Backward integration and forward integration both are the two types of vertical integration. In these two types of methods, companies either can choose backward vertical strategy or can choose the forward vertical strategy. Thus they can choose both strategies.
So in this blog, you will know everything about backward integration and forward integration. Also, you will understand the different strategies and examples of companies. How they use those techniques to enhance work. Without a delay, let’s get started.
You will know–
- Backward Integration
- Advantages of Backward Integration Strategy
- Forward Integration
- Advantages of Forward Integration Strategy
- Backward and Forward Integration Strategy
If I talk about backward integration, this is a strategy of the business. This technique is also called backwards vertical integration. But why? Yes, I’m here to tell you.
So backward integration means one company acquires the supply chain process companies for better supplies. Now you might be confused! Wait, I will explain everything with examples.
Backward Vertical Integration
Important to realize that, it is a type of vertical integration. In the vertical integration, one company started working with a different level of the value chain company or can acquire raw materials company. So that they have better resources for product manufacturing.
For example, one clothing manufacturing company started working with a fabric company or can acquire a fabric wholesale company so they have enough raw materials for making dresses. This is a backward integration where a company integrated its business by a move back to the supply chain processes.
Supply Chain Process
Take a quick look at the supply chain process. Supply chain means a system from raw materials to consumers.
Firstly, raw materials
Thirdly, finished products
After that marketing
Then shipping or transporting
And then go to distributors and retailers
At last, going to customers or consumers.
In the same way, take another example of a furniture company. If a furniture manufacturing company wants to expand its company then they can acquire a wood supply company so that the firm has enough sources of wood to make furniture.
The best example of a backward vertical integrated company is IKEA who acquired the forest company.
(Include sir’s youtube video on IKEA business model | case study)
2. Advantages of Backward Integration Strategy
Now you must be looking for the advantages of strategies used by companies. Of course, here are all advantages behind backwards vertical integration.
So whenever companies choose to move backwards they have some reasons behind it.
Firstly, control the raw materials.
Secondly, when firms or companies control their raw supplies then they can also control the production.
Thirdly, when they control the production they can manage the overall operations.
Also, they have access to improve their products. Because raw materials are the most important thing in business. Only because of it, products make better.
Mostly manufacturing industry using backwards integration so they can manage the overall manufacturing process. As you saw earlier, dress manufacture processes. There are several other manufacturers using this backwards integration for controlling the production.
3. Forward Integration
Now let’s understand the forward integration. As you saw earlier, that backwards means a company acquires those companies who provide the raw materials for manufacturing products.
In this case, forward means one company acquires the distributions or sales channel for a move forward. In the supply chain system, you already saw how supply management processes go on. If you have any doubt then check-in depth of the vertical integration process.
(Internal links to vertical and horizontal integration page)
Forward Vertical Integration
So whenever companies want to control their distribution process they acquire distribution or sales companies.
For this reason, one company can expand its businesses globally. Also, they lead the industry.
For example, again I use the furniture company as an example. So if the furniture company wants to enhance its sales they can acquire distribution and retail channels. In this case, the furniture company has more will power to control its sales.
IKEA is the best example of backward integration. Recently in April 2020, IKEA acquired an AI imaging startup called Geomagical Labs. Who provides supercharge room visualisation.
I know, you might think that IKEA is the best example of a backwards integration strategy. Then why I give you an example of forward integration?
Then you need to realise that one company can maintain both types of integration strategies. Yes, I will discuss this after sometime later. Although you can take a look at the advantages of this integration first.
4. Advantages of Forward Integration Strategy
Forward integration is the best strategy to take control of the overall distribution channel. As you can see IKEA use this technique for better consumer visualisation. The supercharge 3d visualisation will impact on the overall business. Because it will give the consumer the best experience. When the customer will be satisfied with their services, IKEA will be more profitable. So now you can understand what is the advantage of this method.
Forward means move forward, as the supply system has two parts one is backwards and another one is forward. Right now IKEA uses both of them to capture the overall market.
Secondly, the company uses this technique for a better supply system. Undoubtedly, sales and distribution channels are the key factors of any business. So definitely a company wants to enhance its distribution channel to all over the world so they can reach more and more customers.
Thirdly, when the firm acquires the distribution channels then they have all control of the overall system. Such as they can build up their own distribution network and also control by their own.
So let’s take another example of Apple.
Apple Business Integration
Apple has its own selling distribution channel. As well as it has its own manufacturing process. In this case, Apple uses both the backwards and forwards integration strategies.
Apple has its own software, hardware and retail stores. Also, have their own services company. Apple is the only company who uses all techniques and we can say that it is vertically integrated into everything.
So now you can understand how its impact if a company chose both integration strategies.
5. Backwards and Forward Integration
Still, now, you already understand the concept of integration. Then you also realise that if a company uses both strategies for developing and expanding its business then the company is called vertically integrated into both.
However, not all companies use those techniques because larger is not always nicer. Because both techniques have some advantages and disadvantages as I already indicated above.
Then look at some examples of both integrated companies.
Amazon is the biggest e-commerce business in the world right now. But did you ever ask yourself how Amazon became this big? Of course, maybe you have answers or maybe not.
Amazon became big because of its smart techniques. While Amazon has its own selling system and it also has its own distribution channel. In this case, it enhances its business by forward vertical integration.
Similarly, it has its own manufacturing process where Amazon provides its own branded products. Now, this time it is integrated backwards.
In this situation, where it monitors both the strategies similarly, it expands the overall market and captures the whole world.
Take a look at another example, Netflix.
It is also well known for its vertically integrated into both sides. Undoubtedly, the forward and backwards strategy.
Netflix started as a DVD rental organization but now it started its own movie or series making production house. Who started creating Netflix original content series. In this case, it is also vertically integrated by both sides. While on the one hand, they start creating the series on their own so they don’t depend on tv or outsource. On the other hand, they vertically integrated into the distribution system. So it can capture the overall market and industry.
(Include sir’s youtube video on Netflix business model)
Similarly, we all know that Ford is an automotive company who once started making their own engine. Later on, they started their own manufacturing to all distribution and sales channels so they can control and take the power of everything.
But, this equal integration technique does not benefit them. Because I already told you earlier that when a company becomes too big, it is always not helpful. You can also check how geographical expansion affects the business expansion, for better analysis.
(Internal link to Geographical expansion page)
So as you realise how integrations sometimes are helpful for companies and sometimes not.
In conclusion, I must say that you have clear information about all. Although, take a quick look at everything in shortly. So backwards integration and forward integration are two types of vertical integration strategies.
On one hand, backwards use for better resources and on the other hand forwards control the overall distribution systems. Different companies use those techniques for global expansion.
Also, some companies use both techniques for capturing the overall industry and overall industry. So you can choose on your own if you realize you need to expand your business by both sides.
As I already discussed above that integration has two types, one is Vertical and another one is Horizontal. Also, vertical integration divided by forward and backwards integration.
It can be a bakery who collects wheat and other raw materials from farmers. Or can be the juice distributors who collect fruits from farmers or can acquire fruit supply companies. Or a fabric company who collects cotton yarn from farmers.
It can be a mobile company who acquires an advanced technology group for better consumer experience. Or can acquire retail channels so they can do better supply.
Similarly, Disney acquires lots of retail stores so that they can sell its Disney character. It is also a forward vertical integration.
Yes nestle is vertically integrated. This company uses both backwards and forwards integration for better productivity.