Deck 9: Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing

Question 1

Vertical integration can raise costs if, over time, a company's leaders continue to purchase inputs from company-owned suppliers even when independent suppliers can supply the same inputs at lower cost.

Answer 1

True

Question 2

Horizontal integration can lead to low cost advantages but rarely to differentiation advantages.

Answer 2

False

Question 3

In order to achieve the increased profitability that horizontal integration can offer, the only area integration must be successful in is reducing rivalry within the industry.

Answer 3

False

Question 4

Transfer pricing refers to when a company is taken advantage of by another company it does business with after it has made an investment in expensive specialized assets to better meet the needs of the other company.

Question 5

The horizontal integration of pharmaceutical companies helps lower costs by filling the need to achieve scale economies in research and development (R&D), sales, and marketing and combining the fixed costs of building a nationwide pharmaceutical sales force.

Question 6

Vertical integration can be risky when demand is unpredictable because it is hard to manage the volume or flow of products along the value-added chain.

Question 7

The difference between transfer prices and bureaucratic costs is that transfer prices are associated with in-house cost increases and bureaucratic costs are not part of a company's cost structure.

Question 8

An example of increased product differentiation, acquiring or merging with a competitor helps to eliminate excess capacity in an industry.

Question 9

A merger occurs when one company uses capital resources such as stock, debt, or cash to purchase another company.

Question 10

Tina's Technologies is expanding its operations backward into an industry that produces inputs for the company's products. Tina's Technologies is utilizing horizontal integration.

Question 11

An advantage of horizontal integration is that it can lower a company's cost structure by creating increasing economies of scale.

Question 12

Investments in specialized assets only occur on the production side within an industry to build competitive advantage.

Question 13

The main difference between an acquisition and a merger is that an acquisition establishes a new entity.

Question 14

A company must choose an appropriate corporate-level strategy after selecting the pricing option (lowest, average, or premium price) that will allow it to maximize profitability.

Question 15

By using their enormous bargaining power and efficiency in inventory logistics, Wal-Mart has been able to expand and have a competitive advantage in other discount retail store formats, such as its chain of Sam's Clubs. This is an example of leveraging a competitive advantage more broadly.

Question 16

Product bundling involves offering customers the opportunity to purchase a range of products at a single, combined price.

Question 17

A company that chooses forward vertical integration into downstream industries is focused on moving toward adding value to component parts, manufacturing, and raw materials.

Question 18

Oracle Corp., based in Reno, Nevada, has purchased several other companies to become the world's largest maker of database software. This strategy is known as the strategy of acquisition.

Question 19

A company should first choose a corporate-level strategy, and then look at how changes will affect a company's current business model and strategies.

Question 20

When a company is successful and focused in one industry, they should always try enter into new industries because the company's existing resources and capabilities will always create value and a new set of competitive industry forces can be met with the strategies that the company has used successfully in their original industry.

Question 21

In 1999, two pharmaceutical companies that held an equal market share decided to pool their operations to create a new firm that was known by a different name. This is an example of a(n):

A) merger.
B) acquisition.
C) procurement.
D) takeover.
E) dissolution.

Question 22

Strategic alliances cannot serve as a substitute for vertical integration because they only create relatively weak, short-term partnerships that allow only one company to obtain the benefits that would have resulted from vertical integration.

Question 23

When a company outsources its noncore activities to specialists, it loses its capabilities to differentiate its final products.

Question 24

Rachel, a new mom, is shopping for baby products. She notices that one of the manufacturers, Lucy's, is offering a wide range of products such as baby shampoo, baby lotion, and baby wipes packaged together at a better price as one combined product. Which of the following concepts is the company utilizing to meet customers' needs?

A) Product bundling
B) Cross-selling
C) Hostage taking
D) Strategic outsourcing
E) Parallel sourcing

Question 25

The final part of the strategy-formulation process is choosing:

A) business-level strategies.
B) functional-level strategies.
C) corporate-level strategies.
D) functional-level goals.
E) business-level goals.

Question 26

A leading software company merged with its competitor to form a new company. Which of the following is likely to be the result of this merger?

A) Decreased cost per unit output
B) Decreased bargaining power over suppliers and customers
C) Increased industry rivalry
D) Decreased profitability
E) Decreased product differentiation

Question 27

Strategic outsourcing is the decision to allow one or more of a company's value-chain activities or functions to be performed by independent companies.

Question 28

All of the following are benefits of horizontal integration EXCEPT:

A) reduced risk of coming into conflict with the FTC.
B) increased product differentiation.
C) reduced industry rivalry.
D) increased bargaining power over suppliers.
E) reduced cost structure.

Question 29

Which of the following is NOT a cause for the intervention of antitrust authorities?

A) Companies abuse their market power by acquiring new firms that allow for the increase of prices above a level that would occur in a competitive market.
B) The merger between two companies allows for several customer options and substantial competition within the industry.
C) An acquisition that creates too much consolidation and increases the potential for future abuse of market power.
D) A company cuts prices when a new competitor enters the industry to force the competitor out of business.
E) Dominant companies use their market power to crush potential competitors.

Question 30

Which of the following is NOT an advantage of the corporate-level strategies followed by companies like McDonalds and Wal-Mart?

A) Their strategies allow all managerial, financial, technological, and functional resources to focus on competing successfully in one area.
B) Their strategies keep them from making the mistake of entering new industries in which existing resources and capabilities create little value.
C) Their strategies prepare them to deal with a whole new set of competitive forces and help create ways to address unanticipated threats.
D) Their strategies allow them to compete effectively in fast-growing, changing industries in which demands on a company's resources and capabilities are likely to be substantial.
E) Their strategies allow them to capture the substantial long-term profits from establishing a competitive advantage.

Question 31

In a strategic alliance, one company in the agreement benefits more than the other.

Question 32

Product bundling and cross-selling are ways to establish which of the following?

A) Lowered cost structure
B) Increased product differentiation
C) Leveraged broad competitive advantage
D) Increased bargaining power
E) Reduced industry rivalry

Question 33

One negative effect of competitive bidding is that suppliers don't want to invest in expensive, long-term specialized assets as they will be reluctant to agree upon scheduling that will increase a supplier's costs and reduce its profitability.

Question 34

Which of the following is a benefit that firms should expect to gain from the use of horizontal integration?

A) Reduced risk of coming into conflict with the FTC
B) Better realization of economies of scale
C) Greater control over the entire supply chain
D) Reduced risk of holdup
E) Reduced need for investment in core activities

Question 35

In a backward vertical integration into upstream industries, which of the following describes the next step in the value chain after final assembly?

A) Raw materials
B) Retail
C) Component parts manufacturing
D) Customer
E) Final assembly is the final step in the value chain.

Question 36

Sharing the expenses of investment in production assets or inventory, or making long-term supply or purchase guarantees are examples of vertical integration.

Question 37

The difference between full integration and taper integration is that taper integration includes outside suppliers and independent distributors during the in-house manufacturing function.

Question 38

Adam's boss tells him that their company is pursuing the strategy of horizontal integration. Which of the following is true of this scenario?

A) The company will acquire one of its suppliers.
B) The company will buy or merge with one of its rivals.
C) The company will begin to distribute its own products.
D) The company will change the organizational structure to make it increasingly flat.
E) The company will merge with another company that belongs to a different industry.

Question 39

When a company decides to expand into new industries, it must:

A) develop a "multibusiness model" that justifies its entry into different businesses.
B) halt marketing activities in the current industry to avoid being associated with one specific industry.
C) select a new CEO and reappoint the board of directors.
D) create one common business model for all the industries rather than each business unit.
E) avoid talking about ways of increasing profitability in the business model.

Question 40

Horizontal integration may be thought of as:

A) moving into a new unrelated industry.
B) giving control to suppliers.
C) gaining control of distributors.
D) staying inside the industry in which the company currently operates.
E) combining functional units within the company.

Question 41

Which of the following is NOT a difference between in-house and independent suppliers?

A) In-house suppliers have much less incentive to look for new ways to reduce operating costs or increase component quality.
B) Independent suppliers can pass on cost increases in the form of higher transfer prices.
C) Independent suppliers constantly need to increase their efficiency to protect their competitive advantage.
D) In-house suppliers do not face competition and the resulting rising cost structure that reduces a company's profitability.
E) When company-owned suppliers develop a higher cost structure than those of independent suppliers, vertical integration can be a major disadvantage.

Question 42

Vertical disintegration occurs when a company:

A) decides to exit industries to its core industry.
B) takes advantage of another company it does business with after the other company has made a substantial investment in assets to meet the needs of the company.
C) decides to acquire its suppliers and distributors.
D) uses its capital resources to purchase its competitor.
E) decides to sell its business model to another company.

Question 43

Companies invest in specialized assets because these assets allow them to:

A) lower their cost structure.
B) charge excessive prices for their products.
C) use materials that are unique.
D) develop customized products.
E) charge premium prices for their products.

Question 44

Which of the following describes a benefit of a long-term cooperative relationship over a short-term alliance?

A) It is a substitute for vertical integration because it creates a relatively stable, long-term partnership that allows both companies to obtain the same kinds of benefits that result from vertical integration.
B) It can help avoid the problems such as bureaucratic costs that arise from managerial inefficiencies that result when a company owns its own suppliers.
C) Resulting cost savings are shared by suppliers who make substantial investments in specialized assets to better serve the needs of a particular business, and another company.
D) The businesses jointly find ways to lower costs or increase product quality so both players gain from the relationship.
E) All of these are benefits of a long-term cooperative relationship. They both gain from their relationship.

Question 45

Lime's business decision to buy scooters that are not optimized for its purposes because the option to manufacture their own scooters would result in large fixed costs. Which of the following disadvantages of vertical integration does this represent?

A) Increasing cost structure
B) Technological change
C) Demand unpredictability
D) Mismatches in optimal scale
E) Vertical disintegration

Question 46

Deep Check
Company A has made substantial investments in specialized assets and, in theory, because of this investment, has become dependent on Company
B) Company B can threaten to change orders to other suppliers as a way of driving down Company A's prices. Company B is highly unlikely to change suppliers because it is, in turn, a major supplier to Company A and also has made major investments in specialized assets to serve their needs. These companies are mutually dependent because of the specialized investment the other has made. Thus, Company B is unlikely to renege on any pricing agreements with because it knows that Company A would respond the same way. This is an example of which of the following?

A) Hostage taking
B) Credible commitment
C) Parallel sourcing policy
D) Market discipline

Question 47

Which of the following would be a factor in the decision of strategic managers to vertically disintegrate to strengthen their core business model?

A) There is a substantial increase in low-cost, global, component parts suppliers that compete for the company's business.
B) The disadvantages of expanding the boundaries of their company by entering adjacent industries outweighs the advantages.
C) The firm's asset investments are at greater risk of rapid decrease due to technological change or changing customer demands.
D) There have been major shifts in institutional norms or competitive dynamics.
E) All of these are factors in the decision of strategic managers to vertically disintegrate to strengthen their core business model.

Question 48

SparklingLeaves is one of the major suppliers of automobile tools to StanMotors, a leading automobile company. Many of the tools are customized to meet the specific needs of StanMotors and hence have little other value. In return, StanMotors has agreed to make SparklingLeaves its sole supplier of automobile equipment for a period of 15 years. This scenario illustrates:

A) horizontal integration.
B) a credible commitment.
C) competitive bidding.
D) vertical integration.
E) parallel sourcing.

Question 49

Long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are part of the agreement are known as:

A) horizontal integration.
B) outsourcing.
C) strategic alliances.
D) joint ventures.
E) vertical integration.

Question 50

The price that one division of a company charges another division for its products, which are the inputs the other division requires to manufacture its own products, is known as:

A) vertical disintegration.
B) related pricing.
C) transfer pricing.
D) related diversification.
E) tapered pricing.

Question 51

Ownership of retail outlets may be necessary if:

A) the products produced by the manufacturer are not complex.
B) the required standards of after-sales service for complex products are to be maintained.
C) products are expended in consumption.
D) products are intended for one-time use.
E) products are inexpensive.

Question 52

For a company concentrating on final assembly, adding retail and distribution into its value chain will require:

A) backward integration.
B) forward integration.
C) taper integration.
D) related diversification.
E) unrelated diversification.

Question 53

Long-term contracts:

A) are preferable to short-term contracts when there is a minimal need for cooperation.
B) are preferable to vertical integration when it is not feasible to exchange hostages.
C) generally result in lower prices than competitive bidding.
D) achieve the same outcomes as vertical integration, but they incur higher bureaucratic costs.
E) are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers.

Question 54

Which of the following is NOT a benefit of vertical integration?

A) Facilitated investments in specialized assets
B) Enhanced product quality
C) Improved scheduling
D) Lowered cost structure
E) Strengthened differentiation advantage

Question 55

An automobile company enters into a long-term contract with two suppliers for the same automobile tool. This is to ensure the company is protected in the event one of the suppliers adopts an uncooperative attitude. Which of the following concepts is illustrated in this scenario?

A) Outsourcing
B) Vertical integration
C) Horizontal integration
D) Parallel sourcing
E) Full integration

Question 56

When technology in an industry is changing rapidly, a company pursuing a strategy of vertical integration may find itself:

A) locked into an old, inefficient technology.
B) able to sell its products at continually lower prices.
C) increasing returns on its assets.
D) establishing a monopoly in the industry.
E) lowering its cost structure.

Question 57

Which of the following benefits of vertical integration provides advantages to those businesses that want to use just-in-time (JIT) inventory systems correctly?

A) Improved scheduling
B) Enhancing product quality
C) Facilitating investments in specialized assets
D) Demand unpredictability
E) Increasing cost structure

Question 58

John's surfboard shop has a long-term relationship with two surfboard makers. John is using:

A) parallel sourcing.
B) cross-selling.
C) product bundling.
D) vertical integration.
E) horizontal integration.

Question 59

Which of the following would be a deterrent to companies seeking to achieve a competitive advantage through one company making an investment in a specialized asset so it can trade with another?

A) Tapered integration
B) The risk of holdup
C) Mutual dependence
D) Transfer prices
E) Technological change

Question 60

Under which of the following circumstances is vertical integration considered hazardous?

A) When the demand for the product fluctuates frequently
B) When vertical integration involves moving downstream into retailing
C) When the value added by successive stages of production is declining
D) When the industries involved are undergoing rapid expansion
E) When the company's competitors are also following a strategy of vertical integration

Question 61

How can strategic outsourcing strengthen a company's business model and increase its profitability?

Question 62

What is the relationship between a company's corporate-level strategy and its business model?

Question 63

Compare the benefits and risks associated with horizontal and vertical integration. Under what circumstances would a firm prefer one over the other?

Question 64

In which of the following is a firm MOST likely to lose direct control over value creation activities?

A) Merger
B) Acquisition
C) Vertical integration
D) Strategic alliance
E) Outsourcing

Question 65

In the process of strategic outsourcing, which of the following would come after managers review noncore functions to assess whether independent companies that specialize in those activities can perform them more effectively and efficiently?

A) Activities are outsourced to those specialists.
B) Structured long-term, contractual relationships, with rich information sharing between the company and the specialist organization to which it has contracted the activity are formed between the company and its specialists.
C) Determine whether the companies that specialize in particular activities can perform them in ways that lower costs or improve differentiation.
D) Execution of outsourcing.
E) Identify the value-chain activities that form the basis of a company's competitive advantage.

Question 66

Strategic alliances and outsourcing are two alternatives to vertical integration. What are the advantages and disadvantages of each compared to vertical integration? What can managers do to eliminate or reduce the risks?

Question 67

As one of the benefits of outsourcing, what are the advantages of focusing on the core values and activities?

A) Companies can enhance their core competencies and are able to push out the value frontier and create more value for their customers.
B) It allows for the improvement of product differentiation by outsourcing to specialists when they stand out on the excellence dimension of quality.
C) It will reduce costs when the price that must be paid to a specialist company to perform a particular value-chain activity is less than what it would cost the company to perform that activity in-house.
D) A specialist may be able to achieve a lower error rate in performing an activity precisely because it focuses solely on that activity and has developed a strong, distinctive competency in it.
E) It lowers costs and gives companies the flexibility to switch to a more favorable location if labor costs change. This is the most efficient way to handle production.

Question 68

Which of the following risks of outsourcing can be reduced by ensuring that there is appropriate communication between the outsourcing specialist and the company?

A) Holdup
B) Increased competition
C) Loss of information and forfeited learning opportunities
D) Enhanced differentiation
E) Lower cost structure

Question 69

Consider the case of a manufacturing firm that purchases subassemblies from a supplier, creates a finished product, and then sells that product to a wholesale distributor. What advantages might this firm gain from forward integration? From backward integration? What potential pitfalls of vertical integration might the firm face?

Question 70

Strategic alliances are:

A) short-term agreements between two companies to jointly develop new products.
B) short-term agreements between two companies to jointly market new products that benefit all companies involved in creating the product.
C) short-term partnerships between two companies.
D) long-term commitments between two companies to share research and development activities.
E) long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are a part of the agreement.

Question 71

GM typically solicits bids from global suppliers to produce a component and awards a 1-year contract to the supplier that submits the lowest bid. At the end of the year, a contract is once again put out for bid, and once again the lowest cost supplier is most likely to win the bid. Which of the following is GM using?

A) Strategic outsourcing
B) Competitive bidding
C) Strategic bidding
D) Long-term alliance
E) Hostage taking