Summary of the economics course Organisation & Strategy, which includes all basic concepts, such as boundaries of a firm and how different strategies can be used to improve a firm's competitiveness.
Organisation & Strategy Summary
Contents
Chapter 2: Horizontal Boundaries of a Firm.............................................................................................2
Chapter 3: Vertial Boundaries of the Firm..............................................................................................3
Chapter 4: Integraton and Its Alternaties...............................................................................................5
Chapter 5: Competton............................................................................................................................7
Chapter 6: Entry & Exit.............................................................................................................................9
Chapter 7: Dynamiis – Competng Aiross Time.....................................................................................11
Chapter 8: Porter’s Fiie-Fories Model...................................................................................................12
Chapter 9: Strategii Positoning for Compettie Adiantage..................................................................14
Chapter 11: Sustainable Compettie Adiantage...................................................................................16
Chapter 12: Performanie Measures and Inienties...............................................................................20
Chapter 13: Strategy and Struiture........................................................................................................21
Chapter 14: Eniironment, Power, and Culture.......................................................................................23
,Boundaries of the Firm
- Horizontal: what produits/seriiies does the frm oferr Entry/substtutess
- Vertial: whiih aitiites in-house, whiih outsouriedr Buyer/supplier powers
- Geographiial
Chapter 2: Horizontal Boundaries of a Firm
- Economies of Scale: the produiton proiess for a speiifi good or seriiie exhibits eionomies of
siale oier a range of output when aierage iost per unit of output deilines oier that range.
AC>MCs
o Unit iost reduiton by produiing more at a partcular point in tme.
o U- or L- shaped.
- Economies of Learning: unit iost reduiton by aiiumulatng experienie and know-hows over
tme.i
- Economies of Density: iost saiings arising within a transportaton network due to greater
geographii density of iustomers. Sourie of eionomies of siale.s
- Economies of Scope: iost saiings arising as the iariety of goods and seriiies that a frm
produiess inireases. TC(Qx,Qy) < TC(Qx,0) + TC(0,Qy) E.g. spilloier in logistis/R&D/purihasing.
Eionomies of Siale (p.77) Diseionomies of Siale
- Indiiisibilites iannot be sialed down - Labour iost
below a minimum size, eien if output is - Exhaustng speiialised resouries
iery low; iapital intensiies & spreading of - Organisatonal difiultes.
fxed iosts.
- Inireased produitiity of iariable inputs
e.g. speiialisatons
Diversifcaton: produiing for multple markets.
- Firms are conglomerates if they are iniolied in unrelated diversifcaton limited room for siope
eionomiess.
Reasons for diversification
- Efiieniy-based:
o Siope eionomies: spreading managerial talents.
o Internal capital markets: use reienues from iash-
riih business to fund proftable iniestment
opportunites in iash-ionstrained business see
BCG growth/share matrixs. Alloiaton of aiailable
working iapital within the frm.
- Problemati ustfiatons:
o Diiersifying shareholders’ portolios.
o Identfying underialued frms: unlikely to fnd a genuinely underialued frm.
o Managers looking for growth, eien when unproftable, for personal returns.
Failure in corporate governance: the meihanisms through whiih iorporatons
and their managers are iontrolled by shareholders.
, Chapter 3: Vertical Boundaries of the Firm
Make-or-buy decision: a frm’s deiision to perform an aitiity itself or to purihase it from an
independent frm.
Vertcal foreclosure: integraton to te up
ihannels.
Reasons to buy
- Market frms are more efiient than in-house departments, due to innoiatons and aggregatng
demand eionomies of siales.
- Aioid ageniy iost: iost assoiiated with preientngs shirking. Difiult to udge efiieniy.
o Shirking: managers and workers knowingly aitng against the best interests of their frm.
- Aioid infuenie iost: managers try to infuenie alloiaton of internal iapital market. E.g. lobbying
and iost of bad deiisions.
Reasons to make
- Coordinaton adiantages.
o Timing, sequenie, teihniial speiifiaton, and iolour ft examples p.115s.
o Internal beter than through iontrait of merchant coordinators: independent frms that
speiialise in linking suppliers, manufaiturers, and retailers.
o Design atributes: atributes that need to relate to eaih other in a preiise fashion,
otherwise they lose a signifiant porton of their eionomii ialue examples p.115s.
- Proteiton of priiate ionsumers informaton.
- Aioiding transaiton iost related to relatonship-speiifi assets e.g. tme and iost related to
ireatng a iontrait and opportunisti behaiiours.
o Relatonship-specifc assets: iniestment made to support a speiifi transaiton. It iannot
be redeployed to another transaiton without some sairifie in produitiity or
adaptaton iost. Bilaterally dependent: loiked in the relatonship.
o Quasi-rents
o Holdup problem: trading partner atempts to renegotate terms of a deal in order to
iapture more quasi-rent. A problem that arises when a party in a iontraitual
relatonship exploits the other party’s iulnerability due to relatonship speiifi assets.
More difiult and frequent renegotatons.
Iniestment to improie ex-post bargaining positon e.g. seeking seiond input
souries.
Distrust: harms ioordinaton and willingness to share releiant informaton.
Reduied iniestment: frms might not be willing to iniest a lot in speiifi assets if
they antiipate holdup.
Fundamental transformaton: transformaton in the relatonships between the partes iniolied afer the
iniestment.
- Rent: proft expeited when all goes as planned. Q Pe-Cs-I
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