Recommended chapter questions
Organizing Vertical Boundaries: Vertical Integration and Its Alternatives This chapter examines why vertical integration differs across industries, across firms within the same industry, and across different transactions within the same firm. The first part of this chapter assesses the merits of vertical integration as a function of the industry, firm, and transactions characteristics. It then presents evidence on vertical integration from studies of a number of specific industries including automobiles, aerospace, electric utilities, and electronic components industry. The next section examines whether there might be other factors apart from those discussed in Chapter 5 that might drive a firm’s decision to vertically integrate. This chapter focuses on two alternative classes of explanation. One is theory offered by Sanford Grossman, Oliver Hart and John Moore that stresses the role of asset management and its effect on investments in relationship specific assets as a key determinant of vertical integration. The second theory analyzes “market imperfections” motivations for vertical integration.
Recommended chapter questions 1. Use the arguments of Grossman and Hart to explain why stockbrokers are permitted to keep their client lists (i.e., continue to contact and do business with clients) if they are dismissed from their jobs and find employment at another brokerage house. 2. The following is an excerpt from an actual strategic plan (company and product names have been changed to protect the innocent): “Acme's primary raw material is PVC sheet that is produced by three major vendors within the United States. Acme, a small consumer products manufacturer, is consolidating down to a single vendor. Continued growth by this vendor assures Acme that it will be able to meet its needs in the future.” Assume that Acme's chosen vendor will grow as forecast. Offer a scenario to Acme management that might convince them that they should rethink their decision to rely on a single vendor. What do you recommend that Acme do to minimize the risk(s) that you have identified? Are there any drawbacks with your recommendation?
Recommended chapter questions 1. Use the arguments of Grossman and Hart to explain why stockbrokers are permitted to keep their client lists (i.e., continue to contact and do business with clients) if they are dismissed from their jobs and find employment at another brokerage house. 2. The following is an excerpt from an actual strategic plan (company and product names have been changed to protect the innocent): “Acme's primary raw material is PVC sheet that is produced by three major vendors within the United States. Acme, a small consumer products manufacturer, is consolidating down to a single vendor. Continued growth by this vendor assures Acme that it will be able to meet its needs in the future.” Assume that Acme's chosen vendor will grow as forecast. Offer a scenario to Acme management that might convince them that they should rethink their decision to rely on a single vendor. What do you recommend that Acme do to minimize the risk(s) that you have identified? Are there any drawbacks with your recommendation?
