mgmt4210 final 2

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  1. internal transaction costs – eg and noneg
    • The cost of searching employees
    • The cost of negotiating and drafting employment agreements
    • The cost of training the employees
    • The cost of managing and monitoring the employees
    • The cost of malfeasance and opportunism
    • X
    • Cost of maintaining plant and machinery
    • Cost of employee’s salary and benefits
  2. External transaction costs – eg
    • The costs of searching for an exchange partner
    • The cost of negotiating, drafting and monitoring the contract
    • The cost of enforcing the contract
    • The cost of dealing with contractual partner malfeasance and opportunism
  3. why do firms exist at all given that markets are so efficient at allocating scarce resources to their best uses?
    every transaction carries different levels of transaction costs, When the external transaction costs exceed the internal transaction costs of a particular exchange, this exchange can be more efficiently executed within a the firm
  4. markets vs. hierarchies – market pros and cons
    • pros
    • High-powered incentives
    • The disciplining power of competition
    • Ability to change providers or demand levels (for highly volatile demand)
    • Cons
    • Search costs in every individual transaction
    • Info asymmetries
    • Potential loss of transaction-specific investments – learning, capital assets
    • Contracts may be more cumbersome to enforce, and are necessarily incomplete
  5. markets vs. hierarchies –hierarchies pros and cons
    • pros
    • Ability to make command and control decisions by fiat
    • Better internal coordination can allow highly specialized division of labor
    • Ability to make transaction-specific investments (only valuable in certain transaction but not in other transaction)
    • preservation of any resulting learning within the firm
    • Shared understandings (corp. culture)
    • Cons
    • Low-powered incentives
    • Principal-agent problem
  6. What kinds of transactions are most likely to be produced in house
    • Those requiring most frequent individual transactions )(otw re-incur)
    • Those requiring high asset specificity (otw extortionary concessions)
    • Those that involve critical core competencies or resources that need to be preserved in house (otw leakage and hard to retain learning)
    • Those in which incomplete contracts present greater risks (Quality, Greater uncertainty about adaptations, Need for tighter coordination with other activities/transactions)
    • Those that present higher potential of asymmetric information
    • Those that do not involve frequent changes of firm’s transaction volume
  7. Integration spectrum – X
    • Arm’s length market transactions
    • Short term contracts
    • Long-term contracts
    • Joint ventures
    • Parent-subsidiary relationships
    • In-house activities
  8. Key factors to consider when deciding on whether to control a segment
    • How attractive is the segment? (most profitable segments)
    • How suited are our core competencies to compete in the segment? (leverage and reinforce cc)
    • Are there synergies from presence in multiple segments?
    • Is it efficient (from a TCE perspective)( control segments that feature high information asymmetries, asset specificity, high uncertainty)
    • Can we benefit from tighter coordination and control (efficiency, reduce the risks of some types of misbehaviors of the suppliers)
    • How much do we value the discipline of the market?
  9. Taper integration – pros and cons
    • pros
    • Creates stronger incentives for the in-house suppliers
    • builds in greater flexibility
    • Preserves key competencies
    • option of fully integrating later
    • Combines internal and external knowledge and boosts absorptive capacity
    • Cons
    • Doesn’t benefit from economies of scale
    • Higher coordination cost
    • Reputational risk
    • Knowledge leakage
  10. Dominant business, Related-constrained, Related-linked
    • Generally close ties between dominant business and other activities,
    • All businesses share key competencies in products, services etc.
    • Only some businesses share key competencies in products, services,
  11. key considerations when diversifying
    • Industry attractiveness (profitability, barriers to entry)
    • Our core competencies and the new market (leverage our existing competencies, Can the new market help us create competencies)
    • Are there any synergies with our existing markets? (economies of scale, economies of scope, synergies in learning or experience, benefit from the expanded flexibility)
  12. Too little diversification – Cons
    • Cannot exploit economies of scope, economies of scale, synergies in learning or experience
    • Cannot benefit from the flexibility of internal capital markets
  13. Too much diversification – Cons and pros
    • Cons
    • dilute managerial attention
    • significant coordination and influence costs
    • illegitimacy discount on the financial markets (comglomerates worth less than sum of its parts)
    • pros
    • unrelated diversification tends to be efficient in developing markets, as it helps in bridging the institutional voids (Emerging markets are hardly uniform. Nevertheless, they all fall short to varying degrees in providing the institutions necessary to support basic business operations.)
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mgmt4210 final 2
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mgmt4210 final 2
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