What is Backward Integration?

This is a type of vertical integration involving the merger with or purchase of suppliers up the supply chain. This type of integration is employed by firms when they expect it will improve efficiency and cost savings. Some of the improvements that companies hope to benefit from by using backward integration include the reduction in transportation costs, developing a more competitive edge, and an increase in profit margins.

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How does Backward Integration Work? 

Vertical integration involves the merger of two or more companies which are at different points on the supply chain. A supply chain is a group comprised of firms, individuals, resources, activities, technologies and other factors necessary in the manufacture and sale of products. This chain begins where the manufacturer receives the raw materials and ends with the final sale to an end consumer. 

When a company moves backward in its industry's chain, it initiates backward integration. For example, a bakery may decide to move up the supply chain by acquiring a wheat processor or a wheat farm. The bakery, therefore, purchases its manufacturer and eliminates the middle man. This means it will, thus, gain a competitive advantage against other firms in the same industry. 

Backward integration is an essential strategy in business because when executed, costs spanning from the production to the distribution process can be better controlled. 

Related Topics Strategy

• Organizational Strategies
  
• Growth-Based (Expansion) Strategies
• Inorganic Growth
• Organic Growth
• Diversification
• Concentration
• Integration or Combination (Horizontal and Vertical)
• Asset Acquisition Strategy Definition
• Horizontal Integration - Explained
• Backward Integration - Explained
• Internationalization
• Cooperative Strategy
• Consortium Definition
• Stability and Retrenchment Strategies