INTERNALIZATION-

EXTERNALIZATION
5th Course
 TRENDS
• Redefinition of the firm’s core activities
– separation of peripheral activities
• Repositioning of the firm’s focus along
the production chain – downstream
services functions
• Redefining the boundaries between
internalized and externalized
transactions
• Geographical reconfiguration
 EVOLUTION OF THE
CONCEPT
• Historically, centralization was seen as
necessary for three reasons:
• physical location of machines necessitates
centralization, which in turn, generates
benefits from specialization in labor
• a hierarchy emerges when the costs of
using the market mechanism exceed the
costs of internal organization (Coase,
1937)
• the primary source of market uncertainty is
competition - costs to reduce competitive
uncertainty -> protection costs
 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
 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 telephone 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
 OUTSOURCING
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

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.
 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
• Benefits from outsourcing:
• specialization
• clarifying configurational
arrangements
• flexibility
• cost savings
• Costs of outsourcing:
• hollowing out
• loss of skills and corporate memory
• weakened innovative capacity
• 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