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If you’re running a business, it’s essential to consider how you can improve your operations by integrating backward. This process can help you take control of your entire supply chain and ensure that all aspects of your business are working smoothly.
This article will discuss the importance of backward integration, explain how it works, and provide successful case studies. Let’s get started!
What is backward integration?
Backward integration is a business strategy in which a company expands its operations to include activities further back in the supply chain. In other words, the company moves “upstream” to control more of the sources of its raw materials and components.
Companies pursue backward integration to gain control of their supply chain. The company does not have to rely on outside suppliers to provide its goods, services, or resources through backward integration because they own raw materials and produce them themselves. This gives the company more control over pricing, quality, distribution channels, and production. By understanding backward integration, companies can make more informed decisions about whether or not to pursue this type of growth strategy.
Many large companies and conglomerates conduct backward integration. For example, when Amazon.com became both a book vendor and a book publisher, the company backtracked vertically integrated forward. It was formerly the first online bookstore of books and bought materials from traditional publishers for a fee before instituting as a publisher.
Backward Integration’s Importance in Business Strategy
As business becomes more globalized, supply chains become longer and more complex. Therefore, companies must control their supply chains carefully to maintain a competitive advantage. One way to do this is through backward integration, bringing production back in-house.
There are several reasons why backward integration can be beneficial for a company:
- It can help to improve quality control. For example, when companies outsource production, they often have less control over the quality of the finished product. By producing components or products themselves, companies can ensure that they meet their high standards.
- Backward integration can lead to cost savings. For example, it is cheaper to produce goods in-house than to purchase them from an outside supplier in many cases.
- Backward integration can help companies become more vertically integrated, giving them greater control over their supply chains.
Backward integration vs. forward integration
There are two main types of business integration: backward integration and forward integration. Backward integration is when a company takes over its suppliers. Forward integration is when a company takes over its customers. Each type of integration has its advantages and disadvantages.
Backward and forward integration are types of vertical integration that a business can use to improve its supply chain. Backward integration occurs when a company purchases the companies that are suppliers to it. In backward integration, the supply chain process goes in a reverse direction. Sometimes organizations can establish their subsidiary and complete backward integration. This can lead to cost savings and improved quality control.
Forward integration is when a company acquires or becomes partners with other competitors to expand its operations into new markets. This allows the company to grow its market share and reach new customers. Forward integration can also help a company become more vertically integrated, leading to increased efficiency and profitability.
So, which type of integration is best for your business? It depends on your specific situation. For example, backward integration may be the answer if you have trouble with your suppliers. On the other hand, if you have difficulty reaching customers, then forward integration may be the way to go.
Related: Selective Distribution
Advantages of Backward Integration
1. More control over pricing, quality, and distribution channels
This helps them ensure that they can maintain a high level of control over how their products are presented to consumers and their quality. It also allows them to manage better the distribution of their products, which can help increase sales.
2. Improved efficiency and reduced costs due to streamlined production processes
By producing their goods and services themselves, companies can often achieve greater efficiency in their production processes, leading to cost savings. This can be especially beneficial for smaller businesses that may not have the scale to negotiate better prices with suppliers.
3. Greater flexibility and agility to adapt to changes in the market or economy
They do not have to rely on outside suppliers. For example, suppose a company expands through backward integration. In that case, it can produce its goods quickly and easily adjust its production levels in response to changing demand, giving them a competitive advantage.
This can be especially important during economic volatility when demand for certain products may fluctuate.
4. Improved ability to respond to customer demands and needs
While some logistics companies may offer “just in time” production services for businesses, many will likely need a certain level of flexibility and responsiveness; having greater control over their sources of supply can make this possible.
Related: Disintermediation
Disadvantages of Backward Integration
1. Higher costs
Backward integration can often lead to increased production costs, as the company is now responsible for all aspects of the supply chain. This can be a particular issue for smaller businesses that may not have the resources to produce all product components themselves.
2. Lack of competition
When a company produces its goods, it can lack competition, leading to higher prices and reduced quality. This is because the company no longer has to compete with other suppliers for the best price or the highest quality product. Instead, it can simply produce the product itself, which may not be as good as products from other suppliers. Again, this can lead to reduced competition and higher prices for consumers.
3. Reduced flexibility
Backward integration can often lead to decreased flexibility, as the company is now reliant on its internal resources and processes. This can make it challenging to respond to changes in the market or customer needs.
Examples of Backward Integration
Backward integration can take on different forms, allowing a company to become self-reliant by taking back control of its supply chain.
This can be done through acquiring or building its production facilities, acquiring or partnering with suppliers, or entering into joint ventures with other companies.
Example #1
Apple’s acquisition of Beats Electronics gave Apple ownership of the entire supply chain, from product design to manufacturing to distribution.
Example #2
Apple has utilized backward integration as a business strategy to regain control of its supply chain. As a result, the company produces its processors, displays, and other critical components used in its products. This allows them to maintain tight control over quality and pricing.
Example #3
Amazon’s purchase of Whole Foods gave Amazon an extensive network of grocery stores that it could use to distribute its products.
Example #4
Ford Motor Company has also used backward integration to become more self-sufficient. They have vertically integrated their production process to include the manufacturing process of vehicles and the production of parts and components needed for assembly.
Example #5
Walmart is a retailer that has implemented a successful backward integration strategy. As a result, they produce and distribute many of the products they sell in their stores. This allows them to keep prices low and ensure a reliable supply of products for their customers.
Example #6
Hotels are an excellent example of this. Many hotels produce their food and beverages and provide housekeeping and other services. This allows them to maintain control over quality and pricing while still providing guests with a high level of service.
Example #7
Another real-world example is Netflix, It began as a DVD rental company selling television and movie content, but it expanded its business model by developing original material through backward integration.
Backward integration can be a powerful business strategy, but it’s not always the right move for every company. It’s crucial to weigh the pros and cons carefully before deciding. Backward integration can provide many benefits, but it also carries risks, such as increased capital expenditures and higher operating costs. So, it’s essential to make sure that the potential benefits outweigh the risks before moving forward.
Related: Intensive Distribution
Conclusion
Backward integration is a critical piece of any business’s strategy. By understanding the advantages and disadvantages of backward integration, you can make a more informed decision about whether or not it is suitable for your company.
Have you ever implemented backward integration into your business? If so, we want to hear from you! Share your story in the comments below and help other entrepreneurs learn from your successes and failures.
FAQ
What is the difference between vertical and horizontal integration?
Horizontal integration is often thought of as a defensive move, as it can make a company less vulnerable to takeover by making it larger and, therefore, more challenging to acquire. It can also give the company more negotiating power with suppliers. Additionally, horizontal integration can increase market share and economies of scale.
On the other hand, Vertical integration is when a company encompasses multiple segments to expand its operations to include activities further down the supply chain. The goal of vertical integration is to increase operational control and, as a result, profitability. For example, a company that vertically integrates by acquiring a supplier or distributor will be able to control its costs and quality better.
How do you do backward integration?
There are a few different ways that companies can go about backward integration. The first is to purchase the suppliers themselves. This gives the company complete control over production and allows them to reduce costs by eliminating the middleman. The second way is to start a subsidiary. This also gives the company full control over production but may be more expensive upfront.
Both of these methods have advantages and disadvantages that companies must weigh before deciding. For example, backward integration can be a great way to improve efficiency and reduce costs, but it is not always the best option for every company. Ultimately, the decision comes down to what will work best for the specific business.
What is Conglomerate integration?
Pure conglomerates are created when two firms with completely unrelated businesses merge. For example, a manufacturer of auto parts may merge with a company that owns a chain of restaurants. The two companies have no business overlap and are in entirely different industries. Mixed conglomerates occur when two companies merge even though they have some business overlap. For example, a company that owns a chain of hotels may merge with a company that owns an airline. The two companies have some business overlap, but they are still considered in different industries.
Conglomerate integration can be a very effective growth strategy for companies. It allows companies to enter new markets and expand their product offerings. Additionally, conglomerate integration can lead to cost savings and operational efficiencies. However, conglomerate integration can also be very risky. Therefore, it is important for companies to carefully consider whether or not a conglomerate merger is the right growth strategy for them.
What is Balanced Integration?
As the world of business becomes increasingly globalized, companies are finding that they need to adopt new strategies to stay competitive. One such strategy is known as balanced integration. Balanced integration is quite simply a combination of both backward and forward integration.
For instance, balanced integration would be where a company mergers’ with both a company that is before it in the supply chain and one that is after. Therefore, balanced integration involves two transactions – one downstream and another upstream.
