Question

WillowWorks LLC, a retail clothing store, has been sourcing its raw materials from a supplier named ThreadTym Corp. for the last five years. A change of management at ThreadTym resulted in an increase of the prices of the raw materials. As a result, WillowWorks purchases ThreadTym so that it can produce these products on its own. This scenario best illustrate:_______.

a) network effect.
b) forward integration.
c) backward integration.
d) switching cost.

Answer 1

Answer: c) backward integration.

Explanation: The scenario best illustrates backward integration which describes a firm purchasing its suppliers in order to make a product itself rather than buying it from another firm. Due to the change in management of the supplier (ThreadTym) which led to increase in prices of the raw materials used by WillowWorks LLC, it would be far more cost efficient to extract the needed raw materials itself than buying at a higher price. So by buying the company ThreadTym, WillowWorks LLC has engaged in backward integration.