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.
The advantages of outsourcing:
The primary to be considered
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The agency cost is illustrated as internal cost raises from an agent acting on behalf of a principal (Dorofeenko et al 2007). The conflicts of interests between shareholder and management is intractable. For example, when producing in-house rather than facing the market, employees are slacking due to lack of incentives and competitive pressure(Besanko et al 2009). Moreover, their performance is difficult to be measured. Consequently, it increases the administrative cost for deter such problem.
When distributing the scare resources into internal division by person who has centralized authority, some resistance activities occurs in the firm, which leads to influence cost (Besanko et al 2009). For instance, a manager would like to shift a decision depends on his predilection, which causes time wasting. Even worse, the wrong decision made by the manager will misallocate the scare resource. Hence, bureaucracy effects will contribute to significantly high agency and influence cost for firm to produce in-house.
In summary, the objective of outsourcing from competitor firm is to improve the efficiency including saving cost and focusing on their core competencies. Therefore, the firm can pay more attention to improve the quality of the goods, satisfy customers and develop technology.
The risks of outsourcing:
However, there are several disadvantages of purchasing from competitor firms like leakage of private