Marketing Channels, 8e (Palmatier)
Chapter 04: Make versus Buy Channel Analysis
1) A manufacturer that performs all functions in a
channel is most likely engaged in ________
A) outsourcing
B) relationalism
C) target marketing
D) vertical integration
E) classical market contracting
Answer: D
2) Which of the following best describes classical
market contracting?
A) distributing benefits to channel members
B) delegating channel functions to third parties
C) taking responsibility for all channel functions
D) sharing channel function risks with third parties
E) merging with a third party to meet channel
demands
Answer: B
3) A marketing channel system in which the
channels have some properties of both owned and
independent channels is most likely engaged in
________.
A) offshoring
B) vertical integration
C) horizontal integration
D) quasi-vertical integration
E) classical market contracting
Answer: D
4) Which of the following would most likely lead to
relational governance in a channel system?
A) maintaining strong links with channel members
B) promoting channel member services and products
C) basing most channel functions on the equity
principle
D) outsourcing costly, time-consuming channel
functions
E) creating a significant distance between channel
members
Answer: A
5) ElectroInc, an electronics manufacturer, is
considering the idea forward vertical integration.
ElectroInc employees would make sales and fulfill
orders in addition to manufacturing products. What is
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the primary risk that ElectroInc faces with vertical
integration?
A) increasing performance ambiguity
B) reducing its return on investment
C) engaging in product speculation efforts
D) performing redundant channel functions
E) establishing environmental and managerial bounds
Answer: B
6) What is the LEAST likely risk associated with
forward vertical integration?
A) reduced ability to meet service output demands
B) fewer employees focused on core activities
C) limited control over value-chain operations
D) insufficient managerial resources
E) lower profits and market share
Answer: C
7) According to the text, the best reason for vertical
integration is ________.
A) monitoring reverse logistics
B) owning a larger enterprise
C) obtaining new resources
D) sharing channel control
E) improving profit margins
Answer: E
8) According to the text, Manoukian experienced
poor results with vertical integration because the firm
failed to________.
A) recognize the service outputs demanded by most
end-users
B) realize the expertise power of independent
retailers
C) apply the equity principle to all channel members
D) take control of distribution decisions
E) offer enough product variations
Answer: B
9) Gordon Industries, a large manufacturer, pays
outside firms to perform certain channel functions.
What is the most common way for Gordon Industries
to express the price of performing channel functions?
A) expenses
B) royalties
C) lump sum payments
D) functional discounts
E) future considerations
Answer: B
10) Return on investment is best defined as the
________.
A) percentage of equity in the firm
B) ratio of expenses to direct costs
C) revenues that accrue under integration
D) ratio of net effectiveness to overhead
E) variable costs incurred after integration
Answer: D
11) All of the following are reasons to outsource
channel functions to a third party EXCEPT the third
party’s ________.
A) motivation
B) specialization
C) market coverage
D) economies of scale
E) dedicated capacities
Answer: E
12) Which of the following statements about
outsourcing is most likely true?
A) Third-party distributors are typically motivated by
monetary rewards and market discipline.
B) Both wholesalers and manufacturers specialize in
cost-effective distribution activities.
C) Distribution usually involves high entry barriers,
so it attracts only the best firms.
D) Third-party distributors are limited to selling one
brand and product line.
E) Economies of scale are desired by distributors but
rarely attained.
Answer: A
13) Alvin Electronics sells televisions, surround
sound systems, and stereo components made by firms
such as Sony, Bose, and Samsung. By selling a broad
range of brands in the home entertainment product
category, Alvin Electronics is most likely able to
achieve ________.
A) idiosyncratic knowledge
B) zero-based channels
C) economies of scale
D) vertical integration
E) site specificity
Answer: C
14) Todd, an independent sales agent in the medical
device industry, sells products made by six different
manufacturers. Previously, Todd worked as a
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salesperson for only one medical device
manufacturer. Since becoming a manufacturers’
representative for multiple firms, Todd’s sales have
increased dramatically. What is the LEAST likely
reason for Todd’s current success?
A) Todd relies on an efficiency template to monitor
prices.
B) Todd offers a wide variety of medical devices to
end-users.
C) Todd’s portfolio of medical products supports
one-stop shopping.
D) Todd’s deep customer knowledge leads to repeat
purchases and referrals.
E) Todd sells only the best medical devices produced
by each manufacturer.
Answer: A
15) A firm should most likely outsource channel
functions when the ________.
A) function requires company-specific capabilities
B) firm has resources that cannot be used for other
purposes
C) firm cannot afford the set-up costs of creating an
internal operation
D) firm has resources that are demanded in a volatile
and prosperous market
E) firm’s brand equity relies on customer experiences
with downstream service providers
Answer: C
16) When a firm has highly valuable company-
specific capabilities, vertical integration will LEAST
likely result in ________.
A) improving revenues
B) lowering overhead
C) reducing opportunism
D) minimizing direct costs
E) increasing net effectiveness
Answer: B
17) How does a firm with company-specific assets
most likely benefit from vertical integration?
A) confirming that external distributors are well
trained
B) ensuring that employees are highly capable and
skilled
C) providing customized solutions to high-value end-
users
D) establishing credibility by showing dedication to 22) Downstream vertical integration is LEAST
the market necessary when ________.
E) quantifying brand equity by monitoring all A) sales teams are important in creating a strong
upstream activities brand image
Answer: D B) channel members lack financial incentives to
implement brand strategies
18) All of the following are the major forms of C) brand equity among consumers is independent of
company-specific distribution capabilities EXCEPT channel member actions
________. D) after-sales support of the branded product is
A) site specificity necessary to ensure customer satisfaction
B) dedicated capacity E) brand strategy requires a level of cooperation that
C) idiosyncratic knowledge overrides the decision-making discretion of channel
D) customized physical facilities members
E) upstream brand strategy and equity Answer: C
Answer: E
23) Customized physical facilities, dedicated
19) Which term refers to a firm’s overall knowledge capacity levels, and site specificities are firm-specific
base that cannot be readily redeployed to another assets that all have ________.
principal? A) low values for alternative uses
A) general-purpose assets B) generic channel functions
B) dedicated relationships C) intangible service outputs
C) proprietary skill sets D) low distribution costs
D) idiosyncratic assets E) high cost gaps
E) brand equity Answer: A
Answer: D
24) Which term refers to the concentration of market
20) A(n) ________ can most likely be redeployed to share in the hands of a few players?
benefit another principal without the manufacturer A) distribution
losing productive value. B) adaptation
A) zero salvage know-how C) specialization
B) proprietary knowledge D) integration
C) general-purpose asset E) consolidation
D) idiosyncratic asset Answer: E
E) brand equity
Answer: C 25) The primary reason that Coca-Cola and PepsiCo
initially outsourced product assembly to independent
21) What is most likely essential to just-in-time bottlers was to _________.
supply arrangements? A) share promotional expenses
A) strong brand equity for consumers and B) reduce transportation costs
downstream channel members C) facilitate brand building
B) close relationships between manufacturers and D) comply with regulations
channel members E) expand product lines
C) use of two-way communication between end-users Answer: B
and retailers
D) management of general-purpose and idiosyncratic 26) Coca-Cola and PepsiCo most likely shifted from
assets outsourcing to vertical integration for the purpose of
E) knowledge of site specific capabilities and ________.
facilities A) building brand equity
Answer: B B) lowering bottling costs

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C) negotiating with bottlers
D) meeting global demands 31) According to the author, which of the following
E) controlling fountain sales best explains the lack of multinational business
Answer: A activity in sub-Saharan Africa?
A) non-standard market practices and procedures
27) Consolidation among manufacturers most likely B) nonexistent distribution infrastructures
leads to ________. C) uneducated, unskilled labor pools
A) fewer monopolies D) low economic development
B) more outsourcing E) significant political risk
C) niche marketing Answer: B
D) thinner markets
E) broken alliances 32) The LEAST likely reason that manufacturers
Answer: D vertically integrate is to ________.
A) handle thin markets
28) ACE Clothing Company makes and sells trendy B) learn from customers
clothes that appeal to teenagers. If ACE is vertically C) achieve economies of scale
integrated, which of the following statements is most D) reduce performance ambiguity
likely true? E) cope with environmental uncertainty
A) ACE clothing is sold through department stores Answer: C
that carry many brands.
B) Independent wholesalers manage ACE product 33) A manufacturer of a discontinuous innovation
distribution efforts. would most likely vertically integrate forward
C) ACE clothing is sold exclusively through because of ________.
company-owned stores. A) idiosyncratic knowledge
D) Manufacturers’ representatives sell most ACE B) performance ambiguity
products. C) limited infrastructures
E) ACE clothing is promoted through social media D) unreliable outputs
tools. E) market demands
Answer: C Answer: B

29) Which of the following would most likely be 34) According to the text, the purchase of Lens
best for a manufacturer with low specificity in a Crafters by Luxottica provided the manufacturer with
highly volatile market? an “observatory” to ________.
A) engaging in forward vertical integration A) monitor distribution
B) customizing physical facilities B) establish brand equity
C) acquiring competitors C) motivate salespeople
D) expanding globally D) learn from customers
E) outsourcing E) cover the market
Answer: E Answer: D

30) Company X, which has substantial specificities, 35) Intermarché best serves as an example of a firm
is facing a highly volatile but very promising market. that has engaged in ________.
What is the best option for Company X? A) localization
A) engaging in forward vertical integration B) global outsourcing
B) increasing performance ambiguity C) forward integration
C) redefining channel functions D) mass merchandising
D) relying on local wholesalers E) backward integration
E) outsourcing distribution Answer: E
Answer: A

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36) According to the text, the make-or-buy decision
begins with the base case that ________.
A) outsourcing is more attractive than vertical
integration
B) vertical integration offers higher ROI than
outsourcing
C) idiosyncratic assets decrease with environmental
uncertainty
D) backward integration is more profitable than
forward integration
E) outsourcing is best when company-specific
capabilities are tangible
Answer: A
37) Which of the following is most likely a
characteristic of relational governance?
A) employees monitored and motivated completely
by a third party
B) major decisions formed and implemented by a
third party
C) costs and benefits shared by a third party and the
principal
D) brand equity established and maintained by a third
party
E) risks and responsibilities controlled by the
principal
Answer: C
40) Which statement about vertical integration in an
uncertain environment is most likely true?
A) Backward vertical integration is best for all firms.
B) Vertical integration is best for multinational
corporations.
C) Outsourcing is best for firms with significant
specificities.
D) Outsourcing will lead to far less performance
ambiguities.
E) Outsourcing is best for firms without significant
specificities.
Answer: E
41) Franchising exhibits characteristics of a quasi-
vertical integration.
Answer: TRUE
42) Overhead refers to the revenues that accrue under
vertical integration minus the direct costs incurred
after integrating.
Answer: FALSE
43) Since upstream and downstream channel
activities are so similar and conform to the same
financial models, many firms decide to engage in
vertical integration.
Answer: FALSE

38) Charlton Manufacturing relies on manufacturers’ 44) Research indicates that under normal
representatives, independent wholesalers, and third- circumstances in developed economies, vertical
party retailers to perform channel functions. Charlton integration is more efficient than outsourcing and
Manufacturing is most likely engaged in _________. should be viewed as the default option for most
A) quasi-vertical integration firms.
B) classical market contracting Answer: FALSE
C) backward integration
D) forward integration 45) The greater the value of company-specific
E) relational governance capabilities, the greater the economic rationale for the
Answer: B manufacturer to vertically integrate.
Answer: TRUE
39) Which term refers to the revenues that accrue
under vertical integration minus the direct costs 46) What is relational governance? What are the most
incurred after integrating? likely causes and effects of relational governance?
A) overhead Answer: Most arrangements with third parties exhibit
B) variable costs some degree of relationalism, such that the
C) fixed costs manufacturer takes a greater share of both costs and
D) net effectiveness benefits than it would if it strictly and completely
E) return on investment delegated to a third party. Relational governance
Answer: D implies a compromise, in which the channels have
some properties of both owned (make) and

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independent (buy) channels and use strong
relationships as opposed to contracts or direct
ownership to manage an exchange transaction.
Relational governance arises in several ways, such as
building and maintaining close, committed
relationships, or through selective distribution or
franchising. When the argument for integration is
strong but not entirely compelling, relational
governance offers a means to attain some benefits of
vertical integration without assuming all of its
burdens. For example, information sharing in
relational partnerships nearly always benefits
performance, especially in volatile markets.
47) Why are third-party distributors typically able to
provide better market coverage than vertically
integrated manufacturers?
Answer: It is difficult for manufacturers to duplicate
the thorough coverage afforded by third parties, for
several reasons. First, few manufacturers can match
the breadth of related products and services that a
third party can assemble. Even if manufacturers have
really broad product lines, a distributor still enjoys an
advantage, in that it is free to select only the best
products provided by a variety of manufacturers,
bypassing any “weak links.” Second, independent
distributors can realize potential synergies that a
vertically integrated manufacturer cannot reproduce,
because even if the manufacturer were to offer to
carry products from its competitors (and thus
duplicate the independent distributor’s assortment),
these competitors and sellers of complementary
goods likely hesitate, out of fear that the
manufacturer’s sales force will favor its own products
at their expense. Third, the degree of substitutability
in manufacturers’ products influences the equilibrium
distribution structure. At low degrees of
substitutability, each manufacturer prefers to
distribute its product through a company store; for
more highly competitive goods, manufacturers are
more likely to use a decentralized distribution
system.
Ultimately, a third party’s ability to amortize the cost
of a sale allows it to cover a market much more
thoroughly (make calls more often, to more
influencers, in smaller accounts, even in pursuit of a
low-probability sale) than can most vertically
integrated manufacturers, which represents a
substantial advantage.
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48) Briefly describe the two main circumstances in
which vertical integration would be more appropriate
than outsourcing.
Answer: Vertical integration potentially is preferable
if either of two circumstances prevail:
1. Company-specific capabilities are likely to accrue
and become substantial. They may be intangible
(know-how, relationships, downstream activities
brand equity) or tangible (dedicated capacity, site
specificity, physical customization). The effects of
idiosyncratic assets increase with environmental
uncertainty, so firms should learn some important
capabilities through vertical integrating that will pay
off over time.
2. Performance ambiguity forces the firm to monitor
and direct activities, rather than tally up and pay for
performance. It is too hard to watch and track
channel partners.
49) What conditions support a firm’s decision to
outsource channel functions? How does a firm
benefit from outsourcing distribution activities?
Answer: The firm should outsource if little money is
at stake (e.g., it is a minor function); if the firm
cannot afford the resources needed to create an
internal operation; and if the firm has better uses for
these resources. There are six fundamental
advantages of an outside specialist: superior
motivation; specialization; survival of the
economically fittest; economies of scale; heavier
market coverage; and independence from any single
supplier.
50) What is performance ambiguity? What are the
potential causes and effects of performance
ambiguity?
Answer: Performance ambiguity occurs when it is
very difficult to ascertain whether a third party is
doing a job well. It arises when the market is so
unfamiliar that the firm has no baseline to judge
whether results are good or bad. It also occurs when
it is difficult or impossible to gather relevant, timely,
accurate result indicators. To deal with this
ambiguity, the principal may seek to increase its
long-term ROI by vertically integrating forward to
gain both information and an ability to direct
behavior. Greater performance ambiguity increases
the chances that vertical integration is more efficient
than outsourcing.