Deck 11: Vertical Integration and the Scope of the Firm

Question 1

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

Answer 1

False

Question 2

Vertical integration can be used to extend a monopoly position from one stage of an industry's value chain to adjacent stages,thereby allowing the monopolist to increase the amount of monopoly profit it can extract.

Answer 2

False

Question 3

Corporate strategy is concerned with decisions over product scope,geographical scope,and vertical scope.

Answer 3

True

Question 4

J.K.Galbraith opposed the trend towards "corporate capitalism" arguing that large,integrated corporations were not essential to develop and commercialize new technologies.

Question 5

Jewelry companies typically do not own gold and silver mines because the markets for gold and silver are highly competitive and impose few transaction costs on jewelry makers.

Question 6

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

Question 7

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

Question 8

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

Question 9

Alfred Chandler described the administrative mechanism of firms as the "invisible hand" of economic coordination.

Question 10

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.

Question 11

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

Question 12

By offering the possibility of repeat business,the suppliers and buyers can avoid the problems of opportunism that give rise to transaction costs.

Question 13

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

Question 14

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

Question 15

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.

Question 16

Managing vertically-related businesses that are strategically very different is not a problem is companies adopt an appropriate organizational structure.

Question 17

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.

Question 18

In fashion clothing,one reason why mass-market distributors such as H&M,Forever 21,and Gap outsource their production is to reduce new product cycle time (the time between the initial design of a product and its delivery to a retail store).

Question 19

Franchising offers a means of reconciling the coordination and control benefits of vertical integration with the entrepreneurial flexibility and high-powered incentives of market contracts.

Question 20

Firms exist in situations where the administrative costs of coordinating economic activity are less than the transactions costs of organizing such activity across markets.

Question 21

The opening quotation from Tom Peters states that as "yesterday's highly integrated giants" de-integrate,their vertical relationships are taking the form of:

A)Market contracts.
B)Long-term contracts.
C)Alliances and partnerships.
D)All of the above.

Question 22

The reason that most food processing firms do not backward integrate into farming is that:

A)Most food products are supplier through competitive markets where transaction costs are low
B)Farming and food processing are strategically dissimilar businesses
C)Both of these
D)Neither of these

Question 23

Vertical integration is:

A)A firm's ownership of vertically related activities
B)A firm's control over its input sources and the distribution of its output
C)A firm establishing close relationships with its suppliers and its buyers
D)A firm's acquisition of a supplier or one of its buyers

Question 24

The main cause of downsizing,refocusing,and outsourcing during the latter part of the 20^th century was:

A)Developments in IT-especially the advent of the internet.
B)A greater turbulence in the environment.
C)Both (a)and (b).
D)Neither (a)nor (b).

Question 25

Corporate strategy decisions are concerned with:

A)Establishing competitive advantage
B)The scope of the firm's activities
C)The geographical boundaries of the firm
D)Diversification and vertical integration

Question 26

Which of the following factors has not contributed to the trend towards outsourcing in recent decades?

A)The advent of the internet
B)Increasing emphasis of the need for speed
C)Increasing turbulence of the business environment
D)Increasing emphases on the need for competitive advantage based upon superior capabilities

Question 27

When a winery opens a tasting room through which it sells its wine to visitors,this represents:

A)Backward integration
B)Forward integration
C)Partial integration
D)Diversification

Question 28

Vendor partnerships based on relational contacts-such as the relationships between Toyota and its major component suppliers-are more successful than either pure market contracts or vertical integration because:

A)They give the buyer immense bargaining power over its suppliers.
B)They offer similar benefits of high-powered incentives and flexibility that market contracts.
C)They offer similar coordination benefits as vertical integration.
D)They combine the coordination benefits of vertical integration with the incentive and flexibility benefits of market contracts.

Question 29

The vertical scope of a firm relates to:

A)The extent to which a firm owns adjacent stages of the industry value chain.
B)The proportion of the firm's inputs that are produced in-house.
C)The size of the firm's value added.
D)The number of hierarchical layers of the firm's management structure.

Question 30

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

A)It is best to outsource the production of components and materials.
B)It is best to be backward integrated into the production of components and materials.
C)It depends upon the type of flexibility that is desired.
D)It is best to be partially backward integrated.

Question 31

Which of the following factors is not conducive to vertical integration between two adjacent stages of production?

A)Similarity of the optimum scale of production between the two stages
B)Few companies at each of the two stages
C)Stability in the technologies used at each stage
D)Different organizational capabilities are required at each stage

Question 32

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

A)Technical economies from the physical integration of processes.
B)Avoiding the transactions costs involved monitoring and enforcing contracts with external suppliers.
C)Economies of scale.
D)None of the above.

Question 33

Vertical integration by industrial firms during the major part of the 20^th century was motivated primarily by firms' desire for:

A)Reducing costs
B)Securing scare inputs
C)Reducing risk and improving coordination
D)Increasing speed

Question 34

The capitalist economy comprises two forms of economic organization,the market mechanism operated by prices and the administrative mechanism of firms.

A)The market mechanism is referred to as the "visible hand" while the administrative mechanism of firms is referred to as the "invisible hand".
B)The market mechanism is referred to as the "invisible hand" while the administrative mechanism of firms is referred to as the "visible hand".
C)The simultaneous operation of both "hands" means that the capitalist system is often referred to as an "ambidextrous organization".
D)The notion of the capitalist economy as governed by market processes is a myth.In reality the global capitalist economy is controlled by large corporations.

Question 35

The reason that the producers of wood pulp have often forward integrated into the production of paper is:

A)To increase value added by moving closer to the final customer.
B)To exploit technical economies of co-locating pulp and paper making plants while avoiding transaction costs caused by transaction-specific investments.
C)To be able to respond quicker to demand fluctuations because of superior coordination.
D)To insulate the firm from fluctuations in the price of wood pulp.

Question 36

The main business of the Coca-Cola Company is manufacturing,marketing and distributing concentrate for soda drinks to bottlers in over 200 countries of the world.The corporate scope of the Coca-Cola Company is best described as:

A)A broad product,geographical,and vertical scope.
B)A broad product and vertical scope,and a narrow geographical scope.
C)A broad geographical scope and narrow product and vertical scope.
D)A broad product and geographical scope and narrow vertical scope.

Question 37

The growth in the scope of business enterprises for most of the 19th and 20th centuries can be attributed to a drop in administrative costs of firms relative to the transaction costs of market.This resulted from:

A)The monopolistic power of large firms to raise prices and push down wages
B)Globalization
C)The growing transaction costs of markets as a result of taxes,regulation,and litigation
D)Innovation in information and communications technology and in management

Question 38

Which of the following factors is not an explanation for the lack of vertical integration between steel producers and shipbuilders?

A)The market for steel has many suppliers and buyers,good information flows,and little need for transaction-specific investments
B)Steel is a commodity product available in standardized grades
C)The world's biggest shipbuilding countries (South Korea,Japan,and China)are also among the leading steel producing countries
D)Steel production and shipbuilding are strategically very different industries

Question 39

The corporate scope of Walt Disney Company may be described as follows:

A)A broad product and geographical scope,but narrow vertical scope.
B)A broad product and vertical scope,but a narrow geographical scope.
C)A broad vertical and geographical scope but narrow product scope.
D)A broad product,geographical and vertical scope.

Question 40

Starbucks owns and operates most of its retail outlets; McDonalds franchises most of its retail outlets.An advantage of franchising over vertical integration is:

A)Franchising permits superior coordination of retail activities with upstream activities.
B)Franchising subjects the operators of retail outlets being subject to "high-powered" incentives.
C)Franchising permits more effective quality control of the retail outlet.
D)Franchising is always more profitable than vertical integration because the franchisor does not bear the costs of owning the retail outlets and paying their staff.

Question 41

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:

A)It is best to do it in-house without heavy reliance on external suppliers.
B)Extensive outsourcing is inevitable as no single company has sufficient technological capabilities in-house.
C)The principal firm must possess well-developed integration capabilities.
D)A competitor such as Airbus Industrie which began as an alliance among a number of separate companies will always have an advantage.

Question 42

Vertical integration by Zara,the main division and brand of the Spanish clothing firm Inditex,illustrates:

A)The potential of vertical integration to offer flexibility in responding to seasonal fluctuations in demand.
B)The potential for vertical integration to offer flexibility in responding to rapid changes in customer product preferences.
C)The potential for vertical integration to overcome problems arising from the need for transaction-specific investments by garment manufacturers.
D)The potential for vertical integration to exploit technical economies from co-locating adjacent processes.