189 Chapter 9

A company pursuing a strategy of vertical integration may expand its operations a. backward into an industry that produces inputs for the company's products. b. forward into an industry that uses, distributes, or sells the company's products. c. laterally into an industry that competes with the company's products. d. A and B. e. A and C.

A and B

Companies invest in specialized assets because these assets allow them to a. lower their cost structure. b. charge excessive prices for their products. c. better differentiate their products. d. A and B. e. A and C.

A and C

T/F A company seeking to form a long-term strategic alliance needs to enter the agreement with total trust in its partner to live up to its end of the agreement.

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T/F A company should first choose a corporate-level strategy and then look at how changes will affect a company's current business model and strategies.

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T/F A strategic alliance is a substitute for horizontal integration.

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T/F Even though companies may invest in specialized assets to build competitive advantage, it is seldom necessary that suppliers do so.

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T/F Horizontal integration almost always increases rivalry in an industry.

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T/F Horizontal integration can lead to low cost advantages but rarely to differentiation advantages.

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T/F Oracle Corp., based in Reno, Nevada, has become the world's largest maker of database software largely through a strategy of acquisition.

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T/F The term bureaucratic costs refers to costs associated with the creation and maintenance of the administrative function in a company.

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T/F Tina's Technologies is expanding its operations backward into an industry that produces inputs for the company's products. Tina's Technologies is utilizing horizontal integration.

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T/F Transfer pricing refers when a company is taken advantage of by another company it does business with after it has made an investment in expensive specialized assets to better meet the needs of the other company.

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T/F Unfortunately, horizontal integration can not be accomplished by acquisitions or mergers.

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T/F When Citibank offers home mortgages and credit cards to its checking account customers, it is using horizontal integration strategy.

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T/F When a company outsources its noncore activities to specialists, it looses its capabilities to differentiate its final products.

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T/F An advantage of horizontal integration is that by staying in one industry, a firm can focus its resources and capabilities on competing successfully in just one area.

T

T/F At the time of the merger of Hewlett Packard and Compaq, Dell Computer's competitive advantage over Hewlett Packard was based on Dell's cost-leadership business model

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T/F Companies that outsource most or all of their value creation activities are often referred to as virtual corporations.

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T/F Competitive bidding makes suppliers reluctant to make investments that tie them closely to their trading partners.

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T/F Horizontal integration can help lower costs when it allows a company to reduce the duplication of resources.

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T/F Managers use corporate-level strategy to identify which industries a company should compete in to maximize long-run profitability.

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T/F One outcome of horizontal integration is industry consolidation, leading to more bargaining power over buyers and suppliers.

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T/F Product bundling occurs when a firm offers a range of products that are sold together at a single price.

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T/F Strategic outsourcing is the decision to allow one or more of a company's value chain activities or functions to be performed by independent companies.

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T/F Vertical integration can be risky when demand is unpredictable because it is hard to manage the volume or flow of products along the value-added chain.

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T/F Vertical integration can raise costs if, over time, a company continues to purchase inputs from company-owned suppliers when independent suppliers can supply the same inputs at lower cost.

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T/F Vertical integration can strengthen a company's differentiation advantage.

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T/F Vertical integration is undertaken to support the competitive position of a company's core business.

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T/F When a company stays inside one industry, the problems of sustaining a successful business model and strategies over time can be difficult because of changing conditions in the environment.

T

Under a competitive bidding strategy, independent component suppliers compete with each other to be the company that will be chosen to supply a. a particular part for a particular manufacturer. b. all of the parts for a particular manufacturer. c. a particular part for all manufacturers in the industry. d. all parts for all manufacturers in the industry. e. none of these choices.

a particular part for a particular manufacturer

Google bought Clever Sense, a mobile app company. This is an example of a(n) a. parallel sourcing policy. b. strategic outsource. c. strategic alliance. d. merger. e. acquisition.

acquisition

Ownership of retail outlets may be important for a manufacturer if a. the products produced by the manufacturer are not complex. b. after-sales service is required for complex products. c. products are expended in consumption. d. products are intended for one-time use. e. products are inexpensive.

after-sales service is required for complex products

Which of the following problems is (are) associated with a strategy of vertical integration? a. An increasing cost structure b. Manufacturing disadvantages that arise because of rapidly changing technology c. Marketing disadvantages that arise when demand is unpredictable d. All of these e. None of these

all of these

Long-term contracts a. are preferable to short-term contracts when there is a minimal need for cooperation. b. are preferable to vertical integration when it is not feasible to exchange hostages. c. generally result in lower prices than does competitive bidding. d. achieve exactly the same outcomes as vertical integration, but they incur higher bureaucratic costs. e. are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers.

are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers

Credible commitments a. are believable promises or pledges to support the development of a long-term relationship between companies. b. facilitate diversification based on acquisitions and restructuring. c. facilitate competitive bidding. d. facilitate vertical integration. e. reduce the risk of losing proprietary technology to a venture partner and facilitate vertical integration.

are believable promises or pledges to support the development of a long-term relationship between companies

Antitrust authorities a. favors large companies. b. reduces industry competition. c. are concerned with companies' abuse of their market power to raise prices for consumers above the level that would exist in more competitive situations. d. tends to raise prices for consumers. e. enables the achievement of market power.

are concerned with companies' abuse of their market power to raise prices for consumers above the level that would exist in more competitive situations

Which of the following is a benefit that firms should expect to gain from the use of horizontal integration? a. Expanded control over stages of the supply chain b. Better realization of economies of scale c. Shared risk with another firm d. Reduced risk of holdup e. Reduced investments in noncore activities

better realization of economies of scale

Adam's boss tells him that their company is pursuing a strategy of horizontal integration, which means that the company will a. acquire one of its suppliers. b. buy one of its rivals. c. begin to distribute its own products. d. reorganize into fewer business units. e. centralize all of its support functions.

buy one of its rivals

GM typically solicits bids from global suppliers to produce a particular component and awards a 1-year contract to the supplier that submits the lowest bid. At the end of the year, a contract is once again put out for competitive bid, and once again the lowest cost supplier is most likely to win the bid. GM is using which of the following? a. Strategic outsourcing b. Competitive bidding c. Long-term contracting d. Strategic alliance e. Hostage taking

competitive bidding

When there is a minimal need for close long-term cooperation between a company and its suppliers, which of the following strategies is the most appropriate? a. Full integration b. Taper integration c. Competitive bidding d. Long-term contracting e. Diversification based on economies of scope

competitive bidding

When a company decides to expand into new industries, it must a. construct its business models at two levels. b. secure government approval from the Securities and Exchange Commission (SEC). c. select a new CEO. d. all of these choices. e. none of these choices.

construct its business models at two levels

The final part of the strategy formulation process is a. formulation of business-level strategies. b. formulation of functional-level strategies. c. formulation of corporate-level strategies. d. development of functional-level goals. e. development of business-level goals.

formulation of corporate-level strategies

When an intermediate manufacturer moves into final assembly, it is pursuing a. backward integration. b. forward integration. c. taper integration. d. related diversification. e. unrelated diversification.

forward integration

All of the following are benefits of horizontal integration except: a. Higher cost structure b. Increased product differentiation c. Replicated business model d. Increased bargaining power over suppliers e. All of these are benefits of horizontal integration

higher cost structure

Outsourcing occurs when a firm a. buys one of its rivals. b. merges with one of its suppliers. c. enters into a joint venture with a rival. d. hires another firm to perform value creation activities. e. enters into contracts with two suppliers simultaneously.

hires another firm to perform value creation activities

Many industries have experienced increased consolidation over the last decade due to an increase in a. strategic alliances. b. vertical integration. c. horizontal integration. d. franchising. e. diversification.

horizontal integration

Which of the following is not a benefit of vertical integration? a. Facilitating investments in specialized assets b. Enhancing product quality c. Improved scheduling d. Increasing cost structure e. None of these choices

increasing cost structure

Vertical integration can be disadvantageous when a. competitors are vertically integrated. b. demand is stable. c. industry technology is changing rapidly. d. technology is changing slowly. e. competitors are vertically integrated and industry technology changes rapidly.

industry technology is changing rapidly

When technology in an industry is changing rapidly, a company pursuing a strategy of vertical integration may find itself a. locked into an old, inefficient technology. b. able to sell its products at continually lower prices. c. increasing returns on its assets. d. all of these choices. e. none of these choices.

locked into an old, inefficient technology

Strategic alliances are a. short-term agreements between two companies to jointly develop new products. b. short-term agreements between two companies to jointly market new products. c. short-term partnerships between two companies. d. long-term commitments between two companies to share research and development activities. e. long-term agreements between two or more companies to jointly develop products that benefit all companies involved in the alliance.

long-term agreements between two or more companies to jointly develop products that benefit all companies involved in the alliance

To build trust in a cooperative relationship, both firms can a. rely on competitive bidding. b. make mutual investments in specialized assets. c. write short-term contracts that must be renewed frequently. d. increase their vertical integration. e. use outsourcing of noncore activities.

make mutual investments in specialized assets

A hospital supply company invests in training for a team of sales associates to learn the details of each hospital chain's operations. In return, the hospital chain invests in a computer system that supports supply ordering. The supply company and the hospital chain are working to ensure the success of their long-term relationship by a. reducing the risk of losing proprietary technology. b. making a credible commitment. c. encouraging competitive bidding. d. facilitating vertical integration. e. using parallel sourcing.

making a credible commitment

When Hewlett Packard and Compaq merged, the combined firm was larger and therefore could negotiate lower prices from suppliers. This benefit of horizontal integration is called a. economies of scale. b. reduction of excess capacity. c. cross-selling. d. product bundling. e. market power.

market power

In 1999, Glaxo Wellcome and SmithKline Beecham came together to create a single firm known as GlaxoSmithKline. This is an example of a(n) a. merger. b. acquisition. c. reverse takeover. d. parallel sourcing policy. e. credible commitment.

merger

Outsourcing a. eliminates the need for a value chain. b. reduces the firm's dependence on its value chain. c. reorders the steps in a firm's value chain. d. moves some value chain activities outside the firm. e. strengthens the firm's capabilities in each value chain function.

moves some value chain activities outside the firm

In which of the following is a firm most likely to lose direct control over value creation activities? a. Merger b. Acquisition c. Vertical integration d. Strategic alliance e. Outsourcing

outsourcing

Companies can maintain market discipline over suppliers by a. outsourcing. b. demanding hostages. c. attaining a credible commitment. d. parallel sourcing. e. full integration.

parallel sourcing

John's surfboard shop has a long-term relationship with two surfboard makers. John is using a. parallel sourcing. b. cross-selling. c. product bundling. d. vertical integration. e. horizontal integration.

parallel sourcing

Rachel is a new mom who was shopping for products to use on her baby. She noticed that the company Johnson & Johnson often packaged together baby shampoo, baby lotion, and other similar products such as bottles and baby wipes. Johnson & Johnson is utilizing which of the following? a. Product bundling b. Cross-selling c. Hostage taking d. Strategic outsourcing e. Parallel sourcing

product bundling

Horizontal integration in an industry tends to a. increase rivalry among firms. b. reduce rivalry among firms. c. have little effect on rivalry among firms. d. reduce the number of consumers buying the products. e. none of these choices.

reduce rivalry among firms

Horizontal integration may be thought of as a. moving into a new unrelated industry. b. giving control to suppliers. c. gaining control of distributors. d. staying inside the industry in which the company currently operates. e. combining functional units within the company.

staying inside the industry in which the company currently operates

Another name for long-term cooperative relationships between two or more companies who agree to commit resources to develop new products is a. horizontal integration. b. outsourcing. c. strategic alliance. d. joint venture. e. vertical integration.

strategic alliance

The price that one division of a company charges another division for its products, which are the inputs the other division requires to manufacture its own products refers to: a. vertical disintegration. b. vertical integration . c. transfer pricing. d. related diversification. e. none of these.

transfer pricing

A strategy of vertical integration may be a risky strategy for a company to pursue when demand is a. predictable. b. stable. c. unpredictable. d. steadily increasing. e. rapidly increasing.

unpredictable

Vertical integration is based on a company entering industries that add ____ to its core products. a. costs b. little or nothing c. incremental elements d. shipping expenses e. value

value

Which of the following strategies facilitates the implementation of a just-in-time inventory system? a. Short-term contracts b. Vertical integration c. Unrelated diversification d. Diversification based on transferring competencies e. Diversification based on realizing economies of scope

vertical integration

Under which of the following circumstances is vertical integration hazardous? a. When the technology involved in different stages of production is changing rapidly b. When vertical integration involves moving downstream into retailing c. When the value added by successive stages of production is declining d. When the industries involved are undergoing rapid expansion e. When the company's competitors are also following a strategy of vertical integration

when the technology involved in different stages of production is changing rapidly