WPC 480 FINAL EXAM QUESTIONS AND ANSWERS
Corporate Strategy - Answers - The decisions & actions taken to gain & sustain
competitive advantage in several industries and markets simultaneously
What does corporate strategy address? - Answers - Where to compete on 3
dimensions:
Industry value chain: vertical integration
Products & services: diversification
Geography: regional, national, or global markets
Vertical Integration - Answers - The process in which several steps in the production
and/or distribution of a product or service are controlled and owned by a single
company or entity, in order to increase that company's or entity's power in the
marketplace
Forward Integration - Answers - Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
Backward Integration - Answers - Integrating steps that are further back in the
production process
Ex. Hermes - getting a crocodile farm to supply own leather
Boundaries of the firm - Answers - Why does a firm exist and to what extent should the
firm expand?
Transaction Cost Economics - Answers - Helps explain and predict boundaries of the
firm
Transaction costs - Answers - the costs associated with activities that are not directly
productive but are engaged in only as a consequence of the need to coordinate
exchange among the parties of a transaction
Internal transaction costs - Answers - Recruiting and retaining employees
Paying salaries and benefits
Setting up a shop floor
Providing office space and computers, etc.
,External Transaction Costs - Answers - Searching for a firm individual to contract with
Bargaining, negotiating, haggling cost
Monitoring, measuring, supervising, enforcing or policing performance
External transaction costs arise primarily as a result of: - Answers - Opportunism
Asset Specificity
Opportunism - Answers - Willingness of at least some people to take advantage of
others
Dishonesty
Threat of Opportunism - Answers - Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
Asset Specificity - Answers - Unique assets with high opportunity cost - significantly
more value in their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
Asset Specificity Examples - Answers - Oil refinery & oil pipeline
Auto parts & auto assembly
Benefits of vertical integration: - Answers - Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
Risks of Vertical Integration - Answers - Integration costs
Increase in the potential for legal repercussions
Reduction in flexibility
, VI - Integration Costs - Answers - Integration cos must be less than opportunism cost
Firm vs. Market (Make or buy) - Answers - Firm-Advantage
Firm-Disadvantage
Market-Advantage
Market-Disadvantage
Firm-Advantage - Answers - Command and control - fiat, hierarchical lines of authority
Coordination
Transaction-Specific Investments
Community of knowledge
Firm-Disadvantage - Answers - Administrative Costs
Low-powered incentives
Principal-agent problems
Initial Investment
Less flexibility
Market-Advantages - Answers - High-powered incentives
Flexibility especially under high uncertainty
Utilizing market specialty (i.e. pick the winner; price mechanism
Market-Disadvantages - Answers - Search costs
Opportunism - hold-up
Incomplete contracting - specifying & measuring performance; information asymmetries
Enforcement of contracts
When should a firm make (vertically integrate)? - Answers - Value creation of using
organization > value creation of using market
Corporate Strategy - Answers - The decisions & actions taken to gain & sustain
competitive advantage in several industries and markets simultaneously
What does corporate strategy address? - Answers - Where to compete on 3
dimensions:
Industry value chain: vertical integration
Products & services: diversification
Geography: regional, national, or global markets
Vertical Integration - Answers - The process in which several steps in the production
and/or distribution of a product or service are controlled and owned by a single
company or entity, in order to increase that company's or entity's power in the
marketplace
Forward Integration - Answers - Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
Backward Integration - Answers - Integrating steps that are further back in the
production process
Ex. Hermes - getting a crocodile farm to supply own leather
Boundaries of the firm - Answers - Why does a firm exist and to what extent should the
firm expand?
Transaction Cost Economics - Answers - Helps explain and predict boundaries of the
firm
Transaction costs - Answers - the costs associated with activities that are not directly
productive but are engaged in only as a consequence of the need to coordinate
exchange among the parties of a transaction
Internal transaction costs - Answers - Recruiting and retaining employees
Paying salaries and benefits
Setting up a shop floor
Providing office space and computers, etc.
,External Transaction Costs - Answers - Searching for a firm individual to contract with
Bargaining, negotiating, haggling cost
Monitoring, measuring, supervising, enforcing or policing performance
External transaction costs arise primarily as a result of: - Answers - Opportunism
Asset Specificity
Opportunism - Answers - Willingness of at least some people to take advantage of
others
Dishonesty
Threat of Opportunism - Answers - Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
Asset Specificity - Answers - Unique assets with high opportunity cost - significantly
more value in their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
Asset Specificity Examples - Answers - Oil refinery & oil pipeline
Auto parts & auto assembly
Benefits of vertical integration: - Answers - Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
Risks of Vertical Integration - Answers - Integration costs
Increase in the potential for legal repercussions
Reduction in flexibility
, VI - Integration Costs - Answers - Integration cos must be less than opportunism cost
Firm vs. Market (Make or buy) - Answers - Firm-Advantage
Firm-Disadvantage
Market-Advantage
Market-Disadvantage
Firm-Advantage - Answers - Command and control - fiat, hierarchical lines of authority
Coordination
Transaction-Specific Investments
Community of knowledge
Firm-Disadvantage - Answers - Administrative Costs
Low-powered incentives
Principal-agent problems
Initial Investment
Less flexibility
Market-Advantages - Answers - High-powered incentives
Flexibility especially under high uncertainty
Utilizing market specialty (i.e. pick the winner; price mechanism
Market-Disadvantages - Answers - Search costs
Opportunism - hold-up
Incomplete contracting - specifying & measuring performance; information asymmetries
Enforcement of contracts
When should a firm make (vertically integrate)? - Answers - Value creation of using
organization > value creation of using market
