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The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships

Author

Listed:
  • Olivier Chatain

    () (INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France)

  • Peter Zemsky

    () (INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France)

Abstract

Horizontal scope--the set of products and services offered--is an important dimension of firm strategy and a potentially significant source of competitive advantage. On one hand, the ability to build close buyer-supplier relationships over multiple transactions can give an advantage to broad firms that offer buyers "one-stop shopping." On the other hand, the existence of organizational tradeoffs can give an advantage to firms that specialize in a narrower range of products or services. We develop a biform game that incorporates this tension and show how the use of three generic scope strategies--specialist, generalist, and hybrid--depends on organizational tradeoffs, client-specific scope economies, barriers to entry, heterogeneity in buyer task requirements, and the bargaining power of suppliers relative to buyers. We then use the model to study a variety of issues in supply chain management, including the gains to coordinating suppliers, the optimal level of buyer power, and the desirability of subsidizing suppliers. One of our objectives is to show how biform games, which introduce unstructured negotiations into game theory analysis, can be used to develop applied theory relevant to strategy. Generalizing from our stylized model, we identify a class of biform games involving buyers and suppliers that is useful for strategy analysis. Games in this class have the attractive property of each supplier's share of industry total surplus being the product of its added value and its relative bargaining power.

Suggested Citation

  • Olivier Chatain & Peter Zemsky, 2007. "The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships," Management Science, INFORMS, vol. 53(4), pages 550-565, April.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:4:p:550-565
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0680
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    References listed on IDEAS

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    Cited by:

    1. repec:spr:cejnor:v:26:y:2018:i:1:d:10.1007_s10100-017-0483-x is not listed on IDEAS
    2. Tarziján, Jorge, 2013. "The emergence of world-class companies in Chile: Analysis of cases and a framework to assess integration decisions," Journal of Business Research, Elsevier, vol. 66(10), pages 1728-1735.
    3. Ye, Guangliang & Mukhopadhyay, Samar K., 2013. "Role of demand-side strategy in quality competition," International Journal of Production Economics, Elsevier, vol. 145(2), pages 696-701.
    4. Tomasz Obloj & Peter Zemsky, 2015. "Value creation and value capture under moral hazard: Exploring the micro-foundations of buyer– supplier relationships," Strategic Management Journal, Wiley Blackwell, vol. 36(8), pages 1146-1163, August.
    5. repec:eee:jbrese:v:85:y:2018:i:c:p:127-141 is not listed on IDEAS
    6. Marco Giarratana & Alessandra Perri, 2014. "Product and Marketing Actions in a Competitive Scenario," Working Papers 30, Department of Management, Università Ca' Foscari Venezia.
    7. repec:bla:stratm:v:38:y:2017:i:10:p:1964-1985 is not listed on IDEAS
    8. Michael D. Ryall & Olav Sorenson, 2007. "Brokers and Competitive Advantage," Management Science, INFORMS, vol. 53(4), pages 566-583, April.
    9. Mohammad Keyhani & Moren Lévesque & Anoop Madhok, 2015. "Toward a theory of entrepreneurial rents: A simulation of the market process," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 76-96, January.
    10. Feess, Eberhard & Thun, Jörn-Henrik, 2014. "Surplus division and investment incentives in supply chains: A biform-game analysis," European Journal of Operational Research, Elsevier, vol. 234(3), pages 763-773.
    11. Jens Schmidt & Richard Makadok & Thomas Keil, 2016. "Customer-specific synergies and market convergence," Strategic Management Journal, Wiley Blackwell, vol. 37(5), pages 870-895, May.
    12. repec:eee:respol:v:47:y:2018:i:8:p:1478-1494 is not listed on IDEAS
    13. Günter Fandel & Jan Trockel, 2016. "Investment and lot size planning in a supply chain: coordinating a just-in-time-delivery with a Harris- or a Wagner/Whitin-solution," Journal of Business Economics, Springer, vol. 86(1), pages 173-195, January.

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