Deck 8: Economics of Strategy: Creating and Capturing Value

Question 1

In the area of agricultural chemicals, the Environmental Protection Agency requires detailed labeling on cans of pesticides and herbicides. Generally speaking, the industry not only doesn't oppose these labeling requirements, but even supports government sponsored education programs on how to use the these chemicals. Why?

Answer 1

Government sponsored education program about the proper use of pesticides and herbicides reduce the costs for consumers to uses these products. Better knowledge about the proper use of these products acts to increase the demand for these goods. Greater demand creates more value for consumers, and the chemical companies can capture some of this greater value in the form of higher profits. These programs may also reduce producer borne transaction costs stemming from lawsuits that may arise from improper use.

Question 2

What is the relation between value creation and transactions cost?

Answer 2

Value is created when transactions costs for the producer, consumers are lowered. Managers can also devise newer products and strategies to reduce transactions cost and thereby create additional value.

Question 3

Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customer. This process tries to:

A) reduce transactions costs for both Dell and the customer.
B) reduce transactions costs for the customer only.
C) increase transactions costs for Dell so that it can reduce taxable profits.
D) increase transactions costs for customers so that IBM can sell send PCs also.

Answer 3

A

Question 4

Draw supply and demand for a product showing the equilibrium price and quantity. Illustrate what would happen if all the transactions costs of market were reduced. Generally, what is the impact of transactions costs on the operation of the marketplace?

Question 5

The fast food industry from Back Yard Burgers to KFC promises good food delivered quickly. The value of the consumer's time:

A) is less important than productions costs.
B) is a key component in creating value for the firm and the consumer.
C) is usually so low that fast food is unimportant in the marketplace.
D) must be discounted to make sure it is negative.

Question 6

Besides barriers to entry, what are some of the other reasons for incumbents to maintain their profits.

Question 7

What are the key components for creating market power in order to capture value?

Question 8

Many manufacturers attempt to build fairly close relationships with the firms that supply their packaging and boxes. Why?

Question 9

If transactions costs can be reduced in a marketplace, then total producer and consumer surplus will:

A) increase.
B) stay the same.
C) decrease.
D) first increase and then decrease.

Question 10

Let Q be the number of printer-computer combinations sold in the market and let MC of both these products equal $0. Let the demand for both the products be given as Q = 12 - (P_p + P_c) where P_p and P_c are the prices of printers and computers. What are the profits of each firm, when they decide to cooperate, and what happens if they decide to go alone?

Question 11

If consumers find that there are substantial transactions costs to purchasing a product, then:

A) overall consumer demand is greater at each price.
B) overall consumer demand is the same at each price.
C) overall consumer demand is less at each price.
D) equilibrium price and quantity both fall.

Question 12

Since the terrorist attacks of September 2001, the US has attempted to protect itself by instituting many security features in airports and airlines. Each of these procedures has made it more difficult to fly. The result has been an increase in travel by automobile. Using a transactions cost analysis, how can the airline industry recreate and capture value from the traveling public?

Question 13

The learning effect is one form of:

A) diversification.
B) creating value through increasing transactions costs.
C) creating value through stabilizing transactions costs.
D) creating value through decreasing transactions costs.

Question 14

Strategy refers to the general policies that managers adopt to increase:

A) costs.
B) the number of customers at the same price.
C) the rate of technological change.
D) the generation of profits.

Question 15

Wal-Mart tends to have the best retailing system, the best distribution system, and the best marketing system of the modern retailers. It also dominates the marketplace for retail sales to a greater extent than any other retailer. What is the source of Wal-Mart's ability to capture value in the marketplace?

Question 16

As opposed to corporate strategy, business strategy is focused on:

A) cost control of fixed costs.
B) demand management.
C) the choice of industries in which to produce.
D) the choice of how to compete with other firms in the industry.

Question 17

Finding a way to create and capture value is part of:

A) business strategy.
B) cost control systems.
C) management control, but not general management.
D) allowing the market to run a company's future plans.

Question 18

What happens to producer surplus and consumer surplus if transactions costs are reduced?

Question 19

Wal-Mart, like many companies in the new economy, uses a hub-and-spoke distribution system to:

A) increase costs of stocking and inventory .
B) change consumer attitudes toward warehouse shopping.
C) shift consumer demand to the left.
D) decrease costs of stocking and inventory.

Question 20

In terms of business strategy, managers will attempt to adopt business strategies that attempt to:

A) maximize transactions costs.
B) stabilize transactions costs.
C) Minimize transactions costs.
D) Invert transactions costs.

Question 21

Successful invention and innovation in the marketplace:

A) can create value and is easy to capture.
B) cannot create value and is difficult to capture.
C) can create value but is often difficult to capture.
D) is not important to most company's strategy.

Question 22

Economies of scope are said to exist when:

A) one firm produces many products rather than separate firms for each.
B) many firms produce many products rather than one firm producing all.
C) many firms produce a single product rather than one firm.
D) one firm produces multiple products rather than separate firms producing all.

Question 23

Hardware, software and wetware refer to:

A) fixed costs, variable costs and liabilities.
B) financial resources, buildings and overhead.
C) buildings, computers and financial resources.
D) physical assets, "soft" assets such as its advertising strategies and human resources.

Question 24

Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of:

A) increased consumer transactions cost.
B) increased producer transactions cost.
C) reduced consumer transactions cost.
D) reduced producer transactions cost.

Question 25

Bundling of complements to create value strategically usually leads to lower prices for the consumer:

A) greater volume sold, and lower profits.
B) less sold, and lower profits.
C) greater volume sold, and greater profits.
D) less sold, and greater profits.

Question 26

Putting together two goods - shaving cream and razors - to increase value is using the power of:

A) complementary goods.
B) substitute goods.
C) unrelated goods.
D) technologically advanced goods.

Question 27

Ready-to-eat products like Kraft Lunchables:

A) decrease producer transactions costs.
B) increase producer transactions costs.
C) decrease consumer transactions costs.
D) increase consumer transactions costs.

Question 28

Human resources as a source of creating value in a modern company are also referred to as:

A) hardware.
B) software.
C) wetware.
D) dryware.

Question 29

Since September 11, 2001, longer lines, longer airport waits, and limits on carry-on luggage have all contributed to:

A) an increase vacation air travel.
B) an increase in business air travel.
C) a decline in value of air travel.
D) an increase in value of air travel.

Question 30

A firm can capture value through market power or through superior factors of production. The latter are also called:

A) housing rents.
B) monopoly rents.
C) Ricardian rents.
D) Bushian rents.

Question 31

Setting up of outlet malls in rural highways is an example of:

A) increased consumer transactions cost.
B) increased producer transactions cost.
C) reduced consumer transactions cost.
D) reduced producer transactions cost.

Question 32

With creating value we have:

A) a shift in both the demand and supply curves to the right.
B) a shift in both the demand and supply curves to the left.
C) demand shift to the right and supply to the left.
D) demand shift to the left and supply to the right.

Question 33

Manufacturers of printers and computers set prices independently. This means that they:

A) do not consider the positive effect that their lower prices have on the other's profit.
B) do not consider the negative effect that their lower prices have on the other's profit.
C) do not consider the positive effect that their higher prices have on the other's profit.
D) do not consider the negative effect that their higher prices have on the other's profit.

Question 34

Profits will be:

A) high regardless of the degree of rivalry.
B) high when the degree of rivalry is high.
C) low when the degree of rivalry is low.
D) low when the degree of rivalry is high.

Question 35

Degree of rivalry is:

A) high when excess capacity of existing firms is low.
B) low when fixed costs of existing firms are high.
C) high when fixed costs of existing firms are low.
D) high when fixed costs of existing firms are high.

Question 36

Diversifying to reduce volatility is a:

A) good idea only if shareholders can hold a diversified portfolio.
B) good idea only if managers cannot hold a diversified portfolio.
C) good idea only if managers can hold a diversified portfolio.
D) good idea only if shareholders cannot hold a diversified portfolio.

Question 37

A company can translate its assets into value if it effectively uses them in the marketplace. The three types of assets are tangible assets, intangible assets and:

A) fungible assets.
B) liability assets.
C) human assets.
D) machinery and tools.

Question 38

Paul Romer argues that "what underlies this process [economic success] ...... are instructions, formulas, recipes, and methods of doing things." He is referring to the:

A) hardware or tangible assets.
B) software or intangible assets.
C) wetware or soup recipes.
D) hardware or human resources.

Question 39

In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the:

A) firm's cost curves are higher than rivals.
B) firm's superior productivity is based on value of the whole organization.
C) firm's superior productivity is based on selected components of superiority within the firm.
D) demand for the firm's product is inelastic.

Question 40

In a corporation, one important source of value is that 'whole organization' is worth more than the sum of its parts. This is called:

A) team production capabilities.
B) collective cost analysis benefits.
C) complementary goods value creation.
D) substitute goods value creation.

Question 41

Related diversification occurs when:

A) a business serves itself first before serving others.
B) a business serves others first before serving itself.
C) a business serves itself and allows other to serve it.
D) a business serves itself and many other common businesses.