Chapter 9

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.

a

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.

a

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

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

a

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.

a

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.

a

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.

c

Under which of the following circumstances is vertical integration most likely to help a company establish itself as a differentiated player in its core business? A. When backward vertical integration involves circumventing suppliers with the power to charge high prices B. When vertical integration is based on a desire to avoid paying market middlemen C. When vertical integration allows the company to establish for itself a stable supply of high-quality inputs D. When vertical integration facilitates close coordination among adjacent stages of production, eliminating the need to hold excessive inventories E. When vertical integration prohibits technologically complementary processes being carried out in quick succession

c

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.

c

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

c

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.

d

A specialized asset is one that is designed to A. perform a multitude of generic tasks. B. perform a specified sequence of tasks. C. perform several nonsequential tasks. D. perform a specific task. E. none of these choices.

d

Companies can maintain market discipline over suppliers by A. outsourcing. B. demanding hostages. C. attaining a credible commitment. D. parallel sourcing. E. full integration.

d

Forward integration means that a company is moving into A. sales. B. retail. C. distribution. D. all of these choices. E. none of these choices.

d

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.

d

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.

d

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.

d

Strategic outsourcing is best described as a A. means of getting rid of excess activities. B. way of getting other companies to do what the outsourcing company no longer wants to do. C. method of streamlining the marketing activities of a company. D. decision to allow one or more of a company's value chain activities to be performed by other companies. E. none of these choices.

d

To ensure the easy transfer of important competitive information between a firm and its outsourcing contractors, the firm should A. exchange hostages. B. use parallel sourcing. C. lengthen the supply chain. D. develop trust. E. become a virtual corporation.

d

Which of the following activities should not be outsourced by a virtual corporation? A. Manufacturing B. Research and development (R&D) C. Materials management D. Contract management E. Marketing

d

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

d

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 choices E. None of these choices

d

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.

e

Hewlett Packard and Compaq recently completed a merger. The combined firm is larger and therefore can 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.

e

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

e

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.

e

A company achieves full integration when it produces all of a particular input needed for its processes or disposes of all of its completed products through its own operations.

t

A company may be able to differentiate its final products better by outsourcing certain noncore activities to specialists.

t

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

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.

t

Bauxite ore, the raw material used to produce aluminum, varies considerably in content; thus, a refinery must be designed for the particular type of ore that it refines.

t

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

t

Company-specific know-how acquired through training is a specialized asset.

t

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

t

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

t

Horizontal integration may be accomplished by acquisitions or mergers.

t

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

t

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

t

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

t

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.

t

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.

t

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.

t

Vertical integration can strengthen a company's differentiation advantage.

t

Vertical integration is undertaken to support the competitive position of a company's core business.

t

When Citibank offers home mortgages and credit cards to its checking account customers, it is using cross-selling.

t

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

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.

e

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

e

Which of the following is a benefit of horizontal integration? A. Lower cost structure B. Increased product differentiation C. Replicated business model D. Increased bargaining power over suppliers E. All of these choices

e

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.

b

A wealth of data suggests that most mergers and acquisitions A. create extensive value for the companies involved. B. do not create, and may actually reduce, value for the entities involved. C. create and sustain large and immediate increases in value. D. have little financial impact on the firms involved. E. none of these choices.

b

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.

b

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.

b

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.

b

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.

b

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.

b

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

b

Which of the following is not a characteristic of strategic alliances entered into to support related diversification? A. It is a way for companies to realize some of the benefits of diversification at a lower level of bureaucratic costs. B. It requires each company to take an equity stake in the new venture. C. A disadvantage is the risk of losing proprietary know-how to a competitor. D. It entails investing in a new business or product (including upgrades) instead of an existing one. E. It allows a company to swap complementary skills.

b

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

b

A credible commitment on the part of two companies is an example of a A. short-term agreement. B. commitment that may be terminated by either company at any time. C. believable promise or pledge to support the development of a long-term relationship between companies. D. public relations gesture undertaken to stimulate sales. E. marketing strategy.

c

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.

c

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.

c

Antitrust regulation A. favors large companies. B. reduces industry competition. C. is 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.

c

In today's business environment, mergers and acquisitions are A. rare. B. too expensive to undertake. C. occurring in many industries. D. an inappropriate technique for expanding a company. E. none of these choices.

c

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.

c

Observing the pattern of consolidation in U.S. industries over time, one will notice that A. horizontal integration has never been a very popular strategy. B. firms that horizontally integrate tend to divest later. C. horizontal integration has been very popular in the last decade. D. while a few industries have consolidated since 1970, most remain fragmented. E. mergers were very common and acquisitions were rare from 1900 to 1999.

c

Taper integration A. has higher bureaucratic costs than does full integration. B. has lower bureaucratic costs than does long-term contracts. C. can increase the incentive for in-house suppliers to reduce costs. D. is preferable to full integration when demand conditions are stable. E. eliminates the disadvantage of potential technological obsolescence.

c

Which of the following is not an accurate statement about outsourcing? A. Outsourcing should be done for an entire function¾for example, all of human resources. B. Outsourcing requires that some value creation activities be performed outside an organization. C. A risk of outsourcing is the decreased control that organizations have over how the functions are performed. D. Outsourcing means that activities can be performed by companies that specialize in that activity. E. Outsourcing is a strategy that is primarily used by small firms who cannot afford skilled personnel in every specialty.

e

Which of the following statements concerning vertical integration is not correct? A. Vertical integration can reduce a company's overall cost of production. B. Vertical integration allows a company to circumvent powerful buyers and suppliers. C. Vertical integration can be used to protect a company's investments in proprietary technology. D. Vertical integration is a means of implementing just-in-time inventory systems when suppliers are unreliable. E. Vertical integration facilitates the attainment of economies of scope.

e

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.

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.

f

A strategic alliance is a substitute for horizontal integration.

f

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

f

Horizontal integration almost always increases rivalry in an industry.

f

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

f

Oracle Corp., based in Reno, Nevada, has become the world's largest maker of database software largely through a strategy of acquisition.

f

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

f