Organizational Limit to Firm Scope

1. Collis & Montgomery, Chapter 5 Organizational Limit to Firm Scope By Dwi Joko Pramudito Song Young Kang

2. 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

3. 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

4. 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

5. 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

6. 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

7. The Choice

8. The Limit to Firm Scope

9. A Spectrum of Governance Structure

10. 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

11. Choosing The Scope of the Firm • A Decision Process • Disaggregate the Industry Value Chain • Competitive Advantage • Market Failure • Need for Coordination • Importance of Incentives

12. Thank You