Framework: Transaction Cost Analysis (Outsourcing)
Core Question: How should I govern vertical exchanges (e.g., make versus buy)?
Key Application Steps:
Examine the magnitude of sources of opportunism that elevate the transaction costs of market exchange (writing and implementing contracts)
Examine the bureaucratic costs of organization
Determine if production or strategic benefits offset the above two considerations
Comparisons with other concepts and frameworks:
Transaction cost analysis deals with how to structure exchanges and deals with the appropriate boundaries of the firm
May challenge the prescriptions of real options for these types of decisions
Illustrative Decision Contexts:
Should I internalize a certain value chain activity (e.g., R&D)
Should I outsource manufacturing, back office functions, etc.?
Real world example/HBR Case:
- Nucleon, Inc. Case
