Often, the incentive for the acquisition or merger of competitive enterprises producing similar products was to gain more effective control of output, price, and markets. Such horizontal combination increased organizational capabilities only if a single, centralized administrative control was established over the acquired companies, and then the facilities and personnel were rationalized to exploit the economies of scale and scope. If the administrations of the companies acquired were not centralized, but operated autonomously as they had before the change, the enlarged enterprise remained little more than a federation of firms. The resulting cost advantages were minimal.
The motivations behind vertical integration — that is, growth through obtaining facilities along the chain of production — were more complex. Faster “throughput,” cost reductions, and increased productivity in terms of worker output rarely resulted from vertical integration unless the additional processes were directed to the firm’s existing ones by its own rails or pipes. Such integration was particularly successful in the production of metals and machinery. Where the facilities to make related products were located at a distance, increased “throughput” was less feasible.
The motive for such investments in growth by vertical integration was primarily defensive, but not in the same way as through horizontal combination. Sometimes the aim was to withhold supplies from competitors, thereby creating barriers to entry. More often, however, the motive was to ensure a steady supply of materials into the enterprise’s production, which maintained the cost advantages of scale and scope. It provided insurance against cost increases from fluctuating production, and reduced the cost of inventory storage and other carrying costs. It lowered the risk that suppliers would fail to carry out contractual agreements — risks economists have termed “bounded rationality” (human fallibility) and “opportunism” (self-interest with guile). The greater the investment in capital-intensive facilities and the greater the optimized size of these facilities, the greater the incentive companies have for insurance against cost increases. Thus, the more concentrated the facilities of production and supply, the more likely the integration of the two within a single enterprise.
Which of the following correctly describes how the passage is organized?
A. Two business strategies are presented, followed by a criticism of one strategy. B. One type of business strategy is presented, followed by a second strategy which is deemed the more successful. C. Two business strategies are presented, followed by a deeper examination of one of the strategies. D. One business strategy is examined, followed by a deeper examination of this strategy. E. A discussion of various topics concludes with an unsupported summary.
(C) The passage contains 3 paragraph! s: the first is about the motivations behind horizontal integration, the second introduces the motivations behind vertical integration, and the third goes into detail about these motivations. Therefore, (C) is correct. (A) and (B) indicate bias, and the author does not show a bias towards one strategy over the other. (D) leaves out the presence of a second strategy altogether. (E) is incorrect because the author doesn't conclude with a summary.
One type of business strategy is presented, followed by a second strategy which is deemed the more successful.
I think "the most successful" is better, isn't it?
The author never deems the second strategy "more successful." In fact, for both strategies the author describes the circumstances where each could be successful, but he never compares the two. The author does go into greater detail about vertical integration, but you cannot assume this means he somehow deems it more successful than horizontal integration. Choice (C) accurately reflects the organization of the passage.
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