Modern manufacturers, who need reliable sources of materials and

Question

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A company that decides to make rather than buy important parts can lock itself into an outdated technology.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.

BrightOutlookJenn · Accepted Answer

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?

BrightOutlookJenn · Answer

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.

Bunuel · Answer

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, 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:  1 
 D

Bunuel · Answer

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.

Bunuel · Answer

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.

RahulSingh13 · Answer

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.

cmpunk1990 · Answer

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.

Aadhitthyaa · Answer

what does 'to qualify' mean in this particular case?
thanks.

teaserbae · Answer

GMATNinja   workout   broall   Gnpth 
What actually " owning the producers " mean here can you please explain ?

GMATNinja · Answer

Kaczet  has pointed out another common phrase in the business world used to describe this type of arrangement (thanks!).

But to make this incredibly simple: owning the producers means  literally owning the companies that produce . It's as simple as that. And if you own the companies that produce, then you don't have to negotiate contracts to purchase the components produced by those companies. Everything produced is already property of your company. I hope this helps clarify!

Timebomb · Answer

3. 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 paragrap.
(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.

can some one please provide an answer to this?

I marked A. isnt the central idea of passage that it is difficult to make a choice between doing backward integration and not doing the backward integration?

Isnt last para an argument that supports the central idea as a whole?

DmitryFarberMPrep · Answer

For #3, it's important to recognize that all we have in terms of a central argument is the initial statement that manufacturers face a difficult choice between owning the producers and buying from independent producers. The author then goes back and forth, outlining advantages and disadvantages of backward integration (owning the producers). However, the second half of p2 and all of p3 are entirely about the disadvantages.

p4 presents a pivot, showing why it may not be great to move away from backward integration, despite its disadvantages. So the role of this paragraph in the passage as a whole is to show why the previous arguments may not lead to the conclusion one would expect--namely, a move away from backward integration. The meaning of "qualifies" here is "presents a limitation or exception to." When we qualify a statement, we're saying it is not universal or may turn out not be true under circumstances. For instance, if I say "I'm the best basketball player in my neighborhood--at least that I know of," that disclaimer at the end is a qualification of my original statement. (For another instance of this word in RC, check out Q1, answer B here: https://gmatclub.com/forum/it-is-an-odd ... 07145.html. People sometimes choose that answer, not realizing that it means the exact opposite of what they expect it to mean.)

DmitryFarberMPrep · Answer

Note that A, C, and E are all wrong for more or less the same reason. The paragraph is not part of a series of statements all supporting the same point. If they were, p4 would have to go in the same direction as the other paragraphs, and the point would have to be that backward integration was good or necessary. However, since the other paragraphs show evidence AGAINST integration and the point is just that the choice is tough, we have a more nuanced situation. Imagine a passage stating that anyone who wants an mba will have to study hard. The first paragraphs show why you may not actually need to take the GMAT, but the later ones show that in that case, you have to take the GRE, which also requires a lot of study. The point is not "Take the GMAT" or "Take the GRE" but rather "You'll have to study either way." That's kind of the situation we're in. P4 is one part of a two-pronged argument.

GAGAN121 · Answer

Dear Friend,

As pointed out, the key to answer this question lies in understanding the word "to qualifies".
I, also, did choose a wrong answer because I didn't know the meaning of "to qualifies" while attempting the question.

Qualify (as a verb) :-

Meaning 1 - To measure up, to achieve the required criteria.
Meaning 2 - To restrict something or to limit something.

Here "to qualifies" means that the last paragraph provides limits or issues of the argument provided in earlier paragraph.
Which is true as we know.

Thanks for your attention. I hope that it helped.

Regards
Gagan

GMATNinja · Answer

Thanks  GAGAN121 !

For another example of this usage of "qualify", check out  this post .

dcummins · Answer

PM p1: To discuss decision to Backwards integrate p2: state advantage of BI, but qualify with risks p3: discuss risks of BI --> trade off on innovation p4 : describe the necessity of BI even when Innovation is needed. Q1 - Detail The answer to this is found in the last paragraph quite clearly actually. "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." This Matches up with Answer choice (D) perfectly. A is incorrect because huge, not "modest" investments are required. B is incorrect for the same reason C is incorrect because low, not high, profit margins result E is incorrect because the only relationship we are told is that of BI. We are merely told that contractual arrangements have the same financial benefits, but we don't know if they have the same financial requirements. Q2 - Detail Inference The answer is A - https://www.gmac.com/executive-assessme ... -questions We are told in p2 "independent suppliers may be unwilling to share innovations with assemblers with whom they are competing..." A is the only thing that can be supported. B has a typo and B cannot be supported C No- this is nowhere stated D - Not supported E - No. In fact independent suppliers would be the source of innovation Q3 - Detail Except Most of the benefits are listed or mentioned in p2 A - listed in p2 - "centralizes overhead" - incorrect C - "removes need for some purchasing and marketing functions" - incorrect D - I misinterpreted this as "reliability of source components" instead of "reliability of A source of components" - It is discussed in the last paragraph and acquisition is recommended, so this is incorrect. E- mentioned in P2, so incorrect B is correct - We are told "backward integration boosts profits" BUT not of the sale of the components, but rather the sale of the finished goods. The whole reason Manufacturers BI is to enhance the production of their good. Q4 - Detail Inference Refer to passage map above. A - incorrect. The other paras don't function as arguments. B - This is correct. In p3 the risks of BI are discussed, then in p4 we are told that we can't completely go without BI because of certain conditions (supplier reliability) - hence p4 serves to qualify earlier discussions. C - no. A new contention is provided. D - No. They aren't mentioned as points of departure and no mention of further study. E - No specific example is provided. A general principle is stated to warn against completely moving away from BI.

Harsh2111s · Answer

Hi,

As per below sentence from passage.
"Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits."

Which profit is author talking about ?
 GMATNinja   MentorTutoring

AndrewN · Answer

Hello,  Harsh2111s . Thank you for tagging me. To gain insight into what  profits  may refer to, we need to look at the passage for additional context:

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.

Up to the point in the paragraph at which  profits  are mentioned, we have read about  manufacturers  only. Thus, these profits must be attributed to manufacturers, and we are to understand that utilizing backward integration allows such manufacturers or companies to enjoy higher profits.

I hope that helps. If you have further questions, feel free to ask.

- Andrew

Sneha2021 · Answer

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

Modern manufacturers, who need reliable sources of materials and

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