Martin Lockström

Low-Cost Country Sourcing

GABLER EDITION WISSENSCHAFT
Einkauf, Logistik und
Supply Chain Management
Herausgegeben von
Professor Dr. Christopher Jahns

Die Schriftenreihe stellt den State-of-the-art betriebswirtschaftlicher

Forschung am Supply Management Institute SMI™ im Bereich Ein-
kauf, Logistik und Supply Chain Management dar. Die Verbindung von
Theorie und Praxis steht dabei ebenso im Vordergrund wie die inter-
nationale Ausrichtung und die unmittelbare Verknüpfung der Themen
Einkauf, Logistik und Supply Chain Management.
Martin Lockström

Low-Cost Country Sourcing

Trends and Implications

With a foreword by Prof. Dr. Christopher Jahns

Deutscher Universitäts-Verlag
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Dissertation European Business School Oestrich-Winkel, 2006

D 1540

1. Auflage Juni 2007

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 V

Foreword
Low-cost country sourcing has for long been one of the hottest buzz words in the
purchasing and supply management community, especially among practitioners.
The lack of coverage in the academic field can potentially be explained by the
complexity and the breadth of the topic. Although companies in most industries
have sourced on a global level for decades or even centuries in order to reduce
cost, the subject have received increasing attention over the last few years in a
sense that the concept has become more and more institutionalized as part of the
overall sourcing strategy.

The developments are welcome – especially since the field of purchasing and
supply management traditionally has been lagging behind other, more
“acknowledged” disciplines such as finance, accounting, and marketing, among
others. This lag is glaring if one considers the absence of faculties involved in the
discipline among many universities. Therefore, the initiative of Supply
Management Institute to build a worldwide research and training network has
proven to be highly attractive for both scholars and practitioners.

Furthermore, the discipline has also become increasingly complex due to

globalization effects, where business networks become increasingly intertwined
and the flow of goods, services, money and human capital grow exponentially
over time. To handle the situation, companies are in desperate need for knowledge
and information that can help them to crafting effective strategies that can secure
supply, reduce risk and ultimately translate into competitive advantage.

This dissertation provides a significant contribution to the current body of

research, by dealing with two very important subtopics of low-cost country
sourcing – namely trends and implications. The trend analysis of this dissertation
provides guidance where the field is heading; this is extremely helpful for
companies in order to increase the planning horizon and reduce uncertainty. Also
from an academic perspective this will contrast and add perspectives to earlier
studies, and provide a solid basis for longitudinal research in terms of follow-up
studies.
 VI

Moreover, the thesis part investigating implication puts the topic in perspective,
by probing into an area which has yet been covered to a very low extent. This part
contrasts the long tradition of heavily focusing on external factors as key strategic
drivers, instead looking at the internal factors of the firm and how these contribute
to the performance of low-cost country sourcing initiatives.

The results of the thesis show that there is currently a tremendous momentum in
the field of low-cost country sourcing. Companies that do not leverage their
organizations in low-cost regions will miss opportunities to reduce cost while
maintaining quality levels, get access to new suppliers, get closer to new customer
bases and so forth. Those that do not exploit opportunities in emerging supply
markets and protect their strategic assets will most likely suffer from competitive
disadvantages and deteriorating profits on a long term. Those who do will be the
future market leaders.

Finally, I would hereby like to congratulate Dr. Martin Lockström for a great
effort. As part of the first generation of doctoral students at the Chair for
Purchasing, Logistics and Supply Chain Management at European Business
School, he has understood that performance is not only measured through
successful delivery of research projects, scientific publications and high-quality
lectures, but more importantly, through a very strong and amiable personality and
mindset. Not to mention the least is Dr. Lockström a couple of months after his
doctoral degree ceremony appointed as Associate Professor at SMI China to build
up the BMW-SMI Endowed Chair for Purchasing and Supply Management at
Tongji University in Shanghai. I can simply congratulate to the successful career
of Dr. Lockström and express my honor to let him reach his full potential.

Univ.-Prof. Dr. Christopher Jahns

 VII

Acknowledgements
This thesis is an embodiment of a journey in space and time. Coming from
Sweden as a newly hatched M.Sc. graduate and starting at the Chair of Purchasing,
Logistics and Supply Chain Management, ebs European Business School, in the
small town of Oestrich-Winkel, Germany, I knew little about what was to come.
With an initial headcount of four, the Chair organization now includes almost
fourty staff members in three countries. Through the growth and success of the
Chair, I have gathed knowledge and experience that I will benefit from for the rest
of my life. Topics such as entrepreneurship, strategy, human resources
management, and internationalization, are nowadays things I have not only read
about in text books, but dealt with on a daily basis at the Chair.

Moreover, as this thesis is part of larger on-going research activities, it gives an

indication of the tremendous amounts of work that have been invested in realizing
it. Nevertheless, the work has undoubtedly been worthwhile, as I have developed
intellectually and personally at a pace I thought was not possible. I have also had
the opportunity to visit places I have never before seen, and meet interesting
people both from academia and practice.

The research of this thesis would not have been possible without support from
other organizations and individuals. Although I risk omitting people that should
have been mentioned, I would like to name a few of those who have contributed
most to the emergence of this thesis. As a start, I would like to thank the faculty at
the Chair of Purchasing, Logistics and Supply Chain Management of ebs
European Business School. First of all, I would like to thank my first supervisor,
Prof. Christopher Jahns, who has truly inspired me to work hard, and he has given
me the authority and autonomy to realize my dreams. I would also like to thank
Dr. Evi Hartmann for sharing her long experience in practice, and her invaluable
input regarding technical issues and methodology, but also for providing helpful
feedback on my research.

There are also a number of doctoral students at the Chair, with whom I have had
fruitful discussions. These include Roger Moser, Gerhard Trautmann, Tobias
 VIII

Weigl, Aiko Entchelmeier, Anja Wagner, Andreas Potzner, Gernot Kaiser,

Stephan Schmidberger, Julia Wolf, Heiko van der Gracht, Lars Eiermann, Marco
Linz, Alex Pedrosa, Falk Raschke, Christine Schüffler and Nadia Henkel (I will
not mention all of them – but rather thank all of them and name my few real
supporters – or how has Falk or Nadia helped you). I would also like to thank my
two former colleagues, Magnus Andersson and Björn Garmann, for their support
and helpfulness. Moreover, I would like to thank Dr. Handik Widiarta for the
interesting and entertaining discussions we have had.

There are also a number of people outside the Chair I would like to thank. Firstly,
I would like to thank Mr. Peter Bernard, Mr. Paul Hampton and Mr. Steve
Muddiman at Ariba, Inc., for providing funding and support that enabled the
empirical research of my thesis. I would also like to take the opportunity to and
thank Mr. Alexander Vukotic at Confield Research who always was very
cooperative and friendly during the field study execution. I also owe thanks to
DAAD for the financial support in terms of a scholarship during my doctoral
studies, which has greatly facilitated my personal situation. Another institution
that should not go unmentioned is CDHK of Tongji University, Shanghai, at
which I had the opportunity to experience the world’s number one supplier market
from within. My stay there greatly served as a source of inspiration when working
on my thesis in the end phase.

I would also like to thank my parents, and my wife Veronica. Without their
kindness, support and patience, I would not have been able to accomplish my
goals. They have also helped reminding me that there is a life besides and beyond
writing a dissertation. Finally, I would like to express my sincere apologies for
anyone forgotten to be mentioned. Therefore, I hereby collectively thank all of
those who deserve being mentioned but unintentionally were omitted.

Martin Lockström
 IX

Table of Contents
1. Introduction..........................................................................................................................1

1.1. Background and Problem Definition .....................................................................................1

1.2. Research Objectives...............................................................................................................3
1.3. Research Questions and Thesis Outline.................................................................................4

2. Frame of Reference on Low-Cost Country Sourcing: A Literature Review ..................9

2.1. Terminology.........................................................................................................................10
2.1.1. Purchasing, Procurement, and Supply Management............................................................11
2.1.2. Strategic Sourcing................................................................................................................15
2.1.3. Global Sourcing and Low-Cost Country Sourcing ..............................................................18
2.2. Internationalization ..............................................................................................................21
2.2.1. Globalization and International Trade .................................................................................24
2.2.2. Internationalization of the Firm ...........................................................................................29
2.2.3. Internationalization of Purchasing and Supply Management...............................................40
2.3. Concept of Low-Cost Country Sourcing..............................................................................43
2.3.1. Conceptual Frameworks ......................................................................................................43
2.3.2. Motivations and Barriers......................................................................................................49
2.3.3. Contingency Models ............................................................................................................53
2.4. Positioning the Topic: A Morphological Analysis...............................................................55
2.4.1. Methodological Background................................................................................................55
2.4.2. The Morphological Approach..............................................................................................56
2.4.3. Morphological Box For Low-Cost Country Sourcing .........................................................57
2.5. Interim Summary .................................................................................................................65

3. Research Methodology ......................................................................................................69

3.1. Research Design ..................................................................................................................73

3.1.1. Design Parameters ...............................................................................................................73
3.1.2. Cross-Sectional vs. Longitudinal Study...............................................................................77
3.1.3. Qualitative vs. Quantitative Research ..................................................................................78
3.1.4. Inductive vs. Deductive Research........................................................................................79
3.2. Research Strategy ................................................................................................................79
3.2.1. Literature Review.................................................................................................................83
3.2.2. Development of Theoretical Framework .............................................................................85
3.2.3. Data Collection and Analysis...............................................................................................86
3.2.4. Sampling ..............................................................................................................................89
3.3. Philosophical Considerations...............................................................................................93
3.3.1. Ontology ..............................................................................................................................95
 X

3.3.2. Epistemology .......................................................................................................................96

3.3.3. Human Nature......................................................................................................................96
3.3.4. Methodology........................................................................................................................97
3.4. Interim Summary .................................................................................................................98

4. Low-Cost Country Sourcing Trends: A Descriptive Study..........................................101

4.1. Purchasing and Supply Management Trends .....................................................................103

4.1.1. Performance Improvements ...............................................................................................103
4.1.2. Supplier, purchasing and sourcing importance ..................................................................104
4.1.3. Organization.......................................................................................................................106
4.2. Strategic LCCS Management.............................................................................................107
4.2.1. Articulation of Visions.......................................................................................................107
4.2.2. Strategy Development........................................................................................................109
4.2.3. Performance Measurement ................................................................................................110
4.2.4. Organization.......................................................................................................................111
4.2.5. Human Resources Management.........................................................................................114
4.3. LCCS Operations...............................................................................................................115
4.3.1. Important Sourcing Countries............................................................................................115
4.3.2. Direct and Indirect LCC Spend..........................................................................................125
4.3.3. Sourcing the Right Supplies...............................................................................................130
4.3.4. Sourcing of Goods and Services ........................................................................................132
4.3.5. Supply Risk Management ..................................................................................................134
4.4. The LCCS Roadmap: A Strategic Guideline .....................................................................138
4.4.1. Roadmap Steps ..................................................................................................................138
4.4.2. Roadmap Developments ....................................................................................................139
4.4.3. Performance Impact ...........................................................................................................142
4.5. Interim Summary ...............................................................................................................144

5. Implications of Low-Cost Country Sourcing: An Explanatory Study ........................147

5.1. The Resource-Based View of the Firm..............................................................................148

5.1.1. Economic and Organizational Theories in Perspective......................................................148
5.1.2. Historical Antecedents of the Theory ................................................................................150
5.1.3. The Logic of the Resource-Based View ............................................................................155
5.2. Theoretical Framework......................................................................................................165
5.2.1. Development of Hypotheses ..............................................................................................165
5.2.2. Research Model .................................................................................................................180
5.2.3. Operationalization of Constructs .......................................................................................181
5.3. Analysis and Results ..........................................................................................................189
5.3.1. Factor Analysis ..................................................................................................................189
 XI

5.3.2. Path Analysis .....................................................................................................................207

5.3.3. Evaluation of Hypotheses ..................................................................................................213
5.4. Interim Summary ...............................................................................................................218

6. Summary and Conclusions..............................................................................................221

6.1. Theoretical Contributions ..................................................................................................221

6.2. Managerial Implications ....................................................................................................223
6.3. Limitations of the Study and Suggestions for Future Research .........................................225

References ....................................................................................................................................227

Appendix A: Interview Guideline ........................................................................................267

Appendix B: Survey Questionnaire .....................................................................................269

Appendix C: LISREL Output ..............................................................................................277

 XIII

List of Figures
Figure 1. Thesis outline....................................................................................................................8
Figure 2. The purchasing and supply management continuum .......................................................13
Figure 3. The three dimensions of globalization .............................................................................25
Figure 4. The four drivers of globalization .....................................................................................28
Figure 5. Modes of internationalization ..........................................................................................32
Figure 6. Global leverage points from internationalization.............................................................34
Figure 7. Factors influencing the attractiveness of nations .............................................................36
Figure 8. Configuration and coordination of operations .................................................................37
Figure 9. Coordination and integration along the value chain.........................................................38
Figure 10. Kaufmann and Hedderich’s (2005) global sourcing framework...................................44
Figure 11. Arnold’s (1989) global sourcing framework.................................................................47
Figure 12. Global sourcing stages ..................................................................................................48
Figure 13. Morphological box for ”purchasing and supply management”......................................62
Figure 14. Morphological box for low-cost country sourcing.........................................................65
Figure 15. Graphical representation of research design parameters................................................74
Figure 16. Rresearch design configuration......................................................................................76
Figure 17. Key decisive research design factors .............................................................................78
Figure 18. Research method............................................................................................................80
Figure 19. The theory as an instrument for predictions...................................................................82
Figure 20. Industry representation...................................................................................................92
Figure 21. Philosophical research dimensions ................................................................................95
Figure 22. Graphical representation of philosophical considerations..............................................98
Figure 23. Driving forces behind globalization.............................................................................102
Figure 24. The Supply Management Navigator ............................................................................107
Figure 25. Vision for low-cost country sourcing activities ...........................................................108
Figure 26. Low-cost country sourcing strategy.............................................................................110
Figure 27. Use of key performance indicators ..............................................................................111
Figure 28. Use of cross-functional purchasing teams....................................................................111
Figure 29. Who initiates and drives LCCS initiatives? .................................................................112
Figure 30. The purchasing channel ...............................................................................................113
Figure 31. LCCS knowledge level ................................................................................................115
Figure 32. Top ten sourcing countries for direct spend among French companies .......................116
Figure 33. Top ten sourcing countries for indirect spend among French companies ....................117
Figure 34. Top ten sourcing countries for direct spend among German companies .....................118
Figure 35. Top ten sourcing countries for indirect spend among German companies ..................118
Figure 36. Top ten sourcing countries for direct spend Italian companies....................................119
Figure 37. Top ten sourcing countries for indirect spend Italian companies.................................120
 XIV

Figure 38. Top ten sourcing countries for direct spend among Spanish companies......................121
Figure 39. Top ten sourcing countries for indirect spend among Spanish companies ..................121
Figure 40. Top ten sourcing countries for direct spend among UK companies ............................122
Figure 41. Top ten sourcing countries for indirect spend among UK companies .........................123
Figure 42. Importance of various low-cost regions for direct spend .............................................124
Figure 43. Importance of various low-cost regions for indirect spend..........................................124
Figure 44. Direct LCCS spend as percentage of total purchase spend ..........................................125
Figure 45. Indirect LCCS spend as percentage of total purchase spend........................................126
Figure 46. Direct LCCS spend as percentage of total spend by industry ......................................127
Figure 47. Indirect LCCS spend as percentage of total spend by industry....................................128
Figure 48. Suitable supplies for LCCS..........................................................................................130
Figure 49. Sourcing of goods vs. services 2005 and 2010 ............................................................133
Figure 50. Different supply categories sourced in LCCs 2005 and 2010......................................134
Figure 51. The ten most important supply risks ............................................................................135
Figure 52. LCCS Process phases...................................................................................................139
Figure 53. The LCCS roadmap .....................................................................................................140
Figure 54. Business impact from LCCS........................................................................................143
Figure 55. Scheme of organizational, economic and management theories..................................150
Figure 56. The causal chain of the resource-based view (Barney, 1991)......................................156
Figure 57. Constructs and interrelated hypotheses........................................................................181
Figure 58. Exogenous measurement model with parameters ........................................................196
Figure 59. Endogenous measurement model with parameters ......................................................198
Figure 60. Structural model with parameters ................................................................................208
Figure 61. Structural model with path coefficients .......................................................................213
 XV

List of Tables
Table 1. Terms related to purchasing and supply management.......................................................15
Table 2. Definitions of sourcing and strategic sourcing in literature...............................................18
Table 3. Definitions of global sourcing and low-cost country sourcing.........................................21
Table 4. Internationalization topics .................................................................................................24
Table 5. Globalization topics in literature .......................................................................................29
Table 6. Internationalization topics at firm level............................................................................39
Table 7. Internationalization of purchasing and supply management topics...................................43
Table 8. Concepts related to low-cost country sourcing .................................................................52
Table 9. Chi-square test for non-response bias ...............................................................................93
Table 10. Key contributors to the resource-based view of the firm ..............................................155
Table 11. Resource classification schemes (adapted from Fahy, 2001)........................................167
Table 12. Univariate statistics before and after normal scores procedure .....................................193
Table 13. Standardized solution for exogenous measurement model ...........................................197
Table 14. Standardized solution for endogenous measurement model .........................................198
Table 15. Fit indices for the exogenous side of the measurement model......................................200
Table 16. Fit indices for the endogenous side of the measurement model....................................200
Table 17. Principal component analysis of LCCS resources.........................................................202
Table 18. Principal component analysis of purchasing process performance. ..............................203
Table 19. Structural coefficients with significance levels .............................................................210
Table 20. Fit indices for structural model .....................................................................................211
Table 21. Summary of hypothesis tests.........................................................................................217
 XVII

List of Abbreviations
CATI Computer-Aided Telephone Interviewing
CEO Chief Executive Officer
CFO Chief Finanial Officer
COO Chief Operations Officer
CPO Chief Procurement Officer
DMNC Diversified Multinational Corporations
e.g. exempla gratia (for example)
ERP Enterprise resource planning system
EU European Union
FDI Foreign direct investment
GDP Gross domestic product
HCC High-cost country
i.e. id est (this means)
IPO International Procurement Office
IMP International marketing and purchasing paradigm
IT Information Technology
LCC Low-cost country
LCCS Low-cost country sourcing
LISREL Linear Structural Relationships
MRO Maintenance, repair and operations
NAISC North American Industry Standardization Code
PLS Partial Least Squares
PSM Purchasing and Supply Management
R&D Research & Development
RBV The resource-based view
SCA Sustainable competitive advantage
SCM Supply chain management
SEM Structural Equation Modeling
SWOT Strengths, weaknesses, opportunities and threats
TCT Transaction cost theory
VRIO Valuable, rare, inimitable and organization support
WFOE Wholly foreign-owned enterprise
 1

1. Introduction
The aim of this chapter is to introduce the reader to the topic of low-cost country
sourcing (LCCS) and to provide relevant background information as well as the
main problem to be solved within the scope of the thesis. It also contains the setup
of research objectives and definition of research questions as guidance for the
research. It also contains an overview of the thesis structure in order to facilitate
navigation throughout the thesis.

1.1. Background and Problem Definition

Globalization has induced immense competition in many industries. Moreover,
firms competing in mature markets have experienced increasing difficulties to
grow revenues, especially in the aftermath of the economic recession caused by
the dot-com crash and the September 11 event in 2001. As a result, firms are
increasingly focusing on cost reduction as a means for increasing shareholder
value.

As indicated by Monczka (1995), offering low product prices as a result of being

a low-cost producer is one of the most important competitive advantages from a
marketing perspective. However, firms with strategies focusing on differentiation
also benefit from low costs since released capital can instead be spent on more
value-adding activities. Furthermore, cost-savings translate directly dollar by
dollar to the bottom line result, making it the most effective means for improving
corporate profitability (Aberdeen Group Inc., 2002).

In order to reduce costs and thus satisfying internal customer demand (Jahns &
Bänziger, 2002; Koppelmann, 2003), an important objective of the corporate
supply function is to source goods and services in a way that yields reductions in
total cost while delivering adequate quality. The strategic importance of this task
has increased significantly over the last few years, as the degree of value added
has decreased to less than fifty percent in many industries (Jahns, 2005).

One of the most effective ways to achieve cost-saving targets is to source from
countries with a comparatively lower price level, so called low-cost country
 2

sourcing (LCCS). Although the term does not specify which costs are actually
lower, one is usually referring to the vast difference in labor costs between the
high-cost country (HCC) and the low-cost country (LCC). Typically, the labor
cost difference ranges between a factor of two to twenty, meaning that a wage rate
including benefits in a HCC of €20 could translate to as little as €1 in an LCC
(Battacharya et al., 2004). As a result, the opportunity cost of not sourcing from
LCCs is very high.

Reducing costs is not the only reason for LCCS, however. LCC markets are often
characterized by rapid growth and absolute market size, and increasing customer
demand has turned these regions into important sales markets as well. Hence,
corporate LCC presence is important not only for sourcing and manufacturing, but
also for serving local consumer markets. In other words, companies that can
acquire significant market shares in these regions are more likely to breed cash
cows in the future.

The low labor cost level has a number of secondary implications, especially in
manufacturing and assembling operations. Firstly, it is possible to increase the
amount of manual labor content and hence reduce capital requirements in terms of
expensive automation equipment such as welding robots, conveyor belts etc.
Whereas lower labor costs translates directly to the bottom line, lower capital
investments can significantly reduce the amount of tied-up capital on the balance
sheet (Battacharya et al., 2004). An increase in manual labor content also means
increased flexibility and reduced costs for exiting legacy assets, since less
machinery and tooling equipment need to be sold or moved when operations are
relocated.

However, LCCS is a crucial task that needs to be planned and executed with grate
care. Despite anecdotal evidence of vast cost-savings opportunities, a company
can easily end up with increased instead of decreased total costs if not doing
LCCS operations properly. Due to the many challenges imposed by globalization
(Jahns, 2001), there are numerous challenges and obstacles to overcome, for
 3

example cultural barriers, fluctuating currencies, increased distances for travel and
transportation, political instability among others (Battacharya et al., 2004).

The aim of the sourcing initiatives is to identify suppliers that can deliver
maximum amount of value at the lowest possible total cost, at adequate quality
levels. Firms must learn how to develop strategies that can ultimately lead to
adequate organizations and processes that can cope with challenges in the
environment, in other words creating a “strategic fit” (P. Lawrence & Lorsch,
1967; Zajac, Kraatz, & Bresser, 2000). The main problem for the strategist (i.e.
the CPO) is therefore to obtain critical information and knowledge to craft sound
and viable sourcing strategies.

1.2. Research Objectives

Over the last two decades, a rich body of research on the topic has emerged. As
shown in the literature review in chapter 2, most of this research has either
focused on the nature of the supplies sourced by applying transaction cost theory
(TCT) (Kotabe, 1994; Murray, 2001; Murray, Kotabe, & Wildt, 1995) or more
pragmatic approaches in terms of physical characteristics of supplies being
sourced (J. M. Smith, 1999). Other scholars have investigated situational factors
as motivation for global sourcing (Alguire, Frear, & Metcalf, 1994). Much of the
research has focused on organizational issues, such as organizational design
(Guinipero & Monczka, 1990), and centralization/decentralization issues (Arnold,
1999). Others, such as Monczka and Trent (1991), and Bozarth et al. (1998),
investigated trends in the field of global sourcing. Another interesting stream is
the debate about the strategic importance of purchasing (Mol, 2003; Ramsay,
2001a), which has important implications for the theoretical foundation of this
thesis.

Interestingly, less attention has been paid to the role of intra- and inter-firm
resources as a source of competitive advantage and their potential influence on
performance. Although somewhat contradictory empirical evidence (e.g.
Schmalensee, 1985), there seems to be empirical evidence from general research
settings in favor of the importance of intra-firm factors (Cool & Schendel, 1988;
 4

Cubbin, 1988; Hansen & Wernerfeldt, 1989; Roquebert, Phillips, & Westfall,
1996; Rumelt, 1991). Hence, the first objective of this thesis to examine these
effects in a global sourcing setting, in effect also providing a novel and different
perspective on the topic compared to the dominating TCT-based research on
global sourcing done during the 1990s and early 2000s.

Moreover, despite vast amounts of macroeconomic data available at country-level,

very little scientific research has been done about the future developments of
LCCS at firm-level. In other words, there is an academic knowledge gap about
where and to what extent sourcing activities will be located in a near future. As a
result, the second objective of this thesis is to investigate trends and developments
in the field.

From a practical perspective, anecdotal evidence has shown that companies have
so far primarily relied on the external assessment, or market-based view (“outside-
in perspective”), in order to identify attractive supplier markets, while paying less
attention to the internal assessment (“inside-out perspective”) during the strategy
development phase. Therefore, it is likely that many companies miss opportunities
to adapt their organizations to a highly dynamic and complex sourcing
environment and thus not exploiting comparative advantages to the fullest extent
possible.

This motivates further research on how internal factors on the buying side affect
business performance. Academic research in this field is highly needed, as many
firms are experiencing increasing competition on a global level and are therefore
more or less forced to source globally. Since the research stems from actual needs
among companies, it is very likely that the findings from the thesis will have a
significant importance to business executives as well as scientists in the field.

1.3. Research Questions and Thesis Outline

Based on the discussion above, it is evident that there exist research gaps about
the role of internal factors of the firm for the success of LCCS as well as future
trends in the field, both in theory and practice. In order to eliminate, or at least
close these research gaps, a theoretical framework based on the resource-based
 5

view of the firm (RBV) and parallel streams of research will be applied as a
theoretical lens onto the topic. The theoretical framework will also be briefly
discussed in the light from other theories from organizational science, economics
and strategic management. Examples of such theories are systems theory,
international trade theory, transaction cost theory and theory of foreign direct
investment. In line with the purpose of the study in combination with the research
gaps, five overarching research questions can be formulated:

1. What is low-cost country sourcing?

2. What makes low-cost country sourcing different from general sourcing?
3. How do firm resources affect business performance when sourcing in
LCCs?
4. What is the relative importance of firm resources for superior business
performance when sourcing in LCCs?
5. How will the sourcing patterns in LCCs change in a near future?

The ultimate goal of the thesis is of course to answer the research questions above.
The research questions themselves also provide guidance for the structure and
contents of the thesis. As such, the thesis is structured in a way that it fulfils three
types of requirements as defined by Gleich (2001). These are as follows:

1. Theoretical objective: Definition of terms and positioning the topic into

existing streams of research
2. Explanatory objective: Conceptual development and empirical
evaluation of relationships between constructs within a research model
3. Presentation objective: Drawing conclusions and deriving
recommendations for practice and research

From a structural point of view, the thesis is divided into six chapters (Figure 1).
Chapter 1 serves as an overall introduction to the thesis. More in-depth, chapter
1.1 introduces the reader to the topic by providing relevant background
information and defining the main problem to be solved by the thesis. Based on
the background information and problem definition, chapter 1.2 elaborates the
objectives that are to be accomplished over due course of the research within the
 6

thesis. Finally, in chapter 1.3 (i.e. this chapter) explicit research questions that are
to be answered are formulated, and the structure of the thesis itself is explained.

Chapter 2 contains the literature review, which lays the groundwork for
understanding the LCCS topic itself, as well as the reasoning and argumentation
in later chapters. Chapter 2.1 deals with explanation and definition of important
terms used throughout the dissertation (cf. Gleich, 2001, p. 18). The terms are also
compared in order to highlight crucial nuances and differences that are essential
for the understanding of the subject of study. In chapter 2.2 internationalization of
firms are discussed. This chapter helps understanding why and how firms are
expanding into new geographical regions. The knowledge gained from this
section is very helpful in order to broaden the resource-based perspective on
which the theoretical fundament in later chapters is based. Chapter 2.3 builds on
the previous chapters by further developing terms and defining the concept of
LCCS. The LCCS term is then positioned with respect to literature through the
deployment of a morphological analysis in chapter 2.4.

Chapter 3 elaborates on the methodological aspects of the research conducted

within the dissertation. More specifically, chapter 3.1 discusses important research
design parameters such as quantitative/qualitative research, cross-
sectional/longitudinal research, and deductive/inductive research, and how they
are configured in this particular case. Next, chapter 3.2 deals with the practical
proceedings of the research in the shape of a research strategy. It includes
practical considerations for the literature review, development of a theoretical
framework, data collection and analysis, as well as sampling procedures. Lastly,
in chapter 3.3 philosophical considerations are performed. Here, aspects such as
ontology, epistemology, human nature and their impact on methodology are
covered.

Chapter 4 comprises one of the cornerstones of the dissertation, namely “trends”.

This is a purely descriptive section without any special theoretical underpinnings,
which aims at providing a snapshot picture of the current situation, but also
expected development in the field subject of study for the next five-year period.
 7

Thus, it tries to give answer to the “what” and “when” questions. Chapter 4.1
contains a general overview of LCCS trends in terms of improvement
requirements, importance, organizational developments, system development,
performance measurement and responsibilities. Chapter 4.2 deals with strategic
LCCS management, based on the Supply Management Navigator (Jahns, 2005).
Next, chapter 4.3 examines trends at the operational level, i.e. activities that are
performed on a day-to-day basis. Then, chapter 4.4 summarizes key activities into
a strategic guideline that helps managers and other practitioners structure
activities in a timely manner. The chapter ends by providing an interim summary
in chapter 4.4.

Chapter 5 comprises the second cornerstone of the thesis, namely “implications”.

This chapter is of explanatory nature, i.e. it tries to answer the “how” and “why”
questions. More in-depth, chapter 5.1 discusses the theoretical underpinnings of
the chapter by comparing various economic and organizational theories (cf.
Gleich, 2001, p. 18), by elaborating the historical developments of the resource-
based view, and its fundamental logic. In chapter 5.2, the theoretical framework is
developed by deductively deriving a total number of fifteen hypotheses, building a
research model out of the hypotheses, and finally operationalizing the constructs
contained in the hypotheses. Chapter 5.3 involves empirical testing of the research
hypothesis in terms of factor analysis and path analysis. The results from the
hypothesis tests are also evaluated, and discussed in the interim summary in
chapter 5.4.

Chapter 6 is a relatively brief and contains conclusions from the research as such,
but also a discussion in a broader sense. Chapter 6.1 discusses the theoretical
contributions of the research to the existing body of research and it is thus of
primary interest for academics. Chapter 6.2 deals with the managerial implications
of the research, i.e. the practical considerations and recommendations (cf. Gleich,
2001, p. 18) to CPOs and equivalent senior purchasing managers that have
ultimate responsibility for sourcing operations within firms. Finally, in chapter 6.3
limitations of the research is provided and suggestions for future research is
provided.
 8

1. Introduction

1.1 Research
1.1 Background and 1.2 Research
Questions and
Problem Definition Objectives
Thesis Outline

2. Frame of Reference on Low-Cost Country Sourcing: A Literature Review

2.3 Concept of 2.4 Intern-

2.1 Terminology 2.2 Inter- ationalization of
Low-Cost Country
nationalization Purchasing and
Sourcing
Supply Management

3. Research Methodology

3.1 Research Design 3.2 Research 3.3 Philosophical

Strategy considerations

4. Low-Cost Country Sourcing Trends: A Descriptive Study

4.1 Purchasing 4.2 Strategic

and Supply 4.3 LCCS 4.4 The LCCS
LCCS
Mangement Management Operations Roadmap
Trends

5. Low-Cost Country Sourcing Implications: An Explanatory Study

5.1 The Resource-

Based View of the 5.2 Theoretical 5.3 Analysis and
Framework Results
Firm

6. Summary and Conclusions

6.3 Limitations and

6.1 Theoretical 6.2 Managerial Suggestions for
Contributions Implications
Future Research

Figure 1. Thesis outline

 9

2. Frame of Reference on Low-Cost Country

Sourcing: A Literature Review
As the degree of value added is continuously decreasing, the importance of
purchasing and supply management will increase accordingly in the future (Jahns,
2005). Furthermore, as many supplies have relatively high strategic importance,
the ability to enhance and transfer value from suppliers is highly dependent on the
supply management capabilities of the buying firm. In contrast to the environment
within the firm boundaries, the external environment is characterized by a great
deal of uncertainty and complexity regarding communication, coordination, and
conflicting strategic objectives.

The aim of this chapter is to provide a foundation for the LCCS concept by
presenting work done by scholars and practitioners from the past. In other words,
the chapter serves as a review of the literature on the topic. Moreover, a
subsection is devoted to clarify the differences and nuances in terms used in order
to facilitate the reading of this thesis. Finally, some general conclusions are drawn
about the status quo of the research in the field along with some guidance of
future directions. This is essential for the understanding of the topic and to be able
to juxtaposition the concept of LCCS with other streams of research. Few
literature reviews with respect to LCCS have been performed in the past,
potentially indicating an underdeveloped body of research.

In order to get a clear picture of what low-cost country sourcing is, it makes sense
to dichotomize the word into its constituent parts and analyze them separately.
First of all, the word sourcing needs to be clarified. It is a word that has gained a
lot of popularity over the last decade and become a commonly used “buzz word”
in business-related contexts. This has also led to a situation where it is partly
misused and used in too many different contexts. Alas, it is difficult to give the
word a precise definition. Very often, it is used to overarch the sourcing process,
which, put simply, involves the search, evaluation, and selection of suppliers.
 10

With this in mind, the word can be used to represent sourcing from one or many
suppliers for a given supply category, so called single and multiple sourcing,
respectively. It can also be used to represent specific regions to source in, for
example local sourcing for domestic suppliers, global sourcing for suppliers
regardless of geographic location, or low-cost country sourcing, which will be
further elaborated later in this chapter. Some people even use the sourcing term
synonymously with the term outsourcing, a discussion that is omitted in this thesis.

Another frequently used term is strategic sourcing. This term is somewhat

debated, as some scholars have claimed that is a purely operational and not
strategic task (Ramsay, 2001a); from this viewpoint the term strategic sourcing is
an oxymoron. By examining the meaning of the terms used both in academia and
practice, this section will show that sourcing indeed is a strategic task (although it
involves a number of operational tasks as well), where a huge step already has
been taken in order to traverse from purchasing to supply management (Kraljic,
1983).

2.1. Terminology
In order to successfully explain and investigate the low-cost country sourcing
phenomenon, a number of underlying terms and concepts need to be elaborated.
The meaning and use of the various terms are dependent on the evolutionary paths
that firms have taken throughout the history of acquisition of factor inputs. The
vocabulary used also greatly varies from scholar to scholar, and most terms
overlap to some extent in terms of their meanings. As a result, many of the terms
are used interchangeably, which sometimes can cause confusion. The situation
gets even more complicated as the terms and concepts are not only related to each
other, but also to other fields such as material handling, logistics and supply chain
management. Consequently, the aim of this section is to clarify frequently used
terms as a support to the reader.

In the literature, most scholars differentiate between purchasing, procurement,

sourcing, and supply management, although they are sometimes used
interchangeably. What they all have in common is the highly debated question
 11

about their strategic importance. Ellram and Carr (1994) gave a brief historical
overview where Ammer’s (1974) was one of the earliest writers to directly
address the role of purchasing in business organizations. This view was also
shared by Ansoff (1965) who viewed purchasing as an administrative rather than
strategic task. Purchasing did not receive much attention as a strategic weapon
until the 1980s, when Porter’s five-force model established itself as the number
one strategy framework (Porter, 1980). In this framework, two of the market
forces are “bargaining power of suppliers” and “bargaining power of customers”,
respectively. Consequently, a stream of research emerged in which theories and
concepts were elaborated on how to cope with and balance these forces. During
the 1990s, the paradigm behind purchasing and supply management shifted from
isolated and individual purchasing scattered across organizations, to a more
integrated and holistic approach for the entire organization (Robert J. Trent &
Robert M. Monczka, 2002).

Throughout the history, the perceived strategic importance of purchasing and

supply management has often increased one notch after large-scale events with
global impact. For example, Ellram and Carr (1994) noted that the oil crisis and
corresponding raw material shortages during 1973-74 increased the cost pressure
and accordingly the importance of purchasing as a mechanism for increasing
profitability. Another major event that shocked the market was the dot com crash
in 2001 which led to a situation where firms started to rely on cost-cutting rather
than market expansion to an increasing extent. The terror attack in New York on
September 11 the same year worsened the situation led to a world-wide recession
that forced companies to streamline their organizations and cut costs to an extent
never before seen.

2.1.1. Purchasing, Procurement, and Supply Management

Generally speaking, purchasing refers to the operational activities that are
performed by the functional unit frequently called the purchasing department.
The fact that purchasing is considered operational implies that there is a lack of
strategy; no visions or goals exist that can provide guidance for day-to-day
activities. Instead, the purchasing department is considered a passive functional
 12

unit of the firm that simply takes orders from internal customers and performs
transactions with external suppliers. As a result, there is little or no coordination
or integration of purchase requirements among the various internal customers of
the firm. A summary of the scholarly work described in this chapter can be found
in at the end of this chapter.

Another closely related term is procurement, which is defined as a broader set of

activities with tactical importance (Dobler & Burt, 1996). Monczka et al. (1998)
uses the terms purchasing and supply management interchangeably and defines
them as “a functional activity that most often refers to the day-to-day management
of material flows and information”. In contrast to logistical activities, purchasing
activities are focusing on contracts rather than physical movement of goods
(Tempelmeier, 1995). He defines procurement as any activity within the firm
aiming at supplying it with needed factor inputs (Tempelmeier, 1995). According
to Corsten (1995), the purchasing department is responsible for making
procurement decisions. Furthermore, the purchasing process involves the task of
obtaining the property rights of the procured goods (H. Corsten, 1995). His
definition of procurement is the same as Tempelmeier’s (H. Corsten, 1995)

The definitions of purchasing and procurement by Arnold (1997) are very similar
to those of Dobler and Burt (1996), but the main difference is that Arnold uses the
term supply management as an overarching term that also includes procurement,
materials management and logistics. Here, logistics includes inbound logistics,
internal logistics and outbound logistics (Arnold, 1997). In a similar fashion,
Corsten (1994) defines supply management as proactive procurement with a
strategic orientation with the aim of making significant contribution to corporate
performance.

As Kaufmann (1999) notes, the German literature on purchasing and supply

management generally has slightly different definitions than most foreign
counterparts. For example, Arnold (1997), Pieper and Pfohl (1993) and
Tempelmeier (1995) include the acquisition of personnel and financial resources
in their definitions. They argue that all factor inputs must be considered, although
 13

they also claim that German companies exclusively focus on materials. Another
argument is that many resources are interrelated (Arnold, 1997; Pieper & Pfohl,
1993). As an example, the use of a certain type of production material may need a
certain type of tooling or machinery, which in turn needs personnel for operating
and capital for financing.

In contrast, scholars such as Dobler and Burt (1996), Monczka et al. (1998) and
van Weele (1995) restrict their definitions of purchasing and supply management
to materials, services and capital equipment, thus excluding personnel and
financial resources.

Of course, the purchasing processes for personnel and capital are very different
regarding the competencies needed to execute them; this is why such purchasing
processes are handled by other departments (Kaufmann, 1999). Although not
named as such explicitly, “purchasing processes” for the acquisition of personnel
and marketing campaigns are almost exclusively handled by the human resources
department and marketing department, respectively.

Purchasing Procurement Supply Management

Operational Tactical Strategic

Figure 2. The purchasing and supply management continuum

Kaufmann (1999) strongly argues that the acquisition of services should be part of
the purchasing department’s task list. He claims that purchasing of machinery and
equipment is closely related to other purchasing processes and such purchases
often are associated with purchases of indirect material and services such as
maintenance, repair and operations (MRO).

Another argument for including services in the definitions is because the

difference between a product and a service is often very vague and blurry. For
example, when one buys a mobile phone, one not only gets the mobile phone
 14

itself, but instead a bundle of products and services, such as customer support via
telephone, access to web services, and so on.

A third argument for including services is the fact that the degree of value added
among companies is constantly decreasing and is on average lower than fifty
percent in some industries (Jahns, 2005). Thus, companies are focusing on core
competencies to a greater extent than ever, and this focus not only includes
products, but also services (Monczka & Trent, 1993). As the degree of value
added decreases, the need for professionally managed procurement of products
and services increases (Monczka & Trent, 1993).

Somewhat simplified, the difference between purchasing, procurement and supply

management is the degree of strategic importance, where purchasing is the most
operational and supply management the most strategic. Comparing supply
management and logistics management, the basic difference is that the latter
encompasses the whole company; only inbound logistics represents an overlap of
both sets of activities (Kaufmann, 1999).

Analogously, materials management includes not only receiving and storing

production inputs but also includes activities in the production and operations (e.g.
materials for work-in-process). Without question, these activities go beyond the
scope of supply management. In other words, the three terms are overlapping
when it comes to inbound logistics, but none of them overlaps the other two
completely.

It is also interesting to compare purchasing and supply management with the

concept of supply chain management (SCM). The main difference between the
terms is that SCM does not only include dyadic relationships (e.g. buyer-supplier),
but encompasses multiple organizations across more than two echelons of the
supply chain (M. Cooper, Lambert, & Pagh, 1997). In sum, SCM could be seen as
an overarching term for cross-company supply management, materials
management and logistics management, stretching from the extraction of raw
materials to consumption by the end-customer, including waste, recycling and
reverse logistics.
 15

Table 1. Terms related to purchasing and supply management

Author(s) / Year Term(s) Key Insights

Ammer (1974) Purchasing Empirical study concluding that top managers

perceive purchasing as an operational activity
Ansoff (1965) Purchasing Purchasing perceived as administrative rather
than strategic task
Arnold (1997) Supply management Supply management as overarching term that
includes procurement, materials management
and logistics
Cooper et al. (1997) Supply chain management Supply chain management as cross-company
supply management, materials management
and logistics management
Corsten (1994) Supply management Supply management as proactive
procurement with strategic orientation
Corsten (1995) Purchasing Purchasing as the task of obtaining property
rights and making procurement decisions
Dobler and Burt (1996) Procurement Day-to-day management of material flows and
information

Ellram and Carr (1994) Purchasing Purchasing as an operational activity that

slowly evolves towards a more strategic
activity
Kaufmann (1999) Purchasing and supply Argues for including acquisition of services in
management, supply chain definition of terms. Purchasing defined as
management operational, supply management as strategic.
Monczka and Trent Purchasing Purchasing as part of cross-functional and
(2002) cross-business unit activities
Monczka et al. (1998) Purchasing and supply Use of the terms purchasing and supply
Management management interchangably
Pieper and Pfohl (1993) Purchasing and supply The terms include acquisition not only of
management goods, but also personnel and financial
resources
Tempelmeier (1995) Purchasing, procurement and Purchasing defined as contracts and
logistics transactions management, logistics as
physical movement of goods, procurement as
supply of factor inputs

2.1.2. Strategic Sourcing

As stated in the previous subsection, sourcing has become increasingly popular
both in academia and practice. Fundamentally speaking, the firm can be seen as a
production function, where inputs are converted to outputs (Bain, 1968; Mason,
1949). With this model, the firm earns profits from the value it adds to the inputs
when generating output. Inputs can be either tangible, such as raw material, or
intangible, such as information or services. The origin, or source, is the starting
point of the definition of the sourcing concept. A summary of the scholarly work
described in this chapter can be found in Table 2 at the end of this chapter.
 16

The sourcing term has been defined in numerous ways in literature. Vollman et al.
(1984) and van Weele (1994) define it as “researching the market for potential
input sources, securing the continuity of these sources, searching for alternative
sources and keeping knowledge up to date”. Kraljic (1983) on the other hand,
positions sourcing management activities to what he refers to as “bottleneck
supplies”. That is, supplies characterized by high uncertainty/complexity but low
strategic importance to the buying firm. In contrast, Monczka et al. (1998) defines
it as “a cross-functional process that involves members of the firm other than
those who work in the purchasing department. The sourcing management team
may include members from engineering, quality, design, manufacturing,
marketing, accounting, strategic planning and other departments”.

In a similar fashion, Kaufmann (1995) defines sourcing as “an integrative

management approach to designing all supplier relations in the sense of a total
relationship management”. Corsten (1995) simply states that “sourcing is the
process of planning and handling outside sources”. Finally, Mol (2001) defines
sourcing as “the process of finding and subsequently managing a source for the
input of production”. Put simply, the least common denominator for the sourcing
definition is the acquisition of factor inputs for production. In a similar fashion,
the definition used for sourcing in this thesis is as follows:1

“Sourcing is the process of searching, selecting and managing suppliers as a

means for securing a continuous supply of factor inputs for the value creation
mechanism.”

This definition clarifies that sourcing is not just about finding suitable suppliers,
but rather seeing the acquisition of supplies as an ever-changing and continuous
task that goes beyond sole transactions, involving a complex interplay between
suppliers and buyers. Contrary to purchasing, it is also evident that sourcing is

1
In line with the discussion about moving away from a goods-dominant view (Vargo & Lusch,
2004, p. 2), the term more generic term “value creation mechanism” is used instead of
“production” for the definition of “sourcing”.
 17

highly process-oriented. Following the definition given by Besterfield et al.

(2003), a business process can be defined as:

“The interaction of some combination of people, materials, equipment,

method, measurement, and the environment to produce an outcome or an
input to another process.”

As the question whether sourcing is strategically important goes on, some

proponents have developed frameworks for distinguishing between more
“operational” purchasing activities and more “strategic” sourcing activities.
Ellram and Carr (1994) identified three main purposes of a purchasing and supply
strategy, namely (1) Specific strategies for the purchasing function, (2) Purchasing
as support for other functional units and the company as a whole, and (3)
Utilization of purchasing as a strategic function of the firm.

Andersen and Katz (1998) defines strategic sourcing as a set of interrelated

business processes focusing on items and methodology related to value
maximization of externally produced goods and services. 2 Carr and Smeltzer
(1998) extended the interrelated sourcing process by developing it as an
integrated process. The number of steps in the process varies, but is exclusively in
the range from four to seven. As noted by Smeltzer et al. (2003), Novack and
Simco (1991), who are two of the earliest scholars elaborating the strategic
sourcing term, developed a four-step process. Mercer Management Consulting
utilizes a six-step process, whereas A.T. Kearney deploys a well-known seven-
step process (Smeltzer et al., 2003). The former of the two spans from the
development of an annual plan to supplier development, whereas the latter spans
from profiling of the sourcing group to continuous benchmarking and
improvement (M. G. Andersen & Katz, 1998; Smeltzer et al., 2003). The sourcing
process applied by Deloitte Consulting is another well-known sourcing process

2
Noteworthy, the strategic sourcing definition by Kotabe (1994), is not limited to external
suppliers, but also includes so called internal suppliers of other business units and this
phenomenon is consequently called internal sourcing.
 18

that encompasses all steps from opportunity and progress assessment to strategy
institutionalization (Smeltzer et al., 2003).

Table 2. Definitions of sourcing and strategic sourcing in literature

Author(s) / Year Term(s) Key Insights

Anderson and Katz Strategic sourcing Process related to value maximization of

(1998) externally produced goods and services
Carr and Smeltzer Strategic sourcing Strategic sourcing as an integrated and not
(2003) only interrelated process
Corsten (1995) Sourcing Sourcing as the process of planning and
handling outside sources
Kaufmann (1995) Sourcing Sourcing defined as an integrative
management approach to configure all
supplier relationships
Kraljic (1983) Sourcing The task of dealing with “bottleneck suppliers”
Mol (2003) Sourcing Sourcing as the process of finding and
managing sources for factor inputs
Novack and Simco Strategic sourcing Development of a four-step sourcing process
(1991)
van Weele (1994) Sourcing Researching the supplier market for potential
input sources, securing supply from existing
sources, searching for alternate sources
Vollman et al. (1984) Sourcing Researching the supplier market for potential
input sources

2.1.3. Global Sourcing and Low-Cost Country Sourcing

Nurtured by improved telecommunications, removal of trade barriers etc.,
globalization has lead to a situation where multinational companies can benefit
from location advantages of other nations than the home country. A frequently
used term in this context is comparative advantage, which originates from work
by early scholars such as Ricardo (1817) and Smith (1776). The rationale is that
factor costs (Porter, 1990) such as lower material costs, labor costs, tax rates etc.
(i.e. lower comparative price level) differ from country and hence companies can
benefit from these by locating activities of the value chain in a way that reduces
cost and thus increases customer surplus (Kogut, 1985a). A summary of the
scholarly work described in this chapter can be found in Table 3 at the end of this
chapter.

This phenomenon, usually referred to as value chain fragmentation, also means

that firms can surpass institutional and cultural barriers in order to transfer
 19

competitive advantages among nations (Kogut, 1985a). Take an automobile

manufacturer as an example; it can source components from suppliers in Asia and
Eastern Europe, assemble the components in Central Europe and finally market
and sell the end-product through regional sales offices in Western Europe, North
America and Japan.

Noteworthy, the term “low-cost country sourcing” is scarcely used in scholarly

literature, but more frequently used in the industry. The most logical explanation
to this is probably because it is difficult to give a stringent definition to the term
“low-cost country” (LCC), as the term is completely relative; a country
considered “low-cost” by country A is not necessarily considered “low-cost” by
country B. To better understand the LCC term, we introduce the term comparative
price level which means “the cost in one country as a per cent of the cost of the
same good or service in another country, when prices in both countries are
expressed in a common currency, with the official exchange rate being used for
currency conversions”.3

In order to be able to define the term “low-cost country sourcing”, it is appropriate

to start with an overview of the term global sourcing, which itself can be seen as
an umbrella term for LCCS and other similar terms. Kotabe et al. (1994, p.6)
defines the term “global sourcing” as management of the R&D, manufacturing
and marketing interfaces on a global basis, thus identifying which production
units will serve which particular markets and how components will be supplied
for production, such that the firm can exploit both its own advantages and the
comparative advantages of various countries. This definition is hence relatively
similar to the global sourcing concept proposed by Fayerweather (1969), who
differentiates between worldwide supplier, production and consumer markets.

3
Comparative price level: A comparative price level is defined as the purchasing-power parity
divided by the exchange rate. Purchasing-power parity (PPP) in turn is defined as the number of
currency units required to buy goods equivalent to what can be bought with one unit of the
currency of the base country or with one unit of the common currency of a group of countries.
Definition from United Nations Statistics Division (http://unstats.un.org/unsd/methods/
icp/gdp/gdp06_htm.htm)
 20

Mol (2001, p. 2) suggests a slightly different definition by stating its meaning as

“the decision-making process through which firms find and manage inputs for
final production in an integrated, international context in order to contribute to the
creation of sustainable competitive advantage by the firm”. In other words, his
global sourcing definition is component of corporate strategy, in which firms
strive towards obtaining sustainable competitive advantage (Barney, 1991).

Under the waves of globalization and outsourcing, the literature review reveals
that large manufacturing companies often develop their products in Europe and
the USA, manufacture in Asia and Latin America, and sell worldwide. This
strategy is the starting point for the definition of global sourcing by Monczka and
Trent (1991) and implies the integration and coordination of procurement
requirements across worldwide business units, looking at common items,
processes, technologies, and suppliers.

The definition of LCCS as it is used throughout this thesis is derived from the
global sourcing term defined by (Monczka & Trent, 1991) and the definition of
LCC above. By combining these two terms as a starting point, the term “low-cost
country sourcing” can be defined as follows:

Low-cost country sourcing (LCCS) implies coordinating and

integrating procurement requirements of world-wide business units,
through acquisition of goods and services from suppliers in countries
with a lower comparative price level compared to the home country of
the buying firm.

Hence, from this point of view, LCCS can be seen as a subset of global sourcing,
specifically focusing on the conditions in the low-cost sourcing markets. On the
other hand, as discussed above, global sourcing deals with sourcing in any country
around the globe, thus disregarding country borders. In order to preserve the terms
originally used in the sources, various terms are used interchangeably in the
literature review.
 21

Table 3. Definitions of global sourcing and low-cost country sourcing

Author(s) / Year Term(s) Key Insights

Kotabe et al. (1994) Global sourcing Global sourcing as the management of R&D,
manufacturing and marketing interfaces on a
global basis
Mol (2003) Global sourcing Global sourcing as the decision-making
process through which firms find and manage
inputs for final production
Monczka and Trent Global sourcing Global sourcing as the integration and
(1991) coordination of procurement requirements
across worldwide business units

2.2. Internationalization
The concept of internationalization plays an important role for LCCS. By
understanding why and how internationalization takes place at a macro-economic
level, one can effectively translate the developments to firm- and business-unit
level. As a result, it is possible to narrow down the focus so that one can assess
the impact from internationalization on supply-side activities. Accordingly, this
chapter addresses the globalization and international trade in general as a start,
then discussing internationalization of firms, finalized by elaborating the
internationalization of purchasing and supply management. A summary of the
scholarly work described in this chapter can be found in Table 4 at the end of this
chapter.

One of the most striking characteristics of business science and strategic

management is a lack of taxonomies, nomenclatures and definitions of terms for
describing the different entities used. Although the degree of stringency has
increased by time, many terms are still being used interchangeably. This is no less
true in an international business environment which takes place at several levels in
organizations and the society as a whole simultaneously.

Depending on historical background and geographic location, various terms have

frequently been used to describe the same or at least similar concepts. During the
1960s, when the globalization phenomenon started to receive increased scholarly
 22

attention, terms such as ”multinational” or ”international” were the two most

commonly used. One of the early scholars, Kindleberger (1969), differentiated
between three types of firms, namely “national firms with international
operations”, “multinational firms” and “international firms”. Bartlett and Goshal
(1987; 1989) brought some order to the somewhat chaotic situation by introducing
a coherent terminology. In addition to the three commonly used organization
types (i.e. international, global, and multinational), they introduced a fourth type,
namely the so called “transnational” organization.

Since the use of the word ”global” was popularized by influential scholars such as
Levitt (1983) among others, there has so far been relatively little consensus about
its real meaning. Often, the word has been used in juxtaposition with other words
to highlight a world-wide reach. For example, Douglas and Craig (1989) used the
term ”global marketplace” to denote the international product and services market.
In a similar fashion, Particelli (1990) denotes any kind of presence in a foreign
market as ”global participation”. Levitt (1983) and Porter (1986) use the
term ”global strategy” for denoting strategies that involve integration of business
operations across nation borders. Aaker (1998), on the other hand, defines the
term as a means for getting access to strategic markets, bypassing trade barriers
and taking advantage of foreign investment incentives such as tax and interest
rates. In line with Bartlett and Goshal’s (1987; 1989) organization taxonomy (later
elaborated in chapter 2.2.2), ”global firms” are those which pursues a single
strategy that is scaled up, encompasses markets, and exploits commonalities
across nations.

Internationalization implies competing in industries that span across national

boundaries, among firms with different home bases, and with firms that operate
across national boundaries that leverage strategic assets in multiple locations.
Consequently, generic frameworks for assessing the desirability of an industry or
business and firm capabilities for obtaining competitive advantage must be
extended in order to apply in an international context.
 23

Therefore, strategic thinking in an international business setting involves the

following levels of analysis:

„ Geographic scope of the industry

„ Attractiveness of various locations as consumer markets, supplier markets,

or special competencies, as well as aggregated competitive advantage
provided by various locations

„ Sustainability of internationalization as a competitive strategy for a

particular firm. That is, internationalization makes little sense if
competitive advantages achieved from such activities will quickly erode.

„ Degree of global coordination and integration as well as local focus of

operations

The Ricardian concept of comparative advantage has predominated as de facto

explanation model for international trade. However, as roughly one-third of world
trade is intra-firm trade, academic research is increasingly focusing on alternative
levels of analysis, for example at industry- and firm-level (Zeile, 1997).

Although internationalization is not a new phenomenon, its importance has

increased at an accelerating rate during the 20th century. Especially since the
1960s, the global economy has become increasingly interdependent and
functionally integrated through cross-border flows of capital, goods, people and
information (Yeung, 1997). The term “internationalization” is often used
interchangeably with the term “globalization”. Although there is a great deal of
overlap between the terms, there are also important differences that need to be
highlighted.

Whereas globalization focuses on the integration geographic regions from a

holistic perspective, internationalization focuses more on the interdependencies
between nations themselves. Internationalization can be defined as “a process of
cross-border operations when a business firm headquartered in one country
controls and influences the strategic decision-making of at least one affiliate in
another country” (Yeung, 1997, p. 104). Other scholars, such as Czinkota et al.
 24

(1989), Hibbert (1997), Rugman and Hodgetts (1995) consider the global business
environment to be a subset of the more general international business environment.

Based on the information above, the aim the following sections is to examine the
drivers and effects from internationalization by starting at a global level and
subsequently narrowing down the scope to firm level.

Table 4. Internationalization topics

Author(s) / Year Topic Key Insights

Aaker (1998) Global participation Defined global participation as a means to get

access to strategic markets, bypassing trade
barriers and taking advantage of government
incentives
Bartlett and Goshal Internationalization taxonomy Differentiation between international,
(1987) multinational, transnational and global firms
Czinkota et al. (1989) Global business environment Defined the global business environment to
be part of the international business
environment
Douglas and Craig Global marketplaces Explained the phenomenon of international
(1989) product and services markets
Hibbert (1997) Global business environment Defined the global business environment to
be part of the international business
environment
Kindleberger (1969) Internationalization taxonomy Differentiation between national, international
and multinational firms
Levitt (1983) Global markets Popularized the use of the “global” prefix
Particelli (1990) Global participation Defined global participation as any kind of
presence in a foreign market
Rugman and Hodgetts Global business environment Defined the global business environment to
(1995) be part of the international business
environment
Yeung (1997) Internationalization Defined internationalization as the cross-
border flows of capital, goods, people and
information

2.2.1. Globalization and International Trade

The number of driving forces behind low-cost country sourcing is virtually
infinite. However, somewhat simplified, these driving forces can be collectively
positioned under the umbrella term globalization. Globalization refers to “the
political, economic, and social activities that have become interregional or
intercontinental and to the intensification of levels of interaction and
interconnectedness within and between states and societies” (Held, McGrew,
Goldblatt, & Perraton, 1999). Tomlinson (1999, p. 2) elegantly defines
 25

globalization as “the rapidly developing and ever-densening network of

interconnections and interdependencies that characterize modern social life”. Fahy
(2001) refers to globalization as the process in which geographic scope,
convergence, and interdependence is increasing. Several scholars have claimed it
to be unstoppable (Dicken, 1992; W. W. Lewis & Harris, 1992; T. Levitt, 1983;
Naisbitt & Aburdene, 1990). A summary of the scholarly work described in this
chapter can be found in Table 5 at the end of this chapter.

Globalization permeates the society as a whole at several levels, such as in social,

political, economic, demographic and technological contexts (Burgeois, 1980).
Industries such as aircraft (Y. Doz, 1987; Hout, Porter, & Rudden, 1982),
chemicals (Chakravarthy & Perlmutter, 1985; T. Levitt, 1983) and
semiconductors (Kobrin, 1991; Porter, 1986) have all been extensively
investigated in terms of globalization effects.

Economic, social
and political inter-
dependencies

Increased
convergence

Geographic scope

Figure 3. The three dimensions of globalization

(Fahy, 2001)

As the environment has a strong influence on strategy and structure, many

scholars have attempted to identify important variables for describing it (Aldrich,
1979; Dill, 1958; Duncan, 1972; Emery & Trist, 1965; P. Lawrence & Lorsch,
1967; Thompson, 1967). Burgeois (1980) identified four variables that are
claimed to have the biggest impact as external strategic determinants on firms.

These are complexity/heterogeneity, rate of change, volatility and managerial

perception of uncertainty. Literature suggests that today’s global environment is
characterized as highly complex/heterogenous, rapidly changing, highly volatile
 26

and highly uncertain (Fahy, 2001). With this in mind, Naisbitt (1994) claims there
is a so called ”global paradox”, implying that many large-sized companies today,
despite their market power and economies of scale, are lacking the flexibility to
remain strong in the future. Therefore, it is hypothesized that smaller, more
flexible and agile firms are about the gain market share on the expense on the
industry titans. Ohmae (1985) and Peters (1990) stress the need for speed in order
to keep up with the pace currently characterizing the current business environment.

Globalization would probably not take place if there were not an economic
impetus for promoting it. Already in the 18th century, British economist Adam
Smith (1776) proved that specialization leads to increased industrial output.
Furthermore, he considered international trade as a special case of specialization
where resources are assumed to be scarce and consumer demand in a nation
cannot be independently satisfied. To solve the equation, he proposed that each
nation should engage in activities that use resources with which the nation is
relatively well endowed with. For example, a nation endowed with inexpensive
labor should engage in labor-intense activities. The production surplus should
then be exported to other nations in exchange for goods that the nation cannot
produce as efficiently.

Although Smith did not develop the ideas extensively, another famous classical
economist David Ricardo developed them into what is known as “the principle of
comparative advantage” (Ricardo, 1817). Although one nation can be better at
producing every kind of good or service, and thus have an “absolute competitive
advantage”, it is still beneficial to trade goods as long as the production efficiency
ratios of different goods are different for the two countries. In its original shape,
the principal of comparative advantage is restricted to a two-nation, two-good
system; however, with some modification, it can be extended to include multiple-
country, multiple-good systems.

Hecksher (1919) and Ohlin (1933) extended the concept of comparative

advantage into what is commonly known as the Hecksher–Ohlin theory of factor
endowments, by stating that a country has a comparative advantage in the
 27

commodity that extensively uses factors of production that it is well endowed with.
The theory relies on a several assumptions in order to be valid, namely (1)
countries have perfect goods and factor markets, (2) the factors of production are
locationally immobile, (3) production units from country to country are identical,
(4) companies are price takers operating under conditions of atomistic competition,
and (5) there are neither trade barriers nor any transaction costs. Clearly, none of
these prerequisites are completely fulfilled; as a result, its validity is limited.
However, the concept is still valuable, as it can still explain the driving forces of
the internationalization and globalization phenomenon that is taking place.

As discussed above, globalization means that market actors specialize in what

they are best at doing, and thus increasing the possible production frontier,
according to the Ricardian view of international trade (Ricardo, 1817). What is
usually referred to as “the first wave of globalization” started around 1870 and
lasted until the start of World War I in 1914 (Baldwin & Martin, 1999). “The
second wave of globalization”, on the other hand, spans from the 1960s until
today.

The difference between the two waves is two-fold. Firstly, in the first wave of
globalization, trade flows were centered on goods, whereas the second wave is
characterized by flows not only of goods, but also of services, information and
knowledge. Secondly, during the first wave, globalization was limited to the
developed countries of the world whereas the second wave also involves
developing countries as well as emerging and transition economies (Baldwin &
Martin, 1999).

According to Yip (1992), there are four primary groups of driving forces behind
globalization: market factors, economies of scale, comparative advantage, and
regulatory factors (Figure 4). Market factors refer to the characteristics of
geographical markets. An example can be incumbent competitors that enter new
markets or new competitors enter incumbent markets. Another example can be the
homogeneity of the markets in terms of consumer tastes and requirements.
Economies of scale implies taking advantage of the expansion of operations into
new markets, while utilizing experience from the past in order to reduce the
 28

learning curve and reap benefits from country-specific idiosyncrasies. Moreover,

multinational companies with converging needs expect their suppliers to follow
and internationalize their operations as well. Comparative advantage means
leveraging competencies confined to specific geographic regions, especially
competencies aquired during periods of technological change. Finally, political
actions, such as removal of trade barriers, privatization and liberalization of
certain key markets, for example in Eastern Europe and China, have accelerated
the process.

Scale/Scope

Regulation Market Conditions

Comparative Advantage

Figure 4. The four drivers of globalization

(Yip, 1992)

Due to the varying conditions among different industries, globalization manifests

itself differently from industry to industry. For example, for a company like Coca-
Cola, the production can be manufactured anywhere and thus avoiding hight
transportation costs for the relatively low-value product it is. In the aircraft
manufacturing industry, sales and marketing is done locally while manufacturing
is highly centralized, due to the advanced and expensive production equipment
needed (and due to the fact that aircraft are transportation means themselves). In
sum, globalization takes many shapes depending on economies of scale and
transportation cost.
 29

Table 5. Globalization topics in literature

Author(s) / Year Topic Key Insights

Baldwin and Martin Globalization waves Identified “waves” of globalization

(1999)
Burgeois (1980) Impact of globalization Globalization permeates society in social,
political, economic, demographic and
technological contexts
Dicken (1992); Lewis Globalization Globalization as an unstoppable process
and Harris (1992); Levitt
(1992); Naisbitt and
Auburdene (1990)
Fahy (2001) Globalization Globalization as the process in which
geographic scope, convergence and
interdependence is increasing
Hecksher (1919); Ohlin Hecksher-Ohlin theory of factor Introduced the idea that countries have a
(1933) endowments comparative advantage in the commodity in
which they are well endowed with
Held et al. (1999) Globalization Defines globalization as the political,
economic, and social activities that have
become interregional or intercontinental
Omahe (1985); Peters Changing environment Speed and flexibility important so keep up
(1990) with external change
Ricardo (1817) Comparative advantage Developed Smith’s (1776) ideas and
introduced the concept of comparative
advantage of nations
Smith (1776) Specialization of business Concluded that specialization expands the
activities possible production frontier

Tomlinson (1999) Globalization Defines globalization as a developing and

densening network of interconnections and
interdependencies
Yip (1992) Globalization driving forces Identified four groups of globalization driving
forces: market factors, economies of scale,
comparative advantage, and regulatory
factors

2.2.2. Internationalization of the Firm

International management mainly concerns which countries to operate in, and
along which dimensions to internationalize. The company has to decide if it wants
to enter markets where it can market and sell products (consumer market), where
it has production facilities (production market), where it acquires production
inputs (supplier market), and/or acquires other resources such as skilled personnel
and technologies (see Table 6 at the end of this chapter for a summary of
scholarly work).

Scholarly work subsequent to the Hecksher–Ohlin theory (Heckscher, 1919; Ohlin,

1933) shifted focus from the macro-level of countries towards the micro-level of
 30

firms, thus switching attention from trade patterns to modes of foreign direct
investment (FDI). In the footsteps of the Bain/Mason industrial organization (IO)
paradigm (Bain, 1968; Mason, 1939), forthcoming scholars gave rise to the
greatest and most influential body of research ever seen in the fields of business
science and strategic management science. During the 60s and 70s, most research
was centered on entry modes. That is, how to enter and expand in new markets,
through exports or FDI (wholly-owned or joint venture). Hymer (1960) suggested
that FDI was driven by the objective to compete in foreign markets and to reinvest
profits earned domestically.

Furthermore, it is assumed that companies operating in foreign countries are

facing disadvantages in comparison to local competitors, since the latter have
better knowledge about the local market, less exposure to political and exchange
risks, and less costs for transportation, travel and communication (R. E. Caves,
1971; Hymer, 1960). In order to be able to compete internationally, companies
must possess domestic competitive advantages that can overcome the local
competitive disadvantages in the foreign markets (Graham, 1978). Such local
competitive advantages may originate from special market imperfections such as
product differentiation or seller concentration competencies, factor markets with
unique technologies, or government-imposed restrictions (Kindleberger, 1969).

According to Caves (1971), seller concentration is a key driver of backward

vertical foreign direct investment because of the need to remove uncertainty when
acquiring strategic factor inputs. By controlling key sources of supply, companies
can create barriers of entry in the supplier markets. Other drivers are claimed to be
defensive activity (Graham, 1978; Knickerbocker, 1973) or ”follow the leader”
behavior (Kindleberger, 1969).

Much of the literature on international management stem from the seminal work
of Chandler (1962), which stressed the importance of fit between structure and
strategy. In a seminal paper, Vernon (1966) claims the primary reason for
internationalizing is to take advantage of comparative advantages among different
nations. In a later paper, Vernon (1979) states that product life cycle stages had
 31

little relevance as a driver for internationalization as companies move down the

learning curve of international management and operations. Instead, the key
questions were to configure operations world-wide in order to maximize
competitive advantage.

Dunning’s (1977) eclectic paradigm is another prominent framework that has

gained significant recognition since its publication in the 1970s. This framework
differentiates between four types of international production. The first type
consists of companies seeking natural resources at lowest possible cost through
FDI. The second type constitutes companies that aim at expanding their markets
through FDI instead of importing goods, although intermediate goods are still
sourced domestically in the early phases of market expansion. The third type,
efficiency seeking FDI, internationalize operations as a means for improving
efficiency, as the name implies. This can be done by either locating parts of the
value chain to different geographic regions. The fourth type includes companies
that are seeking strategic assets through FDI, thus developing and protecting
existing assets used for production. This aim can be accomplished acquisitions,
joint ventures, or wholly foreign-owned subsidiaries.

Even though advantages from increased customer bases, economies of scale,

comparative advantages and access to new technologies are needed requirements,
they are not sufficient. The requirement that internationalization must lead to
sustainable competitive advantage must still be met. Furthermore, these factors
are highly dependent on the nature of the industry, the nature of the home market,
among others. For example, in an industry where goods are traded world-wide,
the efficient market price is most likely determined by the region where it sells to
the lowest price according to the idea of efficient market outcomes and the
principle of comparative advantage. Competing companies therefore must
produce and sell goods and services equal to this price if they want to stay in
business on a long term.

Dunning (1981) summarizes the conditions for international sustainable

competitive advantage through his “OLI” framework, where “O” refers to
 32

“ownership”, “L” to “location-specific advantages”, and “I” to

“internationalization advantages”. The latter refers to deployment of intra-firm
tangible and intangible resources across nation borders.

Stopford and Wells (1972) studied 187 large-sized U.S. firms in order to shed
light on the question how firms are internationalizing their organizations. It was
found that, depending on the relative mix of foreign product diversity and share of
sales abroad, firms took four distinct internationalization paths. Firms with low
levels of foreign product diversity and foreign sales were characterized by an
international division organization. When foreign product diversity increased,
firms arranged their organizations according to a worldwide product divisional
organization. On the other hand, firms that increased their share of sales abroad,
tended to arrange themselves according to a area division structure. In those cases
where foreign product diversity and share of foreign sales were high, a matrix-like
organization structure was adopted. Subsequent studies supported these empirical
findings (Daniels, Pitts, & Tretter, 1985; Franko, 1976).

Area
Division Matrix
Organization Organization

Share of
foreign sales
International Product
Division Division
Organization Organization

Foreign product diversity

Figure 5. Modes of internationalization

(Stopford & Wells, 1972)

A study of ten, large-sized, diversified and successful companies done in the

beginning of the 1980s showed that each had retained an international division
organization (Bartlett, 1983), suggesting that a correct formal organization (at
least according to theory) may not be a key success factor. The paradigm of firms
 33

evolving from a collection of autonomous subsidiaries to a globally integrated

organization has been accompanied by a shift of perspectives regarding key
processes such as planning, coordination, and control (Bartlett, Doz, & Hedlund,
1990). At an early stage, planning mainly concerned reconciliation of conflicting
interests due to adaptation and integration (Lorange, 1976). Morover, early
planning models in the 1980s aimed at being able to cope with obstacles
associated with increased integration (Lorange, 1989) and manage increased
complexity (Bettis & Hall, 1981; Naylor, 1985; Wind & Douglas, 1981).

Several scholars have also investigated conflicts caused by demands for

integration vis-à-vis responsiveness (Y. L. Doz, 1980; Y. L. Doz, C. A. Bartlett, &
C. K. Prahalad, 1981). After a study of twelve European diversified multinational
corporations (DMNCs), Doz (1980) concluded that the most successful firms in
terms of coordination had administrative managers with little or no prejudice for
integration or responsiveness. However, the results also showed that this could
increase the risks of strategic paralysis, fragmentation and bureaucratization (Y. L.
Doz, 1980). To counteract these risks Muralidhanan and Hamilton (1999) suggest
to adjust the control mechanisms as the firm develops and matures.

Bartlett and Goshal (1988) analyzed and compared the internationalization of

American, European and Japanese companies in order to answer the question why
to internationalize. The results showed that Western companies generally evolved
into decentralized multinationals which operated in regional markets with strong
local positions as a result from a high degree of adaptation. On the contrary,
Japanese companies reap benefits through globally scaled organizations and high
efficiency with a high degree of centralization and strong tie to the corporate
headquarters. A third form, the international company, takes advantage of critical
competencies from the parent organization, while developing market-specific
skills and thus enjoys a significant, but limited degree of self-sufficiency. The
various leverage points from internationalization are shown in Figure 6.

From the centralized global firm, the decentralized multinational firm, and the
intermediate international firm, a fourth form known as the transnational firm can
 34

emerge. The transnational firm is characterized by highly flexible and local

operations that can be leveraged through transnational (i.e. cross-country)
management capabilities. One of the key issues for realizing a transnational
organization is effective knowledge management that can be generated and shared
across borders (Bartlett & Goshal, 1989).

Efficiency
Economies of scale,
comparative
advantage

Knowledge
Leverage
Responsiveness
Deploy knowlege and
Adapt to local
skills world-wide
consumer demands

Figure 6. Global leverage points from internationalization

(Bartlett & Goshal, 1989)

What is more, not only the environmental conditions influence the organization,
but also certain unique time-paths, that is, administrative heritage in terms of
strategic assets or liabilities. Bartlett and Goshal (1988) claim that business
opportunities often arise at locations where a firm is not very well endowed with
the necessary strategic resources. Thus, the ability of a company to create and
maintain a flexible structure while continuously utilizing this ability to
continuously reconfigure itself to environmental changes requires a transition to
the transnational organization type. This is somewhat similar to the evolutionary
paradigm of comparative advantage proposed by Nelson and Winter (1982).

Industry analysis is an important question of strategy formulation. It involves

assessing and identification of attractive industries to compete in (Porter, 1980),
as well as strengths and weaknesses of the own firm (Andrews, 1971). Doz et al.
 35

(1981) and Prahalad and Doz (1987) mapped industries along two dimensions in
their seminal papers – global integration and local responsiveness. This was the
starting point of the as of today old expression “think global – act local”. With this
framework, they captured the benefits of integrations (such as economies of scale),
with the competencies required to reap those benefits. Both dimensions are
important for determining how a firm can compete in a given industry, the global
dimension is most important in order to define the geographic scope of the
industry to compete in.

Porter (1990) extended his framework for attractiveness of industries (Porter,

1980) to fit into the context of nations. More elaborate, he identifies four factors
that make a nation competitive that together forms a diamond shape known as
“The Porter Diamond” (Figure 7).

The first factor is factor conditions, which concerns the position of a nation in
terms of factors of production, such as skilled labor or infrastructure, which can
nurture innovativeness, and bring down certain costs. The second is demand
conditions, which involves the nature of the demand in the home market. It is
hypothesized that complex and demanding consumers force companies to work
hard in order to satisfy them, thus those companies become more consumer-
oriented; this could lead to improved competitiveness which then can be
leveraged abroad. The third component of the diamond is related and supporting
industries, which potentially can improve innovativeness and technology transfer
across industries. Fourth, and last, is firm strategy, structure, and rivalry; this is
basically the determinants of industry attractiveness (Porter, 1980). Companies
who have learnt how to survive in an “unattractive industry” in the home market
is said to be better prepared for competing abroad, where market forces are
weaker.

Dunning (1992) extends Porter’s diamond in a sense that multinational companies

try to “extend” the diamond. Rugman and D”Cruz (1993) go one step further by
claiming that Porter’s diamond does not need to be delimited to only nations, but
also to regions and economic zones.
 36

Firm strategy,
structure, and
rivalry

Factor Demand
conditions conditions

Related and
supporting
industries

Figure 7. Factors influencing the attractiveness of nations

(Porter, 1990)

Porter (1986) states there are two dimensions of configuration for each activity in
the value chain, namely asset configuration and coordination. Asset configuration
means the degree of dispersion, i.e. where activities are located, whereas
coordination means the degree to which activities are coordinated across country
borders. The dimensions form a two-times-two matrix, with the following options:

1. Market spread – Refers to the geographic scope of the marketing and

sales activities.

2. Configuration of core activities – Refers to geographic scope of key

activities. Global configuration of core activities does not necessarily
mean global dispersion, but rather correctly located from a global
viewpoint.

3. Connectedness – Refers to the coordination of creating and sharing know-

how across nation borders.

4. Localization – Refers to the degree local consumer demands are met.

 37

From a supply-side perspective, this implies choosing from where to source and
how to integrate procurement needs of geographically dispersed business units
across countries. Porter’s view extends the Ricardian paradigm of comparative
advantage to apply not only on the corporate demand side, but to each echelon of
the value chain. Following this view, it is hypothesized that global firms are
expected to increase globally coordinated activities and expanding geographical
coverage.

Furthermore, Porter (1986) distinguishes between multi-domestic and global

companies. The former type means that companies expand into new geographical
markets where operations are adapted in order to satisfy local consumer needs.
The coordination and integration of strategies are limited though, but the
advantage is high flexibility and high ability to respond to environmental changes.
Accordingly, a country-centered strategy is the preferred one. On the contrary,
global companies are characterized by a higher degree of coordination and
integration between geographical markets which facilitates economies of scale
and scope. Cross-border integration and coordination is said to emerge when such
activities yield competitive advantages. Enabling factors here are technological
break-throughs in transportation and communication, political factors, as well as a
recursive globalization process that nurtures itself.

Home-Based Global

Degree of Global
Integration

Multi-Domestic

Degree of Global Coordination

Figure 8. Configuration and coordination of operations

(Porter, 1986).
 38

Similar to Porter (1987) and Sumantra/Goshal (1987; 1989), Kogut (1985a)

makes an interesting case by stating that coordination and integration should not
only apply to the company as a whole, but instead to each echelon of the value
chain. Here, he distinguishes between two dimensions: competitive advantage of
firms and comparative advantage of nations. This leads to the following questions,
namely

1. Where should the value chain be broken across borders?

2. In which functional activities should a firm concentrate its resources?

Like in the earlier discussion, comparative advantages are referred to as “location-

specific advantages”, for example where to source or where to market. The
strategic determinant here is said to be lower cost for factors of production (e.g.
labor), which favors firms which are extensively using that resource. Competitive
advantage, on the other hand, is here referred to as “firm-specific advantages”,
and analogously concern what to source or what to market.

As Kogut (1985a) explains, a firm may be highly concentrating on its core

competency, with a very low degree of value added, on one echelon of the value
chain. However, in most cases there is a certain degree of vertical integration and
thus there are several echelons that need individual attention.

Degree of
Integration

Value chain Degree of

echelons Coordination

Figure 9. Coordination and integration along the value chain

(Kogut, 1985a)
 39

Finally, it is claimed that there is a relationship between competitive and

comparative advantage. For example, by exploiting comparative advantages by
marketing in a certain country, increased market share might be a result, with
strengthened market position and competitive advantage as a result. The final
product is a concept with several configuration-coordination matrices, one for
each echelon in the value chain (Figure 9).

Table 6. Internationalization topics at firm level

Author(s) / Year Topic Key Insights

Bartlett and Goshal Motivations for Identified improving efficiency, leveraging

(1988) internationalization knowledge and responsiveness as
motivations
Bettis and Hall (1981); Internationalization obstacles Discussed obstacles associated with
Naylor (1985); Wind and integration and complexity
Douglas (1981)
Caves (1971) Mobility barriers Claimed that control over supply sources
could create mobility (entry) barriers
Chandler (1962) Strategy and structure Claimed that structure follows strategy
Daniels et al. (1985); Internationalization modes Discovered that product diversity and share of
Franko (1976) foreign sales affected organizational structure
Doz (1980); Bartlett and Internationalization obstacles Elaborated on trade-offs between integration
Goshal (1981) and responsiveness
Dunning (1977) Foreign direct investment (FDI) Concluded that the objective of FDI is to
acquire resources at lower cost, expand
markets, and increase efficiency
Dunning (1981) International sustainable Defined the key criteria for international
competitive advantage sustainable competitive advantage through
the so called OLI framework
Dunning (1992) “Extended Porter diamond” Claimed that Porter’s diamond not only
applies to nations, but also regions and
economic zones
Graham (1978) Foreign direct investment (FDI) Stated that domestic competitive advantages
could be used to overcome offshore
competitive disadvantages
Hymer (1960) Foreign direct investment (FDI) Claimed that FDI is driven by the objective to
compete in foreign markets and reinvest
profits domestically
Kogut (1985); Porter Value chain fragmentation Claimed that value chains can be broken
(1986) down and located in different geographical
regions
Porter (1986) Configuration of international Claimed that activities should are influenced
business activities by degree of geographical dispersion and
degree of cross-country coordination
Porter (1990) “Porter’s diamond” Developed a framework for determining the
competitiveness of nations
Stopford and Wells Internationalization modes Identified four distinct internationalization
(1972) paths: international division organization, area
division organization, product division
organization, and matrix organization
Vernon (1979) Product life cycles and Claimed that product life cycles affect
internationalization internationalization decisions
 40

2.2.3. Internationalization of Purchasing and Supply

Management
World-wide purchasing of supplies is a response to the globalization process that
has had tremendous impact on international business. In order to fully understand
the concept of low-cost country sourcing, the aim of this section is to examine
developments in purchasing and supply management in an international business
environment. Moreover, another aim of this section is to provide an overview of
scholarly contributions in the field. A summary of scholarly work is provided in
Table 7 at the end of this chapter.

As noted in chapter 2.2.1, globalization is considered to have started in the end of

the 19th century. Nowadays, globalization is without doubt the single most
important driver of the international business environment. During the decades
after World War II, international trade has constantly outperformed global
production output, at annual growth rates at approximately nine and five percent
with respect to aggregated gross domestic product (GDP), respectively (See figure:
Hedderich, 2005). Moreover, multinational companies have entered new
geographical markets through increasing rates of foreign direct investments (FDI).

Through a study on 150 companies primarily located in North America, Monczka

and Trent (2002) identified five stages of purchasing activities through which
companies evolve, called “the worldwide sourcing continuum” (cf. Figure 2).
Monczka and Trent (2002), refers to stages two to three as “international
purchasing”, whereas stages four to five represent “global sourcing”. According to
Trent and Monczka (2002) “international purchasing refers to a commercial
transaction between a buyer and supplier located in different countries” whereas
“global sourcing […] differs from international purchasing in scope and
complexity, involves proactively aggregating volumes and coordinating common
items, practices, processes, designs, technologies, and suppliers across world-wide
procurement, design, and operating locations.”

In the first stage, “domestic purchasing only”, as the name implies, the company
on purchases from domestic suppliers (Robert J. Trent & Robert M. Monczka,
2002). Although the company might have international operations, such as sales
 41

or marketing, the purchasing activities do not encompass country borders. The

reasons to pure domestic sourcing are many, but could include lack of scale
economies, lack of needed resources or lack of competencies needed to
internationalize purchasing activities. Reasons for internationalizing purchasing is
primarily to lower cost, but could also be due to a lack of domestic suppliers
(Trent & Monczka, 2003). Macro-economic factors such as exchange rates, tax
rates, and increased price levels in the home market also play a role.

The second stage, “international purchasing as needed”, is usually a reactive

rather than a proactive initiative in order to cope with market forces (Robert J.
Trent & Robert M. Monczka, 2002). Simply put, this means that international
purchasing is only done sporadically, without any long-term objectives. Thus,
international purchasing as such is not yet institutionalized.

In the third step, “international purchasing as part of sourcing strategy”, the

company is starting to realize the advantages of international purchasing, and is
thus recognizing the need for more long-term strategies (Robert J. Trent & Robert
M. Monczka, 2002). Although the international purchasing activities are
becoming institutionalized, the efforts are scattered throughout the organization;
thus, there is a lack of coordination and integration of the global procurement
requirements.

The fourth step, “integration and coordination of global sourcing strategies”,

implies that the company is starting to integrate and coordinate global
procurement needs across the company world-wide (Robert J. Trent & Robert M.
Monczka, 2002). By doing so, purchase spend can be bundled, thus increasing the
bargaining power against suppliers and economies of scale. In order to realize this,
the company needs to have implemented enterprise-wide IT systems such as ERPs,
and have hired qualified staff with a global mindset, and an organization that
enables central coordination (Trent & Monczka, 2003).

The fifth and final stage, “integration and coordination of global sourcing with
other functional groups”, is similar to the fourth stage except for the important
difference that integration and coordination takes place not only among business
 42

units, but also between functional units, such as finance and accounting,
production and marketing (Robert J. Trent & Robert M. Monczka, 2002). In other
words, integration and coordination of global sourcing activities are realized
through a matrix organization.

In order to traverse towards the higher levels in the worldwide sourcing

continuum, Monczka and Trent (2002) identified a number of key success factors.
First and foremost, the company needs to have personnel with adequate skills and
abilities. Moreover, the company needs timely and accurate information, which
can only be realized through enterprise-wide IT systems as stated earlier. There
must also be an awareness of the potential of global suppliers, and sufficient with
time for developing global strategies. Naturally, availability of suppliers with
global capabilities is a necessary, but not sufficient requirement.

At the time of doing the study, the majority of the surveyed companies was found
to be in the third stage (31.0%), followed by the second stage (21.3%), and the
fourth stage (18.1%). The first and fifth stages were represented by 13.4 and 16.1
of the surveyed companies, respectively. Over the three to five years following the
year of the survey, companies were expected to traverse rapidly from the lower
stages to level five. The fact that a minor decrease in the number of companies in
level four was expected reveals that many companies basically are leapfrogging
this stage and enters the fifth stage immediately.

Bozarth et al. (1998) used applied a somewhat different approach among 108 US
companies, and arrived at four distinct development stages. This study also
showed that companies in the lower development phases primarily focused on
short-term benefits in terms of cost, quality and technology, potentially foreseeing
more long-term advantages that can be eliminated from the “system”, such as
tied-up capital, shorter lead-times.
 43

Table 7. Internationalization of purchasing and supply management topics

Author(s) / Year Topic Key Insights

Trent and Monczka Development stages of Identified five distinct internationalization

(2002) purchasing and supply stages of purchasing and supply management
management
Bozarth et al (1998) Development stages of Identified five distinct internationalization
purchasing and supply stages of purchasing and supply management
management

2.3. Concept of Low-Cost Country Sourcing

Before starting to discuss the idiosyncrasies of low-cost country sourcing, it is
worthwhile precede the discussion with a definition of global sourcing. Global
sourcing appeared in the scholarly literature as early as 1969, when Fayerweather
(1969) described a conceptual framework that involved the dynamic relationship
between factories, markets, products, components and their logistical flows. Due
to the increased global competition over the last decades, the importance of
supply strategies has increased significantly (see Table 9.

2.3.1. Conceptual Frameworks

Conceptual frameworks in literature usually concerns different factors interact at a
high level of abstraction. Ideally, global sourcing is used as a starting point when
discussing the LCCS concept. By taking the definition of global sourcing by
Monczka and Trent (Monczka & Trent, 1991), it can be differentiated from
international sourcing purchasing and local sourcing for offshore production sites
(Kaufmann & Hedderich, 2005). A summary of relevant scholarly work can be
found in Table 8 at the end of this section.

Global Sourcing Framework by Kaufmann and Hedderich

One of the most recent contributions to the existing body of literature is a global
sourcing framework by Kaufmann and Hedderich (2005). This framework
consists of two dimensions: location of own value creating facilities and location
of supply sources. Thus, it is very similar to Fayerweather’s (1969) global
sourcing framework, which deals with what suppliers are serving which
production units, and which production units are serving which consumer markets.
 44

In other words, the two dimensions concern foreign value creation from a global
business strategy perspective, and imports from a sourcing perspective,
respectively. Furthermore, Kaufmann and Hedderich (1969) claim that foreign
value creation can be performed through franchises, joint ventures, and
subsidiaries. Imports include intra- and extra-firm trade.

By combining the two dimensions, a two-times-two matrix containing four

generic sourcing strategies emerge (Figure 10), namely (1) domestic local
sourcing, (2) import orientation, (3) local sourcing abroad, and (4) integrated
global sourcing (Kaufmann & Hedderich, 2005). Domestic local sourcing is
characterized by low to no imports for home-based value creation. Although it
represents a more or less trivial base case, it serves well as a starting point for
strategy development.

Abroad

Local Sourcing Integrated Global

Abroad Sourcing

Location of
Value Creation

Domestic Local
Sourcing Import Orientation

Domestic

Domestic Abroad
Location of Sourcing Activities

Figure 10. Kaufmann and Hedderich’s (2005) global sourcing framework

(Kaufmann & Hedderich, 2005)

Import orientation implies an internationalization of the supplier base. As

described by Monczka and Trent (1991), this approach is often reactive, meaning
that it is a response to an external event, such as a supply disruption. The
objective is to increase competitive advantage through short-term cost reductions,
quality improvements, access to technology, and logistical improvements
(Kaufmann & Hedderich, 2005). Imports may be managed through different
 45

supply channels, such as direct interaction with an offshore supplier (Kaufmann,

2001), or by setting up IPOs in important supply markets (Leenders et al., 2002).
Moreover, import orientation means that the company does not source internally
from as can be seen from the domestic scope of production facilities.

Local sourcing abroad features low intra- and extra-firm imports. Basically, it can
be viewed as a replication of domestic local sourcing in an offshore market. The
key difference between local sourcing abroad and global sourcing is the fact that
cross-border flows of supplies only occur to a very limited extent. Thus, it lacks
the extent of international coordination and integration that is needed to be
categorized as global sourcing. The key driver behind local sourcing abroad is
often the access to inexpensive labor. Furthermore, local content requirements in
many foreign sales markets make local sourcing abroad an essential and viable
approach. However, difficulties among local suppliers to meet quality or quantity
requirements of foreign companies led to a development where producers
“forced” their suppliers to relocate (Kaufmann, 1995). Often, local sourcing
abroad is restricted to sourcing of commodities due to the challenges above,
whereas strategic supplies are still being sourced from incumbent supply markets.
(Kaufmann/Carter, 2000).

Finally, global sourcing implies high levels of import sourcing and foreign value
creation. In other words, global sourcing can be seen as a means to integrate and
coordinate globally dispersed value creation and purchasing locations The key
objective is to coordinate company-wide demand to maximize bundling effects
while receiving the best quotes possible from the most important supply markets
(Hausmann/Kaufmann, 2002). In line with the discussion by Monczka and Trent
(Robert J. Trent & Robert M. Monczka, 2002), global sourcing requires both
cross-functional and cross-business-unit integration and coordination.

Global Sourcing Framework by Arnold

Earlier studies have shown that firms cannot harness the full advantages of higher-
level global sourcing unless a more strategic approach is adopted (Samli,
Browning, & Busbia, 1998). Although companies have started to realize the
 46

strategic importance of purchasing and supply management, many are lagging

behind in practice. In order to make global sourcing activities strategic, both
planning and operations must span the whole enterprise, across functional units
(Robert J. Trent & Robert M. Monczka, 2002).

According to Arnold (1989), global sourcing involve globalization from two

perspectives: globalization of purchasing activities and adopting a strategic
sourcing orientation. Today, the research focus has shifted from the former to the
latter of the two. Arnold (1989) makes an interesting case by applying a marketing
framework by (Keegan & McMasters, 1983) on the buying side of the firm,
resulting in four distinct policies for international purchasing activities:

1. Traditional procurement – Operational sourcing only in the home market

2. International purchasing – Operational sourcing aiming at satisfying the

procurement requirements of the buying firm at the lowest cost possible.

3. Strategically oriented procurement (“Supply management”) – Strategic

sourcing in the home market

4. Global sourcing – Strategic sourcing in international supply markets

Interestingly, the framework resembles a great deal of the IMP paradigm

developed by Håkansson (1982). What is more, the distinction between supply
management and global sourcing is rather outdated and nowadays replaced by a
paradigm where supply management in seen as an umbrella term of which global
sourcing is a subset (cf. chapter 2.1.1).
 47

Operational

Traditional International
Procurement Purchasing

Location of
Value Creation

Supply Global
Management Sourcing

Strategic

Domestic International
Location of Sourcing Activities

Figure 11. Arnold’s (1989) global sourcing framework

(Arnold, 1989)

Global Sourcing Framework by Monczka and Trent

Monczka and Trent (2003) differentiate between five levels of worldwide

sourcing: Level I represents the starting point in which companies are sourcing in
the local supply market exclusively. Through reactive behavior, companies are
acting on external contingencies such as supply disruptions or increased
competition and start sourcing sporadically in offshore supply markets – a state
referred to as level II. However, in level II, international sourcing is not
institutionalized and thus no international sourcing strategies are formulated.
However, in level III, worldwide sourcing is considered more strategic in a sense
that international sourcing strategies have been formulated. According to Trent
and Monczka’s (2002, p. 69) vocabulary level II and III are referred to as
“international purchasing” (Figure 12).

However, the sourcing activities are relatively isolated in the organization in a

sense that they are not integrated across business units and departments. Level IV,
on the other hand, is considered to be at a more advanced level of sourcing due to
the fact that a coordination takes place across world-wide business units. As Trent
and Monczka (2002) indicates, integration primarily is rather cross-locational than
cross-functional. The highest level of worldwide sourcing, level V, adds the
 48

aspect of coordinating and integrating worldwide procurement requirements both

across business units as well as functional units.

Figure 12. Global sourcing stages

(Robert J. Trent & Robert M. Monczka, 2002)

This form of collaboration between functions and business units facilitates spend
consolidation and early supplier involvement. Figure 1 summarizes the possible
levels of Worldwide Sourcing and shows the current positioning of 162 mainly
large companies (average annual sales of $1.5 billion) who participated in the
exploratory research carried out by Monczka and Trent (2003).

Table 8. Summary of global sourcing frameworks

Author(s) / Year Key Insights

Kaufmann and Hedderich (2005) Location of value creation and location of sources as two
determinants of global sourcing activities

Arnold (1997) Globalization of purchasing activities and strategic sourcing

orientation as two determinants of global sourcing activities

Trent and Monczka (2002) Identified five distinct development stages toward global sourcing
 49

2.3.2. Motivations and Barriers

The concept of integrated sourcing was introduced in the mid 80s by scholars
such as Kogut (1985a) and Porter (1986). Most issues from this period were
focusing on managerial issues such as structural complexity and operational
complexity of international sourcing as reasons for sourcing internationally (Starr,
1984). Other scholars argued cost advantage/disadvantage reasons while some
saw global sourcing as a means for obtaining sustainable competitive advantage
by looking beyond national boundaries for sourcing of components and finished
products (Hahn, Kim, & Kim, 1986). See Table 9 for a summary of relevant
literature sources for this section.

The complexity of global sourcing implies numerous obstacles to overcome in

order to succeed on a global scale. Monczka and Guinipero (1984) claimed that
logistics, inventory, distance, nationalism and a lack of knowledge about foreign
business practices are the most important problems among US firms involved in
international sourcing. Furthermore, they claim that sourcing development
programs should be set up within organizations in order to foster a positive
attitude regarding international sourcing. Such initiatives require cross-functional
processes and systems (J. C. Fayerweather, 1981; Trent & Monczka, 1994).

However, the real growth in research on global sourcing did not take place until
the late 1980s and early 1990s. According to Trent and Monczka (2002),
international sourcing was the primary research focus during this period.
Furthermore, they state that the growth in research was correlated to the decline in
competitiveness of many Western firms and that international sourcing was a
solution to this problem. Most research within the field have addressed potential
effects of international sourcing when competing against companies acting in a
global environment (Rajagopal & Bernard, 1991).

Most research during the 1990s showed that purchase price reduction and not total
cost reduction was the most important outcome from global sourcing initiatives
(Petersen, Frayer, & Scannel, 2000). Moreover, most global sourcing initiatives
were reactive, as a response to the increasing global competition, in order to find
 50

suppliers offering the lowest unit prices (Alguire et al., 1994). A review of global
sourcing literature done by Murray (2001) showed that many managers primarily
view global sourcing as means to realize short-term cost savings while neglecting
the sustainable competitive advantages global sourcing can provide on a long term.
Until recently, sourcing decisions have been done at comparatively low
organizational levels and with little collaboration with other functional
departments; thus, sourcing has had a more operational or tactical rather than
strategic nature (Guinipero & Monczka, 1990).

Some scholars have had contradictory views of the overall cost benefits of global
sourcing (Levy, 1991). Technological and organizational developments have
facilitated global sourcing initiatives while logistics and inventory still remain as
hurdles; hence, total cost estimations have often been underestimated. As
secondary outcomes of global sourcing initiatives, researchers have stated greater
access to product and process technology, higher quality and ability to introduce
competition to the domestic supply base (Trent & Monczka, 1998).

Most empirical studies acknowledge lower purchase price as the greatest

motivation for sourcing in LCCs, especially among firms in HCCs (Handfield,
1994; Monczka & Guinipero, 1984; Spekman, 1991). Despite the developments in
the field of LCCS, the empirical study conducted in this thesis indicated that
purchase price is still the key driver of LCCS initiatives. It is estimated though,
that the focus on purchase price will decrease by time, as companies are sourcing
more and more sophisticated components and finished goods from LCCs in which
production costs are significantly lower than in the home country (Frear, Metcalf,
& Alguire, 1992; Guinipero & Monczka, 1990). Moreover, companies are
becoming increasingly aware of costs for inventories, shipping, duties, customs
and quality problems, as transportation distances increase (Fawcett & Birou,
1992). These elements must all be part of any total cost calculation.

It has also been widely acknowledged that suppliers in LCCs can produce goods
with similar or even better quality than their European or US counterparts (C. R.
Carter & Narasimhan, 1990; Handfield, 1994; Min & Galle, 1991). The suppliers
 51

in Japan and Southeast Asia have implemented sophisticated quality management

systems such as Taguchi methods, and are nowadays able to produce goods with
“six sigma” quality (Bhote, 1987).4

Another motivation for sourcing in LCCs is to acquire advanced production

technologies (Bozarth et al., 1998). This is often accomplished through setup of
joint ventures and strategic alliances. A good example here is China, in which
Western companies have only been allowed to do business through joint ventures
with Chinese ones in certain industries (Haley, Haley, & Tan, 2004), although the
policies nowadays are more liberal and allows wholly foreign-owned enterprises
(WFOEs) in most industries. By establishing sourcing operations in an LCC, the
buying firm can later also start selling goods and services to consumers in the
local market (Frear et al., 1992; Kotabe & Murray, 1990).

Another motivation behind LCCS is shortened product life-cycles. It is becoming

increasingly important to serve worldwide customer demand on a shorter and
shorter notice. This puts additional competitive pressure on firms in terms of
flexibility for production volumes and varieties. The automotive and computer
industry have been particularly influenced by this phenomenon (Goldberg, 1994;
Womack, Jones, & Roos, 1990). In other words, the need for flexibility is
becoming a key success factor, since companies can no longer afford delays in the
delivery and product development cycles (Bozarth et al., 1998; Fawcett & Birou,
1992; Monczka & Trent, 1992). To obtain and maintain high flexibility, the
suppliers of the buying firm must be close to the consumer markets; hence, it is
not enough to rely solely on domestic suppliers.

It is nowadays not necessary to first launch a product in the home market, and
then launch the same product in foreign countries. Due to improved
communication technologies and global sourcing, products can now be launched
in multiple geographic consumer markets simultaneously. LCCS plays an

4
Six sigma quality here refers to the requirement of deviating six standard deviations from
requirements, which equals a defect rate of 3.4 ppm.
 52

increasingly important role here since many LCCs, such as China, are important
not only as supplier markets, but also as consumer markets, due to the large
populations and improved standards of living (Battacharya et al., 2004). Since
technology dissipates at a high rate, parallel sourcing, production and marketing
worldwide is essential in order to secure first-mover advantages and prevent
reverse engineering (Bozarth et al., 1998).

Table 9. Motivations for global sourcing

Author(s) / Year Topic Key Insights

Alguire et al. (1994) Global sourcing drivers Increased global competition as key driver

Bozarth (1998) Technology as global sourcing Study showing that global sourcing can be a
driver means for technology acquisition

Carter and Narasimhan Quality as global sourcing Empirical studies showing that LCCS can
(1990); Handfield driver nowadays yield adequate quality of goods and
(1994); Min and Galle services
(1991); Bhote (1987)

Fayerweather (1969) Global sourcing framework Developed a global sourcing framework

consisting of supplier, production and
customer markets

Frear et al. (1992); Global sourcing to access Studies showing that global sourcing can be
Kotabe and Murray customer markets used to produce and sell to consumers in
(1990) supplier markets

Hahn et al. (1986) Sustainable competitive Global sourcing as a means for obtaining
advantage sustainable competitive advantage by looking
beyond national boundaries

Handfield (1994); Global sourcing drivers Purchase price reduction as key driver
Spekman (1991);
Petersen et al. (2000)

Kogut (1985); Porter Global sourcing Developed the notion of integrated sourcing
(1986)

Monczka and Guinipero Global sourcing barriers Logistics, inventory, distance, nationalism and
(1984) a lack of knowledge about foreign business
practices are the most important problems

Murray (2001) Global sourcing drivers Study indicating that managers perceive
global sourcing as a means for realizing short-
term benefits
Starr (1984) International sourcing drivers Identified complexity as an important driver for
international sourcing
Trent and Monczka Globalization developments Decline in competitiveness among Western
(2002) firms as driving force
 53

2.3.3. Contingency Models

Strategic management is at heart about explaining how to achieve sustainable
competitive advantage (Mol, 2001). Many studies (like the explanatory study in
this thesis) try to shed light on this matter by investigating the relationship
between various “key success factors” and different performance measures.
However, this is a difficult task that has been subject to debate widely, as will be
elaborated in chapter 5. Venkatraman and Ramanujam (1986, p. 801) describe it
as “one of the thorniest issues confronting the academic community today”.
Nevertheless, these causal models are usually referred to as “contingency models”,
implying that performance is contingent on a number of hypothesized factors (See
Table 10 of literature sources about contingency models).

The relationship between global sourcing strategies and market performance of

the firm has been extensively investigated since the end of the 1980s, most
notably by Kotabe (1994; 1998; Kotabe & Murray, 1990) who has investigated
the implications of a wide range of strategic determinants over more than a decade,
and the research virtually forms a body on its own.

In a study conducted by Kotabe and Omura (1989), the relationship between

global sourcing strategy and product market performance was investigated. The
results showed that performance was positively correlated with internal sourcing
(i.e. in-house production) and negatively correlated with product adaptation.
Another interesting finding was the fact that the mode of assembly of a product
(i.e. internally or externally) had no impact on performance.

In 1990, another study by Kotabe and Murray (1990), the relationship between
market performance and process and product innovation was investigated.
Somewhat surprising, this study showed that outsourcing led to decreased market
performance. Murray concluded that “there may not be one best way to source;
one should investigate the nature of business environments before making strategy
decisions” (Murray et al., 1995).

The relationship between asset specificity and channel integration has also been
examined through transaction cost theory, hypothesizing that the higher asset
 54

specificity of goods sourced (i.e. the higher strategic importance), should lead to
higher channel integration (i.e. larger degree of ownership of the procurement
channel) (Aulakh & Kotabe, 1997). Somewhat counter-intuitive, the results
showed an opposite relationship than what was hypothesized. Moreover, it was
concluded that channel integration itself was not related to performance, but the
control mechanism instead turned out to have positive performance implications.

A study by Kotabe et al. (1998) concerned the relationship between global

sourcing of services and performance, above and beyond the effects of
innovativeness. The results indicated that innovation in so called core and
supplementary services was important for strategic performance (i.e. long term
performance) and that successful sourcing of supplementary services has a
positive impact on product quality. In line with the common understanding of core
competencies (Prahalad & Hamel, 1990), it was concluded that sourcing of
strategically important services and components should be done internally (i.e. in-
house production) (Murray et al., 1995).

Table 10. Contingency models

Author(s) / Year Topic Key Insights

Kotabe and Omura Global sourcing strategy and Performance positively correlated with internal
(1989) performance sourcing and negatively correlated with
product adaptation.
Kotabe and Murray Market performance and Outsourcing led to decreased market
(1990) process and product innovation performance
Aulakh and Kotabe Asset specificity and degree of Results opposite than hypothesized, asset
(1997) channel integration specificity negatively related to channel
integration
Kotabe et al. (1998) Core and supplementary The results indicated that innovation in so
services and performance called core and supplementary services was
important for strategic performance
Hult (2002) Sustainable performance and Culture encourages entrepreneurship,
cycle time performance innovativeness and organizational learning, in
turn positively influencing business
performance

Hult (2002) conducted a study in which the relationship between sustainable

competitive advantage (represented by entrepreneurship, innovativeness and
learning) and cycle time performance and business performance, was examined.
Interestingly, this study “reversed” the causal chain as it is usually represented
 55

with sustainable competitive advantage as the dependent variable. The results of

this study supported the hypothesis that a culture that encourage entrepreneurship,
innovativeness and organizational learning positively influence business
performance.

2.4. Positioning the Topic: A Morphological Analysis

General morphological analysis was introduced by the Swiss-American
astrophysicist and aerospace scientist Fritz Zwicky at California Institute of
Technology (Caltech) as a method for investigating relationships in multi-
dimensional and qualitative problem complexes (Zwicky, 1966, 1969). Zwicky
used the methodology in a wide range of fields, such as astrophysics and in the
development of jet and rocket propulsion systems. In order to support the use and
development of the methodology, he later founded the Society for Morphological
Research, in which he played an active role until his death in 1974 (Greenstein &
Wilson, 1974).

2.4.1. Methodological Background

When investigating problems, many difficulties may arise. Firstly, many factors
involved are not quantitative (i.e. cannot be represented by numbers). Secondly,
many uncertainties make the problem impossible to reduce. Thus, traditional
means such as statistical research is usually not feasible. An alternative to
statistical and causal research is a methodology that relies on a judgmental process
and internal consistency.

Many sciences, such as social and political science, have a predominant

qualitative nature. Here, it is possible to analyze them along a number of
qualitative dimensions and ranges of conditions. The qualitative conditions can in
turn be synthesized into well-defined relationships or configurations, so called
“solution spaces” (Ritchey, 1998). This kind of analysis can be accomplished
through a so called morphological analysis. It facilitates rigorous structuring and
investigation of internal properties of inherently qualitative problem complexes,
which may contain an arbitrary number of distinct dimensions. This approach also
 56

provides an audit trail, which makes it possible to trace the path from the initial
problem formulation to specific results and solutions.

2.4.2. The Morphological Approach

Today, morphological analysis is used in disciplines where quantitative research
is of secondary importance. To mention a few examples, morphological analysis
is used in linguistics to describe word formation, in biology to describe the form
and structure of living organisms, and in geology to describe the formation of
bedrock and land formations.

Basically, morphological analysis is an approach for identifying and investigating

the total set of possible relationships or configurations contained in a specific
problem domain. Typology construction, on the other hand, is a special case of
morphological analysis (Bailey, 1994; Doty & Glick, 1994).

The approach starts with identification and definition of the various dimensions of
the problem. Subsequently, each dimension is assigned a set of values that each
dimension can hold. The various states can then in turn serve as dimensions that
can hold values. This leads to an n-dimensional matrix known as a morphological
box or Zwicky box (Zwicky, 1966). Zwicky defines five iterative steps in his
morphological approach as shown below (Zwicky, 1969):

1. The problem solved must be concisely formulated.

2. All dimensions that might be important for the solution of the given problem
must be localized and analyzed.

3. The morphological box or multidimensional matrix, which contains all

possible solutions of the given problem, is constructed.

4. All solutions contained in the morphological box are closely scrutinized and
evaluated with respect to the purposes to be achieved.

5. The optimally suitable solutions are selected and practically applied.

For the sake of simplicity and clarity, we stick to development of a 2-dimensional

morphological box in this case.
 57

2.4.3. Morphological Box for Low-Cost Country Sourcing

In this subsection, a morphological analysis is applied to low-cost country
sourcing, resulting in a Zwicky box for the topic. The approach here consists of
the five process steps as described in the previous section.

Step 1: Problem Definition

As discussed earlier, the term “low-cost country sourcing” is scarcely used in

scholarly literature, but more frequently used in the industry. The soundest
explanation to this is probably because it is difficult to give a stringent definition
to the term “low-cost country”, as the term is completely relative; a country
considered “low-cost” by country A is not necessarily considered “low-cost” by
country B. In order to be able to define the term “low-cost country sourcing”, we
introduce the term comparative price level which means “its cost in one country
as a per cent of the cost of the same bundle in another country, when prices in
both countries are expressed in a common currency, with the official exchange
rate being used for currency conversions”.

Since this case deals with purchasing activities, it is logical to set the delimitations
of the problem domain to the purchasing/supply department of the firm and
consequently set the subject of study to purchasing and supply management as
defined in section 2.1.1. By doing so, the problem can be solved by accomplishing
the following goal:

To characterize the term “low-cost country sourcing” by performing

a morphological analysis on purchasing and supply management as a
problem domain.

In order to arrive at a morphological box that fit the scope of this thesis, the
discussion is limited to large-sized firms.
 58

Step 2: Parameter Localization and Analysis

In line with the definition in section 2.1.1, supply management is defined as “the
identification, acquisition, access, positioning and management of resources that
an organization needs or potentially needs in the attainment of its strategic
objectives” (Cavatino, 2001).

Depending on the nature of the activities, purchasing and supply management is

usually divided into three categories as discussed in section 2.1.1, namely
purchasing, procurement and supply management (Jahns, 2004). To recap this
discussion, it was concluded that purchasing is primarily characterized by
operational issues such as handling transactions, invoices etc. (Dobler & Burt,
1996). Procurement, on the other hand, has a more tactical nature, and involves
supporting activities such as managing information systems needed to carry out
transactions, and so on (Dobler & Burt, 1996). Supply management, on the other
hand, can be positioned at the strategic level, and involves a wide range of
activities, from transaction management and technical activities to strategic
planning (Jahns, 2004). These three options form the first dimension, here denoted
as category.

Koontz and O’Donnell (1964) define planning as one essential component of

management practices. Literally, planning means what to do over time. Since
supply management is a management concept, as the name implies, it is natural to
incorporate a time dimension in the morphological analysis. Here, we have the
option to plan activities just for any point of time in the future. Hence, we have a
continuum of time, ranging from the instant all the way into eternity. Such
reasoning is of course lacking practical relevance, and therefore we divide the
time horizon into three parts: short-term, mid-term and long-term planning. Short-
term includes the very near future, roughly for the next week or month ahead.

With this time frame, it is possible to deal with everyday activities at an

operational level and control financial parameters such as revenue and cost
(Bleicher, 1999). Mid-term planning involves strategic positioning and decisions
about choosing competitive advantage (Bleicher, 1999). This level of planning
 59

ranges from a couple of years up to half a decade. The long-term planning deals
with more abstract dimensions such as formulating visions and changing
corporate culture (Bleicher, 1999). This time horizon stretches far away into the
future, up to as much as twenty years ahead (Shrivastava, 1994).

Supply management is not an isolated system. Instead, it needs to be tightly

integrated into the value chain as a support function to create superior
performance (Porter, 1985). Even in the field of supply management, the customer
should be in focus as it is the origin of all demand. As a consequence, the way of
purchasing goods and services must be seen in the light of the marketing strategy
(i.e. the demand side of the firm). Moreover, the firm must have a supply flow
that is not only vertically aligned with the corporate strategy, but also horizontally
with other functional units such as the marketing strategy, in order to implement
and execute it successfully. Porter states that the marketing strategy can focus on
cost leadership, differentiation or focus (Porter, 1980). These three marketing
strategies form the third dimension, namely marketing strategy.

Another intuitive dimension to consider in supply management is geographical

scope. The main issue here is whether the firm should purchase individual
supplies domestically or from abroad. To elaborate the topic, it helps to recap the
Bartlett and Goshal typology of internationalized firms, each of which has its
distinct strategic orientation (Bartlett & Goshal, 1987, 1989). The different types
of geographical scopes are:

1. International – Centralized management where foreign subsidiaries are

adapted to prerequisites in the home market.

2. Multinational – Decentralized management with high level of subsidiary

autonomy.

3. Global – Globally scaled management aiming at reaping benefits through

economies of scale from standardized products, processes and
technologies.
 60

4. Transnational – Highly integrated management, both centralized and

decentralized in order to obtain economies of scale while still preserving a
certain degree of autonomy (think global, act local paradigm).

Although the paradigm of the transnational firm mainly focuses on the demand
side of the firm, the supply side needs to be aligned as discussed in the previous
paragraph. Consequently, we use the four categories above to specify
geographical scope of the purchasing activities.

Another essential part of management is the organization. In the beginning of the

20th century, companies on the domestic market acting with a single product
almost all had a functional organization. However, Chandler (1962) was the first
scholar to notice that as firms increased sales volumes, geographic dispersion,
horizontal and vertical integration, they eventually evolved into what is know as
the M-form, or multi-divisional corporation (A. Chandler, 1962). Depending on
the product diversity versus the geographical dispersity of the firm, firms take
distinct paths in order to obtain the optimal organization (Stopford & Wells, 1972).

In some cases, the outcome was the matrix organization that tried to reap benefits
and eliminate weaknesses from the functional and divisional organizations,
respectively. Some companies, such as Unilever and ABB succeeded to
implement this organization type, whereas others such as Citigroup and Dow
Chemical failed. Consequently, we choose to divide the type of organization into
three groups: centralized, decentralized and matrix, where the latter can be
considered as a hybrid of the two former ones.5 Depending on the organizational
orientation of the firm as a whole, the purchasing department must be aligned
accordingly.

Leadership constitutes one of the five management processes of the

Koontz/O”Donnell management model (Koontz & O'Donnell, 1964). The wider
span and importance of a functional unit, the higher up in the hierarchy decisions

5
Although these terms represent ideal types, the terms are still valuable for illustrative purposes.
 61

must be made; this is evidenced for example in the IT department, which activities
also span across the whole enterprise (Jarvenpaa & Ives, 1991). Hence, we define
the leadership level in three categories: first-level management, middle
management and top management.

Finally, three dimensions can be identified depending on the nature of the supplies
in question. The first is asset specificity, which specifies the criticalness and
uniqueness of the goods sourced. The higher asset specificity, the more difficult it
is to use the good in another situation (Williamson, 1975). Supplies with high
asset specificity are usually complex. This leads to higher transaction costs due to
difficulties to find and evaluate the right suppliers, longer and more complicated
set-up costs and contracts (Williamson, 1975).

According to the transaction cost analysis theory (TCA), it is better to source

complex supplies internally (i.e. purchasing from subsidiaries) rather than from
external suppliers. Hence, we can set up a dimension internal/external sourcing,
which states the predominating sourcing form. Asset specificity also affects the
type of supplier relationship to be used. For standardized, low-value supplies,
such as nuts and bolts, where a large number of suppliers are competing on price,
a transactional relationship is preferred. On the other hand, for supplies with high
asset specificity, a strategic relationship is the preferred type of relationship if not
producing in-house (Murray, 2001). Subsequently, the last dimension is strategic
relationship type containing two states: transactional and strategic relationship.

Step 3: Morphological Box Design

Based on the dimensions and corresponding states developed in the previous

chapter, we can now design the morphological box by aligning the dimensions
vertically and juxtaposing their corresponding states horizontally, as depicted in
Figure 13. The morphological box has eight dimensions with two to four
corresponding states; all in all 25 states which yields a total of 7,776 combinations.
The next challenge is now to elaborate on the viable alternatives that can possibly
categorize “low-cost country sourcing”, a task that is performed in the next sub
section.
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State
Dimension

Category Purchasing Procurement Supply management

Decision-making level Middle management Department management Senior management

Geographical scope International Multinational Global Transnational

Organization type Centralized Decentralized Matrix

Time horizon Short-term Mid-term Long-term

Marketing strategy Cost leadership Differentiation Focus

Asset specificity Low High

Internal/External
Internal External
sourcing

Relationship type Transactional Strategic alliance

Figure 13. Morphological box for “purchasing and supply management”

Step 4: Evaluation of Solutions

The evaluation of possible solutions is performed by going through the different

dimensions one by one while elaborating viable options. Hence, the number of
viable options can be drastically reduced through sound reasoning, a process
Zwick called the principle of contradiction and reduction (Zwicky, 1966). At the
same time, a so called cross-consistency assessment (CCA) needs to be performed.

The purpose of this assessment is to eliminate pairs or sets of conditions in

dimensions that are contradictory or mutually inconsistent (Zwicky, 1966). For
example, in our case, selecting “Senior management” from the “Decision-making
level” dimension would not be consistent if “Purchasing” was selected from the
“Category” dimension. This is due to the fact that “Purchasing” was defined as
operational, and operational activities need not to be managed by senior
management.

However, since low-cost country sourcing involves many strategic issues, such as
fulfilling needs for other functional units, considerations for overall inventory
levels etc., we can already now conclude that low-cost country sourcing is closely
interrelated with supply management concepts. As an implication to this, it is
clear that low-cost country sourcing activities needs to be managed by senior
management in order to succeed; low-cost country sourcing is thus aligned with
 63

the paradigm-shift from purchasing to supply management (Jahns, 2005; Kraljic,

1983; Ritchey, 1998).

Regarding “Geographical Scope”, it is currently evident that most companies

today have undergone radical organizational change and are capable of executing
integrated low-cost country sourcing strategies (Trent & Monczka, 1998). It is
clear though, that many companies today are using low-cost country sourcing in
order to obtain economies of scale by marketing and sourcing standardized
supplies from all over the world (Kotabe, 1994). Mid-sized companies are
probably too small to obtain such economies of scale, which makes international
or multinational management a more likely choice. However, since we are
focusing on large-sized companies, global scope is the safest bet.

Few companies acting world-wide today are centralized. The most centralized
companies are probably found in the pharmaceutical and chemical processing
industry, where products are identical throughout the world. Here, marketing is
the activity that is different from region to region. Thus, centralized management
is least likely. Since most large-sized companies today have extensively divested
products and are acting in numerous geographical markets, a wide range of
supplies from many different markets are being purchased. Therefore, the most
probable management type to find is the matrix organization.

Continuing with the “Time horizon” dimension in the morphological box, it is

evident that most firms source in low-cost countries to reap short-term benefits
such as lower purchase price (Battacharya et al., 2004). However, the market-
leaders go one step further and view low-cost country sourcing as a means for
acquiring competitive advantage. The aim is not to change corporate culture and
set corporate visions though; therefore the time horizon is considered mid-term.

On a mid term, low-cost country sourcing can be seen a strategic weapon, made
possible primarily by significant total cost savings. Therefore, it is logical to
believe that the first-movers in such undertakings are the ones that have cost
leadership as a primary marketing strategy. This does not exclude other
companies from sourcing in low-cost countries for other reasons though, but they
 64

are considered less likely to do so. As a consequence, it is most likely that

companies executing a cost leadership strategy are dominating low-cost country
sourcing activities. This statement remains as a hypothesis though, as it has not
yet been confirmed empirically.

The nature of the supplies sourced in low-cost countries, have until recently been
dominated by low-value and non-critical components (Battacharya et al., 2004).
This is due to the fact that time-critical supplies are difficult to source because of
the long distances and the increased inventory levels incurred. Higher value here
means larger amounts of tied-up capital; this is highly unwanted. Hence, it makes
sense to believe that supplies with low asset specificity are dominating, and will
continue to dominate, since one cannot do much about the geographical distance.

In the same manner, due to the dominance of supplies with low asset specificity, it
is logical to conclude that sourcing is mainly conducted with external suppliers,
using predominantly transactional relationships.

Step 5: Selection of Optimal Solution

Selecting precise states for each of the dimensions is not a stringent science;
instead, it is done by making use of earlier findings in the field (empirical
assessment) in combination with sound reasoning (logical assessment). Although
there were some ambiguities in the previous chapter, we the choices made so far
are sufficient from a qualitative perspective. This means that we have reached the
destined goal, namely to position “low-cost country sourcing” in the context of
purchasing and supply management. The final morphological box with the
selected states is shown in Figure 14.

State
Dimension

Category Purchasing Procurement Supply management

Decision-making level Middle management Department management Senior management

Geographical scope International Multinational Global Transnational

Organization type Centralized Decentralized Matrix

Time horizon Short-term Mid-term Long-term

 65

Marketing strategy Cost leadership Differentiation Focus

Asset specificity Low High

Internal/External
Internal External
sourcing

Relationship type Transactional Strategic alliance

Figure 14. Morphological box for low-cost country sourcing

2.5. Interim Summary

This chapter has dealt with the very important task of reviewing literature related
to the topic of LCCS. The purpose of the chapter itself is to provide a knowledge
base that can facilitate the understanding of forthcoming chapters. Unnecessary
theoretical elaborations were omitted on purpose for the sake of clarity. The
chapter has explained the meaning and difference of frequently used terms,
identified and described different streams of research and also positioned the
LCCS topic in relation to other adjoining topics.

More specifically, chapter 2.1 started by discussing terminology that is commonly

occurring. The meaning and difference between frequently used terms such as
purchasing, procurement and supply management were elaborated. Despite the
fact that they are often used interchangeably relatively often lead to a great deal of
confusion. It was concluded that the main difference lies in a different strategic
focus of the respective terms, where purchasing can be considered operational,
procurement tactical, and supply management strategic. The differences in
meaning have implications on which activities they include, the planning horizon
in terms of time, and hierarchical locus in the organization.

An explanation of closely related terms such as inbound logistics, outbound

logistics, logistics management, materials management, and supply chain
management was provided. Here the conclusion was that that supply management
and logistics management are partially overlapping terms, where inbound logistics
is said to bridge those two terms. Supply chain management differs from supply
management in a sense that it does not solely refer to dyadic relationships, but
 66

encompasses the whole supply chain, from the raw materials extractor, to the end
customer.

Thereafter, a definition of sourcing in general and strategic sourcing in particular

was given. In sum, sourcing has a much higher process-oriented focus that terms
such as purchasing and supply management. Strategic sourcing is characterized by
a more long-term orientation, aiming at assuring the long-term supply of inputs to
the firm. By using the sourcing definition as a starting point, the terms were
extended to include acquisition of supplies in foreign countries, thus extending it
to a global level and finally to low-cost countries in particular.

Chapter 2.2 dealt with internationalization as a key driver of LCCS. First, a

general discussion about internationalization was provided, stating that
internationalization is a process in which firms are expanding business across
nation borders, thus competing with firms located in other countries than the
home country a particular firm.

At firm level, it was concluded that there are several reasons for internationalizing,
for example entering new consumer or supplier markets, realizing economies of
scale and scope across borders, by leveraging competitive and comparative
advantages. Here, globalization differs from internationalization in a sense that
globalization is a more generic term, not only including business, but also political,
social and technological aspects. Increased cultural openness, deregulation and
privatization of markets, technological advancements and decreasing
communication costs were said to influence the process. Empirical studies have
also shown that companies configure themselves in different ways depending on
internal and external factors. A common taxonomy includes four categories,
namely international, multinational, global, and transnational firms.

It was also shown that internationalization and globalization have vast

implications at functional unit level within firms, in this case within the
purchasing department. Empirical studies have shown that firms develop their
international sourcing activities through five distinct stages, depending on the
 67

extent of offshore sourcing, and implementation of cross-functional and cross-

business unit coordination and integration of procurement requirements.

Chapter 2.3 discussed important streams of research related to LCCS. Although

not much scholarly literature has been written specifically about LCCS, closely
related fields such as global sourcing and international sourcing can contribute to
an increased understanding of the topic. Several conceptual frameworks were
presented, such as Fayerweather’s (1969) early global sourcing framework, along
with the growing body of research from the 1980s and 1990s, such Arnold (1989),
Kotabe (1994) and Kaufmann and Hedderich (2005). Also scholarly work about
motivations and barriers, most notably the research by (Alguire et al., 1994) was
presented, indicating that factors relating to comparative advantages, competitive
advantages, circumvention of government policies and internal factors contributed
to the developments.

Finally, chapter 2.4 concluded chapter 2 by position the LCCS topic in the
literature landscape through a morphological analysis. Thereby important
dimensions that characterize the LCCS concept were also identified. Based on the
morphological analysis in combination with the previous literature review, all in
all nine characteristic dimensions were distilled out of the process.
 69

3. Research Methodology
This chapter presents an overview of the methodological perspective of the
research. After a general discussion about scientific research, section 3.1 describes
the research design based on the research questions and theoretical models
hypothesized in this study. With the research design as a starting point, the
research strategy is presented in section 3.3. In section 3.3, the perspectives are
broadened by a discussion about the philosophical aspects of the research design.
Finally, an interim summary of the chapter is given in 3.4.

Research is defined as “Study and investigation, especially to discover new facts”

(The Oxford Minidictionairy, 1991). Although the definition stresses the
discovery of new facts, it may also concern confirmation of existing facts. As an
example, studies or experiments with controversial results may be repeated by
other scientists in order to validate the credibility. Such approaches which are
applied to several independent samples are denoted as cross-validation
(Terblanche & Boshoff, 2003). Research may also be conducted by reviewing
existing knowledge in a particular area together with the creation of an analysis on
the accumulated body of knowledge. Such research is often referred to as research
synthesis or meta analysis (H. Cooper & Hedges, 1994; Glass, McGraw, & Smith,
1989; Hedges & Olkin, 1985; Paulson, 2003). In sum, research is not only about
uncovering new facts, but also creating new perspectives on old ones.

Scientific research focuses on solving problems in a sequential, logical and

ordered manner (Sekaran, 2003). It involves rigorous activities for identifying
problems, gathering and analyzing data, and making valid conclusions. The
rigorousness of scientific research enables other researchers to repeat trials and
obtain results that can be compared.
 70

For research to be considered scientific, there are a number of requirements that

have to be fulfilled (Sekaran, 2003):

„ Purposiveness „ Precision and confidence

„ Rigor „ Objectivity

„ Testability „ Generalizability

„ Replicability „ Parsimony

Purposiveness refers to the state of doing an activity with a predetermined goal

(Sekaran, 2003). Without it, one can neither determine when to close the research
project, nor determine the success or failure of it. Moreover, having a purpose also
facilitates motivation among project team members and striving towards the same
direction.

Rigor implies having a solid theoretical base and a sound methodological design
(Sekaran, 2003). Moreover, a research methodology that is carefully selected, well
thought-through, and commonly accepted in the scientific community provide
rigor to the research. Therefore, a minimal requirement for rigorousness is well-
anchored hypotheses, evaluation techniques and drawn conclusions. Ultimately,
rigorous research planning enables research with high reliability and validity.

Another requirement for being scientific is testability. For example, if theories

developed cannot be empirically tested, the objectiveness and practical value is
severely limited. At best, the research will end up as casual reading material, or at
worst, being forgotten in a desk drawer. Testability itself implies the requirement
for operationalization, i.e. allowing for application of statistical tools and
techniques. This is a necessary requirement if doing hypothetico-deductive
research, as is the case in this thesis.

According to Popper (1934), a theory can never be proven to be true. Instead, it

can only be proven not to be incorrect. Hence, a theory is accepted until such
amounts of evidence are gathered that there is no longer support for it. This
paradigm is often denoted falsifiability and is often considered a fundamental
 71

criterion for being a scientific theory. As Hume (1978 [1739]) puts it: “just
because the sun has risen every day for as long as anyone can remember, doesn”t
mean that there is any rational reason to believe it will come up tomorrow”.

Anyhow, in practice, science is not black or white, but rather a grey zone of what
is true or false. A theory that has withstood testing repeatedly has a higher
credibility than a theory which has never been tested. Therefore, replicability
becomes an important requirement for scientific research; if it does not allow
repeated test, it is deemed unlikely to gain credibility.

As Sekaran (2003) notes, it is seldom possible to make perfectly definite

measurements. As a result, the conclusions drawn cannot be more precise than the
measurements they are based upon. Many quantities have a vague nature and can
only be measured indirectly, i.e. one can only observe “symptoms” of the
underlying concepts. However, by being able to estimate the degree of statistical
error, one can determine how close the results are to reality.

According to the old adage, “it is better to be approximately right than exactly
wrong”. An important measure here is therefore precision, which means how
accurate a measurement is. The logic is that it does not do much harm if one is
only approximately right as long as it is possible to determine how far one is
from ”reality”. Here, the concept of confidence plays a central role. It tells the
researcher about the range, within which the ”true” measurement is lying with a
certain probability. This confidence interval is commonly 95 percent, meaning
that there is a five-percent chance that the measured value is outside the range.
The narrower range (in terms of upper and lower bounds), the greater confidence.

Another important requirement for scientific research is objectivity, which means

that the interpretation of data and drawing of conclusions should be based on facts,
and not subjective opinions or emotional values (Sekaran, 2003). For long, there
has been an ongoing debate between the nominalistic and realistic paradigms (cf.
3.3.1), where the former concedes that reality is to some extent socially
constructed, thus in the eye of the beholder (Hollis, 1994). The standpoint of
 72

Sekaran (2003, p. 25) is truly realistic, by stating that “the more objective the
interpretation of the data, the more scientific the research investigation gets”.

The second last scientific requirement is generalizability, meaning the extent to

which results of one setting are valid and applicable in another setting (Sekaran,
2003). The higher degree of generalizability, the higher degree of value and
usefulness of the research findings. Generalizability is primarily dependent on the
sampling procedures, which is deeper elaborated in section 3.1.1. In general,
sophisticated sampling procedures tend to be very costly, so the benefits gained
always have to be weighed against the costs incurred.

The final scientific requirement is parsimony, which is a guiding principle in

research. The concept can be traced back to many great philosophers and
scientists. For example, Aristotele is supposed to have stated that “nature operates
in the shortest way possible”. The 14th century logician and Franciscan friar
William of Ockham, introduced a principle known as ”Occam’s Razor”, which
says that “entities are not to be multiplied without necessity”, or “shave off (omit)
unnecessary entities in explanations”.

In essence, parsimony means selecting the shortest (and, thereby, most efficient)
path to the production of true theorems, given a set of facts (observations) and a
set of theories. In other words, given two equally predictive theories, choose the
simpler one. The French mathematician and philosopher Poincare (1903) thought
that nature itself, this metaphysical entity which encompasses all, is parsimonious.
He believed that mathematical simplicity must be a sign of truth. Interestingly,
Dirac (1939) almost equates simplicity (parsimony) with beauty, by stating

"The research worker, in his effort to express the fundamental laws of

Nature in mathematical form should strive mainly for mathematical
beauty. It often happens that the requirements of simplicity and
beauty are the same, but where they clash the latter must take
precedence."
 73

In much research, models are overly complex. As a result, they are often virtually
impossible to visualize in mind and understand from a logical perspective. With
this in mind, it is not by accident that the majority of the most popular
management frameworks consists of two-times-two matrices, such as the Kraljic
matrix in purchasing and supply management (Kraljic, 1983). Mol (2001) asks
what sense an extremely complicated model makes. Furthermore, he states that “a
model with 25 independent variables that are all deemed relevant might lead to an
outcome where everything matters a little bit. However, what really matters in
research is not what matters a little bit, but what matters most” (Mol, 2001 p. 57).

Therefore, a lot of attention is devoted to preserve parsimony of the models

developed in this thesis. As will be shown later in chapter 5, parsimony will be
statistically manifested by questioning whether the independent variables have
any explanatory power for the phenomenon under scrutiny. Thus, if the
independent variable does not add to the explanatory power, in terms of total
explained variance (e.g. R2), there is no justification for including it in the model
(Gujarati, 1995). Ultimately, by limiting the number of independent variables,
clarity and parsimony is improved.

3.1. Research Design

The aim of research design is to create a link between the research questions and
the empirical data which has been collected. Moreover, research design also
involves the tools and procedures used to answer the research questions. Put
simply, research design should follow the questions and fit to the data. In other
words, it serves as a plan for empirical research and includes main parts such as
research strategy, sample, and data collection/analysis procedures (Punch, 2000).
In this section, only the research strategy, sample, and philosophical
considerations are discussed; the data analysis procedures used are discussed in
their corresponding chapters where they are applied (i.e. chapter 4 and 5).

3.1.1. Design Parameters

As is the case with any project undertaken, the success of a research project is
highly dependent on the rigorousness of the preceding planning. Without clear
 74

objectives, one cannot determine when the destined goal has been reached; it can
be compared with a skipper on boat not knowing where to go. Moreover, if the
procedures of the research project are not elaborated, the objectives will certainly
be very difficult to accomplish on time and on budget, if accomplished at all that
will say. With the same analogy, a research project without predetermined
analysis tools is like navigating the sea without a compass. Therefore, before
starting the research activities, four dimensions of design parameters have to be
considered before starting the actual research itself, namely (1) pure/applied
research, (2) primary/secondary research, (3) theoretical/empirical research, and
(4) descriptive/explanatory research (Figure 15). These are discussed below.

Pure research Applied research

Primary research Secondary research

Theoretical research Empirical research

Descriptive research Explanatory research

Figure 15. Graphical representation of research design parameters

Pure research implies that there are no explicit practical implications of the
research conducted. In other words, there is no apparent use of the knowledge
except for the contribution itself to the particular field of science. However, this
does not exclude the research from being applied in practice at a later stage (Riley,
Wood, Clark, Wilkie, & Szivas, 2003). In contrast, applied research aims directly
at solving a problem found in practice. Often, as is the case with this thesis,
applied research may be sponsored by external clients to academia, such as
companies and other industrial organizations. As a result, applied research puts a
lot of emphasis on pragmatism and applicability, meaning that the research
outcome can be easily translated into action with little hassle. In the case of this
thesis, the research is without doubt applied, as it seeks to answer a number of
 75

questions associated with solve problems frequently encountered by firms

sourcing in low-cost countries.

In general, primary research concerns research that deals with collecting first-
hand empirical data by using commonly accepted research procedures. Secondary
research, on the other hand, does not involve collection of first-hand data, but
instead relies on analysis of already existing empirical data sets (i.e. ”secondary
sources”). Usually, secondary research is also undertaken in primary research in
order to examine what research has been conducted in the past in a particular field
of interest. Thus, secondary research can serve as a precursor to research design
(Riley et al., 2003). In essence, primary data comprise new and original data from
first-hand sources whereas secondary data includes the rest, such as books, journal
papers, conference proceedings, online databases, and so on. The research
conducted in conjunction with this thesis is predominantly of primary nature,
since a great extent of the data used for the analysis comes from first-hand sources.
Nevertheless, a significant amount of data is gathered from second-hand sources
in order to discuss the various concepts and terms, for the literature review, and
for the creation of the theoretical framework.

After determining whether to conduct primary or secondary research, one has to

decide on whether to carry out theoretical research or empirical research. In
general, theoretical research implies using already existing resources
or ”inventing” new ideas in order to form new theories within a particular field of
science. Empirical research, on the other hand, involves applying theory onto a
first-hand set of data and compares the outcome with expected and hypothesized
outcomes from theory. The term “empirical” emanates from the Greek words for
“observation” or “experiment”, and emphasizes the requirement for use of first-
hand sources. Therefore, empirical and theoretical research is often used
synonymously with primary and secondary research, respectively (Riley et al.,
2003).

As is the case with primary and secondary research, empirical research does not
automatically exclude theoretical research. This is due to the fact that that in order
 76

to contribute to a body of theory, the empirical research needs to be preceded by

developing a theoretical framework that can be used to analyze and interpret the
empirical data. Although the empirical research in this thesis rests on a foundation
of theoretical syntheses, the research is primarily empirical, as the lion’s share of
the data used for the analysis is inherently empirical.

The fourth and final research design dimension is the distinction between
descriptive research and explanatory research.6 In essence, descriptive research
mainly concerns the “what”, “when”, “where” and “who” questions (Riley et al.,
2003, p. 148). In other words, descriptive research only aims at providing a clear
picture of the data itself, without any claims of generalizability. Exploratory
research, on the other hand, tries to uncover the relationships between variables
(i.e. causal relationships), thus trying to answer the “why” questions. Moreover,
the exploratory research also aims at generalizing the results to the population
from which the sample was drawn. With this in mind, as chapter 4 primarily
involves descriptive research whereas chapter 5 mainly deals with explanatory
research, it is clear that the research conducted for this thesis is somewhere in the
middle of the descriptive–exploratory research continuum.

After the four design dimensions have been determined, the standpoint of the
research done as a basis for this thesis can be summarized in a chart as depicted in
Figure 16.

Pure research Applied research

Primary research Secondary research

Theoretical research Empirical research

Descriptive research Explanatory research

Figure 16. Rresearch design configuration

6
In statistical contexts (depending on authors), the terms descriptive and inferential research are
frequently being used, respectively.
 77

3.1.2. Cross-Sectional vs. Longitudinal Study

The research presented in this study is determined from the objectives and
research questions specified in chapter 1, with respect to the expected types of
results. The dramatic momentum that characterizes emerging and transition
economies raises the question whether to conduct a cross-sectional or longitudinal
study. Longitudinal studies, in which data is repeatedly collected over an extended
period of time, is suitable for studying trends and effects from specific changes
(Abercrombie, Hill, & Turner, 1994).

Another alternative is to do a cross-sectional study, which means that data is only

collected once. Hence, it provides a snapshot of the current situation, omitting
trends developed over time. With the rapid developments characterizing the
LCCS topic in mind, it would make sense to conduct a longitudinal study for the
research. Alas, as time and money are scarce resources, it was not feasible to
conduct a longitudinal study within the scope of this thesis. Thus, a cross-
sectional study was designed and launched. Therefore, the trends captured in
chapter 4 are based on qualified estimations from senior purchasing managers.

The research questions defined in chapter 1 provide guidance on how to go about

with the research and what needs to be done in which order. As a reminder, the
five research questions are:

1. What is low-cost country sourcing?

2. What makes low-cost country sourcing different from general sourcing?

3. How do firm-related resources affect business performance when sourcing

in LCCs?

4. What is the relative importance of firm-related resources for superior

business performance when sourcing in LCCs?

5. How will the sourcing patterns in LCCs change in a near future?

Naturally, in order to answer these questions, a number of tasks have to be carried

out. Or, as Miles and Huberman (1984 p. 42) put it, “knowing what you want to
find out leads inexorably to the question of how you will get that information”.
 78

Firstly, one has to clarify what the different terms and concepts really mean and
their relevance for companies and industries as a whole (cf. 2.1).

In essence, there are two decisive factors when developing a research strategy.
The first decisive factor is to choose whether to conduct quantitative or qualitative
research. The second decisive factor is whether to follow an inductive or a
deductive approach. Although the different alternatives are not mutually exclusive,
that will say, a study can for example contain both quantitative and qualitative
elements, they can somewhat simplified be represented as a 2x2-matrix. The
different approaches have their advantages and disadvantages, as elaborated
below.

Quantitative- Quantitative-
Inductive Deductive

Qualitative- Qualitative-
Inductive Deductive

Figure 17. Key decisive research design factors

3.1.3. Qualitative vs. Quantitative Research

As discussed in section 3.3, the qualitative method facilitates a high level of
details and depth. In general, it provides a comprehensive set of data about a
relatively small number of research specimens. This means that the understanding
of the subjects of study is very high, but on the other hand the possibilities to
generalize the findings are relatively low (Patton, 1990).

The quantitative method, on the other hand, necessitates the application of

standardized procedures that can only examine empirical data in a predefined
format, such as Likert scales etc. The advantage of quantitative methods is that
they can generally be applied to a large number of research specimens along a
limited number of research dimensions, which facilitates comparisons within the
 79

sample, but also drawing inferential conclusions about the population from which
the sample was drawn.

In order to offset their respective disadvantages, the two methods can be

combined. For this thesis, the topic was first addressed qualitatively by
performing expert interviews and thus identifying relevant topics and assuring
face validity. The qualitative phase was then followed by a quantitative phase in
which data was collected through a survey method.

3.1.4. Inductive vs. Deductive Research

Scientific research can take the shape either through inductive or deductive
reasoning, or through a combination of the two. Deductive reasoning means
traversing from the large to the small; in this case, the conclusion is of no greater
generality than the premises. An example of deductive reasoning would be: “All
swans are white. Therefore, if this is a swan, it is white. In contrast, inductive
reasoning implies that the conclusion is of greater generality than the premises.
An example of inductive reasoning could be: “All swans found so far are white.
Therefore, all swans are white”.

Induction has been subject to a lot of criticism, however. The main problem is the
way in which hypothesis are considered true or false. In order to prove the
inductive example above to be true, one would need to examine all swans in
universe. To solve this dilemma, Popper (1934) replaced the inductive reasoning
with falsifiability, which means that instead of trying to prove a hypothesis to
be ”true”, one tries to reject it by proving it to be ”false”. The approach taken for
the explanatory research in this thesis is known as the hypothetico-deductive
method, which implies starting with a theoretical framework, followed by
subsequent deduction of hypotheses that are finally tested and evaluated.

3.2. Research Strategy

The research carried out in this study is based on multiple methods and sources.
The methods of analysis are primarily quantitative, but qualitative research
methods are also applied where needed, for example when conducting the pre-
study and when evaluating the performance of the pilot test of the survey.
 80

Moreover, the sources include both primary data and secondary data. As Yin
(1994) notes, different research methods are useful for different purposes. In this
study, different methods are seen as complements and no method is seen as
fundamentally superior over another method.

Moreover, as is the case of the research conducted for this thesis, scientific
research is usually carried out iteratively, through theory development and theory
testing (Yin, 1994). An example of such an iterative that was applied for this
research in this thesis is depicted in Figure 18.

1. Observation

2. Identification of problem
area/Literature review

3. Theoretical Framework/
Development of hypotheses

4. Operationalization of
Constructs/Research model

5. Data collection and analysis

6. Interpretation of data/
Hypothesis testing

Figure 18. Research method

(adaptation from Silverman, 2000)

Normally, research starts by making some sort of observation(s) (step one). In the
context of strategic management and business science, it could be a shift of
strategies pursued, such as increasing degrees of outsourcing, increasing degree of
internationalization and so on. In the case of this thesis, the observation done was
an increasing extent of sourcing in low-cost countries. Already at this stage it is
possible to decide the forthcoming level of analysis, for example individual, group,
business unit, corporate, or even regional/country level.
 81

The observation step was then followed by identifying associated problems (step
two). This was achieved by probing deeper into the subject of study, primarily
through an extensive literature review and discussions with experts from industry
and practice. In this way, a picture of what was happening and why started to
emerge. In the research of this thesis, the main “problems” identified were two-
fold. First, a strong trend towards increased sourcing in low-cost countries could
be identified from literature. As a consequence, the natural question was: “will the
trend persist, or will it level off in a near future?” Secondly, another problem area
that emerged was which factors that influence the outcome of LCCS initiatives.
The influence from factors in the external environment has been covered
relatively extensively – as a consequence, the aim of this research is to shift focus
to the interior of firms.

Step three involves development of a theoretical framework and development of

hypotheses. This aim of this step is to develop a tool that includes responsible
factors that can be applied and predict outcomes in reality. Often, the formulation
of theoretical frameworks is guided by experience and intuition (Sekaran, 2003).
Often, as is the case with the theoretical framework in chapter 5, it is partly built
on existing theories which then forms an adapted version that fits into the context
of low-cost country sourcing. In this step, the necessary variables are identified,
and their interrelations are interconnected through postulation of hypotheses.

The hypotheses are formulated through deductive reasoning, guided by the

underlying theories. Analogous to the definition of a scientific theory by
Bacharach (1989 p. 496), that “a theory is a statement of relations among
constructs within a set of boundary assumptions and constraints”, the hypotheses
are the fundamental building blocks that connect constructs with each other.

In order to be able to apply the theory in practice, it has to be operationalized (step

four), implying that it is taken from a conceptual level to an operational level into
which empirical data can be used as input and predictions generated as output
(depicted in Figure 19). The research model is thus a statistical instrument that
 82

makes it possible to predict the outcome with a certain probability, given a known
set of input data.

Operationalization of
theory/Research model

Empirical data Predictions

Figure 19. The theory as an instrument for predictions

Step five involves the data collection, which is elaborated more in-depth in
section 3.2.3. This is a crucial step of the research process in which the
appropriate data collecting method is chosen. For the study in this thesis, a
quantitative survey methodology was carried out. Moreover, a careful selection
and execution of sampling procedure ensures high reliability and validity of the
results and high generalizability of the sample to the population. During this phase,
data on every variable in the theoretical framework was collected. This data then
serves as the input for the analysis phase, in which the data is statistically
analyzed. There are two dimensions in this phase. First, a descriptive analysis was
done to give an overall picture of the data. Second, a more exploratory analysis
was conducted in order to test relationships between variables, in other words
testing the hypotheses.

In the sixth and final step, an overall evaluation of the hypotheses is performed in
order to get a holistic picture of the outcome. The aim of the interpretation of the
hypotheses evaluation is to finally provide answers to the research questions and
discuss the theoretical and practical implications of the results. The theoretical
implications give rise to a feedback loop (see Figure 18) in which suggestions to a
modified theory is provided. The practical implications are manifested in a set of
“rules” and guidelines that managers should consider in order to succeed with
their low-cost country sourcing initiatives. A more elaborate discussion on the
most important steps of the research is dedicated to the rest of this subsection.
 83

3.2.1. Literature Review

The first and second research question – “What is low-cost country sourcing?”
and “What makes low-cost country sourcing different from general sourcing?” –
are inherently descriptive. According to Punch (2000), the aim of descriptive
research is to collect, organize, and summarize information about the phenomenon
being studied. Simply put, it aims at making complicated things understandable.
Consequently, a literature review was considered the best approach to answer
these first two research questions. The literature review in chapter 2 provides
fundamental background information in order to set the scene for more extensive
investigations. More importantly, the literature review was also used in order to
identify gaps both in research as well as in practice. In this way, the value
delivered from the research can be maximized.

Essentially, the literature review is a documentation of the published and

unpublished work from secondary sources of data in the areas subject of study.
The literature review is an ongoing process that spans across the whole research
project duration. In the beginning, its main purpose is orientation, implying that it
provides the necessary bits and pieces to get started, to identify research gaps, and
to formulate research questions.

Moreover, the purpose of the literature review is to identify critical variables that
need to be included in the survey process. Therefore, it serves as a complement to
the expert interviews done in this study, since one cannot guarantee that the expert
interviewees articulate all of them. For example, it could be the case that they
cannot articulate them, or are simply not aware of their impact. Another important
goal of the literature is of course to avoid “inventing the wheel again”, by
addressing research topics that have already been investigated.

In some cases research is replicated with another independent sample on purpose.

Nevertheless, the researcher must know whether he or she is conducting novel
research or just cross-validation.
 84

The literature review for this thesis started by identifying various published and
unpublished materials on the topic of low-cost country sourcing and closely
related fields. In a second step, the relevant information was gathered by getting
access to needed secondary sources. In a third step, the literature was completed
by writing a summarized version of the collected materials.

The material for the literature review in terms of books, journals, magazines,
academic theses and conference proceedings were primarily gathered from online
resources. The online resources used for this thesis are EBSCO, ProQuest, JSTOR,
ScienceDirect and Emerald. These online databases provide access to an
enormous wealth of information, and contain a number of scientific journals that
were extensively used especially for the literature review.

The online databases were searched by using keywords such as “sourcing”,

“purchasing”, “supply management”, “global sourcing”, “globalization”,
“resource-based view”, “international trade” among others. A screening and
assessment of potential journals to be used in the thesis were done à priori in
order to avoid becoming an ”information junkie” that collects all possible material
(of which a great extent is of low quality). These most frequently used journals
were as follows:

„ Journal of Purchasing and Supply Management (JPSM)

„ Journal of Supply Chain Management (JSCM)

„ Academy of Management Review (AMR)

„ Strategic Management Journal (SMJ)

„ Administrative Science Quarterly (ASQ)

„ Journal of International Business Studies (JIBS)

„ Journal of Marketing (JOM)

„ International Marketing Management (IMM)

„ Journal of Business Research (JBR)

„ Journal of International Business Studies (JIBS)

 85

Moreover, statistical data from governments such as the US Census Bureau and
agencies like The International Monetary Fund and The World Bank were also
used. More general search engines such as Google Scholar were used, especially
for searching academic pdf documents from other universities around the world.

In a similar manner, an assessment of influential scholars was done in order to

identify important literature in terms of books and magazines of value for the
thesis. The libraries used as sources were the university library at ebs European
Business School in Oestrich-Winkel, Germany, the university library at Johannes
Gutenberg University in Mainz, Germany, and the university library at the School
of Business, Economics and Law in Gothenburg, Sweden.

In most cases, the most recent data and sources as possible were used. However,
the ”freshness” of sources was not an exclusive criterion, but also the factors such
as commonly accepted importance of authors in the particular fields. For example,
the works of economists such as Adam Smith and David Ricardo dates back to the
18th and 19th century, respectively, and deserves being mentioned in any
publication discussing globalization and internationalization.

3.2.2. Development of Theoretical Framework

Next, a wide range of scientific theories from strategic management, business
science and organizational theory were screened in order to find plausible ones
that could potentially fit into the LCCS context. After a following analysis and
assessment, it was evident that the resource-based view of the firm was the most
suitable one. The most important reason is due to the fact that, most research on
LCCS or global sourcing have so far relied on transaction cost analysis (Coase,
1937; Williamson, 1975) or market-based view (Porter, 1980, 1990). An inside-
out perspective using resource-based view had only been elaborated briefly
theoretically (Mol, 2003; Ramsay, 2001b), and thus provided a valuable and novel
perspective on the topic.

The descriptive part of the thesis investigating status quo and trends is not
theoretically elaborated in itself, but is indirectly based on systems theory through
 86

the implementation of the Supply Management Navigator (Jahns, 2005). In this

way, key research areas of the purchasing function were identified and provided a
suitable research framework that could be deployed to survey companies about
status quo and expected changes over time, as essential components then were
included in the research. Since most trend analyses so far have focused on raw
data at corporate or macro-economic level, a research gap was very obvious from
a managerial perspective.

3.2.3. Data Collection and Analysis

As a complement to the literature review, a number of expert interviews were
performed in order to get an overview and insight in important topics to address
within the field of study. The expert interviews involved a group of individuals
consisting of eight senior purchasing managers and management professors.
Moreover, the expert interviews helped improving the credibility of the research
and assuring face validity. The interviews were conducted according to a
relatively open scheme, but covered a number of pre-defined topics (see Appendix
A for the interview structure).

In general, expert interviews can produce detailed information compared to survey

techniques since the interviews are not limited to the scope of the survey (Lessler
& Forsyth, 1996; Willis & Lessler, 1999); additional information is provided in a
more probing and exploratory way. Finally, the aim of the expert interviews was
also to gain a better overall understanding of the topic, both from a theoretical as
well as practical perspective. Although expert interviews are suitable for
determining important dimensions to investigate deeper, they are not sufficient for
making substantive, quantitative assessments, nor for drawing inferential
conclusions about the population (Dillman, 2002). Furthermore, they are not
suited for validating the theoretical framework developed.

According to Punch (2000), theory validation aims at testing a theory, or more in-
depth, testing hypotheses derived from one or several existing theories.
Quantitative research normally starts with the theories, deduces hypotheses from
them, which are then tested. Since the research questions of this thesis are
 87

inherently inferential in nature, with the objective to draw conclusions about the
population domain, a quantitative survey technique was selected as research
instrument; In other words, an objectivistic, nomothetic survey methodology. As
the research concerns a mix of theory validation and prediction, the type of
research is strongly positivistic. Only when the objective of the study is clear and
not complex, like in this case, survey techniques can be used (Borque & Fiedler,
1995). Survey techniques have been widely applied in closely related fields of
purchasing and supply management, such as global sourcing (see for example
Alguire et al., 1994; Kotabe, 1994; Narasimhan & Jayaram, 1998; Robert J. Trent
& Robert M. Monczka, 2002). Commonly, questionnaires are used to generate
extensive databases with low level of details. For this study, the questionnaire was
designed to gather data about trends, accessibility to resources, and different
performance measures.

Before the full-scale survey was launched, a pilot study was conducted in order to
test whether the articulation of the research instruments was sufficient to meet the
research objectives. Thus, the pilot study helped clarifying the effectiveness and
relevance of the questionnaire questions. Moreover, it provided opportunities for
updating and improving the questionnaire so that it maximizes the opportunities
for securing the views of the respondents (Riley et al., 2003). The pilot study was
performed on a relatively small sample (N = 30) in the same way as the full-scale
survey was planned to be executed. An important difference, however, was the
fact that the interviewers at the call center performing the interviews also had a
qualitative, on-going discussion between the questionnaire questions in order to
detect unclear issues. These issues were then discussed with the project leader at
the call-center and necessary adjustments were done to optimize the questionnaire
further.

The questionnaire, on which the survey was based, was designed through three
key guiding principles, namely (1) wording of questions, (2) principles of
measurement, and (3) visual design. These are all very important to consider, as
they can minimize the bias of the data (Sekaran, 2003).
 88

The wording of the questions should be aligned to the level of knowledge of the
respondents (Sekaran, 2003). Factors that were considered here are estimated
level of knowledge, business culture, and language spoken. The questions were
formulated in way that supposedly maximizes the chances to tap the dimensions
and elements of the concepts. Since the survey was done through telephone
interviews, the interview process must be very efficient and smooth in order not to
waste time. Therefore, most questions (with only a few exceptions) were designed
as closed, meaning that the respondents cannot answer the questions freely, but
rather choosing from sets of predefined alternatives.

The questions were also scrutinized to eliminate the risk for unclear, ambiguous
or lengthy questions. The initial questionnaire was pre-tested for time length,
clarity and other problems. It was also translated into the corresponding language
of the countries subject of study by native speakers at the call center together with
a research assistant who could support with expertise. The questionnaire was then
translated back to the original language. Thus, it could be assured that no meaning
was lost during the translation and that the terminology was consistent and correct.

Regarding measurement, most questions tapped information through so called

“semantic differential scales”, which are similar to Likert scales but with the
important difference that only the extremes of the scale are labeled (Ajzen &
Fishbein, 1980). This type of scale is easy to interpret and use when doing
telephone interviews, since the interviewee does not need to keep a multitude of
alternatives in mind, but rather the two extremes and then position his or hers
answer somewhere in between. The only questions that were open-ended were the
ones that only captured numbers, such as annual turnover, percent of purchase
spend sourced in LCCs etc.

Since the questionnaire was implemented through telephone interviews, the need
for visual appearance is of course redundant. Nevertheless, the telephone
interviews had to be initiated in a professional and friendly manner. Consequently,
the interviewers at the contracted call-center were briefed on how to introduce
themselves to the respondents. Upon initiation, the interviewers presented
 89

themselves and the assigner (i.e. European Business School/Supply Management

Institute), the purpose of the study, its contents, the estimated length of the
interview, and the value proposition (in this case a management report of the
study results). The purpose of the value proposition was to provide an incentive to
participate, thus increasing the response rate. Finally, it was also clearly
articulated to the respondents that all collected data was treated as strictly
confidential. A full version of the questionnaire itself can be found in Appedix A.

The collected data was then analyzed statistically with two de facto standard
software packages, namely SPSS 12.0 and LISREL 8.57. The reason why two
different software packages were used is because they both have their strengths
and weaknesses, and each of them have some unique features not found in the
other. The simpler descriptive analysis was primarily performed in SPSS through
Ȥ2-testing, t-testing, and calculations of mean and variation values. The
exploratory analysis and inferential tests, on the other hand, were predominantly
conducted in LISREL by using maximum likelihood path analysis. More in-depth
explanations of the statistical analysis techniques applied are provided as they are
used, in chapter 4 and 5, respectively.

3.2.4. Sampling
The core of the data collection process is sampling, which means taking a part of a
population to represent the population as a whole (Alreck & Settle, 1995).
Another method is enumeration, meaning that one investigates the whole
population. Since this approach is very costly in terms of time, money and
personnel, it is not very feasible. Therefore, due to economic reasons, sampling is
much more frequently used. With sampling, only a small fraction of the entire
population needs to be investigated. While it is a very cost-effective approach, it
has to be done with great care in order not to introduce bias or error in the data set
(Alreck & Settle, 1995). In other words, if the sampling is not done correctly, it
will not represent the intended population and results will ultimately be biased.

The first step of the sampling procedure was to identify the population. The main
criterion for choosing the sample is to assure that the population consists of
 90

people that actually possess the information sought (Alreck & Settle, 1995). In the
case of the research for this thesis, the expert interviews revealed that Chief
Procurement Officers (CPOs) and equivalent senior purchasing managers at
business unit level were appropriate for representing the population since these
tend to be involved in decision-making regarding localization of sourcing
activities. Furthermore, they are frequently positioned at board-level where
strategic sourcing decisions normally are taken.

With respect to the high-level resources investigated in this study, this category of
respondents can be considered the most suitable for this study and hence key-
informant bias is minimized (Kumar, Stern, & Anderson, 1993). Furthermore, the
expert interviews that were conducted before the survey indicated only a very
small discrepancy between the academics and the practitioners. This indicates a
high degree of trustworthiness to the survey informants and thus risk of single
informant bias, which has been pointed out in literature as a potential problem
(Premkumar & Ramamurthy, 1995), was considered low.

Moreover, since large-sized companies generally have more extensive LCCS

operations, the qualifying criterion for participation was set to an annual revenue
exceeding 300 million euros. Finally, in order to let the sample represent firms
located in the largest Western European markets, the sample frame was
proportionally stratified into France, Germany, Italy, Spain and the UK.

The next step was to define the sample frame, which consists of all sample units
representing the population. The sample frame can be a list of names with
addresses for a mail survey, or a map showing residential areas for face-to-face
interviews with residents. In this study, the sample frame consisted of an
electronic database obtained from Dun & Bradstreet, which contained 5,147
entries of names and corresponding telephone numbers of potential respondents.

The actual respondents were randomly selected from the database by using a
computerized random number generator, thus fulfilling the criterion of being a
probability sample (Riley et al., 2003). This implies that each sample unit has a
known, non-zero chance of being selected (Arber, 1993; Chisnall, 1991).
 91

Probability sampling provides the best means for drawing a sample that can be
generalized to the population through inferential extrapolation.

Furthermore, the sample should be sufficiently large in order to provide adequate

reliability, but not larger, as this would be a waste of resources. A rule of thumb
suggests that the sample should be somewhere between 100-1,000 units, and not
exceeding ten percent of the population (Alreck & Settle, 1995). This rule of
thumb hence suggests that the maximum sample size is somewhere in the range
100-500 units. Roscoe (1975) is a little bit less conservative and suggests a
minimum sample size of 30 units and ten times as large as the number of
independent variables if multivariate techniques are being deployed. After some
scrutiny, a sample size N = 200 was considered appropriate with respect to the
planned multivariate analysis methods to be used and with respect to requirements
for reliability and validity. With a target of a total number of 200 interviews, this
yields a probability of 3.9 percent of being selected (200 / 5,147).

All in all 1,273 phone calls had to be made in order to obtain the two hundred
interviews. Out of the total number of calls, about 15 percent resulted in no
answer, and another 14 percent resulted in an answering machine. Three percent
of the numbers were invalid. The remaining 68 percent equals 866 firms which
yields an effective response rate at 23.1 percent. The response rate is comparable
to those of mail surveys and poses no problem as sometimes have been pointed
out in literature (Fitti, 1979; Massey, Barker, & Hsuing, 1981). The sample
represented a wide range of industries, distributed as depicted in Figure 16. The
industries correspond to NAISC codes 11, 21, 23, 32, 33, 44, 45, 48 and 52.7
Mean direct and indirect spend volume were 651 and 262 million euros,
respectively. The questionnaire used for the survey is shown in Appendix B.

7
The NAISC used in this thesis were obtained from the NAICS Association web site
(http//www.naics.com/search/), by extracting the two first digits from the respective industry codes
returned by the search engine.
 92

Financial Services
3%
Transportation 4% Other 2%
Food & Agriculture
Retail 6%
16%

Telecom 7%

Pharma, Chemical
Machinery 16%
8%

Electronics 8%
Energy/
Resources/
Automotive 8% Material 12%
Construction 10%

Figure 20. Industry representation

About 83 percent of the completed interviews came on a follow-up call; this

differentiation was used to detect possible non-response bias. To test for this, a
modified procedure suggested by Armstrong and Overton (1977) was applied.
First-call interviews were compared to follow-up call interviews on three nominal
variables, namely industry, country of business unit headquarters and spend
volume. The assumption of this analysis was that follow-up call respondents
shared similar characteristics and response biases with non-respondents. A chi-
square test (Figure 20) indicated that no significant differences existed between
first-call and follow-up call respondents for country (Ȥ24df = 4.989, p = 0.288),
spend volume (Ȥ24df = 5.781, p = 0.216) or industry (Ȥ211df = 11.99, p = 0.364).
Thus, there was no evidence of obvious response bias in the sample. Although
more stringent non-response bias tests exist (Mentzer & Flint, 1997), the one
applied for this particular study was considered sufficient.
 93

Table 11. Chi-square test for non-response bias

Cells shows count/

expected
2
count/column % First call Call-back Total (%) Ȥ Sig.

Country 4.989 0.288

France 7 6.0 20.6 28 29.0 17.0 17.6
Germany 6 8.5 17.6 44 41.5 26.7 25.1
Italy 10 6.0 29.5 25 29.0 15.2 17.6
Spain 3 4.1 8.8 21 19.9 12.7 12.1
UK 8 9.4 23.5 47 45.6 28.4 27.6

Total 34 34.0 100.0 165 165.0 100.0 100.0

Spend volume (mn 5.781 0.216

euros)
< 51 11 6.8 55.0 41 45.2 31.1 34.2
51 í 100 0 2.1 0.0 16 13.9 12.1 10.5
101 í 500 5 6.3 25.0 43 41.7 32.6 31.6
501 í 1,000 2 2.4 10.0 16 15.6 12.1 11.8
> 1,000 2 2.4 10.0 16 15.6 12.1 11.8

Total 20 20.0 100.0 132 132.0 100.0 100.0

Industry 11.99 0.364

Automotive 3 2.7 8.8 13 13.3 7.9 8.0
Construction 5 3.4 14.8 15 16.6 9.1 10.1
Energy/Resources/Mater 3 4.1 8.8 21 19.9 12.7 12.2
ial
0 1.0 0.0 6 5.0 3.6 3.0
Financial Services
10 5.5 29.5 22 26.5 13.3 16.1
Food & Agriculture
2 2.7 5.9 14 13.3 8.5 8.0
Electronics
5 5.5 14.7 27 26.5 16.4 16.1
Machinery
1 2.7 2.9 15 13.3 9.1 8.0
Pharma, Chemical
0 2.1 0.0 12 9.9 7.3 6.0
Retail
3 2.4 8.8 11 11.6 6.7 7.0
Telecommunications
1 1.4 2.9 7 6.6 4.2 4.0
Transportation
1 0.5 2.9 2 2.5 1.2 1.5
Other

Total 34 34.0 100.0 165 165.0 100.0 100.0

3.3. Philosophical Considerations

Silverman (2000) gives proposes four fundamental questions to be answered when
doing qualitative research. These four questions, which provide guidance
 94

throughout the research process, are no less important when doing quantitative
research. They are as follows:

1. How did you go about your research?

2. What overall research strategy did you adopt and why?

3. What design and what techniques did you use?

4. Why these and not others?

At a first glance, these questions may sound trivial and obvious. However, after a
second thought, one realizes that they are indeed very pragmatic and useful. The
questions are also in line with what Saunders (1997) states as important issues to
address in a methodology chapter. Simply put, a conscious mind is essential when
doing research. Without it, there is no possibility to find an optimal path towards
the destined goal. Preferably, the research process starts with a set of concrete
research questions that together serve as a beacon for navigation. Furthermore,
careful planning of the different steps in the research process is also very
important.

In other words, the research process pretty much resembles of classical project
planning and execution. Quantitative research is generally highly focused and the
methodology is predetermined. Qualitative research, on the other hand, has often a
more probing and exploratory nature, and the research process is often redefined
and modified throughout the course of the research (Hussey & Hussey, 1997).

According to Burrell and Morgan (1979), social science can be conceptualized

along four dimensions, namely ontology, epistemology, human nature and
methodology. Each of the dimensions has its extremes, with according names as
shown below Figure 21. Since business science and strategic management science
very much resembles of social science in terms of contents and methodology, a
similar concept was applied in this study.
 95

Ontology
Nominalism Realism

Epistemology
Anti-positivism Positivism

Human nature
Voluntarism Determinism

Methodology
Idiographic Nomothetic

Figure 21. Philosophical research dimensions

3.3.1. Ontology
Ontology, which comes from the Greek word for “being”, addresses the very
essence of the phenomenon subject of study in the research (Hollis, 1994).
Ontology aims at answering whether there is an objective reality, or if the reality
is in the eye of the beholder.

In social sciences, relationships among entities are many times very diffuse and
extremely complex. The difficulty to measure many properties, such as
intelligence or trust implies that social science contains a significant degree of
subjectiveness is referred to as “nominalism”. This means that the “truths” are just
created by individual cognition and social communication of the ideas. On the
other side of the scale, one could for example put natural sciences such as
chemistry or physics which measure quantities that are relatively simple to assess.
Consequently, natural sciences belong to what is referred to as “realism”.

Business science, on the other hand, to which the LCCS topic belongs, probably
lies somewhere in between on the scale, as there is a mix of quantities to measure.
Some are easy to quantify, for example return on investment, cash flow, or profit.
Others, such as innovativeness, flexibility, or competitiveness, are much more
difficult to grasp, and are thus of a more nominalistic nature. With this in mind,
the research in this thesis is ontologically anchored relatively far towards the
realism endpoint, as objective facts are to be obtained.
 96

3.3.2. Epistemology
Epistemology deals with the production and or acquisition of knowledge, what is
true and false, and how knowledge is communicated. Here, the two extremes
argue either that the knowledge about the world can be proved or rejected,
identifying laws of cause and effect (“positivism”), or identifying subjective
knowledge of individuals (“anti-positivism”) 8 . Positivism tries to produce
knowledge through verifying or falsifying hypotheses; in the end, observations
made will ultimately distill down to what is considered true knowledge.

Positivism has close ties to natural sciences where the observer is passive and
does not interfere with the phenomenon. The heavy focus on cause and effect
therefore stresses the ”how” questions rather than the ”why” questions. Through
reduction, the phenomenon subject of study can be simplified and easier to
investigate. The logic boils down to the conclusion that there is no difference
between something that cannot be observed and something that does not exist at
all. Relativism, in contrast, aims at probing a problem from within, rather than
being a passive observer. What is more, not only the problem itself is of
importance, but also the surrounding environment. Consequently, a holistic
approach is preferable when conducting qualitative research.

For the research in this study, the epistemological dimension is primarily towards
the positivistic extreme, as the research specimen is modeled through deduction of
a number of hypotheses that are tested quantitatively. It is not purely positivistic
though, as chapter 4 is relatively holistic and tries to give a complete rather than
reduced picture of the LCCS phenomenon.

3.3.3. Human Nature

Human nature concerns the question whether the environment affect the actions of
an individual or vice versa. Such environmental factors can for example be social

8
It is worth noting that the terminology used varies from author to author. Other terms for
“positivism” are for example “representativism” or “objectivism”, while for “anti-positivism”
terms such as “relativism”, “constructivism” or “relativism” have been used. See for example
Rüegg-Stürm (2003) for an alternative terminology.
 97

heredity or structures. One extreme, where all actions of an individual are

predestined by environmental factors, is referred to as “determinism”. In a social
context, this implies that free will is only an illusion and therefore the observer
can investigate and predict the actions of an individual by looking at his or hers
immediate surroundings. In contrast, where free will exists, actions of an
individual do not follow a predestined path. As a consequence, two different
individuals, in two identical environments, are not predestined to take the same
actions. This end of the scale is commonly known as “voluntarism”.

In a business setting, this dimension is very difficult to assess. If the time frame
through which environmental factors are considered is extended to infinity, one
could of course argue that the situation is completely deterministic (i.e. behavior
inherited genetically is a result of evolution). With the time frame equivalent to
the life span of an average individual, the truth probably lies somewhere in
between. That means that individual actions are to some extent determined by the
surrounding environment, and to some extent to free will.

3.3.4. Methodology
The three philosophical dimensions above have all significant impact on the
research methodology since they determine for example how to formulate
research questions, apply theory, collect empirical data, as well as analyze and
interpret empirical data. For example, if one relies on subjectivist approaches to
social science, the case study method, which involves a small group of research
subjects that are qualitatively investigated, should be highly suitable (Larsson,
1993). On the other hand, if an objectivist approach is applied, where a large
sample is examined quantitatively, the nomothetic survey method would be
preferred (Larsson, 1993).

Without doubt, the research in this thesis belongs to the latter category, especially
chapter 5, where the number of variables is small in comparison to the sample size.
Although the methodology applied in Chapter 4 is more of a probing nature, it is
yet quantitative and performed through the same survey, thus making it
 98

predominantly objectivistic. A graphical representation of the philosophical

considerations of the research in this thesis is depicted in Figure 18.

Nominalism Realism

Anti-positivism Positivism

Voluntarism Determinism

Idiographic Nomothetic

Figure 22. Graphical representation of philosophical considerations

The research of this thesis concerns low-cost country sourcing, which repeatedly
has been claimed to have a significant impact on strategic and operational
performance (Alguire et al., 1994; Kotabe, 1994; R.J. Trent & R. M. Monczka,
2002). The phenomena are trends and implications of low-cost country sourcing,
which in themselves set the focal point of the research. These two phenomena
consist of several parts that need to be broken down and analyzed systematically
while not losing the big picture. Despite its status as “buzz word” in business
contexts, it cannot survive and gain acceptance without substantial scientific
underpinnings over the long term. Thus, this study aims at investigating low-cost
country sourcing as a strategic and viable concept for generating sustainable
competitive advantage.

3.4. Interim Summary

Choosing appropriate research methodology is a daunting task that needs
thorough and careful planning. Moreover, developing a solid research strategy is
crucial in order to successfully complete the research project. Luckily, as a
doctoral student in business science and strategic management, the research
strategy development process is at heart very similar to traditional strategy
formulation within firms, and therefore does not pose any significant problems in
theory. However, as researcher, one needs to know the different research design
parameters, and which configurations work in which situations.
 99

First, the research design was elaborated in chapter 3.1. The research design is
centered on four design parameters, each of which forms a continuum between
two extremes. These are pure/applied research, primary/secondary research,
theoretical/empirical research, and descriptive/explanatory research. None of the
design parameters were configured at either extreme, but rather somewhere in
between, i.e. the research utilize several techniques and approaches. In sum
though, it can be concluded that the research in this thesis is more applied than
theoretical, uses more primary than secondary data, more empirical than
theoretical, and approximately equally descriptive as explanatory.

Chapter 3.2 laid the groundwork for how to go about the research by developing a
research strategy. The strategy was developed according to a generally accepted
approach, which consists of six process steps, namely (1) observation of a real-life
phenomenon, (2) literature review and identification of a problem, (3) hypothesis
and theoretical framework development, (4) operationalization of constructs and
research model development, (5) data collection and analysis, and finally (6)
hypothesis testing and interpretation of results. A feedback loop from the last
phase ensured that the theoretical underpinnings could be altered depending on
the outcome of the analysis. The empirical study was conducted in the shape of
expert interviews which served as a pre-study, followed by a large-scale survey
involving 200 CPOs at large-sized firms from France, Germany, Italy, Spain and
the UK.

In chapter 3.3 philosophical aspects of the research were also considered, namely
ontology, epistemology, human nature, and methodology. They form four distinct
continua, similar to the research design parameters in chapter 3.1, and the
extremes on each continuum are nominalism/realism, anti-positivism/positivism,
voluntarism/determinism, and idiographic/nomothetic research method,
respectively. By configuring the research along these four continua, fundamental
questions such as how the world is perceived, how knowledge can be obtained,
and what the most appropriate research method is, can be answered.
 101

4. Low-Cost Country Sourcing Trends: A

Descriptive Study
Although the term low-cost country sourcing is relatively new, its roots in the
concept of international trade are almost as old as trade itself. However, the
industry has experienced dramatic changes over the last few decades. Instead of
operating in a geographically concentrated area and selling to a large market, the
constituent parts of the corporate value chain are being relocated world-wide. As
an example, consider a global automotive company: design and marketing may be
conducted at R&D facilities in the EU and India; components may be sourced in
China, which are later assembled in Eastern Europe. Final products can then be
distributed world-wide, focusing on the US, Europe and Japan as primary sales
markets.

This trend is prevalent in many industries where multinational companies try to

optimize their value chains. By relocating the constituent parts, the influence from
various trade-offs can be minimized and ultimately yielding higher return on
investments. Better communication and removal of trade barriers have also
reduced friction so that capital, goods and information can flow more or less
freely across borders. As a consequence, momentum and scale of the trend has
recently accelerated. The aim of this chapter is to identify and assess the
magnitude of these trends as a starting point for exploratory research, but also
provide guidance for strategy development among practitioners.

There are many driving forces behind globalization, but they can generally be
condensed to four main categories, namely political factors, socio-economic
factors, technological factors, and macro-economic factors (Figure 23). Political
factors refer to regulations and policies set by local and national governments,
such as trade barriers, tax rates and labor laws. Socio-economic factors deal with
characteristics of the population in a nation, for example educational levels,
language proficiency, cultural openness, and so on. Technological factors includes
use of new innovations that can help reducing communication and transportation
costs, such as wireless and information technologies, new and improved means of
 102

transportation etc. Finally, macro-economic factors refer to productivity and

growth of markets, wage, tax and interest rates, foreign direct investments, among
others. The driving forces are not nurturing the globalization process in isolation
however, but interplay in a complex manner. For example, technological
advancements can reduce communication costs, which in turns affect social
behavior and nurturing cultural openness, ultimately leading to altered economic
policies, and so on.

Macro-Economical 1 Political Factors

Factors ƒ Removal of trade barriers such as tariffs and quotas
ƒ Large wage differentials ƒ New WTO members, e.g. China‘s entry in 2001.
ƒ High foreign direct investments ƒ Weak labor protection laws and labor unions
(FDI): $153 bn in China 2004
ƒ Low tax and interest rates
ƒ High economic growth in LCCS
ƒ Decreasing transportation 2
costs
Socio-Demographic
ƒ Decreasing communication Globalization Factors
costs
ƒ Large pool of both educated
4
and low-wage labor
ƒ Highly motivated workforce
Technological Factors
ƒ Rapid developments in wireless technologies and Internet ƒ Large consumer base due to
large population numbers
ƒ Adoption of sophisticated computer software such as ERPs,
e-procurement solutions etc. ƒ Improved English proficiency

ƒ Improved transportation in terms of infrastructure, logistical ƒ Cultural openness

3
systems and vehicles

Figure 23. Driving forces behind globalization

On the supply side, this has led to a situation where goods and services are
sourced more and more on a global scale, with less attention to national borders.
In other words, a shift in sourcing patterns is taking place. Most notably, we will
see that China is more important than the home country to French companies, and
this pattern will be even more pronounced by 2010. Moreover, according to the
statistics obtained, historical trade patterns still remain, at least to some extent.
Tied to geography, culture and language, data shows that companies still source
extensively in their home countries and neighboring countries, with a few
important exceptions.
 103

4.1. Purchasing and Supply Management Trends

Before starting to discuss trends in the field of LCCS, it is worthwhile to discuss
general trends that take place in the field of purchasing and supply management.
Therefore, this chapter is devoted to highlight these trends according the literature.

As was discussed in chapter 2.1, purchasing was once regarded as a non-strategic

and reactive activity that did not contribute to firm performance. Nowadays,
however, purchasing has more and more developed into supply management,
where its positive contributions to firm performance is gaining increasing
acknowledgement. New paradigms such as early supplier involvement, cross-
functional collaboration and spend consolidation have proved to be “key success
factors” to purchasing and supply management (Dobler & Burt, 1996; Trent &
Monczka, 1994)

So how are the trends manifested in the purchasing and supply management
literature? A study by Trent and Monczka (1998) indicated that the trends take
place at the following levels:

„ Performance improvement requirements

„ Supplier and purchasing and sourcing importance
„ Organization
„ Systems development
„ Performance measurement
„ Supply base management
„ Purchasing responsibilities and activities

Clearly, the key drivers can be found at many levels throughout firms, industries,
and the economy as a whole. The following sub sections deal with the different
sub trends more in-depth.

4.1.1. Performance Improvements

The need for continuous improvement is becoming increasingly important as
global competition becomes higher. Classical targets for continuous improvement
are for example cycle times, costs, quality and delivery, both within the own
 104

organization, but also through cooperation with external suppliers. While quality
and cost have always been perceived as important, time-related factors (i.e. speed)
have become the next target for efficiency improvements.

In line with the old adage “You cannot manage what you cannot measure”
(Kaplan & Norton, 1992), performance measurement is necessary for gauging the
success rate of functional and team-based strategies and plans. More in-depth,
purchasing managers should deploy performance measurement to assess the
following (Monczka et al., 1998):

„ Supplier performance and opportunities for joint improvements

„ Past and present performance, as well as outlooks for future performance
„ Supplier relationship configurations depending on supply category
(strategic, non-strategic supplies etc.)
„ Supplier development and early supplier involvement outcomes

The current trend aims at focusing more on effectiveness rather than efficiency, i.e.
contributions to top-line results through sourcing of innovations etc. This also
indicated a paradigm shift where the perceived strategic importance of purchasing
and supply management is on the rise.

4.1.2. Supplier, purchasing and sourcing importance

The shift in supplier importance is a result of at least five factors which affect
most industries (Trent & Monczka, 1998):

„ The need to influence end-product prices

„ The need to reduce the total cost of ownership for acquired supplies
„ The need to involve suppliers to respond to end-customers requirements,
especially since it affects time-related requirements
„ Supplier base reduction (i.e. towards fewer but more strategic suppliers)
„ An increasingly important role for suppliers to design and build entire
subassemblies and subsystems for production

Not very long time ago, it was common practice for buying firms to play suppliers
off against each other. Moreover, it was also common to switch suppliers on a
 105

regular basis and only offer short-term contracts in order to induce competition
among them. Today, practices have significantly changed and buying firms have
more diverse range of relationships with their suppliers. The trend is indicating
that most companies will continue to reduce their suppliers and instead
developing the relationships with preferred suppliers (Trent & Monczka, 1998).

Hand in hand with this trend is another related trend which implies reliance on
larger full-service suppliers that have capabilities to design and build entire
subsystems, contrary to the alternative approach to have many smaller suppliers
providing components of the subsystem (Trent & Monczka, 1998). Often, supplier
base reductions involved picking a smaller group of suppliers out of the original
supplier base. Potentially, the supplier base reduction could have been performed
more effectively if it also included involvement of new suppliers, especially from
other geographic regions, such as LCCs. Supplier base reduction can facilitate the
focus on core competencies, ultimately improving effectiveness and efficiency
(Jahns, 2005).

As discussed above, the historic developments show purchasing and supply

management has become increasingly important, and indicate a need for a more
cross-functional and strategic focus. It appears from literature that there are three
distinct types of strategies for purchasing and supply management (Ellram & Carr,
1994):

„ Specific purchasing and supply strategies confined to the

purchasing/supply function
„ Purchasing and supply strategies as support for other functional units,
such as marketing, R&D, production etc.
„ Utilization of purchasing and supply strategies for the company as a whole

While these strategy types are closely interrelated, they are unique in terms of
their execution and impact on the purchasing and supply function. At the first
level, the purchasing and supply function develops and executes its own strategies
and, whereas at a higher level the strategies might turn out to be dysfunctional for
the organization as a whole. In other words, what is optimal for the purchasing
 106

and supply function might not be optimal for the company. At the second level the
purchasing and supply strategies are designed to support the corporate strategy to
the greatest extent possible. Finally, at the third level purchasing and supply
management is an integral part of the corporate strategy. The alignment of the
sourcing strategy is an important aspect when sourcing in LCCs, as will be shown
in chapter 4.2.

4.1.3. Organization
Having an adequate organizational structure is essential for successfully
implementing a viable sourcing strategy. Today this usually implies collaboration
not only between functional units and business units within the firm, but also with
preferred suppliers. The need to achieve bundling effects for purchase spend has
led to a concentration of buying centers, resulting in hybrid organizational
structures. This reflects an increased need for purchasing and supply management
to become more integrated with other parts of the organization.

A shift in responsibilities of purchasing activities has also taken place, which

indicates the increased perceived strategic importance of purchasing and supply
management. The study by Trent and Monczka (1998) shows that the strategic
and external focus on sourcing activities can be expected to increase. Furthermore,
a decrease in tactically oriented tasks can be expected.

There is also an emphasis on purchasing and supply systems development due to

the need to coordinate purchasing and sourcing activities across different
geographic locations, which shows that the strategic perspective is rather
organizational than a functional, with increasingly complex and strategic
responsibilities for existing staff members. The support from various systems
plays a crucial role when sourcing in LCCs, due to the wide range of challenges,
such as increased transportation distances, new requirements for sample and
quality inspections, different time zones, among others (Battacharya et al., 2004).
The impact on these aspects among others will be elaborated later in the chapter.
 107

4.2. Strategic LCCS Management

Low-cost country sourcing is an undertaking that spans across multiple business
units, functional departments and geographical regions. In order to manage and
coordinate such large-scale and complex operations, it is imperative that
businesses have the adequate organization, staffing and leadership to undertake
such a task (Dobler & Burt, 1996; Monczka & Trent, 1993; Trent & Monczka,
1994).

As such, this chapter uncovers how companies are formulating visions and
strategies in order to maximize the value of their end-customer products and
services through low-cost country sourcing. As a starting point, the Supply
Management Navigator (SMN) was used as an analytical framework (Jahns,
2005). It contains the necessary information for effective and efficient
purchasing/supply management practices. Since the target group for this study
primarily consists of CPOs, the areas of investigation focused on the management
module (Figure 24).

Supply Vision Supply Value

Management Modules

Strategy Modules Supply Strategy

Management

Supply Comm. Supply Process Supply

Process Modules
Management Management Organisation

Supply Human Resource Supply Controlling &

Potential Modul
Management Supply Risk Management

Core Module Supply Performance Management

Support Modules Contract Supply Supply Supply Supply Bench-

Mgt. Tech. Tools Logistics Systems marking

Figure 24. The Supply Management Navigator

4.2.1. Articulation of Visions

First of all, it is our belief that low-cost country sourcing cannot be successfully
managed without support from senior management. As a first step, the top
 108

manager of the purchasing department needs to be positioned at board level

(Soellner & Mackrodt, 1999). This is the only way in which ambitious strategic
goals for the purchasing department can be set and propagated throughout the
organization, with the fulfillment of necessary resource requirements (Figure 25).

A chief procurement officer at senior management level has the power to set a
corporate vision for global sourcing activities that can later be effectively
translated into strategies for individual business units (Monczka et al., 1998), and
to serve internal customers (D. F. Lawrence, Hopkins, & Bhonsle, 2005). In this
context, the vision itself serves as a starting-point for definition of important
sourcing markets, and how these can be exploited in order to optimize the
corporate value chain (C. R. Carter, 1998). A clearly articulated vision is essential
for the long-term orientation of supply side activities and for the conformity to the
overarching corporate philosophy (Module 1 in the SMN).

When asked whether companies have extensively taken action to facilitate

formulation and alignment of a vision for LCCS (Figure 25), 28 percent of the
respondents are involving senior management to a very high extent in the
development of an LCCS vision. Consistent with this finding, 25 percent of the
companies are aligning the LCCS vision to the corporate vision, and almost as
many respondents claim that their companies are aligning business operations to
the LCCS vision. Ranking number four, only 14 percent of the respondents say
they have articulated a mission statement for daily LCCS activities to a very high
extent.
Involve senior
management in
LCCS vision4 8% 12% 19% 33% 28%
development
Not at all
Align LCCS vision to3 8% 13% 23% 31% 25% Not at all extent
To some
corporate vision
To some extent
Toaamoderate
To moderateextent
extent
Align operations to2 To
Toaahigh
highextent
extent
6% 10% 31% 29% 24%
the LCCS vision To a very high extent
To a very high extent
Articulate a mission
statement for daily1 18% 19% 24% 25% 14%
activities

0% 20% 40% 60% 80% 100%

Share of respondents in percent

Figure 25. Vision for low-cost country sourcing activities

 109

4.2.2. Strategy Development

The vision then needs to be translated into an executable strategy (Module 2 in the
SMN) (Jahns, 2005; Shrivastava, 1994). In essence, the low-cost country sourcing
strategy is about setting up goals and approaches for how to satisfy internal
customer needs among world-wide business units, through coordination and
integration of purchasing activities (cf. 2.1.1). Since the internal customer base
ranges from back-office support functions to assembly and manufacturing core
functions, the demands in terms of cost, quality and delivery vary considerably.

Therefore, it is of great importance that the low-cost country sourcing strategy is

broken down so that different supply categories, geographical regions and
different internal requirements can be taken into consideration (Leenders, Johnson,
Flynn, & Fearon, 2002). As a concluding remark, no strategy can succeed without
appropriate staffing, organization, control or leadership. This is even more
important in the context of low-cost country sourcing due to geographical, cultural
and political diversity.

According to the LCCS strategy results (Figure 26), it is clear that the most
widely taken action is to align the LCCS strategy to the corporate strategy.
Companies are also adapting the LCCS strategy to threats and opportunities in the
external environment to an equal extent. Implemented to a slightly lesser extent,
companies have derived strategies for how to source individual supply categories
in LCCs. The majority of participating companies have also aligned their LCCS
strategies with other functional strategies such as R&D, marketing etc. This
indicates that functional departments within the organization are collaborating to
some extent. In second to last place, we find integration of strategic suppliers into
business processes such as early supplier involvement only implemented to a high
or very high extent among 30 percent of the respondents. Lastly, organizational
changes to support LCCS are the action that is taken to the least extent.
 110

Align LCCS
Adapt LCCS strategy
strategy to the
to threats and
corporate
opportunities strategy
of sourcing markets 8% 16% 28% 31%
31% 17%

AlignAdapt LCCStostrategy
LCCS strategy to
the corporate
threats and opportunities
strategy 8% 15% 27% 34%
34% 16%

Not at all
Derive
Derive strategies for individual
special strategies for individual Not at all
11% 18% 28% 30%
30% 13%
LCCS
LCCS supply
supplies andcategories
services To some extent
To some extent
Link LCCS
Integrate strategy
strategic to other
LCCS suppliers into ToTomoderate
a moderate extent
extent
business processes 17% 19% 28% 25%
25% 11%
functional strategies ToTohigh extent
a high extent
To very high extent
Do organisational changes toLCCS
Integrate strategic support To a very high extent
LCCS initativesprocess 21% 24% 24% 22%
22% 8%
suppliers into business

Do
Linkorganisational changes
LCCS strategy to other to
functional
9% 22% 31% 32%
32% 6%
supportstrategies
LCCS initiatives

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Share of respondents in percent

Figure 26. Low-cost country sourcing strategy

4.2.3. Performance Measurement

Performance measurement is another important issue when sourcing in LCCs
(Module 8 in the SMN). The old mantra “if you cannot measure it, you cannot
manage it” also applies in this context (Kaplan & Norton, 1992). The company
needs to have the ability to timely assess the right selection of key performance
indicators (KPIs) in terms of cost, quality and delivery and use these to take
appropriate action. This section pinpoints a selection of the most common KPIs
and the extent to which they are used among the participating companies.

As can be seen in Figure 27, it is evident that companies are primarily focusing on
the quality of goods and services sourced (i.e. conformity to specifications); 56
percent of the companies do this to a high or very high extent. Total cost savings
is measured to a slightly lesser extent, but is still frequently evaluated among the
majority of the respondents. The reason why this number is not higher might be
due to difficulties in assessing enterprise-wide spend data. Delivery reliability is
measured more or less to the same extent as order lead time (measured to a high
or very high extent by 35 percent of the responding companies). Percentage of
spend sourced in LCCs is found in last place (measured to a high or very high
extent by 31 percent of the respondents).
 111

Quality5 14% 9% 21% 27% 29%

Total savings delivered4 17% 10% 27% 26% 20%

Not at all
NotTo
at some
all extent
To some extent
Delivery reliability3 18% 10% 27% 25% 20% To a moderate extent
To a moderate extent
To To a high
a high extent
extent
To a very high extent
Order lead time2 To a very high extent
21% 16% 28% 19% 16%

Percentage of spend
sourced in low-cost1 20% 18% 31% 21% 10%
countries

0% 20% 40% 60% 80% 100%

Share of respondents in percent

Figure 27. Use of key performance indicators

4.2.4. Organization
Having the right organization is a crucial aspect of any company (Module 6 in the
SMN) (Barney, 1997; Barney & Hesterly, 1996). This holds especially true when
sourcing in LCCs – it does not matter how good the strategy is if the organization
is not able to execute it. In order not to sub-optimize overall company
performance, it is important that functional departments can cooperate and
coordinate activities at an appropriate level (Dobler & Burt, 1996; Leenders et al.,
2002).

Quality assurance 61%

R&D 61%

Marketing 47%

Finance and controlling 45%

Manufacturing 42%

Warehousing/Distribution 27%

0% 10% 20% 30% 40% 50% 60% 70%

Percentage of functional involvement in purchasing teams

Figure 28. Use of cross-functional purchasing teams

 112

As can be seen in Figure 28, the quality assurance department and R&D
department are, on average, involved in 61 percent of cross-functional purchasing
teams in the participating companies, closely followed by the marketing and the
finance/controlling department at 47 and 45 percent, respectively. The
manufacturing department is slightly less frequently involved with 42 percent
involved in cross-functional purchasing teams.

So now we know that quality assurance and R&D are most commonly involved in
cross-functional purchasing teams. But who is initiating and driving LCCS
initiatives within the business? A closer look at Figure 29 shows that 34 percent of
the respondents claim that the CPO is most commonly initiating LCCS activities.
This comes with no surprise, since the CPO usually has the ultimate responsibility
for the purchasing/supply function (Dobler & Burt, 1996; Leenders et al., 2002).
Next follow the CEO and COO, which are also relatively frequently initiating and
driving the LCCS operations. The CFO is involved less often, as is the case with
internal and external customers. Although not a common practice, LCCS activities
can sometimes be driven by other stakeholders such as staff at the R&D
department.

t
(CPO) 34%

r
(CEO) 21%

r
(COO) 14%

r
(CFO) 8%

s
Customers 7%

Other
r 16%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Percentage of LCCS initiatives most frequently intitiated by stakeholder

Figure 29. Who initiates and drives LCCS initiatives?

Another strategically important aspect is the choice of purchasing channel

(sometimes called “procurement channel”), which is the very connection to the
 113

individual sourcing market. Which type of purchasing channel is most suitable for
a given situation is such a highly complex issue; a whole book could be written on
the topic. Consequently, as this part of the thesis is a descriptive study, the aim is
to examine to what extent different purchasing channels are being used by large-
sized companies today, thus focusing less on the underlying determinants.

Nevertheless it can be stated that one of the most important decisive factors for
the choice of purchasing channel is the purchase volume from a specific sourcing
market (Carduck, 2000). Normally, with a purchase volume exceeding 100
million Euro per year, an international procurement office (IPO) can be justified.
Figure 30 shows the current situation among the responding companies.

Direct
Direct purchasingfrom
purchasing from LCC
LCC
25%
supplier supplier

Purchasing from LCC

Purchasing from LCC supplier
supplier through foreign 21%
through foreign subsidiary
subsidiary

Purchasing from LCC

Purchasing fromthrough
LCC
supplier’s subsidiary in home 20%
supplier's sales subsidiary
country

Purchasingthrough
Purchasing through 3
3rd party
party
rd
19%
intermediary
intermediary

Purchasingthrough
Purchasing through IPO
IPO 16%

0% 5% 10% 15% 20% 25% 30%

Percetage of responses for most important purchasing channel

Figure 30. The purchasing channel

As can be seen in Figure 30, the predominant way to purchase from LCCs is
through direct purchasing from suppliers in the LCC. The second most popular
approach is to make use of another subsidiary of the parent company for
purchasing activities. Although associated with the highest risks, these two
alternatives provide the best opportunities for close collaboration and
development of suppliers (Carduck, 2000). Closely followed on third place, we
find the alternative to purchase from sales subsidiaries belonging to the supplier in
the home country of the buying firm. Next follows purchasing through third-party
intermediaries such as trade houses, brokers and agents. Although a less risky
 114

alternative, advantages can be offset by hefty mark-ups on purchase price. On last

place is purchasing through international procurement offices. Most likely, the
relatively scarce usage is due to insufficient purchasing volumes. In other words,
the costs of operating the IPOs offset the cost savings they can generate.

4.2.5. Human Resources Management

Internal capabilities of the buying organization are among the most important key
success factors when sourcing in LCCs (Module 4 in the SMN). Without proper
knowledge about what to source, how to source, or where to source, failure is
inevitable. On a scale ranging from one to five, the participating companies rated
their level of knowledge for carrying out LCCS operations to 3.0 on average.
Positioned right in the middle of the extremes of the scale, this indicates that
LCCS is today a challenge that takes time and effort as the knowledge level is
apparently not optimal.

Figure 31 shows that the overall knowledge level of various topics associated with
LCCS is relatively moderate among the participating companies. Only knowledge
about cross-functional collaboration stands out of the crowd. Moreover, as an
example, for knowledge about LCCS strategy development, 41 percent of the
responses belongs to the “moderate” category; such an important core activity is
expected to score much higher.

If one is not sure whether a newly developed strategy is optimal, then there is
naturally a risk of sub optimal results. In line with the data obtained, more non-
strategic topics about supportive systems, such as supply systems, were expected
to score relatively low; these are often subject to outsourcing to external service
providers. As other research has shown that fifty percent of all offshoring projects
do not meet expectations (Cohen & Young, 2005), a lack of knowledge could
potentially be one of the sticking points.
 115

8 6%
cross-functional collaboration 17% 26% 40%
40% 12%

local operations knowledge

7 11% 15% 32% 11%
32%
(supplier site assessment)

enterprise-wide LCCS information 6 7% 22% 33% 25% 13%

25%
transparency (spend visibility) Not at all
Non-existent
LCCS strategy development
5
entry/exit/operations strategy)
7% 21% 41% 22%
22% 9% To some extent
Little
Moderate
supply systems To a moderate extent
4 10% 19% 38% 29%
29% 5% High
(e-sourcing platforms etc.)
To a high
Very high extent
3t
LCCS process managemen 8% 22% 40% 24% 6% To a very high extent
LCCS trade (economics,
2
culture, politics, barriers) 10% 26% 41% 17% 7%

outsourcing of LCCS process

1
(e.g. to 3rd party IPO) 24% 21% 34% 14%
14% 7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Share of respondents in percent

Figure 31. LCCS knowledge level

4.3. LCCS Operations

This chapter focuses on the more operational aspects of LCCS, that is, activities
with a relatively short planning horizon. That does not mean that the activities
lack strategic importance, but is rather a means to distinguish it from the purely
managerial topics that were described in the previous chapter. The topics
addressed in this chapter include analysis and outlook of important sourcing
countries, degree goods and services sourced in LCCs, and types of supplies
sourced in LCCs.

4.3.1. Important Sourcing Countries

The aim of this section is to examine the sourcing pattern shift by investigating
important sourcing countries for the companies participating in the study. The
importance was measured by letting the respondents rank their three most
important sourcing countries. The ranking was then aggregated to a single
measure, showing the percentage of total responses rating a country among the
three most important ones. To give a clearer picture, the statistics are presented
separately for direct and indirect spend, country by country, showing one bar for
2005 and one for 2010.

Direct spend is defined as a purchased good that is required to manufacture a

finished good or service that is provided to the customer; in other words, inputs to
 116

the manufacturing process such as components and related material. Indirect

spend can most easily be defined as all purchase spend not categorized as direct
spend.

The sourcing pattern for France is very interesting (Figure 32 and Figure 33). As
shown in the chart, China is currently considered significantly more important
than the home country (scoring 49 vs. 32 percent for direct spend and 45 vs. 37
percent for indirect spend). Moreover, the gap between the two countries will
increase even further over the next five years, with a score of 62/65 percent (from
now on written as “direct/indirect spend”) for China and a small drop from 32/37
percent to 27/35 percent for France. Italy, Poland and Thailand will remain
relatively important, whereas Germany is expected to fall in importance for
sourcing of direct supplies.

70%

62%
60%
Percentage of total responses for top 3
most important sourcing countries

49%
50%

40%

32%

30% 27%
25% 24% 23%
22% 21%
20%
16%
15%
13%
12% 11% 11%
8% 8% 8% 8%
10% 7%

0%
nd

a
nd
na

a
ly
y

K
ry
ce

si
an

di
U
Ita

ga
la

la
hi

an

ay

In
m

Po

ai
C

un
Fr

al
er

Th

M
H
G

2005 2010 Direct spend

Figure 32. Top ten sourcing countries for direct spend among French companies
 117

60%
Percentage of total responses for top 3 53%53%
most important sourcing countries
50%

40% 37%
33%

30% 27% 28%

26%
23% 24%
21% 21%
20% 19%
20%
14%14% 13%
10%
10% 8%
5% 5%

0%

y
K

ia

n
y

d
a

ep
a

ke
nc

an
U

ai
n
n

d
si

la
hi

In

Sp
R

r
us
a

Tu

Po
C
Fr

ch
er
R

ze
C

2005 2010
Indirect spend

Figure 33. Top ten sourcing countries for indirect spend among French companies

The situation among the German companies (Figure 34 and Figure 35) is
interesting in the sense that domestic suppliers have a very dominant position
today with 53/69 percent. Somewhat surprisingly, the situation is expected to
remain until at least 2010 (scoring 50/67 percent). Hence, the discussion about an
offshoring wave in Germany may be exaggerated (Baily & Farrell, 2004). The
domestic suppliers seem to remain internationally competitive on a medium term.
In line with expectations, China will drastically increase in importance, apparently
at the expense of Southern European and Central European suppliers. A relatively
high gain in importance is expected for India as well. To sum up, it seems that the
supplier base currently located in Europe, outside Germany, will partially shift
towards low-cost regions in Asia. Interestingly, as opposed to other European
countries, Germany sources a comparatively high number of goods and services in
Turkey. Although industrial structures may play an important role, one cannot
neglect the large share of Turks who live in Germany. Most likely, their
knowledge about the Turkish language and culture facilitates sourcing operations
there.
 118

80%

Percentage of total responses for top 3 70%

most important sourcing countries

60% 56%
53%
50%
50%

40%
34%
31% 32%
28% 28%
30% 26%

19% 18%
20% 15% 16%
13% 13%
9% 10% 9%
10% 6% 6% 6%
3%

0%
nd

a
.

na
ly
y

ia
ey

il
ce
ep
an

di

az
ak
Ita

U
la

rk
hi

an

In
R
m

Br
Po

ov
C

Tu
Fr
ch
er

Sl
G

ze
C

2005 2010 Direct Spend

Figure 34. Top ten sourcing countries for direct spend among German companies

80%
Percentage of total responses for top 3

69%
70%
most important sourcing countries

67%

60%

50%

39%
40% 36%
31% 30%
29% 28% 27%
30%
23% 23%

20% 18%
12% 13%
10% 10% 10%
10% 6%
4% 4% 3% 3%

0%
ly

K
e

ia
.

y
y

ep

ke
nc
an

It a

ar
ki

U
n

d
la

hi

In
g
R

r
a
m

Tu

ov
Po

un
C

Fr
ch
er

Sl

H
G

ze
C

2005 2010
Indirect spend

Figure 35. Top ten sourcing countries for indirect spend among German companies
 119

Among the Italian companies, only minor changes are expected (Figure 36 and
Figure 37). The importance score of the home country is expected to decrease
from 49/65 percent to 40/60 percent. A similar development is expected for
Germany and France, although a sharper decline is estimated for German
suppliers. Furthermore, it is interesting to note that German suppliers have a very
strong position among Italian companies as the most important sourcing country
today. However, this situation will change as China climbs to the number one
sourcing country for direct supplies by 2010. The estimated developments for
indirect spend are less dramatic, with slight declines for suppliers in Western
Europe and increasing importance for Central European suppliers.

80%
Percentage of total responses for top 3
most important sourcing countries

70%

60%
56%
49%
50% 45%
41% 40%
40%
30% 29%
30% 25%

20% 17%
13%
9% 8%
10%
4% 5% 4% 3% 4% 5% 4% 5%

0%
nd
a
ly

na

.
y

ey
il
ce

ep
di
an

az
U
Ita

la

rk
hi
an

In

R
Br
m

Po
C

Tu
Fr

ch
er
G

ze
C

2005 2010 Direct spend

Figure 36. Top ten sourcing countries for direct spend Italian companies
 120

70%
65%

Percentage of total responses for top 3

60%

most important sourcing countries

60%
53%
50%
50% 47%
45%

40%

30%
30%
22% 22% 21%
20% 19%
20%

8% 7% 9% 8% 8%
10% 6% 6% 6%

0%

nd
na
ly

.
y

s
K

ey
ce

ep
an

nd
ai
U
Ita

la

rk
hi
an

R
Sp

rla
m

Po
C

Tu
Fr

ch
er

he
G

ze
et

C
N

2005 2010 Indirect Spend

Figure 37. Top ten sourcing countries for indirect spend Italian companies

The most dramatic change to the sourcing pattern is estimated to take place in
Spain (Figure 38 and Figure 39). Today, domestic suppliers are considered most
important and China is ranked as number two and four for direct and indirect
supplies, respectively. By 2010, however, China is expected to take the lead as the
most important sourcing country for both spend categories. Here, it is also
interesting to see that Mexico has significant importance, verifying the fact that
language acts as a facilitating factor when sourcing. Interestingly, India scores
higher in Spain than in any of the other countries where the study was conducted.
 121

50%
46%
45%
Percentage of total responses for top 3
most important sourcing countries
40%
35%
35% 32%
30%
30%
26%
24%
25% 23% 23%
20%
20%
14% 14%
15% 13% 13% 13%
12% 12% 12%

10% 8% 8% 8%

5%

0%
nd

a
na

.
y
n

ey
ce

ep
an

di
ai

ic

U
la

rk
hi

an

In
R
ex
Sp

m
Po
C

Tu
Fr

ch
M

er
G

ze
C

2005 2010 Direct spend

Figure 38. Top ten sourcing countries for direct spend among Spanish companies

50%
45%
Percentage of total responses for top 3

45%
most important sourcing countries

40% 38%
35%
35% 32%

30% 27%

25% 24%
22% 22% 23%

20% 18%
15%
15% 13%
11% 11% 11%
10% 10% 10%
10%
6%
5%
5%

0%
ico

K
ce

ia
.

il
n

d
a

ep

az
an

U
ai

n
n

d
an
ex

la
hi

In
Sp

Br
m

Po
C
M

Fr
ch
er
G

ze
C

2005 2010 Indirect spend

Figure 39. Top ten sourcing countries for indirect spend among Spanish companies

The sourcing pattern in the UK is also interesting (Figure 40 and Figure 41). As in
the case with Germany, it seems that UK suppliers will manage to fend off global
 122

competition until 2010 with roughly an unchanged perception in importance.

However, China’s importance will increase significantly for direct supplies, from
24 percent today to 37 percent by 2010. The French suppliers will experience the
most notable decline, with the importance rating decreasing from 32/37 percent to
25/26 percent. Interestingly, the UK is the only nation where a significant degree
of supplies are sourced in Russia. A closer look at the data set reveals that mainly
companies from the energy/resources/materials industry source there. The UK is
also the only country in which the USA is ranking among the top ten as a sourcing
country. As is the case with Spain and its special relation with Mexico, the reason
to the special trade pattern is lower cultural and linguistic barriers due to historical
connections and language similarities (Best, 1990; J. Chandler, A.D., Sölvell, &
Hagström, 1998; Piore & Sabel, 1984; Staber, Schaefer, & Sharma, 1996).

50%
45%
45%
Percentage of total responses for top 3
most important sourcing countries

41%
40% 37%
35% 32%

30%
25% 25%
25% 24%
20% 20%
20% 17%

15% 13% 14% 12% 12%

11% 11% 11%
10%
10% 7%
5%
5%

0%
SA
ey
K

ia
.
y

d
a

ep
a
nc

an
U

n
n

d
si

rk

la
hi

In
R
us
a

Tu

Po
C
Fr

ch
er

R
G

ze
C

2005 2010 Direct spend

Figure 40. Top ten sourcing countries for direct spend among UK companies
 123

60%
53% 53%
Percentage of total responses for top 3
most important sourcing countries
50%

40% 37%
33%

30% 27% 28%

26%
23% 24%
21% 21%20%
19%
20%
14% 14% 13%
10%
10% 8%
5% 5%

0%

y
K

ia

n
y
a

ep
a

ke
an
nc
U

ai
n
n

d
si

la
hi

In

Sp
R

r
us
a

Tu

Po
C
Fr

ch
er
R

ze
C

2005 2010
Indirect spend

Figure 41. Top ten sourcing countries for indirect spend among UK companies

When looking at the importance of specific low-cost regions (in this case sub-
continents), it is evident that the importance of these will increase until at least
2010 (Figure 42 and Figure 43 show respondents rating of regions on a five-grade
scale). Among the companies studied, the average importance score for low-cost
regions will increase from 2.4 to 2.8 for direct supplies and from 2.0 to 2.4 for
indirect supplies. The biggest relative increase in importance is expected to occur
in East Asia, South Asia and Eastern Europe. Less importance increases are
expected for Central Europe, Middle East and Africa. Although East Asia is
estimated to have the biggest increase in importance, Eastern Europe will be
perceived as most important when considering both direct and indirect spend. This
is probably due to the low comparative price level in combination with the
relatively low geographic distance to Europe, making it a viable option for
supplies with moderate time requirements. China, here included in the East Asia
category, would probably score much higher on its own. Most likely, the same
applies to countries such as India, which is included in the South Asia category
for the purposes of this study.
 124

5,0

4,5

4,0

3,5 3,3 3,3

3,2 3,3
Rating Score

3,0
2,9
3,0 2,8 2,8
2,7
2,5 2,4 2,4 2,4
2,5
2,1 2,1

2,0 1,9 1,9

1,7

1,5

1,0
Central Eastern East Asia South South- Central Middle Africa Average
Europe Europe Asia East Asia and Latin East
America
2005 2010 Direct spend

Figure 42. Importance of various low-cost regions for direct spend

5,0

4,5

4,0

3,5
Rating Score

3,2
3,0
3,0 2,8
2,6
2,5 2,4
2,5 2,4
2,2
2,1 2,0 2,0 2,0
2,0
2,0 1,8 1,8
1,7
1,6
1,5
1,5

1,0
Central Eastern East Asia South South- Central Middle Africa Average
Europe Europe Asia East Asia and Latin East
America

2005 2010 Indirect Spend

Figure 43. Importance of various low-cost regions for indirect spend

 125

4.3.2. Direct and Indirect LCC Spend

It is evident that the amount of direct supplies sourced in low-cost regions will
increase dramatically over the next five years (Figure 44 and Figure 45).
Measured as LCCS purchase spend as percentage of total purchase spend, German
companies will experience the biggest overall increase. As stated in the previous
subchapter, German suppliers appear to remain important in the near future
though. Thus, the supplier base in neighboring countries is seemingly the target
for the shift to more pronounced low-cost countries such as China and India.
Since the data is only is a forecast, one cannot of course tell whether the trends
will be realized or whether it is a sign of nationalism, but it gives a least an
indication of direction and magnitude of the future sourcing patterns.

40%

35% 34%
31%
30% 29%
27%
Percentage LCCS Spend

25%
22%

19% 19%
20% 18%

14% 14%
15%

10%

5%

0%
UK Italy Germany Spain France
2005 2010
Direct spend

Figure 44. Direct LCCS spend as percentage of total purchase spend

 126

40%

35%

30%
Percentage LCCS Spend

25%
22% 22% 22%
21% 21%
20%
16% 16%
15% 14%

10%
10%
7%

5%

0%
France Italy UK Germany Spain
Indirect spend

Figure 45. Indirect LCCS spend as percentage of total purchase spend

France, on the other hand, is expected to increase its share of direct LCCS spend
by more than one hundred percent (from 14 to 29 percent) over the next five years,
but only very little when it comes to indirect spend. A similar pattern applies to
the other countries, where most of the increases in LCCS spend stem from
sourcing direct supplies and less from indirect supplies. Italy and the UK, on the
other hand, with a relatively higher degree of low-cost country sourcing today, are
estimated to increase their degree of low cost country purchases to a lesser extent,
both expressed in absolute and relative terms.

As a whole, participating companies are expected to increase their degree of direct

and indirect LCC purchase spend to approximately 30 and 20 percent by 2010,
respectively. The exception is Spain, which is lagging behind the European
average today, and is expected to stay behind until at least 2010. Although the
perceived importance of China as a sourcing country scored very high in the
previous subchapter, it is evident that Spanish companies will have difficulties
realizing their LCCS initiatives. On average, the companies studied are expected
 127

to increase their direct and indirect LCC purchase spend by 64 and 34 percent,
respectively.

Comparing direct and indirect spend, it is worth noting that the difference
between the two spend categories is not significant today, but direct low-cost
country spend is expected to experience a higher relative growth until 2010. One
would normally expect indirect spend to be more suitable for sourcing in LCCs
due to its relatively low strategic importance, but that argument does not seem to
hold in this situation. A possible explanation is that direct supplies usually are of
higher value and hence it is possible to realize larger relative cost savings for that
type of supplies (Battacharya et al., 2004).

It is also interesting to examine the differences of LCCS among industries (Figure

46 and Figure 47). As can be seen, the sourcing patterns vary heavily from
industry to industry, where the energy/resources/ material industry is sourcing
direct supplies to the greatest extent in LCCs today (25 percent).

Direct spend
Energy/Resources/Material
40
35
Pharma/Chemical Food and agriculture
30
25
20

15
Machinery Telecom
10
5
0

Construction Electronics

Retail Transportation

2005 2010 Automotive

Figure 46. Direct LCCS spend as percentage of total spend by industry

Then follows food and agriculture (22.5 percent), telecom (21 percent),
electronics (19 percent), transportation (18 percent), automotive (17 percent),
 128

retail (16.5 percent), construction (15 percent), machinery (12.5 percent) and
pharma/chemical (10 percent).

Indirect Spend

Energy/Resources/Material
40
35
Pharma/Chemical Food and agriculture
30
25
20
15
Machinery Telecom
10
5
0

Construction Electronics

Retail Transportation

Automotive
2005 2010

Figure 47. Indirect LCCS spend as percentage of total spend by industry

The reason why the extent of sourcing in the pharma/chemical industry is

relatively low is quite clear. This industry is highly process oriented, where most
operations are carried out by highly complex and automated processing equipment.
Inherently, the labor content and the transferability are low. Consequently, the
potential for labor cost savings is also very low (Battacharya et al., 2004).
Moreover, the manufacturing processes are seldom the core business in this
industry; instead, most of the expenses stem from intense R&D activities in which
new drugs and chemical compounds are developed. Finally, as innovativeness and
not cost is the primary competitive advantage in the pharmaceutical industry, cost
pressure is lower compared to other industries and hence the need for LCCS is
relatively low.

On the other hand, taking the retail industry as an example, the end-product
quality is of secondary importance. In combination with the relative ease to enter
markets (Bresnahan, Reiss, Willig, & Stigler, 1987), entry barriers are low, which
is reflected in the relatively low profit margins. As a result, economies of scale,
 129

super-efficient supply chains and extensive spend consolidation is of utterly

importance (Fitzgerald, 2005; Zairi, 1998). This is reflected in the very high
degree of direct LCC spend as well as a very high estimated growth of direct LCC
spend over the next five years (+100 percent). Companies such as Wal-Mart,
Tesco and Carrefour are excellent examples, all of which are relying heavily on
IPOs in mainland China; the purchases of the former company comprises ten
percent of Chinese exports to the US (Shenkar, 2005), which is a staggering
number.

Similar to the retail industry, we find industries such as the electronics, telecom,
machinery and automotive industries, all of which are experiencing high
competition from domestic producers in emerging markets (Nellore, Chanaron, &
Söderquist, 2001). Consequently, companies in these industries have been forced
reshape their global strategies over the last decade and source in LCCs to an
increasing extent in order to bring down cost (Alguire et al., 1994; Bozarth et al.,
1998). The moderate LCCS growth in the telecom sector can be explained by the
high product and service complexity, where Western incumbents on the global
arena such as Cisco Systems, Nortel and Ericsson still hold a relatively strong
market position against green fielders such as Chinese Huawei (Nissen, 2005).

The LCCS pattern for indirect supplies is very different from the direct supplies,
both in absolute and relative terms. Not only the amount of spend sourced today is
lower, but the growth over the next five years is also much lower. The most
important explanation to this is the huge diversity and complexity of indirect
spend, since this category frequently involves different types of services. The
often intangible and tacit nature of services makes the whole sourcing process less
efficient. The difficulty is due to the fact that it is much more difficult to asses the
quality of services than of goods, since one cannot easily order a “service sample”
for evaluation. Instead, one often has to rely on past track records and business
reputation of service providers.

This effect is even more pronounced when sourcing in LCCs where the business
environment is characterized by cultural and language barriers, time zone
 130

differences and vast geographical distances. The greatest efforts of sourcing

indirect spend in LCCs are to be found in the telecom, automotive and
construction sector. Very little (or even negative) growth is expected for the
transportation industry, which already has a very geographically dispersed service
network due to the recent years of consolidation (Monroe, 2006).

4.3.3. Sourcing the Right Supplies

Historically speaking, companies have evolved from “import sourcing” to “global
sourcing” (Robert J. Trent & Robert M. Monczka, 2002). That is, instead of
purchasing imported goods and services from the domestic market, companies are
more and more relocating parts of their value chains to where it makes most
economically sense (Kogut, 1985a; Porter, 1986). As a consequence, companies
need to revaluate the relationships with their suppliers in order to assure high
performance in terms of cost, quality and delivery. Although it is less risky to
source indirect spend (such as office equipment) in LCCs due to its lower
strategic importance, sourcing direct spend in LCCs can generate greater cost
savings due to its higher value (Battacharya et al., 2004). Figure 48 depicts the
opinions among the respondents on what to source in LCCs.

Quality-critical supplies 3.27

Standardised supplies 3.14

Supplies for which a large 3.05

supplier base exists
Supplies that can be used 2.98
for products in local market
High-tech supplies 2.79

Supplies for mature

2.69
products

Time-critical supplies 2.65

Supplies with high
intellectual property 2.48
content
1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Rating Score (1=not suitable at all, 5=highly suitable)

Figure 48. Suitable supplies for LCCS

 131

Clearly, quality-critical supplies are perceived to be relatively suitable for

sourcing in LCCs (score 3.27). This may seem counter-intuitive at first as
suppliers in LCCs (and less developed countries in general) have long been
thought to lack quality. However, this is no longer the case – anecdotal evidence
from purchasing managers at market-leading companies shows that supplies with
adequate quality can now be sourced around the globe.9

For obvious reasons, standardized supplies are also considered suitable for
sourcing in LCCs. Firstly, seen from a market perspective, a company can achieve
large economies of scale if it can sell final products on several consumer markets
with only minor modifications. This characteristic goes hand in hand with the
characteristic found in forth place, namely supplies that can be used as inputs for
manufacturing for the local market. Secondly, standardized supplies are easier to
specify and specifications are easier to interpret, which speeds up the whole
sourcing process and facilitates high quality. The pharmaceutical and beverage
industries are examples in which production inputs are standardized and
transportation costs are relatively high thus yielding extensive local production
through a decentralized organization (Brainard, 1993; Horstmann & Markusen,
1992; Pontes, 2004).

In third place, we find supplies where a large local supplier base already exists.
The advantages are quite obvious. With a large local supplier base, competition is
higher, which in turn facilitates lower purchase price and better quality due to
higher effectiveness and efficiency of the suppliers (Porter, 1990). It also renders
better bargaining power of the buyer and less risk, since multiple sourcing and
supplier shifting can be done more easily.

Supplies with high technological contents prove not to be among the most suitable
supplies for sourcing in LCCs for a number of reasons. For example, supplies

9
During a guest lecture for the course “Strategic Value Chain Management” at European Business
School, Oestrich-Winkel, Germany, summer semester 2005, Siemens Com CPO Dietmar Dresp
claimed that quality is no longer an issue; it is only a matter of having the right quality
management systems in place.
 132

with high technological content are more dependent on timely delivery due to
their higher value and shorter life cycle. Moreover, high-tech supplies contain
proprietary knowledge, and, for obvious reasons, the buyer often does not want
such knowledge to be dispersed uncontrolled. This holds especially true in many
LCCs, where intellectual property rights and copyrights have little support from
local jurisdiction (Haley et al., 2004).

This statement is further supported by the two final supply characteristics, namely
time-critical supplies and supplies with high intellectual property content, scoring
a meager 2.65 and 2.48, respectively. High-tech supplies are also more difficult to
specify, which makes supplier relationship management a crucial task. Supplies
for mature products (late in product life cycle) prove not to be very suitable for
LCCS; most likely, this is due to the low profit margin of such products, which
cannot offset initial overhead costs in the sourcing process when setting up a
buyer-supplier relationship (Battacharya et al., 2004).

4.3.4. Sourcing of Goods and Services

It is also interesting to see whether differences exist between sourcing of goods
and services in LCCs. Whereas goods are of a tangible nature and can be stored
and shipped around the globe, services are intangible and must be consumed at the
time they are produced (Vargo & Lusch, 2004). Furthermore, services also
involve a higher degree of social interaction, which is sometimes restricted by
language and cultural barriers, thus further complicating the issue. Bearing this in
mind, this section examines differences in sourcing of goods and services, and
what developments we can expect over the next five years (Figure 49).
 133

30%
28%

25%

Percentage of category spend in LCCs

20%
17%
16%
2005
15%
2010
10%
10%

5%

0%

Goods Services

Figure 49. Sourcing of goods vs. services 2005 and 2010

As can be seen in Figure 49, goods are sourced to a 70 percent greater extent than
services. This is most likely due to the complex nature of services as discussed in
the previous paragraph. Today, 17 percent of goods are currently sourced in low-
cost countries, with an estimated increase of 64 percent over the next five years.
Hence, by 2010, the amount of goods sourced in low-cost countries is estimated to
reach a staggering 45 percent. Sourcing of services in low-cost countries, on the
other hand, is estimated to increase from 10 percent today, to more than 25
percent by 2010.

If taking a closer look at individual commodity categories (Figure 50), one can see
that electronics is most widely sourced in LCCs today. It is also the supply
category that will be most widely sourced by 2010; with spend for electronics
estimated to increase from 13 percent today to 16.5 percent in five years as a
percentage of total category spend. Purchase spend for the packaging, metals and
transportation categories will approximately amount to 10 percent by the year
2010. However, the plastics/rubber, engineering/construction and MRO/services
categories are all estimated to decrease by roughly 5-10 percent.
 134

13.0%
Electronics
16.5%

11.9%
Plastics/Rubber
10.9%

11.7%
Transportation
12.5%

11.4% 2005
Metals
12.9% 2010

Engineering & 10.9%

Construction 10.5%

10.7%
Packaging
11.7%

8.5%
MRO
8.3%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Percentage of total category spend sourced in LCC

Figure 50. Different supply categories sourced in LCCs 2005 and 2010

4.3.5. Supply Risk Management

Risk is defined as the probability of a negative event to occur (Knight, 1921).
From this perspective, risk is different from uncertainty in a sense that it is
quantifiable. As most Purchasing/Supply managers know, sourcing in LCCs is
associated with a virtually endless list of potential risks. Although highly
quantifiable risks such as quality defects, high inventory levels and delays provide
interesting cases from an operational perspective, this study tries to highlight risks
at a higher level that are not always particularly easy to assess (i.e. uncertainty).
Figure 51 summarizes a set of risks that poses high business impact on a long
term and thus makes an interesting case at managerial level.

Although business risk usually refers to the probability of an undesirable outcome

to occur (Kallman, 2005), it is usually also multiplied by the impact of the event
(i.e. in business contexts usually the potential economic loss). A general risk
management approach consists of the phases: risk identification, risk assessment
and risk mitigation (Dorfman, 1997). In the context of low-cost country sourcing,
the findings show that risks in the external environment are perceived as most
important. This is probably due to the fact that such risks are very difficult to
 135

assess and pose a very high impact on business operations if the associated events
would occur.

y
Political instability 3.72
Increased comparative
price levelss 3.58

n
Criminality and corruption 3.52

Currency Risks
s 3.51

Lack of supplier skills 3.42

e
and knowledge
Intellectual property risks
s 3.33
Price erosion due to
increased competition n 3.33

Prioritization of other
s 3.27
business initiatives
Costs for exiting
s 2.86
legacy assets
s
Quality problems 2.78

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Rating Score (1=not important at all, 5=highly important)

Figure 51. The ten most important supply risks

At the top, we find political instability as the most important risk to consider when
sourcing in low-cost countries. It includes any action at a governmental level that
can cause uncertainty and interruptions to the business operations – ranging from
raising tariff and non-tariff barriers to the event of civil or international war. The
most effective way to mitigate this risk is through risk avoidance, i.e. limiting the
operations in such regions where political instability is prevalent. As an example,
China’s openness to business over the last decade, along with the country’s entry
in the WTO has significantly improved political stability and reduced uncertainty
for foreign companies (Chow, 2001).

Increased price levels in LCCs are ranked as the number two risk factor by the
respondents. This risk has a very clear financial impact on operations, since high
inflation rates can erode profit margins in the long term. Fortunately, price level
increases are relatively easy to assess thanks to the vast amount of macro-
 136

economic data readily available.10 Taking China as an example again, its high
inflation rate of 5 percent on a year-to-year basis should not pose any threats as
most of the inflation stems from increases in grain prices (31.8 percent last year)
(Dashan, 2004). Moreover, as three quarters of the Chinese population still live in
rural areas (Ravallion & Chen, 2004), the pool of low-wage labor will remain
decades ahead.

Ranked as number three, criminality and corruption can of course have severe
impact on at several levels of society such as economic, social and political
(Shelley, 2005). The probability of criminality is difficult to assess in specific
cases although statistics are easy to obtain at a regional level. The impact usually
ranges from frauds and scams to theft and burglary in corporate properties.
Corruption, on the other hand, can be assessed by examining common business
culture. While corruption is generally less prevalent in the western hemisphere, it
is considered more of a risk in less-developed regions as a result of poverty and
extensive government involvement in the public (Goolsarran, 2006).

Currency risks (i.e. currency volatility) at fourth place can have very big impact
on businesses, especially for companies with a high degree of foreign trade. Since
currency volatility can be easily assessed through extensive economic statistics
publicly available and mitigated through hedging mechanisms such as currency
futures or taking positions in the currency spot market (Dales & Meese, 2001), the
risk was actually perceived to be more important than expected.

Lack of supplier skills and knowledge in fifth place includes all levels of the
supplying organization: from the staff working in manufacturing and assembly or
production of services to the management level. The buying firm should strive to
select high-performing suppliers that can provide knowledge and complementary
competencies (Goffin, Lemke, & Szwejczewski, 2006; Johnsen, Phillips,

10
There are several excellent online resources with macroeconomic data readily available, for
example United Nations Economic Commission for Europe (UNECE, http://w3.unece.org), the
Statistical Bureau of Statistics (Eurostat, http://epp.eurostat.ec.europa.eu) or US Census Bureau
(http://www.census.gov/)
 137

Caldwell, & Lewis, 2006), preferably those who have a proven track record.
While cost savings and quality cannot be expected to be realized immediately
(Dobler & Burt, 1996), long-term supplier development is dependent more on the
capabilities of the buying firm than the supplier skills. Moreover, on-site supplier
visits and continuous quality inspections are a must for success.

Intellectual property risk is a hot topic in the context of low-cost country sourcing.
Although it did not rank higher than sixth place, it is likely that the participating
companies have already mitigated this risk through risk avoidance, i.e. not
sourcing supplies with high intellectual property content, which has also been
noted in literature (Battacharya et al., 2004). It could of course also mean that
companies have not yet paid attention to this risk. This hypothesis is further
supported by the low sourcing suitability rating depicted in Figure 50.

Price erosion, caused by shifting the supplier base to low-cost regions, means that
achieving competitive advantage through lower purchase price will become more
and more difficult over time. Instead, internal capabilities such as supplier
development, inventory control and effective quality management will play an
increasingly important role, as well as product strategies such as product bundling
(Lancioni & Gattona, 1992). Multinational enterprises that today pursue proactive
supply management are very well aware of this and develop strategies to cope
with these challenges, which is most likely the reason for the relatively low rating
(3.48).

Prioritization of other important business initiatives, which scored 3.27, can be a

serious threat to low-cost country sourcing initiatives. Inadequate resources in
terms of financing and staffing, especially as a result of short-term
underperformance, failure will likely be a fact (Yan, 1999). Again, large-sized
companies acting globally have most likely realised this, which is why this risk is
not a serious threat to companies.

At second from bottom in Figure 11, costs for exiting legacy assets prove to be
not a very serious issue either, although they could imply a financial burden
(Battacharya et al., 2004). The risk assessment can be made easier since the risk is
 138

completely in the hands of the company itself, thus only imposing a specific
risk. 11 Moreover, the business impact (such as costs for laying off workers,
shutting down production plants etc.) can be calculated relatively easily from
internal data.

As shown in the previous chapter, sourcing for quality in low-cost countries has
actually proven to be a viable approach. With this in mind, it is no surprise that
quality problems pose a low threat for the outcome of low-cost country sourcing
initiatives. To summarize, it is evident that external risks are perceived to be more
important. Is this due to psychological or rational reasons? Clearly, external risks
are more difficult to assess which makes them more important if associated events
should occur. However, without proper assessment, rational decisions cannot be
made.

4.4. The LCCS Roadmap: A Strategic Guideline

In order to successfully plan and execute LCCS operations, a structured and
scalable management process must be implemented. Through qualitative
identification of a large set of activities pursued by companies, 12 especially
important activities were distilled and arranged according to four management
process steps (Figure 52). By mapping the quantitative data obtained from the
field study, the current and future evolutionary stages could be assessed.

4.4.1. Roadmap Steps

The four management process steps are shown in what is termed “The LCCS
Roadmap” (Figure 53). The percentages in the illustration show the share of
companies who have taken corresponding actions today and by 2010. Since
actions taken without consideration to other functional units and business units are
considered sub- optimal, this study specifically investigates the extent to which
actions have been taken on an enterprise-wide level.

11
In line with general risk management literature, a distinction is here made between systematic
and specific risk, in a sense that the latter is only influenced by factors with the own organization
and can thus be hedged away. The former denotes market risk that the organization virtually
cannot influence.
 139

LCCS Process Phase Action 2005 2010 Change

1. Enable – Set up Have implemented LCCS-focused spend analysis 30% 44% +47%
necessary infrastructure.
Have dedicated staff specifically to LCCS 22% 35% +59%

Have redesigned business processes to facilitate LCCS 22% 33% +50%

Have redesigned products to facilitate LCCS 16% 18% +13%

2. Plan – Develop Have formulated strategies at corporate, purchasing organisational 29% 46% +59%
strategies through internal and supply category level to facilitate LCCS
and external environment
assessment Use integrated global capacity planning 25% 36% +44%

Have visited potential sourcing sites in LCCs 25% 39% +56%

Have contacted business development agencies in LCCs 21% 26% +24%

3. Execute – Test the Use international procurement office(s) 13% 19% +46%
waters and ramp up
Have contracted 3rd party global sourcing services 14% 17% +21%

4. Evaluate – Assess Benchmarks LCCS initiatives against other companies 19% 25% +32%
impact and improve
Use total cost management approaches in sourcing process 32% 42% +31%

Figure 52. LCCS Process phases

The four process steps are labeled “Enable”, “Plan”, “Execute” and “Evaluate”. In
the first step, Enable, the necessary infrastructure is built. On the corporate supply
side, the most important issue here is the ability to identify and analyze enterprise-
wide purchase spend. Without it, the possibility to achieve economies of scale
through bundling is very limited. The study reveals that less than one third of the
participating companies today are able to analyze enterprise-wide purchase spend.
With an estimated growth of 47 percent over the next five years, 44 percent of the
companies will be able to analyze enterprise-wide spend by 2010.

An important aspect in order to enable LCCS operations is adequate staffing.

Since buyers and suppliers in a LCCS setting most likely have different social and
cultural backgrounds (Helper & Sako, 1995), personnel should not only have
relevant education and experience, but also the right mix of nationality in order to
be able to adapt to local business practices (Pucik, 1988). Thus, staff members
with cross-cultural understanding can be an invaluable assets as this property has
been proven to be related to communication effectiveness (Hamel, 1991).

4.4.2. Roadmap Developments

The study shows that 22 percent of the participating companies have dedicated
personnel specifically addressing LCCS activities; however this number is
estimated to increase to 44 percent by 2010. However, the size of the
purchasing/supply department is, of course, a limiting factor. The conclusion here
 140

is that companies might not have realized the importance of dedicated staffing,
but that by 2010 LCCS will clearly become a strategic focus.

4. Evaluate:

Benchmark
3. Execute: and assess
impact
2. Plan: Test the
waters and
1. Enable: Develop ramp up
strategies 26%Ö34%
Set up
necessary
infrastructure
14%Ö21%
23%Ö33% 25%Ö37%

Figure 53. The LCCS roadmap

Business process redesign and product redesign are two powerful actions that can
be taken to increase the benefits from LCCS. Business process redesign is
especially important, since the domestic sourcing process cannot just be replicated
in LCCs (Battacharya et al., 2004). For example, onsite supplier management and
development is often needed in order to build up relational capital assure quality
(Cousins, Handfield, Lawson, & Petersen, 2006b); thus, the sourcing process
needs to be redesigned in a way that it facilitates adequate face-to-face
communication. This is especially important in countries such as China, where
trust is built between individuals, and not organizations (Haley et al., 2004).

The study shows that 22 percent of the participating companies have redesigned
the sourcing process to support LCCS, which is a surprisingly low number. The
low-cost labor in LCCs provides opportunities to redesign products in order to
increase the degree of labor content and reduce the need for capital-intense
automation equipment (Battacharya et al., 2004). The result is decreased tied-up
capital as well as improved flexibility. However, only 16 percent of the
respondents have redesigned processes and products and this number is only
expected to increase to 18 percent over the next five years.
 141

The second LCCS process phase is planning. The key issue here is to make an
internal assessment of the organization and match it to conditions in the external
environment in order to exploit opportunities and neutralize threats, in line with a
classical strategy formulation approach (e.g. Shrivastava, 1994). 29 percent of the
study participants say they have formulated strategies at corporate, purchasing,
organizational and supply category level. Although estimated to increase to 33
percent by 2010, this number is considered to be relatively low. 25 percent of the
respondents make use of global capacity planning to forecast future needs of
internal customers. This number is expected to reach a penetration rate of 36
percent within five years. 25 percent of the respondents assess the sourcing
environment by on-site supplier visits in LCCs and 21 percent have contacted
business development agencies there.

The third phase is about executing the LCCS strategy. By starting out at a
controlled pace by using for example balanced scorecard (Kaufmann, 1999), thus
“testing the waters”, initial trials can be carried out while keeping risk impact low.
During this time, valuable knowledge can be obtained while most cost saving
gains coming from reduced purchase price. However, this is not sufficient on a
long-term basis (Kaufmann, 1999). LCCS operations must be integrated in the
global business model in order to reap as many benefits as possible.

If the purchase volume is high enough (Carduck, 2000; Reinelt, 1999), a steady
purchasing channel in the shape of an international procurement office (IPO) can
be set up. This enables removal of costly intermediaries and facilitates supplier
development in the sourcing country. Only 14 percent of the respondents use IPOs
and this number will increase to a meagre 17 percent by 2010. As an example,
retail industry leader Wal-Mart is currently purchasing merchandise amounting to
10 percent of China’s total exports to the US through its IPOs and the company is
achieving enormous bundling effects in this way (Shenkar, 2005).

There is also a growing trend to outsource non-strategic purchasing operations in

order to increase focus on core activities and make the so called procure-to-pay
process more efficient (Maor & Broumand, 2004; Monczka & Carter, 2005). This
 142

has only been done among 14 percent of the respondents and is expected to
increase to 17 percent by 2010.

The fourth and last process step is centered on evaluation. The purpose is to assess
the outcome of previous actions and set an agenda for improvements. One of the
most powerful means is to benchmark against other companies, not only against
competitors in one’s own industry, but also against companies in other industries
(Jahns, 2005). This helps the company to determine the market position and
identify strengths where performance is excelling as well as weaknesses that need
to be addressed. Benchmarking of LCCS activities is only done by 19 percent of
the companies surveyed; however this number is expected to grow to 25 percent
over the next five years. To capture landed cost-savings from LCCS, 32 percent of
the respondents are applying total cost management approaches. With as strong a
growth as benchmarking, this number is estimated to increase to 42 percent over
the same period.

After the end of the LCCS management process, an agenda for improvements
must be developed and implemented so that effectiveness and efficiency gains can
be realized. In this way, businesses can adopt a closed loop approach which spurs
continuous improvements and long-term success, similar to the concept of total
quality management (Lillrank & Kano, 1989)

4.4.3. Performance Impact

The notion that LCCS has a positive bottom-line impact is verified in Figure 54.
As shown, LCCS has a strong positive impact on total cost with 70 percent of the
respondents claiming to have achieved positive impact on total costs while only
10 percent claim to have experienced negative impact on total costs. Material
costs and labor costs have been positively influenced by LCCS among 60 and 51
percent of the respondents, respectively.
 143

Total costs -10% 70%

Material costs -16% 60%

Labor costs -15% 51%

Material/component/ -21% 34%

service quality

Capital investment costs -20% 35%

Delivery reliability -28% 32%

Order lead time -39% 31%

Inventory costs -35% 24%

Transportation -50% 23%

costs

-80% -60% -40% -20% 0% 20% 40% 60% 80%

Share of respondents in percent, neutral not shown
Positive impact
Negative impact

Figure 54. Business impact from LCCS

It is also interesting to note that 15 and 16 percent of the responding companies,

respectively, have experienced negative impact on these two performance
indicators.

Quite surprisingly, labor costs scored lower than expected, as they often pointed
out as the main lever for overall cost savings. Roughly one-third of the
respondents claim to have experienced positive impact on quality, capital
investment costs and delivery reliability. However, now the picture starts to
become ambiguous as about one-fifth of the respondents say they have
experienced negative impact on the quality and capital investment costs, and more
than one-quarter say they have experienced negative impact on delivery reliability.

This result is also in line with earlier findings. The fact that order lead time,
inventory costs and transport costs are negatively affected was also expected and a
natural consequence of longer geographical distances between buyers and
suppliers, as well as a result from more complex supply chains.

Looking at the chart, there is a natural explanation to the question why the impact
from LCCS is higher on some performance indicators and lower on others. The
 144

performance indicators at the top are closely related to so-called factor advantages,
which is the nature of very fundamental input resources, such as labor, raw
material and infrastructural factors, which virtually any company can exploit just
by its presence on the LCC market. When traversing towards the bottom of the
chart, the factors behind the performance indicators become more and more
dependent on internal capabilities of the buying company.

Taking delivery reliability, order lead time, inventory costs and transportation
costs as examples, it is evident that these are all part of global supply chain
management, a highly complex issue that is dependent on many factors. Such
factors could be how the buying company is working with its suppliers, what
information they are sharing with suppliers and how they do this. It is also highly
dependent on the sourcing location in order to weigh transportation and inventory
costs against other cost elements. At the end of the day, these actions are all
dependent on rational and sound decisions made by internal staff, which
highlights the importance of educated, skilled and talented purchasing and supply
managers.

4.5. Interim Summary

This chapter had two objectives: to show status quo of sourcing patterns among
large-sized firms in Europe, and to show expected developments over the next
five-year period. It is descriptive in a sense that it does not aim at explaining why
the sourcing patterns presented look like they do, or why they are expected to
develop in certain directions. Nevertheless, the descriptive analysis provided an
objective and factual picture of the current situation and trends that can be of great
value to decision makers as well as serve as a starting point for further research in
the field.

The initial discussion was based on globalization as the fundamental driver to the
LCCS developments, which in turn is affected by a wide range of factors that
somewhat simplified can be boiled down to four categories of drivers, namely
political factors, socio-demographic factors, technological factors, and macro-
economic factors. It was also concluded that they are not nurturing the
globalization process in isolation however, but interplay in a complex manner. For
 145

example, technological advancements can reduce communication costs, which in

turns affect social behavior and nurturing cultural openness, ultimately leading to
altered economic policies, and so on.

The first sub section is chapter 4.1 which contains a general overview of trends in
purchasing and supply management from secondary sources, as a point of
reference for further analysis. The general discussion about trends described in the
literature are primarily focusing on issues such as requirements for improvements
in business performance, increased importance of suppliers as a result of
decreasing degree of value added, and a changed paradigm of supplier
relationship management.

The descriptive analysis in the chapter was structured according to the so called
Supply Management Navigator (Jahns, 2005), which is a “knowledge landscape”
that contains the necessary bits and pieces for successfully carrying out sourcing
activities. By applying the navigator in an LCCS setting, relevant aspects for the
research could be identified. The first part of the descriptive analysis concerned
strategic LCCS management and was discussed in chapter 4.2. Aspects
investigated in this section was the degree to which firms have articulated visions,
developed strategies, are measuring performance, set up organizations, and
dedicate human resources to support LCCS initiatives.

Next, in chapter 4.3 operational aspects were elaborated. Here, the lion’s share of
the analysis focused on important sourcing countries today and in five years, the
suitability of certain supply categories, differences in sourcing patterns between
goods/services and direct/indirect supplies, and supply risk management. It was
evident that there is currently a high momentum in the field at present, where the
amount of supplies sourced in LCCs will increase by more than sixty percent over
a five-year period. Another interesting result was that the home country of the
buying firm seems to remain in high importance also over the next five-year
period, but neighboring countries will lose market shares in favor of suppliers in
low-cost countries.

Finally, in chapter 4.4, the extent to which certain LCCS-related activities are
carried out today and expected extent in five years were investigated. These
activities were identified through expert interviews with eight practitioners and
 146

academics. By grouping them, an applicable guideline was generated, the so

called “LCCS Roadmap”. The conclusion from this roadmap is that firms as of
today have primarily focused on improving activities with a relatively narrow
horizontal and vertical range in the organization, simply because it is much more
difficult to implement organizational changes that span multiple functional units,
multiple business units, or even multiple firms. It was also concluded that the
majority of the firms have experienced positive impact on total cost, material
costs, labor costs and quality. Naturally, these advantages are offset by increased
transportation costs, inventory costs and order lead time, due to the increased
geographic distances.
 147

5. Implications of Low-Cost Country

Sourcing: An Explanatory Study
Low-cost country sourcing has become one of the hottest buzz words during the
last decade, at least among practitioners. The reasons are many: Improved
telecommunications, removal of trade barriers etc., globalization has lead to a
situation where multinational companies can benefit from location advantages of
other nations than the home country. In addition, firms competing in mature
markets have experienced increasing difficulties to grow revenues, especially in
the aftermath of the economic recession caused by the dot-com crash and the
September 11 event in 2001. Besides focusing on cost reduction as a means for
increasing shareholder value, low-cost country sourcing has in many instances
become a strategic imperative in order to stay in business on a long term.

The results from chapter 4 indicate that it is possible to realize cost savings while
preserving quality. However, this raises a number of questions. For example, what
makes some firms more successful than others in terms of low-cost country
sourcing? Are they just fortunate to do business in an attractive industry (Porter,
1980), or is it just plain luck that leads to success? Much research has focused on
factors in the external environments as explanatory variables for the success of
sourcing initiatives. The question is, with the hype regarding important sourcing
regions such as China and India, does this mean that any firm starting sourcing
there will automatically be successful? The answer is likely no, but the question is
then where key to competitive advantage lies?

As will be elaborated in this chapter, a growing body of research is indicating that

a great portion of competitive advantage and performance can be attributed to
factors within firm boundaries as material, equipment, facilities, and more
importantly, knowledge and skills (Cubbin, 1988; Hansen & Wernerfeldt, 1989;
Rumelt, 1991). Based on the literature review, the so called resource-based of the
firm (Barney, 1991; Wernerfelt, 1984) seems to provide a promising theoretical
lens for further analysis of the subject. An indication of the theory in an LCCS
 148

context is given by Ulrich and Barney (1984, p. 472), by stating that organizations
are “altering their structure and patterns of behavior to acquire and maintain
needed external resources”. With this as a starting point, the rest of this chapter is
devoted to the application of RBV in an LCCS setting and empirically test its
validity.

5.1. The Resource-Based View of the Firm

This section deals with the historical aspects, the logic, and the implications of the
resourced-based view of the firm. The first section will elaborate on the historical
developments in the field and an analysis and comparison of the theory with other
alternative plausible theories. The discussion and analysis are provided in order to
position it in the economic/business scientific/strategic management scientific
landscape. The subsequent section starts with an investigation of the origins of the
theory and how the ideas have evolved over time. This also serves as a critical
review and motivation why the theory is applicable in this very context.

5.1.1. Economic and Organizational Theories in Perspective

There are many alternative levels of analysis when doing research in the field of
business science and strategic management. As discussed in chapter 2 about the
conceptual underpinnings of internationalization and globalization, a common
level of analysis has traditionally been national level. Since business at its most
fundamental level is about transactions, a very predominating level of analysis has
been the transactional level (see for example Coase, 1937; Williamson, 1975,
1979). Other scholars, such as Emery (1969), Bertalanffy (1968) and Luhmann
(1995) have proposed theories which enables the business organization to be seen
as an open system.

In times with an increasing share of value created outside the firm (Jahns, 2005),
with highly permeable firm boundaries, some scholars have questioned the
distinction of the firm with its environment (Perrow, 1967). This highlights the
strong decency between the firm and its environment suggested by numerous
management gurus and researchers (A. Chandler, 1962; P. Lawrence & Lorsch,
 149

1967). Many attempts have been made to develop an integral theory that capture
the different idiosyncrasies at different analysis levels, alas, with limited success
(Astley & Van de Ven, 1983; Barney & Ouchi, 1986; Hrebiniak, 1985).

Fahy (2001) suggests a scheme of organizational, economic and management

theories which is a further development of work by Astley and Van de Ven (1983)
(Figure 55). In this scheme, different theories can be positioned along two
dimensions, namely “level of analysis” (micro – macro) and “role of choice”
(deterministic – voluntaristic). Level of analysis, on the vertical axis, concerns the
question whether a theory is “top-down” (macro level) or “bottom-up”
(microlevel).

In this instance, top-down means that the theory is holistic and integral; thus the
focus is on the big picture rather than the constituent parts. Bottom-up, on the
other hand, focuses on the small details; the components and interrelations that
forms an “aggregation of specifics” (Astley & Van de Ven, 1983).

The horizontal axis, on the other hand, distinguishes between strategic choice
(voluntaristic) or environmental determinism (deterministic). This dimension is
rather philosophical and concerns the question whether free will exists in reality
(see the discussion about human nature in chapter 3.3). In order to depict a
continuum along the axes rather than dichotomous situations, the scheme is not
divided into a two-times-two matrix.
 150

Macro
level Organizational ecology
Human ecology theory

Bain/Mason IO framework

Level of
analysis Schumpetarian economics

Resource-dependency
Institutional theory theory

Chamberlinian
Micro
Structural contingency theory economics/RBV
level

Deterministic Voluntaristic
Role of choice

Figure 55. Scheme of organizational, economic and management theories

(Fahy, 2001)

5.1.2. Historical Antecedents of the Theory

In this section, a synthesis of relevant literature in organization theory, economics
and strategic management is performed in order to arrive at a theoretical
framework that can be used for investigating the low-cost country sourcing
phenomenon in subsequent chapters. Moreover, another objective of this section
is to provide an overview of the origins, developments and status quo of the
resource-based view of the firm (RBV), which, up to date, predominantly has
been investigated theoretically. Hence, this section paves the road for later
application and test of its validity as explanatory model for the research questions
of this thesis.

The importance of resources for superior performance can be traced back to as

early as the 1930s to economists such as Chamberlin (1933) and Robinson (1933).
These scholars claimed that unique assets and capabilities within firms were the
source for creating imperfect competition and ultimately generating above-
average economic rents. The interesting thing is that this view was developed (and
then forgotten) before the market-based positioning era, initiated by scholars such
as Bain (1959) and Mason (1939) with their industrial organization framework,
 151

which was later popularized by Porter (1980). In line with the modern version of
the resource-based view, Chamberlin (1933) found evidence that key capabilities
could stem from technical know-how, reputation, brand awareness, team work,
patents and trademarks. Due to the heterogeneity of products, a market that would
normally be considered as perfectly competitive can contain ”pockets” of
monopolistic-like firms, which have some influence on the market. An example is
for example Coca-Cola, which has obtained a superior market position through
branding and advertising, despite many attempts from rivals to imitate the product.

The ideas from Chamberlin and Robinson were later developed by Penrose (1959)
in the 1950s, by arguing that the resources themselves are not inputs to the
production process, but instead the services they can generate. Simply put,
services are dependent on the underlying resources, which can give rise to
different services depending on the configuration and combination with other
resources in other contexts. Her views have surprisingly similar arguments as
have been proposed in the dynamic capabilities view developed by scholars such
as Teece et al. (1998; 1997) and Eisenhardt and Martin (2000). It is this
heterogeneous distribution of resources that has the potential to make firms differ
from each other (Penrose, 1959). In sum, Penrose (1959) claims the firm to be “a
pool or resources, the use of which is organized in an administrative framework”.

With its roots in neoclassical economics, and in Chamberlinian economics in

particluar, RBV is focusing on the importance of economic factors rather than
social and political. Hence, the individuals in the organization are considered
rational and opportunistic. Instead of seeing performance as a result of the
industry, it stresses the importance of firm heterogeneity (Caroll, 1993; Nelson,
1991). Since the resource heterogeneity is assumed to be a result of managerial
action, in combination with the firm as the level of analysis, the position of the
RBV in the scheme presented in Figure 55 is located in the voluntaristic, micro-
level (bottom right-hand) corner.
 152

The interesting thing about the historical developments of the RBV is the
relatively little importance it received, especially during the 1980s. In the early
years of strategic management, the schools of thought primarily emerging at
Harvard Business School, gave equal weighting to the external vis-à-vis the
internal environment.

The most famous strategy formulation framework is the so called Learned,

Christensen, Andrews and Guth (LCAG) framework (Andrews, 1971; Learned,
Christensen, Andrews, & Guth, 1969). In contrast to Ansoff’s (1965) SWOT
framework, the LCAG framework not only considered strengths and weaknesses
of the firm, and opportunities and threats in its environment, but also personal
values and other social factors. Still, the optimal strategy formulation process
began by identifying opportunities in the surrounding environment, followed by
an assessment of how these opportunities could be exploited with regards to
existing resources and competencies. In sum, no matter what framework, strategic
management has always had a normative nature, with the objective of finding a
viable path of action in order to reach a predestined goal (Ansoff, 1965).

The attention of what later was to become the RBV became even less during the
1980s when Porter (1980) launched his five-forces industry attractiveness model.
The model, which had its roots in the Bain/Mason industrial organization, led to a
paradigm shift where the perceived importance of firm resources declined in favor
to the industry quadrant of the LCAG framework (Hoskisson, Hitt, Wan, & Yiu,
1999).

The framework aimed at explaining the relationship between industry

attractiveness and superior market performance. Here, industry attractiveness was
argued to be determined by five market forces, namely the rivalry among existing
competitors, the threat of entrants and of substitutes, and the bargaining power of
customers and suppliers. By choosing to compete in attractive industries (i.e. with
weak market forces) or by counteracting market forces in existing industries,
monopoly rents can be earned (Porter, 1980). Thus, the five-force model was
 153

contingency-based, leading to a typology of strategic approaches, namely

differentiation, cost leader ship and focus (Porter, 1985).

However, during the late 1980s, an increasing body of empirical evidence was
starting to speak against the ideas of Porter. Not because there was a belief that his
model was wrong, but rather that it did not tell the whole story. For example,
studies by Cubbin (1988), Hansen and Wernerfeldt (1989) and Rumelt (1991)
showed that performance between firms was different within the same industries.
Furthermore, Cool and Schendel (1988) and Lewis and Thomas (1990) even
observed performance differences within the even narrower strategic groups. Even
more interesting, in a 2,800-company sample, Rumelt (1982) observed that
business-unit factors explained 44 percent of the variance in performance,
compared to a mere 4 percent from industry factors. With such an extensive body
of empirical evidence, the strategic management pendulum started to swing back
to the neutral position.

During the same period, in parallel with the empirical body of research that was
conducted, a new stream of theoretical research emerged. Beginning with scholars
such as Wernerfeldt (1984) and Barney (1986a), a growing number of researchers
started to believe that a great deal of market success can be attributed to internal
factors. Wernerfeldt (1984) was the first scholar to use the term “resource-based
view”, and indeed indicated the high potential of the theory by describing the
theoretical findings as “the first cut at a huge can of worms”. In the following
years, a truly huge body of research on the RBV emerged, ranging from insights
in both economics and management. A summary of the most influential
contributions are shown in Table 12.

Mahoney and Pandian (1992, p. 373) argue that RBV provides an “illuminating
generalizable theory of the growth of the firm” and that competitive advantage is a
function of industry structure, organizational governance and firm effects (i.e.
firm resources and strategies). Furthermore, they claim that RBV has the potential
to coalesce with the other cornerstone of competitive advantage (i.e. market
 154

attractiveness) and therefore it provides a very plausible and comprehensive

theory of the strategic firm (Conner, 1991; Rumelt, 1984).

Conner (1991) has made a comparison of RBV with five major schools of thought,
namely neoclassical economics, industrial organization, the Chicago school,
Schumpetarian economics and transaction cost economics. The conclusions from
this comparison are that RBV shares at least one commonality and one difference
with these five schools of thought. However, this does not by any mean say it
serves as a unifying theory, but rather that it supports other theoretical viewpoints
while contributing with its own unique perspective.

As was shown in the previous section, there is compelling empirical evidence

acknowledging the existence of intra-firm effects. Ever since the discovery of
market imperfections (Chamberlin, 1933), several streams of research dealing
with intra-firm factors have emerged, such as the comparative advantage theory of
competition (S. D. Hunt, 1997; S. D. Hunt & Morgan, 1995, 1996), and the RBV
(Barney, 1991; Conner, 1991; Peteraf, 1993; Wernerfelt, 1984) As of today, a
coherent body of research in this field of strategic management is still missing,
although there are a number of commonalities in the different streams of research.
For this study, the theoretical framework is based on RBV.

Although RBV has been widely criticized for being tautological (Priem & Butler,
2001), this problem is effectively solved in the empirical study of this thesis by
not defining resource characteristics and competitive advantage in the same terms.
Instead, the questionnaire investigated the possession of key resources separately
from the performance assessment, thus also avoiding retrospective bias (March &
Sutton, 1997).
 155

Table 12. Key contributors to the resource-based view of the firm

Contributor Key Insights

Ansoff (1965) Developed the SWOT framework

Caroll (1993); Nelson (1991) Stressed the importance of resource heterogeneity

Chamberlin (1933); Robinson (1933) Discovered resource heterogeneity

Conner (1991) Compared RBV with five major schools of thought
Conner (1991); Rumelt (1984) Claimed RBV to be a plausible and comprehensive theory of the firm
Cool and Schendel (1988); Lewis and Empirical studies discovering performance difference within strategic
Thomas (1990) groups
Cubbin (1988); Hansen and Empirical studies discovering performance difference within
Wernerfelt (1989); Rumelt (1991); industries
Rumelt (1992)
Hoskisson et al. (1999) Discussion about the strategic management “pendulum” swinging
towards a resource-based view
Hunt (1997); Hunt and Morgan (1995, Founded the comparative advantage theory of competition
1996)
Learned et al. (1969) Developed the LCAG framework
Mahoney and Pandian (1992) Claimed that competitive advantage is a function of industry
structure, organizational governance and firm effects
Penrose (1959) Developed the view of the firm as a bundle of resources
Priem and Butler (2001) Claimed RBV to be tautological
Teece et al. (1997, 1998); Eisenhardt Developed the dynamic capabilities
and Martin (2000)
Wernerfelt (1984); Barney (1986) Establishment of the modern resource-based view

5.1.3. The Logic of the Resource-Based View

In contrast to theories such as systems theory (e.g. Bertalanffy, 1968; Luhmann,
1995), RBV is causal in the sense that it is possible to make predictions with it.
The underlying logic of the theory is quite straightforward; it starts with the
assumption that the desired managerial effort within the firm is sustainable
competitive advantage (SCA) (Barney, 1991; Dierickx & Cool, 1989; Reed &
Philippi, 1990; Wernerfelt, 1989). The theory also states that above-average
performance is a result of the possession of sustainable competitive advantage,
which can only be achieved through the possession of key resources which are
heterogeneously distributed among market actors (Barney, 1991).

With this in mind, it is assumed that resource heterogeneity and the possession of
key resources are a result of strategic choice (i.e. managerial action). The
 156

implication is that the key tasks for managers are to identify, obtain/create, protect
and deploy key resources in order to arrive at the optimum resource bundle
(Penrose, 1959). In sum, the RBV can be represented as a causal chain with four
constructs, namely (1) the resource pool which is the whole domain of resources,
both free resources and resources in possession of firms, (2) key resources in
possession by firms, (3) sustainable competitive advantage generated by firms
possessing key resources, and (4) superior performance in the shape of Ricardian
rents (Figure 56). The next subsection will elaborate on the constructs in more
detail.

Key Resources
SCA
Resource Pool Valuable
Customer service Superior
Resource Rare Performance
Heterogenity Cost leadership
Imperfectly Ricardian rents
Imperfect imitable Differentiation
resource mobility Monopoly rents
Imperfectly Innovativeness
substitutable

Figure 56. The causal chain of the resource-based view

(Barney, 1991)

The Concept of Economic Rents

The resource-based view seeks to explain why firms differ. The theory departs
from the assumption of perfect competition and then seeking to identify the
dimensions that do not apply in the particular case (cf. Chamberlin, 1933). When
perfect competition holds, the market is in equilibrium and the market players are
too many and too small in comparison with total market size in order to have any
influence on it. Moreover, the equilibrium state implies that producers are ”price
takers” and hence cannot earn any profits. According to the resource-based view,
successful firms that are in possession of key resources will earn so called “rents”
(Ricardo, 1817). The value of a resource is thus the sum of the discounted future
cash flows it can render over its life time (Lippman & Rumelt, 1982).

The concept of rents can be traced back to the era of classical economics in the
19th century. The first economist to use the term was Ricardo (1817), whose ideas
 157

was later further developed by British economist Alfred Marshall (1920). ”Rents”
are defined as earnings that do not induce additional competition. This is
according to the neoclassical assumption that the possibility to earn profits (i.e.
profitable industry segment) will attract new firms until no more profits can be
made and a state of equilibrium is achieved. According to Penrose (1959), rents
are defined as the prices of the flow of services emanating from the underlying
resources, referring to the idea that resources is the origin of the services a firm
can produce. Broadly speaking, literature distinguishes between five types of rent:

„ Ricardian rents

„ Marshallian (or Paretian rents)

„ Monopoly rents

„ Entrepreneurial rents

„ Quasi-rents

Ricardian rents, which, not surprisingly, were ”discovered” by Ricardo (1817),

were originally defined as “that portion of the produce of the earth which is paid
to the landlord for the use of the original and indestructible powers of the soil”. In
other words, rents are claimed to be dependent the productivity of the land in a
particular case. With this in mind, it is obvious that the factor that makes land
different is its scarce supply. If this was not the case, there would be an abundance
of soil available and the price would land would be driven towards zero. Today,
the modern interpretation of Ricardian rents includes both “classical Ricardian
rents” as well as quasi-rents (see explanation below). This is illustrated by Peteraf
(1993) who states that “the Ricardian model is often thought of with respect to
resources which are strictly fixed in supply. But it may be applied as well to
quasi-fixed resources, which are of much greater importance”.

As discussed earlier, Marshall (1920) developed Ricardo’s ideas further by

claiming that the scarcity factor does not only apply to farmland, but to all kinds
of resources in the marketplace, both resources in fixed as well as temporary
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supply. Those resources which are only temporarily scarce are known as quasi-
rents.12 In sum, the Ricardian-Marshallian concept of rent therefore hinges on the
fixed/temporary scarcity of the resource, as well as its value compared to its next
best alternative. According to the latter criterion, rents are considered to
be ”supra-normal profits”, or ”above-average profits”.

Rumelt (1987) distinguishes between Ricardian, Paretian and entrepreneurial rents.

As Ricardo considered farmland with differentiated productivity, firms may have
other resources with different productivity. The resource with least productivity is
claimed to earn no rent and thus serves as a “zero-point” when determining rents.
Thus, the rents earned by a resource are equal to the difference between its value
and the resource earning no rents. Paretian rents are thus defined as “the
difference between a resource’s payment in its best and the payment it would
receive in its next best use” (Rumelt, 1987 p. 142). In other words, Paretian rents
are basically equivalent to quasi-rents.

By contrast, entrepreneurial rents are defined as “the difference between a

venture’s ex post value (or payment stream) and the ex ante cost (or value) of the
resources combined to form the venture” (Rumelt, 1987 p. 144). Entrepreneurial
rents are considered to arise in a Schumpeterian fashion to the addition of value
by the combining of resources in new combinations (or the discovery, or creation
of new resources, or modes of organization) (Schumpeter, 1934). They thus apply
to the “entrepreneurial discovery of resource value” (Rumelt, 1987 p. 144). Since
the value of such resources are not widely known or anticipated, entrepreneurial
rents apply to a situation of disequilibrium, whereas Ricardian or Paretian rents
can be earned in a situation of equilibrium (where resource values are widely
known) (Lewin & Phelan, 2000).

12
The term quasi-rents is also sometimes denoted as Marshallian rents after its “founder”. See
(Peteraf, 1993) for a in-depth discussion on the topic.
 159

Another important resource type is monopoly rents, which in comparison to

Ricardian rents are not generated from the inherent scarcity of resources, but
rather from a deliberate restriction of output (Peteraf, 1993). The resource
heterogeneity may be a result from the presence of intra-industry mobility barriers
with differentiate strategic groups from each other (R. E. Caves & Porter, 1977).
Other factors can be due to scale economies, where a single firm in one particular
industry has obtained vast relative economic size so that it can limit the supply to
the market on its own. The downward-sloping demand curves enable monopoly
firms to maximize profits by consciously reducing output compared to the
equilibrium level.

Sustainable Competitive Advantage

The extensive attention given to the word ”competitive advantage” can be traced
back to the fields of economics, and most notably, military studies (Whittington,
1993). The idea of seeking a strong and attractive position dates all the way back
to the ancient Greek wars. This explains the original meaning of the Greek word
for strategy, namely strategos, meaning “generalship” (Cummings, 1993). von
Neumann and Morgenstern (1944), on the other hand, see strategy as a pattern of
action with the aim of move and counter-move.

Although the term ”competitive advantage” is one of the most renowned ones in
strategic management literature, most research has revolved around how to
achieve it rather than what it is (for a good example, see Coyne, 1986). Most
likely, the reason to this is the fact that it is a relative term that is very difficult to
define. Firstly, it is a relational term that only makes sense when the focal firm is
compared with one or more competitors along a number of dimensions that are
relevant in particular situation of competition (Hao, 2000; Hu, 1995; Kay, 1993,
1994).

This implies that a competitive advantage in one industry or geographical market

is not necessary a competitive advantage in another (Hu, 1995). Secondly, it is
neither for sure that competitive advantage always leads to superior performance
 160

(Coff, 1999), nor that superior performance is a result from competitive advantage
(Powell, 2001). For example, competitive advantage along one dimension might
be offset by another competitive disadvantage and will thus not be reflected in
market performance (Ray, Barney, & Muhanna, 2004). Furthermore, it is possible
that economic rents are being generated after a competitive advantage has ceased
to exist (Hao, 2000).

A common approach to get around the above mentioned problems has been to
view the competitive advantage intermediary either as a black-box, where superior
performance is assumed to be an implication of competitive advantage (i.e. the
assumption that superior performance always and only follows competitive
advantage), or by considering competitive advantage and superior performance to
be equivalent. The latter case clearly imposes a risk for tautology (Priem & Butler,
2001). Others have attempted to measure other variables, such as differentiation
or cost leadership, which have been suggested to be ”effects” caused by
competitive advantage (Bharadwaj, Varadarajan, & Fahy, 1993; Day, 1994; Day
& Wensley, 1988; S. D. Hunt & Morgan, 1996; Porter, 1980, 1985).

The fundamental problem here is that such market-oriented factors only applies
when analyzing rents generated by industry-related factors. In other words, this
means that one would try to assess the impact from internal factors while
measuring the actual effect stemming from industry-related factors. An analogy
here is to measure the temperature in the refrigerator when trying to determine
whether it is a good day for ice cream. The various industry-related factors
proposed in literature as a measure for resource-based competitive advantage
might prove highly reliable, but validity is certainly the opposite. As a
consequence, Ray et al. (2004) suggest to choose business process effectiveness
as the independent variable when testing the resource-based view empirically.

The attribute “sustainable” when talking about competitive advantage also

deserves an explanation. As used by Barney (1991) and Grant (1991), it does not
refer to any quantifiable period of wall-clock time, nor does it mean that the
 161

competitive advantage will last infinitely (Günther Mc Grath, MacMillan, &

Venkataraman, 1995). Instead, a competitive advantage is said to be sustainable if
it cannot be obtained by competing firms or if it is impossible to substitute or
imitate. One of the main pieces of criticism against has been against the
assumption of the need for sustainability in order to generate rents.

As a response, management thinkers such as Teece et al. (1997), Eisenhardt and

Martin (Eisenhardt & Martin, 2000) have suggested that the ability to
continuously generate short-term competitive advantage is in itself sustainable.
Such an ability is therefore a higher-level key resource, which is used to ”shock”
the market, similar to the Schumpetarian view of innovativeness (Schumpeter,
1934). The potential quick erosion of competitive advantages is supported by
empirical research. A study done by Ghemawat (1986) indicated that competitors
obtained detailed information about seventy percent of new products being
developed and that sixty to ninety percent of all process improvements within a
firm rapidly diffuses to its competitors.

The Resource Pool and Key Resources

A fundamental assumption of the resource-based view is that resources are

heterogeneously distributed among firms, a phenomenon known as resource
heterogeneity (Barney, 1991). As Peteraf (1993, p. 180) puts it, “productive
factors [i.e. resources] have insintrically different levels of ”efficiency”. Some are
superior to others”. The fact some resources are more important than others, in
combination with the fact that they are heterogeneously distributed across markets
(i.e. not all firms possess them) implies that firms have unequal possibilities to
compete in the marketplace. However, it is worth noting that it is theoretically
possible that several firms earn equal rents, as long as there is an efficiency
differential between them and other firms (Peteraf, 1993). Firms with so called
key resources will earn rents (Peteraf, 1993). Interestingly, superior resources do
not have to be inherently unique or rare; the important thing is that they are scarce
in supply.
 162

As such, firms can sustain a competitive advantage only if the key resources do
not diffuse among firms. For this to hold true, heterogeneously distributed key
resources must be imperfectly mobile. Put simply, imperfect mobility implies that
a certain resource cannot be traded in a strategic factor market (R. Caves, 1980;
Dierickx & Cool, 1989). Resources of which the property rights are vaguely
defined or lacking “bookkeeping feasibility” belongs to this category (Bator, 1958;
Dierickx & Cool, 1989; Meade, 1952). Moreover, some resources are inherently
imperfectly mobile due to its idiosyncratic value to a particular firm; outside the
firm, it would be less valuable. In other words, resources are imperfectly mobile
when they are specialized to a particular firm (Williamson, 1985). Heterogeneity
is a necessary condition for imperfect mobility, but the opposite does not
necessarily need to hold. However, the latter condition is relatively unlikely in
reality, meaning that imperfect mobility implies heterogeneity as well (Peteraf,
1993).

As discussed above, the two cornerstones of the resource-based view are

heterogeneously distributed firm resources and imperfect resource mobility.
However, these are necessary, but not sufficient requirements. In order to qualify
as a key resource, with the ability to generate sustainable competitive, it needs to
fulfil four requirements, namely (1) it must be valuable meaning that it exploits
opportunities and/or neutralizes threats in the external environment, (2) it must be
rare across the marketplace, meaning that it is scarce in supply, (3) it is
imperfectly imitable and substitutable, and (4) it must have organizational focus,
meaning that they are managerially supported (Barney, 1997; Barney & Hesterly,
1996). In short, requirements (1) and (2) are conditions for competitive advantage,
whereas (3) and (4) determines whether a competitive advantage is sustainable or
not. These properties are at heart of the so called VRIO framework (Barney, 1997;
Barney & Hesterly, 1996).13

13
Initially, the framework proposed by Barney (1991) considered imperfect imitability and
substitutability separately, the so called VRIN framework (valuable, rare, inimitable and
 163

According to Barney (1991), a resource can only be a source of competitive

advantage if it enables the firm to execute a strategy that improves effectiveness
and/or efficiency. In line with SWOT analyses developed by scholars such as
Ansoff (1965) and Learned et al. (Learned et al., 1969), a value-creating strategy
must be able to exploit opportunities and neutralize threats in the external
environment. Therefore, it does not matter if a resource is rare, imperfectly
imitable or imperfectly substitutable as long as it cannot create value. This
condition serves as an important bond between the resources pool of the firm and
its surrounding environment (Barney, 1991).

By definition, a resource that is not scarce in supply cannot generate competitive

advantage (Barney, 1991). Competitive advantage is said to arise when a firm is
implementing a value-creating strategy that is not currently being implemented by
any other firm in the same strategic group. If this was not the case, all competing
firms deploying the same value-creating strategy would gain equal benefits and no
one would be better off than the other. However, it is worth noting that a resource
that is not inherently rare can still be valuable. Although it does not provide any
competitive advantage in comparison other firms, it provides advantages in a
sense that absence of it would render competitive disadvantage.

Therefore, possession of valuable (but not rare) resources can be said to avoid an
opportunity disadvantage. 14 This is supported by McKelvey (1982) and Porter
(1980), who claim that firms do increase their probability of economic survival
under conditions of competitive parity. According to Hirschleifer (1980), a

nonsubstitutable), but were later merged and complemented with the organizational focus
dimension (cf. Barney, 1996, 1997).
14
Analogous with the term opportunity cost, we introduce the term competitive opportunity
disadvantage, to denote the competitive disadvantage of not being a possession of a valuable, but
neither rare, nor imperfectly imitable nor imperfectly substitutable resource. An example of
resources with an opportunity disadvantage is an ERP. As such, it can yield tremendous efficiency
improvements across the enterprise. Not having an ERP implemented thus implies a competitive
disadvantage relative to those firms who have one. But it cannot generate sustainable competitive
advantage per se, because a vendor like SAP or Oracle can (and do) implement the same ERP to a
wide range of its clients.
 164

resource has the potential to generate competitive advantage as long as the

number of firms possessing a particular valuable resource is less than the number
of firms needed to generate perfect competition in an industry.

Although valuable and rare resources can generate competitive advantage, it is not
for sure that the competitive advantage generated is sustainable. So called ex post
limits to competition provides the necessary requirement in order to make the
competitive advantage sustainable (Peteraf, 1993). Without sustainability,
competitive advantage, and ultimately rents, would erode over a short period of
time. Hence, resources must remain scarce in supply. In the resource-based view,
the first ex post limit to competition in order to render sustainability is imperfect
imitability.

Put simply, imperfect imitability means that competing firms that do not possess a
certain rare and valuable resource, are not able to obtain them (Barney, 1986a,
1986b; Lippman & Rumelt, 1982). The reasons for imperfect imitability can be
one or several of the three following factors (Dierickx & Cool, 1989): (1)
dependency on unique historical conditions, (2) causal ambiguity, meaning that
the link between a resource and sustainable competitive advantage is not clearly
understood, and (3) social complexity which obscures the situation. Clearly,
imperfect imitability is especially important for companies seeking to compete
through differentiation and innovativeness, since first-mover advantages
otherwise would erode.

The second ex post condition for sustainable competitive advantage is imperfect

substitutability. This means that there is only one unique type of resource that can
exploit a particular opportunity or neutralize a particular threat in the external
environment. If this condition would not hold, it would mean that there may be
other alternative resource types available to competing firms to be used as a
substitute for exploiting the same benefits. Such a situation would not be
sustainable per se. Hence, it does not matter whether the resources is valuable,
rare and imperfectly imitable unless this requirement is fulfilled. Barney and Tyler
 165

(1990) gives a high-performing top management team as an example; it cannot be

imitated due to the inherent uniqueness of individuals, but can be substituted for
another team of individuals in the own firm.

5.2. Theoretical Framework

This section forms the core part of chapter 5, which essentially applies RBV to the
LCCS topic. More in-depth, subsequent deductions of hypotheses are formed to
an integrated research model that can be tested empirically. In sum, this chapter
focuses on research questions 3–5 as stated in chapter 1.3, namely the role of
resources in a low-cost country sourcing context.

5.2.1. Development of Hypotheses

Strategic management literature is replete with discussions about the ultimate
source of competitive advantage, from concrete tasks such as customer service
excellence and product development to more abstract competencies such as
innovativeness, teamwork and adaptability. From a resource-based view, the task
of managers is to identify resources needed to execute a value-creating strategy
(i.e. key resources). If those resources cannot be found within the boundaries of
the firm, it might be possible to acquire them from the external environment,
through the purchasing department. The purchasing department thus serves as an
interface between the firm and its surrounding environment.

When the needed resources have been acquired, they need to be developed,
protected, and deployed. By developing a resource, it is meant that it is combined
with other resources in order create a configuration which has a value that is
greater than its constituent parts. Resources also have to be protected, either by
mechanisms hindering them from diffusing to competitors directly or indirectly
through imitation or substitution. As discussed in chapter 5.1.3, the inherent
nature of supplies can help a great deal to protecting the resources from being
 166

appropriated by competing firms. Finally, the resource configurations must be

deployed, implying that the value is tapped and delivered to the end-customer.

The number of resources in every firm is virtually endless. Many times, different
terms are used interchangeably which can cause a great deal of confusion. For
example, the term “competency” is often used interchangeably with terms such as
“skill” or “capability”. Moreover, they are often used in combination with
attributes such as “core” or “distinctive” in order to highlight their strategic
importace (Fahy, 2001). As a first simple typology, Black and Boal (1994)
differentiates between contained resources and system resources, which is pretty
much in line with the discussion above. Contained resources are resources that are
in themselves “atomic” in a sense that they are fundamental resources themselves
and cannot be broken down further. System resources are, as the name implies,
systems of resources that are built up contained resources. A common
classification scheme is to distinguish resources depending on their physical
characteristics, such as financial resources, physical resources, human resources,
organizational resources and technological resources (Hofer & Schendel, 1978).

In contrast, Lado et al. (1992) suggest to classify resources in terms of

competencies, distinguishing between resource-based, transformation-based,
output-based and managerially based. Williams (1992) on the other hand, uses
imitability as typological criterion thus ending up with three types, namely slow-
cycle resources, standard-cycle resources and fast-cycle resources. On the
contrary, Baghai et al. (1999) use a more function-oriented typology with four
categories, namely operational skills, privileged assets, growth-enabling skills and
special relationships. Finally, scholars such as Teece et al. (1997) and Eisenhardt
and Martin (2000), with their extended resource-based view called dynamic
capabilities view, consider the key activity of any firm as the ability to create new
resource configurations over time.
 167

As can be seen from the discussion above, an abundance of resource classification

schemes exist. However, a very pragmatic scheme proposed by Fahy (2001) is
based on the physical nature (Wernerfelt, 1989), and on what the company has or
what it does (Hall, 1992; Prahalad & Hamel, 1990). With these criteria, we can
distinguish between tangible resources, intangible resources and capabilities
(Fahy, 2001). An overview of different resource typologies are shown in table
Table 13. Although it is possible to use a more fine-grained typology (Grant, 1995;
Hall, 1992), the one chosen for this study is more parsimonious. A more detailed
discussion about the different resource types is provided below in this section.

Table 13. Resource classification schemes

(adapted from Fahy, 2001)

Resource Type

Author Tangible Resources Intangible Resources Capabilities

Wernerfelt (1989) Fixed assets Blueprints Cultures

Barney (1991) Physical capital, human
capital, organizational
capital
Black and Boal (1994) Contained resources System resources
Hall (1992) Intangible assets Intangible capabilities
Hall (1993) Assets Competencies
Prahalad and Hamel (1990) Core competencies
Itami (1987) Invisible assets
Amit and Shoemaker (1993) Intermediate goods
Selznick (1957), Hitt and Distinctive
Ireland (1985), Hofer and competencies
Shcnedel (Hofer &
Schendel, 1978),
Irvin and Michaels (1989) Core skills
Vargo and Lusch (2004) Operand and operant
resources
Teece et al. (1998), Dynamic capabilities
Eisenhardt and Martin
(2000); Winter (2003)
 168

As was discussed in chapter 5.1.3, it is assumed that the performance

contributions from internal factors are a result from resource heterogeneity and the
possession of key resources. Furthermore, it was stated that the RBV could be
represented as a causal chain with four constructs, namely (1) the resource pool,
(2) key resources, (3) sustainable competitive advantage, and (4) superior
performance in the shape of Ricardian rents (Figure 56). The obvious question is
hence how to operationalize the constructs, and how to choose dependent and
independent variables. Alas, resource heterogeneity is virtually impossible to
measure due to practical reasons, since it implies investigating all companies in a
particular strategic group15 (R. E. Caves & Porter, 1977; M. Hunt, 1972; Porter,
1979). Therefore, attention is instead paid to the second construct in the causal
chain, namely to key resources, which are selected as independent variables in this
study. Since the no special attention is paid to assess whether a resource in fact is
a key resource, no claims about the sustainability of competitive advantages are
made. Instead, a qualitative discussion about the relative strategic importance of
different resource types and their corresponding performance implications will be
given below.

As discussed in the previous section, Ray et al. (2004) suggest to choose business
process effectiveness as the dependent variable when testing the resource-based
view empirically. Positive impact on purchasing process effectiveness from
supply-side activities has been observed earlier, for example through supply chain
integration (Berry, Towill, & Wadsley, 1994), early supplier involvement (J. R.

15
Michael Porter coined the concept of strategic groups in his studies about industry structures in
the late 1980s. Following his work, there have been numerous studies considering strategic groups
either partly or completely. The existence of strategic group has been widely debated in literature.
Strategic groups defined as groups of firms that have same strategic dimensions (Hunt, 1972;
Porter, 1979). According to this definition, firms in the group follow similar strategies in terms of
the key decisive criteria. Strategic groups can consist of a single firm or all the firms in the
industry.
 169

Carter & Ellram, 1994) and strategic supplier development (Narasimhan &
Jayaram, 1998).

Since this approach has proved to be successful in the past, purchasing process
performance was selected as a measure of the impact of firm resources in
possession or acquired through low-cost country sourcing in this particular study.
Furthermore, the performance measures were also dichotomized into two
subcategories, namely effectiveness and efficiency. Here, effectiveness refers to
the extent to which a pre-defined objective has been achieved, whereas efficiency
refers to the extent of inputs needed to achieve those pre-defined objectives
(Monczka, Carter, & Hoagland, 1979).

Tangible resources are basically entities with physical properties that one can see
and touch. They are also characterized by fixed long-term capacity (Wernerfelt,
1989). Moreover, tangible resources have the property of being owned by a legal
institution and the value can often be measured by means of accounting and thus
affects the balance sheet (Hall, 1992). Another important property is that tangible
assets are tradable in strategic factor markets (Barney, 1986a; R. Caves, 1980;
Dierickx & Cool, 1989), meaning that the resource ownership may very well
change over time.

The governance structure (i.e. resource ownership) of tangible resources in LCCs

is highly dependent on the mode of entry into a new supplier market. Generally,
the larger cultural distance (Hofstede, 1980), the more often a collaborative
approach such as setup of a joint venture with a local supplier is taken (Dyer &
Sing, 1998). However, the research studies are indicating a trend favoring wholly
foreign owned enterprises (WFOEs) as the mode of entry, indicating a need for
greater span of control and influence of the buying firm (Vanhonacker, 1997).

This property has important implications for sourcing, as will be elaborated

further in this section. Although the strategic importance of tangible resources can
be debated, they can be, if well protected, at least a source of competitive
 170

opportunity disadvantage (cf. section 5.1.3 about the resource pool and key
resources). Thus, we hypothesize:

Hypothesis 1a: Purchasing process effectiveness is positively influenced by the

extent of tangible resources in possession by the firm sourcing in low-cost
countries.

Hypothesis 1b: Purchasing process efficiency is positively influenced by the

extent of tangible resources in possession by the firm sourcing in low-cost
countries.

Intangible resources, on the other hand, have a more vague nature, and can be
entities such as product and process patents, brand names, reputation etc (Hall,
1992; Williams, 1992). Contrary to tangible resources, intangible resources cannot
be valued efficiently in terms of supply and demand. However, the value of such
resources can be assessed by observing the discrepancy between the balance sheet
valuation and market capitalization of publicly listed firms (Grant, 1991; Hall,
1989, 1992; Rumelt, 1987). Such discrepancies have been empirically observed in
industries such as the pharmaceutical industry, consumer goods industry and
service industry (Fahy, 2001; Grant, 1991).

Another important difference is the fact that intangible resources in some

instances have unlimited capacity, meaning that the intangible resource can be
replicated with virtually infinitesimal effort. product or process technologies that
are either transferred to or from suppliers in LCCs, controlled through
mechanisms consisting of patents and licences (Hall, 1992; Rumelt, 1987;
Wernerfeldt, 1989). Such technology transfers from buyers in HCCs to LCCs as a
means to realize efficiency gains in the upstream part of the supply chain have
been examined recently (Goh, 2005).

Also trust and reputation generated from formal and informal socialization have
proven important for successful supplier relationship management (Burt, 2000;
Cousins, Handfield, Lawson, & Petersen, 2006a; Johnston, McCutcheon, Stuart,
 171

& Kerwood, 2003), especially in LCCs through supplier on-site visits (Handfield
& Nichols Jr., 2004). With this in mind, the second set of hypotheses is:

Hypothesis 2a: Purchasing process effectiveness is positively influenced by the

extent of intangible resources in possession by the firm sourcing in low-cost
countries.

Hypothesis 2b: Purchasing process efficiency is positively influenced by the

extent of intangible resources in possession by the firm sourcing in low-cost
countries.

Capabilities is a broad category that involves several dimensions such as skills

(Klein, Edge, & Kass, 1991) and invisible assets (Itami, 1987). Amit and
Schoemaker (1993) defines capabilities as “the firm’s capacity to deploy
Resources”, meaning that they represent what the firm is “doing” rather than what
it is “having” (Hall, 1992). Capabilities usually also fall into the category “operant
resources”, as defined by Vargo & Lusch (2004). Several scholars have claimed
that organizational capabilities are not only based on the capabilities of the
individual people, but also the inter-personal capabilities when employees work in
teams (Grant, 1991; Senge, 1994), a notion derived from Nelson and Winter’s
(1982) concept of organizational routines.

Capabilities have also been frequently been pointed out as the strategic factor that
makes the firm dynamic in a sense that it lets the firm “renew competences”
(Teece et al., 1997), and is in line with the knowledge-based view in a sense that
existing knowledge can be reconfigured into new knowledge sets that can render
new competencies (Grant, 1996). This property is becoming increasingly
important in today’s volatile business environment where competition is
increasing, product life cycles become shorter and shorter and the requirements
for time-to-market and timing are crucial (Teece et al., 1997). Moreover, several
scholars claim capabilities to be the ultimate source of competitive advantage, as
they make firms truly distinguishable and unique (Learned et al., 1969; Prahalad
& Hamel, 1990).
 172

As the degree of value added is decreasing, capabilities for effective supplier

collaboration is becoming increasingly important in order to realize competitive
advantages for the buying firm (Gadde & Snehota, 2000; Wagner, 2006), and
overcome the disadvantages of foreignness (Luo, 2001). As an example, in order
to successfully manage supplier relationships, the capability to share information
and communicate is highly important (Prahinski & Benton, 2004), and is even
more important when sourcing in emerging and transition economies where
accurate information is scarce and uncertainty is high (Sungmin & Nermin, 2006).
This statement is further supported by Harvey et al. (2003) who state that both
technical and social competencies are essential for effective supply management
in global account relationships. Based on the discussion above, this leads to the
third set of hypotheses examined in this study:

Hypothesis 3a: Purchasing process effectiveness is positively influenced by the

extent of capabilities in possession by the firm sourcing in low-cost countries.

Hypothesis 3b: Purchasing process efficiency is positively influenced by the

extent of capabilities in possession by the firm sourcing in low-cost countries.

Based on the four criteria postulated by Barney (1991), we can assess the relative
importance of internal resources. As discussed earlier, tangible resources are often
purchased from strategic factor markets; such a market is defined as “a market
where the resources necessary to implement a strategy are acquired” (Barney,
1986a). As a result, such resources can virtually be acquired by any firm that has
sufficient financial resources to perform the transaction, thus questioning its
strategic importance (Ramsay, 2001a).

Intangible resources, on the other hand, are more difficult to trade in strategic
factor markets due to their idiosyncratic nature (Williamson, 1979). Moreover,
they are predominantly developed within the firm, as a result of “choosing
appropriate time paths of flows over a period of time” (Dierickx & Cool, 1989).
Although some intangible assets such as copyrights and patents can be bypassed
by making appropriate modifications to product designs, short-term rent
 173

generation through imitation or substitution is unlikely due to time compression

diseconomies, meaning that the accumulation of a certain resource stock cannot be
achieved no matter how much inputs are being deployed unless a certain time
period has elapsed (Dierickx & Cool, 1989). As an example, it has been proven
very difficult to overtake supplier relationships through acquisitions (H. Anderson,
Havila, & Salmi, 2001); this holds especially true in many LCCs like China where
trust is based on inter-personal rather than inter-firm relationships (Haley et al.,
2004; Vanhonacker, 2004).

In short, these arguments show that intangible resources are likely to be more
difficult to imitate and substitute as the causal ambiguity is higher. As was
discussed earlier, intangible resources are also characterized by an ability to be
scaled up and reused with little or no efforts, implying that the value can be
“inflated” through asset mass efficiencies and potentially creating synergies with
other resources, so called asset stocks interconnectedness (Dierickx & Cool,
1989). Consequently, the potential value of intangible resources is likely to be
much higher compared to tangible resources. This leads to the following
hypotheses:

Hypothesis 4a: Intangible resources have a higher impact on purchasing

process effectiveness than tangible resources when sourcing in low-cost
countries.

Hypothesis 4b: Intangible resources have a higher impact on purchasing

process efficiency than tangible resources when sourcing in low-cost countries.

As discussed in the previous section, many scholars have claimed that capabilities
are the most important source of competitive advantage. The rationale is very well
grounded in RBV. Firstly, capabilities (i.e. know-how) are created through
“learning-by-doing”, meaning that knowledge about how to carry out a task or
solve a problem is accumulated over time (Argote & Epple, 1990; Arrow, 1962;
Senge, 1994). Furthermore, the current and future capability development is also
claimed to be contingent on past experience (B. Levitt & March, 1988). In other
 174

words, it is an iterative process that can be named iterative asset stock

interconnectedness, meaning that the current capability stock increments depends
on past capability stock accumulation. This process is reflected in unit cost
reductions as experience increases and is usually referred to as the learning curve
(Andress, 1954; Hirschmann, 1964; T. P. Wright, 1936). Hence, the time-path
dependency of capabilities results in very strong time compression diseconomies.

This paradigm is further supported by several streams of research that

acknowledge the more dynamic nature of some resources, such as the dynamic
resource based view with so called capability life cycles (Helfat & Peteraf, 2003),
dynamic capabilities (Eisenhardt & Martin, 2000; Teece & Pisano, 1998; Winter,
2003) and the concept of the resource-advantage theory of competition (S. D.
Hunt & Morgan, 1996).

What is more, so called tacit knowledge is a special type of capabilities that

cannot be articulated and is strongly connected to experience (Polanyi, 1997). As
a consequence, such capabilities are very difficult for competitors to imitate or
substitute. Even though it is possible to acquire tacit knowledge by hiring skilled
personnel from a competitor, there are also “organizational capabilities” which lie
in the interpersonal capabilities within teams, between workers and managers and
the way through which they utilize tangible and intangible resources (Senge,
1994). Since both intra- and inter-personal capabilities are so strongly connected
to the firm, the rareness of capabilities as a resource is very high.

The least common denominator of the various research streams is the fact that
higher-order resources are considered to be the source of dynamism and
adaptability within firms (Helfat & Peteraf, 2003; Teece & Pisano, 1998; Vargo &
Lusch, 2004; Winter, 2003). For example, Vargo and Lusch (2004) claim that is
not goods themselves that comprise customer value, but rather the knowledge that
were used to create them. As such, a distinction between operand and operant
resources is done, implying that operant resources are “employed to act on
 175

operand resources or other operant resources” (Vargo & Lusch, 2004, p. 2). In
other words, operant resources are here represented by capabilities.

It can be concluded that capabilities are very valuable since they essentially
represent the value-creating mechanism and are rare due to the fact that they
cannot be purchased in factor markets. Morover, several scholars claim
capabilities to be the ultimate source of competitive advantage, as they make
firms truly distinguishable and unique (Learned et al., 1969; Prahalad & Hamel,
1994). Finally, they are difficult to imitate and substitute due to the tacitness and
causal ambiguity. Based on the discussion above, the next set of hypotheses is:

Hypothesis 5a: Capabilities have a higher impact on purchasing process

effectiveness than intangible resources when sourcing in low-cost countries.

Hypothesis 5b: Capabilities have a higher impact on purchasing process

efficiency than intangible resources when sourcing in low-cost countries.

Until recently, RBV has predominantly focused on heterogeneously distributed

firm-specific resources as the source for rent generation, but to a very limited
extent on the dependency with dyadic or network relationships that characterizes
today’s business environment. Dyer and Singh (1998, p. 660) claims that “a firm’s
critical resources may span firm boundaries and may be embedded in inter-firm
resources and routines”. Moreover, Srivistava et al. (1998) suggests that many key
resources arise from the firm’s interaction with the external environment. These
statements hold no less true today as firms are relying on an increasing extent on
suppliers for the creation of customer value. For example, a recent study shows
that the degree of value-added (i.e. the degree of vertical integration) is constantly
decreasing in many industries and have fallen to less than fifty percent in some
industries (Jahns, 2005).

With this in mind, it is worthwhile to combine the fields of international business,

strategic management and supply management in order to adapt the RBV
framework to sourcing activities, of which the strategic importance has been
 176

seriously questioned (Ramsay, 2001a). On the other hand, as all supply markets
suffer from market failure to a certain extent, the requirements postulated by RBV
can still hold in practice (Ramsay, 2001b). A growing body of research seems to
be in favor of the increasing strategic importance of purchasing due to factors
such as the decreasing degree of value-added and possibilities to set up alliances
and strategic supplier relationships (P. H. Andersen & Christensen, 2000; Mol,
2003).

After all, purchasing and supply management is not as trivial as “purchasing

sustainable competitive advantage in open markets” (Ramsay, 2001a). This is
supported by Caves (1980, p. 65), who claims that “at least some [factors] are
simply not traded on open markets that permit capitalizing their differential
qualities into their contract prices”. Interestingly, the traditional TCT perspective
perceives inter-firm resources as a sticking point (Friis Olsen & Ellram, 1997),
leading to high supplier switching costs rather than as a strategic asset that can be
leveraged as is the case with RBV (Buvik & Reve, 2001).

By applying RBV as a theoretical lens, it is interesting to examine the driving

forces behind certain purchasing and supply strategies where companies are
seeking new opportunities in emerging and transition economies. Firstly, it has
been observed that factor endowments such as land, labor and capital differ
widely from country to country. Furthermore, differentials in exchange rates, tax
rates and wage levels provide leverage for cost savings and improved efficiency
(Kogut, 1985b). As a result, firms should focus on parts of the value chain in
which they have competitive advantages (i.e. degree of vertical integration) and
locate the in-house value-chain parts in a way that maximizes end-customer value
(Kogut, 1985a; Porter, 1986). These factor endowments are highly immobile,
implying that they can only be exploited by physical presence in the specific
market.

From a resource-based view, sourcing in emerging and transition economies can

therefore be seen as a way of increasing the available resource pool and in turn
 177

gain competitive advantage, as firms expand their sourcing markets into new
geographic regions. Such resources have two characteristics: they are (i) external
to the firm and (ii) imperfectly mobile. (i) implies that the resources are not in full
control of the firm, but can be at least partially controlled through management
decisions. An example is a joint venture with a manufacturing firm or an
exclusive strategic relationship with a LCC supplier. (ii) implies that local
presence is necessary to some extent in order to take advantage of the resource,
since it cannot be moved to the home country of the buying firm.

When applying the resourced-based view on resources in the external

environment, it becomes evident that such resources can be dichotomized into two
categories, namely basic factor resources and advanced factor resources,
depending on how they score according to Barney’s four criteria (Barney, 1991).
Basic factor resources basically comprise tangible resources with the important
exception that they are located outside the firm boundary. Such resources are
“classical” factor inputs that any firm present in the supply market can enjoy, such
as climate, infrastructure, low-wage labor etc. Such resources were the prime
targets of buying firms during the 1980s and are closely related to the concept of
value chain fragmentation as discussed by Kogut (1985a) and Porter (1986).
Therefore, the following is hypothesized:

Hypothesis 6a: Purchasing process effectiveness is positively influenced by the

extent of basic factor resources in possession by the firm sourcing in low-cost
countries.

Hypothesis 6b: Purchasing process efficiency is positively influenced by the

extent of basic factor resources in possession by the firm sourcing in low-cost
countries.

Advanced factor resources, on the other hand, can only be obtained through
resource stock accumulation, analogous to the earlier discussion about intangible
resources and capabilities (Dierickx & Cool, 1989). An example of such an
advanced resource is the transfer of technologies and competencies from suppliers;
 178

it has been shown that preferred suppliers not only deliver goods at the right time,
at adequate quality and at lowest price possible, but increasingly delivering
“competencies” and “knowledge” (Goffin et al., 2006; Johnsen et al., 2006).
Value does not solely stem from the supplies being purchased, but also from the
buyer-supplier relationship itself (Lindgreen & Wynstra, 2005). Moreover,
managing these relationships requires capabilities that are difficult to imitate and
also require supportive organizations (Barney, 1997). Based on the discussion
above, the next set of hypotheses is:

Hypothesis 7a: Purchasing process effectiveness is positively influenced by the

extent of advanced factor resources in possession by the firm sourcing in low-
cost countries.

Hypothesis 7b: Purchasing process efficiency is positively influenced by the

extent of advanced factor resources in possession by the firm sourcing in low-
cost countries.

The factor resources have a number of interesting properties that need to be

elaborated. Firstly, none of the factor resources can be purchased from strategic
factor markets per se. Like nutrients are passing through the membrane of an
organic cell, such resources cannot normally be appropriated by letting them pass
through the firm boundary from the external environment through transactions (as
is the case with tangible resources). Instead, as the factor resources are spatially
fixed (e.g. a firm cannot “move” the climate or tax rate from a foreign country to
its home country), the buying firm needs to reduce its distance to them in order to
successfully appropriate them.

In line with Dierickx and Cool’s (1989) paradigm of time-path dependency, we

need not only a time dimension to explain the sourcing phenomenon from a
classical intra-firm RBV, but also a space dimension. Therefore, we coin the term
space-path dependency, which essentially means that the buying firm must locate
its sourcing activities in a way that minimizes the overall spatial distance to factor
 179

resources needed to execute its strategy in order to maximize the resource stock
and ultimately generation of rent.

Naturally, since basic factor resources can only be protected by the buying firm to
a very limited extent, they can basically be appropriated by any firm that has the
internal resources needed such as manpower and capital needed to set up sourcing
activities in a foreign supply market. Consequently, the value and rareness of such
resources are limited. Although the substitutability of basic factor resources
potentially can be highly imperfect, the imitability is certainly not, due to the lack
of protective barriers.

Advanced factor resources, on the other hand, differs from basic factor resources
in a number of ways. Firstly, they have a more tacit and intangible nature which in
turn yields a higher degree of causal ambiguity and the degree of imperfect
imitability and substitutability is thus higher. As an example, special relationships
to key market actors such as strategic suppliers or government officials may not
be known to competitors, nor is it for sure that competitors are able to obtain such
information.

By creating such inter-firm resources, difficult-to-imitate combinations of

resources arise (D'Aveni, 1999; Eisenhardt & Martin, 2000). This is also in line
with the perspective of the IMP paradigm, which states that both sides in buyer-
supplier relationships will make mutual adaptations (i.e. create inter-firm
resources) by time (Hallén, Johansson, & Seyed-Mohamed, 1991; Håkansson &
Snehota, 1995), and is the outcome of the quest for similar and complementary
business partners (Chung, Harbir, & Lee, 2000; Wilkinson, Young, & Vagn
Freytag, 2005).

This in turn leads to a situation where the buying firm has the potential to
influence decision-making of its partners (Gaski, 1986; Sheth & Parvatiyar, 1992).
Thus, the buying firm has the possibility to influence the external environment by
exerting power on other market actors (Griffith & Harvey, 2001), and especially
create imperfections in factor markets (Barney, 1986a). Based on this discussion,
 180

it is evident that the potential for sustainable competitive advantage is much

higher for advanced factor resources than for basic factor resources. Finally, since
advanced factor resources can be purchased from strategic factor markets to a
much lesser extent then basic factor resources, their existence instead rely on
internal accumulation over time. Hence, advanced factor resources ought to be
much rarer. This leads to the second last set of hypotheses:

Hypothesis 8a: Advanced factor resources have a higher impact on

purchasing process effectiveness than basic factor resources.

Hypothesis 8b: Advanced factor resources have a higher impact on

purchasing process efficiency than basic factor resources.

The relationship between effectiveness and efficiency has not been extensively
investigated in literature. Therefore, it is hypothesized that there exist a non-
recursive relationship, positive relationship between purchasing process
effectiveness and efficiency. That is, the ability to accomplish pre-defined goals
can lead to less resource consumption and vice versa. Therefore, without making
any claims on causal direction, the last hypothesis is:

Hypothesis 9: Purchasing process effectiveness is positively and bi-

directionally related to purchasing process efficiency.

5.2.2. Research Model

Together, the various constructs and hypotheses form the research model which is
later to be tested empirically. The research model itself is depicted in Figure 57. It
conly depicts the model from a conceptual level, i.e. it is not a statistical model.
The arrows in the figure show how the different hypotheses are connecting the
constructs. A single-ended arrow represents a causal (i.e. uni-directional)
relationship, whereas a double-ended arrow represents a non-causal (i.e. bi-
directional) relationship. All in all, there are seventeen hypotheses. The rest of the
chapter is devoted to operationalize and test those hypotheses.
 181

Tangible
Resources

H4a/b H1a

Intangible H2a H1b

Resources Purchasing
H2b Process
H5a/b Effectiveness
H3a
Capabilities H3b H9

H6a
Purchasing
Basic H6b
Process
Factor Efficiency
Resources H7a H7b
H8a/b
Advanced
Factor
Resources

Figure 57. Constructs and interrelated hypotheses

5.2.3. Operationalization of Constructs

The number of unique resources in firms and their external environment is
virtually infinite. Consequently, only a subset of all possible resources can be
assessed. Since the goal of this study is not to investigate the effect from a
plethora of resources, but rather empirically testing the research model that was
developed earlier, a limited number of representative resources were selected. The
selection was performed by compiling a list of potential resources through eight
expert interviews which were then evaluated according to the literature and
mapped to the five categories that were defined earlier.

The items representing purchasing process performance (i.e. purchasing process

effectiveness and efficiency) were also identified in a similar manner by asking
practitioners which three dimensions they perceive as most important and then
compare with literature (Monczka et al., 1979; van Weele, 1984b). Only items
that could be consistently mapped to one of the five categories were included in
order to assure content validity (Venkatraman & Grant, 1986).

All items were measured on a five-grade semantic differential scale (Ajzen &
Fishbein, 1980) ranging from one to five. The construct items were not rotated
 182

from interview to interview, but were randomly ordered. The questionnaire was
pre-tested during a purchasing and supply management seminar with eight
sourcing experts comprising a mix of researchers and industry practitioners. Items
that were not immediately understood or found ambiguous were changed in their
wording or dropped altogether unless it would detrimentally affect construct
validity.

Out of the original set of items, the constructs (i.e. resources and purchasing
process performance) could be operationalized through three items each. The
fifteen items representing the resources were then grouped into five factors
through principal component analysis. In this way, potential problems with
collinearity were eliminated (Backhaus, Erichson, Plinke, & Weiber, 2003). The
same approach was applied for the three items representing purchasing process
effectiveness and efficiency, respectively, in order to generate the corresponding
components.

Extent of Tangible Resources

In order to consolidate purchase spend to the greatest extent possible, firms must
coordinate and integrate sourcing activities both across business units as well as
functional units (Robert J. Trent & Robert M. Monczka, 2002). Here, various
supportive systems play a key role as enablers for increasing transparency to
metrics such as total cost savings, quality improvements etc. Therefore, it was no
surprise that the first measure representing tangible resources identified was
implementation and use of performance measurement systems. Such systems can
be any sort of IT system such as ERPs, e-sourcing solutions, spend management
solutions etc., where internal corporate data can be gathered, processed and
presented as key performance indicators.

Performance measurement has also proved to be an invaluable tool as a means for

monitoring and controlling strategy execution, which has been proven by the
widely adoption of the balance scorecard approach as an example (Kaplan &
Norton, 1992). Such supportive systems are also paramount for assuring quality;
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when sourcing in emerging and transition economies, quality is one of the most
important metrics, and the high importance has been repeatedly acknowledged in
earlier research (Cross & Gordon, 1995; Turnbull, Delbridge, Oliver, &
Wilkinson, 1993).

Through the expert interviews, it also became clear that sufficient resource
allocation to affiliations in emerging and transition economies were very
important for successful operations. Therefore, the second item, free capital, as
the name implies, is basically readily available cash for investments and
expenditures, and directly affects solvency. Thus, it was selected as the second
item representing tangible resources.

The interviews also revealed that LCCS operation plants and facilities (i.e.
physical entities which enable and facilitate local operations) were regarded as
highly important. The overall consensus was that sourcing activities in emerging
and transition economies cannot be performed “remotely”, implying that facilities
such as international procurement offices (IPOs) need to be located in the
sourcing market, in proximity to suppliers, to support on-site supplier visits and
similar activities.

Furthermore, these are all enablers for an adequate organization in terms of

location-specific manpower, which has proved to be critical for successful
sourcing in emerging and transition economies (Helper & Sako, 1995; Pucik,
1988). As the need for different skills and competencies change over the sourcing
project life cycle (entry, development, global integration) (Lieberthal & Lieberthal,
2003), the facilities in which business activities takes place must also change
accordingly.
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Extent of Intangible Resources

Regarding intangible resources, the majority of the interviewees claimed that

protection and utilization of patents is an effective means for transferring
intellectual property such as technology to supplier markets in transition and
emerging economies. This claim is supported by literature as it allows firms to
exclusively exploit an innovation by legal means (Hall, 1992). The rationale is
that patents give the firm opportunities to exert monopoly power in the market
segment that surrounds the innovation. Rumelt (1987, p. 145) categorizes them as
“isolating mechanisms” which protects the firm from imitation and keep rent
streams stable.

This is also in line with Caves and Porter’s (1977) concept of mobility barriers,
which themselves are a further development from Bain’s (1956) idea of entry
barriers. Patents are not limited to only include the physical characteristics of an
invention (what it is), but can also include processes (i.e. the way in which a good
is produced). Thus, the first item measuring the extent of intangible resources
available to the firm is the amount of product/process patents held by the firm. Of
course, in order to have effect, intellectual property regulations in the host country
are essential.

The expert interviews also revealed that reputation of the firm was important, as it
was claimed that this property can increase the trust in buyer-supplier
relationships in emerging and transition economies, thus facilitate bidding and
negotiation processes (Hall, 1992). Therefore, the second item is the reputation of
the firm in the LCC where sourcing is taking place.

Also all kinds of codified knowledge about sourcing in emerging and transition
economies, here referred to as LCCS know-how, was considered highly important.
The conclusion from the interviews is that it is actually not the knowledge itself
that is of importance, but they act as precursors to higher-order capabilities
(Eisenhardt & Martin, 2000; Teece & Pisano, 1998; Teece et al., 1997; Winter,
2003). Thus this measure was selected as a third item of the construct.
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Extent of Capabilities

The expert interviews made it clear that the ability to integrate strategic suppliers
in business processes was one of the most important capabilities when sourcing in
emerging and transition economies; thus it was selected as the first item of the
capabilities construct. The importance is confirmed in literature where leveraging
knowledge with local suppliers can help the buying firm decreasing the so called
“market knowledge gap”, which is defined as “the difference between
international partners related to the local market” (Griffith & Harvey, 2001).
Empirical studies have indicated its positive impact on performance (Carr &
Pearson, 1999).

The second item that was distilled from the expert interviews is the ability to
utilize cross-functional teams. This implies that staff from various functional units
such as production, purchasing, marketing, finance and R&D are brought together,
often together with key suppliers in order to develop an optimal product.
Empirical studies have shown that this is the most effective way to reduce product
cost; the later in the product development cycle one tries to influence costs, the
more difficult it gets (Jahns, 2005). These two items pointed out as the two most
critical factors for successful sourcing in emerging and transition economies are
also consistent with supply management literature (Dobler & Burt, 1996).

When sourcing in emerging and transition economies, government officials are

often a third category of stakeholders. Therefore, it was no surprise that the
interviewed experts claimed the ability to work and cooperate with LCC
government and authorities to be highly important. In literature, it is an important
factor for increasing efficiency in firms especially in transition economies
(Nugent, 1993).

This claim is further supported by Wu and Choi (2004), who claim that good
relationships with governments can help firms to obtain valuable information
about issues such as future economic policies, taxation and import/export duties,
thus reducing uncertainty and increasing the financial planning horizon. For
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example, in many transition economies, where many financial institutions are

owned and controlled by the government, good relationships can provide firms
with low interest loans etc. (Wu & Choi, 2004). Yoshihara (1988) exemplifies the
importance of such government relationships by claiming that overseas Chinese
industrialists in some instances are “ersatz capitalists” that create competitive
advantage by forming alliances with the ruling elite.

Extent of Basic Factor Resources

As most studies point out that cost reduction is the key driver behind low-cost
country sourcing, it is no surprise that the access to low-cost labor was considered
the most important basic factor resource by the interviewees. This resource
provides the highest leverage for total cost savings in many instances, since labor
cost is often one of the biggest cost elements of purchased supplies (Battacharya
et al., 2004). Moreover, it was claimed that the choice of low-cost manual labor in
favor of expensive automation equipment can reduce the amount of tied-up capital
and thus strengthen the balance sheet.

The second important basic factor resource identified through the interviews was
access to the LCC supplier base with a certain critical mass (i.e. sufficient size), as
it was claimed that this facilitates competition and supplier selection, both for
supplies that require strategic collaboration and for supplies that require arms-
length relationships. This is also an effect from the supplier base consolidation
taking place in many firms; as the number of tier-one suppliers are reduced and
increased focus on single sourcing in order to increase bargaining power and
economies of scale, the risk of supply chain disruptions also increases (Atkinson,
1989). Therefore, the second item selected is access to LCC supplier base.

Another interesting outcome from the expert interviews was the fact that the
access to LCC customer markets also was considered very important. The
rationale was the fact that vast synergies can be achieved if the supplier market
and customer market are closely located to each other. The synergies will be even
higher in case the markets are overlapping, thus effectively shifting the entire
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“center of gravity” of the business. As an example, the Swedish furniture retailer

IKEA does not only tap the benefits of China on the supply side, but also on the
demand side, by setting up ten department stores in major cities such as Beijing,
Shanghai, Guangzhou and Shenzhen over the next five years (Zhou, 2003). Before
2020, the company believes China will rank as one of its five most important sales
markets in the world, indicating the importance of considering both the upstream
and downstream supply chain when making sourcing-related decisions.

Extent of Advanced Factor Resources

The first item of the advanced factor resource construct obtained through the
expert interviews was access to educated/skilled local workforce, which is
frequently stated as a crucial aspect of LCCS. Many interviewees claimed that
excellent workforce can help reducing the cultural distance (i.e. the difference
between market actors along a set of cultural dimensions) between the buying
firm and its environment, which is also supported by literature (Gomez-Mejia &
Palich, 1997; Kogut & Singh, 1988).

The second item obtained through the interviews was access to new technologies.
In other words, through strategic sourcing in emerging and transition economies,
not only goods can be supplied to the buying firm, but also technology and
knowledge embedded in the supplies sourced, similar to the marketing paradigm
suggested by Vargo and Lusch (Vargo & Lusch, 2004). This resource can provide
competitive advantage, but only under the prerequisite that it cannot be easily
obtained by competitors. This item has proved to be an important driving force to
buying firms, as it helps them to improve innovativeness and quality and
ultimately improve competitive advantage (Alguire et al., 1994).

The last item provided by the expert interviewees was first-mover advantages in
LCCs, which was claimed to give opportunities for locking up scarce resources
and thus preempting competitors from acquiring them in a “first come, first serve”
manner (Lieberman & Montgomery, 1988, p. 1112). Examples of first-mover
advantages mentioned in this context was hard-to-imitate exclusive buyer-supplier
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relationships and joint ventures, but also more tangible advantages such as tax
rates and climate, which potentially may erode more rapidly; therefore, the timing
of entry is a crucial factor (Kevin, Lam, Karakowsky, & Gongming, 2003).
Although the life span of first-mover advantages have been widely debated, it is
clear that it is contingent on the type of first-mover advantage, which eventually
translates into (at least) short-term rents (Boulding & Christen, 2003).

Purchasing Process Performance

Purchasing process performance can be operationalized in a large number of ways.

van Weele (1984b) proposed a distinction between effectiveness and efficiency,
where the former includes metrics such as supplier development, make-or-buy
decisions, value analysis etc., and the latter includes metrics such as lead time,
order volume, cost savings, single/multiple sourcing decisions etc. The formal
difference is that purchasing effectiveness is defined as “the extent to which, …, a
previously established goal or standard can be met”, whereas purchasing
efficiency is defined as “the relationship between planned and actual sacrifices
made in order to realize a goal previously agreed upon” (van Weele, 1984b, p. 18).

Purchasing Process Effectiveness. For this study purchasing process effectiveness

gains were measured through a construct consisting of three items: delivery
reliability, component/service quality and order lead time (Monczka et al., 1979;
van Weele, 1984a). Although a more fine-grained research model using more
indicator variables could be beneficial, a less complex solution was considered
more appropriate for this study as the main goal is primarily theory validation
rather than prediction. All the indicator variables were assessed by asking how
they have been affected by sourcing activities in emerging and transition
economies over the past three years in order capture the sustainability dimension
which plays an important role for RBV. The initial expert interviews and earlier
research (Chao, Scheuing, & Ruch, 1993), as well as respondents of this study
indicate that these measures are the most relevant ones.
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Purchasing Process Efficiency. Purchasing process efficiency relates to the

different inputs that are used in order to accomplish pre-defined goals determined
through effectiveness measures. Therefore, efficiency measures are directly linked
to effectiveness. Furthermore, it makes sense to believe that the link between the
two measures are bi-directional, since efficiency can theoretically influence
effectiveness and vice versa. For the purchasing department of the company, it
usually means measuring various cost elements at a relatively aggregated level
that makes sense for evaluation and decision-making. For this particular study, six
different indicator variables comprise the purchasing performance efficiency gains
measure, namely savings in total cost, labor costs, material costs, transportation
costs, capital costs and inventory costs.

5.3. Analysis and Results

In this section, the operationalized research model is applied to the empirical data
collected as described in chapter 3.2. In the first step, a confirmatory factor
analysis and a principal component analysis are performed to confirm the
underlying factor structure of the constructs. Then, the validated factors (in this
case principal components) are used to set up a path model in which the
hypotheses derived in chapter 5.2.1 are tested and the outcome is finally
summarized.

5.3.1. Factor Analysis

Construct validity measures the extent to which the items in a scale all measure
the same construct (Flynn et al., 1994), and can be evaluated by the use of factor
analysis. Factor analysis addresses the issue of analyzing the interrelationships
among a large number of items and then explaining these items in terms of their
common underlying dimensions (factors). In fact, the general purpose of factor
analysis is to find a way of condensing or summarizing the information into a
smaller set of new composite dimensions (factors) with a minimum loss of
information (Hair, Anderson, Tatham, & Black, 1992).
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There are two forms of factor analysis, namely exploratory factor analysis and
confirmatory factor analysis. According to Hair et al. (1992), there is continued
debate concerning the appropriate role of factor analysis. Many researchers
consider it only exploratory, useful in searching for structure among a set of
variables, or as a data reduction method.

Exploratory factor analysis (EFA) attempts to discover the nature of the constructs
influencing a set of responses. The aim of exploratory factor analysis is to
examine the underlying structure of a relatively large set of variables. The key
feature of EFA is that the researcher has no à priori assumption of the underlying
factors (i.e. latent variables) and their corresponding indicator variables. This is
the most common form of factor analysis. Hence, no prior theory is applied, and
one uses factor loadings to determine the factor structure of the data.

Confirmatory factor analysis (CFA) tests whether a specified set of constructs is

influencing responses in a predicted way. Both types of factor analyses are based
on the common factor model (Spearman, 1904). This model proposes that each
observed response is partially influenced by underlying common factors and
partially by underlying unique factors. The strength of the link between each
factor and each measure varies, such that a given factor influences some measures
more than others.

In other words, the aim of confirmatory factor analysis is to determine if the

number of factors and the loadings of measured (indicator) variables on them are
in line with what is expected with respect to the application of a pre-established
theory. Indicator variables are selected on the basis of prior theory and factor
analysis is used to see if they load as predicted on the expected number of factors.
Consequently, the à priori assumption of the research is that each factor is
associated with a specified subset of indicator variables. The minimum
requirement of confirmatory factor analysis is that the researcher hypothesize
beforehand the number of factors in the model, but almost always also
hypothesize which variables will load on which factors (Kim & Mueller, 1978).
 191

Put simply, the researcher seeks to determine, if measures created to represent a

latent variable really belong together.

The aim of this section is to examine and validate the underlying factor structure
of the empirical set of variables for the model. This is achieved in two steps. First,
the theorized factor structure was put to test through a confirmatory factor
analysis with the statistical software package LISREL. In this way, a rigorous
assessment of convergent and discriminant validity could be performed
(Campbell & Fiske, 1959). Finally, a semi-exploratory factor analysis was
performed through principal component analysis (PCA) in order to generate
normally distributed and non-correlated factors for the principal component
regression analysis.

The reason why the first stage of the factor analysis is denoted as “semi-
exploratory” is that we do not introduce any constraints to the analysis, but let the
indicator variables arrange themselves freely according to the PCA algorithm. At
a first glance, one would suggest that this makes the analysis qualified as a
exploratory factor analysis. However, since an à priori establishment of the
underlying factor structure has been done, thus the criterion for being an
exploratory factor analysis is not fulfilled.

The fact that the indicator variables are not constrained to any hypothesized
factors implies that it cannot be categorized as a confirmatory factor analysis
either. As Jöreskog (1974 p. 2) puts it, “Many factor analyses are to some extent
both exploratory and confirmatory, since they involve some variables of known
and other variables of unknown composition”. In other words, exploratory and
confirmatory factor analysis should not be seen as mutually exclusive, but rather
as a continuum of ordered progression (J. C. Anderson & Gerbing, 1988).

Confirmatory Factor Analysis

In order to assess convergent and discriminant validity for the various constructs
used in this study, confirmatory factor analysis was applied. Confirmatory factor
 192

analysis can be seen as a subset of structural equation modeling (SEM), which

provides a methodology that can be viewed as a relatively generic approach in the
fields of regression analysis and factor analysis (Tomer, 2003). As Tomer (2003)
states in a historical literature review on the topic, one root of SEM can be traced
back at least to the early days of path analysis (S. Wright, 1918). Another root is
factor analysis which dates back to Thurstone (1931). Jöreskog (1966) proposed
confirmatory factor analysis methods and developed the as of today not very well-
known COFAM software in the 1960s, that enabled researchers to perform such
analysis. The widely established and renowned LISREL model (Jöreskog, 1977),
combines path analysis and factor analysis in a more general model.

Based on the previous development and testing of the proposed model,

confirmatory factor analysis was considered appropriate for this study. The
confirmatory factor analysis is useful in establishing how the observed variables
and the latent variables are related (Bollen, 1989; Long, 1983). In other words,
this means how well the underlying latent constructs relate to the observed
variables. This is done by testing the strength of the regression paths from the
factors to the factor loadings, also known as the “structure coefficients” (Tomson
& Daniel, 1996). The so called composite reliability generated from LISREL
estimates is often used as a reliability estimate for the latent variables (i.e. factors)
(Bollen, 1989; Mueller, 1996) while the standardized loadings are often used as
reliability estimates for the observed variables (i.e. indicator variables). See
Appendix C for detailed LISREL output for the respective models tested in this
section.

Normality is an important property of frequency distributions when performing

ML estimations. The initial data screening revealed that the sample exhibited a
certain degree of deviation from normality, as two variables have absolute
skewness values exceeding 1.0. In this case, it seems that the distributions are
slightly negatively skewed and slightly leptokurtic as shown in Table 14 It is very
common that statistical data in social and behavioral sciences are nonnormal as
 193

the data frequently exhibits a hierarchical nature (Micceri, 1989; Schafer &
Graham, 2002; Yuan & Bentler, 2002).

There are several approaches that can cope with this problem. One is to
standardize the data and thus rely on correlation matrices instead of covariance
matrices (Gerbing & Anderson, 1984). This is generally not advisable as the
variable scaling is lost. Another approach is to use the asymptotically distribution
free (ADF) approach proposed by Poon and Lee (1994). However, this procedure
can only be applied for very large samples (Fouladi, 2000; Muthén & Kaplan,
1992). Consequently, this approach is not feasible for this study as the current
sample size is N = 200.
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Table 14. Univariate statistics before and after normal scores procedure

Initial Sample Normal Scores

# Variable Mean St. Dev. Skewness Kurtosis Skewness Kurtosis

Tangible resources (ȟ1)

x1 PERFMEAS 3.320 1.174 0.007 -0.873 -0.095 -0.579
x2 FREECAP 3.119 1.299 0.062 -1.419 -0.063 -0.853
x3 PLANTS 3.121 1.301 -0.033 -1.266 -0.007 -0.831

Intangible resources (ȟ2)

x4 PATENTS 2.770 1.279 0.109 -0.827 0.108 -0.816
x5 REP 3.280 1.163 -0.081 -0.625 -0.083 -0.594
x6 KNOWHOW 3.190 1.006 -0.149 -0.248 -0.131 -0.220

Capabilities (ȟ3)
x7 SUPPINT 3.105 0.993 -0.063 -0.281 -0.062 -0.257
x8 CROSSFNC 3.278 1.052 -0.073 -0.330 -0.095 -0.306
x9 GOVMGT 2.621 1.188 0.207 -0.739 0.173 -0.704

Basic factor resources (ȟ4)

x10 LCLABOR 3.159 1.154 -0.038 -0.513 -0.031 -0.512
x11 SUPPBASE 3.383 1.054 -0.113 -0.314 -0.128 -0.285
x12 CMARKETS 3.304 1.196 -0.079 -0.508 -0.091 -0.529

Advanced factor resources (ȟ5)

x13 WORKFORC 3.153 1.040 -0.063 -0.345 -0.077 -0.313
x14 TECH 3.019 1.135 -0.018 -0.489 -0.003 -0.503
x15 FIRSTMOV 2.931 1.143 0.028 -0.537 0.028 -0.530

Purchasing process efficiency (Ș1)

y1 TOTCOST 3.781 0.854 -0.214 -0.016 -0.206 0.025
y2 LABCOST 3.465 0.959 -0.131 -0.388 -0.098 -0.300
y3 MATCOST 3.629 0.974 -0.174 -0.356 -0.183 -0.256
y4 TRANCOST 2.858 0.811 0.051 -0.338 0.268 -0.134
y5 CAPCOST 3.162 0.847 -0.073 -0.013 -0.062 0.024
y6 INVCOST 2.815 0.877 -0.085 -0.259 -0.075 -0.332

Purchasing process effectiveness (Ș2)

y7 QUALITY 3.203 0.894 -0.037 -0.147 -0.015 -0.011
y8 LEADTIME 2.839 1.024 0.028 -0.391 0.056 -0.305
y9 DELIRELI 3.087 0.876 0.008 -0.236 0.029 -0.093
 195

The problems associated with nonnormal data can be avoided by transforming the
data into a more normal distribution shape (Babakus, Ferguson, & Jöreskog, 1987;
Curran, West, & Finch, 1996; West, Finch, & Curran, 1995). The so called
normal scores technique was applied to achieve the transformation while
preserving means and standard deviations (Jöreskog, 1999; Jöreskog, Sörbom, du
Toit, & du Toit, 2000).

After the normal scores transformation, the data fulfills a rule of thumb saying
that absolute univariate skewness and kurtosis should not exceed 1.0 (Hair et al.,
1992). In comparison with Monte Carlo simulations done in the past, the
deviations from normality are considered “slight” (Boomsma & Hoogland, 2001;
Curran et al., 1996). To be on the safe side, in order to decrease the possible
impact from the small deviations, so called robust maximum likelihood (RML)
estimation was applied in which Ȥ2 values are scaled to account for the degree of
multivariate non-normality (Satorra & Bentler, 1988, 1994). Since RML takes
third- and fourth-order product moments into account, it has proven to be very
stable against multivariate non-normality.

Convergent Validity

As a first step, assessment of convergent validity was performed. Convergent

validity is the extent to which a latent variable correlates with the indicator
variables that are supposed to represent the same latent variable (Garver &
Mentzer, 1999). For this study, measures that were maximally different but
intended to represent the same construct were selected (Schwab, 1980). In order
to obtain an unambiguous and valid model, the indicators of each latent variable
should converge to measure a single construct (Hughes, Price, & Marrs, 1986).
Evidence of convergent validity is achieved when the squared multiple
correlations for each of the indicator variables is significant (Bollen, 1989;
Jöreskog & Sörbom, 1989).
 196

The empirical data was analyzed through structural equation modeling (SEM)
using the statistics software package LISREL 8.72. First, the measurement model
for the exogenous side of the model was set up and analysed. The configuration
along with parameters is shown in Figure 58.

Figure 58. Exogenous measurement model with parameters

As can be seen in Table 15, there is evidence for convergent validity, as all factor
loadings are highly significant. Moreover, Construct reliability was highly
satisfactory, as the parameters for each corresponding latent variable exceeds 0.7
(Nunally, 1978). The amount of variance extracted were below but relatively close
to the threshold for all constructs but one (Homburg, 2000).
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Table 15. Standardized solution for exogenous measurement model

Parameter Value t-value Item Parameter Value t-value

reliability

Tangible resources (ȟ1): Variance extracted: 52.0%, Construct reliability: 0.76

Ȝx1 0.586 8.83 0.343 į1 0.657 7.51
Ȝx2 0.773 14.50 0.598 į2 0.402 6.68
Ȝx3 0.787 12.36 0.619 į3 0.380 6.38

Intangible resources (ȟ1): Variance extracted: 54.0%, Construct reliability: 0.76

Ȝx4 0.688 10.86 0.473 į4 0.527 7.43
Ȝx5 0.763 14.35 0.582 į5 0.418 7.12
Ȝx6 0.742 10.92 0.551 į6 0.450 8.21

Capabilities (ȟ1): Variance extracted: 49.3%, Construct reliability: 0.70

Ȝx7 0.717 11.18 0.514 į7 0.487 7.31
Ȝx8 0.671 9.15 0.450 į8 0.550 7.36
Ȝx9 0.717 13.42 0.514 į9 0.486 9.65

Basic factor resources (ȟ2): % Variance extracted: 44.3%, Construct reliability: 0.70
Ȝx10 0.630 8.34 0.349 į10 0.651 8.97
Ȝx11 0.651 9.86 0.424 į11 0.576 7.24
Ȝx12 0.714 10.44 0.510 į12 0.490 6.10

Advanced factor resources (ȟ2): % Variance extracted: 50.5%, Construct reliability: 0.75
Ȝx13 0.742 10.35 0.551 į13 0.450 5.31
Ȝx14 0.711 10.87 0.506 į14 0.495 6.02
Ȝx15 0.678 10.66 0.460 į15 0.541 7.39

Inter-factor Correlations
ĭ12 0.857 17.22 ĭ24 0.773 9.49
ĭ13 0.839 15.89 ĭ25 0.683 9.31
ĭ14 0.873 13.71 ĭ34 0.873 13.66
ĭ15 0.599 8.23 ĭ35 0.779 11.65
ĭ23 0.963 20.91 ĭ45 0.767 11.50

Notes:
All parameters are significant at the 0.001 level

Next, the measurement model for the endogenous side of the model was set up
and analyzed according to the same procedure as with the exogenous side. The
configuration along with parameters is shown in Figure 59.
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Figure 59. Endogenous measurement model with parameters

Although the item reliability of some parameters were relatively low, all
parameters proved to be highly significant (Table 15). Thus, evidence for
convergent validity is adequate. The parameters for Ȝy4 were exceptionally low; as
a result, it was altogether dropped from the model in order to improve reliability
and validity. In this way, variance extracted and construct reliability of Ș1
increased from 38.2% to 44.6% and from 0.77 to 0.80, respectively.

Table 16. Standardized solution for endogenous measurement model

Parameter Value t-value Item reliability Parameter Value t-value

Purchasing process efficiency (Ș1): Variance extracted: 44.6%, Construct reliability: 0.80
Ȝy1 0.793*** 12.34 0.629 İ1 0.371*** 5.81
Ȝy2 0.657*** 9.46 0.432 İ2 0.569*** 8.41
Ȝy3 0.787*** 12.07 0.619 İ3 0.381*** 6.16
Ȝy4 0.259*** 3.386 0.067 İ4 0.933*** 9.12
Ȝy5 0.537*** 7.19 0.288 İ5 0.712*** 9.21
Ȝy6 0.510*** 5.97 0.260 İ6 0.785*** 9.48

Purchasing process effectiveness (Ș2): Variance extracted: 51.3%, Construct reliability: 0.75
Ȝy7 0.679*** 9.41 0.461 İ7 0.539*** 7.36
Ȝy8 0.554*** 9.08 0.307 İ8 0.572*** 7.78
Ȝy9 0.879*** 12.06 0.773 İ9 0.227** 2.64

Inter-factor Correlations
Ȍ12 0.856*** 25.07

Notes:
** Significant at the 0.01 level, *** Significant at the 0.001 level
 199

Discriminant Validity

Discriminant validity was evaluated through chi-square difference tests for each
pair of constructs in the measurement model. Here, discriminant validity is said to
exist when an unconstrained model (correlation coefficient between constructs are
set free) vis-à-vis a constrained model (correlation coefficient set to 1.0) has
significantly lower chi-square value. This indicates that the constructs are not
perfectly correlated and thus discriminant validity is acceptable (J. C. Anderson &
Narus, 1984; Bagozzi, Yi, & Philipps, 1991; Jöreskog, 1971). On the exogenous
side, the chi-square difference test for intra-firm resources and inter-firm
resources also showed acceptable discriminant validity (Satorra-Bentler Ȥ21df =
230.25 – 162.01 = 68.24, p < 0.001) (Table 17).

In order to assess the fit of the measurement model, two nested models were
compared for the exogenous and endogenous side, respectively (one oblique and
one restricted where the correlation is fixed to 1.0) (J. C. Anderson & Gerbing,
1988). The results are shown in Table 17. As can be seen, the oblique
measurement models provide a better fit to the data than the restricted ones.
Consequently, the restricted measurement models were omitted for further
examination. The model parameters proved to be highly significant.

Also the chi-square values associated with the measurement models were
significant; these values are dependent on sample size and are inflated due to non-
normal properties of the data, the Satorra-Bentler Ȥ2/df ratio is applied in this
study (Bagozzi & Yi, 1988; Cagli, 1984; Hulland, Chow, & Lam, 1995; Satorra &
Bentler, 1988). According to Carmines and McIver (1981), this ratio should be
less than 3.0. In a similar manner, goodness-of-fit (GFI), root mean square error
of approximation (RMSEA), normed fit index (NFI), comparative fit index (CFI),
parsimonious goodness-of-fit index (PGFI) were used for this study. With the
exception of RMSEA for both oblique measurement models (RMSEA > 0.10), all
fit indices were within the range that indicates good fit to the data (i.e. Ȥ2/df ” 3.0,
 200

GFI • 0.80 NFI, CFI > 0.90) (Carmines & McIver, 1981; Hoyle, 1995;
Marcoulides & Schumacker, 1996).

Based on this, the conclusion that can be drawn is that the hypothesized
measurement models provide a better fit to the data than rival nested models. The
PGFI is usually around 0.50 for most models. In this case, PGFI for the two
oblique exogenous and endogenous measurement models were 0.55 and 0.63,
respectively. Hence, the parsimonious fit was relatively high.

Table 17. Fit indices for the exogenous side of the measurement model

2 2
Model S-B Ȥ df S-B Ȥ /df GFI RMSEA NFI CFI PGFI

Oblique 162.01 75 2.16 0.88 0.043 0.97 0.99 0.55

Constrained 230.25 90 2.56 0.83 0.089 0.94 0.96 0.62

Notes:
Null model: Ȥ2 = 3,673.36, S-B Ȥ2 = 2898.71, df = 105, S-B Ȥ2/df = 27.61, GFI = 0.29, RMSEA = 0.37, NFI = 0.21, CFI = 0.22,
PGFI = 0.25

On the endogenous side, the chi-square difference test for purchasing process
effectiveness and purchasing process efficiency indicated acceptable discriminant
validity (Satorra-Bentler Ȥ21df = 119.43 – 56.17 = 63.26, p < 0.001) (Table 18).

Table 18. Fit indices for the endogenous side of the measurement model

2 2
Model S-B Ȥ df S-B Ȥ /df GFI RMSEA NFI CFI PGFI

Oblique 56.17 19 2.96 0.92 0.12 0.92 0.94 0.63

Constrained 119.43 20 5.97 0.84 0.16 0.87 0.89 0.47

Notes:
Null model: Ȥ2 = 930.30, S-B Ȥ2 = 635.14, df = 28, S-B Ȥ2/df = 22.68, GFI = 0.46, RMSEA = 0.33, NFI = 0.32, CFI = 0.33,
PGFI = 0.36

Semi-Exploratory Factor Analysis

According to Hair et al. (1992), there are two methods of exploratory factor
analysis: Principal component analysis and common factor analysis. Principal
component analysis is appropriate when the researcher is seeking to find the
 201

minimum number of factors needed to account for the maximum portion of the
variance represented in the original set of items. In contrast, common factor
analysis is appropriate when the researcher is seeking to identify the latent
dimensions or constructs represented in the original items.

In line with the first stage of the factor analysis in this study, principal component
analysis was the preferred choice as it can determine how and to what extent items
are linked to their underlying factors (Byrne, 1998). For this study, the principal
component analysis was configured in a way that prevents an item from loading
on more than one factor in order to assure unidimensionality (Hughes et al., 1986).
In this case, it is hypothesized that three items are selected for measuring each
latent construct representing resources.

Factor loadings are used to present these relations. According to Hair et al. (1992),
factor loadings greater than 0.30 are considered significant; loadings of 0.40 are
considered more important; if the loadings are 0.50 or greater, they are considered
very significant. For this study, a factor loading of 0.50 was used as cut-off point.
The most commonly used method of determining whether items are loading on
one factor is the so called latent root criterion,16 implying that only the factors
having eigenvalues greater than 1 are considered significant; those with
eigenvalues less than 1 are considered insignificant and are omitted for further
analysis (Hair et al., 1992).

First, the principal component analysis was applied for all indicator variables on
the exogenous side of the research model using varimax rotation and eigenvalues
greater than one. The outcome was very successful, resulting exactly in the the
hypothesized factor structure. The results from this factor analysis are
summarized in Table 19.

16
The latent root criterion is frequently referred to as the Kaiser criterion in statistics literature (cf.
Backhaus et al., 2003)
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Table 19. Principal component analysis of LCCS resources

% of Item to total Factor

a
Component variance Cronbach’s Į Scale items corr. loadings

Capabilities 66.4 0.75 Ability to integrate strategic 0.617 0.846

(ȟ1) suppliers (x1)
Ability to utilize cross- 0.594 0.831
functional teams (x2)
Ability to work with LCC 0.511 0.766
government (x3)
Intangible 67.2 0.76 Firm’s reputation in LCC 0.637 0.855
resources (ȟ2) (x4)
LCCS know-how (x5) 0.581 0.819
Product/Process patents 0.536 0.783
(x6)
Advanced 69.3 0.70 Access to skilled/ educated 0.635 0.846
Factor workforce (x7)
Resources (ȟ3)
Access to new technology 0.632 0.844
(x8)
LCC first-mover 0.576 0.805
advantages (x9)
Basic Factor 62.3 0.70 Access to low-cost labour 0.558 0.823
Resources (ȟ4) (x10)
Access to LCC supplier 0.495 0.777
base (x11)
Access to LCC customer 0.484 0.767
markets (x12)
Tangible 66.7 0.75 Free capital in LCC (x13) 0.631 0.853
resources (ȟ5)
Performance measurement 0.592 0.830
systems (x14)

LCCS operating plants and 0.510 0.764

facilities (x15)

Notes:
a
Based on rotation of sums of squared loadings
All significance levels < 0.001

Next, the three indicator variables on the endogenous side of the research model
were subject to a principal component analysis, also using varimax rotation and
egigenvalues greater than one. The nine items were reduced to two factors,
accounting for 68.2 and 55.6 percent of the total variance in the data, respectively
(depicted in Table 20).
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Table 20. Principal component analysis of purchasing process performance.

% of Item to total Factor

a
Factor variance Cronbach’s Į Scale items correlation loadings

Purchasing 68.2 0.77 Delivery reliability (y1) 0.635 0.849

process
effectiveness Supply quality (y2) 0.582 0.815
(Ș1) Order lead time (y3) 0.580 0.813

Purchasing 55.6 0.79 Material cost (y4) 0.615 0.822

process
efficiency (Ș2) Capital cost (y5) 0.585 0.765
Total cost (y6) 0.566 0.748
Labor cost (y7) 0.550 0.719
Inventory cost (y8) 0.529 0.628
Transportation cost 0.382 0.530
(y9)

Notes:
a
Based on rotation of sums of squared loadings
Significance level < 0.001

The program of SPSS 12.0 was used to perform the factor analysis, each scale
being factor analyzed separately. From Table 19 and Table 20, it was clear that all
items had factor loadings greater than 0.50. In order to prevent an indicator
variable to load on more than one factor, the varimax rotation was used. The
factor analysis showed that each indicator variable loaded according to the
hypothesized structure.

Reliability

Reliability refers to whether one gets the same result by using an instrument to
measure something repeatedly (Bernard, 2000). It measures the extent to which an
experiment, test or measuring procedure renders the same results over several
trials (Carmines & Zeller, 1979). In other words, it is a statistical measure of the
reproducibility of the data gathered by a survey instrument (Litwin, 1995).
Generally, four different methods are available for measuring reliability: (1) the
test-retest method, (2) the alternate-form method, (3) the split-halves method and
(4) the internal consistency method (Nunally, 1978).
 204

The test-retest reliability method implies conducting a survey repeatedly using the
same set of respondents for each of the surveys. Subsequently, correlation
coefficients are calculated to compare the sets of responses. Thus, the correlation
coefficients give an estimate of the test-retest reliability of the survey instrument.
In this way, reliability can be assessed by measuring the reproducibility. Here, a
correlation coefficient equal or exceeding 0.70 is usually set as a lower threshold
for sufficient reliability (Litwin, 1995).

The second method, the alternate-form method, is a means for assessing the
reliability of a survey instrument. By rewording questions and responses, or
change their order, the objective is to create items that are similar but not identical;
the items are different only in wording or order. The items or scales of the survey
instrument are then used for the same population repeatedly in different points of
time. Then, the correlation coefficients are calculated in a similar fashion to the
test-retest method. Again, correlation coefficients equal to or exceeding 0.70 are
considered to have adequate reliability (Litwin, 1995).

The third method, the split-halves method, uses a slightly different approach than
the two former ones. Here, the sample is divided into two halves, where reliability
is estimated for each halves then laterally compared with each other. It is
important to remember that the halves are randomly selected in order to eliminate
group differences. Furthermore, the sample must also be large enough to allow
reliability assessment of each half (Litwin, 1995).

The fourth reliability method, internal consistency method, is the most commonly
applied psychometric measure for survey instruments and scales. Internal
consistency measures how well a set of items or scales measure a common latent
construct. Thus, the items or scales measuring the construct must be clearly
focused on that particular construct intended to be measured. The most well-
known statistic to estimate internal consistency is Cronbach’s alpha coefficient
(Cronbach, 1951; Nunally, 1978). The coefficient measures the internal
consistency among a set of items that are conjoined to form a common construct
 205

or latent variable. In other words, it reflects the homogeneity of the scale. As with
the other reliability methods, a coefficient equal to or higher than 0.70 is
considered adequate (Nunally, 1978).

By qualitatively evaluating the effectiveness of the reliability measurement

methods above, it is evident that the first three have practical shortcoming due to
the nature of this particular study. Firstly, it is difficult to administer the survey
instrument on the same group of respondents repeatedly with two different forms
of measurement instrument. Contrary to this, the internal consistency method does
not need to split nor repeat item measurements. Thus, the measurement procedure
only needs to be administered once upon which an estimation of reliability can be
generated. Furthermore, it is also the most general form of reliability assessment
(Nunally, 1978). Consequently, the internal consistency method was selected to
assess reliability for this study. From Table 19 and Table 20 it is evident that the
reliability criterion is fulfilled as all Cronbach Į parameters are higher than 0.7.

Item Analysis

Nunnally (1967) developed a method for evaluating the assignment of items to

scales that considers the correlation of each item with each scale. Specifically, the
item-score to scalescore correlations are used to determine whether an item
belongs to the scale as assigned, to some other scales, or should be eliminated.
The scale-score is obtained by computing the arithmetic average of the scores of
the items that comprise that scale.

The values of item to scale correlations should be greater than 0.50; those lower
than 0.50 do not share enough variance with the rest of the items in that scale.
Therefore, it is assumed that the items are not measuring the same construct and it
should be deleted from the scale (Kemp, 1999). As an example, Saraph et al.
(1989) used this method to evaluate the assignment of items to scales in
developing their instrument for measuring the critical factors of quality
management. It was judged that item analysis should be performed in order to
understand whether items were assigned appropriately. As is the case with the
 206

indicator variable representing “transportation cost” in Table 20, its item-to-total

correlation value is only 0.382 which is below the cut-off point. Hence, it was
excluded for further analysis.

In addition to the above criteria, a number of other parameters were used to

reliability and validity measures. First, a recommendation by Homburg (2000)
saying that average variance extracted should exceed 50 percent was apparently
fulfilled with a good margin; in the case of this study, the amount of variance
extracted ranged from 55.6 to 69.3 percent. Second, Kumar et al. (1993) suggest
that item-to-total correlation should exceed 0.3, which is also fulfilled in this
study.

Validity

Validity is defined as the extent to which any instrument measures what it is

intended to measure. The three most popular methods of evaluating the validity of
a measurement instrument are content validity, criterion-related validity, and
construct validity (Carmines & Zeller, 1979). Due to limitations of some
instruments that are known to be valid, many researchers do not evaluate the
criterion-related validity of their instruments (e.g. De Jong, 1999). In this study,
all of these three validitiy criteria were considered to evaluate the measurement
instruments. The criteria-related validity was assessed through two of its sub-
criteria, namely convergent validity and discriminant validity.

Content validity depends on the extent to which an empirical measurement

reflects a specific domain of content. It cannot be evaluated numerically as it is a
subjective measure of the perceived appropriateness to various reviewers with
some knowledge of a subject matter. The evaluation of content validity typically
involves an organized review of the survey’s contents to ensure that it includes
everything it should, and does not include anything it should not. Strictly speaking,
content validity is not a highly scientific measure of a survey instrument’s
accuracy. Nevertheless, it provides a solid foundation on which to build a
methodologically rigorous assessment of a survey instrument’s validity.
 207

In this research, however, it was argued that the fifteen scales for measuring
accessibility to resources and the nine scales for measuring purchasing process
performance had content validity since the development of these measurement
items was based on an extensive literature review and expert interviews with a
group consisting of both academics and practitioners.

5.3.2. Path Analysis

After assessing the fit of the measurement model was assessed, the next step was
to examine the interrelations between the different constructs, as was depicted in
Figure 57. Naturally, an important question is to determine what statistical
methodology to apply in order to evaluate the postulated hypotheses. Without
doubt, the structure of the conceptual research model deliberately calls for a path
analysis in order to conform to the conceptual research model developed in
chapter 5.2 (depicted in Figure 60).

A common critique against this type of causal analysis methods is the prevalence
of retrospective and self-serving bias (March & Sutton, 1997). However, since
each respondent most likely is equally biased in every question, the bias is
automatically eliminated through the inherent way correlation coefficients are
calculated. a common critique against these types of quantitative analysis methods
is the prevalence of retrospective and self-serving bias (March & Sutton, 1997).
However, the questions being asked were done in isolation, i.e. first the
availability of resources was assessed, then purchasing performance was assessed
separately. Thus, questions like “to what extent did resource X help you achieving
cost reductions” were avoided in order to minimize negative effects from self-
serving and retrospective bias.

What also comes into question is of course causality, which can be established
either deductively (i.e. based on theory) or empirically through longitudinal
studies (Mol, 2003). Since this study is cross-sectional, the causal directions are
deductively supported from the extensive body of research presented earlier in
this paper. Furthermore, from a nomological perspective, the effects in the
 208

“reverse causal direction” are considered negligible, i.e. it is much more likely
that cost savings follow effective supplier development rather than vice versa.

į1 x1 ʌȟ1
į2 x2 ʌȟ2
ȟ1 ȗ1
ʌȟ3
į3 x3 Ȗ11

ʌȟ4 Ȗ12 Ȝy1 y1 İ1

į4 x4
ʌȟ5 Ȗ21 Ȝy2
į5 x5 ȟ2 Ș1 y2 İ2
ʌȟ6 Ȝy3
į6 x6 Ȗ22 y3 İ3

į7 x7 ʌȟ7 Ȗ31
ʌȟ8
į8 x8 ȟ3 Ȗ32 ȗ2
ʌȟ9
į9 x9 Ȝy5 y5 İ5

į10 x10 ʌȟ10 Ȗ41 Ȝy6 y6 İ6

ʌȟ11 Ȗ42 Ȝy7
į11 x11 ȟ4 Ș2 y7 İ7
ʌȟ12 Ȝy8
į12 x12
Ȗ51 Ȗ Ȝy9 y8 İ8
52
į13 x13 ʌȟ13
y9 İ9
ʌȟ14
į14 x14 ȟ5
ʌȟ15
į15 x15

Figure 60. Structural model with parameters

Another issue that needs to be addressed is the choice of indicator mode, i.e. the
question whether to use a reflective or a formative modeling approach. Indicator
mode is primarily determined by the theory behind the model; the way in which
unobservable (latent) constructs are conceptualized (Fornell & Bookstein, 1982).
Reflective indicators mean that the causal link is going from the underlying latent
variable towards each of the indicator variables. The indicators are said “to be
caused by the latent construct”. In other words, the latent variable is the cause,
whereas the effect is reflected in the indicators. An example of a reflective latent
 209

variable is “personality”, of which one can see “symptoms” such as anger,

destructive behaviour etc.

In contrast, formative indicators are totally opposite. In this case, the indicator
variables are said “to cause the latent variable”. An example here could be socio-
economic status (SES), which can be formatively represented by indicator
variables such as education, income and occupational prestige (Chin, 1998).
Clearly, if a person would lose his/hers job, a decline would be observed in the
SES latent variable. However, the opposite is not necessarily true; a decline in
SES does not necessarily mean that a person has lost his/hers job. Furthermore, a
change in an indicator (e.g. income) does not necessarily imply a similar
directional change for the other indicators (e.g. education or occupational prestige)
(Chin, 1998). Therefore, such a latent construct is without doubt of formative
nature.

Nevertheless, according to Chin (1998), it is a common and serious mistake by

researchers to inadvertently apply formative indicators in a structural equation
model (SEM) analysis. The reason to this is the fact that it is an underlying
assumption for SEM analysis that the items or indicators used to measure a latent
variable are inherently reflective (Keiding, Morgan, Speed, & van der Heijden,
2004). In case of this study, the natural question is therefore: are the different
resources available to a firm a result of the accessibility to the more abstract types
of resources, such as tangible or intangible resources? Does an increase in the
accessibility to performance measurement systems also lead to an increase of free
capital (i.e. liquidity)? The answer to these two questions are without doubt no.
Consequently, the approach to be taken for the latent variable path analysis in this
study should be formative.

With this in mind, the next question is whether to apply partial least squares
regression or maximum likelihood path analysis with observed variables. Both
methods have their respective advantages and disadvantages. Partial least squares
regression is advantageous since it does not require normally distributed data, it is
 210

stable against multicollinearity, and performs well under circumstances where the
number of indicator variables is large in comparison with the sample size (Abdi,
2003). However, the drawback is that there is limited ways of statistically testing
overall model fit. Maximum likelihood path analysis, on the other hand, generates
a test statistic which is distributed as Ȥ2. The test statistic gives an indication on
how well the maximum likelihood estimation has succeeded to reconstruct the
covariance matrix of the variables. In other words, it indicates the discrepancy
between the original covariance matrix and the regenerated covariance matrix.
Thus, the Ȥ2 should be as low as possible and insignificant which indicates no
significant difference (Bollen, 1989).

This test statistic can in turn be used to determine absolute, relative, as well as
parsimonious fit. The disadvantage though is the fact that data is assumed to have
multivariate distribution in order not to bias parameter estimates (Boomsma &
Hoogland, 2001). Fortunately, as the principal components calculated earlier are
inherently normally distributed, they could be used to perform a maximum
likelihood observed variable path analysis in LISREL (e.g. Blacock, 1964; Bollen,
1989; Kelloway, 1998). The model along with parameters is depicted in Figure 60.

The initial model, with 21 structural paths, is exactly equal to the number of
equations, namely k(k – 1) / 2 = 21, where k = 7 (i.e. the number of variables).
This yields a so called just-identified (or saturated) model which fits to the data
perfectly. Hence, no indices of fit are generated as they would all show ideal
values. The parameter estimates are shown in Table 21.

As can be seen in Table 21, two path coefficients proved to be insignificant (Ȗ11
and Ȗ42). In line with the argument to remove paths that do not contribute to total
explained variance (Gujarati, 1995), we obtain a model with two degrees of
freedom after fixing the insignificant paths to zero, thus making the model
overidentified. The good thing now is that it is possible to obtain a quantitative
assessment of absolute, relative and parsimonious fit.
 211

Table 21. Structural coefficients with significance levels

Parameter Standard
(Hypothesis) coefficient t-value p-value

Ȗ11 (H1a) 0.068 1.041 0.313

Ȗ12 (H1b) 0.177 2.738 0.0140*
Ȗ21 (H2a) 0.300 4.625 0.00200***
Ȗ22 (H2b) 0.168 2.605 0.0185*
Ȗ31 (H3a) 0.170 2.636 0.0173*
Ȗ32 (H3b) 0.316 4.926 < 0.001***
Ȗ41 (H6a) 0.164 2.527 0.0217*
Ȗ42 (H6b) -0.046 -0.721 0.481
Ȗ51 (H7a) 0.176 2.708 0.0149*
Ȗ52 (H7b) 0.169 2.612 0.0182*
Ȍ12 (H9) 0.426 6.471 < 0.001***

Notes:
R2(Ș 1) = 0.185, R2(Ș2) = 0.183, * Significant at the 0.05 level, ** Significant at the
0.01 level, *** Significant at the 0.001 level

It is common practice to report several indexes of overall fit when examining the
results from LISREL analyses, since there is currently little to no consensus
regarding which fit indexes produce the most reliable results (Marsh, Balla, &
McDonald, 1988; Raykov, Tomer, & Nesselroade, 1991; Tanaka, 1993). The
corresponding fit indices are shown in Table 22, which clearly show that the
model fits very well to the data. The chi-square value at 1.648 is highly
insignificant (p = 1.00, df = 17).

Table 22. Fit indices for structural model

2
Ȥ p df GFI AGFI RMR NFI CFI PNFI PGFI

1.648 1.00 17 .998 .996 .0178 .998 1.00 .800 .606

The goodness-of-fit index (GFI) is similar to the R2 value used in multiple

regression analysis as it indicates the ratio of the sum of squared discrepancies
between the hypothesized covariance matrix and the observed covariance matrix
(Hoyle, 1995, p. 166). Goodness-of-fit for the model in this study (GFI = 0.998) is
well above the threshold (• 0.90) and also very close to the maximum value (i.e.
 212

1.0) (Kelloway, 1998). Adjusted goodness-of-fit (AGFI) is similar to GFI but

takes the number of freedom into account. Also AGFI proved to be very high
(AGFI = 0.996) which indicates excellent fit (Jöreskog & Sörbom, 1992). Both
the GFI and AGFI are absolute fit indexes because they generate fit statistics
without comparing the hypothesized model to another model.

Comparative fit indices are used to compare the fit of one model with the fit of
another. The normed fit index (NFI) is calculated by determining how much better
the hypothesized model is compared to a so called null model, which essentially is
a model where all possible paths are constrained to zero (i.e. no relationships at
all). Like GFI and AGFI, the value ranges between zero and one, and the value
should exceed the cut-off point of 0.90 to indicated good fit (Bentler & Bonett,
1980). NFI for the model in this study was 0.998 which indicates a strong
comparative fit. Similar to the AGFI, the so called comparative fit index (CFI)
proposed by Bentler (1990) also considers the degree of freedom. CFI in this case
was 1.00, which indicates a perfect fit. Like the earlier fit indices, this value
should exceed 0.90.

The root mean squared residual (RMR) is measuring the mean of the squared
discrepancies between the observed and the hypothesized covariance matrices.
Values below 0.05 are considered as good fit; for this study, the value is 0.0178
and hence indicates a very good fit (” 0.05) (Kelloway, 1998).

The parsimony goodness-of-fit index (PGFI) takes the complexity of the model
into account when estimating its overall fit (Byrne, 1998). This is done by
considering the number of estimated parameters when assessing the fit of the
model. Both the goodness-of-fit of the model (i.e., the GFI) and the parsimony of
the model are used to generate the PGFI (Mulaik et al., 1989). Although there is
no cut-off point recommended for PNFI and PGFI in the literature (Kelloway,
1998), it is typically around 0.50 (Byrne, 1998; Mulaik et al., 1989). For this
model, the parsimony normed fit index (PNFI = 0.800) and parsimony goodness-
of-fit (PGFI = 0.606) indices can therefore be considered relatively high. The
 213

intuitive reason to the relatively high value is the low complexity of the model
structure.

Figure 61. Structural model with path coefficients

5.3.3. Evaluation of Hypotheses

Hypothesis 1a postulated the relationship between purchasing process
effectiveness and tangible resources available to the firm. In contrast to what was
expected, it turned out to be an insignificant predictor variable (p = 0.313)
although the relationship was weakly positive (0.068). Hence, hypothesis 1a was
rejected. Hypothesis 1b explored the relationship between purchasing process
efficiency and tangible resources available to the firm. For this variable, the
relationship was positive and moderately strong (0.177), and also significant (p =
0.0140). Thus, hypothesis 1b was accepted.

Hypothesis 2a investigated the relationship between purchasing process

effectiveness and intangible resources available to the firm. As expected, it turned
out to be a highly significant predictor variable (p = 0.00200) and the relationship
was relatively strong (0.300). Hence, hypothesis 2a was accepted. Hypothesis 2b
 214

examined the relationship between purchasing process efficiency and intangible

resources available to the firm. For this variable, the relationship was positive and
moderately strong (0.168), and also significant (p = 0.0185). Thus, hypothesis 2b
was accepted.

Hypothesis 3a explored the relationship between purchasing process effectiveness

and the extent of capabilities in possession by the firm. In this case, the
relationship was moderately positive (0.170), and significant (p = 0.0173).
Consequently, hypothesis 3a was accepted. In a similar fashion, hypothesis 3b
postulated a relationship between purchasing process efficiency and the extent of
capabilities of the firm. As expected, the relationship was positive and relatively
strong (0.316) and highly significant (p < 0.001).

Hypothesis 4a investigated the relative impact between intangible resources and

tangible resources on purchasing process effectiveness. Hotelling’s t-test for
“correlated correlations” was used to evaluate this hypothesis. 17 This test
generates a t-statistic through pairwise comparison of correlation coefficients
rather than direct comparison of the regression coefficients (e.g. rxy and rvy, where
y is a dependent variable and v and x are independent variables). Since the
relationship between tangible resources and purchasing process effectiveness was
insignificant, hypothesis 4a was automatically accepted. Hypothesis 4b
investigated the relative impact between intangible resources and tangible
resources on purchasing process efficiency. The hypothesis was evaluated in the
same manner as hypothesis 4a. The difference between the beta coefficient of
intangible resources (Ȗ22 = 0.168) and tangible resources (Ȗ12 = 0.177) was
observed (cf. Table 21), but the difference proved to be insignificant (one-sided
test, df = 197, t = -0.0921 and p = 0.4634). Consequently, hypothesis 4b was
rejected.

17
The actual test was performed by using a small software utility called “FZT”, which was
developed by Prof. Dr. Karl Wuensch and colleagues at the Department of Psychology at East
Carolina University.
 215

Hypothesis 5a investigated the relative impact between capabilities and intangible

resources on purchasing process effectiveness. Analogous to the test of
hypotheses 4a and 4b, Hotelling’s t-test for “correlated correlations” was used to
evaluate this hypothesis. The difference between the beta coefficient of
capabilities (Ȗ31 = 0.170) and tangible resources (Ȗ21 = 0.300) was observed and
significant at the 0.1 level, but proved to have the wrong sign (one-sided test, df =
197, t = -1.375 and p = 0.0854). Hypothesis 5b investigated the relative impact
between intangible resources and tangible resources on purchasing process
efficiency. The hypothesis was tested in the same manner as hypothesis 5a. The
difference between the beta coefficient of capabilities (Ȗ32 = 0.316) and tangible
resources (Ȗ22 = 0.168) was observed and significant at the 0.1 level (one-sided
test, df = 197, t = 1.573 and p = 0.0671). Therefore, hypothesis 5b was accepted.

Hypothesis 6a investigated the relationship between purchasing process

effectiveness and basic factor resources available to the firm. As expected, it
turned out to be a significant predictor variable (p = 0.0217) and the relationship
was moderately strong (0.164). Hence, hypothesis 6a was accepted. Hypothesis 6b
scrutinized the relationship between purchasing process efficiency and basic
factor resources available to the firm. In contrast to what was expected, the
relationship was both negative (-0.046), and insignificant (p = 0.481). Thus,
hypothesis 6b was rejected.

Hypothesis 7a examined the relationship between purchasing process

effectiveness and advanced factor resources available to the firm. As expected, it
turned out to be a moderately positive predictor variable (0.176) and also
significant (p = 0.0149). As a result, hypothesis 7a was accepted. Hypothesis 7b
investigated the relationship between purchasing process efficiency and advanced
factor resources available to the firm. Similar to hypothesis 7a, the relationship
was positive and moderately strong (0.169), and also significant (p = 0.0182).
Thus, hypothesis 7b was accepted.
 216

Hypothesis 8a dealt with the relative impact between advanced factor resources
and basic factor resources on purchasing process effectiveness. Analogous to the
test of hypotheses 4a and 4b, Hotelling’s t-test for “correlated correlations” was
used to test this hypothesis. The difference between the beta coefficient of
advanced factor resources (Ȗ51 = 0.176) and basic factor resources (Ȗ41 = 0.164)
was observed but insignificant (one-sided test, df = 197, t = 0.1227 and p =
0.1217). Hypothesis 8b investigated the relative impact between advanced factor
resources and basic factor resources on purchasing process efficiency. Since the
relationship between basic factor resources and purchasing process efficiency (Ȗ41)
was insignificant, hypothesis 8b was trivially accepted.

Finally, hypothesis 9 investigated the relationship between purchasing process

effectiveness and purchasing process efficiency. In line with what was expected,
the bi-directional relationship proved to be positive, relatively strong (0.426) and
highly significant (p < 0.001). Consequently, hypothesis 9 was accepted. A
summary of the hypothesis tests is presented in Table 23.
 217

Table 23. Summary of hypothesis tests

ʋ Hypothesis p-value Accepted

†
1a. Purchasing process effectiveness is positively influenced by the extent of 0.313
tangible resources in possession by the firm sourcing in low-cost
countries.
1b. Purchasing process efficiency is positively influenced by the extent of 0.0140**
tangible resources in possession by the firm sourcing in low-cost
9
countries.

2a. Purchasing process effectiveness is positively influenced by the extent of 0.0200**

intangible resources in possession by the firm sourcing in low-cost
9
countries.
2b. Purchasing process efficiency is positively influenced by the extent of 0.0185**
intangible resources in possession by the firm sourcing in low-cost
9
countries

3a. Purchasing process effectiveness is positively influenced by the extent of 0.0173*

capabilities in possession by the firm sourcing in low-cost countries.
9
3b. Purchasing process efficiency is positively influenced by the extent of <0.001***
capabilities in possession by the firm sourcing in low-cost countries.
9
a
4a. Intangible resources have a higher impact on purchasing process N/A
effectiveness than tangible resources when sourcing in low-cost
9
countries.
†
4b. Intangible resources have a higher impact on purchasing process 0.468
efficiency than tangible resources when sourcing in low-cost countries.

†
5a. Capabilities have a higher impact on purchasing process effectiveness 0.0981
than intangible resources when sourcing in low-cost countries. (wrong sign)
5b. Capabilities have a higher impact on purchasing process efficiency than 0.0671*
intangible resources when sourcing in low-cost countries.
9
6a. Purchasing process effectiveness is positively influenced by the extent of 0.0127**
basic factor resources in possession by the firm sourcing in low-cost
9
countries.
†
6b. Purchasing process efficiency is positively influenced by the extent of 0.481
basic factor resources in possession by the firm sourcing in low-cost
countries.

7a. Purchasing process effectiveness is positively influenced by the extent of 0.0149**

advanced factor resources in possession by the firm sourcing in low-cost
9
countries.
7b. Purchasing process efficiency is positively influenced by the extent of 0.0182**
advanced factor resources in possession by the firm sourcing in low-cost
9
countries.

8a. Hypothesis 8a: Advanced factor resources have a higher impact on 0.1217†
purchasing process effectiveness than basic factor resources.

8b. Hypothesis 8b: Advanced factor resources have a higher impact on N/A
a
9
purchasing process efficiency than basic factor resources.

9. Advanced factor resources have a higher impact on purchasing process <0.001****

performance than basic factor resources.
9
†
Not significant, * Significant at the 0.1 level, ** Significant at the 0.05 level, *** Significant at the 0.01 level, **** Significant at
the 0.001 level, a Trivially accepted
 218

5.4. Interim Summary

This chapter dealt with performance implications of intra- and inter-firm resources,
which formed the second major part of the empirical study conducted for this
thesis. The contributions from this chapter are valuable in a sense that they
highlight the importance of internal factors which also are complementary to
external factors as enablers and facilitators for strategy execution. It was
concluded early in chapter 5 that external factors only explain a minor part of firm
performance, and that the resource-based view (RBV) could potentially provide
an interesting insight into the influence from inter-firm factors.

An overview of scholarly work about RBV was provided in chapter 5.1, and also
put in perspective by comparing it with other plausible theories from economics,
organizational theory and social science. It was also concluded that, despite a
consideration of internal factors around the middle of the 20th century, external
factors were almost totally dominating strategic management literature during the
1980s and major part of the 1990s. The chapter also explained the fundamental
logic of RBV and the causal chain with corresponding constructs. Another
conclusion was that RBV is only one (although dominating) stream of research
out of several others such as dynamic capabilities view (Eisenhardt & Martin,
2000; Teece et al., 1997; Winter, 2003), operand/operant resource view (Vargo &
Lusch, 2004), and the resource-advantage theory of competition (S. D. Hunt &
Morgan, 1996).

Chapter 5.2 dealt with the build-up of a theoretical framework by applying RBV
as a theoretical lens onto the LCCS topic. A review of they key contributions led
to a resource classification according to what a company has and what it does,
namely the five resource categories tangible resources, intangible resources,
capabilities, basic factor resources, and advanced factor resources. The possession
of each of these resources was hypothesized to positively influence purchasing
performance. Depending on their value, rareness, inimitability, and organizational
support, it was also hypothesized that intangible resources have a higher impact
on purchasing performance than tangible resources, capabilities have a higher
 219

impact than intangible resources, and advanced factor resources have a higher
impact than basic factor resources. The hypotheses, all in all seventeen of them,
were then connected to form a research model. As a last step, the various
construct in the research model were operationalized.

In chapter 5.3, the research model was tested by using empirical data collected
according to the description in chapter 3.2. The analysis started by performing a
confirmatory factor analysis in order to validate the theorized factor structure. The
factor analysis confirmed the factor structure, although one item had to be
dropped due to its low item-to-total correlation. Then, the same factor structure
was used to generate non-correlated and normally distributed factors through
principal component analysis. After assessing reliability and validity of the
constructs, they were used for the operationalization of the research model
through path analysis, which in this case essentially is a principal component
regression model. The analysis showed that twelve out of the total number of
seventeen hypotheses were accepted. Therefore, the theoretical model is
considered to be sufficiently validated. Overall, the research model has a
relatively high explanatory power in comparison with similar empirical studies
deploying regression models and path analyses.
 221

6. Summary and Conclusions

This chapter contains a summary of this thesis, research conclusions obtained
from the empirical study, and a brief overall evaluation of the research conducted.
Chapter 6.1 presents a brief summary of the theoretical contributions from the
thesis. That is, the contributions that can be added to the existing body of research.
Chapter 6.2 provides more praxis-oriented conclusions in the shape of managerial
implications that are of primary interest for CPOs and equivalent managers in the
industry. Finally, chapter 6.3 discusses limitations of the research and provides
suggestions for future research.

6.1. Theoretical Contributions

The research in this thesis examined trends and implications in the field of low-
cost country sourcing. The insights gained throughout the research stem from both
the theoretical elaborations, as well as from the empirical study. First, through the
literature review, it was concluded that LCCS is at heart part of the
internationalization and globalization phenomena, in which it can be seen as a
means to realize economies of scale, to reap benefits from comparative
advantages, and to leverage internal competitive advantage. The rapid
developments in the field support the paradigm of the buying firm as a seeker of
an increased resource pool through global sourcing activities in order to improve
competitive advantage and obtain superior performance.

Second, the review of earlier empirical studies show that only a minor share of
firm performance can be contributed to external factors, thus leaving a knowledge
gap regarding the importance of intra-firm effects when sourcing in LCCs. RBV
proved to be a plausible theory for explaining the effects of intra-firm factors and
is one stream of research together with several others that acknowledge strategic
assets and competencies as the ultimate source of competitive advantage. It is
claimed that these must be kept away from competitors in order to preserve their
uniqueness. By combining the more classic approaches of RBV with other
streams of research that acknowledge inter-firm resources, e.g. mutually
 222

dependent resources in buyer-supplier relationships, a research model for

investigating purchasing activities in an LCCS setting could be developed.

Third, the results from the empirical study support the hypothesized strategic
importance of purchasing and supply management that has been under scrutiny
for several years (Mol, 2003; Ramsay, 2001a). The results were in line with
expectations, where all resource types but one (i.e. basic factor resources) were
significant and positively related to purchasing process performance. Thus, the
results support the paradigm of the firm as a seeker of an increased research pool,
not only through purchased goods, but more importantly through similar and
complementary higher-order resources (Chung et al., 2000; Wilkinson et al.,
2005), inter-firm resources (Dyer & Sing, 1998), and through mutual adaptations
(Hallén et al., 1991).

The relative importance of the individual resource types still remains somewhat
unclear due to the fact that only the hypothesized higher importance of intangible
resources over tangible resources was significant. Theoretically, capabilities were
expected to score highest, as this category has frequently been claimed to be the
most important source of competitive advantage (Teece & Pisano, 1998).
Although the capabilities investigated in this study are indeed more difficult to
acquire than the tangible resources, it is unlikely that they are core competencies
of any firm, considering the definition in literature (Prahalad & Hamel, 1990).
This can explain why these two resource categories had approximately the same
impact on purchasing process performance.

The importance of intangible resources and advanced factor resources also scored
high, which was also in line with expectations. Hence, it is evident that valuable,
difficult-to-imitate resources, such as technology transfer (Goh, 2005) and the
higher-order capability to perform the actual transfer (Winter, 2003), play
important roles for the outcome of sourcing initiatives in emerging and transition
economies.
 223

Somewhat surprising, the importance of basic factor resources was not significant.
This leads to the conclusion that such resources can easily be obtained by any
company that is locally present in the sourcing market and any competitive
advantages that could potentially arise will quickly erode, a claim that has been
noted for long by several scholars (Barney, 1986b; Ramsay, 2001b).

To sum up, the reason why three pairwise comparisons of resource was significant,
leading to rejection of hypothesis 4b, 5a and 8a, was due to the fact that the
observed regression coefficient was too small to yield significant results.
Therefore, sources of error such as inadequate models or data can be excluded.

6.2. Managerial Implications

The results provided support for the hypothesized impact from intra- and inter-
firm resources on purchasing process performance. The outcome of the study has
several managerial implications. First, the results underline the necessity to have
adequate resources in order to create competitive advantage from sourcing in
emerging and transition economies. This is in line with the classical strategy
development approach where the internal assessment helps determining how
opportunities can be exploited and how threats can be neutralized in the external
environment (Andrews, 1971; Ansoff, 1965; Learned et al., 1969).

The key insight here is the fact that the internal and external assessments should
not be seen as two isolated entities, but rather two integral process steps within the
sourcing strategy development. By bridging the gap between the traditional
market-based positioning school with the resource-based view, the role of the
purchasing and supply function as a mediator between supply markets and the
internal customers becomes apparent. Hoopes et al. (2003) proposed a promising
generic framework based on resource heterogeneity to bridge this gap.

Second, as activities at operational level are derived from strategy, this highlights
the importance of purchasing and supply management, where managerial skills
play a key role in locking up scarce resources in the external environment,
 224

allocating internal resources in order to maximize value creation, and ultimately

generating superior market performance (Mol, 2003).

Third, this study has also shown that basic factor resources (i.e. traditional factor
inputs such as land and labor) played an insignificant role. This appears to be
counterintuitive at a glance, as practitioners often state short-term benefits such as
inexpensive labor and tax incentives to be the primary reasons for sourcing in
emerging and transition economies. The lifespan of such benefits does not seem to
be more than temporary, as they can be appropriated by virtually any firm. Hence,
sole search for such short-term benefits would support the thesis of purchasing’s
strategic irrelevance (Ramsay, 2001a).

This implies that the strategic focus should be placed on developing the firm’s
organization in general and the know-how of the employees in particular. These
strengths can then be used in the every-day challenges that the purchasing staff are
facing, such as negotiations, setup of joint ventures and strategic supplier
relationships, among others, which ultimately lead to competitive advantages
stemming not only from the own firm, but also from an extension of the firm in
terms of inter-firm resources (Dyer & Sing, 1998), that are hard for the
competitors to duplicate.

Fourth, the fact that the share of goods and services sourced in LCCs over the next
five-year period is estimated to increase by more than sixty percent indicates a
very high momentum in the field of LCCS. This also means that indicates that
companies will continue to search for suppliers in which they can reduce cost
even further while assuring quality. Overall, the home country of the buying firms
will play a decreasing role in the future, where the “center of gravity” of the
business landscape is slowly shifting towards more pronounced low-cost regions.
Interestingly, the home country of the buying firms will not decrease as much in
importance as the neighbouring countries, potentially indicating a certain degree
of national protectionism. The rising star on the LCCS sky is without doubt China,
which is experiencing tremendous economic growth due to massive foreign direct
 225

investments and proactive government policies (Ahrens, 1999). The shift in

sourcing patterns creates totally new challenges for the buying firms, all of which
has to be tackled with adapted organizations, processes, personnel and strategies.

6.3. Limitations of the Study and Suggestions for Future

Research
The study has several limitations. First, the study is cross-sectional, which means
that the results only provide a snapshot of the current situation. Thus, it fails to
capture the dynamic nature of the supply markets in emerging and transaction
economies. What is more, in contrast to cross-sectional studies, a longitudinal
study would also strengthen the argumentation about causality.

Second, only large-sized firms were included in this study. Since large-sized firms
generally have more resources available to deploy through subsidiaries in foreign
countries, they can potentially overcome barriers associated with sourcing in
emerging and transition economies. As a result, the results from this study may
not be generalizable to small or medium-sized firms. This opens up a window of
opportunity for future research where SMEs are examined in order to see whether
differences in performance implications from sourcing in emerging and transition
economies exist.

Third, as the sample in this study represents a wide range of industries, one has to
be cautions about drawing conclusions at industry-level as the number of firms in
some industry categories (e.g. financial services) is very low and thus cannot
provide any statistically significant results. For the larger industry categories, such
as food and agriculture, machinery, and energy/resources/material, a more
detailed analysis may be worthwhile.

Fourth, as the aim of this study is to validate a theoretical model for sourcing in
emerging and transition economies, the number of predictors in this study is
limited to fifteen, in order to preserve parsimony. In case a normative model was
to be developed, a more exhaustive range of predictors would have to be
considered to capture the idiosyncrasy and complexity that characterize real-life
 226

sourcing contexts. However, this is beyond the scope of this study. Fifth, as many
firms have their own specific performance objectives, it is likely that the
performance measures used in this study do not perfectly correspond to the
measures of the responding firms.
 227

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 267

Appendix A: Interview Guideline

The following guideline served as a structure for the conducted expert interviews:

1. Introduction
„ Dissertation background information
„ Purpose of the interview
„ Confidentiality of responses
2. For practitioners
„ What is your job position?
„ Which industry does your company belong?
„ What products and services are offered to the customer?
„ How many employees does your company have?
„ What is the annual turnover of your company?
„ To what extent are you sourcing in LCCs?
„ Since when are you working at your current position?
3. For academics
„ To which faculty and chair do you belong?
„ What is your field of research?
„ How long have you been active in the field of research?
4. Trends
„ What are the most important LCCs today and in five years?
„ What supplies do you consider most suitable for sourcing in LCCs?
„ What are the most important barriers/facilitators behind LCCS?
„ What are the most important activities for day-to-day LCCS?
5. Implications
„ What are the most important internal factors (resources) for the success of
LCCS initiatives?
„ How do these internal factors influence the outcome of LCCS decisions?
 269

Appendix B: Survey Questionnaire

Introduction text to the participant:
“European Business School in Germany is currently doing a research project on low-cost
country sourcing, where they investigate how companies are purchasing goods and
services internationally which focus on emerging markets. Therefore, we are wondering
whether you would like to participate in this study by answering a number of questions.
The interview will take about 20 minutes to complete, and as an incentive for
participating, you have the opportunity to receive a management summary of the results,
where you can benchmark your company against other companies in your industry. All
answers will be held strictly confidential and anonymous since your contact information
will not be linked to the answers you give.”

Part I: General
1. In which country is the headquarters of your company located?
[Belgium, France, Germany, Italy, Luxemburg, Netherlands, Spain, UK]

2. Which industry does your company belong to?

a. Automotive
b. Construction
c. Energy/Resources/Material
d. Financial Services
e. Food & Agriculture
f. Electronics
g. Machinery
h. Pharma, Chemical
i. Retail
j. Telecommunications
k. Transportation
l. Other: ___________ (Verbatim input)

3. To your nearest estimate, what was the size of the total direct purchase spend
of your company in 2005?
[Verbatim input (million Euros)]

4. To your nearest estimate, how large was the total indirect purchase spend of
your company in 2005?
[Verbatim input (million Euros)]

5. To your nearest estimate, what percentage of your direct spend is sourced in

low-cost countries today (2005) and in the future (2010)?

2005: [Verbatim input]

2010: [Verbatim input]

6. To your nearest estimate, what percentage of your indirect spend is sourced in

low-cost countries today (2005) and in the future (2010)?

2005: [Verbatim input]

2010: [Verbatim input]
Part II: Vision
 270

7. Regarding vision for LCCS initiatives, to what extent does your company
ƒ involve corporate senior manage- [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ment in the development of an
LCCS vision?

ƒ align strategic LCCS goals to the [1 – Not at all, 2, 3, 4, 5 – Very large extent]
corporate goals?

ƒ align LCCS operations to the [1 – Not at all, 2, 3, 4, 5 – Very large extent]

supply strategy?

ƒ articulate a mission statement [1 – Not at all, 2, 3, 4, 5 – Very large extent]

for daily activities?

Part III: LCCS Strategy

8. Regarding strategy for LCCS initiatives, to what extent does your company
ƒ adapt LCCS strategy to threats [1 – Not at all, 2, 3, 4, 5 – Very large extent]
and opportunities of sourcing
markets?

ƒ align LCCS strategy to the [1 – Not at all, 2, 3, 4, 5 – Very large extent]

corporate strategy?

ƒ derive special strategies for [1 – Not at all, 2, 3, 4, 5 – Very large extent]

individual LCCS supplies and
services?

ƒ integrate strategic LCCS suppliers [1 – Not at all, 2, 3, 4, 5 – Very large extent]

into business processes?

ƒ do organisational changes to [1 – Not at all, 2, 3, 4, 5 – Very large extent]

support LCCS initiatives?

ƒ link LCCS strategy to other [1 – Not at all, 2, 3, 4, 5 – Very large extent]

functional strategies (e.g. marketing,
manufacturing etc.)?
 271

Part IV: Supply Value Management

9. How do you rate the following geographical areas for sourcing direct supplies
today (2005) and in the future (2010)?

a. Central Europe [1 – Not important at all, 2, 3, 4, 5 – Very important]

b. Eastern Europe [1 – Not important at all, 2, 3, 4, 5 – Very important]
c. South Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
d. South-East Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
e. East Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
f. Central and Latin America [1 – Not important at all, 2, 3, 4, 5 – Very important]
g. Middle East [1 – Not important at all, 2, 3, 4, 5 – Very important]
h. Africa [1 – Not important at all, 2, 3, 4, 5 – Very important]

10. How do you rate the following geographical areas for sourcing indirect
supplies today (2005) and in the future (2010)?
a. Central Europe [1 – Not important at all, 2, 3, 4, 5 – Very important]
b. Eastern Europe [1 – Not important at all, 2, 3, 4, 5 – Very important]
c. South Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
d. South-East Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
e. East Asia [1 – Not important at all, 2, 3, 4, 5 – Very important]
f. Central and Latin America [1 – Not important at all, 2, 3, 4, 5 – Very important]
g. Middle East [1 – Not important at all, 2, 3, 4, 5 – Very important]
h. Africa [1 – Not important at all, 2, 3, 4, 5 – Very important]

11. What are the three most important sourcing countries for direct supplies at
your company today (2005) and in the future (2010)?

[Free selection of country]

12. What are the three most important sourcing countries for indirect supplies at
your company today (2005) and in the future (2010)?

[Free selection of country]

Part V: LCCS Controlling

13. To what extent do you use supply performance metrics for LCCS in your
company, regarding
ƒ total savings delivered [1 – Not at all, 2, 3, 4, 5 – Fully implemented
across all business units]
ƒ percentage of spend sourced [See above]
from low-cost countries
ƒ order lead time [See above]
ƒ delivery reliability [See above]
 272

ƒ product quality [See above]

Part VI: Supply Organization

14. To what extent are other departments besides the purchasing department
involved in cross-functional LCC purchasing teams at your company?
[1 – Not at all, 2, 3, 4, 5 – Very high extent]

15. Which departments are involved in cross-functional LCC purchasing teams at

your company in (in addition to the purchasing department)? [Multiple choice]
a. R&D
b. Manufacturing
c. Marketing
d. Quality assurance
e. Warehousing/Distribution
f. Finance and controlling
g. Other:_______ (verbatim input)

h. Do not use cross-functional teams, Do not know

16. To what extent are the following stakeholders driving LCCS initiatives at your
company?
ƒ CEO [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ƒ CFO [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ƒ COO [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ƒ CPO [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ƒ Customers [1 – Not at all, 2, 3, 4, 5 – Very large extent]
ƒ Other:__________ (verbatim input)

Part VII: Supply Human Resources Management

17. To what extent do staff members at your company fulfill requirements for
carrying out LCCS activities?
[1 – Not at all, 2, 3, 4, 5 – Very large extent]

18. How do you rate the level of knowledge of the purchasing staff at your
company, regarding
ƒ LCCS strategy development [1 – Very low, 2, 3, 4, 5 – Very high]
(entry/exit/operations strategy)
ƒ LCCS process management [1 – Very low, 2, 3, 4, 5 – Very high]
ƒ cross-functional collaboration [1 – Very low, 2, 3, 4, 5 – Very high]
ƒ enterprise-wide LCCS information [1 – Very low, 2, 3, 4, 5 – Very high]
transparency (spend data etc.)
ƒ LCCS trade (economics, culture, [1 – Very low, 2, 3, 4, 5 – Very high]
politics, barriers)
ƒ supply systems [1 – Very low, 2, 3, 4, 5 – Very high]
(e-Sourcing platforms etc.)
 273

ƒ local operations knowledge [1 – Very low, 2, 3, 4, 5 – Very high]

(supplier site assessment,
supplier on-site management)
ƒ outsourcing of LCCS process [1 – Very low, 2, 3, 4, 5 – Very high]
(e.g. to 3rd party IPO)

Part VIII: LCCS Practices

19. What actions have you taken in order to drive LCCS today (2005) and what
actions are planned for 2010? [i.e. two answers per item, option to omit
question item if not able to answer]
2005 / 2010
ƒ Have implemented LCCS-focused spend [1 – Not at all, 2, …, 5 – All
analysis across enterprise]
ƒ Have formulated LCCS strategy on commodity, [1 – Not at all, 2, …, 5 – All
purchasing organizational and corporate level across enterprise]

ƒ Have benchmarked against LCCS initiatives [1 – Not at all, 2, …, 5 – All

of other companies across enterprise]
ƒ Have redesigned business processes to [1 – Not at all, 2, …, 5 – All
facilitate LCCS across enterprise]
ƒ Have redesigned products to facilitate LCCS [1 – Not at all, 2, …, 5 – All
across enterprise]
ƒ Have implemented integrated global capacity [1 – Not at all, 2, …, 5 – All
planning across enterprise]
ƒ Have contacted business development [1 – Not at all, 2, …, 5 – All
agencies in low-cost countries across enterprise]
ƒ Have visited potential sourcing sites in [1 – Not at all, 2, …, 5 – All
low-cost countries across enterprise]
ƒ Have dedicated staff specifically to low-cost [1 – Not at all, 2, …, 5 – All
countries across enterprise]
ƒ Have contracted 3rd party global sourcing [1 – Not at all, 2, …, 5 – All
services across enterprise]
ƒ Use international procurement office(s) (IPO) [1 – Not at all, 2, …, 5 – All
across enterprise]
ƒ Have implemented total cost management [1 – Not at all, 2, …, 5 – All
approaches in sourcing process across enterprise]

20. To your nearest estimate, what percentage of your total commodities spend is
sourced in low-cost countries today (2005)?
[Verbatim input]

21. To your nearest estimate, what percentage of your total commodities spend is
sourced in low-cost countries in the future (2010)?
[Verbatim input]
 274

22. To your nearest estimate, what percentage of your total services spend is
sourced in low-cost countries today (2005)?
[Verbatim input]

23. To your nearest estimate, what percentage of your total services spend is
sourced in low-cost countries in the future (2010)?
[Verbatim input]

24. What is the impact of your LCCS initiatives so far, regarding

ƒ total costs [Large negative impact, Somewhat negative
impact, No impact at all, Somewhat positive
impact, Large positive impact]
ƒ labour costs [Same alternative as above]
ƒ material costs [Same alternative as above]
ƒ transportation costs [Same alternative as above]

ƒ capital-investment costs [Same alternative as above]

ƒ inventory costs [Same alternative as above]
ƒ material/component/service [Same alternative as above]
quality
ƒ order lead time [Same alternative as above]
ƒ delivery reliability [Same alternative as above]

25. To what extent are the following resources accessible to your company in
order to gain competitive advantage through LCCS?
ƒ LCCS operating plants and facilities [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ cash in hand/bank [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ performance measurement systems [1 – Not at all, 2, …, 5 – Highly
(cost, quality, delivery) accessible]
ƒ firm’s reputation in LCC [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ process/product patents [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ innovative demands of buyers [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ cost-reduction demands of buyers [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ LCCS know-how [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ ability to integrate strategic suppliers [1 – Not at all, 2, …, 5 – Highly
in design accessible]
 275

ƒ ability to mobilise cross-functional teams [1 – Not at all, 2, …, 5 – Highly

accessible]
ƒ LCC government incentives [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ access to low-cost labour [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ access to LCC customer markets [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ access to LCC supplier base [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ access to educated/skilled workforce [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ access to new technology [1 – Not at all, 2, …, 5 – Highly
accessible]
ƒ LCC first-mover advantages [1 – Not at all, 2, …, 5 – Highly
accessible]
26. How do you rate the following risks when sourcing in LCCs?
ƒ Political instability [1 - Unimportant, 2, ..., 5 - Very important]
ƒ Criminality and corruption [1 - Unimportant, 2, ..., 5 - Very important]
ƒ Prioritization of other important [1 - Unimportant, 2, ..., 5 - Very important]
business initiatives
ƒ Currency risks [1 - Unimportant, 2, ..., 5 - Very important]
ƒ Price level increases in LCCs [1 - Unimportant, 2, ..., 5 - Very important]
ƒ Price erosion due to increased [1 - Unimportant, 2, ..., 5 - Very important]
competition
ƒ Intellectual property risks [1 - Unimportant, 2, ..., 5 - Very important]
ƒ Lack of supplier skills and [1 - Unimportant, 2, ..., 5 - Very important]
knowledge
ƒ Costs for exiting legacy assets [1 - Unimportant, 2, ..., 5 - Very important]

27. To what extent are you using different types of purchasing channels with LCC
suppliers at your company, regarding
ƒ direct purchasing from LCC [1 – Not used at all, 2, 3, 4, 5 – Extensively
supplier used]
ƒ purchasing from LCC supplier [1 – Not used at all, 2, 3, 4, 5 – Extensively
through foreign subsidiary in LCC used]
ƒ purchasing from LCC supplier’s [1 – Not used at all, 2, 3, 4, 5 – Extensively
sales subsidiary in home country used]
ƒ purchasing through 3rd party [1 – Not used at all, 2, 3, 4, 5 – Extensively
intermediary (e.g. trading company, used]
commission house, import broker etc.)
ƒ purchasing through international [1 – Not used at all, 2, 3, 4, 5 – Extensively
procurement office (IPO) located used]
in LCC
 276

28. How do the following characteristics of supplies impact on the suitability for
LCCS, regarding
ƒ supplies sourced from an LCC in [1 – Not suitable at all, 2, 3, 4, 5 – Highly
which the same supplies can be suitable]
used for products to a large extent
(i.e. large local sales market)
ƒ supplies for which a large local [Same as above]
supplier base already exists
ƒ standardised supplies [Same as above]
(i.e. uniform supplies that can be
used in a wide range of products)
ƒ time-critical supplies [Same as above]
ƒ quality-critical supplies [Same as above]
ƒ supplies with high intellectual [Same as above]
property content
ƒ supplies with high [Same as above]
technological content
ƒ supplies for mature products [Same as above]
(late stage of product life cycle)
 277

Appendix C: LISREL Output

B – 1: Exogenous Measurement Model (Oblique)

Degrees of Freedom = 80
Minimum Fit Function Chi-Square = 212.98 (P = 0.00)
Normal Theory Weighted Least Squares Chi-Square = 210.92 (P = 0.00)
Satorra-Bentler Scaled Chi-Square = 162.01 (P = 0.00)
Chi-Square Corrected for Non-Normality = 511.00 (P = 0.0)
Chi-Square Difference with 25 Degrees of Freedom = 3462.45 (P =
0.0)
Estimated Non-centrality Parameter (NCP) = 82.01
90 Percent Confidence Interval for NCP = (49.50 ; 122.29)
Minimum Fit Function Value = 1.07
Population Discrepancy Function Value (F0) = 0.41
90 Percent Confidence Interval for F0 = (0.25 ; 0.61)
Root Mean Square Error of Approximation (RMSEA) = 0.072
90 Percent Confidence Interval for RMSEA = (0.056 ; 0.088)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.00
Expected Cross-Validation Index (ECVI) = 1.46
90 Percent Confidence Interval for ECVI = (1.05 ; 1.42)
ECVI for Saturated Model = 1.21
ECVI for Independence Model = 18.61
Chi-Square for Independence Model with 105 Degrees of Freedom =
3673.36
Independence AIC = 3703.36
Model AIC = 290.92
Saturated AIC = 240.00
Independence CAIC = 3767.84
Model CAIC = 462.85
Saturated CAIC = 755.80
Normed Fit Index (NFI) = 0.96
Non-Normed Fit Index (NNFI) = 0.97
Parsimony Normed Fit Index (PNFI) = 0.73
Comparative Fit Index (CFI) = 0.98
Incremental Fit Index (IFI) = 0.98
Relative Fit Index (RFI) = 0.94
Critical N (CN) = 138.98
Root Mean Square Residual (RMR) = 0.073
Standardized RMR = 0.054
Goodness of Fit Index (GFI) = 0.88
Adjusted Goodness of Fit Index (AGFI) = 0.81
Parsimony Goodness of Fit Index (PGFI) = 0.58
 278

B – 2: Exogenous Measurement Model (Constrained)

Degrees of Freedom = 90
Minimum Fit Function Chi-Square = 307.527 (P = 0.0)
Normal Theory Weighted Least Squares Chi-Square = 304.788 (P = 0.0)
Satorra-Bentler Scaled Chi-Square = 230.254 (P = 0.00)
Chi-Square Corrected for Non-Normality = 683.736 (P = 0.0)
Chi-Square Difference with 0 Degree of Freedom = 15.600 (P = 1.000)
Estimated Non-centrality Parameter (NCP) = 140.254
90 Percent Confidence Interval for NCP = (99.266 ; 188.923)
Minimum Fit Function Value = 1.545
Population Discrepancy Function Value (F0) = 0.705
90 Percent Confidence Interval for F0 = (0.499 ; 0.949)
Root Mean Square Error of Approximation (RMSEA) = 0.0885
90 Percent Confidence Interval for RMSEA = (0.0744 ; 0.103)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.000
Expected Cross-Validation Index (ECVI) = 1.833
90 Percent Confidence Interval for ECVI = (1.253 ; 1.703)
ECVI for Saturated Model = 1.206
ECVI for Independence Model = 18.610
Chi-Square for Independence Model with 105 Degrees of Freedom =
3673.364
Independence AIC = 3703.364
Model AIC = 364.788
Saturated AIC = 240.000
Independence CAIC = 3767.839
Model CAIC = 493.737
Saturated CAIC = 755.798
Normed Fit Index (NFI) = 0.937
Non-Normed Fit Index (NNFI) = 0.954
Parsimony Normed Fit Index (PNFI) = 0.803
Comparative Fit Index (CFI) = 0.961
Incremental Fit Index (IFI) = 0.961
Relative Fit Index (RFI) = 0.927
Critical N (CN) = 108.272
Root Mean Square Residual (RMR) = 0.0906
Standardized RMR = 0.0674
Goodness of Fit Index (GFI) = 0.830
Adjusted Goodness of Fit Index (AGFI) = 0.774
Parsimony Goodness of Fit Index (PGFI) = 0.623
 279

B – 3: Exogenous Measurement Model (Null Model)

Degrees of Freedom = 105

Minimum Fit Function Chi-Square = 1430.89 (P = 0.0)
Normal Theory Weighted Least Squares Chi-Square = 3673.36 (P = 0.0)
Satorra-Bentler Scaled Chi-Square = 2898.71 (P = 0.0)
Chi-Square Corrected for Non-Normality = 2640.37 (P = 0.0)
Chi-Square Difference with 0 Degree of Freedom = 0.0 (P = 1.00)
Estimated Non-centrality Parameter (NCP) = 2793.71
90 Percent Confidence Interval for NCP = (2621.81 ; 2972.94)
Minimum Fit Function Value = 7.19
Population Discrepancy Function Value (F0) = 14.04
90 Percent Confidence Interval for F0 = (13.17 ; 14.94)
Root Mean Square Error of Approximation (RMSEA) = 0.37
90 Percent Confidence Interval for RMSEA = (0.35 ; 0.38)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.00
Expected Cross-Validation Index (ECVI) = 18.61
90 Percent Confidence Interval for ECVI = (13.85 ; 15.62)
ECVI for Saturated Model = 1.21
ECVI for Independence Model = 18.61
Chi-Square for Independence Model with 105 Degrees of Freedom =
3673.36
Independence AIC = 3703.36
Model AIC = 3703.36
Saturated AIC = 240.00
Independence CAIC = 3767.84
Model CAIC = 3767.84
Saturated CAIC = 755.80
Normed Fit Index (NFI) = 0.21
Non-Normed Fit Index (NNFI) = 0.22
Parsimony Normed Fit Index (PNFI) = 0.21
Comparative Fit Index (CFI) = 0.22
Incremental Fit Index (IFI) = 0.22
Relative Fit Index (RFI) = 0.21
Critical N (CN) = 10.72
Root Mean Square Residual (RMR) = 0.52
Standardized RMR = 0.39
Goodness of Fit Index (GFI) = 0.29
Adjusted Goodness of Fit Index (AGFI) = 0.19
Parsimony Goodness of Fit Index (PGFI) = 0.25
 280

B – 4: Endogenous Measurement Model (Oblique)

Degrees of Freedom = 19
Minimum Fit Function Chi-Square = 72.80 (P = 0.00)
Normal Theory Weighted Least Squares Chi-Square = 70.59 (P = 0.00)
Satorra-Bentler Scaled Chi-Square = 59.17 (P = 0.00)
Chi-Square Corrected for Non-Normality = 73.24 (P = 0.00)
Chi-Square Difference with 9 Degrees of Freedom = 859.75 (P = 0.0)
Estimated Non-centrality Parameter (NCP) = 40.17
90 Percent Confidence Interval for NCP = (20.69 ; 67.27)
Minimum Fit Function Value = 0.37
Population Discrepancy Function Value (F0) = 0.20
90 Percent Confidence Interval for F0 = (0.10 ; 0.34)
Root Mean Square Error of Approximation (RMSEA) = 0.10
90 Percent Confidence Interval for RMSEA = (0.074 ; 0.13)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.00013
Expected Cross-Validation Index (ECVI) = 0.53
90 Percent Confidence Interval for ECVI = (0.37 ; 0.60)
ECVI for Saturated Model = 0.36
ECVI for Independence Model = 4.76
Chi-Square for Independence Model with 28 Degrees of Freedom =
930.35
Independence AIC = 946.35
Model AIC = 104.59
Saturated AIC = 72.00
Independence CAIC = 980.73
Model CAIC = 177.66
Saturated CAIC = 226.74
Normed Fit Index (NFI) = 0.94
Non-Normed Fit Index (NNFI) = 0.93
Parsimony Normed Fit Index (PNFI) = 0.64
Comparative Fit Index (CFI) = 0.96
Incremental Fit Index (IFI) = 0.96
Relative Fit Index (RFI) = 0.91
Critical N (CN) = 122.72
Root Mean Square Residual (RMR) = 0.064
Standardized RMR = 0.079
Goodness of Fit Index (GFI) = 0.92
Adjusted Goodness of Fit Index (AGFI) = 0.85
Parsimony Goodness of Fit Index (PGFI) = 0.48
 281

B – 5: Endogenous Model (Constrained)

Degrees of Freedom = 20
Minimum Fit Function Chi-Square = 131.99 (P = 0.0)
Normal Theory Weighted Least Squares Chi-Square = 151.93 (P = 0.0)
Satorra-Bentler Scaled Chi-Square = 119.43 (P = 0.00)
Chi-Square Corrected for Non-Normality = 76.05 (P = 0.00)
Chi-Square Difference with 1 Degree of Freedom = 81.33 (P = 0.0)
Estimated Non-centrality Parameter (NCP) = 99.43
90 Percent Confidence Interval for NCP = (68.70 ; 137.67)
Minimum Fit Function Value = 0.66
Population Discrepancy Function Value (F0) = 0.50
90 Percent Confidence Interval for F0 = (0.35 ; 0.69)
Root Mean Square Error of Approximation (RMSEA) = 0.16
90 Percent Confidence Interval for RMSEA = (0.13 ; 0.19)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.00
Expected Cross-Validation Index (ECVI) = 0.92
90 Percent Confidence Interval for ECVI = (0.61 ; 0.95)
ECVI for Saturated Model = 0.36
ECVI for Independence Model = 4.76
Chi-Square for Independence Model with 28 Degrees of Freedom =
930.35
Independence AIC = 946.35
Model AIC = 183.93
Saturated AIC = 72.00
Independence CAIC = 980.73
Model CAIC = 252.70
Saturated CAIC = 226.74
Normed Fit Index (NFI) = 0.87
Non-Normed Fit Index (NNFI) = 0.85
Parsimony Normed Fit Index (PNFI) = 0.62
Comparative Fit Index (CFI) = 0.89
Incremental Fit Index (IFI) = 0.89
Relative Fit Index (RFI) = 0.82
Critical N (CN) = 63.59
Root Mean Square Residual (RMR) = 0.073
Standardized RMR = 0.086
Goodness of Fit Index (GFI) = 0.84
Adjusted Goodness of Fit Index (AGFI) = 0.71
Parsimony Goodness of Fit Index (PGFI) = 0.47
 282

B – 6: Endogenous Measurement Model (Null Model)

Degrees of Freedom = 28
Minimum Fit Function Chi-Square = 577.16 (P = 0.0)
Normal Theory Weighted Least Squares Chi-Square = 930.35 (P = 0.0)
Satorra-Bentler Scaled Chi-Square = 635.14 (P = 0.0)
Chi-Square Corrected for Non-Normality = 163.62 (P = 0.0)
Chi-Square Difference with 0 Degree of Freedom = 0.0 (P = 1.00)
Estimated Non-centrality Parameter (NCP) = 607.14
90 Percent Confidence Interval for NCP = (528.82 ; 692.88)
Minimum Fit Function Value = 2.90
Population Discrepancy Function Value (F0) = 3.05
90 Percent Confidence Interval for F0 = (2.66 ; 3.48)
Root Mean Square Error of Approximation (RMSEA) = 0.33
90 Percent Confidence Interval for RMSEA = (0.31 ; 0.35)
P-Value for Test of Close Fit (RMSEA < 0.05) = 0.00
Expected Cross-Validation Index (ECVI) = 4.76
90 Percent Confidence Interval for ECVI = (2.88 ; 3.70)
ECVI for Saturated Model = 0.36
ECVI for Independence Model = 4.76
Chi-Square for Independence Model with 28 Degrees of Freedom =
930.35
Independence AIC = 946.35
Model AIC = 946.35
Saturated AIC = 72.00
Independence CAIC = 980.73
Model CAIC = 980.73
Saturated CAIC = 226.74
Normed Fit Index (NFI) = 0.32
Non-Normed Fit Index (NNFI) = 0.33
Parsimony Normed Fit Index (PNFI) = 0.32
Comparative Fit Index (CFI) = 0.33
Incremental Fit Index (IFI) = 0.33
Relative Fit Index (RFI) = 0.32
Critical N (CN) = 16.13
Root Mean Square Residual (RMR) = 0.30
Standardized RMR = 0.36
Goodness of Fit Index (GFI) = 0.46
Adjusted Goodness of Fit Index (AGFI) = 0.31
Parsimony Goodness of Fit Index (PGFI) = 0.36
 283

B – 7: Observed Variable Path Analysis

Degrees of Freedom = 17
Minimum Fit Function Chi-Square = 1.65243 (P = 1.00)
Normal Theory Weighted Least Squares Chi-Square = 1.64779 (P =
1.00)
Estimated Non-centrality Parameter (NCP) = 0.0
90 Percent Confidence Interval for NCP = (0.0 ; 0.0)
Minimum Fit Function Value = 0.0083037
Population Discrepancy Function Value (F0) = 0.0
90 Percent Confidence Interval for F0 = (0.0 ; 0.0)
Root Mean Square Error of Approximation (RMSEA) = 0.0
90 Percent Confidence Interval for RMSEA = (0.0 ; 0.0)
P-Value for Test of Close Fit (RMSEA < 0.05) = 1.00
Expected Cross-Validation Index (ECVI) = 0.20103
90 Percent Confidence Interval for ECVI = (0.20103 ; 0.20103)
ECVI for Saturated Model = 0.28866
ECVI for Independence Model = 0.79522
Chi-Square for Independence Model with 21 Degrees of Freedom =
140.27329
Independence AIC = 154.27329
Model AIC = 23.64779
Saturated AIC = 56.00000
Independence CAIC = 184.36152
Model CAIC = 70.92929
Saturated CAIC = 176.35289
Normed Fit Index (NFI) = 0.98822
Non-Normed Fit Index (NNFI) = 1.15895
Parsimony Normed Fit Index (PNFI) = 0.79999
Comparative Fit Index (CFI) = 1.00000
Incremental Fit Index (IFI) = 1.12450
Relative Fit Index (RFI) = 0.98545
Critical N (CN) = 4024.65017
Root Mean Square Residual (RMR) = 0.017812
Standardized RMR = 0.017799
Goodness of Fit Index (GFI) = 0.99764
Adjusted Goodness of Fit Index (AGFI) = 0.99611
Parsimony Goodness of Fit Index (PGFI) = 0.60571
 284

B – 8: LISREL Script for Path Analysis

TI Resource-Based LCCS Model

DA NI = 7 NO = 200 MA = CM
CM FI = LCCS2.COV
LA
”TR” ”IR” ”CPB” ”BFR” ”AFR” ”EFFE” ”EFFI”
SE
6 7 1 2 3 4 5
MO NX=5 NY=2 BE=FU,FI GA=FU,FI PS=SY PH=FU,FI
FR GA(1,2) GA(1,3) GA(1,4) GA(1,5) GA(2,1) GA(2,2) GA(2,3) GA(2,5)
PS(1,2)
PD
OU ME = ML ND = 3

B – 9: Covariance Matrix for Path Analysis Model

0.10000D+01 0.14408D-01 0.10000D+01 0.15636D-01 -0.61082D-02

0.10073D+01
-0.15942D-01 0.46578D-02 0.33558D-04 0.10000D+01 0.28368D-01
0.16284D-01
-0.13171D-01 -0.19174D-01 0.99645D+00 0.76996D-01 0.30385D+00
0.16864D+00
0.16100D+00 0.17699D+00 0.10000D+01 0.18948D+00 0.17106D+00
0.31820D+00
-0.51710D-01 0.17264D+00 0.56604D+00 0.10000D+01