ECMC40 Chapter 3
-Vertical chain: the process that begins with the acquisition of raw materials and ends
with the distribution and sale of finished G & S
-Vertical boundaries: of a firm define the activities that the firm itself performs as
opposed to purchases from independent firms in the market. ( ie vs outsourcing)
-Make or buy decision: a firm’s decision to perform an activity itself or to purchase it
from an independent firm. “Make” means that the firm performs the activity itself; “buy”
means it relies on an independent firm to perform the activity perhaps under a contract
-Goods in an economy “flow”: along a vertical chain from raw materials and component
parts to manufacturing through distribution & retailing.
Early steps in the vertical chain are upstream in the production process
Later steps are downstream
-Large hierarchial enterprises in the 1900s performed these support services
(figure 3.2) themselves to coordinate the flow of production through the vertical chain.
Sometimes, these support activities became principal sources of value creation in
-Market firms: specialists in the market. They include many recognized leaders in their
By using these firms, a manufacturer can obtain a superior marketing program, low cost
distribution, and accurate reports about payroll, sales & inventories without having to
perform any of the tasks itself.
However, its not always desirable to use the market, a critical task for any firm is to
“define its boundaries” by determining what tasks to make and what other to buy.
-Defining boundaries: regardless of a firm’s position along a vertical chain it needs to
define its boundaries. To resolve the make or buy decision the firm must compare the
benefits and costs of using the market as opposed to performing the activity in house.
Benefits & costs of using the market
1) Market firms (MF) can achieve EOS
that in-house departments producing
only for their own needs cannot.
1) Coordination of production flows
through the VC may be compromised
when an activity is purchased from
an independent market firm rather
than performed in house.
2) MFs are subject to the discipline of
the market and must be efficient &
innovative to survive.
Overall corporate success may hide
2) Private information may be leaked
when an activity is performed by an
independent market firm.