Deck 14: Vertical Integration and the Scope of the Firm

Question 1

What trends exist in regard to market vs. vertical integration?

Answer 1

Recent trends have tried to reconcile the flexibility and the incentives of the market, with the close collaboration and control provided by vertical integration.
Firms try to build long-term relationships with their suppliers.
However, the general trend toward outsourcing still exists, and many firms exploit lower costs abroad in international competition. Outsourcing goes hand-in-hand with specialization (concentration) because firms that outsource generally want to eliminate a stage of the value chain and to focus on stages where they possess a competitive advantage.
New organizational forms have emerged, such as the virtual corporation; in this structural form, a firm only coordinates it suppliers and does not perform other activities.
One key aspect of outsourcing resides in the portfolio of competencies and capabilities that is at risk, if critical capabilities are not used or maintained, or even transferred to a new partner.

Question 2

In recent years, the trend has been:

A)A complete reversal of the prior situation
B)A growing diversity of hybrid vertical relationships
C)A tendency towards vendor reduction and less adversarial buyer-seller relationships
D)Answers b and c

Answer 2

D

Question 3

A virtual corporation is:

A)A firm that has few resources and risks losing its suite of capabilities
B)A firm that has outsourced almost all operational capability
C)A firm that may have only a limited future
D)All of the above

Answer 3

D

Question 4

With regard to outsourcing, the advent of fast broadband internet has:

A)Facilitated outsourcing to distant locations
B)Facilitated vertical integration spread to distant locations
C)Neither a nor b
D)Both a and b

Question 5

What seems to be the key explanation for vertical integration of two activities?

Question 6

Can-making and caning products industries, oil refining and petrochemical production, steel and steel strip production illustrate:

A)Technological innovations at the interface of these activities
B)The value chain of these industries
C)Technology-intensive and process-based industries
D)The technical economies stemming from the physical integration of processes

Question 7

What are the options for the "market form" of organization?

Question 8

Choosing the appropriate form of vertical relationship depends on:

A)A firm's overall strategy, resources and capabilities, how risk is viewed and shared, and how effectively incentives to comply are structured
B)The relative positional bargaining powers of would-be partners, and the intensity of competition
C)The intensity of competition, top managers' past experience with vertical integration, and industry's recipes about market vs. vertical integration
D)None of these

Question 9

One example of the factors to consider when deciding whether to opt for vertical integration is:

A)The number of rivals
B)The experience and background of top managers
C)The size of the firm
D)A reasonable match in terms of scale efficiency

Question 10

Can transaction costs exist within a firm?

Question 11

Are M&A, outsourced functions, and acquisition of rivals considered as types of vertical integration?

Question 12

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

A)The importance of its specific styling capabilities
B)Vertical integration
C)The consequences of a dominant brand within a firm
D)A low-cost business level strategy

Question 13

How can one assess the efficiency of the administrative costs of internalization vs. transactions costs?

Question 14

In the media industry, the benefits of vertical integration are the focus of a debate, because:

A)Some think that the ownership of the distribution activity helps content providers to lower their costs
B)Some claim that content providers can cooperate with distributors without common ownership
C)Both a and b
D)Neither a or b

Question 15

In comparison to EDS, IBM, and Accenture, firms such as Xerox, Kodak, and Philips:

A)Exhibit superior profitability because they are not pure IT companies
B)Were successful in the past, and are still successful because they were able to adapt to changing environments
C)Cannot reach the level of capabilities of the former firms in the IT field
D)Cannot keep up with the former firms' investments in R&D

Question 16

If no acquisition takes place, is there vertical integration?

Question 17

McDonalds, Century 21 Real Estate, Hilton Hotels, and 7-Eleven stores are illustrations of:

A)Entertainment-based firms
B)Franchises
C)Large chains of stores with centralized authority
D)Chains of stores that are basically managed around financial results

Question 18

What are the two main forms of economic organization?

Question 19

In a vertically integrated firm, if the relative importance of administrative and transaction costs shifts from one to the other, what could the firm do?

Question 20

How can small businesses benefit from vertical integration?

Question 21

What would likely be the main reason why an electronic component company should not buy one of its customers?

A)They would be strategically too different
B)Such forward vertical integration is out of fashion nowadays
C)Other similar customers would probably stop buying the company's components
D)It would divert too much managerial attention

Question 22

Vertical integration may afford flexibility in responding to uncertain demand when:

A)The firm has built a capability to respond speedily in a coordinated fashion
B)The firm maintains spare capacity, and can bear spare capacity
C)The market cannot respond as quickly, or capacity is unavailable
D)All of the above

Question 23

Full vertical integration compounds risk because:

A)Top managers have a complete knowledge of the entire value chain
B)The capital invested and the fixed costs are often much higher for a vertically integrated firm
C)A decline in sales and profits in the end market affects all stages simultaneously
D)Both b and c above

Question 24

Which characteristic of transaction-specific investments explains the necessity for vertical integration?

A)The lack of a competitive market between them
B)The fact that each of the two producers has the opportunity to "hold up" the other
C)Low transaction costs in that relationship
D)The fact that a and b together form an untenable situation for separate owners.

Question 25

A shared service organization is an internal entity that:

A)Supplies services to the parent company, while competing with external suppliers
B)Supplies services to different departments
C)Is a joint venture between large firms, which provides each of them with services
D)Is a not-for-profit internal service supplier

Question 26

Managing vertically related but strategically different businesses is:

A)Easy, and not an issue for top managers
B)Not easy, but it is a sign of good top managers to be able to do it
C)Not easy and generally inadvisable, unless there are specific compelling reasons to do so
D)Part of what would be expected of corporate managers

Question 27

A decision to opt for vertical integration or external sourcing:

A)Can easily be reversed, so should not take up too much managerial time
B)Can be made easier by simply opting for both
C)Should be considered rationally by senior managers, both from a long-term financial and a strategic perspective
D)Should be trusted to external consultants who understand the theory better

Question 28

Why does FedEx purchase its trucks externally, and not operate a truck manufacturing business?

A)FedEx's needs are well below the minimum efficient scale for truck production
B)FedEx's top managers do not like the truck manufacturing industry
C)FedEx does not know how to produce trucks
D)They could do - they've just not chosen to do so.

Question 29

Another reason why vertical integration of steel producers and shipbuilders is highly unlikely is

A)The scale and continuous production of a steel plant would be huge and ill-matched to the needs of a shipbuilder.
B)They are such different businesses as to make management of both very difficult
C)Both these industries are often highly politically sensitive.
D)Both a and b above

Question 30

Does vertical integration always incur costs, if so, which?

A)No, the associated costs are integrated into the variable costs of the firm
B)Yes, administrative costs
C)Yes, transaction costs
D)No, never

Question 31

High powered-incentives and low-powered incentives respectively generally apply to:

A)Externally and internally sourced inputs
B)Internally and externally sourced inputs
C)Market and alliance sourced inputs
D)Joint venture and alliance sourced inputs

Question 32

Why is market demand uncertainty a factor to consider when deciding whether to opt for vertical integration?

A)The greater the unpredictability of demand, the greater the need to make suppliers suffer the consequences rather than the firm
B)The greater the unpredictability of demand, the greater the consequences of compounded risk through vertical integration
C)The more turbulent the demand, the greater the control advantage of vertical integration
D)The more uncertain the market demand, the greater the bargaining power of the firm in the external market

Question 33

Relational contracts:

A)Tend to be less voluminous and legalistic
B)Rely on mutual trust between the parties
C)Both a and b
D)Only work in Japanese business culture

Question 34

Independent suppliers and customers may be unwilling to do business with a vertically integrated firm, because:

A)They believe that the firm cannot excel at all stages of the value chain
B)They may now view the firm as a direct competitor
C)They would see the firm as a producer of complementary products
D)They do not like large integrated firms

Question 35

A major risk with pure spot transactions is:

A)It's difficult to predict what future costs will be
B)If a market shortage arises, there is no obligation or loyalty to be called upon to secure supply
C)There is less risk
D)Both a and b above

Question 36

In the relationship between steel producers and shipbuilders, vertical integration is highly unlikely because

A)There are low transaction costs and low switching costs associated with purchasing steel, and plenty of suppliers
B)There are insufficient technical economies from combining steel production and shipbuilding
C)Both industries aren't very profitable, so neither firm is likely to be able to afford to buy the other
D)Both a and b above

Question 37

In the case of steel smelters and steel strip producers:

A)Each steel strip producer is tied to its adjacent steel producer
B)The relationship can be called "bilateral monopoly"
C)There is no possibility of a competitive market between them
D)All of the above

Question 38

To make a choice between vertical integration or external sourcing, which statement is true?

A)It depends on the specific factors prevailing
B)Vertical integration is preferable in a technology-intensive industry
C)Market sourcing is preferable when the industry is very fragmented
D)It is simply a matter of managerial preference

Question 39

Long-term contracts, agency agreements, joint ventures, supplier-customer partnerships, and franchising are examples of:

A)Different business models
B)Different types of hybrid relationships between sellers and buyers
C)Power-based relationships between sellers and buyers
D)Techniques for international business

Question 40

In the relationship between steel smelters and steel strip producers, which element dictates the nature of the relationship?

A)The necessity of large mutual transaction-specific investments
B)Pooled resources and competencies
C)Risk-free investments
D)The fact that each is in a monopoly position

Question 41

The two main forms of economic organization are:

A)The administrative mechanism within the firm and the market mechanism
B)The administration by the state and the free market
C)The visible hand and the pressure from politicians
D)The invisible hand of the market and micro-economic mechanisms

Question 42

One of the factors explaining the emergence of large firms during the 19th and the early 20th centuries, is:

A)The evolution of customers' tastes over time
B)The development of management techniques
C)The improvement in telecommunications
D)The decrease in administrative costs of the firm relative to the transaction costs

Question 43

Which factors explain downsizing and refocusing?

A)Internal competition and the development of the internet
B)A greater turbulence in the environment, and the emergence of efficient and reliable suppliers of outsourcing services
C)Top managers and employees have lost confidence in firms as a way to organize economic activities
D)None of the above

Question 44

Which of these has been the trend in the last thirty years?

A)An increase in labour costs
B)A faster moving and more unpredictable market environment
C)Downsizing and refocusing
D)Answers b and c

Question 45

Vertical integration provides:

A)Superior coordination and security
B)A larger margin
C)Increased power over rivals in the same industry
D)None of the above as necessity, only potentially, depends on the circumstances.

Question 46

Vertical integration is defined as:

A)A firm's ownership of vertically integrated activities
B)A firm's ownership of horizontally integrated activities
C)A firm's involvement in a narrow range of products which it makes entirely in-house.
D)A firm with many decentralized decision centers

Question 47

The use of vertical integration as a preferred strategic option has:

A)Always been unclear and dependent on CEOs
B)Been subject to shifting fashion
C)Witnessed, over time, the dominance of vertical integration
D)Not followed any identifiable pattern

Question 48

The drop in administrative costs relative to transaction costs is explained by:

A)Dominant firms' ability to push down wages.
B)A relentless search for lowering operational costs
C)The emergence of globalisation
D)An increase in the efficiency of firms, induced by improvements in technology and management techniques

Question 49

A situation of vertical integration where a firm does not use any outside input for all the stages of the main production process is called:

A)Full vertical integration
B)Partial vertical integration
C)Hybrid vertical integration
D)Inverted vertical integration

Question 50

In order to conduct economic activity efficiently, firms, rather than individuals are:

A)A necessary evil
B)The best way economists have yet found
C)Not always the best solution
D)Always the best solution.

Question 51

How does the physical integration of processes reduce costs?

A)It reduces transportation costs, investment in work in progress, and delays due to transport problems.
B)It reduces the workforce required to take care of the facilities
C)It reduces managerial fixed costs
D)All of the above

Question 52

Administrative costs are:

A)The costs of establishing and maintaining a large number of contracts
B)The costs incurred by a firm conducting activities in-house
C)The costs incurred by all administrative functions
D)The fixed costs incurred by the firm

Question 53

The primary factor determining the degree of vertical integration in a firm is:

A)Transaction costs
B)Administrative costs
C)The relative level of transaction costs to administrative costs
D)The nature of an industry

Question 54

Backward vertical integration and forward vertical integration can be respectively defined as a situation where:

A)A firm takes over activities previously undertaken by its customers
B)A firm takes over activities producing some of its own main inputs, and takes over activities previously undertaken by some of its significant customers
C)A firm takes control of one of its rivals, and a firm takes control of one of its suppliers
D)A firm takes control of most of its suppliers, and of a few of its customers

Question 55

In the last decades, the prevailing wisdom has been that:

A)Vertical integration reduces risk
B)Reversal of vertical integration enhances flexibility and helps firms to concentrate on their core capabilities
C)Vertical integration allows superior coordination
D)Coordination can be achieved by alliances

Question 56

The classic justification of vertical integration relies on the conviction that:

A)The co-location of plants enables each owner to avoid being bound to the other partner for its strategic decisions
B)The physical integration of two processes, for example linking the two stages of production in a single location, results in cost savings
C)The physical location of two processes on the same site does not explain why there is not just one owner
D)Each process owner realizes savings by exploiting its assets in an alliance framework

Question 57

How is vertical integration linked with the two forms of economic organization?

A)It is part of the administrative costs
B)It is part of the market costs
C)It is one of the dimensions of corporate scope, which is part of the administrative mechanism
D)All of the above

Question 58

How does unpredictability in the environment influence the relative costs of the two forms of economic organization?

A)It saturates the management of contracts activity and external relationships
B)It disrupts processes and procedures
C)It tends to increase administrative costs of vertical integration because of the need for flexibility and speed
D)It has no influence at all

Question 59

In terms of the two main forms of economic organization, the firm can be understood as:

A)An organization that sells products and services to its environment as its "raison d'etre"
B)An organization based around financial resources and physical resources
C)An organization comprising individuals bound by employment contracts to a central contracting authority
D)An organization with employees obeying managers

Question 60

The balance of opinion as to whether firms should conduct activities themselves or buy them in:

A)Was settled in the 19th century
B)Has changed over time
C)Was decided once and for all by the emergence of downsizing in the 1990's
D)Is still to be settled by academics

Question 61

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

Question 62

A virtual corporation runs the risk that its outsourcing contractors renege on the arrangement, and take over the role of the virtual corporation as well, including all the profits.

Question 63

Vertical integration makes economic sense when large transaction-specific investments exist at the interface of two in-sequence activities.

Question 64

What is the difference between a firm's geographical scope and its vertical scope?

A)The first describes the regions of the world where the firm is present and the second the stages of the industry value chain which the firm performs itself
B)The first describes the number of countries and the second the number of horizontal businesses where the firm is present
C)There is no difference
D)This question does not make sense

Question 65

Product scope, international scope, and vertical scope are part of corporate level strategy decisions

Question 66

Vertical integration is a good strategy for combating the risks of a volatile economic environment

Question 67

Corporate strategy is concerned with:

A)The scope of a firm's products
B)The scope of a firm's activities
C)The scope of a firm's structure and corporate governance system
D)The "how" to compete

Question 68

The decision to opt for vertical integration or not depends entirely on the specific circumstances that a firm finds itself in.

Question 69

Until the last quarter of the 20th century, the prevailing wisdom favored a strategy of greater vertical integration, whatever the industry

Question 70

The design of a vertical relationship contract between partners should include the allocation of risk, and incentives structured so as to discourage adversarial behaviour.

Question 71

Managing vertically related businesses that are strategically very different is not a problem, but a challenge.

Question 72

The traditional justification of vertical integration emphasised the costs savings from technical economies.

Question 73

Vertical integration can be used as a strategy for refocusing on core activities

Question 74

Given the changing fashion for vertical integration over the past 25 years, it is ultimately just a matter of managerial choice or whim

Question 75

A long-term procurement contract helps to avoid the risks of opportunism, and should reduce procurement costs

Question 76

The key concepts of economies of scope, resources and capabilities, transaction costs, and cost and complexity are:

A)Common to vertical, geographical, and product scope
B)Common concepts used in micro-economics
C)Concepts used in the Porter's five forces model of competition
D)Different, but have relationships related to the risk they entail

Question 77

Vertical integration for firms is:

A)The ideal
B)A way to create a monopoly
C)A tried and tested recipe for success
D)Primarily to do with transaction costs

Question 78

Vertical integration compounds risk, because all the integrated stages of the value chain are affected simultaneously.

Question 79

Building a large vertical scope of activities was a popular strategy from?

A)The late 19th to late 20th century
B)1912 to the present day
C)The 1920's to the 1960's
D)Japan

Question 80

Low-powered incentives tend to be based on internal mechanisms, whereas high-powered incentives relate to profit or loss