SEVI 3013 CH8 CORPORATE STRATEGY
VERTICAL INTEGRATION AND
DIVERSIFICATION EXAM QUESTIONS
AND ANSWERS
risks of vertical integration - Answer--increased costs
-reduced quality
-reducing flexibility
-increasing the potential for legal repercussions
when vertical integration makes sense - Answer-- when there are issues with raw
materials (tesla and lithium ion batteries)
- to enhance the customer experience: eliminate annoyances and poor interfaces (apple
having retail stores)
- vertical market failure: when transactions are too risky or costly
Amazon has decided to enter the college bookstore market with a line of university-
specific websites offering textbooks and logo apparel. This is an example of:
A) Geographic expansion
B) Product diversification
C) Vertical integration
D) Horizontal integration - Answer-B
industry value chain - Answer-depiction of the transformation of raw materials into
finished goods and services along distinct vertical stages, each of which typically
represents a distinct industry in which a number of different firms are competing
(firm) MAKE: - Answer-if costs in house < costs in market
- vertically integrate
- own production of the inputs / or own output distribution channels
advantages of firm MAKING - Answer-- command and control (fiat, hierarchical lines of
authority)
- Coordination
- Transaction-specific investments
- Community of knowledge
disadvantages of firm MAKING - Answer-- Administrative costs
- Low-powered incentives
- Principal-agent problem
, (markets) BUY: - Answer-if costs in market < costs in house
- firm shoulder consider purchasing instead
advantages of market BUY - Answer-- high powered incentives
- flexibility
disadvantages of market BUY - Answer-- search costs
- opportunism (hold up)
- incomplete contracting (specifying and measuring performance, information
asymmetries)
- enforcement of contracts
Principal-Agent problem - Answer-major disadvantage of organizing economic activity
within firms
- Principal: owner of firm
- Agent: manager or employee, should act on behalf of principal
Problem: agents pursue their own interests (corporate jets, golf outings)
Solution: stock options to make agents owners
information asymmetry - Answer-situation in which one party is more informed than
another because of the possession of private information
can result in the crowding out of desirable goods and services by inferior ones
If a firm is considered to be fully integrated, this means that it is:
A) A single-business organization
B) A conglomerate
C) Reliant on certain key suppliers in the industry value chain
D) Conducting all business activities within the boundaries of the firm - Answer-D
backward vertical integration - Answer-owning inputs of the value chain
forward vertical integration - Answer-owning activities closer to the customer
benefits of vertical integration - Answer--lowering costs
-improving quality
-facilitating scheduling and planning
-facilitating investments in specialized assets
-securing critical supplies and distribution channels
product diversification - Answer-- Increase in variety of products / services
- active in several product markets
VERTICAL INTEGRATION AND
DIVERSIFICATION EXAM QUESTIONS
AND ANSWERS
risks of vertical integration - Answer--increased costs
-reduced quality
-reducing flexibility
-increasing the potential for legal repercussions
when vertical integration makes sense - Answer-- when there are issues with raw
materials (tesla and lithium ion batteries)
- to enhance the customer experience: eliminate annoyances and poor interfaces (apple
having retail stores)
- vertical market failure: when transactions are too risky or costly
Amazon has decided to enter the college bookstore market with a line of university-
specific websites offering textbooks and logo apparel. This is an example of:
A) Geographic expansion
B) Product diversification
C) Vertical integration
D) Horizontal integration - Answer-B
industry value chain - Answer-depiction of the transformation of raw materials into
finished goods and services along distinct vertical stages, each of which typically
represents a distinct industry in which a number of different firms are competing
(firm) MAKE: - Answer-if costs in house < costs in market
- vertically integrate
- own production of the inputs / or own output distribution channels
advantages of firm MAKING - Answer-- command and control (fiat, hierarchical lines of
authority)
- Coordination
- Transaction-specific investments
- Community of knowledge
disadvantages of firm MAKING - Answer-- Administrative costs
- Low-powered incentives
- Principal-agent problem
, (markets) BUY: - Answer-if costs in market < costs in house
- firm shoulder consider purchasing instead
advantages of market BUY - Answer-- high powered incentives
- flexibility
disadvantages of market BUY - Answer-- search costs
- opportunism (hold up)
- incomplete contracting (specifying and measuring performance, information
asymmetries)
- enforcement of contracts
Principal-Agent problem - Answer-major disadvantage of organizing economic activity
within firms
- Principal: owner of firm
- Agent: manager or employee, should act on behalf of principal
Problem: agents pursue their own interests (corporate jets, golf outings)
Solution: stock options to make agents owners
information asymmetry - Answer-situation in which one party is more informed than
another because of the possession of private information
can result in the crowding out of desirable goods and services by inferior ones
If a firm is considered to be fully integrated, this means that it is:
A) A single-business organization
B) A conglomerate
C) Reliant on certain key suppliers in the industry value chain
D) Conducting all business activities within the boundaries of the firm - Answer-D
backward vertical integration - Answer-owning inputs of the value chain
forward vertical integration - Answer-owning activities closer to the customer
benefits of vertical integration - Answer--lowering costs
-improving quality
-facilitating scheduling and planning
-facilitating investments in specialized assets
-securing critical supplies and distribution channels
product diversification - Answer-- Increase in variety of products / services
- active in several product markets
