Backward Integration: Meaning, Importance and Examples

 By Hitesh Bhasin

Have you heard about backward integration? Confused how such a term plays a key role in managing and optimizing a business?

Then let me define it in the simplest possible manner

So, backward integration is the purchase or production of some key segments or parts of their supply chain.

Now, you may think about why it is so important for businesses? Let us discuss this right away-

There are many different methods which are taken into account by different businesses that want to ensure the success of the company in the best way.

Here we are going to talk about one such method which is very popular amongst the businesses these days.

Backward integration is a sort of vertical integration that a company takes to expand the role that it has and to fulfill all the tasks which have been completed formerly by the other business up to the particular supply chain.

The companies often tend to use the process of backward integration with the help of some assistance from other companies, but some companies have decided to take the step on their own.

These companies always pursue the path of backward integration when they need to improve the efficiency of the company and also ensure cost savings. This is to provide better results for the success of the company.

With the help of backward integration, a company will be able to cut costs of transportation, make improvements in profit margins, and provide a competitive edge to their brand and business.

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Table of Contents

Meaning of Backward Integration

When we talk about backward integration, we also name it as vertical integration, and that is achieved when the company includes different segments of the supply chain.

When it comes to the definition of the supply chain that we are talking about, it can be said that it is made with organizations, individuals, activities, workers, resources, as well as different technologies which come to action during the manufacturing of a particular product.

The starting of supply chain happens when raw materials are delivered to the manufacturer from a proper supplier, and it ends when the sale has happened of the final product, and the consumer has bought it.

Backward integration happened when the company would integrate a proper vertical integration and moves a few steps back into this particular supply chain in the industry.

Examples of Backward Integration

Scenario 1

Imagine Ford acquires an iron and steel manufacturing company for supplying the iron and steel components required for making cars then it would be Backward Integration.

Scenario 2

Instead of acquiring or buying a company, if Ford starts manufacturing all the iron and steel components on its own, then it would also be termed as Backward Integration.

What Is The Importance of Backward Integration?

Many people might still doubt the importance of the backward integration strategy, and this part of the article is going to clear out all the doubt that they have.

We can say that it is one of the most important business strategies that people can use these days because it helps the company in addressing the bottom line of it.

There are certain costs which can be significantly reduced with the help of this particular strategy that we are talking about. Also, the production and distribution costs can be cut down. So, who wouldn’t want to use this strategy in the first place, right?

Apart from that, the businesses will be able to gain more and more control over the company when it comes to the value chain. This process also helps in increasing the efficiency of the company and provides some direct access to the raw materials which are required for the production.

Related: SWOT analysis of Toyota

Advantages of Backward Integration

In the abovementioned part, we just touched on the subject of the importance of backward integration.

But here we are going to talk about the actual advantages that this strategy can have on the business. So, those who want to have an idea about the process and how it can help the business need to read this part to know more.

1) Better Control

With the help of backward integration as well as the merging with certain suppliers, the business will be able to have more and more control in the supply chain most effectively and efficiently.

The companies will be able to control the product manufacturing with the help of the information about raw materials, and that is one of the most important things for sure. They will have a certain clarity when it comes to the start as well as the end product.

In this way, the companies can have more control over the quality of materials which are being used in manufacturing. The company will also be able to secure the position when it comes to the supply of the materials as well.

2) Cost Cutting

Here we have another one of the benefits which might come from backward integration and it is certainly a very important one.

The cutting of costs is probably one of the main reasons why people want to try out this method in the first place. In our supply chain of the industry, there are some markups which tell us about selling and buying of the goods which are produced.

There are suppliers, middlemen, as well as the distributors who are part of this supply chain. Backward integration can remove the need for middlemen and hence will cut the cost, which is required in the process as well. Along with that, producing costs and distribution costs will also be decreased.

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3) Efficiency

The efficiency of the company is one of the most important factors to consider when we talk about the success of the business. While backward integration helps a great deal in cutting the costs of the company, it also helps a lot when it comes to the improvement in the efficiency of the company as well.

The entire process of manufacturing will go through a phase of improvement with the help of backward integration, which is important.

Since the company has some control over the chain of supply, the company will be able to control the production of certain materials as well as the amount of production too.

This will result in better efficiency for the company and then will further help in the cutting of costs too. There will be no products which are wasted in the process too.

4) Providing Competitive Advantage

There are many companies in the industry that need to have a competitive edge to survive in the business. So, you need to take the help of backward integration to have that particular competitive edge that you want for your particular business.

We are here to tell you that when there is a major supplier that is supplying to the business in question, there might be someone else in the line too.

With the help of backward integration, companies can ensure that they have a proper and better proposal for the supplier so that they can do the business properly.

5) Differentiation

Different companies always integrate backward to create differentiation of the products from their competitors in the industry.

These companies will gain control over all the units of production as well as the chain of distribution so that they can produce products which are different from their competitors. This is one of the main benefits that people need to know about for sure.

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Drawbacks Of Backward Integration

Now that you know all about the benefits which might come with backward integration, it is time to know the drawbacks as well. Here we are going to discuss the cons of the strategy so that you can have a better idea of the concept.

1) Huge Investments

To assure that backward integration is going in the correct direction, the company will have to make some huge improvements in the process. That can be an additional burden for the company balance sheet and can often result in several debts for the company.

2) Costs

While you might think that backward integration will always result in the cutting of costs, such is not the case.

When there is a lack in the competition from the suppliers, there will be a reduction in the efficiency of the company and that will further lead to the increase in costs which is not a good sign for the company. This can also increase the burden which is already there in your company.

3) Quality

In the case of the competition lack, there will not be an increase in innovation, and as a result, the quality of products will also decrease too. The company might also become less efficient in the process, and then there will be losses all over. Surely that is something a company wouldn’t want for itself.

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In Conclusion

Backward integration is a particular business strategy that is being used by companies from all over the world to ensure the success of their business.

If used correctly, the strategy can produce the best results for the company as well as the people working in it by reducing several costs and providing other benefits.

There might be some drawbacks to the process as well due to the lack of competition in the supplier industry. One of the most important things to remember about the strategy is that the company needs to use it correctly and at the proper time to ensure the best results.

It is for sure, going to make the production process more hassle-free and profit-driven.