Deck 6: Vertical Integration

Question 1

Firms should only bring market exchanges within their boundaries when the cost of vertical integration is more than the cost of opportunism.

Answer 1

False

Question 2

When companies staffed and operated their own call centers in the United States, they were engaging in backward vertical integration, but when they started using independent companies in India to staff and operate these centers, they were more vertically integrated.

Answer 2

False

Question 3

If one of a firm's exchange partners behaves opportunistically, this reduces the economic value of the firm.

Answer 3

True

Question 4

Opportunism exists when a firm is unfairly exploited in an exchange.

Question 5

If a firm engages in vertical integration into a business activity where it does not possess any of the valuable, rare, or costly-to-imitate resources it needs to gain a competitive advantage, it may find itself at a competitive disadvantage to the extent that some firms already have competitive advantages in these business activities.

Question 6

A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials.

Question 7

A firm with a high ratio between value added and sales has brought many of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.

Question 8

Decisions about whether or not to vertically integrate often determine whether or not a firm is operating in a single business or industry or multiple businesses or industries.

Question 9

Business strategy is a firm's theory of how to gain competitive advantage by operating in several businesses simultaneously.

Question 10

More vertically integrated firms accomplish fewer stages of the value chain within their boundaries than less vertically integrated firms.

Question 11

One of the biggest uncertainties in providing customer service through call centers is the question of whether the people staffing the phones actually help a firm's customers.

Question 12

Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions.

Question 13

If Iron Horse Helmets (IHH) were to contract with a Chinese manufacturing firm to provide IHH with superior quality helmets for sale in the United States but discovered that the shipments were actually of inferior quality when they were received, IHH would be said to be acting opportunistically.

Question 14

Transaction-specific investments make parties to an exchange vulnerable to opportunism, and vertical integration solves this vulnerability problem.

Question 15

Firms should avoid vertically integrating in those businesses where they possess valuable, rare, and costly-to-imitate resources and capabilities.

Question 16

Firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages.

Question 17

A transaction-specific investment is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

Question 18

If Wal-Mart were to purchase a factory to make socks and it planned to sell these socks in its stores, this would be an example of forward vertical integration.

Question 19

The threat of opportunism is the least when a party to an exchange has made transaction-specific investments.

Question 20

A firm's level of vertical integration is the number of steps in its value chain that the firm accomplishes within its boundaries.

Question 21

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

Question 22

Strategic alliances are the major substitute for vertical integration.

Question 23

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

Question 24

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

Question 25

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.

Question 26

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.

Question 27

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

Question 28

Flexibility is always valuable.

Question 29

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

Question 30

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.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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.

Question 39

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

Question 40

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

Question 41

________ exists when a firm is unfairly exploited in an exchange.

A) Competitive advantage
B) Business level strategy
C) Opportunism
D) Corporate level strategy

Question 42

To the extent that other firms may have competitive advantages in business activities that a firm is considering to enter through vertical integration, vertically integrating into these activities could put the firm at a

A) competitive advantage.
B) temporary dynamic disadvantage.
C) sustainable competitive advantage.
D) competitive disadvantage.

Question 43

According to ________ of when vertical integration creates value, vertical integration is valuable when it reduces threats from a firm's suppliers or buyers due to any transaction-specific investments a firm has made.

A) firm capability explanations
B) opportunity-based explanations
C) flexibility-based explanations
D) opportunism-based explanations

Question 44

A firm with a ________ ratio between value added and sales has brought ________ of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.

A) low; many
B) high; many
C) medium; many
D) medium; few

Question 45

________ refers to how costly it is for a firm to alter its strategic and organizational decisions.

A) Flexibility
B) Dynamic capability
C) Opportunism
D) Uncertainty

Question 46

In 1937, which Nobel Prize-winning economist first articulated the question of vertical integration, i.e., which stages of the value chain should be included within a firm's boundaries and why?

A) Ronald Coase
B) Adam Smith
C) David Ricardo
D) Milton Freidman

Question 47

Which of the explanations of vertical integration is the oldest and has received the greatest empirical support?

A) opportunism-based
B) flexibility-based
C) firm capabilities-based
D) alliance-based

Question 48

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

A) significantly more flexible
B) somewhat more flexible
C) comparatively flexible
D) less flexible

Question 49

A(n) ________ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

A) opportunity-specific investment
B) transaction-specific investment
C) competition-specific investment
D) opportunistic investment

Question 50

When Apple, Inc. opened retail stores to sell its computers and iPods, this was an example of

A) forward vertical integration.
B) backward vertical integration.
C) forward horizontal integration.
D) backward horizontal integration.

Question 51

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

A) uncertain
B) opportunistic
C) flexible
D) dynamic

Question 52

If a firm decided to maintain relationships with several different call center management companies, each of which have adopted different technological solutions to the problem of how to use call center employees to assist customers who are using very complex products, to reduce the uncertainty of whether the people staffing the phone can help the firm's customers, this would be consistent with which explanation of vertical integration?

A) opportunism-based
B) flexibility-based
C) firm capabilities-based
D) alliance-based

Question 53

A firm's ________ measures the percentage of a firm's sales that is generated by activities done within the boundaries of a firm.

A) value added as a percentage of sales
B) simple product diversification
C) competitive advantage
D) competitive dynamic

Question 54

Which of the following is not used to determine a firm's level of vertical integration using the value added as a percentage of sales approach?

A) value added
B) net income
C) sales
D) gross margin

Question 55

The essence of the ________ to vertical integration is that if a firm possesses valuable, rare, and costly-to-imitate resources in a business activity, it should vertically integrate into that activity otherwise it should not vertically integrate into that activity.

A) flexibility-based explanation
B) opportunism-based explanation
C) firm capability explanation
D) opportunity-based explanation

Question 56

If Dell computers were to open its own factory to manufacture the LCD televisions it sells at its online store, this would be an example of

A) forward vertical integration.
B) product differentiation.
C) forward horizontal integration.
D) backward vertical integration.

Question 57

A(n) ________ approach to vertical integration suggests that rather than vertically integrating into a business activity whose value is highly uncertain firms should not vertically integrate and instead should form a strategic alliance to manage this exchange.

A) alliance-based
B) flexibility-based
C) firm capabilities-based
D) opportunism-based

Question 58

Some observers predict that by ________ an additional 3.3 million jobs in the United States will be outsourced, many to operations overseas.

A) 2014
B) 2015
C) 2016
D) 2017

Question 59

The number of steps in a firm's value chain that it accomplishes within its boundaries describes the firm's level of

A) product differentiation.
B) diversification.
C) vertical integration.
D) competitive dynamics.

Question 60

Vertical integration is a type of

A) business strategy.
B) generic strategy.
C) differentiation strategy.
D) corporate strategy.

Question 61

Compensation that focuses on groups of employees such as cash bonuses and stock grants are best suited for ________ explanations of vertical integration.

A) flexibility-based
B) capabilities-based
C) strategically-based
D) opportunism-based

Question 62

Firm-specific investments are a type of ________ investments.

A) operational
B) contingent
C) transaction-specific
D) horizontal

Question 63

Which organizational structure is used to implement a vertical integration strategy?

A) matrix
B) functional
C) multidivisional
D) product-divisional

Question 64

The ________ explanations call for compensation that focuses on individual employees, such as cash bonuses for individual performance.

A) capabilities-based
B) strategically-based
C) flexibility-based
D) opportunism-based

Question 65

Which committee in a U-form organization meets monthly and usually consists of the CEO and each of the heads of the functional areas included in a firm?

A) executive committee
B) functional committee
C) operations committee
D) managerial committee

Question 66

If a computer company decided to open its own call centers to provide technical support to its corporate customers because the employees in these call centers need a significant level of in-depth training that was highly specialized to the computer company's products, this would be consistent with which explanation of vertical integration?

A) opportunism-based
B) flexibility-based
C) firm capabilities-based
D) alliance-based

Question 67

According to the flexibility-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) stock options for individual performance
B) stock grants for individual performance
C) stock grants for corporate performance
D) cash bonuses for individual performance

Question 68

The major substitute for vertical integration is

A) vertical disintegration.
B) strategic alliances.
C) a product-differentiation strategy.
D) a low-cost strategy.

Question 69

The ________ logic suggests that compensation that has a fixed and known downside risk and significant upside potential is important for firms implementing vertical integration strategies.

A) opportunism
B) strategic
C) capabilities
D) flexibility

Question 70

________ are when employees are given the right, but not the obligation, to purchase stock at predetermined prices.

A) Flexibility grants
B) Stock grants
C) Stock options
D) Grant options

Question 71

Which committee in a U-form organization meets weekly and reviews the performance of the firm on a weekly basis and typically consists of a CEO and two or three functional senior managers?

A) top management team
B) executive committee
C) operations committee
D) functional committee

Question 72

Which of the following statements regarding direct duplication and substitutes for vertical integration is accurate?

A) A firm's valuable and rare vertical integration choices may be subject to direct duplication and substitutes.
B) A firm's valuable and rare vertical integration choices are subject to neither direct duplication nor substitutes.
C) A firm's valuable and rare vertical integration choices may be subject to direct duplication but not to substitutes.
D) A firm's valuable and rare vertical integration choices may be subject to substitutes but not to direct duplication.

Question 73

Evaluating a functional manager's performance relative to budgets can be an effective control when

A) the process used in developing budgets is open and participative.
B) the process reflects the economic best-case scenario developed by the functional manager.
C) the process reflects the economic worst-case scenario developed by the functional manager.
D) the process relies solely on quantitative criteria to evaluate the functional manager's performance.

Question 74

From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves

A) conflict resolution.
B) competitive positioning.
C) product differentiation.
D) corporate expansion.

Question 75

If Brenda Thompson, Tom Mix's supervisor, wanted to use a budgeting process to help evaluate Tom's performance but wanted to ensure that using a budget did not encourage Tom to focus on short-term behaviors at the expense of long-term results, she should

A) develop the budget herself using realistic goals based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow.
B) work with Tom in an open and participative process to develop the budget based on the most optimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function.
C) develop the budget herself based on the most pessimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow.
D) work with Tom in an open and participative process to develop the budget based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function.

Question 76

Investments made by employees that have more value in a particular company than in alternative companies are known as

A) firm-specific investments.
B) individual-specific investments.
C) group-specific investments.
D) opportunistic investments.

Question 77

A firm is likely to be among the first in its industry to vertically disintegrate an exchange when

A) the firm concludes that the level of specific investment required to manage an economic exchange is high.
B) the firm believes that the exchange is costly to imitate.
C) the level of uncertainty about the value of an exchange has increased.
D) the firm believes that the exchange is rare.

Question 78

________ are payments to employees in a firm's stock.

A) Stock grants
B) Cash grants
C) Flexibility grants
D) Option grants

Question 79

According to the capabilities-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) salary
B) cash bonuses for corporate performance
C) cash bonuses for individual performance
D) stock grants for individual performance

Question 80

According to the opportunism-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A) cash bonuses for corporate performance
B) cash bonuses for group performance
C) stock options for individual performance
D) stock grants for individual performance