backward
integration is a form of vertical integration, enables businesses to
control their suppliers, and thus improve the supply chain efficiency. To
gain a competitive edge over rivals and save money firms join with their
suppliers and purchase them. In certain markets, this may cause monopolies
or antitrust violations. Many organizations can benefit from this
approach, however they should be aware of the potential risks that come by
backward integration.
Forward Integration
When
a company chooses to take over the tasks which its suppliers used to perform
this is referred to as backward integration. When
a business purchases the company that provides its customers in raw material,
items or services, this occurs. A company that makes knitwear and buys the
wool it needs from a farm, for instance it would integrate backwards if it
acquired the sheep farm. Backward integration lets businesses be in
complete control of areas of the supply chain and reduces
inefficiencies and the cost. The firm believes that controlling certain
parts that comprise its supply chain instead of relying upon outsiders that it
does not have control, can cut costs, increase margins, and distribute more
quickly and increase the number of customers it serves.
BIP Advantages for Backward
Integration
Backward
integration offers a number of advantages one of that is total control. A
business will be in complete control from the moment it acquires raw materials
to the point it can sell the finished product, contingent on the suppliers it's
selected. The corporation is in charge of its raw material's quality,
their quality, speed at that they are transformed into finished products, as
well as the speed at that they are provided to customers in this manner. Backward
integration is an advantage in terms of competitiveness. If a supplier
provides multiple businesses, a company who purchases the supplier will gain an
advantage over the competition since the rival will need to locate a new
supplier.
Backward Integration Benefits
There
are many challenges and risks that come in backward integration. companies
that aren't able to effectively control their supply chains following buying
suppliers are at risk of loss of money and making lower-quality products. There
is a chance that cost of managing suppliers aren't in good interests of the
company or that the business isn't equipped to produce goods. Additionally,
buying suppliers' competitive advantages could cause a lack of competition,
which can lead to a lack in innovation. In addition, buying the services
of a company requires integration with the personnel of its employees, which
can be difficult if there are conflicts of cultures or unwelcome bureaucracy.
An Example from the Real World
Netflixis
among the most effective and latest examples of backward integration. Netflix
was initially an online rental service for DVDs, users logging onto their
online accounts choosing films, and then receiving them by mail. As the
Internet changed and the capabilities of streaming videos grew, Netflix
transitioned to offering episodes and movies through streaming services. Netflix
reached agreements for licensing with media companies to make these movies and
episodes accessible. Netflix eventually integrated backwards by producing
its own content which allowed them to make more revenue. This reduced the
dependence of the company on artists from outside and satisfied the demand of
its clients for more exclusive content. Netflix's original content and not
licensed programming is the primary draw for its users in the past.
Conclusion
In
your strategy for
growth As part of their business plan, businesses must
carefully evaluate the advantages and risks of an forward
integration approach. Midsized businesses should be aware
as they may not be ready to take on the added danger of purchasing suppliers. Backward
integration, on other hand, can be advantageous when controlling suppliers
results in greater profit margins and also ensures the availability of the
materials needed to manufacture.
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