What is ‘Backward Integration’
Backward integration is a form of vertical integration that involves the purchase of, or merger with, suppliers up the supply chain. Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. For example, this type of integration might cut transportation costs, improve profit margins and make the firm more competitive.
Explaining ‘Backward Integration’
Vertical integration is the integration of two or more companies at different places on the supply chain. A supply chain is the summation of individuals, organizations, resources, activities and technologies involved in the manufacturing and sale of a product. The supply chain starts with the delivery of raw materials from a supplier to a manufacturer, and ends with the sale of a final product to an end-consumer. Backward integration occurs when a company initiates a vertical integration by moving backward in its industry’s chain.
Difference Between Backward Integration and Forward Integration
By way of contrast, forward integration is a type of vertical integration that involves the purchase or control of distributors. An example of forward integration is if the bakery sold its goods directly to consumers at local farmers markets, or if it owned a chain of retail stores through which it could sell its goods. If the bakery did not own a wheat farm, a wheat processor or a retail outlet, it would not be vertically integrated at all.
Potential Issues With Backward Integration
Vertical integration is not inherently good. For many firms, it is more efficient and cost effective to rely on independent distributors and suppliers. For example, backward integration would be undesirable if a supplier could achieve greater economies of scale and provide inputs at a lower cost as an independent business, rather than if the manufacturer were also the supplier.
How to determine if backward integration is the right strategy for your business
There are many reasons why a company might choose to pursue backward integration, including the desire to increase market share, reduce costs, or improve product quality. However, backward integration is not without its risks, and it is important to carefully consider whether or not it is the right strategy for your business. One key factor to consider is the strength of your existing relationships with your suppliers. If you have a strong working relationship built on trust and mutual respect, it may be easier to negotiate favorable terms as part of an ongoing partnership.
On the other hand, if your relationships with your suppliers are strained, backward integration could lead to further conflict. Additionally, you should consider the costs associated with backward integration and whether or not you have the financial resources to support such a growth strategy. Finally, it is also important to think about your long-term goals for your business. Backward integration can be a complex and time-consuming process, and it may not be the best option if you are looking for quick results. Ultimately, the decision of whether or not to pursue backward integration should be based on a thoughtful evaluation of your specific circumstances.
The advantages and disadvantages of backward integration
Backward integration is a business strategy that involves a company taking control of its suppliers. There are several advantages to this approach. First, it can provide the company with a steadier and more reliable supply of raw materials. Second, it can help the company to reduce its costs by eliminating the middleman. Finally, it can give the company greater control over the quality of its inputs.
However, backward integration also has some disadvantages. First, it requires a significant up-front investment. Second, it can create dependence on a single supplier. Finally, it can limit the company’s flexibility and responsiveness to changes in the marketplace. Ultimately, whether or not backward integration is a good choice for a particular company depends on a number of factors, including its financial resources and its competitive environment.
How to overcome the challenges associated with backward integration
One of the key challenges associated with backward integration is the need to align the interests of upstream and downstream partners. This can be difficult to achieve, as each partner is typically focused on different objectives. For example, upstream partners may be more concerned with maximizing production efficiency, while downstream partners may be more concerned with minimizing costs.
As a result, it is important to establish a clear and mutually agreed upon set of objectives from the outset. Once these objectives have been established, both parties can work together to develop a plan that meets everyone’s needs. Additionally, it is important to clearly communicate the plan to all stakeholders and ensure that it is being executed as intended. By taking these steps, companies can overcome the challenges associated with backward integration and realize the full benefits of this strategy.
The future of backward integration
The future of backward integration is shrouded in potential but fraught with uncertainties. On the one hand, the global economy is increasingly interconnected, making it easier for companies to source inputs from around the world. This increased globalization could make backward integration less necessary for companies looking to reduce costs and access new markets.
On the other hand, the rise of protectionist policies could make backward integration more attractive for companies looking to insulate themselves from trade disruptions. In addition, advances in technology could make it easier for companies to vertically integrate their supply chains, making backward integration more feasible. As a result, the future of backward integration is difficult to predict. However, it is clear that the issue will remain relevant for companies as they navigate an increasingly complex and ever-changing global economy.
A Real World Example of Backward Integration
Many large companies and conglomerates conduct backward integration. Amazon.com, for example, became vertically integrated backward when it expanded its business to become both a book retailer and a book publisher. Previous to acting as a publisher, Amazon.com was the first online retailer of books, and it made purchases from traditional publishers for a fee. Once it decided to print and market its own books as a publisher, it reduced the costs of producing or procuring the books.