Integration strategy under demand uncertainty: a real option approach

global outsourcing has emerged as one of the major approaches to gaining a worldwide competitive edge for many industries. this paper investigates companies’ flexibility, in very uncertain markets, in adapting their internal capacity so as to become an alternative to outsourcing. the capacity to be installed and the related resources allocation will be determinant for timing the change. we intend to quantify the impact of anticipating a capacity expansion, treated as a partially irreversible investment. unlike earlier studies, it provides analytical research on the probability of switching from outsourcing to an integration option, and the expected timing of the switch under two regimes: full and partial insourcing.