Ch. 6 Vertical Integration

Which of the following international strategy options would be considered to be the least vertically integrated?

A. Licensing B. Foreign direct investment C. Importing/exporting D. Joint ventures Answer: C

Which of the explanations of vertical integration is the oldest and has received the greatest empirical support?

A. Opportunism-based B. Flexibility-based C. Firm capabilities-based D. Alliance-based Answer: A

Which committee in a U-form organization meets weekly and reviews the performance of the firm on a weekly basis and typically consists of a CEO and two or three functional senior managers?

A. Top management team B. Executive committee C. Operations committee D. Functional committee Answer: B

Vertical integration is a type of

A. business strategy. B. generic strategy. C. differentiation strategy. D. corporate strategy. Answer: D

A firm is likely to be among the first in its industry to vertically dis-integrate an exchange when

A. the firm concludes that the level of specific investment required to manage an economic exchange is high. B. the firm believes that the exchange is costly to imitate. C. the level of uncertainty about the value of an exchange has increased. D. the firm believes that the exchange is rare. Answer: C

Evaluating a functional manager's performance relative to budgets can be an effective control when

A. the process used in developing budgets is open and participative. B. the process reflects the economic best-case scenario developed by the functional manager. C. the process reflects the economic worst-case scenario developed by the functional manager. D. the process relies solely on quantitative criteria to evaluate the functional manager's performance. Answer: A

Which of the following statements regarding direct duplication and substitutes for vertical integration is accurate?

A. A firm's valuable and rare vertical integration choices may be subject to direct duplication and substitutes. B. A firm's valuable and rare vertical integration choices are subject to neither direct duplication nor substitutes. C. A firm's valuable and rare vertical integration choices may be subject to direct duplication but not to substitutes. D. A firm's valuable and rare vertical integration choices may be subject to substitutes but not to direct duplication. Answer: A

According to the opportunism-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A. Cash bonuses for corporate performance B. Cash bonuses for group performance C. Stock options for individual performance D. Stock grants for individual performance Answer: D

_________ exists when a firm is unfairly exploited in an exchange.

A. Competitive advantage B. Business level strategy C. Opportunism D. Corporate level strategy Answer: C

Which committee in a U-form organization meets monthly and usually consists of the CEO and each of the heads of the functional areas included in a firm?

A. Executive committee B. Functional committee C. Operations committee D. Managerial committee Answer: C

Which of the following would be considered a somewhat vertically integrated international strategy?

A. Exporting B. Foreign direct investment C. Strategic alliances D. Importing Answer: C

Which of the following international strategy options would be considered the most vertically integrated?

A. Exporting B. Strategic alliances C. Joint ventures D. Foreign direct investment Answer: D

_________ refers to how costly it is for a firm to alter its strategic and organizational decisions.

A. Flexibility B. Dynamic capability C. Opportunism D. Uncertainty Answer: A

TerraLoc's decision to manufacture the battery in-house is most consistent with which explanation of vertical integration?

A. Flexibility-based explanations B. Firm capability-based explanations C. Alliance-based explanations D. Opportunism-based explanations Answer: D

Which one of the following is not one of the advantages of vertical integration in international operations?

A. Integration enables a firm to realize any sources of value that might exist in an internal opportunity. B. Integration enables managers to use a wider range of organizational controls to limit the threats from any transaction-specific investments that have been made. C. Integration enables a firm to capture all of the economic profits from their international operations. D. Integration tends to be less costly and risky than other international strategies such as exporting, licensing or joint ventures. Answer: D

Which organizational structure is used to implement a vertical integration strategy?

A. Matrix B. Functional C. Multi-Divisional D. Product-Divisional Answer: B

If a computer company decided to open its own call centers to provide technical support to its corporate customers because the employees in these call centers need a significant level of in-depth training that was highly specialized to the computer company's products, this would be consistent with which explanation of vertical integration?

A. Opportunism-based B. Flexibility-based C. Firm capabilities-based D. Alliance-based Answer: A

If a firm decided to maintain relationships with several different call center management companies, each of whom have adopted different technological solutions to the problem of how to use call center employees to assist customers who are using very complex products to reduce the uncertainty of whether the people staffing the phone can help the firm's customers, this would be consistent with which explanation of vertical integration?

A. Opportunism-based B. Flexibility-based C. Firm capabilities-based D. Alliance-based Answer: B

In 1937, which Nobel Prize-winning economist first articulated the question of vertical integration, which stages of the value chain should be included within a firm's boundaries and why?

A. Ronal Coase B. Adam Smith C. David Ricardo D. Milton Freidman Answer: A

According to the capabilities-based explanations of vertical integration which of the following would be the most appropriate type of compensation to support strategy implementation?

A. Salary B. Cash bonuses for corporate performance C. Cash bonuses for individual performance D. Stock grants for individual performance Answer: B

According to the flexibility-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?

A. Stock options for individual performance B. Stock grants for individual performance C. Stock grants for corporate performance D. Cash bonuses for individual performance Answer: A

Which of the following is not used to determine a firm's level of vertical integration using the value added as a percentage of sales approach?

A. Value added B. Net income C. Sales D. Gross margin Answer: D

A(n) _____________ approach to vertical integration suggests that, rather than vertically integrating into a business activity whose value is highly uncertain, firms should not vertically integrate, and, instead should form a strategic alliance to manage this exchange.

A. alliance-based B. flexibility-based C. firm capabilities-based D. opportunism-based Answer: B

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

A. backward vertical integration. B. a strategic alliance. C. forward vertical integration. D. opportunism. Answer: A

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

A. backward vertical integration. B. a strategic alliance. C. forward vertical integration. D. opportunism. Answer: C

To the extent that other firms may have competitive advantages in business activities that a firm is considering to enter through vertical integration, vertically integrating into these activities could put the firm at a

A. competitive advantage. B. temporary dynamic disadvantage. C. sustainable competitive advantage. D. competitive disadvantage. Answer: D

From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves

A. conflict resolution. B. competitive positioning. C. product differentiation. D. corporate expansion. Answer: A

Between 1997 and 2000, the size of the outsourced services market

A. decreased by 50%. B. remained roughly the same. C. increased slightly. D. doubled. Answer: D

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

A. use an open process in developing budgets. B. determine budgets for her managers and allow them to focus only on meeting the budgets. C. use both quantitative and qualitative evaluations of managers' performance. D. make sure that the process used in developing budgets reflects the economic reality facing the firm's managers. Answer: B

A firm's ________________ measures the percentage of a firm's sales that is generated by activities done within the boundaries of a firm.

A. value added as a percentage of sales B. simple product diversification C. competitive advantage D. competitive dynamic Answer: A

The major substitute for vertical integration is

A. vertical dis-integration. B. strategic alliances. C. a product differentiation strategy. D. a low cost strategy. Answer: B

A decision-making setting is _________ when the future of an exchange cannot be known when investments in that exchange are being made.

A. uncertain B. opportunistic C. flexible D. dynamic Answer: A

Research suggests that, in general, vertically integrating is __________ than not vertically integrating.

A. significantly more flexible B. somewhat more flexible C. comparatively flexible D. less flexible Answer: D

If Brenda Thompson, Tom Mix's supervisor, wanted to use a budgeting process to help evaluate Tom's performance but wanted to ensure that using a budget did not encourage Tom to focus on short-term behaviors at the expense of long-term results she should

A. develop the budget herself using realistic goals based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow. B. work with Tom in an open and participative process to develop the budget based on the most optimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function. C. develop the budget herself based on the most pessimistic scenario possible and use both quantitative and qualitative evaluations of the performance of Tom's function and then give the budget to Tom to follow. D. work with Tom in an open and participative process to develop the budget based on the economic reality facing Tom's function and use both quantitative and qualitative evaluations of the performance of Tom's function. Answer: D

If a domestic firm grants a firm in a nondomestic market the right to use its products and brand names to sell products in that nondomestic market, this is best described as an example of a(n)

A. exporting agreement. B. licensing arrangement. C. foreign direct investment. D. joint venture. Answer: B

According to _____________ of when vertical integration creates value, vertical integration is valuable when it reduces threats from a firm's suppliers or buyer due to any transaction-specific investments a firm has made.

A. firm capability explanations B. opportunity-based explanations C. flexibility-based explanations D. opportunism-based explanations Answer: D

Investments made by employees that have more value in a particular company than in alternative companies are known as

A. firm-specific investments. B. individual-specific investments. C. group-specific investments. D. corporate-specific investments. Answer: A

Currently, the trend in vertical integration decisions in an international context seems to be for

A. firms to reduce their level of vertical integration by outsourcing functions that used to be within their boundaries to independent foreign operations. B. firms to increase their level of vertical integration by outsourcing functions that used to be within their boundaries to independent foreign operations. C. firms to reduce their level of vertical integration by bringing functions that used to be outside of their boundaries within their foreign operations. D. firms to increase their level of vertical integration by bringing functions that used to be outside of their boundaries within their foreign operations. Answer: A

The essence of the ________________ to vertical integration is that if a firm possesses valuable, rare, and costly-to-imitate resources in a business activity, it should vertically integrate into that activity otherwise it should not vertically integrate into that activity.

A. flexibility-based explanation B. opportunism-based explanation C. firm capability explanation D. opportunity-based explanation Answer: C

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

A. flexibility. B. opportunism. C. uncertainty. D. vertical integration. Answer: B

If TerraLoc wanted to expand internationally and wanted to do so through a highly vertically integrated strategy, TerraLoc should consider expanding through

A. foreign direct investment. B. exporting. C. licensing. D. a joint venture. Answer: A

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

A. forward vertical integration B. backward vertical integration. C. a transaction-specific investment. D. opportunism. Answer: C

When Gateway computers opened retail stores to sell their computers and computer peripherals, this was an example of

A. forward vertical integration. B. backward vertical integration. C. forward horizontal integration. D. backward horizontal integration. Answer: A

If Dell computers were to open its own factory to manufacture the LCD televisions it sells at its online store, this would be an example of

A. forward vertical integration. B. product differentiation. C. forward horizontal integration. D. backward vertical integration. Answer: D

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.

A. low flexibility B. low opportunism C. high flexibility D. high opportunism Answer: A

A firm with a _________ ratio between value added and sales has brought _______ of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.

A. low; many B. high; many C. medium; many D. medium; few Answer: B

TerraLoc is most likely to use the _____________ organizational structure.

A. matrix B. product-based multidivisional C. functional D. geography-based multi-divisional Answer: C

A(n) _______________ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

A. opportunity-specific investment B. transaction-specific investment C. competition-specific investment D. opportunistic investment Answer: B

The number of steps in a firm's value chain that it accomplishes within its boundaries describes the firm's level of

A. product differentiation. B. diversification. C. vertical integration. D. competitive dynamics. Answer: C

TerraLoc's development of the new battery technology is likely to

A. reduce the rarity of TerraLoc's vertical integration strategy since competitors can purchase batteries from other sources. B. increase the rarity of TerraLoc's vertical integration strategy since TerraLoc has reduced uncertainties related to increased battery-life in its products. C. increase the imitability of TerraLoc's vertical integration strategy since competitors can purchase traditional batteries from other sources. D. decrease the imitability of TerraLoc's vertical integration strategy since it increases competitor's flexibility. Answer: B