Backward integration

[edit] Introduction

Backward integration is a form of vertical integration which involves a company buying some or all of its raw material suppliers from the upper side, irrespective of whether this is a single business or the entire supply chain. Such an action can avoid dependency on suppliers, maintains a constant supply of material, controls costs and improves profit margins, and can increase efficiency and competitiveness.

So, for example, a developer working on a large infrastructure contract likely to take many years to complete may find it economically viable to buy a small, local brickworks to ensure a constant supply of bricks at a reasonable cost.

Backward integration is often achieved by acquisition of, or merger with, the businesses further up the supply chain. As well as gaining a competitive advantage, the process can be used to make it more difficult for new companies to enter the market.

[edit] Forward integration

The opposite of backward integration is forward integration involving acquiring or merging with companies in the lower supply chain. This means the company seeking forward integration is looking to buy the distributors of its products or the retail stores that sell them. This can give a manufacturer better control in supplying its product to consumers as well as a better position to receive first-hand product feedback.

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