Chapter.7 Exam Prep Vertical Integration and Outsourcing

Package Title: Chapter 7, Testbank

Course Title: Dyer, SM 2e

Chapter Number: 7

Question type: Multiple Choice

1) The process where a firm contracts out a business process or activity to an external supplier is known as _________.

a) outsourcing

b) vertical integration

c) horizontal diversification

d) market penetration

Difficulty: Easy

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

2) North Road LLC, an apparel company, found that its fashion supplies and accessories section was not generating much profit. Thus, the company contracted this section of its business to another company that designs and manufactures these products in a better way. The management of North Road realized that the employees of North Road could use the time to focus on other aspects that bring profit to the company. This scenario best illustrates _________.

a) market penetration

b) vertical integration

c) horizontal diversification

d) outsourcing

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

3) Which of the following scenarios illustrates the concept of outsourcing?

a) TechOn Inc., a company that buys raw materials from a supplier company

b) BNX Corp., a company that procures raw materials and supplies them to a different company

c) Virgo Corp., a company that contracts out a business activity to another company

d) Red Inc., a company that sells all its assets to another company

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

4) Vertical integration can be best defined as _________.

a) breaking a large process into smaller tasks that require specialized knowledge

b) bringing business processes or activities previously conducted by outside companies in-house

c) a graphic representation of the relationship between cost per unit of a product and its scale of production

d) the sequence of all activities that are performed by a firm to turn raw materials into a finished product

Difficulty: Easy

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

5) Which of the following scenarios best illustrates the concept of vertical integration?

a) NZB Corp., a company that sells all its assets to another company

b) Hues Inc., a company that owns its supply chain for its raw materials and processes

c) Scorpio LLC, a company that buys raw materials from a supplier company

d) Blue Corp., a company that makes raw materials and supplies them to a different company

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

6) Green Solutions Corp. is a washing machine manufacturing company. When it initially started out, it had held contracts with a supplier who provided the company with finished washing machine parts. However, Green Solutions later started manufacturing the parts by itself and assembling its products within the company without having to seek supplier intervention. This scenario best exemplifies _________.

a) vertical integration

b) market penetration

c) task specialization

d) horizontal diversification

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

7) The sequence of all activities that are performed by a firm to turn raw materials into a finished product that is sold to a buyer best describes the term _________.

a) product line

b) task specialization

c) virtuous circle

d) value chain

Difficulty: Easy

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

8) BHG Corp. is a glass manufacturing company that specializes in float glasses. The company manufactures float glass through various stages of melting and refining, coating, and annealing. It is then inspected and cut according to customer requirements. This manufacturing process performed by BHG Corp. is termed as _________.

a) virtuous circle

b) value chain

c) task specialization

d) supply chain

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

9) Yellow Express LLC is a company in the computer hardware industry that solely manufactures microchips. Yellow Express LLC is _________.

a) diagonally integrated

b) vertically integrated

c) horizontally diversified

d) vertically specialized

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

10) Activities closer to the beginning of the industry value chain are referred to as _________.

a) middle activities

b) forward activities

c) upstream activities

d) downstream activities

Difficulty: Easy

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

11) Coral Corp. is a company that initially used to manufacture handbags. It has now set up a store in which it sells its own products rather than supplying them to different stores. This initiation by Coral Corp. best illustrates _________.

a) forward integration

b) backward integration

c) horizontal diversification

d) market penetration

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

12) Browns Inc., a well-established suitcase brand, started manufacturing its own suitcases. It added new features in its suitcases such as water-resistance and extra storage space. The initiation by Browns Inc. to manufacture its own suitcases best illustrates _________.

a) linked diversification

b) backward integration

c) forward integration

d) assisted development

Difficulty: Hard

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

13) In the context of the primary reasons for vertical integration in companies, what do capabilities refer to?

a) Whether a company has the finances to handle and overcome organizational criticism

b) Whether a company knows when it should establish and exercise strict rules and regulations

c) Whether a company can economize on scarce inputs in order to reduce transaction costs

d) Whether a company has the right resources to perform an activity better than other firms

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

14) The chief executive officer (CEO) of Ecos Inc., a well-established firm in the real estate industry states that the firm has the resources to outperform its competitors. In the context of reasons for vertical integration, the CEO is referring to the firm’s _________.

a) control

b) priorities

c) capabilities

d) coordination

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

15) White Flower Corp. and DLG Inc. are competitors in the crockery industry. Claude, the head of operations at White Flower, says that the company is able to undertake its in-house business processes and activities much better than DLG. This, Claude says, helps White Flower produce better quality products that DLG. In the context of vertical integration, Claude’s statements refer to the concept of _________.

a) coordination

b) networking

c) priorities

d) control

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

16) Which of the following best illustrates a vertically integrated company with control?

a) Runners Corp., a shoe manufacturing company, which has a say in how much of its assets are divided among the company’s shareholders

b) Blueberry Inc., a confectionery company, which has a stronghold over an important resource of the company that helps in differentiating its final product

c) Trendsetters LLC, an apparel manufacturing company, which has a stronghold over the number of employees that the company can afford to recruit, train, and retain

d) Coders Corp., a software development company, which successfully deflects any possibilities of hostile takeovers

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

17) A supplier that is contracted to create and provide a customized input to a local firm is called a(n) _________.

a) acquirer

b) coordinator

c) subcontractor

d) advocate

Difficulty: Easy

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

18) Which of the following statements is a characteristic of subcontractors?

a) They are responsible for bringing in key functions to regulate a company.

b) They have to assign and coordinate various projects of a company.

c) They have 10 percent share in the profits accrued by a company.

d) They create made-to-order contributions for a company.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

19) In the context of the primary reasons for vertical integration in companies, which of the following statements is true of coordination?

a) The greater the interdependence between activities, the more a company should vertically integrate.

b) Activities that require high levels of coordination are known to be modular in nature.

c) The greater the interdependence between activities, the more a company should rely on outsourcing.

d) Activities that require low levels of coordination are known to be reciprocal in nature.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

20) In this context of the three Cs of vertical integration, which of the following scenarios accurately depicts capabilities?

a) BagMore Inc., a handbag company, decides to engage in backward integration and manufacture all of its products and accessories in the company house.

b) GoSpeed Corp., an automobile manufacturing company, evaluates itself by asking if it can perform the vertically integrated activity better than its rivals.

c) StyleRight LLC, an apparel company, manufactures eco-friendly, organic, and sustainable clothes.

d) HDC Inc., an electronics company, decides to effectively regulate its new technologies.

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

21) DHC Inc. is a television manufacturing company. The components of the televisions are manufactured separately by different companies around the globe. Later, these components are tested and then assembled to get the finished products in house by DHC Inc. In the context of the degree of coordination, this scenario best illustrates _________.

a) sequential interdependence

b) reciprocal interdependence

c) modular interdependence

d) extensive interdependence

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

22) A car has to go through several different levels of manufacturing processes before it can be painted. The painting process cannot be initiated until a car is externally assembled and then inspected. This type of interdependence can be best termed as _________.

a) extensive interdependence

b) modular interdependence

c) reciprocal interdependence

d) sequential interdependence

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

23) Apex Electronics LLC requires many teams to work together intensively and in tandem with each other in order to effectively produce its products. A high level of coordination between the working teams is essential for the company to maintain the high quality of its products. This type of interdependence can be best termed as _________.

a) sequential interdependence

b) reciprocal interdependence

c) limited interdependence

d) modular interdependence

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

24) Sport Soles Inc., a sports footwear manufacturing company, makes athletic shoes with rubber soles. In order to maximize its value and profit, Sport Soles sets up its operations right next to rubber tree fields. This way, the company gets easy access to its main raw material. In the context of vertical integration, this scenario illustrates that Sport Soles Inc. is exercising _________.

a) control

b) coordination

c) extensive focus

d) modular interdependence

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

25) Which of the following is a primary characteristic of a transaction-specific asset?

a) It has the ability to generate value only when used for several purposes together.

b) It is an intangible asset whose value is very hard to evaluate.

c) It is an asset that can be transported or transferred with ease.

d) It can generate maximum value only when used for a particular purpose.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

26) Which of the following examples correctly depicts a company that uses a transaction-specific asset?

a) Indigo Inc., a company that manufactures faucets

b) Eclipse Corp., a company that manufactures pens and sells them through distributors

c) BLC Corp., a company that uses heavily customized software to manufacture airplane seats

d) Vertigo LLC, a company that sources raw material from suppliers to manufacture dinnerware

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

27) The country of Lydania has a complex network of pipelines that transports natural gas for millions of people. These pipelines are specifically designed for the transportation of natural gas and have limited uses outside the natural gas industry because of inherent industry regulations. These pipelines exemplify a(n) _________.

a) sunk cost

b) transaction-specific asset

c) intangible asset

d) greenfield entry

Difficulty: Hard

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

28) Having more flexibility, or being less vertically integrated, is more valuable when _________.

a) a firm can create its own raw materials

b) technology used is outdated

c) the cost to perform an activity remains the same

d) new technologies are innovated

Difficulty: Medium

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

29) Pulse Corp., a vertically integrated company, is finding it difficult to adapt to current technology that is capable of speeding up its manufacturing process. The company is used to performing work in a specific manner using the old technology. However, in order to maintain competitive advantage, it has to upgrade itself to the current technology. This scenario is an example of __________ that is one of the disadvantages of vertical integration.

a) loss of frequency

b) loss of focus

c) loss of flexibility

d) loss of facility

Difficulty: Hard

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

30) Violet Inc. has been undertaking a lot of responsibilities as a company in order to be the best in its industry. Over time, however, these responsibilities become tough to handle and the company finds it difficult to efficiently manage the time and effort to perform its activities. In contrast, other firms in the industry that outsource some of their activities to smaller companies find it easier to generate more profit than Violet Inc. The situation faced by Violet Inc. in this example illustrates one of the important disadvantages of vertical integration that is _________.

a) loss of flexibility

b) loss of frequency

c) loss of focus

d) loss of facility

Difficulty: Hard

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

31) Teal Motors Inc., an automobile company, outsources the manufacturing of most of the automobile parts to several other companies that specialize in making parts such as ignition boxes, coil wires, and grills. Teal Motors makes sure to get these parts manufactured at a much lesser rate than it would if it manufactures its own parts. In this scenario, Teal Motors Inc. is effectively avoiding a _________.

a) loss of identity

b) loss of frequency

c) loss of facility

d) loss of focus

Difficulty: Hard

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

32) Saturn LLC., a computer manufacturer, uses outdated technology to build specialized graphic cards for its computers. The company finds it difficult to upgrade its graphic card building technology to a newer version. However, Sun Products Inc., one of its competitors, upgrades itself to the new version with lesser difficulty. In this scenario, Saturn LLC is facing a _________.

a) loss of frequency

b) loss of focus

c) loss of flexibility

d) loss of facility

Difficulty: Hard

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Application

Standard 1 : AACSB || Analytic

33) Nate, the managing director of Juniper Inc., believes that instead of making auto parts on its own, it should rather outsource these tasks to other companies so that the company can focus only on the critical aspects of the final product. His colleague, Salma, believes that the company would have more competitive advantage if it made its own auto parts. Which of the following statements strengthens Nate’s belief?

a) Outsourcing will minimize the capital investment Juniper Inc. requires to grow.

b) Outsourcing will lessen the pressure of crowdsourcing so that lesser and more stable options are sought.

c) Outsourcing will help minimize Juniper Inc.’s need to innovate its assets or activities.

d) Outsourcing will minimize suppliers’ bargaining power as Juniper Inc. chooses its suppliers.

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Analyze

Standard 1 : AACSB || Reflective Thinking

34) Which of the following companies is most likely to experience the benefits of outsourcing?

a) Pulsar Corp., a shoe manufacturer, which has invested huge an amount of capital in order to afford its suppliers

b) Black Inc., a consumer electronics company, which has been importing its supplies from other companies and focuses only on the critical aspects of its work

c) Carbon LLC, an automobile manufacturer, which has the capability to produce more of its raw materials in house

d) Beta Corp., a computer manufacturer, which has been trying hard to adapt new technologies in order to gain competitive edge in the industry

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

35) Which of the following scenarios supports the view that a company should engage in outsourcing?

a) Zenith Corp., a publishing house, which needed a high capital investment to grow because it contracted most of its peripheral activities to other companies

b) FRC Inc., an apparel company, which fears the loss of a strong hold over its prime activities if it does not perform them in house

c) AutoLuxe LLC, an automobile company, which has the flexibility to contract processes to another company at a fast rate

d) Innovator Inc., a software company, which foresees that its employees will have less work and more time under their disposal for leisure activities if it lets other suppliers help perform its activities

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

36) A production house called Script Creations Inc. initiated a strategy for making its next movie. It invited a mass of people to create short documentaries on a social theme. As per the terms and conditions, Script Creations would select top three short stories to create an overall complete movie. This initiation by Script Creations Inc. is an example of _________.

a) crowdsourcing

b) insourcing

c) offshoring

d) benchmarking

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

37) Lupus LLC is a company that sells personalized gift items. It reduces the cost of employing professional artists, designers, photographers, salespeople, and retailers by letting its members and other people submit their ideas for designs, quotes, and phrases on its e-commerce website. Which of the following types of crowdsourcing does Lupus LLC use?

a) Crowdvoting

b) Crowdinnovation

c) Crowdtasking

d) Crowdcreating

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

38) Cygnus Bank is a banking and financial services company. It offered a large sum of money and a chance to receive employment to the programmers who could create software that would help enhance employee productivity. Which of the following types of crowdsourcing did Cygnus Bank use?

a) Crowdvoting

b) Crowdinnovation

c) Crowdtasking

d) Crowdcreating

Difficulty: Hard

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Application

Standard 1 : AACSB || Analytic

39) Adia, the chief executive officer (CEO) of Touch Works Corp., believes that outsourcing would be a disadvantage to her company. She states that she would not be able to control the finances and assets of her company if work gets outsourced. Which of the following statements strengthens Adia’s belief?

a) Outsourcing would maximize the capital investment that Touch Works Corp. would require to grow.

b) Outsourcing would prevent Touch Works Corp. from contracting out activities to industry specialists.

c) Touch Works Corp. would be forced to focus on a wide range of activities.

d) Touch Works Corp. would lose the ability to innovate and create competitive advantage.

Difficulty: Hard

Section Reference 1: Dangers of Outsourcing

Learning Objective 1: Discuss the actions a manager could take to prevent a subcontractor from becoming a competitor.

Bloomcode: Analyze

Standard 1 : AACSB || Reflective Thinking

40) Hydrus Corp. contracted most of its business processes to various other companies. This helped the company generate immediate profits, but Hydrus was losing competitive advantage over its rivals in the long run due to its lack of innovation. Which of the following is a danger of outsourcing that Hydrus Corp. experienced?

a) Lack of control

b) Loss of capabilities

c) Lack of focus

d) Loss of technology

Difficulty: Hard

Section Reference 1: Dangers of Outsourcing

Learning Objective 1: Discuss the actions a manager could take to prevent a subcontractor from becoming a competitor.

Bloomcode: Application

Standard 1 : AACSB || Analytic

41) Identify a true statement about vertically integrated companies.

a) They participate in many or all stages of the industry value chain from exploration to final sale.

b) They participate only in activities closer to the beginning of the industry value chain.

c) They participate only in activities closer to the end of the industry value chain.

d) They participate in only one activity of the industry value chain.

Difficulty: Medium

Section Reference 1: What is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

42) Which of the following is an example of a vertically-specialized company?

a) A company that contracts all of its activities to an external supplier

b) A company that participate in all stages of the industry value chain

c) A company that participates in only one activity of the industry value chain

d) A company that wants to grow by moving forward in the industry value chain

Difficulty: Medium

Section Reference 1: What is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

43) Identify a reason why companies choose to make versus buy.

a) They have the capability to perform an activity better than other firms.

b) They lack the marketing capability to build a brand that will differentiate its products.

c) Coordinating multiple activities in the value chain is always easy.

d) It offers the flexibility to make changes to any activity in the value chain.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

44) In the context of the three Cs of vertical integration, under what conditions should a firm choose to engage in vertical integration?

a) When the firm lacks the capability to perform an activity better than other firms

b) When the firm is incapable of coordinating different activities within its departments

c) When the activities of the firm are conducted independently

d) When there is greater interdependence between the activities of the firm

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

45) Which of the following statements is true of subcontractors?

a) They are contracted to create customized inputs for a firm.

b) They are contracted to oversee the production process of a firm.

c) They are responsible for the production capacity of a firm.

d) They are responsible for the profitability of a firm.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

46) In the context of the three Cs of vertical integration, some activities or tasks require more coordination than others to be successful because _________.

a) people performing the activity are not skilled

b) those activities need no supervision

c) of greater interdependence with other activities

d) those activities are independent of each other

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

47) In the context of the three Cs of vertical integration, some activities require lower levels of coordination than others to be successful because the activities _________.

a) are modular in nature

b) do not involve huge investments

c) are not very important in the value chain

d) are performed by highly-skilled professionals

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

48) Which of the following best illustrates modular interdependence?

a) A firm in which team performance is based on individual activities that are pooled together

b) A firm in which activities are based on the completion of preceding tasks by another firm

c) A firm whose performance is achieved through a process of iterative knowledge sharing

d) A firm whose performance is free of the results of individual activities in the value chain

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

49) Identify a true statement about activities that are sequentially interdependent.

a) They require low levels of coordination because of their sequential nature.

b) They require team members to meet together more regularly and consistently to coordinate their work.

c) They require individuals to be responsive to the needs of those performing related activities.

d) They require individuals to communicate their own requirements frequently.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

50) Which of the following best illustrates reciprocal interdependence?

a) Designing and manufacturing nuts and bolts

b) A golf team

c) Product development teams

d) Designing and manufacturing automobile components

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

51) Identify a danger of vertical integration.

a) Loss of flexibility to quickly make changes to a business

b) Loss of capabilities to create a new product

c) Loss of creativity to create a unique product

d) Loss of control over the activities of the value chain

Difficulty: Medium

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

52) Which of the following is a danger for vertically-specialized companies?

a) They offer their best product at the lowest price.

b) They do not allow the firm to focus on making profits.

c) They have the flexibility to quickly make changes to the business model.

d) They go out of business if they cannot make enough profits.

Difficulty: Medium

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

53) Outsourcing is advantageous when _________.

a) there is high technological uncertainty in an industry

b) a high degree of coordination is required between activities

c) a firm does not have an established brand image to protect

d) a firm is operating at a loss and is on the verge of a shutdown

Difficulty: Medium

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

54) Which of the following is a disadvantage of outsourcing?

a) It is difficult to focus on many different activities at once.

b) A lack of control over critical assets or activities results.

c) A firm does not have an established brand image to protect.

d) Firms lack the flexibility to quickly make changes to the business model.

Difficulty: Medium

Section Reference 1: Dangers of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

55) Identify an action managers could take to prevent a subcontractor from becoming a competitor.

a) Take an equity stake in the supplier.

b) Share tacit knowledge with suppliers.

c) Choose a single supplier for outsourcing activities.

d) Involve the supplier in the production process.

Difficulty: Medium

Section Reference 1: Dangers of Outsourcing

Learning Objective 1: Discuss the actions a manager could take to prevent a subcontractor from becoming a competitor.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Question type: Text Entry

56) When one firm tries to take advantage of another firm that has made a transaction-specific investment, by causing a brief delay in business because a product has no other use is known as a(n) ___.

Difficulty: Easy

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

57) As a danger of vertical integration, a(n) ___ refers to the fact that the more different types of activities a firm needs to manage, the harder it is to be world class in all of those activities.

Difficulty: Easy

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Question type: Essay

58) Briefly state the difference between outsourcing and insourcing.

Difficulty: Medium

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: Outsourcing is the process where a firm contracts out a business process or activity to an external supplier, whereas, vertical integration or insourcing brings business processes or activities previously conducted by outside companies in-house.

59) What is the main difference between a company that is vertically integrated and a company that is vertically specialized?

Difficulty: Medium

Section Reference 1: What Is Vertical Integration?

Learning Objective 1: Define vertical integration, forward vertical integration, and backward integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: Companies that participate in many or all stages of the industry value chain from exploration to final sale are vertically integrated. Companies that participate in only one activity are vertically specialized.

60) In the context of vertical integration, when is flexibility most valuable?

Difficulty: Medium

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: Having more flexibility—that is, being less vertically integrated—is particularly valuable when new technologies are being developed or if the cost to perform an activity can change quickly.

61) In the context of coordination, what is modular interdependence?

Difficulty: Easy

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: In the context of coordination, modular interdependence is one of the three types of interdependence. Some activities in a vertically integrated firm require low levels of coordination because the activities are modular in nature. This means the results are pooled together but the individual activities can be conducted without coordinating with other activities. The members of such teams may share information about the activity with each other, but in the final analysis, the activity is done by the individual performer. In this case, team performance is based on individual performances or activities that are pooled together. This is typically referred to as modular or pooled interdependence, meaning that the degree of coordination required is relatively low.

62) Explain the three Cs of vertical integration.

Difficulty: Medium

Section Reference 1: Three Key Reasons to Vertically Integrate

Learning Objective 1: Describe the three Cs that represent the primary reasons that firms may choose to vertically integrate (make) and perform an activity internally versus outsource (buy) the activity to a supplier.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: The three Cs of vertical integration—capabilities, coordination, and control—are the primary reasons that companies choose to make versus buy. The first C is capabilities, which refers to the question of whether a firm has—or can build—the capabilities to perform an activity better than other firms. The firm’s leaders should ask this question: To what extent are they, or could they be, the best in the world at conducting that activity? If the firm can be one of the best in the world, then it is probably an activity it should do. But, if it cannot be one of the best in the world, then the firm is probably better off by outsourcing the function to a company that has stronger capabilities.

The second C is coordination, which refers to the question of whether a firm is better able to effectively coordinate an activity with other activities in the firm when both are conducted internally. In this case, the firm isn’t necessarily more capable at performing a particular activity, but it lowers the coordination costs associated with two interdependent activities. A firm’s leaders should ask: To what extent will they improve their ability to coordinate their business activities—and offer unique value—by conducting this activity themselves? The fact of the matter is that some activities or tasks require more coordination than others to be successful because of greater interdependence with other activities. The greater the interdependence between activities, the more it makes sense to vertically integrate and have these done within a company where the team members can effectively coordinate their work.

The third C is control, which refers to a firm’s desire to maintain control over a valuable activity or input in the value chain. In other words, an organization’s leaders must ask: to what extent should they maintain control over a crucial step in the value chain by conducting that activity themselves? A company may want to vertically integrate in order to control some scarce and valuable resource, particularly if it is a differentiator of its final product. The choice to backward integrate may be made in order to control access to important raw materials or inputs that are highly customized to downstream activities. In a similar vein, it might make sense to maintain control over investments in assets or equipment that provide key inputs at lower cost.

63) What are the dangers of vertical integration?

Difficulty: Medium

Section Reference 1: Dangers of Vertical Integration

Learning Objective 1: Describe the two Fs, which examine the potential dangers of vertical integration.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: There are two important dangers—a loss of flexibility and loss of focus—the two Fs.

First, when many activities are managed in a value chain, the flexibility to quickly make changes to the business is lost. This might be important when there are major technological changes. In fact, research has shown that companies that are more vertically integrated take a bigger hit to performance when there is a technological change. Having more flexibility—that is, being less vertically integrated—is particularly valuable when new technologies are being developed or if the cost to perform an activity can change quickly.

A loss of focus refers to the fact that the more different types of activities a firm needs to manage, the harder it is to be world class in all of those activities. It is just too difficult for managers to focus on many different activities at once and be world class at all of them. There is one more dimension to focus that is worth mentioning. When firms are vertically specialized, they only stay in business when they can focus on making profits. If they can’t make enough profits, they go out of business.

64) What are some of the advantages of outsourcing?

Difficulty: Easy

Section Reference 1: Advantages of Outsourcing

Learning Objective 1: Explain the advantages of outsourcing and the conditions under which it might be advantageous to outsource an activity to an external supplier.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: Outsourcing does give firms more flexibility to quickly move activities to whatever company is the best at performing that particular activity. When there is high technological uncertainty in an industry with lots of new leapfrog technologies being developed, flexibility is valuable, and outsourcing is often preferred to vertical integration. Outsourcing also allows firms to focus their attention on being good at a narrower range of activities. Along with this benefit, outsourcing also minimizes the capital investment required to grow. Also, outside suppliers can often produce at much greater scale than in-house suppliers because in-house suppliers often have difficulty getting outside customers.

65) What are the disadvantages to outsourcing?

Difficulty: Easy

Section Reference 1: Dangers of Outsourcing

Learning Objective 1: Discuss the actions a manager could take to prevent a subcontractor from becoming a competitor.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: There are two major dangers of outsourcing: a loss of capabilities (particularly the capability to innovate) and a lack of control over critical assets or activities. In addition to leading to a loss of innovation capabilities, outsourcing can lead to a loss of control as suppliers that provide key inputs gain bargaining power.