T h e B i g P i c t u r e
Where we have been:
Chapter 10 introduces students to the rm as a decision making entity with an
organizational structure and a specic goal. Key ideas in this chapter are
recognizing the importance of having access to accurate cost and protability
information for making sound business decisions (learning the di erence
between economic versus accounting prot) and using the correct notion of
eciency as a criteria for making these decisions (understanding the
di erence between technological versus economic e”ciency).
Where we are going:
The chapter provides a clear overview to the key features of the market
structures to be studied in the following chapters and will help students to be
able to compare and contrast the features as each is introduced.
Understanding the nature of the rm allows students to gain a better
appreciation of those chapters, which cover business decisions made by the
rm under di erent market structures. Chapter 11 introduces the rm’s
production function and cost functions. Chapter 12 examines rm performance
in a competitive environment, and Chapter 13 explores the rm as a
monopoly. Chapters 13 and 14 look at rm behavior under monopolistic
competition and oligopoly. Chapter 18 covers the rm’s decisions in the
resource and labor markets.
N e w i n t h e Tw e l f t h E d i t i o n
The chapter opener has been streamlined and revised. The data in the application
on market concentration in the U.S. economy have been updated. A new Worked
Problem section has been added. The Worked Problem gives students information
that can be used to calculate the opportunity costs of a bike shop. It asks the
students to use the information to calculate the costs of resources purchased in
the market, the opportunity cost of the resources owned by the bike shop, and the
opportunity cost of all the resources used by the bike shop. The Worked Problem
then demonstrates to the students how to use the information to make the
required calculations. To include the new Worked Problem without lengthening the
chapter, some problems have been removed from the Study Plan Problem and
Applications. These problems are in the MyEconLab and are called Extra Problems.
Lecture Notes
10 ORGANIZING
PRODUCTION
C h a p t e r
Organizing Production
Firms must organize their production so that it is as e”cient as possible.
Firms operate in markets that di er according to the competition within the market.
Firms organize some economic activities while markets are used for other economic
activity.
I. The Firm and Its Economic Problem
The number and scope of business rms in the economy is vast and diverse. A *rm
is an institution that hires factors of production and organizes those factors to
produce and sell goods and services.
The Firm’s Goal
The rm’s goal is to maximize its prot. If a rm fails to maximize prot it is either
eliminated through competition or bought out by other rms seeking to maximize
prot.
Do rms really maximize prot? Sometimes rms state they are willing to bear lower
prots to expand market share. Other rms claim to utilize only the “greenest” technology
in their production process. Ask the students if these are long term goals or short term
objectives for these rms. They should see that maximizing market share or using the
latest green technology is an e ort to gain greater market power and consumer loyalty in
the long run, so that the rm can raise market prices and increase its prots. Remember
that the capital necessary to pursue green production methods can only be retained if the
rms are able to match the alternative protable uses for that capital, because the owners
of that capital seek out the highest rate of return.
Accounting Prot and Economic Prot
A rm’s accounting prot is the rm’s revenues minus expenses and depreciation.
A rm’s economic pro*t is equal to total revenue minus total opportunity cost.
A Firm’s Opportunity Cost of Production
A rm’s decisions respond to opportunity cost and economic prot. A rm’s
opportunity cost of production is the value of the best alternative use of the
resources that a rm uses in production.
Opportunity costs of production include the cost of resources that are bought in the
market, owned by the rm, or supplied by the rm’s owner.
For example, renting capital means the rm is paying a rental cost re<ecting the
opportunity cost to the owner of the capital when someone else using the
capital. However, if the rm buys capital it incurs an opportunity cost of using
its own capital, which is called the implicit rental rate of capital. The
implicit rental rate includes economic depreciation, which is the change in
the market value of capital over a given period, and the interest forgone, which
is the lost potential return on the funds that were used to acquire the capital.
The return to the owner for the owner’s entrepreneurial ability is prot. The
return for this input that an entrepreneur can expect to receive on the average
is called normal pro*t. The normal prot is part of the rm’s opportunity cost.
Economic prot is a rm’s total revenue minus its opportunity cost. Because
normal prot is part of the rm’s opportunity costs, economic prot is prot over
and above normal prot.
Is economic prot a “better” measure of prot than accounting prot? Economic
prot and accounting prot really have di erent purposes, so one is not universally better
or worse than the other. Economic prot is a better measure of whether a rm is using its
resources e”ciently and is a better measure for predicting a rm’s actions, but accounting
prot may be a better measure of whether the rm is earning enough revenue to pay its
expenses. Emphasize the di erence between accounting prot and economic prot when a
rm owner is using cost information to make business decisions. Only economic prot
re<ects the full opportunity cost of making a business decision and it is vital for assessing
the true nancial health of a rm. Stress that accountants are limited in their ability to
interpret and report the costs of production: All accounting costs must either be
documented with a receipt or estimated according to strict, generally accepted accounting
procedures (GAAP). Point out the principal-agent problem that arises when rm managers
can exploit the limitations of accounting prot calculations to under–report costs and
over-report revenues to paint an articially rosy nancial picture for the rm—to the
detriment of the rm owners.
Decisions
In order to maximize economics prot, a rm must decide:
What to produce and in what quantities.
How to produce.
How to organize and compensate its managers and workers.
How to market and price its products.
What to produce itself and what to buy from others.
The Firm’s Constraints
A rm faces three basic constraints that limit its maximum prot:
Technology Constraints: A technology is any method of producing a good or
service. At the existing level of technology, a rm can produce more output only
if it hires more resources, which increases its costs and limits its prots.
Information Constraints: A rm has only limited information about the quality
and e ort of its work force, about the current and future buying plans of its
customers, and about the plans of its competitors.
Market Constraints: What a rm can sell and the prices it sets are constrained
by its customers’ willingness to pay and by the prices and marketing e orts of
other rms.
II. Technological and Economic E-ciency
There typically are many di erent combinations of inputs that can produce a specic
level of output. Technological e-ciency occurs when a rm produces a given
output by using the least amount of inputs. Economic e-ciency occurs when the
rm produces a given output at the least possible cost. An economically e”cient
production process is always technologically e”cient. But, a technologically e”cient
process might not be economically e”cient.
The table has 4 di erent methods of producing a
unit of output. The columns show the number of
units of labor and capital needed to produce 1
unit of output.
Method 2 is technologically ine”cient
because it uses the same amount of capital
but more labor than does Method 1.
Which method is economically e”cient depends on the prices of labor and
capital. If labor is $10 per unit and capital is $1, then Method 1 is economically
e”cient (with a cost of $60 per unit of output). If labor is $1 per unit and capital
is $10 per unit, then Method 4 is economically e”cient (with a cost of $30 per
unit of output).
Does technological eciency imply economic eciency (or vice versa)? Point out
that technological e”ciency minimizes the quantity of resources used in producing a given
level of output, while economic e”ciency minimizes the value of the resources being used.
Method Labor Capital
1 5 10
2 10 10
3 15 9
4 20 1
Since all resources are not equally priced (let alone equally productive), there will
inevitably be a di erence between technological and economical e”ciency.
III. Information and Organization
A rm organizes production by combining and coordinating productive resources using a
mixture of command systems and incentive systems.
A command system uses a managerial hierarchy. Commands pass downward
through the hierarchy and information (feedback) passes upward.
An incentive system uses a market-like mechanism inside the rm.
The principal-agent problem is the problem of devising compensation rules that
induce an agent to act in the best interests of a principal. For example, the
stockholders of a rm are the principals and the managers of the rm are their
agents. Stockholders wish to provide incentives to the managers to bring the
manager’s decisions in line with prot maximization. Firms cope with the
principal-agent problem in many ways:
Ownership: Firms’ owners often o er managers partial ownership of the rm to
give the managers an incentive to maximize the rm’s prots, which is the goal
of the owners.
Incentive pay: Firms’ owners can links managers’ or workers’ pay to the rm’s
performance, such as its sales, to help align the managers’ and workers’
interests with those of the owners.
Long-term contracts: Firms’ owners can tie managers’ or workers’ long-term
rewards to the long-term performance of the rm.
The Economics in the News presents the case of J.P. Morgan’s losses due to the “whale”
London trader. The case is analyzed through the lens of a principal/agent problem.
Because the case identies both the problems and the solution, it would be useful to
reinforce this example with another drawn from recent headlines.
Types of Business Organization
A proprietorship is a rm with a single owner. This owner has unlimited legal liability,
which means the owner has legal responsibility for all debts incurred by the rm up
to an amount equal to the entire wealth of the owner. The proprietor is the only one
who makes management decisions and is the sole claimant of the rm’s prot.
Prots are taxed the same as the owner’s other income.
A partnership is a rm with two or more owners. Each partner has unlimited legal
liability. The partners must agree upon a management structure and agree how to
divide up the prots from the rm. Prots from partnerships are taxed as the
personal income of the owners.
A corporation is a rm that is owned by one or more stockholders with limited
liability, which means the owners have legal liability only for the initial value of their
investment, so the personal wealth of the stockholders is not at risk if the rm goes
bankrupt. The prot of corporations is taxed twice—once as a corporate tax on the
rm’s prots, and then again as income taxes paid by stockholders receiving their
after–tax prots distributed as dividends.
Proprietorships are the most common form of business organization but corporations
account for the majority of revenue received by all types of business organization.
Student businesses: Students generally have no idea how to legally form and operate a
business. Discussing a sole proprietorship example for a simple business is helpful and
engages interest of some students. How they would legally start a business and report
income so easily often reinforces the e“ciency ideas we discuss elsewhere. The Economics
in Action case summarizes the numbers for the various types of rms in the U.S. economy
and table 10.4 nicely identies the pros and cons of each form of organization.
IV. Markets and the Competitive Environment
Perfect competition is a market structure when there are many rms, each selling
an identical product, many buyers, and with no restrictions on entry of new rms to
the industry. Both rms and buyers are well informed of the prices of the products of
all rms in the industry.
Monopolistic competition is a market structure in which a large number of rms
compete by making similar but slightly di erent products. Making a product slightly
di erent from the product of a competitor is called product di3erentiation and it
gives the rm an element of market power.
Oligopoly is a market structure in which a small number of rms compete.
Oligopolies might produce almost identical or di erentiated goods.
Monopoly arises when there is one rm, which produces a good or service that has
no close substitutes and in which the rm is protected by a barrier preventing the
entry of new rms.
Measures of Concentration
There are two measures of market concentration:
The four-*rm concentration ratio is the percentage of the value of sales
accounted for by the four largest rms in the industry. The four-rm concentration
ratio ranges between near 0 (extremely competitive) to 100 (not very competitive).
The Her*ndahl–Hirschman Index (HHI) is the square of the percentage market
share of each rm summed over the largest 50 rms (or summed over all the rms if
there are fewer than 50) in a market. The HHI ranges between near 0 (extremely
competitive) to 10,000 (a monopoly).
An Economics in Action case identies the HHI for various industries in the United States,
with cigarettes and batteries being the most concentrated and quick printers and bakeries
the least of those included. It also describes why other information may also be necessary
to conclude how competitive a specic market is.
The U.S. Justice Department uses the HHI to classify markets:
Markets with an HHI of less than 1,000 are regarded as highly competitive.
Markets with an HHI of between 1,000 and 1,800 are regarded as moderately
competitive.
Markets with an HHI above 1,800 are regarded as concentrated.
Concentration measures fail to take account of:
Geographic Scope of the Market: Concentration ratios dene the market as the
entire United States, but the relevant market might be smaller than the entire
nation (newspapers, for which the market is a city) or larger than the entire
nation (automobiles, for which the market is the entire world).
Barriers to Entry and Firm Turnover: For some industries, a few rms might be
currently operating in the market but competition in these industries might be
erce, with rms regularly entering and exiting the industry.
An Economics in Action application considers data from 1939 to 1980 that were used to
study the degree of competition in U.S. markets. These data concluded there were more
rms operating in competitive markets in 1980 than in 1939. Because the data do not
capture the degree of global competition that has resulted after 1980, the study may
understate the degree to which markets are competitive today.
Market and Industry Correspondence: Some rms produce a product with very
specic applications for which few competitors exist, but are classied in too
broad of a market (specic pharmaceutical drugs) while other rms have
diversied into several distinct product lines and are subject to more e ective
competition than what their market share for just one product might suggest.
How do economists identify the market for a product? Examples:
Geography: the (expanding) market for beer. In the early 20th century, a market
for any given brand of beer was largely limited to the geographic area within a days’ truck
drive from the brewery—if the beer traveled for too long under too high an ambient
temperature, the trip ruined the product. When technological advances in mobile
refrigeration made transporting beer over the road economical, local monopoly brands
suddenly felt the pain of competition from out-of-state brands that had never before been
observed in the local market.
Demography: the (hidden) market for cigarettes. Can you dene the market for a
cigarette manufacturer by looking only at the market among adults? What if mostly illegal,
under–aged smokers favored the brand rather than adult smokers? The sales to minors
would not likely be recorded, yet it represents market share.
Substitutability: the (changing) market for personal transportation. Can you
dene the market for personal transportation? Twenty-ve years ago it meant just the
market for cars. Today, if we wanted to determine the market share for an auto
manufacturer that happens to only sell cars, would the denition of the market for
personal (as opposed to commercial) transportation include only cars? Or should trucks,
mini-vans and SUVs be included as well? How about motorcycles and scooters?
The World Wide Web of business. Conclude the discussion of market denition by
mentioning how today, items can be produced anywhere in the world and can be
discovered and ordered from anywhere else in the world using the World Wide Web. These
items can be paid for through electronic accounts located only in cyber-space, and the
product can be shipped literally overnight to nearly any city in any developed country
around the world. Stress how di”cult it is to discern even the relevance of the term
“market” in today’s business climate.
What is the relevant market for Ford Motor Company? Ford Motor Company
advertises that it is the largest seller of pickup trucks in the United States. Should we be
concerned that Ford might have too much market power in that area of the market? Ask
the students to consider identifying what would be an appropriate denition for the
“market” such that a proper market concentration measure might be calculated. Should
only pickup trucks be included? Or should all cars and trucks be considered as possible
substitutes? How about minivans and/or SUVs?
V. Produce or Outsource? Firms and Markets
Factors of production can be coordinated by rms or by markets.
Firms coordinate production when they can do so more e”ciently than a market.
Markets coordinate production by adjusting prices and making the decisions of
buyers and sellers of factors of production consistent.
Outsourcing, buying parts or products from other rms, is an example of market
coordination.
Why might rms be more ecient at coordinating production than markets?
Firms can reduce transactions costs, which are the costs that arise from nding
someone with whom to do business, of reaching an agreement about the price and
other aspects of the exchange, and of ensuring that the terms of the agreement are
fullled.
Firms can capture economies of scale, which occurs when the cost of producing a
unit of a good falls as its output rate increases.
Firms can capture economies of scope, which occurs when a rm can use
specialized inputs to produce a range of di erent goods at a lower cost than
otherwise.
Firms can engage in team production, in which the individuals can coordinate to
specialize in mutually supporting tasks.
Because of these advantages, rms rather than markets coordinate most of our
economic activity.
Economics in Action: Apple doesn’t produce the iPhone by itself. Global supply chains,
high degrees of specialization and competition, and other innovations have made it
possible for a company to design and market a product, collect most of the prot from it,
and yet not produce it.
Why do rms exist? Ronald Coase is the classic on this topic. You might like to tell your
students about this remarkable person. Born in England in 1910, be graduated with a
bachelor of commerce degree in 1932, at the depth of the Great Depression. While still an
undergraduate, he was puzzled by the fact that he was being taught that markets
coordinate economic activity, yet all around him he could see rms that were also
coordinating economic activity. “Why?” he wondered. The question was especially
important at that time because Socialists (and the young Coase was one of them) thought
that central planning by government was superior to the market.
Quoting from Coase’s autobiography,
http://www.nobel.se/economics/laureates/1991/coase-autobio.html,
“I spent the academic year 1931-32 on my Cassel Travelling Scholarship in the United
States studying the structure of American industries, with the aim of discovering why
industries were organized in di erent ways. I carried out this project mainly by visiting
factories and businesses. What came out of my enquiries was not a complete theory
answering the questions with which I started but the introduction of a new concept into
economic analysis, transaction costs, and an explanation of why there are rms. All this
was achieved by the Summer of 1932, as the contents of a lecture delivered in Dundee in
October 1932, make clear. These ideas became the basis for my article “The Nature of the
Firm,” published in 1937, cited by the Royal Swedish Academy of Sciences in awarding me
the 1991 Alfred Nobel Memorial Prize in Economic Sciences.”
So, this amazing scholar had done his Nobel-prize-winning work at the age of 22!
An Economics in the News article discusses how Facebook plans to use data about users’
web browsing history to target specic advertisements based on these revealed interests.
It compares Facebook’s revenue to Google’s and Yahoo’s revenue.Additional Problems
Additional Problems
1. Sue can do her accounting assignment by using: a personal computer; a
pocket calculator; a pocket calculator and a pencil and paper; or a pencil and
paper. With a PC, Sue completes the job in half an hour; with a pocket
calculator, it takes 4 hours; with a pocket calculator and with a pencil and
paper, it takes 5 hours; and with a pencil and paper, it takes 14 hours. The PC
and its software cost $2,000, the pocket calculator costs $15, and the pencil
and paper cost $3.
a. Which, if any, of the methods is technologically e”cient?
b. Which methods is economically e”cient if Sue’s wage rate is
(i) $10 an hour?
(ii) $20 an hour?
(iii) $50 an hour?
2. Alternative ways of making 100 shirts a day
are in the table to the right.
a. Which methods are technologically e“cient?
b. Which method is economically e“cient if:
(i) The wage rate is $1 an hour and the rental
cost of a machine is $100 an hour?
(ii) The wage rate is $5 an hour and the rental
cost of a machine is $50 an hour?
(iii) The wage rate is $50 an hour and the rental cost of a machine is $5
an hour?
3. Sales of the rms in the pet food industry are
in the table to the right.
a. Calculate the four-rm concentration ratio.
b. What is the structure of the industry?
4. Market shares
of mat makers
are in the table to the right.
a. Calculate the Herndahl-Hirschman Index.
b. What is the structure of the industry?
Metho
d
Labor
(hours
)
Capital
(machine
s)
A 10 50
B 20 40
C 50 20
D100 10
Firm
Sales
(thousand
s of
dollars)
Big Collar, Inc 50
Shiny Coat,
Inc
75
Friendly Pet,
Inc
60
Naturals Way,
Inc
65
Other 8 rms 400
Firm
Market
share
(percent)
Made-to-last,
Inc
20
Big Wheel, Inc 17
Magic Carpet,
Inc
22
Supreme, Inc 17
Copra, Inc 24
S o l u t i o n s t o A d d i t i o n a l P r o b l e m s
1. a. All methods other than “pocket calculator with paper and pencil” are technologically
e”cient. To use a pocket calculator with paper and pencil to complete the
accounting assignment is not a technologically e”cient method because it takes
more hours than it would with a pocket calculator and it uses more capital.
b. The economically e”cient method is the technologically e”cient method that allows
the task to be done at least cost.
(i) When the wage rate is $10 an hour: Total cost with a PC is $2,005, total cost
with a pocket calculator is $55, and total cost with paper and pencil is $143.
Total cost is least with a pocket calculator.
(ii) When the wage rate is $20 an hour: Total cost with a PC is $2,010, total cost
with a pocket calculator is $95, and the total cost with paper and pencil is
$283. Total cost is least with a pocket calculator.
(iii) When the wage rate is $50 an hour: Total cost with a PC is $2,025, total cost
with a pocket calculator is $215, and total cost with pencil and paper is $703.
Total cost is least with a pocket calculator.
2. a. Methods A, B, C, and D are technologically e”cient. Compare the amount of labor
and capital used by the four methods. Start with method A. Moving from A to B to C
to D, the amount of labor increases and the amount of capital decreases in each
case.
b. The economically e”cient method in (i) is method D, in (ii) is method D, and in (iii) is
method A. The economically e”cient method is the technologically e”cient method
that allows the 100 shirts to be made at least cost.
(i) Total cost with method A is $5,010, total cost with method B is $4,020, total
cost with method C is $2,050, and total cost with method D is $1,100. Method
D has the lowest total cost.
(ii) Total cost with method A is $2,550, total cost with method B is $2,100, total
cost with method C is $1,250, and total cost with method D is $1,000. Method
D has the lowest total cost.
(iii) Total cost with method A is $750, total cost with method B is $1,200, total cost
with method C is $2,600, and total cost with method D is $5,050. Method A
has the lowest total cost.
3. a. The four-rm concentration ratio is 38.46. The four-rm concentration ratio equals
the ratio of the total sales of the largest four rms to the total industry sales
expressed as a percentage. The total sales of the largest four rms is $50,000 +
$75,000 + $60,000 + $65,000, which equals $250,000. Total industry sales equal
$250,000 + $400,000, which equals $650,000. The four–rm concentration ratio
equals ($250,000/$650,000) 100, which is 38.46 percent.
b. This industry is competitive because the four–rm concentration ratio is less than 60
percent.
4. a. The Herndahl-Hirschman Index is 2,038. The Herndahl–Hirschman Index equals
the sum of the squares of the market shares of the 50 largest rms or of all rms if
there are less than 50 rms. The Herndahl–Hirschman Index equals 202 + 172 + 222
+ 172 + 242, which equals 2,038.
b. This industry is not competitive because the Herndahl-Hirschman Index exceeds
1,800.
A d d i t i o n a l D i s c u s s i o n Q u e s t i o n s
1. What decisions go into setting up and operating your own business?
Have the students imagine starting up their own rm after graduation. Let
them dream about pursuing their passion and trying to make a living at it, and
get them to appreciate the complexities of organizing production and making
a prot. Challenge them with the following business decision issues and open
their eyes to how much risk must be endured and how much market
perceptiveness is necessary to be a successful entrepreneur.
Organizing your rm. Ask students if the initial capital requirements for
their dream business would be extensive, such as starting up a
high-performance car manufacturing rm (John DeLorean tried this, but his
attempt to raise nancial capital caused him to take a bit of a career detour—
he was tried, and acquitted, for tra”cking drugs!), or merely a modest capital
outlay. Will the size and scope of their operation require a large management
structure with a diversity of specialized managers, or a small, streamlined
structure with only a few managers in multi-purpose roles? Will they want to
spread out the risk of nancial liability among stockholders in exchange for
sharing a portion of their prot?
Determining your rm’s nancial reporting standards. What nancial
reporting standards will their rm practice? Ask the students how they will
treat the wages paid to themselves, the owners of the rm? Mention that if
their best alternative job has just experienced a signicant increase in salary,
the implicit cost of running their own business has just increased and their
economic protability has decreased. Point out that if they were to give
themselves a raise to re<ect the higher opportunity cost and transform that
implicit cost into an explicit cost, their accounting prot then declines as well.
Not only will a lower prot report for the period hurt their rm’s perceived
stature in the industry, it will also make it more costly for their rm to raise
nancial capital in the future.
Determining appropriate sources of information. Where will they receive
the information needed to locate good workers and managers? Where can
they nd the market wages, salaries, and benets that they must o er to their
employees in order to attract quality people to work with them instead of other
rms? How will they uncover all the business regulations, licensing, periodic
tax ling procedures, and labor laws that must be strictly followed to remain in
operation?
2. How do corporate taxes a2ect eciency? Ask the students to recall the
deadweight loss of taxation analyzed in Chapter 6 and apply it to the double
taxation of corporate prots. Help them to see that they can model the e ects
of the compounding deadweight losses by using the production possibilities
frontier. Show them how the corporate tax causes movement of the economy
to production combinations that are ine”cient and in the interior of the
production possibilities frontier.
3. Should you hire a contractor or a development company to build your
house? Mention to the students that if a market is more e”cient at allocating
resources among buyers and sellers than a rm, the market will be
characterized by the presence of many di erent contractors or consultants,
rather than with traditional companies. Ask the students to identify some of
these kinds of markets and get them to consider what characteristics of the
products or services do not lend themselves to the organizational structure of
the rm. For example, ask the students what characteristics that describe the
building of new residential homes that encourages a predominance of
contractors rather than rms to supply new residential housing? In this
market, independent, general construction contractors who deal with many
sub-contractors are the entities that tend to build individual “spec” homes. Yet,
in the same market there are also a few large residential developments of
“cookie cutter” homes built in a small geographic area by one rm. Perhaps
the high cost of monitoring the progress in many o -site work areas, combined
with a high degree of variation in the customer preferences for the product,
prevents any economies of scale to be enjoyed by a rm trying to build “spec”
homes. Perhaps the economies of scale can only be enjoyed in a small
geographic area with a high concentration of construction sites managed by
one rm.
4. Compare and contrast the possible result of Apple outsourcing the
iPad’s production with doing it all within the rm. Competition among
component makers likely leads to lower costs and a greater speed of
innovation in terms of product features. Technology transfer will be more
widespread as rms try to mimic what others are producing and as rms that
develop new technologies are likely to be able to sell some or all of those
features to other rms or markets (such as programmable chips migrating
from devices to autos to green energy grids). Under the outsourcing system,
Apple is more vulnerable to problems with a supplier delaying products or
damaging the rm’s reputation.