WPC 480 Exam 2 Questions and Answers Latest Update
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Course
WPC 480
Institution
WPC 480
Vertical Integration - Answer-Deciding to make something in your value chain (meaning everything that it takes to get your product or service to a consumer) in house instead of outsourcing it or buying it on in the market
Forward Integration- Deciding to make something in the value chain that is...
WPC 480 Exam 2 Questions and
Answers Latest Update
Vertical Integration - Answer-Deciding to make something in your value chain (meaning
everything that it takes to get your product or service to a consumer) in house instead of
outsourcing it or buying it on in the market
Forward Integration- Deciding to make something in the value chain that is moving in
the direction of the customer. Ex: Coke buying bottlers
Backward Integration: Deciding to make something in the value chain that is moving in
the opposite direction of the customer. Ex: Hermes bags buying crocodile farms.
transaction costs - Answer-Costs associated with an economic exchange
Costs that don't have anything to do with production but has to do more with
coordinating. (meaning what is it gonna cost for us to make it vs. buy it).
internal transaction costs - Answer-1. Recruiting and retaining employees
2. Paying salaries and benefits
3. Setting up a shop floor
4. Providing office space and computers, etc.
These would all be the costs of we would need to consider if we're thinking of making
something in house as opposed to buying it on the market.
external transaction costs - Answer-1. Searching for a firm or an individual to contract
with
2. Bargaining, negotiating, haggling cost
3. Monitoring, measuring, supervising, enforcing or policing performance
These would all be the costs of we would need to consider if we're thinking of buying
something in the market as opposed to making it ourselves.
asset specificity - Answer-1. Unique assets with high opportunity cost: They have
significantly more value in their intended use than in their next-best use. (meaning they
are only valuable when they are used as they were supposed to).
2. Site specificity, physical asset specificity, human asset specificity
When Should a Firm Make Or Buy? - Answer-When you can create more value by
making it than buying it and vice versa.
Opportunism - Answer-(External) Transaction costs arise primarily as a result of
, 1. Opportunism: willingness of at least some people to take advantage of others;
dishonesty. (meaning we don't know the industry as well so they try to sell us their
product for a higher price than what it really is).
Ex: drug dealers charge people more if they don't know how much it typically costs._
2. The threat of opportunism is greatest when there is an asset specificity problem (i.e.,
transaction-specific investment).
when should a firm vertically integrate? - Answer-Threat of opportunism: High costs of
market exchange (high transaction cost)
When operations within the firm is more efficient than using market transaction
When flexibility is not an important issue
Control vs. Flexibility - Answer-Vertical integration gives you more control but also
decreases flexibility
Boundaries of the firm - Answer-Firms will either make or buy something depending on
how much the transaction costs are.
Diversification - Answer-What range of products and services should the firm offer and
(what new industries should the firm target)?
Economies of Scope - Answer-exist in a firm when the value of products or services it
sells increases as a function of the number of businesses that firm operates in.
(meaning the more different products we make the more money we'll make and the
more costs we'll cut thanks to economies of scale)
In this definition, scope refers to the range of businesses in which a diversified firm
operates. EoS are valuable because they increase revenues or decrease costs.
Operational Economies of Scope - Answer-We can achieve operational economies of
scope by:
1. sharing activities: We can become more efficient by sharing our business activities or
capabilities with our other businesses.
For example if we make cars and decide to diversify into boats. We can share our fixed
assets or R&D to help make the boat engines better as well as the car engines together
which will lower our costs.
2. Leveraging Core Competencies: Exploiting core competencies in other businesses.
Ex: Disney makes Mickey Mouse movies and exploit the likable character by making a
Disney store where they sell Mickey Mouse dolls.
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