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global sourcing strategy: an evolution

Masaaki Kotabe and Janet Y. Murray

As global competition has accelerated the speed of technological obsolescence for most products, companies can no longer survive simply by adopting a polycentric, country-by-country approach to international business. If companies with a new product do follow a country-by-country approach to enter foreign markets over time, a globally oriented competitor will likely overcome their initial competitive advantages by blanketing the world markets with similar products in a shorter time frame. Increasingly, how to source globally has become a critical strategic decision that is influenced by the capabilities needed to compete.

Without established sourcing plans, distri- bution, and service networks, it is extremely difficult to simultaneously exploit both emerging technology and potential markets worldwide. The increased pace of new product intro- duction and reduction in innovational lead time calls for more proactive management of locational and corporate resources on a global basis. In this article, we emphasize the choices companies make to perform activities either inside the firm or have those activities performed by others, anywhere in the world – which we call global sourcing strategy. Global sourcing strategy, therefore, refers to the management of (i) logistics (see DESIGNING A GLOBAL SUPPLY CHAIN: OPPORTUNI- TIES AND CHALLENGES) identifying which production units will serve which particular markets and how components will be supplied for production and (ii) the interfaces among R&D (see GLOBAL PRODUCT R&D), manufac- turing/operations, and marketing (see GLOBAL MARKETING STRATEGY; MARKETING STRATEGY IMPLEMENTATION) on a global basis. Global sourcing strategy requires a close coordination among R&D, manufac- turing/operations, and marketing activities across national boundaries (Kotabe, 1992).

GLOBAL SOURCING PHENOMENON

In a hypercompetitive and uncertain global business environment (see SOCIETY, CULTURE,

AND GLOBAL CONSUMER CULTURE) coupled with a more even distribution of supply capabilities worldwide, an increasing number of large and small firms either produce in lower-cost locations or outsource goods and services from lower-cost producers. To create a sustainable competitive advantage over their rivals, firms realize that it is imperative to continuously create and acquire capabilities. In addition to securing lower costs from global suppliers, firms increasingly outsource to gain access to suppliers’ capabilities. Thus, the core driver of the latest form of global outsourcing (i.e., both onshore and offshore) is the heightened organizational and technological capacity of firms in decoupling and coordinating a network of remotely located external suppliers performing an intricate set of activities. Hence, how to source globally has become a critical strategic decision that is influenced by the capabilities needed to compete and help sustain a firm’s competitive advantage.

Although firms have embraced global sourcing of goods and services, they have expe- rienced mixed results. Gottfredson, Puryear, and Phillips (2005) found that about 50% of firms in their sample reported that their outsourcing programs fell short of expectations. Only 10% were highly satisfied with the cost savings, and 6% were highly satisfied with their offshore outsourcing overall. Other researchers (Leiblein, Reuer, and Dalsace, 2002) have even suggested that outsourcing may not be related to performance. Owing to the inconclusive perfor- mance outcomes, practitioners have started to question whether universally prescribing global outsourcing is the right way to go.

One plausible argument is that based on a ‘‘balance’’ perspective, there is an optimal degree of outsourcing. The outsourcing–performance relationship takes on an inverted-U shape, implying that as firms deviate further from their optimal degree of outsourcing, by either outsourcing (or insourcing) and offshoring (or onshoring) too much, their performance will suffer disproportionately. So, the key question for sourcing firms is how much global sourcing they should engage in, to achieve desirable performance.

Another plausible argument for the incon- clusive sourcing performance findings is that

Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra. Copyright © 2010 John Wiley & Sons Ltd

2 global sourcing strategy: an evolution

Table 1 Different sourcing strategies.

Ownership Aspect Locational Aspect

Domestic Sourcing Foreign Sourcing

Insourcing (intrafirm sourcing) Onshore insourcing Offshore insourcing Outsourcing (contractual sourcing) Onshore outsourcing Offshore outsourcing

desirable sourcing performance necessitates the sourcing strategy to achieve a strategic ‘‘fit’’ with the environment. Indeed, researchers have theo- rized that the appropriateness of a particular strategy is based on its ‘‘coalignment’’ or ‘‘fit’’ with environmental contingencies (Drazin and Van de Ven, 1985). Using contingency theory to examine the environment–strategy coalign- ment effect on performance, we believe that the environment and strategy interact in a dynamic process, and that a match between them would exert a positive impact on performance. Thus, firms that can adapt their global sourcing strategy effectively to both internal and external factors are likely to achieve better performance.

We focus on global sourcing as it adds many more complexities that do not apply to domestic sourcing strategy. In developing viable global sourcing strategies, firms must consider not only manufacturing and delivery costs, the costs of various resources, and exchange rate fluctua- tions, but also the availability of infrastruc- ture (including transportation, communications, and energy), industrial and cultural environ- ments, the ease of working with foreign host governments, and other factors. Furthermore, the complex nature of global sourcing strategy spawns many barriers to its successful execution. In particular, logistics, inventory management, distance, nationalism, and a lack of working knowledge about foreign business practices, are some of the major operational problems encoun- tered by both United States and foreign multi- national firms engaging in global sourcing.

Intuitive arguments, like ‘‘focusing on core competency’’ and ‘‘strategic sourcing,’’ are often made to legitimize the trends toward more global outsourcing. We first discuss the recent trends in global sourcing strategy. Then, we highlight the advantages and disadvantages of global sourcing, by providing a list of intuitive arguments for each. We then attempt to explain global sourcing

levels and how these relate to performance based on the two complementary perspectives of ‘‘balance’’ and ‘‘fit.’’ By synthesizing these two perspectives, we introduce existing theories of sourcing in this article.

Trends in global sourcing. The primary objec- tive of global sourcing strategy is for the firm to exploit both its own and its suppliers’ compet- itive advantages and the comparative locational advantages of various countries in global compe- tition. From a contractual point of view, the global sourcing of intermediate products such as components and services by firms takes place in two ways: (i) from the parents or their foreign subsidiaries on an ‘‘intrafirm’’ basis (i.e., insourcing) and (ii) from independent suppliers on a ‘‘contractual’’ basis (i.e., outsourcing). Simi- larly, from a locational point of view, multi- national firms can procure goods and services either (i) domestically (i.e., onshoring) or (ii) from abroad (i.e., offshoring) (see OFFSHORING AND MARKETING). This leads to a matrix of possible choices presented in Table 1.

In the last two decades, we have witnessed three waves of global sourcing. The first wave, starting in the mid-1980s, was primarily focused on global sourcing of manufacturing activities. Therefore, research was conducted primarily on manufacturing firms. Large manufacturing firms increasingly set up their operations globally and began to use suppliers from many countries to exploit best-in-world sources (Quinn and Hilmer, 1994). Consequently, supply chains (see SUPPLY CHAIN MANAGE- MENT STRATEGY) became more global and complex, with manufacturing firms sourcing from suppliers in many countries for raw materials, intermediate, and final products.

A second wave began to occur in the early 1990s, when firms started eliminating their infor- mation technology (IT) departments that had

global sourcing strategy: an evolution 3

Table 2 Recent waves in global sourcing.

Time Period First Wave (since 1980s)

Second Wave (since Early 1990s)

Third Wave (since Early 2000s)

Type of activity Manufacturing Information technology Business processes Destinations China, Central and

Eastern Europe, Mexico, and others

India, Ireland, and others India, Pakistan, South Africa, and others

Type of firms Manufacturing Manufacturing, banks, and others

Financial services, and services, more generally

Primary motives Reduction in labor costs

Obtaining enough skilled programmers and cost reduction

Reduction in labor costs and round-the-clock service provision

grown substantially. As IT itself had become commoditized and many firms had little interest in developing new information systems in-house, this IT outsourcing wave spawned the growth of specialist providers, such as EDS and Accenture. Global sourcing mostly involved labor-intensive and standardized programming activities, which could be easily sourced from low-cost locations like India. The rise of commercial applications for a wide range of firm activities, epitomized in enterprise resource planning systems, also implied that a marketplace had developed where independent suppliers could make competitive offerings.

A third wave, characterized as the offshoring movement, began in the early 2000s. We have witnessed the rise of business process outsourcing that extends beyond IT services to a range of other services related to accounting, human resource management, finance, sales, and after-sales services such as call centers. It is this third wave of business process outsourcing that has generated so much publicity. Many are concerned that foreign business processes suppliers may be moving up the knowledge chain more rapidly than expected by sourcing firms. Such knowledge transfer could, in the long run, undermine sourcing firms’ ability to differentiate themselves from their foreign suppliers. Indeed, such hollowing-out concerns have previously been raised about outsourcing of manufacturing activities (Bettis, Bradley, and Hamel, 1992; Kotabe, 1998). We summarize our argument on these recent waves of global sourcing in Table 2.

GLOBAL SOURCING STRATEGY AND PERFORMANCE

It is widely suggested that global sourcing helps improve performance, particularly cost effectiveness (Trent and Monczka, 2003). Firms located in developed countries often find that labor costs are excessive, compared to the value that is added to their products. At the other extreme, some global sourcing may be driven by knowledge concerns. Some inputs, such as liquid-crystal displays and technical expertise, may be available only in certain other countries, thus making global sourcing not a choice but an imperative. As for the sourcing of many raw materials, domestic sourcing is not an option since many raw materials are unavailable domestically. Certain intermediate products tend to be sourced from locations near the source of raw materials. Another argument in favor of global sourcing is that it enables a firm to produce closer to its customer markets, thereby increasing access to its customers and obtaining critical market knowledge for product development (see GLOBAL PRODUCT DEVELOPMENT). For instance, Japanese manufacturing firms have, over time, replicated supply chains in North America and Europe to operate closer to these markets. Production and sourcing experience in these regions has also enabled them to improve their product offerings. Another reason to opt for global sourcing is that demand from various regions can be pooled, thus achieving maximum scale and bargaining power through single sourcing from a foreign supplier.

4 global sourcing strategy: an evolution

Table 3 Arguments for and against outsourcing.

The Case for Outsourcing The Case Against Outsourcing

Strategic focus/reduction of assets Interfaces/economies of scope Through outsourcing activities a firm can

reduce its level of asset investment in manufacturing and related areas. Therefore, stock markets usually react favorably to outsourcing since more or less similar absolute profit levels can be obtained with lower fixed investments. Furthermore, outsourcing can help the management of a firm redirect its attention to its core competencies, instead of having to possess and update a wide range of competencies.

Firms may benefit from internalizing production through scope economies. Manufacturing firms, in their outsourcing decisions, ought to reflect on the interfaces among R&D, manufacturing, and marketing. If there are important interfaces between activities, decoupling them into separate activities performed by different suppliers will generate less than optimal results.

Strategic flexibility Hollowing out Outsourcing may increase the firm’s strategic

flexibility. By using outside sources, it is much easier to switch from one supplier to another. If an external shock occurs, firms are able to react quickly by simply increasing or decreasing the volumes obtained from an external supplier. If the same item were produced in-house, the firm would not only incur high restructuring costs but also a much longer response time to external events.

Firms that outsource activities excessively are hollowing out their competitive base. Once activities have been outsourced, it tends to become difficult to differentiate a firm’s products on the basis of these activities. Furthermore, a firm could lose bargaining power vis-à-vis its suppliers because its suppliers’ capabilities may increase relative to those of the firm.

Avoiding bureaucratic costs Opportunistic behavior Rising production costs are associated with

internal production, due to a lack of a price mechanism and economic incentives inside a firm. As a consequence, firm efficiency will suffer.

External suppliers may behave opportunistically as their incentive structure varies widely from that of the outsourcing firm. Opportunistic behavior allows a supplier to extract more rents from the relationship than it would normally do, for example, by supplying a lower than agreed-on product quality or withholding information on changes in production costs.

Relational rent Rising transaction and coordination costs In recent years, many researchers have argued

that certain relationships with external suppliers can help create a competitive advantage. By outsourcing items on the basis of idiosyncratic and valuable relationships with suppliers, firms may be able to innovate, learn, and reduce transaction costs.

Excessive outsourcing may lead to high coordination costs. Firms are limited in their capacity to work with outside suppliers as partners and therefore, have to prioritize outside partners. If they simultaneously invested time and attention to all outside suppliers, this would induce very high coordination costs.

(continued overleaf)

global sourcing strategy: an evolution 5

Table 3 (Continued).

The Case for Outsourcing The Case Against Outsourcing

Limited learning and innovation A form of learning that is deemed especially

important for attaining tacit knowledge is learning by doing. The supplier may acquire tacit knowledge by performing the activity; consequently, the outsourcing firm cannot appropriate all benefits. Appropriation of innovation and rents is always a problem in buyer–supplier relationships because both parties will try to obtain as many private benefits as possible. Furthermore, it may become more difficult to innovate, owing to the different incentives available and the subsequent lack of interfaces between firms.

On the other hand, there are disadvan- tages associated with global sourcing. One major problem is ‘‘cultural differences’’ between buyers and their foreign suppliers (see BASE OF THE PYRAMID MARKETS: CULTURE INSIGHTS AND MARKETING

IMPLICATIONS). Indeed, differences such as institutional and language problems may affect a relationship negatively. This raises another layer of issues related to the long-term sustainability of firms’ core competencies, particularly when firms begin to increase reliance on independent suppliers through outsourcing (for a more extensive discussion of outsourcing and core competencies, see Mol, 2007). There are two opposing views of the long-term implications of outsourcing. One school of thought argues that many successful companies have developed a dynamic organizational network through increasing cross-border joint ventures, subcon- tracting and licensing activities (Miles and Snow, 1986). This flexible network system, also known as supply-chain alliances, allows each participant to pursue its particular competence. Each network participant is complementing rather than competing against the other participants for the common goals. The other school of thought argues that while a firm may gain short-term advantages, there could also

be negative long-term consequences. As the firm becomes more reliant on its independent suppliers, it may not be able to keep abreast of constantly evolving design and engineering technologies without engaging in those develop- mental activities (Kotabe, 1998). Consequently, the firm encounters the inherent difficulty in sustaining its long-term competitive advantages. In other words, over time a firm’s technical expertise and capability surplus vis-à-vis its foreign suppliers may diminish to the point that its value added is limited, and it may become more like a trading company. Thus, based on the arguments for and against outsourcing, we need to synthesize our thinking on outsourcing and performance. A summary of these opposing arguments is presented in Table 3.

A ‘‘balance’’ perspective. A ‘‘balance’’ perspective offers insights on the sourcing strategy–performance relationship. The under- lying argument of a ‘‘balance’’ perspective is that firms that outsource all of their activities run into a multitude of problems, such as a lack of innovation and bargaining power, and an inability to be distinct in the eyes of the customer. However, firms that only insource fail to use the powerful incentives supplied by markets, thus becoming bureaucratic and inefficient. Therefore, outsourcing some but not

6 global sourcing strategy: an evolution

all activities provides the best solution overall, and there is an optimal degree of outsourcing.

We believe a similar line of reasoning can apply to the degree of internationalization of sourcing (i.e., onshoring and offshoring) and how that affects performance. More specifi- cally, there are advantages and disadvantages associated with global sourcing, as we high- lighted above. As a firm does more offshoring (particularly, offshore outsourcing), the disad- vantages become larger to the point where they severely impede performance. If firms do not use offshoring at all, they cannot enjoy any of the advantages of offshoring, such as having a wider supply base from which to choose. This line of reasoning is consistent with research in international business; it is, for instance, indi- rectly suggested by Dunning’s (1993) treatment of international sourcing, and neoinstitutional economics traditions, particularly the transac- tion costs framework (Williamson, 1985).

Williamson (1985) distinguishes between production and transaction costs. Production costs refer to the costs of producing a good or a service, and transaction costs represent all the costs incurred as the product moves from one supply-chain partner to the next. When firms use offshore outsourcing by procuring from foreign suppliers, it may help reduce their production costs. In some instances, a local supplier’s production costs may be lower than those of foreign suppliers, but this is often the exception and not the rule. Transaction costs, on the other hand, tend to be higher for such offshoring, as there are many types of institutional, cultural, and language barriers that must be overcome.

The cost of searching for supply sources abroad, whether internal or external sources, is somewhat higher than that for local supply sources. The cost of evaluating those foreign supply sources is much higher, as the evaluation costs are strongly related to the familiarity that decision makers have with the other party. Since firms are likely to be less familiar with foreign supply sources and decision makers may not be able to draw on their networks in helping them evaluate these sources, this induces substantial evaluation costs. Rangan (2000) uses this argu- ment to explain why buying firms are much more likely to choose a domestic rather than a

foreign supplier, even when the physical distance between the buyer and each of these suppliers is the same.

We argue that offshoring is a balancing act between production and transaction costs. Firms need to find the proper balance between domestic and foreign supply sources (using onshoring and offshoring) if they wish to locate on the top of the curve and obtain the highest possible performance. They can achieve this by using foreign sources for part, but not all of their sourcing. Sourcing everything from abroad produces poor performance results because the disadvantages of offshoring, like the hollowing-out argument, become too large. Focusing all efforts on onshoring, however, is a serious form of myopia with equally disastrous effects on firm performance, primarily because the firm is not capitalizing on important opportunities to improve competitiveness. A graphic illustration of our argument is presented in Figure 1.

The balance perspective is therefore summa- rized as follows: Some activities are best outsourced globally while others ought to be integrated (from a performance perspective). A firm can enjoy optimal performance when it correctly outsources and integrates all activities. Similarly, the firm also needs to balance between onshoring and offshoring activities. This produces a pattern of an inverted U-shaped (negatively curvilinear) relationship between outsourcing and performance, with the top of the curve presenting the performance optimum.

A ‘‘fit’’ perspective. Despite the heightened publicity of global sourcing, many firms have been highly dissatisfied with their sourcing performance. The problem may be due to the fact that many researchers and practitioners have adopted a deterministic view in evaluating the global sourcing strategy–performance relation- ship, without exercising caution that such a view tends to overgeneralize the sourcing benefits.

Researchers often adopt the contingency approach in representing a ‘‘fit’’ perspective of the environment–strategy–performance rela- tionship. Extant research has confirmed that some environmental factors indeed exerted moderating effects on the sourcing strategy– performance relationship. In the manufacturing

global sourcing strategy: an evolution 7

Insourcing/Onshoring Outsourcing/Offshoring

F ir m

p e

rf o

rm a

n ce

Figure 1 A curvilinear relationship between the degree of global outsourcing and firm performance.

context, Murray, Kotabe, and Wildt (1995) concluded that the financial performance advan- tage of global insourcing over global outsourcing of nonstandardized (i.e., major) components strengthened with increased product innova- tions, process innovations, and asset specificity.

Using foreign firms manufacturing in China as subjects of their study, Murray, Kotabe, and Zhou (2005) found that global outsourcing of major components (in the form strategic alliance-based sourcing) did not affect market performance. Instead, product innovativeness and technological uncertainty moderated such a relationship. Specifically, at low levels of product innovativeness/technological uncer- tainty, the use of strategic alliance-based sourcing of major components by the sourcing firm is positively related to market perfor- mance. However, at higher levels of product innovativeness/technological uncertainty, the sourcing–performance relationships become negative.

In refuting the popular arguments that insourcing or outsourcing will lead to superior performance, they found that sourcing strategy per se did not significantly affect performance. Instead, the sourcing strategy–performance relationship was driven by factors underlying sourcing strategy choice. They further cautioned against the universalistic normative implications for firms deciding on whether to insource or outsource their value-chain activities

and stressed the value of contingency-based theoretical approaches.

As discussed earlier, global sourcing of services did not take place until the second wave of global sourcing; therefore, extant literature on global sourcing of services (see SERVICES MARKETING STRATEGY; SERVICE INNOVATION MANAGEMENT) is limited when compared to that in manufactured goods. Murray and Kotabe 1999 found that similar to components and finished-goods sourcing, supplementary services were sourced globally, either by insourcing or outsourcing. The higher the asset specificity and the lower the transaction frequency of the supplementary services, the higher the global insourcing used. Finally, insourcing and offshoring of supplementary services were negatively related to the market performance of a service.

The fit perspective is therefore summarized as follows: There is a range of contingency factors (i.e., capital intensity, degree of service inseparability, market uncertainty, and transac- tion frequency) at the transaction-, firm-, and context-levels. These factors determine how much global outsourcing (both onshore and offshore) ought to take place from a perfor- mance perspective. To an extent, the contin- gency factors also explain how much global outsourcing actually takes place in practice. Fit is achieved when the actual global outsourcing level is in accordance with the level predicted

8 global sourcing strategy: an evolution

on the basis of the contingency factors. If a firm matches a global outsourcing decision to the rele- vant contingency factors, the resulting strategic fit helps achieve superior performance.

A ‘‘balanced-fit’’ perspective. The previous discussion raises two related questions. First, are these contradictory or rather complementary perspectives; if they are complementary, how do they complement each other? Second, how can we, taking into account these perspectives, explain the large increases in offshore and global outsourcing? We now seek to answer these two questions on the basis of the extant literature, specifically by drawing upon possible conceptual angles on global outsourcing.

To describe how the balance and fit perspec- tives complement each other, and to explain why over the past two decades or so we have witnessed the degree of global sourcing shifting toward more offshoring, we need to draw more directly upon key academic perspectives on global sourcing. We summarize 11 such perspec- tives in Table 4.

It is not in the scope of this article to describe each perspective in detail or to show how different perspectives are useful in predicting global outsourcing (for a more detailed descrip- tion, see Mol, 2007). However, it is important to note that these perspectives operate at three different levels: the transaction, the firm, and the industry and institutional contexts. Taken together, they represent almost all the contin- gency factors that the academic literature has produced to date. Which of these perspectives matters most is to an extent determined by the empirical context in which outsourcing is investigated. Some of the perspectives have been more prominent than others in recent academic studies of outsourcing. Transaction-cost

economics and the resource-based view come to mind as examples, which may reflect their actual importance in practice.

This takes us back to the two questions. The first question can be answered by stating that exactly where the optimal point of outsourcing (balance) lies is determined by the scores on the contingency factors (fit). In terms of the second question, the optimal point in terms of how much a firm should engage in offshoring will shift over time. Over the past two decades or so, we have witnessed that the degree of global sourcing has shifted to the right in Figure 1, that is, toward more outsourcing and offshoring. This implies that changes in both the level of the contingency factors as well as their constitution (i.e., which variables matter and to what extent) have caused the increase in outsourcing and offshoring levels.

Taken together, the implication is that the balance in global outsourcing has shifted toward higher levels of outsourcing because of the need to fit global outsourcing levels to a set of changed circumstances. We suggest two major drivers of this change. First, IT, including the Internet, has greatly facilitated cross-border business-to-business transactions. Second, insti- tutional changes, which lie at the heart of the rise of both China and India as supply destina- tions, have also facilitated cross-border trade and investment, both of which in turn lead to more global outsourcing. These conclusions provide different implications for managers.

CONCLUSIONS AND MANAGERIAL IMPLICATIONS

On the basis of these discussions, managers should rethink and redesign their global outsourcing activities. Many managers have a strong general sense for what constitutes a sound

Table 4 Perspectives on global outsourcing.

Firm Context Transaction

Past Resource-based view Social networks — Present Costly contracting

Microeconomics Core competencies

Industrial organization Institutional voids

Transaction-cost economics Agency

Future Real options Relations and learning

— —

global sourcing strategy: an evolution 9

outsourcing and offshoring policy. They realize that outsourcing and offshoring every activity may lead to disasters, just as much as they recog- nize that not all activities should be insourced.

There is currently a tendency in practice to describe performance problems related to outsourcing or offshoring as implementation issues. Managers often assume that their outsourcing or offshoring decision is the proper design choice, and tend to attribute its unsatisfactory performance to various imple- mentation problems that occur when dealing with independent and overseas suppliers. We suggest that there are many more fundamental problems of outsourcing or offshoring that are unrelated to implementation problems. Rather, there are limits to outsourcing and offshoring, and many inputs of a firm should not be outsourced or offshored.

Managers are often not conscious of the fact that there is an optimal degree of outsourcing across their entire portfolio (Leiblein, Reuer, and Dalsace, 2002). Instead of using this portfolio level, they tend to see the good or the evil of outsourcing or offshoring particular items or activities in that suppliers are not well equipped, insufficient guarantees are built into contracts, or market circumstances change rapidly. Many firms do not conduct enough analysis before they jump into outsourcing or offshoring. This helps explain why, in practice, outsourcing or offshoring often looks like a bandwagoning process. Likewise, many academic approaches have centered on analyzing individual make-or-buy decisions.

However, the performance advantages of outsourcing or offshoring will only materialize when a firm has the organizational capacity to integrate outsourced and/or offshored items/activities into its operations. Further- more, many companies make outsourcing or offshoring decisions by evaluating only a few options on the basis of their previous experience and by what their competitors are doing.

Managers are in need of guidelines as to where the optimal point lies for their particular busi- ness at a particular time. On the basis of the contingency approach using a ‘‘fit’’ perspective, we can suggest several indicators to help answer that question including asset specificity, uncer- tainty, firm competencies, industry trends, and

firm nationality and location. These moderating factors may help determine what is optimal for a particular firm at a particular time. Timing is crucial, as the optimal point will shift due to changes internal and external to the firm.

From a managerial perspective, developing a model that helps determine a firm’s optimal degree of outsourcing or offshoring would be very useful. On the basis of this model, managers could prioritize their set of activities and outsource or offshore until they more or less reach optimality. As global sourcing is a dynamic process, competing firms may not accurately grasp the full benefit (and cost) of outsourcing or offshoring activities due to causal ambiguity. Simply bandwagoning on the first mover’s current outsourcing or offshoring strategy offers no guarantee for improved performance. We suggest that tackling that challenge involves a broader behavioral understanding of how firms’ outsourcing or offshoring trajectories change over time and within industries.

ACKNOWLEDGMENT

The authors acknowledge Michael J. Mol for his inputs on their previous research projects that help build the foundation of this article.

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