Antecedents of Decisions to Outsource Production: A Manufacturing Strategy Perspective

We examine how key attributes of a business unit’s manufacturing strategy affected its plans to outsource manufacturing resources in the late 1990’s; a time when the outsourcing of production was at the forefront of manufacturing strategy. Drawing upon theory, we test a hierarchical regression model that includes the traditional transaction cost variables as well as operationsbased competitive capabilities and priorities. Consistent with theory, we find that high levels of product and process asset specificity significantly reduce plans to outsource. But, counter to transaction cost theory, we explain and show empirically that uncertainty can actually lead to an increase in outsourcing plans. We next examine the effect of the operations capabilities and priorities. Not surprisingly, companies with strong cost capability were less likely to be planning to outsource, and companies that placed a high priority on cost exhibited a higher propensity to outsource–controlling for their current capability. Consistent with real options theory and the management fads of the time, flexibility capability and priority also affected outsourcing plans. Counter to expectations, and interesting in light of recent events, the competitive dimensions of quality and new product development did not directly affect outsourcing plans. Taken together, and coupled with insights from competitive progression theory, our results provide insights into decisions to outsource production. In addition to the above, our results show that existing strategic management and economics theories on firm boundaries are incomplete as they generally fail to consider the role that competitive priorities play in outsourcing decisions.