Evaluation of Firm versus Market Essay Example | Topics and Well Written Essays - 1500 words

Evaluation of Firm versus Market - Essay Example A firm’s decision to make or buy depends on which is more beneficial to the firm. If the firm chooses to make then it will have to engage in vertical integration where it starts or acquires a business in order to facilitate upstream activities that are required for the production of the goods and services that it provides. In making this decision there are various factors for consideration, including the coordination of production flows through the vertical chain. In order to determine whether to make or buy a firm should compare the benefits and costs of using the market as opposed to performing the activity internally. The benefits of using the market include: ï‚ § The fact that firms that are producing for the market (market firms)can achieve economies of scale that cannot be achieved by producing that the firm may not be able to achieve by producing it internally ï‚ § Market firms must operate both efficient and innovative to survive and so they have to subject themselves to the discipline that the market requires. The overall success of the corporate entity may hide the inefficiencies that exist in carrying out specific activities internally. The costs of using the market include: ï‚ § The fact that coordination of production flows through the vertical chain may be compromised when an activity is purchased from an independent market firm rather than performed internally. ï‚ § The risk of private information being leaked to competitors by the independent market firm.... In order to determine whether to make or buy a firm should compare the benefits and costs of using the market as opposed to performing the activity internally. The benefits of using the market include: The fact that firms that are producing for the market (market firms)can achieve economies of scale that cannot be achieved by producing that the firm may not be able to achieve by producing it internally Market firms must operate both efficient and innovative to survive and so they have to subject themselves to the discipline that the market requires. The overall success of the corporate entity may hide the inefficiencies that exist in carrying out specific activities internally. The costs of using the market include: The fact that coordination of production flows through the vertical chain may be compromised when an activity is purchased from an independent market firm rather than performed internally. The risk of private information being leaked to competitors by the independent mark et firm. transaction costs involved in doing business with independent market firms can be avoided if the activity is performed internally Coordination of production of production flows through the vertical chain is of extreme importance to business. When the decision to buy a product from a market firm is taken coordination of production flows has to be emphasized through the preparation of contracts. In order for this to be a success the decisions that one firm makes must be coordinated with those of the other firm. There has to be a good fit if this cooperative effort is to succeed. The dimensions of production that this encompass are timing fit; size fit; colour fit; and sequence fit. Timing fit relates to the coordination of the increased supply of a new