When a firm diversifies, there are various modes of initiating new businesses and the amount of risk involved varies depending on the mode. If the objective is to lower the risks of a new business initiative, which of the following would be the most recommended means to achieve diversification?

1. strategic alliance
2. mergers and acquisitions
3. synergy creation
4. internal development

When transaction costs such as search cost and monitoring cost are higher than administrative costs of internalizing the activity, firms should ____________________.

1. outsource the activity
2. vertically integrate
3. use pooled negotiating power
4. harvest and exit the market