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What Is the Difference Between Forward Integration and Backward Integration?

Vertical integration takes two forms: forward and backward integration.
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  • Written By: Mary S. Yamin-Garone
  • Edited By: J.T. Gale
  • Last Modified Date: 06 April 2014
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In the competitive world of business, companies generally do whatever it takes to secure their stature in the marketplace. One of the most effective means to this end involves what is referred to as vertical integration, which takes on two forms: forward and backward integration. Forward integration focuses on the manner in which a company oversees its product distribution. On the other hand, the backward form concentrates on how a company regulates its goods or supplies.

World-renowned steel tycoon Andrew Carnegie pioneered the concept of vertical integration. This led other entrepreneurs to embrace the idea of doing what they could to improve their organizations’ fiscal growth and effectiveness. This approach to management 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.

When practicing this type of integration, a business typically will establish subsidiaries that either disseminate or advertise the goods of the company to customers. The subsidiaries also could use use those goods themselves. In essence, the company is either consolidating with or purchasing another company that is below it on the supply chain.

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It generally is considered a good business strategy for a company to apply forward integration. Doing so ensures the company has a tighter rein over the supply chain where the sale takes place. Examples include a farmer selling his produce at an area market instead of to a distributor, a brewery purchasing a chain of taverns, and a wholesale company purchasing a retailer.

Backward integration focuses strictly on regulation of goods or supplies. A company hopes to expand its business and profits by acquiring suppliers of materials in an attempt to lower its reliance on those vendors. Simply put, the goal is for the company to increase its purchasing power while diminishing that of its suppliers.

Benefits to this type of integration 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. 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 chooses to purchase a smelter and mine in an attempt to gain a continuous inventory of the raw materials needed to manufacture its product, and an automobile manufacturer who acquires tire, glass, and metal companies.

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Discuss this Article

MightyMe
Post 2

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!

anon93748
Post 1

Thank you! The most well-written, to the point comparison on the subject I have found. Kudos.

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