Lecture Notes 4A

8/9/2019 Lecture Notes 4A

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COURSE 4A

INTERNALIZATION - EXTERNALIZATIONTHE VIRTUAL CORPORATION

TRENDS ON THE TNC MARKETS:- Redefnition o te f!"#$ %o!e &%ti'itie$ through stripping away

activities that no longer ft the frms strategy the emphasis is oncore competencies, core business), resulting in a separation operipheral activities. Thus, companies involve in externalarrangements in orer to improve the operational e!ciency an thecapacity to create value ae.

- Re(o$itionin) o te f!"#$ o%*$along the (!od*%tion %&in toplace a greater emphasis on ownstream service unctions"

- +eo)!&(i%&, !e%onf)*!&tion o the frms prouction chainactivities internationally an in some cases globally to reefne theroles an unctions o iniviual corporate units

- #econfguration o the frms prouction chain activities which involves

!edefnin) te o*nd&!ie$ et.een inte!n&,i/ed &nde0te!n&,i/edtransactions.

CHOICE O1 INTERNALIZATION OR EXTERNALIZATION STRATE+2

Contracting out of organizational activities is no new phenomenon. The#omans contracte out tax collection, while in the $%th an $&th century'nglan, services provie by the private sector uner contact to the thenlocal authorities inclue the maintenance an operation o street lights,prison management, roa maintenance, the collection o public revenue.(imilarly, in the (* an *ustralia, the carriage o mail elivery wasentruste to private operators uring much o the $& thcentury. +n rance, thebuiling an operation o the railways, water storage an istributionacilities were auctione to private operators by competitive tener. Thus,prior to the inustrial revolution, contractual relationships betweengovernment an the private sector ominate the economic organi-ation oprouction an istribution.

ith the onset o the /0th century, the evelopment o a prouctiontechnology that avore large, vertically integrate enterprises an thegrowth o irect government involvement in the economic activities o thestate le to an inte!n&,i/&tion o t!&n$&%tion$within organi-ations an aecline o contracting out.

1istorically, %ent!&,i/&tion o the company an its vertically integrateorgani-ation was seen as ne%e$$&!3or three !e&$on$2

- 1i!$t, the physical location o machines, it can be argue, necessitatescentrali-ation, which in turn, generates benefts rom speciali-ation inlabor, or vice versa.

3n this particular view the frm is characteri-e by its prouction unction,which is to say that its internal organi-ation is not shape by mar4et orces,but by the nature o the prouction process an the technology employe in

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it. Thus, the emergence o large centrali-e enterprises, with which weassociate mass manuacturing, is etermine by technological evelopments.

- Se%ond, a hierarchy emerges when the costs o using the mar4etmechanism excee the costs o internal organi-ation 56oase, $&78).

The costs to use the mar4et mechanism inclue 5$) ex ante mar4etingcosts, 5/) bargaining costs an 57) ex post contract enorcing costs

5illiamson, $&%9).- Te ti!dexplanation o the existence o centrali-e frms traces its

lineage to :night 5$&/$) ; any ecentrali-e metho o implementationwill lea to bottlenec4s ue to human error or opportunistic behavior,i.e., when agents brea4 away rom their previous agreements in pursuito higher gains. *lso, a primary source o mar4et uncertainty iscompetition. *s frms introuce new proucts an new methos oprouction the mar4et lie o existing proucts is shortene, an moreso, o proucts that are manuacture with less cost;e


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6oases wor4 was continue an refne by illiamson, who ientife twocriteria or etermining the option an arbitrating between internali-ation anexternali-ation2

- !e*en%3 o *$e more re=uent the nee, more will the companytry to avoi replicating transaction costs an will ten towarsinternali-ation

- de)!ee o $(e%if%it3 o te &$$et$ more specifc the nee, largerthe transaction costs, thus the tenency towars internali-ation ? orstanari-e services externali-ation

- *n%e!t&int3

urther insight into these issues lea to the conclusion that what processesare internali-e an what are carrie through the mar4et is etermine not

@ust by consieration o prouction an transaction costs but also by whetherthe internali-ation contributes to2

o the protection o competitively valuable inormation,

o the proprietary use o which gives the frm competitive ege,

o an secures the reali-ation o its profts.

There are various "e&nin)$ &tt&%ed to %ont!&%tin) o*t o!o*t$o*!%in)5 ranging rom contracting out wor4, to processes involvingactivities traitionally carrie out internally which are contracte out toexternal proviers, or to the use o outsie resources to complementorgani-ational own esign an evelopment e


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o outsourcing essentially stem rom gaining beneft rom either prouction orexchange through contractual relationships. 1owever, successul contractualrelationships are not simple spot transactions, or bilateral exchanges, butrather ones that combine mar4et iscipline with long;term, cooperativerelationships.

6eneft$ !o" o*t$o*!%in):our broa categories o benefts rom aopting outsourcing arrangementsare ientife2

$. specialization having other companies specialist in the prouctionan provision o supporting goos an services allows the hostorgani-ation to concentrate on core competencies. ocusing on corecompetencies an leveraging against other source relationshipsallows or the achievement o economies o scale, thus proucinggoos an services more e!ciently, while improving =uality throughthe application o specialist 4nowlege an promoting competitiveavantage.

/. clarifying congurational arrangements i the prouct an services

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$. hollowing out excessive outsourcing can lea to consierablereuction o overhea so that the host organi-ation becomes a ractiono its ormer sel, sometimes terme as hollow corporation or virtualorgani-ation. EF, General Fotors, Hirgin, Eenetton, EI, *moco,Ji4e, Far4s K (pencer have been substantially moving in thisirection, whereby the system integrators in almost all unctions are

contracte out to a collaborating networ4 o companies. This tren willcontinue as companies will outsource those activities that hol acommoity status an 4eep those that ma4e them uni=ue.

/. loss of sills and corporate memory ) by contracting out goos anservices traitionally prouce in;house, the organi-ation loses thes4ills, competencies an collective 4nowlege as both a proucer anclient o those services. (uch costs are not only associate with loss os4ills per se, but also leave the organi-ation vulnerable to ac=uiringesire expertise in the uture, on reasonable competitive terms.

7. weaened innovative capacity contracting out reuces the incentiveto an the capability o being innovative, as the competitive pressureto innovate is transerre to suppliers.

B. transition and switching costs contracting out activities re=uires areefnition o organi-ational bounaries, which in turn inucespossible urther restructuring an islocation o resources, therebyinucing a variety o costs. (uch costs, especially when associate withloss o employment, are fnancial as well as social.

Te n&t*!e o o*t$o*!%in)6urrent literature purports that an enterprise outperorms its competitorsonly i it can establish a sustainable esirable i


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sourcing arrangements that will give them the lea in terms o competitiveavantage*s such, sourcing has been unerta4en either2

$. to improve operational e!ciency or/. to enhance value;aing business capability 5Iorter, $&&A).

9; In%!e&$in) o(e!&tion&, e


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THE VIRTUAL CORPORATION

The concept o 'i!t*&, o!)&ni/&tionis part o the broaer concept o thefrm an its economic unction. +t is a new concept brought into existence byevelopments in computer networ4s, which are changing the wor4place in noless signifcant way than the actory i uring the +nustrial #evolution.

+ the eighteenth century frm move wor4ers rom their homes to the actory,toay, corporate computer networ4s are moving the wor4place bac4 to thehomes o employees

The frm as an institution appears to be in transition an, hence, the =uestionis how uture frms will i


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the actions o competitors or competitive biing cannot be organi-evirtually without proucers giving important inormation.

The alternative to biing or the supply o proucts an services isbiing or>o$The beneft o this process is that the employer oes notnee to isclose the etails o the @ob, an hence competitively valuableinormation is better preserve. Thus, employment contracts can be

virtuali-e with signifcantly less ris4 o issemination o competitivelyvaluable inormation. +n act, we see a substantial amount o @ob postings onthe eb. 'mployment, however, is not cheap or the employer, an involvesi


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ma4e subcontractors responsible or maintenance, property managementan utility supplies in its actories. *t frst glance, it appears that that theor Fotor 6ompany has @umpe on the subcontracting banwagon, an thatby opening wie its actory oors it is ma4ing its manuacturing blueprintspublicly available, an is, thus, exposing itsel to competitive ris4s.

Eut is itN nli4e in the early ays o the company, when improvements

in the assembly process were 4ey to the frm>s competitiveness, toayexternal venors provie the assembly machines, an thus, there is littlecompetitively valuable inormation in this process. 1ence, whether the orFotor 6ompany 4eeps or outsources its assembly oes not a


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Lecture Notes 4A