5TH COURSE Internalization-

externalization
TRENDS

Repositioning of the firm’s

Redefinition of the firm’s
focus along the value
core activities – separation
chain – downstream
of peripheral activities
services functions

Redefining the boundaries

Geographical
between internalized and
reconfiguration
externalized transactions
  Historically, centralization was
seen as necessary for three
reasons:
 physical location of machines
necessitates centralization,
which in turn generates
benefits from specialization in
Evolution of labor

the  a hierarchy emerges when the

costs of using the market
concept mechanism exceed the costs
of internal organization (Coase,
1937)
 the primary source of market
uncertainty is competition -
costs to reduce competitive
uncertainty -> protection costs
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 telecom 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
 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

OUTSOURCING 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.
 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
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
OUTSOURCING

Benefits from outsourcing: Costs of outsourcing:

specialization hollowing out
clarifying configurational loss of skills and corporate
arrangements memory
flexibility weakened innovative capacity
cost savings 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