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Home arrow Business & Finance arrow Human Capital and Innovation: Examining the Role of Globalization
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The Costs of Flexibility

Flexibility is not costless: as well as the direct costs of building and maintaining flexible strategies and structures, there may also be indirect costs if the pursuit of flexibility involves trade-offs with other desirable goals. In this section, we consider some of the key costs.

Coordination and Transaction Costs

If flexibility is achieved through externalisation to partner organisations, then coordination or transaction costs will arise. These costs can be compared to those necessary for the management of an internal hierarchy, but which may imply a lower level of flexibility. In situations such as employment, hierarchies may be a lower-cost option than contracting through the market (Williamson, 1975) but do carry coordination costs. The relevant comparison is thus between the costs of hierarchy and the (likely higher) costs of externalisation where the difference is a premium for enhanced flexibility. However, the pursuit of flexibility is likely to impact not just the volume, but also the nature, of coordination costs. If, for example, greater flexibility necessitates multiple sourcing, or the regular switching of suppliers to ensure lowest cost, then average supplier tenure is likely to fall. Cooperation based on loyalty is liable to decrease, and incidences of cheating may rise since perceptions of a continuing and significant business relationship are reduced. In such a situation management priorities may change. Managers would need to place greater weight on identification, effective screening, and comprehensive due diligence when selecting partner organisations. The creation of a transparent corporate culture emphasising loyalty could assist in reducing incidences of cheating or opportunism. Inculcating such values and behavioural changes is likely to add to coordination costs.

There are reasons to believe that the costs of contracting may have fallen in comparison with management by fiat. This has occurred as technological developments in communication and control have facilitated integration, particularly cross-border activities, a world market for specialist skills has emerged (Liesch et al., 2012), and global factory firms have invested heavily in developing their coordination skills. Indeed, we would argue that such skills are now the primary source of competitive advantage of the global factory (Enderwick & Buckley, 2015).

 
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