Backward integration

Backward integration is a business strategy where a company expands its operations upstream by acquiring or merging with suppliers or manufacturers of its raw materials or components.
Written by
Reviewed by
Updated on May 29, 2024
Reading time 3 minutes

3 Key Takeaways

Copy link to section
  • Backward integration involves a company moving upstream in its supply chain.
  • It can lead to cost savings, increased control over quality, and reduced reliance on external suppliers.
  • However, backward integration can also require significant investment and may pose challenges in managing new operations.

What is Backward Integration?

Copy link to section

Backward integration is a form of vertical integration where a company expands its operations to include the production of inputs or raw materials that it previously purchased from external suppliers. This can be achieved through acquiring existing suppliers, merging with them, or establishing new production facilities to manufacture the required inputs in-house.

Importance of Backward Integration

Copy link to section
  • Cost Reduction: By owning and controlling the production of raw materials or components, companies can reduce their reliance on external suppliers and potentially lower their input costs.
  • Quality Control: Backward integration allows companies to have greater control over the quality of their inputs, ensuring consistency and reducing the risk of supply disruptions.
  • Increased Bargaining Power: By becoming their own supplier, companies can gain leverage in negotiations with other suppliers, potentially securing better terms and prices.
  • Competitive Advantage: Backward integration can create barriers to entry for new competitors, as it requires significant investment and expertise to replicate the integrated supply chain.

Real-World Applications

Copy link to section

Backward integration has been a common strategy across various industries.

In the oil and gas industry, companies like ExxonMobil and Shell have integrated upstream by acquiring or developing their own oil fields and refineries. This has allowed them to control the entire production process, from extraction to refining and distribution.

In the technology sector, companies like Apple and Tesla have integrated backward by designing and manufacturing their own chips and batteries, respectively. This gives them greater control over the quality and performance of their products.

In the retail industry, companies like Amazon and Walmart have integrated backward by developing their own private label brands and sourcing products directly from manufacturers. This allows them to offer lower prices and increase their profit margins.

However, backward integration is not without its challenges. It can require significant upfront investment in new facilities, technologies, and expertise. Companies may also face difficulties in managing new operations and coordinating with existing business units.

Despite these challenges, backward integration can be a valuable strategy for companies seeking to improve efficiency, reduce costs, and gain a competitive edge in their respective markets.


Sources & references

Arti

Arti

AI Financial Assistant

  • Finance
  • Investing
  • Trading
  • Stock Market
  • Cryptocurrency
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...