Vertical chain is an important issue since the first day one wants to set up his own business. When a firm is considering growing its business, one of the options that management may consider is to expand along the vertical chain. We can also investigate along the vertical chain when conducting cost analysis to see any unnecessary cost incurred in some activities along the chain. The concept of vertical chain helps us to define, position and expand the business aiming at profit maximisation.
Vertical chain and Vertical boundaries
Vertical chain refers to the process by which starts from purchasing of raw materials, through the production “black-box” to delivery of goods or services. In modern world, business doesn’t end at the sales of goods, …show more content…
However a contract can never be a perfect one as we cannot anticipate all possible circumstances and contingencies, which made a contract incomplete. And we have limited capacity to possess information and foresee all possible scenarios, and this is bounded rationality. When executing a contract, we cannot make sure that information between both parties is shared and totally transparent at all time. Such asymmetry causes misinterpretation or malpractice of the contract, and above all these, when drafting an enforceable, relatively complete contract will incur a considerable cost, which is a transaction cost. This includes negotiation time and effort by both parties and related labour costs, professional fees on drafting and reviewing the contracts, Sometimes there is some extreme case that the market firm does not execute to deliver the parts to you according to contract, instead they sell these parts in the market, at a higher profit margin, and such holdup problem will break the collaboration relationship as well as bringing you further lost in time for buying parts from another supplier, drafting another contract, and the time and labour cost while waiting for the parts to deliver from the new supplier. These are all transaction costs and can be of very huge …show more content…
HK Government as the major shareholder of MTR (77%, MTR company website), the government should be speaking on behalf of HK citizen requesting the railway operation to be of quality, on time, at reasonable price. However, the top management of MTR they only care about the year-end bonus, which to be correlated to the company’s performance in terms of revenue. Making use of the fare adjustment mechanism, which was initiated by the government, the company increases the fare up to the profit ceiling under this system, so as to gain the maximum allowed profit and finally the management’s year end performance bonus is secured, sacrificing the affordability of HK citizens. Also since the focus of the management falls on the accounting performance, they sacrificed the quality of the railway services to put strict control on the expenses on maintenance technicians as well as mechanical parts replenishment. The procurement under stress of budget can only source for less good quality parts for worn and torn replacement, and sacrificing the service quality. For the last two years, the incidence rate for MTR has been increasing year by year, after its 30 years of operations. This proves this conflict of principal-agent interest will finally harm the company financially, as well as by reputation and
Vertical chain and Vertical boundaries
Vertical chain refers to the process by which starts from purchasing of raw materials, through the production “black-box” to delivery of goods or services. In modern world, business doesn’t end at the sales of goods, …show more content…
However a contract can never be a perfect one as we cannot anticipate all possible circumstances and contingencies, which made a contract incomplete. And we have limited capacity to possess information and foresee all possible scenarios, and this is bounded rationality. When executing a contract, we cannot make sure that information between both parties is shared and totally transparent at all time. Such asymmetry causes misinterpretation or malpractice of the contract, and above all these, when drafting an enforceable, relatively complete contract will incur a considerable cost, which is a transaction cost. This includes negotiation time and effort by both parties and related labour costs, professional fees on drafting and reviewing the contracts, Sometimes there is some extreme case that the market firm does not execute to deliver the parts to you according to contract, instead they sell these parts in the market, at a higher profit margin, and such holdup problem will break the collaboration relationship as well as bringing you further lost in time for buying parts from another supplier, drafting another contract, and the time and labour cost while waiting for the parts to deliver from the new supplier. These are all transaction costs and can be of very huge …show more content…
HK Government as the major shareholder of MTR (77%, MTR company website), the government should be speaking on behalf of HK citizen requesting the railway operation to be of quality, on time, at reasonable price. However, the top management of MTR they only care about the year-end bonus, which to be correlated to the company’s performance in terms of revenue. Making use of the fare adjustment mechanism, which was initiated by the government, the company increases the fare up to the profit ceiling under this system, so as to gain the maximum allowed profit and finally the management’s year end performance bonus is secured, sacrificing the affordability of HK citizens. Also since the focus of the management falls on the accounting performance, they sacrificed the quality of the railway services to put strict control on the expenses on maintenance technicians as well as mechanical parts replenishment. The procurement under stress of budget can only source for less good quality parts for worn and torn replacement, and sacrificing the service quality. For the last two years, the incidence rate for MTR has been increasing year by year, after its 30 years of operations. This proves this conflict of principal-agent interest will finally harm the company financially, as well as by reputation and