Procurement & Resource Based View

Procurement is An Integral Part of Resource-­ Based View of An Organization Phuong Duong University College Dublin (12251697) 4112 words ABSTRACT Procurement has become an increasingly widespread practice among organizations and is today of strategic importance that attract great interest from scholars in the literature. The primary purpose of the paper is to contribute with a review of leading studies that analyze procurement from the resource-­? based view of the organization. The paper begins by setting out the business environment of procurement and then presents the development and propensity of procurement.

This is followed by a review of principal works and differences of perspectives of resource-­? based view. The next section contains an analysis of the relationship between procurement and resource-­? based theory and discusses empirical works on outsourcing that address outsourcing from the resource-­? based view. The studies are classified into two categories: those studying the propensity to procure and those studying the relationship between procurement decision and firm’s performance. Finally, some insights are put together to assess the outsourcing decision influenced by resource-­? based view with the im of contributing to a better understanding of outsourcing and its role from the perspective of resource-­? based view of an organization. 1. Procurement and the propensity to procure in modern business context Procurement, or in other words, “sourcing”, for years has become “a financial material, but strategically peripheral, corporate function” of an organization (Gottfredson et al. , 2005). In the literature, procurement becomes a key component and is of major strategic importance to many organizations (Humphreys et al. , 1998, Paulraj et al. , 2006). Recent decades have witnessed significant changes in acro-­? economic trends that direct business environment. These changes have been driven by increased globalization, technology innovation, changing consumer behaviours, and consequently, a shift toward procurement and outsourcing (Giunipero et al. , 2005, Giunipero et al. , 2006, Zheng et al. , 2007). Gottfredson et al. (2005) argued that globalization, accompanied by technological advances, is causing the core of competition to change. These days, the ownership of capabilities of an organization is not as important as its ability to govern and take advantage of critical capabilities, whether or not they are he organization’s assets. Procurement is developing so sophisticatedly that even core functions such as engineering, R&D, manufacturing and marketing can be outsourced. That, according to Gottfredson et al. (2005), in turn, is changing the way the firms think about their organizations, their core values and their competitive abilities. The author also revealed that an emphasis on capability sourcing could result in an organization’s better strategic position by reducing costs, streamlining the company, and enhancing quality. Critical functions provided by more qualified partners usually allow organizations to mprove their core capabilities that help them take the lead in their industries. With the business world changing everyday, the propensity to procure becomes prominent than ever. Nowadays procurement is not only practiced by companies in the technology industries but also spread to multiple businesses such as supply chain, manufacturing, services and so forth. It is recognized that not passive cost-­? focused, but proactive value-­? focused procurement strategies are a means of achieving competitive advantage and integral to long-­? term organizational strategy (Leseure et al. , 2005, Mehra and Inman, 2004,

Noonan and Wallace, 2004). In a study of the impact of procurement or purchasing on supply integration and performance, Paulraj et al. (2006) also concluded that: (1) a more strategic purchasing function leads to better supply integration; (2) managers must comprehend the importance of purchasing in incorporating buyer-­? supplier by focusing on “process, relational, information, and cross-­? organisational teams”; (3) strategic procurement can create a win-­? win situation for both buyer and supplier. Taking these into account, it is undeniable that there is a tendency to procure or outsource among organizations.

To assist with procurement decision making, Gottfredson et al. (2005) developed a sourcing opportunities map like Figure 1 to help companies judge the relative merits of their outsourcing possibilities. The vertical dimension of the exhibit “measures how proprietary a process or function is” while the horizontal axis indicates the degree of commonality, both within and outside the company’s industry. The author found that capabilities locating in the upper right portion of the map are potential candidates for procurement. Once capabilities promising strong candidates for alternative sourcing are discovered, the ompany needs to figure out how to source them. In this stage, cost and quality requirements should be taken into account to detect key capability gaps to be filled and top-­? performing competitors or suppliers to partner with. To address these issues, another assessment map has been introduced, again by Gottfredson et al. (2005) as described in the Figure 2 below. Figure 1 What should you outsource? Source: Adapted from (Gottfredson et al. , 2005). Figure 2 How strong are your capabilities? Source: Adapted from (Gottfredson et al. , 2005) The author explained that the position of capabilities on this grid eterminates suitable goals for an outsourcing relationship. Specifically, functions that fall in the upper left should be outsourced to low-­? cost providers regardless of reduction in quality, while those falling in the lower left require outsourcing partners that can both reduce costs and improve quality. 2. Resource-­based view In the opinion of Mol (2003), resource-­? based view has today become the domineering perspective of analyzing corporation strategy. However, this concept has been perceived and developed by different scholars in the literature. Porter (1985) suggested a firm’s competitive position an be analyzed by looking at industry structure and the role of internal decision making was overlooked. This theory contradicts itself with earlier strategic management arguments which highlighted both internal and external factors (Skinner, 1969, Ansoff, 1965) and therefore several scholars such as Barney (1991), Amit and Schoemaker (2006), and Peteraf (2006) felt a different perspective and went on developing the resource-­? based view based on the researches of Coase (1937) and Wernerfelt (1984). In an effort to stress the significance of managerial choice and internal factors, Barney (1991) concluded that he resource-­? based view “examines the link between a firm’s characteristics and performance” by investigating varied resources within the firm. By the nature of its activities, procurement management is subject to obtaining inputs from outside partners in the organization’s environment (Mol, 2003). According to Wernerfelt (1984), resource-­? based approach “views the firm as a historically determined collection of assets or resources which are tied semi-­? permanently to the firm’s management”. Lockett and Thompson (2001) criticized that resource-­? based view is sometimes used to distinguish “appropriate esources, such as physical capital or brand names, from less tangible assets, such as organizational routines and capabilities”. Appropriate resources can be seen as assets utilized as appropriate over a specific period, while dynamic resources may lie in capabilities that form additional opportunities over time. The crucial requirements of resource-­? based view are that relevant resources, regardless of their nature, are specific to the firm and not easy to be imitated by rivals (Barney, 1991). It was noted by Lockett and Thompson (2001) that resource-­? based view is implied in the sense that each firm’s pportunity set is exclusive and a product of the resources is obtained from its past experience. “Therefore, it follows that decisions about the appropriate boundaries of a firm’s activities should reflect its existing resource bundle. If firms face a similar external environment, in the sense of similar product and factor markets, the resource-­? based view suggests that those firms with a similar initial resource endowment should display similar ceteris paribus patterns of behavior and performance”. 3. Procurement is an integral part of resource–based view of an organization Procurement and resource-­based iew Procurement, or in many context, usually referred to as “outsourcing”, is defined as “ astrategic decision that entails the external contracting of determined non-­? strategic activities or business processes necessary for the manufacture of goods or the provision of services by means of agreements or contracts with higher capability firms to undertake those activities or business processes, with the aim of improving competitive advantage” (Espino Rodriguez and Padron Robaina, 2006). According to resource-­? based view, resources can be exploited by means of contracts (Barney, 1999, Gainey and Klaas, 2003,

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Grant, 1991) and this perspective can be used as a framework to help organizations decide which activities should be outsourced and which to perform in-­? house. In this regard, one of the dominant frameworks that explain the propensity of procurement is core competences approach (Gilley and Rasheed, 2000, Teng et al. , 2007). Based on this approach, a firm should invest in activities generating core capabilities and outsource the rest (Prahalad, 1990, Hilmer and Quinn, 1994), regarding that the former activities are those providing the firm’s growth and development (Peteraf, 2006). It is pointed out by Prahalad 1990) that a firm can perform better by focusing on those resources generating the core competences. According to the author, short-­? term success results from the price and the attributes of the products, while long-­? term competitive advantages lie on the core capabilities, which derives from the firm’s collective learning. Strategic outsourcing, based on resources and capabilities, signifies a deep understanding of the core competences, which assist organizations to build their long-­? term competitiveness (Bettis et al. , 1992). Espino Rodriguez and Padron Robaina (2006) concluded that the resource ased view helps to distinguish the core competences and provides knowledge (Hilmer and Quinn, 1994) about which activities to perform with internal resources and which to procure, “determining that the possession of some resources and capabilities is what defines what the firm itself will do and what it will obtain from third parties”. In order to explain the integral part that procurement plays from resource-­? based view, it is important to look into the framework developed by Grant (1991), in which a firm’s resources and capabilities are the main considerations in formulating strategies. In this framework or strategy formulation, five stages were established to associate strategy, competitive advantage and resources and capabilities. Among these five stages, the last one refers to “identifying the resource gaps which need to be filled and invest in replenishing, augmenting and upgrading the firm’s resource base” where there is a place for procurement. This is demonstrated in Figure 3 as below. Grant (1991) believes that regarding the lack of firm’s resources and capabilities, the firm needs to decide between developing resources in-­? house and outsourcing resources from the third parties. Hence, in order to

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