Making More by Doing Less-An Analysis of Outsourcing and Its Effects On Firm Performance

Journal of Management
2000, Vol. 26, No. 4, 763–790
Making More by Doing Less: An Analysis

of Outsourcing and its Effects on Firm
Performance
K. Matthew Gilley
Oklahoma State University
Abdul Rasheed
The University of Texas at Arlington
This study empirically examined the extent to which outsourcing of

both peripheral and near-core tasks influences firms’ financial and
nonfinancial performance. In addition, the potential moderating effects
of firm strategy and the environment on the outsourcing-performance
relationship were examined. Results indicate that, whereas there was no
significant direct effect of outsourcing on firm performance, both firm
strategy and environmental dynamism moderated the relationship be-
tween outsourcing and performance. © 2000 Elsevier Science Inc. All
rights reserved.
Organizations are increasingly turning to outsourcing in an attempt to enhance

their competitiveness. Chrysler, for example, outsources 100% of the manufacture
of half of its minicompact and subcompact cars. Furthermore, Chrysler and Ford
currently produce less than one-half of the value of all their vehicles in-house.
Similarly, Boeing has begun to rely more heavily on outsourcing partners to
manufacture its aircraft. For example, the manufacture of a large portion of the
Boeing 767, Boeing’s third largest commercial aircraft, is outsourced to a con-
sortium of Japanese manufacturers including Fuji, Kawasaki, and Mitsubishi (Hill
& Jones, 1995). As a result, only 10% of the value of the 767 is produced
in-house.
Despite the dramatic rise in outsourcing in recent years, few empirical
investigations of the subject have been conducted. Previous work on outsourcing
has been primarily theoretical in nature and has relied mostly on anecdotal
evidence to support assertions. Furthermore, the conclusions of these works are
inconsistent. Many intuitively appealing arguments have been offered both for
and against outsourcing as a means of achieving sustainable competitive advan-
tage. For example, Quinn (1992) proposes that, by allowing outside specialist
organizations to concentrate on certain tasks, firms may increase their perfor-
mance by focusing more narrowly on the things they do best. However, Bettis,
Bradley, and Hamel (1992) argue that outsourcing may reduce organizational
innovation, may shift knowledge to supplier organizations, and may reduce
Copyright © 2000 by Elsevier Science Inc. 0149-2063
763
764 K.M. GILLEY AND A. RASHEED
control over a firm’s activities. In this way, outsourcing may destroy long-run
competitive advantage.
This study empirically investigates the influence of outsourcing on organi-
zational performance. To date, little is known about the firm-level outcomes of
outsourcing decisions. Many authors have discussed the issue and have supported
their positions with anecdotal evidence. However, little systematic empirical work
has been conducted to determine the influence of outsourcing decisions on firms’
financial and nonfinancial performance. Therefore, this study seeks to advance
understanding about the relationship between organizational reliance on outsourc-
ing strategies and firm performance.
Literature Review
In this section, the definitions of outsourcing used in prior research are
examined. In addition, a definition of outsourcing is developed that is based on a
comprehensive review of the outsourcing literature. Finally, the advantages and
disadvantages of outsourcing that have been identified in prior studies are inves-
tigated.
Definitions of Outsourcing
There seems to be confusion in the management literature about what is
meant by the term “outsourcing.” In their study of information technology (IT)
outsourcing, Loh and Venkatraman defined outsourcing as “the significant con-
tribution by external vendors in the physical and/or human resources associated
with the entire or specific components of the IT infrastructure in the user
organization” (1992: 9). Alternatively, outsourcing has been defined as “products
supplied to the multinational firm by independent suppliers from around the
world” and “the extent of components and finished products supplied to the firm
by independent suppliers” (Kotabe, 1992: 103). In addition, outsourcing has been
defined as “the reliance on external sources for manufacturing components and
other value-adding activities” (Lei & Hitt, 1995: 836). Generally, the definition of
outsourcing used in studies of the subject is so broad that it includes virtually any
good or service that an organization procures from outside firms.
However, defining outsourcing simply in terms of procurement activities
does not capture the true strategic nature of the issue. Outsourcing is not simply
a purchasing decision; all firms purchase elements of their operations. On the
contrary, we suggest that outsourcing is less common and represents the funda-
mental decision to reject the internalization of an activity. In this way, outsourcing
is a highly strategic decision that has the potential to cause ripple effects through-
out the entire organization. Further, we propose that outsourcing may arise in two
ways. First, outsourcing may arise through the substitution of external purchases
for internal activities. In this way, it can be viewed as a discontinuation of internal
production (whether it be production of goods or services) and an initiation of
procurement from outside suppliers. To the extent that this type of outsourcing
reduces a firm’s involvement in successive stages of production, substitution-
based outsourcing may be viewed as vertical disintegration. This seems to be the
most commonly understood type of outsourcing.
JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000
AN ANALYSIS OF OUTSOURCING AND ITS EFFECTS ON FIRM PERFORMANCE 765
However, outsourcing may also occur through abstention. Outsourcing need

not be limited to those activities that are shifted to external suppliers. On the
contrary, outsourcing may also arise when a firm purchases goods or services
from outside organizations even when those goods or services have not been
completed in-house in the past. However, we believe that abstention-based
outsourcing is unique from basic procurement, because the former only occurs
when the internalization of the good or service outsourced was within the
acquiring firm’s managerial and/or financial capabilities. In other words, as with
substitution-based outsourcing, abstention-based outsourcing also reflects a deci-
sion to reject internalization. Therefore, we suggest that organizations having no
choice but to acquire a particular good or service from an external source (because
of a lack of capital or expertise, for example) are not outsourcing, because the
internalization of the activity in question is not an option. In other words, rejecting
the internalization of the focal activity was never a choice, and the firm is simply
engaging in procurement. Whether virtual or network organizations, as well as
other types of firms founded with the intention of performing only a narrow range
of activities in-house from inception, are considered to be outsourcing must be
determined on a firm-by-firm (or even activity-by-activity) basis. Indeed, this
definition of outsourcing may exclude many types of activities that have been
considered outsourced in prior research. Previous definitions of outsourcing have
not made the substitution/abstention distinction and, therefore, have not allowed
researchers to approach the subject of outsourcing from a common starting point.
The Advantages of Outsourcing
Although the definition of outsourcing has been somewhat uncertain, many
potential benefits of outsourcing have been identified in the literature. Those most
often discussed are improved financial performance (attributable, in part, to
almost immediate cost improvements) and various nonfinancial performance
effects, such as a heightened focus on core competencies. These and other
proposed advantages of outsourcing are discussed below.
Outsourcing firms often achieve cost advantages relative to vertically inte-
grated firms (Bettis, Bradley, & Hamel, 1992; D’Aveni & Ravenscraft, 1994;
Kotabe, 1989; Lei & Hitt, 1995; Quinn, 1992). Through outsourcing, manufac-
turing costs decline and investment in plant and equipment can be reduced (Bettis
et al., 1992). This reduced investment in manufacturing capacity lowers fixed
costs and leads to a lower break-even point. The short-run cost improvement
swiftly reinforces the outsourcing decision. Thus, outsourcing may be an attrac-
tive method of improving a firm’s financial performance, especially in the short
run.
Outsourcing may contribute to other advantages as well. In-house production
increases organizational commitment to a specific type of technology and may
constrain flexibility in the long run (Harrigan, 1985). However, firms focusing on
outsourcing can switch suppliers as new, more cost effective technologies become
available. In addition, outsourcing allows for quick response to changes in the
environment (Dess, Rasheed, McLaughlin, & Priem, 1995) in ways that do not
increase costs associated with bureaucracy (D’Aveni & Ravenscraft, 1994). Thus,
firms that outsource may achieve long-run advantages compared to firms relying
on internal production. As noted by Quinn, “virtually all staff and value chain
activities are activities that an outside entity, by concentrating specialists and
technologies in the area, can perform better than all but a few companies for
whom that activity is only one of many” (1992: 37).
An increased focus on an organization’s core competencies is another
important benefit associated with outsourcing (Dess et al., 1995; Kotabe &
Murray, 1990; Quinn, 1992; Venkatraman, 1989). Outsourcing noncore activities
allows the firm to increase managerial attention and resource allocation to those
tasks that it does best and to rely on management teams in other organizations to
oversee tasks at which the outsourcing firm is at a relative disadvantage.
The importance of defining and developing the core competence of the firm
has attained great popularity among management researchers and practitioners
(Prahalad & Hamel, 1990). This has increasingly led to a move away from
market-based definitions of businesses toward more competence-based defini-
tions. For example Honda’s core competence is in small engine production and,
therefore, the domain of Honda’s activities can be seen as any business in which
this core competence finds an application. Nike’s core competencies are in the
design and marketing of shoes rather than in their manufacture. Therefore, Nike
has focused on these aspects of the athletic shoe industry and has relied on outside
firms for virtually all manufacturing activities. Quinn, Doorley, and Paquette
(1990) and Quinn (1992) also make a strong case for outsourcing activities in
which a firm cannot excel to provide the firm with heightened focus on its core
competencies.
Other nonfinancial benefits of outsourcing have received less attention in
research. One additional advantage is that it tends to promote competition among
outside suppliers, thereby ensuring availability of higher-quality goods and ser-
vices in the future (Kotabe & Murray, 1990). Quality improvements may also be
realized by outsourcers, because they can oftentimes choose suppliers whose
products or services are considered to be among the best in the world (Dess et al.,
1995; Quinn, 1992). Outsourcing also spreads risk (Quinn, 1992). By using
outside suppliers for products or services, an outsourcer is able to take advantage
of emerging technology without investing significant amounts of capital in that
technology. Thus, the outsourcer is able to switch suppliers when market condi-
tions demand.
The Disadvantages of Outsourcing
Although outsourcing’s potential benefits are many, some argue that reliance
on outside suppliers is likely to lead to a loss of overall market performance
(Bettis et al., 1992; Kotabe, 1992). One of the most serious threats resulting from
a reliance on outsourcing is declining innovation by the outsourcer. Outsourcing
can lead to a loss of long-run research and development (R&D) competitiveness
(Teece, 1987) because it is often used as a substitute for innovation. As a result,
firms that outsource are likely to lose touch with new technological breakthroughs
that offer opportunities for product and process innovations (Kotabe, 1992).
In addition, as suppliers gain knowledge of the product being manufactured,

they may use that knowledge to begin marketing the product on their own
(Prahalad & Hamel, 1990). In fact, firms from the Pacific Rim have a well-
established pattern of market entry based on outsourcing partnerships (Willard &
Savara, 1988). Many Asian firms have made their initial entrance into U.S.
markets by first entering supplier arrangements with U.S. manufacturers, and
subsequently marketing their own brands aggressively. In this way, many Asian
firms have achieved market dominance.
There are several other dangers associated with outsourcing. First, the cost
savings associated with outsourcing may not be as great as they seem, especially
with respect to foreign suppliers. The transaction costs associated with repeated
market-based transactions, especially overseas, can be significant. In addition, as
long as foreign wages remain relatively low and the dollar remains relatively
strong, foreign outsourcing is attractive (Markides & Berg, 1988). However,
success attributable to low foreign wages and a strong dollar is fleeting advantage.
Also, outsourcing requires a shift in overhead allocation to those products or
activities that remain in-house. This reallocation of overhead degrades the appar-
ent financial performance of the remaining products or activities and raises their
vulnerability to subsequent outsourcing (Bettis et al., 1992), perhaps leading to an
outsourcing spiral. Thus, those remaining products or activities that were per-
forming satisfactorily before the onset of outsourcing may erroneously be targets
for future outsourcing. In addition, longer lead times resulting from spatial
dispersion cause several problems, such as larger inventories, communication and
coordination difficulties, lower demand fulfillment, and unexpected transportation
and expediting costs (Levy, 1995). Tariffs are another danger associated with
outsourcing, as are increases in the difficulty of bringing back into the firm
activities that may now add value because of market shifts (Dess et al., 1995).
The preceding discussion of the benefits and dangers of outsourcing make it
clear that reliance on outsourcing is not necessarily a viable competitive strategy.
On the contrary, continuously switching from one supplier to another may merely
postpone the “day of reckoning” when firms must fix what is wrong with their
organizations (Markides & Berg, 1988).
Theory Development
Characteristics of Outsourcing Strategies

Two generic types of outsourcing are proposed here: peripheral outsourcing
and core outsourcing. The first type occurs when firms acquire less strategically
relevant, peripheral activities from external suppliers. The second type occurs
when firms acquire activities that are considered highly important to long-run
success. What constitutes a core or peripheral activity is essentially a judgment by
each individual firm, based on what it considers as its core competency and the
strategy it intends to pursue. Thus, although it is possible that some similarities
may exist within the industry, there is considerable scope for variation among
firms within the industry.
In addition, it is proposed here that each of these outsourcing strategies is not

a unidimensional concept. Instead, outsourcing strategies can be conceptualized
as having two fundamental properties, breadth and depth. Breadth is defined here
as the number of activities (i.e., accounting, maintenance, machining) outsourced
as a percentage of the total number of activities in which the firm could be
engaged. This is similar to Harrigan’s (1984) conceptualization of breadth of
vertical integration.
Outsourcing strategies vary greatly in their breadth. On the one hand, many
firms choose to maintain internalization of most of their activities and, therefore,
have relatively narrow outsourcing strategies. Such firms may decide to outsource
only a few activities while maintaining tight control over most others. In contrast,
other firms choose to take a much broader approach to their outsourcing strategies
by farming-out many peripheral activities, and even some activities much closer
to their core capabilities.
The second dimension of outsourcing strategies is “depth.” Whereas firms
outsourcing some portion of many activities are considered to have higher levels
of breadth, those firms farming-out a higher portion of the value of each out-
sourced activity are considered to have deeper outsourcing strategies. Thus, given
that an activity is outsourced, depth is the extent to which a firm outsources a
higher portion of that activity on average. For example, all else being equal, a firm
farming-out an average of, say, 80% of each outsourced activity is considered to
have a deeper outsourcing strategy than an identical firm farming-out an average
of only 10% of each outsourced activity.
It is proposed here that the breadth and depth dimensions combine to form
an organization’s overall outsourcing strategy. Attempting to determine a firm’s
reliance on outsourcing strategies by examining breadth or depth in isolation is
much less meaningful than examining them in tandem. A firm’s dependence on
outsourcing cannot be measured simply by the number of activities that the firm
(partially) outsources. Examining a firm’s level of outsourcing only in terms of
breadth misses an important aspect of the phenomenon: the extent to which each
activity is provided by an outside supplier. Only when a firm’s breadth and depth
of outsourcing are combined does an accurate picture of the firm’s reliance on
outsourcing emerge. In the current study, breadth and depth are multiplied
together to form a single indicator of the level of outsourcing. This combined
construct is called “outsourcing intensity,” and reflects the firm’s overall reliance
on outsourcing.
Performance Implications of Outsourcing Intensity
The organizational effects of outsourcing decisions have been discussed
widely in previous work. However, the current level of understanding of these
outcomes is based primarily on anecdotal evidence. Potential performance en-
hancements that may result from a carefully formulated outsourcing strategy are
suggested by the competency-based and resource-based perspectives on strategic
management. As mentioned previously, the competency-based view suggests that
a firm should continuously invest in those activities that constitute its core
competence while outsourcing the rest (Prahalad & Hamel, 1990; Quinn, 1992).
The core competencies provide both the basis and the direction for the growth of
the firm (Peteraf, 1993). Similarly, the resource-based view suggests that sus-
tained competitive advantage is possible only through developing resources and
capabilities that are valuable, rare, imperfectly imitable, and nonsubstitutable
(Barney, 1991; Grant, 1991). Thus, the resource-based view suggests that inputs
that are traded should be procured from the market, because investments in their
creation are unlikely to lead to any sustainable competitive advantage.
Potential benefits of outsourcing, such as cost improvements and a more
narrow focus on core competencies, make outsourcing an attractive option. On the
other hand, potential disadvantages, such as declining innovation by outsourcing
firms and eventual competition from suppliers, make the benefits of outsourcing
suspect. Thus, the performance implications of varying levels of outsourcing
intensity appear uncertain. To clarify some of the misunderstandings that underlie
this debate, and to proceed toward resolving the issue of performance conse-
quences of outsourcing, we propose firm performance to be influenced by the two
types of outsourcing (peripheral and core) in unique ways. Figure 1 shows the
proposed effects of peripheral and core outsourcing intensity on firm performance.
In addition, it highlights the proposed moderating influence of firm strategy and
environmental dynamism on outsourcing-performance relationships.
Peripheral Outsourcing. By peeling off layers of peripheral tasks and
shifting their production to highly focused, specialist organizations, firms can see
enhanced performance (Bettis et al., 1992; D’Aveni & Ravenscraft, 1994; Kotabe,
1989; Lei & Hitt, 1995; Quinn, 1992). This performance improvement relative to
nonoutsourcing firms manifests itself in three ways. First, reducing peripheral
activities allows firms to focus on those activities they do best. This heightened
focus on core competencies may greatly enhance firm performance by allowing
the firm to become more innovative and agile in its core domain. Second,
outsourcing peripheral activities may greatly improve the quality of those activ-
ities (Dess et al., 1995). Specialist organizations, by focusing their attention on a
very narrow set of functions, perform them much more successfully than could the
Figure 1

outsourcing firm, to which a given peripheral activity is only one of many (Quinn,
1992). Finally, outsourcing peripheral activities to the lowest-cost suppliers may
lead to incremental improvements in a firm’s overall cost position. Therefore, it
is proposed that, by pursuing intense peripheral outsourcing strategies, firms can
achieve higher levels of performance relative to firms that do not outsource their
peripheral activities.
H1: Peripheral outsourcing intensity has a positive effect on firm

performance.
Core Outsourcing. Firm performance may also be influenced by the

intensity with which a firm outsources its near-core, strategically relevant activ-
ities. Several authors have noted that this “core outsourcing” may lead to declin-
ing innovation (Kotabe, 1990; Teece, 1987) and eventual competition from
suppliers (Bettis et al., 1992; Prahalad & Hamel, 1990; Quinn, 1992), resulting in
reduced firm performance. In addition, the transfer of specialized knowledge
necessary when firms outsource near-core activities may also place the firm’s
future performance in jeopardy. The decline of industries such as televisions,
bicycles, and automobiles in the U.S. has consistently been used as examples of
the dangers of outsourcing near-core activities (Bettis et al., 1992). Therefore, it
is proposed that firms outsourcing activities very near their strategic core will
achieve lower levels of performance relative to firms that retain tight control over
these activities.
H2: Core outsourcing intensity has a negative effect on firm perfor-

mance.
Moderating Relationships. The relationships between the two types of

outsourcing and firm performance may be more complex than they first appear.
When certain conditions exist, the positive effects of peripheral outsourcing and
the negative effects of core outsourcing may be increased or reduced. Below, the
potential moderating effects of firm strategy and environmental dynamism are
discussed.
Generic Firm Strategy. The relationship between outsourcing intensity
and firm performance may be contingent on a firm’s generic strategy. By using
peripheral outsourcing, cost leaders may not only heighten their focus on their
core competencies and improve the quality of their nonstrategic activities (Dess et
al., 1995), but they may also incrementally lower their total costs. This improved
cost position may greatly enhance their competitiveness relative to industry rivals,
thereby leading to superior performance. Therefore, it is proposed that a cost
leadership strategy strengthens the positive effect (or reduces any negative effect)
of peripheral outsourcing on firm performance.
On the contrary, firms pursuing a differentiation strategy, while also bene-
fiting from a heightened focus on core competencies and improved peripheral
activity quality, stand to gain less (relative to cost leaders) by outsourcing
peripheral activities. The incremental cost improvements that may be achieved
through peripheral outsourcing are less significant to differentiators, because these

cost improvements may have little direct effect on the differentiation of their
outputs. Although there may be an indirect effect of cost reductions for differen-
tiators (i.e., they may have more resources with which to pursue differentiation-
enhancing actitivies), we believe that differentiators have less to gain relative to
cost leaders. Thus, a differentiation strategy is proposed to weaken the positive
effect (or strengthen the negative effect) of peripheral outsourcing on firm
performance.
With respect to core outsourcing, the situation is different. Although firms
outsourcing activities near their core skills are proposed to have lower levels of
performance, the negative performance effects are likely to be different for cost
leaders than they are for differentiators. For cost leaders, the drawbacks of
near-core outsourcing may be partially offset by the improvement in their cost
competitiveness that results from their actively seeking out the lowest-cost pro-
vider of each near-core activity. In this way, a cost leadership strategy is proposed
to reduce the negative effect (or increase the positive effect) of core outsourcing
on firm performance.
The opposite relationship may occur for differentiators. Harrigan (1984)
noted that it is critical for differentiators to determine which activities drive their
differentiation (i.e., their core activities) and keep them in-house. Differentiators
that outsource higher levels of their unique, differentiation-enhancing internal
transfers (Barney, 1997) will likely find that their control over these activities has
been sacrificed. This, in turn, may lead to erosion of the differentiator’s compet-
itive position. Thus, any negative effect of core outsourcing on firm performance
is likely increased for firms pursuing a differentiation strategy.
In summary, any benefits of outsourcing are more likely to be realized by
cost leaders than by differentiators, and any costs are more likely to be borne by
differentiators than by cost leaders.
H3: A firm’s business-level strategy moderates the relationship be-

tween outsourcing intensity and firm performance such that, for a cost
leader, any positive effect of outsourcing on performance is strength-
ened, and any negative effect is weakened; and, for a differentiator, any
positive effect weakened and any negative effect is strengthened.
Environmental Dynamism. Dynamism of the organization’s external en-

vironment may also moderate the relationships between the two types of out-
sourcing intensity and firm performance. Because environments represent one of
the major sources of contingency faced by firms, outsourcing intensity may not
affect the performance of firms in different environments equally. Rather, the
influence of outsourcing on firm performance may be contingent on the level of
environmental dynamism.
The effect of outsourcing may increase with increasing levels of environ-
mental dynamism. By relying on outsiders for peripheral and near-core activities
in more dynamic environments, firms are able to take advantage of emerging
technologies without investing large amounts of capital in them (Quinn, 1992).
Furthermore, when new technologies emerge, outsourcing firms may switch

suppliers, when contractually allowable, to exploit any cost or quality improve-
ments that may then be available (Dess et al., 1995). Therefore, environmental
dynamism increases an important benefit of outsourcing (technology-related
flexibility), thereby increasing the positive effects of outsourcing on firm perfor-
mance and partially offsetting the negative effects.
On the contrary, the performance effects of outsourcing intensity may
decline in stable environments. There are two reasons for this. First, an important
advantage of outsourcing is that it allows firms to switch suppliers as technolog-
ical considerations demand. In more stable environments, the outsourcing-related
benefits associated with changes in technology are much less pronounced than
they are in more dynamic environments, because production and service technol-
ogies are changing much less rapidly. Thus, environmental stability reduces an
important benefit of outsourcing. Second, firms in more stable environments may
find it more difficult to avoid the transfer of knowledge associated with shifting
activities to external organizations. A firm’s competitive advantage is largely
based on its ability to obscure the connection between its resources and skills and
its success in the industry. This causal ambiguity (Dierickx & Cool, 1989) may be
much less pronounced in stable environments, leading outsourcing firms to
inadvertently divulge their source of competitive advantage to their suppliers.
Thus, environmental stability likely increases the negative effect of outsourcing
on firm performance.
It is proposed, therefore, that the benefits of outsourcing increase with
increasing levels of environmental dynamism, and the costs associated with
outsourcing decrease with increasing levels of environmental dynamism. Con-
versely, in more stable environments, the benefits of outsourcing decline and the
costs of outsourcing increase.
H4: Environmental dynamism moderates the relationship between

outsourcing intensity and firm performance such that any positive effect
of outsourcing on firm performance is strengthened, and any negative
effect of outsourcing on firm performance is weakened, as dynamism
increases.
Research Method
Sample and Sampling Procedures

A double-respondent, survey methodology was used to test the propositions.
The top executive of each firm was contacted by letter and asked to complete a
survey. The top executive was then asked to give a second survey to another
executive within the firm who would be familiar with the firm’s strategic issues.
The sample included top executives from independent, nondiversified manufac-
turing firms employing more than 50 people. Manufacturing firms were chosen as
the sample for this study to allow insight not only into the outsourcing of
service-related activities (such as accounting, payroll, and customer service), but
also to allow for an investigation of the dynamics of outsourcing manufacturing-
related activities (such as assembly and machining operations). Firms were sent
follow-up letters 7 days after the initial mailing. These follow-up letters served as
a “thank you” to participants and as a reminder to those who had not yet returned
their completed surveys (Dillman, 1978). Twenty-one days after the initial mail-
ing, nonresponding firms were contacted by telephone. Of 558 firms contacted, 94
(17%) returned usable surveys in time to be included in this study. Multiple
responses were received from 31 of these firms. To test for nonresponse bias,
differences in total number of employees and industry representation (Greer &
Ireland, 1992) for responding and nonresponding firms were examined. Testing
for nonresponse by industry reputation indirectly results in our checking a variety
of industry-level issues, such as dynamism within the industry, levels of outsourc-
ing within the industry, and industry profitability. No significant differences were
detected in either firm size (␹2 df.⫽4 ⫽ 6.13, p ⬎ .05) or industry representation
(␹2df.⫽15 ⫽ 18.71, p ⬎ .05). The firms in the sample include many industrial
sectors, such as electronic equipment, chemicals, textiles, and others. Descriptive
data for respondents and their firms are found in Table 1.
We followed the recommendations of Kumar, Stern, and Anderson (1993)
for dealing with differences across multiple respondents. They propose that, if
differences occur because one respondent is less knowledgeable about the issues
under investigation, that respondent should be dropped. In the current study, we
assumed that those in more senior positions within these firms would be more
knowledgeable of their firms’ outsourcing, strategies, environment, and perfor-
mance. As a result, one response from all multiple-respondent firms was dis-
carded. Responses were chosen for deletion in the following manner. Two
Table 1. Company and Respondent Information

Mean respondent age 50 years
Mean respondent tenure with firm 14 years
Mean firm size 259 employees
Industry types (and percent of sample)
Food and kindred products 5.2%
Textile mill products 1.3%
Apparel 3.9%
Lumber and wood products 5.2%
Furniture and fixtures 5.2%
Paper and allied products 2.6%
Printing, publishing, and allied industries 9.1%
Chemicals and allied products 6.5%
Rubber and misc. plastics 7.8%
Stone, clay, glass, and concrete 3.9%
Primary metal industries 2.6%
Fabricated metal products 14.3%
Industrial machinery and computers 14.3%
Electronic equipment 10.4%
Transportation equipment 2.6%
Measuring instruments 5.2%

individuals familiar with this research project (one associate professor and one
doctoral student) were given a list of eleven organizational titles (i.e., president,
general manager, purchasing manager) and asked to rank them in order of
decreasing knowledge of their firm’s strategies. The correlation between the two
raters’ assessments (determined with a Spearman’s Rho) was 0.95. Both raters
agreed that the president or CEO was the most informed respondent, followed by
the vice president, and then the general manager. For all multiple-respondent
firms, the respondent rated higher by the two raters was the only one used in the
analyses. Information from the other respondent was used to calculate inter-rater
reliabilities but was not used in the other analyses. In one case, both respondents
were vice presidents. Organizational tenure was used to determine the most
informed respondent in this case, as suggested by Kumar and colleagues (1993).
Measures
Outsourcing Intensity. To determine a firm’s overall reliance on outsourc-
ing, a measure of “outsourcing intensity” was developed. A firm’s outsourcing
intensity was derived by multiplying its breadth of outsourcing by its depth of
outsourcing. Breadth and depth are discussed below. The larger a firm’s value of
outsourcing intensity, the greater is the role that outsourcing plays in its strategy
making. Outsourcing intensity was calculated separately for peripheral and core
activities.
Similar to Harrigan’s (1984) operationalization of breadth of vertical inte-
gration, breadth of outsourcing was measured as the number of activities out-
sourced (such as accounting, human resources, and manufacturing), divided by
the maximum number of activities that could be outsourced by the firm. After
in-depth interviews with three executives of firms meeting the criteria mentioned
previously, a comprehensive list of value-creating activities was developed. This
list was subsequently enhanced with several items discussed by Porter (1985). The
list of activities provided to respondents can be found in Table 2. Respondents
were given this list of 14 activities and were asked to indicate the percentage of
the value of each activity that is currently being performed by outside suppliers.
Our survey instrument did not specifically encourage respondents to add any
activities to the list; nor did any of the respondents write in any additional
activities, and rarely did a respondent suggest that any were missing. Therefore,
we are confident that our list, though not inclusive of all activities in which
organizations are engaged, does an adequate job of capturing the phenomenon
Table 2. List of Activities Provided to Respondents

Accounting Product repair
Advertising Purchasing
Assembly Research & development
Customer service Sales Force
Information systems Shipping
Machining/manufacturing Training
Payroll Warehousing

under study. We would have preferred to give respondents a larger set of activities
or even a free format; however, we were concerned about problems of a potential
deleterious influence on the response rate as well as lack of consistency in the
terms they choose. Our effort, despite its limitations, represents a reasonable
trade-off.
Outsourcing of an activity was considered to have occurred if two conditions
were met. First, 25% or more of the value of that activity must have been provided
by an outside supplier. Second, to be consistent with the definition of outsourcing
provided earlier, the activity must be within the firm’s capability to internalize. A
floor of 25% was chosen so that only those firms making a significant commit-
ment to outsourcing a given activity were counted as having outsourced. Thus,
firms outsourcing only a small fraction of an activity to maintain a secondary
source of supply, for example, were not considered to have outsourced that
activity. Outsourcing is less likely to influence the performance of these firms.
Subsequent analyses supported the use of this 25% threshold. Reducing the
threshold below 25% reduced our ability to predict firm performance with
outsourcing (and its interactions with firm strategy and environmental dynamism).
In other words, including in our analyses the outsourcing of relatively small
portions of certain tasks confounds our results. At thresholds of 25%, 50%, and
75%, the same general conclusions about the relationships among outsourcing,
environmental dynamism, and strategy were reached.
Breadth of outsourcing was measured as the ratio of outsourced activities to
total activities performed. Thus, the higher the ratio, the broader the firm’s
outsourcing strategy. Because some activities are not applicable to all firms (the
respondents were allowed to select “not applicable” in response to the activities
given on the survey), the denominator in the calculation was different across firms
in the sample. Breadth was calculated for peripheral and core activities (see
section on Strategic Significance of Activity).
As with breadth of outsourcing, depth was calculated from data obtained
from the list of activities given in Table 2. Depth may be viewed as the average
percentage of each outsourced activity that is being provided by external suppli-
ers. Thus, the percentages of each activity being outsourced were summed and
averaged, yielding a firm-level measure of depth of outsourcing. Depth was
calculated separately for peripheral and core activities.
To determine whether a particular activity being provided entirely by an
outside firm is within the focal firm’s ability to internalize (consistent with the
definition of outsourcing given earlier), respondents were asked to indicate the
extent to which that activity is within their firm’s financial or managerial capa-
bilities. Responses were coded on a 5-point scale (1 ⫽ activity is not at all within
our capabilities to 5 ⫽ activity is well within our capabilities). Those activities
receiving scores of three or higher (3 ⫽ activity is somewhat within our capa-
bilities) were considered to be within the firm’s abilities.
Inter-rater reliabilities were 0.36 for core outsourcing and 0.42 for peripheral
outsourcing. We believe that these relatively low levels of inter-rater agreement
resulted from the different perceptions and understanding of individuals holding
different positions in the firm, rather than from an inappropriate measure (see
McDougall & Robinson, 1990). Our measure of outsourcing required the broadest
possible knowledge of the organization, because we asked the respondent to
indicate levels of outsourcing across a very broad spectrum of organizational
tasks. In most cases, one respondent was the CEO/President and one was another
manager within the firm. It is highly likely that the CEO/President has a different
(and more accurate) understanding of outsourcing-related issues than the other
individuals in the organization. Given that our respondents may have had very
different levels of knowledge of the organization, we believe that the inter-rater
reliabilities are acceptable.
Strategic Significance of Activity. To differentiate between peripheral and
core activities, respondents were asked to indicate the extent to which each
activity listed in Table 2 is important to superior performance in their industry.
Respondents indicated the significance of each activity to sales growth and
profitability on separate 5-point scales (1 ⫽ not at all important to 5 ⫽ extremely
important). These two scores were summed to give an overall measure of each
activity’s importance. Activities receiving scores above the median were catego-
rized as core activities. Thus, core and peripheral activities were not predeter-
mined; rather, they were allowed to vary according to each firm’s industry. This
is especially important given the wide variety of industries represented in our
sample (16). Although all the firms in our sample were in manufacturing indus-
tries, it would be difficult, if not impossible, to determine which of the activities
given were more strategic in general. Nevertheless, we analyzed our data after
determining core and peripheral activities a priori, using Porter’s (1985) Value
Chain as a guide. As we had expected, our ability to predict firm performance with
outsourcing (and its interactions with environmental dynamism and strategy) was
greatly reduced, thus highlighting the need for customized definitions of core
versus peripheral activities across the industries represented in our sample.
Firm Performance. Because smaller, privately held firms are unlikely to
provide objective financial data, subjective financial performance data were
collected as described by Dess and Robinson (1984), Pearce, Robbins, and
Robinson (1987), and Priem, Rasheed, and Kotulic (1995). Respondents were
asked to indicate how their firm’s return on assets, return on sales, and overall
financial performance compared with similar firms in their industry for two
periods: the last 12 months and 5 years ago (the latter being used as a control
variable). Following Venkatraman and Ramanujam’s (1986) suggestion, broader
measures of firm performance were examined to determine the effects of out-
sourcing on overall organizational effectiveness. Cameron (1978) and Chakra-
varthy (1986) have both emphasized the multidimensionality of the performance
construct. To determine each firm’s nonfinancial performance, respondents were
asked to rate their firm’s R&D outlays, stability/growth of employment, process
innovations, product innovations, employee compensation, employee morale/job
satisfaction, customer relations, and supplier relations relative to their competi-
tors. For both financial and nonfinancial performance, responses were coded on a
5-point scale (1 ⫽ at the bottom of similar firms in the industry to 5 ⫽ at the top
of similar firms in the industry). Comparisons of firm performance relative to
similar firms in the same industry were requested to minimize industry effects
(Dess, Ireland, & Hitt, 1990) and strategic group effects (Hatten, Schendel, &
Cooper, 1978). Firm performance data from 5 years ago were used to minimize
the effects of annual fluctuations (Roth, 1992).
Exploratory factor analyses, using principal axis extraction techniques and an
oblique rotation (Ford, MacCallum, & Tait, 1986), revealed that past performance
and current performance each had three distinct factors. The final rotated factor
solutions are given in Table 3. For both past and current performance, the
financial performance items comprise one factor. However, the nonfinancial
performance items created two separate factors. One nonfinancial performance
factor deals with innovation performance, whereas the second factor concerns
stakeholders. As a result of these exploratory factor analyses, the current and past
performance measures were split into financial performance (three items), inno-
vation performance (three items), and stakeholder performance (four items).
Advertising outlays and employee compensation were removed because of their
significant cross-loadings and adverse effect on reliabilities.
Dess and Robinson (1984) provide strong evidence of the validity and
reliability of this type of subjective measure of performance. In addition, Pearce
et al. (1987) indicate a high correlation between subjective and objective measures
of performance in their sample, which consisted of firms and survey items that
were quite similar to those found in the current study. The results of confirmatory
factor analyses (CFA) using our own data also suggest that our measures of
performance are valid. For performance over the last 12 months, our CFA
revealed that both the confirmatory fit index (CFI) and the goodness of fit index
(GFI) were acceptable (0.93 and 0.86, respectively). For performance over the
prior 5 years, the CFI was 0.89 and the GFI was 0.86, indicating a reasonable fit
(Moorman, Blakely, & Niehoff, 1998). The internal reliability coefficients (Cron-
bach, 1951) for performance over the last 12 months were 0.93 (financial), 0.80
(innovation), and 0.76 (stakeholder). For historical performance, reliabilities were
0.89 (financial), 0.72 (innovation), and 0.67 (stakeholder). Inter-rater reliabilities
for performance over the last 12 months were 0.70 (financial), 0.85 (innovation),
and 0.71 (stakeholder). For historical performance, inter-rater reliabilities were
0.18 (financial), 0.71 (innovation), and 0.49 (stakeholder).
Environmental Dynamism. Environmental dynamism was measured us-
ing a scale developed by Miller and Friesen (1982). Responses were coded on a
7-point scale (1 ⫽ strongly disagree to 7 ⫽ strongly agree). Miller (1988) reported
a reliability of this measure of 0.59. To increase reliability, two additional
dynamism items were included, increasing the number of items in this scale to 7.
As shown in Table 3, exploratory factor analyses reveal that the seven dynamism
items comprise one distinct factor. The internal reliability coefficient of this
measure was 0.79, and the inter-rater reliability of the dynamism measure was
0.74. CFA suggests an excellent fit (CFI ⫽ 0.95, GFI ⫽ 0.94).
Firm Strategy. Firm strategy was measured using an amended form of
Miller’s (1988) scale, which consisted of three subscales: innovative differentia-
tion, marketing differentiation, and cost leadership. Miller (1988) reported Cron-
bach alphas (Cronbach, 1951) of these subscales as 0.64, 0.47, and 0.50, respec-
tively. Several items were added to Miller’s (1988) subscales in an attempt to
Table 3. Results of Exploratory Factor Analyses
Factor 1 Factor 2 Factor 3
A. Current performance items
1. Return on assets .91
2. Return on sales .92
3. Overall financial performance .80 .28
4. R&D outlays .64
5. Process innovations .71 .32
6. Product innovations .85
7. Employment growth/stability .28 .39 .45
8. Employee morale .33 .59
9. Customer relations .71
10. Supplier relations .60
Eigenvalue 2.58 1.95 1.64
B. Past Performance Items
1. Return on assets .84
2. Return on sales .84 .29
3. Overall financial performance .71 .41
4. R&D outlays .71
5. Process innovations .64
6. Product innovations .77
7. Employment growth/stability .31 .32 .46
8. Employee morale .62
9. Customer relations .27 .66
10. Supplier relations .61
Eigenvalue 2.25 1.80 1.77
C. Environmental dynamism items
1. Little need to change marketing practices .42
2. Slow product obsolescence .69
3. Competitors’ actions easy to predict .62
4. Consumer demand easy to predict .74
5. Production technology changes slowly .73
6. Technological changes easy to predict .60
7. Consumer demand is stable .51
Eigenvalue 2.73
D. Strategy items
1. We differentiate our products .85
2. We distinguish our products .83
3. We have major/frequent product innovations .77
4. We add features to our products .76
5. We use prestige pricing .56
6. We advertise extensively .50
7. We use market segmentation .47
8. Our focus is on cost minimization .68
9. We standardize products to lower costs ⫺.34 .72
10. We lengthen production runs to lower costs .51
11. We cut prices often .50
12. We analyze cost variances to determine cause ⫺.32 .49
13. We minimize advertising expenses .26
Eigenvalue 3.74 1.74
Values less than .25 have been omitted.
improve their reliability. As a result, reliabilities were 0.86, 0.52, and 0.46 for
innovative differentiation, marketing differentiation, and cost leadership, respec-
tively. Inter-rater reliabilities were 0.77, 0.56, and 0.57 for innovative differenti-
ation, marketing differentiation, and cost leadership, respectively. Although these
reliabilities are not as high as we had hoped, they are well within the range
recommended by Van de Ven and Ferry (1980) for broad constructs. Responses
were made on a 7-point scale (1 ⫽ we never use this strategy to 7 ⫽ we always
use this strategy).
As shown in Table 3, exploratory factor analyses suggest that the strategy
items comprise only two factors: one for differentiation and one for cost leader-
ship. However, Miller (1988) provided a discussion of the validity of, and the
distinctions among, the three strategy subscales used in this study. For a subset of
the firms in Miller’s (1988) study, two strategy professors read detailed descrip-
tions of the firms’ strategies and determined the extent to which each firm was
pursuing a given strategy. The conclusions of these two raters matched the ratings
given by respondents in approximately 90% of the cases, providing evidence of
construct validity. As a result, we have chosen to maintain the distinction between
innovative and marketing differentiation in our analyses. CFA revealed a mar-
ginal-to-poor fit (CFI ⫽ 0.71, GFI ⫽ 0.82).
Results
Means, SD, zero-order correlations, and estimated reliabilities are presented in
Table 4. In each case, reliabilities were calculated using coefficient alpha. The two
measures of outsourcing intensity were highly skewed. In both cases, log trans-
formations were conducted to normalize their distributions. Skewness for both
core and peripheral outsourcing intensity were reduced to within acceptable
limits.
Direct Effects of Outsourcing Intensity on Performance
Regression analyses determined the influence of outsourcing intensity on
financial, innovation, and stakeholder performance. In each case, the appropriate
type of previous performance was used as a control variable. Table 5 presents the
results of these tests. Linear combinations of the predictors, adjusted for the
number of independent variables, explained 29% of the variance in financial
performance, 39% of the variance in innovation performance, and 15% of the
variance in stakeholder performance. In each case, the majority of the variance
was explained by the prior performance control variable. Neither peripheral
outsourcing intensity nor core outsourcing intensity was a significant predictor of
any of the three types of current firm performance. Thus, Hypotheses 1 and 2 were
not supported, indicating that there is no direct, firm-level performance effect of
outsourcing intensity for the firms in this sample.
Moderating Effects of Firm Strategy and Environmental Dynamism
Firm strategy and environmental dynamism were proposed as moderators of
the outsourcing intensity-firm performance relationship and were tested with
780
Table 4. Descriptive Statistics and Correlations
Variable Mean SD 1 2 3 4 5 6 7 8 9 10 11 12
1. (Log) Peripheral outsourcing intensity .89 1.07
2. (Log) Core outsourcing intensity 1.23 1.23 .14
3. Cost leadership strategy 25.25 5.34 .13 .13 (.46)
4. Mktg. differentiation strategy 9.98 3.79 .11 .04 .09 (.52)
5. Innov. differentiation strategy 19.06 5.92 .05 .12 .18 .49*** (.86)
6. Environmental dynamism 32.25 7.17 ⫺.23* .03 ⫺.12 .19 .35*** (.79)
7. Prior financial performance 10.13 2.72 .07 ⫺.19 ⫺.00 .28** .21* ⫺.13 (.89)

8. Prior innovation performance 8.58 3.01 .10 ⫺.08 ⫺.08 .28** .53*** .20 .38*** (.72)
9. Prior stakeholder performance 14.08 2.97 ⫺.05 ⫺.16 ⫺.14 .06 .19 ⫺.13 .58*** .40*** (.67)
10. Current financial performance 10.31 2.97 .08 ⫺.13 .10 .29** .16 ⫺.18 .56*** .36*** .27** (.93)
11. Current innovation performance 9.32 3.01 .05 .02 ⫺.19 .30** .63*** .26 .29** .65*** .19 .30** (.80)
K.M. GILLEY AND A. RASHEED
12. Current stakeholder performance 14.78 2.60 .01 ⫺.07 .09 .10 .20 .11 .30** .14 .42*** .43*** .38*** (.76)
Coefficient alphas indicating estimated reliabilities are in parentheses on the diagonal.
*p ⬍ .05
**p ⬍ .01
***p ⬍ .001.
Table 5. Results of Regression Analyses for Performance Implications of

Outsourcing Intensity
Standardized Regression Coefficients
Firm performance
Financial Innovation Stakeholders
Predictors (n ⫽ 89) (n ⫽ 90) (n ⫽ 91)
Past performance .55*** .65*** .42***
Peripheral outsourcing .05 ⫺.01 .04
Core outsourcing ⫺.04 .08 .00
F (full model) 13.19*** 20.30*** 6.33***
R2 .32 .41 .18
Adj. R2 .29 .39 .15
df 3, 85 3, 86 3, 87
***p ⬍ .001.
moderated multiple regression. The results of these analyses are presented in

Tables 6 through 9.
Firm Strategy As a Moderator. Hypothesis 3 proposed that the effect of
outsourcing intensity on firm performance was dependent on firm strategy. More
specifically, a cost leadership strategy was hypothesized to reduce the negative
performance effects of outsourcing and to increase the positive effects. The
Table 6. Results of Regression Analyses for Moderating Effects of Cost Leadership

Strategy
Firm performance
Predictors (n ⫽ 89) (n ⫽ 90) (n ⫽ 91)
Peripheral outsourcing .03 .01 .04
Cost leader strategy .11 ⫺.14† ⫺.04
Peripheral outsourcing ⫻
cost leader strategy 1.33* ⫺.07 .87
Core outsourcing ⫻ cost
leader strategy ⫺.10 1.06* .50
F (full model) 8.15*** 12.27*** 3.72**
R2 .37 .47 .21
Adj. R2 .32 .43 .15
df 6, 82 6, 83 6, 84
†
p ⬍ .10
*p ⬍ .05
**p ⬍ .01
***p ⬍ .001.

Table 7. Results of Regression Analyses for Moderating Effects of Marketing

Differentiation Strategy
Firm performance
Predictors (n ⫽ 89) (n ⫽ 90) (n ⫽ 91)
Peripheral outsourcing .04 ⫺.01 .03
Core outsourcing ⫺.05 .08 ⫺.00
Mktg. diff. strategy .14 .17† .07
mktg. diff. strategy ⫺.09 .11 ⫺.29
Core outsourcing ⫻
mktg. diff. strategy ⫺.02 ⫺.05 .03
F (full model) 6.97*** 10.95*** 3.35**
R2 .34 .44 .19
Adj. R2 .29 .40 .14
df 6, 82 6, 83 6, 84
†
p ⬍ .1
**p ⬍ .01
***p ⬍ .001.
opposite was proposed for differentiation strategies. Therefore, the benefits of

outsourcing were proposed to be greater for cost leaders.
Cost leadership strategy interacted with peripheral outsourcing intensity
(␤ ⫽ 1.33, p ⬍ .05) to predict financial performance. The Chow test for all
interactions involving cost leadership strategy was significant (F ⫽ 2.44, p ⬍ .10).
In addition, cost leadership strategy interacted with core outsourcing (␤ ⫽ 1.06,
p ⬍ .05) to predict innovation performance. The Chow test was significant
(F ⫽ 2.90, p ⬍ .05). Finally, innovative differentiation strategy interacted with
peripheral outsourcing (␤ ⫽ 0.45, p ⬍ .10) to predict innovation performance.
This Chow test was also significant (F ⫽ 7.66, p ⬍ .001). Marketing differenti-
ation strategy was not a moderator of any of the relationships. Nevertheless, these
findings provide partial support for Hypothesis 3.
The results of these moderator tests suggest that the effects of outsourcing
are not the same for firms pursuing different strategies (see Figure 2, Panels A-C).
For cost leaders, there is a positive relationship between outsourcing and perfor-
mance. More specifically, for cost leaders, peripheral outsourcing has a positive
effect on financial performance, and core outsourcing has a positive effect on
innovation performance. The results were similar for innovative differentiators. A
strong positive relationship was found for innovative differentiators. In tandem,
these findings suggest that the benefits of outsourcing are more fully realized by
firms pursuing cost leadership or innovative differentiation strategies. The finding
for cost leaders is consistent with Hypothesis 3, whereas the finding for innovative
differentiators is the opposite of what was predicted.
Table 8. Results of Regression Analyses for Moderating Effects of Innovative

Differentiation Strategy
Firm performance
Predictors (n ⫽ 89) (n ⫽ 90) (n ⫽ 91)
Core outsourcing ⫺.05 .02 ⫺.02
Innov. diff. strategy .06 .40*** .12
innov. diff. strategy ⫺.29 .45† ⫺.41
innov. diff. strategy .15 ⫺.16 ⫺.06
F (full model) 6.69*** 16.34*** 3.67**
R2 .33 .54 .21
Adj. R2 .28 .51 .15
df 6, 82 6, 83 6, 84
†
p ⬍ .1
**p ⬍ .01
***p ⬍ .001.
Environmental Dynamism as a Moderator. Hypothesis 4 proposed that

the outsourcing intensity-firm performance relationship varies across firms in
different environments. Specifically, environmental dynamism was proposed to
enhance the positive effects of outsourcing on firm performance and neutralize the
negative effects. Therefore, the benefits of outsourcing were proposed to increase
with increasing dynamism. Results are shown in Table 9.
Environmental dynamism was found to interact with peripheral outsourcing
intensity (␤ ⫽ ⫺.81, p ⬍ .10) to predict stakeholder performance. The Chow test
showed that this moderator was significant (F ⫽ 2.58, p ⬍ .10). Contrary to
Hypothesis 4, it appears that the benefits of peripheral outsourcing to firm
performance actually decline in more dynamic environments. Conversely, the
findings of this study suggest that firms operating in relatively stable environ-
ments have more to gain from outsourcing. This is shown in Panel D of Figure 2.
Discussion
Performance Implications of Outsourcing
The performance implications of outsourcing decisions have been widely
debated. However, very little empirical research has been conducted to determine
whether and to what extent outsourcing influences firm performance. In the
current study, the impact of peripheral and core outsourcing intensity on financial,
innovation, and stakeholder performance was examined. The results indicate that
firms pursuing more intense outsourcing strategies do not experience significant,
direct performance impacts.
Table 9. Results of Regression Analyses for Moderating Effects of Environmental

Dynamism
Firm performance
Predictors (n ⫽ 89) (n ⫽ 90) (n ⫽ 91)
Dynamism ⫺.10 .12 ⫺.06
dynamism ⫺.38 ⫺.17 ⫺.81†
dynamism ⫺.47 ⫺.63 ⫺.42
F (full model) 7.17*** 11.02*** 4.06**
R2 .34 .44 .22
Adj. R2 .30 .40 .17
df 6, 82 6, 83 6, 84
†
p ⬍ .1
**p ⬍ .01
***p ⬍ .001.
This finding should not be interpreted as outsourcing has no effect whatso-

ever on firm performance. In the current study, performance was measured at the
firm level. Thus, outsourcing was found to have no direct impact on the financial,
innovation, or stakeholder performance of the firm overall. However, it is highly
likely that outsourcing has an effect on the individual functional areas in which it
occurs. For example, a firm’s manufacturing operations may experience cost
reductions as a result of outsourcing, or a firm may improve its customer service
by shifting it to an outside specialist organization. Therefore, individual functional
areas may experience performance improvements or declines as a result of
outsourcing. However, in the current study, no firm-level performance impact of
outsourcing was detected, leading to the conclusion that the firm-level benefits of
outsourcing may have been overstated in the past. The extent to which potential
functional-level performance effects from outsourcing are translated into firm-
level effects should be examined. Whether a functional-level performance im-
provement in, say, shipping improves a firm’s bottom line, or is offset by
transactions costs and other expenses, has not been examined in prior research.
This is a promising area that should be investigated.
In addition, the dangers associated with outsourcing may not be as large as
they appear. For example, Teece’s (1987) argument that relying on outsourcing
can lead to a loss of R&D competitiveness is not supported here, because
outsourcing intensity did not have a significant negative effect on innovation
performance. Also, the danger of eventual competition from suppliers and other
dangers associated with outsourcing may be exceptions to the rule, rather than the
Figure 2
norm. However, these dangers of outsourcing are long-term and may not have
been adequately captured in this research.
Moderators of the Outsourcing-Performance Relationship
The results of this study indicate that the influence of outsourcing on firm
performance is not the same for firms following different strategies or operating
in different environments. Although outsourcing had no significant direct effect
on firm performance, it was involved in several significant interactions with
strategy and dynamism to predict performance.
Firm strategy was found to moderate the relationships between both periph-
eral and core outsourcing intensity and financial and innovation performance.
Specifically, outsourcing was positively related to performance for firms pursuing
a cost leadership strategy and negatively related to performance for firms that
were not. Furthermore, outsourcing was positively related to performance for
innovative differentiators and negatively related to firms that were not pursuing
innovative differentiation strategies. The finding that companies vigorously pur-
suing cost leadership strategies have more to gain from outsourcing is intuitively
appealing. As predicted, by outsourcing tasks, cost leaders may be able to
incrementally lower their costs, thereby improving their cost position relative to
their industry rivals. The finding that innovative differentiators gain from out-
sourcing is also interesting. Innovative differentiators that outsource a higher
portion of their peripheral activities were found to achieve higher levels of

innovation performance. In other words, by outsourcing their peripheral tasks and
focusing their efforts on more “innovation-enhancing” activities, firms pursuing
an innovative differentiation strategy are able to become better innovators.
The effect of outsourcing on firm performance also varied with differing
levels of environmental dynamism. In very stable environments, stakeholder
performance was positively related to a firm’s level of peripheral outsourcing. The
opposite was found for firms operating in highly dynamic environments. These
results are contrary to our hypothesis. One reason for this finding may be that the
transaction costs associated with negotiating, monitoring, and enforcing outsourc-
ing arrangements increase in more dynamic environments. In addition, rapidly
changing technologies may allow supplier firms, which specialize in developing
and/or implementing a particular technology or process, to capture a higher
portion of the economic rents generated by the outsourcing agreement. In other
words, in rapidly changing environments, powerful suppliers with specialized
skills may be able to exert higher levels of bargaining power over outsourcing
firms. This is the case especially when the number of suppliers is limited or when
the outsourcing firm’s bargaining power declines as a result of its decreasing
ability to reinternalize the outsourced activity (because of dramatic shifts in
technology, for example). Thus, although certain benefits of outsourcing may
increase in more dynamic environments, there are increasing costs associated with
outsourcing in those environments that may offset the benefits. Therefore, firms
outsourcing in more dynamic environments must be aware that the full benefits of
outsourcing may not be realized. In fact, firm performance may actually decline.
Limitations and Suggestions for Future Research
This study has several limitations. First, the generalizability of this study’s
findings may be limited. Although the sample was representative of the population
of interest based upon firm size and industry type, there is a striking lack of
representativeness of firms in various stages of industry development and with
varying levels of unionization. There were no firms in introduction-stage indus-
tries and only one in a decline-stage industry. Also, less than 6 percent of the
sample had any unionized employees. Thus, the outsourcing behavior of firms in
either the youngest or most mature industries was not examined, nor was the
outsourcing of unionized firms. In addition, firm size may be an issue. It is
conceivable that larger firms outsource more activities. Further, smaller firms
might outsource different activities than large ones, given that their skill base and
core competencies are very different. Thus, extremely large or extremely small
firms may have performance implications of outsourcing that conflict with this
study’s findings. Finally, because all of the firms in the sample were manufac-
turers, generalizing the findings to service firms may be difficult. It is possible that
the pattern of outsourcing may be different for service firms than it is for
manufacturers, because service industries are characterized by less tangible out-
puts and simultaneous consumption and production (Boddewyn, Halbrich, &
Perry, 1986). Future research should attempt to gather outsourcing information
from firms in introduction- and decline-stage industries, as well as from unionized
firms, those in service industries, and those with very few or very many employ-
ees.
Another potential limitation of this study is common method bias. This is a
general criticism of survey research, because the independent and dependent
constructs are often measured entirely with self-reported data (as was the case
here). However, common method bias may not be as much of a limitation as once
thought. The reason is that, although common method bias inflates zero-order
correlations, it also increases the shared variance among the independent vari-
ables. This makes it more difficult to find unique, significant beta weights. Also,
because common method bias is a main effect (meaning that it only inflates the
zero-order correlations), it does not inflate the likelihood of finding moderator
variables. This reduces the chance that common method bias had an important
effect on the conclusions of this study.
An additional limitation of this study concerns our measure of outsourcing.
Specifically, our measure, although it asked respondents to indicate the percentage
of the value of each activity being supplied by an outside firm, is fundamentally
a perceptual one. Outsourcing research may be advanced through the development
of a more objective measure of a firm’s reliance on outsourcing. One potential
approach to doing so is to collect information on the product level, and then to
aggregate the firm’s various product-level outsourcing initiatives into a firm-level
measure. Nayyar (1993) noted that business-level and product-level strategic
issues can be quite different within a firm, and we believe that a more fine-
grained, product-level approach to outsourcing research is needed. Objective data
are likely available by product and would be invaluable in assessing the perfor-
mance implications of outsourcing strategies.
Another potentially important avenue for future research on outsourcing is
the investigation of “fit” among firms’ outsourcing intensities, business-level
strategies, and environments. It is quite likely that certain levels of outsourcing
intensity are best suited for particular combinations of generic strategy and
environmental dynamism. In the current study, however, we were unable to
empirically pursue this line of inquiry because of our limited sample size. Power
analyses (Cohen, 1988) indicated that our sample was much too small to ade-
quately test the effects of an outsourcing-environment-strategy fit on performance.
This area of exploration may yield results that greatly enhance mangers’ abilities
to formulate and implement successful outsourcing strategies.
Because outsourcing strategies and their performance implications evolve
over time, future research should be directed toward collecting longitudinal data.
For example, in the past, one of the strongest arguments against outsourcing was
that it transfers critical knowledge to supplier firms. This takes many years to
develop and may be examined more effectively through longitudinal research.
Finally, the relationship between outsourcing and vertical integration should
be examined. To the extent that outsourcing can reduce a firm’s involvement in
successive stages of production, the effects of outsourcing on performance should
be similar to those of vertical integration on performance. As discussed above, our
measure of outsourcing is similar to Harrigan’s (1984) conceptualization of
vertical integration. As such, our research represents an initial attempt to examine
the outsourcing-performance relationship within a vertical integration framework.

Our findings suggest that reductions in integration through outsourcing, at least
for the firms in our study and the types of activities examined, may not have
significant, direct effects on performance. This is interesting in light of the
findings of D’Aveni and Ravenscraft (1994) and Rumelt (1974, 1982), who
suggested that vertical integration has a direct effect on performance. However,
the exact nature of the outsourcing-vertical integration relationship has not been
the subject of rigorous examination. More research is needed to better understand
how outsourcing fits with the vertical integration literature, as well as the larger
body of strategic management knowledge.
Conclusion
This study has attempted to determine the performance implications of
outsourcing strategies. Although no direct effect of outsourcing on performance
was detected, outsourcing interacted with firm strategy and environmental dyna-
mism to predict performance. Our findings suggest that the benefits of outsourcing
may be more fully realized by firms pursuing cost leadership and innovative
differentiation strategies. Furthermore, firms operating in relatively stable envi-
ronments may also achieve performance increases through outsourcing. Future
research should attempt to further specify the effects of outsourcing on perfor-
mance by examining the outsourcing behavior of a broader sample of firms,
including those in introduction- and decline-stage industries, firms with high
levels of unionization, and service firms.
References
Barney, J.B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99 –120.
Barney, J.B. 1997. Gaining and sustaining competitive advantage. New York: Addison-Wesley.
Bettis, R., Bradley, S., & Hamel, G. 1992. Outsourcing and industrial decline. Academy of Management
Executive, 6 (1): 7–22.
Boddewyn, J.J., Halbrich, M.B., & Perry, A.C. 1986. Service multinationals: Conceptualization, measurement,
and theory. Journal of International Business Studies, Fall: 41–57.
Cameron, K. 1978. Measuring organizational effectiveness in institutions of higher education. Administrative
Science Quarterly, 23: 604 – 632.
Chakravarthy, B. 1986. Measuring strategic performance. Strategic Management Journal, 6: 437– 458.
Cronbach, L.J. 1951. Coefficient alpha and the internal structure of tests. Psychometrika, 16: 297–334.
Cohen, J. 1988. Statistical power analysis for the behavioral sciences. Hillsdale: Lawrence Erlbaum Associates.
D’Aveni, R., & Ravenscraft, D. 1994. Economies of integration versus bureaucracy costs: Does vertical
integration improve performance? Academy of Management Journal, 37 (5): 1167–1206.
Dess, G.G., Ireland, R.D., & Hitt, M.A. 1990. Industry effects and strategic management research. Journal of
Management, 16: 7–27.
Dess, G.G., Rasheed, A., McLaughlin, K., & Priem, R. 1995. The new corporate architecture. Academy of
Management Executive, 9 (3): 7–20.
Dess, G.G., & Robinson, R.B., Jr. 1984. Measuring organization performance in the absence of objective
measures: The case of the privately-held firm and the conglomerate business unit. Strategic Management
Journal, 5: 265–273.
Dierickx, I., & Cool, K. 1989. Asset stock accumulation and sustainability of competitive advantage. Manage-
ment Science, 35: 1504 –1511.
Dillman, D.A. 1978. Mail and telephone surveys: The total design method. New York: Wiley.
Ford, J.K., MacCallum, R.C., & Tait, M. 1986. The application of exploratory factor analysis in applied
psychology: A critical review and analysis. Personnel Psychology, 39: 291–314.

Grant, R.M. 1991. The resource-based theory of competitive advantage: Implications for strategy formulation.
California Management Review, 33 (3): 114 –135.
Greer, C.R., & Ireland, T.C. 1992. Organizational and financial correlates of a “contrarian” human resource
investment strategy. Academy of Management Journal, 35: 956 –984.
Harrigan, K.R. 1984. Formulating vertical integration strategies. Academy of Management Review, 9(4):
638 – 652.
Harrigan, K.R. 1985. Exit barriers and vertical integration. Academy of Management Journal, 28(3): 686 – 697.
Hatten, K.J., Schendel, D.E., & Cooper, A.C. 1978. A strategic model of the U.S. brewing industry. Academy
of Management Journal, 21: 592– 610.
Hill, C.W.L., & Jones, G.R. 1995. Strategic management: An integrated approach. Boston: Houghton Mifflin.
Kotabe, M. 1989. “Hollowing-out” of U.S. multinationals and their global competitiveness: An intrafirm
perspective. Journal of Business Research, 19: 1–15.
Kotabe, M. 1990. The relationship between offshore sourcing and innovativeness of U.S. multinational firms: An
empirical investigation. Journal of International Business Studies, 3: 623– 638.
Kotabe, M., & Murray, J. 1990. Linking product and process innovations and modes of international sourcing
in global competition: A case of foreign multinational firms. Journal of International Business Studies, 3:
383– 408.
Kotabe, M. 1992. Global sourcing strategy: R&D, manufacturing, and marketing interfaces. New York:
Quorum.
Kumar, N., Stern, W., & Anderson, J.C. 1993. Conducting interorganizational research using key informants.
Academy of Management Journal, 36: 1633–1651.
Lei, D., & Hitt, M. 1995. Strategic restructuring and outsourcing: The effect of mergers and acquisitions and
LBOs on building firm skills and capabilities. Journal of Management, 21(5): 835– 859.
Levy, D.L. 1995. International sourcing and supply chain stability. Journal of International Business Studies,
26(2): 343–360.
Loh, L., & Venkatraman, N. 1992. Determinants of information technology outsourcing: A cross-sectional
analysis. Journal of Management Information Systems, 9(1): 7–24.
Markides, C., & Berg, N. 1988. Manufacturing offshore is bad business. Harvard Business Review, September-
October: 113–120.
McDougall, P., & Robinson, R.B., Jr. 1990. New venture strategies: An empirical identification of eight
‘archetypes’ of competitive strategies for entry. Strategic Management Journal, 11: 447– 467.
Miller, D. 1988. Relating Porter’s business strategies to environment and structure: Analysis and performance
implications. Academy of Management Journal, 31: 280 –308.
Miller, D., & Friesen, P. 1982. Innovation in conservative and entrepreneurial firms: Two models of strategic
momentum. Strategic Management Journal, 3: 1–25.
Moorman, R.H., Blakely, G.L., & Niehoff, B.P. 1998. Does perceived organizational support mediate the
relationship between procedural justice and organizational citizenship behavior? Academy of Management
Journal, 41: 351–357.
Nayyar, P.R. 1993. On the measurement of competitive strategy: Evidence from a large multiproduct U.S. firm.
Academy of Management Journal, 36: 1652–1669.
Pearce, J.A., Jr, Robbins, D.K., & Robinson, R.B., Jr. 1987. The impact of grand strategy and planning formality
on financial performance. Strategic Management Journal, 8: 125–134.
Peteraf, M.A. 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management
Journal, 14: 179 –191.
Porter, M.E. 1985. Competitive advantage: Creating and sustaining superior performance. New York: Free
Press.
Prahalad, C.K., & Hamel, G. 1990. The core competence of the corporation. Harvard Business Review, 68(3):
79 –93.
Priem, R.A., Rasheed, A., & Kotulic, A.G. 1995. Rationality in strategic decision processes, environmental
dynamism, and firm performance. Journal of Management, 5: 913–929.
Quinn, J.B. 1992. Intelligent enterprise: A knowledge and service based paradigm for industry. New York: Free
Press.
Quinn, J.B., Doorley, T.L., & Paquette, P.C. 1990. Technology in services: Rethinking strategic focus. Sloan
Management Review, 31(2): 79 – 87.
Roth, K. 1992. International configuration and coordination archetypes for medium-sized firms in global
industries. Journal of International Business Studies, 23(3): 533–549.
Rumelt, R. 1974. Strategy, structure, and economic performance. Cambridge, MA: Harvard University Press.
Rumelt, R. 1982. Diversification strategy and profitability. Strategic Management Journal, 3: 359 –370.
Teece, D. 1987. Capturing value from technological innovation: Integration, strategic partnering, and licensing
decisions. In B. Guile & H. Brooks (Eds.), Technology and global industry: 65–95. Washington: National
Academy Press.

Van de Ven, A., & Ferry, D. 1980. Measurement and Assessment of Organizations. New York: Wiley.
Venkatraman, N. 1989. Beyond outsourcing: Managing IT resources as a value center. Sloan Management
Review, 38: 51– 64.
Venkatraman, N., & Ramanujam, V. 1986. Measurement of business performance in strategy research: A
comparison of approaches. Academy of Management Review, 11: 801– 814.
Willard, G., & Savara, A. 1988. Patterns of entry: Pathways to new markets. California Management Review,
Winter: 57–76.

Making More by Doing Less-An Analysis of Outsourcing and Its Effects On Firm Performance

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Making More by Doing Less-An Analysis of Outsourcing and Its Effects On Firm Performance

Hochgeladen von

Copyright:

Verfügbare Formate

Journal of Management

2000, Vol. 26, No. 4, 763–790

Making More by Doing Less: An Analysis

This study empirically examined the extent to which outsourcing of

Organizations are increasingly turning to outsourcing in an attempt to enhance

However, outsourcing may also occur through abstention. Outsourcing need

In addition, as suppliers gain knowledge of the product being manufactured,

Characteristics of Outsourcing Strategies

In addition, it is proposed here that each of these outsourcing strategies is not

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

H1: Peripheral outsourcing intensity has a positive effect on firm

Core Outsourcing. Firm performance may also be influenced by the

H2: Core outsourcing intensity has a negative effect on firm perfor-

Moderating Relationships. The relationships between the two types of

through peripheral outsourcing are less significant to differentiators, because these

H3: A firm’s business-level strategy moderates the relationship be-

Environmental Dynamism. Dynamism of the organization’s external en-

Furthermore, when new technologies emerge, outsourcing firms may switch

H4: Environmental dynamism moderates the relationship between

Sample and Sampling Procedures

Table 1. Company and Respondent Information

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

Table 2. List of Activities Provided to Respondents

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

Table 5. Results of Regression Analyses for Performance Implications of

moderated multiple regression. The results of these analyses are presented in

Table 6. Results of Regression Analyses for Moderating Effects of Cost Leadership

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

Table 7. Results of Regression Analyses for Moderating Effects of Marketing

opposite was proposed for differentiation strategies. Therefore, the benefits of

Table 8. Results of Regression Analyses for Moderating Effects of Innovative

Environmental Dynamism as a Moderator. Hypothesis 4 proposed that

Table 9. Results of Regression Analyses for Moderating Effects of Environmental

This finding should not be interpreted as outsourcing has no effect whatso-

portion of their peripheral activities were found to achieve higher levels of

the outsourcing-performance relationship within a vertical integration framework.

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

JOURNAL OF MANAGEMENT, VOL. 26, NO. 4, 2000

Das könnte Ihnen auch gefallen