Key Difference – Forward vs Backward Integration
All businesses are a part of a value system (a network where the company is connected with its suppliers and customers), where many organizations work in collaboration to deliver a product or service to the customers. Both forward and backward integration are forms of vertical integration, i.e., where the company integrates with other companies who are in different steps on the same production path; for instance, with manufacturers and distributors. Forward integration is an instance where the company acquire or merge with a distributor or retailer whereas backward integration is an instance the company acquire or merge with a supplier or manufacturer. This the key difference between forward and backward integration.
1. Overview and Key Difference
2. What is Forward Integration
3. What is Backward Integration
4. Side by Side Comparison – Forward vs Backward Integration
What is Forward Integration?
Forward integration is a business strategy where the company merge with or acquire a company that provides services to deliver the product to the end customer. This alliance can be with an intermediate distributor or a retailer.
E.g. If a brewery enters into an alliance with a company selling beer, this is a form of forward Integration
Disney provides a sound real life company example of forward integration where the company purchased more than 300 retail stores that sell merchandise based on Disney characters and movies.
What is Backward Integration?
If the company decides to enter into an alliance with a manufacturer or a supplier by way of acquisition or merger, this is called backward integration. This is done in order to achieve improved efficiency and cost savings.
E.g. A bakery business purchasing a wheat processor or a wheat farm is a form of backward integration since it is a supplier of ingredients
Ford Motor Company incorporated subsidiaries that supply key inputs to its vehicles such as rubber, metal and glass. Other popular global companies such as Amazon.com and Tesco have collaborated with suppliers in a similar way.
Figure 1: Illustration of Forward and Backward Integration in automobile industry
Some companies practice vertical integration to a greater extent where they are both backwardly and forwardly integrated. Apple is such a company where it is integrated with manufacturers of hardware and Apple Retail Stores exclusively sell company’s products.
Vertical integration facilitates healthy business communications and relationships since two or more companies do business collaboratively to serve the end customer. Since all the organizations involved have a common objective, goal congruence is well established. There are lower costs of transactions and a commitment towards high quality.
Despite the advantages forward and backward integration, these two options may not be viable for many companies. Some supplier or distributors may prefer to do business independently since they have significant capacity and the ability to enjoy greater economies of scale (cost advantage that arises with increased output of a product). For instance, DHL the world’s largest logistics company has vast economies of scale and very efficient distribution channels; thus, they will not consider entering into alliances with other companies.
What is the difference between Forward and Backward Integration?
|In forward integration, the company acquire or merge with a distributor.||Backward integration is where the company acquire or merge with a suppler or manufacturer.|
|The main purpose of forward integration is to achieve larger market share.||The main purpose of backward integration is to achieve economies of scale.|
Summary – Forward vs Backward Integration
The difference between forward and backward integration depends on whether the company integrates with a manufacturer/supplier or distributor/retailer. Other than that, they share widely similar structure, merits and demerits, as both are forms of vertical integration. The success in vertical integration always depends on the ability of two or more firms to work together towards a common goal. Partners in a vertical integration arrangement have different levels of bargaining powers and this may even lead to conflicts among them at times. These has to be controlled and resolved in order to achieve increased benefits from the alliance.
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1. “Integration in English” By Integration.png: Martin Sauterderivative work: Andrew c (talk) – Integration.png (CC BY-SA 3.0) via Commons Wikimedia