Empirical studies bear this out. A study of the Japanese automobile indus-
try found that the more specialized and interdependent a component is, the
more likely it is to be produced in-house. Moreover, as production and supply
chain operations have become more interdependent and complex over the
last decade, many firms have pursued a strategy of vertical integration—pur-
chasing either suppliers or customers in order to have a more reliable supply
of inputs or market for outputs.^15 Table 14.1 lists the most important factors
favoring in-house production over outsourcing. Besides the factors already dis-
cussed, the presence of outsourcing uncertainty confers an advantage to taking
activities in-house. Thus, for a state-of-the-art high-tech component, the firm
may not be able to ensure the same quality through outsourcing that it can
achieve through in-house production. In addition, the firm may find it easier
to handle redesigns in-house than through outsourcing.
In short, when risks loom large, the firm might want to fall back on the
maxim: If you want something done right, do it yourself.Assigning Decision-Making Responsibilities
A general principle guides the division of management responsibilities within
the firm.A firm should assign decision responsibilities to those managers with the best infor-
mation on which to act.This maxim reminds us of Chapter 13’s principal message. Superior information
is valuable precisely because it supports better decisions. Thus, good organiza-
tional design places decisions as close as possible to the relevant information.596 Chapter 14 Asymmetric Information and Organizational Design(^15) There are numerous examples of vertical integration. In 2008 Apple purchased a key producer
of custom microchips used in its products. That same year, steel producer ArcelorMittal bought
mines in Brazil. In 2009, Boeing acquired a key producer of fuselage parts, and in 2010, Oracle, a
software producer, purchased Sun Microsystems whose servers run Oracle products. For a discus-
sion, see B. Worthen, C. Tuna, and J. Scheck, “Companies More Prone to Go ‘Vertical,’” The Wall
Street Journal, December 1, 2009, p. A1. For a study of Japanese auto production, see S. Nagaoak,
A. Takeishi, and Y. Noro, “Determinants of Firm Boundaries: Empirical Analysis of the Japanese
Auto Industry from 1984 to 2002,” NBER Working Paper, 2007.
TABLE 14.1
The Choice between
In-House Production
and Outsourcing
Factors Favoring In-House Production Factors Favoring Outsourcing
- Firm-specific good or service 1. Standardized good or service
- Outside risks: input quality, 2. Competitive market available
supply disruptions - High degree of coordination required 3. Low degree of coordination required
c14AsymmetricInformationandOrganizationalDesign.qxd 9/26/11 11:03 AM Page 596