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.
Main body
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-h...
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...ourcing strategies in an IT company shows in the following diagram, it just outsources the commodity with low business value and operational performance. Consequently, it avoid leaking core technology and other confidential information to its competitor (Earl 1996).
In conclusion, the advantages like lower cost and disadvantages like leaking of private information, cooperation probable and high transaction cost both coexist in outsourcing from competitor firm. However, “make” and “buy” are two extremes along a continuum of possibilities for vertical integration (Besanko et al 2009). The degree of integration of a firm differs across industries, firms within an industry and transaction within a firm. Most importantly, it depends on firms themselves to combining the in-house production and outsourcing from competitors to take the largest advantage for business.
Outsourcing simply means acquiring services from an external organization instead of using internal resources (Butler, 2000). By using outsourced resources, organizations can gain a competitive advantage by utilizing contingent staff to accomplish strategic goals without incurring the fixed overhead. By focusing on the leading edge and highly specialized skill sets, outsourcing providers can often offer higher quality services, or at a lower price than the client organization. Typical reasons for outsourcing go beyond simple contingent staffing. Outsourcing providers are able to maintain economies of scale with regard to specialization (...
Recently outsourcing has been in the news, especially during political election years. It seems to be a phenomenon that is causing much concern among the population. But exactly how is outsourcing effecting both workers and businesses? And is it as big of a problem as politicians describe?
The proponents of contracting out assume that outsourcing in the IT sector is useful in strategic, technological, and economic reasons. (Gonzalez, Gasco & Llopis, 2009) They believe that outsourcing enables an organization to get the same or better services with lower cost. First, strategic advantages enable organizations to refocus on strategic and core functions, and provide flexibility for organizations because organizations need not to concern about routine tasks (Gonzalez, Gasco & Llopis, 2009). OPPGA (1998) also support these strategic advantages. It asserts that outsourcing can provide organizations with great flexibility in personnel and facilities in short-term projects. Outsourcing providers can provide better services for clients since they usually use new and developed technologies. Second, proponents think that outsourcing gives organizations opportunities to access to technology and reduce technological obsolescence without large investments (Gonzalez, Gasco & Llopis, 2009). Lastly, Pros assume that contracting out can save s...
In many cases outsourcing has proven to be beneficial for businesses. It can help a business’s management by allowing executives to focus on the core structure of the firm rather than every specific element. Production, manufacturing, or additional servic...
The supply-side economies of scale are related to large volumes, which forces new entrants to come in on a large scale or accept cost disadvantage. T.J. Maxx is big enough buy large quantities at a discount and sends it to thousands of its other stores (Kowitt, 2014). This would be the Sun Zi
Companies outsourcing can take advantage of the service provider’s capabilities and innovative competencies, which may be impossible to develop in-house. For example, if a company outsources its IT solutions to a service provider in India, the service provider will give access to the company for its software solutions and data warehouses, which would be very hard to replicate on their own.
‘The neoclassical theory of the firm considers four main theoretical market structures: perfect competition, monopolistic competition, oligopoly and monopoly.’ (Lipczynski, Goddard and Wilson, 2001) According to Lipczynski (2001)‘the models of perfect competition, monopoly and monopolistic competition describe how firms should set their output levels and prices in order to maximize their profits, under various sets of assumptions concerning market structure.’ Regarding the competitive process, the neoclassical theory of the firm and the ‘analysis of competition in the theory is contained in the model of perfect competition, which describes the ideal conditions that must hold in the market to ensure the existence of perfectly competitive behaviour from the typical firm and, by extension, the characterisation of the industry as competitive or not.’ (Tsoulfidis, 2011) Additionally, in standard theory, all observed market structures could be compared to the perfectly competitive equilibrium and outcome.
...price, it also allows for them to increase their sales and enter into new markets, which in turn would help to increase their profits.
Do you ever wonder what our nations underlying focus is? The answer is simple and should be fairly easy to guess… Money! Outsourcing originated from someone coming up with the idea that we can make products for practically nothing in other countries and make very high profits. Although it seems like a great idea to businesses, it negatively affects our country. American consumers are buying these products that are made in other countries and the companies profits are continuing to rapidly increase. At the same time, people that are in the production field of work in America are losing their jobs because producers would rather pay foreign workers to get the job done for a much lower wage. When it comes down to it, one of the reasons our economy is suffering is because of outsourcing. Basically, it all comes down to money. The consumers don’t pay close enough attention to where the products are made. Therefore, consumers are spending extra money and are causing outsourcing to thrive. The lack of knowledge Americans have on the subject of consumers affecting outsourcing is leading our country to economic stress but if we begin to recognize the issue, the jobs we could potentially save may be our own.
Lim, W., & Tan, S. (2010). Outsourcing suppliers as downstream competitors: Biting the hand that feeds. European Journal of Operational Research, 203(2), 360-369. doi:10.1016/j.ejor.2009.08.006.
Outsourcing has been around for many years. In this paper, I will discuss some of the history of outsourcing, the good things about outsourcing, and the bad things about outsourcing. Outsourcing is important because many companies rely on it in order to get many different products and services to their facility on time and in good shape. Outsourcing is a huge part of the business industry today. Any business can be affected by outsourcing.
Scale Economies: the industry contains several very large players and multiple medium to small players
Outsourcing is a technique for companies to reassign specific responsibilities to external entities. There are several motivations for outsourcing including organizational, improvement, cost, and revenue advantages (Ghodeswar & Vaidyanathan, 2008).
The Effect of the Development of Large Firms on Society Many firms choose to expand in size because of the cost and market share benefits the firms can reap. However, the development of large firms may not always be of benefit to consumers, and the advantages and disadvantages will be discussed in the following essay. Because larger firms such as Shell Petrol Station are able to experience internal economies of scale through lower unit costs, many of the cost savings are then passed on to the consumers through lower prices. Hence consumers are then able to enjoy greater consumer surplus, defined as the difference between the maximum price that a buyer is willing to pay for a good or service and the actual price paid. As seen from the diagram below, the marginal cost curve shifts to the right such that the new marginal cost = marginal revenue equilibrium lowers the price and increases the output level compared with the initial equilibrium.
In recent years, global and local companies alike have felt the sting of the failing economy and turned to outsourcing in order to produce in the most economically efficient way possible. Outsourcing can be defined as a technique used by companies to reduce costs by transferring portions of work to outside suppliers rather than completing the work internally. Many things must be considered when companies make the decision to outsource. Economically, it would only make sense for the company to outsource if the potential partner had a comparative production advantage. First and foremost, sending parts of the supply chain overseas has the potential to compromise quality and brand image. Critics of the practice among luxury brands argue that outsourcing jeopardizes integrity and reputation; since the production is farther away geographically, companies are unable to maintain tight control over standards. However, outsourcing can also improve the quality of the product; for example, watches from Louis Vuitton are manufactured in Switzerland, a country known for its superior watchmaking, and Hermes’ cashmere products are often made in the Kashmir region of Asia. Environmental concerns are another consideration companies must acknowledge. Outsourcing to developing countries opens opportunities for poor environmental and health regulation, an important ethical and logistical factor. Additionally, if these regulations are compromised, the brand suffers greatly on the public relations front; for this reason, many strive to uphold a code of conduct to bar ethical crises from happening in outsourcing.