CH 8 Vertical Integration

identify three fundamental explanations of how vertical integration can create value

1. opportunism-based explanation 2. capabilities- based explanation 3. flexibility-based explanation

firm specific investments are a type of _____ investments

transaction-specific

discuss the firms capabilities-based explanation

create value focus on firm capabilities and their ability to generate sustained competitive advantages

Research suggests that, in general, vertically integrating is more flexible than not vertically integrating

False

Research suggests that in general, vertically integrating is ________ than not vertically integrating

less flexible

opportunism-based explanation of vertical intergration

opportunism exists when a firm is unfairly exploited in an exchange

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?

opportunism-based

______ are payments to employees in a firms stock

stock grants

when should firms engage in strategic alliances instead of vertical integration

when business activity whose value is highly uncertain

gross margin

which of the following is not used to determine a firms level of vertical integration using the value added as a percentage of sales approach

Discuss the role of the budgeting process as a control mechanism in vertically integrated u-form organizations

1. ensure that the process used in developing budgets is open and participative 2. make sure the budgeting process reflects the economic reality facing functional managers and the firm 3. augment quantitative evaluations of a functional managers performance with qualitative evaluations of that performance

identify 3 reasons why a firm may be able to create value through vertical integration

1. new technology 2. may have unusual skills or capabilities 3. may be able to gain competitive advantage

Some observers predict that by ______ and additional 3.3 million jobs in the United States will be outsourced, many to operations overseas

2015

If Iron Horse Helmets (IHH) were to contract with a Chinese manufacturing firm to provide IHH with superior quality helmets for sale in the United States but discovered that the shipments were actually of inferior quality when they were received, IHH would be said to be acting opportunistically.

False

If Wal-Mart were to purchase a factory to make socks and it planned to sell these socks in its stores, this would be an example of forward vertical integration.

False

The downside risks associated with investing in a strategic alliances are unknown but fixed

False

The threat of opportunism is the least when a party to an exchange has made transaction-specific investments

False

when companies staffed and operated their own call centers in the United States, they were engaging in backward vertical integration, but when they started using independent companies in india to staff and operate these centers, they were more vertically integrated

False

Once a firm has vertically integrated it has committed its organizational structure, its management controls, and its compensation policies to a particular vertically integrated way of doing business and it has enhanced its flexibility.

Fasle

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

Flexibility

a firm with high ration between value added and sales has brought many of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration

True

a firms level or vertical integration is the number of steps in its value chain that the firm accomplishes within its boundaries

True

Corporate Strategy

Vertical integration is a type of

Forward vertical integration

When apple, inc. opened retail stores to sell its computers and ipods this was an example of

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

backward vertical integration

compensation that focuses on groups of employees such as cash bonuses and stock grants are best suited for _______ explanations of vertical integration

capabilities-based

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?

cash bonuses for corporate performance

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

competitive disadvantage

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

conflict resolution

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.

determine budgets for her managers and allow them to focus only on meeting the budgets

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

executive committee

business strategy is a firms theory of how to gain competitive advantage by operating in several businesses simultaneously

false

more vertically integrated firms accomplish fewer stages of the value chain within their boundaries than less vertically integrated firms

false

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

firm-specific investments

The ______ logic suggests that compensation that has a fixed and known downsize risk and significant upside potential is important for firms implementing vertical integration strategies

flexibility

An __________ approach to vertical integration suggests that rather than vertically integrating into business activity whose value is highly uncertain firms should not vertically integrate and instead should form a strategic alliance to manage this exchange

flexibility-based

If a firm decided to maintain relationships with several different call center management companies, each of which 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

flexibility-based

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

forward vertical integration

If TerraLoc wanted to expand into selling its GPS units through company-owned retail stores, this would be an example of ________ A) forward vertical integration. B) backward vertical integration. C) opportunism. D) a joint venture.

forward vertical integration

TerraLoc is most likely to use the ________ organizational structure. A) matrix B) product-based multidivisional C) functional D) geography-based multidivisional

functional

which organizational structure is used to implement a vertical integration strategy

functional

flixibility-based explanation of vertical intergration

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

Backward vertical integration

if dell computers were to open its own factory manufacture the lcd televisions it sells at its online store, this would be an example of

Ronald Coase

in 1937, which noble prize winning economist first articulated the question of vertical integration, which stages of value chain should be included within a firms boundaries and why?

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

increase the rarity of TerraLocs vertical integration strategy since TerraLoc has reduced uncertainties related to increased battery life in its products

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

low flexibility

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

opportunism-based explanations

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?

stock grants for individual performance

________ are when employees are given the right, but not the obligation, to purchase stock at predetermined prices

stock options

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?

stock options for individual performance

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

stock options for individual, corporate, or group performance

the major substitute for vertical integration is

strategic alliances

identify the organizational structure that is used to implement a vertical integration strategy

the functional or u-form structure

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

the level of uncertainty about the value of an exchange has increased

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

the process used in developing budgets is open and participative

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.

transaction- specific investment

an ________ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges

transaction-specific investment

decisions about whether or not to vertically integrate often determine whether or not a firm is operating in a single business or industry or multiple businesses or industries

true

a decision making setting is _______ when the future of an exchange cannot be known when investments in that exchange are being made

uncertain

a firms ________ measures the percentage of a firms sales that is generated by activities done within the boundaries of a firm

value added as a percentage of sales

define vertical integration

vertical integration is a corporate strategy

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

work with tom in an open and participative process to develop the budget based on the economic reality facing toms function and use both quantitative and qualitative evaluations of the performance of toms function

A firm's vertical integration strategy can only be rare when it is the only firm that is able to vertically integrate efficiently.

False

A firms ability to conceive and implement vertical integration strategies tend to be highly susceptible to direct duplication

False

Budgets are an important control tool and they contribute to only positive outcomes.

False

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

True

A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials.

True

A firm may be able to gain an advantage from vertically integrating when it resolves some uncertainty it faces sooner than its competition.

True

A firm's vertical integration strategy is rare when few competing firms are able to create value by vertically integrating in the same way.

True

A flexibility-based approach to vertical integration suggests that when the decison-making setting regarding a business activity is highly uncertain, firms should form a strategic alliance to enter this activity instead of vertically integrating

True

A transaction-specific investment is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges

True

Capability explanations of vertical integration acknowledge the importance of firm-specific investments in creating value for a firm.

True

If a firm engages in vertical integration into a business activity where it does not possess any of the valuable, rare, or costly-to-imitate resources it needs to gain a competitive advantage, it may find itself at a competitive disadvantage to the extent that some firms already have competitive advantages in these business activities.

True

If a firm has capabilities that are valuable and rare, then vertically integrating into businesses that exploit these capabilities can enable the firm to gain at least a temporary competitive advantage.

True

If one of a firm's exchange partners behaves opportunistically, this reduces the economic value of the firm.

True

Numerous conflicts can arise among functional managers in a vertically integrated U-form organization.

True

Firms should only bring market exchanges within their boundaries when the cost of vertical integration is more than the cost of opportunism.

False

Firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages.

True

Flexibility is only valuable when the decision-making setting a firm is facing is uncertain

True

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

True

Strategic alliances are major substitute for vertical integration

True

The use of budgets in vertically integrated u-form organization can lead functional managers to overemphasize longer-term behavior that is more difficult to measure

True

Firms should avoid vertically integrating in those businesses where they possess valuable, rare, and costly-to-imitate resources and capabilities.

False

Flexibility is always valuable

False

Flexibility is low when the cost of changing strategic choices is low

False

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

False

firm capability explanation

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.

One of the biggest uncertainties in providing customer service through call centers is the question of whether the people staffing the phones actually help a firm's customers.

True

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

True

Outsourcing can help firms reduce costs and focus their efforts on those business functions that are central to their competitive advantage.

True

Transaction-specific investments make parties to an exchange vulnerable to opportunism, and vertical integration solves this vulnerability problem

True

Vertical integration

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

high; many

a firm with a ________ ration 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

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

a firms valuable and rare vertical integration choices may be subject to direct duplication and substitutes

Which committee is 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

operations committee

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 A) flexibility. B) opportunism. C) uncertainty. D) vertical integration.

opportunism

______ exists when a firm is unfairly exploited in an exchange

opportunism

The _____ explanations call for compensation that focuses on individual employees, such as cash bonuses for individual performance

opportunism-based

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

opportunism-based

According to __________ of when vertical integration creates value, vertical integration is valuable when it reduces threats from a firms suppliers or buyers due to any transaction-specific investments a firm has made

opportunism-based explanations