Vertical integration occurs when a company expands its operations into a different stage of its supply chain. In this case, the restaurant is moving from relying on third-party delivery services to handling its own delivery operations, which is an example of backward vertical integration (taking control of a process previously handled by an external provider).
(A) Incorrect – Diversification.
Diversification refers to entering a completely different industry or market (e.g., a restaurant launching a grocery store).
In this case, the restaurant is expanding within the same industry by adding delivery services.
(B) Correct – Vertical integration.
Vertical integration happens when a company takes control of another step in its supply chain.
Since the restaurant is now handling its own deliveries instead of outsourcing, this is an example of backward vertical integration.
(C) Incorrect – Risk avoidance.
Risk avoidance means eliminating an activity entirely to prevent exposure to risk (e.g., deciding not to offer delivery at all).
The restaurant is not avoiding risk but taking on additional responsibilities.
(D) Incorrect – Differentiation.
Differentiation is a strategy focused on making a product/service unique to stand out from competitors.
The restaurant is not introducing a unique feature but integrating delivery operations.
IIA’s Global Internal Audit Standards – Business Strategy and Risk Management
Defines vertical integration and its impact on operational control.
COSO’s ERM Framework – Strategic Risk Considerations
Discusses how vertical integration influences business risks and cost control.
Porter’s Competitive Strategies – Vertical Integration Analysis
Explains backward and forward integration in supply chain management.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
