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.

Accepted Answer

Vertical integration, while beneficial in certain circumstances, can lead to higher costs if a company continues to rely on its own internal suppliers even when outside suppliers can provide the same inputs at a lower cost. This can occur due to a lack of competition and a tendency to prioritize internal suppliers over external ones.

Question 2

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

Accepted Answer

Horizontal integration can lead to differentiation advantages when a company combines with a firm that has a different product line or expertise, allowing the merged company to offer a wider range of differentiated products or services.

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.

Accepted Answer

While reducing rivalry within the industry can be a potential benefit of horizontal integration, there are other factors that also contribute to increased profitability, such as increased market power, economies of scale, and access to new markets and resources. Therefore, successful integration in multiple areas may be necessary to achieve increased profitability.

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.

Accepted Answer

Transfer pricing refers to the pricing of goods, services, and intangibles between related parties, such as subsidiaries within a multinational company, rather than the scenario described.

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.

Accepted Answer

Horizontal integration allows pharmaceutical companies to lower costs by achieving scale economies in various areas, such as R&D, sales, and marketing. By combining the fixed costs of building a nationwide pharmaceutical sales force, they can further reduce their expenses.

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.

Accepted Answer

Vertical integration involves owning and controlling multiple stages of the value-added chain, from raw materials to finished products. When demand is unpredictable, it can be difficult to manage the volume or flow of products along the chain, leading to inefficiencies and higher costs. Therefore, vertical integration can be risky in such situations.

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.

Accepted Answer

The statement is incorrect. Transfer prices refer to the prices charged for goods or services transferred between different units or divisions within the same company. Bureaucratic costs, on the other hand, refer to the costs associated with complying with regulations, policies, and procedures in a business environment, and are 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.

Accepted Answer

The answer of An example of increased product differentiation, acquiring...

Question 9

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

Accepted Answer

A merger is when two companies combine to form a new entity, while an acquisition involves one company purchasing another.

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.

Accepted Answer

This is actually an example of backward vertical integration, as Tina's Technologies is expanding into an industry that provides inputs for their products. Horizontal integration would involve them expanding into a similar industry that produces similar products.

Question 11

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

Accepted Answer

When companies horizontally integrate, they can combine resources and processes, which can lead to economies of scale. This can help lower their overall cost structure and improve their profitability.

Question 12

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

Accepted Answer

Investments in specialized assets can also occur on the consumption side when customers invest in specialized assets that complement a particular industry's products or services. For example, purchasing specialized software to work with a certain type of machinery or equipment.

Question 13

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

Accepted Answer

The main difference between an acquisition and a merger is that in an acquisition, one company takes over another company, while in a merger, two companies join together to form a new entity. Therefore, an acquisition does not establish a new entity, it simply adds the acquired company to the acquiring company.

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.

Accepted Answer

The selection of a pricing option is one component of a corporate-level strategy, but it is not the only factor in maximizing profitability. Other factors to consider include target market, product differentiation, distribution channels, and resource allocation. Therefore, a company must consider various components of a corporate-level strategy in conjunction with pricing 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.

Accepted Answer

The statement accurately describes how Wal-Mart has been able to leverage its competitive advantage in order to expand into other discount retail formats, such as Sam's Clubs, by utilizing their bargaining power and inventory logistics efficiency.

Question 16

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

Accepted Answer

Product bundling involves offering customers the option to buy a package of products at a single, combined price. This is a common sales tactic used by businesses. It is said to improve sales and customer satisfaction, as well as offer a better value for the customer.

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.

Accepted Answer

Forward vertical integration involves a company moving closer to the end customer in the supply chain, typically by taking over distribution or retail aspects, not by adding value to raw materials or component parts, which would be more characteristic of backward vertical integration.

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.

Accepted Answer

Oracle has indeed adopted a strategy of acquisition by purchasing several other companies to become the world's largest maker of database software.

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.

Accepted Answer

The answer of A company should first choose a corporate-level...

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.

Accepted Answer

While a company's resources and capabilities may be valuable, entering a new industry means facing different competitive forces and challenges that may require new or different strategies. Success in one industry does not guarantee success in another.

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