Forward Integration (2024)

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Explanation

In practice, companies can opt for forward and backward integrationBackward Integration Backward Integration is a vertical integration type in which a Company buys or integrates with its supplier firms to improve efficacy, save costs, & gain more control over the production process.read more to gain a competitive advantage. It helps a company extend its reach in the market, helping it get control of the demand side; on the contrary, backward integration helps the company get control of the supply side.
In general, the industry comprises five steps in the supply chainSupply Chain A supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale.read more, raw materials, intermediate goods, manufacturing, marketing and sales, and after-sales service.
If a company plans to implement this strategy, it has to move forward in the supply chain while maintaining control of its initial place. This integration achieves greater economies of scale, higher market share, or greater control over distribution.
By removing the third parties, the company has ownership of the distribution processes, thus having greater control over the flow of the products.

How does Forward Integration work?

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Source: Forward Integration (wallstreetmojo.com)

Let us see an example. Company Intel supplies the company DELL with processors, which are intermediate goods placed within DELL’s hardware. If Intel decides to move forward in the supply chain, it may think of a mergerMerger Merger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more or acquisition of DELL to own the manufacturing portion of the industry.

Again if DELL wants to implement this strategy, it can take control over the marketing agency that the company previously used to market its end product. If Intel decides to follow them, then, in the long run, it can operate as a monopoly and dominate the market by controlling both raw material and finished product. Buy DELL cannot take over Intel if it plans to integrate forward because only a backward integration allows a movement up the supply chain.

When to Follow Forward Integration?

When the existing distributors, as well as the retailers, are expensive and are not able to match up to the distribution needs of the company.
The absence of quality distributors in the market helps the company in gaining a competitive edge over the competitors;
When the company has adequate human resources, like human resources and the financial advantage to meet the expenses of the distribution channel.
When the company has very good production facilities to satisfy the customers’ demand, in this case, it will help in strengthening the organization’s value chain from production to sales and support of the products.
When the existing retailers and distributors have a higher profit margin, Profit Margin, Profit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more which increases the cost of the product and leads to the higher price of the product, with the help of this integration, the company can reduce the cost of distribution; hence the product price will be lower thus increasing sales.

Amazon’s Example – WholeFoods Acquisition

source: money.cnn.com

Amazon’s purchase of whole foods is one of the highest-profile examples of forwarding integration strategy in the current years.
Amazon publishes the book itself and provides a publishing platform for independent writers.
It also has its transportation (Amazon Transportation Services) and distribution, which is forward and backward integration-toward suppliers-and forward integration because Amazon directly delivers to the end-users.
It is a brick and mortarBrick And Mortar Brick and Mortar is a kind of business that offers goods and services to its customers face-to-face through a physical outlet. It represents a physical presence of a business. read more Whole Foods outlet for Amazon. The Whole Foods outlets act as places to sell their products or have the customers pick them up at their convenience.
Amazon was already in the grocery business in a small way, but this acquisition made Amazon a top player in the market. Shares of traditional food retailers fell to new lows because Amazon could shake up the industry.
Similarly, DELL sells online directly to the customers, and Apple has its stores to reach out to the customers, which are also good examples of such integration strategy.

Top Examples of forwardingIntegrationStrategy

A bicycle tyre manufacturer starts manufacturing bicycles, i.e., the end product.
An FMCGFMCG Fast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more company like Britannia builds up its distribution network, including regional warehouses, to directly sell to the retailers without going via wholesalers.
A farmer, i.e., a producer of vegetables, directly sells his products at the farmer’s markets.
A manufacturing company of ski equipment opens its outlets in various ski resorts to offer customers a brand experience to improve their brand image and recognition, along with direct contact with the customers.
Myntra, an e-commerce company starts its own logistics service- Myntra Logistics, to reduce costs, improve turnover time, and reach its customers timely.
A software company starts its own consulting and software development services to not depend on a network of partners to help customers implement its products.
Flipkart, an e-commerce company, has its customer service functions instead of outsourcing them to improve customer experience.

Key Differences between forwarding and Backward Integration

Forward Integration	Backward Integration
Here the company acquires or merges with a distributor.	Here the company acquires or merges with the supplier or manufacturer.
The main objective is to achieve a larger market share.	The main objective of backward integration is to achieve economies of scale.
Here the companies are looking to expand their distribution or improve the placement of their products in the market.	Involves internal steps to reduce overall dependency on suppliers and service providers.
Gives control over the supply chain;	Gives control over purchasing power;

Advantages

Low costs due to the elimination of market transaction costs
Reduction in transportation costs.
There is a synchronization of supply and demand and proper coordination in the supply chain.
Bigger market share.
Strategic independence
Better opportunities for investment growth.
Creates an entry barrierEntry Barrier Barriers to entry are the economic hurdles that a new entrant must facein order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more to potential competitors.

Disadvantages

It leads to higher costs if new activities are not managed properly.
It may lead to lower product quality and reduced efficiency due to competition.
Increased bureaucracy and high investments may lead to lesser flexibility.
The inability to offer product variety as in-house efficiency and skillsets are required.
Possibilities of monopoly arise.
Organizational structure may become rigid due to the shortcomings of such implementations.

Forward Integration (2024)

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