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Oil exploration
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  1. Figure 6.1 A set of supply chains Petrol for vehicles Car production Motor cycle production Iron ore extraction & processing Oil exploration Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  2. Figure 6.1b Upstream vertical integration Petrol for vehicles Car production Motor cycle production Iron ore extraction and processing Iron ore extraction & processing Oil exploration Transportation and storage of steel Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  3. Figure 6.1c Downstream vertical integration Petrol for vehicles Car production Motor cycle production Iron ore extraction and processing Iron ore extraction & processing Oil exploration Transportation and storage of steel Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  4. Figure 6.1d Product related (or technology related) diversification Petrol for vehicles Car production Motor cycle production Iron ore extraction and processing Iron ore extraction & processing Oil exploration Transportation and storage of steel Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  5. Figure 6.1e Conglomerate (unrelated) diversification Petrol for vehicles Car production Motor cycle production Iron ore extraction and processing Iron ore extraction & processing Oil exploration Transportation and storage of steel Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  6. Table 6.1

  7. Figure 6.2 Necessary relationships when engine manufacture is being done in-house by a car assembler Land owners Suppliers of engine materials and components In-house customers (assemblers) and outbound logistics Engine manufacturing Finance providers Labour requirements Government

  8. Figure 6.3 Engine manufacturing (by a car assembler) as a collection of functional activities Property management Purchasing of materials and components Engine manufacturing Finance Management Internal and External Sales and Logistics Human Resource Management External affairs

  9. Engine manufacture Tyre manufacture Seat production Figure 6.4 The car production supply chain Iron ore extraction & processing Transportation and storage of steel Inbound logistics of car engines Car assembly Car storage and transportation Car retailing

  10. Figure 6.5 A vertically disintegrated car production industry Iron ore extraction & processing Transportation and storage of steel Denotes exchange through market transactions Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing

  11. Figure 6.6 A partially vertically integrated car production business (core = car assembly) Iron ore extraction & processing Transportation and storage of steel Denotes exchange through market transactions Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing

  12. Output of cars per period A D • C • ½ A 0 Output of lorries per period ½ B B Figure 6.7 Economies of scope in the production of two goods

  13. Market contracts if frequency low. Vertical integration if frequency high Uncertainty High Vertical integration Vertical integration Low Market contracts Long-term contracting Vertical integration Low for both parties High for both parties High for one party, low for the other Asset specificity Figure 6.8 Governance structure, asset specificity and uncertainty

  14. Potential entrants Threats of entrants Competitive Rivalry Suppliers Buyers Bargaining power Bargaining power Threats of substitutes Substitutes Figure 6.9 Michael Porter’s 5 Forces Model of Competition

  15. Additional slides • Not currently used from here on

  16. We look at things from the point of view of one firm: a car assembly business. Right now, it gets all its inputs via the market and sells all its output via the market

  17. A car assembly business Car assembly

  18. This firm can be thought of as one component of a larger “car production” supply chain:

  19. Let us focus only on the ‘central’ part of this supply chain. We begin with a situation in which each activity along the supply chain is undertaken by a separate firm.

  20. Vertical integration But there may be good reasons why the car assembler might choose to link ‘upstream’ and/or ’downstream’ with other parts of the supply chain … And so become a vertically integrated company.

  21. Production Costs Production Costs Business 1 Business 2 Support and Organisation Costs Support and Organisation Costs Figure 5.9 Costs for a collection of independent businesses

  22. Corporation Costs Potential synergy (Cost savings) Production Costs Production Costs Business 1 Business 2 Support and Organisation Costs Support and Organisation Costs Potential synergy (Cost savings) Figure 5.10 Costs and the corporation

  23. Production and processing activities Raw material extraction Transportation and storage Intermediate goods processing Transportation and storage Final manufacturing Transportation and storage Retailing Support activities Accounting Finance Human Resource Management Legal Marketing

  24. Now envisage three separate supply chains:

  25. Horizontal integration Meanwhile, distinct firms undertaking iron ore extraction and processing activities might choose to combine (or integrate)… and so become a horizontally integrated single company. (Two separate car assembly firms might also choose to combine, but we don’t show this here).

  26. Production and processing activities Production and processing activities Iron ore extraction and processing Iron ore extraction & processing

  27. Car production activities Motor cycle production activities Iron ore extraction and processing Transportation and storage of steel

  28. Vertical and horizontal integration It may make sense for two separate materials transport and storage companies to merge too. Moreover, it may be sensible to combine the integrated materials storage and transport company with the combined extraction and processing company. If this were to occur, it would generate a single horizontally and vertically integrated company.

  29. Economies of scope (Related diversification) There are potential synergies between car and motor cycle production activities. We might observe integration among such businesses where economies of scope exist, generating those synergies.

  30. Production and processing activities Iron ore extraction & processing Transportation and storage of steel Transportation and storage of steel Engine manufacture Engine manufacture Inbound logistics of engines Inbound logistics of car engines Motor cycle assembly Car assembly Motor cycle transportation and storage Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  31. Production and processing activities Engine manufacture Engine manufacture Inbound logistics of engines Inbound logistics of car engines Motor cycle assembly Car assembly

  32. Engine manufacture Inbound logistics of car engines Car storage and transportation A partially vertically integrated car production business (core = car assembly) Iron ore extraction & processing Transportation and storage of steel Denotes exchange through market transactions Car assembly Car retailing

  33. Production and processing activities Production and processing activities Production and processing activities Iron ore extraction and processing Iron ore extraction & processing Oil exploration Transportation and storage of steel Transportation and storage of steel Oil field development Engine manufacture Engine manufacture Crude oil extraction Inbound logistics of engines Crude oil transportation and storage Inbound logistics of car engines Motor cycle assembly Oil refining into petrol Car assembly Motor cycle transportation and storage Petrol storage and transportation Car storage and transportation Motor cycle retailing Petrol retailing Car retailing

  34. ARCHITECTURE The boundaries of a firm: • Horizontal and vertical integration • Integration associated with economies of scope • Other forms of linkage ?

  35. High 4 6 5 Uncertainty/complexity Low 1 2 3 Low for both parties High for both parties High for one party, low for the other Asset specificity Figure x Asset specificity and uncertainty