Firm Boundaries Flashcards
1
Q
Horizontal boundaries
A
Quantities and varieties of products produced by the firm
2
Q
Vertical boundaries
A
Define activities along the value chain that are make instead of buy
3
Q
Determinants of horizontal boundaries (3)
A
- Learning effects (lernkurve)
- Economies of scale (fixed costs, inventories)
- Economies of scope (procurement, umbrella branding, R&D)
4
Q
Diseconomies of scale/scope (3)
A
- Higher labor costs due to unions
- Incentive issues and bureaucracy
- Conflicting out (for professional services firms)
5
Q
Vertical boundaries examples
A
Highly integrated: oil industry
Less integrated: Telco
Integration varies even within industries (automotive)
6
Q
Make or buy decision
- Actors
- Allocation mechanism
- Performance mechanism
A
- actors: subunits vs independent entities
- allocation mechanism: price vs transfer prices
- performance mechanism: share price vs. controlling
7
Q
Advantages of Buy (4)
A
- economies of scale
- lower coordination costs
- suppliers have incentive to innovate
- cost structure is variable
8
Q
Advantages of Make (4)
A
- Avoid transaction costs, which are typically higher for rarer items
- no info/know-how leakage
- no coordination of decisions across firm boundaries
- no possibility of hold up
