Economics Of Industry Essay Example | Topics and Well Written Essays - 1500 words

Economics Of Industry - Essay Example Some of the factors which can define the decision making process of whether to buy or outsource also depend upon the agency relationship. Bergmann and Friedl (2008) are of the view that since managers have the private information regarding the projects therefore they intend to exert "unobservable levels of different kinds of effort in order to increase the feasibility of successfully completing the project in terms of meeting product specifications." (Bergmann and Friedl). This paper will attempt to present a comprehensive analysis of the above factors and their impact on the decision making process of whether to buy or outsource. Further, this work will also attempt to present what remedies may be available to address such problems in terms of agency cost. To make or buy is one of the fundamental dilemmas faced by the modern organizations as increasing competition and globalization is forcing organizations to re-evaluate their strategies as well as processes and technologies to better position themselves onto the competitive landscape. As discussed above that the decision to make or buy depends largely upon whether the organization is willing to refocus its strengths on exploiting its core competencies and outsource some of the activities which do not probably fall under the domain of their specialty therefore instead of developing weaknesses into strengths, organizations often consider to focus on their strengths. Secondly, lack of internal resources such as manpower, technology, economies of scales etc may force organizations to decide on buying rather than producing in house. Thirdly, cost reduction is another critical element which contributes in deciding whether to buy or make because due to lack expertise, lack of resources, org anizations may find it expensive to produce in house and rather focus on outsourcing. However, despite all these factors, there are some other critical elements which contribute to that decision making process. As discussed above that uncertainty is one of the key elements which differentiate the labor markets therefore both internal as well as external factors heavily influence the decision making process of make or buy. Internal organizational factors such as agency relationships as well as adverse selection involve the management of the firms however; uncertainty and asymmetric information may be internal as well as external in nature. Agency Relationship Diversification is one of the reasons why managers often decide to make investments so that the risk could be easily distributed across the different products as well as markets. It is also because of this reason that the managers often have to decide whether to initiate that diversification process by producing that product or procuring that machinery in-house or outsource them. However, Denis et al (1997) are of the view that there is a negative relationship between the diversification and the managerial equity ownership. (Denis, Denis and Sarin) This fact also points towards the tendency of the managers to perform in ways which create a sort of value reducing diversification for firms. Therefore taking an analogy from this fact, it can easily be inferred that while making