Deck 6: Organizing Vertical Boundariesvertical Integration and Its Alternatives

Question 1

Which of the following conclusions can we make about vertical integration with regards to product market share and scope?

A)If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.
B)A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope
C)A firm with multiple product lines will benefit more from being vertically integrated in the production of components for those products in which it can achieve significant market scale
D)The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist
E)If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists

Answer 1

C

Question 2

Which of the following conclusions can we make about vertical integration with regard to product market share and scope?
A) Firms should make an asset, rather than buy it, if that asset is a source of competitive advantage for the firm

A)If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.
B)A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope
C)A firm with a larger share of the product market will benefit more from vertical integration than a firm with a smaller share of the product market
D)The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist
E)If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists

Answer 2

C

Question 3

Which of the following conclusions can we make about vertical integration with regards to asset specificity?

A)If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.
B)A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope
C)A firm with a larger share of the product market will benefit more from vertical integration than a firm with a smaller share of the product market
D)The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist
E)If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists

Answer 3

A

Question 4

What term describes when a firm has minimized the extent to which the exchange of goods and services in the vertical chain has been organized to minimize coordination,agency and transaction costs?

A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant

Question 5

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 2 owns the assets of Firm 1?

A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Question 6

What happens when the process by which governance develops exhibits path dependence?

A)Governance arrangements split decision rights and controls between two related firms
B)Governance arrangements are optimal
C)Past circumstances could exclude certain possible governance arrangements in the future
D)The firm will split into two entities to reduce the governance issues created
E)The governance will form effectively

Question 7

According to the GHM Theory,the choice between an in-house sales force versus independent agents should turn on the relative importance of investments in developing persistent clients by the agent versus list-building activities by the insurance firm.What would GHM thus predict about the sales of whole life versus term life insurance?

A)Both would be sold by the insurance company's in-house sales force
B)Whole life would be sold by the insurance company's in-house sales force; term by an independent agent
C)Whole life would be sold by an independent agent; term by the insurance company's in-house sales force
D)Both would be sold by an independent agent
E)An insurance company would try to "buy" the business (whole and term life insurance)of its independent agents

Question 8

Which of the following is not a benefit of tapered integration?

A)It expands the firm's input and/or output channels without requiring substantial capital outlays
B)Allows the firm to use information about the cost and profitability of its internal channels to help negotiate contracts with independent channels
C)Lets the firm motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house.
D)Allows the firm to produce most efficiently in all circumstances
E)Helps the firm protect itself against holdup by independent input suppliers

Question 9

Why are the current health care systems on the rise being built around the integration of clinical information technology and disease management systems?

A)They both have high costs
B)They both are new trends in health care
C)They are easy to integrate
D)They do not require a significant investment to integrate
E)They both require asset specificity and coordination

Question 10

What term describes when a firm is using the least-cost production process?

A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant

Question 11

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where the two firms are independent,each with control over its own assets?

A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Question 12

For what critical aspect of drug development has research (Azoulay & Henderson)shown that major drug houses have chosen tapered integration?

A)Clinical Research
B)Drug Development
C)Marketing
D)Sales
E)Manufacturing

Question 13

Which of the following is true with regard to the difference in exchange costs between an item produced internally firm and an item purchased from an outside supplier through an arm's length market transaction as the level of asset specificity increases?

A)The cost difference is positive for both low and high levels of specificity
B)The cost difference is negative for both low and high levels of specificity
C)The cost difference is negative for low and positive for high levels of specificity
D)The cost difference is positive for low and negative for high levels of specificity
E)As asset specificity increases, the transaction costs of the market exchange decrease

Question 14

Which of the following is true with regard to the difference in production costs between an item produced in a vertically integrated firm and an item exchanged through an arm's length market transaction as the level of asset specificity increases?

A)The cost difference increases with greater asset specificity
B)Scale-based advantages of outside suppliers are likely to be stronger with greater asset specificity
C)The cost difference declines with greater asset specificity
D)Scope-based advantages of outside suppliers are likely to be stronger with greater asset specificity
E)The costs are negative for all levels of asset specificity

Question 15

Which of the following in the late 19ᵗʰ century was predicted by the asset-specificity hypothesis?

A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers, marketing relied on specialized assets
E)For industries with small manufacturers, distribution relied on specialized assets

Question 16

Which of the following conclusions can we make about vertical integration with regard to scale and scope economies?

A)If asset specificity is significant enough, vertical integration will be more profitable than arm's-length market purchases, even when production of the input is characterized by strong scale economies or when the firm's product market scale is small.
B)A firm gains more from vertical integration when outside market specialists are better able to take advantage of economies of scale and scope
C)A firm with a larger share of the product market will benefit more from vertical integration than a firm with a smaller share of the product market
D)The more a firm produces, the greater its input and this ultimately decreases the likelihood that in-house production can take as much advantage of economies of scale and scope as an outside market specialist
E)If a firm is considering whether to make or buy an input requiring significant up-front setup costs, and there is a large market outside the firm for the input, then the firm should buy the input from outside market specialists

Question 17

What type of strategic alliance involves two or more firms creating and together owning a new independent organization?

A)Partnership
B)Tapered integration
C)Close-knit semi-formal relationship
D)Mutual agreement
E)Joint venture

Question 18

What concept describes the situation where the owner of an asset grants another party the right to use that asset,but the owner retains all controlling rights that are not explicitly stipulated in the contract?

A)Asset specificity
B)Non-contract rights of ownership
C)Control rights agreement
D)Residual rights of control
E)Coordination

Question 19

Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?

A)Backward Integration
B)Forward integration
C)Nonintegration
D)Contractually unbound
E)Contractually bound

Question 20

Which of the following in the late 19ᵗʰ century was predicted by the firm-size hypothesis?

A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers, marketing relied on specialized assets
E)For industries with small manufacturers, distribution relied on specialized assets

Question 21

Which of the following features of transactions make those transactions excellent candidates for alliances?

A)The transaction involves impediments to comprehensive contracting
B)The transaction is complex, not routine.
C)The transaction involves the creation of relationship-specific assets by both parties in the relationship, and each party to the transaction could hold up the other
D)It is excessively costly for one party to develop all the necessary expertise to carry out all the activities itself
E)All of the above

Question 22

Which of the following is not a benefit that Toys "R" Us gained through its alliance with McDonald's Japan?

A)Political know-how
B)Site-selection expertise
C)Changes to Japan's Large-Scale Retail Store Law requiring MITI approval
D)Business Connections
E)Significant growth on all three major islands

Question 23

Which of the following is a characteristic of an implicit contract?

A)It is an understanding between parties in a business relationship
B)It is generally enforceable in court
C)The threat of losing future business makes implicit contracts not viable
D)They are typically used in firms that have little relationship with one another
E)It is an alternative agreement method to the Keiretsu understandings between members

Question 24

What Japanese term describes a labyrinth of firms with long-term semi-formal relationships up and down the vertical chain?

A)Kaizen
B)Keiretsu
C)Kanban
D)Karõshi
E)Mochibun kaisha

Question 25

What term does Uzzi use to describe relationships characterized by trust and a willingness to exchange closely held information and work together to solve problems?

A)Strategic partnerships
B)Joint ventures
C)Jobbers agreements
D)Embedded ties
E)Strategic alliance