Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development. Backward integration removes the need for some purchasing and marketing functions, centralizes overhead, and permits manufacturers to eliminate duplicated efforts in research and development. Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits. Nevertheless, because product innovation means adopting the most technologically advanced and cost-effective ways of making components, backward integration may entail a serious risk for a technologically active company—for example, a producer of sophisticated consumer electronics. A company that decides to make rather than buy important parts can lock itself into an outdated technology. Independent suppliers may be unwilling to share innovations with assemblers with whom they are competing. Moreover, when an assembler sets out to master the technology of producing advanced components, the resulting demands on its resources may compromise its ability to assemble these components successfully into end products. Long-term contracts with suppliers can achieve many of the same cost benefits as backward integration without compromising a company’s ability to innovate. However, moving away from backward integration is not a complete solution either. Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development. The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms. Because the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components, assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business. 1 D 1. According to the passage, which of the following relationships between profits and investments in research and development holds true for producers of technologically advanced components? 1) Modest investments are required and the profit margins on component sales are low. 2) Modest investments are required but the profit margins on component sales are quite high. 3) Despite the huge investments that are required, the profit margins on component sales are high. 4) Because huge investments are required, the profit margins on component sales are low. 5) Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs. 2 A 2. According to passage, when an assembler buys a firm that makes some important component of the end product that the assembler produces, independent suppliers of the same component may A. withhold technological innovations from the assembler B. experience improved profit margins of on sales of their products C. lower their prices to protect themselves from competition D. suffer financial difficulties and go out of business E. stop developing new versions of the component 3 B 3. According to the passage, all of the following are benefits associated with backward integration EXCEPT: A. improvement in the management of overhead expenses B. enhancement of profit margins on sales of components C. simplification of purchasing and marketing operations D. reliability of a source of necessary components E. elimination of unnecessary research efforts 4 B 4. Which of the following best describes the way the last paragraph functions in the context of the passage? A. The last in a series of arguments supporting the central argument of the passage is presented. B. A viewpoint is presented which qualifies one presented earlier in the passage. C. Evidence is presented in support of the argument developed in the preceding paragraph. D. Questions arising from the earlier discussion are identified as points of departure for further study of the topic. E. A specific example is presented to illustrate the main elements of argument presented in the earlier paragraphs.

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Modern manufacturers, who need reliable sources of materials and

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18 Apr 2021, 10:49

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Sneha2021

3/4 correct.

3. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

A. improvement in the management of overhead expenses
B. enhancement of profit margins on sales of components
C. simplification of purchasing and marketing operations
D. reliability of a source of necessary components
E. elimination of unnecessary research efforts

I wasn't able to eliminate C - simplification of purchasing and marketing operations

Acc to info in the passage, backward integration "removes need for some purchasing and marketing functions" - This does not mean simplification of operations.

Can you please help? GMATNinja

“To simplify” means “to make something easier to do or understand.” If a company removes the need for some purchasing and marketing functions, that will reduce the overall amount of purchasing and marketing work that is done. With less work required, purchasing and marketing operations would certainly be easier.

For that reason, removing the need for some functions does mean simplification, and (C) can be eliminated.

I hope that helps!

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27 Mar 2022, 08:08

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GMATNinja KarishmaB egmat
Could you please help explain the question 3?
Why is the correct answer B instead of D?
Thanks for your explanations.

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01 Apr 2022, 09:50

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Question 3

krittapat

GMATNinja KarishmaB egmat
Could you please help explain the question 3?
Why is the correct answer B instead of D?
Thanks for your explanations.

Question 3 asks us to find the answer choice that is NOT mentioned in the passage as a benefit of backward integration.

Here's (D):

Quote:

D. reliability of a source of necessary components

In the last paragraph, we learn that certain factors "threaten the long-term financial stability" of firms that produce components. In other words, these firms are pretty unstable.

To mitigate this instability, assemblers often buy those firms "just to keep their suppliers in business." So, backward integration is a way to increase the reliability of the supply of necessary components.

(D) is a benefit of backward integration, so eliminate (D).

Here's (B):

Quote:

B. enhancement of profit margins on sales of components

The main issue with (B) is that the manufacturers discussed in the passage aren't interested in selling components -- they're actually interested in acquiring components to assemble into other products. So, these companies won't see enhanced profits on sales of components because they don't sell components.

(B) is the correct answer.

I hope that helps!

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23 Apr 2023, 02:10

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2. According to passage, when an assembler buys a firm that makes some important component of the end product that the assembler produces, independent suppliers of the same component may

A. withhold technological innovations from the assembler
B. experience improved profit margins of on sales of their products
C. lower their prices to protect themselves from competition
D. suffer financial difficulties and go out of business
E. stop developing new versions of the component

Reading Q2 - At a first glance this question looks like it is referring to the last para where it talks about mnaufacturers buying the the suppliers inorder to stay them in the business. But the last line - individual suppliers refers to the third para where if manufacturers builds technology inhouse, the individual suppliers will withhold technology from them.
Hence, I had marked B as an answer thinking that they are buying suppliers to keep them in the business.
Please help in my understanding

GMATNinja @VeritasKarishma

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10 May 2023, 11:49

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Question 2

nikitathegreat

2. According to passage, when an assembler buys a firm that makes some important component of the end product that the assembler produces, independent suppliers of the same component may

A. withhold technological innovations from the assembler

B. experience improved profit margins of on sales of their products

C. lower their prices to protect themselves from competition

D. suffer financial difficulties and go out of business

E. stop developing new versions of the component

Reading Q2 - At a first glance this question looks like it is referring to the last para where it talks about mnaufacturers buying the the suppliers inorder to stay them in the business. But the last line - individual suppliers refers to the third para where if manufacturers builds technology inhouse, the individual suppliers will withhold technology from them.

Hence, I had marked B as an answer thinking that they are buying suppliers to keep them in the business.

Please help in my understanding

GMATNinja @‌VeritasKarishma

This question talks about how "independent component suppliers" react when an assembler buys out one of their competitors.

For example, let's say that Supplier A and Supplier B make computer chips. A company that assembles computers -- let's be creative and call them Assembler Co -- buys Supplier A. What would Supplier B do? Well, now Supplier B is in competition with the Assembler Co, because both of them now make computer chips.

This situation is discussed near the beginning of the third paragraph: "Independent suppliers may be unwilling to share innovations with assemblers with whom they are competing." So, Supplier B would not want to share innovations with Assembler Co.

That's what (A) describes:

Quote:

A. withhold technological innovations from the assembler

(A) is the correct answer to question 2.

I hope that helps!

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Question 3

krittapat

GMATNinja KarishmaB egmat
Could you please help explain the question 3?
Why is the correct answer B instead of D?
Thanks for your explanations.

Question 3 asks us to find the answer choice that is NOT mentioned in the passage as a benefit of backward integration.

Here's (D):

Quote:

D. reliability of a source of necessary components

Quote:

B. enhancement of profit margins on sales of components

Is (B) incorrect for this reason alone? I was thinking that the paragraph does mention about profits for certain industries like commodities, but it does not mention anything about "margins" EXPLICITLY, though it could be inferred that margins might improve owing to reduction of costs in many areas mention (overhead, marketing, R&D, etc). Once it is backward integrated, the firm is no longer just an assembler, it could very well be a firm that sells both finished goods and components. I know it is too much speculation but just being the devil's advocate here to test the strength of the argument.

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No need for devil's advocate on a specific detail question. The question is asking for something that wasn't explicitly mentioned, and B wasn't explicitly mentioned, so that's that. We should spend exactly 0 seconds wondering about the possible business ramifications of any of these practices; either it was stated or it wasn't.

If we *were* going to analyze, we'd want to look at the very tempting text that mirrors this answer choice. We're told directly that independent suppliers have low profit margins on components. But that's a result of the cost of R&D; it's not about whether the firms are backward-integrated or not. We're told that backward integration may be needed to keep these firms in business. That doesn't mean it improves their profit margins; it just means that a firm with low profit margins may only survive if it is subsumed into a larger organization with the cash to keep it afloat.

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