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June 2, Year 2010

Impact of outsourcing dynamism

on firm´s innovativeness Björn Louis

Master in Management of Innovation and Business Development, Halmstad University, Halmstad, Sweden, and

Gustaf Tångne Master in Management of Innovation and Business Development, Halmstad University,

Halmstad, Sweden

ABSTRACT Purpose: The purpose of this paper is to examine the impact of outsourcing dynamism on firm’s innovativeness. Design/methodology/approach: The cited case concerns a small family manufacturing firm located in Sweden, producing electrostatic precipitators, and operating globally. An analysis of the relation between outsourcing as a strategy and development of core-activities was done to see the effect on innovativeness over time. Findings: The outsourcing dynamism shows that a high level of outsourcing has a positive effect on firm´s Innovativeness. Focus on the core activities by outsourcing the non-core activities increase knowledge and skills, which in turn boost firm´s innovativeness. Originality/value: An up to date picture on the positive effects of outsourcing on firm’s innovativeness. Keywords: Core-competence, Core-activities, Innovation, Innovativeness, Innovative performance, Outsourcing, Outsourcing as a strategy. Paper type: Scientific article.

INTRODUCTION Outsourcing as an innovative way to gain or strengthen the none-core activities to further boost the core-activities is today a great challenge but it offers great return (Linder, Cole & Jacobsen, 2002).The goal of outsourcing is to find the best possible deal for the firm from a Total Value Management perspective - which takes into account all costs from the initial extraction and acquisition of raw materials and services to the final disposal of the product (Jiang, Frazier & Prater, 2006). While focusing on the firm’s core-activities, the aim of outsourcing is to release other non-core activities to the “best-in-world” supplier(s) (Quinn & Hilmer, 1994). Offers the firm more flexibility to focus towards their main objectives while making sure their outsourced activities are well handled.

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Outsourcing has also generally been used to improve firm’s flexibility toward change, new technologies, and new turns on the market (Linder et al., 2002). Indeed, when having troubles of performance, speed, control, or profit in one or another firm’s department. The outsourcing alternative relieves the firm from these problems using collaborating companies’ valuable resources and generally offering quick paybacks as well (ibid., 2002).

Not only relieving a firm from problems and giving them the opportunity to focus on their core-activities, outsourcing is sometimes used as a competitive tool bringing external knowledge (Linder et al., 2002). Indeed, in today’s’ world economy, where the information revolution has created an economic environment with shorter life cycles, shaking industries boundaries up, and enlarging interrelated world markets (Özsomer et al., 1997). It is not always easy for firms to cope with their industry environment. Such environmental dynamism leaves no other choice to companies than to be innovative enough to catch up with their industry (Özsomer et al., 1997). Outsourcing can therefore help organization in this way bringing external knowledge, source of innovativeness (ibid). Outsourcing as a process of giving away potion of the firm’s activities, can also, by definition, curb the firm’s innovativeness since it decreases firm’s control (Grossman & Helpman, 2005).

Research Objectives Companies strategically use outsourcing to access competitive skills and respond to business needs (Linder et al., 2002). Outsourcing as a strategy is a process to subcontract activities to other actors in the industry. Does this result in increasing innovativeness? Can outsourcing strategy be a source of new knowledge through collaboration when most of a firm’s activities are run by others actors in the industry?

Many authors have defined outsourcing, strategic outsourcing, outsourcing innovation and their success factors but none have truly illustrated the effects of outsourcing strategies on firms’ innovativeness through improved focus on core competences.

Through a literature review, drawing out a research framework and analyzing a case study of a highly outsourced and innovative firm. We would like to highlight the innovative impact of outsourcing along time on innovativeness, through outsourcing strategies used at a high level. Since the firm is innovative and highly outsourced, we hope to conclude that dynamism of outsourcing influences firm´s innovativeness, through better focus on core competences.

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LITERATURE REVIEW

Innovation Invention is the creation of a new idea (Galbraith, 1982), while innovation is an idea, practice or object that is perceived as new by an individual or other group of adopters (Rogers, 2003). It is successfully introducing something new to commercial or practical objectives according to Schilling (2005). It is the new use of a good, service or method that is new to it (Schmookler, 1996). And, according to Love and Roper (1999), it affects the firm’s competitive position. Four types of innovations are defined by Francis and Bessant (2005); cited in Tidd, Bessant and Pavitt (2005); product innovation, which is a change in the product offered to the customer; process innovation, that changes the way products are created and offered; position innovation, which modifies the introduction way of products/services and; paradigm innovation, that changes the mental model framing the organization’s activities. Each of these types can be described as incremental (‘doing better’) or radical (‘new to the world’) (Tidd et al., 2005).

Competitive advantage can come from amounts of resources, assets, etc, but it increasingly comes to support the ones who can rally experience, technological abilities and know-how to produce newness in their offerings and the methods they generate and deliver those offerings (Tidd et al., 2005); the ones who are “innovative”.

Schumpeter (1939) stated that innovation leads to creative destruction, which means that new innovations destroy old ways of doing things, and can be used to measure how innovative the innovations are. Indeed if we can measure how the previous method, goods or service became obsolete compared to the new one, we could compare these result and define which innovation is most innovative.

The innovators are the ones who move first. “The first enterprise to make a given technical change is an innovator. Its action is innovation” (Schmookler, 1996). The ability of a firm to repeat that process we define as innovativeness (Parsons, 1992).

Table 1 below shows the evolution of defining innovation during the last decades. The creative destruction mentioned by Schumpter (1939) highlight the fact that each innovation can turn the previous product or process it replaces obsolete. This concept will be wider explained later in this section.

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1939 Schumpeter Innovation is a useful and creative change which leads to creative destruction

1982 Galbraith Invention is the creation of a new idea. Innovation is the process of applying a new idea to create a new process or product

1996 Schmooklers Every innovation is (a) a new combination of (b) pre-existing knowledge which (c) satisfies some want

1999 Love & Roper Innovation is “a commercial rather than a technological activity, which is related to and affects firm´s competitive position

2005 Schilling The act of introducing something new to commercial or practical objectives. The innovation projects should align with the resources and objectives, leveraging the core competencies and helping achieving the strategic intents.

Table 1: Definitions of innovation

There are no one-size-fits all recipes to make every firm more innovative (Jagerman, 2003). Even though successful innovative firms have specific characteristics, each firm must imbed innovation in their own way.

To be an innovating firm or not to be is not always the given choice, a fast second mover or even a third mover can outperform the innovator (Teece, 1986). It is not enough to just have an invention, skills and knowledge of the market is vital or an imitator/follower will adopt the innovation to a commercial success. 80 percent of all innovations fail due to bad commercialization (Rogers, 2003).

A commercial success is critical or the firm will not make enough profit to repeat the innovative process. Operations of firms can be considered as a chain of value creating activities. Innovativeness is here defined as how well the firm manages to repeat the innovation process, this perspective will be used as framework while looking at the organizations innovativeness in relation to a high level of outsourcing.

Figure 1: Schematic model of prerequisites of innovativeness.

Creation of a new idea

Applying the idea

Repeating process

Creative change

Organisations innovative

performance

Invention Commercialization Innovation Continuous change

Innovativeness + +

Knowledge base

Complimentary assets

Diffusion and

adoption

Innovative culture

Creative destruction

External

Serendipity

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One wildly accepted conceptualization of knowledge can be defined as meaningful information useful to the firm (Weissenberger-Eibl & Schwenk, 2009). An innovation consist of certain technical knowledge of how to do things better than existing state of art (Teece 1986). A firm’s innovative capacity lies within the firm’s ability to absorb new knowledge (Cohen & Levin, 1990). To be able to absorb new knowledge the firm needs to have a knowledge base, internal knowledge embedded in the organization. Knowledge is perishable and is therefore very important to continuously update with external information. The external information needed by the top management is often divided in two broad types - information on immediate environment of the firm, and the wider environment. The immediate environment of the firm includes its customers, suppliers, competitors and the industry within which the organization operates. The wider environment includes everything else outside the firm. Absorptive capacity is the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends (Cohen & Levin, 1990). Tsai (2001) further add that the absorptive capacity is limited by the firm’s knowledge base.

Successful commercialization of an innovation requires know-how to be utilized in conjunction with other capabilities or assets. Services are such as marketing, manufacturing and after sales services which are obtained from complementary assets which are specialized. Generic assets are general purpose assets which do not need to be tailored to the innovation. Specialized assets are those where there is unilateral dependency between the innovation and the complementary assets. Cospecialized assets are those for which there is bilateral dependency (Teece, 1986). Dependencies between assets and innovativeness are illustrated in figure 2.

Figure 2: Teece (1986) Complimentary assets: Generic, Specialized and Cospecialized.

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Sustainable advantage requires more than just the ownership of difficult-to-replicate assets. It also requires unique and difficult-to-replicate dynamic capabilities - distinct skills, processes, procedures, organizational structures, decision rules, and disciplines. These capabilities can be exploited to continuously create a unique assets base (Teece, 2007). Jagersma (2003) also highlight the importance of correctly assessing commercialization risks, allows a firm to custom-tailor its approach to innovation; ignoring the process is to innovate failure

According to Rogers (2003) the rate of adoption is the relative speed which an innovation is adopted by members of a social system. An innovation generally follows an S-shaped curve. The innovation is taken up slowly by a few (pioneers) then by a rapidly increasing number of early and late followers and finally laggards.

Leonard and Rayport (1997) say that customers are sometimes so accustomed to current conditions that they do not ask for new solutions. Hence firm´s must introduce new products before customers know what they need but not so far ahead that the customers are not interested (Jagersma, 2003). Abernathy and Clark (1985) argue that a firm gains competitive advantage when it achieves a position in one of perceived attributes or a combination of them that is both valued by costumers and superior to its competitors. When an innovation reaches critical mass, the innovation´s further rate of adoption becomes self-sustaining (Rogers, 2003).

Setting clear innovation aspiration is the key. A culture to nurture and sustain the innovative spirit and, therefore, institutionalize innovativeness, which Jagersma (2003) defines as building a creative environment. Innovation occurs best when initial efforts are separated from the operating organization and its control (Galbarith, 1982). Not lone-wolf inventors but rather on multiple high performance teams. Innovativeness indicates overt behaviour of change (Rogers, 2003).

The conventional role of a designer is the wrong environment for successful innovation as they often have requirements to comply with the rules and templates which often set the parameters for thoughts that are permitted. This means that they miss the bigger picture. It is the combination of measures together with the personnel concerned, awareness and acceptance of opportunities to happen. “True innovation is complex and tumultuous – full of spurts, Frustrations and sudden insights” (Quinn, 2000 p.22) Discoveries which prove to be important appears when you are looking for something else, this is called serendipity. Here are the six key elements of the concept serendipity, conducted by Mellberg, Olsson and Rundquist (1998).

I. Conducts research. II. Encourage freedom of research. III. Encourage the exchange between scientists and development personnel. IV. Raising awareness of the importance of serendipity.

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V. Involve staff in many different projects and issues to be cross-fertilization. VI. Creating wealth of knowledge.

It is important to give individuals the right to be unconventional and open to the radically different approaches.

All innovations impose change of some kind, but change does not need to be destructive (Abernathy & Clark, 1985). A great innovation vision provides a broad roadmap but leaves room for creativity, tolerance for ambiguity and a willingness to destroy what exists. Wealth creation results from moving toward innovation aspiration. Those firms that develop an innovative culture can use it to maintain their competitive advantage (Jagersma, 2003).

Abernathy and Clark (1985) divide innovations in a “transilience-map” after their capacity to influence the established system of production and marketing from regular to revolutionary. Where regular innovations often are invisible, yet can have a dramatic cumulative effect on product cost and performance while revolutionary innovations disrupts and render established technical and production competence obsolete.

Revolutionary innovations usually create a leap into the future but are also dangerous and can hurt. These types of innovations needs a constant flow of new knowledge or creative destruction may cause serious difficulties in the short term and long term for those who cannot acquire skills and work experience.

By the time imitators have caught up, the innovator has moved on. Change is the root of all innovation. “Innovate or die” is harsh but it is the truth of today. Without a competitive edge driven by an innovative spirit the firm will most likely parish. The innovative process requires a tailored corporate strategy and dedicated execution. Successful innovators understand that they do not manage innovation but rather oversee a portfolio of innovative strategies (Jagersma, 2003).

Outsourcing Outsourcing is to sub-contract company´s activities to an external collaborator (Barthélemy, 2003). Supposed to reduce transaction costs, outsourcing is the transfer from ‘make’ to ‘buy’, so called ‘backward’ vertical integration (Grossman and Helpman, 2005). Outsourcing is introduced with the ambition of increasing performance and intrinsically reducing costs, or enhancing the organization either to boost their flexibility or to focus on core activities (Business Dictionary, 2009). The departments or activities that are outsourced are supposed to be non-core to the business (Sourcing mag, 2009).

Quinn and Hilmer (1994) stated that firms should concentrate on core activities while outsourcing the ones that do not create value or uniqueness toward the customers. Outsourcing is the tactical use of external resources to run activities that were formerly held by internal resources (Elmuti, 2003). That way, managers would empower their firm’s abilities in four ways: maximize returns on internal resources; well developed core

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competences provide formidable barriers against present and future competitors; full utilization of external suppliers’ investments; decrease risk, shorten cycle times, lower investments and create better responsiveness to customer needs (Quinn & Hilmer, 1994).

The reasons for deciding outsourcing as a strategy are wide and described by many scholars. The objectives aimed to be reached according to Quinn (1999) are: to obtain more valuable, more flexible and more integrated services than domestic resources can provide; to increase internal abilities by collaborating with the best-in-world exterior knowledge resources; and to reach shareholders value gains and cross divisional synchronization that domestic resources cannot accomplish. For Elmuti (2003), strategic outsourcing helps firms to enhance areas or factors such as expertise, service quality, reduce staff, streamline the process, decrease costs and lower the administrative load and saving time.

A survey held in 2006 by Enterprises Systems and sourcemag.com (sourcemag.com, consulted on February, 20th, 2010) over 463 companies picked up casually worldwide highlighted the nine main reasons for firms to outsource (multiple answers were allowed).

Figure 3: Resons for outsourcing (Source:2006 data center outsourcing survey by enterprise Systems IESJ.com and sourcingmag.com; http://www.sourcingmag.com/content/c060424a.asp)

All the factors justifying outsourcing defined here above only implicitly mention the quest for innovativeness felt by firms and do not evoke the limitations of outsourcing.

Through strategic outsourcing, companies try to empower their core competences or structural flexibility to actually meet the innovative revolution felt within markets and

05

1015202530354045

Percentage

Reasons for outsourcing

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industries nowadays (Quinn, 2000). Quinn (2000) defined four forces that generally drive the innovation revolution: the demand of the global market that is doubling every 14 to 16 years; the supply of scientists that has recently significantly increased through increased sources of knowledge; the interaction capabilities that have boomed with the revolution of communication means; and the new incentives that have emerged opening trade barriers and lowered taxes.

Mazzanti et al (2007) have defined the insights of innovation outsourcing around four sub-issues more focused on technological organizations. First the technological uncertainty present in the firm sector could lead the firm to lose its focus in trying to find the right innovative way. In such situation, companies would therefore outsource this type of activities until the market gets back to stable. Second, outsourcing can help companies to experiment external knowledge interfaces and other sources of learning-by-interacting that would bring technological innovations internally. Third, innovation radicalness seems to have a direct correlation with the vertical integration of the firm; indeed when introducing new radical innovations, vertical integrations have shown to be superior because external suppliers are unable to “understand the viability of an innovation too distant from their current competencies” (ibid). Fourth and last, organizational innovation and flexibility which are two vital aspect of an innovative firm have shown to be more efficient when coupled with strategic innovation outsourcing.

Again, Quinn (2000), on his side has defined three reasons for outsourcing innovations: resources limits; need of specialists’ talents; multiple risks management. Resources are indeed the first reason of outsourcing. Since companies cannot afford to put all the efforts needed for each innovation they rather have to outsource and use suppliers’ skills and resources. Companies might not have the required skills for all necessary technical fields, bringing therefore the need for using others’ technical talents. Every desired innovation also possesses an amount of risk that the firm must handle; in the case the firm cannot afford this risk development, outsourcing becomes a solution.

Leavy (2004) stated that one of the major strategic risks linked to outsourcing is about losing skills. Because outsourcing is very often implemented to save short-terms benefits, it therefore often fails long terms perspectives; while in this lapse skill could be have been improved to catch up with new trends. As an example, Leavy (2004) took case of General Electric when they produced micro wave features. For some flexibility reasons, GE outsourced this production to Samsung. In a short time lapse, Samsung managed to increase the scale on their micro wave production. GE after a few months had to realize that they could not in-house the production anymore since the high quality and low costs reached by Samsung were too hard to replicate. We understand therefore that outsourcing must be well thought because it takes skill, and therefore resources, away.

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RESEARCH FRAMEWORK Authors such as Linder et al. (2002), Quinn and Hilmer (1994), Sourcing mag (2009), Elmuti (2003), etc, mention limits of outsourcing as being the core competences of a firm; companies are therefore not supposed to outsource any kind of activity linked to the core skills of the organization. According to Prahalad and Hamel (1990, pp.83-84) a core competence has three characteristics: First it provides potential access to a wide variety of markets, second, it increases perceived customer benefits and third, it is hard for competitors to imitate.

Coyne, Hall and Gorman Clifford (1997) argue that with their definition of core-competences; “A core-competence is a combination of complementary skills and knowledge bases embedded in a group or team that results in a the ability to execute one or more critical processes to a world-class standard” (Coyne, Hall & Gorman Clifford, 1997. p. 2) many skills often cited by organizations can be excluded, such as: patents, brands, products and technologies. When the core-competences have been defined (ibid) have developed four questions to evaluate their superiority:

I. Are our skills truly superior? II. How sustainable is the superiority? III. How much value can the competence generate in comparison to other economic levers? IV. Is the competence integral to our value position?

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 (Gilley, & Rasheed, 2000).

The focus of this paper is targeting outsourcing strategies only, which implies that no other kind of cooperation will be taken into consideration. In the figure 4, we developed a linear equation representing the level of outsourcing according to the place taken by core competences within an organization; where the maximum level of outsourcing possible for an organization (y-axe; in percent of the firm’s activities) is equal to 100 (total size of the firm and previously held activities in %) minus the place taken by core activities within the firm (x-axe; in percent). Being hard to define in exact numbers, these percentages will be divided in three categories: Low, Medium, and High.

To clearly define what are companies’ outsourced activities, we take support from Lonsdale and Cox (1998) who defined that outsourcing is “is the process of transferring an existing business activity, including relevant assets to a third party” and Elmuti (2003) stating that outsourcing is the tactical use of external resources to run activities that were formerly held by internal resources. De facto, only activities that were handled in-house in previous time and that are now transferred to a third party are considered as outsourced.

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Figure 4: Maximum level of outsourcing according to the place taken by core competences within an organization.

All companies can be placed on this model according to the place held by core activities and the level of outsourcing. Probably only few would have a perfect equation such as forty percent of core business and sixty percent of outsourcing. Large collaborative firms do not outsource everything that does not belong to core business; using alliances, acquisitions, intense collaborations, and a small percentage of outsourcing, these firms would find place in the space under the line “limits of strategic outsourcing”. Much smaller firms that do not have a wide range of resources, are more likely to focus on their core activities while outsourcing other activities. These firms formally called SME’s would therefore find a place much closer to this limit of strategic outsourcing.

When applying our case study on this model, a third dimension is going be added, Innovativeness. By comparing three situations of strategic outsourcing and innovativeness at different moments in a firm’s history, are we hoping to see a correlation between both phenomenons.

It is hard to measure the exact size of each activity held in-house and no existing formula to measure the firms’ innovativeness. The terms “low” “medium” and “high” will be used to

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describe the percentages of outsourced none-core activities and innovativeness at the different stages of the analysis.

METHOD/DESIGN To reach and answer the research question, this paper is aimed to highlight the innovative impacts of outsourcing along time on innovativeness, through outsourcing strategies used at a high level; through a literature review, a theory framework and a case study. Since a case study would provide an “intensive examination of the setting” (Bryman & Bell, 2003; p.62) and “an in-depth elucidation of it” (ibid; p.63) it would therefore offer a relevant practical example to apply the research on. The aim of a case study being to “identify typical cases that can be used to represent a certain class of objects” (ibid; p.63), this paper focuses therefore on a typical innovative and highly outsourced firm, ELFI Elektrofilter. ELFI was previously producing, marketing and selling their product. Now they outsource the activities they did not have competences for and are now focusing on what they do best. This firm provides therefore a very good basis to analyze the consequences of outsourcing dynamism along time on innovativeness.

To learn more about this subject, the information will be treated on a deductive approach, aiming to deduce meaningful information from interviews and apply them to the theoretical framework developed earlier in this paper. This approach for examine primary data is relevant for the researches to apply on theories (ibid). Primary data were collected through interviews made with both former and current CEO’s of ELFI Elektrofilter. Semi-structured interview guides were used to obtain more exhaustive answers.

According to Wirtz and Caspar (2002) reliability constitutes the most important criteria for empirical research besides validity and objectivity; our respondents being both former and current CEO’s, to cover both the history and current vision of the firm.

Validity determines how trustful the findings are and how these findings can reflect the reality (Bryman & Bell, 2007); we paid great attention to choose recognized authors within our field of research.

RESULT ELFI is a small firm located in Alingsås (Sweden) that is manufacturing small standalone comfort and ventilation units for in-house climate. The firm´s vision is to clean the air we breathe in an environmental friendly way with low energy consumption. Selling “air” is not an easy task. ELFI is not manufacturing all the parts in their products, but do the final assembly and quality-testing.

Previously manufacturing, assembling and testing all the units were held by the firm as well as marketing and sales. In 2000, ELFI started collaborating with a wholesaler to market and

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sell the produced units. (Un)fortunately the wholesalers demand was high and ELFI’s production could meet the wholesalers requirement on production units and cost per unit. The collaboration was not profitable and was therefore stopped. ELFI decided to re-think their business and value-chain.

Nowadays the firm have outsourced their production to Chinese Airdow. Airdow also handles the marketing and sales operations in China. ELFI are doing the final assembly and testing in Sweden of the products being sold on the European- and the American market. ELFI can now focus all their energy on the firm core-competences, R&D and design.

To truly be, an innovative force is grounded in the corporate culture and like Jagersma (2003) nicely put it; setting a clear innovation aspiration is the key. ELFI has done exactly that, they have, through their former CEO and founder, imbued a core-competence in innovative spirit. The firm’s capability to encourage creative change is easily shown trough their talent to generate new innovative products. Years after years, the product has found new markets, and the firm also developed a wider line of air filters for private households as well as schools and industries. The step towards environmental caring was also taken since incremental innovations have been implemented to the product to reduce energy consumption in the years of the 21th century. Recently, in 2009, ELFI evocated a new product design for the health-care industry and a possible entrance on the industrial-pollution-filtering market.

The innovative capability has been built throughout the years. As mentioned by Cohen and Levin (1990), it´s the firm´s knowledge base that determines the absorbing capabilities to learn new skills. In ELFI’s case, these capabilities have been built around Jan-Olof Wallin, who has from the beginning of the firm developed and improved his product and process knowledge. ELFI’s acceptance of free thinking is demonstrated by former CEO Jan-Olof Wallin: “Nothing is impossible; we are full of ideas just waiting to come to life”. From an outsider’s first impression of the firm, it looks like the firm surrounds a lone-wolf inventor that is the heart and soul of the innovative process. And it is part true. Most of the knowledge base is allocated with the former CEO, Jan-Olof Wallin.

This practice of basing most of the product development knowledge on one person is risky; losing this person would mean losing necessary knowledge and therefore any related competitive strength. Since the firm is small and never really grew in terms of employees, most of the available working force was employed to produce units when sales were high; making therefore a correlation between increase of sales and low product development.

Coyne et al. (1997) mentioned the need for combined knowledge and skill to execute critical processes. It is needless to say that ELFI’s core-competences have been developed around their R&D, knowledge and skills held by Jan-Olof Wallin. Now when most of the manufacturing is outsourced to their Chinese partner, ELFI has made a beginning to put a greater focus on cultivating their knowledge.

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1970 -> 2000 During this period of time, ELFI is a self sustaining firm producing and selling their products on their own. They are a small family firm with focus on the lone-wolf inventor’s ability to juggle all the activities. Most of ELFIs employees are working in production and assembly since producing and selling much, would provide profit and increased knowledge.

ELFI jumped on every train that they could, not that they needed to or had the capacity to generate value to the firm in form of revenue but rather to creating wealth of knowledge Mellberg et al. (1998), and rallying experience Tidd et al. (2005). Jan-Olof Wallin early understood that to be successful and to be able to breed innovations a wide knowledge base was needed, but exactly what was meaningful information to the firm was not certain.

Trying to handle an increasing amount of activities caused ELFI to drift from their true core-competence, research and development, and towards generating money for survival. . This had tremendous effect on the firm´s innovative performance, which ultimately stagnated. “Minor improvements were brought to the product but without the aim to develop products for new potential markets. If we should compare rate of innovativeness of today with the period between 1970 and 2000, the knowledge and skills we now possess makes us much more innovative.” said Jan-Olof Wallin.

Measures 1970 -> 2000

Core-Activities Building knowledge towards product and processes; product development takes a small place within ELFI: “Low”.

Outsourced Activities None: -> “Low”.

Innovativeness Product and process, knowledge base and skills are being built; innovativeness is “Low”.

Table 2: Measure of the three phenomenons in the first period

2001 -> 2009 On the move towards being more profitable, ELFI decided to outsource the most strenuous and expensive departments such as marketing, sales and distribution to a wholesaler. The part of the firm’s specialized assets which do not need to be tailored into the innovation (Teece, 1986). ELFI are now working to revamp their production to meet demands of the wholesaler. The knowledge ELFI has captured and continues to collect through their curios nature is now starting to serve its use in a more focused R&D and introduce newness in their offerings (Tidd et al., 2005). Their products are starting to become more complex and ELFI is stretching there thinking with products targeted for specific markets.

The innovativeness rose with external knowledge and feedback from the wholesaler, since the wholesaler was a distributing actor, it brought ELFI feedback about their products as well as new market knowledge (Cohen & Levin, 1990); as illustrated in figure 1, external knowledge is an important asset of a firm’s innovative process. Even though this particular

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time was very stressful with a lot of focus on production, ELFIs innovativeness increased. “It was a critical time for the company with intensive force on production. Even though it was a stressful period it brought us knowledge and new information that would be explored when time permitted” said Jan-Olof Wallin. He added: “I was impatient to shift from an intensive focus on manufacturing to new product development and improvement of existing products”. ELFI are now on the stride to enhance their core-competences which is possible with increased knowledge and skills (Coyne et al., 1997), thanks to their outsourcing collaborations. The most essential resource at this stage appears to be that ELFI’s innovativeness is incarnated with Jan-Olof Wallin. When analyzing the resource represented by the former CEO through the RBV (resource based view), we realize his value; his product skills and knowledge are precious, rare, inimitable, and a non-substitutable resource for the company (Barney, 1991). Indeed, acquiring internal competences towards the product and developing a market understanding through external collaborations. The richness held by ELFI through Jan-Olof Wallin are hard to replicable for competitors– which is also described as a highly valuable resource by Collis and Montgomery (1995).

With new opportunities appearing, ELFI slowly starts to think of the firm´s future growth. The company is now aiming to develop air cleaning units for big buildings and enter foreign markets where the need is higher than on the European market and Swedish quality is perceived as added value.

Measures 2001 -> 2009

Core-Activities Focus on manufacturing and product development. “Medium”.

Outsourced Activities Marketing, distribution and sales activities. “Low -Medium”.

Innovativeness Significantly increasing innovativeness. “Medium”.

Table 3: Measure of the three phenomenons in the second period

Nowadays A tumultuous period had it starting point by breaking free from the collaboration with the wholesaler. The collaboration ended by a series of reasons but the most significant motive was that the collaboration was tearing on ELFIs entrepreneurial spirit and innovativeness due to the high demand of the wholesaler and the manufacturing capacity of ELFI could not follow. The company could have created a new manufacturing facility and hired work force; but as Jan-Olof Wallin mention: “ELFI’s entrepreneurial spirit is based within the firm´s family nature and an expansion could have been harmful for the company”. (Through the interview, we could feel that the former CEO indicated a certain fear for loss of control, which can explain the choices made for not expanding).

External knowledge won through the wholesaler collaboration is now becoming useful while exploring new markets and new possible partners. ELFI is developing a new outsourcing strategy which will reduce their need of space within the manufacturing area. Since the

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strategy includes outsourcing of production, distribution, marketing and sales activities. The firm reduce production capabilities to enhance better focus on product development. "EFLI have now reached a position where we can work on what we do best, developing new innovative air cleaning units for specific markets representing Swedish quality" said Jan-Olof Wallin. De facto, having described the value of resources incarnated by the former CEO through a resource based view, showing power being freed-up that ELFI now can enjoy more efficiently.

By outsourcing nonessential activities ELFI can pursue an innovative differentiation strategy and become better innovators (Gilley & Rasheed, 2000). By starting collaborating with the Chinese manufacturer “Airdow”, the new outsourcing strategy increases ELIF´s production flexibility and capability with better focus on product development and market opportunities.

Through a cultural collaboration, ELFI enjoy a new source of knowledge and feedback from the market. Airdow takes care of the manufacturing of ELFI’s electrostatic precipitators, marketing, distribution and sales on the Chinese market. Products only come to Sweden for an approval test. The collaboration generates revenue, which ELFI can use in R&D. Now when ELFI are doing a correct assessment of their commercialization risks, they can custom tailor their move towards innovation (Jagersma 2003).

The announcement of new products and new specific markets such as health-care and industrial-pollution-filtering translate a real confidence within the product and the future of the company coming from widened knowledge and increasing innovativeness. We now see ELFI as an innovative company well focused towards what they do best; this have been built up along time through the outsourcing of non-core activities, and acquisitions of market knowledge through collaborations.

Measures Nowadays

Core-Activities Still “Medium” with a better focus.

Outsourced Activities Main part of the non-core activities is outsourced: “Medium-High”.

Innovativeness Increased knowledge, skills in product development: “High”.

Table 4: Measure of the three phenomenons in the third period

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Illustrated Results

Figure 5: Comparative results illustration

In the first period, ELFI did not use an outsourcing strategy. All the activities were handled in-house. Manufacturing and selling electro air-filters, the product knowledge and skills were slowly built. The first period in the model, 1970 -> 2000, is placed low on each axes translating a low outsourcing strategy, a low portion taken by core activities since these have to be developed along time and de facto, low innovativeness.

Between the two last periods, the difference in level of outsourced activities is bigger than it seems. In the second period ELFI was outsourcing marketing, distribution and sales activities to a wholesaler, while in the third period they outsource previous activities plus manufacturing to their new partner, Chinese Airdow.

The evolution of core-activities has not been large along time but has lately been allowed an increased focus. The result of this improved focus can especially be seen in innovativeness.

Observations Looking at the Level of outsourced activities in relation to the Size taken by core activities, the correlation show that the closer to the outsourcing border in red, gives a higher innovativeness. This might not be a constant phenomenon common to all companies since other forms of cooperation such as alliances, acquisitions, in-sourcing, etc, can be used. For

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ELFI, it shows that focusing on core-activities by outsourcing non-core activities increase knowledge and skills, which in turns boost firm´s innovativeness.

CONCLUSION AND IMPLICATION The outsourcing dynamism effects on innovativeness has not been illustrated or clearly described by previous studies. Authors, definitions and researches such as Quinn and Hilmer (1994), Quinn (1999), business dictionary (2009), Sourcing mag (2009), all state that outsourcing should be used at a high level to give away potion of the firm that are non-core or do not bring value to the customer. Unfortunately no one really has illustrated the direct correlation between Level of outsourced activities and improved Innovativeness. The survey led by sourcemag.com (consulted on February, 20th, 2010) mentions eight reasons for outsourcing activities without any concrete statement on improved innovativeness.

The comparison between the three periods in the story of the referenced firm, in terms of level of outsourced activities and innovativeness, shows that a correlation exists between these three phenomenons. In the early years of ELFI, all the activities from product development to marketing, distribution and sales were handled in-house. Along the years, more and more activities have been outsourced and given away to better skilled partners. This has early shown that “freeing-up” internal resources towards product development skills and knowledge, translates an improvement of firm´s Innovativeness. The firm´s resources have shown to be mainly held by the former CEO, who, along years, has gathered product knowledge and skills as well as market understanding through collaborations.

Nowadays, ELFI is regularly developing new products and aiming for specific markets; this innovative freedom comes from the fact that the knowledge base has been enlarged along years thanks to a better outsourcing strategy. This allows the firm to focus their resources on what they do best: developing Swedish air filters. That this case has reached an almost ideal correlation shows that the firm now have a better innovative potential and enhanced competitive position.

Having an understanding and an open mind to the importance of continuous change makes the firm more accessible for serendipity and future growth. To complete previous scholars, we can state through this analysis; outsourcing must be applied on non-core activities to free-up internal resources, this for better focus on core activities, widen skills and knowledge, and, in fine, improve firm´s innovativeness.

LIMITATIONS AND FURTHER RESEARCH The paper focuses on a small family manufacturing firm. It is therefore a bit delicate to draw conclusions applicable to all economic sectors. Large companies can indeed use other forms of cooperation with partners such as alliances, acquisitions, in-sourcing, etc. In these cases, a direct correlation between Level of outsourced activities, Size taken by core activities in

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percent of the company and Innovativeness might be more complex to establish. Through this article we have shown that a high level of outsourcing has a positive effect on firm´s Innovativeness. What future research should attempt to do is further specify the effects of outsourcing on innovativeness by examining the outsourcing behavior of a broader sample of firms. See exactly how close to the core-competences activities can be outsourced and to what extent these activities can be “set-out” without losing exchange of knowledge. A bigger sample applied on the model showed in figure 5 could create clusters among company´s different situations, and therefore highlight positions that are more alike to enhance firm´s Innovativeness.

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APPENDIX

Questionnaire, Interview with the owner and former CEO, Jan-Olof Wallin • How was the company founded, when and where, and by whom? • How does the organizational organization look within and outside the company?

(total number of employees, number of employees within each division, any division with special focus, transferring of information, infrastructure, recruitment of personnel)

• Does the company have any external investors? If so how do they participate in the company action?

• Does the company have a clear business idea/plan? How does it look like? Explain. • What is the company vision (the reason why it exists)? Explain. • What is the current strategy? General speaking, what is the goals regarding the near

future, explain. • What are the threats on the market? (Global economy, environment) How do these

threats affect the strategy? Explain. How can these threats be dodged? Explain. • How often is the strategy/business plan renewed? Explain. (examples influential

events- market expansion, product demand fluctuation) • Any critical incidents that has caused the company strategy to be renewed or

altered? (example- family relations, expansion, employee discharge, investors) • Any existing cooperation between your company and other companies? Within the

same industry or external? Are there companies who have created alliances to better compete on the market?

• Does the company have pillar of foundation that differs from other companies in the industry?

• Where is the company positioned in the product line? Explain. (selling to a wholesaler or directly to end customer)

• Who are the customers? (Industrial or private. Small large corporations.) Explain. • Describe the intensity of rivalry in the industry. Are there any dominating companies? • Is it possible for a new entrant to enter the market and conquer market share? Does

it exist any hinder/protection against new entrants? (Example: Economy of scale/scope, patent, laws). How you as a company act against a new entrant? Explain.

• Is the company marketed as an exclusive brand or low-price marketing strategy? Explain.

• Are there new markets to conquer, such as new countries? What market/countries are interesting and Why? What is the qualification for further expansion? Explain.

• What products does the company offer? What specific products is the bestseller (also called cash-cow)? Explain.

• Has the company produced products that differ from today’s products in the past? If so what caused the change? Explain.

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• How does the company production line look like? What manufacturing system is used? How many steps exist in the process before the product is ready for the customer? Explain

• Any specific step/steps in the process that is extra time consuming or difficult? If so why? Is it possible to skip certain procedures to make more money today? Explain.

• Is there any installation process for the end customer or does the company supply that service? Explain.

• How do you and your employees look at the products, are they self selling or is a marketing plan required to reach the customers? How does the company advertise themselves? Explain.

• Is the company vertically integrated with a supplier or customer or any other company types in the industry?

• How does the cooperation function between supplier and the company? Who has the power to influence who? What do the suppliers manufacture for the company? Where are the suppliers geographically located in relation to the company? Any standards, laws, CE-label that needs to followed? Do the company and supplier have certificate today? Is it possible to replace a supplier? Explain.

• How does the cooperation function between buyer and the company? Who has the power to influence who? Where are the buyers geographically located in relation to the company? Any standards, laws, CE-label that needs to followed? Do the company and buyer have certificate today? Is it possible to replace a buyer? Explain.

• Is there any other products or substitutes that could replace your product on the market? Explain.

• Is there any laws or standards that most be followed? Any future laws or standards coming up? Do the company benefit from these laws and standards or hinder development and sells? Explain.

• When did you and the board of executives understand that now we doing well? Any specific decisions that was good or bad? How did this affect the company as a whole? Explain.

• Has the company climate changed during the expansion up till today? Positively or negatively? Explain.

• How much influence do the employees have in the decisions made by you and the board of executives? How do the employees react to the decisions being made, they stand behind them? Explain.

• Does the company have a reward system? If o how does it designed? Explain. • How does the company take advantage of feedback from customers and employees?

Explain. • Does the company focus on developing new products or product improvement? How

does this work, where do the new ideas come from? Does this development involve ex-parties? Explain.

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• Have the company had collaboration with students/schools in the past? If so what did they perform?

• What exists in the new future for the company and how will the market develop? Explain.

• Does the company mainly focus on expanding and organizing the organization or is the main focus on the products? Explain.

• Do you have a role model? Have you read any books on how to run a company, biographies? Explain.

Questionnaire, Interview with the current CEO, Pernilla Wallin • Does the company have a clear business idea/plan? How does it look like? Explain. • What is the company vision (the reason why it exists)? Explain. • What is the current strategy? General speaking, what is the goals regarding the near

future, explain. • How does the organizational structure look like? • What core-competences exist in the company and are they bound to specific people,

that the company stands and fall with? • 6.1 How does the company´s production line look like? • 6.2 Any specific step/steps in the process that is extra time consuming or difficult? If

so why? Is it possible to skip certain procedures to make more money today? Explain. • How do you and your employees look at the products, are they self selling or is a

marketing plan required to reach the customers? How does the company advertise themselves? Explain.

• How does the cooperation function between supplier and the company? Who has the power to influence who? What do the suppliers manufacture for the company? Where are the suppliers geographically located in relation to the company? Is it possible to replace a supplier? Explain.

• Have the company had collaboration with students/schools in the past? If so what did they perform?

• Where do you see the company in 3 years, 5 years and 10 years?