What Is Meant By Backward Integration

Backward integration is a type of vertical integration where a company takes on responsibilities that were previously handled by companies higher up the supply chain. In other words, backward integration occurs when a business acquires a supplier of goods or services for its own operations. For instance, a business might purchase raw materials or goods from its supplier. 

 

Although companies frequently carry out backward integration through the acquisition or merger of these with other businesses, they can also create their own subsidiary to carry out the process. When a corporation owns every step of the production process, from raw materials to completed goods or services, this is referred to as complete vertical integration.

 

•    Backward integration is the process through which a corporation takes on responsibilities that were previously handled by suppliers higher up the supply chain.

 

•    Backward integration frequently entails the acquisition of or a merger with a supplier of the company's goods.

 

•    When backward integration is anticipated to increase efficiency and save costs, businesses embrace it.

 

•    Backward integration can be capital demanding, which means that acquiring a portion of the supply chain frequently costs a sizable quantity of money. 

 

Integration is frequently used by businesses to gain control of a section of their supply chain. The collection of people, businesses, resources, tasks, activities, and technological advancements involved in the production and distribution of a good is known as a supply chain. The distribution of raw materials from a supplier to a manufacturer marks the beginning of the supply chain, which concludes with the sale of a finished good to an end customer. 

 

A technique for increasing efficiency is backward integration, which makes advantage of vertical integration. Vertical integration is when a business integrates different supply chain segments with the intention of fully or partially controlling their production process. 

 

A firm may use vertical integration to gain control over the distributors that distribute its goods, the stores that sell them, or, in the case of backward integration, the inventories and raw material suppliers. Briefly put, backward integration happens when a business starts a vertical integration by going backward in its industry's supply chain.

 

A bakery buying a wheat farm or a wheat processor is an example of backward integration. This situation involves a retail supplier buying one of its manufacturers, eliminating the middleman and reducing competition. 

 

A sort of vertical integration known as "forward integration" is the acquisition or management of a company's distributors. A company that generally sells its clothing to department shops for retail sales but instead opens its own retail stores is an example of forward integration. As an alternative, backward integration may entail a clothing manufacturer purchasing a textile business that makes the fabric for their clothing.

 

In short, forward integration entails purchasing a portion of the supply chain that comes after the company's manufacturing process, whereas backward integration entails purchasing a portion of the chain that comes before. 

 

Backward integration allowed Netflix Inc., which began as a provider of TV and movie DVD rentals, to grow its business model by producing original content.

 

When backward integration is anticipated to increase efficiency and save costs, businesses embrace it. Backward integration, for instance, could reduce transportation expenses, increase profit margins, and boost the company's competitiveness. Costs can be greatly reduced throughout the production and distribution processes. 

 

Additionally, businesses can improve their productivity and have direct access to the commodities they require while having more control over their value chain. By securing access to specific markets and resources, such as technology or patents, they can also keep rivals at away. 

 

Backward integration can be capital demanding, which means that acquiring a portion of the supply chain frequently costs a sizable quantity of money. Backward integration may require a corporation to incur significant debt if it wants to buy a supplier or a production site. Even though the corporation might have cost reductions, the extra debt's cost could offset any savings. 

 

Additionally, the company's ability to obtain future approval for additional credit facilities from their bank may be hampered by the additional debt on its balance sheet. In some circumstances, relying on independent distributors and suppliers might be more efficient and economical for businesses. 

 

If a supplier could create more goods at a cheaper cost as the number of units produced rises, backward integration would be undesirable. In some cases, if the supplier also served as the manufacturer, it might be able to provide input items at a lower cost than the latter.

 

Backward-integrating businesses run the risk of growing too big and becoming challenging to manage. As a result, businesses may depart from their core competencies or the things that make them so profitable. 

 

Backward integration is practiced by numerous big businesses and conglomerates, notably Amazon.com Inc. In 1995, Amazon launched as an online book seller, buying books directly from publishers. It established a separate publishing division in 2009 and bought the rights to both classic and contemporary works. It now has numerous imprints.

 

While it continues to sell books created by others, its own publishing initiatives have increased earnings by drawing readers to its own goods, assisting in the management of distribution on its Kindle platform, and giving it influence over rival publishing houses. In other words, Amazon used backward integration to grow its company and turn into a publisher and reseller of books.