Learning by supplying

• Author: Juan Alcacer,Joanne Oxley
• Date: 01 February 2014
• DOI: http://doi.org/10.1002/smj.2134
• Published date: 01 February 2014

Strategic Management Journal

Strat. Mgmt. J.,35: 204– 223 (2014)

Published online EarlyView 14 June 2013 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2134

Received 14 April 2012;Final revision received 26 March 2013

LEARNING BY SUPPLYING

JUAN ALCACER1and JOANNE OXLEY2*

1

Harvard Business School, Harvard University , Boston, Massachusetts, U.S.A.

2

Rotman School of Management, University of Toronto, Toronto, Canada

Outsourcing in many industries has advanced beyond simple component supply to encompass

manufacturing of entire products, often by suppliers in emerging economies. Understanding the

evolving role and capabilities of suppliers in global supply chains is thus a pressing strategic

issue for suppliers and customers alike. We analyze a novel panel dataset of supply relationships

in the mobile telecommunications industry to answer the following questions: What factors

contribute to a supplier’s ability to build technological and market capabilities? Does it matter

to whom the firm supplies? Is involvement in product design important, or is manufacturing the

key to learning? Do the same types of relationships that support technological innovation also

facilitate successful introduction of own-brand products, or does this require a different “locus”

of learning? Copyright 2013 John Wiley & Sons, Ltd.

INTRODUCTION

The globalization of markets and the rise of

offshore outsourcing have elevated supply-chain

management from an operational issue to a key

strategic concern. In the early 2000s, McKinsey

reported that two thirds of U.S. auto companies’

value added already resided with suppliers, and

the average consumer electronics firm aimed to

outsource almost 75% of its manufacturing in

the coming years (Doig et al., 2001). As this

trend continued, outsourcing in many industries

has advanced beyond simple component supply to

encompass manufacturing of entire products, often

by suppliers in emerging economies. In this new

environment, understanding the evolving role and

capabilities of suppliers is a pressing strategic issue

for suppliers and customers alike.

Keywords: outsourcing; suppliers; OEM; innovation;

learning

*Correspondence to: Joanne Oxley, Rotman School of Manage-

ment, University of Toronto, 105 St George Street, Toronto, ON

M5S 3E6, Canada. E-mail: oxley@rotman.utoronto.ca

Copyright 2013 John Wiley & Sons, Ltd.

Interest in the evolution of global supply chains

is further fueled by speculation that some firms

in emerging economies may successfully parlay

their experience as “Original Equipment Manufac-

turers” (OEMs) supplying to major branded pro-

ducers into positions as viable world-class players

in their industry. In particular there is a concern

that this process— which we dub “learning by

supplying”— may come at the expense of previous

market leaders (Pisano and Shih, 2009). An influ-

ential Harvard Business Review article by Khanna

and Palepu, for example, noted that

Taiwan-based Inventec ...is among the

world’s largest manufacturers of notebook

computers, PCs, and servers, many of

which it makes in China and sells to

Hewlett-Packard and Toshiba... Inventec

has mastered the challenges associated with

sourcing components from around the world,

assembling them into quality products at a

low cost, and shipping them to multinational

companies in a reliable fashion. Recently

Inventec started selling computers in Taiwan

and China under its own brand name. The

Learning by Supplying 205

computers have a Chinese operating system

and software, so Inventec doesn’t compete

directly with its customers— yet (2006:

66– 67).

Other anecdotal evidence reinforces the connec-

tion between supply activity and capability devel-

opment and further suggests that building the tech-

nological and marketing capabilities necessary for

independent sales success represents a particu-

larly effective path to increased and sustainable

profitability for suppliers. The popular “Smiling

Curve,” developed by Acer CEO Stan Shih cap-

tures this received wisdom:

Recognizing that Acer’s focus on assem-

bling PCs was keeping the company in

the least profitable segment of the market,

CEO Stan Shih decided to move up the

value curve by developing capabilities in

components and distribution. Succeeding

in components required [developing] strong

technology ...Succeeding in distribution

required a strong brand, established channels

and effective logistics. Acer has built both

(Bartlett and Ghoshal, 2000: 134).

Despite the apparent benefits of moving up the

value curve, there are nonetheless few promi-

nent examples of firms breaking out of their role

as OEM suppliers to become viable world-class

competitors. Even Acer— this seemingly iconic

example in 2000— has since faltered in its efforts

to sustain sales of its own-brand products, and still

gets most of its earnings from OEM relationships,

supplying computers and other electronics prod-

ucts to industry leaders.

These observations raise intriguing questions for

strategy researchers as well as for OEM suppliers

as they attempt to climb up the value curve in

search of greater profits: To what extent are firms

able to leverage their experience as OEM suppliers

to build valuable technological capabilities and

ultimately establish independent (own-brand) sales

success? What factors facilitate these “learning

by supplying” processes? Does it matter to whom

the firm supplies? Is involvement in product

design important, or is manufacturing the key to

capability development? And do the same types of

relationships that support technological innovation

also facilitate successful introduction of own-brand

products, or does this require a different “locus” of

learning?

To date, researchers and managers contemplat-

ing these important questions have by necessity

relied on the type of anecdotal evidence cited

above, due to a scarcity of relevant empirical

research.1In this paper we remedy this situation

by documenting the extent and nature of learn-

ing by supplying in the context of one important

industry, the mobile telecommunications handset

industry. This is a dynamic industry within the

electronics manufacturing sector, often featured in

popular debates about offshore outsourcing and

the migration of capabilities (Engardio and Ein-

horn, 2005). We apply theoretical insights from

research in related fields to generate hypotheses

linking the development of technological capabili-

ties (patenting activity) and marketing capabilities

(introduction and sales of own-brand products) to

the duration and extent of an OEM supplier’s expe-

rience in the industry, as well as to characteristics

of the customers served, the nature of the supply

relationship, and the initial resources and capabil-

ities that a supplier brings to the relationship.

Our empirical study exploits a novel dataset

detailing all significant supply relationships for the

design and manufacture of complete handsets for

major branded producers and operators over the

entire history of the mobile telecom industry. We

marry this data with information on the patenting

activities of OEM suppliers and their customers

and on mobile handsets introduced by these firms

over the period 1995– 2010. This generates an

unusually complete picture of evolving supply

relationships in the industry, allowing us to assess

the extent to which OEM suppliers learn by

supplying and achieve independent technological

innovation and sales of own-brand products.

The results of our empirical analysis point to

interesting and quite distinct pathways to techno-

logical and market learning for OEM suppliers. We

observe a strong increase in suppliers’ technolog-

ical capabilities as their supply experience accu-

mulates, but the relationship between experience

1What empirical evidence exists is primarily based on a small

number of cases describing the rise of multinationals from

emerging economies (e.g., Duysters et al., 2009; Khanna and

Palepu, 2006; Pisano and Shih, 2009). There is also a related

body of literature examining the effect of international trade

and foreign direct investment on technological and economic

convergence or “catch-up” at the country level. See Athreye and

Cantwell (2007) for a useful review and discussion.

Copyright 2013 John Wiley & Sons, Ltd. Strat. Mgmt. J.,35: 204– 223 (2014)

DOI: 10.1002/smj