Decisions to Vertically Integrate in the Construction Industry
26 February 2011
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Contents
Assignment Question 3
Introduction 3
The construction industry & the division of labour 3
Key Characteristics of Transaction Cost Economics 3
The Vertical boundaries of the firm 3
Vertically integrated firms 3
Vertical boundaries 3
Defining the boundaries 3
Conclusion 3
Assignment Question
Identify the key characteristics of TCE.
Analyse the vertical boundaries of a firm by describing the critical role played by coordination in a vertical chain.
Use the issue tree in Figure 5.4 pp144 of Besanko as a guide to your reply.
Introduction
In a time of uncertainty; the construction industry which has in the past been widely criticised for its lack of trust, inefficiency and instability are leaving clients with little choice but to vertically integrate some of the functions that has previously been bought through the market.
This was evident in a current article in the Building magazine which recorded the following:
Fears are growing that housing associations are looking to take their repairs and maintenance work back in house in response to the collapses of Rok and Connaught and the rise in VAT.
The concerns come after housing association L&Q became the latest to launch a contracting arm last week. Other housing associations reliant on Connaught or Rok have set up in-house contracting arms, called Direct Labour Organisations (DLOs), using staff made redundant when the firms collapsed.
Analysts say the move to DLOs is being driven by clients worried about maintenance contractors going bust, and by the rise in VAT to 20% in January, which means in-house operations could generate 20% savings.
Chris Durkin, chief executive of Willmott Dixon support services, said: “A number have been forced to go in-house, a number have considered
| |
Contents
Assignment Question 3
Introduction 3
The construction industry & the division of labour 3
Key Characteristics of Transaction Cost Economics 3
The Vertical boundaries of the firm 3
Vertically integrated firms 3
Vertical boundaries 3
Defining the boundaries 3
Conclusion 3
Assignment Question
Identify the key characteristics of TCE.
Analyse the vertical boundaries of a firm by describing the critical role played by coordination in a vertical chain.
Use the issue tree in Figure 5.4 pp144 of Besanko as a guide to your reply.
Introduction
In a time of uncertainty; the construction industry which has in the past been widely criticised for its lack of trust, inefficiency and instability are leaving clients with little choice but to vertically integrate some of the functions that has previously been bought through the market.
This was evident in a current article in the Building magazine which recorded the following:
Fears are growing that housing associations are looking to take their repairs and maintenance work back in house in response to the collapses of Rok and Connaught and the rise in VAT.
The concerns come after housing association L&Q became the latest to launch a contracting arm last week. Other housing associations reliant on Connaught or Rok have set up in-house contracting arms, called Direct Labour Organisations (DLOs), using staff made redundant when the firms collapsed.
Analysts say the move to DLOs is being driven by clients worried about maintenance contractors going bust, and by the rise in VAT to 20% in January, which means in-house operations could generate 20% savings.
Chris Durkin, chief executive of Willmott Dixon support services, said: “A number have been forced to go in-house, a number have considered
Bibliography: Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2010). Economics of Strategy. Hoboken: John Wiley & SOns. Chang, C.-Y. &. (2007). The hold-up problem in the management of construction projects: a case study of the Channel Tunnel. International Journal of Project Management 25 (4) , 394-404. Gardener, J. (2011). Rok and Connaught force repairs in-house. Building . SCHÖNSLEBEN, P., BREMEN, P., OEHMEN, J., & ALARD, R. (2006). Transaction Costs in Global Supply Chains of Manufacturing Companies. iii.sci.org . Smith, A. (1776). An inquiery into the Nature and Causes of the Wealth of Nations. The Economist. (2010). Why do firms exist? The Economist December 18th - 31st , 122. Wikipedia. (2011, February 26). Wikipedia. Retrieved February 26, 2011, from Division of Labour: http://en.wikipedia.org/wiki/Division_of_labour ----------------------- |The Public Sector Client |Decisions to vertically integrate in the construction industry |