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

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.

[1]  Jeffrey H. Dyer,et al.  Strategic Supplier Segmentation: The Next “Best Practice” in Supply Chain Management , 1998 .

[2]  Jeffrey H. Dyer,et al.  The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage , 1998 .

[3]  S. Lippman,et al.  A BARGAINING PERSPECTIVE ON RESOURCE ADVANTAGE , 2003 .

[4]  B. Curtis Eaton,et al.  The Geometry of Supply, Demand, and Competitive Market Structure with Economies of Scope , 1991 .

[5]  R. Rumelt,et al.  What in the World is Competitive Advantage , 2003 .

[6]  Adam Brandenburger,et al.  Value-based Business Strategy , 2005 .

[7]  J. Gans,et al.  A Bargaining Perspective on Strategic Outsourcing and Supply Competition , 2007 .

[8]  P. Klemperer,et al.  Do Firms' Product Lines Include Too Many Varieties? , 1993 .

[9]  R. Willig,et al.  Economies of scope , 1981 .

[10]  B. Uzzi,et al.  Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing , 1999, The New Economic Sociology.

[11]  Glenn M. MacDonald,et al.  The Simple Analytics of Competitive Equilibrium with Multiproduct Firms , 1987 .

[12]  Nicolaj Siggelkow.  Evolution toward Fit , 2002 .

[13]  Nicolaj Siggelkow,et al.  Why Focus? A Study of Intra-Industry Focus Effects , 1998 .

[14]  Henry Mintzberg.  Musings on management. Ten ideas designed to rile everyone who cares about management. , 1996, Harvard business review.

[15]  Glenn R. Carroll,et al.  Organizational processes of resource partitioning. , 2002 .

[16]  M. Hannan,et al.  The Population Ecology of Organizations , 1977, American Journal of Sociology.

[17]  Michael D. Ryall,et al.  How Do Value Creation and Competition Determine Whether a Firm Appropriates Value? , 2004, Manag. Sci..

[18]  Stephen P. Bradley,et al.  Wal-Mart Stores in 2003 , 2003 .

[19]  S. Fawcett,et al.  Ten guiding principles for high-impact SCM , 2004 .

[20]  J. Gans,et al.  Operationalizing Value-Based Business Strategy , 2005 .

[21]  Nicolaj Siggelkow,et al.  Why Focus? A Study Of Intra-Industry Focus Effects: INTRA-INDUSTRY FOCUS EFFECTS , 2003 .

[22]  Ron Adner,et al.  A demand‐based perspective on sustainable competitive advantage , 2006 .

[23]  Adam Brandenburger,et al.  Biform Games , 2007, Manag. Sci..

[24]  Glenn R. Carroll,et al.  Concentration and Specialization: Dynamics of Niche Width in Populations of Organizations , 1985, American Journal of Sociology.

[25]  Harborne W. Stuart,et al.  Efficient spatial competition , 2004, Games Econ. Behav..

[26]  M. Porter.  What is strategy , 2000 .

[27]  Paul R. Milgrom,et al.  Employment Contracts, Influence Activities, and Efficient Organization Design , 1987, Journal of Political Economy.

[28]  G. Stigler.  The Division of Labor is Limited by the Extent of the Market , 1951, Journal of Political Economy.

[29]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[30]  D. Maister.  Managing the Professional Service Firm , 1997 .