Certified Production & Operations Manager (POM) Practice Exam

What theory implies that you should allow another firm to perform work activities for your company if that company can do it more productively than you can?

1. Theory of comparative advantage

2. Theory of absolute advantage

3. Theory of organizational behavior

4. Porter’s Five Forces Theory

The correct answer is: Theory of comparative advantage

The theory that supports allowing another firm to perform work activities more productively is the theory of comparative advantage. This economic principle suggests that even if one party can produce two goods or services more efficiently than another, it is still beneficial for both parties to specialize in the production of the good or service where they hold the greatest comparative advantage. By outsourcing tasks to a firm that can perform them more efficiently, a company can focus its resources on areas where it has a relative advantage, thereby increasing overall productivity and efficiency. Comparative advantage emphasizes the opportunity costs of production and the benefits of trade, showing that specialization can lead to better allocation of resources and enhanced economic efficiency. This approach is fundamental in production and operations management, as it guides companies in making strategic decisions about outsourcing and resource allocation. The other theories listed, such as absolute advantage, concern the ability of a firm to produce goods more efficiently than another without the comparative perspective, while Porter’s Five Forces Theory is primarily about market competition and strategy. The theory of organizational behavior focuses on individual and group dynamics within an organization, which does not directly relate to productivity comparisons with external firms.