Deck 6: Vertical Integration and Outsourcing

Question 1

According to transaction cost theory, vertical integration occurs under two conditions:

A) low uncertainty and high supplier asset specialization
B) high uncertainty and high supplier size
C) high uncertainty and strong suppler market competition
D) high uncertainty and high supplier asset specialization

Answer 1

high uncertainty and high supplier asset specialization

Question 2

A key assumption underlying theories of vertical integration is:

A) suppliers give up control over non-specifiable parts of an activity
B) the boundary of the firm is a harmful myth that needs to be debunked
C) firms know more about what they are doing than suppliers
D) employees give up control over work that cannot be specified in advance

Answer 2

employees give up control over work that cannot be specified in advance

Question 3

In the strategic sourcing framework, firms outsource when:

A) the need to control and the ability to perform the activity are uncorrelated
B) there is high uncertainty surrounding the transaction with the supplier
C) the firm's need to control, and its ability to perform, an activity are both low
D) None of the above

Answer 3

the firm's need to control, and its ability to perform, an activity are both low

Question 4

The property rights theory of vertical integration assumes that the organization that vertically integrates an activity:

A) has the strongest Value minus Cost position
B) benefits the most from performing the activity in-house
C) has the lowest control needs
D) is the least opportunistic

Question 5

The standard theory of vertical integration over the industry life cycle states:

A) vertical integration increases throughout the life cycle
B) vertical integration increases in the shakeout
C) vertical integration occurs primarily in the early and late stages
D) vertical integration decreases over the life cycle

Question 6

Vertical integration and outsourcing decisions are made for:

A) products
B) markets
C) activities
D) none of the above

Question 7

Which of the following is not a rationale for vertical integration?

A) the strategic importance of the activity has increased
B) the relative competence of the firm to perform the activity has decreased
C) uncertainty regarding demand (volume) has increased
D) none of the above

Question 8

Which of the following is not a key component of control determining vertical integration decisions?

A) the supplier's growth rate
B) supplier practices and policies
C) strategic information
D) the distribution of the economic return from the relationship

Question 9

In which of the following situations is a firm sometimes ill-advised to vertically integrate an activity?

A) the firm's competence to perform the activity is high but the activity's strategic importance is low
B) the firm's control needs and relative competence to perform the activity are both high
C) the supplier refuses to accede to the firm's control needs
D) the activity is important to the firm and there are no alternatives to a weak supplier

Question 10

In the efficient boundaries framework, the coordination and production costs of vertical integration relative to outsourcing:

A) both decrease as uncertainty increases
B) act as complements
C) both decrease as customization decreases
D) both decrease as customization increases

Question 11

The only situation forcing a firm to outsource is a change in its strategy.

Question 12

Vertical integration usually occurs because of control problems with the supplier over strategically important decisions.

Question 13

The property rights approach to vertical integration has to do primarily with real estate transactions.

Question 14

According to the efficient boundaries model, when supplier asset specialization is high, vertical integration is more costly than sourcing in the market.

Question 15

The strategic sourcing framework shows the conditions under which partnerships can occur.

Question 16

In the efficient boundaries model, vertical integration is determined by production costs alone.

Question 17

When demand or volume uncertainty is high, a firm should outsource the activity.

Question 18

A firm with proprietary technology will be more likely to outsource technology development when technological uncertainty is high and supplier markets are competitive.

Question 19

Complementarities among the firm's activities typically have little to do with boundary decisions.

Question 20

A profit center operating inside a firm and that sells to both internal and external customers is considered a hybrid sourcing arrangement.

Question 21

What are the causes of the Chinese outsourcing phenomenon?

Question 22

Why is buyer control over task design ill-advised in particular types of hybrid sourcing arrangements?

Question 23

A startup firm has developed a prototype for a new-to-the-world product. The product requires both hardware and software design expertise. The firm has a sufficient number of excellent hardware designers to support the project but needs an entire software design team in order to complete the project on schedule. Given its limited financial resources, the firm is considering outsourcing the software design activity and has identified several suppliers with strong software design capabilities. However, the firm also is concerned about protecting its intellectual property. In addition, other startups are beginning to develop competing products but a dominant design has not emerged and technological uncertainty remains high. What should the firm do? Apply the strategic sourcing framework and content from the chapter to support your answer.