Strategic Management and Competitive Advantage, 4e (Barney)
Chapter 6 Vertical Integration
1) Business strategy is a firm’s theory of how to gain competitive advantage by operating in
several businesses simultaneously.
2) 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.
3) A firm’s level of vertical integration is the number of steps in its value chain that the firm
accomplishes within its boundaries.
4) More vertically integrated firms accomplish fewer stages of the value chain within their
boundaries than less vertically integrated firms.
5) 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.
6) 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.
7) 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.
8) 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.
9) Opportunism exists when a firm is unfairly exploited in an exchange.
10) 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.
11) If one of a firm’s exchange partners behaves opportunistically, this reduces the economic
value of the firm.
12) Firms should only bring market exchanges within their boundaries when the cost of vertical
integration is more than the cost of opportunism.
13) The threat of opportunism is the least when a party to an exchange has made transaction-
specific investments.
14) 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.
15) Transaction-specific investments make parties to an exchange vulnerable to opportunism,
and vertical integration solves this vulnerability problem.
16) Firms should avoid vertically integrating in those businesses where they possess valuable,
rare, and costly-to-imitate resources and capabilities.
17) Firms should not vertically integrate into business activities where they do not possess the
resources necessary to gain competitive advantages.
18) 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.
19) If a supplier is overly reliant on a single customer, this supplier can be at risk of opportunism
on the part of the customer.
20) Flexibility refers to how costly it is for a firm to alter its strategic and organizational
decisions.
21) Flexibility is low when the cost of changing strategic choices is low.
22) Research suggests that, in general, vertically integrating is more flexible than not vertically
integrating.
23) 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.
24) Flexibility is always valuable.
25) Flexibility is only valuable when the decision-making setting a firm is facing is uncertain.
26) A decision-making setting is uncertain when the future value of an exchange cannot be
known when investments in that exchange are being made.
27) 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.
28) 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.
29) The downside risks associated with investing in a strategic alliance are unknown but fixed.
30) A firm’s vertical integration strategy is rare when few competing firms are able to create
value by vertically integrating in the same way.
31) Outsourcing can help firms reduce costs and focus their efforts on those business functions
that are central to their competitive advantage.
32) A firm’s vertical integration strategy can only be rare when it is the only firm that is able to
vertically integrate efficiently.
33) 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.
34) A firm may be able to gain an advantage from vertically integrating when it resolves some
uncertainty it faces sooner than its competition.
35) A firm’s ability to conceive of and implement vertical integration strategies tends to be
highly susceptible to direct duplication.
36) Strategic alliances are the major substitute for vertical integration.
37) While the functional or U-form structure is used to implement a cost-leadership or product-
differentiation strategy, a matrix structure is most often used to implement a vertical integration
strategy.
38) From a CEO’s perspective, coordinating functional specialists to implement a vertical
integration strategy rarely involves conflict resolution.
39) Numerous conflicts can arise among functional managers in a vertically integrated U-form
organization.
40) Strategizing is one of the most important control mechanisms available to CEOs in vertically
integrated U-form organizations.
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, which stages of the value chain should be included within a firm’s boundaries and
why?
A) Ronal 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 buyer 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) 2010
B) 2012
C) 2014
D) 2015
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) A 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.