Question 1

A transaction-specific investment is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

Accepted Answer

A transaction-specific investment is focused on a specific exchange and involves investing in an asset that has a higher value in that exchange compared to other exchanges. This can potentially lead to higher returns on investment.

Question 2

Flexibility is only valuable when the decision-making setting a firm is facing is uncertain.

Accepted Answer

Flexibility allows a firm to adapt to changes and remain competitive in uncertain environments. In more certain environments, rigid strategies may be effective, and flexibility may not be as valuable.

Question 3

Flexibility is always valuable.

Accepted Answer

Flexibility is generally valuable, but its value can depend on the context, such as in situations where consistency or stability is more important.

Question 4

The downside risks associated with investing in a strategic alliance are unknown but fixed.

Accepted Answer

The downside risks associated with investing in a strategic alliance may not be fixed and can vary depending on factors such as changes in the market, competitiveness of partners, and external economic and political factors.

Question 5

Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions.

Accepted Answer

Flexibility is defined as the ease and speed with which a firm can alter its strategic and organizational decisions. A high level of flexibility means that the firm can quickly and easily make changes in response to external or internal changes, without incurring significant costs. Conversely, low flexibility means that the firm may face significant costs and difficulties when it tries to change its decisions or operations.

Question 6

One of the biggest uncertainties in providing customer service through call centers is the question of whether the people staffing the phones actually help a firm's customers.

Accepted Answer

This statement is true because while call centers are meant to provide customer service, there is always a chance that the individuals working there may not be adequately trained, experienced, or motivated enough to provide effective help to customers. This uncertainty can lead to a lack of trust between the company and its customers.

Question 7

Firms should avoid vertically integrating in those businesses where they possess valuable,rare,and costly-to-imitate resources and capabilities.

Accepted Answer

Firms should vertically integrate in businesses where they possess valuable, rare, and costly-to-imitate resources and capabilities. This would allow them to leverage their strengths and gain a competitive advantage.

Question 8

Transaction-specific investments make parties to an exchange vulnerable to opportunism,and vertical integration solves this vulnerability problem.

Accepted Answer

Transaction-specific investments refer to investments made by parties to an exchange in order to participate in that particular transaction. This can make parties vulnerable to opportunistic behavior by the other party, such as reneging on the terms of the transaction or engaging in hold-up behavior. Vertical integration, which involves owning and controlling multiple stages of production or distribution, can solve this vulnerability problem because there is no need for any transactions between different parties.

Question 9

Once a firm has vertically integrated it has committed its organizational structure,its management controls,and its compensation policies to a particular vertically integrated way of doing business and it has enhanced its flexibility.

Accepted Answer

Vertical integration can reduce a firm's flexibility because it commits the firm to a specific path of production and investment, making it harder to adapt to market changes or shifts in technology.

Question 10

Firms should only bring market exchanges within their boundaries when the cost of vertical integration is more than the cost of opportunism.

Accepted Answer

Firms should consider bringing market exchanges within their boundaries (vertical integration) when the cost of opportunism (e.g., the risk of being exploited in a transaction) is higher than the cost of vertical integration, not the other way around. Vertical integration can mitigate opportunism by providing more control over the supply chain.

Question 11

Discuss the firm capabilities-based explanation of how vertical integration can create value.In your discussion identify the two broad implications of this approach and when,under this approach,firms should engage in vertical integration.

Accepted Answer

The answer of Discuss the firm capabilities-based explanation of how...

Question 12

Identify the three fundamental explanations of how vertical integration can create value and discuss how value is created under each.

Accepted Answer

The answer of Identify the three fundamental explanations of how...

Question 13

A flexibility-based approach to vertical integration suggests that when the decision-making setting regarding a business activity is highly uncertain,firms should form a strategic alliance to enter this activity instead of vertically integrating.

Accepted Answer

A flexibility-based approach argues that it is better to form a strategic alliance when there is high uncertainty in decision-making related to a business activity, rather than vertically integrating. This is because strategic alliances offer more flexibility and can be dissolved if the activity does not prove to be profitable, whereas vertical integration is a permanent and costly commitment.

Question 14

If a firm engages in vertical integration into a business activity where it does not possess any of the valuable,rare,or costly-to-imitate resources it needs to gain a competitive advantage,it may find itself at a competitive disadvantage to the extent that some firms already have competitive advantages in these business activities.

Accepted Answer

Vertical integration can backfire if the firm does not possess the necessary resources to compete in the new activity. This can put the firm at a disadvantage compared to competitors who already possess valuable, rare, or costly-to-imitate resources in that activity.

Question 15

Firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages.

Accepted Answer

Vertical integration is a strategy in which a company expands its business operations into a different stage of the same production path, from raw material to end product. However, to successfully implement this strategy, the company must possess the necessary resources, such as expertise, technology, and financial capacity, to gain a competitive advantage in the new business activities. If a company lacks these necessary resources, it may not achieve the desired results, leading to failures and losses. Thus, firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages.

Question 16

Discuss the opportunism-based explanation of vertical integration value creation and identify when,under this explanation,firms should vertically integrate.In your answer be sure to clearly define opportunism and the role that transaction-specific investments play in the opportunism-based explanation.

Accepted Answer

The answer of Discuss the opportunism-based explanation of vertical integration...

Question 17

Flexibility is low when the cost of changing strategic choices is low.

Accepted Answer

Flexibility is high when the cost of changing strategic choices is low, as it allows an organization to adapt more easily to changes.

Question 18

The threat of opportunism is the least when a party to an exchange has made transaction-specific investments.

Accepted Answer

The threat of opportunism is greatest when a party to an exchange has made transaction-specific investments, as these investments often cannot be easily repurposed for other exchanges, making the investor more vulnerable to opportunistic behavior from the other party.

Question 19

A decision-making setting is uncertain when the future value of an exchange cannot be known when investments in that exchange are being made.

Accepted Answer

Uncertainty refers to a situation where the outcome or result of an event cannot be predicted or known with certainty. In a decision-making setting, uncertainty arises when the future value of an exchange cannot be accurately determined or known when investments in that exchange are being made. Therefore, statement A is true.

Question 20

Research suggests that,in general,vertically integrating is more flexible than not vertically integrating.

Accepted Answer

Vertically integrating often locks a company into its specific supply chain and production processes, reducing flexibility compared to companies that can freely choose suppliers and partners.

Quiz 8: Vertical Integration