Hoofdstuk 6 Vertical Integration

Question 1

Vertical integration

Answer 1

The number of steps in the value chain that a firm accomplishes within its boundaries

Question 2

Backward vertical integration

Answer 2

Incorporate more stages of the value chain within its boundaries and those stages bring it closer to the beginning of the value chain; that is, closer to gaining access to raw materials

Question 3

Forward vertical integration

Answer 3

Incorporates more stages of the value chain within its boundaries and those stages bring it closer to the end of the value chain; that is, closer to interacting directly with final customers

Question 4

Value of vertical integration

Answer 4

• Threat of opportunism (a firm is unfairly exploited in an exchange; monitor and control the exchange; transaction-specific investments lead to higher vulnerability of opportunism)
• Firm capabilities (vertically integrate business activities where they possess valuable, rare, and costly-to-imitate resources and capabilities)
• Flexibility (how costly it is for a firm to alter its strategic and organizational decisions; vertically integration is less flexible; uncertainty needs flexibility)

Question 5

Rarity of vertical integration

Answer 5

• Rare transaction-specific investments (new technology or new approach to doing business leads to vertically integration)
• Rare capabilities
• Rare uncertainty (resolve some uncertainty sooner than its competition and focus on production efficiency)
• Rare vertical dis-integration (first see the value of vertically dis-integrating)

Question 6

Imitability of vertical integration

Answer 6

• Direct duplication (when resources and capabilities are path dependent, socially complex, or causally ambigious, they may be immune from direct duplication)
• Substitute (strategic alliances)

Question 7

Organizing to implement vertical integration

Answer 7

• Organizational structure (exchanges are incorporated into one of the functions in a functional organizational structure; CEO must take the lead in making decisions about whether each individual function should be vertically integrated into a firm, and work to resolve conflicts that naturally arise between vertically integrated functions)
• Management controls (budgeting process and management committee oversight process)
• Compensation:
  
  • Employees will often be reluctant to make firm-specific investments, because, once they do, they become vulnerable in their exchange with this firm. Thus, one of the tasks of compensation policy is to create incentives for employees who firm-specific investments could create great value to actually make those investments (salad, cash bonus & stock grants for individual performance)
    * Recognize that firm-specific investments will often be collective in nature (cash bonus & stock grants for group performance)
    
    • Because the creation of flexibility in a firm depends on employees being willing to engage in activities that have fixed and known downside risks and significant upside potential, it follows that compensation that has fixed and known downside risks and significant upside potential would encourage employees to choose and implement flexible integration strategies (stock options for individuals or group performance)

Question 8

Firm-specific investments

Answer 8

Investments made by employees/firms that have more value in a particular firm than in alternative firms