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Modern manufacturers, who need reliable sources of materials and

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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A company that decides to make rather than buy important parts can lock itself into an outdated technology.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. 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. 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. 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. 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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Originally posted by carcass on 04 Jul 2012, 09:00.
Last edited by Bunuel on 16 Oct 2019, 20:46, edited 3 times in total.
Updated - Complete topic (856).
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New post 15 Jun 2018, 03:57
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Hi Aadhitthyaa

To qualify in this sense is to add a "but"/add some restrictions to an earlier opinion.

The most common way you see this is in an expression like "He gave an unqualified yes," meaning "he gave a 'yes' with no restrictions or hesitations." (Note that sentence does NOT mean "he does not have the qualifications to say yes but he did anyway." )

So B works well for us as the best of these answer choices. The third paragraph talks about the disadvantages of backward integration and implies that manufacturers could benefit from not doing backward integration. However, the fourth paragraph turns and says that not doing backward integration isn't a perfect solution either - that they might end up having to integrate backward just to keep their suppliers in business.
So the author is giving us the "but" or saying "well, what I said above doesn't always hold true" or "it's not just black and white". He or she is thus qualifying the previous paragraph that is quite supportive of eliminating backward integration.

Make sense?
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New post 26 Nov 2015, 08:11
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Funny thing, I've learnt a different meaning of the word qualified and it's variant 'qualifies' on this forum. It means to limit in some way,make less strong or positive. Never knew that before. Got up to 4 RC Qs wrong owing to this.
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New post 20 Dec 2012, 21:17
This is a good passage!

IMO Answer could be The last in a series of arguments supporting the central argument of the passage is presented.

Conclusion given in the argument is
Modern manufacturers face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers.

Premise:
Para 2 - 3 talk supports the conclusion of the argument by giving reasons as to why Backward Integration is beneficial.

Para - 4 (Last para):
Is a part of the premise which supports the conclusion.

Please let us know the OA and the explanation given. Thank you.
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New post Updated on: 06 Jan 2019, 07:51
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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, centralizers 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.
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?

(A) Modest investments are required and the profit margins on component sales are low.

(B) Modest investments are required but the profit margins on component sales are quite high.

(C) Despite the huge investments that are required, the profit margins on component sales are high.

(D) Because huge investments are required, the profit margins on component sales are low.

(E) Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.

OA:



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Originally posted by Bunuel on 17 Jul 2014, 14:17.
Last edited by hazelnut on 06 Jan 2019, 07:51, edited 2 times in total.
Added the missing passage text
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New post 17 Jul 2014, 14:18
Bunuel wrote:

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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.

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?

A. Modest investments are required and the profit margins on component sales are low.

B. Modest investments are required but the profit margins on component sales are quite high.

C. Despite the huge investments that are required, the profit margins on component sales are high.
D. Because huge investments are required, the profit margins on component sales are low.

E. Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.

OA:


This question asks you to identify information presented in the passage about the relationship between profits and investments for producers of technologically advanced components.

The best answer is D. The passage indicates the high investments required to develop technologically advanced components can lead to low profit margins for producers of such components.

Choice A is incorrect because the passage indicates that large, not modest, investments in research and development are required.

Choices B and C are incorrect because the passage indicates that profit margins for producers of technologically advanced components are low, not high as these answer choices assert.

Choice E is incorrect: although the author claims that long-term contracts with suppliers are beneficial to assemblers, the passage does not indicate that long-term contracts with purchasers lead to high profits for producers of technologically advanced components.

Answer: D.
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New post 19 Jul 2014, 06:50
I have some serious trouble absorbing this passage

I read that modern manufacturers can choose backward integration (owning producers) to make short term profits by removing purchasing/R&D needs.

and then backward integration is risky because innovation is needed to make cheap products

but where does it say that component producers, who are presumably owned by modern manufacturers in backward integration, have low profit margins?
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New post 01 Aug 2014, 20:52
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Incomplete passage above..

Here's the full passage:


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, centralizers 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.
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New post 24 Sep 2014, 05:59
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Bunuel wrote:

GMAT weekly questions



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.
Question:
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 the argument presented in the earlier paragraphs.

OA:



This question asks you to choose the statement that best describes the function of the last paragraph of the passage. The best answer is B. At the end of the third paragraph, the author indicates that assemblers benefit from contracting with, rather than owning, independent suppliers. In the last paragraph however, the author indicates that contracting with independent suppliers can itself present problems. Thus the last paragraph qualifies the viewpoint presented at the end of the third paragraph. Choice A is not the correct answer because the passage makes several points about backward integration, but does not present a central argument about this topic. Choice C is not the correct answer because the final paragraph qualifies rather than supports an argument made in the third paragraph about contracting with independent suppliers. Choices D and E are incorrect because the final paragraph does not identify questions or present a specific example.
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New post 25 Oct 2014, 05:34
carcass wrote:
it is correct ..........which one of the question ??


I was implying that if it was possible to have possible explanations along with the given OAs.

However, after a second sound reading, i don't feel the need for any explanations but still i cannot seem to understand this last sentence
" assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business. "

It was clear in the above lines of the same last paragraph that suppliers of components need to make huge investments in innovative technologies and as a result play with low profit margins. And since the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components then: the highlighted portion comes and i am gone for a toss.

Is it implying that the assemblers/manufacturers turn to backward integration/owning the suppliers(producers of components) just to keep there suppliers in business?
If so, then it does not really makes sense for a firm to be doing both purchasing/becoming self sufficient supplier as well as keeping their suppliers on roll as well.

So please kindly explain that, if possible.
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New post 14 Jan 2015, 07:42
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carcass ,
You can add one more question to this passage...
The official GMAT exam (GMAC) posted the same passage and the following question in its Facebook page - "This Week's Question"


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 the argument presented in the earlier paragraphs.


OA is (B)

Explanation ->
This question asks you to choose the statement that best describes the function of the last paragraph of the passage. The best answer is B. At the end of the third paragraph, the author indicates that assemblers benefit from contracting with, rather than owning, independent suppliers. In the last paragraph however, the author indicates that contracting with independent suppliers can itself present problems. Thus the last paragraph qualifies the viewpoint presented at the end of the third paragraph. Choice A is not the correct answer because the passage makes several points about backward integration, but does not present a central argument about this topic. Choice C is not the correct answer because the final paragraph qualifies rather than supports an argument made in the third paragraph about contracting with independent suppliers. Choices D and E are incorrect because the final paragraph does not identify questions or present a specific example.
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New post 27 Aug 2016, 23:15
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Reliability is the topic of the entire last paragraph. It says that suppliers are often financially unstable, leading the assembling companies to purchase their suppliers simply to keep them in business.
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New post 18 Sep 2016, 02:49
Question 9 tricked me

9. According to the passage, all of the following are benefits associated with backward integration EXCEPT:
(B) enhancement of profit margins on sales of components - You would think this was implicitly stated on the very first read

However read the below again
" 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"

Hence option (B) isn't necessarily true for consumer electronics.
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New post 22 Sep 2016, 09:45
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umg

please refer last para : " 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. "
- High R& D cost indirectly implies high Production cost. And hence low margins.

12. 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?
(A) Modest investments are required and the profit margins on component sales are low. - Does not imply any relationship
(B) Modest investments are required but the profit margins on component sales are quite high.- Not stated
(C) Despite the huge investments that are required, the profit margins on components sales are high. - The inverse is stated
(D) Because huge investments are required, the profit margins on component sales are low. - This is mentioned in the passage
(E) Long-term contractual relationships with purchasers of components ensure a high ratio of profits to investment costs.-Not stated
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New post 24 May 2018, 09:30
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Can anyone explain question no 1...

1. 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

Why B is correct when it is said that BI boosts profit in 2nd para?
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New post 25 May 2018, 09:13
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1. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

(A) improvement in the management of overhead expenses - mentioned in para 2
(B) enhancement of profit margins on sales of components - mentioned in para 2 but it boosts profit for commodities, for others, it is a risk- correct
(C) simplification of purchasing and marketing operations - mentioned in para 2
(D) reliability of a source of necessary components- mentioned in para 1
(E) elimination of unnecessary research efforts - mentioned in para 2
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New post 08 Jun 2018, 08:39
Hi jennpt,

1. 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 did this question 3 weeks ago. I got it wrong. I just did it again, I got it wrong again :)

I get why D is wrong. The first sentence mentions Backward integration and buying from independent suppliers as options for manufacturers who need reliable sources of material. Therefore, a reliable source of material is a need that is achieved if one of those two options is selected. Therefore, it's a benefit. Although, I don't like it, I can live it with it.

Choice B says enhancement of profit margins on sales of components. This is true sometimes depending on component type. The choice doesn't say enhancement of profit margins on ALL sales of components. This is what threw me off a little bit: enhancement of profit margins on sales of components is a benefit sometimes. Is that enough to select this answer choice?

Many thanks in advance Jennifer.
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New post 10 Jun 2018, 13:47
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Hi oasis90

The problem with B is that the manufacturers are not selling components - instead, they assemble the components into some final product and sell that final product. Components are an input to the manufacturers, so they wouldn't look at selling components as a source of profit.
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New post Updated on: 25 Oct 2018, 21:16
GMATNinja workout broall Gnpth
What actually " owning the producers " mean here can you please explain ?

Originally posted by teaserbae on 25 Oct 2018, 20:51.
Last edited by teaserbae on 25 Oct 2018, 21:16, edited 1 time in total.
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New post 26 Oct 2018, 00:19
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teaserbae wrote:
GMATNinja workout broall Gnpth
What actually " owning the producers " mean here can you please explain ?


I think it's about vertical acquisition. A company gains control over another company that operates within the same supply chain to mitigate expenditures.
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Re: Modern manufacturers, who need reliable sources of materials and   [#permalink] 26 Oct 2018, 00:19

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