GMAT Reading Comprehension
Home > GMAT Test > GMAT Reading Comprehension Questions
Next steps
- Use your browser's back button to return to your test results.
- Do more GMAT Reading Comprehension Questions.
Source: OG10th
Level: 3
Modern manufacturers, who need reliable sources of materials and technologically advancedcomponents to operate profitably, face an increasingly difficult choice between owning theproducers of these items (a practice known as backward integration) and buying from independentproducers. Manufacturers who integrate may reap short-term rewards, but they often restrict theirfuture capacity for innovative product development.
Backward integration removes the need for some purchasing and marketing functions, centralizersoverhead, and permits manufacturers to eliminate duplicated efforts in research and development.Where components are commodities (ferrous metals or petroleum, for example), backwardintegration almost certainly boosts profits. Nevertheless, because product innovation meansadopting 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 outdatedtechnology. Independent suppliers may be unwilling to share innovations with assemblers withwhom they are competing. Moreover, when an assembler sets out to master the technology ofproducing advanced components, the resulting demands on its resources may compromise itsability to assemble these components successfully into end products. Long-term contracts withsuppliers can achieve many of the same cost benefits as backward integration withoutcompromising a company's ability to innovate.
However, moving away from backward integration is not a complete solution either. Developinginnovative technologies requires independent suppliers of components to invest huge sums inresearch and development. The resulting low profit margins on the sale of components threaten thelong-term financial stability of these firms. Because the ability of end-product assemblers torespond to market opportunities depends heavily on suppliers of components, assemblers are oftenforced to integrate by purchasing the suppliers of components just to keep their suppliers inbusiness.
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 lowl.
- 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 components 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 ratio of profits to investment costs.