quality issues in outsourcing to china: is it still a sustainable competitive advantage?

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Quality issues in outsourcing to China: Is it still a sustainable competitive advantage? Ruta Armalyte a , Nachiappan Subramanian a, *, Angappa Gunasekaran b a Nottingham University Business School China, The University of Nottingham Ningbo China, 199 Taikang East Road, Ningbo 315 100, China b Department of Decision and Information Sciences, Charlton College of Business, University of Massachusetts – Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA Introduction In the recent years, outsourcing to China has become an important business strategy. Firms achieve competitive advantage by producing or sourcing products and services more effectively from a low cost country. Other than cost reductions, firms gain competitive advantage through premium quality, improved flexibility and dependability according to changing business environment and market demand (Kakabadse and Kakabadse, 2000; Jennings, 2002; Lynch, 2004; Fallah and Lechler, 2008). Therefore, outsourcing is one of the ways created by the globalisation as a fashionable strategy. China presents enormous business opportunities for the Western countries, not only as a low-cost labour country for cheap production, but also as a growing giant for potential market and high profits. Today J. Eng. Technol. Manage. xxx (2013) xxx–xxx ARTICLE INFO Keywords: Outsourcing Sustainable competitive advantage Quality issues ABSTRACT Globalisation has made outsourcing to low-cost countries fashion- able but firms face several challenges that fade outsourcing fashion. To survive in this outsourcing wave adopting proper sustainable strategy is needed. Using four case studies and four competitive strategies (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core Competences’’ and ‘‘Value-Chain Analysis’’), this paper proposes sustainable competitive advantage framework to overcome quality issues in outsourcing to China. ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved. * Corresponding author. Tel.: +86 574 8818 0197. E-mail addresses: [email protected] (R. Armalyte), [email protected], [email protected] (N. Subramanian), [email protected] (A. Gunasekaran). G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003 Contents lists available at ScienceDirect Journal of Engineering and Technology Management journal homepage: www.elsevier.com/locate/jengtecman 0923-4748/$ – see front matter ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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Globalisation has made outsourcing to low-cost countries fashionable but firms face several challenges that fade outsourcing fashion.To survive in this outsourcing wave adopting proper sustainable strategy is needed.Using four case studies and four competitive strategies (‘‘Generic Strategies’’,‘‘Sandcone’’,‘‘Core Competences’’and ‘‘Value-Chain Analysis’’),this paper proposes sustainable competitive advantage framework to over come quality issues in outsourcing to China.

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J. Eng. Technol. Manage. xxx (2013) xxx–xxx

G Models

ENGTEC-1382; No. of Pages 19

Contents lists available at ScienceDirect

Journal of Engineering andTechnology Management

journal homepage: www.elsevier.com/locate/jengtecman

Quality issues in outsourcing to China: Is it still asustainable competitive advantage?

Ruta Armalyte a, Nachiappan Subramanian a,*,Angappa Gunasekaran b

a Nottingham University Business School China, The University of Nottingham Ningbo China, 199 TaikangEast Road, Ningbo 315 100, Chinab Department of Decision and Information Sciences, Charlton College of Business, University of Massachusetts– Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA

A R T I C L E I N F O

Keywords:

Outsourcing

Sustainable competitive advantage

Quality issues

A B S T R A C T

Globalisation has made outsourcing to low-cost countries fashion-

able but firms face several challenges that fade outsourcing fashion.

To survive in this outsourcing wave adopting proper sustainable

strategy is needed. Using four case studies and four competitive

strategies (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core Competences’’

and ‘‘Value-Chain Analysis’’), this paper proposes sustainable

competitive advantage framework to overcome quality issues in

outsourcing to China.

� 2013 Elsevier B.V.Elsevier B.V. All rights reserved.

Introduction

In the recent years, outsourcing to China has become an important business strategy. Firms achievecompetitive advantage by producing or sourcing products and services more effectively from a lowcost country. Other than cost reductions, firms gain competitive advantage through premium quality,improved flexibility and dependability according to changing business environment and marketdemand (Kakabadse and Kakabadse, 2000; Jennings, 2002; Lynch, 2004; Fallah and Lechler, 2008).Therefore, outsourcing is one of the ways created by the globalisation as a fashionable strategy. Chinapresents enormous business opportunities for the Western countries, not only as a low-cost labourcountry for cheap production, but also as a growing giant for potential market and high profits. Today

* Corresponding author. Tel.: +86 574 8818 0197.

E-mail addresses: [email protected] (R. Armalyte), [email protected],

[email protected] (N. Subramanian), [email protected] (A. Gunasekaran).

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

0923-4748/$ – see front matter � 2013 Elsevier B.V.Elsevier B.V. All rights reserved.

http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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China is the fastest growing market in the world and until now it is regarded as ‘‘the world’s factoryfloor’’ (The Economist, 2005).

However, outsourcing can also lead to loss of competitive advantage. Ting (2004) reported that‘‘Outsourcing to China helped many firms to save money, but it would be frustrating if not doneright’’. China is classified as a risky and demands a tight control over poor intellectual propertyprotection, fading quality of production and high level of corruption by many firms (TheEconomist, 2005). Due to increased global competition and the need for cost reductions, manyinternational companies outsourced or established their production to China, however not all ofthem managed to achieve success, resulting in many issues, such as quality fade and loss ofcompetitive advantage.

Plethora of studies have been carried out to understand the motivation and benefits associatedwith outsourcing to China in different industries starting from manufacturing to informationtechnology and financial industries (Bon and Hughes, 2009; Chadee and Raman, 2009; Contractoret al., 2010; Andersen, 2008). In addition to this, few studies reported major hiccups to the firms thatoutsourced to China (Kakabadse and Kakabadse, 2000; Kliem, 1999). Furthermore, few researchersspecifically stated the management control and quality issues as dominant issues in manufacturingindustry (Freytag et al., 2012; Fleisher et al., 2010). Even though there were many media reports aboutquality issues in manufacturing industries in the recent years, however, there was no adequate studywhich discusses on how to overcome quality issues within the specific manufacturing sector of theChinese operations.

Furthermore, enormous efforts have been made by researchers to understand why companiesshould backshore its production from China (Kinkel and Maloca, 2009). However not much was doneto identify how to survive in China without quality and financial losses and to maintain itscompetitive and sustainable strategy. Hence, this paper aims to answer the following researchquestions.

� H

ow a firm within a specific industry transforms Chinese operations (fashionable outsourcing) intocompetitive and sustainable strategy? � H ow to overcome the quality issues with the Chinese operations?

The major contributions of this study are twofold: theoretically this is a contextual perspectivestudy to suggest guidelines to succeed and to develop a sustainable competitive advantageframework. Practically this study serves as a guide to those companies on how to survive in theChinese market. Furthermore, this research also can help new entrants on how to deal with qualityissues if they prefer to source or operate in China.

The reminder of the paper is structured as follows. The background for the research is presentednext, followed by competitive advantage theoretical perspective and research methodology. Results,discussion and managerial implications are then presented respectively.

Background for the research

A large number of studies have analysed the issues associated with Chinese outsourcing throughtheoretical and empirical perspective (Deloitte, 2005; Freytag et al., 2012; Chou and Chou, 2011;Harland et al., 2005). Outsourcing or operations in low cost country would lead to increasedcompetition and loss of innovation due to gained knowledge by its contractors (Hoecht and Trott,2006). Power et al. (2007) claimed that many organisations and its subcontractors failed to provide fullcommitment, loyalty and discipline, in order to gain from outsourcing. It leads to themisunderstanding of the employees, processes and methods of outsourcing. Jennings (2002) in hisfindings states that outsourcing can lead to leakage of critical knowledge, which would then increasethe competition. Furthermore, Domberger (1998) concluded that the loss of cross-functional skills ordevelopment of wrong skills and the loss of the control of the suppliers are the main concerns ofoutsourcing.

Beaumont and Sohal (2004) state that outsourcing can lead to decreased flexibility by the company,due to its contractual agreement, which in case of the business environment or demand change cannot

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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be adjusted as quickly as it could have been by the managerial fiat. According to Dankbaar (2007),outsourcing can damage industrialisation and innovation capability of the firm. Furthermore,Plambeck and Taylor (2005) claims that although contract manufacturing can lead to lower costs, itcan result in quality fade and weaken the incentives for innovation, by shifting the focus frominnovation to costs.

Kakabadse and Kakabadse (2000) in their study signalled that the companies must understandtheir own business processes and problems associated with it when souring or operating in differentlocations. In addition to this, the supplier also needs a greater understanding of its client’s service.Otherwise outsourcing to third party can lead to increased costs and unfilled service qualityexpectations. This was further discussed and proved by Kliem (1999) that a firm’s dependency of theoutside supplier can lead to hidden costs such as managing failing relationships and other criticalsuccess factors of the company. Another study related to information systems outsourcing stated thatoutsourcing can have hidden costs associated with hiring, training and transferring staff, searchingand contracting the vendor or cost of switching vendors (Gonzalez et al., 2005). In addition to this,Barthelemy (2003) states that outsourcing can encounter additional costs when managing the transferof products, knowledge and equipment to the outsourcing partner.

In manufacturing industry, McIvor and Humphreys (2000) through cost and benefit analysis foundthat increased outsourcing of components which were previously made in-house can result inincrease of unexpected costs due to company’s operations becoming more dependent on much widerrange of suppliers. This is due to the fact that many companies have inadequate costing systems, suchas direct labour hours being used for allocating overheads, even though the production process ishighly automated. This incorrect costing system leads to overpricing profitable products andexpanding unprofitable production lines (Lutz and Ritter, 2009).

Other problems, such as difficulties in coordination of global supply chains and the loss ofintellectual property rights due to legal and political issues in China, need to be taken intoconsideration when choosing outsourcing location (Meixell and Gargeya, 2005; Lutz and Ritter, 2009).Finally, issues associated with communication challenges and misunderstandings, due to culturaldifferences, were also discussed in the literature (Campbell, 1995). Lutz and Ritter (2009) throughempirical evidence showed that lack of communication and cultural understanding betweeninternational companies and the Chinese suppliers leads to incorrect orders, loss of flexibility,increased costs and loss of competitive advantage (Domberger, 1998; McCarthy and Anagnostou,2004).

Our study views the causes of quality issues using Gordon et al. (2009) six main categoriesclassification. Six major causes are human default, machinery failure, poor quality of raw materials,management and control issues, legal issues and communication problems.

Human resource failure

Most of the quality issues are associated with human resource failure. This is primarily due to lackof motivation and interest, shortage of skilled people, lack of skills and training needed to process thetasks (Campbell, 1995). Most common human resource failure occurs due to human ‘cut-corners’philosophy. Chinese suppliers in general to increase their profits in short period cut quality and do notsee beyond the next order. Furthermore, evidence of ‘product fade’ is a common issue of human error,where the owner of the factory ensures that the first few orders meet the required standards and in thefollowing orders the quality of the goods decreases as material inputs are replaced with cheaper onesin order to cut costs (The Economist, 2007).

Machinery failure

Machinery failure is another important reason why quality of the goods does not reach theirstandards. Problems associated with machinery are lack of maintenance, lack of new technologyneeded to produce the goods or improper setup. Furthermore, most industrial centres lack capital,which is needed for updated technology in order to meet the product requirements (Gordon et al.,2009).

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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Material inadequacy

30% of defaults occur due to wrong or default raw materials being bought from suppliers (UNIDO,2006). Furthermore, manufacturers often subcontract to other companies for supply of raw materials;hence the quality of it may vary depending on the supplier (Forward Forever, 2011).

Management and control issues

It is important for the companies to understand that only reliance of Chinese manufacturers arenot enough to ensure good product quality. Importing companies should take careful steps whencontracting a Chinese supplier; understand the quality control and safety testing procedures of themanufacturers (Waldmeir, 2007). Furthermore, increased on-site monitoring should be used byinternational companies who want to establish a long term presence in China. Furthermore, if foreigncompanies do not focus on establishing long-term relationships and implementing qualityprocesses, but only concentrate on cost savings, suppliers will continue cut-corners in quality,resulting in some very unpleasant import quality issues (Industry Week, 2008). Management andcontrol are essential factors for quality assurance, hence additional supervision such as detail reportsabout the product design, its production process, representations and warranties regarding theproduct quality as well as specifications of product design, its prototypes and samples need to beestablished (Fremlin, 2008).

Legal issues

China is still in its early age of development and product-liability or product-recall systemsare not fully established in China. This leads manufacturers abuse the system and not bepunished for it (Reisman, 2006; Wharton, 2012). According to USA trade statistics, in 2009 the UScopyright and software industry lost $48 billion due to intellectual property rights (IPR)infringement in China. Furthermore, this is not a problem only for international, but alsofor domestic companies in China. An official study in Beijing states that pirated software cost$20.9 billion for domestic companies in 2010 (Tandon, 2011). It is generally reported that greedyand cut-throat owners of the manufactures take advantage of the weak legal enforcement andeven encourage cheating as a business culture, where corruption and bribery are flourishing(Barboza, 2007).

Communication issues

An essential part of any business is to clarify the requirements and manufacturing processesthat depends on the quality and production of the final goods. To achieve this, close relationshipbetween manufacturing and management has to be established and constant communication isrequired. However, when companies produces from China, the time difference, distance andlanguage barriers become the biggest issues to communicate (Blackerby, 2003). As a result,communication becomes an issue and can result in a quality fade, if the supplier does not speakinternational language or does not fully understand the requirements (Campbell, 1995).Furthermore, some issues cannot be solved by communicating through phone or email andhence it has to be solved on site, however due to the distance this option becomes limited and canlead to further complications. Due to reliance on communication through phone or email mayresult in lower productivity, choice of poor raw material quality or incorrect manufacturingprocesses (Wharton, 2007) (Table 1).

Competitive advantage theoretical perspective

Our study considers four different competitive strategies that indicate four different ways of howa company can achieve and maintain its sustainable competitive advantage when outsourcing toChina.

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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Table 1Issues and consequences of outsourcing to China.

Issues Consequences Source

Human Resource Failure Quality loss UNIDO (2006), Wharton (2007), Freytag et al.

(2012), Campbell (1995)Delays in shipment

Failure to realise the

cost of outsourcing

Machinery Failure Loss of profit Beaumont and Sohal (2004), Gordon et al. (2009),

Lynch (2007)Loss of flexibility

Material Inadequacy Hidden costs Kakabadse and Kakabadse (2000)

Failure to realise the cost

of outsourcing

Kliem (1999), Gonzalez et al. (2005), Harland

et al. (2005), McIvor and Humphreys (2000),

McCarthy and Anagnostou (2004)Increased operating costs

Loss of Management

and Control

Quality fade Hoecht and Trott (2006), Power et al. (2007),

Jennings (2002), Domberger (1998), Dankbaar

(2007), Plambeck and Taylor (2005), Freytag et al.

(2012), Fremlin (2008), Yamashita (2010),

Dabhilkar et al. (2009)

Inaccurate work

Loss of core competences

Increased competition

Leak of knowledge

Risk of losing customers

Loss of innovation

Loss of competitive advantage

Legal Issues Loss of competitive advantage Meixell and Gargeya (2005), McCarthy and

Anagnostou (2004), Gordon et al. (2009), Tandon

(2011), Barboza (2007)

Loss of core competences

Loss of intellectual property

Loss of Communication Incorrect execution of processes Blackerby (2003), Wharton (2007), McCarthy and

Anagnostou (2004), Lutz and Ritter (2009),

Campbell (1995)

Improper material usage

Delays in shipment

Loss in efficiency

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Focus on single objective–‘‘Generic Strategies’’

Porter (1980) believed that in order to be competitive in the market, companies should achievesustainable competitive advantage through differentiation theory, proposed in 1980. Porter (1980)named three generic strategies for firms to be successful: cost leadership, differentiation or focus. Costleadership attempts the firm to be the lowest-costs producers of goods and services in the industry.The firm with the lowest costs would achieve the highest profits and outperform its competitors(Devaraj et al., 2004). Differentiation strategy occurs when a firm offers unique products and hence, itcan often charge a premium price for it in the market. Furthermore, a focus strategy occurs when a firmconcentrate on specific niche in the market and produce specialised goods for this niche market.Competitive advantage can be achieved through focusing on the differentiation or leadershipapproach with regard to the focus strategy (Eonsoo et al., 2004).

It is important to note that Porter (1980) warns the firms not to be stuck between two chairs. Bythis phrase Porter (1980) refers to differentiation and cost leadership strategies, which cannot beachieved simultaneously and therefore a company should decide whether they want to be the‘cheapest’ or the ‘best’ in the market. There is an argument that if the firm adopts both differentiationand cost leadership strategies do not have a competitive advantage and therefore has a poor financialperformance. However, Dess (1984) has proved that even if companies combine the generic strategies,they can still be successful and profitable.

Few firms use Porter’s generic strategies to gain advantage such as differentiation or cost reductionby sourcing part of their business (Eonsoo et al., 2004). According to McIvor (2005) outsourcing,manufacturing or administrative parts of the business leads to the cost structure of the business. Onthe other hand, outsourcing creative part of the business such as design is done to gain differentiationpurposes (Eonsoo et al., 2004). It is claimed that regardless the reason for outsourcing, it has to bealigned with the overall strategy of the business (McIvor, 2005).

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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Satisfy all five dimensions – ‘‘Sandcone’’

Ferdows and De Meyer (1990) suggest that there is a specific order for the competitive measuresand if the company follows it, the competitive measures will reinforce each other rather than replacingeach other as suggested by Skinner (1974). It claims that quality in regards to customer’s expectationsassociated with the brand is the crucial and most important factor in order to be competitive, and thencomes dependability, flexibility, cost and innovation. Ferdows and De Meyer (1990) claim that until thesolid ground for quality expected from consumers is not implemented then there is no use to reducecosts and increase flexibility. Furthermore, Ferdows and De Meyer (1990) identified that for thecompanies who compete on the high quality, premium cost disadvantage is only an illusion. Ferdows andDe Meyer (1990) argued that before the technological boom, trade-off between cost and flexibly mightbe an issue, but due to current innovation and high technology era, any kind of mix in the production ispossible. It is obvious that increased dependability can eventually lead to higher flexibility. This is due tothe reason that when a company has all its processes under control (wholly owned subsidiary), it mightthen find it much easier to meet sudden change in the order rather than request this from an outsidesupplier who might have already problems delivering the regular order on time.

‘‘Sandcone’’ model states that companies can and must compete on several dimensionssimultaneously. Combining ‘‘Sandcone’’ and Hill (1988) suggestions, a company to achievecompetitive advantage has to compete on several dimensions such as quality and dependabilityhas to be maintained within the customers expected standards.

Concentrate on core competences – ‘‘Core Competences’’

Prahalad and Hamel (1990) suggest that core competences are the wellspring of the new businessstrategy and are achieved through collective learning in cooperation, paying special attention on howto coordinate diverse production abilities and integrate compound stream technologies. They arguethat only if the company is considered as a hierarchy of core competences, core products and marketfocused business units then it will be ready to fight and succeed.

Outsource non-value adding activities ‘‘Value-Chain Analysis’’

According to Porter (1985) value chain analysis will enable the organisations to improve overallperformance and increase their profit margin of the company, by performing activities efficiently, sothat the value the customer will be willing to pay exceeds the cost of the activities in the value chain.Value chain analysis distinguishes core activities of the firm (value added activities that providecompetitive advantage over its competitors) from the secondary activities (necessary for theorganisations presence) which do not add-value to the company. Those activities might be costly forthe company and thus company might want to reduce the fixed costs by outsourcing them to the thirdparty.

A company can then create a cost advantage over its competitors by evaluating cost of each activityin the value chain. The efficiency can be achieved through reducing costs of individual value chainactivities or by reconfiguring the value chain (outsourcing some parts of it). A firm may specialise inone or more value chain activities and outsource the rest, depending on the strengths and weaknessesin each activity in terms of cost and differentiation. Understanding the linkages between theindividual activities can help the managers to make a better make-or-buy decision that can result incost reduction or differentiation advantage (Chang and Hwang, 2002).

Research methodology

Research design and setting

The purpose of this study is to develop a new theoretical framework based on the research andexisting literature on quality issues when outsourcing to China. Due to the nature of the research topic,case studies were appropriate for the theory building, because it allowed us to answer ‘how’ questions

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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about the contemporary set of events in which we are and ‘why’ questions in order to understand thescope of the problem.

As a result, we conducted in-depth case studies with interviews in order to explore and interpretthe phenomena from real world experience and try to answer the question of why companies stillkeeps its production in China, when the quality of the production affected them negatively.

We conducted an in-depth case study of four companies which are in automotive and toyindustries which are important and more sensitive to human being if there are quality issues.Company A is most recognised for its quality and design brand toys in the world. Furthermore,amongst the toys collectors it is best known for its pricey and highly collectible teddy bears. CompanyB on the other hand is now known as the biggest designer and manufacturer of broad variety of toys. Itproduces all the toys overseas with many wholly owned manufacturing facilities in China, Malaysia,Indonesia, Mexico and Italy.

Other two companies were chosen from the automotive industry. Company C is a world’s leadingautomotive manufacturer and supplier for driveline and chassis technology and Company D is adiversified global provider of power tools and accessories, hardware and home improvement productsas well as technology based fastening systems.

Table 2 provides an overview of the respondent profiles and their experiences. Furthermore,additional four Chinese manufacturing companies were interviewed and the feedback wasincorporated in this study to get a more profound general idea about the causes of quality fail inChina. From Table 2 it can be concluded that all the respondents had experience with at least 4 years inthe company and somehow related to the quality issues of outsourcing. It is important to note thatsome of the respondents were unwilling to disclose information about their firms. Therefore someinterpretation was made in regards to their answers. Finally, none of the interviewees wanted theirnames or their work positions to be disclosed for sensitivity of the research topic and confidentialityreasons, therefore no names will be mentioned in the analysis.

Data collection and analysis

The choices of four case studies were based on Eisenhardt (1989) argument that multiple cases arebetter to extend external validity and give a more objective assessment of the phenomena. Inparticular 4–10 case studies are likely to create more robust and testable theory.

The four companies were collected in a way to have different scenarios of outsourcing success orfailure. This helps to compare and contrast the broader spectrum of the issue considered for the study.First of all, all four companies selected for this research produce consumer durables. In addition to this,the studied activities had to cover the definition of outsourcing identified in the research, which statedthat all companies should have been outsourced at least part of its production process to a foreign

Table 2Respondents and the industry details.

Company Respondent position Industry/main products

Company A � Reporter

� Supervisor in supply chain

Toys industry: stuffed animals, especially teddy

bears

Company B � Supervisor

� Branch Manager

Toys industry: games for children, collection toys,

toys from famous children TV programmes and

movies

Company C � Manager

� Supervisor

Automotive industry: parts for cars

Company D � Branch Manager

� Manager of Quality Assurance

� Manager of Engineering Department

Power tools and accessories: drills, home

durables

Chinese Manufacturer 1 � Manager Petrochemicals

Chinese Manufacturer 2 � Director Cement industries, construction materials

Chinese Manufacturer 3 � Director Medicine and medical products

Chinese Manufacturer 4 � Manager Industrial. IT and home technology (printers,

scanners, industrial paper machines)

Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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country (our case China), by contracting its portion of activities to the third party or creating a whollyowned subsidiary, in order to analyse the quality issues of manufacturing processes. In addition tothis, the critical events of outsourcing have already taken place and the chosen cases should havedifferent outcomes of it (Gadde and Hakansson, 2001). Therefore, two companies were chosen torepresent the negative outcome of outsourcing whereas other two companies were selected torepresent successful outsourcing to the Chinese situation. This selection of the companies enabled toidentify different causes of quality issues and diverse competitive strategies.

The data on the four case studies were collected through primary and secondary data sources,because evidence from multiple sources is considered to be more appealing and robust (Yin, 1994).Secondary data included academic journals and books, corporate reports of the case companies andmedia publications. In addition to that primary data incorporated semi-structured interviews pertelephone, email and face-to-face consultations. Furthermore, open discussion questions werepreferred in order to understand the issues from different angles and follow the theoretical literatureused for this paper. The explanatory interviews comprised two to three respondents from differentdepartments within the case companies, who had direct or indirect involvement in the problematic orsuccessful outsourcing strategy, in order to gain different opinions about the quality issues andcompanies’ failure or success. In addition to this, we attempted to verify individual reports by askingsimilar questions to multiple informants such as Chinese directors and managers from differentmanufacturing companies (international companies and Chinese suppliers for internationalcompanies). However, it has to be noted that some linguistic problems was encountered, thereforetranslation from English to Chinese had to be done simultaneously, in order to process the interview.The responses were then transcribed and incorporated in the analysis, which gave valuable input tofurther evaluation of quality fade phenomena when outsourcing to China in the future.

All the primary and secondary data collected were used to analyse the quality issues and the effecton case company’s competitive advantage and its success/failure in China. Finally, the findings fromthe case studies and interviews were then synthesised together to develop a sustainable competitiveadvantage theoretical framework. The compare and contrast method was also applied in order torelate the findings of the case studies and interviews to identify patterns and to provide suggestionsabout outsourcing phenomena in China.

Results

Observations in case Company A

Due to very competitive business environment, in 2004 company’s management decided to movesome of its production to China in order to reduce costs. This was done through a Chinese contractor.However it experienced quality issues and transportation delays like every other company thatoutsourced to China. Furthermore, the biggest issue was the nature of the product itself. It was not justabout making a high quality teddy bear; it was about being very precise. Furthermore, the longdistance offshore production plant became biggest disadvantage when some of its production reachedthe retail stores 3 months after the initial deadline and there were drop in sales. In order to get a betterunderstanding of the quality failure, the main points from the interviews are summarised in Table 3.

According to the reporter, who was directly involved in case Company A noted that Company Aencountered quality failures, because the pattern sheets were too complicated for the Chinese sewersand could not accomplish specified quality as in home country. Furthermore, the training of how tosew using this specific pattern took too long time to make them learn. In addition to this, the accuracywas especially important in this manual work, because very small errors in knitting resulted in teddybear eyes being misapplied, hence making the bears look to sinister for the western customers. Thereporter also mentioned that there was no guarantee or restriction to keep the workers after they havebeen trained to do the work, when there is a better opportunity the workers moved to high payerswithout any notice. This led to further problems such as delays in production shipments.

With respect to management and control issue, both the reporter and the ex-worker in supplychain agreed that lack of control over the production process due to the ownership structure andmanagement communication issues led to many products being produced incorrectly. The quality

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Table 3Quality issues reported by Company A.

Cause of

quality

issues

Human

resource

Machinery Raw

materials

Management

and control

Communication Legal

Reporter Employees were

not trained enough.

Complicated

knitting

techniques, to slow

in learning

N/A N/A No control over

production due to

loss of ownership

Not

understanding

the need for

accuracy

No guaranties or

restrictions to keep

the workers after

they have been

trained

Ex worker

in supply

chain

Employees did not

have the skills

N/A N/A There was no

control over

production, not

enough

instructions and

training due to

change in

employees

Not being able

to explain the

accuracy need

N/A

R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 9

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problem could only be detected once the products reach Europe, hence increasing company’s overallcosts, because the teddy bears could not be sold in the market.

From the interviews it can be concluded that tight control over the quality and production of theteddy bears was crucial for company’s success. Furthermore, manual work requires special skills andexperience which can be obtained with continuous training, however it takes long time to achieve,therefore outsourcing may not always be the most feasible option.

Overall we can see that Company A outsourcing strategy in terms of quality did sacrifice to anextent that it led the company to move back its production to Europe. However it is important to notethat different from other companies, by outsourcing to China, Company A did not aim to enter Chinesemarket. Several theories suggest that competitive advantage can be achieved only by being close to itstarget market (KPMG, 2012). Furthermore, by having the production close to its market, qualityassurance is easier to achieve. Company A’s primary markets are Europe and USA, when it moved itscertain operations to non-marketing destination lead to loss of control on management and hence itencountered issues in production quality. However, it is arguable and more study is needed tounderstand how far quality loss could have been offset by gaining the entrance to a huge potentialAsian market with increased profits, which Company A did not considered to do.

Observation in case Company B

According to the worker in Company B, the main issue with quality errors is the human resourceproblem, because some Chinese suppliers try to ‘cut corners’ by providing lower quality materials andresulting in poor quality production of toys.

However, there is no doubt that Company B will stay in China and even though the recent qualityissues brought a lot of damage to the company’s reputation and hurt its sales, Asia market accounts alarge part of sales. According to the worker, China is a huge market for enormous profits in the nextdecade; therefore Company B plans to expand its international footprint in Asian markets by buildingnew franchises and entertainment partnerships in order to achieve sustainable growth. Even if thequality reduces and more attention has to be paid to the supervision and management of theproduction, there is no doubt that this sacrifices will only be a smaller concern with the developmentof Chinese economy and increase in the consumption of goods.

On the other hand, the worker argued that Company B outsourced to China due to low costproduction and the reason why Company B still keeps its production in China is also due to its lowerlabour costs (Table 4).

With the raising demand for toys, the ability to create the toys and meet the demand became thebiggest concern for Company B. Toys business is lucrative whereas it depends on how firms are going

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Table 4Quality issues reported by Company B.

Cause of

quality

issues

Human

resource

Machinery Raw

materials

Management

and control

Communication Legal

Subcontractor

in China

N/A N/A Due to cost

savings poor

quality

materials can be

chosen

Lack of

instructions and

control

Lack of

communication

between the

management

and supplier

N/A

Worker Do not pay

attention to

details. Trying

to ‘cut corners’

N/A N/A N/A N/A N/A

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to handle inconsistency in production volumes, seasonality and market life of less than a year. Thesenon-core production toys were a huge pool for high profits, however dependability was crucial to itssuccess. Due to these high demand fluctuations, non-core toy production was outsourced to China.Company B operated through network of approx. 35 vendors that were contracted to manufactureCompany B’s production. The manager in China selected the vendors very carefully depending on theexpected time to market, political expertise and price. During that time, this was a very successfulstrategy for Company B, due to its low investment costs (no capital needed for wholly ownedmanufacturing) and increased flexibility due to demand variability. The relationship between themanager and the vendors was of the crucial importance for the quality reliability, due to its complexityand high volume production where a lot of the emphasis was put on the price but not quality.

In 2007 Company B recalled 1.5 million toys which contained lead-paint and were produced inChina. Several weeks later, Company B had to make another announcement and recall 9 million moreChina-made toys. The problem arose when the subcontractor of Company B outsourced the work ofpainting parts of the toys to an outside vendor, who in order to save costs acquired the paint from anon-authorised supplier. It is important to note that the third party supplier had close relationshipswith subcontractor, hence it was believed by subcontractor to be a trustworthy supplier. It led to theproduction of final goods which contained ‘‘impermissible levels of lead’’. These recalls lead not only toa drastic reduction in Company B sales, but also it damaged Company B reputation andtrustworthiness. Even though Company B understood the importance of quality control in itsoutsourcing strategy, due to its cost leadership strategy they did not put enough emphasis on quality.Hence the product recalls showed that the quality issues outperformed cost leadership advantage.According to the report made by Xinhua, who was the spokesman of China’s general administration ofquality supervision and inspection, Company B did not establish tight quality supervision over itsproduction in China and the manufacturers were doing what the importers requested. Regardless of allthe quality issues and production recalls, Company B keeps its outsourcing option in China and doesnot consider any other relocation of manufacturing plant in the near future. To improve the qualityCompany B has to follow ‘‘Sandcone’’ model instead of cost leadership strategy to satisfy the orderwinning criteria.

Observations in case Company C

Company C entered Chinese market in early 1980s by engaging in sales and service licenceagreements with two Chinese manufacturers of clutch and shock absorber. Later Company C openedits representative office in Shanghai through joint venture and carried out its look-and-see strategy inorder to understand Chinese market and risks associated with it. The company’s strategy towardsChinese operations is not a short-term cut-cost option rather than it is a long-term strategy with fullcommitment to Chinese market in terms of R&D, manufacturing and sales.

In 1998 Chinese Government relaxed its regulations and allowed ownership of foreign affiliates inthe automotive industry. During that time Company C quickly took advantage and successfully

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Table 5Quality issues reported by Company C.

Cause of

quality

issues

Human

resource

Machinery Raw

materials

Management

and control

Communication Legal

Subcontractor

in China

N/A For high

standardised

products it is

important

N/A Could cause if

management

and control is

not good

N/A N/A

Supervisor in

quality safety

N/A N/A N/A N/A Not being able to explain

the instructions face to

face, misunderstanding

occurs

N/A

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established a fully owned production plant which was crucial for its later development. ‘‘Customer-oriented’’ focus with customised production and research and development is considered to be thesuccessful strategy for Company C.

Today Company C is a leader in chassis and powertrain business and continues its growth withastonishing results. Furthermore, engineering departments being located in China, many newinnovative applications are developed and distributed to other countries. Company C values more thequality of its products and process efficiency. Dependability and top quality are the ultimate criteriaand it is achieved through standardisation.

In order to ensure high quality, Company C’s production group has a highly qualified team with asuperb command of material and processes. Furthermore the whole value chain activities such asmanufacturing, engineering, logistics and quality assurance are integrated into the processes fromvery beginning. Moreover, high automation ensures highest level of efficiency and dependability.Cutting-edge technology is used for production and quality assurance which is integrated into theproduction process. Furthermore, quality circle teams are essential part of quality control andimprovement. The highest efforts are put into ensuring error free production.

According to the supervisor of quality assurance department, the main reason that causes qualityissues are lack of understanding of design and manufacturing requirements. However they avoidedquality issues through high manufacturing process automation. Furthermore, full control to theownership structure helped them to keep all the processes under strict quality checks in every part ofthe production process.

The manager of the Chinese operations agreed that management and control skills are the keyfactors to overcome quality issues. Chinese operations started incorporating quality into company’sstrategy. Furthermore, the manager believes that China has the ability to compete in the world forquality production through tight quality control. In conclusion, the manager argues that costadvantage in China is diminishing, therefore for Company C China is an important market for the salesof their production, that is why they believe most of the companies still prefer to stay in China(Table 5).

Company C experiences reveal that China is a huge pool of opportunities and development.Implementation of quality assurance in every step of the process lead Company C to be the leaders andexperts in its production all over the world.

Observation in case Company D

In the past decade Company D’s strongest competitors are able to produce at lower cost due to theirlocation strategy and supply standardised products worldwide. Therefore, Company D continuouslystarted losing its market share and had to react to increasing production costs as soon as possible inorder to sustain its competitive advantage. Therefore, Company D decided to adopt global costleadership strategy and as a consequence in 2002 they shifted some of its production and operations toChina by subcontracting and also establishing a wholly owned subsidiary. Due to its standardisedproduction restructuring with high automation, new products are produced quicker which ultimately

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Table 6Quality issues reported by Company D.

Cause of

quality

issues

Human

resource

Machinery Raw

materials

Management

and control

Communication Legal

Branch

Manager

Some issues

occur due to

unskilled

workers who

sometimes do

not pay enough

attention to

details

N/A N/A No control over

third party supply

sometimes cause

minor quality

errors

Due to German–

English–

Chinese

language mix

some important

issues are not

understood

N/A

Manager Never admitted

to having made

a mistake

N/A N/A Important to keep

very high control

and give incentives

for good work such

as quality bonuses.

Important to keep

responsible QS

managers on the

site.

Very important

to communicate

regularly in

order to

monitor actions

to eliminate the

root of failure.

If some

problems

occurred

Chinese

manufacturers

did not take any

responsibility

for it, nor did

they put effort

to help

Manager of

Quality

Assurance

Department

It has to be put a

lot of additional

training for

human resource

in order to

overcome

quality issues

N/A N/A The quality was not

hurt mainly due to

additional

resources which

were allocated for

quality inspection

N/A N/A

Manager of

Engineering

Department

Some minor

quality errors

occur because

workers

sometimes do

not follow the

strict

instructions in

production

process

No quality

issues because

products are

standardised

and very little

human interface

is needed in the

production

process. High

automation

N/A Some quality issues

can occur due to

inability for the

engineers to be on

site all the time.

However it does

not happen very

often, but

additional

resources for

inspection is crucial

N/A N/A

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increases company’s flexibility. Functional managers were further given coordination responsibilitywith country’s management. Furthermore, Company D implemented new point of sales softwareapplication system with strict supply and demand control for all the products manufactured in China.With its new software system, Company D managed to capture demand changes on time and respondto it quickly (Table 6).

Based on the interview and the data collected through questionnaire, it can be concluded thatCompany D does not encounter any huge quality issues due to strict quality control and inspection, notonly in production process, but also when the goods are shipped to Europe and America. Furthermore,some respondents agreed that minor quality issues occur due to human resource failure, moreprecisely due to lack of responsibility in fulfilling all the requirements by the Chinese workers.Therefore, according to the respondent from quality assurance department, a lot of additionalinvestment in training has to be devoted in order to maintain approximately the same qualitystandards as in other manufacturing locations. Furthermore, incentives such as quality bonuses for themanagers are the encouraging ways to ensure that there will be no leak in quality of the production. Inaddition to this, quality production double check, plant audits and on site quality inspectors areneeded to ensure error free production: ‘‘The quality is maintained especially with additional resources

for quality inspections’’. On the other hand, standardised and highly automated production of goods

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leads Company D to minimize human interface and to ensure quality. Since the early 90s Company Dhas never encountered any big quality issues.

Overall it can be concluded that Company D case study show some evidence when compared to allthe above mentioned competitive advantage theories. However, it is important to note that in adynamic environment focusing only on one competence is not enough to be competitive. Thecompany has to focus all the five factors (quality, cost, flexibility, dependability and innovation)through strict implementation of control and management.

Sustainable competitive advantage framework

Overall insights to deal with quality issues

Based on the case studies observations it is obvious that outsourcing to China does not have anynegative effect on production quality. Most of the respondents agreed that quality fade can be avoidedwith strict controls and checks. On the other hand, Chinese manufacturer 3 agreed that outsourcing toChina does have a negative effect on quality because some Chinese suppliers put ‘‘cost control’’ ontheir orders and to gain margins they find ways to reduce quality in order to minimise costs.Furthermore, from Company’s A and B responses, it can be determined that outsourcing to China canhave radical consequences.

From the consolidated observations summary shown in Table 7, it can be emphasised that commoncause of quality issues in China are due to the unskilled or unspecialised workers (human resource)with lack of accuracy and responsibility in their work. It is to be noted that management and control(Lack of coordination and regulation) is also the major significant factor that causes quality issues in theproduction. Few respondents highlighted, if production is not automated then additional control andguidance is needed to meet the requirements. However this is not always possible to achieve due todistance, language barriers or prohibition of control over the processes and ownership structures.Other problems such as machinery and legal disputes play only minor roles with respect to qualityissues in China.

Most of the respondents agreed that cheap labour costs are still a significant motivation forinternational companies to have their presence in China regardless of quality issues associated with it.However, some respondents argued that rapidly increasing labour costs and continuously appearingquality issues make China as a less attractive destination. However, many companies prefer to keep itsoperation in China to capture the bug Asian market which is a significant profit pool for internationalcompanies. Company D followed a step by step approach, at the very beginning the companyoutsourced some of its production to China because of the cost reasons and subsequently established awholly owned subsidiary based on the market potential and it started sales to the Asia market.

Overall it can be said that both international and Chinese manufacturers believe that quality issueswith respect to human failures can be dealt with strict quality check systems in the productionprocess. Furthermore, it is essential to train specialised workforce for manual manufacturingprocesses and naturally with more time and effort. Finally, Chinese manufacturers emphasised thatquality does play a crucial role in company’s competitive advantage and only by achieving the qualitystandards the firms can be successful in the developing markets. A respondent highlighted that onsupply side Chinese market is saturated with cheap low quality production whereas the fast growingeconomy makes the demand side more attractive with high affordability of Chinese customers forgood quality products. In addition to this, a report prepared by chief executive of Bangkok bank statedthat Chinese customers have the capability and are also willing to pay higher price for the qualitygoods, therefore companies which are entering into the Chinese market should ensure good quality tosustain and outperform the competitors (Songwanich, 2009).

Overall insights based on competitive strategies

Table 8 shows that Company A encountered huge quality issues when outsourcing to China,because it followed Generic strategies. Before the outsourcing Company A competed based on quality.However, by outsourcing to China, they gave up quality priority and tried to compete on cost factor.

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Table 7Case companies responses.

Company Does outsourcing to

China compromise

product quality?

To what extent?

Causes of quality

issues in China?

Reasons of having

presence in China even

though it has quality

issues and generate

huge losses to them?

Additional comments

A Yes, had to move back

to Europe

Human resource,

Management and

Control,

Communication, Legal

Moved back to Europe.

Company A did not sell

its production to

Chinese market

The stuffed teddy

bears could not be

made accurate enough.

For manual production

China is not the best

option

B Yes, many recalled

toys, damaged

reputation

Human resource,

unsuitable Raw

Material Management

and Control,

Communication

Low labour cost, access

to certain materials

new sales market

‘Made in China’ is

moving towards high

end of the market

C No, because of

implemented quality

checks

Poor quality control

and management,

communication

Entry to huge potential

market, because cost

advantage in China is

diminishing

Quality in China is

improving due to

continuous training

provided by Company

C. China still needs to

learn a lot from

western companies.

Only products with

good quality can

survive in the market

competition

D Not necessary, if the

quality control is

reliable and strict big

quality issues can be

overcome. However,

additional resources

have to be allocated to

it. Incentives for

quality such as quality

bonuses work well

Do not encounter

quality issues due to

quality control

technologies. However

minor errors occur due

to Human Resource of

the third party

suppliers. Lack of legal

agreements between

parties may give

incentives to cheat on

quality standards

At the moment still for

lower cost reasons

Quality is an issue due

to the Chinese mind-

set of ‘cut corners’ and

achieve short term

profits. The quality

was kept

approximately the

same due to additional

resources to quality

inspection

Chinese

manufacturer 1

Not necessarily. China

has capability to

produce low quality

and high quality goods

Communication and

management issues

New market China has the ability to

produce low and high

quality goods. The

quality is improving

Chinese

manufacturer 2

No. Quality has been

improving in China

Keeping up with new

technology in

machinery,

communication

Enter the market Quality in China is

improving

Chinese

manufacturer 3

Yes, it has got worse

due to increased

labour and material

costs

Lack of quality control Cheap labour is a big

attraction

Some products

improve in quality, but

many are even less

trustworthy due to

‘cost control’

Chinese

manufacturer 4

No, very high quality

control checks ensure

the highest quality.

China has the

technology to make

good quality goods

Under capacity of

specialised workers

Still for cost reduction The products we

produce are perfect

substitute of imported

products from the

perspective of

technology, quality

and customer

recognition

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Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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Table 8Competitive strategies pattern in the case companies.

Competitive

advantage strategy

Case Company A Case Company B Case Company C Case Company D Importance

of the model

in terms of

quality

when

outsourcing

‘Generic Strategies’

Model by Porter

(1980)

Did not follow

after

outsourcing

Followed by

choosing cost

leadership

strategy

Followed by

choosing to

compete on Quality

Followed by

choosing cost

leadership

strategy

Moderate

importance

‘Sandcome’ by

Ferdows and

De Meyer (1990)

Did not follow

because quality

standards was

not safeguarded

Did not follow,

by not

maintaining

quality

expectation

standards

Followed by

ensuring quality

standards before

flexibility and

competitive costs

was achieved

Followed by

maintaining

expected quality

as the basement

High

importance

‘Core Competences’

by Prahalad and

Hamel (1990)

Did not follow Followed by

keeping

concentrating

on its core

competences

Did not follow by

outsourcing its core

competences (R&D,

engineering

manufacturing) to

China

Followed by

keeping its core

competences

(engineering,

R&D)

Moderate/

low

importance

‘Value Chain’ by

Porter (1985)

Did not follow Followed by

keeping its

value adding

activities in-

house

Did not follow

because most

value-adding

activities was

outsourced to

China

Followed by

keeping its most

value added

activities (R&D,

engineering,

design) in house

Moderate/

low

importance

Overall result Failed in terms

of quality

outsourcing to

China

Failed in terms

of quality when

outsourcing to

China

Succeed in terms of

quality when

outsourcing to

China

Succeed in terms

of quality when

outsourcing to

China

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This led to a huge failure, because consumers’ expectation of the product quality was not only notmaintained, but deteriorated due to lack of specialised workers and absence of quality control whenoutsourcing to China.

From the Company B point of view, it attempted to embrace ‘‘Generic Strategies’’, ‘‘CoreCompetences’’ and ‘‘Value Chain’’ competitive strategies. Still it encountered quality issues because oflack of implementation of quality control standards. Even though Company B’s focus is towards costleadership it compromised quality standards which are the basic in Sandcone Model. It can beconcluded that if Company B followed ‘‘Sandcone’’ Model, the quality issues may not have occurredand outsourcing to China would have been successful.

Company C followed quality differentiation strategy and sustained with it to be successful in theChinese outsourcing. Company C reveals that ‘‘Sandcone’’ Model in a dynamic businessenvironment is crucial to maintain its competitive advantage and firms should concentrate onseveral dimensions in order to succeed. Furthermore, it supports the theory that quality assurancedoes not always require higher costs, because Company C managed to achieve cost reductionwithout hurting quality. Company D also supports ‘‘Sandcone’’ Model and revealed that eventhough quality is not a prime factor they have to maintain (qualifying aspect) it to a desired level togain competitive advantage.

Overall it can be concluded that ‘‘Sandcone’’ Model shows the highest importance whenoutsourcing to China. Through the observations from literature and case studies it is obvious thatconcentrating on one factor (Generic Strategies) or focus on ‘‘Core Competences’’ keeping its valueadding activities in-house might still lead to quality issues in China. This then can not only damagecompany’s reputation, but also reduce its profits and decrease or even diminish its competitiveadvantage in the global world.

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Table 9Sustainable competitive advantage framework.

Survival aspects Survival approach

Competitive strategy

Sand-cone theory:

focus on five

dimensions

Quality, dependability, flexibility, cost and innovation

Better quality

Human resources Focus more on selection of skilled workers, contextualised training and reduce attrition rate

through protecting employees

Machinery Continuous improvement approaches and automation if possible

Raw material Good governing policy to avoid cut-corners, integrate value chain activities such as

manufacturing, engineering, logistics and quality assurance

Management and

control

Well defined ownership structure, transparent supplier evaluation policies, good

understanding of quality control and testing procedure

Communication Good relationship between manufacturing and top management to overcome time

difference, distance and language barriers

Legal Educate employees about IPR threat, product liability and product recall system. Not to take

advantage of non-existent of well-developed legal system

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Based on the above discussions we have highlighted the survival aspects to encounter qualityissues while outsourcing to China and the corresponding survival approach (see Table 9). Based on thefindings of this study, the following propositions are made:

� P

roposition 1To be successful in the Chinese operations companies should compete on severaldimensions simultaneously and maintain quality standards. � P roposition 2Outsourcing to China because of cost savings has no negative effect on quality. � P roposition 3The entry into new potential market through Chinese operations is the main determining

factor for the multinational companies regardless of quality issues and raising labour costs.

Managerial implications and limitations

Study findings reveal that manufacturing companies have to manage their Chinese operationsefficiently to avoid potential loss due to quality issues and to enter into the largest market. This is away in which a huge pool of new sales can be generated and potential loss in quality may be offset bythe profits (Deloitte, 2012). Furthermore, managers should realise that by producing abroad, a moresophisticated management needs to be established, since the manufacturing and delivery of the goodsbeyond international boarders require advanced knowledge and precise planning. Furthermore, as wecan see from Company A that long distance supply chains are much more vulnerable and exactschedule of the delivery is not always possible to set. This has to be taken into consideration especiallyfor those companies, which production is very seasonal. Being close to company’s market addadditional advantage. Furthermore, It has to be well accounted with the costs advantage consideringthe risk of missing the time line when the sales has to be done.

Another important implication for those managers’ aims to achieve competitive advantagethrough quality differentiation strategy has to produce with high automated technology and usestandardised approach. However, if they prefer to produce goods manually then they have to provideintensive customised training. Other factors such as absence of employer protection, ‘cut-corner’concept, corruption and communication problems have to be taken into consideration whenoutsourcing or keeping production in China. Managers should expect the staff to leave the job withoutnotice and as result raise additional costs for the company in terms of hiring and training new staff. Ontop of that, as Company B case study shows, even long-term relationships can be abused due toChinese strategy of ‘cutting-corners’ in order to offset the constantly raising raw material and labourcosts. Finally, due to the political system and high corruption, it is very hard to find the ‘ends’ whensomething goes wrong. Besides quality criticism, most of the firms outsourced to China or has itspresence in China are successful.

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Qualitative research has some limitations and they are personal disposition of researcher, hisbeliefs, reactions, cultural and religious background will, indeed, effect the interpretation andinvestigation of the data (Russell, 2005). Furthermore, verbal and linguistic discrepancies can affectthe study since qualitative research is collected through one-to-one interviews rather thanstandardised questionnaires (Miles and Huberman, 1994). Few limitations of the study are as follows.

This study focused only on international companies which outsourced their production to China orhave their presence in China. Other issues and benefits regarding financial performance, research anddevelopment, information technology and other influencing factors were not taken into considerationwhen analysing company’s success and competitive advantage. Furthermore, in this study the qualityissues are analysed at an organisational level, i.e. risks were tied to the organisation. The focus was onboth European/American companies who had outsourced at least part of their production to Chinaeither by contracting or by establishing subsidiaries (FDI).

In qualitative method there are subjective and perceptive interpretations of the information. Theyare mainly from few interviews and public available sources such as academic literature and mediareports. Since the population interviewed for each case study is rather low, these results cannot berepresentative for the whole population. Furthermore, the interviewees might have had only limitedamount of information and they might not disclosed some particular issues regarding their productionquality or did interpreted the issues in their own understanding, thus, the trustworthiness of theempirical data should not be interpreted as exact and thus, is expected to be different if theinterviewees were asked the same questions after 1 year time frame.

Furthermore, due to limited amount of case studies the findings give only a broad picture of theproblem, however, in order to prove or reject the quality issues detailed survey based study needs tobe undertaken with bigger sample size.

Concluding remarks

This study proposed a sustainable competitive advantage framework for multinational firms toadapt and prosper in China. The study listed the major causes of quality and how to overcome them inorder to prosper. Four competitive strategy theories (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘CoreCompetences’’ and ‘‘Value-Chain Analysis’’) were used to interpret the Chinese operations and todevelop a sustainable competitive framework. As per the proposed framework, to gain competencefirms have to focus on five dimensions viz. quality, cost, dependability, flexibility and innovation. Thedominant quality issues that need attention are human resource, management and control and legalaspects.

Furthermore, it is very hard to make a judgement of the cause of the quality issues on such broad-spectrum of business operations. This is due to the fact that each industry within manufacturing sectorhas unique issues which can cause quality fade and cannot be combined and generalised for overallmanufacturing industry. Therefore, detailed empirical survey based study is essential to verify theproposed propositions in different manufacturing sectors. It is also suggested to extend the study toservice industries which gains prominence in China. It would also be interesting to carry out furtherresearch on what causes the quality issues, when European companies outsource their production toEast or Middle East Europe. Then it would be interesting to compare and see how the quality issuesaffect company’s competitive advantage.

Acknowledgements

The authors wish to thank the three anonymous reviewers for their excellent and insightfulcomments. We are sure that the readability of our paper has improved considerably after carrying outthese modifications. We thank the special issue editors for their encouragement.

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