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

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Unfortunately, horizontal integration can not be accomplished by acquisitions or mergers.

Answer 3

False

Question 4

Horizontal integration can help lower costs when it allows a company to reduce the duplication of resources.

Question 5

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 6

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 7

Vertical integration can strengthen a company's differentiation business-level strategy and competitive advantage.

Question 8

Horizontal integration almost always increases rivalry in an industry.

Question 9

When a bank offers home mortgages and credit cards to its checking account customers, it is using horizontal integration strategy.

Question 10

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

Question 11

Vertical integration is undertaken to support the competitive position of a company's core business.

Question 12

The term bureaucratic costs refers to costs associated with the creation and maintenance of the administrative function in a company.

Question 13

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

Question 14

When a company stays inside one industry, the problems of sustaining a successful business model and strategies over time can be difficult because of changing conditions in the environment.

Question 15

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.

Question 16

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 17

Product bundling occurs when a firm offers a range of products that are sold together at a single price.

Question 18

Horizontal integration allows companies to obtain bargaining power over suppliers or buyers and increase their profitability at the expense of suppliers or buyers.

Question 19

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 20

Managers use corporate-level strategy to identify which industries a company should compete in to maximize long-run profitability.

Question 21

_____ is the process of acquiring or merging with industry competitors to achieve the competitive advantages.

A) Tapered integration
B) Vertical integration
C) Horizontal integration
D) Franchising
E) Diversification

Question 22

Competitive bidding makes suppliers reluctant to make investments that tie them closely to their trading partners.

Question 23

Companies that outsource most or all of their value creation activities are often referred to as virtual corporations.

Question 24

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

Question 25

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 26

Even though companies may invest in specialized assets to build competitive advantage, it is seldom necessary that suppliers do so.

Question 27

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

Question 28

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 29

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 30

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) take over.
E) dissolution.

Question 31

Antitrust authorities:

A) favor large companies.
B) reduce industry competition.
C) are concerned with the abuse of market power.
D) tend to raise prices of products for consumers.
E) enable the achievement of market power.

Question 32

The final part of the strategy formulation process is:

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

Question 33

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, together, at a better price as one combined product. Which of the following concepts is the company utilizing to meet the customer's needs?

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

Question 34

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 more flat.
E) The company will merge with another company that belongs to a different industry.

Question 35

Google bought Clever Sense, a mobile app company. This is an example of a(n):

A) parallel sourcing policy.
B) strategic outsource.
C) strategic alliance.
D) merger.
E) acquisition.

Question 36

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 37

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 38

Strategic alliance is a type of long-term contract that involves one company taking over another company.

Question 39

Horizontal integration in an industry tends to:

A) increase the cost structure.
B) increase product differentiation.
C) undermine the company's competitive advantage.
D) increase rivalry within the industry.
E) reduce bargaining power over suppliers and buyers.

Question 40

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

A) develop "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 41

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 42

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 43

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 44

Which of the following problems is associated with the strategy of vertical integration?

A) Decrease in cost structure
B) Increase in industry competition 
C) Vulnerability to unpredictable demand 
D) Assured conflict with the antitrust authorities
E) Lack of bureaucratic costs

Question 45

Vertical integration can be disadvantageous when:

A) competitors are vertically integrated.
B) demand is stable.
C) industry technology is changing rapidly.
D) the company is operating in the home country.
E) costs of company decreases.

Question 46

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 47

Ownership of retail outlets may be important for a manufacturer if:

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

Question 48

To build trust in a cooperative relationship, both firms can:

A) rely on competitive bidding.
B) make mutual investments in specialized assets.
C) write short-term contracts that must be renewed frequently.
D) increase their vertical integration.
E) use outsourcing of noncore activities.

Question 49

A company pursuing a strategy of vertical integration may expand its operations:

A) backward into an industry that produces inputs for the company's products.
B) by making specialized investments jointly with its competitor.
C) laterally into an industry that competes with the company's products.
D) by merging with industry competitors.
E) by using its capital resources to purchase another company within the industry.

Question 50

A strategy of vertical integration may be a risky strategy for a company to pursue when demand is:

A) predictable.
B) stable.
C) unpredictable.
D) steadily increasing.
E) rapidly increasing.

Question 51

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 52

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 53

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

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

Question 54

Vertical disintegration occurs when:

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

Question 55

Vertical integration is based on a company entering only those industries that:

A) are involved in the distribution of products.
B) are considered as potential competitors.
C) are involved in sourcing raw materials.
D) are not in any way related to the company's current business operation.
E) add value to its core products.

Question 56

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 exactly 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 57

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

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

Question 58

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) credible commitment.
C) competitive bidding.
D) vertical integration.
E) parallel sourcing.

Question 59

Credible commitments refer to:

A) believable promises that support the development of a long-term relationship between companies.
B) the merging of two companies that have an equal market share.
C) to obtaining of goods, services or works from an external source.
D) the acquisition of one company by another company.
E) the outsourcing of after-sale services to a different company.

Question 60

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

A) horizontal integration.
B) outsourcing.
C) strategic alliance.
D) joint venture.
E) vertical integration.

Question 61

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

Question 62

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

Question 63

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 64

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 65

Under a competitive bidding strategy, independent component suppliers compete with each other to be the company that will be chosen to supply:

A) a particular part for a particular manufacturer.
B) all of the parts for a particular manufacturer.
C) a particular part for all manufacturers in the industry.
D) all parts for all products a manufacturer needs in the industry.
E) all parts for a particular product a manufacturer needs in the industry.

Question 66

Outsourcing:

A) eliminates the need for a value chain.
B) reduces the firm's dependence on its value chain.
C) reorders the steps in a firm's value chain.
D) moves some value chain activities outside the firm.
E) strengthens the firm's capabilities in each value chain function.

Question 67

Outsourcing occurs when a firm:

A) buys one of its rivals.
B) merges with one of its suppliers.
C) enters into a joint venture with a rival.
D) hires another firm to perform value creation activities.
E) enters into contracts with two suppliers simultaneously.

Question 68

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

Question 69

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 products that benefit all companies involved in the alliance.

Question 70

GM typically solicits bids from global suppliers to produce a particular 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

Question 71

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?