Quiz 18: Organization Structure and Corporate Governance


A) The statement is false. A vertical relation is relation is a business connection between companies at the different point along the production-distribution chain. B) The statement is true. Actually, it should come under the agency costs. Contract between managers and workers should be continuously negotiated. A strike may be a product of poor managerial decisions. However, since workers also can be considered as agents and they have contracted with the organization, then the strike might result due to some problem in the contract they have with the organization and this may come under decision costs. C) The statement is true. A merger between same type of organization like Wal-Mart and Target can be considered as horizontal in nature since it is happening at the same point of production distribution chain. D) The statement is true. In the sense of Coasian idea of a firm, which is necessary, to reduce transaction cost between several contractual agreements. Hence, from this perspective, it is clear that, when a firm is filing bankruptcy it is not able to minimize its transaction costs. E) The statement is false. It is true that Internet do reduce transaction cost a lot. Yet there cannot be any obvious relationship between use of Internet and corresponding rise of profit. Internet is a tool, which will be used by all the competing organizations. Hence, firm's profit situation will depend on a bunch of other factors. Moreover, use of Internet cannot reap any obvious gain in profit.

A firm's organizational structure refers to the vertical and horizontal relationships among the firm, its suppliers, and its customers. Regarding firm is organizational structure it is important to distinguish between vertical and horizontal relationship. A vertical relationship refers to business connection between companies at different points of the production-distribution chain for example the relationship between General Motors and its raw material supplier. In addition, horizontal relationship refers to business connection between companies at same point of the production-distribution chain for example tie up between Coca-Cola and Pizza hut about serving combo packs in Pizza hut.

A) The loss can be regarded as 'other people's money' type of agency cost. This is because if personal money is not involved in an investment decision, then people might become a bit careless while taking the final call. This is an important agency problem. This may arise for manager's myopic decision or various other issues. B) The loss can be regarded as managers' myopic behavior. Managers' shortsighted behaviors in most of the cases create such problems. C) The loss can be regarded as 'end of game' problem. This is a kind of horizon problem. It implies that at the end of one's carrier one would like to go for the projects, which will yield short-term gains by compromising potentially robust project, which may yield higher return in long term. This is a common problem among senior executives. D) The given situation comes under manager's myopic behavior about obtaining short-term profit by neglecting value-increasing projects. Sometimes managers may be opportunistic to take undue risks in the short run projects by compromising long-term returns. E) The given situation comes under income inflation kind of problem. Insiders or high rank executive managers manipulate company balance sheet in order to portray a better picture and send wrong signals to the stockholders.