What Is Forward Integration?
Forward integration is a business strategy that involves a form of downstream vertical integration whereby the company owns and controls business activities that are ahead in the value chain of its industry, this might include among others direct distribution or supply of the company's products. This type of vertical integration is conducted by a company advancing along the supply chain.
A good example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets. Or, a clothing label that opens up its own boutiques, selling its designs directly to customers instead of or in addition to selling them through department stores.
How Forward Integration Works
Often referred to as "cutting out the middleman," forward integration is an operational strategy implemented by a company that wants to increase control over its suppliers, manufacturers, or distributors, so it can increase its market power. For a forward integration to be successful, a company needs to gain ownership over other companies that were once customers. This strategy differs from backward integration in which a company tries to increase ownership over companies that were once its suppliers.
A company implements forward integration strategies when it wants to exert a wider control over the value chain of its industry, optimize economies of scope, and target better cost structure, thereby increasing its industry market share and profitability.
The rise of the internet has made forward integration both easier and a more popular approach to business strategy. A manufacturer, for example, has the ability to set up an online store and use digital marketing to sell its products. Previously, it had to use retail companies and marketing firms to effectively sell the products.
The goal of forward integration is for a company to move forward in the supply chain, increasing its overall ownership of the industry. Standard industries are made up of five steps in the supply chain: raw materials, intermediate goods, manufacturing, marketing and sales, and after-sale service. If a company wants to conduct a forward integration, it must advance along the chain while still maintaining control of its current operations—its original place in the chain, so to speak.
Key Takeaways
- Forward integration is a business strategy that involves expanding a company's activities to include the direct distribution of its products.
- Forward integration is colloquially referred to as "cutting out the middleman."
- While forward integration can be a way to increase a company's control of its product and profits, there can be a danger of diluting the core competencies and business.
Special Considerations for Forward Integration
Companies should be aware of the costs and scope associated with a forward integration. They should only engage in this sort of strategy if there are cost benefits and if the integration won't dilute its current core competencies. Sometimes it is more effective for a company to rely on the established expertise and economies of scale of other vendors, rather than expand on its own.
Example of Forward Integration
For example, the company Intel supplies Dellwith intermediate goods—its processors—that are placed within Dell'shardware. If Intel wanted to move forward in the supply chain, it could conduct a merger or acquisition of Dellin order to own the manufacturing portion of the industry.
Additionally, if Dellwanted to engage in forward integration, it could seek to take control of a marketing agency that the company previously used to market its end-product. However, Dellcannot seek to take over Intel if it wants to integrate forward. Only a backward integration allows a movement up the supply chain its case.
FAQs
Forward integration is a business strategy that involves a form of downstream vertical integration whereby the company owns and controls business activities that are ahead in the value chain of its industry, this might include among others direct distribution or supply of the company's products.
What are the cons of forward integration? ›
Disadvantages Of Forward Integration
- If additional activities aren't managed appropriately, they will result in increased costs.
- Due to a lack of competition, product quality and efficiency may suffer.
- Increased bureaucracy and large investments may limit flexibility.
Forward integration is a business strategy that involves a form of downstream vertical integration whereby the company owns and controls business activities that are ahead in the value chain of its industry, this might include among others direct distribution or supply of the company's products.
What are the advantages and disadvantages of integration strategy? ›
The advantages include increasing market share, reducing competition, and creating economies of scale. Disadvantages include regulatory scrutiny, less flexibility, and the potential to destroy value rather than create it.
What happens in forward integration quizlet? ›
What is a forward integration? Takes information entered into a given system and sends it automatically to all downstream systems and processes.
What are the disadvantages of integrating? ›
Disadvantages of Integration:
Integration may threaten the coherence and consistency of current arrangements that have the support of everyone involved. Relevant specialists may continue to concentrate on the area of their core expertise and further specialist training may not be needed.
What are the disadvantages of forward derivatives? ›
The disadvantages of forward contracts are:1) It requires tying up capital. There are no intermediate cash flows before settlement. 2) It is subject to default risk. 3) Contracts may be difficult to cancel.
What is forward integration in simple words? ›
Forward integration is a type of vertical integration that involves taking control of later stages in the production process while continuing to manage earlier phases. This strategy can have many benefits for companies in various industries, helping them increase their market share and maximize profits.
Is Netflix forward integration? ›
The Netflix Model
Netflix is one of the most significant backward vertical integration examples in the entertainment industry.
What are the advantages of forwards and backwards integration? ›
Forward integration enables the organization to respond to changes in demand more effectively, while the backward integration allows the organization to seize a stronger control over its quality of raw material supply and, thereby, its quality of final products.
Conclusion. Forward integration if managed well is a great strategy that can serve as a boon to the business and help in increasing the market share and gain market hold.
Is forward integration good for suppliers? ›
Forward integration is a strategy adopted by businesses to reduce production costs and improve the firm's efficiency by acquiring supplier companies and, therefore, replacing the third party channels and consolidating its operations.
What are the three integration strategies? ›
There are three forms this strategy takes: backward integration, forward integration, and balanced integration. Each one involves a firm branching out within its supply chain and taking control of a part of it to gain more control of manufacturing, distributing, and/or selling their products.
What are the benefits integrated strategies? ›
Facilitate mergers and acquisitions. Increase collaboration with business partners. Reduce time-to-market. Optimize IT resources and reduce costs.
What are the benefits of forward integration quizlet? ›
It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.
Which statement best describes forward integration? ›
Which of the following statements best describes forward integration? A firm goes into the business of its former buyers, rather than continuing to sell products to them.
What is the difference between forward and backward integration? ›
In short, backward integration involves buying part of the supply chain that occurs prior to the company's manufacturing process, while forward integration involves buying part of the process that occurs after the company's manufacturing process.
What is the greatest weakness of system integration? ›
One of the main disadvantages of system integration is that it can create security problems. In a system integrative model, one hack or misrepresentation could gain access to the entirety of information instead of just a few isolated systems.
What are 2 disadvantages of vertical integration? ›
Disadvantages of vertical integration
- Vertical mergers will have fewer economies of scale because production is at different stages of supply.
- Mergers can often create new problems of communication and coordination within the bigger more disparate firm.
Disadvantages of horizontal integration include regulatory scrutiny, the reduction of choices for consumers, less internal flexibility, and the potential to destroy value rather than create it.
There is credit risk involved in forward contract because the counterpart may not deliver the asset to you at the time of delivery. Since a forward contract is not exchange traded, a buyer or seller cannot lock in gains/losses on the contract's value prior to the agreed settlement date.
What are two 2 advantages of a forward contract? ›
Advantages
- Hedging: The preset specifications in the agreement made by the parties allow them to manage risks and protect themselves from market fluctuations that can affect the asset price.
- Customization: The parties involved in the agreement make specific requirements, including expiry date, lot size and pricing.
Derivatives can also help investors leverage their positions, such as by buying equities through stock options rather than shares. The main drawbacks of derivatives include counterparty risk, the inherent risks of leverage, and the fact that complicated webs of derivative contracts can lead to systemic risks.
Is Apple a forward integration? ›
Apple Inc. has employed a vertical integration strategy for decades. Its software products are placed into electronic devices and computer systems manufactured and assembled by Apple using hardware and components also manufactured by the company.
Is Nike a forward integration? ›
Nike reducing dependence on wholesalers, distributors & retailers, and prioritizing direct-to-consumer sales is an example of Forward Integration.
Does Amazon use forward integration? ›
One well-known real-world example of forward integration is Amazon's purchase of Whole Foods for $13.7B, allowing it to expand into brick-and-mortar stores to sell food products to consumers through retail stores rather than exclusively through e-commerce.
Is Disney forward or backward integration? ›
A forward vertical integration strategy involves a firm moving further down the value chain to enter a buyer's business. Disney has pursued forward vertical integration by operating more than three hundred retail stores that sell merchandise based on Disney's characters and movies.
Does IKEA use forward integration? ›
Ikea. Ikea, a leading name in the wooden furniture game, is also one of the best examples of vertical integration. The organization takes the last spot in the supply chain by acting as a retailer. It sells its product directly to the end-users.
What is the main purpose of forward integration and backward integration? ›
The main purpose of forward integration is to achieve larger market share. The main purpose of backward integration is to achieve economies of scale.
What are the advantages of backward integration? ›
Advantages of backward integration include:
- Better control.
- Securing a supply of needed raw materials for a product.
- Reducing costs through economies of scale.
- Eliminating inefficiencies.
- Gaining in-house technology skills for competitive advantage and differentiation.
The correct option is D) backward; forward
Backward integration is often more profitable than forwarding integration in many situations.
Which company has used forward integration? ›
Companies that have used forward integration to great effect include Nike, Amazon, and Apple. Nike used the strategy to increase DTC sales while Apple established its now famous Apple Store to increase the number of customer touchpoints.
What are the 5 system integration methods? ›
We'll discuss the pros and cons of each type and when to use each one.
- Manual data integration. ...
- Middleware data integration. ...
- Application-based integration. ...
- Uniform access integration. ...
- Common storage integration (sometimes referred to as data warehousing)
To better understand what integration is, one should examine the different approaches used. There are many forms of curricular integration developed, but research has found three main types of integration: multidisciplinary, interdisciplinary, and transdisciplinary.
What are the two basic integration strategies? ›
Horizontal integration and vertical integration are two different growth strategies that can help companies expand their business.
What are the two types of integration strategies? ›
Strategic integration frameworks could be broadly categorized into two major divisions. These are: Vertical Integration Strategy. Horizontal Integration Strategy.
What is the main purpose of integration strategy? ›
Integration strategies are an important tool in building a competitive business. Businesses can use various integration strategies to increase their influence in supply and distribution or lessen competition. This can help them consolidate and expand their place in the market and increase their competitiveness.
How do you achieve strategic integration? ›
How to develop an integration strategy
- Data consistency – e.g. ensuring customer data in 3 different systems is the same.
- Multistep process – e.g. implementing a business process like Quote-to-Cash across systems.
- Composite services – e.g. a new application or services using data from multiple systems.
The Benefits of Vertically Integrated Businesses
The risks of investment are lower because there is less uncertainty, which places companies in better positions to fight off foreign competition. Most importantly, a vertically integrated model allows a company a greater degree of control over its product.
What are the 7 stages of economic integration? ›
Specialists in this area define seven stages of economic integration: a preferential trading area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union, and complete economic integration.
Advantages of vertical integration include resilience to supply chain disruptions, market power, and economies of scale. Drawbacks of vertical integration include high costs, less flexibility, and loss of focus.
What is a good example of forward integration? ›
A good example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets.
What are two benefits of the business vertical forward integration? ›
A vertical integration strategy can deliver advantages, including greater economies of scale, lower variable production costs, decreased logistics costs and quality concerns and — yes — increased profitability.
What are two strategic advantages of a forward vertical integration strategy? ›
Vertical integration requires a company's direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain. The advantages can include greater efficiencies, reduced costs, and more control along the manufacturing or distribution process.
Why is forward integration important? ›
Benefits of Forward Integration
Generally, the strategy eliminates various transaction and transportation costs. This subsequently results in a lower final price for the company's product. Thus, a company can achieve greater market share through lower product prices.
Which of the following answer is true about forward integration? ›
Which of the following is true about forward integration as a diversification strategy for a firm? It refers to introducing a new product into a new market that is not related to the existing business.
What is an example of forward integration quizlet? ›
Forward integration is the gaining of ownership or increased control over distributors or retailers. An example of forward integration is Gateway Computer Company opening its own chain of retail computer stores. Backward integration is the seeking of ownership or increased control of a firm's suppliers.
What is a major potential drawback of backward or forward integration? ›
Disadvantages of Backward Integration
Backward integration can be capital intensive, meaning it often requires large sums of money to purchase part of the supply chain. If a company needs to purchase a supplier or production facility, it may need to take on large amounts of debt to accomplish backward integration.
What are the disadvantages of forward exchange market? ›
The disadvantages of forward contracts are: It requires tying up capital. There are no intermediate cash flows before settlement. It is subject to default risk.
What are the cons of backward integration? ›
Disadvantages of Backward Integration
By acquiring the supplier of raw materials required in the production process, the company will limit competition, resulting in sluggishness and lack of innovation. The company will be less motivated to spend money on research and development.
Implementing backward integration can derive benefits such as increased control, cost reduction, efficiency, competitive advantage, barriers to entry, differentiation, etc. However, it can also cause certain disadvantages for the company, such as the incurring of a huge investment.
What are the strategic disadvantages of a forward vertical integration strategy quizlet? ›
Disadvantages of Vertical Integration:
- May increase cost of inputs.
- Suppliers = less incentive to be efficient (guaranteed purchase)
- Company is tied in to old/high-cost technology.
Forward Contract: Cons
Currency fluctuates in both directions; a forward contract protects your business if the value of the dollar goes down, but there is the possibility that it could also go up. If the dollar rises, you may be locked into a lower rate than the market rate.
What are the risks of a forward contract? ›
There is credit risk involved in forward contract because the counterpart may not deliver the asset to you at the time of delivery. Since a forward contract is not exchange traded, a buyer or seller cannot lock in gains/losses on the contract's value prior to the agreed settlement date.
What are the advantages and disadvantages of forward market? ›
Advantages include: fixes the future rate, thus eliminating downside risk exposure.
...
Disadvantages include:
- contractual commitment that must be completed on the due date (option date forward contract can be used if uncertain)
- no opportunity to benefit from favourable movements in exchange rates.
- availability - see above.
The Disadvantages of Vertical Integration
- High Capital Requirements. Vertical integration is not a viable strategy for small and medium enterprises in most cases. ...
- Risk of Increased Organisational Inefficiency. ...
- No Easy Exits. ...
- Lack of Familiarity. ...
- Reduced Flexibility in the Supply Chain.
Vertical integration could potentially hurt a company when new technologies evolve quickly and become available. The company is then forced to reinvest in the new technologies in order to stay competitive, which is costly and may require retraining of employees.
Which is better forward or backward integration? ›
Forward vs Backward Integration
The main purpose of forward integration is to achieve larger market share. The main purpose of backward integration is to achieve economies of scale.
Is Apple backward integration? ›
Some of the most well-known examples of backward integration include Apple Inc. and Carnegie Steel. Apple Inc. has employed a vertical integration strategy for decades.
