Economics of Strategy Chapter 4 Organizing Vertical Boundaries:

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1 Economics of Strategy Chapter 4 Organizing Vertical Boundaries:
Besanko, Dranove, Shanley and Schaefer, 4th Edition Chapter 4 Organizing Vertical Boundaries: Vertical Integration and its Alternatives Slide show prepared by Richard Ponarul California State University, Chico  John Wiley  Sons, Inc.

2 Vertical Boundaries For each step in the vertical chain the firm has to decide between market exchange and vertical integration The degree of vertical integration differs Across industries: 알미늄 산업은 tin 산업에 비해 수직 결합이 높음 Across firms within an industry: GM은 Ford에 비해 수직결합이 높음 Across transactions with in firm: 미국기업의 경우 수송은 아웃소싱하는 업체가 많은 반면 창고나 재고관리는 직접하는 경우가 많음 → 왜 이러한 차이가 발생???

3 The Tradeoff in Vertical Integration
Using the market improves technical efficiency (least cost production): 시장 공급기업은 규모의 경제와 범위의 경제효과를 통해 생산비용을 감소시키는 효과를 가짐 Vertical integration improves agency efficiency: 시장거래에 수반되는 coordination 비용, 중요 정보의 노출로 인한 비용, transactions costs 등은 감소. 그러나 기업내부의 agency cost와 influence cost가 증가할 수 있음 Firm should “economize” - choose the best possible combination of technical and agency efficiencies. 즉 technical cost와 agency cost를 합한 총 코스트를 최소화 하는 점에서 기업의 경계를 결정

4 Technical Efficiency Using the market leads to higher technical efficiency compared to vertical integration : 규모의 경제 효과. 즉 시장 판매 기업은 여러 기업들로부터 주문을 받게 됨으로 규모의 경제효과를 통해 technical efficiency를 극대화 할 수 있음 The difference in technical efficiency of market over vertical integration (T) depends on the nature of the assets involved in production. 시장 판매 기업의 규모의 경제효과는 asset-specificity에 의해 제약됨. 규모의 경제효과는 표준화 된 제품의 경우에 크게 나타남. 즉 제품 또는 제품의 생산 시설이 asset specificity가 크다면 그러한 제품을 수요하는 기업이 제한됨으로 규모의 경제효과가 제약됨

5 Technical Efficiency As the assets become more specialized the market firm’s economies of scale become weaker: 특정 기업에서만 필요한 asset-specificity가 높은 부품을 공급하는 시장기업은 많지 않음. 따라서 시장기업도 규모 또는 범위의 경제 효과가 크지 않음 T=Technical Costs of VI-Technical Costs of market firm The difference in technical efficiency of market over vertical integration (T) declines with greater asset specificity

6 Agency Efficiency 시장거래의 agency costs: 시장거래에 수반되는 coordination 비용, 중요 정보의 노출로 인한 비용, transactions costs 등을 포함. Asset-specifity가 클수록 시장에서의 강탈(hold up) 가능성으로 인해 agency costs가 증가함 내부생산의 agency costs: 시장경쟁에 노출되지 않음으로 기업내부의 직원들의 도덕적 해이와 influence cost가 증가할 수 있음 At high levels of asset specificity, differential agency efficiency of market over vertical integration (A) is negative - A=Agency costs of VI - Agency costs of market transactions - When specialized assets are involved, potential for a holdup is high and the result is higher transactions costs: A<0 - Asset-specificity가 낮은 경우에는 hold-up 가능성이 낮고 따라서 시장거래의 거래비용은 상대적으로 낮으나 내부생산의 경우 agency costs나 또는 influence costs가 높을 수 있음 : A>0

7 Agency Efficiency At low levels of asset specificity, differential agency efficiency of market over vertical integration (A) is likely to be positive Without the holdup problem, market exchange could be more agency efficient in-house production

8 Technical and Agency Efficiency

9 Efficiency Tradeoff The combined (market over vertical integration) differential efficiency (C=A+T) will be negatively related to asset specificity At high levels of assets specificity vertical integration is more efficient: C<0 →수직결합의 경우 agency cost와 technical cost의 합이 시장거래의 경우보다 상대적으로 낮아짐. 따라서 수직결합이 유리 At low levels of assets specificity outsourcing wins: C>0 → 시장거래를 하는 것이 agency cost와 technical cost의 합이 내부에서 생산하는 경우보다 상대적으로 낮아짐. 따라서 시장거래가 유리

10 Efficiency Tradeoff and Scale
When the scale of production increases, the vertically integrated firm enjoys better economies of scale With increased scale, the differential technical efficiency decreases for every level of asset specificity: T 커브가 아래로 이동

11 Efficiency Tradeoff and Scale
With an increase in scale, the differential agency efficiency becomes more sensitive to asset specificity Differential agency efficiency (market over vertical integration) will increase with scale for low asset specificity: 내부 생산의 경우 기업 규모 또는 생산규모가 커지면서 agency costs나 또는 influence costs가 증가할 수 있음 With high asset specificity, differential agency efficiency decreases with scale: asset-specificity가 높아지면 거래 규모가 커지면서 시장거래의 경우 hold-up 가능성이 높아지고 따라서 거래비용이 증가 거래 규모가 커지면서 A 커브가 오른쪽으로 기울기가 커짐

12 Efficiency Tradeoff and Scale

13 Efficiency Tradeoff and Scale
The combined differential efficiency (C) sharply declines for low asset specificity The degree of asset specificity at which market is just competitive with vertical integration declines. 시장규모가 증가하면 시장거래 영역이 감소하게 됨 Vertical integration is preferred to market exchange over a larger range of asset specificity → 따라서 거래 규모가 증가하면 수직결합이 증가하는 효과

14 Conclusions From the Efficiency Tradeoff Model
Inputs in the firm of routine products and services are likely to be procured in the market (supplier’s economies of scale): asset specifity가 없는 표준화된 부품이나 상품은 시장거래를 통해 조달되는 경향이 높음 When a firm’s product market activities is large in scale, it is likely to be vertically integrated: 시장규모가 커질 수록 내부생산 가능성이 증가 Presence of relationship-specific assets will tilt the advantage in favor of vertical integration. Asset specificity가 증가할 수록 내부생산이 증가하는 경향

15 Real-World Evidence 1800년대 후반에 생산기술 및 교통 통신의 발전으로 시장규모가 커지고 규모의 경제효과가 크게 나타나면서 수직결합이 가속화. 이 시기에 유통부문에 대한 전방 통합 및 원재료 등에 대한 후방통합이 활발하게 일어남 GM is more vertically integrated than Ford is, for the same asset specificity (scale) In aerospace, greater design specificity increases the likelihood of vertical integration of production. 항공기 생산에서 asset specificity가 높은 부품은 외주를 주기보다는 직접 생산하는 경향이 높음 Among utilities, mine-mouth plants are more likely to be integrated compared with other plants: location specificity . 전력회사는 석탄 광산과 인접하여 건설하거나 인접한 탄광과 철도로 연결되는 경우가 많은데 이러한 location specificity가 있는 경우 수직결합 가능성이 높음

16 Real-World Evidence In the electronics components industry firms rely on own sales force: when there is greater asset specificity. 제품의 특성을 교육하고 이해하는데 많은 시간이 소요되어 인적 자본 투자가 많이 필요한 경우 when they are larger manufacturers when performance measurement is more difficult: 제품을 파는 것만이 아니고 친절, A/S 등 측정하기 어려우면서 고객만족도에 영향을 주는 요소들은 실적을 평가하기 어려운 경우

17 The Virtual Corporation
Advances in technology have reduced coordination costs and reduced asset specificity. 또는 asset specificity가 존재하는 경우에도 기술의 발전으로 낮은 비용으로 극복이 가능. Ex. 로봇기술, 제어기술의 발전으로 다른 특성을 갖는 제품을 한 개 라인에서 생산이 가능 → 결과적으로 시장거래 비용이 획기적으로 감소 Consequently, the advantage of market over vertical integration has steadily increased Virtual corporation is the limit when each element in the vertical chain will be independent. 생산만이 아니고 디자인, 마케팅, 브랜딩 등의 거의 모든 기업활동의 외부 시장조달이 가능

18 Vertical Integration and Asset Ownership
Make-or-buy decision is essentially a decision regarding ownership rights If contracts were complete, it will not matter who owned the assets in the vertical chain With incomplete contracts, ownership pattern determines the willingness of each party to make relationship-specific investments Ex. 제철소와 석탄광산은 소유가 분리되어 있다면 가까이 위치해서 제철소를 지으려는 유인이 감소

19 Vertical Integration and Asset Ownership
Three ways to organize a transaction in the vertical chain The two units are independent (non integration) Upstream unit owns the assets of the downstream unit (forward integration) Downstream unit owns the assets of the upstream unit (backward integration)

20 Asset Ownership and Integration
The form of integration affects the incentives to invest in relationship-specific assets Whether vertical integration is optimal or not depends on the relative contribution to value added by each party’s investment

21 Asset Ownership and Integration
If the investments by the upstream player and the downstream player are of comparable importance, market exchange is preferred (양측이 모두 relation-specific investment가 상대방에게 중요할 경우 상호 hold-up 가능성이 적음) If the investment by one player is more important in value creation, vertical integration is preferred specific asset에 투자한 쪽이 상대방에게 hold-up 당할 가능성이 높아짐 → vertical integration이 유리함

22 Asset Ownership and Integration
Asset ownership is an important dimension of vertical integration There could be degrees of integration depending on the extent of control over specialized assets Example: Auto manufacturers can use independent suppliers for body parts but own the dies and stamping machines. Hold up 가능성 때문에 부품회사에서 많은 비용을 투자하여 다이나 stamping 기계를 설치하려는 유인이 낮음

23 Vertical Integration in Insurance Industry
보험회사는 생명보험의 경우는 주로 내부 sales 담당 직원이 영업. 반면 손해보험의 경우는 독립적인 보험대리인을 통한 sales - 기본적인 핵심은 누가 고객의 리스트를 관리하는가 하는데 있음 In whole life insurance, sales agents’ efforts in renewal are unimportant and insurers tend to use in-house sales forces and tend to own client lists. 생명보험이나 연금보험은 장기 상품으로 중간에 보험회사를 바꾸거나 할 유인이 별로 없음. 따라서 직원을 통해 상품을 판매하고 고객 리스트를 보험회사가 보유 In term life insurance, renewal efforts are more important and independent agents who own client lists are used. 단기 생명보험이나 손해 보험 등 보험을 갱신할 깨 납입 보험료에 따라 보험회사를 바꿀 가능성이 높은 경우 독립적인 agent를 통한 상품 판매가 일반적. 독립적인 agent는 고객 리스트에 대한 배타적 소유권을 갖기 때문에 보험회사에 의한 hold up 가능성이 없음. 따라서 고객을 확보하기 위한 적극적 투자

24 Human Assets and Vertical Integration
When physical assets are involved, upstream (or downstream) asset ownership can be used along with market exchange: 기계설비 등 자산은 M&A를 통해 사용권 확보가 쉬움 When human assets are important, acquiring control of these assets can be done only through a full fledged vertical integration: 인적 자원은 Vertical Integration을 하여 의사 결정권을 확보 한다 해도 일을 열심히 할 것인가 하는 것은 본인의 의사에 이해 결정. 경우에 따라 중요한 인적 자원이 수직결합과 함께 다른 회사로 옮길 수 도 있음

25 Alternatives to Vertical Integration
Tapered integration (making some and buying the rest) Joint ventures and strategic alliances Long term collaborative relationships Implicit contracts between firms

26 Tapered Integration A firm may produce part of its input on its own and purchase the rest A firm may sell part of its output through in-house sales efforts and sell the rest through independent distributors

27 Tapered Integration: Advantages
Additional input/output channels without massive capital investments. 많은 자본 투자 없이 유통회사나 또는 생산요소 생산의 확대가 가능 Information about costs and profitability from internal operations can help in negotiating with market firms Threat of self manufacture can discipline external channels

28 Tapered Integration: Advantages
Internal supply capabilities will protect against potential holdups Potential expansion of external supply can impose discipline on in-house production

29 Tapered Integration: Disadvantages
Possible loss of economies of scale Coordination may become more difficult since the two production units must agree on product specifications and delivery times 내부생산 부서가 비효율적일 경우 이를 바탕으로 외부 공급 조건을 평가할 가능성

30 Tapered Integration in Gasoline Retailing
Major oil refiners sell through their own service stations and through independently owned stations. 1930년대 중반까지는 정유회사 소유 주유소 체제. 1930년대 중반 이후 개인 소유 주유소가 확대되어 왔음. 주유소의 경우 자동차 정비를 같이 하는데 정비 부문에 대한 감시나 quality control이 어렵다는 점이 개인 소유 주유소가 확대된 이유 As gas stations have moved away from auto repair and maintenance services, the proportion of company owned stations are growing. 또한 개인 주유소의 가격정책을 통제할 수 없다는 점도 최근 정유회사에서 주유소를 직접 운영하는 것이 증가해온 또 다른 이유임

31 Strategic Alliances and Joint Ventures
Alliances involve cooperation, coordination and information sharing for a joint project while the participating firms continue to be independent A joint venture is an alliance where a new independent organization is created and jointly owned by the promoting firms

32 Strategic Alliance Alliances and joint ventures are intermediate solutions, between market exchange and vertical integration Rather than rely on contracts, an alliance relies on trust and reciprocity Disputes are rarely litigated but resolves through negotiation

33 Strategic Alliance - Scenarios
Uncertainty surrounding future activities prevents the parties from going into the specifics of those decisions in a contract - Transactions are complex and one cannot count on contract law to “fill the gaps” Existence of relationship-specific assets and potential holdup problem also prevent from depending on contracts

34 Strategic Alliance - Scenarios
Any one party does not have the expertise to organize the transaction internally Market opportunity that induced the transaction is not expected to last very long, making a long term contract or merger unattractive Regulatory environment necessitates acquiring a local partner for the venture Ex. 중국에 투자하는 기업들은 중국의 규제로 인해 대부분 중국 기업과 합작하는 형태로 진출

35 Collaborative Relationships: 일본의 그룹기업, Keiretsu
Japanese industrial firms appear to be less vertically integrated compared to their western counterparts Japanese firms organize the vertical chain using long term collaborative relationship among firms rather than arm’s length transactions Recent trend in the west is to choose vertical disintegration and focus on core competencies

36 Collaborative Relationships
Two major types of collaborative relationships are found in Japan Subcontractor networks: 협력업체 관계 Keiretsu: 지분 소유를 통한 계열사 관계

37 Subcontractor Networks
Japanese manufacturers maintain close, informal, long term relationship with their network of subcontractors: 일본의 경우 대기업에 납품하는 부품회사나 하청업체 등은 대기업과 장기적 거래관계를 유지할 뿐 아니라 부품의 개발과정에 참여. 영국이나 미국의 부품회사들은 모기업이 발주한 설계도에 따라 생산할 뿐 개발과정에 참여하지 않음. 또한 장기적 거래관계가 유지된다는 보장이 없음 The typical relationship between a manufacturer and a subcontractor involves far more asset specificity in Japan than in the West

38 Keiretsu Members with strong institutional linkages
Links further strengthened by social affiliation and personal relationship among executives Easy coordination and no holdups when vertical chain activities are performed by keiretsu members

39 Evidence of Keiretsus Recent research indicates that Keiretsus are not what they were thought to be Members borrow from their central banks as well as from outside banks Members have extensive business dealings outside their Keiretsus Profitability of Keiretsus have always been average

40 Implicit Contracts Implicit contracts are unstated understanding between firms in a business relationship Longstanding relationship between firms can make them behave cooperatively towards each other without any formal contracts

41 Implicit Contracts The threat of losing future business (and the future stream of profits) is enough to deter opportunistic behavior in any one period The desire to protect one’s reputation in the market place can be another mechanism that makes implicit contracts viable