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Business Strategy and Accounting Basics

A semiconductor manufacturer acquired the materials maker that produces the wafers it uses, so that its group now handles everything from material supply to product manufacturing. Which form of integration is this?

  1. AHorizontal integration
  2. BSetting up a joint venture
  3. CVertical integration
Show answer and explanation

Answer: C. Vertical integration

Vertical integration means bringing companies that handle upstream or downstream stages of the supply chain, from procurement of raw materials through manufacturing to sales, into the company's group through acquisitions and the like. It can be expected to stabilize procurement, improve quality control and reduce transaction costs, but it also means carrying more equipment and staff when demand falls. Integration between companies in the same business at the same stage is horizontal integration, which aims at economies of scale and a larger market share. Setting up a joint venture is a form of alliance in which several companies invest jointly to create a new company, which is different from acquiring an existing company.

  • A. This is integration between companies in the same business at the same stage. The materials maker handles a stage upstream of the semiconductor manufacturer.
  • B. This is a form of alliance in which several companies invest jointly to create a new company. This example is the acquisition of an existing company.
  • C. Correct. It brings in a company upstream in the supply chain, so it is vertical integration.
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