AEM 2601 Prelim 2 || with Accurate Answers 100%.

Vertical Integration correct answers the combination in one company of two or more stages of production normally operated by separate companies. Benefits of Vertical Integration correct answers - Avoid transaction costs - Technical economies from integration - Coordination Costs of Vertical Integration correct answers difference in optimal scale (fedEx) prevents developing distinctive capabilities (Rolls Royce) difficult administratively if strategically different (coke and coke bottling) lacks high powered incentives (Cornell dining vs. other competitors in the market place) compounding of risk limits flexibility response to demand to technology (might take time to switch over plant vs. just sourcing from new supplier) difficult to reverse Make vs. Buy correct answers Buy: transaction costs (search costs, negotiation, monitoring, enforcement) Make: Administrative costs What are sources of transaction costs? correct answers uncertainty, bounded rationality, opportunism -Contracts are difficult to write Small number of buyers and sellers, frequent transactions, high asset specificity, durability and intensity (contracts are not optimal) In all this all ties into costs of making as opposed to buying Key issues in designing vertical relationship correct answers no generic solution! depends on the resources, capabilties and strategy of the firm What is asset specificity? correct answers The extent to which assets in that exchange have a higher value in that particular relationship than the next best option *** this is referring to the relationships between company and its supplier 3 types of asset specificity correct answers site specificity: buyers and sellers locate fixed assets in close proximity technical specificity: one or both parties invest in equipment for that relationship Human capital specificity: employees develop specific skills to that relationship