Robert A. Goehlich
Make-or-Buv Oecisions in Aerospace Organizalions
GABLER EDITION WISSENSCHAFT
Robert A. Goehlieh
Make-or-Buy Decisions in Aerospace Organizations Essays on Strategie Effieieney Improvements
With a foreword by Prof. Dominique Demougin. Ph.D.
GABLER EDITION WISSENSCHAFT
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Dissertation European Business School, International University Schloss Reichartshausen. Oestrich-Winkel, 2008
01540
1st Edition 2009 All rights reserved © Gabler I GV'N Fachverlage GmbH, Wiesbaden 2009 Editorial Office: Claudia Jeske I Britta Göhrisch-Aadmacher Gabler is parl of the specialist publishing group Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmilted, in any form or by any means, electronic, mechanical. photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Aegistered and/or industrial names, Irade names, trade descriptions etc. cited in this publication are part of the law tor trade-mark protection and may not be used free in any form or by any means even if this is not specitically marked. Cover design: Aegine Zimmer, Oipl.-Oesignerin, Frankfurt/Main Printed on acid-free paper Prinled in Germany ISBN 978-3-8349-1530-6
Forcword Roben A. Gochlich's doctorallhcsis analyzes Ihc incfficiencies in today's organillllions and Ihe polenlial explanalions for them. Aeeording 10 the thesis. Ihese ineOicieneics may bc rooted in corporale gOllcmanec. at leaSI panly as a rcsult ofpolilieal considcrations. as lI'ell as for reasons rclattd 10 the individuals involved and 10 globali7..ation. Spccifieal1y. the thcsis focuscs on Ihe make-or-buy dccision lI'ithin aerospaee organizations. The sceond ehapter olTers an eXlensive overview ol"the eurrcnl aerospaee scelor lrum an cconomic point 01" vie\\', The chaplcr has bencfited from Ihc background 01" lhc authoT. who has an exlensive 1I'0rk expcrienee lI'ilh JAXA. NASA and EADS. Tlte lltird ehapter presents the outsourcing strategies that hallC been employed by spacc organiwlions in Europc. tltc US and Japan. Tltc cltaptcr includcs valuable information with respcet 10 existing thcories on lhe makc-or-buy dccision and its interaelion lI'ith rcspcct to Ihc acrospace induSll)' in Ihc "big lltrec" rcgions of tltc world. Tlte lilerature used is weil explained and ils rclationsltip to dccisions of organi7..alions in lhc spcci/ie conlcxt analyzcd is well dcscribed. Thc fourth chapler dcscribes U Iltcory-bascd dL'Cision process and suggcsts a \'cT)' useful 1001 for guiding managemenl in ils makeoQr-buy dL'Cision process. The tool is designcd to induce Iransparency in a modular fashion, MClhodologically, lhe chapter presenls scquenlially each of the arguments related 10 makc vcrsus buy: Ihe pros and eons of IIcnical integration and outsourcing. Eaeh of Ihe tool' s dimensions Itas a Ihorouglt tltL'ürclieal foundalion with II solid underpinning in Ilte exisling lilCnllurc. The eomprehcnsillc method cmploycd by Ihis 1001 guarantces Ihat management will bc forccd 10 lhink Ihrough each of the possiblc pros and L'üns of olilsoureing IICrsUS intcgration. Ineluding argumenls for or againsl outsourcing in llte 1001 is simplifiL'd bccause lhe tool is SlruClurcd in modulcs, Although dcve10pcd for Ihc acrospace induSII)'. usc ofthc 1001 is by no means reslrieled 10 tllat illdustT)'. Overall. the thesis is weil written and prollides a very lIseful management tool for guiding Iltc nmke-or-buy dccision proeesscs in organiwlions. Prof. Dominiquc Dcmougin. Ph.D. 1·lead of Depanment of Lall'. Govemanee & Economics Emopcan Business School
Acknowlcdgements I would likc to thank my doctoral supcrvisor, Prof. Dominiquc Demougin of thc Europcan Business School, Dcpanmcnt of Law, Govcmanec & Economics, for the chance to pursue my doctoral studies under his supervision. His advice and guidance for finding the "path to bccoming an cconomist"' over the last years, starting from our first mccting in summer 2004, combined with the freedolll to develop creativlty in these studies, has been a very stimulating combination to me. My acknowledgement gocs to Prof. Andre Schmidt, field of international cconomic policy at the Europcan Business School, for his ideas, time and efron as a sccond advisor. His view ofeconomic policy in our meetings has given me a unique chance to incorporate them within my thesis. I am appreciative to the chairman of my doctoral eommil1ce, Prof. Hartmut Kreikcbaum, fic1d of business ethics and the membcrs, Prof. Stefan Waller and Prof. Michael Hcnkcl, field of supply chain management at the European Business School for accepling my thesis and the time spent on evaluations. I wish to thank Prof. Rose Rubin, University of Memphis, for helpful comments to the charactcristics ehapter. Many thanks go to Dr. Vcikko Thicle, University of British Colmnbia, for reviewing the case study chapter. Prof. Ralf Bebenroth of Kobe Univer· sity is the co-all1hor ofthis slUdy. I am very grateful for the opponunity to conduct research on this topic with him and for many fruitful discussions as a good friend. Valuable comments from Prof. Benjamin Bental of the University of Haifa on the make-orbuy decision chapter are highly appreciated. I would like to express my sincere thanks to my colleagues Dr. Sabine Altiparmak, Gudrun Fehler, Petra Ernst and Clemens Buchen of the Europcan Business School for their valuable comments on my thesis and research col1oquiutn regarding content and language, for being so supportive, and for providing a friendly working climate in the dcpartment. I would also like
{O
thank the panicipants at the 4th International Conference on
Economics and Globalizalion (EcoTrend) 2007 held in Targu Jiu, the International Conference on Applied Business Research (lCABR) 200S held in Accra and the ISth International Conference of International Trade & Finance Associalion (IT&FA) 2008 held in Lisbon for Iheir comments and suggestions.
viii
Aeknowledgements
My thanks to my fonner colleagues, Prof. Anja Sehöttner, Dr. Ria Steiger, Dr, Jcnny Kragl and Dorothee Schneider of the 2007 disbanded Walther Rathenau Institute for Organizmion Theol)' at Humboldt University at Berlin for the niee working elimate and answering evel)' silly question a new eeonomist eould have. Last, and most importantly, I would like to thank my parents, Rosemarie and Lothar Goehlieh, withOllt whom I would never have been able to aehieve so mlleh and who taught me to stay the course even when it is vel)' challenging. In panicular, I want to thank my girlfriend Naoko Ogawa, my parcnts and my sister Anja Wollenberg, for being so patient; the leisure time we spent together was definilely too Iillie in the last years. This research has been supported by the Alcxander von Humboldt Foundation, which is gratefully acknowlcdgcd, The views reported in this thesis are those ofme alone, and not those of any institution. All eITors and omissions, whieh may unwittingly rcmain, are the sole rcsponsibility of mc.
Roben A. Gochlich
Abstract Today's organizmions sufTer from ineffieiencies that may oceur for any number ofreasons. lnemeieneies may: bc rootcd in the eorporate govemance of an organization, result from politieal reasons, be due to individual reasons, and result from globalization as weIl. This study focuses on the strategie aspeets of deeision-making within aerospace organizations, eoneentrating on the make-or-buy deeision in an atlempt to examine organizational efficiencies. The present study ineludes an understanding of the existing or· ganizational structures of aerospace enterprises, and whi1c searehing for emeieneies, diseusses strategies to avoid inefficiencies and investigates the potential for implementing reeommendations into praetiee. The main rcsult ofthe study is the fonnation ofa process, in the fonn ofa eomputerizcd tool, that handles approximalely 50 propositions of make-or-buy decisions, systemmieally eonneeted to strategie objeetives, and organizational, produet and environmental ehar3eteristies. The strength of this process lies in its ability to eover the entire spcetrum of make-or-buy (the continuIIm from in-hollse to blly-ofT-thc-shelf) in order to suppon deeision-makers with holistie recommcndations. This proeess allows one to detennine the kind of organi7.ational arehiteeture that is best suited 10 a speeified activity.
The resuhing tool is applicd tO four ease studies taken from the aerospaee seetor: (A) Copy maehine usage (as a referenee), (B) Aireraft final assembly produetion, (C) Satellite rocket launeh operation and (0) Spaee tourism rocket development. In three of the four eases, the make-or-buy deeision [hat is reeommended by the tool mirrors instinctual, expcrienee-based eonclusions. lt is also shown that a well eonsidercd make-or-buy deeision approach is paramollnt to overcoming opcrational ineffieiencies for aerospaee organi7.ations. Keywords:
Aerospaee Organization, Aviation, Corporate Govemanee, Game Theory, Make-or-Buy Decision, Outsoureing, Strategy, Spaee, Venieallntegration
JEL Classifieation:
L25, 023, L93, C72, M55
Statisties:
136 pages, 23 figures, 15 tables, 182 rcferenees
Contaet:
E-mail:
[email protected] Table of Contents Foreword
v
Acknowledgemcn Is
\'ii
Abstract
ix
Tablc ofConlents
xi
list uf Figures and Tables
xiii
list or Abbrevialions
X\'
Definitions ...•.........•........................•.........................••......•..................................•......• x\,ii
2
3
Inlroduclion
1
1.1
1
Motivation
1.2
Structure and Analylieal ProceduTC
1.3
Thc Need for Effieiency, Organizmions and Multinational Acting
2 .. 3
Economic Characleristics or Aerospace Organizalions 2.1
lntroduction
2.2
Characleristics
7 7
. , , ,.. , , , ,..
... , , , ,.. , ,8
2.2.1
General....
2.2.2
Markel Struclllrc
2.2.3
Products .......
2.2.4
Contractor Classilicalion
2.2.5
lndustry Sizc
11
2.2.6
Organizational Arehiteeture
13
2.2.7
Pcrfonnanec
2.3
Diseussion...
2.4
Rcsults .......
.
8 9
,..
., , 9
, , ,....
.. 10
.., ,
20 ..
.... 21 ...23
Oulsourcing Stralegies in Europe, USA and Japan: A Case or Space .,.........••.•.. 25
Organizations 3.1
lnlroduction
, , , , , , , , ,..
.
3.2
Theorctical Approaches for Outsourcing.......
,
..
, , ,
, ,
25 27
3.2.1
General
27
3.2.2
Transaetion Cost Theory
3.2.3
Principal.Agent Thcory...
...28
3.2.4
The Human ResouTCc-bascd View
... 29
27
Tabte ofContents
Xll
3.3
3.4
Case Study of Spaee Organi7..ations ..... 3.3.1
General
4
.
30
3.3.2
Europe
32
USA
33
3.3.4
Japan
34
Diseussion
.... 35
General........................
..
35
3.4.2
Understanding of Coherenees
3.4.3
Alternative Theories
.
36
3.4.4
Limitations..
..
36
Results
37 ..37
Development of a Make-or-BlIY Decision-supporting Proeess
39
4.1
lntroduetion
39
4.2
The Proeess.
....41
4.2.1
General
....41
4.2.2
Qualitative Assessment.............
4.23
Quantitative Assessment...
43
4.4
4.5 5
,.............
3.3.3
3.4.1
3.5
30
.. .. .. ,
Application ofProeess 43.1
General................................
43.2
Case Studies
433
Results
45 72
..
78
..
78 ... 79 .
,
80
Diseussion
87
4.4.1
General
87
4.4.2
Choiee of ltems for "Settings" Submodule
4.4.3
Sensitivity Analysis
. 88 .... 89
87
4.4.4
Infonnal Versus Fonnal Statements.
4.4.5
Comparison With Other SlUdies
90
4.4.6
Limitations
92
Results
Concillsion
..
93 95
References ..•................................................................•........................................•........ 99 Abollt the Allthor
117
List of Figures and Tablcs Figure I:
Research Strueture
2
Figure 2:
Investigmcd Charaeteristies of Aerospaee Organizations
8
Figure 3:
Nurnber of Manufacturing Plants and Associatoo Revenue for the US Aerospaee Industry (US Department ofCommerce, 1995)
Figure 4:
Dircct Labor Requirement and Annual OutpUl for Lockheed LIOll Aircraft Production (Benkard, 2000)
Figure 5:
12 16
.
Vision Versus Realit)' ofSpace Shuttle Operation (NASA, 2000b)
.. 18
Figure 6:
Illustration of Organi7Altionai Architectures
... 39
Figure 7:
Overview ofthe Make-or-Bu)' Oecision-supporting Process
.42
Figure 8:
Settings Submodule....................
..42
Figure 9:
Integration Pros Submodule
Figure 10: OUlsourcing Pros Submodule.
.43 .
Figure 11: Results Submodule.
.44 ..
.45
Figure 12: Exampleofa Vertical Integration Proposition
.45
Figure 13: Potential-probability Matrix for Vcrtical Integration Figure 14: Pmential.probability Matrix for Outsollrcing.............
73 .
75
Figllre 15: Integration and Outsourcing Sllb-bcnefit for Each Setting ltern (ResOl Output Mask)...
..78
Figllre 16: Application ofthe Makc-or-Bu)' Decision-supporting Process
80
Figllre 17: Extract frorn the MoB-Tool
81
Figure 18: Sub-benelit for Case Stud)' "(A) Copy Machine" (Rcs02 Output Mask)
84
Figure 19: Sub-bcnelit for Case Study "(8) Aireraff' (Rcs02 Output Mask)
84
Figllre 20: Sllb·benelit for Case Study "(C) Satellite" (Res02 Output Mask)
85
Figurc 21: Sub-benelit for Case Study "(0) Space Tourism" (Rcs02 Output Mask)
85
Figure 22: Outsoureingllntcgration Total Bcnefit Ratio (Rcs03 Output Mask)
86
Figurc 23: Rcsult ofSensitivity Analysis
.
89
List ofFigures and Tables Table I:
Typieal Aviation Market Strueture (marked in gray)
Table 2:
Typieal Spaee Market Strueture (marked in gray)
"
,,,.,
9 9
Table 3:
PrimaT)' Aerospaee Produets
Table 4:
Classifieation of Aerospaee Contractors
... I0
Table 5:
Plant Size Distribution ofUS Aviation Industry (modified from: US
Table 6:
Plant Size Distribution ofUS Spaee Industry (modified from: US
Table 7:
Aerospaee Companies Ranked by Revenue (based on: Anselmo, 2005)
20
Table 8:
Comparison of Space Market Structures for Commercial Launehers
31
Table 9:
Ycnical Integration Propositions
11
Depanmenl of Commeree, 1995)
.
Dcpanment ofCommcrcc, 1995)
Table 10: Outsourcing Propositions ....... Table 11:
.
" " . ".........
13
73 .. 74
Integration Pros Submodule ..
Table 12: Olltsourcing Pros Submodule
13
... 76 .
77
Table 13: Scttings Submodu1c (Input Mask 113)
82
Table 14: Settings Submodulc (Input Mask 2/3)
82
Table 15: Settings Submodule (Input Mask 313)
... 83
List of Abbrcviations ave.
average
BS
bmion US dollars
BERI
Business Environment Risk Index
BLS
Bocing Launch Services
eee
China Compulsory Certifieation
CEO
Chief Exeeutive Offiecr
CNES
Ccntrc National d'Etudes Spatiales
CSA
Chinese Spaee Ageney
EADS
European Aeronautic Defense and Spaee Company
ESA
European Space Agency
LU
European Union
FFP
Finn-Fixed Priee eontract
FPIS
Fi:<ed-Price Incentive Successive targets contract
GECAS
General Electrie Commcrcial Aviation Services
GDP GPS
Gross Domestie Product
GTO
Geostationary Transfer Orbit
[H[
Ishikawajima Heavy lndustries
ILFC
International Lease Finanee Corporation
IR&D
Investor Relations & Dcvelopmcnt
ISAS
Institutc of Space and Astronautical Science
[SO
International Organization for Standardi7.ation
ISRO
Indian Space Research Organization
ISS
International Space Station
JAXA
Japan Aerospace Exploration Ageney
KP[
Key Perfonnance IndicalOr
LEO
Low EaJ1h Orbit
LSE
Large Scale Enterprise
MS
million US dollars
Global Positioning System
MH[
Mitsubishi Heavy lndustries
"
number of units built
xvi
List of Abbrcviations
"0.
number
NAL
National Aerospace Laboratory of Japan
NASA
National AeronaUlics and Space Administration
NASDA
National Space Development Agency of Japan
NPV
Net Present Value
P R&D
1caming rate
RLV
Reusable Launeh Vehicle
Research and Development
RSA
Russian Spaee Ageney
SRB
Solid Rocket Booster
SSME
Spaee Shullle Main Engine
wlo
without
Definitions The foJlowing definitions muy be uscful for undeTStunding the teehnieal tenllS used in the present smdy. All numbeTS, physieul units und dutes refer 10 metric systems und ure in [uropeun style unless otherwise specified. Thc fiscul yeur of dollar vulues is the yeur ofthc referenee·s publication unlcss otherwisc specified.
[xpendable Launch Vchicle A vehicle that can only be uscd once, that is e;>;pendcd (bumt up) after a single use. All conventional TOckets fall under this category. Reusable Launch Vehiele
A vchicle thut can be used multiple times. Note that the
Space Shuttle is not atme Rcusuble Launch Vehicle (RLV) because it rcquircs a new fuel tank for each launch. Orbital Space Flight
The spacccraft is able tO rcueh and maintain Low Eanh Orbit (LEO), which is normally at an altitude of abollt
200 km. Space Tourism
Spuce tOllrism is the term broadly applicd to the concept of paying customers trnveling beyond Eanh 's atmosphere.
Suborbital Space Flight
111e spacceraft is able to reaeh astronam ahitude, but is not trnveling at a speed fast enough
{Q
maintain an Eanh orbit.
The total flight will last about Y, hour or maximal 3 hOUTS if using a curricr airernft dcpending on the type of vchicle and flight profile used.
Introduction This chaplcr aims to provide an overview of lhe motivalion, slmeture and analytieal proeedure ofthe present research series. Funher, the ehapler bricf1y introduces the need for efficiency, the need for building organizations as weil as the need for thinking and aeting on a mullinationallcvel. These are pivolal topies found in alJ thrce studics ofthc present research series.
1.1
Motivation
Thc primary purpose ofthis research series is to find strntegies Ihat promise to incrcasc the efficiencies of aerospaee organizations. Research in thc ficld of "cfficieney of organizations" is immense, but mostly disregards inefficiencies that occur uniquely for aerospaec organizutions. Economic literaturc typically addresscs the make-or-buy dccision with rcgard to only a fcw industry scctors (e.g., eoal, oil, gas, elcctric, agrieuhure, IT business, aUlomobile, lTUcking), bul seldom broaches the aerospace sector and docs not yel address lhc spaee scetor as a eenlral topie. Howcver, aerospace organizations offer much potential for effieicney improvcmcnls (see US Congress, 1995; A.T. Keamey, 2003). Their imponanee to global market OUlput strongly increases over the last several decades and this trend is expecled 10 continue in Ihe future. Thus, this research series aims 10 offer some insighls inlO Ihis relativcly uncxplorcd arcna. Among others, Ihe make-or-buy decision is a lrade-offbclween the diseconomies of scope (make) and the transaction costs that are caused by search frictions, incomplete contracts and relation-spccific invcstments (buy). CUlTCnt lhcorics indicatc why, whcn stressing efficiency gains in tcnns oftransaction and production costs, cenain activities mighl best be suited for oUisourcing; while other thearies show lhal panicular activities, e.g., core compctencies, are more efficienl when venically integrnted. However, real-world outsourcing deeisions are seldom based on lhe sound trade-ofT of risk, on the eosts imposed and the potential benefits of these risks. One reason for lhis is the overwhelming supply oftheories, each one concentrating on a single aspccl of the problem and thcrcfore eomplieating thc deeision-making process for managers. Thus, there is a need for a process thaI: (I) is simple to apply; (2) encompasses the vari-
2
!ntroduction
aus prcdiclions thai afe typical1y tcsled in isolation in the empirieal literaturc; aod (3) allows significant conclusions 10 bc drawn thai are aligncd with cxtUllt thearies rclatcd [0
thc makc-or-buy dccision. The preseo! investigation also allempts [0 overcome litcrnlUrc sholtcomings by dcvcl-
oping a proccss through which tradc-olTis made essential (0 analysis. Partncrships have bOlh positive und negative cfTects. By cxplaining these cfTects, {he prescol slUdy
(1[-
tempts [0 cnhanee the CUITen! underslanding of both emdent vcnieal integration und
outsourcing.
1.2 Structurc and Analylical Proccdurc This research serics is structurcd in Ihree studies, slaning with one ovcrvicw slUdy (Chapter 2) followcd by two in-dcpth sludics (Chapler 3 and 4), as illustralcd in Figurc I. Eaeh invcstigatcd issuc and lhe rclated rcsults are prcscnled as aseparate ehapler, however, the investigalion is pcrfonned in eonjunction with alllhrce studies. The chapters titled "Introduclion" and "Conclusion" arc not rcprcsenled in lhis figure.
Chaptcr 2: ··Eronomic Chlll'llCleristics of Acrospace Organillllions"
I.
~
Characlcrislics ofaerospace orgamlat,ons aro umque as com, pared 10 Ihc o~erall charaClcrislics .... ofmost Olhcr industries. ~
~
Many cconomic thrones should be modificd ifapplicd 10 thc cases of aerospace organizations.
I Chaptcr 3: "OUlsourcing Stnll4:gies in Europc. the USA and Japan: A Case ofS~e Organizations··
I
Chapler 4: ··Dc,·c1opmcnl ofa Make-orBuy Dccision-supponing I'rocess··
"-
--
A 1001 is de\"eloped lhal facililales make-or-buy decisions for manag working in lhe acrospace SCClor.
~F
Figure 1: Research Slruclure Chapter 2, titlcd "Economic Characteristics of Aerospacc Organi7.ations," provides an ovcrvicw and discllssion of lhc typical charactcrislics of aerospacc organizations from an economic pcrspective, Chapler 3, tilled "Oll1sourcing Slralegies in Europe, the
lnlroduction
)
USA and Japan: A Case of Space Organi7.ations," examines the applieabililY of organizational theories to spaee organizations' outsoureing aelivities. Chapter 4, tit1cd '·Development of a Make-or-Buy Decision-supporting Proeess:' illvesligates the make-orbuy decision in detail and offers a tool to ineorporate all theoretical1y known advantages and disadvantages of vertical integration or oUlsourcing, respcetivc1y. For all lhree studies, the investigmed system architeeture within this research series is defined using system elements, geopolitical SlnLctures and time frames: •
S,'slcm Elements: In the prescnt study, lhe lerm "aerospaee organi7...lltion" means eompanies that operate in lhe aerospace industI)', as weil as aerospaee agencies and any other unions or al1ianees that eoneern aerospaee. The teml ·'aerospaee" ineludes: aircraft, aircraft engines, spaee vehicles, spaee vehiele propulsion unils, missiles and spaee systems.
•
Geopolilical Slruclures: The USA, Europe, Japan, Russia, China and India mainly eontribute to lhe spaee scetor, whi1c the USA and Europe nOI only eontribute to the spaee seelor, bUl also eontribute primarily 10 lhe aviation seetor. Therefore, this Study foeuses on these six regions. All six regions are stable in tenns of economic and politieal issucs within the investigated time frame,
•
Time Framcs: The time frame of the investigated ease studies and scenarios is 1980-2026.
1.3 Thc Nccd for Efficicncy, Organizations and Multinational Acting Herc, I briefiy introduee the nccd for emeieney, the need for building organizations as well as the need for thinking and aeting on a multinational level. These pivotal topies are found in allthrcc studies ofthe present research series. •
The Need for Efficienq': Due to high demand for the long-tenn reliability of aireraß systems, the aviation seelor is eost-intensive. Substantial demand for rcliability exists beeause a high eataslrophic failure rate docs not meet ethical standards and is too eostly. In a similar way, this phenomenon ean be applied to the space seetor as weil. Govemmenl funding was oßen approved only in the hope for politieal gains or for national security rcasons. As a result, spaee organizations have relied on gov-
!ntroduclion
4
cmmcnt subsidics, al10wing thcm 10 bccomc nOloriously incfficicnt in thcir lISC of working capiml (AT. Kcamcy, 2003).
In order 10 improvc sarety aod rcduce costs in [he lang tenn, grcatcr overall effideney is constantly requircd in [he industry.
•
The Need for Building Organizations: Becausc ofincrcasing labor returns, a team of workers can producc more output than the same number of single workcrs. This creales an inccntive for workers 10 build a team, which in turn, results in [he formation of organizations (Arrow, 1970; TiTolc, 1988). Potential sources of improving labor returns primarily includc (he division of labor within cach group ofthc organi-
zation that concentrates on a panicular task. Related 10 this is the possibiliry ofspecialization, with the etTect of1carning-by-doing when experience improves workers' skills. However, a team's output may marginally diminish from a cenain point when more workers are addcd to the team. First, emdeney dccreases when one worker's tasks interfere with those of a eol1caguc. Sccond, monitoring eosts inerease when another job or worker is neeessary in order to manage and monitor worker perfonn. anees. In addition, rnonitoring ereates also amoral hazard problem beeause monitoring predsion is not verifiablc (Bemal & Demougin, 2006). Thus, aeeording to Coase (1937), an organi7.ation should expand only so long as the eosts of an additional
transaetion within the organization do not surpass market eosts. Gibbons (2005) provides an overall integrative framework of the various clemental theories of organizations as put fonh by Grossman, Han, Holmstrom, Klein, Moore, Murphy, Simon, Williamson, ete. •
The Need fOT Thinking and Aeting on a Multinational level: In panieular, the very high eosts of aerospaee programs (e.g., the Spaee Shunle's Main Engine (SSME) development costs are S6,3 billion (Koclle, 2003), the Airbus A380's devclopment eosts are $12 billion (Phillips, 2005) and the International Spaee Station's (ISS) operational costs are S5,5 billion per year (David, 2002» neeessitate the fonnation and/or cooperation ofboth national and multinational aerospace organizations. Worldwide, aerospaee organizations adopt an approach of simuhaneous eooperation and eompetition. For example, the USA eooperates with Russia, Europe and Japan in endeavors thaI concern the International Spaee Swtion (ISS), but the USA
lntroduction
5
competes with these countries with rcgard to its commercial satellites. A dilemma, thcrcforc, cxists becausc Organization A (e.g., anational cntcrprisc), may dcsirc a collaborative rclalionship with Organization B (e.g., a forcign enlcrprise) that ellhances productivity and growlh. However, due to national sccurity interests, Organization A does not want Organi7..ation B to acquire sensitive technology that could be used for military purposes
OIlC
day or. does not want to suppon
Organiza~
tion B competition's effons. What kinds of interactions exist between the global aerospace players that are rcsidcnts ofthc USA, Europc, Japan, Russia, China and lndia? ls this ··gamc·' drivcn by fairness, compelitioll and/or cooperation? Game theory facilitates efficient decision-making givcn Ihis situation.
2 Economic Characteristics of Aerospacc Organizations This ehapter provides an overview of the eUTTent aerospaee sector from an eeonomie point ofview. along with possible projeetions. An aerospaee organizalion shows many different chamClcristics. These characterislics are sclcclcd, which fonn the basis for thc dcvclopment of follow-up studies within thc prcsent research scries. The CUTTent chapter discusses products manufaeturcd in this industl)' and the market environment, industl)' and organizational arehitccture that cxist amidst cconomic trends.
2.1
Illtroduction
The aerospace induSll)' has continued to develop since the first motorized flighl of the Wright Brothers in 1903. Today, the importance ofaerospace to the world's cconomy is immense. One option used
(Q
measurc the importanee of aeronamies to the world·s cconomy is
by its contribution to Gross Oomestic Product (GOP). For cxamp1c, direct contributions, such as air transportation and indircct contributions, such as aircraft manufaetllring or tourism, by the US aviation industl)' to the US GOP has been cstimated at $436 billion per year, or 5% ofthe US GOP (Anderson, 1999). Another way to eonsider the importanee of aeronalltics is the inereasc in passenger traffie and rclatcd airerafl demand. World passengcr traffic is expccted to increase by around 5% per year according to Airbus' (2008) Global Market Forecast for 2007-2026. Boeing prediets that the total market potential for ncw commercial airplancs in lhe course ofthc ncxt twenty years will bc around 29 000 airplanes (Boeing, 2007a). Such market share would require an average allnual output of over 1000 planes by the world's eommereial airerafl manufaeturcrs alone, which is substantially above the eUTTelll rate of produetion (Commission on En· gineering and Tcchnical Systems, 1999). The importancc of the spacc sector to the world's cconomy is lesser than that of aeronauties, butthe spaee sector plays an important role with regard to improvement in a eountl)"s quality of Iife. For example, operating satellitcs provide weather and natural catastrophe forecasls, hclp exposc environmental offenders, and facilitatc communication, education and tc1emedieine in remotc regions. The spaee sector is also a eritieal
Economic Characlcristics of Acrospacc Organizations
8
componcnt ofa country's lcchnology base for cnhancing
Diffcrent;atcd
J
Scveral Homogcneous Oligopoly kerosel\oC oducers
Monopolislic Compclilic)ll airlines)
Differenliale
Monopoly (e,g.. localte)ephone service)
Tablc 2: Typical Space Markel SlntClure (marked in gray) ProduCI
~umbuorOrganiulio"
...
Many
Scveral
Homogencous
Peneet Compet;lion (e.g., ",heal fanllcrs)
Homogcneous Oligopoly
Diffcrcnl;alcd
MOllopolislic COl11pclilion (e.g.• restauranIs)
2.2.3
Monopoly
'"F~~k~'~'§~I~I~~,§~~~m=:l~(ISS modules can
)I
Differentiale
nly be lransponcd by Space Shunle)
Products
This seetion provides an overview of aerospace products, dividcd inlo aviation and space rc1aled ones, as shown in Table 3. Examples are given in parcnthesis for eaeh case. Thcre are many different types ofaircraft include
Economic Characlcristics of Acrospacc Organiz3tions
'0
lion of airplancs since they represenl the [arges! revenue portion of the induslry. Major cus/omers of the aircraft industry inc1udc commcrcial airlincs, transport companics and
the military. Facilitics that produce jet cngincs and auxiliary parts cmploy processes that are similar 10 many othcr meta! casting, fabricating and finishing facilitics and proccsscs from a
widc range of othcr industries. Typical producls manufacturcd by these faeiHties includc: cngines. exhaust systems, motors, brakes, landing gear, wing assemblics, propellers, ete. The main customers for these induSlrics are [he cnlcrpriscs involvcd in [he asscmbly ofaircraft. The space vchiclc and missile industry includcs entcrprises that arc primarily cngagcd in thc rcsearch and manufacturing of the foltowing typical products: guided and ballistic missiles, space and military rockets, space vehicles, propulsion unils, cngines and airframe assemblics. Thc main eustomer for this indllstry is thc mililary; howcver, spaee vehieles are also used by eommercial cntilics for relcasing commllnicalion satellites. Table 3: Primary Acrospace Products ,hialion Sector • Airct'llfi wfo Engincs (Airbus A380. Boeing B 787. Conc:orde. elc.)
SplIcr Secl(lr Spaee Vehidcs w/o Engines (Ariane 5. Spaee Shuttle. H2-A rockei. eie.) Missilcs (I'alriol. drones. SS9. eIe.) Spaee Syslems (Inlemalion31 Spaee Slation. Galileo GI'S satelliles. MeteQS31 wealher satelIile.ete.)
Jet Engincs (Rolls-Royce Tren! 900. CFM-56.
V2500. ete.)
Propulsion Units (Space Shuttle Main Engine SSME, Vuleain 2. Solid Rocket Boosler SRB. etc.)
Auxiliary Parts (Ianding gear. brakes. on-board entertainment sySlem. eie.)
Au~iliary Parts (Ianding parachut~'S, navigation computers. cameras. eIe.)
InfrastnlC1Urc (Frankfurt airport. SkyChefs calering. Lufihansa Technik maintenance. eie.)
lnfraslmclure (KOllroU spaeeporl. Sanla Maria ground slalion. Colibri Iransport ship. eIe,)
2.2.4
Conlraclor Classiflcalion
Manufacmring and asscmbly of complctc llnits in thc acrospace industry typically involves a prime contraclor and scveralliers of subcontractors as shown in Table 4 (modified from: US Environmenlal PrOleclion Agency, 1998). Thc prime COnlraClor seils
Economic Characteristics of Aerospacc Organizalions completc units to customers, while subconlractors sell
lJ 10
the prime conlractor or olher
subcontractors (US Congrcss, 1995). The examplc given in the table is taken from the aviation industf)' for large aircraft. While lherc has nOl been any foreign content for key aircraft eomponents for early models, such as lhe 80cing 727 (US companies have produced nose fuselage, front fuselage, center wing box, aft fusclage, wing and empennage), forcign panners have dearly beeome imponant for produetion of ellrrent models, such as lhe 80eing 787 (US companies only produce pans of the nose fuselage, front fuselage and empennage). Also, prime eontractors for the 8787 model control the seleetion process ofsubcontraetors, in the same manner as has been done for early models by Boeing (MacPherson & Pritehard, 2007), Tablc 4: Classification of Aerospace COlllrnctors Ag~nts
Tasks
F.nm"l~
Prime Conlraetor
Design. develop, assemble andlor 1l1allUfaeture eomplete unils and seil to 100 costomer
Aircraft fmal asscmbly and scl1ing to the airline (aircrafl)
FirsHicr Subconlraelors
Provide major asscmbly andlor manufae· ture OfStelions ofairispacccraft WÜhOlll design or 8.S>embly of complele units
Wing asscmbly (aircraft pans)
Sccooo-tier Subcontractors
Make "arious Sllbasscmblies and scctions
Fucl pump for wing (aircraft p"ns)
Third·tier Subcontractors
Produce machincd componcuts and sub· asscmblics
Elcclric controillnit offuc1 pump (variely ofinduslries)
Founh.ticr SubcomraCIOrs
Specialize in the production ofpanicular componenls and proccsscs
ElCClronic COlllponents of c1cetric control unit (variely of industrics)
Fifth·tier Subcontraclors
Produce basic comlllodilics and/or raw materials
Ccramic for elcclronic COIllponel1ls ("ariety ofindustries)
2.2.5
Industry Size
Figure 3 illustrates the distribution ofmanufaeluring planls and lhe associaled revenues wilhin the US aerospaee induslry. [ ehoose lhe US aerospace industry as an exampte beeause lhe USA has the largest share, e.g., 55% in 1998 (National Seienee Board, 2002), of lhe world 's aerospaee market, with rcvenlles of S l61 billion in 2004 (Euromonitor International, 2005), These figures show that while lhe "aircraft pans" seelor of the US aerospaee indllstry is by far the largest in lenns of number of manllfaeruring
Economic Characlcristics of Acrospacc Organizations
12
plants (59%), the "aircraft" seclor generates thc most revenue (48%). Revenue produccd in 2004 was ncarly idcntical for thc military Sc
(0)
Direct Labor Re<juirernem IIOOOhfllnitJ
90ll
(01
IA)
40
700 500
20
300
100
10
---'0
h--0
50
'00
'60
200
Curnulalivc Output [llnitsl
Figurc 4: Direct Labor Requirenx:nt und Annual Output fOT Lockhecd L IOll Aircraft Produc[ion (Bcnkard, 2000)
Economic Characteristics of Aerospacc Organizations
lJ
The Orl;aniz.1tional/c(ll"/Iing cjJect takes into aceount the diminishing effort that is requircd for manufaeture of fol1ow-on units under the same quality standards. Aireraft produetion is driven by strong leaming effccts (Wright, 1936). The leaming rate p, an indieator for leaming effeel, varies aeross eaeh plane type (Alchian, 1963) and depends on the number n ofunits built (Arend, 1987). This can be set, in the ease ofcontinuous production, ifno other data are available, to the fol1owing values (Goehlieh, 2002): p = 0,90 for n
= 2 to
100 unhs built, p
= 0,95
for n
= 101
to 1000 unilS buih, and p
= 1,00
for n > 1000 or n = I unilS built. Thus, p is diminishing with an increase in units built. Leaming primarily results from proeess improvements and same task repetition: eeonomists and engineers analyze the produetion process and make small ehanges that result in gradual productivity improvements. The use of new tcchnologies al10ws processes to require 1css manpower. Workers bceome more effieicnt at the tasks they perfonn through multiple repctilions. lt should be noted thai leaming comes al high eosts too. Same task repetilion is Ihe resuh of proeess improvemcnls and planning of Ihe eompany's organizational strueturc. New teehnologies must bc studied, verified in experiments and implemented. These aetivities rcquirc manpower resourees, expensive labor experiments and aequisilions. This means that a reduetion in direet labor reqlliremenlS is also the result of expendilllres (the program improvemem budget), whieh must be taken into accounl. lt ean be said that tOlal nccessary devclopment COSIS are divided into non-recurring eosts (before the start ofproduetion) and into rccurring costs (during produetion). Conscquemly, as Benkard (2004) claims, is "direet labor rcquircmems'· per unit the eorrcct parameter to asscss the leaming etfect? I suggest that the parameter would be better defined as "direet labor requircments plus program improvcment budget"' per unil in order 10 eorreetly model eoherenees (sec Thompson, 200 I). The organizationaljOlgcuillg ejJecl is Ihe hypothesis that a companies' slock of produetion experienee depreeiates over time (Argote, Beekman & Epp1c, 1990). This is eaused by the mmover and worker layotfs Ihat embody eompany experienees. One reason for deprcciation of experienee QCcurs in times of falling produetion rates beeause those times are aecompanicd by layotfs. Ouring subsequent increases in produclion, the eompany is often unab1c to aequirc the same workers that it fonnerly released and must rclain entircly new workcrs (Benkard, 2000). In loday's aerospacc business, whether industry or govemmcnl, it is eommon Ihat a Sllbstantial number of employees are hired as eontrnet workers in addition to the organization·s pennanent statf. The motivation for this is to easily dismiss employees in times wherc fewer laborers are needed. Another
Economic Characlcrislics of Acrospacc Organizations
18 inccntivc is
(0
cvadc (burcaucratic) rcquircmcnts. Duc 10 political und organi7.3tional
rcasons thai rcquirc maimcnancc of the balance of power allocations, euch division is siricily Iimitcd in its number of permanent stafT, but lcsscr regulation cxists cancerning thc number of contrac! workers allowcd. Organi7- Govcml11cm (NASA)
Govemmcl11 (JAXA)
De\"elOpl11enl! Production
Private (EADS)
Private (Bocing)
Private (IHI, MIII)
Private (Arianespace)
Private (Bocing Launch Services)
Operation sinee 1980
•
sinee 2001
~
G","",,,,,, (JAXA)
-""""
~
Private (H·IIA Launch Services) since 2007
Basic Research, Concepl and Definition I'hases: Typieally, spaee agencies are responsible for the basic research phase. Basic research indudes any fundamental research, which need nOI neeessarily be relatcd to a speeific rocket program, such as investigations on novel propcllants. Such studies are somctimes investigmcd over several decades. The coneept phase includes preparation of a eoneeptual design and a system analysis. These activities are sometimes delegatcd to a consulting company. Ouring the eoneept phase, system speeifieations, an assessment ofpolitieal restrietions and advanced development on high-risk items (e.g., rocket engines) are completed. The concept and definition phase can usually be accomplished within 5 years.
Outsourcing Stratcgics in Europe, USA and Japan: A Case of Space Organizations
32
•
Development and Produetion Phase: Typieally, private eompanies devc10p and produee the rocket. The developmem phase refers to the eomplete developme11l of the rocket, ineluding tesls on one or more prototypes and construetion of ground support if not yet existing from older rocket programs. This phase ean be aeeomplished within 4 to 6 years. Nonnally, prototype flights are used to transport seien· tifie satellites imo spaee. [f the test flights are sueeessful, the series produetion of that rocket starts.
•
Operation Phase: For early eommereial spaee flights, space ageneies were responsib1c for the operation and marketing of launehers. Later on, some spaee ageneies olllsoureed those tasks 10 launeh service eompanies. In Europe, the world's first launeh service eompany was ereated in 1980, and the USA followed in 2001. Japan is currently in the process of privatizing Ihe operation of launchers.
3.3.2
Europe
The major players for the commercial launeher sector in Europe are ESA for research, EADS for development and produetion, and Arianespace for operation. u) GOI·emmellfal Key Leaders (Research)
The European Spaee Ageney (ESA), established in 1975, consists of 17 member states. The ESA falls roughly within Ihe gCQgraphieal scope of the European Union (EU); however, Swit7.erland and Norway are also member Slates and there is strong eooperation with Callada. A long-tenn goal for the ESA is to attraet all EU states to beeome members by 2014 (ESA, 2006). The ESA has a staffofabolll 1900 employees with an annual budget of about 53,8 billion in 2006. The three largest contriblllors are Franee (about 30%), Gennany (aboul 25%) and ftaly (about 15%).
b) Pr;l"ute Key Leuder!J· (De,·elopl1lelll & Produclio/l) EADS was fonned by its member eompanies in July 2000, becoming the world's second largest aerospacc company after Bocing. One of its divisions, Astrium, with its subsidiary EADS Astrium Transportation, is a prime eontraetor for the Ariane 5 launcheT. This eompany developcd the Ariane launeher family, and is responsib1c for the delivery to Arianespace of a comp1cle and completc1y tested launcher whi1c managing all contraets assoeiated with its manufaeturers. Member states, Ihrough the ESA, fund the de-
Outsourcing Strategies in Europe, USA and Japan: A Case of Spaee Organizations
33
vclopment costs for the Ariane launehers and the associated tcchnology. The eompany has faeilities in Franee (Les Murcaux near Paris and Aquitaine near Bordeaux) and Gennany (Bremen). [n 2006, the spaee division had a workforce of abollt 11 000 em· ployees and eonsolidated revenucs of S4,4 billion, representing 12% of EADS' total revcnucs (EADS, 2007). c) Pril'flte XeJ' Leader..' (Operation)
Arianespace is a commcrcial launch service operator, holding more than 50% of the world market for satellites destined for Geostationary Transfer Orbit (GTO). Created as the first eommercial spaee transportation eompany in 1980, Arianespace has signed eontraets for 280 satellite payloads. Abollt 270 employees work for this company. Arianespaee has 23 shareholders including the French space ageney CNES with 34% and EADS with 30%, while aH of the Europcan eompanies panieipate in the eonstruction of the Ariane launehers (Arianespace, 2007). Although it operatcs as a private finn, Arianespaee reeeivcs considerable, although indircct, support from the European Spaee Ageney, which purehases Arianespaee's launeh services. 3.3.3
USA
The major players for the eommereial launeher sector in the USA are NASA for re· search, Bocing for development and production, and Boeing Launeh Services for operation. a) GOI·emmelltal Key Leadt'fl' (Re.\·earc1,)
The National Aeronamies and Spaee Administration (NASA) is the agency responsible for the nation's publie spaee program. [t had a budget of around $16 billion in 2006. NASA eonducts its work in four prineiple organizations, eallcd mission direetorates: aeronalllics, exploration systems, seienee operations and spaee operations. The Spaee Operations Mission Directorale provides eritical cnabling technologies for much of NASA through the Space Shuttlc, the International Space Station and flight support (NASA, 2006).
34
Outsoureing Strategies in Europe, USA and Japan: A Case of Space Organizations
b) Pril'ofc Kc)' Lcodcn.' (DCI'clopl1lellt & Prodlfctiflll)
Boeing opcrates in four prineipal segments: Commercial Airplanes, Military Aireraft and Missile Systems, as wel1 as in Spaee & Communieations, and also in the so-eallcd Boeing Capital Corporation, Space & Communieations operations, with its Network & Spaee Systems Division, principally focuses on research, development and the produetion of space systems, missile defense systems, satellites, launch vehicles and rocket engines, and also the Spaee Shuttle and International Spaee Station (ISS) programs (Boeing, 2008), In 2006, the Network & Space Systems Division's revenues were $[2 billion, represcnting 20% of Boeing's total revenues (Soeing, 2007b). Boeing has devc10ped and cominues to produce the Deha launeher family. The eompallY has eustomcrs in more than 90 countrics arollnd the world and is onc o(the largest US exponers in tenns ofsales. Recently, Bocing stancd to shift its core business away from commercial aircraft manufacturillg toward space vehiclcs, commullications, tcchnical services and de(ense applications (MacPherson & Pritchard, 2002). c) Pril'ote Ke)' Leaders (Operation)
Boeing Launeh Services (BLS), which is based in Huntington Beach, USA, is an or· ganization that combines strategic planning, business development and sales for commerciallaunch scrvice cllstomers. [t is a wholly owned subsidiary of Bocing and is pan of Boeing's Imegrated Defense Systems. BLS markets the Sca Launch and Deha IV launcher family (Bocing, 2008), 3.3.4
Japan
The major p[ayers for the eommereia[ space launch sector in Japan are JAXA for research, Ishikawajima Heavy Industries ([Hl) and Mitsubishi Heary Industries (MHI) for developmem and produetion, and H-llA Launeh Serviccs for operation launches. a) GOI'erl/melltol Ke}' Leader.\' (Re.\'carcll)
JAXA is the result of the merge between the National Space Dcvelopment Ageney of Japan (NASDA), (he National Aerospaee Laboratory of Japan (NAL), and the Institute of Spaee and Astrommtieul Scienee (1SAS) in 2003. JAXA wem through a drastie re· duction ofstafT, und more focus has sinee been put on the ISS program. JAXA now fot· lows a policy of privatizalion, which can be observed from various documented sourees,
Outsourcing Strategies in Europe, USA and Japan: A Case of Space Organizations
35
such as "Take steps toward tuming the space equipmcnt induslry and the spacc utilization scrvice industry into thc key industries of Japan;' as dcscribcd in JAXA's Vision 2025 (JAXA, 2005, p. 24). b) P,i1'ate Key Leaders (Del'e/opmelll & Prodltclion)
The key companies involvcd in thc developmcnt and production of commercial launchers in Japan are Mitsubishi Heavy Industries for liquid-fuelcd rockets (e.g., the main stage of H-lIA), IHI for the upper stages and sma]] engines, and Nissan for the solid fuclled rockets (e,g" strap-on boosters of H-IIA), Typically, these companies have inhouse R&D groups that co-dcvclop programs with JAXA, while privatcly financcd R&D programs arc almost non-existent in Japan (Polak & Belmondo, 2006). c) GOI'erumelllal1 Pril'afe Key Leaders (Operation)
H-IIA Launeh Services, as organized by Mitsubishi Heavy lndustries, is Japan's newly established launeh operator resuhing from the privatization process of H-liA launeh operations initiated in 2002. Thc H-liA No. 13 rocket, launched in September 2007, was the first H-IIA to be launched after JAXA's privatizution program (Asahi Shinbun, 15 September 2007). H-lIA Launch Services promotes the su1cs :md marketing of launch operations to govemmental and commercial customcrs all over the world. Funhennorc, it otTers supJXln services that are nonnal1y perfonned by the cllstomers themselves, inc1uding the prc-Iaunch operation and safety checks of spacecraft at Tanegashima Space Center, arrangement for launch·rclated insurance, rc+launch, back+up launch and finance (Mitsubishi Heavy Industries, 2007).
3.4 Discussion 3.4.1
General
The given case study has been examined using the thrcc separate theories discussed in previous sections, In the following section, this invcstigation will altempt to widen the point ofview through a discussion centered on the eohcrenccs, alternatives and limitations eoneeming the applied thcories.
36
Outsourcing Stratcgics in Europe, USA and Japan: A Case of Space Organizations
3.4.2
Understanding ofCohcrences
As I stated in Hypothesis I, the outsourcing activities ofthe Japanesc JAXA are hard to cxplain using transaction cost thcory. Also, thc human rcsourcc-bascd vicw, rcprcscntcd by Hypothesis 3, carries linie support. Only ageney thcory holds, represellted by Hypothesis 2, as it ean be applied to the privatization of the operational part of the JAXA space organization. As [ stated in Hypothesis 3, oUlsourcing is nonnally conneeted to a loss of knowledge, which is problematic in the area of human resourees. What ean be seen in spaee organi7.3tions is that several space organizations outsource specific production assets. However, the rcsearch part is n0n11ally eovercd by the space organi7.3tions themsclvcs. Therefore, space organizations seem to benefit from oUlsourcing eertain activities, while others are kept within the organization. Another factor is that the vertical integration of activities is mainly uscd in basic research scctors where it is not profitable to outsourcc aetivities. The aim of JAXA is to increase the eompctitiveness of Japanese commerciallaunch services. To do so, JAXA nceds to reducc eosts, incrcase rcliabiJity and improvc eustomer service. [n sum, [ argue timt, under the eurrcnt organizational architccturc (Le., where basic research, production and operating divisions are venieally integrated), the ability of this organi7.3tion to increase its commercial compctitiveness is significantly limited. Tbe reason for this is that an effieient organizational architeeture is different for abasie rcscarch division and an operation division: Whilc, for examp1c, in a basic research division the reward system needs to bc optimized to elicit innovations from seientisls, the rcward system in an operation division needs to bc optimizcd to motivale managers to create 1can processes and high quality standards. 3.4.3
Allernalh'c Thetlries
[ selected three theories out of a pool of alternatives because 1 expeet thm they are best suited for my investigation eentercd on oUlsourcing stralegies, whi1c also providing me with some signifieant rcsults within thc rcspectivc frameworks of transaction cost theory, agency theory and the human resouree-based view. I am aware that there are other theories or approaehes, e.g., the property rights theory, whieh posit that outsoureing stimulatcs cfficient bargaining powcr (sec Grossman & Hart, 1986). Also, rent-secking thcory as a coneept can bc discusscd in this area. Ae-
Outsourcing Strategies in Europe, USA and Japan: A Case of Space Organizations
37
cording to rent-seeking theory, vertical integration can stop socially destructive haggling ovcr appropriate quasi-rcnts (sec Williamson, 1985), but vertieal integration docs not eompletely eliminate contraeting problems (Klein, Crawford & Alehian, 1978). For instance, influence activities (giving someone authority means that this person will be lobbied) subsequently results in high costs (Milgrom & Roberts, 1988). Finally, adaptation thcory also exists, which stipulates that owning an asset allows the owner to deter· mine how the asset is eonscquently used (sec Williarnson, 1975). 3.4.4
Limitations
Generally, the weakness of these theories is that they make speeulative assumptiolls aoout human eognition and managerial discretion (Mahnke, 2001). Managers who need to decide on whether to vel1ically integrate or to outsouree tasks are usually faeed with a general lack of relevant infonnation. nlis fact strengthens the bounded rationality, wh ich means that human aetors involved in eomplex problem solving are Iimited in knowledge, skills and time (Cyen & March, 1963). lnstead, managers are driven by mealls of an experimental scareh to discover possibilities for improving the effieieney ofthe organization. Another weakness of these theories is their limitations of seope. Essentially. transac· tion eost theory is restrieted to the issue of the costs of writing complete contraets, while principal-agent theory narrowly focuses on the issue of moral ha7.3rd, and the human resouree-based view is limited to the simple issue of I inking resources to propcrty. Finally, it should be noted that Olltsourcing by eompanies and govemments has similar but not completcly identical objcctives. Typically, the company's motivation is based mainly on economical aspects. while the govemment's motivation might also be based on politieal aspeets. FUl1hennore, my definition of outsourcing is always con· nected to switching from govemmental activities to private cornpanies. Overall, this kind of outsourcing is much stronger than from one private to anOlher private company.
3.5 Rcsults [n Ihis chapter, I explore a number of reasons why the Japanese govemment's space organization, JAXA, recently intensified ils outsourcing aetivities 10 private companies.
38
Outsourcing Stratcgics in Europc, USA and Japan: A Case of Space Organizations
This process is shown to have occurrcd several years ago in the olher investigated areas: Europe and the USA. The directional trend of outsourcing activities in space organizalions, therefore, is most congruent with principal-agent thcory. In contrast, transaction cost theory and the human resouree-bascd vicw both fail to provide sumeicnt reasons 10 explain why JAXA should venically integrate its activities to bc more emcien\. ralher than outsoureing them to private companies. I also eoncludc that eeonomic thcories ean be used for a wide fjeld ofindustrial sectors, bul have limiled use with regard to lhe space seetor. One reason for this might bc that the characteristics of aerospacc organizations, and in panicular spaee organizalions, arc unique as compared 10 lhe overall eharacteristies of most other induslries, as shown in Chaptcr 2.
4 Dcvelopmentofa Make-or-Buy Decision-supporting Proccss The obj<x:tive ofthis ehapter is to analyze and support the makc-or-buy deeision. This is realizcd by the development ofa theory.based decision process. In this smdy,the proc· ess is applicd to aerospaee organi7..ations as a tool, but its transparency and modularization enablcs thc proccss to be applicd to any organization of intercs\. Thc chaptcr is stmclllred as folIows. In the next seetion, the make-or-buy continllum philosophy is introduced. In section two, the literallIre is qualitatively reviewcd by presenting the pros and cons conceming vertical integration and outsourcing. For illustration, the tool's propositions are sllpplemented with cxamples taken from the aerospace sector. Then, those pros and cons are quantitatively assessed and ranked by importance and probability. Next, the devcloped proccss is applied to four case studics. Finally, section three offers a discussion of scnsitivity analysis, eomparison with othcr studies and limitations.
4.1
Illtroduction
A company has many architcctural choices from which to produce its prodllets or scrvices (Figure 6). At one extreme, the product or selViee can be purchased from any supplier in the spot marke!. Allhe olher extreme, the company can produce the product or service intemally within a division. Between the extremes are various long-tenn eontracts, such as strategie alliances, franchise agreements, lease contracts, joint venlllres and supply contracts (Bricklcy, Smith & Zimmerman, 2006). Note that a certain overlap exists belween diffcrent types of long-Iernl contraets and typology can vary m some buycr-supplier relationships.
II spot
Outsourcing
r
Market Joint Venlllrc Strategic Alliance I Supply Contract Fmnehisc Agreement I Intcrnal Pro
I I
1
r
Lease Canlm
AchIC~\~ 'ligh-powercd
~IU2' AVOIIl burcaucranc
diS!.
.
8
Sl.. bllll}' AJpens
I I
I fut04 ~chie\'e spreading of1
1
~t05 A \'Ol~lhlign cost 0 n II! UllllSfe
r',03' Avoid ~ost!y IlICen;~ pulO6 Dclcr markel cmry mouvlIllng em. p ~7
Ach;",,'c stable sei 0 c1iems
J
I
C ..... rdlnallon Asptds
1ft'11 0 Increase safes
I
rutil Reduce labOr oosts
1
~12 ~edllCe card""s activ;,,~
1 F 113 onncrcasccol'ICcnl::J eore Com~les
u108 Achic"c nigh Ilrogram I ~ Roouce levels ur manfkJIibilil ulO9 Increasc sharing or
_"0_
agement coordinalioo
1l:::llS"Avoid reduccd initia_ ,;, "- In lnves
gal,,·cNeI J EI16"AvclldllC Prt:SCIU Value ~lS
~117
RoollCe production
="
~118'Avoid
insufficient volume
~ 19
locrcasc bundling or _" .Iol
E,20 Achie"e !'"',
e~panding
==~
Gain access 10 1X'llefils
or
er's
'
uI22 Develop tccholesT stan-
""
~23' Avoid .rr~
liule leaming
~~t1raCI highet-quality
mss iaf
r'2' Achlcve a~ai~ Figure 10: Qutsourcing Pros Submodule
I ily
01 I
Devc10pment of a Make-or-Buy Deeision-supporting Process
45
RESULTS Submodul~
~esot SUb:~cril ofcach iel~llem
1t
s02 Su.b.bcneril ?fc~ch ] .a U$ted Iielllll lIem
~esOJ Mah-or-Buy ralio
1
Figurc 11: Rcsults Submodule
4,2.2
Qualitath'e Assessment
Each submodule and its associated items, or propositions, is organized in the same manner for simple review. The "Settings" and "Resuhs" submodulc items are listed bricfly, whi1c the "Integration Pros'· and "Outsourcing Pros'· submodule propositions are Iisted in detail, as spccified in the following text and shown by example in Figurc 12. For readcr-friendly usc, all information is preparcd in the same format. 1021' Amid
I'h~olO'"
limh pYio
Dc«:rirlion: LoSI inlcraelion cfli:cts "ilh oulsourecd aeli\'ilics (indtpcndenlly On lhcir eOTl.' or non-oorc: sialus) can diminis\1 lhc dTec\i"cncss ufille rcmaining acli"ilies (Mahnke. 2(01). ~: Airlin~'S
oUlSOur.-:ed lhe handling of passenger luggage al airports. E\'en
lhough airlincs lry 10 otTer lhe bcsl sen'iee for their firsl ebss pasSC1lgers. lhe passenger salisfaction ean he slrongly b1urrcd by dirty, damagcd, dclaycd or IOSI luggagc_ ~:
The organizalion can cnsurc: lhal its n:maining cmployccs inlCr1lCI c10scly
"ilh ils oulsourccd acli"ilics (Quinn & Hilrner.
199~).
Ahemali'·ely. Ihe organiza-
lion can handle lhe "Ioss" heller by finding and implemalling ahemali,"cs. if lhe proccss ofoutsourcing is slower.
Figurc 12: Examplc of a Venical Integration Proposition Header: The header is where J place the serial number and name of thc proposition. As for thc purpose of process development, I have reversed the propositions in such a way that the disadvantages of outsourcing become advantages of vertieal integralion and disadvantages of vertical integration beeome advantages of outsollrcing. Those re· versed propositions are markcd with an apostrophe ('). Description: The deseription bricfly introdllCeS the proposition, but mayaIso includc additional information. Ellam-
46
I.'!k:
Dcvclopmcllt of a Make-or-Buy Dccision-supponing Proccss FOT illustration, cach proposition is supplcmcntcd with an c:
Dcvclopmcnt of a Make-or-Buy Dccision-supporting Proccss
64
prodUClivily, becausc the information that workcrs huve, aod managers lack, about
the workplacc can bc uscd. Downs (1966) names Ihe following countcrmcasurcs for controlling lass: external data checks, rcdundancy, cfealion of ovcrlapping arcas of rcsponsibility, and rcorganization 10 keep the hiemrchy
•
Oul03' A\'oid
cosll~'
nato
incenlh'es for molh'ating emdent production
Dcscrintion: Companics must adop' costly inccntivcs and conlr01 systems 10 mOliV3tC interna! managers 10 cngage in cfficicnt production, othcrwisc, frcc-ridcr eITects will occur within vcrtical integration. Thcrc is a misalignmcn! of inccmivcs bCIWCClI
cClltral aod internal managers. Examplc: In Ihe acrospacc industry, cvcry task must be recordcd to mect strict aircraft licensing mies. Based on this, the free+ridcr effcct is ncarly prevented, thus, this argument is of minor interest. Solution: An atlempt may be made to invest in thc company culture, such as enhanced good will, teamwork and ethical understandings 10 address this concern. i) Omsollrcillg Pros Silbmodule (Srubility Aspect~)
•
OuI04 Achie\'e spreading or risk Description: Risk, while impossible to c1iminalc, can bc divcrsificd :md spread Ihroughout 01 corporalion. Bllrgers, Hill and Chan Kim (199]) argue that demand uneertainty motivates competitors to enter into strategie alliances in order to gain acccss to thc capabilities requircd to cope with such uneertainty. Burgcrs et oll. (199]) imply that poorly pcrfonning companies are more likely have an incentive 10 enter into al1iances Ihan emciemly operating enterprises. The reason for this is that poorly perfonning eompanies are likcly less able to dcal Wilh the adverse eonscquences ofuncertainties aml/or persistent competitivc banles. Example: One sourec for funding the A380 development comes from risk-sharing partners other than Airbus partners and their national govemments' funding, aeeording to Esty (2004). These risk-sharing partners agrced to bcar a eertain amount or the development eosts, whieh wOllld be rcpaid on a per plane basis, in exchangc for the right to beeome exc1usive suppliers for the A380 (Esty, 2004). Unfavorably for Airbus, might bc the commitment to acecpt thc risk-sharing partners as cxclusive suppliers, bccause exclusivc suppliers might have the incentive to bcnefit from this dcpendency (incrcasc prices, decrease quality, etc.) at thc expcnse of Airbus. Over-
Devc10pment of a Make-or-Buy Deeision-supporting Process
65
al1, the advantages of a low-risk funding program are assul11ed to outweigh the disadvantages of dependeney. •
OuI05 Avoid high cost of ownership Iransfer Deseription: \Vhen the useful life of a general (i.e., non-eompany specific) assct is significantly longer than the period over which a eompany expccts to llse the asset and when the eosts of ownership transfer are high, it may be advantageous to lease, rathcr than blly, thc asset (Smith & Wakcman, 1985). In particular, leasing reduccs the eosts for infonnation on qllality comparcd to purchasing (Flath, 1980). Example: An airline that leases an aircraft is less eoneemed aOOm its eondition than an airlinc that plans to buy the aircraft.
•
Oul06 Deter market entry Description: Selling up partncrships with potcntial eompctitor can dctcr their markct entl)'. Example: An incumbent airline may olTer a potential entrant airline to share expensive facilities, not for the purpose of eeonomies of seulc, bm to diseouragc the entrant from building its own faeility and entcring the market at a more eompetitive seale (Chen & Ross, 2000).
•
Oul07 Achie\'e stable seI of c1ienls Deseription: Random variation in demand for setvices from any one client ean bc eompensated for by a larger set of c1ients (Clemons & Hitt, 1997). Example: An uerospace organization typieally has u high incentivc to produce, not only for its countl)' of origin, but also to export its prodUCIS.
•
OuI08 Achieve high program nexibility Description: The buyer can convert the fixed cost ofpayroll to a variable cost using temporal)' stamnJ;. Thus, Ihe buyer can expand or shrink programs in a short period versus maintaining company cmployces. In this scenario. downsizing is possible without the disadvantageous publicity cntailcd by layotTs (Bcan, 2(03). Examp1e: Temporal)' staffing is typical in the aerospaec industl)' beeause the devc1opment phase for new aircrafl, rockcts, ctc., rcquires substantiallabor, whi1e thc period thercaftcr requires only moderate rcsources for product improvcmcnts, muintenanee, etc. In addition, passenger demand is eyclical, resulting in the fact thm air-
Dcvclopmcnt of a Make-or-Buy Dccision-supporting Proccss
66
lioes lease an average of onc-third (Hcincmann, 2007) of thcir fleet
[0
adjust
10
changing market conditions. Currently, General E1celTic Commcrcial Aviation Services (GECAS) und the International Lease Financc Corpora/ion (ILFC) dominatc !he aircraft leasing service marke!. •
OuI09 Inereuse sharing of R&D costs Dcscrintion: Ncw producl innovations ure ortcn high-cost activitics und the rcquircd asscts ure bcyond the capabilitics of a single company. Thus, horizontal or vcrtical coopcration muy bc the ooly viablc mcans for improvcmcnl (Tcecc, 1992). In addition, collabof3tivc R&D reduccs needlcss duplic3tion of eITans, i.e., :lvoidancc of ncar-idcllticallcchnological paths (David, 1985). Example: Development ofthe International Spaee Station (ISS) may nOl be feasible for one country alone, from a financial and resource poinl ofview.
j) Omsollrcillg Pros Submodllfe (Coordillurioll
•
Aspecl~'J
QullO Increase sales Description: According to Frynas, MelJahi and Pigman (2006), global outsoull:ing has the advantage of collaboration and consultation with forcign industry and forcign policymakcrs. Conscquelltly, one of the goals of outsoureing is to secure a sale that would not take plaee in the absence of eompensatory provisions. In lhe IileratUIl: (Wessncr, 1999), this is called induSlrial ofTseI. Dircct offsets involve production sharing, lechnology transfer or worker training, whcll:as indircct ofTsets can include countcr Irades. Industrial offscts are cornmon in the aerospace market, where unit-selling prices are high and buyers are Slriclly regulaled by govemmenlS. Example: In 1974, Boeing conlracted with Mitsubishi in Japan to produce flaps for the B747, which resulled in major sales of B747s {o Japan (MacPherson & Pritchard, 2002).
•
Outll Reduee labor eosls Description: One of lhe basic incentivcs for outsourcing is
10
produce in regions
where labor eosts are lower than lhe horne region. Therc is also a trend toward outsoureing work 10 more low+cost service industries, such as lhose localed primarily in lndia. However, oUlsourcing in China, Thailand, Philippines, Russia, Bulgarin and Jamaica is also on lhe rise.
Devc10pment of a Make-or-Buy Deeision-supporting Process
6J
Example: Labor eosts are typieally at least 5()'l1o lower in the Asia-Paeifie region than in furore or the USA (MaePherson & Pritehard, 2002). Aeeording to the literarure, it is estimatcd that 3,3 million
white~eollar
jobs (equivalem to $136 billion in
wages) will shirt from the USA to low-eost eoumries by 2015 (Engardio, Bernstein & Kripalani, 2003).
•
Outl2 Reduce careless activities Description: Outsourcing is initiated to transfonn or rcduee sloppy aetivities (Rebitzer & Taylor, 1991). However, according to Mahnke (2001), when employees fear losing their jobs through oUlsoureing, they are strongly reluetant to share their knowlcdge with external vendors. Example: This argument is of less relevanee for the aerospaee sector, beeause OUlsourcing is beeoming the nonn.
•
Out 13 Inereuse coneentration on eore eompetenci{'s Deseription: Conecntration on eore eompcteneics means focusing owned rcsourccs on a set of eore eornpctencies, where the eompany sees a eritienl strategie need and where it has special capabilities of providing unique valuc to eustomers (Quinn, Doorley & Pnquelle, 1990). Quinn and Hilmer (1995) define eore eompeteney as folIows. (I) Sets of skills and knowledge, such as produet design, teehnology ereation or customer service, rather than traditional funetion, such as engineering, produetion or sales. (2) Flexible long-tenn architeetures that allow improving skil1s in areas that customers will continue to value over time. (3) A limited number of skill sets, typically less than three, because for a higher number of skill sets, a compuny might be unable to match the perfonnanee of its more focused eompetitors. (4) Areas where the eompany is able to dominate by pcrforming skil1s more effeetively than the competition. (5) Sets of skills that ure captured within the eompuny's system, rather than based on individuals whose dismissal might destroy eompany sueeesscs. Example: In order to incrcase the product palene, aerospaee organizations are foreed to reduce the depth of their produetion.
•
Out 14 Reduce le,·els or management coordination Deseription: Management ean focus more on the eompany's eore business, beeausc the time spent managing peripheral aetivities is rcdueed as a rcsult of oUlsourcing
Dcvclopmcnt of a Make-ar-Buy Dccision-supporting Proccss
68
(Quinn & Hilmcr, 1995). Thus, fewer levels of management coordinalion are
TC-
quircd, which rcsults in lowcr transaction costs Ihan ure incurroo in a more diversificd organization. Exarnple: JAXA recently outsouTccd its lUllnch operation division [0 Mitsubishi
Hcavy lndustrics in order to bc more compclitivc in thc international marke! for commcrcial1aunchcrs. •
Ou115' Avoid reduced initiative 10 in\'est Dcscription: One i05igh! from propcrty.righls lhcory is that a division's inccntivc [0 invest is rcduccd by thc fear of hold-up from its parent company, c.g., cXlracting
rcnlS in thc casc of vcrtical integration (i.c., hold-up within a company). Unfortunmcly, slopping one hold-up problem using a fonnal instrument typically creales another hold-up problem (Gibbons, 2005). Examp1c: This advantage is of minor interest to the aerospace seClor because the parent company's interests should not exploit ilS divisions, which would result in a weak competitive position. Solution: An atlcmpt to incrcasc thc inccntive to invest may occur by rcpctition, to show that the investment is ofbeneficial value. •
Outl6' A,·oid negalive Nel Present V.lllue projecls Description: Jensen (1986) predicts that a vertically integraled company invesls more in negative Net Present Value (NPV) projeets than its divisions would if operated separately. This can be explaincd by the fact that different lines of business have access to more free cash flow as part of a verticatly integrated company, lhan thcy otherwise would on lheir own. Example: This argument is of major intercst to lhe aerospace seClor because budgels are ollen allocaled to fascinaling projecls rather lhan to economically feasible projccts. Solution: An a1tcmpl to rcduce investmellls in cconomical1y unfcasible projccts may occur by establishing a commillee 10 evaluale, e.g., the NPV of each project.
•
OuI11 Redllce prodllclion costs Description: Over time, suppliers adopt technological advances that lower production cost without lowcring quality.
Devc10pment of a Make-or-Buy Deeision-supporting Process
69
Example: This argument is of high importanee to the aerospaee seetor beeause lhere is high ineenlive for acrospaee supplicrs to invest in niehe produets in order to beeome a pioneer in the induslry as weil as to produee at a low eost, so that other eompanics have less interest in entering the marke!. •
Oul18' Avoid insllffkient ,'oillme Description: It is typically difficult to generale sufficient volume to capitalize on returns-to-seale effeels in produetion. Returns-lo-sealc is the relationship betwcen output and a proportional variation of aJ1 inpUls, taken logether. Finns ean produee the optimal volume and seil the surplus in lhe open marker. Thus, this ehoice requires finns to enter a new market, whieh is not its primary line of business. An empirieal study eondueled by Berger and Dfek (1995) suggests that diversified organizations often perfonn poorly relalive 10 those that are more foeus oriented. Example: Thc typical (acrospaee) eompany has incrcasing returns-to-seale whcn output is low, followed by eonstant returns-to·seale as OUlpu! inereases, and deereas· ing returns-to-seale whcn OUlPUt is high, as demonstrated by Berndt, Friedlaendcr and Wang Chiang (1990). Solution: Howevcr, the proposition to avoid insuffieient volumc docs not hold for al1 types of eustomers that the eompany wishes to targer. Customers with higher incomes demand more differenliation or even eustomized and less standardized produets. Small eompanies ean satislY these demands beuer lhan large ones. These small eompanies typically produec only a very small volumc of proouets.
•
Out19 Achic\'e bundling of knowledgc Deseription: Bundling knowledge at one physieal plaee enables effieient use by partieipants (Clemons & Hin, 1997). Example: Airlines enjoy advanlages over alternative fonns ofsing1c-briefing offices before cach flight.
•
Out20 Achicve expanding resources Deserintion: DUlsoureing ean aehieve an expansion of resources such that it redllees a eompany's developmenl phase - assuming ilS manpower resouree is eonstant - as multiple suppliers work simuhancously on individual eomponents of a system that are on the eritieal path (Quinn & Hilmer, 1995).
70
Dcvclopmcnt of a Make-or-Buy Dccision-supporting Proccss Examplc: Without immense lISC of supplicrs as rcsourccs, NASA would nOI havc hecn able 10 dcvclop Ihe Satum V rockel within one dccadc.
•
Oul2 J Gai" access to benelits or partner's assets Dcscriplion: A contractor with litt1c cxpcricncc in Ihe cQuntry whcrc Ihe projcct is localcd, bUl with spccializcd skills, should team up with one who has an cstablishcd organi7.3.tion, political Of othcr valuablc rclationship in Ihe country (Rowan, 2004). Sy doing so, Ihe contractor gains acccss 10 oew tcchnologics, rcsulting in improvcd pcrfonnancc, oew producl innovation (Rolhacnncl, Hilt & Jobc, 20(6) aod cuslOm· crs, resllhing in growlh in marke! power. Diversification ofnew business is applicable in the ease ofstrategic alliances. Example: An alliance wilh Airline B enables Airlinc A to obtain access to valuable mre slots at airports that were originally designmed for Airllne B. Thc structure of labor markcIS in Japan, in particular, whercin lifctime cmployment is commonly pracliccd, leads to a relatively homogencolls and slowly adjuslable labor force mixture, which is disadvanlageous to satisfying fast-changing markel trends. Therefore, Japancse companics are cncouraged to utilize supplicrs as efficient sources ofdispamte labor inputs (Smilka, 1991). This is one rcason why Japanese acrospace companies are less vertically integrated compared to Westcm companies.
•
OutZZ De\'elop technical standards Description: Compclitors bcnefil from partial coopcmtion in rcferencc 10 defining standards. This is applicable, in particular, in the case ofstralegie allianccs or other fonllS ofhierarchieal, same-level eorporations. Example: Partncrs agrcc to only use a spccific plug for thcir aircmft modules to allow easy replacemcnt of cenain modules built by diffcrent companies.
•
Out23' A\'oid Iittle learning effects Description: Vertical integmtion leads to a high cost of producing componcnlS beeausc thc firm does nOI bcnelit from leaming that comes with speeializing in a single aClivity (Grossman & Helpman, 2002). Specialization greatly enhances Ihe stan· dard of Iiving of a soeielY. However, companies benefil from economies of seope, beeausc skills and rcsources can bc uscd in rclalcd markeIs. According 10 Nayyar (1993), bencfits from economics of scopc are available for relatcd, hut nOI for unrclated, diversificalions. Bellcfils from economies of scope for related products are
Devc10pment of a Make-or-Buy Deeision-supporting Process
7J
partly redueed by the negative effeet on demand beeause ofthe eapabililY to substitute a produet when the priee of another inereases. Example: In the
long~range
wide-body market segment, introduetion of Airbus'
A380 has a signifieanlly negalive effeet on the priee and sales of Boeing's B747, but an even greater adverse affeet on lhe Airbus' 1\330 and A340 (lrwin & Pavenik, 2004). However, Airbus' overall market share is assumed 10 inerease beeause
syn~
ergies that exis! in ownlng all Airbus family planes migh! induee airlines to switeh from Boeing planes to Airbus planes. This resuh highlights the fact thaI as companies expand their produel !ine over time, profit maximization bccomes more complicated as demand for a particular company's exisling models is sensitive to the price and chamcleristics of its new models. Solution: Companies must either spccialize in one activity or produee relatcd products to benefil from learning effects. •
OuI24 AUracl higher-qualit)' specialisis Description: Suppllers are able to attract higher-quailly specialists because its operational sea1c provides fulure earecr opportunities for more speeialized positions, than a less focused company can provide. Example: This argument is of 1css importance 10 the aerospaee scctor beeause buyers also offer many spccialized positions.
•
OuI25 Achieve avaiJability of belter spccialists Deserip!ion: External speeialists arc likely 10 bc belter spceialists (Domberger, 1998). However, Mahnke (2001) argues lhal if an activity has been poorly managed intemally, due to lack ofspeeialist knowlcdge, il is questionab1c thaI those managers are any belter at eommunicaling their needs to eXlemal providers. Example: This argument, 10 achieve availabililY of beller specialists, is one of the typieal ineentives for aerospaee organizations to hire spccialized eonsultants. However, Mahnke has many doublS on Ihe efficieney of this ehoiee, which should bc acknowledged.
Dcvclopmcnt of a Make-or-Buy Dccision-supporting Proccss
72 k)
•
Re,mlt~·
SlIbmodllle
ResOI Sub-benefit of each setting item Dcscription: This ilcm shows the vcrtical integration and oUlsourcing sub-bencfits ofcach setting itcm, This rcsulr hclps 10 idcntify those setting ilcms that are slrongly
influCllccd by cither vcrtical integration or oUlsourcing.
•
Res02 Sub-benefit of each adjusted selting ilem Dcscription: This ilcm shows the vcrtical integration and oUlsourcing sub-bencfits of each adjustcd sClliog ilem. This rcsuh includes, in addition [0 ResOI, illf1ucncc
from: strategie objcclivcs, quasi-independent faclors, and weighting of strategie objtttivcs as weH as quasi-independent factors. •
Res03 Make-or-Buy ratio Dcscription: This item shows Ihe lotal benefit ofvertieal integration and outsoureing
as a fraetion. All eITorts have been taken to keep the graph simple.
------.--------- Descriplioll 0/items Gnd propositions /1'0111 page 46 10 here ---------.---.--
4.2.3 a)
Quantitath·e Assessment
Pre-us.\·essllle"t
For pre-assessment of approximatc1y 50 propositions eonceming outsourcing and vertieal integration deeisions two indiealors are used, namc1y "potential" and "probability:' The assessment of potential (What is the maximum positive, relative eITeet in tenns of short-tenn profit, marke! share, ete., to the organi7ll.tion, when this cireumstanee occurs?) is measured on a five·point Likert-type (ßabbie, 2000; Trochim, 2006) seale (+, ++, +++, ++++, +++-t+) whercin "+.. rcprcsents a very poor proposition and
"++t++.'
rcprcsents a very promising one. The assessment ofthe probabiliry (How often does this circumstanee occur?) is bascd on a five-point seale wherein "+" rcpresents aproposition thai very seldom oceurs, and "+++-t+" represents aproposition that oceurs very often. This pre-asscssment method ofpropositions based on potential and probability, in general, is sufficiently rcliable to preliminarily rank propositions. This ranking is helpful for accurate assessment, i.e., to spend rclatively more time on significant propositions than on those ones with low potential and low probability.
7J
Dcvc10pmcnl of a Makc-or-Buy Dccision-supporting Proccss
Tablc 9: Vertieallnlegralion Proposilions Scrlal No. lnOI
[ 11'02 :1'_ ....."'_ .... _ld ...'~lI».. fi'...." ........ ~ ..
"'_0I......,'iIy.
0
_ · . _ ~ _ . , , _
-_.. _ _ _ _ _ ,.,-.. _ _...
.-,"'_01.......... ' "'_01 .......... 1 "'_01.........' "'_0I.....,'iIy.
-
i
J
~
I, .,, •
i
.. ..
< .oo'Henn prof. SdO~
1""rf compeo'lion (high) SeIl S
, , , , , , , , , , , " 0u"...«1.1'" ""'1'.011.. " o.m..."I.g
~b.l:...
drnland u""",.,,,in,y (high)
SelI6 Quality or b,.. ilen clitn.,,, (kow)
Figurp«ifl!ol!Y _
