WPC 480 FINAL QUESTIONS AND SOLUTIONS
GRADED A+
◉ What does corporate strategy address?
Answer: Where to compete on 3 dimensions:
Industry value chain: vertical integration
Products & services: diversification
Geography: regional, national, or global markets
◉ Vertical Integration
Answer: 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
Answer: Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
,◉ Backward Integration
Answer: Integrating steps that are further back in the production
process
Ex. Hermes - getting a crocodile farm to supply own leather
◉ Boundaries of the firm
Answer: Why does a firm exist and to what extent should the firm
expand?
◉ Transaction Cost Economics
Answer: Helps explain and predict boundaries of the firm
◉ Transaction costs
Answer: 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
Answer: Recruiting and retaining employees
Paying salaries and benefits
,Setting up a shop floor
Providing office space and computers, etc.
◉ External Transaction Costs
Answer: 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:
Answer: Opportunism
Asset Specificity
◉ Opportunism
Answer: Willingness of at least some people to take advantage of
others
, Dishonesty
◉ Threat of Opportunism
Answer: Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
◉ Asset Specificity
Answer: 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
Answer: Oil refinery & oil pipeline
Auto parts & auto assembly
◉ Benefits of vertical integration:
Answer: Reduces opportunism
Facilitates investments in specialized assets
GRADED A+
◉ What does corporate strategy address?
Answer: Where to compete on 3 dimensions:
Industry value chain: vertical integration
Products & services: diversification
Geography: regional, national, or global markets
◉ Vertical Integration
Answer: 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
Answer: Integrating steps that are further forward in the process
Ex. concentrate producers integrating bottling
,◉ Backward Integration
Answer: Integrating steps that are further back in the production
process
Ex. Hermes - getting a crocodile farm to supply own leather
◉ Boundaries of the firm
Answer: Why does a firm exist and to what extent should the firm
expand?
◉ Transaction Cost Economics
Answer: Helps explain and predict boundaries of the firm
◉ Transaction costs
Answer: 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
Answer: Recruiting and retaining employees
Paying salaries and benefits
,Setting up a shop floor
Providing office space and computers, etc.
◉ External Transaction Costs
Answer: 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:
Answer: Opportunism
Asset Specificity
◉ Opportunism
Answer: Willingness of at least some people to take advantage of
others
, Dishonesty
◉ Threat of Opportunism
Answer: Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
◉ Asset Specificity
Answer: 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
Answer: Oil refinery & oil pipeline
Auto parts & auto assembly
◉ Benefits of vertical integration:
Answer: Reduces opportunism
Facilitates investments in specialized assets
