The boundaries of which activities are to be performed inside the firm and which to be out-sourced from markets are demarcated as vertical boundaries of the firm (Besanko et al 2009). Therefore, it is possible for the firm to source components they need from competitors. However, the firm need to resolve the make-or- buy decision by comparing the benefits and costs of performing the activity itself as opposed to purchasing from competitor’s firm(Besanko et al 2009). This essay will firstly discuss the advantages and disadvantages of outsourcing from competitors. Then two solutions will be applied according to the risks of outsourcing. Finally. It will make a conclusion.
The advantages of outsourcing:
The primary to be considered is efficiency so that firms should concentrate on what they do best and leave others to markets. There are some specific reasons to support firms buying from competitors.
Firstly, it is probable for some firms to exploit scale and learning economies more easily. The definition of economic of scale is that the reduction in average cost from an increase in output in long run(Anderton 2008). Known from the diagram:
the most efficient production is when quantity is more than A*. Nevertheless, some firms just produce A’ which is less than A* with cost C’ while some competitor firms are able to produce A’’ which is more than A* with cost C*. Because this competitor firm might be able to aggregate the demands of a large number of clients and cause production surplus (Besanko et al 2009). Moreover, they may gain learning economies by exploiting their experience in producing for many clients in long period of time. As result, the cost of purchasing from some competitor firms is lower than perform in-house.
The second reason refers to bureaucracy effects which happens when producing inside firm. It includes agency cost and influence cost (Besanko et al 2009). The agency cost is illustrated as internal cost raises from an agent acting on behalf of a principal (Dorofeenko et al 2007). The conflicts of interests between shareholder and management is intractable. For example, when producing in-house rather than facing the market, employees are slacking due to lack of incentives and competitive pressure(Besanko et al 2009). Moreover, their performance is difficult to be measured. Consequently, it increases the administrative cost for deter such problem.
When distributing the scare resources into internal division by person who has centralized authority, some resistance activities occurs in the firm, which leads to influence cost (Besanko et al 2009). For instance, a manager would like to shift a decision depends on his predilection, which causes time wasting. Even worse, the wrong decision made by the manager will misallocate the scare resource. Hence, bureaucracy effects will contribute to significantly high agency and influence cost for firm to produce in-house.
In summary, the objective of outsourcing from...