Week 4 Boundaries of the Firm, Transaction Costs and Agency Problems

Week 4 Boundaries of the Firm, Transaction Costs and Agency Problems

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Unformatted text preview: Week 4 Boundaries of the Fi rm, T ransaction Costs and Agency Problems Why does the firm diversify? the extension of scale and scope to gain certain competitive advantages in the market 1. internal pressures or opportunities provided by economies of scale/scope 2. external pressures market forces such as changes in technology or tastes in the market How does the fi rm diversify? 1. Merge or acquisition speedy but need to dispose of some of acquisition and absorption of new unit into existing 2. I nternal growth slow but measured and enhance the internalize learning 3. I ntermediate choice alliances such as franchises or joint ventures that maybe speedy but have to work with others. The vertical integration the core activities integration may be forward or backward in the vertical chain Forward integration: We can integrate our customers into the downstream supply chain, too. PepsiCo did this when it began acquiring local bottlers. McDonald's practices the same with its extensive franchise network. Forward integration ensures a ready and willing outlet for our products. Backward integration: We can integrate the inputs into our manufacturing operation as well -- essentially looking upstream in our value chain. The major automotive manufacturers routinely practice this by producing their own engines and transmissions that go into their cars. Self-manufacturing removes power from the supplier by bringing crit ical information in- house. It also elim inates the need for shopping and reduces negotiat ing costs. It also offers economies of combined operations such as sales, purchasing, and overhead allocations. By lowering manufacturing costs and ensuring a stable supply of crit ical components, vert ical integrators remove some of the r isk in their businesses Tapered integration -...
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This note was uploaded on 08/11/2009 for the course ECOF 3001 taught by Professor - during the Three '09 term at University of Sydney.

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Week 4 Boundaries of the Firm, Transaction Costs and Agency Problems

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