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Organizational Limit to Firm Scope

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Collis & Montgomery, Chapter 5. Organizational Limit to Firm Scope. By Dwi Joko Pramudito Song Young Kang. Introduction. Many corporation still expanding, entering new businesses and markets, and becoming larger and more complex Others are reducing the scale and the scope of activities

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Presentation Transcript
introduction
Introduction
  • Many corporation still expanding, entering new businesses and markets, and becoming larger and more complex
  • Others are reducing the scale and the scope of activities
  • The chapter addresses limit to the scope of the firm
  • Organizational Economics
scope of the firm resources and competitive advantage
Scope of the Firm: Resources and Competitive Advantage
  • Is the firm possesses resources that provide a competitive advantage in business
  • Yes  consider of competing in the business
  • No  should not be active in the business
scope of the firm market or hierarchy
Scope of the Firm: Market or Hierarchy
  • Why should a particular business or activity be performed inside the firm?
  • The choice lies between The Market or The Hierarchy
  • Corporate hierarchy will be efficient when it can be shown to be the organizational arrangement that minimizes the sum of production and governance cost
the market
The Market
  • Benefit of the Market:
    • More efficient at information processing
    • Incentives
  • Cost of the market
    • Transaction cost theory
    • Market Failure:
      • Opportunism
      • Asset specificity
      • Uncertainty
      • High Frequency
the hierarchy
The Hierarchy
  • Benefit of the Hierarchy:
    • One party has authority over anyone else
    • Unified ownership reduce the pursuit of local goals
    • When intense coordination is needed among parties to a transaction
  • Cost of the Hierarchy:
    • Beureaucracy
    • Agency Cost
choosing the scope of the firm
Choosing The Scope of the Firm
  • Bias to the Market
    • Activities should be performed outside rather than inside the firm
    • The production cost benefit that independent suppliers can exploit and the governance cost benefit of high-powered incentives and decentralized information processing
choosing the scope of the firm1
Choosing The Scope of the Firm
  • A Decision Process
    • Disaggregate the Industry Value Chain
    • Competitive Advantage
    • Market Failure
    • Need for Coordination
    • Importance of Incentives
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