Note on Managing the Value Chain: Governance, Location, and Firm Scope Decisions

by: Robert E. Kennedy

Publication Date: December 7, 2010
Length: 8 pages
Product ID#: 1-429-011

Core Disciplines: Economics, Operations Management/Supply Chain, Strategy & Management

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Teaching Note

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This note explains the considerations involved in determining a firm’s vertical, horizontal, and geographic scope. It is organized into five sections: An introduction that presents important questions related to strategy formulation that managers face after mapping their firm’s value chain; a second section that provides a brief introduction to Transactions Cost Economics, a framework that helps explain firm governance and scope decisions; a third section that links TCE considerations to decisions about a firm’s vertical and horizontal scope; a fourth section that explores the issue of where to locate activities; and a fifth section that summarizes.

Teaching Objectives

After reading and discussing the material, students should:

  • Explain how transactions cost economics (TCE) influences scope decisions.
  • The transactions cost section briefly covers Coase and Williamson and highlights how TCE interacts with managerial decisions.
  • Discuss the differences between vertical and horizontal scope.
  • Assess how geographic scope can affect competitive advantage.