Question 1

How do firms benefit from vertical integration?
A) Vertical integration allows firms to reduce organizational complexity and administrative costs.
B) Firms that vertically integrate will have increased strategic flexibility when faced with technological changes.
C) Firms that vertically integrate do not have to make transaction-specific investments.
D) Vertical integration allows firms to increase operational efficiencies through improved coordination of adjacent value chain activities.

Accepted Answer

Vertical integration allows firms to increase operational efficiencies through improved coordination and the fine-tuning of adjacent value chain activities. It facilitates scheduling and planning.

Question 2

Virtue Products Inc., a large conglomerate, procures a few component parts from external suppliers and also manufactures some of the key raw materials in its own subsidiaries.This apart, the company does not solely depend on outside distributors to reach its customers.In fact, it has its own retail stores to distribute its products.In this scenario, which of the following alternatives to vertical integration is Virtue Products applying?
A) Concentric integration
B) Taper integration
C) Horizontal integration
D) Conglomerate integration

Accepted Answer

In this scenario, Virtue Products is applying taper integration. Taper integration is a way of orchestrating value activities in which a firm is backwardly integrated, but it also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside-market firms for some if its distribution.

Question 3

Neon Electronics Inc.sourced touchscreens required for its tablet computers, cell phones, and televisions from a manufacturer in China.But the demand for such components was high globally, and the supplier could not meet the quality standards of Neon Electronics.Thus, Neon Electronics decided to set up its own unit to develop and manufacture the required touchscreens.What does this scenario best illustrate?
A) Crowdsourcing
B) New product development
C) Backward vertical integration
D) Conglomerate diversification

Accepted Answer

This scenario best illustrates backward vertical integration. Backward vertical integration involves moving ownership of activities upstream nearer to the originating inputs of the industry value chain.

Question 4

Each stage of the vertical value chain typically represents a distinct _____ in which a number of different firms are competing.
A) industry
B) functional department
C) economy
D) customer segment

Accepted Answer

Industry value chains are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. Each stage of the vertical value chain typically represents a distinct industry in which a number of different firms are competing.

Question 5

Which of the following best illustrates site specificity?
A) Equipment necessary for mining bauxite and aluminum smelting
B) Bottling machinery to manufacture bottles with trademarked shapes
C) Investment made in human capital to master procedures of a specific organization
D) Investment made to train employees to operate computers

Accepted Answer

Equipment necessary for mining bauxite and aluminum smelting best illustrates site specificity. Site specificity, a form of specialized assets, refers to assets that are required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

Question 6

_____ is best described as changes in an industry value chain that involve moving ownership of activities closer to the end (customer)point of the value chain.
A) Forward vertical integration
B) Corporate divestiture
C) Reverse engineering
D) Closed innovation

Accepted Answer

Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.

Question 7

Which of the following alternatives on the make-or-buy continuum allows for most integration?
A) Short-term contracting
B) Joint ventures
C) Licensing
D) Parent-subsidiary relationship

Accepted Answer

The parent-subsidiary relationship describes the most-integrated alternative to performing an activity within one's own corporate family.

Question 8

_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs.
A) Venture capitalism
B) Bootlegging
C) Vertical integration
D) Crowdsourcing

Accepted Answer

Vertical integration is a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. Vertical integration can be measured by a firm's value added: What percentage of a firm's sales is generated within the firm's boundaries?

Question 9

_____ are best described as unique assets with high opportunity costs that have significantly more value in their intended use than in their next-best use.
A) Cost drivers
B) Value drivers
C) Specialized assets
D) Liquid assets

Accepted Answer

Specialized assets are unique assets with high opportunity costs. They have significantly more value in their intended use than in their next-best use. They come in three types: site specificity, physical-asset specificity, and human-asset specificity.

Question 10

When Toyota wanted to secure a long-term supply of lithium, it had to create a bond of trust with an Australian company, Orocobre Ltd.Orocobre wanted to establish the bond of trust before making huge investments in specialized equipment required to extract the high-quality lithium.What did Toyota do to instill this trust?
A) It offered Orocobre exposure to Toyota's proprietary information.
B) It made a credible commitment by taking an equity stake in Orocobre.
C) It acquired Orocobre as part of its backward vertical integration plans.
D) It offered Orocobre franchising opportunities to sell hybrid vehicles.

Accepted Answer

In Strategy Highlight 8.1, it is discussed as to how Toyota took an equity stake, worth an estimated $120 million in this project, to mitigate Orocobre's concerns. Toyota made a credible commitment-a long-term strategic decision that is both difficult and costly to reverse.

Question 11

Which of the following best illustrates physical-asset specificity?
A) A unique training program developed in an organization
B) A ship container designed to carry more than the average load of iron ore
C) A generic machine that can be used to churn different mixtures
D) A machine solely designed to give a candy its trademarked shape

Accepted Answer

A machine solely designed to give a candy its trademarked shape best illustrates physical-asset specificity. Physical-asset specificity is a form of specialized assets that refers to assets whose physical and engineering properties are designed to satisfy a particular customer.

Question 12

Galaxi Products Inc.is a U.S.-based consumer electronics company.It owns smaller firms in Japan and Taiwan where most of its cell phone technology is developed and manufactured before being released worldwide.Which of the following alternatives to integration does this best illustrate?
A) Venture capitalism
B) Franchising
C) Joint venture
D) Parent-subsidiary relationship

Accepted Answer

The parent-subsidiary relationship describes the most-integrated alternative to performing an activity within one's own corporate family. The corporate parent owns the subsidiary and can direct it via command and control.

Question 13

Investments in specialized assets tend to incur high opportunity costs because the:
A) assets can be profitably used for multiple purposes.
B) threat of one of the partners pursuing his or her self-interest is high.
C) social costs associated with these assets are high.
D) firms can avoid backward integration by investing in these assets.

Accepted Answer

Making a specialized investment opens up the threat of opportunism by one of the partners. Opportunism is defined as self-interest seeking with guile. Backward vertical integration is often undertaken to overcome the threat of opportunism and in securing key raw materials.

Question 14

A(n)_____ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages.
A) encrypt
B) chain of command
C) industry value chain
D) scatter chart

Accepted Answer

Industry value chains are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. Each stage of the vertical value chain typically represents a distinct industry in which a number of different firms are competing.

Question 15

Divina Pharma Inc.and MF Electronics Inc.have together invested and created a new organization, FirstHealth Inc., to focus on developing diagnostic devices.Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments.However, the new organization operates independent of Divina Pharma and MF Electronics.Which of the following alternatives to integration does this scenario best illustrate?
A) A joint venture
B) A franchisee
C) A licensing contract
D) A corporate acquisition

Accepted Answer

The scenario best illustrates a joint venture. In a joint venture, which is another special form of strategic alliance, two or more partners create and jointly own a new organization. Since the partners contribute equity to a joint venture, they make a long-term commitment, which in turn facilitates transaction-specific investments.

Question 16

BioGrow Pharma Inc.wanted its research partner, an R&D company, to develop a cancer vaccine.However, the project required huge capital investments, and its research partner was not ready to solely face the risks involved.Thus, to gain its partner's confidence and to prove its involvement, BioGrow Pharma invested $100 million in the project.This investment made by BioGrow Pharma will result in a _____.
A) cartel
B) credible commitment
C) corrective action
D) parent-subsidiary relationship

Accepted Answer

The strategic decision made by BioGrow Pharma would be referred to as a credible commitment. A credible commitment is a long-term strategic decision that is both difficult and costly to reverse.

Question 17

Which of the following is true of the parent-subsidiary relationship?
A) The ability to create a community of knowledge is low.
B) The parent firm has no control and command over the subsidiary.
C) The transaction costs that arise are frequently due to transfer prices.
D) The parent firm will lack specialization and division of labor.

Accepted Answer

In the parent-subsidiary relationships, transaction costs that arise are frequently due to political turf battles, which may include the capital budgeting process and transfer prices, among other areas.

Question 18

Silver Weave Inc., an apparel company, operates through a business model in which individuals can buy the rights to set up Silver Weave stores and sell the company's merchandise in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month.The owners of the stores have to stock the collection approved from the company's headquarters and also maintain consistent customer service as expected in its flagship store.Which of the following alternatives to integration does this best illustrate?
A) Crowdsourcing
B) Credit Rationing
C) Franchising
D) Bootstrapping

Accepted Answer

This scenario best illustrates franchising. Franchising is a long-term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues.

Question 19

Apple and Nike have their own retail outlets and also use other independent retailers, both the brick-and-mortar type and online, to sell their products.This is an example of _____.
A) monopsony
B) geographic diversification
C) crowdsourcing
D) taper integration

Accepted Answer

Both Apple and Nike use taper integration: They own retail outlets but also use other retailers, both the brick-and-mortar type and online.

Question 20

Which of the following best illustrates forward vertical integration?
A) A firm that manufactured and sold car engines to major automobile companies launches its own line of cars.
B) A chain of ice cream parlors launches a brand of toys and accessories for children.
C) A multinational coffee chain sources its coffee beans from plantations in Brazil and Vietnam.
D) A designer shoe company that previously purchased leather from external suppliers establishes its own leather tannery.

Accepted Answer

A firm that manufactures car engines and sells it to major automobile companies launching its own line of cars best illustrates forward vertical integration. Forward vertical integration involves moving ownership of activities closer to the end customer.

Quiz 8: Corporate Strategy: Vertical Integration and Diversification

How do firms benefit from vertical integration?

Each stage of the vertical value chain typically represents a distinct _____ in which a number of different firms are competing.

Which of the following best illustrates site specificity?

_____ is best described as changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

Which of the following alternatives on the make-or-buy continuum allows for most integration?

_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs.

_____ are best described as unique assets with high opportunity costs that have significantly more value in their intended use than in their next-best use.

Which of the following best illustrates physical-asset specificity?

Galaxi Products Inc.is a U.S.-based consumer electronics company.It owns smaller firms in Japan and Taiwan where most of its cell phone technology is developed and manufactured before being released worldwide.Which of the following alternatives to integration does this best illustrate?

Investments in specialized assets tend to incur high opportunity costs because the:

A(n) _____ is best used to depict the transformation of raw materials into finished goods and services along distinct vertical stages.

Which of the following is true of the parent-subsidiary relationship?

Apple and Nike have their own retail outlets and also use other independent retailers, both the brick-and-mortar type and online, to sell their products.This is an example of _____.

Which of the following best illustrates forward vertical integration?