This preview shows page 1. Sign up to view the full content.
Unformatted text preview: must
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
— 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
(Besanko Table 2.1, p.73)
Beneﬁts and Costs of Using the Market:
• 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
• 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
• 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
• Firms should generally make, rather than buy, to avoid paying a proﬁt margin to independent
• 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
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
• 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...
View Full Document
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.
- Fall '13