SEVI 3013 - Ch. 8 - Corporate Strategy:
Vertical Integration and Diversification
UPDATED Exam Questions and
CORRECT Answers
corporate strategy - CORRECT ANSWER - the decisions that senior management makes and
the goal-directed actions it takes to gain and sustain competitive advantage in several industries
and markets simultaneously
why firms need to grow - CORRECT ANSWER - 1. increase profits and shareholder returns
2. lower costs and achieve economies of scale
3. increase market power
4. reduce risk through diversification
5. motivate management
corporate strategy questions - CORRECT ANSWER - 1. in what stages of the value chain
should the firm compete? vertical integration
2. what range of products and services? diversification
3. where should the firm compete? geographic scope
4. how should we organize the firm for success?
transaction cost economics - CORRECT ANSWER - a theoretical framework in strategic
management to explain and predict the boundaries of the firm, which is central to formulating a
corporate strategy that is more likely to lead to competitive advantage
transaction costs - CORRECT ANSWER - all internal and external costs associated with an
economic exchange, whether within a firm or in markets
, external transaction costs - CORRECT ANSWER - searching for contracts, negotiating,
monitoring, and enforcing contracts
include third party purchase or sale of goods, incurring of expenses etc.
costs of searching for a firm or an individual with whom to contract, and then negotiating,
monitoring, and enforcing the contract
internal transaction costs - CORRECT ANSWER - recruiting and retaining employees, setting
up shop on floor
internal stock transfers from one department to another, charge of depreciation, amortization of
prepaid expenses etc.
vertical integration - CORRECT ANSWER - the firm's ownership of its production of needed
inputs or of the channels by which it distributes its outputs
industry value chain - CORRECT ANSWER - depiction of the transformation of raw
materials into finished goods and services along distinct vertical stages, each of which typically
represents a distinct industry in which a number of different firms are competing
(firm) MAKE: - CORRECT ANSWER - if costs in house < costs in market
- vertically integrate
- own production of the inputs / or own output distribution channels
advantages of firm MAKING - CORRECT ANSWER - - command and control (fiat,
hierarchical lines of authority)
- Coordination
- Transaction-specific investments
- Community of knowledge
Vertical Integration and Diversification
UPDATED Exam Questions and
CORRECT Answers
corporate strategy - CORRECT ANSWER - the decisions that senior management makes and
the goal-directed actions it takes to gain and sustain competitive advantage in several industries
and markets simultaneously
why firms need to grow - CORRECT ANSWER - 1. increase profits and shareholder returns
2. lower costs and achieve economies of scale
3. increase market power
4. reduce risk through diversification
5. motivate management
corporate strategy questions - CORRECT ANSWER - 1. in what stages of the value chain
should the firm compete? vertical integration
2. what range of products and services? diversification
3. where should the firm compete? geographic scope
4. how should we organize the firm for success?
transaction cost economics - CORRECT ANSWER - a theoretical framework in strategic
management to explain and predict the boundaries of the firm, which is central to formulating a
corporate strategy that is more likely to lead to competitive advantage
transaction costs - CORRECT ANSWER - all internal and external costs associated with an
economic exchange, whether within a firm or in markets
, external transaction costs - CORRECT ANSWER - searching for contracts, negotiating,
monitoring, and enforcing contracts
include third party purchase or sale of goods, incurring of expenses etc.
costs of searching for a firm or an individual with whom to contract, and then negotiating,
monitoring, and enforcing the contract
internal transaction costs - CORRECT ANSWER - recruiting and retaining employees, setting
up shop on floor
internal stock transfers from one department to another, charge of depreciation, amortization of
prepaid expenses etc.
vertical integration - CORRECT ANSWER - the firm's ownership of its production of needed
inputs or of the channels by which it distributes its outputs
industry value chain - CORRECT ANSWER - depiction of the transformation of raw
materials into finished goods and services along distinct vertical stages, each of which typically
represents a distinct industry in which a number of different firms are competing
(firm) MAKE: - CORRECT ANSWER - if costs in house < costs in market
- vertically integrate
- own production of the inputs / or own output distribution channels
advantages of firm MAKING - CORRECT ANSWER - - command and control (fiat,
hierarchical lines of authority)
- Coordination
- Transaction-specific investments
- Community of knowledge
