Strategy and Economics of Vertical Chain

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Strategy and Economics of Vertical Chain Vertical chain in its simplest form starts with the acquisition of raw material and ends with the distribution and sale of finished goods. The strategy to participate in one activity (one industry) or many activities (many industries) along the value chain has become a key consideration of today’s corporate planning. Firm needs to make a decision it will only manufacture the product or would engage in retailing and after sales service also. We will be discussing the Vertical Boundaries of the firm from the perspective of the Vertical chain and the production process and examine how firms take a make-buy decision. We will also look at bureaucracy issues that large firms suffer which are due to the non-performing managers and workers or the divisions, for e.g. a tools department of a large automotive firm may decide to buy from market due to the non competitive performance of there own tools division. Firm’s decision to buy from market is sometimes limited when the firm is exploited because of incomplete contracts, Oliver Williamson in his book The Economic Institution of Capitalism concluded that transactions cost include the time and expense of negotiating, writing and enforcing contracts as well as far greater costs that arise when firms exploit incomplete contracts. Oil and Gas industry follows vertical integration in supply chain which arises because of Technological economies, meaning less input cost will be required to produce a given output in downstream process. Such pricing lowers reported input prices and raises the profit of downstream operation. If the firm is engaged in the upstream process i.e. backward integration, it avoids firm to pay high price for the input during the time of peak demands, ensure adequate supplies, and reduce cost distortion from monopolized inputs. The producer

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