Hill SM TB CH 09

1.
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.
a. True
b. False
ANSWER: False
POINTS: I
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.l5.09.01- Discuss how corporate-level strategy can be used to
strengthen a company's business model and business-level strategies
NATIONAL STANDARDS: United States- BUSPROG: Reflective Thin- BUSPROG: Analytic
KEYWORDS: Bloom's: Comprehension
2. Managers use corporate-level strategy to identify which industries a company should compete in to maximize long
run profitability.
a. True
b. False
ANSWER: True
POINTS: I
DIFFICULTY: Easy
KEYWORDS: Bloom's: Knowledge
3. An advantage of horizontal integration is that it can lower a company's cost structure by creating increasing
economies of scale.
a. True
b. False
ANSWER: True
POINTS: I
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.l5.09.02- Defme horizontal integration and discuss the primary
advantages and disadvantages associated with this corporate-level strategy
4. 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 envirornnent.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.15.09.02- Defme horizontal integration and discuss the primary
5. Unfortunately, horizontal integration can not be accomplished by acquisitions or mergers.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
6. Oracle Corp., based in Reno, Nevada, has purchased several other companies to become the world's largest maker
of database software. This strategy is known as the strategy of acquisition.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
NATIONAL STANDARDS: United States- BUSPROG: Reflective Thinking
7. Horizontal integration allows companies to obtain bargaining power over suppliers or buyers and increase their
profitability at the expense of suppliers or buyers.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
8. Horizontal integration can help lower costs when it allows a company to reduce the duplication of resources.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
9. Product bundling occurs when a finn offers a range of products that are sold together at a single price.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
10. When a bank offers horne mortgages and credit cards to its checking account customers, it is using horizontal
integration strategy.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.l5.09.02- Defrne horizontal integration and discuss the primary
11. Horizontal integration can lead to low cost advantages but rarely to differentiation advantages.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
12. Horizontal integration ahnost always increases rivalry in an industry.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
13. A merger occurs when one company uses its capital resources, such as stock, debt, or cash, to purchase another
company.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
14. Transfer pricing refers when a company is taken advantage of by another company it does business with after it has
made an investment in expensive specialized assets to better meet the needs of the other company.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.15.09.03 -Explain the difference between a company's internal value
chain and the industry value chain
15. Vertical integration is undertaken to support the competitive position of a company's core business.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
16. Vertical integration can strengthen a company's differentiation advantage.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.l5.09.03 -Explain the difference between a company's internal value
17. 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.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
18. The term bureaucratic costs refers to costs associated with the creation and maintenance of the administrative
function in a company.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
19. 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.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
20. Tina's Technologies is expanding its operations backward into an industry that produces inputs for the company's
products. Tina's Technologies is utilizing horizontal integration.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Moderate
KEYWORDS: Bloom's: Application
21. Competitive bidding makes suppliers reluctant to make investments that tie them closely to their trading partners.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.l5.09.04- Describe why, and under what conditions, cooperative
relationships such as strategic alliances and outsourcing may become a substitute for
vertical integration
22. In a strategic alliance, one of the companies that's part of the agreement benefits more than the other.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.IIILL.15.09.04- Describe why, and under what conditions, cooperative
23. Even though companies may invest in specialized assets to build competitive advantage, it is seldom necessary that
suppliers do so.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.15.09.04- Describe why, and under what conditions, cooperative
24. Strategic alliance is a type oflong-terrn contract that involves one company taking over another company.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
25. 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.
a. True
b. False
ANSWER: True
POINTS: I
DIFFICULTY: Easy
26. Companies that outsource most or all of their value creation activities are often referred to as virtual corporations.
a. True
b. False
ANSWER: True
POINTS: I
DIFFICULTY: Easy
27. When a company outsources its noncore activities to specialists, it looses its capabilities to differentiate its fmal
products.
a. True
b. False
ANSWER: False
POINTS: I
DIFFICULTY: Easy
28. The final part of the strategy formulation process is:
a. choosing business-level strategies.
b. choosing functional-level strategies.
c. choosing corporate-level strategies.
d. choosing functional-level goals.
e. choosing business-level goals.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SMIA.HILL.15.09.01- Discuss how corporate-level strategy can be used to
29. When a company decides to expand into new industries, it must:

a. develop "multibusiness model" that justifies its entry into different businesses.
b. halt marketing activities in the current industry to avoid being associated with one specific industry.
c. select a new CEO and reappoint the board of directors.
d. create one common business model for all the industries rather than each business unit.
e. avoid talking about ways of increasing profitability in the business model.
ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: SMIA.HILL.15.09.01- Discuss how corporate-level strategy can be used to
30. is the process of acquiring or merging with industry competitors to achieve the competitive advantages.
a. Tapered integration
b. Vertical integration
c. Horizontal integration
d. Franchising
e. Diversification
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
3 1. 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.
ANSWER: d
POINTS: I
KEYWORDS: Knowledge
32. Which of the following is a benefit that fmns should expect to gain from the use of horizontal integration?
a. Reduced risk of corning into conflict with the FTC
b. Better realization of economies of scale
c. Greater control over the entire supply chain
d. Reduced risk of holdup
e. Reduced need for investment in core activities
ANSWER: b
POINTS: I
DIFFICULTY: Easy
33. Horizontal integration in an industry tends to:

a. increase the cost structure.
b. increase product differentiation.
c. undermine the company's competitive advantage.
d. increase rivalry within the industry.
e. reduce bargaining power over suppliers and buyers.
ANSWER: b
POINTS: I
DIFFICULTY: Easy
34. Adam's boss tells him that their company is pursuing the strategy of horizontal integration. Which of the following is
evident from the scenario?
a. The company will acquire one of its suppliers.
b. The company will buy or merge with one of its rivals.
c. The company will begin to distribute its own products.
d. The company will change the organizational structure to make it more flat.
e. The company will merge with another company that belongs to a different industry.
ANSWER: b
POINTS: 1
LEARNING OBJECTIVES: SM1A.HILL.15.09.02- Defme horizontal integration and discuss the primary
35. A leading software company merged with its competitor to form a new company. Which of the following is likely to
be the result of this merger?
a. Decreased cost per unit output
b. Decreased bargaining power over suppliers and customers
c. Increased industry rivalry
d. Decreased profitability
e. Decreased product differentiation
ANSWER: a
POINTS: 1
DIFFICULTY: Challenging
KEYWORDS: Bloom's: Analysis
36. Antitrust authorities:

a. favor large companies.
b. reduce industry competition.
c. are concerned with the abuse of market power.
d. tend to raise prices of products for consumers.
e. enable the achievement of market power.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
37. All of the following are benefits of horizontal integration except:
a. Reduced risk of corning into conflict with the FTC
b. Increased product differentiation
c. Reduced industry rivalry
d. Increased bargaining power over suppliers
e. Reduced cost structure
ANSWER: a
POINTS: I
DIFFICULTY: Easy
38. In 1999, two pharmaceutical companies that shared an equal market share decided to pool their operations to create
a new firm that was known by a different name. This is an example of a(n):
a. merger.
b. acquisition.
c. procurement.
d. take over.
e. dissolution.
ANSWER: a
POINTS: I
DIFFICULTY: Easy
39. Google bought Clever Sense, a mobile app company. This is an example of a(n):
a. parallel sourcing policy.
b. strategic outsource.
c. strategic alliance.
d. merger.
e. acquisition.
ANSWER: e
POINTS: I
DIFFICULTY: Easy
40. Rachel, a new morn, is shopping for baby products. She notices that one of the manufacturers, Lucy's, is offering a
wide range of products such as baby shampoo, baby lotion, and baby wipes, together, as one combined product.
Which of the following concepts is illustrated in the scenario?
a. Product bundling
b. Cross-selling
c. Hostage taking
d. Strategic outsourcing
e. Parallel sourcing
ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: SMIA.HlLL.15.09.02- Defrne horizontal integration and discuss the primary
41. For a company based in frnal assembly, moving into retail and distribution means:
a. backward integration.
b. forward integration.
c. taper integration.
d. related diversification.
e. unrelated diversification.
ANSWER: b
POINTS: 1
42. Which of the following is not a benefit of vertical integration?

a. Facilitated investments in specialized assets
b. Enhanced product quality
c. Improved scheduling
d. Lowered cost structure
e. Strengthened differentiation advantage
ANSWER: d

43. Vertical integration can be disadvantageous when:
a. competitors are vertically integrated.
b. demand is stable.
c. industry technology is changing rapidly.
d. the company is operating in the horne country.
e. costs of company decreases.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
44. The price that one division of a company charges another division for its products, which are the inputs the other
division requires to manufacture its own products is known as:
a. vertical disintegration.
b. related pricing.
c. transfer pricing.
d. related diversification.
e. tapered pricing.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
45. 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. by making specialized investments jointly with its competitor.
c. laterally into an industry that competes with the company's products.
d. by merging with industry competitors.
e. by using its capital resources to purchase another company within the industry.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
46. Under which of the following circumstances is vertical integration considered hazardous?
a. When the demand for the product fluctuates frequently
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
ANSWER: a
POINTS: 1
KEYWORDS: Bloom's: Evaluation
47. Vertical disintegration is said to occur when:

a. a company decides to exit industries either forward or backward in the industry value chain to its core
industry.
b. a company takes advantage of another company it does business with after the other company has made an
substantial investment in assets to meet the needs of the company.
c. a company decides to acquire its suppliers and distributors.
d. a company uses its capital resources to purchase its competitor.
e. a company decides to sell its business model to another company.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
48. Vertical integration is based on a company entering only those industries that:
a. are involved in the distribution of products.
b. are considered as potential competitors.
c. are involved in sourcing raw materials.
d. are not in any way related to the company's current business operation.
e. add value to its core products.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
49. 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.
ANSWER: b
POINTS: I
DIFFICULTY: Easy
50. Which of the following problems is associated with the strategy of vertical integration?
a. Decrease in cost structure
b. Increase in industry competition
c. Vulnerability to unpredictable demand
d. Assured conflict with the antitrust authorities
e. Lack of bureaucratic costs
ANSWER: c
POINTS: I
DIFFICULTY: Easy
51. When technology in an industry is changing rapidly, a company pursuing a strategy of vertical integration may fmd
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. establishing a monopoly in the industry.
e. lowering its cost structure.
ANSWER: a
POINTS: I
DIFFICULTY: Easy
NATIONAL STANDARDS: United States- BUSPROG: Technology
52. 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.
ANSWER: c
POINTS: I
DIFFICULTY: Easy
53. An automobile company enters into a long-term contract with two suppliers for the same automobile tool. This is to
ensure the company is protected in the event of one of the suppliers adopting an uncooperative attitude. Which of the
following concepts is illustrated in this scenario?
a. Outsourcing
b. Vertical integration
c. Horizontal integration
d. Parallel sourcing
e. Full integration
ANSWER: d
POINTS: I
DIFFICULTY: Easy
54. Credible commitments refer to:
a. believable promises that support the development of a long-term relationship between companies.
b. the merging of two companies that have an equal market share.
c. to obtaining of goods, services or works from an external source.
d. the acquisition of one company by another company.
e. the outsourcing of after-sale services to a different company.
ANSWER: a
POINTS: I
DIFFICULTY: Easy
55. Long-term agreements between two or more companies to jointly develop new products or processes that benefit all
companies that are a part of the agreement are known as:
a. horizontal integration.
b. outsourcing.
c. strategic alliance.
d. joint venture.
e. vertical integration.
ANSWER: c
POINTS: I
DIFFICULTY: Easy
56. SparklingLeaves is one of the major suppliers of automobile tools to StanMotors, a leading automobile company.
Many of the tools are customized to meet the specific needs of StanMotors and hence have little other value. In
return, StanMotors has agreed to make SparklingLeaves its sole supplier of automobile equipment for a period of 15
years. This scenario illustrates:
a. horizontal integration.
b. credible commitment.
c. competitive bidding.
d. vertical integration.
e. parallel sourcing.
ANSWER: b
POINTS: 1
57. Companies invest in specialized assets because these assets allow them to:
a. lower their cost stmcture.
b. charge excessive prices for their products.
c. the materials required are unique.
d. develop customized products.
e. charge premium prices for their products.
ANSWER: a
POINTS: 1
58. To build trust io a cooperative relationship, both fmns can:
a. rely on competitive biddiog.
b. make mutual iovestrnents in specialized assets.
c. write short-term contracts that must be renewed frequently.
d. iocrease their vertical iotegration.
e. use outsourcing of noncore activities.
ANSWER: b
POINTS: I
DIFFICULTY: Easy
relationships such as strategic alliances and outsourciog may become a substitute for
vertical iotegration
NATIONAL STANDARDS: United States- BUSPROG: Reflective Thio- BUSPROG: Analytic
59. John's surfboard shop has a long-term relationship with two surfboard makers. John is usiog:
a. parallel sourciog.
b. cross-selliog.
c. product bundliog.
d. vertical iotegration.
e. horizontal iotegration.
ANSWER: a
POINTS: I
relationships such as strategic alliances and outsourciog may become a substitute for
vertical iotegration
NATIONAL STANDARDS: United States- BUSPROG: Reflective Thinkiog
60. 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
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
61. 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.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
62. 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.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
63. 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
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
64. 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.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
65. 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 that benefit all companies
involved in creating the product.
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.
ANSWER: e
POINTS: I
DIFFICULTY: Easy
66. 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 products a manufacturer needs in the industry.
e. all parts for a particular product a manufacturer needs in the industry.
ANSWER: a
POINTS: I
DIFFICULTY: Easy
67. GM typically solicits bids from global suppliers to produce a particular component and awards a !-year contract to
the supplier that submits the lowest bid. At the end of the year, a contract is once again put out for bid, and once
again the lowest cost supplier is most likely to win the bid. Which of the following is GM using?
a. Strategic outsourcing
b. Competitive bidding
c. Strategic bidding
d. Long-term alliance
e. Hostage taking
ANSWER: b
POINTS: I
DIFFICULTY: Easy
KEYWORDS: Comprehension
68. What is the relationship between a company's corporate-level strategy and its business model?
ANSWER: Corporate-level strategies drive a company's business model over time and ultimately
help determine the kinds of business and functional-level strategies that it uses to
maximize long-mn profitability. The link between corporate strategy and profitability
should be underscored.
To increase profitability, a corporate strategy should enable a company, or one or more
of its business divisions, or units, to perform one or more value chain activities or
functions at either a lower cost or in a way that allows for differentiation. In addition,
corporate strategy may have a positive impact on profitability if it helps a company
achieve a better competitive position in the marketplace.
Thus, a company's corporate-level strategies should be chosen to promote the success
of a company's business model and to help achieve sustainable competitive advantage
at the business level.
POINTS: I
KEYWORDS: Bloom's: Synthesis
69. Compare the benefits and risks associated with horizontal and vertical integration. Under what circumstances would
a firm prefer one over the other?
ANSWER: Horizontal integration has many of the same benefits and risks as vertical integration.
For example, both risk the inability to blend two different organizational cultures, both
can lead to lower costs, and so on. One area of difference is that horizontal integration
is always with rivals, while vertical integration is with buyer or supplier firms.
Therefore, the nature of the integration, implementation, and anticipated cost savings is
different. Another difference is that vertically integrated fmns face the risk of high
operating costs relative to outside suppliers or buyers due to lack of competitive
pressure. A third difference is that the bureaucratic costs of vertical integration are
likely to be higher because of the need for close coordination between business units
that are connected in the same supply chain, which is not a concern for a horizontally
integrated firm.
Mergers are more common than acquisitions when the two fmns are of approximately
equal size, although there have been acquisitions between equals, and smaller fmns
have even acquired larger ones. An acquisition requires cash or some other form of
payment to meet the purchase price, while a merger is a mere blending of assets and
so may be preferable for cash-poor companies. Also, a merger is always friendly,
while an acquisition may be either friendly or hostile. When one party is reluctant to
enter into the deal, acquisition would be the preferred method.
POINTS: 1
LEARNING OBJECTIVES: SMIA.HlLL.l5.09.02- Defme horizontal integration and discuss the primary
SMIA.HILL.l5.09.03 -Explain the difference between a company's internal value
70. Consider the case of a manufacturing finn that purchases subassemblies from a supplier, creates a finished product,
and then sells that product to a wholesale distributor. What advantages might this finn gain from forward integration?
From backward integration? What potential pitfalls of vertical integration might the firm face?
ANSWER: Forward integration would allow the manufacturing finn to own its distributors, which
could enable it to realize higher profits because it will be able to capture the profits that
were previously going to the distributor. Also, the vertically integrated finn will be
larger and therefore can more easily build barriers to entry, limit competition, and
charge higher prices. The firm may also find that it can invest more readily in
specialized assets, which protect product quality, enabling differentiation and higher
prices. A fmal benefit would be the increased ease of scheduling and coordination, and
the increased opportunities for organizational learning.
Backward integration would require the firm to build its own subassemblies. The
benefits of backward integration are the same as those found in forward integration.
However, whether the firm chooses forward or backward integration, it must consider
some potential pitfalls. First, by owning more value creation activities, the finn's
complexity is increasing, which will increase bureaucratic costs. Second, the buyer or
supplier business units may be less motivated to keep expenses low because they have
a guaranteed seller or buyer for their output. Third, ownership of the additional steps in
the process locks the firm into technology, capacity, cost, and other choices, whereas
the nonintegrated firm is free to choose other suppliers, other technology, other
quantities, and so on, through purchasing agreements.
POINTS: I
71. How can strategic outsourcing strengthen a company's business model and increase its profitability?
ANSWER: 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 that are specialists in
those activities. Companies generally outsource noncore activities.
Strategic outsourcing can help strengthen a company's business model and increase its
profitability in several ways. First, outsourcing can help reduce a company's cost
structure. Outsourcing reduces costs when the price that it pays to an independent
company to perform one or more of its value chain activities is lower than the cost of
performing the activities itself. Second, outsourcing can help a company enhance its
differentiation. This occurs when the independent firm performs an activity at a higher
level of quality than the company performs the activity. Finally, outsourcing allows
companies to focus their energies and company resources on performing those core
activities that have the most potential to create value and competitive advantage.
POINTS: I
KEYWORDS: Bloom's: Synthesis
72. Strategic alliances and outsourcing are two alternatives to vertical integration. What are the advantages and
disadvantages of each compared to vertical integration? What can managers do to eliminate or reduce the risks?
ANSWER: Compared to vertical integration, strategic alliances allow the finn to reduce its
bureaucratic costs because the firm no longer has to manage the entire set of complex
activities. Also, strategic alliances enable the finn to remain flexibleDfor example, by
renegotiating the contract terms. This means the firm is not locked into choices about
technology, capacity, and so on. Thus, strategic alliances provide the advantages of
vertical integration D closer coordination, investment in specialized assets, and so
on D but with lower costs and increased flexibility. The major disadvantages of strategic
alliances are the potentially higher costs of allowing the partner to profit and the
possibility oflosing control over scheduling, proprietary know-how, and other items.
Outsourcing will reduce costs when the price paid to a specialist company is less than
performing the function internally. Specialists can control their cost structure (and
therefore offer their services at attractive prices) because of economies of scale,
learning effects, location scale, and other efficiencies not available to the client
company. Secondly, outsourcing will afford the client company greater ability to
differentiate its fmal products if the quality of the activity is greater than the quality that
could be achieved internally. Higher quality products with lower defect rates, for
example, translate into reliability, a key factor in differentiation. Thirdly, outsourcing
allows managers to focus their energies and the company's resources on core
activities. The pitfalls to outsourcing include the risk of overdependence on the
specialist (sometimes leading to holdup, an extreme effect of bargaining power), and
the loss of critical information (such as customer complaints). Compared to vertical
integration, outsourcing requires much less outlay of resources, affords greater
flexibility and less complexity, and keeps an organization on track with its core
business.
To reduce or eliminate risks, managers considering the use of strategic alliances or
outsourcing can take actions that align the interests of the parties more closely. For
example, the parties can exchange hostages by the use of mutual investments in
specialized assets, also called credible commitments. This will ensure that each party
can inflict some costs on the other, lessening the chance that either will do so. Market
discipline, in the form of a willingness to renegotiate contractual agreements or switch
to a different partner altogether, also reduces the chances of one firm taking advantage
of the other. Another way to accomplish market discipline is through the use of parallel
sourcing so that the frrm uses two or more partners, signaling its independence from
both. Finally, any action that serves to build trust, encourage cooperation, improve
communication, support personal friendships, and so on, will increase the chances that
the firms will act in a way that enhances the benefits for both.
POINTS: 1
LEARNING OBJECTIVES: SMIA.HlLL.l5.09.04- Describe why, and under what conditions, cooperative

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1.

5. Unfortunately, horizontal integration can not be accomplished by acquisitions or mergers.

12. Horizontal integration ahnost always increases rivalry in an industry.

29. When a company decides to expand into new industries, it must:

33. Horizontal integration in an industry tends to:

36. Antitrust authorities:

42. Which of the following is not a benefit of vertical integration?

KEYWORDS: Bloom's: Comprehension

47. Vertical disintegration is said to occur when:

61. Long-term contracts:

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