2 firms may identify an industry segment in which the

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Unformatted text preview: must cope with. Several ways: 1. Firms may position themselves to outperform their rivals, by developing a cost or differentiation advantage that somewhat insulates them from the five forces. 2. Firms may identify an industry segment in which the five forces are less severe. e.g. Crown Cork & Seal served manufacturers of “hard-to-hold” liquids, a less competitive niche market → much higher rates of return. 3. Firms may try to change the five forces: In this context, buyers may be powerful if: • there are few of them, and • a seller is locked into a relationship with the buyer because of relationship-specific investments. ECL 2-10 — may reduce internal rivalry by creating switching costs, such as using its parts lest the warranty be voided, which creates a cost (the voided warranty) to those who switch and buy parts from another supplier — may reduce the threat of entry by pursuing entry-deterring strategies — may try to reduce buyer or supplier power by tapered integration (in which the firm both makes — vertical integration — and buys — market exchange: see §2.3 below). R.E. Marks ECL 2-11 2.3 Make versus Buy: the Vertical Boundaries of the Firm (Besanko Table 2.1, p.73) Benefits and Costs of Using the Market: Benefits • Market firms can achieve economies of scale that in-house departments producing only for their own needs cannot. Speation. • Market firms are subject to the discipline of the markets and must be efficient and innovative to survive. Overall corporate success may hide the inefficiencies and lack of innovativeness of in-house departments • Avoids possible post-merger culture clash. Costs • Coordination of production flows through the vertical chain may be compromised when an activity is purchased from an independent market firm rather than performed in-house. • Private information may be leaked when an activity is performed by an independent market firm. • There may be costs of transacting (contracting) with independent market firms that can be avoided by performing the activity in-house. • Long-term contracts may reduce flexibility and information on alternatives. R.E. Marks ECL 2-12 Some Make-or-Buy Fallacies: • Firms should generally buy, rather than make, to avoid paying the costs necessary to make the product. • Firms should generally make, rather than buy, to avoid paying a profit margin to independent firms. • Firms should make, rather than buy, because a vertically integrated producer will be able to avoid paying high market prices for the input during periods of peak demand or scarce supply. (Use opportunity costs.) 2.3.1 Tapered Integration: Make & Buy (Besanko p.156) A mixture of both: • a manufacturer might produce some input itself and buy some; • it might sell some of its product through an in- house sales force and sell the rest through an independent rep Several benefits: • expands the firm’s input and/or output channels without much capital invested: helpful for new and growing firms • use information about the cost and profitability of its internal channel...
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This note was uploaded on 02/04/2014 for the course TIDB 1010-18 taught by Professor Kellygrany during the Fall '13 term at Tulane.

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