2 - Horizontal Boundaries Of Te Firm

Question 1

Definition: Horizontal boundaries

Answer 1

Horizontal boundaries identify the quantity and the variety of goods and services that a firm producers. Very determining are economies of scale and scope.

Question 2

Definition: Economies of scope

Answer 2

There are economies of scope if the average cost per unit of output falls as the volume of output increases

TC(x,y) < TC(x,0) + TC(0,y)

Question 3

Scale economies factors

Answer 3

• The spreading of fixed cost over an ever-greater volume of output (and eventually rise as production runs up against capacity constraints) (ST)
• trade off à among alternative technologies (LT)

Question 4

Definition: throughput

Answer 4

The movement of inputs and outputs through a production process.

Question 5

Capital intensive prod vs labor/material intensive prod

Answer 5

In general capital intensive production processes are more likely to display economies of scale and scope than labor or material intensive processes

Question 6

The division of labor is limited by the extent of the market

Answer 6

Adam Smith

The division of labor refers to the specialisation of productive activities. Spécialisation offer requires upfront investments and will be pursued only if the demand requires it.

Question 7

What does mean:

• leverage core activities
• compete on capabilities

Answer 7

Scope economies

Question 8

Sources of economies of scale and scope (6)

Answer 8

1. Economy of density
2. Purchasing
3. Advertising
4. R&D
5. Physical properties of production
6. Inventories

Question 9

The cube square rule

Answer 9

As the volume of the vessel increases by a given proportion, the surface area increases by less than this proportion.

Question 10

Umbrella effect

Answer 10

The effectiveness of a firm’s advertisement increases by the reputation and the fact that they offer a broad product line.

Question 11

Sources of diseconomies of scale and scope:

Answer 11

1. Labor Cost
2. Bureaucracy/Agency problems
3. Dilution of special resources

Question 12

Definition: the learning curve

Answer 12

Advantages that flow from accumulating experience and know-how.

Question 13

Definition: comglomerates

Answer 13

Firms that are involved in unrelated markets.

Question 14

Efficiency based reasons for diversification

Answer 14

• economies of scope: they can be based on market and technological factors as well as on managerial synergies
• use of internal market : combining a cash-rich and a cash poor business

Question 15

Stupid reasons for diversification

Answer 15

• diversifying the shareholder’s portfolio

- identifying under valued firms

Question 16

The market for corporate control

Answer 16

Henry Manne

The market for corporate control limits manager’s ability to diversity unprofitably. If the actual price of a firm’s shares is far below the potential, the raider can profit from taking over the firm and instituting changes that increase its value.

Accountability

Question 17

The efficient market hypothesis

Answer 17

The market itself of reflecting all information we have about the firm (expectations)

Question 18

Learning curve vs economies of scale

Answer 18

Economies of scale exist of AC decrease as Q increase.
Learning economies are a source of economies of scale and refer to the reduction in AC due to accumulation of experience and know-how

Question 19

BCG growth/ share framework

Answer 19

Relative Market Growth (RMG)
Relative Market Share (RMS)

+ RMG & + RMS => Rising star
- RMG & - RMS => Problem child
+ RMG & - RMS => Cash Cow
- RMG & - RMS => Dog

Question 20

Managerial reasons for diversification

Answer 20

• social prominence and public prestige
• higher compensation
• job perspectives

Question 21

Doomed to large cost disparity?

Answer 21

• push demand
• use leftover capacity
• opt for a smaller plant size