Chapter 5 CS
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Questions and Answers

What is the central question in the step 'Disaggregation of the Industry Value Chain'?

  • How to achieve competitive advantage?
  • How to increase market failure?
  • What are the horizontal and vertical corporate boundaries? (correct)
  • How to achieve vertical integration?

    • Which step of the decision process focuses on determining if a corporation can earn revenues higher than the capital costs?

  • Step 2: Competitive Advantage (correct)
  • Step 4: Need for Coordination
  • Step 1: Disaggregation of the Industry Value Chain
  • Step 3: Market Failure

    • Which factor is important in determining the need for coordination in a firm?

  • Importance of Incentives (correct)
  • Market Failure
  • Disaggregation of the Industry Value Chain
  • Competitive Advantage

    • In the context of competitive advantage, what is the condition for a firm to possess a competitive advantage?

    <p>Achieving revenues higher than capital costs</p> Signup and view all the answers

    What aspect does Step 3 ('Market Failure') of the decision process focus on?

    <p>Analyzing if market failures exist</p> Signup and view all the answers

    What is the purpose of having an 'open' structure in the analysis of corporations?

    <p>To allow for diverse interpretations based on individual corporations</p> Signup and view all the answers

    Which element is not part of the three different elements of the triangle discussed as part of Resources in Corporate Strategy?

    <p>Goals</p> Signup and view all the answers

    What does the Value driver tree based on Du Pont scheme aim to provide?

    <p>A detailed breakdown of value creation drivers within a firm</p> Signup and view all the answers

    What is one primary focus area discussed in the topic 'Organizational Limits to Firm Scope'?

    <p>Managing the Multibusiness Corporation</p> Signup and view all the answers

    In the context of Corporate Strategy, what does 'Corporate Governance' primarily refer to?

    <p>The management of relationships between a company's management and stakeholders</p> Signup and view all the answers

    What is a common consequence of the principal and agent having different goals in a firm?

    <p>Emergence of agency costs</p> Signup and view all the answers

    In the context of governance structures, which characteristic makes employee performance easier to regulate?

    <p>High incentive system</p> Signup and view all the answers

    What factor is a key consideration in the choice between market and hierarchy structures for a firm?

    <p>Informational efficiency</p> Signup and view all the answers

    Which element influences the decision-making process about vertical integration into a specific activity?

    <p>Partner capabilities comparison</p> Signup and view all the answers

    In the context of the automotive industry example provided, which component category is usually bought rather than made?

    <p>Belts</p> Signup and view all the answers

    What is the main focus of Chapter 5 in the text provided?

    <p>Choosing the Scope of the Firm</p> Signup and view all the answers

    What does the text suggest as a key consideration for determining the scope of a firm?

    <p>Competitive advantage from resources</p> Signup and view all the answers

    What are the costs associated with the Market in the context of corporate strategy?

    <p>Sources of Market Failure</p> Signup and view all the answers

    In the context of corporate strategy, what are 'Scale' Effects related to?

    <p>Expansion within an Industry</p> Signup and view all the answers

    Why does the text mention the question 'Why should a particular business/activity be performed inside the firm?' in relation to Corporate Strategy?

    <p>To address resource-based competitive advantages</p> Signup and view all the answers

    What is the main focus of Transaction Cost Economics (TCE) in the context of corporate strategy?

    <p>Market failure costs</p> Signup and view all the answers

    According to Agency Theory, what are some critical assumptions about individuals involved in corporate activities?

    <p>Risk aversion and self-interest</p> Signup and view all the answers

    Which concept focuses on leveraging critical corporate resources across corporate boundaries?

    <p>Relational View</p> Signup and view all the answers

    In the context of corporate strategy, what is one of the key explanatory variables considered in the Relational View?

    <p>Complementary resources/skills</p> Signup and view all the answers

    Who is known for their contributions to understanding the characteristics of vertical relationships in the context of corporate strategy?

    <p>Williamson (1981)</p> Signup and view all the answers

    According to Coase (1937) and Williamson (1975), why do firms exist?

    <p>To minimize transaction costs and contractual problems</p> Signup and view all the answers

    In the context of governance structures, why are activities organized within hierarchical structures according to the Theory of the Firm?

    <p>Due to the inefficiency of markets</p> Signup and view all the answers

    What is the main reason why markets are preferable according to Coase (1937) and Williamson (1975)?

    <p>To minimize contractual problems and 'cheating'</p> Signup and view all the answers

    How does the neoclassic theory argue for economic organization?

    <p>By promoting market efficiency through the price system</p> Signup and view all the answers

    What does the concept of 'governance costs of the transaction' refer to in the context of corporate strategy?

    <p>Costs related to monitoring, negotiating, and writing contracts</p> Signup and view all the answers

    What is the primary role of high-powered incentives for individual unit owners in a franchising system?

    <p>To enhance individual unit owners' skill and effort</p> Signup and view all the answers

    Why does standardization of the product play a crucial role in the franchising model described?

    <p>To simplify monitoring operations</p> Signup and view all the answers

    How does the practice of franchising impact the decision-making process regarding the scope of a firm?

    <p>By affecting incentives for store managers</p> Signup and view all the answers

    In the context of a franchising model, what problem does standardization of the product help to mitigate?

    <p>Incentive problem</p> Signup and view all the answers

    Why would monitoring operations of multiple stores across different locations be costly in a franchising system?

    <p>Because of geographical dispersion</p> Signup and view all the answers

    What impact does the skill and effort of store managers have on store performance in a franchising system?

    <p>Critical impact on store performance</p> Signup and view all the answers

    How does high-powered incentives for individual unit owners in a franchising system differ from standardization of products?

    <p>Incentives motivate individual owners, while standardization simplifies operations</p> Signup and view all the answers

    In the context of governance structures, what are the benefits of Market over Hierarchy? Informational efficiency, _______ power, coordination benefits

    <p>market</p> Signup and view all the answers

    According to Collis and Montgomery, what is a key cost of the Hierarchy in the Choice between Market and Hierarchy? Bureaucracy and _______ costs

    <p>agency</p> Signup and view all the answers

    When considering the Limits to Firm Scope, what is the source of benefit A and cost B in the increasing Firm Scope diagram? Benefit of Transaction, Cost of the _______

    <p>market</p> Signup and view all the answers

    In the automotive industry example of the 'Make or Buy' Model, what component category is usually bought rather than made? _______ components

    <p>engine</p> Signup and view all the answers

    What is the governance structure that is most common according to the Spectrum in Corporate Strategy? Corporate _______

    <p>hierarchy</p> Signup and view all the answers

    According to Transaction Cost Economics (TCE), the unit of analysis is the ______

    <p>transaction</p> Signup and view all the answers

    In Agency Theory, critical corporate resources can be leveraged across corporate ______

    <p>boundaries</p> Signup and view all the answers

    The Relational View in Corporate Strategy focuses on relationships between firms and ______

    <p>stakeholders</p> Signup and view all the answers

    According to Coase (1937) and Williamson (1981), firms exist due to ______

    <p>transaction costs</p> Signup and view all the answers

    In the context of corporate strategy, the Theory of the Firm discusses the organization of activities within ______ structures

    <p>hierarchical</p> Signup and view all the answers

    Step 1: Disaggregation of the Industry Value Chain involves breaking down the industry value chain into all __________ that can be separated sensibly.

    <p>steps</p> Signup and view all the answers

    Competitive Advantage is about a corporation's ability to earn revenues higher than the __________ costs.

    <p>capital</p> Signup and view all the answers

    Market Failures are assessed based on the existence of high costs of market __________.

    <p>governance</p> Signup and view all the answers

    In the Decision Process, Step 4 focuses on the firm's need for __________.

    <p>coordination</p> Signup and view all the answers

    Step 5 emphasizes the importance of __________ for the firm's operations.

    <p>incentives</p> Signup and view all the answers

    In Corporate Strategy, the text discusses the advantages and costs of the ______

    <p>Market</p> Signup and view all the answers

    Expansion within an Industry and Expansion between Industries are characteristics of corporate ______

    <p>Expansion</p> Signup and view all the answers

    The scope of the firm is defined by where the firm boundaries lie and whether the firm possesses resources that provide a competitive ______

    <p>Advantage</p> Signup and view all the answers

    The decision-making process regarding the scope of a firm involves choosing between the ______ or Hierarchy

    <p>Market</p> Signup and view all the answers

    The text raises the question of why a particular business/activity should be performed inside the ______

    <p>Firm</p> Signup and view all the answers

    The purposefully 'open' structure in the analysis of corporations leaves room for your thoughts on the topic and similar questions to the exam.

    <p>interpretation</p> Signup and view all the answers

    In Corporate Strategy, the Governance structure that is most common according to the Spectrum is Corporate _______.

    <p>Hierarchy</p> Signup and view all the answers

    The primary focus area discussed in the topic 'Organizational Limits to Firm Scope' is ___________.

    <p>Scope</p> Signup and view all the answers

    One of the key explanatory variables considered in the Relational View in Corporate Strategy is _______.

    <p>relationships</p> Signup and view all the answers

    The main focus of Transaction Cost Economics (TCE) in the context of corporate strategy is to analyze transaction _______.

    <p>costs</p> Signup and view all the answers

    According to Coase (1937) and Williamson (1975), why do firms exist? Why is not everything organized in one giant ______?

    <p>corporation</p> Signup and view all the answers

    Sometimes market failure arises; e.g., governance costs of the transaction are higher than the benefit of low production costs. Corporate Strategy 12 Governance Structures: Market vs. ______

    <p>Hierarchy</p> Signup and view all the answers

    Why does the text mention the question 'Why should a particular business/activity be performed inside the firm?' in relation to Corporate ______?

    <p>Strategy</p> Signup and view all the answers

    What is the main reason why markets are preferable according to Coase (1937) and Williamson (1975)? Sometimes market failure arises; e.g., governance costs of the transaction are higher than the benefit of low production costs. Corporate Strategy 12 Governance Structures: Market vs. ______

    <p>Hierarchy</p> Signup and view all the answers

    According to the text provided, what is a common consequence of the principal and agent having different goals in a firm? Step 1: Disaggregation of the Industry Value Chain involves breaking down the industry value chain into all ______ that can be separated sensibly.

    <p>components</p> Signup and view all the answers

    Can dominant firms exercise market ______?

    <p>foreclosure</p> Signup and view all the answers

    In the context of Corporate Strategy, what does 'Corporate Governance' primarily refer to?

    <p>structure</p> Signup and view all the answers

    What is more important: coordination or high-powered ______?

    <p>incentives</p> Signup and view all the answers

    What is a common consequence of the principal and agent having different goals in a firm?

    <p>conflict</p> Signup and view all the answers

    What factor is a key consideration in the choice between market and hierarchy structures for a firm?

    <p>efficiency</p> Signup and view all the answers

    According to Coase (1937) and Williamson (1981), firms exist due to ______

    <p>transaction</p> Signup and view all the answers

    What does the concept of 'governance costs of the transaction' refer to in the context of corporate strategy?

    <p>regulation</p> Signup and view all the answers

    Why would monitoring operations of multiple stores across different locations be costly in a franchising system?

    <p>distance</p> Signup and view all the answers

    What impact does the skill and effort of store managers have on store performance in a franchising system?

    <p>outcome</p> Signup and view all the answers

    The Relational View in Corporate Strategy focuses on relationships between firms and ______

    <p>customers</p> Signup and view all the answers

    Study Notes

    Disaggregation and Decision Process

    • The central question in "Disaggregation of the Industry Value Chain" involves breaking down the chain into separable parts.
    • A step in the decision process determines if revenues exceed capital costs.
    • A factor necessary for coordination in a firm is the level of interdependence among tasks.

    Competitive Advantage and Market Failure

    • A firm possesses a competitive advantage when it can sustain higher revenues than its capital costs.
    • "Market Failure" assesses occurrences where the costs of market transactions are significantly high.

    Governance and Organizational Structure

    • An 'open' structure in corporate analysis allows flexibility in viewpoints and encourages other perspectives.
    • The common governance structure in corporate strategy is identified as Corporate Governance.
    • A focus area in "Organizational Limits to Firm Scope" is identifying boundaries for a firm's operations.

    Transaction Costs and Firm Scope

    • Transaction Cost Economics (TCE) primarily analyzes the costs associated with market transactions.
    • "Scale Effects" in corporate strategy refer to efficiency gains from increased production levels.
    • The choice between market and hierarchy structures for a firm is influenced by the specific transaction types involved.

    Franchising Model and Standardization

    • In franchising, standardization of products is crucial for maintaining quality across multiple units.
    • High-powered incentives for unit owners impact performance positively, contrasting standardization methods.
    • Monitoring operations at multiple franchise locations presents cost challenges.

    Resource and Relational View

    • The Relational View considers the importance of relationships between firms to leverage resources effectively.
    • Governance costs of transactions refer to expenses incurred in maintaining the relationship, leading to market structure preferences.
    • Common consequences of differing goals between principals and agents can lead to inefficiencies.

    Theoretical Foundations and Market Preference

    • According to Coase and Williamson, firms exist to mitigate transaction costs that would be higher in market exchanges.
    • The Theory of the Firm discusses organizational structures, underscoring why not all activities are centralized.
    • Market structures are often more preferable due to lower governance costs compared to hierarchical setups.

    Key Considerations in Corporate Strategy

    • Decision-making regarding firm scope involves evaluating whether to produce internally (inside the firm) or outsource.
    • Factors such as agency theory highlight critical assumptions about individuals in corporate activities, affecting strategic decisions.
    • The governance structure choice relates closely to transaction efficiency and the nature of interfirm relationships.

    Market and Hierarchy Dynamics

    • The governance costs encountered in transactions weigh heavily in deciding between market and hierarchical arrangements.
    • Understanding limits of firm scope involves balancing benefits of transactions against related costs.

    Specialized Knowledge and Contributions

    • Individuals like Coase and Williamson contributed significantly to the understanding of firms and market dynamics within corporate strategy.

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