Strategic Management and Competitive Advantage, 5e (Barney)

Chapter 6 Vertical Integration

1. 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.
2. A firm's level of vertical integration is the number of steps in its value chain that the firm
accomplishes within its boundaries.
3. 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.

4. A firm with a high ratio 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.
5. Opportunism exists when a firm is unfairly exploited in an exchange.
6. If one of a firm's exchange partners behaves opportunistically, this reduces the economic
value of the firm.
7. 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.
8. Transaction-specific investments make parties to an exchange vulnerable to opportunism,
and vertical integration solves this vulnerability problem.
9. Firms should not vertically integrate into business activities where they do not possess the
resources necessary to gain competitive advantages.
10. 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.
11. 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.
12. Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions.
13. Flexibility is only valuable when the decision-making setting a firm is facing is uncertain.
14. A decision-making setting is uncertain when the future value of an exchange cannot be
known when investments in that exchange are being made.
15. The use of budgets in a vertically integrated U-form organization can lead functional managers to
overemphasize short-term behavior that is easy to measure and underemphasize longer-term
behavior that is more difficult to measure.
16. A flexibility-based approach to vertical integration suggests that when the decision-making
setting regarding a business activity is highly uncertain, firms should form a strategic alliance to
enter this activity instead of vertically integrating.
17. A firm's vertical integration strategy is rare when few competing firms are able to create value by
vertically integrating in the same way.
18. Outsourcing can help firms reduce costs and focus their efforts on those business functions
that are central to their competitive advantage.
19. 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.
20. A firm may be able to gain an advantage from vertically integrating when it resolves
some uncertainty it faces sooner than its competition.
21. Strategic alliances are the major substitute for vertical integration.
22. Numerous conflicts can arise among functional managers in a vertically integrated U-
form organization.
23. Capability explanations of vertical integration acknowledge the importance of firm-specific
investments in creating value for a firm.

24. Business strategy is a firm's theory of how to gain competitive advantage by operating in
several businesses simultaneously.
25. More vertically integrated firms accomplish fewer stages of the value chain within their
boundaries than less vertically integrated firms.
26. 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.
27. 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.
28. 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.
29. Firms should only bring market exchanges within their boundaries when the cost of
vertical integration is more than the cost of opportunism.
30. The threat of opportunism is the least when a party to an exchange has made transaction-
specific investments.
31. Firms should avoid vertically integrating in those businesses where they possess valuable,
rare, and costly-to-imitate resources and capabilities.
32. Flexibility is low when the cost of changing strategic choices is low.
33. Research suggests that, in general, vertically integrating is more flexible than not
vertically integrating.
34. 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.
35. Flexibility is always valuable.
36. The downside risks associated with investing in a strategic alliance are unknown but fixed.
37. A firm's vertical integration strategy can only be rare when it is the only firm that is able
to vertically integrate efficiently.
38. A firm's ability to conceive and implement vertical integration strategies tends to be highly
susceptible to direct duplication.
39. Budgets are an important control tool and they contribute to only positive outcomes.
40. From a CEO's perspective, coordinating functional specialists to implement a vertical
integration strategy rarely involves conflict resolution.
41. Vertical integration is a type of
A. business strategy.
B. generic strategy.
C. differentiation strategy.
D. corporate strategy.
42. The number of steps in a firm's value chain that it accomplishes within its boundaries
describes the firm's level of
A. product differentiation.
B. diversification.
C. vertical integration.
D. competitive dynamics.
43. When Apple, Inc. opened retail stores to sell its computers and iPods, this was an example of
A. forward vertical integration.
B. backward vertical integration.
C. forward horizontal integration.
D. backward horizontal integration.
44. If Dell computers were to open its own factory to manufacture the LCD televisions it sells at
its online store, this would be an example of
A. forward vertical integration.
B. product differentiation.
C. forward horizontal integration.
D. backward vertical integration.
45. A firm's measures the percentage of a firm's sales that is generated by activities
done within the boundaries of a firm.
A. value added as a percentage of sales
B. simple product diversification
C. competitive advantage
D. competitive dynamic
46. Which of the following is not used to determine a firm's level of vertical integration using
the value added as a percentage of sales approach?
A. value added
B. net income
C. sales
D. gross margin
47. A firm with a ratio between value added and sales has brought of the value-
creating activities associated with its business inside its boundaries, consistent with a high level
of vertical integration.
A. low; many
B. high; many
C. medium; many
D. medium; few
48. In 1937, which Nobel Prize-winning economist first articulated the question of vertical
integration, i.e., which stages of the value chain should be included within a firm's boundaries
and why?
A. Ronald Coase
B. Adam Smith
 C. David Ricardo
D. Milton Freidman
49. exists when a firm is unfairly exploited in an exchange.
A. Competitive advantage
B. Business level strategy
C. Opportunism
D. Corporate level strategy
50. A(n) is any investment in an exchange that has significantly more value in the
current exchange than it does in alternative exchanges.
A. opportunity-specific investment
B. transaction-specific investment
C. competition-specific investment
D. opportunistic investment
51. According to of when vertical integration creates value, vertical integration is
valuable when it reduces threats from a firm's suppliers or buyers due to any transaction-
specific
investments a firm has made.
A. firm capability explanations
B. opportunity-based explanations
C. flexibility-based explanations
D. opportunism-based explanations
52. The essence of the to vertical integration is that if a firm possesses valuable, rare,
and costly-to-imitate resources in a business activity, it should vertically integrate into that
activity otherwise it should not vertically integrate into that activity.
A. flexibility-based explanation
B. opportunism-based explanation
C. firm capability explanation
D. opportunity-based explanation
53. To the extent that other firms may have competitive advantages in business activities that a
firm is considering to enter through vertical integration, vertically integrating into these
activities could put the firm at a
A. competitive advantage.
B. temporary dynamic disadvantage.
C. sustainable competitive advantage.
D. competitive disadvantage.
54. refers to how costly it is for a firm to alter its strategic and organizational decisions.
A. Flexibility
B. Dynamic capability
C. Opportunism
D. Uncertainty
55. Research suggests that, in general, vertically integrating is than not vertically
integrating.
A. significantly more flexible
B. somewhat more flexible
C. comparatively flexible
D. less flexible
56. A decision-making setting is when the future of an exchange cannot be known when
investments in that exchange are being made.
A. uncertain
B. opportunistic
C. flexible
D. dynamic
57. A(n) approach to vertical integration suggests that rather than vertically integrating
into a business activity whose value is highly uncertain firms should not vertically integrate and
instead should form a strategic alliance to manage this exchange.
A. alliance-based
B. flexibility-based
C. firm capabilities-based
D. opportunism-based
58. Which of the explanations of vertical integration is the oldest and has received the
greatest empirical support?
A. opportunism-based
B. flexibility-based
C. firm capabilities-based
D. alliance-based
59. 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
60. Some observers predict that by an additional 3.3 million jobs in the United States
will be outsourced, many to operations overseas.
A. 2014
B. 2015
C. 2016
D. 2017
61. If a computer company decided to open its own call centers to provide technical support to
its corporate customers because the employees in these call centers need a significant level
of in- depth training that was highly specialized to the computer company's products, this
would be consistent with which explanation of vertical integration?
A. opportunism-based
B. flexibility-based
C. firm capabilities-based
D. alliance-based
62. firm is likely to be among the first in its industry to vertically disintegrate an exchange when
A. the firm concludes that the level of specific investment required to manage an
economic exchange is high.
B. the firm believes that the exchange is costly to imitate.
C. the level of uncertainty about the value of an exchange has increased.
 D. the firm believes that the exchange is rare.
63. Which of the following statements regarding direct duplication and substitutes for
vertical integration is accurate?
A. A firm's valuable and rare vertical integration choices may be subject to direct duplication
and substitutes.
B. A firm's valuable and rare vertical integration choices are subject to neither
direct duplication nor substitutes.
C. A firm's valuable and rare vertical integration choices may be subject to direct
duplication but not to substitutes.
D. A firm's valuable and rare vertical integration choices may be subject to substitutes but
not to direct duplication.
64. The major substitute for vertical integration is
A. vertical disintegration.
B. strategic alliances.
C. a product-differentiation strategy.
D. a low-cost strategy.
65. Which organizational structure is used to implement a vertical integration strategy?
A. matrix
B. functional
C. multidivisional
D. product-divisional
66. From a CEO's perspective, coordinating functional specialists to implement a vertical
integration strategy almost always involves
A. conflict resolution.
B. competitive positioning.
C. product differentiation.
D. corporate expansion.
67. If Brenda Thompson, Tom Mix's supervisor, wanted to use a budgeting process to help evaluate
Tom's performance but wanted to ensure that using a budget did not encourage Tom to focus
on short-term behaviors at the expense of long-term results, she should
A. develop the budget herself using realistic goals based on the economic reality facing Tom's
function and use both quantitative and qualitative evaluations of the performance of
Tom's function and then give the budget to Tom to follow.
B. work with Tom in an open and participative process to develop the budget based on the
most optimistic scenario possible and use both quantitative and qualitative evaluations
of the performance of Tom's function.
C. develop the budget herself based on the most pessimistic scenario possible and use both
quantitative and qualitative evaluations of the performance of Tom's function and then
give the budget to Tom to follow.
D. work with Tom in an open and participative process to develop the budget based on the
economic reality facing Tom's function and use both quantitative and qualitative evaluations
of the performance of Tom's function.
68. Evaluating a functional manager's performance relative to budgets can be an effective
control when
A. the process used in developing budgets is open and participative.
B. the process reflects the economic best-case scenario developed by the functional manager.
C. the process reflects the economic worst-case scenario developed by the functional manager.
D. the process relies solely on quantitative criteria to evaluate the functional
manager's performance.
69. Which committee in a U-form organization meets monthly and usually consists of the CEO
and each of the heads of the functional areas included in a firm?
A. executive committee
B. functional committee
C. operations committee
D. managerial committee
70. Which committee in a U-form organization meets weekly and reviews the performance of
the firm on a weekly basis and typically consists of a CEO and two or three functional senior
managers?
A. top management team
B. executive committee
C. operations committee
D. functional committee
71. Investments made by employees that have more value in a particular company than
in alternative companies are known as
A. firm-specific investments.
B. individual-specific investments.
C. group-specific investments.
D. opportunistic investments.
72. According to the opportunism-based explanations of vertical integration, which of the
following would be the most appropriate type of compensation to support strategy
implementation?
A. cash bonuses for corporate performance
B. cash bonuses for group performance
C. stock options for individual performance
D. stock grants for individual performance
73. According to the capabilities-based explanations of vertical integration, which of the
following would be the most appropriate type of compensation to support strategy
implementation?
A. salary
B. cash bonuses for corporate performance
C. cash bonuses for individual performance
D. stock grants for individual performance
74. According to the flexibility-based explanations of vertical integration, which of the
following would be the most appropriate type of compensation to support strategy
implementation?
A. stock options for individual performance
B. stock grants for individual performance
C. stock grants for corporate performance
D. cash bonuses for individual performance
75. are payments to employees in a firm's stock.
A. Stock grants
B. Cash grants
C. Flexibility grants
D. Option grants
76. are when employees are given the right, but not the obligation, to purchase stock
at predetermined prices.
A. Flexibility grants
B. Stock grants
C. Stock options
D. Grant options
77. The explanations call for compensation that focuses on individual employees, such
as cash bonuses for individual performance.
A. capabilities-based
B. strategically-based
C. flexibility-based
D. opportunism-based
78. Compensation that focuses on groups of employees such as cash bonuses and stock grants
are best suited for explanations of vertical integration.
A. flexibility-based
B. capabilities-based
C. strategically-based
D. opportunism-based
79. The logic suggests that compensation that has a fixed and known downside risk
and significant upside potential is important for firms implementing vertical integration
strategies.
A. opportunism
B. strategic
C. capabilities
D. flexibility
80. Firm-specific investments are a type of investments.
A. operational
B. contingent
C. transaction-specific
D. horizontal
81. If Digipics were to begin manufacturing lenses for the cameras they assembled, this would be
an example of
A. backward vertical integration.
B. a strategic alliance.
C. forward vertical integration.
D. opportunism.
82. 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.
83. 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.
84. 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.
85. The fact that it would be very costly for Digipics to alter its operations if the large customer
referred to in the previous question decided to stop doing business with Digipics suggests
that Digipics has in this situation.
A. low flexibility
B. low opportunism
C. high flexibility
D. high opportunism