There are two main kinds of vertical integration: Forward vertical integration: this an integration of a business that is closer to final consumers e.g. In short, Amazon used backward integration to expand its business and become both a book retailer and a book publisher. By this way, the Company is trying that the existing competitor exits from business or look for another supplier and creating entry barriers for new Competitors. Both forward and backward integration are vertical integration strategies to gain better control of the value chain, reduce dependence on the suppliers and increase business competitiveness. In a supply chain, there is always a markup when goods are sold from one party to another. a manufacturer buying a raw material or component supplier Examples of Vertical Integration Key Difference – Forward vs Backward Integration All businesses are a part of a value system (a network where the company is connected with its suppliers and customers), where many organizations work in collaboration to deliver a product or service to the customers. In some cases, backward vertical integration can increase efficiency by A. giving a company proprietary knowledge that is expensive to keep from rivals B. allowing a company to outsource activities that are too costly to perform in-house C. Improving the competitive position of existing suppliers in the value chain. It implies the integration of various entities engaged in different stages of the distribution chain. If this car Company merges/ acquires the supplier of iron and steel, it will be called backward integration. Forward and backward integration. Here we discuss its examples along with the advantages and disadvantages of backward integration. Vertical integration involves the merger of two or more companies which are at different points on the supply chain. A vertical integration is when a firm extends its operations within its supply chain. A Little More on Backward Integration. They will control the production of raw materials until the production of the end product. The two strategies can help companies gain higher control of their business and reduce the bargaining power of suppliers. a manufacturer buying a raw material or component supplier Examples of Vertical Integration Should it look at various factors such as – will the investment cost and finance cost will be lower than the long-term benefits it will have by acquiring the suppliers? from various suppliers. It may start making intermediate goods on its own and start supplying. Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. In the vertical integration, one company started working with a different level of the value chain company or can acquire raw materials company. Companies that engage in backward integration might become too large and difficult to manage. Vertical integration is a strategy used by a company to gain control over its suppliers or distributors in order to increase the firm’s power in the marketplace, reduce transaction costs and secure supplies or distribution channels. Sometimes Companies, to keep the competition out of the market, can acquire the supplier. It now has several imprints. Backward integration is a form of vertical integration by which the Company integrates its operations with the suppliers or the supply side of the business. When a firm gets involved in new portions of the value chain. In this video, I provide an example of vertical integration. https://strategicmanagementinsight.com/topics/vertical-integration.html What is Backward Vertical Integration? a manufacturer buying a retailer Backward vertical integration: here the aquisition is operates earlier in the supply chain e.g. By this, they will have a larger control on the quality of raw material to be used in production. Backward integration refers to the company’s strategy of vertical integration with its supply-side or supplier where the company either merges with the suppliers or acquires the supplier’s business who provides raw materials to the company and also if the company decides to set up its own internal supply unit. The Company does so to maintain a competitive advantage in the business and increase entry barriers. I explain both backward and forward vertical integration. The Company needs to perform due diligence before integrating backward. Vertical integra-tion lowers the retail price of a product because it reduces the number of intermediaries profiting from it. Forward integration is a business strategy that involves expanding a company's activities to include control of the direct distribution of its products. Backward Vertical Integration Important to realize that, it is a type of vertical integration. Backward integration is a sort of vertical integration that a company takes to expand the role that it has and to fulfill all the tasks which have been completed formerly by the other business up to the particular supply chain. Backward and Forward integrations are two mixing strategies which most companies adapt to achieve competitive advantages in the market and to achieve control over the value chain of the industry under which they are operating. Although backward vertical integration is usually discussed within the context of manufacturing businesses, such as steelmaking and the auto industry, this strategy is also available to firms such as Disney that compete within the entertainment sector. Backward integration is a process in which a company acquires or merges with other businesses that supply raw materials needed in the production of its finished product. When it comes to the definition of the supply chain that we are talking about, it can be said that it is made with organizations, individuals, activities, workers, resources, as well as different technologies which come to action during the manufacturing of a particular product. In other words, backward integration is when a company buys another company that supplies the products or services needed for production. List of the Advantages of Vertical Integration … Another successful brand that has achieved remarkable success in Backward Vertical Integration is Luxottica the maker of popular brands in Optic wear such as Ray-Ban, Oakley, etc. Backward integration moves an organization into supplying some or all of the products used in producing its present products. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. For example, a company might buy their supplier of inventory or raw materials. Th… even the backward integration option unprofitable for the competing manufacturer. Backward integration is the expansion of a business to new levels of the supply chain moving in the opposite direction of the customer. Backward integration is a type of vertical integration that includes the purchase of, or merger with, suppliers. 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