Advantages and Disadvantages of Forward Integration
Forward integration is a strategy proceed by corporates to gain authority over the business activities that are ahead in the value chain. Forward integration is a type of vertical integration.
The company reaches the next levels of the distribution chain in an effect to synergize their total operations of the value chain ahead. An organization can integrate forwardly by acquiring or merging with business entities that were their customers. This is also known as “cutting out the middleman”.
Following are the Advantages and Disadvantages (Risks) of Forward Integration,
Advantages (Pros / Positives / Benefits) of Forward Integration
1. Synergize Operations and Increase Revenue
The ultimate goal of forward integration is to increase the power and ownership over the forward of their value chain. This brings the company more control of its distribution chain. The main benefit of this will be to synergize the total operations to increase revenue and profit.
2. Increase Barriers to Entry for New Competitors
Forward integration provides corporates the control over their distribution network. This means the company can conduct production and distribution both in their own company. The total operation from production to delivery will be optimized and will be in greater control. This will be a thread for the competitors outside to compete with a company like this.
3. Increase the Market Share
Forward integration strategy optimizes the entire process of production to distribution. This will eventually help the company to reach different geographies in a fast pace manner with less depending on another company. Company market share will be increased as a result.
4. Greater Competitive Advantage
Forward integration brings down the cost of distribution. This will result in a greater competitive advantage for the corporates over their competitor companies. The main competitive advantage will be greater control over their distribution network with less dependency on another company.
5. Reduce Cost and Increase Profit
Operational synergies of the forward integration will reduce the distribution cost of the company. The company can analyze the ways to reduce costs since the control is available in the distribution chain. This will increase the profit of the company.
6. Gain More Control Over the Distribution Network
Prior to the forward integration, the company has to depend on another company for distribution. This will be an operation with less control because the distribution is handled by a different company. But with forward integration company will have more control over its distribution network with fewer external dependencies.
Disadvantages (Cons / Negatives / Drawbacks / Risks) of Forward Integration
1. Failure to Realize Synergistic
Forward integration requires a greater level of synergies between the two companies. There could be some situations where these synergies can not be realized practically. There could be problems in the strategy or else during the execution. This is the biggest risk and disadvantage of forward integration.
2. High Level of Cost
The company has to maintain two companies after forward integration. Those are the mother company with the original business and the distribution company. Failure of proper management could result in a higher cost of the total operation. The company should carefully analyze whether the benefits of forward integration exceed its costs.
3. Considerable Capital Requirements
Forward integration requires considerable capital. The main financial requirement is to acquire or merge with the company ahead of the value chain. Also, there will be cost involved in the first few months or a few years after forward integration to optimize the business activities.
4. Human Resource Issues
There could be unforeseen human resource issues that arise after forward integration. Certain pressures from union associations can arise unexpectedly. There could be management decisions for the lay-off of existing employees. These activities could result in labor issues.
5. Less Focus on the Original Business
After forward integration, management focus could shift to the new business, with losing focus on the original business. This will be a risk for the company because if the profitability of the original business is loose then the entire synergies will collapse.
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