This paper is analyzing whether it was a good decision for LEGO to outsource its distribution to DHL, by means of three theories: the Transaction ost Theory, !esource"#ased Theory, and E$olutionary Theory% Theory% &urthermore, a recommendation rec ommendation is gi$en what LEGO should do ne't: stic( to the original plan and outsource all the distribution to DHL or (eep three distribution distr ibution centers )one operated by DHL and two by LEGO*% One of the main thoughts of the Transaction Cost Theory )TT* is that firms e'ist because the costs of organizing transactions internal are sometimes lower than the costs of using the mar(et for transactions )oase, +-./ 0illiamson, +.1, +2*% Two Tw o important assumptions are made within the TT: )+* bounded rationality )e%g% incomplete contracts* and )3* some people are opportunistic )4self"interest see(ing with guile5*% There guile5*% There is a distinction between $ertical integration6insourcing )internalized transactions, e'ecuting the production of own inputs* and $ertical disintegration6outsourcing )4re7ecting the internalization of an acti$ity5, Gilley 8 !asheed, 3999, p% .;*% Three T hree dimensions determine the transaction costs when deciding on outsourcing: )+* uncertainty6comple'ity, )3* asset specific ity and )-* transaction fref the transaction costs are high for those three dimensions, it is better to internalize the transactions% Translating this to the situation of LEGO, low transaction costs mean that is was a good decision to outsource the distribution processes to DHL% &irst of all, the transaction costs are higher for a transaction with the e'ternal organization )DHL* because of uncertainty/complexity uncertainty/complexity:: high bounded rationality )a D on such a scale had ne$er been built before in zech !epubli c, ordon 8 =eifert, 399, p% * and the plan of changing its customer ordering processes )not all specific customer re
transaction costs are lower for a transaction with DHL because of asset specificity )LEGO has room to be opportunistic, because of the $ulnerable position of DHL caused by the asset specific in$estment of DHL in the new D* and low frequency of transactions )long"term contract of 1%1 years*% Howe$er, there is no room for impro$ement or discussion during the long"term contract, which ma(es the contract slightly more ris(y due to the impossibility to adapt the contract to a dynamic en$ironment% O$erall, the decision to outsource the distribution processes is supported by the TT, because the transaction costs are slightly lower for outsourcing% The main thought of the Resource-Based View )!#?* is that a company should obtain resources and capabilities with specific characteristics )?!>@* that enable firms to achie$e superior performance, which creates sustained competiti$e ad$antage )=A*)#arney, ++/ Grant, ++*% oncerning outsourcing, the !#? suggests that a company should obtain this resource or capability from outside, if a company does not ha$e the resources or capabilities itself, because in$esting in their creation will not lead to any =A )Gilley 8 !asheed, 3999*% Additionally, as stated by Brahalad and Hamel )+9* regarding the concept of core competences, a firm should continuously in$est in those acti$ities that are part of its core competence while outsourcing the rest% &rom this point of $iew, outsourcing has a positi$e influence on firm performance in three ways: )+* by outsourcing peripheral )non"core* acti$ities, firms can focus on their core competences/ )3* outsourcing peripheral acti$ities may greatly impro$e the
0hen applying this to the LEGO"case, it can be concluded that it was a good decision for LEGO to outsource their distribution acti$ities to DHL% According to the !#?, LEGO did not ha$e the resources and capabilities to superiorly perform the distribution acti$ities itself% LEGO did in$est in the de$elopment of resources and capabilities to e'ecute the distribution acti$ities successfully, howe$er, LEGO did not manage to effecti$ely e'ecute this process% >nstead it became a highly comple' and costly acti$ity% Additionally, loo(ing at the core competences of LEGO it can be deduced that outsourcing enhances performance since )+* LEGO can now focus on their core competence of selling creati$e toy"products in competiti$e and highly seasonal mar(etplace )ordon 8 =eifert, 399*, rather than focusing on the distribution processes which is categorized as a non"core acti$ity/ )3* the n conclusion, based on the abo$e arguments regarding the !#? and the core competences, it can be concluded that at that moment in time, it was a good decision to outsource the distribution processes of LEGO to DHL% The evolutionary theory )ET* pro$ides the core of a process theory of an economic organization )ahn(e, 399+*% ET yields important insight r ele$ant to the process of outsourcing )ahn(e, 399+*% The ET is emphasizing )continuous* growth, rather than economic profit% A dynamic competiti$e ad$antage is created through fa$orable learning asymmetries, where it is outperforming its competitors regarding the generation of $ariations in its acti$ities )$ariation*, aligning internal choices with
e'ternal selection criteria in order to ma(e sure the firmCs output is in line with customer needs )selection*, and where it can reliably reproduce successful acti$ities across time and space )retention* )=toelhorst 8 #ridou', 39+1*% Analyzing the LEGO case from an ET perspecti$e, one can conclude that it has been a good decision to outsource distribution% &irst, although the ET suggests that the learning cycles LEGO will e'perience regarding distribution will decline drastically when deciding to outsource, since the outsourcer will be e'ecuting the ?=!"cycles and is acn other words, LEGOCs decision to outsource their non"core distribution processes are pro$iding them with the opportunity to emphasize producti$e learning within the processes that are categorized as core acti$ities% Thirdly, according to Domberger )+2*, another reasoning for outsourcing is that e'ternal specialists are li(ely to be better capable of fle'ibly and
confronted with is that outsourcing the distribution processes increases the ris( that the distance between the (now"how of LEGO and the (now"how of DHL will continue to disperse, which increases the difficulty for LEGO to assess the $alue deli$ered by DHL%
What should LEGO do next?
>n order to ad$ise LEGO on whether to continue outsourcing all the distribution to DHL or to (eep the other two Ds for the company itself, the ad$antages and disad$antages of pre$iously mentioned contributions are to be summarized first% According to the !#? perspecti$e, an organization should outsource its acti$ities, when they are not considered as core acti$ities% =ince distribution is not considered as core, this peripheral outsourcing will grant LEGO the opportunity to emphasize its core business% &urthermore, LEGO is showing to be dysfunctional when it comes to their distribution processes which already implies that outsourcing is rather a solution towards efficiency, due to the specialized (nowledge DHL will bring along% On the other hand, considering the ET, there might be disad$antages in terms of differences in (now"how between the different firms and decreasing learning processes of LEGO, which might cause difficulty for LEGO to assess performances of DHL% Howe$er, since DHL is not dealing with an y core competences of LEGO, this ris( of learning decrease is minimized% @e't to that, DHL will enhance its producti$e learning, and therefore increase its efficiency, which in turn will lead to a cost reduction for LEGO% oreo$er, considering the TT, the situation became $ery comple'6uncertain )e%g% changed deli$ery process, cultural clash, etc%*, which led to a $ery low
perception of fairness and high fairness"response transaction costs )Husted 8 &olger, 399;*% Transaction costs increased, but can be lowered by drawing up a complete contract and impro$ing the interactional 7ustice% &urthermore, the TT is not ta(ing into account the production costs% As mentioned abo$e, the production costs will get lower when continuing outsourcing due to the continuous learning of DHL% Therefore, it is suggested that LEGO should indeed stic( to its original plan and outsource all the distribution to DHL% et, it is to be pointed out that the contracts need to fully specify what the parties e'pect from each other, in terms of the logistics, deli$ery, and further in$estments as well% Also importantly, better conflict resolution and communication need to be $isible, impro$ing the relationship and building trust and goodwill%
References
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Grant, !%% ++% The resource"based theory of competiti$e ad$antage: >mplications for strategy formulation% "alifornia Management #eview, $$ )-*: ++;+-1% Husted, #%0%, and &olger, !% )3999*% &airness and transa ction costs: the contribution of organizational 7ustice theory to an integrati$e model of economic organization% %rgani&ation 'cience, 11)*, .+".3% Langfield"=mith, I%, and =mith, D% )3993*% anagement control systems and trust in outsourcing relationships% Management (ccounting #esearc), 14, 32+"-9.% ahn(e, ?% )399+*% The process of $ertical dis">ntegration: an e$olutionary perspecti$e on outsourcing% Journal of Management an* +overnance, , -1-"-.% @elson, !% 8 0inter, =% )+23*% (n evolutionary t)eory of economic c)angeambridge, A: The #el(nap Bress @oteboom, #% )399;*% Go$ernance and competence: how can they be combinedJ Journal of Economics, ., 191"131% Brahalad, %I%, 8 Hamel, G% +9% The core competence of the corporation% arvar* 0usiness #eview, !.)-*: .-% =toelhorst, F%0% and #ridou', &% )39+1*% An e$olutionary resource"based theory of competiti$e ad$antage% 0or(ing Baper% 0illiamson, O% E% )+.1*% ar(ets and hierarchies% ew 2or3 , 3"-9% 0illiamson, O% E% )+2*% Transaction cost economics% an*oo3 of In*ustrial %rgani&ation, 1, +-1"+23%
