STRA 5370 - Chapter 7: Vertical Integration and Outsourcing Quiz

According to transaction cost theory, vertical integration occurs under two conditions: a) High uncertainty and high supplier asset specialization b) High uncertainty and high supplier size c) Large suppliers and strong supplier market competition d) Low uncertainty and high supplier asset specialization

a) High uncertainty and high supplier asset specialization

The standard theory of vertical integration over the industry life cycle states that: a) vertical integration occurs primarily in the early and late stages b) vertical integration increases only in the shakeout stage c) vertical integration increases throughout the life cycle d) vertical integration decreases over the life cycle

a) vertical integration occurs primarily in the early and late stages

Which of the following statements are TRUE? I. A firm with proprietary technology should outsource the technology's development if technological uncertainty is high and supplier competition is low II. The key determinant of vertical integration in the efficient boundaries model is increasing input customization III. In the context of strategy, an organization's boundary is the line that separates its profitable and unprofitable activities a) I only b) II only c) III only d) I and III e) II and III

b) II only

According to the property rights approach to vertical integration, under which condition can a company increase its profitability by acquiring another firm? a) The company doing the acquiring has a better forecast of the target company than its rivals do b) The company choosing to internalize an activity (i.e., the buyer) has the most to gain from controlling investments in it c) The company doing the acquiring has a higher stock market capitalization than the acquired company d) The acquiring firm's integration abilities are above average for its industry e) The acquired firm has a competitive advantage in its market

b) The company choosing to internalize an activity (i.e., the buyer) has the most to gain from controlling investments in it

The "Efficient Boundaries" model of moving an activity in-house focuses on the minimization of the sum of which costs? a) The sum of fixed costs and variable costs b) The sum of production costs and transaction costs c) The sum of production costs and distribution costs d) The sum of coordination costs and communication costs

b) The sum of production costs and transaction costs

In which of the following situations is a firm generally ill-advised to vertically integrate an activity? a) the supplier refuses to accede to the firm's control needs b) the firm's competence to perform the activity is high but the activity's strategic importance is low c) the firm's control needs and relative competence to perform the activity are both high d) the activity is important to the firm and there are no alternatives to a poor supplier

b) the firm's competence to perform the activity is high but the activity's strategic importance is low

The employment relationship differs from supplier relationships because: a) supply contracts guarantee fixed payments but employees can earn performance bonuses b) employees have contracts whereas suppliers rely on relationships and their industry reputations c) employees give up control (to their employers) over aspects of work that cannot be specified in detail or might need to be changed suddenly d) employers are liable for the damage a supplier may do to a third party in the course of business, but not the damage an employee may cause

c) employees give up control (to their employers) over aspects of work that cannot be specified in detail or might need to be changed suddenly

Which of the following is NOT a rationale for outsourcing? a) the strategic importance of the activity has dropped b) the relative competence of the firm to perform the activity has decreased c) uncertainty regarding demand volume has increased d) none of the above

c) uncertainty regarding demand volume has increased

Which of the following is NOT a new and valuable control benefit when a firm vertically integrates with a supplier? a) Control over the distribution of economic gain from the relationship b) Control over the supplier's investments in assets, human resources, and management processes c) Control over access to information about the supplier's business d) Control over the final price of the product to the consumer

d) Control over the final price of the product to the consumer

In the strategic sourcing framework, firms vertically integrate when: a) there is high uncertainty surrounding the transaction with the supplier b) the need to control and the ability to perform the activity are uncorrelated c) the supplier has invested in high technology d) the firm's need to control and its ability to perform an activity are both high

d) the firm's need to control and its ability to perform an activity are both high