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Backward Integration – Definition

Backward Integration Definition

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.

A Little More on What is Backward Integration

Vertical integration involves the merge 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. This is called backward integration.

Backward integration is an essential strategy in business because when executed, costs spanning from the production to the distribution process can be better controlled and this improve a company’s bottom line. It also grants significant control to the company’s value chain, and this increases efficiency since the company has direct access to the required materials.

This strategy also aids companies in staying ahead of the competition since they gain access to various markets and resources as well as technology and patents. The opposite of backward integration is forward integration which entails the purchase and control of distributors.

For example, if the bakery discussed above sold its goods through a chain of retail stores or directly to consumers at farmers markets, then it would be employing a forward integration strategy. If the same bakery did not own anything such as a wheat farm or a retail store, then it would not be vertically integrated.

Sometimes vertical integration is not so good because various firms find that it is more efficient and effective in terms of cost, to rely on independent distributors and suppliers. If an independent supplier achieves great economies of scale and provides lower cost inputs, then backward integration would be undesirable.

An example of backward integration

Amazon Company employed backward integration when it expanded its business to become a book retailer and a book publisher. Amazon was initially an online retailer of books and purchased these books from traditional publishers. After is started printing and marketing its books, it reduced the cost of procuring the books. It also differentiated itself from other competitors since it chose where to distribute its published books and regulated the sale of these books.

References for Backward Integration

Academic Research on Backward Integration

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