourcing research focuses on full and partial outsourcing (e.g. Choi and
Davidson, 2004; Sharpe, 1997; Hirschhorn and Gilmore, 1992; Quinn, 1992). Beyond full
and partial outsourcing, at least two more outsourcing modes have emerged in the
domain of business studies and strategic and operations management practices. Taken
together, the four modes provide reasonably comprehensive coverage of the full range
of outsourcing arrangements undertaken by today’s ?rms.
One mode is inter-outsourcing, which entails a ?rm and external supplier in a
symbiotic relation that yields ?rm-speci?c bene?ts for both partners ( Jiang et al., 2008).
The mutual bene?t of inter-outsourcing offers specialized process improvements and
value to both sides. For example, once Motorola outsourced its logistics operations in
China to United Parcel Service and MAERSK, those two ?rms outsourced their own
telecommunication processes in China in turn to Motorola ( Jiang, 2002). In the airline
industry, many airlines have jointly created inter-outsourcing alliances for ground
handling and maintenance operations, lounge access, operational facilities and staff,
and other services (Song et al., 2007).
The last outsourcing mode is spinout outsourcing, which occurs when a department
or unit of a ?rm becomes a separate, distinct entity but maintains previous in-house
operations from an external position (Tubke et al., 2004; EGA, 1999). Spinout
outsourcing offers the bene?t of familiarity between outsourcing partners, but also
offers greater autonomy for the outsourcing provider to develop its own distinct
business processes. For example, ABB spun out a plastics production division, which
soon became an independent entity and served as the principal outsourcing supplier of
plastics products for ABB (Brandes et al., 1997). Through spinout outsourcing, IBM
created “put options” to handle surge needs via spun-out factories that have base-load
commitments to IBM (Quinn and Hilmer, 1995).
2.2 Entrepreneurial ?rm growth
Another important consideration in understanding small ?rm outsourcing behavior is
the strategic context of the decision. Understanding the leaders’ objectives helps
explain why one outsourcing approach was favored over the others. To inform this
discussion we brie?y review ?rm growth theory and integrate the theoretic approaches
reviewed above.
Firm growth is an important aspect of small business operations and
entrepreneurship activity (Murphy, 2012; Shane and Venkataraman, 2000;
Venkataraman, 1997). The resources for enabling ?rm growth include employees,
Small ?rm
entrepreneurial
outsourcing
251
?nancial capital, and social and relational capital with customers and suppliers (Sinha
et al., 2011; De Clercq et al., 2006). Because of the scarcity of such resources controlled
by small businesses (Kuratko, 2009; Gartner and Bellamy, 2008; Timmons and Spinelli,
2007), alertness to external opportunities, ?at structures, multi-stage resource
commitments, and the episodic use of resources are particularly important for small
businesses (Sadler-Smith et al., 2003; Covin and Slevin, 1988). These actions can come
in the three forms of enabling resources, realizing operations, and managing
relationships (Lechner and Leyronas, 2009).
The ?rst action entails the enabling of resources. Small businesses must identify,
pursue, and exploit necessary resources in order to grow (Lichtenstein and Brush,
2001). The capability to enable resources in different con?gurations enhances ?rm
?tness (Sirmon et al., 2007), maintains effective operations (Lechner and Leyronas,
2009; Wiklund, 1998), and promotes control (Sadler-Smith et al., 2003). The RBV
clari?es these activities by conceptualizing ?rm relations with the environment in
terms of a resource’s value, rareness, inimitability and nonsubstitutability. A TCT
approach holds that ?rms protect themselves from threats of external change by
making their resources speci?c and unable to be redeployed by other ?rms (Dewald
et al., 2007). To the same end, the RDT perspective emphasizes the alignment of ?rm’s
internal resources and external environment to serve markets better (Salimath et al.,
2008).
The second action involves realizing operations. Firm growth requires identifying
appropriate operational focus in a changing environment (Companys and McMullen,
2007). From the TCT perspective, minimizing transaction costs is the most important
operational focus (Hudson and McArthur, 1994). From the RDT perspective, however,
a ?rm should pursue scarce and valued resources, even though the transaction costs
may be high (Covin et al., 2006). Managing the complexity of internal and external
changes can undermine the retention of a consistent strategic ?rm orientation
(Companys and McMullen, 2007; Hudson and McArthur, 1994). In this way, focusing
on transaction costs or pursuit of valuable resources can impede operational focus and
steer a ?rm away from its original mission and values (Covin et al., 2006). Therefore,
the RBV holds that a ?rm’s operational focus should always remain with its core
competencies, which are derived from its dif?cult-to-replicate resources (Takeishi,
2001).
The third and ?nal action entails managing relationships. From the RDT
perspective, growth-oriented small ?rms should rely heavily on partnerships due to the
lack of necessary resources (Sorenson et al., 2008; Eisenhardt and Schoonhoven, 1996).
Small ?rms bene?t from such relations when core competencies and resources are
accessible in the network (Lounsbury and Glynn, 2001). From the TCT perspective,
these partnerships have a tension because of the need to preclude opportunistic
behavior (Williamson, 1985). Moreover, bargaining power in these partnerships is a
function of what each partner might lose upon exit from the partnership, which
introduces certain costs. Therefore, small ?rms must select the right governance
mechanism (i.e. hierarchy vs market) to control these costs (Everaert et al., 2007). The
RBV holds that ?rms can ameliorate such costs via internalizing resources for core
competency (Hitt et al., 2007). However, the costs of internalizing processes should
balance with the uncertainty of approaching a potential outsourcing arrangement
(Everaert et al., 2007; Arbaugh, 2003).
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2.3 Entrepreneurial ?rms and outsourcing
The existing literature provides some separated insightful hints about entrepreneurial
outsourcing decisions and processes, but it does not offer a complete framework to study
the relationship between growth and outsourcing decisions. Thus, understanding of
entrepreneurial outsourcing is low and studies are often contradictory. For example, Sen
and Haq (2011) ?nd that small ?rms tend to outsource core organizational competencies,
whereas Yu and Lindsay (2011) ?nd outsourcing to have negative effects on core
competencies. Moreover, Solakivi et al. (2011) observe no change in logistics performance
due when small ?rms outsource. Nadkarni and Herrmann (2010) identify that
entrepreneurial ?rm outsourcing decision-making relates to founder personality, but
Memili et al. (2011) and Kamyabi and Sevi (2011) show that entrepreneurial complexity is
the critical force behind outsourcing decisions. Whereas Gilley et al. (2004) ?nd perceived
environmental dynamism and managerial risk aversion to in?uence a small ?rm’s
outsourcing decision, Jiang et al. (2008) show that power differences between outsourcing
suppliers and potential buyers play an important role.
The confusion about how and why entrepreneurial ?rms enter outsourcing
arrangements calls for an integrative framework. Because smaller ?rms ?nd it
challenging to generate resources internally, outsourcing seems to be a practical
solution. It is an option that enables ?rms to leverage external resources without
owning them (Arbaugh, 2003). Yet, as we explained, they cannot afford to purchase the
arrangements.
Table I presents an integrative framework based on the theoretic foundations
reviewed above combined with the enabling, realizing, and managing forms of ?rm
growth action. This table provides a foundation for our empirical study.
3. Method
Given the absence of small ?rm outsourcing theory, our empirical study bene?ted from
the employment of case study methodology (Hitt et al., 1998; Birkinshaw, 1997;
Eisenhardt, 1989). Yin (2008) also illustrates that the case study approach is optimal for
developing how or why explanations, when there is low control, and when a topic is
new. In the case of our research, we also had to deal with the fact that entrepreneurial
ventures are patently unique from one another. As such, they are often impossible to
compare using identical standards. All of these considerations apply to our study and
Outsourcing decision making from different theoretical perspectives
Implementing small
?rm’s growth through
outsourcing TCT RDT RBV
Enabling (identify
resources and
environment ?tness)
Asset speci?city,
uncertainty and
infrequency
Concentration,
muni?cence and
interconnectedness
Value, rareness,
inimitability and
nonsubstitutability
Realizing (identify
operational focus)
Minimize transaction
costs
Access scarce and
valued resources from
the environment
Maintain dif?cult-to-
replicate resources
Managing (identify
supplier’s role)
Hierarchy vs market Dependence vs
independence
Core competency vs
non-core competency
Table I.
Integrative theoretic
framework
Small ?rm
entrepreneurial
outsourcing
253
justify our case approach. The case approach allows greater consideration of the
diversity of empirical aspects that de?ne unique ?rms, while leaving it possible to
make comparisons across them based on theoretic bases. Our method was highly
collaborative. We examined each ?rm closely as a team in order to develop a series of
theoretically-derived ways to explain variance across ?rms.
3.1 Sample
Our target ?rms consisted of small business ventures, which we accessed via three
business incubators in Shanghai, China. Since the venture capital market is very
underdeveloped in China (White et al., 2005), the lack of access to venture capital forced
our target ?rms to rely on endogenous operational development (instead of ?nancing)
to achieve growth. This business environment provides an very convenient context to
explore the intersection of operations management and ?rm growth strategy. It also
helped mitigate subtle exogenous performance effects that can derive from ?nancial
capitalization, a pivotal variable that is dif?cult to operationalize in strategic growth
research (Chen, 2009; De Clercq et al., 2006).
For our empirical sample, we sought to identify one case for each outsourcing mode
(i.e. full, partial, inter-outsourcing, and spinout). After interviewing three incubator
directors with considerable experience, we used four criteria to select our target ?rms:
an incubator exit date at least three years prior, expansion into new geographic areas, a
current size (i.e. number of employees) at least ?ve times larger than at incubator exit,
and original founder engagement. The ?rst three criteria measure survival and growth,
and the last one ensures direct knowledge of the ?rm’s approach to outsourcing.
Finally, six target ?rms passed our selection criteria and re?ected clearly the four
major outsourcing strategies. Table II summarizes our sample.
3.2 Procedure
Interviews were conducted by members of the research team ?uent in Mandarin
Chinese and English in coordination with a local consulting ?rm. We conducted a total
of 21 interview sessions from 2010 until early 2011. All the sessions were audio taped
and transcribed to facilitate full and accurate translation between languages. All
interviews lasted between 60 and 120 minutes and involved three types of informants.
The ?rst informant type had a broad view of the ?rm, typically a CEO/founder or
president. The second informant type had responsibility for contacting external
suppliers and overseeing outsourcing relationships, such as a COO or VP. The third
informant type consisted of individuals from supplier ?rms, usually an account
manager of the outsourcing project.
We also collected publicly available secondary material and promotional information
prior to the interviews to enhance external valid measurement. Once each case was
complete, we also gave informants an opportunity to provide feedback to promote
internally valid measurement. The multiple sources of evidence helped triangulate the
information to ensure greater accuracy of the study data overall. Data collection stopped
once we reached theoretical saturation and additional data would not provide new
information to promote our engagement of the research question (Eisenhardt, 1989).
Table III provides additional information about the interviews and procedure.
Our research team coded the interview notes and transcripts. We undertook an
iterative process of comparing, coding and analyzing the data. We then compared the
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Small ?rm
entrepreneurial
outsourcing
255
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Interviewee data and data
collection information
SO
5,3
256
coded data for each rater and each case. Differences in coding were resolved before
combining scores and entering them into a single dataset. This process promoted
clari?cation, aided in construct de?nition, and enhanced the rigor of the data analysis.
Finally, we clari?ed with interviewees directly if data were still unclear. When there
were disparate views about the coding and interpretation of the data, discussion was
held until a consensus was achieved.
3.3 Analysis
The purpose of our within-case analysis was to trace the key determinants by
systematically aggregating the information and identifying the key factors that
describe each case, including ?rm objectives and resources, supplier responsibilities,
and the initial outsourcing arrangement. We created a succinct description of each
?rm’s motives, contracts, and relationships to re?ect how the ?rm sought to leverage
outsourcing to enable, realize, and manage growth. These descriptions included
information about the product/service to be outsourced. Table IV summarizes them. In
what follows, we describe these data in greater detail based on outsourcing mode and
use pseudonyms when referring to the ?rms.
3.3.1 Full outsourcing.
3.3.1.1 Firm A
1
. Based on an environmental protection innovation in the glass
melting process, Firm A
1
was established in 2000 to provide optical ?ber glass
substrates for telecommunications networks. Firm A
1
’s product was more expensive
than competing products made by a traditional method that eschews environmental
protection guidelines for glass melting processes. In the past, cheap products by Firm
A
1
’s competitors dominated the market. However, in recent years telecommunication
companies had begun to consider the environmental consequences of production and
leverage green products as a competitive strategy. Those ?rms consistently purchased
Firm A
1
’s glass substrates in small quantities and used a proportion of them in their
own products, which allowed them to advertise their products as being made with
environmentally friendly materials. Accordingly, Firm A
1
’s product had wide
recognition, but it did not garner much market share.
In 2006, Firm A
1
’s R&D team developed new ceramic substrate and ?lter products
for automobile emission control systems. As China’s automobile market is growing
and emission requirements are emerging, Firm A
1
recognized a growth opportunity in
the provision of ceramic substrates to the automobile emission control sector. Indeed,
several ?rms also identi?ed this opportunity and began to enter the market. Firm A
1
sought to move fast to extend its ceramic substrate production and build market share.
However, establishing new capacity was a slow process. It was estimated that it would
take two years to acquire the necessary resources, land, capital, workers, and
governmental approval. Firm A
1
, as a small entrepreneurial ?rm, could not raise the
capital to fund its expansion project.
As its existing glass substrate production facility could be retooled to support
ceramic substrate production, Firm A
1
decided to outsource its glass substrate
production and focus in-house capacity on ceramic substrate production. In order to
approach former competitors as outsourcing suppliers, Firm A
1
offered to share its
patented glass melting process. In addition, to manage cash ?ow, Firm A
1
offered to
share glass substrate revenues with vendors instead of buying an outsourcing
arrangement. By 2007, two suppliers had signed on and took over Firm A
1
’s glass
Small ?rm
entrepreneurial
outsourcing
257
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Descriptive summary of
case data
SO
5,3
258
substrate production. The arrangement allowed Firm A
1
’s management team to
concentrate capacity on its growing automobile emission control business.
One of the suppliers said:
He had been looking forward to acquiring Firm A
1
’s expertise in glass melting. We tried
many ways, such as acquisition, merger and co-investment, but it was very dif?cult to seal
the deal due to the disagreement about the potential value of environmentally friendly glass
substrate production. The ?nal solution [outsourcing and sharing revenue] is creative for
both sides.
Firm A
2
. According to traditional Chinese medicine (TCM), vital ?ows of life energy
circulate through the human body in channels known as meridians. TCM therapeutic
techniques (e.g. acupuncture) target various points along these meridians. Firm A
2
produces an infrared thermography device that targets and applies heat to these
meridian structures and affects the energy pathways to yield a therapeutic effect. In its
initial growth stage, Firm A
2
concentrated on sales in its local area through retail
outlets. To attract additional customers and allay quality concerns, Firm A
2
also
offered an unconditional money-back guarantee for the product. The unconditional
money-back policy became an integral component of the ?rm’s growth strategy.
Firm A
2
originally established a reverse logistics department to visit customer
homes and pick up returned units. This service was deemed necessary because the
products weigh over 20 kilograms (44 lbs.) and customers were reluctant to transport
them back to the retail store. Once sales expanded beyond its original geographic area,
customers would order the devices either on-line or by postal mail. Firm A
2
then
delivered the units directly to customers using the postal service. However, new issues
around handling the reverse logistics began to emerge with the greater distance, and
unsatis?ed customers were reluctant to assume responsibility for transporting units to
a post of?ce.
Product returns outside the ?rm’s home area were dif?cult to predict in terms of
location, time and quantity. It was also dif?cult to transport all the returned units to
Firm A
2
in single shipments, which required each unit be handled multiple times.
Thus, Firm A
2
sought to outsource its reverse logistics to a profession logistics
company with national-level operations. Firm A
2
offered to sell its reverse logistics
department to this supplier at a very low price. In return, the supplier established
consolidation hubs to collect returned units and transport them back to Firm A
2
in bulk
shipments.
The supplier initially would not accept Firm A
2
’s outsourcing offer because the
business operations were small and unpredictable. Thus, to guarantee a pro?t margin,
the vendor charged a ?xed-price service fee no matter how many units were shipped.
Moreover, to reach the needed economy of scale, the supplier agreed to store Firm A
2
’s
returned units in its warehouses until a suf?cient volume was reached for shipment;
but in Firm A
2
’s local area, returned units continued to be handled as per the original
operation.
3.3.2 Partial outsourcing.
3.3.2.1 Firm B. Western brands and original equipment manufacturers (OEMs)
increasingly seek external veri?cation that their sourcing and manufacturing
processes in developing countries are environmentally sound and in compliance with
international standards. In response to this increasing demand, Firm B was established
in 2006 as an independent certi?cation and testing company. It began with 120
Small ?rm
entrepreneurial
outsourcing
259
employees with services for detecting the level of lead, mercury, chromium-VI,
cadmium and other trace chemicals using state-of-the-art equipment. Many
international purchasers currently use Firm B to test, analyze and validate Chinese
supplies performance and certify compliance with environmental standards.
Firm B recognized an operational problem because many products undergoing ?nal
assembly in Shanghai derive from components and material from suppliers in distant
areas. To test those components and materials, Firm B originally sent staff and
equipment to supplier locations. In many cases, the portable versions of the equipment
could not ?nish the full tests. In those cases, Firm B had to bring samples back to the
corporate lab in Shanghai. Thus, to offer timely national testing and certi?cation, Firm
B decided to establish remote laboratories but projected that company-owned
laboratories would be expensive and underutilized. Therefore, Firm B sought to
partially outsource lab functions to save overhead and costs. They eventually secured
outsourcing contracts with four university-based laboratories. Firm B sent experienced
staff to direct and monitor projects at each site to ensure quality and standardization.
The director of one laboratory said:
Now it becomes more and more dif?cult for junior faculty to get ?nancial support from the
National Science Foundation of China. Some of them do not have necessary capital to
purchase specialized equipment to carry out their research. Firm B’s testing business really
helps our laboratory. Moreover, its revenues let us upgrade some equipment and hire
assistants in return for our support of Firm B more complicated or dif?cult tests.
3.3.3 Inter-outsourcing.
3.3.3.1 Firm C
1
. A major university designed a software program to manage sales of
public housing in metropolitan Shanghai. Later, the success of this service created an
opportunity for Firm C
1
to further develop the software to meet the increasing demand
for commercial housing management. In 2004, a customer asked Firm C
1
to develop
similar software for his automobile spare parts business. That initial request led Firm
C
1
to extend its software functionality to automobile parts trading. Relying upon
customers and relationships, Firm C
1
gradually entered two new cities and grew from
eight employees in 2003 to 25 employees in 2005.
New software applications are usually accepted by a market only after a few years
of trial and promotion. Applications that fail in a market can be costly to a ?rm. Firm
C
1
already had a small market research team to seek new market opportunities, but
lacked a suf?cient budget and had poor networking. Consequently, the team did not
provide effective support to Firm C
1
’s growth. Therefore, in 2005, Firm C
1
hired a
national market research company to help explore potential markets, but it quickly
became disappointed with the vendor’s services. According to the contract, the vendor
provided Firm C
1
with local market analysis and a promotion plan for each locale,
which marked completion of the job. However, in this industry, customers scan
products and services continuously and frequently change purchasing decisions. To
compete, Firm C
1
needed a better arrangement offering continuous market analysis so
it could offer timely promotions. However, such an arrangement would require
extensive allocation of responsibilities and risks between buyer and vendor.
Stipulating all possible contingencies was dif?cult. Moreover, Firm C
1
could not
afford the exposure of an open-ended service contract and did not have the power to
shift any risk to the vendor.
SO
5,3
260
At the same time, the vendor had problems stemming from its IT system provider.
Because of a lack of internal IT expertise, the vendor ?rm had bought its current
software three years ago. Yet, due its business expanding and new client requirements
emerging, the software required constant updating. Thus, the vendor had to increase
its IT budget frequently based on its IT system provider’s requirement, totally losing
the control of IT budget.
In 2005, Firm C
1
and the vendor decided to develop an inter-outsourcing
relationship. Firm C
1
outsourced its continuous market research to the vendor under a
?xed-price outsourcing contract. Similarly, the vendor outsourced its continuous IT
system management to Firm C
1
with a ?xed price. As inter-outsourcing is a reciprocal,
the mutually bene?cial process made the vendor its customer’s customer and the
customer its vendor’s vendor. In this way, Firm C
1
approached a unique outsourcing
solution and, by 2008, expanded into 40 new cities.
An executive at the vendor reported:
Firm C
1
and my ?rm do not charge each other for unpredictable services. We both pay ?xed
fees and avoid unpredictable expense. When my ?rm needs support, I call Firm C
1
directly.
The arrangement with Firm C
1
is on-going project rather than an episodic one. The
continuous market research improves our service quality to them.
Firm C
2
. This ?rm launched in metropolitan incubator alongside many exporters of
high-end glassware, chinaware, furniture, handicrafts, and packaged snacks for western
consumers. The distributors of these products began requiring exporters to utilize
environmentally-friendly packaging. Firm C
2
recognized this trend as an opportunity to
use an organic polyester material derived from lactic acid as packaging. Although its cost
is high, the material is adaptable to a wide variety of applications and has an
environmental footprint superior to the traditional options of polyethylene,
polypropylene, and polystyrene. Based on this organic material, Firm C
2
obtained some
initial business from the local exporters. Working with these clients over time, through
some initial failed runs, Firm C
2
gained experience packaging brittle and fragile products.
In the early days, Firm C
2
delivered materials to the factories of the exporters with a
few employees, a couple trucks, and a small warehouse. However, as they expanded their
business regionally, internal logistics began to fail. Thus, Firm C
2
needed alternatives for
servicing more distally located accounts. Firm C
2
opted against expanding in-house
logistics capacity due to a lack of expertise and the required investment in non-core
assets. A regional logistics ?rm approached Firm C
2
and made it known that they were
experiencing high costs and inef?ciencies when transporting fragile and irregularly
shaped products. For example, specialized equipment such as an A-shaped frames
minimized damage to plate glass but limited the capacity of the truck used for transport.
The lack of space increased expenses. Moreover, for irregularly shaped items, the
standard boxes ?lled with scrap paper, ?bers, or bubble wrap frequently failed to ?x the
item, which resulted in higher damage rates. These materials were generally not reused,
which also made customers critical of the logistic ?rm’s environmental impact.
After drawn out negotiations, the two ?rms approached an inter-outsourcing
agreement. Firm C
2
agreed to provide packaging services for the logistics ?rm’s fragile
and oddly shaped items by mirroring the exact geometric shape of odd shaped items
with “earth friendly” materials. As a result, volume, damage rates, and environmental
impact were optimized. The regional logistics company agreed to service Firm C
2
’s
Small ?rm
entrepreneurial
outsourcing
261
remote clients at a ?at rate, which helped avoid less-than-truckload penalties and
potential expediting fees. The COO of the logistics ?rm reported:
The conventional wisdom is that the logistics industry is physical, low tech, and dirty. In fact,
our customers demand special handling services that are challenging. We need advanced
packing to satisfy the requirements. Under the inter-outsourcing agreement, Firm C
2
’s
engineering department is like one of our own departments. When we need special package
designs, they help us reduce damage during transportation.
3.3.4 Spinout outsourcing. Established in 2002, Firm D targets an intersection of art
and technology. It provides digital animation services for websites, movies, games,
presentations, product demonstrations, 2D/3D modeling, logos, and advertisements.
Because the digital animation industry is a capital-intensive space, ?rms must invest
heavily in high-end software, hardware, data center infrastructure, and animators. The
best ?rms employ animators who apply cutting-edge technical expertise with high
artistic skill. Yet, such a combination of competencies is rare. Firm D’s CEO reported:
While the animation industry has often been listed in the technology sector, I believe this
business is 70 percent art and 30 percent technology. This is probably why big companies failed
to make a mark but entrepreneurial ventures, driven by the passion of art-loving entrepreneurs,
win some notable deals [. . .] The business is not about scale but about domain expertise.
Cross-disciplinary human capital is important in the animation industry. Even though
an animator must master a specialty, a range of skills is important because the market
shifts are particularly volatile. Firm D’s CEO reported:
There are feasts and famines. Sometimes an order lasts for a year or more. Other times, many
short and high-paying jobs come your way. Other times, nothing. It is important to monitor
your resources responsibly and continuously.
In 2006, Firm D introduced a new policy to increase responsiveness to its market
environment. For animators with high technical rankings, Firm D would provide
start-up funds to help them establish their own studios. In return, those animators
would serve as Firm D’s outsourcing vendors. According to Firm D’s CEO:
Running your own studio is a great way to test your talents and sharpen your technical skills.
The better you understand the range of different roles in the studio environment, the more
your value improves in digital animation industry.
Five animation initially left Firm D and established their own businesses. Two years
later, four spun-out operations exist and one animator has returned to Firm D.
The four spinouts operate independently. Firm D does not carry their operating
costs. However, the four studios maintain strong ties with Firm D due to the previous
relationships and Firm D’s investment of start-up capital. One of the spinouts reported,
“Nothing is more motivational to passion and enthusiasm than running a studio, and
such passion and enthusiasm cannot be created as an employee.” Firm D’s CEO
reported, “The quality of their work is better, as they have become more generally
skillful and responsible for running their own businesses.”
3.4 Cross-case comparisons
Outsourcing is not a simple purchasing transaction but a complicated process
involving the substitution of external purchases for internal activities (Gilley et al.,
SO
5,3
262
2004). Thus, a pre-outsourcing small ?rm, like the ones in our study, must manage
multiple outsourcing-related resources, including the external ones and the internal
ones it has possessed or will release. In this section, we report how our cross-case
analysis compared the outsourcing strategies of the six cases.
The ?rms in our study adopted four modes of outsourcing to pursue external
resources, supplant internal de?ciencies, and manage environmental dynamics.
Table IV reveals some commonalities. For Firms A
1
and A
2
, they sought outsourcing
to handle scale challenges. They outsourced with signi?cant costs in exchange for
higher performance based on their core competencies. For Firm B, to handle fast
growth, it took its power advantage over its vendors (i.e. Firm B can bring extra cash
?ows to those universities’ labs) to remedy its lack of facilities in remote areas. Firms
C
1
and C
2
intentionally coupled their businesses with their suppliers to reduce risk and
build mutual reliance, even though coupled businesses were not related. Firm D opted
for an outsourcing arrangement for reasons other than cost savings. Instead, it sought
to secure expertise for its future growth.
All case ?rms were compelled to outsource because they could not manage growth
internally. They focused on opportunities to grow and outsourced supporting or even
core businesses. They intended to mitigate potential operational disruptions using risk
management mechanisms such as revenue sharing, ?xed-pricing, mutual bene?ts, and
investments in suppliers. Such mechanisms promote stable buyer-supplier
relationships, which are dif?cult to obtain under bootstrapping.
Whereas these considerations address why the cases approached outsourcing, the
next step of our cross-case analysis is to examine how these small ?rms leveraged
outsourcing for growth. We use the three categories of entrepreneurial action noted
earlier (enabling, realizing, and managing). These categories allowed us to assess aspects
of resources, operations, and relationships with suppliers emphasized in existing
research on outsourcing. Based on the integrated key theoretical constructs (see Table I),
we evaluated these dimensions for each case in light of the three forms of ?rm growth
action. Figure 1 juxtaposes all six cases to identify critical patterns in these ?rms.
3.4.1 Enabling growth with resources. From the TCT perspective, the internal
resources of the ?rms in our sample were consistent in several respects. First, asset
speci?city was high, as all the ?rms invested heavily in internal resources to support
unique business activities. Second, uncertainty was high, as all the ?rms faced
unpredictable markets, and technological or economic trends. Third, infrequency was
high. TCT explains Firms A
1
and A
2
’s external resources selections well. Namely, to
lower its internal resource asset speci?city, Firm A
1
shared a patent with its supplier.
Firm A
2
did not ask any special services from its supplier, thus the asset speci?city of
Firm A
2
’s external resource was already low. By sharing revenues with suppliers
rather than buying outsourced products, Firm A
1
had relatively guaranteed incomes
from its outsourced glass substrate production. Similarly, by entering a ?xed-price
service contract, Firm A
2
reduced uncertainty in its outsourcing arrangement.
Although TCT offers reasons for small ?rm resource selections in full outsourcing
settings, it does not explain why ?rms select external resources with high asset
speci?city and uncertainty under other outsourcing modes. For these decisions, RDT
helps explain small ?rm outsourcing, especially under inter-outsourcing and spinout
outsourcing agreements. From the RDT perspective, Firms C
1
, C
2
, and D possessed
similar internal resources of low concentration. For instance, none of Firm C
1
’s market
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263
Figure 1.
Results of cross-case
comparisons
SO
5,3
264
research team, Firm C
2
’s logistics department, or Firm D’s animators had much power.
Additionally, muni?cence was high because similar resources were not scarce in the
environment. Finally, interconnectedness was low in that the internal resources of
Firms C
1
, C
2
and D were isolated from the environment. When those resources did not
fuel Firms C
1
, C
2
, and D’s development, those ?rms began to pursue external resources.
For example, C
1
looked for expertise on continuous market analysis, Firm C2 needed
?exible, timely, and cost-ef?cient long distance logistics service, and Firm D sought
cross-disciplinary human capital. Those external resources were all scarce and valued,
as their concentration was high, muni?cence was low, and interconnectedness was
high.
Neither TCT nor RDT explain small entrepreneurial ?rm resource selections under
the partial outsourcing mode. For this mode, the RBV helps reveal not only the reason
for partial outsourcing as well as the difference between partial outsourcing and
spinout outsourcing. From the RBV perspective, while Firms B and D’s internal
resources were generating high values, Firm B’s internal resource (i.e. Firm B’s
internationally recognized authority on certi?cation) was rare and inimitable, but Firm
D’s was not. In contrast, while Firms B and D’s external resources could generate high
values, Firm D’s external resource (i.e. cross-disciplinary skill) was also rare and
inimitable but Firm B’s external resource (i.e. Firm B’s testing supplier) was not. In
other words, Firm B’s power was higher than its low-value suppliers’ power, so that it
could use traditional partial outsourcing; but Firm D’s high value suppliers possessed
relatively high power, so that Firm D used spinout outsourcing in order to maintain its
control on those powerful suppliers.
3.4.2 Realizing growth via operational foci. According to TCT, substitution of
in-house operations for external services cannot be realized if transaction costs are too
high. In our sample, Firms A
2
, C
1
and C
2
’s in-house reverse logistics, marketing
research activity, and logistics were replaceable by vendors’ operations because asset
speci?city was low. To outsource its glass melting process, which was sheltered by an
environmental protection patent (i.e. the asset speci?city is high), Firm A
1
had to share
the patent with its outsourcing vendors to lower the asset speci?city. The asset
speci?city of Firm B’s in-house operations, lab testing, was high. Thus, Firm B retained
those resources and did not fully outsource them. Of course, TCT does not fully explain
why Firm D outsourced its internal operation with the high transaction costs
associated with investments in departed animators’ studios. However, the RBV and
RDT can provide some insights into this outsourcing arrangement.
From the RBV perspective, a ?rm with inimitable resources has a competitive
advantage. As noted, in the animation industry, general animation competence tends to
be more valuable to a ?rm than specialized skill. Running a business independently is
one way to build such competence. Thus, by encouraging and helping its animators to
run businesses in the context of a spinout outsourcing arrangement, Firm D
simultaneously created and obtained access to the dif?cult-to-replicate resources. In
light of the RBV, Firms A
1
, A
2
, C
1
and C
2
’s internal resources were releasable but Firm
B’s internal resources were not. These ?ndings are outside the boundaries of TCT.
The RDT’s tenet that ?rms pursue scarce and valued resources from its
environment also helps explain Firm D’s outsourcing arrangement. Before being spun
out, the animators and their expertise were somewhat common in the broader
environment. Yet, after being spun out, they gained rare skills and increased their
Small ?rm
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265
value, which Firm D leveraged via the spinout outsourcing arrangement. Whereas
RDT explains why Firms A
2
and B’s internal resources were maintained in-house and
Firms C
1
and C
2
’s internal resources were released, it cannot explain why Firm A
1
’s
scarce internal resource should be outsourced. However, the RBV sheds light on this
event in the previous discussion.
3.4.3 Managing growth via supplier relations. According to the RBV, TCT, and
RDT, if a resource incurs high transaction cost, relates to the ?rm’s core competency,
and is heavily depended upon by the ?rm, then the ?rm must control this resource
tightly in house or in alliance. For other resources, the ?rm can get them from the open
market.
Firm A
1
’s glass substrates production had low transaction cost (after Firm A
1
shared its patent with vendors). Since Firm A
1
depended on its ceramic substrates
business heavily, the glass substrates production was no longer the core competency.
For Firm A
2
, the reverse logistics was never its core competency and had low
transaction cost to get it from external services. Thus, Firms A
1
and A
2
applied the full
outsourcing strategy, i.e. governing their transactions by the market.
In the other four cases, the ?rms could not adequately secure their needed resources
by a pure market mechanism due to high transaction costs (e.g. Firm D’s investment in
spin-outs), heavy dependence (e.g. Firms C
1
, and C
2
’s external marketing research and
long distance logistics, Firm D’s animator expertise), and the concern of maintaining
core competency (e.g. B’s authority of certi?cation, D’s innovation). The four ?rms
enhanced the level of control over their external resources through different operational
safeguards. For example, Firm B’s partial outsourcing reduced the risk of depending
on a single channel and/or becoming the vendor’s hostage. Firms C
1
and C
2
’s
inter-outsourcing agreement reduced the vendor’s opportunism by forcing both parties
to following the Golden Rule (i.e. do to others what you would like to be done to you).
Finally, Firm D’s spinout outsourcing introduced the hierarchical power (through
start-up funds support) and relationship building to govern its suppliers.
4. Results
Our analyses yield multiple propositions with potential for future research on the area
of small ?rm outsourcing. We report and summarize these propositions here, before
concluding with a summary of the contribution of our study:
P1. Due to lack of attractive outsourcing business value and weak market
positions, small ?rms enter outsourcing arrangements via the exchange of
non-traditional resources and offensive, not defensive, strategic postures.
Firms must have internal resources in order to procure external resources (Eisenhardt
and Schoonhoven, 1996). Since small ?rms usually do not have redundant non-core
resources, they may have to use core resources in ways that are offensive and not
defensive to barter with vendors in order to promote collaboration. Whereas
controlling core competencies protects ?rms from opportunism by other ?rms, it can
drive defensive and protective postures that limit the procurement of external
resources. An aggressive negotiating posture is germane to using non-traditional
resources to entice potential vendors into outsourcing agreements via non-traditional
modes.
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266
Our study results re?ect P1. For example, in the case of Firm A
1
, the non-traditional
asset was the glass substrate process patent. Whereas the vendors might not have been
interested in a normal outsourcing contract with Firm A
1
, they were willing to enter
into a patent-sharing agreement. Once Firms C
1
and C
2
identi?ed their vendors with
particular needs they could satisfy with their own strengths, they entered
inter-outsourcing agreements that were attractive to the vendors. Finally, Firm D
acted aggressively to invest and support the spun-out animators as they established
independent operations. Otherwise, the animators may have remained in-house with
limited skill levels or departed to work for competitors. The spinout arrangement
allowed the animators to develop expertise independently but still maintain a
relationship with Firm D. In each case, the small ?rm assumed an offensive negotiating
posture and sought novel ways for the vendor to enter the outsourcing arrangement.
This proposition points to new ways for small ?rms to engage in outsourcing not
re?ected in the existing outsourcing literature:
P2. Outsourcing mode selection is determined by the structure of power between
a small ?rm and its outsourcing vendor.
The mainstream view of outsourcing involves large companies and potential
outsourcing vendors that are always ready because the buyer’s outsourcing business is
pro?table to them. Indeed, it is a widely known aspect of outsourcing arrangements.
However, small ?rms outsource business processes that are relatively small and
perhaps not attractive to vendors. Large ?rm outsourcing mode selection is different
from that of small ?rms, which have unconventional market offerings and smaller
operations.
Our results illustrate overall how the power relationship between vendors and
buyers is vital to outsourcing mode, as P2 holds. The small ?rms in our sample were
concerned with different outsourcing modes based in part on power patterns. If a small
?rm’s power was higher than a potential vendor, then the ?rm sought partial
outsourcing or spinout outsourcing. When power was relatively equal on both sides, it
sought inter-outsourcing. When power was lower than that of a vendor, a small ?rm
tended to seek full outsourcing.
Firm B and D had suppliers that were small and relatively weak. Therefore, Firms B
and D’s outsourced businesses were attractive to their suppliers. As our study
illustrates, partial or spinout sourcing thus enabled the small ?rms to exploit supplier
expertise while controlling external resources tightly. Firms C
1
and C
2
wanted higher
service-levels from vendors, but they could not control vendor performance due to the
low attractiveness of their outsourced businesses. By exchanging resources based on
relative strengths and weaknesses, Firms C
1
and C
2
changed an asymmetric power
pattern to a balanced one. An inter-outsourcing arrangement helped them receive high
quality services despite an ostensibly low level of power over the arrangement. Firms
A
1
and A
2
could not offer exchangeable services to their powerful suppliers. Thus, to
approach needed external resources, they had to outsourcing internal operations as a
whole rather than a fraction, and even provided additional bene?ts (i.e. Firm A
1
gave a
patent; Firm A
2
sold an internal logistic department at a low price and suffered a
higher ?xed-price for outsourcing) in order to attract suppliers.
Our results show clear and speci?c linkages with our original research question
(i.e. how do small ?rms procure effective outsourcing solutions) in terms of the four
Small ?rm
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267
outsourcing modes (i.e. full, partial, inter, and spinout). Here we brie?y summarize the
?ndings as they compose P2. In terms of full outsourcing, the revenue sharing solution
gave Firm A
1
better cash ?ow and lowered risk and reduced uncertainty. It also
provided entre´e into a larger market with an essential swapping of some technology for
greater market exposure. Firm A
2
procured similar bene?ts via ?xed price fees and
consolidation of returns in the warehouse. For each entrepreneurial ?rm, there was risk
around technology or the incurring of fees in the pursuit of growth. The suppliers, in
turn, bene?ted from support of their own operations. Partial outsourcing linkages
depended on complementarity with suppliers. In the case of Firm B, the testing and
certi?cation services (in exchange for R&D equipment) expanded its service capacity
with minimal risk. For inter-outsourcing, the IT provider and Firm C
1
had overlapping
capabilities and were subtle competitors. The arrangement was thus an antagonistic
form of cooperation. Given the high cost of market research, the entrepreneurial Firm
C
1
bene?ted from fee sharing with the vendor at low risk and high return. Firm C
2
enjoyed a similar arrangement in the context of a ?at fee exchange of packaging
expertise and logistics services. Both of those cases show a distinct extension of TCE
via unique resource exchanges. However, spinout outsourcing showed the most unique
linkage with our research question. It turns out to be a driver of innovation and tool for
risk management in our study, which are both important to entrepreneurial ?rms. Firm
D created a supplier/knowledge supply chain through the cultivation of innovative
suppliers. The result is a growth of intellectual capital that is important to
entrepreneurial ?elds, where adaptivity and innovation are as important as ?rm size.
The foregoing results and linkages pertain to P2 and the nontraditional nature of the
outsourcing modes undertaken by entrepreneurial ?rms. Our study also generated a
third proposition concerning internal operational and external service aspects:
P3. For small ?rms, outsourcing goes beyond switching internal operations for
external services to involve purposeful leveraging of unique internal
operations to pursue unique external services.
Small ?rms must make their internal operations valuable to potential outsourcing
vendors. In line with this notion, the small ?rms in our study, which varied in their
levels and types of internal operations, all of them leveraged resources in hand or
operations set to be outsourced as they pursued external alternatives.
In the case of Firm A
1
, the glass substrate process had potential for long-term value,
but it provided a relatively low current value compared to the ceramic substrate
production process. However, by leveraging this internal operation (i.e. sharing the
patent with potential outsourcing suppliers), Firm A
1
could outsource this process so
that concentrate on the ceramic substrate production. Firm A
2
’s internal reverse
logistics was too small to attract external suppliers. Therefore, Firm A
2
had to
dramatically lower the sale price of its internal logistics facility to seal the outsourcing
deal. While Firms C
1
and C
2
also had low-value internal operations to potential
suppliers, they took the advantage of their strengths from other internal operations
over their suppliers’ weaknesses to contract those low-value operations via the
inter-outsourcing mode. Firm B had relatively high-value internal operations based on
its unique set of expertise. Such valuable operations could also bring extra cash ?ows
to those university labs. By allowing suppliers to participate partially in its internal
operations, Firm B easily accessed to external services. Finally, in the case of Firm D, it
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268
is dif?cult to upgrade the value of internal resources (i.e. animator’s expertise) via
internal operations. Investing in new ventures that derived from previous internal
operations enabled Firm D to create new, high, and accessible external value through
the mode of spinout outsourcing.
5. Conclusion
Outsourcing is a promising area of research with respect to small business growth. In
addition to traditional bootstrapping techniques, the full, partial, spinout and
inter-outsourcing modes offer small ?rms potentially alternative options to access
needed resources. Studies in this area are valuable because an increasing number of
small entrepreneurial ventures are seeking to utilize outsourcing as a growth strategy
(Elango, 2008). Our study responds to this need by illustrating how small ?rms have
approached outsourcing with the objective of ?rm growth. We formulated an
integrative framework based on the overlap and limits of distinct theoretic traditions.
This approach allowed us to study outsourcing in a new context, where small ?rms
focus on leveraging their limited internal resources to draw in collaboration and
partnership with external resources not possessed internally.
Our principal research question was “how can small entrepreneurial ?rms procure
much needed outsourcing solutions that large ?rms enjoy without having the
traditional resources required to buy those solutions?” In undertaking the research to
help answer this question, our study generated three contributions to the outsourcing
literature and some practical implications. First, our undertaking illustrates how small
?rms can enter outsourcing arrangements and bene?t from the increased reliability
and stability of their suppliers compared to the frequently tenuous supply
relationships and questionable service quality available via bootstrapping. By
leveraging the highly speci?c nature of their own resources, small ?rms can enter
various outsourcing modes in novel ways that go beyond traditional large
?rm-oriented outsourcing decisions. These options include revenue sharing, the
deployment speci?c ?rm assets in an alliance, mutual reciprocity of business
processes, and investment partnerships.
Second, our study reveals some of the explicit differences between the four principal
modes of outsourcing (full, partial, inter-outsourcing, spinoff). The differences between
these modes follow directly from a small ?rm’s strategic position. In the context of
small entrepreneurial ventures, where strategic positions and alliances vary widely,
these distinctions are important. Our study thus clari?es some of the linkages between
small ?rm bargaining power and appropriate outsourcing mode.
Our study offers an integration of three theoretic traditions (i.e. TCT, RDT, and
RBV) that are relevant to outsourcing as a strategy for ?rm growth. The integration of
these theoretic perspectives creates a broader conceptual foundation. This broader
approach reveals new underpinnings of outsourcing success in small business settings.
Our study thus provides a coherent foundation to future studies of small ?rm
performance in the context of outsourcing.
Finally, our study offers some important practical implications for entrepreneurial
?rms. Smaller ventures have less absorptive capacity and fewer slack resources than
larger ?rms. The buffer that a dense administrative organizational layer provides
against environmental shocks is not part of a small ?rm’s constitution. Whereas larger
?rms achieve adaptive functioning through traditional outsourcing contracts or simply
Small ?rm
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269
weathering environmental shifts, small ?rms utilize adaptability and responsiveness.
The most practical implication of our study is new insight into how small ?rms can go
beyond adaptability and pursue the outsourcing bene?ts that large ?rms enjoy.
Whereas small ?rms do not normally have the resources to transact formal contracts,
they are often particularly endowed with unique and inimitable resources that
distinguish them. Based on this study, we suggest that small ?rms consider those
resources in light of the four outsourcing modes delineated in this paper as a more
strategic approach to outsourcing solutions that promise to enhance their operations
and growth.
This research has some limitations that warrant a mildly cautioned interpretation of
the results. First, while the case research method may reveal the insights of
outsourcing decision making for the particular ?rms we studied, such results might be
limited to those speci?c ?rms. Our study is designed along these lines to serve as a
foundation for subsequent studies based that use a larger sample of quantitative data
to assess hypothesized relations. With such an approach to investigating small ?rm
entrepreneurial outsourcing, the limits of outsourcing theory can be appropriately
developed in accordance with the burgeoning entrepreneurial sector that it has
traditionally not admitted readily into its purview. Moreover, a stronger focus on
international diversity in sampled ?rms would also add robustness to such research.
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