Transaction Cost Advantages And Disadvantages

Submitted By marios412
Words: 974
Pages: 4

Transaction costs (SA) - These are all the costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets. When companies transact in the open market, they incur the costs of searching for an economic agent with whom to contract, negotiating, monitoring, and enforcing the contract. These costs can incur within the firm e.g. administrative costs for when recruiting and retaining employees.
Introduction Phase (SA) - Early adopters, slow market growth, price is high, market size is small, few if any competitors, non-price competition, differentiation strategy and the objective is to achieve market acceptance.
Growth phase - Early majority, high market growth, falling price, market size is larger, many competitors, non-price competition, differentiation strategy and the objective is to stake out a strong strategic position.
Maturity phase - Late majority, none to moderate growth, low price, largest market size, moderate but large number of competitors, price competition, cost-leadership or integration and maintaining strategic position.
Decline phase - Laggards, negative market growth, low-high price, small-moderate market size, few if any competitors, price or non-price competition, cost-leadership/differentiation or integration and exit/harvest or consolidate is the strategic objective.
Vertical integration (SA) - Is the firms’ ownership of its production of needed inputs or of the channels by which it distributes its outputs. Vertical integration is typified by one firm engaged in different parts of production. Vertical integration can be measured by a firm's valued added e.g. what % of a firm's sales is generated within the firm's boundaries? Fully vertically integrated = All activities are conducted within the boundaries of the firm. Vertically disintegrated = Firms that focus on only one or a limited few stages of the industry value chain. Industry value chain (Backward and Forward Vertical Integration) = stage 1 - Raw materials, stage 2 - Components and intermediate goods, stage 3 - Final assembly and manufacturing, stage 4 - Marketing and Sales and Stage 5 - CS and support.
Benefits and risks of vertical integration - Benefits include securing critical supplies, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialised assets. Risks include increasing costs, reducing quality, reducing flexibility and increasing the chance for legal repercussions. Vertical integration contributes to competitive advantage if the incremental value is > than the incremental costs of the specific corporate level strategy.
Define horizontal integration and the advantages (SA) - Process of acquiring and merging with competitors that handle the same part of the production process, leading to industry consolidation. 1) Reduction in competitive intensity, 2) lower costs, 3) increase differentiation, and 4) access new markets and distribution channels. This type of corporate strategy can improve a firm's strategic position in a single industry. Strategic inflection point (SA) - An event that changes the way we think and act." Inflection points can be a result of action taken by a company, or through actions taken by another entity, that has a direct impact on the company. Inflection points in technology include the advent of the Internet and smart phones (turning point after which dramatic changes, with either positive or negative results are expected). Differentiation strategy (MC) - Generic business strategy that seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping the firm's cost structure at the same or similar