Question 1

Which of the following is an example of an internal transaction cost?
A) The cost of searching for a contract manufacturer
B) The cost of signing a contract with a supplier
C) The cost of buying raw materials
D) The cost of maintaining a production unit

Accepted Answer

Transaction costs can occur within a firm. Considered internal transaction costs, these include costs pertaining to organizing an economic exchange within a firm-for example, the costs of recruiting and retaining employees, paying salaries and benefits, maintaining a production unit, setting up a shop floor, providing office space and computers, and organizing, monitoring, and supervising work.

Question 2

_____ is best described as a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property.
A) Lean manufacturing
B) Licensing
C) Crowdsourcing
D) Bootlegging

Accepted Answer

Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent.

Question 3

Hitoro Inc.developed a superior touchscreen technology for tablet computers that enabled multiple users to operate the screen at the same time.The technology was leased to Revox Inc., a consumer electronics company, for five years.Which of the following alternatives to integration does this best illustrate?
A) Licensing
B) Franchising
C) Crowdsourcing
D) Bootlegging

Accepted Answer

This scenario best illustrates licensing. Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent.

Question 4

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's:
A) level of diversification.
B) geographic scope.
C) vertical integration.
D) absorptive capacity.

Accepted Answer

The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages. This decision determines the firm's vertical integration.

Question 5

Which of the following statements is true of internal transaction costs?
A) Internal transaction costs arise when companies transact in the open market.
B) When the internal costs involved in pursuing an activity in-house are more than the costs of transacting, then the concerned firm should vertically integrate.
C) Internal transaction costs tend to increase with organizational size and complexity.
D) It is beneficial to "buy" goods or services rather than "make" when internal transaction costs are low.

Accepted Answer

Internal transaction costs include administrative costs associated with coordinating economic activity between different business units of the same corporation such as transfer pricing for input factors, and between business units and corporate headquarters including important decisions pertaining to resource allocation, among others. Internal transaction costs tend to increase with organizational size and complexity.

Question 6

The most efficient way to overcome the principal-agent problem in a firm is to:
A) increase the level of vertical integration within the firm.
B) provide stock options to managers.
C) downsize the existing workforce.
D) organize economic activities within the firm.

Accepted Answer

The principal-agent problem is a major disadvantage of organizing economic activity within firms, as opposed to within markets. One potential way to overcome the principal-agent problem is to give stock options to managers, thus making them owners.

Question 7

_____ are best described as voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.
A) Embargos
B) Cartel agreements
C) Strategic alliances
D) Corporate acquisitions

Accepted Answer

Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.

Question 8

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy?
A) The first-line employees
B) The creditors
C) The chief executive officer
D) The middle manager

Accepted Answer

Although many managers have input to this important decision-making process, the responsibility for corporate strategy ultimately rests with the CEO.

Question 9

When approaching a bank for a loan, the borrower has better knowledge than the lender about his or her own ability to repay the loan without defaulting.What is this situation referred to as?
A) Principal-agent problem
B) Information asymmetry
C) Experience-curve effect
D) Learning-curve effect

Accepted Answer

Information asymmetries are situations in which one party is more informed than another, because of the possession of private information.

Question 10

Grace Apparel Inc.has decided to procure fabrics required for its garments from external suppliers instead of maintaining its own dyeing and weaving facilities.How will this decision affect the firm?
A) The firm will be protected against the principal-agent problem.
B) The firm's administrative costs will be low because of necessary bureaucracy.
C) The firm will have more flexibility in purchasing and comparing prices of goods and services.
D) The firm will have high-powered incentives, such as hourly wages and salaries.

Accepted Answer

Grace Apparel will have more flexibility in purchasing and comparing prices of goods and services. The advantages of obtaining goods and services externally include increased flexibility. Transacting in markets enables those who wish to purchase goods to compare prices and services among many different providers.

Question 11

Managers in a firm hired to improve the firm's profitability and ultimately the shareholders' value will add to the overall costs if they pursue their own self interests.What does this best illustrate?
A) Diseconomies of scale
B) Principal-agent problem
C) Experience-curve effects
D) Information asymmetries

Accepted Answer

The principal-agent problem is a major disadvantage of organizing economic activity within firms, as opposed to within markets. It can arise when an agent such as a manager, performing activities on behalf of the principal (the owner of the firm), pursues his or her own interests.

Question 12

General Electric's CEO, Jeffrey Immelt, decided to refocus GE's portfolio of businesses and leverage the firm's core competency in industrial engineering while pursuing future-growth industries.The two industries that CEO Immelt had identified as major future-growth industries were the:
A) education and entertainment sectors.
B) clean-technology sector and health care sector.
C) capital finance and information technology sectors.
D) consumer electronics sector and hospitality sector.

Accepted Answer

In Chapter Case 8, it has been discussed how Mr. Immelt decided to refocus GE's portfolio of businesses to reduce its exposure to capital markets and to achieve reliable and sustainable future growth by leveraging its core competency in industrial engineering. GE had identified the clean-technology sector and, more recently, health care as major future-growth industries.

Question 13

Which of the following firms is least integrated?
A) A firm that enters a joint venture with another company to develop a new technology
B) A firm that owns production subsidiaries across the globe
C) A firm that makes equity investments in its supplier's company
D) A firm that buys all the required raw materials from multiple external vendors

Accepted Answer

In the make-or-buy-continuum, the "make" and "buy" choices anchor each end of a continuum from markets to firms. Moving from transacting in the market ("buy") to full integration ("make"), alternatives include short-term contracts as well as various forms of strategic alliances (long-term contracts, equity alliances, and joint ventures) and parent-subsidiary relationships.

Question 14

A drawback of short-term contracting as an alternative to making a component in-house is that:
A) it is the most-integrated alternative to performing an activity so the principal company has no control over the agent.
B) the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality.
C) it fails to allow a long planning period that individual market transactions provide.
D) the buying firm cannot demand lower prices due to the lack of a competitive bidding process.

Accepted Answer

The drawback of short-term contracts is that firms responding to the requests for proposals (RFPs) have no incentive to make any transaction-specific investments (e.g., buy new machinery to improve product quality) due to the short duration of the contract.

Question 15

Which of the following is an example of an external transaction cost?
A) The cost of setting up a production unit
B) The cost of searching for a contract manufacturer
C) The cost of recruiting and retaining employees
D) The cost of maintaining plant and machinery

Accepted Answer

When companies transact in the open market, they incur external transaction costs: the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract.

Question 16

_____ is best described as a situation in which one party is more informed than another, because of the possession of private information.
A) Information governance
B) Information asymmetry
C) Information deregulation
D) Information piracy

Accepted Answer

Frequently, sellers have better information about products and services than buyers, which in turn creates information asymmetries, situations in which one party is more informed than another, because of the possession of private information.

Question 17

Which of the following statements is true of transaction costs?
A) When the costs of pursuing an activity in-house are more than the costs of transacting for that activity in the market, then the concerned firm should vertically integrate.
B) When companies transact in the open market, they incur internal transaction costs.
C) Transaction costs exclusively consist of external costs associated with economic exchanges.
D) Transaction costs are necessary to explain and predict the boundaries of a firm.

Accepted Answer

A theoretical framework in strategic management called transaction cost economics explains and predicts the boundaries of the firm. Transaction costs are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets.

Question 18

A primary advantage of organizing economic activity within firms is the:
A) ability to coordinate highly complex tasks to allow for specialized division of labor.
B) low administrative costs because of reduced bureaucracy.
C) eradication of the principal-agent problem.
D) high-powered incentive to work as salaried employees for an existing firm.

Accepted Answer

The advantages of organizing economic activity within firms include coordination of highly complex tasks to allow for specialized division of labor. Internal transaction costs include administrative costs associated with coordinating economic activity between different business units of the same corporation such as transfer pricing for input factors, and between business units and corporate headquarters including important decisions pertaining to resource allocation, among others.

Question 19

Bill is in an interview for a sales job that requires no experience.He is trying to portray himself as a highly enthusiastic, energetic person with high-level communication and interpersonal skills.The interviewer is convinced that Bill should be hired as a sales person in the company.However, in his resume, Bill had not mentioned his previous work experience as he was fired from that job on the account of using illegal drugs.Which of the following does this scenario best illustrate?
A) Information asymmetry
B) Principal-agent problem
C) Experience-curve effect
D) Learning-curve effect

Accepted Answer

The scenario best illustrates information asymmetry. Information asymmetries are situations in which one party is more informed than another, because of the possession of private information.

Question 20

In the market for used cars, which of the following is a reason behind the crowding out of desirable cars by lemons or inferior ones?
A) Experience-curve effects
B) Time compression diseconomies
C) Principal-agent problem
D) Information asymmetry

Accepted Answer

In the market for used cars, unequal information between sellers and buyers has led to a lemons problem. Information asymmetries can result in the crowding out of desirable goods and services by inferior ones.

Quiz 8: Corporate Strategy: Vertical Integration and Diversification

Which of the following is an example of an internal transaction cost?

_____ is best described as a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property.

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's:

Which of the following statements is true of internal transaction costs?

The most efficient way to overcome the principal-agent problem in a firm is to:

_____ are best described as voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.

Which of the following stakeholders of a company would most likely be responsible for formulating a corporate strategy?

When approaching a bank for a loan, the borrower has better knowledge than the lender about his or her own ability to repay the loan without defaulting.What is this situation referred to as?

Grace Apparel Inc.has decided to procure fabrics required for its garments from external suppliers instead of maintaining its own dyeing and weaving facilities.How will this decision affect the firm?

Managers in a firm hired to improve the firm's profitability and ultimately the shareholders' value will add to the overall costs if they pursue their own self interests.What does this best illustrate?

General Electric's CEO, Jeffrey Immelt, decided to refocus GE's portfolio of businesses and leverage the firm's core competency in industrial engineering while pursuing future-growth industries.The two industries that CEO Immelt had identified as major future-growth industries were the:

Which of the following firms is least integrated?

A drawback of short-term contracting as an alternative to making a component in-house is that:

Which of the following is an example of an external transaction cost?

_____ is best described as a situation in which one party is more informed than another, because of the possession of private information.

Which of the following statements is true of transaction costs?

A primary advantage of organizing economic activity within firms is the:

In the market for used cars, which of the following is a reason behind the crowding out of desirable cars by lemons or inferior ones?