Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Petrol for vehicles Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Motor cycle production Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Car production Figure 6.1 A set of supply chains

Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Petrol for vehicles Iron ore extraction and processing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Motor cycle production Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Car production Figure 6.1b Upstream vertical integration

Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Petrol for vehicles Iron ore extraction and processing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Motor cycle production Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Car production Figure 6.1c Downstream vertical integration

Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Petrol for vehicles Iron ore extraction and processing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Motor cycle production Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Car production Figure 6.1d Product related (or technology related) diversification

Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Petrol for vehicles Iron ore extraction and processing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Motor cycle production Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Car production Figure 6.1e Conglomerate (unrelated) diversification

Table 6.1

Suppliers of engine materials and components In-house customers (assemblers) and outbound logistics Government Land owners Finance providers Labour requirements Engine manufacturing Figure 6.2 Necessary relationships when engine manufacture is being done in- house by a car assembler

Purchasing of materials and components Internal and External Sales and Logistics External affairs Property management Finance Management Human Resource Management Engine manufacturing Figure 6.3 Engine manufacturing (by a car assembler) as a collection of functional activities

Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Figure 6.4 The car production supply chain Tyre manufacture Seat production

Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Figure 6.5 A vertically disintegrated car production industry Denotes exchange through market transactions

Iron ore extraction & processing Transportation and storage of steel Car assembly Car retailing Figure 6.6 A partially vertically integrated car production business (core = car assembly) Inbound logistics of car engines Engine manufacture Car storage and transportation Denotes exchange through market transactions

Figure 6.7 Economies of scope in the production of two goods B 0 ½ B A ½ A C D Output of cars per period Output of lorries per period

High Low Uncertainty Asset specificity Market contracts if frequency low. Vertical integration if frequency high Market contracts High for both parties Vertical integration Long-term contracting Vertical integration Low for both parties High for one party, low for the other Figure 6.8 Governance structure, asset specificity and uncertainty

Potential entrants Suppliers Competitive Rivalry Buyers Substitutes Threats of entrants Bargaining power Threats of substitutes Bargaining power Figure 6.9 Michael Porter’s 5 Forces Model of Competition

Additional slides Not currently used from here on

We look at things from the point of view of one firm: a car assembly business. Right now, it gets all its inputs via the market and sells all its output via the market

Car assembly A car assembly business

This firm can be thought of as one component of a larger “car production” supply chain:

Let us focus only on the ‘central’ part of this supply chain. We begin with a situation in which each activity along the supply chain is undertaken by a separate firm.

Vertical integration But there may be good reasons why the car assembler might choose to link ‘upstream’ and/or ’downstream’ with other parts of the supply chain … And so become a vertically integrated company.

Business 1 Support and Organisation Costs Production Costs Business 2 Support and Organisation Costs Production Costs Figure 5.9 Costs for a collection of independent businesses

Business 1 Support and Organisation Costs Production Costs Business 2 Support and Organisation Costs Production Costs Corporation Costs Potential synergy (Cost savings) Figure 5.10 Costs and the corporation

Accounting Finance Human Resource Management Legal Marketing Support activities Raw material extraction Transportation and storage Intermediate goods processing Transportation and storage Final manufacturing Transportation and storage Retailing Production and processing activities

Now envisage three separate supply chains:

Horizontal integration Meanwhile, distinct firms undertaking iron ore extraction and processing activities might choose to combine (or integrate)… and so become a horizontally integrated single company. (Two separate car assembly firms might also choose to combine, but we don’t show this here).

Iron ore extraction and processing Production and processing activities Iron ore extraction & processing Production and processing activities

and processing storage of steel Motor cycle production activities Iron ore extraction Transportation and Car production activities

Vertical and horizontal integration It may make sense for two separate materials transport and storage companies to merge too. Moreover, it may be sensible to combine the integrated materials storage and transport company with the combined extraction and processing company. If this were to occur, it would generate a single horizontally and vertically integrated company.

Economies of scope (Related diversification) There are potential synergies between car and motor cycle production activities. We might observe integration among such businesses where economies of scope exist, generating those synergies.

Petrol retailing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Production and processing activities

Engine manufacture Inbound logistics of engines Motor cycle assembly Engine manufacture Inbound logistics of car engines Car assembly Production and processing activities

Iron ore extraction & processing Transportation and storage of steel Car assembly Car retailing A partially vertically integrated car production business (core = car assembly) Inbound logistics of car engines Engine manufacture Car storage and transportation Denotes exchange through market transactions

Oil exploration Oil field development Crude oil extraction Crude oil transportation and storage Oil refining into petrol Petrol storage and transportation Petrol retailing Production and processing activities Iron ore extraction and processing Transportation and storage of steel Engine manufacture Inbound logistics of engines Motor cycle assembly Motor cycle transportation and storage Motor cycle retailing Production and processing activities Iron ore extraction & processing Transportation and storage of steel Engine manufacture Inbound logistics of car engines Car assembly Car storage and transportation Car retailing Production and processing activities

ARCHITECTURE The boundaries of a firm: Horizontal and vertical integration Integration associated with economies of scope Other forms of linkage ?

High Low Uncertainty/complexity Asset specificity 4 1 High for both parties Low for both parties High for one party, low for the other Figure x Asset specificity and uncertainty