What does vertical integration measure?

Vertical integration measures the level of control a company has over its supply chain. When a company engages in vertical integration, it takes control over its supply chain's different stages, which can include the production of raw materials, manufacturing processes, and even distribution channels. This control allows a company to reduce dependence on third-party suppliers, improve operational efficiencies, lower costs, and enhance product quality and reliability.

By integrating vertically, a business can respond more effectively to market demands, streamline production processes, and potentially pass on those benefits to consumers in the form of lower prices or enhanced service levels. This strategic approach is often employed to gain a competitive advantage and is vital in ensuring that the entire operation aligns with the company’s goals and market strategy.

In contrast, other options like employee productivity, rate of product return, and market demand fluctuations do not directly relate to the extent of control a company has over its supply chain, making them less relevant to the concept of vertical integration.