BUS491 - Chapter 8 Review Questions

Which of the following best illustrates forward vertical integration?

A firm that manufactures and sells car engines to major automobile companies launches its own line of cars.

How is an equity alliance different from a joint venture?

An equity alliance involves taking ownership in a partner; a joint venture involves two or more entities owning a firm.

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

the cost of maintaining a production unit

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

the cost of searching for a contract manufacturer

Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

False

Which of the following is a drawback of vertical integration?

It increases the potential of legal repercussions.

The most challenging diversification strategy is likely to be one that combines new core competencies with new and emerging markets.

True

_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs.

Vertical integration

Coastal Pharma and Brainwave Technologies have together invested and created a new organization, InnerView, to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Coastal Pharma and Brainwave Technologies. Which of the following alternatives to integration does this scenario best illustrate?

a joint venture

Which of the following best illustrates physical-asset specificity?

a machine solely designed to give a candy its trademarked shape

Radial Autos currently sources components such as airbags, upholstery, and brake pads from various suppliers in the industry value chain. In order to lower costs and reduce the risk of interruptions in the supply of components, Radial should pursue

backward integration.

Which quadrant in the core competence-market matrix is the hardest to pursue?

building new core competencies to create and compete in markets of the future

In 2007, Salesforce.com recognized an emerging market for platform as a service (PaaS) offerings and developed a new competency in delivering software development and deployment tools. This allowed its customers to either extend their existing CRM offering or build completely new types of software. This is an example of

building new core competencies to create and compete in markets of the future.

Revolution Watches, a Swiss-based premium watch brand, has recently started selling its watches through company-owned retail outlets in major cities of developing nations. Which of the following types of diversification strategies is the firm pursuing?

geographic diversification strategy

Decisions relating to the range of products and services a firm will offer determine the firm's

level of diversification.

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?

principal-agent problem

Beagle Autos is known for its affordable and reliable brand of consumer vehicles. Because its shareholders expect to see an improved rate of growth in the coming years, Beagle's executives have decided to diversify the company's range of products so that at least 40 percent of the firm's revenue is generated by new business units. However, the company's resources, capabilities, and competencies are limited to producing other forms of motorized vehicles, such as motorcycles and all-terrain vehicles (ATVs). Which type of corporate diversification strategy should Beagle pursue?

related-constrained

When executives of a firm consider business opportunities only where they can leverage their existing competencies and resources, it can be concluded that the firm is using

related-constrained diversification.

Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should

vertically integrate.