Resource Dependence Theory

Resource dependence theory pointed out the resource in the environment is not endless; company can’t get the resource from internal and external without limitation.

So, the key of making the decision are understanding and well-using the internal recourse and ability. Resource dependence theory researchers proposed that

organizations have different dependence level with different resource no matter it is

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internal or external resource. (Kotter, 1989).

Zeithaml (1994) emphasized organization need to adopt the uncertainty of external environment, overcome the problem of independent on external resource, manage and control the resource actively. So the key point of making the decision is how to get the important resource smoothly and stabilize the relationship between

organization and the environment.

Teng, 1995, though when internal lack of resources and abilities, organization will tend to seek the resource form external. So, organization needs to get the support from external environment to exist in the environment (Pfeffer & Salancik, 1978).

Even though resource-base theory and resource dependence theory have different view of how companies get their competitive advantage, but both of the theories think when a company lack of the resource they need to get the resource from external environment.

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Chapter 3 RESEARCH METHODOLOGY

3.1 Qualitative research

Qualitative research is researcher aimed at one specific event or question to do the explanation research. It is a tool for understanding one event’s meaning or

structure (Parker, 1994). The information got by qualitative always shown by words and the analysis of information always presents by concept (Saunders, Lewis &

Thormhill, 1997).

Compare to quantification research, qualitative research emphasizes the process and meaning which can’t be count by numbers (Denzin & Lincoln,1994). Even thought the meaning between quantification and qualification is contrary, but it

doesn’t mean they are conflict. In fact, we can see a lot of quantification research also use qualitative information and vice versa (Bryman,1989).

3.2 Case study

Case study is a basic research method in social technology research; it is also a strategy of empirical research (Yin, 1989). Yin thought that when the research purpose is studying a method or reason of a phenomenon, or can’t control from outside, it is an event which happened in this moment instead of a history event can use the method of case study. Case study can use every kind of tool to do the

research without any limit, so researcher can use both quantification and qualitative research base on their research requirement and purpose.

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Chapter 4 CASE STUDY

4.1 Outsourcing question preface

At the end of 2011, 25 years old Taiwanese OEM/ODM company E company.

got a big mother board order from one famous customer I company(ICBD) which E company never cooperate with. This huge order not only helps E company’s shipment quantity increase average 250 thousands per month but also makes her stockholders get back their confident for the E company’s future. In order to support this brand new business, E company immediately built a team to in charge of this project. But except the exciting for the huge quantity of the shipment, this team also faces a big challenge. The manager of this project found out that their factory’s product

certification equipments can’t catch the standard of their new customer. But if they need to purchase the equipments, the equipments are quite expensive and have the risk that they might not catch their customer’s aggressive schedule. The only way to solve this urgent problem in the short time is that they need to find the third party which already be certificated by I company to do the product certification.

Three months later, when E company still snowed under their first mother board business with I company, E company got their second business N product from this new customer. This new product is not only just a mother board product like before Intel’s traditional product. This new product is a system product including small size mother board which cut in the mobile solution in the desk top mother board. For I company, they really want to push this smallest desk top to the market. In another way, E company also wants to keep tightly partnership and show their excellent work to their new customer I company. For the E company team which support I company project, they might not that happy like I company and other people in E comapny. It’s because that now they have another big decision need to make by them. First, if E company only want to trade with I company one time, the best way to reach I

company’s product certification is outsourcing to the third party. But it’s obvious that

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E company will not give up this chance to cooperate with one of the biggest CPU manufacture company in the world. However, can E company get enough project to cover the cost of those equipments is still a big uncertainty for the E Company’s I company team. Second, for a traditional desk top mother board manufacture like E company which already have their own PCB factory for last two decade, lack of the skill of the mobile solution is also become a big problem when they get the award of the N Product. In the past two decades, E company put all of their sources on the standard mother board size like ATX (advanced technology extended) or micro ATX.

For the N Product, there is no way but outsourcing their PCB to their other vender.

It’s also a good time for E company’s manager to think about whether it’s a good idea for E company to improve their PCB factory’s ability.

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4.2 E COMPANY history and industry analysis

(1) ODM

ODM is the abbreviation of the original design manufacturer (ODM) which designs and manufactures a product which is specified and eventually branded and sold by another firm. ODMs allow the brand firm to produce (either as a supplement or solely) a product even without having to engage in the organization or running of a factory.

Due to the popularity of international trade and professional service age, ODMs play more and more important roles in the world. The traditional model between ODM and brand firm is usually like ODM produce goods for a foreign company which sees some advantage in the transaction (such as low labor inputs, transport links or proximity to markets). Another reason for the ODM is that some countries’

laws possibly prohibit direct ownership of assets by foreigners, allowing a local firm to produce for a brand company for either the domestic market or export.

Another famous name of this kind of model is named "outsourcing". In Taiwan, there is a lot of computer ODM such as Compal Electronics, which famous as

making notebook computers and monitors and operating as a mass producer for numerous brand companies. For Compel, they assisted brand firm by low labor costs, low-cost transport, and the near commodity nature of the physical inputs.

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(2) E COMPANY

E company was established in 1987, had just passed their 25^th birthday. In the first decade, E company was the first mother board OEM which design and

manufacture the mother board for almost all the famous computer company. Such as Dell, Lemel and Genuin. In 1996, E company developed their system fabricate

production line in American subsidiary. And then soon in 1999, E company officially extended their field to the system design, manufacture and marketing business. From now on, E comapny’s main focus had expanded to not only motherboards, but also desktop and notebook computers, graphic cards.

When E company tried to develop their own brand’s product, a lot of Taiwanese company like ASUS and ACER which were also the manufacture vender for the International computer brand before had already launched their own brand product to worldwide market successfully and tried to separate their OEM and brand department.

For example, 2008 ASUS tried to separate their OEM business from her own brand business, so she built another company to handle her OEM’s business which called Pegatron Corporation. Now, ASUS already put their order to another OEM instead of put all their order in Pegatron(table 1). In another hand, Pegatron also tried their best to develop their relationship with their other customer. And due to Pegatron was managed by ASUS, Pegatron has plentiful capital and resource to develop their

supply chain and knowledge. Now, Pegatron had become the biggest ODM in Taiwan and also the biggest competitor for E company to get the order from I company.

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Figure 5: 2007~2010 ASUS ODM partner and quantity comparison (excerpted from Global sources, 2009)

Compared to E company’s competitor like Pagatron and MSI, E company doesn’t have that much capital and resource to develop their supply chain. So the decision of whether they should take the issue to be outsourcing or not is really important for the E company’s I company team.

(3) Competitors

The market research firm iSuppli issued a report in 2006 which demonstrated that 82.6% of PC notebooks' components are made by Taiwanese ODMs.

2003, the biggest three computer ODMs are Quanta, Hon Hai and Compal. Later, Pagatron join in this competitive war. However, the manufacturer such like Wistron, Inventec is still very powerful. Below we listed some of famous Taiwanese ODM.

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Foxconn: Foxconn which is known as the group of Hon Hai specialized in computer, communications, consumer electronics, digital content and even the high-tech automobiles parts production. Foxconn is currently the world's largest electronic professional manufacturer with more than 120 million people and the world-class IT (Information technology) customers. Their ODM business scope is really wide, from the newest technology as tablet to the traditional and mature ODM business as motherboards. Foxconn is famous for their high quality motherboards and excellent Apple’s iphone series.

Quanta: In the beginning, Quanta is the largest ODM in the world for notebook.

Their famous product includes the ThinkPad and MacBook. Quanta's notebook

business also includes the world's leading IT brands such as HP, and SONY. 2007, the shipment of notebook computer first time over one hundred million units and the notebook market share is 38% become the first ODM in the world. Their famous product includes 80% of the IBM ThinkPad (later, Lenovo ThinkPad) and Apple’s MacBook Air.

Compal: 2009, Compal which always the second largest notebook computer contract manufactures first time shipped out more than Quanta. After 2009, Compal competed with Quanta to be the first notebook ODM in Taiwan. Compal's main business is LCD monitors and LCD TVs. The SONY Trinitron, Mitsubishi Zuanshi Long Today Eizo, Mitsubishi ultra-high-end LCD monitors all made by Compal,.

Compal has a really famous customer called DELL.

Pagatron: Pagatron was separated from ASUS. In early 2008, ASUS finally completed the separation of brand and ODM business, and the subsidiary is the Pagatron which is responsible for the ODM business for a variety of IT products, among the product notebook computers is the main products for their ODM business

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(also including 100% of the ASUS notebook). A lot of researchers thought this separation of ASUS is really a wise decision. In 2011, Pagatron got the order of the iPad 3 (now is The New iPad contract) due to their good reputation and the strategy of word of mouth. After the separation, Pagatron owns ASUS original OEM strength and solid foundation, so the shipment volume is increasing steadily nowadays. And also, Pagatron is the biggest competitive for E COMPANY in this case due to their experienced ODM history.

Listed three of Pegatron’s important factors as below:

1. Talented Employees

Pegatron employed highly talented in-house design teams that perform at a high level by internalizing and executing innovation ideas.

2. R & D capability

Fueled by the spirit of innovation and development, Pegatron work to maintain and cultivate a strong IP position and patent portfolio.

3. Manufacturing systems

Pegatron implement tight vertical integration and streamlined manufacturing operations to ensure customer satisfaction.

(4) Customer- I company:

I comapny, the world biggest processor manufacture company, was founded in founded in Mountain View, California by Gordon E. Moore, Rpbert Noyce, and Arthur Rock in 1968. 1991, launched "I company Inside" campaign. This successful strategy makes I company one of the most recognizable computer company in the world. It also help I company to earn brand loyalty and awareness of I company processors in computers. In 2009, I company using a good-better-best strategy

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(Celeron<Pentium<I Family) calling I Family (Core i3, i5, i7) to separate different customer segment.

Due to their amazing strategy and unique technology, for the last 40 years, there is no doubt that I company is the biggest and strongest CPU (central process unit) manufacture. Furthermore, most of people might think they will keep this record for the next ten years. But in 2011, Advanced Micro Devices (AMD) launched their Bulldozer serial and APU. This is the first time, I company understand they might lose their first place of the CPU market.

Another side, I company saw the potential in the all in one (AIO) market. 2010, Apple launch their first AIO computer; try to develop another new product to replace the traditional desk top. In 2011, the growth rate of the AIO was 17%, and due to the mature of the AIO product, the expectation of the AIO in 2012 is 31%. But, Apple didn’t take all the advantage of this special product. From 2010 to 2011, Apple lost their market share from 37.1%to 28.6%. In the other side, Lenovo increase their market share from 12.6% to 22.8%, and might replace Apple’s first place in 2012.

Not only Lenovo, but also almost all of the famous computer companies, such as HP and Dell had prepared to focus on the AIO market in 2012.

For Intel, they saw the potential of the AIO market and a turning point to develop their system level product. But the critical problem is they don’t have any experience about the system level. So, if they want to extend their product category, they need to find a partner to help them design their system product. And which product they need to focus on? Should they focus on the competitive AIO market? Or the decayed market desk top?

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4.3 E COMPANY outsourcing feature

Being an OEM like E company, they need to help their customer from initial product design to the manufacture and quality control after product launched. Before launch, they also need to the reliability, compatibility, regulatory, signal, power and EMC/EMI (electromagnetic interference) test. For a company like E company which produced the several product lines such as motherboard, system products and graphic cards, it’s really hard for E company’s manager whenever they need to procure some expensive equipment. For example, if E company needs to buy a 2000 times

telescope for motherboard’s dye and pry test, system product might not need to do any kind of dye and pry test and the graphic cards business doesn’t need that much high standard telescope to do the dye and pry test. So, does E Company need to purchase the telescope for the dye and pry test or just outsourcing to outside lab to so this test? Due to it’s hard to discuss every outsourcing problem E company is, so I tried to focus on their new order- N Product to clarify one way to understand the pros and cons of outsourcing.

Regarding to a system product like N Product, we can separate four parts which E Company I company team choose to outsource to third party to implement the activities:

1. PCB manufacture: even though E company has their own PCB factory, due to lack of mobile solution PCB experience, facing the latest desk top I company N Product which cut in the mobile technology in the motherboards product, E company has no choice but choosing outsourcing to another two PCB venders.

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But except the cost of outsourcing, E company found out that due to community difficulties between their own company and the venders, they might have a big problem after N product start to mass product.

2. Product certification: after manufacture the product, OEM needs to do the product certification to make sure the product can keep their good function in the different situation before shipping. Product certification contains several complicated test item like dry and humility or shock and vibration. For example, the purpose of the humility test is trying to figure out after the product be shipped in the cargo and passed by the high humility area like the India Ocean, can the product still have good function like before. Being a huge and significant motherboards company, I company has their own high standard product certification requirement for their vender. Unfortunately, E company’s product certification equipment couldn’t catch their new

customer’s request. Due to almost every item of the product certification is really expensive; E Company couldn’t purchase all the equipment in the beginning, so in the first order, E Company seeks third parties’ help to do the product certification. But after first product launched successfully in 2012 May, E company start purchasing the equipments and try to do the product certification in house.

3. Software: in the past few years, A company is always the only BIOS partner of I company. A company help I company to develop their CPU’s BIOS code.

So, when I company award E company, it also means E Company needs to outsource the BIOS to A company.

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4. Regulatory and EMC: Before shipping the goods to another company, E Company and I company need to make sure their product is match to all the countries regulatory certifications which they plan to ship to. Normally, does E Company need to outsource to another laboratory to do the regulatory depended on whether their customer requested they need to get the

certification or just report. If I company wanted to get the official certification, and then E Company needs to outsource their test to outside laboratory; on contrary, if their customer didn’t request them to get the official report, E Company can just do the test in house.

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4.4 E COMPANY core competence

Hayes & Pisano(1996) think Core competence has the character as below:

1. It only belong to the specific company and developed from internal, so other companies couldn’t buy it from other place.

2. Other companies are hard to imitate or transfer the value produced be the company.

3. Core competence seldom produced from special technology and manufacture equipment. It’s because that technology and manufacture equipment are easy to be imitated and purchased by other companies, so it’s hard to generate competition advantage form technology and equipment.

If you browsed E Company’s website, you can find E company’s core

competition on the website was: Time to market, product reliability, competitive cost and supply chain. But core competence is not just what company thinks who they are or what they are good at, it also need to provide the value of cognition for their

customer (Gamel, Prahalan and Hamel, 1990). Like every ODM company, E

Company tried their best on developing their own cost down strategy. Last decades, E Company only focus on the low price market and almost gave up all high-end

product. Until now, no matter the big customers like I company and Dell or the small customer like game players talked about E Company, cheap and low quality is the first image popping in their heads. How did it happen? It is because that for the last two decades, almost every ODM tried to attract their customer by cost down strategy.

So, the gross profit of motherboards started decreasing from 10% in 1990 to 3% in 2010. If E Company still wanted to keep their competitive advantage of cost down,