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The main difference between forward integration and backward integration is focus. When companies are looking forward they are usually looking to expand their distribution or improve the placement of their products, while backward movement usually involves internal steps to reduce overall dependency on things like suppliers and service providers. Stated differently, forward integration focuses on the manner in which a company oversees its product distribution, while the backward form concentrates on how a company regulates its goods and supplies.
Both are included in the broader business concept of “vertical integration,” but how they play out and what they actually require are slightly different. Ideally corporations will practice both simultaneously. While it is possible to pick one or the other, in most cases businesses do both; focus may be more heavily forward or backward depending on specific corporate needs, but in most cases one doesn’t exist without the other.
Vertical integration is usually part of a larger corporate strategy to stay ahead of the competition and secure stature in the marketplace. As an approach to management it strives to raise or lower the degree of control a business has over its supplies and the allocation of its goods and services. Businesses that practice vertical integration control every facet of production, from obtaining the necessary materials to selling the finished product. Most scholars credit the American steel magnate Andrew Carnegie with first developing the concept in the late 19th century, but regardless its origins it has become an almost universally accepted way for entrepreneurs to embrace the idea of doing what they can to improve their organizations’ fiscal growth and effectiveness. Steps facing both forward and backward play into this.
When it comes to forward-facing integration, the idea is usually for the company to get a tighter reign over its supply chain. Business experts and theorists often teach that applying this sort of integration is good business strategy generally, since it gives a bigger and more complete picture of all the players involved; giving it the more formal “forward” name is in many cases simply titling a practice that is, or often should, already be happening.
In practice this can be big or small. The most obvious examples tend to involve direct control, like a brewery purchasing a chain of taverns in which to serve its drinks or a wholesale company acquiring a retailer where its goods are sold. Absorbing and acquiring competition is a big part of the forward-looking prong, but it isn’t required. Depending on the circumstances, smaller actions could also qualify. A farmer selling his produce at an area market instead of to a distributor is one example.
Backward integration, on the other hand, tends to be more concerned with giving a company control over purchasing power and market share when it comes to regulating goods and supplies. Simply put, the goal is for the company to increase its purchasing power while diminishing that of its suppliers. Acquiring suppliers of materials can lower a business’ reliance on outside vendors, and can often improve internal efficiency, too.
One example is a baked-goods store purchasing a wheat farm so it can lower its dependency on flour suppliers. Other examples include a copper producer who buys a smelter and mine in an attempt to gain a continuous inventory of the raw materials needed to manufacture its product, or an automobile manufacturer who acquires tire, glass, and metal companies. In all of these instances the parent company is improving its ability to do things for itself.
The biggest benefits of vertical integration, whether forward or backward, include being able to guarantee the cost, quality, and accessibility of supplies, as well as efficiencies gained from synchronizing the manufacturing of supplies with the company's use. Businesses following this model often establish subsidiaries that either disseminate or advertise the goods of the company to customers. The subsidiaries also could use those goods themselves. In many instances the company is either consolidating with or purchasing another company that is below it on the supply chain, or is at least looking for fringe opportunities for efficiency. The benefits overall tend to be bigger profits, better gains, and improved productivity over time.
I have been trying to wrap my head around these concepts for week sin my business integration class. Before I started I knew that business integration, as a whole, is quite complex and there are many comparisons to be made and analyzed as a company tries to figure out the best direction to go in, but it's really crazy just how incredibly complex it gets!
Thanks for a clear and concise article, wisegeeks!
Thank you! The most well-written, to the point comparison on the subject I have found. Kudos.