Question

8. Determine the optimal governance structure for the transactions given below. In doing so,

first describe the characteristics that define the particular transaction in terms of degree of

specificity and the degree of uncertainty. Given these characteristics, then explain which

of the governance structures (market transaction, long-term contract, or vertical integration)

would be optimal. Explain fully. Be complete.

a. A subcontractor makes wing assemblies for a particular model of a Boeing airliner.

b. General Mills contracts with a supplier of wheat grain to be used in the production

of several of its “Ready-to-Eat” breakfast cereals.

Answer 1

Introduction:-

The case study above, highlights the use of different management strategies of growth to evolve business. In general, each company interacts with numerous parties at any point of time, to ensure that the final product reaches the customer in a better way and manner.

It aims at ensuring that the product is flawless, and the company can earn long term profits using the vendors respectively. The three strategies represented and a small overview of the same are as follows:-

1) Market transaction:-

This is representative of an individual transaction which takes place between two or more companies at one single time. Without the necessity of it being replicated again.

2) Long Term Contract:-

A long term contract aims at getting goods at a relatively cheaper rate and being dependent upon a party for a long period of time and thus ensuring that the company is not vulnerable in its supplies.

3) Vertical Integration-

A Vertical Integration strategy enables a company to take a product which is manufactured by some other company for it, into its own foray of products which it manufactures. This is more evident in companies with higher availability of funds or involving higher technology to enable themselves from being protected from any quality implications.

Case Specifics:-

1. A subcontractor makes wing assemblies for a particular model of a Boeing airliner.

For this case, it is important that the company follows vertical integration instead of any other means to manufacture the product. To give an overview, Boeing manufactures top end air carriers in which millions of people will travel over the years. For this, quality control is extremely important for the company.

Its high availability of funds enables it to engage in business that it can buy any company manufacturing for it, or produce the goods themselves without having to compromise on quality.

Though presently the company seems to be using a long term contract, in the long run, vertical integration is more viable as an option. This is because it is difficult to assess the quality of the product being produced by the subcontractor and involves large number of customers and errors if any could have serious ramifications for the company.

2) B General Mills contracts with a supplier of wheat grain to be used in the production of several of its “Ready-to-Eat” breakfast cereals.

In this the company can use a strategy of long term contracts to ensure that the supplies do not stop when needed since the company will find it difficult to produce wheat themselves and small transactions would mean the company could suffer during times of reduced supplies.

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