Exam 10: Vertical Integration and the Scope of the Firm

When a farmer operates a stall in a local farmers' market;this is a form of backward integration.

Manufacturers of final products such as motor vehicles,airplanes,and domestic appliances are more likely to backward integrate into the productions of commodity components than components that are specialized to the specific requirements of the manufacturer of the final product.

The main manifestation of the trend towards vertical de-integration is the growth of outsourcing.

For most of the 20^th century companies expanded their vertical scope in the belief that vertical integration reduced risk and permitted superior coordination compared to relying on markets.

Vertical integration is:

The growth in the size and scope of companies throughout most of the 19^th and 20^th centuries can be attributed primarily to the increasing transaction cost of markets.

Transaction costs of markets include search costs and costs of negotiating contracts,but usually exclude the costs incurred in enforcing contracts.

When there are technical efficiencies from co-locating vertically-related processes (e.g.the production of pulp and paper or the production of steel and steel strip),vertical integration (in the form of common ownership of the vertically-linked activities)is essential.

A major factor causing the narrowing in the scope of the activities of large corporations during the last two decades of the 20^th century was increasing turbulence of the economic environment.

In order for a manufacturer of consumer goods to maximize responsiveness to changes in consumer demand for its products:

McDonalds--like most other fast-food chains--prefers to franchise rather than directly operate its retail outlets.An advantage of franchising over vertical integration is:

The main lesson to be drawn from the delays to the launch of Boeing's 787 Dreamliner is that,when developing complex products that embody diverse new technologies:

Corporate strategy is concerned with how a firm competes in a particular industry,whereas business strategy is concerned the choice of which businesses the firm competes in.

When Amazon,com founded Amazon Studios to create content for its Amazon Prime video streaming service,this represented:

Economic organization in the capitalist economy is achieved through markets by the price mechanism and through firms by administrative direction.

Corporate strategy decisions are mainly concerned with:

During the past three decades,increased emphasis on flexibility and the need to develop superior organizational capabilities has caused large companies ot reduce their vertical scope.

The economic organization of the home improvement industry fearures:

The opening quotation concerning Bath Fitter illustrates the following benefits of vertical integration:

One of the advantages of a company providing its own facilities maintenance services is that the incentives that a wholly owned and directly managed maintenance unit is subject to "high powered" incentives.