Question 1

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.
-If TerraLoc were to use a U-form organizational structure and the CEO decided to use budgets as a management control but wanted to make sure that the managers did not become too focused on the short term, the CEO should do all of the following except

Accepted Answer

If the CEO wants to discourage short-term focus, allowing managers to focus only on meeting budgets would be counterproductive. The CEO should instead encourage a long-term perspective by using both quantitative and qualitative evaluations of managers' performance, making sure that the process used in developing budgets reflects the economic reality facing the firm's managers, and using an open process in developing budgets.

Question 2

Discuss the flexibility-based explanation of vertical integration. In discussing this explanation be sure to define flexibility, the role of uncertainty in this explanation, and identify when, under this explanation, firms should engage in vertical integration.

Accepted Answer

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Question 3

The fact that it would be very costly for Digipics to alter its operations if the large customer referred to in the previous question decided to stop doing business with Digipics suggests that Digipics has ________ in this situation.

Accepted Answer

The fact that Digipics cannot easily alter its operations suggests that it has low flexibility in this situation. High flexibility would mean that it can quickly adapt to changes in the business environment, but this is not the case for Digipics.

Question 4

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.
-TerraLoc's development of the new battery technology is likely to

Accepted Answer

TerraLoc's decision to manufacture the battery in-house to prevent reverse engineering increases the rarity of its vertical integration strategy as it reduces uncertainties related to increased battery life in its products. This makes it difficult for competitors to imitate TerraLoc's strategy and offer a similar product.

Question 5

Identify the organizational structure that is used to implement a vertical integration strategy and why from a CEO's perspective coordinating functional specialists to implement a vertical integration strategy almost always involves conflict resolution and how this conflict can be resolved.

Accepted Answer

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Question 6

Discuss the opportunism-based explanation of vertical integration value creation and identify when, under this explanation, firms should vertically integrate. In your answer be sure to clearly define opportunism and the role that transaction-specific investments play in the opportunism-based explanation.

Accepted Answer

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Question 7

If Digipics were to begin manufacturing lenses for the cameras they assembled, this would be an example of

Accepted Answer

Backward vertical integration occurs when a company starts producing its own inputs or raw materials, such as Digipics manufacturing lenses for their cameras.

Question 8

Identify three reasons why a firm may be able to create value through vertical integration when most of its competitors are not able to create value through vertical integration.

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Question 9

What type of compensation approach goes best with the flexibility explanation of vertical integration?

Accepted Answer

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Question 10

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.
-TerraLoc's decision to manufacture the battery in-house is most consistent with which explanation of vertical integration?

Accepted Answer

TerraLoc's decision to manufacture the battery in-house is driven by the desire to prevent opportunistic behavior by potential outsourcing partners who might reverse engineer and sell the battery technology to competitors. This aligns with opportunism-based explanations of vertical integration, which focus on mitigating risks associated with opportunistic behavior by external partners.

Question 11

Within the flexibility-based approach to vertical integration when should firms engage in strategic alliances instead of vertical integration, and what are the advantages of alliances under these conditions?

Accepted Answer

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Question 12

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.
-If TerraLoc wanted to expand into selling its GPS units through company-owned retail stores, this would be an example of ________

Accepted Answer

Forward vertical integration involves a company expanding its operations by acquiring or opening new distribution channels, such as retail stores, in order to sell its products directly to consumers. This is the most appropriate option as TerraLoc plans to expand into selling its GPS units through company-owned retail stores. Backward vertical integration involves a company acquiring or owning suppliers of its raw materials or components, which is not relevant to TerraLoc. Opportunism refers to taking advantage of a situation for personal gain, and joint venture involves two or more companies collaborating to form a new entity, neither of which applies to TerraLoc in this scenario.

Question 13

If one of the suppliers that Digipics purchases its components from purposefully delivered a batch of its product that was substandard but did not inform Digipics of this, this would be an example of

Accepted Answer

This situation illustrates opportunism, which occurs when one party takes advantage of another party's lack of information or trust to benefit themselves. The supplier purposefully delivered substandard products without informing Digipics, taking advantage of Digipics' trust in their products.

Question 14

If Digipics were to begin selling the cameras it assembled directly to customers through a website operated by the company, this would be an example of

Accepted Answer

Forward vertical integration involves a company expanding its operations by engaging in activities that were previously done by its suppliers. In this scenario, Digipics would be selling directly to customers, taking on the role of the retailer, which is traditionally done by others in the supply chain.

Question 15

Discuss the firm capabilities-based explanation of how vertical integration can create value. In your discussion identify the two broad implications of this approach and when, under this approach, firms should engage in vertical integration.

Accepted Answer

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Question 16

Identify the three fundamental explanations of how vertical integration can create value and discuss how value is created under each.

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Question 17

Discuss the role of the budgeting process as a control mechanism in vertically integrated U-form organizations, the potential unintended negative consequence budgets can have, and three things CEOs can do to counter this potential consequence.

Accepted Answer

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Question 18

If Digipics were to agree to spend a significant amount of money to establish a new assembly line for a large client, PicPro, that has unique needs that would make this assembly line largely useless for any other customer, the funds Digipics spent in establishing this line would be an example of

Accepted Answer

The funds spent by Digipics to establish a new assembly line for PicPro, a client with unique needs, would be an example of a transaction-specific investment. This is because the investment is specific to the needs of PicPro and would not be useful for any other customer, thus making it a risky investment for Digipics.

Question 19

Define vertical integration and differentiate between forward vertical integration and backward vertical integration.

Accepted Answer

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Question 20

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.
-TerraLoc is most likely to use the ________ organizational structure.

Accepted Answer

TerraLoc's organizational structure is focused on manufacturing its proprietary GPS units and battery in-house to ensure quality control and prevent reverse engineering. This suggests a functional organizational structure where departments are organized by specialized functions such as manufacturing, research and development, and sales. In this structure, each department has a specific role to play in the production and sale of the product, and there is a clear chain of command. The other options, such as matrix, product-based multidivisional, and geography-based multidivisional, do not align with TerraLoc's specific focus on in-house manufacturing and direct sales.

Quiz 6: Vertical Integration