National Institute of Technology 2009-1st Sem M.B.A International Business IV Sem - - Question Paper

6. Denial of the possibility of specialized investments

Trade-offs is always involved in make or buys decisions. The benefits of manufacturing components in house seem to be very strong when highly specialized assets are involved, when firm is simply more efficient than external suppliers at performing a particular activity.

When these conditions are not present, the risks of strategic inflexibility and organizational issues suggest that it may be better contract out manufacturing components to independent suppliers. Since problems of strategic flexibility and organizational control loom even larger for International business than purely domestic ones, an MNC should be particularly wary of vertical integration into component manufacturing.

The make or buy problem does not end with making a option of either. Assuming that the firm decides to manufacture its components in house, it has the choice of making the parts by itself, or in partnership with others. If partnership is the choice, yet a different decision is needed as to the degree of control the firm wants to exercise. Similarly, when the firm decides to buy rather than to make, there need to select ranging from long-term and short-term supplier relationships.

Outsourcing when an International business decides to buy a service or process, it is resolving to what is known as an outsourcing strategy. Outsourcing is the act of moving a few of the firm’s internal activities and decision responsibility to external service providers. If a B-school, for example, assigns house-keeping of the school to an external contractor, it is outsourcing the work of house keeping. Complete responsibility for house keeping equipment for scrubbing, mowing, washing, dusting, staff is taken over by the service provider.

The reasons why a company decides to outsource can vary. Outsourcing allows a firm to focus on activities that represent its core competencies. Thus, a firm can create a competitive advantage while reducing cost. Outsourcing has its flip side too. There is fear of losing jobs, sensitive info may be lost there can also be back of psychological acceptance questionable quality and ethics of the vendors.

An entire function, or a few elements of an activity, may be outsourced, with the rest kept in-house. For example, a few of the elements of info technology may be strategic, a few may be critical, and a few may be performed less expensively by a 3rd party. Identifying a function as a potential outsourcing target, and then breaking that function into its components allows decision makers to determine which activities are strategic or critical and should remain in-house and which can be outsourced.

Earning:   Approval pending.