Contracting external resources for critical activities: An analysis of strategic risk

Strategic management has traditionally emphasized the accumulation and management of resources as internalized assets, and theory and research have reflected this focus on internal resources. However, the endless search for competitive advantage has induced managers to seek resources outside their organizational boundaries, generating evolutionary changes in the structure of economic exchange. Coordinating internal and external resources across firm boundaries brings new benefits and new risks, especially when the organization's core is concerned.;This dissertation drew on the resource-based view of strategy, resource-dependence theory, and legitimation theories to develop a conceptual model of the strategic risks of contracting out activities critical to an organization's core. The model suggests that contracting external resources for critical activities can alter key processes within and between organizations, jeopardizing a firm's access to needed resources and reducing its ability to develop and maintain core competencies. Affecting these vital components of organizational success can have a substantial negative effect on long-term profitability and growth.;Two hypotheses positing adverse effects of contracting for critical activities were tested using 18 years of archival data from acute-care California hospitals. Quantitative measures tailored to the hospital industry captured the extent of each hospital's contracting and outshifting of clinical services. Business-level organizational performance measures were modeled over multiple time horizons. Effects were allowed to vary by hospital type. Over 160 regression models contributed their results to a collective picture of the performance effects of contracting external resources for critical activities. Results were interpreted as supportive of the hypotheses if consistent, meaningful patterns of significance in coefficients were found across time.;Both hypotheses received partial support. Different effects were observed for the four hospital types and for the two performance measures. Adding time variables to the analysis sharpened these results, enhancing partial support for both hypotheses. A primary finding was that certain organizational types were more vulnerable than others to the strategic risks of core contracting. Certain types were able to contract out critical activities without adverse consequences. The findings imply that performance effects of core contracting are more complex than theory currently suggests.