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What Is Forward Integration
Forward integration is a type of business strategy where a company attempts to acquire or control business activities that are further down in its supply chain.
In other words, forward integration is when a company advances in its supply chain.
For example, a company can acquire distributors or retailers allowing it to distribute its own products or sell them at retail to end customers.
A standard supply chain is composed of five steps starting with raw materials, intermediate goods, manufacturing, marketing and sales, and then after-sale services.
When a successful forward integration is achieved, a company can have greater operational efficiency over more steps in its supply chain and achieve more power over its suppliers, manufacturers, and distributors.
A company can either make investments to engage in the business activities that are downstream in its supply chain or acquire companies in such segments.
Typically, forward integration acquisitions involve a company buying out its clients.
Keep reading as I will break down further the meaning of forward integration and go over examples.
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Forward Integration Benefits
There are many benefits to engaging in forward integration strategies.
The most important benefit companies are looking to achieve when implementing forward integration is to remove the middleman downstream in their supply chain.
By owning or controlling downstream supply chain operations, a company will be able to optimize economies of scope and achieve greater profitability.
In addition, by cutting out intermediary organizations, a company can exert a greater level of control and influence over its manufacturers and suppliers upstream in its supply chain.
When a company has more control over its supply chain, it can find ways of achieving economies of scale allowing it to reduce its cost per unit and achieve greater profitability.
With greater profitability, the company can keep moving forward in its supply chain until it reaches end customers.
Ultimately, the company can increase its market share by eliminating various intermediate transactions allowing it to offer its products and services at more competitive rates.
Dominating the steps in your supply chain will result in a company consolidating its market power and making it more difficult for competitors to enter into the same space.
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Forward Integration Drawbacks
Although there are important benefits to forward integration, you should also be aware of its drawbacks.
The most important drawback of forward integration is that a company can lose focus on its core strengths.
In other words, by getting into business activities that are ahead in its supply chain, the company dilutes its core competencies and starts losing competitiveness in the market.
Another important drawback is that a company fails to achieve the synergies that it hoped to achieve.
Without the anticipated synergies, a company’s operations become less efficient than prior to engaging in forward integration.
Also, companies that are involved in more downstream steps in their supply chain may find that they get tangled up in bureaucratic inefficiencies.
Since they are responsible for more steps in their supply chain, business inefficiencies and bureaucracy can plague them throughout their entire supply chain steps.
Ultimately, a company may inadvertently find itself dealing with higher costs per unit.
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Forward Integration vs Backward Integration
Both forward integration and backward integration are a form of vertical integration strategies.
The main difference between forward integration and backward integration is that a company moves forward in its supply chain rather than backward.
For example, a software chip maker can acquire a computer manufacturer allowing it to move forward in the supply chain for personal computers.
This is an example of forward integration.
Backward integration is when a personal computer maker acquires its computer chip supplier.
In this case, the company is moving up in its supply chain.
In forward integration, companies will tend to acquire or merge companies that were previously their customers.
On the other hand, in backward integration, companies will acquire or merge with companies that were previously their supplier.
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Forward Integration Examples
Let’s look at a few examples of forward integration to better understand the concept.
Example 1
Today, the Internet allows companies to achieve forward integration more easily and affordably than in the past.
For example, a product manufacturer can invest in an e-commerce website allowing it to sell its own products directly to end customers.
This way, it is effectively cutting out wholesalers and distributors from the equation.
Example 2
A classic example of a forward integration strategy is when a clothing manufacturer opens up its own boutiques to sell its products to end customers.
Rather than dealing with retailers, the manufacturer can offer better prices to end customers as there’s no retailer in between looking to make a profit.
Example 3
An example that many of you will recognize is when Apple launched its own Apple retail stores.
In this case, Apple not only produces its own Apple mobile phones and computers but sells it through its own retail stores to end customers.
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Takeaways
So there you have it folks!
What does forward integration mean?
In a nutshell, forward integration is when a company moves further in its supply chain by owning or controlling the distribution and sale of its products and services.
Companies adopting forward integration strategies will acquire or merge with companies that were previously their customers.
For example, a coffee producer acquires the coffee distributors that were previously its customers.
Forward integration allows a company to increase its market share, gain control over its distribution channels, achieve a greater competitive advantage, and create a higher barrier to entry for competitors.
On the other hand, since forward integration can be very costly, it’s important that companies properly assess the value of this strategy for their business.
Now that you know what forward integration means and how it works, good luck with your research!
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