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1、Economics of Strategy,Chapter 3Vertical Boundaries of the Firm,Besanko,Dranove,Shanley and Schaefer,Vertical Chain,Begins with the acquisition of raw materialsEnds with the sale of finished goods/servicesIncludes support services such as finance and marketingOrganizing the vertical chain is an impor
2、tant part of business strategy,Vertical Boundaries of the Firm,Which steps of the vertical chain are to be performed inside the firm?Which steps of the vertical chain to be out-sourced?Choice between the“invisible hand”of the market and the“visible hand”of the organization(Make or Buy),Vertically In
3、tegrated Firms,In a vertically integrated firm,many of the steps in the vertical chain are performed in-house.Example:UIBESome firms choose to outsource many of the vertical chain tasks and become vertically disintegrated.Example:Nike,Make versus Buy,Decision depends on the costs and benefits of usi
4、ng the market as opposed to performing the task in-houseOutside specialists may perform a task better than the firm canIntermediate solutions are possible(Examples:Strategic alliances with suppliers,Joint ventures),上游下游,Support Services,AccountingFinanceLegal SupportMarketingPlanningHuman Resource M
5、anagement,Support Services,Support services can be major sources of value creationUPS LogisticsToyota Human Resource ManagerNike-Marketing,Defining Boundaries,Firms need to define their vertical boundaries Considerations Economies of scale achieved by market firms Value of market disciplineEase of c
6、oordination of production flows in-house Transactions costs when dealing with market firms,Some Make-or-Buy Fallacies,Firm should make rather than buy assets that provide competitive advantagesOutsourcing an activity eliminates the cost of that activityBackward integration captures the profit margin
7、 of the supplierBackward integration insures against the risk of high input pricesIt makes sense to tie up the distribution channel in order to deny access to the rivals,Reasons to Buy rather than Make,Market firms(outside specialists)may have patents/proprietary information that makes low cost prod
8、uction possibleMarket firms can achieve economies of scale that in-house units cannotMarket firms are subject to market discipline,whereas in-house units may be able to hide their inefficiencies behind overall corporate success(Agency and influence costs),Economies of Scale,Make-or-Buy in Insurance,
9、Buying insurance utilizes economies of scale available to insurersLarge firms with sufficient capital can“self-insure”,案例：Self-Insurance by British Petroleum,BP self-insures large losses but buys insurance for small lossesWhy,Agency and Influence Costs,The incentives to be inefficient and innovative
10、 are weaker when a task is performed in-houseAgency costs are particularly problematic if the task is performed by a“cost center”within an organization忽视代理成本优于消除代理成本It is difficult to internally replicate the incentives faced by market firms,Influence costs,In addition to agency costs,performing a t
11、ask in-house will lead to“influence costs”as well“Internal Capital Markets”allocates scarce capitalAllocations can be favorably affected by influence activitiesResources consumed by influence activities represent“influence costs”为什么在过去几十年里，GM在拥有世界上最高生产量的同时，它的许多零部件供应部门的成本也是最高的,Reasons to Make,Costs i
12、mposed by poor coordinationReluctance of partners to develop and share valuable private informationTransactions cost that can be avoided by performing the task in-houseEach problem can be traced to difficulties in contracting,Role of Contracts,Firms often use contracts when certain tasks are perform
13、ed outside the firmContracts listthe set of tasks that need to be performed the remedies if one party fails to fulfill its obligation,Contracts,Contracts protect each party to a transaction from opportunistic behavior of other(s)Contracts ability to provide this protection depends onthe“completeness
14、”of contractsthe body of contract law,Complete Contract,A complete contract stipulates what each party should do for every possible contingencyNo party can exploit others weaknessesTo create a compete contract one should be able to contemplate all possible contingenciesOne should be able to“map”from
15、 each possible contingency to a set of actionsOne should be able to define and measure performancesOne should be able to enforce the contract,Complete Contract(Continued),To enforce a contract,an outside party(judge,arbitrator)should be able toobserve the contingencyobserve the actions by the partie
16、simpose the stated penalties for non-performanceReal life contracts are usually incomplete contracts,Incomplete Contracts,Incomplete contractsInvolve some ambiguitiesNeed not anticipate all possible contingenciesDo not spell out rights and responsibilities of parties completely,Factors that Prevent
17、Complete Contracting,Bounded rationalityDifficulties in specifying/measuring performanceAsymmetric information,Bounded Rationality,Individuals have limited capacity toProcess informationDeal with complexityPursue rational aimsIndividuals cannot foresee all possible contingencies,Specifying/Measuring
18、 Performance,Terms like“normal wear and tear”may have different interpretationsPerformance cannot always be measured unambiguously,Asymmetric Information,Parties to the contract may not have equal access to contract-relevant informationOne party can misrepresent information with impurity,Contract La
19、w,Contract law facilitates transactions with incomplete contractsParties need not specify provisions that are common to a wide class of transactions,Limitations of Contract Law,Doctrines of contract law are in broad language that could be interpreted in different waysLitigation can be a costly way t
20、o deal with breach of contractLitigation can be time consumingLitigation weakens the business relationship,Coordination of Production Flows,For successful coordination one party needs to make decisions that depend on the decision made by othersA good fit should be accomplished in several dimensions.
21、Some examples are:TimingSizeColorSequence,Coordination Problems,Without good coordination,bottlenecks arise in the vertical chainTo ensure coordination,firms rely on contracts that specify delivery dates,design tolerances and other performance targets,Design Attributes,Design attributes are attribut
22、es that need to relate to each other precisely;significant loss in economic value resultsSome examplesSequencing of courses in MBA curriculumFit of auto sunroof glass to apertureTimely delivery of a critical component,Design Attributes,If coordination is critical,administration control may replace t
23、he market mechanismDesign attributes may be moved in-house,Leakage of Private Information and Outsourcing,Well-defined patents can help but may not provide full protection Contracts with non compete clauses can be used to protect against leakage of informationIn practice non-compete clauses can be h
24、ard to enforce 例如竞业禁止条款,Transactions Costs,If the market mechanism improves efficiency,why do so many of the activities take place outside the price system?(Coase)Costs of using the market that are saved by centralized direction transactions costs,Transactions Costs,Outsourcing entail costs of negot
25、iating,writing and enforcing contractsCosts are incurred due to opportunistic behavior of parties to the contract and efforts to prevent such behaviorTransactions costs explain why economic activities occur outside the price system,Transactions Costs,Sources of transactions costsInvestments that nee
26、d to be made in relationship specific assetsPossible opportunistic behavior after the investment is made(hold up problem)Quasi-rents(magnitude of hold up problems),Forms of Asset Specificity,Relation-specific assets may exhibit different forms of specificitySite specificity（电厂、钢铁加工）Physical asset sp
27、ecificity（玻璃生产的模具）Dedicated assets（定制的培训项目）Human asset specificity,Rent and Appropriable Quasi-rent,The Holdup Problem,Effect on Transactions Costs,The holdup problem raises the cost of transacting exchangesContract negotiations become more difficultInvestments may have to be made to improve the ex-
28、post bargaining positionPotential holdup can cause distrustThere could be underinvestment in relation specific assets,Asset Specificity and Transactions Costs,Relation-specific assets support a particular transactionRedeploying to other uses is costlyQuasi rents become available to one party and there is incentive for a holdupPotential for holdups lead toUnderinvestment in these assetsInvestment in safeguardsReduced trust,
