HSP 480 Chapter 8

Which of the following statements is true of transaction costs? A. Transaction costs are necessary to explain and predict the boundaries of a firm. B. When the costs of pursuing an activity in-house are more than the costs of transacting for that activity in the market, then the concerned firm should vertically integrate. C. Transaction costs exclusively consist of external costs associated with economic exchanges. D. When companies transact in the open market, they incur internal transaction costs.

A. Transaction costs are necessary to explain and predict the boundaries of a firm.

Which of the following best illustrates forward vertical integration? A. A chain of ice cream parlors launches a brand of toys and accessories for children. B. A firm that manufactures and sells car engines to major automobile companies launches its own line of cars. C. A designer shoe company that previously purchased leather from external suppliers establishes its own leather tannery. D. A multinational coffee chain sources its coffee beans from plantations in Brazil and Vietnam.

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

Which of the following is an example of an external transaction cost? A. the cost of recruiting and retaining employees B. the cost of maintaining plant and machinery C. the cost of setting up a production unit D. the cost of searching for a contract manufacturer

D. the cost of searching for a contract manufacturer

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's a. vertical integration. b. level of diversification c. geographic scope d. absorptive capacity

a. Vertical Integration

Symphon Times Inc., a Swiss-based premium watch brand, has recently started selling its watches through company-owned retail outlets in major cities of the emerging nations. Which of the following types of diversification strategies is the firm pursuing? a. geographic diversification strategy b. process diversification strategy c. product-market diversification strategy d. product diversification strategy

a. geographic diversification strategy

A(n) ________ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages. a. industry value chain b. encrypt c. chain of command d. scatter chart

a. industry value chain

________ are best described as voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage. a. Strategic alliances b. Corporate acquisitions c. Cartel agreements d. Embargos

a. strategic alliances

How do firms benefit from vertical integration? a. Vertical integration allows firms to reduce organizational complexity and administrative costs. b.Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities. c. Firms that vertically integrate do not have to make transaction-specific investments. d. Firms that vertically integrate will have increased strategic flexibility when faced with technological changes.

b. Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities.

Which of the following firms is least integrated? a. a firm that owns production subsidiaries across the globe b. a firm that buys all the required raw materials from multiple external vendors c. a firm that makes equity investments in its supplier's company d. a firm that enters a joint venture with another company to develop a new technology

b. a firm that buys all the required raw materials from multiple external vendors

Silver Weave Inc., an apparel company, operates through a business model in which individuals can buy the rights to set up Silver Weave stores and sell the company's merchandise in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month. The owners of the stores have to stock the collection approved from the company's headquarters and also maintain consistent customer service as expected in its flagship store. Which of the following alternatives to integration does this best illustrate? a. bootstrapping b. franchising c. crowdsourcing d. credit rationing

b. franchising

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? a. diseconomies of scale b. information asymmetries c. principal-agent problem d. experience-curve effects

c. principal-agent problem

Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of a. geographic diversification. b. vertical integration. c. product diversification. d. horizontal integration.

c. product diversification.

PepsiCo operates in many countries and sells a wide variety of aerated drinks, other beverages, different types of chips, and Quaker Oats goods to achieve continuous growth. From this data, we can conclude that PepsiCo has been involved in a. strategic outsourcing. b. process diversification. c. product-market diversification. d. lean manufacturing.

c. product-market diversification.

When a firm is said to be pursuing a geographic diversification strategy, it means that the firm will a. depend solely on its in-house facilities for all its production purposes. b. operate from multiple headquarters across the globe. c. sell its products in several different regional, national, and international markets. d. introduce different products and services in an existing single market.

c. sell its products in several different regional, national, and international markets.

________ is best described as changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain. a. Corporate divestiture b. Closed innovation c. Reverse engineering d. Forward vertical integration

d. Forward vertical integration

Neon Electronics Inc. sourced touch screens required for its tablet computers, cell phones, and televisions from a manufacturer in China. But the demand for such components was high globally, and the supplier could not meet the quality standards of Neon Electronics. Thus, Neon Electronics decided to set up its own unit to develop and manufacture the required touch screens. What does this scenario best illustrate? a.new product development b.conglomerate diversification c. crowdsourcing d. backward vertical integration

d. backward vertical integration

Today, many companies use PeopleSoft and EDS to avoid maintaining a human resource management system. By doing this, these firms are a. increasing their level of vertical integration. b. engaging in unrelated diversification. c. offshoring their core activities. d. engaging in strategic outsourcing.

d. engaging in strategic outsourcing

BM Goods Inc. is a large conglomerate that operates only in its home country. The company competes in industries like the consumer electronics, health care, hotel, airlines, education, and steel industries. Which of the following diversification strategies does this best illustrate? a.geographic diversification b. market diversification c. process diversification d. product diversification

d. product diversification

A firm that engages in strategic outsourcing typically a. increases its internal transaction costs. b. reduces its level of external transaction costs. c. increases its level of horizontal integration. d. reduces its level of vertical integration.

d. reduces its level of vertical integration

________ is best described as moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. a. Forward integration b. Horizontal integration c. Reverse engineering d. Strategic outsourcing

d. strategic outsourcing