Strategic Outsourcing Innovation and Global Supply Chains 9781032455396, 9781003377474, 9781032455426, 9788892123588

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Decision-making on outsourcing new product development (especially innovation projects), such as engaging and managing the supply chain, is far from easy. It may involve addressing strategic and operational risks that might cause longer development times and increase innovations costs. It is, therefore, imperative to select suppliers very carefully and set up an effective management strategy vis-à-vis the supply partners right from the inception phase. Supply chain management is facing enormous challenges, driven by interrelated disruptions that will have a vast and lasting impact. Based on a relevant case study, Boeing 787 Dreamliner programme, this volume offers a comprehensive overview of the decision-making models for outsourcing strategic activities. The proposed model suggests a valuable approach to outsourcing the decision-making strategies for new product development when the innovation is driven by technological innovation.

Giuseppe Fabio Cantone is Business Intelligence and Marketing Analyst, providing as consultant the creation of business intelligence analysis systems in synergy with the management consulting. Also, he is engaged in academic research activity relating to issues of brand management, business model innovation, and strategic outsourcing. His research has been published in international academic journals, such as in book chapters of Italian publishing houses. He earned PhD in Management from the Federico II University of Naples in 2020. Luigi Cantone is a Full Professor of Marketing and Strategic Management in the Department of Economics, Management, Institutions at Federico II University of Naples, Italy. His research interests focus on the issues of brand management, place marketing, strategic outsourcing, and business model innovation. Until today, his academic track-record shows more than 80 publications overall. His research has been published in top-ranked international and Italian distinguished academic international journals, such as for leading Italian and international publishing houses. Pierpaolo Testa is an associate professor in Economics and Business Management at the Federico II University of Naples. He also holds a Ph.D. In Management from the same Institution. He carries out research on the themes of strategic innovation, outsourcing, and branding. The results of his research have been published on leading management and marketing international journals. He has also published a research monograph relating business model innovation.

Strategic Outsourcing, Innovation and Global Supply Chains A Case Study from the Aviation Industry

Strategic Outsourcing, Innovation and Global Supply Chains A Case Study from the Aviation Industry

Luigi Cantone, Pierpaolo Testa, Giuseppe Fabio Cantone

G. Giappichelli Editore

First published 2023 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business and by G. Giappichelli Editore Via Po 21, Torino – Italia © 2023 Luigi Cantone, Pierpaolo Testa, Giuseppe Fabio Cantone The right of Luigi Cantone, Pierpaolo Testa, Giuseppe Fabio Cantone to be identified as authors of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library

ISBN: 978-1-032-45539-6 (hbk-Routledge) ISBN: 978-1-003-37747-4 (ebk-Routledge) ISBN: 978-1-032-45542-6 (pbk-Routledge) ISBN: 978-88-921-2358-8 (hbk-Giappichelli)

Typeset in Simoncini Garamond by G. Giappichelli Editore, Turin, Italy

The manuscript has been subjected to a peer review process prior to publication.

Dedicated with Love To Angelo

CONTENTS page List of Figures and Tables Foreword, by Luigi Maria Sicca Introduction 1.

xv 1

Outsourcing in times of disruption 1.1. 1.2.

1.3.

2.

xiii

Introduction In search of a supply chain in times of disruption 1.2.1. Disruption from digital technologies 1.2.2. Disruption from social and environmental sustainability 1.2.3. Disruption from the Covid-19 pandemic and the war in Ukraine The Gruppo Schiano case study: How shifts in customer behaviour drive innovation in the bicycle industry manufacturing paradigm and supply chain 1.3.1. Introduction 1.3.2. Highlights of the bicycle market 1.3.3. The history of the bicycle industry 1.3.4. The company profile 1.3.5. From mass production to mass customization 1.3.6. Conclusions and implications for management

5 17 18 22 24

28 28 28 29 33 36 42

Theories of the firm and implications for outsourcing 2.1. 2.2. 2.3. 2.4. 2.5. 2.6.

Introduction Transaction Cost Economics Theory (TCET) Resource-Based Theory (RBT) Competence-Based Competition Theory (CBCT) Strategic Assets Theory (SAT) Dynamic Capability Theory (DCT)

43 44 52 54 55 55

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page 2.7. 2.8. 2.9.

3.

58 60 61

A review of existing models in the strategic outsourcing literature 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7.

4.

Knowledge-Based Theory (KBT) Open Innovation Theory (OIT) Network Theory (NT) and Supply-Chain Network Theory (SCNT)

Outsourcing decision-making and types of outsourcing Kraljic’s portfolio-purchasing model Quinn’s model Baden-Fuller et al. model Sislian and Satir’s model McIvor’s model Becker and Zirpoli’s model

65 71 77 78 79 80 81

A case study. The Boeing 787 Dreamliner programme: leveraging the capabilities of the global and collaborative supply-partner network through technological disruption in the aircraft industry 4.1. 4.2. 4.3.

4.4.

4.5.

4.6.

Introduction Methodology 4.2.1. Empirical research based on case study 4.2.2. The sample of companies involved in the case study The perspective of the OEM: the rationale behind the launch of the B787-8 programme 4.3.1. Difficulties and delays in the B787-8 programme 4.3.2. The mitigation strategy for solving difficulties along the supply chain The “Small prime” contractor’s perspective: Leonardo and the rationale behind the decision to join the B787-8 programme 4.4.1. How Leonardo exploited and explored new core competencies through the B787-8 Dreamliner programme 4.4.2. Leonardo’s perspective on supply chain management in the B787-8 programme The tier-2 perspective: Dema and the rationale behind the decision to join the B787-8 programme 4.5.1. A new approach to supply-chain management for the Boeing 787-9 programme 4.5.2. Exploiting Dema’s new competencies through the B787-8 programme The tier-2 Geven perspective: the rationale behind the decision to join the B787-8 programme

85 90 90 92 99 104 107 108 111 115 120 121 123 124

Contents

xi page

4.7. 4.8. 4.9. 5.

Discussion points Findings Conclusions and implications for management

125 132 143

Proposing a conceptual decision-making model for outsourcing new product development 5.1. 5.2. 5.3. 5.4.

Research questions, research propositions, and decisionmaking model The Boeing 787 Dreamliner: a case of technological disruption in the aircraft industry The conceptual decision-making model applied to the Boeing 787-8 Dreamliner programme Management implications, limits and future directions

151 163 165 169

Afterword – The supply chain in the aviation industry: an insider’s perspective, by Vincenzo Caiazzo

173

References

181

Index

211

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Foreword By Prof. Luigi Maria Sicca Federico II University of Naples Chapter 1 1.1. by Luigi Cantone 1.2. by Luigi Cantone, and Giuseppe Fabio Cantone 1.3. by Mario Schiano, CEO at Gruppo Schiano ebikes&bikes Chapter 2 by Luigi Cantone, Giuseppe Fabio Cantone, and Teresa Marrone Chapter 3 by Luigi Cantone, and Giuseppe Fabio Cantone Chapter 4 4.1. by Luigi Cantone, and Giuseppe Fabio Cantone 4.2.1 by Pierpaolo Testa 4.2.2 by Luigi Cantone, and Giuseppe Fabio Cantone 4.3. by Luigi Cantone, and Pierpaolo Testa 4.4. by Luigi Cantone, and Pierpaolo Testa 4.5. by Pierpaolo Testa, and Luigi Cantone 4.6. by Pierpaolo Testa, and Luigi Cantone 4.7. by Pierpaolo Testa, and Luigi Cantone 4.8. by Pierpaolo Testa, and Luigi Cantone 4.9. by Luigi Cantone, Pierpaolo Testa, and Giuseppe Fabio Cantone Chapter 5 by Luigi Cantone, Giuseppe Fabio Cantone, and Pierpaolo Testa Afterword by Vincenzo Caiazzo, Former Chief Operating Officer at Alenia North America & Former Chairman of the Board at Global Aeronautica

LIST OF FIGURES AND TABLES page

Figures Chapter one Figure 1. Figure 2. Figure 3.

Some drivers for outsourcing innovation Gruppo Schiano: the “old” supply chain Gruppo Schiano: the “new” supply chain

10 32 38

Chapter three Figure 1. Figure 2.

The outsourcing decision-making process Types of outsourcing (buyer-supplier) relationships

67 74

Chapter four Figure 1. Figure 2. Figure 3.

The hierarchical supply chain organization of the commercial aircraft industry The evolution of Boeing 787 Dreamliner strategic outsourcing relationships The collaborative model underlying the Boeing 787 Dreamliner programme from its launch

89 142 147

Chapter five Figure 1. Figure 2. Figure 3.

The general sourcing decision-making model The outsourcing decision-making model involving NPD activities The sourcing strategy for NPD activities relating to the B787. The findings of the case study

160 161 166

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page Tables

Chapter one Table 1. Table 2.

The primary responsibilities of the “focal firm” within the supply chain Some reasons for outsourcing innovation activities

6 9

Chapter three Table 1.

Types of outsourcing (buyer-supplier) relationships

76

Chapter five Table 1.

The key dimensions of the selected outsourcing decisionmaking models in the literature. A comparison with the model proposed in this book

152

FOREWORD * When Neil Fligstein published his book, “The Transformation of Corporate Control” in 1993, he challenged the most widespread theories on the nature of corporations up to that time. Fligstein proposed a radically innovative point of view, even though he clearly understood the Classics of industrial organization literature, focusing on how firms grow. In his approach, the evolution of the strategies of American corporations was interpreted as the effect of multiple causes, among which national economic policies were particularly significant, especially competition laws. Fligstein described the evolution of twentieth-century corporate strategy behind us, highlighting how strategies initially emphasized direct production control. Subsequently, firms shifted their attention to sales and marketing before moving on to focus on the role of finance, which had already assumed strategic importance for some years. This process saw the affirmation of the concept of outsourcing: yesterday, like today, it can also be read in the context of economic sociology, in line with the research programme coordinated by Fligstein at the University of Berkeley in California. The term ‘outsourcing’ and its associated practices entered academic debate and managerial practices in 1982 (Van Mieghem, 1998; 1999); the term was used to describe the set of practices firms or public institutions adopted using other (outside) enterprises in several phases of their production or support processes. This approach offers a broader possibility: to read the strategic option of outsourcing in the setting of an action-net theory (Czarniawska, 2014) according to the constructivist approach, which entered organizational thinking when the expression ‘organizing’ was first used, namely in Karl Weick’s seminal book The social psychology of organizing (1969/1979). In this approach, one considers the action before even looking at the actors. Actors, in short, are performers of scripts written by someone else (Goffman, 1959), so managers and entrepreneurs interpret what is described in the action networks. This act of interpretation enriches their knowledge- and competencies capital to achieve a competitive advantage in the markets where they operate or intend to do so. In 2003, a new book by Luigi Cantone and Lucio Sicca (Cantone, Sicca, 2003) was published in Italy, in which the authors analysed the issue of outsourcing in the context of that historical moment, having crossed the * By Luigi Maria Sicca, Full Professor of Business Organization and HR Management at Federico II University of Naples.

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threshold of the millennium. This approach was in harmony with the most esteemed strategic management literature. The authors matched the academic standpoint (analysing the impact of outsourcing on value creation, organizational changes, logistics, and distribution, as well as on R&D and ICT management) with experiences described by entrepreneurs and managers by examining case studies of national and international importance. In so doing, the authors enriched the literature on management, rethinking even then the crucial question of defining and redefining business models and value creation processes. And how to do it. This was a step forward compared to the studies of the seventies and eighties, but the authors themselves still considered them very useful. This was true (and, I believe, still holds) for some “sacred texts” (Ansoff 1965; Hofer&Schendel, 1978; Porter, 1982; Abell, 1993), which, while remaining such, also required a rethink in the light of new geopolitical assets, probably induced by discontinuous shifts in the current technological paradigm. In short, the Italian academic world and this group of researchers in particular, were part of an international academic debate aligned with evolving economicindustrial systems characterized by increasingly meaningful interconnections. This work paved the way for their new book, and both have at least two great merits: The merit of testifying to how an academic community can be truly “international”, not because it pursues passing fads, but because it connects to the ongoing international academic debates and therefore also to significant economic-industrial phenomena that are, by definition, global. I use the word “global” here, not only in reference to globalization as a social phenomenon (robustly asserting itself in the 1990s) but with specific reference to a “basic” (i.e., fundamental) mechanism that affects revolutionary scientific systems in the “global sense” and therefore as employed by Thomas Samuel Kuhn (1962) in his “The Structure of Scientific Revolutions”. For Kuhn, when basic theoretical research (in some managerial contexts, one might say “too theoretical”) is applied to production, it becomes a “technique” – synonymous with “howto-do”. If then we embark upon a discourse (the Ancient Greek logos) about what technique (“techne”) is, we find ourselves in the presence of a “technology”: from this point of view, we can affirm that outsourcing is a technology and no mere fad or slogan. In other words, the impact of outsourcing will impinge on society at large (extending beyond the industrial sector) and will continue into the third decade of the twenty-first century. Outsourcing then – following the model proposed by T.S. Kuhn – is the concrete manifestation of how theoretical knowledge, perhaps initially ‘too theoretical’ (as has been said in less

Foreword

xvii

aware managerial contexts), can impinge on real life and be generally accepted. Thus, we see the breaking down of what we might call the structure of a common edifice, recalling that the word ‘economy’ comes from the ancient Greek nomos (rule) and oikos (house). In assuming that outsourcing governs the ‘rules’ of the house, we refer to an organizational practice that plays an essential part in shaping a firm’s strategic management. This is, therefore, an opportunity to cross the entire decision-making process, from senior management to the people operating at the bottom line in every organization. In effect, when it comes to decision-making processes and therefore outsourcing, it is pointless to distinguish between strategic senior management, middle management, and operations. At the same time, it is much more helpful to understand how (‘how-to-do’, ‘technique’) decisions take form, are transformed, and create performance. It seems that this approach (apparently “too theoretical”) is, on the contrary, decidedly realistic and much less academic than meets the eye. As the best industrial organization literature claims, it is an approach that considers the temporal perspective a necessary condition for addressing management, looking both to the past and future, which brings me to the second point. The second merit (related to the first) of the approach followed in this book is that it sees the firm not as a black box but as embedded in its context. This is a highly sensitive issue and is not to be taken for granted even at this stage in the history of economic-managerial studies, so far removed in time from the first research in business and organizational theory. In recent years, with the specialization of academic research, something of a misunderstanding has arisen whereby there is a tendency to think (even if only on the part of the layman) that economists adhering to the neoclassical economics tradition (albeit with some discontinuity, such as the ‘wound’ inflicted by H. Simon, 1947 with his critique of rationality) are skilled readers of scenarios and in some cases even magically predict them. On the other hand, those who study management (i.e., focusing on managers, as the word itself suggests) only address concrete aspects affecting strategic decisions, perhaps distinguishing (improperly) from operational ones and almost regardless of geo-economic, industrial, and international policy scenarios. In line with the best international academic culture of industrial organization, this book, working on a unique “economics-and-management” construct (Milgrom and Roberts, 1992), does not fall into this error. Luigi Cantone is very aware that outsourcing decisions, like any business decision, impact the macrosystem level (the environment in general). For example, the choice of using off-shore or near-shore practices that may – or may not – limit the growth of a country’s industrial fabric. However, to un-

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derstand the impact of a company’s decisions at the macrosystem level, one needs to understand its role or stance in shaping the macro environment. If the company adopts green practices, diversity support, etc., within its supply chain, this will affect the macro environment accordingly. Such an approach, such a connection between micro and macro – this interactive dialectic, makes the experience of outsourcing contemporary. In short, the questions raised in this book – at a distance of approximately 30 years from the previous one – are far from obsolete. Quite the opposite, they are fresh and more current than ever. They are potential points of interest concerning post-pandemic recovery, with new financial flows entering the coffers of numerous industrial systems directly from a long-term perspective.

INTRODUCTION The issue of strategic outsourcing has recently become the focus of renewed academic interest and has increasingly come to bear on managerial practice. This is particularly true when examining the role of outsourcing product and service innovation in the development of a firm’s competitive advantage and growth. There are several reasons for this. Firstly, the strategic outsourcing of decision-making alters a firm’s business model, as well as its value proposition and operating model. Secondly, strategic outsourcing intensifies the vertical relationships within the supply chain; this leads to the need to develop the relational skills of the firms involved – especially those of the focal firm (the strategic centre) – in order to integrate and coordinate the business actors, the work, and all the resources along the supply chain. Thirdly, strategic outsourcing makes it possible to extend the options to create and sustain the companies’ competitive advantage thanks to opportunities for accessing resources, skills, and knowledge otherwise hard to find in an individual firm in the short term. All of this comes at a high cost and with a strong element of risk. Decision-making on outsourcing new product development (especially innovation projects), such as engaging and managing the supply chain, is far from easy. It may involve addressing strategic and operational risks that might cause longer development times and increase innovations costs. It is, therefore, imperative to select suppliers very carefully and set up an effective management strategy vis-à-vis the supply partners right from the inception phase. Supply chain management is facing enormous challenges, driven by three interrelated disruptions that will have a vast and lasting impact: the disruption of digital technologies, the disruption of social sustainability and environmental practices, and disruption due to Covid-19 and the most recent war in Ukraine. In the near future, the ability to address these disruptions will impact firms’ ability to manage the supply chain effectively and efficiently. It will also affect their ability to become best performers in innovation projects which require specific activities, resources and skills, in addition to knowledge of their supplier network. The book is organised as follows. Chapter 1 focuses on the main transformations involving supply chains in today’s fast-changing and challenging times. It examines a case study involving Gruppo Schiano (section 1.3). Here we see how shifts in customer behaviour force innovation in the manufacturing paradigm and supply chain in the bicycle industry, which is now adopting digital technologies. The case study was written by Mario Schiano, the company’s CEO. Chapter 2 presents some business theories and

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Strategic Outsourcing, Innovation and Global Supply Chains

their implications for strategic outsourcing, while Chapter 3 reviews existing models on decision-making for strategic outsourcing. It also highlights some notable gaps in the literature. After a discussion of the methodology adopted, Chapter 4 introduces the relevant case study for this book: this time the Boeing 787 Dreamliner programme (beginning with the early B787-8 programme and tracking it throughout the product’s life cycle with the launch of the new models B787-9 and B787-10). Chapter 5 illustrates the proposed outsourcing decision-making model for new product development activities in order to describe the fundamental dynamics behind strategic decisions. A discussion of our research findings on the embedded and in-depth longitudinal case study validates the research question and propositions stated in this book. The case study concludes with a description of the implications for management and some limits and opportunities for future research. Lastly, the afterword of this book – provided by Vincenzo Caiazzo, former Chief Operating Officer at Alenia North America & former Chairman of the Board at Global Aeronautica – judiciously presents an insider’s perspective of the supply chain in the aviation industry. This volume offers a comprehensive overview of the decision-making models for outsourcing strategic activities. The proposed model suggests a valuable approach to outsourcing the decision-making strategies for new product development when the innovation is driven by technological innovation. The reader will find a more exhaustive framework than has appeared in the literature so far. It presents an integrated set of dimensions that may be helpful when a firm has to decide what kind of new product innovation activities (or strategic activities in general) it needs to outsource – and when. This decision-making model acknowledges the complexity of outsourcing strategic activities, making it an effective support for the decision-maker. This integrated perspective combines a theoretical framework with practical solutions for concrete action and management. The Boeing 787 programme case study (Chapter 4) provides a comprehensive overview of the challenges that outsourcing product innovation can entail when a global supply chain is involved. It also considers the implication of these changes with regards to technologically complex products such as commercial aircraft, whose innovation depends on technological development, and especially new materials. This contribution to the literature was inspired by some previous research projects, two of which stand out in particular. The first is a book edited by Luigi Cantone, 2003, titled Outsourcing e creazione del valore. Ridisegnare i modelli di business per conseguire il vantaggio competitivo, published by Il Sole 24 Ore, Milan. It contains a foreword by my unforgettable

Introduction

3

mentor, Prof. Lucio Sicca. From the early 1990s on, he encouraged me to study issues in procurement management and supply chain management from a strategic perspective. His counterfactual intelligence, scientific rigour and method will always be a pivotal point of reference for me. The second research project led to the article “Outsourcing new product development fostered by disruptive technological innovation: a decision-making model”, published in co-authorship with Pierpaolo Testa, Svend Hollensen, and Giuseppe Fabio Cantone in the International Journal of Innovation Management (June 2018). The printing process of this book began over a year ago. Therefore, some specific data (i.e., on the aircraft industry) are not updated. However, the underlying assumptions, the reasoning and the outcomes proposed don’t change. This book is the result of all the input and insights received from many people. I wish to thank Prof. Pierpaolo Testa (University Federico II of Naples), and Dr Giuseppe Fabio Cantone PhD for their valuable contribution to researching and writing some of the chapters of this book with me. Giuseppe Fabio is a young PhD graduate and expert in branding. He is committed to business intelligence and works as a marketing analyst. His deep, counterfactual, and explorative mind will certainly nourish his personal and professional growth in the future. I would also like to thank Prof. Svend Hollensen for his precious contribution to the article “Outsourcing new product development fostered by disruptive technological innovation: a decision-making model”, published in the International Journal of Innovation Management (June 2018), Prof. Luigi Maria Sicca for his interesting foreword to this book, and engineer Mario Schiano for his case study on Gruppo Schiano, where he is CEO. I also thank Vincenzo Caiazzo, Former Chief Operating Officer at Alenia North America & Former Chairman of the Board at Global Aeronautica, for his invaluable afterword on the “Supply chain in the aviation industry: an insider’s perspective”. I also wish to mention some very close colleagues for their encouragement and support for the research and teaching activities involved: Dr Teresa Marrone PhD, Dr Vincenzo Basile PhD, Dr Nicola Cirillo PhD, and Prof. Paolo Calvosa. I am grateful to the anonymous reviewers for supporting and revising the book proposal, and publishers Giappichelli-Routledge for believing in the project. I am also grateful to Prof. Adrian Bedford for his precious proofreading of the manuscript.

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Lastly, a heartfelt ‘thank you’ goes to my family: my beloved wife Anna Maria and our lovely sons Angelo and Giuseppe Fabio (co-author), who have been somewhat deprived of my company over the last few months but have always been there for me. I would like to dedicate this new book to my lovely son Angelo. I trust the helping hand of our visible and invisible mentors will always protect him. His imaginative and creative mind is truly remarkable, as are his courage, resilience, responsibility, awareness, and respect, not to mention his love of beauty and style. It is my hope and belief that his life and dreams will be fulfilled as soon as possible. Naturally, my co-authors and I are to be considered the only ones responsible for the contents. Prof. Luigi Cantone Federico II University of Naples September 2022

Outsourcing in Times of Disruption

5

Chapter 1

OUTSOURCING IN TIMES OF DISRUPTION SUMMARY: 1.1. Introduction. – 1.2. In search of a supply chain in times of disruption. – 1.2.1. Disruption from digital technologies. – 1.2.2. Disruption from social and environmental sustainability. – 1.2.3. Disruption from the Covid-19 pandemic and war in Ukraine. – 1.3. The Gruppo Schiano case study: How shifts in customer behaviour drive innovation in the bicycle industry manufacturing paradigm and supply chain. – 1.3.1. Introduction. – 1.3.2. Highlights of the bicycle market. – 1.3.3. The history of the bicycle industry. – 1.3.4. The company profile. – 1.3.5. From mass production to mass customization. – 1.3.6. Conclusions and implications for management.

1.1. Introduction In the past, outsourcing decision-making was synonymous with the term “make-or-buy” and was primarily based, albeit not exclusively, on evaluating the market price/internal cost trade-off. The importance of cost economies in outsourcing decisions is largely based on the Transaction Cost Economic Theory (TCET), developed first by Coase (1937) and updated revised, almost fifty years later, by Williamson (1981). More recently, outsourcing has rapidly spread throughout the business world, involving several high-tech and other industries (Mohiuddin et al., 2017; Cohle, 2019; Stanko and Calantone, 2011; Calantone and Stanko, 2007; Chiesa et al., 2004; Carson, 2007). It has been applied to several activities along firms’ value chains, not only at the operational (Boulaksil and Fransoo, 2010; McIvor et al., 2009) but also at the strategic level (Edvardsson et al., 2019; McIvor, 2008; Gottfredson et al., 2005; Shy and Storbacka, 2003; Baden-Fuller et al., 2000; McIvor, 2000; Sislian and Satir, 2000; Targett & Hunt, 2000; Quinn, 1999, 2000; Quinn and Hilmer, 1994). This has made outsourcing an interesting topic for the academic community and managerial practice alike (Gewald and Schäfer, 2017). Outsourcing is a growing phenomenon in industries where firms are mainly committed to redefining their operating model and updating competitive advantage through product innovation development involving intense collaborative relationships between buyers and suppliers (Slot et al., 2019; Cantone et al., 2018; Handley and Benton, 2013). The strategic potential of outsourcing has encouraged firms to involve not only the non-core activities along the value chain but also those strategically relevant for innovation and competitive advantage, as well as those relating to new product development.

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Strategic Outsourcing, Innovation and Global Supply Chains

Demand for product innovation is increasing across the board: customers want better-performing products with new features better customised to their needs. At the same time, the spread of new digital technologies opens up new opportunities to innovate value propositions and operating models, sometimes shaping the form of disruptive innovation. Bringing innovative products to the markets requires capabilities across several complementary technologies. In addition, firms must address rapid changes to technology and organisation, transforming many of their longstanding technologies and introducing new R&D processes. These pressures drive firms to increase supplier participation in innovation projects despite the difficulties of involving them in new and successful forms of collaboration, which requires time and significant mutual commitment. Firms do not always possess all the necessary capabilities to develop innovation internally by themselves, nor do they have the necessary effective resources to create them internally. When it comes to innovation, any activity along a firm’s value chain might be outsourced if there are suppliers able to carry them out more efficiently and effectively when forced to do so by their competitors. However, firms adopt varying levels of outsourcing policy. Some firms outsource activities not directly connected with their core business. Others outsource the primary and/or support activities along the value chain that they deem essential for a competitive advantage and to create value. In interfirm networks relying on high-intensive knowledge and innovation, some firms, generally seen as “focal firms” (Sharma et al., 2020; Lorenzoni and Lipparini, 1999), assume the role of “network orchestrator” (Häcki and Lighton, 2001; Brown et al., 2002). This term denotes a focal firm in an actor’s business network. Being endowed with vast relational capabilities (Lorenzoni and Lipparini 1999; Capaldo, 2004), it can coordinate multiple, repeated, and trust-based outsourcing relationships with key suppliers (relationship or partnership-based outsourcing). Table 1. – The primary responsibilities of the “focal firm” within the supply chain. 1. Selecting the actors of the tier-1 supply network, establishing the criteria for selecting tier-2 and tier-3 suppliers. 2. Defining fair incentives for the tier-1 suppliers. 3. Defining the routine for exchanging information, such as the criteria for assessing tier-1 supplier performance. 4. Defining business processes by involving tier-1 suppliers to increase the effectiveness and efficiency of the supply network. 5. Managing communication flows with tier-1 suppliers to facilitate learning processes and the supply-chain business target. 6. Monitoring the evolutionary trajectories of knowledge and competency innovation of key business processes in order to improve innovativeness and performance within the supply chain.

Outsourcing in Times of Disruption

7

7. Managing customer relationships to monitor changing needs. 8. Managing all relationships with tier-1 suppliers. 9. Assuming responsibility towards customers for the final product/service.

Source: The Authors.

As we mentioned earlier, firms generally supplement their internal resources and capabilities with a selected set possessed by the suppliers. These can share solutions, services, and their usual activities, which would otherwise be difficult or impossible to substitute or imitate. Integrating know-how is therefore essential and depends on the cost structure and capabilities of potential suppliers, market conditions, technological development, and a firm’s personal vision. The main task of those deciding to outsource extensively, such as pure network orchestrators, is to build supplier networks and manage the relational processes along the supply chain. However, building and managing supplier relationships can be timeconsuming, needing substantial relation-specific investments. It also requires the ability to select suppliers, define the goals of the outsourcing relationship and key performance indicators, and set up a system to measure them and distribute the benefits resulting from the outsourcing relationships. Furthermore, it is necessary to establish suitable interfaces and organisational routines, investing in digital and intelligence-based technologies to manage the relationships, and so forth. Widespread recourse to outsourcing in business systems arises from several trends (Table 2; Figure 1). 1. The globalisation of supply markets and consequent increased market efficiency (i.e., a greater variety of market offerings, specialization, and supplier reliability, along with more competitive prices). 2. A growing knowledge-based economy requiring more specialised knowledge in designing, producing, and delivering products and services. 3. Firms focusing on core business and core competencies. The result is the deconstruction of the value chain. A firm focuses its investments and energies on activities embedding its organisational capabilities, on which current and future competitive advantage will depend. At the same time, it can access capabilities and knowledge, establishing vertical and/or horizontal and/or intersectional relationships with actors in the business ecosystem and exploiting the advantages of network economies (variety, speed, learning, and quality economies). 4. The spread of digital technologies. This makes it possible to build extended value networks, to separate the physical flows of goods from

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the relative information flows to explore new kinds of cognitive division of labour, to absorb the competencies and knowledge (innovation economies) available on an increasingly borderless market, and to reduce interaction costs. The spread of digital networks over the last decade has led to significant growth in platform business models, with both “asset control” (i.e., Amazon and Zalando) and “peerto-peer-provided assets” (i.e., Airbnb and Uber), constituting an increasing threat to traditional pipeline businesses (Wirtz et al., 2019; Modul et al., 2019). However, according to Modul et al. (2019: 695), there is a “convergence” of business models, i.e., “there are several examples of pipeline and platform businesses adopting each other’s business model characteristics”. Thanks to digitalization, platform businesses can leverage the activities and resources available within the ecosystem (Fehrer et al., 2018; Rangaswami et al., 2020; Wirtz et al., 2019) and the competitive advantages of network effects (Hagiu and Rothman, 2016; Modul et al., 2019). 5. Decreasing interaction costs associated with exchanging products, services, ideas, data, information, and knowledge (Hagel III and Singer, 1999; Walters et al., 2011). These costs, particularly substantial in high-intensity innovation businesses, create frictions between the economies and affect how the firms organise their internal activities and establish relationships with the actors within the business system. Changing interaction costs, therefore, determine fast (and vast) transformations in conventional business models in industries. Digital technologies, and the setting up of interactive digital networks, make it possible to share and exchange data, information, and codified knowledge more effectively, more quickly, and at a lower cost. These five trends are closely interrelated. An economy based on digital and intelligent technologies – splitting flows of goods (manufacturing, stocking, handling and transportation of goods) from flows of information (data and information processing and transfer) – encourages interfirm relationships (Doan et al., 2021; Valdani, 2000), broadens the space-time options in interfirm collaboration, and lowers interaction costs. The new information and communication technologies also enable the adoption of more efficient and effective modes of dividing cognitive labour, thus overcoming the limitations arising from relationships based on the physical location of business partners. Involving suppliers in innovation can provide several overall benefits and allow firms to create new sources of value, such as leveraging and applying specific technologies already adopted and end-tested by suppliers, which would be difficult or impossible to replicate in-house. Firms can also

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pursue new business opportunities from scratch; they may develop new products and services and optimise costs from the earliest stages of innovation development (with shorter development times, greater design effectiveness, reorganising manufacturing operations and supply chain, investing more effort and commitment in preventing and solving problems, etc.). In addition, they may share data, information, objectives, strategies and actions to build new value propositions and operating models. Lastly, supplier involvement can create new competitive advantages. When innovation incorporates specific products and/or process technologies, and when pressure from competition reduces time-to-market (TTM), outsourcing innovation offers benefits and advantages otherwise unavailable. Innovations arising from the early involvement of suppliers vastly reduce time-to-market compared with home-grown efforts. This is often because the suppliers already have partial experience in terms of the resources, capabilities, and technologies on which the innovation is based. In fact, suppliers can have significant experience in using innovative firmspecific technologies, opening up new opportunities for problematic inhouse product innovation (for an example, see the mini-case of collaboration between Aston Martin and Flexsys, below). Table 2. – Some reasons for outsourcing innovation activities. Extending organizational resources and capabilities in terms of: Focus on core competencies and improvement of strategic execution. Transforming the firm’s business model, especially the effectiveness and efficiency of the operating model. Increasing the flexibility and agility of the firm, coherently with the strategic change of the competitive environment (customer needs, technologies, competition games rules, and so forth). Extending and integrating the firm’s resources and competencies. Improving managerial systems. Enhancing innovation capability. Improving competitive performance in terms of: Operating performance (quality, time-to-market, time to profit, return on investment, etc.). Value proposition for customers. Economic value for shareholders. Business-risk mitigation through sharing (financial, industrial and market risk). Enhancing visibility, effectiveness, and efficiency in the supply chain. Accelerating business growth using the strategic and operating capabilities in the supply network.

Source: Author’s elaboration.

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Figure 1. – Some drivers for outsourcing innovation. Market Globalization

Knowledge-based Economy

Outsourcing Innovation

Focus on Core Business

Digital Technologies

Source: The Authors. Illustrative mini-case: Aston Martin and FlexSys UK carmaker Aston Martin joined forces with Aerospace technology company FlexSys Inc., applying their advanced FlexFoil™ technology to Aston Martin’s latest ultra-high-performance vehicle. Aston Martin intends to incorporate FlexFoil™ shape-adaptive wing technology to the rear wing of the new AM-RB 003 hypercar. FlexSys Inc. has worked with Aston Martin over several years to develop technologies ranging from the AM-RB 003 morphing wing to the Valkyrie windscreen wiper system, which enables rain clearance throughout the entire sweep of a highly complex windscreen. David Hornick, President and COO of FlexSys Inc., describes Aston Martin as being “laser-focused from the start of our relationship, achieving technical perfection in performance car systems and aerodynamics”. The shape-adaptive rear wing on the AM-RB 003 allows the car’s downforce to be modified without changing its mounting position, resulting in a seamless design with high performance, improved efficiency, and reduced wind noise. In addition, the turbulence and associated drag increase found in current “state of the art” active wing designs is virtually eliminated. FlexSys, a Michigan-based company, has been developing advanced aircraft wing technologies with the United States Air Force Research Laboratories for the past 18 years and has validated its seamless shape-adaptive wings’ fuel savings and noise reduction benefits through extensive NASA flight testing on a modern aircraft. The patented technology uses variable-geometry control surface mechanisms that exploit the inherent flexibility of aerospace materials to continuously reshape wing profiles for optimal performance throughout the flight. FlexSys Inc., an Ann Arbor Michigan-based company, was founded in 2000 by Dr Sridhar Kota to develop and commercialise his patented shape-morphing adaptive control surface design for an aerofoil. As a professor of Mechanical Engineering at the University of Michigan (1987 to date), Dr Kota started researching compliant mechanisms in the 1990s and pioneered the bio-inspired concept of Distributed Compliance for designing powerful and flexible one-piece machines. FlexSys developed proprietary software to create and optimise compliant systems and successfully demonstrated the application of compliant design methods for aerospace, automotive, and other applications over the years. Today, FlexSys is an established world leader in shape-adaptive structures.

Source: The Authors’ reworking of the information on the company website.

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Since the nineties, several studies have highlighted the role of strategic conditions and factors affecting outsourcing choices. From a strategic perspective, a firm’s outsourcing decision-making process not only emphasises the effects in terms of transaction costs but also in terms of impact, extending and integrating internal resources, capabilities, and the knowledge base. Increasing efficiency through cost reduction and accessing new resources and capabilities to extend a firm’s competitive potential are not alternative goals of outsourcing decisions. There are circumstances in which these choices seek prevalently, if not exclusively, to obtain scale economies on activities that specialised external business partners can perform, significantly reducing unit costs. For example, in the commercial aircraft industry, outsourcing components and parts incorporating mature and straightforward technology with predominantly quantitative technical features aiming to meet this kind of goal. Similarly, there are circumstances where cost reduction is less significant since the aim of the outsourcing is essentially strategic, seeking access to the unique and specific resources and capabilities of specialised external suppliers. This occurred, for example, in the design and manufacture of components and subassemblies of the Boeing 787 Dreamliner 1, an all-new, mid-sized, advanced, and efficient commercial aircraft with an innovative fuselage in carbon fibre and some titanium parts. For the first model (B787-8), the project owner of this innovative commercial aircraft, Boeing, outsourced a large share (70%) of the design and manufacturing activities of this innovative aircraft to a global network of top-tier (or tier-1) specialised suppliers (14 partners located in several countries: Japan, China, Sweden, Australia, USA, Italy, France, South Korea). There were many reasons for this. Reducing the cost of project development and sharing the risks of the related investments, access to the technology and innovation capabilities of a skilled global network of suppliers, especially for new materials technologies (titanium and carbon fibre for the airframe structures), and reducing time-to-market, all increase the flexibility and quality of the new product development process. Increased use of outsourcing to remodel strategic business processes is correlated to several general trends. The primary reason is an ever increasing and increasing uncertainty about the environment. In fact, to absorb 1 The Boeing 787 Dreamliner is designed and is built in three versions: the 787-8 Dreamliner seating 210-250 passengers, the 787-9 seating 250-290 passengers, and the 787-10 seating 290-310 passengers. The 787-3 Dreamliner would have accommodated 290-330 passengers. But this project was cancelled on December 2010 for lack of orders. See www.boeing.com. Here we will use the terms “Boeing 787 Dreamliner”, “B787 Dreamliner”, “787 Dreamliner”, “B787 Dreamliner”, “787” and “Dreamliner” interchangeably. When necessary, we will specify the model in question.

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the sources of uncertainty – technology and market changes – firms extend their relationships with external organisations and pursue closer cooperation with trusted and skilled supply partners (Lorenzoni and Lipparini, 1999). According to the vast set of resource-based theories – Resourcebased Theory (Penrose, 1959; Rumelt, 1984; Wernerfelt, 1984; Grant, 1991; Barney, 1991; Peteraf, 1993), Competence-based Competitive Theory (Hamel and Prahalad, 1996; Hamel, 1994), Strategic Assets Theory (Amit and Schoemaker, 1993), Knowledge-based Theory (Nonaka and Takeuci, 1991, 1995; Nonaka, 1994; Grant and Baden-Fuller, 1995; Liebeskind, 1996; Grant, 1997; Nonaka and Konno, 1998), Dynamic Capability Theory (Teece and Pisano, 1994; Teece, Pisano and Shuen, 1990, 1997) – in the industries characterised by high-intensity competition and technological product innovation, the creation and development of a firm’s competitive advantage stem from the resources, competencies, and knowledge portfolio it owns and/or can access through collaboration with selected external organisations. Access to the complementary resources and capabilities of specialised strategic suppliers – imperfectly imitable, mobile, reproducible, and substitutable – is a way of sustaining technological innovation for new product development and the future growth of a firm (Hagedoorn, 1993, 1995, 2002; Hagedorn and Schakenraad, 1994; Lorenzoni and Baden-Fuller, 1995; Ragatz et al., 1997; Handfield et al., 1999; Howells, 1999; Narula, 1999; Das and Teng, 2000; Quinn, 2000; Zhao and Calantone, 2003; Engardio et al., 2005; Carson, 2007; Rundquist, 2008; Griffith et al., 2009). This managerial approach is particularly effective in industries experiencing high-intensity product innovation. These include the following sectors: automotive (Wasti and Liker, 1997; von Corswant and Fredriksson, 2002; Mikkola, 2003); aircraft (Amesse et al., 2001); pharmaceutics (Piachaud, 2002; Chang, 2003); biotechnology (Powell, 1998; Powell et al., 1996; Pisano, 1991); and information and communication technology (Lee, 2001; Sturgeon, 2002). Numerous studies in the literature have addressed the issue of outsourcing new product development (NPD) or R&D processes (Becker and Zirpoli, 2017; Liao et al., 2010; Rundquist, 2008; Song and Di Benedetto, 2008; Stanko and Calantone, 2011; Calantone and Stanko, 2007; Petersen et al., 2005; Zhao and Calantone, 2003; Wynstra et al., 2001, Carson, 2007; Chiesa et al., 2004). “New product development” refers to a firm’s innovation process yielding new products. From a consolidated perspective, this means that the products may be new to the market and/or the firm. The degree of newness may also vary, so on the one hand, products can be radically new, while on the other, they may merely represent improvements to

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existing ones (Garcia and Calantone, 2002). The term “outsourcing of innovation activities”, instead, concerns outsourcing activities that are an “innovative part” of a new product and therefore have substantial implications for the innovation process (Rundquist, 2008). Given the importance and complexity of innovation projects, many are undertaken in very close collaboration with the partners involved (Schamberger et al., 2013; Barczak et al., 2009). The supply partners are thus considered a potential source of innovativeness since their involvement permits access to the specialised technological capabilities of external organisations and to sustain NPD activities more effectively and efficiently (Carson, 2007; Engardio et al., 2005; Quinn, 2000; Howells, 1999; Narula, 1999; Griffith, Harmancioglu and Deoge, 2009). The success of NPD programmes depends on several factors, which may be internal – for example, linking portfolio decision-making to strategy and decentralising NPD portfolio-planning decision-making (Carbonell and Escudero, 2016), adopting effective human resources management practices (Aagaard, 2017) – and external, such as implementing a practical approach to selecting external partners (Guertler and Lindemann, 2016). As the longitudinal case study presented later in this volume shows, innovation-based outsourcing underscores the importance of a firm’s relational capabilities (Lorenzoni and Lipparini, 1999). These represent the “strategic centre” of an innovative value constellation (Lorenzoni and Baden-Fuller, 1995) to create, manage, and develop relationships with the network of firms along the supply chain, and to learn, absorb (Cohen and Levinthal, 1989, 1990), and integrate complementary resources, capabilities and knowledge, which are otherwise imperfectly imitable, mobile, reproducible, and replaceable (Grant, 1996). Conversely, the central tenets of Transaction Cost Economics TheoryTCET (Williamson, 1979; Walker and Weber, 1984) and outsourcing decision-making involving NPD and/or R&D processes (Becker and Zirpoli, 2017; Cantone and Testa, 2012; Hsuan and Mahnke, 2011; Stanko and Calantone, 2011; Ambos and Ambos, 2011; Quinn, 2000; Veugelers and Cassiman, 1999) not only affect cost economies (design, production, and transaction costs) but also impact on the extension and integration of internal assets, resources, capabilities, and the knowledge base. Thus, NPD outsourcing must be interpreted in accordance with Resource-Based Theory – RBT (Wernefelt, 1994; Barney, 1991; Grant, 1991; Collis and Montgomery, 1995) and other epistemologically related theories, such as Competence-Based Competition Theory – CBCT (Prahalad and Hamel, 1990; Hamel, 1991; Sanchez et al., 1996), Knowledge-Based Theory – KBT (Grant and Baden-Fuller, 1995; Nonaka and Takeuci 1991; Grant, 1996), Strategic

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Assets Theory – SAT (Amit and Schoemaker, 1993), Dynamic Capabilities Theory – DCT (Teece et al., 1997; Day, 1994). Furthermore, Network Theory – NT (Gulati et al., 2000; Gulati, 1998), and Supply Network Theory – SNT (Mena et al., 2013; Hearnshaw and Wilson, 2013; Galaskiewicz, 2011; Häkansson and Persson, 2004; Mills et al., 2004) also contribute to the general theoretical background. NPD outsourcing activities based on collaborative relationships within the supply network bring several benefits to both firms and their suppliers. These benefits may be listed as follows: 1. the optimization of returns from shared investments, such as specific assets, which are not available or easy to develop in-house, focusing on the resources and capabilities of each partner (Narula, 2007); 2. access to the specialised and complementary resources of the supply partners (Dyer and Ouchi, 1993), in accordance with the open-innovation paradigm (Chesbrough, 2003); 3. the opportunity for partners to increase relational advantages arising from inter-firm cooperation within the innovation process (Hagedoorn, 2002; Dyer and Singh, 1998); 4. the opportunity to absorb and transfer capabilities, such as tacit and imperfectly transferable knowledge (Saenz et al., 2014; Azadegan et al., 2008); 5. the creation of new knowledge and competences for use during the innovation process, which could otherwise not be possible by merely leveraging the internal capabilities of the individual partners (Wu, 2008); 6. sharing the risk of relation-specific investments; 7. improving supply chain flexibility (Scherrer et al., 2014), performance (Cao and Zhang, 2011; Jang et al., 2006; Mikkola, 2003), and efficiency along the supply chain; 8. overcoming financial limits within the innovation projects (Song and Di Benedetto, 2008); 9. the opportunity for buyers and suppliers to capture mutual interest in both the short and long term (Vitasek and Manrodt, 2012; Van Echtelt et al., 2008). Nevertheless, some case-based study research highlights that integrating suppliers into NPD projects could potentially give rise to costs, risks, and ineffective performance in terms of quality (Shirouzu, 2006) and lead-time delays (Lunsford, 2007), both of which may hugely outweigh the benefits. There is also a risk that innovation competencies may be lost (Becker and Zirpoli, 2017). Such consequences primarily arise from the complexity of buyer-supplier interdependency during the design and manufacturing phases (Salvador and Villena, 2013). A possible solution, to mitigate these adverse effects, may be the use of modular architecture product design (Lau et al., 2010; Chesbrough, 2008; Mikkola, 2003), or distinguishing between types of product innovation projects and applying dynamically different approaches over time (Becker and Zirpoli, 2017). The issue of how outsourcing decisions in the NPD process can best be

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undertaken has not been fully addressed in the literature (Stanko and Calantone, 2011). The factors influencing the decision to opt for innovation outsourcing most likely still need to be understood in current research. As it stands, the existing literature takes accounts for neither a complete set of decision-making dimensions nor the specificity of the NPD process, especially when a disruptive technology fosters product innovation. Although several studies have analysed the antecedents of innovation outsourcing (Gooroochurn and Hanley, 2007; Bertrand and Mol, 2013; Griffith et al., 2008; Mol et al., 2005; Fill and Visser, 2000; Stanko and Calantone, 2011), the decision-making dimensions are not taken into account in an integrated multidimensional decision-making model, which considers the inter-related effects of their simultaneous evaluation. There are, therefore, significant gaps in the literature, which this book intends to fill. This volume examines how organisations approach outsourcing decisions relating to NPD activities in technology-intensive industries and the implications of these decisions for performance. The context is that of industries characterised by a) high-intensity product innovation, b) high technological product complexity as a result of specific technologies developed and supplied by several organisations belonging to the supply chain, c) high value added by suppliers in the innovation development process in terms of quality, cost, and lead time, which contributes both to the final product and to value chain competitiveness, and d) a global supply chain, geographically dispersed among several countries (Mol et al., 2005). The multidimensional and integrated decision-making model for outsourcing NPD activities proposed in this book is especially suited to situations in which disruptive technology drives product innovation. According to Danneels (2004: 249), disruptive technology “is a technology that changes the base of competition by changing the performance metrics along which firms compete”. The same author explains that “a particular technology has performance constraints which limit the current product attributes set […] disruptive technologies introduce a dimension of performance along which products did not compete previously”. The multidimensional and integrated decision-making model proposed in this book brings together, from an inter-related perspective, six key dimensions theoretically embedded in influential firm theories, offering a broader set of guidelines and directions for outsourcing decisions. The dimensions of our analysis work synchronously in order to consider the effects of their interrelations on the outsourcing decision. Therefore, even if “bounded rationality” limits the degree to which managers are perfectly rational in making decisions (Simon, 1955, 1959), it is necessary to develop a “satisfying” decision model (Simon, 1955, 1959), able to provide more effective guidance for manag-

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ers when making outsourcing decisions (de Boer et al., 2006). To improve the reliability and success of an NPD outsourcing decision, all possible factors must be considered and thoroughly investigated. One of the causes of failure or ineffectiveness of the decision-making process is the difficulty in isolating the drivers influencing the decision. Therefore, in order to prove more effective, the proposed model considers the effect on the decision of all the relevant dimensions at the same time. In line with the aims we described earlier, we will discuss the findings of empirical research exploring an embedded in-depth longitudinal case study, namely the Boeing 787 programme, starting with the first B787-8 Dreamliner model. This new aircraft constitutes disruptive technology product innovation within the industry as it adopts new material technologies enabling it to meet future customer needs (Christensen, 2013). The programme has radically changed the partnership model adopted in the industry’s supply chain. This study aims to verify how the proposed model works to investigate outsourcing strategies related to the Boeing 787 Dreamliner programme. Therefore, the main research question that we aim to answer is: what strategic dimensions in a decision-making model can extensively and thoroughly address the outsourcing decisions relating to NPD activities, given the hypothesis that a disruptive technology fosters product innovation? The book is organised as follows. It begins with a focus on the major transformations in supply chains during the fast-changing and adverse times we live through. A case study involving Gruppo Schiano highlights how customer behaviour shifts drive innovation in the bicycle industry’s manufacturing paradigm and supply chain, now adopting digital technologies. The chapter on the case study was written by Mario Schiano, CEO of the company. There follows a presentation of theories of the firm and their implications for strategic outsourcing, after which we present a review of existing models in the literature addressing decision-making for strategic outsourcing and highlighting the notable gaps in the literature. Then, after discussing the methodology, we introduce a case study regarding the Boeing 787 Dreamliner programme (starting from the early B787-8 programme and tracking it throughout its product life cycle with the launch of the new B787-9 and B787-10 models). Next, we illustrate the proposed outsourcing decision-making model for NPD activities to describe the fundamental dynamics behind strategic decisions. A discussion of the empirical research findings on the embedded and in-depth longitudinal case study validates the stated research question and propositions set out in this volume. The case study concludes with some suggested implications for management and its limitations, as well as some opportunities for future research. Final-

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ly, the afterword of this book – written by Vincenzo Caiazzo, former Chief Operating Officer at Alenia North America & former Chairman of the Board at Global Aeronautica – judiciously outlines an insider’s perspective of the supply chain in the aviation industry.

1.2. In search of a supply chain in times of disruption This section discusses three main disruption phenomena impacting on the supply chain, and its current and future organisation, relationships, and performance. Supply chains have become intensely global and highly sophisticated. Globalisation has made supply chains more vulnerable to operational and macro-environmental disruption risks. In the light of such disruption occurring across industries worldwide, firms have to face the new challenges of managing supply chains efficiently in an age of disruption. The main forces of disruption are the following: 1. widespread use of digital technologies; 2. an urgent need for business objectives and strategies to address environmental and social sustainability issues in accordance with ESG (Environmental, Social, and Governance) principles; 3. the Covid-19 pandemic (implications for supply chains in postpandemic era), and the most recent war in Ukraine. Few firms and supply chains are currently prepared to address these overwhelming disruptions through resilient strategies, culture and organisation. Therefore, to survive in the ‘new normal’ age, they have to build a resilient supply chain, a. leveraging digital and intelligent technologies, to transform the traditional linear supply chain into a digital supply chain, b. implementing an environmentally and socially sustainable supply chain, and c. overcoming the turmoil created by the global health pandemic over the last two years and the most recent war in Ukraine, caused by Russia invasion. Building resilient supply chains enables firms to be proactive, agile, and flexible, as well as environmentally and socially responsible. They can engage with the supply ecosystem while being collaborative, visible, authentic, trustworthy, and digitally interconnected. Digital technologies are enablers of resilience at every node of the supply chain. In the next section, we describe the three disruptive forces that particularly affect the supply chain.

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1.2.1. Disruption from digital technologies Disruption from digital technologies (DITs) influences society, relationships, and interactions between people and organisations, as well as the business models of firms. This disruption makes the latter much more difficult to manage (Kanarachos et al., 2018). As outlined by Queiroz (2018: 3), writing on the seminal idea developed by Legner et al. (2017), “there is some confusion regarding the difference between the terms digitization and digitalization. According to Legner et al. (2017), digitization refers to the process associated with converting analogue signals (physical activities) into a digital model, while digitalization refers to the impact of these technologies, caused by adoption and operation, in organizational and societal perspectives”. Therefore, “digitization is a subset of the concept of digitalization”. In what follows, we will use the terms interchangeably, although the discussion mainly regards the impact of digitalization on firms’ strategic and operating models and, therefore, supply chain management. One of the business model components with a direct impact on its operating model is the structure of the supply chain, how it is organised, and how relationships are formed within the supplier network (Queiroz et al., 2018). Digitalization and the evolution of information communication technologies in intelligent learning systems have enabled the Fourth Industrial Revolution, known as Industry 4.0, which encompasses several technologies (Hecklau et al., 2016; Qin et al., 2016; Lee, 2015; Schumacher et al., 2016; Xu et al., 2018), many of which stem from the field of Artificial Intelligence (AI), such as Machine Learning, Deep Learning, Robotics, Natural Language Processing, and Computer Vision. Further enabling and advanced technologies are transforming society, people, and business, such as IoT – Internet of Things (Bibri, 2018; Kumar et al., 2016; Ben-Daya et al., 2017; Majeed and Rupasinghe, 2017), BDABig Data/Analytics (Kache and Seuring, 2017; Strandhagen et al., 2017; Chen et al., 2015), CPS-Cyber-Physical System Technologies (Bibri, 2018; Kumar et al., 2016; Qin et al., 2016), 3D Printing-Additive Manufacturing (Kapetaniou et al., 2018; Mohr and Khan, 2015), CCI-Cloud Computing Infrastructures (Korpela et al., 2017; Vazquez-Martinez et al., 2018; (Jede and Teuteberg, 2015; Giannakis, 2019; Maqueira et al., 2019), Nanotechnologies, Advanced Robotics/Robotics Process Automation (Barreto et al., 2017; Oyekan et al., 2017), Sensors, Blockchain (Korpela et al., 2017; Li et al., 2018), Augmented Reality (Rejeb et al., 2020), and Quantum and Edge Computing (Porambage et al., 2018). As leading multinational consulting companies have pointed out (McKinsey, 2016; Boston Consulting Group, 2016; Deloitte, 2016; Bain &

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Company, 2018; AT Kearney, 2015; Accenture, 2016), these DITs – spurred on by their data-driven and analytics powered capabilities – blur the borders between the physical and the virtual worlds. They activate an interactive and circular physical-to-digital-to physical loop, using data gathered from many physical and digital sources such as locations through sensors and other networked intelligent machines. They apply advanced and human learning algorithms to automate decision-making. They are influencing organisations in every industry (i.e., Retail, Finance, Media, Gaming and Entertainment, Health care, Education, Data analytics, Apparel, Innovative industries), as well as the management of every activity in a firm’s value chain (i.e., Operations, Procurement, Logistics, R&D, Marketing), and the management of relationships among business actors in the business systems (supply-chain management relationships). They also permit real-time access to large amounts of data gathered from multiple sources. DITs have changed the value creation processes (i.e., how products are manufactured and services are produced and delivered, emphasising quality, safety, time, customization, and other elements in performance), as well as how this value is delivered to customers and exchanged within the supply chain. For example, IoT, blockchain, drones, wearable technologies, and so forth open up new potential for (mass) customising the customer experience (Srai et al., 2016). They improve effectiveness and efficiency along the supply chain, leveraging micro-scale distributed manufacturing plants and new manufacturing models (Holmström and Partanen, 2014; Zhou, 2013; Luz Martín‐Peña et al., 2018), as well as more instantaneous tracking and digitally connected delivery systems). Lastly, they have changed the way customers and other supply-chain partners engage in the value co-creation process (Queiroz et al., 2018). DIT disruption is, and will continue in the near future to be, driven by several factors (The Economist Intelligence Unit, 2020), such as – just to cite those with more significant impact – a. widespread internet access, increasing use of mobile and connecting devices in society, b. more company investment in interactive and connective technologies for big data analysis, c. more government investment in the digital economy, cybersecurity, and info-structure technologies, d. more private and public investment incentives for innovative start-ups, e. improved digital regulations and tax regimes for new digital enterprises, f. more education programmes on digital capabilities. Another critical factor is the sharp decline in the cost of bandwidth, storage and computing on the one hand with significant growth of computing power and technological capabilities, on the other. This growth means that even small and medium-sized enterprises can invest in new interactive DITs,

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which can process greater amounts of data and establish wider and deeper business relationships than ever before. In other words, they allowed, and will increasingly allow, supply chains to shift from traditional and linear configurations to multidirectional and dynamic digitally networked ones (Deloitte, 2016). Decision-making (i.e., planning) and operational (i.e., manufacturing, warehousing, delivering, buying, communication, and so forth) processes, involving the actors of the supply chains, are becoming more intelligent, smarter, more synchronised, more dynamically adaptive, and better connected in real-time. Lastly, industry 4.0 and digital transformation technologies strongly facilitate the information-sharing and decision-making process along the whole supply chain (Preindl et al., 2020). In line with our previous remarks, we may add that the potential advantages of a digitalised supply chain supported by DITs become clear through some of the most appropriate definitions of the Digital Supply Chain (DSC). According to Ageron et al. (2020: 133), DSC “can be defined as the development of information systems and the adoption of innovative technologies strengthening the integration and the agility of the supply chain and thus improving customer service and sustainable performance of the organization”. According to Büyüközkan and Göçer (2018: 165), DSC is “an intelligent best-fit technological system that is based on the capability of massive data disposal and excellent cooperation and communication for digital hardware, software, and networks to support and synchronize interaction between organizations by making services more valuable, accessible and affordable with consistent, agile and effective outcomes”. The backbone of a DSC is represented by advanced analytics and data-management technologies, capabilities, and capacities that make it possible to support the interactive and circular physical-to digital-to-physical loop relying on AI machines and a broad set of human learning algorithms. This allows firms to increase (Ageron et al., 2020) their end-to-end visibility and flexibility, as well as collaboration and real-time realignment at every stage of the supplier network. This, in turn, enables more cost-effective operational decision-making as well as the discovery of hidden insights for better strategic decisions regarding operational excellence (e.g., order management, performance management, logistics flow management, planning, end-to-end collaboration) and supply chain management (dynamic supply chain redesign, microsegmentation of supply chains, end-to-end collaboration throughout the entire supply chain, and so on). It also enables process and product optimization, risk management, organisational capabilities, and new product-process innovation performance (agility, flexibility, quality, cost). As Garay-Rondero et al. (2019: 899) put it, the main differences regarding DSC compared with the traditional and linear SC involve several dimensions, such as accelerated,

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adaptable, smart, real-time data gathering, and the fact that they are transparent, globally-connected, scalable, clustered, front-edge, inventive, and sustainable. Thanks to these qualities, DITs can enhance supply chain processes, ensuring actor responsiveness. If the digitalization of a supply chain is to have a real impact on a firm’s value proposition – improving and customising the offer system with the agility and flexibility needed to respond to changing customer needs – what is required is a profound transformation of firms’ organisational culture and operating models (i.e., the structure of the supply chain, how interrelations within and outside the value chain are managed, in addition to organisational and cost structures). Digitalization will most likely drive a firm to reimage and innovate its business model (Kane et al., 2015); it will redefine its reasoning to build up a competitive advantage. In this disrupted organisational context, the competencies and capabilities of employers and managers also change. Beyond technology and big-data-driven competencies, other key capabilities must be developed and rethought, such as (Ageron et al., 2020; Queiroz et al., 2018) continuous human learning, critical thinking, decision-making, business process management, the engagement and management of external partners, negotiation, data science for developing analytical solutions and algorithms, digital translation (interfacing between business and analytics), collaboration and platform-based informationsharing at scale, the continuous redefinition of the collaborative relationships between humans and machines, and managing broader ecosystems comprising organisations belonging to multiple industries. Of course, not all competencies can be developed and managed inside a firm, so, following the open innovation paradigm (Chesbrough, 2003a), they join partnerships with others who can integrate their distinctive competencies with the “best of the breed” capabilities available in the broader business ecosystem. As we will argue in greater detail later on, digitalization and automation technologies offer an excellent opportunity to achieve sustainability and apply circular economy models within the supply chain. To conclude, Queiroz et al. (2018: 7) propose a framework of capabilities to manage a DSC. These are basic capabilities grouped into “ICT policies, worker policies, supplier integration, customer integration, warehouse capabilities, transportation and smart production”. Then there are six enablers: Big Data Analytics, Blockchain, Analytical Intelligence, Cyber-Physical Systems, Cloud Computing, and the Internet of Things; these support the basic capabilities and permit a high level of integration and coordination with other players along the supply chain.

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1.2.2. Disruption from social and environmental sustainability Environmental and social issues have led to increasing awareness in society at large and impact the business world in terms of their economic relevance. Many companies are effectively addressing these issues; however, many others have yet to do so. The firm’s stakeholders – shareholders, customers, employers, communities – are increasingly demanding vast and concrete commitments to these themes in order to match business practice with environmental and social needs. It is no understatement to affirm that the sustainability of a business is increasingly linked to its ability to integrate environmental and social issues into its own strategies and business models so as to create a competitive advantage. These issues are relevant because they have a direct impact on supply-chain management, and practices in this regard have been addressed in the literature for some time (Marshal et al., 2014; Pfeffer, 2010; Dey and Cheffi, 2013; CamarinhaMatos and Afsarmanesh, 2012; Klassen and Vereecke, 2012; Awaysheh et al., 2010; Chaabane et al., 2011; Pagell and Wu, 2009). Indeed, according to various studies (Reuter et al., 2010; Zimmermann and Foerstl, 2014; Pullman et al., 2009), adopting sustainable-oriented supply-chain management practices can create a unique competitive advantage if they effectively meet – radically or gradually – the needs of aware customers by changing – again radically or gradually – a firm’s resource set. The need to involve the whole supply chain in reducing emissions has been brought to light in a worldwide study published by the Boston Consulting Group (March 2021). In fact, eight global supply chains (Food, Construction, Fashion, FMCG, Electronics, Automobile, Professional Services, and Other Freights) cause more than 50% of annual greenhouse gas emissions, and only a small proportion of these are produced during the final manufacturing phase; the rest comes from the supply chain partners. In addition, in all the supply chains analysed in the BCG study, full decarbonization (a net-zero supply chain) would have a low impact on the end consumer prices (rising no more than 4%). Supply-chain sustainability refers to the systemic commitment of all the actors in the supply chain to pursuing environmental and social benefits (Jabbarzadeh et al., 2018; Taylor and Vachon, 2017). Contrary to previous studies in the literature (Pfeffer 2010; Pullman et al., 2009; Barreto 2010; Kleindorfer et al., 2005) – breaking down the sustainability of supply-chain practices into environmental and social components in order to measure and analyse the effects on its outcomes more accurately – Marshal et al. (2015: 675), argue “that sustainability should not be a single overarching concept but should be deconstructed into environ-

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mental sustainability and social sustainability to allow researchers to explore the differences”. The sustainability of a supply chain in terms of environmental issues entails all the actors becoming involved in the supply chain of processes and products designed to protect the environment, minimise resources, recycle material, and use smart and more efficient technologies. The social sustainability of a supply chain, on the other hand, means that all those involved in the supply chain of management and humancentric organisational practices must work to protect the long-term health and well-being of the workforce, in compliance with the national and international regulations. They must combat discrimination, be inclusive of any kind of diversity, ensure fair compensation for work, and reject any form of labour that deprives anyone, especially children, of their dignity and cultural, social, and economic growth. This means relationships within the supply chains have to be monitored beyond the conventional performance metrics – costs, time, and quality – foregrounding employees’ social and individual well-being. Enhancing efforts in terms of the health, wellbeing, and welfare of all those making up the supply chain is a core responsibility of any business, especially focal firms. These must encourage the supply chain to adopt ESG (Environmental, Social, Governance) metrics when evaluating suppliers; they should also adopt DEI (Diversity, Equity, Inclusion) analytics to promote a more inclusive corporate culture and organisational environments. Pursuing social sustainability involves, first of all, a firm’s culture, namely its core values, shared by all the players along the supply chain, and will condition their behaviours. However, a firm’s culture is influenced by – and influences – other elements that foster social sustainability. These are the firm’s vision, its organisational and management systems (planning systems, control systems, communication and information systems, reward systems, etc.) (Pfeffer, 2010). The focal firm in a supply network has a crucial role in creating a socially and environmentally aware supply chain. The role of the focal firm is essential when selecting suppliers capable of creating sustainability within the supply chain; they will monitor suppliers’ sustainable practices over time, encouraging them to adopt and transfer the best solutions. To guarantee the sustainability of the chain, focal firms in supply chains with environmental and social objectives must add ESG and DEI to their supply partners’ business models, including these metrics in their scorecards to evaluate the performance of the supply chain as a whole and that of any partners. As we will see, the Covid-19 pandemic has accelerated the need to invest in the environmental and social sustainability of supply chains.

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Marshal et al. (2015) – starting from Klassen and Vereecke’s classification (2012) and extending to those of Vachon and Klassen (2006) – have catalogued and measured four supply-chain sustainability practices. 1. Environmental process practices, focusing on monitoring suppliers’ adoption of environmental management systems over time. This means the role of the focal firm should be to encourage suppliers to adopt and update sustainability-inspired processes. 2. Environment market practices, introducing new product- and process-development practices, and reconfiguring the supply chain. The former entail redesigning products and/or production processes to benefit the environment (lower resource consumption, less waste, greater use of recycled materials, etc.). The latter pursues a different supply chain configuration to minimise resources by recycling waste for this purpose. Implementing circular supply chains or closed-loop supply chains could be a way to redefine the supply chain and pursue its environmental sustainability. 3. Social process practices through which focal firms monitor suppliers’ social sustainability practices and implement social management systems (i.e., health and safety systems; well-being programmes; fair wages; education programmes for developing capabilities; diversity). 4. Social market practices aiming to design and produce new products or processes whereby suppliers can improve the health and safety of workers along the supply chain and provide fair margins for suppliers (Waage, 2007). Undoubtedly, it is a long and arduous task for an organisation to enable a supply chain to solve disruptive environmental and social tensions. However, some leading initiatives might be of help: 1. planning and sharing ambitious environmental and social targets (i.e., reduction of CO2 emissions to zero, gender parity, inclusivity, and so on) with suppliers – starting with tier-1 suppliers and critical material/parts; 2. redesigning the organisation, processes, and products/services to achieve the expected environmental and social targets; 3. working with suppliers to reach the expected environmental and social targets; 4. redesigning the value and supply chains in the light of environmental and social targets; 5. sharing best-in-class ESG/DEI actions along the supply chain; 6. integrating environmental and social metrics in the vendor rating systems, rewarding the best performers and scaling up best practices throughout the supply chain.

1.2.3. Disruption from the Covid-19 pandemic and war in Ukraine Causing lockdowns around the world, the Covid-19 pandemic has accelerated the spread of digitalization in businesses across various sectors (retail, finance, healthcare, entertainment, and so forth), bringing unique economic and organisational challenges in terms of both supply and de-

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mand, with a considerable impact on production processes and consumption patterns. The global and synchronous spread of the virus, initially from China, has disrupted and will bring changes to entire supply chains across several sectors, including the aeronautics industry. The resilience of supply chains is facing severe challenges as a result of the Covid-19 pandemic, arising from difficulties caused by demand volatility, delayed deliveries, shortage of stock, monitoring suppliers, lost sales, operations planning, and health and safety at work, to name but a few. Therefore, this crisis too has been disruptive and challenging for supply chains. The overall long-term effects of Covid-19 have still to be analysed. However, the worldwide crisis has accelerated profound shifts already affecting businesses, such as emerging customer behaviours, and how customers evaluate offer systems, along with the impact of new technologies on innovating business models. How customers buy and value products and/or services is changing dramatically. Customising, on-demand delivery, real-time order-tracking, tailored value-added services, sustainability, and transparency are only a few examples of shifts reshaping customer experience, which will have a significant impact on supply chain disruption in the new normal scenario, and which will push for a more digitally integrated supply network. The Covid-19 pandemic has undermined many assumptions about the globalisation of businesses, also highlighting the vulnerability of supply chains run on traditional models. One of the outcomes of post-Covid-19 new normality is that supply chains will be managed on the assumption that post-pandemic disruption is a worldwide phenomenon rather than the exception, causing significant economic and social harm. Therefore, most firms are aware that they will have to plan and implement significant shifts in organising and managing their supply chains. Full implementation of the vaccine campaigns offers high hopes for the coming year and will probably mitigate the risks of the pandemic, paving the way for a ‘new normal’ era. However, the digitalisation of business will probably continue to expand due to permanent changes to consumer behaviours and the opportunities that firms have recognized and appreciated as they have sought to find their way during pandemic disruption. Considering the two consolidated classes of risks in supply chain networks, namely operational and disruption risks (Jabbarzadeh et al., 2018: 5946; Jabbarzadeh et al., 2016; Goh et al., 2007; Kleindorfer and Saal, 2005), and in line with Jabbarzadeh et al. (2018: 5946; 2016), disruption risks – caused by natural, pandemic, and man-made disasters – would appear to be more harmful than operational risks, namely those stemming

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from business factors (i.e., customer demand, supply partner behaviour constituting a moral hazard, and below-expectation supplier performance). The most recent war in Ukraine, caused by the Russian invasion, is one of the most disruptive geopolitical crises from the second World War, with dramatic humanitarian, social and economic effects over the world. This war, and the consequent sanctions, request to the firms to rethink again the management of their supply chain due to the scarcity of supplies and the rising of prices about key materials, commodities (metals, energy, cereals, oils, among others) and equipments. Therefore, to be resilient to this geopolitical huge crisis, the firms should implement in the short time (1-2 years) strategies to diversify geographically the supply countries, to move towards “dual sourcing” or “parallel sourcing” approaches, nearshoring and onshoring policies, mitigating as much as possible the risks of the strategic dependence. Jabbarzadeh et al. (2018) classified the common resilient strategies adopted to address disruption risks along the supply chain. By adapting, extending and adding to them, we believe that they may also be applied as a means of enhancing resilience in light of the Covid-19 pandemic and war in Ukraine. These strategies are 1. multiple geographically diversified sourcing: this is a conventional strategy particularly suited to diversifying risk within the supply chain and reinforcing the controlling power of the focal firm, mitigating competition among supply partners (producing less dependency on single-source partners), even at the risk of incurring higher costs. The same solution might be applied to the manufacturing base. Diversifying the supply partners across countries or regions and evaluating the reliability of their ecosystems (in the subcontractor network) might be an important lever in the event of supply shortages, a serious problem for organisations during the pandemic and geopolitical crisis. The design of a resilient supply chain should therefore envisage a balanced configuration of multiple suppliers across local, regional, and global locations. However, the focal firm must be able to select the most resilient suppliers in a given location and the best supplier with the most resilient supplier base (in terms of facilities, agility, organisation, and so forth). The supplier network needs to be controlled using an impact-risk model able to reallocate supply volumes in the light of delivery risks. Activating multiple supplier relationships might enable a firm to have additional inventory and greater capacity. Before the pandemic crisis, some nations favoured China as the supply country – for large companies and SMEs – creating excessive strategic dependence and substantial supply risk. Therefore, in new normal post-Covid times, such as in the current war times, companies will try to diversify their supply chain geographically to reduce pandemic and geopolitical-related

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risk; 2. localise and regionalise the supply base (nearshoring outsourcing) and the manufacturing base (nearshoring production) to reduce risk and be closer to customers; 3. establish backup suppliers/facilities to replace the primary suppliers/facilities when they are no longer available due to disruption. In this case, flexible contracts are a vital tool for this option; 4. support suppliers to improve the robustness and flexibility of their organisation and facilities in the event of disruptions, building a resilient supply chain. Of course, resilience should be monitored diachronically, measuring it with appropriate KPIs embedded in the contractual agreements; 5. hold additional inventory to use in disruption situations (Sawik, 2013a, 2013b; Garcia-Herreros, Wassick and Grossmann, 2014); 6. maintain internal extra production capacities to address lost supplier/factory capability during disruption (Khalili, Jolai and Torabi, 2017), reconfigure production lines or organise micro-factories; 7. reduce logistics flow and node complexity in the supply chain network (Cardoso et al., 2015; Zahiri, Zhuang and Mohammadi, 2017), also adopting nearshoring supply and manufacturing base strategies; and 8. enhance visibility in the supply network (supplier inventory data, fulfilling production plans, purchase order fulfilment status, etc.) in order to increase real-time response (supply chain agility) when pandemic and geopolitical disruption happens, mitigating impact from the event. Enhancing visibility not only involves tier-1 suppliers but also those in tier-2. This could improve the overall visibility of the whole supply ecosystem and increase the ability of the supply chain to address supply requirements, managing the potential risks of pandemic and geopolitical disruption, with the agility and flexibility needed to shift the production and purchase order along the chain. The greater the visibility of supplier networks, the greater the control using impact risk models to reallocate supply volumes in the light of the potential delivery risks associated with pandemic and geopolitical disruption. Of course, enabling end-to-end supply chain visibility requires massive digitization-digitalization investments, and lastly; 9. improve agility within the supply chain, adopting, for example, contracts that envisage the possibility of switching flexibly between make-or-buy decisions for critical materials/parts. As the pandemic crisis has spread rapidly worldwide, starting from Wuhan (China), such as the persisting war in Ukraine, all these ways of handling disruption have involved a strong capacity on the part of focal firms to develop different pandemic and geopolitical risk scenarios in the countries where the suppliers are located, as well on the global level. Of course, the greater the digital interconnection between suppliers in the network, the more excellent the opportunity to improve visibility across the end-to-end supply chain, strengthening agility, flexibility and resilience

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to pandemic and geopolitical disruption and the reduction of vulnerability to concurrent risks at the same time.

1.3. The Gruppo Schiano case study 2: How shifts in customer behaviour drive innovation in the bicycle industry manufacturing paradigm and supply chain 1.3.1. Introduction Bicycles are increasingly being used in intermodal transport as they are now seen as the last-mile problem solver and the best means of urban mobility in compliance with social distancing requirements after Covid 19. In fact, surveys and statistics show that bicycles and e-bikes are used not only for sport and recreation in Italy but also for daily travel. They are used to arrive at work or school, to run errands, or as a link with rail and public transport in general, thanks to the numerous secure parking spaces that have been set up in railway stations. The popularity of e-bikes, in particular, is snowballing, now covering all the market segments of traditional cycles. They enable cyclists to cover longer distances at higher average speeds and open up new mobility options in cities and towns. They represent a new way of pedalling. After quickly looking at the market and the history of the industry, we examine how Gruppo Schiano, Italian bicycle maker since 1923, has been facing recent business challenges. We illustrate how a company that has been in the bicycle industry for almost a hundred years is facing up to new market challenges through a new approach to its supply chain, leveraging new technologies. After outlining the market highlights up to 2019, we present an overview of the modern bike industry to show how traditional business processes work. We then introduce a new smart factory model based on industry 4.0 technologies.

1.3.2. Highlights of the bicycle market Around 20 million bicycles and EPACs are sold annually across the EU, over 13 million of which are produced internally. The European Bicycle Industry creates (directly and indirectly) more than 120,000 jobs in the Union market, which has over 900 SMEs. On average, European citizens own 2

By Mario Schiano, CEO and owner of Gruppo Schiano.

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more bicycles than any other means of transport. Bicycles and e-bikes are synonymous with healthy and sustainable individual mobility and are an increasingly important component of modern mobility concepts in our cities. Hence, European governments, regions and municipalities are pursuing the goal of significantly increasing the percentage of cyclists. The Italian bike market is the fourth in Europe in terms of yearly sales, following Germany, France, and Great Britain. In 2019, 1,713 million units including bicycles and e-bikes were sold – 7% more than the previous year, while e-bike sales grew by 13%, from 173 to 195 thousand units. Traditional bicycles, especially city and trekking bikes, are enjoying newfound popularity in all areas of Italy. Production is increasing again, and so too are exports. The entire Italian market, in terms of sales, is now worth around 1.35 billion euros. There are many reasons for this increase in sales, but the main one is probably the awareness shown by a category of consumers. Technical and technological innovations, the attractiveness of vehicles, and the growing importance of bicycles and e-bikes in daily mobility, especially the new political and social scenarios on climate change – accompanied by changes in behaviour and habits – are all elements behind more individual choices than in the past.

1.3.3. The history of the bicycle industry The modern idea of the bicycle emerged in the late 19th century in the United Kingdom and France. It evolved from previous means of transport defined as a two-wheeled person-propelled machine evolving from the 15th century. For about half a century, the industry was characterised by continuous technological improvement, taking advantage of metallurgical developments and new mechanical manufacturing processes. The industry was highly integrated to reduce costs and provide resistant and comfortable mass-produced bikes at a modest price. In the aftermath of World War II, bicycle manufacturers did not invest much in the development of bicycles, except for racing bicycles. This period saw a decrease in the number of frame producers due to a shift away from the bicycle in favour of the automobile. In the late 50s and 60s, only the road bike segment was pulling the industry forward. For instance, materials from the aerospace industry, such as dura-luminium, were increasingly being used to achieve weight reduction. Since its foundation in 1895, the American Schwinn has been the industry leader, and they have benefitted from this consumer behaviour to offer reliable and standardised bicycles with low production costs. Consumers identified prominent integrated

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players such as Schwinn or Peugeot with quality bicycles thanks to the integrated bicycle value chain. Barriers to entry were relatively high because entrants needed high capital investments in machinery and distribution channel management. In the late 60s and 70s, the bicycle industry was characterised by capital intensity, poor attention to innovation and research, integrated companies, and the fact that frame producers dominated the industry. Supplier Bargaining Power was low and unspecialized. The rivalry rate among leading firms was low due to the oligopoly that existed in a growing market. Evolution was driven by producers rather than consumers, whose bargaining power and influence were minimal. At that time, the turning point in the market was a change in consumer needs. Consumer trends changed dramatically in the 1970s when young Californians invented off-road bikes (Shimano inside, 2002). The well-established companies, i.e. Schwinn, dismissed this phenomenon as a fad, and the producers of bicycle components failed to take the mountain bike seriously in its early days. This new market trend and the consequent change in consumer demand led to the collapse of the bicycle value chain. At the onset of the mountain bike craze, the users and producers of mountain bikes were one and the same. After1976, some riders began assembling and selling their own bicycles. A crucial step in developing a mountain bike industry was the manufacture of frames and parts specifically designed for off-road use. This led to dramatic changes to the structure of the bicycle industry; the market now required highly specialised components, which provided smaller companies with the opportunity to come up with innovative designs and specialised parts. This is an important event for our analysis as it demonstrates that a mature industry was able to go modular even though it was already integrated. A new structure and firm strategy were able to influence and shape Industry Architecture. After that, the bicycle value chain was marked by more competition on the market, especially in terms of component R&D. Parts manufacturers rode the innovation wave in the bicycle industry, while original manufacturers downgraded and became assemblers. Suppliers became specialised (parts manufacturers), building brand equity and capturing an essential part of the consumer WTP. Original manufacturers captured only the low end of the value chain. Industry Rivalry increased at assembly level, but few component producers took the leadership, enjoying this phase of fast-growth. The consumers who brought the revolution about did not acquire strong power due to the size of the new leaders and the control which they exercised over the distribution channels and dealers. Over the last 35 years, the bicycle industry has undergone dramatic changes due to a radical shift in customer preferences. The mature business

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of the late 70s was revolutionised by changes in the architecture of the industry and the supply chain pattern. The leading global actors in this change were Shimano and Merida. The first took over leadership of the component sector, while the second turned the frame-producer supply chain upside down: having been an assembler, it became the leader. This revolution brought a change to the bicycle supply chain: the vertically integrated manufacturers who had dominated the market before consumer preferences changed lost their position of dominance thanks to their slowness in adapting to the new trends, a lack of investment in research and development, and no short-term strategy. They were unable to understand the evolution of the industry and thus lost the elements of competitive advantage they had previously relied on. They downgraded from industry leaders to scaled-down assemblers, capturing only the remaining low-end surplus of the value chain. Innovative companies such as Shimano captured the most significant portion of the desire to pay off the emerging high-end customers. This firm, a former bicycle parts manufacturer in Japan, gained recognition for the quality and innovation it brought to the market. In the early seventies, it was the second component producer after the Italian company Campagnolo, but was able to seize leadership under an all-embracing strategy. Firstly, it focused on R&D in particular; secondly, it had a sophisticated marketing strategy based on bundling products; thirdly, it counted on the integration of systems incompatible with competitor products; fourthly, it constantly changed its product specifications, and lastly, its management of the dealer network was outstanding. As for the business processes, European bicycle companies mostly owned their brands, as is the case of the Gruppo Schiano over the last two decades. Figure 2 shows the straightforward supply chain model for operations involved in bike production. In order to reduce unit production costs, the Group outsourced their production to Original Equipment Manufacturers (OEMs). The OEMs are specialised in different areas, so bicycle brands have multiple sourcing. Based on the forecast, the OEMs push components to the assembly facilities. The assembly facilities are owned by bicycle brands, although they can also be outsourced, and bicycles are hand-assembled before being shipped to destination. Shipping time between Asia and Europe is 30 to 45 days by sea. At the assembly facility, material requirement planning (MRP) manages all the operations from the OEMs to the customers. Hence, all the players involved in the supply chain depend directly on the MRP. The centralised

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MRP is a push system, and production planning is carried out for all levels in advance. Once production is completed, units are pushed to the next level. Depending on sales volume, bicycle brands have one or more warehouses strategically located in Europe. Dealers have direct access to the warehouse inventory before placing an order. When an order is placed, bicycles are shipped to the dealer; the lead-time is between 5 and 8 days. When the bicycle arrives at the dealer, it has to be assembled and adjusted for the customer. Dealers usually have one or two bicycles of each model on display so the customer can see them. In most cases, bicycles have to be ordered because the colour or sizes required are not in stock. This supply chain has various weaknesses, such as high inventory and work in progress, long lead times, and low flexibility. However, these main factors are counterbalanced by its main strengths in terms of highly competitive pricing thanks to a scale economy. With no 4.0 technology, it would be an unreal scenario even to think that a company would be able to provide unique, i.e. personalised goods with pricing remotely similar to that of traditional supply chains. But this is what industry 4.0 is now making possible, and it is being widely adopted by those businesses able to take up the challenge. Figure 2. – Gruppo Schiano: the “old” supply chain.

Overseas shipment

OEM

Gruppo Schiano assembly facility Multiple component suppliers

Schiano bike wholesales

Distributors

Land shipment Retailers

Material flows Order flows

Source: Author’s own.

End customer

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1.3.4. The company profile The Gruppo Schiano Italian handcraft company was founded between the two World Wars, and, over the years, it became an industrial reality based on traditional production systems. Today it is committed to intercepting the changing needs of the market in the context of the new global challenges; it now operates in the bicycle and sustainable mobility sector. Indeed, one of the main goals of the Fratelli Schiano Company is enterprise value creation, not only for itself but for the territory in which it is based. The company’s vision, focusing on value-creation for customers before, during, and after purchase, influences present and future policy in supply-chain decision-making and management. All the activities necessary to achieve this goal are carried out according to precise quality procedures and respecting precise indications aimed at safeguarding the environment. Moreover, the company believes that the bicycle, an ecological vehicle by definition, can genuinely be considered such only if everything that leads to its construction is designed and executed with minimal environmental impact. Indeed, in recent years, the company has set up research projects in partnership with universities and research centres (recognized as centres of excellence at EU level), investing in energy production from renewable sources. In essence, the company’s main milestones are the following. 1923 The firm’s story began in 1923, when young Mario Schiano, aged only 21, designed and built his first bicycle for a friend. It was the first step towards the establishment of a workshop dedicated to the hand-production of bicycles and machinery maintenance for the agricultural sector. Schiano eventually abandoned this latter sector, dedicating himself wholeheartedly to the most ecological two-wheeled vehicle in history. 1960 This artisan workshop remained so until the 1960s, Schiano’s son Raffaello took over the reins and, exploiting his design/technological capabilities on the one hand, and his father Mario’s know-how on the other, making it as flexible as it was responsive to market demands. The result? A bicycle every 108 seconds: a record for the time.

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1970 The 70s were decisive for the firm and the world of bikes. After several months during which the laboratories studied new ideas for bicycle production, the Condorino model was launched on the market; being lightweight, agile, and resistant, it was perfect for everyday afternoon rides. Not only that: its smoothness allowed riders to pedal comfortably even on the most challenging surfaces. Thanks to the Condorino, the Schiano brand became an established name in Italy. The elegant and minimalist style of this model is effectively a hallmark of Schiano bicycles. 1980 The brand’s success in Italy was a spur for constant improvement. Using his technical-design capabilities to adapt the entire company infrastructure to the changes taking place, Raffaello Schiano automated several processes, raising the level of efficiency to such a level that it became the national market leader, later breaking into the international markets and supplying distributors in Spain, Greece, France, and North Africa. This Italian brand came to be seen as a guarantee of quality and safety. 1990 The 90s witnessed a mountain biking boom, requiring a specially designed bicycle for use uphill and downhill, off the city streets. These market changes did not find the Group unprepared, and – thanks to the Italian connotation – the firm enjoyed a significant increase in exports, increasing the Schiano Group brand’s international recognition. 2006 2006 was an important year for the Group. Mario, Consiglia, and Antonio Schiano, all three of Raffaello’s children, took over the company’s management, offering all their capabilities and acting as a direct link between tradition and innovation. Not surprisingly, they were able to interpret the needs of their market by combining bicycle production with successful brands. A production division was set up to do so with ad hoc licences marked SSC Napoli Spa, SS Lazio Spa, AS Roma. Spa, FIGC Italian National Football Team (Italy won the World Football Championship in 2006), Blue Dragon, Twin Princess, and Idaten Jump (Mediaset and Disney licensees). 2013 In 2013, the firm celebrated its ninetieth anniversary. In recognition of the quality of the work carried out over the years, it received several awards

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from local institutions. This anniversary was also an occasion for creating a unique logo testifying to the long-lasting commitment of the Schiano family from the earliest days of bicycle production. 2014 This was a special year for bicycles, now the means of transport par excellence, and also the most ecological. Energy-saving and environmental sustainability became the very bedrock of the Schiano Group, which launched its new collection, the SCH BIKE COLLECTION, that year. It was designed to meet the needs of bicycle lovers and help people rediscover the joy of pedalling immersed in nature. The digital graphics of the sketches, as well as the computer-assisted frame design and production, reflected the Italian spirit that represents the distinctive character of the models in the collection. The SCH BIKE COLLECTION range included the E-SCH line, consisting of pedal-assisted bicycles suited to long, pollution-free rides in the city or the country, thus protecting the environment. The environment was now at the forefront of the Group’s ethos, so much so that all its offices are powered by photovoltaic systems, thus avoiding emissions of around 200,000 kg of carbon dioxide per year. 2016 The Schiano group now consolidated its position on the international markets thanks to Internet channels Amazon and e-Bay. It also created ecommerce platforms for both B2B and B2C online sales. It is now structured for direct sales abroad through quality partners such as Brandon Ferrari, one of the best start-ups in the field of brand promotion, an awardwinning company for positioning work on international marketplaces. Participation in major trade fairs in the world of cycling is always essential, and the Group regularly attends them to present its latest catalogues to a public of all ages. The success of the Child, Runner, and Pink Love Bike lines all brought excellent results to the leading markets in the sector. 2018 2018 was the year when the Schiano Group innovated and gave a boost to its commercial strategy. It also became a vendor for Amazon Europe. This was possible thanks to the company’s new policy of agility, reducing organisational inertia and focusing in the long term on satisfying customer needs. EBike production began in 2018 with a high yearly increase rate reflecting market demand. Introducing a logistics service and investing in an after-sales customer service centre were two critical elements of in-company growth.

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1.3.5. From mass production to mass customization In this section, we explore how a small or medium-sized enterprise can ride the market wave. Supply-chain decisions affect company value-creation as well as the territory where the company is based. At a time when the driving forces involved in the decision-making process were top-down, the Gruppo Schiano company, like many other bike industries based on economy of scale processes, worked with a make-to-stock production model. Worldwide spare parts procurements and some parts production with final product assembling were the primary operations up to 2016. This way of working with high vertical integration and economy of scale was the key to success until the end of the first decade of the twenty-first century. Of course, in recent years, and especially over the last decade, IT technology has influenced our lives and customer behaviours during the purchasing process. Fast-changing market conditions led to the collapse of all the old supply chain models. Leading the markets is a more significant challenge than before due to unpredictable conditions, which influence businesses heavily, so the rule for obtaining results is: supply what the customers want when they want, and how they want. Matching customer requirements is no easy job for enterprises located in a country like Italy, with one of the highest production cost factors and a rigid production paradigm marked by low flexibility and low responsiveness. The key element in the new company approach is immediate customer satisfaction. The management was aware that leveraging outsourcing alone would not be enough. Because of quickly emerging hidden and semihidden customer needs, consumers now wish to buy a unique product – a unique bicycle. Mario Schiano’s idea was to create a bicycle and e-bike smart factory paradigm that would radically subvert the current production logic. The world is constantly evolving, and we are no longer in an era where producers are pushing their products onto the market. In today’s reality, it is the customer who draws a specific product onto the market only if it has the characteristics that he or she cares about most. Businesses can no longer afford to create a product at minimal production costs without fully meeting customers’ needs. Since the one who will benefit from the product and determine its success/failure is the end consumer, he or she is the central element on which the economic activities of the producer must increasingly be based. The desires and needs of the customer are what determine whether a specific product will be placed on the market. Over the years,

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industrial paradigms have undergone several changes: we have moved away from mass production, where the company produced large batches of a particular product in order to minimise unit production costs as much as possible. This was the guiding production logic throughout the last century in manufacturing industries of all levels and sizes. However, it proved to be limiting for companies from many points of view: producing large batches requires sizeable stocks in order to produce as much as possible, and/or the product placed on the market often does not satisfy the needs and desires of the market end consumers. In both cases, a product has been created that will be hard to place, if not by selling it at a lower price, thus cancelling out the advantage of producing it at the lowest cost possible. Many companies have understood these limits and, perceiving that globalisation has totally changed the way we do business, they have begun to understand that a product can win the favour of the market only if it responds to the wishes/needs of those who might buy it. A logic of Mass Customization was therefore adopted, a strategy for the production of goods and services aiming to satisfy the individual needs of customers and, at the same time, preserve the efficiency of mass production in terms of low production costs and consequent low sales prices. This strategy assumes that manufacturing companies are endowed with considerable flexibility in the production and assembly phases and interact with customers, who communicate their specific needs or choose the desired product configuration from the many possible alternatives. However, the extreme volatility of the modern market and the increasing and diversified introduction of products by competitors have led to the definition of a new industrial paradigm called Personalized Production. To be competitive today, it is not enough for a manufacturer to offer a family of highly customised products: it must make every product unique. This is, in fact, what every consumer wishes for: to buy a product that satisfies his or her desires and is unique. Based on this emerging market demand, Mario Schiano has therefore decided to evaluate the technical and economic feasibility of an assembly plant for bicycles and e-bikes that reflects this goal. Customers will be able to purchase a bicycle/e-bike that they have “created” themselves. In fact – using a special Web configurator – consumers will be able – depending on the bicycle model they wish to purchase – to choose the components and graphic customizations they prefer, without prejudice to the possibility of technical coupling between the mode chosen and the selected component. Once the purchase has been made using the configurator, the product will be assembled at the factory and shipped directly to a destination chosen by the customer. The time-tomarket will be only slightly higher than for purchasing products through other web platforms – Amazon, for example – which currently takes

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around 5/7 working days. The customer will not mind this slightly longer wait, considering that he or she will then be the owner of a product that has the added value of having been customised in person and therefore unique. The supply chain for this kind of production is described in the following figure. The strong point of this business model is the alignment of enterprise processes with market needs, but the key point is to enter into partnerships with multiple suppliers. These must already have bike parts available, managed by automatic warehouses in Europe and with IT systems able to interconnect with third-party Enterprise Resource Planning (ERP). They must be capable of shipping parts as the business model requires, i.e., with a minimum order quantity of one per part number and express shipment. Impact on the supply chain is heavily disruptive when adopting this new manufacturing paradigm based on key enabling technologies 4.0, such as intelligent manufacturing, IoT, and industrial robotics. Figure 3. – Gruppo Schiano: the “new” supply chain. Express courier shipment

Express shipment

Multiple component suppliers

Schiano smart factory

End customer

Material flows Order flows

Source: Author’s own.

What does adopting an Industry 4.0 philosophy entail? It no longer envisages a batch production logic; instead, it seeks to maintain a tense production flow. The production logic is diametrically opposed to that widely adopted by the manufacturing industries today. These tend to produce, and therefore to place, products on the market before there is a demand for the goods. Batch logic inevitably leads to goods being produced before

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the need for it becomes evident. This entails immobilising assets and resources, something which is no longer tolerable today, and so production methodology must be overturned entirely. It is now for the consumer to “pull” the production and not the factory to “push” the product towards the customer. This means moving away from push-type production towards one of the pull types, providing only what the customer requires and no longer putting products on the market before there is a specific need for them. This generates a better consumption of resources and applies both downstream – towards customers – and upstream, in relations with suppliers. In doing so, goods and product production becomes a continuous stream. A twofold example to illustrate the impact that this kind of organisational philosophy can have in managerial and economic terms can be seen in the following situation: on the one hand, only what the customer requests is produced – based on the specifications selected by the customer via the configurator, eliminating the possibility of producing a bicycle not yet in demand, entailing inevitable storage costs and placement issues. On the other hand, producing only what the customer wants reduces costs due to saving on very high raw materials and semi-finished product storage costs. By knowing the types and quantities of products in the warehouse at the plant and the suppliers, it becomes possible to establish – based on the orders coming in via the configurator – which semi-finished products must be picked up from the warehouse in order to start production, and which ones to order from suppliers in order to start production in the shortest possible time. The firm will thus minimise the number of parts in stock and maximise the material choices available to the end customer through the webbased configurator. As for actual production, Industry 4.0 is not distorting bicycle manufacturing technologies, but interconnecting all the systems in the plant which allows the management to know – at any time and every level – what is happening inside the plant itself. For example, using a series of printers and barcode readers, it is possible to know the position of any semifinished product in the factory. Industry 4.0 makes it possible to integrate production within a firm’s IT system. So, while the current bicycle production philosophy envisages machines working autonomously, equipped with individual systems control, Industry 4.0 will connect them all. The ability to communicate and exchange data between inanimate objects is the concept underlying the Internet of Things. By giving objects the ability to communicate with each other and exchange data, objects will have the ability to create information. We might say that the object becomes “intelligent” when machinery is allowed to receive information from the outside world and receives the technology

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to gather information, process it, and put it in a format that can be understood by other machines/people. Naturally, suitable technology will also be needed to connect the network and transmit this information. The technologies with which machines are endowed will be decisive in meeting this need. They will have sensors to capture information from the outside and may also have pre-processing capabilities to handle the information they obtain. They will be endowed with microprocessors, intelligent electronic units to give the intelligent object the ability to process information from the sensors, translating it into a form suitable for transfer to the outside, and wireless communication protocols to realise the transfer. For IoT to work, the communication protocols between the various intelligent machines must be shared and standardised, regardless of who built the devices. Lastly, it is also important to establish communication protocols suited to the distances involved in information transfer. A practical example may serve to illustrate the advantages of such a system. In the current system, if a machine comes to a stop due, for example, to an accident involving an operator along the line, the machine performing either the previous or the subsequent stage of processing, now disconnected from the halted reads the interruption as a separate event and continues with its processing. If Industry 4.0 is used, however, production is stopped. The bottleneck that would inevitably be created is thus avoided. Another fundamental innovation introduced by the Industry 4.0 approach derives from the fact that orders are currently sent to a management software located on a server which is simply a general-purpose computer and therefore different from a PLC. This is a computer for industry specialising in the management or control of industrial processes assembled on industrial machinery. With Industry 4.0, it is possible to introduce a supervision system that connects the factory and the offices using Manufacturing Execution System (MES) software. An MES is a software system that can manage a company’s production process through direct connection to machines (PLC) or manually prepared statements made by the operators. It is then possible to produce a production order from the management software. ERP system management software makes it possible to create a production order processed by the MES software and passed on to a machine. It is thus communicated to the model to be produced directly by the machine. It is also possible to receive information in the opposite direction: information from the factory is sent in real-time to the offices, which then have a complete view of the progress of the orders and the physical state of the resources and materials used. Robotics will also play an important part in new plants. New-generation collaborative robots will be interconnected and quickly programmable. Robots have become so flexible that an autonomous e-collaborative ma-

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chine has been developed: the COBOT, a Robot able to share the workstation and controllable through intuitive interfaces such as smartphones or tablets. The evolution of industrial robots from first generation machines – controlled via PC and programmed off-line, making them unsuited to producing small or customised series, into second generation machines made from light materials with yielding behaviour in interactions with their environment, has led to greater safety and reliability. They are equipped with intuitive controls allowing them to share workspaces with humans. So, unlike the first generation of robots, where physical barriers separated the machines from their operators, these latest ones collaborate with their operators and share the same environment with no risk to human safety. This means they can function in more and more manufacturing contexts, and in the case at hand, they can be used to carry out Pick and Place, polishing, screwing, and assembly work. Robots will not replace humans at work but will provide support; people will remain at the centre, but robots will be used to improve their work. Most robots will transport semi-finished products from one part of the assembly islands to another and then to the assembly area. Transportation is the area where actual wastage takes place. As for the fundamental frame-customization area, robots will be treated as Additive Manufacturing solutions. Until a few years ago, the creation of physical objects through Additive Manufacturing systems required costly systems and investments to equip specific laboratories and purchase sophisticated software. Today the scenario has changed, and certain types of 3D printers are readily affordable thanks to significant reductions in costs linked to the expiry of a number of patents and to project networking, such as Open-Source. 3D digital models can now be shared on the net as several websites are dedicated precisely to sharing digital 3D models by printing user-created objects. The spread of 3D printing is also due to its being the only technology to make products with very complex geometry. Virtual Manufacturing techniques can simulate the production cycle, while virtual simulation tools can help identify the best plant layout, optimising the use of automated machines and human personnel. They also help to study the interaction between machines and people in terms of safety requirements. Virtual reality can simulate all the actual activities to be carried out in the various production areas, enabling firms to make changes to manufacturing or the system, where necessary. Simulation from start to finish reveals all the potential problems that can arise during production. Visual Management software can simulate the entire layout of the assembly lines or multiple work cells. It becomes possible to control the kinematics and dynamics of each production stage and evaluate, with all their implications and consequences, appropriate changes to optimise the process. If the design

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phase is only based on two-dimensional models, it is difficult to evaluate and interpret the interaction between the components of the system and the interaction between the system and the personnel. A 3D view gives the impression of seeing the entire production line, making it possible to identify problems before they occur, thus increasing worker safety and ergonomics in the factory. Augmented Reality technologies can be a great support to operators assembling bicycle components. Indeed, the operator assembles the product according to a procedure guided by images of arrows and lights illustrating the steps to be carried out directly on the parts. A device that projects arrows on the bicycle can also show operators where to insert the screws.

1.3.6. Conclusions and implications for management This chapter has shown how an Italian company that has been the owner of a brand and operating in the bicycle industry for almost a hundred years is addressing new market challenges. The firm sees the customer-centred approach to designing new business and supply-chain processes as the critical factor in market leadership. The drivers are now the customers and the new online marketplace, offering goods and services both before and after sales. So, the question the firm needs to be asking about the new business approach is: what do customers expect of what is already a worldwide operator that the online form or brick and mortar cannot satisfy? As we have seen, they seem to demand the personalization of goods. The smart factory is the way forward for any manufacturing industry whose goal is to achieve long-term development. It does not merely represent a new production paradigm focusing on a few optimization metrics, an enterprise productivity index or something regarding better use of enterprise factors. It is the key to matching a wholly new demand in terms of sheer numbers and how it comes onto the market. The transformation of the manufacturing industry and increasing profits are just one side of the coin; the other is improving quality and production speeds of products based on actual performance and the personalised demand of users so that firms can invest more energy in the product innovation, research, and development. Thanks to the Industry 4.0 concept, smart factories are now called to focus on intelligent manufacturing, the Internet of things, industrial robotics, software, communications technology, and big data.

Chapter 2

THEORIES OF THE FIRM AND IMPLICATIONS FOR OUTSOURCING SUMMARY: 2.1. Introduction. – 2.2. Transaction Cost Economics Theory (TCET). – 2.3. Resource-Based Theory (RBT). – 2.4. Competence-Based Competition Theory (CBCT). – 2.5. Strategic Assets Theory (SAT). – 2.6. Dynamic Capability Theory (DCT). – 2.7. Knowledge-Based Theory (KBT). – 2.8. Open Innovation Theory (OIT). – 2.9. Network Theory (NT) and Supply-Chain Network Theory (SCNT).

2.1. Introduction Innovation has always been one of the main forces driving the long-term competitive advantage and growth of firms. The effects it can produce in terms of creative destruction (Schumpeter, 1994) and the ability to profoundly redefine the rules of competition for firms and customers (Markides, 2000; Markides, 2008; Markides, 2015) are undoubtedly significant for even radically renewing ways of creating “value innovation” (Kim and Mauborgne, 2015). Innovativeness – a firm’s desire to build a competitive advantage by creating and introducing new products or services, adopting new technologies to enable fresh products or services – has been identified as one of the most critical capabilities a firm can possess (Eisenhardt and Martin, 2000). The meaning of ‘innovation’ assumed in this study concerns research and development activities, especially production, focusing on new product development (NPD). Product innovation is linked to process innovation when the manufacturing and designing processes trigger breakthrough product innovation in which the use of innovative materials may also be a contributing factor. Different perspectives in the literature have addressed the decision-making behind strategic outsourcing involving innovation (or R&D) activities, including the organisational and control mechanisms firms employ to increase the productivity of outsourced R&D activities and protect intellectual property (Carson, 2007), the strategic and economic logics underlying their choices (Quinn, 2000; Narula, 1999), the contractual models used to manage the decision (Grossman and Helpman, 2005, 2003, 2002; Hagedoorn and Hesen, 2007), the issues related to technology transfer among the firms involved in the outsourcing (Amesse, Dragoste, Nollet and Ponce, 2001), and networks of learning (Powell et al., 1996; Powell, 1998; Pisano, 1991; Hagedoorn, 1993, 1995, 2000; Hagedoorn and Schakenraad, 1994).

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Until recently, firms generally preferred to carry out their innovation activities internally. Generally speaking, the reasons for this choice are as follows: 1. the strategic importance of innovation in long-term competitive advantage and growth; 2. the need to control core technologies and intellectual property to reduce the risk of losing the necessary competencies for innovation (Becker and Zirpoli, 2027) as far as possible and avoid knowledge and competence spill-over (Stanko and Olleros, 2013; Becerra et al., 2008); 3. the difficulties and high costs of coordinating the suppliers involved in innovation (Mikkola, 2003; Bertrand and Mol, 2013); 4. problems associated from sharing tacit knowledge, a critical factor in the collaborative relationships inherent in technological innovation (Mikkola, 2003; Bertrand and Mol, 2013; Martínez‐Noya and García‐Canal, 2016); 5. problems associated with arranging effective contracts and monitoring supplier performance. Over the last few years, the management approach to innovation has begun to change. NPD activities are increasingly being outsourced because they make it possible to reduce the costs and risks (i.e., through risksharing contracts) associated with innovation projects, giving (tacit and explicit) access to new and complementary resources, competencies, and knowledge held by suppliers. Outsourcing also shortens the time-to-market of product innovation; in other words, outsourcing innovation activities is a practical strategic option for high-intensive innovation industries. The following section explores the ways different theories of the firm explain the outsourcing of innovation.

2.2. Transaction Cost Economics Theory (TCET) In accordance with the central tenets of Transaction Cost Economics Theory (TCET), outsourcing NPD activities is appropriate under two circumstances. The first occurs when the cumulative development, production, and transaction costs of innovation activities are lower than for those carried out within the firm. The second is when outsourcing innovation activities to external suppliers represents little risk (poor quality, delays in time-to-market, knowledge spill-over, opportunistic behaviour). Concerning knowledge appropriation risks (Nakamura and Odagiri, 2005; Steensma and Corley, 2000; Veugelers and Cassiman, 1999), the literature on property rights (Love and Roper, 2005; Gooroochurn and Hanley, 2007) sustains that outsourcing NPD may be possible when the risk of exclusive knowledge being expropriated by partners (opportunistic behaviour) is low. TCET argues that a firm’s main competitive goal is to minimise the overall production and transaction governance costs when there is little differentiation among its competitors’ marketing offers. Companies, therefore,

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seek to gain a cost advantage over their direct competitors. The choices relating to the vertical borders of a firm’s value chain, and consequently its outsourcing choices, pursue this goal. In TCET, initially proposed by Coase (1937) and Commons (1931, 1934), later developed by Williamson (1981), the decision whether to keep the value chain’s activities internal or to outsource depends on three main transaction governance models, as follows. The market solution relies on external firms for the value chain. These firms manage transactions through the market-price mechanism. The hierarchy solution. In this case, hierarchical structure, routines, and organisational coordination mechanisms underpin the firm’s transactions. Recourse to the “internal market” for transactions, vertically integrating the value chain’s activities, gives a company autonomy in carrying out activities interconnected to its business (upstream or downstream vertical integration). The hybrid or intermediate solution concerns the relationship between the hierarchy and the market. This organisational form of the transaction can be defined as neither hierarchy- nor market-related as it combines elements of both solutions. There are several kinds of interfirm collaboration relationships or hybrid governance structures. These include mid-to-longterm contract equity (joint ventures, consortium, minority shareholdings), non-equity-based contracts (licence, subcontracting, distribution agreements, know-how, and technology exchange), or strategic alliances. Governance of these relationships makes it possible to bring together the advantages of both solutions while limiting the disadvantages of adopting either of them singly (Williamson, 1981). There is a direct relationship between “hierarchy” and keeping inside (or making), just as there is between outsourcing and “market” (or buy). TCET suggests that a firm’s value chain activities involved in outsourcing decision-making (making use of the market solution and market-price mechanism) are those where this kind of exchange governance reduces the total transaction and production costs compared with keeping decisionmaking internal (making use of internal resources and organisational coordination mechanisms). As we said previously, from the TCET point of view, production costs are either internal (when keeping production inside or using the organisation as a transaction governance mechanism) or the market price (when outsourcing or using the market as a transaction governance mechanism). On the other hand, governance costs arise from defining, managing, and controlling any exchange relationship. Transaction costs usually arise from involving the market. However, they are still incurred when a firm keeps exchanges and transactions inside or internalises them (exploiting hierar-

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chy). This is the case of costs relating to the design, organisation, and management of measurement systems for personnel performance (Arnold, 2000). The following activities entail transaction costs: 1. seeking, evaluating, and selecting supply partners; 2. negotiating and defining contract clauses; 3. monitoring supplier performance in accordance with contractual agreements; 4. reformulating contracts in order to consider new aspects/circumstances that could not be foreseen during the negotiation phase; 5. solving conflicts between buyers and suppliers; 6. moral hazard. There are two kinds of transaction costs (Williamson, 1995; Sobrero, 1999): ex ante transaction costs, including those indicated as 1) and 2) above, and ex post transaction costs, indicated above as 3), 4), 5), and 6). Moral hazard costs are usually ex post. The actors involved in the transaction during the negotiation phase highlight future opportunistic behaviours (Vining and Globerman, 1999; Klein et al., 1978), and only transaction costs 1) and 2) can be established during the negotiation phase, before the outsourcing relationship takes place. The other costs arise as soon as the transaction becomes a reality. From this distinction in governance costs, it is evident that outsourcing the decision-making process cannot be based on perfect prior knowledge (“bounded rationality”) of the possible effects in terms of costs. In fact, these decisions are reached in conditions of bounded rationality, so it is essential to have an idea of the likely effects of these conditions on the key elements of the exchange relationship and the behaviour of the players involved. This means that, according to consolidated behavioural theory (Simon and March, 1963; Simon, 1975), the decisionmaking process is limited by individual and collective capabilities, the information and knowledge available, and socio-organisational and political factors, as well as by the motivational influence of the incentives (Chalos and Sung, 1998). Therefore, the decision-making processes, like those regarding the firm’s value chain boundaries, follow a pathway involving several phases. The more efficient and effective solution is an experimental approach incorporating iterative learning to reach the proposed – and adopted – solution. The learning processes occur when the exchange relationship takes place to evaluate whether the scheduled objectives are effectively met. On the other hand, internal production costs come directly from the actual or opportunity costs of the resources needed to perform an activity. These costs are usually, and very precisely, calculated beforehand. Howev-

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er, they may be higher than the market price for several reasons. TCET argues that any decision to outsource has to take into account the structure and interaction of the transaction and production costs. Therefore, outsourcing is not always the right choice when market prices are lower than production costs because the higher transaction costs might increase the spread [production cost-buying market price]. In TCET, the factors influencing transaction costs and, therefore, decisions concerning the governance of transactions, belong to two categories. These are “human factors”, i.e., the behaviours of the economic actors involved in the transaction, and the “environmental factors”, i.e., the nature of the transactions and the environmental context in which they occur. As for the behaviour of the economic agents and individuals in general, TCET argues, economic agents make decisions under conditions of bounded rationality because of their information and/or cognitive limits; decision-makers pursue their own interests, assuming opportunistic behaviours (false promises, pretence, even threats). Human factors, being innate to the behaviour of individuals, are not entirely influenced by the choices about transaction governance structure. The environmental factors are the following: the uncertainty within which the transaction takes place among the economic actors involved; the frequency of the transactions or interactions among the actors; the investments in specific assets made by the actors involved in the transaction (idiosyncratic investments); the information asymmetries among the actors involved in the transaction, and the number of actors involved in the transaction. These factors influence the behaviours of the various actors (human factors). For example, the higher the uncertainty, the higher the cognitive and/or information gap among the economic actors involved and therefore the frequency and intensity of opportunistic behaviours. Therefore, the analysis of environmental factors is fundamental to calculating transaction costs, choosing the configuration of the “efficient boundaries” in the value chain, and the related risks in terms of performance (quality, time-tomarket, price, innovation, etc.). In short, TCET argues that it is advisable to outsource for a specific value chain activity than to keep inside or insource decision-making when this means reducing cumulative production and transaction costs and when the risks for performance are low. Outsourcing risks are low, so the transaction costs are also low under the conditions listed below. 1. Uncertainty around the transaction relationship is low. The complexity of the activity (difficulty in establishing the tasks and/or the actions to carry them out, such as setting performance targets) affects the level of uncer-

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tainty. This is affected by environment complexity (the level of dynamism of the external context), too. The higher the level of uncertainty surrounding transactions, the higher the ex ante governance costs (i.e., the difficulty in drawing up and monitoring contract clauses and increasing the information exchange between the actors during the negotiation phase) and ex post costs (i.e., renegotiating contract clauses in response to unpredictable changes in the external context or performance targets; managing conflicts arising from uncertainty; increasing the information exchange to handle unpredictable events). Uncertainty can increase production costs ex post (forecast errors regarding the use of internal resources and assets and their costs), and – ex ante – the difficulty of evaluating the fair value of the prices on the supply market correctly (the risk of paying higher prices than the intrinsic value of the products or services). 2. High transaction frequency. When investments in idiosyncratic resources are high, it is difficult to offload them (or recover them) if the frequency of the transactions is low. Therefore, to use resources that have not been adequately employed, the transaction frequency must be sufficiently high. This can be accomplished in two ways. If the resources are highly idiosyncratic, participating in a high supply share with the only (or the few) suppliers with whom an outsourcing relationship has been established, on the one hand. On the other, when investment in the transaction is very high (capital intensive), it may be helpful to diversify the supplier portfolio for similar transactions. Thus, it is possible to suitably exploit the investments that have been made and the capabilities employed. 3. Idiosyncratic investments (relation-specific assets) are low. In TCET (Williamson, 1985, 1989, 1991), an asset’s specificity (idiosyncrasy) and resources are the most critical element in the transaction. An asset or a resource is idiosyncratic when it cannot be used, or its potential use in transactions is limited, unlike those initially used. Thus, specific investments in activities or resources have no (or less) value when used for alternative transactions. When a transaction contract requires an economic agent to carry out investments in specific or idiosyncratic activities, other agents’ risks and opportunistic behaviour costs increase. The ex ante and ex post governance costs are higher (governance infrastructures hardly usable in other transaction relationships; specifically dedicated human resources; a high information flow sustaining the negotiation phase and managing the relationship). The buying price itself is higher (the suppliers cannot carry out the activity for other buyers and cannot reach the optimal minimum that would allow them to exploit all the economies of scale and obtain the

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lowest possible medium unit cost). Therefore, when transactions engage one of the high-investing agents in specific activities and resources, outsourcing or market solutions are not viable. In this case, a firm must keep the activities in-house, managing them according to their internal routines and organisational coordination mechanisms. 4. There are no information asymmetries, or they are less critical. Information asymmetries create a competitive advantage based on one of the agents involved in the transaction, having complete control of relevant information and knowledge. These asymmetries increase the costs of opportunistic behaviours by agents involved in the relationship benefitting from the information advantage. Information asymmetries arise from the uncertainty/complexity of the activity which the transaction is intended to fulfil. Complex activities require specific and qualified information and knowledge unavailable to both contracting parties in equal measure. These too arise from environmental uncertainty/complexity. So, for example, turbulent and hypercompetitive contexts require the availability, with adequate advance notice, of information regarding potential changes in environmental trends, which are not available in equal measure to the actors involved in the transactions. As previously mentioned, the costs arising from this moral hazard can be measured only if the transaction relationship actually exists (ex post). Over the last few decades, TCET has proved to be a valuable and fundamental theoretical basis for interpreting decision-making regarding the firm’s boundaries, namely which activities along the value chain to keep inside (make) and which to outsource to suppliers (buy). However, it also highlights several limitations to a deep and wide-ranging understanding of these decisions. Essentially, these limitations are embedded in the same theoretical assumptions of TCET, as follows. • The firm is viewed as a portfolio of contracts rather than a system of assets, resources, capabilities, and competencies to be continuously improved, innovated, and supplemented with the contribution of external actors. From this perspective, TCET cannot fully explain the connection between outsourcing decisions and the dynamic growth of a firm’s capabilities and knowledge portfolio. • TCET focuses on transactions as isolated rather than interdependent episodes (the unit of analysis is the individual transaction and not the system of transactions). It argues that there is no obligation to separate commitment or governance requirements in decisions regarding transaction governance structure (Mahnke, 2001). According to Argyres and Libeskind (1999, 2000), a company’s previous contractual obligations can limit future strategic transformations due to the in-

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terdependencies and imperfect detachment of transactions. Therefore, decisions about the governance of transactions – whether to keep them inside or outsource them – takes into account the duties of previous contractual commitments. Therefore, outsourcing might not be a viable option due to previous contractual duties (i.e., exclusive long-term agreements with suppliers or dealers, or contractual duties with employers), or various other obligations (i.e., an excellent reputation obtained thanks to internal activities or adverse effects on the employers’ motivation following the outsourcing of value chain activities). • TCET asserts the hypothesis of the bounded rationality of economic actors involved in a transaction; however, it does not entirely reject absolute rationality. This appears evident when TCET argues that, for any transaction, a firm chooses the governance structure that minimises cumulative production and transaction costs. • TCET supposes that all the switching costs arising from changes to the transactions’ governance structure (keeping in-house, outsourcing, and collaborative relationships) can be defined beforehand, i.e., during the negotiation and decision-making phase. This would appear to confirm acceptance of the hypothesis of the decision-makers’ absolute rationality. These costs are affected by the level of knowledge codification to be exchanged between the actors in order to perform and coordinate the shared activities. They are also influenced by how technological interfaces work to integrate the activities of the same actors and by situations of insufficient absorptive capacity (Cohen and Levinthal, 1990) caused by the cognitive distance of the actors (Noteboom, 2000). Only some of these costs can be foreseen and established before the relationship begins (ex ante). The majority of which emerge only once the outsourcing relationship is underway. • TCET does not take into sufficient account the horizontal interrelations or synergies among a firm’s different but connected activities and, consequently, the difficulty of separating them if this does not entail high costs. Horizontal interrelations work when several activities along the value chain share assets, resources, competencies, and knowledge. They are a huge source of a firm’s competitive advantage in terms of lower costs (superior efficiency) and/or higher differentiation (superior effectiveness) than when it cannot exploit synergic interrelations. Horizontal interrelations are tangible if they come from sharing tangible assets and resources (e.g., operations, design assets) and intangible if they are due to sharing intangible resources (i.e., brand equity), knowledge, and (technological and managerial)

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competencies. Horizontal interrelations give rise to connections and shared routines along the firm’s value chain; they are the result of the interactive, co-specialized, and partially tacit learning processes adopted by those within a firm. Existing horizontal interrelations among different activities limit outsourcing opportunities because they might weaken the foundations of a firm’s competitive advantage. • Although TCET takes hybrid governance solutions (between the market and the hierarchy) into account, it does not explore alternative strategies to reduce outsourcing risks when transactions require substantial specific (idiosyncratic) investments in strategically important activities. Relationships based on trust, mutual dependence, sharing specific investments, “mutual hostage” mechanisms, and reputation might reduce the risks and costs of exchange relationships among firms, even those hard to define ex ante. Scholars argue that TCET provides a valuable perspective from which to pursue the outsourcing decision-making process (Williamson, 2008; Cànez et al., 2000) even though there are several limits to complete understanding, especially when it comes to core activities along the value chain, as in the case of NPD. However, outsourcing decision-making involving NPD and/or R&D processes (Becker and Zirpoli, 2017; Hsuan and Mahnke, 2011; Stanko and Calantone, 2011; Ambos and Ambos, 2011; Quinn, 2000) also impacts on the extension and integration of internal resources, competences, and the knowledge base. According to some theories and innovative managerial experience, a firm’s internal resources are the main factors that generate value and competitive advantage. Resource-based Theory (RBT), based on the seminal ideas of Penrose (1959), represents a breakthrough compared with previous strategy studies. The latter emphasises a strategic perspective “from the outside in” (Teece et al., 1999), ascribing significant influence in formulating competitive strategy and connecting a firm’s advantage in to positioning in the industry (Porter, 1980) to environmental dynamics and business opportunities. On the other hand, in line with a strategic perspective “from the inside out”, RBT argues the prevalence of internal conditions – the endowment of organisational resources and competencies – to explain the sources of a firm’s competitive advantage. Over time, other epistemological theories and theoretical frameworks relating to the strategic field came to supplement RBT, sharing its central underlying tenets and assumptions. These include Competence-based Competition Theory (CBCT), leveraging firms’ architectural-component (Henderson and Clark, 1990) and core competencies (Prahalad and Hamel,

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1990). Strategic Asset Theory (SAT) underscores the strategic assets that create the firm’s competitive advantage (Amit and Schoemaker, 1993). Capability Theory (CT) highlights a firm’s core (Leonard-Barton, 1992) and dynamic capabilities (Teece et al., 1997). Knowledge-based Theory (KBT) prioritises individual and collective knowledge resources accumulated over time and embedded in the places where they are created (Kogut and Zander, 1992; Spender, 1996; Grant, 1991, 1996a, 1996b; Vicari, 1991). Network Theory (NT) and Supply Network Theory (SNT) also contribute to the general theoretical background. They emphasise the concept of network resources (Gulati, 1999) as external resources embedded in a firm’s network, able to leverage market opportunities and create value for the firm (Lavie, 2006).

2.3. Resource-Based Theory (RBT) Resource-Based Theory (RBT) has not directly addressed the issue of a firm’s boundary decisions and, consequently, those relating to outsourcing. However, it offers a theoretical background to explain some of the reasons underlying a firm’s outsourcing decisions. RBT pays close attention to a firm’s tangible and intangible assets to create value, develop, and maintain competitive advantage, creating barriers against competitors (Wernerfelt, 1984). From a holistic perspective, a bundle of resources owned by the firm (Barney, 1991) is a strategic asset when it is firm-specific and therefore cannot easily be separated from the company and brought onto the strategic resources supply market as it is the result of a resource accumulation process over time (Dierickx e Cool, 1989). Resources include the skills of the firm’s employees and managers, its operation and design equipment, and the collective skills of the organisation (Penrose, 1959). Sanchez et al. (1996: 8) define resources as “assets that are available and useful in detecting and responding to market opportunities or threats. Resources include capabilities, as well as other forms of useful and available assets”. These resources foster competitive advantage when they are durable, imperfectly transferable, and reproducible, and the firm can appropriate the rents earned from it (Grant, 1991: 123). Barney (1991: 5) argues that a resource provides a competitive advantage and sustainable performance when it is valuable, rare, imperfectly imitable and non-substitutable (the VRIN criterion mode). The more the firm is able to accumulate, replace, and renovate its unique resources, the more it will be able to create value and maintain its competitive advantage in business over time. Peteraf (1993: 180) argues that a firm nurtures competitive advantage when the four following condi-

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tions or “cornerstones” occur from the RBT perspective. 1. Resource heterogeneity (resource superiority). Thanks to this heterogeneity, some firms are able to carry out the activities of the value chain with a higher level of efficiency and effectiveness than others, earning Ricardian and monopoly rents. The former arise due to some firms being endowed with rare superior resources or assets that could not expand rapidly (the scarcity of resources supply causes low imitability). Thus, firms endowed with these kinds of scarce resources have lower leverage costs and, consequently, higher profits and returns. The latter, on the other hand, result from restricted output due to imperfectly imitable product differentiation (high intra-industry mobility barriers) or spatial monopoly (Peteraf, 1993: 181182). 2. Ex post limits to competition include the imperfect imitability and substitutability of the resources underlying the firm’s competitive advantage and the Ricardian and monopoly rents streams. “Isolating mechanisms” (Rumelt, 1984) protect competitive advantage in addition to ex ante limits to competition in order to prevent costs from offsetting the rents due to property rights, idiosyncrasy, firm-specific specialisation, switching cost, and co-specialization of resources, for example, in order to bind the rents to the firm. In rapidly changing environmental conditions (such as shifts in technology and customer needs) and faced with the overwhelming pressure to compete by relying on new product innovation, “Resource-Based Theory discusses outsourcing as a strategic decision to fill gaps between the firm’s NPD resources and the desired NPD resources” (Rundquist, 2008: 429). Thus, from the RBT perspective, outsourcing NPD activities permits access to partners’ assets (i.e., specialised production facilities, engineering activities, laboratories, testing and certification activities, patents) that are difficult if not impossible to imitate or transfer among firms otherwise. Internally creating resources for innovation that can fulfil the VRIN criteria (Barney, 1991) and build competitive advantage – meaning that they must be valuable, rare, difficult to imitate, and impossible to substitute – is costly and time-consuming. From the RBT perspective, therefore, outsourcing NPD activities stems from a firm’s need to expand and supplement its own resources portfolio so as to force competition dynamics (resource-based competition). Especially when these new resources are valuable, rare, imperfectly imitable and non-substitutable, a firm might be convinced to establish relationships with suppliers possessing them. As we shall see later, Boeing 787 outsourced NPD activities as a response to the need to access resources (design and manufacturing resources) available in Boeing’s supply network in order to meet the strict objectives of the product innovation project, especially in terms of time-to-market (three years, a very short time

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for the aeronautics industry), costs (highly competitive), and performance (disruptive for the industry).

2.4. Competence-Based Competition Theory (CBCT) This theory argues that the competitive advantage of the firm arises from its distinctive competencies endowment. “Competence is an ability to sustain the coordinated deployment of assets in a way that helps a firm to achieve its goals, where the meaning of ability is the power to do something” (Heene et al., 1996: 8). According to Heene et al. (1996: 7), competencies have a conceptually different meaning from capabilities. The latter are “repeatable patterns of action in the use of assets to create, produce, and/or offer products to a market. Because capabilities are intangible assets that determine the uses of tangible assets and other kinds of intangible assets, we recognize capabilities as important special capabilities of assets”. The term ‘assets’ is understood here as “anything tangible or intangible the firm can use in its process of creating, producing, and/or offering its products (goods or services) to a market […] capabilities are included within the term assets”. According to Prahalad and Hamel (1990: 79-91), “core competencies are the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies”. In effect, competencies are involved in all the activities along the value chain. As an integrated set of skills, a core competence has three main traits (Hamel, 1994: 13-16). 1. It enables a firm to create and deliver exceptional value for customers (“customer value”). 2. It is competitively unique, not ubiquitous, and superior to any other competence possessed by the competitors (“competitor differentiation”), and 3. It makes it possible to enter new markets (as a “gateway to a new market”). In addition, Hamel (1994: 16-18) identifies three types of core competencies. 1. Market-access competencies, or business-linking skills creating and managing close and collaborative relationships with customers and other business actors (i.e., brand management, sales and marketing, distribution and logistics, customer care, customer relationship management, supplier management, etc.). 2. Integrity-related competencies, which help enable a firm complete product and/or service-related activities more effectively and efficiently than competitors (i.e., quality management, operations management, design management, inventory management, etc.), and 3. Functionality-related competencies, which allow a company to produce and deliver products and/or services with distinctive features and exceptional value for its customers (business sensing, new product development management, etc.). In CBCT, since the competition aims to accumulate, substitute, and innovate

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dynamically distinctive competencies, outsourcing strategies might provide a way to access the external capabilities needed to be competitive. Through outsourcing, the firm puts in place mutual learning mechanisms with other business actors (learning interactions) together with coordination processes bringing together distinctive complementary capabilities that are imperfectly imitable and non-substitutable, except at very high costs and over a protracted timeframe. According to the tenets of CBCT, outsourcing product innovation activities should make it possible to access the stream of complementary, unique, and untradeable technological competencies of the NPD process that a single firm is not able, or has no wish, to keep in-house (Kristal et al., 2010; Azadegan et al., 2008). CBCT provides the best theoretical background for explaining NPD outsourcing decisions when product innovation changes the competencies-base underlying manufacturing, sub-assembling, and design activities (integrity-related competencies and functionality-related competencies), extending it outside the firm and involving supply partners, as the Boeing 787 programme highlights.

2.5. Strategic Assets Theory (SAT) Strategic Assets Theory (SAT) considers a firm’s strategic assets “as the set of difficult to trade and imitate, scarce, appropriable and specialised resources and capabilities that bestow the firm’s competitive advantage [….]. Examples of possible SA include technological capability, fast product development cycles, brand management, control of, or superior access to, distribution channels, a favourable cost structure, buyer-seller relationships, the firm’s installed user base, its R&D capability, the firm’s service organisation, its reputation and so forth” (Amit and Schoemaker, 1993: 36). Therefore, the firm’s capability to enter into effective relationships with suppliers is one of the key sources for building a competitive advantage. Strategic assets can generate and protect “organisational rents” if they have unique and superior characteristics matching current and future industry-specific “strategic industry factors” (or the critical success factors in the industry). Since strategic assets must co-evolve with the strategic industry factors, the supplier network – particularly in high-intensive innovation industries – is pivotal to the dynamic innovation of the firm’s competitive advantage.

2.6. Dynamic Capability Theory (DCT) Capabilities have a different meaning and role from resources and assets. “The manner in which a firm’s resources are coordinated and managed is

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at least as important to competitive success and survival as the identity of the resources themselves. Capabilities such as asset orchestration and market creation (or co-creation) are vital to profitable resource management” (Pitelis and Teece, 2010: 17). Capabilities arise in part from learning, from combining resources, and from exploiting complementary assets. Many capabilities become embedded in routines, and some are found in the top management team (Teece, 2019: 7). Indeed, the concepts of competence stated by Heene et al. (1996) and capability argued by Teece et al. (1997) and Teece again (2019) largely overlap. In this volume, we will use the two terms interchangeably. According to Teece (2019: 8), there are two distinct categories of organizational capabilities: “ordinary capabilities” and “dynamic capabilities.” The first are prevalently operational, while the second are strategic. “Ordinary capabilities, which encompass the operations, administration, and governance of the firm’s activities, allow the firm to produce and sell a defined (and static) set of products and services. Ordinary capabilities are embedded in some combination of (1) skilled personnel, including, under certain circumstances, independent contractors; (2) facilities and equipment; (3) processes and routines; and (4) the administrative coordination needed to get the job done. [….] Dynamic capabilities help enable an enterprise to profitably build and renew resources, reconfiguring them as needed to innovate and respond to (or bring about) changes in the market and in the business environment more generally (Pisano and Teece, 2007; Teece et al., 1997). They allow the enterprise and its top management to develop conjectures about the evolution of consumer preferences, business problems, and technology; validate and fine-tune them, and then act on them by realigning assets and activities. Strong dynamic capabilities support high performance based on new product (and process) development, a changeoriented organizational culture, and a prescient assessment of the business environment and technological opportunities. The corresponding managerial modes include asset orchestration, entrepreneurial agility, and forward-looking leadership. For applied purposes, dynamic capabilities can usefully be broken down into three primary clusters: (1) identification and assessment of threats, opportunities, and customer needs (sensing); (2) mobilization of resources to address fresh opportunities while capturing value from doing so (seizing); and (3) ongoing organizational renewal (transforming). Engagement in continuous or semi-continuous sensing, seizing, and transforming is essential if the firm is to sustain itself as customers, competitors, and technologies change (Teece, 2007)”. Eisenhart and Martin (2000) see dynamic capabilities as processes using resources to address change and business challenges. Dynamic capability

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thus means a firm’s capability to innovate or adapt its set of competencies to address changes to the environment or bring them about. In highly changeable, unstable, and unpredictable markets where the industries’ borders, the role of the business actors and the critical success factors are difficult to define (Eidsenhardt, 1989; Eisenhardt and Martin, 2000) where consolidated knowledge and competencies became obsolete in terms of competition, or rather, they become a disadvantage if firms continue to use them extensively (Argote, 1999; Eisenhardt and Martin, 2000; Teece, 2007). Dynamic capabilities have a role of greater competence (Winter, 2003); they are able to innovate value propositions (product, services, market targets, and profit model), the firm’s operating model (processes profitably delivering the value proposition), and create new specific knowledge and routines to be combined, of course, with some existing ones in order to address new competitive challenges (Eisenhardt and Martin, 2000). However, in moderately dynamic markets, where the change happens frequently but follows linear and predictable paths, exploiting codified knowledge (Nonaka, 1994; Eisenhardt, 1989; Zollo and Winter, 2002), dynamic capabilities trace the traditional concept of organisational routines. These are linear, predictable, and repetitive processes, depending on existing knowledge and execution modes (Eisenhardt and Martin, 2000), albeit with an incremental capacity for adaptation. Ultimately, a firm’s resources and competencies portfolio underlines the increasing obsolescence of processes due to changes to the environment in which it works. DCT thus recognizes a firm’s ability to modify, supplement, build, reconfigure, and renew the combination of internal and external firm-specific competencies in order to survive in hypercompetitive and fast-changing environments. This typically occurs when a firm needs to develop product innovation projects requiring a different combination of resources and competencies, and those of the supply partners could have an essential role in fulfilling this aim. Therefore, over time, the network of supplier relationships with capability holders might change in terms of the number and mix of the components in order to have real access to new competencies and knowledge and pursue new approaches to building competitive advantage. As we will see later on, the B787 was a challenging, innovative project for Boeing in which it dramatically changed the design and manufacturing paradigm of the industry. By doing so, Boeing brought about a revolutionary technological shift in which it addressed evolving customer needs, improving the value delivered to them (airline companies and passengers) and leapfrogging a strong direct competitor (Airbus). The project required a new combination of resources and capabilities, which, at that time, meant bringing onboard the best-in-class suppliers under the close coordination of Boeing management.

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2.7. Knowledge-Based Theory (KBT) Knowledge-based Theory (KBT) envisages the firm as a portfolio of individual and collective knowledge resources. Knowledge fosters the capabilities, and the capabilities foster the activities or processes along the value chain, creating value for customers through the firm’s products and/or services. In the KBT theoretical framework, outsourcing relationships with specialised suppliers extend and integrate the technological and organisational knowledge base. KBT best explains outsourcing a firm’s NPD activities when product innovation satisfies new customer needs and the product and process technology change radically. So, it is necessary to revolutionise the knowledge base underlying activities and processes. In other words, the firm accesses the complementary knowledge available to external actors in the business system by creating knowledge links (Badaracco, 1991) or knowledge networks. The ability to combine (Kogut and Zander, 1992) and absorb (Cohen and Levinthal, 1990) are two leading mechanisms (meta-capabilities) for learning, absorbing, exploring and exploiting new knowledge. Absorptive capability is the “ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (Cohen and Levinthal, 1990: 128). In line with the “knowledge conversion” model proposed by Nonaka and Takeuchi (1995: 62 and following), in the high-intensive innovation industries, NPD is a complex long-term process managed by several cross-functional teams, mostly involving external business partners such as strategic suppliers and key-customers as co-design partners (Becker and Zirpoli, 2017). Interaction between tacit and explicit knowledge occurs during the various stages of the innovation process and in the crossfunctional teams involved in the co-design activities. In the first stage, the tacit knowledge, skills, and mental models are “socialised” and “embedded” in the cross-functional development team (conversion from tacit to explicit knowledge) by sharing and combining individual experiences, creating new perspectives and other tacit “sympathised knowledge”. The socialisation of knowledge is necessary when new product development projects are carried out in collaboration with other firms (suppliers, key business clients, competitors). In the second stage, knowledge is “externalised”, that is, it becomes “explicit, taking the shapes of metaphors, analogies, concepts, hypothesis, or models” (Nonaka and Takeuchi, 1995: 64) through communication. This concept-creation process results from collective reflection by the innovation team members, combining shared deductive and inductive reasoning (from implicit to explicit knowledge

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conversion). In this creative process, the team leaders have a key role in revealing the tacit knowledge held by the innovation team and transforming it into a clear concept through metaphors and/or analogies. Externalization thus creates explicit new “conceptualised knowledge” from tacit knowledge. The third stage is the “combination” of different concepts or explicit knowledge that came to light during “externalisation”. Systemizing existing and explicit knowledge by the team members using collective and individual information exchanges creates explicit new “systemic knowledge” (from explicit to explicit knowledge conversion). The team members can use different modes to create systemic knowledge, such as discussion with other members of their own organization, databases, formal and informal knowledge networks, online repositories, or meetings. In this phase, new knowledge is created in the form of new productservice prototypes or new operation technologies. The fourth and last stage is the “internalisation” of explicit knowledge into tacit knowledge (from explicit to implicit knowledge conversion), cross-fertilizing, and reexperiencing the tacit mental model of most of the members of the organisation. “Internalization is a process of embodying explicit knowledge into tacit knowledge. It is closely related to ‘learning by doing’ and creates, therefore, operational knowledge. For explicit knowledge to become tacit, it helps if it is recorded or diagrammed in documents, manuals, or oral stories. Operational knowledge makes it possible to design, produce and/or sell new products, and manage new process technologies implementing the innovation. Documentation helps individuals to internalize what they experienced, thus enriching tacit knowledge. In addition, documents or manuals facilitate the transfer of explicit knowledge to other people, thereby helping them experience the experiences of others indirectly” (Nonaka and Takeuchi, 1995: 69). Ultimately, the process of internalisation can lead in time to tacit knowledge becoming part of a firm’s organizational culture. This new tacit knowledge can be “socialised” within an organization and/or with business partners, restarting the “spiral of knowledge creation”. Lastly, the stages of “socialization” and “externalisation” of knowledge occur strictly inside, among the interfunctional team (group level), stimulated by the team leaders. “Combination”, instead, is triggered via an outside-in approach, that is, the members of the team solicit and integrate knowledge embedded in other departments of the organisation (the organization level) and the business partners (the inter-organisation level) involved in the innovation project. Lastly, the “internalisation” stage involves three knowledge levels: individual, organisational, and inter-organisational.

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2.8. Open Innovation Theory (OIT) Chesbrough (2003a) argued that firms have shifted from a closed innovation process (Chesbrough, 2003b) towards an open approach to innovating because the latter approach makes it possible to overcome several limitations of the former (Chesbrough, 2003, 2004; Chesbrough et al., 2006; Lichtentahler, 2009; Chesbrough and Crowther, 2006), developing innovation projects, adding to and relying on the ideas and capabilities of other organisations. As Chesbrough (2006) and Henkel (2006) state, the stream of knowledge and capabilities is bidirectional, outside-in and inside-out. The former makes it possible to accelerate a firm’s innovation process, leveraging the external innovation capabilities possessed by other actors (suppliers, lead users, competitors, distributors, other organisations); the latter, instead, makes it possible to exploit underperformed knowledge and technologies, making sure that they can be used better by existing firms or new enterprises (start-ups, spin-offs) on the market. In particular, most of the ideas, knowledge, capabilities, and resources strategic to new product development projects are outside the firms in high-intensive innovation industries. For instance, suppliers play an increasingly important role in the product innovation process in terms of ideas, technologies, processes, and capabilities. Through cooperation with suppliers, a firm can improve the efficiency and effectiveness of the innovation process and, therefore, the value created for customers and itself. As Chesbrough (2003a) suggests, open innovation can involve all three stages of the innovation process: front-end innovation, observing and leveraging external sources (suppliers, customers, non-customers, start-ups, creative talents, inventors) to explore new solutions and/or new market needs; idea-generation and development, using technologies, patents, IPs, resources, the capabilities of external actors; as well as the commercialization of innovation on the market involving external channels (out-licencing, spin-off ventures, and so forth), together with internal ones. The Boeing 787 case study illustrates an open approach to innovation with prime suppliers’ intensive and strategic collaboration (tier-1 suppliers) during the front-end stage and the idea-generation and development phases. In fact, for the front-end innovation stage, Boeing involved the leading worldwide airline companies as a means of understanding how best to satisfy customer needs.

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2.9. Network Theory (NT) and Supply-Chain Network Theory (SCNT) In Network Theory (NT) and the related Supply-Chain Network Theory (SCNT), a firm’s superior performance and competitive advantage (for instance, its product innovation advantage) might be heavily influenced by its business network or “strategic network” (Gulati et al., 2000; Dyear and Singh, 1998; Häkansson, 1987) and business relationships among partners. Both NT and SNT argue that a firm’s superior performance and competitive advantage may be strongly influenced by its inter-firm ties or its strategic network (Gulati et al., 2000; Dyer and Singh, 1998; Häkansson, 1987). Gulati (1999) defines the strategic network as “valuable knowledge acquired through the network” (Dyer and Hatch, 2006: 702). Therefore, a firm participating in a strategic network can have access to “network resources” that will be useful for creating superior performance (for example, product innovation advantage) but which cannot be generated by the firm itself (Dyer and Hatch, 2006; Dyer and Nobeoka, 2000; Tsai, 2001). Networks, working as an operational pattern of relationships among firms are (1) an alternative to markets and hierarchies (Powell, 1990); they are (2) the locus of innovation in high-technology industries (Powell et. al., 1996; Ahuja, 2000; Owen-Smith et. al., 2002; Pittaway et al., 2004) as they form the shape and the diffusion of technologies (Rogers, 1962) and organizational practices (Davis and Pett, 2002); they accelerate (3) product-tomarket (Almeida and Kogut, 1999); they act (4) as a key vehicle for obtaining access to external knowledge (Cooke et al., 1996; Powell et al., 1996; Kogut, 2000); they create (5) trust and increase forbearance (Piore and Sabel, 1984; Uzzi, 1997); they inspire (6) conformity of thought and action (Galaskiewicz, 1991; Mizruchi, 1992); they create (7) interactive relationships between selling and buying firms (Häkansson, 1982; Häkansson and Snehota, 1989, 1995; Dwyer and Schurr, 1987); they develop (8) a collaborative advantage (Schilling and Phelps, 2007; Hansen and Nohria, 2004; Dyer and Singh, 1998; Dyer, 2000; Cao and Zhang, 2011), and learning alliances (Doz and Hamel, 1998; Khanna and Anand, 2000); they are (9) the locus of value co-production (Norman and Ramirez, 1993) and value cocreation (Lush and Vargo, 2004, 2006; Chatain, 2010; Swaminathan and Moorman, 2009; Dobrzykowski et al., 2010), where the rigid distinction between customers and suppliers (or buyers and sellers) is superseded (Vargo and Lusch, 2011, adopt an actor-to-actor terminology). Integrating the supplier network within the NPD process is recognized as one of the factors leading to frame-breaking innovation (Romijin and

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Albu, 2002; Kaufmann and Tödtling, 2001; Ragatz et al., 1997; Ritter and Gemünden, 2003), thanks to its massive impact on the relative competitive position of buying firms. In fact, suppliers can permit product success (Gemünden et al., 1992, 1996), access to specific technology, knowledge and expertise in the long-term (Cooke, 1996, Powell et al., 1996), accelerating time-to-market (Almeida and Kogut, 1999), improving quality, productivity, and lead time performance (Clark and Fujimoto, 1991; Quesada et al., 2006; Cao and Zhang, 2011; McIvor and McHugh, 2000), reducing costs and risk (Grandori and Soda, 1995). NT, in turn, is based on other theories, as we will see below. The first of these is the Resources Dependence Theory (Thompson, 1967; Pfeffer and Salancik, 1978; Alter and Hage, 1993); according to this, firms constitute collaborative and coordinated relationships with other organisations to control environmental uncertainty. Another is Exchange or Market Power Theory; here, firms set up collaborative relationships with other firms to gain access to resources unavailable internally or to control the use of capabilities owned by these organisations thanks to the scope of their power and/or influence (Evan, 1966; Pfeffer and Salancik, 1978). According to Reciprocity Theory (Larson, 1992; Das and Teng, 1998; Haugland, 1999), firms build networked relationships with other organizations to earn more rents and to create and sustain their competitive advantage (Lavie, 2006). Then there is Economic Inefficiency Theory, whereby firms constitute collaborative inter-firm relationships so as to increase operating effectiveness and reduce transaction costs (Williamson, 1975; Davis, 1991; Turati, 1990; Teece, 1980). In Resource Pooling Theory, firms have collaborative relationships with other firms to gain continuous access to complementary knowledge from other organisations or share the risks of innovative business projects (Harrigan, 1985). According to Institutional Theory, firms set up collaborative relationships to obtain authorizations and comply with rules, including those of government and control organisations (Whetten,1981; Leblebic and Salancik, 1982; Stern, 1981), which increases their legitimacy and reputation with the institutions (Di Maggio, 1988; Meyer and Rowan, 1977). Networks are kinds of “hybrid organizational arrangements” (Powell, 1990, 1987; Bartlett and Ghoshal, 1989) representing power and trusted relationships through which organizations can exchange otherwise unavailable resources, cooperating to leverage reciprocal advantages (Borys and Jemison, 1989; Ebers, 1997). Organisations set up a variety of cooperative relationships with different aims and a variety of actors (i.e., suppliers, competitors, customers, local communities, business communities, Universities and Research Centres) that make up their relational ecosystem. In an

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institutional network comprising of legally distinct but profit-connected organisations, the allocation and control of resources come about differently compared with the consolidated mechanisms of the “market” (bargaining over prices) and the “hierarchy” (authority relations) because they are based on stable cooperation, reciprocity, negotiation, trust and reputation (Grandori and Soda, 1995). Granovetter (1985) argues that networked practices are embedded in the context of the social or interpersonal relationships within the network. Despite its underlying collaborative logic, the network does not eliminate competitive, opportunistic and authoritarian behaviours. In NT/SNT, integrating the supplier network into the NPD process is one factor that drives frame-breaking innovation (Ragatz et al., 1997). Time-to-market acceleration, raising quality, productivity and operational performance (Cao and Zhang, 2011), together with cost and risk reduction, might represent further valuable benefits. Both NT and SNT are theoretical frameworks explaining the outsourcing of NPD activities when business relationships are essential for codeveloping “relationship value” (where the benefits exceed the costs of the relationship). They improve internal resources and/or competencies and/or develop new ones, providing access to and exploiting the external, complementary resources and competencies available inside the supplier network. Many previous studies address the issue of Supply Chain Management (SCM) and its definition (LeMay et al., 2017; Lummus and Vokurka, 1999; Mentzer et al., 2001; Stock and Boyer, 2009). Stock and Boyer (2009) compiled 173 SCM definitions in the literature and suggested the following: “The management of a network of relationships within a firm and between interdependent organizations and business units consisting of material suppliers, purchasing, production facilities, logistics, marketing, and related systems that facilitate the forward and reverse flow of materials, services, finances and information from the original producer to the final customer with the benefits of adding value, maximizing profitability through efficiencies, and achieving customer satisfaction” (Stock and Boyer, 2009: 706). As a result of the attention to “network relationships” in Stock and Boyer’s definition, we believe that their approach is robust and suitable for understanding the complexities created by the various relationships in the product/service production process. However, their definition encapsulates neither the complexities of digital age transformation nor the disruption caused in the SCM. The following sections discuss the issue and suggest some ideas to improve SCM digitalization awareness in a “smooth way”, based on the Digital Supply Chain approach.

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In terms of outsourcing decision-making, the resource-based theories of the firm and the recommendations of the transaction cost theory could be more closely interwoven. The reasoning behind TCET rests on a cost-based and short-term perspective. The approach adopted by the resources-based theories, on the other hand, attaches great importance to a long-term strategic perspective. Drawing these different theoretical views together would make it possible to build an interpretive model of outsourcing decisionmaking, broadening the variety and strategic importance of evaluative dimensions and thus framing the outsourcing decision-making in the broader strategic management process of the firm. Lastly, the fusion of the various theoretical perspectives just examined (TCET, RBT, CBCT, DCT, KBT, NT/SNT) could help to clarify whether outsourcing decisions and the outsourcing relationships set up by a firm in its business system might seek to pursue a holistic set of objectives, as listed here. 1. Reducing the cumulative production and transaction costs as a solution to keep the activities in-house; 2. reducing fixed costs and therefore industrial and financial risk. The former would be due to the lower fixed costs and variable costs rate. The latter would be due to the lower debt/equity ratio and, consequently, the lower debt cost; 3. improving strategic and operational flexibility; 4. focusing investments on the value chain activities constituting the firm’s core competencies; 5. absorbing new competencies through collaborative relationships with suppliers (a competencelearning strategy), and 6. developing new competencies through collaborative relationships with suppliers (competence-building strategy). Some approaches in the literature have integrated both TCET and RBT (Stanko and Calantone, 2011; McIvor 2009, Holcomb and Hitt, 2007; Poppo and Zenger, 1998) like other resources theories (Arnold, 2000; Becker and Zirpoli, 2017) in order to explain the decision-making of strategic outsourcing, in particular outsourcing new product innovation activities. Therefore, the existing literature lacks a well-grounded approach allowing analysis of outsourcing decisions in relation to NPD activities from the perspective of all the theoretical paradigms discussed above, considered as a whole. The decision-making model for outsourcing NPD activities proposed in this book (Chapter 5) incorporates a multiple and integrated set of dimensions rooted in the assumptions of all the above-mentioned theories.

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Chapter 3

A REVIEW OF EXISTING MODELS IN THE STRATEGIC OUTSOURCING LITERATURE SUMMARY: 3.1. Outsourcing decision-making and types of outsourcing. – 3.2. Kraljic’s portfolio-purchasing model. – 3.3. Quinn’s model. – 3.4. Baden-Fuller et al. model. – 3.5. Sislian and Satir’s model. – 3.6. McIvor’s model. – 3.7. Becker and Zirpoli’s model.

3.1. Outsourcing decision-making and types of outsourcing Decision-making involves analysing a finite set of alternatives described in terms of evaluative criteria. It helps to rank alternatives and/or select the best when all the criteria are considered simultaneously, together with their inter-related influences (Triantaphyllou and Evangelos, 2000). Therefore, a decision-making model has two distinctive characteristics: 1. it considers multiple evaluative criteria influencing the decision, and 2. these criteria are arranged as an integrated and interrelated set of factors to be considered at the same time in order to exploit their reciprocal influences on the decision. In general, the outsourcing decision-making process might be analysed from two main angles, in terms of, 1. the kind of outsourcing, namely the decisional approach underlying it and, as a consequence, the kind of activities involved in the decision-making, and 2. the decision-making process, i.e., the set of phases involved in it. Regarding the first aspect, the approach to outsourcing decision-making might be said to fall into two types: strategic and non-strategic outsourcing. Strategic outsourcing occurs when the underlying decisions are part of the broader process of a firm’s strategic management. Thus, it significantly affects its current and future resource portfolio and competitive advantage. It can bring about considerable changes to a firm’s strategic assets portfolio (assets, resources, competencies, knowledge), paving the way for new opportunities for future growth. In addition, strategic outsourcing naturally involves activities along the value chain with high strategic importance in terms of value creation, development, and maintaining a firm’s competitive advantage in the market. Therefore, the impact of strategic outsourcing decision-making can be seen, in terms of the firm’s results and value chain configuration, in the mid-to-long term. Instead, non-strategic outsourcing decision-making does not involve activities strategically relevant to the

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firm’s value chain, nor does it enhance and supplement its strategic assets. And it does not strengthen the firm’s current and future competitive potential or pursue short-time objectives. Effectively, this kind of outsourcing only leads to reconfiguring the firm’s value chain boundaries as far as some operational activities based on evaluations of costs and/or more efficient use of current assets are concerned. The second aspect – the decision-making process – can be broken down into the following decisions (Figure 1): which activities to outsource; the form of outsourcing governance (internal sourcing, using SBUs from the same company versus external sourcing); the decision-making model to use, i.e., evaluating the set of dimensions that will affect the decision to outsource activities or keep them in-house; supplier selection, and defining the suppliers’ contractual responsibilities. In the following, we briefly describe the main decisions. The choice of activities to outsource along the value chain is one of the most important decisions a firm can make. Firstly, an activity might have various implications depending on its breadth. It may be a single microactivity (e.g., delivering products or manufacturing single part numbers), a macro-activity, i.e., a set of technologically and functionally homogenous micro-activities involving a whole activity in the value chain (i.e., inbound/outbound logistics, the subassembly of main product components, the manufacturing or assembly of products, new product development, design, IT, hiring and training, marketing, and so on). Otherwise, it might be a process, a set of macro-activities linked by input-output relations (i.e., integrated logistics, marketing-sales-customer service, the design and production of a main component or a product or product range), or else an interfirm process (i.e., supply chain management).

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Figure 1. – The outsourcing decision-making process.

Firm’s resources and competencies

Competitive strategy and business model

Effect on change of firm’s resources and competencies base

Outsourcing decision

Monitoring

Comparative assessment of the firm’s and suppliers’ competencies

Management and monitoring of outsourcing relationships

Effect on costs and performance

Outsourcing in practice

Negotiation and supply contract

Supplier selection

• How does the firm’s value chain change? • How does the firm’s supply chain change? • What does the competencies base of the firm access? • How does the competencies base of the firm improve?

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Source: Author’s own.

Evaluation of the strategic effect

• What decision-making model is used? • What type of outsourcing is adopted?

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Competitive environment

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The activities along the value chain (macro-activities) can be aggregated into three main blocks (Hagel and Singer, 1999). The first is customer centred (i.e., Marketing, Sales, Customer service), focusing on acquiring, retaining, developing the customer base, and customer relationships management. Customer-centric culture lies at the core of these kinds of activities. Innovation-based activities (i.e., R&D), on the other hand, focus on product innovation, service and/or process. These activities pursue competitive innovation in a broader sense; they involve products, services, organization and processes, contributing to strengthening a firm’s competitive advantage in terms of differentiation and/or costs. These activities focus on “internal customers”, adopting organisational structures based on adhocracy and spreading a start-up mentality within the firm, leading to constructive disruption in innovation building. Finally, infrastructurebased innovation aims to manage operational systems (i.e., manufacturing, logistics, IT). Here, process-standardisation, operational efficiency, and exploitation of economies of experience and scale create the competitive advantage these activities bring. From the point of view of the strategic importance of these activities as ways of creating a competitive advantage for the firm, we might recognize four categories (Arnold, 2000: 24): “Core activities”, namely strategic or distinctive activities where the unique competencies of the firm, necessary to create and maintain the competitive advantage, are embedded. These activities can be described as the most likely to grow because their future growth depends on them. Then, there are the “Core-close activities” – also called “core-related” (Brown et al., 2002), connected to core activities by their close functional interrelations and thus difficult to separate from them, except with a substantial risk of spill-over. Third, there are the “Core-distinct activities” which support the core activities in the value chain, albeit without close connections (i.e., Logistics, IT). The last category is that of the “Disposable activities” or general activities; these are not closely interrelated, either directly or indirectly, to core activities along the value chain (i.e., security, cleaning, the canteen, conservation of green spaces services). According to the literature and managerial practice, the most suitable activities for outsourcing are the core-distinctive and disposable activities. Conversely, core and core-close activities are best kept inside the firm or insourced. This reduces the risk of spill-over in terms of the distinctive competencies and knowledge that nourish a firm’s competitive advantage. As for outsourcing the decision-making process, we need to understand the firm’s core competencies and in which core activities they are embed-

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ded. The critical question is, therefore, “what is a core competence or core activity?” For Hamel (1994: 11-16) and Quinn and Hilmer (1994), a core competence has the following characteristics: 1. it is the integration of a bundle of skills and knowledge permitting the firm to build its current and future competitive advantage in the market. The core competencies are embedded in the activities of the value chain (manufacturing, marketing, logistics, customer service, etc.); they might be technology-related (e.g., product technology, quality control, software production programming) or non-technology-related (e.g., the skills of a salesperson in customer relationships, skills in market segmentation and discovering new needs). Furthermore, there are only a limited number of core competencies; 2. they create customer value, so they are essential to satisfying customer needs; 3. they are unique and superior to those of the competitors (“competitor differentiation”); 4. they represent a robust platform for process-productservice-market future innovations (a “gateway to new markets”); 5. they have high resilience, so they can co-evolve with current and expected changes in the competitive ecosystem; 6. they are embedded in the firm’s organisational routines. Following the previously outlined segmentation of the value chain’s macro-activities, the core competencies might be further broken down into three broad types: “customer-centric competencies” (e.g., customer relationship management, brand management, sales and marketing, customer care, customer knowledge management); “innovation-centric competencies” (e.g., new product-service development, new process development); “infrastructure-centric competencies” (i.e., skills guaranteeing high levels of flexibility, reliability, efficiency and effectiveness, superior product quality, time-to-market, inventory and delivery time, and core co-operating processes to build competitive advantage). As for the types of outsourcing, we can distinguish between two broad categories: internal and external outsourcing (Arnold, 2000). Internal outsourcing entails organising the firm into business units under central but strategically and economically autonomous control (profit centres). These business units serve the internal market (internal supplier) according to a vertical integration rationale. However, when the capabilities available are greater than the internal requirements, and there are no further obligations, they can serve external customers, too. Of course, when they are insufficient, the firm buys what it needs from the suppliers. According to transaction-cost economy theory, internal outsourcing is a hybrid transaction-governance structure where the market and the hierarchy coexist. This kind of outsourcing might be implemented when one or more of the following conditions occur: 1. the activities to be outsourced

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require highly specific supplier investment that is not sustainable or feasible for them; 2. the activities involved have a strategic role in competitive advantage, and the firm has an interest in maintaining robust control; 3. the activities involved have close functional and cost interrelationships with core activities. It is therefore risky (quality, time-to-market, performance) and expensive to outsource them; 4. the activities involved will become particularly important for gaining a competitive advantage in the future, so the firm has a genuine interest in investing in skills and competencies relating to those activities. External outsourcing, on the other hand, entails the involvement of independent supply partners. This kind of outsourcing is feasible when one or more of the following conditions occur: 1. the activities to be outsourced are non-core, so they are not strategically relevant to the firm’s competitive advantage, and it therefore lacks the necessary competence to perform them; at the same time, it has no interested in acquiring them internally. 2. the activities involved have high strategic value in terms of the firm’s competitive advantage, but the necessary competencies are protected by ex post limits to competition and/or are imperfectly imitable. 3. the firm promises to absorb core competencies from leading supply partners in a specific field of competencies, or it has lost the leadership (learning outsourcing). When decision-makers have to undertake outsourcing decisions regarding NPD activities, they face two crucial questions (Cantone et al., 2018; Cantone and Testa, 2012). Firstly, what are the circumstances in which it is vital to outsource? Additionally, when would outsourcing be a useful option? Secondly, what kind of activities can be outsourced? Regarding the first issue, the literature provides several valuable contributions that might explain why some firms outsource the core business activities along the value chain. Leading articles and volumes have already provided multicriteria decision-making frameworks to identify and implement outsourcing decisions. They tend to be one of three main kinds: 1. multi-criteria and integrated decision-making models for outsourcing business activities that can be loosely defined as ‘strategic’ or ‘core’; 2. multi-criteria and integrated decision-making models for outsourcing innovation activities (NPD or R&D activities); 3. multi-criteria models identifying and evaluating antecedents that – as independent and not inter-related factors – influence outsourcing decisions. In the next section, we briefly discuss some of the frameworks that come closest to the aims of this book.

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3.2. Kraljic’s portfolio-purchasing model A seminal and practical framework well-known in the literature and widespread in worldwide managerial practice is Kraljic’s Portfolio Purchasing Model (Kraljic, 1983). The rationale behind this framework is to optimise the management of a firm’s whole purchasing portfolio. Kraljic was one of the first authors to emphasise the strategic role of purchasing and the need to manage purchasing from a supply management perspective. This model aims to identify differentiated supply strategies to optimise supply management, looking at four different types of purchases (raw materials, components, products, services). The strategic decision-making process in Kraljic’s model envisages four phases: purchase classification, market analysis, strategic positioning, and action planning. The first phase, “purchase classification”, is carried out according to two variables. The first is the “strategic importance of supplying”, i.e., potential “profit impact” (the grading criteria are, for example, a percentage share of the total amount of a firm’s purchases, the added value profile, the profitability profile, and so on). Therefore, profit impact is high when an item is an essential or strategic component of the firm’s output in terms of cost, added value, differentiation, and/or profit margin. If this is not the case, it is low. The second variable is the “complexity of the supply market”, i.e., the “supply risk” (such as the availability of supplies over time, the number of qualified alternative suppliers, the bargaining power of the suppliers, the pace of technological advancement, government instability, potential natural disasters, logistics costs and complexity, and so on). Therefore, the supply risk is high when the number of qualified suppliers of the purchased item is low, and the continuity of supplies is adversely affected, for example, by logistic difficulties, and/or a limited number of suppliers, and/or environmental and geopolitical risks in the supply market country. As shown in Kraljic’s purchasing requirements classification, there are four categories of purchased items, each one with a different recommended purchasing strategy. “Strategic items” (of high strategic importance/profit impact, high complexity supply market/supply risk) require supply chain managers’ keen attention. According to the general managerial approach, these items should be made in-house rather than being outsourced. However, if a firm can analyse and manage the risk, the items could be outsourced to any available and competent suppliers. The decision is geared to developing and maintaining long-term supply partnerships with single or dual consolidated suppliers (single/dual sourcing strategy), planning for

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contingencies and maintaining the capability to produce the item in-house if necessary. As for “leverage items” (high strategic importance/profit impact, low complexity supply market/supply risk), instead, the aim is to optimise purchasing flows, the total purchase cost, and supplier performance (quality, price, delivery time). It might therefore be helpful to establish medium-long term partnerships with a few suppliers (parallel/dual sourcing strategy) with whom to create a performance plan based on the key indicators in the outsourcing relationship. Outsourcing “bottleneck items” (of low strategic importance/profit impact, highly complex market/supply risk) requires a sole or dual sourcing strategy or one of vertical integration in order to ensure the continuity of supply flows, closely controlling suppliers, lead times, as well as arranging contingency plans to address the highrisk levels on the supply market. To this end, it might be helpful to establish agreements regarding supplier control (i.e., long-term contracts, investments in shares, exclusive licencing, etc.); alternatively, it might be advisable to leverage bargaining power, placing over-orders when the item is available. Lastly, the aim of outsourcing “non-critical items” (of low strategic importance/profit impact, low complexity market/supply risk) is to optimise order volume, inventory level, and total costs (purchasing price and transaction costs), leveraging market conditions and the firm’s bargaining power. Since the availability of the products and suppliers in the market is high, a firm may be able to exploit a multiple sourcing strategy, as well as to make spot purchases if a particular supplier offers a good deal. Strategic, bottleneck and leverage purchases require medium-long outsourcing relationships, as well closer collaboration with the suppliers. The second phase, “supply market analysis”, compares suppliers’ bargaining power with that of the buyers. The third phase is “strategic positioning”, arranging each of the four categories of purchased items described previously. In the seminal model, strategic positioning mainly regarded strategic items, but in the latest applications, it involves all four categories in Krajilic’s matrix. The three general purchasing strategies identified by Krajilic and applied to supply-category strategic items are the following. First, “exploitation”, reducing supply risk by using high buying power to attain continuity of supply flows, best prices, safe inventory levels, delivery time, and long-term contracts from different suppliers. The second is “diversification”, reducing supply risk by having alternative suppliers or using alternative items. The third category is “balance”, pursuing a purchasing strategy mitigating exploitation and the diversification approach mentioned above. The three generic purchasing strategies involve several decisions regarding, for example, price, order vol-

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ume, new suppliers and/or substitute products, inventories, and internal production capacity in order to address a temporary supply shortage. The fourth phase regards medium-long-term action plans for the execution of the purchasing strategies formulated in phase 3 in order to secure the supply flows and/or reduce the supply risk regarding strategic items, leverage, and bottleneck purchases. The reasoning behind the fourth phase may be the starting point for questioning the classification of outsourcing relationships. In the consolidated literature (Cantone, 1994, 1996, 2003; De Maio and Maggiore, 1992; Merli, 1990), outsourcing relationships might also be classified according to two strategic dimensions (Figure 2): the “time horizon of the relationship” (short, medium, or long-term), and the “scope of the relationship” (restricted, medium, broad). The latter considers the kind and the number of factors governing the outsourcing relationship between firms and suppliers and may be restricted, medium, or broad. The more restricted the relationship’s scope, meaning that the outsourcing relationship involves negotiating purchasing conditions and supplier performance (price, delivery time, quality variance, and so on), the more the firm-supplier relationship shapes up to be a set of short-term and independent market transactions (transaction-based outsourcing). Generally, this outsourcing relationship should prevalently concern specific noncritical materials. Once the quality targets have been specified, the main factor to consider in evaluating and selecting the suppliers is the overall cost of the supply (the sum of the buying and interaction costs). Therefore, if performance is of equal quality, the suppliers with the lowest overall supply cost should be favoured and selected. For any outsourced product/activity, a firm should have multiple suppliers to reduce dependency or strategic vulnerability, and there should be price competition among them. Outsourcing relationships are chiefly short-term (within 12 months) and based on bargaining power. Conversely, the more the relationship looks to the medium-long-term, the more it will tend to become a partnership-based association (partnership-based outsourcing). Generally, this outsourcing relationship involves high-value products/activities (strategic and leverage bottleneck items according to the Kraljic model), exploiting the interrelatedness between the operating, organisational, and managerial systems of a firm and its suppliers in order to increase the efficiency and effectiveness of the activities. The broad scope of the relationship means that outsourcing involves products or activities of high strategic importance – such as manufacturing and/or designing parts, sub-assemblies, or end products – and if appropriate, sup-

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pliers will be engaged in developing the new product from the earliest stage (co-design). They will also share in the business investment risk. In this case, then, the interests of the firm and its suppliers converge, involving strategic choices based on trust, reciprocity, long-term vision, and value cocreation. The strategic partnership is the most advanced form of the outsourcing relationship, involving the following distinctive characteristics: 1. a long-term vision (3-5 years); 2. the integration of key-value creation processes (new product development, logistics, information systems, operations, and so on); 3. investment sharing for innovation (product and/or process); 4. relationship-specific investments (high investment idiosyncrasy); 5. sharing strategic objectives and action plans to meet them; 6. risksharing, in particular when the outsourcing regards innovation projects; 7. information exchange; 8. mutual trust; 9. sharing the benefits resulting from the outsourcing relationship (positive-sum game). The firm’s need for stable, collaborative, and trustworthy outsourcing relationships entails a drastic reduction in the number of suppliers involved. On the other hand, operations partnerships typically have a medium-term outlook (1-3 years), but this can also be extended to the long term (3-5 years). In this kind of relationship, a firm and its suppliers integrate their logistics, operations, and information processes to significantly enhance the performance and costs of the outsourced product/activity. Figure 2. – Types of outsourcing (buyer-supplier) relationships.

Time horizon

Long

Operating partnership

Medium

Short

Strategic partnership

Agreement

Market transaction

Restricted

Medium

Broad

The scope of the relationship

Source: Adapted from Cantone, 2003, 1996, 1994; De Maio and Maggiore, 1992; Merli, 1990.

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The different strategic importance/complexity (profit-risk impact) of the outsourced product activities strongly influences the evaluation and selection processes (vendor rating) of the suppliers with whom outsourcing relationships will be established. The higher the strategic importance of the products/activities to be outsourced, the greater the difficulty in managing the supply market and outsourcing relationships and the more complex and profound the model for evaluating and selecting supply partners. When an outsourcing relationship is built on the principles of “strategic partnership” (i.e., for strategic items), evaluating and selecting suppliers not only entails evaluating the potential performance levels that suppliers can reach but also, and in particular, the suppliers’ strategic capacity to exploit and sustain the firm’s medium and long-term competitive advantage. This means being able to evaluate the suppliers’ resources, competencies, and knowledge portfolio and their ability to develop in the future. Instead, when outsourcing relationships involve non-critical products/ activities, for which the key performance criterion is operational efficiency, the time horizon for the relationship with the supplier is short (generally within 12 months), and the supply market has low complexity, selecting the suppliers involves evaluating their performance (i.e., cost, quality, reliability, delivery time).

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Table 1. – Types of outsourcing (buyer-supplier) relationships.

Transaction-based outsourcing

Contractual Agreements

Operating Partnership

Strategic Partnership

Short-term (≤12 months)

Long-term (3-5 years)/ Medium-term (1-3 years)

Medium-term (1-3 years)/ Long-term (3-5 years)

Long-term (3-5 years)

Value of integrating key processes along the chain

Low

Medium or low

Medium or low

Broad

Sharing investment in innovation (product, process)

Missing

Limited

Limited

Broad

Idiosyncratic investments (relationship-specific investments)

Low

Medium

Medium

Broad

Sharing strategic objectives

Missing

Missing

Missing

Broad

Business-risk sharing

Missing

Missing

Missing

Possible

Information exchange

Low

Medium

Medium

Broad

Mutual trust

Low

Medium

Medium

Broad

Benefit-sharing reciprocity (positive-sum relationship)

Low

Medium

Medium

Broad

Factors

Time horizon

Source: Author’s own.

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Classifying outsourcing relationships (vendor-buyer relationships)

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Outsourcing relationships, on the other hand, inspired by principles of “operating partnership”, require evaluation and selection processes that can measure – in addition to supplier performance – the reliability of their operations systems (quality, logistics, operations, innovation, information) and the overall costs of the supply relationship (the sum of the purchase price, transaction costs, non-quality costs, logistics costs, and so on) affected by the efficiency of the executive processes. Lastly, if outsourcing relationships aim to build strategic partnerships, supplier evaluation and selection not only depend on overall performance but also on the consistency of the suppliers’ strategic profile. This concerns their affinity regarding the critical factors in the firm’s strategic management (i.e., vision, competitive advantage, portfolio of resources and competencies, innovation commitment, organisational culture, propensity for interfirm collaboration, business risk-sharing). Lastly, “agreements” are a kind of collaborative outsourcing whereby a firm and supplier coordinate and optimise shared actions on specific products or activities in the value chain (such as product innovation or the logistics for joint management of shared logistics infrastructure). This kind of collaboration requires a medium or long-term relationship.

3.3. Quinn’s model Quinn (1999, 2000) argues that outsourcing innovation decisions should be influenced by two strategic dimensions (see also Quinn and Hilmer, 1994). The first is the potential for obtaining a “competitive advantage” from outsourcing. This dimension defines the strategic importance of the activity, namely if, and to what extent, it contributes to creating and maintaining a firm’s competitive advantage. This dimension might be measured along a scale from low to high. The second dimension concerns the potential “strategic risk” from outsourcing – the degree of strategic vulnerability (Quinn and Hilmer, 1994, 1995) connected to the negative impact if the suppliers’ performance (quality, costs, delivery time, innovation) mismatches with the assigned target. The suppliers’ low performance might be caused by the newness and complexity of the activity, limited rationality, uncertainty about the desired results, information asymmetries, moral hazard behaviour, and any other factor that – from the TCET perspective – influences supplier-customer relationships. The risk is defined by the likelihood and expectation of poor performance by the supplier. It may be measured along a scale from low to high. In this approach, a “best-in-the-world core competency” company in a specific sector – for whom it would be risky to outsource – must keep

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its activities in-house. On the contrary, a firm lacking superior competencies should outsource if the decision to do so does not involve excessive risk.

3.4. Baden-Fuller et al. model Baden-Fuller et al. (2000) suggest circumstances when outsourcing a firm’s core business makes sense in the light of two external factors. The first concerns changes in the socio-economic environment, reduced to the “degree of shift in customer demand”. The second is the technological environment, reduced to the “degree of technology shift”. These changes can induce a firm to outsource one or more core activities because the underlying core competencies have become obsolete and need to be renewed. Therefore, outsourcing what appears to be a core competence makes sense when a company is under threat in each of the following circumstances: there is a “need to catch up with the competitors” and reach competitive parity with regard to the core, where it has found itself at a considerable disadvantage. This situation occurs when a firm has been unable to keep abreast of shifts in customer needs and the technology it ought to be using. Therefore, in some circumstances, a firm might need to regain competitive parity in terms of product innovation where it has fallen behind, working on the capabilities required to manage these activities and, consequently, launch new products in the market. Relying on internal resources and capabilities makes this competitive gap very hard to close in the short term. In this case, it might be advisable to outsource NPD in order to rebuild or renovate the firm’s competencies, learn from the supply partners, and interiorize the necessary competencies in a bid to regain product innovation and market leadership. The second case is “changes to the value chain in the industry”. These occur because of rapid changes in customer demand and an evolutionary shift in the state of technology. The rules of the competitive game within industries can change due to considerable shifts in customer preferences and behaviours. These considerable changes might make the competence set of the companies unfit for purpose and unable to allow the activities of a firm’s value chain to develop product innovation practices in pursuit of competitive advantage in a changing market. To access the new competencies needed, a firm might implement M&A strategies or outsource activities along the value chain. The third case regards “changing technology within the industry”. These changes cause revolutionary shifts in technological capabilities (for example, product technology-related capabilities) as customer needs evolve. Internal development of new technological competencies may not be possible due to financial and/or

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time-to-market and/or competition dynamics in the market. In these situations, outsourcing NPD innovation-based activities might be a necessity rather than an option. It thus becomes a priority to select the supply partners’ best performers in the specific emergent technology and establish collaborative relationships with them. The fourth situation concerns “emerging markets” (new market creation), where technologies and market needs are rapidly and radically changing and therefore highly uncertain. In this case, outsourcing relationships take the form of complex and flexible alliances, making it possible to develop technology (product and/or process-based) and explore emerging market opportunities. With its current resources and competencies portfolio, no single company will be able to pursue the opportunities found in the emerging markets. This means it will be necessary to take a collaborative approach involving several partners, and sharing multiple complementary technological capabilities. In the emerging markets, any kind of competitive advantage is temporary due to rapid technological changes and customer needs. In all four situations, partner selection is fundamental. In the “catchup” case, the supply partner is the best-in-class, and no direct competitor will be selected. Contracts between partners are generally very detailed and of limited duration, which facilitates the transferral of competencies. In the “changing value chain economics” situation, the supply market is usually underdeveloped. Therefore, the best suppliers are generally spin-offs of the same firm. When a “technology shift” occurs, the partner will be the bestin-class as far as that specific technology is concerned. As for the “emerging markets” scenario, the firm has to access new competencies, resources, and activities as soon as possible. Competitors become potential partners. Of course, all the partners risk losing control over their own competencies during collaboration (the spill-over effect) due to the poor efficacy of the isolation mechanisms. In addition, when a market enters a growth phase, any partner could attempt to go it alone. However, emerging market opportunities can only be explored by taking these risks. Indeed, contracts are very detailed, covering a wide range of aspects. Their primary purpose is the exchange and use of intellectual property and patents.

3.5. Sislian and Satir’s model The framework proposed by Sislian and Satir (2000: 5-7) considers five factors when deciding to outsource. 1. “Competitive advantage”. This concerns whether the activity in question contributes significantly to a firm’s competitive position of market advantage (the greater the contribution, the more the activity should be kept

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in-house); 2. “Demand flexibility” is required when performing the activity so a firm can react quickly to changing customers’ needs and competition forces (the greater the flexibility, the more the activity should be kept inhouse); 3. “Process capability” means that the greater the ability of the sourcing organisation to perform the activity in question compared with the competitors and/or other suppliers in the industry, the more the activity should be kept in-house. These dimensions recognize the competitive value of a firm’s resources and competencies-base compared with its suppliers and/or competitors; 4. “Process maturity” is the ease with which a process can be performed and how widespread it is on the supply market (the greater the ease and diffusion, the greater the number of suppliers able to perform the activity and the opportunity for outsourcing it); 5. “Strategic risk” is the risk that suppliers might not promptly deliver the correct quantities and quality and that the proprietary knowledge embedded in products and/or services and/or processes might be absorbed by the suppliers or – through them – competitors (the greater this strategic risk, the more the activity should be kept in-house). Sislian and Satir define dimensions 1 and 2 as “primary factors” with a powerful influence on the sourcing decision (insourcing or outsourcing). Instead, variables 3, 4, and 5 are “secondary factors” that drive the decision to adopt executive actions to implement the sourcing decision (Sislian and Satir, 2000: 5).

3.6. McIvor’s model Instead, the framework proposed by McIvor (2008) underlines that a successful outsourcing strategy for a business process must involve an analysis of three critical dimensions: 1.the “relative capability of the company” in relation to the process to be outsourced to competitors and suppliers. Also in this case, this dimension evaluates the relative competitive value of the firm’s resources and competencies; 2. the “contribution of the process to competitive advantage” of the company, and 3. the “potential of opportunism” arising from outsourcing the process. Generally speaking, therefore, a process should be kept in-house rather than outsourced when one of the following conditions occur: 1. a company has a strong relative capability position in the process to be outsourced (as above) to competitors and suppliers; 2. it makes a significant contribution to a company’s competitive advantage; 3. the potential for supplier opportunism is high due to the outsourced business process. Indeed, beyond this general prescription, the model suggests several alternative sourcing strategies for improving the performance of a process, adding other considerations and factors: the possibility of replicating the

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competitive advantage of the competitors and suppliers; the possibility that a process is likely to diminish in importance in the future; the lack of capable suppliers; the feasibility of spinning off the process as a separate business.

3.7. Becker and Zirpoli’s model According to Becker and Zirpoli (2017: 25-26), “companies developing complex products face a crucial dilemma: the much-cited benefits of R&D outsourcing – such as lower costs, access to deep specialist knowledge, or shorter development lead times – are often traded off with the risk of negative consequences for competence development due to the loss of opportunities for learning by doing”. In their article, the authors examine “how firms can tackle such a trade-off and can organize R&D to protect against competence loss in R&D outsourcing”. The outsourcing decision-making framework proposed by Becker and Zirpoli (2017) is based on the case study of Fiat Auto – since 2014 FCA-Fiat Chrysler Automobiles and since 2021 Stellantis – that “offers a novel solution for how to organize R&D outsourcing to protect against competence loss (i.e., assure learning despite outsourcing). Fiat managed to significantly mitigate the learning trade-off and improve its NPD performance when it started distinguishing between two types of product development projects and alternating them over time: a first type (‘template’) in which Fiat focused on learning about key component technologies and their interdependencies with the rest of the product; and a second type (‘derivative’) in which Fiat could economize on the use of internal engineering resources and devolve to suppliers most of the design and engineering tasks. The novelty of Fiat’s approach consists in explicitly applying different task allocation schemes over time, and thereby explicitly employing the time dimension in the division of labour, thus making it dynamic rather than static”. When deciding which components of a new car to insource or outsource to suppliers, Fiat considered two interacting criteria (Becker and Zirpoli, 2017: 30): 1. the “component’s impact on overall product performance” that customers value most, and 2. the “level of interdependencies between a component and the rest of the product”. Matching these two dimensions, “Fiat found more differentiated criteria for the make-or-buy decision that proved more informative than the usual considerations on costs or technical interdependencies that it had made before”. The framework illustrates the insourcing-outsourcing choices pursued by Fiat, matching both criteria in order to keep its current component-specific competencies and knowledge in-house and gain new ones.

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The decision-making models discussed above undoubtedly make a valuable contribution to understanding under which circumstances businesses should outsource a process. The advantage of these frameworks is that they focus on the core activities in outsourcing the decision-making process. In addition, they provide comprehensive and practical decision-making models for analysing outsourcing decisions. Nevertheless, the frameworks do not consider an exhaustive set of key decision-making dimensions or the dynamic inter-related effects of considering them simultaneously, nor the specificity of NPD processes, especially when faced with disruptive technology innovation involving both the product and the process. These important limitations in the existing literature reduce the ability of the described frameworks to allow complete interpretations or make concrete recommendations. Some of the frameworks place great weight on the decision-making process when outsourcing NPD activities. Some consider only a limited and industry-specific set of decision-making dimensions (Becker and Zirpoli, 2017). Others argue specifically about the antecedents influencing innovation outsourcing and provide guidelines on how a given single factor, as an independent unit of analysis, can drive and influence the outsourcing decision process (Gooroochurn and Hanley, 2007; Calantone and Stanko, 2011; Liao et al., 2009; Griffith et al., 2009; Bertrand and Mol, 2013). In so doing, they ignore the concurrent interrelations among all the drivers of outsourcing and fail to propose a comprehensive and practical multidimensional and integrated decision-making model for understanding and managing the outsourcing process, especially when product and process innovation is driven by technology disruption. On the other hand, some frameworks provide a complete description of the stages (arguments for and against outsourcing, selecting the suppliers, iterative outsourcing process management) involved in making a decision on innovation outsourcing (Rundquist and Halila, 2010; Liao et al., 2009). Lastly, other frameworks analyse the decision-making criteria and process when outsourcing manufacturing or operational activities (Fill and Viser, 2000; Mol et al., 2005; Dekkers, 2011; Hsiao et al., 2010; Mohanty, 2009). These frameworks too show the weaknesses mentioned above: they do not consider all the criteria identified and the interrelated influences on the decision taken as a whole. This book aims to enrich the understanding of NPD outsourcing decision-making and specifically the factors that influence it. To this end, we propose a multidimensional and integrated decision-making model in order to overcome the limitations of explaining the outsourcing decisions relating to NPD activities mentioned so far. The model includes six interacting key

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dimensions that affect the choice of whether to outsource or keep NPD activities in-house. These dimensions are all rooted in the theories of the firm discussed in the notional background to this article. However, the model makes it possible to address NPD outsourcing decisions, treating them as more than merely choosing between making or buying, improving the effectiveness of the decisions and closely weighing up their risks and opportunities (Becker and Zirpoli, 2017: 39). The fitness for purpose of this decision-making framework is validated through the embedded and in-depth longitudinal B787case study, the most recent example of disruptive technological product innovation in the commercial aircraft industry – essentially driven by materials technology innovation.

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Chapter 4

A CASE STUDY. THE BOEING 787 DREAMLINER PROGRAMME: LEVERAGING THE CAPABILITIES OF THE GLOBAL AND COLLABORATIVE SUPPLY-PARTNER NETWORK THROUGH TECHNOLOGICAL DISRUPTION IN THE AIRCRAFT INDUSTRY SUMMARY: 4.1. Introduction. – 4.2. Methodology. – 4.2.1. Empirical research based on case study. – 4.2.2. The sample of companies involved in the case study. – 4.3. The perspective of the OEM: the rationale behind the launch of the B787-8 programme. – 4.3.1. Difficulties and delays in the B787-8 programme. – 4.3.2. The mitigation strategy for solving difficulties along the supply chain. – 4.4. The “Small prime” contractor’s perspective: Leonardo and the rationale behind the decision to join the B787-8 programme. – 4.4.1. How Leonardo exploited and explored new core competencies through the B787-8 Dreamliner programme. – 4.4.2. Leonardo’s perspective on supply chain management in the B787-8 programme. – 4.5. The tier-2 perspective: Dema and the rationale behind the decision to join the B787-8 programme. – 4.5.1. A new approach to supply-chain management for the Boeing 787-9 programme. – 4.5.2. Exploiting Dema’s new competencies through the B787-8 programme. – 4.6. The tier-2 Geven perspective: the rationale behind the decision to join the B787-8 programme. – 4.7. Discussion points. – 4.8. Findings. – 4.9. Conclusions and implications for management.

4.1. Introduction The research method adopted is a case study to answer the RQ at the heart of this book (Yin, 2003). A qualitative method allows effective data collection, which helps shed light on complex issues and enriches previous knowledge (Dubois and Gadde, 2002; Gummesson, 2005). The case study concerns the Boeing 787 Dreamliner programme, beginning in 2009 with the B787-8’s first model and continuing to track its evolution until more recent times through the B787-9 and B787-10 models. The early B787-8 model provides an opportunity to trace the early disruptive change to the outsourcing relationships within Boeing’s global supply chain. On the other hand, the latest models (B787-9 and B787-10) allow an analysis of how the early relationships have changed over time, highlighting to some extent a reverse insourcing strategy.

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Studies of the B787-8 are not new in the management literature (Cizmeci, 2005; Kotha and Nolan, 2005; Mahmoodi, 2009; Tang et al., 2009; Elahi et al., 2012; Kotha and Srikanth, 2013). The current study serves as a means for testing our hypothesis. It relies on deductive reasoning to establish whether a conceptual, indeed theoretical decision-making model for outsourcing NPD activities actually works by combining theoretical hypotheses and facts to validate the theory (Johansson, 2003). A variety of factors conditioned our choice to study the B787 case. Firstly, the new aircraft represents a case of disruptive technology product innovation within the industry since it adopts new material technologies that make it possible to meet future customer needs, profoundly changing the design and manufacturing processes. Secondly, it adopts a new approach to outsourcing NPD activities at the industry level. Thirdly, it involved a broadly distributed multi-level supply network (Mena et al., 2013) in the NPD process (Niosi and Zhegu, 2005; Kotha and Srikanth, 2013). Further, it employs a new digital concurrent co-design platform (Enovia) to manage outsourcing relationships within the supply network (Cagliano et al., 2005). The commercial aircraft industry is an appropriate research setting for several reasons. Firstly, it is characterised by high-intensity technological innovation with multiple technology platforms (materials, aerostructures, engines, systems, tools) supporting the design and manufacture of an aeroplane. Secondly, inter-firm outsourcing relationships in the industry make it possible to share business-process investment risks and achieve time compression in developing and launching new planes on the market. Thirdly, inter-firm outsourcing relationships involve suppliers located in several countries across an international network (Cao and Zhang, 2011). The industry is hierarchically organised into four primary levels in the form of a pyramid (Niosi and Zhegu, 2005). First of all, at the top of the pyramid are the so-called “Original Equipment Manufacturers” (OEMs) or prime contractors, such as Boeing Co. and Airbus competing in the large and mid-sized commercial aircraft market, and Bombardier, Embraer, and Leonardo competing in the regional jets’ market; these firms are responsible for carrying out the design and final assembly of the aircraft. They act as system integrators along the worldwide supply chain. More specifically, they manage relationships with customers (marketing, sales, and relationships capabilities), exploit new market opportunities (sense-making capabilities), and establish the product concept of new aircraft (innovation capabilities). They also design the whole aerostructure of the aircraft and produce prototypes (design capabilities). In addition, they coordinate the activities of the “small prime” strategic suppliers or tier-1 suppliers in the aircraft industry pyramid (project management and leadership capabilities)

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and assemble the finished aircraft from the parts or subassemblies designed and/or manufactured by the prime contractors (engineering capabilities for final assembling). Some of the principal small prime contractors that Boeing. Co involved in the B787 Dreamliner programme were the Leonardo S.p.A. (Italy), Spirit AeroSystems (USA), Kawasaki Heavy Industries (Japan), Vought Aircraft Industries (USA), Fuji Heavy Industries (Japan), Mitsubishi Heavy Industries (Japan), KAL-ASD (South Korea), Rolls-Royce (UK), and General Electric (USA). When it began its involvement in B787-8, the name of the Italian company Leonardo was Alenia Aeronautica, and then, in 2012, it became Alenia Aermacchi. In 2016 it changed again to LeonardoFinmeccanica, and in January 2017, it became Leonardo S.p.A. In recent years, small prime contractors have generally begun to participate directly in developing, designing, and manufacturing new aircraft. They have assumed the role of strategic partners to OEMs because they have gradually developed specific technological and organizational product innovation capabilities in-house. The suppliers’ asset specificities and capabilities feed OEM expectations about putting innovation into practice (Joshi, 2017) and encourage their involvement in NPD programmes. These tier-1 suppliers have long-lasting and trustworthy relationships with OEMs (since the 1950s, in the case of the Italian Leonardo S.p.A.). Moreover, the tier-1 strategic suppliers coordinate – like small primes – the relationships and activities of all the other suppliers operating along the supply chain, namely towards the tier-2 suppliers. At this level (tier-2) of the pyramid, we find a select number of suppliers distributed around the globe; they are generally small and medium-sized firms supplying single components or parts. These firms are also considered second-level suppliers because they are not usually in direct contact with OEMs, interacting only with the small primes, and they are unable to carry out all the designing and manufacturing activities relating to new orders from OEMs alone. They specialize in the engineering and/or manufacturing of parts and components. Generally speaking, the tier-1 small primes develop the production standards and technical specifications, and the tier2 suppliers follow these to engineer and/or manufacture the work package assigned. However, some tier-2 subcontractors with specific technological and organisational capabilities collaborate in developing and designing parts and subassemblies for new aircraft under the coordination of small primes (outsourcing innovation activities). Therefore, they are supplyintegrators because they work together to supplement the capabilities of tier-1 small primes as far as the design, production, and assembly of aeroplane components is concerned. They also have the necessary capabilities

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to develop tools as well as manufacturing processes. In addition, they have the industrial competencies to use innovative materials (i.e., composites) in manufacturing. In some cases, these suppliers have direct relationships with OEMs to carry out innovation-based and operational activities. Of course, the number of subcontractors with such innovation capabilities is minimal. Lastly, tier-3 of the pyramid hosts many small suppliers (third-level suppliers) that manufacture single and technologically simple components or parts. Generally speaking, tier-2 suppliers assemble the components produced by tier-3. In recent years, some tier-2 suppliers have been trying to assume the role of small prime operating between the OEMs and the tier-3 small and medium enterprises. As mentioned earlier, outsourcing relationships along the aerospace supply chain – both innovation-based and operational – are hierarchical and top-down. The importance of tier-1 strategic suppliers stems from their role as business partners in innovative programmes for OEMs towards the top of the pyramid. This co-partnership role has increased over the last twenty years. Tier-1 suppliers also play a strategic role by involving, coordinating, and managing the innovative and operational activities of numerous small and medium suppliers operating down the supply chain (second and third level suppliers). Tier-1 contractors also possess the innovation capabilities to develop and manufacture commercial aircraft internally. An example is the Italian Leonardo S.p.A., OEM – in partnership with Airbus – for the ATR (Avion de Transport Regional) regional aircraft family. The Boeing 787 Dreamliner brings the economies of large jet transport (e.g., Airbus 380) to the middle of the market. It features wings and structure optimised for mid-range flights and provides a revolutionary answer to the preferences of airlines across the globe requiring super-efficient aeroplanes with high fuel efficiency (the Boeing 787 Dreamliner uses 20 percent less fuel than similarly sized aeroplanes for comparable missions), lower maintenance and replacement costs (30% less), a lower environmental impact (20% fewer emissions than similarly sized aeroplanes), and increased passenger comfort (with higher humidity and pressure now possible in the cabin). The Dreamliner allows airlines to offer point-to-point flights, reducing operational costs and better satisfying the needs of international passengers.

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Figure 1. – The hierarchical supply chain organization of the commercial aircraft industry. Boeing Co.; Airbus EU Consortium; Embraer (Brazil); Bombardier (Canada) Leonardo (Italy); Mitsubishi (Japan); Kawasaki (Japan); Latécoère (France); GE (USA); Rolls-Royce (UK) Concentrated number of suppliers worldwide (usually SMEs)

Many small suppliers, located worldwide

OEMs

● Boeing Co.

Tier-1: Sub-assemblers; Engine suppliers; Avionics suppliers; etc.

Companies involved in the case study

● Leonardo

Tier-2: Producers or parts and components

● Dema ● Geven

Tier-3: Mechanical equipment; airport transportation; steel works; non-final assembling; surface treatments; painting; packaging; etc.

Partnership risk-sharing contract

Partnership non-risk sharing contract

Order contract

Source: Authors’ own.

There are several reasons for considering the B787 programme a breakthrough innovation. First of all, 50% of primary aerostructures (80% by weight) – including fuselage and wings – on the Boeing 787 Dreamliner are made up of composite material (carbon-fibre) and 15% of titanium. The remaining parts of the aerostructures (20% aluminium, 10% steel, 5% other) are made using traditional materials. This breakout configuration is totally different from Boeing’s previous commercial aeroplane families (such as the B737), where only 12 per cent of the aerostructures were made up of composites and 50% of aluminium. Secondly, the design and manufacturing process is based on the innovative “one-piece-barrel” logic, whereby the fuselage is designed and manufactured in only five sections rather than in several single parts. Rather than building the complete aircraft from the ground up in the traditional manner, Boeing assembled the complete sub-assemblies and integrated systems delivered by tier-1 suppliers at its factories in Everett (Washington) and South Carolina. This strategy aimed to reduce final assembly to only three days (a quarter of the time traditionally required for Boeing’s final assembly process), also reducing the number of employees at the final assembly plants. For the B787 Dreamliner programme, Boeing decided to change its historical assembly approach to supply chain management. Rather than re-

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ceive different single parts from hundreds of suppliers and assemble them at its assembly factories in the USA, it assigned its own top-tier worldwide suppliers to do most of the assembly themselves and deliver complete subsystems. Thirdly, a web-based open architecture made it possible to apply the concurrent engineering model globally throughout the supply chain, coordinating the suppliers’ development activities and visibility. This system also provided the advantages of the “24 Hour Knowledge Factory” model (Mahmoodi, 2009), saving time compared with sequential or concurrent engineering acting on a local or internal basis. Lastly, the tier-1 partners shared the project risk (risk-sharing partners) with Boeing, participating in the commercial risk of the new aeroplane, so that all partners would receive a quota for their own contribution to designing and manufacturing subassemblies when the plane was delivered to the customer (airline).

4.2. Methodology 4.2.1. Empirical research based on case study The B787 case study is an “embedded case study”. In fact, this empirical research involves several firms (one OEM, one tier-1 small prime contractor, and two tier-2 subcontractors) and several analysis units (senior management, supply chain managers, and programme managers committed to the B787-8 project). The study entailed an in-depth longitudinal examination, a systematic way of observing the development of the B787-8 programme, interviewing the managers involved, collecting qualitative data, analysing information, and interpreting and presenting the results over several years (2009-2012). When the personal interviews at the basis of the research began in 2009, the B787-8 Dreamliner project (the first model in the series) was still underway. The first flight test of the new B787-8 plane rolled out in December 2010, nearly three years behind schedule (July 8th, 2007, as indicated by the acronym in the plane’s name). Following Olsen’s model (2003), we employed a triangulation of qualitative techniques (Denzin, 1978) to explore the main research question which we aimed to answer through the empirical study carried out in this book, namely: what strategic dimensions in a decision-making model can extensively and thoroughly address the outsourcing decisions relating to NPD activities given the hypothesis that a disruptive technology fosters product innovation? First, we adopted a narrative technique (Will et al., 1996) to interview

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the managers of each firm involved in the B787-8 Dreamliner project. This phase took place in two subsequent periods from 2009 to 2012. Secondly, the same managers supplied proprietary documents to shed light on the topic investigated without informant subjectivity. Thirdly, mainly American articles in online newspapers and reviews, written by academics (Mahmoodi, 2009; Tang et al., 2009; Elahi et al., 2012; Kotha and Srikanth, 2013), and numerous industry experts, were consulted. The research design uses well-known criteria for judging the quality of the case study and the qualitative research methods adopted (Kidder and Judd, 1986), also incorporating a double-checking system for empirical findings contributing to testing the internal and external validity of the research design, respectively. To this end, two phases of the ground checks were carried out with the senior and programme managers of tier-2 subcontractors involved in the case study (Dema and Geven). Boeing Commercial Airplanes decided not to participate in the empirical research despite two formal requests – the first in 2009, the second in 2017. The Boeing 787 Dreamliner programme was therefore investigated using secondary sources, such as the documents available on the Boeing Co. website, working papers (Mahmoodi, 2009), articles from specialist industrial reviews, business magazines, journals and blogs (Vittachi, 2003; Gates, 2006, 2011a, 2011b) in addition to earlier case studies (Cizmeci, 2005; Tang et al., 2009; Cantone and Testa, 2012; Elahi et al., 2012; Kotha and Srikanth, 2013), and special reports (Peterson, 2011). Alenia Aermacchi, now Leonardo S.p.A. (tier-1 small prime partner), contributed to setting up the case study by releasing internal documents and information gathered from personal interviews with eleven managers involved in the B787-8 programme. Some had been involved in the early design phase, which began in Everett, Washington, in 1998, and all eleven of the managers had been involved in the programme since its inception in January 2004. Similarly, Dema S.p.A. and Geven S.p.A (both tier-2 subcontractors) contributed to the case study through internal documents and information gathered during personal interviews with some of their key managers. Also in this case, all the interviewed managers had been involved in the B787-8 Dreamliner programme since its inception. The second set of interviews began in early January 2012 and were completed by the end of the month. We interviewed two managers at Dema S.p.A. – both respondents in the previous field research phase – and three managers at Geven S.p.A. In the end, the personal interviews amounted to a total of 24 hours and involved 16 managers. As we mentioned earlier, all the managers inter-

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viewed had been involved in the B787-8 Dreamliner programme since its inception (2004). Direct involvement in the B787-8 programme was an essential requirement for participating in the interviews.

4.2.2. The sample of companies involved in the case study From the start, the study involved four firms on the commercial aircraft supply chain: the American Boeing Co. (USA), the Italian Leonardo S.p.A., Dema S.p.A., and Geven S.p.A. When research began in 2009, Leonardo S.p.A. was known as Alenia Aeronautica. It became Alenia Aermacchi in 2012, and then Leonardo-Finmeccanica in January 2016, before becoming Leonardo S.p.A. in January 2017. In this chapter, we will use Leonardo S.p.A. (or simply Leonardo). However, we will refer to the company’s former brand names when necessary. These companies are representative organisational units on the supply chain in the commercial aircraft industry and are organized in multi-tier, pyramidal form (Niosi and Zhegu, 2005). At the top of the pyramid are the OEMs, system integrators, or prime contractors (i.e., Boeing Co.). At the second level, there are the tier-1 small prime contractors (i.e., Leonardo S.p.A.). At the third level, we find the tier-2 subcontractors (i.e., Dema S.p.A., Geven S.p.A.), and, at the fourth level, the tier-3 suppliers (SMEs manufacturing small components or part numbers). OEMs (first level) compete in the global market and specialise in designing and manufacturing aeroplanes, subassemblies, parts and components. The distinctive competencies of the firms positioned as tier-1 contractors (second level) and tier-2 sub-contractors (third level) of the supply chain have contributed to their international growth. By exploiting their capabilities in product innovation and increasing investments in R&D, they were able to create valuable relationships with leading and specialised international partners. As we mentioned above, companies positioned as tier2 (such as Dema and Geven) and tier-3 subcontractors (third and fourth level respectively) were able to create partnerships not only with tier-1 or small prime firms (i.e., Leonardo S.p.A.) but also directly with Boeing Co. thanks to their well-recognized capabilities. As we will argue later on, these firms are linked by supply relationships involving design and manufacturing activities. Thanks to their competencies and technical skills, these firms enjoy recognition in the business community and a leading role in the geographical contexts in which they are embedded.

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Boeing Boeing is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft. It designs and builds rotorcrafts, electronic and defence systems, missiles, satellites, launch vehicles and advanced information and communication systems. Boeing has a broad range of technological and organisational capabilities in designing and manufacturing aeroplanes, intelligence and security systems, communication architectures, and extensive large-scale integration expertise reaching across military and commercial business units. Boeing Co. has high relational capabilities that permit it to call on a broad, skilled, and global supplier network. Headquartered in Chicago, in 2019 Boeing employed more than 140,000 people across the United States and in more than sixty-five countries (https://www.boeing.com). Boeing Co. has contracts with more than 12,000 suppliers globally and a turnover of 76.6 billion US dollars, with customers in 150 countries. Boeing is organised into three business units: Commercial Aeroplanes; Defence, Space & Security; Boeing Global Services. Supporting these units is the Boeing Capital Corporation (BCC), “a global provider of financing solutions for Boeing customers. Working closely with Commercial Airplanes and Defense, Space, & Security, BCC ensures customers have the financing needed to buy and deliver their Boeing products. BCC combines Boeing’s financial strength and global reach, detailed knowledge of Boeing customers and equipment and the expertise of a seasoned group of financial professionals. Boeing Global Services, instead, delivers innovative, comprehensive and cost-competitive service solutions for commercial, defence and space customers, regardless of the equipment’s original manufacturer. With engineering, digital analytics, supply chain and training support spanning across both the government and commercial service offerings, Boeing Global Services’ unsurpassed, around-the-clock support keeps our customers’ commercial aircraft operating at high efficiency and provides mission assurance for nations around the world” (https://www.boeing.com). The Commercial Airplanes business unit is committed to being the leader in commercial aviation by offering planes that deliver superior design, efficiency and value to customers worldwide. “Boeing has been the premier manufacturer of commercial jetliners for decades. Today, the company manufactures the 737, 747, 767, 777 and 787 families of aeroplanes and the Boeing Business Jet range. New product development efforts include the Boeing 787-10 Dreamliner, the 737 MAX, and the 777X. More than 10,000 Boeing-built commercial jetliners are in service worldwide, which is almost half the world’s fleet. The company also offers the

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most complete family of freighters, and about 90 per cent of the world’s cargo is carried onboard Boeing planes” (https://www.boeing.com). In 2019, the Commercial Airplanes business unit, headquartered in Puget Sound, Washington (USA), employed approximately 34,000 people worldwide, and revenues amounted to 32.3 billion US dollars in the same year. Boeing aeroplanes represent approximately half of the world’s fleet, with more than 10,000 jetliners in service. Commercial aircraft are developed in cooperation with customers (airline companies) in order to meet their emerging needs. Boeing acts as a system integrator (or OEM) in the aerospace supply chain, producing medium and large-sized commercial aircraft in this business segment. It can design and assemble a vast family of aeroplanes and manage collaborative agreements with many tier-1 suppliers worldwide. With the merger between Boeing and McDonnell Douglas in 1997, Boeing’s leadership in commercial jets and the Douglas heritage give the combined company a 70-year heritage of leadership in commercial aviation. In 2019, Boeing invested 3,219 million US dollars in R&D, of which 1,956 million were invested in the Commercial Airplanes unit.

Leonardo S.p.A. Leonardo S.p.A. (www.leonardocompany.com), headquartered in Rome (Italy), formerly Leonardo-Finmeccanica and Finmeccanica, is an Italian multinational and diversified company, operating in Aeronautics, Helicopters, Space, Defence, Electronics and Security industries. The company has 180 sites worldwide. It is partially owned by the Italian government through the Ministry of the Economy and Finance, which holds 30.2% of its shares and is the company’s largest shareholder. Currently, Leonardo designs and manufactures products, services, and integrated solutions covering a wide range of operating scenarios (air, land, space, and cyberspace). New technology development can benefit both the military and civilian markets synergically through various products, systems, and applications. Leonardo designs, develops, produces, maintains and upgrades commercial, military and military training aircraft, as well as producing aerostructures. In the aerospace sector, the company is part of a network of joint ventures and product partnerships, including such programmes as Eurofighter (with BAE Systems and Airbus Group) to build the supersonic multi-role Typhoon, and ATR (with Airbus Group) to build the family of turboprop regional aircraft of the same name. It is Italy’s leading aircraft company, engaging in the design, development, manufacture, maintenance, and inspection of civil and military aircraft, trainers, unmanned aircraft, and aerostructures.

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The company has a long history in the aerospace industry, with subsidiaries specialising in aerostructures, changing its name many times. Starting in the 1990s, the company worked as Alenia Aeronautica, founded in 1990 from a merger between Aeritalia and Selenia, which competed in the defence and aerospace industries, respectively. Both owned by Finmeccanica S.p.A., an aerospace corporation created in 1969 from the merger between Fiat Aviazione and Aerfer, historical Italian companies. The former, headquartered in Naples (Italy), was founded in 1955; the latter, created in 1908 and headquartered in Turin (Italy), focused mainly on military aviation. On January 1st 2012, the new Alenia Aermacchi emerged from a merger between Alenia Aeronautica and Alenia SIA. When the B787 programme started, the company had already been involved from the earliest stages of NPD under the name of Alenia Aeronautica, rebranded as Alenia Aermacchi in 2012. The fusion of Alenia Aeronautica and Alenia SIA triggered industrial synergies, with significant economies of scale in terms of both processes and products through the consolidation of engineering practice, the redefinition of production systems and their supply chain relating to the specialisation of each site by technology/product. “This merger will bring together an extraordinary wealth of knowledge, technology and products to ensure that the Italian aerospace industry will continue to play a leading role in an increasingly global market in the years to come”, claimed Giuseppe Giordio, the CEO of Alenia Aermacchi and Head of Finmeccanica’s Aeronautics Sector (www.aleniaaermacchi.it) at that time. The latest reorganization of the companies under the umbrella brand Leonardo S.p.A. aimed to create a large conglomerate able to compete as a key player in the global market of aerospace, defence, and security businesses in both the civilian and military markets. By focusing on the commercial aerostructures business, the company has developed specific expertise in manufacturing large composite structures for commercial aircraft, contributing to making aircraft lighter and safer. It also provides nacelle design, engineering, and manufacturing. With its long history of experience and know-how, the company partners with major commercial airline manufacturers to design, build, test, and integrate conventional and composite structures and components. Its highly automated facilities are specialised in manufacturing large and complex structures. Therefore, Leonardo’s product portfolio currently includes large and complex carbon-fibre structures built with unique and innovative technologies. For example, its facilities accommodate the largest “one-piece barrel”, which it manufactures for Boeing, and supplies highly automated stabilisers and fins for Boeing and Airbus.

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Using non-composite materials, the firm designed and developed the vertical fin and fully equipped fuselage for the ATR regional aircraft family, a joint venture that it shares with Airbus, of which over 1,700 have been manufactured to date, and it builds several fuselage sections in traditional alloys for Airbus, Boeing, and Dassault. Meeting the strictest thermal, aerodynamic and mechanical requirements of these complex structures, the company manufactures nacelles for all the leading platform primes and invests in developing advanced technological solutions to reduce noise, weight, and drag. The company’s main programmes concern designing and building empennages and the equipped fuselage as part of the ATR partnership. Leonardo and Airbus owned the programme in equal measure; they currently manufacture the ATR 42 (50 seats) and the stretched ATR 72 (68-78 seats) turboprop aircraft. All fuselages, complete with the empennages made in the Foggia plant (Italy), are built and equipped by the Aerostructures Division at its plant in Pomigliano d’Arco (in the province of Naples, Italy) and then shipped to Toulouse (France) for final assembly and delivery. The ATR-600, with over 1,700 aircraft sold to more than 200 operators in nearly 100 countries, is the world leader for regional aircraft below 90 seats. The ATR-600 series is the most modern regional aircraft with state-of-theart avionics, a comfortable cabin, and low operating costs. In 2017, the new ATR 72-600F Freighter version was launched. For Boeing 787-8, Leonardo was involved in designing and building composite horizontal stabiliser and fuselage sections 44 and 46. As a Boeing strategic risk-sharing partner, it designs and manufactures a roughly 14% share of the 787-8 airframe: the horizontal stabiliser is built at its Foggia plant, while both central fuselage sections are made using “onepiece barrel” advanced technology at its innovative plant in Grottaglie. Frames and shear-ties are produced in the Pomigliano d’Arco plant (in the province of Naples, Italy), and metal alloy machined parts are made in Nola (again, in the province of Naples). Leonardo plays a leading role as a global partner in the medium and large-sized commercial aircraft market, designing and building aerostructures for aeroplane families developed by Boeing and Airbus. As a major system supplier in some programmes, Leonardo is involved as a risksharing co-developer. It partners with Russian company Sukhoi to develop and market the Superjet 100, an advanced and environmentally friendly regional jet available worldwide. To develop technological capabilities and nurture R&D activities, the company cooperates, in an open innovation approach, with the leading national and international aerospace centres and universities, as well as with

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aerospace and non-aerospace companies. It owns capabilities and know-how covering a full range of activities, including the development, production, integration, and support of fixed-wing aircraft. It is a partner in European and international programmes and competes selectively on the global market. It leverages its traditional core competencies – system integration capability and airframe technologies – to strengthen its global customer support activities and exploit synergies with other Finmeccanica companies. In the field of aerostructures, Leonardo’s main technological and organisational distinctive capabilities are currently composite materials, carbonfibre aerostructures, the development, production, integration, and support of fixed-wing aircraft, and system integration. In 2019, Leonardo made 13,784 million euros in consolidated revenues (Ebit, 1,153 million euros), of which the aerospace business unit generated 3,390 million euros. It employed 49,530 people, 9,000 of whom are involved in Research and Development, costing the company 1.5 billion euros, making up around 11% of revenues) (www.leonardocompany.com). Leonardo was already one of Boeing’s consolidated global partners. In 1998, when the product concept phase of the Boeing 787 Dreamliner began, Alenia Aeronautica (rebranded as Alenia Aermacchi, in January 2012, and as Leonardo, in 2017) relocated about 100 people from the engineering department to the Boeing plant in Everett (Washington, USA) to cooperate with the R&D people at Boeing and co-develop the new product concept. In terms of the number of people, Alenia Aeronautica was the partner most involved in the programme. The engineers from Alenia Aeronautica worked cooperatively and integrated with Boeing’s R&D people to develop configuration, certification, and tests regarding the newly assigned subassemblies. Boeing’s control over the tier-1 strategic suppliers was always total as a means of protecting itself from spill-over. In fact, all the top-tier partners – even when co-located at the Everett plant in Washington – worked on the Boeing 787-8 Dreamliner programme separately. The organisation was centralised, and the system was impermeable. Boeing kept the core competencies and knowledge of the airframe and engineering in-house for final assembling. All the tier-1 strategic supplier teams involved in co-designing complete aerostructure subassemblies (fuselage sections, wings, stabilisers, etc.) developed calculus models in line with the “design guides” defined by Boeing itself. These guides allowed Boeing to have complete subassemblies designed according to the final design configuration of the whole aircraft according to its own parameters. The calculus model underlying the plane’s final design configuration was known only to Boeing and not to the other partners.

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Dema-Design Manufacturing S.p.A.

Dema-Design Manufacturing S.p.A. is an Italian subcontractor operating in the aircraft industry dating back to 1993 and is one of the most important in Southern Italy. It includes connected and subsidiary companies with specialised capabilities for engineering and manufacturing aircraft, helicopters, and aerospace products (tooling, sheet metal, machining, composites). From 1993 until 2013, it experienced uninterrupted growth, becoming an excellent subcontractor in the worldwide aircraft industry. “Over the years, the company has also added aerospace component production, with the opening of manufacturing plants first in Campania (Somma Vesuviana, in the province of Naples, Italy; Paolisi, in the province of Benevento, Italy), and then in Apulia (Brindisi, Italy), expanding its technological offer also with composite materials and assembly. Today, the company boasts an integrated offer of design, industrialization, production, and assembly of complex aerostructures. In 2004, Dema launched its international programme by opening Dema Aeronautics Inc. in Montreal, Canada. It is a specialised engineering centre boasting collaborations with several of the most important research centres and universities in Canada, and it is currently the support base for North-American customers. In 2006, the IMI Fondi Chiusi SGR fund entered Dema’s capital stock in order to support the company’s development plan. In 2017, in an extraordinary transaction, the English Bybrook Capital, supported by the international investment bank Morgan Stanley, invested in Dema to sustain its restructuring and turnaround. Currently, Dema Group includes Dema S.p.A., with plants in Somma Vesuviana (near Naples, Italy) and Brindisi (Italy)); CAM S.r.l., with a plant in Paolisi (Benevento, Italy); DAR S.r.l. with a plant in Brindisi (Italy), and Dema Aeronautics Inc., with a design and engineering centre in Montreal (Canada)” (www.demaspa.it). Dema’s core competencies relate to aerostructure component design, fabrication and assembly, as well as composite materials. It is considered a tier-2 supplier, but for some prime contractors (i.e., Bombardier), it operates as tier-1 (small prime), i.e., it is an integrator between the major international customers and the network of qualified SMEs through an integrated offer including engineering, manufacturing and assembling complex aerostructures (www.demaspa.it). Dema lays great stock in R&D activities and has entered agreements with national and international firms, universities, and research centres to acquire, share, and develop technical knowledge and capabilities with them, increasing competitive performance and breaking into new markets. Since 2013, Dema has seen the effects of the financial crisis due to dwindling supply from Augusta Westland (an Italian company belonging

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to the Italian Finmeccanica Group at the time), one of the company’s most valuable customers. In addition, Leonardo’s drop in orders caused Dema’s Pomigliano d’Arco plant (in the province of Naples, Italy) to close. Dema started its financial and industrial rebalancing in 2017 with the support of the English investment fund Bybrook Capital and the American investment bank Morgan Stanley. Thanks to this financial support, the company entered a new recovery phase. Dema has approximately 800 employees. (https://www.demaspa.it).

Geven S.p.A. Geven S.p.A., founded in 1984 and headquartered in Nola (near Naples, Italy), is a leading force in “Passenger Seating and Interiors”, striving to preserve its reputation for reliability and quality performance, products, and aftermarket support services/care. Over the years, it has acquired numerous seating product certifications for a vast and varied number of applications covering a wide array of configurations and LOPA’s, covering most of the aircraft types flying the skies today. Geven is also one of the primary companies in the design, manufacture, and installation of isolation blankets for aircraft such as the A380; A330; A321; B767; B777; B787; ATR 42 and 72; DC9/10/MD 80; B707; P180 Avanti; P68; and P68TP aircraft. Flooring panels for the ATR aircraft family are a recent and successful addition to Geven’s production output. Geven has also established a leading position in aerospace support by providing skilled “Overhaul and Repair Services” for some of the major MRO’s. Turnover was 75.29 million euros in 2018 (net profit, 13.65 million euros), with about 200 employers (https://www.geven.com).

4.3. The perspective of the OEM 1: the rationale behind the launch of the B787-8 programme This section looks first at the main features of the B787-8 Dreamliner and their impact on value for customers (airlines carriers) and passengers (Tang et al. 2009: 76). For customers (that is, Airlines) the B787 Dreamliner grants faster cruising speed, increases the fuel efficiency, reduces manufacturing costs, improves flexibility thanks to the simplicity of design, lowers operating costs, reduces community noise levels, can operate for longer period being supported by maintenance services. Instead, for the passengers using the new aeroplane means non-stop city pair flights (less time to reach 1

This section is based exclusively on secondary sources.

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the destination, a fewer risk of delays), an improved on-board comfort, thanks to the “smart glasses”, a better humidity inside the fuselage, and a reduced noise. The B787-8’s supply chain is based on a tiered structure (Tang et al., 2009) that would allow Boeing to foster partnerships with 14 tier-1 strategic partners. These strategic partners serve as integrators assembling different parts and subsystems produced by tier-2 suppliers. Boeing instituted a new risk-sharing contract under which no strategic suppliers would be paid for the supply and development costs until Boeing delivers its first B787-8 to its customers (slated to be ANA-All Nippon Airways). This contract imposes some financial risk on Boeing’s suppliers if delivery deadlines are missed. However, Boeing sustains them, allowing access to intellectual property regarding each subsystem’s requirements and calculation model. Indeed, a risk-sharing contract allows tier-1 suppliers to increase their revenues (and potential profits) by taking on the development and production of the entire section of the plane rather than just a small part. The B787-8 business processes were markedly different from Boeing’s 20th-century processes (Nolan, 2012). To design the B787-8, Boeing adopted a “build-to-performance” instead of a “build-to-print” process. Traditionally, Boeing would start a new programme with a relatively small team of 100–200 Boeing engineers to create a conceptual design. This team would then involve Boeing suppliers to develop the conceptual design of the new aeroplane. Thus, designing the new aeroplane was prevalently managed internally, developed and tested in the supplier network. Once the conceptual design of the new aeroplane was agreed upon, the internal design-engineering group would expand to take on thousands of members, producing detailed design and engineering drawings, which would be sent to the Boeing manufacturing facilities and/or contract suppliers for manufacture. The process has been called “build-to-print”. If a supplier subsequently ran into problems, Boeing sent out teams to assist the supplier to get back on track, working from the detailed engineering drawings. With the new B787-8, Boeing changed its policy. A group of tier-1 partners (small primes) would be chosen to “build-to-performance”, and Boeing would provide its tier-1 partners with performance specifications, and the tier-1 partners would develop detailed drawings from which to build the major components of the aeroplane. Thus, the design of the new plane was prevalently managed outside Boeing but according to some specifications agreed upon by Boeing and its small primes. Global partners would also be responsible for developing their own tooling and supply network to manufacture the individual part numbers and assemble the major components (tier-1 suppliers), including electrical systems, fuel tanks, and the like. In

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this way, the final assembly was simplified and shortened to a matter of a few days. According to Kotha and Srikanth (2013: 16): “what we had done is we have taken the way that we have historically dealt with system suppliers and moved that into the airframe of the aeroplane. So rather than us doing all the engineering on the airframe and having suppliers do build-to-print, we put a fair amount of aeroplane design detail into the supply base. The fundamental premise here is that you want to have the ‘design and build’ aspects aligned because to think that you could optimize for efficient production in someone else’s factory, we have proven over and over again, is not the right answer. The suppliers know their factory and their capabilities. They need to know this is going to work to make the subtle design decisions they make to ensure that they optimize the production of the aeroplane”. The engineering teams at the 14 tier-1 global strategic partners, selected by Boeing, came to Seattle (USA) to do preliminary engineering design. These partners represented the most diverse global talent pool ever established to develop a new commercial Boeing aeroplane. They were assigned to eight work teams: (1) fuselage, (2) propulsion, (3) services, (4) interiors, (5) systems, (6) production, (7) integration, (8) wing, empennage (an aviation term for the aeroplane tail section), and landing gear. The main subsystems designed and manufactured by the tier-1 suppliers – also leveraging the work packages assigned to their tier-2 and tier-3 subcontractors network – were to have been assembled into a finished B787 at Boeing’s final assembling plants (USA) within three days, a remarkably short time for the final assembly of a large commercial plane (Tang et al., 2009). In the light of the above, in what follows we discuss the rationale behind the B787-8 programme. Boeing itself did not possess all the resources needed (financial, technological, and know-how) to carry out the breakthrough innovation it was looking for with B787-8 alone. In the commercial aircraft industry, however, competitive pressure was high, as Airbus had taken a substantial market share away from Boeing, and the company was also less competitive than Airbus in terms of cost/prices. Therefore, to fill the competitive gap, shorten development time, and, above all, to share the risks and costs of the new programme, Boeing had to resort to strategic outsourcing, assigning a significant part of the B787-8 development activities to outsiders. Boeing has made extensive use of strategic outsourcing logic for the design and production of the Dreamliner 787-8 for several reasons, as summarised in the following point.

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• To reap the benefits of strategic “offset” and “offshoring” worldwide. In the civil aerospace sector, the leading companies, such as Boeing and Airbus, tend to involve countries with an important role in the international scenario, leveraging their accumulated know-how, the final demand for commercial aircraft, and/or the available budget to be invested in R&D programmes for commercial aircraft (offset). Furthermore, in this way, these companies internationalise their value chains vis-à-vis countries willing to play a fundamental role in aerospace programmes, allocating the design and manufacture of strategic components to them (offshoring). These choices increase the general competitiveness of the countries involved and attract their investment in specific aerospace programmes. In addition, these countries will encourage the national airline companies – sometimes partially or totally owned by national governments – to purchase the aircraft models in which the country has invested, aware of the impact that their choice will have on the national economy in terms of employment and competitiveness. • Lower investment costs for exploring a technology breakthrough concerning manufacturing material involving the consolidated worldwide supply partners network. • A worldwide design network allowing continuous design activity (24 hours a day), as well as a global network of equipment and laboratories, and more generally, a widespread qualified set of assets and resources to carry out the countless certification and testing activities required by the ambitious and challenging B787-8 programme. • Lower risks and development costs. By adopting risk-sharing contracts, Boeing transferred part of its risk and the R&D investments to Boeing’s small prime partners. In so doing, the partners supported the investment with their own resources and were paid upon successful delivery of the parts they supplied. David Mahmoodi (2009) identifies several primary and secondary reasons for strategic outsourcing in the B787-8 programme from Boeing’s point of view. One primary reason was that outsourcing was already a common practice for Boeing. On the other hand, Airbus had a more conservative approach to outsourcing, contracting out 52% of airframes to outside suppliers. Boeing, instead, outsources 65% of the B787-8 airframe, which is more or less the same proportion as for the B777 programme (Peterson, 2011). A second primary reason is cost savings because of the lower labour rates in countries whose national firms are candidates for outsourcing. A third and undoubtedly important primary reason was time-to-

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market. As Airbus was taking over the market, the time needed to implement the B787-8 programme was critical for Boeing. As for the secondary reasons, the first one depended on the dwindling employment supply. Designing the B787-8 required numerous engineers who could not be found in the United States alone. Boeing thus considered outsourcing the solution that best enabled them to benefit from a worldwide dispersed engineering network. Another secondary reason was political. Boeing needed to convince public opinion in the USA that it could still compete with other aircraft manufacturers. As we said earlier, Airbus had superseded Boeing’s market share in the worldwide commercial aircraft industry. In addition, in 2004, some US news reports had undermined the company’s credibility. This was connected to the recruitment of personnel from the Pentagon that had favoured Boeing in some public tenders with the US Government to the detriment of direct competitors. Therefore, Boeing needed to affirm that it too was an ethical and transparent competitor. To date (2021), the Boeing Dreamliner is the most successful product in the commercial aviation industry worldwide. At the time of writing, there have been 1,489 orders of its several variants (787-8, 787-9 and 787-10) and 1,003 deliveries. The first delivery was to ANA-All Nippon Airways, which purchased 95 aircraft in one of three different variants (787-8, 787-9, 78710). This is a record commercial aircraft sale to a single airline. However, as we will show in the next section, the programme was beset with technical problems, delays in deliveries, and budget overruns. Nevertheless, it is generally acknowledged that the 787 Dreamliner programme took Boeing to a frontier in technological innovation that superseded that of its direct competitor. In the years to come, Airbus will have to bridge the learning curve in the new outsourcing and operating model Boeing has created through its supply chain partners. To facilitate coordination between Boeing and its tier-1 supply partners, in collaboration with IBM and Dassault Systèmes S.A., the company developed a uniquely sophisticated Project Lifecycle Management System (PLMs/CAD/CAM systems) (Nolan, 2012) based on CATIA and ENOVIA software. With this system, Boeing can span all its business units and sites with tier-1 supply partners (Phillips and Clark, 2000). According to Scott Griffin, Boeing’s former Chief Information Officer, “our relationship with IBM and Dassault Systèmes is strategic to the success of the Boeing Company. Boeing is aggressively becoming the aerospace industry’s leader in applying advanced information technologies to its manufacturing operations. IBM is playing a critical role in that journey” (Phillips and Clark, 2000).

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4.3.1. Difficulties and delays in the B787-8 programme The B787-8 programme had a budget overrun of approximately 14 billion US dollars compared to the budgeted 6 billion US dollars (in 2013, the programme’s total cost was around 20 billion). According to Zhao (2016: 79), “the first flight was delayed by 26 months, and the first delivery was delayed by 40 months with a cost overrun of at least 11 billion US dollars by the first delivery, including write-offs due to defects (about 2,5 billion US dollars), excessive R&D costs (about 3,5 billion US dollars), and a customer contract penalty (about 5 billion US dollars). It was the worst delay ever in the commercial aviation industry”. Moreover, numerous interventions by the international flight safety authority grounded the entire B787-8 world fleet in 2012 due to manufacturing problems (the lithium battery power system, delays in developing the stabiliser, problems assembling the fuselage, delays in obtaining certification for some components of the Rolls-Royce engine). The original plan was to receive all the subsystems from the tier-1 suppliers in June 2007 (Zhao, 2016). The plan was to assemble the plane in June-July 2007, test the first flight in August 2007, and make the first delivery in May 2008. However, in May 2007, almost all the subsystems were delivered to Boeing’s US final assembly plants incomplete. The main problems (Zhao, 2016) arising during the B787-8 programme can be said to concern the shortage of parts, defective or unfinished work by the suppliers, design issues, slow assembly at Boeing, defective key components (wings, body joints, flight control software, engine), and fires onboard. These problems were mainly due to the suppliers’ inefficient manufacturing and design processes (mainly connected with scale economies and productive capacity), poor organisation and/or ability on the part of Boeing and the small prime suppliers to plan their activities efficiently, poor testing and quality assurance processes, inaccurate coding, or poorly written instructions from Boeing. Among the case studies on the B787-8 Dreamliner, Bellmann et al. (2010) found 13 articles dealing with the programme’s shortcomings. Interestingly, all of the articles focused solely on delays in the B787-8 Dreamliner programme. All the articles were published between October 2007 and October 2009 and contained 70 causal relationships. The same articles (Bellmann et al., 2010) – published in “Flight International”, a monthly magazine focusing on aerospace and the world’s oldest continuously published aviation news magazine (founded in 1909 and published in the United Kingdom) – discovered that the delays to the 787-8 Dreamliner programme were caused by an aerostructure fastener shortage (17 causal rela-

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tionships). In addition, these articles pointed out the presence of defects in the fuselage barrel’s sections manufactured at the Leonardo plants. These fuselage sections needed to be reworked on Boeing’s final assembly line (7 causal relationships). Besides these production issues, the final assembly of the B787-8 Dreamliner was hampered by a two-month workers’ strike at the Boeing facilities (4 causal relationships). Ultimately, in this regard, “Flight International”, reporting on the 787-8 Dreamliner programme, focused on so-called travel work (5 stated causal relationships) due to part shortages and the poor quality of workmanship as well as the impact of the workers’ strike. Further delaying factors reported in “Flight International” were problems in developing the flight-control software and the need to redesign the centre wing box after potential premature buckling in the spars had been noted during static tests. Mr Mike Bair, the first B787-8 programme manager (Kotha and Srikanth, 2013: 20), instead, pointed out the inadequacy of some tier-1 partners: “some of the things that we have learned [from the delays], and this is primarily around structural partners, we had basically assumed that all the structural partners could do the same sort of work statement. Bad assumption; some of them were really good at delivering the ‘whole package,’ and some of them had some deficiencies. […] We probably wouldn’t have them do the complete package the same way next time around. So, there is some fine-tuning around how we would divvy that work up that would probably yield us better results”. Mr Scott Fancher, the next B787-8 programme manager (Kotha and Srikanth, 2013: 52), made the same observation: “you know, you get into a situation where either some of the first tiers, or their sub-tiers simply aren’t able to perform, now there could be a lot of reasons for that, could be that they are in financial stress, could be that technically they’ve run into a situation they can’t handle or could be the complexity of the production of the product that they’ve designed is beyond their capability, so we tend to look at the root cause of the non-performance and how we can help them succeed. […] Clearly as we go forward, we’ll look at some rebalancing of work scope as we sort through where work is most efficiently and cost-effectively done, but by and large, the focus is on helping our supply chain succeed, not moving the work in a rapid fashion [without completing it] [Ostrower, 2009]”. However, the biggest problem causing Boeing delays in the assembly of the B787-8 Dreamliner was the shortage of fasteners (Marsh, 2009; Zhao, 2016). As Marsh (2009:18-19) put it: “while the adoption of a half plastic airframe greatly reduces the need, compared with metal, to fasten a multitude of structural items together, thousands of fasteners are still needed to join the fewer, more integrated components and sub-assemblies. Here, a

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weak point in the supply chain became apparent. A shortage of the specified and qualified aluminium-based fasteners (akin to rivets) had arisen, partly because the selected sole supplier had shed much of its workforce during the post-’9/11’ aviation slump. As a result, Boeing’s manufacturing partners were delivering fabricated items held together with temporary fasteners obtained from everyday sources – even, it is said, hardware stores. Some were incorrectly sized, all were unqualified. Although these fasteners had been painted red so that they could be identified, the task of locating and replacing several thousands of them challenged the capabilities of a leaned-down Everett. Fasteners have to be replaced very carefully since composites are more sensitive to clamping pressure and installation force than metal. […] This happened because of damage suffered when some temporary fasteners had been removed to make way for correct replacements. Inspectors found that metal swarf produced at metal-to-composite joins when drilling oversized holes prevented fasteners from sitting flush to the fastened surfaces, prejudicing structural integrity. […] Then, to fix Dreamliner One, technicians had to remove cabin linings, insulation blankets, overhead bins and other interior items fitted prior to the show roll-out in July in order to gain access to the aircraft skin. For a period, last year, the fastener issue practically stalled production”. There was also a severe delay in delivering the aft fuselage by Vought Aircraft Industries, part of Global Aeronautica, LLC, a South Carolina fuselage sub-assembly facility, responsible for joining and integrating B787-8 fuselage sections from Alenia and other structural partners (https://boeing.mediaroom.com/2008-06-11). The latter, at that time, was a joint venture between Boeing and Alenia North America (to date, Finmeccanica North America Inc.). Vought continued to produce the aft fuselage for the B787-8 at its facility adjacent to Global Aeronautica in North Charleston (https://boeing.mediaroom.com/2008-06-11). Boeing decided to acquire Vought Aircraft Industries’ interest in Global Aeronautica, LLC, by investing approximately 1 billion euros in shares. “As a partner in the Global Aeronautica joint venture with Alenia North America, Boeing looks forward to applying its proven lean manufacturing expertise to enhance the efficiency and productivity of the facility’s operations and ensure the timely delivery of high-quality assemblies to our Everett, Washington facility”, said Pat Shanahan, former Vice President and General Manager of the B787-8 programme (https://boeing.mediaroom.com/2008-06-11). “We are proud to partner with Boeing in Global Aeronautica. We are committed to our investment in South Carolina and the success of the 787 programme”, said Giuseppe Giordo, President and Chief Executive Officer of Alenia North America (https://boeing.mediaroom.com/2008-06-11).

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In addition, during the reliability test, damage emerged at the point where the central body of the fuselage and the wings are welded together. This damage concerned Boeing, Fuji, and Mitsubishi, and required the aerostructure to be strengthened and redesigned, which led to delays of about three months. There were also problems regarding the availability and reliability of the Rolls-Royce engines, which probably delayed the certification process. Lastly, there were several episodes of fire in the electrical substations due to the use of lithium battery technology, also causing some inconvenience (Marsh, 2009).

4.3.2. The mitigation strategy for solving difficulties along the supply chain When Boeing began to experience significant delays in subsystem delivery and became aware of difficulties in obtaining a full view of the supply chain issues, they decided to adopt a risk mitigation strategy. First of all, Boeing built a state-of-the-art command and control centre (equipped with video conferencing and high data transmission speeds that allowed all partners to share and coordinate among themselves, using the same CAD/CAM drawings as the B787-8). The Puget Sound centre operated 24 hours a day, seven days a week, 365 days a year, to work and coordinate with Boeing’s global outsourcing partners. This “Production Integration Center” allowed Boeing to know what was happening in each of the individual plants of its suppliers at all levels. As Mr Bob Noble, Vice President of Supplier Management for Boeing Commercial Airplanes, said, “We needed to take advantage of the night” (James, 2009), referring to the fact that the centre operated seamlessly across the globe. The 5,100-square-feet centre has 27 workstations, each equipped with three flat screens. The screens contain dozens of TVs that monitor worldwide news, supplier plans, global weather conditions, and earthquakes in real-time, as well as each supplier’s manufacturing issues, the health of computer servers connected with the B787-8 programme, and the shipping schedules for the three giant Boeing 747 Dreamlifters. The latter is a wide-body cargo aircraft, an extensively modified Boeing 747-400 airliner. It is used primarily to transport Boeing 787 Dreamliner aircraft components to its assembly plants in the US from suppliers worldwide. There was also a team of mechanical engineers, procurement agents, supplier management staff, global logistics experts, and quality team employees. The team worked to solve every issue arising along the B787-8 international supply chain. Boeing also

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sent its engineers worldwide to solve emerging issues at every level of the supply chain. As mentioned above, Boeing insourced some bottleneck industrial supply partners, acquiring control of two Vought Aircraft Industries plants that had failed to complete the “one-piece barrel” assembly of the rear fuselage section at its facilities in South Carolina (USA). Another important risk mitigation action was to boost the workforce in their own assembly plants with economic rewards to increase productivity and reward punctual delivery. Boeing also replaced its own senior management with new appointments who had more experience in managing supply chains. Boeing provided financial support for some tier-1 suppliers when the delays caused an impasse in the programme (Ray, 2008). Finally, Boeing intervened in the design activities alongside important partners who proved unable to solve some design problems, such as the Leonardo B787-8 empennages.

4.4. The “Small prime” contractor’s perspective 2: Leonardo and the rationale behind the decision to join the B787-8 programme We must look to the past to understand the outsourcing logic behind the Boeing 787-8 supply chain network management. Boeing launched the programme in January 2004, having previously declared in June 2003 that it intended to make an aircraft totally designed and produced in carbonfibre. This decision was preceded by a 1998 study and product development period during which Leonardo participated in an initial collaboration venture as a key partner supplying some key components. Thus, Boeing decided to launch a new programme exploring stiffening architecture and new materials in the aircraft industry. At the start (1998) of the programme, Boeing had launched the concept of a new transonic aircraft made from composite fibre, and it was this kind of composite vehiThe managers interviewed at Leonardo S.p.A., from September 2009 to December 2012, were the following: Vincenzo Caiazzo, Chief Operating Officer, North America; Nazario Cauceglia, Senior Vice President and Chief Technical Officer; Aldo Gianni, CEO’s Senior Advisor; Giovanni Sagnella, Head of Aero Structures Engineering; Generoso Iannuzzo, Head of Aero Structures Technology; Danilo Cannoletta, Engineering Manager; Marco Sguanci, Chief of Procurement and Supply Chain; Rosario Neri, Budget and Control for Procurement and Supply Chain Manager; Giancarlo Mezzanatto, Planning and Development Supply Chain Manager; Pierantonio Cerreta, Program Manager B787-9; Nicola Miani, CPE 787 Horizontal Stabilizer. 2

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cle rather than the declared material which was to be the true object of the pre-industrial collaboration. This objective was abandoned several years later (2003), and the information was probably intended to mislead the competitors about the true goal, namely to radically transform the new concept of ‘aeroplane’ and the aircraft industry as a whole. This disruptive technological innovation was not, therefore, particularly related to proposing a brand-new product concept or radical product innovation (Markides, 1997) but to developing new material and the necessary associated innovative processes for building the new commercial aircraft (disruptive technological innovation fostered by new carbon-fibre materials). Boeing’s logic, together with that of the key supply partners, was to study the new frontier of composite materials and bring about a technological breakthrough. From the beginning, Leonardo introduced a horizontal structure (fuselage) that would minimise fuselage assembly time and costs (the “one-piece barrel” patent) and the know-how to build a central stabiliser. These competencies were inherited from some previous experiences (related to the ATR and the MX programmes). As for the fuselage, Leonardo’s contribution is not so much its skill in working the carbon-fibre, which it did not already possess, but its pre-existing know-how concerning working with metal laminates. This competence was essentially a Dutch patented capability developed for Airbus, using stratification of aluminium and plexiglass composite. As stated by the CEO’s Senior Advisor at Leonardo “[…] this solution improved the fatigue of the materials in operation and the infusion. We started from a rich fibre and infused it by ourselves […]” (quote, Leonardo’s CEO Senior Advisor interview, 2009). On the other hand, Boeing’s main goal from the start was to explore the composite materials skills available in the entire global supply market; this was the innovative focus of the programme. Weights, costs, and the industrial effects of the new material were evaluated in concert with the first partners (small primes), and, of course, the organisation of the programme remained centralized and impermeable. Leonardo had been linked to Boeing by decades of fruitful collaboration, and in 1998 showed up with their engineers at Boeing, which welcomed them into the programme. As Leonardo’s senior vice president and chief technical officer stated, “[…], we were the first partner, the most involved in numerical terms on the 787-8 programme. Boeing has always been very good at controlling partners who still worked isolated on the programme. The birth of the Partner Council, an organization participated by the various prime contractors, including Leonardo, was more to give each partner horizontal visibility of who was involved in the programme, but not the ob-

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ject of the collaboration. For example, at this stage, it was unknown what the Japanese were working on in terms of calculation solutions and model, and what they would produce […]” (quote, Leonardo’s Senior Vice President and Chief Technical Officer interview, 2009). At some point (June 2003), the choice was crystallised: the small primes were informed by Boeing that the final decision was to design a commercial aircraft in carbon-fibre. As a consequence of Boeing’s choice, Leonardo inevitably decided to make massive use of carbon-fibre on the fuselage. Metal material had already shown its full development potential. The decision to create this new opportunity was not accompanied by a full awareness of, and competence regarding, how the composite would be processed. Therefore, Boeing lacked total control over the industrial process technology regarding carbon-fibre, which had to be explored by the small primes and their own supply partners. Until 2004, work focused exclusively on new ideas. The first two years of the programme saw Leonardo engineers involved with their counterparts at Boeing, working closely together on the configuration, certification, and testing of the new components assigned to the supplier. As stated by the Senior Vice President and Chief Technical Officer at Leonardo, “[…] to certify a new aircraft structure, we also had the experience of testing and the responsibility to list the kind of tests to be carried out. The tests were split, and Boeing was the certifying body. In 2004 in Everett-Seattle (first production and assembly line of Boeing 787-8) between engineering and other company functions, about 100 Leonardo employees were on a mission and involved in the programme […]” (quote, Leonardo’s Senior Vice President and Chief Technical Officer interview, 2009). Over time, the working group involved in the programme was enriched by introducing other resources, bringing an internal knowledge transfer. Considering involvement in the design aspect in Italy alone, 250 employees participated in the B787-8 programme. In 2004, then, the work was rigidly shared out. However, Boeing needed a “design guide” to ensure uniformity among the several partners involved. For example, the reasonably detailed design guide sought to ensure that the fuselage development would be the same even if the supplier changed (Leonardo vs others). The design guide was therefore a contract that established how calculations were to be made and which metrics could be used. Boeing, therefore, identified the models that incorporated the scientific methodology of the calculations and the admissible requirements that would allow everyone engaged in developing a part number for a component or sub-component to calculate and apply the ordinates of the parts. The partners, like Leonardo, increased their knowledge of processing

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new materials, industrial process technologies, assemblies, and equipment used or developed for manufacturing. As highlighted by the Senior Vice President and Chief Technical Officer at Leonardo, “[…] we also made a decisive contribution to the ordinates on the dry materials that we infused in Pomigliano d’Arco (near Naples, Italy, author’s note). The part that remained hidden from the prime contractors represented Boeing’s proprietary know-how and concerned the calculation models for the analysis, evaluation and integration of the various key components’ calculation contributions, each developed by one or more small primes in direct competition. Therefore, there is a part of the computing technology that we did not see and do not already see but to whose development we contributed together with the other partners on the programme […]” (quote, Leonardo’s Senior Vice President and Chief Technical Officer interview, 2009).

4.4.1. How Leonardo exploited and explored new core competencies through the B787-8 Dreamliner programme Generally speaking, Leonardo’s partnership with Boeing in the B787-8 programme allowed it to exploit the core competencies it had previously developed for other programmes. However, the domain had to be explored and fine-tuned for a completely new material technology: the carbon-fibre composite. In addition, the programme allowed Leonardo to explore and absorb a radically new (meta)competence regarding the designing process – prevalent in concurrent and remote mode – for which it needed a specific digital codesign platform and software. Its partnership in the B787 programme thus allowed Leonardo to leverage a sort of “ambidexterity”, achieved by balancing exploration and exploitation, allowing the company to be flexible, adaptable, refinement oriented, and innovative through experimentation all at once (Bernal et al., 2019; Andriopoulos and Lewis, 2009, Holmqvist, 2004). The massive use of a digital concurrent engineering platform in the product design process allowed Leonardo to gain new expertise in a different field of (meta)competence to compete in the aircraft industry. As Leonardo’s Head of Aerostructures Engineering put it, “[…] this same specialization in competitive digital co-design represents a new meta-competence which we believe will play a fundamental role in the development of the commercial aircraft industry in the future […]” (quote, Leonardo’s Head of Aerostructures Engineering interview, 2009). The working methodology was an excellent lesson for Leonardo’s engineers, both in terms of process

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organisation and the digital technologies environment in which the B787-8 programme was developed. Boeing commissioned IBM and Dassault Systèmes S.A. to create this digital relational platform, but it was developed together with all tier-1 partners. The platform at Leonardo was checked weekly, and any problems were studied and resolved jointly with Boeing. Control over planning, engineering and collaboration for its development were some of the crucial roles orchestrated by Boeing. Creating a digitalized and highly integrated concurrent co-design environment has become a standard for flight certification bodies. The product know-how Leonardo gained thanks to the B787-8 programme can be broken down as follows: the calculation models for stabilisers are owned by Leonardo, and they can keep them; the fuselage design is split between several partners, but the patents concerning manufacturing methods are owned only by Leonardo; Leonardo is the only partner to design the 787-8 fletching system (empennages), a competence kept totally inside the firm and managed under its control. The Head of Aerostructures Technology at Leonardo clarifies the competencies the company brought to this and other programmes which the firm is working on for other players: “[…] for a long time, my responsibility has been related to the aircraft structures and systems installation. I deal with all the programmes being developed at Leonardo. Apart from the A380, we are involved in all the world projects. We worked on the A380, and then we moved on to the B787-8. We are responsible for two barrels of the fuselage (produced in a single solution or melded through the technology of the onepiece barrel process). We are even working on Sukoy, the Bombardier, and MS21 (composite wings and wing fletching) […]” (quoting Leonardo’s Head of Aerostructures Technology interview, 2009). The manager goes on to explain Leonardo’s contribution to the advancement of the aerospace programme compared with its two competitors: “[…] we know what Boeing and Airbus are doing; we improve and offer them something new. For instance, lightning, or the reflection (glow) generated by carbon-fibre, becomes an important hurdle for a composite aircraft, and we are working on this issue. Also, installing structures on the composite is not a conventional thing. We are trying to apply a multifunctional approach to the project: systems, lightning resistance, avionics, etc. We began our experience on the Boeing 787-8 ten years ago, working on aerostructures and systems with some working groups at the Boeing headquarters. As for product technologies, we analysed the scenarios of possible technologies to be applied to the aircraft industry in the future […]”. For the fuselage especially, Leonardo engineers worked on a composite using different processing methods; hybrid laminates, competencies previ-

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ously developed for, and applied to, the Airbus 380; welding with aluminium and lithium. As Leonardo’s Head of Aerostructures Engineering says “[…] thanks to the development of one-piece barrel technology, of which Leonardo retains the manufacturing process patent, we have made significant steps forward in building the fuselage. Of course, the manufacturer – Leonardo – has firm control over its production process. The volume of the fuselage is 27 times greater than that of the ATR. The mere knowledge of the requirement to which the test of the composite fuselage component is subject represents a key competence in the aircraft industry […]” (quote, Leonardo’s Head of Aerostructures Engineering interview, 2009). This aircraft represents a technological breakthrough but also a radical innovation for the market due to the benefits it guarantees: no maintenance costs for 40 years; greater comfort for the passenger (since the composite guarantees better humidity on board and less noise); lower flight costs, higher speed, lower management, maintenance and operating costs. Leonardo studied and developed the fuselage barrel solution together with Boeing, implementing different construction methods. The manager went on to say: “[…] we did reviews in Seattle every month, discussing the costs and returns of alternative solutions with Boeing. At the close of 2003 and the beginning of 2004, it was agreed to adopt a fuselage production process proposed by Boeing but developed at Leonardo: the one-piece barrel solution […]” (quote, Leonardo’s Head of Aerostructures Engineering interview, 2009). In fact, the fuselage is manufactured in just five pieces, later joined together in a single production process. In this way, compared to the aluminium fuselage, which was produced in many pieces, better structural rigidity and greater resistance was obtained. For the horizontal stabiliser, Leonardo developed a technology also used on the ATR: fletching with a baseline configuration. Leonardo brought its technology to the B787-8 Dreamliner programme and assumed responsibility for designing and testing the sub-assembly. Recourse to strategic outsourcing, combined with strategic offset, has enabled Boeing to leverage funds for research in the aviation sector in the many countries involved in the programme. This is not a secondary benefit. Governments finance research programmes in proportion to the industrial benefits they will reap for their own country and not only on the basis of expected increasing international competitiveness in terms of acquired know-how. The logic of strategic outsourcing Boeing adopts with its network partners is based on a “democratic” principle: everything each small prime partner brings to the programme belongs to the partner itself; everything

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each small prime contractor has contributed to developing, whether it leaves the programme early or at the end of the programme, belongs to both the partner and Boeing. As emerges from the field research, the processes are highly standardised. Each phase and part number of the programme must be subject to risk analysis and a mitigation action plan. Additionally, a multitude of organisational routines were put in place. According to the Chief of Procurement and Supply Chain at Leonardo, “[…] the system that has been imposed on us is one of “bureaucracy”: sometimes, the excess of routines has caused certain checks to fail. Our own supply chain network has been reshaped and has become very similar to the vertically integrated one Boeing adopted as a whole. Naturally, this only applies to the individual key component/s under our direct responsibility (fuselage, stabilizer, the fletching system) […]”. (Leonardo’s Chief of Procurement and Supply Chain interview, 2009). Leonardo’s competence-base regarding key innovations such as the composite comes from long and intensive investment in R&D programmes, lasting 7-10 years, and concerns both product and process technologies. At Leonardo, the research activity is arranged according to nine subsequent development levels. Levels from one to three address basic research and involve (mainly Italian) universities; levels from four to six regard applied research and involve International Research and Competencies Centres; levels seven to nine regard industrial research and involve the supply network. To reach level “nine” or “pre-industrialization” and obtain a final solution to be applied within a new aircraft programme, it is necessary to refine manufacturing processes by participation in learning programmes with partners and to refine experimentation through technological advances, demonstrators and participation in international programmes. As one of the Engineering Managers at Leonardo says, “[…] we have a road map for research on both infrastructures and systems, and we draw heavily on national and international funding […]” (quote, Leonardo’s Engineering Manager interview, 2009). However, this is what is known as pre-industrial research on prototypes. Then there is the other delicate aspect of the development of the programme. As the engineering manager affirmed, “[…] today, we are in a phase where even the European Union understands the need to finance experimentation. Sometimes, the suppliers grouped in a single partnership on a specific objective are also involved in the research programmes. The reason for this is so-called specialized research. For example, the supplier has project responsibilities on interiors […]” (quote, Leonardo’s Engineering Manager interview, 2009).

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4.4.2. Leonardo’s perspective on supply chain management in the B787-8 programme Within the commercial aircraft industry, Leonardo plays the role of system integrator for regional aeroplanes (like the ATR 42 and ATR 72, for which it produces the whole fuselage and empennage, constructed entirely in composite), and small prime for long haul aircraft (like the Boeing 787, for which it is a risk-sharing partner). Within the B787 programme, Leonardo is a structural integration partner, coordinating its subcontractor network (tier-2 and tier-3 suppliers), also supplying directly usable sub-assemblies. Therefore, Leonardo needs to oversee all the commitments consistent with a small prime partner’s role and possess structural integration competencies, such as design, testing, certification, and flight. For instance, in the 787-8 programme, Boeing adopted titanium welds technology, which Leonardo did not prioritise. The need for Leonardo and its supply network to work with this technology encouraged the company to develop capabilities regarding this process technology internally and to evaluate its impact in terms of medium/long term benefits/costs. The supply chain governance model of a specific aerospace programme depends on the role assumed by the suppliers along the value co-creation chain. Thus, when Leonardo is involved in programmes in which it acts not as a small prime but as a system integrator, there is the greater complexity of managing a much larger supply network directly. The requirements for the aircraft design and manufacture are always the same; what changes are the depth and breadth of responsibility and commitment. In terms of technology transfer from Leonardo to its supply partners, there are tier-2 suppliers that become involved in specific projects only at an advanced stage of technological development; these deal with the industrialization of specific part numbers; others, in riskier programmes such as the B787-8 are involved in the pre-development phase. Leonardo assigns two possible levels of responsibility to its B787-8 tier2 suppliers. The first is the design package involving design only, with no risk-sharing. The second is a vertically integrated package, where the suppliers are responsible for designing and manufacturing their assigned work packages, thus becoming risk-sharing partners. Boeing required Leonardo to ensure that all its suppliers were qualified according to their own standards. Thus, Leonardo built an ad hoc centre of excellence in Grottaglie (Puglia, Italy) and had to organise its own supply chain. As the Supply Chain Manager at Leonardo says, “[…] the project to organize a supply chain for B787-8 was developed in two consecutive phases […]” (Leonardo’s Supply Chain Manager interview, 2009).

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Phase one (ending in October 2009) was one of pioneering, seeking to develop totally new technology and, based on the capabilities of each supplier, to process the carbon-fibre. During this phase, work packages (orders) were assigned by Leonardo, selecting new sub-contractors on the basis (among other things) of their previous experience gained in managing their supply network. In fact, Leonardo had been trying to gather detailed information about its suppliers to make continuous assessments since the ATR programme. At that time, adopting a supplier assessment tool was also imposed along its own supply chain. As the Budget and Control for Procurement and Supply Chain Manager at Leonardo stated: “[…] we started evaluating our supply chain at the time of the ATR programme, later continuing with the B787-8 programme. We were scared by the complex logistics around the programme. At the time, we had a supply chain with fourteen suppliers, and we made our assessments based on: 1. the marginality of the supplier within the programme; 2. its ability to manage logistic flows; 3. its cost competitiveness, and 4. its manufacturing capacity. One of the weaknesses of our supply chain is the size of suppliers who are not organized to fulfil the manufacturing quantities required by the different programmes that Leonardo is involved in (i.e., B787-8 and ATR). Our supply chain suffers from “industrial dwarfism”. 5. financial sustainability. Some suppliers have poor financial strength, which does not allow them to cope with “current” investments in raw materials (which Leonardo supplies). In this regard, one of the projects that we started some time ago, which will become operational at the end of 2009, is the birth of a service provider that will allow suppliers to centrally negotiate the raw materials that will feed the supplies; 6. variance with respect to the best-in-class performer. Although our suppliers are the best Leonardo can have, there is still a gap between the best and ideal supplier. So, we recommended action our partners can take to constantly improve their performance. Progress and other business functions (Operations, R&D, Finance) are monitored from time to time, depending on the area needing improvement; the necessary corrections are then adopted; lastly, 7. the supplier’s governance role, in terms of its contribution to the growth of the entire network […]” (quoted from the interview with Leonardo’s Budget and Control for Procurement and Supply Chain Manager, 2009). Concerning the specified KPIs (relating to organisation, production, finance, efficiency, etc.), Leonardo calls the suppliers, shows them their position compared to the best ten suppliers, and gives them personalised recommendations to improve efficiency and production-cycle costs. To summarise, in phase one, suppliers were selected above all for their technological competencies or mechanical processing capacities. Neverthe-

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less, this evaluation had to be combined with a qualitative analysis of the supplier’s potential ability to work on new materials (titanium and carbonfibre). During this phase, reference was made to the automotive sector and suppliers who had already worked on the composite. In other words, regarding the technology of the material, it was much more like a bet (or qualitative evaluation) than an objective evaluation. As Leonardo’s Chief of Procurement and Supply Chain “[…] highlighted, […] we selected a minimum number of preferred suppliers for our own B787-8 supply chain. We initially considered only the primary industrialization aspects and the ability of the tier-2 suppliers to work the composite. So, we selected mechanical skills in processing carbon-resin materials. The chosen suppliers were admitted to tender, and the design/production orders (vertical packages) were assigned to the winners […]” (quoted from the interview with Leonardo’s Chief of Procurement and Supply Chain, 2009). Leonardo releases information and vertical know-how to its suppliers, assuming a relatively limited risk of spill-over, not allowing anyone to overcome the barriers protecting its knowledge and core competencies. As the Planning and Development Supply Chain Manager at Leonardo says, “[…] we give the supplier what is strictly necessary to obtain the supply and allow it to access the interface with the concurrent co-design platform (ENOVIA and CATIA digital platforms) […]” (quoted from the interview with Leonardo’s Planning and Development Supply Chain Manager, 2009). These suppliers also acquired skills in the composite component assigned to each. As the Planning and Development Supply Chain Manager at Leonardo says, “[…] for example, the supplier who designed the spindle that allows us to produce the one-piece barrel acquired the specific competence needed to manufacture the composite […]” (quoted from the interview with Leonardo’s Planning and Development Supply Chain Manager). Phase two entailed the reorganisation of Leonardo’s supply chain as required by the life cycle of Boeing’s 787-8 orders. Indeed, between phase one and phase two (2009-2010), B787-8 orders increased from one series per month to five series per month. This meant changing the approach to the management of relationships within the B787-8 supply chain, emphasising aspects relating to production capacity and cost constraints. Above all, during phase two, suppliers needed to have the manufacturing capacity and to demonstrate their ability to meet efficiency requirements. The organisational model adopted by Leonardo not only requires the management of a few selected tier-2 suppliers – five or six acting as small prime partners with Leonardo – but also concomitant planning of the supply chain of the future (looking to the medium-long term). Four projects affected Leonardo’s procurement decisions in 2012: the evaluation data-

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base of existing suppliers; the growth/efficiency programmes of existing supplier portfolios; scouting for new suppliers; the terms of the contracts. The analytical assessment process was supplemented by a further twenty new variables attributable to some macro-evaluation parameters, such as organisation, production technology, finance, and efficiency. As the Planning and Development Supply Chain Manager at Leonardo put it, “[…] Leonardo will not necessarily distort the current network: it could place new suppliers alongside existing ones in order to mitigate price concerns […]” (quoted from the interview with Leonardo’s Planning and Development Supply Chain Manager, 2012). This analytical assessment does not consider the suppliers of primary raw materials: titanium, carbon-fibre, and other raw materials. Risk-sharing contracts follow especially transparent written rules. As the Budget and Control for Procurement and Supply Chain Manager at Leonardo says: “[…] imagine the contractual clauses covering the management and sharing of exchange-rate variation risk. We told the supplier: your prices are ‘fixed’, meaning that they will not be adjusted if exchange-rate volatility remains within a certain contractually defined range […]” (quoted from the interview with Leonardo’s Budget and Control for Procurement and Supply Chain Manager). Financial resources are also invested to foster supplier growth, so Leonardo also has a sort of “lock-in” effect. As highlighted by Leonardo’s Chief of Procurement and Supply Chain, “[…] we have changed the paradigm in the sense that if there is an industry in which ‘partnership’ is concretely feasible, it is aerospace […]” (quoted from the interview with Leonardo’s Chief of Procurement and Supply Chain interview, 2012). Before this new approach, the relationship with the supplier was still long-term. However, Leonardo was not able to extract all the potential benefits from it. To ensure guarantees are maintained, the success of the partnership requires suppliers to adjust in order to constantly stay abreast of the competitive challenges required by programmes such as B787-8. If Leonardo’s key suppliers are to remain competitive, they must commit to constant research into new technological solutions for the aerospace supply market. Therefore, this new approach is oriented towards a continuous improvement of the supply chain. As mentioned before, Leonardo decided to adopt a partnership approach with only some key suppliers (5-6 tier-2). The profit margin on supply contracts is fixed, and recovery in terms of profitability, therefore, depends on efficiency. The break-even on investment in efficiency is very short and does not extend beyond six months. Furthermore, suppliers are free to apply the new technology (mainly process technology) also to other customers.

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The trend followed by Boeing and Airbus is to impose its main contractor selection-assessment criteria, as happened with Leonardo (Boeing’s small prime) and its tier-2 and possibly tier-3 suppliers. As stated by the Budget and Control for Procurement and Supply Chain Manager at Leonardo, “[…] we have decided, on the other hand, to try to have our own model for evaluating and managing supply chain relationships, which, among other things, is transversal to the various programmes to which Leonardo is committed […]” (quoted from an interview with Leonardo’s Budget and Control for Procurement and Supply Chain Manager, 2012). It was necessary to convince both Boeing and Airbus of the virtue of the selection-assessment model Leonardo was developing. It is still a “star model” of collaboration in the supply chain, insofar as best practices are never shared or developed in a supplier-supplier relationship but are always mediated through Leonardo as a strategic centre or focal firm in the supply network. Conversely, the “net model” is implemented in some way by Boeing, which has set up a Partnership Council through which the members (prime contractors) can also develop horizontal relationships. Finally, there is a tendency in the aircraft industry to globalise the supply market towards low-cost countries. This means there is a geographical rearrangement of the supply chain, with suppliers becoming global players. Leonardo, for example, has substantial job orders assigned abroad, especially for raw materials and components (30%). Of these, around 60% are represented by Turkish, Israeli, and American suppliers. For the B787-8, Leonardo purchased fuselage sections in China and gears in Taiwan. The final certification of part numbers is the responsibility of small primes, even for sub-assemblies designed by tier-2 firms. As the Planning and Development Supply Chain Manager at Leonardo says, “[…] as yet, the sub-suppliers do not have the managerial culture to accredit themselves directly to Boeing; however, by optimizing the supply chain, we cannot completely exclude that in the near future some small prime companies may try to obtain a direct relationship with Boeing. However, it is a problem of size, and we believe it is improbable that sub-suppliers will organize themselves in networks. We are identifying small primes with whom we can establish longterm partnerships […]” (quoted from an interview with the Planning and Development Supply Chain Manager, 2012). In 2012 Leonardo’s supply chain management still had some weaknesses in terms of the uniformity of component quality, delivery times, and delays or discrepancies in the acquisition of raw materials. The financial capabilities of the supplier are strategic from this point of view: Leonardo acted as a guarantor for its suppliers in the context of the

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national and international research programme – directly through evaluation, and indirectly by contributing to the fundraising.

4.5. The tier-2 perspective 3: Dema and the rationale behind the decision to join the B787-8 programme The managers at Dema fell into line with Boeing’s changes in 2012, shifting from the B787-8 programme to B787-9. Overall, Dema dedicated 300,000 hours of engineering activities to the two programmes. In Benevento, Dema acquired CAM srl for composites and owns the B787-8 design department located in Pomigliano (a small town near Naples, Italy), where all the customers’ needs and everything concerning the B787 programmes are analysed (all designing activity is recognized and monitored by Boeing). Thus, Dema has all the competencies needed for the B787-8 programme as far as composite design and manufacturing are concerned. Dema has 40 engineers working on design for international customers, reaching 60 in 2012. Leonardo’s vertical B787-8 packages involve 30 engineers (over half of its engineering capacity). For the B787-8 programme, Dema worked on the floor of the fuselage, the stabilizer, and several composite part-numbers with vertical packages. In 2012, it was also involved in the B787-8 project, employing 10-12 people at the dedicated B787-8 second final assembly plant in Charleston (USA). For the B787-8 programme, Dema was engaged in designing several work packages involving fuselage sections 44 and 46, i.e., the middle section of the fuselage under the primary responsibility of Leonardo, and some vertical packages (including engineering and manufacturing). Although Dema was not supposed to have direct relations with Boeing, in reality, the opposite was true. This was achieved in two ways. Firstly, through the presence of Boeing representatives at the Dema plants, and then, using ENOVIA web-based concurrent co-design architecture, permitting Dema’s engineers to connect directly – day-by-day – with Boeing’s colleagues in the B787-8 design process. As reported by the Vice President of Strategic Marketing and Institutional Relations at Dema, “[…] for the B787 programmes, we are involved in almost all of Leonardo’s technology development. The B787-8 delays brought us losses of 10 million Euros around the world. In the case of B7878, most delays were also due to the certification process. Too many new mateThe following managers were interviewed in October 2009 and December 2012 at Dema SpA: Paolo Bellomia, Vice President of Strategic Marketing and Institutional Relations; Placido De Alcubierre, Head of Plant in Somma Vesuviana (near Naples, Italy). 3

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rials were introduced all at once, and in most cases, procedures and certification rules were lacking […]” (interview with Dema’s Vice President of Strategic Marketing and Institutional Relations, 2009). As affirmed by the Dema Head of Plant in Somma Vesuviana, “[…] for B787-8, we were assigned vertical packages by both Boeing and Leonardo. Leonardo’s big limitation nowadays is that its organization as an organizational identity seems to be missing […]” (interview with Dema’s Head of Plant, 2009). The company is also experiencing a moment of extreme financial vulnerability. Some resources and engineers have been diverted to the Bombardier programme.

4.5.1. A new approach to supply-chain management for the Boeing 787-9 programme In 2012, Dema took part in the B787-9 programme and the production of the longer version of the aeroplane (787-10). Comparing the B787-9 and B787-10 with the previous version (B787-8), Boeing and Leonardo confirmed all Dema’s previous work packages and assigned new ones for the systems. According to the managers’ reasoning, Boeing’s improvements to the B787-9 are as follows. First, the aircraft is longer and has more seats. This affects the convenience of airline customers. Second, the housing of sections 44 and 46, previously made up of two linked parts, was replaced with only one part (a one-piece shorty frame). Third, concurrent co-design was introduced for both structure and systems, whereas the systems in the aerospace industry are traditionally designed soon after the structures. Fourth, the use of aluminium is practically prohibited in the B787-9 programme. The percentage of titanium and composite, on the other hand, is far greater, for obvious reasons of weight. Fifth, Leonardo relies heavily on contract-based relationships with its suppliers rather than to-order ones. This is not a risk-sharing approach, but there is some guarantee of job continuity during the B787-9 aircraft life cycle. Dema’s contribution to B787-9 can be summarized as follows. First, the firms designed the primary structure joining fuselage sections 44 and 46 to the wings. The wing box was previously in two parts but has been simplified and improved as a single unit. Second, they designed the cargo door and passenger door, acquiring (design) work packages for these part-numbers from Leonardo/Boeing, in addition to some minor production work packages. As reported in 2012 by the Head of Plant at Somma Vesuviana, “[…] there is great confusion about the B787-9, and it is not yet clear what will be

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assigned. Boeing is internalizing and trying to insource much of the project’s added value again, so Leonardo will probably not continue to assign vertical packages. For the B787-9, Dema has also acquired some new design and manufacturing work packages. However, most of them are for manufacturing, and Dema is penalized compared with other USA suppliers in terms of operational and manufacturing efficiency […]” (quoted from the interview with Dema’s Head of Plant, 2012). Boeing was calling the entire project into question, forcing Leonardo and the other partners (prime contractors) to engage American key parts suppliers. Thus, whereas, Leonardo and the other Boeing small primes had great freedom and absolute power to choose their partners in the B787-8 programme, Boeing was trying to bring the focus back to the USA for the B787-9’s fuselage sections 44 and 46. This meant that tier-2 firms were forced to compete with larger American suppliers, whose organization, costs, and delivery time were more competitive. Boeing, furthermore, nudged its way fully into the supply pyramid scheme, no longer trusting the prime contractors’ (small primes) ability to coordinate their own network. Boeing no longer wanted to give too much leeway to its small primes and tried interacting directly with tier-2 suppliers. They wanted to be close to the suppliers who actually carried out the work along the supply chain, disintermediating the still dominant interface of small primes and imposing its manufacturing methods and routines on them. This was a drastic but necessary change of direction that would allow a complete vision of the entire supply network. Leonardo hit a crucial point in 2012: either it had to find a way of obtaining a new geocentric strategic role in the new scenario of supply chain relationships with Boeing, or it would be forced to withdraw. There were two reasons for deciding to redesign its relationships along the supply chain compared with the B787-8 programme: to remedy problems that had emerged in the previous programme and reduce the weight of the aircraft to increase cost-efficiency. This was partly due to the competition, as Airbus was also designing a new composite aircraft. However, designing the B787-9 was more laborious than the previous version. With the latest version, Boeing, and therefore Leonardo too – along with other small primes – sent a strong message to their suppliers who had made huge investments but not fully exploited them. As stated by the Vice President of Strategic Marketing and Institutional Relations and Placido De Alcubierre, Head of Plant in Somma Vesuviana, “[…] the organizational model for designing the B787-9 is not innovative compared with B787-8, but what is new is how Boeing assigns the design authority per single component. New technologies allow Boeing a different selection of key part suppliers […]”. For example, there is just one company supplying

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aluminium (TMX) for the entire supply chain. You cannot use other suppliers; Boeing re-invoices the tier-1 and tier-2 levels suppliers for that (quoted from the interview with Dema’s Vice President of Strategic Marketing and Institutional Relations and the Head of Plant interview, 2012).

4.5.2. Exploiting Dema’s new competencies through the B787-8 programme Boeing’s adoption of a web-based concurrent co-design platform triggered impressive development among tier-2 and tier-3 suppliers’ work methodologies and organization management. The main effects of the digital concurrent co-design platform adoption are the standardized procedures and tools, wired work methodologies transferred online, and the digitalized processes and procedures implemented by all the supply partners involved in the B787-8 programme. The system provides a process check and proposes final designs for approval through a strictly online-proceduralized process. This helped the tier-2 and tier-3 suppliers improve their organizational practice according to the work methodology developed by Boeing for the B787 programmes. The system permits both dynamic and static checks ensuring configuration control as well as materials and process control. The suppliers grew in terms of business process re-engineering, and it is likely that some tier-2 suppliers – such as Dema, as multiple suppliers for more than one customer (i.e., Leonardo, Bombardier) and different programmes – learned different ways of working. Consequently, they could be considered more culturally advanced than other small prime contractors from the organisational standpoint. Involvement in the B787 programme gave Dema and other tier-2 suppliers the opportunity to explore new competencies, namely: • internal and external communication: meetings planned with clear indications regarding participants, topic, precise duration, documents to be produced, etc.; • process requirements to be met; • risk assessment; mainly of internal importance, such as a plan to highlight and quantify the risk of scarcity of resources for a few critical tasks or skills; • defining mitigation and recovery plans; • through its working methodology, Boeing helped tier-2 identify several internal critical processes the latter was unaware it had available. In order to address Leonardo’s difficulties in coordinating its network of suppliers, Boeing favoured extensive disintermediation and direct con-

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trol by placing representatives in the sub-contractors’ plants. Thus, Leonardo’s Grottaglie facility (Puglia, Italy) hosted around one hundred American Boeing employees, whereas Boeing’s engineers occupied a whole building, almost equalling the number of Italian engineers at Leonardo’s Pomigliano d’Arco plant. This was probably not due to delays but also Boeing’s awareness of the importance of fuselage technology, using the “one-piece barrel” to the competitive advantage of the company and the entire network for years to come. Thus, taking advantage of a problem at Leonardo, Boeing broke into the supply network, most likely to ensure compliance with efficient delivery terms and to gain skills and critical production process routines. As confirmed by the Vice President of Strategic Marketing and Institutional Relations at Dema, “[…] Leonardo had major problems making the stabilizer. We do not know if this is also true of the other partners. But it must be true for the Japanese Mitsubishi with its huge delays in making wings […]” (quoted from the interview with Dema’s Vice President of Strategic Marketing and Institutional Relations, 2012). Lastly, using a web-based concurrent co-design platform improved how Boeing coordinated the supply network and limited the prime contractor partners’ contribution to single-stage project management and control activities. On the other hand, technology transfer is facilitated by the platform and the direct involvement of Boeing employees in the various tiers of the supply chain (1, 2, and 3). All this led to a sort of ‘flattening’ of the traditional tier-centric pyramid of supplier relationships in the aerospace industry from the B787-9 programme onwards.

4.6. The tier-2 Geven perspective 4: the rationale behind the decision to join the B787-8 programme Geven supplies Boeing with aircraft seating and manufactures interiors. The Boeing accreditation process is complex and competitive because of the supplier’ great interest in entering the aircraft interiors market. For the B787-8 programme, Boeing’s relationship with Geven was fully digitalized and intermediated insofar as it received Boeing’s specifications for the design, manufacture, and installation of the insulation blankets on the two The managers interviewed in Geven SpA (10/2009 and 10/06/2012) were: Rodolfo Baldascino, Chief Marketing Officer; Federico Manna, Programme Manager of 787 Dreamliner; Angelo Romano, Direct of Strategic Initiatives & Commercial Partnership. 4

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sections of the central fuselage (44 and 46) from Leonardo using the ENOVIA platform. Blankets are systems of thermal and acoustic insulation (primary and secondary insulation). Having received the design specifications for the blanket, Geven’s Engineering Department used ENOVIA to manage the entire process up to delivery. The property rights of the final design belong to Boeing. Geven provided the blankets for Boeing’s final assembly facility in Seattle (USA). Here, the barrels were assembled, and the blankets were installed too. Regarding section 46, Geven assembled the blankets for the whole body of the B787-8 fuselage, including the underside of the floor. As regards 44, Geven assembled the blankets from the ground up as this is the section where the wings attach. At the Leonardo plant in Grottaglie too, the overblankets and blankets for the B787-8 were installed from the floor up. However, Geven staff were often called to Boeing’s plant in Seattle to carry out the cabling or check the actual size of individual part-numbers. They would also verify compliance with the specifications and proceed to on-site sampling rather than use digital CATIA estimation. Leonardo received only one engineering package for B787-9. With its non-vertical or design-only package, Geven competed with engineering houses and engineering-only service companies. As the Strategic Initiatives & Commercial Partnership Director at Geven put it, “[…] however, we also have precious production and installation experience gained through the B787-8 programme. As we are all asked to align our work to the hourly costs of the engineering house, we have negotiated a compromise with the prime contractor on account of the greater contribution we were able to guarantee regarding engineering in terms of our production experience curve. Essentially, we are negotiating an “if we give you a discount on the design, we have to be guaranteed production” approach! For now, there is only a gentlemen’s agreement […]” (quoted from the interview with Geven’s Strategic Initiatives & Commercial Partnership Director, 2012).

4.7. Discussion points This section examines some of the main discussion points emerging from the B787 case-study programme.

Would it have been possible to produce an aircraft like the B787-8 Dreamliner without relying so much on outsourcing?

In other words, could Boeing have designed and manufactured such an innovative aircraft totally in-house? The answer is probably not, as Boeing

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leveraged best-in-class technologies from all over the world, using a dispersed design network rather than its own centralised one, also to reduce R&D costs for the Dreamliner programme. From an analysis of the Boeing Company 2010 Annual Report, it may be observed that, on average, total R&D expenditure did not exceed 4.3 billion US dollars per year. This budget, furthermore, was to cover all the company’s R&D investments. It is estimated that in 2013, investment in the B787-8 programme rose from 16.3 to 23 billion US dollars. Investment on this scale absorbed the company’s entire budget: about 4 billion per year from 2005 to 2010, leaving few residual resources for other R&D investments. Boeing Co. was, and is, committed to several business units, each one requiring very substantial investments in R&D. In 2009, Boeing launched two radical innovations which absorbed the entire budget (75% and 25% respectively) in the commercial aircraft division: the 787 and the 747. In 2011, although Boeing was considering improvements to their supply chain outsourcing relationships in the immediate future (B787-9), they were fully aware that the strategic outsourcing policy adopted had allowed the Dreamliner to become a reality. As a Boeing manager interviewed by Reuters (Peterson, 2011) affirmed, “Boeing itself has acknowledged that the system needs tweaking, and the company promises to bring more of the design work back in-house for the upcoming B787-9 model. Nevertheless, Boeing defends its reliance on outside partners, saying their work and investments made the Dreamliner possible”. Another Boeing manager interviewed by Reuters affirmed that (Peterson, 2011), “it is true that supplier involvement in the development and design of the B787-8 is significant. Suppliers helped us develop and understand technologies and options for the aeroplane as we went through the early phases of concept development. Suppliers have also provided more of their own development, design and manufacturing funding”. Nevertheless, even if we accept that Boeing would have been able to overcome the first and second limits mentioned earlier, it would never have built the B787-8 Dreamliner in the same time-to-market and with the available budget. Therefore, by relying on the digital concurrent engineering co-design platform and the “24-Hours Knowledge Factory” option (Mahmoodi, 2009), it was possible to address the severe challenges emerging from the B787-8 programme. Some Wall Street analysts estimated that the added costs of the programme amounted to 12-18 billion US dollars, on top of the 5 billion US dollars Boeing originally envisaged. (Gates, 2011b). It is probably true to say that some of this excess was partly distributed across the supplier network.

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Did the decision to outsource make the B787-8 programme sustainable in terms of total costs? We must distinguish three cost configurations in order to answer this question: the planned cost of the programme (the R&D budget cost); the total cost of development up to 2012 (the time of the interviews); and the opportunity cost, referring to the cost of the project within the hypothesis of a more centralised development programme comparable to the traditional outsourcing model generally adopted in the aerospace industry. For the first cost configuration, the budget was estimated at approximately 10 billion US dollars (5.8 billion US dollars allocated by Boeing and 4.2 billion US dollars from the supplier network). According to recent sources (Gates, 2011b), the project exceeded the previous budget, reaching approximately 16 billion US dollars (or 32 billion US dollars, considering the overall investment, including production facilities and M&A). It is impossible to say what the cost would have been if the processes had been kept in-house. Clearly, developing the technologies and production processes that already existed somewhere in the supply network would have cost Boeing more than turning to external sources for the same technologies, expertise and know-how. The additional expense would influence overall costs in terms of longer delivery time and would have had a negative impact on sales. The real total cost exceeded the budget, but strategic outsourcing led to savings in knowledge and experience development for difficult-to-achieve innovation, also transferring some of the R&D costs onto the external network suppliers.

Did the decision to outsource increase time-to-market rather than reducing it? It is important not to confuse real product development time (2004-2011, seven years), scheduled time (2004-07, three years), the actual time-tomarket, and product development time in the event of a more centralised (inhouse) alternative development option. As mentioned earlier, the concurrent digital engineering co-design platform on a global scale provides a “24-Hour Knowledge Factory” opportunity, saving time compared with sequential or concurrent engineering on a local or internal basis. Through the “24-Hour Knowledge Factory” model, an engineer’s output on one side of the world can be verified by a counterpart on the other, testing the effectiveness of the calculation models developed by the first one without delaying the design process. If properly designed, this outsourcing system makes the B787-8 development (both conceptually and theoretically) process a continuous flow process with obvious savings in time and, consequently, costs.

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The Boeing Company 2010 Annual Report clearly shows that the time-tomarket of the B787-8 Dreamliner is much longer than any other Boeing programme, except the derivative B787-9 project. The B787-9 required an extended time-to-market as it requires further R&D effort to bring some component production back home and develop production and organisational know-how already owned by specialized suppliers involved in B787-8.

Did outsourcing lead to a competency spill-over from Boeing to the supply partners? To answer this question, it may be helpful to reflect on the types of knowhow involved in developing a new commercial aeroplane. It may be grouped into three main types (design, production, and organisation), as follows: 1. designing a calculation model for the entire aircraft (Boeing ownership); 2. designing a calculation model for vertical sub-assemblies (Boeing and prime contractor ownership); 3. assembling the entire product (Boeing ownership); 4. sub-assembly of complete subsystems and the manufacture of small parts (prime and sub-prime supplier ownership); 5. organisational routines developed by suppliers (prime and sub-prime supplier ownership) during the manufacturing processes; 6. organisational routines for Boeing assembly processes (Boeing proprietary). For Boeing, strategic outsourcing has caused limited spill-over of knowhow in terms of vertical design (calculation models), counterbalanced by the development of skills relating to the final assembly of composite subsystems supplied by tier-1 small primes to make the final product. The fact that Boeing assigns vertically integrated packages has allowed a limited number of suppliers to develop tribal knowledge acquired through composite material optimisation. Such knowledge may also be gained during the processes adopted to convert design specifications into manufacturing choices for a specific part number or sub-assembling system. As a Boeing manager interviewed by Reuters (Peterson, 2011) put it, “it is important for Boeing to retain critical engineering skills and manufacture the aerostructures, such as wings and composite structures. Acquired on the job and over time, tribal knowledge is a key ingredient in developing a new plane, some experts say. It is the shared method of performing countless daily tasks efficiently and in coordination with colleagues. In short, tribal knowledge is the grease that cuts friction throughout the design and assembly process”. Boeing acquired vertical design expertise regarding individual components and new composite assembling skills, keeping the overall product design know-how to itself. Of course, Boeing could not have gained industrial know-how regarding individual subsystems and organisational routines except for interaction with partners and the overall assem-

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bly process. Clearly, there can be no doubt that developing new industrial know-how and tribal knowledge from suppliers is in line with the theoretical assumptions of the strategic use of outsourcing processes.

Is the outsourcing model performed by Boeing reversible? The role of acquisitions. The Boeing outsourcing model is only partially reversible. The firm may decide to bring the currently outsourced production of some components back to the USA. Nevertheless, if it has no problem with its design knowhow, it will definitely need to develop its production-process know-how and organisational routines from scratch. This risk could be mitigated through an acquisition strategy. In fact, Boeing purchased Vought Aircraft Industries and Alenia North America’s shares in Global Aeronautica LLC. This acquisition kept the company competitive in the long run since fuselage assembly based on the “one-piece barrel” was a significant process innovation in the B787 Dreamliner programme, allowing Boeing to overcome acquisition costs. It may be helpful to reflect on the relative size of the different players involved. Boeing had the negotiating power to absorb the economic issues of any of its key suppliers. In 2012, Boeing bought portions of the business units of two of its suppliers in order to help regain control of Dreamliner production. It paid 580 million US dollars for the operations of Vought Aircraft Industries in South Carolina (USA), the company that worked on the B787-8 aft fuselage section. Boeing later purchased Alenia North America’s half of Global Aeronautica LLC, the South Carolina fuselage subassembly facility for the B787-8. Boeing did not disclose the financial terms of the deal. As Jim Albaugh, former President and CEO of Boeing Commercial Airplanes, said (Peterson, 2011): “By taking Alenia North America out of the ownership equation, this tidies up the situation in Charleston. The Boeing Charleston site is critical to the success of the 787 program. Through this acquisition, Boeing benefits by joining two solid operations – including their talented employees and state-of-the-art facilities – into one Boeing team. Ultimately, we believe the integration of the site will increase productivity for the B787-8 program and allow us to maintain our long-term competitiveness”.

Can the outsourcing model adopted by Boeing be improved? Boeing’s outsourcing model can undoubtedly be improved, but some decisions on strategic outsourcing of new product development activities are irreversible. As a Boeing manager interviewed by Reuters (Peterson, 2011) affirms,

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“In retrospect, our B787-8 game plan may have been overly ambitious, incorporating too many firsts all at once in the application of new technologies, in revolutionary design-and-build processes, and increased global sourcing of engineering and manufacturing content […]. While we clearly stumbled on the execution, we remain steadfastly confident in the innovative achievements of the aeroplane and the benefits it will bring to our customers. […] The sourcing decisions on the B787-8 are a natural evolution of the work done at Boeing Commercial over the years. We’ve said in the past that, for the most part, we are satisfied with the general direction. However, there are a few things we would change, and you’ve seen us make changes on the B787-8 over the years”. The areas for drastic improvement are the following, • Improving the process of the new product development programming. The B787-8 programme has shown that Boeing adopted an ineffective and inefficient new product development process. There were delays and problems throughout all the phases of new product development, and even the remediation plan adopted to solve the problems was ineffective. • Improving the selection and evaluation capability of tier-1 and tier-2 suppliers (vendor rating). Boeing’s senior management made some observations on the affordability of a number of the suppliers, as prime contractors had not only outsourced production activities but also engineering operations. Suppliers had also delivered late, and their output did not conform to the specifics. • Re-centralizing the design of key components and key manufacturing competencies emerging from the B787-8 Dreamliner development programme. This is a rolling operation. We suggest that Boeing has realised that core competencies in the aerospace industry are not only grounded in overall aircraft design but the control of the design and manufacture of some key components, now shifting from traditional wing design and assembly to fuselage design and manufacturing. In fact, Boeing is bringing “one-piece barrel” know-how back home, even engaging in expensive acquisition initiatives (Vought and Alenia North America’s half of Global Aeronautica LLC). • Increasing specific coding ability, which was one of Boeing’s main limits during B787-8 development. The problems Boeing experienced in assembling the B787-8 Dreamliner not only demonstrate the difficulties of codifying these innovative design activities and production tasks; they also highlight Boeing’s weaknesses when it comes to implementing them.

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• Enhancing communication and interaction capabilities vis-à-vis its key partners and increasing control/ongoing monitoring. Boeing realized that stretching the supplier network due to the massive outsourcing of its prime contractors to tier-1 and tier-2 suppliers requires much more intensive coordination over the entire network. In fact, it set up a “production integration centre” for the whole network. This decision too demonstrates that this global sourcing model is strategic rather than operational. • Improving the testing process (certification and testing laboratories). According to Leonardo’s managers, the number and importance of the innovations introduced in the B787-8 Dreamliner project all at once led to massive testing of the individual components, the subassembled systems, and the final B787-8 aircraft. As testing laboratories and tools in the aerospace industry are proprietary and very expensive, they are limited in number and duration (testing hours). Testing and certification activity reached a bottleneck that delayed the entire testing and certification process. • Improving risk-sharing contracts, moving away from a pure configuration. The logic adopted ended up penalizing the defaulting suppliers and any others who perhaps shared no responsibility. In this way, the causes of inefficiencies added up along the supply chain. The penalties resulting from the delays were therefore spread prorata over the suppliers who had to bear the costs. The programme’s costs rose to three times the budget, and the accumulated delay went well beyond the three years stated in all the international information sources. The risk-sharing method sought to recognize the direct reasons for delay, attributing it exclusively to the supplier, identifying them and any external or indirect reasons for delay not attributable to individual suppliers. Risk-sharing would therefore be mitigated through non-pure risk-sharing with the proviso that, 1. for delays attributable to the individual supplier, penalties would be applied to it alone, excluding risk-sharing – if not in absolute terms, at least in relative ones; 2. suppliers able to comply with delivery without delay and in compliance with quality requirements would receive a bonus. This consideration is supported by those who say that “to properly align the incentives among all strategic partners, Boeing ought to structure the contracts with rewards (penalty) for on-time (late) delivery” (Kwon et al., 2009); and c. pure risk-sharing should have been envisaged for delays due to reasons beyond the supplier’s control.

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4.8. Findings The supply partners’ involvement in the B787-8 programme began with early-stage product concept definition (1998). Boeing selected its supply partners based on their specific capabilities. This section discusses the main findings of the B787-8 case study, quoting the managers interviewed.

Involving the key partners in the new aircraft programme from the concept-development stage As Senior Vice President and Chief Technical Officer at Leonardo said, “[…] the project started in 1998, and the product concept was drawn up at that time. Due to its capabilities in designing and manufacturing plane structure components, Leonardo was involved in the concept-development team, named ‘Partner Council’. Similarly, other prime global contractors, like the Japanese firms, were involved in the ‘Partner Council’ because of the specific organizational and technological capabilities they were able to bring to the programme […]” (quoted from the interview with Leonardo’s Senior Vice President and Chief Technical Officer, 2009). In the early stage of product-concept development, Boeing had total control over the tier-1 strategic suppliers, so it was able to protect itself from any information spill-over concerning the real purpose of the project and the governance model to be adopted for the entire programme. The top-tier partners – located at the Everett plant in Washington (USA) – worked separately on the individual B787-8 Dreamliner engineering work packages. In fact, as the manager confirmed, “[…] the presence of the top-tier suppliers in the ‘Partner Council’ gave all the partners a horizontal vision of who was involved in the programme but not what the collaboration with Boeing entailed. In this phase, we did not know what the Japanese firms were working on in terms of the technological solution and calculus model, nor what they had to produce once the final product concept was ‘crystallized’ […]” (quoted from the interview with Senior Vice President and Chief Technical Officer, 2009). As a Boeing manager pointed out during an interview with Reuters, “suppliers’ integration into the development and the design of the B787 is significant […]. The suppliers helped us to develop and understand technologies and options for the aeroplane as we went through early-stage product concept development” (Peterson, 2011). Leonardo’s senior vice president and chief technical officer clarified that “[…] Boeing’s logic was to co-develop the new frontier of aerostructures materials, systems, and engines with its top-tier supplier partners and co-

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create a technological breakthrough in the aircraft industry. These changes brought about huge innovation in the design and manufacturing processes too. During the early stage of product concept development, Boeing aimed to explore – on the global supplier market not only from the aerospace world – what capabilities in design and work composite materials were available, which was the innovation focus of the B787-8 programme. In the field of aero-structures, Leonardo contributes the designing and technological capabilities of a horizontal fuselage structure that minimizes the number of assemblies based on one-piece barrel section process technology and competencies on the central stabilizer […]” (quoted from the interview with Leonardo’s Senior Vice President and Chief Technical Officer, 2009). As Kotha and Srikanth (2013: 17) remark, “[We looked] outside of the United States for partners. We were investigating our suppliers’ intellectual capital. We cast a net fairly wide to get the right and the smartest people in the world to help design this aeroplane. For example, the Italians, who were building part of the body and the horizontal tail, had some unique IP that we didn’t have. The Japanese have brought us a certain measured discipline. It is sort of a foreign skill, certainly foreign to the United States and very much so to the Italians. We have absolutely selected the best of the best”. Boeing selected outsourcing partners with diverse, complementary, and superior resources (Odagiri, 2003; Howells et al., 2008). These strategic partners have long-lasting and trustworthy relationships with Boeing Co., in some cases (Leonardo) dating back to the 1950s. The cultural and organizational affinity gained over time with the tier-1 supply partners reduces the OEM’s behavioural uncertainty and, consequently, the perception of the transaction costs for the innovation project (Joshi, 2017).

Changing the supplier-relationships model from “build-to-print” to “build-to-performance”. With the 787 Dreamliner, Boeing tried to transform its operating model for supplier relationships. Boeing had previously developed all the calculation models for its aircraft internally and then delegated the components to suppliers following a “build-to-print” model. With the B787-8 Dreamliner – in an attempt to bridge the competitive gap with Airbus – it decided to build a composite plane in carbon-fibre. The scope of the innovation was so great that it would only be pursued externally. Boeing switched to a “build-to-performance” model by delegating development to the small primes through integrated design and production (and occasionally assembly) packages with new aerospace solutions adapted to composite component production. It thus transitioned from a

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logic of innovation guided from within towards an open innovation logic, from a cost-centred logic to one of radical technological innovation shared with its partners. The three Geven managers interviewed agreed upon at least one consideration. In the following words of one of them: “[…] It would have been very difficult to design and produce B787-8 internally. The number of new aircraft components to design and produce and the scale of costs and investments were too large to be managed internally because the delivery times were very tight […]” (quoted from the interview with Geven’s Programme Manager of 787 Dreamliner, 2012). Boeing Co. kept its core competencies and knowledge of the airframe and engineering for final assembling in-house. All the tier-1 strategic suppliers were involved in co-designing complete large aero-structure components (i.e., fuselage sections, wings, stabilisers). The B787 was co-developed with fourteen of the world’s most highly-skilled top-tier partners, who were responsible for designing, manufacturing, and delivering complete key components (i.e., fuselage sections, wings, horizontal and vertical stabilisers, doors); these were assembled at the final assembly plant at Everett, Washington (USA). All the strategic suppliers were involved in the programme as risk-sharing partners; they are large firms with a strong financial and organizational structure, all requisites for sustaining the scale of the innovation project. As stated by the Chief Operating Officer at Alenia North America, “[…] the metamorphosis of the major aircraft manufacturers into system integrators has brought radical changes in the industry. The suppliers are “vertical” partners, collaborating on all industrial processes from design to manufacture as well as sharing strategic decisions with the prime manufacturer. The difference between partners and suppliers is the ability to create complete systems, a consolidation of efforts that enables a group of partner companies to act as “small prime contractors” capable of designing and producing complete systems to be delivered to the final integrator, such as Boeing and Airbus, that increasingly tend to act as system integrators on a large scale. A transfer of responsibilities and activities from the prime manufacturer to a smaller number of tier-1 manufacturers characterizes the changes taking place in the supply chain. As utilized by Boeing for the B787-8 airframe, the partnership model dramatically changes the traditional relationships between various entities in the supply chain. Boeing is transforming itself from being a jet manufacturer into a large-scale systems integrator, a company that projects, sells, and supports new aircraft but actually defines and produces very few of the components employed within them. With the B787-8, Boeing has moved all the assembly of major sub-assemblies to the suppliers, keeping in-house only a light final assembly line. Major suppliers, such as Leonardo, are taking

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responsibility for designing, producing, and delivering fully equipped sections of the aeroplane to the Boeing 787 final assembly line […]” (quoted from the interview with Alenia North America’s Chief Operating Officer, 2009). To keep the partners committed to the goal, Boeing adopted a risksharing logic, remunerating the partners only after delivery of the final product (the plane itself, not the subsystem the individual supplier was responsible for) to the flying operators. Boeing thus aimed to transform its role coordinator and leading company of network of suppliers into a system integrator, making massive use of strategic outsourcing to reduce costs and time, also carrying out the ambitious programme it set out to realise.

Risk-sharing contracts and their implications for delays. The risk-sharing contract is the central element of Boeing’s strategic outsourcing process. According to Zhao (2016), risk-sharing was the main cause of the delay accumulated by the programme as this resulted in an effect on suppliers known in the literature as moral hazard. With its risksharing policy, Boeing essentially established – after extensive negotiation – a price for the prime contractor, who would take care of the task for which it assumed responsibility. In this way, it left the partner free to find the most profitable solution thanks to the introduction of organizational innovation within its supply chain. This would lead to greater efficiency in design and/or the industrialization of the part number for which it was responsible. In short, it was a strategy to stimulate continuous innovation, a kind of hybrid contract with high-powered incentives to obtaining realtime responsiveness from the parties (Williamson, 2008). It represented a substantial strategic change in supply network management (innovation of the supply network management process) because the risks and benefits of building the new aeroplane were shared between Boeing and the supply partners. The latter received payment for their activities related to the assigned vertical packages (designing and manufacturing complete subassemblies) only when the B787-8 customer (airlines) orders were fulfilled. Risk-sharing, as it was conceived, transferred the risk of individual delay to the entire network. Zhao (2016) breaks down development project costs into two kinds: direct and indirect. Direct costs may include research, engineering and testing, workforce and training, equipment, materials, and transportation. An individual supplier can reduce direct costs by delaying the task. Indirect costs may include overheads (utilities, facilities, and benefits), capital costs, breach-of-contract penalties, and order cancellations. Indirect costs increase the duration of a project. Boeing’s risksharing partnership entailed each firm investing in its task and receiving payment once the whole project was completed and the aircraft delivered

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to the airline. Zhao argues that “if a firm delays its task, it saves its own direct costs, but everyone suffers a higher indirect cost due to the resulting project delay and resulting penalties. The risk-sharing partnership can put the firms into a Prisoners’ Dilemma: despite keeping the planned duration benefits, it can be in each firm’s best interest to delay the entire project. In summary, although risk-sharing may seem to motivate partners to work hard and efficiently, it actually provides a strong incentive for them to delay deliberately so that they can save their own costs at the expense of others” (Zhao, 2016: 81).

Adopting a hybrid configuration to solve problems arising along the supply chain. Boeing left its prime contractors too much leeway in defining their outsourcing policy. Some of these small primes were clearly unready for this, and their networks also lacked the experience for such a complex role. Indeed, it was not possible to put the plan fully into effect. The partners are not yet ready for such a radical change. There were considerable time delays due to defects in the design and manufacture of individual components or poor organisation along the supply chain, but also due to occasional unforeseeable external causes. Boeing was soon forced to adopt a remediation plan to solve the industrialization problems that occur along the supply chain or to help small primes manage their second-level networks efficiently. In fact, Boeing began to see itself as a hybrid organization, a system integrator deeply involved in the operational and organisational activities of its tier-1 partners. First of all, Boeing acquired one of its partners as a way of solving production bottlenecks. It also set up a virtual room so that Boeing’s supply chain managers could remotely control B787 manufacture. Lastly, it sent its engineers to the facilities of its tier-1 and tier-2 partners worldwide to solve any technical and organizational bottlenecks. One of the probable causes of the enormous delays in the first delivery of the B787 was Boeing’s extensive use of modularization, or the dismemberment of the primary key components of the new commercial aircraft programme (wings, fuselage, stabilizer, empennage, electrical systems, engine), entrusting their development to strategic outsourcing. We can safely say that some key components should have been kept inside the company. The acquisition of Vought Aircraft Industries showed that the “one-piece barrel” assembly of the fuselage’s rear section, like stabilizer manufacture, required Boeing’s massive and lengthy intervention in Leonardo’s and other small primes’ operations. As Elmer Doty, former CEO at Vought (Kotha & Srikanth, 2013: 19),

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says, “Vought’s role in the venture became problematic when the supply chain broke down and work that was to be completed by other major suppliers arrived in Charleston unfinished. […] The problem was Vought had no control over the procurement of those large pieces [from Kawasaki, a tier-1 Japanese partner in the programme]. Boeing, as the prime contractor, was responsible for managing those major partners. […] To manage the travelled work efficiently, you need that responsibility. […] That is best done by the prime [contractor]” (quoted in Gates, 2008). Mr Jim McNerney, a former CEO at Boeing, recognized the difficulty in executing the new outsourcing strategy, but he saw no reason to change the company’s approach (Kotha & Srikanth, 2013: 18-19). “The global partnership model of the B787-8 remains a fundamentally sound strategy. It makes sense to utilize technology and technical talent from around the world. It makes sense to be involved with the industrial bases of countries that also support our big customers. But we may have gone a little too far, too fast in a couple of areas. I expect we’ll modify our approach somewhat on future programmes—possibly drawing the lines differently in places with regard to what we ask our partners to do, but also sharpening our tools for overseeing overall supply chain activities” (Boeing Press Release, 2008).

The main long-term consequence of Boeing’s strategic outsourcing model: losing the competitive edge in industrial processes and tribal knowledge (tacit knowledge). Strategic outsourcing decision-making should not be evaluated only in the short term and/or in terms of the programme’s ROI and risk-sharing, the reduction of development costs, and the transformation of fixed costs into variables. It is necessary to assess the overall profitability in the mediumlong term along with the impact on critical strategic options for the future development of new aerospace programmes. As reported by the Director of Strategic Initiatives & Commercial Partnership at Geven “[…] The digital co-design model adopted by Boeing will be the new model for managing and transferring aero-structure know-how into the supply chain together with specific knowledge about production and co-design processes […]” (quoted from the interview with Geven’s Strategic Initiatives & Commercial Partnership Director, 2012). Through specific contractual arrangements and the use of a concurrent co-design IT platform, Boeing was able to control the development of the design along the entire supply chain and would acquire co-ownership of the new calculation solutions developed along the network. Under a specific contract clause, Boeing initially had to share the re-

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quirements and calculation models of the individual subsystems with the prime contractors, acquiring the calculation models of the subsystems updated in terms of the composite material in co-ownership with the individual partners who contributed to their development. The small primes thus developed sub-assembly skills regarding the individual key composite components, which they lost to the advantage of the tier-2 suppliers’ industrialization skills, with the optimization of industrial processes in tacit and organizational routines. However, it must be recalled that by its very nature, composites require a very high degree of specialization and optimized manufacturing assessment. As the B787-9 Programme Manager at Leonardo put it “[…] In the near future, Boeing may decide to internalize manufacturing but not the design unless it can face very high investment costs. Boeing would not be able to replicate some electronic components, like the landing gear or the engine, internally because it only owns the design specifications or requirements. But the structures could be insourced again. However, it will take a long time to reverse the learning curve. As for carbon-fibre, it would be possible to optimize the manufacture of each small component to a high degree. For the 787-9, for example, a model is being developed with large assemblers like Boeing, who make barrels and gears and other small suppliers in parallel. These specialize in specific components such as the floor, for example. For some components or areas of the 787-9 project, Boeing wants to recentralize production or outsource only small sub-assemblies, such as the floor, to specialized direct-line suppliers, just to name an example […]” (quoted from the interview with Leonardo’s B787 Programme Manager interview, 2012). Boeing therefore became fully aware that it was losing its industrialization processes, material optimization skills, and tribal knowledge to the benefit of its tier-1 and tier-2 partners. (Spencer et al., 2005) relate tribal knowledge to the soft ways in which people fulfil their tasks and relate to each other. As Peter et al. (2011: 2) argue, “Managers may attempt to document a complete list of all the steps during design, but steps in production are often unobserved or unrecorded and therefore become tribal knowledge held only by the human operators. Further, minor changes to correct quality issues or increased worker productivity implemented without documentation also increase tribal knowledge. When tribal knowledge grows beyond documented procedures, a company’s ability to adapt to change is often significantly limited”. As Tom McCarty, former President of the Society of Professional Engineering Employees in Aerospace, states, “now with the 787, management

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felt they knew how to outsource the design jobs” and that, by relying so heavily on foreign partners for their engineering, Boeing “devalues the socalled tribal knowledge that facilitates practical application of complicated, academic engineering concepts that eventually produce a new plane. Acquired on the job and over time, tribal knowledge is a key ingredient in developing a new plane, some experts say. It is the shared method of performing countless daily tasks efficiently and in coordination with colleagues. In short, tribal knowledge is the grease that cuts friction throughout the design and assembly process”. McCarty argues that the loss of tribal knowledge could have far-reaching consequences for American engineering: “as we outsource part of this work, we’re removing opportunities for learning this trade, for learning these skills. As we reduce these opportunities to learn how to do these jobs, the Boeing Company becomes less capable of doing the job” (Peterson, 2011). The outsourcing model adopted by Boeing brought several short-term benefits, but – according to some experts – it undermined Boeing’s and the entire American aviation industry’s control of the know-how relating not so much to design but to the industrialization of an entire aerospace programme. Boeing gradually acknowledged that it must bring this know-how back into the US in the years to come, but in order to do so, it will have to fill a gap, this time not in competition with Airbus but with its vertical partners within the industry. In the event of a future decision to insource, Boeing would have to reverse the learning curve, not in terms of design, of which it had full knowledge and held the patents, but in terms of the industrialization of parts and components, subsystems, and tribal knowledge.

The subsequent decision to insource the B787-9 and B787-10 models. In the medium term, however, Boeing had to resort to insourcing to reclaim much of the added value produced by the supply network for the company and the US. In particular, it had to bring home the production of components deemed strategic for the lasting competitive advantage of the company-industry-country. This could be done mainly by developing any local and/or company industrialization skills that may have been lost along the way during periods of innovation and breakthrough. For the new versions of the Dreamliner (787-9 and 787-10), Boeing outsourced design only (or productive only) packages, while the production of many strategic components was brought back home again and entrusted to American suppliers. If a company persisted with a strategic outsourcing decision for developing new products, it would end up becoming a system integrator, reducing its technological and know-how defensibility and los-

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ing its role as a guide for the entire supply chain. It would probably also fail to identify the future evolutionary trajectories of aerospace technology and production and end up simply being the owner of overall product design and assembly, concentrating on marketing and customer relations, as the production of an aeroplane is radically different from that of an automobile. It is a science-based rather than a supplier-dominated sector (Pavitt, 1984). Competitive advantage comes from the ability of the leading company to develop both design and industrial competencies but, above all, to keep future options for the development of aerospace programmes under its control. For this reason, it is difficult to aim for a long-term pure systemintegration model in the sector of interest here, also because the small primes in this sector are often key suppliers to both competitors (Boeing and Airbus) on different aerospace programmes. Strategic outsourcing thus remains a way to scout rare resources and skills anywhere in the world, or combine the unique skills of different partners to appropriate the revenues they produce, also through subsequent processes of insourcing and backshoring.

Digital technologies and their implications for strategic outsourcing. A further consideration must be made concerning technology. A webbased open architecture (ENOVIA) is used to apply the concurrent engineering model on a global scale in the supply chain (Koufteros et al., 2001, 2002; Quesada et al., 2006). In addition, it facilitates collaboration among the supply network (Fawcett et al., 2011), also easing coordination of the suppliers’ activities and their visibility (Kehoe and Boughton, 2001), bringing advantages to the innovation process (Huston and Sakkab, 2006). This web-based co-design platform also provides the advantages of the “24Hour Knowledge Factory” model (Mahmoodi, 2009), allowing time savings not found using the sequential engineering approach (design process innovation, supply chain relationship management innovation, and knowledge management innovation). Boeing’s adoption of a digital concurrent co-design platform has allowed it to break with the traditional trade-off of strategic outsourcing choices. Traditionally, strategic outsourcing has always involved an increase in the strategic risk associated with the fact that the supplier acquires complete control over the outsourced activities, of which the outsourcer completely loses visibility. These activities are also critical for the customer in the value creation process; otherwise, one would not be able to speak of strategic outsourcing. In Boeing’s case – on the one hand – ENOVIA made it possible to leverage strategic partners (network economies) located in different parts

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of the world specialised in design and manufacturing activities pertinent to composites. On the other hand, it enabled greater control of the supply network and the use of hierarchy, increasing the visibility of the entire outsourced innovation process. In addition, this conclusion concerns not only design activities but, as revealed by the mitigation strategy adopted by Boeing to solve the supply chain problems that occurred during the implementation of the 787-8 programme, also the manufacturing side. By creating a digital room (the “Production Integration Centre”), Boeing can be in continuous remote connection with the production plants of its tier1 and tier-2 supply partners, thus regaining control over its suppliers’ industrial processes. This was probably an inevitable development. The partners had to accept Boeing’s ‘interference’ in order take advantage of its greater industrial and organisational skills and resolve contingent crises, including the impossibility of meeting supply commitments within the times or to the quality required. These last two considerations suggest a general flattening of hierarchical relations in the civil aviation industry concerning the project under analysis, which has enabled Boeing to achieve high visibility along the entire supply chain. This is not a secondary conclusion since it can have future implications for strategic outsourcing choices and, as the Boeing 787 Dreamliner itself demonstrates, for adopting open business models and more general strategic partnerships in not only the aerospace industry but also others. More specifically, the B787-8 is a case of quasi-strategic outsourcing or ‘impure’ strategic outsourcing since, although innovation activities were outsourced, Boeing kept complete control of the supplier’s calculation models. Furthermore, the contract agreements provided that, at the end of the design process, Boeing would become co-owner of 50% of the calculation models and measures used by the supplier for definitive product innovation (whether patented or not). Figure 2 shows the evolution of Boeing’s strategic outsourcing relationships with its small prime partners for the B787 Dreamliner programmes.

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Figure 2. – The evolution of the Boeing 787 Dreamliner strategic outsourcing relationships. Efficiency and cost reduction/ incremental innovation

Vertically integrated package

Re-insourcing to close the gap in manufacturing and carbon-fibre optimization 787-9; 787-10

Boeing

Breakthrough Innovation/ system integration

Supply-chain Remediation plan

Build-toperformance

787-8

Co-Development of new competencies in carbon fiber designing

New future programme

Build-to-print

Production or design package

Contract-based payment

Hybrid configuration Low technological integration

Risk-sharing partnership

High technological integration

Source: Authors’ own.

With the B787-8, and given the necessity to explore new-to-the-world technology for the commercial aircraft industry, Boeing sought disruptive technological innovation at both product and process level by using carbon-fibre in the design and manufacture of its new aeroplane. Boeing tried to employ a system integration logic along the supply chain, relying on greater use of ICTs and stipulating vertically integrated contracts (for design and production) based on risk-sharing with the key partners. In this way, Boeing outsourced the risks, time, and cost of developing new products. However, problems relating to component delays and faulty manufacturing due to low maturity levels and development along the supply chain led to Boeing delivering the plane to the airlines after significant delays. These delays and defective products caused Boeing and the network substantial financial losses. The solution was to change the approach, increasing the level of Boeing’s presence along the supply chain (at the tier-1 and tier-2 levels) as part of its remediation plan. At this point, with the B787-8 programme underway, Boeing was fully aware it was losing its competitiveness vis-à-vis its tier-1 and tier-2 suppliers. This was due to the material chosen for product innovation having very different technological characteristics from the consolidated and conven-

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tional aluminium and having broader margins for industrial optimization. As Chen, et al. (2020) point out, the “optimization of carbon-fibre reinforced plastic (CFRP) mainly includes two aspects, i.e., orientation optimization and thickness optimization. […] The first provides opportunities to achieve the desired performance of the composite structures by selecting appropriate fibre orientations in each layer. As mentioned above, CFRP structures usually weigh less than conventional metal structures and have the same or even better mechanical performance because of the high elastic modulus, high strength and low density of CFRP materials. Moreover, thickness optimization or topology optimization will further reduce the weight of structures through reasonable material distribution”. Therefore, Boeing was fully aware that continuing to outsource integrated vertical packages allowed the supply partners to control key industrial expertise, especially regarding core aero-structure components. In subsequent versions of the B787-8 (9 and 10), Boeing understood the need to put a stop to this situation and, in a bid to hold on to industrial competitiveness, it selectively reduced the number of vertical packages it assigned to its partners. This decision was implemented wherever possible, mainly on aerostructure subsystems and other strategic part numbers, merely providing its partners with engineering or manufacturing-only packages.

4.9. Conclusions and implications for management An initial reflection must be made concerning a substantial increase in vertical and lateral competition caused by Boeing’s overall supply relations governance model for the 787-8 programme. This model led to the democratisation of some of the core activities in commercial aerospace design and production. Collaborative engineering led to Boeing losing calculation skills after acquiring new and adapted ones to construct a composite aircraft. Nevertheless, these calculation skills were shared with the partners, who thus acquired the industrialization process for the individual components. Of course, the vertical partners will be able to adopt these acquired critical skills (concerning wings, fuselage, systems, stabiliser, empennage, and so on) also in complementary sectors (regional planes, private jets, military planes, drones) and with other customers (such as Airbus). However, the threat of other countries – such as Russia, China, or Japan – might lead us to suppose that – given the size of the demand for commercial aircraft that these countries accumulate – one of the players in these countries, with adequate government support, may decide at some point to become a system

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integrator and compete directly with the two undisputed market leaders (Boeing and Airbus). For example, the Japanese small primes control all the calculation and industrial skills to realise an entire development programme for a new aircraft. They would only have to develop the calculation model and measures for system integration or final assembly and related industrialization internally. It is likely that companies in these countries will adopt lateral competition choices, so they will try to enter market segments other than the production of long-haul aircraft. This was part of the broader and more general expectation of profit from the outsourced components that the partners had to evaluate when deciding whether to sign the risk-sharing contract. The more a supplier partner has been able to competitively isolate from the others or develop a fine-tuned proprietary industrial process and patent it, the more difficult it will be for Boeing to control and/or insource this core competence. If Boeing hopes to once more manufacture the individual components whose measures and calculation models it is familiar with by itself once more. This is not only to bring a greater share of the added value created through the new programme back to the USA and the company itself but also to keep vertical and lateral competition risk in the aircraft industry in check. Jim Albaugh, former CEO of Boeing Commercial Airplanes, says, “we outsourced too much. […]. We didn’t consider the extent of the risk we’d take on by going outside. We will make sure the voice of the engineers is much more involved in the decision-making as we go forward” (Gates, 2010). In the long run, even the engineering must be brought back within the boundaries of the firm. This does not mean that the strategic outsourcing decision was wrong. However, it has forced Boeing to dynamically reconfigure its core capabilities (Teece et al., 1997) and those of the small primes. In fact, in trying to assume the role of pure system integrator (or network orchestrator), the firm ran the risk of losing strategic options for the future development of the new programmes. Boeing was therefore forced to identify new industrial processes and routines that would give the company a fundamental role in the industry’s short-term competitive dynamics. An implication therefore emerges: thanks to the evolution of connective technologies and innovation in handling industrial relationships – strategic outsourcing is still risky in the long run and forces firms to dynamically reconfigure their core competencies. Indeed, connective technologies make it possible to oversee the new aircraft development processes with the involvement of partners. However, the impact of strategic outsourcing choices has to be evaluated regarding the blending of key skills and, above all, the risk of losing control

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over industrial skills and their development trajectories on tacit and tribal knowledge. According to Ehsan et al. (2012: 20), Prahalad and Hamel (1990) argue in their seminal article that “core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”. Boeing’s core competencies historically stem from the detailed design, engineering, and assembly activities of all the parts of an aircraft, with partial outsourcing of the manufacturing process. With its B787-8 programme, Boeing tried to change its core competence as a system integrator, losing some of its consolidated core competencies to the advantage of other partners in the supply chain (especially small primes). This considerable attempt to transform was not wholly successful because the company was not able to select the (small prime) supply chain partners with the appropriate competencies and industrial resources. In addition, it was unable to coordinate and integrate them effectively and efficiently along the supply chain. Lastly, it was not able to communicate effectively with its supply chain partners distributed all over the world, finding it difficult to overcome cultural and language barriers and solve problems arising along the supply chain quickly and effectively. The firm may be said to have lost its key competencies, industrial skills, tribal knowledge, and industrial routines to its small prime and sub-assemblers. If a part number should improve in the near future, it will have to collaborate with its small prime, the coowner of an engineering and calculation model regarding the specific part number. It will not be able to benefit from opportunities to improve the industrial process; this will be possible only for the partners responsible for manufacturing it. All this is an excellent source of potential profit increase on the specific programme. The bottom line is that Boeing was unable to benefit fully from the governance model it decided to adopt for the B787-8 Dreamliner programme. The case study demonstrates that developing a core competence is a long and gradual process and that the traditional models for interpreting strategic outsourcing fail in the long run. In fact, in terms of the impact of strategic outsourcing choices on competitive advantage – not in the short term but dynamically over time – these models fail to predict the sustainability of the firm in years to come, the evolution of core competencies, and the strategic options for subsequent innovative programmes. The models also failed to predict the strategy’s impact on ROI and RONA in the short term. Counterintuitively, the strategic outsourcing decision for the B787-8 Dreamliner was unsuccessful even in the short term, but it was probably the only viable solution for producing a break-

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through innovation of this kind. In reality, the B787-8 programme required massive resources, R&D expenditure, direct investments, and know-how that would have been impossible without involving a global supply network. The case study also shows why Boeing broke the roles of the competitive game and its approach to governing the supply chain; designing the retrenchment of the supply chain will be strategic to gaining a competitive advantage in the near future. In addition, the case study highlights how difficult and dangerous it is to evaluate strategic outsourcing choices according to logic alone and from a short-medium term perspective. To conclude, what emerges from this study is that the model adopted by Boeing can be considered a best practice if used strategically and dynamically. Boeing was able to simultaneously exploit value-chain de-composition (leveraging strategic outsourcing and collaboration), the strong points of the host countries and the internationalisation of the supply chain (leveraging offshoring, geographical distribution and the network), and foreign governments and markets (leveraging strategic offset, negotiation, and political contexts). According to Johnson (1999:158), strategic offset is “a practice in which a purchasing entity, usually a government, demands that a seller not only provides a service or product, but in addition helps the purchaser to obtain additional technology, business, or investment”. The demand for new aircraft in emerging countries is increasing rapidly, and these countries’ governments require a part of the overall project to be assigned to their own firms as suppliers of higher-value components (Bédier et al., 2008). Thus, an offset requirement is a condition that requires the prime manufacturer wishing to sell an aircraft to a specific country to purchase domestic products there and/or to invest in it (a kind of direct offshoring). According to Rosello and Steenhuis (2018: 9), for the B787-8 launch programme (initially called the 7e7 programme), strategic offset brought Boeing exceptionally high financial benefits (9,194 billion US dollars).

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Figure 3. – The collaborative model underlying the Boeing 787 Dreamliner programme from its launch.

Leverage on host countries’ advantages and supply-chain internationalization

OFFSHORING

BACKSHORING OPERATIVE OFFSET

787-8 787-9 787-10 Leverage on value-chain breakdown

STRATEGIC OFFSET

Leverage on foreign Governments and markets

147

Source: Authors’ own.

• Central Investments in R&D • Market advantages (orders from private ones or government-owned airline operators) • Transferring key competencies and technologies • Increasing national aircraft-industry supply competitiveness

A Case Study. The Boeing 787 Dreamliner Programme

• Host country advantages (knowhow, lower cost of engineering and/or manufacturing, specialized human capital) • 24-hour factories • Complementary resources and infrastructures (testing and certification laboratories, national research and competence centres)

• Focalizing on core competencies • Leveraging key partners’ resources and capabilities • Sharing the overall risks • Reducing time-to-market, costs, investments

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Boeing appears to benefit from extensive outsourcing/offshoring/strategic offset when it explores radical or disruptive innovation. However, our case study offers some preliminary findings showing, on the contrary, that Boeing selectively leveraged insourcing/reshoring (back-shoring)/operative offset when actually exploiting innovation, reaffirming its hegemony over the solutions it found and the advantages it gained during the innovative phase at network level. The firm is trying to selectively bring the industrialization skills lost to the benefit of partners and foreign countries back to the US. Boeing adopted a policy of offshore outsourcing with a strong emphasis on strategic offset to develop the B787-8 and achieve numerous benefits, as described in point 3 below. Nevertheless, in designing the later versions (787-9 and 787-10), Boeing opted: 1. to adopt back-shoring (reshoring) or to assign the industrialization of selected part-numbers (e.g., a section of the fuselage) and engineering services previously assigned to other international suppliers to partners located in the US through manufacturing only packages. The goal was to bring back to the US the previously lost industrialization skills and contribute to national competitiveness in such a strategic sector as civil aircraft production; 2. to adopt strategic insourcing or direct industrialization of the components considered critical for obtaining competitive advantage and developing new and ambitious programmes (stabilizer, cockpit, wings) in the years to come. Since the programme’s launch, a significant change has taken place: Boeing acquired co-ownership of the calculation models for the individual strategic components of the composite product. As the acquisition of Vought Aircraft Industries shows, in a small number of cases – and for unique industrial processes (“one-piece barrel”), where the partners were particularly successful in developing difficult-to-imitate proprietary innovation – acquisition was the only alternative to insourcing the process skills developed by the partner; 3. to continue leveraging offset policies and benefit from orders and financial investments from foreign countries, but only on the operative level, assigning design-only packages for key components (infrastructures, wings, cockpit, empennage, and so on) and vertically integrated packages on the remaining non-strategic ones (blanket, engines, electronic systems, lithium batteries). Ultimately, Boeing was forced to reduce the strategic offset to an operative configuration, no longer transferring technology and industrial competencies abroad, thus nurturing their competitiveness in the civil aircraft industry.

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The design package has a limited effect on knowledge spill-over as the outcome of the design is shared by the key partner and Boeing with no risk of the critical partner acquiring industrial know-how regarding the optimization of carbon-fibre manufacturing for a specific component. For Pisano and Shih (2009: 10), “offshoring has been devastating whole US industries, stunting innovation, and crippling capacity to compete long-term (Denning, 2013: 2). The decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise cannot be maintained since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate”. However, what could be a possible alternative? Only the decision not to go ahead with technological innovation in materials and processes – meaning no new programme. Boeing’s breakthrough would never have been achieved for the reasons explained in the introduction. On the other hand, it is true that the network, and not Boeing, could have made fewer design errors, errors which then multiplied due to the numerous innovations inserted simultaneously throughout the B787-8 programme. However, it should not be forgotten that the governance model adopted by Boeing has a learning curve, so it is conceivable that the experience of offshoring/strategic offset/strategic outsourcing will be a learning opportunity for the company in the long run. In particular, Boeing will understand how – in the medium and long term – some strategic decisions will require subsequent selective choices to counterbalance the consequences, mitigate risks, and correct their impact on competitiveness. If this does not occur, the company risks losing its position in the industry definitively, thanks to its handling of the strategic subsystems created to make the final product, with consequences not only for Boeing but for the United States.

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Chapter 5

PROPOSING A CONCEPTUAL DECISIONMAKING MODEL FOR OUTSOURCING NEW PRODUCT DEVELOPMENT SUMMARY: 5.1. Research questions, research propositions, and a decisionmaking model. – 5.2. The Boeing 787 Dreamliner: a case of technological disruption in the aircraft industry. – 5.3. The conceptual decision-making model applied to the Boeing 787-8 Dreamliner programme. – 5.4. Management implications, limits, and future directions.

5.1. Research questions, research propositions, and a decisionmaking model The research question (RQ) stated in this book is the following: “what strategic dimensions in a decision-making model can extensively and thoroughly address the outsourcing decisions relating to NPD activities given the hypothesis that a disruptive technology fosters product innovation?”. In order to answer the RQ, a multidimensional and integrated decisionmaking model with six interacting key dimensions that affect the choice of whether to outsource (buy) NPD activities or keep them in-house (make) has been empirically validated. The key dimensions of decision-making in outsourcing, rooted in the theories of the firm discussed in the theoretical background to this work, form an integrated outsourcing framework where they are associated with one or more research propositions (RPs) found in the literature. In what follows, we illustrate the reasoning related to the decision-making dimensions and their relative RPs. Strategic importance (high or low). A successful product innovation project depends on core (high strategic importance) activities. Non-core (low strategic importance) activities are less relevant. The literature relating to sourcing strategies acknowledges the importance of this decision-making dimension (McIvor, 2008; Sislian and Satir, 2000; Quinn, 1999, 2000; Quinn and Hilmer, 1994; Odagiri, 2003; Kraljic, 1983). RP1. Non-core product innovation activities are mainly suitable for outsourcing, while core activities are more effectively kept in-house. Both the decision-making dimension and the associated RP have their theoretical roots in RBT, CBCT and SAT frameworks.

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Strategic importance

Strategic risk and extent of control over suppliers (appropriability and property rights risk, opportunistic behaviour risk, risk of poor supplypartners performance)

X

X

X

X

X

X

Proposed decisionmaking model

General meaning

Reference theoretical framework

Cantone et al., 2018

Becker and Zirpoli, 2017

McIvor, 2008

Sislian and Satir, 2000

Baden-Fuller et al., 2000

Quinn and Hilmer, 1994; Quinn ,1999, 2000

Kraljic, 1983

Criteria

Other outsourcing frameworks in the existing literature

X

Steensma and Corley, 2000; Gooroochurn and Hanley, 2007; Nakamura and Odagiri, 2005; Love and Roper, 2005, Veugelers and Cassiman, 1999, on appropriability and property rights risks.

X

Contribution of NPD activities to the firm’s competitive advantage. As (core) NPD activities of high strategic imRBT, CBCT, SAT portance, they should be kept inhouse.

X

The risk deriving from outsourcing NPD activities to suppliers. When the strategic risk is high and the extent of control over the suppliers is low, the TCET, CBCT decision to keep them in-house is preferable. Outsourcing is the preferred decision if the risk is low and the extent of control over the suppliers is high.

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Reference outsourcing decision-making models in the existing literature

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Table 1. The key dimensions of the selected outsourcing decision-making models in the literature. A comparison with the model proposed in this book.

Proposing a Conceptual Decision-Making Model

Asset specificity (degree of modularity, strategic value or profitability of the project, technology specificity)

Cutural distance between partners

Degree of technology shift

Demand flexibility

X

X

X

Griffith et al., 2009

TCET

X

When the asset specificity is high, keeping the activities in-house should be the preferred decision.

X

When the cultural distance between partners is high, keeping activities inTCET, RBT house should be the preferred decision.

X

Shifts in customer demand make the core competencies underlying the NPD activities in the firm’s value TCET chain obsolete. In this case, the NPD activities should be outsourced.

X

Shifts in the technology used by the firm make the core competencies underlying the NPD activities in the firm’s value chain obsolete. In this case, the NPD activities should be outsourced.

Flexibility is required in performing the NPD activities to satisfy customer demand. The greater the required TCET flexibility, the more the NPD activities should be kept in-house.

X

Process capability X

X

X

A firm’s ability to perform the NPD activities vs competitor and/or available suppliers. The greater the

CBCT, SAT

153

X

TCET

Proposing a Conceptual Decision-Making Model

Degree of shifting customer needs

X

Griffith et al., 2009; Gooroochurn and Hanley, 2007; Nakamura and Odagiri, 2005; Cesaroni, 2004; Veugelers, 1997; Ulset, 1996; Audretsch et al., 1996.

153

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154

Process maturity

Level of relative ease of performing NPD activities. The greater the ease, the higher the number of suppliers able to perform the NPD activities and, therefore, the opportunity to outsource.

X

Technological discontinuity

Environmental uncertainty (market, technology uncertainty)

Griffith et al., 2009; Love and Roper, 2005); Audretsch et al., 1996; Calantone and Stanko, 2007; Nakamura and Odagiri, 2005; Swan and Allred, 2003; Croisier, 1998; Ulset, 1996.

TCET

X

The degree of change the NPD projects bring about in the technological paradigm underlying products (or their key large components) and/or processes. When the effect on technological discontinuity is broad, the TCTE, CBCT, DCT outsourcing of the processes involved could be a consistent decision. On the contrary, if discontinuity is narrow, the recommended choice is to keep the processes involved inhouse.

X

High levels of market and technology uncertainty (unpredictability of the TCET environment) should favour keeping activities in-house.

Strategic Outsourcing, Innovation and Global Supply Chains

process capability, the more the NPD activities should be kept inhouse.

Proposing a Conceptual Decision-Making Model

Degree of familiarity with the technological domain

X

X

Source: Authors’ own.

X

Technology domain refers to the specific process technologies on which the NPD project has a major impact. If the technology domain is TCTE, CBCT, familiar, keeping the processes inSAT, DCT house is recommended. If the technology domain is unfamiliar, the processes should be outsourced. 1. Delegate the overall system development and provide broad specifications when the levels of interdependency and component impact are low. 2. Provide very detailed specifications, but outsource system or component development when the level of interdependency is low and component impact is high. 3. CoCBCT, SAT design the system or component when the supplier holds componentspecific knowledge, the level of interdependence is high, and the component impact is low. 4. Develop the system or component design inhouse when interdependence and component impacts are high.

Proposing a Conceptual Decision-Making Model

Level of interdependencies between components and the rest of the product; the impact of components on overall product performance

155

155

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Technological discontinuity (broad or narrow). This dimension refers to the change that NPD projects bring about on the technological paradigm underlying their products (or key large components) and/or processes. The discontinuity is broad if it substantially changes the technological paradigm of both product and process. On the other hand, it is narrow if the change affects either the product or the process. Moreover, technological discontinuity refers to the introduction of radically new materials in product manufacture. As highlighted in the B787 case study, the adoption of new materials (carbon fibre and titanium in place of iron and aluminium) in the production of the new (B787) aircraft has caused a technological discontinuity that involves both the key large components of the product (i.e., aerostructures) and the key processes (i.e., design and manufacturing). For this reason, B787 is a disruptive technological product innovation fostered by the adoption of a new materials technology. The literature on outsourcing strategies has never considered this decision-making dimension to be relevant. Instead, it has contemplated an ‘effect’ dimension, namely technological uncertainty or the difficulty of providing accurate forecasts of the technological paradigm shift and what is required for its governance (Walker and Weber, 1984). Technological discontinuity affects the technological domain, namely the process technology on which the NPD project impacts. The literature relating to outsourcing strategies has never considered this decision-making dimension relevant, if not in terms of a derived dimension: technological uncertainty. The technology domain might be familiar or unfamiliar in terms of the firm’s expertise and capabilities. Examples in aircraft production include aerostructure design and manufacturing (i.e., the fuselage or sections of fuselage, wings, stabiliser, and doors), engines, avionics, and interiors, all representing technological domains. Product innovation activity therefore belongs to the core-domain since it a) interiorizes the key capabilities of the NPD process, b) leverages the technological domain in which the firm has a vast capability base, and c) creates, maintains, and dynamically improves a firm’s competitive advantage in the industry. In the aircraft industry, for instance, the final assembly and design configuration of the entire fuselage of an aeroplane constitute core domain activities to be kept necessarily in-house, especially when crucial to a firm’s survival. Other product innovation activities might be considered core-domain-related since they are connected to the coredomain activities through technologically complementary ties (i.e., the design and manufacturing of key large aircraft components, such as individual fuselage sections or wings and pre-assembling key large components). Moreover, it is difficult to share these activities out, unless there is a high risk of knowledge and capabilities spill-over or there are inefficiencies due to the design and operation processes. On the other hand, NPD activities are core-domain outside if they are strategic to innovation but do not belong to any technolog-

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ical domain of the firm’s core capabilities (e.g., the design and manufacturing of aeroplane engines, avionics, systems, interiors). As long as the technological domain is under control, the firm should have absolute leadership and governance of NPD core-domain activities. To avoid knowledge and capabilities spill-over (risk of misappropriation by the market) and/or inefficiencies related to NPD core-domain activities, the firm should keep the core-domain related activities in-house too. Nevertheless, these activities could be outsourced when the following circumstances occur. First, the existing suppliers have the right resources and capabilities to satisfy the quality, time-to-market, and cost targets established by the NPD project. Secondly, the firm adopts effective mitigation strategies to control the outsourcing risk in terms of knowledge and competencies spillover, as well as opportunistic behaviour by suppliers. Thirdly, overwhelming competition forces the firm to reach a faster time-to-market and lower costs, which cannot be achieved if the NPD activities occur internally. Fourthly, in cases when the budget of an NPD project is not adequate to sustain the costs and investments of all the core activities. Clearly, outsourcing the NPD core-domain outside activities should involve the best-in-class suppliers in terms of core competencies. RP2. When there is broad technology discontinuity in product innovation activities, in the presence of an unfamiliar technological domain, a firm undertakes unexplored growth paths, which are complex and risky to manage internally. In this case, the decision to outsource is the most advisable. Conversely, when a discontinuity is broad and familiar, the technological change is more consistent with the firm’s current capabilities and knowledge base. In this case, the most suitable decision is to keep NPD activities in-house. The decision-making dimensions discussed above, and the associated RP, are rooted in the TCET, CBCT, and DCT frameworks. The last two entail, to some extent, evolutionary changes to the combination of resources and competencies of the firm, while those of the supply partners play a relevant role in NPD projects in addition to the consistency of the technological domain with the technological capabilities of the firm and the need to modify them. The former, instead, entail changes because, in situations in which technology discontinuity is significant, the performance risk of the NPD project (quality, time-to-market, and cost performance) when contracting with supply partners is lower than that of developing activities internally (Swan and Allred, 2003; Calantone and Stanko, 2007). Market competitive pressure (high or low) refers to product quality and cost performance, especially time-to-market. Calantone and Stanko (2011) highlight the lack of consensus concerning the relationship between cost-saving

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and external innovation contracting in the literature. Some empirical findings suggest no relation between cost-saving and external innovation contracting (Kessler et al., 2000) or that there may be a negative one (Audretsch et al., 1996; Veugelers and Cassiman, 1999; Swan and Allred, 2003). Others state that the cost saving is very marginal (Huang et al., 2009). Instead, case-based research (Quinn, 1999, 2000; Barragan et al., 2003; Piachaud, 2005) asserts the relationship between cost-saving and external innovation governance. Indeed, Stanko and Calantone (2007) argue for a positive association between higher profit margins and the externalisation of innovation activities, particularly in high-tech industries, as Audretsch et al. (1996) show. The literature on the governance of innovation outsourcing has given little importance to timeto-market as a decision-making dimension (Stanko and Calantone, 2011). RP3. When competitive and environmental pressure requires higher product quality, faster time-to-market, and/or lower costs, a firm is recommended not to outsource its core domain activities within the NPD process. However, under these circumstances, if suppliers achieve superior performance in terms of cost, quality, and/or time-to-market, there should be a consistent decision to outsource NPD core-domain related activities. The decision-making dimension and associated RP have their theoretical roots in the TCET framework. Strategic risk (high or low). The greater the disruptive level of product innovation, the higher the risk. In fact, breakthrough product innovations are riskier than incremental ones. A fair evaluation of the strategic risk determinants – operational and structural risk (Aron and Singh, 2005), the risk impact, and the likelihood of opportunistic behaviour by partners (Williamson, 1975; Nakamura and Odagiri, 2005; Steensma and Corley, 2000; Veugelers and Cassiman, 1999; Love and Roper, 2005; Gooroochurn and Hanley, 2007), market (Robertson and Gatignon, 1998; Audretsch et al., 1996; Love and Roper, 2005; Gooroochurn and Hanley, 2007), and technological uncertainty (Ulset, 1996; Swan and Allred, 2003; Calantone and Stanko, 2007; Nakamura and Odagiri, 2005; Geyskens et al., 2006) – is crucial to reaching the decision to outsource NPD activities. Given the high strategic risk, outsourcing can be a viable choice only if the sourcing company adopts an appropriate risk mitigation strategy (Liao et al., 2010). This means involving trustworthy and longstanding suppliers, arranging contractual agreements relating to the most critical aspects of the outsourcing relationships (i.e., the use of licences, property rights on patents deriving from the innovation project, exchange, and access to proprietary resources, etc.), and/or the precise definition of the work packages for suppliers in order to include the autonomy of any of the partners. The literature on sourcing strategies has already

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considered this decision-making dimension relevant (Quinn and Hilmer, 1994; Quinn, 1999; Sislian and Satir, 2000). RP4. When the strategic risk is high, the recommended decision is to keep the NPD activities in-house. On the contrary, activities outsourcing is preferred. The decision-making dimension and associated RP have their theoretical roots in the CBCT and TCET frameworks (we consider the propriety rights framework in the TCET). Capabilities base (broad or narrow). The capabilities base of a sourcing organisation can be broader or narrower than those of the existing competitors and suppliers. The literature on sourcing strategies has already explicitly considered this decision-making dimension relevant (Sislian and Satir, 2000; McIvor, 2008). RP5. When the firm has fewer capabilities than its competitors and suppliers, it may be advisable to outsource NPD activities. Otherwise, outsourcing may not be a priority when the firm has a broader capabilities base than its competitors and suppliers, and this condition is sustainable over time. Of course, when a firm can develop valuable resources internally and needs to protect them against the risk of appropriability by the partners, the recommended solution is to keep innovation activities in-house (Swan and Allred, 2003). The decision-making dimension and the associated RP have their theoretical roots in the CBCT framework. The six key dimensions – strategic importance, technology discontinuity, technological domain, stra-tegic risk, market competitive pressure, capabilities base (relative range of sourcing company capabilities vs suppliers/competitors) – discussed above led to setting up a conceptual, integrated decision-making model to analyse the outsourcing decisions of NPD activities. This integration makes it possible to recognize the influential relationships among the strategic dimensions, for example, between these and the associated RPs, working out and managing the complexity of the decision-making process in NPD activities outsourcing. Figure 1 illustrates the general decision-making model, highlighting all the firms’ sourcing decisions related to core activities and non-core activities for generic sourcing decision-making. It is simply a conceptual hypothesis to find a non-core activity when a new product innovation occurs in the field of high-intensity innovation industries, such as the aircraft industry. Figure 2 shows the four quadrants (1, 2, 3, and 4) of the decisionmaking model for NPD activities, especially in the aircraft industry. These always have great strategic importance, being both core and core-related. Of course, the general model might help a discussion of the general circumstances of outsourcing when non-core activities are involved too.

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Figure 2. – The outsourcing decision-making model involving NPD activities. Strategic risk

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Outsourcing core innovation activities. Quadrants 1, 2, and 3 of the model (Figure 2) make it possible to take outsourcing decisions about NPD activities. Quadrant 1 – arranged into sections 1, 2, 3, and 4 – shows an unreal hypothesis. On the other hand, core-domain related NPD activities (the design and manufacture of large components of aeroplanes, such as wings and fuselage sections, and the pre-assembly of key large components), could be positioned in sections 5, 6, 7, and 8. The profile of these activities would suggest keeping them in-house. However, when overwhelming competitive pressure imposes faster time-to-market and/or lowers costs for product innovation projects (sections 5 and 6), that the firm cannot achieve all alone, outsourcing might be a necessary decision, even implying a high outsourcing risk (section 5). In this case, while suppliers should be able or empowered to perform innovation activities in line with the established targets (quality, time-to-market, and/or cost), the firm would manage the outsourcing risk through appropriate mitigation strategies. Sections 5 and 6 alternatively consider both sourcing choices (keep inhouse or outsource) for core-domain-related NPD activities. Indeed, sections 5 and 6 alternately consider both sourcing choices because the coredomain activities (design of the whole aircraft, final assembly of the complete aircraft) can be positioned within these too. These activities are always kept in-house, independently of whether the competitive pressure is high or low. Quadrant 2 – sections 1, 2, 3, and 4 – recognises the position of the core-domain outside NPD activities (avionics, engines, interiors, systems). Since the firm is unfamiliar with the technology domain, outsourcing is necessary. One of the firm’s strategic aims should be to leverage the innovation capability and knowledge bases of the supply network to improve the performance of the NPD process. If the outsourcing risk is high (sections 1 and 4), it is necessary to adopt an effective mitigation strategy. Moreover, as envisaged by sections 5, 6, 7, and 8, core-domain and core-domain-related activities must be outsourced (the capabilities base is narrower than those of the competitors and/or suppliers). A subtle distinction should be made concerning the activities in section 8 that alternatively considers the sourcing choices (outsourcing, keeping in-house). Since competitive pressure is low, if the firm can readily overcome an existing gap in technological capabilities, the activities should be kept in-house. On the contrary, outsourcing these activities is a necessary decision. Sections 2 and 3 of quadrant 3 envisage core-domain and core-domain-related NPD activities. In this case, outsourcing is the recommended choice (the capabilities base of the firm is narrower than those of the competitors and suppliers). Outsourcing would be advisable for the NPD activities in section 1 because the competitive pressure is high, so the capabilities gap with competitors

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and suppliers is hard to fill in the short term. However, when this situation occurs, an appropriate mitigation strategy is required. Finally, the firm should keep the NPD activities in section 4 in-house only if the technological capabilities gap is narrow, so it can be filled to achieve competitive performance quickly. Otherwise, it would be wiser to outsource. Keeping the core innovation activities in-house. This option involves core or core-related activities of great importance to the success of NPD projects and the competitive advantage of a firm within the industry. In this case, quadrants 1 and 4 in Figure 2 show the NPD activities to be kept inhouse. Sections 5, 6, 7, and 8 of quadrant 1 identify NPD core-domain activities. NPD activity performances would be best achieved in-house because the firm owns broader technological and organisational capabilities than its competitors and/or suppliers. This strategic choice is particularly advisable because of the firm’s familiarity with the technological domain. In this case, competitive pressure is not a discriminating dimension in decision making. Moreover, sessions 5, 6, 7, and 8 recognize core-domain related NPD activities too. When the competitive pressure in terms of higher quality, faster time-to-market, and/or lower costs is not overwhelming (sections 7 and 8), the profile of these activities would suggest keeping them in-house because the firm has the time and capabilities to handle the outsourcing risk carefully. Lastly, quadrant 4 recognises the core-domain and core-domain-related activities to keep in-house because the NPD project causes a narrow technology discontinuity and affects familiar technology domains. In addition, the firm possesses broader technological and organisational capabilities than its competitors and/or suppliers. In this case, competitive pressure is not a discriminating dimension in decision making.

5.2. The Boeing 787 Dreamliner: a case of technological disruption in the aircraft industry The Boeing 787 Dreamliner is a mid-sized, wide-body, twin-engine, highly fuel-efficient commercial aircraft. Boeing Co. launched the B787-8 programme (the first version of the B787 airline family) in January 2004. The Boeing 787 Dreamliner represents a technological discontinuity in terms of both product and process. As we mentioned previously, this allnew aeroplane can offer significant advantages in terms of performance and operating costs compared with other commercial aircraft in the same category (mid-sized aircraft) already on the market. The Boeing 787 Dreamliner, however, also represents a technological process discontinuity as it is

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the first and (to date) only commercial aircraft for which 50% of its primary structures – including the fuselage and wings – are made from composite materials (carbon fibre) and 15% in titanium, materials never before used in the commercial aircraft industry. This technological discontinuity with the industry’s standards has changed the processes of design, manufacturing, and assembly of both components and subassemblies. The new technologies allow increased aircraft quality and performance (lower environmental impact, increased passenger comfort) and lower operating costs for the airline companies during the product’s life cycle (higher fuel efficiency, lower maintenance costs, and lower emissions) compared with similarly sized aeroplanes. Therefore, the all-innovative Boeing 787 Dreamliner project is a breakthrough or radical innovation (Henderson and Clark, 1990) because it has profoundly redefined both dimensions of technological innovation (product and process) rather than simply reinforcing the existing technological paradigm of just one dimension. It may thus be helpful to analyse the technological discontinuity created by the B787 Dreamliner in terms of two further dimensions: 1. the changes in the product’s key components or subassemblies, and 2. the changes in the architecture of product engineering, namely in the technical configuration of interdependencies among the product’s key components or subassemblies in terms of how the assembly is organised. The Boeing 787 Dreamliner can still be considered a radical or breakthrough innovation because a) completely new materials for the technological state of the industry have been used for the aircraft’s aerostructures; b) the structure of the links between the key components and/or subassemblies (product architecture) used to design and assemble the aircraft has been profoundly altered. The same conclusion can be reached if the innovation process of the B787 is analysed from the point of view of product architecture and changes to the product concept. In conclusion, the B787 has wholly redefined the competencies and the interdependencies of the product architecture consolidated for designing and producing commercial mid-sized vehicles in the aircraft industry. We believe that these factors of strong technological discontinuity affected the decision of Boeing Co. to outsource widely in the development and manufacture of the B787 Dreamliner, also considering the need to put the new aircraft on the market in as short a lead time as possible, developing and manufacturing it at a competitive cost and regaining the market leadership lost to its rival, Airbus. The first flight test of Boeing of the 787-8 Dreamliner was three years behind schedule. Managers interviewed for this study mentioned different causes. The first of these was the radical innovativeness of the materials used for producing parts and subassemblies. None of the suppliers had sufficient experience working with these materials in order to produce a

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commercial mid-sized aircraft. This meant that numerous design and manufacturing problems (incorrect installation of parts, structural breaks) occurred; there were delivery delays along both the foreign and domestic supply chains caused by the shortages of parts (one of the most serious was the shortage of fasteners), not to mention lack of documentation with complete and precise specifications for the parts and subassemblies. The second reason given for the delays was the high number of tests on individual parts carried out by the suppliers themselves. It is unclear whether these delays and problems were a matter of design, communication, execution, or something else. The Boeing 787-8 Dreamliner is a breakthrough innovation for several reasons: 1. the supply chain relationships model, with two fundamental objectives: a. leveraging the best technologies and R&D capabilities of a worldwide supply partner network; b. balancing the centralization and decentralisation of R&D activities, transferring the design knowledge needed for R&D to supply partners, all the while accessing know-how from the supplier network to develop the innovation process and holding on to its competencies and knowledge for final assembly; 2. the materials technology (carbon fibre and titanium) used to build the product; 3. the manufacturing and assembly processes; 4. the product concept (more efficient in terms of fuel and management costs and more comfortable for the clients); 5. the design processes (with drastic changes adapting them to new materials technology); 6. the web-based interactive platforms to provide global visibility throughout the extended supply chain and synchronise demand/supply and logistic information across multiple partners (collaborative codesign). This is certainly an enormous challenge.

5.3. The conceptual decision-making model applied to the Boeing 787-8 Dreamliner programme The case study findings show that the B787 NPD sourcing strategy can be spread out over three of the quadrants in Figure 3 (quadrants 1, 2, 4). These activities are of the core-domain, core-domain related, and coredomain outside type. Some sections in the quadrants (section 5, quadrant 1; section 8, quadrant 2) concern both sourcing choices (outsourcing and keeping in-house) because, in line with the B787 case study findings, various kinds of NPD activities can be positioned within them.

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Thus, the outsourcing decisions adopted by Boeing Co. were as follows. 1. To keep the overall design configuration (core-domain activity) of the new B787 aircraft (quadrant 4, sections 1, Figure 3) in-house 2. To keep the digital concurrent co-design technology platform (Enovia) (core-domain related activity) for coordinating and managing the designing processes (core domain activity) of the tier-1 small prime contractors and their tier-2 sub-contractors (quadrant 1, section 5, Figure 3) in-house, and 3. to outsource the major aircraft subassemblies (core-domain related activities) (quadrant 1, section 5, Figure 3). In fact, Boeing assigns the design and assembly of complete key large components to its global small prime contractors working alone for delivery to Boeing’s final assembly plants in Everett (USA). According to the mainstream literature, these kinds of activities are best kept in-house. However, the decision to outsource them to tier-1 suppliers was fundamentally contingent on the need to rapidly regain its standing as an industry leader – previously lost to Airbus. Launching an innovative commercial plane at competitive costs and in a shorter time-to-market period (the scheduled time-to-market was three years, a very short time compared with the typical standard for the industry) was Boeing’s challenging objective for the B787 programme. In other words, strong competitive pressure played a crucial role in the outsourcing decision. 4. To keep the final assembly and pre-assembly of the large components (core-domain activity) designed and manufactured by the small prime contractors (quadrant 4, section 1, Figure 3) in-house, and 5. to outsource all the coredomain outside activities, given the significant technology discontinuity and unfamiliar technology domain (quadrant 2, sections 1-2-3-4, Figure 3). On the other hand, the decisions of Boeing’s tier-1 suppliers (i.e., Leonardo) were as follows. 1. To keep the design and assembly of complete key large components (core-domain activities) (quadrant 4, section 1, Figure 3) in-house. 2. To outsource to tier-2 subcontractors (e.g., Dema) the design and manufacturing of single parties and components of major aircraft subassemblies (core-domain related activities) (quadrant 1, section 5, Figure 3). 3. To outsource to tier-2 subcontractors (e.g., Geven) the design, manufacture, and assembly of interiors, systems, and any other activities with significant technology discontinuity and an unfamiliar technology domain (quadrant 2, section 1, Figure 3). The new outsourcing model for Boeing and its tier-1 suppliers (i.e., Leonardo) was also applied for these and their tier-2 suppliers (i.e., Dema, Geven). In fact, the latter were now responsible for whole work packages, designing and manufacturing individual parts and components of the major aircraft subassemblies. In the past, tier-1 would give its subcontractors detailed designs of the components to produce, and they would manufacture

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the components in accordance with the design, planned costs, and times. In the new scenario, Boeing (in line with its “Boeing Quality Management System for Suppliers”) certifies the processes of the tier-2 sub-contractor (design, manufacturing, administrative, and support organisation). The interpretation and generalisation of the findings of the embedded in-depth Boeing 787-8 Dreamliner case study confirm the five research propositions (RPs 1-5) and the six dimensions of the decision-making model stemming from the RQ underpinning this volume. Moreover, the case study makes it possible to validate the RQ and show that the model can explain the sourcing strategies identified in the Boeing 787-8 Dreamliner case study. The programme is an interesting case study of product innovation and collaborative relationships outsourcing in a supply network in response to a disrupting technology scenario. However, it was not an immediate success in terms of execution and project management. In fact, the first test flight of the Boeing 787-8 Dreamliner took place three years behind schedule. Thirteen articles addressing the programme’s shortcomings (Bellmann et al. 2010; Elaih et al., 2012) identify the recurrent causes of delays. In all, the articles, published between October 2007 and October 2009, contain seventy causes of delay, prevalently related to engineering and organisational problems. With its new versions of the aircraft (B787-9 and B787-10 Dreamliner), Boeing attempted to solve the engineering and organisation problems that had emerged with the first version of the aircraft (B787-8) by trying to centralise the core processes influencing performance (quality, costs, lead time). To do so, Boeing acquired Global Aeronautica and Vought, its tier-1 suppliers located in South Carolina (USA), and the companies responsible for the pre-assembling process. The decision to move the supply chain back to the USA was driven by the same logic, forcing the small prime partners to make greater use of American tier-2 suppliers. The Boeing NPD outsourcing model certainly needed improvement in the execution and project management phase. However, decisions on the strategic outsourcing of innovation activities are irreversible. As a Boeing manager observed in an interview with Reuters (Peterson, 2011): “In retrospect, our 787 game-plan may have been overly ambitious, incorporating too many firsts, all-at-once changes in the application of new technologies, in revolutionary design-and-build processes, and in increased global sourcing of engineering and manufacturing contents. [….] While we clearly stumbled in the execution, we remain steadfastly confident in the innovative achievements of the aeroplane and the benefits it will bring to our customers. […] The outsourcing decisions made on the 787 are a natural evolution of the work done at Boeing Commercial over the recent years […]

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We are satisfied with the general direction. However, there are a few things we would change on the 787 over the years”.

5.4. Management implications, limits, and future directions Companies are increasingly considering the NPD process a collaborative effort, sharing tasks among the various players with good valuecreation potential across the supply chain network (Emden et al., 2006) even if they are located around the globe (Von Haartman and Bengtsson, 2015). Adopting appropriate risk strategies is a challenge to the traditional assumption that core business activities must always stay inside the innovating firm. With the integration of a supply network in the disruptive NPD process, especially when it is on a global scale, web technologies (Tarofder, 2013; Fawcett et al., 2011) are valuable enablers of virtual platforms for implementing and integrating activities, resources, competencies, and explicit knowledge (Polany, 1966) wherever they are located. The competitive pressure of the innovation context – expressed in terms of shorter time-to-market, lower costs, and investment-sharing – influences a firm’s (i.e., Boeing, tier-1 suppliers) decision to radically change the outsourcing model of a disruptive innovation project. Outsourcing involving NPD disruptive activities is an ongoing process. A firm has to adopt an effective learning plan in order to overcome and mitigate failures. In other words, it has to be prepared to develop and redefine its own outsourcing capabilities – so important in the disruptive product innovation processes when these are outsourced (Pratap, 2014). Despite the suggestions in the mainstream literature, a firm’s NPD coredomain related activities can be outsourced even when the strategic risk is high, and its internal competencies are broader than those of the competitors and/or suppliers. This is a recommended choice, especially when the competitive pressure is high, the firm has a valuable supply network, and it adopts an effective risk mitigation strategy. Firms should keep all the core-domain and core-domain-related activities in-house, as suggested in the mainstream literature. Outsourcing an NPD project in response to disruptive technologies allows a firm to meet several strategic objectives. Firstly, it reduces costs and project duration, optimising design and production risk at country level. Secondly, it leverages best-in-class technologies, resources, and competencies in the supply chain network. To this end, it is necessary to have and implement a faultless methodological approach to selecting strategic partners (Guertler and Lindemann, 2016). Thirdly, it controls, accesses, and

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manages the competencies spread out along the supply chain. Fourthly, such a decision leverages the proprietary digital co-design to define the process standards to be applied along the entire supply chain network using the same digital platform as a knowledge management tool along the chain. Lastly, it dynamically reconfigures the resources, competencies, and competitive advantage-base of both the firm and supply network. Lastly, as mentioned earlier, the B787 programme adopts an open innovation model (Chesbrough, 2003), implemented according to a strategic outsourcing logic. In line with corporate entrepreneurship strategy literature (Ireland et al., 2009; McFadden et al., 2005; Meyer and Heppard, 2000; Echols and Neck, 1998), Boeing applied a remarkably philosophical vision of entrepreneurship, building a strategic outsourcing relationship model favouring in-house strategy, organisational structure, and critical processes. In fact, from 2002, such a strategic vision was shared only with a controlled group of small prime partners who would share in the adventure from the beginning. [….] the Partner Council – joined by several prime contractors – served more to give horizontal visibility to those involved in the programme from the beginning, but not on the subject of collaboration. At this stage, for example, the partner did not know what they were working on (in terms of solutions and calculation models) and what the Japanese would do. Only later, the choice was crystallised: let’s make a carbon fibre plane […] (quote, Leonardo’s Project Manager and Chief 787 Program Engineering Manager interview, 2009). This Council was set up mainly to test the product concept but never tried to prove the worthiness and achievability of the strategic outsourcing model. Secondly, the organisational structure facilitating the strategic outsourcing model consisted mainly of the Enovia platform, which was designed at Boeing with Cisco. While allowing partner access, it was fully integrated with Boeing and operated in line with its processes, operating procedures, and workflows. The latter was probably the most difficult change to implement. It was not easy to make the several pyramid partners adopt Boeing’s working methods, and it sometimes took industrial mistakes and company managers operating in the field to align tier-2 and tier-3 with Boeing’s processes. “The newly announced standards were selected by the companywide Engineering Process Council, led by Swain (Boeing corporate senior vice president of engineering and technology). The Council is chartered to develop breakthrough common processes to provide Boeing with a significant competitive advantage through major improvements in engineering cycle time, quality, and cost. Through evaluating the best engineering tools and processes from across Boeing, the Council has been developing the framework for establishing standard design, analysis, and pro-

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duction tools and processes” (www.boeing.com, January 7th, 2000). It is well known that a corporate entrepreneurship strategy ultimately requires strong leadership. The Boeing Company is a diversified firm, and civil aircraft production is just one of the businesses to which the company is committed, so it was obliged to combine strategic innovation in the civilian aircraft business with that of the overall company. In this sense, strategic outsourcing was the only possible alternative to initiating a strategic innovation process that, if it had been sought totally inside the company, would have probably undermined the resources of the other well-run businesses. In conclusion, the entrepreneurial corporate strategy Boeing adopted has allowed it to develop an innovative business model (Zott et al., 2011; Chesbrough, 2010) involving the key partners and the key activities of its supply chain. In this way, the new strategy allowed the key partners in the chain to be more innovative (Cooper et al., 2000) and to instil more creative, innovative, and responsible approaches to constructing business processes (Amit et al., 2000). This research aims to provide valuable empirical evidence from the B787 case study on which to build and test an integrated and practical decision-making model for outsourcing NPD activities when disruptive technologies foster product innovation projects. However, it contains some limitations calling for further research. The first is that the tier-1 and tier-2 supply partners involved in the research are limited in terms of number and country of origin (all Italian companies). Secondly, when the empirical research was being carried out, Boeing refused to grant interviews with the senior and programme managers involved in the B787 programme, nor did it provide access to internal documents. The case study prevalently focuses on the B787-8 programme, the first version of the aeroplane. At the time, the programme (B787-8) was in a critical phase regarding lead-time delays and technical problems. The changes in outsourcing strategy over time (changes to the B787-9 and B787-10 programmes compared with B787-8) and the reasons for the three-year delay in the B787-8 programme compared with the scheduled time-to-market are further issues to be investigated. Thirdly, a quantitative survey is necessary to test these empirical findings, overcoming the limitations of the B787 case study, using only a qualitative approach. Lastly, the sourcing decision-making model has been tested only on the aircraft industry and the B787 programme. Further research might investigate whether it is also suitable for analysing other NPD projects in the same and other high technology-based industries (i.e., automotive, biotech, pharmaceutics, ICTs).

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Afterword

THE SUPPLY CHAIN IN THE AVIATION INDUSTRY: AN INSIDER’S PERSPECTIVE by Vincenzo Caiazzo * My contribution to this book is not an academic analysis of the B 787 programme but the testimony of a company executive who has followed its evolution since its conception. My contribution is the result of daily interaction with all the players involved (Boeing, Alenia, and the other global supply partners) during my 20 years in the USA. The Boeing 787 programme is the most recent attempt to reshape the outsourcing model in the commercial aviation industry, changing the way prime contractors work with their supply chain. This is yet another example of Boeing’s mindset and strategy for setting innovative market standards when launching a new programme, thus leading the way in terms of technologies, governance, and new operating models. Until the late twentieth century, Boeing dominated the lucrative commercial aviation industry market. In the early 2000s, Airbus – Boeing’s European competitor – gained the lead in terms of the number of orders and deliveries, thus threatening Boeing’s position of market dominance. In 2004, after months of internal debate about whether to improve existing products or launch a new platform, Boeing decided to launch the B7E7, an innovative, efficient, wide-body aircraft, later called the B787 Dreamliner. The new aircraft was designed to be a real market “game-changer” with major new features. Among these, improving the travel experience of the passengers with more comfort and non-stop flights between any two cities (point-to-point model vs Airbus hub-spoke model), creating value for the airlines with an unprecedented level of efficiency (20 percent less fuel consumption) and reduced life-cycle maintenance costs. The investment for developing the new aircraft was initially estimated at US$ 10 billion. The 9/11 attack and its subsequent impact on the commercial aviation industry disrupted Boeing’s financial position, so it could not afford such an investment. As a result, the only way to convince the Board of Directors to proceed with the programme was to spread part of the financial risk along a global chain of suppliers. * Former Chief Operating Officer at Alenia North America & Former Chairman of the Board at Global Aeronautica.

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This risk-sharing model followed a similar approach to that of the MD95 programme (later called B717). McDonnell Douglas first utilised this before its merger with Boeing in 1997, but it was then applied to a new aircraft development programme that introduced brand-new technologies and high production rates instead of a new derivative with established technologies and lower production rates such as the MD95. In 2004, the Boeing Board signed off an investment of US$ 6 billion for the project, spreading the remaining development costs among several global strategic suppliers, aiming to reduce development time from six to four years. Shifting the financial risks of developing an innovative aircraft onto the suppliers drove all the choices and the consequences in the 787 programme. The main effect of such a shift was to create an innovative and unconventional global supply chain model (global supply partnership) capable of taking control of the activities and responsibilities previously performed by the “prime”, creating new growth opportunities for the entire Supply Chain. The partnership model modified the traditional relationships in the supply chain. Boeing was transformed from jet manufacturer to large-scale systems integrator, extensively outsourcing work packages – including all the major sections of the new airframe – to its globally located tier-1 suppliers. Few tier-1 suppliers became “vertical” partners, so-called “small prime” partners, operating on a higher level by assuming the activities and the responsibilities previously performed by Boeing. The “small prime” partners agreed – through contractual “risk share partnership” arrangements – to undertake up-front non-recurring R&D investment for their work, with payment upon delivery to the final customers. Under this arrangement, the “small primes” benefitted from life-cycle aftermarket sales. The cutting-edge one-piece barrel technology and extensive use of composite material made it possible to design and manufacture the 787 airframes in major structural sections to be built in locations around the world before being transported into a lean final assembly line (a 3-day cycle) at Everett in the State of Washington, employing an air-transportation system (a modified B747) to speed up and ensure deliveries in intensive rate mode (over 14 per month). Boeing identified seven “small primes” for major aircraft structures: Alenia Aeronautica (Italy, centre fuselage and horizontal stabiliser, currently known as ‘Leonardo’), Kawasaki (Japan, forward fuselage), Mitsubishi (Japan, wings), Fuji (Japan, centre wing box), Spirit (USA, forward fuse-

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lage), Vought (USA, aft fuselage), Global Aeronautica (USA JV Alenia North America/Vought, fuselage integration). The 787 Global Partnership model began a new working model for aircraft development programmes. Boeing had previously worked with its suppliers according to “build-toprint” arrangements where Boeing engineers developed the design and detailed drawings (often hundreds of pages) for every part of the plane and then contracted suppliers to build them in strict conformity with the drawings. For the B787 programme, Boeing requested each partner to “build to specification”, with their own engineers providing only concept specifications (over a limited number of pages) with the performance metrics and key parameters that the various parts had to meet. For the first time in its history, Boeing outsourced the manufacture and integration of most of the major airframe sections and opted to outsource the design, detailed drawings, and tooling – limiting its own role to providing general design architectures and acting as a large-scale integrator. Over 70% of the Dreamliner engineering, tooling, manufacturing, and integration was outsourced to its global supply partners, with the vertical fin being the only major part designed and manufactured directly by Boeing. Partners were required to deliver their sections fully equipped and tested (with all parts and components installed) to the final assembly line in Everett (USA). Each partner was responsible for all tier-2 and tier-3 suppliers associated with its own section. The 787 global supply partnership allowed Boeing to reduce its tiers from thousands to just 50 tier-1 “small primes”, enabling Boeing to run a less complex management programme. With its 787 programme, Boeing has radically revolutionised its approach to development, design, and manufacture, in addition to financing new products with partners worldwide. It is an example of the extensive verticalization of the supply chain in an innovative global environment. The market enthusiastically embraced the innovative features of the aircraft as well as the unconventional global supply partnership model. The B787, therefore, became the fastest-selling aeroplane in commercial aviation history. However, events turned out differently than planned. In September 2007, embarrassing delays led to the most prolonged programme delay in Boeing history. This was a severe setback for Boeing’s ambition to become a large-scale systems integrator and also for the suppliers’ ambition to become small prime players in a new global supply partnership. The root causes of such delays have been widely covered in the literature. As regards my contribution to defining the evolution of the global supply partnership model, I believe it may be more profitable to address the measures Boeing adopted to fix the delays.

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In order to take control of the critical packages as a part of the recovery effort, in 2008, Boeing acquired Vought’s interest in Global Aeronautica; then, in 2009, it decided to acquire the Vought Charleston production site (aft fuselage production). Later that year, Boeing completed the acquisition of the Global Aeronautica fuselage pre-integration site, buying Alenia North America’s interest in the joint venture. In 2013, Boeing moved back in-house the assembly of the horizontal stabiliser produced by Alenia Aeronautica as the sole source under a co-production arrangement. Through a series of contract arrangements, Boeing took control of responsibility for the tier-2 and tier-3 suppliers initially managed by “small prime” partners. The last adjustment to the global supply partnership model, first utilised on the 787 programme, resulted from Boeing’s decision to insource wing design and manufacture, system design, and engine integration, including aftermarket sales for its new B777X and all future programmes. All these adjustments to the initial governance model of the project have reshaped the role and core competencies of Boeing and the supply chain partnership. Boeing opted to return to a more traditional role where the jet manufacturer retains responsibility for the design, manufacture, and assembly of the major sections. The original scope for the 787 “small prime” was downsized, reassigning to Boeing management responsibility for some of the tier-2 and tier-3 suppliers originally under the control and responsibility of the “small primes”. Despite its challenges, the 787 programme remains a crucial milestone in aircraft innovation history and will surely be an object of study for decades. The aircraft has been a market success, totalling more than 1,500 firm orders with 1,000 aircraft deliveries to date, making it the all-time bestselling aircraft in its category. This success is validated by passengers’ enthusiasm for aircraft comfort and its innovative features. On a personal note, I will always cherish the memory of the enthusiasm of hundreds of young engineers from all over the world (including a large Italian Alenia team) deployed at the Everett site at the start of the programme, thrilled at the opportunity to work on defining the general architecture of the aircraft. These talented young people were enthusiastic and fully aware that they were part of a shared and global effort, a unique opportunity unlikely to be repeated in future programmes. I am convinced that this global team will be the strength behind the aviation industry’s recovery from the Covid pandemic.

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The global aviation industry supply chain has been drastically affected by the Covid-19 pandemic. Although the picture is not yet clear, the industry that will emerge from Covid-19 will undoubtedly be very different. Like most aspects of our lives, the global aerospace industry (both the major OEMs and the whole supply chain) will be severely tested by these events and will emerge with fewer participants and a new set of norms. The latest IATA data show that full-year 2020 global air traffic is down 66% compared with 2019, and it will take at least three to five years to return to pre-Covid levels. Smaller and less financially stable air carriers are expected to consolidate and exit the market, downsizing the post-Covid airline industry. Aircraft production is forecast to decline by more than 30%, and production rates are not expected to return to pre-Covid levels until 2025. The 2020 Boeing Market Outlook, released in October 2020, indicates that the projected demand for new aircraft expected over the next ten years is 11% lower than the comparable 2019 forecast. Historically, the supply chain has always been driven by new programmes, but no new launch is expected until passenger demand returns to pre-Covid levels. In the long term, Boeing is likely to work on New MidSize Aeroplanes, while Airbus is expected to focus on derivatives of existing aircraft. The aviation supply chain, already weakened by the long grounding of the 737 MAX, is now in a major crisis that will probably progress in three phases over an extended period called “Covid overhang”. In Phase 1, all the tier suppliers, like all OEMs, are already making large-scale layoffs and liquidating assets to secure liquidity. Experts are concerned that mass layoffs could see specific skills and tribal knowledge leave the sector altogether. As people seek new jobs or take early retirement, suppliers and OEMs in the USA, UK, and France – the heartlands of the aerospace industry – risk finding themselves poorly positioned to benefit from any possible upswing. Phase 2, beginning in 2021, will entail both internal and external restructuring, where suppliers rationalise existing facilities and dispose of unprofitable segments. The lower volumes could cause some small suppliers or those with unhealthy balance sheets to fail or exit the market, disrupting aircraft production. Due to the financial situation, consolidation is expected among the tier-2 and tier-3 suppliers, facilitating the influx of private equity funds. The final Phase 3 (2023-2025) will create value again but in a different scenario. Once market recovery and confidence return, aircraft production rates should climb rapidly, albeit with a slimmed-down, more efficiently structured supply chain driving growth.

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The Covid-19 pandemic has further highlighted the supply chain globalisation risk and accelerated the “de-globalization” process that was already well underway before the crisis. The 787 programme has highlighted the significant coordination and control challenges in managing a global supply chain far removed from the prime and its final assembly line. Boeing’s adjustments to the 787 programme governance have shifted the company towards a more traditional “command and control” role over a supply chain – both for current and future programmes – that will be closer to its home base and optimised in terms of competencies and resource availability. The unprecedented disruptions to the global supply chain caused by the health crisis have confirmed and accelerated the need for a more regional, “local” supply chain. Government stimulus will be the critical factor for the survival of many players in the industry. Every country will have to assess its own industrial strategy to decide which domestic industries should grow. The aerospace industry has proved to be a strategic element in every developed economy. What must be saved during this collapse and rebuilding effort are the principles that make the aerospace industry function successfully. One of these is that key suppliers not only build parts and assemblies but also participate in a significant portion of the design effort. At a time when the entire aerospace industry is in a perilous spot, the supply chain may not have the resources to keep the flame of design capability alive. If a nation’s private aerospace companies cannot provide sufficient opportunities to keep their design teams abreast with the rest of the world, then governments may need to intervene by providing such opportunities as a bridge to better times. Those stimuli could take various forms; what is essential is that government-funded projects should involve technologies (materials, design methodologies, implementation strategies, software, etc.) for aerospace products. These projects would not need to be massive; they could involve devices like ventilators, small-scale robotics, automotive parts, assemblies, etc., just enough to keep a core of competence alive and updated. Government support of this type could help produce items specifically for domestic use; otherwise, funds that would allow returns if the product is sold could be made available. Thinking in the long term, I imagine a wholly restructured commercial supply chain able to optimise the availability of resources endowed with competencies. This restructured supply chain would be primarily domestic and regional. It would be slimmer and more efficient – with fewer strategic tier-1 suppliers, and they would be mainly located domestically or in Western countries. Consolidated tier-2 and tier-3 suppliers would be privately owned.

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The design will likely be led and controlled by the “prime”, with the participation of a few strategic tier-1 suppliers. Development activities will most likely be centralised, with detailed design falling to tier-1 suppliers at their plants and controlled by the “prime”. Collaborative global outsourcing will be replaced by a blend of domestic outsourcing (cost-cutting) and international strategic sourcing (capability enhancement), adopting a “build to print” approach rather than a “build to specifications” methodology. In this scenario, prime contractors would retain a “command and control” role across all production activities, keeping some critical competencies and critical manufacturing know-how in-house. Boeing has largely anticipated this kind of restructuring as a “lesson learned” from the 787 programme. The major difference will be the roles of governments in supporting major aerospace players with massive stimulus packages in the aftermath of the Covid-19 pandemic.

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Websites https://www.boeing.com https://www.brightworkresearch.com/scmhistory/2017/03/boeings-collabo ration-problems/ https://www.demaspa.it https://www.forbes.com/sites/stevedenning/2013/01/17/the-boeing-debacl e-seven-lessons-every-ceo-must-learn/#7a1ab0a015c1 https://www.forbes.com/sites/stevedenning/2013/01/21/what-went-wrongat-boeing/#425ca6937b1bhttps://www.geven.com https://www.leonardocompany.com

Index

137

INDEX A Accenture 19 Additive Manufacturing solutions 41 aerospace industry: build-to-print methodology for outsourcing 179; collaborative global outsourcing, replacement of 179; commercial supply chain for, restructuring of 178–9; government stimulus, critical nature of 178; perils of future for 178; restructured commercial supply chain, suggestions for 178–9 aerostructure design 86–7, 89 AI (Artificial Intelligence) 18, 20 Airbnb 8 Airbus 380 88, 113 Airbus Industrie 57, 164, 167, 173, 177; Dreamliner 787 in competitive market with 86, 88–9, 94, 95–6, 101–3, 109, 112, 119, 122, 133–4, 139, 140, 143, 144 Albaugh, Jim 144 Alenia Aermacchi 87, 91, 92, 95, 97, 106 Alenia Aeronautica 173, 174–5, 176; Boeing 787 Dreamliner programme and 87, 97 Alenia North America 2, 3, 17, 106, 129, 130, 134, 135, 173, 175, 176 Amazon 8 AM-RB 003 hypercar 10 Analytical Intelligence 21 assets 54; asset specificity 153 Aston Martin 9; illustrative mini-case 10 ATR (Avion de Transport Regional) 88, 94, 96, 99, 109, 113, 115, 116 Augmented Reality 18, 42 aviation industry: flattening of hierarchical relations in 141; hierarchical supply chain organization of 86–8, 89; insider’s per-

spective on 173–9; major aircraft structures, “small primes” identified for 174– 5; organizational hierarchy of 86–7; research setting 86; tendency to globalise supply to low-cost countries 119

B back-shoring (reshoring) 148 backup suppliers, establishment of 27 Baden-Fuller model: competitive advantage in changing markets 78–9; core competences, outsourcing of 78; emerging markets, outsourcing for 79; new product development (NPD), outsourcing of 78, 79; partner selection 79; socio-economic environment and 78; technological environment and 78; technology shift, dealing with 79 Bain & Company 18–19 Baldascino, Rodolfo 124n barrel technology 174 Basile, Dr Vincenzo 3 BDA (Big Data Analytics) 18, 21 Becker and Zirpoli’s model: component impact on overall product performance 81; Fiat Auto case study (2017) 81; make-or-buy decision 81; new product development (NPD) performance and 81; product-component interdependencies, level of 81; research and development (R&D) outsourcing and 81 Bedford, Professor Adrian 3 Bellomia, Paolo 120n bicycle industry, history of 29–31; see also Gruppo Schiano case study Blair, Mike 105 Blockchain 18, 21

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Strategic Outsourcing, Innovation and Global Supply Chains

Boeing 787 Dreamliner programme 2, 15; breakthrough innovation, reasons for 165; design and manufacture of components for 11; outsourcing strategies for, main research question on 16; radical innovation in 164; specialised suppliers for, location of 11; subassemblies for, design and manufacture of 11 Boeing 787 Dreamliner programme, case study on 2, 85–149; acquisitions, role of 129; aerostructure design 86–7, 89; aft fuselage, severe delay in delivery by Vought 106; Airbus 380 88; Airbus Industrie 88; aircraft industry, flattening of hierarchical relations in 141; aircraft industry, tendency to globalise supply to low-cost countries 119; Alenia Aermacchi and 87, 91, 92, 95, 97, 106; Alenia Aeronautica and 87, 97; architecture and new materials, launch of new programme exploring 108–9; assembly at Boeing, problems with 104; assembly process 89–90; ATR (Avion de Transport Regional) and 88, 94, 96, 99, 109, 113, 115, 116; back-shoring (reshoring) 148; benefits of strategic “offset” and “offshoring” worldwide 102; Boeing calling entire project into question 122; Boeing Capital Corporation (BCC) 93; Boeing Commercial Airplanes 91, 93–4; Boeing Global Services 93; Boeing total control over strategic suppliers 97; bottleneck industrial supply partners, insourcing of 108; breakthrough innovation 89; build-to-performance model, switch to 133–5; build-to-performance process 100–101; business processes, differences in 100; carbon-fibre design, Boeing's decision on (June, 2003) 110; carbon-fibre reinforced plastic (CFRP), optimization of 143; certification of part numbers, responsibility for 119; certification testing 110; choice to study B787 case 86; coding abilities, improvement of specificity in 130; collabora-

tive model underlying programme from launch 147; commercial aircraft industry, hierarchical supply chain organization of 86–8, 89; commercial aircraft industry, organizational hierarchy of 86–7; commercial aircraft industry, research setting 86; communication enhancement 131; companies involved in case study, sample of 92; competence spill-over from outsourcing 128–9; competitive advantage, basis for 140; competitive edge and tribal knowledge (tacit knowledge), loss of 137–9; composite materials 97, 98, 109, 133; composite materials, need for specialisation with 138–9; composite materials skills available, Boeing’s exploration of 109; concept-development stage, key partner involvement in new programmes 132–3; conclusions, implications for management and 143–9; connective technologies in industrial relationships 144–5; contractor selection-assessment criteria 119; coordination between supply partners, facilitation of 103; core competences, collective learning and 145; core competences, development of 145–6; cost sustainability of outsourcing 127; critical components, direct industrialization of 148; customer relationships, management of 86–7; Dassault Systèmes S.A. and 112; deductive reasoning 86; defective or unfinished work by suppliers 104; delays, risksharing contracts and implications for 135–6; delays and difficulties in programme 104–7; design and build aspects, alignment of 101; design and manufacturing process, “one-piece barrel” logic in 89; design development control, contractual arrangements and 137–8; design issues, problems with 104; design network, worldwide composition of 102; design of key components and key manufacturing compe-

Index tences, re-centralisation of 130; development costs, risks and 102; digital technologies, implications for strategic outsourcing 140–43; discussion points 125–31; dynamic reconfiguration of core capabilities for Boeing 144–5; early disruptive change to outsourcing relationships within global supply chain 85–6; empirical research, Boeing Commercial Airplanes and 91; empirical research based on case study 90–92; engineering teams of strategic partners 101; ENOVIA web-based concurrent co-design architecture 120, 123, 124, 125, 140; Everett, Boeing assembly plant at 89, 91, 97, 106, 110, 132, 134, 167, 174, 175, 176; evolution of strategic outsourcing relationships 142; fasteners, problem of shortage of 105–6; features of Dreamliner, value for customers and passengers 99–100; financial resources, supplier growth and investment of 118; findings 132–43; flight safety authorities, interventions by 104; Fuji Heavy Industries (Japan) 87; game plan, over-ambition on 130; General Electric (USA) 87; Global Aeronautica and 106, 130; Global Aeronautica and, Boeing purchase of Alenia shares in 129; guarantees, maintenance of 118; hybrid configuration for problem-solving along supply chain 136–7; improvement of outsourcing model for? 129– 31; innovation breakthrough, B787 programme as 86; insourcing B787-9 and B787-10 models, subsequent decision on 139–40; investment costs 102; KAL-ASD (South Korea) and 87; Kawasaki Heavy Industries (Japan) and 87; knowledge spill-over 149; Leonardo-Finmeccanica and 87, 92, 95; management literature on B787-8 86; McDonnell Douglas and Boeing, merger of (1997) 94; methodology 90–99; middle market aspects of Boeing B787

213

Dreamliner 88; mitigation strategy for solving difficulties along supply chain 108–9; Mitsubishi Heavy Industries (Japan) and 87; modularization, extensive use of 136; multi-level supply network (broadly distributed) 86; narrative technique 90–91; new product development (NPD), approach to outsourcing for 86, 87, 90, 95; new product development (NPD) programming, improvement of 130; offset policies, leveraging of 148; offshoring, effects of 149; open approach to innovation in 60; Original Equipment Manufacturers (OEMs) and 86–8, 89, 90, 92, 94, 99– 105, 133; outsourcing model, knowhow control and 139; outsourcing partners, selection of 132–3; partners, knowledge gains of 110–11, 112; personal interviews 90, 91–2; principal small prime contractors 87; problemsolving along supply chain, hybrid configuration for 136–7; process standardisation 114; production of B787-8 without outsourcing, possibility of 125–6; prototypes, pre-industrial research on 114; qualitative method, data collection and 85; qualitative techniques, triangulation of 90–91; rationale behind B787-8 programme 101–2; rationale for launch of programme, perspective of OEMs on 99–103; reliability testing 107; research and development (R&D) costs, problem with 125; research design 91; reversibility of outsourcing model for? 129; risks and development costs 102; risk-sharing, profitability and 144; risksharing contracts 118; risk-sharing contracts, implications for delays and 135– 6; risk-sharing contracts, improvement of 131; risk-sharing partnerships 134–5; Rolls-Royce (UK) and 87; Rolls-Royce (UK) and, engines from, availability and reliability of 107; second-level suppliers 87–8, 92; shortages of parts 104;

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shortcomings of programme 104–5; Spirit AeroSystems (USA) and 87; startegic outsourcing, “democratic” principle in 113–14; state-of-the-art command and control centre 107–8; strategic inshoring 148; strategic offset 146; strategic offset, benefits of 102; strategic offset, implications of 148–9; strategic outsourcing, logic for 101–2; strategic outsourcing, primary and secondary reasons for 102–3; strategic outsourcing model, main long-term consequence of 137–9; strategic outsourcing policy, importance of 125; strategic outsourcing policy, skills development and 128–9; structural partners, claims of inadequacies of 105; subsystems design and manufacture 101; success of Boeing Dreamliner 103; supplier-relationships model, changes in 133–5; supply chain, tiered structure of 100; supply chain relationships, redesign of (and difficulties with) 122–3, 123–4; system integrators along worldwide supply chain 86–7, 87–8; testing process, improvement in 131; third-level suppliers 88, 92; timeto-market 125; time-to-market, outsourcing and 127–8; “24 Hour Knowledge Factory” model 90, 127; uniformity among partners, need for “design guide” to ensure 110–11; vendor rating, improvement of 130; vertical partners adoption of acquired critical skills 143–4; Vought Aircraft Industries (USA) 87; Vought Aircraft Industries, problematic role in venture 137; Vought Aircraft Industries, purchase of 129; worldwide design network 102; see also Boeing Company in United States; Dema S.p.A.; Geven S.p.A.; Leonardo S.p.A.; Vought Aircraft Industries Boeing B777X programme 176 Boeing Capital Corporation (BCC) 93 Boeing Commercial Airplanes 91, 93–4, 168–9

Boeing Company in United States 93–4; Annual Report (2010) 125, 128; business units 93; calling entire B787 Dreamliner project into question 122; contribution to research 92; entrepreneurial corporate strategy at 171; game plan, over-ambition on 130; Market Outlook (2020) 177; outsourcing decisions on B787 project 167; Quality Management System for Suppliers 168; strategic suppliers for 787 programme, total control over 97 Boeing Global Services 93 Boston Consulting Group (BCG) 18, 22 bottlenecks: industrial supply partners, insourcing and 108; outsourcing bottleneck items 72–3; supply chain partnerships and 136; in testing and certification 131 bounded rationality: bounded rationality hypothesis 15–16; Transaction Cost Economic Theory (TCET) and 46, 47, 50 Brandon Ferrari, brand promotion and 36

C Caiazzo, Vincenzo 2, 3, 17, 108n, 173–9 Calvosa. Professor Paolo 3 Cannoletta, Danilo 108n Cantone, Dr Giuseppe Fabio 1–4 Cantone, Professor Luigi 2–3 carbon-fibre design: Boeing's decision on (June, 2003) 110; carbon-fibre reinforced plastic (CFRP), optimization of 143 Cauceglia, Nazario 108n CCI (Cloud Computing Infrastructures) 18 Cerreta, Pierantonio 108n Cisco 170 Cloud Computing 21 COBOT Robot 41 collaborative relationships, benefits of 14 communication enhancement 131 communication protocols, establishment of 40

Index Competence-Based Competition Theory (CBCT) 12, 51–2, 54–5; assets 54; competitive advantage, competencies and 54; core competencies 54–5; functionality-related competencies 54–5; integrity-related competencies 54; market-access competencies 54; NPD outsourcing, conceptual decision-making model for and 151, 157, 159; outsourcing and 13; technological competencies, access to 55 competences: competence spill-over from outsourcing 128–9; competitive advantage and 54; design of key components and key manufacturing competences, re-centralisation of 130; dynamic capabilities, competence and 57; exploitation of new competencies through B787 programme 123–4; functionalityrelated competences 54–5; identification of new competences 123; integrityrelated competences 54; Leonardo technological competences of suppliers 116–17; market-access competences 54; NPD outsourcing, Competence-Based Competition Theory (CBCT) and 151, 157, 159; see also Competence-Based Competition Theory (CBCT) competition, ex post limits to 53 competitive advantage 1, 5, 6, 7, 8, 12, 21, 124, 148, 163; basis for 140; business networking and 61–2; in changing markets 78–9; competencies and 54; creation along value chain of 68; dynamic capabilities and 57; generation of 51; horizontal interrelations and 50–51; information asymmetries and 49; innovation as driver of 43–4, 68–70, 156; Kraljic’s portfolio-purchasing model 75, 77; loss of 31; outsourcing and 75, 77, 79–81; resources and 52–3; social and environmental sustainability and 22; strategic assets and 52, 55; strategic outsourcing and 65, 145–6; supplier involvement and 9; tribal knowledge (tacit knowledge) loss and 137–9

215

components, impact on product performance 155 composite materials 97, 98, 109, 133; extensive use of 174; need for specialisation with 138–9; skills available in, Boeing’s exploration of 109 concept-creation process 58–9 conceptual decision-making model, application to B787-8 programme 165–9 conceptualised knowledge, creation of 59 Condorino model, launch of (1970) 34 connective technologies in industrial relationships 144–5 consolidated behavioural theory 46 contractor selection-assessment criteria 119 core activities along value chain 68 core competences: Baden-Fuller model and 78; collective learning and 145; Competence-Based Competition Theory (CBCT) and 54–5; at Dema S.p.A. 98; development of 145–6; of firm, value of understanding 68–9; focus on, outsourcing and 7; Leonardo core competencies exploited through B787 programme 111– 14; Leonardo new core competences 111–14; outsourcing of 78; value of understanding about 68–9 Covid-19 pandemic 17, 23; Covid overhang, dealing with 177; disruption from 24–6; effect on global aviation industry supply chain 177; globalization risk and 178 CPS (Cyber-Physical System Technologies) 18, 21 critical components, direct industrialization of 148 cultural differences between partners 153 customer needs, shift in 153 customer relationships, management of 86–7 customer requirements, matching production to 36 customer-centric activities in value chain 68, 69

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D Dassault Systèmes S.A. 112 De Alcubierre, Placido 120n decision-making: behind strategic outsourcing 43; conceptual decision-making, application to B787-8 project 165–9; limitations of Transaction Cost Economic Theory (TCET) 49–50; multidimensional and integrated model for outsourcing NPD 15–16; non strategic outsourcing, decision-making on 65–6; outsourcing decision-making process 65; outsourcing of 65–70; on outsourcing of NPD 1, 2; process of, main decisions in 66–7; processes in 46, 51; strategic outsourcing, decision-making on 65–6; see also NPD outsourcing, conceptual decision-making model for deductive reasoning 86 DEI (Diversity, Equity, Inclusion) analytics 23–4 Deloitte 18, 20 Dema S.p.A. 89, 91, 92, 98–9; aerospace component production 98; Bybrook Capital and 98; competitive pressures on 122; contribution to B787 programme 120, 121–2; contribution to research 91, 92; core competences 98; delays, reasons for 120–21; Dema Group 98; exploitation of new competencies through B787 programme 123–4; financial crisis, effect on 98–9; IMI Fondi Chiusi SGR fund and 98; new approach to supply-chain management 121–3; new competencies identified 123; rationale for joining B787 programme 120–21; research and development (R&D) activities 98 demand flexibility, NPD outsourcing and 80, 153 design and build aspects, alignment of 101 design and manufacturing process, “onepiece barrel” logic in 89 design development control, contractual arrangements in 137–8

“design guide” to ensure uniformity among partners, need for 110–11 design issues, problems with 104 design network, worldwide composition of 102 Di Donato, Alberto 3 digital interconnection between suppliers 27–8 Digital Supply Chain (DSC) 20–21 digital technologies: disruption from 17, 18–21; implications for strategic outsourcing 140–43; outsourcing and 7–8 disruptive phenomena impacting supply chains 17–28 disruptive technology, innovation and 15, 16 Distributed Compliance, concept of 10 Dynamic Capability Theory (DCT) 12, 52, 55–7; capabilities, definition of 55– 6; competitive advantage, dynamic capabilities and 57; conceptual decisionmaking model for NPD outsourcing 157; dynamic capabilities 56–7; dynamic capabilities, adaptability, innovation and 56–7; dynamic capabilities, competence and 57; dynamic capabilities, primary clusters 56; ordinary capabilities 56; outsourcing and 14

E Economic Inefficiency Theory 62 Economist Intelligence Unit 19 Edge Computing 18 emerging markets, outsourcing to 79 empirical research: based on case study 90–92; Boeing Commercial Airplanes and 91 Engineering Process Council at Boeing 170–71 ENOVIA web-based concurrent codesign architecture 120, 123, 124, 125, 140, 170 Enterprise Resource Planning (ERP) 38 environment market practices 4; supply chains and 24

Index environmental factors: Resource-Based Theory (RBT) and 53; Transaction Cost Economic Theory (TCET) and 47 environmental pressure on NPD outsourcing 158 environmental process practices 4; supply chains and 24 environmental uncertainties, outsourcing and 11–12, 154 ESG (Environmental, Social, and Governance) principles. outsourcing and 17, 23–4 European Bicycle Industry 28–9 Everett, Boeing assembly plant at 89, 91, 97, 106, 110, 132, 134, 167, 174, 175, 176 Exchange or Market Power Theory 62 explicit knowledge, “internalisation” of 59 external outsourcing 69–70

F Fancher, Scott 105 fasteners, problem of shortage of 105–6 Fiat Auto case study (2017) 81 financial resources, supplier growth and investment of 118 financial risk shift for B787 Dreamliner 174 findings of 787 Dreamliner programme case study 132–43 firm, theories of the: Competence-Based Competition Theory (CBCT) and 51–2, 54–5; Dynamic Capability Theory (DCT) 52, 55–7; Knowledge-Based Theory (KBT) and 52, 58–60; Network Theory (NT) 52, 61–4; Open Innovation Theory (OIT) 60; outsourcing decision-making, resource-based theories of the firm and 64; Resource-Based Theory (RBT) 51, 52–4; Strategic Assets Theory (SAT) 52, 55; Supply-Chain Network Theory (SCNT) 61–4; theoretical perspectives, fusion of 64; Transaction Cost Economics Theory (TCET) 44–52

217

first flight test of Boeing of 787-8 Dreamliner three years behind schedule 164– 5, 168 Flexsys 9; illustrative mini-case 10 Flight International 104–5 flight safety authorities, interventions by 104 Fuji Heavy Industries (Japan) 87, 174–5 functionality-related competences 54–5

G General Electric (USA) 87 Geven S.p.A. 89, 91, 92, 99; contribution to research 91, 92; insulation blankets, provision of 99, 124–5; rationale for joining B787 programme 124–5 Gianni, Aldo 108n Giordio, Giuseppe 95, 106 Global Aeronautica 2, 3, 17, 168, 175, 176; Boeing purchase of Alenia shares in 129; Dreamliner programme case study and 106, 129, 130 Global Partnership model for 787 Dreamliner 175 global supply chains 22 global teamwork, talent of young engineers in 176 globalisation: supply chains and 17; of supply markets, outsourcing and 7 governance costs 45, 46 Gruppo Schiano 1–2, 3 Gruppo Schiano case study 16, 28–42; Additive Manufacturing solutions 41; Augmented Reality technologies 42; beginnings of Gruppo Schiano 33–4; bicycle industry, dramatic changes over last 35 years 30–31; bicycle industry, history of 29–31; bicycle market, highlights of 28–9; brand success, constant improvement and 34; Brandon Ferrari, brand promotion and 36; COBOT Robot 41; communication protocols, establishment of 40; company profile 33– 5; conclusions, implications for management and 42; Condorino model,

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launch of (1970) 34; consumer trends, change in 30; customer requirements, matching production to 36; Enterprise Resource Planning (ERP) 38; European Bicycle Industry 28–9; Industry 4.0 philosophy (and technologies) 28, 32, 38– 9, 40, 42; Industry Architecture 30; innovative companies, market share advances of 31; intermodal transport, bicycles and 28–42; Italian bike market 29; Manufacturing Execution System (MES) software 40; Mass Customization, logic of 37; Mass Customization, move from mass production to 35–42; material requirement planning (MRP) 31–2; milestones in company development 33–5; Original Equipment Manufacturers (OEMs) 31–2; Personalized Production, paradigm of 37; robotics in production 40–41; SCH BIKE COLLECTION (2014) 35; smart factory paradigm 36–7; Supplier Bargaining Power 30; supply chain, “new” version 38; supply chain, “old” version 32; supply chain, weaknesses in 32; time-to-market 37–8; Virtual Manufacturing techniques 41–2 guarantees, maintenance of 118

H hierarchy solution on value chain activities 45 high-intensity product innovation, managerial approach to 12 Hollensen, Professor Svend 3 horizontal interrelations 50–51 hub-spoke market model 173 hybrid governance solutions 51 hybrid solution on value chain activities 45

I Iannuzzo, Generoso 108n idiosyncratic investments 48–9

individual knowledge 59 Industry 4.0 (Fourth Industrial Revolution): innovation and 18, 20; supply chains and 18 Industry 4.0 philosophy (and technologies) 28, 32, 38–9, 40, 42 Industry Architecture 30 information asymmetries 49 infrastructure-based innovation in value chain 68 innovation: Accenture and 19; AI (Artificial Intelligence) 18, 20; Analytical Intelligence 21; Augmented Reality 18; Bain & Company and 18–19; BDA (Big Data Analytics) 18, 21; Blockchain 18, 21; Boston Consulting Group (BCG) and 18, 22; CCI (Cloud Computing Infrastructures) 18; Cloud Computing 21; core product innovation activities 151, 156–7, 162–3; core product innovation activities, keeping in-house 163; core product innovation activities, outsourcing of 162–3; CPS (Cyber-Physical System Technologies) 18, 21; Deloitte and 18, 20; demand for product innovation 6; Digital Supply Chain (DSC) 20–21; Edge Computing 18; high-intensity product innovation, managerial approach and 12; importance and complexity of innovation projects 13; Industry 4.0 (Fourth Industrial Revolution) and 18, 20; innovation activities, reasons for outsourcing of 9; innovation breakthrough, B787 programme as 86; innovation-based activities in value chain 68; innovation-based outsourcing, relational capabilities 13; innovation-based outsourcing, relational capabilities and 13; innovative companies, market share advances of 31; innovative features of B787, market enthusiasm for 174, 176; insourcing of, problems for firms in 6; interfirm networks and 6; involvement of suppliers in 8–9; IoT (Internet of Things) and 18, 21; AT Kearney and

Index 19; marketing innovative products, requirements of 6; McKinsey and 18; new product development (NPD) and 43–4; outsourcing in, role of 1; outsourcing in NPD, literature on 12–16; outsourcing innovation, drivers for 10; outsourcing innovation activities, reasons for 9; process of, stages of 60; projects in, collaborative partnerships and 13; Quantum Computing 18; Robotics Process Automation 18; 3D Printing-Additive Manufacturing 18; time-to-market (TTM) and 9 insourcing: B787-9 and B787-10 models, subsequent decision on 139–40; problems for firms, innovation and 6 Institutional Theory 62 integration: integrating suppliers into NPD, risks and costs of 14; of strategic dimensions, NPD and 159–61 integrity-related competences 54 interaction costs, outsourcing and 8 interfirm networks 6 International Journal of Innovation Management 3 inter-organisational knowledge 59 inventory building, supply chains and 27 IoT (Internet of Things) 18, 21 isolating mechanisms 53

K KAL-ASD (South Korea) 87 Kawasaki Heavy Industries (Japan) 87, 174 knowledge: conceptualised knowledge, creation of 59; explicit knowledge, “internalisation” of 59; individual knowledge 59; inter-organisational knowledge 59; knowledge conversion model 58– 9; knowledge spill-over 149; knowledge stream, bidirectionality of 60; knowledge-based economy, outsourcing and 7; operational knowledge 59; organisational knowledge 59; partners, knowledge gains of 110–11, 112; systemic

219

knowledge, creation of 59; tacit knowledge, interaction between KBT and 58; tacit knowledge, “socialization” of 59; tribal knowledge (tacit knowledge) loss, competitive advantage and 137–9; “24 Hour Knowledge Factory” model 90, 127 Knowledge-Based Theory (KBT) 12, 52, 58–60; concept-creation process 58–9; “conceptualised knowledge,” creation of 59; explicit knowledge, “internalisation” of 59; individual knowledge 59; interorganisational knowledge 59; “knowledge conversion” model and 58–9; metacapabilities 58; operational knowledge 59; organisational knowledge 59; outsourcing and 13; “systemic knowledge,” creation of 59; tacit and explicit knowledge, interaction between 58; tacit knowledge “socialization” of 59; technological and organisational knowledge base, integration of 58 Kota, Dr Sridhar 10 Kraljic’s portfolio-purchasing model 71– 7; agreements 77; competitive advantage 75, 77; operating partnership 77; outsourced product activities, strategic importance of 75; outsourcing relationship, scope of 73–4; outsourcing (buyer-supplier) relationships, types of 74, 76; partnership-based association 73–4; purchase classification phase 71–2; purchasing strategies execution phase 73; rationale behind 71; strategic decisionmaking process in, phases of 71–3; strategic partnership 74, 75; strategic positioning phase 72–3; supply market analysis phase 72

L Leonardo S.p.A. 3, 86, 87, 88, 89, 91, 92, 94–7, 99, 105, 108, 109–11; aerospace industry, history in 95; aerostructures, distinctive capabilities in 97; ambidexterity, leveraging of 111; analytical assessment process 118; automated facili-

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Strategic Outsourcing, Innovation and Global Supply Chains

ties 95; carbon-fibre innovation by 95; centre of excellence in Grottaglie 115; commercial aerostructures, focus on 95; composite horizontal stabiliser and fuselage sections for B787 96; contribution to research 91, 92; core competences exploited through B787 programme 111–14; decades of fruitful collaboration with Boeing 109–10; digital engineering, use of 111–12; fuselage engineering, processing methods in 112–13; horizontal stabiliser, technology for 113; horizontal structure, introduction of 109; joint ventures and product partnerships 94; key performance indicators (KPIs), specification of 116; new approach to supply-chain management 121–3; new core competences 111–14; non-composite materials, use of 96; one-piece barrel technology 113; organisational model adopted by 117– 18; partnership approach only with some key suppliers 118; perspective on supply chain management 115–20; product know-how gained by 112; rationale for joining B787 programme 108–11; research and development (R&D) activities, development of 96–7; research and development (R&D) programmes, investment in 114; supplier assessment tool 116; supply chain evaluation 116; supply chain governance 115; supply chain management, perspective on 115–20; supply chain management, phases of 115–18; supply chain management, weaknesses in 119– 20; supply chain reorganisation 117–18; system integrator for regional aeroplanes, role of 115; technical capabilities, development of 96–7; technological competences of suppliers 116–17; technology transfer from 115 Leonardo-Finmeccanica 87, 92, 94 literature on strategic outsourcing, review of models in 65–83, 152–5; BadenFuller et al’s model 78–9; Becker and

Zirpoli’s model 81–3; Kraljic’s portfolio-purchasing model 71–7; McIvor’s model 80–81; Quinn’s model 77–8; Sislian and Satir’s model 79–80 local firms, responsibilities within supply chains 6–7 logistics flow reduction, supply chains and 27

M macro-activities along value chain 68 make-or-buy decision 81 management: Boeing Quality Management System for Suppliers 168; conclusions of B787 study, implications for management and 143–9; customer relationships, management of 86–7; Dema S.p.A., new approach to supply-chain management 121–3; Gruppo Schiano study, conclusions and implications for management 42; Leonardo, new approach to supply-chain management 121–3; Leonardo supply chain management, perspective on 115–20; Leonardo supply chain management, phases of 115–18; Leonardo supply chain management, weaknesses in 119–20; management literature on B787-8 86; NPD outsourcing, management implications, limits, and future directions for 169–71; supply chain challenges, management of 1 Manufacturing Execution System (MES) software 40 market changes, outsourcing and 12 market competitive pressure, NPD outsourcing and 157–8, 159 market “game-changer,” B787 designed as 173 market solution on value chain activities 45 market uncertainty, NPD outsourcing and 154 market-access competences 54 marketing innovative products, requirements for 6

Index Marrone, Dr. Teresa 3 Mass Customization: logic of 37; move from mass production to 35–42 material requirement planning (MRP) 31–2 McDonnell Douglas: Boeing and, merger of (1997) 94; MD95 programme 174 McIvor’s model: alternative sourcing strategies 80–81; competitive advantage, outsourcing strategy and 80; opportunism potential, outsourcing strategy and 80; relative capability, outsourcing strategy and 80–81 McKinsey 18 meta-capabilities 58 methodology, Dreamliner programme case study 90–99 Mezzanatto, Giancarlo 108n Miani, Nicola 108n Mitsubishi Heavy Industries (Japan) 87, 174 modularization, extensive use of 136 multi-level supply network (broadly distributed) 86

N narrative technique 90–91 NASA flight testing 10 Neri, Rosario 108n network relationships (relational ecosystem) 62–3 Network Theory (NT) 52, 61–4; Economic Inefficiency Theory and 62; Exchange or Market Power Theory and 62; Institutional Theory and 62; networks, working of 61; networks as "hybrid organizational arrangements" 62–3; outsourcing and 14; Reciprocity Theory and 62; Resource Pooling Theory and 62; Resources Dependence Theory and 62; strategic network, definition of 61; supplier network. integration within NPD process 61–2, 63 new product development (NPD): approach to outsourcing 86, 87, 90, 95;

221

Baden-Fuller model, outsourcing and 78, 79; Becker and Zirpoli’s model, performance and 81; collaborative relationships in, benefits of 14; decision making on outsourcing of 1, 2; decision-making behind strategic outsourcing and 43; decision-making in outsourcing, crucial questions on 70; disruptive technology, innovation and 15, 16; innovation and 43–4; integrating suppliers into, risks and costs of 14; integrating suppliers into projects, downside of 14; internal innovation activities, reasons for 44; multidimensional and integrated decision-making model for outsourcing 15–16; Open Innovation Theory (OIT) and 60; outsourced R&D activities, productivity of 43–4; outsourcing and, theory of the firm and 44; outsourcing in, issue of 12–13; outsourcing in, supply network collaboration and 14; outsourcing of, literature on 12–16; process of, literature on outsourcing decisions in 14–15; programming in, improvement of 130; Resource-Based Theory (RBT), outsourcing and 53–4; technology-intensive industries, outsourcing decisions relating to 15 Noble, Bob 107 NPD outsourcing, conceptual decisionmaking model for 82–3, 151–71; asset specificity 153; Boeing 787 Dreamliner project, breakthrough innovation, reasons for 165; Boeing 787 Dreamliner project, radical innovation in 164; Boeing Company outsourcing decisions on B787 project 167; Boeing NPD outsourcing model, new version of 167–9; Boeing Quality Management System for Suppliers 168; capabilities base 159; Competence-Based Competition Theory (CBCT) and 151, 157, 159; competitive pressure of innovation context 169; components, impact on product performance 155; conceptual decisionmaking model, application to B787-8

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programme 165–9; core product innovation activities 151, 156–7, 162–3; core product innovation activities, keeping in-house 163; core product innovation activities, outsourcing of 162–3; cultural difference between partners 153; customer needs, degree of shift in 153; demand flexibility 153; Dynamic Capability Theory (DCT) and 157; engineering problems in 787-8 programme 164, 168; Engineering Process Council at Boeing 170–71; entrepreneurial corporate strategy at Boeing 171; environmental pressure 158; environmental uncertainty 154; first flight test of Boeing of 787-8 Dreamliner three years behind schedule 164–5, 168; general sourcing decision-making model 160; integration of strategic dimensions 159–61; interdependencies between components and rest of product 155; key dimensions of outsourcing decision-making models in literature compared with 152–5; limitations calling for further research 171; management implications, limits, and future directions 169–71; market competitive pressure 157–8, 159; market uncertainty 154; non-core product innovation activities 151; open innovation model, B787 programme and adoption of 170; organisational problems in 7878 programme 163, 168; outsourcing decision-making model involving NPD activities. 161–3; partners, cultural difference between 153; process capability 153–4; process maturity 154; research and development (R&D) capabilities on Boeing 787 Dreamliner project 165; research questions (RQs) and propositions 151–63, 168; Resource-Based Theory (RBT) and 151; RPs (research propositions) 151, 159, 168; shift in customer needs, degree of 153; shortcomings of Boeing 787-8 Dreamliner programme 168; sourcing strategy for NPD activities on B787, findings of case

study 166; Strategic Assets Theory (SAT) and 151; strategic importance 151, 152, 159; strategic objectives, outsourcing NPD and achievement of 169–70; strategic risk 152, 158–9; suppliers, control over 152; technological discontinuity 154, 156–7, 159; technological disruption in aircraft industry, B787 as case of 163–5; technological domain, degree of familiarity with 155; technologies, leveraging best-in-class resources and 169–70; technology, uncertainty about 154, 156, 159; technology shift, degree of 153; time-to-market 158; Transaction Cost Economic Theory (TCET) and 157, 158, 159

O offset policies, leveraging of 148 offshoring, effects of 149 Open Innovation Theory (OIT) 60; Boeing 787 case study, open approach to innovation in 60; innovation process, stages of 60; knowledge stream, bidirectionality of 60; new product development (NPD) projects, resources strategic to 60 operating partnership 77 operational knowledge 59 opportunism potential, outsourcing strategy and 80 organisational knowledge 59 Original Equipment Manufacturers (OEMs): Dreamliner case study and 86–8, 89, 90, 92, 94, 99–105, 133; Gruppo Schiano case study and 31–2 outsourcing: bottleneck items 72; bounded rationality hypothesis and 15–16; choices for, strategic conditions and factors in 11; competence spill-over from 128–9; Competence-Based Competition Theory (CBCT) and 13; competitive advantage, creation along value chain of 68; competitive advantage, strategic outsourcing and 65; competi-

Index tive potential, extension through 11; complementary resources, access to 12; core activities along value chain and 68; core competences focus and 7; core competences of firm, value of understanding of 68–9; core-distinctive activities along value chain and 68; cost reduction and increasing efficiency through 11; customer-centric activities in value chain and 68, 69; decision-making, resource-based theories of firm and 64; of decision-making 65–70; decision-making model involving NPD activities 161–3; decision-making process for 65; decisions in, goals of 11; digital technologies and 7–8; disposable activities along value chain and 68; Dynamic Capabilities Theory (DCT) and 14; environmental uncertainties and 11–12; ESG (Environmental, Social, and Governance) principles and 17, 23–4; external outsourcing 70; globalisation of supply markets and 7; growth of phenomenon of 5–6; infrastructure-based innovation in value chain and 68; of innovation, drivers for 10; innovation activities, reasons for outsourcing of 9; innovationbased activities in value chain and 68; innovation-based outsourcing, relational capabilities and 13; interaction costs and 8; interfirm networks and 6; internal outsourcing 69–70; internal resources, supplementation through 7; key dimensions of outsourcing decisionmaking models 152–5; know-how control and 139; knowledge-based economy and 7; Knowledge-Based Theory (KBT) and 13; literature on strategic outsourcing, review of models in 65– 83, 152–5; macro-activities along value chain and 68; managerial approach to 12; market changes and 12; Network Theory (NT) and 14; new product development (NPD) crucial questions on decision-making in 70; in NPD, literature on 12–16; in NPD, supply network

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collaboration and 14; NPD process, issue of 12–13; NPD process, literature on outsourcing decisions in 14–15; NPD process, multidimensional and integrated decision-making model for 15–16; outsourced product activities, strategic importance of 75; outsourced R&D activities, productivity of 43–4; outsourcing decisions, goals of 11; outsourcing relationship, scope of 73–4; outsourcing relationship, types of 74, 76; partners in, selection of 132–3; partnershipbased outsourcing 6; resource-based theories 12; Resource-Based Theory (RBT) and 13; Resource-Based Theory (RBT) and, perspective on 53–4; resources and capabilities, accessing through 11; risks in, Transaction Cost Economic Theory (TCET) and 47–9; role in innovation 1; specialised external suppliers, resources and capabilities of 11, 12; strategic outsourcing, “democratic” principle in 113–14; Strategic Assets Theory (SAT) and 13–14; Supply Network Theory (SNT) and 14; technological uncertainties and 12; technology-intensive industries and 15; theory of the firm and NPD outsourcing 44; time-tomarket and 127–8; Transaction Cost Economic Theory (TCET) and 5, 13; types of 65–70; value chain and activities along 68

P partner selection: Baden-Fuller and 79; cultural difference and 153; knowledge gains in 110–11, 112 partnership-based association: Dreamliner project and 174, 175; Kraljic’s portfolio-purchasing model and 73–4 partnership-based outsourcing 6 personal interviews 90, 91–2 Personalized Production, paradigm of 37 point-to-point market model 173

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process capability: NPD outsourcing and 153–4; Sislian and Satir’s model and 80 process maturity: NPD outsourcing and 154; Sislian and Satir’s model and 80 product innovation, demand for 6 product-component interdependencies 81 production costs, Transaction Cost Economic Theory (TCET) and 45, 46–7 programme delay on Dreamliner, embarrassment of 175–6 prototypes, pre-industrial research on 114

Q qualitative method, data collection and 85 qualitative techniques, triangulation of 90–91 Quantum Computing 18 Quinn’s model: core competences and 77–8; outsourcing innovation decisions 77

R Reciprocity Theory 62 reliability testing 107 research and development (R&D): capabilities on Dreamliner project 165; costs of, problem with 125; outsourcing of, Becker and Zirpoli’s model and 81 research design on Dreamliner project 91 research questions (RQs) and propositions on NPD outsourcing 151–63, 168 resilience of supply chains, enhancement of 26–7 Resource Pooling Theory 62 resource-based theories of outsourcing 12 Resource-Based Theory (RBT) 12, 51, 52– 4; competition, ex post limits to 53; competitive advantage, resources and 52–3; environmental conditions 53; isolating mechanisms 53; new product development (NPD), outsourcing and 53– 4; outsourcing, RBT perspective on 53– 4; outsourcing and 13; outsourcing NPD, conceptual decision-making mo-

del for 151; resource heterogeneity 53; resources, definition of 52; value creation, tangible and intangible assets and 52 Resources Dependence Theory 62 Reuters 168 risk-sharing, profitability and 144 risk-sharing contracts 118; implications for delays and 135–6; improvement of 131 risk-sharing model for Dreamliner project 174 risk-sharing partnerships 134–5 Robotics Process Automation 18 Rolls-Royce (UK) 87; engines, availability and reliability of 107 Romano, Angelo 124n RPs (research propositions) 151, 159, 168

S Sagnella, Giovanni 108n SCH BIKE COLLECTION (2014) 35 Schiano, Antonio 34 Schiano, Consiglia 34 Schiano, Mario 1–2, 3, 16, 33, 34, 36, 37 Schiano, Mario Jnr. 34 Schiano, Raffaello 33, 34 second-level suppliers 87–8, 92 Sguanci, Marco 108n Shanahan, Pat 106 shortages of parts 104 shortcomings of Dreamliner programme 104–5, 168 Sicca, Professor Luigi Maria 3 Sicca. Professor Lucio 2–3 Sislian and Satir’s model: competitive advantage, outsourcing and 79–80; demand flexibility, outsourcing and 80; process capability, outsourcing and 80; process maturity, outsourcing and 80; strategic risk, outsourcing and 80 smart factory paradigm 36–7 social and environmental sustainability, disruption of 17, 22–4

Index social market practices 4; supply chains and 24 social process practices 4; supply chains and 24 social sustainability of supply chains 23 socio-economic environment, Baden-Fuller and 78 specialised external suppliers, resources and capabilities of 11, 12 Spirit AeroSystems (USA) 87, 174–5 state-of-the-art command and control centre 107–8 Strategic Assets Theory (SAT) 12, 52, 55; competitive advantage and 55; NPD outsourcing and 151; outsourcing and 13–14 strategic inshoring 148 strategic network, definition of 61 strategic offset 146; benefits of 102; implications of 148–9 strategic outsourcing: academic interest in 1, 5; decision-making on 65–6; logic of 101–2; main long-term consequence of model 137–9; policy, importance of 125; policy, skills development and 128–9; primary and secondary reasons for 102–3; relationships in, evolution of 142 strategic outsourcing, “democratic” principle in 113–14 strategic partnership, Kraljic’s portfoliopurchasing model and 74, 75 strategic risk: NPD outsourcing and 152, 158–9; Sislian and Satir’s model and 80 subsystems design and manufacture 101 success of Boeing Dreamliner 103 Supplier Bargaining Power 30 supplier network. integration within NPD process 61–2, 63 supplier support, supply chains and 27 supplier-relationships model, changes in 133–5 suppliers, control over 152 supply base localization 27 supply chains: agility within, improvement of 27; in aviation industry, insid-

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er’s perspective on 173–9; backup suppliers, establishment of 27; Covid-19 pandemic, disruption from 24–6; DEI (Diversity, Equity, Inclusion) analytics and 23–4; digital interconnection between suppliers 27–8; digital technologies, disruption from 17, 18–21; disruptive phenomena impacting on 17–28; environment market practices and 24; environmental process practices and 24; global supply chains 22; globalisation and 17; hybrid configuration for problem-solving along 136–7; Industry 4.0 (Fourth Industrial Revolution) and 18; internal production capacities, maintenance of 27; inventory building 27; local firms, responsibilities within supply chains 6–7; logistics flow reduction 27; management of, challenges for 1; multiple geographically diversified sourcing 26–7; resilience of, enhancement of 26– 7; restructured commercial chain, suggestions for 178–9; risks to supply chain networks 25–6; social and environmental sustainability, disruption from 17, 22–4; social market practices and 24; social process practices and 24; social sustainability of 23; supplier support 27; supply base localization 27; supply chain relationships, redesign of (and difficulties with) 122–3, 123–4; supply network visibility, enhancement of 27; sustainability of 22–3; sustainability practices 24; tiered structure in Dreamliner project 100; Ukraine, disruption from war in 26–8; vulnerability of traditional models, Covid-19 pandemic and 25; weaknesses at Gruppo Schiano 32 Supply Network Theory (SNT) 14 supply network visibility, enhancement of 27 Supply-Chain Network Theory (SCNT) 52, 61–4; see also Network Theory (NT) sustainability of supply chains 22–3; practices for 24

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switching costs 50 system integrators along worldwide supply chain 86–7, 87–8 systemic knowledge, creation of 59

T tacit knowledge: interaction between KBT and 58; “socialization” of 59 technological domain, degree of familiarity with 155 technological environment, Baden-Fuller and 78 technologies: leveraging best-in-class resources 169–70; technological discontinuity 154, 156–7, 159; technology shift, dealing with 9; technology shift, degree of 153; technology-intensive industries, outsourcing and 15; uncertainty about, NPD outsourcing and 154, 156, 159; uncertainty about, outsourcing and 12 Testa, Professor Pierpaolo 3 testing process, improvement in 131 third-level suppliers 88, 92 3D Printing-Additive Manufacturing 18 time-to-market (TTM): Dreamliner programme and 125; Gruppo Schiano case study 37–8; innovation and 9; outsourcing Dreamliner programme and 127–8; outsourcing NPD and 158 Transaction Cost Economic Theory (TCET) 44–52; bounded rationality 46, 47, 50; competitive advantage, generation of 51; conceptual decision-making model for outsourcing NPD 157, 158, 159; consolidated behavioural theory 46; cost advantage and 44–5; decision-making limitations 49–50; decision-making processes 46, 51; environmental factors 47; ex ante governance costs 48; ex ante transaction costs 46; ex post governance costs 48; ex post transaction costs 46; governance costs 45, 46; hierarchy solution on value chain activities 45; horizontal interrelations 50–51; hybrid governance solutions 51; hybrid

solution on value chain activities 45; idiosyncratic investments 48–9; information asymmetries 49; intermediate solution on value chain activities 45; internal production costs 46–7; limitations 49–51; market solution on value chain activities 45; outsourcing and 5, 13; outsourcing risks 47–9; production costs 45, 46–7; switching costs 50; transaction costs 45–6; transaction costs, factors influencing 47–9; transaction frequency 48; transaction governance models 45; transaction relationship, uncertainty about 47–8 “24 Hour Knowledge Factory” model 90, 127 types of outsourcing 65–70

U Uber 8 Ukraine, war in 1, 17; disruption from 26–8 United States Air Force Research Laboratories 10

V value chain and activities along 68 value creation, tangible and intangible assets 52 vendor rating, improvement of 130 vertical partners adoption of acquired critical skills 143–4 Virtual Manufacturing techniques 41–2 Vought Aircraft Industries 87, 168, 175, 176; problematic role in B787 venture 137; purchase by Boeing of 129

W worldwide design network for 787 Dreamliner 102

Z Zalando 8