Certified Financial Management Specialist Practice Exam

Which of the following describes vertical integration?

1. Acquisition of a business at a different production stage.

2. Combining two companies under a new entity.

3. Taking control over one or more production stages.

4. Acquiring unrelated businesses to diversify.

The correct answer is: Taking control over one or more production stages.

Vertical integration refers to the process of a company taking control over one or more stages of its production or supply chain. This strategy allows a business to manage its supply chain more efficiently by owning various parts of the production process, from raw material sourcing to the manufacture and distribution of the final product. By engaging in vertical integration, a firm can reduce costs, increase efficiencies, and gain greater control over its supply chain, ultimately leading to improved profitability and competitive advantages. It may involve either backward integration, where a company acquires control over its suppliers, or forward integration, where it takes control over distribution channels or retailers. The other options describe different business strategies. For instance, the acquisition of a business at a different production stage focuses more narrowly on the specific action rather than the broad concept of taking control over production stages. Similarly, combining two companies under a new entity pertains more to mergers, while acquiring unrelated businesses to diversify is a form of diversification strategy rather than vertical integration.