Operating in domestic markets and expanding into global market offers new opportunities. These opportunities necessitate changes relating to the strategy, operational planning and the organisation itself. Growth can be planned. To operate effectively in a global market it is necessary to identify global drivers and to compete with rivals. Therefore costs should be reduced and the competitive advantage should be extended. One issue relating to the reduction of costs could be a “make or buy (m/b)” decision, in other words, vertical integration or vertical de-integration, so-called outsourcing. Cost savings are achieved through more effective co-operation. Vertical integration includes merging and acquiring and its direction is backward or forwards due to its related activities respectively its supply chain. Outsourcing, or deintegration, contains to concentrate on the specialisation of competences by subcontracting all other activities and it subcontracts activities (Grant, 2002: 393-4). There are three forms of outsourcing: Co-sourcing that keeps the clients responsibility for management and strategic aspects of the activity while an expert provides the outsourced activity (Brown, 1997: 60). Secondly, removing an activity out of the company as an indepented company and demand its products. Thirdly, outsourcing as used in the following: An activity is in the responsibility of another organisation (Brown, 1997: 60).
While talking about a m/b decision it is necessary to define and to present the point of view of the transaction cost approach in contrast to the resource-based approach. Firstly, an introduction in transaction costs approach is given, after a discussion of its point of view relating to the make and buy decision. Afterwards the resource-based approach is added. Because of limits of space, the network approach is not discussed1. Relying on at least two frameworks discuss those factors which influence an organisation′s decision whether to "make or buy" goods or services.
Table of Contents
1. Introduction
2. Transactions costs (TC) Approach
3. Resource-based approach (RBV)
4. Conclusion
Objectives and Topics
The primary objective of this work is to analyze the factors influencing an organization's "make or buy" decision by applying and contrasting the Transaction Cost (TC) approach and the Resource-Based View (RBV).
- Theoretical foundations of the Transaction Cost approach
- Core principles and strategic implications of the Resource-Based View
- Comparative analysis of vertical integration versus outsourcing
- Impact of market imperfections and opportunistic behavior on strategic decisions
- Evaluation of core competences in the context of organizational efficiency
Excerpt from the Book
Transactions costs (TC) Approach
The underlying assumption of the TC approach is that there is an economic system that works by itself without being centrally controlled. Its automatic co-ordination is guaranteed through the interaction of demand and supply, the so-called price-mechanism. Participants of the markets choose rationally between alternatives, hence, optimal allocation of resources is given (Coase, 1937: 387). Also firms try to maximize their profits by working along the production function. (Williamson, 1996: 131). Within firm, activities are coordinated through the hierarchy, which includes, for example rules and directives, routines, mutual adjustment as well as internal prices and competition. Activities between firms’ are co-ordinated by contracts and the price- mechanism (Grant, 2002: 194; 390).
To summarise, there are two different “places” where co-ordination takes place: Within the organisation and between organisations. Within the organisation co-ordination is guided by hierarchies (“visible hand”), or in other words, by the administrative-mechanism. Between organisations, the market coordinates decisions through the price-mechanism (“invisible hand”) (Grant, 2002: 388). However, these mechanisms of co-ordination do not work perfectly: there are several imperfections in markets that should be mentioned briefly: market failure due to imperfect competition, market failure due to inadequate information and governmental failures. Contracts exist in order to reduce imperfections in the market. Despite the existence of these contracts, imperfections are reduced, but not deleted, in terms of co-ordination.
Summary of Chapters
1. Introduction: This chapter defines the "make or buy" (m/b) decision, introduces the concepts of vertical integration and outsourcing, and outlines the two primary frameworks used for analysis.
2. Transactions costs (TC) Approach: This section details how economic systems and hierarchies coordinate activities, explaining how market imperfections and transaction costs influence the decision to internalize or outsource activities.
3. Resource-based approach (RBV): This chapter evaluates the strategic dimension of the m/b decision, focusing on core competencies, capabilities, and the importance of maintaining a competitive advantage through resource management.
4. Conclusion: The final chapter synthesizes the findings from both frameworks, providing guidelines on how factors like uncertainty and asset specificity drive the organizational choice between market coordination and internal hierarchy.
Keywords
Make or Buy, Transaction Costs, Resource-Based View, Vertical Integration, Outsourcing, Competitive Advantage, Core Competencies, Market Imperfections, Hierarchy, Strategic Management, Opportunism, Bounded Rationality, Administrative Costs, Supply Chain, Contractual Hazards.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the strategic and economic factors that lead an organization to either produce goods or services internally ("make") or procure them from external suppliers ("buy").
Which theoretical frameworks are applied in the study?
The analysis relies on the Transaction Cost (TC) approach and the Resource-Based View (RBV).
What is the main objective regarding the "make or buy" decision?
The goal is to provide a comprehensive understanding of why firms integrate activities or outsource them, balancing efficiency with strategic necessity.
How is the methodology structured?
The paper follows a comparative methodology, defining each framework individually and then contrasting their perspectives on organizational decision-making.
What does the main body of the text cover?
It covers the mechanisms of market versus hierarchy coordination, the role of opportunism, the impact of asset specificity, and the strategic importance of core competences.
Which keywords define this work?
Key concepts include Transaction Costs, Resource-Based View, Vertical Integration, Outsourcing, and Core Competencies.
How does the Transaction Cost approach view the market?
It views the market as a mechanism that, while efficient due to the price mechanism, can suffer from imperfections that increase the costs of transacting with external parties.
What is the critical risk when outsourcing according to the RBV?
The primary risk is the loss of know-how and the possibility that an external agent could influence or replicate unique capabilities to the disadvantage of the principal organization.
- Citar trabajo
- Susanne Jung (Autor), 2003, Relying on at least two frameworks discuss those factors which influence an organisation's decision whether to "make or buy" goods or services., Múnich, GRIN Verlag, https://www.grin.com/document/53644
