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    Internalization-Externalization: 5 Course

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    Cîrstescu Andreea
    1) Firms are redefining their boundaries between internal and external activities by outsourcing peripheral functions and focusing on core competencies along the production chain. 2) Historically, firms centralized activities for reasons like proximity of machines and reducing transaction costs, but drivers now include using markets for outsourced services and improving operational efficiency and strategic positioning. 3) Outsourcing involves contracting out traditionally internal activities and restructuring around core competencies and external relationships, but it can reduce skills, innovation and increase switching costs against benefits of specialization and flexibility.

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    Internalization-Externalization: 5 Course

    Uploaded by

    Cîrstescu Andreea
    41 views12 pages
    1) Firms are redefining their boundaries between internal and external activities by outsourcing peripheral functions and focusing on core competencies along the production chain. 2) Historically, firms centralized activities for reasons like proximity of machines and reducing transaction costs, but drivers now include using markets for outsourced services and improving operational efficiency and strategic positioning. 3) Outsourcing involves contracting out traditionally internal activities and restructuring around core competencies and external relationships, but it can reduce skills, innovation and increase switching costs against benefits of specialization and flexibility.

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    international transaction

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    Slides Course 5

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    1) Firms are redefining their boundaries between internal and external activities by outsourcing peripheral functions and focusing on core competencies along the production chain. 2) Historically, firms centralized activities for reasons like proximity of machines and reducing transaction costs, but drivers now include using markets for outsourced services and improving operational efficiency and strategic positioning. 3) Outsourcing involves contracting out traditionally internal activities and restructuring around core competencies and external relationships, but it can reduce skills, innovation and increase switching costs against benefits of specialization and flexibility.

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    © All Rights Reserved
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    41 views12 pages

    Internalization-Externalization: 5 Course

    Uploaded by

    Cîrstescu Andreea
    1) Firms are redefining their boundaries between internal and external activities by outsourcing peripheral functions and focusing on core competencies along the production chain. 2) Historically, firms centralized activities for reasons like proximity of machines and reducing transaction costs, but drivers now include using markets for outsourced services and improving operational efficiency and strategic positioning. 3) Outsourcing involves contracting out traditionally internal activities and restructuring around core competencies and external relationships, but it can reduce skills, innovation and increase switching costs against benefits of specialization and flexibility.

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    of 12

    INTERNALIZATION-

    EXTERNALIZATION
    5th Course
    TRENDS
    • Redefinition of the firm’s core activities
    – separation of peripheral activities
    • Repositioning of the firm’s focus along
    the production chain – downstream
    services functions
    • Redefining the boundaries between
    internalized and externalized
    transactions
    • Geographical reconfiguration
    EVOLUTION OF THE
    CONCEPT
    • Historically, centralization was seen as
    necessary for three reasons:
    • physical location of machines necessitates
    centralization, which in turn, generates
    benefits from specialization in labor
    • a hierarchy emerges when the costs of
    using the market mechanism exceed the
    costs of internal organization (Coase,
    1937)
    • the primary source of market uncertainty is
    competition - costs to reduce competitive
    uncertainty -> protection costs
    DRIVERS OF ITS
    RESURGENCE:
    1. Managerial power & pay

    •Number of employees •Profitability of business units


    •Size of revenue created •Value added

    SHIFT

    2. The development of a market for the


    provision of outsourced services
    Based on:
    • Technology development
    • Government policy
    DECENTRALIZATION OF FIRMS
    The coordination of productive processes:
    - through transactions on the market
    - inside the company
    • Coase - factors that contribute to the growth of
    firms:
    • (1) inventions that reduce the cost of organizing
    spatially, such as telephone and computer
    networks, and
    • (2) improvements in managerial techniques,
    which also tend to reduce the cost of
    organization.
    • Williamson - criteria identified:
    • frequency of use
    • degree of specificity of the assets
    • uncertainty
    OUTSOURCING
    Meanings:
    • contracting out work
    • activities traditionally carried out internally which are
    contracted out to external providers
    • use of outside resources to complement
    organizational own design and development effort

    Strategic use of outside resources to perform


    activities traditionally handled by internal staff and
    resources

    • outsourcing involves the whole restructuring of the


    corporation around core competencies and outside
    relationships.
    SOURCING PURPOSE:
    • Core business – new sourcing arrangements:
    • 1. to improve operational efficiency
    • 2. to enhance value-adding business
    capability (Porter, 1996).
    1.) undertaking similar activities but with
    greater cost discipline application than
    competitors - more effectively utilize its
    inputs
    2.) consideration of issues of strategic
    positioning - adopting a unique market
    position which differentiates the enterprise
    from competitors
    • Benefits from outsourcing:
    • specialization
    • clarifying configurational
    arrangements
    • flexibility
    • cost savings
    • Costs of outsourcing:
    • hollowing out
    • loss of skills and corporate memory
    • weakened innovative capacity
    • transition and switching costs
    VIRTUAL CORPORATION
    CUSTOMER
    KNOWLEDGE
    SERVICE

    MANAGING
    FOR VALUE

    Competitive advantage

    Cost Profit
    discipline

    Near to level of Virtualization


    optimum efficiency of the firm
    vanishing of the formal and spatial boundaries of firms
    VIRTUAL CORPORATION
    • Question - whether one can request bidding
    for development of competitively valuable
    information and for collection of
    competitively valuable information?!
    • bidding for components - increases
    competitive uncertainty
    • bidding for jobs
    If it were not for the impossibility of
    firms to subcontract certain
    processes without increasing their
    competitive uncertainty, firms will
    not hire any workers.
    VIRTUAL CORPORATION
    • Processes which contribute to the:
    • collection,
    • development
    • protection
    of competitively valuable information will
    not be outsourced.
    • Processes that do not contribute in any way
    to the management of competitively
    valuable information will be outsourced for
    their internalization utilizes managerial
    resources
    IC

    IDC
    ICP
    ICDP
    ID
    IDP
    IP

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