Chapter 13 - Vertical integration and the scope of the firm. This chapter presents the following content: Transactions costs and the scope of the firm, the costs and benefits of vertical integration, designing vertical relationships, recent trends. | Vertical Integration and The Scope of the Firm Transactions Costs and the Scope of the Firm --Why does the firm exist? --The evolution of firms and markets The Costs and Benefits of Vertical Integration Designing Vertical Relationships Recent Trends OUTLINE 33 From Business Strategy to Corporate Strategy: The Scope of the Firm Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes, . the scope of its activities The dimensions of scope are geographical scope vertical scope product scope 34 P1 P2 P3 C1 C2 C3 Vertical Product Geographical Scope Scope Scope V1 V2 V3 P3 P2 P1 C3 C2 C1 V1 V2 V3 [A] Single Integrated Firm [B] Several Specialized Firms linked by Markets In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets? Transactions Costs and the Scope of the Firm 35 Transactions Costs and The Existence of the Firm Transaction cost theory explains not just the boundaries of firms, also the existence of firms. In 18th century English woollen industry, no firms – independent spinners and weavers linked by merchants. Residential remodeling industry -- mainly independent self- employed builders, plumbers, electricians, painters. Key issue -- transaction costs of the market vs. administrative costs of firms. Where transaction costs high—firm is more efficient means of organization Note: transaction costs = cost of locating, negotiating, and enforcing a contract. 36 Changes in Aggregate Concentration Over Time For most of the 19th & 20th centuries industrial firms have expanded their vertical, geographical and product scope. Why? From the late 1970s to the mid-1990s, this trend reversed. Large companies began downsizing, outsourcing, and refocusing. Why? Why the recent renewal of concentration in | Vertical Integration and The Scope of the Firm Transactions Costs and the Scope of the Firm --Why does the firm exist? --The evolution of firms and markets The Costs and Benefits of Vertical Integration Designing Vertical Relationships Recent Trends OUTLINE 33 From Business Strategy to Corporate Strategy: The Scope of the Firm Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes, . the scope of its activities The dimensions of scope are geographical scope vertical scope product scope 34 P1 P2 P3 C1 C2 C3 Vertical Product Geographical Scope Scope Scope V1 V2 V3 P3 P2 P1 C3 C2 C1 V1 V2 V3 [A] Single Integrated Firm [B] Several Specialized Firms linked by Markets In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of .
