Backward Integration Overview, How It Works, Advantages

Controlling the entire supply chain will also reduce wastages, transport costs, and other costs incurred before the raw materials are delivered to the company’s warehouse. Since the company would effectively control the raw material supply, it would be less incentivized to spend on research and development. Like we saw in Carnegie Steel’s case, Backward Integration gives companies increased control over the supply chain, reducing dependency on third-party suppliers. The reduction in dependency gives companies increased control over the quality of raw materials used in production and tighter control over the quantity and delivery of the raw materials. With backward integration, you’re an owner rather than a customer making company purchases from suppliers. Your company may gain market share in your industry by getting a limited supply of raw materials before your competitors.

Business is my passion and i have established myself in multiple industries with a focus on sustainable growth. Here we have another one of the benefits which might come from backward integration and it is certainly a very important one. Here we are going to talk about one such method which is very popular amongst the businesses these days. Talk to DealRoom about how our M&A project management tool can help you avoid the pitfalls of backward integration.

DISTRIBUTION

Finally, each company then has a retail division to take care of marketing and sales of petrol, diesel, engine oils, and other related products and services. Some companies, such as Shell, even interact directly with invidivual customers through petrol stations across the world. Backward integration is a strategy that uses vertical integration to boost efficiency. Vertical integration is when a company encompasses multiple segments of the supply chain with the goal of controlling a portion, or all, of their production process. In short, backward integration occurs when a company initiates a vertical integration by moving backward in its industry’s supply chain.

• Like we saw in Carnegie Steel’s case, Backward Integration gives companies increased control over the supply chain, reducing dependency on third-party suppliers.
• A reason for buying a supplier is to increase the ability to get all the raw materials needed for manufacturing your finished product.
• The group seems to be not interested in any business with an annual return less than 12%.
• This strategy attempts to move organizations backward in the supply chain so that they have control over the raw materials.
• Its software products are placed into electronic devices and computer systems manufactured and assembled by Apple using hardware and components also manufactured by the company.
• Before one can understand backward integration, one must first understand vertical integration because backward integration is essentially a type of vertical integration.

If the manufacturer were to pay the retail chain ahead of it to control distribution, it would be an example of forward integration. A business that implements backward integration attempts to move backward in the supply chain to the control of raw materials. The supply chain process starts with the sourcing and delivery of raw materials to the manufacturer’s warehouse and ends when the final product gets to the end consumer. A Hindustan Lever spokesman said that the soaps and detergents giant would be exporting half its LAB production to Pakistan and other nations through the network of its UK principal, Unilever.

Costs can be controlled significantly from production through to the distribution process. Businesses can also gain more control over their value chain, increasing efficiency, and gaining direct access to the materials that they need. In addition, they can keep competitors at bay by gaining access to certain markets and resources, including technology or patents. Vertical integration may lead a company to monitor its distributors who ship their product. It can help the retail locations that sell their product, or their inventory suppliers and raw materials in the event of backward integration. In short, backward integration happens when a company initiates vertical integration by going backwards in the supply chain of its business.

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It will ensure that the Company receives adequate supplies as and when required without worrying about raw materials being sold to the competitor or not produced /manufactured by the suppliers. One of the significant drawbacks of backward integration is that it can lead to unintended inefficiencies with the company and also the overall market as a result of it. In some cases, after acquiring the supplier of raw materials in the production process, the company could limit competition, turning lethargic and preventing innovation. Thus companies required deep pocket and huge cost to regulate the business operations. These companies will gain control over all the units of production as well as the chain of distribution so that they can produce products which are different from their competitors.

As I mentioned at the beginning of the article, Backward Integration is a type of Vertical Integration. If a vertically integrating company acquires a company behind it in the supply chain, it is called Backward Integration. In the example stated earlier, the clothing manufacturer acquiring its raw material supplier is an example of Backward integration since the manufacturer is buying out an operator before it in the supply chain.

Hybrid Business Strategy of IBM

If used correctly, the strategy can produce the best results for the company as well as the people working in it by reducing several costs and providing other benefits. Carnegie Steel is one of the firstfamous examples of backward integration implementation. In this case, Apple uses both the backwards and forwards integration strategies. As a result of backward integration, the acquiring company obtains more control over the earlier phases of the supply chain cycle, which refers to the manufacturing and supply side of the process. The cutting of costs is probably one of the main reasons why people want to try out this method in the first place. In our supply chain of the industry, there are some markups which tell us about selling and buying of the goods which are produced.

The synergies of this business activity were to produce semiconductors and additional electronic components. This was a particularly adept move by Walmart, as milk is the ultimate commodity product, often used in economics textbooks to illustrate perfect competition. Companies that engage in backward backward integration example in india integration might become too large and difficult to manage. As a result, companies might stray away from their core strengths or what made the company so profitable. This time the foray backward was fraught with more risk as it was into the complex and volatile world of petrochemicals.

Backward integration also gives a business higher control on the cost, quality, and quantity of raw material . These synergies result in lower costs and better margins, especially in high-volume, low-margin industries like steel manufacturing or refining. There are suppliers, middlemen, as well as the distributors who are part of this supply chain.

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Entry Barriers For New CompetitorsBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. Often, companies use a backward integration strategy as a method to take over a specific part of the supply chain of a company. This supply chain begins with raw materials’ delivery to a manufacturer to a supplier and ends with the sale of the end product to the consumer. Backward integration is where a company expands across multiple supply chain segments, which are behind its value chain, to control a part or entire production process.

In this case, one of the suppliers is acquired by a retail supplier, thereby cutting the middleman out, and hindering rivalry. Backward integration can help your company expand its revenues if you also ship to external companies. This guide defines backward integration, describes the advantages and disadvantages of backward integration as a business strategy, and provides real examples of backward integration. If a company acquires another company with an extremely different culture and mindset, a synergy failure can happen between the two entities.

Seeking backward integration, during 2014 and 2015, Tesla tried to buy Simbol Materials, a lithium extraction startup company near the Salton Sea in California that has since ceased operations. The deal wasn’t completed by Tesla and Simbol, primarily due to valuation issues. Before one can understand backward integration, one must first understand vertical integration because backward integration is essentially a type of vertical integration. This was a particularly adept move by Walmart, as milk is the ultimate commodity product -often used in economics textbooks to illustrate perfect competition.

Backward integration can remove the need for middlemen and hence will cut the cost, which is required in the process as well. Backward integration is a form of vertical integration in which a company expands its role to fulfill tasks formerly completed by businesses up the supply chain. In other words, backward integration is when a company buys another company that supplies the products or services needed for production. Companies often complete backward integration by acquiring or merging with these other businesses, but they can also establish their own subsidiary to accomplish the task. Complete vertical integration occurs when a company owns every stage of the production process, from raw materials to finished goods/services. 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.

However, these suppliers were unable to consistently meet the demand for Carnegie’s mills. Then the company moved to construct its own ‘blast furnaces’ for coke production, cutting out the dependency on their suppliers and ensuring reliable and cheap supply. Vertical integration is a business strategy to take ownership of two or more key stages of its operations to cut costs. Lastly, huge surplus capacities can be created in the same industry just because many companies are eager to ensure captive input supplies.

Additionally, horizontal integration can increase market share and economies of scale. When a company produces its goods, it can lack competition, leading to higher prices and reduced quality. What other successful vertical integration examples can business owners learn from?

The starting of supply chain happens when raw materials are delivered to the manufacturer from a proper supplier, and it ends when the sale has happened of the final product, and the consumer has bought it. Similarly, it involves acquisitions, mergers, and takeovers within the same supply chain level. However, it does not allow companies to secure supplies needed to produce their products. In contrast, vertical integration helps companies have more control over their supply chain.