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

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.

• 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.