Types of Markets & Cost Effects

Question 1

Types of Cost

Answer 1

Fixed - do not change with the level of output

Variable - vary according to output

Total - sum of fixed and variable

Marginal - amount total cost increases with each additional unit of output

Average - total costs/level of output

Question 2

Outsourcing

Answer 2

The contracting out of all or part of a business operation to an external organisation

Question 3

Advantages of Outsourcing

Answer 3

Lower cost and higher quality

Known fee

Question 4

Disadvantages of Outsourcing

Answer 4

Loss of control overall

Companies are unlikely to gain a competitive advantage

Companies become dependent on external providers

Lose internal expertise

External provider has limited knowledge of the business

Loss of confidentiality

Question 5

Competencies

Answer 5

Skilled processes within an organisation, split into 3 categories: core, complimentary, residual

Question 6

Core Competencies

Answer 6

Essential to the business maintaining it’s competitive advantage - NEVER outsourced

Question 7

Complimentary Competencies

Answer 7

Important, but not key to competitive advantage - only outsourced to an expert

Question 8

Residual Competencies

Answer 8

Not directly linked to business activity e.g payroll - can be outsourced to anyone

Question 9

Outsourcing: Newtork Organisations

Answer 9

Dependent on the relationships built with others.

Keeps numbers employed to minimum

Many activities outsourced. Role of the organisation is to coordinate outsourced activities
Only key drivers kept in house

Flexible, can increase or reduce capacity through outsourcing company

Question 10

Outsourcing: Virtual Organisations

Answer 10

Uses IT as main communication tool between employees and contractors

Staff or contractors may be located in geographically disperse locations communicating via IT

Question 11

Transaction Cost Theory

Answer 11

Helps companies decide whether to outsource (market solutions) or employ (hierarchy solutions). All costs associated with outsourcing needs to be taken into account: contract negotiations, monitoring quality, possible legal costs

Question 12

Asset Specificity

Answer 12

How specific an asset is to one particular area of work. Could be an employees, a building, a machine etc. The more specific, the higher the transaction cost, the more likely to be kept in house.

Question 13

Bounded Rationality

Answer 13

Idea that when making outsourcing decisions, individuals are bounded by 3 constraints:

1) limited time
2) limited capacity of the human mind
3) limited information available

Question 14

Alternatives to Outsourcing

Answer 14

Shared services organisations: created when any repeated services throughout the organisation are put into one division to serve the whole org, e.g HR and IT

Flexible staffing: employment agencies, leased employees, contractors. First two stay on agencies payroll

Question 15

Share Service Organisations

Answer 15

Positives: avoids duplication of staff and tasks, staff doing tasks for the whole org increase expertise

Negatives: level of efficiency depends on how organisation is set up and how effective communication is between departments

Question 16

Flexible Staffing

Answer 16

Positives: less staff time on recruiting, no job ad fees or interview costs, only have to pay staff when needed, internal staff not paid overtime, payroll done elsewhere, no costs for long term staff development

Negatives: less loyalty to the company could mean lower quality work, higher hourly rate