International Journal of Operations & Production ManagementEmerald Article: How do subcontractors evolve?Andrea Furlan, Roberto Grandinetti, Arnaldo Camuffo

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To cite this document: Andrea Furlan, Roberto Grandinetti, Arnaldo Camuffo, (2007),"How do subcontractors evolve?", International Journal of Operations & Production Management, Vol. 27 Iss: 1 pp. 69 - 89

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How do subcontractors evolve?Andrea Furlan, Roberto Grandinetti and Arnaldo Camuffo

Department of Economics, University of Padova, Padova, Italy

Abstract

Purpose – The purpose of this study is to investigate how small and medium sized subcontractingfirms evolve.

Design/methodology/approach – A cluster analysis was applied to a sample of 417 North EastItalian subcontractors to explore if (and to what extent) Italian subcontractors differ and can beclassified on the basis of their design and marketing capabilities. Using this classification as a startingpoint, multiple case study analysis is conducted on a sample of ten subcontractors and a modeldeveloped of how subcontractors’ capabilities evolve over time.

Findings – Four profiles of subcontractors are identified as a function of their design and marketingcapabilities: developed, developing, question mark and traditional. A model is proposed to understandand predict subcontractors’ evolution. In the model knowledge codification, supply management,design and marketing capabilities mutually reinforce one another and tend to align over time.

Research limitations/implications – Firstly, future research should articulate the four clustersidentified. Secondly, the framework for subcontractors’ evolution should be tested on large-scaledatabases. Thirdly, more accurate measures of subcontractors’ capabilities should be conceived andtested.

Practical implications – Results of this study are critical for industrial buyers who need to segmenttheir subcontractors and understand how their marketing and design capabilities evolve. Moreover,they are also critical for subcontractors’ managers who wish to avoid cost-based strategies, enlargetheir customer base, broaden their international scope and engage in durable relationships with theircustomers.

Originality/value – This study proposes an original model of subcontractors’ classification andevolution and suggests good practices to design and manage supply networks.

Keywords Subcontracting, Design management, Marketing management

Paper type Research paper

IntroductionThe role subcontractors play in supply systems is a research topic located at thecrossroads of a variety of managerial and economic disciplines such as strategicmanagement, operations and supply chain management, organizational design andindustrial organization. Such a role, and its dynamics, is especially important in theItalian economy, known worldwide for its high fragmentation, its organization aroundgeographically coupled supply systems (industrial districts) and the prevalence ofsmall and medium sized firms, vertically specialized in one or few phases of a supplychain (Sabel and Piore, 1984; Porter, 1990). Challenged by globalization and newtechnologies, in recent years these supply systems have often lost their competitiveedge and undergone major structural and strategic changes, partly losing theirhistorical peculiarities (Berger and Locke, 2001; Grandinetti and Bortoluzzi, 2004).Firstly, increasing competition from producers located in low cost countries and evernew, more powerful information and communication technologies have reduced theimportance of geographical proximity as a competitive advantage factor. Secondly,globalization and the related risks ask for financial structures and managerialcapabilities not easily accessible and adoptable by district firms, which are mostly

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International Journal of Operations &Production Management

Vol. 27 No. 1, 2007pp. 69-89

q Emerald Group Publishing Limited0144-3577

DOI 10.1108/01443570710714547

undercapitalized, family-owned and run businesses. Finally, while manufacturing,built on a heritage of craftsmanship and skilled labor, has historically been districtfirms’ core competence, marketing and design capabilities have been neglected and areunderdeveloped. Now that innovation and internationalization are key success factors,competencies other than manufacturing efficiency and flexibility have become critical.

To address these new challenges, subcontractors have to change their strategiesand adapt their structures. Above all, they need to develop appropriate design andmarketing capabilities (Esposito and Lo Storto, 1991; Nassimbeni et al., 1996).

As concerns design, subcontractors need to take on more responsibilities,abandon a mere productive role and undertake proactive behaviors towardscustomers. Subcontractors are required to develop specific product and/or processtechnologies, so that they can be incorporated in the customers’ products and/orprocesses and become integrative part of their value propositions.

As concerns marketing, subcontractors have to be able to offer innovative products,processes or services, to navigate autonomously the global market, to position in new,more defendable niches, to find out new segments and opportunities, to serve andmanage more demanding and differentiated customers, and to develop their ownbrands.

Marketing capabilities (MC) can alleviate subcontractors’ dependence from localdemand and facilitate diversification and internationalization. Design capabilities (DC)are the pre-requisite to establish more valuable and balanced relationships with awider array of customers.

Within this complex and worrisome situation, common to other European countriesthan Italy, this paper asks the following research question is:

RQ1. How are small and medium sized subcontracting firms changing asglobalization and new technologies challenge traditional supply systems inmature industries?

Such a question is critical for industrial buyers who, in order to improve supply chainperformance and match sourcing with their business strategies, need to segment theirsubcontractors and understand how, on top of manufacturing excellence and beyondcost efficiency, their marketing and design capabilities evolve. But it is also critical forsubcontractors who, in order to survive, need to avoid strategies based on mere costcompetition, enlarge their customer base, offer unique, higher quality products, servetheir customers with ever higher degrees of flexibility and engage them in durablerelationships.

We address this question studying the case of Italian subcontractors.Applying cluster analysis to a sample of 417 North East Italian subcontractors,

we explore if (and to what extent) Italian subcontractors differ and can beclassified on the basis of their design and marketing capabilities. We identify fourprofiles of subcontractors as a function of their design and marketing capabilities:“developed” “developing” “question mark” and “traditional”.

Using this segmentation as a starting point, we also use data from ten in-depthsubcontractors’ case studies and propose a model of how subcontractors’ capabilitiesdevelop over time. We identify some typical subcontractors’ evolutionary patterns,showing how the transition from one profile to another can take place.

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The paper is organized as follows. The second section presents a review of theliterature on subcontractors’ segmentation and evolution. Third section proposes asubcontractors’ classification based on the results of the cluster analysis. Fourthsection illustrates the findings of the multiple case study analysis and proposes amodel of how subcontractors’ capabilities develop over time. Fifth section discussesour findings’ implications in terms of the resource-based and knowledge-based viewsof the firm. It also suggests managerial guidelines about how industrial buyers shouldapproach subcontractors’ strategic segmentation and how subcontractors coulddevelop design and marketing capabilities.

Theoretical backgroundSubcontractors’ strategies, structures and role within supply system have beenapproached from two different perspectives. The first perspective takes a staticapproach and classifies subcontractors on the basis of industry-wide, company-specificor relational characteristics. The second perspective takes a dynamic approach andproposes evolutionary models of subcontractors and of the industries they operate in.This section provides a literature review for each of the two perspectives.

The static perspective: subcontractors’ segmentationIn purchasing and supply management literature, authors often build on the concept ofsupplier segmentation based on industry, suppliers’ or relational characteristics.Generally speaking, the segmentation of suppliers into different tiers of sourcing help toprioritize and differentiate supply management practices among different suppliers(Dyer et al., 1998; Lamming et al., 2000; Petroni and Panciroli, 2002; Vokurka et al., 1996).

Kraljic’s (1983) seminal work uses two classification criteria to develop a portfoliomodel of suppliers. One is the importance of the purchased item, the other is thecomplexity of the supply market. Out of these two dimensions, he identifies fourcategories of materials and components:

(1) non-critical;

(2) leverage;

(3) bottleneck; and

(4) strategic.

Since, Kraljic’s (1983) groundbreaking work, a number of studies have developed modelsof supplier segmentation. For example, Van Weele (2000) builds on Kraljic’s (1983) andOlsen and Ellram’s (1997) models and proposes two dimensions to segment suppliers:

(1) supplier’s impacts on buyer’s financial results; and

(2) how risky the supplier relation is.

He derives four types of suppliers (strategic, leverage, bottleneck and routine suppliers)and associates to them four different sourcing strategies:

(1) partnership with strategic suppliers (i.e. market leaders, specific know-how, andbalance of power may differ among buyers-suppliers);

(2) competitive bidding – leverage suppliers (i.e. many competitors, commodityproducts, and a buyer dominated segment);

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(3) securing continuity of supply – bottleneck suppliers (i.e. technology leaders,few – if any – alternative suppliers); and

(4) systems contracting – routine suppliers (i.e. large supply, many suppliers withdependent position, and a reduction in the number of suppliers).

Studying relational contracts in the Japanese auto industry, Asanuma (1989) identifiesthree types of suppliers/subcontractors on the base of their involvement in the productdevelopment process of the core firm: drawings supplied vendors, drawings approvedvendors and marketed goods vendors.

Dyer et al. (1998) comparative analysis of supplier-automaker relationships inthe USA, Japan and Korea suggests that firms have to think strategically aboutsupplier management and abandon “one-size-fits-all” approaches. Rather, firms shouldstrategically segment suppliers and assess how they contribute to the core competenceand competitive advantage of the buying firm.

Bensaou (1999) builds on relational contracting theory and develops a typologybased on the nature of the supplier relationship. He uses the specific investments madeby buyers and suppliers in the relationship as segmentation criteria, identifying fourrelationship categories:

(1) market exchange;

(2) captive buyer;

(3) captive supplier; and

(4) strategic partnership.

Within this segmentation he considers suppliers’ technological capabilities as one ofthe three constituents (along with product characteristics and market characteristics)of the contextual profiles for the management of supplier relations.

Masella and Rangone (2000), building on Nydick and Hill (1992) and Narasimhan(1983), develop a supplier segmentation system based on two dimensions: the timeframe (i.e. short-term versus long-term) and the content (i.e. logistic versus strategic) ofthe buyer-supplier relationship. They identify four different types of suppliers,grounding this typology on an analytic hierarchy process framework, on different setsof measures, and on a resource-based view of suppliers’ strategy.

These studies share the belief that, in order to be meaningful and predictive,suppliers’ segmentation ought to rest on criteria related to suppliers’ capabilities(rather than to other suppliers’ characteristics) and should specify the nature of therelationships (rather than of the purchase) to be developed.

The dynamic perspective: subcontractors’ evolutionThough the static perspective gives some conceptual and empirical tools that can beused for segmenting subcontractors, it fails to provide an understanding of thedynamics within and between different subcontractors’ segments. Indeed,comparatively fewer studies have focused on the topic of subcontractors’ evolution.

Lamming’s (1993) groundbreaking work on suppliers’ evolution identifies ninefactors (e.g. competitive pressure, adoption of information sharing and negotiationpractices, supplier integration in new product development and logistics) that need tobe considered in the analysis of buyer-supplier relationships. On the basis of these

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factors, he proposes evolutionary patterns that mark the transition from traditionalsubcontracting to partnership relationships.

Several Italian studies analyze subcontractors’ evolution, too.Some of them model the evolution of subcontractors analyzing the characteristics of

the relations between them and their main contractors. For example, Zanoni (1991)identifies an evolutionary pattern (from traditional subcontracting into partnership)contingent on the evolution of some characteristics of the supply relationship(i.e. information sharing, technological integration, early supply involvement in newproduct development).

Some others emphasize knowledge transfer as the main determinant ofsubcontractors’ evolution. For example, Esposito and Lo Storto (1991) first identifyfour components in the technological knowledge of a subcontractor: machines(e.g. computerized numerical control (CNC) tools), individual skills (e.g. design,engineering, testing), formal documentation (e.g. drawings, specs) and organizationalroutines (quality manuals and procedures); then they argue that changes in one or moreof these components entail the evolution of the subcontractor. Esposito and Raffa(1994) subsequently develop this point, suggesting that several knowledge transfermechanisms (technical help, on-site support, resident engineers, training, exchange ofdocument/equipment/machines) can induce changes in the equilibrium among the fourcomponents of technological knowledge, thus triggering subcontractors’ evolution.Their findings provide evidence that Italian supply systems are moving towardssupplier relations characterized by more intense technological knowledge transfer,stronger inter-firm collaboration and increasing subcontractors’ involvement andresponsibilities in design. Moreover, they find that, although subcontractors still focuson few customers (on average the first two customers account for 70 percent of the totalsales of the subcontractors), they tend to diversify their customer portfolios leveragingon their growing technological knowledge.

Almost all these studies illustrate how subcontractors evolve and how theirrelationships with customers change, but do not explain the dynamics underlyingthese evolutionary processes. They describe the elements involved in the evolutionprocess (the “what” of subcontractors’ evolution) but they do not explain the reasonwhy these elements evolve and what are the interactions occurring among theseelements over time (the “why” of subcontractors’ evolution).

Despite their descriptive nature, these studies provide a fundamental insight:subcontractors’ evolution is driven by:

. subcontractors’ capability development (i.e. how subcontractors learn to dobetter different activities); and

. the nature of the buyer-supplier relationships in which subcontractors areengaged (i.e. what kind of customers, what they require, how they manage therelationship).

Providing a synthesisOur study blends the static and the dynamic perspectives in an attempt to overcomethe limits of a mere descriptive approach. Following Olsen and Ellram (1997), we buildon the fundamental intuitions provided by the two streams of research briefly reviewedin the previous sections, i.e. that subcontractors’ diversity and evolution derive from

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the capabilities they are able to develop as well as from the type of buyer-supplierrelationships they are into.

We also refer to Hakansson and Snehota’s (1995) activities-actors-resources model,which describes how business relationships can be analyzed through their individualsubstance layers (activity links, resource ties and actors bonds). Activity links are thelinks between the activities performed by each actor involved in the relationship.Resource ties are the links used by the actors to exchange existing resources, access tocomplementary resources and create new ones. Actors bonds describe the bondsbetween the actors through their perceptions, their trust and their understanding ofeach other. It is the interplay of bonds, ties and links that is at the origin of change anddevelopment in relationships.

From a methodological standpoint, our study puts together the two perspectives,proceeding in two steps:

(1) We first propose a classification of Italian subcontractors, identifying fourdifferent profiles as a function of their marketing and design capabilities. Thesecapabilities are appropriate segmentation criteria for several reasons. First of all,it is demonstrated that they are involved in subcontractors’ evolution. Forexample, the studies on “lean suppliers” or “voice” practices in supplymanagement (Cusumano and Takeishi, 1991; Helper and MacDuffie, 1997; Helperand Sako, 1998; Helper and Kiehl, 2004) provide empirical evidence aboutincreasing supplier involvement in design activities. They also suggest thatsuppliers need to develop valuable design and marketing capabilities to handlethe complex interdependencies arising from these new types of relationships.Secondly, industrial marketing literature and the studies on business marketsstructure and dynamics (Ford et al., 1986; Hakansson and Snehota, 1995)emphasize that subcontractors leverage on the interface capabilities (e.g. designand marketing capabilities) to manage their relationships portfolios. Thirdly, ashighlighted in the previous sections, design and marketing capabilities areparticularly critical for Italian subcontractors.

(2) We conduct multiple case study analysis on a sample of ten subcontractors, andpropose, using the segmentation resulting from the cluster analysis as astarting point, a model of how subcontractors’ capabilities evolve. This generalmodel highlights:. the capabilities, in addition to design and marketing, that are involved in

subcontractors’ evolution; and. the interactions over time among these capabilities.

Clustering Italian subcontractorsData and variablesAs part of a broader research project on the evolution of Italian subcontractingrelationships conducted in 2003 and 2004, we use an online questionnaire survey togather a wide array of data regarding, among other aspects, the marketing and designcapabilities of subcontractors located in Friuli-Venezia Giulia, in the North East ofItaly. The data source is the Regional Center for Subcontracting of Friuli VeneziaGiulia, an agency within the Pordenone Chamber of Commerce.

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The data set provides information on a total of 431 firms operating in severalindustries. We eliminate 14 firms due to incomplete data which yields a complete set ofinformation for 417 firms. Even if the analyzed subcontractors are located only in theRegion of Friuli Venezia Giulia, the dataset is representative of the Italiansubcontracting system as a whole. Indeed, a recent research based on a database of5,262 Italian subcontractors located in several Italian Regions shows that our sample isrepresentative (in terms of size, industry and basic skills distributions) of the wholeItalian subcontracting system (Grandinetti and Bortoluzzi, 2004).

Since, our intent is to classify subcontractors on the basis of their design and marketingcapabilities, i.e. to identify clusters of subcontractors that share similar basic marketingand design capabilities profiles, we start by identifying proxies for these two variables.

Our database offers several possible measures of design and marketing capabilities.Among them, we select which to be subjected to cluster analysis following the criteriasuggested by Chiu et al. (2001). First, we delimitate the range of measures to only fewand accurate ones. Second, because of the requirements posed by the aggregationalgorithm, we choose to exclude the measures with a high correlation.

Construct 1: marketing capabilities. These capabilities relate to subcontractors’ability to monitor the market, to seek and identify new opportunities and marketniches, to develop interactive relationships with its customers and to adopt customerrelationship management practices. This definition overlaps with that of “relationalcapabilities” in the industrial marketing literature (Hakansson and Snehota, 1995). MCpositively affect the subcontractors’ ability to:

. diversify their customers’ portfolio; and

. internationalize sales.

Consequently, we use the degree of diversification of the customers’ portfolio and thedegree of internationalization of sales as proxies for MC.

More specifically, we use two variables to capture subcontractors’ MC: the degree ofdiversification of the customers’ portfolio (customer portfolio diversification – CPD)and degree of the sales internationalization of the subcontractor (salesinternationalization – SI).

We use the number of the customers served by each subcontractor during the lastfiscal year (the dataset provides the following ranges of customers: 1-2; 3-5; 6-9; 10-19;20-49; .50) as the measure for the first variable. We use only the non-weighed numberof customers (rather than the proportion of the main customers on the subcontractors’total sales or other measures like the number of industries served) for two reasons.Firstly, small, young subcontractors typically have few customers each accounting fora high proportion of total sales (e.g. in the cases of spin-offs, subcontractors may haveonly one customer, the originating firm). As subcontractors evolve, the number ofcustomers increases and the proportion of each customers’ sales on subcontractors’total sales usually decreases. Secondly, since each customer represents a source ofknowledge regardless the proportion of its sales on subcontractors’ total sales, thelarger the number of customers the more opportunities for subcontractors’ learning(Hakansson and Snehota, 1995). We use the percentage of export sales on the total salesas the measure for the second variable, SI.

Construct 2: design capabilities. DC relate to the ability to autonomously developproducts/services that meet the client requirements. We use the adoption of

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computer-aided design (CAD) systems as a proxy to measure subcontractors’DC. We choose this variable for two reasons strictly connected with the peculiarities ofthe Italian subcontracting system. Firstly, other measures of DC suggested in theliterature – such as the presence of appropriate product development systems (Liu andWhite, 1997; Liu et al., 2000; Wynstra et al., 1999; Petroni and Panciroli, 2002) – are notappropriate in the case of small and medium sized business like those included in theanalyzed sample (35 percent of the firms has less than ten employees and 88.5 percentof the firms has less than 50 employees). Secondly, the implementation of CAD systemsseems to be a clear and unequivocal signal of the presence, in the subcontractor’sorganization, of specific DC. Interestingly, we observe that:

. of 173 subcontractors that claim to have autonomous DC, 162 (94 percent) haveimplemented a CAD system; and

. of 244 subcontractors that claim to have not autonomous DC, 14 subcontractors(6 percent) have implemented a CAD system.

Given the fact that firms that claim to have or have not autonomous DC can haveoverestimated or underestimated their DC, we considered the adoption of CAD as amore conservative and accurate measure of autonomous DC.

Cluster analysisScholars have used cluster analysis techniques to study phenomena of interest in themanagement of supplier relations (Bensaou and Venkatraman, 1995). Using SPSS, weapply two-step cluster analysis, based on the aggregation algorithm proposed by Chiuet al. (2001), to our data (i.e. the three variables – CPD, SI, DC – used as measures forthe two constructs defining subcontractors’ design and marketing capabilities). Wechoose this procedure for two reasons. Firstly, it allows dealing with variables thathave different nature (in our case CPD is a ordinal variable, SI is a continuous variableand DC is a dichotomous variable). Secondly, it provides an effective and efficient wayfor identifying outliers (Chiu et al., 2001).

The two-step procedure proposes the number of clusters on the basis of asub-procedure that uses the Bayes information criterion and the variation of thedistance between the clusters (Ketchen and Shook, 1996). The procedure uses adistance measure based on the log-likelihood function to assign each firm to its cluster.It automatically excludes 33 firms (7.9 percent of the sample) as outliers that cannot beaggregated to any of the clusters. Table I provides a summary of the samplecharacteristics by industry and size.

The procedure identifies four clusters. Table II summarizes the profile of eachcluster, providing some descriptive statistics.

We define the clusters as follows:

(1) A-type of subcontractors – developed subcontractors (n ¼ 93, 24.2 percent of thesample). They show the highest percentage of export on total sales (23.7 percent)with a diversified customers’ portfolio (all the firms have more than50 customers). Almost all subcontractors (94 percent) adopt a CAD system.

(2) B-type of subcontractors – developing subcontractors (n ¼ 77, 20.1 percent of thesample). They have a lower propensity to export than the developedsubcontractors (12.2 percent is the average percentage of export to total sales)

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and a less diversified customers’ portfolio (the customer range with the highestfrequency is 20-49 with almost 55 percent of the subcontractors). However, allthe developing subcontractors have adopted a CAD system.

(3) C-type of subcontractors – question mark subcontractors (n ¼ 123, 32 percent ofthe sample). These subcontractors do not have DC (nobody has adopted a CADsystem), present a low propensity to export (6.7 percent is the averagepercentage of export on total sales) but show a certain degree of diversificationof the customer portfolio (20-49 is the customer range with the highestfrequency with about 39 percent of the subcontractors falling into this range).

(4) D-type of subcontractors – traditional subcontractors (n ¼ 91, 23.7 percent of thesample). They have a low propensity to export (6 percent is the averagepercentage of export on total sales), a limited customer portfolio (40.9 percent ofthe subcontractors have 1 to 9 customers) and no DC (all the subcontractors donot employ a CAD system).

Since, cluster analysis is static, this segmentation does not provide any data onsubcontractors’ evolution. However, we can infer that the different clusters are theresult of some kind of evolution. Indeed, the literature quoted in the previous sectionsrefers to changes occurred in subcontractors’ strategies and structures during the lastdecade. Moreover, several studies show that Italian subcontractors usually start as

Subcontractor size (number of employees)Industry 1-9 10-19 20-49 50-99 .100 Total

Electronics Number 6 4 4 1 2 17Percent 35.3 23.5 23.5 5.9 11.8 100.0

Mechanics Number 68 56 49 16 10 199Percent 34.2 28.1 24.6 8.0 5.0 100.0

Rubber and plastics Number 13 9 10 1 4 37Percent 35.1 24.3 27.1 2.7 10.8 100.0

Furniture Number 33 42 25 5 3 108Percent 30.6 38.9 23.1 4.6 2.8 100.0

Apparel Number 15 4 0 1 0 20Percent 75.0 20.0 0.0 5.0 0.0 100.0

Textiles Number 5 3 3 1 1 13Percent 38.4 23.1 23.1 7.7 7.7 100.0

Total Number 140 118 91 25 20 394Percent 35.5 29.9 23.1 6.4 5.1 100.0

Table I.The sample composition:

breakdown by industryand firm size

ClustersPercentage of export on total sales

(SI)

Number of customers(CPD)

(mode and percent)

CAD system(DC)

(percent)

A (n ¼ 93) 23.7 50 or more (100.0) Yes (94.9)B (n ¼ 77) 12.2 20-49 (54.7) Yes (100.0)C (n ¼ 123) 6.7 20-49 (38.9) No (100.0)D (n ¼ 91) 6.0 1-9 (40.7) No (100.0)

Table II.Cluster analysis

summary

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“traditional” subcontractors (Becattini, 1999; Dei Ottati, 2003). For example, a largenumber of subcontractors originate from spin offs and begin doing business asoutsourced operations of the originating firm. The “traditional” type can therefore beconsidered a sort of baseline for subcontractors.

Consequently, since our cluster analysis identifies subcontractor types other than“traditional” we argue that some change has occurred and that at least somesubcontractors have evolved to a different configuration as concerns design and/ormarketing capabilities.

In order to provide a crisper characterization of the clusters, we also calculate, for eachof them, further descriptive statistics on other variables/subcontractors’ characteristics ofrelated interest. These variables and data, presented in Table III, also come from the onlinequestionnaire survey. They confirm the results of the cluster analysis, providingadditional evidence about the diversity between the four types of subcontractors.

First of all, the first two types of subcontractors are, on average, larger than theothers. This would suggest that there are some scale effects involved due either totechnological indivisibilities and threshold effects in marketing or, alternatively, tocomplementarities among these activities (Carlaw, 2004). However, a closer look to thedata reveals that size is unevenly distributed across the four clusters. For example,23.8 percent of “developed” subcontractors have less then nine employees while22.7 percent of “traditional” subcontractors fall within the 20-49 size range. Moregenerally, our cluster variables are not collinear with firm size and data do not showcorrelation between firm size and the clustering variables. For example, there is asignificant fraction of small subcontractors (25 of those with less then nine employees,17.8 percent), that have more than 50 customers. Similarly, approximately 30 percent ofthe larger subcontractors (those with more than 100 employees) have more than50 customers while this fraction rises to 44 percent for subcontractors within the50-99 employees size range. Furthermore, 35 percent of small subcontractors (less thannine employees) adopt CAD while 33 percent of subcontractors within the10-19 employees size range adopt CAD. Finally, linear correlation coefficients withfirm size (measured by the number of employees) are negligible in the cases of both MC(for export sales r ¼ 0,18) and DC (for the adoption of CAD r ¼ 0.19).

The average proportion of sales coming from exclusive, customer-dedicated shopfloor activities to total sales is smaller for developed and developing subcontractors.For example, the average for this variable is 26 percent for developed subcontractors,51 percent for traditional ones. The presence of exclusive, customer-dedicated shopfloor activities is a typical feature of the traditional subcontracting relationships, withsubcontractors treated as buffers against demand fluctuations, as pure contractualextensions of the customer’s operations. Developed subcontractors seem to havemoved away from this kind of attachment to their customers.

Conversely, “developed” and “developing” subcontractors adopt and use advancedproduction technologies (APT) – like flexible automation, more than “traditional” and“question mark” subcontractors. Most of the literature maintains that, for its technologicaland managerial implications, as well as for its typical connection with CAD adoption andthe ability to customize production, the adoption of APTs is positively correlated with thedevelopment of marketing and design capabilities (Petroni and Panciroli, 2002). Thus,APTs adoption and use, as well as patents, proprietary technologies, and even qualitycertification, signal the presence of innovation capabilities.

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Table III.Cluster’s profiles

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All these variables confirm that the four clusters are significantly diverse, and suggestthat developed and developing subcontractors have developed a wider set ofcapabilities, valuable in relationships other than traditional subcontracting. Assuggested below, these capabilities are grounded on the ability to codify tacitknowledge (Nonaka and Takeuchi, 1995).

Finally, the geographic location of subcontractors and, consequently, theirembeddedness in industrial districts is not a feature specific to any of thesubcontractors’ clusters. This makes sense since industrial districts are extremelydiverse, in nature and structures, even in the same region. For example, in FriuliVenezia-Giulia, some industrial districts (e.g. the wood chair district of Manzano) arecharacterized by a prevalence of traditional subcontractors while in other industrialdistricts (e.g. the knife district of Maniago) developed subcontractors prevail.

Summarizing, our cluster analysis allow us to classify, contingent on design andmarketing capabilities, the analyzed subcontractors into four different types. At thesame time, however, each individual subcontractor has worked out a trajectory leadingto its current status. Along that trajectory, each subcontractor has developed, to adifferent extent, design and marketing capabilities. The next research question, wewish to address is:

RQ2. Is there some kind of dynamic relationship between design, marketing, orother capabilities and what are the determinants of their development?

Italian subcontractors’ evolution: an exploratory studyMethodology and data collectionUsing our cluster analysis as a starting point, we wish to explore how and whysubcontractors capabilities change and, consequently, understand some of the ongoingdynamics of Italian supply systems. In order to do so, we conducted ten case studies ofsubcontractors chosen from those included in the sample subjected to the clusteranalysis. As usually happens in case study research (Yin, 1994; Eisenhardt, 1989), thechoice of the research sample was not random (random or statistical sampling) buttheoretical (theoretical sampling). Indeed, we chose subcontractors from differentindustries that belong to different clusters (i.e. seven developed subcontractors, twodeveloping subcontractors, one question mark subcontractor).

As suggested by Ellram (1996) and Voss et al. (2002), we collected informationthrough semi-structured interviews, guided by a common case study protocol built ona review of the relevant literature, and on discussions with several operationsmanagers from the firms involved in the study. For each case study, we interviewedCEOs and top managers. The case studies were first of all case histories (fromfoundation/inception to present time), with the interviews focused on subcontractors’changes and transformation over time. On the whole, we interviewed 18 persons andeach interview took about two hours. The interviews were taped and written up.Transcripts were used for the subsequent within-case and cross-case analysis.

Each interview comprises three sections. The first addresses if and how thesubcontractor has developed design and marketing capabilities. This part containsspecific questions related to explicit research constructs (e.g. when did you introduce aCAD system? When did you start to use the CAD for designing new products? Howhave your customers changed, i.e. their number, identity, location, during time?).However, this section also includes more general questions aimed at investigating if

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there were other capabilities involved in the above process (i.e. are there any othercapabilities, beyond design and marketing capabilities, that have been relevant in thetransformation of your firm?). The second section investigates what triggered thedevelopment of the capabilities, with questions analyzing both external and internalfactors (e.g. what factors did facilitate and/or hurdle the development of the capabilitiesidentified in the previous section?). The third section analyzes what were the conditionspermitting the development of capabilities (e.g. what investment in tangible, intangibleand organizational resources has supported the development of your capabilities?).

Table IV reports a summary of key information about the ten subcontractorsincluded in the sample.

A model of subcontracting evolutionFrom the cross-analysis of the case studies and after a series of iterative cycles of datagathering (Westbrook, 1995) we built an interpretative framework that explainssubcontractors’ evolution (due to space constraints we do not report the longitudinalwithin-case analysis of each of the subcontractors).

Firstly, the framework defines what are the capabilities involved in the evolution ofa subcontractor. Interestingly, the case studies confirm that design and marketingcapabilities are crucial in shaping subcontractors’ development, but also suggest thattwo other capabilities play an important role:

(1) Supply management capabilities. The ability to design its upstream supplychain, to select suppliers with the required capabilities and to developsatisfactory relationships (in terms of purchased goods costs and quality,service level, delivery lead times, and flexibility) with them (Fine, 1998).

(2) Knowledge codification capabilities. The ability to codify a firm’sunderstandings of the performance implications of internal routines inwritten tools such as manuals, blueprints, procedures, spreadsheets, decisionsupport teams, and software (Zollo and Winter, 2002).

Secondly, the framework defines the dynamic relationships among these capabilitiesand illustrates how their evolution affects one another (Figure 1).

Knowledge codification capabilities are exogenous to our model. In fact, ourcross-case analysis shows that they:

. derive from investments in people and technologies needed to develop writtentools such as manuals, blueprints, procedures, spreadsheets, decision supportsystems, and software; and

. are usually a consequence of organizational discontinuities (new customers’requirements, managerial turnover, entrepreneurial succession, financial crisis,change in governance or stakeholders, etc.).

We did not observe any significant causal feedback relationships between design,marketing and supply management capabilities and knowledge codification capabilities.

Our case analysis highlights that the main driver of subcontractors’ evolution is thecodification of at least part of their tacit technical and commercial knowledge. In otherwords, it is knowledge codification that drives subcontractors’ development, enlargingand enriching their capabilities’ portfolio. Knowledge codification widenssubcontractors’ relational capabilities because it allows them to “establish

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conversations” with non-local actors. Also, it allows developing self-awareness aboutthe knowledge, routines and relationships the firm has. This, in turn, makes suchcapital replicable or, at least applicable to different business situations at negligiblecosts. Finally, being able to codify knowledge represents a necessary condition tostructure an autonomous R&D function and introduce total quality management(TQM) and quality certification (Benezech et al., 2001; Romano and Vinelli, 2001).

Knowledge codification capabilities constitute the ground on which DC aredeveloped, too (relation 1). For example, the possibility to retrieve drawings or designelements from electronic archives facilitates autonomous new product developmentshortening lead times and reducing design costs. Moreover, being able to codifyknowledge means to set up marketing information systems which support marketsearching and monitoring capabilities (relation 2). Knowledge codification capabilitiesalso entail the establishment of non passive relationships with key customers (forexample, enabling such cross-firm activities as root cause problem solving, just in time,target costing, TQM), thus enhancing subcontractors’ relational capabilities (relation 2).Finally, knowledge codification capabilities positively impact on supply managementcapabilities (relation 3). For example, the possibility to access and updatesystematically market data on the cost of raw materials and components supportssuch processes as vendor rating and suppliers’ development.

The evidence provided by our case studies is also consistent with supply chainmanagement theory (Fine, 1998), which maintains that design and supply managementcapabilities need to be aligned over time (relation 4). On the one hand, DC improve thesubcontractors’ ability to efficiently allocate design tasks within and outside itsboundaries. They also support the design process of its upstream partners. On theother hand, supply management capabilities improve the subcontractors’ ability toabsorb new technical knowledge from its suppliers (Kotabe et al., 2003) thus enhancingtheir DC.

Figure 1.A model of

subcontractors’ evolution

Designcapabilities

Relationalcapabilities

Searching andmonitoringcapabilities

Relation 5

Marketingcapabilities

Knowledgecodificationcapabilities

Relation 1

Relation 2

Supply managementcapabilities

Relation 4

Relation 3How do

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The case analysis highlights a bi-directional dynamic relationship also between DCand MC (relation 5). On the one hand, better design capabilities improve thesubcontractor’s ability to approach the market proactively and represent theprerequisite for co-development practices. For example, shorter development timesand lower design costs, as resulting from CAD adoption and use, widen subcontractors’market horizons, allowing to reaching more potential customers, thus overcoming thelocal approach that typically characterizes traditional subcontractors. On the otherhand, the development of relational capabilities grants access to technologicalknowledge from the customer (Dyer and Singh, 1998), thus enhancing DC. For example,fulfilling customers’ requirements in terms of quality, safety, and legal standardsenriches the subcontractors’ ability to autonomously develop products/services thatmeet the requirements of other potential customers.

The development of market and design capabilities positively impact on thediversification of customers’ portfolio and the diversification of products’/processes’portfolio. As for the first point, the enhancement of monitoring and searchingcapabilities favors an enlargement of market horizons, reaching an increasing numberof potential customers and overcoming a local market situation that typicallycharacterized a traditional subcontractor. Leveraging on these capabilities,subcontractors can diversify their customer portfolios, geographical markets andserved industries. As for the second point, DC are the basis of product and processinnovation (Petroni and Panciroli, 2002).

Interestingly, our case studies do not show any specific relation betweensubcontractors’ age (date of foundation) and their status or evolutionary trajectory. Forexample, the youngest and the oldest companies analyzed are both classified as“developed” while the third oldest is a “question mark”. Since, our sample for the casestudy analysis includes only subcontractors that have developed some design andmarketing capabilities, it is interesting to note that there is not a unique and predefinedevolutionary trajectory, and that the pace and the type of subcontractors’transformation and capabilities development are not rigidly determined.

Discussion and conclusionsOur analysis has two main empirical results. Firstly, it provides a classification of Italiansubcontractors on the basis of their design and marketing capabilities. Secondly, itproposes a model of how subcontractors’ capabilities develop over time. From theseresults we can derive some important theoretical and managerial implications.

As for the first point, results of the cluster analysis support theory predictions andconfirm our understanding of Italian supply systems: subcontractors are diverse andcan be meaningfully classified on the base of their design and marketing capabilities.

As for the second point, from a cross-case analysis of ten case studies, and after aseries of iterative cycles of data gathering, we develop a general model to understandsubcontractors’ change as a function of capabilities development. The modelhighlights several important aspects of this process of change.

Firstly, the model shows that subcontractors’ transformation involves the dynamicover time of a wide range of capabilities. More specifically, the model poses thatknowledge codification, supply management, design and marketing capabilitiesmutually reinforce one another and tend to align over time. For example,subcontractors do not develop marketing activities in spite of or without developing

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over time DC. On the whole, this result suggests that, in order to understand firm’scompetitive advantage, scholars, particularly those that draw on RBV (resource-basedview) of the firm, should carry out longitudinal studies to capture how firm’scapabilities interact over time (Teece et al., 1997; Lorenzoni and Lipparini, 1999), thuscreating new knowledge and capabilities, rather than consider them as independententities (Combs and Ketchen, 1999; Kotabe et al., 2003).

Secondly, supply management capabilities emerge as distinctive in the model. Thisis somewhat surprising, given the fact that most of the literature on supply networksfocuses on the ability of focal or lead firms to deliberately manage their supplynetworks to create architecture of capabilities located both internally and externally(Frohlich and Westbrook, 2001; Furlan et al., 2006; Lorenzoni and Baden-Fuller, 1995;Lorenzoni and Lipparini, 1999; Dyer and Nobeoka, 2000). We claim that this ability isimportant also upstream the supply chain, for subcontractors.

Thirdly, knowledge codification capabilities constitute a sort of logical antecedent andorganizational prerequisite for subcontractors’ development to occur. This finding makesan original contribution to the literature on the strategy for knowledge creation in firms,especially medium and small ones. Indeed, in the knowledge-based view of the firm (Grant,1996; Kogut and Zander, 1995; Nonaka and Takeuchi, 1995), the relationship betweenknowledge-codification capabilities and the creation of new tacit or explicit knowledge hasnot been sufficiently explored. As our results show, knowledge codification capabilitiescontribute to the creation of new knowledge in the form on new design, marketing andsupply management capabilities. Knowledge codification capabilities foster the creationof new knowledge by enhancing both willingness to share knowledge and understandingamong individuals (Un and Cuervo-Cazurra, 2004). Knowledge codification capabilitiesdevelop new organizational-level communication routines between individuals at alllevels of the organizations thus promoting the transfer of knowledge within and acrossorganizational boundaries. Furthermore, they contribute to create a common and availablebase of knowledge for all the organization thus creating a common code (Arrow, 1974) or acommon knowledge (Grant, 1996) that make possible for individuals to understand eachother. From this standpoint our study supports the view that knowledge codification isintimately related to the concept of dynamic capabilities in that it is a deliberate process oflearning and one of the mechanisms involved in the creation and evolution of dynamiccapabilities (Zollo and Winter, 2002).

Beyond its managerial and theoretical implications, this study can also be useful ingenerating further conceptual and empirical research. Firstly, future research mayrefine subcontractors’ classification, articulating the four clusters we identified.Secondly, our framework for subcontractors’ development should be tested on the fieldthrough quantitative research. Thirdly, more accurate measures of subcontractors’capabilities should be conceived and tested. Finally, given that knowledge codificationis a sort of fundamental dynamic capability, it is worth conducting more in-depthresearch about how this capability originates.

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Further reading

Ellram, L. (1997), “The supplier selection decision in strategic partnerships”, Journal ofPurchasing and Materials Management, Vol. 26 No. 3, pp. 8-14.

About the authorsAndrea Furlan is an Assistant Professor of Operations and Supply Chain Management at theUniversity of Padova, Italy, Department of Economics. He graduated in business economics atUniversity of Padova where he completed his PhD in Economics and Management with adoctoral dissertation on supply chain management. He works within the Business andOperations Management group at the Department of Business and Economics (University ofPadova). His research has appeared in the Journal of Manufacturing Technology Management,Journal of Purchasing and Supply Management and International Journal of Operations &Production Management. Andrea Furlan is the corresponding author and can be contacted at:andrea.furlan@unipd.it

Roberto Grandinetti is a Professor of Management at the University of Padova, Italy,Department of Economics. His main areas of research are the international opening of Italianindustrial districts, the basic concepts of knowledge management, and the evolution ofmarketing in a relational sense. He has published books and articles in journals like the Revued’Economie Industrielle, Human Systems Management, International Journal of Operations &Production Management, Piccola Impresa/Small Business.

Arnaldo Camuffo is a Professor of Management at the University of Padova, Italy,Department of Economics. He holds a degree and a PhD in management from the University ofVenice and a Master of Science in Management from the Sloan School of Management at MIT. Hehas published books (the most recent is Automation in Automotive Industries. RecentDevelopments, Berlin, Springer, 1999 with A. Comacchio and G. Volpato) and several articles injournals like the MIT Sloan Management Review, Industrial and Corporate Change, IndustrialRelations, Industry and Innovation, International Journal of Human Resource Management,International Journal of Training and Development, Journal of Management and Governance,International Journal of Innovation and Learning, Human Resource Development, Journal ofManufacturing Technology Management, International Journal of Operations & ProductionManagement, Journal of Purchasing and Supply Management and Korean Journal of PoliticalEconomy.

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