Deck 10: Vertical Integration and the Scope of the Firm

Question 1

The growth in the size and scope of companies throughout most of the 19^th and 20^th centuries can be attributed primarily to the increasing transaction cost of markets.

Answer 1

False

Question 2

Managing vertically-related businesses that are strategically very different is not a problem if companies adopt an appropriate organizational structure.

Answer 2

False

Question 3

Manufacturers of final products such as motor vehicles, airplanes, and domestic appliances are more likely to backward integrate into the productions of commodity components than components that are specialized to the specific requirements of the manufacturer of the final product.

Answer 3

False

Question 4

One of the advantages of a company providing its own facilities maintenance services is that the incentives that a wholly owned and directly managed maintenance unit is subject to "high powered" incentives.

Question 5

Corporate strategy is concerned with decisions over product scope, geographical scope, and vertical scope.

Question 6

Firms exist in situations where the administrative costs of coordinating economic activity are less than the transactions costs of organizing such activity across markets.

Question 7

When there are technical efficiencies from co-locating vertically-related processes (e.g.the production of pulp and paper or the production of steel and steel strip), vertical integration (in the form of common ownership of the vertically-linked activities) is essential.

Question 8

During the past three decades, increased emphasis on flexibility and the need to develop superior organizational capabilities has caused large companies ot reduce their vertical scope.

Question 9

Corporate strategy is concerned with how a firm competes in a particular industry, whereas business strategy is concerned the choice of which businesses the firm competes in.

Question 10

By offering the possibility of repeat business, the suppliers and buyers can avoid the problems of opportunism that give rise to transaction costs.

Question 11

Jewelry companies typically do not own gold and silver mines because the markets for gold and silver are highly competitive and impose few transaction costs on jewelry makers.

Question 12

A major factor causing the narrowing in the scope of the activities of large corporations during the last two decades of the 20^th century was increasing turbulence of the economic environment.

Question 13

Transaction costs of markets include search costs and costs of negotiating contracts, but usually exclude the costs incurred in enforcing contracts.

Question 14

For most of the 20^th century companies expanded their vertical scope in the belief that vertical integration reduced risk and permitted superior coordination compared to relying on markets.

Question 15

Economies of scope and transaction costs are important concepts when analyzing the vertical, geograpjical, amd product scope of the firm.

Question 16

The main manifestation of the trend towards vertical de-integration is the growth of outsourcing.

Question 17

When a farmer operates a stall in a local farmers' market; this is a form of backward integration.

Question 18

Alfred Chandler described the administrative mechanism of firms as the "invisible hand" of economic coordination.

Question 19

Vertical integration allows a firm to extend its monopoly position from one stage of an industry's value chain to adjacent stages, this allows the firm to increase the amount of monopoly profit it can extract.

Question 20

Economic organization in the capitalist economy is achieved through markets by the price mechanism and through firms by administrative direction.

Question 21

The capitalist economy comprises two forms of economic organization, the market mechanism operated by prices and the administrative mechanism of firms.

A)The market mechanism is referred to as the "visible hand" while the administrative mechanism of firms is referred to as the "invisible hand"
B)The market mechanism is referred to as the "invisible hand" while the administrative mechanism of firms is referred to as the "visible hand"
C)The simultaneous operation of both "hands" means that the capitalist system is often referred to as an "ambidextrous organization"
D)The notion of the capitalist economy as governed by market processes is a myth.In reality the global capitalist economy is controlled by large corporations.

Question 22

When Amazon,com founded Amazon Studios to create content for its Amazon Prime video streaming service, this represented:

A)Forward integration
B)Backward integration
C)Full integration
D)Outsourcing

Question 23

In fashion clothing, one reason why mass-market distributors such as H&M, Forever 21, and Gap outsource their production is to reduce new product cycle time (the time between the initial design of a product and its delivery to a retail store).

Question 24

Which of the following factors has not contributed to the trend towards outsourcing in recent decades:

A)Increasing emphasis on cost efficiency
B)Increasing transaction costs
C)Increasing turbulence of the business environment
D)Increasing emphases on the need for competitive advantage based upon superior capabilities

Question 25

Corporate strategy decisions are mainly concerned with:

A)Establishing competitive advantage
B)The scope of the firm's activities
C)The geographical boundaries of the firm
D)Diversification and vertical integration

Question 26

McDonalds--like most other fast-food chains--prefers to franchise rather than directly operate its retail outlets.An advantage of franchising over vertical integration is:

A)Franchising permits superior coordination of retail activities with upstream activities
B)Franchising subjects the operators of retail outlets to "high-powered" incentives
C)Franchising permits more effective quality control of the retail outlet
D)Franchising avoids some of the transaction costs that can arise with owning and operating retail outlets

Question 27

The opening quotation concerning Bath Fitter illustrates the following benefits of vertical integration:

A)Technical economies from the physical integration of processes
B)Avoiding the transactions costs involved monitoring and enforcing contracts with external suppliers
C)Economies of scale
D)None of the above.

Question 28

Vertical integration is:

A)A firm's ownership and control of vertically-related activities
B)A firm's control over its input sources and the distribution of its output
C)A firm establishing close relationships with its suppliers and its buyers
D)A firm acquiring an equity stake in a supplier or buyer

Question 29

The main reason that the producers of wood pulp have often forward integrated into the production of paper is:

A)To increase value added by moving closer to the final customer
B)To exploit technical economies of co-locating pulp and paper making plants while avoiding transaction costs caused by transaction-specific investments
C)To reduce inventories and improve quality
D)To insulate the firm from fluctuations in the price of wood pulp.

Question 30

The opening quotation from Tom Peters states that as "yesterday's highly integrated giants" de-integrate, their vertical relationships are taking the form of:

A)Market contracts
B)Long-term contracts
C)Alliances and partnerships
D)All of the above.

Question 31

When a winery opens a tasting room through which it sells its wine to visitors, this represents:

A)Backward integration
B)Forward integration
C)A marketing initiative
D)Diversification

Question 32

Which of the following factors is not conducive to vertical integration between two adjacent stages of production?

A)Similarity of the optimum scale of production between the two stages
B)Few companies at each of the two stages
C)The need for transaction-specific investments by the firms involved
D)Distinctly different organizational capabilities are required at each stage

Question 33

Vertical integration by industrial firms during the major part of the 20^th century was motivated primarily by firms' desire for:

A)Reducing costs
B)Securing scare inputs
C)Reducing risk and improving coordination
D)Increasing speed

Question 34

The main cause of downsizing, refocusing, and outsourcing during the latter part of the 20^th century was:

A)Developments in IT-especially the advent of the internet
B)A more turbulent business environment
C)Both (a) and (b)
D)Neither (a) nor (b)

Question 35

The main business of the Coca-Cola Company is manufacturing, marketing and distributing concentrate for soda drinks to bottlers in over 200 countries of the world.The corporate scope of the Coca-Cola Company is best described as:

A)A broad product, geographical, and vertical scope
B)A broad product and vertical scope, and a narrow geographical scope
C)A broad geographical scope and narrow product and vertical scope
D)A broad product and geographical scope and narrow vertical scope.

Question 36

Franchising offers a means of reconciling the coordination and control benefits of vertical integration with the entrepreneurial flexibility and high-powered incentives of market contracts.

Question 37

In order for a manufacturer of consumer goods to maximize responsiveness to changes in consumer demand for its products:

A)It is best to outsource the production of components and materials
B)It is best to be backward integrated into the production of components and materials
C)It depends upon the type of flexibility that is desired
D)It is best to be partially backward integrated.

Question 38

The principal feature of the corporate scope of Tesla Inc, compred to other automobile manufacturers, is:

A)Its broad geographical scope
B)Its narrow product scope
C)A broad vertical scope
D)Its emphasis on technology

Question 39

The economic organization of the home improvement industry fearures:

A)Self-employed individals and small firms linked by cmarket contracts
B)Large integrated companies
C)Highly-diversified companies
D)Vertical integration

Question 40

The growth in the scope of business enterprises for most of the 19th and 20th centuries can be attributed to a drop in administrative costs of firms relative to the transaction costs of market.This resulted from:

A)The monopolistic power of large firms to raise prices and push down wages
B)Globalization
C)The growing transaction costs of markets as a result of taxes, regulation, and litigation
D)Innovation in information and communications technology and in management

Question 41

Vendor partnerships based on relational contacts-such as the relationships between vehicle manufacturers and their component suppliers-are superior to either pure market contracts or vertical integration because:

A)They give manufacturers immense bargaining power over their suppliers
B)They offer similar benefits of high-powered incentives and flexibility that market contracts
C)They offer similar coordination benefits as vertical integration
D)They combine the coordination benefits of vertical integration with the incentive and flexibility benefits of market contracts.

Question 42

Vertical integration by Zara, the main division and brand of the Spanish clothing firm Inditex, illustrates:

A)The potential of vertical integration to offer flexibility in responding to seasonal fluctuations in demand
B)The potential for vertical integration to offer flexibility in responding to rapid changes in customer product preferences
C)The potential for vertical integration to overcome problems arising from the need for transaction-specific investments by garment manufacturers
D)The potential for vertical integration to exploit technical economies from co-locating adjacent processes.

Question 43

The main lesson to be drawn from the delays to the launch of Boeing's 787 Dreamliner is that, when developing complex products that embody diverse new technologies:

A)It is best to do it in-house without heavy reliance on external suppliers
B)Extensive outsourcing is inevitable as no single company has sufficient technological capabilities in-house
C)The principal firm must possess well-developed integration capabilities ○
D)A competitor such as Airbus Industrie which began as an alliance among a number of separate companies will always have an advantage.