Exam 10: Vertical Integration and the Scope of the Firm

The main lesson to be drawn from the delays to the launch of Boeing's 787 Dreamliner is that, when developing complex products that embody diverse new technologies:

The main reason that the producers of wood pulp have often forward integrated into the production of paper is:

Firms exist in situations where the administrative costs of coordinating economic activity are less than the transactions costs of organizing such activity across markets.

When there are technical efficiencies from co-locating vertically-related processes (e.g.the production of pulp and paper or the production of steel and steel strip), vertical integration (in the form of common ownership of the vertically-linked activities) is essential.

The capitalist economy comprises two forms of economic organization, the market mechanism operated by prices and the administrative mechanism of firms.

Transaction costs of markets include search costs and costs of negotiating contracts, but usually exclude the costs incurred in enforcing contracts.

Economies of scope and transaction costs are important concepts when analyzing the vertical, geograpjical, amd product scope of the firm.

Corporate strategy is concerned with how a firm competes in a particular industry, whereas business strategy is concerned the choice of which businesses the firm competes in.

During the past three decades, increased emphasis on flexibility and the need to develop superior organizational capabilities has caused large companies ot reduce their vertical scope.

By offering the possibility of repeat business, the suppliers and buyers can avoid the problems of opportunism that give rise to transaction costs.

Vertical integration allows a firm to extend its monopoly position from one stage of an industry's value chain to adjacent stages, this allows the firm to increase the amount of monopoly profit it can extract.

The growth in the size and scope of companies throughout most of the 19^th and 20^th centuries can be attributed primarily to the increasing transaction cost of markets.

Vertical integration is:

Managing vertically-related businesses that are strategically very different is not a problem if companies adopt an appropriate organizational structure.

Alfred Chandler described the administrative mechanism of firms as the "invisible hand" of economic coordination.

The economic organization of the home improvement industry fearures:

A major factor causing the narrowing in the scope of the activities of large corporations during the last two decades of the 20^th century was increasing turbulence of the economic environment.

Vendor partnerships based on relational contacts-such as the relationships between vehicle manufacturers and their component suppliers-are superior to either pure market contracts or vertical integration because:

In fashion clothing, one reason why mass-market distributors such as H&M, Forever 21, and Gap outsource their production is to reduce new product cycle time (the time between the initial design of a product and its delivery to a retail store).

McDonalds--like most other fast-food chains--prefers to franchise rather than directly operate its retail outlets.An advantage of franchising over vertical integration is: