Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly diffi...
GMAT Reading Comprehension : (RC) 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A company that decides to make rather than buy important parts can lock itself into an outdated technology.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.
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. Passage Analysis:
Progressive Passage Analysis
| Text from Passage | Analysis |
|---|---|
| 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. | What it says: Companies have two options for getting parts: buy the supplier company or just buy from them What it does: Introduces the central topic and key choice manufacturers face Source/Type: Author's factual statement about business reality Connection to Previous Sentences: This is the opening sentence - establishes the foundation Visualization: • Company A needs computer chips • Option 1: Buy ChipCorp (backward integration) • Option 2: Just purchase chips from independent ChipCorp Reading Strategy Insight: Clear setup sentence - author immediately defines the key term and presents this as a simple either/or choice. Feel confident about grasping this foundation. What We Know So Far: Manufacturers face a choice between two sourcing strategies What We Don't Know Yet: Which option is better and why this choice is "difficult" |
| Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development. | What it says: Buying suppliers = good now, bad later for innovation What it does: Provides the author's main thesis about backward integration Source/Type: Author's analytical judgment Connection to Previous Sentences: This builds on sentence 1 by starting to explain WHY the choice is "difficult" - there are trade-offs over time Visualization: • Year 1-2: Company A buys ChipCorp → saves money/gains control • Year 3-5: Company A struggles to innovate because stuck with ChipCorp's technology Reading Strategy Insight: This sentence reveals the passage's direction - it will explore nuances of this trade-off. The "but" signals the author sees problems with integration. |
Question Analysis:
This question asks us to identify the specific relationship between R&D investments and profit margins for producers of technologically advanced components according to the passage. We need to find what the passage directly states about these two financial factors and how they relate to each other.
Connecting to Our Passage Analysis:
Our passage analysis reveals that the author discusses independent suppliers' financial challenges in sentences 11-12, which directly address this question. From our analysis:
- The passage explains why long-term contracts aren't a perfect solution
- It identifies that independent suppliers face a specific economic problem
- This economic problem involves both R&D costs and profit margins
- The relationship between these factors threatens supplier stability
Specifically, our analysis of sentence 11 notes: "Suppliers spend lots on R&D, which makes their profits low and threatens their survival." This creates a direct causal relationship between investment requirements and profit outcomes.
Prethinking:
Based on our passage analysis, the author states that developing innovative technologies requires "huge sums" in R&D investment, and this results in "low profit margins." The passage presents these as causally connected - the large investments directly lead to the low margins. This creates financial instability for suppliers, which ultimately forces manufacturers back toward backward integration. The correct answer should capture both the magnitude of required investments (huge) and their effect on profits (low margins), with a causal relationship between them.
Why It's Wrong:
- Contradicts the passage's explicit statement about investment size
- The passage clearly states "huge sums" are required, not "modest investments"
- While correctly identifying low profit margins, it misrepresents the investment scale
Common Student Mistakes:
- Do students focus only on the profit margin part and miss the investment scale?
→ Always read the complete relationship - both parts must match the passage - Do students assume that low profits mean low investments?
→ Check the passage for the actual causal direction - high investments can cause low profits
Why It's Wrong:
- Completely contradicts the passage on profit margins
- Says profit margins are "quite high" when passage explicitly states they are "low"
- Also incorrectly describes investments as "modest" rather than "huge"
Common Student Mistakes:
- Do students confuse what should logically happen with what actually happens?
→ Stick to what the passage states, not what seems economically logical - Do students mix up different parts of the passage about when profits are high?
→ Note that high profits are mentioned only for commodity integration, not advanced component suppliers
Why It's Wrong:
- Correctly identifies "huge investments" but wrong about profit margins
- Claims margins are "high" despite passage stating they are "low"
- Misses the causal relationship that huge investments lead to low margins
Common Student Mistakes:
- Do students think "Despite" suggests the expected outcome doesn't happen?
→ The passage shows exactly what you'd expect: high costs lead to low margins - Do students assume innovative technology automatically means high profits?
→ The passage argues the opposite - innovation costs hurt profitability
Why It's Right:
- Accurately captures both elements: huge investment requirements and low profit margins
- Correctly shows the causal relationship with "Because" - investments cause low margins
- Directly matches the passage's explanation of supplier financial problems
- Explains why suppliers face "long-term financial stability" threats
Key Evidence: "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."
Why It's Wrong:
- Introduces information not found in the passage
- The passage never discusses how long-term contracts affect the profit-to-investment ratio
- Contradicts the passage's point that even long-term contracts don't solve supplier financial problems
Common Student Mistakes:
- Do students assume long-term contracts solve the profitability problem?
→ The passage states contracts help with some benefits but don't eliminate financial instability - Do students create connections the passage doesn't explicitly make?
→ Stick to relationships the author directly establishes