Question 1

Capability explanations of vertical integration acknowledge the importance of firm-specific investments in creating value for a firm.

Accepted Answer

Capability explanations of vertical integration emphasize that a firm may realize greater benefits by internally owning the capabilities required for a particular type of production or activity, as firms often make substantial investments in specialized resources that are specific to their particular product or industry.

Question 2

Strategic alliances are the major substitute for vertical integration.

Accepted Answer

Strategic alliances are partnerships between companies that work together to achieve common goals. They can allow companies to access necessary resources or capabilities without having to vertically integrate or merge with another company. Therefore, strategic alliances can serve as a substitute for vertical integration.

Question 3

Budgets are an important control tool and they contribute to only positive outcomes.

Accepted Answer

Budgets can be a helpful control tool, but they may not always result in positive outcomes. Poorly designed or unrealistic budgets can lead to excessive spending cuts, hinder growth and development, and negatively impact employee motivation and job satisfaction. Additionally, unexpected external factors or changes in the business environment can render budgets ineffective.

Question 4

Flexibility is only valuable when the decision-making setting a firm is facing is uncertain.

Accepted Answer

Flexibility becomes valuable when a firm is facing uncertainty because it allows the firm to adapt to changes and respond quickly to unexpected events. In a stable and predictable setting, there is less need for flexibility as there are fewer external factors influencing decision-making.

Question 5

A flexibility-based approach to vertical integration suggests that when the decision-making setting regarding a business activity is highly uncertain, firms should form a strategic alliance to enter this activity instead of vertically integrating.

Accepted Answer

This statement is true, as a flexibility-based approach takes into account the uncertainty in a business activity and suggests that forming a strategic alliance would provide more flexibility and a lower risk approach compared to vertical integration.

Question 6

The use of budgets in a vertically integrated U-form organization can lead functional managers to overemphasize short-term behavior that is easy to measure and underemphasize longer-term behavior that is more difficult to measure.

Accepted Answer

In a vertically integrated U-form organization, functional managers may focus on achieving their own budget goals in the short term, even if it means neglecting long-term planning and investments that would benefit the organization as a whole. This is because budgets typically emphasize short-term performance metrics that are easy to measure, rather than more subjective and difficult-to-measure long-term goals such as innovation, employee development, or customer satisfaction.

Question 7

A decision-making setting is uncertain when the future value of an exchange cannot be known when investments in that exchange are being made.

Accepted Answer

Uncertainty refers to a situation where the future value of an exchange cannot be precisely known. This could be due to various factors such as incomplete information, unpredictable events, etc. In such a setting, decision makers have to rely on their judgment and experience to make decisions, and there is always some degree of risk involved.

Question 8

Flexibility is always valuable.

Accepted Answer

Flexibility is not always valuable as it depends on the context and specific circumstances. In some situations, rigidity or consistency may be more beneficial.

Question 9

A firm's vertical integration strategy is rare when few competing firms are able to create value by vertically integrating in the same way.

Accepted Answer

When few competing firms are able to create value by vertically integrating in the same way, a firm's vertical integration strategy becomes rare. This is because vertical integration involves a company acquiring or establishing operations that are involved in the production or distribution of its products or services, and if there are few competitors who can do this effectively, then a company that can do it stands out as being unique in the marketplace.

Question 10

If a firm has capabilities that are valuable and rare, then vertically integrating into businesses that exploit these capabilities can enable the firm to gain at least a temporary competitive advantage.

Accepted Answer

Vertical integration can provide a firm with greater control over its supply chain and enable the firm to leverage its valuable and rare capabilities in new ways that can help it achieve a competitive advantage. This can be especially effective in the short run, as competitors may not be able to quickly replicate the firm's vertical integration strategy. However, over time, competitors may be able to develop similar capabilities or find new ways to compete effectively, so a firm must continually evaluate the effectiveness of its vertical integration strategy to ensure that it remains a source of competitive advantage.

Question 11

A firm's vertical integration strategy can only be rare when it is the only firm that is able to vertically integrate efficiently.

Accepted Answer

A firm's vertical integration strategy can be rare even if only one firm is able to do it efficiently. Other factors such as market demand, availability of resources, and competition can also play a role in determining the rarity of a firm's vertical integration strategy.

Question 12

The downside risks associated with investing in a strategic alliance are unknown but fixed.

Accepted Answer

The downside risks associated with investing in a strategic alliance are not fixed and can vary depending on the nature of the alliance, the partners involved, and external factors such as changes in the market or industry.

Question 13

From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy rarely involves conflict resolution.

Accepted Answer

Coordinating functional specialists to implement a vertical integration strategy can involve conflict resolution. This is because different functional specialists may have different opinions, priorities, and goals, which may lead to conflicts regarding decision-making, resource allocation, communication, and coordination. The CEO needs to be aware of these potential conflicts and use effective leadership, communication, and negotiation skills to manage them and foster collaboration and alignment among the functional specialists.

Question 14

Numerous conflicts can arise among functional managers in a vertically integrated U-form organization.

Accepted Answer

In a U-form organization, functional managers often have overlapping responsibilities and must work together closely. This can lead to conflicts and disagreements over decision-making authority, resource allocation, and other important issues.

Question 15

Flexibility is low when the cost of changing strategic choices is low.

Accepted Answer

Flexibility is high when the cost of changing strategic choices is low, as it allows for easier adaptation to new circumstances or opportunities.

Question 16

A firm's ability to conceive and implement vertical integration strategies tends to be highly susceptible to direct duplication.

Accepted Answer

Vertical integration strategies are often complex and involve unique resources, capabilities, and relationships that are difficult for competitors to directly duplicate.

Question 17

Outsourcing can help firms reduce costs and focus their efforts on those business functions that are central to their competitive advantage.

Accepted Answer

Outsourcing allows companies to delegate non-core business functions to external service providers who can often perform the work more efficiently and at a lower cost. This frees up internal resources and allows companies to focus on their core competencies, which are typically the areas where they have a competitive advantage.

Question 18

Once a firm has vertically integrated it has committed its organizational structure, its management controls, and its compensation policies to a particular vertically integrated way of doing business and it has enhanced its flexibility.

Accepted Answer

Vertical integration often reduces a firm's flexibility because it commits the firm to a specific supply chain structure and can make it harder to adapt to changes in the market or technology.

Question 19

A firm may be able to gain an advantage from vertically integrating when it resolves some uncertainty it faces sooner than its competition.

Accepted Answer

Vertical integration can enable a firm to control its supply chain and reduce uncertainty in the production process. By integrating forward or backward, the firm can gain insight into the activities of its suppliers or customers, respectively, and respond to changing market conditions more quickly than its competitors who rely on outside partners. Therefore, vertical integration can be a source of competitive advantage if it helps the firm to resolve uncertainty sooner.

Question 20

Research suggests that, in general, vertically integrating is more flexible than not vertically integrating.

Accepted Answer

Vertically integrating typically involves more control and less flexibility, as it requires managing more stages of production or distribution internally, which can limit adaptability to market changes.

Quiz 6: Vertical Integration