Question 1

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.

Accepted Answer

Independent suppliers cannot pass on cost increases in the form of higher transfer prices as easily as in-house suppliers because they operate in a competitive market and must maintain competitive pricing to retain business. This statement is not a difference between in-house and independent suppliers; rather, it's more applicable to in-house suppliers who may have more leeway to adjust prices due to the lack of external competition.

Question 2

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.

Accepted Answer

Vertical disintegration refers to the process of a company slimming down by exiting industries that are not its core industry. Therefore, choice A is the best option. The other options describe different strategies for growth and expansion, which are the opposite of vertical disintegration.

Question 3

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.

Accepted Answer

E  Specialized assets can lead to a lower cost structure due to efficiencies and can also allow companies to charge premium prices due to the unique value or differentiation they provide.

Question 4

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.

Accepted Answer

A long-term cooperative relationship provides benefits such as shared cost savings, joint efforts to lower costs or increase product quality, act as a substitute for vertical integration, and avoid managerial inefficiencies. Therefore, all of the given options are benefits of a long-term cooperative relationship.

Question 5

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

Accepted Answer

This represents a mismatch in optimal scale, as Lime is choosing to purchase scooters that are not optimized for its specific purposes instead of manufacturing their own, which would require a large initial investment in fixed costs.

Question 6

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

Accepted Answer

The answer of Company A has made substantial investments in...

Question 7

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.

Accepted Answer

All of these factors can be a reason for strategic managers to consider vertical disintegration as a way to strengthen their core business model. The increase in low-cost global component part suppliers can make it more cost-effective to outsource certain aspects of the production process. Disadvantages of expanding can include increased risk and the diversion of resources from core competencies. Rapid technological change or changing customer demands may lead to the need for more flexibility, which could be achieved through vertical disintegration. Finally, major shifts in institutional norms or competitive dynamics may require restructuring and disintegration to remain competitive.

Question 8

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.

Accepted Answer

The scenario illustrates a credible commitment, as SparklingLeaves has made a long-term agreement with StanMotors to be its sole supplier in exchange for customized tools. This provides assurance to StanMotors that it will have a reliable source of high-quality tools, while also securing SparklingLeaves' future business.

Question 9

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.

Accepted Answer

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 strategic alliances. Horizontal integration is the merging of companies at the same level of the supply chain, while vertical integration is the merging of companies at different levels of the supply chain. Outsourcing refers to hiring a third-party company to perform a task or service. Joint ventures refer to partnerships between two or more companies to create a new entity.

Question 10

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.

Accepted Answer

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 transfer pricing.

Question 11

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.

Accepted Answer

When products are complex, the manufacturer may need to provide after-sales service, which is better done through retail outlets that are owned by the manufacturer rather than relying on third-party retailers who may not adhere to the required standards.

Question 12

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.

Accepted Answer

Adding retail and distribution into the value chain would require forward integration, where the company would expand its operations downstream by acquiring or creating retail and distribution channels to sell its finished products directly to customers.

Question 13

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.

Accepted Answer

Long-term contracts are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers. This option allows for flexibility and avoids the high bureaucratic costs associated with vertical integration. Additionally, long-term contracts can lead to economies of scale and lower transaction costs over time.

Question 14

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

Accepted Answer

Lowered cost structure is not a benefit of vertical integration. Vertical integration is the process of combining different stages of production or distribution under one ownership. This can lead to benefits such as facilitated investments in specialized assets, enhanced product quality, improved scheduling, and strengthened differentiation advantage. However, it does not necessarily lead to a lowered cost structure.

Question 15

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

Accepted Answer

Parallel sourcing is the concept illustrated in this scenario. It involves maintaining relationships with multiple suppliers for the same product or service to mitigate the risk of supply chain disruptions or uncooperative behavior from one supplier. This strategy also allows companies to compare prices, quality, and delivery times between suppliers and negotiate better deals.

Question 16

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.

Accepted Answer

Vertical integration involves owning and controlling multiple stages in the production process, which can limit a company's ability to adapt to new technologies if they are already locked into an old, inefficient technology. This can lead to decreased competitiveness and higher costs.

Question 17

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

Accepted Answer

Vertical integration can improve scheduling, which is crucial for just-in-time inventory systems as it allows for better coordination and timing of production and delivery processes.

Question 18

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.

Accepted Answer

Parallel sourcing refers to the practice of developing long-term relationships with more than one supplier or vendor for the same product or service, in order to have a backup in case of supply chain disruptions or quality issues. In this scenario, John's surfboard shop has a long-term relationship with two surfboard makers, indicating that he is using parallel sourcing.

Question 19

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

Accepted Answer

The risk of holdup refers to the possibility that the other company will increase the price or demand additional concessions once the investing company has made the specialized asset investment, making it a less attractive strategy for achieving a competitive advantage. The other options listed are not directly related to this specific strategy.

Question 20

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

Accepted Answer

Vertical integration is hazardous when demand fluctuates frequently because it can lead to inefficiencies and increased costs due to the inability to quickly adapt to changes in demand.

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

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

Vertical disintegration occurs when a company:

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

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

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?

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

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:

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:

Ownership of retail outlets may be necessary if:

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

Long-term contracts:

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

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?

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

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

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

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?

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