TESTBANK: CHAPTER 11
Vertical Integration and the Scope of the Firm
True/False Questions
1. Corporate strategy is concerned with how a firm competes in a specific industry, whereas business
strategy is concerned the choice of which businesses a firm competes in.
[See p.292]
2. Corporate strategy is concerned with decisions over product scope, geographical scope, and vertical
scope.
[See p.292]
3. Economic organization in the capitalist economy is achieved through markets by the price
mechanism and through firms by internal administration.
[See p.293]
4. Alfred Chandler described the administrative mechanism of firms as the “invisible hand” of
economic coordination.
5. Firms exist in situations where the administrative costs of coordinating economic activity are less
than the transactions costs of organizing such activity across markets.
[See p.293]
6. The growth in the size and scope of companies throughout most of the 20th century can be attributed
primarily to the increasing transaction cost of markets.
[See pp.294-295]
7. Transaction costs of markets include search costs and costs of negotiating contracts, but usually
exclude the costs incurred in enforcing contracts.
[See p.293]
8. A major factor causing the narrowing in the scope of the activities of large corporations during the
last two decades of the 20th century was increasing turbulence of the economic environment.
[See p.294]
9. When a farmer operates a stall in a local farmers’ market; this is a form of backward integration.
[See p.295]
10. For most of the 20th century companies expanded their vertical scope in the belief that vertical
integration reduced risk and permitted superior coordination compared to relying on markets.
[See p.295]
11. J.K. Galbraith opposed the trend towards “corporate capitalism” arguing that large, integrated
corporations were not essential to develop and commercialize new technologies.
[See p.295]
12. During the past three decades, increased emphasis on flexibility and the need to develop superior
organizational capabilities has caused large companies to reduce their vertical scope.
[See p.295]
13. Manufacturers of final products such as motor vehicles, airplanes, and domestic appliances are
more likely to backward integrate into the productions of commodity components than components that
are specialized to the specific requirements of the manufacturer of the final product.
[See p.298]
14. Managing vertically-related businesses that are strategically very different is not a problem is
companies adopt an appropriate organizational structure.
[See p.299]
15. One of the advantages of a company providing its own maintenance services is that the incentives
that a wholly owned and directly managed maintenance unit is subject to “high powered” incentives.
[See p.300]
16. Jewelry companies typically do not own gold and silver mines because the markets for gold and
silver are highly competitive and impose few transaction costs on jewelry makers.
[See p.297]
17. Vertical integration can be used to extend a monopoly position from one stage of an industry’s
value chain to adjacent stages, thereby allowing the monopolist to increase the amount of monopoly
profit it can extract.
[See p.300]
18. By offering the possibility of repeat business, the suppliers and buyers can avoid the problems of
opportunism that give rise to transaction costs.
[See p.304]
19. In fashion clothing, one reason why mass-market distributors such as H&M, Forever 21, and Gap
outsource their production is to reduce new product cycle time (the time between the initial design of a
product and its delivery to a retail store).
[See p.305]
20. Franchising offers a means of reconciling the coordination and control benefits of vertical
integration with the entrepreneurial flexibility and high-powered incentives of market contracts.
[See p.305]
Multiple Choice Questions
21. The opening quotation concerning Bath Fitter illustrates the following benefits of vertical
integration:
[See p.291]
22. The opening quotation from Tom Peters states that as “yesterday’s highly integrated giants” de–
integrate, their vertical relationships are taking the form of:
[See p.291]
23. Corporate strategy decisions are concerned with:
[See p.292]
24. The corporate scope of Walt Disney Company may be described as follows:
[See p.292]
25. The main business of the Coca-Cola Company is manufacturing, marketing and distributing
concentrate for soda drinks to bottlers in over 200 countries of the world. The corporate scope of the
Coca-Cola Company is best described as:
[See p.292]
26. The capitalist economy comprises two forms of economic organization, the market mechanism
operated by prices and the administrative mechanism of firms.
[See p.293]
27. The vertical scope of a firm relates to:
[See p.293]
28. The growth in the scope of business enterprises for most of the 19th and 20th centuries can be
attributed to a drop in administrative costs of firms relative to the transaction costs of market. This
resulted from:
[See p.293]
29. The main cause of downsizing, refocusing, and outsourcing during the latter part of the 20th century
was:
[See p.295]
30. Vertical integration by industrial firms during the major part of the 20th century was motivated
primarily by firms’ desire for:
[See p.298
31. Which of the following factors is not conducive to vertical integration between two adjacent stages
of production?
[See p.303]
32. Which of the following factors has not contributed to the trend towards outsourcing in recent
decades?
[See p.295]
33. Vertical integration is:
[See p.295]
34. When a winery opens a tasting room through which it sells its wine to visitors, this represents:
[See p.295]
35. The reason that the producers of wood pulp have often forward integrated into the production of
paper is:
[See p.297]
36. The reason that most food processing firms do not backward integrate into farming is that:
[See pp.297-300]
37. Which of the following factors is not an explanation for the lack of vertical integration between
steel producers and shipbuilders?
[See p.301–305]
38. In order for a manufacturer of consumer goods to maximize responsiveness to changes in consumer
demand for its products:
[See pp.300-301]
39. Starbucks owns and operates most of its retail outlets; McDonalds franchises most of its retail
outlets. An advantage of franchising over vertical integration is:
[See p.305]
40. Vendor partnerships based on relational contacts—such as the relationships between Toyota and its
major component suppliers—are more successful than either pure market contracts or vertical
integration because:
[See p.304]
41. The main lesson to be drawn from the delays to the launch of Boeing’s 787 Dreamliner is that,
when developing complex products that embody diverse new technologies:
[See pp.304-307]
42. Vertical integration by Zara, the main division and brand of the Spanish clothing firm Inditex,
illustrates:
[See pp.300-301]