Strategic Decisions: Balancing In-house and Outsourced Operations

All firms are faced with the need to make strategic decisions that determine which business activities will be performed internally, and which activities should be outsourced. Outsourcing has become an increasingly favourable way of executing business operations due to advancing technology and reductions in transportation costs. Nowadays the majority of firms tend to employ a mixture of both business models as it has become strategically advantageous to conduct some activities in-house and other activities externally. The Transaction Cost Economic Theory literature dates back to works began with Coase (1937) and his Transaction Cost Economic Theory (TCE) of the firm. Coase(1937) states that a this is also known as a ‘hybrid strategy’ Three

It is essentially the degree to which a company performs all of its business transactions. It is a strategy used by corporate managers to increase the productivity and efficiency of a firm as well as reducing transaction and transportation expenses. Corporations with a high level of integration are able to grasp full control over the business through integration, meaning there is less of a risk factor as they can ensure that the quality and materials of there goods are of high quality. Integration can allow a firm to reduce costs through economies of scale. although vertical integration can be advantageous, it isn 't always the best solution. It can sometimes limit the variety of products that a firm can produce, due to the extra amount of processes added into the production line it is difficult for companies to learn whole new sectors of the business world and to do so at a rapid pace keeping up with trends. Vertically integrating a firm can be an extremely expensive process as the more integration means the more workspaces and staff you will need. strategy has been used for hundreds of years and is a strategy many corporations nowadays adopt. A vast amount of theoretical literature is available on vertical integration. Stigler (1951) Arrow (1975) bases his anlaysis of vertical integration on the assumption that integration reduces communication costs between firms.

H&M started production in 1947 in Sweden and currently have over 20 production offices around the world, 10 of which are in asia. Like the majority of merchandising retailers, H&M do not own a single factory, instead they have a team of 100 in-house designers that work on developing their clothing designs, which are then outsourced to an international network of over 900 suppliers, they manufacture most of their clothing in Bangladesh and Cambodia, where the labor costs are cheap.

The first ZARA store opened in Spain in 1975 and it is now the highest profile chain store of its parent group Inditex with over 1000 stored worldwide. Zara unlike H&M have adopted a more vertically integrated business model. 60% of their goods are manufactured in spain whilst only 24% are manufactured in low cost regions like africa and