Oil exploration

1
Figure 6.1 A set of supply chains
Petrol for vehicles
Car production
Motor cycle production
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
2
Figure 6.1b Upstream vertical integration
Petrol for vehicles
Car production
Motor cycle production
Iron ore extraction and processing
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
3
Figure 6.1c Downstream vertical integration
Petrol for vehicles
Car production
Motor cycle production
Iron ore extraction and processing
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
4
Figure 6.1d Product related (or technology
related) diversification
Petrol for vehicles
Car production
Motor cycle production
Iron ore extraction and processing
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
5
Figure 6.1e Conglomerate (unrelated)
diversification
Petrol for vehicles
Car production
Motor cycle production
Iron ore extraction and processing
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
6
Table 6.1
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Figure 6.2 Necessary relationships when engine
manufacture is being done in-house by a car
assembler
Land owners
Suppliers of engine materials and components
In-house customers (assemblers) and outbound
logistics
Engine manufacturing
Finance providers
Labour requirements
Government
8
Figure 6.3 Engine manufacturing (by a car
assembler) as a collection of functional
activities
Property management
Purchasing of materials and components
Finance Management
Engine manufacturing
Internal and External Sales and Logistics
Human Resource Management
External affairs
9
Figure 6.4 The car production supply chain
Iron ore extraction processing
Transportation and storage of steel
Inbound logistics of car engines
Car assembly
Car storage and transportation
Car retailing
10
Figure 6.5 A vertically disintegrated car
production industry
Iron ore extraction processing
Transportation and storage of steel
Denotes exchange through market transactions
Engine manufacture
Inbound logistics of car engines
Car assembly
Car storage and transportation
Car retailing
11
Figure 6.6 A partially vertically integrated car
production business (core car assembly)
Iron ore extraction processing
Transportation and storage of steel
Denotes exchange through market transactions
Engine manufacture
Inbound logistics of car engines
Car assembly
Car storage and transportation
Car retailing
12
Output of cars per period
A
D

C

½ A
0
Output of lorries per period
½ B
B
Figure 6.7 Economies of scope in the production
of two goods
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Market contracts if frequency low. Vertical
integration if frequency high
Uncertainty
High
Vertical integration
Vertical integration
Low
Market contracts
Long-term contracting
Vertical integration
Low for both parties
High for both parties
High for one party, low for the other
Asset specificity
Figure 6.8 Governance structure, asset
specificity and uncertainty
14
Figure 6.9 Michael Porters 5 Forces Model of
Competition
15
Additional slides

• Not currently used from here on

16

• We look at things from the point of view of one
  firm a car assembly business.
• Right now, it gets all its inputs via the market
  and sells all its output via the market

17
A car assembly business
Car assembly
18

• This firm can be thought of as one component of a
  larger car production supply chain

19

• Let us focus only on the central part of this
  supply chain.
• We begin with a situation in which each activity
  along the supply chain is undertaken by a
  separate firm.

20

• Vertical integration
• But there may be good reasons why the car
  assembler might choose to link upstream and/or
  downstream with other parts of the supply chain
  
• And so become a vertically integrated company.

21
Production Costs
Production Costs
Business 1
Business 2
Support and Organisation Costs
Support and Organisation Costs
Figure 5.9 Costs for a collection of independent
businesses
22

Corporation Costs
Potential synergy (Cost savings)
Production Costs
Production Costs
Business 1
Business 2
Support and Organisation Costs
Support and Organisation Costs
Potential synergy (Cost savings)
Figure 5.10 Costs and the corporation
23
Support activities
Accounting Finance Human Resource
Management Legal Marketing
24

• Now envisage three separate supply chains

25

• Horizontal integration
• Meanwhile, distinct firms undertaking iron ore
  extraction and processing activities might choose
  to combine (or integrate)
• and so become a horizontally integrated single
  company.
• (Two separate car assembly firms might also
  choose to combine, but we dont show this here).

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Production and processing activities
Production and processing activities
Iron ore extraction and processing
Iron ore extraction processing
27
Motor cycle production activities
Car production activities
Iron ore extraction
and processing
storage of steel
Transportation and
28

• Vertical and horizontal integration
• It may make sense for two separate materials
  transport and storage companies to merge too.
• Moreover, it may be sensible to combine the
  integrated materials storage and transport
  company with the combined extraction and
  processing company.
• If this were to occur, it would generate a single
  horizontally and vertically integrated company.

29

• Economies of scope
• (Related diversification)
• There are potential synergies between car and
  motor cycle production activities. We might
  observe integration among such businesses where
  economies of scope exist, generating those
  synergies.

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Production and processing activities
Iron ore extraction processing
Transportation and storage of steel
Transportation and storage of steel
Engine manufacture
Engine manufacture
Inbound logistics of engines
Inbound logistics of car engines
Motor cycle assembly
Car assembly
Motor cycle transportation and storage
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
31
Production and processing activities
Engine manufacture
Engine manufacture
Inbound logistics of engines
Inbound logistics of car engines
Motor cycle assembly
Car assembly
32
A partially vertically integrated car production
business (core car assembly)
Iron ore extraction processing
Transportation and storage of steel
Denotes exchange through market transactions
Car assembly
Car retailing
33
Production and processing activities
Production and processing activities
Production and processing activities
Iron ore extraction and processing
Iron ore extraction processing
Oil exploration
Transportation and storage of steel
Transportation and storage of steel
Oil field development
Engine manufacture
Engine manufacture
Crude oil extraction
Inbound logistics of engines
Crude oil transportation and storage
Inbound logistics of car engines
Motor cycle assembly
Oil refining into petrol
Car assembly
Motor cycle transportation and storage
Petrol storage and transportation
Car storage and transportation
Motor cycle retailing
Petrol retailing
Car retailing
34
ARCHITECTURE

• The boundaries of a firm
• Horizontal and vertical integration
• Integration associated with economies of scope
• Other forms of linkage ?

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High
4
6
5
Uncertainty/complexity
Low
1
2
3
Low for both parties
High for both parties
High for one party, low for the other
Asset specificity
Figure x Asset specificity and uncertainty