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The Silver Bullet of Coors: TCE Theory of Contracting

The Silver Bullet of Coors: TCE Theory of Contracting. Michelle Mullins Jane Njuguna Andrea Woolverton. Overview. Which of the three New Institutional Economic theories of the firm best describes Coors’ malt barley contracting program? Theory Overview Coors’ Strategic Focus

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The Silver Bullet of Coors: TCE Theory of Contracting

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  1. The Silver Bullet of Coors: TCE Theory of Contracting Michelle Mullins Jane Njuguna Andrea Woolverton

  2. Overview • Which of the three New Institutional Economic theories of the firm best describes Coors’ malt barley contracting program? • Theory Overview • Coors’ Strategic Focus • Theoretical Evidence • Conclusion

  3. Theory Overview (Williamson, 2000) (Furubotn & Richter,1998) (Sykuta & Chaddad, 1999) (Williamson, 2000) (Saussier & Masten,2002)

  4. Coors’ Value Chain Supply Chain Management Sales and Marketing Distribution Service Profit Margin Operations Integrated Cost Structure Barley quality has significant role in cost variability

  5. Coors’ Value Chain Supply Chain Management Sales and Marketing Operations Distribution Profit Margin Service Barley Input Barley Production Malting Contracted Production Transaction Cost Economics Vertical Integration Incomplete Contracting

  6. Case Overview Case Facts Coors contracts 100% of production: 160,000 acres 100% Domestic growers Non-GMO barley varieties R&D in-house Vertical Integration of malting operations Case Assumptions Specific Asset in question is Quality/Taste of Beer Loyalty is based on Quality/Taste Coors strategy Competitive advantage through PVP seed

  7. Quality Control Options • Sell PVP seed and purchase back on open market operations • Malt barley variety co-mingling issues • Can not procure specifications of market

  8. Malt Barley Specifications

  9. Quality Control Options • Sell PVP seed and purchase back on open market operations • Malt barley variety co-mingling issues • Can not procure specifications of market • Vertically integrate seed production • Information intensive; 160,000 acres, not feasible • Contract barley production • Control quality throughout value chain • Minimizes profit erosion • International opportunities

  10. Theory-based Expectations • Agency Theory • Prices as incentives are sufficient through market • Incomplete Contracts • Vertically integrate production as Coors must own the asset to control • Transaction Cost Economics • Contract to control and preserve identity of specific asset

  11. Justification of TCE • Focus of Transaction Cost Economics is on ex post costs and contractual hazards associated with a specific asset • A potential holdup situation is eliminated through contract terms • PVP barley = Quality of beer (specific asset)

  12. Conclusion Incomplete Contracts Theory • R & D • Structure of Contracts Agency Theory/IC Theory

  13. Thank you from Mizzou!

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