Backward and Forward Integration

Introduction

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. These strategies are one of the major concerns while developing future plans for an organization. Together these two strategies are known as vertical integration.

The process of backward and forward integrations is shown below:

What is Backward Integration?

In this case, companies try to control over their supply chains and try to obtain raw materials directly; eliminating the suppliers. Such an upstream movement in the supply chain is termed as Backward Integration. The term “Backward” is because the company moves backward in the value chain.

It can be beneficial for the company as it gets the raw materials at reduced costs. With this, companies sales can be enhanced and its bottom line gets healthier. Ultimately, companies can get a better control over their business operations. Reduced dependency on suppliers also ensures the availability of raw materials on time.

Example

A furniture producer when buys forests to obtain wood; rather buying it through a supplier, then falls in the category of Backward Integration; as the furniture manufacturing unit is not dependent on a supplier to obtain woods.

What is Forward Integration?

Businesses choose forward integration when a manufacturer decides to execute distribution and/or retail functions within the distribution channel. In other words, it means “eliminating the middleman.” In such a situation, manufacturers may eliminate the wholesaler to sell directly to retailers or eliminate the retailer to sell directly to customers. The main aim is to reduce the cost and increase the efficiency of the firm by getting closer to the end customer.

Example

Let’s take furniture store as an example of forward integration, which has its own manufacturing, control over the distribution/retailer. As it cuts out the middleman, it can easily offer a product with the brand name at a much lower price. Furthermore, they offer a wider range of products at the best price than you can get from the regular retailer.

Final Thought

The integration strategies may not always work for the organization due to many reasons. Scarce of sufficient resources that are required to venture into a new industry is one of the reasons. Sometimes the alternatives to integration strategies offer more benefits.

The following two issues need to be considered by an organization for taking a decision on the integration strategies.

Costs: The organization should choose integration strategies when the cost of making the product in-house is lower than the cost of buying that product in the market.

The scope of the organization: While planning to adopt integration strategies, the firm needs to consider, whether moving into a new area of activities will weak its current competencies or not. As in most cases, new activities in the organization are also normally harder to control and manage. Therefore, it is advisable for an organization to analyze every aspect associated with it before adopting any strategy.