Lecture 9 - Internal Organization 2

Question 1

Hybrid governance structures:
A) are the most cost-efficient governance structures when asset specificity is medium (Williamson)
B) the different sub-categories are very heterogeneous: very different from each other
C) incl. long-term supplier contracts as a sub-category
D) all of the above
E) two of the above

Answer 1

D) all of the above

Question 2

Which of the following are forms of hybrid governance structures?

A) long-term supplier contracts
B) supply chain systems
C) quasi-integration
D) supplier parks
E) strategic alliances
F) joint ventures
G) franchising
H) all of the above
I) 6 of the above

Answer 2

H) all of the above

Question 3

Toyota shares substantial information and decisions regarding design of its cars with its priveledged subcontractors in order to allow for better coordination.

What hybrid form has Toyota implemented?

A) long-term supplier contracts
B) supply chain systems
C) quasi-integration
D) supplier parks
E) strategic alliances
F) joint ventures
G) franchising

Answer 3

B) supply chain systems

Question 4

Many of the big US auto-producers follow a quasi-integration hybrid organizational structure, which entails that they take ownership of some of the key assets of their suppliers. Which of the following are NOT implications of this?

A) important assets are safeguarded by the firm itself
B) hold-up problem is eliminated because the firm owns the important/specific asset itself
C) the supplier will not be incentivized to perform well since it knows that the customer is more reliant on them than the other way around
D) supplier is subject to market mechanism due to lack of vertical integration with the customer and due to the ease of being replaced

Answer 4

WRONG: C) the supplier will not be incentivized to perform well since it knows that the customer is more reliant on them than the other way around

Question 5

When a cluster of suppliers is located adjacent to, or close to, a final assembly point at the focal firm - this is the case of:
A) long-term supplier contracts
B) supply chain systems
C) quasi-integration
D) supplier parks
E) strategic alliances
F) joint ventures
G) franchising

Answer 5

D) supplier parks: when supply chain is located close to the firm

Question 6

Which of the following is/are not characteristics of Strategic Alliances as a hybrid form?
A) the cooperate agreement is relatively enduring; partners jointly plan and monitor substantial activities
B) contracts are used to coordinate and build relational trust
C) a separate legal entity is set up for the purpose of the alliance
D) industries that often use this governance structure incl. airline and biotech/pharma

Answer 6

WRONG: C) a separate legal entity is set up for the purpose of the alliance

Question 7

In a joint-venture, simultaneously contractual agreements between multiple organizations are made, with a separate legal entity established with its own purpose

TRUE/FALSE

Answer 7

TRUE

Question 8

Which of the following is/are not TRUE about franchising as a hybrid form?

A) typically involves a trade-mark
B) lasts for a fixed time period
C) serves a specific geographical area
D) involves training by the franchisor
E) typically involves three payments: franchise fee, training free, royalties
F) account for 50% of all private sector jobs in the US (in 2020)

Answer 8

WRONG: F) account for 50% of all private sector jobs in the US (in 2020)

Question 9

Franchising often entails that there is large geographical distance between franchisor and franchisee - making monitoring of the input performance costly for the franchisor

TRUE/FALSE

Answer 9

TRUE

Question 10

A franchise agreement entails constrained delegation: each party (franchisee and franchisor) is responsible and specialize in separate aspects. E.g., the franchisor develops concepts and decides on market strategy, while the franchisee is responsible for production and distribution

TRUE/FALSE

Answer 10

TRUE

Question 11

According to Kaufmann and Lafontaine, franchising can give rise to moral hazard problems such as the franchisee free-riding on the brand/trademark giving rise to need of additional safeguards. Which?

A) making franchisee a residual claimant - providing incentives for franchisee to pick make the efficient choice to harvest the biggest possible profit
B) increased monitoring with punishment as result if moral hazard is pursued by franchisee
C) market discipline: slack on quality and service will be punished by customers who will not repeat their purchase –> harmful for both parties
D) all of the above

Answer 11

D) all of the above

Question 12

According to Kaufmann and Lafontaine, what is/are the purpose of McD leaving downside rents for franchisees?
A) It ties the franchisee’s livelihodd to the success of their outlets
B) it creates additional incentives/ safeguards - if moral hazard is detected, the loss from punishment is significant
C) the franchisees chosen by McD are often liquidity constrained (limited savings, limited ability to obtain favorable bank loans) because a franchise with McD will be a huge opportunity for such individuals
D) McD do not have enough bargaining power
E) McD has a significant bargaining power, but is unable to exercise it due to bounded rationality

Answer 12

A) It ties the franchisee’s livelihodd to the success of their outlets
B) it creates additional incentives/ safeguards - if moral hazard is detected, the loss from punishment is significant
C) the franchisees chosen by McD are often liquidity constrained (limited savings, limited ability to obtain favorable bank loans) because a franchise with McD will be a huge opportunity for such individuals

Question 13

In the study by Kaufmann and Lafontaine, it was found that McDonald’s possess the bargaining power to extract almost all rent - but did not do so intentionally

TRUE/FALSE

Answer 13

TRUE

Question 14

The analysis by Kaufmann and Lafontaine revealed that McD, besides leaving significant downstream rent to franchisees, also employed other incentive-inducing mechanisms that gave them superior bargaining power. Which mechanism?

A) required significant investments made to update and maintain equipment - sunk costs for franchisee
B) 2000 hours of McD-specific training required - sunk cost for franchisee
C) required a security deposit for the agreement to be paid upfront and returned at the end of the relation - lost interest earnings
D) McD owns trademark, buildings and land, and franchisees that perform well are allowed to buy additional restaurants and renew their contract – i.e., McD has to power to take away the assets that makes the agreement valuable for the franchisee
E) all of the above

Answer 14

E) all of the above

Question 15

What is the purpose of the royalty payment with respect to the double moral hazard problem?

A) Franchisee POV: it limits franchisor opportunism: giving McD a % of profits incentivizes them to invest in marketing, supplying training, and upgrading concepts
B) Franchisor POV: it incentivizes franchisee to take efficient actions because it makes them residual claimants
C) Both options are correct

Answer 15

C) Both options are correct

Question 16

McD makes use of a ”dual distribution” system: they mix wholly owned outlets with franchised outlets (cf. K&L) - why?

A) easy monitoring: if this is the case (e.g., geographical proximity is high), moral hazard problems will be insignificant - making direct ownership more sensible
B) signaling effect: showing franchisees that McD is committed to the agreement and has a strong stake in the overall operation
C) learnings: it is more difficult to get a franchisee to test a new concept that it is to do it yourself - learnings from this can then later be implemented across the chain (most important explanation)
D) all of the above

Answer 16

D) all of the above

Question 17

According to Theory of the Firm scholars, diversification is not a product of managerial moral hazard, but rather a result of superior knowledge of how to use (excess) resources that have zero opportunity cost

TRUE/FALSE

Answer 17

TRUE

Question 18

Which of the following statements is/are NOT true about economies of scope?
A) refers to increased cost efficiency due to larger quantity of production
B) refers to when the cost of one firm producing two goods is lower than two firms producing each good separately
C) serves as part of the explanation to the rise of diversified multi-product firms
D) serves as the entire explanation to the rise of diversified multi-product firms

Answer 18

WRONG: D) serves as the entire explanation to the rise of diversified multi-product firms

Question 19

One of the drivers for product diversification (rise of multiproduct firms) is excess fungible resources (Penrose). Which of the following statements hold true in this explanation?
A) As firms advance through learning and routinization, resources are freed; resulting in excess managerial talent, improved coordination, and excess machine capacity
B) excess resources may be “idle”; have no opportunity cost + they may be fungible (applicable to new different uses)
C) there is resultingly a strong incentive to deploy them through diversification (horizontal boundary expansion)
D) after a diversification move has been made, after some time, further resources will be freed up due to learning and routinization –> even more growth through diversification
E) all of the above
F) three of the above

Answer 19

E) all of the above

Question 20

According to Penrose, successful firms will continue to grow through related diversification as idle excess fungible resources will arise as firms learn and routinize

TRUE/FALSE

Answer 20

TRUE

Question 21

Arrow’s information paradox refers to:
A) when knowledge is tacit a difficulty/ costly to articulate, it leads to incomplete contracts
B) if knowledge is highly explicit, the firm risks giving away too much information to a counterparty in a transaction
C) when knowledge is tacit, and therefore, co-location is necessary but very expensive

Answer 21

Arrow’s information paradox refers to: B) if knowledge is highly explicit, the firm risks giving away too much information to a counterparty in a transaction

Question 22

Diversification arises as a response to market failure (Teece)

TRUE/FALSE

Answer 22

TRUE

Question 23

According to Teece, which are the causes for market failure?

A) excess specific physical capital: hold-up risk
B) excess specific human capital: hold-up risk
C) excess knowledge resources that are either tacit (and difficult to articulate) or explicit (Arrow’s information paradox)
D) excess financial capital (cash): managers may have superior knowledge about attractiveness of opportunities than market/ stockholders
E) all of the above

Answer 23

E) all of the above

Question 24

According to Zhou (2011), what are the main benefit of diversification?
A) spreading risks
B) synergies
C) access to new product markets

Answer 24

B) synergies: shape the direction that diversification takes –> leads to related diversification

Question 25

Synergy can be defined as a type of economies of scope arising from complementarity between activities

TRUE/FALSE

Answer 25

TRUE

Question 26

According to Zhou (2011), there is a dark side to related diversification - what? (multiple may be correct)
A) they are not always realized in the same degree as anticipated ex-ante
B) it is more costly to manage the organization
C) involves more interdependencies and complexity in the hierarchy

Answer 26

B) it is more costly to manage the organization
C) involves more interdependencies and complexity in the hierarchy

Question 27

Sharing inputs implies that interdependencies are created between business lines, which in turn implies that changing an activity in one department creates ripple effects throughout the rest of the operation

TRUE/ FALSE

Answer 27

TRUE

Question 28

Which of the following is/ are arguments proposed by Zhou’s (2009)

A) in order to pursue synergies from related diversification, the firm needs to actively manage the interdependence between different business lines - which increases coordination costs. By extension, if the coordination costs increases
B) If coordination costs increases faster than synergy, this sets a limit to related diversification
C) When the firm’s existing business lines already have complex interdependence, coordination costs are likely to increase faster from related diversification
D) All of the above

Answer 28

TRUE

Question 29

Zhou’s study (2009) presented several findings - which of the following is/are NOT part of the conclusion?

A) Firms are more likely to diversify into a new business when its existing business lines can potentially share more inputs with the new business (more related diversification)
B) a firm is less likely to diversify into any new business when its existing business lines are complex
C) the firm’s likelihood of diversifying into a new business increases with the complexity in the firm’s existing business if they share more inputs with the new business
D) overall, the results suggest that increasing coordination costs counterbalance the potential synergistic benefits associated with related diversification
E) all options are true

Answer 29

WRONG:
C) the firm’s likelihood of diversifying into a new business DECREASES MORE with the complexity in the firm’s existing business if they share more inputs with the new business - i.e., firms with greater complexity in existing lines are more likely to see marginal coordination costs surpass marginal synergistic benefits, thus facing righter constraints on related diversification

Question 30

What are the assumptions of transaction cost economies?
A) bounded rationality; opportunism; transactions differ wrt. frequency, uncertainty and asset specificity
B) bounded rationality; self-interest; transactions differ wrt. frequency, volatility, asset specificity

Answer 30

A) bounded rationality; opportunism; transactions differ wrt. frequency, uncertainty and asset specificity